-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PUhoLxKe7YJnlnioISLvPq56KpEuq69O3gYzB3fUk0ct9xQgn3c+5//t8KCmaEE2 GSfkYg9rT2EhjqL6v2dHKA== 0000950144-96-003879.txt : 19960719 0000950144-96-003879.hdr.sgml : 19960719 ACCESSION NUMBER: 0000950144-96-003879 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960701 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: A D A M SOFTWARE INC CENTRAL INDEX KEY: 0000863650 STANDARD INDUSTRIAL CLASSIFICATION: 7372 IRS NUMBER: 581878070 STATE OF INCORPORATION: GA FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-26962 FILM NUMBER: 96589574 BUSINESS ADDRESS: STREET 1: 1600 RIVEREDGE PARKWAY STREET 2: STE 800 CITY: ATLANTA STATE: GA ZIP: 30328 BUSINESS PHONE: 7709800888 MAIL ADDRESS: STREET 1: 1600 RIVEREDGE PKWY STREET 2: STE 800 CITY: ATLANTA STATE: GA ZIP: 30328 10-K 1 A.D.A.M. SOFTWARE INC. FORM 10-K 1 - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- 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 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED MARCH 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) FOR THE TRANSITION PERIOD FROM TO ------------------ ------------------
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 (I.R.S. employer incorporation or organization) identification no.)
1600 RiverEdge Parkway Suite 800 Atlanta, Georgia 30328 (Registrants address including zip code) (770) 980-0888 (Registrant's telephone number, including area code) Securities registered pursuant to Section(b) of the Act: NONE Securities registered pursuant to Section(g) of the Act: COMMON STOCK $.01 PAR VALUE (TITLE OF CLASS) 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. --------------- The aggregate market value of the voting stock held by non-affiliates of the Registrant was $9,686,443 at June 25, 1996 based on the closing market price of the Common Stock on such date as reported by the Nasdaq Stock Market's National Market. As of such date, there were 5,254,647 shares of Registrant's Common Stock, $.01 per share par value, outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive Proxy Statement for the Annual Meeting of Shareholders to be held on September 18, 1996 are incorporated by reference into Part III. - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- 2 TABLE OF CONTENTS
PAGE ---- PART I Item 1. Business..................................................................... 1 Item 2. Properties................................................................... 11 Item 3. Legal Proceedings............................................................ 11 Item 4. Submission of Matters to a Vote of Security-Holders.......................... 11 Item X. Executive Officers of the Registrant......................................... 11 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........ 13 Item 6. Selected Financial Data...................................................... 13 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................................. 14 Item 8. Financial Statements and Supplementary Data.................................. 18 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure................................................................. 18 PART III Item 10. Directors and Executive Officers of the Registrant........................... 19 Item 11. Executive Compensation....................................................... 19 Item 12. Security Ownership of Certain Beneficial Owners and Management............... 19 Item 13. Certain Relationships and Related Transactions............................... 19 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............. 20 SIGNATURES.............................................................................. 23
3 PART I ITEM 1. BUSINESS GENERAL A.D.A.M. Software, Inc. (the "Company" or "A.D.A.M.") creates, publishes and markets educational multimedia software products that provide anatomical, medical, scientific and health-related information for the academic/health professional ("academic") and consumer markets. A.D.A.M. products incorporate internally developed, original medical illustrations with text, audio, photography, animation and video in easy-to-use, interactive software applications. The Company creates educational multimedia software products with varying levels of content, functionality and price for both the academic and consumer markets. The A.D.A.M. Scholar Series includes products for the medical school, undergraduate and K-12 institutional and student markets, and the A.D.A.M. At Home Series includes products for children and adult consumers. A.D.A.M. Comprehensive, the Company's flagship A.D.A.M. Scholar Series product, was completed in March 1993 and A.D.A.M. The Inside Story, the Company's first product in the A.D.A.M. At Home Series, was released in September 1994. The Company's products are provided on CD-ROM disks that can be used on Apple Macintosh or Windows-based multimedia PCs. The Company was incorporated as a Georgia corporation and commenced operations in March 1990. The Company was organized by the management of Medical-Legal Illustrations, Inc. ("MLI"), a predecessor company, which was founded in 1984 and merged into the Company effective June 30, 1992. MLI which produced customized medical illustrations, operated as a division of the Company until March 31, 1994, when the Company made the strategic decision to discontinue its customized medical illustration business. In connection with the discontinuance of these operations, the Company entered into certain license and royalty arrangements with J.S.K., Inc., a company controlled by John W. McClaugherty, a director of the Company. STRATEGY The Company's strategy is to establish itself as a leading educational software publisher specializing in anatomical, medical, scientific and health-related information for the academic and consumer markets. To address the academic market, the Company intends to continue to develop and enhance software products that advance the study, comprehension and dissemination of anatomical, medical, scientific and health-related information and to aggressively expand market share. To address the consumer market, the Company's strategy is to focus on enhancing and upgrading the Company's proven successful title, A.D.A.M. The Inside Story, as well as leveraging the Company's other consumer titles in creative ways. There can be no assurance that the Company will successfully implement its business strategy. The key elements of the Company's business strategy are to continue to: - Establish the "A.D.A.M." Brand Name as a Recognized Leader in Educational Software. Management of the Company believes that establishing brand name recognition for the "A.D.A.M." name across the Company's various markets is an essential element of the Company's long-term sales and marketing strategy and will permit the company to leverage the strength of its brand in marketing and promoting the sale of its existing and future products. Ideally, students would become familiar with the "A.D.A.M." brand name and its reputation for high-quality educational multimedia products at a young age and purchase more advanced "A.D.A.M." products as their level of education advances and their need for more detailed anatomical, medical, scientific and health-related information increase. Conversely, the Company believes that its most advanced academic products add credibility to its K-12 and consumer software products. - Develop and Enhance a Broad Array of High Quality, Market-Driven Educational Multimedia Software Products. The Company offers a range of educational multimedia software products targeted for customers ranging from students, educators and medically-related professionals with the A.D.A.M. Scholar Series to children and adult consumers with the A.D.A.M. At Home Series. In 4 developing its multimedia software products, the Company dedicates marketing, research and development resources to create high-quality products that match an identified market opportunity. The A.D.A.M. product development team, consisting of medical illustrators, anatomists, commercial illustrators, script writers, multimedia experts and software engineers, uses its collective skills in interface design, interactive functionality, character development, and engaging storytelling to create high-quality educational products. - Leverage the A.D.A.M. Image Database and Creative and Technical Capabilities. Management of the Company believes that the A.D.A.M. Image Database and the Company's programming and creative capabilities represent core assets which should facilitate the development of health-related multimedia software products for users ranging from the health-minded consumer to students, educators and medically-related professionals. The Company intends to leverage its extensive library of digitized anatomical and medical information and its interactive programming and creative design capabilities to develop and enhance high quality products. There can be no assurance that the Company will continue to create new products or that such new products will be accepted by the market. - Strengthen Distribution Capabilities. The Company addresses the academic market principally through strategic alliances and other relationships with existing distributors. More recently, in the undergraduate market, the Company has expanded its direct telesales operations and increased lead generation activities. The Company addresses the consumer market through distribution relationships with existing distributors and retailers. A.D.A.M. intends to strengthen the distribution of its existing consumer products by leveraging its products using bundling, original equipment manufacturers, and private label activities and by seeking additional retail distribution outlets and alternative distribution channels. There can be no assurance that distributors and retailers will purchase the Company's products or provide the Company's products with adequate levels of shelf space and promotional support. PRODUCTS General The Company develops a range of educational multimedia software products with varying levels of price, content and functionality targeted for customers ranging from the health-minded consumer to students, educators and medical-related professionals. The Company has created two product categories: The A.D.A.M. Scholar Series, designed for the academic market, and the A.D.A.M. At Home Series, designed for the consumer market. All of the Company's products operate on Apple Macintosh and Windows-based multimedia PCs. Japanese versions of the Company's products operate on the DOS/V Windows and NEC Windows platforms and, in the case of A.D.A.M. Comprehensive, the Apple Macintosh platform. All of the Company's products incorporate images from the A.D.A.M. Image Database. The original database was assembled by a team of master degreed medical illustrators, anatomists, commercial illustrators, multimedia experts and software engineers over a three and one-half year period and continues to expand as the Company produces new images. The proprietary A.D.A.M. Image Database currently includes more than 4,000 original medical illustrations that have been scanned into a computer database on a layer by layer basis. The images have been assembled and linked together to present an interactive view of the human anatomy. This database permits the Company to create products like A.D.A.M. Comprehensive, which allows the user to observe and identify anatomical structures at different magnification levels, simulate surgery using an onscreen "scalpel" tool, "peel-back" successive layers of anatomy (i.e., to go from the skin to the bone, layer by layer, at a given point on the body), highlight individual anatomical systems or structures, and view anatomical systems or structures, and view anatomical structures from multiple perspectives. The Company's educational multimedia software products have received significant media and professional recognition including two 1996 Software Publishers Association Codie awards for Best Curriculum Based Education Program and Best Education Program for Middle School (for A.D.A.M. The Inside Story- School Edition), two 1995 Software Publishers Association Codie Awards for Best Overall Education Program (for A.D.A.M. Standard and A.D.A.M. Benjamin/Cummings Interactive Physiology) and Best 2 5 Home Learning Program (for A.D.A.M. The Inside Story), the 1993 NewMedia INVISION Multimedia Best of Show Award (for A.D.A.M. Comprehensive) and the 1992 Frank J. Netter Award for medical illustration excellence (for A.D.A.M. Comprehensive). The Codie Awards are sponsored annually by the Software Publishers Association (the "SPA"), an industry trade group consisting of most software publishers. In 1996 and 1995 respectively, over 900 and 680 products were entered into the Codie competition. One award is given in each of a number of categories and winners are selected via ballot by SPA member companies. The INVISION awards are sponsored annually by New Media Magazine. Products are reviewed and judged by a panel of industry experts, journalists and publishers selected by INVISION staff. The Best of Show award is given to the best overall product among all entries based on factors including quality of content, execution and innovativeness. The Frank J. Netter Award is sponsored by the Versalius Trust and the winner is selected by a vote of the Versalius Trust for Visual Education in the Health Sciences. The award is given to the entry that (1) best represents anatomical accuracy and scientific detail as taught in medical illustration programs worldwide and (2) exemplifies an innovative product that has had a substantial impact on medical education. In addition to the aforementioned industry awards, the Company's academic and consumer products have been the subject of numerous reviews and commentaries, the majority of which have been favorable. Occasionally, however, a review or commentary has been critical of particular elements of the product being discussed, including criticism related to subject matter, speed, cost and image pixelation when greatly enlarged. A.D.A.M. SCHOLAR SERIES PRODUCTS A.D.A.M. COMPREHENSIVE is designed for the medical school, graduate institution and medically-related professional marketplace. As the Company's flagship product, it is the most sophisticated and comprehensive core anatomy software product based on the amount and detail-level of anatomical content and software functionality. The key features of A.D.A.M. Comprehensive include (1) Approximately 1,000 layers of anatomy and 22,000 identifiable anatomical structures; (2) Extensive medical terminology and comprehensive labeling designed for graduate level study; (3) Anterior, posterior, medial and lateral dissectible views of anatomy; (4) Three levels of magnification; (5) Histologies, cross-sections, radiologies, MRIs, text overviews, and select audio pronunciations; (6) Interactive systems study that permits exploration of each system of the human body; and (7) An expanded interface with an unabridged bookshelf that accepts optional CD-ROM animation books, projects and additional content. The Company also offers a lower-priced version of A.D.A.M. Comprehensive for graduate health science students, which has most of the same features as A.D.A.M. Comprehensive but cannot be used with A.D.A.M. Studio. A.D.A.M. STANDARD is designed primarily for undergraduate institutions with health science programs. It is the intermediate-level application in the A.D.A.M. Scholar Series and provides a thorough overview of human anatomy. The key features of A.D.A.M. Standard are: (1) Approximately 200 layers of anatomy and 18,000 identifiable anatomical structures; (2) Scientific and medical terminology consistent with undergraduate level of study; (3) Anterior, posterior and limited lateral dissectible views of anatomy and a static medial view; (4) Three levels of magnification; (5) Histologies, cross-sections, MRI's, text, overviews and select audio pronunciations; (6) Interactive systems study that permits exploration of each system of the human body; and (7) An expanded interface with a bookshelf that accepts additional content. The Company also offers a lower-priced version of A.D.A.M. Standard for undergraduate health science students, which has most of the same features as A.D.A.M. Standard but cannot be used with A.D.A.M. Studio. A.D.A.M. ESSENTIALS is designed primarily for high school biology/anatomy teachers, libraries and introductory/non-major college courses. A.D.A.M. Essentials incorporates a simplified interface design, which enables the user to explore dissectible anatomy and animations of physiological content in a simple, easy-to-use manner. The key features of A.D.A.M. Essentials include: (1) Approximately 100 layers of anatomy and 4,000 identifiable anatomical structures; (2) Lay and scientific terminology, labeling and an audio pronunciation guide appropriate for introductory level study; (3) Interactive systems study with 38 animations and text overviews that permit exploration of each system of the human body and its related functions; (4) Anterior and posterior dissectible views of anatomy; (5) Two levels of magnification; and (6) Interactive puzzles designed to enhance learning comprehension. 3 6 A.D.A.M. ESSENTIALS -- SCHOOL EDITION is a curriculum-oriented solution for the study of human anatomy and physiology at the high school level. It combines A.D.A.M. Essentials with a comprehensive Teachers' Guide that includes student worksheets, ideas for classroom activities, laboratory exercises, a bibliography of additional learning resources and teacher reference materials. A.D.A.M. BENJAMIN/CUMMINGS INTERACTIVE PHYSIOLOGY is a series of co-developed products with Benjamin/Cummings Publishing Company, Inc. ("Benjamin/Cummings") designed for the undergraduate health sciences curriculum. Each module is designed to complement A.D.A.M. Standard, integrating anatomical structures with physiological functions. A.D.A.M. Benjamin/Cummings Interactive Physiology uses animation, audio, narration and video to explain difficult and complicated physiology concepts and processes. Its organization and self-test features provide the methodology for curriculum integration. Current products available are a Cardiovascular Module, a Muscular Module and a Respiratory Module. Benjamin/Cummings and the Company have an agreement to co-develop four additional modules for the series. A.D.A.M. STUDIO is designed to operate in conjunction with A.D.A.M. Comprehensive or A.D.A.M. Standard to meet the customization and integration needs of the academic and professional marketplace. It permits users to customize the content of the A.D.A.M. products by integrating additional digitized media into the A.D.A.M. products and creating a personal archive of interactive images and multimedia projects. A.D.A.M. Studio enables users to: (1) modify, cut, paste, copy and adapt the image database in a variety of manners; (2) integrate external media from a variety of sources such as slides, x-rays, text, graphics, animations, audio and video into the A.D.A.M. programs; and (3) generate interactive documents, exhibits and original multimedia works. A.D.A.M. Studio is an add-on product and will not operate independently of A.D.A.M. Comprehensive or A.D.A.M. Standard. CD-ROM ANIMATION BOOKS include A.D.A.M. Trauma, A.D.A.M. Obstetrics and Gynecology and A.D.A.M. Orthpaedic and are intended primarily for the graduate education and professional markets. A.D.A.M. Trauma, which operates only in conjunction with A.D.A.M. Comprehensive, contains a set of interactive animations, patient education documents and accompanying tools for simulating typical head, back and burn injuries. A.D.A.M. Obstetrics and Gynecology, which operates in conjunction with A.D.A.M. Comprehensive or as a stand-alone program, offers a selection of birth and gynecological procedures for anatomy/medical instruction, physicians' reference and patient communication. A.D.A.M. Orthopaedic, which operates in conjunction with A.D.A.M. Comprehensive or as a stand-alone program, contains a series of animations of various surgical procedures for anatomy of the lower limbs. SCHOOL EDITION OF A.D.A.M. AT HOME SERIES Products include A.D.A.M. The Inside Story, Nine Month Miracle and Life's Greatest Mysteries -- School Editions. They combine the stand-alone A.D.A.M. At Home Products with comprehensive Teachers' Guides to meet the needs of a classroom setting. A.D.A.M. The Inside Story -- School Edition enables study of human anatomy and physiology in a middle school biology or life sciences course, while Nine Month Miracle -- School Edition is designed to supplement the study of human reproduction at the high school level. The Teachers' Guides for each product include student worksheets, ideas for classroom activities, laboratory exercises, a bibliography of additional learning resources and teacher reference materials. The A.D.A.M. Scholar Series Products contributed approximately 57.2%, 73.0% and 96.7% of net revenues in fiscal 1996, fiscal 1995 and fiscal 1994, respectively. The Company anticipates that it will continue to devote resources to developing products for the academic market. A.D.A.M. AT HOME SERIES PRODUCTS A.D.A.M. THE INSIDE STORY is a consumer "edutainment" product designed for use by all members of the family. A.D.A.M. The Inside Story is the Company's first product in the A.D.A.M. At Home Series and it provides A.D.A.M. anatomy in an easy-to-use software application. A.D.A.M. The Inside Story features a "Family Scrapbook" in which modern-day Adam and Eve characters lead a light-hearted and animated tour through each system of the body. These characters are given personalities and provide an entertaining story-line approach to the exploration of human anatomy. Fifty-two animations, six interactive puzzles and a medical glossary provide an engaging and educational multimedia experience. During fiscal 1997, the 4 7 Company will release an updated version of A.D.A.M. The Inside Story which will include among other features new 3-D graphics and one-button Internet connectivity. NINE MONTH MIRACLE is a consumer "edutainment" product designed for use by all members of the family interested in pregnancy. Nine Month Miracle contains accurate and informative animations and video in which modern-day Adam and Eve characters join medical experts for a month-by-month tour depicting the development of a fetus from conception through delivery. This product also integrates dramatic intra-uterine photography by Lennart Nilsson, an informative glossary from the American College of Obstetricians and Gynecologists and emotional video footage from the Nine Months documentary to create a unique multimedia experience. Nine Month Miracle also features "Emily's New Sister," a chapter where cartoon animations allow younger children to discover the miracle of a new baby through the eyes of a 7-year old character named Emily. LIFE'S GREATEST MYSTERIES is a consumer "edutainment" product designed for use by all members of the family that provides an interactive exploration of the myths, mysteries and curiosities of the human body. Using detailed animations and a simple "Q&A" format, a live entertaining character named Bob Winkle reveals answers to dozens of questions ranging from "What is cancer?" and "What causes Alzheimer's Disease?" to curiosities such as "What causes headaches?" and "Why does hair turn grey?" Life's Greatest Mysteries also includes activities to help reinforce key concepts, a supplemental text reference section and a glossary of key terms. The A.D.A.M. At Home Series Products contributed approximately 39.3%, 21.0% and 0% of net revenues in fiscal 1996, fiscal 1995 and fiscal 1994, respectively. Because of the risks involved in introducing new consumer products in today's unstable retail environment, in the fourth quarter of fiscal 1996 the Company decided to temporarily halt the development and publishing of any new consumer titles that would be solely funded by the Company. PRODUCT DEVELOPMENT The Company believes in a thorough and systematic approach to product development which includes stages of market analysis, specification development, product creation and testing. All product ideas that have received preliminary approval from senior management of the Company for possible development are subject to extensive market analysis prior to product definition. This analysis focuses on market size, product potential, sales projections and pricing strategies. As a result of the analysis, each product concept is evaluated for return on investment, sales potential and overall strategic value. The completed analysis from this stage is then presented to senior management of the Company for final product development decisions. Once accepted for development, product candidates enter into the specification stage, during which the product concept develops into a detailed design. During this stage, writers, content experts and other production partners are identified and brought under contract. Additionally, third party content such as images, audio tracks and existing video are also located and licensed. When appropriate, the Company may develop simple prototypes during the specification stage to test interface, navigation and content with internal and external focus groups. Upon completion of the specification stage, products enter the product development stage. It is during this stage that the Company's designers, illustrators, programmers, and other creative talent become actively involved in developing the product. At several points during the development stage the product is sent to various evaluators, including potential customers, to conduct functionality tests and to gain user feedback, the results of which are integrated back into the design specifications. In addition to the functionality and testing, management believes it is important for the Company to continually market test products at several other levels. Since the Company is producing information products, it is necessary to constantly assess the accuracy of the content, which includes text, illustrations, animations, video and audio. Products also undergo usability testing to determine the friendliness of the interface, appropriateness of tools and other aspects of a user's interaction with the product. 5 8 The Company has entered into a co-development agreement with Benjamin/Cummings which provides for the co-development, on an exclusive basis, of products for certain specified education markets (secondary school science, undergraduate science and health science education, and schools of nursing). The Company may terminate the agreement on September 1, 1997 if the Company does not receive specified revenues from Benjamin/Cummings by that date. If the minimum revenue target is satisfied, then Benjamin/Cummings will have the right to extend the term for an additional four years. The agreement does not impose any capital commitments on the part of either party. The agreement provides that particular products will be developed pursuant to separate product development agreements. The Company and Benjamin/Cummings have entered into two such product development agreements; the first such agreement provided for development of the first three modules of the A.D.A.M. Benjamin/Cummings Interactive Physiology Series (Cardiovascular, Muscular and Respiratory Modules), all of which have been completed, and the second agreement provides for the development of an additional four modules through June 1997. Both product development agreements provide for the Company to receive a royalty. Under the second agreement, the Company is required to spend certain specified minimums on the development of such modules. The agreements may be terminated by either party for material breach. Historically, the effect of these agreements has not been significant to the financial position of the Company nor is it anticipated to be in the future. For the fiscal years ended March 31, 1996, 1995 and 1994 total expenditures for product development, including capitalized expenses, were $2,940,000, $2,850,000 and $1,800,000, respectively. SALES, MARKETING AND DISTRIBUTION The Company employs a wide range of marketing and distribution strategies in the academic and consumer markets to promote brand name recognition and broaden product distribution. To capitalize on the innovative nature of its products, the company has developed a public relations program that has resulted in coverage for the Company in a wide variety of publications and broadcasts. The Company also makes use of new information technology for communication and public relations purposes, such as a fax-on-demand information system and the A.D.A.M. Worldwide Web Page available on the Internet. The Company has distribution relationships with Industrial Co. ("Matsushita"), Benjamin/Cummings Publishing Company, Inc. ("Benjamin/Cummings") and Ingram Micro, Inc. ("Ingram Micro"). The sales of the Company's products through Ingram Micro, Inc. represented approximately 18% of the Company's total net revenues in fiscal 1996. No other distributors or retailers accounted for more than 10% of the Company's revenues during fiscal 1996. In the academic market, the Company markets its products through both direct and indirect channels. Historically, the Company promoted the products in the A.D.A.M. Scholar Series directly to the academic marketplace through its sales and marketing personnel based in Atlanta, Georgia. Direct sales and marketing activities include advertising in publications, media relations, direct mailings, distribution of brochures, participation in educational seminars, campus visits by field sales personnel, and telemarketing and telesales efforts. In fiscal 1995, the Company increased the range and scope of its distribution efforts through the development of strategic alliances with numerous established distribution networks including Addison-Wesley Publishing Company ("Addison-Wesley"), Benjamin/Cummings and Churchill Livingstone USA. Marketing support for the Company's indirect sales efforts includes the development of print and electronic catalogs, creation and supply of special demonstrative software, training kits, and media relations. In the consumer market, the Company believes that marketing to both its distribution channels and to the end user is fundamental to its success. The Company utilizes advertising in computer and general consumer publications, in-store promotions, merchandising, direct mailings to targeted audiences in the retail and distribution community, training kits, demo disks, participation in key consumer retail conferences and on-line marketing to promote sales of its consumer products. The Company sells its software products through multiple channels, including software distributors such as Ingram Micro and ABCO, software retailers such as Egghead and Software Etc., computer superstores such as CompUSA and Computer City, consumer electronics stores such as Circuit City and Best Buy, mass merchants such as Target, and mail order companies such as Mac Warehouse and Tiger. Additionally, the Company offers consumers the opportunity to purchase products by calling a toll-free telephone number, the fulfillment of which is handled by Advanced Access, a fulfillment company under contract to the Company. There can be no assurance that distributors and retailers will purchase the Company's products. To distribute in the retail market, the Company primarily utilizes external sales organizations, such as manufacturing representative firms, to promote its products into the channel. The Company may add internal sales staff or develop strategic alliances in the future to strengthen and expand its selling capabilities for the consumer market. There can be no assurance that such sales staff or strategic alliances will materially increase the Company's sales to the consumer market. 6 9 The distribution channels through which consumer software products are sold have been characterized by rapid change, including consolidations and financial difficulties of certain distributors and retailers. Retailers of the Company's consumer products typically have a limited amount of shelf space with intense competition among educational software products. There can be no assurance that such distributors and retailers will continue to purchase the Company's products or provide the Company's products with adequate shelf space. The Company records an allowance against sales based on historical experience and anticipated returns. To the extent that the Company's sales returns exceed the Company's allowances, the Company's results of operations could be materially adversely impacted. A large portion of the Company's business is highly seasonal, with operating results varying substantially from quarter to quarter. Historically, this trend has been the result of cyclical variations in funding experienced by certain of the Company's academic customers and the seasonal buying patterns in the consumer market. The Company's historical revenues and results of operations are not necessarily indicative of future revenues and results of operations because the market for educational multimedia software products is rapidly evolving and the Company's revenues in any period are significantly affected by the announcements and product offerings of the Company and its competitors, as well as consumer and academic demands and the economy in general. The Company's expense levels are based, in part, on its expectations as to future revenues. If revenue levels are below expectations, the Company may be unable or unwilling to reduce expenses proportionately and operating results are likely to be adversely affected. Products are generally shipped as orders are received and accordingly the Company has historically operated with little backlog. As a result, revenues in any quarter are substantially dependent on the quantity of product orders received in that quarter. In the international market, the Company depends primarily on strategic partners to promote, distribute and sell its software products. The Company has established distribution relationships with several key players in the academic markets, such as Matsushita in Japan, Pearson Professional in Asia and Churchill Livingstone UK in Europe, and with several key players in the consumer markets, such as BOMICO in Germany. Certain of the Company's international distribution arrangements are structured as standard distribution or reseller arrangements where the partner purchases product at a wholesale price from the Company's inventories while others involve republishing the software products where the partner is responsible for product localization, sales, marketing and consumer support and the Company receives a royalty on the sales. International revenues comprised 15.2%, 28.6% and 28.1% of the Company's total net revenues in fiscal 1996, fiscal 1995 and fiscal 1994, respectively. STRATEGIC ALLIANCES An essential element of the company's business strategy is to develop alliances with domestic and international educational and medical publishers and others in an effort to establish effective distribution channels for its products and, in certain cases, to facilitate new product development. A summary of the Company's significant alliances is set forth below. Addison-Wesley Publishing Company, a subsidiary of Pearson PLC - Through its subsidiary, Benjamin/Cummings, Addison-Wesley is a major publisher for the undergraduate market for science, health science, nursing and allied health. Addison-Wesley is an investor and has product development and distribution relationships with the Company. - The Company and Benjamin/Cummings have agreed to co-develop a series of multimedia products, known as A.D.A.M. Benjamin/Cummings Interactive Physiology, for the undergraduate health science market. The first three modules, Cardiovascular Module, Muscular Module and Respiratory Module already have been completed. See "-- Products." - The Company and Benjamin/Cummings have signed a distribution agreement under which Benjamin/ Cummings distributes the A.D.A.M. Scholar Series of products to the undergraduate market in the United States and Canada with primary emphasis on A.D.A.M. Standard. The distribution agreement provides for an initial term of two years ending August 4, 1996. However, during the fourth quarter of fiscal 1996 the Company and Benjamin/Cummings agreed that Benjamin/Cummings would cease 7 10 direct sales and marketing activities of A.D.A.M. Standard and focus its selling efforts on Student Edition products in school bookstores. Benjamin/Cummings is not subject to any capital requirements or minimum purchase commitments under the agreement. Benjamin/Cummings is required to pay the Company for copies of products distributed by Benjamin/Cummings in accordance with the Company's product list, as in effect from time to time. Matsushita Electric Industrial Co., Ltd. - Matsushita is one of the world's largest consumer electronics companies and the parent entity to Panasonic, Technics, Quasar and National. The Company and Matsushita have an exclusive distribution relationship for A.D.A.M. products in Japan. - Matsushita funded the conversion of the A.D.A.M. Comprehensive and A.D.A.M. Essentials products into Kanji, the principal Japanese language. - Matsushita has assembled a group of third-party distributors to sell A.D.A.M. Comprehensive in Japan, including: Canotec, the largest dealer of Apple Macintosh in Japan; Maruzen, a major medical and educational publisher; Uchida Yoko Co., Ltd., a major distributor of Fujitsu computers in the Japanese market; and AMCO, a large medical equipment sales company. In addition, Matsushita is utilizing Nippon Electric Company to distribute A.D.A.M. Essentials in Japan and has associated with Softbank to sell A.D.A.M. The Inside Story in Japan once the Kanji language conversion is completed on this product. - The exclusive distribution agreement with Matsushita provided for an initial term of three years ending April 16, 1996. Matsushita is not subject to any continuing capital commitments or minimum purchase requirements under the agreement, nor is the Company subject to any capital or similar commitments or requirements. The Company and Matsushita are currently negotiating an extension to the exclusive distribution agreement. Matsushita is required to pay the Company for copies of products distributed by Matsushita in accordance with the agreement product price list or royalty, as in effect or as modified from time to time. Churchill Livingstone, a division of Pearson PLC - Churchill Livingstone is Europe's oldest and largest medical publisher and is the publisher of Gray's Anatomy, the top selling medical title in the world. Pearson PLC also is the ultimate parent entity to Addison-Wesley with whom the Company has a strategic alliance. The Company has two distribution relationships with Churchill Livingstone. - Churchill Livingstone UK and the Company have entered into an agreement pursuant to which Churchill Livingstone UK distributes A.D.A.M. Comprehensive and A.D.A.M. Standard to the higher education market in Europe on a limited exclusive basis. The distribution agreement provided for an initial term of one year ending December 30, 1995. The Company and Churchill Livingstone UK have negotiated a one year extension with certain modifications to the agreement. Churchill Livingstone UK is not subject to any capital requirements or minimum purchase commitments. Churchill Livingstone is required to pay the Company for copies of products distributed by Churchill Livingstone in accordance with the Company's product price list, as in effect from time to time. - The Company and Churchill Livingstone USA have signed a limited exclusive distribution agreement under which Churchill Livingstone USA distributes A.D.A.M. products to the medical school, graduate institution and health professional markets in North America. The agreement requires Churchill Livingstone to achieve minimum sales levels to maintain this exclusive relationship. The agreement provides for an initial term of one year ending May 8, 1996. Churchill Livingstone has met the minimum purchase commitment objective for the initial term, and the agreement has been extended for one year. The term of the agreement may continue to be extended for consecutive additional one year terms, subject to the achievement of mutually agreed upon annual sales performance objectives. If the annual sales performance objectives are not met in the second year of 8 11 the agreement, then the Company may terminate the agreement. Churchill Livingstone is required to pay the Company for copies of products distributed by Churchill Livingstone in accordance with the Company's product price list, as in effect from time to time. ANATOMICAL REVIEW CONSULTANTS The Company engages the services of individuals with expertise in the fields of anatomy, biology and medicine to assist the Company in its endeavor to ensure that the A.D.A.M. Image Database conforms to the highest standards of anatomical accuracy and instructional utility. These individuals make periodic recommendations to the Company with respect to content accuracy and testing reliance of the Company's products and product development candidates. As of March 31, 1996 the anatomical review consultants were as follows:
NAME AFFILIATION - - --------------------------------------------- --------------------------------------------- Anne M.R. Agur, B.Sc. (TO), M.Sc............. Associate Professor, Anatomy and Cell Biology University of Toronto, Faculty of Medicine Arthur English, Ph.D......................... Professor of Anatomy Emory University School of Medicine Keith L. Moore, Ph.D......................... Professor, Anatomy and Cell Biology University of Toronto, Faculty of Medicine Todd Olson, Ph.D............................. Professor of Anatomy Albert Einstein College of Medicine Wojciech (Albert) Pawlina, M.D............... Assistant Professor, Anatomy and Cell Biology University of Florida College of Medicine Vick Williams, M.D., Ph.D.................... Professor, Cellular and Structural Biology University of Texas Health Science Center at San Antonio
MANUFACTURING The production of the Company's software includes CD-ROM pressing, assembly of purchased product components, printing of product packaging and user manuals and shipping of finished goods, which is performed by third-party vendors in accordance with the Company's specifications and forecasts. The Company believes that there are alternate sources of these services that could be implemented without material delay. PROPRIETARY RIGHTS AND LICENSES The Company regards its software and the A.D.A.M. Image Database as proprietary and relies primarily on a combination of copyright, trademark, trade secret and confidential information laws, employee and third-party nondisclosure agreements and other methods to protect its proprietary rights. There can be no assurance that these protections will be adequate to protect the Company's intellectual property rights or that the Company's competitors will not independently develop technologies that are substantially equivalent or superior to the Company's technologies. The Company has obtained federal registrations of its trademarks "A.D.A.M.," "SCHOLAR SERIES", and the "WALKING MAN" logo in the United States and has applied for registration of the trademark "NINE MONTH MIRACLE." The Company has also obtained registrations of the "A.D.A.M." trademark in 22 foreign countries and has applications for registration of the mark pending in an additional 7 countries. The Company does not currently hold any patents or have any patent applications pending. The Company believes that, due to the rapid pace of innovation within the multimedia and software industries, factors such as the technological and creative skills of its personnel and the quality of the content of its products are more important in establishing and maintaining a leadership position within the industry than are the various legal protections of its technology. The Company licenses certain software programs from third-party developers and incorporates them into its products. Such software products are widely licensed by the respective developers thereof for incorporation 9 12 by other developers (like A.D.A.M.) in their products and provide specific functionality required in order to operate the product. For example, the Company licenses Macromind Director, a program distributed by Macromedia, which permits a product to display animated sequences. This product is incorporated in several A.D.A.M. products. Generally, the licenses grant to the Company nonexclusive, worldwide licenses with respect to the subject program and terminate only upon a material breach by the Company. Certain of the licenses require payment of annual license fees (but such annual license fees do not exceed $25,000 per annum in the aggregate). If a third-party agreement for licensed software expires or terminates and the Company is unable to renew or extend the agreement, the Company could be required to engage in independent development of replacement software or to obtain a suitable replacement. The Company believes that licenses for alternative software programs are generally available on commercial terms from a number of licensors. The Company owns and does not license the anatomical illustrations included in the A.D.A.M. Image Database, but licenses certain additional multimedia content included in its products, including video, photographs, music and text, from various third parties that is incorporated in its products. Such licenses generally provide the Company with fully-paid perpetual, worldwide licenses to include the licensed content in a designated product. The Company believes that its products, trademarks and other proprietary rights do not infringe on the proprietary rights of third-parties. However, as the number of software products in the multimedia industry increases and the functionality of these products further overlaps, software developers may become increasing subject to infringement claims. There can be no assurance that third-parties will not assert infringement claims against the Company in the future with respect to current or future products, trademarks or other Company works or that any assertion may not require the Company to enter into royalty arrangements or result in costly litigation. COMPETITION The educational multimedia software industry is intensely competitive and demand for particular software products may be adversely affected by the increasing number of available competitive products. The Company competes in the academic marketplace primarily with other companies offering educational software products on anatomy, health and medical topics and, to a lesser extent, with larger publishers of traditional print textbooks on anatomy and medicine. Existing competitors may continue to broaden their product lines and potential competitors, including large hardware or software manufacturers and educational publishers may enter or increase their focus on the academic market, resulting in greater competition for the Company. In the K-12 academic marketplace, the Company faces direct competition from other companies offering educational software products. In the consumer market, the Company faces direct competition from other companies offering educational software products as well as competition for shelf space from companies offering entertainment and consumer software products. Moreover, competition for the Company's products is influenced by the timing of competitive product releases and the similarity of such products to those of the Company, which may result in significant price competition, reduced profit margins, loss of shelf space or a reduction in sell-through of the company's products at retail stores. There can be no assurance that any of the Company's software products will compete effectively against other interactive multimedia software products in general or anatomical, health, medical and educational information products in particular. The Company's competitors include many companies, most of which have substantially greater financial, development, marketing and personnel resources than those of the Company. Moreover, the price of the Company's products and the computer hardware required to operate them may be higher than alternative competitive informational sources such as anatomy textbooks. EMPLOYEES As of March 31, 1996, the Company employed 75 full-time persons. Of these, 32 were engaged primarily in product development, 16 in sales, 6 in marketing and 21 in finance and administration. The Company currently employs 12 degreed medical illustrators and 4 commercial illustrators. None of the Company's employees are covered by a collective bargaining agreement and the Company has experienced no work stoppages. The Company considers its employee relations to be good. Management believes that the 10 13 Company's future growth and success will depend upon its ability to retain and continue to attract highly skilled and motivated personnel in all areas of its operations. DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS Portions of this Annual Report include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Although the Company believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, it can give no assurance that its expectations will be achieved. Important factors that could cause actual results to differ materially from the Company's current expectations are disclosed in conjunction with the forward-looking statements included herein. ITEM 2. PROPERTIES The Company's headquarters and principal operations are located in approximately 33,000 square feet of leased office space in Atlanta, Georgia. The space is leased for a term ending in 2002. Management of the Company believes that the Company's current facilities will be adequate through at least 1998. If additional facilities are required, the Company believes that suitable facilities will be available. ITEM 3. LEGAL PROCEEDINGS On April 25, 1996, a class action lawsuit was filed in Fulton County Superior Court in Atlanta, Georgia by an owner of 1,000 shares of A.D.A.M. common stock against the Company and certain of its officers and directors (Robert S. Cramer, Jr., Curtis A. Cain, Gregory M. Swayne, Holcombe T. Green, Jr. and John W. McClaugherty). 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. The Company and its officers and directors intend to defend vigorously against the allegations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of fiscal 1996. ITEM X. EXECUTIVE OFFICERS OF THE REGISTRANT The persons who are executive officers of A.D.A.M. Software, Inc. and their positions are as follows:
NAME AGE POSITIONS WITH THE COMPANY - - ------------------------------------------- --- ------------------------------------------- Robert S. Cramer........................... 35 Chairman of the Board, Co-Founder and Director Curtis A. Cain............................. 37 Chief Executive Officer Gregory M. Swayne.......................... 38 President Founder, Vice President Production and Director Robert A. DiProva.......................... 48 Chief Financial Officer, Vice President of Administration, Secretary and Treasurer Joseph R. Fuller........................... 33 Vice President of Marketing David A. Tranberg.......................... 43 Vice President of Sales
ROBERT S. CRAMER, JR. Mr. Cramer, a co-founder of the Company, has served as Chairman of the Board and a Director since the Company's inception in March 1990. From 1987 to 1992, he served as Chairman of the Board of Directors of Medical Legal Illustrations, Inc. ("MLI"), a predecessor to the Company. In 1989, Mr. Cramer served as an Executive Editor and Co-Publisher of Atlanta Computer Spectrum, a regional technology publication he helped to create. Also, since 1994, Mr. Cramer has served as Chairman of the 11 14 Board of the Atlanta Task Force for the Homeless, a community-wide, non-profit organization working with and on the behalf of homeless people. CURTIS A. CAIN. Mr. Cain has served as the Company's Chief Executive Officer since April 1994. Prior thereto, he served as the Company's Chief Operating Officer from March 1992 to March 1994, President of MLI from February 1992 until the merger of MLI and the Company in May 1992 and Consultant to MLI from November 1991 to January 1992. Previously, he was employed by Clayton, Williams and Sherwood, a real estate investment firm, serving as Regional Manager and Director of Finance and Business Development from August 1987 to September 1991. Prior thereto, he served in the United States Marine Corps from 1981 to 1985, attaining the rank of Captain. GREGORY M. SWAYNE. Mr. Swayne, a co-founder of the Company, has served as President, Vice President of Production and a Director of the Company since its inception in March 1990. As the original founder of MLI, he served as President of MLI from 1985 until February 1992, and as a director of MLI from 1985 until the merger of MLI and the Company in May 1992. Mr. Swayne is a master degreed medical illustrator who completed a three year graduate program in medical illustration that required him to participate in all the first year medical school courses (including gross anatomy, histology, embryology and neuroanatomy) as well as a full year of direct surgical observation and illustration. ROBERT A. DIPROVA. Mr. DiProva joined the Company in September 1995 as Chief Financial Officer, Vice President of Administration, Secretary and Treasurer. Prior thereto, he served from 1989 until August 1995 as Chief Financial Officer, Vice President and Treasurer for Dateq Information Network, Inc., a publicly held technology firm, and was responsible for all financial, MIS, human resources and administrative functions. Previously thereto, he served as Corporate Controller for Rhodes, Inc., a specialty furniture retailer, from 1984 to 1988. Mr. DiProva is a Certified Public Accountant and a member of the Georgia Society of Certified Public Accountants. JOSEPH R. FULLER. Mr. Fuller has served as the Company's Vice President of Marketing since January 1996. Prior thereto, he served as the Company's Director of Marketing from April 1995 to December 1995, and as Manager -- Consumer Division from April 1994 to March 1995. Previously, he was employed by Hayes Microcomputer Products, Inc., a developer and marketer of personal communications hardware and software, in management roles within Product Development, Product Management, and Business Development from July 1984 to March 1994. DAVID A. TRANBERG. Mr. Tranberg joined the Company in January 1996 as Vice President of Sales. Prior thereto, he served from January 1995 until November 1995 as Vice President of Sales and Marketing at The Blue Ribbon Soundworks, Ltd., a multimedia software developer. Prior thereto, he served from January 1994 to September 1994 as Vice President of Sales at SofNet, Inc., a communications software developer; from June 1993 to December 1994 as Eastern Regional Sales Manager at Media Vision, a multimedia hardware and software developer; from March 1992 to May 1993 as Vice President, Western Area Sales at Melita International, a telecommunications integrator; and from January 1989 to November 1991, as Regional Vice President for Ashton-Tate, developer of dBase. 12 15 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is quoted on the NASDAQ National Market system under the symbol "ADAM". The following table sets forth the high and low bid quotations of the Company's Common Stock as reported by NASDAQ since the Company's initial public offering, which was consummated on November 10, 1995.
