-----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, OD+QU+0T8A7rJ9Of9HrU13zqKAnqQCZSYoHCGfirAUb5HVUm71XEb0sbX+zkvuwx LaePDmT3NLnDp8M1vq+KPw== 0000950144-98-007919.txt : 19980630 0000950144-98-007919.hdr.sgml : 19980630 ACCESSION NUMBER: 0000950144-98-007919 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980629 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: A D A M SOFTWARE INC CENTRAL INDEX KEY: 0000863650 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 581878070 STATE OF INCORPORATION: GA FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-26962 FILM NUMBER: 98657157 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 ADAM SOFTWARE INC 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 FOR THE FISCAL YEAR ENDED MARCH 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 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 (Address of Principal Executive Offices) (770) 980-0888 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12 (b) of the Act: NONE Securities registered pursuant to Section 12 (g) of the Act: Title of Each Class Name of Each Exchange on which Registered ------------------- ----------------------------------------- Common Stock $.01 par value Nasdaq National Market System -------------------- 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 $9,642,562 at June 25, 1998 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 4,657,230 shares of the Registrant's Common Stock, par value $.01 per share, outstanding, excluding shares held in treasury by the Registrant. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Proxy Statement in connection with its Annual Meeting of shareholders to be held September 24, 1998 are incorporated by reference in Part III. 2
TABLE OF CONTENTS PART I Page ---- Item 1. Business........................................................................ 1 Item 2. Properties...................................................................... 12 Item 3. Legal Proceedings............................................................... 12 Item 4. Submission of Matters to a Vote of Security Holders............................. 12 Item X Executive Officers of the Registrant............................................ 13 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters......................................................... 14 Item 6. Selected Financial Data......................................................... 15 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......................................... 17 Item 8. Financial Statements and Supplementary Data..................................... 22 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosures........................................ 22 PART III Item 10. Directors and Executive Officers of the Registrant.............................. 23 Item 11. Executive Compensation.......................................................... 23 Item 12. Security Ownership of Certain Beneficial Owners and Management.............................................................. 23 Item 13. Certain Relationships and Related Transactions.................................. 23 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................................................. 24
SIGNATURES 3 PART I ITEM 1. BUSINESS 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. Among the factors that could cause actual results to differ materially are the following: business conditions and the general economy, increased competition, general risks of technology and software obsolescence, the loss of a principal customer in a given period if the Company is unable to replace sales to such customer, the loss of a primary distributor and the other risk factors described in the Company's reports filed from time to time with the Securities and Exchange Commission. GENERAL A.D.A.M. Software, Inc. ("the Company" or "A.D.A.M.") is a leading developer of anatomy/medical content (including two-dimensional ("2-D") and three-dimensional ("3-D") imagery, animations and text) and software technologies. In addition to licensing content and software components, A.D.A.M. creates, publishes and markets multimedia software products, along with content and Internet-ready applications that provide anatomical, medical and health-related information for the education, consumer and healthcare professional markets. A.D.A.M. products use the Company's proprietary, branded A.D.A.M. Image Database of visual anatomical content, and the Company's clinical database of text-based patient and professional information acquired from Mosby, Inc. ("Mosby") during the fiscal year ended March 31, 1998 ("fiscal 1998"). Following six years of losses, the Company has achieved four consecutive quarters of profitability, and has reported results for fiscal 1998 as its first profitable year since inception. The Company attributes this turnaround to stronger education market sales, less emphasis on the consumer software market and improved expense controls. Going forward, the Company believes that the growth of the Internet and intranets will provide new cost-efficient ways to distribute A.D.A.M. content, and that the Company's strong commitment to the healthcare professional markets may provide the Company new growth opportunities. The Company is a Georgia corporation and it commenced operations in March 1990. STRATEGY The Company's strategy is to deploy its expanded product line and proprietary content to the education, healthcare, pharmaceutical, legal and broadcast markets. Using CD-ROM, the Internet, and broadcast and print media, the Company intends to capitalize on its recognized brand name and become a leading publisher and provider of anatomical and medical content. The key elements of the Company's business strategy are to continue to: 3 4 - Enhance the "A.D.A.M.," Brand Name as a Recognized Leader in Anatomical and Medical Content in the Education Market, and in New Markets. Management of the Company believes that brand name recognition for "A.D.A.M.(TM)" across the Company's various markets is an important element of the Company's long-term goals of technological superiority and profitability in all of its market segments. The Company has invested significant time and resources in brand development including, without limitation, seeking protection of its trademarks, copyrights and other proprietary rights, and management believes that these investments create a strong competitive advantage while enhancing customer satisfaction and building a loyal customer base. The Company has established an online brand "ADAM.com," a World Wide Web site that is currently used for marketing and general corporate purposes. Management believes this brand and website could be modified to become a commercial, revenue generating website by leveraging the Company's reputation as an innovative supplier of health and medical information, and by using the Company's existing database of animations, illustrations and clinical assets. - - Integrate the Internet into Most Areas of the Company's Business. The Internet has emerged as a major new distribution channel and business opportunity and management believes many of the Company's content assets are suitable for online delivery and distribution. The Company has established new online products and licensable assets that take advantage of the Internet and the World Wide Web, and management intends to focus attention on building A.D.A.M.'s Internet presence and business. - - Seek Opportunities to Grow the Size and Scope of A.D.A.M.'s Businesses. During fiscal 1998, A.D.A.M. completed its first acquisition since becoming a publicly traded company by acquiring three products from Mosby. Management believes that strategic alliances or acquisitions may enable the Company to access new markets more efficiently than through internal development. Furthermore, A.D.A.M.'s education business may benefit from strategic alliances or acquisitions that provide additional products to the Company's product portfolio. - - Maintain Strong Expense Control. Management believes that maintaining strong control over expense growth has been one of the key factors in the Company's recent profitability. Having developed significant content assets over the years, management believes it can produce new products and content in a cost effective manner by leveraging existing resources. Furthermore, management believes it can market and distribute new and existing titles through established sales channels, particularly in the education market, thereby adhering to its disciplined approach regarding costs. PRODUCTS General The Company creates software products with varying levels of content, functionality and price for the education, consumer and professional markets, and licenses its content and software technologies. A.D.A.M.'s educational products serve the medical school, undergraduate, allied health (nursing, physical therapy, occupational therapy, etc.) and K-12 market, consumer products serve home computer users, and professional products serve the healthcare, pharmaceutical, legal and broadcast market. In addition, A.D.A.M. licenses content and software technologies for online distribution of information, and provides content for incorporation into third party applications. Most 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's degreed medical illustrators, anatomists, commercial illustrators, multimedia experts and software engineers over a three and one-half year period. Each year, the Company creates content, with recent emphasis placed on 3-D modeling. Currently, the A.D.A.M. Image Database contains approximately 32 gigabytes of visual anatomical and medical content in the form of illustrations, animations, 3-D models and interactive, dissectible imagery. A.D.A.M. images are assembled and linked together to present an interactive view of the human anatomy, allowing users to observe and identify anatomical structures at different magnification levels, "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 from multiple perspectives. 4 5 During fiscal 1998, the Company acquired three products from Mosby that use a text-based clinical database of patient and professional information. Management believes that portions of this new clinical content database will also be used in a variety of the Company's existing and new products. EDUCATION. For fiscal 1998, sales of products to the education market accounted for approximately 77.8% of the Company's revenues. A.D.A.M. Interactive Anatomy ("AIA"), the Company's flagship product released in the first quarter of fiscal 1998, provides an integrated environment for the teaching and study of human anatomy at the higher education and professional levels. Powerful tools and search capabilities offer the user unprecedented access to over 20,000 anatomical structures in six different views. Three-dimensional images based on the Visible Human data set, cadaver photographs from the Bassett collection, pinned anatomical images and Slide Show (a built-in curriculum integration and authoring tool), augment AIA's digital medical illustrations. In addition, one-button Internet access provides solutions for distance learning and offer seamless integration of the World Wide Web and its capabilities. A.D.A.M. 3-D Library 2 is the second collection of 3-D models from A.D.A.M. and offers 3-D rotation capabilities and the ability to simulate a "fly-thru" of different body organs. This program is used in conjunction with A.D.A.M. Interactive Anatomy. This comprehensive collection includes eye, ear, brain and female and male reproductive models, and was introduced in the fourth quarter of fiscal 1998. A.D.A.M. Practice Practical ("APP") simulates gross anatomy practical exams, complete with pinned atlas images and time limits. Tests can be customized by region, system or specific course syllabus. APP combines 15,000 questions with over 500 detailed A.D.A.M. illustrations, cadaver photographs and radiographs. A.D.A.M. Comprehensive is a program designed for the medical school, graduate institution and medically-related professional marketplace. 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; and (6) interactive systems study that permits the exploration of each system of the human body. A.D.A.M. Benjamin/Cummings Interactive Physiology ("IP") is a series of five co-developed products between A.D.A.M. Software, Inc. and Addison Wesley Longman, Inc. ("Addison Wesley") which were designed for the undergraduate health sciences curriculum and completed during the fiscal year ended March 31, 1997 ("fiscal 1997"). Each module is designed to complement the A.D.A.M. Standard product (described below) by integrating anatomical structures with physiological functions. IP 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. The five modules are described below: - - Cardiovascular System offers colorful images and informative animations that present topics related to heart and blood vessel physiology. Covered in this module are: Heart Physiology-Anatomy Review of the Heart, Intrinsic Conduction System, Cardiac Action Potential, Cardiac Cycle, Cardiac Output Blood Vessel Physiology, Blood Vessel Structure and Function, Factors That Affect Blood Pressure, Measuring Blood Pressure and Autregulation and Capillary Dynamics. - - Muscular System uses the detailed and accurate illustrations of muscles at gross and micro-levels to demonstrate the structure and function of the muscular system. Topics covered in the Muscular Module include: Anatomy Review-Skeletal Muscle Tissue, The Neuromuscular Junction, Sliding Filament Theory, Muscle Metabolism, Contraction of Motor Units and Contraction of Whole Muscle. - - Respiratory System offers detailed information at the gross and cellular level of the respiratory system. The module includes: Anatomy Review-Respiratory Structures, Pulmonary Ventilation, Gas Exchange, Gas Transport and Control of Respiration. 5 6 - Nervous System, sub-titled "The Neuron: The Action Potential," presents in-depth information on Neurons, Resting Membrane Potential and the Generation/Propagation of the Action Potential within the nervous system. The module includes: Orientation, Anatomy Review, Ion Channels, Membrane Potential and Action Potential. - - Urinary Systems details Glomerular Filtraton, Early Filtrate Processing and Late Filtrate Processing by the urinary system. The Anatomy Review includes key features of: The Nephron, Tubular Segments and Associated Blood Vessels and Renal Corpuscle. A.D.A.M. Standard is a program 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; and (6) interactive systems study that permits the exploration of each system of the human body. 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 that 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 permits the 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. 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. At Home Series - School Editions include A.D.A.M. The Inside Story - - School Edition, Nine Month Miracle - School Edition and Life's Greatest Mysteries - School Edition. These products 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 students to study 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. PROFESSIONAL. For fiscal 1998, sales of products to the professional market accounted for approximately 11.9% of the Company's revenues. Iliad is a medical expert software CD-ROM program used worldwide by health care clinicians to provide expert diagnostic consultations and patient simulations. Iliad covers more than 930 diseases and 1,500 syndromes and provides treatment protocols for each including the ICD-9 codes for each diagnosis. Iliad also includes 11,900 disease manifestations covering topics in Internal Medicine, Pediatrics, Dermatology, Psychiatry, OB/GYN, Peripheral Vascular Diseases and Sleep Disorders. Iliad acts as an expert consultant that provides a differential diagnosis, or acts as a second opinion to critique a presumptive diagnosis. The program can assist in selecting the most appropriate and cost-effective data at any stage in the patient work up. The program also comes with 90 simulated patient cases that can be used to test specific diagnostic problem solving skills. This product was acquired from Mosby in October 1997. 6 7 MLI's Winning Medical Illustrations is a 5-volume set of CD-ROM discs containing high-quality anatomical, trauma, and medical-related images and exhibits for use in settlement brochures, jury education materials and trial exhibits. Designed primarily for personal injury and medical malpractice attorneys, the image database includes over 10,000 medical illustrations used in over 2,500 exhibits and approximately 1,300 cases. The Spine is a CD-ROM program offering over 5,000 frames of animated material relating to the spine and is used primarily by attorneys involved in medical-related litigation. The interactive information is broken down into three different areas, including spinal anatomy, spinal injury and spinal surgery. ActiveX Dissectible Anatomy Component - Management believes this product is the most comprehensive digital database of detailed anatomical images in the world, which includes illustrated, fully dissectible male and female bodies. The product utilizes powerful features such as Pixel Level Recognition to identify over 24,000 structures. The component presentation allows the dissectible anatomy to be incorporated into third party applications, making it possible to integrate A.D.A.M. content into electronic medical records and other health information systems. This component was introduced in the fourth quarter of fiscal 1998. Online Encyclopedias: Medical Encyclopedia, Pediatric Encyclopedia, and Sexually Transmitted Disease Encyclopedia contain thousands of articles complemented with color photographs and illustrations make up these easy-to-use, HTML-based, interactive online encyclopedias covering a full range of topics including diseases, symptoms, medical tests, surgeries, drugs, nutrition, poisons and injuries. Containing thousands of 2-D images and illustrations, animations, high-resolution 3-D images and interactive movies, the A.D.A.M. Image Database is known for its detailed and medically accurate anatomy, pathology and surgical imagery. The Company licenses its imagery for various mediums including print, broadcast and online, and began actively pursuing a licensing strategy during fiscal 1998. CONSUMER. For fiscal 1998, sales of products to the consumer market accounted for approximately 9.5% of the Company's revenues. A.D.A.M. The Inside Story is a consumer "edutainment" program designed for family use that provides A.D.A.M. anatomy content 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, 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. A.D.A.M. The Inside Story 1997 Edition is an upgraded version of the Company's flagship consumer software title, and includes new features such as 3-D content, the "Quizmeister" testing feature, one-button Internet access, additional imagery and updated print capabilities. Nine Month Miracle is a consumer "edutainment" program designed for use by family members with an interest in pregnancy. Nine Month Miracle contains 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 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" program designed for family use which provides an interactive exploration of the myths, mysteries and curiosities of the human body. Using detailed animations and a simple "Q&A" format, a 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 gray?" Life's Greatest Mysteries also includes activities to help reinforce key concepts, a supplemental text reference section and a glossary of key terms. 7 8 Physician's Home Assistant and Pediatrician's Home Assistant, are easy-to-use symptom analysis tools and medical reference guides intent on creating an informed patient. These products offer extensive disease, nutrition, surgery, medical record, drug side-effect and interaction databases. These products were acquired from Mosby in October 1997. 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 the Company's senior management for potential 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, a return on investment, sales potential and overall strategic value is determined for each product concept. The completed analysis is then presented to the Company's senior management for a final product development decision. Once approved 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 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. During this stage, the Company's designers, illustrators, programmers and other creative talent become actively involved in product development. 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; then results of such feedback are integrated back into the design specifications. In addition to the functionality and testing stages, management believes it is important for the Company to continually market test products at several other levels. The Company constantly assesses the accuracy of the content, including all 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. Capitalized software development costs consist principally of salaries and certain other expense 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. SERVICES The Company uses its Image Database to create custom services in the professional market for various customers, including book publishers and pharmaceutical companies. The A.D.A.M. production staff works closely with its customers to create content and presentations that are medically accurate and visually engaging. A.D.A.M. Software typically retains copyright ownership on its custom development work. For fiscal 1998, custom service work accounted for approximately 1.8% of the Company's revenues. SALES, MARKETING AND DISTRIBUTION The Company employs a wide range of marketing and distribution strategies in the academic and professional markets to promote brand name recognition broaden product distribution and increase market 8 9 share. In fiscal 1997, the Company licensed its consumer product line to Mindscape, Inc. ("Mindscape") for distribution into the retail market, relieving the Company of sales, marketing and distribution responsibilities in the consumer market. In the education market, the Company markets its products through both direct and indirect channels. The Company employs four direct telesales representatives and four field sales people, and engages a network of value added resellers and catalog resellers to sell its products. In addition, the Company works non-exclusively with Addison Wesley, Mindscape, Williams and Wilkins and other distributors for the education market. Sales and marketing activities include advertising, media relations, direct mailings, distribution of brochures, participation in educational seminars, campus visits by field sales personnel, telemarketing and telesales efforts. In fiscal 1998, the Company launched an aggressive series of national grant and training programs designed to enhance the Company's position as a market leader in education anatomy products and increase the average institutional sales order. These grant and training programs offer hands-on instruction on A.D.A.M. products and offer educators the opportunity to propose ideas on topics such as curriculum integration and online strategies, in return the Company provides these educators with free software. The Company also instituted a highly successful competitive upgrade program for its higher education products. The upgrade program had two primary purposes: (i) capture additional institutional budgetary dollars and (ii) develop new account relationships. 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 fiscal 1998, management believes that approximately $1.5 million of revenue was attributable to these marketing programs. In addition, during fiscal 1998 the Company terminated a non-exclusive relationship with a distributor. for the K-12 market and created new non-exclusive relationships with other distributors, including Mindscape. These and other changes led to increased revenue for the Company from the fast growing K-12 market. In international markets, the Company maintains exclusive distribution relationships with Matsushita in Japan, Pearson Professional in Australia, and a non-exclusive distribution relationship with Churchill Livingstone UK in Europe. International revenues comprised 23.9% of the Company's total net revenues in fiscal 1998, mainly from the education and professional markets. The Company has designated four employees to pursue sales opportunities in professional markets such as healthcare, pharmaceutical, legal and broadcast. The Company sales, marketing and distribution in professional markets involve building awareness of the Company's products, attending industry events, establishing relationships with prospective companies and customers and conducting thorough market research. In the healthcare market, the Company intends to develop strategic marketing initiatives designed to target top tier healthcare and pharmaceutical companies. These initiatives will include seminars, partnership development and focused national account management. In the legal market, the Company has built a direct marketing and sales model that links mail and print advertising with outbound telesales. The Company works exclusively with CNN Newssource, a division of Time-Warner, Inc., to address the domestic broadcast market. CNN Newssource is responsible for all sales, marketing and distribution to the local and national broadcast market in return for a percentage of the revenue generated. The Company also signed a major licensing agreement with Kainos Laboratories ("Kainos"), a Japanese pharmaceutical company, during fiscal 1998. The agreement provides Kainos a 99-year license for the exclusive rights to Japanese-language versions of the three products A.D.A.M. acquired from Mosby, and exclusive distribution of English-language versions in Japan. This agreement accounted for approximately 10.9% of the Company's revenues in fiscal 1998. STRATEGIC ALLIANCES The Company has established a number of important relationships with companies that operate in the markets A.D.A.M. Software serves. A summary of the Company's significant alliances is set forth below: 9 10 Addison Wesley Longman, Inc., a subsidiary of Pearson PLC Addison Wesley is a major publisher for the undergraduate market for science, health science, nursing and allied health. Addison Wesley is a significant shareholder of the Company and has product development and distribution relationships with the Company. The Company and Addison Wesley co-developed a series of multimedia products, known as A.D.A.M. Benjamin/Cummings Interactive Physiology, for the undergraduate health science market. Both companies sell these products, with A.D.A.M. Software focused on the institutional market and Addison Wesley focused on the student market. Mindscape, Inc., a subsidiary of The Learning Company, Inc. During the last quarter of fiscal 1998, the Company and Mindscape entered into a non-exclusive distribution agreement for the K-12 marketplace. In March 1997, the Company and Mindscape entered into a worldwide distribution agreement for A.D.A.M.'s consumer products. The agreement granted Mindscape exclusive distribution rights for English language consumer products in retail markets, to equipment manufacturers and by direct mail, and non-exclusive rights in certain other retail market segments. CNN Newssource, a division of Time Warner, Inc. During fiscal 1998, the Company signed an agreement with CNN Newssource for distribution of a special compilation of A.D.A.M. content into the broadcast news marketplace. The Company granted CNN Newssource exclusive domestic rights to distribute the A.D.A.M. Image Database to television news broadcasters for use in health and medical news coverage. CNN Newssource is responsible for the sales, marketing and distribution of the A.D.A.M. content into the local and national broadcast news market. CNN Networks, including Cable News Network, CNN Headline News and CNN International, were initial customers of this new service. ANATOMICAL REVIEW BOARD AND EDITORIAL REVIEW BOARD The Company has an Anatomical Review Board composed of individuals with expertise in the fields of anatomy, biology and medicine that assists 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. Members of the Anatomical Review Board make periodic recommendations to the Company regarding content accuracy and testing reliance of the Company's products and product development candidates. With the release of A.D.A.M. Interactive Anatomy (AIA), the Company established an Editorial Review Board composed of 125 educators and healthcare professionals whose role is to review the A.D.A.M. Image Database and advise the product development teams on user interface design, product features and functionality. The Editorial Review Board provides important feedback that helps the Company create products and services that meet the needs of the marketplace. 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 the trademarks "A.D.A.M.," "SCHOLAR SERIES," "NINE MONTH MIRACLE," and 10 11 the "WALKING MAN" logo in the United States. The Company has applied for registration of approximately ten additional trademarks in the United States. 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 five 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 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 non-exclusive, worldwide rights 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 generally 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 from various third parties that the Company incorporates in its products, including video, photographs, music and text. 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 upon 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. Numerous companies serve the healthcare, pharmaceutical and legal markets, including large publishers such as Mosby, Thomson and Reed Elsevier, as well as numerous small companies that may have many more years of industry experience and contacts than A.D.A.M. Although the Company has entered into and began selling to these market segments in fiscal 1998, additional resources have been allocated such that increased penetration and presence in this market are expected in fiscal 1999. The Internet represents a new and fast growing market. While A.D.A.M. believes it can offer content resources for the Internet, there are many existing competitors that exist who have greater resources, 11 12 experience and relationships. There can be no assurance A.D.A.M. will be successful licensing its content for use on the Internet or developing other Internet related business. 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, many 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 in cost than alternative competitive informational sources such as anatomy textbooks. EMPLOYEES As of March 31, 1998, the Company employed 62 persons. Of these, 22 were engaged primarily in product development, 15 in sales, eight in marketing and 17 in finance and administration. The Company currently employs ten masters-degreed medical illustrators. None of the Company's employees is 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 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. ITEM 2. PROPERTIES The Company's headquarters and principal operations are located in approximately 26,000 square feet of leased office space in Atlanta, Georgia. The space is leased for a term ending in 2002. In February 1998 the Company sub-leased approximately 3,100 square feet of its leased space to another company for a period of 18 months, the term of which may be extended at the Company's option. Management of the Company believes that the Company's current facilities will be adequate through at least 1999. 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 in Fulton County Superior Court in Atlanta, Georgia was filed against the Company and certain of its then officers and directors. The complaint alleges violations of sections 11, 12(2) and 15 of the Securities Act of 1933, violations of the Georgia Securities Act and negligent misrepresentation arising out of alleged disclosure deficiencies in connection with the Company's initial public offering which was completed on November 10, 1995. The complaint seeks compensatory damages and reimbursements for plaintiff's fees and expenses. A motion to dismiss is pending and the Company and its officers and directors are vigorously defending against the allegations. 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 1998. 12 13 ITEM X. EXECUTIVE OFFICERS OF THE REGISTRANT The persons who are executive officers of the Company and their positions are as follows:
NAME AGE POSITIONS WITH THE COMPANY - ---- --- -------------------------- Robert S. Cramer, Jr. 37 Chairman of the Board, Co-Founder, Chief Executive Officer Gregory M. Swayne 40 Co-Founder, Vice-Chairman, Vice President of Production and Director Michael Fisher 35 Corporate Secretary, Director of Finance and Administration
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, and Chief Executive Officer since September 1996. From 1987 to 1992, he served as Chairman of the Board of Directors of Medical Legal Illustrations, Inc. ("MLI"), a predecessor to the Company. Previously, Mr. Cramer served as a magazine publisher and television news producer. Since 1994 Mr. Cramer has served as Chairman of the Board of the Atlanta Task Force for the Homeless, a community-wide non profit organization working with and on the behalf of homeless people. GREGORY M. SWAYNE. Mr. Swayne, a co-founder of the Company, has served as Vice President of Production and Vice-Chairman of the Company since March 1997 and as a Director since March 1990. Previously, he served as President from March 1990 until March 1997. As the original founder of MLI, he served as President 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 degree 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. MICHAEL S. FISHER. Mr. Fisher joined the Company in September 1993 as Controller, became Director of Finance and Administration in February 1997 and was appointed Corporate Secretary in March 1997. From June 1990 through August 1993 he served as Controller for Morgan Medical Holdings, Inc., a publicly held medical diagnostic services firm, and was responsible for all financial functions. Previously thereto, he served two years as an accountant with BDO/Seidman. Mr. Fisher is a CPA licensed in the state of New York. 13 14 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
High Low ---- --- FISCAL 1997 ----------- First Quarter 5 3 Second Quarter 5 2-1/8 Third Quarter 4 2-1/8 Fourth Quarter 2-7/8 2 FISCAL 1998 ----------- First Quarter 2-5/16 1-3/4 Second Quarter 3-5/8 2 Third Quarter 3-5/8 1-7/8 Fourth Quarter 3-1/4 2-1/8 FISCAL 1999 ----------- First Quarter (through June 25, 1998) 6-5/8 2-5/8
At June 25, 1998 there were approximately 192 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 near future. The Company 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. 14 15 ITEM 6. SELECTED FINANCIAL DATA
Fiscal Year Ended March 31, --------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (in thousands, except per share amounts) STATEMENT OF OPERATIONS: Net revenues $ 6,888 $ 4,591 $ 6,447 $ 5,742 $ 2,813 Cost and expenses: Cost of revenues 1,178 1,280 1,491 791 293 Sales and marketing 2,778 4,494 4,090 3,666 1,965 Product development 1,512 2,260 2,847 2,401 1,759 General and administrative 1,293 2,369 2,008 1,774 1,554 Restructuring charge - 490 - - - Total costs and expenses 6,761 10,893 10,436 8,632 5,571 Income (loss) before income 127 (6,302) (3,989) (2,890) (2,758) Interest expense (3) (8) (317) (383) (90) Interest income 529 869 415 43 64 ---------- --------- --------- ---------- ---------- Income (loss) from continuing operations 653 (5,441) (3,891) (3,230) (2,784) Loss from discontinued operations - - - - (400) ---------- --------- --------- ---------- ---------- Income (loss) before income taxes and Extraordinary item 653 (5,441) (3,891) (3,230) (3,184) Income Taxes (75) - - - - ---------- --------- --------- ---------- ---------- Income (loss) before extraordinary item 578 (5,441) (3,891) (3,230) (3,184) Extraordinary loss from early extinguishment of debt, net of income tax benefit of $29 - - (46) - - ---------- --------- --------- ---------- ---------- Net income (loss) $ 578 $ (5,441) $ (3,937) $ (3,230) $ (3,184) Net income (loss) per share from continuing operations $ .12 $ (1.03) $ (1.13) $ (1.22) $ (1.11) Net income (loss) per share .12 (1.03) (1.14) (1.22) (1.27) Weighted average number of common shares and share equivalents outstanding 4,959 5,258 3,673 2,694 2,510
15 16
As of March 31, ------------------------------------------------------------------ 1998 1997 1996 1995 1994 (in thousands) BALANCE SHEET DATA: Cash and cash equivalents 704 2,422 5,352 940 716 Working capital (deficiency) 9,011 9,982 15,354 (1,736) (593) Total assets 11,900 13,662 18,871 4,247 3,632 Short-term debt - - 250 2,530 284 Long-term debt - - - 298 336 Convertible Preferred Stock - - - 2,022 - Total shareholders' equity (deficit) 10,713 11,555 16,896 (1,943) (1,284)
16 17 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Financial Statements and Notes thereto of the Company presented elsewhere herein. OVERVIEW A.D.A.M. Software, Inc. ("the Company" or "A.D.A.M.") is a leading developer of anatomy/medical content (including 2-D and 3-D imagery, animations and text) and software technologies. In addition to licensing content and software components, A.D.A.M. creates, publishes and markets multimedia software products, content and Internet-ready applications that provide anatomical, medical and health-related information for the education, consumer and professional markets. The Company sells its products into the academic markets through alliances with distributors and by direct sales and marketing activities. In March 1997 consumer distribution was outsourced to Mindscape. 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. Licensing revenue is recognized when contracts are finalized in cases where no further performance by the Company is required, and over the term of the contract in cases where further performance by the Company is required. 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 in the balance sheet and are recognized as revenue when the related software is shipped and all applicable obligations are fulfilled. The Company's initial products addressed the graduate education and professional markets, which were characterized by higher unit prices, lower cost of goods sold as a percentage of selling price and lower unit volumes than the Company's consumer products. Accordingly, such products had 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 its multimedia capabilities toward developing products for the larger consumer and general education markets. As a result, the Company's product mix shifted 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 had a lower unit price, higher cost of goods sold as a percent of price and lower gross margin. As a result of releasing a new, flagship academic product in the first quarter of fiscal 1998 and outsourcing the distribution of consumer products to Mindscape in March 1997, the average net revenues received by the Company increased to approximately $36.00 per unit for the 120,000 units of software sold in fiscal 1998 compared to approximately $24.00 per unit for the 189,000 units of software sold in fiscal 1997, and approximately $50.00 per unit for the 129,000 units of software sold in the year ended March 31, 1996 ("fiscal 1996"). A significant reduction in price points due to changes in product mix, as well as up to 40% price reductions in April 1996 of several academic products, had resulted in lower gross margins and higher costs of revenue as a percentage of net revenue for fiscal 1997 as compared to fiscal 1996 and fiscal 1998. Approximately 63% of revenues in fiscal 1998 were derived from actual product shipments, compared to 96% in fiscal 1996 due to increased licensing and royalty income activity in fiscal 1998. The Company experienced its first profitable year in fiscal 1998. However, substantial losses since the Company's inception in prior years has resulted in an accumulated deficit of approximately $21.9 million as of March 31, 1998. For fiscal 1998, the Company earned net income of $578,000 and for the fiscal 1997, 1996 and 1995, the Company incurred net losses of approximately $5.4 million, $3.9 million and $3.2 million, respectively. Management believes that the profit for fiscal 1998 was primarily due to successful implementation of the Company's restructuring Plan (the "Plan") during fiscal 1997, which enabled the Company to bring costs in line with revenues. The Plan was designed to enhance overall competitiveness, productivity and efficiency through the reduction of overhead costs. The major costs associated with the Plan included severance costs, employee termination costs, and costs associated with the termination of a non-cancelable lease. The basis for determination of the cost accrued with respect to the non-cancelable lease was gross rental payments due through the end of the lease plus broker's commission less expected rental receipts from subleasing the space. The cost benefits of reduction in 17 18 personnel was largely realized in the third and fourth quarters of fiscal 1997, and the lease termination benefits were realized in fiscal 1998. At March 31, 1998, the Company had net operating loss carryforwards available for tax purposes of approximately $19.1 million, which will expire in years 2007 through 2013. 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 pre-ownership net operating loss carryforwards. 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 FISCAL YEAR ENDED MARCH 31, ----------------------- ------------------------------------ 1997 TO 1996 TO 1998 1997 1996 1998 1997 ---- ---- ---- ---- ---- Net revenues 100% 100% 100% 50.0% (28.8)% Costs and expenses: Cost of revenues 17.1 27.9 23.1 (8.0) (14.2) Sales and marketing 40.3 97.9 63.4 (38.2) 9.9 Product development 22.0 49.2 44.2 (33.1) (20.6) General and administration 18.8 51.6 31.1 (45.4) 18.0 Restructuring charge - 10.7 - (100.0) 100.0 --------- -------- -------- Total costs and expenses 98.2 237.3 161.8 --------- -------- -------- Operating income (loss) 1.8 (137.3) (61.8)
The following table sets forth for the periods indicated the revenues derived by the Company from the academic, consumer and professional markets and from other sources. Other revenues include royalty income, license fees and support services.
