AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 1, 1998
REGISTRATION NO. 333-58469
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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VALUE AMERICA, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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VIRGINIA 5999 33-0712568
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(State or other jurisdiction (Primary Standard (I.R.S. Employer
of incorporation or organization) Industrial Classification Code Number) Identification Number)
</TABLE>
VALUE AMERICA, INC.
2300 COMMONWEALTH DRIVE
CHARLOTTESVILLE, VIRGINIA 22901
(804) 817-7700
(Address, including zip code and telephone number, including
area code, of registrant's principal executive offices)
---------------
DEAN M. JOHNSON
EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
VALUE AMERICA, INC.
2300 COMMONWEALTH DRIVE
CHARLOTTESVILLE, VIRGINIA 22901
(804) 817-7700
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
COPIES OF COMMUNICATIONS TO:
J. BENJAMIN ENGLISH, ESQ. MARK L. JOHNSON, ESQ.
LECLAIR RYAN, A PROFESSIONAL CORPORATION FOLEY HOAG & ELIOT LLP
707 EAST MAIN STREET, SUITE 1100 ONE POST OFFICE SQUARE
RICHMOND, VIRGINIA 23219 BOSTON, MASSACHUSETTS 02109
(804) 783-2003 (617) 832-1000
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APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable on or
after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] ____________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ____________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ____________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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TITLE OF EACH CLASS OF SECURITIES TO PROPOSED MAXIMUM AMOUNT OF
BE REGISTERED AGGREGATE OFFERING PRICE REGISTRATION FEE
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Common Stock, without par value:
Previously filed .................................... $86,250,000 $25,444
To be registered pursuant to this Amendment ......... 5,750,000 1,696
Total ................................................ $92,000,000 $27,140
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED SEPTEMBER 1, 1998
[VALUE AMERICA LOGO]
5,000,000 SHARES
COMMON STOCK
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All of the 5,000,000 shares of Common Stock offered hereby are being sold
by Value America, Inc. ("Value America" or the "Company"). Prior to this
offering, there has been no public market for the Common Stock of the Company.
See "Underwriting" for information relating to the method of determining the
initial public offering price. It is currently estimated that the initial
public offering price will be between $14.00 and $16.00 per share. Application
has been made to have the Common Stock approved for quotation on the Nasdaq
National Market under the proposed symbol "VUSA." Upon completion of this
offering, the Company's executive officers and directors will, in the
aggregate, beneficially own approximately 81.5% of the outstanding Common Stock
of the Company. See "Principal Stockholders."
---------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 7.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS COMPANY(1)
<S><C>
Per Share ......... $ $ $
Total (2) ......... $ $ $
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(1) Before deducting expenses of the offering payable by the Company, estimated
at $900,000.
(2) The Company and the Company's two founders (the "Founding Stockholders")
have granted the Underwriters a 30-day option to purchase up to an
additional 750,000 shares of Common Stock solely to cover over-allotments,
if any. See "Principal Stockholders" and "Underwriting." If such option is
exercised in full, the total Price to Public, Underwriting Discounts and
Commissions, and Proceeds to Company will be $ , $ and $ ,
respectively, and proceeds to the Founding Stockholders will be $ .
---------------
The Common Stock is offered by the Underwriters as stated herein, subject
to receipt and acceptance by them and subject to their right to reject any
order in whole or in part. It is expected that delivery of such shares will be
made through the offices of BancBoston Robertson Stephens, San Francisco,
California, on or about , 1998.
BANCBOSTON ROBERTSON STEPHENS
VOLPE BROWN WHELAN & COMPANY
HAMBRECHT & QUIST
THE ROBINSON-HUMPHREY COMPANY
THE DATE OF THIS PROSPECTUS IS , 1998
<PAGE>
The following is reprinted from Value America's World Wide Web site at
www.valueamerica.com:
[VALUE AMERICA LOGO] [REPRODUCTION OF PAGE FROM VALUE AMERICA WEB SITE SHOWING
LOGOS OF PRODUCTS OFFERED IN THE VALUE AMERICA ONLINE STORE
"Value America - Value America Shopping By Brand Page 2 - Microsoft
Internet Explorer" appears at top of page.
Guide words "File," "Edit," "View," "Go," Favorites" and "Help" appear on
the next line.
Guide words "Back," "Forward," "Stop," "Refresh," "Home," "Search,"
"Favorites," "History," "Channels," "Fullscreen" and "Mail," together with
icons, appear on the next line.
The words "Address" and "http://www.valueamerica.com appear on the next
line.
In the principal portion of the page, the ValueAmerica logo appears in the
upper lefthand corner, followed by "Servant," "Back," "Next," "Search," "Brand
Menu," "Hot Buys" and "Main Menu," together with icons. The caption "We're
known by the company we keep..." is centered above logos for the following:
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IBM Pitney Bowes
Hewlett Packard Seiko
Amana Verbatim
USRobotics Brother
Samsung BIC
Panasonic Rolodex
Canon KitchenAid
Philips Magnavox West Bend
GE Appliances Imation
Fujifilm Mattel
Hitachi Day-Timer
Weber Lexmark
Microtek Roadmaster
DeLonghi Toshiba
Pendaflex Sony
Compaq Braun
Epson Quartet
Zenith Technics
Microsoft Peerless
Kensington shopovac Corporation
Hoover Ramgolf
Casio Iomega
Sentry Sharp
Olympus Fujifilm
Polariod Pulsar
Bushnell Kodak
At-A-Glance Pampers
Singer Packard Bell
Avery Targus
Weiser Lock Olympus
Delta Sanyo
Adobe NEC
3M Nokia
Labtec Merriam-Webster
Fellowes Galoob]
</TABLE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET FOR THE COMMON STOCK OF
THE COMPANY, INCLUDING ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
2
<PAGE>
[Two-page presentation combining text, photographs and drawings under heading
containing Value America logo, with the slogan "The Marketplace for a New
Millennium"]
Value America delivers what customers want most. Quality products: from
over 625 trusted brands. Selection: thousands of choices from technology to
office products, from consumer electronics to jewelry. Value: Internet
technologies enable Value America to sell the best for less. Service: a virtual
"Personal Shopper" makes shopping fast and easy. Convenience: Value America's
store is in your home and on your desk. Information: interactive multi-media
presentations communicate each product's features and benefits.
SHOPPING SMARTER
Value America is a fast, easy, and smart way to shop. Multi-media product
presentations help customers make better buying decisions. [Photograph
depicting individuals using computer]
50 MILLION LOCATIONS. THERE'S ONE NEAR YOU.
Value America can be reached at www.valueamerica.com from any
Internet-enabled computer. Customers can shop from their homes or offices, 24
hours a day, 7 days a week. [Simulation of screen from Value America Web site]
BENEFITS OF MEMBERSHIP
Everyone is welcome, but members enjoy special privileges, starting with
lower prices. A "Personal Shopper" keeps track of receipts, warranties, related
products, important dates and discounts, and makes checkout faster and easier.
[Simulation of screen from Value America Web site]
BRAND LOYALTY
Over 625 brands are represented on the Value America Web site. The store
even allows customers to shop in exclusive departments by brand. [Simulation of
screen from Value America Web site]
SHOP YOUR WAY
How many retailers are willing to rearrange their entire store for each
shopper? Value America does. Customers can shop by product category, product
type, brand name, what's new or what's on sale. [Drawing depicting globe in
box]
INTERACTIVITY
Value America is not a collection of static catalog Web pages. Everything
is dynamically pulled together for each individual customer from a database
using the Company's proprietary authoring and administration software.
[Simulation of screen from Value America Web site]
BE SELECTIVE
Value America is a factory authorized reseller for many brands offered on
its Web site. Broad product assortment means that customers can make the right
choice, because they actually have a choice! [Simulation of screen from Value
America Web site]
REASONS TO BUY
Value America's multi-media product presentations are more than lists of
features or technical specifications. They provide insights into the products'
features, benefits, applications and use. They are factual, product-focused,
informative and entertaining. [Simulation of screen from Value America Web
site]
MULTI-MEDIA SHOPPING
Product presentations are researched and written by Value America's
marketing team. They include copy, photographs and illustrations. Many include
automatically-launched audio streams. Some even contain a video demonstration,
streamed in real time. [Photograph of television, with caption "Projection
Televisions"]
<PAGE>
PRODUCT PURCHASING INFORMATION
Each presentation ends with a list of the products, along with their
specifications, features, prices, and options as well as a close-up photo of
each item. It's easy to make one-on-one comparisons. The store helps shoppers
make intelligent, informed decisions about their purchases. [Simulation of
screen from Value America Web site]
OUR FIRST NAME IS VALUE
Value America's customers enjoy the benefits of the Company's low overhead
and aggressive pricing.
VALUE DOLLARS
When members make purchases, they gain credit toward further purchases.
Known as "Value Dollars," this credit is an average of one percent of every
purchase. The credit is applied to a member's next purchase -- the amount is
deducted from the price. Value Dollars encourage frequent visits and increase
customer value. [Drawing of coins]
BUYING IS EASY
The "Personal Shopper" holds customers' selections until they are ready to
check out. The Personal Shopper remembers a member's favorite shipping and
billing addresses, as well as most of their credit card information. This data
remains encrypted and behind firewalls to maximize security. [Drawing of genie]
DELIVERING THE GOODS
When a product is purchased at Value America, the item is shipped directly
to the customer's designated shipping address. The Company's order fulfillment
systems are designed to choose the best product price and availability if
multiple distributors offer the same product. The Value America store delivers
the purchase order via facsimile or EDI. [Picture depicting delivery] [Drawing
of butterfly]
<PAGE>
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY
SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER
TO, OR A SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF.
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
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TABLE OF CONTENTS
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PAGE
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Summary .............................................................................. 4
Risk Factors ......................................................................... 7
Use of Proceeds ...................................................................... 18
Dividend Policy ...................................................................... 18
Capitalization ....................................................................... 19
Dilution ............................................................................. 20
Selected Financial Data .............................................................. 21
Management's Discussion and Analysis of Financial Condition and Results of Operations 22
Business ............................................................................. 28
Management ........................................................................... 41
Certain Transactions ................................................................. 49
Principal Stockholders ............................................................... 50
Description of Capital Stock ......................................................... 51
Shares Eligible for Future Sale ...................................................... 55
Underwriting ......................................................................... 56
Legal Matters ........................................................................ 58
Experts .............................................................................. 58
Additional Information ............................................................... 58
Index to Financial Statements ........................................................ F-1
</TABLE>
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VALUE AMERICA is a registered service mark of the Company. This Prospectus
also includes service marks, trademarks and trade names of companies other than
the Company.
The Company intends to furnish its stockholders with annual reports
containing audited financial statements and to make available quarterly reports
containing unaudited summary financial information for the first three quarters
of each fiscal year.
3
<PAGE>
SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ
IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION, INCLUDING "RISK FACTORS"
AND THE FINANCIAL STATEMENTS AND NOTES THERETO, APPEARING ELSEWHERE IN THIS
PROSPECTUS. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS BASED UPON
CURRENT EXPECTATIONS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL
RESULTS AND TIMING OF CERTAIN EVENTS COULD DIFFER MATERIALLY FROM THE RESULTS
DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR
CONTRIBUTE TO SUCH A DIFFERENCE INCLUDE THOSE SET FORTH UNDER "RISK FACTORS,"
AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS PROSPECTUS.
THE COMPANY
Value America is an Internet-based destination retailer that offers a wide
selection of technology, office and consumer products for sale at its Internet
site, WWW.VALUEAMERICA.COM. The products offered for sale in the Company's
online store are branded goods from national and international manufacturers
such as Hewlett-Packard and IBM. These products are presented to customers
utilizing information-rich multi-media product presentations designed to take
advantage of the online selling environment. The Company's online store has
been created to provide consumers with product information, shopping
convenience and value on brand name products, and to offer manufacturers the
ability to communicate effectively the features and benefits of their products.
Customers initially visit the Company's online store principally as a result of
the Company's advertising in regional and national newspapers, technology and
consumer magazines, direct mailings, regional radio commercials and Internet
portals. The Company generates revenues primarily from the sale of branded
products. The Company also receives revenue from manufacturers for the creation
of product presentations shown on the Value America online store.
In recent years, a number of companies have developed new business models
that have significantly altered the competitive environment in the retailing
industry. Superstore retailers such as Circuit City and Staples seek to attract
customers by emphasizing very broad selections of a few related categories of
merchandise. Volume discount retailers such as Sam's Wholesale Club and
Price/Costco generally seek to attract customers by de-emphasizing traditional
retail concepts such as personalized customer service and breadth of
merchandise in order to sell fewer products at substantial discounts. In order
to remain competitive, many traditional retailers have responded by lowering
prices and seeking to reduce costs, in part by offering lower quality
merchandise and employing fewer, less experienced customer service and sales
employees.
The market for electronic commerce is large and growing and has the
potential to further alter the competitive environment in the retailing
industry. One industry source estimates that the total value of goods and
services purchased over the Internet reached $12.4 billion in 1997 and projects
the market may grow to $425 billion by 2002. The sale of technology, office and
consumer products has begun to generate significant online revenues for
segment-specific retailers such as Dell Computer, Office Depot and Amazon.com.
The Company believes that this rapid growth in electronic commerce is being
driven in large part by the unique nature of the Internet, which gives online
retailers such as Value America the ability to provide their customers (i) high
quality goods at lower prices, (ii) convenient in-home or in-office access
24-hours-a-day, 365-days-a-year, (iii) increased product selection and (iv)
access to detailed information about product features, functions, benefits and
applications. Unlike traditional "brick and mortar" retailers, online retailers
are not limited by the constraints of real estate selection, store construction
or shelf space, and they can react quickly and cost-effectively to change
product descriptions, pricing and mix.
The Company has developed and continues to expand relationships with
manufacturers and distributors of branded technology, office and consumer
products. The Company has formed relationships with manufacturers of more than
160 technology and office products brands, including (i) technology
manufacturers such as Compaq, Hewlett-Packard, IBM and Toshiba, (ii) computer
peripheral manufacturers such as Brother, Canon, Epson, Iomega and US Robotics,
and (iii) office products suppliers such as 3M, Avery, Pitney-Bowes and Texas
Instruments. In order to expand its line of products and to leverage its
current customer base, the Company has also integrated more than 460 consumer
product brands into its online store, including Amana, Braun, Delta, Hoover,
Kodak, Norelco, Philips/Magnavox, Polaroid, Sharp and Singer.
The Company has created an integrated technology platform to support its
online store. The Company has designed its software and system architecture to
accommodate peak transaction loads and believes its system will "scale up"
efficiently as transaction volume on the Company's online store increases. The
Company has also devised proprietary Web-based authoring and content management
tools that enable the Company's marketing department to integrate copy,
graphics, pictures, and audio and video streaming into the Company's product
presentations with a limited amount of technology expertise.
4
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The Company's objective is to create the leading online destination store
that offers consumers, businesses, educational institutions and government
agencies access to, and information about, a wide variety of products from
brand name manufacturers. In order to achieve this objective, the Company is
(i) initially emphasizing the sale of business technology and office products,
(ii) moving rapidly into the business-to-consumer market, (iii) expanding
relationships with leading brand name manufacturers, (iv) continuing to enhance
its customers' online shopping experience and (v) developing and expanding
direct response marketing campaigns and strategic partnerships.
The Company was incorporated in March 1996 in the State of Nevada and was
reincorporated in October 1997 in the Commonwealth of Virginia. Its principal
executive offices are located at 2300 Commonwealth Drive, Charlottesville,
Virginia 22901, and its telephone number is (804) 817-7700.
THE OFFERING
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Common Stock Offered by the Company ................... 5,000,000 shares
Common Stock to be Outstanding after the Offering ..... 32,889,667 shares(1)
Use of Proceeds ....................................... Working capital and other general
corporate purposes, including advertising
and promotion, development of system
enhancements, relocation and expansion of
facilities, payment of accrued preferred
stock dividends, and potential acquisitions
of, or investments in, complementary
businesses and technologies. See "Use of
Proceeds."
Proposed Nasdaq National Market Symbol ................ VUSA
</TABLE>
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(1) Based on shares outstanding as of August 31, 1998. Includes 4,737,167
shares of common stock, without par value (the "Common Stock"), to be
issued upon conversion of the Company's Series A Preferred Stock, without
par value (the "Series A Stock"), and Series B Preferred Stock, without
par value (the "Series B Stock"), concurrently with the closing of the
offering made hereby. Excludes as of August 31, 1998 (i) 3,465,924 shares
of Common Stock issuable upon exercise of stock options outstanding under
the Company's 1997 Stock Incentive Plan (the "Incentive Plan"); (ii)
284,076 shares of Common Stock reserved for grants of future options
pursuant to the Incentive Plan; and (iii) 213,750 shares of Common Stock
issuable upon exercises of outstanding warrants. See "Management --
Incentive Plan," "Certain Transactions," "Description of Capital Stock --
Warrants" and Notes 5 and 6 of Notes to Financial Statements.
5
<PAGE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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PERIOD FROM
INCEPTION SIX MONTHS ENDED
(MARCH 13, 1996) JUNE 30,
THROUGH YEAR ENDED -------------------------
DECEMBER 31, 1996 DECEMBER 31, 1997 1997 1998
------------------ ------------------ ------------- -----------
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STATEMENT OF OPERATIONS DATA:
Total revenues ................................................. $ -- $ 134 $ -- $ 7,231
Total cost of revenues ......................................... (97) (486) (142) (7,128)
Gross profit (loss) ............................................ (97) (352) (142) 103
Total operating expenses ....................................... (331) (1,519) (213) (12,620)
Operating income (loss) ........................................ (428) (1,871) (355) (12,517)
Other income (expense), net .................................... 3 18 (1) 148
Net loss ....................................................... (425) (1,853) (356) (12,369)
Net loss per share -- basic and diluted ........................ $ (0.02) $ (0.09) $(0.02) $ (0.64)
Weighted average number of shares -- basic and diluted ......... 22,500 22,616 22,500 23,153
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1998
-------------------------------------------
PRO FORMA
ACTUAL PRO FORMA(1) AS ADJUSTED(2)
------------ -------------- ---------------
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BALANCE SHEET DATA:
Cash and cash equivalents ...................... $ 20,253 $19,885 $88,735
Working capital ................................ 14,054 13,686 82,536
Total assets ................................... 25,965 25,597 94,447
Long-term debt ................................. 50 50 50
Mandatorily redeemable preferred stock ......... 29,415 -- --
Total stockholders' (deficit) equity ........... (15,399) 13,648 82,498
</TABLE>
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(1) Gives effect, as of June 30, 1998, to the conversion of all outstanding
shares of the Series A Stock and the Series B Stock into an aggregate of
4,737,167 shares of Common Stock and the payment of approximately $368,000
in accrued dividends on the Series A Stock and the Series B Stock, all
upon the closing of this offering. See "Capitalization" and Note 5 of
Notes to Financial Statements.
(2) Adjusted to give effect to the sale of the shares of Common Stock offered
hereby at an assumed initial public offering price of $15.00 per share,
after deducting estimated underwriting discounts and commissions and
estimated offering expenses payable by the Company, and the application of
the net proceeds thereof. See "Use of Proceeds."
EXCEPT AS OTHERWISE NOTED, ALL INFORMATION IN THIS PROSPECTUS (I) GIVES
EFFECT TO THE CONVERSION OF ALL OF THE OUTSTANDING SHARES OF SERIES A STOCK AND
SERIES B STOCK INTO AN AGGREGATE OF 4,737,167 SHARES OF COMMON STOCK
CONCURRENTLY WITH THE CLOSING OF THIS OFFERING, (II) GIVES EFFECT TO A 3-FOR-1
SPLIT OF THE COMMON STOCK EFFECTED AS OF SEPTEMBER 1, 1998, AND (III) ASSUMES
NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. SEE "DESCRIPTION OF
CAPITAL STOCK" AND "UNDERWRITING."
6
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVES A HIGH
DEGREE OF RISK. THE FOLLOWING FACTORS, IN ADDITION TO THE OTHER INFORMATION
CONTAINED IN THIS PROSPECTUS, SHOULD BE CAREFULLY CONSIDERED IN EVALUATING THE
COMPANY AND ITS BUSINESS BEFORE PURCHASING SHARES OF THE COMMON STOCK OFFERED
HEREBY.
LIMITED OPERATING HISTORY
Although the Company was incorporated in March 1996, the Company did not
commence operations until January 1997 and did not advertise the Value America
online store until late January 1998. Accordingly, the Company has a limited
operating history upon which to base an evaluation of the Company and its
business and prospects. The Company's business and prospects must be considered
in light of the risks, expenses and difficulties frequently encountered by
companies in their early stages of development, particularly companies in new
and rapidly evolving markets, such as the market for online retailing and
electronic commerce. To address these risks, the Company must, among other
things, continue to develop and extend relationships with manufacturers for
merchandise, implement and successfully execute an evolving and unproven
business model, establish and upgrade internal accounting systems and controls,
manage growth, continue to develop its technological platform, continue to
develop and upgrade its transaction processing systems, continue to improve its
Internet site, anticipate and adapt to a developing market, develop online
service offerings that are equal or superior to those of the Company's
competitors, provide customer support and service, and identify, attract,
retain and motivate qualified personnel. There can be no assurance that the
Company will be successful in addressing such risks, and the failure to do so
could have a material adverse effect on the Company's business, financial
condition and results of operations. Due to the Company's limited operating
history, investors should not rely upon the Company's historical results of
operations as an indication of future performance. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Overview."
HISTORICAL AND ANTICIPATED LOSSES; UNCERTAIN AVAILABILITY OF ADDITIONAL FUNDING
To date, the Company has incurred significant start-up and other expenses,
including the costs of additional personnel and equipment, developing its
technology, and commencing sales and marketing efforts. These expenses have
resulted in substantial losses. For the year ended December 31, 1997 and the
six months ended June 30, 1998, the Company incurred net losses of $1.9 million
and $12.4 million, respectively, and as of June 30, 1998, the Company had an
accumulated deficit of $17.1 million. In order to succeed, the Company believes
that it must rapidly establish name recognition and a reputation for value, and
dramatically increase customer traffic through, and purchases from, the Value
America online store. The Company intends to invest extensively in marketing,
advertising and promotion, increase the number of its employees, and fund the
development of its technology and operating infrastructure. As a result, the
Company expects that it will continue to incur substantial operating losses for
the foreseeable future. Because the Company has narrow product gross margins,
its ability to achieve profitability depends upon its ability to generate and
sustain substantially increased revenue levels. The Company believes that one
or more substantial additional equity or debt financings may be required to
fund its operations. There can be no assurance that the Company will be able to
consummate any such financing on favorable terms, if at all. Similarly, there
can be no assurance that such financings, if any, will be adequate to meet the
Company's capital requirements. Any additional equity financing could result in
substantial dilution to the Company's stockholders, and any debt financing may
be costly and could involve restrictive covenants that preclude the Company
from making distributions to stockholders and taking other actions beneficial
to stockholders. The failure of the Company's marketing and promotion campaign
and other activities to generate substantially increased revenues or the
Company's inability to obtain needed capital would have a material adverse
effect on the Company's business, financial condition and results of
operations. Additionally, although the Company has experienced revenue growth
in recent periods, there can be no assurance that the Company's revenues will
continue to increase or even continue at their current levels. See "Use of
Proceeds," "Dilution," and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview."
EARLY STAGE OF DEVELOPMENT; NEED FOR IMPROVED OPERATIONAL AND FINANCIAL SYSTEMS
The Company's early stage of development and rapid growth have placed, and
are expected to continue to place, a significant strain on the Company's
managerial, operational and financial resources. From January 1, 1998 to August
31, 1998, the number of the Company's full-time equivalent employees increased
from 30 to 180. The Company continues to implement its business model of
offering for sale on the Internet a broad selection of brand name merchandise
that is shipped directly to the customer. Although the Company's business model
depends upon the direct sale of merchandise through the Company's online store,
to date a significant portion of the Company's revenues has been derived from
telephone orders generated by advertisements in the print media of particular
high profile or heavily discounted products from a limited number of vendors.
These telephone orders have been processed by employees in the Company's call
center. The success of the
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Company's business model will depend upon orders placed through the Company's
online store without the assistance of Company personnel, and continued
reliance by customers on telephone orders could have a material adverse effect
on the Company's business, financial condition and results of operations.
Moreover, the failure of the Company's marketing and promotion campaign to
generate dramatic increases in customer traffic through the Company's online
store and sustained levels of product purchases will have a material adverse
effect on the Company's business, financial condition and results of
operations. See "Business -- Order Fulfillment."
The Company's business model also depends upon the Company's ability to
offer a complete selection of brand name products in a broad variety of product
categories. Many of the Company's product categories do not yet provide a broad
product selection, and there can be no assurance that the Company will be able
to establish or maintain vendor relationships that will enable it to achieve
the breadth of product offerings necessary for the Company to succeed.
Moreover, there can be no assurance that customers will be satisfied with the
Company's current or future product offerings. The failure of the Company to
offer a satisfactory product selection could have a material adverse effect on
the Company's business, financial condition and results of operations. The
Company's success will also depend upon its ability to upgrade and maintain its
current systems and automate certain types of business transactions. The
Company's agreements with its product vendors generally require the Company to
place product orders through electronic data interchange ("EDI"). Since
February 1998, the Company has installed and tested software capable of placing
orders through EDI, electronic mail and automated facsimile transmission.
Beginning in May 1998, the Company began transmitting orders to vendors through
test EDI transmissions as well as parallel facsimile transmissions. In July
1998, the Company established one-way EDI connections for the electronic
delivery of purchase orders with 12 of its product vendors. Other vendors have
yet to be integrated onto the Company's EDI platform or have been unable or
unwilling to establish EDI connections with merchants such as the Company. To
date, the number of customer purchases has not exceeded the Company's capacity
to place orders in a timely manner. In light of the Company's planned
operations, the failure or inability of the Company to establish and utilize
reliable EDI-only connections with its product vendors could cause delays in
product ordering, shipping confirmations and fulfillment, which could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Order Fulfillment."
In addition, the Company believes that, to the extent that the number of
product orders increases, the Company will need to establish automated systems
to, among other things, track shipments of products from vendors to customers,
provide customer assistance and handle product returns. The failure of the
Company to establish and maintain adequate systems would have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business -- Systems Infrastructure, Technology and Security"
and " -- Customer Service."
In connection with their audit of the Company's financial statements for
the year ended December 31, 1997 and the three months ended March 31, 1998, the
Company's independent accountants advised the Company of certain weaknesses in
the Company's financial and accounting controls. These weaknesses included
matters relating to the Company's inability to determine product shipment dates
and order statuses on a timely basis, which might have made it difficult for
the Company to produce accurate financial reports on a timely basis. As a
result, the Company's independent accountants determined those matters
constituted a "reportable condition," which the American Institute of Certified
Public Accountants defines to be matters involving significant deficiencies in
the design or operation of the internal control structure that could adversely
affect a company's ability to record, process, summarize and report financial
data consistent with the assertions of management in such company's financial
statements.
In connection with their audit of the Company's financial statements for
the six months ended June 30, 1998, the Company's independent accountants
identified certain matters for which they recommended improvements in the
Company's financial and reporting controls. While the Company's independent
accountants did not advise the Company that any of the identified matters
constituted a reportable condition, there can be no assurance that any of the
identified matters will not adversely affect the Company's ability to produce
accurate financial statements on a timely basis or that there are not other
matters involving the Company's financial and accounting controls that fall
within the definition of a reportable condition. The audit procedures performed
by the independent accountants were for the purpose of expressing an opinion on
the Company's financial statements and not to provide assurance on the internal
control structure of the Company. The Company believes that ongoing
improvements in the Company's financial and management controls, reporting
systems and procedures are needed, and will continue to be needed, to manage
any future growth. The failure to implement or the inadequacy of such controls,
systems and procedures, or a subsequent failure by the Company to maintain and
adhere to existing controls, systems and procedures, would have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Securities Exchange Act of 1934, as amended (the "Exchange Act"),
requires the Company to devise and maintain a system of internal accounting
controls that meets certain specified minimum requirements. The Company
believes that
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additional improvements in the Company's financial and management controls,
reporting systems and procedures are needed, and will continue to be needed, to
manage any future growth. The failure to implement or the inadequacy of such
controls, systems and procedures, or a subsequent failure by the Company to
maintain and adhere to existing controls, systems and procedures, would have a
material adverse effect on the Company's business, financial condition and
results of operations. The failure to comply with the Company's obligations
under Section 13 of the Exchange Act could cause the Securities and Exchange
Commission (the "SEC") to seek to deregister the Common Stock under the
Exchange Act and result in a suspension of trading in the Common Stock.
UNPREDICTABILITY OF FUTURE REVENUES; POTENTIAL FLUCTUATIONS IN QUARTERLY
RESULTS
As a result of the Company's limited operating history and the emerging
nature of the market in which it competes, the Company is unable to forecast
its revenues accurately. The Company began to advertise in January 1998 and has
significantly modified its operations and consistently increased its monthly
advertising expenditures since such time. As a result, the Company has a
limited basis on which to evaluate the effect of these changes on the Company's
revenues. The Company's current and future expense levels are based largely on
its investment plans and estimates of future revenues and are to a large extent
fixed. Sales and operating results generally depend on the volume of, timing of
and ability to fulfill orders received, which are difficult to forecast. The
Company may be unable to adjust spending in a timely manner to compensate for
any unexpected revenue shortfall. Accordingly, any significant shortfall in
revenues in relation to the Company's planned expenditures would have an
immediate adverse affect on the Company's business, financial condition and
results of operations. Further, in response to changes in the competitive
environment, the Company may from time to time make certain pricing, service or
marketing decisions that could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business --
Competition."
The Company expects to experience significant fluctuations in its future
quarterly operating results due to a variety of factors, many of which are
outside the Company's control. Factors that may result in fluctuations in the
Company's quarterly operating results include: (i) the Company's ability to
attract and retain customers, maintain customer satisfaction and establish
consumer confidence in conducting transactions on the Internet environment,
(ii) the Company's ability to manage fulfillment operations electronically and
to establish competitive gross margins, (iii) the announcement or introduction
of new Web sites, services and products by the Company and its competitors,
(iv) price competition or higher vendor prices, (v) the level of use and
consumer acceptance of the Internet and other online services for the purchase
of technology, office and consumer products such as those offered by the
Company, (vi) the Company's ability to upgrade and develop its systems and
infrastructure and attract new personnel in a timely and effective manner,
(vii) the level of traffic on the Company's Web site, (viii) technical
difficulties, systems downtime or Internet "brownouts," (ix) the amount and
timing of operating costs and capital expenditures relating to expansion of the
Company's business, operations and infrastructure, (x) delays in revenue
recognition at the end of a fiscal period as a result of shipping or logistical
problems, (xi) the level of merchandise returns experienced by the Company,
(xii) governmental regulation and (xiii) general economic conditions. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Fluctuations in Operating Results."
CAPACITY CONSTRAINTS; RELIANCE ON INTERNALLY DEVELOPED SYSTEMS; SYSTEM
DEVELOPMENT RISKS
A key element of the Company's strategy is to generate a high volume of
traffic through, and purchases from, the Value America online store.
Accordingly, the availability, reliability and satisfactory performance of the
Company's Internet site, transaction processing systems and network
infrastructure are critical to the Company's reputation and its ability to
attract and retain customers and provide adequate customer service. The
Company's revenues depend on the number of visitors who shop at the Value
America online store and the volume of orders the Company fulfills. Any network
interruptions or system shortcomings that result in the unavailability of the
Company's Internet site or reduced order fulfillment would reduce the volume of
goods sold and the attractiveness of the Company's product and service
offerings. The Company has experienced system interruptions which it believes
may recur from time to time. Such delays or interruptions could negatively
impact a customer's shopping experience and reduce the likelihood that such
customer would return to the Company's online store. Substantial increases in
the volume of traffic on the Company's Internet site or the number of orders
placed by customers through the Company's online store will require the Company
to further expand and upgrade its technology, transaction processing systems
and network infrastructure. There can be no assurance that the Company will be
able to accurately project the rate or timing of increases, if any, in the use
of its Internet site, or to expand and upgrade its systems and infrastructure
to accommodate such increases in a timely manner.
The Company uses an internally developed system for its Internet site,
product presentations, and substantially all aspects of order fulfillment,
including order management, purchasing and shipping. This order fulfillment
system is not fully integrated with the Company's accounting system. To date,
development efforts for the Company's order fulfillment systems have
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focused primarily on support for rapid growth of order volume, and less on
traditional accounting, control and reporting aspects of system development. As
a result, the Company's current management information system is less efficient
with respect to traditional accounting-oriented reporting and requires manual
effort to prepare information for financial and accounting reporting. If the
volume of transactions were to increase substantially without enhancements to
the order fulfillment system, it would be difficult for management to produce
accurate financial statements and reporting information on a timely basis. The
Company's inability to add additional software and hardware or to develop and
upgrade further its existing technology, order fulfillment systems or network
infrastructure may cause unanticipated system disruptions, slower response
times, degradation in levels of customer service, impaired quality and speed of
order fulfillment, and delays or inaccuracies in reporting accurate financial
information, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations. There can be no
assurance that the Company will be able to upgrade and expand its order
fulfillment systems effectively, or to integrate any newly developed or
purchased modules with its existing systems. Any inability to do so could have
a material adverse effect on the Company's business, financial condition and
results of operations. See " -- Early Stage of Development; Dependence Upon
Improved Financial and Operational Systems" and "Business -- Systems
Infrastructure, Technology and Security."
DEPENDENCE ON CERTAIN MANUFACTURERS AND OTHER VENDORS
The Company is entirely dependent upon manufacturers and distributors to
provide merchandise for sale through the Company's online store. During the six
month period ended June 30, 1998, goods manufactured by IBM, Hewlett-Packard
and Toshiba accounted for approximately 62%, 25% and 6%, respectively, of the
Company's net sales. The Company also relies upon its product vendors to
fulfill a number of traditional retail functions, including maintaining
inventory, accepting product returns, and preparing merchandise for shipment to
individual customers. There can be no assurance that vendors of the products
that the Company wishes to offer will perform these tasks on behalf of the
Company on terms acceptable to the Company or will be willing or able to
establish the necessary communication protocols to support the Company's direct
shipment infrastructure. Moreover, the Company has no effective means, other
than through contractual provisions, to control the extent to which its product
vendors will perform these tasks to the Company's satisfaction. The Company's
product vendors have no obligation to supply products to the Company or to
perform these other tasks and may terminate their relationships with the
Company at any time and without penalty. Because the Company has not
established regular purchasing patterns with a substantial number of its
product vendors, there can be no assurance that any vendor with a limited
inventory would give the Company any priority in the allocation of its
available inventory. The Company is unable to assess the availability of
inventory prior to the acceptance of an order and the Company may accept orders
which it is unable to fulfill. In addition, the Company has entered into
long-term agreements to purchase certain types of office and other products
exclusively from certain vendors. These contracts do not guarantee the
availability of merchandise, the continuation of particular payment terms, or
the extension of credit limits. These agreements may preclude the Company from
obtaining such merchandise at the lowest price or on the most favorable terms.
The failure of the Company or its vendors to arrange for the delivery of
products in a timely manner, to accept product returns, to provide good
customer service or to prepare merchandise properly for shipment to customers
could cause customer dissatisfaction and result in the cancellation of orders,
either of which could have a material adverse effect on the Company's business,
financial condition and results of operations. The failure of the Company to
maintain its relationships with existing product vendors on acceptable
commercial terms, to establish similar relationships with vendors of products
not currently offered by the Company but demanded by its customers, or to
obtain satisfactory performance from such vendors could have a material adverse
effect on the Company's business, financial condition and results of
operations. See "Business -- Supplier Relationships."
DEPENDENCE ON KEY PERSONNEL; NEED FOR ADDITIONAL QUALIFIED PERSONNEL
The Company's performance is substantially dependent on the continued
services and performance of its current senior management and other key
personnel, particularly Craig A. Winn, the Company's Chairman, President and
Chief Executive Officer, Rex Scatena, the Company's President -- Consumer
Products Division, and Joseph L. Page, the Company's Executive Vice President
and Chief Technology Officer. The Company does not have employment agreements
with Messrs. Winn and Scatena. The loss of the services of any of these
individuals would have a material adverse effect on the Company's business,
financial condition and results of operations. Certain members of the Company's
senior management have joined the Company only recently, including: Dean M.
Johnson, the Company's Executive Vice President, Chief Financial Officer and
Secretary, who joined the Company in November 1997; Marc McCullough, the
Company's President -- Office Products Division, who joined the Company in
April 1998; Kimberly E. De Jong, the Company's President -- Technology Products
Division, who joined the Company in May 1998; Jerry K. Goode, the Company's
Vice President -- Engineering, who joined the Company in May 1998; Marcus
Nucci, the Company's Vice President -- Systems Development, who joined the
Company in June 1998; and Glenda Dorchak, the Company's Senior Vice President
- -- Marketing and Advertising, who joined the Company
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in August 1998. In order to achieve its business objectives, the Company
believes that it must hire additional personnel to fill certain key managerial
positions. The Company's future success will depend to a significant degree on
the ability of its current executive officers and other current and future
members of senior management to establish clear lines of responsibility and
authority, to work effectively as a team and to gain the trust and confidence
of the Company's other employees. The Company believes that its future success
will also depend upon its ability to identify, attract, train, motivate and
retain other highly skilled technical, managerial, merchandising, engineering,
accounting, marketing and customer service personnel. Competition for such
personnel is intense, and there can be no assurance that the Company will be
successful in attracting, training, motivating or retaining the necessary
personnel, and the failure to do so could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business -- Employees" and "Management."
DEVELOPING MARKET; UNPROVEN ACCEPTANCE OF THE INTERNET AS A MEDIUM FOR COMMERCE
The Company's long-term viability is substantially dependent upon the
widespread acceptance and use of the Internet as a medium of commerce. The use
of the Internet to sell goods and services has developed only recently, and
there can be no assurance that a sufficiently large number of customers will
begin to use the Internet as a medium of commerce. Demand and market acceptance
for recently introduced products and services over the Internet are subject to
a high level of uncertainty and there exist few proven electronic commerce
business models. For the Company to be successful, consumers and manufacturers
that have historically relied upon traditional means of commerce to purchase
and sell merchandise must accept and utilize new ways of conducting business
and exchanging information. The Internet may not prove to be a viable medium of
commerce for certain purposes because of inadequate development of the
necessary infrastructure, such as a reliable network backbone, or delayed
development of enabling technologies, such as high speed modems and high speed
communication lines. The Internet has experienced, and is expected to continue
to experience, significant growth in the number of users and amount of traffic.
There can be no assurance that the Internet infrastructure will continue to be
able to support the demands placed on it by this continued growth. In addition,
delays in the development or adoption of new standards and protocols to handle
increased levels of Internet activity or increased governmental regulation
could slow or stop the growth of the Internet as a viable medium for commerce.
Moreover, critical issues concerning the commercial use of the Internet
(including security, reliability, accessibility and quality of service) remain
unresolved and may adversely affect the growth of Internet use or the
attractiveness of conducting commerce online. Because the exchange of
information on the Internet is new and evolving, there can be no assurance that
the Internet will prove to be a viable medium of commerce. The failure to
resolve critical issues concerning the commercial use of the Internet, the
failure of the necessary infrastructure to develop in a timely manner, or the
failure of the Internet to continue to develop rapidly as a viable medium of
commerce would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Industry
Background."
COMPETITION
The electronic commerce market is new, rapidly evolving and intensely
competitive, and the Company expects competition to increase in the future.
Barriers to entry are minimal, and current and new competitors can establish
Internet stores at relatively low cost. Moreover, all of the products sold by
the Company are widely available through established traditional retail
channels, and accordingly, the Company competes not only with other
participants in the electronic commerce market but also with traditional
retailers and resellers. The Company currently or potentially competes with a
variety of other companies depending on the type of merchandise and sales
format offered to customers. These competitors and potential competitors
include: (i) segment-specific online retailers such as Amazon.com, BuyComp,
CDNow, Cyberian Outpost, Dell Computer and Gateway International; (ii) online
vendors of a broad selection of consumer products such as Cendant, CyberShop,
iMall, Internet Shopping Network, iQVC, ONSALE and Wal-Mart Online; (iii) a
number of indirect competitors that derive a substantial portion of their
revenues from electronic commerce, including America Online, Excite, Infoseek,
Lycos, Microsoft Network, Prodigy and Yahoo!; (iv) mail order catalog operators
such as Lands' End, Micro Warehouse, Sharper Image, Spiegel and
Williams-Sonoma; (v) retail and warehouse/discount store operators such as
Circuit City, Home Depot, Office Depot, Price/Costco, Staples and Target; and
(vi) other national and international retail, catalog, distribution and
manufacturing companies. The Company believes the principal competitive factors
in its markets are breadth of selection, quality of brands, price, convenience,
customer service, reliability and speed of fulfillment. Most of the Company's
current and potential competitors have substantially longer operating
histories, larger customer bases, greater brand recognition and significantly
greater financial, marketing and other resources than the Company. In addition,
competing online retailers may be acquired by, receive investments from or
enter into other commercial relationships with larger, well-established and
well-financed companies as the use of the Internet and other online services
increases. Many of the Company's competitors may be able to secure merchandise
from vendors on more favorable terms, respond more quickly to changes in
customer preferences, devote greater resources to marketing and promotional
campaigns, adopt more aggressive pricing or inventory availability policies and
devote substantially more resources to Internet site and systems development
than the Company. For example, a number of Internet companies
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offer search engines and other tools that enable potential customers to locate
multiple vendors of products they might wish to buy. Extensive use of these
search engines and tools could result in severe price competition, which could
have a material adverse effect on the Company's business, financial condition
and results of operations. Current and potential competitors have established
or may establish cooperative relationships among themselves or directly with
vendors to obtain exclusive or semi-exclusive sources of merchandise.
Accordingly, it is possible that new competitors or alliances among competitors
and vendors may emerge and rapidly acquire market share. Increased competition
may result in reduced operating margins, loss of market share and a diminished
brand franchise, any one of which could materially adversely affect the
Company's business, results of operations and financial condition. There can be
no assurance that the Company will be able to compete successfully against
current and future competitors, and competitive pressures faced by the Company
may have a material adverse effect on the Company's business, financial
condition and results of operations. New technologies and the expansion of
existing technologies may increase the competitive pressures on the Company. In
addition, companies that control access to transactions through network access
or Web browsers could grant exclusive access rights to the Company's
competitors or charge the Company a substantial fee for inclusion, the
occurrence of either of which could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business -- Competition."
INTERNET COMMERCE SECURITY RISKS
A significant precondition for the successful development of electronic
commerce is the secure transmission of confidential information over public
networks. The Company relies on licensed, third-party encryption technology to
transmit confidential payment and other information securely over the Internet.
Nonetheless, there can be no assurance that existing technologies, advances in
computer capabilities, new discoveries in the field of cryptography or other
events or developments will not permit a compromise or breach of the security
of the customer transaction data of the Company and other online retailers. Any
such compromise or breach could substantially impair customer confidence in the
Company's online store or otherwise have a material adverse effect on the
Company's business, financial condition and results of operations. A party who
is able to circumvent the Company's security measures could destroy valuable
transaction and other data, misappropriate proprietary information or cause
interruptions in the Company's operations. The Company expects that it will be
required to expend capital and other resources to protect against the threat of
such security breaches or to alleviate problems caused by such breaches.
Concerns over the security of Internet transactions and the privacy of users
may also inhibit the growth of the Internet generally, especially as a medium
of commerce. To the extent that activities of the Company or third party
contractors involve the storage and transmission of proprietary information,
such as credit card numbers, security breaches could expose the Company to a
risk of loss or litigation and possible liability. There can be no assurance
that the Company's security measures will prevent security breaches or that
failure to prevent such security breaches will not have a material adverse
effect on the Company's business, financial condition and results of
operations. See "Business -- Systems Infrastructure, Technology and Security."
RELIANCE ON OTHER THIRD PARTIES
In addition to its product vendors, the Company's operations depend to a
significant degree on a number of other third parties, including Internet
service providers and less-than-truckload delivery services. The Company has no
effective control over these third parties and no long-term contractual
relationships with any of them. For example, the Company relies on UUNet and
MCI to connect the Company's Web site to the Internet. From time to time, the
Company could experience temporary interruptions in its Web site connection and
its telecommunications access. Continuous or prolonged interruptions in the
Company's Web site connection or in its telecommunications access would have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company's agreements with its Internet service
providers place certain limits on the Company's ability to obtain damages from
the service providers for failure to maintain the Company's connection to the
Internet. The Company also uses third-party delivery services, including United
Parcel Service and Roadway, to deliver all products it sells to its customers.
Increases in delivery costs, delays in delivery or the failure of these third
parties to deliver the Company's products for a sustained period of time as a
result of a strike or for other reasons could have a material adverse effect on
the Company's business, financial condition and results of operations.
In connection with the sale of Series A Stock and Series B Stock to The
Union Labor Life Insurance Company ("ULLICO"), the Company agreed that so long
as ULLICO remains a stockholder of the Company, the Company will use shippers
that have recognized one or more unions as the collective bargaining
representative of some or all of its employees, unless there is no viable union
transportation option available. This agreement may limit the Company's ability
to utilize certain third party delivery services. The failure of the Company to
develop and maintain satisfactory relationships with third party vendors or
poor performance by these third parties could have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Business -- Order Fulfillment."
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RAPID TECHNOLOGICAL CHANGE
The Internet and the electronic commerce industry are characterized by
rapid technological change, changes in user and customer requirements and
preferences, frequent new product and service introductions, and the emergence
of new industry standards and practices that could render the Company's
existing online systems obsolete. To remain competitive, the Company must
continue to enhance and improve the responsiveness, functionality and features
of the Value America online store. The Company's success will depend, in part,
on its ability to identify, select and license leading technologies useful in
its business, enhance its existing services, develop new services and
technologies that address the increasingly sophisticated and varied needs of
its prospective customers, and respond to technological advances and emerging
industry standards and practices in a cost-effective manner and on a timely
basis. There can be no assurance that the Company will successfully use new
technologies effectively or adapt its Internet site, technology and transaction
processing systems to customer requirements or emerging industry standards. The
failure of the Company to adapt in a timely manner to changing market
conditions or customer requirements for technical, legal, financial or other
reasons could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Systems
Infrastructure, Technology and Security."
RISK OF SYSTEM FAILURE; SINGLE SITE
The Company's business is dependent on the efficient and uninterrupted
operation of its computer and communications hardware systems. These systems
are presently located at a single site in Charlottesville, Virginia, and the
Company does not have a redundant "mirror" site. The Company intends to move
substantially all of its operations to a new location during the fourth quarter
of 1998, and there can be no assurance that system interruptions will not occur
during the move. The Company's computer and communications hardware systems are
also vulnerable to interruption or damage from fire, flood, prolonged power
loss, telecommunications failure, earthquake and other events. Any system
interruptions that result in the unavailability of the Company's Internet site
or reduced transaction processing performance could reduce the volume of
products sold, damage the Company's reputation and cause customer
dissatisfaction, any of which could have a material adverse effect on the
Company's business, financial condition and results of operations. The
Company's coverage limits on its property and business interruption insurance
may not be adequate to compensate the Company for all losses that may occur.
Despite the implementation of network security measures by the Company, its
servers are also vulnerable to computer viruses, physical or electronic
break-ins and other disruptive problems. Computer viruses, break-ins or other
problems caused by third parties could lead to interruptions, delays, loss of
data or cessation of service to the Company's customers, any of which could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business -- Systems Infrastructure, Technology
and Security."
LIMITED CUSTOMER SERVICE CAPABILITIES
As of August 31, 1998, the Company employed 43 full-time equivalent
employees in its customer service department. On such date, the Company had
limited capabilities to provide customer service in the form of telephone
ordering, telephone support and e-mail replies to customer inquiries. The
Company has experienced periods during which its personnel were unable to meet
the Company's target response time for customer service calls or inquiries.
There can be no assurance that the Company will be able to hire the personnel
necessary to build a customer service organization that is able to respond
satisfactorily to the needs of the Company's customers. The failure of the
Company to provide adequate customer service could damage the Company's
reputation and could cause customers to transfer their business to other
Internet retailers or traditional retail stores. Accordingly, there can be no
assurance that the Company will not experience customer service capacity
constraints and the failure to remedy such constraints in a timely manner could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business -- Customer Service."
SALES AND OTHER TAXES
The Company does not currently collect sales or other taxes in respect of
shipments of goods into states other than Virginia. However, one or more
federal, state or local governmental authorities may seek to impose sales tax
collection obligations on companies that engage in electronic commerce via the
Internet. Further, a requirement to pay sales tax may discourage customers from
making product purchases through online stores. In addition, any new operations
in other jurisdictions could subject shipments to sales taxes under the laws of
those jurisdictions. Any requirement by multiple jurisdictions for the Company
to collect and remit sales taxes could result in potentially cumbersome
administrative burdens for the Company. Further, a successful assertion by any
jurisdiction that the Company should collect sales or other taxes on the sale
of merchandise could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Government
Regulation."
13
<PAGE>
PROPRIETARY RIGHTS; INFRINGEMENT CLAIMS
The Company's success will depend in part on its proprietary intellectual
property. The Company principally relies upon trade secret and contract law to
protect its proprietary intellectual property. There can be no assurance that
the steps taken by the Company will be adequate to prevent misappropriation of
its proprietary intellectual property or that the Company's competitors will
not independently develop technologies that are substantially equivalent or
superior to the Company's technology. The Company has registered the "Value
America" service mark in the United States for limited uses and claims service
mark rights in, and has applied for service mark registrations in the United
States for, a number of other uses. There can be no assurance that the Company
will be able to secure significant protection for these service marks. It is
possible that competitors of the Company or others will adopt product or
service names similar to "Value America" and the Company's other service marks,
thereby impeding the Company's ability to build brand identity and possibly
leading to customer confusion. The failure or inability of the Company to
protect the name "Value America" adequately would have a material adverse
effect on the Company's business, financial condition and results of
operations. See "Business -- Intellectual Property."
Due to the importance of copyright, trade secret and contractual
protections and the competitive nature of its industry, the Company may also be
subject to claims that its technologies infringe on the proprietary rights of
other companies. There can be no assurance that such claims will not arise,
that the Company will have sufficient resources to pursue any resulting
litigation to a final judgment, or that the Company will prevail in such
litigation. The Company could incur substantial costs and diversion of
management resources with respect to the defense of any claims relating to
proprietary rights, which could materially affect the Company's business,
financial condition and results of operations. Parties making such claims could
secure a judgment awarding substantial damages, as well as injunctive or other
equitable relief that could effectively block the Company's ability to exploit
its products and services in the United States or abroad. Such a judgment could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business -- Intellectual Property."
CONTROL BY EXECUTIVE OFFICERS AND DIRECTORS
Upon completion of this offering, the Company's executive officers and
directors will, in the aggregate, beneficially own approximately 81.5% of the
outstanding Common Stock. As a result, such persons, acting together, will have
the ability to control substantially all matters submitted to stockholders of
the Company for approval (including the election and removal of directors and
any merger, consolidation or sale of all or substantially all of the Company's
assets) and to control the management and affairs of the Company. Accordingly,
such concentration of ownership may have the effect of delaying, deferring or
preventing a change in control of the Company, impeding a merger,
consolidation, takeover or other business combination involving the Company or
discouraging a potential acquiror from making a tender offer or otherwise
attempting to obtain control of the Company, which in turn could have an
adverse effect on the market price of the Common Stock. See "Management" and
"Principal Stockholders."
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES
The Company is currently subject to few laws and regulations directly
applicable to access to or commerce on the Internet. However, due to the
increasing popularity and use of the Internet, it is possible that a number of
laws and regulations may be adopted with respect to the Internet, covering
issues such as privacy, pricing and characteristics and quality of products and
services. Furthermore, the growth and development of electronic commerce may
prompt calls for more stringent consumer protection laws that may impose
additional burdens on companies conducting business over the Internet. The
adoption of any additional laws or regulations may decrease the growth of
Internet usage, which, in turn, could decrease the demand for the Company's
service, increase the Company's costs of doing business or otherwise have a
material adverse effect on the Company's business, financial condition and
results of operations. Moreover, the applicability to the Internet of existing
laws in various jurisdictions governing issues such as property ownership,
sales tax, libel and personal privacy is uncertain and may take years to
resolve. Any such new legislation or regulation, or the application of laws or
regulations from jurisdictions whose laws do not currently apply to the
Company's business, could have a material adverse effect on the Company's
business, financial condition and results of operations.
Several telecommunications carriers are seeking to have telecommunications
over the Internet regulated by the Federal Communications Commission (the
"FCC") in the same manner as other telecommunications services. Because the
growing popularity and use of the Internet has burdened the existing
telecommunications infrastructure and many areas with high Internet use have
begun to experience interruptions in phone service, local telephone carriers,
such as Pacific Bell, have petitioned the FCC to regulate Internet service
providers and online service providers in a manner similar to long distance
telephone carriers and to impose access fees on such providers. If any such
petition is granted, or the relief sought therein is otherwise granted, the
costs of communicating on the Internet could increase substantially,
potentially slowing the growth
14
<PAGE>
in the use of the Internet. Any such new legislation or regulation, or new
applications or interpretations of existing laws, could have a material adverse
effect on the Company's business, financial condition and results of
operations.
In addition, U.S. and foreign laws regulate certain uses of customer
information and the development and sale of mailing lists. New restrictions may
arise in this area that could have an adverse affect on the Company.
The law regarding linking to and framing of third-party Web sites without
permission is uncertain. The Company may be asked to pay a license fee or cease
linking or framing. See "Business -- Government Regulation."
RECENT AND CONTINUING PUBLICITY
The Company has received, and may continue to receive, a high degree of
media coverage, including coverage that is not directly attributable to
statements by the Company's executive officers and employees. Neither the
Company nor any of the Underwriters has confirmed, endorsed or adopted these
third-party statements for utilization by, or distribution to, prospective
purchasers in this offering. In addition, two Charlottesville, Virginia
periodicals, THE DAILY PROGRESS and C-VILLE WEEKLY, published articles
regarding the Company in July 1998. The articles included statements attributed
to Craig A. Winn and other Value America personnel. Certain of the statements
concerned the purchase of securities of the Company by certain investors,
including Vulcan Ventures Incorporated, a widely followed investment entity
organized by Paul Allen, a founder of Microsoft, Inc. None of the statements in
the articles should be construed as an endorsement of the Company, its business
plan or its future prospects by such investors or as a recommendation by those
investors to purchase any shares of Common Stock in this offering. The article
in THE DAILY PROGRESS overstates the amount of proceeds recovered by the
Company from these investors; in fact, the Company received approximately $18.8
million from these investors with the remainder going to selling stockholders.
See "Certain Transactions." The article states that the Company was discussing
an arrangement with Yahoo! to offer links from the Yahoo! Web browser home page
to the Value America online store; no such arrangement exists as of the date
hereof and it is the policy of the Company not to disclose the existence,
status or termination of nonbinding negotiations regarding business
arrangements. The article significantly overstates the amount of the Company's
expenditures on advertising to date; in fact, during the six months ended June
30, 1998 and the year ended December 31, 1997, the Company's sales and
marketing expenses totaled $8.9 million and $488,000, respectively. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The article substantially overstates the number of products
offered by the Company through its online store. The Company does not believe
information as to its product count is meaningful to potential investors, since
the count may vary materially depending upon the extent to which different
features and configurations of an item are assumed to constitute different
products. See "Business -- The Value America Store -- Wide Selection of Leading
Brand Products." The article overstates the number of the Company's employees;
in fact, at June 30, 1998, the Company had 133 full-time equivalent employees.
See "Business -- Employees." The article states that William D. Savoy is a
member of the Board of Directors; in fact, Mr. Savoy will not begin to serve as
a director until the closing of this offering. See "Management -- Executive
Officers, Directors and Key Personnel." The article incorrectly states that the
Company is seeking "permanent" facilities to occupy in lieu of facilities
recently leased by the Company. See "Business -- Facilities." As a result of
the inaccuracies contained in the articles, no reliance should be placed on any
of the statements made in either article. To the extent that any such
statements are inconsistent with, or conflict with, the information contained
in this Prospectus, or otherwise relate to information contained in this
Prospectus, they are disclaimed by the Company and the Underwriters. In
evaluating an investment in shares of Common Stock offered hereby, prospective
investors should not rely on third-party statements, statements in the articles
in THE DAILY PROGRESS and C-VILLE WEEKLY, or any other information not
contained in this Prospectus.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish twenty-first century
dates from twentieth century dates. As a result, in less than eighteen months,
computer systems and/or software may need to be upgraded to comply with such
"Year 2000" requirements. There can be no assurance that the Company's systems
are Year 2000 compliant. For example, the Company utilizes third-party
equipment and software that may or may not be Year 2000 compliant. Failure of
the Company's systems or such third-party equipment or software to operate
properly with regard to the Year 2000 problem could require the Company to
incur unanticipated expenses to remedy any problems, which could have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company currently is unable to predict the extent to
which Year 2000 compliance issues will affect its vendors' systems (insofar as
they relate to the Company's business) or the extent to which the Company would
be vulnerable to any failure by its vendors to remediate Year 2000 compliance
issues on a timely basis. The failure of a major vendor's systems to operate
properly with respect to the Year 2000 problem on a timely basis or a Year 2000
conversion that is incompatible with the Company's systems could have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, most of the
15
<PAGE>
purchases from the Company's store are made with credit cards via the Internet,
and the Company's operations may be materially adversely affected to the extent
its customers are unable to use their credit cards or access the Internet due
to Year 2000 problems that are not remedied by their credit card vendors or by
the organizations responsible for maintaining and providing access to the
Internet. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Year 2000 Compliance."
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
Sales of a substantial number of shares of Common Stock in the public
market could have a material adverse effect on the market price of the Common
Stock and could impair the Company's ability to raise capital through
additional sales of its equity securities. Following the closing of this
offering, there will be 32,889,667 shares of Common Stock outstanding (based on
shares outstanding on August 31, 1998), of which the 5,000,000 shares of Common
Stock offered hereby will generally be freely tradable in the public market.
Upon the expiration of "lock-up" agreements between certain stockholders of the
Company and the Representatives of the Underwriters, 180 days after the date of
this Prospectus (or earlier with the consent of BancBoston Robertson Stephens
in certain cases), approximately 25,026,075 of the remaining shares of
outstanding Common Stock will be eligible for immediate sale in the public
market under Rules 144 and 701 under the Securities Act. Approximately 90 days
after the closing of this offering, the Company intends to register on Form S-8
an aggregate of 3,750,000 shares of Common Stock reserved for issuance under
the Incentive Plan, which would permit the immediate resale in the public
market of any shares of Common Stock issued pursuant to that plan. Upon the
expiration of the lock-up agreements referred to above, the holders of
approximately 5,355,141 shares of Common Stock will be entitled to exercise
certain registration rights. If those holders, by exercising their registration
rights, cause a large number of shares to be registered and sold in the public
market, such sales could have a material adverse effect on the market price of
the Common Stock. See "Management -- Incentive Plan," "Shares Eligible for
Future Sale" and "Underwriting."
ANTI-TAKEOVER PROVISIONS; INDEMNIFICATION
Upon the closing of the offering, the Company's Articles of Incorporation,
as amended (the "Articles"), and Bylaws will provide for a classified Board of
Directors, the removal of directors only with cause, and advance notice
requirements for director nominations and actions to be taken at annual
meetings of the Company's stockholders. The Company is subject to certain
provisions of the Virginia Stock Corporation Act (the "Virginia Act") that, in
general, (i) prevent an Interested Stockholder (defined generally as a person
owning more than 10% of any class of the Company's voting securities) from
engaging in an "Affiliated Transaction" (as defined herein) with the Company
unless certain conditions are met and (ii) deny voting rights to shares
acquired by a person in a Control Share Acquisition (defined generally as an
acquisition resulting in voting power which exceeds one-fifth, one-third or a
majority) unless such rights are granted by the Company's stockholders, and
permit the Company, under certain circumstances, to redeem the shares so
acquired. Such provisions could impede any merger, consolidation, takeover or
other business combination involving the Company or discourage a potential
acquirer from making a tender offer or otherwise attempting to obtain control
of the Company. See "Description of Capital Stock -- Anti-Takeover Effects of
Provisions of the Articles and Bylaws."
The Articles require the Company to indemnify directors and officers
against liabilities and expenses sustained by them with respect to claims
brought against them in their capacities as directors and officers. Such
provisions may deprive stockholders of the opportunity to recover damages from
the Company's directors and officers for acts or omissions of directors or
officers unless the exceptions to liability limitation can be proven. See
"Business -- Elimination of Liability and Indemnification."
NO PUBLIC MARKET; POTENTIAL STOCK PRICE VOLATILITY
Prior to this offering, there has been no public market for the Common
Stock. There can be no assurance that an active public market will develop or
be sustained after this offering or that investors will be able to sell shares
of Common Stock should they desire to do so. The initial public offering price
will be determined by negotiations among the Company and the Representatives of
the Underwriters and may bear no relationship to the price at which the Common
Stock will trade upon completion of this offering. See "Underwriting" for a
discussion of the factors to be considered in determining the initial public
offering price. The market price of the Common Stock is likely to be highly
volatile and could be subject to wide fluctuations in response to factors such
as actual or anticipated variations in the Company's results of operations,
announcements of technological innovations, new sales formats by the Company or
its competitors, changes in financial estimates by securities analysts,
conditions and trends in the Internet and electronic commerce industries,
adoption of new accounting standards affecting the retail sales industry,
general market conditions and other factors. Further, the stock markets have
experienced extreme price and volume fluctuations that have particularly
affected the market prices of equity securities of many Internet companies and
that often have been unrelated or disproportionate to the operating performance
of those companies. The trading prices of the stocks of many Internet companies
are at or near historical highs and reflect price-to-earnings ratios
substantially above historical market averages. There can be no assurance that
these trading prices and price-to-earnings
16
<PAGE>
ratios will be sustained. These broad market factors may adversely affect the
market price of the Common Stock. In the past, following periods of volatility
in the market price of a company's securities, securities class action
litigation has often been instituted against such company. Any such litigation
instituted against the Company could result in substantial costs and a
diversion of management's time, attention and resources, which could have a
material adverse effect on the Company's business, financial condition and
results of operations.
BROAD MANAGEMENT DISCRETION IN ALLOCATION OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common
Stock offered hereby at an assumed initial public offering price of $15.00 per
share, after deducting estimated underwriting discounts and commissions and
estimated offering expenses, are estimated to be approximately $68.9 million.
The Company intends to use the net proceeds of this offering for working
capital and other general corporate purposes, including advertising and
promotion, development of system enhancements, relocation and expansion of
corporate facilities, payment of accrued preferred stock dividends, and
potential acquisitions of, or investments in, complementary businesses and
technologies. Accordingly, the Company's management will retain broad
discretion as to the allocation of the proceeds of this offering. The failure
of management to apply such funds effectively could have a material adverse
effect on the Company's business, financial condition and results of
operations. See "Use of Proceeds."
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of Common Stock in this offering will experience immediate and
substantial dilution of $12.49 per share in the net tangible book value of the
Common Stock from the initial public offering price (assuming an initial public
offering price of $15.00 per share). To the extent that outstanding options and
warrants to purchase shares of Common Stock are exercised, there may be further
dilution. See "Dilution."
NO DIVIDENDS ON COMMON STOCK
The Company has not paid any cash or other dividends on its Common Stock
and intends for the foreseeable future to retain any earnings to fund
operations. See "Dividend Policy."
17
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 5,000,000 shares of
Common Stock offered hereby are estimated to be $68.9 million ($72.8 million if
the Underwriters' over-allotment option is exercised in full), assuming an
initial public offering price of $15.00 per share, after deducting estimated
underwriting discounts and commissions and estimated offering expenses payable
by the Company. The Company intends to use its net proceeds of this offering
for working capital and other general corporate purposes, including the
implementation of the Company's marketing and advertising strategy, the
development of system enhancements, the relocation and expansion of corporate
facilities, and the payment of preferred stock dividends. A portion of the net
proceeds may also be used for the acquisition of, or investment in, businesses
and technologies that are complementary to those of the Company. The Company
currently expects to utilize a majority of the net proceeds from this offering
in connection with the Company's advertising and promotional campaign. From
February 1998 through June 1998, the Company spent in excess of $1.0 million
per month on advertising and promotional expenses, and the Company intends to
increase its sales and marketing expenses significantly following the
completion of this offering. The Company intends to apply approximately
$368,000 of its net proceeds to pay dividends to holders of Series A Stock and
Series B Stock at the closing of this offering. See "Dividend Policy." Pending
such uses, the Company intends to invest such funds in short-term,
investment-grade, interest-bearing securities.
DIVIDEND POLICY
In March and July 1998, the Company paid $145,000 and $125,000,
respectively, in dividends on outstanding shares of the Series A Stock. No
dividends have yet been paid on the Series B Stock. The Company expects to pay
additional dividends in the aggregate amount of approximately $368,000 to the
holders of the Series A Stock and the Series B Stock upon the closing of this
offering and the resulting conversion of the Series A Stock and the Series B
Stock into shares of Common Stock. The Company has never declared or paid
dividends on the Common Stock. The Company intends to retain its earnings, if
any, for use in its operations and does not intend to pay cash dividends on the
Common Stock in the foreseeable future. Payments of future cash dividends, if
any, will be at the discretion of the Company's Board of Directors after taking
into account various factors, including the Company's financial condition,
operating results, and current and anticipated cash needs. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
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<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
June 30, 1998 on: (i) an actual basis; (ii) a pro forma basis giving effect, as
of June 30, 1998, to the conversion of all outstanding shares of the Series A
Stock and the Series B Stock into an aggregate of 4,737,167 shares of Common
Stock and the payment of approximately $368,000 in accrued dividends on the
Series A Stock and the Series B Stock, all upon the closing of this offering;
and (iii) a pro forma basis, as adjusted to give effect to the sale of the
shares of Common Stock offered hereby at an assumed initial public offering
price of $15.00 per share, after deducting estimated underwriting discounts and
commissions and estimated offering expenses, and the application of the net
proceeds thereof. This table should be read in conjunction with the Financial
Statements and the Notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1998
-----------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------------ ----------- ------------
(IN THOUSANDS)
<S><C>
Long-term debt ................................................. $ 50 $ 50 $ 50
--------- --------- ---------
Mandatorily redeemable preferred stock:
Series A Preferred Stock (convertible), without par value, 5%
cumulative dividend; 5,000,000 shares authorized, issued and
outstanding, actual; 0 shares outstanding, pro forma and pro
forma as adjusted .......................................... 11,735 -- --
Series B Preferred Stock (convertible), without par value, 5%
cumulative dividend; 617,979 shares authorized, issued and
outstanding, actual; 0 shares outstanding pro forma and pro
forma as adjusted .......................................... 17,680 -- --
--------- --------- ---------
29,415 -- --
--------- --------- ---------
Stockholders' equity (deficit):
Common Stock, without par value; 50,000,000 shares
authorized, actual and 100,000,000 shares authorized, pro
forma and pro forma as adjusted; 23,152,500 shares issued
and outstanding, actual; 27,889,667 shares issued and
outstanding, pro forma; 32,889,667 shares issued and
outstanding, pro forma as adjusted ......................... 1,657 30,704 99,554
Accumulated deficit ......................................... (17,056) (17,056) (17,056)
--------- --------- ---------
Total stockholders' equity (deficit) ...................... (15,399) 13,648 82,498
--------- --------- ---------
Total capitalization ................................... $ 14,066 $ 13,698 $ 82,548
========= ========= =========
</TABLE>
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<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of June 30, 1998
was approximately $13.6 million, or $0.49 per share of Common Stock. Pro forma
net tangible book value per share represents the total amount of the Company's
tangible assets less total liabilities, divided by the number of shares of
Common Stock outstanding after giving effect, as of June 30, 1998, to the
conversion of all outstanding shares of the Series A Stock and the Series B
Stock into shares of Common Stock and to the payment of approximately $368,000
in accrued dividends on the Series A Stock and the Series B Stock, all upon the
closing of this offering. After giving effect to the sale of the Common Stock
offered hereby (based upon an assumed initial public offering price of $15.00
per share and after deducting estimated underwriting discounts and commissions
and estimated offering expenses), the pro forma net tangible book value of the
Company as of June 30, 1998 would have been approximately $82.5 million, or
$2.51 per share. This represents an immediate increase in pro forma net
tangible book value of $2.02 per share to existing stockholders and an
immediate dilution of $12.49 per share to new investors. The following table
illustrates this per share dilution:
<TABLE>
<S><C>
Assumed initial public offering price per share ....................... $ 15.00
Pro forma net tangible book value per share as of June 30, 1998 ..... $ 0.49
Increase per share attributable to new investors .................... 2.02
-------
Pro forma net tangible book value per share after the offering ........ 2.51
--------
Dilution in net tangible book value per share to new investors ........ $ 12.49
========
</TABLE>
The following table summarizes, on a pro forma as adjusted basis as of
June 30, 1998, after giving effect, as of June 30, 1998, to the conversion of
all outstanding shares of the Series A Stock and the Series B Stock into shares
of Common Stock, the number of shares of Common Stock purchased from the
Company, the total consideration paid to the Company and the average price per
share paid by the existing stockholders and by the investors purchasing shares
of Common Stock in the offering, based upon an assumed initial public offering
price of $15.00 per share (before deducting estimated underwriting discounts
and commissions and estimated offering expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
---------------------- ------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ --------- --------------- --------- --------------
<S><C>
Existing stockholders ......... 27,889,667 84.8% 29,871,144 28.5% $ 1.07
New investors ................. 5,000,000 15.2 75,000,000 71.5 15.00
---------- ----- ---------- -----
Total ...................... 32,889,667 100.0% $104,871,144 100.0%
========== ===== ============ =====
</TABLE>
The foregoing tables assume no exercise of outstanding stock options and
warrants. As of June 30, 1998, there were outstanding (i) stock options to
purchase an aggregate of 3,374,880 shares of Common Stock at a weighted average
exercise price of $1.74 per share and (ii) warrants to purchase an aggregate of
213,750 shares of Common Stock at an exercise price of $1.67 per share. To the
extent that these options and warrants are exercised, there will be further
dilution to new investors. See "Management -- Incentive Plan," "Description of
Capital Stock -- Warrants" and Note 6 of Notes to Financial Statements.
20
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data of the Company are qualified by
reference to, and should be read in conjunction with, the Financial Statements
and Notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this Prospectus. The
statement of operations data for the period from inception (March 13, 1996)
through December 31, 1996, the year ended December 31, 1997 and the six months
ended June 30, 1998 and the balance sheet data at December 31, 1996 and 1997
and June 30, 1998 have been derived from the Company's audited financial
statements. The statement of operations data for the six months ended June 30,
1997 have been derived from the Company's unaudited financial statements and,
in the opinion of the Company's management, contain all adjustments, consisting
of only normal recurring adjustments, necessary to present fairly the Company's
results of operations for such interim period. Results of operations for the
six months ended June 30, 1998 are not necessarily indicative of the results to
be expected for the entire year.
<TABLE>
<CAPTION>
PERIOD
FROM INCEPTION SIX MONTHS
(MARCH 13, 1996) ENDED JUNE 30,
THROUGH YEAR ENDED --------------------------
DEC. 31, 1996 DEC. 31, 1997 1997 1998
----------------- -------------- ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S><C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Net sales ..................................................... $ -- $ 48 $ -- $ 6,713
Product presentations ......................................... -- 86 -- 518
------- -------- ------ ---------
Total revenues .............................................. -- 134 -- 7,231
------- -------- ------ ---------
Cost of revenues:
Cost of goods sold ............................................ -- 31 -- 6,667
Product presentations ......................................... 97 455 142 461
------- -------- ------ ---------
Total costs of revenues ..................................... 97 486 142 7,128
------- -------- ------ ---------
Gross profit (loss) ............................................ (97) (352) (142) 103
------- -------- ------ ---------
Operating expenses:
Sales and marketing ........................................... 44 488 61 8,936
General and administrative .................................... 152 544 46 1,994
Technical and system development .............................. 135 487 106 996
Professional fee(1) ........................................... -- -- -- 694
------- -------- ------ ---------
Total operating expenses .................................... 331 1,519 213 12,620
------- -------- ------ ---------
Operating loss ................................................. (428) (1,871) (355) (12,517)
------- -------- ------ ---------
Interest income (expense), net ................................. 3 18 (1) 148
------- -------- --------- ---------
Net loss ....................................................... $ (425) $ (1,853) $ (356) $ (12,369)
======= ======== ======== =========
Accretion and dividends on Series A preferred stock ............ -- (188) -- (2,414)
------- -------- -------- ---------
Net loss available for common stockholders ..................... $ (425) $ (2,041) $ (356) $ (14,783)
======= ======== ======== =========
Net loss per share -- basic and diluted ........................ $ (0.02) $ (0.09) $(0.02) $ (0.64)
Weighted average number of shares -- basic and diluted ......... 22,500 22,616 22,500 23,153
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- JUNE 30,
1996 1997 1998
--------- ---------- ------------
(IN THOUSANDS)
<S><C>
BALANCE SHEET DATA:
Cash and cash equivalents ...................... $ 81 $ 10,341 $ 20,253
Working capital (deficit) ...................... (116) 9,329 14,054
Total assets ................................... 144 10,994 25,965
Long-term debt ................................. -- 50 50
Mandatorily redeemable preferred stock ......... -- 9,466 29,415
Stockholders' deficit .......................... (275) (1,310) (15,399)
</TABLE>
- ---------
(1) In June 1998, Craig A. Winn, the Chairman, Chief Executive Officer and
President and a director of the Company, sold 288,321 shares of Common
Stock to an entity that had assisted in the promotion of the private
placements of the Series A Stock and Series B Stock. The excess of the
fair value of the Common Stock sold by Mr. Winn over the consideration he
received has been recognized by the Company as a period expense. See Note
6 of Notes to Financial Statements.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE
RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY
FROM THOSE DISCUSSED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS
FACTORS, INCLUDING THOSE SET FORTH IN "RISK FACTORS" AND ELSEWHERE IN THIS
PROSPECTUS. THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE
FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
Value America is an Internet-based destination retailer that offers a wide
selection of technology, office and consumer products for sale at its Internet
site, WWW.VALUEAMERICA.COM. Value America was in a developmental period from
its inception in March 1996 until the first quarter of 1998, when it launched
its initial advertising campaign. In 1996 and 1997, the Company's primary
activities related to establishing relationships with manufacturers, creating
product presentations and developing the Company's systems and operating
procedures. The Company has been selling merchandise on the Internet since the
third quarter of 1997.
Accordingly, the Company has a limited operating history and is still in
the early stages of development. Currently, revenues are derived from two
sources: sales of products through the Company's online store and fees
collected from manufacturers for the preparation and hosting of product
presentations and listing of manufacturers' products available for purchase on
the online store. Revenues from product sales are recognized upon shipment from
the vendor. The Company's vendors ship products directly to the customer
typically within two to three days after receipt of an order from the Company.
The Company is responsible for selling the merchandise, collecting payment from
the customer, ensuring that the shipment reaches the customer and processing
returns. The Company generally takes title to products upon shipment and bears
the risk of loss for collection, delivery and merchandise returns from
customers. The Company periodically purchases merchandise prior to receiving
customer orders and records such merchandise as inventory until shipped to
customers. The Company accrues a reserve for estimated product returns at the
time of sale.
The Company has contractual agreements with suppliers under which the
Company develops and maintains multi-media product presentations on the
Company's online store. These agreements provide for the development of the
presentations and the listing of the presentations and the manufacturers'
products on the Company's Internet site, typically for a specified period. For
agreements entered into prior to January 1, 1998, the listing period generally
extended for 36 months; for agreements entered into after that date, the period
generally has been 12 months. The Company recognizes the costs of developing
presentations and listing the manufacturers' products on its website as
incurred and recognizes the product presentation and listing revenues ratably
over the period of the related agreement. Amounts that are billed under the
terms of these agreements but are not yet earned are reflected as deferred
revenue. Certain of these agreements provide that suppliers may pay a renewal
fee to continue product listings beyond the initial listing periods. Any
revenues from these renewal fees will be recognized ratably over the renewal
term.
To date, payments for products purchased through the Company's online
store have been primarily made with credit cards. The Company anticipates that
it will begin to extend trade credit terms to certain large customers.
Typically the Company receives payment from a customer's credit card through a
financial institution within one to four business days. The Company typically
pays its vendors for goods within 30 to 60 days.
The Company expects that its operating expenses will increase
significantly during the foreseeable future, as the result of its plans to
increase expenditures on marketing, advertising and promotion, hire additional
personnel, enhance existing store operations, and establish strategic vendor
relationships that the Company believes are important to the success of the
Company. The Company expects to incur substantial operating losses for the
foreseeable future. The Company has an extremely limited operating history upon
which to base an evaluation of the Company and its business. The Company's
business and prospects must be considered in light of the risks, expenses and
difficulties frequently encountered by companies in early stages of
development, particularly companies in new and rapidly evolving markets such as
electronic commerce. Although the Company has experienced significant growth in
revenue, there can be no assurance that the Company's revenue will continue at
its current level or increase.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
REVENUES
Revenues consist of product sales through the Company's online store and
product presentation and listing fees. The Company did not open its online
store until the third quarter of 1997, and the Company generated $0 of revenues
from
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product sales or product presentations and listing services for the six months
ended June 30, 1997. For the six months ended June 30, 1998, net sales totaled
$6.7 million and product presentation fees recognized were $518,000. For the
six months ended June 30, 1998, the average order size of products purchased
directly through the Company's online store exceeded $1,300. This amount
excludes items purchased by check and business-to-business transactions from
larger businesses with which the Company has developed special purchasing
arrangements. For the six months ended June 30, 1998, product returns and
cancellations (including product returns resulting from malfunctioning
products, erroneous shipments and other quality related issues) were
approximately 4.9% of sales.
COST OF REVENUES
Cost of revenues consists of cost of goods sold and cost of product
presentations. Cost of goods sold consists of payments to third-party suppliers
for merchandise, net of shipping costs, and credit card processing fees. The
Company incurred $0 of cost of goods sold for the six months ended June 30,
1997. For the six months ended June 30, 1998, cost of goods sold totaled $6.7
million, representing 99% of net sales. The narrow gross margin on product
sales was due to (a) the Company's short-term strategy to selectively accept
narrow or negative margins in order to attain increased volumes and brand
awareness and (b) isolated instances in which the Company provided upgraded
merchandise in response to unanticipated favorable response to advertised
promotions.
Cost of product presentations consists of direct costs associated with the
production of multi-media product presentations, together with payroll and
related expenses. Cost of product presentations increased from $142,000 for the
six months ended June 30, 1997 to $461,000 for the six months ended June 30,
1998. In the six months ended June 30, 1998, cost of product presentations
represented 89% of product presentation and listing revenues. The dollar
increase of $319,000 in the cost of product presentations was due primarily to
increases in payroll and related expenses of $249,000 and to increases in video
and production expenses of $73,000. Margins on product presentations and
listing services during the six months ended June 30, 1998 were narrow as there
were minimal revenues deferred in prior periods to recognize against current
costs.
SALES AND MARKETING
Sales and marketing expenses consist of costs of advertising and
promotional expenses associated with promoting the Company's online store to
potential customers and vendors, together with payroll and related expenses.
Sales and marketing expenses increased from $61,000 for the six months ended
June 30, 1997 to $8.9 million for the six months ended June 30, 1998. The
increase primarily reflected the commencement of the Company's advertising
campaign in late January 1998, an increase in the number of merchandising,
advertising and promotion department employees, and a general increase in the
level of the Company's promotional activities. Advertising and promotional
expenses increased from $3,000 for the six months ended June 30, 1997 to $8.0
million for the six months ended June 30, 1998. These 1998 expenditures were
primarily for advertising in regional and national newspapers, technology and
consumer magazines, direct mailings and regional radio commercials. Payroll
expenses relating to merchandising, advertising and promotion department
employees increased from $35,000 for the six months ended June 30, 1997 to
$869,000 for the six months ended June 30, 1998. From February 1998 through
July 1998, the Company spent in excess of $1.0 million per month on advertising
and promotional expenses. The Company intends to increase its sales and
marketing expenses significantly following the completion of this offering. See
"Use of Proceeds."
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist of management and executive
compensation, customer service compensation, depreciation, rent, professional
services, telephone expense, postage and other general corporate expenses.
General and administrative expenses increased from $46,000 for the six months
ended June 30, 1997 to $2.0 million for the six months ended June 30, 1998.
This increase reflected the hiring of additional management and customer
service personnel, the incurrence of increased facilities charges and
substantially increased activity levels to support the expansion of the
Company's operation, all of which were undertaken in late 1997 and continued
into the first quarter of 1998. Payroll expenses relating to general and
administrative personnel were $728,000 and $0 for the six months ended June 30,
1998 and 1997, respectively. The Company expects that general and
administrative expenses will continue to increase significantly for the
foreseeable future, as the Company continues to expand its operations.
TECHNICAL AND SYSTEM DEVELOPMENT
Technical and system development expenses consist primarily of expenses
incurred for the development and maintenance of the Company's online store,
including employee compensation and the cost of designing, developing and
improving store content, Internet connectivity, operations and reporting. Due
to the rapid rate of changes in associated technology and the
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Company's business, these expenses are expensed as incurred. Technical and
system development expenses increased from $106,000 for the six months ended
June 30, 1997 to $996,000 for the six months ended June 30, 1998. This increase
principally reflected higher payroll and consulting expenses. Payroll expenses
related to technical and system development increased from $87,000 for the six
months ended June 30, 1997 to $424,000 for the six months ended June 30, 1998.
Payments to outside consultants totaled $435,000 and $0 for the six months
ended June 30, 1998 and 1997, respectively. The Company expects that technical
and systems development expenses will continue to increase for the foreseeable
future.
PROFESSIONAL FEE
In June 1998, Craig A. Winn, the Chairman, Chief Executive Officer and
President and a director of the Company, sold 288,321 shares of Common Stock
for consideration below fair value to an entity that had assisted in the
promotion of the private placements of the Series A Stock and Series B Stock.
The Company recognized the excess of the fair value of the Common Stock sold by
Mr. Winn over the consideration received as a current period expense of
$694,000. See Note 6 of Notes to Financial Statements.
INTEREST INCOME (EXPENSE), NET
Interest income of $148,000 for the six months ended June 30, 1998
consisted primarily of income earned on the net proceeds of the Company's
issuance and sale of the Series A Stock in December 1998. The $1,000 expense
for the six months ended June 30, 1997 related primarily to interest expense on
the Company's capital lease obligations.
INCOME TAXES
The Company provided $0 for income taxes in the six months ended June 30,
1997 and the six months ended June 30, 1998, since the Company incurred a net
loss in each period. A full valuation allowance was recorded to offset the
future benefit from tax loss carryforwards.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO PERIOD FROM INCEPTION (MARCH 13, 1996)
THROUGH DECEMBER 31, 1996
REVENUES
The Company did not open its online store until the third quarter of 1997
and thus generated $0 of revenues from product sales, product presentations and
listing services for the period ended December 31, 1996. For the year ended
December 31, 1997, net sales totaled $48,000 and product presentation revenues
were $86,000.
COST OF REVENUES
The Company incurred $0 of cost of goods sold for the period ended
December 31, 1996. For the year ended December 31, 1997, cost of goods sold
totaled $31,000, representing 65% of net sales.
Cost of product presentations increased from $97,000 for the period ended
December 31, 1996 to $455,000 for the year ended December 31, 1997. In the year
ended December 31, 1997, cost of product presentations represented 529% of
product presentation revenues. The dollar increase of $358,000 in the cost of
product presentations was due primarily to increases in payroll and related
expenses of $305,000 and to increases in video and production expenses of
$19,000. Negative margins on product presentation and listing services during
the year ended December 31, 1997 occurred as there were no revenues deferred in
prior periods to recognize against current costs.
SALES AND MARKETING
Sales and marketing expenses increased from $44,000 for the period ended
December 31, 1996 to $488,000 for the year ended December 31, 1997. This
increase resulted from significant increases in both advertising and
promotional expenses and related payroll expenses. Advertising and promotional
expenses totaled $194,000 and $0 for the year ended December 31, 1997 and the
period ended December 31, 1996. Payroll expense relating to merchandising,
advertising and promotion department employees increased from $21,000 for the
period ended December 31, 1996 to $137,000 for the year ended December 31,
1997.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased from $152,000 for the period
ended December 31, 1996 to $544,000 for the year ended December 31, 1997. This
increase reflected the hiring of additional management and customer service
personnel, the incurrence of increased facilities charges and substantially
increased activity levels to support the expansion of the Company's operation,
all of which were undertaken in late 1997. Payroll expenses relating to general
and administrative personnel increased from $74,000 for the period ended
December 31, 1996 to $206,000 for the year ended December 31, 1997.