HIGH LOW ---- --- 1996 Fiscal Third Quarter (commencing November 10, 1995)................. $14 1/8 $4 3/8 Fourth Quarter...................................................... 7 4 1/2
At June 18, 1996 there were approximately 180 record holders of the Company's Common Stock. The Company has never paid or declared any cash dividends on its Common Stock and does not intend to pay dividends on its Common Stock in the foreseeable future. To date, the Company has incurred losses and presently expects to retain its future anticipated earnings to finance development of and expansion of its business. The payment by the Company of dividends, if any, on its Common Stock in the future is subject to the discretion of the Board of Directors and will depend on the Company's earnings, financial condition, capital requirements and other relevant factors. ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED MARCH 31, ----------------------------------------------- 1996 1995 1994 1993 1992 ------- ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) STATEMENT OF OPERATIONS: Net revenues..................................... $ 6,447 $ 5,742 $ 2,813 $ 976 $ 107 Cost and expenses: Cost of revenues............................... 1,491 791 293 114 10 Sales and marketing............................ 4,090 3,666 1,965 1,141 324 Product development............................ 2,847 2,401 1,759 1,023 500 General and administrative..................... 2,008 1,774 1,554 1,200 594 ------- ------- ------- ------- ------- Total costs and expenses............... 10,436 8,632 5,571 3,478 1,428 ------- ------- ------- ------- ------- Operating income (loss)........................ (3,989) (2,890) (2,758) (2,502) (1,321) Interest expense................................. (317) (383) (90) (117) (124) Interest income.................................. 415 43 64 3 -- ------- ------- ------- ------- ------- Income (loss) from continuing operations.... (3,891) (3,230) (2,784) (2,616) (1,445) Loss from discontinued operations.............. -- (400) (185) (223) ------- ------- ------- ------- ------- Loss before extraordinary item.............. (3,891) (3,230) (3,184) (2,801) (1,668) Extraordinary loss from early extinguishment of debt, net of income tax benefit of $29...... (46) -- -- -- -- ------- ------- ------- ------- ------- Net loss............................... $(3,937) $(3,230) $(3,184) $(2,801) $(1,668) ======= ======= ======= ======= ======= Net loss per share from continuing operations.................................. $ (1.13) $ (1.22) $ (1.11) $ (1.35) $ (1.02) Net loss per share............................. (1.14) (1.22) (1.27) (1.44) (1.18) Weighted average number of common shares and share equivalents outstanding............... 3,673 2,694 2,510 1,939 1,419 ======= ======= ======= ======= =======
13 16
YEAR ENDED MARCH 31, ----------------------------------------------- 1996 1995 1994 1993 1992 ------- ------- ------- ------- ------- (IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents........................ 5,352 940 716 348 299 Working capital (deficiency)..................... 15,354 (1,736) (593) (550) (707) Total assets..................................... 18,871 4,247 3,632 1,340 628 Short-term debt.................................. 250 2,530 284 480 654 Long-term debt................................... -- 298 336 546 529 Convertible Preferred Stock...................... -- 2,022 -- -- -- Total shareholders' equity (deficit)... 16,896 (1,943) (1,284) (653) (1,046)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW A.D.A.M. creates, publishes and markets educational multimedia software products that provide anatomical, medical, scientific and health-related information for the academic and consumer markets. The Company sells its products into the academic and consumer markets through alliances with distributors and by direct sales and marketing activities. Revenue from product sales is generally recognized at the time of shipment to customers, distributors and resellers or, in the case of consignment arrangements, at the time of shipment from the consignee to their customers. The company records allowances for product returns based on historical experience and anticipated returns. Payments received in advance of shipments are recorded as deferred revenue and customer deposits in the balance sheet and are recognized as revenue when the related software is shipped and all related obligations are fulfilled. The Company's first products addressed the graduate education and professional markets, which are characterized by higher unit prices, lower cost of goods sold as a percentage of selling price and lower unit volumes. Accordingly, such products have a significantly higher gross margin than the Company's consumer products. In early 1994, the Company made the strategic decision to leverage its A.D.A.M. Image Database and multimedia capabilities into developing products for the larger consumer and general education markets. As a result, the Company's product mix is shifting from predominately higher priced products for graduate education and professional markets to a broad array of products with lower price points for the general education and consumer markets. The Company's consumer products generally have a lower unit price, higher cost of goods sold as a percent of price and lower gross margin. The average net revenues received by the Company were approximately $50 per unit for the 129,000 units of software sold in fiscal 1996 as compared to approximately $101 per unit for the 56,700 units of software sold in fiscal 1995 and approximately $1,174 per unit for the 2,400 units of software sold in fiscal 1994. The significant reduction in price points due to changes in product mix results in lower gross margins and higher costs of revenue as a percentage of net revenue. The Company expects these trends to continue. In addition in April 1996, the Company announced that in order to expand market share and pursue a more volume driven business in the academic market, the Company had reduced the prices of several of its academic products by approximately 40%. The Company believes these price reductions will result in lower gross margins and higher costs of revenues as a percentage of net revenue. The Company has experienced substantial losses since its inception resulting in an accumulated deficit of approximately $17.1 million as of March 31, 1996. For the fiscal years ended March 31, 1996, 1995 and 1994 the Company incurred net losses of approximately $3.9 million, $3.2 million and $3.2 million respectively, and anticipates that it will also incur a net loss during the fiscal year ending March 31, 1997. Management believes that the Company must successfully implement its business strategy and significantly increase its revenues from the academic and consumer markets in order to achieve profitability. At March 31, 1996, the Company had net operating loss carryforwards available for tax purposes of approximately $14.8 million, which will expire in years 2004 through 2011. Future sale of shares by certain significant shareholders could create a substantial ownership change (as defined by the Internal Revenue Service) which would limit the amount of the Company's future taxable income that may be offset by preownership net operating loss carryforwards. 14 17 RESULTS OF OPERATIONS The following table sets forth for the periods indicated selected financial data and the percentages of the Company's net revenues represented by each line item and the percentage change in each line item.
PERCENTAGE CHANGE YEAR ENDED MARCH 31, ------------------- ------------------------- 1996 TO 1995 TO 1996 1995 1994 1995 1994 ----- ----- ----- ------- ------- Net revenues...................................... 100.0% 100.0% 100.0% 12.3% 104.1% Costs and expenses: Cost of revenues................................ 23.1 13.8 10.4 88.5 170.0 Sales and marketing............................. 63.4 63.8 69.9 11.6 86.6 Product development............................. 44.2 41.8 62.5 18.6 36.5 General and administration...................... 31.1 30.9 55.2 13.2 14.2 ----- ----- ----- Total costs and expenses................ 161.8 150.3 198.0 ----- ----- ----- Operating income (loss)........................... (61.8) (50.3) (98.0)
The following table sets forth for the periods indicated the revenues derived by the Company from the academic and consumer markets and from other sources. It also sets forth the revenues derived from each of these markets and sources as a percentage of total net revenues. Other revenues include royalty income, license fees and support services.
YEAR ENDED MARCH 31, ---------------------------- 1996 1995 1994 ------ ------ ------ Academic................................................. $3,688 $4,194 $2,719 Consumer................................................. 2,533 1,207 -- Other revenues........................................... 226 341 94 ------ ------ ------ Net revenues................................... $6,447 $5,742 $2,813 ====== ====== ======
Fiscal 1996 Compared to Fiscal 1995 Total net revenues increased 12.3% to $6,447,000 in fiscal 1996 compared to $5,742,000 in fiscal 1995 as a result of increased sales of the Company's products to the consumer market, partially offset by a decline in revenues from the academic market. Total unit shipments of the Company's products increased to approximately 129,000 units in fiscal 1996 from approximately 56,700 units in fiscal 1995 due to a continued shift in the Company's product mix toward higher volume, lower priced consumer products. Net revenues from the academic market decreased 12.1% to $3,688,000 in fiscal 1996 from $4,194,000 in fiscal 1995 due primarily to a significant reduction of revenues from strategic partners during the fourth quarter of fiscal 1996. The decrease was further impacted by the Company's aggressive policy on price protection resulting in an increase in an allowance of approximately $315,000 in the fourth quarter for anticipated price reductions on several academic products. As a percent of total net revenues, net revenues from the academic market decreased to 57.2% in fiscal 1996 compared to 73.0% in fiscal 1995. Net revenues from the consumer market increased 109.9% to $2,533,000 in fiscal 1996 from $1,207,000 in fiscal 1995 due primarily to a full year of continued sales of A.D.A.M. The Inside Story and the Company's introduction of its second consumer title Nine Month Miracle in April 1995. The Company's third consumer title, Life's Greatest Mysteries, which was launched in October 1995, experienced lower than expected sales during the Company's fourth quarter of fiscal 1996. As a percent of total net revenues, net revenues from the consumer market increased to 39.3% in fiscal 1996 compared to 21.0% in fiscal 1995. The Company believes that its future revenue growth will depend on, among other things, its ability to introduce new and upgraded products to the marketplace, the extent of competition, unit pricing trends, the demand for its software in the academic and consumer markets, and the performance of the Company's 15 18 strategic partners in areas of marketing, sales and distribution of the Company's products. In this regard, the Company considers its future revenues to be unpredictable. Cost of revenues increased 88.5% to $1,491,000 in fiscal 1996 compared to $791,000 in fiscal 1995. Cost of revenues, which includes the cost of support, packaging, documentation, royalties, and amortization of capitalized product development costs, increased primarily from increases in net revenues, specifically in the consumer market and an increase in amortization of capitalized product. As a percent of total net revenues, cost of revenues increased to 23.1% in fiscal 1996 compared to 13.8% in fiscal 1995 due to the above factors, as well as a shift in the Company's product mix towards higher volume, lower priced consumer products. Sale and marketing expenses increased 11.6% to $4,090,000 in fiscal 1996 from $3,666,000 in fiscal 1995, primarily as a result of increased marketing expenses relating to the introduction of Nine Month Miracle and Life's Greatest Mysteries in the consumer market. As a percentage of total net revenues, sales and marketing expenses decreased slightly to 63.4% in fiscal 1996 from 63.8% in fiscal 1995. Product development costs increased 18.6% to $2,847,000 in fiscal 1996 from $2,401,000 in fiscal 1995 due primarily to an increase in consulting costs related to product development activity and a $356,000 reduction in the amount of development costs capitalized for fiscal 1996 compared to fiscal 1995. The reduction in capitalized development costs was due to changes in design specifications of new products later in the development process which resulted in an extension of the time required before technological feasibility was achieved and thereby shortened the period during which development costs were capitalized. As a percentage of total net revenues, product development expenses increase to 44.2% in fiscal 1996 from 41.8% in fiscal 1995. Total expenditures for product development, including capitalized expenses, increased to $2,940,000 in fiscal 1996 compared to $2,850,000 in fiscal 1995. The Company capitalized product development expenses of $93,000 and $449,000 in fiscal 1996 and fiscal 1995, respectively which represented 3.2% and 15.8% of total expenditures for product development in these respective periods. Amortization of capitalized product development cost totaled $356,000 and $119,000 in fiscal 1996 and 1995, respectively, and is charged to and included in cost of revenues described above. General and administrative expenses increased 13.2% to $2,008,000 in fiscal 1996 from $1,774,000 in fiscal 1995 primarily as a result of increased consulting and professional fees associated with being a public company. As a percentage of total net revenues, general and administrative expenses increased to 31.1% in fiscal 1996 from 30.9% in fiscal 1995. Fiscal 1995 Compared to Fiscal 1994 Total net revenues increased 104.1% to $5,742,000 in fiscal 1995 from $2,813,000 in fiscal 1994 as a result of increased sales of the Company's products in the academic market and the initiation of sales of the Company's products to the consumer market beginning September 1994. Total unit shipments of the Company's products increased to approximately 56,700 units in fiscal 1995 from approximately 2,400 units in fiscal 1994 due to a shift in the Company's product mix toward higher volume, lower priced consumer products. Net revenues from the academic market increased 54.2% to $4,194,000 in fiscal 1995 from $2,719,000 in fiscal 1994 as a result of the introduction of new products and an increase in the number of resellers of the Company's products. Net revenues from products introduced in fiscal 1995, including A.D.A.M. Essentials, A.D.A.M. Standard and A.D.A.M. Benjamin/Cummings Interactive Physiology: Cardiovascular Module, generated $1,153,000 of net revenues in fiscal 1995. As a percentage of total revenues, net revenues from the academic market decreased to 73.0% in fiscal 1995 from 96.7% in fiscal 1994. Net revenues from the consumer market of $1,207,000 in fiscal 1995 resulted from sales of A.D.A.M. The Inside Story, which was introduced in September 1994. Net revenues from the consumer market comprised 21.0% of total net revenues in fiscal 1995. Cost of revenues increased 170.0% to $791,000 in fiscal 1995 from $293,000 in fiscal 1994, primarily as a result of increased net revenues and a $116,000 increase in amortization of capitalized software development costs. As a percentage of total net revenues, cost of revenues increased to 13.8% in fiscal 1995 from 10.4% in 16 19 fiscal 1994, primarily due to a shift in the Company's product mix toward higher volume, lower-priced consumer products. Sales and marketing expenses increased 86.6% to $3,666,000 in fiscal 1995 from $1,965,000 in fiscal 1994, primarily as a result of product launch and marketing expenses of approximately $1,361,000 relating to the Company's introduction of products for the consumer market. As a percentage of total net revenues, sales and marketing expenses decreased to 63.8% in fiscal 1995 from 69.9% in fiscal 1994. Product development expenses increased 36.5% to $2,401,000 in fiscal 1995 from $1,759,000 in fiscal 1994, primarily as a result of an increase in personnel and consulting costs for the development of new products. As a percentage of total net revenues, product development expenses decreased to 41.8% in fiscal 1995 from 62.5% in fiscal 1994. Total expenditures for product development, including capitalized expenses, increased to $2,850,000 in fiscal 1995 from $1,800,000 in fiscal 1994. The Company capitalized product development expenses of $449,000 and $41,000 in fiscal 1995 and fiscal 1994, respectively, which represented 15.8% and 2.3% of total expenditures for product development in these respective periods. Amortization of capitalized product development cost totaled $119,000 and $3,000 in fiscal 1995 and fiscal 1994, respectively, and is charged to and included in cost of revenues described above. General and administrative expenses increased 14.2% to $1,774,000 in fiscal 1995 from $1,554,000 in fiscal 1994, primarily due to an increase in infrastructure expenses to support the growth of the Company's operations. As a percentage of total net revenues, general and administrative expenses decreased to 30.9% in fiscal 1995 from 55.2% in fiscal 1994. LIQUIDITY AND CAPITAL RESOURCES Since the Company's organization in 1990, the Company has financed its operations primarily through private placements of Common Stock and preferred stock and borrowings, having received net proceeds totaling approximately $10,423,000 from private sales of Common Stock and $6,104,000 from private sales of Convertible Preferred Stock. On November 10, 1995 the Company received net proceeds of approximately $16,500,000 from its initial public offering of Common Stock. At March 31, 1996 the Company had cash and cash equivalents of $5,352,000, short-term investments of $10,981,000, and working capital of $15,354,000. Cash used in operating activities was $2,601,000 in fiscal 1996, $3,504,000 in fiscal 1995 and $2,223,000 in fiscal 1994, principally as a result of net losses for these periods. Cash used in investing activities was $11,028,000 in fiscal 1996, $462,000 in fiscal 1995 and $2,098,000 in fiscal 1994. The increase in fiscal 1996 primarily reflects the purchase of short-term investments. Cash provided by financing activities was $18,041,000 in fiscal 1996, $4,190,000 in fiscal 1995 and $4,689,000 in fiscal 1994. The increase in fiscal 1996 primarily reflects the proceeds from the issuance of common stock resulting from the initial public offering. At March 31, 1996 the Company had used approximately $2,000,000 of the net proceeds from its initial public offering to repay outstanding indebtedness, consisting of all principal and accrued interest outstanding under the subordinated bridge notes issued to certain investors in fiscal 1995, and the Company's term loan with a bank. The Company uses its working capital to finance ongoing operations and to fund expansion and development of its product lines. In addition, the Company evaluates from time to time other acquisitions of products or companies that compliment the Company's business. At this time, the Company is not committed to incur any significant capital expenditure in fiscal 1997. The Company expects that cash flow from operations and existing cash and short-term investments will be adequate to meet the Company's cash requirements for the short and long term (i.e. twelve months or less and one to two years respectively). 17 20 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Information included under Item 14(a)(1) and (2). ITEM. 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable 18 21 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT The information under the heading "Election of Directors" entitled "Nominees for Election Term Expiring in 1996", "Directors Continuing in Office Until 1997" and "Directors Continuing in Office Until 1998" of the Proxy Statement for the Annual Meeting of Shareholders to be held September 18, 1996 (the "Proxy Statement") is incorporated hereby by reference for information on the directors of the Registrant. See Item X in Part I hereof for information regarding executive officers of the Registrant. The information under the heading "Other Matters" entitled "Compliance with Section 16(a) of the Securities Exchange Act of 1934" of the Proxy Statement is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information under the heading "Election of Directors" entitled "Compensation of Directors" of the Proxy Statement and the sections under the heading "Executive Compensation" entitled "Summary Compensation Table," "Option Grants in Last Fiscal Year," "Fiscal Year-End Option Value Table" and "Compensation Committee Interlocks and Insider Participant" of the Proxy Statement are incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information under the heading "Common Stock Ownership by Management and Principal Shareholders" of the Proxy Statement is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information under the heading "Certain Transactions" of the Proxy Statement is incorporated herein by reference. 19 22 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are included as part of this report:
PAGE ---- (1) Financial Statements: Report of Independent Accountants...................................... F-1 Balance Sheet at March 31, 1996 and 1995............................... F-2 Statement of Operations for the three years ended March 31, 1996....... F-3 Statement of Changes in Shareholders' Equity (Deficit) for the three years ended March 31, 1996.............................................. F-4 Statement of Cash Flows for the three years ended March 31, 1996....... F-5 Notes to Financial Statements.......................................... F-6 (2) Financial Statement Schedule: For the three years ended March 31, 1996 II -- Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
EXHIBIT DESCRIPTION - - ------- --------------------------------------------------------------------------------- 3.1* -- Amended and Restated Articles of Incorporation of the Company. 3.2* -- Amended and Restated Bylaws of the Company. 4.1* -- Amended and Restated Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.1). 4.2* -- Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.2). 4.3* -- Specimen Common Stock Certificate Stock Option Plan. 4.4* -- Forms of Option Certificates relating to Company's 1992 Stock Option Plan. 4.5* -- Form of Warrants to Purchase shares of Common Stock, dated April through November, 1994. 4.6* -- Warrant issued to The Robinson-Humphrey Company, Inc. on May 23, 1995. 10.1* -- Convertible Preferred Stock Purchase Agreement by and among the Company, Chemical Bank, as trustee for the Firestone Tire and Rubber Master Trust (the "Firestone Trust") and James D. Oelschlager, dated as of December 22, 1994. 10.2* -- Convertible Preferred Stock Purchase Agreement by and among the Company, the Firestone Trust and James D. Oelschlager, as trustee for the Oak Associates Profit Sharing Plan and Trust, dated as of May 23, 1995. 10.3* -- Convertible Preferred Stock Purchase Agreement by and between the Company and Addison-Wesley Publishing Company, Inc., dated as of August 22, 1995. 10.4* -- Form of Convertible Preferred Stock Purchase Agreement by and between the Company and certain investors, dated as of August 30, 1995. 10.5* -- Termination Agreement by and between John W. McClaugherty and the Company, effective as of March 31, 1994. 10.6* -- ADAM/McClaugherty Termination-Redemption Agreement between the Company and John W. McClaugherty, dated August 30, 1995. 10.7* -- Irrevocable Standby Letter of Credit issued by NationsBank of Georgia, N.A., for the benefit of the Northwestern Mutual Life Insurance Company. 10.8* -- Amended and Restated 1992 Stock Option Plan. 10.9* -- 401(k) Adoption Agreement and Trust. 10.10* -- Employment Agreement between the Company and Robert S. Cramer, Jr., dated December 21, 1994. 10.11* -- Employment Agreement between the Company and Curtis A. Cain, dated December 19, 1994.
20 23
EXHIBIT DESCRIPTION - - ------- --------------------------------------------------------------------------------- 10.12* -- Employment Agreement between the Company and Gregory M. Swayne, dated December 19, 1994. 10.13* -- Employee Confidentiality, Non-disclosure and Non-competition Agreement between the Company and Robert A. DiProva, dated September 1, 1995. 10.14* -- Severance Agreement between the Company and Robert A. DiProva, dated September 1, 1995. 10.15 -- Employee Confidentiality, Non-disclosure and Non-competition Agreement between the Company and David Tranberg dated January 25, 1996. 10.16 -- Severance Agreement between the Company and David Tranberg, dated January 25, 1996. 10.17 -- Employee Confidentiality, Non-disclosure and Non-competition Agreement between the Company and Joseph R. Fuller, dated April 18, 1994. 10.18 -- Severance Agreement between the Company and Joseph R. Fuller, dated January 15, 1996. 10.19* -- Sublease between I.B.M. Corporation and the Company, dated as of March 1, 1994. 10.20* -- Sublease Agreement between PCI Group and the Company, dated as of October 13, 1994. 10.21* -- Lease between Northwestern Mutual Life Insurance Company and the Company, dated as of March 1, 1994. 10.22*+ -- Software Distribution Agreement by and among Matsushita Electric Industrial Co., C.I.T.D. and the Company, dated April 16, 1993. 10.23*+ -- Co-Development Agreement by and among Addison-Wesley Publishing Company, Inc. ("Addison-Wesley"), The Benjamin/Cummings Publishing Company, Inc. ("Benjamin/ Cummings") and the Company, dated June 25, 1993. 10.24*+ -- Product Development Agreement (Physiology Product) between Benjamin/Cummings and the Company, dated August 4, 1994, as amended by Letter Agreement dated May 19, 1995. 10.25*+ -- Product Development Agreement (Physiology Product -- Modules 4-8) between Benjamin/ Cummings and the Company, dated as of September 14, 1995. 10.26*+ -- Software Reseller Agreement by and between Churchill Livingstone, Medical Division of Longman Group UK Ltd., and the Company, dated as of December 30, 1993 (the agreement was assigned by Churchill Livingstone to Pearson Professional Limited, its successor, effective as of January 1, 1995). 10.27* -- Publishing Agreement by and between Williams & Wilkins and the Company, dated February 22, 1994. 10.28* -- License Agreement by and between J.S.K., Inc. and the Company, dated April 1, 1994, as amended on August 30, 1995. 10.29* -- Software Reseller Agreement between J.S.K., Inc. and the Company, dated April 29, 1994, as amended on August 30, 1995. 10.30*+ -- Software Distribution Agreement between Brderbund Software, Inc. and the Company, dated as of June 1, 1994, as amended by Amendment No. 1, dated as of November 1, 1994. 10.31*+ -- Software Reseller Agreement among the Company, Addison-Wesley, through its Addison-Wesley/Benjamin Cummings Group Sales Force Division, Benjamin/Cummings, and Addison-Wesley Publishers, Ltd., dated as of August 4, 1994. 10.32*+ -- Software Reseller Agreement between the Company and Addison-Wesley, through its Addison-Wesley School Division, dated as of February 9, 1995. 10.33* -- Compact Disc Distribution Agreement between Apple Computer, Inc. and the Company, dated August 18, 1994, as amended by Amendment 1, dated as of January 23, 1995 and Amendment 2, dated as of July 11, 1995. 10.34*+ -- Software Reseller Agreement between Longman Asia Limited and the Company, dated as of October 21, 1994, as amended by Amendment No. 1, dated as of November 6, 1994. 10.35*+ -- Software Reseller Agreement between Churchill Livingstone, Inc. and the Company, dated as of May 8, 1995. 10.36* -- Localization Agreement between Sunflowers Interactive Entertainment, a wholly-owned subsidiary of BOMICO, and the Company, dated June 28, 1995.
21 24
EXHIBIT DESCRIPTION - - ------- --------------------------------------------------------------------------------- 10.37* -- Software Reseller Agreement between BOMICO UNTERHALTUNGSSOFT-UND-HARDWARE VERTRIEBS GMBH and the Company, dated June 28, 1995. 10.38* -- Distribution Agreement with Ingram Micro, dated August 10, 1995. 10.39* -- Vendor Agreement between ABCO Distributors, Inc. and the Company, dated August 10, 1994. 10.40 -- Publishing/Developer Agreement by and between J.S.K., Inc. and the Company dated as of November 30, 1995. 10.41 -- Software Reseller Agreement between Pearson Professionals (Australia) and the Company dated as of December 13, 1995. 10.42 -- Addendum dated January 19, 1996 to Distribution Agreement with Ingram Micro, dated August 10, 1995. 10.43 -- Localization Agreement between ZEMI Corp. and the Company dated June 7, 1996. 10.44++ -- Amendment dated June 11, 1996 to Product Development Agreement (Physiology Product -- Modules 4-8) between Benjamin/Cummings and the Company, dated as of September 14, 1995. 11.1 -- Computation of Per Share Earnings. 27.1 -- Financial Data Schedule (for SEC use only).