FISCAL YEAR ENDED MARCH 31, ------------------------------------------- 1998 1997 1996 ---- ---- ---- (in thousands) Education $ 5,357 $ 2,523 $ 3,688 Professional 821 - - Consumer 652 1,978 2,533 Other revenues 58 90 226 -------- -------------- ----------- Net revenues $ 6,888 $ 4,591 $ 6,447 ======== ============== ===========
Fiscal 1998 Compared to Fiscal 1997 Total net revenues increased 50.0% to $6,888,000 in fiscal 1998 compared to $4,591,000 in fiscal 1997 as a result of increased sales of the Company's high-end, flagship product in the education market, increased revenue from the professional market and increased licensing revenue. Total unit shipments of the Company's products decreased to approximately 120,000 units in fiscal 1998 from approximately 189,000 units in fiscal 1997. The increased net revenues and decreased unit shipments reflect higher 18 19 revenues per unit shipped, which are the result of higher pricing for the Company's new flagship product, A.D.A.M. Interactive Anatomy released in the first quarter of fiscal 1998, distribution of lower priced consumer products such as A.D.A.M. The Inside Story and Nine Month Miracle through a third party, and greater focus on sale of higher margin education products during fiscal 1998. Net revenues from the education market increased 112.3% to 5,357,000 in fiscal 1998 from $2,523,000 in fiscal 1997 due primarily to increased sales of the flagship product education product, A.D.A.M. Interactive Anatomy, as well as increased unit sales of other, more mature products such as the Benjamin Cummings Interactive Physiology series and A.D.A.M. Practice Practical. The Company's agreement with Kainos represented $750,000 of the education market net revenues. In addition, in fiscal 1998 the Company recognized approximately $389,000 of revenue related to upgrade rights granted to purchasers of certain products that was deferred during fiscal 1997. As a percent of total net revenues, net revenues from the education market increased to 77.8% in fiscal 1998 compared to 54.9% in fiscal 1997. Net revenues from the consumer market decreased 67.0% to $652,000 in fiscal 1998 compared to $1,978,000 in fiscal 1997 due primarily to the March 1997 distribution agreement with Mindscape pursuant to which the Company receives royalties on the sale of consumer products rather than recognizing gross sales price as it had previously done. As a percent of total net revenues, net revenues from the consumer market decreased to 9.5% in fiscal 1998 compared to 43.1% in fiscal 1997. Net revenues from the professional market were $821,000 in fiscal 1998. These net revenues were derived from sales of custom services, license fees for software components developed by the Company, and product sales each of which accounted for 15%, 41%, and 44% of the total professional market net revenues, respectively. Approximately 47% of product sales, or $170,000, into this market resulted from sales of Medical-Legal Series products introduced during fiscal 1997. As a percent of total net revenues, net revenues from the professional market was 11.9% in fiscal 1998. The Company believes that anticipated future revenue growth will depend on, among other things, its ability to improve and upgrade existing products and become a content provider of anatomical imagery that can become more widely adopted through licensing models, education curriculums, professional market intranets and Internet website markets. Additionally, continued adoption of electronic commerce on the Internet, the extent of competition, unit pricing trends, the demand for its software in the education, consumer and professional markets and the performance of the Company's strategic partners in the areas of marketing, sales and distribution of the Company's products will be significant factors. In this regard, the Company considers its future revenues to be unpredictable. Cost of revenues decreased 8.0% to $1,178,000 in fiscal 1998 compared to $1,280,000 in fiscal 1997. Cost of revenues, which includes the cost of support, packaging, documentation, royalties and amortization of capitalized software development costs decreased primarily due to the significant reduction of consumer product units shipped as a result of the Mindscape distribution agreement reached in March 1997, partially offset by significant increases in royalty expenses related to increased sales of A.D.A.M. Benjamin/Cummings Interactive Physiology series products, increased capitalized software amortization and decreased software support costs. As a percent of total net revenues, cost of revenues decreased to 17.1% in fiscal 1998 compared to 27.9% in fiscal 1997 due to changes in product mix, specifically, the decreased unit sales of lower priced, lower margin consumer products, increased sales of the higher margin, higher priced flagship education product and the impact on net revenues from the recognition of income for certain education product sales that was deferred in fiscal 1997. Sales and marketing expenses decreased 38.2% to $2,778,000 in fiscal 1998 from $4,494,000 in fiscal 1997, primarily as a result of decreased marketing activities related to the sale and distribution of the company's consumer market products as a result of the March 1997 Mindscape distribution agreement. Sales and marketing costs attributable to sale and distribution of consumer products in fiscal 1997 totaled $1,693,000 and was insignificant for fiscal 1998, accounting for nearly the entire reduction in overall sales and marketing costs for fiscal 1998. As a percentage of total net revenues, sales and marketing expenses decreased to 40.3% in fiscal 1998 from 97.9% in fiscal 1997. Product development costs decreased 33.1% to $1,512,000 in fiscal 1998 from $2,260,000 in fiscal 1997 due primarily to decreases in salary and consulting costs incurred in fiscal 1997 associated with the development of language lexicons for the Company's international products and maintenance of the consumer product line in fiscal 1997. In addition, the amount of development costs capitalized for fiscal 19 20 1998 increased by $41,000 compared to fiscal 1997, primarily resulting from earlier achievement of "working models" in the development process of products developed during fiscal 1998. As a percentage of total net revenues, product development expenses decreased to 22.0% in fiscal 1998 from 49.2% in fiscal 1997. Total expenditures for product development, including capitalized expenses, decreased to $2,054,000 in fiscal 1998 compared to $2,761,000 in fiscal 1997. The Company capitalized product development expenses of $542,000 and $501,000 in fiscal 1998 and fiscal 1997, respectively, which represented 26.4% and 18.1% of total expenditure for product development in these respective periods. Amortization of capitalized product development cost totaled $340,000 and $119,000 in fiscal 1998 and 1997, respectively, and is included in cost of revenues described above. General and administrative expenses decreased 45.4% to $1,293,000 in fiscal 1998 from $2,369,000 in fiscal 1997. As a percentage of total net revenues, general and administrative expenses decreased to 18.8% in fiscal 1998 compared to 51.6% in fiscal 1997. The decrease was mainly due to decreased legal, rent, bad debt, investor relations, and salary expenses. Rent and salary decreases in fiscal 1998 are the result of the Company's restructuring in the second quarter of fiscal 1997. Interest income decreased 39.1% to $529,000 in fiscal 1998 from $869,000 in fiscal 1997 due to reduced average cash and short term securities balances during fiscal 1998. The lower balances during fiscal 1998 are the result of the Company's net loss during fiscal 1997. Fiscal 1997 Compared to Fiscal 1996 Total net revenues decreased 28.8% to $4,591,000 in fiscal 1997 compared to $6,447,000 in fiscal 1996 as a result of decreased sales of the Company's products to both the consumer and academic markets. Total unit shipments of the Company's products increased to approximately 189,000 units in fiscal 1997 from approximately 129,000 units in fiscal 1996. The decreased net revenues and increased unit shipments reflect lower revenues per unit shipped, which are the result of lower pricing of the Company's aging consumer products, price decreases for academic products implemented in April 1996, increased unit sales of lower priced academic products such as A.D.A.M., The Inside Story - School Edition and A.D.A.M. Practice Practical, heavy discounting of the high end A.D.A.M. Comprehensive product in anticipation of release of A.D.A.M. Interactive Anatomy and significantly increased volume sales of the newest flagship consumer title, A.D.A.M. The Inside Story - 1997 Edition (ATIS '97). Net revenues from the academic market decreased 31.6% to $2,523,000 in fiscal 1997 from $3,688,000 in fiscal 1996 due primarily to lower sales of the flagship academic product, A.D.A.M. Comprehensive, in anticipation by the market of an upgraded flagship product, as well as price reductions implemented at the beginning of fiscal 1997 which were not offset by the increased volume of units shipped. Also, the Company deferred approximately $389,000 of revenue during the second and third quarters of fiscal 1997 related to upgrade rights granted to purchasers of certain products. The upgraded versions were not released until after the close of fiscal 1997. As a percent of total net revenues, net revenues from the academic market decreased to 54.9% in fiscal 1997 compared to 57.2% in fiscal 1996. Net revenues from the consumer market decreased 21.9% to $1,978,000 in fiscal 1997 from $2,533,000 in fiscal 1996 due primarily to lower selling prices of aging consumer titles not offset by the increased unit volumes shipped of the newly released ATIS '97. Lower selling prices per unit of titles in the aging consumer product line, such as Nine Month Miracle and Life's Greatest Mysteries, did not result in significant increases in unit shipments of those titles, and adversely affected overall revenues per unit in the consumer market. As a percent of total net revenues, net revenues from the consumer market increased to 43.1% in fiscal 1997 compared to 39.3% in fiscal 1996. 20 21 Cost of revenues decreased 14.2% to $1,280,000 in fiscal 1997 compared to $1,491,000 in fiscal 1996. Cost of revenues, which includes the cost of support, packaging, documentation, royalties, and amortization of capitalized software development costs, decreased primarily from decreases in amortization of capitalized software development costs, as well as operating efficiencies and new cost controls which offset the cost for significantly increased units shipped for fiscal 1997. As a percent of total net revenues, cost of revenues increased to 27.9% in fiscal 1997 compared to 23.1% in fiscal 1996 due to changes in the product mix sold, specifically, the increased unit sales of lower priced, lower margin consumer and academic products, and the impact on net revenues from the deferral of income for certain academic product sales. Sales and marketing expenses increased 9.9% to $4,494,000 in fiscal 1997 from $4,090,000 in fiscal 1996, primarily as a result of increased marketing activities such as the ADAM Across America Tour and Mothers Day promotions in support of A.D.A.M. The Inside Story - 1997 Edition and Nine-Month Miracle consumer products, respectively. Also, increased marketing activities relating to the launch (in the first quarter of fiscal 1998) of A.D.A.M. Interactive Anatomy and development of the professional market did not result in significant revenue for fiscal 1997. As a percentage of total net revenues, sales and marketing expenses increased to 97.9% in fiscal 1997 from 63.4% in fiscal 1996. Product development costs decreased 20.6% to $2,260,000 in fiscal 1997 from $2,847,000 in fiscal 1996 due primarily to decreases in consulting costs related to product development activity and a $408,000 increase in the amount of development costs capitalized for fiscal 1997 compared to fiscal 1996. The increase in capitalized development costs was primarily related to the significant resources allocated to A.D.A.M. Interactive Anatomy. This product was released in the first quarter of fiscal 1998. As a percentage of total net revenues, product development expenses increased to 49.2% in fiscal 1997 from 44.2% in fiscal 1996. Total expenditures for product development, including capitalized expenses, decreased to $2,761,000 in fiscal 1997 compared to $2,940,000 in fiscal 1996. The Company capitalized product development expenses of $501,000 and $93,000 in fiscal 1997 and fiscal 1996, respectively, which represented 18.1% and 3.2% of total expenditure for product development in these respective periods. Amortization of capitalized product development cost totaled $119,000 and $356,000 in fiscal 1997 and 1996, respectively, and was charged to and included in cost of revenues described above. General and administrative expenses increased 18.0% to $2,369,000 in fiscal 1997 from $2,008,000 in fiscal 1996. As a percentage of total net revenues, general and administrative expenses increased to 51.6% in fiscal 1997 from 31.1% in fiscal 1996. The increase was mostly due to legal fees of approximately $212,000 relating to the shareholder class action lawsuit. The Company does not expect these legal costs to continue in fiscal 1998. The decrease in premises rental cost as a result of the restructuring was realized beginning April 1, 1997. During the second quarter of fiscal 1997, the Company implemented the Plan, designed to enhance overall competitiveness, productivity and efficiency through the reduction of overhead costs. The Plan resulted in a pre-tax charge of approximately $490,000. The charge principally reflects severance costs resulting from workforce reductions of 29 employees and realignments throughout the Company, employee termination costs and costs associated with non-cancelable leases net of estimated sublease rental income. Total payments of approximately $301,000, primarily related to severance agreements were made subsequent to the implementation of the Plan. Accrued restructuring at March 31, 1997 was approximately $189,000. Interest expense decreased 97.5% to $8,000 in fiscal 1997 from $317,000 in fiscal 1996 primarily due to the repayment of outstanding indebtedness, consisting of principal and accrued interest outstanding under the subordinated bridge notes issued to certain investors in fiscal 1995, the Company's term loan with a bank and third party advances. Interest income increased 109.4% to $869,000 in fiscal 1997 from $415,000 in fiscal 1996 due to interest on the net proceeds from the Company's initial public offering completed in November 1995. The increase in capitalized software development costs in fiscal 1997 was due mainly to development costs related to ADAM Interactive Anatomy. During fiscal 1996 and the year ended March 31, 1995 ("fiscal 1995"), the majority of the 21 22 Company's development efforts were focused on consumer products, which generally reach TF much later in the development cycle due to their newly designed functionalities and uncertain content. Accordingly, development cost capitalization periods for the newly created consumer products was shorter than for AIA, which, as an academic product, drew upon a more established content and core technology base. The Company deferred the recognition of approximately $389,000 of revenue during the second and third quarters of fiscal 1997 due to free upgrade rights granted with the sale of certain academic products. Accordingly, the Company deferred liability at March 31, 1997 that it recognized as income during the first and second quarters of fiscal 1998. LIQUIDITY AND CAPITAL RESOURCES At March 31, 1998 the Company had cash and cash equivalents of $704,000, short-term investments of $7,664,000, and working capital of $9,011,000. Cash used in operating activities was $344,000 in fiscal 1998, $4,858,000 in fiscal 1997 and $2,601,000 in fiscal 1996, principally as a result of net losses for fiscal 1997 and fiscal 1996. 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 1999. In April 1997, the Board of Directors adopted a stock repurchase program. The program authorized the repurchase of the Company's Common Stock from time to time prior to December 31, 1997 in open market transactions on the Nasdaq Stock market at an aggregate purchase price of up to $1 million. In February 1998, the Board approved continuation of the stock repurchase program up to the purchase of 25% of the Company's outstanding shares. Any repurchase of the Company's Common Stock will be made based upon market conditions and other factors. The Company will use cash on hand to fund the repurchase program, and the repurchased stock will be held as treasury stock. Pursuant to the program, the Company repurchased 635,550 shares of Common Stock on the open market for an average price of approximately $2.39 per common share and an aggregate purchase price of approximately $1,519,000 through June 30, 1997. Repurchased shares represented approximately 12.0% of the shares of Common Stock outstanding. 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 at least the next two years. YEAR 2000 COMPLIANCE The Company believes that all of its internal management information systems are currently Year 2000 compliant and, accordingly, does not anticipate any significant expenditures to remediate or replace existing internal-use systems. Although most of the Company's products are Year 2000 compliant, two products acquired by the Company from Mosby are not Year 2000 compliant. The Company is currently developing and testing solutions for its non-compliant products and currently estimates that all of these products will be Year 2000 compliant by mid-1999 at an estimated aggregate cost of approximately $25,000, including both remediation and testing costs. However, any unexpected difficulties in achieving Year 2000 compliance for the A.D.A.M. products could have a material adverse effect on the Company's business, financial condition and results of operations. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA This information is set forth under Item 14(a)(1) and (2). ITEM. 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON FINANCIAL DISCLOSURES Not applicable 22 23 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The sections under the headings "Election of Directors" entitled "Nominees for Election - Term Expiring in 2001", "Directors Continuing in Office until 1999" and "Directors Continuing in Office until 2000" of the Proxy Statement for the Annual Meeting of shareholders to be held September 24, 1998 (the "Proxy Statement") are incorporated hereby by reference for information on Directors of the Registrant. See Item X in Part I hereof for information regarding executive officers of the Registrant. The section under the heading "Other Matters" entitled "Section 16(a) Beneficial Ownership Reporting Compliance" of the Proxy Statement is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The section 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", "Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values", "Employment Agreements", "Compensation Committee Interlocks and Insider Participation" and "Section 16(a) Beneficial Ownership Reporting Compliance" of the Proxy Statement are incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The section 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 section under the heading "Certain Transactions" of the Proxy Statement is incorporated herein by reference. 23 24 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, 1998 and 1997 F-2 Statement of Operations for the three years ended March 31, 1998 F-3 Statement of Changes in Shareholders' Equity for the three years ended March 31, 1998 F-4 Statement of Cash Flows for the three years ended March 31, 1998 F-5 Notes to Financial Statements F-6 (2) Financial Statement Schedule: For the three years ended March 31, 1998 II - Valuation and Qualifying Accounts
All other schedules have been omitted because they are not applicable or are not required or the information required to be set forth therein is included in the Financial Statements or Notes thereto.
EXHIBIT NO. DESCRIPTION --- ----------- *3.1 Amended and Restated Articles of Incorporation of the Company. *3.2 Amended and Restated By-Laws 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 By-Laws of the Company (incorporated by reference to Exhibit 3.2). *4.3 Specimen Common Stock Certificate *4.4 Form of Option Certificate relating to the 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 on May 23, 1995 *10.1 Amended and Restated 1992 Stock Option Plan *10.2 401(k) Adoption Agreement and Trust. *10.3 Employment Agreement between the Company and Robert S. Cramer, Jr., dated December 21, 1994. *10.4 Employment Agreement between the Company and Gregory M. Swayne, dated December 19, 1994. *10.5 Publishing Agreement by and between Williams & Wilkins and the Company, dated February 22, 1994 *+10.6 Software Distribution Agreement between Broderbund Software, Inc. and the Company, dated as of June 1, 1994, as amended by Amendment No. 1, dated as of November 1, 1994. *+10.7 Software Reseller Agreement among the Company, Addison Wesley Longman, through its Addison Wesley/Benjamin Cummings Group Sales Force Division, Benjamin/Cummings, and Addison Wesley Publishers Ltd., dated as of August 4, 1994. *+10.8 Software Reseller Agreement among the Company and Addison Wesley Longman, through its Addison Wesley School Division, dated as of February 9, 1995. *+10.9 Software Reseller Agreement between Churchill Livingstone, Inc. and the Company, dated as of May 8, 1995. ***10.10 Amendment to Software Reseller Agreement between Churchill Livingstone, Inc. and the Company, dated as of December 23, 1996 *10.11 Localization Agreement between Sunflowers Interactive Entertainment, a wholly-owned subsidiary
24 25 of BOMICO, and the Company, dated June 28, 1995. *10.12 Software Reseller Agreement between BOMICO UNTERHALTUNGSSOFT- UND-HARDWARE VERTRIEBS GMBH and the Company, dated June 28, 1995. *10.13 Distribution Agreement with Ingram Micro, dated August 10, 1995 **10.14 Addendum dated January 19, 1996 to Distribution Agreement with Ingram Micro, dated August 10, 1995. *10.15 Vendor Agreement between ABCO Distributors, Inc. and the Company, dated August 10, 1994. **10.16 Publishing/Developer Agreement by and between J.S.K., Inc. and the Company, dated as of November 30, 1995. **10.17 Localization Agreement between ZEMI Corp. and the Company dated June 7, 1996. ***10.18 Letter Agreement with Mindscape, Inc., dated February 26, 1997, setting forth distribution terms. 10.19 Licensing and Distribution Agreement between Mindscape, Inc. and the Company dated June 13, 1997. 10.20 Asset Purchase and Sale agreement between Mosby, Inc. and the Company dated October 16, 1998. 10.21 Copyright License Agreement between Kainos Laboratories, Inc. and the Company, dated December 29, 1997 10.22 License Agreement between CNN Newssource, Inc. and the Company dated January 15, 1998. 10.23 Sublease Agreement between UltimateCom of Atlanta, L.L.C. and the Company, dated January 15, 1998 23.1 Consent of Price Waterhouse LLP 27.1 Restated Financial Data Schedule - March 31, 1998 (for SEC use only) 27.2 Restated Financial Data Schedule - December 31, 1997 27.3 Restated Financial Data Schedule - September 30, 1997 27.4 Restated Financial Data Schedule - June 30, 1997 27.5 Restated Financial Data Schedule - March 31, 1997 27.6 Restated Financial Data Schedule - March 31, 1997
- --------------- * Incorporated by reference to the Company's Registration Statement on Form S-1, File No. 33-96864, dated September 12, 1995, as amended). ** Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1996. *** Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1997. + The Company has been granted 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 1998. 25 26 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: /s/ Robert S. Cramer, Jr. -------------------------------------------- Robert S. Cramer, Jr. Chairman of the Board, Co-Founder, Chief Executive Officer, and Director Date: June 26, 1998 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 indicated, on June 26, 1998.
Signature Title --------- ----- /s/ Robert S. Cramer, Jr. Chairman of the Board, Co-Founder, Chief - ----------------------------------- Executive Officer, and Director (Principal Robert S. Cramer, Jr. Executive Officer) /s/ Gregory M. Swayne Vice-Chairman, Co-Founder and Director - ----------------------------------- Gregory M. Swayne /s/ Michael S. Fisher Director of Finance/Administration - ----------------------------------- (Principal Financial Officer) Michael S. Fisher /s/ Sally D. Elliott Director - ----------------------------------- Sally D. Elliott Director - ----------------------------------- Dr. Anthony J. Gatti /s/ Daniel S. Howe Director - ----------------------------------- Daniel S. Howe Director - ----------------------------------- Hamilton Jordan Director - ----------------------------------- David O'Connor /s/ John W. McClaugherty Director - ----------------------------------- John W. McClaugherty Director - ----------------------------------- Francis J. Tedesco, M.D.