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TECHNICAL AND SYSTEM DEVELOPMENT
Technical and system development expenses increased from $136,000 for the
period ended December 31, 1996 to $487,000 for the year ended December 31,
1997. This increase principally reflected higher payroll expenses relating to
technical and systems development, which increased from $95,000 for the period
ended December 31, 1996 to $434,000 for the year ended December 31, 1997.
FLUCTUATIONS IN OPERATING RESULTS
The Company's operating results have fluctuated in the past, and are
expected to continue to fluctuate in the future, due to a number of factors,
many of which are outside the Company's control. These factors include: (i) the
Company's ability to attract and retain customers, maintain customer
satisfaction and establish consumer confidence in conducting transactions on
the Internet environment, (ii) the Company's ability to manage fulfillment
operations electronically and to establish competitive gross margins, (iii) the
announcement or introduction of new Web sites, services and products by the
Company and its competitors, (iv) price competition or higher vendor prices,
(v) the level of use and consumer acceptance of the Internet and other online
services for the purchase of technology, office and consumer products such as
those offered by the Company, (vi) the Company's ability to upgrade and develop
its systems and infrastructure and attract new personnel in a timely and
effective manner, (vii) the level of traffic on the Company's Web site, (viii)
technical difficulties, systems downtime or Internet "brownouts," (ix) the
amount and timing of operating costs and capital expenditures relating to
expansion of the Company's business, operations and infrastructure, (x) delays
in revenue recognition at the end of a fiscal period as a result of shipping or
logistical problems, (xi) the level of merchandise returns experienced by the
Company, (xii) governmental regulation, and (xiii) general economic conditions.
As a strategic response to changes in the competitive environment, the Company
may from time to time make certain service, marketing or supply decisions or
acquisitions that could have a material adverse effect on the Company's
quarterly results of operations and financial condition. Due to the foregoing
factors, in future quarters the Company's operating results may not meet or
exceed the expectations of securities analysts and investors. In such event,
the trading price of the Common Stock may be materially adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily from
capital contributions from stockholders and from amounts paid by vendors for
product presentations. During the year ended December 31, 1997, the Company
received net proceeds of $10.2 million from the sale of Series A Stock, Common
Stock and warrants. In June 1998, the Company received net proceeds of $17.7
million from the sale of Series B Stock. The Company presently believes that
its existing capital resources and the proceeds of this offering will be
sufficient to fund its operations for at least 12 months from the effective
date of this Prospectus. Thereafter, if cash generated from operations is
insufficient to satisfy the Company's liquidity requirements, the Company may
seek to sell additional equity or convertible debt securities or obtain a
larger credit facility. The sale of additional equity or convertible debt
securities could result in additional dilution to the Company's stockholders.
There can be no assurance that financing will be available to the Company in
amounts sufficient to fund the Company's operations or on terms acceptable to
the Company. See "Risk Factors -- Historical and Anticipated Losses; Uncertain
Availability of Additional Funding" and "Certain Transactions."
Net cash used in operating activities was $166,000, $338,000 and $3.3
million for the period ended December 31, 1996, the year ended December 31,
1997 and the period ended June 30, 1998, respectively. The Company has financed
its operating activities primarily through the aforementioned capital
contributions by stockholders. Capital expenditures, primarily for computers
and peripheral equipment and office furniture and fixtures, totaled $58,000,
$165,000 and $1.1 million for the fiscal periods ended December 31, 1996, 1997
and June 30, 1998, respectively. The purchases were required to support the
Company's expansion and increased infrastructure.
The Company has a $5.0 million line of credit from Wachovia Bank, N.A.
that is backed by cash deposits and a $750,000 standby letter of credit in
favor of a trade creditor secured by a $750,000 certificate of deposit. The
line of credit provides for cash advances evidenced by short term notes and
secured by cash deposits. This line bears interest on advanced funds at LIBOR
plus 1.75% (7.59% at June 30, 1998) and expires on May 31, 1999. The standby
letter of credit which expires June 8, 1999 is callable if the Company defaults
in the payment of trade payables to the secured vendor. Subsequent to June 30,
1998, the Company obtained two additional standby letters of credit in favor of
trade creditors, which letters are secured by a total of $3.0 million in
certificates of deposit. These standby letters of credit, each for $1.5
million, expire January 23, 1999 and February 4, 1999, and are callable if the
Company defaults in the payments of trade payables to the secured vendors.
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The Company has no material commitments for capital expenditures. The
Company incurred capital expenditures of approximately $1.1 million during the
first six months of 1998, and expects to incur approximately $3.0 million in
capital expenditures for the remaining six months of 1998. These expenditures
are primarily for computer and telephony equipment, and furniture and fixtures
associated with the Company's anticipated relocation to new facilities and
continued systems development. The Company may require additional cash to
support the anticipated growth in accounts receivable, as a result of the
Company's intention to offer ordinary trade credit to certain large customers
in the near future. The Company plans to increase its operating expenses
significantly in order to increase the size of its staff, expand its marketing
and advertising efforts, increase its technical and systems development
efforts, improve and maintain its controls, systems and procedures, and support
its growing infrastructure. As a result, the Company may experience substantial
quarterly net losses for the foreseeable future. Thus, the Company may have to
finance its capital expenditures, increased accounts receivable from product
sales, marketing and advertising expenses and some portion of its growth in
operating expenses with the proceeds of the offering.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are
programmed to assume that the century portion of a date was "19" to conserve
the use of storage and memory. This assumption resulted in the use of two
digits (rather than four) to define an applicable year. Accordingly, computer
systems that rely on two digits to define an applicable year may recognize a
date using "00" as the year 1900, rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process or transmit
data or engage in normal business activities. The Company's ability to operate
is dependent upon the delivery of accurate, electronic information via the
Internet. To the extent that Year 2000 issues result in the long-term
inoperability of the Internet or the Company's online store, the Company's
results of operation and financial condition will be materially and adversely
affected.
The Company is currently in the process of assessing its Year 2000
readiness. This assessment includes a review of the Company's internal
information technology systems, non-information technology systems and the
systems of third parties upon which the Company may rely. Although the Company
has developed its proprietary computer systems to specifically address Year
2000 issues, there can be no assurance that the Company's systems, as a whole,
are Year 2000 compliant. The Company utilizes third-party equipment and
software that may or may not be Year 2000 compliant. Consequently, the
Company's ability to address Year 2000 issues is, to a large extent, dependent
upon the remediation activities of third parties. The Company is requesting
statements of Year 2000 compliance for third party technology providers
associated with the Company's core information systems infrastructure.
The Company is in the process of initiating formal communications with all
of the manufacturers and distributors presented in the Company's store to
determine the extent to which the Company is vulnerable to those third parties'
failures to remediate their own Year 2000 issues. In some cases, corporate
systems or EDI mappings may have been designed to rectify Year 2000 problems.
For other suppliers with which the Company communicates order, invoice, and
inventory information via EDI, the Company is switching from the current 3040
EDI format to the Year 2000 compliant 4010 format. For suppliers who are
capable of supporting the 4010 format, the Company will begin to migrate them
to that format in January 1999. The Company anticipates that all current
vendors either are in compliance with Year 2000 requirements or will migrate to
the 4010 format.
In addition, the Company is evaluating Year 2000 compliance by credit card
processors and other financial intermediaries through which transactions are
processed when the Company's customers purchase goods from the Company's store.
Due to the complexity of these transaction processing systems and the fact that
the Company has no direct control over them, the Company is in the process of
securing a secondary source for financial transaction processing as a backup
measure. These relationships and contingency plans for switching to a new
processor in the event of Year 2000 related problems are expected to be in
place by December 1998.
Although the cost of the Company's Year 2000 remediation program has not
yet been finalized, the Company estimates that these costs will not exceed
$50,000 and, in any event, believes that such costs will not have a material,
adverse effect upon the Company's results of operation or financial condition.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 130 establishes
standards for reporting and display of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general-purpose
financial statements and requires that all items that are required to be
recognized under accounting
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standards as components of comprehensive income be reported in financial
statements that are displayed with the same prominence as other financial
statements. SFAS No. 130 is required to be adopted for the Company's fiscal
year ending December 31, 1998. The adoption of this pronouncement for the
period ended June 30, 1998 had no impact on the Company's financial position or
results of operations as the comprehensive loss was the same amount as the
Company's net loss. SFAS No. 131 establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
stockholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. SFAS No. 131 is
required to be adopted for the Company's fiscal year ending December 31, 1998.
Based upon present structure, the Company does not believe that SFAS No. 131
will significantly impact existing presentations and disclosures. As the
Company's business and structure continues to evolve, the Company will continue
to evaluate the impact, if any, of the adoption of this pronouncement on the
Company's existing disclosures.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") No. 98-1 "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." SOP 98-1 provides
guidance on accounting for the cost of computer software developed or obtained
for internal use. Costs incurred prior to the initial application of SOP 98-1,
whether capitalized or not, should not be adjusted to the amounts that would
have been capitalized had this SOP been in effect when those costs were
incurred. SOP 98-1 is effective for the Company's fiscal year ending December
31, 1999. The Company has not yet evaluated the impact of this pronouncement on
the Company's financial condition, results of operations or cash flows.
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BUSINESS
OVERVIEW
Value America is an Internet-based destination retailer that offers a wide
selection of technology, office and consumer products for sale at its Internet
site, WWW.VALUEAMERICA.COM. The products offered for sale in the Company's
online store are branded goods from national and international manufacturers
such as Hewlett-Packard and IBM. These products are presented to customers
utilizing information-rich multi-media product presentations designed to take
advantage of the online selling environment. The Company's online store has
been created to provide consumers with product information, shopping
convenience and value on brand name products, and to offer manufacturers the
ability to communicate effectively the features and benefits of their products.
Customers initially visit the Company's online store principally as a result of
the Company's advertising in regional and national newspapers, technology and
consumer magazines, direct mailings, regional radio commercials and Internet
portals. The Company generates revenues primarily from the sale of branded
products. The Company also receives revenue from manufacturers for the creation
of product presentations shown on the Value America online store.
INDUSTRY BACKGROUND
GROWTH OF THE INTERNET AND ELECTRONIC COMMERCE
The audience of potential customers in the United States on the World Wide
Web now exceeds 60 million people and is growing at a rate of close to 10
million users per quarter, according to data cited in a 1998 report by the U.S.
Department of Commerce. Shopping has become one of the most popular activities
on the Internet, and the number of people who shop and buy products on the
Internet is growing rapidly. Industry reports indicate that more than 10
million households in the U.S. and Canada have purchased at least one product
or service over the Internet and that the number of households world-wide that
shop online will double from 5% to 10% by the end of 1998. One industry source
estimates that the total value of goods and services purchased by businesses
and consumers on the Internet was $12.4 billion in 1997 and projects that the
market may grow to $425 billion by 2002.
The rapid growth in electronic commerce is not limited to consumer usage
of the Internet. Prior to the advent of the Internet, large retailers and
manufacturers began to establish a system of communicating business documents
in a standard electronic form, known as electronic data interchange ("EDI").
These business-to-business EDI systems enable purchase orders, invoices and
shipping instructions to be transmitted electronically among manufacturers,
distributors and retailers, and thereby can diminish costs and improve service
opportunities.
THE TRADITIONAL RETAIL MARKETPLACE
In the traditional marketplace, retailers utilize "brick-and-mortar"
stores and catalogs to sell goods to customers. Retailers typically maintain an
inventory of products offered for sale and assume the costs and risks
associated with that inventory. These costs include expenses relating to
personnel, distribution, warehousing, financing inventory and leasing or buying
real property to display merchandise. Risks of carrying inventory include
damage, theft, loss, obsolescence and mismatches between supply and demand.
Traditional retailers must attempt to factor these costs and risks into their
selling prices.
In recent years, a number of companies have introduced new business models
that have significantly altered the competitive environment in the retailing
industry. Many of these business models rely on variations of two basic
retailing concepts: the "superstore" concept and the "volume discount" concept.
In general, superstore retailers such as Circuit City and Staples seek to
attract customers by emphasizing very broad selections of a few related
categories of merchandise. Volume discount retailers such as Sam's Wholesale
Club and Price/Costco generally seek to attract customers by de-emphasizing
traditional retail concepts such as personalized customer service, product
presentations, consistency of product offerings and breadth of merchandise in
order to be able to offer a smaller number of products at substantial discounts
from manufacturers' suggested retail prices. Superstores and volume discounters
have succeeded in drawing customers away from more traditional retail stores.
In order to remain competitive, many traditional retailers have responded by
lowering prices and seeking to lower costs, in part by offering lower quality
merchandise and hiring fewer, less experienced customer service and sales
employees.
As a result of the significant number of retailers who compete for
customers primarily on the basis of price, the Company believes that retail
customers may not receive sufficient information to make informed purchasing
decisions and may purchase products that fail to meet their expectations. Many
retailers are attempting to re-focus their sales strategies to address certain
of these concerns: large destination stores offer more efficient operations;
specialty retailers offer improved product quality and presentation; and direct
response retailers offer greater convenience.
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THE ONLINE RETAIL OPPORTUNITY
The Internet provides retailers with the opportunity to offer a broad and
evolving selection of merchandise from a wide array of product categories.
Through the use of the Internet, retailers can have access to input product
information and users can have access to shop 24-hours-a-day, 365-days-a-year.
An online store, unlike a traditional retail store, is not limited by the
constraints and expenses of store construction, real estate selection, shelf
space, in-store staffing or the customer inconvenience associated with travel
to and from a store location. Internet retailers have the ability to react
quickly to update product descriptions, pricing and mix without incurring
substantial costs in revising, printing and mailing catalogs.
The Internet is a highly interactive medium through which online retailers
can track shopper responses and preferences, thereby enabling retailers to
customize their online stores, target specific customer groups and individuals,
and tailor cross-selling efforts. Online retailers also benefit from the
traditional marketing and advertising strategies employed by product
manufacturers, which typically invest substantial amounts to advertise the
benefits and features of their branded products. Product manufacturers also
typically utilize television, radio and print advertising to build strong brand
recognition. In turn, consumers seek out their preferred brands and products in
each of the channels in which they are available for sale, including the
Internet. Online retailers can use EDI to facilitate the entire ordering,
shipping, invoicing and documentation process, thereby reducing costs
throughout the supply chain and increasing their ability to service their
customers more cost-effectively and efficiently.
The Company believes that an electronic commerce strategy can enable the
Company to provide a comprehensive solution to the difficulties associated with
the traditional retail market. The Company has identified three segments of the
traditional retailing industry that are particularly attractive for electronic
commerce: (i) technology products, (ii) office products and (iii) consumer
products. Each of these segments has begun to generate online revenues for
segment-specific retailers such as Dell Computer, Office Depot and Amazon.com.
TECHNOLOGY PRODUCTS include computers, computer peripherals,
communications products and software. These products are sold to small,
medium and large businesses, educational institutions, governmental
agencies and individual consumers. Technology products are typically
distributed through a distribution channel whereby certain value-added
resellers, system integrators, distributors and direct marketers sell to
end-users.
OFFICE PRODUCTS include equipment, supplies and furniture. This segment
includes a broad assortment of products ranging from facsimile machines to
pencils to desk chairs. Office products have traditionally been sold
through catalog-based distributors and brick-and-mortar retailers.
CONSUMER PRODUCTS encompass a wide range of hard and soft goods targeted
for use by individuals, including electronics, housewares, home
improvement, jewelry, books, music, home furnishings, sporting goods, toys,
household products, health and beauty aids, and pet supplies. These sales
principally occur in traditional brick-and-mortar stores and through
catalog shopping. In recent years, larger retailers, including "big box"
retailers, warehouse clubs, superstores and volume discounters have
constituted a significant portion of this market segment.
THE VALUE AMERICA SOLUTION
Value America is an Internet-based destination retailer that offers a wide
selection of technology, office and consumer products for sale at its Internet
site, WWW.VALUEAMERICA.COM. Consumers visit the Value America online store as a
result of the Company's traditional advertising, direct response marketing,
online promotions and affinity marketing, as well as consumers' Internet
browsing. The store provides the customer with entertaining and informative
multi-media product presentations. Consumers purchase products directly online
by selecting the items they wish to buy and providing credit card and shipping
information. The Company also offers a toll-free telephone number that
customers can call to complete a purchase transaction or obtain additional
customer service. Once a product has been purchased, the Company transmits
ordering and shipping information to the manufacturer or distributor, which
ships the product directly to the customer.
The Value America business model is designed to utilize the benefits of
the Internet and electronic commerce to provide customers with value by
offering convenient access to quality brand name products, responsive service
and pertinent product information. The Value America online store also
addresses the desire of manufacturers and distributors to have direct exposure
to individual consumers and businesses, the ability to sell products based upon
their merits and distribution efficiency.
The Company believes that its online store offers customers a number of
benefits that differentiate the Company from traditional retailers and
distributors:
QUALITY AND SELECTION OF RECOGNIZED BRANDS. As an online store, the
Company's virtually unlimited shelf space allows the Company to offer a
broad variety of technology products, office products and
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consumer products from a large number of leading manufacturers. The
Company believes that customers shopping on the Internet, a relatively
new commercial medium, will be more comfortable purchasing products with
recognized brand names.
VALUE PRICING. The Company's fixed cost infrastructure and direct
distribution process is designed to enable the Company to offer brand
name products at lower prices.
INFORMATION-RICH MARKETING. In order to educate customers, the Value
America online store is designed to provide valuable information
regarding the features, functions, benefits and applications of the
products sold by the Company. The Company's store utilizes interactive
multi-media presentations to encourage purchases and allow customers to
make informed purchase decisions.
CUSTOMER CONVENIENCE. Value America's online store is open
24-hours-a-day, 365-days-a-year and is available to consumers and
business customers through any computer with Internet access. The
Company's graphical user interface and database design enable customers
to organize the store in a manner specifically designed to meet their
shopping styles. Customers can shop in the Company's store by category,
product, brand or price.
PERSONALIZED SERVICE. The Company's store emphasizes customer
satisfaction by offering personalized services, including Web access to
receipts, shipping and warranty information. The store greets members by
name, thanks them for the last products they purchased and asks them to
share their opinions about their shopping experience and the purchased
products. The Company provides telephone customer service, as well as
recommendations for additional purchases and reminders of important dates
such as anniversaries and birthdays via electronic mail. The store
retains and utilizes shipping addresses and billing data to make check
outs more efficient.
The Company believes that its electronic commerce model offers four key
benefits to manufacturers:
BROADER REACH. The Company's online presence provides manufacturers
with access to an increasingly large base of customers beyond the reach
of any individual brick-and-mortar retailer or catalog operator.
CLOSER CUSTOMER CONTACT. The Company solicits manufacturer's
suggestions regarding the development of multi-media product
presentations in order to properly present product information to
customers.
EMPHASIS ON PRODUCT MERITS. The multi-media product presentations in
the Company's online store provide manufacturers with the opportunity to
educate potential customers as to the benefits and features associated
with their products. Consequently, manufacturers are able to sell
products on their merits, rather than price alone.
EFFICIENT DISTRIBUTION. Value America's technology platform is capable
of processing order information electronically to product manufacturers,
distribution centers and freight companies, thereby facilitating
efficient delivery of purchased goods directly from the manufacturer or
distributor to the customer. The Company is seeking to automate its
distribution process further by implementing EDI-only order processing.
STRATEGY
The Company's strategy is to provide a single destination online store
that offers consumers, businesses, educational institutions and government
agencies access to and information about products from brand name
manufacturers. To implement this strategy, the Company is pursuing the
following objectives:
INITIALLY EMPHASIZE SALE OF BUSINESS TECHNOLOGY AND OFFICE PRODUCTS. The
Company has focused its initial strategy on business technology and office
products. The Company believes that the most rapid acceptance of electronic
commerce has been in the business-to-business market segment, which serves
customers who are rapidly integrating the use of the Internet into their
day-to-day business operations. The Company has formed relationships with
manufacturers of more than 160 brands, including (i) technology manufacturers
such as Compaq, Hewlett-Packard, IBM and Toshiba, (ii) computer peripheral
manufacturers such as Brother, Canon, Epson, Iomega and US Robotics, and (iii)
office products suppliers such as 3M, Avery, Pitney-Bowes and Texas
Instruments.
MOVE RAPIDLY INTO THE BUSINESS-TO-CONSUMER MARKET. The Company intends to
offer a wide selection of products from a variety of categories to consumers.
The Company believes that individual consumer use of the Internet and
electronic commerce as a means to purchase consumer products will increase as
electronic commerce becomes more commonplace.
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In order to accommodate this increasing demand, the Company has integrated more
than 460 consumer product brands into its online store. The categories for
these targeted consumer products include: consumer technology and electronics,
sporting goods, home furnishings and home improvement, housewares, jewelry,
personal care and health care products, household products, specialty foods and
gift items. The Company has, for example, recently entered into a relationship
with Procter & Gamble, which the Company expects will provide 50 brands of
household products and personal care products.
EXPAND BRAND RELATIONSHIPS. The Company intends to continue to develop and
expand the presence of recognized name brand manufacturers and products within
the store. The Company believes that relationships with name brand
manufacturers and products are essential to the Company's ability to continue
to build its reputation as an online destination store. Furthermore, the
Company believes that the high-quality reputation of leading brands is
essential to building consumer confidence in online shopping. The Company
offers products from more than 625 brands and intends to enhance existing
relationships with leading brand name manufacturers to obtain access to new
product introductions. In addition, the Company will continue to increase the
number of new brands offered in its online store by expanding existing product
categories and developing new categories.
ENHANCE THE CUSTOMER EXPERIENCE. The Company utilizes multi-media product
presentations to inform its customers of product features, functions, benefits
and applications prior to a sale. Manufacturers pay Value America to create
multi-media product presentations that combine sound, video, copy and visual
elements to create informative and entertaining presentations that reveal
product features and benefits. As of June 30, 1998, the Company had received
commitments for approximately 750 product presentations, which had resulted in
approximately $600,000 in cumulative revenues and approximately $2.5 million in
deferred revenues. The Company currently estimates that it will recognize such
deferred revenues over the next 12 to 30 months. The Company intends to utilize
the features of its proprietary presentation authoring tool to upgrade the
content of existing picture and audio listings to more comprehensive
video-enhanced presentations. The Company plans to implement additional
technology to increase the number of customers that can shop in the store
simultaneously, improve audio and video streaming techniques, integrate
customer service capabilities with converging telephony technologies and
implement expanded EDI relationships with manufacturers and suppliers.
DEVELOP AND EXPAND DIRECT RESPONSE ADVERTISING AND PARTNERSHIPS. The
Company intends to continue to develop and expand upon its direct response
advertising and partnership strategies. From February 1998 through July 1998,
the Company spent in excess of $1.0 million per month on advertising and
promotional expenses, principally for advertising in regional and national
newspapers, technology and consumer magazines, direct mailings, regional radio
commercials and Internet portals. The Company also may partner with certain
manufacturers to conduct exclusive direct response campaigns. The Company
intends to increase its sales and marketing expenses significantly following
the completion of this offering.
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THE VALUE AMERICA STORE
Customers enter the Value America online destination store at
WWW.VALUEAMERICA.COM. At the store, customers can register for membership,
conduct targeted product or brand searches, browse through the store's product
offerings, buy products, obtain personalized shopping services, view
multi-media product presentations, check order status, obtain a receipt for a
previous purchase and check warranty status. The Company's online store offers
customers the following key features:
MULTIPLE METHODS OF SHOPPING. The customer interface of the Value America
store enables customers to organize the store to suit their own shopping
preferences. The store can be organized to permit shopping by category, brand
or product type. The Value America store also allows customers to shop solely
for new products or for special promotional offerings. Customers may also use
an internal search engine to search for products by keywords. When customers
shop by brand, the store displays the logos associated with the leading brands
the Company offers.
INFORMATIVE PRODUCT PRESENTATIONS. Each of the products the Company offers
is accompanied by at least one of four different types of product presentations
which the Company has created and produced under contract with the
manufacturer. The four types of presentations are: picture listings, basic
presentations, multi-media presentations and video presentations. A standard
picture listing presents a digital and compressed color picture of the product,
lists the product's most important specifications and provides specific product
purchasing information. A basic presentation adds to the picture listing by
providing several pages of copy and visual images that describe features and
benefits. A multi-media presentation provides a further in-depth look at the
product through a combination of photographs, illustrations, special effects
and audio streaming. A video presentation, the most comprehensive of the
Company's product presentations, provides customers with a full motion video
demonstration of the product, including a detailed audio description of its
features and benefits and a textual description of the history and applications
of the product.
PERSONALIZED SHOPPING SERVICES. Customers may become members of the Value
America online store and obtain access to the benefits of the Company's
personalized shopping services. This membership entitles customers to
additional discounts, typically 5%, from the prices that are available to all
shoppers, as well as other member benefits such as bonus "Value America
Dollars" applicable to future purchases and retention of shipping and credit
information to make additional purchases faster and easier. The Value America
store offers the use of an animated "personal shopper" who greets members by
name and who can serve as a guide through the store's features and functions. A
member's personal shopper can be used as a convenient method to (i) retain
access to receipts, product warranties and information relating to past Value
America purchases, (ii) track the accumulation of Value America Dollars and
(iii) remind shoppers of important dates, such as birthdays and anniversaries,
which may require gift or other product purchases. Membership in the Value
America store is currently free. The Company is currently contemplating a small
membership fee, such as $25 annually for individual memberships.
CONVENIENT WAYS TO ORDER. Customers may order products either on Value
America's Internet site store or via a toll-free telephone number and may pay
for purchases by credit or debit card or by check. Regardless of the purchasing
method selected by the customer, substantially all purchases are routed through
the technological platform that supports the Company's online store so as to
allow customers access to order status, shipping and warranty information via
the Internet.
WIDE SELECTION OF LEADING BRANDED PRODUCTS. The Value America store
emphasizes brand name products from leading manufacturers across a broad array
of product categories. The Company organizes its products into 20 categories.
At present, the Company has made 12 of these categories available for shopping:
computers, computer peripherals, computer software, fun stuff, home
electronics, home furnishings, home improvement, housewares, jewelry, office
supplies, specialty gifts, and sports and fitness. The list below includes the
brand names and representative products of manufacturers with which the Company
has entered into product listing agreements:
<TABLE>
<CAPTION>
BRANDS DESCRIPTION
- ------- -------------
<S> <C>
3Com Megahertz Modems
3M LCD Projectors, Ergonomic Products, Air Purifiers and Office Products
Acco Brands Office Equipment
Acme Brands Office Equipment
Adams Golf Clubs
All-Star Sports Clothing and Gear
Alsons Handheld Showers and Accessories
Amana Major Appliances and Microwave Ovens
American Camper Outdoor and Camping Equipment
American Power Conversion Computer Accessories
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
BRANDS DESCRIPTION
- ------- ------------
<S> <C>
American Shower and Bath Showers and Accessories
Ames Lawn and Garden Tools
Apollo Office Equipment
Aroma Spa Aromatic Steam Sauna
Artistic Office Products Office Products
At-A-Glance Dated Goods, Diaries, Journals and Organizers
Avery Inkjet, Laser and Office Labels, Media Storage and Presentation Supplies
Baby Jogger Contemporary Children's Strollers
Beaulieu Rugs Manufactured Oriental Rugs
Bic Pens and Pencils
Bike Football Gear
Bissell Floor Care Products
Bold Laundry Products
Boyd's Premium Car Care Products
BPI Office Panels and Modular Furniture
Braun Kitchen Appliances, Hair Care and Health Care
Brother Printers, Scanners, Copiers, Faxes, Word Processors and Labeling
Bush Office Furniture
Bushnell Optical Instruments
Callaway Golf Golf Clubs
Canon Copiers, Printers, Scanners, Faxes and Cameras
Cascade Dish Care
Casio Calculators, Personal Televisions and Palm Computers
Casio PhoneMate Phones and TADs
Claris Productivity Software
Cobra Golf Clubs
Compaq Business Servers, Notebook Computers and Business Computers
Computer Associates Virus Protection Software
Congoleum Floor Coverings
Connisseurs Jewelry Cleaning Equipment
Curtis Computer Equipment
Curtis Mathes Home Electronics
DayTimer Dated Goods, Personal Organizers and Productivity Software
Delonghi Coffee and Cappuccino Makers, Heaters and Air Conditioners
Delta Faucets, Shower and Bath Products
Dragon Voice Recognition Software
Epson Printers, Scanners, Copiers, Faxes and Cameras
Fellowes Ergonomic Accessories, Computer Peripherals
Franchi Menotti Fine Watches
FujiFilm Digital and Film Cameras, Film Processing and APS Cameras
Galoob Toys Children's Toys
General Electric Major Appliances, Phones, Microwaves and Televisions
General Housewares Professional Quality Knives
Gillette Fine Writing Instruments - Waterman and Parker
Gino Carlini Sunglasses
Ginsana Dietary Supplements
Global Office Chairs, Desks and Filing Cabinets
Gori & Zucchi Fine Giftware and Designer Gold Jewelry
Graphic Utilities Ink Jet Printer Supplies
Hammermill Copier, Laser and Inkjet Papers
Hewlett-Packard Printers, Faxes, Copiers, Scanners, Ink Cartridges, Drives, Business Computers,
Servers, Notebooks, Home Computers and Cameras
Hitachi Computer Monitors and Notebook Computers
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
BRANDS DESCRIPTION
- ------- ------------
<S> <C>
Hoover Vacuums and Floor Care
Huffy Bikes
Hughes Electronics Direct Satellite Systems
IBM Business Computers, Servers, Notebooks, Home Computers and Printers
Igloo Coolers
Imation Data Storage and Media
Info Peripherals Scanners
Intelligent Nutrition Systems Vitamins and Nutrient Supplements
InterMetro Office Furnishings
International Paper Business Papers
Iomega Data Storage Drives and Media
Ivory Dish Care
JetFill Printer Supplies
Johnson & Johnson Medical Products
Josten's Class Rings
Jules Jurgenson Fashion Watches
KellyRest Ergonomic Products
Kensington Computer Accessories
KidDesigns Children's Electronic Toys
Kindred Fine Sinks
Kitchenaid Small Appliances, Food Mixers and Processors
Kodak Digital and Film Cameras and Writable CDs
Lexmark Printers and Supplies
Lorus Watches
Luvs Diapers
Macabee Sports Camping Equipment
MacKenzie Golf Bags
Marks-a-lot Markers and Hi-Liters
Martin Fishing Equipment
Martin-Yale Office Machines
Merriam Webster Dictionaries, Reference Books and Software
MicroTek Scanners and Video Conference Cameras
Newell Office Furniture
Noble Watches
Norelco Shavers, Coffee Makers, Kitchen Appliances and Personal Care
Odyssey Golf Clubs
Okidata Laser and Dot Matrix Printers and Supplies
Olympus Digital and Film Cameras, APS Cameras, SLR Camera
Oxford File Folders and Filing Systems
Oxo Good Grips Ergonomic Kitchen Accessories
Pampers Diapers
Panamax Surge Protection
Panasonic Consumer Electronics
Peerless Faucets, Shower and Bath Products
Pelonis Ceiling Fans
Pelouze Mailroom Machines
Pendaflex Hanging File Systems and Accessories
Perfect Data Computer Cleaning Supplies
Philips/Magnavox Monitors, Televisions, Video Cassette Recorders, WebTVs and Portable Audio
Pitney Bowes Postal Meters and Mailroom Supplies
Plantronics Business Telephone Headsets
Polaroid Instant, Commercial and Digital Cameras, and Film
Post-It Adhesive Note Pads
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
BRANDS DESCRIPTION
- ------- -------------
<S> <C>
Quantum Fishing Equipment
Rawlings Sports Clothing and Gear
Riddell Sports Clothing and Gear
Roadmaster Bicycles
Rolodex Card Files and Electronic Organization
Safco Bookcases, Seating, Ergonomics and Office Organizers
Samsung Computer Monitors
Sanford Writing Instruments, Markers and Pencils
Satco Track Lighting
Scotch Adhesives, Glue Sticks and Tape Watches
Sharp Microwave Ovens, Vacuum Cleaners and Air Conditioners
Shop-Vac Wet-Dry Vacuums
Singer Sewing Machines and Ironing Products
Sirco Contemporary Office Furniture
Smart Modular Technology and Modems
Smead Filing Systems
Sonance Home Audio Speakers
Sony Data Storage Media
Southland Micro System Memory
Survivor Waterproof and Puncture-Proof Envelopes
Swingline Staplers and Desk Accessories
Targus Computer Notebook Bags
TDK Audio and Video Tapes
Team Concepts Laptop Computers for Children
Technics Quality Audio Systems
Tenex Contemporary Office Accessories
Texas Instruments Calculators and Organizers
Timex Audio Products
Tobacco Source Hand-Rolled Cigars
Toshiba Televisions, Video Cassette Recorders, DVD Players, Telephones and Notebook
Computers
Upjohn/Pharmacia Health Care Products
UUNet Internet Connectivity
Vantage Point Television Mounting Equipment
Verbatim Data Storage Media
Victor Business Calculators
Vidal Sassoon Hair Care Products
Weber Barbecue Grills
Weiser Lock Residential Hardware
Wenger Original Swiss Army Knives
Wite-Out Correction Supplies
Zebco Fishing Equipment
Zenith Corp. Televisions, Video Cassette Recorders, DVD Players and Audio Systems
</TABLE>
MARKETING AND PROMOTION
The Company's marketing strategy is designed to sell products at its
online store by increasing customer traffic, promoting the Value America brand
name, building strong customer loyalty and encouraging repeat purchases. From
February 1998 through July 1998, the Company spent in excess of $1.0 million
per month on advertising and promotional expenses, principally to advertise its
branded product offerings in regional and national newspapers, technology and
consumer magazines, direct mailings, regional radio commercials and Internet
portals. Following this offering, the Company expects to increase significantly
its investment in direct marketing, advertising and promotion to continue to
sell products and attract and retain customers. The Company employs a variety
of promotional activities and various media to accomplish its marketing goals
including:
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TRADITIONAL ADVERTISING. The Company has implemented a program of print
advertising in general circulation newspapers including THE WALL STREET
JOURNAL, USA TODAY, LOS ANGELES TIMES, WASHINGTON POST, SAN FRANCISCO CHRONICLE
and THE NEW YORK TIMES and magazines including COMPUTER SHOPPER, INTERNET WEEK,
INTERNET WORLD, PC COMPUTING, PC WEEK, PC WORLD and WINDOWS. The Company values
newspaper advertising for its strong demographics with respect to
Internet-savvy consumers and the relatively short period of time from
advertising creation to media insertion. The Company uses magazine advertising
to target specific products to specific target markets, and uses radio
advertising to motivate shopping excursions. In August 1998, the Company began
to supplement its primary print advertising campaign with national radio and
television advertisements in selected markets.
DIRECT MARKETING. The Company utilizes direct response marketing to sell
products, promote the Value America online store and increase brand share. The
Company coordinates its own direct response efforts with manufacturers to
create a unified marketing approach for products. Elements of the Company's
direct response advertising efforts include the use of direct targeted
mailings, the development and utilization of a telephone call center, and the
use of advertisements in specific industry publications.
COOPERATIVE MARKETING SUPPORT. The Company has conducted cooperative
marketing activities with Amana, Brother, Canon, GBC Quartet, Hewlett-Packard,
IBM, Panasonic, Procter & Gamble, Toshiba and Weber. The Company intends to
further develop coordinated marketing plans with certain manufacturers. By
creating such affiliations, the Company can reduce its marketing expenses and
increase the level of its advertising, thereby developing customer recognition
of the interrelationship between the Value America store and the manufacturers'
brand name products.
ONLINE SERVICE AND INTERNET ADVERTISING. The Company advertises on various
high profile and high-traffic Web sites such as Alta Vista, c|net, ESPN
SportZone, Excite, Infoseek, Lycos and Yahoo!. These advertisements take the
form of banners that encourage readers to click through directly to the Value
America online store. The Company is seeking to use portals to build and direct
Internet traffic to its online store. In addition to banner advertisements, the
Company is designing an external interface that brings Value America product
category presentations to the attention of individuals using search engine
services on the Internet.
VALUE AMERICA DOLLAR PROGRAM. Value America awards each member a store
credit equal to a percentage of the member's total purchases of certain
products. This credit is typically 1% of the purchase price of each product,
although some promotional products earn bonus Value America Dollars. Members
may apply accumulated Value America Dollars toward a portion of the purchase
price of products on future visits to the Value America store.
ORDER FULFILLMENT
The Company fulfills orders primarily by arranging for direct shipment of
products from the manufacturer or their designated distribution partner. Value
America does not carry significant levels of inventory, but, from time to time,
does make commitments to purchase minimum quantities of products. The Company's
order fulfillment systems are designed to choose the best product price and
availability if multiple distributors offer the same product. The Value America
store generates a purchase order for each manufacturer or distributor and
delivers the purchase order via facsimile or EDI. The Company currently has
one-way EDI connections for the electronic delivery of purchase orders with 12
of its vendors, the products of which accounted for approximately 92% of the
Company's net sales for the six months ended June 30, 1998. The Company has
established two-way EDI connections with two of those vendors, the products of
which accounted for approximately 65% of the Company's net sales for the six
months ended June 30, 1998. In addition, the Company has EDI connections for
the electronic receipt of invoices in parallel with its two largest vendors,
the products of which accounted for 88% of the Company's net sales for the six
months ended June 30, 1998. In the future, the Company expects the process of
ordering and fulfillment to become increasingly automated, as e-mails,
automated facsimile transmissions and EDI transmissions are used to transmit
transaction documents. The Company's order fulfillment system is capable of
transmitting all data necessary to prompt labels to be printed automatically at
the appropriate shipment or distribution centers. These labels will include
information stored within the Company's customer database, including the
customer's name, address and telephone number. At the time the product is
provided to the freight company for shipment, the title and risk of loss of the
purchased goods are transferred to Value America. The Company currently ships
most products with United Parcel Service and Roadway. As part of its
relationship with ULLICO, the Company has agreed that so long as ULLICO remains
a stockholder of the Company, the Company will only use shippers that have
recognized one or more unions as the collective bargaining representative of
some or all of its employees unless such shipping arrangements are unreasonable
or unavailable to the Company. See "Certain Transactions."
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<PAGE>
CUSTOMER SERVICE
The Company believes that its ability to establish and maintain long-term
relationships with its customers and encourage repeat visits and purchases
depends, in significant part, upon the strength of its customer support and
service operations and staff. The Company encourages frequent communication
with, and feedback from, its customers in order to continually improve its
product and service offerings. To this end, the Company has dedicated
significant resources to establishing a customer service department and
providing its support and service personnel with the tools to answer customer
inquiries and to keep customers informed of the status of orders. Customer
support and service personnel are responsible for processing customer orders,
handling general customer inquiries, answering customer questions about the
ordering process, and investigating the status of orders, shipments and
payments. The tools used by this staff are automated and fully integrated with
the Company's online store. The staff is divided into teams dedicated to
certain types of products. Members of the various teams receive training on
attributes and benefits of products in the categories with which they work.
The Value America store offers an e-mail address and a toll-free telephone
number to enable customers to request information and to encourage feedback and
suggestions, via the Internet or telephone. The Company's telephone system
provides automatic call distribution and call statistics reporting. Currently
the Company's online store provides customers with automatic e-mail updates for
a change in order status. The Company has installed e-mail management software
that allows the Company's customer support and service personnel to handle a
large volume of e-mail more efficiently by providing for prioritization and
routing.
MANUFACTURER RELATIONSHIPS
The Company typically forms relationships directly with manufacturers. The
Company has listing agreements with manufacturers under which the Company
develops and hosts multi-media product presentations on the Company's online
store. Certain of these agreements require the Company to maintain product
listings for a minimum period of time, typically 12 or 36 months. The
manufacturers are not obligated under these agreements to offer or provide
products for sale by Value America for any minimum period of time. The Company
has entered into significant arrangements with the following manufacturers:
IBM. IBM provides its technology products for sale through the Value
America online store. IBM is providing dedicated account support, advertising
support, special terms and conditions programs, and promotional opportunities.
Value America, in turn, identifies IBM as an alliance partner, provides
Internet access to IBM products through its online store, advertises IBM
products in major print media, and engages in joint electronic commerce and
direct response marketing with IBM.
HEWLETT-PACKARD. In 1997, the Company entered into agreements with
Hewlett-Packard pursuant to which Hewlett-Packard authorized the Company to
sell Hewlett-Packard's Pavilion line of home personal computers, consumer and
business printing and imaging products, and selected business computer systems.
TEAR DROP GOLF COMPANY. In August 1998, the Company signed an agreement
with Tear Drop Golf Company, the maker of Tommy Armour golf clubs, Ram Golf
products, Tear Drop putters and other golf equipment, requiring each party to
spend $1.9 million and $5.0 million in coordinated advertising in 1998 and
1999, respectively. In addition, Tear Drop has committed to pay $60,000 for
multi-media product presentations covering the entire Tear Drop product line in
the Company's online store.
JAN BELL MARKETING. In July 1998, the Company entered into agreements with
Jan Bell Marketing pursuant to which the Company granted to Jan Bell Marketing
an exclusive concession to provide all fine jewelry, watches, fine crystal and
collectibles, fragrances and sunglasses for sale in the Value America online
store, subject to certain conditions. Jan Bell Marketing contracted with Value
America for the production of 80 multi-media product presentations with a total
cost of $400,000 and a further $100,000 in advertising in 1998. Jan Bell and
the Company have agreed to share equally the cost of future jewelry
advertisements, subject to certain limitations.
COMPETITION
The electronic commerce industry is relatively new, intensely competitive
and rapidly evolving. Barriers to entry are minimal, allowing current and new
competitors to launch new Web sites at a relatively low cost. The Company
currently or potentially competes with a variety of other companies. These
competitors and potential competitors include: (i) segment-specific online
retailers such as Amazon.com, BuyComp, CDNow, Cyberian Outpost, Dell Computer
and Gateway International; (ii) online vendors of a broad selection of consumer
products such as Cendant, CyberShop, iMall, Internet Shopping Network, iQVC,
ONSALE and Wal-Mart Online; (iii) a number of general purpose commercial online
services and Web directories that derive a substantial portion of their
revenues from online products and services, including America Online, Excite,
Infoseek, Lycos, Microsoft Network, Prodigy and Yahoo!; (iv) mail order catalog
operators such as Lands' End, Micro Warehouse,
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<PAGE>
Sharper Image, Spiegel and Williams-Sonoma; (v) traditional retail and
warehouse/discount store operators, such as Circuit City, Home Depot, Office
Depot, Price/Costco, Staples and Target; and (vi) numerous other national and
international retail, catalog, distribution or manufacturing companies that may
enter the electronic commerce industry. The Company anticipates that the number
of its direct and indirect competitors will increase in the future.
The Company believes that the principal competitive factors in its market
are brand recognition, quality of brands, convenience, ease of use, price,
value, accessibility, speed of fulfillment, reliability, personalized services,
customer service, and quality of site content. Many of the Company's current
and potential competitors have longer operating histories, larger customer
bases, greater brand name recognition and significantly greater financial,
marketing and other resources than the Company. In addition, other online
retailers may be acquired by, receive investments from or enter into other
commercial relationships with larger, well-established and well-financed
companies as the use of the Internet and other commercial online services
increases. Certain of the Company's competitors may be able to secure
merchandise from vendors on more favorable terms, devote greater resources to
marketing and promotional campaigns, adopt more aggressive pricing or inventory
availability policies or devote substantially more resources to Web site and
systems development than the Company. Increased competition may result in
reduced operating margins or loss of market share, and may have a material
adverse effect on the Company's business, financial condition and results of
operations.
SYSTEMS INFRASTRUCTURE, TECHNOLOGY AND SECURITY
The Company has designed and developed a scalable system for transacting
business as an electronic retailer with multiple storefronts on the Internet.
The Company's hardware and software infrastructure supports multiple online
stores as well as internal systems for customer service, order processing, EDI,
fulfillment, accounting and management of product data.
DEPLOYMENT NETWORK. The Company has developed a secure, fault tolerant
network for hosting its Web site. The network utilizes high quality, industry
standard hardware including Cisco routers, IBM quad-processor Netfinity and
dual-processor IBM servers, RAID arrays, and redundant Hewlett-Packard tape
libraries. The Company acquired an Autonomous System Number (ASN) and maintains
a set of Internet routing tables to provide optimal routing for its network
traffic and to support its internal network architecture. The Company currently
maintains an aggregate bandwidth to the Internet of 6 MBPS via redundant
connections with UUNET and MCI. The Company is in the process of upgrading to
dual DS3 connections with 12 MBPS sustained bandwidth and the ability to handle
burst communication rates of 90 MBPS. The Company intends to establish a
redundant data center site in connection with the Company's relocation in the
fourth quarter of 1998.
The Company maintains an "N+1" philosophy for capacity and redundancy
planning; that is, the Company implements at least one unit of capacity above
the expected requirements for peak load. For example, Web servers are added as
loads increase so that failure of any single server will not significantly
degrade performance, network bandwidth is increased symmetrically on both
Internet connections to ensure performance in the event of failure in either
path, and all mission critical data are stored in RAID configurations. A custom
network and server monitoring system have been implemented to aid in network
management and to notify operators of potential problems.
SOFTWARE SYSTEMS. The Company has developed custom software that makes
extensive use of relational database technology to implement online stores. The
system is deployed on a network of servers running Windows NT and UNIX. The
Company has worked with GE Information Systems to develop EDI mappings for
major suppliers. The Netscape ECXpert system is used to manage EDI processing
and to provide automated interfaces to the online stores. Credit card
transactions are automatically verified and cleared through PaymentNet.
SOFTWARE ARCHITECTURE. As a user navigates through the store, product
pages are generated from the database. Pages are dynamically created by
retrieving data elements from the database and inserting them into HTML
templates. The separation of data from presentation allows product content to
be added to the site without any software updates. Authoring and content
management tools have been created to add products and multi-media product
presentations quickly and reliably to the Company's online store in a
standardized way. Multi-media presentations are implemented with RealAudio and
RealVideo technology, with the streaming media remotely hosted on RealNetwork's
servers.
The order processing pipeline ensures that orders flow through the system
with limited human intervention. A proprietary system tracks order status from
the initial purchase to placing the order with a supplier to the order's final
shipment and invoicing. Using a proprietary real-time shopping mechanism, the
system automatically selects appropriate suppliers based upon the selected
product, the cost and product availability.
38
<PAGE>
SECURITY. The Company's network architecture employs commercial firewall
software that has been designed to protect the system from unauthorized access.
Electronic transactions between Web browsers and the online store and between
the store and the credit card processor are encrypted and transmitted with
Secure Socket Layer (SSL) to ensure the security of customer transactions.
Sensitive information is encrypted in the database and stored on a secure
sub-network with controlled access from both internal and external sources.
INTELLECTUAL PROPERTY
The Company relies on a combination of copyright and trademark laws, trade
secret protections, and confidentiality and non-disclosure agreements, as well
as other contractual provisions to establish and protect its proprietary rights
in intellectual property. The Company does not currently hold any patents or
have any patent applications pending for itself or its products. The Company
has obtained a registered service mark for "Value America" and two other
variations of such name. The Company also owns six pending applications for
federal service mark registration of other variations of the "Value America"
name. The Company retains certain intellectual property rights associated with
the multi-media product presentations developed by the Company for the branded
manufacturers whose products are featured in the Company's store. The Company
has entered into non-disclosure and invention assignment agreements with all of
its employees and enters into non-disclosure agreements with all of its
consultants and subcontractors that have access to or are involved in the
development of proprietary intellectual property. There can be no assurance,
however, that such measures will protect the Company's proprietary technology,
that the Company will be able to prevent competitors from developing software
with similar functionality, or that third parties will not infringe upon or
misappropriate the Company's intellectual property rights.
The Company believes that its trademarks, software and other proprietary
rights do not infringe on the proprietary rights of third parties. The Company
has been displaying the content of its site on the Internet without receiving
claims from third parties that its product offerings, trademarks or names
infringe on any proprietary rights of any other parties. However, the Company
is a recent entrant in the market for sale of merchandise on the Internet, and
there can be no assurance that third parties will not assert infringement or
other claims against the Company in the future with respect to current or
future product offerings, trademarks or other Company works. Such assertion may
require the Company to enter into royalty arrangements or result in costly
litigation. The Company is also dependent upon obtaining licenses to utilize
existing technology related to its operations. To the extent that new
technological developments are unavailable to the Company on terms acceptable
to it, or at all, the Company may be unable to continue to implement its
business, which would have a material adverse effect on the Company's business,
financial condition and results of operations.
GOVERNMENT REGULATION
The Company is subject, both directly and indirectly, to various laws and
governmental regulation relating to its business. However, because the market
for electronic commerce is new and rapidly evolving, there are currently few
laws or regulations directly applicable to commerce on the Internet. Due to the
increasing popularity and use of the Internet and other commercial online
services, it is possible that a number of laws and regulations may be adopted
with respect to electronic commerce covering issues such as user privacy,
pricing, content, copyrights, distribution and characteristics and quality of
products and services. The adoption of certain of these laws or regulations may
have the effect of decreasing the growth of electronic commerce or increasing
the cost of doing business on the Internet. Moreover, the applicability to the
Internet and other commercial online services of existing laws in various
jurisdictions governing issues such as property ownership, sales and other
taxes, libel and personal privacy is uncertain and may take years to resolve.
Any such new legislation or regulation, the application of laws and regulations
from jurisdictions whose laws do not currently apply to the Company's business,
or the application of existing laws and regulations to the Internet and other
commercial online services, could have a material adverse effect on the
Company's business, financial condition and results of operations.
Several telecommunications carriers are seeking to have telecommunications
over the Internet regulated by the FCC in the same manner as other
telecommunications services. Because the growing popularity and use of the
Internet has burdened the existing telecommunications infrastructure and many
areas with high Internet use have begun to experience interruptions in phone
service, local telephone carriers, such as Pacific Bell, have petitioned the
FCC to regulate Internet service providers and online service providers in a
manner similar to long distance telephone carriers and to impose access fees on
such providers. If any such petition is granted, or the relief sought therein
is otherwise granted, the costs of communicating on the Internet could increase
substantially, potentially slowing the growth in the use of the Internet. Any
such new legislation or regulation, or new applications or interpretations of
existing laws, could have a material adverse effect on the Company's business,
financial condition and results of operations.
39
<PAGE>
In addition, U.S. and foreign laws regulate certain uses of customer
information and the development and sale of mailing lists. The Company believes
that it is in material compliance with these laws, but new restrictions may
arise in this area that could have an adverse affect on the Company.
The law regarding linking to and framing of third-party Web sites without
permission is uncertain. The Company believes that its linking and framing
activities are lawful, but there is a possibility that it may be asked to pay a
license fee or cease linking or framing.
Permits or licenses may be required from federal, state or local
government authorities to operate or to sell certain products on the Internet.
No assurances can be made that such permits or licenses will be obtainable. The
Company may be required to comply with future national or international
legislation and statutes regarding conducting commerce on the Internet in all
or specific countries throughout the world. No assurances can be made that the
Company will be able to comply with such legislation or statutes, or that the
adoption of such legislation or statutes will not have a material adverse
effect on the Company's business, financial condition, and results of
operations.
FACILITIES
The Company's principal administrative, computer, marketing and customer
service facilities are located in two office buildings in Charlottesville,
Virginia encompassing an aggregate of approximately 12,000 square feet. The
facilities occupied by the Company are subject to leases that expire from
October 1998 through March 1999. The leases provide for aggregate monthly
rental charges of approximately $12,000. The Company has found suitable
substitute facilities providing for 26,700 square feet with aggregate monthly
rental charges of approximately $25,000. These facilities will become available
to the Company between October 1998 and January 1999.
EMPLOYEES
As of August 31, 1998, the Company had 180 full-time equivalent employees,
of which 37 were in technical and related operations, 81 were in marketing and
merchandising, 43 were in customer service, and 19 were in finance,
administration and management. The Company believes that its future success
will depend in large part on its ability to attract hire and retain qualified
personnel. Competition for such personnel is intense, and while the Company
believes that it can attract and retain qualified personnel, there can be no
assurance that the Company will be able to do so.
The Company believes its relationships with its employees are good. None
of the Company's employees is represented by a collective bargaining agreement,
and the Company has never experienced a work stoppage. In connection with the
Company's sale of Series A Stock and Series B Stock, the Company agreed that so
long as ULLICO is a stockholder of the Company (i) the Company will recognize
any union attempting to represent the Company's employees upon a showing of
majority support through a formal gathering of cards for such union and (ii) in
connection with any organizing activities being performed by a union, the
Company will refrain from actively campaigning in opposition to the designation
of such union as the representative of the Company's employees.
LEGAL PROCEEDINGS
From time to time, the Company may be involved in litigation relating to
claims arising out of its operations in the normal course of business. The
Company is not currently party to any litigation or other legal proceedings,
nor is the Company aware of any planned legal action by third parties, the
adverse outcome of which, individually or in the aggregate, would have a
material adverse effect on the Company's business, financial conditions and
results of operations.
40
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY PERSONNEL
The executive officers, directors, director-nominees and other key
personnel of the Company, and their ages and positions as of August 31, 1998,
are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
------ --- -----------
<S><C>
EXECUTIVE OFFICERS, DIRECTORS AND DIRECTOR-NOMINEES
Craig A. Winn 43 Chairman, Chief Executive Officer and President
Rex Scatena 49 President -- Consumer Products Division and Director
Dean M. Johnson 39 Executive Vice President, Chief Financial Officer, Secretary
and Director
Joseph L. Page 29 Executive Vice President and Chief Technology Officer
Glenda Dorchak 44 Senior Vice President -- Sales and Marketing
Kimberly E. De Jong 37 President -- Technology Products Division
Marc N. McCullough 40 President -- Office Products Division
Gary D. LeClair (1) 43 Director
John L. Motley III 48 Director
Michael R. Steed (1) 49 Director
David R. Dukes 54 Director -- Nominee
William D. Savoy 33 Director -- Nominee
KEY PERSONNEL
Kenneth R. Power 52 Senior Vice President -- Advertising
Sandra T. Watson 41 Senior Vice President -- Finance and Personnel and
Controller
Kenneth K. Erickson, Jr. 36 Senior Vice President -- Merchandising
Jerry K. Goode 35 Vice President -- Engineering and Chief Information Officer
Marcus F. Nucci 32 Vice President -- Systems Development
</TABLE>
- ---------
(1) Member of the Audit Committee and the Compensation Committee.
CRAIG A. WINN, the principal founder of the Company, has been Chairman and
Chief Executive Officer since co-founding the Company in March 1996 and has
also served as the President of the Company since August 1998. In 1978, he
founded Craig A. Winn Company, Inc. (the "Winn Company"), a manufacturers
representative firm. From 1979 to 1989, Mr. Winn held a variety of positions,
including Chairman, Chief Executive Officer, President, Chief Financial
Officer, Secretary and director, with the Winn Company. During this period, Mr.
Winn worked with the original Price Company management team; Mr. Winn believes
that he has integrated into the Value America solution much of what he learned
through this relationship. In February 1986, Mr. Winn founded Dynasty Classics
Corporation, a manufacturer and distributor of decorative and fixture lighting
("Dynasty"), and served as its Chief Executive Officer from February 1986 to
August 1993 and its Chairman from February 1986 to February 1994. Dynasty
acquired the Winn Company in December 1989 and became a publicly traded company
in May 1990. Dynasty increased its annual net sales to more than $90,000,000 in
1991, selling to a variety of large retailers including Home Depot, Price Club,
Sam's Wholesale Club, and Sears. Mr. Winn believes that his experience in
managing Dynasty has provided him with an appreciation of the challenges facing
suppliers and how the suppliers' EDI and distribution systems operate. In
October 1993 Dynasty filed a petition for relief under Chapter 11 of the United
States Bankruptcy Code, and in July 1994 it ceased being a publicly traded
company. Relying on his experience with Dynasty, Mr. Winn has sought to develop
a new low-cost, high-value business model that reduces the risks associated
with inventory, customer concentration and reliance upon bank loans. Mr. Winn
received a B.S. in Business Administration, MAGNA CUM LAUDE, from the
University of Southern California.
REX SCATENA co-founded the Company with Mr. Winn in March 1996. Mr.
Scatena has served as a director since March 1996 and has served as President
- -- Consumer Products Division since June 1998. From the Company's inception
until August 1998, Mr. Scatena served as the Company's President. From July
1988 to August 1997, Mr. Scatena was Managing Partner of the law firm Jaffe,
Trutanich, Scatena & Blum. Mr. Scatena served as a director of Dynasty from
October 1992 to July 1994. Mr. Scatena received a B.A. in Political Science
from the University of California, Santa Barbara, and a J.D. from the Western
State University College of Law.
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<PAGE>
DEAN M. JOHNSON joined the Company in November 1997 as Executive Vice
President, Chief Financial Officer and director. In December 1997, Mr. Johnson
became the Company's Secretary. From April 1996 to November 1997, Mr. Johnson
served as Vice President of Business Development of Pacific Monolithics, a
developer of gallium arsenide semiconductors. From April 1991 until August
1995, he was Vice President and General Manager of CFW Cable, Inc., a wireless
cable television company that he co-founded, and the Managing Director of
Charlottesville Quality Cable, a company acquired by the parent corporation of
CFW Cable, Inc. From September 1986 to April 1991, he was Vice
President-Corporate Finance for Lehman Brothers, an investment bank. Mr.
Johnson received his B.S. in Industrial Administration from General Motors
Institute, and his M.B.A. from the University of Virginia.
JOSEPH L. PAGE has been Executive Vice President and Chief Technology
Officer of the Company since March 1996. From February 1994 to March 1996, Mr.
Page was Chief Technology Officer at Internet Connect, a company providing
Internet services, including hosting for corporations. From May 1993 to
September 1994, he was a Systems Engineer at Raycon Corporation, a manufacturer
of laser and electronic drilling machines. Mr. Page holds a B.S. in Computer
Engineering from the University of Michigan.
GLENDA M. DORCHAK joined Value America in August 1998 as Senior Vice
President -- Marketing and Advertising. From December 1995 until August 1998,
she held several executive positions at IBM US, including Director of PC
Direct, Director of General Business PC Sales, Director of US Channel Marketing
and Director of Marketing for the Personal Systems Group North America. From
December 1992 until December 1995, Ms. Dorchak served as the Director of Sales
and Service of AMBRA, a build-to-order, telemarketing PC business. From July
1974 to December 1992, Ms. Dorchak held a variety of positions with IBM Canada,
including National Direct Sales Manager, IBM Direct, where she lauched IBM's
first personal computer telemarketing operation in 1991.
KIMBERLY E. DE JONG joined the Company in May 1998 as President --
Technology Products Division. Prior to joining the Company, she spent 14 years
with IBM in various capacities, including from May 1997 to April 1998,
Mid-Atlantic PC sales manager; from March 1996 to April 1997, PC brand
manager/business unit executive for the Southeast region; from January 1994 to
February 1996, national account manager for the Southeast region; from January
1993 to December 1993, manager of plans and schedules for the United States;
and from February 1991 to December 1992 project manager in the area of supply
management and distribution. Prior to February 1991, she held various other
positions in the areas of engineering and supply management. She holds a B.S.
from Michigan State University and an M.S. in Finance from The Johns Hopkins
University.
MARC N. MCCULLOUGH joined the Company in April 1998 as President -- Office
Products Division. Prior to joining the Company, Mr. McCullough was the
regional sales manager for the Southeast region for United
Stationers/MicroUnited from November 1989 until April 1998. Prior to this he
worked in marketing operations for United Stationers/MicroUnited from March
1983 until November 1989. Mr. McCullough holds a B.S. in Marketing and Computer
Science from the University of Wisconsin.
GARY D. LECLAIR has been a director of the Company since November 1997.
Mr. LeClair has been Chairman of LeClair Ryan, A Professional Corporation,
legal counsel to the Company, since 1988. He has served as a director of
MacroSonix Corp. since April 1996 and The Tredegar Trust Company since
September 1994 and as Chairman of the Board and a director of Community Pride
Grocery Stores, Inc. since 1993. He holds a B.S. in accounting from the College
of William & Mary and a J.D. from Georgetown University Law Center.
JOHN L. MOTLEY III has been a director of the Company since November 1997.
Mr. Motley is the founder and has been the President of John Motley Associates,
Inc., an office products manufacturers' representative company, since 1980. Mr.
Motley has served as a part-time employee of the Company since August 1997. See
" -- Director Compensation." Mr. Motley received a B.S. in Political Science
from the University of Vermont.
MICHAEL R. STEED has been a director of the Company since December 1997.
He has been Senior Vice President of Investments for ULLICO, a financial
services holding company, and President of ULLICO's investment subsidiary,
Trust Fund Advisors since November 1992. Prior to joining ULLICO, Mr. Steed
served as President and Founder of A.F.I.C. Group, Ltd., a financial and
investment consulting firm, from 1985 to 1992. Mr. Steed serves as a director
of Global Crossing, Ltd., a global fiber optic network. He received a B.A. from
Loyola University of Los Angeles and a J.D. from Loyola University School of
Law in Los Angeles.
DAVID R. DUKES has been nominated to serve as a director of the Company
upon the closing of this offering. Mr. Dukes currently serves as the Chairman
of the Global Technology Distribution Council, an organization designed to
represent wholesale distributors in connection with the development of
standards for the wholesaling industry. From September 1989 until May
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<PAGE>
1998, Mr. Dukes was employed by Ingram Micro, a distributor of computer
products, in various executive capacities, including Chief Executive Officer of
Ingram Alliance from January 1994 to May 1998, President of Ingram Micro from
September 1989 to December 1991 and Chief Operating Officer of Ingram Micro
from September 1989 to December 1993.
WILLIAM D. SAVOY has been nominated to serve as a director of the Company
upon the closing of this offering. Mr. Savoy has served as Vice President of
Vulcan Ventures Incorporated, a venture capital fund, since November 1990. From
October 1987 until November 1990, Mr. Savoy was employed by Layered, Inc. and
became its President in 1988. Mr. Savoy has served as President of Vulcan
Northwest Inc., a company that manages the personal financial activities of
Paul G. Allen, co-founder of Microsoft Corporation, from November 1990 until
the present. Mr. Savoy serves on the Advisory Board of Directors of Dreamworks
SKG and serves as a director of c|net, Inc., Harbinger Corporation, Metricom,
Inc., PersonaLogic, Inc., Telescan Inc., USA Networks, Inc. and U.S. Satellite
Broadcasting. Mr. Savoy holds a B.S. in computer science, accounting and
finance from Atlantic Union College.
KENNETH R. POWER has been Senior Vice President -- Advertising since April
1997 and Creative Director of the Company since August 1996. From February 1987
to August 1996, Mr. Power owned and operated K.R. Power Graphics, Inc., a
graphic design studio. He received a B.A. from California State University,
Long Beach.
SANDRA T. WATSON has been Senior Vice President -- Finance and Personnel
since March 1998 and Controller since November 1997. From August 1993 to August
1997, Ms. Watson was financial and regulatory manager for CFW Cable, Inc. a
wireless cable television company, and the controller of Charlottesville
Quality Cable, a company acquired by the parent-corporation of CFW Cable, Inc.
From July 1979 to August 1993, she was at Coopers & Lybrand, most recently as
Audit Manager. Ms. Watson is a certified public accountant. She received a
B.B.A. from the College of William and Mary.
KENNETH K. ERICKSON, JR. has been Senior Vice President -- Marketing since
August 1998 and served as Vice President -- Marketing from September 1997
through July 1998. From January 1997 through August 1997, he served as National
Accounts Director for M. Fabrikant & Sons, a jewelry manufacturer. From January
1996 through December 1996, he was Vice President of American Gem Corporation,
a mining company. From January 1995 through December 1995, he was President of
Golden Sun Manufacturing, a jewelry manufacturer. From January 1994 through
December 1994, Mr. Erickson served as National Accounts Manager for London Star
Inc., a jewelry manufacturing company. From May 1985 to December 1993, he was
Vice President of Sales and Marketing of Coleman Company, a jewelry
manufacturing company. Mr. Erickson holds a B.A. from Seattle University.
JERRY K. GOODE joined the Company in May 1998 as Vice
President-Engineering. From January 1995 to February 1998, Mr. Goode was Area
Manager for Engineering Services for Apple Computer, Inc. From May 1993 to
January 1995, Mr. Goode was Director of On-Line Product Development at Starwave
Corporation, an Internet technology company. Since 1995, Mr. Goode has also
been an independent management consultant. He holds a B.S. in Computer Science
from Southern Methodist University.
MARCUS F. NUCCI joined the Company in June 1998 as Director -- Business
Commerce and has served as Vice President -- Systems Development since August
1998. From March 1998 to June 1998, he was Manager, Solution Architects in the
Interactive Media group at IBM. From August 1996 to February 1998, Mr. Nucci
was Kiosk Development Manager in Direct Customer Access and Kiosk Solutions at
IBM. From April 1992 to August 1996, he was Senior Architect in Direct Customer
Access and Kiosk Solutions at IBM. Mr. Nucci has a B.S. in Electrical
Engineering from Syracuse University.
Executive officers of the Company are elected annually by the Board of
Directors and serve until the next annual meeting of the Board of Directors and
until their successors have been duly elected and qualified. The Bylaws provide
that the President shall be chosen from among the Directors. There are no
family relationships among the executive officers and directors of the Company.
BOARD OF DIRECTORS
The Articles provide that the Company's Board of Directors shall have nine
members and upon the closing of this offering, shall be divided into three
classes as nearly equal in number as possible. The members of the three classes
of directors will serve for staggered three-year terms. Following the
completion of the offering, Messrs. Johnson and Motley will be classified as
Class I directors and will serve until the annual meeting of the Company's
stockholders (the "Annual Meeting") to be held in 1999; Messrs. Dukes, Savoy
and Scatena will be classified as Class II directors and will serve until the
Annual Meeting to be held in 2000; and Messrs. Winn, LeClair and Steed will be
classified as Class III directors and will serve until the Annual Meeting to be
held in 2001. Each successor to a director whose term expires at an Annual
Meeting will be elected to serve until the third Annual Meeting after his
election and until his successor has been duly elected and
43
<PAGE>
qualified. Any director chosen to fill a vacancy on the Board shall hold office
until the next election of the class for which he shall have been chosen and
until his successor has been duly elected and qualified. Vacancies in the Board
of Directors can be filled only by the stockholders of the Company. Directors
may be removed only by stockholders and only with cause (as defined in the
Articles).
COMMITTEES OF THE BOARD OF DIRECTORS
The Company's Board of Directors has an Audit Committee and a Compensation
Committee. Messrs. Steed and LeClair serve as the members of both committees.
Under the Bylaws, Mr. Winn, as the Company's Chairman, is an EX OFFICIO member
of both committees. The Audit Committee recommends the annual appointment of
the Company's independent auditors, with whom the Audit Committee reviews the
scope of audit and non-audit assignments and related fees, accounting
principles used by the Company in financial reporting, internal auditing
procedures, the quality and integrity of the Company's financial statements,
and the adequacy of internal accounting controls. The Compensation Committee
determines the salaries and bonuses paid to the executive officers of the
Company and determines the amounts annually available for bonuses pursuant to
any bonus plan or formula approved by the Board. Under the Articles, the
Compensation Committee must approve all matters affecting the compensation of
any officer or director of the Company or any subsidiary or any employee of or
consultant to the Company or any subsidiary whose base compensation exceeds
$75,000. The Compensation Committee has the exclusive authority to administer
and take all action permitted or required to be taken by the Board or any
committee of the Board under the Incentive Plan and any other stock option plan
or arrangement that may provide for the issuance of Common Stock, stock
appreciation rights, phantom stock or other similar benefits to any employee of
or any adviser or consultant to the Company. The Compensation Committee also
has oversight responsibilities for all employee compensation and benefit
programs.
DIRECTOR COMPENSATION
Directors of the Company do not receive cash compensation for their
services as directors but are reimbursed for their reasonable expenses in
attending meetings of the Board and the committees on which they serve.
Directors who are not employees of the Company are eligible to receive
incentive awards under the Incentive Plan. On August 1, 1997, the Company
granted Mr. Motley, as an employee of the Company, incentive stock options to
purchase 375,000 shares of Common Stock. Options to purchase 150,000 shares
vested immediately and the remaining options vest in equal installments over a
three-year period. The options have ten-year terms and an exercise price of
$0.58 per share. On November 13, 1997, the Company granted Mr. LeClair
non-qualified options to purchase 105,000 shares of Common Stock. Such options
vest over a three-year period, have ten-year terms and have an exercise price
of $1.67 per share. On June 1, 1998, the Company granted Mr. Dukes
non-qualified options to purchase 45,000 shares of Common Stock. The options
vest in equal installments over a five-year period, have ten-year terms and
have an exercise price of $3.50 per share. Upon a change in control, as such
term is defined in the Incentive Plan, the Compensation Committee may take any
one or more of the following actions either at the time such options are
granted or any time thereafter: (i) provide for the assumption of options
granted under the Incentive Plan; (ii) provide for substitution of appropriate
new options awards covering the stock of a successor corporation to the Company
or an affiliate thereof; or (iii) give notice to participants that no such
assumption or substitution will be made, in which event each outstanding option
will automatically accelerate to become fully exercisable immediately before
the effective date of the change in control, except that such acceleration will
not occur if, in the opinion of the Company's independent accountants, it would
render unavailable "pooling of interests" accounting treatment for a change in
control that would otherwise qualify for such accounting treatment. All such
options will terminate immediately following the consummation of a change in
control, except to the extent assumed by the successor corporation or an
affiliate thereof. The Company may grant additional non-qualified options to
non-employee directors in the future.
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<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned by or
paid to Craig A. Winn, the Company's Chairman and Chief Executive Officer (the
"Named Officer"), for services rendered to the Company in all capacities during
1997. No executive officer of the Company received salary and bonus in excess
of $100,000 for 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION
-------------------
NAME AND PRINCIPAL POSITION YEAR SALARY(1)
---------------------------- ------ ----------
<S> <C> <C>
Craig A. Winn, Chairman, Chief Executive Officer and President ......... 1997 $45,000
</TABLE>
- ---------
(1) Represents salary earned by Mr. Winn from October 1, 1997 to December 31,
1997. Mr. Winn served without compensation during the first nine months of
1997. Effective July 1, 1998, Mr. Winn's salary was increased from
$180,000 per year to $295,000 per year.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board was formed in December 1997 to
make recommendations to the Board of Directors regarding the compensation and
benefits for the Company's executive officers and to administer the Company's
Incentive Plan. The Compensation Committee is currently composed of Messrs.
LeClair and Steed. Prior to the appointment of the Compensation Committee, the
Board of Directors determined the compensation of the Company's executive
officers. No executive officer of the Company serves as a member of the Board
of Directors or Compensation Committee of any entity that has one or more
executive officers serving as a member of the Company's Board of Directors or
Compensation Committee.
Gary D. LeClair serves as a member of the Compensation Committee of the
Board. Mr. LeClair also serves as the Chairman of LeClair Ryan, A Professional
Corporation, the Company's legal counsel.
Michael R. Steed also serves as a member of the Compensation Committee of
the Board. Mr. Steed serves as the Senior Vice President of ULLICO, which, upon
the closing of this offering, will be the record holder of 3,138,473 shares of
the Company's Common Stock.
INCENTIVE PLAN
The Company adopted the Incentive Plan on August 1, 1997. The Incentive
Plan provides for the granting of incentive awards to employees, officers,
directors, consultants and certain non-employees of the Company. Incentive
awards may be in the form of stock options, stock appreciation rights ("SARs"),
restricted stock, incentive stock, or tax offset rights. The maximum number of
shares of Common Stock that may be issued under the Incentive Plan is
3,750,000, subject to adjustment in the event of a stock split, stock dividend
or other change in the Common Stock or capital structure of the Company. The
Compensation Committee administers the Incentive Plan. Subject to the
provisions of the Incentive Plan, the Compensation Committee is authorized to
determine who may participate in the Incentive Plan, the number and type of
awards to each participant, the schedules on which each award will become
exercisable and the terms, conditions and limitations applicable to each award.
The Compensation Committee has the exclusive power to interpret the Incentive
Plan and to adopt rules and regulations to carry out the Incentive Plan.
OPTIONS. Options granted under the Incentive Plan may be either "incentive
stock options" within the meaning of Section 422 of the Internal Revenue Code
of 1986, as amended (the "Code"), or non-qualified options. Incentive stock
options may be granted only to employees of the Company (including directors
who are employees), while non-qualified options may be issued to non-employee
directors, employees, consultants, advisors and other independent contractors
providing services to the Company. The per share exercise price of the Common
Stock subject to any option granted pursuant to the Incentive Plan is
determined by the Compensation Committee at the time the option is granted. In
the case of incentive stock options, the exercise price must not be less than
100% of the fair market value of the Common Stock at the time the incentive
stock option is granted. No person who owns, directly or indirectly, at the
time of the grant of an incentive stock option, 10% or more of the total
combined voting power of all classes of voting stock (a "10% Stockholder"), is
eligible to receive an incentive stock option under the Incentive Plan unless
the exercise price is at least 110% of the fair market value of the Common
Stock, determined on the date of grant.
No incentive stock option may be transferred by an optionee other than by
will or the laws of descent and distribution. During the lifetime of any
optionee, the option generally will be exercisable only by the optionee. In the
event of termination
45
<PAGE>
of employment, other than for cause (as defined in the Incentive Plan), death
or permanent disability, the optionee will have three months after such
termination to exercise the option to the extent it was exercisable on the date
of such termination. In the event of termination of employment for cause, the
option terminates on the date of misconduct. Upon termination of employment of
any optionee by reason of death or permanent disability, an incentive stock
option remains exercisable for one year thereafter.
Incentive stock options granted under the Incentive Plan cannot be
exercised more than 10 years from the date of grant, and incentive stock
options issued to 10% Stockholders cannot be exercised more than 5 years after
the date of grant. All options granted under the Incentive Plan may provide for
the payment of the exercise price in cash or by delivery to the Company of
shares of Common Stock already owned by the optionee having a fair market value
equal to the exercise price of the options being exercised. Therefore, an
optionee may be able to tender shares of Common Stock to purchase additional
shares of Common Stock and may, theoretically, exercise all of his or her stock
options with no additional investment other than his or her original shares, if
any. Any shares of Common Stock subject to unexercised options that expire or
terminate become available for the issuance of new options.
SARS. Under the Incentive Plan, the Compensation Committee may also grant
SARs either in tandem with a stock option or alone. SARs granted in tandem with
a stock option may be granted at the same time as the stock option or at a
later time. An SAR entitles the participant to receive from the Company an
amount, payable in cash, in shares of Common Stock or in a combination of cash
and Common Stock, equal to the difference between the fair market value of a
share of Common Stock on the date of exercise and the exercise price.
RESTRICTED STOCK. Restricted stock issued pursuant to the Incentive Plan
is subject to the following general restrictions: (i) restricted stock may not
be sold, transferred, pledged or otherwise encumbered or disposed of until the
restrictions on such stock have lapsed or have been removed under the
provisions of the Incentive Plan; and (ii) if a holder of restricted stock
ceases to be employed by the Company, the holder will forfeit any shares of
restricted stock on which such restrictions have not lapsed or been otherwise
removed.
The Compensation Committee will establish as to each share of restricted
stock issued under the Incentive Plan the terms and conditions upon which the
restrictions on such share shall lapse. Such terms and conditions may include,
without limitation, the lapsing of such restrictions at the end of a specified
period of time or as a result of death, permanent disability or retirement of
the participant. In addition, the Compensation Committee may, at any time, in
its sole discretion, accelerate the time at which any or all of the
restrictions lapse or remove any or all of such restrictions.
INCENTIVE STOCK. The Compensation Committee may establish performance
programs with fixed goals and designate key employees as eligible to receive
incentive stock if the goals are achieved. More than one performance program
may be established by the Compensation Committee. They may operate concurrently
or for varied periods of time, and a participant may participate in more than
one program at the same time. A participant who is eligible to receive
incentive stock under a performance program has no rights as a stockholder
until the incentive stock is received.
TAX OFFSET RIGHTS. The Compensation Committee may, in its sole discretion,
award tax offset rights in conjunction with any incentive award. Tax offset
rights entitle the participant to receive an amount of cash from the Company
sufficient to satisfy the income and payroll taxes legally required to be
withheld upon exercise of an option or SAR, upon grant of incentive stock or
upon the lapse or removal of restrictions on restricted stock.
FEDERAL INCOME TAX CONSEQUENCES. A participant will not incur federal
income tax upon the grant of an option, SAR, tax offset right, and, in most
cases and depending on the restrictions imposed and unless the grantee
otherwise elects, restricted stock. Upon receipt of incentive stock, a
participant will recognize compensation income, which is subject to income tax
withholding by the Company, equal to the fair market value of the shares of
incentive stock on the date of transfer to the participant.
Upon exercise of a non-qualified stock option, a participant generally
will recognize compensation income, which is subject to income tax withholding
by the Company, equal to the difference between the fair market value of the
Common Stock on the date of the exercise and the exercise price. The
Compensation Committee has the authority under the Incentive Plan to include
provisions allowing the participant to deliver Common Stock, or elect to have
withheld a portion of the shares the participant would otherwise acquire upon
exercise, to cover tax liabilities. The election will be effective only if
approved by the Compensation Committee and made in compliance with other
requirements set forth in the Incentive Plan. When an employee exercises an
incentive stock option, the employee generally will not recognize income,
unless the employee is subject to the alternative minimum tax provisions of the
Code.
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<PAGE>
If the terms of an option permit, a participant may deliver shares of
Common Stock instead of cash to acquire shares under the option without having
to recognize taxable gain (except in some cases with respect to stock acquired
upon the exercise of incentive stock options, or "statutory option stock") on
any appreciation in value of the shares delivered. However, if a participant
delivers shares of statutory option stock in satisfaction of all, or any part,
of the exercise price under an incentive stock option, and if the applicable
holding periods of the statutory option stock have not been met (two years from
grant and one year from exercise), the participant will be considered to have
made a taxable disposition of the statutory option stock.
The exercise of an SAR is generally a taxable event. The participant
usually must recognize income equal to any cash that is paid and the fair
market value of any Common Stock that is received in settlement of an SAR.
In general, a participant who received shares of restricted stock will
include in his gross income as compensation an amount equal to the fair market
value of the shares of restricted stock at the time that such shares are no
longer subject to a substantial risk of forfeiture. Such amounts will be
included in the tax recipient's income for the year in which such event occurs.
The income recognized will be subject to income tax withholding by the Company.
Upon exercise of a tax offset right, a participant generally will
recognize ordinary compensation income, which is subject to income tax
withholding by the Company, equal to the cash received.
Subject to certain limitations, the Company will be entitled to a business
expense deduction, except as explained below, at the time and in the amount
that the recipient of an incentive award recognizes ordinary compensation
income in connection therewith. As stated above, this usually occurs upon
exercise of non-qualified options or tax offset rights, upon the lapse or
removal of restrictions on restricted stock, upon issuance of incentive stock,
upon a grantee's election to include in income on the date of grant the fair
market value of a grant of restricted stock, and upon exercise of an SAR. No
deduction is allowed in connection with an incentive stock option, unless the
employee disposes of the Common Stock received upon exercise in violation of
the holding period requirements.
This summary of the federal income tax consequences of incentive stock
options, non-qualified stock options, SARs, restricted stock, incentive stock
and tax offset rights does not purport to be complete. There may also be
certain state and local income taxes applicable to these transactions.
CHANGE IN CONTROL PROVISIONS. In the event of a "change in control"
transaction, the Compensation Committee may take any one or more of the
following actions either at the time an incentive award is granted or any time
thereafter: (i) provide for the assumption of incentive awards granted under
the Incentive Plan; (ii) provide for substitution of appropriate new incentive
awards covering the stock of a successor corporation to the Company or an
affiliate thereof; or (iii) give notice to participants that no such assumption
or substitution will be made, in which event each outstanding incentive award
will automatically accelerate to become fully exercisable immediately before
the effective date of the change in control, except that such acceleration will
not occur if, in the opinion of the Company's independent accountants, it would
render unavailable "pooling of interests" accounting treatment for a change in
control that would otherwise qualify for such accounting treatment. All
incentive awards will terminate immediately following the consummation of a
change in control, except to the extent assumed by the successor corporation or
an affiliate thereof. Under the Incentive Plan, a "change in control"
transaction generally is defined to constitute any of the following: (i)
approval by the stockholders of a reorganization, merger or consolidation in
which holders of outstanding voting securities of the Company would receive
less than 50% of the voting securities of the surviving or resulting
corporation; (ii) approval by the stockholders of a complete liquidation or
dissolution of the Company; (iii) approval by the stockholders of the sale or
transfer of substantially all of the assets of the Company; or (iv) the
acquisition other than from the Company by a person or group of related persons
of beneficial ownership of 50% or more of the outstanding voting securities of
the Company. Should a change in control or other event result in acceleration
of vesting of outstanding options or changes in other benefits, as defined
under Section 280G of the Internal Revenue Code, certain highly-compensated
employees would likely be subject to payment of a 20% excise tax on their
incremental gain, as defined.
EMPLOYMENT ARRANGEMENTS
The Company does not presently have any employment agreements or change in
control arrangements with the Named Officer.
The Company and Mr. Johnson entered into an employment agreement as of
November 13, 1997. The agreement has a term of two years and renews
automatically for additional periods of one-year until either party gives
notice of non-renewal at least 30 days before the expiration date of the
agreement. The Company agreed to pay Mr. Johnson a salary of $100,000
47
<PAGE>
per year, subject to adjustment at any time in the sole discretion of the
Company. The Company increased Mr. Johnson's annual salary to $125,000 as of
March 1, 1998 and to $150,000 as of July 1, 1998. Mr. Johnson is generally
entitled to participate in any employee benefit plans from time to time in
effect for all employees. The agreement provides that, in the event of Mr.
Johnson's death, the Company will pay his beneficiary or his estate an amount
equal to one month's salary. Mr. Johnson may terminate his employment under the
agreement by giving 30 days' notice to the Company. The Company may terminate
Mr. Johnson's employment immediately with or without cause by giving him
written notice of termination. If Mr. Johnson is an officer of the Company on
the date of his termination, he will be entitled to 30 days' salary and, if the
Company does not waive Mr. Johnson's obligation not to compete with the Company
for a period of six months following the termination of his employment, an
additional six months' salary.
The Company and Glenda Dorchak entered into an employment agreement on
August 18, 1998, pursuant to which Ms. Dorchak accepted the position of Senior
Vice President -- Sales and Marketing. Pursuant to this agreement, Ms. Dorchak
will receive an annual salary of $162,000. In addition, the agreement provides
that she shall receive options to purchase 60,000 shares of Common Stock. These
options vest in equal increments over five years and are subject to the terms
of the Incentive Plan. Upon exercise of these options, the Company has agreed
to pay Ms. Dorchak a bonus equal to $6.65 per option exercised. The agreement
also provides that Ms. Dorchak is eligible for quarterly incentive
compensation. During the first year of her employment, the Company will pay Ms.
Dorchak a minimum bonus of $150,000. In each subsequent year of her employment,
the Company shall grant bonuses ranging between $50,000 and $150,000. In
addition to bonuses, Ms. Dorchak is also eligible, upon the achievement of
certain revenue goals, to receive incentive stock options to purchase an
aggregate of 20,000 shares of Common Stock. These options will have an exercise
price equal to the fair market value of the Common Stock on the date of grant
and will vest over a 12 month period. The Company has agreed to loan Ms.
Dorchak $250,000 with interest of 6% per annum and has agreed to forgive all
principal and accrued interest associated with the loan if (i) the Company
terminates Ms. Dorchak's employment without cause or (ii) the Company fails to
generate at least $100 million in sales during any fiscal year. Upon a change
in control of the Company, the resignation or termination of Craig A. Winn, the
Company's Chairman, Chief Executive Officer and President, or (iii) termination
of Ms. Dorchak's employment without cause, the Company shall pay Ms. Dorchak
six months' salary as a severance payment.
The Company and Mr. Motley entered into an employment agreement effective
as of August 1, 1997 under which Mr. Motley agreed to serve as an employee of
the Company for not more than five hours per month at a salary of $12,000 per
year. The agreement has a term of two years and renews automatically for
additional periods of one-year until either party gives notice of non-renewal
at least 30 days before the expiration date of the agreement.
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<PAGE>
CERTAIN TRANSACTIONS
On August 1, 1997, the Company issued a promissory note to Mr. Winn in the
principal amount of $150,000. The principal amount of this note represented
reimbursement for Company expenses that Mr. Winn personally incurred on behalf
of the Company in 1996 and 1997. The note accrued interest at a rate of 12% per
annum upon default. The note was paid in full in December 1997.
On November 13, 1997, the Company sold an aggregate of 577,500 shares of
Common Stock and warrants to purchase an aggregate of 213,750 shares of Common
Stock to 15 investors for an aggregate purchase price of $962,500. Dean M.
Johnson, the Executive Vice President, Chief Financial Officer and Secretary
and a director of the Company, and Gary D. LeClair, a director of the Company,
each purchased 60,000 shares of Common Stock at $1.50 per share and 30,000
warrants at $0.33 per warrant. The warrants have five-year terms and exercise
prices of $1.67 per share. In addition, John M. Motley, a director of the
Company, purchased 150,000 shares of Common Stock at $1.67 per share.