- - --------------- * Incorporated by reference to the Company's Registration on Statement on Form S-1, File No. 33-96864 + The Company has been granted confidential treatment of portions of this Exhibit. Accordingly, portions thereof have been omitted and filed separately. ++ The Company has applied for confidential treatment of portions of this Exhibit. Accordingly, portions thereof have been omitted and filed separately. (b) Reports on Form 8-K No reports on Form 8-K have been filed with the Securities and Exchange Commission during the fourth quarter of fiscal 1996. 22 25 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) By: ROBERT S. CRAMER, JR. ------------------------------------ Robert S. Cramer, Jr. Chairman of the Board, Co-Founder and Director Date: June 30, 1996 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - - --------------------------------------------- --------------------------------- -------------- ROBERT S. CRAMER, JR. Chairman of the Board, Co-Founder June 30, 1996 - - --------------------------------------------- and Director Robert S. Cramer, Jr. CURTIS A. CAIN Chief Executive Officer June 30, 1996 - - --------------------------------------------- (Principal Executive Officer) Curtis A. Cain GREGORY M. SWAYNE President, Co-Founder, Vice- June 30, 1996 - - --------------------------------------------- President of Production and Gregory M. Swayne Director ROBERT A. DIPROVA Chief Financial Officer and Vice- June 30, 1996 - - --------------------------------------------- President of Administration Robert A. DiProva (Principal Financial Officer) MICHAEL S. FISHER Controller (Controller) June 30, 1996 - - --------------------------------------------- Michael S. Fisher JOHN W. MCCLAUGHERTY Director June 30, 1996 - - --------------------------------------------- John W. McClaugherty - - --------------------------------------------- Director June 30, 1996 Sally D. Elliott DR. ANTHONY J. GATTI Director June 30, 1996 - - --------------------------------------------- Dr. Anthony J. Gatti HOLCOMBE T. GREEN, JR. Director June 30, 1996 - - --------------------------------------------- Holcombe T. Green, Jr. - - --------------------------------------------- Director June 30, 1996 J. Larry Jones DR. C. EVERETT KOOP Director June 30, 1996 - - --------------------------------------------- Dr. C. Everett Koop
23 26 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of A.D.A.M. Software, Inc. In our opinion, the financial statements listed in the index appearing under Item 14(a)(1) and (2) on page 20 present fairly, in all material respects, the financial position of A.D.A.M. Software, Inc. at March 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended March 31, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP Atlanta, Georgia May 10, 1996 F-1 27 A.D.A.M. SOFTWARE, INC. BALANCE SHEET
MARCH 31, ----------------------- 1996 1995 -------- -------- (IN THOUSANDS, EXCEPT SHARE DATA) ASSETS Current assets Cash and cash equivalents.......................................... $ 5,352 $ 940 Short-term investments............................................. 10,981 -- Accounts receivable, net of allowances of $766 and $110............ 448 1,024 Inventories........................................................ 433 170 Prepaids and other................................................. 115 -- -------- -------- Total current assets....................................... 17,329 2,134 Property and equipment, net.......................................... 889 1,014 Software development costs, net...................................... 105 368 Restricted certificate of deposit.................................... 548 731 -------- -------- $ 18,871 $ 4,247 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities Accounts payable................................................... $ 526 $ 397 Accrued liabilities................................................ 614 446 Accrued interest................................................... 158 171 Accrued compensation and employee benefits......................... 182 130 Deferred rent...................................................... 245 196 Third party advances............................................... 250 250 Subordinated notes payable to related parties...................... -- 1,319 Current portion of notes payable................................... -- 961 -------- -------- Total current liabilities.................................. 1,975 3,870 Notes payable........................................................ -- 298 -------- -------- Total liabilities.......................................... 1,975 4,168 -------- -------- Mandatorily redeemable convertible preferred stock Series A, $0.01 par value; $12 redemption value; 937,500 shares authorized; 0 and 262,500 shares issued and outstanding.............................. -- 2,022 Shareholders' equity (deficit) Preferred stock, no par value; 9,062,500 shares authorized; no shares issued and outstanding................................... -- -- Common stock, $0.01 par value; 20,000,000 shares authorized; 5,234,647 and 2,696,887 shares issued and outstanding........... 52 27 Common stock warrants.............................................. 135 -- Additional paid-in capital......................................... 33,783 10,168 Accumulated deficit................................................ (17,074) (12,138) -------- -------- 16,896 (1,943) Commitments (Note 12)................................................ -------- -------- $ 18,871 $ 4,247 ======== ========
The accompanying notes are an integral part of these financial statements. F-2 28 A.D.A.M. SOFTWARE, INC. STATEMENT OF OPERATIONS
YEAR ENDED MARCH 31, ------------------------------- 1996 1995 1994 ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net revenues.................................................. $ 6,447 $ 5,742 $ 2,813 ------- ------- ------- Cost and expenses Cost of revenues............................................ 1,491 791 293 Sales and marketing......................................... 4,090 3,666 1,965 Product development......................................... 2,847 2,401 1,759 General and administrative.................................. 2,008 1,774 1,554 ------- ------- ------- 10,436 8,632 5,571 ------- ------- ------- Operating loss........................................... (3,989) (2,890) (2,758) Interest expense.............................................. (317) (383) (90) Interest income............................................... 415 43 64 ------- ------- ------- Loss from continuing operations before income taxes........... (3,891) (3,230) (2,784) Income taxes.................................................. -- -- -- ------- ------- ------- Loss from continuing operations.......................... (3,891) (3,230) (2,784) ------- ------- ------- Discontinued operations Loss from operations of MLI (less applicable income taxes of $0)...................................................... -- -- (291) Loss on disposal of MLI (less applicable income taxes of $0)...................................................... -- -- (109) ------- ------- ------- Loss from discontinued operations before extraordinary item..................................................... -- -- (400) Extraordinary loss on extinguishment of debt (net of income tax benefit of $29)...................................... (46) -- -- ------- ------- ------- Net loss................................................. $(3,937) $(3,230) $(3,184) ======= ======= ======= Net loss per common share and common share equivalent Loss before discontinued operations......................... $ (1.13) $ (1.22) $ (1.11) Loss from discontinued operations........................... -- -- (.16) Loss from extraordinary item................................ (.01) -- -- ------- ------- ------- Net loss per common share..................................... $ (1.14) $ (1.22) $ (1.27) ======= ======= ======= Weighted average number of common shares and common share equivalents outstanding..................................... 3,673 2,694 2,510 ======= ======= ======= Unaudited pro forma and supplemental earnings per share Pro forma net loss per common share......................... $ (.99) $ (1.17) ======= ======= Pro forma weighted average number of common shares outstanding.............................................. 3,962 2,766 ======= ======= Supplemental pro forma net loss per common share............ $ (.92) ======= Supplemental pro forma weighted average number of common shares outstanding....................................... 4,055 =======
The accompanying notes are an integral part of these financial statements. F-3 29 A.D.A.M. SOFTWARE, INC. STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
COMMON STOCK ADDITIONAL COMMON ------------------ PAID-IN STOCK ACCUMULATED SHARES AMOUNT CAPITAL WARRANTS DEFICIT TOTAL --------- ------ ---------- -------- ----------- ------- (IN THOUSANDS, EXCEPT SHARE DATA) BALANCE AT MARCH 31, 1993............ 2,169,739 $ 22 $ 5,049 $ -- $ (5,724) $ (653) Issuance of common stock............. 450,000 4 4,980 -- -- 4,984 Net loss............................. -- -- -- -- (3,184) (3,184) Conversion of borrowings from shareholder and accrued interest to common stock.............................. 65,515 1 130 -- -- 131 Exercise of common stock options..... 2,000 -- 6 -- -- 6 --------- ------ ---------- -------- ----------- ------- BALANCE AT MARCH 31, 1994............ 2,687,254 27 10,165 -- (8,908) 1,284 Net loss............................. -- -- -- -- (3,230) (3,230) Accretion of discount on mandatorily redeemable preferred stock......... -- -- (47) -- -- (47) Notes receivable received for stock options exercised.................. -- -- (43) -- -- (43) Exercise of common stock options..... 9,633 -- 93 -- -- 93 --------- ------ ---------- -------- ----------- ------- BALANCE AT MARCH 31, 1995............ 2,696,887 27 10,168 -- (12,138) (1,943) Issuance of common stock............. 1,558,600 15 16,489 -- -- 16,504 Net loss............................. -- -- -- -- (3,937) (3,937) Retirement of common shares.......... (125,000) (1) (999) (1,000) Conversion of preferred stock........ 762,500 8 6,186 -- -- 6,194 Accretion of discount on mandatorily redeemable preferred stock......... -- -- (244) -- -- (244) Exercise of common stock options..... 341,660 3 1,184 -- -- 1,187 Issuance of common stock warrants.... -- -- -- 135 -- 135 --------- ------ ---------- -------- ----------- ------- BALANCE AT MARCH 31, 1996............ 5,234,647 $ 52 $ 33,783 $135 $ (17,074) $16,896 ======== ====== ======= ======= ========= =======
The accompanying notes are an integral part of these financial statements. F-4 30 A.D.A.M. SOFTWARE, INC. STATEMENT OF CASH FLOWS
YEAR ENDED MARCH 31, ---------------------------- 1996 1995 1994 -------- ------- ------- (IN THOUSANDS) Cash flows from operating activities Net loss....................................................... $ (3,937) $(3,230) $(3,184) Adjustments to reconcile net loss to net cash used in operating activities Depreciation and amortization.................... 796 562 274 Accretion................................................... (118) -- -- Loss on disposal of property and equipment.................. -- -- 16 Loss on disposal of MLI..................................... -- -- 109 Loss on extinguishment of debt.............................. 75 -- -- Changes in assets and liabilities Decrease (increase) in accounts receivable................ 576 (477) (24) (Increase) in inventories................................. (263) (14) (156) (Increase) decrease in prepaids and other assets.......... (115) -- 26 Increase (decrease) in accounts payable................... 129 (141) 338 Increase (decrease) in accrued liabilities................ 168 (499) 325 (Decrease) increase in accrued interest................... (13) 132 -- Increase (decrease) in accrued compensation and employee benefits............................................... 52 26 (6) Increase in deferred rent................................. 49 137 59 -------- ------- ------- Net cash used in operating activities.................. (2,601) (3,504) (2,223) -------- ------- ------- Cash flows from investing activities Purchases of short-term investments............................ (20,803) -- -- Proceeds from sale of short-term investments................... 10,000 -- -- Purchases of property and equipment............................ (315) (180) (1,159) Redemption (purchase) of restricted certificate of deposit..... 183 167 (898) Software development costs..................................... (93) (449) (41) -------- ------- ------- Net cash used in investing activities.................. (11,028) (462) (2,098) -------- ------- ------- Cash flows from financing activities Proceeds from issuance of common stock, net of issuance costs, and exercise of options..................................... 17,691 7 4,990 Repurchase of common stock..................................... (1,000) -- -- Proceeds from issuance of mandatorily redeemable preferred stock, net of issuance costs................................ 3,928 1,975 -- Proceeds from issuance of subordinated debt.................... -- 2,244 -- Borrowings under line of credit................................ -- 291 100 Repayments under line of credit................................ -- (291) (300) Repayments of notes payable.................................... (2,578) (36) (30) Other.......................................................... -- (71) -------- ------- ------- Net cash provided by financing activities................... 18,041 4,190 4,689 -------- ------- ------- Increase in cash and cash equivalents............................ 4,412 224 368 Cash and cash equivalents, beginning of period................... 940 716 348 -------- ------- ------- Cash and cash equivalents, end of period......................... $ 5,352 $ 940 $ 716 ======== ======= =======
The accompanying notes are an integral part of these financial statements. F-5 31 A.D.A.M. SOFTWARE, INC. NOTES TO FINANCIAL STATEMENTS 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A.D.A.M. Software, Inc. (A.D.A.M. or the Company) creates, publishes and markets educational multimedia software products that provide anatomical, medical, scientific and health-related information for the academic/professional (academic) and consumer markets. A.D.A.M.(R) products incorporate internally developed, original medical illustrations with text, audio, photography, animation and video in easy-to-use, interactive software applications. BASIS OF PRESENTATION The accompanying financial statements for the year ended March 31, 1994 include the accounts of A.D.A.M. and Medical-Legal Illustrations, Inc. (MLI). Effective June 30, 1992, MLI was merged into A.D.A.M., with MLI operating as the medical illustrations business of A.D.A.M., and the separate corporate existence of MLI ceased. The merger was accounted for as a combination of entities under common control and was accounted for by combining the historical accounts of A.D.A.M. and MLI (in a manner similar to a pooling of interest) since A.D.A.M. and MLI had common shareholders. The shareholders of MLI received 312,760 shares of A.D.A.M. common stock for the 1,250 outstanding common shares of MLI. Subsequently, on March 31, 1994, the Company approved a plan to discontinue the operations and dispose of the medical illustrations business (Note 14). The disposal of MLI was reflected in the March 31, 1994 financial statements. Certain prior year amounts in the financial statements have been reclassified to conform to current year presentation. USE OF ESTIMATES 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 and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of net revenues and expenses during the reporting period. Actual results could differ from those estimates. REVENUE RECOGNITION The Company sells its products into the academic and consumer markets through alliances with distributors and by direct sales and marketing activities. Revenue from product sales is generally recognized at the time of shipment to customers, distributors or resellers or, in the case of consignment arrangements, at the time of shipment from the consignee to their customers. The Company records allowances for product returns based on historical experience and anticipated returns. Payments received in advance of shipments are recorded as deferred revenue and customer deposits in the accompanying balance sheet and are recognized as revenue when the related software is shipped. RESTRICTED CERTIFICATE OF DEPOSIT In connection with the Company's noncancellable operating lease for its office space, the Company is required to purchase certificates of deposit with a bank securing a letter of credit guaranteeing rental payments under the lease (see Note 12). The certificate of deposit matures May 29, 1996, bears interest at 4.3% and is carried at cost which approximates market. CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of marketable securities and trade receivables. The Company restricts investment of marketable F-6 32 A.D.A.M. SOFTWARE, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) securities to short-term investment grade securities and direct or guaranteed obligations of the United States government. A significant portion of the Company's revenues and related receivables are from major distributors. At March 31, 1996, the Company had receivables from two major distributors of approximately $400,000 and $133,000, respectively. Total sales to these distributors were approximately 18% and 5% of net revenues during fiscal 1996. 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. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost, less accumulated depreciation and amortization. Depreciation and amortization are provided using the straight-line method for financial reporting purposes and accelerated methods for income tax purposes over the estimated useful lives of three to five years. SOFTWARE DEVELOPMENT COST Capitalized software development costs consist principally of salaries and certain other expenses directly related to development and modifications of software products capitalized in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed". Capitalization of such costs begins when a working model has been produced as evidenced by completion of design, planning, coding and testing such that the product meets its design specifications and has thereby established technological feasibility as defined in SFAS No. 86. Capitalization of such costs ends when the resulting product is available for general release to the public. Amortization of capitalized software development costs is provided at the greater of the ratio of current product revenue to the total of current and anticipated product revenue or on a straight-line basis over the estimated economic life of the software, which the Company has determined is not more than eighteen months. It is reasonably possible that those estimates of anticipated product revenues, the remaining estimated economic life of the product, or both will be reduced significantly in the near term due to changing technologies. As a result, the carrying amount of capitalized software costs may be reduced materially in the near term. INCOME TAXES On April 1, 1993, the Company adopted SFAS 109, "Accounting for Income Taxes." The adoption of SFAS 109 changed the Company's method of accounting for income taxes from the deferred method to an asset and liability approach. The asset and liability approach requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The adoption of SFAS 109 did not have a significant effect on the financial statements. LOSS PER SHARE Net loss per share is computed using the weighted average number of common shares and common share equivalents outstanding during 1996, 1995 and 1994. The loss per common share gives effect to the accretion of discount on mandatorily redeemable preferred stock. The Company's stock options and warrants are excluded from the calculation of loss per share due to their anti-dilutive effect. F-7 33 A.D.A.M. SOFTWARE, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) PRO FORMA NET LOSS PER SHARE (UNAUDITED) Pro forma net loss per share has been included to give effect to the conversion of the Company's outstanding convertible preferred stock upon consummation of the initial public offering (see Notes 8 and 9). Pro forma net loss per share is computed using the weighted average number of common shares and common share equivalents outstanding during 1996 and 1995. The number of pro forma weighted average shares outstanding during 1996 and 1995 is based on the number of weighted average shares outstanding in each period after giving effect to the estimated number of additional shares (289,000 in fiscal 1996 and 72,000 in fiscal 1995) that would have been outstanding upon conversion of the mandatorily redeemable preferred stock. The Company's stock options and warrants are excluded from the 1996 and 1995 calculation of pro forma net loss per share due to their anti-dilutive effect. SUPPLEMENTAL PRO FORMA NET LOSS PER SHARE (UNAUDITED) Supplemental pro forma net loss per share for 1996 is computed using the pro forma weighted average number of shares of common stock and common stock equivalents increased by the estimated number of additional shares to repay certain indebtedness. This payment was effected after consummation of the initial public offering. Pro forma net loss is decreased to give effect to the reduction in interest costs of approximately $187,000 in fiscal 1996. NEW PRONOUNCEMENTS In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" (SFAS 123) which establishes a fair value based method model to value options and determine compensation costs at the date of grant. However, SFAS 123 provides companies with the election to continue to measure compensation cost using the methods prescribed by Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" (APB 25). Companies making such election must make pro forma comparative disclosures of net income and earnings per share beginning in fiscal years beginning after December 31, 1995 as if SFAS 123 had been applied. The Company intends to elect the disclosure alternative of SFAS 123; therefore, no adjustment as a result of adopting this statement is anticipated. 2. MARKETABLE SECURITIES On March 31, 1996, the Company held investments in marketable 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. Securities with a maturity date within one year are classified as short-term investments as a part of Current Assets and are stated at fair value plus accrued interest. These held-to-maturity securities at March 31, 1996 included the following (in thousands):
GROSS AMORTIZED FAIR UNREALIZED COST VALUE GAIN/(LOSS) --------- ------- ----------- Paine Weber Commercial Paper, face value of $2,000,000 interest at 5.38% due April 1, 1996.................. $ 2,000 $ 1,999 $ (1) CIGNA Commercial Paper, face value of $2,000,000 interest at 5.38%, due April 1, 1996................. 2,000 1,999 (1) GMAC Commercial Paper, face value of $2,000,000 interest at 5.33%, due June 6, 1996.................. 1,981 1,979 (2) U.S. Treasury Note, face value of $1,000,000 interest at 7.25%, due November 30, 1996...................... 1,036 1,012 (24)
F-8 34 A.D.A.M. SOFTWARE, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
GROSS AMORTIZED FAIR UNREALIZED COST VALUE GAIN/(LOSS) --------- ------- ----------- U.S. Treasury Strips, face value of $1,000,000 interest at 5.34%, due May 15, 1996........................... 994 994 -- AMEX -- Commercial Paper, face value of $1,000,000 interest at 5.56%, due June 3, 1996.................. 990 990 -- CIGNA Financial -- Commercial Paper, face value of $1,000,000 interest at 5.34%, due August 30, 1996.... 977 977 -- Federal Home Loan Bank Note, face value of $1,000,000 interest at 5.4%, due March 28, 1997................. 1,003 999 (4) --------- ------- ----------- $10,981 $10,949 $ (32) ======= ======= =========
Net unrealized losses on held-to-maturity securities have not been recognized in the accompanying financial statements. There were no realized gains or losses for the years ended March 31, 1996, 1995 and 1994. 3. INVENTORIES The components of inventory are summarized as follows (in thousands):
MARCH 31, ----------- 1996 1995 ---- ---- Raw materials........................................................... $274 $111 Finished goods.......................................................... 159 59 ---- ---- $433 $170 ==== ====
4. PROPERTY AND EQUIPMENT Property and equipment is summarized as follows (in thousands):
MARCH 31, ---------------- 1996 1995 ------- ------ Computers........................................................... $ 1,073 $ 840 Equipment........................................................... 257 221 Furniture and fixtures.............................................. 545 515 Leasehold improvements.............................................. 167 161 ------- ------ 2,042 1,737 Less -- accumulated depreciation and amortization................... (1,153) (723) ------- ------ $ 889 $1,014 ======= ======
Depreciation and amortization of property and equipment totalled approximately $440,000, $443,000 and $271,000 for 1996, 1995 and 1994, respectively. F-9 35 A.D.A.M. SOFTWARE, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 5. PRODUCT DEVELOPMENT EXPENDITURES Product development expenditures are summarized as follows (in thousands):
YEAR ENDED MARCH 31, ---------------------------- 1996 1995 1994 ------ ------ ------ Total development expenditures........................... $2,940 $2,850 $1,800 Less: Additions to capitalized software development, prior to amortization.................................. (93) (449) (41) ------ ------ ------ Product development expense.............................. $2,847 $2,401 $1,759 ====== ====== ======
The activity in the capitalized software development account is summarized as follows (in thousands):
YEAR ENDED MARCH 31, ---------------------------- 1996 1995 1994 ------ ------ ------ Balance at beginning of year, net........................ $ 368 $ 38 $ -- Additions................................................ 93 449 41 Amortization expense..................................... (356) (119) (3) ------ ------ ------ Balance at end of year, net.............................. $ 105 $ 368 $ 38 ====== ====== ======
Capitalized software development costs of approximately $0, $140,000 and $12,000 at March 31, 1996, 1995 and 1994, respectively, were not subject to amortization as products were not available for general release. 6. DEBT Debt consists of the following (in thousands):
MARCH 31, ---------------- 1996 1995 ---- ------- Note payable to bank, bearing interest at 8.5% per annum, payable in monthly principal and interest installments of $5,345 Through February 1998 with a final payment due March 15, 1998, collateralized by substantially all Company assets and secured by guarantees from certain officers and shareholders................. $-- $ 334 Subordinated notes payable, including notes payable to a shareholder and other related parties of approximately $1,319, bearing interest at 15% per annum, payable in quarterly interest installments, and principal payments due April 28, 1995 through November 29, 1995................................................. -- 2,244 ---- ------- -- 2,578 Less current maturities........................................... -- (2,280) ---- ------- Long-term debt.................................................... $-- $ 298 ==== =======
During fiscal years 1996 and 1995, the Company maintained a line of credit with a bank. At March 31, 1996, borrowings of $450,000 were available under the line of credit agreement through May 1996 bearing interest at prime (8.25% at March 31, 1996) plus 1% with an annual renewal fee of 1% of the unused line of credit. The line of credit is collateralized by substantially all of the Company's assets. At March 31, 1996 and 1995, the Company had no borrowings outstanding under the agreement. At March 31, 1996 and 1995, the Company had unsecured advances of $250,000 plus accrued interest payable to a third party. The advances are payable on demand. F-10 36 A.D.A.M. SOFTWARE, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 7. INCOME TAXES On April 1, 1993, the Company adopted SFAS 109 and recorded a deferred benefit of approximately $2,066,000 for net operating loss carryforwards and $28,000 of cumulative temporary deductible differences. Simultaneously, the Company recorded a valuation allowance of approximately $2,094,000. At March 31, 1996, the Company had net operating loss carryforwards available for tax purposes of approximately $14,775,000, which will expire in years 2004 through 2011. Future sale of shares by certain significant shareholders could create a substantial ownership change (as defined by the Internal Revenue Service) which would limit the amount of the Company's future taxable income that may be offset by preownership change net operating loss carryforwards. The provision for income taxes differs from the amount computed by applying the applicable U.S. statutory federal income tax rate of 34 percent to pre-tax loss from continuing operations as a result of the following items (in thousands):
YEAR ENDED MARCH 31, --------------------------- 1996 1995 1994 ------- ------- ------- Federal tax benefit on income from continuing operations at statutory federal income tax rate................... $(1,319) $(1,098) $ (947) (Increase) decrease due to: Change in valuation allowance.......................... 1,430 1,264 1,295 Loss attributable to MLI............................... -- -- (152) State taxes............................................ (117) (128) (110) Research and development credits....................... (12) (51) (48) Other.................................................. 18 13 (38) ------- ------- ------- $ -- $ -- $ -- ======= ======= =======
The components of the Company's deferred tax assets and liabilities are as follows (in thousands):
MARCH 31, ----------------- 1996 1995 ------- ------- Deferred tax assets Fixed assets................................. $ 23 $ 1 Accrued expenses............................................... 94 89 Allowance for doubtful accounts................................ 286 42 Net operating loss carryforwards............................... 5,609 4,563 Research and development credits............................... 111 99 ------- ------- 6,123 4,794 ------- ------- Deferred tax liabilities Software development cost............... (40) (141) ------- ------- (40) (141) ------- ------- Net deferred tax asset before valuation allowance................ 6,083 4,653 Valuation allowance.............................................. (6,083) (4,653) ------- ------- $ -- $ -- ======= =======
Net tax assets increased approximately $1,430,000 for the year ended March 31, 1996, primarily due to an increase in net operating loss carryforwards. Due to the existence of continuing losses, the Company recorded a corresponding increase in the valuation allowance of $1,430,000. Management's estimate of the valuation allowance could be effected in the near term based on taxable income generated in future years. F-11 37 A.D.A.M. SOFTWARE, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 8. MANDATORILY REDEEMABLE PREFERRED STOCK During fiscal 1996 and 1995, the Company issued 500,000 shares and 262,500 shares, respectively, of Series A preferred stock (Convertible Preferred stock) at $8.00 per share. The Convertible Preferred stock was convertible into a like number of shares of the Company's common stock. The call features of the Convertible Preferred stock allowed for redemption by the Company of the stock beginning on the fifth anniversary of the initial issuance of the Convertible Preferred stock, and on each anniversary thereafter. Holders of the Convertible Preferred stock could redeem the stock beginning on the fifth anniversary of the initial issuance of the Convertible Preferred stock. The redemption price included a guaranteed annual return of 10% per share and the conversion feature expired on the tenth anniversary of the initial issuance of the Convertible Preferred stock. Accretion of the discount on the mandatorily redeemable preferred stock was recorded as a charge to additional paid-in capital and a credit to the mandatorily redeemable preferred stock account. Upon consummation of the initial public offering discussed in Note 9, the 762,500 shares were automatically converted into an equal number of common shares. 9. SHAREHOLDERS' EQUITY In November 1995, the Company completed an initial public offering of 2,000,000 shares of its common stock comprised of 1,558,600 newly-issued Company shares and 441,400 shares sold by Selling Shareholders. Employees and certain shareholders exercised 191,200 options and sold the shares obtained as part of the Offering. The Company used a portion of the proceeds to repay indebtedness and for general corporate purposes. 10. COMMON STOCK, OPTIONS AND WARRANTS A.D.A.M. has two stock option plans under which the Company may grant incentive or non-qualified stock options to full-time employees and key persons. Options are granted at an exercise price which is not less than fair market value as estimated by the Board of Directors and vest ratably over a three-year period. Options granted under the 1991 Option Plan expire five years from the date of grant. Options granted under the 1992 Option Plan expire ten years from the date of grant. In addition to the options granted under A.D.A.M.'s incentive and non-qualified stock option plans, A.D.A.M. also granted options to purchase shares of its common stock to certain employees, directors and consultants in connection with their association with the Company. These options are immediately exercisable and expire five years from the date of grant with the exception of 5,000 options granted during fiscal 1995 which expire ten years from the date of grant. Additionally, in June 1993, the Company issued options to purchase 245,000 shares of its common stock to an investor at $11.11 per share. These options expired in June 1995 without exercise. In August 1995, the Company issued options to purchase 64,658 shares of its common stock to an investor at $11.11 per share. These options are exercisable for one year from the date of issuance. F-12 38 A.D.A.M. SOFTWARE, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Transactions related to stock options for the three years ended March 31, 1996 are as follows:
OPTION PRICE SHARES PER SHARE --------- ------------ Outstanding at March 31, 1993................................. 1,147,760 $ 2.00-7.00 Granted..................................................... 302,467 11.11 Exercised................................................... (2,000) 3.00 Canceled or expired......................................... (1,800) 11.11 --------- ------------ Outstanding at March 31, 1994................................. 1,446,427 2.00-11.11 Granted..................................................... 151,900 8.00-11.11 Exercised................................................... (9,633) 3.00-7.00 Canceled or expired......................................... (93,067) 5.00-11.11 --------- ------------ Outstanding at March 31, 1995................................. 1,495,627 2.00-11.11 Granted..................................................... 449,758 4.75-12.00 Exercised................................................... (341,660) 2.00-7.00 Canceled or expired......................................... (473,990) 3.00-11.11 --------- ------------ Outstanding at March 31, 1996................................. 1,129,735 $ 2.00-12.00 ======== ==========
The options outstanding at March 31, 1996 for 1,129,735 shares are exercisable at prices ranging from $2.00 to $12.00 per share for total exercise value of approximately $7,772,000. The Company has reserved 1,400,000 shares of common stock for issuance under the 1992 Option Plan. The subordinated notes payable issued during fiscal 1995 included 112,188 warrants exercisable into a like number of common shares for $8.00 per share. During the first six months of fiscal 1996, the maturity of $1,650,000 aggregate principal amount of subordinated notes was extended for an additional year in exchange for the issuance of 82,500 warrants. An additional 19,375 warrants were issued to the placement agent for the Convertible Preferred Stock. The warrants are exercisable beginning on the first anniversary of the date of notes issuance and expire five years thereafter. 11. RELATED PARTY TRANSACTIONS During 1996, the Company sold approximately $308,000 of product to Benjamin/Cummings, a subsidiary of an investor of the Company. Additionally, the Company had royalty revenues of approximately $93,000 related to Benjamin/Cummings. The Company purchased approximately $30,000 of product from Benjamin/Cummings during the year and paid royalty expense of approximately $47,000. During fiscal 1996, an officer and shareholder of the Company borrowed $25,000 as evidenced by a promissory note which bore interest at 12% per annum. The promissory note was repaid in conjunction with the initial public offering. During fiscal 1996, the Company sold approximately $64,000 of product to J.S.K., Inc. (JSK), whose president is a director and shareholder of the Company. JSK paid the Company approximately $86,000 in licensing and rental fees during the same period. During fiscal 1995, the Company issued subordinated debt in the amount of $718,750 and $600,000 to an officer and shareholder of the Company and to other entities operated by a director of the Company, respectively. The subordinated notes payable bearing interest at 15%, payable in quarterly installments, are due on varying maturity dates from May 2, 1996 through November 29, 1996. The subordinated notes payable issued during fiscal 1995 included 35,938 and 17,500 warrants exercisable into an equal number of shares of common stock for $8.00 per share. During fiscal 1996, the Company repaid the subordinated debt with proceeds from the initial public offering discussed in Note 9. Certain officers and shareholders have guaranteed repayment of the Company's bank indebtedness (see Note 6). F-13 39 A.D.A.M. SOFTWARE, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 12. COMMITMENTS The Company leases office space and equipment under noncancellable lease agreements expiring on various dates through 2002. At March 31, 1996, future minimum rentals for noncancellable leases with terms in excess of one year were as follows (in thousands):
MINIMUM ANNUAL YEAR ENDING MARCH 31, RENTALS - - --------------------- ------- 1997......................................................................... $ 635 1998......................................................................... 642 1999......................................................................... 733 2000......................................................................... 752 2001......................................................................... 752 Thereafter................................................................... 940 ------- $4,454 =======
Rent expense for the years ended March 31, 1996, 1995 and 1994 was approximately $663,000, $670,000 and $341,000, respectively. The Company is required to secure rental payments under the office space lease agreement with a letter of credit supported by certificates of deposit. The amount of the certificates of deposit securing the letter of credit decreases over the term of the lease. The Company entered into a development agreement in September 1995 whereby the Company is required to fund a minimum of $250,000 for four products to be completed by June 1997. There were no costs capitalized under this agreement during fiscal 1996. During December 1994, the Company entered into employment agreements with certain officers of the Company. Each agreement expires on December 31, 1997 (the "Expiration Date") and is automatically renewable for successive one-year periods unless written notice of non-renewal is given by either party. If the agreements are terminated without cause, the Company will be obligated to pay certain amounts as specified by the agreements. 13. 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 during the year 1996, 1995 and 1994 include interest of approximately $329,000, $252,000 and $63,000, respectively. Noncash investing and financing activities having an impact on the balance sheet are as follows:
YEAR ENDED MARCH 31, -------------------- 1996 1995 1994 ------ ---- ---- Conversion of borrowings from shareholder and accrued interest to common stock................................................... -- -- $131 Notes receivable taken for stock options exercised............... -- $43 -- Additions to common stock through decreases in accrued liabilities.................................................... -- 43 -- Conversion of preferred stock.................................... $6,194 -- -- Preferred stock accretion........................................ 244 47 -- Issuance of common stock warrants................................ 135 -- --
F-14 40 A.D.A.M. SOFTWARE, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 14. DISCONTINUED OPERATIONS On March 31, 1994, the Company made the strategic decision to focus its business exclusively on creating educational multimedia software products and to discontinue its customized medical illustration business. As part of this strategic decision, the Company terminated all employees associated with the medical legal illustrations business and entered into an agreement (the Agreement) on April 7, 1994 with a former officer of the Company which licenses the MLI trademark, the right to use electronic anatomical images, and the MLI name in exchange for royalties from future MLI revenues. The discontinuance of MLI's operations is recorded as a disposal of a segment as of March 31, 1994 in the accompanying financial statements and, accordingly, the operating results have been classified as discontinued operations for 1994. The historical cash flows from MLI's operations consist of funding its losses through equity transactions and have not been separately stated in the statement of cash flows for 1994. MLI revenues for the year ended March 31, 1994 were approximately $1,006,000. In connection with the Agreement, the Company retained $50,000 of MLI customer deposits, accrued $121,000 of employee severance expenses and transferred equipment with a net book value of $38,000 to MLI at March 31, 1994. Any future royalties derived from the Agreement have not been reflected in the computation of the loss on disposal at March 31, 1994 due to the uncertainty in the realizability of the potential receivable and will be reflected in the Company's future results from operations as the royalties are collected. No income tax benefits have been allocated to the division's fiscal 1994 losses or the loss on disposal because there are no realizable taxable benefits available to allocate to the discontinued operation. Such losses are included in the Company's net operating loss carryforwards disclosed in Note 7. 15. PRODUCT SALES The Company exports its products through agreements with international and domestic distributors which grant territorial rights. During 1996, 1995 and 1994, the Company had net revenue from international sales of $983,000, $1,645,000 and $790,000, respectively. A summary of revenues by geographic area for 1996, 1995 and 1994 is as follows (in thousands):