7 27 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 24 present fairly, in all material respects, the financial position of A.D.A.M. Software, Inc., at March 31, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended March 31, 1998, 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 22, 1998 F-1 28 A.D.A.M. SOFTWARE, INC. Balance Sheets (In thousands, except share data) - -------------------------------------------------------------------------------
MARCH 31, ----------------------- 1998 1997 ---- ---- ASSETS Current assets Cash and cash equivalents $ 704 $ 2,422 Short-term investments 7,664 8,546 Accounts receivable, net of allowances of $162 and $459 1,239 638 Inventories 467 375 Prepaids and other 124 108 -------- -------- Total current assets 10,198 12,089 Property and equipment, net 496 729 Software development costs, net 689 487 Restricted certificates of deposit 517 357 -------- -------- Total assets $ 11,900 $ 13,662 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable $ 318 $ 434 Accrued liabilities 375 562 Accrued compensation and employee benefits 247 259 Accrued restructuring costs -- 189 Deferred rent 209 173 Deferred revenue 38 490 -------- -------- Total current liabilities 1,187 2,107 -------- -------- Commitments and contingencies Shareholders' equity 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; 5,274,647 shares issued and outstanding 52 52 Common stock warrants 135 135 Additional paid-in capital 33,883 33,883 Treasury stock at cost, 602,550 shares (1,420) -- Accumulated deficit (21,937) (22,515) -------- -------- 10,713 11,555 -------- -------- Total liabilities and shareholders' equity $ 11,900 $ 13,662 ======== ========
The accompanying notes are an integral part of these financial statements. F-2 29 A.D.A.M. SOFTWARE, INC. Statement of Operations (In thousands, except share data) - -------------------------------------------------------------------------------
YEAR ENDED MARCH 31, -------------------------------------- 1998 1997 1996 ---- ---- ---- Net revenues $ 6,888 $ 4,591 $ 6,447 Cost and expenses Cost of revenues 1,178 1,280 1,491 Sales and marketing 2,778 4,494 4,090 Product development 1,512 2,260 2,847 General and administrative 1,293 2,369 2,008 Restructuring charge -- 490 -- -------- -------- -------- 6,761 10,893 10,436 -------- -------- -------- Operating income (loss) 127 (6,302) (3,989) Interest expense (3) (8) (317) Interest income 529 869 415 -------- -------- -------- Income (loss) before income taxes and extraordinary item 653 (5,441) (3,891) Income taxes (75) -- -- -------- -------- -------- Income (loss) before extraordinary item 578 (5,441) (3,891) Extraordinary loss on extinguishment of debt (net of income tax benefit of $29) -- -- (46) -------- -------- -------- Net income (loss) $ 578 $ (5,441) $ (3,937) ======== ======== ======== Basic net income (loss) per share Income (loss) before extraordinary item $ 0.12 $ (1.03) $ (1.13) Extraordinary item -- -- (.01) -------- -------- -------- Basic net income (loss) per share $ 0.12 $ (1.03) $ (1.14) ======== ======== ======== Weighted average shares outstanding 4,916 5,258 3,673 ======== ======== ======== Diluted net income (loss) per share Income (loss) before extraordinary item $ 0.12 $ (1.03) $ (1.13) Extraordinary item -- -- (.01) -------- -------- -------- Diluted net income (loss) per share $ 0.12 $ (1.03) $ (1.14) ======== ======== ======== Weighted average shares outstanding 4,959 5,258 3,673 ======== ======== ========
The accompanying notes are an integral part of these financial statements. F-3 30 A.D.A.M. SOFTWARE, INC. Statement of Changes in Shareholders's Equity (In thousands, except share data) - -------------------------------------------------------------------------------
COMMON STOCK ADDITIONAL COMMON ----------------------- PAID-IN STOCK ACCUMULATED TREASURY SHARES AMOUNT CAPITAL WARRANTS DEFICIT STOCK TOTAL ---------- ---------- ---------- ---------- ----------- ---------- ---------- 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 Retirement of common shares (125,000) (1) (999) -- (1,000) Accretion of discount on mandatorily redeemable convertible preferred stock -- -- (244) -- -- -- (244) Conversion of mandatorily redeemable convertible preferred stock 762,500 8 6,186 -- -- -- 6,194 Exercise of common stock options 341,660 3 1,184 -- -- -- 1,187 Issuance of common stock warrants -- -- -- 135 -- -- 135 Net loss -- -- -- -- (3,937) -- (3,937) ---------- ---------- ---------- ---------- ---------- ---------- ---------- BALANCE AT MARCH 31, 1996 5,234,647 52 33,783 135 (17,074) -- 16,896 Exercise of common stock options 40,000 -- 100 -- -- -- 100 Net loss -- -- -- -- (5,441) -- (5,441) ---------- ---------- ---------- ---------- ---------- ---------- ---------- BALANCE AT MARCH 31, 1997 5,274,647 52 33,883 135 (22,515) -- 11,555 Repurchase of stock -- -- -- -- -- (1,420) (1,420) Net income -- -- -- -- 578 -- 578 ---------- ---------- ---------- ---------- ---------- ---------- ---------- BALANCE AT MARCH 31, 1998 5,274,647 $ 52 $ 33,883 $ 135 $ (21,937) $ (1,420) $ 10,713 ========== ========== ========== ========== ========== ========== ==========
The accompanying notes are an integral part of these financial statements. F-4 31 A.D.A.M. SOFTWARE, INC. Statement of Cash Flows (In thousands) - -------------------------------------------------------------------------------
YEAR ENDED MARCH 31, ---------------------------------------- 1998 1997 1996 ---- ---- ---- Cash flows from operating activities Net income (loss) $ 578 $ (5,441) $ (3,937) Adjustments to reconcile net income (loss) to net cash used in operating activities Depreciation and amortization 707 576 796 Accretion -- -- (118) Loss on extinguishment of debt 75 Changes in assets and liabilities Accounts receivable (601) (190) 576 Inventories (92) 58 (263) Prepaids and other assets (16) 7 (115) Accounts payable (116) (92) 129 Accrued liabilities (187) (52) 168 Accrued interest -- (158) (13) Accrued compensation and employee benefits (12) 77 52 Accrued restructuring costs (189) 189 -- Deferred rent 36 (72) 49 Deferred revenue (452) 490 -- Third party advances -- (250) -- -------- -------- -------- Net cash used in operating activities (344) (4,858) (2,601) -------- -------- -------- Cash flows from investing activities Purchases of short-term investments (32,116) (29,363) (20,803) Proceeds from sale of short-term investments 32,998 31,798 10,000 Purchases of property and equipment (134) (297) (315) Redemption of restricted certificate of deposit -- 191 183 Software development costs (542) (501) (93) -------- -------- -------- Net cash provided (used) in investing activities 206 1,828 (11,028) -------- -------- -------- Cash flows from financing activities Proceeds from issuance of common stock, net of issuance costs, and exercise of options -- 100 17,691 Repurchase of common stock -- -- (1,000) Proceeds from issuance of mandatorily redeemable preferred stock, net of issuance costs -- -- 3,928 Purchase of treasury shares (1,420) -- -- Restricted certificate of deposit (160) -- -- Repayments of notes payable -- -- (2,578) -------- -------- -------- Net cash provided by financing activities (1,580) 100 18,041 -------- -------- -------- (Decrease) increase in cash and cash equivalents (1,718) (2,930) 4,412 Cash and cash equivalents, beginning of period 2,422 5,352 940 -------- -------- -------- Cash and cash equivalents, end of period $ 704 $ 2,422 $ 5,352 ======== ======== ========
The accompanying notes are an integral part of these financial statements. F-5 32 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, and consumer markets. The Company sells its products into the academic and consumer markets through alliances with distributors and original equipment manufacturers (OEMs) and by direct sales and marketing activities. 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. 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 Revenues are primarily derived from the sale of software products and from royalty agreements. 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 its customers. Revenues from royalty agreements are recognized as earned based upon performance or product shipment. Allowances for estimated returns are provided at the time of sale. The Company evaluates the adequacy of allowances for returns and doubtful accounts primarily based upon its evaluation of historical and expected sales experience and by channel of distribution. The estimates determined for reserves for returns and allowances are based upon information available at the reporting date. To the extent the future market, sell through experience, channels of distribution and general economic conditions change, the estimated reserves required for returns and allowances may also change. Payments received in advance of shipments are recorded as deferred revenue in the accompanying balance sheet and are recognized as revenue when the related software is shipped. 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 securities to short-term investment grade securities and direct or guaranteed obligations of the United States government. At March 31, 1998, the Company had a receivable due from one customer of $300,000. In addition, total sales to that customer were approximately 10.9% of net revenues during fiscal 1998. At March 31, 1997, the Company had receivables from each of two major distributors of approximately $269,000 and $137,000, respectively. Total sales to these distributors were approximately 16% and 3%, respectively, of net revenues during fiscal 1997. F-6 33 A.D.A.M. SOFTWARE, INC. NOTES TO FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of the Company's financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, accrued compensation and other accrued liabilities, approximate fair value due to their short maturities. INVENTORIES Inventories consist principally of computer software media and related shipping materials and are stated at the lower of 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 COSTS 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 to be in the range of eighteen to twenty-four 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. RESTRICTED CERTIFICATES OF DEPOSIT In connection with the Company's noncancelable operating leases for its office space and telephone system, the Company is required to purchase certificates of deposit with a bank securing letters of credit guaranteeing payments under the leases (see Note 13). The certificates of deposit mature subsequent to March 31, 1999, bear interest at an average rate of approximately 5.50% and are carried at cost which approximates market. INCOME TAXES The Company accounts for income taxes utilizing the liability method and deferred income taxes are determined based on the estimated future tax effects of differences between the financial reporting and income tax basis of assets and liabilities given the provisions of the enacted tax laws. A valuation allowance is provided against deferred tax assets for which it is more likely than not that the asset will not be realized. F-7 34 A.D.A.M. SOFTWARE, INC. NOTES TO FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- STOCK-BASED COMPENSATION The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations and to elect the disclosure option of SFAS No. 123, "Accounting for Stock-Based Compensation". Accordingly, compensation cost for stock options issued to employees is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock. EARNINGS PER SHARE In fiscal 1998, the Company adopted SFAS No. 128, "Earnings Per Share". The computation of basic earnings per share is based on the weighted average number of common shares outstanding during the period. The computation of diluted earnings per share is based on the weighted average number of common shares outstanding plus, when their effect is dilutive, potential common stock consisting of shares subject to stock options, stock warrants and convertible notes. As of March 31, 1998 potential common stock shares of 43,620 have been included in computing diluted earnings per share. The basic and diluted loss per share for fiscal 1996 gives effect to the accretion of a discount on previously outstanding mandatorily redeemable preferred stock (Note 8). 2. MARKETABLE SECURITIES On March 31, 1998 and 1997, 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 and are stated at cost plus accrued interest. F-8 35 A.D.A.M. SOFTWARE, INC. NOTES TO FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- Held-to-maturity securities at March 31, 1998 included the following (in thousands):
GROSS AMORTIZED FAIR UNREALIZED COST VALUE GAIN/(LOSS) --------- ------ ----------- General Motors Commercial Paper, face value of $1,012,000, interest at 5.37%, due April 24, 1998 $1,008 $1,008 $ -- Merrill Lynch Commercial Paper, face value of $3,145,000, interest at 5.37%, due May 22, 1998 3,121 3,121 -- Merrill Lynch Commercial Paper, face value of $300,000, interest at 5.16%, due May 22, 1998 298 298 -- Toshiba Commercial Paper, face value of $1,500,000, interest at 5.50%, due June 9, 1998 1,484 1,484 -- Atlantis One Commercial Paper, face value of $1,774,000, interest at 5.46%, due June 18, 1998 1,753 1,753 -- ------ ------ ------ $7,664 $7,664 $ -- ------ ------ ------
There were no realized gains or losses for the years ended March 31, 1998, 1997 and 1996. 3. INVENTORIES The components of inventory are summarized as follows (in thousands):
MARCH 31, ------------------- 1998 1997 ---- ---- Raw materials $256 $158 Finished goods 211 217 ---- ---- $467 $375 ---- ----
F-9 36 A.D.A.M. SOFTWARE, INC. NOTES TO FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- 4. PROPERTY AND EQUIPMENT Property and equipment is summarized as follows (in thousands): Depreciation and amortization of property and equipment totaled approximately $367,000, $457,000 and $440,000 for the years ended March 31, 1998, 1997 and 1996, respectively.
MARCH 31, --------------------- 1998 1997 ---- ---- Computers $ 1,194 $ 1,260 Equipment 299 271 Furniture and fixtures 507 528 Leasehold improvements 156 151 ------- ------- 2,156 2,210 Less - Accumulated depreciation and amortization (1,660) (1,481) ------- ------- $ 496 $ 729 ------- -------
5. PRODUCT DEVELOPMENT EXPENDITURES Product development expenditures are summarized as follows (in thousands):
YEAR ENDED MARCH 31, ----------------------------------- 1998 1997 1996 ---- ---- ---- Total development expenditures $ 2,054 $ 2,761 $ 2,940 Less: Additions to capitalized software development, prior to amortization (542) (501) (93) ------- ------- ------- Product development expense $ 1,512 $ 2,260 $ 2,847 ======= ======= =======
The activity in the capitalized software development account is summarized as follows (in thousands):
YEAR ENDED MARCH 31, ----------------------------- 1998 1997 1996 ---- ---- ---- Balance at beginning of year, net $ 487 $ 105 $ 368 Additions 542 501 93 Amortization expense (340) (119) (356) ----- ----- ----- Balance at end of year, net $ 689 $ 487 $ 105 ===== ===== =====
F-10 37 A.D.A.M. SOFTWARE, INC. NOTES TO FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- 6. DEBT During fiscal 1996, 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 was collateralized by substantially all of the Company's assets. The Company terminated the line of credit agreement during the year ended March 31, 1997. At March 31, 1996, the Company had unsecured advances of $250,000 plus accrued interest payable due to a third party. The advances were paid in full during the year ended March 31, 1997. 7. INCOME TAXES F-11 38 A.D.A.M. SOFTWARE, INC. NOTES TO FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- 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 income (loss) before income taxes and extraordinary item as a result of the following (in thousands):
YEAR ENDED MARCH 31, ----------------------------------- 1998 1997 1996 ---- ---- ---- Federal tax provision (benefit) on income (loss) before income taxes and extraordinary item at statutory federal income tax rate $ 222 $(1,850) $(1,319) (Increase) decrease due to: Change in valuation allowance (205) 2,042 1,430 State taxes 26 (255) (117) Research and development credits (37) (38) (12) Foreign taxes withheld 75 -- -- Other (6) 101 18 ------- ------- ------- $ 75 $ -- $ -- ------- ------- -------
The components of the Company's deferred tax assets and liabilities are as follows (in thousands):
MARCH 31, --------------------- 1998 1997 ---- ---- Deferred tax assets Accrued expenses $ 201 $ 229 Deferred revenue 1 186 Allowance for doubtful accounts 17 174 Fixed assets 104 12 Research and development credits 173 150 Net operating loss carryforwards 7,262 7,133 ------- ------- 7,758 7,884 ------- ------- Deferred tax liabilities Software development costs (264) (185) ------- ------- (264) (185) ------- ------- Net deferred tax asset before valuation allowance 7,494 7,699 Valuation allowance (7,494) (7,699) ------- ------- $ -- $ -- ======= =======
At March 31, 1998, the Company had net operating loss and general business credit carryforwards available for tax purposes of approximately $19,100,000 and $173,000, respectively, which will expire in years 2007 through 2013. Under the Tax Reform Act of 1986, the amounts of, and the benefit from, net operating loss carryforwards may be impaired or limited in certain circumstances, including ownership changes (as defined by the Internal Revenue Service). At March 31, 1998 and 1997, the Company has recorded a valuation allowance equal to its net deferred tax assets as management believes it is more likely than not that the net deferred tax assets will not be realized. Management's estimate of the valuation allowance could be effected in the near term based on taxable income generated in future periods. F-12 39 A.D.A.M. SOFTWARE, INC. NOTES TO FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- 8. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK Upon consummation of the Company's initial public offering in November 1995, 762,500 shares of Series A mandatorily redeemable convertible preferred stock (Convertible Preferred Stock) were automatically converted into an equal number of common stock shares. During the year ended March 31, 1996, accretion of the discount on the Convertible Preferred Stock of $244,000 was recorded as a charge to additional paid-in capital and a credit to the Convertible Preferred Stock account. 9. TREASURY STOCK In April 1997, the Company's Board of Directors adopted a stock repurchase program. The program authorized repurchase of the Company's common stock from time to time In open market transactions on the Nasdaq Stock market. During the year, the Company repurchased common stock at various times during fiscal 1998 with an aggregate cost for all shares purchased of $1.4 million. The Company used cash on hand to fund the repurchase program, and the repurchased stock is held as treasury stock. 10. COMMON STOCK OPTIONS AND WARRANTS The Company. has two stock option plans (the 1992 Option Plan and the 1991 Option Plan) 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 of the Company's common stock as determined by the Company's Board of Directors and vest ratably over a three-year period. Options granted under the 1992 Option Plan expire ten years from the date of grant. As of March 31, 1997, all options granted under the 1991 Option Plan were exercised or expired. No further grants under the 1991 Option Plan are authorized. In addition to the options granted under the 1992 and 1991 Option Plans, the Company has 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 vest from immediate to ratably over three years and have terms from five to ten years. F-13 40 A.D.A.M. SOFTWARE, INC. NOTES TO FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- The following table summarizes stock option activity for the three years ended March 31, 1998:
OPTION PRICE SHARES PER SHARE ------------- --------------- 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 Granted 83,400 2.25 - 2.50 Exercised (40,000) 2.00 - 3.00 Canceled or expired (551,108) 2.38 - 11.11 ------------- --------------- Outstanding at March 31, 1997 622,027 2.25 - 12.00 Granted 515,600 2.00 - 10.00 Exercised - - Canceled or expired (173,300) 2.00 - 11.11 ------------- --------------- Outstanding at March 31, 1998 964,327 $ 2.00 - 12.00 ============= ===============
The Company has reserved 1,400,000 shares of common stock for issuance under the 1992 Option Plan. During 1995, the Company issued subordinated notes payable that 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. The warrants are exercisable beginning on the first anniversary of the date of the issuance of the notes and expire five years thereafter. During May 1995, an additional 19,375 warrants were issued to the placement agent for the Convertible Preferred Stock. The warrants are exercisable on the first anniversary of the date of issuance and expire five years thereafter. F-14 41 A.D.A.M. SOFTWARE, INC. NOTES TO FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- 11. STOCK COMPENSATION The Company has adopted the disclosure only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation ("SFAS 123")". Accordingly, no compensation cost has been recognized for options issued to employees under the Company's stock option plans. Had compensation cost for the Company's stock option grants described in Note 10 been determined based on the fair value at the grant date for awards in fiscal 1998,1997 and 1996 consistent with the provisions of SFAS 123, the Company's net income (loss) and income (loss) per share would have been changed to the pro forma amounts indicated below (in thousands, except per share amounts):
1998 1997 1996 ---- ---- ---- Net income (loss) As reported $ 578 $ (5,441) $ (3,937) Pro forma 380 (5,566) (4,395) Basic and diluted net income (loss) per share As reported $ .12 $ (1.03) $ (1.14) Pro forma .07 (1.05) (1.19)
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in fiscal 1998, 1997 and 1996, respectively: dividend yield of 0% for all years; expected volatility of 56% for all years; average risk-free interest rates of 6.01%, 6.22% and 5.88%; and expected life of 3.5 years for all years. A summary of the status of the Company's stock option grants as of March 31, 1998, 1997 and 1996 and changes during the years ending on those dates is presented below:
1998 1997 1996 ---------------------------- ---------------------------- -------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ------------ -------------- ------------- ------------- ------------- ----------- Outstanding at beginning of year 622,027 $ 6.03 1,129,735 $ 6.20 1,495,627 $ 5.85 Granted 515,600 4.96 83,400 2.41 449,758 17.11 Exercised - - (40,000) 2.41 (341,660) 3.48 Forfeited (173,300) 3.48 (551,108) 6.75 (473,990) 7.28 ----------- ----------- ----------- Outstanding at end of year 964,327 5.75 622,027 6.03 1,129,735 6.20 =========== =========== =========== Options exercisable at end of year 370,039 444,523 670,835 Weighted-average fair value of options granted during the year $ .95 $ 1.18 $ 4.44
F-15 42 A.D.A.M. SOFTWARE, INC. NOTES TO FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- The following table summarizes information about stock options outstanding at March 31, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ---------------------------------------------------- ---------------------------- WEIGHTED AVERAGE WEIGHTED WEIGHTED NUMBER REMAINING AVERAGE NUMBER AVERAGE RANGE OF OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE EXERCISE PRICE AT 3/31/98 LIFE PRICE AT 3/31/98 PRICE $ 2.00 to 2.94 289,200 7.9 years $ 2.27 39,900 $ 2.29 $ 4.75 to 7.00 298,360 5.7 6.00 176,727 5.12 $ 8.00 to 12.00 376,767 7.3 8.88 153,412 9.06 -------------- --------- $ 2.00 to 12.00 964,327 7.0 6.01 370,039 6.45 ============== =========
In April 1997, the Company granted non-qualified stock options to two officers of the Company to acquire 120,000 shares each of the Company's common stock. The vesting period for 60,000 of the options granted to each officer is one-third per year for three years. The vesting period of the remaining 60,000 options granted to each officer is one-third per year for three years or, if the Company's stock price reaches certain targets, vesting will occur in blocks of 20,000 options for each target price met. The exercise price for the first 20,000 options granted to each officer is $5.00 per share. The exercise price for the remaining options increases by $1.00 for each block of 20,000 options. 12. RELATED PARTY TRANSACTIONS During fiscal 1998 and 1997, the Company sold approximately $17,000 and $11,000, respectively, of product to Addison Wesley Longman, Inc., a shareholder in the Company. During fiscal 1998, 1997 and 1996, the Company sold approximately $42,000, $-0- and $308,000, respectively, of product to Benjamin/Cummings (BC), a subsidiary of a shareholder of the Company. The Company earned royalty revenues of approximately $217,000, $134,000 and $93,000, related to BC during fiscal 1998,1997 and 1996, respectively. Additionally, the Company purchased approximately $43,000, $22,000 and $30,000 of product from BC during fiscal 1998, 1997 and 1996, respectively, and paid royalty expense to BC of approximately $215,000, $70,000 and $47,000, respectively. During fiscal 1997 and 1996, J.S.K., Inc. (JSK), whose president is a director and shareholder of the Company, paid the Company approximately $68,000 and $86,000 in licensing and rental fees, respectively. Additionally, during fiscal 1996, the Company sold approximately $64,000 of product to JSK. 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 November 1995. 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 F-16 43 A.D.A.M. SOFTWARE, INC. NOTES TO FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- bore interest at 15%, were payable in quarterly instalments, and 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. The warrants are exercisable beginning on the first anniversary date of the issuance of the notes and expire five years thereafter. During fiscal 1996, the Company repaid the subordinated debt with proceeds from the Company's initial public offering. The related warrants remain outstanding at March 31, 1998. 13. COMMITMENTS AND CONTINGENCIES The Company leases office space and equipment under noncancelable lease agreements expiring on various dates through 2002. At March 31, 1998, future minimum rentals for noncancelable leases with terms in excess of one year were as follows (in thousands):
MINIMUM YEAR ENDING ANNUAL MARCH 31 RENTALS -------- ------- 1999 $ 524 2000 522 2001 522 2002 522 2003 175 --------- Thereafter $ 2,265 =========
Rent expense for the years ended March 31, 1998, 1997 and 1996 was approximately $417,000, $640,000 and $663,000, respectively. 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 are vigorously defending against the allegations. The Company cannot estimate the impact of the outcome of the lawsuit on the financial condition or results of operations. 14. 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 for interest during fiscal years 1998, 1997 and 1996 were approximately $ -0-, $-0- and $329,000, respectively. F-17 44 A.D.A.M. SOFTWARE, INC. NOTES TO FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- Noncash investing and financing activities having an impact on the balance sheet are as follows:
YEAR ENDED MARCH 31, --------------------------------------- 1998 1997 1996 ---- ---- ---- Convertible Preferred Stock accretion $ - $ - $ 244 Conversion of Convertible Preferred Stock - - 6,194 Issuance of common stock warrants - - 135
15. PRODUCT SALES The Company exports its products through agreements with international and domestic distributors which grant territorial rights. During the years ended March 31, 1998, 1997 and 1996, the Company had net revenue from international sales of approximately $1,643,00, $709,000 and $983,000, respectively. A summary of revenues by geographic area is as follows (in thousands):
YEAR ENDED MARCH 31, ------------------------------------------- 1998 1997 1996 ---- ---- ---- United States $ 5,245 $ 3,882 $ 5,464 Europe 371 474 359 Pacific Rim and Asia 1,003 119 370 Other 269 116 254 ------------ --------- ---------- $ 6,888 $ 4,591 $ 6,447 ============ ========= ==========
No geographic region within Europe accounted for more than 10% of total sales during the three year period ended March 31, 1998. 16. RESTRUCTURING During the second quarter of fiscal 1997, the Company implemented a restructuring Plan (the Plan) designed to enhance overall competitiveness, productivity and efficiency through the reduction of overhead costs. The Plan resulted in a pre-tax charge of approximately $490,000. The charge principally reflects severance costs resulting from realignments throughout the Company, including workforce reductions of 29 employees, employee termination costs and costs associated with non-cancelable leases net of estimated sublease rental income. Total payments of approximately $301,000, primarily related to severance agreements were made subsequent to the implementation of the Plan. There are no accrued restructuring costs remaining at March 31, 1998. F-18 EX-10.19 2 LICENSING AND DISTRIBUTION AGREEMENT 1 EXHIBIT 10.19 LICENSING AND DISTRIBUTION AGREEMENT This Agreement is made effective as of June 13, 1997 (the "Effective Date") by and between Mindscape, Inc., a Delaware corporation with offices at 88 Rowland Way, Novato, CA 94845 ("Mindscape") and A.D.A.M. Software, Inc., 1600 River Edge Parkway, Suite 800, Atlanta, Georgia 30323 ("A.D.A.M."). RECITALS A. Mindscape is engaged in the business, inter alia, of distributing and marketing computer Interactive entertainment software products in the form of computer programs and written documentation relating to their use. B. A.D.A.M. desires to grant certain distribution rights in the Licensed Products (as defined below) which it has developed, and Mindscape desires to obtain said rights from A.D.A.M. under the terms and conditions set forth in this Agreement. NOW, THEREFORE, in consideration of the premises and mutual covenants and agreements set forth herein, Mindscape and A.D.A.M. agree as follows: SECTION 1 DEFINITIONS The following definitions shall apply throughout this Agreement: 1.1 Programs. "Programs" shall mean the English language version of the software programs listed in Schedule "A" and other mutually agreed upon program titles. Unless expressly indicated to the contrary herein, the term "Program(s)" also includes "Upgrades." 1.2 Platform. "Platform" shall mean the hardware platforms on which the Programs have been developed by A.D.A.M. 1.3 Collateral Materials. "Collateral Materials" shall mean the instruction manuals (user's guide), packaging, labels, promotional and advertising materials which are or have been developed by A.D.A.M. for use in the sale and promotion of the Programs. 1.4 Licensed Products. "Licensed Products" shall mean the Programs, together with associated Collateral Materials. 2 1.5 Upgrades. "Upgrades" shall mean revisions, modifications, updates, corrected and new versions, new editions, and add-ons which may be developed by A.D.A.M. during the term of this Agreement. 1.6 Net Cash Receipts. "Net Cash receipts" means gross receipts actually received by Mindscape from the sale, license, or sublicense of Programs less Cost of Goods, royalties, duties, credits for discounts, refunds (including price protection), replacements, and returns (including returns for stock balancing purposes). 1.7 Cost of Goods. "Cost of Goods" means the actual cost of the finished Licensed Product unit, including program media, manuals and other collateral materials. 1.8 Trademarks. "Trademarks" shall mean any trademarks, service marks or tradenames of A.D.A.M. associated with the Programs or as designated by A.D.A.M.. 1.9 Territory. "Territory" shall mean the World, except with respect to A.D.A.M.'s prior contractual relationships set forth in Schedule "B". SECTION 2 RIGHTS GRANTED TO MINDSCAPE 2.1 Grant. In accordance with the terms and conditions of this Agreement, A.D.A.M. hereby grants to Mindscape the following license and related rights with respect to the Licensed Products in the Territory: (a) to reproduce or have reproduced on its behalf the Licensed Products; (b) to sell and distribute the Licensed Products during the term of the Agreement. Mindscape shall have exclusive rights to retail distribution, OEM licensing, and retail direct marketing of the Licensed Programs, except in the Health Care Market. For this purpose, the "Health Care Market" means individuals, companies and institutions that provide health care services. Notwithstanding anything herein to the contrary, in the Health Care Market, Mindscape shall only have the limited, nonexclusive right to retail direct marketing solely with respect to individuals that provide health care services. Mindscape shall not have the right to retail direct marketing in the Health Care Market, with respect to companies and institutions that provide health care services. The parties acknowledge that Mindscape's mailing list may have addresses for companies and institutions in the Health Care Market, and that a mass mailing may result in promotional materials being sent to said addresses. A mailing which incidentally includes said addresses shall not be deemed a breach of this Section 2.1. Mindscape shall have non-exclusive rights for on-line distribution of the Licensed Products and Mindscape shall have the right to 3 purchase all education SKU's related to the Licensed Products as finished goods at standard reseller prices determined by A.D.A.M. Mindscape shall distribute such educational SKUs in accordance with A.D.A.M.'s standard and commercially reasonable educational reseller practices. The rights granted to Mindscape are subject to A.D.A.M.'s right to maintain its existing contractual relationships with the third parties listed on Schedule "B". All rights not granted to Mindscape are retained by A.D.A.M. Without limiting the generality of the foregoing, A.D.A.M. expressly retains the right to retail direct marketing in the Health Care Market in any manner that A.D.A.M. deems appropriate. A.D.A.M. further retains the right to sell directly to an end-user who contacts A.D.A.M. (but not through direct mailings or catalogs); (c) to affix the Trademarks to the Licensed Products and use the Trademarks in the promotion and distribution of the Licensed Products; provided that Mindscape complies in all respects with any commercially reasonable guidelines or directions provided by A.D.A.M. with respect to proper usage of the Trademarks. At the request of A.D.A.M., Mindscape will submit to A.D.A.M. any and all materials bearing or including any Trademarks. Mindscape shall submit all Licensed Product packaging to A.D.A.M. for prior review and approval. Upon the request of A.D.A.M., Mindscape will discontinue the use of (i) any Trademarks being used by Mindscape in a manner determined by A.D.A.M. to be inconsistent with the guidelines set forth above or (ii) any trademark, service mark, or tradename deemed by A.D.A.M. to create a likelihood of confusion with a Trademark. (d) to publicly display and perform the Licensed Products incidental to the promotion and sale of the Licensed Products. 