Pursuant to an agreement entered into as of June 3, 1998, Mr. Winn sold
288,321 shares of Common Stock on June 24, 1998 to a single investor for
$2,000,000, or $6.94 per share, including $1,000,000 in cash and a $1,000,000
five-year promissory note. The promissory note will not be payable unless the
fair market value (as defined) of the transferred shares exceeds $6.0 million
on the date that is 180 days after the date of this Prospectus. In connection
with this transaction, the Company granted the investor certain demand and
piggy-back registration rights. See "Description of Capital Stock --
Registration Rights" and Note 6 of Notes to Financial Statements.
On June 26, 1998, the Company issued an aggregate of 617,979 shares of
Series B Stock to 18 investors (the "Series B Transaction") for an aggregate
purchase price $18,829,820 or $30.47 per share of Series B Stock (equivalent to
a purchase price of $10.16 per share of Common Stock on an as-converted basis).
The Company granted the holders of Series B Stock certain rights of first
refusal, tag-along rights, and demand and piggy-back registration rights. The
terms of the Series B Stock also require the Company to pay quarterly dividends
on such shares of stock until they are redeemed or converted. Mandatory
redemption of the Series B Stock may occur if the Company does not successfully
offer shares of Common Stock to the public prior to December 19, 1999.
Simultaneously with the closing of this offering, the shares of Series B Stock
will automatically convert into an aggregate of 1,853,937 shares Common Stock.
Upon such conversion, certain of the rights granted to Series B investors, such
as rights of first refusal and tag-along rights, will terminate. In connection
with the Series B Transaction, Mr. Winn and Rex Scatena, the President --
Consumer Products Division and a director of the Company, executed a Voting
Agreement whereby Mr. Winn and Mr. Scatena agreed to vote their shares of
Common Stock in favor of the election of certain individuals nominated by
ULLICO and Vulcan Ventures Incorporated for a period of up to ten years.
ULLICO, the holder of all outstanding shares of the Series A Stock and the
beneficial holder of more than 5% of the outstanding shares of the Common
Stock, purchased 7,801 shares of Series B Stock.
In connection with the Series B Transaction, Messrs. Winn and Scatena sold
an aggregate of 617,979 shares of Common Stock to ULLICO and two other
stockholders for an aggregate purchase price of $6,276,607 or $10.16 per share.
On July 2, 1998, Mr. Winn sold an aggregate of 28,350 shares of Common
Stock to three employees of the Company for an aggregate of $289,942 or $10.16
per share.
LeClair Ryan, A Professional Corporation, serves as the Company's legal
counsel. Gary D. LeClair, one of the Company's directors, serves as the
Chairman of such law firm.
See "Management -- Employment Agreements" for a description of certain
employment agreements to which the Company is a party.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Stock as of August 31, 1998, and
as adjusted to reflect the sale of the 5,000,000 shares of Common Stock offered
hereby by: (i) each person known by the Company to be the beneficial owner of
more than 5% of the Common Stock, (ii) each of the Company's directors and
director-nominees, (iii) the Named Officer and (iv) all current executive
officers, directors and director-nominees as a group.
<TABLE>
<CAPTION>
PERCENT BENEFICIALLY
OWNED (1)
NUMBER OF ----------------------
SHARES BENEFICIALLY BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED OFFERING OFFERING
-------------------------------------- -------------------- ---------- ---------
<S><C>
Craig A. Winn(2) ......................................... 15,147,312 54.3% 46.1%
Rex Scatena(3) ........................................... 6,562,200 23.5 20.0
Michael R. Steed(4) ...................................... 3,139,858 11.3 9.5
The Union Labor Life Insurance Company(5) ................ 3,139,858 11.3 9.5
William D. Savoy(6) ...................................... 1,526,094 5.5 4.6
Vulcan Ventures Incorporated(7) .......................... 1,476,861 5.3 4.5
John L. Motley(8) ........................................ 375,000 1.3 1.1
Dean M. Johnson(9) ....................................... 164,900 * *
Gary D. LeClair(10) ...................................... 145,002 * *
David R. Dukes ........................................... -- -- --
All executive officers, directors and director-nominees as
a group (12 persons)(11) ................................ 27,415,668 98.3 81.5
</TABLE>
- ---------
* Less than one percent (1%)
(1) Beneficial ownership is determined in accordance with the rules of the SEC.
In computing the number of shares beneficially owned by a person and the
percentage ownership of that person, shares of Common Stock subject to
options or warrants held by that person that are currently exercisable or
exercisable within 60 days of August 31, 1998 are deemed outstanding. Such
shares are not deemed outstanding for the purposes of computing the
percentage ownership of any other person. Except as indicated in the
footnotes to this table and pursuant to applicable community property
laws, each person named in the table has sole voting and investment power
with respect to the shares set forth opposite such person's name. This
table assumes no exercise of the Underwriters' over-allotment option.
Percentage of ownership is based on 27,889,667 shares of Common Stock
outstanding on August 31, 1998 (after giving effect to the conversion of
the Series A Stock and the Series B Stock upon the closing of this
offering) and 32,889,667 shares of Common Stock to be outstanding after
the completion of this offering.
(2) The address of Mr. Winn is c/o Value America, Inc., 2300 Commonwealth
Drive, Charlottesville, Virginia 22901. Includes 300,300 shares of Common
Stock held of record by Crystal Investments, L.L.C., a Virginia limited
liability company, for which Mr. Winn serves as Manager, and 144,162
shares of Common Stock held of record by Capital Advisers, L.L.C., as to
which Mr. Winn holds an irrevocable proxy to vote until the earlier of
December 31, 2003 and the date on which Capital Advisers, L.L.C. transfers
such shares.
(3) The address of Mr. Scatena is c/o Value America, Inc., 2300 Commonwealth
Drive, Charlottesville, Virginia 22901. Includes 300,300 shares of Common
Stock held of record by Frostine, L.L.C., a Virginia limited liability
company, for which Mr. Scatena serves as Manager.
(4) Consists of shares of Common Stock held of record by ULLICO. Mr Steed is
the Senior Vice President of Investments of ULLICO. Mr. Steed's address is
c/o The Union Labor Life Insurance Company, 111 Massachusetts Avenue,
N.W., Washington, D.C. 20001.
(5) The address of ULLICO is 111 Massachusetts Avenue, N.W., Washington, D.C.
20001
(6) Includes 1,476,861 shares of Common Stock held of record by Vulcan Ventures
Incorporated ("Vulcan"). Mr. Savoy is the Vice President of Vulcan. Mr.
Savoy's address is c/o Vulcan Northwest Inc., 110 110th Avenue Northeast,
Suite 550, Bellevue, Washington 98004.
(7) The address of Vulcan is 110 110th Avenue Northeast, Suite 550, Bellevue,
Washington 98004.
(8) Includes 225,000 shares of Common Stock underlying options exercisable
within 60 days of August 31, 1998.
(9) Includes 105,000 shares of Common Stock underlying options exercisable
within 60 days of August 31, 1998, 30,000 shares of Common Stock
underlying warrants exercisable within 60 days of August 31, 1998 and
9,900 shares of Common Stock held of record by Skye Thug, L.L.C., a
Delaware limited liability company for which Mr. Johnson serves as
manager.
(10) Includes 55,002 shares of Common Stock underlying options exercisable
within 60 days of August 31, 1998 and 30,000 shares of Common Stock
underlying warrants exercisable within 60 days of August 31, 1998.
(11) Includes 727,854 shares of Common Stock underlying options exercisable
within 60 days of August 31, 1998 and 60,000 shares of Common Stock
underlying warrants exercisable within 60 days of August 31, 1998.
The Founding Stockholders, Craig A. Winn and Rex Scatena, have granted to
the Underwriters an option to purchase up to 333,333 and 133,333 shares of
Common Stock, respectively, solely to cover over-allotments. If the
Underwriters exercise the over-allotment option in full, Mr. Winn will
beneficially own 14,813,979 shares of Common Stock, or 44.7% of the outstanding
Common Stock after this offering, and Mr. Scatena will beneficially own
6,428,867 shares of Common Stock, or 19.4% of the outstanding Common Stock
after this offering.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 100,000,000 shares
of Common Stock, 5,000,000 shares of Series A Stock and 617,979 shares of
Series B Stock. Upon the closing of this offering, all of the outstanding
shares of Series A Stock and Series B Stock will automatically convert into
shares of Common Stock.
The following summary of certain provisions of the Common Stock does not
purport to be complete and is subject to, and qualified in its entirety by, the
Articles and the provisions of applicable law.
COMMON STOCK
As of August 31, 1998, there were 23,152,500 shares of Common Stock
outstanding that were held of record by 26 stockholders and there were
outstanding options and warrants to purchase an aggregate of 3,465,924 shares
and 213,750 shares of Common Stock, respectively. See "Management -- Incentive
Plan" and "Description of Capital Stock -- Warrants." Based on the number of
shares of Common Stock outstanding and the number of shares of Common Stock
issuable upon conversion of the Series A Stock and Series B Stock as of August
31, 1998, and after giving effect to the sale of the 5,000,000 shares of Common
Stock offered hereby, there will be 32,889,667 shares of Common Stock
outstanding (assuming no exercise of outstanding options and warrants).
The holders of Common Stock are entitled to one vote for each share held
of record on all matters submitted to a vote of stockholders. Holders of Common
Stock do not have cumulative voting rights in the election of directors. The
holders of Common Stock are entitled to receive ratably such dividends, if any,
as may be declared by the Board of Directors out of funds legally available for
the payment of dividends. See "Dividend Policy." In the event of a liquidation,
dissolution or winding up of the Company, the holders of Common Stock are
entitled to share ratably in all assets remaining after payment of liabilities
of the Company. Holders of Common Stock have no preemptive rights or rights to
convert their Common Stock into any other securities. There are no redemption
or sinking fund provisions applicable to the Common Stock. All outstanding
shares of Common Stock are fully paid and non-assessable, and the shares of
Common Stock to be issued upon completion of this offering will be fully paid
and non-assessable.
WARRANTS
As of August 31, 1998, there were outstanding warrants to purchase an
aggregate of 213,750 shares of Common Stock that were held of record by 14
persons. All of the warrants are fully exercisable, have exercise prices of
$1.67 per share and expire on October 31, 2002. In the event the Company issues
or sells any shares of Common Stock without consideration or for a
consideration per share less than the market price per share of the Common
Stock on the date immediately prior to the issuance or sale of such shares, the
number of shares issuable upon exercise of each warrant and the exercise price
of such warrant will be adjusted according to a pre-defined, weighted-average
formula. The warrants and the shares of Common Stock issuable upon exercise of
the warrants are subject to certain restrictions on transfer.
REGISTRATION RIGHTS
Pursuant to an Amended and Restated Registration Rights Agreement (the
"Preferred Stock Registration Rights Agreement") dated as of June 26, 1998
among the Company and the holders of the Series A Stock and the Series B Stock
(the "Preferred Holders"), the Preferred Holders are entitled to certain rights
with respect to the registration under the Securities Act of the shares of
Common Stock owned now or in the future by such holders and the shares of
Common Stock issuable upon conversion of the Series A Stock and the Series B
Stock (collectively, the "Registrable Securities"). As of August 31, 1998, the
Registrable Securities consisted of a total of 5,355,141 shares of Common Stock
(after giving effect to the conversion of the Series A Stock and the Series B
Stock into Common Stock upon the closing of this offering). If the Company
proposes to register any of its securities under the Securities Act, either for
its own account or for the account of other securityholders, the Preferred
Holders are entitled to notice of such registration and are entitled to include
the Registrable Securities therein; provided, however, among other conditions,
that any underwriters for such offering may limit the number of such shares
included in such registration. In addition, the Preferred Holders may require
the Company on not more than two occasions to file a registration statement
under the Securities Act with respect to the Registrable Securities, and the
Company is required to use its best efforts to effect the registration, subject
to certain conditions and limitations. Further, the Preferred Holders may
require the Company, on not more than six occasions and not more than once in
any six-month period, to register the Registrable Securities on Form S-3 when
such form becomes available to the Company, subject to certain conditions and
limitations. The Company will bear all of the expenses of any such
registration.
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<PAGE>
In addition, pursuant to a Registration Rights Agreement dated as of June
3, 1998 between the Company and Capital Advisers, L.L.C. ("Capital"), Capital
is entitled to certain rights with respect to the registration under the
Securities Act of 288,321 shares of Common Stock (the "Capital Registrable
Shares"). If the Company proposes to register any of its securities under the
Securities Act, either for its own account or for the account of other
securityholders, Capital is entitled to notice of such registration and is
entitled to include, on not more than two occasions, the Capital Registrable
Shares therein; provided, however, among other conditions, that any
underwriters for such offering may limit the number of such shares included in
such registration. In addition, Capital may require the Company on not more
than one occasion to file a registration statement on Form S-3 under the
Securities Act with respect to the Capital Registrable Securities, and the
Company is required to use its best efforts to effect the registration, subject
to certain conditions and limitations. The Company will bear all of the
expenses of any such registration. Capital's registration rights are subject to
and restricted by the terms of the Preferred Stock Registration Rights
Agreement.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE ARTICLES AND BYLAWS
The Company's Articles and Bylaws contain provisions that might make more
difficult the acquisition of control of the Company by means of a tender offer,
a proxy contest, open market purchases or otherwise. The Articles provide for
the Company's Board of Directors to be divided into three classes serving
staggered terms so that the initial terms of each class of directors will
expire at the respective annual meetings of stockholders in 1999, 2000 and
2001. Starting with the annual meeting of stockholders in 1999, one class of
directors will be elected each year for a three-year term, subject to the terms
of a voting agreement among certain existing stockholders. See "Certain
Transactions." A director may be removed only for cause and then only by the
holders of at least a majority of the shares then entitled to vote at an
election of directors.
The Articles require the affirmative vote of more than two-thirds of the
outstanding shares of Common Stock for the approval of mergers, share
exchanges, certain dispositions of assets and other extraordinary transactions.
The Articles further require the affirmative vote of the majority of the
outstanding shares of Common Stock for the approval of amendments to the
Articles, except that the affirmative vote of at least three-quarters of the
outstanding shares of Common Stock is required to approve an amendment to the
Articles that (i) reduces or eliminates the number of authorized shares of the
Company's capital stock, (ii) amends or repeals the Company's staggered Board
of Directors, (iii) amends or repeals the Articles' super-majority voting
provisions, (iv) amends or repeals the Articles' indemnification provisions,
(v) amends or repeals the Articles' restrictions on the calling of special
meetings of the Company's stockholders, or (vi) amends or repeals the Articles'
limitations on the removal of the Company's directors.
The Bylaws establish an advance notice procedure for the nomination, other
than by the Board of Directors of the Company, of candidates for election as
directors and for certain matters to be brought before an annual meeting of
stockholders. A stockholder must give the Company notice not less than 90 days
prior to an annual meeting of stockholders to (i) nominate persons to be
elected directors of the Company at such meeting or (ii) propose business
matters to be considered at such meeting.
The purpose of the relevant provisions of the Articles and Bylaws is to
discourage certain types of transactions that may involve an actual or
threatened change of control of the Company and to encourage persons seeking to
acquire control of the Company to consult first with the Company's Board of
Directors to negotiate the terms of any proposed business combination or offer.
The provisions are designed to reduce the vulnerability of the Company to an
unsolicited proposal for a takeover of the Company that does not have the
effect of maximizing long-term stockholder value or is otherwise unfair to
stockholders of the Company, or an unsolicited proposal for the restructuring
or sale of all or part of the Company that could have such effects. See "Risk
Factors -- Anti-Takeover Provisions; Indemnification."
ELIMINATION OF LIABILITY AND INDEMNIFICATION
The Articles eliminate the liability of the officers and directors of the
Company to the Company or its stockholders for monetary damages in any
proceeding brought by or on behalf of stockholders of the Company except in
cases of willful misconduct or a knowing violation of the criminal law or any
federal or state securities law. The Articles also provide for mandatory
indemnification of any director or officer of the Company who is, was, or is
threatened to be made a party to a proceeding (including a proceeding by or in
the right of the Company) because (i) he or she is or was a director or officer
of the Company or (ii) he or she is or was serving as a director, trustee,
partner or officer of or another legal entity at the request of the Company,
against all liabilities and reasonable expenses incurred in connection with
such proceeding, except such liabilities as are incurred because of such
individual's willful misconduct or knowing violation of the criminal law. In
addition, the Articles expressly authorize the Company to enter into agreements
to indemnify its officers and directors to
52
<PAGE>
the fullest extent permitted by the Articles and to advance expenses incurred
as a result of any proceeding against them as to which they could be
indemnified.
There is no pending litigation or proceeding involving an officer or
director of the Company as to which indemnification is being sought, and the
Company is not aware of any threatened litigation that may result in claims for
indemnification by any officer or director.
The rights of indemnification provided in the Company's Articles are not
exclusive of any other rights that may be available under any insurance or
other agreement, by vote of stockholders or disinterested directors, or
otherwise. In addition, the Articles authorize the Company to maintain
insurance on behalf of any person who is or was a director, officer, employee,
or agent of the Company, whether or not the Company would have the power to
provide indemnification to such person.
CERTAIN CORPORATE GOVERNANCE PROVISIONS OF THE VIRGINIA ACT
The Company is subject to certain anti-takeover provisions of the Virginia
Act that regulate affiliated transactions, control share acquisitions and the
adoption of stockholder rights plans. The "affiliated transactions" provisions
of the Virginia Act restrict certain transactions ("Affiliated Transactions")
between the Company and any person (an "Interested Stockholder") who
beneficially owns more than 10% of any class of the Company's voting
securities. These restrictions, which are described below, do not apply to an
Affiliated Transaction with an Interested Shareholder who has been such
continuously since the date the Company first had 300 stockholders of record or
whose acquisition of shares making such person an Interested Stockholder was
previously approved by a majority of the Company's Disinterested Directors.
"Disinterested Director" means, with respect to a particular Interested
Stockholder, a member of the Company's Board of Directors who was (i) a member
on the date on which an Interested Stockholder became an Interested Stockholder
or (ii) recommended for election by, or was elected to fill a vacancy and
received the affirmative vote of, a majority of the Disinterested Directors
then on the Board of Directors. Affiliated Transactions include mergers, share
exchanges, material dispositions of corporate assets not in the ordinary course
of business, any dissolution of the Company proposed by or on behalf of an
Interested Stockholder, or any reclassification, including a reverse stock
split, recapitalization or merger of the Company with its subsidiaries, which
increases the percentage of voting shares beneficially owned by an Interested
Stockholder by more than five percent.
The "affiliated transaction" provisions of the Virginia Act prohibit the
Company from engaging in an Affiliated Transaction with an Interested
Stockholder for a period of three years after the Interested Stockholder became
such unless the transaction is approved by the affirmative vote of a majority
of the Disinterested Directors and by the affirmative vote of the holders of
two-thirds of the voting shares other than those shares beneficially owned by
the Interested Stockholder. Following the three-year period, in addition to any
other vote required by law, an Affiliated Transaction must be approved either
by a majority of the Disinterested Directors or by the stockholder vote
described in the preceding sentence unless the transaction satisfies the
fair-price provisions of the statute. These fair-price provisions require, in
general, that the consideration to be received by stockholders in the
Affiliated Transaction (i) be in cash or in the form of consideration used by
the Interested Stockholder to acquire the largest number of its shares and (ii)
not be less, on a per share basis, than the amount determined in the manner
specified in the statute by reference to the highest price paid by the
Interested Stockholder for shares it acquired and the fair market value of the
shares on specified dates.
The Company is also subject to the "control share acquisitions" provision
of the Virginia Act, which provides that shares of the Company's voting
securities which are acquired in a "Control Share Acquisition" have no voting
rights unless such rights are granted by a stockholders' resolution approved by
the holders of a majority of the votes entitled to be cast on the election of
directors by persons other than the acquiring person or any officer or
employee-director of the Company. A "Control Share Acquisition" is an
acquisition of voting shares which, when added to all other voting shares
beneficially owned by the acquiring person, would cause such person's voting
strength with respect to the election of directors to meet or exceed any of the
following thresholds: (i) one-fifth, (ii) one-third or (iii) a majority.
"Beneficial ownership" means the sole or shared power to dispose or direct the
disposition of shares, or the sole or shared power to vote or direct the voting
of shares, or the sole or shared power to acquire shares, including any such
power which is not immediately exercisable, whether such power is direct or
indirect or through any contract, arrangement, understanding, relationship or
otherwise. A person is deemed to be a beneficial owner of shares as to which
such person may exercise voting power by virtue of an irrevocable proxy
conferring the right to vote. An acquiring person is entitled, before or after
a Control Share Acquisition, to file a disclosure statement with the Company
and demand a special meeting of stockholders to be called for the purpose of
considering whether to grant voting rights for the shares acquired or proposed
to be acquired. The Company may, during specified periods, redeem the shares so
acquired if no disclosure statement is filed or if the stockholders have failed
to grant voting rights to such shares. In the event full voting rights are
granted to an acquiring person who then has majority voting power, those
stockholders who did not vote in favor of such grant are entitled to dissent
and demand payment of the fair
53
<PAGE>
value of their shares from the Company. The control share acquisitions statute
does not apply to an actual or proposed Control Share Acquisition if the
Articles or Bylaws are amended, within the time limits specified in the
statute, to so provide.
Finally, the stockholder rights plan provisions of the Virginia Act permit
the Company's Board of Directors to adopt a stockholder rights plan that could
render a hostile takeover prohibitively expensive if the Board determines that
such a takeover is not in the best interests of the Company.
A corporation may, at its option, elect not to be governed by the
foregoing provisions of the Virginia Act by amending its articles of
incorporation or bylaws to exempt itself from coverage; provided, however, that
any such election not to be governed by the "affiliated transactions" statute
must be approved by the corporation's stockholders and will not become
effective until 18 months after the date it is approved. The Company has not
elected to exempt itself from coverage under these statutes. See "Risk Factors
- -- Anti-Takeover Provisions; Indemnification."
EFFECT OF CERTAIN PROVISIONS UPON AN ATTEMPT TO ACQUIRE CONTROL OF THE COMPANY
The foregoing provisions of the Company's Articles and Bylaws, as well as
the provisions of the Virginia Act described above, make more difficult, and
may discourage certain types of potential acquirors from proposing, a merger,
tender offer or proxy contest, even if such transaction or occurrence may be
favorable to the interests of the stockholders. Similarly, such provisions may
delay or frustrate the assumption of control by a holder of a large block of
Common Stock and the removal of incumbent management, even if such removal
might be beneficial to stockholders. By discouraging takeover attempts, these
provisions might have the incidental effect of inhibiting certain changes in
management and temporary fluctuations in the market price of the Common Stock
that might result from actual or proposed takeover attempts. See "Risk Factors
- -- Anti-Takeover Provisions; Indemnification."
TRANSFER AGENT AND REGISTRAR
First Union National Bank serves as the Company's transfer agent and
registrar.
LISTING
Application has been made to have the Common Stock approved for quotation
on the Nasdaq National Market under the proposed symbol "VUSA."
54
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 32,889,667 shares
of Common Stock outstanding, based on shares outstanding on August 31, 1998. Of
the outstanding shares, the 5,000,000 shares sold in this offering will be
freely tradable without restriction under the Securities Act unless purchased
by "affiliates" of the Company, as that term is defined in Rule 144 under the
Securities Act. All of the remaining 27,889,667 outstanding shares (the
"Restricted Shares") will be "restricted securities" as defined in Rule 144.
Restricted securities generally may be sold in the public market only if they
are registered under the Securities Act or sold in compliance with Rule 144.
The Restricted Shares are subject to lock-up agreements providing that, with
certain limited exceptions, the holder thereof will not offer, sell, contract
to sell, grant an option to purchase, make a short sale or otherwise dispose
of, or engage in any hedging or other transaction that is designed or
reasonably expected to lead to a disposition of, any shares of Common Stock or
any option or warrant to purchase shares of Common Stock or any securities
exchangeable for or convertible into shares of Common Stock for a period of 180
days after the date of this Prospectus without the prior written consent of
BancBoston Robertson Stephens. As a result of these lock-up agreements,
notwithstanding possible earlier eligibility for sale under the provisions of
Rules 144 and 701 under the Securities Act, none of these shares will be
available for sale in the public market until 180 days after the date of this
Prospectus. Beginning 180 days after the date of this Prospectus (or earlier
with the consent of BancBoston Robertson Stephens), approximately 25,026,075 of
these shares will be eligible for immediate resale in the public market under
Rules 144 and 701 under the Securities Act.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares are aggregated)
who has beneficially owned Restricted Shares for at least one year (including
the holding periods of certain prior owners) will be entitled to sell within
any three-month period a number of shares that does not exceed the greater of:
(i) 1% of the number of shares of Common Stock then outstanding (or
approximately 328,897 shares immediately after this offering); or (ii) the
average weekly trading volume of the Common Stock during the four calendar
weeks preceding the filing of a Form 144 with respect to such sale. Sales under
Rule 144 are also subject to certain manner of sale provisions and notice
requirements and to the availability of current public information about the
Company. Under Rule 144(k), a person who is not deemed to have been an
affiliate of the Company at any time during the 90 days preceding a sale, and
who has beneficially owned the shares proposed to be sold for at least two
years (including the holding periods of certain prior owners), is entitled to
sell such shares without complying with the manner of sale, public information,
volume limitation or notice provisions of Rule 144. The one-year and two-year
holding periods described above do not begin to run until the full purchase
price or other consideration is paid by the person acquiring the Restricted
Shares from the Company or an affiliate of the Company.
Rule 701 permits resales of certain shares in reliance upon Rule 144 but
without compliance with certain restrictions, including the holding period
requirement, of Rule 144. Any employee, officer or director of, or consultant
to, the Company who purchased his or her shares from the Company pursuant to a
written compensatory plan or contract may be entitled to rely on the resale
provisions of Rule 701. Rule 701 permits affiliates to sell their Rule 701
shares under Rule 144 without complying with the holding period requirements of
Rule 144. Rule 701 further provides that non-affiliates may sell such shares in
reliance on Rule 144 without having to comply with the holding period, public
information, volume limitation or notice provisions of Rule 144. All holders of
Rule 701 shares are required to wait until 90 days after the date of this
Prospectus before selling such shares. However, certain of the shares issued
pursuant to Rule 701 will be subject to the lock-up agreements described above
and will not become eligible for sale until the expiration of 180 days after
the date of this Prospectus (or 90 days after the date of this Prospectus with
the prior written consent of BancBoston Robertson Stephens).
Approximately 90 days after the closing of this offering, the Company
intends to file a registration statement on Form S-8 under the Securities Act
covering shares of Common Stock subject to incentive awards outstanding or
reserved for issuance under the Company's Incentive Plan. Based on the number
of shares subject to outstanding options at August 31, 1998 and currently
reserved for issuance under all such plans, such registration statement will
cover 3,750,000 shares. Such registration statement will automatically become
effective upon filing. Accordingly, shares registered under such registration
statement will be available for sale in the open market upon the filing of such
registration statement subject to Rule 144 volume limitations applicable to
affiliates of the Company, and, in the case of existing stockholders, subject
to the expiration of the 180-day lock-up agreements described above.
Prior to this offering, there has been no public market for the Common
Stock of the Company. There can be no assurance that a significant public
market for the Common Stock will develop or be sustained after this offering.
Future sales of substantial amounts of Common Stock in the public market could
adversely affect the market price of the Common Stock prevailing from time to
time and could impair the Company's ability to raise capital through the sale
of its equity securities.
55
<PAGE>
UNDERWRITING
The underwriters named below (the "Underwriters"), acting through their
representatives, BancBoston Robertson Stephens Inc., Volpe Brown Whelan &
Company, LLC, Hambrecht & Quist LLC and The Robinson-Humphrey Company, LLC (the
"Representatives"), have severally agreed with the Company, subject to the
terms and conditions set forth in the Underwriting Agreement, to purchase from
the Company the number of shares of Common Stock set forth opposite their names
below. The Underwriters are committed to purchase and pay for all such shares
if any are purchased.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
- ----------- ----------
<S> <C>
BancBoston Robertson Stephens Inc. .........
Volpe Brown Whelan & Company, LLC ..........
Hambrecht & Quist LLC ......................
The Robinson-Humphrey Company, LLC .........
Total ................................... 5,000,000
=========
</TABLE>
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock to the public at the initial public
offering price set forth on the cover page of this Prospectus and to certain
dealers at such price less a concession not in excess of $ per share, of
which $ may be reallowed to other dealers. After the initial public
offering, the public offering price, concession and reallowance to dealers may
be reduced by the Representatives. No such reduction shall change the amount of
proceeds to be received by the Company as set forth on the cover page of this
Prospectus.
The Company and the Principal Stockholders have granted to the
Underwriters an option, exercisable during the 30-day period after the date of
this Prospectus, to purchase up to 750,000 additional shares of Common Stock at
the same price per share as the Company will receive for the 5,000,000 shares
that the Underwriters have agreed to purchase. To the extent that the
Underwriters exercise such option, each of the Underwriters will have a firm
commitment to purchase approximately the same percentage of such additional
shares that the number of shares of Common Stock to be purchased by it shown in
the above table represents as a percentage of the 5,000,000 shares offered
hereby. If purchased, such additional shares will be sold by the Underwriters
on the same terms as those on which the 5,000,000 shares are being sold. The
Company will be obligated, pursuant to the option, to sell shares to the extent
the option is exercised. The Underwriters may exercise such option only to
cover over-allotments made in connection with the sale of the shares of Common
Stock offered hereby.
The Underwriting Agreement contains covenants of indemnity among the
Underwriters and the Company against certain civil liabilities, including
liabilities under the Securities Act and liabilities arising from breaches of
representations and warranties contained in the Underwriting Agreement.
Each of the Company's executive officers, directors, director-nominees and
stockholders of record has agreed with the Representatives, for a period of 180
days after the date of this Prospectus (the "Lock-Up Period"), subject to
certain exceptions, not to offer to sell, contract to sell or otherwise sell,
dispose of, loan, pledge or grant any rights with respect to any shares of
Common Stock, any options or warrants to purchase any shares of Common Stock,
or any securities convertible into or exchangeable for shares of Common Stock
owned as of the date of this Prospectus or thereafter acquired directly by such
holders or with respect to which they have or hereafter acquire the power of
disposition, without the prior written consent of BancBoston Robertson
Stephens. However, BancBoston Robertson Stephens may, in its sole discretion
and at any time without notice, release all or any portion of the securities
subject to lock-up agreements. There are no agreements between the
Representatives and any of the Company's stockholders providing consent by the
Representatives to the sale of shares prior to the expiration of the Lock-Up
Period. The Company has agreed that during the Lock-Up Period, the Company will
not, subject to certain exceptions, without the prior written consent of
BancBoston Robertson Stephens, (i) consent to the disposition of any shares
held by stockholders prior to the expiration of the Lock-Up Period or (ii)
issue, sell, contract to sell or otherwise dispose of, any shares of Common
Stock, any options or warrants to purchase any shares of Common Stock, or any
securities convertible into, exercisable for or exchangeable for shares of
Common Stock, other than the Company's sale of shares in the offering, the
issuance of Common Stock upon the exercise of outstanding options and warrants,
and the Company's issuance of incentive awards under the Company's Incentive
Plan. See "Shares Eligible for Future Sale."
The Underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
56
<PAGE>
Prior to this offering, there has been no public market for the Common
Stock of the Company. Consequently, the initial public offering price for the
Common Stock offered hereby will be determined through negotiations between the
Company and the Representatives. Among the factors to be considered in such
negotiations are prevailing market conditions, certain financial information of
the Company, market valuations of other companies that the Company and the
Representatives believe to be comparable to the Company, estimates of the
business potential of the Company, the present state of the Company's
development and other factors deemed relevant.
The Representatives have advised the Company that, pursuant to Regulation
M under the Securities Act, certain persons participating in the offering may
engage in transactions, including stabilizing bids, syndicate covering
transactions or the imposition of penalty bids, that may have the effect of
stabilizing or maintaining the market price of the Common Stock at a level
above that which might otherwise prevail in the open market. A "stabilizing
bid" is a bid for or the purchase of the Common Stock on behalf of the
Underwriters for the purpose of fixing or maintaining the price of the Common
Stock. A "syndicate covering transaction" is the bid for or purchase of the
Common Stock on behalf of the Underwriters to reduce a short position incurred
by the Underwriters in connection with the offering. A "penalty bid" is an
arrangement permitting the Representatives to reclaim the selling concession
otherwise accruing to an Underwriter or syndicate member in connection with the
offering if the Common Stock originally sold by such Underwriter or syndicate
member is purchased by the Representatives in a syndicate covering transaction
and has therefore not been effectively placed by such Underwriter or syndicate
member. The Representatives have advised the Company that such transactions may
be effected on the Nasdaq National Market or otherwise and, if commenced, may
be discontinued at any time.
57
<PAGE>
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by LeClair Ryan, A Professional Corporation, Richmond,
Virginia. Gary D. LeClair, the Chairman of LeClair Ryan, A Professional
Corporation, is a director of the Company, and Mr. LeClair and certain of his
partners beneficially own, in the aggregate, 157,500 shares of Common Stock.
See "Management -- Executive Officers, Directors and Key Personnel" and
"Principal Stockholders." Certain legal matters in connection with this
offering will be passed upon for the Underwriters by Foley, Hoag & Eliot LLP,
Boston, Massachusetts.
EXPERTS
The financial statements of Value America, Inc. as of June 30, 1998,
December 31, 1997 and December 31, 1996, and for the six months ended June 30,
1998, the year ended December 31, 1997 and the period from inception (March 13,
1996) through December 31, 1996 included in this Prospectus have been so
included in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
ADDITIONAL INFORMATION
The Company has filed with the SEC a Registration Statement on Form S-1
under the Securities Act with respect to the shares of Common Stock offered
hereby (the "Registration Statement"). This Prospectus does not contain all of
the information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information with respect to the Company and the
Common Stock offered hereby, reference is made to the Registration Statement
and the exhibits and schedules filed as a part thereof. Statements contained in
this Prospectus regarding the contents of any contract or any other document
referred to contain the information required to be disclosed in this Prospectus
pursuant to the Securities Act and the rules and regulations thereunder. In
each instance, reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference. A copy of the Registration
Statement, including the exhibits and schedules thereto, may be inspected and
copied at the public reference facilities maintained by the SEC at Room 1024,
450 Fifth Street, N.W., Washington, D.C. 20549 and at the SEC's regional
offices located at 7 World Trade Center, Suite 1300, New York, New York 10048
and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of all
or any part of the Registration Statement may be obtained from the public
reference facilities of the SEC at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. The SEC maintains a Web site
(HTTP://WWW.SEC.GOV) that contains reports, proxy and information statements
and other information regarding registrants, such as the Company, that file
electronically with the SEC.
58
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Accountants ........................................................ F-2
Balance Sheets as of December 31, 1996 and 1997 and June 30, 1998 ........................ F-3
Statements of Operations for the period from Inception (March 13, 1996) through December
31, 1996, the year ended December 31, 1997 and the six months ended June 30, 1997
(unaudited) and 1998 .................................................................... F-4
Statements of Changes in Stockholders' Equity (Deficit) for the period from Inception
(March 13, 1996) through June 30, 1998 .................................................. F-5
Statements of Cash Flows for the period from Inception (March 13, 1996) through December
31, 1996, the year ended December 31, 1997 and the six months ended June 30, 1997
(unaudited) and 1998 .................................................................... F-6
Notes to Financial Statements ............................................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND
STOCKHOLDERS OF VALUE AMERICA, INC.
In our opinion, the accompanying balance sheets and related statements of
operations, of changes in stockholders' equity (deficit) and of cash flows
present fairly, in all material respects, the financial position of Value
America, Inc. at December 31, 1996 and 1997 and at June 30, 1998, and the
results of its operations and its cash flows for the period from Inception
(March 13, 1996) through December 31, 1996, the year ended December 31, 1997,
and the six months ended June 30, 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.
PricewaterhouseCoopers LLP
Falls Church, VA
August 21, 1998, except as to Note 12,
which is as of September 1, 1998
F-2
<PAGE>
VALUE AMERICA, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, JUNE 30, BALANCE SHEET AT
------------------------------ ---------------- JUNE 30, 1998
1996 1997 1998 (NOTE 1)
------------- -------------- ---------------- -----------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............................. $ 80,902 $ 10,340,987 $ 20,252,962 $ 19,884,741
Restricted cash ....................................... -- -- 2,250,000 2,250,000
Accounts receivable, net of allowances of $0, $49,000
and $159,000 ........................................ 12,500 458,005 1,999,158 1,999,158
Inventory ............................................. -- -- 4,598 4,598
Other current assets .................................. -- 7,128 -- --
---------- ------------ ------------- -------------
TOTAL CURRENT ASSETS ................................ 93,402 10,806,120 24,506,718 24,138,497
---------- ------------ ------------- -------------
Equipment, furniture and fixtures, net ................. 48,578 167,800 1,068,098 1,068,098
Other assets ........................................... 1,894 20,158 390,687 390,687
---------- ------------ ------------- -------------
TOTAL ASSETS ........................................ $ 143,874 $ 10,994,078 $ 25,965,503 $ 25,597,282
========== ============ ============= =============
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS'EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable ...................................... 29,744 126,643 4,428,340 4,428,340
Accrued expenses ...................................... 25,052 707,133 2,644,504 2,644,504
Deferred revenue ...................................... -- 352,500 2,815,973 2,815,973
Other current liabilities ............................. 4,152 18,041 -- --
Loan from stockholder ................................. 150,000 -- -- --
Accrued stock-based compensation ...................... -- 273,000 563,500 563,500
---------- ------------ ------------- -------------
TOTAL CURRENT LIABILITIES ........................... 208,948 1,477,317 10,452,317 10,452,317
---------- ------------ ------------- -------------
Deferred revenue ....................................... 210,000 1,294,586 1,447,348 1,447,348
Other liabilities ...................................... -- 66,644 50,000 50,000
---------- ------------ ------------- -------------
TOTAL LIABILITIES ................................... 418,948 2,838,547 11,949,665 11,949,665
Commitments and contingencies
MANDATORILY REDEEMABLE PREFERRED STOCK:
Series A, without par value, convertible, 5% cumulative
dividend; 5,000,000 shares authorized, issued and
outstanding (0 in 1996 and pro forma);
redeemable for $4.00 per share ....................... -- 9,465,982 11,735,274 --
Series B, without par value, convertible, 5% cumulative
dividend; 617,979 shares authorized, issued and
outstanding (0 in 1996, 1997 and pro forma);
redeemable for $60.94 per share....................... -- -- 17,679,569 --
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, no par value, 100,000,000 shares
authorized; 22,500,000, 23,152,500, 23,152,500 and
27,889,667 shares issued and outstanding .............. 150,000 962,500 1,656,718 30,703,340
Accumulated deficit ..................................... (425,074) (2,272,951) (17,055,723) (17,055,723)
---------- ----------- ------------- -------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT)................... (275,074) (1,310,451) (15,399,055) 13,647,617
---------- ----------- ------------- -------------
TOTAL LIABILITIES, MANDATORILY REDEEMABLE
PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(DEFICIT).............................................. $ 143,874 $ 10,984,078 $ 25,965,503 $ 25,597,282
========== ============ ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
VALUE AMERICA, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD
FROM INCEPTION
(MARCH 13, SIX MONTHS ENDED
1996) THROUGH YEAR ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, ---------------------------------
1996 1997 1997 1998
--------------- --------------- -------------- ----------------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES:
Net sales ................................ $ -- $ 47,677 $ -- $ 6,713,309
Product presentations .................... -- 85,764 -- 517,798
----------- ------------ ----------- -------------
Total revenues ......................... -- 133,441 -- 7,231,107
----------- ------------ ----------- -------------
COST OF REVENUES:
Cost of goods sold ....................... -- 31,025 6,666,977
Product presentations .................... 96,680 454,617 141,723 460,719
----------- ------------ ----------- -------------
Total cost of revenues ................. 96,680 485,642 141,723 7,127,696
----------- ------------ ----------- -------------
Gross profit (loss) ....................... (96,680) (352,201) (141,723) 103,411
----------- ------------ ----------- -------------
OPERATING EXPENSES:
Sales and marketing ...................... 43,863 487,626 61,126 8,935,869
General and administrative ............... 152,018 544,479 45,550 1,994,445
Technical and system development ......... 135,896 486,776 106,269 995,917
Professional fee (see Note 6) ............ -- -- -- 694,218
----------- ------------ ----------- -------------
Total operating expenses ............... 331,777 1,518,881 212,945 12,620,449
----------- ------------ ----------- -------------
Operating income (loss) .................. (428,457) (1,871,082) (354,668) (12,517,038)
OTHER INCOME AND EXPENSES:
Interest income (expense), net ........... 3,383 17,823 (1,448) 148,423
----------- ------------ ----------- -------------
NET LOSS (425,074) (1,853,259) (356,116) (12,368,615)
Accretion and dividends on Series A
preferred stock .......................... -- (188,368) -- (2,414,157)
----------- ------------ ----------- -------------
Net loss available for common
stockholders ............................. $ (425,074) $ (2,041,627) $ (356,116) $ (14,782,772)
=========== ============ =========== =============
NET LOSS PER COMMON SHARE:
Basic .................................... $ (0.02) $ (0.09) $ (0.02) $ (0.64)
=========== ============ =========== =============
Diluted .................................. $ (0.02) $ (0.09) $ (0.02) $ (0.64)
=========== ============ =========== =============
WEIGHTED AVERAGE NUMBER OF SHARES:
Basic .................................... 22,500,000 22,615,625 22,500,000 23,152,500
=========== ============ =========== =============
Diluted .................................. 22,500,000 22,615,625 22,500,000 23,152,500
=========== ============ =========== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
VALUE AMERICA, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM INCEPTION (MARCH 13, 1996) THROUGH JUNE 30, 1998
<TABLE>
<CAPTION>
COMMON STOCK
---------------------------- ACCUMULATED
SHARES AMOUNT DEFICIT TOTAL
------------ ------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Initial capitalization ................................ 22,500,000 $ 150,000 $ -- $ 150,000
Net loss .............................................. -- -- (425,074) (425,074)
---------- ---------- ------------- -------------
BALANCE, DECEMBER 31, 1996 ............................ 22,500,000 150,000 (425,074) (275,074)
---------- ---------- ------------- -------------
Common stock granted as employee compensation ......... 75,000 43,750 -- 43,750
Transfer of S-corporation losses upon incorporation
as a C-corporation ................................... -- (193,750) 193,750 --
Sale of common stock and warrants ..................... 577,500 962,500 -- 962,500
Accrual of preferred stock dividends .................. -- -- (37,500) (37,500)
Accretion of mandatorily redeemable preferred
stock ................................................ -- -- (150,868) (150,868)
Net loss .............................................. -- -- (1,853,259) (1,853,259)
---------- ---------- ------------- -------------
BALANCE, DECEMBER 31, 1997 ............................ 23,152,500 962,500 (2,272,951) (1,310,451)
---------- ---------- ------------- -------------
Accrual of preferred stock dividends .................. -- -- (450,000) (450,000)
Accretion of mandatorily redeemable preferred
stock ................................................ -- -- (1,964,157) (1,964,157)
Professional fee ...................................... -- 694,218 -- 694,218
Net loss .............................................. -- -- (12,368,615) (12,368,615)
---------- ---------- ------------- -------------
BALANCE, JUNE 30, 1998 ................................ 23,152,500 $1,656,718 $ (17,055,723) $ (15,399,005)
========== ========== ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
VALUE AMERICA, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD
FROM INCEPTION
(MARCH 13, SIX MONTHS ENDED
1996) THROUGH YEAR ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, --------------------------------
1996 1997 1997 1998
--------------- ----------------- -------------- -----------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .................................................... $ (425,074) $ (1,853,259) $ (356,116) $ (12,368,615)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization ............................. 9,137 45,946 23,029 184,539
Common stock granted as employee compensation ............. -- 43,750 -- --
Stock-based compensation .................................. -- 273,000 -- 290,500
Professional fee .......................................... -- -- -- 694,218
(Increase) decrease in:
Accounts receivable ..................................... (12,500) (445,505) (22,734) (1,541,153)
Inventory ............................................... -- -- -- (4,598)
Other current assets .................................... -- (7,128) -- 7,128
Other assets ............................................ (1,894) (18,264) -- 6,371
Increase (decrease) in:
Accounts payable ........................................ 29,744 96,899 12,196 4,301,697
Accrued expenses ........................................ 25,052 89,810 15,905 2,529,642
Deferred revenue ........................................ 210,000 1,437,086 221,250 2,616,235
Other liabilities ....................................... -- -- 86,012 --
---------- ------------- ---------- -------------
NET CASH USED IN OPERATING ACTIVITIES ........................ (165,535) (337,665) (20,458) (3,284,036)
---------- ------------- ---------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Restricted cash ............................................. -- -- -- (2,250,000)
Capital expenditures ........................................ (57,715) (165,168) (37,994) (1,084,837)
---------- ------------- ---------- -------------
NET CASH USED IN INVESTING ACTIVITIES ........................ (57,715) (165,168) (37,994) (3,334,837)
---------- ------------- ---------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from assets placed under capital lease ............. 5,558 46,892 46,892 --
Principal payments under capital lease obligations .......... (1,406) (16,359) (5,700) (34,685)
Proceeds from issuance of common stock ...................... 150,000 962,500 -- --
Proceeds from issuance of preferred stock ................... -- 10,000,000 -- 18,829,894
Payment of offering costs ................................... -- (130,115) -- (2,119,496)
Repayment of loan from stockholder .......................... -- (150,000) -- --
Borrowing from stockholder .................................. 150,000 -- -- --
Proceeds from note payable .................................. -- 50,000 -- --
Dividends paid .............................................. -- -- -- (144,865)
---------- ------------- ---------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES .................... 304,152 10,762,918 41,192 16,530,848
---------- ------------- ---------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ......... 80,902 10,260,085 (17,260) 9,911,975
CASH AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD ........... -- 80,902 80,902 10,340,987
---------- ------------- ---------- -------------
CASH AND CASH EQUIVALENTS, END OF THE PERIOD ................. $ 80,902 $ 10,340,987 $ 63,642 $ 20,252,962
========== ============= ========== =============
</TABLE>
Non-cash investing and financing transactions:
During 1997, the Company granted 75,000 shares of common stock valued at
$43,750 to an employee in lieu of cash compensation.
During 1997, the increase in accrued expenses includes $592,271 related to
offering costs for the issuance of mandatorily redeemable preferred stock.
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
VALUE AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997 AND JUNE 30, 1998
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Value America, Inc. (the "Company") is an Internet-based retailer that
sells a large selection of high quality, brand name products and services at
competitive prices to both consumers and businesses. Additionally, the Company
develops and maintains custom multi-media presentations for the products and
services featured on its online store. The Company was considered to be a
development stage enterprise until late 1997.
RISKS AND UNCERTAINTIES
The Company is subject to all of the risks inherent in an early stage
business in the technology and retail industries. These risks include, but are
not limited to: limited operating history, limited senior management resources,
management of a changing business, reliance on merchandise vendors, reliance on
other third parties, the competitive nature of the industry, dependence on the
Internet and related security risks, and the uncertain ability to protect
proprietary intellectual properties.
USE OF ESTIMATES
The presentation 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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly-liquid investments purchased with
original maturities of three months or less to be cash equivalents.
RESTRICTED CASH
In March 1998, the Company entered into an asset collateral agreement with
Deutsche Financial Services Corporation (DFS) whereby the Company granted a
security interest in and limited power of attorney over a $750,000 certificate
of deposit purchased in support of a wholesale financing agreement with DFS and
a major vendor of the Company. In addition, DFS and the vendor have been
granted a security interest in certain of the Company's assets. Such agreement
may be terminated upon written notice at any time by either party. The security
interests in the certificate of deposit and other assets of the Company will
continue in existence until termination of the agreements and settlement of all
amounts owed, if any, to DFS. The $750,000 certificate of deposit is included
in restricted cash as of June 30, 1998.
In April 1998, the Company entered into a two-year agreement for credit
card clearing services which required the Company to establish a $1,500,000
cash deposit account to cover potential chargebacks. Although the agreement may
be terminated without penalty by either party, the credit card processor can
require the Company to maintain the account for up to ten months following
termination. Additionally, the credit card processor has a first priority lien
and security interest in the reserve account until the funds are released to
the Company. This cash deposit is included in restricted cash as of June 30,
1998.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of the Company's financial instruments, which include
accounts receivable and accounts payable, is considered to approximate fair
value due to the relatively short maturities of the respective instruments.
INVENTORY AND COST OF GOODS SOLD
The Company began in 1998 to periodically purchase quantities of
merchandise from vendors prior to receiving customer orders. The inventory
generally remains at the manufacturer or distributor that provides fulfillment
services. Inventories are stated at the lower of cost (determined on a
first-in, first-out basis) or market.
During the six months ended June 30, 1998, the Company purchased goods
from three vendors that accounted for approximately 63%, 25% and 2%,
respectively, of cost of goods sold. The comparable amount of cost of goods
sold is minimal in 1997. The Company has no long-term contracts or arrangements
with any of its vendors that guarantee the availability of merchandise, the
continuation of particular payment terms, or the extension of credit limits.
There can be no
F-7
<PAGE>
VALUE AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- Continued
assurance that the Company's current vendors will continue to sell merchandise
to the Company on current terms or that the Company will be able to establish
new or extend current vendor relationships to ensure acquisition of merchandise
in a timely manner and on acceptable commercial terms. If the Company were
unable to develop and maintain relationships with vendors that would allow it
to obtain sufficient quantities of merchandise on acceptable commercial terms,
such inability could have a material adverse effect on the Company's financial
position, results of operations and cash flows.
EQUIPMENT, FURNITURE AND FIXTURES
Equipment, furniture and fixtures are recorded at cost. The Company
computes depreciation on a straight-line basis for financial reporting purposes
and uses accelerated depreciation methods for tax purposes, where appropriate.
REVENUE AND COST RECOGNITION
The Company has contractual agreements with vendors to prepare and
maintain multi-media product presentations and list vendors' merchandise in the
Company's online store. These agreements provide for both the development and
the Web-access of these presentations for established contractual periods. The
Company recognizes the costs of developing and maintaining presentations as
incurred and recognizes product presentation and listing revenue ratably over
the period of the related agreement beginning upon availablity of the
presentation in the Company's online store. At December 31, 1997 and June 30,
1998, the Company had deferred revenue of $1,647,086 and $2,521,758,
respectively, which it will recognize over varying terms through 2000. The
agreements generally provide for the payment of a renewal fee if the vendor
wants the presentation and its merchandise to be listed beyond the initial
agreement period. Revenues from renewal fees when generated will be recognized
ratably over the renewal term.
The Company also has deferred revenue of approximately $1,741,563
associated with cash received for product sales in advance of the shipment of
the underlying product at June 30, 1998. This amount will be recognized as
revenue upon the shipment of the product.
The Company's online store showcases products and services using
multi-media presentations that allow customers to learn more about the features
and benefits of the products and to purchase the products from the Company. The
Company's vendors generally ship products directly to the customer upon receipt
of an order from the Company. Revenue from product sales is recognized upon
shipment from the vendor. The Company is responsible for selling the
merchandise, collecting payment from the customer, ensuring shipment to the
customer and processing returns. The Company takes title to the product upon
shipment and bears the risk of loss for collection, delivery and merchandise
returns from customers. The Company accrues a reserve for estimated product
returns at the time of sale.
ADVERTISING
Advertising costs are expensed as incurred. Revenue received from
cooperative advertising agreements is recorded as a reduction of advertising
expense. Advertising expense for the year ended December 31, 1997 and the six
months ended June 30, 1998 was approximately $194,000 and $7,863,000,
respectively.
VALUE AMERICA DOLLARS
The Company offers customers Value America Dollars on certain purchases.
These can be used against future purchases of merchandise from the store. The
Company records a liability for Value America Dollars at the time of the sale
on which they are earned. At December 31, 1997 and June 30, 1998, the Company
had recorded approximately $2,000 and $80,000, respectively, in accrued
expenses for Value America Dollars.
MANDATORILY REDEEMABLE PREFERRED STOCK
The Company carries its mandatorily redeemable preferred stock at fair
value with periodic adjustment to increase the carrying value to its redemption
value by the earliest possible date of stockholder initiated redemption. See
Note 5 for additional information on the Company's mandatorily redeemable
preferred stock.
F-8
<PAGE>
VALUE AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
EARNINGS PER SHARE
Statement of Financial Accounting Standards No. 128 (FAS 128), EARNINGS
PER SHARE, establishes standards for computing and presenting earnings per
share. Basic earnings per share is calculated using the average shares of
common stock outstanding, while diluted earnings per share reflects the
potential dilution that could occur if stock options and warrants were
exercised. Stock options and warrants are excluded from the calculation if
their effect would be antidilutive.
STOCK-BASED COMPENSATION
FAS 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, defines a fair value
based method of accounting for an employee stock option or similar equity
instrument. This statement gives entities a choice of recognizing related
compensation expense by adopting the fair value method or measuring
compensation using the intrinsic value approach under Accounting Principles
Board (APB) Opinion No. 25. The Company has chosen to continue to use the
measurement prescribed by APB Opinion No. 25 for employee stock options and to
make supplemental disclosures to show the effects of using the fair value-based
measurement criteria. The Company accounts for options granted to non-employees
under FAS 123.
INCOME TAXES
FAS 109, ACCOUNTING FOR INCOME TAXES, requires the recognition of deferred
tax liabilities and assets for the expected future tax consequences of events
that have been included in the financial statements or tax returns. Under this
method, deferred income taxes are recognized for the tax consequences in future
years arising from differences between the tax bases of assets and liabilities
and their financial reporting amounts at each period end based on enacted tax
laws and statutory tax rates applicable to the periods in which the differences
are expected to affect taxable income. Valuation allowances are established,
when necessary, to reduce deferred tax assets to the amount expected to be
realized. The provision for income taxes represents the tax payable for the
period and the change during the period in deferred tax assets and liabilities.
TECHNICAL AND SYSTEM DEVELOPMENT
Technical and system development expenses consist primarily of payroll,
related expenses and consulting fees for the development of the Company's Web
site and order fulfillment systems. To date, all technical and system
development costs have been expensed as incurred.
RECLASSIFICATIONS
Certain reclassifications were made to the 1997 financial statements to
conform to the 1998 presentation.
NEW ACCOUNTING PRONOUNCEMENTS
As of January 1, 1998, the Company adopted FAS 130, REPORTING
COMPREHENSIVE INCOME, which establishes standards for the reporting and display
of comprehensive income and its components. The adoption of FAS 130 had no
impact on the Company's net loss or stockholders' equity as the comprehensive
loss was the same as the Company's net loss.
In June 1997, the Financial Accounting Standards Board issued FAS 131,
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. FAS 131
establishes standards for the way that public reporting enterprises report
information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in annual financial reports issued to stockholders. FAS 131 is
required to be adopted for the Company's fiscal year ending December 31, 1998.
Based upon its present structure, the Company does not believe that FAS 131
will significantly impact existing presentations and disclosures. As the
Company's business and structure continue to evolve, the Company will continue
to evaluate the impact, if any, of the adoption of this pronouncement on the
Company's existing disclosures.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") No. 98-1, ACCOUNTING FOR THE COSTS OF
COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE. SOP 98-1 provides
guidance on accounting for the costs of computer software developed or obtained
for internal use. Costs incurred prior to the initial application of SOP 98-1,
whether capitalized or not, should not be adjusted to the amounts that would
have been capitalized had this SOP been in effect when those costs were
incurred. SOP 98-1 is effective for the Company's fiscal year ending December
31, 1999. The Company has not yet evaluated the impact of this pronouncement on
the Company's financial condition, results of operations or cash flows.
F-9
<PAGE>
VALUE AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
INTERIM FINANCIAL INFORMATION (UNAUDITED)
Interim financial information for the six months ended June 30, 1997
included herein is unaudited. However, the Company believes the interim
financial information includes all adjustments, consisting of only normal
recurring adjustments, necessary for a fair presentation of the results for the
interim period. The results of operations for the six months ended June 30,
1998 were audited but are not necessarily indicative of the results to be
expected for the year ending December 31, 1998.
PRO FORMA BALANCE SHEET (UNAUDITED)
In July 1998, the Company's Board of Directors authorized management to
file a registration statement with the Securities and Exchange Commission to
permit the Company to sell shares of its common stock to the public. Upon
completion of the offering, each outstanding share of Series A and Series B
Preferred Stock will convert into shares of common stock on the basis described
in Note 5 to these financial statements. The accompanying unaudited pro forma
balance sheet at June 30, 1998 reflects the assumed conversion of the Series A
and Series B preferred stock into common stock as of June 30, 1998. Dividends
associated with the Series A and Series B preferred stock were assumed to have
been paid in cash.
2. ACCOUNTS RECEIVABLE
Accounts receivable primarily represent amounts billed for contracts
related to multi-media product presentations. Contract terms permit the Company
to bill 50% of the total contract value at signing with the remainder billable
when the presentations are available to customers on the Company's web site.
The Company has recorded a provision for estimated uncollectible accounts
receivable of $49,000 and $110,000 for the year ended December 31, 1997 and the
six months ended June 30, 1998, respectively. The Company has not written off
any accounts receivable through June 30, 1998.
3. EQUIPMENT, FURNITURE AND FIXTURES
Equipment, furniture and fixtures consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ JUNE 30, DEPRECIABLE
1996 1997 1998 LIVES
---------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
Computer hardware and software ................ $ 54,537 $ 179,072 $1,014,892 2 years
Office furniture and equipment ................ 3,178 37,580 278,331 2-5 years
Other ......................................... -- 6,231 14,497 2 years
-------- --------- ----------
57,715 222,883 1,307,720
Accumulated depreciation ...................... (9,137) (55,083) (239,622)
-------- --------- ----------
Net equipment, furniture and fixtures ......... $ 48,578 $ 167,800 $1,068,098
======== ========= ==========
</TABLE>
Computer equipment with a capitalized cost of $5,558 and $50,998 at
December 31, 1996 and 1997, respectively, and accumulated depreciation of
$1,853 and $33,671, at December 31, 1996 and 1997, respectively, was held under
capital lease agreements. These leases were paid in full during the six months
ended June 30, 1998.
4. NOTE PAYABLE AND LINE OF CREDIT
At December 31, 1997 and June 30, 1998, the Company had a note payable to
an employee for $50,000. This note bears interest at 5% annually with interest
and principal payable on September 15, 2007. The note payable is included in
other liabilities at December 31, 1997 and June 30, 1998.
On April 8, 1998, the Company entered into a line of credit agreement with
a bank, which provides for borrowings up to $5,000,000. Such borrowings are to
be fully secured by liquid securities. Interest on any funds advanced will
accrue at a rate of LIBOR plus 1.75% and the agreement expires on May 31, 1999.
There were no amounts drawn down on this line during the six months ended June
30, 1998.
F-10
<PAGE>
VALUE AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
5. MANDATORILY REDEEMABLE PREFERRED STOCK
In December 1997, the Company sold 5,000,000 shares of 5% Cumulative
Convertible Series A Preferred Stock ("Series A") for $10,000,000. The Company
recorded this sale, net of related issuance costs, at $9,277,614. These shares
are convertible at any time at the option of the holder at a rate such that one
preferred share will be convertible into the number of common shares which
results from dividing $2.00 by the conversion price (approximately $3.47 at
June 30, 1998, subject to adjustment). A preferred stockholder is entitled to
the number of votes equal to the largest number of full shares of common stock
into which the preferred shares could be converted on the record date for the
determination of stockholders eligible to vote on a particular matter.
If the Company does not successfully offer common shares to the public
before December 19, 1999, these Series A shares may be redeemed at the option
of the stockholder for $4.00 per share plus any unpaid dividends. If full
redemption is not elected by the stockholder, 1,666,666 shares are mandatorily
redeemable in each of January 2003, 2004 and 2005 at a price of $4.00 per share
plus any unpaid dividends. In addition, if there is no successful public
offering by that date, the dividend rate increases to 9%, retroactive to the
issuance date. Dividends accrue daily and are due quarterly on April 1, July 1,
October 1 and January 1. As discussed in Note 1, the carrying amount of these
securities is periodically adjusted to increase the carrying value to the
redemption value of $20,000,000 at December 19, 1999. Accretion for 1997 and
the six months ended June 30, 1998 was $188,368 and $2,414,157, respectively,
inclusive of cumulative, unpaid dividends at 9%.
At the completion of a successful public offering of equity securities
with aggregate gross proceeds of at least $25,000,000 with common share price
of a minimum of $3.82, these shares will automatically convert to common
shares, with registration rights. In addition, the Series A preferred
stockholders could, at their discretion, elect to purchase up to 85% of the
Company for a previously agreed-upon price before March 17, 1998. This option
lapsed without exercise.
In June 1998, the Company sold 617,979 shares of 5% Cumulative Convertible
Series B Preferred Stock ("Series B") for $18,829,894. The Company recorded
this sale, net of related offering costs, at $17,679,569. These shares are
convertible at any time at the option of the holder at a rate such that one
preferred share will be convertible into three shares of common stock (subject
to adjustment). A Series B stockholder is entitled to the number of votes equal
to the largest number of common shares into which the shares can be converted.
If the Company does not successfully offer common shares to the public
before December 19, 1999, the Series B shares may be redeemed for $60.94 per
share plus any unpaid dividends at the option of the stockholder. If full
redemption is not elected by the stockholder, 205,993 shares are mandatorily
redeemable in each of January 2003, 2004 and 2005 at a price of $60.94 per
share. In addition, if there is no successful public offering, as defined, by
that date, the dividend rate increases to 9% retroactive to the issuance date.
Dividends accrue daily and are due quarterly. The carrying amount of these
securities will be periodically adjusted to increase the carrying value to the
redemption value of $37,659,640 at December 31, 1999. The Company did not
record any accretion for the six months ended June 30, 1998.
At the completion of a successful public offering of equity securities
with aggregate gross proceeds of at least $25,000,000 and with common share
price of a minimum of $3.82, the Series B Preferred Shares will automatically
convert to common shares, with registration rights.
The Series B investors also acquired 617,979 shares of common stock from
the two founders of the Company for $6,276,607.
6. STOCKHOLDERS' EQUITY (DEFICIT)
COMMON STOCK
During 1996, the Company was capitalized with the issuance of an aggregate
of 22,500,000 shares of common stock, without par value, to two officers of the
Company for $150,000. A common stockholder is entitled to one vote for each
common share held.
In October through November 1997, the Company sold 427,500 and 150,000
shares of common stock at a price of $1.50 and $1.67 per share, respectively,
and 213,750 warrants at a price of $0.33 per warrant. The warrants expire
October 31, 2002 and allow the holder to purchase one share of common stock for
$1.67.
F-11
<PAGE>
VALUE AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
In June 1998, the Company's principal stockholder sold 288,321 shares of
common stock to an entity which assisted in the promotion of the private
placements of Series A and Series B preferred stock. The shares were sold for
$1,000,000 in cash and $1,000,000 in notes receivable by the stockholder, due
June 30, 2003, which notes are not receivable unless the fair market value of
the shares, as defined, exceeds $6 million on the determination date. The
excess of the fair value of the stock sold by the principal stockholder over
the consideration received has been recognized by the Company as a period
expense (with a corresponding increase in common stock) in the amount of
$694,218 during the six months ended June 30, 1998. The fair value of the note
was determined by an independent valuation to be $226,000.
The Company paid commissions of $500,000 and $1,050,000, respectively, for
the placement of the Series A and Series B preferred stock, respectively, to a
principal in the entity. These amounts are recorded as a reduction of the
related proceeds.
COMMON STOCK OPTIONS
The Company's Board of Directors adopted the Company's 1997 Stock
Incentive Plan ("Plan") and reserved 3,750,000 shares of common stock for
grants under this Plan. Generally, these options are offered to all employees
at the fair value of the stock at the date of the grant. These options vest
over periods up to five years (as determined by the Board at the date of grant)
and expire upon the earlier of ten years from the grant date or optionee's
termination of employment.
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED
OPTIONS AVERAGE PRICE
------------- --------------
<S> <C> <C>
Balance, December 31, 1996 ......... -- $ --
Granted ............................ 2,591,625 0.88
Exercised .......................... -- --
Expired/forfeited .................. (6,000) 1.67
--------- -----
Balance, December 31, 1997 ......... 2,585,625 0.88
Granted ............................ 1,111,755 4.01
Exercised .......................... -- --
Expired/forfeited .................. (322,500) 2.65
--------- -----
Balance, June 30, 1998 ............. 3,374,880 $ 1.74
========= ======
</TABLE>
At June 30, 1998, the following options were outstanding:
<TABLE>
<CAPTION>
EXERCISE WEIGHTED
NUMBER PRICE AVERAGE LIFE
- ---------------------- ---------- -------------
<S> <C> <C>
1,903,875 ......... $ 0.58 10 years
510,750 ........... 1.67 10 years
848,250 ........... 3.50 10 years
51,750............. 6.67 10 years
60,255............. 10.16 10 years
</TABLE>
Certain options were issued during 1997 which provide for cash bonuses
upon exercise. The Company recorded approximately $273,000 and $76,000 in
compensation for 1997 and the six months ended June 30, 1998, respectively,
related to these bonus provisions. Additional expense to be recognized related
to these bonus provisions is as follows: July 1, 1998 through December 31, 1998
- -- $76,000, 1999 -- $77,000, 2000 -- $19,000.
Additionally, the Company issued options through June 30, 1998 to certain
employees with exercise prices less than the fair market value at the date of
grant, resulting in compensation expense of approximately $214,500 for the six
months ended June 30, 1998. Additional expense to be recognized related to
these options is as follows: $499,000 for the six months ended December 31,
1998; 1999 -- $689,000; 2000 -- $402,000; 2001 -- $232,000; 2002 -- $115,000;
2003 -- $25,000.
F-12
<PAGE>
VALUE AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
6. STOCKHOLDERS' EQUITY (DEFICIT) -- Continued
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its Plan and recognizes compensation expense for its employee
stock-based compensation plan based upon the intrinsic value method. If the
Company had elected to recognize compensation expense based upon fair value at
the grant dates for the stock option awards granted, consistent with the
methodology prescribed by SFAS No. 123, net loss for the period from Inception
(March 13, 1996) through December 31, 1996 would be the same as currently
presented. For the year ended December 31, 1997 and the six months ended June
30, 1998, the balances would have been reported at the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1997 JUNE 30, 1998
------------------- -----------------
<S> <C> <C>
NET LOSS
As reported ......................... $ (1,853,259) $ (12,368,615)
============= =============
Pro forma ........................... $ (1,885,509) $ (12,524,240)
============= =============
NET LOSS PER SHARE, BASIC AND DILUTED
As reported ......................... $ (0.09) $ (0.64)
============= =============
Pro forma ........................... $ (0.09) $ (0.65)
============= =============
</TABLE>
The fair value for these options was estimated at the grant date using the
Black-Scholes option pricing model with the following assumptions:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
-------------- ---------------
<S> <C> <C>
Expected volatility ............. 0.01% 0.01%
Risk-free interest rate ......... 5.71%-5.90% 5.38%-5.71%
Expected life ................... 5 years 5 years
Expected dividend yield ......... 0% 0%
</TABLE>
EARNINGS PER SHARE
The following table sets forth the calculation for loss (numerator) and
shares (denominator) for earnings per share:
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION (MARCH 13, 1996)
THROUGH DECEMBER 31, 1996
------------------------------------------
PER-SHARE
LOSS SHARES AMOUNT
-------------- ------------ ----------
<S> <C> <C> <C>
BASIC AND DILUTED EPS
Loss available to common stockholders ......... $ (425,074) 22,500,000 $ (0.02)
========== ========== =======
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, 1997
------------------------------------------
(UNAUDITED)
PER-SHARE
LOSS SHARES AMOUNT
-------------- ------------ ----------
<S> <C> <C> <C>
BASIC AND DILUTED EPS
Loss available to common stockholders ......... $(356,116) 22,500,000 $ (0.02)
========= ========== =======
</TABLE>
F-13
<PAGE>
VALUE AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
6. STOCKHOLDERS' EQUITY (DEFICIT) -- Continued
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
--------------------------------------------
PER-SHARE
LOSS SHARES AMOUNT
---------------- ------------ ----------
<S> <C> <C> <C>
BASIC EPS
Net loss .............................................................. $ (1,853,259)
Less: Preferred stock dividends ....................................... (37,500)
Less: Accretion of preferred stock .................................... (150,868)
------------
Loss available to common stockholders ................................. $ (2,041,627) 22,615,625 $ (0.09)
============ ========== =======
DILUTED EPS
Loss available to common stockholders and assumed conversions ......... $ (2,041,627) 22,615,625 $ (0.09)
============ ========== =======
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, 1998
---------------------------------------------
PER-SHARE
LOSS SHARES AMOUNT
----------------- ------------ ----------
<S> <C> <C> <C>
BASIC EPS
Net loss .............................................................. $ (12,368,615)
Less: Preferred stock dividends ....................................... (450,000)
Less: Accretion of preferred stock .................................... (1,964,157)
-------------
Loss available to common stockholders ................................. $ (14,782,772) 23,152,500 $ (0.64)
============= ========== =======
DILUTED EPS
Loss available to common stockholders and assumed conversions ......... $ (14,782,772) 23,152,500 $ (0.64)
============= ========== =======
</TABLE>
Options and warrants to purchase common shares and preferred securities
are not included in the Diluted EPS calculations as their effect is
anti-dilutive for all periods presented. These dilutive securities at June 30,
1998 include weighted average common stock equivalents relating to preferred
stock of 2,903,714 shares and options and warrants to purchase common shares
under the Treasury Stock method of 2,081,426 shares.
7. INCOME TAXES
From Inception through October 31, 1997, the Company has provided no
provision for income taxes since it had elected, with the consent of its
original stockholders, to be an S Corporation under the Internal Revenue Code.
In lieu of corporate income taxes, the stockholders of an S corporation are
taxed on their proportionate share of the Company's taxable income.
Accordingly, no provision for income taxes was recorded for this period.
Effective November 1, 1997, the Company terminated its S Corporation status and
recorded gross deferred tax assets of $478,787.
The Company has not recorded a provision or benefit for income taxes for
the period November 1, 1997 through December 31, 1997 or for the six months
ended June 30, 1998 due to the net losses incurred for tax purposes for which
there is no carryback potential. The Company has calculated net operating loss
carryforwards of approximately $11,321,000 at June 30, 1998, which may or may
not be representative of the total available net operating loss carryforward
determined at December 31, 1998, to offset future taxable income. The net
operating loss carryforwards would expire principally in 2012. If certain
substantial changes in the Company's ownership should occur, there would be an
annual limitation on the amount of the carryforwards which can be utilized.
F-14
<PAGE>
VALUE AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
The components of deferred income tax assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
-------------- ---------------
<S> <C> <C>
Deferred tax assets:
Deferred revenue ......................... $ 448,720 $ 448,519
Stock-based compensation ................. 103,740 247,760
Depreciation ............................. 6,867 31,765
Net operating loss carryforwards ......... 36,652 4,302,106
---------- ------------
595,979 5,030,150
Valuation allowance ....................... (595,979) (5,030,150)
---------- ------------
Net deferred tax assets .................. $ -- $ --
========== ============
</TABLE>
Deferred tax assets are offset by a full valuation allowance as the lack
of earnings history gives rise to uncertainty as to whether the assets are
realizable. As a result of the Company's history of operating losses and the
uncertainty surrounding the Company's ability to recognize income tax benefits
associated with such losses, no pro forma tax provision calculation or related
earnings per share effects have been included in these financial statements as
they relate to the Company's previous status as an S Corporation.
A reconciliation between the statutory federal income tax rate and the
effective rate of income tax expense follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1997 JUNE 30, 1998
------------------- -----------------
<S> <C> <C>
Statutory federal income tax rate ................................. 34% 34%
Decrease in taxes resulting from:
Effect of S corporation status prior to November 1, 1997 ......... (28%) --
Professional fee ................................................. -- (6%)
Change in valuation allowance .................................... (6%) (28%)
--- ---
0% 0%
=== ===
</TABLE>
8. EMPLOYEE BENEFIT PLAN
In June 1998, the Company adopted a 401(k) defined contribution savings
plan. The plan covers all full-time employees who are at least 18 years of age,
and are not covered by a collective bargaining agreement where retirement
benefits are subject to good faith bargaining. Participants may contribute up
to 15% of pre-tax compensation, subject to certain limitations. The Company may
make discretionary annual profit sharing contributions as well as a
discretionary employer matching contributions. Employees vest in employer
matching contributions and profit sharing contributions over three years of
eligible service. The Company has made no profit sharing or matching
contributions to date.
9. RELATED PARTY TRANSACTIONS
At December 31, 1996, the Company had a non-interest bearing loan from a
stockholder. This note was repaid during 1997.
For the year ended December 31, 1997, 13% of net sales, or approximately
$6,000, were to a stockholder.
10. COMMITMENTS AND CONTINGENCIES
The Company is subject to various legal claims in the ordinary course of
business. In the opinion of management, none of these claims will have a
material adverse effect on the financial position, results of operations or
cash flows of the Company.
The Company was obligated under various capital leases for equipment,
which were capitalized at the present value of future minimum lease payments,
discounted at imputed interest rates of 12% to 19%. These capital lease
obligations were repaid in total during the six months ended June 30, 1998.
Interest paid in connection with these leases was $563, $4,686
F-15
<PAGE>
VALUE AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
10. COMMITMENTS AND CONTINGENCIES -- Continued
and $6,339 for the period from Inception (March 13, 1996) through December 31,
1996, for the year ended December 31, 1997 and for the six months ended June
30, 1998, respectively.
The Company has operating lease commitments of approximately $19,000 for
the six months ending December 31, 1998 and $6,000 for the year ending December
31, 1999. Rent expense for the Company was $99,351, $45,369 and $10,683 for the
six months ended June 30, 1998, the year ended December 31, 1997 and the period
from Inception (March 13, 1996) through December 31, 1996, respectively.
On June 26, 1998, the Company entered into an operating lease agreement
for several office buildings for the Company's Charlottesville, Virginia
headquarters. The lease has terms commencing between October 1998 and January
1999 for the individual buildings and ending on February 1, 2000, with optional
terms of extension. Total lease payments will approximate $52,000 in 1998,
$303,000 in 1999 and $25,000 in 2000.
11. LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1998, the Company had approximately $22.5 million in cash,
cash equivalents and restricted cash. For fiscal 1998, the Company's plans
include a substantial expansion of its business, including such investments as
the hiring of additional resources, systems investment and a national
advertising campaign.
During 1998, the Company plans to pursue the filing of a registration
statement in connection with obtaining additional equity financing and to use
such financing to fund the expansion of the business. Should the equity
financing either be delayed or not occur, management has developed a contingent
operating plan which, if ultimately necessary, management believes could
involve scaling back investments from levels presently budgeted for 1998. In
management's view, were such contingency actions required and therefore
pursued, the Company would have sufficient liquidity to continue in business at
least through fiscal 1998.
12. SUBSEQUENT EVENT
On July 1, 1998, the Company's Board of Directors approved a three-for-one
stock split of the Company's common stock which was effected as of September 1,
1998. All references to the number of shares issued and outstanding, the
conversion factors for the Series A and Series B Preferred Stock and per share
information for all periods presented have been adjusted to give effect to the
aforementioned stock split.
In addition, on September 1, 1998, the Company's Board of Directors
approved an increase in the number of shares of Common Stock authorized from
50,000,000 to 100,000,000 to be effective on September 1, 1998. The reference
to the number of shares of Common Stock authorized has been adjusted to give
effect to the aforementioned share authorization.
F-16
<PAGE>
The Marketplace for a New Millennium...
An Internet-based destination retailer, Value America offers a wide
selection of technology, office and consumer products for sale at its
Internet site, www.valueamerica.com.
[DRAWING DEPICTING WOMAN USING COMPUTER]
Customer Benefits
Customers gain direct access to branded products from national and international
manufacturers. The convenience of home or office delivery is combined with
informative multimedia presentations.
[DRAWING DEPICTING GENIE USING COMPUTER]
Product Presentations
The features and benefits of products are explained by Value America's
multimedia product presentations. Insights into applications help customers
make better purchasing decisions. Headlines, copy, photographs, illustrations,
animations and audio and video streaming combine to provide consumers with
product information and shopping convenience.
[DRAWING DEPICTING $100 BILL BLENDING INTO CREDIT CARD]
Electronic Commerce
A customer's credit card is automatically encrypted for security, and funds
are transferred electronically.
[DRAWING DEPICTING A FACTORY]
Factory Connections
Value America is an electronic store for brand name products, bringing
consumers and manufacturers together. With diminished overhead, effective
product demonstrations and its proprietary operating system, Value America
provides the value, information, service and convenience customers deserve.
[DRAWING DEPICTING SATELITE SYSTEM]
Delivery Systems
Value America fulfills orders primarily by arranging for direct shipment of
products from the manufacturer or its designated distribution partner. The
Company's order fulfillment systems are designed to choose the best product
price and availability if multiple distributors offer the same product.
The Value America store delivers the purchase order via facsimile or EDI.
<PAGE>
[VALUE AMERICA LOGO]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all expenses, other than underwriting
discounts and commissions, payable by the Registrant in connection with the
sale of the Common Stock being registered. All amounts shown are estimates,
except for the SEC registration fee, the Nasdaq National Market filing fee and
the NASD fee. The Company will pay all expenses, other than underwriting
commissions and discounts, related to any sale of shares by the Principal
Stockholders.
<TABLE>
<S> <C>
SEC registration fee .......................... $ 27,140
NASD filing fee ............................... 9,700
Nasdaq National Market fee .................... 95,000
Accounting fees and expenses .................. 325,000
Legal fees and expenses ....................... 250,000
Printing and engraving expenses ............... 100,000
Blue sky fees and expenses .................... 7,500
Transfer agent and registrar fees and expenses 10,000
Miscellaneous ................................. 75,660
--------
Total ........................................ $900,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Articles of Incorporation implement the provisions of the
Virginia Stock Corporation Act ("VSCA"), which provide for the indemnification
of the Company's directors and officers in a variety of circumstances, which
may include indemnification for liabilities under the Securities Act. Under
Sections 13.1-697 and 13.1-702 of the VSCA, a Virginia corporation generally is
authorized to indemnify its directors and officers in civil and criminal
actions if they acted in good faith and believed their conduct to be in the
best interests of the corporation and, in the case of criminal actions, had no
reasonable cause to believe that the conduct was unlawful. The Company's
Articles of Incorporation require indemnification of directors and officers
with respect to certain liabilities, expenses and other amounts imposed upon
them by reason of having been a director or officer, except in the case of
willful misconduct or a knowing violation of criminal law. In addition, as
permitted by the VSCA, the Company's Articles of Incorporation eliminate the
liability of a director or officer in a stockholder or derivative proceeding.
This elimination of liability will not apply in the event of willful misconduct
or a knowing violation of the criminal law or any federal or state securities
law.
The Company has purchased officers' and directors' liability insurance
policies. Within the limits of their coverage, the policies insure (1) the
directors and officers of the Company against certain losses resulting from
claims against them in their capacities as directors and officers to the extent
that such losses are not indemnified by the Company and (2) the Company to the
extent that it indemnifies such directors and officers for losses as permitted
under the laws of Virginia.
The Underwriting Agreement contains provisions by which the Underwriters
have agreed to indemnify the Company, each person, if any, who controls the
Company within the meaning of Section 15 of the Securities Act, each director
of the Company, and each officer of the Company who signs this Registration
Statement, with respect to information furnished in writing by or on behalf of
the Underwriters for use in this Registration Statement.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since March 13, 1996, the Company's date of incorporation, the Company has
sold and issued the following unregistered securities:
(1) On May 24, 1996, the Company issued an aggregate of 19,125,000 shares
of Common Stock to Craig A. Winn, the Company's Chairman, Chief
Executive Officer and President, and Rex Scatena, the Company's
President -- Consumer Products Division, for an aggregate of $127,500.
(2) On August 13, 1996, the Company issued an aggregate of 3,375,000 shares
of Common Stock to Mr. Winn and Mr. Scatena for an aggregate of $22,500.
(3) On November 13, 1997, the Company completed the issuance of an
aggregate of 427,500 shares of Common Stock and warrants to purchase an
aggregate of 213,750 shares of Common Stock to a total of 14 accredited
II-1
<PAGE>
investors. The Company issued the shares of Common Stock at $1.50 per
share and the warrants at $0.33 per warrant. In addition, the Company
issued 150,000 shares of Common Stock to a single, accredited investor at
$1.67 per share.
(4) On December 17, 1997, the Company issued 5,000,000 shares of Series A
Preferred Stock to The Union Labor Life Insurance Company pursuant to
the terms of a Preferred Stock Purchase Agreement of even date
therewith. The aggregate purchase price of the Series A Preferred Stock
was $10,000,000. In connection with this transaction, the Company paid a
$500,000 finder's fee to Timothy Driscoll.
(5) On June 24, 1998, Mr. Winn sold 288,321 shares of Common Stock to a
single investor for $2,000,000 or $6.94 per share.
(6) On June 26, 1998, the Company issued an aggregate of 617,979 shares of
Series B Preferred Stock to 18 accredited investors (collectively, the
"Series B Investors") pursuant to a Preferred Stock Purchase Agreement
of even date therewith. The aggregate purchase price of the Series B
Preferred Stock was $18,829,820 or $30.47 per share. In connection with
such offering, Mr. Winn and Mr. Scatena sold an aggregate of 617,979
shares of Common Stock to the Series B Investors for an aggregate
purchase price of $6,276,607 or $10.16 per share.
(7) On July 1, 1998, Mr. Winn sold an aggregate of 28,350 shares of Common
Stock to three investors for an aggregate of $289,942 or $10.16 per
share.
(8) The Company has issued an aggregate of 3,287,625 options to purchase
Common Stock with exercise prices ranging from $0.58 to $6.67 per share
under the Incentive Plan.
The sales and issuances of securities in the above transactions were
deemed to be exempt under the Securities Act by virtue of Section 4(2) thereof
and/or Regulation D and Rule 701 promulgated thereunder as transactions not
involving any public offering. The purchasers in each case represented their
intention to acquire the securities for investment only and not with a view to
the distribution thereof. Appropriate legends were affixed to the stock
certificates issued in such transactions. Similar representations of investment
intent were obtained and similar legends imposed in connection with any
subsequent transfers of any such securities. The Company believes that all
recipients had adequate access, through employment or other relationships, to
information about the Company to make an informed investment decision.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following exhibits are filed herewith:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ---------- ------------------------
<S> <C>
1.1 Form of Underwriting Agreement*
3.1 Articles of Incorporation of Registrant, as amended*
3.2 Amended and Restated Bylaws of the Company*
4.1 Form of Stock Certificate*
5.1 Opinion of LeClair Ryan, A Professional Corporation**
10.1 Consent Agreement, dated as of December 3, 1997, by and between the Company
and Stephen S. Freedman relating to the mark "Value America"***
10.2 Agreement, dated as of December 3, 1997, by and between Stephen S. Freedman
and the Company relating to the mark "Value America," with Personal Guaranty of
Rex and Jane Scatena***
10.3 Lease, dated as of September 17, 1997, by and between 2300 Commonwealth
Building and the Company relating to property located at 2300 Commonwealth
Drive, Charlottesville, Virginia***
10.4 Tenant Lease, dated as of March 16, 1998, by and between Preston O. Stallings and
the Company relating to property located at 2340 Commonwealth Avenue, Suites
102, 103 and B-1, Charlottesville, Virginia***
10.5 Lease, dated as of June 10, 1996, by and between Commonwealth Clinical Systems,
Inc. and the Company relating to property located at 1650 State Farm Boulevard,
Charlottesville, Virginia***
10.6 Lease Agreement, commencing January 15, 1998, by and between Preston O.
Stallings and the Company relating to property located at 2340 Commonwealth
Drvie, Suite 202, Charlottesville, Virginia***
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ----------- ----------------------
<S> <C>
10.7 Employment Agreement, dated as of August 1, 1997, by and between John L.
Motley, Director and Value America, Inc., a Nevada corporation (predecessor of the
company)***
10.8 Professional Services Agreement, executed by the company on February 11, 1998,
by and between Business Data Services, Inc. and the Company***
10.9 Loan Agreement, executed by the company on April 8, 1998, by and between
Jefferson National Bank (predecessor of Wachovia Bank, N.A.) and the
Company***
10.10 Assignment, Pledge and Subordination Agreement, dated as of April 16, 1998, by
and among First Data Merchant Services Corp. Wachovia Bank, N.A. and the
Company***
10.11 Bank Asset Collateral Agreement and Limited Power of Attorney, dated as of
March 23, 1998, by and among Deutsche Financial Services Corporation, Jefferson
National Bank (predecessor of Wachovia Bank, N.A.) and the Company***
10.12 Warrant, dated November 20, 1997 to purchase 10,000 Shares of Common Stock of
the Company issued to Dean M. Johnson, Director***
10.13 Employment Agreement, dated as of November 13, 1997, by and between Dean M.
Johnson, Director and the Company***
10.14 Form of Developments, Noncompete and Nondisclosure Agreement, by and between
the Company and each of the Company's employees***
10.15 1997 Stock Incentive Plan adopted on August 1, 1997 by Value America, Inc., as
amended *
10.16 Amended and Restated Registration Rights Agreement, dated as of June 26, 1998,
by and among the Company and the entities and individuals listed on Annex A
thereto***
10.17 Amended and Restated Stockholders Agreement, dated as of June 26, 1998, by and
among the Company, Craig A. Winn, Director, Rex Scatena, Director, Crystal
Investments, L.L.C., Frostine, L.L.C., and the holders of the Series A Preferred
Stock and the Series B Preferred Stock***
10.18 Voting Agreement, dated as of June 26, 1998, by and among the Company, Craig A.
Winn, Director, Rex Scatena, Director, Crystal Investments, L.L.C., Frostine, L.L.C.
and the holders of the Company's Series B Preferred Stock***
10.19 Preferred Stock Purchase Agreement, dated as of June 26, 1998, by and among the
Company and those entities and individuals listed on Annex A thereto***
10.20 Preferred Stock Purchase Agreement, dated as of December 17, 1997, by and
between The Union Labor Life Insurance Company acting on behalf of its Separate
Account P and the Company***
10.21 Stock Purchase Agreement, dated as of June 26, 1998, by and among Craig A.
Winn, Director, Rex Scatena, Director, The Union Labor Life Insurance Company
acting on behalf of its Separate Account P, United Association of Journeyman and
Apprentices of the Plumbing and Pipefitting Industry of the United States and
Canada, General Fund, and The Annette M. and Theodore N. Lerner Family
Foundation***
10.22 Registration Rights Agreement, dated as of June 3, 1998, by and between the
Company and Capital Advisers, L.L.C.*
10.23 Product Listing Agreement, dated October 8, 1997, by and between Toshiba
America Information Systems and the Company.*
10.24 Product Listing Agreement, dated June 3, 1997, by and between Toshiba America
Information Systems and the Company.*
10.25 Category Presentation Agreement, dated January 21, 1998, by and between IBM and
the Company.*
10.26 Product Listing Agreement, dated April 16, 1997, by and between Hewlett-Packard
and the Company.*
23.1 Consent of PricewaterhouseCoopers LLP*
23.2 Consent of LeClair Ryan, A Professional Corporation (included in Exhibit 5.1)**
24.1 Power of Attorney***
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ----------- ------------------------
<S> <C>
27.1 Financial Data Schedule*
99.1 Letter, dated January 21, 1998, from the Company to Mr. Robert A. Bayless, Chief
Accountant of the Division of Corporation of the Securities and Exchange
Commission, relating to the Company's revenue recognition for product sales.*
</TABLE>
- ---------
* Filed herewith.