YEAR ENDED MARCH 31, ---------------------------- 1996 1995 1994 ------ ------ ------ United States............................................ $5,464 $4,097 $2,023 Europe................................................... 359 633 174 Pacific Rim and Asia..................................... 370 791 464 Other.................................................... 254 221 152 ------ ------ ------ $6,447 $5,742 $2,813 ====== ====== ======
16. SUBSEQUENT EVENT On April 25, 1996 the Company and certain of its officers and directors were named in a class action lawsuit. The complaint alleges violations of Section 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. The Company and its officers and directors intend to defend vigorously against the allegations. The Company cannot estimate the impact of the outcome of the lawsuit on the financial condition or results of operations. F-15 41 SCHEDULE II A.D.A.M. SOFTWARE SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS FOR THE YEAR ENDED MARCH 31, 1996
BALANCE AT CHARGED TO ACCOUNTS BALANCE AT BEGINNING COSTS AND WRITTEN END OF DESCRIPTION OF PERIOD EXPENSES OFF PERIOD - - ------------------------------------------------------ --------- ---------- -------- ---------- (THOUSANDS OF DOLLARS) Allowance for Doubtful Accounts....................... $ 110 $ 687 $ 31 $ 766 ======== ======== ======== ========
FOR THE YEAR ENDED MARCH 31, 1995
BALANCE AT CHARGED TO ACCOUNTS BALANCE AT BEGINNING COSTS AND WRITTEN END OF DESCRIPTION OF PERIOD EXPENSES OFF PERIOD - - ------------------------------------------------------ --------- ---------- -------- ---------- (THOUSANDS OF DOLLARS) Allowance for Doubtful Accounts....................... $ 51 $ 53 $ (6) $ 110 ======== ======== ======== ========
FOR THE YEAR ENDED MARCH 31, 1994
BALANCE AT CHARGED TO ACCOUNTS BALANCE AT BEGINNING COSTS AND WRITTEN END OF DESCRIPTION OF PERIOD EXPENSES OFF PERIOD - - ------------------------------------------------------ --------- ---------- -------- ---------- (THOUSANDS OF DOLLARS) Allowance for Doubtful Accounts....................... $ 40 $ 46 $ 35 $ 51 ======== ======== ======== ========
EX-10.15 2 EMPLOYEE AGREEMENT - DAVID TRANBERG 1 EXHIBIT 10.15 Employee Name: David A. Tranberg A.D.A.M. SOFTWARE, INC. EMPLOYEE CONFIDENTIALITY, NON-DISCLOSURE AND NON-COMPETITION AGREEMENT (LONG FORM - KEY EMPLOYEE) PLEASE READ THIS AGREEMENT CAREFULLY. THIS AGREEMENT DESCRIBES THE BASIC LEGAL AND ETHICAL RESPONSIBILITIES THAT YOU ARE REQUIRED TO OBSERVE AS AN EMPLOYEE EXPOSED TO HIGHLY SENSITIVE TECHNOLOGY AND STRATEGIC INFORMATION. THIS AGREEMENT, effective as of the date shown below, by and between A.D.A.M. Software, Inc. ("Employer") and you, as an employee of Employer: SECTION 1. SCOPE OF DUTIES 1.1. EMPLOYMENT BY EMPLOYER AS SOLE OCCUPATION. Subject only to the exceptions provided in this Agreement, you agree to devote your full business time, attention, skill, and effort exclusively to the performance of the duties that Employer may assign you from time to time. You may not engage in any business activities or render any services of a business, commercial, or professional nature for compensation for the benefit of anyone other than Employer, unless Employer has given its consent in writing in advance. It is the policy of Employer never to allow its personnel to work for any competitive enterprise during their employment, including after hours, on weekends, or during vacation time, even if only organizational assistance or limited consultation is involved. This Agreement does not prohibit the investment of a reasonable part of your assets in the stock of a company whose stock is traded on a national stock exchange. 1.2. NONINTERFERENCE WITH THIRD-PARTY RIGHTS. Employer is employing you with the understanding that (1) you are free to enter into employment with Employer and (2) only Employer is entitled to the benefit of your work. Employer has no interest in using any other person's patents, copyrights, trade secrets, or trademarks in an unlawful manner. You should be careful not to misapply proprietary rights that Employer has no right to use. 1.3. CONTINUANCE OF EMPLOYMENT. The faithful observance of this Agreement by you is, and shall remain, a condition to your employment. YOUR EMPLOYMENT IS TERMINABLE AT WILL BY EITHER YOU OR EMPLOYER AT ANY TIME. Employer asks that as courtesy, at least two weeks' notice be given in advance of any termination by you of employment. Employer reserves the absolute right to make any changes in assignment, personnel, or employee benefits at any time. 2 SECTION 2. OWNERSHIP OF EMPLOYEE DEVELOPMENTS 2.1. EXISTING PROPRIETARY RIGHTS. The patents, patent applications, copyrights and trademarks listed on Schedule 1 hereto, are the only intangible interests and properties that you own, or have any claim in, at the time of execution of this Agreement. IF EMPLOYEE OWNS ANY PATENTS, PATENT APPLICATIONS, COPYRIGHTS OR TRADEMARKS, THEY SHOULD BE LISTED ON SCHEDULE 1 AND ATTACHED TO THIS AGREEMENT. 2.2. OWNERSHIP OF WORK PRODUCT. a. Employer shall own all Work Product (as defined in Section 2.2(e)). All Work Product shall be considered work made for hire by you and owned by Employer. b. If any of the Work Product may not, by operation of law, be considered work made for hire by you for Employer, or if ownership of all right, title, and interest of the intellectual property rights therein shall not otherwise vest exclusively in Employer, you agree to assign, and upon creation thereof automatically assign, without further consideration, the ownership of all Trade Secrets (as defined in Section 3.2), U.S. and international copyrights, patentable inventions, and other intellectual property rights therein to Employer, its successors and assigns. c. Employer, its successors and assigns, shall have the right to obtain and hold in its or their own name copyright registrations, trademark registrations, patents and any other protection available in the foregoing. d. You agree to perform, upon the reasonable request of Employer, during or after your employment, such further acts as may be necessary or desirable to transfer, perfect, and defend Employer's ownership of the Work Product. When requested, you will 1. Execute, acknowledge, and deliver any requested affidavits and documents of assignment and conveyance with respect to any Work Product; 2. Assist in the preparation, prosecution, procurement, maintenance and enforcement of copyrights and, if applicable, patents with respect to the Work Product in any countries; 3. Provide testimony in connection with any proceeding affecting the right, title, or interest of Employer in any Work Product; and 4. Perform any other acts deemed necessary or desirable to carry out the purposes of this Agreement. - 2 - 3 Employer shall reimburse all reasonable out-of-pocket expenses incurred by you at Employer's request in connection with the foregoing, including (unless you are otherwise being compensated at the time) a reasonable per diem or hourly fee for services rendered following termination of your employment. e. For purposes hereof, "Work Product" shall mean all intellectual property rights, including all Trade Secrets, U.S. and international copyrights, patentable inventions, discoveries and improvements, and other intellectual property rights, in any programming, documentation, technology, or other Work Product that relates to the business and interests of Employer and that you conceive, develop, or deliver to Employer at any time during the term of your employment. Work Product shall also include all intellectual property rights in any programming, documentation, technology, or other work product that is now contained in any of the products or systems, including development and support systems, of Employer to the extent you conceived, developed, or delivered such Work Product to Employer prior to the date of this Agreement while you were engaged as an independent contractor or an employee of Employer. You hereby irrevocably relinquish for the benefit of Employer and its assigns any moral rights in the Work Product recognized by applicable law. 2.3. CLEARANCE PROCEDURE FOR PROPRIETARY RIGHTS NOT CLAIMED BY EMPLOYER. If you ever wish to create or develop, on your own time and with your own resources, anything that may be considered Work Product but to which you believe you should be entitled to the personal benefit of, you are required to follow the clearance procedure set forth on this section in order to ensure that Employer has no claim to the proprietary rights that may arise. Before you begin any development work on your own time, you must give Employer advance written notice of your plans and supply a description of the development under consideration. Unless otherwise agreed in a writing signed by Employer prior to receipt, Employer shall have no obligation of confidence with respect to such description. Employer will determine, in good faith, within thirty (30) days after you have fully disclosed your plans to Employer, whether the development is claimed by Employer as Work Product. If Employer determines that it does not claim such development, you will be notified in writing and may retain ownership of the development to the extent of what has been disclosed to Employer. You should submit for further clearance any significant improvement, modification, or adaptation so that it can be determined whether the improvement, modification, or adaptation relates to the business or interests of Employer. Clearance under this procedure does not relieve you of the need to obtain the written consent of Employer before engaging in business activities or rendering business, commercial, or professional services for the benefit of anyone other than Employer, as required in Section 1.1 hereof. Employer thus - 3 - 4 reserves the right to exercise greater control over development work that you might consider doing for profit after hours, as opposed to mere hobby work pursued in your spare time. SECTION 3. CONFIDENTIALITY 3.1. CONSEQUENCES OF ENTRUSTMENT WITH SENSITIVE INFORMATION. You should recognize that your position with Employer requires considerable responsibility and trust. Relying on your ethical responsibility and undivided loyalty, Employer expects to entrust you with highly sensitive confidential, restricted, and proprietary information involving Trade Secrets (as defined in Section 3.2) and Confidential Information (as defined in Section 3.4). You are legally and ethically responsible for protecting and preserving Employer's proprietary rights for use only for Employer's benefit, and these responsibilities may impose unavoidable limitations on your ability to pursue some kinds of business opportunities that might interest you during or after your employment. 3.2. TRADE SECRETS DEFINED. For purposes of this Agreement, a "Trade Secret" is any information, including, but not limited to, technical or nontechnical data, techniques relating to the preparation and production of illustrations for use in Employer's computer software products, source codes, flow charts, diagrams, technical documentation, scripts, algorithms, file structures, metadata, data definitions and principles of operation relating to or reflected in Employer's computer software products, formulas, patterns, compilations, programs, devices, methods, techniques, drawings, processes, or other information similar to the foregoing, that: (1) derive economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from their disclosure or use; and (2) are the subject of efforts that are reasonable under the circumstances to maintain their secrecy. The term "Trade Secret" will not include any information which constitutes Confidential Information (as defined in Section 3.4). The term Trade Secret will not include information that you can show by competent proof (i) was known to you prior to disclosure by Employer; (ii) was generally known to the public at the time Employer disclosed the information to you; (iii) became generally known to the public after disclosure to you by the Employer through no act or omission of yours; or (iv) was disclosed to you by a third party having a bona fide right both to possess the information and to disclose the information to you. 3.3. RESTRICTIONS ON USE AND DISCLOSURE OF TRADE SECRETS. You shall hold in confidence at all times after the date hereof all Trade Secrets of Employer and shall not disclose, publish or - 4 - 5 make use at any time after the date hereof of Trade Secrets without the prior consent of Employer. 3.4. CONFIDENTIAL INFORMATION DEFINED. For purposes of this Agreement, "Confidential Information" is any financial information, financial data, financial plans, information concerning the relationship between the Company and its customers or suppliers, or product plans or strategies of Employer which are valuable to Employer and not generally known or available to competitors of Employer. 3.5. USE OR DISCLOSURE OF CONFIDENTIAL INFORMATION. You agree that during the term of your employment by Employer, and for a period of two (2) years following termination of your employment, you will hold in confidence all Confidential Information and will not disclose, publish or make use of Confidential Information without the prior written consent of Employer. 3.6. SCREENING OF PUBLIC RELEASES OF INFORMATION. In addition, and without any intention of limiting your other obligations under this Agreement in any way, you should not, during your employment, reveal any non-public information concerning the technology pertaining to the proprietary products and manufacturing processes of Employer (particularly technology under current development or improvement), unless you have obtained approval from Employer in advance. In that connection, you should submit to Employer for review any proposed scientific and technical articles and the text of any public speeches relating to work done for Employer before they are released or delivered. Employer has the right to disapprove and prohibit, or delete any parts of, such articles or speeches that might disclose Employer's Trade Secrets or other Confidential Information or otherwise be contrary to Employer's business interests. 3.7. EMPLOYER RIGHTS UNDER APPLICABLE TRADE SECRET LAW. Nothing in this Agreement is intended to, nor shall it, diminish the Employer's rights regarding the protection of Employers trade secrets pursuant to applicable Georgia law. SECTION 4. RETURN OF MATERIALS Upon the request of Employer and, in any event, upon the termination of your employment, you must return to Employer and leave at its disposal all memoranda, notes, records, drawings, manuals, computer programs, documentation, diskettes, computer tapes, and, other documents or media pertaining to the business of Employer or your specific duties for Employer, including all copies of such materials. You must also return to Employer and leave at its disposal all materials involving any Trade Secrets of Employer. This Section 4 is intended to apply to all materials - 5 - 6 made or compiled by you, as well as to all materials furnished to you by anyone else in connection with your employment. SECTION 5. NON-INTERFERENCE WITH PERSONNEL RELATIONS During my employment with Employer and for a period of one (1) year afterwards, I will not knowingly solicit, entice or persuade any other employees of Employer to leave the services of Employer for any reason. SECTION 6. NON-COMPETITION AGREEMENT 6.1. DEFINITIONS. For the purposes of this Section 6, the following definitions shall apply: a. "Employer Activities" shall mean all activities of the type conducted, authorized, offered, or provided by you within one year prior to termination of your employment. For purposes of reference, such activities at the date of this Agreement include the business of producing, marketing, promoting and distributing multimedia computer software programs which have as their primary content anatomical, medical or health-related material (including without limitation programs designed for educational markets and consumer markets). The term "Employer Activities" shall include (without limitation) the production, marketing and distribution of multimedia computer software programs which compete directly with any of the computer software programs distributed by Employer as of the date hereof or on the date of termination of your employment. b. "Noncompete Period" or "Nonsolicitation Period" shall mean the period beginning on the date hereof and ending on the second (2nd) anniversary of the date of termination of your employment with Employer. c. "Territory" shall mean the areas where you worked within one year prior to termination of your employment and as such shall include such areas where any Employer Activities performed, supervised, or assisted in by you were conducted and any area where customers or actively sought prospective customers of Employer with whom you had material contact were present. For purposes of reference, such areas at the date of this Agreement include the United States of America, its territories and possessions. 6.2. TRADE NAME. You agree that during the Noncompete Period, you shall not, directly or by assisting others, own, manage, operate, join, control or participate in the ownership, management, operation or control of any business conducted under - 6 - 7 any corporate or trade name of Employer or name similar thereto without the prior written consent of Employer. 6.3. NONCOMPETITION. a. Coverage. The parties hereto acknowledge that you conduct Employer Activities throughout the Territory. You acknowledge that to protect adequately the interests of Employer in the business of Employer, it is essential that any noncompete covenant with respect thereto cover all Employer Activities and the entire Territory. b. Covenant. You hereby agree that you shall not, during the Noncompete Period, in any manner (other than as an employee of or as a consultant to Employer), directly or by assisting others, conduct Employer Activities in the Territory. It is specifically understood and agreed that accepting employment with, or acting as a consultant to, any one of the following companies during the Noncompete Period would constitute a breach of this covenant: IVI Publishing, Inc., or any other actual or potential competitors of Employer where fifty percent (50%) or more of such competitor's revenues are derived from multimedia computer software programs which have as their primary content anatomical, medical or health-related material (such companies are referred to as "Designated Competitors"). Notwithstanding the foregoing provisions of this Section 6.3 b., it is understood and agreed that you may accept employment with, or act as a consultant to, a company (other than a "Designated Competitor") that is engaged in Employer Activities in the Territory, so long as you have no direct and material responsibility for, and involvement in, products which compete directly with Employer's multimedia computer software programs which have as their primary content anatomical, medical or health-related material (products will be deemed to compete directly with Employer's products if they might be purchased by consumers in lieu of the products of Employer). For example, you would be permitted to be an employee of, or a consultant to, Broderbund Software, Inc., so long as you did not have direct and material responsibility for, and involvement in, the development, marketing or distribution of any multimedia computer software programs which have as their primary content anatomical, medical or health-related material. Notwithstanding this Section 6.3(b), you shall be permitted to (i) acquire up to five percent (5%) of any competitor of Employer whose common stock is publicly traded on a national securities exchange or in the over-the- counter market; or (ii) own shares of stock of Employer. 6.4. NONSOLICITATION. You hereby agrees that you shall not, during the Nonsolicitation Period, in any manner (other than as an employee of or a consultant to Employer), directly or by assisting others: -7- 8 a. solicit or attempt to solicit, any business from any of Employer's customers, including actively sought prospective customers, with whom you had material contact during your employment hereunder for purposes of providing products or services that are competitive with those provided by Employer; or b. solicit or attempt to solicit for employment, on your behalf or on behalf of any other person, firm or corporation, any other employee of Employer or its affiliates with whom you had material contact during your employment hereunder. 6.5. SEVERABILITY. If a judicial determination is made that any of the provisions of this Section 6 constitutes an unreasonable or otherwise unenforceable restriction against you, the provisions of this Section 6 shall be rendered void only to the extent that such judicial determination finds such provisions to be unreasonable or otherwise unenforceable. In this regard, you and Employer hereby agree that any judicial authority construing this Agreement shall be empowered to sever any portion of the Territory, any prohibited business activity or any time period from the coverage of this Section 6 and to apply the provisions of this Section 6 to the remaining portion of the Territory, the remaining business activities and the remaining time period not so severed by such judicial authority. Moreover, notwithstanding the fact that any provision of this Section 6 is determined not to be specifically enforceable, Employer shall nevertheless be entitled to recover monetary damages as a result of your breach of such provision. The time period during which the prohibitions set forth in this Section 6 shall apply shall be tolled and suspended for a period equal to the aggregate quantity of time during which you violate such prohibitions in any respect. SECTION 7. IMPLEMENTATION 7.1. SEVERABILITY. The covenants in this Agreement shall be construed as covenants independent of one another and as obligations distinct from any other contract between you and Employer. Any claim that you may have against Employer shall not constitute a defense to enforcement by Employer of this Agreement. 7.2. SURVIVAL OF OBLIGATIONS. The covenants in Sections 2 through 6 of this Agreement shall survive the execution and delivery of this Agreement and the termination of your employment, regardless of who causes the termination and under what circumstances the termination occurred. 7.3. SPECIFIC PERFORMANCE AND CONSENT TO INJUNCTIVE RELIEF. The faithful observance of all covenants in this Agreement is an essential condition to your employment, and Employer is depending upon absolute compliance. Damages would probably be very difficult to ascertain if you breached any covenant in this Agreement. This - 8 - 9 Agreement is intended to protect the proprietary rights of Employer in many important ways. Even the threat of any misuse of the technology of Employer would be extremely harmful, since that technology is essential to the business of Employer. In light of these facts, you agree that any court of competent jurisdiction may immediately enjoin any breach of this Agreement upon the request of and proper showing by Employer. 7.4. CONSTRUCTION OF AGREEMENT. No provision of this Agreement or any related document shall be construed against or interpreted to the disadvantage of any party hereto by any court or other government or judicial authority by reason of such party having or being deemed to have structured or drafted such provision. 7.5. NOTICES. All notices required under this Agreement shall be made in writing and shall be deemed given when (1) delivered in person, (2) deposited in the U.S. mail, first class, with proper postage prepaid and properly addressed, or (3) sent through the interoffice delivery service of Employer, if you are still employed by Employer at the time. 7.6. RELATED PARTIES. This Agreement shall inure to the benefit of, and be binding upon, Employer and its subsidiaries and its affiliates, together with their successors and assigns, and you, together with your executor, administrator, personal representative, heirs, and legatees. 7.7. MERGER. This Agreement merges and supersedes all prior and contemporaneous agreements, undertakings, covenants, or conditions, whether oral or written, express or implied, to the extent that they contradict or conflict with the terms and conditions hereof. This Agreement is not intended to modify or impair the effectiveness of the general rules and policies Employer may announce from time to time, such as Employer's Trade Secret Security Program, a copy of which you should already have received and read. 7.8. CHOICE OF LAW. This Agreement shall be governed by and enforced under the laws of the State of Georgia. 7.9. NO WAIVER. The waiver by either party of a breach of this Agreement shall not operate or be construed as a waiver of any subsequent breach of this Agreement. 7.10. HEADINGS. The section and paragraph headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. - 9 - 10 IN WITNESS WHEREOF, you, as an employee of Employer, have entered and executed this Agreement under seal, and Employer has accepted your undertaking. EMPLOYEE: /s/ David A. Tranberg - - ---------------------- Signature /s/ David A. Tranberg - - ---------------------- Name (typed or printed) Social Security No. ###-##-#### ----------- Address: 107 Barrington Hills Drive - - -------------------------- Atlanta, GA 30350 - - -------------------------- Date: 01/25/96 ------------------------- Accepted: EMPLOYER A.D.A.M. SOFTWARE, INC. By: /s/ Christine W. Finch ---------------------- Its: Human Resources Mgr. --------------------- Date: January 25, 1996 --------------------- - 10 - EX-10.16 3 SEVERANCE AGREEMENT - DAVID TRANBERG 1 EXHIBIT 10.16 A.D.A.M. SOFTWARE, INC. SEVERANCE AGREEMENT THIS SEVERANCE AGREEMENT (this "Agreement"), dated as of January 25, 1996, is made by David A. Tranberg, an individual resident of the State of Georgia (the "Executive"), and A.D.A.M. Software, Inc., a Georgia Corporation (the "Company"). The purpose of this Agreement is to set forth the mutual understandings of the Executive and the Company in the event of a termination of Executive's employment by the Company without "Good Cause" (as defined below). 1. If the Executive's employment with the Company is terminated for any reason other than (1) Good Cause (as defined below), or (2) the voluntary termination by Executive of his employment, then, if such termination occurs at any time, Executive will be entitled to receive one year's base salary and bonus (if earned) as severance. In addition, the Company shall permit the Executive, at his own cost, to continue to participate in health benefit plans in accordance with the provisions of the COBRA legislation passed by Congress. 2. It is expressly understood and agreed that Executive will only be required to perform services as an employee and officer of the Company at the Company's facilities at 1600 RiverEdge Parkway or such other location of the principal executive offices of the Company in the Atlanta metropolitan area as the Board of Directors of the Company may designate. If Executive is required to relocate to any location outside of the metropolitan Atlanta area in connection with his employment by the Company, and Executive elects not to accept such reassignment by notifying the Company in writing within 45 days of such reassignment, then he will be deemed to have been terminated by the Company without Good Cause and will be entitled to severance in accordance with the terms in Paragraph 1. 3. It is further understood and agreed that if the Company unilaterally and materially reduces the Executive's duties and responsibilities, and the Executive elects not to accept such change in his role or responsibilities by notifying the Company in writing within 45 days of such change, then Executive's employment will be deemed to have been terminated by the Company without Good Cause and the Executive will be entitled to severance in accordance with the provisions of Paragraph 1. 2 4. For purposes of this Agreement, "Good Cause" shall exist upon the occurrence of any of the following: (i) Executive is convicted (in a United States court) of, pleads guilty to, or confesses to any felony or any act of fraud, misappropriation or embezzlement, (ii) Executive engages in a fraudulent act to the material damage or prejudice of the Company or any affiliate of the Company or in conduct or activities materially damaging to the property, business or reputation of the Company or any any affiliate of the Company, as determined in good faith by the Board of Directors of the Company, (iii) Executive is convicted (in a United States court) of, pleads guilty to, or confesses to illegal use by Executive of controlled substances, (iv) any material act or omission by Executive involving malfeasance or negligence in the performance of Executive's duties to the Company to the material detriment of the Company, which has not been corrected by Executive within thirty (30) days after written notice from the Company of any such act or omission, or (v) failure by the Executive to comply with the terms of this Agreement or any written policies or directives of the Board of Directors, which has not been corrected by Executive within thirty (30) days after written notice from the Company of such failure. A.D.A.M. SOFTWARE, INC. By: /s/ Curtis A. Cain ----------------------- Title: CEO -------------------- EXECUTIVE /s/ David A. Tranberg -------------------------- David A. Tranberg EX-10.17 4 EMPLOYEE AGREEMENT - JOSEPH FULLER 1 EXHIBIT 10.17 NONCOMPETITION AND NONDISCLOSURE AGREEMENT This Agreement is made this 18th day of April, 1994, between A.D.A.M. Software, Inc., a Georgia corporation (the "Employer"), and Joseph R. Fuller, (the "Employee"). WHEREAS, the Employee has or will obtain valuable experience and knowledge with respect to the affairs of the Employer; WHEREAS, the Employee realizes that the Employer has made a substantial investment in time and money in developing business and customer relationships, and that it is a legitimate business interest of the Employer to protect that investment and to retain its contracts with the good will of its customers, and the Employee further realizes that he is employed in a position of much trust and responsibility by the Employer; WHEREAS, the Employee is willing to agree to the terms and conditions hereinafter set forth; NOW, THEREFORE, in consideration of the Employee's continued employment with the Employer and pursuant to the terms and conditions hereinafter set forth, and in further consideration of their mutual covenants herein contained, the parties hereto agree as follows: 1. EMPLOYMENT AND DUTIES The Employer agrees to continue to employ the Employee and the Employee accepts his continued employment as Product Marketing Manager subject to the terms and conditions hereinafter set forth. The Employee's duties shall be those currently being performed by him for the Employer and any other related duties as may be determined and assigned to the Employee from time to time hereafter by the Employer. 2. EXTENT OF SERVICES. The Employee shall devote his entire time, attention and energies to the business of the Employer and shall not during his employment be engaged in any other business activity, without the continuing approval of his supervisors, whether or not such business activity is pursued for gain, profit or other pecuniary advantage, but this shall not be construed as preventing the Employee from investing his assets in such form or manner as will not require any services on the part of the Employee in the operation of the affairs of the companies in which such investments are made. 3. CONFIDENTIAL INFORMATION. Employee agrees not to divulge, disclose, or communicate to any person, firm, or corporation at any time, during or after employment, in any fashion, form or manner, either directly or indirectly, any information of any kind, nature, or description concerning any matters affecting or relating to the business of Employer or Employee's employment with Employer which specifically includes NONCOMPETITION AND NONDISCLOSURE AGREEMENT Page 1 of 6 2 any matter whatsoever concerning A.D.A.M. Software, Inc., its subsidiaries, divisions or affiliated companies (collectively referred to hereafter as "Confidential Information") . The parties agree that Confidential Information includes, without limiting the generality of the foregoing, the name of any customers of Employer, the prices it obtains or has obtained or at which it sells or has sold its products or services, research, development, inventing, accounting, computer hardware configuration, computer software, source code, manufacturing, engineering, merchandising, equipment, or any other information of, about, or concerning the business of Employer or the business of customers of Employer, its manner of operation, its plans, processes, or other data of any kind, nature, or description, without regard to whether any or all of the foregoing matters would be deemed confidential, material, or important. The parties agree that the above matters are important, material, and confidential and gravely affect the effective and successful conduct of the business of the Employer, and its goodwill, and that any breach of the terms of this paragraph is a material breach hereof. This Agreement shall not be deemed to prevent Employee from disclosing Confidential Information if all of the following circumstances exist: (1) such disclosure is necessary to the business of Employer and to the performance of the duties of Employee; (2) such disclosure does not involve trade secrets or other theretofore undisclosed matters; and (3) Employee makes such disclosure in circumstances and in a manner reasonably calculated to benefit Employer and not Employee or actual or potential competitors of Employer. 4. RETURN OF CONFIDENTIAL INFORMATION. Upon termination of the Employee's employment, all documents, art or office supplies, records, computer hard drive, diskettes, or tape, notebooks and similar repositories of or containing Confidential Information, including copies thereof, then in the Employee's possession, whether prepared by him or others, will be left with the Employer. In the event of a breach or threatened breach by the Employee of the provisions of this Section 4, the Employer shall be entitled to an injunction restraining the Employee from disclosing, in whole or in part, the Confidential Information, or from rendering any services to any person, firm, corporation, association or other entity to whom Confidential Information, in whole or in part, has been disclosed or is threatened to be disclosed. Nothing herein shall be construed as prohibiting the Employer from pursuing any other remedies available to the Employer for such breach or threatened breach, including the recovery of damages from the Employee. 5. PATENTS. A. The Employee shall disclose fully to the Employer any and all inventions which he shall conceive or make during his employment with Employer and all inventions which he shall conceive or make during the period of six (6) NONCOMPETITION AND NONDISCLOSURE AGREEMENT Page 2 of 6 3 months after his last day of employment with Employer, which are in whole or in part the result of his work with the Employer. Such disclosure is to be made promptly after the conception of each invention, and the inventions are to become and remain the property of the Employer, whether or not patent applications are filed thereon. Upon request and at the expense of the Employer, the Employee is to make application through the patent solicitors of the Employer for letters patent of the United States and any and all other countries at the discretion of the Employer on such inventions and to assign all such applications to the Employer or its designated representative, all without additional payment during his employment by the Employer and for reasonable compensation for time actually spent by the Employee at such work at the request of the Employer after his employment. The Employee is to give the Employer, its attorneys and solicitors, all reasonable assistance in preparing and prosecuting such applications and, on request of the Employer, to execute all papers and do all things that may be reasonably necessary to protect the right of the Employer and vest in it or its assigns the inventions, applications and letters patent herein contemplated. B. With respect to inventions the concept, creation or development of which is outside the reasonable contemplation of the Employee's employment with the Employer and which are not derived from or the result in whole or in part of the Employee's work with the Employer and are not related in any way or to any degree to any project or field of work in which the Employer was engaged or was actively considering during his employment by Employer, if, within six (6) months from the date on which a complete description (where necessary by sketches) of such an invention is submitted to the Employer by the Employee, the Employer has not filed a first patent application thereon, or requested a further period not exceeding six months, the Employer shall grant a written release of the invention to the Employee upon the Employee's written request (unless such release would conflict with any contractual obligations of the Employer or with governmental requirements) and such Employee shall thereafter be free to make application for a patent in respect of such invention at his own expense. In the event that the Employer does not release the invention in accordance with the foregoing provisions, the Employer shall make reasonable compensation for such invention. 6. RESTRICTIVE COVENANT. Upon the Employee's termination the Employee shall not, without the prior written consent of the Employer, directly or indirectly, within the Restricted Territory (hereinafter defined), in competition with the Employer enter into or engage in the business of manufacturing, jobbing, selling or marketing the services which are being performed by the employer at the time of termination, either as an individual for NONCOMPETITION AND NONDISCLOSURE AGREEMENT Page 3 of 6 4 his own account, or as a partner or joint venturer, or as an employee, agent, or salesman for any person, or as an officer, director or shareholder (except ownership of publicly traded shares, so long as such is less than 1%) for a period of two (2) years following the termination of his employment by the Employer. Solicitation or acceptance of orders outside the Restricted Territory for shipment to or delivery in, the Restricted Territory shall constitute "engaging in business" in the Restricted Territory in violation of this agreement. As used herein, "Restricted Territory" means the following geographical area: "Continental United States for anatomically based multi-media companies." Both parties hereto recognize that the Employer does business throughout such area, and the Employee has been responsible for operations throughout such area, and such an area is necessary for the protection of the Employer. This covenant on the part of the Employee shall be construed as an agreement independent of any other provision of this agreement; and the existence of any claim or cause of action of the employee against the Employer, whether predicated on this agreement or otherwise, shall not constitute a defense to the enforcement by the Employer of this covenant. In the event of a breach or threatened breach by the Employee of the provisions of this Section 6, the Employer shall be entitled to an injunction restraining the Employee from violating the provisions of this Section 6. Nothing herein shall be construed as prohibiting the Employer from pursuing any other remedies available to the Employer, including the recovery of damages and attorneys' fees, for a breach or threatened breach of this Section 6. 7. NONSOLICITATION OF CUSTOMERS. The Employee agrees to refrain, during his employment and for a period of three (3) years following his termination, from soliciting or accepting, or attempting to solicit or accept, directly or by assisting others, any business from any of the Employer's customers, including actively sought prospective customers, with whom the employee had material contact during his employment for purposes of providing products or services that are competitive with those provided by the employer's business. 8. NONSOLICITATION OF EMPLOYEES. The Employee agrees to refrain, during his employment and for three (3) years following his termination, from recruiting or hiring, or attempting to recruit or hire, directly or by assisting other, any other employee of the Employer or its affiliates. NONCOMPETITION AND NONDISCLOSURE AGREEMENT Page 4 of 6 5 9. TOLLING. The Employee's breach of Sections 6, 7, or 8 of this Agreement shall automatically toll and suspend the period so stated in Sections 6, 7 or 8 for the amount of time that the violation continues. 10. TERMINATION OF EMPLOYMENT. The Employee is employed at will and may be terminated by the Employer at any time, with or without cause, without prior notification and without severance pay unless specifically provided otherwise in writing. 11. SEVERABILITY AND INTERPRETATION. In the event that any provision of this Agreement is held invalid by a court of competent jurisdiction, the remaining provisions shall nonetheless by enforceable according to their terms. Further, in the event that any provision are held to be overbroad as written, such provisions shall be deemed amendable to narrow its application to the extent necessary to make the provision enforceable according to applicable law and enforceable as amended. 12. MISCELLANEOUS. A. Section headings contained herein are for reference purposes only and shall not in any way affect the meaning or interpretation of this agreement. All terms and words used herein shall be construed to include the number and gender as the context of this Agreement may require. B. This agreement may be executed in any number of counterparts, each of which shall be deemed an original part, all of which together shall constitute one and the same instrument. C. This agreement sets forth the entire agreement and understanding of the parties with respect to the transactions contemplated hereby and supersedes all prior agreements, arrangements, and understandings relating to the subject matter, including any prior agreements between the Employer and the Employee. D. No representation, promise, inducement or statement of intention has been made by the Employer or the Employee which is not embodied in this agreement. E. This agreement may be amended, modified, superseded or canceled, and any of the terms, provisions and conditions hereof may be waived, only by a written instrument executed by the Employer and the Employee. The failure of any party at any time or times to require performance of any provision herein shall not be construed to be a waiver of any succeeding breach of such provision by such party. NONCOMPETITION AND NONDISCLOSURE AGREEMENT Page 5 of 6 6 F. This agreement shall be interpreted and construed pursuant to the laws of the State of Georgia. Any provisions in conflict with the laws of the State of Georgia shall be deemed void and the parties shall be bound by the remaining provisions. G. The Employee agrees that the provisions of this agreement shall be binding on his heirs, assigns, executors, administrators, and other legal representatives. IN WITNESS WHEREOF, the Employer has caused this agreement to be duly executed and delivered by its officer duly authorized, and the Employee has duly executed and delivered this agreement, all as of the date first above written. /s/ Joseph R. Fuller ----------------------------- EMPLOYEE A.D.A.M. SOFTWARE, INC. By /s/ Christine Hamrick CES -------------------------- Title Human Resources Manager ------------------------ NONCOMPETITION AND NONDISCLOSURE AGREEMENT Page 6 of 6 EX-10.18 5 SEVERANCE AGREEMENT - JOSEPH FULLER 1 EXHIBIT 10.18 A.D.A.M. SOFTWARE, INC. SEVERANCE AGREEMENT THIS SEVERANCE AGREEMENT (this "Agreement"), dated as of January 15, 1996, is made by Joseph R. Fuller, an individual resident of the State of Georgia (the "Executive"), and A.D.A.M. Software, Inc., a Georgia Corporation (the "Company"). The purpose of this Agreement is to set forth the mutual understandings of the Executive and the Company in the event of a termination of Executive's employment by the Company without "Good Cause" (as defined below). 