2.2 Sublicenses. A.D.A.M. hereby grants Mindscape the right to sublicense the reproduction and distribution (through multiple tiers of sublicenses) of the Licensed Products; provided that Mindscape shall cause all such sublicensees to comply with the terms and conditions of this Agreement. 2.3 No Implied Rights. Except as specifically set forth in this Agreement, no express or implied license or right of any kind is granted to Mindscape regarding the Licensed Products or the Trademarks, 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 Licensed Products or create derivative works based on the Licensed Products or any portions thereof, or obtain possession of any source code or other technical material relating to the Licensed Products. 4 SECTION 3 A.D.A.M.'s OBLIGATIONS 3.1 Upgrades. From time to time during the term of this Agreement, A.D.A.M. may create, at its own expense, Upgrades for the Program. A.D.A.M. shall provide Mindscape with the Program masters and Collateral Materials for any Upgrades created. Nothing contained in this Agreement shall be construed to obligate A.D.A.M. to create any Upgrades or Mindscape to publish them. 3.2 Development. A.D.A.M. shall prepare and deliver to Mindscape for reproduction a master copy (golden master disc) of each Program in CD-ROM format. 3.3 Product Quality. All A.D.A.M. titles published by Mindscape must be approved by the Mindscape quality assurance department, whose approval will not be unreasonably withheld, prior to publication. Licensor agrees, during the term of this Agreement, at its own expense, to use commercially reasonable efforts to promptly correct any material errors or defects which may be discovered in the Program. 3.4 Marketing Support. A.D.A.M. will provide Mindscape with all reasonable cooperation and support in Mindscape's efforts to market the Programs. Accordingly, A.D.A.M. will provide, upon request, in reasonable quantities determined by A.D.A.M., any reproducible artwork and other marketing materials which A.D.A.M. has prepared for the Programs. 3.5 Technical Support. A.D.A.M. will provide Mindscape with reasonable technical support and assistance throughout the term of this Agreement. A.D.A.M. further agrees to inform Mindscape, and Mindscape agrees to inform A.D.A.M. promptly of any known defects or operational errors in the Programs. SECTION 4 OBLIGATIONS OF MINDSCAPE 4.1 Marketing. Mindscape will use reasonable efforts to promote and market the Licensed Products on the same basis as similar Mindscape products. Mindscape will submit to A.D.A.M. an initial marketing plan to be submitted to A.D.A.M. no later than April 15, 1997 and provide updated information upon request. Mindscape agrees to submit 2 sales plans in 1997, the first by April 15, 1997, and three plan in 1998 to A.D.A.M. Mindscape will bear the cost of all marketing and advertising expenses in connection with the promotion of Licensed Products in Mindscape's channels of distribution. 4.2 Product Support and Warranty. Mindscape shall be solely responsible for providing technical support for all end-users of the Licensed Products distributed by 5 Mindscape. Warranty support and coverage shall be provided in accordance with the end-user license and warranty which has been approved by A.D.A.M. and which shall be included with the Licensed Product. 4.3 Order Solicitation. Subject to the restrictions in Section 2.1, Mindscape may solicit orders from, inter alia, distributors, retail stores and end users for the Licensed Products and distribute the Licensed Products so ordered in accordance with Mindscape's then-effective distribution policies. 4.4 Sales Policies. Mindscape shall sell, sublicense and distribute the Licensed Products using such sales policies and practices as are then implemented by Mindscape for its own products. A.D.A.M. understands that the sales policies maintained by Mindscape will vary from time to time, and from account to account (including discount rates, returns, adjustments, settlement, stock balance, price protection, payment and credit terms). Mindscape shall use commercially reasonable efforts to sell, promote, distribute and otherwise exploit the Licensed Products throughout the Territory. 4.5 Promotional Copies. Mindscape shall have the right to distribute copies of the Licensed Products royalty free solely for internal and promotional use by Mindscape; such use shall not exceed, in the aggregate, during the term of this Agreement, two percent (2%) of total retail units of Programs sold during the first year of this Agreement. 4.6 Packaging. Mindscape will display the Trademarks (or such other logos as are on the master materials and/or the Collateral Materials for the Programs which are specified by A.D.A.M.) on all packaging and sales material and will represent product with a label which has been approved in advance by A.D.A.M., that says "distributed by Mindscape." A.D.A.M. will provide Mindscape the package design for all products listed on Schedule "A". Mindscape will develop all new packaging for Licensed Products, which must be approved in advance and in writing by A.D.A.M. A.D.A.M. will approve or disapprove submitted packaging materials within five (5) business days after receipt. 4.7 Notices. Mindscape will maintain any copyright and trademark notices which are included on and in the Licensed Products. 4.8 Electronic Product Registration. A.D.A.M. will incur the operating expenses for the electronic registration services utilized in ATIS 97. Mindscape, at its own cost, may put electronic registration services on the other Programs. A.D.A.M. will own the registration records generated from all registration methods and will grant Mindscape a royalty free, non-exclusive, perpetual license to use and sublicense the use of such records. A.D.A.M. and Mindscape agree to share this information in an electronic form on a monthly basis. 4.9 No Authority to Bind A.D.A.M. Mindscape has and will exercise no authority to make statements, warranties or representations concerning the Programs that exceed or are inconsistent with the marketing materials or technical specifications 6 provided to Mindscape by A.D.A.M. Mindscape has and will exercise no authority to bind A.D.A.M. to any undertaking or performance with respect to the Programs. SECTION 5 PROPRIETARY RIGHTS 5.1 Ownership. Notwithstanding any provision herein to the contrary, as between Mindscape and A.D.A.M., A.D.A.M. shall retain and own all worldwide right, title and interest in and to the Licensed Products and the Trademarks and all intellectual property and other rights therein, including but not limited to copyrights, patents, and trade secrets in the Programs (both object code and source code form), Program masters, and the Collateral Materials, including all copies and all portions thereof, and nothing in this Agreement will vest title in Mindscape to any rights therein, except as expressly set forth in this Agreement. 5.2 Inventory Risk. Mindscape will assume all A.D.A.M. channel inventory of the Licensed Products. Mindscape shall own title to all media on which the Programs are copied by or for Mindscape, as well as any and all packaging and collateral materials developed by Mindscape or for its benefit. Those shall be and remain the properties of Mindscape subject to A.D.A.M.'s copyright ownership of the Programs and Collateral Materials. 5.3 Mindscape Developed Materials. Mindscape may, at its own expense, adopt its own trademarks, artwork, copy and packaging in marketing and promoting the Licensed Products subject to A.D.A.M.'s prior written approval and Sections 4.5. and 4.6 of this Agreement. SECTION 6 CONFIDENTIALITY 6.1 Confidential Information. All documentation and information designated by the party disclosing the information (the "Disclosing Party") as proprietary or confidential, including without limitation drawings, source code, computer program listings, techniques, algorithms and processes and technical and marketing information ("Confidential Information") which is supplied by the Disclosing Party in connection with this Agreement shall be treated confidentially by the recipient of the confidential information ("Recipient") and its employees and contractors and shall not be disclosed by the Recipient, except as required in order to exercise the rights and obligations set forth in this Agreement, without the Disclosing Party's prior written consent. Recipients of Confidential Information shall disclose Confidential Information only to employees, contractors, and sublicensees who have a need to know and have executed written agreements requiring them to comply with the nondisclosure obligations set forth herein. 6.2 Limitations. Information shall not be considered to be Confidential Information if it (1) is already or otherwise becomes publicly known through no act of 7 Recipient; or (2) is lawfully received from third parties subject to no restriction of confidentiality; or (3) can be shown by Recipient to have been independently developed by it; or (4) is authorized by the Disclosing Party to disclose, copy or use; or (5) is disclosed by the Disclosing Party to third parties without restriction on subsequent disclosure; or (6) is required to be disclosed in the context of an administrative or judicial proceeding. 6.3 Survival. The duty of confidentiality with respect to source code, which is disclosed pursuant to this Section 6, if any, shall survive the termination of the license granted in Section 2.1 for so long as the materials remain confidential and proprietary. The duty of confidentiality with respect to all other confidential information shall survive the termination or expiration of the license granted in Section 2.1 for a period of three (3) years. SECTION 7 WARRANTIES, COVENANTS AND INDEMNIFICATION 7.1 Warranties and Covenants of A.D.A.M. A.D.A.M. represents, warrants and covenants to Mindscape the following: (a) A.D.A.M. has the full power to enter into this Agreement; (b) A.D.A.M. has all necessary rights, title, and interest in and to the Programs, Program masters, Trademarks and Collateral Materials, including without limitation the necessary rights to grant Mindscape the rights granted hereunder; (c) A.D.A.M.'s performance of the terms of this Agreement and of A.D.A.M.'s obligations hereunder shall not breach any separate agreement by which A.D.A.M. is bound. 7.2 A.D.A.M's Indemnity. A.D.A.M. agrees to indemnify, hold harmless and defend Mindscape from all claims, defense costs (including reasonable attorneys' fees), judgments and other expenses arising out of or on account of claims of: (a) alleged infringement or violation of any copyright, trademark, patent, trade secret or other intellectual property right with respect to the Program, Program masters, and Collateral Materials; (b) the breach of any representation, covenant or warranty set forth in Section 7.1 above. (c) any third party claims arising from the use of Licensed Product other than those for which Mindscape has a duty to indemnify A.D.A.M. under section 7.5. 8 7.3 Mindscape's Obligation. Mindscape shall notify A.D.A.M. promptly of any claim as to which indemnification will be sought and provide A.D.A.M. reasonable cooperation in the defense and settlement thereof. 7.4 Warranties and Covenants of Mindscape. Mindscape represents, warrants and covenants to A.D.A.M. the following: (a) Mindscape has the full power and authority to enter into this Agreement and to fulfill its obligations hereunder; (b) any promotional materials, packaging, documentation or other materials developed by Mindscape for use with the Programs, to the extent said materials are not based upon materials provided by A.D.A.M., do not infringe upon, or misappropriate, any copyright, trademark, trade secret or other proprietary rights of any third party; and (c) Mindscape's performance of the terms of this Agreement and of Mindscape's obligations hereunder shall not breach any separate agreement by which Mindscape is bound. 7.5 Mindscape's Indemnity. Mindscape agrees to indemnify, hold harmless and defend A.D.A.M. from all claims, defense costs (including reasonable attorneys, fees), judgments and other expenses arising out of or on account of claims of: (a) any actions or omissions on the part of Mindscape in reproducing, distributing or marketing the Licensed Products in Mindscape's distribution channel in accordance with this Agreement. (b) any statements, claims, representations or warranties made by Mindscape or its employees, agents, sublicensees or representative, relating to the Licensed Products, other than as authorized by A.D.A.M. in writing or made in A.D.A.M.'s own writings; (c) the breach of any representation, covenant or warranty set forth in Section 7.4 above. (d) alleged infringement or violation of any copyright, trademark, patent, trade secret or other intellectual property right to the extent said claims arise from packaging and other materials provided by Mindscape or modifications or additions to the A.D.A.M. materials made by Mindscape. 7.6 A.D.A.M.'s Obligation. A.D.A.M. shall notify Mindscape promptly of any claim as to which indemnification will be sought and provide Mindscape reasonable cooperation in the defense and settlement thereof. 9 SECTION 8 ROYALTIES 8.1 Rate and Payment. In consideration for the rights granted Mindscape under Section 2 of this Agreement, and for the other obligations imposed upon A.D.A.M., Mindscape shall pay to A.D.A.M. on a calendar quarterly basis, the percentages of Net Receipts per Licensed Product set forth in Schedule "A" attached. Mindscape will provide unaudited gross sales reports for Licensed Products on a monthly basis to A.D.A.M. 8.2 Advance. As fully recoupable advances against royalties payable under Section 8. 1, Mindscape shall pay A.D.A.M. $275,000 in non-refundable advances for the Programs in accordance with Schedule "A", payable in accordance with the Schedule of Payments also set forth on Schedule "A". All royalties payable under Section 8.1 shall be applied against advances and are fully cross-collateralizable over all Licensed Products. 8.3 Payment Schedule. Royalties payable to A.D.A.M. under this Agreement shall be paid to A.D.A.M. within forty-five (45) days of the end of each calendar quarter in which revenues are received by Mindscape accompanied by a statement describing the calculation of Net Receipts, including revenues from sales of the Licensed Products, the units sold, samples and returns and any revenues from sublicensing. 8.4 Records. Mindscape will keep accurate books of account and records at its principal place of business covering all transactions subject to royalty or other payments under this Section 8. Upon reasonable notice of not less than ten (10) business days, A.D.A.M. shall have the right to inspect such books of account and records to confirm that the correct amount owing A.D.A.M. under this Section 8 has been paid. Mindscape shall maintain such books of account and records for at least one (1) year after the expiration or termination of this Agreement. SECTION 9 TERM; TERMINATION 9.1 Term. The term of this Agreement shall commence of March 1, 1997 and expire December 31, 1998 (the "Initial Term"), unless earlier terminated. If Mindscape pays to A.D.A.M. a minimum of $750,000 ($275,000 advance plus $475,000 in additional royalties) in total royalties during the Initial Term of this Agreement, this Agreement shall be renewed for an additional two (2) years, provided that the royalty structure for such renewal period shall be the same as the royalty structure of the Initial Term. No additional advance shall be payable upon said renewal. The parties acknowledge and agree that the Medical Housecall and Pediatric Housecall programs listed on Schedule "A", if approved by the developer and licensed to Mindscape for distribution and sale during the Initial Term, will only be licensed to Mindscape during 10 any renewal term of this Agreement if A.D.A.M. continues to have the right to distribute said product. 9.2 This Agreement may be terminated on the thirtieth (30) day after either party gives the other party written notice of a material breach by the other party of any material term or condition of this Agreement, unless the breach is cured before that day. 9.3 This Agreement may be terminated on the thirtieth (30th) day after the terminating party gives the non-terminating party written notice of termination because the non-terminating party has been for more than sixty (60) days the subject of any voluntary or involuntary proceeding relating to bankruptcy, insolvency, liquidation, receivership, composition of or assignment for the benefit of creditors. Notice of termination under this Section 9.3 is discretionary, not mandatory. SECTION 10 DISTRIBUTION AFTER TERMINATION 10.1 Mindscape and any of its sublicensees granted rights under this Agreement shall be entitled to continue to hold the right to distribute and sell Licensed Products manufactured prior to the date of termination pursuant to the terms of this Agreement notwithstanding termination of the licenses granted in Section 2. 1. Licensed Products sold during this post-termination period shall be subject to royalty payments under Section 8. However, Mindscape shall not manufacture or reproduce Licensed Products after the termination of the licenses granted in Section 2.1 and no sublicensee shall manufacture or reproduce Licensed Products after the termination of its license which has been granted under Section 2.2 SECTION 11 LEGAL PROCEEDINGS 11.1 Mindscape will promptly notify A.D.A.M. of any infringement of A.D.A.M.'s proprietary rights that comes to Mindscape's attention and will cooperate with A.D.A.M. in any action brought by A.D.A.M. to investigate or remedy any such infringement of these rights. SECTION 12 GOVERNIING LAW AND DISPUTE RESOLUTION 12.1 The parties agree to submit any dispute arising out of or in connection with this Agreement to binding arbitration in Atlanta, Georgia before the American Arbitration Association pursuant to the provisions of this Section 12, and, to the extent not inconsistent with this Section 12, the rules of the American Arbitration Association. 11 The parties agree that such arbitration will be in lieu of either party's rights to assert any claim, demand or suit in any court action, provided that either party may elect either binding arbitration or a court action with respect to a breach by the other party of such party's proprietary rights, including without limitation any trade secrets, copyrights or trademarks. Any arbitration under this Agreement shall be before one arbitrator. Any arbitration shall be final and binding and the arbitrator's order will be enforceable in any court of competent jurisdiction. The arbitration shall render its decision, in writing, within thirty (30) days after the end of the arbitration hearing. 12.2 The validity, construction, and performance of this Agreement shall be governed by the laws of the State of Georgia without regard to principles of conflicts of law. SECTION 13 MISCELLANEOUS PROVISIONS 13.1 Notices. For purposes of all notices and other communications required or permitted to be given hereunder, the addresses of the parties hereto shall be as indicated below. All such communications shall be in writing and shall be deemed to have been duly given if sent by facsimile, the receipt of which is confirmed by return facsimile, or if delivered personally with receipt acknowledged, or sent by first class registered or certified mail or equivalent, return receipt requested, if available, postage paid, or commercial carrier (e.g. Federal Express or UPS), addressed to the parties at their addresses respectively set forth below: If to A.D.A.M.: A.D.A.M. Software Inc. 1600 RiverEdge Parkway - Suite 800 Atlanta, Georgia 30328 Attention: ----------------------------- If to Mindscape: General Counsel Mindscape, Inc. 88 Rowland Way Novato, CA 94945 13.2 The Designated Person to Send and Receive Material. The parties agree that all materials exchanged between the parties for formal approval shall be communicated between single designated persons, or a single alternate designated person for each entry. 13.3 Entire Agreement. This Agreement does not constitute an offer by Mindscape and it shall not be effective until signed by both parties. This Agreement, including any attached schedules, constitutes the entire agreement between the parties with respect to the services and all other subject matter hereof and merges all prior and contemporaneous oral or written communications, agreements, representations and/or 12 understandings. It shall not be modified nor any provision waived or departed from except by a written agreement dated subsequent to the date of this Agreement and signed on behalf of the parties by their respective duly authorized representatives; and then such waiver or consent shall be effective only in the specific instances of and for the specific purposes given. 13.4 Force Maieure. Neither party shall be responsible for any failure to perform due to unforeseen, non-commercial circumstances beyond its reasonable control, including but not limited to acts of God, war, riot, embargoes, acts of civil or military authorities, fire, floods, earthquakes, accidents, strikes, fuel or energy. In the event of any such delay, any applicable period of time for action by said party may be deferred for a period equal to the time of such delay. 13.5 Severabiliiy. In the event that any one or more of the provisions of this Agreement is found to be illegal or unenforceable, then notwithstanding such illegality or unenforceability, this Agreement shall remain in full force and effect, and such term or provision shall be deemed stricken. However, if the stricken provision is of fundamental importance to a party, then that party may immediately terminate the Agreement and any remaining payment or similar remaining performance obligations shall be prorated accordingly. 13.6 Contract Assignment. Neither party may assign their rights and duties under this Agreement without the written consent of the other party which will not be unreasonably withheld; however, either party may assign this Agreement to any parent, subsidiary, or affiliate of such party or to any third party which succeeds by operation of law to, or purchases or otherwise acquires substantially all of the assets of such party or a subsidiary or affiliate of such party and which assumes such party's obligation hereunder; provided, further, that in no event shall the rights or obligations of either party hereunder be assigned or assignable by any bankruptcy proceedings, and in no event shall this Agreement or any rights or privileges hereunder be an asset of either party under any bankruptcy, insolvency or reorganization proceedings. 13.7 Waivers and Amendments. No waiver, amendment, or modification of any provision of this Agreement shall be effective unless consented to by both parties in writing. No failure or delay by either party in exercising any rights, powers, or remedy under this Agreement shall operate as a waiver of any such right, power, or remedy. 13.8 Agency. The parties are separate and independent legal entities. Nothing in this Agreement shall constitute a partnership nor make either party the agent or representative of the other. Neither party has the authority to bind the other or to incur any liability on behalf of the other, nor to direct the employees of the other. 13.9 Titles and Headings. The titles and headings of each section are intended for convenience only and shall not be used in construing or interpreting the meaning of any particular clause or section. 13 13.10 Contract Interpretation. Ambiguities, inconsistencies, or conflicts in this Agreement shall not be strictly construed against the drafter of the language but will be resolved by applying the most reasonable interpretation under the circumstances, giving full consideration to the parties' intentions at the time this Agreement is entered into. 13.11 No Third Party Rights. This Agreement is not for the benefit of any third party, and shall not be considered to grant any right or remedy to any third party whether or not referred to in this Agreement. 13.12 Singular and Plural Terms. Where the context of this Agreement requires, singular terms shall be considered plural, and plural terms shall be considered singular. 13.13 Singular Authority. A.D.A.M. and its representative executing this Agreement, both warrant and represent that such representative has the actual authority to enter into this Agreement on behalf of and to bind A.D.A.M. thereby. Mindscape and its representative executing this Agreement, both warrant and represent that such representative has the actual authority to enter into this Agreement on behalf of and to bind Mindscape thereby. 13.14 Confidentiality of Agreement. The parties consider the terms of this Agreement to be confidential. Neither party shall disclose this Agreement or its terms to any third party except (1) to the extent, if any, required by law or by the legal, accounting, investment, or banking requirements of a party; or (2) with the prior written consent of the other party (such consent not to be unreasonably withheld). 13.15 LIMITATION ON LIABILITY; REMEDIES. NEITHER PARTY SHALL BE LIABLE TO THE OTHER PARTY FOR ANY INCIDENTAL, CONSEQUENTIAL, SPECIAL, OR PUNITIVE DAMAGES OF ANY KIND OR NATURE, INCLUDING, WITHOUT LIMITATION, THE BREACH OF THIS AGREEMENT OR ANY TERMINATION OF THIS AGREEMENT, WHETHER SUCH LIABILITY IS ASSERTED ON THE BASIS OF CONTRACT, TORT (INCLUDING NEGLIGENCE OR STRICT LIABILITY), OR OTHERWISE, EVEN IF EITHER PARTY HAS WARNED OR BEEN WARNED OF THE POSSIBILITY OF ANY SUCH LOSS OR DAMAGE. MOREOVER, EXCEPT IN THE EVENT OF GROSS NEGLIGENCE OR WILFUL MISCONDUCT INCLUDING BUT NOT LIMITED TO INTELLECTUAL PROPERTY INFRINGEMENT, IN NO EVENT SHALL A.D.A.M.'S LIABILITY TO MINDSCAPE OR ANY THIRD PARTY EXCEED THE AMOUNTS PAYABLE TO A.D.A.M. AS SET FORTH IN SCHEDULE "A". 13.16 Survival. Without limitation, the Royalty and Indemnity provisions of this Agreement, Sections 8 and 7, shall survive the termination or expiration of the licenses granted in Section 2.1 and 2.2. The Confidentiality provisions of Section 6 shall survive 14 the termination or expiration of the licenses granted in Sections 2.1 and 2.2 as provided in Section 6.3. 13.17 Counterparts. This Agreement may be executed in counterparts, and a facsimile copy of this Agreement, signed by either party and transmitted to the other party, shall constitute a binding signature to this Agreement. IN WITNESS WHEREOF, this Agreement is executed as of the Effective Date set forth above. A.D.A.M. MINDSCAPE, INC. By:/S/ By:/S/ -------------------------- -------------------------- Its: Chairman and CEO Its: CEO ------------------------- ------------------------- 15 SCHEDULE "A" Program(s): Schedule of Advances and Royalty Rates --------------------------------------
OEM Sale Programs Advance Royalty Royalty - -------- ------- ------- -------- A.D.A.M. The Inside Story 1997 Edition* $180,000 23% 25% Nine Month Miracle* $ 70,000 23% 25% Life's Greatest Mysteries*** $ 15,000 20% 25% Medical Housecall 2.0** $ -- 23% 25% Pediatric Housecall 1.0** $ -- 23% 25% Medical Housecall 1.5**** $ -- 23% 25% ATIS 1.1*** $ 10,000 20% 25% $275,000 --------
- ------------- * Minimum royalty per unit shall be $2.00. Royalty increases to 25% after Mindscape achieves $ 1,000,000 in gross sales for these two products combined. ** Contingent on A.D.A.M.'s receipt of approval from the developer. Such titles are subject to removal. Minimum royalty per unit shall be $1.40. Royalty increase to 25% after Mindscape achieves $1,000,000 in gross sales for these two products combined. *** Minimum royalty per unit shall be $0.25. OEM sales royalty shall be the greater of $0.25 or 25%. **** Minimum royalty per unit shall be $0.50. OEM sales royalty shall be the greater of $0.50 or 25%. 16 Schedule of Payments
Upon Execution 90 Days After Program of Dist. Terms Execution Jan. 31, 1998 - ------- -------------- --------- ------------- A.D.A.M. The Inside Story 1997 Edition* $ 60,000 $ 70,000 $50,000 Nine Month Miracle* $ 30,000 $ 20,000 $20,000 Life's Greatest Mysteries*** $ 10,000 $ -- $ 5,000 Medical Housecall 2.0** $ -- $ -- $ -- Pediatric Housecall 1.0** $ -- $ -- $ -- Medical Housecall 1.5**** $ -- $ -- $ -- ATIS 1.1*** $ -- $ 10,000 $ -- $100,000 $100,000 $75,000
17 SCHEDULE "B" Third Parties Having Existing Consumer Contractual Relationships with A.D.A.M. --------------------------- BOMICO: Non-exclusive for English language products in Europe. Expires July 12, 1997. RANDOM HOUSE U.K.: NON-EXCLUSIVE? expires April 15, 1997. Requires 30-day written notice. The current deal only cover ATIS 1.0 and NMM. BRODERBUND: A non-exclusive bundle deal with ATIS 1.0. POINT GROUP: A non-exclusive bundle/OEM deal for LGM with Compaq. DATAFLOW: NON-EXCLUSIVE? Expires July 24, 1997 with 30-days written notice. Territory is Australia and New Zealand. MATSUSHITA: part of large, long-term exclusive distribution relationship. Have a Japanese language version of ATIS, 97 in development. Must discuss making change in distribution as it relates to English versions. No guarantees. Worldwide, except with respect to the prior contractual relationships set forth in Schedule "B". A.D.A.M. will not extend or renew any contractual relationships with any third party listed on Schedule "B" during the term of this agreement, except possibly Matsushita. 18 AMENDMENT NUMBER ONE TO LICENSING AND DISTRIBUTION AGREEMENT This is the First Amendment (the "Amendment") to the Licensing and Distribution Agreement which was made as of June 13, 1997 (the "Effective Date" for the "Agreement") by and between Mindscape, Inc. ("Mindscape"), a Delaware corporation with offices at 88 Rowland Way, Noveto, California 94945 and A.D.A.M. Software, Inc., 1600 River Edge Parkway, Suite 500, Atlanta, Georgia 30333 ("A.D.A.M."). WHEREAS A.D.A.M. desires to grant additional distribution rights in the Licensed Products into the K-12 education market, and Mindscape desires to obtain said rights from A.D.A.M. under the terms and conditions set forth in this Agreement. WHEREAS the parties wish to amend the terms of the Agreement to reflect these terms, it is hereby amended effective February 24, 1998 (the "Amendment Effective Date"). 1. Section 2.1(e) shall be added as follows: (e) to purchase from A.D.A.M. finished goods of A.D.A.M.'s School Versions of the Licensed Products and to resell them in the US and Canada as follows: (i) the exclusive right to sell and distribute the Licensed Products to Mindscape's K-12 resellers except Educational Resources, Fast Track, Scantron/Quality Computers, Fisher Scientific, Tangens Scientific, and Carolina Biological Supplies. Both parties agree not to approach the other party's resellers concerning the Licensed Products, but will each have the right to sell to resellers not on either party's then-current reseller list. Mindscape's current reseller list shall be an attachment to this Amendment; (ii) the nonexclusive right to sell and distribute the Licensed Products direct to schools and through A.D.A.M.'s K-12 site license Program; and (iii) the nonexclusive right to sell and distribute the Licensed Products at the state, regional, and district level; Mindscape shall achieve such sales through its District Alliance Program. The "School Versions" shall be defined as: Specially packaged versions of the Licensed Products, labeled "School Version," "Lab Pack," "Teacher Edition," or with similarly mutually agreed-upon wording to distinguish them from the retail versions, and containing instructional materials not available in the retail versions. As an exception to the exclusivities described in this Amendment, the parties acknowledge that Broderbund's existing reseller rights will continue until their expiration date of June 30, 1998. 2. Section 3.6 Product Replacement shall be added as follows: 3.6 Product Replacement. Mindscape may return Licensed Products in resaleable condition purchased from A.D.A.M. pursuant to Section 2.1(e) as finished goods to A.D.A.M. for stock balancing or in the event a Licensed Product is replaced by a revision or is declared by A.D.A.M. to be obsolete or discontinued. Further, Mindscape may return product that is defective, including returns pursuant to an end-user warranty claim. All freight charges incurred under this Section will be paid by A.D.A.M. 3. Section 3.7 Technical Support shall be added as follows: 3.7 Technical Support. A.D.A.M. will provide technical support to end users of the Licensed Products sold or distributed by Mindscape pursuant to Section 2.1(e). 4. The following sentence shall be added after the first sentence of Section 8.1, Term: "The rights granted to Mindscape under Section 2.1(e) hereof are effective upon execution of the Amendment and will expire June 30, 2000, or 24 months after execution of the Amendment, whichever is later." 5. Schedule A shall be amended to add the following: 19 Schedule Rate and Payment for Rights Granted in Section 2.1(e) -------------------------------------------------------------- Except as noted in the table below, A.D.A.M. will sell the Licensed Products to Mindscape at 42.5% off its retail list price for distribution into the K-12 education market. This discount will increase to 47.5% if by March 31, 1998 Mindscape delivers to A.D.A.M. an education marketing plan showing activities and expenditures reasonably acceptable to A.D.A.M. No royalty will be paid from Mindscape to A.D.A.M. on sales of school products. Mindscape will make reasonable efforts to sell only the School Versions into the education market. EXCEPTIONS:
Regular Discount off Retail List Discount with Approved Price Marketing Plan Higher ed products 35% 40% K-12 site license current program 25% 30% Interactive Physiology 38% 38% CD Quick Share 30% 20% Virtual Anatomy 30% 30% IMM Radiology 30% 30%
As a clarification: - - Higher ed products include ADAM Interactive Anatomy. - - Interactive Physiology includes Interactive Physiology Instructor's Edition. SPECIAL ARRANGEMENTS FOR A.D.A.M.'S K-12 SITE LICENSE PROGRAM To adhere to A.D.A.M.'s published pricing and distribution policies, Mindscape will provide the customer with one master set of the Teacher's Guide and a set of reference materials with the appropriate number of CDs. Mindscape will not inventory these products; they will be shipped directly to the customer by A.D.A.M. and Mindscape's purchase price will be allocated to the minimum purchase price amount for that period. Mindscape's costs for this program are:
Title 20-29 30-49 50-99 - ----------------------------------------------------------------- A.D.A.M. The Inside Story $22.20 $18.90 $17.50 (Price per unit) Nine Month Miracle $22.20 $18.90 $17.50 " Life's Greatest Miracles $22.20 $18.90 $17.50 " A.D.A.M. Essentials $45.50 $38.50 $35.00 "
SPECIAL ARRANGEMENTS FOR MINDSCAPE DISTRICT ALLIANCE PROGRAM (MDA) For the purpose of these exclusive size Licenses, Mindscape will purchase the Licensed Products as CDs in jewel cases (with a frontliner and backliner) and maintain an inventory of these items. Standard with the terms of Mindscape's published MDA program, Mindscape will ship the Licensed Products to the customers and the customer will not be provided with any teacher materials. However, additional Teacher Guides may be purchased from Mindscape separately at $39.95 (Mindscape's cost from A.D.A.M. to be determined). Mindscape's costs for CDs with jewel case for the MDA program are
Title 100+ - --------------------------------------------------------------- A.D.A.M. The Inside Story $14.00 (Price per unit) Nine Month Miracle $14.00 " Life's Greatest Miracles $14.00 " A.D.A.M. Essentials $31.50 "
Mindscape will purchase, at minimum, the Licensed Products from A.D.A.M. according to the following schedule: 20 $50,000 ordered on or before March 15, 1998 an additional $50,000 ordered on or before July 31, 1998 an additional $100,000 ordered on or before October 31, 1998 an additional $100,000 ordered on or before December 31, 1999 ------------------------------------------------------------ for a $300,000 total purchase commitment in Year 1 an additional $125,000 ordered on or before March 15, 1999 an additional $125,000 ordered on or before July 31, 1999 an additional $75,000 ordered on or before October 31, 1999 an additional $75,000 ordered on or before December 31, 2000 ------------------------------------------------------------ for a $400,000 total purchase commitment in Year 2 It being understood that all amounts are cumulative by way of example, if Mindscape has ordered $100,000 in purchases on or before July 31, 1998, it does not owe A.D.A.M. any order at the July 31, 1998 dated, however, if Mindscape has made $95,000 in purchases, $50,000 by the March 15, 1998 target and $45,000 by July 31, 1998, it agrees to purchase an additional $5,000 on July 31, 1998 for a cumulative total of $100,000. 6. Except as provided in this Amendment, all other terms and conditions of the Agreement shall remain unmodified and are hereby reaffirmed. IN WITNESS WHEREOF, this Amendment is executed as of the Amendment Effective Date listed above. A.D.A.M. Software, Inc. Mindscape, Inc. By: /s/ Robert S. Cramer, Jr. By: /s/ Gordon Landies -------------------------- -------------------------- Robert S. Cramer, Jr. Gordon Landies - ----------------------------- ----------------------------- Print Name Print Name Chairman and CEO Executive Vice President - ----------------------------- ----------------------------- Title Title EX-10.20 3 ASSET PURCHASE AND SALE AGREEMENT 1 EXHIBIT 10.20 ASSET PURCHASE AND SALE AGREEMENT AGREEMENT made as of the 16th day of October, 1997, by and between MOSBY, INC., a Missouri corporation, having its principal place of business at 11830 Westline Industrial Drive, St. Louis, MO 63146 (hereinafter referred to as "Mosby"), and A.D.A.M. SOFTWARE, INC., a Georgia corporation, having its principal place of business at 1600 Riveredge Parkway, Atlanta, Georgia 30328 (hereinafter referred to as ("Buyer"). WHEREAS, Buyer desires to purchase, and Mosby desires to sell, all of Mosby's rights, title and interest in the products as set forth on Schedule A attached hereto and made a part hereof (the "Products"). NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements herein contained, the parties hereto hereby agree as follows: 1. Sale of Assets. 1.1 Assets Sold. Mosby hereby sells, assigns and transfers to Buyer, and Buyer hereby purchases and acquires from Mosby the following (all of which are collectively referred to as the "Assets"): (a) all worldwide rights, title and interest of Mosby in and to the Products including, but not limited to the source codes, scripts, HTML versions and all of the text contained in the Products, the literary content thereof, and Mosby's copyright ownership therein; (b) all inventory of the Products owned by Mosby or any subsidiary or division of Mosby, any gold masters related to the Products, any public relations and marketing items, if any, related to the Products, and any artwork, subject to any third party agreements and restrictions, related to the Products, (hereinafter referred to as the "Inventory"); (c) all of Mosby's right, title and interest in and to the trademark ILIAD (the "Trademarks"), (d) all of the goodwill of Mosby relating exclusively to the Products. 1.2 Returns. Buyer shall be solely liable for any amounts that may be payable or credited to customers for any returns of the Products made after the date hereof. 2 -2- 1.3 Assumption of Liabilities. As of the date of this Agreement, Buyer hereby assumes and agrees to discharge the liabilities and obligations of Mosby to the extent relating to the periods after the date of this Agreement as and when the same shall become due under (i) the agreement dated April 30, 1997 and all subsequent amendments, with the University of Utah relating to ILIAD; (ii) the AMI-Japan distribution agreement dated April 17, 1996; and (iii) the licensing agreement dated July 8, 1997 between Orbis Broadcast Group and Mosby. The liabilities assumsed by Buyer pursuant to this Agreement are hereinafter sometimes collectively referred to as the "Assumed Liabilities." 1.4 Non-Assignability. Any other provision of this Agreement to the contrary notwithstanding, this Agreement shall not constitute an agreement to assign any right or interest of Mosby if an attempted assignment thereof, without a consent required or necessary for such assignment, would constitute a breach thereof or in any way adversely affect the rights of Buyer or Mosby thereunder. If such consent is not obtained or if an attempted assignment would be ineffective or would adversely affect any of Mosby's rights thereunder so that Buyer would not in fact receive all such rights, Mosby and Buyer will cooperate with each other in any commercially reasonable arrangement to provide for Buyer the benefits thereof; provided however, that Mosby shall not be required to accept any arrangement which would impose any cost, expense or liability on Mosby. 1.5 Acknowledgment. Mosby acknowledges that as between Mosby and Buyer, Buyer owns the trademarks to the names Physicians Home Assistant and Pediatricians Home Assistant (the "Buyer's Marks") and that Mosby has no rights, titles or interests in the Buyer's Marks. 2. Delivery of Instruments and Payment. Simultaneously with the execution and delivery by Mosby of this Agreement to Buyer: (a) Mosby shall execute and deliver to Buyer a Bill of Sale, and Assignment of Copyrights, and an Assignment of Trademarks in form and substance reasonably satisfactory to Buyer; and (b) Buyer shall make the payment required by Section 3.2. 3 -3- 3. Purchase Price. 3.1 Purchase Price. The purchase price for the Assets shall be FIFTY THOUSAND DOLLARS ($50,000) (the "Purchase Price") and the assumption of the Assumed Liabilities (collectively, the "Total Purchase Price"). 3.2 Terms of Payment. Upon execution of this Agreement by the parties, Buyer shall pay Mosby the Cash Purchase Price, as defined below, and Buyer expressly agrees to assume and agrees to discharge the Assumed Liabilities. 4. Additional Covenants and Agreements of the Parties. 4.1 Use of Mosby's Name and Logo. Mosby grants Buyer the right to leave Mosby's name and logo on the existing Inventory being purchased from Mosby hereunder in the form it appears on the date hereof. However, Buyer agrees to remove Mosby's name and logo from all future printings of the Products. 4.2 Delivery of Inventory. Mosby shall promptly ship the Inventory located in the United States to Buyer's warehouse in Georgia. The Inventory is being sold F.O.B. Mosby's warehouse in Linn, Missouri. 4.3 Current and New Orders. As soon as practicable after the execution of this Agreement, Mosby shall provide Buyer with a list of any orders of the Products that have not been shipped for fulfillment by the Buyer (the "Unfulfilled Orders"). Buyer shall notify Mosby within five (5) business days from the date of receipt of the Unfulfilled Orders of any orders that it is unwilling to fill along with the reason for its refusal to fulfill such orders. Buyer covenants to review each order in good faith and will only reject an Unfulfilled Order if the material terms are unreasonable. For a period of sixty (60) days after the execution date of this Agreement, any orders that Mosby may receive for any of the Products shall be promptly forwarded to Buyer to the attention of: President and Chief Executive Officer. 4.4 Licensing Fees. In consideration for the Buyer's agreement to assume the duties and obligations contained in the Orbis Broadcast Group agreement, which expires June 30, 1998, Buyer may deduct from the Purchase Price Ten Thousand Dollars ($10,000) for a cash amount due to Mosby of Forty Thousand Dollars ($40,000) (the "Cash Purchase Price"). The Ten Thousand Dollar ($10,000) reduction of the Purchase Price represents a portion of the prepaid licensing fee Mosby received from the Orbis Broadcast Group. 4 -4- 4.5 AMI Claims. Mosby grants Buyer any and all rights it currently has or may have against AMI and NFT under the Agreement dated December 30, 1996 pursuant to which Buyer acquired the Products from AMI and NFT. Mosby agrees to assist Buyer at Buyer's expense in pursuing any claim against AMI and NFT and Buyer agrees to indemnify Mosby for any liability out of the claim against AMI and NFT. 4.6 Consulting. Mosby agrees that for a period of two (2) weeks after execution of this Agreement, it will, where possible, make the appropriate personnel available on a timely basis to the Buyer for any reasonable requests as necessary to understand, maintain and support the Products. Buyer shall be responsible for costs and expenses, if any, that may be associated with such consulting services. 5. Representations and Warranties of Mosby. Buyer hereby expressly acknowledges that the Assets are being sold, transferred and assigned by Mosby to Buyer, and that Buyer is accepting the purchase, transfer and assignment of the Assets, and each of them, from Mosby AS-IS AND WITH ALL FAULTS, AND WITHOUT ANY REPRESENTATIONS AND WARRANTIES OF ANY NATURE WHATSOEVER, INCLUDING WITHOUT ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. Buyer further acknowledges that it is aware that Mosby is currently engaged in litigation with respect to the HOUSECALL trademark and Mosby's right to the use and registration of such trademarks, and that as of the date hereof, Mosby will cease to prosecute all such litigation. It is expressly understood that Buyer assumes no liability with respect to the HOUSECALL trademark litigation, except that Buyer shall be responsible for any future use of such trademark. Mosby represents and warrants to Buyer that Mosby is a corporation duly organized, validly existing and in good standing under the laws of the State of Missouri and has the full corporate power and authority to enter into and perform its obligations under this Agreement. The execution, delivery and performance of this Agreement by Buyer has been duly authorized by all necessary corporate action of Buyer, and this Agreement constitutes the valid and binding obligations of the Buyer, enforceable in accordance with its terms. Mosby states that to its knowledge, without performing any due diligence, the only agreements that affect the right of ownership and use of the Products are: (i) a licensing agreement to Medical Housecall and Pediatric Housecall by and between Buyer and Mosby; (ii) a licensing agreement dated April 30, 1987 and all subsequent amendments with the University of Utah; (iii) a distribution agreement by and between 5 -5- AMI-Japan relating to the distribution of Housecall in Japan; (iv) a licensing agreement dated July 8, 1997 between Orbis Broadcast Group and Mosby; and (v) such customary permission agreements with third party rights holders and other third party agreements entered into in the normal course of its business, a sample of which is attached hereto as Schedule B. Mosby represents and warrants to Buyer that, except for the litigation relating to the HOUSECALL trademark and Mosby's right to the use and registration of such trademarks, to its knowledge, no litigation exists regarding the Products. 6. Representations and Warranties of Buyer. Buyer represents and warrants to Mosby that Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of Georgia and has the full corporate power and authority to enter into and perform its obligations under this Agreement. The execution, delivery and performance of this Agreement by Buyer has been duly authorized by all necessary corporate action of Buyer, and this Agreement constitutes the valid and binding obligation of the Buyer, enforceable in accordance with its terms. 7. Indemnification. (a) Buyer shall defend, indemnify and hold harmless Mosby, promptly upon demand at any time and from time to time, against any and all losses, liabilities, claims, suits, actions, damages, and expenses including, without limitation, reasonable attorneys fees and expenses (including without limitation, reasonable attorneys' fees and expenses incurred by Mosby in connection with any action, suit or proceeding between Mosby and Buyer for other than a breach by Mosby of this Agreement) arising out of or relating to (i) the sale, transfer and assignment of the Assets, or any of them, to Buyer by Mosby; (ii) the production, reproduction, sale and distribution of the Products, or any of them, or an, material comprising the Products by Buyer; (iii) any breach of this Agreement by Buyer; and (iv) any use by Buyer of the Trademark listed on Schedule A. (b) Notwithstanding this Agreement, Buyer is not responsible for any of the liabilities related to the agreement between Springer-Verlag New York, Inc. and Applied Medical Informatics dated September 9, 1996 ("Springer-Verlag Agreement") and shall not be required to defend, indemnify or hold Mosby harmless from any action, suit or proceeding arising out of or relating to the Springer-Verlag Agreement. 6 -6- 8. Covenant Not To Sue. Buyer further agrees never to sue Mosby, its parent, or any of its affiliated companies or any of their respective employees, officers, or directors, or participate in any lawsuit or otherwise file or pursue any claim or initiate any proceeding of any sort on the basis of any claim of any type whatsoever in any way, directly or indirectly, arising out of or related to this Agreement, any of the instruments delivered by Mosby to Buyer in connection with this Agreement, any of the transactions contemplated by this Agreement, the Assets, the Trademarks, or the production, reproduction, sale or distribution of the Products, provided however, that the foregoing covenant shall not apply in the event that (i) Mosby infringes any copyright, patent or other intellectual property rights applicable to the Products, (ii) Mosby fails to discharge any liability retained by it pursuant to Section 1.3 of this Agreement, or (iii) Mosby lacks the full corporate power and authority to enter into and perform its obligations under this Agreement. 9. Survival. The representations and warranties, indemnification and covenant not to sue set forth in sections 6, 7, 8 and 9 of this Agreement shall survive this Agreement. 10. General. 10.1 Notices. All notices and other communications to be given by either party to this Agreement to the other party hereto shall be in writing, and shall be given by personal delivery or by depositing such notice in the United States mail, postage prepaid, certified mail, return receipt requested, addressed as follows: If to Mosby: Mosby, Inc. 11830 Westline Industrial Drive St. Louis, MO 63146 Att: President With a copy to: James Imbriaco, Associate General Counsel The Times Mirror Company 2 Park Avenue New York, NY 10016 If to Buyer: A.D.A.M. Software, Inc. 16 Riveredge Parkway Suite 800 Atlanta, GA 30328 Att: President 7 -7- Any party to whom notices are to be sent pursuant to this Agreement may, from time to time, change its address for future communications hereunder by giving notice in the manner described herein to the other party hereto. Notices shall be deemed given on the date delivered. 10.2 Entire Agreement. This Agreement, the Schedules, and the instruments delivered by Mosby to Buyer referred to in Section 2(a), constitutes the entire agreement between the parties hereto with respect to the transactions contemplated hereunder and supersedes all prior agreements, understandings and arrangements, oral or written, between the parties hereto with respect to the transactions contemplated hereunder. 10.3 Expenses. The parties hereto shall pay the fees and expenses of their respective consultants, counsel, accountants and other experts, and all other expenses incurred by such party incident to the negotiation, preparation, execution, delivery and performance of this Agreement. 10.4 Amendment and Waiver. The terms of this Agreement may not be amended, modified or eliminated, and the observance or performance of any term, covenant, condition or provision herein may not be waived except by the written consent of the party charged with such amendment, modification or waiver. The waiver by any party hereto of a breach of any term or provisions of this Agreement shall not be construed as a waiver of any subsequent breach. 10.5 Binding Effect. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, provided, however, that neither party shall have the right to assign its rights or obligations hereunder or any interest herein without the prior written consent of the other party, except that Mosby shall have the right to assign this Agreement and its rights hereunder to a subsidiary or affiliate company of Mosby provided that Mosby shall remain liable for all of its obligations hereunder. Nothing contained in this Agreement, express or implied, is intended to or shall confer on any person other than the parties hereto and their respective successors or assigns any rights, remedies, obligations or liabilities under or by reason of this Agreement. 10.6 Severability. If any provision of this Agreement is contrary to, prohibited by or deemed invalid under applicable laws or regulations, such provisions shall be inapplicable and deemed omitted to the extent so contrary, prohibited or invalid, but the remainder hereof shall not be invalidated thereby and shall be given effect so far as possible. If any provision of this Agreement is contrary to, prohibited by or deemed invalid under the laws and regulations of one jurisdiction, said provision is not thereby rendered invalid in any other jurisdiction. 8 -8- 10.7 Counterparts. This Agreement may be executed in two or more counterparts, or any number of duplicate originals, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 10.8 Headings. Section and paragraph headings contained in this Agreement are for reference purposes only and shall not be deemed to be part of this Agreement or to affect the meaning or interpretation of this Agreement. 10.9 Governing Law. This Agreement shall be governed by, construed and interpreted according to the laws of the State of Missouri. [THE BALANCE OF THIS PAGE IS INTENTIONALLY LEFT BLANK] 9 -9- IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement on the day and year first above written. A.D.A.M. SOFTWARE, INC. MOSBY, INC. By: /s/ Robert S. Crames, Jr. By:/s/ James Imbriaco --------------------------- ------------------------------ Name: Robert S. Crames, Jr. Name: James Imbriaco Title: Chairman & CEO Title: Vice President & General Counsel 10 SCHEDULE A TO ASSET PURCHASE AND SALE AGREEMENT All versions of: ILIAD HOUSECALL PEDIATRIC HOUSECALL MEDICAL HOUSECALL 11 BILL OF SALE KNOW ALL MEN BY THESE PRESENTS that MOSBY, INC., a Missouri corporation (the "Seller") in consideration of the purchase price of Fifty Thousand Dollars ($50,000) hereby sells, assigns and transfers to A.D.A.M. SOFTWARE, INC., a Georgia corporation (the "Buyer") all of its right, title and interest in and to the Assets, as more particularly defined in that certain Asset Purchase and Sale Agreement of even date between Seller and Buyer (the "Agreement"). TO HAVE AND TO HOLD THE SAME unto the Buyer and its successors and assigns forever from the date hereof, upon and subject to the following terms and conditions: 1. Buyer acknowledges its obligation for the payment of all taxes arising out of this transaction and agrees to indemnify and hold Seller harmless from any claim, demand or cause of action by any state or other governmental entity for same. 2. THIS SALE OF THE ASSETS IS MADE AS IS AND WITH ALL FAULTS. FURTHERMORE, BUYER ACKNOWLEDGES THAT THERE ARE NO WARRANTIES, EXPRESS OR IMPLIED (INCLUDING NO WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE), MADE BY SELLER ACCOMPANYING THIS TRANSACTION. 3. Buyer assumes and discharges all liabilities and obligations relating to the Assumed Liabilities as set forth in the Agreement as and when the same shall become due. IN WITNESS WHEREOF, the Seller has executed this Bill of Sale this 16th day of October, 1997. Seller:/s/ James Imbriaco ------------------------- Agreed to and Accented by: Buyer:/s/ Robert S. Crames, Jr. ---------------------------- 12 ASSIGNMENT OF TRADEMARKS KNOW ALL BY THESE PRESENTS that MOSBY, INC., a Missouri corporation, hereinafter "Assignor"), in exchange for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, hereby sells, assigns and transfers to A.D.A.M. SOFTWARE, INC., a Georgia corporation, (hereinafter "Assignee"), its successors and assigns, all of Assignor's right, title and interest in and to all trademarks, trademark registrations, trademark applications and trademark interests of every kind and nature, and any and all renewals and extensions thereof that may be secured under all laws now or hereafter in force, together with the business and the goodwill of the business symbolized by such trademarks, and any and all causes of action heretofore accrued in the Assignor's favor for infringement of such trademarks, trademark registrations and trademark interests, which are owned, possessed and controlled by Assignor, including, without limitation, the trademarks listed on Schedule A attached hereto and made a part hereof, throughout the United States, its territories and possessions, and in all such other countries, if any, throughout the world wherein Assignor owns, possesses or controls the rights herein being transferred to Assignee, to the full extent of such rights. IN WITNESS WHEREOF, the Assignor has caused this Assignment of Trademarks to be signed in its cooperate name by its duly authorized officers and its corporate seal to be hereunto affixed this 16th day of October, 1997. MOSBY, INC. By:/s/ James Imbriaco ---------------------------- Name: Title: Vice President STATE OF NEW YORK ss.: COUNTY OF NEW YORK On the 16th day of October, 1997, before me personally appeared James Imbriaco, to me known, who being duly sworn, did depose and say that he resides at New Jersey, that he is the Vice President of Mosby, Inc., the corporation described herein and which executed the above Assignment of Trademarks; and that he signed his name thereto with full and unrestricted authority to do so. /s/ Phyllis Bressler --------------------- Notary Public PHYLLIS BRESSLER NOTARY PUBLIC, STATE OF NEW YORK NO. 31-4711089 QUALIFIED IN NEW YORK COUNTY TERM EXPIRED DECEMBER 31, 1998 13 SCHEDULE A Trademark Registration: ILIAD 14 ASSIGNMENT OF COPYRIGHTS KNOW ALL BY THESE PRESENTS that MOSBY, INC., a Missouri corporation (hereinafter "Assignor"), in exchange for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, hereby sells, assigns and transfers to A.D.A.M. SOFTWARE, INC., a Georgia corporation (hereinafter "Assignee"), its successors and assigns, all of Assignor's right, title and interest in and to all copyrights, copyright registrations and copyright interests of every kind and nature, and any and all renewals and extensions thereof that may be secured under all laws now or hereafter in force, and any and all causes of action heretofore accrued in the Assignor's favor for infringement of such copyrights, copyright registrations and copyright interests, which are owned, possessed and controlled by Assignor, including, without limitation, the copyrights listed on Schedule A attached hereto and made a part hereof, throughout the United States, its territories and possessions, and in all such other countries, if any, throughout the world wherein Assignor owns, possesses or controls the rights herein being transferred to Assignee, to the full extent of such rights. IN WITNESS WHEREOF, the Assignor has caused this Assignment of Copyrights to be signed in its corporate name by its duly authorized officers and its corporate seal to be hereunto affixed this 16th day of October, 1997. MOSBY, INC. By: /s/ James Imbriaco --------------------------------- Name: Title: Vice President STATE OF NEW YORK ss.: COUNTY OF NEW YORK On the 16th day of October, 1997, before me personally appeared James Imbriaco to me known, who being duly sworn, did depose and say that he resides at New Jersey, that he is the Vice President of Mosby, Inc., the corporation described herein and which executed the above Assignment of Copyrights; and that he signed his name thereto with full and unrestricted authority to do so. /s/ Phyllis Bressler --------------------- Notary Public PHYLLIS BRESSLER NOTARY PUBLIC, STATE OF NEW YORK NO. 31-4711089 QUALIFIED IN NEW YORK COUNTY TERM EXPIRED DECEMBER 31, 1998 15 SCHEDULE A Copyright Registration: ILIAD Copyright Applications: ILIAD Version 4.5 MEDICAL HOUSECALL version 1.0 MEDICAL HOUSECALL version 1.1 MEDICAL HOUSECALL version 1.5 PEDIATRIC HOUSECALL version 1.0 EX-10.21 4 COPYRIGHT LICENSE AGREEMENT 1 EXHIBIT 10.21 COPYRIGHT LICENSE AGREEMENT This Agreement (this "Agreement") is made effective as of December 29, 1997 (the "Effective Date"), by A.D.A.M. SOFTWARE, INC., a Georgia corporation ("ADAM") and KAINOS LABORATORIES, INC., a Japanese corporation ("KAINOS"). RECITALS A. ADAM is engaged in the business of developing, distributing, and marketing computer software products in the form of computer programs and written documentation relating to their use. B. ADAM has acquired from Mosby Consumer Health (MCH) the rights of Applied Medical Informatics, Inc., a Utah corporation ("AMI"), with respect to three computer software products, known as "Medical HouseCall", "Pediatric HouseCall" and "Illiad" (those three products are referred to in this Agreement as the "Products"). KAINOS wishes to acquire an exclusive license to use and modify the Products to create and manufacture Japanese language versions of the Products and derivative products in the Japanese language, and the exclusive right to distribute Japanese language versions of the Products throughout the world, and ADAM is willing to grant the license and distribution rights in the Japanese language versions of the Products to KAINOS under the terms and conditions of this Agreement. These rights being granted to KAINOS include all of ADAM's rights in and to the current localized Japanese versions and derivatives of the Products developed during the period when MCH owned the rights in the Products. KAINOS also wishes to acquire the right to distribute English language versions of the Products in Japan, and ADAM is willing to grant such rights under the terms of this Agreement. NOW, THEREFORE, in consideration of the premises and mutual covenants and agreements set forth in this Agreement, KAINOS and ADAM agree as follows: Section 1 RIGHTS GRANTED TO KAINOS 1.1 Grant. Subject to the terms and conditions of this Agreement, ADAM grants to KAINOS the following exclusive license and related rights with respect to the Products in the Territory: (a) to manufacture and reproduce, or have manufactured and reproduced on its behalf, copies of Japanese language versions of the Products (including any modified versions of the Products produced by KAINOS pursuant to Section 1.1(c) below); 1 2 (b) to market, sell and distribute Japanese language versions of the Products (including any modified versions of the Products in the Japanese language produced by KAINOS pursuant to Section 1.1(c) below) in the Territory during the term of this Agreement. KAINOS shall have the exclusive right to distribute, by any means or method of distribution, the Japanese language versions of the Products (including any modified versions of the Products in the Japanese language produced by KAINOS pursuant to Section 1.1(c) below) in the Territory, including exclusive copyrights with respect to the Japanese language versions of the Products (including any modified versions of the Products in the Japanese language produced by KAINOS pursuant to Section 1.1(c) below); (c) to modify the Products in the Japanese language (which may include a limited amount of English language where the English language word or term cannot be properly translated into the Japanese language, or which enhances the functions of the Japanese language version) and create derivative works of the Products in the Japanese language, including without limitation localized versions of the Products in the Japanese language (which may include a limited amount of English language where the English language word or term cannot be properly translated into the Japanese language, or which enhances the functions of the Japanese language version) designed for the Japanese market, and to manufacture and reproduce, market, distribute and sell such modifications to and derivatives of the Products (including localized versions of the Products) in the Japanese language in the Territory during the term of this Agreement; provided that any such modifications and derivatives (including localized versions) must be in the Japanese language. 1.2 Sublicenses. ADAM hereby grants KAINOS the right to sublicense the manufacturing, reproduction and distribution (through multiple tiers of sublicenses) of the Japanese language versions of the Products in the Territory during the term of this Agreement; provided that KAINOS must cause all sublicenses to comply with the terms and conditions of this Agreement. 1.3 Distribution Rights. ADAM grants to KAINOS the exclusive right to distribute copies of the English language versions of the "Illiad" Product in Japan only, subject to the terms and conditions of this Agreement. ADAM also grants to KAINOS the exclusive right to distribute copies of the English language versions of the "Medical Housecall" and "Pediatric Housecall" Products in Japan only, subject to (1) the existing rights of Mindscape under the worldwide distribution agreement between Mindscape and ADAM which expires on December 31, 2000 (the "Mindscape Distribution Agreement"), and (2) the terms and conditions of this Agreement. Upon the termination of the existing Mindscape Distribution Agreement, KAINOS will have the exclusive right to distribute the English language versions of the Products in Japan only. All copies of English language versions of the Products distributed by KAINOS in Japan must be obtained by KAINOS from ADAM pursuant to this Agreement; KAINOS will not have the right to manufacture, make or have made copies of the English language versions of the Products. ADAM will furnish KAINOS with 100 copies of the English language versions of each of the Products, solely for distribution in Japan, free of charge, at KAINOS' request. Thereafter, the per unit royalty for the English language versions of Medical Housecall and Pediatric Housecall will be U.S. $12.00 per unit. Units of the English language version of Iliad may be purchased by 2 3 KAINOS at a royalty equal to the average price charged by ADAM in the U.S. to resellers of that Product. The Products will be shipped FOB ADAM by a method specified by KAINOS. KAINOS will be responsible for shipping and insurance. 