** To be filed by amendment.
*** Previously filed.
(b) The following financial statement schedules are filed herewith:
All financial statement schedules have been omitted because they are not
required, are not applicable or the information is included in the Financial
Statements or Notes thereto.
ITEM 17. UNDERTAKINGS.
The undersigned hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 14 above, or
otherwise, the Registrant has been advised that in the opinion of the SEC such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The undersigned hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of
this Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Amendment No. 1 to Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of
Charlottesville, Commonwealth of Virginia, on the 26th day of August, 1998.
VALUE AMERICA, INC.
By: /s/ CRAIG A. WINN
------------------------------------
CRAIG A. WINN
CHAIRMAN, CHIEF EXECUTIVE OFFICER
AND PRESIDENT
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated as of August 26, 1998.
<TABLE>
<CAPTION>
NAME TITLE
------ -------
<S> <C>
/S/ CRAIG A. WINN Chairman, Chief Executive Officer,
----------------------------------
CRAIG A. WINN President (Principal Executive
Officer) and Director
* President -- Consumer Products
----------------------------------
REX SCATENA Division and Director
/S/ DEAN M. JOHNSON Executive Vice President,
----------------------------------
DEAN M. JOHNSON Chief Financial Officer
(Principal Financial and Accounting
Officer), Secretary and Director
* Director
----------------------------------
JOHN L. MOTLEY
* Director
----------------------------------
GARY D. LECLAIR
* Director
----------------------------------
MICHAEL R. STEED
*By: /S/ CRAIG A. WINN
------------------------------
CRAIG A. WINN
ATTORNEY-IN-FACT
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ---------- ------------------------
<S> <C>
1.1 Form of Underwriting Agreement*
3.1 Articles of Incorporation of Registrant, as amended*
3.2 Amended and Restated Bylaws of the Company*
4.1 Form of Stock Certificate*
5.1 Opinion of LeClair Ryan, A Professional Corporation**
10.1 Consent Agreement, dated as of December 3, 1997, by and between the Company
and Stephen S. Freedman relating to the mark "Value America"***
10.2 Agreement, dated as of December 3, 1997, by and between Stephen S. Freedman
and the Company relating to the mark "Value America", with Personal Guaranty***
10.3 Lease, dated as of September 17, 1997, by and between 2300 Commonwealth
Building and the Company relating to property located at 2300 Commonwealth
Drive, Charlottesville, Virginia***
10.4 Tenant Lease, dated as of March 16, 1998, by and between Preston O. Stallings and
the Company relating to property located at 2340 Commonwealth Avenue, Suites
102, 103 and B-1, Charlottesville, Virginia***
10.5 Lease, dated as of June 10, 1996, by and between Commonwealth Clinical Systems,
Inc. and the Company relating to property located at 1650 State Farm Boulevard,
Charlottesville, Virginia***
10.6 Lease Agreement, commencing January 15, 1998, by and between Preston O.
Stallings and the Company relating to property located at 2340 Commonwealth
Drvie, Suite 202, Charlottesville, Virginia***
10.7 Employment Agreement, dated as of August 1, 1997, by and between John L.
Motley, Director and Value America, Inc., a Nevada corporation (predecessor of the
company)***
10.8 Professional Services Agreement, executed by the company on February 11, 1998,
by and between Business Data Services, Inc. and the Company***
10.9 Loan Agreement, executed by the company on April 8, 1998, by and between
Jefferson National Bank (predecessor of Wachovia Bank) and the Company***
10.10 Assignment, Pledge and Subordination Agreement, dated as of April 16, 1998, by
and among First Data Merchant Services Corp. Wachovia Bank, N.A. and the
Company***
10.11 Bank Asset Collateral Agreement and Limited Power of Attorney, dated as of
March 23, 1998, by and among Deutsche Financial Services Corporation, Jefferson
National Bank N.A. and the Company***
10.12 Warrant, dated November 20, 1997 to purchase 10,000 Shares of Common Stock of
the Company issued to Dean M. Johnson, Director***
10.13 Employment Agreement, dated November 13, 1997, by and between Dean M.
Johnson, Director and the Company***
10.14 Form of Developments, Noncompete and Nondisclosure Agreement, by and between
the Company and each of the Company's employees***
10.15 1997 Stock Incentive Plan adopted on August 1, 1997 by Value America, Inc., as
amended *
10.16 Amended and Restated Registration Rights Agreement, dated as of June 26, 1998,
by and among the Company and the holders of the Series A Stock and Series B
Stock***
10.17 Amended and Restated Stockholders Agreement, dated as of June 26, 1998, by and
among the Company, Craig A. Winn, Director, Rex Scatena, Director, Crystal
Investments, L.L.C., Frostine, L.L.C., and the holders of the Series A Preferred
Stock and the Series B Preferred Stock***
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------------ ------------------------
<S> <C>
10.18 Voting Agreement, dated as of June 26, 1998, by and among the Company, Craig A.
Winn, Director, Rex Scatena, Director, Crystal Investments, L.L.C., Frostine, L.L.C.
and the holders of the Company's Series B Preferred Stock***
10.19 Preferred Stock Purchase Agreement, dated as of June 26, 1998, by and among the
Company and those entities and individuals listed on Annex A thereto***
10.20 Preferred Stock Purchase Agreement, dated as of December 17, 1997, by and
between The Union Labor Life Insurance Company acting on behalf of it, Separate
Account P and the Company***
10.21 Stock Purchase Agreement, dated as of June 26, 1998, by and among Craig A.
Winn, Director, Rex Scatera, Director, The Union Labor Life Insurance Company
acting on behalf of its Separate Account P, United Association of Journeyman and
Apprentices of the Plumbing and Pipefitting Industry of the United States and
Canada, General Funds and The Annette M. and Theodore N. Lerner Family
Foundation***
10.22 Registration Rights Agreement, dated as of June 3, 1998, by and between the
Company and Capital Advisers, L.L.C.*
10.23 Product Listing Agreement, dated October 8, 1997, by and between Toshiba
America Information Systems and the Company.*
10.24 Product Listing Agreement, dated June 3, 1997, by and between Toshiba America
Information Systems and the Company.*
10.25 Category Presentation Agreement, dated January 21, 1998, by and between IBM and
the Company.*
10.26 Product Listing Agreement, dated April 16, 1997, by and between Hewlett-Packard
and the Company.*
23.1 Consent of PricewaterhouseCoopers LLP*
23.2 Consent of LeClair Ryan, A Professional Corporation (included in Exhibit 5.1)**
24.1 Power of Attorney***
27.1 Financial Data Schedule*
99.1 Letter, dated January 21, 1998, from the Company to Mr. Robert A. Bayless, Chief
Accountant of the Division of Corporation of the Securities and Exchange
Commission, relating to the Company's revenue recognition for product sales.*
</TABLE>
- ---------
* Filed herewith.
** To be filed by amendment.
*** Previously filed.
II-7
EXHIBIT 1.1
Draft of 9/01/98
5,000,000 Shares(1)
VALUE AMERICA, INC.
Common Stock
UNDERWRITING AGREEMENT
, 1998
BANCBOSTON ROBERTSON STEPHENS INC.
VOLPE BROWN WHELAN & COMPANY
HAMBRECHT & QUIST LLC
THE ROBINSON-HUMPHREY COMPANY, LLC
As Representatives of the several Underwriters
c/o BancBoston Robertson Stephens Inc.
555 California Street, Suite 2600
San Francisco, California 94104
Ladies and Gentlemen:
Value America, Inc., a Virginia corporation (the "Company"), and Craig A.
Winn and Rex Scatena (together the "Selling Stockholders") address you as the
Representatives of each of the persons, firms and corporations listed in
Schedule A hereto (herein collectively called the "Underwriters") and hereby
confirm their respective agreements with the several Underwriters as follows:
1. Description of Shares. The Company proposes to issue and sell
5,000,000 shares of its authorized and unissued common stock, without par value,
to the several Underwriters (the "Firm Shares"). The Company and the Selling
Stockholders propose to grant, severally and not jointly, to the Underwriters an
option to purchase up to 750,000 additional shares of the Company's common
stock, without par value (the "Option Shares"), as provided in Section 7 hereof.
As used in this Agreement, the term "Shares" shall refer collectively to the
Firm Shares and the Option Shares. All shares of the Company's common stock,
without par value, to be outstanding after giving effect to the sales
contemplated hereby, including the Shares, are hereinafter referred to as
"Common Stock."
2. Representations, Warranties and Agreements of the Company and
the Selling Stockholders.
I. The Company represents and warrants to and agrees with
each Underwriter that:
(a) A registration statement on Form S-1 (File No.
333-58469) with respect to the Shares, including a prospectus subject to
completion, has been prepared by the Company in conformity with the
requirements of the Securities Act of 1933, as amended (the "Act"), and
the applicable rules and regulations (the "Rules and Regulations") of the
Securities and Exchange Commission (the "Commission") under the Act and
has been filed with the Commission; such amendments to such registration
statement, such amended prospectuses subject to completion and such
abbreviated registration statements pursuant to Rule 462(b) of the Rules
and Regulations as may have been required prior to the date hereof have
been similarly prepared and filed with the Commission; and the Company
will file such additional amendments to such registration statement, such
amended prospectuses subject to completion and such abbreviated
registration statements as may hereafter be required. Copies of such
registration statement and amendments, of each related prospectus subject
to completion (the "Preliminary Prospectuses") and of any abbreviated
registration statement pursuant to Rule 462(b) of the Rules and
Regulations have been delivered to you.
- --------
1 Plus an option to purchase up to 750,000 additional shares from the Company
and certain stockholders of the Company to cover over-allotments.
<PAGE>
If the registration statement relating to the
Shares has been declared effective under the Act by the Commission, the
Company will prepare and promptly file with the Commission the
information omitted from the registration statement pursuant to Rule
430A(a) or, if BancBoston Robertson Stephens Inc., on behalf of the
several Underwriters, shall agree to the utilization of Rule 434 of the
Rules and Regulations, the information required to be included in any
term sheet filed pursuant to Rule 434(b) or (c), as applicable, of the
Rules and Regulations pursuant to subparagraph (1), (4) or (7) of Rule
424(b) of the Rules and Regulations or as part of a post-effective
amendment to the registration statement (including a final form of
prospectus). If the registration statement relating to the Shares has not
been declared effective under the Act by the Commission, the Company will
prepare and promptly file an amendment to the registration statement,
including a final form of prospectus, or, if BancBoston Robertson
Stephens Inc., on behalf of the several Underwriters, shall agree to the
utilization of Rule 434 of the Rules and Regulations, the information
required to be included in any term sheet filed pursuant to Rule 434(b)
or (c), as applicable, of the Rules and Regulations. The term
"Registration Statement" as used in this Agreement shall mean such
registration statement, including financial statements, schedules and
exhibits, in the form in which it became or becomes, as the case may be,
effective (including, if the Company omitted information from the
registration statement pursuant to Rule 430A(a) or files a term sheet
pursuant to Rule 434 of the Rules and Regulations, the information deemed
to be a part of the registration statement at the time it became
effective pursuant to Rule 430A(b) or Rule 434(d) of the Rules and
Regulations) and, in the event of any amendment thereto or the filing of
any abbreviated registration statement pursuant to Rule 462(b) of the
Rules and Regulations relating thereto after the effective date of such
registration statement, shall also mean (from and after the effectiveness
of such amendment or the filing of such abbreviated registration
statement) such registration statement as so amended, together with any
such abbreviated registration statement. The term "Prospectus" as used in
this Agreement shall mean the prospectus relating to the Shares as
included in such Registration Statement at the time it becomes effective
(including, if the Company omitted information from the Registration
Statement pursuant to Rule 430A(a) of the Rules and Regulations, the
information deemed to be a part of the Registration Statement at the time
it became effective pursuant to Rule 430A(b) of the Rules and
Regulations); provided, however, that if in reliance on Rule 434 of the
Rules and Regulations and with the consent of BancBoston Robertson
Stephens Inc., on behalf of the several Underwriters, the Company shall
have provided to the Underwriters a term sheet pursuant to Rule 434(b) or
(c), as applicable, prior to the time that a confirmation is sent or
given for purposes of Section 2(10)(a) of the Act, the term "Prospectus"
shall mean the "prospectus subject to completion" (as defined in Rule
434(g) of the Rules and Regulations) last provided to the Underwriters by
the Company and circulated by the Underwriters to all prospective
purchasers of the Shares (including the information deemed to be a part
of the Registration Statement at the time it became effective pursuant to
Rule 434(d) of the Rules and Regulations). Notwithstanding the foregoing,
if any revised prospectus shall be provided to the Underwriters by the
Company for use in connection with the offering of the Shares that
differs from the prospectus referred to in the immediately preceding
sentence (whether or not such revised prospectus is required to be filed
with the Commission pursuant to Rule 424(b) of the Rules and
Regulations), the term "Prospectus" shall refer to such revised
prospectus from and after the time it is first provided to the
Underwriters for such use. If in reliance on Rule 434 of the Rules and
Regulations and with the consent of BancBoston Robertson Stephens Inc.,
on behalf of the several Underwriters, the Company shall have provided to
the Underwriters a term sheet pursuant to Rule 434(b) or (c), as
applicable, prior to the time that a confirmation is sent or given for
purposes of Section 2(10)(a) of the Act, the Prospectus and the term
sheet, together, will not be materially different from the prospectus in
the Registration Statement.
(b) The Commission has not issued any order
preventing or suspending the use of any Preliminary Prospectus or
2
<PAGE>
instituted proceedings for that purpose, and each such Preliminary
Prospectus has conformed in all material respects to the requirements of
the Act and the Rules and Regulations and, as of its date, has not
included any untrue statement of a material fact or omitted to state a
material fact necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading; and at the
time the Registration Statement became or becomes, as the case may be,
effective and at all times subsequent thereto up to and on the Closing
Date (hereinafter defined) and on any later date on which Option Shares
are to be purchased, (i) the Registration Statement and the Prospectus,
and any amendments or supplements thereto, contained and will contain all
material information required to be included therein by the Act and the
Rules and Regulations and will in all material respects conform to the
requirements of the Act and the Rules and Regulations, (ii) the
Registration Statement, and any amendments or supplements thereto, did
not and will not include any untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to
make the statements therein not misleading, and (iii) the Prospectus, and
any amendments or supplements thereto, did not and will not include any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided,
however, that none of the representations and warranties contained in
this subparagraph (b) shall apply to information contained in or omitted
from the Registration Statement or Prospectus, or any amendment or
supplement thereto, in reliance upon, and in conformity with, written
information relating to any Underwriter furnished to the Company by such
Underwriter specifically for use in the preparation thereof.
(c) The Company has been duly incorporated and is
validly existing as a corporation in good standing under the laws of the
Commonwealth of Virginia, with full power and authority (corporate and
other) to own, lease and operate its properties and conduct its business
as described in the Prospectus; the Company is duly qualified to do
business as a foreign corporation and is in good standing in each
jurisdiction in which the ownership or leasing of its properties or the
conduct of its business requires such qualification, except where the
failure to be so qualified or be in good standing would not have a
material adverse effect on its condition (financial or otherwise),
earnings, operations, business or business prospects; no proceeding has
been instituted in any such jurisdiction revoking, limiting or
curtailing, or seeking to revoke, limit or curtail, such power and
authority or qualification; the Company is in possession of and operating
in compliance with all authorizations, licenses, certificates, consents,
orders and permits from state, federal and other regulatory authorities
that are material to the conduct of its business, all of which are valid
and in full force and effect; the Company is not in violation of its
articles of incorporation or bylaws or in default in the performance or
observance of any material obligation, agreement, covenant or condition
contained in any bond, debenture, note or other evidence of indebtedness,
or in any material lease, contract, indenture, mortgage, deed of trust,
loan agreement, joint venture or other agreement or instrument to which
the Company is a party or by which it or its properties may be bound; and
Company is not in violation of any law, order, rule, regulation, writ,
injunction, judgment or decree of any court, government or governmental
agency or body, domestic or foreign, having jurisdiction over the Company
or its properties of which it has knowledge, except for violations that,
in the aggregate, would not have a material adverse effect on the
Company's condition (financial or otherwise), earnings, operations,
business or business prospects. The Company does not own or control,
directly or indirectly, any corporation, association or other entity.
(d) The Company has full legal right, power and
authority to enter into this Agreement and perform the transactions
contemplated hereby. This Agreement has been duly authorized, executed
and delivered by the Company and is a valid and binding agreement on the
part of the Company, enforceable in accordance with its terms, except as
rights to indemnification hereunder may be limited by applicable law and
3
<PAGE>
except as the enforcement hereof may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating to
or affecting creditors' rights generally or by general equitable
principles; the performance of this Agreement and the consummation of the
transactions herein contemplated will not result in a material breach or
violation of any of the terms and provisions of, or constitute a default
under, (i) any bond, debenture, note or other evidence of indebtedness,
or under any lease, contract, indenture, mortgage, deed of trust, loan
agreement, joint venture or other agreement or instrument to which the
Company is a party or by which it or its properties may be bound, (ii)
the articles of incorporation or bylaws of the Company, or (iii) any law,
order, rule, regulation, writ, injunction, judgment or decree of any
court, government or governmental agency or body, domestic or foreign,
having jurisdiction over the Company or its properties. No consent,
approval, authorization or order of or qualification with any court,
government or governmental agency or body, domestic or foreign, having
jurisdiction over the Company or its properties is required for the
execution and delivery of this Agreement and the consummation by the
Company of the transactions herein contemplated, except such as may be
required under the Act, the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), or under state or other securities or Blue Sky
laws, all of which requirements have been satisfied in all material
respects.
(e) There is not any pending or, to the best of the
Company's knowledge, threatened action, suit, claim or proceeding against
the Company or any of its officers, properties, assets or rights before
any court, government or governmental agency or body, domestic or
foreign, having jurisdiction over the Company or its officers, properties
or otherwise that (i) might result in any material adverse change in the
condition (financial or otherwise), earnings, operations, business or
business prospects of the Company or might materially and adversely
affect their properties, assets or rights, (ii) might prevent
consummation of the transactions contemplated hereby or (iii) is required
to be disclosed in the Registration Statement or Prospectus and is not so
disclosed; and there are no agreements, contracts, leases or documents of
the Company of a character required to be described or referred to in the
Registration Statement or Prospectus or to be filed as an exhibit to the
Registration Statement by the Act or the Rules and Regulations that have
not been accurately described in all material respects in the
Registration Statement or Prospectus or filed as exhibits to the
Registration Statement.
(f) All outstanding shares of capital stock of the
Company (including the Option Shares to be sold by the Selling
Stockholders) have been duly authorized and validly issued and are fully
paid and nonassessable, have been issued in compliance with all federal
and state securities laws, were not issued in violation of or subject to
any preemptive rights or other rights to subscribe for or purchase
securities, and the authorized and outstanding capital stock of the
Company is as set forth in the Prospectus under the caption
"Capitalization" and conforms in all material respects to the statements
relating thereto contained in the Registration Statement and the
Prospectus (and such statements correctly state in all material respects
the substance of the instruments defining the capitalization of the
Company); the Firm Shares and the Option Shares to be sold by the Company
hereunder have been duly authorized for issuance and sale to the
Underwriters pursuant to this Agreement and, when issued and delivered by
the Company against payment therefor in accordance with the terms of this
Agreement, will be duly and validly issued and fully paid and
nonassessable, and will be sold free and clear of any pledge, lien,
security interest, encumbrance, claim or equitable interest; and no
preemptive right, co-sale right, registration right, right of first
refusal or other similar right of stockholders exists with respect to any
of the Firm Shares or Option Shares to be sold by the Company hereunder
or the issuance and sale thereof other than those that have been
expressly waived prior to the date hereof and those that will
automatically expire upon and will not apply to the consummation of the
transactions contemplated on the Closing Date. No further approval or
authorization of any stockholder, the Board of Directors of the Company
or others is required for the issuance and sale or transfer of the Shares
except as may be required under the Act, the Exchange Act or under state
or other securities or Blue Sky laws. Except as disclosed in the
Prospectus and the financial statements of the Company, and the related
notes thereto, included in the Prospectus, the Company does not have any
outstanding options to purchase, or any preemptive rights or other rights
to subscribe for or to purchase, any securities or obligations
convertible into, or any contracts or commitments to issue or sell,
4
<PAGE>
shares of its capital stock or any such options, rights, convertible
securities or obligations. The description of the Company's stock option,
stock bonus and other stock plans or arrangements, and the options or
other rights granted and exercised thereunder, set forth in the
Prospectus accurately and fairly presents in all material respects the
information required to be shown with respect to such plans,
arrangements, options and rights.
(g) PricewaterhouseCoopers LLP, which has examined
the financial statements of the Company, together with the related
schedules and notes, as of December 31, 1996 and 1997 and June 30, 1998
and for the period from March 13, 1996 (inception) through December 31,
1996, the year ended December 31, 1997 and the six months ended June 30,
1998, filed with the Commission as a part of the Registration Statement,
which are included in the Prospectus, are independent accountants within
the meaning of the Act and the Rules and Regulations; the audited
financial statements of the Company, together with the related schedules
and notes, forming part of the Registration Statement and Prospectus,
fairly present the financial position and the results of operations of
the Company at the respective dates and for the respective periods to
which they apply; and all audited financial statements of the Company,
together with the related schedules and notes, filed with the Commission
as part of the Registration Statement, have been prepared in accordance
with generally accepted accounting principles consistently applied
throughout the periods involved except as may be otherwise stated
therein. The selected and summary financial and statistical data included
in the Registration Statement present fairly the information shown
therein and have been compiled on a basis consistent with the audited
financial statements presented therein. No other financial statements or
schedules are required to be included in the Registration Statement.
(h) Subsequent to the respective dates as of which
information is given in the Registration Statement and Prospectus, there
has not been (i) any material adverse change in the condition (financial
or otherwise), earnings, operations, business or business prospects of
the Company, (ii) any transaction that is material to the Company, except
transactions entered into in the ordinary course of business, (iii) any
material obligation, direct or contingent, incurred by the Company,
except any obligation incurred in the ordinary course of business, (iv)
any material change in the capital stock or outstanding indebtedness of
the Company (other than exercises, if any, of options outstanding as
disclosed in the Prospectus), (v) any dividend or distribution of any
kind declared, paid or made on the capital stock of the Company, or (vi)
any loss or damage (whether or not insured) to the property of the
Company that has been sustained or will have been sustained and that has
a material adverse effect on the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company.
(i) Except as set forth in the Registration Statement
and Prospectus, (i) the Company has good and marketable title to all
properties and assets described in the Registration Statement and
Prospectus as owned by it, free and clear of any pledge, lien, security
interest, encumbrance, claim or equitable interest, other than such as
would not have a material adverse effect on the condition (financial or
otherwise), earnings, operations, business or business prospects of the
Company, (ii) the agreements to which the Company is a party described in
the Registration Statement and Prospectus are valid agreements,
enforceable by the Company, except as the enforcement thereof may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium
or other similar laws relating to or affecting creditors' rights
generally or by general equitable principles and, to the best of the
Company's knowledge, the other contracting party or parties thereto are
not in material breach or material default under any of such agreements,
and (iii) the Company has valid and enforceable leases for all properties
described in the Registration Statement and Prospectus as leased by it,
except as the enforcement thereof may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
5
<PAGE>
relating to or affecting creditors' rights generally or by general
equitable principles. Except as set forth in the Registration Statement
and Prospectus, the Company owns or leases all such properties as are
necessary to its operations as now conducted or as proposed to be
conducted.
(j) The Company has timely filed all necessary
federal, state and foreign income and franchise tax returns and has paid
all taxes shown thereon as due, and there is no tax deficiency that has
been or, to the best of the Company's knowledge, might be asserted
against the Company that might have a material adverse effect on the
condition (financial or otherwise), earnings, operations, business or
business prospects of the Company; and all tax liabilities are adequately
provided for on the books of the Company.
(k) The Company maintains insurance with insurers of
recognized financial responsibility of the types and in the amounts
generally deemed adequate for its business and consistent with insurance
coverage maintained by similar companies in similar businesses, including
insurance covering real and personal property owned or leased by the
Company against theft, damage, destruction, acts of vandalism and all
other risks customarily insured against, all of which insurance is in
full force and effect; the Company has not been refused any insurance
coverage sought or applied for; and the Company does not have any reason
to believe that it will not be able to renew its existing insurance
coverage as and when such coverage expires or to obtain similar coverage
from similar insurers as may be necessary to continue its business at a
cost that would not materially and adversely affect the condition
(financial or otherwise), earnings, operations, business or business
prospects of the Company.
(l) To the best of Company's knowledge, no labor
disturbance by the employees of the Company exists or is imminent; and
the Company is not aware of any existing or imminent labor disturbance by
the employees of any of its licensors or its significant customers that
might be expected to result in a material adverse change in the condition
(financial or otherwise), earnings, operations, business or business
prospects of the Company. No collective bargaining agreement exists with
any of the Company's employees and, to the best of the Company's
knowledge, no such agreement is imminent.
(m) The Company owns or possesses adequate rights to
use all patents, patent rights, inventions, trade secrets, know-how,
trademarks, service marks, trade names and copyrights that are necessary
to conduct its businesses as described in the Registration Statement and
Prospectus; the expiration of any patents, patent rights, trade secrets,
trademarks, service marks, trade names or copyrights would not have a
material adverse effect on the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company; the
Company has not received any notice of, and has no knowledge of, any
infringement of or conflict with asserted rights of the Company by others
with respect to any patent, patent rights, inventions, trade secrets,
know-how, trademarks, service marks, trade names or copyrights; and the
Company has not received any notice of, and has no knowledge of, any
infringement of or conflict with asserted rights of others with respect
to any patent, patent rights, inventions, trade secrets, know-how,
trademarks, service marks, trade names or copyrights that, singly or in
the aggregate, if the subject of an unfavorable decision, ruling or
finding, might have a material adverse effect on the condition (financial
or otherwise), earnings, operations, business or business prospects of
the Company.
(n) The Common Stock has been approved for quotation
on the Nasdaq National Market, subject to official notice of issuance.
6
<PAGE>
(o) The Company has been advised concerning the
Investment Company Act of 1940, as amended, and the rules and regulations
thereunder, and has in the past conducted, and intends in the future to
conduct, its affairs in such a manner as to ensure that it will not
become an "investment company" within the meaning of such Act and rules
and regulations.
(p) The Company has not distributed and will not
distribute prior to the later of (i) the Closing Date, or any date on
which Option Shares are to be purchased, as the case may be, and (ii)
completion of the distribution of the Shares, any offering material in
connection with the offering and sale of the Shares other than any
Preliminary Prospectuses, the Prospectus, the Registration Statement and
other materials, if any, permitted by the Act.
(q) The Company has not at any time during the last
five years (i) made any unlawful contribution to any candidate for
foreign office or failed to disclose fully any contribution in violation
of law or (ii) made any payment to any federal or state governmental
officer or official, or other person charged with similar public or
quasi-public duties, other than payments required or permitted by the
laws of the United States or any jurisdiction thereof.
(r) The Company has not taken and will not take,
directly or indirectly, any action designed to or that might reasonably
be expected to cause or result in stabilization or manipulation of the
price of the Common Stock to facilitate the sale or resale of the Shares.
(s) Each officer, director and director-nominee of
the Company and each record owner of shares of Common Stock has agreed in
writing that such person will not, for a period of 180 days after the
date of the Prospectus (the "Lock-Up Period"), offer to sell, contract to
sell, or otherwise sell, dispose of, loan, pledge or grant any rights
with respect to (collectively, a "Disposition") any shares of Common
Stock, any options or warrants to purchase any shares of Common Stock or
any securities convertible into or exchangeable for shares of Common
Stock (collectively, "Securities") now owned or hereafter acquired
directly by such person or with respect to which such person has or
hereafter acquires the power of disposition, otherwise than (i) as a bona
fide gift or a distribution to limited partners, members or partners or
shareholders of such person, provided that the donees or distributees
thereof (as the case may be) agree in writing to be bound by the terms of
this restriction or (ii) with the prior written consent of BancBoston
Robertson Stephens Inc. The foregoing restriction has been expressly
agreed to preclude the holder of the Securities from engaging in any
hedging or other transaction which is designed to or reasonably expected
to lead to or result in a Disposition of Securities during the Lock-Up
Period, even if such Securities would be disposed of by someone other
than such holder. Such prohibited hedging or other transactions would
include any short sale (whether or not against the box) or any purchase,
sale or grant of any right (including any put or call option) with
respect to any Securities or with respect to any security (other than a
broad-based market basket or index) that includes, relates to or derives
any significant part of its value from the Securities. Notwithstanding
the foregoing, this restriction shall not prohibit (i) the sale of Option
Shares to the Underwriters pursuant to this Agreement or (ii) resales of
shares of Common Stock acquired either in the public offering to which
the Registration Statement relates or in subsequent open-market
purchases. Furthermore, such person also has agreed and consented to the
entry of stop transfer instructions with the Company's transfer agent
against the transfer of the Securities held by such person except in
compliance with this restriction. The Company has provided to Foley, Hoag
& Eliot LLP, counsel for the several Underwriters ("Underwriters'
Counsel"), a complete and accurate list of all securityholders of the
Company and the number and type of securities held by each
securityholder. The Company has provided to Underwriters' Counsel true,
accurate and complete copies of all of the agreements pursuant to which
its officers, directors and stockholders have agreed to such or similar
restrictions (the "Lock-Up Agreements") presently in effect or effected
hereby. The Company hereby represents and warrants that it will not
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release any of its officers, directors or other stockholders from any
Lock-Up Agreements currently existing or hereafter effected without the
prior written consent of BancBoston Robertson Stephens Inc.
(t) Except as set forth in the Registration Statement
and Prospectus, (i) the Company is in compliance with all rules, laws and
regulations relating to the use, treatment, storage and disposal of toxic
substances and protection of health or the environment ("Environmental
Laws") that are applicable to its business, (ii) the Company has received
no notice from any governmental authority or third party of an asserted
claim under Environmental Laws, which claim is required to be disclosed
in the Registration Statement and the Prospectus, (iii) the Company will
not be required to make future material capital expenditures to comply
with Environmental Laws and (iv) no property that is owned, leased or
occupied by the Company has been designated as a Superfund site pursuant
to the Comprehensive Response, Compensation, and Liability Act of 1980,
as amended (42 U.S.C. ss. 9601, et seq.), or has been otherwise
designated as a contaminated site under applicable state or local law.
(u) The Company maintains a system of internal
accounting controls sufficient to provide reasonable assurances that (i)
transactions are executed in accordance with management's general or
specific authorizations, (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain accountability for assets,
(iii) access to assets is permitted only in accordance with management's
general or specific authorization and (iv) the recorded accountability
for assets is compared with existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
(v) There are no outstanding loans, advances (except
normal advances for business expenses in the ordinary course of business)
or guarantees of indebtedness by the Company to or for the benefit of any
of the officers or directors of the Company or any of the members of the
families of any of them, except as disclosed in the Registration
Statement and the Prospectus.
(w) The Company has complied with all provisions of
Section 517.075, Florida Statutes relating to doing business with the
Government of Cuba or with any person or affiliate located in Cuba.
II. Each Selling Stockholder, severally and not jointly,
represents and warrants to and agrees with each Underwriter and the Company
that:
(a) Such Selling Stockholder now has, and on any
later date on which Option Shares are purchased, will have valid
marketable title to the Option Shares to be sold by such Selling
Stockholder, free and clear of any pledge, lien, security interest,
encumbrance, claim or equitable interest other than pursuant to this
Agreement; and upon delivery of such Option Shares hereunder and payment
of the purchase price as herein contemplated, each of the Underwriters
will obtain valid marketable title to the Option Shares purchased by it
from such Selling Stockholder, free and clear of any pledge, lien,
security interest pertaining to such Selling Stockholder or such Selling
Stockholder's property, encumbrance, claim or equitable interest,
including any liability for estate or inheritance taxes, or any liability
to or claims of any creditor, devisee, legatee or beneficiary of such
Selling Stockholder.
(b) Such Selling Stockholder has duly authorized,
executed and delivered, in the form heretofore furnished to the
Representatives, an irrevocable Power of Attorney (the "Power of
Attorney") appointing Dean M. Johnson and Sandra T. Watson as
attorneys-in-fact (collectively, the "Attorneys" and individually, an
"Attorney") and a Letter of Transmittal and Custody Agreement (the
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"Custody Agreement") with , as custodian (the "Custodian"); each of the
Power of Attorney and the Custody Agreement constitutes a valid and
binding agreement on the part of such Selling Stockholder, enforceable in
accordance with its terms, except as the enforcement thereof may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium
or other similar laws relating to or affecting creditors' rights
generally or by general equitable principles; and each of such Selling
Stockholder's Attorneys, acting alone, is authorized to execute and
deliver this Agreement and the certificate referred to in Section 6(h)
hereof on behalf of such Selling Stockholder, to determine the purchase
price to be paid by the several Underwriters to such Selling Stockholder
as provided in Section 3 hereof, to authorize the delivery of the Option
Shares to be sold by such Selling Stockholder under this Agreement and to
duly endorse (in blank or otherwise) the certificate or certificates
representing such Option Shares or a stock power or powers with respect
thereto, to accept payment therefor, and otherwise to act on behalf of
such Selling Stockholder in connection with this Agreement.
(c) All consents, approvals, authorizations and
orders required for the execution and delivery by such Selling
Stockholder of the Power of Attorney and the Custody Agreement, the
execution and delivery by or on behalf of such Selling Stockholder of
this Agreement and the sale and delivery of the Option Shares to be sold
by such Selling Stockholder under this Agreement (other than, at the time
of the execution hereof (if the Registration Statement has not yet been
declared effective by the Commission), the issuance of the order of the
Commission declaring the Registration Statement effective and such
consents, approvals, authorizations or orders as may be necessary under
state or other securities or Blue Sky laws) have been obtained and are in
full force and effect; and such Selling Stockholder has full legal right
to enter into and perform its obligations under this Agreement and such
Power of Attorney and Custody Agreement, and to sell, assign, transfer
and deliver the Shares to be sold by such Selling Stockholder under this
Agreement.
(d) Such Selling Stockholder will not, during the
Lock-Up Period, effect the Disposition of any Securities now owned or
hereafter acquired directly by such Selling Stockholder or with respect
to which such Selling Stockholder has or hereafter acquires the power of
disposition, otherwise than (i) as a bona fide gift, provided that the
donees thereof agree in writing to be bound by this restriction, or (ii)
with the prior written consent of BancBoston Robertson Stephens Inc. The
foregoing restriction is expressly agreed to preclude the holder of the
Securities from engaging in any hedging or other transaction which is
designed to or reasonably expected to lead to or result in a Disposition
of Securities during the Lock-Up Period, even if such Securities would be
disposed of by someone other than the Selling Stockholder. Such
prohibited hedging or other transactions would include any short sale
(whether or not against the box) or any purchase, sale or grant of any
right (including any put or call option) with respect to any Securities
or with respect to any security (other than a broad-based market basket
or index) that includes, relates to or derives any significant part of
its value from the Securities. Notwithstanding the foregoing, this
restriction shall not prohibit (i) the sale of Option Shares to the
Underwriters pursuant to this Agreement or (ii) resales of shares of
Common Stock acquired either in the public offering to which the
Registration Statement relates or in subsequent open-market purchases.
Such Selling Stockholder also agrees and consents to the entry of stop
transfer instructions with the Company's transfer agent against the
transfer of Securities held by such Selling Stockholder except in
compliance with this restriction.
(e) Certificates in negotiable form for all Option
Shares to be sold by such Selling Stockholder under this Agreement,
together with a stock power or powers duly endorsed in blank by such
Selling Stockholder, have been placed in custody with the Custodian for
the purpose of effecting delivery hereunder.
(f) This Agreement has been duly executed and
delivered by or on behalf of such Selling Stockholder and is a valid and
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binding agreement of such Selling Stockholder, enforceable in accordance
with its terms, except as rights to indemnification hereunder may be
limited by applicable law or public policy and except as the enforcement
hereof may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or affecting creditors'
rights generally or by general equitable principles; and the performance
of this Agreement and the consummation of the transactions herein
contemplated will not result in a breach or violation of any of the terms
and provisions of or constitute a default under any bond, debenture, note
or other evidence of indebtedness, or under any lease, contract,
indenture, mortgage, deed of trust, loan agreement, joint venture or
other agreement or instrument to which such Selling Stockholder is a
party or by which such Selling Stockholder, or any Option Shares to be
sold by such Selling Stockholder hereunder, may be bound or, to the best
of such Selling Stockholder's knowledge, result in any violation of any
law, order, rule, regulation, writ, injunction, judgment or decree of any
court, government or governmental agency or body, domestic or foreign,
having jurisdiction over such Selling Stockholder or over the properties
of such Selling Stockholder.
(g) Such Selling Stockholder has not taken and will
not take, directly or indirectly, any action designed to or that might
reasonably be expected to cause or result in stabilization or
manipulation of the price of the Common Stock to facilitate the sale or
resale of the Shares.
(h) Such Selling Stockholder has not distributed and
will not distribute any prospectus or other offering material in
connection with the offering and sale of the Shares.
(i) All information furnished by or on behalf of such
Selling Stockholder relating to such Selling Stockholder and the Option
Shares that is contained in the representations and warranties of such
Selling Stockholder in such Selling Stockholder's Power of Attorney or
set forth in the Registration Statement or the Prospectus is, and at the
time the Registration Statement became or becomes, as the case may be,
effective and at all times subsequent thereto up to and on any date on
which Option Shares are to be purchased, was or will be, true, correct
and complete, and does not, and at the time the Registration Statement
became or becomes, as the case may be, effective and at all times
subsequent thereto up to and on any date on which Option Shares are to be
purchased, will not, contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary
to make such information not misleading.
(j) Such Selling Stockholder will review the
Prospectus and will comply with all agreements and satisfy all conditions
on its part to be complied with or satisfied pursuant to this Agreement
on or prior to any date on which Option Shares are to be purchased and
will advise one of its Attorneys and BancBoston Robertson Stephens Inc.
prior to such date on which Option Shares are to be purchased if any
statement to be made on behalf of such Selling Stockholder in the
certificate contemplated by Section 6(h) would be inaccurate if made as
of such date on which Option Shares are to be purchased.
(k) Such Selling Stockholder does not have, or has
waived prior to the date hereof, any preemptive right, co-sale right or
right of first refusal or other similar right to purchase any of the
Shares that are to be sold by the Company or the other Selling
Stockholder to the Underwriters pursuant to this Agreement; such Selling
Stockholder does not have, or has waived prior to the date hereof, any
registration right or other similar right to participate in the offering
made by the Prospectus, other than such rights of participation as have
been satisfied by the participation of such Selling Stockholder in the
transactions to which this Agreement relates in accordance with the terms
of this Agreement; and such Selling Stockholder does not own any
warrants, options or similar rights to acquire, and does not have any
right or arrangement to acquire, any capital stock, rights, warrants,
10
<PAGE>
options or other securities from the Company, other than those described
in the Registration Statement and the Prospectus.
(l) Such Selling Stockholder hereby confirms the
truth and accuracy of each of the representations and warranties of the
Company set forth in Section 2.I. above, as if such representations and
warranties were set forth in this Section 2.II.
3. Purchase, Sale and Delivery of Shares. On the basis of the
representations, warranties and agreements herein contained, but subject to the
terms and conditions herein set forth, the Company agrees to sell the Firm
Shares to the Underwriters, and each Underwriter agrees, severally and not
jointly, to purchase the Firm Shares from the Company at a purchase price of $
per share. The obligation of each Underwriter to the Company shall be to
purchase from the Company that number of Firm Shares that (as nearly as
practicable, as determined by you) is in the same proportion to the total number
of Firm Shares to be purchased by all the Underwriters under this Agreement as
the number of Firm Shares set forth opposite the name of such Underwriter in
Schedule A hereto (subject to adjustment as provided in Section 10) is to the
total number of Firm Shares to be purchased by all the Underwriters under this
Agreement.
Delivery of definitive certificates for the Firm Shares to be
purchased by the Underwriters pursuant to this Section 3 shall be made against
payment of the purchase price therefor by the several Underwriters by certified
or official bank check or checks drawn in or by wire transfer of same-day funds,
payable to the order of the Company at the offices of LeClair Ryan, A
Professional Corporation, 707 East Main Street, Richmond, Virginia (or at such
other place as may be agreed upon among the Representatives and the Company), at
7 A.M., San Francisco time, (a) on the third full business day following the
first day that Shares are traded, (b) if this Agreement is executed and
delivered after 1:30 P.M., San Francisco time, the fourth full business day
following the day that this Agreement is executed and delivered or (c) at such
other time and date not later than seven full business days following the first
day that Shares are traded as the Representatives and the Company may determine
(or at such time and date to which payment and delivery shall have been
postponed pursuant to Section 10 hereof), such time and date of payment and
delivery being herein called the "Closing Date"; provided, however, that if the
Company has not made available to the Representatives copies of the Prospectus
within the time provided in Section 4(d) hereof, the Representatives may, in
their sole discretion, postpone the Closing Date until no later than two full
business days following delivery of copies of the Prospectus to the
Representatives. The certificates for the Firm Shares to be so delivered will be
made available to you at such office or such other location, including in New
York City, as you may reasonably request for checking at least one full business
day prior to the Closing Date and will be in such names and denominations as you
may request, such request to be made at least two full business days prior to
the Closing Date. If the Representatives so elect, delivery of the Firm Shares
may be made by credit through full fast transfer to the accounts at The
Depository Trust Company designated by the Representatives.
It is understood that you, individually, and not as the
Representatives of the several Underwriters, may (but shall not be obligated to)
make payment of the purchase price on behalf of any Underwriter or Underwriters
whose check or checks shall not have been received by you prior to the Closing
Date for the Firm Shares to be purchased by such Underwriter or Underwriters.
Any such payment by you shall not relieve any such Underwriter or Underwriters
of any of its or their obligations hereunder.
After the Registration Statement becomes effective, the several
Underwriters intend to make an initial public offering (as such term is
described in Section 11 hereof) of the Firm Shares at an initial public offering
price of $ per share. After the initial public offering, the several
Underwriters may, in their discretion, vary the public offering price.
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The information set forth in the last paragraph on the front cover
page (insofar as such information relates to the Underwriters), on the inside
front cover concerning stabilization and over-allotment by the Underwriters, and
under the second, sixth and eighth paragraphs and the third sentence of the
fifth paragraph under the caption "Underwriting" in any Preliminary Prospectus
and in the Prospectus constitutes the only information furnished by the
Underwriters to the Company for inclusion in any Preliminary Prospectus, the
Prospectus or the Registration Statement, and you, on behalf of the respective
Underwriters, represent and warrant to the Company and the Selling Stockholders
that the statements made therein do not include any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading.
4. Further Agreements of the Company. The Company agrees with the
several Underwriters that:
(a) The Company will use its best efforts to cause the
Registration Statement and any amendment thereof, if not effective at the
time and date that this Agreement is executed and delivered by the
parties hereto, to become effective as promptly as possible; the Company
will use its best efforts to cause any abbreviated registration statement
pursuant to Rule 462(b) of the Rules and Regulations as may be required
subsequent to the date the Registration Statement is declared effective
to become effective as promptly as possible; the Company will notify you,
promptly after it shall receive notice thereof, of the time when the
Registration Statement, any subsequent amendment to the Registration
Statement or any abbreviated registration statement has become effective
or any supplement to the Prospectus has been filed; if the Company
omitted information from the Registration Statement at the time it was
originally declared effective in reliance upon Rule 430A(a) of the Rules
and Regulations, the Company will provide evidence satisfactory to you
that the Prospectus contains such information and has been filed, within
the time period prescribed, with the Commission pursuant to subparagraph
(1) or (4) of Rule 424(b) of the Rules and Regulations or as part of a
post-effective amendment to such Registration Statement as originally
declared effective that is declared effective by the Commission; if the
Company files a term sheet pursuant to Rule 434 of the Rules and
Regulations, the Company will provide evidence satisfactory to you that
the Prospectus and term sheet meeting the requirements of Rule 434(b) or
(c), as applicable, of the Rules and Regulations, have been filed, within
the time period prescribed, with the Commission pursuant to subparagraph
(7) of Rule 424(b) of the Rules and Regulations; if for any reason the
filing of the final form of Prospectus is required under Rule 424(b)(3)
of the Rules and Regulations, it will provide evidence satisfactory to
you that the Prospectus contains such information and has been filed with
the Commission within the time period prescribed; it will notify you
promptly of any request by the Commission for the amending or
supplementing of the Registration Statement or the Prospectus or for
additional information; promptly upon your request, it will prepare and
file with the Commission any amendments or supplements to the
Registration Statement or Prospectus that, in the reasonable opinion of
Underwriters' Counsel, may be necessary or advisable in connection with
the distribution of the Shares by the Underwriters; it will promptly
prepare and file with the Commission, and promptly notify you of the
filing of, any amendments or supplements to the Registration Statement or
Prospectus that may be necessary to correct any statements or omissions,
if, at any time when a prospectus relating to the Shares is required to
be delivered under the Act, any event shall have occurred as a result of
which the Prospectus or any other prospectus relating to the Shares as
then in effect would include any untrue statement of a material fact or
omit to state a material fact necessary to make the statements therein,
in the light of the circumstances under which they were made, not
misleading; in case any Underwriter is required to deliver a prospectus
nine months or more after the effective date of the Registration
Statement in connection with the sale of the Shares, it will prepare
promptly upon request, but at the expense of such Underwriter, such
amendment or amendments to the Registration Statement and such prospectus
or prospectuses as may be necessary to permit compliance with the
requirements of Section 10(a)(3) of the Act; and it will file no
amendment or supplement to the Registration Statement or Prospectus that
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<PAGE>
shall not previously have been submitted to you a reasonable time prior
to the proposed filing thereof or to which you shall reasonably object in
writing, subject, however, to compliance with the Act and the Rules and
Regulations and the provisions of this Agreement.
(b) The Company will advise you, promptly after it shall
receive notice or obtain knowledge, of the issuance of any stop order by
the Commission suspending the effectiveness of the Registration Statement
or of the initiation or threat of any proceeding for that purpose; and it
will promptly use its best efforts to prevent the issuance of any stop
order or to obtain its withdrawal at the earliest possible moment if such
stop order should be issued.
(c) The Company will use its best efforts to qualify the
Shares for offering and sale under the securities laws of such
jurisdictions as you may designate and to continue such qualifications in
effect for so long as may be required for purposes of the distribution of
the Shares, except that the Company shall not be required in connection
therewith or as a condition thereof to qualify as a foreign corporation
or to execute a general consent to service of process in any jurisdiction
in which it is not otherwise required to be so qualified or to so execute
a general consent to service of process. In each jurisdiction in which
the Shares shall have been qualified as above provided, the Company will
make and file such statements and reports in each year as are or may be
required by the laws of such jurisdiction.
(d) The Company will furnish to you, as soon as available,
and, in the case of the Prospectus and any term sheet or abbreviated term
sheet under Rule 434, in no event later than the first full business day
following the first day that Shares are traded, copies of the
Registration Statement (three of which will be signed and which will
include all exhibits), each Preliminary Prospectus, the Prospectus and
any amendments or supplements to such documents, including any prospectus
prepared to permit compliance with Section 10(a)(3) of the Act, all in
such quantities as you may from time to time reasonably request.
Notwithstanding the foregoing, if BancBoston Robertson Stephens Inc., on
behalf of the several Underwriters, shall agree to the utilization of
Rule 434 of the Rules and Regulations, the Company shall provide to you
copies of a Preliminary Prospectus updated in all respects through the
date specified by you in such quantities as you may from time to time
reasonably request.
(e) The Company will make generally available to its
securityholders as soon as practicable, but in any event not later than
the forty-fifth day following the end of the fiscal quarter first
occurring after the first anniversary of the effective date of the
Registration Statement, an earnings statement (which will be in
reasonable detail but need not be audited) complying with the provisions
of Section 11(a) of the Act and covering a twelve-month period beginning
after the effective date of the Registration Statement.
(f) During a period of five years after the date hereof, the
Company will furnish to its stockholders as soon as practicable after the
end of each respective period, annual reports (including financial
statements audited by independent certified public accountants) and
unaudited quarterly reports of operations for each of the first three
quarters of the fiscal year, and will furnish to you and the other
several Underwriters hereunder, upon request (i) concurrently with
furnishing such reports to its stockholders, statements of operations of
the Company for each of the first three quarters in the form furnished to
the Company's stockholders, (ii) concurrently with furnishing to its
stockholders, a balance sheet of the Company as of the end of such fiscal
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year, together with statements of operations, of stockholders' equity,
and of cash flows of the Company for such fiscal year, accompanied by a
copy of the certificate or report thereon of independent certified public
accountants, (iii) as soon as they are available, copies of all reports
(financial or other) mailed to stockholders, (iv) as soon as they are
available, copies of all reports and financial statements furnished to or
filed with the Commission, any securities exchange or the National
Association of Securities Dealers, Inc. (the "NASD"), (v) every material
press release and every material news item or article in respect of the
Company or its affairs that was delivered to stockholders in their
capacities as stockholders of the Company, and (vi) any additional
information of a public nature concerning the Company, or its business
that you may reasonably request. During such five-year period, if the
Company shall have any active subsidiaries, the foregoing financial
statements shall be on a consolidated basis to the extent that the
accounts of the Company and such subsidiaries are consolidated and shall
be accompanied by similar financial statements for any significant
subsidiary that is not so consolidated.
(g) The Company will apply the net proceeds from the sale of
the Shares being sold by it in the manner set forth under the caption
"Use of Proceeds" in the Prospectus.
(h) The Company will maintain a transfer agent and, if
necessary under the jurisdiction of incorporation of the Company, a
registrar (which may be the same entity as the transfer agent) for its
Common Stock.
(i) If the transactions contemplated hereby are not
consummated by reason of any failure, refusal or inability on the part of
the Company or either Selling Stockholder to perform any agreement on
their respective parts to be performed hereunder or to fulfill any
condition of the Underwriters' obligations hereunder, or if the Company
shall terminate this Agreement pursuant to Section 11(a) hereof, or if
the Underwriters shall terminate this Agreement pursuant to Section
11(b)(i), the Company will reimburse the several Underwriters for all
out-of-pocket expenses (including fees and disbursements of Underwriters'
Counsel) reasonably incurred by the Underwriters in investigating or
preparing to market or marketing the Shares.
(j) If at any time during the ninety-day period after the
Registration Statement becomes effective, any rumor, publication or event
relating to or affecting the Company shall occur as a result of which in
your opinion the market price of the Common Stock has been or is likely
to be materially affected (regardless of whether such rumor, publication
or event necessitates a supplement to or amendment of the Prospectus),
the Company will, after written notice from you advising the Company to
the effect set forth above, forthwith prepare, consult with you
concerning the substance of and disseminate a press release or other
public statement, reasonably satisfactory to you, responding to or
commenting on such rumor, publication or event.
(k) During the Lock-Up Period, the Company will not, without
the prior written consent of BancBoston Robertson Stephens Inc., effect
the Disposition of, directly or indirectly, any Securities other than the
sale of the Company Shares and the Option Shares to be sold by the
Company hereunder and the Company's issuance of options or Common Stock
under the Company's presently authorized 1997 Stock Incentive Plan.
(l) During a period of ninety days from the effective date
of the Registration Statement, the Company will not file a registration
statement registering shares under the Company's presently authorized
1997 Stock Incentive Plan or any other benefit plan.
5. Expenses.
(a) The Company and the Selling Stockholders agree with each
Underwriter that:
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(i) The Company will pay and bear all costs and
expenses in connection with the preparation, printing and filing
of the Registration Statement (including financial statements,
schedules and exhibits), Preliminary Prospectuses and the
Prospectus and any amendments or supplements thereto; the issuance
and delivery of the Shares hereunder to the several Underwriters,
including transfer taxes, if any, the cost of all certificates
representing the Shares, and transfer agents' and registrars'
fees; the fees and disbursements of counsel for the Company; all
fees and other charges of the Company's independent certified
public accountants; the cost of furnishing to the several
Underwriters copies of the Registration Statement (including
appropriate exhibits), Preliminary Prospectuses and the Prospectus
and any amendments or supplements to any of the foregoing; NASD
filing fees and the cost of qualifying the Shares under the laws
of such jurisdictions as you may designate (including filing fees
and fees and disbursements of Underwriters' Counsel in connection
with such NASD filings and Blue Sky qualifications); and all other
expenses directly incurred by the Company and the Selling
Stockholders in connection with the performance of their
obligations hereunder. Any additional expenses incurred as a
result of the sale of the Shares by the Selling Stockholders will
be borne collectively by the Company and the Selling Stockholders.
The provisions of this Section 5(a)(i) are intended to relieve the
Underwriters from the payment of the expenses and costs that the
Company and the Selling Stockholders hereby agree to pay, but
shall not affect any agreement that the Company and the Selling
Stockholders may make, or may have made, for the sharing of any of
such expenses and costs. Such agreements shall not impair the
obligations of the Company and the Selling Stockholders hereunder
to the several Underwriters.
(ii) In addition to its other obligations under
Section 8(a) hereof, the Company agrees that, as an interim
measure during the pendency of any claim, action, investigation,
inquiry or other proceeding described in Section 8(a) hereof, it
will reimburse the Underwriters on a monthly basis for all
reasonable legal or other expenses incurred in connection with
investigating or defending any such claim, action, investigation,
inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of
the Company's obligation to reimburse the Underwriters for such
expenses and the possibility that such payments might later be
held to have been improper by a court of competent jurisdiction.
To the extent that any such interim reimbursement payment is so
held to have been improper, the Underwriters shall promptly return
such payment to the Company together with interest, compounded
daily, determined on the basis of the prime rate (or other
commercial lending rate for borrowers of the highest credit
standing) listed from time to time in The Wall Street Journal that
represents the base rate on corporate loans posted by a
substantial majority of the nation's thirty largest banks (the
"Prime Rate"). Any such interim reimbursement payments that are
not made to the Underwriters within thirty days of a request for
reimbursement shall bear interest at the Prime Rate from the date
of such request.
(iii) In addition to his other obligations under
Section 8(b) hereof, each Selling Stockholder agrees that, as an
interim measure during the pendency of any claim, action,
investigation, inquiry or other proceeding described in Section
8(b) hereof relating to such Selling Stockholder, it will
reimburse the Underwriters on a monthly basis for all reasonable
legal or other expenses incurred in connection with investigating
or defending any such claim, action, investigation, inquiry or
other proceeding, notwithstanding the absence of a judicial
determination as to the propriety and enforceability of such
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Selling Stockholder's obligation to reimburse the Underwriters for
such expenses and the possibility that such payments might later
be held to have been improper by a court of competent
jurisdiction, provided, that if such claim, action, investigation
or other proceeding is within the purview of Section 8(a) hereof,
the Underwriters shall first demand interim reimbursement from the
Company pursuant to Section 5(a)(ii) hereof and shall have failed
to be so reimbursed in full within fifteen days of such demand
prior to invoking their rights against such Selling Stockholder
pursuant to this Section 5(a)(iii). To the extent that any such
interim reimbursement payment is so held to have been improper,
the Underwriters shall promptly return such payment to the Selling
Stockholders, together with interest, compounded daily, determined
on the basis of the Prime Rate. Any such interim reimbursement
payments that are not made to the Underwriters within thirty days
of a request for reimbursement shall bear interest at the Prime
Rate from the date of such request.
(b) In addition to their other obligations under Section
8(c) hereof, the Underwriters severally and not jointly agree that, as an
interim measure during the pendency of any claim, action, investigation,
inquiry or other proceeding described in Section 8(c) hereof, they will
reimburse the Company and each Selling Stockholder on a monthly basis for
all reasonable legal or other expenses incurred in connection with
investigating or defending any such claim, action, investigation, inquiry
or other proceeding, notwithstanding the absence of a judicial
determination as to the propriety and enforceability of the Underwriters'
obligation to reimburse the Company and each such Selling Stockholder for
such expenses and the possibility that such payments might later be held
to have been improper by a court of competent jurisdiction. To the extent
that any such interim reimbursement payment is so held to have been
improper, the Company and each such Selling Stockholder shall promptly
return such payment to the Underwriters together with interest,
compounded daily, determined on the basis of the Prime Rate. Any such
interim reimbursement payments that are not made to the Company and each
such Selling Stockholder within thirty days of a request for
reimbursement shall bear interest at the Prime Rate from the date of such
request.
(c) It is agreed that any controversy arising out of the
operation of the interim reimbursement arrangements set forth in Sections
5(a)(ii), 5(a)(iii) and 5(b) hereof, including the amounts of any
requested reimbursement payments, the method of determining such amounts
and the basis on which such amounts shall be apportioned among the
reimbursing parties, shall be settled by arbitration conducted under the
provisions of the Constitution and Rules of the Board of Governors of the
New York Stock Exchange, Inc. or pursuant to the Code of Arbitration
Procedure of the NASD. Any such arbitration must be commenced by service
of a written demand for arbitration or a written notice of intention to
arbitrate, therein electing the arbitration tribunal. In the event the
party demanding arbitration does not make such designation of an
arbitration tribunal in such demand or notice, then the party responding
to said demand or notice is authorized to do so. Any such arbitration
will be limited to the operation of the interim reimbursement provisions
contained in Sections 5(a)(ii), 5(a)(iii) and 5(b) hereof and will not
resolve the ultimate propriety or enforceability of the obligation to
indemnify for expenses that is created by the provisions of Sections
8(a), 8(b) and 8(c) hereof or the obligation to contribute to expenses
that is created by the provisions of Section 8(e) hereof.
6. Conditions of Underwriters' Obligations. The obligations of the
several Underwriters to purchase and pay for the Shares as provided herein shall
be subject to the accuracy, as of the date hereof and the Closing Date and any
later date on which Option Shares are to be purchased, as the case may be, of
the representations and warranties of the Company and the Selling Stockholders
herein, to the performance by the Company and the Selling Stockholders of their
respective obligations hereunder and to the following additional conditions:
(a) The Registration Statement shall have become effective
not later than 2 P.M., San Francisco time, on the date following the date
of this Agreement, or such later date as shall be consented to in writing
by you; and no stop order suspending the effectiveness thereof shall have
been issued and no proceedings for that purpose shall have been initiated
or, to the knowledge of the Company, either Selling Stockholder or any
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Underwriter, threatened by the Commission, and any request of the
Commission for additional information (to be included in the Registration
Statement or the Prospectus or otherwise) shall have been complied with
to the reasonable satisfaction of Underwriters' Counsel.
(b) All corporate proceedings and other legal matters in
connection with this Agreement, the form of Registration Statement and
the Prospectus, and the registration, authorization, issue, sale and
delivery of the Shares, shall have been reasonably satisfactory to
Underwriters' Counsel, and Underwriters' Counsel shall have been
furnished with such papers and information as they may reasonably have
requested to enable them to pass upon the matters referred to in this
Section.
(c) Subsequent to the execution and delivery of this
Agreement and prior to the Closing Date, or any later date on which
Option Shares are to be purchased, as the case may be, there shall not
have been any change in the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company from that set
forth in the Registration Statement or Prospectus that, in your
reasonable judgment, is material and adverse and that makes it, in your
reasonable judgment, impracticable or inadvisable to proceed with the
public offering of the Shares as contemplated by the Prospectus.
(d) You shall have received on the Closing Date and on any
later date on which Option Shares are to be purchased, as the case may be,
the following opinion of LeClair Ryan, A Professional Corporation, counsel
for the Company and the Selling Stockholders, dated the Closing Date or
such later date on which Option Shares are to be purchased, addressed to
the Underwriters and with reproduced copies or signed counterparts thereof
for each of the Underwriters, to the effect that:
(i) The Company has been duly incorporated and is
validly existing as a corporation in good standing under the laws of
the Commonwealth of Virginia.
(ii) The Company has the corporate power and authority
to own, lease and operate its properties and to conduct its business
as described in the Prospectus.
(iii) The authorized, issued and outstanding capital
stock of the Company is as set forth in the Prospectus under the
caption "Capitalization" as of the dates stated therein. The issued
and outstanding shares of capital stock of the Company (including
the Option Shares to be sold by the Selling Stockholders) have been
duly and validly issued and are fully paid and nonassessable and, to
such counsel's knowledge, have not been issued in violation of or
subject to any preemptive right, co-sale right, registration right,
right of first refusal or other similar right.
(iv) The Firm Shares or the Option Shares, as the case
may be, to be issued by the Company pursuant to the terms of this
Agreement have been duly authorized and, upon issuance and delivery
against payment therefor in accordance with the terms hereof, will
be duly and validly issued and fully paid and nonassessable, and
will not have been issued in violation of or subject to any
preemptive right, co-sale right, registration right, right of first
refusal or other similar right.
(v) The Company has the corporate power and authority
to enter into this Agreement and to issue, sell and deliver to the
Underwriters the Shares to be issued and sold by it hereunder.
(vi) This Agreement has been duly authorized by all
necessary corporate action on the part of the Company and has been
duly executed and delivered by the Company and, assuming due
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authorization, execution and delivery by you, is a valid and binding
agreement of the Company, enforceable in accordance with its terms,
except insofar as indemnification provisions may be limited by
applicable law and except as enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws
relating to or affecting creditors' rights generally or by general
equitable principles.
(vii) The Registration Statement has become effective
under the Act, and to such counsel's knowledge, no stop order
suspending the effectiveness of the Registration Statement has been
issued and no proceedings for that purpose have been instituted or
are pending or threatened under the Act.
(viii) The Registration Statement and the Prospectus,
and each amendment or supplement thereto (other than the financial
statements, including supporting schedules, and financial data
derived therefrom, as to which such counsel need express no
opinion), as of the effective date of the Registration Statement,
complied as to form in all material respects with the requirements
of the Act and the applicable Rules and Regulations.
(ix) The information in the Prospectus under the
caption "Description of Capital Stock," to the extent that it
constitutes matters of law or legal conclusions, has been reviewed
by such counsel and is a fair summary of such matters and
conclusions; and the forms of certificates evidencing the Common
Stock and filed as exhibits to the Registration Statement comply
with the corporation law of the Commonwealth of Virginia.
(x) The description in the Registration Statement and
the Prospectus of the articles of incorporation and bylaws of the
Company and of statutes are accurate and fairly present the
information required to be presented by the Act and the applicable
Rules and Regulations.
(xi) To such counsel's knowledge, there are no
agreements, contracts, leases or documents to which the Company is a
party of a character required to be described or referred to in the
Registration Statement or Prospectus or to be filed as an exhibit to
the Registration Statement that are not described or referred to
therein or filed as required.
(xii) The performance of this Agreement and the
consummation of the transactions herein contemplated (other than
performance of the Company's indemnification obligations hereunder,
concerning which no opinion need be expressed) will not (a) result
in any violation of the Company's articles of incorporation or
bylaws or (b) to such counsel's knowledge, result in a material
breach or violation of any of the terms and provisions of, or
constitute a default under, (1) any bond, debenture, note or other
evidence of indebtedness, or any lease, contract, indenture,
mortgage, deed of trust, loan agreement, joint venture or other
agreement or instrument known to such counsel to which the Company
is a party or by which its properties are bound, (2) any applicable
statute, rule or regulation known to such counsel or (3) any order,
writ or decree known to such counsel of any court, government or
governmental agency or body having jurisdiction over the Company or
any of its properties or operations.
(xiii) No consent, approval, authorization or order of
or qualification with any court, government or governmental agency
or body having jurisdiction over the Company or any of its
properties or operations is necessary in connection with the
consummation by the Company of the transactions herein contemplated,
except such as have been obtained under the Act or such as may be
required under state or other securities or Blue Sky laws in
connection with the purchase and the distribution of the Shares by
the Underwriters.
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<PAGE>
(xiv) To such counsel's knowledge, there are no legal
or governmental proceedings pending or threatened against the
Company of a character required to be disclosed in the Registration
Statement or the Prospectus by the Act or the Rules and Regulations,
other than those described therein.
(xv) To such counsel's knowledge, the Company is not
presently (a) in material violation of its articles of incorporation
or bylaws or (b) in material breach of any applicable statute, rule
or regulation known to such counsel or, to such counsel's knowledge,
any order, writ or decree of any court or governmental agency or
body having jurisdiction over the Company or any of its properties
or operations.
(xvi) To such counsel's knowledge, except as set forth
in the Registration Statement and Prospectus, no holders of Common
Stock or other securities of the Company have registration rights
with respect to securities of the Company and, except as set forth
in the Registration Statement and Prospectus, all holders of
securities of the Company having rights known to such counsel to
registration of such shares of Common Stock or other securities,
because of the filing of the Registration Statement by the Company
have, with respect to the offering contemplated thereby, waived such
rights or such rights have expired by reason of lapse of time
following notification of the Company's intent to file the
Registration Statement or have included securities in the
Registration Statement pursuant to the exercise of and in full
satisfaction of such rights.
(xvii) The Power of Attorney and Custody Agreement of
each Selling Stockholder has been duly executed and delivered by or
on behalf of such Selling Stockholder; and the Power of Attorney and
Custody Agreement of each Selling Stockholder constitutes the valid
and binding agreement of such Selling Stockholder, enforceable in
accordance with its terms, except as the enforcement thereof may be
limited by bankruptcy, insolvency, reorganization, moratorium or
other similar laws relating to or affecting creditors' rights
generally or by general equitable principles.
(xviii) Each of the Selling Stockholders has full
right to enter into and to perform its obligations under this
Agreement and to sell, transfer, assign and deliver the Option
Shares to be sold by such Selling Stockholder hereunder.
(xix) This Agreement has been duly executed and
delivered by or on behalf of each Selling Stockholder.
(xx) Upon the delivery of and payment for the Option
Shares as contemplated in this Agreement, each of the Underwriters
will receive valid marketable title to the Option Shares purchased
by it from such Selling Stockholder, free and clear of any pledge,
lien, security interest, encumbrance, claim or equitable interest.
In rendering such opinion, such counsel may assume that the
Underwriters are without notice of any defect in the title of the
Option Shares being purchased from the Selling Stockholders.
In addition, such counsel shall state that such counsel has
participated in conferences with officials and other representatives of
the Company, the Representatives, Underwriters' Counsel and the
independent certified public accountants of the Company, at which such
conferences the contents of the Registration Statement and Prospectus and
related matters were discussed, and although they have not verified the
accuracy or completeness of the statements contained in the Registration
Statement or the Prospectus, nothing has come to the attention of such
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<PAGE>
counsel that leads them to believe that, at the time the Registration
Statement became effective and at all times subsequent thereto up to and
on the Closing Date and on any later date on which Option Shares are to be
purchased, the Registration Statement and any amendment or supplement
thereto (other than the financial statements, including supporting
schedules, and other financial and statistical information derived
therefrom, as to which such counsel need express no comment) contained any
untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading, or at the Closing Date or any later date on which the
Option Shares are to be purchased, as the case may be, the Registration
Statement, the Prospectus and any amendment or supplement thereto (except
as aforesaid) contained any untrue statement of a material fact or omitted
to state a material fact necessary to make the statements therein, in the
light of the circumstances under which they were made, not misleading.
Counsel rendering the foregoing opinion may rely as to
questions of law not involving the laws of the United States or the
Commonwealth of Virginia upon opinions of local counsel, and as to
questions of fact upon representations or certificates of officers of the
Company, of the Selling Stockholders, and of government officials, in
which case their opinion is to state that they are so relying and that
they have no knowledge of any material misstatement or inaccuracy in any
such opinion, representation or certificate. Copies of any opinion,
representation or certificate so relied upon shall be delivered to you, as
Representatives of the Underwriters, and to Underwriters' Counsel.
(e) You shall have received on the Closing Date and on any
later date on which Option Shares are to be purchased, as the case may be,
an opinion of Underwriters' Counsel, in form and substance satisfactory to
you, with respect to the sufficiency of all such corporate proceedings and
other legal matters relating to this Agreement and the transactions
contemplated hereby as you may reasonably require, and the Company shall
have furnished to Underwriters' Counsel such documents as they may have
requested for the purpose of enabling them to pass upon such matters.
(f) You shall have received on the Closing Date and on any
later date on which Option Shares are to be purchased, as the case may be,
a letter from PricewaterhouseCoopers LLP addressed to the Underwriters,
dated the Closing Date or such later date on which Option Shares are to be
purchased, as the case may be, confirming that they are independent
certified public accountants with respect to the Company within the
meaning of the Act and the applicable published Rules and Regulations and
based upon the procedures described in such letter delivered to you
concurrently with the execution of this Agreement (herein called the
"Original Letter"), but carried out to a date not more than five business
days prior to the Closing Date or such later date on which Option Shares
are to be purchased, as the case may be, (i) confirming, to the extent
true, that the statements and conclusions set forth in the Original Letter
are accurate as of the Closing Date or such later date on which Option
Shares are to be purchased, as the case may be, and (ii) setting forth any
revisions and additions to the statements and conclusions set forth in the
Original Letter that are necessary to reflect any changes in the facts
described in the Original Letter since the date of such letter, or to
reflect the availability of more recent financial statements, data or
information. The letter shall not disclose any change in the condition
(financial or otherwise), earnings, operations, business or business
prospects of the Company from that set forth in the Registration Statement
or Prospectus that, in your sole judgment, is material and adverse and
that makes it, in your sole judgment, impracticable or inadvisable to
proceed with the public offering of the Shares as contemplated by the
Prospectus. The Original Letter from PricewaterhouseCoopers LLP shall be
addressed to or for the use of the Underwriters in form and substance
satisfactory to the Underwriters and shall (i) represent that they are
independent certified public accountants with respect to the Company
within the meaning of the Act and the applicable published Rules and
Regulations, (ii) set forth their opinion with respect to their
examination of the balance sheets of the Company as of December 31, 1996
and 1997 and June 30, 1998 and related statements of operations,
stockholders' equity, and cash flows for the period from March 13, 1996
(inception) through December 31, 1996, the year ended December 31, 1997
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<PAGE>
and the six months ended June 30, 1998, and (iii) address other matters
agreed upon by PricewaterhouseCoopers LLP and you. In addition, you shall
have received from PricewaterhouseCoopers LLP a letter addressed to the
Company and made available to you for the use of the Underwriters stating
that they had reviewed the Company's system of internal accounting
controls to the extent they deemed necessary in establishing the scope of
their examination of the Company's financial statements as of June 30,
1998; such letter shall not disclose any weakness in internal controls
that PricewaterhouseCoopers LLP deemed to constitute a reportable
condition.
(g) You shall have received on the Closing Date and on any
later date on which Option Shares are to be purchased, as the case may be,
a certificate of the Company, dated the Closing Date or such later date on
which Option Shares are to be purchased, as the case may be, signed by the
Chief Executive Officer and Chief Financial Officer of the Company, to the
effect that, and you shall be satisfied that:
(i) The representations and warranties of the Company
in this Agreement are true and correct, as if made on and as of the
Closing Date or any later date on which Option Shares are to be
purchased, as the case may be, and the Company has complied with all
the agreements and satisfied all the conditions on its part to be
performed or satisfied at or prior to the Closing Date or any later
date on which Option Shares are to be purchased, as the case may be;
(ii) No stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that
purpose have been instituted or are pending or threatened under the
Act;
(iii) When the Registration Statement became effective
and at all times subsequent thereto up to the delivery of such
certificate, the Registration Statement and the Prospectus, and any
amendments or supplements thereto, contained all material
information required to be included therein by the Act and the Rules
and Regulations and in all material respects conformed to the
requirements of the Act and the Rules and Regulations, the
Registration Statement, and any amendment or supplement thereto, did
not and does not include any untrue statement of a material fact or
omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, the
Prospectus, and any amendment or supplement thereto, did not and
does not include any untrue statement of a material fact or omit to
state a material fact necessary to make the statements therein, in
the light of the circumstances under which they were made, not
misleading, and, since the effective date of the Registration
Statement, there has occurred no event required to be set forth in
an amended or supplemented Prospectus that has not been so set
forth; and
(iv) Subsequent to the respective dates as of which
information is given in the Registration Statement and Prospectus,
there has not been (a) any material adverse change in the condition
(financial or otherwise), earnings, operations, business or business
prospects of the Company, (b) any transaction that is material to
the Company, except transactions entered into in the ordinary course
of business, (c) any material obligation, direct or contingent,
incurred by the Company, except obligations incurred in the ordinary
course of business, (d) any change in the capital stock or
outstanding indebtedness of the Company that is material to the
Company (other than exercises, if any, of options outstanding as
disclosed in the Prospectus), (e) any dividend or distribution of
any kind declared, paid or made on the capital stock of the Company,
or (f) any loss or damage (whether or not insured) to the property
of the Company that has been sustained or will have been sustained
and that has a material adverse effect on the condition (financial
21
<PAGE>
or otherwise), earnings, operations, business or business prospects
of the Company.
(h) You shall be satisfied that, and you shall have received a
certificate dated any date on which Option Shares are to be purchased from
the Attorneys for each Selling Stockholder to the effect that, as of such
date on which Option Shares are to be purchased they have not been
informed that:
(i) The representations and warranties made by such
Selling Stockholder herein are not true or correct in any material
respect on such date on which Option Shares are to be purchased; or
(ii) Such Selling Stockholder has not complied with
any obligation or satisfied any condition that is required to be
performed or satisfied on the part of such Selling Stockholder at or
prior to such date on which Option Shares are to be purchased.
(i) The Company shall have obtained and delivered to you an
agreement from each officer, director and director-nominee of the Company
and each record owner of Common Stock (including each Selling Stockholder)
in writing prior to the date hereof that such person will not, during the
Lock-Up Period, effect the Disposition of any Securities now owned or
hereafter acquired directly by such person or with respect to which such
person has or hereafter acquires the power of disposition, otherwise than
(i) as a bona fide gift or a distribution to limited partners, members or
shareholders of such person, provided that the donees or distributees
thereof (or as the case may be) agree in writing to be bound by the terms
of this restriction or (ii) with the prior written consent of BancBoston
Robertson Stephens Inc. The foregoing restriction shall have been
expressly agreed to preclude the holder of the Securities from engaging in
any hedging or other transaction which is designed to or reasonably
expected to lead to or result in a Disposition of Securities during the
Lock-Up Period, even if such Securities would be disposed of by someone
other than the such holder. Such prohibited hedging or other transactions
would include any short sale (whether or not against the box) or any
purchase, sale or grant of any right (including any put or call option)
with respect to any Securities or with respect to any security (other than
a broad-based market basket or index) that includes, relates to or derives
any significant part of its value from the Securities. Notwithstanding the
foregoing, this restriction shall not prohibit (i) the sale of Shares to
the Underwriters pursuant to this Agreement or (ii) resales of shares of
Common Stock acquired either in the public offering to which the
Registration Statement relates or in subsequent open-market purchases.
Furthermore, such person will have also agreed and consented to the entry
of stop transfer instructions with the Company's transfer agent against
the transfer of the Securities held by such person except in compliance
with this restriction.
(j) The Company and the Selling Stockholders shall have
furnished to you such further certificates and documents as you shall
reasonably request (including certificates of officers of the Company and
of the Selling Stockholders as to the accuracy of the representations and
warranties of the Company and the Selling Stockholders herein, as to the
performance by the Company and the Selling Stockholders of their
respective obligations hereunder and as to the other conditions concurrent
and precedent to the obligations of the Underwriters hereunder.
All such opinions, certificates, letters and documents will be in
compliance with the provisions hereof only if they are reasonably satisfactory
to Underwriters' Counsel. The Company and the Selling Stockholders will furnish
you with such number of conformed copies of such opinions, certificates, letters
and documents as you shall reasonably request.
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7. Option Shares.
(a) On the basis of the representations, warranties and
agreements herein contained, but subject to the terms and conditions
herein set forth, the Company and the Selling Stockholders hereby grant,
severally and not jointly, to the several Underwriters, for the purpose of
covering over-allotments in connection with the distribution and sale of
the Firm Shares only, nontransferable options to purchase the respective
number of Option Shares as set forth opposite the names of the Company and
the Selling Stockholders in Schedule B hereto, all at the purchase price
per share for the Firm Shares set forth in Section 3 hereof. Such option
may be exercised by the Representatives on behalf of the several
Underwriters on one or more occasions in whole or in part during the
period of thirty days after the date on which the Firm Shares are
initially offered to the public, by giving written notice to the Company
and the Selling Stockholders in accordance with Section 12 hereof. The
number of Option Shares to be purchased by each Underwriter upon the
exercise of such option shall be the same proportion of the total number
of Option Shares to be purchased by the several Underwriters pursuant to
the exercise of such option as the number of Firm Shares purchased by such
Underwriter (set forth in Schedule A hereto) bears to the total number of
Firm Shares purchased by the several Underwriters (set forth in Schedule A
hereto), adjusted by the Representatives in such manner as to avoid
fractional shares. In the event such option is exercised for less than all
of the Option Shares, the Option Shares to be purchased shall be purchased
from the Company and the Selling Stockholders on a pro rata basis,
adjusted by the Representatives in such manner as to avoid fractional
shares.
The certificates in negotiable form for the Option Shares to
be sold by the Selling Stockholders pursuant to the exercise of the option
granted by this Section 7 have been placed in custody (for delivery under
this Agreement) under the Custody Agreement. Each Selling Stockholder
agrees that the certificates for the Option Shares of such Selling
Stockholder so held in custody are subject to the interests of the
Underwriters hereunder, that the arrangements made by such Selling
Stockholder for such custody, including the Power of Attorney is to that
extent irrevocable and that the obligations of such Selling Stockholder
hereunder shall not be terminated by the act of such Selling Stockholder
or by operation of law, whether by the death or incapacity of such Selling
Stockholder or the occurrence of any other event, except as specifically
provided herein or in the Custody Agreement. If either Selling Stockholder
should die or be incapacitated, or if any other such event should occur,
before the delivery of the certificates for the Option Shares to be sold
by such Selling Stockholder, such Option Shares shall, except as
specifically provided herein or in the Custody Agreement, be delivered by
the Custodian in accordance with the terms and conditions of this
Agreement as if such death, incapacity or other event had not occurred,
regardless of whether the Custodian shall have received notice of such
death or other event.
Delivery of definitive certificates for the Option Shares to
be purchased by the several Underwriters pursuant to the exercise of the
option granted by this Section 7 shall be made against payment of the
purchase price therefor by the several Underwriters by certified or
official bank check or checks drawn in same-day funds or by wire transfer
of same-day funds, payable to the order of the Company with regard to the
Option Shares being purchased from the Company, and to the order of the
Custodian for the respective accounts of Selling Stockholders with regard
to the Option Shares being purchased from the Selling Stockholders. Such
delivery and payment shall take place at the offices of LeClair Ryan, A
Professional Corporation, 707 East Main Street, Richmond, Virginia, or at
such other place as may be agreed upon among the Representatives, the
Company and the Attorneys (i) on the Closing Date, if written notice of
the exercise of such option is received by the Company and the Selling
Stockholders at least two full business days prior to the Closing Date, or
(ii) on a date that shall not be later than the third full business day
following the date the Company and the Selling Stockholders receive
written notice of the exercise of such option, if such notice is received
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by the Company and the Selling Stockholders less than two full business
days prior to the Closing Date.
The certificates for the Option Shares to be so delivered will
be made available to you at such office or such other location, including
in New York City, as you may reasonably request for checking at least one
full business day prior to the date of payment and delivery and will be in
such names and denominations as you may request, such request to be made
at least two full business days prior to such date of payment and
delivery. If the Representatives so elect, delivery of the Option Shares
may be made by credit through full fast transfer to the accounts at The
Depository Trust Company designated by the Representatives.
It is understood that you, individually, and not as the
Representatives of the several Underwriters, may (but shall not be
obligated to) make payment of the purchase price on behalf of any
Underwriter or Underwriters whose check or checks shall not have been
received by you prior to the date of payment and delivery for the Option
Shares to be purchased by such Underwriter or Underwriters. Any such
payment by you shall not relieve any such Underwriter or Underwriters of
any of its or their obligations hereunder.
(b) Upon exercise of any option provided for in Section 7(a)
hereof, the obligations of the several Underwriters to purchase such
Option Shares will be subject (as of the date hereof and as of the date of
payment and delivery for such Option Shares) to the accuracy of and
compliance with the representations, warranties and agreements of the
Company and the Selling Stockholders herein, to the accuracy of the
statements of the Company, the Selling Stockholders and officers of the
Company made pursuant to the provisions hereof, to the performance by the
Company and the Selling Stockholders of their respective obligations
hereunder, to the conditions set forth in Section 6 hereof, and to the
condition that all proceedings taken at or prior to the payment date in
connection with the sale and transfer of such Option Shares shall be
reasonably satisfactory in form and substance to you and to Underwriters'
Counsel, and you shall have been furnished with all such documents,
certificates and opinions as you may reasonably request in order to
evidence the accuracy and completeness of any of the representations,
warranties or statements, the performance of any of the covenants or
agreements of the Company and the Selling Stockholders or the satisfaction
of any of the conditions herein contained.
8. Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless each
Underwriter against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject (including in its
capacity as an Underwriter or as a "qualified independent underwriter"
within the meaning of Schedule E of the Bylaws of the NASD), under the
Act, the Exchange Act or otherwise, specifically including losses, claims,
damages or liabilities (or actions in respect thereof) arising out of or
based upon (i) any breach of any representation, warranty, agreement or
covenant of the Company herein contained, (ii) any untrue statement or
alleged untrue statement of any material fact contained in the
Registration Statement or any amendment or supplement thereto, or the
omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not
misleading or (iii) any untrue statement or alleged untrue statement of
any material fact contained in any Preliminary Prospectus or the
24
<PAGE>
Prospectus or any amendment or supplement thereto, or the omission or
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, and agrees to
reimburse each Underwriter for any legal or other expenses reasonably
incurred by it in connection with investigating or defending any such
loss, claim, damage, liability or action; provided, however, that the
Company shall not be liable in any such case to the extent that any such
loss, claim, damage, liability or action arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged
omission made in the Registration Statement, such Preliminary Prospectus
or the Prospectus, or any such amendment or supplement thereto, in
reliance upon, and in conformity with, written information relating to any
Underwriter furnished to the Company by such Underwriter, directly or
through you, specifically for use in the preparation thereof and, provided
further that the indemnity agreement provided in this Section 8(a) with
respect to any Preliminary Prospectus shall not inure to the benefit of
any Underwriter from whom the person asserting any losses, claims,
damages, liabilities or actions based upon any untrue statement or alleged
untrue statement of material fact or omission or alleged omission to state
therein a material fact purchased Shares, if a copy of the Prospectus (or
any amendment or supplement thereto, to the extent available at the time)
in which such untrue statement or alleged untrue statement or omission or
alleged omission was corrected had not been sent or given to such person
within the time required by the Act and the Rules and Regulations, unless
such failure is the result of noncompliance by the Company with Section
4(d) hereof.