1. If the Executive's employment with the Company is terminated for any reason other than (1) Good Cause (as defined below), or (2) the voluntary termination by Executive of his employment, then, if such termination occurs at any time, Executive will be entitled to receive one year's base salary and bonus (if earned) as severance. In addition, the Company shall permit the Executive, at his own cost, to continue to participate in health benefit plans in accordance with the provisions of the COBRA legislation passed by Congress. 2. It is expressly understood and agreed that Executive will only be required to perform services as an employee and officer of the Company at the Company's facilities at 1600 RiverEdge Parkway or such other location of the principal executive offices of the Company in the Atlanta metropolitan area as the Board of Directors of the Company may designate. If Executive is required to relocate to any location outside of the metropolitan Atlanta area in connection with his employment by the Company, and Executive elects not to accept such reassignment by notifying the Company in writing within 45 days of such reassignment, then he will be deemed to have been terminated by the Company without Good Cause and will be entitled to severance in accordance with the terms in Paragraph 1. 3. It is further understood and agreed that if the Company unilaterally and materially reduces the Executive's duties and responsibilities, and the Executive elects not to accept such change in his role or responsibilities by notifying the Company in writing within 45 days of such change, then Executive's employment will be deemed to have been terminated by the Company without Good Cause and the Executive will be entitled to severance in accordance with the provisions of Paragraph 1. 2 4. For purposes of this Agreement, "Good Cause" shall exist upon the occurrence of any of the following: (i) Executive is convicted (in a United States court) of, pleads guilty to, or confesses to any felony or any act of fraud, misappropriation or embezzlement, (ii) Executive engages in a fraudulent act to the material damage or prejudice of the Company or any affiliate of the Company or in conduct or activities materially damaging to the property, business or reputation of the Company or any affiliate of the Company, as determined in good faith by the Board of Directors of the Company, (iii) Executive is convicted (in a United States court) of, pleads guilty to, or confesses to illegal use by Executive of controlled substances, (iv) any material act or omission by Executive involving malfeasance or negligence in the performance of Executive's duties to the Company to the material detriment of the Company, which has not been corrected by Executive within thirty (30) days after written notice from the Company of any such act or omission, or (v) failure by the Executive to comply with the terms of this Agreement or any written policies or directives of the Board of Directors, which has not been corrected by Executive within thirty (30) days after written notice from the Company of such failure. A.D.A.M. SOFTWARE, INC. By: /s/ Curtis Cain --------------------------- Title: CEO ------------------------ EXECUTIVE /s/ Joseph R. Fuller ------------------------------ Joseph R. Fuller EX-10.40 6 PUBLISHING /DEVELOPER AGREEMENT 1 EXHIBIT 10.40 A.D.A.M. SOFTWARE, INC. PUBLISHING/DEVELOPER AGREEMENT THIS PUBLISHING/DEVELOPER AGREEMENT (this "Agreement") is made and entered into as of November 30, 1995, by and between A.D.A.M. SOFTWARE, INC. ("ADAM"), a Georgia corporation having its principal place of business at 1600 RiverEdge Parkway, Suite 800, Atlanta, Georgia 30328, and J.S.K., INC., D/B/A MEDICAL-LEGAL ILLUSTRATIONS ("MLI"), a Georgia corporation, having its principal place of business at 1600 RiverEdge Parkway, Suite 700, Atlanta, Georgia 30328. RECITALS ADAM is the owner of certain interactive multimedia computer software products which illustrate the various anatomical structures of the human body, simulate dissection of the human body through use of various tools and methods contained in the products, provide descriptive and illustrative information relating to anatomical structures and physiological functions displayed by the products, and allow for the organization of and linking to material prepared by users of the products. MLI is engaged in the production of customized medical illustrations for use as demonstrative evidence by trial lawyers, primarily in medical-related civil lawsuits. Pursuant to the terms of the Medical-Legal Illustrations License Agreement between ADAM and MLI dated April 7, 1994 (the "MLI License Agreement"), ADAM granted to MLI the right to use images from ADAM's database of anatomical images to create Animations and Boards (as defined in the MLI License Agreement) and the right to use the "Medical-Legal Illustrations" service mark in the conduct of MLI's business. MLI desires to develop, and ADAM desires to publish, certain multimedia computer software products containing images owned by ADAM, specifically for the legal market, on the terms and subject to the conditions set forth in this Agreement. In consideration of the premises hereof and other good and valuable consideration, the receipt and sufficiency of which are hereby mutually acknowledged, the parties, intending to be legally bound, hereby agree as follows: 2 TERMS OF AGREEMENT 1. CERTAIN DEFINITIONS. As used in this Agreement, the following defined terms have the meaning specified below: 1.1 "ADAM Images" means anatomical illustrations contained in the database of illustrations maintained by ADAM. 1.2 "Alpha Stage" means a working model or prototype. At the Alpha Stage, the potential risk that the software code will not do what is expected has been resolved. 1.3 "Beta Stage" means the point in a Product's development at which all functionality is complete (there are no specifications which are not yet implemented), all content is complete and implemented in the Product, and the software code is essentially complete, but not all bugs have been resolved. All major functional pieces of the Product work, and all user interface features are in place and work. The Product's program may have many problems that cause it to be unstable, such as major operating failures (crashes) and installation problems. The remaining tasks prior to shipment include full functionality testing, with subsequent bug fixing by engineers to fix all identified problems. Thus, testing and bug fixing is not complete and continues all the way up to product release. 1.4 "COGS" means the cost-of-goods-sold incurred by ADAM in producing a Product, determined by ADAM in accordance with generally accepted accounting principles, as provided in writing by ADAM to MLI from time to time. 1.5 "Content" means illustrations, pictures, images, animations, video, sound, text, and other material. 1.6 "Legal Market" means potential customers who are attorneys or entities providing services to attorneys who acquire Products for use in developing demonstrative evidence (boards and animations) in connection with lawsuits and other legal dispute resolution mechanisms. 1.7 "Marketing Materials" means all materials used by MLI in connection with the marketing and promotion of Products, including without limitation, Product packaging (including box design, jewel case liners and CD- ROM artwork), marketing software, print materials, marketing messages and Product names. 1.8 "Programming" means computer programming incorporated in Products. - 2 - 3 1.9 "Product" means a multimedia computer software product created by MLI utilizing ADAM Images, which is authorized under the terms of this Agreement. The Product may also include a companion videocassette recording of the Content of the multimedia software Product (a "Companion Video") which is intended for distribution solely with copies of the multimedia software Product. In no event may a copy of a Companion Video be sold or otherwise distributed separately from a copy of the multimedia software Product. 1.10 "Prototype" means the first draft of the Product, including its Content, features and functionality (though it will generally not include all of the functionality of the final Product). 1.11 "Royalty Base" means an amount equal to one-half of the suggested retail price of a Product, as agreed by ADAM and MLI. 2. LICENSE. 2.1 Subject to the provisions of Paragraph 2.2 and the prior written approval of ADAM in accordance with Paragraph 2.3, ADAM hereby grants to MLI and MLI hereby accepts a non-exclusive, non-transferable license (i) to make and modify copies of the ADAM Images, solely in the creation of Products, and (ii) to distribute copies of the Products obtained from ADAM solely in the United States and Canada. 2.2 MLI's license to use the ADAM Images is subject to the following conditions: (a) Each Product must be created by MLI solely for the Legal Market, or other markets specifically authorized in advance in writing by ADAM, and copies of such Products may not be distributed, delivered, furnished or otherwise provided by MLI to any person or entity other than the Legal Market. (b) Each Product must be intended solely for internal use by such Legal Market customer (or customer of other markets specifically authorized in advance in writing by ADAM) and its employees in connection with the conduct of the customer's business or the delivery of legal services. (c) Any resale or distribution of a Product by such Legal Market customer shall be expressly prohibited. - 3 - 4 (d) Each Product shall be subject to the terms and conditions of an end-user license agreement substantially in the form of Exhibit A which protects the proprietary rights of ADAM in the Product and restricts the copying and use of the Product and its Content. (e) Prior to producing any Product, MLI must first obtain the written consent of ADAM (in the sole discretion of ADAM) in accordance with the provisions of Paragraph 2.3 below. (f) MLI agrees to notify ADAM periodically (but not less than twice per year), or upon ADAM's request, for information regarding MLI's development activities in the Legal Market and MLI's plans with respect to Products. (g) Representatives of MLI will obtain ADAM Images required in connection with the production of a particular Product from ADAM's database of images using procedures mutually agreed upon by the parties (and which are designed to protect ADAM's proprietary interest in the ADAM Images). Such representatives will not copy any images other than the particular images needed in connection with the production of a specific Product. MLI will not make more than one copy of any image copied from the ADAM database of images as contemplated above. The copied images may then be used to create the Product. All images utilized in the Product or in the production of the Product will then be returned to ADAM, as contemplated in Paragraph 7.1 below, by means mutually agreed upon by the parties. MLI will in no event retain copies of the ADAM Images originally copied from the ADAM database of images, or of any images produced using the ADAM Images once a product has been completed. In no event will MLI permit any third party to have access to any electronic copies of any ADAM Images copied from the ADAM database of images or of images created in connection with the production of the Product (for example, a copy of such an image on optical disk), except for copies distributed as an integral part of Products distributed as authorized under this Agreement, and except for copies to Authorized Subcontractors (as defined in Paragraph 3.14) who are given access to images solely for use in the development of a Product pursuant to Paragraph 3 below. (h) MLI shall use the ADAM images solely for internal purposes in connection with the development of Products and in the production of Marketing Materials for use in the marketing and promotion of Products, and not for any other purpose. - 4 - 5 (i) It is expressly understood and agreed that MLI will not have the right to make copies of any Product, and MLI shall prohibit any other person or entity (including without limitation MLI customers) from copying Products; provided that (1) MLI will have the right to make copies of Content from Products solely as needed to create Marketing Materials for the Products and (2) MLI will have the right to make a single copy of an Alpha Stage version of the Product to furnish to a Primary Physician expert reviewer for review and evaluation during the development process as contemplated in Paragraph 4 (subject to execution by the physician reviewer of an appropriate confidentiality and non-disclosure agreement in form furnished by ADAM). (j) All Marketing Materials shall be accompanied by ADAM's copyright notice in form specified by ADAM. 2.3 (a) MLI shall submit a written specification (in accordance with the outline set forth in Exhibit B) for each Product which MLI desires to create and shall obtain the written approval of ADAM prior to undertaking the development of any such Product. ADAM shall have the sole right to approve or to disapprove any such proposed Product, in the sole and absolute discretion of ADAM. If ADAM elects to reject a proposed Product, ADAM will notify MLI of the reasons for such rejection. ADAM will make a good faith effort to review proposals for Products submitted by MLI and to respond to MLI with its decision within thirty (30) days. (b) Such written proposals for Products (including specifications for the proposed Product) required under Paragraph 2.3(a) above shall be submitted by MLI to ADAM at the address of ADAM specified above, Attention: Stephanie Calabrese, with separate copies of the transmittal letter (only) for such proposals to be addressed to the attention of each of (i) ADAM's Vice President, Production, Greg Swayne, at the address of ADAM specified above, (ii) ADAM's Vice President, Sales and Marketing, Cary Chandler, at the address of ADAM specified above, and (iii) to ADAM's counsel, William G. Roche, King & Spalding, 191 Peachtree Street, Atlanta, Georgia 30303. 2.4 ADAM grants to MLI a nonexclusive, non-transferable, royalty-free license and right to use the mark "A.D.A.M." or "Published by A.D.A.M. Software, Inc." (the "Marks") solely in the marketing, advertising and promotion of Products in the United States and Canada, in accordance with Paragraph 4 of this Agreement, as approved in writing by ADAM. - 5 - 6 2.5 The license to use the Marks is subject to the following conditions: (a) MLI shall ensure that the Marks are used solely in Marketing Materials prepared in accordance with the terms hereof in connection with the marketing and promotion of Products. Any such display of the marks shall be made in accordance with the "Trademark Usage Guidelines" furnished by ADAM from time to time (the current guidelines are attached as Exhibit C). The Marks shall, at all times, remain ADAM's exclusive property. MLI will not adopt or use a mark that is confusingly similar to the Marks. Upon termination of this Agreement for any reason, MLI will promptly cease all use of the Marks. (b) ADAM shall have the right to review and approve all Marketing Materials, including, without limitation, box designs, CD-ROM artwork, Product names and print materials, prepared by MLI. MLI must submit to ADAM all packaging materials (including box design, jewel case liners and CD-ROM artwork), together with samples of all other marketing or promotional pieces prepared by MLI. ADAM will make a good faith effort to review materials submitted by MLI and to respond to MLI with its decision within fourteen (14) days. (c) MLI agrees that if it "bundles" its services with sales of Products or runs promotions involving services and copies of such Products, MLI will make it clear to the customer that MLI is solely responsible for such services and that ADAM will have absolutely no liability or obligation with respect thereto. (d) MLI will not, in any event, hold itself out as having the authority to bind ADAM or to create any liability or obligation binding on ADAM, nor will MLI take (or omit to take) any other action, the effect of which would be to create any liability on the part of ADAM. 3. DEVELOPMENT UNDERTAKING. 3.1 MLI agrees to undertake the design, development, and technical Alpha Stage testing of Products for both Macintosh and Windows platforms (including all current versions of such platforms specified by ADAM, such as Win 95 and Win 3.1). MLI will be responsible for doing initial market research for a proposed Product, developing initial specifications for the Product, and submitting such specifications (together with a marketing justification for the proposed Product) to ADAM for ADAM's approval in accordance with Paragraph 2.3. if approved by ADAM, MLI will be responsible for developing all Content and 6 7 Programming as may be required for such Product. To promote a consistent appearance and operation for all Products, all Products created by MLI must conform to the Product specifications approved by ADAM in advance, in accordance with Paragraph 2.3. In addition, MLI shall provide ongoing editorial review of Products by a primary physician. 3.2 During the course of creating any Product, MLI shall provide to ADAM Prototype versions of such Product for ADAM's review, comment, and final approval in writing. ADAM will make a good faith effort to complete its review within fourteen (14) days after receipt of a Prototype from MLI (or within thirty (30) days if ADAM elects to have external reviewers, such as potential customers, review the Prototype). 3.3 MLI shall deliver each Product in Alpha Stage to ADAM for its review and evaluation with (1) potential customers, (2) anatomical or physician reviewers, and/or (3) ADAM internal reviewers. ADAM will make a good faith effort to complete internal Alpha Stage review within fourteen (14) days after receipt of Alpha Stage Product from MLI and to complete external Alpha Stage review (potential customers and anatomical or physician reviewers) within thirty (30) days after receipt of Alpha Stage Product from MLI. 3.4 MLI shall submit to ADAM a completed Beta Stage electronic copy of the Product at least thirty (30) days prior to the date on which a Product is to be golden mastered. ADAM will perform Beta Stage testing, including, without limitation: (a) Quality assurance testing of technical functionality for Macintosh and Windows on various hardware configurations; and (b) Final content review. ADAM will make a good faith effort to complete Beta Stage testing within thirty (30) days after receipt of Beta Stage Product from MLI. ADAM's testing time is contingent upon MLI's ability to make changes to the Product in a timely manner so that ADAM is able to complete testing within thirty (30) days. It is expressly understood and agreed that the time frame specified in Paragraph 3.4 for ADAM's review of the Beta Stage version, as well as the time frames specified in Paragraphs 3.2 and 3.3 for ADAM's review of the Prototype and Alpha Stage, respectively, is based upon the nature of the products currently contemplated by the parties (including the levels of Content and functionality of such products). If Products proposed after the date of this Agreement contain materially different levels of - 7 - 8 Content or functionality, it may be necessary to adjust the time frames specified in Paragraphs 3.2, 3.3 and 3.4 to allow for additional review time. 3.5 As part of its review of each Product, ADAM will conduct Editorial Review - Legal (customer review); Editorial Review - Anatomical and Medical Accuracy; Usability Testing; Online Help Review; and User Guide Review. 3.6 If ADAM's review and evaluation at either Prototype, Alpha Stage or Beta Stage discloses problems or deficiencies in the Product as delivered by MLI, ADAM may elect to return the Product to MLI for correction of any such problems and deficiencies. MLI agrees to exercise its best efforts to correct promptly the problems and deficiencies identified by ADAM and return the corrected encoded material to ADAM for further review and evaluation within thirty (30) days, or any reasonable extension thereof, after receipt of the returned material, at which time ADAM may conduct further review and evaluation in accordance with the foregoing procedure. 3.7 MLI and ADAM agree to prepare minor modifications and enhancements (i.e., updates) to the Product(s), upon the request of ADAM or MLI, pursuant to a mutually agreeable time schedule and specification of changes. Further, MLI and ADAM agree to negotiate in good faith to reach agreement on the preparation of any substantial enhancements to the Product(s) (i.e., upgrades), which either may request from time to time. 3.8 MLI agrees that each and every copy of Products will include a copyright notice in form furnished by ADAM to MLI for this purpose from time to time. 3.9 MLI also agrees to undertake the design and development of Marketing Materials, which Marketing Materials are subject to ADAM's PRIOR approval in accordance with Paragraph 2.5, and to perform initial market research with respect to proposed Products. 3.10 The "A.D.A.M." brand name must be incorporated into the name of each Product, in the manner specified by ADAM. 3.11 MLI will be responsible for obtaining (at MLI's expense) all third party intellectual property rights required in connection with a Product (including, without limitation, tools/environments, Programming and Content owned by third parties and incorporated in, or used in the development of, Products). MLI will furnish ADAM with copies of all license agreements with third parties at the time of delivery of the Alpha Stage copy of the Product, and ADAM will review such licenses for intellectual property rights concerns. - 8 - 9 3.12 Each of ADAM and MLI will be responsible for bearing the expenses incurred by it in connection with the performance of its respective obligations under this Paragraph 3 in connection with the development of Products, and neither party will be entitled to be reimbursed by the other for such development expenses, except as specified above. 3.13 No Product will be published until ADAM has given its final written approval, by an authorized representative of ADAM, of publication of that Product. 3.14 In no event will MLI engage any consultant or other third party vendor to provide consulting or development services in connection with the development of a Product, without the prior written consent of ADAM. Any consultant approved in writing by ADAM (an "Approved Consultant") must first execute and deliver a consulting and non-disclosure agreement in form furnished by ADAM which provides for the assignment of all intellectual property rights to ADAM and the agreement of the consultant not to use or disclose any confidential information pertaining to the Product. 3.15 Upon delivery of the Alpha Stage copy of the Product to ADAM, MLI will deliver a complete copy of the source code for the Product and will deliver revised and updated source code with each revision of the Product until completion. Upon final approval of the Product for publication, MLI will deliver a final, complete copy of the source code for the Product. MLI will not use such source code except as needed to support and maintain the Products in accordance with this Agreement and will not disclose the source code to any third party. 4. Manufacture and Distribution of Products. 4.1 Upon final approval of a Product by ADAM pursuant to Paragraph 3, ADAM will be responsible for manufacturing of copies of the Product, including duplication of CD-ROMS, final quality assurance of duplicated CD-ROMs and production and collation of packaging. MLI shall not have the right to make copies of Products; MLI shall obtain copies of Products solely from ADAM. MLI shall order copies of Products in writing from ADAM. Copies of Products will be bulk shipped by ADAM to MLI F.O.B. ADAM's point of shipment and MLI will be responsible for fulfillment of its customers' orders. - 9 - 10 4.2 Upon first publication of Products, MLI shall be credited as "Developer" of the Product. Such credit will be noted within the Product in a location and in a manner determined by ADAM to be appropriate. In the case of Derivatives (as defined in Section 6.7), a notice to the effect that "Portions of this product were developed by "MLI" will be included. 4.3 If, in the sole discretion and determination of ADAM, further publication and distribution of any Product would no longer be a beneficial venture, ADAM may discontinue production of the Product. However, if a Product is approved by ADAM for distribution in accordance with this Agreement and ADAM subsequently elects to discontinue further publication and distribution of that Product, MLI will have the right to continue manufacturing and distribution of such discontinued Product at the sole cost and expense of MLI. ADAM and MLI will jointly agree upon a reduced royalty to be paid to ADAM with respect to copies of Products distributed by MLI pursuant to this Section 4.3, taking into account the increased responsibilities that MLI is required to assume with respect to the distribution of those copies (such as technical support and manufacturing costs). 4.4 MLI shall have the right to distribute copies of Products obtained from ADAM solely to the Legal Market. Any copies of Products distributed by MLI shall be distributed subject to a written license agreement, which shall protect the rights and interests of ADAM in and to the Product and shall include the provisions set forth in Exhibit A hereto, which Exhibit may be modified from time to time by ADAM, in its sole discretion, upon the giving of sixty (60) days written notice to MLI. MLI agrees to report to ADAM, promptly after discovery, all violations of such license agreements and to provide ADAM with any assistance reasonably requested by ADAM in connection with the enforcement of such license. MLI will not take any action that adversely affects ADAM's ability to enforce the license rights of ADAM. 4.5 ADAM shall have the right to make copies of Products (and any derivative works thereof prepared by ADAM) and to distribute copies of such Products (and any derivative works thereof prepared by ADAM) directly or through its authorized agents to any and all customers, including without limitation, the Legal Market; provided that ADAM shall distribute Products to the Legal Market directly or through Lawyers Cooperative Publishing, and not through any other agent, unless mutually agreed upon. 4.6 At the request of ADAM, MLI will incorporate into Products product demos for other A.D.A.M. products. Such product demos may not exceed twenty megabytes per Product (however, if there is additional space available on a Product's CD-ROM, ADAM will have the option of increasing the amount of space used for the demo). - 10 - 11 4.7 ADAM may include with distributed copies for Products, promotional flyers/order forms for products (such as products in the ADAM At Home Series). ADAM will be responsible for costs associated with printing the flyers for products and for collation of such flyers with each package of a Product. 5. Support Services 5.1 MLI will be solely responsible for correcting any errors ("bugs") in the Products discovered after release and for furnishing appropriate fixes to ADAM. ADAM will be responsible for the cost of distributing to end-users of the Products any fixes or patches required to correct any such errors. 5.2 ADAM will be responsible for providing support of Products, to any and all parties receiving copies of such Products, in the same manner that ADAM supports its other products. In the event of customer satisfaction issues related to MLI's sales and marketing efforts, ADAM shall refer any such party to MLI, and MLI will be responsible for resolving such issues. MLI will be solely responsible for handling returns of any defective copies and exchanges from MLI customers. 5.3 Subject to availability of ADAM's personnel and consistent with ADAM's ongoing business, ADAM agrees to provide artistic, animation, and production services to MLI at ADAM's then-current service rates. ADAM will notify MLI of estimated time requirements and actual hourly rates and receive sign off from MLI prior to billing for ADAM services rendered. 5.4 To facilitate MLI's ability to develop Products, ADAM may, as it deems appropriate, provide to MLI current information about and examples of ADAM's works in development, published work, newly developed work and future plans collectively referred to as "works-in-progress"). Any works-in-progress provided to MLI by ADAM, and all information relating thereto, shall be considered confidential information for purposes of Paragraph 8. - 11 - 12 6. Compensation. 6.1 MLI shall pay to ADAM, with respect to each copy of a Product ordered by MLI from ADAM (less returns), an amount equal to COGS plus fifty percent (50%) of the Royalty Base. 6.2 ADAM shall pay to MLI with respect to each copy of a Product sold by ADAM to any entity other than MLI (less returns), fifty percent (50%) of the Royalty Base. 6.3 MLI and ADAM shall make payments under Paragraphs 6.1 and 6.2 on a calendar quarter basis within thirty (30) days after the last day of each calendar quarter with respect to copies of Products delivered by ADAM during such quarter. Such payments shall be accompanied by a report specifying, for each Product, the number of copies of that Product distributed during the preceding calendar quarter period, the Royalty Base and COGS applicable to that Product, and the outstanding unpaid balance (if any) with respect to distributed copies of the Product. 6.4 In addition to the reports provided for in Paragraph 6.3, within ten days following the end of each calendar month during the term of this Agreement, MLI will deliver to ADAM a report detailing, for each Product, the number of copies of that Product distributed during the preceding month. 6.5 MLI and ADAM each agree to make and to maintain for a period of two years after termination or expiration of this Agreement, complete books, records and accounts regarding their respective distributions of copies of Products. Each party will have the right to have an auditor of its choice examine such books, records and accounts of the other party during normal business hours, upon two (2) business days' notice, to verify payments due hereunder. If any such examination discloses that either party has not paid proper amounts due hereunder, such party shall pay to the other the amount of such underpayment. If the underpayment disclosed by the examination is greater than ten percent (10%) of the amount that was due, the party making the underpayment shall also pay or reimburse the other party for expenses incurred in connection with the examination, plus interest on past due amounts at 18% per annum. 6.6 Any agreement under which ADAM has agreed to compensate MLI as a reseller of ADAM software shall expire in accordance with its own terms and, thereafter, if MLI wishes to act as a reseller of ADAM software products, the terms of such a relationship shall be negotiated by the parties. - 12 - 13 6.7 If ADAM prepares a derivative work of a Product (a "Derivative") and distributes copies of such Derivative, MLI will be entitled to receive a reduced royalty with respect to copies of the Derivative. The amount of that royalty will be less than the royalty payable under Section 6.2 with respect to copies of a Product; the amount of the reduction will be the amount determined by ADAM, in its reasonable judgment, required to compensate ADAM for its efforts in preparing the Derivative. 6.8 ADAM will have the right to incorporate Derivatives as part of other products distributed by ADAM, and such ADAM products will not be considered Products or Derivatives for purposes of this Agreement. ADAM will not be required to pay any royalty to MLI with respect to any copies of Derivatives incorporated into other ADAM products. For example, if ADAM incorporates a Derivative as part of A.D.A.M.(R) Comprehensive, ADAM will not be required to pay MLI any royalty with respect to the distribution of copies of A.D.A.M. Comprehensive incorporating the Derivative. 7. PROPERTY RIGHTS. 7.1 MLI acknowledges that, pursuant to the MLI License Agreement between ADAM and MLI, ADAM owns (i) the copyright in images, illustrations and animations created by or on behalf of MLI in connection with the production of Boards or Animations (as both are defined in the MLI License Agreement) using images from ADAM's database of images, and (ii) all right, title and interest (including copyright) in any anatomical or medical illustrations, animations or images created by or on behalf of MLI in connection with the production of Boards or Animations, entirely without use of any images from ADAM's database of images. To the extent that any materials incorporated by MLI in a Product are not owned by ADAM pursuant to the MLI License Agreement, MLI hereby assigns to ADAM all right, title and interest (including copyright) in and to each Product, and any and all information and materials contained in each Product (including, without limitation, all Content and Programming included in the Product). In addition, MLI agrees that it will take all actions requested by ADAM in order to confirm the assignment of copyright to ADAM as contemplated herein (including without limitation the execution and delivery of assignments in recordable form). MLI shall enter into agreements with any independent contractors or consultants who create or assist in the creation of any Product on behalf of MLI, which provide for the assignment of copyright in such Product and all materials incorporated therein to ADAM as contemplated hereunder. MLI will indemnify ADAM and hold it harmless from and against any claim by - 13 - 14 any party that ADAM's possession and use of any such Product infringes the rights of any third party (including, without limitation, copyright interests). As provided above in Paragraph 2.2(g), at least monthly, MLI will deliver to ADAM on optical disk copies of all images created by MLI in connection with the production of Products (including without limitation images created entirely without the use of ADAM Images), or will otherwise transmit such images to ADAM by electronic means. ADAM will scan such images and determine (in the sole discretion of ADAM) whether such images will be added to ADAM's database of images. 7.2 Notwithstanding Paragraph 7.1, if any material contained in a Product is a pre-existing work of a third party (or a derivative work thereof), MLI shall advise ADAM in writing of (1) the nature of the pre-existing work; (2) its owner; (3) any restrictions or royalty terms applicable to ADAM's use of the pre-existing work; and (4) the source of MLI's authority to employ the pre-existing work in the preparation of the Product. Unless otherwise specifically agreed in writing by ADAM, MLI shall obtain (at MLI's cost and expense), for ADAM's benefit, the irrevocable, non-exclusive, worldwide, royalty-free right and license to (1) use, execute, reproduce, display, perform, distribute internally or externally, sell copies of, and prepare derivative works based upon all pre-existing works and derivative works thereof, and (2) authorize or sublicense others from time to time to do any or all of the foregoing. Upon request of ADAM, MLI will provide to ADAM copies of any licensing agreements pursuant to which MLI has obtained rights to any works to be included in Products. MLI will be responsible for displaying appropriate copyright notices, if requested, for any third-party works on Products and Marketing Materials. 7.3 ADAM has and shall retain all right, title, and interest in and to the ADAM Images (both as independent works and as underlying works serving as a basis for any Products), and derivative works thereof, subject only to the specific licenses granted in Paragraph 2.1 and 2.2, and MLI shall neither derive nor assert any title or interest in or to licenses granted in Paragraph 2.1 and 2.2. 7.4 As sole owner of all copyright interests in each Product, ADAM will have the exclusive works all of each of the Products (or any portion thereof). ADAM will have the sole right to register copyright in the Products with the U.S. Copyright Office and elsewhere. - 14 - 15 8. Confidentiality. MLI acknowledges that it will be necessary for ADAM to disclose to MLI certain Trade Secrets that have been developed by ADAM at great expense, and that have required considerable effort of skilled professionals. MLI agrees not to disclose, transfer, use, copy or allow access to any such Trade Secrets to any third parties, except with the consent of ADAM to those who have a need to know such Trade Secrets consistent with the conduct of activities contemplated and authorized hereunder and who have undertaken a written obligation of confidentiality and limitation of use. In no event will MLI disclose such Trade Secrets to any competitors or potential competitors of ADAM. As used herein, the term "Trade Secrets" shall mean any scientific or technical data, information, design, process, procedure, formula or improvement that is commercially valuable and not generally known in the industry. The obligations of this Paragraph 8 shall survive this Agreement and continue for so long as the material remains a Trade Secret. 9. Limited Warranty, 9.1 ADAM warrants that it owns, or has the right to license use of, the ADAM Images supplied hereunder and that it has full power and authority to grant the licenses granted by this Agreement to MLI without the consent of any other person; and that exercise of the licenses set forth in Paragraph 2 will not constitute an infringement or other violation of any trade secret, copyright, or United States patent of any third party. 9.2 MLI warrants that it owns the Programming and any content other than ADAM Images that MLI incorporates in Products ("MLI Content") and that it has full power and authority to enter into this Agreement with ADAM and to perform its obligations hereunder (including, without limitation, its obligation to assign all copyright interests in the Products to ADAM in accordance with Paragraph 7) without the consent of any other person; and that use, copying, and licensing of Products will not constitute an infringement or other violation of any trade secret, copyright, or United States patent of any third party. 9.3 THE LIMITED WARRANTIES SET FORTH IN PARAGRAPHS 9.1 AND 9.2 ABOVE ARE EXCLUSIVE AND IN LIEU OF ALL OTHER WARRANTIES, WHETHER ORAL OR WRITTEN, EXPRESS OR IMPLIED, INCLUDING THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, ALL OF WHICH ARE HEREBY EXPRESSLY DISCLAIMED. - 15 - 16 10. LIMITATION OF LIABILITY. 10.1 MLI acknowledges and agrees that except as set forth in this Agreement, ADAM, any affiliate or any of their respective officers, directors, employees, shareholders or representatives will have no liability to MLI or to any third party in warranty, contract, negligence, strict tort or otherwise, regarding any defects in design, development, production, performance or compatibility of any Product, or with regard to any use of or inability to use the ADAM Images. 10.2 MLI further acknowledges and agrees that in no event will ADAM, any affiliate or any of their officers, directors, employees, shareholders or representatives be liable to MLI or any third party for any special, indirect, incidental or consequential damages in any way pertaining to any Products, ADAM Images or this Agreement even if ADAM has been notified of the possibility or likelihood of such damages occurring. 10.3 ADAM acknowledges and agrees that except as set forth in this Agreement, MLI, any affiliate or any of their respective officers, directors, employees, shareholders or representatives will have no liability to ADAM or to any third party in warranty, contract, negligence, strict tort or otherwise, regarding any defects in design, development, production, performance or compatibility of any Product. 10.4 ADAM further acknowledges and agrees that, except as provided in Paragraph 11.2 below, in no event will MLI, any affiliate or any of its respective officers, directors, employees, shareholders or representatives, be liable to ADAM or any third party for any special, indirect, incidental or consequential damages in any way pertaining to any Product or this Agreement, even if MLI has been notified of the possibility or likelihood of such damage occurring. 11. INDEMNIFICATION. 11.1 ADAM agrees to indemnify and hold harmless MLI, its corporate affiliates, and any employee or agent thereof (each of the foregoing being referred to in this Paragraph 11.1, individually, as an "Indemnified Party") from and against any and all claims, demands and liabilities of whatever nature and all costs and expenses (including attorneys' fees) suffered or paid by MLI for the violation of any third party's trade secrets, copyrights, or United States patents, arising from the use, copying, or licensing of the ADAM Images as provided for herein. ADAM may, at its option, conduct the defense in any such third party action arising as described herein and the Indemnified Party shall fully cooperate with such defense. This indemnification is - 16 - 17 limited to the ADAM Images delivered to MLI and does not cover third party claims arising from modifications or derivative works (including those elements of any Product originally created by MLI) prepared by MLI. This obligation of indemnification shall survive termination or expiration of this Agreement. 11.2 MLI agrees to indemnify and hold harmless ADAM, its corporate affiliates, and any employee or agent thereof (each of the foregoing being referred to in this Paragraph 11.2, individually, as an "Indemnified Party") from and against any and all claims, demands and liabilities of whatever nature and all costs and expenses (including attorneys' fees) suffered or paid by ADAM for the violation of any third party's trade secrets, copyrights, or United States patents, arising from the use, copying, or licensing of Products, or in connection with any claim or action arising from or related to the acts or omissions of MLI in creation, distribution, or support of Products. This obligation of indemnification shall survive termination or expiration of this Agreement. 12. Term and Termination. 12.1 This Agreement shall be effective as of the date first set forth above and shall continue thereafter for an initial term ending July 15, 1997, unless terminated earlier as provided herein. The parties may agree to renew this Agreement for a mutually agreeable term. Notwithstanding the foregoing, this Agreement will automatically terminate upon any termination of the MLI license Agreement. The provisions of Paragraphs 1, 7, 8, 9, 10, 11, 12 and 13 shall survive any termination of this Agreement. 12.2 Either party may terminate this Agreement upon thirty (30) days written notice, for cause, whereupon all rights, licenses and obligations hereunder shall terminate, except for those obligations set forth in Paragraphs 1, 7, 8, 9, 10, 11, 12 and 13, which shall continue in full force and effect. 