1.4 No Implied Rights. Except as specifically set forth in this Agreement, no express or implied license or right of any kind is granted to KAINOS regarding the Products or any of the trademarks of ADAM, 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 Products or obtain possession of any source code or other technical material relating to the Licensed Products. KAINOS specifically acknowledges and agrees that the rights granted under this Agreement are limited to the Japanese language versions of the Products ("Medical HouseCall," "Pediatric HouseCall," and "Illiad"); the rights granted do not apply to any other products of ADAM. Section 2 OBLIGATIONS OF KAINOS AND ADAM 2.1 Marketing. KAINOS will use reasonable efforts to promote and market (1) the modified Japanese language versions of the Products and derivatives of the Products in the Japanese language produced by KAINOS in the Territory, and (2) the English language versions of the Products in Japan. KAINOS will bear the cost of all marketing and advertising expenses related to the Japanese language versions and derivatives of the Products in the Japanese language produced by KAINOS and the English language versions of the Products distributed by KAINOS. 2.2 Product Support and Warranty. KAINOS shall be solely responsible for supporting all end-users of the Products distributed by KAINOS and for providing all warranty coverage and support in accordance with the customary end-user warranty included with the Products. ADAM will furnish end-user support and warranty coverage (returns of defective products) for copies of English-language versions of the Products distributed in Japan, in accordance with ADAM's standard end-user warranty and support policies. ADAM will provide to KAINOS, during the term of this Agreement and in a timely manner, all revisions, updates, enhancements or fixes to the Products that ADAM may, in its sole discretion, elect to develop, or have developed, and incorporate, or have incorporated, in the English language versions of the Products for general distribution in the United States; however, ADAM is not obligated to undertake any such revisions, updates, enhancements or fixes. ADAM will also use its commercially reasonable efforts to furnish KAINOS with access to any technical materials or information about the Products that is in ADAM's possession and control (including using reasonable efforts to obtain such materials or information from third parties) and would be useful to KAINOS in the development and manufacture of the Japanese language versions of the Products (including modifications of the Products developed by KAINOS). If the assistance requested by KAINOS exceeds 10 hours in any calendar quarter, ADAM will be compensated at its standard contracted services rate (currently U.S.$125 per hour). 3 4 2.3 Packaging. KAINOS will develop any new packaging required for the Japanese language versions of the Products or derivatives of the Products in the Japanese language produced by KAINOS. Any copies of the English language versions of the Products distributed by KAINOS in Japan in accordance with this Agreement must be distributed in the original packaging furnished by ADAM; KAINOS will not have the right to repackage such copies of the English language versions of the Products without authorization from ADAM. 2.4 Notices. KAINOS will maintain any copyright and trademark notices which are included on and in the Products or otherwise specified by ADAM in writing from time to time. 2.5 No Authority to Bind A.D.A.M. KAINOS 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 KAINOS by ADAM. KAINOS has and will exercise no authority to bind ADAM to any undertaking or performance with respect to the Products. 2.6 Deliverables. ADAM will provide, upon execution of this Agreement, KAINOS all object code, source code, related technical materials in ADAM's possession relating to the development of the current versions of the Products, in electronic form, as listed on Exhibit A. ("Deliverables") Section 3 PROPRIETARY RIGHTS 3.1 Ownership. Notwithstanding any provision in this Agreement to the contrary, as between KAINOS and ADAM, ADAM will retain and own all worldwide right, title and interest in and to the Products and the Trademarks, and all intellectual property and other rights therein, including but not limited to copyrights, patents, and trade secrets in the Products and derivatives thereof (both object code and source code form), and the Collateral Materials, including all copies and all portions thereof, and nothing in this Agreement will vest title in KAINOS to any rights therein, except as expressly set forth in this Agreement. KAINOS will own all rights in any derivative works of the Products in the Japanese language developed by KAINOS in accordance with Section 1.1(c); however, KAINOS' rights in such derivatives will be limited to the Japanese language versions only, and KAINOS will not have the right to translate such derivatives into any other language. 3.2 KAINOS Developed Materials. KAINOS may, at its own expense, adopt its own trademarks, artwork, copy and packaging in marketing and promoting the Japanese language versions of the Products and the derivatives of the Products in the Japanese language produced by KAINOS. KAINOS will not have the right to use any of the trademarks or tradenames of ADAM on or with respect to the Japanese language versions of the Products or derivatives of the Products in the Japanese language produced by KAINOS. Any copies of the English language 4 5 versions of the Products distributed by KAINOS in Japan must be distributed and sold in the original packaging furnished by ADAM; such copies may not be repackaged by KAINOS without authorization from ADAM. Section 4 CONFIDENTIALITY 4.1 Confidential Information. All documentation and information designated by the party disclosing the information (the "Disclosing Party") as proprietary or confidential, including without limitation drawings, source code, computer program listings, techniques, algorithms, and processes and technical and marketing information ("Confidential Information") which is supplied by the Disclosing Party in connection with this Agreement shall be treated confidentially by the recipient of the confidential information ("Recipient") and its employees and contractors and shall not be disclosed by the Recipient, except as required in order to exercise the rights and obligations set forth in this Agreement, without the Disclosing Party's prior written consent. Recipients of Confidential Information shall disclose Confidential Information only to employees, contractors, and sublicensees who have a need to know and have executed written agreements requiring them to comply with the nondisclosure obligations set forth herein. 4.2 Limitations. Information shall not be considered to be Confidential Information if it (1) is already or otherwise becomes publicly known through no act of Recipient; or (2) is lawfully received from third parties subject to no restriction of confidentiality; or (3) can be shown by Recipient to have been independently developed by it; or (4) is authorized by the Disclosing Party to disclose, copy or use; or (5) is disclosed by the Disclosing Party to third parties without restriction on subsequent disclosure; or (6) is required to be disclosed in the context of an administrative or judicial proceeding. 4.3 Survival. The provisions of this Section will survive the termination of this Agreement for so long as the materials remain confidential and proprietary, in the case of any materials which constitute trade secrets under applicable law. The duty of confidentiality with respect to all other confidential information shall survive the termination or expiration of the Agreement for a period of three (3) years. Section 5 WARRANTIES, COVENANTS AND INDEMNIFICATION 5.1 Warranties and Covenants of ADAM. ADAM represents, warrants and covenants to KAINOS that: (a) ADAM has the full power to enter into this Agreement; (b) ADAM's performance of the terms of this Agreement and of ADAM's obligations hereunder will not breach any separate agreement by which ADAM is bound; (c) ADAM has retained (that is, it has not transferred or licensed) any of the rights that it acquired in the Products; (d) the rights being granted to KAINOS include all of ADAM's rights in and to the current localized Japanese versions and derivatives of & Products developed during the period when Mosby Consumer Health owned the rights in the Products; (e) other than Mindscape, ADAM has not 5 6 authorized or licensed, nor will it authorize or license, any party to distribute English language versions of the Products in Japan; and (f) ADAM will not make any derivative versions of the Products with the intent to be and/or would be competitive with KAINOS in the Japanese market. ADAM specifically disclaims any warranty or covenant with respect to the noninfringement by the Products or Trademarks of any third party intellectual property rights (including any copyright rights, patent rights, trade secret rights or trademark rights), and KAINOS expressly assumes any and all risk that the Products or the Trademarks may infringe third party rights, except that KAINOS does not assume any risks with respect to copies of Products distributed by Mindscape in Japan. ADAM does not have actual knowledge of any existing claim against ADAM which would affect ADAM's ownership rights to the Products. ADAM agrees that it will notify KAINOS if ADAM learns of any claim that would affect ADAM's ownership rights to the Products, or any claim that the Products infringe any third party rights in Japan, that may arise subsequent to the execution of this Agreement. 5.2 ADAM's Indemnity. A.D.A.M. agrees to indemnify, hold harmless and defend KAINOS from all claims, defense costs (including reasonable attorneys' fees), judgements and other expenses arising out of or on account of (a) the breach of any representation, covenant or warranty set forth in Section 5.1 above; and/or (b) claims arising out of prior agreements involving MCH, Mosby, AMI Inc., AMI-US, AMI-Japan (not related to claims covered under Section 5.5(c) and (d) of this Agreement). 5.3 KAINOS Obligation. KAINOS shall notify A.D.A.M. promptly of any claim as to which indemnification will be sought and provide A.D.A.M. reasonable cooperation in the defense and settlement thereof. 5.4 Warranties and Covenants of KAINOS. KAINOS represents, warrants and covenants to ADAM that: (a) KAINOS has the full power and authority to enter into this Agreement and to fulfill its obligations hereunder; (b) any promotional materials, packaging, documentation or other materials developed by KAINOS for use with the Products, do not infringe upon, or misappropriate, any copyright, trademark, trade secret or other proprietary rights of any third party; (c) KAINOS's performance of the terms of this Agreement and of KAINOS's obligations hereunder will not breach any separate agreement by which KAINOS is bound; and (d) KAINOS has acquired all rights of AMI-Japan, Inc., a Japanese corporation ("AMI-Japan") with respect to the Products, including without limitation, the rights of AMI-Japan under the Standard Company Agreement between Applied Medical Informatics, Inc. and AMI-Japan, Inc., dated February 19, 1996 (the "Company Agreement") and Statement of Work No. 1 ("Localization of Medical HouseCall and Pediatric HouseCall for Japanese marketplace Effective on March 1, 1996") (the "Statement of Work"), and, as a result of such acquisition of AMI-Japan's rights by KAINOS, AMI-Japan no longer has any right, title or interest in or to the Products. 5.5 KAINOS Indemnity. KAINOS agrees to indemnify, hold harmless and defend ADAM from all claims, defense costs (including reasonable attorneys' fees), judgements and other expenses arising out of or on account of claims of: (a) any actions or omissions on the part of KAINOS in manufacturing, distributing, marketing, or sublicensing the Products; 6 7 (b) any statements, claims, representations or warranties made by KAINOS or its employees, agents, sublicensees representative, relating to the Products; (c) the breach of any representation, covenant or warranty set forth in Section 5A above; (d) any claim by AMI-Japan against ADAM or KAINOS arising out of or relating to the execution, delivery or performance of this Agreement or the Company Agreement or Statement of Work. 5.6 A.D.A.M.'s Obligation. ADAM shall notify KAINOS promptly of any claim as to which indemnification will be sought and provide KAINOS reasonable cooperation in the defense and settlement thereof. Section 6 ROYALTIES 6.1 License Fees. In consideration for the rights granted KAINOS under Section 1 of this Agreement, and the Deliverables provided in Section 2.6, KAINOS will pay to ADAM license fees in the aggregate amount of U.S.$750,000.00 (the "License Fees"). 6.2 Payment of License Fees. The initial installment of the License Fees, in the amount of U.S.$375,000, will be payable upon execution of this Agreement and the receipt by KAINOS of the Deliverables as stated in Section 2.6, by wire transfer of that amount, in U.S. Dollars, to the account of ADAM designated in writing by ADAM. The remaining balance of the License Fees, U.S.$375,000, will be secured by KAINOS by a Letter of Credit in the amount of US. $ 375,000 which ADAM would have the right to draw on March 31st, 1999 provided that (1) KAINOS had received the Deliverables in Section 2.6, and (2) ADAM had provided any updates, revisions, enhancements or fixes that may exist, and has provided any required support needed to complete the Japanese versions of the Products, in each case as contemplated under Section 2.2 of this Agreement. All such payments will be made by wire transfer of US. Dollars to the account of ADAM designated in writing by ADAM. 6.3 No Offsets. Except as may be required under the Conventions between the United States of America and Japan governing Taxes on Income, the License Pees due to ADAM under this Agreement are net amounts, exclusive of all taxes (other than any required withholding of any US. corporate income taxes of ADAM required by existing reciprocal tax agreements between the U.S. and Japan governing such transactions), and are not subject to offset or reduction because of any costs, expenses, or liabilities incurred by KAINOS or imposed on ADAM in the performance of this Agreement or otherwise due as a result of this Agreement. 7 8 6.4 Taxes. KAINOS will be responsible for, and will pay directly, any and all taxes, duties and charges incurred in the performance of this Agreement, including without limitation sales and use taxes, withholding taxes, duties and charges imposed by federal, state or local governmental authorities in the United States, Japan or elsewhere, but excluding U.S. corporate income taxes of ADAM. KAINOS will also be responsible for payment of any license fee, assessment, duty, tax, levy, or other charge imposed by or in Japan as a result of this Agreement or the transactions provided for under this Agreement. Section 7 TERM AND TERMINATION 7.1 Term. The term of this Agreement will commence on January 1, 1998 and will expire on December 31, 2097 (the "Initial Term"), unless earlier terminated. 7.2 Option to Renew. At the end of the Initial Term, KAINOS will have the option to extend the term of this Agreement automatically for an additional term of 99 years, beginning on January 1, 2098, on the same terms and conditions of this Agreement, other than the payment of License Fees. At the time of such exercise, KAINOS will pay license fees for the additional term in the amount of U.S.$10.00. All other terms and conditions of this Agreement will apply during the extended term. KAINOS will notify ADAM in writing whether KAINOS intends not to exercise the option provided for in this Section 7.2 at least 90 days prior to the end of the Initial Term. 7.3 Termination. This Agreement may be terminated on the sixtieth (60) day after either party gives the other party written notice of a material breach by the other party of any material term or condition of this Agreement, unless the breach is cured prior to the end of the 60 day period (or, if the breach cannot reasonably be cured within 60 days but can be cured within a reasonable additional period of time, if the breach is not cured within such reasonable additional period of time). In addition, either party may terminate this Agreement upon written notice to the other party if the other party (1) dissolves or winds up its business (except in connection with a merger or acquisition transaction); or (2) is subject of a voluntary or involuntary filing under the bankruptcy laws of any jurisdiction, unless the filing is discharged within 180 days. 7.4 Rights in the Event of Dissolution, Insolvency or Bankruptcy. If either party is adjudicated as bankrupt or insolvent, or if the shareholders of party shall resolve to dissolve and liquidate the party, and the other party at the time of such adjudication or resolution is in full compliance with this Agreement and has not been notified by the other party of default under the terms of this Agreement, then the other party shall have right of access to all source codes, diagrams and charts that may exist and are necessary to continue the support, manufacture and marketing of the Japanese language versions of the Products, and derivatives of the Products in the Japanese language, within the Territory. 8 9 Section 8 DISTRIBUTION AFTER TERMINATION KAINOS and any of its sublicensees granted rights under this Agreement will be entitled to continue to distribute and sell Products manufactured prior to the date of termination pursuant to the terms of this Agreement notwithstanding termination of the licenses granted in Section 1, for a period not to exceed three (3) months. However, KAINOS must not manufacture or reproduce Products after the termination of the licenses granted in Section 1.1 and no sublicensee may manufacture or reproduce Products after the termination of the license granted to KAINOS. Section 9 LEGAL PROCEEDINGS KAINOS will promptly notify A.D.A.M. of any infringement of A.D.A.M.'s proprietary rights that comes to KAINOS's attention and will cooperate with A.D.A.M. in any action brought by A.D.A.M. to investigate or remedy any such infringement of these rights. Section 10 GOVERNING LAW AND DISPUTE RESOLUTION 10.1 Attorneys' Fees. If either party commences legal action to enforce the terms of this Agreement, or should litigation occur between KAINOS and ADAM over any other issue, then the prevailing party in such legal action shall recover from the non-prevailing party all reasonable costs and expenses incurred, including reasonable attorney fees and court costs. Court costs shall mean all reasonable expenses incurred related to the litigation whether or not such costs are taxable under applicable statutes. 10.2 Governing Law. The validity, construction, and performance of this Agreement shall be governed by the laws of the State of New York without regard to principles of conflicts of law. Section 11 MISCELLANEOUS PROVISIONS 11.1 Notices. For the purposes of all notices and other communications required or permitted to be given hereunder, the addresses of the parties hereto shall be indicated below. All such communications shall be in writing and shall be deemed to have been duly given if sent by facsimile, the receipt of which is confirmed by return facsimile, or if delivered personally with receipt acknowledged, or sent by first class registered or certified mail or equivalent, return receipt requested, if available, postage paid, or commercial carrier (e.g. Federal Express or UPS), addressed to the parties at their addresses respectively set forth below: 9 10 If to ADAM A.D.A.M. Software Inc. 1600 RiverEdge Parkway - Suite 800 Atlanta, Georgia 30328 Attention: Robert S. Cramer, Jr. If to KAINOS: Kainos Laboratories, Inc. 38-18, Hongo 2-Chome Bunkyo-ku, Tokyo 113 Japan Attn: Mr. Toshimichi Nakamura 11.2 Entire Agreement. This Agreement, including any attached schedules, constitutes the entire agreement between the parties with respect to the services and all other subject matter hereof and merges all prior and contemporaneous oral or written communications, agreements, representations and/or understandings. It shall not be modified nor any provision waived or departed from except by a written agreement dated subsequent to the date of this Agreement and signed on behalf of the parties by their respective duly authorized representatives; and then such waiver or consent shall be effective only in the specific instances of and for the specific purposes given. 11.3 Severability. In the event that any one or more of the provisions of this Agreement is found to be illegal or unenforceable, then notwithstanding such illegality or unenforceability, this Agreement shall remain in full force and effect, and such term or provision shall be deemed modified as necessary to achieve the original intent of the parties with respect to the Agreement. 11.4 Contract Assignment. Neither party may assign their rights and duties under this Agreement without the consent of the other party, which will not be unreasonably withheld; however, either party may assign this Agreement to any parent, subsidiary, or affiliate of such party or to any third party which succeeds by operation of law to, or purchases or otherwise acquires substantially all of the assets of such party or a subsidiary or affiliate of such party and which assumes such party's obligations hereunder, provided, further, that in no event shall the rights or obligations of either party hereunder be assigned or assignable by any bankruptcy proceedings, and in no event shall this Agreement or any rights or privileges hereunder be an asset of either party under any bankruptcy, insolvency or reorganization proceedings. The rights and duties of each party will survive any permitted assignment by either party. 11.5 Waivers and Amendments. No waiver, amendment, or modification of any provision of this Agreement shall be effective unless consented to by both parties in writing. No 10 11 failure or delay by either party in exercising any rights, powers, or remedy under this Agreement shall operate as a waiver of any such right, power, or remedy. 11.6 Agency. The parties are separate and independent legal entities. Nothing in this Agreement shall constitute a partnership nor make either party the agent or representative of the other. Neither party has the authority to bind the other or to incur liability on behalf of the other, nor to direct the employees of the other. 11.7 Titles and Headings. The titles and headings of each section are intended for convenience only and shall not be used in construing or interpreting the meaning of any particular clause or section. 11.8 Contractual Interpretation. Ambiguities, inconsistencies, or conflicts in this Agreement shall not be strictly construed against the drafter of the language but will be resolved by applying the most reasonable interpretation under the circumstances, giving full consideration to the parties' intentions at the time this Agreement is entered into. 11.9 No Third Party Rights. This Agreement is not for the benefit of any third party, and shall not be considered to grant any right or remedy to any third party whether or not referred to in this Agreement. 11.10 Authority. A.D.A.M. and its representative executing this Agreement represent and warrant that such representative has the actual authority to enter into this Agreement on behalf of and to bind A.D.A.M. thereby. KAINOS and its representative executing this Agreement represent and warrant that such representative has the actual authority to enter into this Agreement on behalf of and to bind KAINOS thereby. 11.11 Confidentiality of Agreement. The parties consider the terms of this Agreement to be confidential. Neither party will disclose this Agreement or its terms to any third party except (1) to the extent, if any, required by law or to by the legal, accounting, investment, or banking requirements of a party; or (2) with the prior written consent of the other party (such consent not to be unreasonably withheld). 11.12 LIMITATION ON LIABILITY; REMEDIES. NEITHER PARTY SHALL BE LIABLE TO THE OTHER PARTY FOR ANY INCIDENTAL, CONSEQUENTIAL, SPECIAL, OR PUNITIVE DAMAGES OF ANY KIND OR NATURE, INCLUDING, WITHOUT LIMITATION, THE BREACH OF THIS AGREEMENT OR ANY TERMINATION OF THIS AGREEMENT, WHETHER SUCH LIABILITY IS ASSERTED ON THE BASIS OF CONTRACT, TORT (INCLUDING NEGLIGENCE OR STRICT LIABILITY), OR OTHERWISE, EVEN IF EITHER PARTY HAS WARNED OR BEEN WARNED OF THE POSSIBILITY OF ANY SUCH LOSS OR DAMAGE. MOREOVER, IN NO EVENT SHALL EITHER PARTY'S LIABILITY TO THE OTHER 11 12 PARTY OR ANY THIRD PARTY EXCEED THE AMOUNT OF LICENSE FEES PAID TO ADAM AS PROVIDED UNDER THIS AGREEMENT. 11.13 Survival. The following provisions will survive the termination or expiration of this Agreement Sections 2.5, 3.1, 4, 5, 6, 8, 10, 11.11, 11.12, and this 11.13. 11.14 Counterparts. This Agreement may be executed in counterparts, and a facsimile copy of this Agreement, signed by either party and transmitted to the other party, will constitute a binding signature to this Agreement. 11.15 Definitions. The following definitions shall apply throughout this Agreement: (a) Collateral Materials. "Collateral Materials" means the instruction manuals (user guide), packaging, labels, promotional and advertising materials which are or have been developed for use in the sale and promotion of the Products. (b) Products. "Products" means the three computer products known as "Medical HouseCall", "Pediatric HouseCall" and "Illiad", together with associated Collateral Materials. (c) Trademarks. "Trademarks" means any trademarks, service marks or tradenames of A.D.A.M. associated with the Products, as designated by A.D.A.M. (d) Territory. "Territory" means anywhere in the world. 11.16 Bankruptcy or Insolvency. This Agreement will survive any bankruptcy or insolvency of ADAM, and KAINOS will have the right under U.S. bankruptcy law to elect to continue its licenses hereunder in accordance with Section 365(n) of the United States Bankruptcy Code. IN WITNESS WHEREOF, this Agreement is executed as of the Effective Date set forth above. A.D.A.M. SOFTWARE, INC. KAINOS LABORATORIES, INC. By: /s/ Robert S. Cramer, Jr. By: /s/ Masanori Hirakawa -------------------------- -------------------------- Its: Chairman and CEO ------------------------- -------------------------- ITS: President -------------------------- 12 13 EXHIBIT A Deliverables of A.D.A.M. to Kainos 1. Medical Housecall, Pediatric Housecall, Iliad Product Windows and Macintosh Source Code (CD-ROM) 2. Applied Medical Informatics Encyclopedia Processes & Tools (document) 3. Applied Medical Informatics Knowledge Engineering Processes (document) 4. Translation Process (document) ADAM will provide, upon execution of this Agreement, KAINOS all object code, source code, related technical materials in ADAM's possession relating to the development of the current versions of the Products, in electronic form, as listed on EXHIBIT A. ("Deliverables") ADAM will also use its commercially reasonable efforts to furnish KAINOS with access to any technical materials or information about the Products that is in ADAM's possession and control (including using reasonable efforts to obtain such materials or information from third parties) and would be useful to KAINOS in the development and manufacture of the Japanese language versions of the Products (including modifications of the Products developed by KAINOS). 13 EX-10.22 5 CNN NEWSOURCE, INC. LICENSE AGREEMENT 1 EXHIBIT 10.22 CNN NEWSOURCE SALES. INC. LICENSE AGREEMENT THIS AGREEMENT (the "Agreement") is made as of the 15th day of January, 1998, by and between CNN Newsource Sales, Inc. ("CNN-NS"), having a principal place of business at One CNN Center, Box 105366, Atlanta, Georgia 30348-5366, a Georgia corporation, and ADAM Software, Inc. ("ADAM"), a Georgia corporation, with a principal place of business at 1600 River Edge Parkway, Suite 800, Atlanta, Georgia 30328. WITNSSETH: WHEREAS, CNN-NS is licensor throughout the United States and Canada in all forms of media of the news services produced and/or procured by Cable News Network, Inc. ("CNN"); and WHEREAS, ADAM is a creator of various anatomical and medical/health related images which can be used by television programmers to enhance their medical related programming and has an anatomical and medical/health related image library of over 20,000 images; and WHEREAS, ADAM wishes to enter into this Agreement whereby it grants CNN-NS the exclusive license to distribute a set of anatomical and medical/health related graphic images developed and produced by ADAM to potential licensees for use in television programming for exhibition throughout the United States of America and Canada, and in certain limited cases as specified below, worldwide; 2 NOW, THEREFORE, for and in consideration of the foregoing premises, the mutual covenants, conditions, representations and warranties contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Licensing of Adam Products. (a) Image. 1. Right to License: Subject to the terms and conditions of this Agreement, including all exhibits and schedules attached hereto, ADAM hereby grants to CNN-NS a qualified and limited right to license the ADAM Images (which shall be defined as collectively, the Image Package, the Breaking News Images and the Custom Images, as defined herein), without any modifications or alterations thereto to: (i) CNN Networks (except CNN Interactive) and Affiliates solely for incorporation into news and information programming exhibited via Television; (ii) to Affiliates solely for incorporation in entertainment programming which is exhibited via Television only in a local market; and (iii) CNN Interactive as specified in Paragraph l(b) below. "Image Package" means the image databases (in visual form) contained on the compact discs listed on Schedule I. "Breaking News Image" means a custom created anatomical and medical/health related image by ADAM for CNN-NS that is associated with a major national or international breaking news story. "Custom Image" means any images that CNN-NS requests ADAM to produce that is not contained in the Image Package and is not a Breaking News Image. "CNN Networks" shall mean: (A) the following seven networks: (i) CNN; (ii) CNNI; (iii) CNNfn; (iv) CNN en Espanol; (v) CNN Interactive; (vi) CNN Headline News; and (vii) CNN Airport; and (B) any future network controlled by CNN. "Affiliate" means 2 3 an entity who from time to time licenses certain news and information programming from CNN-NS for exhibition via Television. "Territory" with respect to Affiliates the United States of America and Canada and with respect to the CNN Networks means worldwide. "Television" means exhibition via broadcast, direct to home, cable, MMDS and SMATV as well as any other non-interactive television medium either now in existence or created in the future during the Term hereof. Any licenses granted by CNN-NS to an Affiliate shall only allow such Affiliate the right to exhibit the ADAM Images via Television in the Territory during the Term hereof. Any license granted by CNN-NS to a CNN Network may allow only that particular CNN Network to exhibit the ADAM Images via Television worldwide during the Term hereof. All rights not specifically and expressly granted to CNN-NS herein are expressly reserved to and by ADAM. 2. Exclusivity: Subject to the provisions of Section 3 below, CNN-NS's right to license the ADAM Images for use in Television news and information programming within the Territory shall be exclusive. During the Term of this Agreement, ADAM shall not grant any rights to any third party to use and/or distribute the ADAM Images, or any other images that ADAM currently owns or develops during the Term, for exhibition in news and information programming via Television in the Territory. Notwithstanding anything to the contrary contained herein, CNN-NS acknowledges that it is aware of the ADAM license deal with CBS Network News (the "CBS Network News License Agreement") which expires as of June 30, 1998 whereby ADAM has licensed CBS Network News the right to use certain ADAM images in its national newscasts as exhibited via broadcast television, as such terms are commonly understood and used in the television industry, and that such deal, as limited to broadcast television distribution and expiring on June 30, 1998, shall not be deemed a breach of this 3 4 Agreement provided that such deal is not renewed and that the right to license the certain ADAM images specified above is granted to CNN-NS as of June 30, 1998. CNN-NS expressly agrees that upon the expiration of the ADAM/CBS Network News License Agreement specified above, CNN-NS shall negotiate with CBS Network News in good faith for a license to the ADAM Image Products; provided, however, that so long as CNN-NS has complied with the above and negotiated with CBS Network News in good faith, CNN-NS's failure to reach a definitive agreement with the CBS Network News for such images shall not be considered a breach hereof CNN-NS further agrees that it will consult with ADAM about any network exclusive deal that it is contemplating; provided, however, that the ultimate decision to do such deal shall belong to CNN-NS. 3. Basset Images: CNN-NS is aware that the retail versions of the CD-ROM's that make up the Image Package contain cadaver images that are commonly known as the Basset Images. ADAM agrees to remove the Basset Images from the Image Package that is being delivered to CNN-NS. Both CNN-NS and ADAM agree to treat any and all external costs actually incurred by ADAM that are associated with the removal of the Basset Images from the Image Package as a Sales and Marketing Expense (as defined herein) and ADAM shall be reimbursed for such expenses from the first year's Annual Gross Revenues in accordance with the applicable line item set forth on Schedule I attached hereto and by this reference expressly incorporated herein. 