The indemnity agreement in this Section 8(a) shall extend upon
the same terms and conditions to, and shall inure to the benefit of, each
person, if any, who controls any Underwriter within the meaning of the Act
or the Exchange Act. This indemnity agreement shall be in addition to any
liabilities that the Company may otherwise have.
(b) Subject to Section 8(f), each Selling Stockholder,
severally and not jointly, agrees to indemnify and hold harmless each
Underwriter against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject (including in its
capacity as an Underwriter) under the Act, the Exchange Act or otherwise,
specifically including losses, claims, damages or liabilities (or actions
in respect thereof) arising out of or based upon (i) any breach of any
representation, warranty, agreement or covenant of such Selling
Stockholder herein contained, (ii) any untrue statement or alleged untrue
statement of any material fact contained in the Registration Statement or
any amendment or supplement thereto, or the omission or alleged omission
to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or (iii) any
untrue statement or alleged untrue statement of any material fact
contained in any Preliminary Prospectus or the Prospectus or any amendment
or supplement thereto, or the omission or alleged omission to state
therein a material fact necessary to make the statements therein, in the
light of the circumstances under which they were made, not misleading, in
the case of subparagraphs (ii) and (iii) of this Section 8(b) to the
extent, but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission was made in reliance upon
and in conformity with written information furnished to the Company or
such Underwriter by such Selling Stockholder, directly or through such
Selling Stockholder's representatives, specifically for use in the
preparation thereof, and agrees to reimburse each Underwriter for any
legal or other expenses reasonably incurred by it in connection with
investigating or defending any such loss, claim, damage, liability or
action; provided, however, that:
(i) any payment obligation of the Selling Stockholders under
this Section 8(b) shall be limited to the amount of losses, claims,
damages and liabilities that are not paid by the Company pursuant to
Section 8(a), and any payment by the Selling Stockholders under this
Section 8(b) shall not be required until after (A) compliance with
the provisions of Section 8(d) with respect to the obligations of
the Company under Section 8(a) and (B) demand for payment has been
25
<PAGE>
made by the Underwriters first upon the Company and such payment has
not made by the Company within fifteen days of such demand,
provided, however, that this clause (i) shall not apply with respect
to any Selling Stockholder in the event and to the extent that any
such loss, claim, damage or liability arises out of or is based upon
an untrue statement or alleged untrue statement or omission or
alleged omission made in the Registration Statement, any Preliminary
Prospectus or the Prospectus, or any amendment or supplement
thereto, in reliance upon, and in conformity with, written
information relating to such Selling Stockholder furnished to the
Company by such Selling Stockholder specifically for use in the
preparation thereof; and
(ii) the indemnity agreement provided in this Section 8(b)
with respect to any Preliminary Prospectus shall not inure to the
benefit of any Underwriter from whom the person asserting any
losses, claims, damages, liabilities or actions based upon any
untrue statement or alleged untrue statement of a material fact or
omission or alleged omission to state therein a material fact
purchased Shares, if a copy of the Prospectus in which such untrue
statement or alleged untrue statement or omission or alleged
omission was corrected had not been sent or given to such person
within the time required by the Act and the Rules and Regulations,
unless such failure is the result of noncompliance by the Company
with Section 4(d) hereof.
The indemnity agreement in this Section 8(b) shall extend upon
the same terms and conditions to, and shall inure to the benefit of, each
person, if any, who controls any Underwriter within the meaning of the Act
or the Exchange Act. This indemnity agreement shall be in addition to any
liabilities that such Selling Stockholder otherwise may have.
(c) Each Underwriter, severally and not jointly, agrees to
indemnify and hold harmless the Company and each Selling Stockholder
against any losses, claims, damages or liabilities, joint or several, to
which the Company or such Selling Stockholder may become subject under the
Act or otherwise, specifically including losses, claims, damages or
liabilities (or actions in respect thereof) arising out of or based upon
(i) any breach of any representation, warranty, agreement or covenant of
such Underwriter herein contained, (ii) any untrue statement or alleged
untrue statement of any material fact contained in the Registration
Statement or any amendment or supplement thereto, or the omission or
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading or
(iii) any untrue statement or alleged untrue statement of any material
fact contained in any Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto, or the omission or alleged omission to
state therein a material fact necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading,
in the case of subparagraphs (ii) and (iii) of this Section 8(c) to the
extent, but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission was made in reliance upon
and in conformity with written information furnished to the Company by
such Underwriter, directly or through you, specifically for use in the
preparation thereof, and agrees to reimburse the Company and each such
Selling Stockholder for any legal or other expenses reasonably incurred by
the Company and each such Selling Stockholder in connection with
investigating or defending any such loss, claim, damage, liability or
action.
The indemnity agreement in this Section 8(c) shall extend upon
the same terms and conditions to, and shall inure to the benefit of, each
officer of the Company who signed the Registration Statement and each
director of the Company, each Selling Stockholder and each person, if any,
who controls the Company or either Selling Stockholder within the meaning
of the Act or the Exchange Act. This indemnity agreement shall be in
addition to any liabilities that each Underwriter may otherwise have.
(d) Promptly after receipt by an indemnified party under this
Section 8 of notice of the commencement of any action, such indemnified
party shall, if a claim in respect thereof is to be made against any
26
<PAGE>
indemnifying party under this Section 8, notify the indemnifying party in
writing of the commencement thereof but the omission so to notify the
indemnifying party will not relieve it from any liability that it may have
to any indemnified party otherwise than under this Section 8. In case any
such action is brought against any indemnified party, and it notified the
indemnifying party of the commencement thereof, the indemnifying party
will be entitled to participate therein and, to the extent that it shall
elect by written notice delivered to the indemnified party promptly after
receiving the aforesaid notice from such indemnified party, to assume the
defense thereof, with counsel reasonably satisfactory to such indemnified
party; provided, however, that if the defendants in any such action
include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that there may be legal
defenses available to it and/or other indemnified parties that are
different from or additional to those available to the indemnifying party,
the indemnified party or parties shall have the right to select separate
counsel to assume such legal defenses and to otherwise participate in the
defense of such action on behalf of such indemnified party or parties.
Upon receipt of notice from the indemnifying party to such indemnified
party of the indemnifying party's election so to assume the defense of
such action and approval by the indemnified party of counsel, the
indemnifying party will not be liable to such indemnified party under this
Section 8 for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof unless (i) the
indemnified party shall have employed separate counsel in accordance with
the proviso to the next preceding sentence (it being understood, however,
that the indemnifying party shall not be liable for the expenses of more
than one separate counsel (together with appropriate local counsel)
approved by the indemnifying party representing all the indemnified
parties under Section 8(a), 8(b) or 8(c) hereof who are parties to such
action), (ii) the indemnifying party shall not have employed counsel
satisfactory to the indemnified party to represent the indemnified party
within a reasonable time after notice of commencement of the action or
(iii) the indemnifying party has authorized the employment of counsel for
the indemnified party at the expense of the indemnifying party; provided
that in no event shall the indemnifying party be liable to such
indemnified party for any legal fees or expenses in excess of reasonable
legal fees and expenses. In no event shall any indemnifying party be
liable in respect of any amounts paid in settlement of any action unless
the indemnifying party shall have approved the terms of such settlement;
provided that such consent shall not be unreasonably withheld. No
indemnifying party shall, without the prior written consent of the
indemnified party, effect any settlement of any pending or threatened
proceeding in respect of which any indemnified party is or could have been
a party and indemnification could have been sought hereunder by such
indemnified party, unless such settlement includes an unconditional
release of such indemnified party from all liability on all claims that
are the subject matter of such proceeding.
(e) In order to provide for just and equitable contribution in
any action in which a claim for indemnification is made pursuant to this
Section 8 but it is judicially determined (by the entry of a final
judgment or decree by a court of competent jurisdiction and the expiration
of time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case notwithstanding the fact
that this Section 8 provides for indemnification in such case, all the
parties hereto shall contribute to the aggregate losses, claims, damages
or liabilities to which they may be subject (after contribution from
others) in such proportion so that, except as set forth in Section 8(f)
hereof, the Underwriters severally and not jointly are responsible pro
rata for the portion represented by the percentage that the underwriting
discount bears to the initial public offering price, and the Company and
the Selling Stockholders are responsible for the remaining portion,
provided, however, that (i) no Underwriter shall be required to contribute
any amount in excess of the amount by which the underwriting discount
27
<PAGE>
applicable to the Shares purchased by such Underwriter exceeds the amount
of damages that such Underwriter has otherwise required to pay and (ii) no
person guilty of a fraudulent misrepresentation (within the meaning of
Section 11(f) of the Act) shall be entitled to contribution from any
person who is not guilty of such fraudulent misrepresentation. The
contribution agreement in this Section 8(e) shall extend upon the same
terms and conditions to, and shall inure to the benefit of, each person,
if any, who controls any Underwriter, the Company or either Selling
Stockholder within the meaning of the Act or the Exchange Act and each
officer of the Company who signed the Registration Statement and each
director of the Company.
(f) The liability of each Selling Stockholder under the
indemnity and contribution agreements contained in the provisions of this
Section 8 shall be limited to an amount equal to the initial public
offering price of any Option Shares sold by such Selling Stockholder to
the Underwriters minus the amount of the underwriting discounts and
commissions paid thereon to the Underwriters by such Selling Stockholder.
Without limiting the foregoing, if no Option Shares are sold by the
Selling Stockholders to the Underwriters, the Selling Stockholders, as
such, shall have no liability under this Section 8. The Company and such
Selling Stockholders may agree, as among themselves and without limiting
the rights of the Underwriters under this Agreement, as to the respective
amounts of such liability for which they each shall be responsible.
(g) The parties to this Agreement hereby acknowledge that they
are sophisticated business persons who were represented by counsel during
the negotiations regarding the provisions hereof including the provisions
of this Section 8, and are fully informed regarding said provisions. They
further acknowledge that the provisions of this Section 8 fairly allocate
the risks in light of the ability of the parties to investigate the
Company and its business in order to assure that adequate disclosure is
made in the Registration Statement and Prospectus as required by the Act
and the Exchange Act.
9. Representations, Warranties, Covenants and Agreements to Survive
Delivery. All representations, warranties, covenants and agreements of the
Company, the Selling Stockholders and the Underwriters herein or in certificates
delivered pursuant hereto, and the indemnity and contribution agreements
contained in Section 8 hereof shall remain operative and in full force and
effect regardless of any investigation made by or on behalf of any Underwriter
or any person controlling any Underwriter within the meaning of the Act or the
Exchange Act, or by or on behalf of the Company or either Selling Stockholder,
or any of their officers, directors or controlling persons within the meaning of
the Act or the Exchange Act, and shall survive the delivery of the Shares to the
several Underwriters hereunder or termination of this Agreement.
10. Substitution of Underwriters. If any Underwriter or Underwriters
shall fail to take up and pay for the number of Firm Shares agreed by such
Underwriter or Underwriters to be purchased hereunder upon tender of such Firm
Shares in accordance with the terms hereof, and if the aggregate number of Firm
Shares that such defaulting Underwriter or Underwriters so agreed but failed to
purchase does not exceed ten percent of the Firm Shares, the remaining
Underwriters shall be obligated, severally in proportion to their respective
commitments hereunder, to take up and pay for the Firm Shares of such defaulting
Underwriter or Underwriters.
If any Underwriter or Underwriters so defaults and the aggregate
number of Firm Shares that such defaulting Underwriter or Underwriters agreed
but failed to take up and pay for exceeds ten percent of the Firm Shares, the
remaining Underwriters shall have the right, but shall not be obligated, to take
up and pay for (in such proportions as may be agreed upon among them) the Firm
Shares that the defaulting Underwriter or Underwriters so agreed but failed to
purchase. If such remaining Underwriters do not, at the Closing Date, take up
and pay for the Firm Shares that the defaulting Underwriter or Underwriters so
agreed but failed to purchase, the Closing Date shall be postponed for
twenty-four hours to allow the several Underwriters the privilege of
substituting within twenty-four hours (including non-business hours) another
underwriter or underwriters (which may include any nondefaulting Underwriter)
satisfactory to the Company. If no such underwriter or underwriters shall have
28
<PAGE>
been substituted as aforesaid by such postponed Closing Date, the Closing Date
may, at the option of the Company, be postponed for a further twenty-four hours,
if necessary, to allow the Company the privilege of finding another underwriter
or underwriters, satisfactory to you, to purchase the Firm Shares that the
defaulting Underwriter or Underwriters so agreed but failed to purchase. If it
shall be arranged for the remaining Underwriters or substituted underwriter or
underwriters to take up the Firm Shares of the defaulting Underwriter or
Underwriters as provided in this Section 10, (i) the Company shall have the
right to postpone the time of delivery for a period of not more than seven full
business days, in order to effect whatever changes may thereby be made necessary
in the Registration Statement or the Prospectus, or in any other documents or
arrangements, and the Company agrees promptly to file any amendments to the
Registration Statement, supplements to the Prospectus or other such documents
that may thereby be made necessary, and (ii) the respective number of Firm
Shares to be purchased by the remaining Underwriters and substituted underwriter
or underwriters shall be taken as the basis of their underwriting obligation. If
the remaining Underwriters shall not take up and pay for all such Firm Shares so
agreed to be purchased by the defaulting Underwriter or Underwriters or
substitute another underwriter or underwriters as aforesaid and the Company
shall not find or shall not elect to seek another underwriter or underwriters
for such Firm Shares as aforesaid, then this Agreement shall terminate.
In the event of any termination of this Agreement pursuant to the
preceding paragraph of this Section 10, neither the Company nor either Selling
Stockholder shall be liable to any Underwriter (except as provided in Sections 5
and 8 hereof) nor shall any Underwriter (other than an Underwriter who shall
have failed, otherwise than for some reason permitted under this Agreement, to
purchase the number of Firm Shares agreed by such Underwriter to be purchased
hereunder, which Underwriter shall remain liable to the Company, the Selling
Stockholders and the other Underwriters for damages, if any, resulting from such
default) be liable to the Company or either Selling Stockholder (except to the
extent provided in Sections 5 and 8 hereof).
The term "Underwriter" in this Agreement shall include any person
substituted for an Underwriter under this Section 10.
11. Effective Date of this Agreement and Termination.
(a) This Agreement shall become effective at the earlier of
(i) 6:30 A.M., San Francisco time, on the first full business day
following the effective date of the Registration Statement or (ii) the
time of the initial public offering of any of the Shares by the
Underwriters after the Registration Statement becomes effective. The time
of the initial public offering shall mean the time of the release by you,
for publication, of the first newspaper advertisement relating to the
Shares, or the time at which the Shares are first generally offered by the
Underwriters to the public by letter, telephone, telegram or telecopy,
whichever shall first occur. By giving notice as set forth in Section 12
before the time this Agreement becomes effective, you, as Representatives
of the several Underwriters, or the Company, may prevent this Agreement
from becoming effective without liability of any party to any other party,
except as provided in Sections 4(j), 5 and 8 hereof.
(b) You, as Representatives of the several Underwriters, shall
have the right to terminate this Agreement by giving notice as hereinafter
specified at any time on or prior to the Closing Date or on or prior to
any later date on which Option Shares are to be purchased, as the case may
be, (i) if the Company or either Selling Stockholder shall have failed,
refused or been unable to perform any agreement on its part to be
performed, or because any other condition of the Underwriters' obligations
hereunder required to be fulfilled is not fulfilled, including any change
in the condition (financial or otherwise), earnings, operations, business
or business prospects of the Company from that set forth in the
Registration Statement or Prospectus that, in your sole judgment, is
29
<PAGE>
material and adverse, or (ii) if additional material governmental
restrictions, not in force and effect on the date hereof, shall have been
imposed upon trading in securities generally or minimum or maximum prices
shall have been generally established on the New York Stock Exchange or on
the American Stock Exchange or in the over-the-counter market by the NASD,
or trading in securities generally shall have been suspended on either
such exchange or in the over-the-counter market by the NASD, or if a
banking moratorium shall have been declared by federal, New York or
California authorities, or (iii) if the Company shall have sustained a
loss by strike, fire, flood, earthquake, accident or other calamity of
such character as to interfere materially with the conduct of the business
and operations of the Company regardless of whether or not such loss shall
have been insured or (iv) if there shall have been a material adverse
change in the general political or economic conditions or financial
markets as in your reasonable judgment makes it inadvisable or
impracticable to proceed with the offering, sale and delivery of the
Shares, or (v) if there shall have been an outbreak or escalation of
hostilities or of any other insurrection or armed conflict or the
declaration by the United States of a national emergency that, in the
reasonable opinion of the Representatives, makes it impracticable or
inadvisable to proceed with the public offering of the Shares as
contemplated by the Prospectus. In the event of termination pursuant to
subparagraph (i) above, the Company shall remain obligated to pay costs
and expenses pursuant to Sections 4(j), 5 and 8 hereof. Any termination
pursuant to any of subparagraphs (ii) through (v) above shall be without
liability of any party to any other party except as provided in Sections 5
and 8 hereof.
If you elect to prevent this Agreement from becoming effective
or to terminate this Agreement as provided in this Section 11, you shall
promptly notify the Company by telephone, telecopy or telegram, in each
case confirmed by letter. If the Company shall elect to prevent this
Agreement from becoming effective, the Company shall promptly notify you
by telephone, telecopy or telegram, in each case, confirmed by letter.
12. Notices. All notices or communications hereunder, except as
herein otherwise specifically provided, shall be in writing and if sent to you
shall be mailed, delivered, telegraphed (and confirmed by letter) or telecopied
(and confirmed by letter) to you c/o BancBoston Robertson Stephens Inc., 555
California Street, Suite 2600, San Francisco, California 94104, telecopier
number (415) 781-0278, Attention: General Counsel; if sent to the Company, such
notice shall be mailed, delivered, telegraphed (and confirmed by letter) or
telecopied (and confirmed by letter) to Value America, Inc., 2300 Commonwealth
Drive, Charlottesville, Virginia 22901, telecopier number (804) 817-7884,
Attention: Chief Executive Officer; if sent to one or more of the Selling
Stockholders, such notice shall be sent mailed, delivered, telegraphed (and
confirmed by letter) or telecopied (and confirmed by letter) to Dean M. Johnson,
as Attorney-in-Fact for the Selling Stockholders, at Value America, Inc., 2300
Commonwealth Drive, Charlottesville, Virginia 22901, telecopier number (804)
817-7884.
13. Parties. This Agreement shall inure to the benefit of and be
binding upon the several Underwriters, the Company and the Selling Stockholders
and their respective executors, administrators, successors and assigns. Nothing
expressed or mentioned in this Agreement is intended or shall be construed to
give any person or entity, other than the parties hereto and their respective
executors, administrators, successors and assigns, and the controlling persons
within the meaning of the Act or the Exchange Act, officers and directors
referred to in Section 8 hereof, any legal or equitable right, remedy or claim
in respect of this Agreement or any provisions herein contained, this Agreement
and all conditions and provisions hereof being intended to be and being for the
sole and exclusive benefit of the parties hereto and their respective executors,
administrators, successors and assigns and said controlling persons and said
officers and directors, and for the benefit of no other person or entity. No
purchaser of any of the Shares from any Underwriter shall be construed a
successor or assign by reason merely of such purchase.
In all dealings with the Company under this Agreement, you shall act
on behalf of each of the several Underwriters, and the Company and the Selling
Stockholders shall be entitled to act and rely upon any statement, request,
notice or agreement made or given by you jointly or by BancBoston Robertson
Stephens Inc. on behalf of you.
30
<PAGE>
14. Applicable Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of New York.
15. Construction. The headings in this Agreement are included only
for convenience and shall not affect the meaning or interpretation of this
Agreement. The words "herein" and "hereof" and other words of similar import
refer to this Agreement as a whole and not to any particular part of this
Agreement. The word "including" as used herein shall not be construed so as to
exclude any other thing not referred to or described.
16. Counterparts. This Agreement may be signed in several
counterparts, each of which will constitute an original.
If the foregoing correctly sets forth the understanding among the Company,
the Selling Stockholders and the several Underwriters, please so indicate in the
space provided below for that purpose, whereupon this letter shall constitute a
binding agreement among the Company, the Selling Stockholders and the several
Underwriters.
Very truly yours,
VALUE AMERICA, INC.
By_____________________________________________
Chairman, Chief Executive Officer and President
SELLING STOCKHOLDERS
By___________________________________________
Attorney-in-Fact for the Selling Stockholders
named in Schedule B hereto
Accepted as of the date first above written:
BANCBOSTON ROBERTSON STEPHENS INC.
VOLPE BROWN WHELAN & COMPANY
HAMBRECHT & QUIST LLC
THE ROBINSON-HUMPHREY COMPANY, LLC
On their behalf and on behalf of each of the
several Underwriters named in Schedule A hereto
By BancBoston Robertson Stephens Inc.
By________________________________________
Authorized Signatory
31
<PAGE>
SCHEDULE A
Number of
Firm Shares
To Be
Underwriters Purchased
- --------------- -------------
BancBoston Robertson Stephens Inc.
Volpe Brown Whelan & Company
Hambrecht & Quist LLC.
The Robinson-Humphrey Company, LLC
-------------
Total 5,000,000
=============
<PAGE>
SCHEDULE B
Number
of Option
Shares To
Company or Selling Stockholder Be Sold
- --------------------------------- -----------
Value America, Inc. 283,334
Craig A. Winn 333,333
Rex Scatena 133,333
-----------
Total 750,000
===========
ARTICLES OF AMENDMENT
OF
VALUE AMERICA, INC.
1. The name of the Corporation is Value America, Inc.
2. The amendments adopted hereby are listed as follows:
a. The first paragraph of Article III, Section 1 of the Articles of
Incorporation is hereby amended by deleting such paragraph and
adding the following in lieu thereof:
"The number of shares of common stock which the Corporation shall have
the authority to issue shall be 100,000,000 shares, without par value."
b. The definition of "Original Issue Price" in Article III. A., Section 1
of the Articles of Incorporation is hereby amended by deleting it in
its entirety and adding the following in lieu thereof:
"Original Issue Price" shall mean $2.00 per share of Series A Preferred
Stock and $30.47 per share of Series B Preferred Stock."
c. Article III. A., Section 7(b) of the Articles of Incorporation is
hereby amended by deleting the second sentence thereof and adding
the following in lieu thereof:
"The initial Conversion Price for the Series A Preferred Stock shall be
$10.405 and the initial Conversion Price for the Series B Preferred
Stock shall be $30.47."
d. Article III. A., Section 7(i)(1)(I) of the Articles of Incorporation
is hereby amended by deleting the words "prior to a Qualified Offering"
and Article III. A., Section 7(i)(1)(II) of the Articles of
Incorporation is hereby amended by deleting the word "constitutes" in
the third line thereof and adding the following in lieu thereof:
"does not constitute"
e. Article III. A., Section 7(i)(5)(ii) of the Articles of Incorporation
is hereby amended by deleting such clause and adding the following in
lieu thereof:
"the first 3,287,625 shares (or such number of shares as is
proportionately increased in the event of a subdivision of the
outstanding shares of Common Stock or as is proportionately
decreased in the event of a combination of the outstanding shares
of Common Stock into a smaller number of shares) of Common Stock
issued to individuals who are or were employees or directors of or
consultants to the Corporation or any Subsidiary pursuant to stock
purchase or stock option plans or other arrangements,"
<PAGE>
f. Article III. A., Section 7(i)(5)(iii) of the Articles of Incorporation
is hereby amended by deleting such clause and adding the following in
lieu thereof:
"213,750 shares (or such number of shares as is proportionately
increased in the event of a subdivision of the outstanding shares of
Common Stock or as is proportionately decreased in the event of a
combination of the outstanding shares of Common Stock into a smaller
number of shares) of Common Stock issued upon the exercise of stock
purchase warrants that were outstanding on the date of first issuance
of Series A Preferred Stock, and"
g. Article III. A., Section 7(i)(5)(iv) of the Articles of Incorporation
is hereby amended by deleting such clause and adding the following
in lieu thereof:
"75,000 shares (or such number of shares as is proportionately
increased in the event of a subdivision of the outstanding shares of
Common Stock or as is proportionately decreased in the event of a
combination of the outstanding shares of Common Stock into a smaller
number of shares) of Common Stock to be issued to a former employee
for services rendered."
3. The amendments were recommended by the Corporation's Board of Directors to
the Corporation's shareholders pursuant to Sections 13.1-707A and B of the
Virginia Stock Corporation Act (the "Act").
4. Pursuant to Sections 13.1-707B and E of the Act, the amendments were duly
adopted by the shareholders of the Corporation by unanimous written consent,
effective as of September 1, 1998.
[SIGNATURE APPEARS ON THE FOLLOWING PAGE]
<PAGE>
Dated: September 1, 1998
VALUE AMERICA, INC.
By: /s/ Craig A. Winn
-----------------------------
Print Name: Craig A. Winn
---------------------
Title: Chairman
--------------------------
<PAGE>
ARTICLES OF AMENDMENT
OF
VALUE AMERICA, INC.
1. The name of the Corporation is Value America, Inc.
2. The amendments adopted hereby are listed as follows:
A. Article III A of the Articles of Incorporation is hereby deleted in its
entirety and the material attached hereto as Annex A shall be added as
Article III A in lieu thereof.
B. [INTENTIONALLY OMITTED]
C. The first paragraph under Article III. 2. of the Articles of Incorporation
is hereby amended by deleting such paragraph and adding the following in
lieu thereof:
"The number of shares of Preferred Stock which the Corporation shall have
the authority to issue shall be 5,617,979 shares, without par value."
D. Article VII of the Articles of Incorporation is hereby amended by adding the
following after the sole paragraph of such Article:
"Notwithstanding the foregoing, immediately upon the closing of a Qualified
Offering (as such term is defined in Article III. A. of these Articles), the
previous paragraph shall not be applicable and the following provisions
shall govern:
Except as otherwise required in these Articles:
a. Any corporate action requiring shareholder consent, except the
election of directors, an amendment or restatement of these Articles, a
merger, a statutory share exchange, the sale or other disposition of all or
substantially all the Corporation's assets otherwise than in the usual and
regular course of business, or dissolution shall be approved at a meeting at
which a quorum of the Corporation's shareholders is present if the votes
cast in favor of the action exceed the votes cast against the action;
b. Directors shall be elected by a plurality of the voting power of all
of the then outstanding shares of the capital stock of the Corporation
entitled to vote generally in the election of directors, voting together as
a single class at a meeting at which a quorum is present;
c. An amendment or restatement of these Articles other than an amendment
or restatement described, or involved in a transaction described, in
Subsection d or e of this Section shall be approved by a majority of the
voting power of all of the then outstanding shares of the capital stock of
the Corporation entitled to vote on such matters, voting together as a
single class;
d. A merger, statutory share exchange, sale or other disposition of all
or substantially all the Corporation's assets otherwise than in the usual
and regular course of business, or dissolution shall be approved by at least
two-thirds of the voting power of all of the then outstanding shares of the
capital stock of the Corporation entitled to vote on such matters, voting
together as a single class; and
e. An amendment to these Articles that (i) reduces or eliminates the
number of authorized shares of any capital stock set forth in Article III or
(ii) amends, repeals or adopts any provision inconsistent with Articles VI,
VII, VIII, or X of these Articles shall be approved by at least
three-quarters of the then outstanding shares of the capital stock of the
Corporation entitled to vote on such matters, voting together as a single
class."
E. Article VIII of the Articles of Incorporation is hereby amended by
adding the following after the sole sentence in Article VIII:
"Notwithstanding the foregoing, immediately upon the closing of a Qualified
Offering (as such term is defined in Article III A of these Articles), the
previous sentence shall not be applicable and the following provisions shall
govern:
1. The Board of Directors of the Corporation is expressly authorized to
adopt, amend or repeal the Bylaws of the Corporation, subject to any
limitation thereof contained in the Bylaws. The stockholders shall also have
the power to adopt, amend or repeal the Bylaws; provided, however, that, in
addition to any vote of the holders of any class or series of capital stock
of the Corporation required by law or by these Articles, the affirmative
vote of the holders of at least seventy-five percent (75%) of the voting
power of all of the then outstanding shares of the capital stock of the
Corporation entitled to vote generally in the election of directors, voting
together as a single class, shall be required to adopt, amend or repeal any
provision of the Bylaws; and
2. Special meetings of stockholders may be called at any time only by
the Chairman, the President or the Board of Directors. Business transacted
at any special meeting of stockholders shall be limited to matters relating
to the purpose or purposes stated in the notice of the meeting."
F. The following shall be added to the Articles of Incorporation as Article X
thereof:
"Upon the closing of a Qualified Offering (as such term is defined in
Article III. A. of these Articles), the following provisions shall apply:
1. The Board of Directors shall be divided into three classes, Class I,
Class II and Class III, as nearly equal in number as possible. Directors of
the first class (Class I) shall be elected to hold office for a term
expiring at the 1999 annual meeting of shareholders; directors of the second
class (Class II) shall be elected to hold office for a term expiring at the
2000 annual meeting of shareholders; and directors of the third class (Class
III) shall be elected to hold office for a term expiring at the 2001 annual
meeting of shareholders. At each annual meeting of shareholders, the
successors to the class of directors whose terms then shall expire shall be
identified as being of the same class as the directors they succeed and
elected to hold office for a term expiring at the third succeeding annual
meeting of shareholders. When the number of directors is changed, any
newly-created directorships or any decrease in directorships shall be
apportioned among the classes by the Board of Directors as to make all
classes as nearly equal in number as possible.
2. Any one or more or all of the directors may be removed only with
Cause, and then only by the holders of at least a majority of the shares
then entitled to vote at an election of directors. For the purposes of these
Articles, the term "Cause" shall mean:
a. gross incompetence, gross negligence, willful misconduct in office or
breach of a material fiduciary duty owed to the Corporation or any
subsidiary or affiliate thereof;
b. conviction of a felony, a crime of moral turpitude or commission of
an act of embezzlement or fraud against the Corporation or any subsidiary or
affiliate thereof;
c. deliberate dishonesty of the director with respect to the Corporation
or any subsidiary or affiliate thereof; or
d. material dereliction of duties owed to the Corporation by a director.
3. Advance notice of stockholder nominations for election of directors
and other business to be brought by stockholders before a meeting of
stockholders shall be given in the manner provided in the Bylaws of the
Corporation."
3. The amendments were recommended by the Corporation's Board of
Directors to the Corporation's shareholders pursuant to Section 13.1-707A of
the Virginia Stock Corporation Act (the "Act").
4. Pursuant to Section 13.1-707E of the Act, the amendment was duly
adopted by the shareholders of the Corporation by unanimous written consent,
effective as of June 16, 1998.
<PAGE>
Dated: June 26, 1998
-------------------
VALUE AMERICA, INC.
By: /s/ Dean M. Johnson
---------------------
Title: Executive Vice President & CFO
------------------------
ARTICLE III A
A series of Preferred Stock consisting of 5,000,000
shares designated and known as "Series A Preferred Stock" and a
series of Preferred Stock consisting of 617,979 shares designated as
"Series B Preferred Stock" are hereby established. The Series A
Preferred Stock and the Series B Preferred Stock shall have the
rights, preferences and privileges set forth below in this Article III
A and elsewhere in Article III of these Articles of Incorporation.
Section 1. Definitions. For purposes of this Article
III A the following definitions shall apply:
"Board" shall mean the Board of Directors
of the Corporation.
"Business Day" shall mean a day which is not
a Saturday, Sunday or legal holiday on which banking institutions in New
York are authorized to close.
"Commitment Date" shall mean for the
Series A Preferred Stock the date immediately prior to the date of
original issuance of the Series A Preferred Stock and for the Series B
Preferred Stock the date immediately prior to the date of original
issuance of the Series B Preferred Stock.
"Common Stock" shall mean the common stock,
without par value, of the Corporation.
"Common Stock's Fair Market Value" shall
mean the fair market value of a share of Common Stock, as determined in
good faith by the Board for the purpose of granting stock options or
issuing shares to employees of the Corporation or any Subsidiary
and determined as of the most recent date that such determination
has been made within three months of the applicable date or, if no such
determination has been made during such period, the fair market value
of such stock, as determined in good faith by the Board as of the
applicable date; provided, however, that if the Common Stock's Fair
Market Value is being determined in connection with the automatic
conversion of Series Preferred Stock upon the consummation of a
Qualified Offering, the fair market value of Common Stock issued in
payment of accumulated and accrued dividends shall be the per share
"Price to the Public" (as shown in the final prospectus used for the
Qualified Offering).
<PAGE>
"Dividend Rate" means (i) the Standard
Dividend Rate (as hereinafter defined) unless the Corporation is in
arrears at least six months in the payment of all or any portion
of the Redemption Price of any shares of Series Preferred Stock, and
(ii) during any period in which the Corporation is in arrears at least
six months in the payment of all or any portion of the Redemption Price
of any shares of Series Preferred Stock, the Standard Dividend Rate
plus an additional 2% per annum for each full six-month period in which
any such arrears exists. "Standard Dividend Rate" means (1) 5% if
the Corporation completes a Qualified Offering within 24 months after
the first issuance of Series A Preferred Stock, and (2) 9% if
the Corporation does not complete a Qualified Offering within 24
months after the first issuance of Series A Preferred Stock, which
9% dividend rate shall be effective retroactively to the original
issuance of the Series A Preferred Stock.
"Holders of a Majority of the Series
Preferred Stock" means any Person or Persons holding, beneficially or of
record, a Majority of the Series Preferred Stock.
"Investment Value" of any share of Series
Preferred Stock means, as of any date, the sum of (i) the Per Share
Amount of such share, plus (ii) the amount of any unpaid dividends on
such share added to the Investment Value of such share on any Dividend
Reference Date pursuant to Section 2(a) hereof; and in the event
of any liquidations, dissolution or winding up of the Corporation,
within the meaning of Section 3 hereof, or a merger, consolidation
or other transaction involving the Corporation described in
Section 4 hereof, or the redemption of such share, unpaid dividends
on such share, whether or not earned or declared, will be added to the
Investment Value of such share on the payment or distribution date
under Section 3 or 4 hereof, as the case may be, or on the Redemption
Date (as defined in Section 5 hereof), as the case may be, calculated
cumulatively on a daily basis to the close of business on such payment
date, distribution date, or Redemption Date, as the case may be.
"Per Share Amount" means (1) $2.00 per share for the Series A
Preferred Stock and $30.47 per share for the Series B Preferred Stock,
except if determining the Investment Value in the case of the definition
of Mandatory Redemption Price, and (2) $4.00 per share for the Series A
Preferred Stock and $60.94 per share for the Series B Preferred
Stock, if determining the Investment Value in the case of the
definition of Mandatory Redemption Price.
"Junior Stock" shall mean the Common Stock
and all other shares of Capital Stock of the Corporation, whether
presently outstanding or hereafter issued, other than Series Preferred
Stock.
"Majority of the Series Preferred Stock"
shall mean (x) for so long as the issued and outstanding shares of
Series A Preferred Stock and Series B Preferred Stock represent at
least fifty percent (50%) of the total authorized shares of Series A
Preferred Stock and Series B Preferred Stock, respectively, the
vote of both (i) more than fifty percent (50%) of the total number of
outstanding shares of Series A Preferred Stock, voting as a separate
class, and (ii) more than fifty percent (50%) of the outstanding shares
of Series B Preferred Stock, voting as a separate class, or (y) for so
long as the issued and outstanding shares of Series A Preferred Stock or
Series B Preferred Stock represent less than fifty percent (50%) of the
total authorized shares of Series A Preferred Stock or Series B
Preferred Stock, respectively, the vote of more than fifty percent
(50%) of the total number of outstanding shares of Series A Preferred
Stock and Series B Preferred Stock, both series voting together as a
single class on a fully diluted as converted basis.
"Original Issue Price" shall mean $10.405
per share of Series A Preferred Stock and $30.47 per share of Series B
Preferred Stock.
"Person" means an individual, corporation,
partnership, association, trust, limited liability company or any other
entity or organization, including a government or political
subdivision or an agency, unit or instrumentality thereof.
<PAGE>
"Series A Preferred Stock" shall mean the
Series A Preferred Stock, without par value, of the Corporation.
"Series B Preferred Stock" shall mean the
Series B Preferred Stock, without par value, of the Corporation.
"Series Preferred Stock" shall mean the
Series A Preferred Stock and the Series B Preferred Stock.
"Subsidiary" means, with respect to the
Corporation, any Person of which securities or other ownership interests
having ordinary voting power to elect a majority of the board of
directors or other persons performing similar functions are at the time
directly or indirectly owned by the Corporation or a Subsidiary of the
Corporation.
"Voting Stock" shall mean any shares having
general voting power in electing the Board of Directors (irrespective of
whether or not at the time stock of any other class or classes has or
might have voting power by reason or the happening of any
contingency). The Common Stock, the Series A Preferred Stock and the
Series B Preferred Stock are Voting Stock.
Section 2. Dividends.
(a) Right to Dividends. (i) The holders
of the outstanding Series Preferred Stock shall be entitled to receive,
when and as declared by the Board, and out of any funds legally
available therefor, cumulative cash dividends at the rate and in
the manner provided herein. Dividends on the Series Preferred Stock
shall accumulate and accrue on each such share from the date of its
original issue and shall accumulate and accrue from day to day
thereafter, whether or not earned or declared. Such dividends shall
be cumulative so that if such dividends in respect of any previous
or current quarterly dividend period, at the rate specified herein,
shall not have been paid or declared and a sum sufficient for the
payment thereof set apart, the deficiency shall first be fully paid
before any dividend or other distribution shall be paid or declared
and set apart for the Common Stock. Any accumulation of dividends on
the Series Preferred Stock shall not bear interest. Dividends shall
accumulate and accrue on each share of Series Preferred Stock from
the date of its original issue and shall not be affected by the
transfer of any of such shares thereafter or the cancellation and
issuance or reissuance of certificates evidencing such shares.
<PAGE>
(ii) Dividends will be
calculated cumulatively on a daily basis on each share of each series of
Series Preferred Stock at the Dividend Rate per annum on the
applicable Investment Value of such series. To the extent not paid on
the first day of any April, July, October or January (each a "Dividend
Reference Date"), commencing January 1, 1998, all dividends which
have been calculated on each share of Series Preferred Stock then
outstanding during the three-month period (or other period in the case
of the first Dividend Reference Date) ending on such Dividend Reference
Date, whether or not earned or declared, will be added to the
applicable Investment Value of such share and will remain a part
thereof until such dividends are paid. If the Dividend Rate changes as a
result of a change in the Standard Dividend Rate (as provided in the
definition of Investment Value), then the unpaid dividends shall be
deemed to have been added to the applicable Investment Value of each
share of Series Preferred Stock retroactively on and as of each Dividend
Reference Date preceding the change in the Standard Dividend Rate.
(iii) Notwithstanding the cash
dividend requirement of Section 2(a)(i), the Corporation at its option
may make any dividend payment on the Series Preferred Stock in shares
of Common Stock or cash, or both, with each share of Common Stock being
valued for this purpose at the Common Stock's Fair Market Value on the
date such dividend is declared or, if the Common Stock is not issued
within ten (10) days after the date of declaration, on the date such
Common Stock is issued.
(b) Priority. Unless full dividends on
all Series Preferred Stock for all past dividend periods and the then
current dividend period shall have been paid or declared and a sum
sufficient for the payment thereof set apart in trust for the
benefit of all holders of the Series Preferred Stock, (1) no dividend
whatsoever (other than a dividend payable solely in Common Stock)
shall be paid or declared, and no distribution shall be made, on any
Junior Stock, and (2) no shares of Junior Stock shall be purchased,
redeemed or acquired by the Corporation and no monies shall be paid into
or set aside or made available for a sinking fund for the purchase,
redemption or acquisition thereof; provided, however, that this
restriction shall not apply to the repurchase of shares of Common
Stock from directors or employees of or consultants to the Corporation
or any Subsidiary pursuant to agreements under which the Corporation
has the option to repurchase such shares upon the occurrence of certain
events, including without limitation the termination of employment
by or service to the Corporation or any Subsidiary; and provided
further, however, that without the approval, by vote or written consent,
of the Holders of a Majority of the Series Preferred Stock the total
amount applied to the repurchase of shares of Common Stock shall
not exceed $25,000 during any twelve-month period.
(c) Additional Dividends. After
cumulative dividends on the Series Preferred Stock for all past dividend
periods and the then current dividend period shall have been declared
and paid or set apart, subject to Section 8(d) hereof, if the Board
shall elect to declare additional dividends, such additional dividends
shall be declared in equal amounts per share on all shares of Series
Preferred Stock and Common Stock, but with each share of Series
Preferred Stock being entitled to dividends based upon the number of
shares of Common Stock into which such share of Series Preferred Stock
could be converted, pursuant to Section 7 hereof, at the record date
for the determination of shareholders entitled to receive such dividend
or, if no such record date is established, on the date such dividend is
declared.
Section 3. Liquidation Rights of Series Preferred Stock.
<PAGE>
(a) Preference. In the event of any
liquidation, dissolution or winding up of the Corporation, whether
voluntary or involuntary, the holders of each series of Series Preferred
Stock then outstanding shall be entitled to be paid out of the
assets of the Corporation available for distribution to its
shareholders, whether such assets are capital, surplus, or earnings,
before any payment or declaration and setting apart for payment of any
amount shall be made in respect of the Junior Stock, an amount equal to
the Investment Value per share of such series of Series
Preferred Stock on the date of payment. If upon any liquidation,
dissolution, or winding up of the Corporation, whether voluntary or
involuntary, the assets to be distributed to the holders of the
Series Preferred Stock shall be insufficient to permit the payment
to such shareholders of the full preferential amounts aforesaid, then
all of the assets of the Corporation to be distributed shall be
distributed ratably to the holders of Series A Preferred Stock and
Series B Preferred Stock in proportion to the Per Share Amount of
each series times the number of shares of each series held.
(b) Remaining Assets. After the
payment or distribution to the holders of the Series Preferred Stock of
the full preferential amounts aforesaid, the holders of the Junior
Stock shall be entitled to receive $0.17 (seventeen cents) per share,
and after the payment of such amount, if there are any remaining
assets available for distribution to the stockholders of the
Corporation, the holders of the Series Preferred Stock and Junior Stock
then outstanding shall be entitled to receive ratably, with all
Series Preferred Stock treated as if it had been converted into
Common Stock pursuant to Section 7 hereof, all remaining assets of
the Corporation to be distributed.
Section 4. Merger, Consolidation.
(a) At any time, in the event of:
(1) any consolidation or merger
of the Corporation with or into any other corporation or other entity or
person, or any other corporate reorganization or transaction or series
of related transactions by the Corporation in which in excess of 50%
of the Corporation's voting power is transferred, or
(2) a sale or other disposition
of all or substantially all of the assets of the Corporation, then:
(A) holders of each series
of Series Preferred Stock shall be entitled to receive for each share
of such stock in cash or in securities (including, without
limitation, debt securities) received from the acquiring
corporation, or a combination thereof, at the closing of any such
transaction, an amount equal to the applicable Investment Value per
share of such Series Preferred Stock on the date of full payment;
(B) holders of the
Junior Stock shall be entitled to receive $0.17 (seventeen cents) per
share; and
(C) after (i) the payment
or distribution to the holders of each series of Series Preferred Stock
of the full preferential amounts stated in Section 4(a)(2)(A) hereof,
and (ii) the payment or distribution to the holders of the Junior Stock
of the full amounts stated in Section 4(a)(2)(B) hereof, the remaining
proceeds of such transaction shall be distributed as a Shared
Allocation (as defined in Section 4(b) hereof).
<PAGE>
Such payments shall be made with respect
to the Series Preferred Stock and Junior Stock by (i) redemption or
purchase of such shares by the Corporation or (ii) purchase or
acquisition of such shares by the surviving or acquiring corporation,
entity or person or by the Corporation. Before any payment or
distribution is made to the holders of the Junior Stock, the full
preferential amount stated in Section 4(a)(2)(A) hereof shall first
be paid to the holders of each series of Series Preferred Stock. In
the event the full amount of such payment is not paid to the holders of
each series of Series Preferred Stock upon or immediately prior to
such transaction in accordance herewith, then all cash and securities
(including, without limitation, debt securities) to be distributed
in respect of the proposed transaction shall be distributed ratably
among the holders of the Series A Preferred Stock and the Series B
Preferred Stock in proportion to the Per Share Amount of each series
times the number of shares of each series held.
(b) "Shared Allocation" shall mean that the
holders of Series Preferred Stock and Junior Stock shall share the
remaining consideration to be paid by the acquiring corporation in
such transaction in proportion to the number of shares held by each
holder but, for this limited purpose, treating each holder of the
Series Preferred Stock as if it held the number of shares of Common
Stock issuable to it upon conversion of the Series Preferred Stock
held by it in accordance with the conversion privilege set forth in
Section 7 hereof.
(c) Any securities or other property to be
delivered to the holders of the Series Preferred Stock or Common Stock
pursuant to Section 4(a) hereof shall be valued as follows:
(1) Securities not subject to
investment letter or other similar restrictions on free marketability:
(A) If traded on a
securities exchange, the value shall be deemed to be the average of the
closing prices of the securities on such exchange over the 30-day
period ending three (3) days prior to the closing;
(B) If quoted on the Nasdaq
National Market, the value shall be deemed to be the average of the
closing prices (or, if the securities are not quoted on the Nasdaq
National Market but are regularly quoted on another NASDAQ quotation
system and there is an active public market for the securities, the
bid prices) over the 30-day period ending three (3) days prior to the
closing; and
(C) If the securities are
not quoted on the Nasdaq National Market and are either not otherwise
quoted on a NASDAQ quotation system or there is no active public
market therefor, the value shall be the fair market value thereof, as
mutually determined by the Corporation and the Holders of a
Majority of the Series Preferred Stock.
(2) The method of valuation of
securities subject to investment letter or other restrictions on free
marketability shall be to make appropriate discount from the market
value determined as above in paragraph (1)(A), (B) or (C) to
reflect the approximate fair market value thereof, as mutually
determined by the Corporation and the Holders of a Majority of the
Series Preferred Stock.
(3) All other securities or other
property shall be valued at the fair market value thereof, as mutually
determined by the Corporation and the Holders of a Majority of the
Series Preferred Stock.
<PAGE>
(4) If the Holders of a Majority
of the Series Preferred Stock and the Corporation are unable to reach
agreement on any valuation matter, such valuation shall be submitted to
and determined by a nationally recognized independent investment
banking firm selected by the Board and the Holders of a Majority of
the Series Preferred Stock (or, if such selection cannot be made,
by a nationally recognized independent investment banking firm
selected by the American Arbitration Association in accordance with
its rules).
(d) In the event the requirements of
Section 4(a) hereof are not complied with, the Corporation shall
forthwith either:
(1) Cause such closing to be
postponed until such time as the requirements of this Section 4 have
been complied with; or
(2) Cancel such transaction, in
which event the rights, preferences and privileges of the holders of
each series of Series Preferred Stock shall revert to and be the same as
such rights, preferences and privileges existing immediately prior
to the date of the first notice referred to in Section 4(e) hereof.
(e) The Corporation shall give each holder
of record of each series of Series Preferred Stock written notice of
such impending transaction not later than twenty-five (25) days prior
to the shareholders' meeting called to approve such transaction, or
twenty-five (25) days prior to the closing of such transaction,
whichever is earlier, and shall also notify such holders in
writing of the final approval of such transaction. The first of such
notices shall describe the material terms and conditions of the
impending transaction and the provisions of this Section 4, and the
Corporation shall thereafter give such holders prompt notice of any
material changes. The transaction shall in no event take place
sooner than twenty-five (25) days after the Corporation has given the
first notice provided for herein or sooner than ten (10) days after the
Corporation has given notice of any material changes provided for
herein; provided, however, that such periods may be shortened upon
the written consent of the Holders of a Majority of the Series
Preferred Stock.
(f) The provisions of this Section 4 are
in addition to the protective provisions of Section 8 hereof.
Section 5. Redemption.
(a) Restriction on Redemption and
Purchase. Except as expressly provided in this Section 5, the
Corporation shall not have the right to purchase, call, redeem or
otherwise acquire for value any or all of the Series Preferred Stock.
(b) Optional Redemption. On, or at any
time after, the fifth anniversary of the Commitment Date of the Series
A Preferred Stock, the Corporation may, at its option, redeem the
Series Preferred Stock in whole, but not in part, at the applicable
Optional Redemption Price for each series of Series Preferred
Stock hereinafter specified; provided, however, that the Corporation
shall not redeem any series of Series Preferred Stock or give
notice of any redemption unless the Corporation has sufficient
and lawful funds to redeem all of the then outstanding Series
Preferred Stock. The date on which the Series Preferred Stock is to be
redeemed pursuant to this Section 5(b) is herein called the "Optional
Redemption Date."
<PAGE>
(c) Mandatory Redemption.
(1) The Corporation shall redeem
the number of shares of Series Preferred Stock as indicated below on the
dates indicated in the following table (each a "Scheduled
Redemption Date"), at the applicable Mandatory Redemption Price for
each series of Series Preferred Stock hereinafter specified (a
"Scheduled Redemption"):
1,666,666 shares of Series A
Preferred Stock and 205,993
shares of Series B Preferred
Stock First Business Day of January, 2003
1,666,666 shares of Series A
Preferred Stock and 205,993
shares of Series B Preferred
Stock First Business Day of January, 2004
1,666,668 shares of Series A
Preferred Stock and 205,993
shares of Series B Preferred
Stock First Business Day of January, 2005
In addition to the foregoing, if the Corporation does not complete a
Qualified Offering (as hereinafter defined) within twenty-four (24)
months after the first issuance of Series A Preferred Stock, any
holder or holders holding, beneficially or of record, more than
fifty percent (50%) of the total number of outstanding shares of Series
A Preferred Stock or Series B Preferred Stock, by giving written notice
to the Corporation (a "Demand Notice"), may cause the Corporation to
redeem all outstanding shares of such series of Series Preferred Stock
at the applicable Optional Redemption Price for such series of
Series Preferred Stock on the Redemption Date specified in the
Demand Notice (the "Demand Date"), which may not be earlier than
thirty (30) days after the Demand Notice is received by the Corporation
(any such redemption being herein called a "Demand Redemption");
provided, however, that the Corporation shall not be obligated to
redeem any shares of Series Preferred Stock in accordance with a
Demand Notice if, within fifteen (15) days after the Demand Notice is
received, all of the persons named in the Demand Notice (to the extent
that they are not already directors of the Corporation) are elected to
the Board and constitute a majority of the members of the Board. A
Demand Notice shall state the names the individuals whom the holders
giving the Demand Notice wish to have elected to the Board (to the
extent that they are not already directors) and constitute a majority
of the member of the Board. A Scheduled Redemption or a Demand
Redemption is herein sometimes referred to as a "Mandatory Redemption."
<PAGE>
(2) If the funds of the Corporation
legally available for redemption of Series Preferred Stock on a
Scheduled Redemption Date or the Demand Date are insufficient to
redeem the number of shares to be redeemed pursuant to this subsection
(c) on such date, those funds which are legally available will be
used to redeem the maximum possible number of shares ratably among
all holders of Series A Preferred Stock and Series B Preferred Stock
in proportion to the Per Share Amount of each series times the
number of shares of such series held. At the earliest time thereafter
when additional funds of the Corporation are legally available for
redemption of Series Preferred Stock in the manner provided above, such
funds will be immediately used to redeem the balance of the
Series Preferred Stock which the Corporation has become obligated to
redeem on such Scheduled Redemption Date or the Demand Date, as the
case may be, but which it has not yet redeemed.
(3) If fewer than all shares of
Series Preferred Stock are being redeemed, the redemption will be made
ratably among all holders of Series A Preferred Stock and Series B
Preferred Stock in proportion to the Per Share Amount of each series
times the number of shares of each series held.
(d) Redemption Price. The Optional
Redemption Price of a series of Series Preferred Stock (the "Optional
Redemption Price") shall be the Investment Value per share of such
series of Series Preferred Stock. The Mandatory Redemption Price of a
series of Series Preferred Stock (the "Mandatory Redemption
Price") shall be the Investment Value per share of such series of
Series Preferred Stock. As used herein, "Redemption Price" shall
mean either the Optional Redemption Price or the Mandatory Redemption
Price, whichever shall be applicable.
(e) Redemption Notice. The Corporation
shall, not less than thirty (30) days nor more than sixty (60) days
prior to the Optional Redemption Date and each Scheduled Redemption Date
(a "Redemption Date"), give written notice ("Redemption Notice"), to
each holder of record of Series Preferred Stock to be redeemed. In
the case of a Demand Redemption, the Redemption Notice shall be given
by the Corporation to all holders of the Series Preferred Stock not
less than 10 days after receipt of the Demand Notice, and the
"Redemption Date" shall be the Demand Date. The Redemption Notice
shall state:
(1) That all or a specified number of the
outstanding shares of Series Preferred Stock are to
be redeemed and the total number of shares being
redeemed;
(2) The number of shares of Series
Preferred Stock held by the holder which the
Corporation intends to redeem;
(3) The Redemption Date and Redemption
Price;
(4) That the holder's right to convert the
Series Preferred Stock will terminate on the
Redemption Date; and
(5) The time, place and manner in which the
holder is to surrender to the Corporation the
certificate or certificates representing the shares
of Series Preferred Stock to be redeemed.
<PAGE>
(f) Payment of Redemption Price and
Surrender of Stock. On the Redemption Date, the applicable Redemption
Price of each series of Series Preferred Stock scheduled to be
redeemed or called for redemption shall be payable to the holders of
such Series Preferred Stock. On or before the Redemption Date,
each holder of Series Preferred Stock to be redeemed, unless the
holder has exercised his right to convert the shares as provided
in Section 7 hereof, shall surrender the certificate or certificates
representing such shares to the Corporation, in the manner and at the
place designated in the Redemption Notice, and thereupon the
Redemption Price for such shares shall be payable to the order of
the person whose name appears on such certificate or certificates as the
owner thereof, and each surrendered certificate shall be canceled and
retired.
(g) Termination of Rights. If the
Redemption Notice is duly given, and if at least ten (10) days prior to
the Redemption Date the Redemption Price is either paid or made
available for payment through the arrangement specified in subsection
(h) below, then notwithstanding that the certificates evidencing any
of the shares of Series Preferred Stock so called or scheduled for
redemption have not been surrendered, all rights with respect to such
shares shall forthwith after the Redemption Date cease and determine,
except only (i) the right of the holders to receive the Redemption
Price without interest upon surrender of their certificates therefor
or (ii) the right to receive Common Stock plus dividends upon exercise
of the conversion rights provided in Section 7 hereof on or before the
Redemption Date.
(h) Deposit of Funds. At least ten (10)
days prior to the Redemption Date, the Corporation shall deposit with
any bank or trust company in Washington, D.C., having a capital and
surplus of at least $1 billion as a trust fund, a sum equal to the
aggregate Redemption Price of all shares of the Series Preferred Stock
scheduled to be redeemed or called for redemption and not yet
redeemed, with irrevocable instructions and authority to the bank or
trust company to pay, on or after the Redemption Date or prior thereto,
the Redemption Price to the respective holders upon the surrender of
their share certificates. The deposit shall constitute full payment
of the shares to their holders, and from and after the date of such
deposit (even if prior to the Redemption Date), the shares shall be
deemed to be redeemed and no longer outstanding, and the holders
thereof shall cease to be shareholders with respect to such shares and
shall have no rights with respect thereto, except the right to receive
from the bank or trust company payment of the Redemption Price of the
shares, without interest, upon surrender of their certificates
therefor and the right to convert such shares and receive accrued and
unpaid dividends as provided in Section 7 hereof. Any monies so
deposited and unclaimed at the end of one year from the Redemption Date
shall be released or repaid to the Corporation, after which the
holders of shares called for redemption shall be entitled to receive
payment of the Redemption Price only from the Corporation.
Section 6. Voting Rights.
(a) Series Preferred Stock. Each holder
of shares of Series Preferred Stock shall be entitled to vote on all
matters and, except as otherwise expressly provided herein, shall
be entitled to the number of votes equal to the largest number of
full shares of Common Stock into which such shares of Series
Preferred Stock could be converted, pursuant to the provisions of
Section 7 hereof, at the record date for the determination of the
shareholders entitled to vote on such matters or, if no such record
date is established, at the date such vote is taken.
(b) Common Stock. Each holder of shares
of Common Stock shall be entitled to one vote for each share thereof
held. Except as otherwise expressly provided herein or as required by
law, the holders of Series Preferred Stock and the holders of Common
Stock shall vote together and not as separate classes.
(c) Authorized Directors and Class
Voting Rights of Series Preferred Stock and Common Stock; Compensation
Committee.
<PAGE>
(1) The Corporation shall have
nine (9) authorized directors. Subject to subsection (d) of this
Section 6, the holders of Series A Preferred Stock, as a class, shall
be entitled to elect two (2) directors, the holders of the Series B
Preferred Stock, as a class, shall be entitled to elect one (1)
director, and the holders of all other Voting Stock, as a class, shall
be entitled to elect the remaining members of the Board.
(2) The Board shall establish a
compensation committee of three directors (the "Compensation
Committee"), one member of which shall be selected by the Holders of a
Majority of the Series A Preferred Stock, one member of which shall
be selected by the Holders of a Majority of the Series B Preferred
Stock, and the third member of which shall be appointed by the Board
of the Corporation. All action taken by the Compensation Committee
shall require the vote or written consent of two of the three members of
the Compensation Committee, provided that one of such two members is
the member selected by the holders of a Majority of the Series A
Preferred Stock. All matters affecting compensation of any officer or
director of the Corporation or any Subsidiary or any employee of or
consultant to the Corporation or any Subsidiary whose base compensation
is at an annual rate of at least $75,000 shall require approval of the
Compensation Committee in order to be effective. No option or warrant
to purchase Common Stock, stock appreciation right or stock issuance to
any officer, director or employee of the Corporation shall be granted,
effected, modified or accelerated unless the same has been approved
by the Compensation Committee. In addition, the Compensation Committee
shall have the exclusive authority to administer and take all action
permitted or required to be taken by the Board or any committee of
the Board under all stock option plans of the Corporation and under
any other plan or arrangement that provides for the issuance of
Common Stock, stock appreciation rights, phantom stock or other
similar benefits to any employee of or any advisor or consultant to
the Corporation.
<PAGE>
(d) Special Voting Rights of Series
Preferred Stock in Case of Certain Events. If the Corporation shall
have failed to redeem and pay in full the applicable Redemption Price
of any Series Preferred Stock called for redemption or scheduled or
otherwise to be redeemed as required by Section 5 hereof, whether or
not funds are legally available therefor, the holders of the Series
Preferred Stock shall, immediately upon the giving of written notice
to the Corporation by any holder of Series Preferred Stock, be
entitled to elect the smallest number of directors which shall
constitute a majority of the authorized number of directors of
the Corporation as follows: the holders of the Series A Preferred
Stock and the holders of the Series B Preferred Stock, voting as
separate classes, shall each elect an equal number of the directors
constituting such majority of the Board, and to the extent that an
unequal number of directors is required to form such majority, the
extra director shall be elected by the holders of the Series A
Preferred Stock. The holders of all other shares of Voting Stock, as
a class, shall be entitled to elect the remaining members of the
Board. Whenever the holders of the Series Preferred Stock shall be
entitled to elect directors as provided in this subsection (d), the
holders of the Series Preferred Stock may call a special meeting of
stockholders and shall have access to the stock books and records of
the Corporation for such purpose. At any such meeting, or at any other
meeting held while the holders of the Series Preferred Stock have
the voting power described in this subsection (d), the Holders of a
Majority of the Series Preferred Stock, present in person or by proxy,
shall be sufficient to constitute a quorum for the election of directors
as herein provided. At such meeting or, if no such special meeting
shall have been called, then at the next annual meeting of the
stockholders, the holders of the Series Preferred Stock shall be
entitled to elect a majority of the directors of the Corporation (as
provided in the first sentence of this Section 6(d)), and the
holders of all other shares of Voting Stock, as a class, shall be
entitled to elect the remaining members of the Board. Upon the
election by the holders of Series Preferred Stock of a majority of
the directors, the terms of office of all persons who were
theretofore directors of the Corporation shall forthwith terminate,
whether or not the holders of the Common Stock shall then have
elected the remaining directors of the Corporation.
(e) Divestment of Special Voting Rights
of Series Preferred Stock. If the Redemption Price of all Series
Preferred Stock scheduled for redemption or called for redemption or
otherwise to be redeemed, as the case may be, shall have been paid in
full, as required by Section 5 hereof, then the holders of the Series
Preferred Stock shall be divested of the voting rights specified in
Section 6(d). These voting rights shall again accrue to the holders of
Series Preferred Stock as and when provided in Section 6(d). Upon
the termination of any such voting rights as hereinabove provided,
the Board shall call a special meeting of the stockholders at which all
directors will be elected, and the terms of office of all persons who
are then directors of the Corporation shall terminate immediately upon
the election of their successors.
(f) Vacancies. In the case of any
vacancy in the office of a director elected by the holders of the Series
A Preferred Stock or the Series B Preferred Stock, voting as
separate classes, pursuant to subsection (c) of this Section 6 or
the holders of the Series Preferred Stock, voting together as a
separate class, pursuant to subsection (d) of this Section 6, such
vacancy shall be filled by the vote or written consent of the holders
of the class of Series Preferred Stock which elected such director
or, in the absence of action by such holders, by action of the remaining
director elected by the holders of such class, and any such
director so elected shall hold the office for the unexpired term of the
director whose place shall be vacant. Any director who shall have
been elected by the holders of the Series A Preferred Stock or the
Series B Preferred Stock, voting as separate classes, or by the
holders of the Series Preferred Stock, voting together as a separate
class, or any director so elected as provided in the immediately
preceding sentence, shall be removed during the aforesaid term of
office, whether with or without cause, only by the affirmative
vote of the holders of a majority of the class of Series Preferred
Stock entitled to elect such director.
Section 7. Conversion. The holders of Series
Preferred Stock shall have the following conversion rights:
(a) Right to Convert. Each share of
Series Preferred Stock shall be convertible, at any time at the option
of the holder thereof, into fully paid and nonassessable shares of
Common Stock.
<PAGE>
(b) Conversion Price. Each share of a
series of Series Preferred Stock shall be convertible into the number of
shares of Common Stock which results from dividing the Conversion
Price (as hereinafter defined) of that series of Series Preferred
Stock in effect at the time of conversion into the Original Issue Price
of such series of Series Preferred Stock being converted. The initial
Conversion Price for each series of Series Preferred Stock shall be the
Per Share Amount for such series. The Conversion Price for each series
of Series Preferred Stock shall be subject to adjustment from time to
time as provided below.
(c) Mechanics of Conversion. Each holder
of Series Preferred Stock who desires to convert the same into shares of
Common Stock shall surrender the certificate or certificates
therefor, duly endorsed, at the office of the Corporation or of any
transfer agent for the Series Preferred Stock or Common Stock, and
shall give written notice to the Corporation at such office that such
holder elects to convert the same and shall state therein the number
of shares of Series Preferred Stock being converted. Thereupon the
Corporation shall promptly issue and deliver to such holder a
certificate or certificates for the number of shares of Common Stock
to which such holder is entitled and shall promptly pay in cash or, if
the Corporation so elects or is legally or financially unable to pay
such dividends in cash, Common Stock (valued at the Common Stock's
Fair Market Value at the time of surrender), all accumulated, accrued
and unpaid dividends on the shares of Series Preferred Stock being
converted, whether or not earned or declared, to and including the time
of conversion. Such conversion shall be deemed to have been made
immediately prior to the close of business on the date of such
surrender of the certificate representing the shares of Series
Preferred Stock to be converted, and the Person entitled to receive
the shares of Common Stock issuable upon such conversion shall be
treated for all purposes as the record holder of such shares of Common
Stock on such date.
(d) Adjustment for Stock Splits and
Combinations. If the Corporation at any time or from time to time after
the Commitment Date of a series of Series Preferred Stock effects
a subdivision of the outstanding Common Stock, the Conversion Price
for such series of Series Preferred Stock then in effect
immediately before that subdivision shall be proportionately
decreased, and conversely, if the Corporation at any time or from
time to time after the Commitment Date combines the outstanding shares
of Common Stock into a smaller number of shares, the Conversion Price
for such series then in effect immediately before the
combination shall be proportionately increased. Any adjustment
under this subsection (d) shall become effective at the close of
business on the date the subdivision or combination becomes effective.
<PAGE>
(e) Adjustment for Certain Dividends and
Distributions. If the Corporation at any time or from time to time
after the Commitment Date of a series of Series Preferred Stock makes,
or fixes a record date for the determination of holders of Common Stock
entitled to receive, a dividend or other distribution payable in
additional shares of Common Stock, then and in each such event the
Conversion Price for such series then in effect shall be decreased as
of the time of such issuance or, in the event such record date is
fixed, as of the close of business on such record date, by
multiplying the Conversion Price for such series then in effect by a
fraction (1) the numerator of which is the total number of shares
of Common Stock issued and outstanding immediately prior to the time
of such issuance or the close of business on such record date, and
(2) the denominator of which shall be the total number of shares of
Common Stock issued and outstanding immediately prior to the time
of such issuance or the close of business on such record date plus the
number of shares of Common Stock issuable in payment of such dividend
or distribution; provided, however, that if such record date is fixed
and such dividend is not fully paid or if such distribution is not
fully made on the date fixed therefor, the Conversion Price for such
series shall be recomputed accordingly as of the close of business on
such record date and thereafter the Conversion Price for such series
shall be adjusted pursuant to this subsection (e) as of the time of
actual payment of such dividends or distributions.
(f) Adjustments for Other Dividends and
Distributions. In the event the Corporation at any time or from time to
time after the Commitment Date of a series of Series Preferred
Stock makes, or fixes a record date for the determination of holders
of Common Stock entitled to receive, a dividend or other
distribution payable in securities of the Corporation other than
shares of Common Stock, then and in each such event provision shall
be made so that the holders of such series of Series Preferred Stock
shall receive upon conversion thereof, in addition to the number of
shares of Common Stock receivable thereupon, the amount of securities
of the Corporation which they would have received had their Series
Preferred Stock been converted into Common Stock on the date of such
event and had they thereafter, during the period from the date of such
event to and including the conversion date, retained such securities
receivable by them as aforesaid during such period, subject to all
other adjustments called for during such period under this Section 7
with respect to the rights of the holders of such series of Series
Preferred Stock.
(g) Adjustment for Reclassification,
Exchange and Substitution. In the event that at any time or from time
to time after the Commitment Date of a series of Series Preferred
Stock, the Common Stock issuable upon the conversion of such series of
Series Preferred Stock is changed into the same or a different number
of shares of any class or classes of stock, whether by
recapitalization, reclassification or otherwise (other than a
subdivision or combination of shares or stock dividend or a
reorganization, merger, consolidation or sale of assets, provided for
elsewhere in this Section 7), then and in any such event each holder
of such series of Series Preferred Stock shall have the right
thereafter to convert such stock into the kind and amount of stock and
other securities and property receivable upon such recapitalization,
reclassification or other change, by holders of the maximum number of
shares of Common Stock into which such shares of Series Preferred
Stock could have been converted immediately prior to such
recapitalization, reclassification or change, all subject to further
adjustment as provided herein.
<PAGE>
(h) Reorganizations, Mergers,
Consolidations or Sales of Assets. If at any time or from time to time
after the Commitment Date of a series of Series Preferred Stock,
there is a capital reorganization of the Common Stock (other than a
recapitalization, subdivision, combination, reclassification or
exchange of shares provided for elsewhere in this Section 7) or a
merger or consolidation of the Corporation with or into another
corporation, or the sale of all or substantially all of the
Corporation's properties and assets to any other person, then, as a part
of such reorganization, merger, consolidation or sale, provision shall
be made so that the holders of such series of Series Preferred Stock
shall thereafter be entitled to receive upon conversion of such Series
Preferred Stock the number of shares of stock or other securities or
property to which a holder of the number of shares of Common Stock
deliverable upon conversion would have been entitled on such capital
reorganization, merger, consolidation, or sale. In any such case,
appropriate adjustment shall be made in the application of the
provisions of this Section 7 with respect to the rights of the holders
of such series of Series Preferred Stock after the reorganization,
merger, consolidation or sale to the end that the provisions of this
Section 7 (including adjustment of the Conversion Price for such
series then in effect and the number of shares purchasable upon
conversion of such Series Preferred Stock) shall be applicable after
that event and be as nearly equivalent as may be practicable.
(i) Sale of Shares Below Conversion
Price.
(1) If at any time or from time
to time after the Commitment Date of a series of Series Preferred Stock,
the Corporation issues or sells, or is deemed by the express provisions
of this subsection (i) to have issued or sold, Additional Shares of
Common Stock (as hereinafter defined), other than as a dividend
or other distribution on any class of stock as provided in subsection
(e) above and other than upon a subdivision or combination of shares of
Common Stock as provided in subsection (d) above, for an Effective Price
(as hereinafter defined) less than the then existing Conversion Price
for such series, then and in each such case the then existing
Conversion Price for such series shall be reduced, as of the opening of
business on the date of such issue or sale, as follows:
(I) if such issuance or deemed issuance
occurs during the twelve-month period immediately
following the first issuance of Series A Preferred
Stock and prior to a Qualified Offering and
constitutes a Financing Transaction (as
hereinafter defined), the Conversion Price for
such series shall be reduced to the Effective
Price at which the Additional Shares of Common
Stock were issued or deemed to have been issued; and
(II) if such issuance or deemed issuance
occurs during the twelve-month period immediately
following the first issuance of Series A Preferred
Stock and constitutes a Financing Transaction or
occurs after the twelve-month period immediately
following the first issuance of Series A Preferred
Stock, the Conversion Price for such series shall be
reduced to a price determined by multiplying that
Conversion Price by a fraction (i) the numerator of
which shall be (A) the number of shares of Common
Stock outstanding at the close of business on the day
next preceding the date of such issue or sale, plus
(B) the number of shares of Common Stock which the
aggregate consideration received (or by the express
provisions hereof deemed to have been received) by
the Corporation for the total number of Additional
Shares of Common Stock so issued would purchase at
such Conversion Price, plus (C) the number of
shares of Common Stock into which the outstanding
shares of all Series Preferred Stock are convertible
at the close of business on the date next preceding
the date of such issue or sale, plus (D) the number of
shares of Common Stock underlying all Other Securities
(as hereinafter defined) at the close of business on
the date next preceding the date of such issue or
sale, and (ii) the denominator of which shall be
(A) the number of shares of Common Stock outstanding
at the close of business on the date of such issue or
sale after giving effect to such issue of Additional
Shares of Common Stock, plus (B) the number of
shares of Common Stock into which the
outstanding shares of all Series Preferred
Stock are convertible at the close of business
on the date next preceding the date of such issue
or sale, plus (C) the number of shares of Common
Stock underlying the Other Securities at the close
of business on the date next preceding the date of
such issue or sale.
<PAGE>
"Financing Transaction" means any transaction or series of related
transactions in which Additional Shares of Common Stock are issued or
sold, or are deemed to have been issued or sold, for at least $1,000,000
in the aggregate.
(2) For the purpose of making any
adjustment required under this subsection (i), the consideration
received by the Corporation for any issue or sale of securities shall
(A) to the extent it consists of cash be computed at the amount of
cash received by the Corporation, (B) to the extent it consists of
property other than cash, be computed at the fair value of that
property as determined in good faith by the Board, (C) if Additional
Shares of Common Stock, Convertible Securities (as hereinafter
defined) or rights or options to purchase either Additional Shares of
Common Stock or Convertible Securities are issued or sold together with
other stock or securities or other assets of the Corporation for a
consideration which covers both, be computed as the portion of the
consideration so received that may be reasonably determined in good
faith by the Board to be allocable to such Additional Shares of Common
Stock, Convertible Securities or rights or options, and (D) be
computed after reduction for all expenses payable by the Corporation in
connection with such issue or sale.
<PAGE>
(3) For the purpose of the
adjustment required under this subsection (i), if the Corporation issues
or sells any rights or options for the purchase of, or stock or
other securities convertible into or exchangeable for, Additional
Shares of Common Stock (such convertible or exchangeable stock or
securities being hereinafter referred to as "Convertible Securities")
and if the Effective Price of such Additional Shares of Common Stock
is less than the Conversion Price for such series then in effect, then
in each case the Corporation shall be deemed to have issued at the time
of the issuance of such rights or options or Convertible Securities
the maximum number of Additional Shares of Common Stock issuable upon
exercise, conversion or exchange thereof and to have received as
consideration for the issuance of such shares an amount equal to
the total amount of the consideration, if any, received by the
Corporation for the issuance of such rights or options or Convertible
Securities, plus, in the case of such rights or options, the minimum
amounts of consideration, if any, payable to the Corporation
upon the exercise of such rights or options, plus, in the case of
Convertible Securities, the minimum amounts of consideration, if any,
payable to the Corporation (other than by cancellation of
liabilities or obligations evidenced by such Convertible Securities)
upon the conversion or exchange thereof. No further adjustment of the
Conversion Price for such series, adjusted upon the issuance of such
rights, options or Convertible Securities, shall be made as a result
of the actual issuance of Additional Shares of Common Stock on the
exercise of any such rights or options or the conversion or exchange of
any such Convertible Securities. If any such rights or options or the
conversion or exchange privilege represented by any such Convertible
Securities shall expire without having been exercised, the Conversion
Price adjusted upon the issuance of such rights, options or Convertible
Securities shall be readjusted to the Conversion Price which would
have been in effect had an adjustment been made on the basis that the
only Additional Shares of Common Stock so issued were the Additional
Shares of Common Stock, if any, actually issued or sold on the
exercise of such rights or options or rights of conversion or exchange
of such Convertible Securities, and such Additional Shares of Common
Stock, if any, were issued or sold for the consideration actually
received by the Corporation upon such exercise, plus the
consideration, if any, actually received by the Corporation for
the granting of all such rights or options, whether or not
exercised, plus the consideration received for issuing or
selling the Convertible Securities actually converted or exchanged,
plus the consideration, if any, actually received by the Corporation
(other than by cancellation of liabilities or obligations evidenced
by such Convertible Securities) on the conversion or exchange of such
Convertible Securities.
(4) For the purpose of the
adjustment required under this subsection (i), if the Corporation issues
or sells, or is deemed by the express provisions of this subsection
to have issued or sold, any rights or options for the purchase of
Convertible Securities and if the Effective Price of the Additional
Shares of Common Stock underlying such Convertible Securities is less
than the Conversion Price for such series then in effect, then in
each such case the Corporation shall be deemed to have issued at the
time of the issuance of such rights or options the maximum number of
Additional Shares of Common Stock issuable upon conversion or exchange
of the total amount of Convertible Securities covered by such rights or
options and to have received as consideration for the issuance
of such Additional Shares of Common Stock an amount equal to
the amount of consideration, if any, received by the Corporation
for the issuance of such rights or options, plus the minimum amounts of
consideration, if any, payable to the Corporation upon the exercise of
such rights or options and plus the minimum amount of consideration, if
any, payable to the Corporation (other than by cancellation of
liabilities or obligations evidenced by such Convertible
Securities) upon the conversion or exchange of such Convertible
Securities. No further adjustment of the Conversion Price for such
series, adjusted upon the issuance of such rights or options, shall
be made as a result of the actual issuance of the Convertible
Securities upon the exercise of such rights or options or upon the
actual issuance of Additional Shares of Common Stock upon the
conversion or exchange of such Convertible Securities. The provisions
of paragraph (3) above for the readjustment of the Conversion Price for
such series upon the expiration of rights or options or the rights of
conversion or exchange of Convertible Securities shall apply mutatis
mutandis to the rights, options and Convertible Securities referred to
in this paragraph (4).
<PAGE>
(5) "Additional Shares of Common
Stock" shall mean all shares of Common Stock issued by the Corporation
after the Commitment Date of a series of Series Preferred Stock,
whether or not subsequently reacquired or retired by the Corporation,
other than (i) shares of Common Stock issued upon conversion of the
Series Preferred Stock, (ii) the first 1,095,875 shares of Common Stock
issued to individuals who are or were employees or directors of or
consultants to the Corporation or any Subsidiary pursuant to
stock purchase or stock option plans or other arrangements,
(iii) 71,250 shares of Common Stock issued upon the exercise of stock
purchase warrants that were outstanding on the date of first issuance
of Series A Preferred Stock, and (iv) 25,000 shares to be issued
to a former employee for services rendered. The "Effective Price" of
Additional Shares of Common Stock shall mean the quotient determined by
dividing the total number of Additional Shares of Common Stock issued
or sold, or deemed to have been issued or sold by the Corporation under
this subsection (i), into the aggregate consideration received, or
deemed to have been received, by the Corporation for such issue under
this subsection (i), for such Additional Shares of Common Stock.
"Other Securities" with respect to an issue or sale of Additional Shares
of Common Stock shall mean stock and other securities convertible
into or exchangeable for Common Stock; "the number of shares of Common
Stock underlying Other Securities" on a particular date shall mean the
number of shares of Common Stock issuable upon the exercise, conversion
or exchange, as the case may be, of such Other Securities at the
close of business on such date but only to the extent that the holders
thereof have the fully vested legal right to exercise, convert or
exchange such Other Securities on such date and to retain the Common
Stock issued upon such exercise, conversion or exchange.
(j) Accountants' Certificate of
Adjustment. In each case of an adjustment or readjustment of the
Conversion Price of a series of Series Preferred Stock or the number
of shares of Common Stock or other securities issuable upon
conversion of a series of Series Preferred Stock, the Corporation, at
its expense, shall cause independent public accountants of recognized
standing selected by the Corporation (who may be the independent
public accountants then auditing the books of the Corporation)
to compute such adjustment or readjustment in accordance with the
provisions hereof and prepare a certificate showing such
adjustment or readjustment, and shall mail such certificate, by
first class mail, postage prepaid, to each registered holder of
Series Preferred Stock at the holder's address as shown in the
Corporation's books. The certificate shall set forth such adjustment
or readjustment, showing in detail the facts upon which such
adjustment or readjustment is based, including a statement of
(1) the consideration received or deemed to be received by the
Corporation for any Additional Shares of Common Stock issued or sold
or deemed to have been issued or sold, (2) the Conversion Price of such
series of Series Preferred Stock at the time in effect, (3) the
number of Additional Shares of Common Stock and (4) the type and
amount, if any, of other property which at the time would be
received upon conversion of such series of Series Preferred Stock.
(k) Notices of Record Date. In the
event of (i) any taking by the Corporation of a record of the holders of
any class of securities for the purpose of determining the holders
thereof who are entitled to receive any dividend or other distribution,
or (ii) any capital reorganization of the Corporation, any
reclassification or recapitalization of the capital stock of the
Corporation, any merger or consolidation of the Corporation with
or into any other corporation, or any transfer of all or substantially
all of the assets of the Corporation to any other person or any
voluntary or involuntary dissolution, liquidation or winding up of the
Corporation, the Corporation shall mail to each holder of Series
Preferred Stock at least thirty (30) days prior to the record date
specified therein, a notice specifying (1) the date on which any
such record is to be taken for the purpose of such dividend or
distribution and a description of such dividend or distribution, (2)
the date on which any such reorganization, reclassification,
transfer, consolidation, merger, dissolution, liquidation or winding up
is expected to become effective, and (3) the date, if any, that is to be
fixed, as to when the holders of record of Common Stock (or other
securities) shall be entitled to exchange their shares of Common Stock
(or other securities) for securities or other property deliverable
upon such reorganization, reclassification, transfer, consolidation,
merger, dissolution, liquidation or winding up.
(l) Automatic Conversion.
<PAGE>
(1) Each share of Series
Preferred Stock shall automatically be converted into shares of Common
Stock based on the then effective Conversion Price of such series
immediately upon the closing of an underwritten public offering
pursuant to an effective registration statement under the Securities
Act of 1933, as amended, covering the offering and sale of Common
Stock for the account of the Corporation in which the aggregate
gross proceeds received by the Corporation at the public offering price
equals or exceeds $25 million, the public offering price per share of
which equals or exceeds 110% of the Conversion Price of the Series A
Preferred Stock then in effect and the obligation of the underwriters
with respect to which is that if any of the securities being
offered are purchased, all such securities must be purchased (herein
called a "Qualified Offering"); provided, however, that such
conversion shall be conditioned upon payment by the Corporation of
all accrued and unpaid dividends on the outstanding Series
Preferred Stock, whether or not earned or declared, to and including
the date of such conversion, payable either in cash or Common Stock
(valued at the Common Stock's Fair Market Value), or both. Each
share of a series of Series Preferred Stock shall automatically be
converted into shares of Common Stock based on the then effective
Conversion Price of such series upon the receipt by the Corporation of
a written notice from any holder or holders holding, beneficially or
of record, more than fifty percent (50%) of the total number of
outstanding shares of such series of Series Preferred Stock electing
unconditionally to convert their shares of Series Preferred Stock.
(2) Upon the occurrence of
either of the events specified in paragraph (1) above the outstanding
shares of Series Preferred Stock shall be converted automatically
without any further action by the holders of such shares and whether or
not the certificates representing such shares are surrendered to the
Corporation or its transfer agent; provided, however, that the
Corporation shall not be obligated to issue certificates evidencing
the shares of Common Stock issuable upon such conversion unless the
certificates evidencing such shares of Series Preferred Stock are
either delivered to the Corporation or its transfer agent as provided
below, or the holder notifies the Corporation or its transfer agent
that such certificates have been lost, stolen or destroyed and
executes an agreement satisfactory to the Corporation to indemnify
the Corporation from any loss incurred by it in connection with such
certificates. Upon the occurrence of such automatic conversion of any
series of Series Preferred Stock, the holders of such Series
Preferred Stock shall surrender the certificates representing such
shares at the office of the Corporation or any transfer agent for
the Series Preferred Stock or Common Stock. Thereupon, there shall be
issued and delivered to such holder promptly at such office and in
its name as shown on such surrendered certificate or certificates,
a certificate or certificates for the number of shares of Common Stock
into which the shares of such Series Preferred Stock surrendered were
convertible on the date on which such automatic conversion
occurred, and the Corporation shall promptly pay in cash or Common
Stock (taken at the Common Stock's Fair Market Value as of the date
of such conversion), or both, all accrued and unpaid dividends on the
shares of Series Preferred Stock being converted, whether or not
earned or declared, to and including the date of such conversion.
(m) Fractional Shares. Fractional
shares otherwise issuable upon conversion of Series Preferred Stock held
by a single holder shall be aggregated into whole shares and issued to
such holder. Otherwise, no fractional shares of Common Stock shall
be issued upon conversion of Series Preferred Stock. Except as
provided above, in lieu of any fractional share to which the holder
would otherwise be entitled, the Corporation shall pay cash equal
to the product of such fraction multiplied by the fair market value of
one share of Common Stock on the date of conversion, as determined in
good faith by the Board.
<PAGE>
(n) Reservation of Stock Issuable Upon
Conversion. The Corporation shall at all times reserve and keep
available out of its authorized but unissued shares of Common Stock,
solely for the purpose of effecting the conversion of the shares
of the Series Preferred Stock, such number of its shares of Common
Stock as shall from time to time be sufficient to effect the conversion
of all outstanding shares of the Series Preferred Stock; and if at any
time the number of authorized but unissued shares of Common Stock shall
not be sufficient to effect the conversion of all then outstanding
shares of the Series Preferred Stock, the Corporation will take such
corporate action as may, in the opinion of its counsel, be necessary
to increase its authorized but unissued shares of Common Stock to
such number of shares as shall be sufficient for such purpose.
(o) Notices. Any notice required or
permitted by this Section 7 or any other provision of this Article III
A to be given to a holder of Series Preferred Stock or to the
Corporation shall be in writing and be deemed given upon the earlier
of actual receipt or three (3) days after the same has been deposited in
the United States mail, by certified or registered mail, return
receipt requested, postage prepaid, and addressed (i) to each
holder of record at the address of such holder appearing on the books
of the Corporation, or (ii) to the Corporation at 2300 Commonwealth
Drive, Charlottesville, Virginia 22901, or (iii) to the Corporation
or any holder, at any other address specified in a written notice
given to the other for the giving of notice.
(p) Payment of Taxes. The Corporation will
pay all taxes (other than taxes based upon income) and other
governmental charges that may be imposed with respect to the issue
or delivery of shares of Common Stock upon conversion of shares of
Series Preferred Stock, including without limitation any tax or
other charge imposed in connection with any transfer involved in
the issue and delivery of shares of Common Stock in a name other than
that in which the shares of Series Preferred Stock so converted were
registered.