13. General Terms. 13.1 Nothing in this Agreement shall be construed to constitute MLI as a partner, employee or agent of ADAM, nor shall either party have any authority to bind the other in any respect, it being intended that each shall remain an independent contractor responsible only for its own actions. 13.2 This Agreement has been negotiated, executed and delivered in the State of Georgia. Accordingly, the parties agree that the validity, interpretation and enforcement of this Agreement shall be governed by and construed in accordance with the laws of the State of Georgia, without regard to its choice of - 17 - 18 law principles. In any civil action by either party relating to this Agreement, the prevailing party will recover from and be reimbursed by the other party for all costs, reasonable attorneys' fees, and related expenses. 13.3 This Agreement may be executed simultaneously in multiple counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument. 13.4 The section and paragraph headings of this Agreement are inserted for convenience of reference only and are not intended to be part of or to affect the meaning or interpretation of this Agreement. 13.5 Any invalidity, in whole or in part, of any provision of this Agreement shall not affect the validity of any other of its provisions. 13.6 MLI expressly agrees that it will not sublicense any of the rights granted herein without obtaining the prior written approval of ADAM in its sole and absolute discretion. This Agreement and all rights of MLI contained herein are personal to MLI and are not assignable, in whole or in part, without ADAM's prior written consent (in its sole and absolute discretion.) Except as provided herein, any purported grant by MLI of an assignment or sublicense of any rights granted herein shall be void. 13.7 ADAM will have the right to assign its rights and obligations hereunder (i) to any controlled subsidiary of ADAM, (ii) to any joint venture in which ADAM is a participant, (iii) to any entity which is the survivor of a merger of ADAM with or into such other entity, or (iv) to any acquiror of all or substantially all of the assets of ADAM. 13.8 Words of inclusion shall not be construed as terms of limitation, so that references to included matters shall be regarded as non-exclusive, non-characterizing illustrations. 13.9 Any notice or other communication provided for or required by this Agreement shall be in writing and shall be deemed to have been given when delivered by hand or when deposited in the United States Mail, certified or registered, return receipt requested, postage prepaid, and properly addressed to the party to whom such notice is intended to be given, at such address as that party may have previously furnished in writing, or to such party's last known address. - 18 - 19 13.10 Subject to the provisions of Paragraph 13.10 below, this Agreement constitutes the entire agreement of the parties relating to its subject matter, supersedes all prior oral or written understandings or agreements regarding the subject matter, and may not be amended, modified or canceled except by a written instrument executed by both MLI and ADAM. 13.11(a) Any dispute, controversy or difference which may arise out of or in relation to or in connection with this Agreement, or with the interpretation of any part hereof, or for any breach hereof, shall be submitted to arbitration pursuant to the rules of the American Arbitration Association. All arbitration proceedings hereunder shall be conducted in Atlanta, Georgia at a site, date and time mutually acceptable to the parties. (b) Arbitration proceedings hereunder shall be conducted by one (1) arbitrator chosen in the manner specified in this Paragraph 13.11. The party electing arbitration hereunder (the "Initiating Party") shall notify the other party (the "Responding Party") of such election in writing in accordance with the rules of the American Arbitration Association. Such notice shall include the name of an arbitrator selected by the Initiating Party from the list of arbitrators provided by the American Arbitration Association. Within thirty (30) days of receipt of the notice from the Initiating Party, the Responding Party will notify the Initiating Party either (i) that the Responding Party has accepted the arbitrator selected by the Initiating Party (in which case such arbitrator shall act as the Arbitrator hereunder), or (ii) specifying the name of an arbitrator selected by the Responding Party from the list provided by the American Arbitration Association. Within thirty (30) days of the selection of two arbitrators in accordance with the preceding provisions, the two arbitrators so selected will select a third arbitrator from the American Arbitration Association's list of arbitrators, and the third arbitrator so selected shall act as the sole arbitrator hereunder (the "Arbitrator") (c) The parties hereto agree to facilitate the arbitration proceeding by (i) making available to each other and to the Arbitrator for inspection and copying necessary documents, books, and records directly related to the dispute and those personnel under their control as the Arbitrator shall determine to be relevant to the dispute; (ii) conducting arbitration hearings to the greatest extent possible on successive, contiguous days, and (iii) observing strictly the time periods established by the American Arbitration Association Rules or by the Arbitrator for the submission of evidence and briefs. Information disclosed - 19 - 20 during the arbitration proceeding that is confidential or competitively sensitive will be disclosed in confidence to the arbitrators. 13.12 Neither party will be in default by reason of any failure in performance of this Agreement if such failure arises, directly or indirectly, out of causes reasonably beyond the direct control or foreseeability of such party, including, but not limited to, acts of God or of the public enemy, fire, flood, epidemic, restrictions and/or strikes. 13.13 Any failure by either party to detect, protest, or remedy any breach of this Agreement will not constitute a waiver or impairment of any such term or condition, or the right of such party at any time to avail itself of such remedies as it may have for any breach or breaches of such term or condition. A waiver may only occur pursuant to the prior written express permission of an authorized officer of the other party. 13.14 MLI acknowledges that each provision of this Agreement providing for the protection of ADAM's copyrights, proprietary information and other proprietary rights is material to this Agreement. The parties acknowledge that any threatened or actual breach of ADAM's copyrights or other proprietary rights by MLI will constitute immediate, irreparable harm to ADAM, for which equitable remedies may be awarded by a court of competent jurisdiction. - 20 - 21 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered as of the day first above written, whereupon it enters into full force and effect in accordance with its terms. J.S.K., INC., D/B/A MEDICAL-LEGAL ILLUSTRATIONS By: /s/ John McLaugherty -------------------------------- Name: John McLaugherty ------------------------------ Title: President ----------------------------- A.D.A.M. SOFTWARE, INC. By: /s/ Stephanie Calabrese -------------------------------- Name: Stephanie Calabrese ------------------------------ Title: Editorial Manager ----------------------------- By: /s/ Curtis Cain -------------------------------- Name: Curtis Cain ------------------------------ Title: CEO ----------------------------- - 21 - 22 EXHIBIT A A.D.A.M.(R) & SOFTWARE, INC. LICENSE AND LIMITED WARRANTY AGREEMENT CAREFULLY READ THIS LICENSE AND LIMITED WARRANTY AGREEMENT (this "Agreement") BEFORE YOU USE THIS PRODUCT. This is a legal agreement between you (either an individual or an entity) and A.D.A.M. Software, Inc. By using this Product, you agree to be bound by the terms and conditions of this Agreement. If you do not agree to the terms of this Agreement, do not use any of the contents of this Product, and return the Product and your receipt to the place you obtained the Product, within thirty days after you obtained the Product, for a full refund. DEFINITIONS The following definitions apply to the terms as they appear in this Agreement: - - - 'You' and 'Your' refer to any person or entity that acquires or uses this Product. - - - 'Content' means the digitally encoded illustrations, pictures, images, animations, video, sound, text and other materials (other than computer software programming) included with the Programs for use by or with the Programs, and the illustrations, pictures, images, animations and video recorded on the VCR tape included with this Product (if applicable). Content also includes any modifications to the Content made in accordance with this Agreement. - - - 'Legal Proceeding' means a lawsuit, arbitration, mediation, assertion or settlement of a legal claim, or similar legal proceeding. - - - 'Legal Project' means (1) in the case of a lawyer, law firm or legal department, a collection of Content assembled or prepared by You solely for use by You in connection with Your legal representation of Your client in connection with a Legal Proceeding, or (2) in the case of a medical expert, a collection of Content assembled or prepared by You solely for use by You in connection with Your expert testimony in connection with a Legal Proceeding. - - - 'Programs' means the computer software programs contained in this Product created by A.D.A.M. Software, Inc. or its suppliers. - - - 'Product' means the Programs, Content (including the VCR tape recording of the Content included with this Product (if applicable)), documentation and other materials provided to You by A.D.A.M. Software, Inc. - - -1- 23 LICENSE You are obtaining limited rights to use this Product subject to the terms of this Agreement. A.D.A.M. Software, Inc. or its suppliers retain ownership of (1) the Product and any copies You make of the Product or any part of the Product, and (2) any intellectual properties related to the Product. PERMITTED USES OF THE PROGRAMS A.D.A.M. Software, Inc. grants You a limited license to use the Programs as follows. You may: - - - make a copy of the Programs on a storage device solely for execution on one computer at a time; - - - load a copy of the Programs in the memory of one computer for use with that computer by one person at a time; and - - - make a copy of the Programs for archival purposes only. PERMITTED USES OF THE A.D.A.M. CONTENT A.D.A.M. Software, Inc. grants You a limited license to use the Content as follows. You may: - - - copy and modify portions of the Content solely in the creation of Legal Projects; - - - produce a reasonable number of printed copies of a Legal Project which includes Content, solely for distribution to participants in a Legal Proceeding (such as Your client, jury members, judges, opposing counsel, arbitrators, or mediators) in which You are providing legal representation to Your client, or in which you are providing expert testimony. - - - make a videotape recording of Content, and a reasonable number of copies of such videotape, solely for use by You in connection with Your legal representation of Your client in a Legal Proceeding or Your provision of expert testimony in a Legal Proceeding; and - - - make live presentations of the Content through use of a video display terminal or an electronic video projection device, solely in connection with a Legal Proceeding or a presentation to a continuing legal education seminar or similar professional gathering. All copies You make of Content, regardless of the form of such copies, must bear and prominently display A.D.A.M. Software, Inc.'s copyright notice in the following form: "Copyright 1995 - - -2- 24 A.D.A.M. Software, Inc. All Rights Reserved." A.D.A.M. Software, Inc. reserves, and You hereby grant to A.D.A.M. Software, Inc., the right to review all such copies to verify compliance with this Agreement. PROHIBITED USES You may not use, copy or distribute the Programs, the Content, or the documentation contained in this Product, except as expressly authorized above in this Agreement or permitted in writing signed by an authorized representative of A.D.A.M. Software, Inc. Without limiting the generality of the foregoing statement, You may not: - - - reverse engineer, disassemble or decompile the Programs or in any way attempt to discover or reproduce the codes, techniques, formats, concepts, methods, ideas and information contained in or used to create the Programs; - - - export the Product or any portion thereof to any person or entity in violation of the United States Export Administration Act; - - - broadcast or televise any of the Content or Legal Projects containing or based upon the Content; distribute the Programs, Content, or Legal Projects containing or based upon the Content; - - - sell the Programs, Content, or Legal Projects containing or based upon the Content; or - - - make or export copies of the Content, or any portion thereof, for use with other computer programs except in the course of creating a Legal Project. GOVERNMENT END USERS The Product qualifies as commercial computer software for purposes of FAR 52.227-19 and DFARS 52.227.7013. Accordingly, if the Product is acquired by a civilian government agency, it is furnished with only the minimum Restricted Rights provided by FAR 52.227-19. If the Product is acquired by a military agency, it is furnished with only the minimum Restricted Rights provided by DFARS 52.227-7013(c)(1)(ii). Contractor/manufacturer is A.D.A.M. Software, Inc. - - -3- 25 TERMINATION This Agreement and Your rights to use the Product terminate automatically if you violate any part of this Agreement. In the event of termination, you must immediately destroy all copies of the Product or return the Product to A.D.A.M. Software, Inc. LIMITED WARRANTY A.D.A.M. Software, Inc. warrants that the media on which the Product is distributed will be free from defects in materials and workmanship and the Programs will substantially conform to published specifications and to the documentation, provided the Programs are used on the computer hardware and with the operating systems for which they were designed. If the Product falls to comply with this limited warranty, A.D.A.M. Software, Inc. will replace the media or, at A.D.A.M. Software, Inc.'s option, make a reasonable effort to correct any nonconformities in the Programs. You must, however, return Your original media, along with a copy of your paid invoice, to A.D.A.M. Software, Inc. or its authorized representative within 90 days of the date you received the Product. If A.D.A.M. Software, Inc. is unable to correct defective media or nonconformities in the Programs, A.D.A.M. Software, Inc. will refund the price You paid for this Product. The refund will satisfy all of Your claims under this limited warranty. This limited warranty shall continue for any replacement Product for the rest of the original 90-day warranty period or for 30 days from the date You receive the replacement, whichever is longer. A.D.A.M. Software, Inc.'s liability to You for actual damages for any cause whatsoever, and regardless of the form of the action, will be limited to the money paid for the Product. A.D.A.M. Software, Inc. does not warrant that the Product is free from all errors and omissions or that the functions contained in the Product will meet your requirements. A.D.A.M. Software, Inc. does not recommend, advise or suggest that any physician or other health care provider use the Product as a resource for diagnostic or educational purposes. A.D.A.M. Software, Inc. does not warrant the A.D.A.M. Content meets any particular standard. EXCEPT AS SPECIFICALLY SET FORTH ABOVE, A.D.A.M. SOFTWARE, INC. AND ITS SUPPLIERS DISCLAIM ALL OTHER WARRANTIES, EITHER EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. THIS LIMITED WARRANTY GIVES YOU SPECIFIC LEGAL RIGHTS, AND YOU MAY HAVE OTHER RIGHTS, WHICH VARY FROM STATE TO STATE. - - -4- 26 EXCEPT AS SPECIFICALLY SET FORTH ABOVE, A.D.A.M. SOFTWARE, INC. AND ITS SUPPLIERS WILL IN NO EVENT BE LIABLE FOR ANY DAMAGES WHATSOEVER FOR CONSEQUENTIAL OR INCIDENTAL DAMAGES, EITHER DIRECT OR INDIRECTLY INCLUDING BUT NOT LIMITED TO LOSS OF BUSINESS PROFITS, INCOME OR USE OF DATA. SOME STATES DO NOT ALLOW EXCLUSION OR LIMITATION OF INCIDENTAL OR CONSEQUENTIAL DAMAGES; THUS, LIMITATIONS IN THIS AGREEMENT MAY NOT APPLY TO YOU. GENERAL Nothing in this Agreement or the Product shall be deemed as a certification or endorsement of Legal Projects or other material prepared by You, and You shall not make any statements or representations to the contrary. This Agreement constitutes the entire agreement and supersedes any prior agreement between A.D.A.M. Software, Inc. and You concerning the Product. A.D.A.M. Software, Inc. is not bound by any provision of any purchase order, or other document, unless A.D.A.M. Software, Inc. specifically amends this Agreement. This Agreement cannot be amended, modified, or waived, unless the change is written and signed by an authorized corporate officer of A.D.A.M. Software, Inc. This Agreement is governed by the laws of the State of Georgia, without regard to conflict of law principles. TRADEMARK AND COPYRIGHT INFORMATION The computer software and Content described in this Agreement are copyrighted, with all rights reserved. (C)1995 A.D.A.M. Software, Inc. 1600 RiverEdge Parkway, Suite 800 Atlanta, GA USA 30328 A.D.A.M.(R) is a trademark of A.D.A.M. Software, Inc. Windows(TM) is a trademark of Microsoft Corporation. Macintosh(R) is a registered trademark of Apple Computer, Inc. - - -5- 27 EXHIBIT B PROPOSED PRODUCT SPECIFICATION B-1 28 EXHIBIT C LOGO, TRADEMARK & IMAGERY GUIDELINES A4 TRADEMARK GUIDELINES These guidelines are for A.D.A.M. resellers, distributors and business partners who wish to use the A.D.A.M. Software, Inc. trademark in promotional, instructional or reference materials. Please refer to these Guidelines and to the A.D.A.M. Marketing Department to be sure you are using A.D.A.M. product and company marks in an authorized manner. "A D.A.M." vs. "A.D.A.M. Software, Inc." "A.D.A.M. Software, Inc." is the correct company name, and the full name should be used whenever referring to the company. Although in the past the name "A.D.A.M." referred to the initial product which was sold by the company, all A.D.A.M. products now have specific names. The name "A.D.A.M." therefore should only be used as an adjective, such as "A.D.A.M. products, A.D.A.M. employees, A.D.A.M. distributors, etc." It is a challenge to differentiate our product line in the marketplace, and the best way to do this is through consistency in our terminology. Using the A.D.A.M. Trademark. Only A.D.A.M. Software, Inc. and parties authorized in writing may use the A.D.A.M. trademark in products, advertising or sales displays. "A.D.A.M." may only be used to denote A.D.A.M. products. You may not use "A.D.A.M." in the name of any other computer-related product, company or store. Correct uses of the "R"and "TM" Symbols. The registered trademark symbol (R) should appear whenever the "A.D.A.M." name is used. This includes references to both the company and its products. The "(R)" should also be present at the end of the "A.D.A.M. Scholar Series" name. The trademark symbol (TM) should appear after the "A.D.A.M. The Inside Story" and "Nine Month Miracle" names. PLEASE SEE "CORRECT (R) AND(TM) PLACEMENT" AT THE END OF THIS SECTION FOR A COMPLETE LIST SHOWING ALL A.D.A.M. NAMES. When they are printed within a promotional piece or advertisement, the general rule-of-thumb is to use the (R) or (TM) with the first appearance of the appropriate A.D.A.M. name. It does not need to be present in the headline of your promotional piece if the first appearance happens to be there. In such cases, you may put the (R) or (TM) with the first appearance in the body copy. Additionally, whenever and A.D.A.M. product name is printed, it should be in italics (both the word "A.D.A.M." and the accompanying product name). This helps to set it off from the other body copy. E6023-2 (C)Copyright 1995 A.D.A.M. Software, Inc. All rights reserved. 29 LOGO, TRADEMARK & IMAGERY GUIDELINES - A5 USE A CREDIT LINE. Your credits (the fine-print) should state that the A.D.A.M. trademarks and logos you have used belong to A.D.A.M. Software, Inc. (See Examples G & H). "A.D.A.M" AND "THE A.D.A.M. SCHOLAR SERIES" ARE REGISTERED TRADEMARKS OF A.D.A.M. SOFTWARE, INC. (C) COPYRIGHT 19__. ALL RIGHTS RESERVED. (Example G) "A.D.A.M" IS A REGISTERED TRADEMARK AND "NINE MONTH MIRACLE" IS A TRADEMARK OF A.D.A.M. SOFTWARE, INC. (C) COPYRIGHT 19__. ALL RIGHTS RESERVED. (Example H) Credit lines should be placed with the copyright information or at the bottom of advertisements. MISUSE of THE A.D.A.M. TRADEMARKS. The A.D.A.M. trademarks hold valuable property rights. If You misuse them, you may be in breach of your written agreements with A.D.A.M. Software, Inc. and you may be liable for trademark infringement. If you have any questions, talk to your A.D.A.M. channel representative or the A.D.A.M. Marketing Department at +1-404-980-0888, or refer to your contract. E6023-2 Copyright 1995 A.D.A.M. Software, Inc. All rights reserved. EX-10.41 7 SOFTWARE RESELLER AGREEMENT 1 EXHIBIT 10.41 SOFTWARE RESELLER AGREEMENT This SOFTWARE RESELLER AGREEMENT ("Agreement") is dated as of December 13, 1995, and is between A.D.A.M. SOFTWARE, INC., a Georgia corporation ("ADAM") and PEARSON PROFESSIONAL (AUSTRALIA) PTY LTD., an Australian company ("Reseller"). For good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. BACKGROUND. ADAM is the owner of certain Products (as defined below) consisting of computer software programs and related documentation. Reseller desires to obtain the right to distribute such Products, and ADAM agrees to grant to Reseller such right to distribute the Products in the Territory (as defined below) as set forth herein. 2. DEFINITIONS. As used in this Agreement, its Exhibits, and any amendments thereto, the terms herein will have the meaning and definition as specified below: 2.1. "Confidential Information" means information, other than Trade Secrets, that is of value to its owner, that is treated by its owner as confidential, and that is identified by its owner in writing as "Confidential" at the time of disclosure or within thirty (30) days following disclosure. 2.2. "Copies for Demonstration Purposes" means copies of the Products held by Reseller for purposes of demonstration to prospective End-Users as set forth herein and not for actual production use. 2.3. "Effective Date" means the date on which this Agreement is executed by both parties through their authorized representatives. 2.4. "End-User" means any end user which obtains a Product or Products in accordance with an End-User Agreement for the purpose of using same for internal or educational use only or for use in connection with the provision of healthcare services, and not for remarketing or distribution of any kind. 2.5. "End-User Agreement" means a written license agreement with respect to a Product in favor of an End-User, in the form attached hereto as EXHIBIT C, which may be revised from time to time in the sole discretion of ADAM. 2.6. "Intended Markets" means (i) all educational markets, including K-12, universities, graduate schools, medical schools, allied health schools, and nursing schools; 2 (ii) physicians, hospitals, clinics or other healthcare providers; or (iii) pharmaceutical and medical device manufacturers or distributors. 2.7. "License Fee" means the monetary amounts specified in EXHIBIT A to be paid by Reseller to ADAM for each of the Products ordered by Reseller as set forth herein. Such amounts are subject to change as set forth in Section 5.1 below. 2.8. "Marks" means any trademarks, service marks or tradenames of ADAM associated with the Products as designated by ADAM. 2.9. "New Products" means any new software program, including but not limited to derivative works of any Product or Products, in either object code or source code form, and any related documentation, derivative or otherwise, co-developed or co-published by the parties pursuant to a separate, written co-development or co-publishing agreement between the parties. 2.10. "Orders" means written orders of Reseller for Products identifying each Product ordered, quantities desired, and shipping and invoicing addresses. Orders shall be placed by Reseller using the Order Form attached hereto as EXHIBIT E in accordance with the provisions of Section 4.1(j). 2.11. "Products" means the specific version and release of ADAM's computer software programs, in object code, machine readable form only, and the related documentation, including, without limitation, illustrative content contained therein, which are specifically identified in EXHIBIT A, and any subsequent revisions, releases or derivatives of those specific Products listed on EXHIBIT A which are intended specifically for the Intended Markets. It is understood and acknowledged that ADAM may, from time to time, develop or co-develop other computer software products or print products which are based upon or derived from ADAM's existing Products, or which include content from such Products, but which are intended primarily for markets other than the Intended Markets, and it is further acknowledged and agreed that such other products will not constitute Products for purposes of this Agreement, By way of illustration (but not limitation), products intended primarily for the mass distribution markets (consumer products), would not be considered Products for purposes of this Agreement. The term Products will not include products which are developed or co-developed by ADAM which are intended for use with the Products (such as supplemental or auxiliary products). 2.12. "Propriety Information" means Trade Secrets and Confidential Information. 2.13. "Territory" means the countries listed on Exhibit B. 2.14. "Trade Secrets" means information which: (a) derives economic value, actual or potential, from not being generally known to, and not being ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; (b) is the -2- 3 subject of efforts that are reasonable under the circumstances to maintain its secrecy, and (c) is identified by its owner in writing as a "Trade Secret," either at the time of disclosure or within thirty (30) days following disclosure. 3. GRANT. 3.1. ADAM grants Reseller a nonexclusive, nontransferable, nonassignable and limited right to market and distribute the Products to End-Users in the Territory, solely as set forth in this Agreement. 3.2. ADAM agrees that, during the term of this Agreement, ADAM will not itself distribute the Products in the Territory (except through Reseller), nor will it authorize or grant to any third party the right to distribute any of the Products in the Territory. Notwithstanding the foregoing provisions of this Section 3.2, it is understood and agreed that ADAM has authorized (and may hereafter authorize) third party distributors to distribute copies of Products in the Territory in "bundles" with products of other software publishers (where such products are sold together for a single price or are sold together with computer equipment for a single price). ADAM will inform Reseller when such a bundled distribution will be made in the Territory. Revenues received by ADAM from any copies of Products distributed in the Territory in bundles will be credited towards Reseller's Performance Objective for the year in which the bundled copies are distributed. 3.3. Notwithstanding the provisions of Section 3.2, it is understood and agreed that, if ADAM co-develops or co-publishes a product intended for use with one or more of the Products, ADAM will have the right to authorize the third party which has co-developed or co-published such product (the "Co-Developer") to distribute such co-developed or co-published product in the Territory, as well as to distribute Products in the Territory, so long as the Products are offered by the Co-Developer in conjunction with the co-developed or co-published product. Moreover, in the event that ADAM co-develops or co-publishes a Product with a third party, such third party co-developer or co-publisher may retain the right to market and distribute such new Product in the Territory on either an exclusive or nonexclusive basis. 3.4. Except with the prior written consent of ADAM, which consent may be given or withheld in ADAM's sole discretion, Reseller will in no event distribute any of the Products to (i) a party which intends to resell or redistribute such Products outside the Territory, or (ii) to any party for ultimate use outside of the Territory. 3.5. From time to time, ADAM may, in its sole discretion, make available to Reseller for distribution in the Territory (on a non-exclusive basis) products of ADAM other than the Products (such as products intended for markets other than the Intended Markets or new products intended for use with the Products). ADAM will also notify Reseller of the terms and conditions applicable to the distribution of such other products, including license fees. If Reseller elects (in its sole discretion) to distribute such other products, the terms of this Agreement will -3- 4 apply to the distribution of such products (other than the provisions of Section 3.2 above), except to the extent otherwise provided in the terms and conditions specified by ADAM as contemplated in the preceding sentence. 3.6. The grant of rights under this Paragraph 3 is personal to Reseller and does not include the right to appoint any sub-resellers or sub-distributors without the written consent of ADAM, which consent will not be unreasonably withheld by ADAM. Any sub-reseller or sub-distributor appointed by Reseller (with the consent of ADAM) will be required to enter into a sub-reseller's agreement in the form attached as EXHIBIT F. ADAM reserves the right to request that Reseller appoint third parties specified by ADAM as sub-resellers subject to Reseller's approval (which will not be unreasonably withheld). 3.7. ADAM grants Reseller a nonexclusive, nontransferable, nonassignable and limited right and license to use the Marks in marketing the Products solely in accordance with Paragraphs 4 and 11 of this Agreement. 3.8. ADAM agrees to provide Reseller with a total of twenty-six (26) fully functioning Copies for Demonstration Purposes free of charge (ADAM will determine the actual mix of Products to be included in the total). Additional Copies for Demonstration Purposes may be purchased at a cost to be agreed upon by ADAM and Reseller. ADAM grants Reseller a nonexclusive, nontransferable, nonassignable, and limited right and license to use the Copies for Demonstration Purposes solely for purposes of demonstration to prospective End-Users and not for actual production use. Reseller will use the Copies for Demonstration Purposes only for demonstration to prospective End-Users on computer systems owned or leased by Reseller or on the computer system of a prospective End-User. In each such case, Reseller will control and limit the use of the Copies for Demonstration Purposes for the specific purpose authorized above. Within ten (10) days of the termination of this Agreement, Reseller shall, at its expense, return all Copies for Demonstration Purposes to ADAM. For the purposes of this Agreement, Copies for Demonstration Purposes will be considered Products. 4. OBLIGATIONS OF THE PARTIES 4.1. Reseller. (a) Reseller will use its commercially reasonable efforts to promote and market the Products to End-Users in the Territory in accordance with terms of the Annual Plan established in accordance with this Section. To effectively market the Products, Reseller agrees that it will: (i) maintain appropriate computer equipment, as defined by the then-current ADAM recommended hardware requirements, which will permit it to demonstrate the Products to potential End-Users at both customer sites and -4- 5 appropriate Reseller locations (the current ADAM recommended hardware requirements are specified in EXHIBIT G); (ii) cause its personnel to become proficient in the use of the Products and the demonstration of the Products to potential End-Users; (iii) commit sufficient resources from its sales departments towards satisfaction of the sales performance objectives specified in Section 4.1(b) below (the "Performance Objectives"), and cause its sales personnel to be certified as qualified ADAM sales representatives whose responsibilities shall include establishing, qualifying and maintaining sales relationships wherever possible; (iv) commit sufficient resources from its Sales Promotion operations to promote the Products in accordance with the initial marketing plan specified in EXHIBIT D (the Initial Annual Plan). Such promotions shall include without limitation direct mail, print advertising, direct sales calls, telemarketing and exhibition attendance. (b) Reseller's sales performance objective for the Territory (the "Performance Objective") for the first year of this Agreement, commencing upon execution of this Agreement and continuing through December 31, 1996, will be distribution of Products to End-Users in the Territory with aggregate License Fees to ADAM (as specified in Section 5.1 below) of U.S. $95,000. In the event that Reseller satisfies its first year Performance Objective, the term of this Agreement will automatically be extended for a second year. If the Performance Objective is not satisfied, then ADAM will have the right to terminate the Agreement upon written notice to Reseller. If this Agreement continues for a second year, commencing January 1, 1997 and continuing through December 31, 1997, the parties will discuss an appropriate Performance Objective for the second year. (c) Sixty (60) days prior to the end of the first year of this Agreement, Reseller and ADAM will confer to review performance and discuss Reseller's plans for the ensuing year concerning the sale of Products. Reseller will furnish ADAM with Reseller's marketing and sales plans for the year, which shall include (i) sales projections for the year (on a quarterly basis), (ii) information concerning the computer equipment in Reseller's possession and available for use in Product demonstrations, and (iii) information concerning the training of Reseller's personnel in the use and demonstration of the Products (the "Annual Plan"). Upon approval of the Annual Plan by ADAM, such Annual Plan will be effective during the following year. A similar procedure will be used to establish an Annual Plan for each year thereafter for so long as this Agreement shall -5- 6 continue in existence. The initial Annual Plan for the first year under this Agreement is attached hereto as EXHIBIT D. (d) Reseller will furnish ADAM, on a monthly basis, a report and review of all sales with regard to the Products. Such report shall include but is not limited to the name, address and telephone number of each End-User to whom Reseller has distributed a copy of Product during the preceding month so that each End-User can be registered as a licensed End-User. (e) Reseller will submit to ADAM, prior to use, distribution, or disclosure, any advertising, promotional and marketing materials, and publicity relating to the Products proposed to be used by Reseller (the "Marketing Materials"). Reseller may not use, distribute, or disclose the Marketing Materials unless approved by ADAM's Marketing Department, which approval will not be unreasonably withheld. ADAM shall approve or disapprove such Marketing Materials within ten (10) business days of ADAM's receipt of Reseller's written request to use, distribute or disclose such Marketing Materials. In the event ADAM shall fail to approve or disapprove within such ten (10) business day period, ADAM shall be deemed to have approved of such use, distribution or disclosure of the Marketing Materials by Reseller. Thereafter, the parties will mutually agree upon an appropriate procedure to be used for prior approval of marketing and advertising materials. In all events, all such marketing materials will comply with the guidelines furnished by ADAM from time to time, and with the provisions of Paragraph 11 of this Agreement. (f) Reseller will have the authority to market the Products under the terms and conditions of the End-User Agreement only. Reseller has and will exercise no authority to make any alterations to the End-User Agreement. (g) Reseller has and will exercise no authority to make statements, warranties or representations concerning the Products that exceed or are inconsistent with the marketing materials or technical specifications provided to Reseller by ADAM. Reseller has and will exercise no authority to bind ADAM to any undertaking or performance with respect to the Products. (h) Reseller may offer directly to End-Users, separate and independent of its functions as a Reseller of ADAM Products under this Agreement, appropriate ancillary Products or services. The terms, conditions and charges for such Products or services will be established by Reseller with End-Users. Reseller will inform End-Users that ADAM's obligations are limited to those contained in the End-User Agreement with End-Users solely and that Products or services of Reseller are offered on Reseller's own account and that Reseller remains solely responsible for such ancillary Products or services. -6- 7 (i) Orders will be placed by Reseller with ADAM utilizing the Order Form attached hereto as EXHIBIT E, and will be subject to product availability and to acceptance by ADAM. ADAM agrees that it will not reject any orders placed by Reseller in accordance with this Section for the sole purpose of causing Reseller not to meet the Performance Objectives specified in Section 4.1(b) above. If the Product is unavailable, ADAM reserves the right to cancel an order or to reschedule shipment from a promised shipment date. Orders may be faxed to ADAM as specified on the Order Form. Unless otherwise specified by Reseller, all Products will be shipped by ADAM to Reseller's authorized and identified warehouse facilities via air freight common carrier, F.O.B. ADAM's facilities. All freight charges, taxes, duties and customs charges, insurance and miscellaneous costs are to be paid by Reseller. ADAM may change the form of the Order Form or the procedures for placing orders by sending a copy of the new form or procedures to Reseller. Upon receipt and acceptance by ADAM of Orders delivered to ADAM by Reseller, ADAM will invoice Reseller as set forth in Paragraph 5 below. In the event that ADAM delivers the Products to Reseller for delivery to End-User, Reseller will deliver the Products to such End-User only as delivered by ADAM to Reseller (that is, in the form of complete shrink-wrapped packages as shipped by ADAM); provided that Reseller may place a label on the outside of the packaging, identifying Reseller as a distributor of Products (Reseller will submit any such label to ADAM for ADAM's review and approval prior to any such use). In no event shall any such shrink-wrapped packages furnished by ADAM be repackaged, unless (i) prior written consent is obtained from ADAM, or (ii) the Products have been returned, damaged or updated and must be re-shrink wrapped, (j) Reseller shall not during the term of this Agreement or at any time thereafter, directly or indirectly, copy, reproduce, manufacture, reverse engineer, disassemble, or reverse compile the software comprising the Products, or disclose or distribute the design, structure, or operation of any Product or part thereof, to any person, corporation or other entity. ADAM shall have and retain all right, title and interest in and to all intellectual property rights relating to the Products. 4.2. ADAM. In addition to the obligations specified elsewhere in this Agreement, ADAM also agrees: (a) to use all commercially reasonable efforts to obtain distribution rights in the Territory for any co-published or third party software which was designed or intended for use in conjunction with any Products; (b) that where it has co-developed a Product with a third party, and that third party retains the right to market and distribute such new Product in the Territory, or is granted the right to market the Products in the Territory, ADAM will use its commercially reasonable efforts to ensure that such rights retained or granted to the third party do not substantially impair Reseller's business interests in the Territory; -7- 8 (c) to fully inform Reseller of all marketing and distribution of the Products outside the Territory, and to End-Users other than those specified in Section 2.4 within the Territory; (d) in order to assist in the transition of distribution to Reseller, ADAM will provide Reseller with a list of the names and addresses of all current End-Users of Products in the Territory (to the extent that ADAM has such information); (e) to commit sufficient technical and financial resources to assist Reseller in the marketing, promotion and public relations of the Products; and (f) to exchange Reseller's inventory stock of Products and Copies for Demonstration Purposes for upgraded versions, and to replace all Products and Copies for Demonstration Purposes received from ADAM in a damaged condition, provided that Reseller shall pay all costs of return shipping to ADAM, and ADAM shall pay all costs of reshipping to Reseller. 5. LICENSE FEES AND PAYMENT. 5.1. Reseller will pay ADAM the License Fees specified in EXHIBIT A for each of the Products ordered by Reseller and shipped by ADAM as set forth herein at payment terms specified by ADAM. Reseller will pay ADAM within forty-five (45) days of the date of invoice therefor from ADAM. License Fees owed by Reseller will be discounted by one percent (1%) if payment is received by ADAM within fifteen (15) days of the date of invoice therefor. A two percent (2%) penalty will be added to License Fees owed by Reseller if payment is not received by ADAM within forty-five (45) days of the date of invoice therefor. ADAM reserves the right to change the License Fees specified above at any time, in ADAM's sole discretion, by providing Reseller with an amended EXHIBIT A, specifying the new License Fees. Any such change in the License Fees will be effective thirty (30) days after the date such amended EXHIBIT A is provided to Reseller. 5.2. All payments from Reseller to ADAM hereunder will be in U.S. Dollars. Reseller will pay ADAM by means of a company check, bank check or wire transfer to ADAM's bank. 5.3. The amounts due to ADAM as set forth herein are net amounts to be received by ADAM, exclusive of all taxes, and are not subject to offset or reduction because of any costs, expenses, or liabilities incurred by Reseller or imposed on ADAM in the performance of this Agreement or otherwise due as a result of this Agreement. 5.4. Reseller will be responsible for and will pay directly, any and all taxes, duties and charges incurred in the performance of this Agreement, including, but not limited to, sales and use taxes, withholding taxes, duties and charges imposed by federal, state or local governmental -8- 9 authorities in the United States or elsewhere, but excluding U.S. corporate income taxes of ADAM. Reseller will also be responsible for payment of any license fee, assessment, duty, tax, levy, or similar charge imposed by any foreign government as a result of this Agreement or the transactions contemplated by the parties hereunder. 5.5. Reseller will set the license fees that it charges End-Users for copies of Products distributed by Reseller pursuant to this Agreement, in the sole discretion of Reseller. Reseller will furnish a copy of its price list to ADAM (and a copy of any updates to the price list as changes are made by Reseller from time to time). 