4. Additional License Rights: During the Term of this Agreement, ADAM agrees to make a good faith effort to review any CNN-NS proposal for the right to relicense the ADAM Images via Television outside of the Territory; provided, however, that ADAM shall 4 5 retain the right to negotiate such rights with any other party, and ADAM shall be under no obligation to enter into any agreement with CNN-NS, accept any CNN-NS offer or allow CNN-NS to match any other offer or to otherwise grant CNN-NS the right to license the ADAM Images for exhibition via Television outside of the Territory. (b) Breaking News Images and Library Images. ADAM further agrees that throughout the Term hereof CNN-NS shall have the right to license the Breaking News Images at a rate of $50.00 per Image, the Custom Images at a rate of $250.00 per hour spent to create such Image and the Image Package pursuant to a standard rate card as determined by mutual agreement between CNN-NS and ADAM, to the Affiliates and the CNN Networks throughout the Territory. CNN-NS understands and agrees that CNN Interactive's use of such images is limited to (i) CNN Interactive's video-streaming of any programming which aired on the CNN Networks and included one of the ADAM Images and/or (ii) CNN Interactive's insertion of a still frame of one of the ADAM Images image(s) in a web version of a story which was already aired on any one of the CNN Networks (with such still frame used to be a "Raster Image" in .JPG and/or .GIF graphic format or other "Raster Formats" that may be used in the future, as such terms are commonly understood in the interactive world wide web industry.) ADAM agrees that it will provide CNN-NS with the name and contact numbers, facsimile number and address for the person(s) responsible for taking the orders from CNN-NS for the Breaking News Images and the Custom Images. ADAM agrees that it will use its commercially reasonable efforts to create the Breaking News Images and the Custom Images promptly from the time of CNN-NS's initial request, but in no case more than forty-five (45) days of CNN-NS's initial request. Notwithstanding any provision of this Agreement, during any twelve (12) month 5 6 period from the date of this Agreement, ADAM has committed to produce in total no more than four (4) Breaking News Images and Custom Images. (c) Restrictions. CNN-NS acknowledges that with respect to the ADAM Images, this license only grants CNN-NS the rights to relicense the visual images to Affiliates and CNN Networks for exhibition via Television throughout the Territory and excludes any and all other rights, including the rights to the source code. CNN-NS covenants that it shall license the ADAM Images Products to the Affiliates and the CNN Networks pursuant to a standard CNN-NS license agreement which will contain all of the terms, restrictions and covenants set forth herein (a copy of which shall be provided to ADAM within thirty (30) days hereof as of courtesy). Except as expressly required or authorized herein, CNN-NS will not, nor authorize any entity to, transmit, modify, alter, distribute, exhibit, copy, duplicate, sublicense or otherwise use the ADAM Images or any portion thereof by any means whatsoever outside the Territory or to any entity not authorized herein. CNN-NS agrees that nothing in this Agreement shall provide CNN-NS with any other rights whatsoever to the ADAM Images, nor convey, confer, grant, assign or otherwise provide CNN-NS with copyright, title or any other proprietary or ownership interest in or to the ADAM Images or any elements thereof. CNN-NS further agrees that IT will not use nor authorize any of its Affiliates to use any part of the ADAM Images or the Logos, as defined in Paragraph 10 herein, as part of any kind of promotional material without the prior written consent of ADAM. Notwithstanding anything contained in this Agreement, CNN-NS does not have the right to license the ADAM Images for use in: (A) health related programming which is produced by companies primarily for internal distribution; or (B) in nationally distributed entertainment programming. 6 7 2. Term. This Agreement shall remain in full force and effect from the date hereof through January 5, 2002 (the "Term"); provided, however, that should CNN-NS fail to collect Two Hundred Thousand U.S. Dollars (US$200,000.00) in Net Revenues, as such term is defined in Paragraph 5 below, per each year of the Term hereof, calculated within forty-five (45) days after the termination of each year during the Term, then both parties shall have the option to terminate this Agreement anytime within the first four (4) months of the commencement of each year of the Term starting in year 2 of the Term, upon either party's delivery of fifteen (15) days prior written notice delivered to the other party. Both parties agree that should either party terminate the Agreement after the first year of the Term, as specified herein, each will honor any existing agreements with the Affiliates for the distribution of the ADAM Images which shall not extend beyond six (6) months after the applicable effective termination date. 3. Limited Exclusivity. Except for the rights expressly granted to CNN-NS pursuant to Paragraph I hereof, ADAM retains all rights with respect to the ADAM Images. Subject to the terms of Paragraph 1, CNN-NS acknowledges and agrees that ADAM reserves the right to use, license, distribute or license others to do so (i) the ADAM Images to other television networks, solely outside of the Territory (the United States of America) and (ii) the ADAM Images for exhibition via any other medium other than Television, as defined above, within or outside the Territory. ADAM further agrees that it is the intent of both parties in this Agreement that CNN-NS be the sole licensee and distributor of the ADAM Images throughout the Territory for exhibition via Television, and ADAM will not license the ADAM Images during the Term hereof in any way that breaches the intent of this Agreement. 7 8 4. Delivery. (a) ADAM Images. ADAM shall deliver the Image Package on four (4) CDROM's to CNN-NS at its principal office in Atlanta within thirty (30) days of CNN-NS's written request. CNN-NS shall be responsible for the repackaging and distribution of the Image Package to the Affiliates and the CNN Networks in a form mutually agreed upon by the parties hereto. ADAM shall also be responsible for delivery of the Breaking News Images and the Custom Images to CNN-NS via the World Wide Web or, per CNN-NS's instructions, directly to the Affiliates and the CNN Networks directly via the World Wide Web, unless otherwise mutually agreed upon by the parties hereto within thirty (30) days of CNN-NS's written request or a reasonable time thereafter should such Breaking News Image or Custom Image involved require additional preparation time. (b) Equipment Responsibility. As between the parties hereto, CNN-NS, the CNN Networks and/or its Affiliates shall be solely responsible for all construction, equipment, telecommunications service, decoding (if the signal carrying the Custom Images is encrypted) and any other charges necessary for the reception, distribution and exhibition of ADAM Images by CNN-NS and/or its Affiliates and/or the CNN Networks in the Territory. CNN-NS and/or its Affiliates and/or the CNN Networks shall be responsible for obtaining and complying with such necessary and appropriate authorizations, licenses and other permissions, if any, that may be required of CNN-NS by appropriate authority for the reception, transmission and exhibition of ADAM Images in the Territory. ADAM shall be responsible for obtaining and complying with such necessary and appropriate authorizations, licenses and other permissions, if any, that may be required of ADAM by the appropriate authority for the delivery of the ADAM Images, including, 8 9 but not limited to, insurance for the shipment of the CD-ROM's containing the Image Package to CNN-NS. 5. Payment of Expenses and Revenue Sharing. (a) Expenses. CNN-NS and ADAM agree that throughout the Term, ADAM shall be solely responsible for payment of all expenses directly and exclusively associated with the creation and delivery of the ADAM Images as specified above, including, but not limited to, the shipment of the CD-ROMs containing the Image Package and the delivery of the Breaking News Images and the Custom Images via the World Wide Web and all taxes associated therewith. The parties further agree that CNN-NS shall be responsible for all delivery costs as specified in Paragraph 4 as well as all sales and marketing expenses (the "Sales and Marketing Expenses") actually incurred by CNN-NS associated with the marketing and sale of the ADAM Images to the Affiliates and CNN Networks, including, but not limited to, the repackaging of the four (4) CD-ROMs containing the Image Package, production of the marketing material deemed necessary by CNN-NS in order to sell the ADAM Images, and any taxes related thereto, along with any other expenses the parties agree to in writing. If the parties mutually agree that ADAM shall handle the repackaging of the four (4) CD-ROMs which contain the Image Package instead of CNN-NS, ADAM shall be paid for any and all expenses associated with such repackaging with such amount not to exceed the line item set forth on the SM Expense Budget for the initial year of the Term, defined below and attached hereto as Schedule II. Both parties agree that Schedule I, attached hereto and by this reference expressly incorporated herein, sets forth a budget of the Sales and Marketing Expenses (the "SM Expense Budget") anticipated to be spent in year 1 of the Term of this Agreement as well as the actual manufacturing costs of each Image Package. Both parties agree that CNN-NS shall be responsible for submitting an updated SM 9 10 Expense Budget to ADAM within forty-five (45) days of the expiration of the then current year of the Term. Both parties agree that they will make a good faith effort to agree on the terms of the most recently submitted SM Expense Budget within thirty (30) days of CNN-NS's submission of the Budget; provided, however, that should the parties fail to reach such agreement will use the SM Expense Budget agreed to for year 1 of this Agreement for such applicable year of the Term set forth as Schedule I and by this referenced incorporated herein. (b) During each year of the Term, all revenues collected from the license of the ADAM Images throughout the Territory as specified in Paragraph 1 (the "Annual Gross Revenues") shall be paid to CNN-NS. CNN-NS agrees that it will use commercially reasonable efforts to maximize the Annual Gross Revenues hereunder and to collect all such license fees charged for the ADAM Images. From Annual Gross Revenues, CNN-NS shall be entitled each year to deduct and pay the Sales and Marketing Expenses actually incurred by CNN-NS (with such amounts not to exceed the SM Expenses Budget as submitted by CNN-NS quarterly to ADAM pursuant to Paragraph 5(a) above, as well as the actual manufacturing costs of the ADAM Images which amount per Image Package is set forth as a line Item on Schedule I and shall remain the same each year of the Term hereof unless otherwise agreed upon by the parties in writing. Sixty-five percent (65%) of any remaining revenues actually collected after all deductions set forth in this Subparagraph (the "Net Revenues") shall be paid to ADAM within forty-five (45) days after the end of each quarter of each year of the Term hereof along with a definitive report detailing the Sales and Marketing Expenses paid as well as the revenues collected from the Affiliates and CNN Networks for the quarter just ended (with the first such quarter terminating on April 14, 1998). Past due payments on all amounts due and payable as 10 11 provided for in this Agreement shall bear interest, which shall accrue fifteen (15) days after the date such payment was due, at a rate of one and one-half percent (1 1/2%) per month, or, in the event the parties are precluded by law from establishing such rate, the maximum legal interest rate permitted by law. CNN-NS agrees that it shall supply ADAM with estimate reports (the "Estimate Reports") on a quarterly basis throughout the Term detailing estimates of the Marketing and Sales Expenses paid as well as the revenues collected from the Affiliates and the CNN Networks (with such Estimate Reports to be delivered no later than thirty (30) days after the termination of each quarter of each year throughout the Term hereof with the first such quarter terminating on April, 1998 and with ADAM understanding and agreeing that the amounts set forth in such Reports are strictly estimates and not final numbers to be relied upon as such). (c) Right to Audit. Subject to the terms and conditions of Paragraph 6 below, ADAM shall have the right to audit CNN-NS concerning the Sales and Marketing Expenses actually incurred as provided for in Paragraph 5(a) above. 6. Audit. (a) General Rights. ADAM or its authorized representative shall have the right during the Term, at its sole cost and expense unless otherwise expressly provided herein, to audit or inspect the books and records of CNN-NS that relate to those specific items set forth in SubParagraph 5(c) above. These audit rights may be exercised by ADAM during normal business hours upon no less than ten (10) business days advance written notice and not more than once per year at any time within thirteen (13) months following the end of each one (1) year period during the Term hereof including any extensions or renewals thereof. 11 12 (b) Challenge. In the event an audit conducted by or on behalf of ADAM pursuant to Subparagraph (a) of this Paragraph 6 (the "Formal Audit") indicates that any amounts previously paid by CNN-NS as Sales and Marketing Expenses, pursuant to Paragraph 5 (a) and set forth in Schedule I, attached hereto, are beyond those indicated on the SM Expenses Budgets and/or that CNN-NS withheld more than the Sales and Marketing Expenses actually incurred as specified in Paragraph 5(b) above, CNN-NS shall have thirty (30) days from receipt of notice from the ADAM that such overpayment has occurred to: (a) pay back to ADAM all such overpaid and/or withheld amounts, and if such overpayment or withholding is determined to be as a result of willful malfeasance, to pay interest on such amount at a rate of eighteen percent (18%) per annum; or (b) perform an audit solely at CNN-NS's own expense, an audit (the "Challenge Audit") that concludes whether or not the findings of the Formal Audit were correct and communicate to ADAM the discrepancies between the Formal Audit and the Challenge Audit. The parties agree to use reasonable efforts to settle such discrepancy within thirty (30) days of conclusion of the Challenge Audit (the "30-Day Audit Settlement Period"). In the event the parties are unable to settle such discrepancy within the 30-Day Audit Settlement Period, the parties agree to submit the discrepancy to a final audit (the "Final Audit") by a "Big 5" accounting firm that has never performed and is not at the time of such discrepancy performing professional accounting services for CNN-NS and/or ADAM or any of their related companies. If a Final Audit is performed, the costs shall be borne as follows: (a) if the Final Audit concludes that initial CNN-NS has excessively charged to and/or withheld from the ADAM more than the SM Expenses Budget allocated during any one (1) year period during the Term hereof, CNN-NS shall pay all reasonable outside accountant fees and costs arising from or related to the 12 13 Final Audit, the Challenge Audit as well as the Formal Audit; and (b) in all other events, ADAM and CNN-NS shall equally share the costs arising from or related to the Final Audit. 7. Withdrawal. Notwithstanding anything to the contrary which may be contained herein, ADAM hereby expressly acknowledges and agrees that in the event ADAM on any occasion reasonably considers it necessary or advisable to withdraw any portions or particular portions of the ADAM Images due to any question concerning any rights therein or any claim with respect thereto by any person or entity other than CNN-NS, ADAM shall promptly notify CNN-NS thereof and ADAM's license with respect to such positions or segments of ADAM Images shall be deemed revoked thereby with respect to such withdrawn portions or portions of ADAM Images as of the time of the Affiliates and the CNN Networks' receipt of ADAM's notification, which in no instance shall be more than twenty-four (24) hours from the date of CNN-NS's receipt of ADAM's notice. If any such withdrawal results in a material reduction in the amount of ADAM Images provided by ADAM to CNN-NS hereunder, the parties agree that ADAM shall use its best efforts to provide images of a similar nature. CNN-NS expressly agrees to have the Affiliates and the CNN Networks exhibit any and all retractions, corrections, follow up images and/or materials similar in nature thereto in the event that ADAM reasonably considers the exhibition thereof necessary or advisable. 8. Right of Cancellation. CNN-NS reserve the right to terminate this Agreement, upon thirty (30) days prior written notice to the other party (such complete cancellation of the Agreement shall relieve the parties hereto of any further obligations under this Agreement as of the date of such cancellation, except for the payment of any fees or other sums past due at the time of such cancellation and obligations expressly contained herein), if (a) the distribution of the 13 14 ADAM Images or any such particular format, as applicable, by CNN-NS would violate any law, court order, governmental regulation or any other ruling of any governmental entity binding upon or otherwise applicable to CNN-NS; (b) it becomes unlawful for CNN-NS to license or syndicate ADAM Images or any particular format, as applicable, due to any regulation or any other ruling of any governmental entity binding upon or otherwise applicable to CNN-NS. 9. Ownership. All rights and title in and to the ADAM Images, or any portion thereof, including but not limited to, the images, formats, and other creative material included therein (other than material in the public domain) shall, as between CNN-NS and ADAM, remain vested in ADAM. CNN-NS shall take all reasonable precautions to prevent unauthorized use of ADAM Images and shall promptly notify ADAM of any known unauthorized use or copying of ADAM Images. 10. Trademarks/Use of Logos. (a) CNN Logos. ADAM agrees that CNN owns the CNN name, logos and all other trademarks and/or service marks related to CNN programming (the "CNN Logos"), and ADAM agrees that it will not use the CNN Logos without the prior written consent of CNN-NS, and further not use the CNN Logos in any manner which will adversely affect CNN's ownership of the CNN Logos. All rights in the CNN Logos and the goodwill connected therewith shall at all times remain the property of CNN. CNN and/or CNN-NS may withdraw consent for ADAM's usage of the CNN Logos immediately if ADAM breaches any term or condition contained herein or if CNN and/or CNN-NS, in its reasonable discretion, deems such termination necessary or advisable. ADAM further agrees that during the term hereof and upon termination 14 15 of this Agreement, all rights in the CNN Logos and the goodwill connected therewith shall be and remain the property of CNN. (b) ADAM Logos. CNN-NS agrees that ADAM owns the ADAM name, Logos and all other trademarks and/or service marks related to ADAM Images (the "ADAM Logos"), and CNN-NS agrees that it will not use the ADAM Logos without the prior written consent of ADAM, and further not use the ADAM Logos in any manner which will adversely affect ADAM's ownership of the ADAM Logos. Notwithstanding anything to the contrary contained herein, ADAM grants CNN-NS a limited non-exclusive license to use the ADAM Logos in the Image Package packaging and ADAM Images sales and marketing materials deemed necessary by CNN-NS to maximize the Annual Gross Revenues specified in 5(b) above. CNN-NS agrees that it shall contractually obligate the Affiliates to give ADAM appropriate credit for the ADAM Images so used by such Affiliate to display the ADAM logo set forth on Exhibit A, attached hereto and by this reference expressly incorporated herein, during the entire time the ADAM Image(s) are being exhibited by such Affiliate via Television. ADAM agrees that the ADAM logo shall not change during the Term of this Agreement unless CNN-NS consents in writing to the change, which consent shall not be unreasonably withheld. CNN-NS further agrees that it shall contractually obligate each CNN Network (excluding CNN Interactive) to give ADAM appropriate credit for the ADAM Image so used by requiring such CNN Network to simultaneously display the ADAM logo appearing on Exhibit B during the first three (3) seconds of exhibition via Television; such ADAM logo shall not change during the Term unless CNN-NS consents to the change, which consent shall not be unreasonably withheld. CNN-NS agrees that it shall contractually obligate CNN Interactive to give ADAM appropriate credit for the ADAM 15 16 Image so used by requiring CNN Interactive to display ADAM's web logo appearing on Exhibit C at all times on any of its web pages that display an ADAM Image. All rights in the ADAM Logos and the goodwill connected therewith shall at all times remain the property of ADAM. ADAM may withdraw consent for CNN-NS's usage of the ADAM Logos immediately if CNN-NS breaches any term or condition contained herein or if CNN and/or ADAM, in its reasonable discretion, deems such termination necessary or advisable. ADAM further agrees that during the term hereof and upon termination of this Agreement, all rights in the ADAM Logos and the goodwill connected therewith shall be and remain the property of ADAM. CNN-NS agrees that it shall obligate the Affiliates and the CNN Networks to exhibit the ADAM Logos as delivered by ADAM to CNN-NS for distribution to the Affiliates and the CNN Networks. 11. Termination. Except as otherwise provided herein, either party hereto may terminate this Agreement if the other party substantially breaches any material representation or warranty made by it herein or defaults in the performance of any of its material obligations hereunder, and fails to remedy same within a period of sixty (60) days following receipt from the other party of written notice specifying such breach or default; provided, however, that notwithstanding the foregoing, such period of notice and right to cure shall be thirty (30) days in the event of nonpayment by CNN-NS to ADAM of any of the amounts set forth in Paragraph 5 herein above and ADAM's non-compliance with Paragraph 4 above. A party shall be considered in default hereunder, and the other party thereby shall have the right to terminate this Agreement immediately, if it makes a general assignment for the benefit of creditors or files a petition in bankruptcy, or has filed against it a petition in bankruptcy which is not dismissed or stayed within sixty (60) days of such filing, or is adjudicated as bankrupt, or has a receivers trustee or 16 17 liquidator appointed for it, or a substantial portion of its properties or assets, which is not removed within sixty (60) days of such appointment. No remedy expressed herein shall be deemed exclusive of any rights or remedies which either party may have and all such rights or remedies, whether at law or in equity, are hereby expressly reserved. 12. Force Majeure. If the performance hereunder by either party is prevented, suspended or postponed due to an event of force majeure, which for purposes hereof shall include, without limitation, an act of God, flood, fire, earthquake, war, riot, insurrection, strike or act of any governmental entity, satellite or transponder failure or malfunction, or other cause of a similar or dissimilar nature beyond the reasonable control of such party, this Agreement may, at such party's option, be suspended in whole or in part during the continuance of such event without any responsibility of either party to perform hereunder for or during such period of suspension. The parties agree in such event to resume performance hereunder as promptly as reasonably practicable thereafter. Notwithstanding the foregoing, in the event of the continuance of any such period of suspension for longer than thirty (30) consecutive days, or in the event of sporadic suspensions which in the aggregate exceed thirty (30) days in duration during any consecutive twelve months during the term hereof, this Agreement, and all of the respective rights and obligations of the parties hereunder, may, at the option of either party, be terminated (which shall relieve the parties hereto of any further obligations under this Agreement as of the date of such termination, except for payment of any fees or other sums past due at the time of such termination and obligations of indemnification expressly contained herein). 13. Representations and Warranties. Each party hereto represents and warrants to the other that (a) it has the legal right and corporate power and authority to execute, deliver and 17 18 perform this Agreement; (b) its execution, delivery and performance of this Agreement has been duly authorized in accordance with all appropriate corporate power and authority; (c) its execution, delivery and performance of this Agreement will not violate the terms or provisions of any other agreement, contract or other instrument, whether oral or written, to which it is a party or by which it or its properties or assets are bound or any order, judgment or decree to which it is subject; (d) the individual signing this Agreement on its behalf has been authorized to execute this Agreement in the capacity set forth under such individual's name on the signature page hereof; and (e) the execution, delivery and performance of this Agreement constitutes its legal, valid and binding obligation enforceable against it in accordance with its terms, except as enforcement may be limited by applicable bankruptcy, insolvency, reorganization or other similar laws affecting the enforcement of creditors' rights generally and that the remedy of specific performance may be subject to judicial discretion. ADAM further represents and warrants that it owns all rights necessary to license the ADAM Images to CNN-NS for distribution and exhibition by the Affiliates and the CNN Networks as contemplated herein. ADAM represents and warrants that the ADAM Images are not libelous or otherwise unlawful, do not infringe upon any trademark, trade name or copyright, do not violate the private, civil or property rights, the privacy or any other rights of any third party. The representations and warranties set forth in this Paragraph 13 are being made by each party to induce the other party to enter this Agreement and shall survive the execution and delivery of this Agreement. 14. Indemnification. Each party hereto hereby agrees to indemnify and hold harmless the other party and the other party's parent, subsidiaries and affiliates, and the directors, officers, employees, agents and representatives of such party and its parent, subsidiary and 18 19 affiliates, from and against the full amount of any and all claims, actions, counterclaims, suits, damages, losses, judgments and expenses, whether fixed or contingent, including, without limitation, reasonable attorneys' fees and expenses (including an allocable portion of in house counsel fees), reasonable out-of-pocket expenses and court costs, that such party and/or any of the foregoing entities or individuals may incur as the result of or otherwise related to any act or omission of the performance by the indemnifying party hereunder or a breach or default by the indemnifying party of any of its representations, warranties or obligations set forth in this Agreement; provided, owever, that the indemnified party must (i) give to the indemnifying party prompt written notice of any claim, action or other matter to which this indemnification applies; (ii) afford to the indemnifying party the opportunity to participate in and fully control (with legal counsel of its choice; provided such legal counsel is reasonably acceptable to the indemnified party), the disposition (whether by compromise, settlement or other resolution) of such claim, action, suit or other matter, provided that the indemnifying party acknowledges its indemnification obligations; (iii) fully cooperate with the reasonable requests of the indemnifying party to that end; and (iv) have substantially complied with all of its duties and obligations hereunder at the time thereof. Consistent with the provisions of this Paragraph 16, each party hereto agrees that it shall have the obligation to defend and hold harmless the other party against all claims, demands and suits to which this indemnification applies. The obligations of the parties pursuant to this Paragraph 16 shall survive the termination of this Agreement. 19 20 15. Notices. All notices required hereunder shall be in writing and shall be either delivered in person, deposited in the United States Mail for first class certified delivery, return receipt requested, or transmitted by facsimile as follows: if to CNN-NS: CNN Newsource Sales, Inc. One CNN Center Box 105366 Atlanta, Georgia 30348-5366 Attention: Mr. Meade Camp, Senior Vice President Fax No. (404) 827-4959 with a copy to: Cable News Network, Inc. Legal Department One CNN Center Box 105366 Atlanta, Georgia 30348-5366 Attention: CNN-NS Attorney Fax No. (404) 827-1995 if to ADAM: ADAM Software, Inc. 1600 River Edge Parkway Suite 800 Atlanta, Georgia 30328 Attention: Mr. Bob Cramer Fax No. (770) 955-6031 with a copy to: King & Spalding 191 Peachtree Street, NE Atlanta, Georgia 30303-1763 Attention: Mr. Bill Roche Fax No. (404) 572-5145 20 21 Notices shall be deemed effective either when hand delivered, or upon receipt if sent by United States Certified Mail, or on the date sent if faxed prior to 5:00 p.m. and receipt is confirmed by telephone. Addresses may be changed in the manner provided herein for notices. 16. General Provisions. (a) Entire Agreement. This Agreement constitutes the sole agreement of the parties hereto with respect to the subject matter hereof and supersedes all previous written and oral agreements and understandings between the parties with respect to the subject matter set forth herein. (b) Capitalized Terms. All capitalized terms used herein shall have the meaning as expressly defined in this Agreement; provided, however, that proper nouns such as the names of the companies and the locations shall have their commonly understood meaning unless otherwise expressly defined herein. (c) Assignment. This Agreement, and any rights or obligations contained herein, may not be assigned or delegated by either party, in whole or in part nor voluntarily or by operation of law, without the prior written consent of the other party, which shall not be unreasonably withheld. (d) Governing Law. Regardless of the place of execution hereof, this Agreement, all amendments hereto, and any and all issues or controversies arising herefrom or related hereto, shall be governed by and construed exclusively in accordance with the laws and decisions of the State of Georgia (USA) applicable to contracts made, entered into and performed entirely therein. ADAM hereby consents to personal jurisdiction in and service of process by any competent state or federal court in the State of Georgia (USA). Additionally, the parties hereto agree that the 21 22 State of Georgia (USA) shall be the exclusive forum and situs for the resolution of any and all disputes, controversies or matters arising herefrom or related hereto. (e) Amendment and/or Modification. This Agreement may not be amended or modified at anytime except by a writing executed by both of the parties hereto. (f) Invalidity and/or Unenforceability. The invalidity or unenforceability of any particular term or provision of this Agreement shall not affect the validity or enforceability of any other term or provision hereof, and the remainder of this Agreement shall be construed in all respects as if such invalid or unenforceable term or provision were omitted. If any clause, provision or term of this Agreement is declared illegal, invalid or unenforceable under applicable present or future laws, then it is the intention of the parties that in lieu of such clause, provision or term, there shall be substituted a clause, provision or term as similar in substance and effect to such illegal, invalid or unenforceable clause, provision or term as may be possible. In the event one or more terms or provisions of this Agreement shall be illegal, invalid or unenforceable by reason of being excessive or otherwise unreasonable as to duration, scope, subject matter or activity, this Agreement shall be construed by limiting or modifying such terms or provisions so as to render the same lawful, valid and enforceable to the greatest extent compatible with applicable law as it shall then appear. (g) Confidentiality. Each of the parties hereto agrees that, except as they may otherwise mutually agree as contemplated by the immediately succeeding sentence, such party shall keep the terms of this Agreement confidential and shall not disclose the terms or provisions hereof, except (i) to its accountants and attorneys; (ii) as may be required by applicable law or regulation; (iii) pursuant to any applicable subpoena or other legal or regulatory process; or (iv) if 22 23 the terms of this Agreement become generally known to the public other than through a disclosure by such party which violates the terms of this Paragraph (g); provided, however, that neither party shall be prohibited from disclosing the general nature (but none of the economic terms) of the relationship set forth in this Agreement. The parties will mutually agree in advance on the timing and contents of all press releases and similar communications relating to this Agreement or the transactions contemplated hereby. (h) Rights and Remedies. All rights and remedies herein are cumulative and in addition to any and all other rights and remedies available at law or in equity. (i) Waiver. The waiver by either party of any right or remedy hereunder on any one occasion shall not constitute a waiver of such right or remedy on any other occasion. No delay in the exercise of any right or remedy hereunder shall constitute a waiver of such right or remedy or of any other right or remedy. (j) Relationship. Nothing herein shall be deemed to create an employment, joint venture, agency or partnership relationship between the parties hereto and neither party is authorized or shall act toward any third party, individual, entity or the public in any manner which would indicate any such relationship with the other. (k) Counterparts. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. (1) Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of each of the parties' successors and, if permitted, assigns. 23 24 (m) Time of the Essence. The parties hereto agree that time is of the essence in the performance of the respective obligations hereunder. (n) Headings. The headings contained in this Agreement are inserted solely for purposes of reference and convenience and shall not affect the meaning or construction thereof. IN WITNESS WHEREOF, the parties hereto have duly authorized the execution and delivery of this Agreement as of the date and year first above written. ADAM SOFTWARE, INC. CNN NEWSOURCE SALES, INC. By: /s/ By: /s/ --------------------------- -------------------------------- Its: Chairman & CEO Its: President -------------------------- ------------------------------- 24 25 ATTACHMENT A IMAGE PACKAGE FORMAT 25 26 SCHEDULE I IMAGE PACKAGE CM-ROMS 1. A.D.A.M. Interactive Anatomy (AIA) 2. MLI's Winning Medical Illustrations - General Collection 3. A.D.A.M. Home Assistant (formerly called Medical Housecall) 4. A.D.A.M. the Inside Story 26 27 SCHEDULE II SALES AND MARKETING EXPENSES PLUS IMAGE PACKAGE'S COST OF MANUFACTURING