(q) No Dilution or Impairment. The
Corporation shall not amend its Articles of Incorporation or participate
in any reorganization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities or any other voluntary action,
for the purpose of avoiding or seeking to avoid the observance or
performance of any of the terms to be observed or performed hereunder by
the Corporation, but will at all times in good faith assist in
carrying out all such action as may be reasonably necessary or
appropriate in order to protect the conversion rights of the holders of
the Series Preferred Stock against dilution or other impairment.
Section 8. Restrictions and Limitations. For so
long as any shares of Series Preferred Stock remain outstanding, the
Corporation shall not, and shall not permit any Subsidiary to, without
the vote or written consent by the Holders of a Majority of the Series
Preferred Stock:
(a) Redeem, purchase or otherwise
acquire for value any share or shares of Series Preferred Stock,
otherwise than by redemption in accordance with Section 5 hereof,
or any warrant, option or right to purchase any Series Preferred Stock;
<PAGE>
(b) Purchase, redeem or otherwise acquire
for value (or pay into or set aside as a sinking fund for such purpose)
any Junior Stock or any warrant, option or right to purchase any Junior
Stock; provided, however, that this restriction shall not apply to
(i) the repurchase of shares of Common Stock from directors or
employees of or consultants to the Corporation or any Subsidiary
pursuant to agreements under which the Corporation has the option
to repurchase such shares upon the occurrence of certain events,
including the termination of employment by or service to the
Corporation or any Subsidiary; and provided further, however, that
without the approval, by vote or written consent, of the Holders of
a Majority of the Series Preferred Stock, the total amount
applied to the repurchase of shares of Common Stock shall not
exceed $25,000 during any twelve-month period; or (ii) amounts paid
by the Corporation in accordance with its 1997 Stock Incentive Plan in
cancellation of outstanding stock options upon a "Change of Control" as
defined in such Plan; provided, that such payment is approved by the
Compensation Committee.
(c) Authorize or issue, or obligate itself
to issue, any other equity security senior to or on a parity with any
series of Series Preferred Stock as to dividend or redemption rights,
liquidation preferences, conversion rights, voting rights or otherwise;
for purposes of this subsection, a senior equity security shall
include any indebtedness convertible into or exchangeable for shares of
capital stock of the Corporation or any indebtedness issued with (i)
shares of capital stock of the Corporation or (ii) warrants or other
rights to purchase capital stock of the Corporation or Convertible
Securities;
(d) Declare or pay any dividends on or
declare or make any other distribution, direct or indirect, (other than
a dividend payable solely in shares of Common Stock) on account of the
Junior Stock or set apart any sum for any such purpose;
(e) Effect any sale, lease, assignment,
transfer or other conveyance of all or substantially all of the assets
of the Corporation or any of its Subsidiaries, or any consolidation or
merger involving the Corporation or any of its Subsidiaries, or
any reclassification or other change of any stock, or any
recapitalization, or any dissolution, liquidation, or winding up of
the Corporation or, unless the obligations of the Corporation under
an agreement are expressly conditioned upon the requisite approval of
the Holders of a Majority of the Series Preferred Stock as provided
for herein, make any agreement or become obligated to do so; provided,
however, that this Section 8(e) shall not require approval of a
transaction by the Holders of a Majority of the Series Preferred Stock
if as a result of such transaction the holders of the Series Preferred
Stock and the holders of the Junior Stock collectively receive, in
exchange for the capital stock of the Corporation and in accordance with
either Section 3 or 4 hereof, in such transaction cash or fully
marketable securities, or both, having a fair market value on the
date of receipt by all such holders of at least the Minimum Value (as
hereinafter defined), with fair market value determined in accordance
with the procedure specified in Section 4(c); for this purpose
"Minimum Value" shall mean $500 million, which amount shall be
increased by 10% per annum (compounded annually) on each anniversary
of the first issuance of Series A Preferred Stock;
(f) Effect any sale, transfer,
assignment, license or sublicense of any of the Corporation's software
or systems that are used or developed by the Corporation and are
material to the conduct of its business;
(g) Permit any Subsidiary to issue or
sell, or obligate itself to issue or sell, except to the Corporation or
any wholly-owned Subsidiary, any stock or other equity Securities of
such Subsidiary;
<PAGE>
(h) Increase or decrease (other than by
redemption or conversion) the total number of authorized shares of any
series of Series Preferred Stock;
(i) Amend its Articles of Incorporation
or amend or repeal its bylaws;
(j) Enter into or effect any transaction
between the Corporation, on the one hand, and any officer, director,
senior employee or holder of at least 3% of the outstanding Common
Stock of the Corporation, on the other hand, other than any matter
requiring approval of the Compensation Committee of the Board of the
Corporation, except for services rendered in the ordinary course of
business of the Corporation; or
(k) Take any action which would result in
taxation of the holders of any series of Series Preferred Stock under
Section 305 of the Internal Revenue Code of 1986 (or any comparable
provision of the Internal Revenue Code as hereafter from time to time
amended).
Section 9. Additional Restrictions and Limitations.
For so long as any shares of Series A Preferred Stock or Series B
Preferred Stock remain outstanding, in addition to any other vote or
consent required herein or by law, a separate series vote or written
consent of the holders of at least fifty percent (50%) of the
outstanding shares of Series A Preferred Stock or Series B Preferred
Stock, as the case may be, shall be necessary (a) to effect or validate
any amendment, alteration or repeal of any provision of the Articles of
Incorporation of the Bylaws of the Corporation which would change or
alter any of the rights, preferences, privileges or restrictions
provided for herein for the benefit of any shares of such series of
Series Preferred Stock, or (b) to authorize any equity security
senior to or on a parity with such series of Series Preferred Stock as
to dividend or redemption rights, liquidation preferences, voting
rights, or with respect to the rights provided for in this Section 9,
or otherwise.
Section 10. No Reissuance of Series Preferred Stock.
No share or shares of Series Preferred Stock acquired by the
Corporation by reason of redemption, purchase, conversion or otherwise
shall be reissued, and all such shares shall be canceled, retired
and eliminated from the shares which the Corporation shall be
authorized to issue.
<PAGE>
COMMONWEALTH OF VIRGINIA
STATE CORPORATION COMMISSION
June 26, 1998
The State Corporation Commission has found the accompanying articles submitted
on behalf of
VALUE AMERICA, INC.
to comply with the requirements of law, and confirms payment of all related
fees.
Therefore, it is ORDERED that this
CERTIFICATE OF AMENDMENT
be issued and admitted to record with the articles of amendment in the Office of
the Clerk of the Commission, effective June 26, 1998.
The corporation is granted the authority conferred on it by law in accordance
with the articles, subject to the conditions and restrictions imposed by law.
STATE CORPORATION COMMISSION
By /s/ T.V. Morrison Jr.
-----------------------------
Commissioner
<PAGE>
ARTICLES OF AMENDMENT
OF
VALUE AMERICA, INC.
The undersigned corporation hereby submits these Articles of Amendment
for the purpose of amending its Articles of Incorporation pursuant to Section
13.1-639 of the Virginia Stock Corporation Act, as amended:
1. The name of the Corporation is Value America, Inc. (the "Corporation")
2. The amendment to the Articles of Incorporation of the Corporation
attached hereto as Appendix A was duly adopted by the Board of Directors
of the Corporation by unanimous written consent pursuant to Section
13.1-685 of the Virginia Stock Corporation Act, as amended, effective
the 17th day of December, 1997.
3. The consent of the shareholders of the Corporation was not required for
the amendment of the Corporation's Articles of Incorporation.
This the 17th day of December, 1997.
VALUE AMERICA, INC.
By:/s/ Rex Scatena
-------------------
Rex Scatena, President
<PAGE>
ARTICLE III A
A series of Preferred Stock consisting of 5,000,000 shares designated
and known as "Series A Preferred Stock" is hereby established. The Series A
Preferred Stock shall have the rights, preferences and privileges set forth
below in this Article III A and elsewhere in Article III of these Articles of
Incorporation.
Section 1. Definitions. For purposes of this Article III A the following
definitions shall apply:
"Board" shall mean the Board of Directors of the Company.
"Business Day" shall mean a day which is not a Saturday, Sunday
or legal holiday on which banking institutions in New York are authorized to
close.
"Commitment Date" shall mean the date immediately prior to the
date of original issuance of the Series A Preferred Stock.
"Common Stock" shall mean the common stock, without par value,
of the Corporation.
"Common Stock's Fair Market Value" shall mean the fair market
value of a share of Common Stock, as determined in good faith by the Board for
the purpose of granting stock options or issuing shares to employees of the
Corporation or any Subsidiary and determined as of the most recent date that
such determination has been made within three months of the applicable date or,
if no such determination has been made during such period, the fair market value
of such stock, as determined in good faith by the Board as of the applicable
date; provided, however, that if the Common Stock's Fair Market Value is being
determined in connection with the automatic conversion of Series A Preferred
Stock upon the consummation of a Qualified Offering, the fair market value of
Common Stock issued in payment of accumulated and accrued dividends shall be the
per share "Price to the Public" (as shown in the final prospectus used for the
Qualified Offering).
"Dividend Rate" means (i) the Standard Dividend Rate (as
hereinafter defined) unless the Corporation is in arrears at least six months in
the payment of all or any portion of the Redemption Price of any shares of
Series A Preferred Stock, and (ii) during any period in which the Corporation is
in arrears at least six months in the payment of all or any portion of the
Redemption Price, the Standard Dividend Rate plus and additional 2% per annum
for each full six-month period in which any such arrears exists. "Standard
Dividend Rate" means (1) 5% if the Corporation completes a Qualified Offering
within 24 months after the first issuance of Series A Preferred Stock, and (2)
9% if the Corporation does not complete a Qualified Offering within 24 months
after the first issuance of Series A Preferred Stock, which 9% dividend rate
shall be effective retroactively to the original issuance of the Series A
Preferred Stock.
Annex A-1
<PAGE>
"Holders of a Majority of the Series A Preferred Stock" means
any Person or Persons holding, beneficially or of record, a Majority of the
Series A Preferred Stock.
"Investment Value" of any share of Series A Preferred Stock
means, as of any date, the sum of (i) the Per Share Amount, plus (ii) the amount
of any unpaid dividends on such share added to the Investment Value of such
share on any Dividend Reference Date pursuant to Section 2(a) hereof; and in the
event of any liquidations, dissolution or winding up of the Corporation, within
the meaning of Section 3 hereof, or a merger, consolidation or other transaction
involving the Corporation described in Section 4 hereof, or the redemption of
such share, unpaid dividends on such share, whether or not earned or declared,
will be added to the Investment Value of such share on the payment or
distribution date under Section 3 or 4 hereof, as the case may be, or on the
Redemption Date (as defined in Section 5 hereof), as the case may be, calculated
cumulatively on a daily basis to the close of business on such payment date,
distribution date, or Redemption Date, as the case may be. "Per Share Amount"
means (1) $2.00 except if determining the Investment Value in the case of the
definition of Mandatory Redemption Price, and (2) $4.00 if determining the
Investment Value in the case of the definition of Mandatory Redemption Price.
"Junior Stock" shall mean the Common Stock and all other shares
of Capital Stock of the Corporation, whether presently outstanding or hereafter
issued, other than Series A Preferred Stock.
"Majority of the Series A Preferred Stock" shall mean more than
50% of the outstanding Series A Preferred Stock.
"Person" means an individual, corporation, partnership,
association, trust, limited liability company or any other entity or
organization, including a government or political subdivision or an agency, unit
or instrumentality thereof.
"Series A Preferred Stock" shall mean the Series A Preferred
Stock, without par value, of the Corporation.
"Subsidiary" means, with respect to the Corporation, any Person
of which securities or other ownership interests having ordinary voting power to
elect a majority of the board of directors or other persons performing similar
functions are at the time directly or indirectly owned by the Corporation or a
Subsidiary of the Corporation.
"Voting Stock" shall mean any shares having general voting power
in electing the Board of Directors (irrespective of whether or not at the time
stock of any other class or classes has or might have voting power by reason or
the happening of any contingency). The Common Stock and Series A Preferred Stock
are Voting Stock.
Section 2. Dividends.
(a) Right to Dividends. (i) The holders of the outstanding
Series A Preferred Stock shall be entitled to receive, when and as declared by
the Board, and out of any funds legally available therefor, cumulative cash
dividends at the rate and in the
Annex A-2
<PAGE>
manner provided herein. Dividends on the Series A Preferred Stock shall
accumulate and accrue on each such share from the date of its original issue and
shall accumulate and accrue from day to day thereafter, whether or not earned or
declared. Such dividends shall be cumulative so that if such dividends in
respect of any previous or current quarterly dividend period, at the rate
specified herein, shall not have been paid or declared and a sum sufficient for
the payment thereof set apart, the deficiency shall first be fully paid before
any dividend or other distribution shall be paid or declared and set apart for
the Common Stock. Any accumulation of dividends on the Series A Preferred Stock
shall not bear interest. Dividends shall accumulated and accrue on each share of
Series A Preferred Stock from the date of original issue and shall not be
affected by the transfer of shares of Series A Preferred Stock thereafter or the
cancellation and issuance or reissuance of certificates evidencing such shares.
(ii) Dividends will be calculated cumulatively on a
daily basis on each share of Series A Preferred Stock at the Dividend Rate per
annum on the Investment Value thereof. To the extent not paid on the first day
of any April, July, October or January (each a "Dividend Reference Date"),
commencing January 1, 1998, all dividends which have been calculated on each
share of Series A Preferred Stock then outstanding during the three-month period
(or other period in the case of the first Dividend Reference Date) ending on
such Dividend Reference Date, whether or not earned or declared, will be added
to the Investment Value of such share and will remain a part thereof until such
dividends are paid. If the Dividend Rate changes as a result of a change in the
Standard Dividend Rate (as provided in the definition of Investment Value), then
the unpaid dividends shall be deemed to have been added to the Investment Value
of each share of Series A Preferred Stock retroactively on and as of each
Dividend Reference Date preceding the change in the Standard Dividend Rate.
(iii) Notwithstanding the cash dividend requirement of
Section 2(a)(i), the Corporation at its option may make any dividend payment on
the Series A Preferred Stock in shares of Common Stock or cash, or both, with
each share of Common Stock being valued for this purpose at the Common Stock's
Fair Market Value on the date such dividends is declared or, if the Common Stock
is not issued within ten (10) days after the date of declaration, on the date
such Common Stock is issued.
(b) Priority. Unless full dividends on the Series A Preferred
Stock for all past dividend periods and the then current dividend period shall
have been paid or declared and a sum sufficient for the payment thereof set
apart in trust for the benefit of the holders of the Series A Preferred Stock,
(1) no dividend whatsoever (other than a dividend payable solely in Common
Stock) shall be paid or declared, and no distribution shall be made, on any
Junior Stock, and (2) no shares of Junior Stock shall be purchased, redeemed or
acquired by the Corporation and no monies shall be paid into or set aside or
made available for a sinking fund for the purchase, redemption or acquisition
thereof; provided, however, that this restriction shall not apply to the
repurchase of shares of Common Stock from directors or employees of or
consultants or advisers to the Corporation or any Subsidiary pursuant to
agreements under which the Corporation has the option to repurchase such shares
upon the occurrence of certain events, including without limitation the
termination of employment by or service to the Corporation or any Subsidiary;
and provided further, however, that without the approval, by vote or written
consent, of the Holders of a
Annex A-3
<PAGE>
Majority of the Series A Preferred Stock the total amount applied to the
repurchase of shares of Common Stock shall not exceed $25,000 during any
twelve-month period.
(c) Additional Dividends. After cumulative dividends on the Series A
Preferred Stock for all past dividend periods and the then current dividend
period shall have been declared and paid or set apart, subject to Section 8(d)
hereof, if the Board shall elect to declare additional dividends, such
additional dividends shall be declared in equal amounts per share on all shares
of Series A Preferred Stock and Common Stock, but with each share of Series A
Preferred Stock being entitled to dividends based upon the number of shares of
Common Stock into which such share of Series A Preferred Stock could be
converted, pursuant to Section 7 hereof, at the record date for the
determination of shareholders entitled to receive such dividend or, if no such
record date is established, on the date such dividend is declared.
Section 3. Liquidation Rights of Series A Preferred Stock.
(a) Preference. In the event of any liquidation, dissolution or
winding up of the Corporation, whether voluntary or involuntary, the holders of
the Series A Preferred Stock then outstanding shall be entitled to be paid out
of the assets of the Corporation available for distribution to its shareholders,
whether such assets are capital, surplus, or earnings, before any payment or
declaration and setting apart for payment of any amount shall be made in respect
of the Junior Stock, an amount equal to the Investment Value per share on the
date of payment. If upon any liquidation, dissolution, or winding up of the
Corporation, whether voluntary or involuntary, the assets to be distributed to
the holders of the Series A Preferred Stock shall be insufficient to permit the
payment to such shareholders of the full preferential amounts aforesaid, then
all of the assets of the Corporation to be distributed shall be distributed
ratably to the holders of the Series A Preferred Stock on the basis of the
number of shares of Series A Preferred Stock held.
(b) Remaining Assets. After the payment or distribution to the holders
of the Series A Preferred Stock of the full preferential amounts aforesaid, the
holders of the Junior Stock shall be entitled to receive $0.11 (eleven cents)
per share, and after the payment of such amount, if there are any remaining
assets available for distribution to the stockholders of the Corporation, the
holders of the Series A Preferred Stock and Junior Stock then outstanding shall
be entitled to receive ratably, with all Series A Preferred Stock treated as if
it had been converted into Common Stock pursuant to Section 7 hereof, all
remaining assets of the Corporation to be distributed.
Section 4. Merger, Consolidation.
(a) At any time, in the event of:
(1) any consolidation or merger of the Corporation with or into
any other corporation or other entity or person, or any other corporate
reorganization or transaction or series of related transactions by the
Corporation (other than the "Buyout Transaction," as hereinafter defined) in
which in excess of 50% of the Corporation's voting power is transferred, or
Annex A-4
<PAGE>
(2) a sale or other disposition of all or substantially all of
the assets of the Corporation, then:
(A) holders of the Series A Preferred Stock shall
receive for each share of such stock in cash or in securities (including,
without limitation, debt securities) received from the acquiring corporation, or
a combination thereof, at the closing of any such transaction, an amount equal
to the Investment Value per share on the date of full payment;
(B) holders of the Junior Stock shall be entitled to
receive $0.11 (eleven cents) per share; and
(C) after (i) the payment or distribution to the holders
of the Series A Preferred Stock of the full preferential amounts stated in
Section 4(a)(2)(A) hereof, and (ii) the payment or distribution to the holders
of the Junior Stock of the full amounts stated in Section 4(a)(2)(B) hereof, the
remaining proceeds of such transaction shall be distributed as a Shared
Allocation (as defined in Section 4(b) hereof).
For purposes of Section 4(a)(i), "Buyout Transaction" means the sale of Common
Stock by Craig A. Winn and Rex Scatena pursuant to a Buy-Out Option Agreement
dated as of December 17, 1997 among these stockholders, the Corporation and
Union Labor Life Insurance Company.
Such payments shall be made with respect to the Series A Preferred
Stock and Junior Stock by (i) redemption or purchase of such shares by the
Corporation or (ii) purchase or acquisition of such shares by the surviving or
acquiring corporation, entity or person or by the Corporation. Before any
payment or distribution is made to the holders of the Junior Stock, the full
preferential amount stated in Section 4(a)(2)(A) hereof shall first be paid to
the holders of the Series A Preferred Stock. In the event the full amount of
such payment is not paid to the holders of the Series A Preferred Stock upon or
immediately prior to such transaction in accordance herewith, then all cash and
securities (including, without limitation, debt securities) to be distributed in
respect of the proposed transaction shall be distributed ratably among the
holders of the Series A Preferred Stock.
(b) "Shared Allocation" shall mean that the holders of Series A
Preferred Stock and Junior Stock shall share the remaining consideration to be
paid by the acquiring corporation in such transaction in proportion to the
number of shares held by each holder but, for this limited purpose, treating
each holder of the Series A Preferred Stock as if it held the number of shares
of Common Stock issuable to it upon conversion of the Series A Preferred Stock
held by it in accordance with the conversion privilege set forth in Section 7
hereof.
(c) Any securities or other property to be delivered to the holders of
the Series A Preferred Stock of Common Stock pursuant to Section 4(a) hereof
shall be valued as follows:
(1) Securities not subject to investment letter or other similar
restrictions on free marketability:
Annex A-5
<PAGE>
(A) If traded on a securities exchange, the value shall be
deemed to be the average of the closing prices of the securities on such
exchange over the 30-day period ending three(3) days prior to the closing;
(B) If quoted on the Nasdaq National Market, the value shall
be deemed to be the average of the closing prices (or, if the securities are not
quoted on the Nasdaq National Market but are regularly quoted on another NASDAQ
quotation system and there is an active public market for the securities, the
bid prices) over the 30-day period ending three(3) days prior to the closing;
and
(C) If the securities are not quoted on the Nasdaq National
Market and are either not otherwise quoted on a NASDAQ quotation system or there
is no active public market therefor, the value shall be the fair market value
thereof, as mutually determined by the Corporation and the Holders of a Majority
of the Series A Preferred Stock.
(2) The method of valuation of securities subject to investment
letter or other restrictions on free marketability shall be to make appropriate
discount from the market value determined as above in paragraph (1)(A), (B) or
(C) to reflect the approximate fair market value thereof, as mutually determined
by the Corporation and the Holders of a Majority of the Series A Preferred
Stock.
(3) All other securities or other property shall be valued at the
fair market value thereof, as mutually determined by the Corporation and the
Holders of a Majority of the Series A Preferred Stock.
(4) If the Holders of a Majority of the Series A Preferred Stock
and the Corporation are unable to reach agreement on any valuation matter, such
valuation shall be submitted to and determined by a nationally recognized
independent investment banking firm selected by the Board and the Holders of a
Majority of the Series A Preferred Stock (or, if such selection cannot be made,
by a nationally recognized independent investment banking firm selected by the
American Arbitration Association in accordance with its rules).
(d) In the event the requirements of Section 4(a) hereof are not
complied with, the Corporation shall forthwith either:
(1) Cause such closing to be postponed until such time as the
requirements of this Section 4 have been complied with; or
(2) Cancel such transaction, in which event the rights,
preferences and privileges of the holders of the Series A Preferred Stock shall
revert to and be the same as such rights, preferences and privileges existing
immediately prior to the date of the first notice referred to in Section 4(e)
hereof.
(e) The Corporation shall give each holder of record of Series A
Preferred Stock written notice of such impending transaction not later than
twenty-five (25) days prior to the shareholders' meeting called to approve such
transaction, or twenty-five (25) days prior to the closing of such transaction,
whichever is earlier, and shall also notify such holders in writing of the final
approval of such transaction. The first of such notices shall describe the
material terms and conditions of the impending transaction and the provisions of
this Section 4, and the Corporation shall thereafter give such holders prompt
notice of any material changes. The transaction shall in no event take place
sooner than twenty-five (25) days after the Corporation has given the first
notice provided for herein or sooner than ten (10) days after the Corporation
has given notice of any material changes provided for herein; provided, however,
that such periods may be shortened upon the written consent of the Holders of a
Majority of the Series A Preferred Stock.
Annex A-6
<PAGE>
(f) The provisions of this Section 4 are in addition to the protective
provisions of Section 8 hereof.
Section 5. Redemption.
(a) Restriction on Redemption and Purchase. Except as expressly
provided in this Section 5, the Corporation shall not have the right to
purchase, call, redeem or otherwise acquire for value any or all of the Series A
Preferred Stock.
(b) Optional Redemption. On, or at any time after, the fifth
anniversary of the Commitment Date, the Corporation may, at its option, redeem
the Series A Preferred Stock in whole, but not in part, at the Optional
Redemption Price hereinafter specified; provided, however, that the Corporation
shall not redeem Series A Preferred Stock or give notice of any redemption
unless the Corporation has sufficient and lawful funds to redeem all of the then
outstanding Series A Preferred Stock. The date on which the Series A Preferred
Stock is to be redeemed pursuant to this Section 5(b) is herein called the
"Optional Redemption Date."
(c) Mandatory Redemption.
(1) The Corporation shall redeem the number of shares of Series A
Preferred Stock as indicated below on the dates indicated in the following table
(each a "Scheduled Redemption Date"), at the Mandatory Redemption Price
hereinafter specified (a "Scheduled Redemption"):
1,666,666 shares First Business Day of January, 2003
1,666,666 shares First Business Day of January, 2004
1,666,668 shares First Business Day of January, 2005.
In addition to the foregoing, if the Corporation does not complete a Qualified
Offering (as hereinafter defined) within twenty-four (24) months after the first
issuance of Series A Preferred Stock, then the Holders of a Majority of the
Series A Preferred Stock, by giving written notice to the Corporation (a "Demand
Notice"), may cause the Corporation to redeem all outstanding shares of Series A
Preferred Stock at the Optional Redemption Price on the Redemption Date
specified in the Demand Notice (the "Demand Date"), which may not be earlier
than thirty (30) days after the Demand Notice is received by the Corporation
(any such redemption being herein called a "Demand Redemption"); provided,
however, that the Corporation shall not be obligated to redeem Series A
Preferred Stock in accordance with a Demand Notice if, within fifteen (15) days
after the Demand Notice is received, all of the persons named in the Demand
Notice (to the extent that they are not already directors of the
Annex A-7
<PAGE>
Corporation) are elected to the Board and constitute a majority of the members
of the Board. A Demand Notice shall state the names the individuals whom the
Holders of a Majority of the Series A Preferred Stock wish to have elected to
the Board (to the extent that they are not already directors) and constitute a
majority of the member of the Board. A Scheduled Redemption or a Demand
Redemption is herein sometimes referred to as a "Mandatory Redemption"
(2) If the funds of the Corporation legally available for
redemption of Series A Preferred Stock on a Scheduled Redemption Date or the
Demand Date are insufficient to redeem the number of shares to be redeemed
pursuant to this subsection (c) on such date, those funds which are legally
available will be used to redeem the maximum possible number of shares among the
holders of the Series A Preferred Stock ratably on the basis of the number of
shares of Series A Preferred Stock held. At the earliest time thereafter when
additional funds of the Corporation are legally available for redemption of
Series A Preferred Stock in the manner provided above, such funds will be
immediately used to redeem the balance of the Series A Preferred Stock which the
Corporation has become obligated to redeem on such Scheduled Redemption Date or
the Demand Date, as the case may be, but which it has not yet redeemed.
(3) If fewer than all shares of Series A Preferred Stock are
being redeemed, the redemption will be made ratably among all holders in
proportion to the number of shares of Series A Preferred Stock held.
(d) Redemption Price. The Optional Redemption Price of the Series A
Preferred Stock (the "Optional Redemption Price") shall be the Investment Value
per share. The Mandatory Redemption Price of the Series A Preferred Stock (the
"Mandatory Redemption Price") shall be the Investment Value per share. As used
herein, "Redemption Price" shall mean either the Optional Redemption Price or
the Mandatory Redemption Price, whichever shall be applicable.
(e) Redemption Notice. The corporation shall, not less than thirty
(30) days nor more than sixty (60) days prior to the Optional Redemption Date
and each Scheduled Redemption Date (a "Redemption Date"), give written notice
("Redemption Notice"), to each holder of record of Series A Preferred Stock to
be redeemed. In the case of a Demand Redemption, the Redemption Notice shall be
given by the Corporation to all holders of the Series A Preferred Stock not less
than 10 days after receipt of the Demand Notice, and the "Redemption Date" shall
be the Demand Date. The Redemption Notice shall state:
(1) That all or a specified number of the outstanding shares of
Series A Preferred Stock are to be redeemed and the total number of shares being
redeemed;
(2) the number of shares of Series A Preferred Stock held
by the holder which the Corporation intends to redeem,
(3) The Redemption Date and Redemption Price;
Annex A-8
<PAGE>
(4) That the holder's right to convert the Series A Preferred Stock
will terminate on the Redemption Date; and
(5) The time, place and manner in which the holder is to surrender
to the Corporation the certificate or certificates representing the shares of
Series A Preferred Stock to be redeemed.
(f) Payment of Redemption Price and Surrender of Stock. On the
Redemption Date, the Redemption Price of the Series A Preferred Stock scheduled
to be redeemed or called for redemption shall be payable to the holders of the
Series A Preferred Stock. On or before the Redemption Date, each holder of
Series A Preferred Stock to be redeemed, unless the holder has exercised his
right to convert the shares as provided in Section 7 hereof, shall surrender the
certificate or certificates representing such shares to the Corporation, in the
manner and at the place designated in the Redemption Notice, and thereupon the
Redemption Price for such shares shall be payable to the order of the person
whose name appears on such certificate or certificates as the owner thereof, and
each surrendered certificate shall be canceled and retired.
(g) Termination of Rights. If the Redemption Notice is duly given,
and if at least ten (10) days prior to the Redemption Date the Redemption Price
is either paid or made available for payment through the arrangement specified
in subsection (h) below, then notwithstanding that the certificates evidencing
any of the shares of Series A Preferred Stock so called or scheduled for
redemption have not been surrendered, all rights with respect to such shares
shall forthwith after the Redemption Date cease and determine, except only (i)
the right of the holders to receive the Redemption Price without interest upon
surrender of their certificates therefor or (ii) the right to receive Common
Stock plus dividends upon exercise of the conversion rights provided in Section
7 hereof on or before the Redemption Date.
(h) Deposit of Funds. At least ten (10) days prior to the Redemption
Date, the Corporation shall deposit with any bank or trust company in
Washington, D.C., having a capital and surplus of at least $1 billion as a trust
fund, a sum equal to the aggregate Redemption Price of all shares of the Series
A Preferred Stock scheduled to be redeemed or called for redemption and not yet
redeemed, with irrevocable instructions and authority to the bank or trust
company to pay, on or after the Redemption Date or prior thereto, the Redemption
Price to the respective holders upon the surrender of their share certificates.
The deposit shall constitute full payment of the shares to their holders, and
from and after the date of such deposit (even if prior to the Redemption Date),
the shares shall be deemed to be redeemed and no longer outstanding, and the
holders thereof shall cease to be shareholders with respect to such shares and
shall have no rights with respect thereto, except the right to receive from the
bank or trust company payment of the Redemption Price of the shares, without
interest, upon surrender of their certificates therefor and the right to convert
such shares and receive accrued and unpaid dividends as provided in Section 7
hereof. Any monies so deposited and unclaimed at the end of one year from the
Redemption Date shall be released or repaid to the Corporation, after which the
holders of shares called for redemption shall be entitled to receive payment of
the Redemption Price only from the Corporation.
Annex A-9
<PAGE>
Section 6. Voting Rights.
(a) Series A Preferred Stock. Each holder of shares of Series A
Preferred Stock shall be entitled to vote on all matters and, except as
otherwise expressly provided herein, shall be entitled to the number of votes
equal to the largest number of full shares of Common Stock into which such
shares of Series A Preferred Stock could be converted, pursuant to the
provisions of Section 7 hereof, at the record date for the determination of the
shareholders entitled to vote on such matters or, if no such record date is
established, at the date such vote is taken.
(b) Common Stock. Each holder of shares of Common Stock shall be
entitled to one vote for each share thereof held. Except as otherwise expressly
provided herein or as required by law, the holders of Series A Preferred Stock
and the holders of Common Stock shall vote together and not as separate
classes.
(c) Authorized Directors and Class Voting Rights of Series A
Preferred Stock and Common Stock; Compensation Committee.
(1) The Corporation shall have seven (7) authorized directors.
Subject to subsection (d) of this Section 6, the holders of Series A Preferred
Stock, as a class, shall be entitled to elect two (2) directors, and the holders
of all other Voting Stock, as a class, shall be entitled to elect the remaining
members of the Board.
(2) The Board shall establish a compensation committee of three
directors (the "Compensation Committee"), one member of which shall be selected
by the Holders of a Majority of the Series A Preferred Stock, one member of
which shall be selected by the Holders of a majority of the other Voting Stock,
and the third member of which shall be selected by agreement of the other two
members; provided, however, that with the consent of the director selected by
the Holders of a Majority of the Series A Preferred Stock, the Compensation
Committee shall consist of two members, one selected by such Holders and the
other by the Holders of a majority of the other Voting Stock. All action taken
by the Compensation Committee shall require the unanimous vote or written
consent of all of the three members. All matters affecting compensation of any
officer or director of the Corporation or any Subsidiary or any employee of or
consultant to the Corporation or any Subsidiary whose base compensation is at an
annual rate of at least $75,000 shall require approval of the Compensation
Committee in order to be effective. No option or warrant to purchase Common
Stock, stock appreciation right or stock issuance to any officer, director or
employee of the Corporation shall be granted, effected, modified or accelerated
unless the same has been approved by the Compensation Committee. In addition,
the Compensation Committee shall have the exclusive authority to administer and
take all action permitted or required to be taken by the Board or any committee
of the Board under all stock option plans of the Company and under any other
plan or arrangement that provides for the issuance of Common Stock, stock
appreciation rights, phantom stock or other similar benefits to any employee of
or any advisor or consultant to the Corporation.
(d) Special Voting Rights of Series A Preferred Stock in Case of
Certain Events. If the Corporation shall have failed to redeem and pay in full
the Redemption Price of any Series A Preferred Stock called for redemption or
scheduled or otherwise to be redeemed as required by Section 5 hereof, whether
or not funds are legally
Annex A-10
<PAGE>
available therefor, the holders of the Series A Preferred Stock shall,
immediately upon the giving of written notice to the Corporation by any holder
of Series A Preferred Stock, be entitled to elect the smallest number of
directors which shall constitute a majority of the authorized number of
directors of the Corporation, and the holders of all other shares of Voting
Stock, as a class, shall be entitled to elect the remaining members of the
Board. Whenever the holders of the Series A Preferred Stock shall be entitled to
elect directors as provided in this subsection (d), the holders of the Series A
Preferred Stock may call a special meeting of stockholders and shall have access
to the stock books and records of the Corporation for such purpose. At any such
meeting, or at any other meeting held while the holders of the Series A
Preferred Stock have the voting power described in this subsection (d), the
Holders of a Majority of the Series A Preferred Stock, present in person or by
proxy, shall be sufficient to constitute a quorum for the election of directors
as herein provided. At such meeting or, if no such special meeting shall have
been called, then at the next annual meeting of the stockholders, the holders of
the Series A Preferred Stock shall be entitled to elect a majority of the
directors of the Corporation, and the holders of all other shares of Voting
Stock, as a class, shall be entitled to elect the remaining members of the
Board. Upon the election by the holders of Series A Preferred Stock of a
majority of the directors, the terms of office of all persons who were
theretofore directors of the Corporation shall forthwith terminate, whether or
not the holders of the Common Stock shall then have elected the remaining
directors of the Corporation.
(e) Divestment of Special Voting Rights of Series A
Preferred Stock. If the Redemption Price of all Series A Preferred Stock
scheduled for redemption or called for redemption or otherwise to be redeemed,
as the case may be, shall have been paid in full, as required by Section 5
hereof, then the holders of the Series A Preferred Stock shall be divested of
the voting rights specified in Section 6(d). These voting rights shall again
accrue to the holders of Series A Preferred Stock as and when provided in
Section 6(d). Upon the termination of any such voting rights as hereinabove
provided, the Board shall call a special meeting of the stockholders at which
all directors will be elected, and the terms of office of all persons who are
then directors of the Corporation shall terminate immediately upon the election
of their successors.
(f) Vacancies. In the case of any vacancy in the office of a
director occurring among the directors elected by the holders of the Series A
Preferred Stock pursuant to subsection (c) or (d) of this Section 6, the
remaining director or directors so elected by the holders of the Series A
Preferred Stock may, by affirmative vote of a majority thereof (or the remaining
director so elected if there is only one such director), elect a successor or
successors to hold the office for the unexpired term of the director or
directors whose place or places shall be vacant. Any director who shall have
been elected by the holders of the Series A Preferred Stock, or any director so
elected as provided in the immediately preceding sentence, shall be removed
during the aforesaid term of office, whether with or without cause, only by the
affirmative vote of the Holders of a Majority of the Series A Preferred Stock.
Section 7. Conversion. The holders of Series A Preferred Stock shall
have the following conversion rights:
Annex A-11
<PAGE>
(a) Right to Convert. Each share of Series A Preferred Stock
shall be convertible, at any time at the option of the holder thereof, into
fully paid and nonassessable shares of Common Stock.
(b) Conversion Price. Each share of Series A Preferred Stock
shall be convertible into the number of shares of Common Stock which results
from dividing the Conversion Price (as hereinafter defined) in effect at the
time of conversion into $2.00 for each share of Series A Preferred Stock being
converted. The Conversion Price shall initially be $10.405, and shall be subject
to adjustment from time to time as provided below (the "Conversion Price"). The
Corporation and the initial holder of the Series A Preferred Stock have agreed
to a possible reduction in the Conversion Price pursuant to Section 7.11 of the
Preferred Stock Purchase Agreement dated as of December 17, 1997 between the
Corporation and such holder.
(c) Mechanics of Conversion. Each holder of Series A
Preferred Stock who desires to convert the same into shares of Common Stock
shall surrender the certificate or certificates therefor, duly endorsed, at the
office of the Corporation or of any transfer agent for the Series A Preferred
Stock or Common stock, and shall give written notice to the Corporation at such
office that such holder elects to convert the same and shall state therein the
number of shares of Series A Preferred Stock being converted. Thereupon the
Corporation shall promptly issue and deliver to such holder a certificate or
certificates for the number of shares of Common Stock to which such holder is
entitled and shall promptly pay in cash, or, if the Corporation so elects or is
legally or financially unable to pay such dividends in cash. Common Stock
(valued at the Common Stock's Fair Market Value at the time of surrender), all
accumulated, accrued and unpaid dividends on the shares of Series A Preferred
Stock being converted, whether or not earned or declared, to and including the
time of conversion. Such conversion shall be deemed to have been made
immediately prior to the close of business on the date of such surrender of the
certificate representing the shares of Series A Preferred Stock to be
converted, and the Person entitled to receive the shares of Common Stock
issuable upon such conversion shall be treated for all purposes as the record
holder of such shares of Common Stock on such date.
(d) Adjustment for Stock Splits and Combinations. If the
Corporation at any time or from time to time after the Commitment Date effects a
subdivision of the outstanding Common Stock, the Conversion Price then in effect
immediately before that subdivision shall be proportionately decreased, and
conversely, if the Corporation at any time or from time to time after the
Commitment Date combines the outstanding shares of Common Stock into a smaller
number of shares, the Conversion Price then in effect immediately before the
combination shall be proportionately increased. Any adjustment under this
subsection (d) shall become effective at the close of business on the date the
subdivision or combination becomes effective.
Annex A-12
<PAGE>
(e) Adjustment for Certain Dividends and Distributions. If
the Corporation at any time or from time to time after the Commitment Date
makes, or fixes a record date for the determination of holders of Common Stock
entitled to receive, a dividend or other distribution payable in additional
shares of Common Stock, then and in each such event the Conversion Price then in
effect shall be decreased as of the time of such issuance or, in the event such
record date is fixed, as of the close of business on such record date, by
multiplying the Conversion Price then in effect by a fraction (1) the numerator
of which is the total number of shares of Common Stock issued and outstanding
immediately prior to the time of such issuance or the close of business on such
record date, and (2) the denominator of which shall be the total number of
shares of Common Stock issued and outstanding immediately prior to the time of
such issuance or the close of business on such record date plus the number of
shares of Common Stock issuable in payment of such dividend or distribution,
provided, however, that if such record date is fixed and such dividend is not
fully paid or if such distribution is not fully made on the date fixed therefor,
the Conversion Price shall be recomputed accordingly as of the close of business
on such record date and thereafter the Conversion Price shall be adjusted
pursuant to this subsection (e) as of the time of actual payment of such
dividends or distributions.
(f) Adjustments for Other Dividends and Distributions. In
the event the Corporation at any time or from time to time after the Commitment
Date makes, or fixes a record date for the determination of holders of Common
Stock entitled to receive, a dividend or other distribution payable in
securities of the Corporation other than shares of Common stock, then and in
each such event provision shall be made so that the holders of Series A
Preferred Stock shall receive upon conversion thereof, in addition to the number
of shares of Common Stock receivable thereupon, the amount of securities of the
Corporation which they would have received had their Series A Preferred Stock
been converted into Common Stock on the date of such event and had they
thereafter, during the period from the date of such event to and including the
conversion date, retained such securities receivable by them as aforesaid during
such period, subject to all other adjustments called for during such period
under this Section 7 with respect to the rights of the holders of the Series A
Preferred Stock.
(g) Adjustment for Reclassification, Exchange and
Substitution. In the event that at any time or from time to time after the
Commitment Date, the Common Stock issuable upon the conversion of the Series A
Preferred Stock is changed into the same or a different number of shares of any
class or classes of stock, whether by recapitalization, reclassification or
otherwise (other than a subdivision or combination of shares or stock dividend
or a reorganization, merger, consolidation or sale of assets, provided for
elsewhere in this Section 7), then and in any such event each holder of Series A
Preferred Stock shall have the right thereafter to convert such stock into the
kind and amount of stock and other securities and property receivable upon such
recapitalization, reclassification or other change, by holders of the maximum
number of shares of Common Stock into which such shares of Series A Preferred
Stock could have been converted immediately prior to such recapitalization,
reclassification or change, all subject to further adjustment as provided
herein.
(h) Reorganizations, Mergers, Consolidations or Sales of
Assets. If at any time or from time to time after the Commitment Date there is a
capital reorganization of the Common Stock (other than a recapitalization,
subdivision, combination, reclassification or exchange of shares provided for
elsewhere in this Section 7) or a merger or consolidation of the Corporation
with or into another corporation, or the sale of all or substantially all of the
Corporation's properties and assets to any other person, then, as a part of such
reorganization, merger, consolidation or sale, provision shall be made so that
the holders of the Series A Preferred Stock shall thereafter be entitled to
receive upon conversion of the Series A Preferred Stock the number of shares of
stock or other securities or property to which a holder of the number of shares
of Common Stock deliverable upon conversion
Annex A-13
<PAGE>
would have been entitled on such capital reorganization, merger, consolidation,
or sale. In any such case, appropriate adjustment shall be made in the
application of the provisions of this Section 7 with respect to the rights of
the holders of the Series A Preferred Stock after the reorganization, merger,
consolidation or sale to the end that the provisions of this Section 7
(including adjustment of the Conversion Price then in effect and the number of
shares purchasable upon conversion of the Series A Preferred Stock) shall be
applicable after that event and be as nearly equivalent as may be practicable.
(i) Sale of Shares Below Conversion Price.
(1) If at any time or from time to time after the Commitment Date,
the Corporation issues or sells, or is deemed by the express provisions of this
subsection (i) to have issued or sold, Additional Shares of Common Stock (as
hereinafter defined), other than as a dividend or other distribution on any
class of stock as provided in subsection (e) above and other than upon a
subdivision or combination of shares of Common Stock as provided in subsection
(d) above, for an Effective Price (as hereinafter defined) less than the then
existing Conversion Price, then and in each such case the then existing
Conversion Price shall be reduced, as of the opening of business on the date of
such issue or sale, as follows:
(I) if such issuance or deemed issuance occurs during the
twelve-month period immediately following the first issuance of Series A
Preferred Stock and prior to a Qualified Offering and constitutes a
Financing Transaction (as hereinafter defined), the Conversion Price
shall be reduced to the Effective Price at which the Additional Shares
of Common Stock were issued or deemed to have been issued; and
(II) if such issuance or deemed issuance occurs during the
twelve-month period immediately following the first issuance of Series A
Preferred Stock and constitutes a Financing Transaction or occurs after
the twelve-month period immediately following the first issuance of
Series A Preferred Stock, the Conversion Price shall be reduced to a
price determined by multiplying that Conversion Price by a fraction (i)
the numerator of which shall be (A) the number of shares of Common Stock
outstanding at the close of business on the day next preceding the date
of such issue or sale, plus (B) the number of shares of Common Stock
which the aggregate consideration received (or by the express provisions
hereof deemed to have been received) by the Corporation for the total
number of Additional Shares of Common Stock so issued would purchase at
such Conversion Price, plus (C) the number of shares of Common Stock
into which the outstanding shares of all Series A Preferred Stock are
convertible at the close of business on the date next preceding the date
of such issue or sale, plus (D) the number of shares of Common Stock
underlying all Other Securities (as hereinafter defined) at the close of
business on the date next preceding the date of such issue or sale, and
(ii) the denominator of which shall be (A) the number of shares of
Common Stock outstanding at the close of business on the date of such
issue or sale after giving effect to such issue of Additional Shares of
Common Stock, plus (B) the number of shares of Common Stock into which
the outstanding shares of all Series A Preferred Stock are convertible
at the close
Annex A-14
<PAGE>
of business on the date next preceding the date of such issue or sale,
plus (C) the number of shares of Common Stock underlying the Other
Securities at the close of business on the date next preceding the date
of such issue or sale.
"Financing Transaction" means any transaction or series of related transactions
in which Additional Shares of Common Stock are issued or sold, or are deemed to
have been issued or sold, for at least $1,000,000 in the aggregate.
(2) For the purpose of making any adjustment required
under this subsection (i), the consideration received by the Corporation for any
issue or sale of securities shall (A) to the extent it consists of cash be
computed at the amount of cash received by the Corporation, (B) to the extent
it consists of property other than cash, be computed at the fair value of that
property as determined in good faith by the Board, (C) if Additional Shares of
Common Stock, Convertible Securities (as hereinafter defined) or rights or
options to purchase either Additional Shares of Common Stock or Convertible
Securities are issued or sold together with other stock or securities or other
assets of the Corporation for a consideration which covers both, be computed as
the portion of the consideration so received that may be reasonably determined
in good faith by the Board to be allocable to such Additional Shares of Common
Stock, Convertible Securities or rights or options, and (D) be computed after
reduction for all expenses payable by the Corporation in connection with such
issue or sale.
(3) For the purpose of the adjustment required under
this subsection (i), if the Corporation issues or sells any rights or options
for the purchase of, or stock or other securities convertible into or
exchangeable for, Additional Shares of Common Stock (such convertible or
exchangeable stock or securities being hereinafter referred to as "Convertible
Securities") and if the Effective Price of such Additional Shares of Common
Stock is less than the Conversion Price then in effect, then in each case the
Corporation shall be deemed to have issued at the time of the issuance of such
rights or options or Convertible Securities the maximum number of Additional
Shares of Common Stock issuable upon exercise, conversion or exchange thereof
and to have received as consideration for the issuance of such shares an amount
equal to the total amount of the consideration, if any, received by the
Corporation for the issuance of such rights or options or Convertible
Securities, plus, in the case of such rights or options, the minimum amounts of
consideration, if any, payable to the Corporation upon the exercise of such
rights or options, plus in the case of Convertible Securities, the minimum
amounts of consideration, if any, payable to the Corporation (other than by
cancellation of liabilities or obligations evidenced by such Convertible
Securities) upon the conversion or exchange thereof. No further adjustment of
the Conversion Price, adjusted upon the issuance of such rights, options or
Convertible Securities, shall be made as a result of the actual issuance of
Additional Shares of Common Stock on the exercise of any such rights or options
or the conversion or exchange of any such Convertible Securities. If any such
rights or options or the conversion or exchange privilege represented by any
such Convertible Securities shall expire without having been exercised, the
Conversion Price adjusted upon the issuance of such rights, options or
Convertible Securities shall be readjusted to the Conversion Price which would
have been in effect had an adjustment been made on the basis that the only
Additional Shares of Common Stock so issued were the Additional Shares of Common
Stock, if any, actually issued or sold on the exercise of such rights or options
or rights of conversion or exchange of such Convertible Securities, and such
Additional Shares of Common Stock, if any, were issued or sold for the
Annex A-15
<PAGE>
consideration actually received by the Corporation upon such exercise, plus the
consideration, if any, actually received by the Corporation for the granting of
all such rights or options, whether or not exercised, plus the consideration
received for issuing or selling the Convertible Securities actually converted or
exchanged, plus the consideration, if any, actually received by the Corporation
(other than by cancellation of liabilities or obligations evidenced by such
Convertible Securities) on the conversion or exchange of such Convertible
Securities.
(4) For the purpose of the adjustment required under
this subsection (i), if the Corporation issues or sells, or is deemed by the
express provisions of this subsection to have issued or sold, any rights or
options for the purchase of Convertible Securities and if the Effective Price of
the Additional Shares of Common Stock underlying such Convertible Securities is
less than the Conversion Price then in effect, then in each such case the
Corporation shall be deemed to have issued at the time of the issuance of such
rights or options the maximum number of Additional Shares of Common Stock
issuable upon conversion or exchange of the total amount of Convertible
Securities covered by such rights or options and to have received as
consideration for the issuance of such Additional Shares of Common Stock an
amount equal to the amount of consideration, if any, received by the Corporation
for the issuance of such rights or options, plus the minimum amounts of
consideration, if any, payable to the Corporation upon the exercise of such
rights or options and plus the minimum amount of consideration, if any, payable
to the Corporation (other than by cancellation of liabilities or obligations
evidenced by such Convertible Securities) upon the conversion or exchange of
such Convertible Securities. No further adjustment of the Conversion Price,
adjusted upon the issuance of such rights or options, shall be made as a result
of the actual issuance of the Convertible Securities upon the exercise of such
rights or options or upon the actual issuance of Additional Shares of Common
Stock upon the conversion or exchange of such Convertible Securities. The
provisions of paragraph (3) above for the readjustment of the Conversion Price
upon the expiration of rights or options or the rights of conversion or exchange
of Convertible Securities shall apply mutatis mutandis to the rights, options
and Convertible Securities referred to in this paragraph (4).
(5) "Additional Shares of Common Stock" shall mean all
shares of Common Stock issued by the Corporation after the Commitment Date,
whether or not subsequently reacquired or retired by the Corporation, other than
(i) shares of Common Stock issued upon conversion of the Series A Preferred
Stock, (ii) the first 860,375 shares of Common Stock issued to individuals who
are or were employees or directors of or consultants and advisers to the
Corporation or any Subsidiary pursuant to stock purchase or stock option plans
or other arrangements, (iii) 71,250 shares of Common Stock issued upon the
exercise of stock purchase warrants that were outstanding on the date of first
issuance of Series A Preferred Stock, and (iv) 25,000 shares to be issued to a
former employee for services rendered. The "Effective Price" of Additional
Shares of Common Stock shall mean the quotient determined by dividing the total
number of Additional Shares of Common Stock issued or sold, or deemed to have
been issued or sold by the Corporation under this subsection (i), into the
aggregate consideration received, or deemed to have been received, by the
Corporation for such issue under this subsection (i), for such Additional Shares
of Common Stock. "Other Securities" with respect to an issue or sale of
Additional Shares of Common Stock shall mean stock and other securities
convertible into or exchangeable for Common Stock; "the number of shares of
Common Stock underlying Other Securities" on a particular date shall mean the
number of shares of Common Stock issuable upon the
Annex A-16
<PAGE>
exercise, conversion or exchange, as the case may be, of such Other Securities
at the close of business on such date but only to the extent that the holders
thereof have the fully vested legal right to exercise, convert or exchange such
Other Securities on such date and to retain the Common Stock issued upon such
exercise, conversion or exchange.
(j) Accountants' Certificate of Adjustment. In each case of an
adjustment or readjustment of the Conversion Price or the number of shares of
Common Stock or other securities issuable upon conversion of the Series A
Preferred Stock, the Corporation, at its expense, shall cause independent public
accountants of recognized standing selected by the Corporation (who may be the
independent public accountants then auditing the books of the Corporation) to
compute such adjustment or readjustment in accordance with the provisions hereof
and prepare a certificate showing such adjustment or readjustment, and shall
mail such certificate, by first class mail, postage prepaid, to each registered
holder of the Series A Preferred Stock at the holder's address as shown in the
Corporation's books. The certificate shall set forth such adjustment or
readjustment, showing in detail the facts upon which such adjustment or
readjustment is based, including a statement of (1) the consideration received
or deemed to be received by the Corporation for any Additional Shares of Common
Stock issued or sold or deemed to have been issued or sold, (2) the Conversion
Price at the time in effect, (3) the number of Additional Shares of Common Stock
and (4) the type and amount, if any, of other property which at the time would
be received upon conversion of the Series A Preferred Stock.
(k) Notices of Record Date. In the event of (i) any taking by the
Corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend or other distribution, or (ii) any capital reorganization of the
Corporation, any reclassification or recapitalization of the capital stock of
the Corporation, any merger or consolidation of the Corporation with or into any
other corporation, or any transfer of all or substantially all of the assets of
the Corporation to any other person or any voluntary or involuntary dissolution,
liquidation or winding up of the Corporation, the Corporation shall mail to each
holder of Series A Preferred Stock at least thirty (30) days prior to the record
date specified herein, a notice specifying (1) the date on which any such record
is to be taken for the purpose of such dividend or distribution and a
description of such dividend or distribution, (2) the date on which any such
reorganization, reclassification, transfer, consolidation, merger, dissolution,
liquidation or winding up is expected to become effective, and (3) the date, if
any, that is to be fixed, as to when the holders of record of Common Stock (or
other securities) shall be entitled to exchange their shares of Common Stock (or
other securities) for securities or other property deliverable upon such
reorganization, reclassification, transfer, consolidation, merger, dissolution,
liquidation or winding up.
(l) Automatic Conversion.
(1) Each share of Series A Preferred Stock shall automatically be
converted into shares of Common Stock based on the then effective Conversion
Price (A) immediately upon the closing of an underwritten public offering
pursuant to an effective registration statement under the Securities Act of
1933, as amended, covering the offering and sale of Common Stock for the account
of the Corporation in which the aggregate gross proceeds received by the
Corporation at the public offering price equals or exceeds $25 million, the
public offering price per share of which equals or exceeds 110%
Annex A-17
<PAGE>
of the Conversion Price then in effect and the obligation of the underwriters
with respect to which is that if any of the securities being offered are
purchased, all such securities must be purchased (herein called a "Qualified
Offering"); provided, however, that such conversion shall be conditioned upon
payment by the Corporation of all accrued and unpaid dividends on the
outstanding Series A Preferred Stock, whether or not earned or declared, to and
including the date of such conversion, payable either in cash or Common Stock
(valued at the Common Stock's Fair Market Value), or both, or (B) upon the
receipt by the Corporation of a written notice from the Holders of a Majority of
the Series A Preferred Stock electing unconditionally to convert their shares of
Series A Preferred Stock.
(2) Upon the occurrence of either of the events specified in
paragraph (1) above the outstanding shares of Series A Preferred Stock shall be
converted automatically without any further action by the holders of such shares
and whether or not the certificates representing such shares are surrendered to
the Corporation or its transfer agent; provided, however, that the Corporation
shall not be obligated to issue certificates evidencing the shares of Common
Stock issuable upon such conversion unless the certificates evidencing such
shares of Series A Preferred Stock are either delivered to the Corporation or
its transfer agent as provided below, or the holder notifies the Corporation or
its transfer agent that such certificates have been lost, stolen or destroyed
and executes an agreement satisfactory to the Corporation to indemnify the
Corporation from any loss incurred by it in connection with such certificates.
Upon the occurrence of such automatic conversion of the Series A Preferred
Stock, the holders of Series A Preferred Stock shall surrender the certificates
representing such shares at the office of the Corporation or any transfer agent
for the Series A Preferred Stock or Common Stock. Thereupon, there shall be
issued and delivered to such holder promptly at such office and in its name as
shown on such surrendered certificate or certificates, a certificate or
certificates for the number of shares of Common Stock into which the shares of
Series A Preferred Stock surrendered were convertible on the date on which such
automatic conversion occurred, and, subject to Section 2(a)(iv) hereof, the
Corporation shall promptly pay in cash or Common Stock (taken at the Common
Stock's Fair Market Value as of the date of such conversion), or both, all
accrued and unpaid dividends on the shares of Series A Preferred Stock being
converted, whether or not earned or declared, to and including the date of such
conversion.
(m) Fractional Shares. Fractional shares otherwise issuable upon
conversion of Series A Preferred Stock held by a single holder shall be
aggregated into whole shares and issued to such holder. Otherwise, no fractional
shares of Common Stock shall be issued upon conversion of Series A Preferred
Stock. Except as provided above, in lieu of any fractional share to which the
holder would otherwise be entitled, the Corporation shall pay cash equal to the
product of such fraction multiplied by the fair market value of one share of
Common Stock on the date of conversion, as determined in good faith by the
Board.
(n) Reservation of Stock Issuable Upon Conversion. The Corporation
shall at all times reserve and keep available out of its authorized but unissued
shares of Common Stock, solely for the purpose of effecting the conversion of
the shares of the Series A Preferred Stock; such number of its shares of Common
Stock as shall from time to time be sufficient to effect the conversion of all
outstanding shares of the Series A Preferred Stock; and if at any time the
number of authorized but unissued shares of Common Stock shall not be sufficient
to effect the conversion of all then outstanding shares of the Series A
Preferred Stock, the Corporation will take such corporate action as may, in the
Annex A-18
<PAGE>
opinion of its counsel, be necessary to increase its authorized but unissued
shares of Common Stock to such number of shares as shall be sufficient for such
purpose.
(o) Notices. Any notice required or permitted by this Section 7 or
any other provision of this Article III A to be given to a holder of Series A
Preferred Stock or to the Corporation shall be in writing and be deemed given
upon the earlier of actual receipt or three (3) days after the same has been
deposited in the United States mail, by certified or registered mail, return
receipt requested, postage prepaid, and addressed (i) to each holder of record
at the address of such holder appearing on the books of the Corporation, or (ii)
to the Corporation at 2300 Commonwealth Drive, Charlottesville, Virginia 22901,
or (iii) to the Corporation or any holder, at any other address specified in a
written notice given to the other for the giving of notice.
(p) Payment of Taxes. The Corporation will pay all taxes (other than
taxes based upon income) and other governmental charges that may be imposed with
respect to the issue or delivery of shares of Common Stock upon conversion of
shares of Series A Preferred Stock, including without limitation any tax or
other charge imposed in connection with any transfer involved in the issue and
delivery of shares of Common Stock in a name other than that in which the shares
of Series A Preferred Stock so converted were registered.
(q) No Dilution or Impairment. The Corporation shall not amend its
Articles of Incorporation or participate in any reorganization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action, for the purpose of avoiding or seeking to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by the Corporation, but will at all times in good faith assist in
carrying out all such action as may be reasonably necessary or appropriate in
order to protect the conversion rights of the holders of the Series A Preferred
Stock against diltution or other impairment.
Section 8. Restrictions and Limitations. So long as any shares of
Series A Preferred Stock remain outstanding, the Corporation shall not, and
shall not permit any Subsidiary to, without the vote or written consent by the
Holders of a Majority of the Series A Preferred Stock.
(a) Redeem, purchase or otherwise acquire for value any share or
shares of Series A Preferred Stock, otherwise than by redemption in accordance
with Section 5 hereof, or any warrant, option or right to purchase any Series A
Preferred Stock;
(b) Purchase, redeem or otherwise acquire for value (or pay into or
set aside as a sinking fund for such purpose) any Junior Stock or any warrant,
option or right to purchase any Junior Stock; provided, however, that this
restriction shall not apply to (i) the repurchase of shares of Common Stock from
directors or employees of or consultants or advisers to the Corporation or any
Subsidiary pursuant to agreements under which the Corporation has the option to
repurchase such shares upon the occurrence of certain events, including the
termination of employment by or service to the Corporation or any Subsidiary;
and provided further, however, that without the approval, by vote or written
consent, of the Holders of a Majority of the Series A Preferred Stock, the total
amount applied to the repurchase of shares of Common Stock shall not exceed
$25,000 during any
Annex A-19
<PAGE>
twelve-month period; or (ii) amounts paid by the Corporation in accordance with
its 1997 Stock Incentive Plan in cancellation of outstanding stock options upon
a "Change of Control" as defined in such Plan; provided, that such payment is
approved by the Compensation Committee.
(c) Authorize or issue, or obligate itself to issue, any other
equity security senior to or on a parity with the Series A Preferred Stock as to
dividend or redemption rights, liquidation preferences, conversion rights,
voting rights or otherwise; for purposes of this subsection, a senior equity
security shall include any indebtedness convertible into or exchangeable for
shares of capital stock of the Corporation or any indebtedness issued with (i)
shares of capital stock of the Corporation or (ii) warrants or other rights to
purchase capital stock of the Corporation or Convertible Securities;
(d) Declare or pay any dividends on or declare or make any other
distribution, direct or indirect, (other than a dividend payable
solely in
shares of Common Stock) on account of the Junior Stock or set apart any sum for
any such purpose;
(e) Effect any sale, lease, assignment, transfer or other conveyance
of all or substantially all of the assets of the Corporation or any of its
Subsidiaries, or any consolidation or merger involving the Corporation or any of
its Subsidiaries, or any reclassification or other change of any stock, or any
recapitalization, or any dissolution, liquidation, or winding up of the
Corporation or, unless the obligations of the Corporation under an agreement are
expressly conditioned upon the requisite approval of the Holders of a Majority
of the Series A Preferred Stock as provided for herein, make any agreement or
become obligated to do so; provided, however, that this Section 8(e) shall not
require approval of the transaction by the Holders of a Majority of the Series A
Preferred Stock if as a result of such transaction the holders of the Series A
Preferred Stock and the holders of the Junior Stock collectively receive, in
exchange for the capital stock of the Corporation and in accordance with either
Section 3 or 4 hereof, in such transaction cash or fully marketable securities,
or both, having a fair market value on the date of receipt by all such holders
of at least the Minimum Value (as hereinafter defined), with fair market value
determined in accordance with the procedure specified in Section 4(c), for this
purpose "Minimum Value" shall mean $300 million, which amount shall be increased
by 10% per annum (compounded annually) on each anniversary of the first issuance
of Series A Preferred Stock;
(f) Effect any sale, transfer, assignment, license or sublicense of
any of the Corporation's software or systems that are used or developed by the
Corporation and are material to the conduct of its business;
(g) Permit any Subsidiary to issue or sell, or obligate itself to
issue or sell, except to the Corporation or any wholly-owned Subsidiary, any
stock or other equity Securities of such Subsidiary;
(h) Increase of decrease (other than by redemption or conversion)
the total number of authorized shares of Series A Preferred Stock;
(i) Amend its Articles of Incorporation or amend or repeal it bylaws.
Annex A-20
<PAGE>
(j) Take any action which would result in taxation of the holders of
Series A Preferred Stock under Section 305 of the Internal Revenue Code of 1986
(or any comparable provision for the Internal Revenue Code as hereafter from
time to time amended).
Section 9. No Reissuance of Series A Preferred Stock. No share or shares
of Series A Preferred Stock acquired by the Corporation by reason of redemption,
purchase, conversion or otherwise shall be reissued, and all such shares shall
be canceled, retired and eliminated from the shares which the Corporation shall
be authorized to issue.
Annex A-21
<PAGE>
ARTICLES OF MERGER
for the Merger of
VALUE AMERICA, INC., a Nevada Corporation
into
VALUE AMERICA, INC., a Virginia Corporation
1. The Plan and Agreement of merger ("Plan of Merger") is attached hereto
as Exhibit A.
2. The sole shareholder of Value America, Inc., a Virginia corporation,
adopted the Plan by written consent effective October 21, 1997.
3. The shareholders of Value America, Inc., a Nevada corporation, adopted
the Plan by unanimous written consent effective October 21, 1997.
Effective Date: October 23, 1997
VALUE AMERICA, INC.
(a Virginia Corporation)
By: /s/ Rex Scatena
--------------------
Rex Scatena, President
Date: 10-21-97
--------------------
ATTEST:
By: /s/ Rex Scatena
- ---------------------
Rex Scatena, Secretary
Date: 10-21-97
- ---------------------
<PAGE>
EXHIBIT A
AGREEMENT AND PLAN OF ARTICLES OF MERGER
of
VALUE AMERICA, INC.
(a Nevada Corporation)
with and into
VALUE AMERICA, INC.
(a Virginia Corporation)
This Agreement and Plan of Articles of Merger (the "Plan") is made and
entered into as of October 21, 1997 between Value America, Inc., a Nevada
corporation ("Value America (Nevada)"), and Value America, Inc., a Virginia
corporation (the "Corporation"), with reference to the following recitations.
The address of each of Value America (Nevada) and the Corporation is 1650
State Farm Boulevard, Charlottesville, Virginia 22911.
A. The Corporation is a corporation duly organized, validly existing and in
good standing under the laws of the Commonwealth of Virginia. As of the date
hereof, the authorized capital stock of the Corporation consists of 50,000,000
shares of common stock (the "Virginia Corporation Common Stock"), without par
value, 100 of which shares are issued and outstanding, and 5,000,000 shares of
preferred stock (the "Virginia Corporation Preferred Stock"), without par value,
none of which shares are issued and outstanding.
B. Value America (Nevada) is a corporation organized and validly existing
under the laws of the State of Nevada, with authorized capital stock of
7,500,000 shares (the "Nevada Corporation Common Stock"), $.01 par value,
7,500,000 of which shares are issued and outstanding.
C. The board of directors and shareholders of the Corporation have adopted
resolutions by unanimous written consent authorizing the proposed merger (the
"Merger") of Value America (Nevada) with and into the Corporation upon the terms
and conditions hereinafter set forth in accordance with the Virginia Stock
Corporation Act.
D. The board of directors and shareholders of Value America (Nevada) have
adopted resolutions by unanimous written consent approving the Merger upon the
terms and conditions hereinafter set forth in accordance with Title 7 of the
Nevada Revised Statutes.
E. The Merger is intended to qualify as a reorganization under Sections
368(a)(1)(A) and 368 (a)(1)(F) of the Internal Revenue Code of 1986, as amended.
F. The Corporation and Value America (Nevada) are hereinafter sometimes
referred to collectively as the "Constituent Corporations."
NOW, THEREFORE, in consideration of the matters recited above and the
covenants, conditions and agreements contained herein and intending to be
legally bound hereby, the parties hereto agree as follows.
<PAGE>
1. Merger. The Constituent Corporations shall effect the Merger on the
terms and conditions set forth in this Plan.
a. Effect. At the Effective Time, as defined in subsection (b), Value
America (Nevada) shall be merged with and into the Corporation, and the separate
existence of Value America (Nevada), except insofar as it may be continued by
statute or Section 7, shall cease, all with the effect provided in Section
92A.190 of the Nevada Revised Statutes and Section 13.1-721 of the Virginia
Stock Corporation Act. From and after the Effective Time, the Corporation shall
be, and is sometimes hereinafter referred to as, the "Surviving Corporation."
b. Effectiveness. Subject to the terms and conditions herein provided,
an appropriate Articles of Merger under the Nevada Revised Statutes and Articles
of Merger under the Virginia Stock Corporation Act shall be executed by the
Constituent Corporations to be effective as of October 23, 1997. On October 23,
1997, Articles of Merger shall be filed with the Secretary of State of the State
of Nevada, and Articles of merger shall be filed with the State Corporation
Commission of Virginia (the "Commission") and the Merger shall become effective
upon the date and at the time the Certificate of Merger is issued by the
Commission (which date and time are hereinafter referred to as the "Effective
Time").
2. Conversion of Shares; Stock Incentive Plan. At the Effective Time, the
manner and basis of converting shares of the Constituent Corporations will be as
follows: every share of the Nevada Corporation Common Stock issued and
outstanding at the Effective Time shall at the Effective Time be exchanged for
and converted into and become without further action by the holder thereof 1
share of the Virginia Corporation Common Stock, and from and after the Effective
Time shall represent 1 share of the common stock, without par value, of the
Surviving Corporation. Pursuant to Section 19 of the Value America, Inc. 1997
Stock Incentive Plan established by Value America (Nevada) as of August 1, 1997
(the "Stock Incentive Plan"), the Stock Incentive Plan shall become the stock
incentive plan of the Surviving Corporation as of the Effective Time. Every
right of a participant in the Stock Incentive Plan to purchase a share of the
Nevada Corporation Common Stock shall become, as of the Effective Time, a right
to purchase a share of the Virginia Corporation Common Stock under the same
terms and conditions and at the same price provided in the Stock Incentive Plan.
All terms and conditions of the Stock Incentive Plan (including without
limitation the reservation for issuance pursuant to Section 4 of the Stock
Incentive Plan of 1,250,000 shares of common stock) shall be binding upon the
Surviving Corporation and shall apply to the Virginia Corporation Common Stock,
and all obligations under the Stock Incentive Plan (including without limitation
all outstanding options for the purchase of common stock) shall be assumed by
the Surviving Corporation, as of the Effective Time.
3. Articles of Incorporation. From and after the Effective Time, the
Articles of Incorporation of the Corporation, as in effect immediately prior to
the Effective Time, shall be the Articles of Incorporation of the Surviving
Corporation until duly amended in accordance with law, and the Surviving
Corporation shall continue to be a corporation organized and governed by the
laws of the Commonwealth of Virginia.
<PAGE>
4. Bylaws. The Bylaws of the Corporation, as in effect immediately prior to
the Effective Time, shall be the Bylaws of the Surviving Corporation until duly
amended in accordance with law.
5. Certain Agreements. As of the Effective Time, the Surviving Corporation
shall assume all obligations under, and the Surviving Corporation shall be bound
by the terms and conditions of, each of the following agreements: any and all
agreements titled "Employment Agreement" to which Value America (Nevada) was a
party immediately prior to the Effective Time; any and all agreements titled
"Incentive Stock Option Agreement" to which Value America (Nevada) was a party
immediately prior to the Effective Time; and any and all agreements titled
"Developments, Noncompete and Nondisclosure Agreement" to which Value America
(Nevada) was a party immediately prior to the Effective Time.
6. Directors and Officers. The directors and officers of the Corporation
immediately prior to the Effective Time shall be the directors and officers of
the Surviving Corporation until their successors have been duly elected and
qualified, or until their earlier death, resignation or removal.
7. Termination. This Plan may be terminated at any time at or before the
Effective time by agreement of the boards of directors of the Constituent
Corporations.
8. Further Assurances. If at any time the Surviving Corporation shall
consider or be advised that any further assignments of assurances of any other
acts are necessary or desirable to carry out the purposes of this Plan, Value
America (Nevada) and its proper officers and directors shall be deemed to have
granted to the Surviving Corporation an irrevocable power of attorney to execute
and deliver all such proper deeds, assignments and assurances and to do all acts
necessary or proper to carry out the purposes of this Plan; and the proper
officers and directors of the Surviving Corporation are fully authorized in the
name of Value America (Nevada).
9. Interpretation. The headings herein are for convenience of reference
only, do not constitute a part of this Plan, and shall not be deemed to limit or
affect any of the provisions hereof. Words used herein, regardless of the number
specifically used, shall be deemed to include any other number, singular or
plural, as the context may require.
IN WITNESS WHEREOF, the undersigned have executed this Plan as of the date
first above written.
VALUE AMERICA, INC.
(a Virginia corporation)
Attest:
By:/s/ Rex Scatena By:/s/ Rex Scatena
- ------------------- --------------------
Secretary Its: President
Date: 10-21-97 Date: 10-21-97
- ------------------- -------------------
VALUE AMERICA, INC.
(a Nevada corporation)
Attest:
By:/s/ Rex Scatena By:/s/ Rex Scatena
- --------------------- --------------------
Secretary Its: President
Date: 10-21-97 Date: 10-21-97
- --------------------- --------------------
<PAGE>
ARTICLES OF INCORPORATION
OF
VALUE AMERICA, INC.
I.
The name of the corporation is Value America, Inc.
II.
The purpose for which the Corporation is formed is to transact any or all
lawful business, not required to be specifically stated in these Articles, for
which corporations may be incorporated under the Virginia Stock Corporation Act,
as amended from time to time.
III.
1. The number of shares of common stock which the Corporation shall have
authority to issue shall be 50,000,000 shares, without par value.
Dividends may be paid upon the Common Stock out of any assets of the
Corporation available for dividends remaining after full dividends on the
outstanding Preferred Stock at the dividend rate or rates therefor, together
with the full additional amount required by any participation right, with
respect to all past dividend periods and the current dividend period shall have
been paid or declared and set apart for payment and all mandatory sinking funds
payment that shall have become due in respect of any series of the Preferred
Stock shall have been made.
In the event of any liquidation, dissolution or winding up of the
Corporation, the Board of Directors may, after satisfaction of the rights of the
holders of all shares of Preferred Stock, or the deposit in trust of money
adequate for such satisfaction, distribute in kind to the holders of the Common
Stock all then remaining assets of the Corporation or may sell, transfer or
otherwise dispose of all or any of such remaining assets of the Corporation and
receive payment therefor wholly or partly in cash and/or in stock and/or in
obligations and may sell all or part of the consideration received therefor and
distribute all or the balance thereof in kind to the holders of the Common
Stock.
The holders of the Common Stock shall, to the exclusion of the holders of
the Preferred Stock, have the sole and full power to vote for the election of
directors and for all other purposes without limitation except (i) as otherwise
recited or provided in these Articles of Incorporation applicable to the
Preferred Stock, (ii) with respect to a class or series of Preferred Stock, as
shall be determined by the Board of Directors pursuant to Section 2(b) of this
Article III and (iii) with respect to any voting rights provided by law.
Subject to the provisions of these Articles of Incorporation applicable to
the Preferred Stock, the Corporation may from time to time purchase or otherwise
acquire for a consideration or redeem (if permitted by the terms thereof) shares
of Common Stock or shares of any other class of stock hereafter created ranking
junior to the Preferred Stock in respect of dividends or assets and any shares
so purchased, acquired or redeemed may be held or disposed of by the Corporation
from time to time for its corporate purposes or may be retired as provided by
law.
2. The number of shares of Preferred Stock which the Corporation shall have
the authority to issue shall be 5,000,000 shares, without par value.
The Board of Directors is hereby empowered to cause any class of the
Preferred Stock of the Corporation to be issued in series with such of the
variations permitted by clauses (a)-(k) below, as shall be determined by the
Board of Directors.
The shares of Preferred Stock of different classes or series may vary as
to:
a. the designation of such class or series, the number of shares to
constitute such class or series and the stated value thereof;
b. whether the shares of such class or series shall have voting rights
in addition to any voting rights provided by law, and if so, the terms of
such voting rights, which (i) may be general or limited, and (ii) may
permit more than one vote per share;
c. the rate or rates (which may be fixed or variable) at which
dividends, if any, are payable on such class or series, whether any such
dividends shall be cumulative, and if so, from what dates, the conditions
and dates upon which such dividends shall be payable, the preference or
relation which such dividends shall bear to the dividends payable on any
shares of stock of any other class or any other series of such class;
d. whether the shares of such class or series shall be subject to
redemption by the Corporation, and if so, the times, prices and other
conditions of such redemption;
e. the amount or amounts payable upon shares of such class or series
upon, and the rights of the holders of such class or series in, the
voluntary or involuntary liquidation, dissolution or winding up, or any
distribution of the assets of, the Corporation;
f. whether the shares of such class or series shall be subject to the
operation of a retirement or sinking fund, and if so, the extent to and
manner in which any such retirement or sinking fund shall be applied to the
purchase or redemption of the shares of such series for retirement or other
corporate purposes and the terms and provisions relative to the operation
thereof;
g. whether the shares of such series shall be convertible into, or
exchangeable for, shares of stock of any other class or any other series of
such class or any other securities (including Common Stock) and, if so, the
price or prices or the rate or rates of conversion or exchange and the
method, if any, of adjusting the same, and any other terms and conditions
of conversion or exchange;
h. the limitations and restrictions, if any, to be effective while any
shares of such class or series are outstanding upon the payment of
dividends or the making of other distributions on, and upon the purchase,
redemption or other acquisition by the Corporation of, the Common Stock or
shares of stock of any other class or any other series of such class;
i. the conditions or restrictions, if any, upon the creation of
indebtedness of the Corporation or upon the issue of any additional stock,
including additional shares of such class or series or of any other series
of such class or of any other class;
j. the ranking (be it pari passu, junior or senior) of each class or
series as to the payment of dividends, the distribution of assets and all
other matters; and
k. any other powers, preferences and relative, participating, optional
and other special rights, and any qualifications, limitations and
restrictions thereof, insofar as they are not inconsistent with the
provisions of these Articles of Incorporation, to the full extent permitted
in accordance with the laws of the Commonwealth of Virginia.
In the event of any liquidation, dissolution or winding up of the
Corporation, after there shall have been paid to or set aside for the holders of
the Preferred Stock the full preferential amounts to which they are respectively
entitled under the provisions of these Articles of Incorporation applicable to
the Preferred Stock, the holders of the Preferred Stock shall have no claim to
any of the remaining assets of the Corporation.
The powers, preferences and relative, participating, option and other
special rights of each class or series of Preferred Stock and the
qualifications, limitations or restrictions thereof, if any, may differ from
those of any and all other classes and series at any time outstanding. All
shares of Preferred Stock of each series shall be equal in all respects.
3. Notwithstanding the foregoing, if one or more series of the Preferred
Stock shall be subject to (i) redemption or (ii) repurchase by the Corporation
at the option of the holders thereof, as provided in the terms thereof, the
following provisions shall apply:
a. If (i) less than all the outstanding shares of one or more series
are to be redeemed or (ii) the Corporation is unable to purchase all the
shares of one or more series that it is required to offer to repurchase and
which the holders thereof desire the Corporation to repurchase, the shares
to be redeemed or repurchased shall be selected prorata in such manner as
may be prescribed by resolution of the Board of Directors, or in such other
manner, if any, as shall be specified elsewhere in the Articles of
Incorporation.
b. Notice to the holders of the shares to be redeemed or repurchased
shall be given by mailing to such holders a notice of such redemption or
offer to repurchase, first class, postage prepaid, not later than the
thirtieth day, and not earlier than the sixtieth day, before the date fixed
for redemption or repurchase, at their last addresses as they shall appear
upon the books of the Corporation. Any notice which is mailed in such
manner shall be conclusively presumed to have been duly given, whether or
not the stockholder receives such notice; and failure duly to give such
notice by mail, or any defect in such notice, to the holders of any stock
designated for redemption or repurchase shall not affect the validity of
the proceedings for the redemption or repurchase of any other shares.
c. The notice of redemption or offer to repurchase to each stockholder
whose shares are to be redeemed or which the Corporation is required to
offer to repurchase shall specify the number and designation of the shares
of such stockholder to be redeemed or repurchased, the date fixed for
redemption or repurchase, the redemption or repurchase price, and where
payment of the redemption or repurchase price is to be made upon surrender
of certificates for such shares; and shall state the date to which accrued
dividends, if any, will be paid and that from and after said date dividends
thereon will cease to accrue. In the event any of such shares have
conversion rights, the notice shall also state the conversion rate then in
effect and the date on which the conversion rights shall cease and
terminate.
d. In the case of each share called for redemption, or which the
Corporation offers to repurchase and the holder thereof desires the
Corporation to repurchase, the Corporation shall be obligated (unless such
share has conversion rights and shall be converted on or prior to the
redemption or repurchase date), to pay to the holder thereof the redemption
or repurchase price (including accrued dividends, if any, to the extent and
if so provided for such shares) upon surrender of the certificate for such
share at the office of the Corporation or any transfer agent for the
series, specified for that purpose on or after the redemption or repurchase
date. Unless the Corporation shall default in the payment of the redemption
or repurchase price plus accrued dividends, if any, dividends on each share
so called for redemption, or which the Corporation offers to repurchase and
the holder thereof desires the Corporation to repurchase, shall cease to
accrue from and after the redemption or repurchase date or such earlier
date as shall be specified in the terms thereof.
4. In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Corporation, if the assets of the Corporation available for
distribution to its stockholders shall be insufficient to pay in full all
amounts to which the holders of Preferred Stock and any other stock of any class
ranking on a parity as to liquidation preference are entitled, the amount
available for distribution to stockholders shall be shared by the holders of all
such classes and any series thereof prorata according to the preferential
amounts to which the shares of each such series or class are entitled. For the
purposes of this Section 4, a consolidation or merger of the Corporation with
any other corporation, or the sale, transfer or lease of all or substantially
all its assets shall not constitute or be deemed a liquidation, dissolution, or
winding up of the Corporation.
5. Any and all shares of Preferred Stock and Common Stock of the
Corporation, at the time authorized but not issued and outstanding, may be
issued and disposed of by the Board of Directors of the Corporation in any
lawful manner, consistently, in the case of shares of Preferred Stock, with the
requirements set forth in the provisions of these Articles of Incorporation
applicable to the Preferred Stock, at any time and from time to time, for such
considerations as may be fixed by the Board of Directors of the Corporation.
6. No holder of shares of any class of stock of the Corporation shall have
any preemptive or preferential right to purchase or subscribe to (i) any shares
of any class of the Corporation, whether now or hereafter authorized; (ii) any
warrants, rights, or options to purchase any such shares; or (iii) any
securities or obligations convertible into any such shares or into warrants,
rights or options to purchase any such shares.
7. Any class of stock of the Corporation shall be deemed to rank --
a. prior to another class either as to dividends or upon liquidation,
if the holders of such class shall be entitled to the receipt of dividends
or of amounts distributable on liquidation, dissolution or winding up, as
the case may be, in preference or priority to holders of such other class;
b. on a parity with another class either as to dividends or upon
liquidation, whether or not the dividend rates, dividend payment dates, or
redemption or liquidation prices per share thereof are different from those
of such others, if the holders of such class of stock shall be entitled to
receipt of dividends or amounts distributable upon liquidation, dissolution
or winding up, as the case may be, in proportion to their respective
dividend rates or prices, without preference or priority one over the other
with respect to the holders of such other class; and
c. junior to another class either as to dividends or upon liquidation,
if the rights of the holders of such class shall be subject or subordinate
to the rights of the holders of such other class in respect of the receipt
of dividends or of amounts distributable upon liquidation, dissolution or
winding up, as the case may be.
IV.
The initial registered office shall be located at 707 East Main Street,
11th Floor, in the City of Richmond, Virginia 23219, and the initial registered
agent shall be Gary D. LeClair, who is a resident of Virginia and a member of
the Virginia State Bar, and whose business address is the same as the address of
the initial registered office.
<PAGE>
V.
The number of directors constituting the initial Board of Directors shall
be 2, and the names and addresses of the persons who are to serve as the initial
directors are as follows:
Craig A. Winn 1650 State Farm Blvd.
Charlottesville, Virginia 22911
Rex Scatena 1650 State Farm Blvd.
Charlottesville, Virginia 22911
VI.
1. In this Article:
"applicant" means the person seeking indemnification pursuant to this
Article.
"expenses" includes counsel fees.
"liability" means the obligation to pay a judgment, settlement,
penalty, fine, including any excise tax assessed with respect to an
employee benefit plan, or reasonable expenses incurred with respect to a
proceeding.
"party" includes an individual who was, is or is threatened to be made
a named defendant or respondent in a proceeding.
"proceeding" means any threatened, pending, or completed action, suit
or proceeding, whether civil, criminal, administrative or investigative and
whether formal or informal.
2. In any proceeding brought by or in the right of the Corporation or
brought by or on behalf of shareholders of the Corporation, no director or
officer of the Corporation shall be liable to the Corporation or its
shareholders for monetary damages with respect to any transaction, occurrence or
course of conduct, whether before or after the effective date of this Article,
except for liability resulting from that person's having engaged in willful
misconduct or a knowing violation of the criminal law or any federal or state
securities law.
3. The Corporation shall indemnify (i) any person who was or is a party to
any proceeding, including a proceeding brought by a shareholder in the right of
the Corporation or brought by or on behalf of shareholders of the Corporation,
by reason of the fact that the person is or was a director or officer of the
Corporation, or (ii) any director or officer who is or was serving at the
request of the Corporation as a director, trustee, partner or officer of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise, against any liability incurred by that person in connection with the
proceeding unless that person engaged in willful misconduct or a knowing
violation of the criminal law. A person whose duties to the Corporation also
impose duties on, or otherwise involve services by, that person to an employee
benefit plan or to participants in or beneficiaries of the plan is considered to
be serving the plan at the Corporation's request. The Board of Directors is
hereby empowered, by a majority vote of a quorum of disinterested directors, to
enter into a contract to indemnify any director or officer in respect of any
proceedings arising from any act or omission, whether occurring before or after
the execution of the contract.
4. No amendment or repeal of this Article shall affect the rights provided
under this Article with respect to any act or omission occurring before the
amendment or repeal. The Corporation shall promptly take all such actions, and
make all such determinations, as shall be necessary or appropriate to comply
with its obligation to make any indemnity under this Article and shall promptly
pay or reimburse all reasonable expenses, including attorneys' fees, incurred by
any such director, officer, employee or agent in connection with such actions
and determinations or proceedings of any kind arising therefrom.
5. The termination of any proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not of
itself create a presumption that the applicant did not meet the standard of
conduct described in Section (2) or (3) of this Article.
6. Any indemnification under Section (3) of this Article (unless ordered by
a court) shall be made by the Corporation only as authorized in the specific
case upon a determination that indemnification is proper in the circumstances
because the applicant has met the standard of conduct set forth in Section (3).