6. NONDISCLOSURE AND CONFIDENTIALITY 6.1. Each party hereunder may disclose to the other party certain Trade Secrets and Confidential Information. For purposes of this Paragraph 6, "Owner" refers to the party disclosing Trade Secrets or Confidential Information hereunder, whether such party is ADAM or Reseller, and "Recipient" refers to the party receiving any Trade Secrets or Confidential Information hereunder, whether such party is ADAM or Reseller. 6.2. Recipient agrees to hold the Proprietary Information of Owner in strictest confidence and not to, directly or indirectly, copy, reproduce, distribute, manufacture, duplicate, reveal, report, publish, disclose, cause to be disclosed, or otherwise transfer the Proprietary Information of Owner to any third party, or utilize the Proprietary Information of Owner for any purpose whatsoever other than as expressly or impliedly contemplated by this Agreement. With regard to the Trade Secrets, this obligation will continue for so long as such information constitutes a trade secret under applicable law. With regard to the Confidential Information, this obligation will continue for the term of this Agreement and for a period of three (3) years thereafter. The foregoing obligations will not apply if and to the extent that: (a) Recipient establishes that the information communicated was already known to Recipient, without obligations to keep such information confidential, at the time of the Recipient's receipt from Owner, as evidenced by documents in the possession of Recipient prepared or received prior to disclosure of such information; (b) Recipient establishes that the information communicated was received by Recipient in good faith from a third party lawfully in possession thereof and having no obligation to keep such information confidential; or (c) Recipient establishes that the information communicated was publicly known at the time of Recipient's receipt from Owner or has become publicly known other than by a breach of this Agreement. -9- 10 6.3. Without limiting the general obligations specified above in Section 6.2, Recipient agrees to implement the following security steps in order to protect the confidentiality and security of the Proprietary Information of Owner: (a) Implement internal procedures to limit, control and supervise the use of the Proprietary Information of Owner; (b) Make the Proprietary Information of Owner available only to full-time employees of Recipient who have executed written agreements requiring them to recognize the proprietary and confidential nature of the Proprietary Information of Owner and to comply with the nondisclosure obligations set forth herein; (c) Notify Owner in writing of any suspected or known breach of the obligations and/or restrictions set forth in this Paragraph 6; and (d) Use those security procedures it uses for its own Proprietary Information which it protects against unauthorized disclosure, appropriation or use. 7. PROPRIETARY RIGHTS. 7.1. Reseller acknowledges that nothing herein gives it any right, title or interest in the Products or the Marks except for Reseller's express rights to distribute the Products in accordance with the provisions of Paragraph 3 of this Agreement. 7.2. Reseller acknowledges and agrees that, as between ADAM and Reseller, ADAM or its suppliers maintain exclusive ownership of the Products in all forms (both object code and source code) and all copies and all portions thereof and the Marks, including, without limitation, any and all worldwide copyrights, patents, trademarks, service marks, trade names, trade secret, proprietary and confidential information rights and other property rights associated with the Products and the Marks. 8. WARRANTIES. ADAM DOES NOT MAKE ANY EXPRESS OR IMPLIED WARRANTIES TO RESELLER WITH RESPECT TO THE PRODUCTS, ANY COPIES THEREOF, ANY SERVICES PROVIDED HEREUNDER OR OTHERWISE REGARDING THIS AGREEMENT, WHETHER ORAL OR WRITTEN, EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTY OF MERCHANTABILITY, THE IMPLIED WARRANTY AGAINST INFRINGEMENT AND THE IMPLIED WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE. -10- 11 9. LIMITATION OF LIABILITY. 9.1. RESELLER ACKNOWLEDGES AND AGREES THAT IN NO EVENT SHALL ADAM OR ANY AFFILIATE OF ADAM, OR ANY OF ADAM'S OFFICERS, DIRECTORS, EMPLOYEES, SHAREHOLDERS OR REPRESENTATIVES BE LIABLE TO RESELLER FOR ANY SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES IN ANY WAY RELATING TO THE PRODUCTS, EVEN IF ADAM HAS BEEN NOTIFIED OF THE POSSIBILITY OR LIKELIHOOD OF SUCH DAMAGES OCCURRING. 9.2. IN NO EVENT WILL ADAM'S LIABILITY FOR ANY DAMAGES TO RESELLER OR TO ANY THIRD PARTY ARISING OUT OF OR RELATING TO THE PRODUCTS EVER EXCEED THE AMOUNT OF FEES PAID BY RESELLER TO ADAM HEREUNDER, OR PAID BY SUCH THIRD PARTY TO RESELLER, AS THE CASE MAY BE, REGARDLESS OF THE FORM OF ACTION WHETHER IN CONTRACT, NEGLIGENCE, STRICT LIABILITY, TORT, PRODUCTS LIABILITY OR OTHERWISE. 10. INDEMNIFICATION. 10.1. ADAM will defend, at its expense, any action (or portion thereof) brought against Reseller based upon a claim that the Products infringe upon a copyright or violate the trade secret rights of any third party. ADAM will indemnify and hold harmless Reseller against damages and costs including reasonable attorneys' fees, penalties and interest finally awarded against Reseller in such actions directly attributable to such claims. ADAM will not be obligated to indemnify any claim of infringement if such infringement arises out of the use or combination of the Products with other software. 10.2. Reseller agrees to indemnify, defend and hold harmless ADAM, its affiliates, and their directors, officers, shareholders, employees and agents from and against any claims, liabilities, losses, damages, causes of action or injuries, together with costs and expenses, including reasonable attorneys' fees, arising out of or resulting from: (a) Any actions or omissions on the part of Reseller in distributing or marketing the Products; (b) Any statements, claims, representations or warranties made by Reseller or its employees, agents or representatives, relating to the Products, other than as authorized by ADAM in writing or made in ADAM's own writings; or (c) Any failure on the part of Reseller to pay any taxes, duties or assessments due hereunder or other amounts as set forth in Paragraph 5. -11- 12 10.3. The indemnification set forth in Paragraphs 10.1 and 10.2 is conditioned upon the indemnified party providing the indemnifying party (i) notice of any claim or cause of action upon which the indemnified party intends to base a claim of indemnification hereunder, and (ii) the indemnified party providing reasonable assistance and cooperation to enable the indemnifying party to defend the action or claim hereunder. The indemnifying party will have the right to defend any action or proceeding involving a claim that the indemnifying party is obligated to indemnify hereunder. The indemnifying party will not be obligated to indemnify any claim that is settled by the other party without the prior written consent of the indemnifying party. 11. USE OF MARKS. 11.1. In connection with the use of the Marks as permitted in Paragraph 3, Reseller agrees to comply in all respects with any guidelines or directions provided by ADAM with respect to proper usage of the Marks. At the request of ADAM, Reseller will submit to ADAM's Marketing Department any and all materials bearing or including any of the Marks, for prior review and approval by ADAM. Upon the request of ADAM, Reseller agrees to discontinue the use of (i) any Marks being used by Reseller in a manner determined by ADAM in its sole discretion to be inconsistent with the guidelines set forth above, or (ii) any trademark, service mark, or tradename deemed by ADAM to create a likelihood of confusion with a Mark. 11.2. Reseller acknowledges ADAM's right, title and interest in and to the Marks. Reseller covenants and agrees not to file or prepare any application for registration of any of the Marks, or assert any right, title or other interest in or to the Marks, other than the rights specifically granted to Reseller hereunder. Reseller agrees not to adopt, use, file for registration, or register any trademark, service mark, or tradename which may be an infringement of any one or more of the Marks or result in a likelihood or confusion with a Mark. 11.3. Reseller agrees not to commit any acts, directly or indirectly, which may contest, dispute, or otherwise impair the rights, title or interest of ADAM in or to the Marks. Reseller agrees not to claim or assert any rights, title or interest in or to the Marks in any way. The parties agree that all uses of the Marks by Reseller will be in such a manner as to inure at all times to the benefit of ADAM. Reseller will not use any language or display any Marks in such a manner as to create the impression that the Marks belong to and are owned by Reseller. Reseller may not use the Marks in combination with any other trademarks, tradenames, service marks, or other designations, without the prior written approval of ADAM. 11.4. Reseller will promptly notify ADAM of any and all known infringements or known attempted infringements of any Marks. ADAM reserves all rights regarding a decision to initiate any legal action against an alleged infringer, provided that at the request of ADAM, Reseller will provide reasonable assistance to ADAM in connection therewith. -12- 13 12. DISPUTE RESOLUTION, 12.1. Each party, to the extent permitted by applicable law, (i) hereby irrevocably submits itself to and consents to the exclusive jurisdiction of the United States District Court for the Northern District of Georgia for the purposes of any suit, action or other proceeding in connection with any controversy, claim or dispute relating to this Agreement or to enforce a resolution, settlement, order or award made pursuant hereto, and (ii) hereby waives, and agrees not to assert, by way of motion, as a defense or otherwise, in any such suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of such court, that the suit, action or proceeding is brought in an inconvenient forum or that the venue of the suit, action or proceeding is improper. Each party hereby agrees to the entry of an order and to the confession of judgment to enforce a resolution, settlement, order or award made pursuant to this Section 12.1 by the United States District Court for the Northern District of Georgia and in connection therewith hereby waives, and agrees not to assert by way of motion, as a defense or otherwise, any claim that such resolution, settlement, order or award is inconsistent with or violative of any laws or public policy. 12.2. Each party further irrevocably consents to service of process in any action, suit or proceeding by personal service or by the mailing of copies thereof by registered or certified mail, postage prepaid, return receipt requested, to it at its address set forth on the signature page of this Agreement, provided that a reasonable period for appearance is allowed. The foregoing, however, will not limit the right of a party to serve process in any other manner permitted by law. Any judgment against a party or the assets of a party in any suit for which such party has no further right of appeal will be conclusive, and may be enforced in other jurisdictions by suit on the judgment in accordance with Section 12.1, a certified or true copy of which judgment will be conclusive evidence of the fact and of the amount of any indebtedness or liability of such party therein described; provided always that a party seeking to enforce a judgment may at its option bring suit, or institute other judicial proceedings, against another party or any of its assets in the court of any country or place where such other party engages in business or such assets may be found. 13. SUPPORT. 13.1. ADAM agrees to supply Reseller with a qualified staff member for the purposes of training and educating Reseller and its personnel on the Product and its applications for a period not to exceed one (1) week. Any travel required by ADAM's staff member shall be mutually agreed upon in advance by ADAM and Reseller. All travel expenses and lodging within Australia for ADAM's staff member will be paid by Reseller. All travel expenses and lodging between Australia and the United States for ADAM's staff member will be paid by ADAM. 13.2. Subject to availability of ADAM's personnel and consistent with ADAM's ongoing business, ADAM agrees to provide to Reseller technical support relating to the Products, during ADAM's normal business hours (Eastern Time). Reseller is authorized to make available -13- 14 to End-Users support and maintenance services on the same basis on which ADAM offers such services generally to End-Users of the Products, at the prices specified on EXHIBIT A. Reseller will provide technical support directly to End-Users who purchase support services by maintaining a telephone help line during normal business hours and will field calls from End-Users who purchase support services. To the extent necessary, Reseller will refer technical problems to ADAM for resolution and will relay resolutions to the End-User. ADAM will furnish to Reseller copies of any fixes, enhancements and updates to the Products that ADAM makes generally available (at no extra charge) to users of the Products in the United States who have purchased support services from ADAM, as part of the support fees paid by such users, and Reseller will distribute such copies directly to End-Users in the Territory who purchase support services. ADAM and Reseller will divide the support and maintenance fees actually received by Reseller as specified on EXHIBIT A. On or before the fifteenth day of each month during the term of this Agreement, Reseller will pay to ADAM the amount due to ADAM in accordance with this Section in respect of the maintenance and support fees received by Reseller during the preceding month. In addition, Reseller will furnish ADAM with a report detailing the number of End-Users in the Territory subscribing for maintenance and support services, together with a report of the total amounts received by Reseller during such month in maintenance and support fees. 14. TERM AND TERMINATION 14.1. This Agreement commences on the Effective Date and will continue in effect for one (1) year, unless extended in accordance with the provisions of Section 4.1(b) above upon satisfaction of the Performance Objectives or otherwise extended by mutual agreement of the parties in writing. 14.2. Either party may terminate this Agreement by written notice if there has been a material breach hereof by the other party, which material breach has not been cured within thirty (30) days after the date of written notice to the breaching party by the non-breaching party. 14.3. ADAM may terminate this Agreement upon thirty (30) days prior written notice in the event that Reseller fails to satisfy the Performance Objectives provided for in Section 4.1(b) above. 14.4. Either party may terminate this Agreement immediately if Reseller becomes insolvent, makes a general assignment for the benefit of creditors, suffers or permits an appointment of a receiver for its business or assets, becomes subject to any proceedings under any bankruptcy or insolvency law, whether domestic or foreign, or is liquidated, voluntarily or otherwise. 14.5. Upon expiration or termination of this Agreement for any reason, Reseller will, at ADAM's option, immediately return to ADAM all ADAM property, including, but not -14- 15 limited to, the Copies for Demonstration Purposes and the Proprietary Information of ADAM. Upon return of such materials, Reseller will provide ADAM with a signed written statement certifying that it has returned all ADAM property to ADAM. Reseller will receive credit against any monies owed to ADAM for all ADAM unsold inventory returned to ADAM in a salable condition. Upon termination of this Agreement for any reason, all rights and licenses granted by ADAM hereunder to Reseller will immediately cease, provided such termination will not result in termination of End-User Agreements extended to End-Users. 14.6. Termination or expiration of this Agreement for any reason will automatically accelerate the due date of all invoices and any other monies due to ADAM by Reseller, which will become immediately due and payable on the effective date of termination or expiration. 14.7. Upon termination or expiration of this Agreement, the provisions of this Agreement providing for payment of royalties or fees to ADAM, protection of ADAM's proprietary rights, warranties, the limitation of liability, indemnities, arbitration and other provisions of this Agreement concerning the ongoing interests of ADAM, including, but not limited to, Paragraphs 5, 6, 7, 8, 9, 10 and 12 will continue and survive in full force and effect. 15. ASSIGNMENT. This Agreement and all rights and obligations hereunder are personal to the parties hereto and may not be assigned in whole or in part by either party without the prior written consent of the other. Notwithstanding the foregoing, either party will have the right to assign its rights and obligations hereunder, (a) to any controlled subsidiary of either party, (b) to any joint venture in which either party is a participant, (c) to any entity which is the survivor in a merger of either party with or into such other entity, or (d) to any acquiror of all or substantially all of the assets of either party. 16. INDEPENDENT PRINCIPALS. ADAM and Reseller are independent principals in all relationships and actions under and contemplated by this Agreement. This Agreement will not be construed to create any employment, partnership, joint venture, franchise or agency relationship between the parties or to authorize either party to enter into any commitment or agreement binding on the other party, and each party covenants and agrees that it will never contend to the contrary. Reseller will not make any warranties, guarantees or any other commitment on behalf of ADAM. 17. FORCE MAJEURE. Neither party will be in default by reason of any failure in performance of this Agreement if such failure arises, directly or indirectly, out of causes reasonably beyond the direct control or foreseeability of such party, including, but not limited to, default by subcontractors or suppliers, acts of God or of the public enemy, U.S. or foreign governmental acts in either a sovereign or contractual capacity, fire, flood, epidemic, restrictions, strikes, and/or freight embargoes. -15- 16 18. NON-WAIVER. Any failure by either party to detect, protest, or remedy any breach of this Agreement will not constitute a waiver or impairment of any such term or condition, or the right of such party at any time to avail itself of such remedies as it may have for any breach or breaches of such term or condition. A waiver may only occur pursuant to the prior written express permission of an authorized officer of the other party. 19. EQUITABLE REMEDIES AND SPECIFIC PERFORMANCE. Reseller acknowledges that each provision in this Agreement providing for the protection of ADAM's copyrights, Proprietary Information and other proprietary rights is material to this Agreement. The parties acknowledge that any threatened or actual breach of ADAM's copyrights or other proprietary rights by Reseller will constitute immediate, irreparable harm to ADAM, for which equitable remedies may be awarded by a court of competent jurisdiction. 20. GOVERNING LAW. This Agreement will be governed by, construed, and interpreted in accordance with the laws of the State of Georgia without giving effect to its conflict of law rules. 21. SEVERABILITY. If any provision hereof is declared invalid by a court of competent jurisdiction, such provision will be ineffective only to the extent of such invalidity, so that the remainder of that provision and all remaining provisions of this Agreement will continue in full force and effect. 22. COMPLIANCE WITH LAWS. Reseller shall, at its own expense, comply with any and all laws pertaining to the license of the Software Packages in the Territory and the performance of its obligations hereunder, and Reseller shall procure all required governmental licenses and approvals and pay all fees and other charges related thereto. Reseller will limit its actions hereunder to conform to applicable laws regarding the export or reexport of any information, or any process, product, or service, to countries specified as prohibited destinations, including the Regulations of the U.S. Department of Commerce and/or the U.S. State Department, to the extent applicable. 23. NOTICE. All communications between the parties which are required or permitted to be in writing will be sent by hand delivery, with receipt obtained, by prepaid, first class air mail postal service, certified return receipt requested, by telecopier to the telecopy number specified below, or by private priority express delivery services (such as Federal Express), and sent to the following addresses: -16- 17 If to ADAM: A.D.A.M. Software, Inc. 1600 RiverEdge Parkway Suite 800 Atlanta, Georgia 30328 U.S.A. Attention: Cary S. Chandler Phone: +1 770 980-0888 Telecopier: +1 770 955-3088 with a copy to: WILLIAM G. Roche King & Spalding 191 Peachtree Street Atlanta, Georgia 30303 U.S.A. Phone: +1 404 572-4600 Telecopier: +1 404 572-5100 If to Reseller: _____________________________ _____________________________ _____________________________ _____________________________ _____________________________ _____________________________ Phone:_______________________ Telecopier:__________________ with a copy to: _____________________________ _____________________________ _____________________________ _____________________________ _____________________________ _____________________________ _____________________________ Phone:_______________________ Telecopier: _________________ -17- 18 By written communication, either party may designate a different address for purposes hereof. 24. ENTIRE AGREEMENT. This Agreement supersedes and cancels any previous understandings, representations, or agreements between the parties relating to the subject matter hereof and expresses the complete and final understanding with respect to the subject matter hereof and supersedes and cancels all previous and contemporaneous written and oral agreements and communications relating hereto. IN WITNESS WHEREOF, ADAM and Reseller have caused this Agreement to be executed by their respective, duly authorized officers or representatives, effective as of the last date set forth below. "RESELLER": PEARSON PROFESSIONAL (Australia) PTY LTD. By: /s/ Peter Hylands -------------------------------------------- (Authorized Signature) Name (Print): Peter Hylands ---------------------------------- Title: Managing Director ----------------------------------------- Date: 12/22/95 ------------------------------------------ Address: 95 Coventry St --------------------------------------- South Melbourne --------------------------------------- Telephone: 3 9699 5400 ------------------------------------- Fax: 3 9696 5205 ------------------------------------------- -18- 19 "ADAM": A.D.A.M. SOFTWARE, INC. By: /s/ Curtis Cain -------------------------------------------- (Authorized Signature) Name (Print): Curtis Cain ---------------------------------- Title: CEO ----------------------------------------- Date: 12/13/95 ------------------------------------------ By: /s/ Cary Chandler -------------------------------------------- (Authorized Signature) Name (Print): Cary Chandler ---------------------------------- Title: Vice President ----------------------------------------- Date: 12/13/95 ------------------------------------------ Address: 1600 RiverEdge Parkway Suite 800 Atlanta, Georgia 30329 U.S.A. Telephone: +1 770 980-0888 Fax: +1 770 955-3088 -19- 20 EXHIBIT A PRODUCTS AND FEE SCHEDULE (SEE ATTACHED) 21 INTERNATIONAL DISTRIBUTOR PRICE SHEET PRODUCTS
- - ---------------------------------------------------------------------------------------------------------------------- PRODUCT NUMBER DESCRIPTION END USER DISTRIBUTOR - - ------------------------------------------------------------------------------------- COST (EA) COST (EA) (Windows) (Macintosh) A.D.A.M. SCHOLAR SERIES --------------------------------- - - ------------------------ A.D.A.M. COMPREHENSIVE ID1007 IM1007 single unit $2,035.00 $1,017.00 ID1007S IM1007S with A.D.A.M. Studio $2,630.00 $1,315.00 IDL1007 IML1007 LAB PACK* $7,425.00 $3,712.00 - - ---------------------------------------------------------------------------------------------------------------------- A.D.A.M. STANDARD ITD1007 ITM1007 single unit $ 995.00 $ 498.00 ITLD1008 ITLM1008 LAB PACK* $3,485.00 $1,742.00 - - ---------------------------------------------------------------------------------------------------------------------- A.D.A.M. ESSENTIALS IED1007 IEM1007 single unit $ 350.00 $ 175.00 IESD4003 IESM4003 School Edition + $ 350.00 $ 175.00 IELD4003 IELM4003 School Edition LAB PACK + $1,075.00 $ 537.00 - - ---------------------------------------------------------------------------------------------------------------------- A.D.A.M. STUDIO ID2001 IM2001 for Comprehensive $ 595.00 $ 298.00 ITD2001 ITM2001 for Standard $ 595.00 $ 298.00 - - ---------------------------------------------------------------------------------------------------------------------- - - ---------------------------------------------------------------------------------------------------------------------- A.D.A.M. ANIMATION BOOKS Includes animations, pathologies, & devices ID3002 IM3002 Orthopaedics of the Lower Limb $ 495.00 $ 247.00 ID3003 IM3003 Obstetrics & Gynecology $ 495.00 $ 247.00 ID3004 IM3004 Trauma $ 495.00 $ 247.00 - - ----------------------------------------------------------------------------------------------------------------------
All A.D.A.M. Products include free technical support. * The Lab Pack for A.D.A.M. Standard and Comprehensive contains a single box, six CDs in individual jewel cases, one printed copy of the user manual, and six quick reference cards. + The A.D.A.M. Essentials School Edition is shipped in a 3-ring loose-leaf binder which holds the A.D.A.M. Essentials Teacher's Guide. The A.D.A.M. Essentials Lab Pack contains the 3-ring binder with five CDs in individual jewel cases, five copies of the printed user manual, and one copy of the A.D.A.M. Essentials Teacher's Guide. PRICES ARE IN U.S. DOLLARS AND ARE SUBJECT TO CHANGE WITHOUT NOTICE. PLEASE NOTE THAT PRICES DO NOT INCLUDE SHIPPING AND HANDLING CHARGES. ALL SHIPPING IS DONE VIA AIR FREIGHT. REVISED 12-27-94 A.D.A.M. Software, Inc. - 1600 RiverEdge Parkway - Suite 800 Atlanta, GA 30328 USA - TEL +1-404-980-0888 - FAX +1-404/988-0611 22 EXHIBIT B TERRITORY Australia 23 EXHIBIT C END USER AGREEMENT (SEE ATTACHED) 24 License and Limited Warranty Agreement DISCLAIMER This product is not warranteed to be medically accurate or correct. This product is intended for general educational and entertainment purposes only. The information provided herein should not be used for diagnosis or treatment of any medical condition. A licensed physician should be consulted for diagnosis and treatment of any and all medical conditions. CAREFULLY READ THIS LICENSE AND LIMITED WARRANTY AGREEMENT (this "Agreement") BEFORE YOU USE THIS PRODUCT. This is a legal agreement between you (either an individual or an entity) and A.D.A.M. Software, Inc. By using this product, you agree to be bound by this Agreement. If you do not agree to the terms of this Agreement do not use this product, and return the product and your receipt to the place you obtained the product, within thirty days after you obtained the product, for a full refund. DEFINITIONS The following definitions apply to the terms as they appear in this Agreement: - - - "You" and "Your" refer to any person or entity that acquires or uses this Product. - - - "A.D.A.M. Content" means digitally encoded illustrations, pictures, images, animations, video, sound, text and other non-programmatic material created by A.D.A.M. Software, Inc. or its suppliers. - - - "Product" means the Programs, A.D.A.M. Content, documentation and other material provided to You by A.D.A.M. Software, Inc. LICENSE You are obtaining limited rights to use this Product subject to the terms of this Agreement. A.D.A.M. Software, Inc. or its suppliers retain ownership of (i) the Product and (ii) any intellectual properties related to the Product. PERMITTED USES OF THE PROGRAMS A.D.A.M. Software, Inc. grants You a limited license to use the Programs as follows. You may make a copy of the Programs on a storage device solely for execution on one computer at a time; load a copy of the Programs in the memory of one computer for use with that computer by one person at a time; and, make a copy of the Programs for archival purposes only. PROHIBITED USES You may not use, copy or distribute the Programs, A.D.A.M. Content or documentation contained in this Product except as expressly described in this Agreement or permitted in writing signed by an authorized representative of A.D.A.M. Software, Inc. Without limiting the generality of the foregoing statement, You may not: - - - reverse engineer, disassemble or decompile the Programs or in any way attempt to discover or reproduce the codes, techniques, formats, concepts, methods, ideas and information contained in or used to create the Programs; - - - export the Product or any portion thereof to any person or entity in violation of the United States Export Administration Act; - - - broadcast or televise any of the Programs or A.D.A.M. Content; - - - distribute copies of the Programs, A.D.A.M. Content, or documentation contained in the Product or electronically transfer the Programs or A.D.A.M. Content from one computer to another over a network; - - - sell the Programs or A.D.A.M. Content; - - - lend, lease, rent or license the Product, or any portion thereof; or - - - make or export copies of the A.D.A.M. Content, or any portion thereof, for use with other computer programs. GOVERNMENT END USERS The Product qualifies as commercial computer software for purposes of FAR 52.227-19 and DFARS 52.227.7013. Accordingly, if the Product is acquired by a civilian government agency, it is furnished with only the minimum Restricted Rights provided by FAR 52.227-19. If the Product is acquired by a military agency, it is furnished with only the minimum Restricted Rights provided by DFARS 52.227-7013(c)(1)(ii). Contractor/manufacturer is A.D.A.M. Software, Inc., 1600 RiverEdge Parkway, Suite 600, Atlanta, Georgia 30328. TERMINATION This Agreement and Your rights to use the Product terminate automatically if you violate any part of this Agreement. In the event of termination, you must immediately destroy all copies of this Product or return the Product to A.D.A.M. Software, Inc. LIMITED WARRANTY A.D.A.M. Software, Inc. warrants that, upon delivery by A.D.A.M. Software, Inc., the media on which the Product is distributed will be free from defects in materials and workmanship and the Programs will substantially conform to published specifications and to the documentation, provided the Programs are used on the computer hardware and with the operating systems for which they were designed. If the Product fails to comply with these limited warranties, A.D.A.M. Software, Inc. will replace the media or, at A.D.A.M. Software, Inc.'s option, make a reasonable effort to correct any nonconformities in the Programs. You must, however, return Your original media, along with a copy of your paid invoice, to A.D.A.M. Software, Inc. or its authorized representative within 90 days of the date you received the Product. If A.D.A.M. Software, Inc. is unable to correct defective media or nonconformities in the Programs, A.D.A.M. Software, Inc. will refund the price You paid for this Product. The refund will fully satisfy all of Your claims under this limited warranty. This limited warranty shall continue for any replacement Product for the rest of the original 90-day warranty period or for 30 days from the date You receive the replacement, whichever is longer. A.D.A.M. Software, Inc.'s liability to You for actual damages for any cause whatsoever, and regardless of the form of the action, will be limited to the money paid for the Product. A.D.A.M. Software, Inc. does not warrant that the Product is free from all errors and omissions or that the functions contained in the Product will meet your requirements. A.D.A.M. Software, Inc. does not warrant the A.D.A.M. Content meets any particular standard. EXCEPT AS SPECIFICALLY SET FORTH ABOVE, A.D.A.M. SOFTWARE, INC. AND ITS SUPPLIERS DISCLAIM ALL OTHER WARRANTIES, EITHER EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. THIS LIMITED WARRANTY GIVES YOU SPECIFIC LEGAL RIGHTS, AND YOU MAY HAVE OTHER RIGHTS, WHICH VARY FROM STATE TO STATE. EXCEPT AS SPECIFICALLY SET FORTH ABOVE, A.D.A.M. SOFTWARE, INC. AND ITS SUPPLIERS WILL IN NO EVENT BE LIABLE FOR ANY DAMAGES WHATSOEVER FOR CONSEQUENTIAL OR INCIDENTAL DAMAGES, EITHER DIRECT OR INDIRECTLY INCLUDING BUT NOT LIMITED TO LOSS OF BUSINESS PROFITS, INCOME OR USE OF DATA. SOME STATES DO NOT ALLOW EXCLUSION OR LIMITATION OF INCIDENTAL OR CONSEQUENTIAL DAMAGES; THEREFORE, THE LIMITATIONS SET FORTH IN THIS AGREEMENT MAY NOT APPLY TO YOU. GENERAL This Agreement constitutes the entire agreement and supersedes any prior agreement between A.D.A.M. Software, Inc. and You concerning the Product. A.D.A.M. Software, Inc. is not bound by any provision of any purchase order, or other document, unless A.D.A.M. Software, Inc. specifically amends this Agreement. This Agreement cannot be amended, modified, or waived, unless the change is written and signed by an authorized corporate officer of A.D.A.M. Software, Inc. This Agreement is governed by the laws of the State of Georgia, without regard to conflict of law principles. (C) 1994 Macromedia(TM) is licensed from Altura Software, Inc. End user is prohibited from taking any action to derive a source code equivalent of QuickView, including reverse assembly or reverse compilation. (C) 1994 Altura Software, Inc. (C) 1994 Apple Computer, Inc. (C) 1994 Microsoft Corporation. All companies all rights reserved. (C) 1994 A.D.A.M. Software, Inc. 1600 RiverEdge Parkway, Suite 800 Atlanta, Georgia 30328 25 EXHIBIT D ANNUAL PLAN (SEE ATTACHED) 26 PEARSON Pearson Professional PROFESSIONAL (Australia) Pty Ltd ASIA PACIFIC ACN 067 457 390 85 Coventry Street GPO Box 1337 South Melbourne, VIC 3205 AUSTRALIA Tel 461 (0)3 9699-5400 Fax 461 (0)3 9696-5205 COMPRISING ---------------------------- DATE: August 22, 1995 BLEC Books TO: Matthew W. Steeves, ADAM BLEC Business and Software, Inc Professional FROM: Sophie Kaliniecki BLEC Business Law Education RE: ADAM distribution in Centre Australasia Churchill Livingstone CC: Peter Hylands Pitman Publishing Number of pages including cover sheet:3 MESSAGE Matthew the following overview may provide a framework for discussion regarding the future distribution and marketing of the ADAM series of products in Australasia. I believe I have given a comprehensive overview of the market, but have refrained from forecasting units until I know the actual level of sales. GENERAL The market in Australasia for ADAM product includes Medical Schools/teaching hospitals, Schools of Nursing and Allied Health, College Biology (particularly Human Biology) courses, Secondary Schools and the general public. The College nursing, medical and science market is increasingly computerized with lecturers frequently demanding more material to supplement basic texts. Curriculum change has seen the complete integration of nursing into degree programs at college and the movement of postgraduate programs (midwifery, OR etc) away from hospitals into colleges. Nursing Assistant programs are now also moving away from hospitals into vocational colleges, further deepening the academic market. Nursing programs are currently offered in excess of 50 institutions. The medical curriculum is changing. This year three schools in Australia moved away from the traditional six year program, to follow the US style pre medical curriculum, followed by a problem based clinical program. In these schools the curriculum will not be fully designed until 1997. Reports from the field indicate that by this date, a condition of medical school entry will be personal access to a computer and CD drive. A concern expressed by lecturers at medical schools changing to the new curriculum is that, where students previously received intensive specialized training in subjects such as anatomy, they will now come to their clinical years with a more general education and, as a consequence will require strong supplementary reference/teaching materials. The allied health market is strong in areas such as physical therapy, where Australian schools have a world leading reputation, producing a proportionately large group of internationally recognized authors. Sports physical therapy is recognized as one of the fastest growing areas. This is a group with strong purchasing power. 27 PEARSON PROFESSIONAL ASIA PACIFIC The secondary school market is increasingly focussed on preparing students for vocational/technical education and there is a move towards deepening science and technology curriculums. PROPOSED PROMOTIONAL ACTIVITIES Representation Pearson Professional Australia (PPA), has college representation covering medical, nursing and allied health campuses Australia wide with Churchill Livingston(CL) product. All lecturers in key disciplines are personally visited. In 1996 the PPA college reps will be equipped with pc's which will enable them to demonstrate the current range of electric product. CL is a key imprint in the medical education market, and is the leading publisher of Australian nursing titles. PPA will be able to provide the market coverage and knowledge necessary for ADAM, as well as feedback from these markets on products such as the Stanford Package (Mosby) which is currently being heavily sold in. ADAM would complete PPA's strong suite of products in anatomical sciences, and further complement the range of CL electronic products. PPA works closely with medical booksellers in co-operative conference attendance and mailing. The larger medical booksellers now have reps of their own, calling on academics, libraries, hospitals and specialist practises. We have a high level of communication and offer personal customer service and solid marketing support to resellers. These booksellers are now eagerly embracing electronic product and conducting demonstrations in house and at conferences. Through our relationships with key resellers PPA will be able to offer ADAM further enhanced market coverage. Direct Mail/Advertising We access the most targeted medical practitioner mailing lists. Currently PPA is pre promoting Gray's Anatomy--before the end of 1995 it is our aim that every specialist surgeon and practitioner will have received information about the new edition of Gray's. there will be a launch with the Professor of Anatomy from Melbourne University speaking on behalf of he book. The launch will be held on the premises of the largest medical/nursing book retailer in Australla. Gray's, an institutional name in Australia, will continue to be solidly promoted into the practitioner and student market throughout the next year. The synergy between ADAM and Gray's is clear in the Australian market. Concurrently we conduct or regular discipline based mailings for new book and electronic product to the specialist market. Recent campaigns with new CL electronic product have yielded proportionately high levels of enquiries and sales. 28 PEARSON PROFESSIONAL ASIA PACIFIC Past academic activity with CL product has ensured that we have a valuable resource database of medical and nursing names from historical sampling records. We would use this database as a vehicle for mailing ADAM into academic institutions and as support for rep activity. We are able to access the secondary school database through our relationship with our sister company Longman. We have used this database with success for mailing of CL product as schools reference material. Advertising PPA uses industry journals and magazines for reviewing, and advertising to specialist disciplines. We would undertake a comprehensive campaign in appropriate publications for the ADAM products. Conferences To date this year PPA has attended either as an exhibitor, or in co-operation with a bookseller, 18 health science meetings with 8 currently scheduled before year end. The major meeting for the last quarter this year will be a national physical therapy meeting to be attended by practitioners and educators from all Australian colleges. At this meeting we will launch our own sports physical therapy publication and a new CL journal. At other major meetings we will be showing CL electronic product to surgeons, anesthetists and radiologists. Clearly these are high visibility opportunities for ADAM. Conclusion In summary, Pearson Professional Australia proposes that we shall exercise our best efforts to promote the use and sale of ADAM products throughout Australasia. Our representatives will call regularly in key markets, and we will develop and implement an advertising program which will incorporate attendance at all major conferences and concerted efforts in PR. With our proven track record in the academic market and our experience and knowledge of the retail sector of this highly specialized market, we will take an increasing share of the potential market in Australasia for ADAM product. We will provide total customer satisfaction by being completely market responsive, and industry best fulfilment through our relationship with Penguin (a sister Pearson company). I look forward to further discussions with you, and to forecasting based on previous sales into the territory. Sincerely /s/ Sophie Kaliniecki - - --------------------- Sophie Kaliniecki 29 EXHIBIT E Order Form 30 EXHIBIT F Form of Sub-Reseller Agreement 31 EXHIBIT G ADAM Recommended Hardware Requirements (See Attached) 32 SYSTEM REQUIREMENTS: Macintosh(R) 68030 processor/16MHZ or higher; System 7; 8 MB RAM; 11 MB hard disk space; 13-inch or larger monitor, 256 colors; Double-speed CD-ROM drive WINDOWS(TM) 386SX/25 MHZ processor or higher Microsoft Windows 3.1; 8 MB RAM; 9 MB hard disk space; SVGA color monitor, 256 colors; Double-speed CD-ROM drive 33 LIST OF EXHIBITS EXHIBIT A Products and Fee Schedule EXHIBIT B Territory EXHIBIT C End User Agreement EXHIBIT D Annual Plan EXHIBIT E Order Form EXHIBIT F Form of Sub-Reseller Agreement EXHIBIT G ADAM Recommended Hardware Requirements EX-10.42 8 ADDENDUM TO DISTRIBUTION AGREEMENT 1 EXHIBIT 10.42 ADDENDUM TO THE CONSUMER DISTRIBUTION AGREEMENT Distribution Agreement between Ingram Micro Inc. and A.D.A.M. Software, Inc. dated August 10, 1995 is hereby amended as follows: Section 1.1. is deleted and replaced by; Sections 1.1a Vendor hereby grants to Ingram, and Ingram accepts, the non-exclusive right to distribute within the territory of North America those products listed on Exhibit A (1), Consumer Products, as amended from time to time, attached hereto and made a part hereof (hereinafter all products to be distributed shall be referred to as the "Product" or "Products"). Section 1.1b Vendor hereby grants to Ingram, and Ingram accepts, the non-exclusive right to distribute within the territory of North America to the Education market in North America consisting of public, private and parochial schools encompassing grades K-12, and Education Dealers whose target products are those listed on Exhibit A (2), Education Products. The products listed on Exhibit A (2), Education Products, may be amended from time to time, attached hereto and made a part hereof (hereinafter all products to be distributed shall be referred to as the "Product" or Products"). Sections 7.2 and 7.3 under the heading of Cooperative Advertising and Marketing Funds have no affect pertaining to those products listed in Exhibit A (2), Education Products. IN WITNESS WHEREOF, the parties have executed this Agreement. A.D.A.M. Software, Inc. Ingram Micro Inc. By /s/ Curtis Cain By /s/ Sanat K. Dutta -------------------------- ---------------------------- Name Curtis Cain Name Sanat K. Dutta Title CEO Title Executive Vice President Date 12/6/95 Date January 19, 1996 By /s/ Kathy M. Anderson -------------------------- Name Kathy M. Anderson Title Sales Manager Date 12/6/95 2 A.D.A.M. SOFTWARE EDUCATION PRODUCTS (CURRENT AS OF April 1, 1996)