- ------------------------------------------------------------------------------------------------------------------- Per Week Per Month Per Year - ------------------------------------------------------------------------------------------------------------------- REVENUE Cash sales to stations $1,051,250 Sales to CNN Networks $60,000 SUBTOTAL: $1,111,250 EXPENSES Production Studio space and time Crew time Graphics Talent Make-up Travel/Entertainment Writer/Researcher SUBTOTAL: $0 Transmission/Distribution Satellite for special images $1,500 Shipping to stations $1,000 Actual costs of ADAM Materials $4,600 SUBTOTAL: $7,100 Sales and Marketing Support Brochure/one sheet $4,000 Logos for print sheet $500 Booth Graphics $1,000 Broadcast fax (3 per year) $1,500 Multimedia $3,000 Video presentation $10,000 Dubs $500 Public Relations Support $1,000 Conventions/Meetings RTNDA Allocation $5,000 NATPE Allocation $5,000 Optional Expenditures Trade Ad for Communicator Creative $6,000 Film $1,000 Insertions $4,600 SUBTOTAL: $43,100 REVENUES: $1,111,250 LESS EXPENSES: $50,200 TOTAL FOR PROJECT: $1,061,050
27 28 EXHIBIT A ADAM LOGO COURTESY FONT FORMAT FOR AFFILIATES 28 29 EXHIBIT B ADAM LOGO COURTESY FONT FORMAT FOR CNN NETWORKS 29 30 EXHIBIT C ADAM LOGO COURTESY FONT FORMAT FOR CNN INTERACTIVE 30 31 AMENDMENT NO. 1 TO THE CNN NEWSOURCE SALES, INC. LICENSE AGREEMENT This Amendment No. I (this "Amendment") to the CNN Newsource Sales, Inc. License Agreement dated January 15, 1998 (the "Agreement"), by and between CNN Newsource Sales, Inc. ("CNN-NS"), a Georgia corporation, and ADAM Software, Inc. ("ADAM"), a Georgia corporation, is dated as of April 1, 1998. BACKGROUND STATEMENTS A. Pursuant to the Agreement, ADAM licensed to CNN-NS the right to relicense the visual images of the ADAM Images to Affiliates and CNN Networks for exhibition via Television throughout the Territory. B. Both ADAM and CNN-NS mutually agree that it is to each party's benefit to amend the Agreement. NOW, THEREFORE, in consideration of the agreements hereinafter set forth the parties hereto agree as follows: 1. Definitions. Capitalized terms used in this Amendment, unless specifically defined herein, have the meanings given to them in the Agreement. 2. Amendments. Notwithstanding anything to the contrary contained in the Agreement, the parties hereto agree to the following amendments to the Agreement: 2.1 Section 2 shall be deleted in its entirety and restated to read as follows: 2. Term. This Agreement shall remain in full force and effect from the date hereof through January 5, 2002 (the "Term"); provided, however, that should CNN-NS fail to collect One Hundred Thousand U.S. Dollars (US$100,000.00) in Net Revenues, as such term is defined in Paragraph 5 below, per each year of the Term hereof, calculated within forty-five (45) days after the termination of each year during the Term, then both parties shall have the option to terminate this Agreement anytime within the first four (4) months of the commencement of each year of the Term starting in year 2 of the Term, upon either party's delivery of fifteen (15) days prior written notice delivered to the other party. Both parties agree that should either party terminate the Agreement after the first year of the Term, as specified herein, each will honor any existing agreements with the Affiliates for the distribution of the ADAM Images which shall not extend beyond six (6) months after the applicable effective termination date. 2.2 Section 5(b) shall be deleted in its entirety and restated to read as follows: 32 (b) During each year of the Term, all revenues collected from the license of the ADAM Images throughout the Territory as specified in Paragraph 1 (the "Annual Gross Revenues") shall be paid to CNN-NS. CNN-NS agrees that it will use commercially reasonable efforts to maximize the Annual Gross Revenues hereunder and to collect all such license fees charged for the ADAM Images. From Annual Gross Revenues, CNN-NS shall be entitled each year to deduct and pay the Sales and Marketing Expenses actually incurred by CNN-NS (with such amounts not to exceed the SM Expenses Budget as submitted by CNN-NS quarterly to ADAM pursuant to Paragraph 5(a) above, as well as the actual manufacturing costs of the ADAM Images which amount per Image Package is set forth as a line Item on Schedule I and shall remain the same each year of the Term hereof unless otherwise agreed upon by the parties in writing. The following percent of any remaining revenues actually collected after all deductions set forth in this Subparagraph (the "Net Revenues") shall be paid to ADAM within forty-five (45) days after the end of each quarter of each year of the Term hereof along with a definitive report detailing the Sales and Marketing Expenses paid as well as the revenues collected from the Affiliates and CNN Networks for the quarter just ended (with the first such quarter terminating on April 14, 1998): Quarters Percentage of Net Revenue -------- ------------------------- 1-4 55% 5-8 60% 9+ 65% Past due payments on all amounts due and payable as provided for in this Agreement shall bear interest, which shall accrue fifteen (15) days after the date such payment was due, at a rate of one and one-half percent (1 1/2%) per month, or, in the event the parties are precluded by law from establishing such rate, the maximum legal interest rate permitted by law. CNN-NS agrees that it shall supply ADAM with estimate reports (the "Estimate Reports") on a quarterly basis throughout the Term detailing estimates of the Marketing and Sales Expenses paid as well as the revenues collected from the Affiliates and the CNN Networks (with such Estimate Reports to be delivered no later than thirty (30) days after the termination of each quarter of each year throughout the Term hereof with the first such quarter terminating on April, 1998 and with ADAM understanding and agreeing that the amounts set forth in such Reports are strictly estimates and not final numbers to be relied upon as such). 2.3 Section 10(b) is hereby amended by adding the following sentences at the end of the section: 33 Notwithstanding any provision to the contrary in this Section, if CNN-NS has negotiated in good faith to contractually obligate an Affiliate to display the ADAM logo during the entire time the ADAM Images are being exhibited by such Affiliate and such Affiliate is unwilling to contractually obligate itself, CNN-NS may instead offer to reduce the period of time that such Affiliate must simultaneously display the ADAA4 logo to the first three (3) seconds of exhibition via Television (the "Limited Credit"). If CNN-NS has negotiated in good faith to contractually obligate an Affiliate to give ADAM the Limited Credit and such Affiliate is unwilling to contractually obligate itself, CNN-NS may offer, at a minimum, to only require such Affiliate to display an on-screen credit at the end of the program that broadcasted the ADAM Image as set forth in Attachment A to this Amendment. 2.4 Section 13 is hereby amended by adding the following sentence at the end of the section: ADAM represents and warrants that it will not communicate with the Affiliates or the CNN Networks during the Term of the Agreement for the purpose of marketing or selling the Image Package . 2.5 Section 16(e) is hereby amended by adding the following sentence at the end of the section: Both parties agree that if any changes in facts and circumstances would materially affect the rights or obligations of the parties under this Agreement, each party will be willing to discuss in good faith appropriate modifications to the Agreement as necessary to reflect such changes; provided, however, that nothing contained herein shall be deemed a waiver of either party's rights and remedies at law or in equity pursuant to the terms hereof. 34 IN WITNESS WHEREOF, the parties hereto have duly authorized the execution and delivery of this Amendment as of the date and year first above written. ADAM SOFTWARE, INC. By: /s/ ------------------------------- Its: Chairman & CEO ------------------------------ CNN NEWSOURCE SALES, INC. By: /s/ Susan Grant ----------------------------- Its: President ----------------------------- EX-10.23 6 SUBLEASE AGREEMENT 1 EXHIBIT 10.23 SUBLEASE AGREEMENT THIS SUBLEASE AGREEMENT (this "Sublease") is made this 15th day of January, 1998, by and between A.D.A.M. Software, Inc., a Georgia Corporation ("Sublessor"), UltimateCom of Atlanta, L.L.C., a Colorado Limited Liability Company ("Sublessee"). RECITALS A. TriNet Essential Facilities XXIII, Inc. (as successor in interest to The Northwestern Mutual Life Insurance Company) as Landlord, and Sublessor have executed a Lease Agreement, dated November 18, 1993, hereinafter called the "Master Lease" (a copy of which is attached hereto and made a part hereof as "Exhibit B"), for certain premises (the "Premises") comprising approximately 24,848 square feet of rentable space in the building located at 1600 RiverEdge Parkway, Atlanta, GA 30328 (the "Building"). B. Sublessor desires to sublease to Sublessee a portion of the Premises being leased by Sublessor under the terms of the Master Lease (the "Sublease Premises" as defined below), and Sublessee desires to lease such space from Sublessor. NOW, THEREFORE, Sublessor and Sublessee agree as follows: AGREEMENT 1. Sublease of Premises. Sublessor hereby subleases to Sublessee, and Sublessee hereby subleases from Sublessor, the Sublease Premises which is comprised of approximately 3,168 square feet of the Premises under lease to Sublessor. The Sublease Premises is the crosshatched space as shown on "Exhibit A" attached hereto and made a part hereof. Except as otherwise expressed herein provided, such sublease of the Sublease Premises shall be on all the terms, covenants, conditions and provisions in the Master Lease, which terms, covenants, conditions and provisions are incorporated herein and made a part hereof as if fully set forth herein, and are imposed upon the respective parties to this Sublease, with Sublessor herein being substituted for Landlord under the Master Lease, and Sublessee hereunder being substituted for Tenant under the Master Lease, but only with respect to the Sublease Premises. Notwithstanding the foregoing incorporation of the Master Lease, Sublessor shall not be responsible for the performance of any obligations to be performed by Landlord under the Master Lease. Provided that Sublessor has performed all obligations of Sublessor as Tenant under the Master Lease (except for those obligations that have been delegated to Sublessee hereunder), Sublessor shall not be liable to Sublessee for any failure by Landlord to perform such obligations under the Master Lease, nor shall failure by Landlord to perform its obligations under the Master Lease excuse performance by Sublessee of its obligations hereunder. To the extent the succeeding provisions of this Sublease are inconsistent with or different from the provisions of the Master Lease, the provisions of this Sublease shall control. 1 2 2. Term. (a) The term of this Sublease (the "Term") shall commence on the later of February 1, 1998 or the day after receipt of Landlord's consent hereto and shall continue for eighteen (18) full months. (b) Sublessee shall have the option to request a six (6) month extension of the Term by submitting to Sublessor a written request to extend the Term by no later than the end of the twelfth (12th) month of the Term. Within ten (10) business days of receipt of Sublessee's request to extend the Term, Sublessor will respond in writing as to whether or not the Term will be extended. Failure by the Sublessor to respond within the ten (1O) day notice period shall mean that the Sublessor has declined Sublessee's request to extend the Term and this Sublease shall expire as defined in Section 2(a). If the Term is extended, the terms and conditions of the extension period shall be the same as those herein defined (unless modified in writing and agreed upon by both Sublessor and Sublessee) and an amendment to this Sublease will be executed defining the new termination date. 3. Rent and Other Financial Obligations/Security Deposit. The monthly installment of Base Rent payable by Sublessee to Sublessor shall be Five Thousand Five Hundred Forty-four and no/100 Dollars($5,544.00) per month for the term of this Sublease. In addition thereto, Sublessee also shall pay as "additional rent" it's proportionate share of increases in the "Operating Expenses" (as such term is defined in the Master Lease) attributable to the Sublease Premises beyond the 1998 calendar year. For purposes of this Sublease, Sublessee's proportionate share shall mean 12.75% of the "Operating Expenses" payable by Sublessor. Base Rent and additional rent shall be due and payable without notice in advance on the first day of each month. Sublessor agrees to provide Sublessee with copies of expense estimates, billings, invoices or reconciliation statements from Landlord which support increases in "additional rent" owed by Sublessee to Sublessor hereunder. Upon execution of this Sublease, Sublessee shall pay Sublessor the sum of Twenty-two Thousand One Hundred Seventy-six and no/100 Dollars ($22,176.00), of which Five Thousand Five Hundred Forty-four and no/100 Dollars ($5,544.00) shall be applied to the first installment of monthly Base Rent under this Sublease for January, 1998 and Sixteen Thousand Six Hundred Thirty-two and no/100 Dollars (16,632.00) shall be held as a security deposit (the "Security Deposit") by Sublessor for security for the performance by Sublessee of all the terms, covenants, and conditions of this Sublease upon Sublessee's part to be performed. Sublessor shall have the right to apply any part of said Security Deposit to cure any default of Sublessee and if Sublessor does so, Sublessee shall upon demand deposit with the Sublessor the amount so applied by Sublessor so that Sublessor shall have the full Security Deposit on hand at all times during the Term of this Sublease. So long as Sublessee is not in default hereunder, portions of the Security Deposit will be applied to Sublessee's monthly rental payment as follows; Five Thousand Five Hundred Forty-four and no/100 Dollars ($5,544.00) shall be applied to the monthly Base Rent due for May 1998, and Three Thousand Five Hundred Eighty-eight and no/100 Dollars ($3,588.00) shall be applied to the monthly Base Rent due for August 1998. The remaining Seven Thousand Five Hundred and no/100 Dollars ($7,500.00) shall be held throughout the Term as security for Sublessee's performance and shall be returned to Sublessee within thirty (30) days of the termination of this Sublease. 2 3 4. Furnishings. Sublessee shall have the right to use the furniture, trade fixtures and other personal property (collectively, "Personal Property") belonging to Sublessor located in the Sublease Premises and, upon expiration or prior termination of this Sublease, Sublessee shall return to Sublessor such Personal Property in good condition and repair, normal wear and tear excepted. The Personal Property referenced herein shall mean fourteen (14) modular workstations and matching upholstered chairs, one (1) conference table and eight (8) tan conference chairs, and up to nineteen (19) telephone handsets. 5. Telephone System. So long as Sublessee is not in default, Sublessor will allow Sublessee to use Sublessor's telephone system and handsets, and will separate up to ten (10) telephone lines for Sublessee's use. Sublessee will be responsible for all costs associated with its use of Sublessor's telephone system, including, but not limited to, monthly access charges and fees associated with local and long distance service, all hardware/software and service/consulting costs, and all move, add and change charges associated with restructuring Sublessor's telephone system for Sublessee's use (the "System Costs"). Sublessor will provide Sublessee with copies of any invoices or bills associated with the System Costs. Failure by Sublessee to pay any System Costs due of Sublessee within fifteen (15) days of receipt from Sublessor shall constitute a default by Sublessee. In the event Sublessor elects to replace, upgrade or change its telephone system, Sublessor will provide Sublessee with notice of the change over date. 5. Signage. Sublessee shall be allowed to erect a sign of it's logo at the primary entrance to the Sublease Premises in a size not to exceed 1' x 1'. In addition, Sublessee may replace the "Appendix" sign at the entrance to Sublessee's conference room and replace it with a sign stating Sublessee's name. The new conference room sign shall be in the same size, color and style as the existing "Appendix" sign. The signs, their design, location and manner of fixture must be mutually agreed upon by Sublessor and Sublessee. Sublessor will request that the Landlord include Sublessee's name on the building directory in the lobby of the building. All costs associated with the installation, maintenance, and removal of the signs and directory listing will be the responsibility of Sublessee. 6. Rooftop Antenna. It is understood that this Sublease is contingent upon receiving Landlord's approval to mount an antenna (the "Antenna") on the roof of the Building for Sublessee. Failure to receive approval for the Antenna will render this Sublease null and void, and any prepaid sums paid to Sublessor by Sublessee shall be returned within ten (10) days of receipt of Landlord's rejection of the Antenna. Sublessee will be responsible for any and all costs associated with the installation, maintenance, operation and removal of the Antenna. (See Landlord's consent letter attached hereto and made a part hereof as "Exhibit C".) 7. Tenant Improvements. At Sublessor's cost, and after receiving Landlord's consent to this Sublease and the improvements contemplated herein, Sublessor will relocate the wall separating the Sublease Premises to incorporate the executive office into the Sublease Premises and separate the Sublease Premises from the balance of Sublessor's Premises. In addition, Sublessor will install building standard mini-blinds on the windows between the Sublease Premises and the Sublessor's Premises (including the doors if the mini-blinds can be installed with no damage to the doors). 3 4 8. Insurance. (a) Sublessee, at its sole cost and expense, shall carry insurance against fire and other perils encompassed within the commonly accepted term "All Risks", insuring Sublessee's interest in its improvements and betterments to the Sublease Premises and any and all furniture, equipment, supplies, and other property owned, leased, held, or possessed by it and contained therein. Such insurance coverage shall be in an amount equal to the full insurable value of such improvements and property, and shall contain a clause whereby the insurer waives all rights of subrogation against Landlord and Sublessor. (b) Sublessee, at its sole cost and expense, shall carry comprehensive general liability insurance, including contractual liability endorsement concerning Sublessee's obligations under this Sublease, insuring Sublessee against any and all liability for injury to or death of a person or persons and for damage done to property occasioned by or arising out of any construction work being done in the Sublease Premises by Sublessee, its agents, contractors or employees, or arising out of Sublessee's use or occupancy of the Sublease Premises, or in any way occasioned by or arising out of the activities of Sublessee, its agents, contractors or employees on or about the Sublease Premises or other portions of the Building, in the minimum amount of Two Million Dollars ($2,000,000.00) per occurrence combined; provided, however, Sublessee shall carry such greater limits of coverage as Sublessor or Landlord may reasonably request from time to time so long as Sublessor and Landlord maintain similar limits of coverage. Landlord and Sublessor shall be named as an additional insured under such policy of comprehensive general liability insurance, as its interests may appear. (c) Sublessee, at its sole cost and expense, shall carry worker's compensation insurance covering all employees of Sublessee employed in, on or about the Sublease Premises or the Building in order to provide statutory benefits as required by the laws of the State of Georgia. Such insurance coverage shall contain a clause whereby the insurer waives all right of subrogation against Sublessor and Landlord. (d) Said insurance policies as described in the foregoing subsections (a), (b) and (c) shall: (i) be issued by an insurance company that is reasonably acceptable to Sublessor and Landlord and licensed to do business in the State of Georgia, and (ii) provide that said insurance shall not be canceled unless thirty (30) days' prior written notice shall have been given to Sublessor and Landlord. Said policy or policies, or certificates thereof, shall be delivered to Sublessor and Landlord by Sublessee upon commencement of the term of this Sublease and upon each renewal of said insurance. 9. Agency/Broker Participation. Sublessor and Sublessee warrant that they have dealt with no real estate broker in connection with this Sublease other than TC Atlanta, Inc., and that no other broker is entitled to any commission on account of this Sublease. Sublessor and Sublessee acknowledge and agree that TC Atlanta, Inc. has acted as a dual agent in this transaction, representing both parties. Each party will hold the other party harmless from and against any and all costs (including attorneys fees), expense or liability for any compensation, commissions, and charges claimed by any other broker with respect to this Sublease. Sublessor will pay TC Atlanta, Inc. a commission based upon a separate agreement. 10. Notwithstanding any provision to the contrary in the Master Lease, Sublessor, Sublessee, and (to the extent agreed to by Landlord pursuant to the 4 5 Consent to Landlord attached hereto) Landlord each (i) hereby waives all claims such party may have against the other to the extent such claims are covered by insurance carried or required to be carried under the Master Lease, and (ii) shall cause their respective insurers to similarly waive all rights of recovery against the others, and against the officers, employees, partners, agents and representatives of the others, for loss of or damage to the property of the waiving party or the property of others under its control, to the extent such loss or damage is (or would have been) insured against under any insurance policy carried (or required to be carried) by Landlord, Sublessor, or Sublessee hereunder. Each of Sublessee, Sublessor, and (to the extent agreed to by Landlord pursuant to the Landlord's consent hereto) Landlord shall obtain a clause or endorsement to the applicable insurance policies carried by such party denying its insurer any rights of subrogation against the other parties. 11. Termination of Master Lease. This Sublease is and shall at all times be subordinate to the Master Lease. In the event the Master Lease is terminated for any reason, then, on the date of such termination, this Sublease automatically shall terminate and be of no further force or effect. If the termination of the Master Lease (and the resulting termination of this Sublease) occurs through no fault of Sublessor, Sublessor shall have no liability therefor to Sublessee. In the event Sublessor elects to terminate the Master Lease as per Section 6 in the Special Stipulations of the Master Lease, Sublessor will provide Sublessee the same written notice as provided the Landlord thereunder. If Sublessor elects to terminate the Master Lease, Sublessee will not be responsible for any portion of Sublessor's termination penalty as defined in Special Stipulation #8 of the Master Lease. 12. Attorneys Fees. If any action shall be instituted by either of the parties hereto for the enforcement or interpretation of any of its rights or remedies under this Sublease, the prevailing party shall be entitled to recover from the losing party all costs incurred by the prevailing party in said action and any appeal therefrom, including reasonable attorneys' fees to be fixed by the court therein. Said costs and attorneys' fees shall be included as part of the judgment in any such action. 13. Notices. Any notice or demand permitted or required to be given to either party by the other hereunder shall be in writing. All notices and demands by the Sublessor or Sublessee to the other party shall be delivered by hand or by courier service, or sent by registered or certified mail, postage prepaid, return receipt requested. Each notice given by mail shall be deemed received by the receiving party three (3) days after such notice shall have been deposited, and each notice delivered by hand or by courier service shall be deemed to have been received when actually received by the receiving party. With respect to notices to Sublessee, the primary notice address at the Sublease Premises in Atlanta listed first below shall be the official address for notices herein, and the secondary address shall be for courtesy copies only. If either party changes its address for notices, then such party shall given written notice thereof in accordance with the foregoing, except that such notice of change of address shall be deemed to have been given only when actually received. All notices shall be effective on refusal of delivery. 5 6 If To Sublessor: A.D.A.M. Software, Inc. 1600 Riveredge Parkway Suite 800 Atlanta, GA 30328 ATTN: Chief Financial Officer If To Sublessee: UltimateCom of Atlanta 1600 Riveredge Parkway Suite 850 Atlanta, GA 30328 ATTN: Vice President, General Manager With a courtesy copy to: UltimateCom of Atlanta 4643 S. Ulster Street Suite 1450 Denver, CO 80237 ATTN: Vice President Operations In addition, Sublessor will forward to Sublessee a copy of any notice received from Landlord which is pertinent to Sublessee's use or occupancy of the Sublease Premises. 14. Sublessor's Effort. In the event the Landlord defaults in any of its obligations under the Master Lease, Sublessor will use its reasonable efforts to enforce its rights under the Master Lease. 15. Severability. Any provision of this Sublease which shall prove to be invalid, void or illegal in no way affects, impairs or invalidates any other provision hereof, and such other provisions shall remain in full force and effect. 16. Interpretation. This Agreement shall be construed and interpreted in accordance with the laws of the State of Georgia. 17. Entire Agreement. This Sublease represents the entire agreement of the parties with respect to the subject matter hereof, supersedes all prior communications concerning the subject matter and may not be amended except in writing signed by both parties' authorized officers. No provision of this Sublease may be amended or added to except by an agreement in writing signed by the parties hereto or their respective successors in interest. 18. Consent of Landlord. Whenever the consent of Landlord is required under the Master Lease, Sublessee shall obtain the consent of both Sublessor and Landlord. Furthermore, this Sublease shall not be operative or deemed effective for any purpose whatsoever unless and until the consent of Landlord to this Sublease has been obtained. 6 7 IN WITNESS WHEREOF, the parties have caused this Sublease to be executed by their duly authorized representatives as of the date first written above. SUBLESSOR: A.D.A.M. SOFTWARE, INC. By: /s/ Michael S. Fisher ---------------------------------------------- Name: MICHAEL S. FISHER ------------------------------------------- Title: CORPORATE SECRETARY & ------------------------------------------ DIRECTOR OF FINANCE/ADMINISTRATION SUBLESSEE: ULTIMATECOM OF ATLANTA, L.L.C. By: /s/ Michael J. Anziano ---------------------------------------------- Name: Michael J. Anziano ------------------------------------------- Title: Vice President-Operations ------------------------------------------ 7 8 (- description to come -) EX-23.1 7 CONSENT OF PRICE WATERHOUSE 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of A.D.A.M. Software, Inc. We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-7785) of A.D.A.M. Software, Inc. of our report dated May 22, 1998, appearing on page F-1 of this form 10-K. /s/ Price Waterhouse LLP PRICE WATERHOUSE LLP Atlanta, Georgia June 29, 1998 EX-27.1 8 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF ADAM SOFTWARE, INC. FOR THE YEAR ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR MAR-31-1998 APR-01-1997 MAR-31-1998 704 7,664 1,239 162 467 10,198 496 1,660 11,900 1,187 0 0 0 52 10,713 11,900 6,888 6,888 1,178 6,761 0 0 8 653 75 578 0 0 0 578 .12 .12
EX-27.2 9 RESTATED FINANCIAL DATA SCHEDULE - 12/31/97
5 THIS SCHEDULE CONTAINS SUMMARY FINNCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF ADAM SOFTWARE, INC. FOR THE NINE MONTHS ENDED DECEMBER 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS MAR-31-1998 APR-01-1997 DEC-31-1997 1,479 7,586 1,136 144 492 10,749 2,131 1,594 12,308 1,082 0 0 0 52 11,174 12,308 1,801 1,801 312 1,656 0 0 0 272 0 197 0 0 0 197 .04 .04
EX-27.3 10 RESTATED FINANCIAL DATA SCHEDULE - 9/30/97
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF ADAM SOFTWARE, INC. FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS MAR-31-1998 APR-01-1997 SEP-30-1997 2,605 6,500 1,106 160 444 10,640 2,283 1,672 12,181 1,116 0 0 0 52 11,013 12,181 1,773 1,773 317 1,766 0 0 0 139 0 139 0 0 0 139 .03 .03
EX-27.4 11 RESTATED FINANCIAL DATA SCHEDULE - JUNE 30, 1997
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF ADAM SOFTWARE, INC. FOR THE THREE MONTHS ENDED JUNE 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS MAR-31-1998 APR-01-1997 JUN-30-1997 1,353 7,964 715 356 447 10,623 630 2,495 12,169 1,144 0 0 0 52 10,973 12,169 1,737 1,737 243 1,679 0 0 3 198 0 198 0 0 0 198 .04 .04
EX-27.5 12 RESTATED FINANCIAL DATA SCHEDULE - MARCH 31, 1997
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF ADAM SOFTWARE, INC. FOR THE YEAR ENDED MARCH 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR MAR-31-1997 APR-01-1996 MAR-31-1997 2,422 8,546 638 459 375 12,089 729 1,481 13,662 2,107 0 0 0 52 11,555 13,662 4,591 4,591 1,280 10,893 0 0 8 (5,441) 0 (5,441) 0 0 0 0 (1.03) (1.03)
EX-27.6 13 RESTATED FINANCIAL DATA SCHEDULE - DEC 31, 1996
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF ADAM SOFTWARE, INC. FOR THE NINE MONTHS ENDED DECEMBER 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS MAR-31-1997 DEC-31-1996 1,813 9,996 1,319 712 448 12,977 2,265 1,494 14,452 2,003 0 0 0 52 12,397 14,452 3,464 3,464 929 8,726 0 0 9 (4,548) 0 (4,548) 0 0 0 (4,548) (0.87) (0.87)
-----END PRIVACY-ENHANCED MESSAGE-----