The determination shall be made:
a. By the Board of Directors by a majority vote of a quorum consisting
of directors not at the time parties to the proceeding;
b. If a quorum cannot be obtained under subsection (a) of this
Section, by majority vote of a committee duly designated by the Board of
Directors (in which designation directors who are parties may participate),
consisting solely of two or more directors not at the time parties to the
proceeding;
c. By special legal counsel:
(1) Selected by the Board of Directors or its committee in the
manner prescribed in subsection (a) or (b) of this section; or
(2) If a quorum of the Board of Directors cannot be obtained
under subsection (a) of this section and a committee cannot be
designated under subsection (b) of this section, selected by majority
vote of the full Board of Directors, in which selection directors who
are parties may participate; or
d. By the shareholders, but shares owned by or voted under the control
of directors who are at the time parties to the proceeding may not be voted
on the determination.
Any evaluation as to reasonableness of expenses shall be made in the same
manner as the determination that indemnification is appropriate, except that if
the determination is made by special legal counsel, such evaluation as to
reasonableness of expenses shall be made by those entitled under subsection (c)
of this Section 6 to select counsel.
Notwithstanding the foregoing, if the composition of a majority of the
Board of Directors has changed after the date of the alleged act or omission
with respect to which indemnification is claimed, any determination with respect
to any claim for indemnification or advancement of expenses made pursuant to
this Article shall be made by special legal counsel agreed upon by the Board of
Directors and applicant. If the Board of Directors and the applicant are unable
to agree upon such special legal counsel, the Board of Directors and the
applicant each shall select a nominee, and the nominees shall select such
special legal counsel.
7. a. The Corporation shall pay for or reimburse the reasonable expenses
incurred by any applicant who is a party to a proceeding in advance of final
disposition of the proceeding or the making of any determination under Section
(3) if the applicant furnishes the Corporation:
(1) a written statement of the applicant's good faith belief that
he or she has met the standard of conduct described in Section (3);
and
(2) a written undertaking, executed personally or on the
applicant's behalf, to repay the advance if it is ultimately
determined that the applicant did not meet such standard of conduct.
b. The undertaking required by paragraph (2) of subsection (a) of this
Section shall be an unlimited general obligation of the applicant but need
not be secured and may be accepted without reference to financial ability
to make repayment.
c. Authorizations of payments under this Section shall be made by the
persons specified in Section 6.
8. The Board of Directors is hereby empowered, by majority vote of a quorum
consisting of disinterested directors, to cause the Corporation to indemnify or
contract to indemnify any person not specified in Section (2) or (3) of this
Article who was, is or may become a party to any proceeding, by reason of the
fact that the person is or was an employee or agent of the Corporation, is or
was serving at the request of the Corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise, to the same extent as if that person were
specified as one to whom indemnification is granted in Section (3). The
provisions of Sections (4) through (7) of this Article shall be applicable to
any indemnification provided hereafter pursuant to this Section (8).
9. The Corporation may purchase and maintain insurance to indemnify it
against the whole or any portion of the liability assumed by it accordance with
this Article and may also procure insurance, in such amounts as the Board of
Directors may determine, on behalf of any person who is or was a director,
officer, employee or agent of the Corporation, or is or was serving at the
request of the Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise, against any liability asserted against or incurred in any such
capacity or arising from the person's status as such, whether or not the
Corporation would have power to indemnify that person against such liability
under the provisions of this Article.
10. Every reference herein to directors, officers, employees or agents
shall include former directors, officers, employees and agents and their
respective heirs, executors and administrators. The indemnification hereby
provided and provided hereafter pursuant to the power hereby conferred by this
Article on the Board of Directors shall not be exclusive of any other rights to
which any other person may be entitled, including any right under policies of
insurance that may be purchased and maintained by the Corporation or others,
with respect to claims, issues or matters in relation to which the Corporation
would not have the power to indemnify that person under the provisions of this
Article. Such rights shall not prevent or restrict the power of the Corporation
to make or provide for any future indemnity, or provisions for determining
entitlement to indemnity, pursuant to one or more indemnification agreements,
bylaws, or other arrangements (including, without limitation, creation of trust
funds or security interests funded by letters of credit or other means) approved
by the Board of Directors (whether or not any of the directors of the
Corporation shall be a party to or beneficiary of any such agreements, bylaws or
arrangements); provided, however, that any provision of such agreements, bylaws
or other arrangements shall not be effective if and to the extent that it is
determined to be contrary to this Article or applicable laws of the Commonwealth
of Virginia.
11. Each provision of this Article shall be severable, and an adverse
determination as to any such provision shall in no way affect the validity of
any other provision.
VII.
Unless these Articles of Incorporation provide otherwise or the Board of
Directors conditions its submission of a particular matter on receipt of a
greater vote or on any other basis permitted by applicable law, the vote of the
holders of a majority of the outstanding shares of any series or class of stock
voting as such series or class, or any series(es) and/or class(es) of stock
voting together as a voting group, entitled to vote on the following matters
required by applicable law to be submitted to such series(es), class(es) or
voting group shall be required and sufficient for the adoption or approval
thereof by such series(es), class(es) or voting group: (i) any amendment or
restatement of the Articles of Incorporation of the Corporation, (ii) a plan of
merger, (iii) a plan of share exchange, (iv) the sale, lease or exchange or
other disposition of all or substantially all of the property of the Corporation
other than in the usual and regular course of business, or (v) a proposal to
dissolve the Corporation. The foregoing provisions of this Article VII shall not
be construed to alter or modify in any respect the voting requirements
prescribed by the Virginia Stock Corporation Act which would in the absence of
such provisions be applicable to the approval of any affiliated transaction (as
defined in said Act) or any amendment of the Articles of Incorporation relating
to the vote required for such approval.
VIII.
Except as otherwise provided in the bylaws, the Board of Directors shall
have the power to make, amend or repeal bylaws of the Corporation.
IX.
Except as otherwise expressly provided herein, the creation or the issuance
to directors, officers or employees of the Corporation or any subsidiary of the
Corporation of rights, options or warrants for the purchase of Common Stock of
the Corporation, where such rights, options or warrants are not issued or to be
issued to shareholders of the Corporation generally, shall not require approval
by the shareholders of the Corporation.
Dated: October 21, 1997
/s/ Andrew W. White
----------------------------------
Incorporator
AMENDED AND RESTATED
BYLAWS
OF
VALUE AMERICA, INC.
ARTICLE I: MEETINGS OF SHAREHOLDERS
1.1 PLACE OF MEETINGS. All meetings of the shareholders shall be held
at such place, either within or without the Commonwealth of Virginia, as from
time to time may be fixed by the Board of Directors.
1.2 ANNUAL MEETINGS. The annual meeting of the shareholders, for the
election of Directors and transaction of such other business as may come before
the meeting, shall be held in each year on the second Monday in March, at 10:00
a.m., or on such other day as the Board of Directors shall determine if such
other day is not a legal holiday. If that day is a legal holiday, the annual
meeting shall be held on the next succeeding day not a legal holiday.
1.3 SPECIAL MEETINGS. A special meeting of the shareholders for any
purpose or purposes may be called at any time by the Chairman of the Board, the
President, or by a majority of the Board of Directors, and by no other person.
At a special meeting no business shall be transacted and no corporate action
shall be taken other than that stated in the notice of the meeting, except as
otherwise determined by the Board of Directors or the chairman of the meeting.
1.4 NOTICE OF MEETINGS. Written or printed notice stating the place,
day and hour of every meeting of the shareholders and, in case of a special
meeting, the purpose or purposes of which the meeting is called, shall be mailed
not less than 10 nor more than 60 days before the date of the meeting to each
shareholder of record entitled to vote at such meeting, at his address which
appears in the stock transfer books of the Corporation. Such further notice
shall be given as may be required by law, but such meetings may be held without
notice if all the shareholders entitled to vote at the meeting are present in
person or by proxy or if notice is waived in writing by those not present,
either before or after the meeting.
1.5. ADJOURNMENTS. Any annual or special meeting of stockholders may be
adjourned from time to time to reconvene at the same or some other place, and
notice need not be given of any such adjourned meeting if the date, time and
place thereof are announced at the meeting at which the adjournment is taken. At
the adjourned meeting, any business may be transacted which might have been
transacted at the original meeting. If the adjournment is for more than 120
days, or if after the adjournment a new record date is fixed for the adjourned
meeting, a notice of the adjourned meeting shall be given to each stockholder of
record entitled to vote at the adjourned meeting in accordance with Section 1.4.
1.6 QUORUM. Except as otherwise required by the Corporation's Articles
of Incorporation, as may be amended from time to time, any number of
shareholders together holding at least a majority of the outstanding shares of
capital stock entitled to vote with respect to the business to be transacted,
who shall be present in person or represented by proxy at any meeting duly
called, shall constitute a quorum of the transaction of business. If less than a
quorum shall be in attendance at the time for which a meeting shall have been
called, the meeting may be adjourned from time to time by a majority vote of the
shareholders present or represented by proxy without notice other than by
announcement at the meeting.
1.7 ORGANIZATION. Meetings of stockholders shall be presided over by
the Chairman of the Board, if any, or if there is none or in his or her absence,
by the President, or in his or her absence, by a chairman designated by the
Board of Directors, or in the absence of such designation by a chairman chosen
at the meeting. The Secretary shall act as secretary of the meeting, but in his
or her absence the chairman of the meeting may appoint any person to act as
secretary of the meeting.
1.8 VOTING.
(a) Except as otherwise required by the Corporation's Articles of
Incorporation, as may be amended from time to time, each stockholder entitled to
vote at any meeting of stockholders shall be entitled to one vote for each share
of capital stock held by such stockholder which has voting power on the matter
in question.
(b) Voting at meetings of stockholders need not be by written ballot
and need not be conducted by inspectors of election unless so required by
Section 1.10 of these Bylaws or so determined by the holders of capital stock
having a majority of the votes which could be cast by the holders of all
outstanding capital stock entitled to vote which are present in person or by
proxy at such meeting. Except as otherwise required by the Corporation's
Articles of Incorporation, as may be amended from time to time, directors shall
be elected by a plurality of the votes cast in the election of directors. Each
other question shall, unless otherwise provided by law, the Articles of
Incorporation or these Bylaws, as such may be amended or restated from time to
time, be decided by the vote of the holders of stock having a majority of the
votes which could be cast by the holders of all stock entitled to vote on such
question which are present in person or by proxy at the meeting.
(c) Stock of the Corporation standing in the name of another
corporation and entitled to vote may be voted by such officer, agent or proxy as
the bylaws or other internal regulations of such other corporation may prescribe
or, in the absence of such provision, as the board of directors or comparable
body of such other corporation may determine.
(d) Stock of the Corporation standing in the name of a deceased person,
a minor, an incompetent or a debtor in a case under Title 11, United States
Code, and entitled to vote may be voted by an administrator, executor, guardian,
conservator, debtor-in-possession or trustee, as the case may be, either in
person or by proxy, without transfer of such shares into the name of the
official or other person so voting.
(e) A stockholder whose voting stock of the Corporation is pledged
shall be entitled to vote such stock unless on the transfer records of the
Corporation the pledgor has expressly empowered the pledgee to vote such shares,
in which case only the pledgee, or such pledgee's proxy, may represent such
shares and vote thereon.
(f) If voting stock is held of record in the names of two or more
persons, whether fiduciaries, members of a partnership, joint tenants, tenants
in common, tenants by the entirety or otherwise, or if two or more persons have
the same fiduciary relationship respecting the same shares, unless the Secretary
is given written notice to the contrary and is furnished with a copy of the
instrument or order appointing them or creating the relationship wherein it is
so provided, their acts with respect to voting shall have the following effect:
(i) if only one votes, such act binds all; (ii) if more than one vote, the act
of the majority so voting binds all; and (iii) if more than one votes, but the
vote is evenly split on any particular matter each faction may vote such stock
proportionally, or any person voting the shares, or a beneficiary, if any, may
apply to a court in the Commonwealth of Virginia as may have jurisdiction to
appoint an additional person to act with the persons so voting the stock, which
shall then be voted as determined by a majority of such persons and the person
appointed by such court. If the instrument so filed shows that any such tenancy
is held in unequal interests, a majority or even split for the purpose of this
subsection shall be a majority or even split in interest.
1.9 PROXIES.
(a) Each stockholder entitled to vote at a meeting of stockholders may
authorize another person or persons to act for such stockholder by proxy filed
with the Secretary before or at the time of the meeting. No such proxy shall be
voted or acted upon after 11 months from its date, unless the proxy provides for
a longer period. A duly executed proxy shall be irrevocable if it states that it
is irrevocable and if, and only as long as, it is coupled with an interest
sufficient in law to support an irrevocable power. A stockholder may revoke any
proxy which is not irrevocable by attending the meeting and voting in person or
by filing with the Secretary an instrument in writing revoking the proxy or
another duly executed proxy bearing a later date.
(b) A stockholder may authorize another person or persons to act for
such stockholder as proxy (i) by executing a writing authorizing such person or
persons to act as such, which execution may be accomplished by such stockholder
or such stockholder's authorized officer, director, partner, employee or agent
(or, if the stock is held in a trust or estate, by a trustee, executor or
administrator thereof) signing such writing or causing his or her signature to
be affixed to such writing by any reasonable means, including, but not limited
to, facsimile signature, or (ii) by transmitting or authorizing the transmission
of a telegram, cablegram or other means of electronic transmission (a
"Transmission") to the person who will be the holder of the proxy or to a proxy
solicitation firm, proxy support service organization or like agent duly
authorized by the person who will be the holder of the proxy to receive such
Transmission; provided that any such Transmission must either set forth or be
submitted with information from which it can be determined that such
Transmission was authorized by such stockholder.
(c) Any inspector or inspectors appointed pursuant to Section 1.10 of
these Bylaws shall examine Transmissions to determine if they are valid. If no
inspector or inspectors are so appointed, the Secretary or such other person or
persons as shall be appointed from time to time by the Board of Directors shall
examine Transmissions to determine if they are valid. If it is determined a
Transmission is valid, the person or persons making that determination shall
specify the information upon which such person or persons relied. Any copy,
facsimile telecommunication or other reliable reproduction of such a writing or
Transmission may be substituted or used in lieu of the original writing or
Transmission for any and all purposes for which the original writing or
Transmission could be used; provided that such copy, facsimile telecommunication
or other reproduction shall be a complete reproduction of the entire original
writing or Transmission.
1.10 VOTING PROCEDURES AND INSPECTORS OF ELECTIONS.
(a) If the Corporation has a class of voting stock that is (i) listed
on a national securities exchange, (ii) authorized for quotation on an
inter-dealer quotation system of a registered national securities association or
(iii) held of record by more than 2,000 stockholders, the Board of Directors
shall, in advance of any meeting of stockholders, appoint one or more inspectors
(individually an "Inspector," and collectively the "Inspectors") to act at such
meeting and make a written report thereof. The Board of Directors may designate
one or more persons as alternate Inspectors to replace any Inspector who shall
fail to act. If no Inspector or alternate is able to act at such meeting, the
chairman of the meeting shall appoint one or more other persons to act as
Inspectors. Each Inspector, before entering upon the discharge of his or her
duties, shall take and sign an oath faithfully to execute the duties of
Inspector with strict impartiality and according to the best of his or her
ability.
(b) The Inspectors shall (i) ascertain the number of shares of stock of
the Corporation outstanding and the voting power of each, (ii) determine the
number of shares of stock of the Corporation present in person or by proxy at
such meeting and the validity of proxies and ballots, (iii) count all votes and
ballots, (iv) determine and retain for a reasonable period a record of the
disposition of any challenges made to any determination by the Inspectors and
(v) certify their determination of the number of such shares present in person
or by proxy at such meeting and their count of all votes and ballots. The
Inspectors may appoint or retain other persons or entities to assist them in the
performance of their duties.
(c) The date and time of the opening and the closing of the polls for
each matter upon which the stockholders will vote at a meeting shall be
announced at such meeting. No ballots, proxies or votes, nor any revocations
thereof or changes thereto, shall be accepted by the Inspectors after the
closing of the polls unless a court of appropriate jurisdiction within the
Commonwealth of Virginia upon application by any stockholder shall determine
otherwise.
(d) In determining the validity and counting of proxies and ballots,
the Inspectors shall be limited to an examination of the proxies, any envelopes
submitted with such proxies, any information referred to in paragraphs (b) and
(c) of Section 1.9 of these Bylaws, ballots and the regular books and records of
the Corporation, except that the Inspectors may consider other reliable
information for the limited purpose of reconciling proxies and ballots submitted
by or on behalf of banks, brokers, their nominees or similar persons which
represent more votes than the holder of a proxy is authorized by a stockholder
of record to cast or more votes than such stockholder holds of record. If the
Inspectors consider other reliable information for the limited purpose permitted
herein, the Inspectors, at the time they make their certification pursuant to
paragraph (b) of this Section 1.10, shall specify the precise information
considered by them, including the person or persons from whom such information
was obtained, when and the means by which such information was obtained and the
basis for the Inspectors' belief that such information is accurate and reliable.
1.11 FIXING DATE OF DETERMINATION OF STOCKHOLDERS OF RECORD. For the
purposes of determining shareholders entitled to notice of or to vote at any
meeting of shareholders or any adjournment thereof, or entitled to receive
payment of any dividend, or in order to make a determination of shareholders for
any other proper purpose, the Board of Directors may fix in advance a date as
the record date for any such determination of shareholders, such date in any
case to be not more than seventy days prior to the date on which the particular
action requiring such determination of shareholders is to be taken. If no record
date is fixed for the determination of shareholders entitled to notice of or to
vote at a meeting of shareholders, or shareholders entitled to receive payment
of a dividend, the date on which notices of the meeting are mailed or the date
on which the resolution of the Board of Directors declaring such dividend is
adopted, as the case may be, shall be the record date for such determination of
shareholders. When a determination of shareholders entitled to vote at any
meeting of shareholders has been made as provided in this Section, such
determination shall apply to any adjournment thereof unless the Board of
Directors fixes a new record date, which it shall do if the meeting is adjourned
to a date more than 120 days after the date fixed for the original meeting.
1.12 LIST OF STOCKHOLDERS ENTITLED TO VOTE. The Secretary shall
prepare, at least ten days before every meeting of stockholders, a complete list
of the stockholders entitled to vote at the meeting, arranged in alphabetical
order, and showing the address and the number of shares registered in the name
of each stockholder. Such list shall be open to the examination of any
stockholder, for any purpose germane to the meeting, during ordinary business
hours, for a period of at least ten days prior to the meeting, either at a place
within the city where the meeting is to be held, which place shall be specified
in the notice of meeting, or, if not so specified, at the place where the
meeting is to be held. The list shall also be produced and kept at the time and
place of the meeting during the whole time thereof and may be inspected by any
stockholder who is present. The stock ledger shall be the only evidence as to
who are the stockholders entitled to examine the stock ledger, the list of
stockholders or the books of the corporation, or to vote in person or by proxy
at any meeting of stockholders.
1.13 STOCKHOLDER PROPOSALS.
(a) At any annual meeting of the Corporation's stockholders, only such
business shall be conducted as shall have been properly brought before the
meeting. To be properly brought before an annual meeting, business must be (i)
specified in the notice of meeting (or any supplement thereto) given by or at
the direction of the Board of Directors, (ii) otherwise properly brought before
the meeting by or at the direction of the Board of Directors, or (iii) otherwise
properly brought before the meeting by a stockholder in accordance with these
Bylaws. Business may be properly brought before an annual meeting by a
stockholder only if written notice of the stockholder's intent to propose such
business has been delivered, either by personal delivery, United States mail,
first class postage prepaid, or other similar means, to the Secretary of the
Corporation not later than 90 calendar days in advance of the anniversary date
of the release of the Corporation's proxy statement to stockholders in
connection with the preceding year's annual meeting of stockholders (the
"Anniversary Date"), except that if no annual meeting was held in the previous
year or the date of the annual meeting has been changed by more than 30 calendar
days from the anniversary of the annual meeting date stated in the previous
year's proxy statement, a stockholder proposal shall be received by the
Corporation a reasonable time before the solicitation is made.
(b) Each notice of new business must set forth: (i) the name and
address of the stockholder who intends to raise the new business; (ii) the
business desired to be brought forth at the meeting and the reasons for
conducting such business at the meeting; (iii) a representation that the
stockholder is a holder of record of stock of the Corporation entitled to vote
with respect to such business and intends to appear in person or by proxy at the
meeting to move the consideration of such business; (iv) such stockholder's
total beneficial ownership of the Corporation's voting stock; and (v) such
stockholder's interest in such business. The chairman of the meeting may refuse
to acknowledge a motion to consider any business that he determines was not made
in compliance with the foregoing procedures.
(c) An adjourned meeting, if notice of the adjourned meeting is not
required to be given to stockholders, shall be regarded as a continuation of the
original meeting, and any notice of new business must have met the foregoing
requirements as of the date of the original meeting. In the event of an
adjourned meeting where notice of the adjourned meeting is required to be given
to stockholders, any notice of new business made by a stockholder with respect
to the adjourned meeting must meet the foregoing requirements based upon the
date on which notice of the date of the adjourned meeting was given.
<PAGE>
ARTICLE II: DIRECTORS
2.1 POWERS. The business and affairs of the Corporation shall be
managed by or under the direction of the Board of Directors except as otherwise
provided by the Articles of Incorporation, as such may be amended from time to
time, or required by law.
2.2 NUMBER AND TERMS. Except as otherwise required by the Corporation's
Articles of Incorporation, as may be amended from time to time, the number of
Directors of the Corporation shall be fixed by resolution duly adopted from time
to time by the Board of Directors at a number not less than six and no more than
nine.
2.3 DIRECTOR NOMINATIONS.
(a) Except as otherwise required by the Corporation's Articles of
Incorporation, as may be amended from time to time, nominations of candidates
for election as directors of the Corporation at any annual meeting may be made
only (i) by, or at the direction of, a majority of the Board of Directors or
(ii) by any holder of record (both as of the time notice of such nomination is
given by the stockholder as set forth below and as of the record date for the
annual meeting in question) of any shares of the capital stock of the
Corporation entitled to vote at such annual meeting who complies with the
timing, informational and other requirements set forth in this Section 2.3. Any
stockholder who seeks to make such a nomination or his representative must be
present in person at the annual meeting. Only persons nominated in accordance
with the procedures set forth in this Section 2.3 shall be eligible for election
as directors at an annual meeting.
(b) Nominations, other than those made by, or at the direction of, the
Board of Directors, shall be made pursuant to timely notice in writing to the
Secretary of the Corporation as set forth in this Section 2.3. Such nominations
may be properly made by a stockholder only if written notice is delivered,
either by personal delivery, United States mail, first class postage prepaid, or
other similar means, to the Secretary of the Corporation not later than 90
calendar days in advance of the Anniversary Date, except that if no annual
meeting was held in the previous year or the date of the annual meeting has been
changed by more than 30 calendar days from the anniversary of the annual meeting
date stated in the previous year's proxy statement, a stockholder nomination
shall be received by the Corporation a reasonable time before the solicitation
is made.
(c) A stockholder's notice to the Secretary shall set forth as to each
person whom the stockholder proposes to nominate for election or re-election as
a director: (i) the name, age, business address and residence address of such
person, (ii) the principal occupation or employment of such person, (iii) the
class and number of shares of the Corporation's capital stock which are
beneficially owned by such person on the date of such stockholder notice, and
(iv) the consent of each nominee to serve as a director if elected. A
stockholder's notice to the Secretary shall further set forth as to the
stockholder giving such notice: (A) the name and address, as they appear on the
Corporation's stock transfer books, of such stockholder and of the beneficial
owners (if any) of the Corporation's capital stock registered in such
stockholder's name and the name and address of other stockholders known by such
stockholder to be supporting such nominee(s), (B) the class and number of shares
of the Corporation's capital stock which are held of record, beneficially owned
or represented by proxy by such stockholder and by any other stockholders known
by such stockholder to be supporting such nominee(s) on the record date for the
annual meeting in question (if such date shall then have been made publicly
available) and on the date of such stockholder's notice, and (C) a description
of all arrangements or understandings between such stockholder and each nominee
and any other person or persons (naming such person or persons) pursuant to
which the nomination or nominations are to be made by such stockholder.
(d) If the Board of Directors or a designated committee thereof
determines that any stockholder nomination was not timely made in accordance
with the terms of this Section 2.3 or that the information provided in a
stockholder's notice does not satisfy the informational requirements of this
Section 2.3 in any material respect, then such nomination shall not be
considered at the annual meeting in question. If neither the Board of Directors
nor such committee makes a determination as to whether a nomination was made in
accordance with the provisions of this Section 2.3, the presiding officer of the
annual meeting shall determine whether a nomination was made in accordance with
such provisions. If the presiding officer determines that any stockholder
nomination was not timely made in accordance with the terms of this Section 2.3
or that the information provided in a stockholder's notice does not satisfy the
informational requirements of this Section 2.3 in any material respect, then
such nomination shall not be considered at the annual meeting in question, If
the Board of Directors, a designated committee thereof or the presiding officer
determines that a nomination was made in accordance with the terms of this
Section 2.3, the presiding officer shall so declare at the annual meeting and
ballots shall be provided for use at the meeting with respect to such nominee.
(e) In the event that the number of directors to be elected to the
Board of Directors of the Corporation is increased and there is no public
announcement by the Corporation naming all of the nominees for director or
specifying the size of the increased Board of Directors at least 75 days prior
to the Anniversary Date, a stockholder's notice required by this Section 2.3
shall also be considered timely, but only with respect to nominees for any new
positions created by such increase, if such notice shall be delivered to, or
mailed to and received by, the Corporation at its principal executive office not
later than the close of business on the 15th day following the day on which such
public announcement is first made by the Corporation.
(f) No person shall be elected by the stockholders as a Director of the
Corporation unless nominated in accordance with the procedures set forth in this
Section. Election of Directors at the annual meeting need not be by written
ballot, unless otherwise provided by the Board of Directors or presiding officer
at such annual meeting. If written ballots are to be used, ballots bearing the
names of all the persons who have been nominated for election as Directors at
the annual meeting in accordance with the procedures set forth in this Section
shall be provided for use at the annual meeting.
2.4 QUALIFICATION. No Director need be a stockholder of the
Corporation.
2.5 VACANCIES. Except as otherwise required by the Corporation's
Articles of Incorporation, as may be amended from time to time, any and all
vacancies in the Board of Directors, however occurring, including, without
limitation, by reason of an increase in size of the Board of Directors, or the
death, resignation, disqualification or removal of a Director, shall be filled
solely by the affirmative vote of the holders of a majority of the total votes
which would be eligible to be cast by stockholders in the election of such
Director. Any Director appointed in accordance with the preceding sentence shall
hold office for the remainder of the full term of the class of Directors in
which the new directorship was created or the vacancy occurred and until such
Director's successor shall have been duly elected and qualified or until his or
her earlier resignation or removal. In the event of a vacancy in the Board of
Directors, the remaining Directors, except as otherwise provided by law, may
exercise the powers of the full Board of Directors until the vacancy is filled.
2.6 REMOVAL. Except as otherwise required by the Corporation's Articles
of Incorporation, as may be amended from time to time, Directors may be removed
from office at any time, with or without cause by the affirmative vote of a
majority of the total votes which would be eligible to be cast by stockholders
in the election of such Director.
2.7 RESIGNATION. A Director may resign at any time by giving written
notice to the Chairman of the Board, if one is elected, the President or the
Secretary. A resignation shall be effective upon receipt, unless the resignation
otherwise provides.
2.8 REGULAR MEETINGS. The regular annual meeting of the Board of
Directors shall be held, without notice other than this Bylaw, on the same date
and at the same place as the annual meeting following the close of such meeting
of stockholders. Other regular meetings of the Board of Directors may be held at
such hour, date and place as the Board of Directors may by resolution from time
to time determine without notice other than such resolution.
2.9 SPECIAL MEETINGS. Special meetings of the Board of Directors may be
called, orally or in writing, by or at the request of (i) any Director, (ii) the
Chairman of the Board, if one is elected, or (iii) the President. The person
calling any such special meeting of the Board of Directors may fix the hour,
date and place thereof.
2.10 NOTICE OF MEETINGS.
(a) Notice of the hour, date and place of all special meetings of the
Board of Directors shall be given to each Director by the Secretary or an
Assistant Secretary, or in case of the death, absence, incapacity or refusal of
such persons, by the Chairman of the Board, if one is elected, or the President
or such other officer designated by the Chairman of the Board, if one is
elected, or the President. Notice of any special meeting of the Board of
Directors shall be given to each Director in person, by telephone, or by telex,
telecopy, telegram, or other written form of electronic communication, sent to
his business or home address, at least 24 hours in advance of the meeting, or by
written notice mailed to his business or home address, at least 48 hours in
advance of the meeting. Such notice shall be deemed to be delivered when hand
delivered to such address, read to such Director by telephone, deposited in the
mail so addressed, with postage thereon prepaid if mailed, dispatched or
transmitted if telexed or telecopied, or when delivered to the telegraph company
if sent by telegram.
(b) When any Board of Directors meeting, either regular or special, is
adjourned for 30 days or more, notice of the adjourned meeting shall be given as
in the case of an original meeting. It shall not be necessary to give any notice
of the hour, date or place of any meeting adjourned for less than 30 days or of
the business to be transacted thereat, other than an announcement at the meeting
at which such adjournment is taken of the hour, date and place to which the
meeting is adjourned.
(c) A written waiver of notice signed before or after a meeting by a
Director and filed with the records of the meeting shall be deemed to be
equivalent to notice of the meeting. The attendance of a Director at a meeting
shall constitute a waiver of notice of such meeting, except where a Director
attends a meeting for the express purpose of objecting at the beginning of the
meeting to the transaction of any business because such meeting is not lawfully
called or convened. Except as otherwise required by law, by the Articles of
Incorporation of the Corporation or by these Bylaws, neither the business to be
transacted at, nor the purpose of, any meeting of the Board of Directors need be
specified in the notice or waiver of notice of such meeting.
2.11 QUORUM. At any meeting of the Board of Directors, a majority of
the Directors then in office shall constitute a quorum for the transaction of
business, but if less than a quorum is present at a meeting, a majority of the
Directors present may adjourn the meeting from time to time, and the meeting may
be held as adjourned without further notice, except as provided in Section 2.10.
Any business which might have been transacted at the meeting as originally
noticed may be transacted at such adjourned meeting at which a quorum is
present.
2.12 ACTION AT MEETINGS. At any meeting of the Board of Directors at
which a quorum is present, a majority of the Directors present may take any
action on behalf of the Board of Directors, unless otherwise required by law, by
the Articles of Incorporation of the Corporation or by these Bylaws.
2.13 ACTION BY CONSENT. Any action required or permitted to be taken at
any meeting of the Board of Directors may be taken without a meeting if all
members of the Board of Directors consent thereto in writing. Such written
consent shall be filed with the records of the meetings of the Board of
Directors and shall be treated for all purposes as a vote at a meeting of the
Board of Directors.
2.14 MANNER OF PARTICIPATION. Directors may participate in meetings of
the Board of Directors by means of conference telephone or similar
communications equipment by means of which all Directors participating in the
meeting can hear each other, and participation in a meeting in accordance
herewith shall constitute presence in person at such meeting for purposes of
these Bylaws.
2.15 COMPENSATION OF DIRECTORS. Directors shall receive such
compensation for their services as shall be determined by a majority of the
Board of Directors provided that Directors who are serving the Corporation as
employees and who receive compensation for their services as such, shall not
receive any salary or other compensation for their services as Directors of the
Corporation.
ARTICLE III: COMMITTEES
3.1 COMMITTEES. The Board of Directors, by vote of a majority of the
Directors then in office, may elect from its number one or more committees,
including an Executive Committee, a Compensation Committee and an Audit
Committee, and may delegate thereto some or all of its powers except those which
by law, by the Articles of Incorporation of the Corporation or by these Bylaws
may not be delegated. Except as the Board of Directors may otherwise determine,
any such committee may make rules for the conduct of its business, but unless
otherwise provided by the Board of Directors or in such rules, its business
shall be conducted so far as possible in the same manner as is provided by these
Bylaws for the Board of Directors. All members of such committees shall hold
such offices at the pleasure of the Board of Directors. The Board of Directors
may abolish any such committee at any time. Any committee to which the Board of
Directors delegates any of its powers or duties shall keep records of its
meetings and shall report its action to the Board of Directors. The Board of
Directors shall have power to rescind any action of any committee, to the extent
permitted by law, but no such rescission shall have retroactive effect.
3.2 EXECUTIVE COMMITTEE. The Board of Directors, by resolution adopted
by a majority of the number of Directors fixed by these Bylaws, may elect an
executive Committee which shall consist of not less than three Directors,
including the Chairman, if one is elected, and the President. When the Board of
Directors is not in session, the Executive Committee shall have all power vested
in the Board of Directors by law, by the Articles of Incorporation, or by these
Bylaws, provided that the Executive Committee shall not have power to (a)
approve or recommend to shareholders action that the Virginia Stock Corporation
Act requires to be approved by shareholders; (b) fill vacancies on the Board or
any of its committees; (c) amend the Articles of Incorporation pursuant to
Section 13.1-706 of the Virginia Code; (d) adopt, amend or repeal the Bylaws;
(e) approve a plan of merger not requiring shareholder approval; (f) authorize
or approve a distribution, except according to a general formula or method
prescribed by the Board of Directors; or (g) authorize or approve the issuance
or sale or contract for sale of shares, or determine the designation and
relative rights, preferences and limitations of a class or series of shares,
other than within the limits specifically prescribed by the Board of Directors.
3.3 COMPENSATION COMMITTEE. The Board of Directors, in its sole
discretion, shall designate a Compensation Committee which shall consist of one
or more directors. In addition, the Board may at any time designate one or more
alternate members of such committee who shall be Directors who may act in place
of any absent regular member upon invitation by the Chairman or Secretary of the
Committee. With respect to bonuses, the Compensation Committee shall have and
may exercise the powers to determine the amounts annually available for bonuses
pursuant to any bonus plan or formula approved by the Board, to determine bonus
awards to executive officers and to exercise such further powers with respect to
bonuses as may from time to time be conferred by the Board of Directors. With
respect to salaries, the Compensation Committee shall have and may exercise the
power to fix and determine from time to time all salaries of the executive
officers of the Corporation, and such further powers with respect to salaries as
may from time to time be conferred by the Board of Directors. The Compensation
Committee shall administer the Corporation's 1997 Stock Incentive Plan (the
"Plan") and from time to time may grant, consistent with the Plan, stock
options, stock appreciation rights and shares of restricted stock. Vacancies in
the Compensation Committee shall be filled by the Board of Directors, and
members shall be subject to removal by the Board at any time. The Compensation
Committee shall fix its own rules of procedure. A majority of the number of
regular members then serving shall constitute a quorum; and regular and
alternate members present shall be counted to determine whether there is a
quorum. The Compensation Committee shall keep minutes of its meetings, and all
action taken by it shall be reported to the Board of Directors.
3.4 AUDIT COMMITTEE. The Board of Directors, in its sole discretion,
shall designate an Audit Committee which shall consist of one or more Directors.
Vacancies in the Committee shall be filled by the Board of Directors with
Directors, giving consideration to continuity of the Committee, and members
shall be subject to removal by the Board at any time. The Committee shall fix
its own rules of procedures and a majority of the members serving shall
constitute a quorum. The Committee shall meet at least twice a year with both
the internal and the Corporation's outside auditors present at each meeting and
shall keep minutes of its meetings and all action taken shall be reported to the
Board of Directors. The Committee shall review the reports and minutes of any
audit committees of the Corporation's subsidiaries. The Committee shall review
the Corporation's financial reporting process, including accounting policies and
procedures. The Committee shall examine the report of the Corporation's outside
auditors, consult with them with respect to their report and the standards and
procedures employed by them in their audit, report to the Board the results of
its study and recommend the selection of auditors for each fiscal year.
3.5 MEETINGS. Regular and special meetings of any Committee established
pursuant to this Article may be called and held subject to the same requirements
with respect to time, place and notice as are specified in these Bylaws for
regular and special meetings of the Board of Directors.
3.6 QUORUM AND MANNER OF ACTING. A majority of the members of any
Committee serving at the time of any meeting thereof shall constitute a quorum
for the transaction of business at such meeting. The action of a majority of
those members present at a Committee meeting at which a quorum is present shall
constitute the act of the Committee.
3.7 TERM OF OFFICE. Members of the Committee shall be elected as above
provided and shall hold office until their successors are elected by the Board
of Directors or until such Committee is dissolved by the Board of Directors.
3.8 RESIGNATION AND REMOVAL. Any member of a Committee may resign at
any time by giving written notice of his intention to do so to the President or
the Secretary of the Corporation, or may be removed, with or without cause, at
any time by such vote of the Board of Directors as would suffice for his
election.
3.9 VACANCIES. Any vacancy occurring in a Committee resulting
from any cause whatsoever may be filled by a majority of the
number of Directors --------- then serving.
ARTICLE IV: OFFICERS
4.1 ELECTION OF OFFICERS; TERMS. The officers of the Corporation shall
consist of a Chairman of the Board, a President and a Secretary. Other officers,
including a Treasurer, one or more Vice-Presidents (whose seniority and title,
including Executive Vice-Presidents Senior Vice-Presidents, and Executive
Vice-Presidents / Division Presidents, who shall be referred to as Division
Presidents, may be specified by the Board of Directors), and assistant and
subordinate officers, may from time to time be elected by the Board of
Directors. All officers shall hold office until the next annual meeting of the
Board of Directors and until their successors are elected. The President shall
be chosen from among the Directors. Any offices may be combined in the same
person as the Board of Directors may determine.
4.2 REMOVAL OF OFFICERS; VACANCIES. Any officer of the Corporation may
be removed summarily with or without cause, at any time, by the Board of
Directors. Vacancies may be filled by the Board of Directors.
4.3 DUTIES. The officers of the corporation shall have such duties as
generally pertain to their offices, respectively, as well as such powers and
duties as are prescribed by law or are hereinafter provided or as from time to
time shall be conferred by the Board of Directors. The Board of Directors may
require any officer to give such bond for the faithful performance of his duties
as the Board may see fit.
4.4 DUTIES OF THE CHAIRMAN. The Chairman of the Board shall be the
chief executive officer of the Corporation and shall be primarily responsible
for the implementation of the policies of the Board of Directors. He shall have
authority over the general management and direction of the business and
operations of the Corporation and its divisions, if any, subject only to the
ultimate authority of the Board of Directors. He shall be a Director and, except
as otherwise provided by these Bylaws or in the resolutions of establishing such
committees, he shall be ex officio a member of all Committees of the Board. The
chairman shall preside at all corporate meetings. The Chairman may,
notwithstanding Section 4.5, sign and execute in the name of the Corporation
share certificates, deeds, mortgages, bonds, contracts or other instruments
except in cases where the signing and the execution thereof shall be expressly
delegated by the Board of Directors or by these Bylaws to some other officer or
agent of the Corporation or shall be required by law otherwise to be signed or
executed. In addition, he shall perform all duties incident to the office of the
Chairman and such other duties as from time to time may be assigned to him by
the Board of Directors.
4.5 DUTIES OF THE PRESIDENT. The President shall be the chief operating
officer of the Corporation. He shall have authority over the general,
day-to-day, management and direction of the business and operations of the
Corporation and its divisions, if any, subject only to the ultimate authority of
the Board of Directors and the Chairman. He shall be a Director. In the absence
of the Chairman and the Vice-Chairman of the Board, or if there are no such
officers, the President shall preside at all corporate meetings. He may sign and
execute in the name of the Corporation share certificates, deeds, mortgages,
bonds, contracts or other instruments except in cases where the signing and the
execution thereof shall be expressly delegated by the Board of Directors or by
these Bylaws to some other officer or agent of the Corporation or shall be
required by law otherwise to be signed or executed. In addition, he shall
perform all duties incident to the office of the President and such other duties
as from time to time may be assigned to him by the Board of Directors or the
Chairman.
4.6 DUTIES OF THE VICE-PRESIDENTS. Each Vice-President, if any, shall
have such powers and duties as may from time to time be assigned to him by the
President or the Board of Directors. No Vice-President may sign and execute in
the name of the Corporation any deeds, mortgages, bonds, contracts or other
instruments except where the signing and execution of such documents shall be
expressly delegated by the Board of Directors to such Vice-President.
4.7 DUTIES OF THE TREASURER. The Treasurer shall have charge of and be
responsible for all funds, securities, receipts and disbursements of the
Corporation, and shall deposit all monies and securities of the Corporation in
such banks and depositories as shall be designated by the Board of Directors. He
shall be responsible (a) for maintaining adequate financial accounts and records
in accordance with generally accepted accounting practices; (b) for the
preparation of appropriate operating budgets and financial statements; (c) for
the preparation and filing of all tax returns required by law; and (d) for the
performance of all duties incident to the officer of Treasurer and such other
duties as from time to time may be assigned to him by the Board of Directors,
the Finance Committee or the President. The Treasurer may sign and execute in
the name of the Corporation share certificates, deeds, mortgages, bonds,
contracts or other instruments, except in cases where the signing and execution
thereof shall be expressly delegated by the Board of Directors or by these
Bylaws to some other officer or agent of the Corporation or shall be required by
law or otherwise to be signed or executed.
4.8 DUTIES OF SECRETARY. The Secretary shall act as secretary of all
meetings of the Board of Directors and shareholders of the Corporation. When
requested, he also shall act as secretary of the meetings of the committees of
the Board. He shall keep and preserve the minutes of all such meetings in
permanent books. He shall be responsible for (a) seeing that all notices
required to be given by the Corporation are duly given and served; (b) having
custody of the seal of the Corporation and shall affix the seal or cause to be
affixed to all share certificates of the Corporation and to all documents the
execution of which on behalf of the Corporation under its corporate seal is duly
authorized in accordance with law or the provisions of these Bylaws; (c) having
custody of all deeds, leases, contracts and other important corporate documents;
(d) having charge of the books, records and papers of the Corporation relating
to its organization and management as a Corporation; (e) seeing that all
reports, statements and other documents required by law (except tax returns) are
properly filed; and (f) in general, performing all the duties incident to the
office of Secretary and such other duties as from time to time be assigned to
him by the Board of Directors or the President.
ARTICLE V: CAPITAL STOCK
5.1 CERTIFICATES. The shares of capital stock of the Corporation shall
be evidenced by certificates in forms prescribed by the Board of Directors and
executed in any manner permitted by law and stating thereon the information
required by law. Transfer agents and/or registrars for one or more classes of
shares of the Corporation may be appointed by the Board of Directors and may be
required to countersign certificates representing shares of such class or
classes. If any officer whose signature or facsimile thereof shall have been
used on a share certificate for any reason ceases to be an officer of the
Corporation and such certificate shall not then have been delivered by the
Corporation, the Board of Directors may nevertheless adopt such certificate and
it may then be issued and delivered as though such person had not ceased to be
an officer of the Corporation.
5.2 LOST, DESTROYED AND MUTILATED CERTIFICATES. Holders of the shares
of the Corporation shall immediately notify the Corporation of any loss,
destruction or mutilation of the certificate therefor, and the Board of
Directors may in its discretion cause one or more new certificates for the same
number of shares in the aggregate to be issued to such shareholder upon the
surrender of the mutilated certificate or upon satisfactory proof or affidavit
of such loss or destruction, and the Board of Directors, in its discretion, may
require deposit of a bond in such form and amount and with such surety as the
Board of Directors may deem appropriate.
5.3 TRANSFER OF SHARES. The shares of the Corporation shall be
transferable or assignable only on the books of the Corporation by the holder in
person or by attorney on surrender of the certificate for such shares duly
endorsed and, if sought to be transferred by attorney, accompanied by a written
power of attorney to have the same transferred on the books of the Corporation.
The Corporation will recognize, however, the exclusive right of the person
registered on its books as the owner of shares to receive dividends and to vote
as such owner.
ARTICLE VI: MISCELLANEOUS PROVISIONS
6.1 SEAL. The seal of the Corporation shall consist of a flat-faced
circular die, of which there may be a number of counterparts, on which there
shall be engraved the word "Seal" and the name of the Corporation.
6.2 FISCAL YEAR. The fiscal year of the Corporation shall end on
such date and shall consist of such accounting periods as
may be fixed by the ----------- Board of Directors.
6.3 CHECKS, NOTES AND DRAFTS. Checks, notes, drafts and other orders
for the payment of money shall be signed by such persons as the Board of
Directors from time to time may authorize. When the Board of Directors so
authorizes, however, the signature of any such person may be a facsimile.
6.4 AMENDMENT OF BYLAWS BY THE BOARD OF DIRECTORS. These Bylaws may be
altered, amended or repealed, or new Bylaws may be adopted, by the affirmative
vote of a majority of the directors present at any regular or special meeting of
the Board of Directors at which a quorum is present.
6.5 AMENDMENT OF THE BYLAWS BY THE STOCKHOLDERS. These Bylaws may be
altered, amended or repealed, or new Bylaws may be adopted, by the affirmative
vote of the holders of seventy-five percent (75%) of the shares of the capital
stock of the Corporation issued and outstanding and entitled to vote at any
regular meeting of the stockholders or at any special meeting of the
stockholders, provided notice of such alteration, amendment, repeal or adoption
of new Bylaws shall have been stated in the notice of such meeting.
6.6 VOTING OF SHARES HELD. Unless otherwise provided by resolution of
the Board of Directors or of the Executive Committee, if any, the President may
from time to time appoint an attorney or attorneys or agent or agents of the
Corporation, in the name and on behalf of the Corporation, to cast the vote
which the Corporation may be entitled to cast as a shareholder or otherwise in
any other corporation, any of whose securities may be held by the Corporation,
at meetings of the holders of the shares or other securities of such other
corporation, or to consent in writing to any action by any such other
corporation; and the President shall instruct the person or persons so appointed
as to the manner of casting such votes or giving such consent and may execute or
cause to be executed on behalf of the Corporation, and under its corporate seal
or otherwise, such written proxies, consents, waivers or other instruments as
may be necessary or proper in the premises. In lieu of such appointment, the
President may himself attend any meetings of the holders of shares or other
securities of any such other corporation and there vote or exercise of any or
all power of the Corporation as the holder of such shares or other securities of
such other corporation.
VALUE AMERICA, INC.
INCORPORATED UNDER THE LAWS OF THE COMMONWEALTH OF VIRGINIA
COMMON STOCK
CUSIP 92038N 10 2
THIS CERTIFIES THAT
IS THE RECORD HOLDER OF
FULLY PAID AND NONASSESSABLE SHARES OF THE COMMON STOCK, WITHOUT PAR VALUE, OF
VALUE AMERICA, INC.
transferable on the books of the Corporation by the holder hereof in person or
by a duly authorized attorney upon surrender of this Certificate properly
endorsed. This Certificate is not valid unless countersigned and registered by
the Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated:
CHAIRMAN
SECRETARY
SEE REVERSE FOR CERTAIN DEFINITIONS AND A STATEMENT AS TO THE RIGHTS,
PREFERENCES, PRIVILEGES AND LIMITATIONS OF SHARES
COUNTERSIGNED AND REGISTERED:
FIRST UNION NATIONAL BANK
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
VALUE AMERICA, INC.
A statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations and restrictions of such preferences
and/or rights as established, from time to time by the Articles of Incorporation
of the Corporation and by any certificate of determination, the number of shares
constituting each class and series, and the designation thereof, may be obtained
by the holder hereof upon request without charge at the principal office of the
Corporation.
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common
TEN ENT -- as tenants by the entireties
JT TEN -- as joint tenants with right of
survivorship and not as tenants
in common
<TABLE>
<CAPTION>
<S> <C>
UNIF GIFT MIN ACT -- ............... Custodian ........................
(Cust) (Minor)
-------------------------------- under Uniform Gifts to Minors
Act ..............................................................
(State)
UNIF TRF MIN ACT -- ................. Custodian (until age ................)
(Cust)
............................ under Uniform Transfers
(Minor)
to Minors Act ..............................................
(State)
- ----------------------------------
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, ______________________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
</TABLE>
Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
<PAGE>
Dated
THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS WRITTEN
UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER.
X
X
NOTICE:
Signature(s) Guaranteed
By
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO
S.E.C. RULE 17Ad-15.
VALUE AMERICA, INC.
1997 STOCK INCENTIVE PLAN
1. Purpose. The purpose of this Value America, Inc. 1997 Stock
Incentive Plan (the "Plan") is to further the long term stability and financial
success of Value America, Inc. (the "Company") by attracting and retaining
personnel, including employees, directors, officers, consultants, agents,
advisors and independent contractors, through the use of stock incentives. It is
believed that ownership of Company stock will stimulate the efforts of those
persons upon whose judgment and interest the Company is and will be largely
dependent for the successful conduct of its business. It is also believed that
Incentive Awards granted to such persons under this Plan will strengthen their
desire to remain with the Company or to continue to contribute to the growth of
the business of the Company and will further the identification of their
interests with those of the Company's shareholders. The Plan is intended to
conform to the provisions of Securities and Exchange Commission Rule 16b-3
promulgated under the 1934 Act, if the Company shall register its Common Stock
under Section 12 of the 1934 Act.
2. Definitions. As used in the Plan, the following terms have the
meanings indicated:
(a) "Agreement" means a written agreement (including any
amendment or supplement thereto) between the Company and a Participant
specifying the terms and conditions of an Incentive Award granted to such
Participant.
(b) "Applicable Withholding Taxes" means the aggregate amount
of federal, state, and local income and payroll taxes that the Company is
required to withhold in connection with any exercise of a Nonstatutory Stock
Option, SAR, or Tax Offset Right, any lapse of restrictions on Restricted Stock,
or any grant of Performance Stock.
(c) "Affiliate" means any "parent" or "subsidiary" corporation
(within the meaning of Code Section 424) of the Company.
(d) "Board" means the Board of Directors of the Company.
(e) "Cause" means dishonesty, fraud, misconduct, gross
incompetence, gross negligence, breach of a material fiduciary duty, material
breach of an agreement with the Company or any of its Subsidiaries, unauthorized
use or disclosure of confidential information or trade secrets, or conviction or
confession of a crime punishable by law (except minor violations), in each case
as determined by the Committee, which determination shall be binding.
(f) "Change of Control" means:
(i) The acquisition, other than from the Company, by
any individual, entity, or group (within the meaning of
Section 13(d)(3) or 14(d)(2) of the 1934 Act), of beneficial
ownership (within the meaning of Rule 13d-3 promulgated under
the 1934 Act) of 50% or more of either the then outstanding
shares of Common Stock or the combined voting power of the
then outstanding voting securities of the Company entitled to
vote generally in the election of directors (collectively,
"Voting Securities"), but excluding for this purpose, any such
acquisition by the Company or any of its subsidiaries, or any
employee benefit plan (or related trust) of the Company or its
subsidiaries, or any corporation with respect to which,
following such acquisition, more than 50% of the then
outstanding shares of Voting Securities of such is then
beneficially owned, directly or indirectly, by the individuals
and entities who were the beneficial owners of Voting
Securities of the Company immediately prior to such
acquisition in substantially the same proportion as their
ownership, immediately prior to such acquisition, of the then
outstanding shares of Voting Securities of the Company;
provided, however, that a Change of Control shall not result
from beneficial ownership of 50% or more of either the then
outstanding shares of Voting Securities of the Company by any
individual, entity, or group who is the beneficial owner of
such securities as of the effective date of this Plan so long
as such individual, entity, or group does not thereafter
acquire beneficial ownership of additional shares of such
securities that in the aggregate exceed 5% of the outstanding
shares of Voting Securities of the Company without the prior
approval of the Board; or
(ii) Approval by the shareholders of the Company of
(A) a reorganization, merger or consolidation with respect to
which the individuals and entities who were the respective
beneficial owners of the Voting Securities of the Company
immediately prior to such reorganization, merger or
consolidation do not, following such reorganization, merger or
consolidation, beneficially own, directly or indirectly, more
than 50% of the then outstanding shares of Voting Securities
of the corporation resulting from such reorganization, merger
or consolidation, or (B) a complete liquidation or dissolution
of the Company, or (C) any sale, lease, exchange, or other
disposition in one transaction or a series of related
transactions of all or substantially all of the Company's
assets other than a disposition of the Company's assets to a
majority-owned Subsidiary.
(g) "Code" means the Internal Revenue Code of 1986, as
amended.
(h) "Committee" means the Compensation Committee appointed by
the Board from time to time as described under Section 19 hereof, or in the
absence of such Committee, the Board.
(i) "Common Stock" means Common Stock, no par value, of the
Company. If the par value of the Common Stock is changed, or in the event of a
change in the capital structure of the Company (as provided in Section 15), the
shares resulting from such a change shall be deemed to be Common Stock within
the meaning of the Plan.
(j) "Company" means Value America, Inc., a Nevada corporation.
(k) "Date of Grant" means the date on which an Incentive Award
is granted by the Committee. If, however, the Committee designates in a
resolution a later date as the date an Incentive Award is to be granted, then
such later date shall be the Date of Grant.
(l) "Disability" or "Disabled" means, as to an ISO, a
Disability within the meaning of Code Section 22(e)(3). As to all other
Incentive Awards, the Committee shall determine whether a Disability exists,
which determination shall be conclusive.
(m) "Fair Market Value" means, on any given date, the value of
a share of Common Stock. If the Common Stock is not publicly traded on the date
of valuation, the value shall be determined by the Committee in good faith using
any reasonable method. If the Common Stock is publicly traded, then Fair Market
Value shall equal (i) if the Common Stock is listed on the Nasdaq National
Market, the average of the high and low per share sales prices for the Common
Stock as reported by the Nasdaq National Market for a single trading day or (ii)
if the Common Stock is listed on the New York Stock Exchange or the American
Stock Exchange, the average of the high and low per share sales prices for the
Common Stock as such price is officially quoted in the composite tape of
transactions on such exchange for a single trading day. If there is no such
reported price for the Common Stock for the date in question, then such price on
the last preceding date for which such price exists shall be determinative of
the Fair Market Value.
(n) "Immediate Family Member" means, with respect to a
particular Participant, the Participant's spouse, children, stepchildren,
grandchildren, parents, grandparents, siblings, and adopted individuals.
(o) "Incentive Award" means any form of an Option, Stock
Appreciation Right, Performance Stock, Restricted Stock, or Tax Offset Right
granted under the Plan.
(p) "Incentive Stock Option" or "ISO" means an Option intended
to meet the requirements of, and qualify for favorable federal income tax
treatment, under Code Section 422.
(q) "Insider" means a person subject to Section 16(b) of the
1934 Act.
(r) "1934 Act" means the Securities Exchange Act of 1934,
as amended.
(s) "1933 Act" means the Securities Act of 1933, as amended.
(t) "Nonstatutory Stock Option" means an Option that does not
meet the requirements of Code Section 422, or, even if meeting the requirements
of Code Section 422, is not intended to be an ISO and is so designated.
(u) "Option" means a right to purchase Common Stock granted
under the Plan, at a price determined in accordance with the Plan and set forth
in an Agreement.
(v) "Participant" means an individual to whom an Incentive
Award is granted under the Plan.
(w) "Performance Stock" means Common Stock awarded when
performance goals are achieved pursuant to an incentive program as provided in
Section 7.
(x) "Permitted Transferee" has the meaning provided in
Section 11(b).
(y) "Plan" means the Value America, Inc. 1997 Stock
Option Plan.
(z) "Reload Feature" means a feature of an Option described in
an Agreement that authorizes the automatic grant of a Reload Option in
accordance with the provisions of Section 10(c).
(aa) "Reload Option" means an Option automatically granted to
a Participant equal to the number of shares of already owned Common Stock
delivered by the Participant to exercise an Option having a Reload Feature.
(bb) "Restricted Stock" means Common Stock awarded upon the
terms and subject to the restrictions set forth in Section 6.
(cc) "Rule 16b-3" means Rule 16b-3 of the Securities and
Exchange Commission promulgated under the 1934 Act. A reference in the Plan to
Rule 16b-3 shall include a reference to any corresponding rule (or number
redesignation) of any amendments to Rule 16b-3 enacted after the effective date
of the Plan's adoption.
(dd) "Stock Appreciation Right" or "SAR" means a right to
receive amounts from the Company granted under Section 9.
(ee) "Ten Percent Shareholder" means any individual who owns,
directly or indirectly, more than 10% of the total combined voting power of all
classes of stock of the Company or of an Affiliate. Indirect ownership of stock
shall be determined in accordance with Code Section 424(d).
(ff) "Tax Offset Right" means a right to receive cash amounts
related to Applicable Withholding Taxes from the Company as described in Section
12 of the Plan.
3. General. All types of Incentive Awards may be granted under the
Plan. Options granted under the Plan may be ISOs or Nonstatutory Stock Options.
4. Stock. Subject to Section 17 of the Plan, there shall be reserved
for issuance under the Plan an aggregate of 1,250,000 shares of Common Stock,
which shall be authorized, but unissued shares. Incentive Awards may be made and
exercised as to whole shares or fractional shares, at the discretion of the
Committee. Shares that have not been issued and shares allocated to options or
portions thereof that expire or otherwise terminate unexercised after the
effective date of the Plan may be subjected to an Incentive Award under the
Plan. If an Incentive Award is terminated or expires, in whole or in part, for
any reason other than its exercise, the number of shares of Common Stock
allocated to the Incentive Award or portion thereof may be reallocated to other
Incentive Awards to be granted under this Plan. Shares of Common Stock subject
to repurchase or forfeiture which are subsequently repurchased or reacquired by
the Company shall also be available for issuance in connection with future
grants of Incentive Awards. For purposes of determining the number of shares
that are available for Incentive Awards under the Plan, such number shall, to
the extent permissible under Rule 16b-3, include the number of shares
surrendered by a Participant or retained by the Company in payment of Applicable
Withholding Taxes; provided, however, that for purposes of Code Section 162(m),
any such shares shall be counted in accordance with the requirements of such
Code Section.
5. Eligibility.
(a) Subject to the sole discretion of the Committee, any
employee, director, officer, consultant, agent, advisor, or independent
contractor of the Company (or any Affiliate including a corporation that becomes
an Affiliate after the adoption of this Plan) is eligible to receive Incentive
Awards; provided that only employees of the Company or its Affiliates may be
granted ISO's. The Committee has the sole discretion to determine for each
Participant the terms and conditions, the nature of the award, and the number of
shares to be allocated to each Participant as part of each Incentive Award. Any
Incentive Award granted under this Plan shall be evidenced by an Agreement which
shall be subject to the applicable provisions of this Plan and to other such
provisions as the Committee may impose.
(b) The grant of an Incentive Award shall not obligate the
Company or any Affiliate to pay a Participant any particular amount of
remuneration, to continue the employment of a Participant after the grant, or to
make further grants to the Participant at any time thereafter.
6. Restricted Stock Awards.
(a) Whenever the Committee deems it appropriate to grant
Restricted Stock, notice shall be given to the Participant stating the number of
shares of Restricted Stock granted and the terms and conditions to which the
Restricted Stock is subject. This notice, when accepted in writing by the
Participant, shall become an Agreement and certificates representing the shares
shall be issued and delivered to the Participant. Restricted Stock may be
awarded by the Committee in its discretion without cash consideration.
(b) Restricted Stock issued pursuant to the Plan shall be
subject to the following restrictions:
(i) No shares of Restricted Stock may be sold,
assigned, transferred, or disposed of by an Insider within a
six-month period beginning on the Date of Grant, and
Restricted Stock may not be pledged, hypothecated, or
otherwise encumbered within a six-month period beginning on
the Date of Grant if such action would be treated as a sale or
disposition under Rule 16b-3.
(ii) No shares of Restricted Stock may be sold,
assigned, transferred, pledged, hypothecated, or otherwise
encumbered or disposed of until the restrictions on such
shares as set forth in the Participant's Agreement have lapsed
or been removed pursuant to paragraph (d) or (e) below.
(iii) If a Participant ceases to be employed by the
Company or an Affiliate, the Participant shall forfeit to the
Company any shares of Restricted Stock on which the
restrictions have not lapsed or been removed pursuant to
paragraph (d) or (e) below on the date such Participant shall
cease to be so employed and the Company shall have no
obligation to pay any amounts with respect to such forfeiture,
unless the Committee determines to the contrary.
(c) Upon the acceptance by a Participant of an award of
Restricted Stock, such Participant shall, subject to the restrictions set forth
in paragraph (b) above, have all the rights of a shareholder with respect to
such shares of Restricted Stock, including, but not limited to, the right to
vote such shares of Restricted Stock and the right to receive all dividends and
other distributions paid thereon. Certificates representing Restricted Stock
shall bear a legend referring to the restrictions set forth in the Plan and the
Participant's Agreement.
(d) The Committee shall establish as to each award of
Restricted Stock the terms and conditions upon which the restrictions set forth
in paragraph (b) above shall lapse. Such terms and conditions may include,
without limitation, the lapsing of such restrictions as a result of the
Disability, death or Retirement of the Participant or the occurrence of a Change
of Control.
(e) Notwithstanding the provisions of paragraphs (b)(ii) and
(iii) above, the Committee may at any time, in its sole discretion, accelerate
the time at which any or all restrictions will lapse or remove any and all such
restrictions.
(f) Until the requirements of Section 12 have been met, no
stock certificate free of a legend reflecting the restrictions set forth in
paragraph (b) above shall be issued to such Participant.
7. Performance Stock Awards.
(a) Performance Stock may be issued pursuant to the Plan in
connection with incentive programs established from time to time by the
Committee when performance criteria established by the Committee as part of the
incentive program have been achieved.
(b) Whenever the Committee deems it appropriate, the Committee
may establish an incentive program and notify Participants of their
participation in and the terms of the incentive program. More than one incentive
program may be established by the Committee and they may operate concurrently or
for varied periods of time and a Participant may be permitted to participate in
more than one incentive program at the same time. Performance Stock will be
issued only subject to the incentive program and the Plan and consistent with
meeting the performance goals set by the Committee. A Participant in an
incentive program shall have no rights as a shareholder until Performance Stock
is issued. Performance Stock may be issued without cash consideration.
(c) A Participant's interest in an incentive program may not
be sold, assigned, transferred, pledged, hypothecated, or otherwise encumbered.
8. Stock Options.
(a) Whenever the Committee deems it appropriate to grant
Options, a written agreement shall be given to the Participant stating the
number of shares for which Options are granted, the Option price per share,
whether the Options are ISOs or Nonstatutory Stock Options, the extent to which
SARs are granted (as provided in Section 9), and the conditions to which the
grant and exercise of the Options are subject. This written agreement, when duly
accepted in writing by the Participant, shall become an Agreement.
(b) The exercise price of shares of Common Stock covered by an
ISO shall be not less than 100% of the Fair Market Value of such shares on the
Date of Grant; provided that if an ISO is granted to a Participant who, at the
time of the grant, is a Ten Percent Shareholder, then the exercise price of the
shares covered by the ISO shall be not less than 110% of the Fair Market Value
of such shares on the Date of Grant.
(c) The exercise price of shares covered by a Nonstatutory
Stock Option shall be not less than 85% of the Fair Market Value of such shares
on the Date of Grant unless the Compensation Committee otherwise unanimously
consents.
(d) Options may be exercised in whole or in part at such times
as may be specified by the Committee in the Participant's Agreement, subject to
Section 13; provided that no ISO may be exercised after ten years (or, in the
case of an ISO granted to a Ten Percent Shareholder, five years) from the Date
of Grant. Except as otherwise provided in this Plan, no ISO may be exercised
unless the Participant is employed by the Company or an Affiliate at the time of
the exercise and has been employed by the Company or an Affiliate of the Company
at all times since the Date of Grant. An ISO by its terms, shall be exercisable
in any calendar year only to the extent that the aggregate Fair Market Value
(determined at the Date of Grant) of the Common Stock with respect to which ISOs
are exercisable for the first time during the calendar year does not exceed
$100,000 (the "Limitation Amount"). ISOs granted after 1986 under the Plan and
all other plans of the Company and any Affiliate shall be aggregated for
purposes of determining whether the Limitation Amount has been exceeded. The
Board may impose such conditions as it deems appropriate on an ISO to ensure
that the foregoing requirement is met. If ISOs that first become exercisable in
a calendar year exceed the Limitation Amount, the excess will be treated as
Nonstatutory Stock Options to the extent permitted by law.
(e) To obtain certain tax benefits afforded to ISOs under
Section 422 of the Code, the Participant must hold the shares issued upon the
exercise of an ISO for two years after the Date of Grant of the ISO and one year
from the date of exercise. A Participant may be subject to the alternative
minimum tax at the time of exercise of an ISO. The Committee may require a
Participant to give the Company prompt notice of any disposition of shares
acquired by the exercise of an ISO before the expiration of such holding
periods.
(f) Notwithstanding the foregoing, no Option shall be
exercisable within the first six months after it is granted; provided that, this
restriction shall not apply if the Participant becomes Disabled or dies during
the six-month period.
(g) The Committee may, in its sole discretion, grant Options
that by their terms become fully exercisable upon a Change of Control,
notwithstanding other conditions on exercisability in the Agreement.
9. Stock Appreciation Rights.
(a) Whenever the Committee deems it appropriate, SARs may be
granted either in connection with an Option or independent of such. SARs shall
be evidenced in writing as part of the Agreement to which they pertain. The
following provisions apply to all SARs that are granted in connection with
Options:
(i) SARs shall entitle the Participant, upon exercise
of all or any part of the SARs, to surrender to the Company
unexercised that portion of the underlying Option relating to
the same number of shares of Common Stock as is covered by the
SARs (or the portion of the SARs so exercised) and to receive
in exchange from the Company an amount equal to the excess of
(A) the Fair Market Value on the date of exercise of the
Common Stock covered by the surrendered portion of the
underlying Option over (B) the exercise price of the Common
Stock covered by the surrendered portion of the underlying
Option. The Committee may limit the amount that the
Participant will be entitled to receive upon exercise of the
SAR.
(ii) Upon the exercise of a SAR and surrender of the
related portion of the underlying Option, the Option, to the
extent surrendered, shall not thereafter be exercisable.
(iii) Subject to any further conditions upon exercise
imposed by the Board, a SAR shall be exercisable only to the
extent that the related Option is exercisable; provided that
in no event shall a SAR held by an Insider be exercisable
within the first six months after it is awarded even though
the related Option is or becomes exercisable, and a SAR shall
expire no later than the date on which the related Option
expires.
(iv) A SAR may only be exercised at a time when the
Fair Market Value of the Common Stock covered by the SAR
exceeds the exercise price of the Common Stock covered by the
underlying Option.
(b) The manner in which the Company's obligation arising upon
the exercise of a SAR shall be paid shall be determined by the Committee and
shall be set forth in the Participant's Agreement. The Committee may provide for
payment in Common Stock, including fractional shares, or cash, or a combination
thereof, or the Committee may reserve the right to determine the manner of
payment at the time the SAR is exercised. Shares of Common Stock issued upon the
exercise of a SAR shall be valued at their Fair Market Value on the date of
exercise.
10. Method of Exercise of Options and Stock Appreciation Rights.
(a) Options and SARs may be exercised by the Participant
giving written notice of the exercise to the Company, stating the number of
shares the Participant has elected to purchase under the Option or the number of
SARs the Participant has elected to exercise. In the case of the purchase of
shares under an Option, such notice shall be effective only if accompanied by
the exercise price in full in cash; provided that, if the terms of an Option so
permit, the Participant may (i) deliver, or cause to be withheld from the Option
shares, shares of Common Stock (valued at their Fair Market Value on the date of
exercise) that have been held for at least six months if acquired from the
Company and are not subject to any restrictions in satisfaction of all or any
part of the exercise price, (ii) deliver a properly executed exercise notice
together with irrevocable instructions to a broker to deliver promptly to the
Company, from the sale or loan proceeds with respect to the sale of Common Stock
or a loan secured by Common Stock, the amount necessary to pay the exercise
price and, if required by the Committee, Applicable Withholding Taxes, or (iii)
deliver an interest bearing recourse promissory note, payable to the Company, in
payment of all or part of the exercise price together with such collateral as
may be required by the Committee at the time of exercise. The interest rate
under any such promissory note shall be established by the Committee and shall
be at least equal to the minimum interest rate required at the time to avoid
imputed interest under the Code.
(b) The Company may place on any certificate representing
Common Stock issued upon the exercise of an Option or SAR any legend deemed
desirable by the Company's counsel to comply with federal or state securities
laws, and the Company may require a customary written indication of the
Participant's investment intent. Until the Participant has made any required
payment, including any Applicable Withholding Taxes, and has had issued a
certificate for the shares of Common Stock acquired, he shall possess no
shareholder rights with respect to the shares.
(c) If a Participant exercises an Option that has a Reload
Feature by delivering already owned shares of Common Stock in payment of the
exercise price, the Committee shall grant to the Participant a Reload Option.
The Committee shall grant the Reload Option in the same manner as set forth in
Section 8(a). The Reload Option shall be subject to the following restrictions:
(i) The exercise price of shares of Common Stock
covered by a Reload Option shall be not less than 100% of the
Fair Market Value of such shares on the Date of Grant of the
Reload Option;
(ii) If and to the extent required by Rule 16b-3, a
Reload Option shall not be exercisable within the first six
months after it is granted; provided that this restriction
shall not apply if the Participant becomes Disabled or dies
during the six-month period;
(iii) The Reload Option shall be subject to the same
restrictions on exercisability imposed on the underlying
option (possessing the Reload Feature) exercised unless the
Committee specifies different limitations;
(iv) The Reload Option shall not be exercisable until
the expiration of any retention holding period imposed on the
disposition of any shares of Common Stock covered by the
underlying Option (possessing the Reload Feature) delivered;
and
(v) The Reload Option shall not have a Reload Feature.
The Committee may, in its sole discretion, cause the Company to place on any
certificate representing Common Stock issued to a Participant upon the exercise
of an underlying Option (possessing a Reload Feature as evidenced by the
Agreement for such Option) delivered pursuant to this subsection (c), a legend
restricting the sale or other disposition of such Common Stock.
(d) Notwithstanding anything herein to the contrary, at all
times at which the Company has any class of securities registered under Section
12 of the 1934 Act, Options and SARs shall be granted and exercised in such a
manner as to conform to the provisions of Rule 16b-3.
(e) Each Participant shall, before the exercise of any Option,
deliver to the Company any reasonable information the Company deems necessary to
be able to satisfy itself that the shares of Common Stock issuable upon exercise
of an Option will be acquired in accordance with the terms of an applicable
exemption from the securities registration requirements of applicable federal
and state securities law. With respect to Options that are not ISOs and without
limiting the scope of the Company's or the Committee's discretion to withhold
approval or otherwise administer this Plan, approval may be withheld to the
extent that the exercise, either individually or in the aggregate together with
the exercise of other previously exercised Options and/or offers and sales
pursuant to any prior or contemplated offering of securities, would, in the sole
and absolute judgment of the Company, require the filing of a registration
statement with the United States Securities and Exchange Commission or with the
securities commission of any state. The Company shall avail itself of any
exemptions from registration contained in applicable federal and state
securities laws which are reasonably available to the Company on terms which, in
its sole and absolute discretion, it deems reasonable and not unduly burdensome
or costly. If an Option which is not an ISO cannot be exercised at the time it
would otherwise expire due to the restrictions contained in this Section, the
exercise period for that Option shall be extended for successive one-year
periods until that Option can be exercised in accordance with this Section.
11. Nontransferability of Options and Stock Appreciation Rights.
(a) Options and SARs by their terms, shall be exercisable,
during the Participant's lifetime, only by the Participant or, if permitted by
Rule 16b-3, an alternative person under a qualified domestic relations order (as
defined in Code Section 414(p)) ("QDRO"), or by his guardian, duly authorized
attorney-in-fact, executor, administrator, or other legal representative.
(b) An Option or SAR shall not be assigned, alienated,
pledged, attached, sold, transferred, or encumbered by a Participant other than
by will or by the laws of descent and distribution, or in the case of
Nonstatutory Stock Options:
(i) pursuant to a QDRO, or
(ii) by transfer without consideration by a
Participant, subject to such rules as the Committee
may adopt to preserve the purposes of the Plan
(including limiting such transfers to transfers by
Participants who are directors or senior executives),
to
(A) an Immediate Family Member,
(B) a trust solely for the benefit of the
Participant or one or more Immediate Family
Members, or
(C) a partnership or limited liability
company whose only partners or members are
the Participant or one or more Immediate
Family Members,
(each transferee described in (i) - (ii), a "Permitted Transferee"), provided
that the Committee is notified in advance in writing of the terms and conditions
of any proposed transfer intended to be described in (i) or (ii) and it
determines that the proposed transfer complies with the requirements of the Plan
and the applicable option agreement. Any purported assignment, alienation,
pledge, attachment, sale, transfer, or other encumbrance that does not qualify
under (i) or (ii) shall be void and unenforceable against the Company.
(c) The terms of the Option shall apply to the beneficiaries,
executors, and administrators of the Participant and of the permitted
Transferees of the Participant (including the beneficiaries, executors, and
administrators of the Permitted Transferees), including the right to agree to
any amendment of the applicable Agreement, except that Permitted Transferees
shall not transfer any Option other than by will or by the laws of descent and
distribution. In addition, the Permitted Transferee is subject to the same
restrictions as the Participant for purposes of exercise of the Option after
death.
12. Payment of Applicable Withholding Taxes. The Company may require
the Participant to pay to the Company the amount of Applicable Withholding Taxes
with respect to the grant or exercise of any Incentive Award. Subject to the
Plan and applicable law, the Committee may, in its sole discretion, permit the
Participant to satisfy withholding obligations, in whole or in part, by paying
cash, by electing to have the Company withhold shares of Common Stock issuable
upon the exercise of an Incentive Award, or by transferring to the Company
shares of Common Stock that have been held for at least six months if acquired
from the Company and are not subject to any restrictions, in such amounts equal
to the Applicable Withholding Taxes. The Company shall have the right to
withhold from any shares of Common Stock issuable pursuant to an Incentive Award
or from any cash amounts otherwise due or to become due from the Company to the
Participant an amount equal to such taxes. The Company shall have no obligation
to deliver shares of Common Stock until the Applicable Withholding Taxes have
been satisfied.
13. Effect of Death, Disability, or Termination of Employment.
(a) In the event of termination of a Participant's employment
or services for the Company or its Affiliates for any reason other than for
Cause, death, or Disability, such Participant shall have the right to exercise
the Incentive Award at any time within three months after such termination of
employment to the extent of the full number of shares that such Participant was
entitled to purchase under the Incentive Award on the date of termination,
subject to the condition that no Incentive Award shall be exercisable after the
expiration of the term of the Incentive Award.
(b) If a Participant's employment or services is terminated by
the Company or its Affiliates for Cause, his Incentive Awards shall be
terminated as of the date of the misconduct.
(c) If a Participant's employment or services for the Company
or its Affiliates terminate for death or Disability, all Incentive Awards then
held by such Participant under the Plan expire on the earlier of (i) 12 months
from the date of such termination or (ii) the expiration date of such option.
The Incentive Award may be exercised by the personal representatives,
administrators, or guardian of the Participant or by any person or persons to
whom the Incentive Award is transferred by will or the applicable laws of
descent and distribution, but only to the extent of the full number of shares
such Participant was entitled to purchase under the Incentive Award on the date
of such death or termination of employment.
(d) Notwithstanding the foregoing, the Committee shall
establish and set forth in each Incentive Award agreement whether the Incentive
Award will continue to be exercisable, and the terms and conditions of such
exercise, if a Participant ceases to be employed by, or to provide services to,
the Company or its Affiliates, which provisions may be waived or modified by the
Committee at any time. If not so established in the agreement evidencing the
Incentive Award, the Incentive Award will be exercisable according to the
provisions of paragraphs (a), (b), and (c), above, which may be waived or
modified by the Committee at any time. If the Committee extends the
exercisability of an ISO beyond the time provided for in Code Section 422, the
ISO will become a Nonstatutory Stock Option.
<PAGE>
14. Tax Offset Rights.
(a) Whenever the Committee deems it appropriate, Tax Offset
Rights may be granted in connection with Nonstatutory Stock Options, SARs,
Performance Stock, or Restricted Stock. Tax Offset Rights shall be evidenced in
writing as part of the Agreement to which they pertain.
(b) Tax Offset Rights, (i) upon exercise of all or any part of
Nonstatutory Stock Option or SAR, (ii) upon grant of Performance Stock, or (iii)
upon the lapse of restrictions on Restricted Stock, entitle the Participant to
receive in cash from the Company an amount equal to or approximating the
Applicable Withholding Taxes.
(c) A Participant may exercise a Tax Offset Right by giving
the Committee written notice of exercise simultaneously with the exercise of a
Nonstatutory Stock Option or SAR, the receipt of an award of Performance Stock,
or the lapse of restrictions on Restricted Stock. To the extent exercised, the
Tax Offset Right shall lapse.
(d) The Committee may limit the amount the Participant will be
entitled to receive in connection with a Tax Offset Right and may include any
provisions in a Tax Offset Right that the Committee deems appropriate to ensure
that the Tax Offset Right will not be characterized as an "equity security" or
"derivative security" for purposes of Section 16 of the 1934 Act and the rules
and regulations thereunder.
15. Repurchase Rights, Escrow.
(a) The Committee shall have the discretion to authorize the
issuance of unvested shares of Common Stock pursuant to the exercise of an
Incentive Award. In the event of termination of the Participant's employment or
services or breach of a material obligation owed by Participant to the Company
or its Subsidiaries, all shares of Common Stock issued upon exercise of an
Incentive Award which are unvested at the time of cessation of employment or
services shall be subject to repurchase at the exercise price paid for such
shares. The terms and conditions upon which such repurchase right shall be
exercisable (including the period and procedure for exercise) shall be
established by the Committee and set forth in the agreement evidencing such
right. All of the Company's outstanding repurchase rights under this Section
15(a) are assignable by the Company at any time and shall remain in full force
and effect in the event of a Change of Control; provided that if the vesting of
Incentive Awards is accelerated pursuant to Section 18, the repurchase rights
under this Section 15(a) shall terminate and all shares subject to such
terminated rights shall immediately vest in full. The Committee shall have the
discretionary authority, exercisable either before or after the Participant's
cessation of employment or services or breach of a material obligation owed by
Participant to the Company or its Subsidiaries, to cancel the Company's
outstanding repurchase rights with respect to one or more shares purchased or
purchasable by the Participant under an Incentive Award and thereby accelerate
the vesting of such shares in whole or in part at any time.
(b) To ensure that shares of Common Stock acquired upon
exercise of an Incentive Award that are subject to any repurchase right,
stockholders agreement, security for any promissory note, or other restrictions,
including without limitation those set forth in Section 6(b), will be available
for repurchase, the Committee may require the Participant to deposit the
certificate or certificates evidencing such shares with an agent designated by
the Committee under the terms and conditions of escrow and security agreements
approved by the Committee. If the Committee does not require such deposit as a
condition of exercise of an Incentive Award, the Committee reserves the right at
any time to require the Participant to so deposit the certificate or
certificates in escrow. The Company shall bear the expense of the escrow. As
soon as practicable after the expiration of any repurchase rights, stockholders
agreement, or other restrictions, and after full repayment of any promissory
note secured by the shares in escrow, the agent shall deliver to the Participant
the shares no longer subject to such restrictions and no longer security for any
promissory note. In the event shares held in escrow are subject to the Company's
exercise of a repurchase option or stockholders agreement, the notices required
to be given to the Participant shall be given to the agent and any payment
required to be given to the Participant shall be given to the agent. Within 30
days after payment by the Company, the agent shall deliver the shares which the
Company has purchased to the Company and shall deliver the payment received from
the Company to the Participant. In the event of a stock dividend, stock split,
or consolidation of shares or any like capital adjustment of any of the
outstanding securities of the Company, any and all new, substituted or
additional securities or other property to which the Participant is entitled by
reason of ownership of shares acquired upon exercise of an Incentive Award shall
be subject to any repurchase rights, stockholders agreement, and/or security for
any promissory note with the same force and effect as the shares subject to such
repurchase rights, stockholders agreement and/or security interest immediately
before such event
16. Termination, Modification, Change. If not sooner terminated by the
Board, this Plan shall terminate at the close of business ten years after the
effective date as set forth in Section 25 hereof. No Incentive Awards shall be
made under the Plan after its termination. The Board may terminate the Plan or
may amend the Plan in such respects as it shall deem advisable; provided that,
if and to the extent required by the Code or Rule 16b-3, no change shall be made
that increases the total number of shares of Common Stock reserved for issuance
pursuant to Incentive Awards granted under the Plan (except pursuant to Section
17), materially modifies the requirements as to eligibility for participation in
the Plan, or materially increases the benefits accruing to Participants under
the Plan, or unless such change is authorized by the shareholders of the
Company. Notwithstanding the foregoing, the Board may unilaterally amend the
Plan and Incentive Awards as it deems appropriate to ensure compliance with Rule
16b-3 and to cause ISOs to meet the requirements of the Code and regulations
thereunder. Except as provided in the preceding sentence, a termination or
amendment of the Plan shall not, without the consent of the Participant,
adversely affect a Participant's rights under an Incentive Award previously
granted to him.
17. Change in Capital Structure.
(a) In the event of a stock dividend, stock split, combination
of shares, recapitalization, reincorporation, or merger (whether or not the
Company is the surviving corporation), or other change in the Company's capital
stock (including, but not limited to, the creation or issuance to shareholders
generally of rights, options, or warrants for the purchase of common stock or
preferred stock of the Company), the number and kind of shares of stock or
securities of the Company to be subject to the Plan and to Incentive Awards then
outstanding or to be granted thereunder, the maximum number of shares or
securities which may be delivered under the Plan, the exercise price and other
relevant provisions shall be appropriately adjusted by the Committee, whose
determination shall be binding on all persons. The Committee shall have the
authority to cause the surviving corporation in any merger (provided the
surviving corporation agrees) to assume the Plan (including without limitation
all rights and obligations of all parties hereunder and under any Agreement
issued pursuant hereto) with such adjustments, if any, as the Committee shall
deem appropriate, and any such determination by the Committee shall be binding
on all parties. If the adjustment would produce fractional shares with respect
to any unexercised Option, the Committee may, but need not, adjust appropriately
the number of shares covered by the Option so as to eliminate the fractional
shares.
(b) Notwithstanding anything in the Plan to the contrary, the
Committee may take the foregoing actions without the consent of any Participant,
and the Committee's determination shall be conclusive and binding on all persons
for all purposes.
18. Change of Control. Except as otherwise provided in the agreement
that evidences the Incentive Award, in the event of a Change of Control, the
Committee shall determine whether provision will be made in connection with the
Change of Control for an appropriate assumption of the Incentive Awards
theretofore granted under the Plan (which assumption may be effected by means of
a payment to each Participant (by the Company or any other person or entity
involved in the Change of Control), in exchange for the cancellation of the
Incentive Awards held by such Participant, of the difference between the then
Fair Market Value of the aggregate number of shares of Common Stock then subject
to such Incentive Awards and the aggregate exercise price that would have to be
paid to acquire such shares) or for substitution of appropriate new Incentive
Awards covering stock of a successor corporation to the Company or stock of an
Affiliate of such successor corporation. If the Committee determines that such
an assumption or substitution will be made, the Committee shall give notice of
such determination to the Participants, and the provisions of such assumption or
substitution, and any adjustments made (i) to the number and kind of shares
subject to the outstanding Incentive Awards (or to the options in substitution
therefor), (ii) to the exercise prices, and/or (iii) to the terms and conditions
of the stock options, shall be binding on the Participants. Any such
determination shall be made in the sole discretion of the Committee and shall be
final, conclusive, and binding on all Participants. If the Committee, in its
sole discretion, determines that no such assumption or substitution will be
made, the Committee shall give notice of such determination to the Participants,
and each Incentive Award that is at the time outstanding shall automatically
accelerate so that each such Incentive Award shall, immediately before the
specified effective date for the Change of Control, become 100% vested and
exercisable, except that such acceleration will not occur if, in the opinion of
the Company's outside accountants, it would render unavailable "pooling of
interest" accounting for a Change of Control that would otherwise qualify for
such accounting treatment. All such Incentive Awards shall terminate and cease
to remain outstanding immediately following the consummation of the Change of
Control, except to the extent assumed by the successor corporation or an
Affiliate thereof.