A.D.A.M. P/N Product Name Suggested Retail Price - - ------------ ------------ ---------------------- ESM4003 A.D.A.M. Essentials School Edition-MAC 129.95 INGRAM PART NUMBER: 364823 ESD4003 A.D.A.M. Essentials School Edition-WIN 129.95 INGRAM PART NUMBER: 364822 ESLM4002 A.D.A.M. Essentials School Edition Lab Pack-MAC (FIVE USERS) 399.95 INGRAM PART NUMBER 364825 ESLD4002 A.D.A.M. Essentials School Edition Lab Pack-WIN (FIVE USERS) 399.95 INGRAM PART NUMBER: 364824 SNMM4002 A.D.A.M. Nine Month Miracle School Edition-MAC 69.95 INGRAM PART NUMBER: 364819 SNMD4002 A.D.A.M. Nine Month Miracle School Edition-WIN 69.95 INGRAM PART NUMBER: 364818 SNMLM4002 A.D.A.M. Nine Month Miracle School Ed. Lab Pack-MAC (FIVE USERS) 199.95 INGRAM PART NUMBER: 364821 SNMLD4002 A.D.A.M. Nine Month Miracle School Ed. Lab Pack-WIN (FIVE USERS) 199.95 INGRAM PART NUMBER: 364820 SATM4002 A.D.A.M. Inside Story School Edition-MAC 69.95 INGRAM PART NUMBER: 364815 SATD4002 A.D.A.M. Inside Story School Edition-WIN 69.95 INGRAM PART NUMBER: 364814 SATLM4002 A.D.A.M. Inside Story School Ed. Lab Pack-MAC (FIVE USERS) 199.95 INGRAM PART NUMBER: 364817 SATLD4002 A.D.A.M. Inside Story School Edition Lab Pack-WIN (FIVE USERS) 199.95 INGRAM PART NUMBER: 364816 SLGD4002 Life's Greatest Mysteries School Edition-WIN 69.95 INGRAM PART NUMBER: 364826 SLGM4002 Life's Greatest Mysteries School Edition-MAC 69.95 INGRAM PART NUMBER: 364827 SLGLD4002 Life's Greatest Mysteries School Edition-WIN (FIVE USERS) 199.95 INGRAM PART NUMBER: 364828 SLGLM4002 Life's Greatest Mysteries School Edition- MAC (FIVE USERS) 199.95 INGRAM PART NUMBER: 364829
EX-10.43 9 LOCALIZATION AGREEMENT 1 EXHIBIT 10.43 LOCALIZATION AGREEMENT THIS LOCALIZATION AGREEMENT (this "Agreement") is dated June 7, 1996, and is between A.D.A.M. SOFTWARE, INC., a Georgia corporation ("ADAM"), and ZEMI CORP. ("ZEMI"). For good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: I. BACKGROUND. ADAM is the owner of a certain Product (as defined below) consisting of multimedia computer software programs and related user documentation. Zemi desires an exclusive, nontransferable, nonassignable and limited right and license to translate and localize such Product into a Japanese language version of the Product as set forth in this Agreement, and ADAM agrees to grant to Zemi such right and license on the terms and conditions set forth in this Agreement. 2. DEFINITIONS. The capitalized terms used in this Agreement and its Exhibits have the meanings and definitions specified below: 2.1 "Alpha Copy" means a copy of the Product in which (i) all user interface items, including but not limited to, menus, dialog boxes, messages and other text strings in the anatomy portion of the Product are translated; (ii) one or more animations are completely translated, including graphics, sounds and videos; (iii) one or more sections of the multimedia portions of the Product (for example, chapters of the scrapbook if the Product has a scrapbook) are completely translated, including but not limited to, graphics, sounds and video. 2.2 "Beta Copy" means a copy of the Product in which all translatable elements have been translated, including but not limited to, all animations, audio, video, anatomical terms, user interface items, such as dialog boxes and textual messages, online help and installer program. The Product must be fully installable and functioning, with no untranslated elements. 2.3 "Business Day" means a day, other than a Saturday, Sunday, or a day on which Zemi is closed for business pursuant to Zemi's annual list of holidays. 2.4 "Effective Date" means the date on which this Agreement is executed by both parties through their authorized representatives. 2.5 "Localization Costs" means the total out of pocket costs and expenses incurred by Zemi in producing the Localized Version of the Product which the parties have agreed 2 will be One Hundred Thousand United States Dollars (U.S. $100,000) for purposes of this Agreement. 2.6 "Localized Version" has the meaning specified in Section 3.1. 2.7 "Marks" means any trademarks, service marks or tradenames of ADAM associated with the Product (as defined below), as designated by ADAM. 2.8 "MITC" means the Matsushita Inter-Techno Co. Ltd. 2.9 "Product" means A.D.A.M.-The Inside Story, Version 2.0, including related user documentation. 2.10 "Release Candidate" means a version of the Product which is fully installable, completely functional, completely translated, with all identified significant errors (bugs) addressed and resolved. The Release Candidate becomes the Golden Master after a thorough testing process has identified all significant program problems, and those problems have been addressed and resolved to the satisfaction of ADAM. 3. GRANT. 3.1 ADAM hereby grants Zemi an exclusive, nontransferable, nonassignable and limited right and license to translate and localize the Product into a Japanese language version (the "Localized Version") of the Product, solely as set forth in this Agreement. Zemi acknowledges and agrees that the localization rights granted under this Agreement are limited solely to the right to produce a localized Japanese language adaptation of the English language version of the Product. 3.2 ADAM hereby grants Zemi a nonexclusive, nontransferable, nonassignable and limited right and license to use and incorporate the Marks and any symbols or artwork of ADAM's in the Localized Version of the Product solely in accordance with Section 10, 3.3 Except as specifically set forth in the Agreement, no express or implied license or right of any kind is granted to Zemi regarding the Product or the Marks, including, but not limited to, any right to know, use, produce, receive, reproduce, copy, market, sell, distribute, transfer, translate, modify, adapt, disassemble, decompile, or reverse-engineer the Product or create derivative works based on the Product or any portions thereof, or obtain possession of any source code or other technical material relating to the Product. -2- 3 4. PRODUCTION OF A LOCALIZED VERSION OF THE PRODUCT BY ZEMI. 4.1 Zemi shall take any and all steps required in order to create the Localized Version of the Product in accordance with the specifications set forth in Exhibit A and the provisions of this Agreement, including without limitation, this Section 4. 4.2 Zemi shall determine the level of translation necessary to localize the Product. Text, dialogue and graphic files shall be translated by Zemi into the Japanese language and revoiced. Zemi will be responsible for engaging appropriate Japanese medical advisors as necessary to ensure the medical accuracy of all translations. 4.3 Subject to the prior approval of ADAM, Zemi may redesign the outer packaging of the Product and the CD jewel case liners, and translate all verbiage to the Japanese language. ADAM will use its commercially reasonable efforts to respond to any such proposed packaging materials/jewel case liners submitted by Zemi for ADAM's approval within ten (10) Business Days of ADAM's receipt of such materials from Zemi. 4.4 The translation of the Product will be performed by Zemi in accordance with the provisions and the timetables specified in Exhibit A and the provisions of this Section 4.4: (a) Upon receipt of all translatable elements of the Product, Zemi will translate all translatable files included in such elements, including without limitation, anatomical terms, menus and dialog boxes, animations, graphics, audio tracks, video, online help system, textual content, installation program, user's guide and packaging. As soon as practicable following receipt of all translatable elements of the Product from ADAM, Zemi will deliver to ADAM system anatomy source images (with translated structure name labels) and translated vocabulary list. (b) Zemi will compile the translated system anatomy images and vocabulary list delivered by ADAM with the pixel level recognition (PLR) data into ADAM's proprietary format in accordance with the timetable set forth in Exhibit A. (c) Zemi will deliver to ADAM an Alpha Copy of the Localized Version of the Product, including packaging and jewel case liners, together with a translated copy of each translatable file, as soon as practicable after delivery by ADAM to Zemi of the updated PLR files described in paragraph (b) above. ADAM may, but shall not be obligated to, review such Alpha Copy and forward any comments to Zemi not later than (1O) Business Days following ADAM's receipt of the Alpha Copy. (d) Zemi will make any changes to the Alpha Copy reasonably requested by ADAM and incorporate such changes in the Beta Copy of the Localized Version. Zemi will -3- 4 deliver to ADAM a Beta Copy of the Localized Version of the Product, including packaging and jewel case liners, in accordance with the timetable set forth in Exhibit A following delivery by ADAM to Zemi of all translatable elements of the Product. ADAM may, but shall not be obligated to, review such Beta Copy and will forward any comments to Zemi not later than fifteen (15) Business Days following ADAM's receipt of the Beta Copy. If ADAM has not responded to the Beta Copy within such fifteen (15) Business Day period, the Beta Copy will be deemed to be approved by ADAM. (e) Zemi will incorporate any changes to the Beta Copy reasonably requested by ADAM and will deliver the Release Candidate to ADAM in accordance with the timetable set forth in Exhibit A, together with copies of all translated files. ADAM will review the Release Candidate and will request changes (or approve the Release Candidate) within approximately ten (10) Business Days. (f) Once Zemi has made all requested changes to the Release Candidate and the Release Candidate has been approved by ADAM, Zemi will prepare the Golden Master and deliver it to ADAM. 5. ADAM'S OBLIGATIONS. 5.1 As soon as reasonably practicable after execution of this Agreement, ADAM will globalize the Product and shall deliver the following materials to Zemi: (a) Three (3) copies of all CD jewel case liners (including user instructions); (b) Copies of all translatable elements of the Product (written information about specific length of text to be considered by the way of translation/localization shall also be included); (c) In case of included voicing in the Product, where available, copies of the script, including wordings, characters, technical information about the recording, and recording of the original voicing, and (d) The film for the artwork for the packaging. 5.2 ADAM and MITC will each fund one-half of the Localization Costs associated with producing the Localized Version of the Product. The Localization Costs will be paid by ADAM and MITC in accordance with the payment schedule set forth on Exhibit A attached hereto. Zemi acknowledges and agrees that ADAM shall have no obligation to fund or pay any portion of MITC's share of the Localization Costs. Notwithstanding the foregoing, if MITC fails to pay any portion of its share of the Localization Costs, ADAM will pay Zemi an amount equal to fifteen percent (15%) per unit of the wholesale price of the Localized Version -4- 5 sold in Japan during the term of this Agreement until such time as Zemi has recovered that portion of the Localization Costs that MITC failed to pay. 5.3 If ADAM releases any new consumer product after the date of this Agreement, the parties will review such product and determine whether such product would be appropriate for localization into a localized version of such product. If ADAM and Zemi mutually agree that such Product would be appropriate for the Japanese market, then the parties will negotiate, in good faith, the terms under which Zemi will localize such consumer product. 5.4 ADAM will make available technical support from its engineering department to assist in Zemi's translation of the Product in accordance with Section 4, up to a maximum of 40 hours, at no charge to Zemi. Any work in excess of 40 hours of technical support will be charged to Zemi at the rate of U.S. $100 per hour. 6. OWNERSHIP OF LOCALIZED VERSION. 6.1 Zemi acknowledges and agrees that ADAM shall own the copyright of the translation and localization of the Product, the documentation and packaging used in connection therewith and all packaging and other material adapted by Zemi in connection with the production of the Localized Version of the Product in accordance with this Agreement. To the extent that, pursuant to applicable law, Zemi has any right, title or interest in or to the copyright of the Localized Version of the Product or any other material adapted by Zemi in accordance with this Agreement, Zemi hereby grants and assigns to ADAM, all right, title and interest whatsoever, throughout the world, in and to the copyright of the Localized Version of the Product and all other material adapted by Zemi in accordance with this Agreement. 6.2 It is expressly acknowledged and understood that the understanding of the parties that ADAM owns all right, title and interest in and to the Localized Version of the Product (including, without limitation, all copyright interest) is fundamental to this Agreement, and that ADAM would not enter into this Agreement (including, without limitation, grant the rights contemplated under Section 3) in the absence of the agreements specified in this Section 6. 6.3 Zemi agrees to take all actions required under this Section 6 and further covenants and agrees that it will never assert (or permit any other party to assert on its own behalf) any right, title or interest (including, without limitation, copyright) in or to the Product or the Localized Version of the Product, nor will it take any actions otherwise inconsistent with the understandings and agreements set forth in this Section 6. -5- 6 7. WARRANTIES. 7.1 ADAM warrants that ADAM has not granted and will not grant any rights in the Product to any third party inconsistent with this Agreement. ADAM further warrants that there exists no fact or event which would preclude ADAM from entering into this Agreement or carrying out its obligations under this Agreement, and ADAM has the authority to grant the rights with respect to the Product to Zemi provided for in this Agreement. 7.2 ADAM DOES NOT MAKE ANY EXPRESS OR IMPLIED WARRANTIES TO ZEMI WITH RESPECT TO THE PRODUCT, ANY COPIES THEREOF, ANY SERVICES PROVIDED HEREUNDER OR OTHERWISE REGARDING THIS AGREEMENT, WHETHER ORAL OR WRITTEN, EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTY OF MERCHANTABILITY, THE IMPLIED WARRANTY AGAINST INFRINGEMENT AND THE IMPLIED WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE. 8. PROPRIETARY RIGHTS. Zemi acknowledges and agrees that ADAM or its suppliers maintain exclusive ownership of the Product (including without limitation the Localized Version of the Product) in all forms (both object code and source code) and all copies and all portions thereof and the Marks, including, without limitation, any and all worldwide copyrights, patents, trademarks, service marks, trade names, trade secrets, proprietary and confidential information rights and other property rights associated with the Product (including without limitation the Localized Version of the Product) and the Marks. 9. INDEMNIFICATION. 9.1 Each party shall indemnify and hold the other party harmless from and against any loss, liability, damage, cost or expense sustained as a result of the breach of any warranty, representation or covenant contained in this Agreement. 9.2 The indemnification set forth in Section 9.1 is conditioned upon the indemnified party providing the indemnifying party (i) notice of any claim or cause of action upon which the indemnified party intends to base a claim of indemnification under this Section 9, and (ii) the indemnified party providing reasonable assistance and cooperation to enable the indemnified party to defend the action or claim under this Section 9. The indemnifying party will have the right to defend any action or proceeding involving a claim that the indemnifying party is obligated to indemnify under this Section 9. The indemnifying party will not be obligated to any claim that is settled by the other party with the prior written consent of the indemnifying party. -6- 7 10. USE OF MARKS. 10.1 In connection with the use of the Marks as permitted in Section 3, Zemi agrees to comply in all respects with any guidelines or directions provided by ADAM with respect to proper usage of the Marks. At the request of ADAM, Zemi will submit to ADAM's Vice President of Marketing any and all materials bearing or including any of the Marks, for prior review and approval by ADAM (which consent will not be unreasonably withheld). All such materials will be submitted to ADAM's Vice President of Marketing, with copies to Curtis Cain, at the address specified for notices to ADAM. ADAM agrees to use its commercially reasonable efforts to respond to any materials submitted for ADAM's approval pursuant to this Section 10.1 within five (5) Business Days of ADAM's receipt of such materials. Upon the request of ADAM, Zemi agrees to discontinue the use of (i) any Marks being used by Zemi in a manner determined by ADAM in its sole discretion to be inconsistent with the guidelines set forth above, or (ii) any trademark, service mark, or tradename deemed by ADAM to create a likelihood of confusion with a Mark. 10.2 Zemi agrees and acknowledges that ADAM owns all right, title and interest in and to the Marks. Zemi covenants and agrees not to file or prepare any application for registration of any of the Marks. Zemi agrees not to adopt, use, file for registration, or register any trademark, service mark, or tradename which may be an infringement of any one or more of the Marks or result in a likelihood of confusion with a Mark. 10.3 Zemi agrees not to commit any acts, directly or indirectly, which may contest, dispute, or otherwise impair the rights, title or interest of ADAM in or to the Marks. Zemi agrees not to claim or assert any rights, title or interest in or to the Marks in any way. The parties agree that all uses of the Marks by Zemi will be in such a manner as to inure at all times to the benefit of ADAM. Zemi will not use any language or display any Marks in such a manner as to create the impression that the Marks belong to and are owned by Zemi. Zemi may not use the Marks in combination with any other trademarks, tradenames, service marks, or other designations, without the prior written approval of ADAM. 10.4 Zemi will promptly notify ADAM of any and all known infringements or known attempted infringements of any Marks. ADAM reserves all rights regarding a decision to initiate any legal action against an alleged infringer, provided that at the request of ADAM, Zemi will provide reasonable assistance to ADAM in connection therewith. 11. TERM AND TERMINATION. 11.1 This Agreement shall commence on the Effective Date and, unless sooner terminated in accordance with the terms herein, will continue in full force and effect, as provided herein, for a period of one (1) year. -7- 8 11.2 Either party may terminate this Agreement by written notice if there has been a material breach hereof by the other party, which material breach has not been cured within thirty (30) days after the date of written notice to the breaching party by the non-breaching party. 11.3 Either party may terminate this Agreement immediately if the other party makes a general assignment for the benefit of creditors, suffers or permits an appointment of a receiver for its business or assets, becomes subject to any proceedings under any bankruptcy or insolvency law (which shall not be dismissed for sixty (60) days from filing of any petition in connection therewith), whether domestic or foreign, or is wound up or liquidated, voluntarily or otherwise. 11.4 ADAM may terminate this Agreement upon thirty (30) days written notice to Zemi upon MITC's failure to pay any of MITC's portion of the Localization Costs as provided in Section 5.2. 12. ASSIGNMENT. This Agreement and all rights and obligations hereunder are personal to the parties hereto and may not be assigned in whole or in part by either party without the prior written consent of the other. Notwithstanding the foregoing, either party will have the right to assign its rights and obligations hereunder, (i) to any controlled subsidiary of such party, (ii) to any joint venture in which such party is a participant, (iii) to any entity which is the survivor in a merger of such party with or into such other entity, or (iv) to any acquirer of all or substantially all of the assets of such party. 13. INDEPENDENT PRINCIPALS. ADAM and Zemi are independent principals in all relationships and actions under and contemplated by this Agreement. This Agreement will not be construed to create any employment, partnership, joint venture, franchise or agency relationship between the parties or to authorize Zemi to enter into any commitment or agreement binding on ADAM, and Zemi covenants and agrees that it will never contend to the contrary. Zemi will not make any warranties, guarantees or any other commitment on behalf of ADAM, 14. FORCE MAJEURE. Neither party will be in default by reason of any failure in performance of this Agreement if such failure arises, directly or indirectly, out of causes reasonably beyond the direct control or foreseeability of such party, including, but not limited to, default by subcontractors or suppliers, acts of God or of the public enemy, U.S. or foreign governmental acts in either a sovereign or contractual capacity, fire, flood, epidemic, restrictions, strikes, and/or freight embargoes, 15. NON-WAIVER. Any failure by either party to detect, protest, or remedy any breach of this Agreement will not constitute a waiver or impairment of any such term or -8- 9 condition, or the right of such party at any time to avail itself of such remedies as it may have for any breach or breaches of such term or condition. A waiver may only occur pursuant to the prior written express permission of an authorized officer of the other party. 16. EQUITABLE REMEDIES AND SPECIFIC PERFORMANCE. Zemi acknowledges that each provision in this Agreement providing for the protection of ADAM's copyrights and other proprietary rights is material to this Agreement. The parties acknowledge that any threatened or actual breach of ADAM's copyrights or other proprietary rights by Zemi will constitute immediate, irreparable harm to ADAM, for which equitable remedies may be awarded by a court of competent jurisdiction. 17. GOVERNING LAW. This Agreement will be governed by, construed, and interpreted in accordance with the internal laws of the State of Georgia, without giving effect to its conflict of law rules. 18. ARBITRATION. 18.1 GENERALLY. Any dispute, controversy or difference which may arise out of or in relation to or in connection with this Agreement, or with the interpretation of any part hereof, or for any breach hereof, shall be submitted to binding arbitration in accordance with the rules of the International Chamber of Commerce (ICC). Any such arbitration proceeding shall be conducted in New York, New York at a site, date and time mutually acceptable to the parties and shall be conducted by a single arbitrator selected in accordance with the rules of the ICC. Any arbitrator selected hereunder shall have a background or training in either computer law, computer science or the marketing of computer industry products. Judgment upon any award of such arbitrator may be entered by any court of competent jurisdiction. 18.2 INJUNCTIVE RELIEF. Notwithstanding any other provision of this Section 18, the parties shall be entitled to seek a preliminary or permanent injunction from an appropriate court in respect of the enforcement of the obligations provided in Sections 6, 8, 10 and 16 hereof. 19. SEVERABILITY. If any provision hereof is declared invalid by a court of competent jurisdiction, such provision will be ineffective only to the extent of such invalidity, so that the remainder of that provision and all remaining provisions of this Agreement will continue in full force and effect. 20. NOTICE. All communications between the parties which are required or permitted to be in writing will be sent by hand delivery, with receipt obtained, by prepaid, first -9- 10 class U.S. postal service mail, certified return receipt requested, by telecopier to the telecopy number specified below, or by private overnight express delivery services (such as Federal Express), and sent to the addresses specified in the signature blocks below. By written communication, either party may designate a different address for purposes hereof 21. ENTIRE AGREEMENT. This Agreement supersedes and cancels any previous understandings, representations, or agreements between the parties relating to the subject matter hereof and expresses the complete and final understanding with respect to the subject matter hereof -10- 11 IN WITNESS WHEREOF, ADAM and Zemi have caused this Agreement to be executed by their respective, duly authorized officers or representatives, effective as of the last date set forth below,
"Zemi": "ADAM" ZEMI, CORP. A.D.A.M. SOFTWARE, INC. By /s/ Yoshi Majima By: /s/ Curtis Cain ------------------------------- ------------------------------------- (Authorized Signature) (Authorized Signature) Name (Print): Yoshi Majima Name (Print): Curtis Cain -------------------- --------------------------- Title: President Title: CEO --------------------------- --------------------------------- Date: 14th June, 1996 Date: 6/10/96 ---------------------------- ---------------------------------- Address: 28 Hammond #D Address: 1600 RiverEdge Parkway ------------------------- Suite 800 Irvine, CA 92718 Atlanta, Georgia 30328 ------------------------- Telephone: 714-859-3200 Telephone: (770) 980-0888 ----------------------- Telecopy: (770) 955-3088 Telecopy: 714-859-1998 ----------------------- By: /s/ Matthew W. Steeves ------------------------------------ Name (Print): Matthew W. Steeves -------------------------- Title: International Account Manager --------------------------------- Date: 10 June 1996 ---------------------------------- Address: 1600 RiverEdge Parkway Suite 800 Atlanta, Georgia 30328 Telephone: (770) 980-0888 Telecopy: (770) 955-3088
-11- 12 EXHIBIT A CONVERSION PLANNING DOCUMENT See attached. [NOTE:"CONVERSION PLANNING DOCUMENT" SHOULD INCLUDE, AMONG OTHER THINGS, SPECIFICATIONS (SECTION 4.1), TIMETABLE FOR COMPLETION (SECTION 4.4), AND PAYMENT SCHEDULE BASED ON ACHIEVEMENT OF DETAILED MILESTONES (SECTION 5.2).] 13 CONVERSION PLANNING DOCUMENT ADAM The Inside Story 2.0 J Japanese Language Edition for Windows 95 and KT7+ (Schedule, Milestones, Task Allocation and Costs) Seventh edition May 24, 1996 14 ZEMI CORP. Irvine, California 1. SCHEDULE Steps April - May << Windows & Macintosh version ADAM The Inside Story 2.OJ >> Localization Preparations: Receive new feature list for ATIS 2.0 Receive list of resources that will not change in ATIS 2.0 Define target computers (Macintosh and DOS/V Windows 95 machines) Task list and schedule Contract preparation Development Environment: Set up development hardware(Dell 166c,PPC8500/120AV) Install development tools(Win95J SDK,MSC++4.lJ,Director4.0J), resources Localization document: Refinement of ADAM The Inside Story attachment to the contract User Interface (both Windows & Macintosh): Translate menu, dialog boxes, system messages Edit menu, dialog boxes, system messages Medical Dictionary: Translate medical dictionary text PLR: Translate anatomical terms Create xls for ATIS Scrap Book: Translate 4 MMD narration scripts. Rewrite, edit scripts Translate 4 MMD movie labels Contract: Signing 15 First Milestone: Final version of ADAM The Inside Story 2.OJ document All Menus, dialogs, messages in Japanese PLR Medical Dictionary Scrap Book narration scripts (4 systems) Steps June - July Localization Preparations: Obtain ADAM ATIS v2.0 latest resources Setup tools Animation: Translate, rewrite, edit 60 MMD narration scripts. Record narration, edit recording, create sound files Integrate sound files into movies Edit and test MMD movies Scrap Book: Translate, rewrite, edit 8 MMD narration scripts Record and edit narration Create sound files, integrate sound files into movies Edit and test MMD movies Video Clips Translate, rewrite, edit 16 video narration scripts. Record and edit narration Create sound files Integrate sound files into Premier movies Main Program (Windows & Macintosh): Integrate user interface resource (menu, dialog boxes, messages) Alpha test The Inside Story 2.OJ Help (Windows and Macintosh): Translate On-line help, Ouick ref, Step-by-step, Search for, Prod. support, Help-on-help Proof read, edit help files Compile help files 16 Second Milestone: Animation's MMD in Japanese (work-in-progress) Scrap Books MMD in Japanese (work-in-progress) Video Clip in Japanese (work-in-progress) Help in Japanese (work-in-progress) Alpha test report Steps August - Sept Animation, Scrap Book, Video Clips Record narration, edit recording, create sound files Integrate sound files into movies Edit and test MMD movies Integrate sound files into Premier movies Installation Program (Windows and Macintosh): Translate messages Integrate resources Main Program (Windows and Macintosh): Repair and refine CD mastering at ZEMI Product release to packaging Master CD production Testing (Windows and Macintosh): Integrate resources Repair and refine Beta test The Inside Story 2.OJ on Windows 95 and Macintosh KT7+ Test Windows installation program Repair and refine Manual (Windows and Macintosh): Translate manual Capture The Inside Story 2.OJ screen images and replace images Compile, Adjust layout, and print manual Send proof copy and file to ADAM 17 Third milestone Animation's MMD in Japanese Scrap Books MMD in Japanese Video Clip in Japanese Help in Japanese Manual sent to A.D.A.M. Test report sent to A.DAM Master CD created by ZEMI Manual of The Inside Story 2.OJ Windows and Macintosh Deliverables Submission Date: May 31, 1996 List of Deliverable #1 1. Menus, dialogs, messages in Japanese File format 2. Medical dictionary in Japanese File format 3. New ATIS PLR in Japanese File format 4. Scrap Book Narration script in Japanese File format Submission Date: July 30, 1996 List of Deliverable #2: 1. Animation's MMD work-in-progress in Japanese File format 2. Scrap Book MMD work-in-progress in Japanese File format 3. Video clip work-in-progress in Japanese File format 18 Submission Date: List of Deliverable #3: September 30, 1996 1. Animation's MMD in Japanese (complete) File format 2. Scrap Book MMD in Japanese (complete) File format 3. Video clip in Japanese (complete) File format 4. Help in Japanese 5. Manual in Japanese File format 6. Test report (Win95 and Macintosh) Print 7. Master CD 2. TASK ALLOCATION CHART A.D.A.M. The Inside Story: Windows and Macintosh versions
Task: Implemented by: Prepare screens, buttons, menu items ADAM Prepare dialog boxes, system messages ADAM Prepare Scrap books ADAM Prepare Animation ADAM Prepare Videos ADAM Prepare Medical Dictionary ADAM Prepare installation message ADAM Prepare message entry program ADAM Prepare Help resources ADAM Prepare Win & Mac manual resources ADAM Translate screens, buttons, menu items ZEMI
19 Translate dialog boxes ZEMI Translate system messages ZEMI Translate Scrap books ZEMI Translate Animation ZEMI Translate Video ZEMI Translate Medical Dictionary ZEMI Translate installation message ZEMI Translate Help resources ZEMI Translate manual ZEMI Program modifications (if any) ADAM Integrate resources ZEMI Prepare Alpha CD ZEMI Alpha test on Windows 95J and KT7.5 ZEMI Repair and refine resources ZEMI Integrate resources ZEMI Prepare Beta CD ZEMI Beta test on Windows 95J and KT7.5 ZEMI Repair and refine resources ZEMI Prepare Final CD ZEMI Prepare Final Manual for both Win and Mac ZEMI
Please note that ZEMI's responsibility includes the task of converting most resources into Japanese, integration of resources into ATIS program and preparing various test versions of CD, as well as preparing the golden master. It does not, however, include modifying any functionality, or debugging any errors not related to resources. ZEMI does nor warrant translated resources and manuals to be compatible with any particular machine other than those operating systems so specified in this document. Furthermore, ZEMI does not warrant any deliverables to be completed as indicated in this document if all required resources were not delivered as scheduled by A.D.A.M. Software. 20 3. Costs The costs for conversion will be determined by analyzing the product requirements, complexities, and schedule constraints. This is exposed in terms of man-months. << Windows & Macintosh ADAM The Inside Story 2.0J>>
Item Costs ($1,000) Notes Localization Specs. 0.0 non-budgeted item Development Environment 0.0 non-budgeted item Japanese medical references 0.0 non-budgeted item Main Program: Interface 3.0 Scrap book (12) 25.35 Change voice only Video Clips (16) 8.0 Change voice only Animation (60) 25.45 Change voice only Help 8.0 Installation Program: 0.7 New PLR 2.0 Medical Dictionary 10.8 Integration 4.1 Testing: 1.8 Refine and repair: 1.8 CD ROM production 3.0 Beta, Final, GM Office fee: 3.0 $500@6mos Manual 3.0 Translation, PM file Grand Total 100,000
21 A.D.A.M. THE INSIDE STORY - Notes on Contract
Step Costs Pay date Delivery #1 $50,000US Deliverable 1 Delivery #2 $25,000US Deliverable 2 Delivery #3 $25,000US Deliverable 3
A.D.A.M. Software ATIS Plan EX-10.44 10 AMENDMENT TO PRODUCT DEVELOPMENT AGREEMENT 1 EXHIBIT 10.44 CONFIDENTIAL TREATMENT REQUESTED BY A.D.A.M. SOFTWARE, INC. ADDISON WESLEY LONGMAN One Jacob Way Reading Massachusetts 01867-3999 Telephone 617 944 3700 June 11, 1996, 1996 Mr. Curtis Cain Chief Executive Officer A.D.A.M. Software, Inc. 1600 RiverEdge Parkway Atlanta, Georgia 30328 Dear Curt: This letter is to amend the September 14, 1995 Product Development Agreement between Benjamin/Cummings, a wholly-owned subsidiary of Addison Wesley Longman Inc. (AWL), and A.D.A.M. Software (the "Agreement"). Per our discussions, ADAM and AWL agree to the following changes in the Agreement: Throughout the Agreement, replace where it says "4-8 Modules" with "4-7 Modules." Paragraph 11(a) will be replaced in its entirety with the following: 11(a). Royalties. Each party hereto that sells, licenses or otherwise distributes (the "Seller") copies of Modules 1-3 and/or Modules 4-7 (collectively the "Modules") will pay the other party a royalty of XXX of Net Receipts (as defined in Section 11(d) from such products with a minimum annual average per-Module royalty of XXX. For sales by B/C outside of the U.S. to an AWL subsidiary or entity, royalties will be paid as indicated in Paragraph 11(e). For royalties on the first 6,000 units of the Modules (in any combination) sold by AWL, AWL will pay ADAM a royalty of XXX, not XXX. Royalties will be paid quarterly as provided in Paragraph 11(b) below, with adjustments as indicated in Section 11(f) if applicable. These terms will apply to any Modules sold after March 31, 1996. We also agree to add new paragraphs: 11(e). Royalties (outside US). For sales or transfers outside the U.S. by B/C to an AWL subsidiary or entity, royalties will be paid to ADAM of XXX of B/C's net receipts minus B/C's Cost of Goods Sold (as defined in paragraph 15). The minimum per-Module royalty specified in paragraph 11(a) also applies in this case. 11(f). Royalty Adjustment. If, in any calendar year starting with 1996, more than 15% of copies sold by AWL are sold direct to the end-user (e.g. not through resellers such as campus bookstores), then AWL will pay ADAM a XXX royalty on all such units, not XXX as specified in 11(a). Once a year in January, AWL will review its sales and make the appropriate one-time adjustment to royalties owed ADAM at that time. 2 ADDISON WESLEY LONGMAN One Jacob Way Reading Massachusetts 01867-3999 Telephone 617 944 3700 Paragraph 10(c) is hereby amended to remove the words "XXXXXXXXX". Paragraph 14 (COMPLIMENTARY COPIES OF THE WORK) is hereby amended to remove the notification by B/C to ADAM when it has distributed more than 200 complimentary copies of a given Module. B/C will not distribute more than 1,000 copies of a given Module without the written permission of ADAM. Paragraph 16 will be replaced as follows: 16. TECHNICAL SUPPORT OF THE WORK BY AWL AND BY ADAM. AWL shall provide technical support to customers and end users of the Work for each Module of the Work (Modules 1-3 as well as 4-7) according to its technical support policies. ADAM agrees to provide technical support, including but not limited to: (i) any reasonable training to AWL personnel, (ii) technical support documentation such as bug lists and known work-arounds, release notes, frequently asked questions, and (iii) back-up telephone support, all so that AWL may provide adequate support to its customers and to customers of ADAM that have purchased the Modules. If support calls exceed 200 calls/month for two straight months for the Modules altogether, AWL may request that ADAM share the costs of providing this support and ADAM agrees that it will in good faith negotiate a mutually satisfactory arrangement. This section 16 supersedes Section 16 of the Modules 1-3 Agreement. The attached Exhibit A also hereby replaces the original Exhibits A and A-1. Sincerely, Agreed to by: /s/ Curtis Cain /s/ David O'Connor ---------------------- Title: CEO ---------------------- David O'Connor Vice President and Director Date: 6/14/96 Educational Multimedia Group ---------------------- 3 EXHIBIT A SPECIFICATIONS ADAM and Benjamin/Cummings are co-developing a total of seven modules in a series called A.D.A.M. Benjamin/Cummings Interactive Physiology. Three modules are currently published (Cardiovascular, Muscle, and Respiratory). The modules will cover 3-5 core concepts in the particular body system that lend themselves well to the media and are difficult for students to grasp. The four modules yet to be published will follow the interface, functionality, features, and developmental pathway of the Respiratory System (module #3). Two teams will work concurrently to each develop one module within six months. Each team is comprised of (at least) one B/C Developmental Editor and two A.D.A.M. Medical Illustrators, Software Engineer, Product Manager, Quality Assurance (1.5 people). B/C BUDGET ASSUMPTIONS 1. Actual logged B/C Developmental Hours on Muscle (XXX) and Respiratory (XXX) suggest an average of XXX hours per module. These hours include a greater emphasis on development of the paper manuscript before start of art render which we have determined shortens the number of animator hours. 2. Project Management and Producer hours are calculated using similar assumptions based on published modules. 3. Hard costs (travel, market research, reviews) are calculated based on similar costs on previous modules. B/C BUDGET B/C Hours Per Module Development Hours = XXX hours Project Management Hours = XXX hours Executive Producer Hours = XXX hours - - --TOTAL B/C labor = XXX hours B/C HARD COSTS PER MODULE Reviews = $XXX Focus Groups = $XXX Author Travel = $XXX Staff Travel = $XXX Production = $XXX Manufacturing Set-up Costs = $XXX Misc. = $XXX - - --TOTAL B/C Hard Costs = $XXX per module 4 A.D.A.M. BUDGET ASSUMPTIONS 1. Illustrator/Animator time is calculated as roughly XXX hours per page developing base art; XXX hours per page developing first draft animations; XXX hours per page developing second draft animations, and XXX hours per page finalizing. Illustrators spend a range of XXX - XXX hours developing quizzes depending on their complexity. 2. Product management (XXX hours), quality assurance (XXX hours), software engineering (XXX), and installation and mastering (XXX hours) add up to approximately XXX hours per module. A.D.A.M. BUDGET A.D.A.M. Hours Per Module Summing all labor charged to the module, each module is targeted at XXX hours. Variances from this target are subject to the process defined in Paragraph 2. Allowing for variations from module to module, A.D.A.M. is budgeting a total of XXX person hours for the remaining four modules. A.D.A.M. HARD COSTS PER MODULE Focus Group & Brainstorming Meeting Travel = $XXX Voice Recording* = $XXX Video Recording* = $XXX - - --TOTAL A.D.A.M. Hard Costs = $XXX per module *Audio and video recording sessions for two modules must be scheduled to occur in one session and the session must be limited to one day, otherwise cost will double. SCHEDULE A.D.A.M. and B/C plan to publish all seven modules by June 1997. EX-11.1 11 COMPUTATION OF RATIOS 1 EXHIBIT 11 A.D.A.M. SOFTWARE, INC. COMPUTATION OF PRIMARY EARNINGS PER SHARE (IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31, 1996 --------- Net loss applicable to common stock................................................ $(3,937) Add: Accretion on convertible preferred stock...................................... (244) --------- Adjusted net loss applicable to common stock....................................... $(4,181) ======= Weighted average number of common shares and common share equivalents outstanding...................................................................... 3,673 ======= Net loss per share................................................................. $ (1.14) =======
2 A.D.A.M. SOFTWARE, INC. COMPUTATION OF FULLY-DILUTED EARNINGS PER SHARE (IN THOUSANDS, EXCEPT SHARE DATA) Net loss applicable to common stock................................................ $(3,937) ======= Weighted average number of common shares outstanding during the period............. 3,673 Add: Shares issuable assuming exercise of stock warrants........................... 23 Shares issuable assuming exercise of stock options........................... 564 Subtract: Shares which would have been purchased with proceeds from exercise of such stock options....................................................... (346) ------- Weighted average number of common stock and common stock equivalents outstanding... 3,914 Add: Shares issuable assuming conversion of convertible preferred stock............ 289 ------- Weighted average number of common shares, common share equivalents and convertible shares assuming full dilution.................................................... 4,203 ======= Net loss per share assuming full dilution.......................................... $ (.94) =======
This calculation is submitted in accordance with the rules and regulations of the Securities and Exchange Commission. Under generally accepted accounting principles this presentation would not be made because it is anti-dilutive. EX-27.1 12 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FIANNCIAL INFORMATION EXTRACTED FROM THE REGISTRANT'S FORM 10-K FOR THE YEAR ENDED MARCH 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS INCLUDED IN SUCH REPORT. YEAR MAR-31-1996 APR-01-1995 MAR-31-1996 5,352 10,981 448 766 433 17,329 889 1,153 18,871 1,975 0 0 0 52 16,844 18,871 6,447 6,447 1,491 10,436 0 0 0 (3,937) 0 (3,891) 0 (46) 0 (3,937) (1.14) (.94)
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