19. Administration of the Plan. The Plan shall be administered by the
Committee, which shall consist of not less than two members of the Board, who
shall be appointed by the Board. The Committee shall have general authority to
impose any limitation or condition upon an Incentive Award the Committee deems
appropriate to achieve the objectives of the Incentive Award and the Plan and,
without limitation and in addition to powers set forth elsewhere in the Plan,
shall have the following specific authority:
(a) The Committee shall have the power and sole and complete
discretion to determine (i) which eligible persons shall receive Incentive
Awards and the nature of each Incentive Award, (ii) the number of shares of
Common Stock to be covered by each Incentive Award, (iii) whether Options shall
be ISOs or Nonstatutory Stock Options, (iv) when, whether, and to what extent
SARs shall be granted in connection with Options, (v) when, whether and to what
extent Tax Offset Rights shall be granted and the terms thereof, (vi) the time
or times when an Incentive Award shall be granted, (vii) whether an Incentive
Award shall become vested over a period of time and when it shall be fully
vested, (viii) when Options and SARs may be exercised, (ix) whether a Disability
exists, (x) the manner in which payment will be made upon the exercise of
Options or SARs, (xi) conditions relating to the length of time before
disposition of Common Stock received upon the exercise of Options or SARs is
permitted, (xii) whether to approve a Participant's election (A) to deliver
shares of already owned Common Stock to satisfy Applicable Withholding Taxes or
(B) to have the Company withhold from the shares to be issued upon the exercise
of a Nonstatutory Stock Option or SAR the number of shares necessary to satisfy
Applicable Withholding Taxes, (xiii) the terms and conditions applicable to
Restricted Stock Awards, (xiv) the terms and conditions on which restrictions
upon Restricted Stock shall lapse, (xv) whether to accelerate the time at which
any or all restrictions with respect to Restricted Stock will lapse or be
removed, (xvi) notice provisions relating to the sale of Common Stock acquired
under the Plan, (xvii) the terms of incentive programs, performance criteria,
and other factors relevant to the issuance of Performance Stock, and (xviii) any
additional requirements relating to Incentive Awards that the Committee deems
appropriate. Notwithstanding the foregoing, no "tandem stock options" (where two
stock options are issued together and the exercise of one option affects the
right to exercise the other option) may be issued in connection with ISOs. The
Committee shall have the power to amend the terms of previously granted
Incentive Awards so long as the terms as amended are consistent with the terms
of the Plan and provided that the consent of the Participant is obtained with
respect to any amendment that would be detrimental to him, except that such
consent will not be required if such amendment is for the purpose of complying
with Rule 16b-3 or any requirement of the Code applicable to the Incentive
Award.
(b) The Committee may adopt rules and regulations for carrying
out the Plan. The interpretation and construction of any provision of the Plan
by the Committee shall be final and conclusive. The Committee may consult with
counsel, who may be counsel to the Company, and shall not incur any liability
for any action taken in good faith in reliance upon the advice of counsel.
(c) A majority of the members of the Committee shall
constitute a quorum, and all actions of the Committee shall be taken by a
majority of the members present. Any action may be taken by a written instrument
signed by all of the members, and any action so taken shall be fully effective
as if it had been taken at a meeting.
(d) If and so long as the Common Stock is registered under
Section 12 of the 1934 Act, the Board shall consider in selecting the membership
of the Committee, with respect to any person subject or likely to become subject
to Section 16 of the 1934 Act, the provisions regarding (a) "outside directors"
as contemplated by Code Section 162(m) and (b) "nonemployee directors" as
contemplated by Rule 16b-3 under the 1934 Act. The Committee may consist of two
or more members of the Board, subject to such limitations as the Board deems
appropriate. Committee members shall serve for such terms as the Board may
determine, subject to removal by the Board at any time.
20. Market Standoff.
(a) In connection with any underwritten public offering by the
Company of its equity securities pursuant to an effective registration statement
filed under the 1933 Act, including the Company's initial public offering, a
person shall not sell, or make any short sale of, loan, hypothecate, pledge,
grant any option for the purchase of, otherwise dispose or transfer for value,
or otherwise agree to engage in any of the foregoing transactions with respect
to, any shares issued pursuant to an Incentive Award granted under the Plan
without the prior written consent of the Company or its underwriters. Such
limitations shall be in effect only if and to the extent and for such period of
time as may be requested by the Company or such underwriters and agreed to by
the Company's officers and directors; provided, however, that in no event shall
the weighted average number of days in the portion of such period that occurs
after the effective date of the Company's registration statement exceed 180
days. The limitations of this paragraph shall in all events terminate two years
after the effective date of the Company's initial public offering.
(b) In the event of any stock split, stock dividend,
recapitalization, combination of shares, exchange of shares, or other change
affecting the Company's outstanding Common Stock affected as a class without the
Company's receipt of consideration, then any new, substituted or additional
securities distributed with respect to the purchased shares shall be immediately
subject to the provisions of this Section 20, to the same extent the purchased
shares are at such time covered by such provisions.
(c) To enforce the limitations of this Section 20, the Company
may impose stop-transfer instructions with respect to the purchase shares and
any new, substituted or additional securities distributed with respect to the
purchased shares until the end of the applicable standoff period.
21. Registration.
(a) The Company shall be under no obligation to any
Participant to register for offering or resale or to qualify for exemption under
the 1933 Act, or to register or qualify under state securities laws, any shares
of Common Stock, security or interest in a security paid or issued under, or
created by, the Plan, or to continue in effect any such registrations or
qualifications if made. The Company may issue certificates for shares with such
legends and subject to such restrictions on transfer and stop-transfer
instructions as counsel for the Company deems necessary or desirable for
compliance by the Company with federal and state securities laws.
(b) Inability of the Company to obtain, from any regulatory
body having jurisdiction, the authority deemed by the Company's counsel to be
necessary for the lawful issuance and sale of any shares hereunder or the
unavailability of an exemption from registration for the issuance and sale of
any shares hereunder shall relieve the Company of any liability in respect of
the nonissuance or sale of such shares as to which such requisite authority
shall not have been obtained.
(c) As a condition to the exercise of an Incentive Award, the
Company may require the Participant to represent and warrant at the time of any
such exercise or receipt that such shares are being purchased or received only
for the Participant's own account and without any present intention to sell or
distribute such shares if, in the opinion of counsel for the Company, such a
representation is required by any relevant provision of the aforementioned laws.
At the option of the Company, a stop-transfer order against any such shares may
be placed on the official stock books and records of the Company, and a legend
indicating that such shares may not be pledged, sold or otherwise transferred,
unless an opinion of counsel is provided (concurred in by counsel for the
Company) stating that such transfer is not in violation of any applicable law or
regulation, may be stamped on stock certificates to ensure exemption from
registration. The Committee may also require such other action or agreement by
the Participant as may from time to time be necessary to comply with the federal
and state securities laws.
22. Compliance With Laws and Approval of Regulatory Bodies. No Option
or SAR shall be exercisable, no Common Stock shall be issued, no certificates
for shares of Common Stock shall be delivered, and no payment shall be made
under this Plan except in compliance with all applicable federal and state laws
and regulations (including, without limitation, withholding tax requirements)
and the rules of all domestic stock exchanges on which the Company's shares may
be listed. The Company shall have the right to rely on an opinion of its counsel
as to such compliance. Any share certificate issued to evidence Common Stock for
which an Option or SAR is exercised may bear such legends and statements as the
Committee may deem advisable to assure compliance with federal and state laws
and regulations. No Option or SAR shall be exercisable, no Common Stock shall be
issued, no certificate for shares shall be delivered, and no payment shall be
made under this Plan until the Company has obtained such consent or approval as
the Committee may deem advisable from regulatory bodies having jurisdiction over
such matters. The exercise of any Option granted under this Plan shall
constitute a Participant's full and complete consent to whatever action the
Committee deems necessary to satisfy any federal and state tax withholding
requirements which the Committee, acting in its discretion, deems applicable to
such exercise.
23. Notice. All notices and other communications required or permitted
to be given under this Plan shall be in writing and shall be deemed to have been
duly given if delivered personally or mailed first class, postage prepaid, as
follows: (a) if to the Company - at its principal business address to the
attention of the Treasurer and (b) if to any Participant - at the last address
of the Participant known to the sender at the time the notice or other
communication is sent.
24. Interpretation. The terms of this Plan are subject to all present
and future regulations and rulings of the Secretary of the Treasury or his
delegate relating to the qualification of ISOs under the Code. If any provision
of the Plan conflicts with any such regulation or ruling, then that provision of
the Plan shall be void and of no effect. The terms of this Plan shall be
governed by the laws of the Commonwealth of Virginia.
25. Effective Date of the Plan. This Plan shall be effective on August
1, 1997, and shall be submitted to the shareholders of the Company for approval.
Until (i) the Plan has been approved by the Company's shareholders, and (ii) the
requirements of any applicable State securities laws have been met, no
Restricted Stock shall be awarded, no Performance Stock shall be issued and no
Option or SAR shall be exercisable.
IN WITNESS WHEREOF, the Company has caused this Plan to be adopted as
set forth herein this 1st day of August, 1997.
VALUE AMERICA, INC.
By: /s/ Rex Scatena
---------------
Its: President
Exhibit 10.22
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement") is entered into as
of June 3, 1998, by and between VALUE AMERICA, INC. (the "Company"), a Virginia
corporation, and CAPITAL ADVISERS, L.L.C., a Virginia limited liability company
("Investor").
R E C I T A L S
A. Concurrently with entering into this Agreement, the Company and
Investor are entering into a Stock Purchase Agreement as defined below bearing
the same date as this Agreement under which Investor is agreeing to purchase
48,054 shares of the Company's Common Stock, as defined below (the "Shares"),
from Craig A. Winn, a resident of the Commonwealth of Virginia and the Chairman
and Chief Executive Officer of the Company, on the terms and subject to the
conditions appearing therein, and under which Craig A. Winn is granting Investor
an option to purchase an additional 48,053 shares of Common Stock.
B. The execution and delivery of this Agreement by the parties
hereto are a condition to Investor's obligation to purchase the Shares from
Craig A. Winn.
C. The Company is entering into this Agreement in consideration for the
Investor's assistance to the Company in securing investors in the Company's
Series B Preferred Stock.
A G R E E M E N T
THEREFORE, the parties hereto hereby agree as follows:
1. Definitions. Unless the context otherwise requires, the terms defined
in this Section 1 shall have the meanings herein specified for all purposes of
this Agreement, applicable to both the singular and plural forms of any of the
terms herein defined.
"Agreement" means this Registration Rights Agreement.
"Board" means the Board of Directors of the Company.
"Common Stock" means the common stock of the Company, without par
value per share.
"Commission" means the Securities and Exchange Commission.
"Equity Security" has the meaning assigned to it in the Preferred Stock
Purchase Agreement.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Holder" of any security means the record or beneficial owner of such
security.
"Holders of a Majority of the Registrable Securities" means the Person or
Persons who are the Holders of greater than 50% of the shares of Registrable
Securities then outstanding.
<PAGE>
"Initiating Holders" means with respect to each registration pursuant to
Section 2 the Holder or Holders of at least 100% of the shares of Registrable
Securities then outstanding.
"Investor" has the meaning assigned to it in the introductory paragraph
of this Agreement.
"Person" includes any natural person, corporation, trust, association,
company, partnership, joint venture and other entity and any government,
governmental agency, instrumentality or political subdivision.
"Stock Purchase Agreement" means the Stock Purchase Agreement dated as
of June 3, 1998 between Craig A. Winn and Investor.
The terms "register," "registered" and "registration" refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering of the
effectiveness of such registration statement.
"Registrable Securities" means (1) 48,054 shares of Common Stock purchased
by Investor pursuant to the Stock Purchase Agreement, and, if Investor has
exercised the Option, as defined in the Stock Purchase Agreement, the 48,053
shares of Common Stock representing the Option Shares, as defined in the Stock
Purchase Agreement, and (2) any securities issued or issuable with respect to
the Common Stock referred to in clause (1) above by way of a stock dividend or
stock split or in connection with a combination of shares, reclassification,
recapitalization, merger or consolidation or reorganization; provided, however,
that such shares of Common Stock shall (a) only be treated as Registrable
Securities if and so long as they have not been sold or transferred to any
Person other than the Investor, and (b) not be treated as Registrable Securities
after the Company has completed its initial firmly underwritten public offering
registered under the Securities Act if the Holder thereof is lawfully able to
sell such shares of Common Stock without registration and in compliance with all
other applicable securities laws and in reliance upon Rule 144 (k) of the
Commission and has received a reasonably satisfactory opinion of the Company's
counsel (which counsel is reasonably satisfactory to such Holder) and its own
counsel to this effect and all transfer restrictions and restrictive legends
have been removed from the certificates evidencing such shares.
"Securities Act" means the Securities Act of 1933, as amended, together
with the rules and regulations promulgated thereunder.
2. Required Registration.
(a) If and whenever the Company shall receive a written request
therefor from Initiating Holders, the Company agrees to prepare and file
promptly a registration statement under the Securities Act covering the
shares of Registrable Securities which are the subject of such request and
agrees to use its best efforts to cause such registration statement to
become effective as expeditiously as possible. Upon the receipt of such
request, the Company agrees to give promptly written notice to all Holders
of Registrable Securities that such registration is to be effected. The
Company agrees to include in such registration statement such shares of
Registrable Securities for which it has received written requests to
register such shares by the Holders thereof within thirty (30) days after
the receipt of written notice from the Company.
(b) The Company shall be obligated to prepare, file and cause to
become effective only one Form S-3 registration statements pursuant to
this Section 2.
2
<PAGE>
(c) The Company shall not be required by this Section 2 to effect a
registration of Registrable Securities pursuant to any registration
statement, other than on Form S-3.
(d) If the Holders initiating a request for the registration of
Registrable Securities pursuant to this Section 2 intend to distribute the
Registrable Securities covered by their request by means of an
underwriting, they agree to provide the Company with the name of the
managing underwriter or underwriters (the "managing underwriter") that a
majority interest of the Initiating Holders requesting such registration
propose to employ, as a part of their request made pursuant to this
Section 2, and the Company agrees to include such information in its
written notice referred to in Section 2(a). In such event the right of any
Holder to registration pursuant to this Section 2 shall be conditioned
upon such Holder's participation in such underwriting and the inclusion of
such Holder's Registrable Securities in the underwriting to the extent
requested (unless otherwise mutually agreed by the Holders of a Majority
of the Registrable Securities initiating such request for registration and
such Holder) to the extent provided herein. All Holders proposing to
distribute their securities through such underwriting agree to enter into
(together with the Company) an underwriting agreement with the underwriter
or underwriters selected for such underwriting, in the manner set forth
above, provided that such underwriting agreement is in customary form and
is reasonably acceptable to the Holders of a majority of the shares of
Registrable Securities to be included in such registration.
(e) Notwithstanding any other provision of this Section 2, if the
managing underwriter of an underwritten distribution advises the Company
and the Holders of Registrable Securities participating in such
registration in writing that in its good faith judgment the number of
shares of Registrable Securities requested to be included in such
registration exceeds the number of shares of Registrable Securities which
can be sold in such offering, then (i) the number of shares of Registrable
Securities and other securities so requested to be included in the
offering shall be reduced to that number of shares which in the good faith
judgment of the managing underwriter can be sold in such offering (except
for shares to be included pursuant to demand registration rights granted
by the Company in accordance with Section 7 of the December 17, 1997
Agreement, as may be amended and restated from time to time, as defined in
Section 7 hereof, in an offering initiated upon the exercise of such
rights, and except for shares to be issued by the Company in an offering
initiated by the Company, which shall have priority over the shares of
Registrable Securities), and (ii) such reduced number of shares shall be
allocated among all participating Holders of Registrable Securities and
the holders of other securities in proportion, as nearly as practicable,
to the respective number of shares of Registrable Securities and other
securities held by such Holders and other holders at the time of filing
the registration statement. Those Registrable Securities and other
securities which are excluded from the underwriting by reason of the
managing underwriter's marketing limitation and all other Registrable
Securities not originally requested to be so included shall not be
included in such registration and shall be withheld from the market by the
Holders thereof for a period, not to exceed one hundred and eighty (180)
days, which the managing underwriter reasonably determines is necessary to
effect the underwritten public offering.
(f) If the managing underwriter has not limited the number of
Registrable Securities to be underwritten, the Company and, subject to the
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requirements of Section 7 hereof, other holders of the Company's
securities may include securities for its (or their) own account in such
registration if the managing underwriter so agrees and if the number of
Registrable Securities which would otherwise have been included in such
registration and underwriting will not thereby be limited.
3. Incidental Registration.
(a) Each time the Company shall determine to file a registration
statement under the Securities Act other than pursuant to Section 2 hereof
and other than on Form S-4 or S-8 in connection with the proposed offer
and sale for money of any of its securities either for its own account or
on behalf of any other security holder, the Company agrees to give
promptly written notice of its determination to all Holders of Registrable
Securities. Upon the written request of a Holder of any shares of
Registrable Securities given within thirty (30) days after the receipt of
such written notice from the Company, subject to a maximum of two such
written requests, the Company agrees to cause all such Registrable
Securities, the Holders of which have so requested registration thereof,
to be included in such registration statement and registered under the
Securities Act, all to the extent requisite to permit the sale or other
disposition by the prospective seller or sellers of the Registrable
Securities to be so registered.
(b) If the registration of which the Company gives written notice
pursuant to Section 3(a) is for a public offering involving an
underwriting, the Company agrees to so advise the Holders as a part of its
written notice. In such event the right of any Holder to registration
pursuant to this Section 3 shall be conditioned upon such Holder's
participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting to the extent provided herein.
All Holders proposing to distribute their Registrable Securities through
such underwriting agree to enter into (together with the Company and the
other holders distributing their securities through such underwriting) an
underwriting agreement with the underwriter or underwriters selected for
such underwriting by the Company, provided that such underwriting
agreement is in customary form and is reasonably acceptable to the Holders
of a majority of the shares of Registrable Securities requested to be
included in such registration.
(c) Notwithstanding any other provision of this Section 3, if the
managing underwriter of an underwritten distribution advises the Company
and the Holders of the Registrable Securities participating in such
registration in writing that in its good faith judgment the number of
shares of Registrable Securities and the other securities requested to be
registered exceeds the number of shares of Registrable Securities and
other securities which can be sold in such offering, then (i) the number
of shares of Registrable Securities and other securities so requested to
be included in the offering shall be reduced to that number of shares
which in the good faith judgment of the managing underwriter can be sold
in such offering (except for shares to be included pursuant to demand
registration rights granted by the Company in an offering initiated upon
the exercise of such rights, and except for shares to be issued by the
Company in an offering initiated by the Company, which shall have priority
over the shares of Registrable Securities), and (ii) such reduced number
of shares shall be allocated among all participating Holders of
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Registrable Securities and the holders of other securities in proportion,
as nearly as practicable, to the respective number of shares of
Registrable Securities and other securities held by such Holders and other
holders at the time of filing the registration statement. All Registrable
Securities and other securities which are excluded from the underwriting
by reason of the underwriter's marketing limitation and all other
Registrable Securities not originally requested to be so included shall
not be included in such registration and shall be withheld from the market
by the Holders thereof for a period, not to exceed one hundred and eighty
(180) days, which the managing underwriter reasonably determines is
necessary to effect the underwritten public offering.
4. Registration Procedures. If and whenever the Company is required
by the provisions of Section 2 or 3 hereof to effect the registration of
Registrable Securities under the Securities Act, the Company, at its
expense and as expeditiously as possible, agrees to:
(a) In accordance with the Securities Act and all applicable rules
and regulations, prepare and file with the Commission a registration
statement with respect to such securities and use its best efforts to
cause such registration statement to become and remain effective until the
securities covered by such registration statement have been sold, and
prepare and file with the Commission such amendments and supplements to
such registration statement and the prospectus contained therein as may be
necessary to keep such registration statement effective and such
registration statement and prospectus accurate and complete until the
securities covered by such registration statement have been sold;
(b) If the offering is to be underwritten in whole or in part, enter
into a written underwriting agreement in form and substance reasonably
satisfactory to the managing underwriter of the public offering and the
Holders of a majority of the Registrable Securities participating in such
offering;
(c) Furnish to the Holders of securities participating in such
registration and to the underwriters of the securities being registered
such number of copies of the registration statement and each amendment and
supplement thereto, preliminary prospectus, final prospectus and such
other documents as such underwriters and Holders may reasonably request in
order to facilitate the public offering of such securities;
(d) Use its best efforts to register or qualify the securities
covered by such registration statement under such state securities or blue
sky laws of such jurisdictions as such participating Holders and
underwriters may reasonably request within ten (10) days prior to the
original filing of such registration statement, except that the Company
shall not for any purpose be required to execute a general consent to
service of process or to qualify to do business as a foreign corporation
in any jurisdiction where it is not so qualified;
(e) Notify the Holders participating in such registration, promptly
after it shall receive notice thereof, of the date and time when such
registration statement and each post-effective amendment thereto has
become effective or a supplement to any prospectus forming a part of such
registration statement has been filed;
(f) Notify such Holders promptly of any request by the Commission
for the amending or supplementing of such registration statement or
prospectus or for additional information;
(g) Prepare and file with the Commission, promptly upon the request
of any such Holders, any amendments or supplements to such registration
statement or prospectus which, in the opinion of counsel for such Holders,
is required under the Securities Act or the rules and regulations
thereunder in connection with the distribution of the Registrable
Securities by such Holders;
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(h) Prepare and file promptly with the Commission, and promptly
notify such Holders of the filing of, such amendments or supplements to
such registration statement or prospectus as may be necessary to correct
any statements or omissions if, at the time when a prospectus relating to
such securities is required to be delivered under the Securities Act, any
event has occurred as the result of which any such prospectus or any other
prospectus as then in effect would include an untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading;
(i) In case any of such Holders or any underwriter for any such
Holders is required to deliver a prospectus at a time when the prospectus
then in circulation is not in compliance with the Securities Act or the
rules and regulations of the Commission, prepare promptly upon request
such amendments or supplements to such registration statement and such
prospectus as may be necessary in order for such prospectus to comply with
the requirements of the Securities Act and such rules and regulations;
(j) Advise such Holders, promptly after it shall receive notice or
obtain knowledge thereof, of the issuance of any stop order by the
Commission suspending the effectiveness of such registration statement or
the initiation or threatening of any proceeding for that purpose and
promptly use its best efforts to prevent the issuance of any stop order or
to obtain its withdrawal if such stop order should be issued;
(k) Not file any registration statement or prospectus or any
amendment or supplement to such registration statement or prospectus to
which the Holders of a majority of the Registrable Securities included or
to be included in a registration have reasonably objected on the grounds
that such registration statement or prospectus or amendment or supplement
thereto does not comply in all material respects with the requirements of
the Securities Act or the rules and regulations thereunder, after having
been furnished with a copy thereof at least five (5) business days prior
to the filing thereof; provided, however, that the failure of such Holders
or their counsel to review or object to any registration statement or
prospectus or any amendment or supplement to such registration statement
or prospectus shall not affect the rights of such Holders or their
respective officers, directors, partners, legal counsel, accountants or
controlling Persons or any underwriter or any controlling Person of such
underwriter under Section 6 hereof;
(l) Make available for inspection upon request by any Holder of
Registrable Securities covered by such registration statement, by any
managing underwriter of any distribution to be effected pursuant to such
registration statement and by any attorney, accountant or other agent
retained by any such Holder or any such underwriter, all financial and
other records, pertinent corporate documents and properties of the
Company, and cause all of the Company's officers, directors and employees
to supply all information reasonably requested by any such Holder,
underwriter, attorney, accountant or agent in connection with such
registration statement; and
(m) At the request of any Holder of Registrable Securities covered
by such registration statement, furnish to such Holder on the effective
date of the registration statement or, if such registration includes an
underwritten public offering, at the closing provided for in the
underwriting agreement, (i) an opinion dated such date of the counsel
representing the Company for the purposes of such registration, addressed
to the underwriters, if any, and to the Holder or Holders making such
request, covering such matters with respect to the registration statement,
the prospectus and each amendment or supplement thereto, proceedings under
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state and federal securities laws, other matters relating to the Company,
the securities being registered and the offer and sale of such securities
as are customarily the subject of opinions of issuer's counsel provided to
underwriters in underwritten public offerings, and such opinion of counsel
shall additionally cover such legal matters with respect to the
registration as such requesting Holder or Holders may reasonably request,
and (ii) letters dated each of such effective date and such closing date,
from the independent certified public accountants of the Company,
addressed to the underwriters, if any, and to the Holder or Holders making
such request, stating that they are independent certified public
accountants within the meaning of the Securities Act and dealing with such
matters as the underwriters may request, or if the offering is not
underwritten that in the opinion of such accountants the financial
statements and other financial data of the Company included in the
registration statement or the prospectus or any amendment or supplement
thereto comply in all material respects with the applicable accounting
requirements of the Securities Act, and additionally covering such other
accounting and financial matters, including information as to the period
ending not more than five (5) business days prior to the date of such
letter with respect to the registration statement and prospectus, as such
requesting Holder or Holders may reasonably request.
5. Expenses.
(a) With respect to each registration effected pursuant to Section 2
hereof and with respect to each inclusion of shares of Registrable
Securities in a registration statement pursuant to Section 3 hereof, the
Company agrees to bear all fees, costs and expenses of and incidental to
such registration and the public offering in connection therewith;
provided, however, that security holders participating in any such
registration agree to bear their pro rata share of the underwriting
discount and commissions.
(b) The fees, costs and expenses of registration to be borne as
provided in paragraph (a) above, shall include, without limitation, all
registration, filing and NASD fees, printing expenses, fees and
disbursements of counsel and accountants for the Company, fees and
disbursements of counsel for the underwriter or underwriters of such
securities (if the Company and/or selling security holders are otherwise
required to bear such fees and disbursements), all legal fees and
disbursements and other expenses of complying with state securities or
blue sky laws of any jurisdictions in which the securities to be offered
are to be registered or qualified, reasonable fees and disbursements of
one firm of counsel for the selling security holders, selected by the
Holders of a majority of the shares of Registrable Securities to be
included in such registration, and the premiums and other costs of
policies of insurance against liability arising out of such public
offering.
6. Indemnification.
(a) The Company hereby agrees to indemnify and hold harmless each
Holder of Registrable Securities which are included in a registration
statement pursuant to the provisions of this Agreement and each of such
Holder's officers, directors, partners, legal counsel and accountants, and
each Person who controls such Holder within the meaning of the Securities
Act and any underwriter (as defined in the Securities Act) for such
Holder, and any Person who controls such underwriter within the meaning of
the Securities Act, from and against, and agrees to reimburse such Holder,
its officers, directors, partners, legal counsel, accountants and
controlling Persons and each such underwriter and controlling Person of
such underwriter with respect to, any and all claims, actions (actual or
threatened), demands, losses, damages, liabilities, costs and expenses to
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which such Holder, its officers, directors, partners, legal counsel,
accountants or controlling Persons, or any such underwriter or controlling
Person of such underwriter may become subject under the Securities Act or
otherwise, insofar as such claims, actions, demands, losses, damages,
liabilities, costs or expenses arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained in
such registration statement, any prospectus contained therein, or any
amendment or supplement thereto, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not
misleading; provided, however, that the Company will not be liable in any
such case to the extent that any such claim, action, demand, loss, damage,
liability, cost or expense is caused by an untrue statement or alleged
untrue statement or omission or alleged omission so made in strict
conformity with written information furnished by such Holder, such
underwriter or such controlling Person specifically for use in the
preparation thereof.
(b) Each Holder of shares of Registrable Securities which are
included in a registration statement pursuant to the provisions of this
Agreement hereby agrees, severally (in the proportion that the number of
shares sold by it bears to the total number of shares sold in the
applicable registration) and not jointly, to indemnify and hold harmless
the Company, its officers, directors, legal counsel and accountants and
each Person who controls the Company within the meaning of the Securities
Act, from and against, and agrees to reimburse the Company, its officers,
directors, legal counsel, accountants and controlling Persons with respect
to, any and all claims, actions, demands, losses, damages, liabilities,
costs or expenses to which the Company, its officers, directors, legal
counsel, accountants or such controlling Persons may become subject under
the Securities Act or otherwise, insofar as such claims, actions, demands,
losses, damages, liabilities, costs or expenses are caused by any untrue
or alleged untrue statement of any material fact contained in such
registration statement, any prospectus contained therein or any amendment
or supplement thereto, or are caused by the omission or the alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances in
which they were made, not misleading, in each case to the extent, but only
to the extent, that such untrue statement or alleged untrue statement or
omission or alleged omission was so made in reliance upon and in strict
conformity with written information furnished by such Holder specifically
for use in the preparation thereof. Notwithstanding the foregoing, no
Holder of Registrable Securities shall be obligated hereunder to pay more
than the net proceeds realized by it upon its sale of Registrable
Securities included in such registration statement.
(c) Promptly after receipt by a party indemnified pursuant to the
provisions of subsection (a) or (b) of this Section 6 of notice of the
commencement of any action involving the subject matter of the foregoing
indemnity provisions, such indemnified party will, if a claim therefor is
to be made against the indemnifying party pursuant to the provisions of
subsection (a) or (b), notify the indemnifying party of the commencement
thereof; but the omission so to notify the indemnifying party will not
relieve it from any liability which it may have to an indemnified party
otherwise than under this Section 6 and shall not relieve the indemnifying
party from liability under this Section 6 unless such indemnifying party
is prejudiced by such omission. In case any such action is brought against
any indemnified party, and it notifies the indemnifying party of the
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commencement thereof, the indemnifying party will be entitled to
participate therein and, to the extent that it may wish, jointly with any
other indemnifying parties similarly notified, to assume the defense
thereof, with counsel satisfactory to such indemnified party; provided,
however, that if the defendants in any such action include both the
indemnified party and the indemnifying party and the indemnified party
shall have reasonably concluded that there may be legal defenses available
to it and/or other indemnified parties which are different from or
additional to those available to the indemnifying party, the indemnified
party or parties shall have the right to select separate counsel (in which
case the indemnifying party shall not have the right to direct the defense
of such action on behalf of the indemnified party or parties). Upon the
permitted assumption by the indemnifying party of the defense of such
action, and approval by the indemnified party of counsel, the indemnifying
party shall not be liable to such indemnified party under subsection (a)
or (b) for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof (other than
reasonable costs of investigation) unless (i) the indemnified party shall
have employed separate counsel in connection with the assertion of legal
defenses in accordance with the proviso to the next preceding sentence,
(ii) the indemnifying party shall not have employed counsel satisfactory
to the indemnified party to represent the indemnified party within a
reasonable time, (iii) the indemnifying party and its counsel do not
actively and vigorously pursue the defense of such action, or (iv) the
indemnifying party has authorized the employment of counsel for the
indemnified party at the expense of the indemnifying party. No
indemnifying party shall be liable to an indemnified party for any
settlement of any action or claim without the consent of the indemnifying
party and no indemnifying party may unreasonably withhold its consent to
any such settlement. No indemnifying party will consent to entry of any
judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
indemnified party of a release from all liability with respect to such
claim or litigation.
(d) If the indemnification provided for in subsection (a) or (b) of
this Section 6 is held by a court of competent jurisdiction to be
unavailable to a party to be indemnified with respect to any claims,
actions, demands, losses, damages, liabilities, costs or expenses referred
to therein, then each indemnifying party under any such subsection, in
lieu of indemnifying such indemnified party thereunder, hereby agrees to
contribute to the amount paid or payable by such indemnified party as a
result of such claims, actions, demands, losses, damages, liabilities,
costs or expenses in such proportion as is appropriate to reflect the
relative fault of the indemnifying party on the one hand and of the
indemnified party on the other in connection with the statements or
omissions which resulted in such claims, actions, demands, losses,
damages, liabilities, costs or expenses, as well as any other relevant
equitable considerations. The relative fault of the indemnifying party and
of the indemnified party shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by the indemnifying party or by the indemnified party
and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission.
Notwithstanding the foregoing, the amount any Holder of Registrable
Securities shall be obligated to contribute pursuant to this subsection
(d) shall be limited to an amount equal to the per share public offering
price (less any underwriting discount and commissions) multiplied by the
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number of shares of Registrable Securities sold by such Holder pursuant to
the registration statement which gives rise to such obligation to
contribute (less the aggregate amount of any damages which such Holder has
otherwise been required to pay in respect of such claim, action, demand,
loss, damage, liability, cost or expense or any substantially similar
claim, action, demand, loss, damage, liability, cost or expense arising
from the sale of such Registrable Securities).
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Securities Act) shall be entitled to contribution hereunder
from any person who was not guilty of such fraudulent misrepresentation.
(e) In addition to its other obligation under this Section 6, the
Company further agrees to reimburse each Holder of Registrable Securities
included in a registration statement pursuant to this Agreement (and each
of such Holder's controlling Persons, officers, directors, parties, legal
counsel, accountants and underwriters (and controlling Persons of such
underwriters)) on a semi-annual basis for all reasonable legal fees and
other expenses incurred in connection with investigating or defending any
claim, action, investigation, inquiry or other proceeding arising out of
or based upon any statement or omission, or any alleged statement or
admission, described in subsection (a) of this Section 6, notwithstanding
the possibility that such payments might later be held to be improper. To
the extent that any payment is ultimately held to be improper, each Person
receiving such payment shall promptly refund such payment.
7. Limitation on Registration Rights. The Investor hereby acknowledges and
agrees that the rights granted under this Agreement are subject to and
restricted by Section 7 of that certain Registration Rights Agreement, by and
between the Company and The Union Labor Life Insurance Company, a Maryland
Corporation acting on behalf of its Separate Account P (which is not a separate
entity) dated as of December 17, 1997 (the "December 17, 1997 Agreement"), as
may be amended and restated from time to time, which Section 7 is incorporated
herein by reference and which December 17, 1997 Agreement is attached hereto as
Appendix A.
8. Reporting Requirements Under the Exchange Act. When it is first legally
required to do so, the Company agrees to register its Common Stock under Section
12 of the Exchange Act and agrees to keep effective such registration and to
file timely such information, documents and reports as the Commission may
require or prescribe under Section 13 of the Exchange Act. From and after the
effective date of the first registration statement filed by the Company under
the Securities Act, the Company agrees to file timely (whether or not it shall
then be required to do so) such information, documents and reports as the
Commission may require or prescribe under Section 13 or 15(d) (whichever is
applicable) of the Exchange Act. Upon becoming subject to the reporting
requirements of either Section 13 or 15(d) of the Exchange Act, the Company
forthwith upon request agrees to furnish to any Holder of Registrable Securities
(a) a written statement by the Company that it has complied with such reporting
requirements, (b) a copy of the most recent annual or quarterly report of the
Company and (c) such other reports and documents filed by the Company with the
Commission as such Holder may reasonably request in availing itself of an
exemption for the sale of Registrable Securities without registration under the
Securities Act. The Company acknowledges and agrees that the purposes of the
requirements contained in this Section 8 are (a) to enable any such Holder to
comply with the current public information requirement contained in paragraph
(c) of Rule 144 under the Securities Act should such Holder ever wish to dispose
of any of the securities of the Company acquired by it without registration
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under the Securities Act in reliance upon Rule 144 (or any other similar
exemptive provision) and (b) to qualify the Company for the use of registration
statements on Form S-3. In addition, the Company agrees to take such other
measures and file such other information, documents and reports, as shall be
required of it hereafter by the Commission as a condition to the availability of
Rule 144 under the Securities Act (or any similar exemptive provision hereafter
in effect) and the use of Form S-3. The Company also covenants to use its best
efforts, to the extent that it is reasonably within its power to do so, to
qualify for the use of Form S-3.
9. Shareholder Information. The Company may request each Holder of
Registrable Securities as to which any registration is to be effected pursuant
to this Agreement to furnish the Company with such information with respect to
such Holder and the distribution of such Registrable Securities as the Company
may from time to time reasonably request in writing and as shall be required by
law or by the Commission in connection therewith, and each Holder of Registrable
Securities as to which any registration is to be effected pursuant to this
Agreement agrees to furnish the Company with such information.
10. Forms. All references in this Agreement to particular forms of
registration statements are intended to include, and shall be deemed to include,
references to all successor forms which are intended to replace, or to apply to
similar transactions as, the forms herein referenced.
11. Miscellaneous.
(a) Waivers and Amendments. With the written consent of the Holders
of a Majority of the Registrable Securities, the obligations of the
Company and the rights of Investor under this Agreement may be waived
(either generally or in a particular instance, either retroactively or
prospectively and either for a specified period of time or indefinitely),
and with the same consent the Company, when authorized by resolution of
its Board, may enter into a supplementary agreement for the purpose of
adding any provisions to or changing in any manner or eliminating any of
the provisions of this Agreement or of any supplemental agreement or
modifying in any manner the rights and obligations hereunder of Investor
and the Company; provided, however, that no such waiver or supplemental
agreement shall reduce the aforesaid proportion of Registrable Securities,
the Holders of which are required to consent to any waiver or supplemental
agreement, without the consent of the Holders of all of the Registrable
Securities. Upon the effectuation of each such waiver, consent or
agreement of amendment or modification, the Company agrees to give
promptly written notice thereof to the Holders of the Registrable
Securities who have not previously consented thereto in writing. Neither
this Agreement nor any provision hereof may be changed, waived, discharged
or terminated orally or by course of dealing, but only by a statement in
writing signed by the party against which enforcement of the change,
waiver, discharge or termination is sought, except to the extent provided
in this Section 12(a). Specifically, but without limiting the generality
of the foregoing, the failure of Investor at any time or times to require
performance of any provision hereof by the Company shall in no manner
affect the right of Investor at a later time to enforce the same. No
waiver by any party of the breach of any term or provision contained in
this Agreement, in any one or more instances, shall be deemed to be, or
construed as, a further or continuing waiver of any such breach, or a
waiver of the breach of any other term or covenant contained in this
Agreement.
(b) Effect of Waiver or Amendment. Investor acknowledges that by
operation of Section 12(a) hereof the Holders of a Majority of the
Registrable Securities will, subject to the limitations contained in such
Section 12(a), have the right and power to diminish or eliminate certain
rights of Investor under this Agreement.
(c) Rights of Investor Inter Se. Investor shall have the absolute
right to exercise or refrain from exercising any right or rights which
Investor may have by reason of this Agreement or any Registrable Security,
including, without limitation, the right to consent to the waiver of any
obligation of the Company under this Agreement and to enter into an
agreement with the Company for the purpose of modifying this Agreement or
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any agreement effecting any such modification; and Investor shall not
incur any liability to any Holder or Holders of Registrable Securities
with respect to exercising or refraining from exercising any such right or
rights.
(d) Notices. All notices, requests, consents and other
communications required or permitted hereunder shall be in writing
(including telecopy or similar writing) and shall be given,
if to the Company to:
Value America, Inc.
Commonwealth Drive
Charlottesville, Virginia 22901
Attention: Craig A. Winn, Chairman and Chief Executive
Officer
Telecopier: (804) 970-1981
with a copy to
Gary D. LeClair, Esq.
LeClair Ryan, A Professional Corporation
707 East Main Street
Eleventh Floor
Richmond, VA 23219
Telecopier: (804) 783-2294
if to Investor to:
CAPITAL ADVISERS, L.L.C.
c/o Timothy S. Driscoll
The Driscoll Companies
7200 Wisconsin Avenue
Suite 200
Bethesda, MD 20814
Telecopier: (301) 907-8808
with a copy to:
Terence P. Quinn, Esq.
Steptoe & Johnson LLP
1330 Connecticut Avenue, N.W.
Washington, D.C. 20036
Telecopier: (202) 429-3902
if to any other Holder of Registrable Securities to such
Holder at the address or to the telecopier number as such
Holder may specify by notice to the Company from time to time,
or to such other address or telecopier number as such party may specify for the
purpose by notice to the other party or parties to this Agreement, as the case
may be. A copy of any notice to the Company or to Investor or any other Holder
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of Registrable Securities shall also be given to each other Holder of
Registrable Securities. Any notice, request, consent or other communication
hereunder shall be deemed to have been given and received on the day on which it
is delivered (by any means including personal delivery, overnight air courier,
United States mail) or telecopied (or, if such day is not a business day or if
the notice, request, consent or communication is not telecopied during business
hours of the intended recipient, at the place of receipt, on the next following
business day).
(e) Severability. Should any one or more of the provisions of this
Agreement or of any agreement entered into pursuant to this Agreement be
determined to be illegal or unenforceable, all other provisions of this
Agreement and of each other agreement entered into pursuant to this
Agreement, shall be given effect separately from the provision or
provisions determined to be illegal or unenforceable and shall not be
affected thereby.
(f) Parties in Interest. All the terms and provisions of this
Agreement shall be binding upon and inure to the benefit of and be
enforceable by the respective successors and assigns of the parties
hereto, whether so expressed or not and, in particular, shall inure to the
benefit of and be enforceable by the Holder or Holders at the time of any
of the Registrable Securities, provided that the Company has received
notice of any such assignment. Subject to the immediately preceding
sentence, this Agreement shall not run to the benefit of or be enforceable
by any Person other than a party to this Agreement and its successors and
assigns.
(g) Headings. The headings of the sections, subsections and
paragraphs of this Agreement have been inserted for convenience of
reference only and do not constitute a part of this Agreement.
(h) Choice of Law. It is the intention of the parties that the
internal substantive laws of the Commonwealth of Virginia, without
reference to the conflicts of law provisions of any jurisdiction, should
govern the enforceability and validity of this Agreement, the construction
of its terms and the interpretation of the rights and duties of the
parties.
(i) Expenses. The Company agrees to pay and hold Investor and
Holders of the Registrable Securities harmless from liability for the
payment of, (i) the fees and expenses incurred in connection with any
requested waiver of the right of Investor or the consent of Investor to
contemplated acts of the Company not otherwise permissible by the terms of
this Agreement, (ii) the fees and expenses incurred with respect to any
amendment to this Agreement proposed by the Company (whether or not the
same becomes effective), (iii) the fees and expenses incurred in respect
of the enforcement of the rights granted under this Agreement, and (iv)
all costs of the Company's performance of and compliance with this
Agreement.
(j) Counterparts. This Agreement may be executed in any number of
counterparts and by different parties hereto in separate counterparts,
with the same effect as if all parties had signed the same document. All
such counterparts shall be deemed an original, shall be construed together
and shall constitute one and the same instrument.
(k) Authorship. This Agreement shall not be construed for or against
any party by reason of the authorship or claimed authorship of any
provision of this Agreement or by reason of the status of the respective
parties.
13
<PAGE>
(l) Entire Agreement. This Agreement, the Purchase Agreement and any
agreement, document or instrument referred to herein or therein,
constitute the entire agreement among the parties hereto with respect to
the subject matter hereof and thereof, and supersede all other prior
agreements or undertakings with respect thereto, both written and oral.
(m) Variations in Pronouns. All pronouns shall be deemed to refer to
masculine, feminine, neuter, singular or plural, as the identity of the
person(s) or entity(ies) may require.
[SIGNATURES APPEAR ON THE FOLLOWING PAGE]
14
<PAGE>
[SIGNATURE PAGE TO REGISTRATION RIGHTS AGREEMENT]
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their duly authorized officers thereof as of the day and year
first above written.
VALUE AMERICA, INC.
By:/s/ Craig A. Winn
_______________________
Craig A. Winn, Chairman and
Chief Executive Officer
CAPITAL ADVISERS, L.L.C.
By:/s/ Timothy S. Driscoll
________________________
Timothy S. Driscoll
Its:_______________________
<PAGE>
Appendix A
December 17, 1997 Agreement
A copy of the December 17, 1997 Agreement is attached hereto.
Exhibit 10.23
TOSHIBA AMERICA INFORMATION SYSTEMS
PRODUCT LISTING AGREEMENT
[Value America The Living Store! logo]
- --------------------------------------------------------------------------------
The Living Store:
Value America presents the merits of your products directly to the
consumer. Our dynamic multimedia category demonstrations effectively reveal the
features, benefits, quality, style and value of your products.
PICTURE LISTINGS:
Picture Listings are similar to placing your product on the shelf in a
typical retail store. We use your existing photographs, illustrations and copy
to show an image of the product followed by informative text and bullet points.
With Picture Listings we control the number of items, retail, duration and
product positioning within the store.
<TABLE>
<CAPTION>
Development Cost Participation Quantity
<S> <C>
Composition, Compression & Data Entry $ X $ X 1 (X)
-----
</TABLE>
BASIC - CATEGORY PRESENTATIONS:
Basic Presentations are created entirely from your existing library of
photographs, illustrations and copy. We transform the artwork you have created
for your catalogs and packaging into educational, customer-oriented sales
presentations. We select images, write headlines and craft supportive copy to
reveal each product's features, benefits, applications, style, quality and
value. Up to 10 products may be listed and sold.
Development Cost Participation Quantity
Research & Creative Development $ X $ X
Composition & Copy Selection $ X $ X
Graphic Design of Web Presentation $ X $ X X
Photo & Graphic Compression $ X $ X
Data Entry & Web Site Generation $ X $ X 2
Total Supplier Participation $ X $ X _____
MULTIMEDIA - CATEGORY PRESENTATIONS:
Multimedia Presentations are principally created from your library of
photographs and illustrations. We augment your artwork, with our own, and write
compelling consumer-oriented copy. We script and record a powerful narrative
dialog that speaks directly to the customer, enables automatic pagination, and
compels acquisition. These dynamic feature oriented presentations can include 20
individual products. Multimedia Presentations average ten panels in length and
are paced to present product attributes over five minutes.
Development Cost Participation Quantity
Research & Creative Development $ X $ X
Narrative Scripts, Headlines & Copy $ X $ X
Graphic Design and Illustrations $ X $ X
Multimedia Narrative Audio Streams $ X $ X
Photo & Graphic Processing & Compression $ X $ X
Data Entry & Web Site Generation $ X $ X 3
Total Supplier Participation $ X $ X _____
COMPREHENSIVE VIDEO & MULTIMEDIA - CATEGORY PRESENTATIONS:
Comprehensive Video & Multimedia Presentations integrate your best
photographs and illustrations into dynamic sales presentations. Value America
produces environmental photographs, powerful consumer-oriented copy, and
computer illustrations. We script and record a professional narrative dialog
that impacts the consumer's impression of your company and products. We write,
and produce broadcast-quality video demonstrations to reveal your product's
unique features, style, and quality. Each two to three minute video is
<PAGE>
professionally edited, compressed and streamed for tomorrow's world of enhanced
connectivity. Animation, special effects, and music are used to make these
presentations as entertaining as they are compelling. Each Comprehensive
Presentation can feature up to 40 items. Multimedia segments average twelve
panels in length and are typically paced to present information over seven
minutes. Our two to three minute video demonstrations follow the multimedia
presentation.
<TABLE>
<CAPTION>
Development Cost Participation Quantity
<S> <C>
Research & Creative Development $ X $ X
Narrative Scripts, Video Scripts, Headlines & Copy $ X $ X
Video Cast, Crew, Production & Editing $ X $ X
Graphic Design and Illustrations $ X $ X
Still Photography, Props & Processing $ X $ X
Animation & Special Effects $ X $ X
Multimedia Narrative Audio Streams $ X $ X
Video, Photo & Graphic Compression $ X $ X
Data Entry & Web Site Generation $ X $ X
Video Digitizing, Data Entry & Streaming $ X $ X 0
Total Supplier Participation $ X $ X ____
</TABLE>
Payment Terms:
50% Upon Acceptance. X To be credited as
50% Upon Web Accessibility. on going X% accrual (Monthly) passed through by
fulfillment.
Value America Agrees:
1. To provide product presentation corrections, additions and updates at
cost of $100 an hour.
2. To create effective purchasing procedures and host store with sufficient
bandwidth.
3. To implement reasonable MAP or value pricing to maximize revenue.
4. To communicate forecasts, purchase orders and shipping information
electronically using EDI.
5. To be solely responsible for customer payment and outbound freight.
6. To diminish non-defective returns through supportive and integrated customer
service.
7. To reduce sales support and order processing cost by eliminating color
packaging, retail displays, slotting fees, store service, markdowns,
guaranteed sales, rebates, new store allowances, extended payment terms,
prepaid freight, complicated routing, compliance penalties, bills of lading,
and manual order processing.
Supplier and/or Distributor Agree:
1. To provide copies of existing video, photos, illustrations and copy for
integration into presentations.
2. To promptly provide accurate product data, analysis, catalogs, packaging, and
sales training documents.
3. To deliver a sample of each product selected. These will be used in the
creation of product presentations.
4. To provide a sales narrative of each product's features, benefits,
performance capabilities, style, applications, value and competitive
advantages dictated by a knowledgeable spokesperson.
5. To provide a competitive net FOB quotation on all products selected by Value
America.
6. To indemnify Value America against product liability claims arising from
supplier's products.
7. To ship orders promptly using EDI or e-mail with automatic labeling to
minimize cost.
8. To accept defective product returns and issue full credit.
9. To use original content created for the product sales presentations only with
our express written consent.
Agreed:
TOSHIBA AMERICA INFORMATION SYSTEMS
$X
- ------------------------ ------------------------- ---------- -------
Supplier Representative's Name Date Value
/s/ illegible /s/ Craig A. Winn
- ------------------------ -------------------------
Authorized Signature Value America Approval
[Value America The Living Store! logo]
<PAGE>
TOSHIBA AMERICA INFORMATION SYSTEMS
CATEGORIES & PRESENTATIONS
[Value America The Living Store! logo]
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Categories: Presentation:
<S> <C>
1. TOSHIBA SATELLITE NOTEBOOK PCs 305 CDS 315 CDS Multimedia Presentation
2. TOSHIBA SATELLITE ACCESSORIES Basic Presentation & Audio
3. TOSHIBA TECRA NOTEBOOK PCs 520,530 Basic Presentation & Audio
4. TOSHIBA LIBRETTO MINI-NOTEBOOKS 70-CT & ACCESSORIES Multimedia Presentation
6. TOSHIBA EQUIUM BUSINESS PCs 2 Models TBD Multimedia Presentation
7. TOSHIBA EQUIUM ACCESSORIES Picture Listing
</TABLE>
TOSHIBA AMERICA: 1 PICTURE LISTING - Free
2 BASIC PRESENTATIONS - $ X
3 MULTIMEDIA PRESENTATIONS - $ X
0 VIDEO DEMONSTRATIONS -
TOTAL: $ X for 7 Product Presentations, Listing and Sale of All Applicable
Items.
DATE: October 8, 1997
Exhibit 10.24
TOSHIBA AMERICA CONSUMER ELECTRONICS
PRODUCT LISTING AGREEMENT
[Value America The Living Store! logo]
- --------------------------------------------------------------------------------
The Living Store:
Value America is the ultimate home shopping retailer. We prevail by
presenting the merits of your products directly to the consumer. Value America's
dynamic multimedia category demonstrations effectively reveal the features,
benefits, style and value of every product we sell.
BASIC - CATEGORY PRESENTATIONS:
Basic Product Category Presentations are created entirely from your
existing library of photographs, illustrations and copy. We transform the
artwork you have created for your catalogs and packaging into educational,
consumer-oriented sales presentations. Each can feature a dozen individual
products. We guarantee to update and host these listings a minimum of one year
at our expense.
Development Participation Quantity
Creative Development & Copy Selection $ X
Graphic Design of Web Presentation $ X
Photo & Graphic Compression $ X
Composition & Data Entry $ X
World Wide Web Site Generation $ X X
Total Supplier Participation $ X _____
MULTIMEDIA - CATEGORY PRESENTATIONS:
Multimedia Category Presentations are principally created from your
existing library of photographs and illustrations. We augment your artwork with
our own and write compelling consumer-oriented copy. We script and produce a
powerful narrative dialog that speaks directly to the consumer, enables
automatic pagination, and compels acquisition. These dynamic feature oriented
presentations can include two dozen individual products. Multimedia
Presentations average ten panels in length and are paced to present product
attributes over five minutes. We guarantee to update and host these listings for
two years at our expense.
Development Participation Quantity
Creative Development, Narrative Scripts & Copy $ X
Graphic Design and Illustrations $ X
Still Photography, Props & Processing $ X
Multimedia Narrative Audio Streams $ X
Photo & Graphic Compression $ X
Composition & Data Entry $ X
World Wide Web Site Generation $ X 2
Total Supplier Participation $ X _____
COMPREHENSIVE VIDEO & MULTIMEDIA - CATEGORY PRESENTATIONS:
Comprehensive Video & Multimedia Category Presentations integrate your best
photographs and illustrations into dynamic sales presentations. Value America
produces powerful consumer-oriented copy, environmental photographs, and
computer illustrations. We script and produce a professional narrative dialog
that powerfully impacts the consumer's impression of your company and products.
We write, and produce broadcast-quality video demonstrations to reveal your
product's unique features, style, and quality. Each two to three minute video is
professionally edited, compressed and streamed for tomorrow's world of enhanced
connectivity. Animation, special effects, and music are used to make these
presentations as entertaining as they are compelling. Each Comprehensive Video &
Multimedia Category Presentation can feature up to three dozen individual items.
Multimedia segments average twelve panels in length and are typically paced to
present information over seven minutes. Our two to three minute video
demonstrations follow the multimedia presentation. We guarantee to update the
multimedia and product segments and host the entire listing and presentation for
a minimum of three years at our expense.
<PAGE>
Development Participation Quantity
Creative Development, Scripts & Copy $ X
Video Cast, Crew, Production & Editing $ X
Graphic Design and Illustrations $ X
Still Photography, Props & Processing $ X
Animation & Special Effects $ X
Multimedia Narrative Audio Streams $ X
Video, Photo & Graphic Compression $ X
Advanced Composition & Data Entry $ X
World Wide Web Site Generation $ X
Broadcast Bandwidth Site Generation $ X 0
Total Supplier Participation $ X _____
Payment Terms:
50% Upon Acceptance.
50% Quarterly @ $X or X% on sales whichever is sooner.
Value America Agrees:
1. To maintain listing, update presentation and sell products for at least the
one to three year term specified unless products are discontinued, or the
supplier fails to perform reasonably.
2. To provide subsequent product presentation updates at cost not to exceed $100
an hour.
3. To complete category presentations within 60 to 90 days with appropriate
supplier support.
4. To create effective purchasing procedures and host retail sites with
sufficient bandwidth.
5. To implement reasonable MAP or value pricing to maximize revenue.
6. To communicate forecasts, purchase orders and shipping information
electronically using EDI.
7. To be solely responsible for customer payment and to reimburse supplier
within 30 days.
8. To be solely responsible for outbound freight and to pay carriers directly.
9. To diminish non-defective returns through supportive and integrated customer
service.
10.To reduce sales support and order processing cost by eliminating color
packaging, retail displays, slotting fees, store service, markdowns,
guaranteed sales, rebates, new store allowances, extended payment terms,
prepaid freight, complicated routing, compliance penalties, bills of lading,
and manual order processing.
Supplier Agrees:
1. To provide copies of existing video, photos, illustrations and copy for
integration into presentations.
2. To provide data, competitive analysis, catalogs, packaging, and sales
training documents on each product.
3. To supply accurate data and to reimburse Value America should we need to
correct inaccuracies.
4. To deliver a sample of each product selected. These will be used in the
creation of product presentations.
5. To provide a sales narrative of each product's features, benefits,
performance capabilities, style, composition, value and competitive
advantages dictated by a knowledgeable spokesperson.
6. To not directly solicit any Value America customer without our express
permission.
7. To provide the lowest net FOB quotation on all products selected by Value
America.
8. To ship orders promptly using two-way EDI with automatic bar code labeling to
minimize cost.
9. To accept defective product returns and issue full credit.
10.To use original content created for the product sales presentations only with
our express written consent.
Agreed:
TOSHIBA CONSUMER ELECTRONICS
/s/ illegible 6/3/97 $X
- --------------------------------- ----------------- ----------- --------
Supplier Representative Date Value
/s/ illegible /s/ Craig A. Winn
- --------------------------------- -----------------
Authorized Signature Value America
[Value America The Living Store! logo]
Exhibit 10.25
IBM
CATEGORY PRESENTATION AGREEMENT
[Value America The Living Store! logo]
- --------------------------------------------------------------------------------
The Living Store:
Value America presents the merits of your company directly to the consumer. Our
dynamic multimedia category demonstrations effectively reveal the features,
benefits, quality, style and value of your products.
PICTURE PRESENTATIONS:
Picture Presentations are similar to placing your product on the shelf in a
typical retail store. We use your existing photographs, illustrations and copy
to show an image of the product followed by informative text and bullet points.
With Picture Listings we control the number of items, retail and product
positioning.
Development Quantity
Composition, Compression & Data Entry 5
BASIC CATEGORY PRESENTATIONS:
Basic Presentations are created entirely from your existing library of
photographs, illustrations and copy. We transform the artwork you have created
for your catalogs and packaging into educational customer-oriented sales
presentations. We select images, write headlines and craft supportive copy to
reveal each product's features, benefits, applications, style, quality and
value. Up to 10 products may be presented.
Development Quantity
Research & Creative Development
Composition & Copy Selection
Graphic Design of Web Presentation
Photo & Graphic Compression
Data Entry & Web Site Generation
Total Supplier Participation 0
____
MULTIMEDIA CATEGORY PRESENTATIONS
Multimedia Presentations include your library of photographs and illustrations.
We augment your artwork, with our own, and write compelling consumer-oriented
copy. We script and record a powerful narrative dialog that speaks directly to
the customer, enables automatic pagination, and compels acquisition. These
dynamic feature oriented presentations can include 20 individual products.
Multimedia Presentations average ten panels in length and are paced to present
product attributes over five minutes.
Development Quantity
Research & Creative Development
Narrative Scripts, Headlines & Copy
Graphic Design and Illustrations
Multimedia Narrative Audio Streams
Photo & Graphic Processing & Compression
Data Entry & Web Site Generation 5
Total Supplier Participation
COMPREHENSIVE VIDEO & MULTIMEDIA CATEGORY PRESENTATIONS:
Comprehensive Video & Multimedia Presentations integrate your best photographs
and illustrations into dynamic sales presentations. Value America produces
environmental photographs, powerful consumer-oriented copy, and computer
illustrations. We script and record a professional narrative dialog that impacts
the consumer's impression of your company and products. We write, and produce
broadcast-quality video demonstrations to reveal your product's unique features,
style, and quality. Each two to three minute video is professionally edited,
compressed and streamed for tomorrow's world of enhanced connectivity.
Animation, special effects, and music are used to make these presentations as
entertaining as they are compelling. Each Comprehensive Presentation can feature
up to 40
<PAGE>
products. Multimedia segments average twelve panels in length and are typically
paced to present information over seven minutes. Our two to three minute video
demonstrations follow the multimedia presentation.
Development Quantity
Research & Creative Development
Narrative & Video Scripts, Headlines & Copy
Video Cast, Crew, Production & Editing
Graphic Design and Illustrations
Still Photography, Props & Processing
Animation & Special Effects
Multimedia Narrative Audio Streams
Video, Photo & Graphic Compression
Data Entry & Web Site Generation
Video Digitizing Data Entry & Streaming
Total Supplier Participation 0
Value America Agrees:
1. To list products and provide Internet access for a minimum of 12 months.
Provide substantial presentation corrections and product updates.
Supplier Agrees:
1. To provide copies of existing video, photos, illustrations and copy for
integration into presentations. Provide a sample if/as they are available of
products selected, product data, analysis, catalogs, packaging, and sales
training documents.
2. To provide access to an informed product manager or executive. Writers will
conduct interviews to learn more about product's features, benefits,
performance capabilities, style, applications, value and competitive
advantages.
3. To actively assist Value America to assure that the product assortment is
appropriate and is priced competitively.
Agreed:
IBM /s/ illegible 1/21/98
- -------------------------- ------------------------ --------------
Supplier Representative's Name Date
/s/ Monica Link
- -------------------------- ------------------------
Authorized Signature Value America Approval
[Value America The Living Store! logo]
<PAGE>
IBM
Category Presentations
December 30, 1997
Page 2
Categories: Presentation:
1. Thinkpad Multimedia Presentation
2. Thinkpad Accessories Picture Listing
3. Desktop Multimedia Presentation
4. Desktop Accessories Picture Listing
4. Servers Multimedia Presentation
5. Servers Accessories Picture Listing
5. WordPad Multimedia Presentation
6. WordPad Accessories Picture Listing
6. Printers Multimedia Presentation
7. Printer Accessories Picture Listing
PRESENTATIONS
5 Multimedia Presentation, 5 Picture Listing = $ X
TOTAL: $X for 5 Multimedia Presentations, 5 Picture Listing and Sale of All
Applicable Items for three years.
Exhibit 10.26
HEWLETT-PACKARD
PRODUCT LISTING AGREEMENT
[Value America The Living Store! Logo]
The Living Store:
Value America presents the merits of your products directly to the consumer. Our
dynamic multimedia category demonstrations effectively reveal the features,
benefits, style and value of every product we sell.
BASIC - CATEGORY PRESENTATIONS:
Basic Product Category Presentations are created entirely from your existing
library of photographs, illustrations and copy. We transform the artwork you
have created for your catalogs and packaging into educational, customer-oriented
sales presentations. Each can feature a dozen individual products. We guarantee
to update and host these listings a minimum of one year at our expense.
Development Participation Quantity
Research & Creative Development $ X
Composition & Copy Selection $ X
Graphic Design of Web Presentation $ X
Photo & Graphic Compression $ X
Composition & Data Entry $ X
World Wide Web Site Generation $ X 1
Total Supplier Participation $ X
MULTIMEDIA - CATEGORY PRESENTATIONS:
Multimedia Category Presentations are principally created from your existing
library of photographs and illustrations. We augment your artwork with our own
and write compelling consumer-oriented copy. We script and produce a powerful
narrative dialog that speaks directly to the consumer, enables automatic
pagination, and compels acquisition. These dynamic feature oriented
presentations can include two dozen individual products. Multimedia
Presentations average ten panels in length and are paced to present product
attributes over five minutes. We guarantee to update and host these listings for
two years at our expense.
Development Participation Quantity
Research & Creative Development $ X
Narrative Scripts, Headlines & Copy $ X
Graphic Design and Illustrations $ X
Multimedia Narrative Audio Streams $ X
Photo & Graphic Processing & Compression $ X
Composition & Data Entry $ X
World Wide Web Site Generation $ X 2
Total Supplier Participation $ X
COMPREHENSIVE VIDEO & MULTIMEDIA - CATEGORY PRESENTATIONS:
Comprehensive Video & Multimedia Category Presentations integrate your best
photographs and illustrations into dynamic sales presentations. Value America
produces powerful consumer-oriented copy, environmental photographs, and
computer illustrations. We script and produce a professional narrative dialog
that powerfully impacts the consumer's impression of your company and products.
We write, and produce broadcast-quality video demonstrations to reveal your
product's unique features, style, and quality. Each two to three minute video is
professionally edited, compressed and streamed for tomorrow's world of enhanced
connectivity. Animation, special effects, and music are used to make these
presentations as entertaining as they are compelling. Each Comprehensive Video &
Multimedia Category Presentation can feature up to three dozen individual items.
Multimedia segments average twelve panels in length and are typically paced to
present information over seven minutes. Our two to three minute video
demonstrations follow the multimedia presentation. We guarantee to update the
multimedia and product segments and host the entire listing and presentation for
a minimum of three years at our expense.
<PAGE>
HEWLETT-PACKARD SUPPLIES & ACCESSORIES
Support Packs
Toner
Memory DRAM Cards & SIMM
HP JetDirect EX Print Servers
Optional Languages
Network Interfaces
Documentation
Optional Document Feeder
Optional Transparency Adapter
HEWLETT-PACKARD TOTALS:
1 PICTURE PRESENTATION - $ X
1 BASIC PRESENTATIONS - $ X
2 MULTIMEDIA PRESENTATIONS - $ X
1 VIDEO & MULTIMEDIA PRESENTATION - $ X
Every product HP sells within each of these categories may be included without
impacting HP's participation. Value America will update all presentations for a
minimum of three years to keep each category presentation current. Value America
will maintain, host, provide connectivity and sell existing, and new HP products
for a minimum of three years. Value America will upgrade the Picture Listing to
a Basic Presentation, perhaps even to Multimedia because the value of properly
presenting the full range of HP supplies and accessories is considerable.
Please consider a separate multimedia presentation for the 340 portable printers
and their accessories. We may also wish to consider producing a separate
multimedia presentation on the bundled software packages. These titles make your
printers so much more valuable to the consumer they justify special emphasis.
While we will include a significant presentation of the software applications in
our printer demonstrations the added focus will significantly impact our sales
of hardware and powerfully increase the sales of consumables. We feel so
strongly about this incremental benefit we will produce this application upgrade
at one half of our key vendor sponsorship.
We recognize that Value America's unique multimedia retail product presentations
are important to HP because you must continually compete against lessor quality
and cheaper brands. Likewise, we appreciate the value of the HP brand, and its
favorable impact on our Living Store. As a result, we should be able to form a
lasting and mutually beneficial partnership.
PRODUCT PRESENTATION INVESTMENT: $ X
PRESENTATION INVESTMENT/PRODUCT: $ X
PRESENTATION INVESTMENT/PRODUCT/MONTH: $ X
April 16, 1997
<PAGE>
HEWLETT-PACKARD [Value America The Living Store! Logo]
Categories: Presentation
1. HEWLETT-PACKARD DESK-JET PRINTERS Video & Multimedia
HP DeskJet 340 Portable Printer
HP DeskJet 340CM Portable Printer
HP DeskJet 340 CV Portable Printer
HP DeskJet 400 Printer
HP DeskJet 693C Printer
HP DeskJet 694C Printer
HP DeskJet 820Cse Professional Printer
2. HEWLETT-PACKARD LASER-JET PRINTERS Multimedia
HP LaserJet 5L Xtra
HP LaserJet 6P
3. HEWLETT-PACKARD OFFICE JET PRODUCTS Multimedia
HP OfficeJet 300 Printer-Fax-Copier
HP OfficeJet 350 Printer-Fax-Copier-Scanner
4. HEWLETT-PACKARD SCANNERS Basic
HP ScanJet 4s
HP ScanJet 4c
HP ScanJet 5pse
4. HEWLETT-PACKARD SUPPLIES & ACCESSORIES Picture Listing
HP B&W Print Cartridges
HP Color Print Cartridges
HP Premium Transparency Films
HP Premium Glossy Papers
HP White InkJet Papers
HP Premium InkJet Papers
HP Labels
HP Banner Paper
HP Greeting Card Paper
HP Photo Paper
Cables
<PAGE>
Development Participation Quantity
Research & Creative Development $ X
Narrative Scripts, Video Scripts, Headlines & Copy $ X
Video Cast, Crew, Production & Editing $ X
Graphic Design and Illustrations $ X
Still Photography, Props & Processing $ X
Animation & Special Effects $ X
Multimedia Narrative Audio Streams $ X
Video, Photo & Graphic Compression $ X
Advanced Composition & Data Entry $ X
World Wide Web Site Generation $ X
Broadcast Bandwidth Site Generation $ X 1
Total Supplier Participation $ X
Payment Terms:
50% Upon Acceptance.
50% Upon Web Accessibility.
Value America Agrees:
1. To maintain listing, update presentation and sell products for at least the
one to three year term specified unless products are discontinued, or the
supplier fails to perform reasonably.
2. To provide subsequent product presentation updates after 3 years.
3. To complete category presentations within 30 to 90 days with appropriate
supplier support.
4. To create effective purchasing procedures and host retail sites with
sufficient bandwidth.
5. To implement reasonable MAP or value pricing to maximize revenue.
6. To communicate forecasts, purchase orders and shipping information
electronically using EDI.
7. To be solely responsible for customer payment and to reimburse supplier or
designee within 30 days.*
8. To be solely responsible for outbound freight and to pay carriers directly.*
9. To diminish non-defective returns through supporters and integrated customer
service.
10.To reduce sales support and order processing cost by eliminating color
packaging, retail displays, slotting fees, store service, markdowns,
guaranteed sales, rebates, new store allowances, extended payment terms,
prepaid freight, complicated routing, compliance penalties, bills of lading,
and manual order processing.*
Supplier or Designee Agrees:
1. To provide copies of existing video, photos, illustrations and copy for
integration into presentations.
2. To provide data, competitive analysis, catalogs, packaging, and sales
training documents on each product.
3. To supply accurate data and to reimburse Value America should we need to
correct inaccuracies.
4. To deliver a sample of each product. These will be used in product
presentations and returned.
5. To provide a sales narrative of each product's features, benefits,
performance capabilities, style, composition, value and competitive
advantages dictated by a knowledgeable spokesperson.
6. To not solicit Value America customers without permission (except for
warranty card information).
7. To provide the lowest net FOB quotation on all products selected by Value
America.*
8. To ship orders promptly using two-way EDI with automatic bar code labeling to
minimize cost.*
9. To accept defective product returns and issue full credit.*
10.To use original content created for the product sales presentations only
with our express written consent.
Agreed: *New Age has agreed.
HEWLETT-PACKARD 4-16-97 $ X
- --------------- ------------------------ ------- -----------
Supplier Representative Date Value
/s/ illegible /s/ Craig A. Winn
- -------------------- ------------------------
Authorized Signature Value America
[Value America The Living Store! logo]
<PAGE>
HEWLETT-PACKARD
PAVILION
CATEGORY PRESENTATIONS [Value America The Living Store! logo]
Multimedia Presentation:
1. Recommend Company -- Recommend HP quality, features, innovations, technology
and value.
2. Introduce Category -- Preview category, systems, technology, options,
applications and functionality.
3. Features & Benefits -- Present product features, functions and benefits and
explain why they are important.
4. Use & Performance -- Reveal the best methods of maximizing each system's
performance and value.
5. Coordination -- Explain why selecting an all HP solution will provide
superior results and increased performance.
6. Enduring Quality -- Graphically reveal why HP products consistently perform
better.
7. Present Applications -- Explain and demonstrate each primary and unique
system application.
8. Special Advantages -- Demonstrate how each system is designed to perform
effectively and effortlessly.
9. Warranty -- Detail warranty. Stress reliability, durability and customer
support.
10.Present Specific Items -- Picture and describe each system while listing
unique attributes and special features.
11.Coordination -- Recommend other HP products and accessories that are
available in The Living Store.
12.Narration & Pagination -- Multimedia presentations enlighten by talking
directly to the consumer. Ten or more visual panels paginate automatically.
Presentations last 5 to 7 minutes, uninterrupted, yet each is fully
interactive and may be shortened or repeated. Visual panels contain an array
of photographs, illustrations, headlines and supportive copy. Video
demonstrations follow multimedia presentations.
Video Demonstrations:
1. Video demonstrations are filmed in attractive locations by professional
cinematographers. Actors use teleprompters to effectively convey accurate
product information and compel acquisition.
2. HP's logo appears in the opening sequence and the narrative is set to music.
Our spokespeople endorse your systems because we believe they represent the
best quality, technology, performance and value.
3. Spokespeople share the most important reasons to buy HP products and explain
why we are recommending them.
4. Our spokespeople reveal what to look for when purchasing a quality home PC.
They demonstrate how to select the best products for their application.
5. Features and applications of HP products are demonstrated while spokespeople
explain their benefits.
6. Spokespeople explain how to maximize each product's performance and value.
They elevate perceived and actual value by revealing the results that can be
achieved when HP Pavilion PC's are used to their maximum capability.
7. Special insights are given into applications that make these PC's
particularly beneficial and valuable.
8. Our spokespeople demonstrate how easy HP Pavilion's are to use and install
and recommend a holistic HP solution.
9. The benefits of selecting a quality product are highlighted. Important
components and materials are revealed. Spokespeople discuss warranty and
reliability. They share how to reach your customer support staff.
10.Spokespeople close by reemphasizing the most compelling reasons to buy.
They motivate customers to consider other related HP products. We provide a
corporate benediction to reinforce your firm's leadership position.
11.Video demonstrations integrate selective skills and special effects to make
them informative and compelling.
Purchasing Process:
Product purchasing panels automatically emerge following the category
presentation. Every product in the assortment is shown pictorially with
photographs that expand 400% on command to reveal important detail. The
product's name, is followed by a brief description, copy and bullet points. We
present a MSRP, guest and member prices. Our member price always reflects your
retail strategy or UMAP policy. Customers may hand any listed product to their
servant. He tabulates actual freight cost and sales tax after the customer
selects from a wide variety of delivery and payment options. The purchase is
confirmed with a password and swift on-line credit card approval follows. Value
America purchase orders are instantly generated and sent to the proper factory
or distribution center using standard EDI protocols.
<PAGE>
HEWLETT-PACKARD
PAVILION
CATEGORIES & PRESENTATIONS [Value America The Living Store! logo]
<TABLE>
<CAPTION>
Categories: Presentation:
<S> <C>
1. HP PAVILION 7410P & 3100 (Q4 1997) Basic Presentation & Audio
2. HP PAVILION 82XX SERIES (Q1 & Q2 1998) Video & Multimedia Presentation
3. HP PAVILION 32XX (Q1 & Q2 1998) Multimedia Presentation
4. HP PAVILION ACCESSORIES Multimedia Presentation
5. HP INTEGRATED SOLUTIONS FOR HOME & HOME OFFICE Video & Multimedia Presentation
</TABLE>
HP PAVILION: 1 BASIC PRESENTATION & AUDIO - $ X
2 MULTIMEDIA PRESENTATIONS - $ X
2 VIDEO & MULTIMEDIA DEMONSTRATION - $ X
TOTAL $ X for 5 Product Presentations, Listing and Sale of All Applicable
Items.
DISTRIBUTOR: New Age (Subject to Change at HP's Discretion)
DATE: Revised November 21, 1997
<PAGE>
HEWLETT-PACKARD
INFORMATION STORAGE & TRANSFER
CATEGORIES & PRESENTATIONS [Value America The Living Store! logo]
Categories: Presentation:
1. HP COLORADO QIC TAPES Basic Presentation
2. HP DAT DRIVES, DDS CARTRIDGES & TAPES Multimedia Presentation
3. HP DLT DRIVE, CARTRIDGES & TAPE Basic Presentation
4. HP SURE-STORE CD-WRITER & CD-R MEDIA Multimedia Presentation
5. HP OPTICAL DRIVES, DISKS & ACCESSORIES Multimedia Presentation
HP INFORMATION STORAGE & TRANSFER:
2 BASIC PRESENTATION - $ X
3 MULTIMEDIA PRESENTATION - $ X
0 VIDEO DEMONSTRATIONS -
TOTAL: $ X for 5 Product Presentations, Listing and Sale of All Applicable
Items for 3 Years.
DATE: July 5, 1997
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated August 21, 1998, except
as to Note 12, which is as of September 1, 1998, relating to the financial
statements of Value America, Inc., which appears in such Prospectus. We also
consent to the reference to us under the heading "Experts" in such Prospectus.
PricewaterhouseCoopers LLP
Falls Church, VA
September 1, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1998
<CASH> 22,502,962
<SECURITIES> 0
<RECEIVABLES> 2,158,158
<ALLOWANCES> 159,000
<INVENTORY> 4,598
<CURRENT-ASSETS> 24,506,719
<PP&E> 1,307,720
<DEPRECIATION> 239,622
<TOTAL-ASSETS> 25,965,503
<CURRENT-LIABILITIES> 10,452,317
<BONDS> 0
29,414,843
0
<COMMON> 1,656,718
<OTHER-SE> (17,065,723)
<TOTAL-LIABILITY-AND-EQUITY> 25,965,503
<SALES> 6,713,309
<TOTAL-REVENUES> 7,231,107
<CGS> 7,127,696
<TOTAL-COSTS> 19,748,145
<OTHER-EXPENSES> 148,423
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (12,368,615)
<INCOME-TAX> 0
<INCOME-CONTINUING> (12,368,615)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,368,615)
<EPS-PRIMARY> (0.64)
<EPS-DILUTED> (0.64)
</TABLE>
[Value America logo]
January 21, 1998
Mr. Robert A. Bayless
Chief Accountant
Division of Corporation Finance
Securities and Exchange Commission
450 5th Street, N.W.
Mail Stop 4-10
Washington, D.C. 20549
Dear Mr. Bayless:
I am writing on behalf of Value America, Inc., a Virginia corporation, which is
contemplating a public offering of equity securities. We would like to receive
advance clearance from the SEC Staff regarding our Company's revenue recognition
policy pertaining to product sales to be included in an initial registration
statement on Form S-1.
This letter presents relevant background information about Value America, Inc.,
and explains the rationale for the proposed revenue recognition policy for
product sales.
The Company
Value America, Inc. (Value America or the Company) was founded and commenced
operations in April 1996. The Company is an Internet retailer of consumer and
office products. The Company's product mix includes high quality, brand name
office products, consumer electronics, software, computers and peripherals,
building products, housewares and jewelry. The Company generates revenues
primarily from two sources: (1) the development of multimedia online product
presentations on behalf of suppliers; and (2) product sales. The Company expects
that in 1998 and for the foreseeable future, product sales will provide the vast
majority of revenues. This letter addresses revenue recognition for product
sales.
Value America sells its products through its Internet store and through direct
response. Nearly all purchases from the store are made electronically. Direct
response sales are made through the mail and over the telephone. Customers
provide credit
2300 Commonwealth Drive, Charlottesville, VA 22901
<PAGE>
Mr. Robert A. Bayless
Page 2
January 21, 1998
card and shipping information, and the Company uses the CyberCash(TM) software
to transfer data to the customer's credit card company for verification and
authorization. The Company bears the credit risk of customer purchases and
credit card fraud not covered by the CyberCash(TM) arrangement. The Company
expects to offer consumer and business credit for purchases for which the
customer does not wish to use credit cards. The price paid by the customer
includes delivery costs and sales tax, as calculated and subsequently processed
by Value America.
Principal Sales -- Consignment
Most of the Company's business is conducted on consignment. In most cases, the
vendor has physical possession of the merchandise and the Company is not
obligated to take title to the merchandise before the merchandise is sold to
Value America customers.
Typically, when a customer places an order with Value America and the credit
card company approves payment for the order, Value America places an order with
the manufacturer or distributor (collectively referred to herein as "the
manufacturer") telephonically, by fax or by electronic data interchange. In the
future, the Company expects to have the capability to process nearly all orders
electronically using electronic data interchange. The manufacturer ships the
product directly to the customer and bills Value America for the goods shipped.
Value America's cost for the goods is based upon previously negotiated
arrangements with the manufacturer. The freight carrier also invoices for the
shipping cost. Orders are typically filled by the manufacturer, shipped from the
manufacturer and ultimately received by the Value America customer within four
days from the date of the original customer order placed with Value America.
Value America is solely responsible to the manufacturer and freight carrier for
payment. The manufacturer and freight carrier have no recourse to Value
America's customer for payment or return of the product in the event of Value
America's default.
Value America takes title to the goods from the time of shipment until
successful delivery to the customer, at which point title passes. In case of
major appliances, Value America takes ownership of the item, contracts with a
trucking company for over the road transportation, and contracts for the
appliances installation with a local
2300 Commonwealth Drive, Charlottesville, VA 22901
<PAGE>
Mr. Robert A. Bayless
Page 3
January 21, 1998
delivery and installation service. The Company pays for insurance on the goods
and is the name insured on the shipping insurance policy. The Company bears all
risk of loss for (i) collecting all of the sale proceeds, (ii) delivery of the
merchandise and (iii) returns from customers. To compensate for these risks,
however, this business model substantially reduces the Company's exposure to
inventory risk and keeps the fixed portion of distribution costs as low as
possible.
Principal Sales -- Purchases
A small amount of merchandise inventory may be owned and held by the Company as
the result of certain types of sales returns, or in the event that a
particularly favorable product purchase opportunity arises. The process of order
fulfillment is the same, except that no outside manufacturer is involved and
the goods are shipped directly from Value America.
Recognition of Revenue
In both purchase and consignment sales, the Company recognizes the full sales
amount as revenue upon verification of the credit card transaction authorization
and shipment of the merchandise. The Company records revenue from product sales
and the related cost of goods, net of a reserve for estimated returns and a
reserve for the average lag between shipment date and date of customer receipt.
The manner of shipping (i.e., directly from the manufacturer or from Value
America) alters neither the method of recognition nor the amounts.
Returns
To date, the Company has experienced few sales returns. The Company anticipates
that sales returns will eventually be in the range of 2% to 3% of selling price,
consistent with other non-apparel catalogue and mail-order retailers. All
product returns and authorizations will be coordinated and approved by Value
America. Wherever permitted by the manufacturer, customers will return goods
directly to the manufacturer. The Company's warranty protection on any item
generally mirrors that of the manufacturer, thereby mitigating the risk of
having to take defective returned items into inventory. In cases where Value
America's policy is more lenient than the manufacturer's, or when the Company
makes special exceptions to its return policy, the returned merchandise will be
inventoried by the Company. The Company's return policy is "satisfaction
guaranteed".
2300 Commonwealth Drive, Charlottesville, VA 22901
<PAGE>
Mr. Robert Bayless
Page 4
January 21, 1998
For highly priced jewelry and other "high end" goods, it may be necessary for
the Company to verify the merchandise prior to shipping to the customer and
returning to the manufacturer. Returns will be made to Value America, allowing
the Company to authenticate metals and jewels before returning the goods to the
manufacturer.
The Offering
Value America anticipates issuing shares of common stock to the public in the
first half of 1998. The Company intends to use the proceeds for working capital,
advertising and other general corporate purposes. The Company currently
anticipates filing its initial registration statement on Form S-1 in February
1998.
Accounting Method to be Confirmed--The Issue
The Company seeks confirmation from the Staff that its revenue recognition
policy for product sales is appropriate. The revenue recognition policy should
be evaluated in light of the Company's shipping arrangements for most of its
product sales, whereby goods are shipped directly from the manufacturer. This
system renders it logical that revenue be recognized on a gross basis rather
than a margin only basis, as is the case for a commission based sales agent. A
very small percentage of products sold will generate a commission or fee, and
in such cases only the commission or fee will be recognized. The Company
believes that this accounting is appropriate based upon the facts outlined above
and is consistent with the concepts provided in Statement of Financial
Accounting Concepts No. 5, Recognition and Measurement in Financial Statements
of Business Enterprises (Con 5), particularly paragraphs 83-84, and Statement of
Financial Accounting Standards No. 48, Revenue Recognition when Right of Return
Exists (FAS 48). Furthermore, recognizing revenue on a gross basis is consistent
with the guidance in paragraph 60 of SOP 81-1, Accounting for Performance of
Construction - Type and Certain Production - Type Contracts, and paragraphs
3.46-3.48 of Audits Federal Government Contractors, which are applicable in
somewhat analogous situations.
Management's Position
We believe the revenue recognition policy for product sales, described above,
most fairly reflects the facts and circumstances surrounding these sale
transactions and is in accordance with generally accepted accounting principles.
2300 Commonwealth Drive, Charlottesville, VA 22901
<PAGE>
Mr. Robert A. Bayless
Page 5
January 21, 1998
Our rationale is based on the following key points:
o Although payment for goods provided by Value America is typically received in
advance of the shipment of merchandise from the supplier, the Company bears
all credit risk related to the ultimate customer. Credit card fraud,
verification problems or failure by the customer to pay do not relieve Value
America of its liability to the manufacturer or freight carrier. Further, the
manufacturer has no recourse for payment or return of the product from the
Value America customer in the event that Value America fails to meet its
contractual obligations to the manufacturer. All shipments are F.O.B. at the
manufacturer. Value America takes title to the product from the time of
shipment until successful delivery to the customer. The Company must secure
replacements for items lost or damaged during shipment. Furthermore, the
Company bears the cost of shipping and insuring the product.
o Value America is at risk for the full value of product returns, although in
most cases such risk is mitigated by the Company's agreements with
manufacturers. Initially, Value America will have to build its specific
experience base for sales returns, although the Company expects to experience
industry-average sales returns for non-apparel retailers of 2% to 3%, and
accordingly anticipates recording revenue net of an allowance for sales
returns (in accordance with FAS 48).
o Value America plans very limited agency sales transactions whereby it would
sell products or services on behalf of a manufacturer or service provider on
a commission basis. (In such instances, Value America would not take title to
assets or bear any credit or return risk, and would plan to report these
sales on a margin basis only.)
o Having products shipped directly from a manufacturer, instead of operating a
significant in-house shipping facility, should have no impact on revenue
recognition as long as the seller (i.e., Value America) bears the risks and
rewards of ownership. There are various distribution business models for the
Staff to consider in assessing the appropriateness of the Company's
accounting policy. For instance, Amazon.com, Inc. and SkyMall, Inc. have
almost all their products shipped directly from the manufacturer or
distributor to the customer, while Shop at Home, Inc. and OnSale, Inc. have
goods shipped from both manufacturers and
2300 Commonwealth Drive, Charlottesville, VA 22901
<PAGE>
Mr. Robert A. Bayless
Page 6
January 21, 1998
their own warehouses. The revenue recognition policy for all of these
entities is essentially the same: sales are recognized on a "gross" basis,
regardless of how products are distributed.
For these reasons, management believes that recognizing revenue and the related
cost of goods sold, as described above, is appropriate and preferable under
generally accepted accounting principles. Please be advised that we have
reviewed this information with our independent accountants, Price Waterhouse LLP
(including review by their National Office Accounting and SEC Services
professionals), and have obtained their concurrence on this proposed accounting
treatment.
If, after considering the above information, you believe the Staff will require
additional information or clarification, please call me at (804) 964-2166.
Yours very truly,
/s/ Dean M. Johnson
- -------------------
Dean McWhorter Johnson
Chief Financial Officer
Value America, Inc.
cc: Mr. Lawrence M. Alleva, Price Waterhouse LLP
Mr. H. John Dirks, Price Waterhouse LLP - National Office
2300 Commonwealth Drive, Charlottesville, VA 22901
