FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________ to ___________
Commission file number: 000-25689
Value America, Inc.
(Exact name of Registrant as specified in its charter)
Virginia 330712568
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1560 Insurance Lane, Charlottesville, Virginia 22911
(Address of principal executive offices) (Zip code)
1(804)817-7700
(Registrant's telephone number including area code)
Not applicable
(Former name, former address, and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
As of November 8, 1999, there were 44,753,705 shares of common stock
outstanding.
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Value America, Inc.
FORM 10-Q
For the Quarter Ended September 30, 1999
INDEX
<S> <C>
Page
Part I - Financial Information...................................................................... 3
Item 1. Consolidated Financial Statements.................................................... 3
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations........................................................................... 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk........................... 16
Part II - Other Information......................................................................... 17
Item 1. Legal Proceedings.................................................................... 17
Item 2. Changes in Securities and Use of Proceeds............................................ 17
Item 3. Defaults Upon Senior Securities...................................................... 17
Item 4. Submission of Matters to a Vote of Security Holders.................................. 17
Item 5. Other Information.................................................................... 17
Item 6. Exhibits and Reports on Form 8-K..................................................... 17
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Part I. Financial Information
Item 1. Consolidated Financial Statements
VALUE AMERICA, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars, except share data)
September 30, December 31,
1999 1998
-------------- -------------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................ $ 85,714 $ 20,127
Restricted cash...................................................... 5,250 5,000
Short-term investments............................................... 30,221 --
Accounts receivable, net of allowance of $1,131 and $1,021........... 10,830 3,011
Debt issuance costs.................................................. -- 26,095
Inventory............................................................ 1,805 639
Other current assets................................................. 2,622 --
------------- ------------
TOTAL CURRENT ASSETS.............................................. 136,442 54,872
------------- ------------
Equipment, furniture and fixtures, net..................................... 16,393 2,061
Restricted cash............................................................ -- 1,500
Long-term investments...................................................... 1,486 --
Deferred offering costs.................................................... -- 1,369
Notes receivable from officers............................................. 1,200 250
Goodwill................................................................... 1,344 --
Other assets............................................................... 428 45
============= ============
TOTAL ASSETS...................................................... $ 157,293 $ 60,097
============= ============
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS'EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable..................................................... $ 27,649 $ 15,568
Accrued expenses..................................................... 7,433 4,515
Deferred revenue..................................................... 5,385 2,204
Accrued stock-based compensation..................................... 2,235 1,372
Notes payable........................................................ -- 29,024
Other current liabilities............................................ 3,863 143
------------- ------------
TOTAL CURRENT LIABILITIES......................................... 46,565 52,826
------------- ------------
Deferred revenue........................................................... 106 930
Other liabilities.......................................................... 2,768 83
------------- ------------
TOTAL LIABILITIES................................................. 49,439 53,839
------------- ------------
Commitments and contingencies
MANDATORILY REDEEMABLE PREFERRED STOCK:
Series A, without par value, convertible, 5% cumulative dividend;
5,000,000 shares authorized, 0 and 5,000,000 issued and outstanding at
September 30, 1999 and December 31, 1998, respectively; redeemable for
$4.00 per share.................................................. -- 14,440
Series B, without par value, convertible, 5% cumulative dividend; 617,979
shares authorized, 0 and 617,979 issued and outstanding at September
30, 1999 and December 31, 1998, respectively; redeemable for $60.94
per share........................................................ -- 23,382
Series C, without par value, convertible, 5% cumulative dividend;
6,000,000 shares authorized (0 at December 31, 1998), 0 issued and
outstanding; redeemable for $20.00 per share..................... -- --
STOCKHOLDERS'EQUITY (DEFICIT):
Preferred Stock, without par value; 25,000,000 shares authorized (0 at
December 31, 1998); 0 shares issued and outstanding.............. -- --
Common stock, without par value, 500,000,000 shares authorized and
44,686,559 shares issued and outstanding at September 30, 1999;
100,000,000 shares authorized and 23,777,700 shares issued and
outstanding at December 31, 1998................................. 289,656 7,482
Warrants............................................................. 14,490 26,585
Unrealized loss on securities available-for-sale..................... 1,033 --
Accumulated deficit.................................................. (197,325) (65,631)
------------- ------------
TOTAL STOCKHOLDERS'EQUITY (DEFICIT)............................... 107,854 (31,564)
------------- ------------
TOTAL LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS'EQUITY (DEFICIT)................................. $ 157,293 $ 60,097
============= ============
The accompanying notes are an integral part of these financial statements.
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VALUE AMERICA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands of dollars, except per share data)
(unaudited)
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1999 1998 1999 1998
--------------- ------------- ------------- --------------
TOTAL REVENUES............................... $ 57,632 $ 15,613 $ 121,438 $ 22,965
TOTAL COST OF REVENUES....................... 54,156 15,167 115,616 22,217
--------------- ------------- ------------- --------------
GROSS MARGIN (LOSS).......................... 3,476 446 5,822 748
--------------- ------------- ------------- --------------
OPERATING EXPENSES:
Sales, advertising and marketing....... 27,480 12,257 66,900 21,392
General and administrative............. 4,785 2,264 12,141 4,040
Technical and system development....... 4,397 1,585 10,618 2,799
Professional fee....................... -- -- -- 1,700
--------------- ------------- ------------- --------------
Total operating expenses............ 36,662 16,106 89,659 29,931
--------------- ------------- ------------- --------------
OPERATING LOSS............................... (33,186) (15,660) (83,837) (29,183)
OTHER INCOME AND EXPENSES:
Interest (expense) income, net......... 1,599 81 (13,980) 229
--------------- ------------- ------------- --------------
NET LOSS..................................... (31,587) (15,579) (97,817) (28,954)
Accretion and dividends on Series
A, Series B and Series C redeemable
preferred stock........................ -- 4,156 12,162 6,570
Beneficial conversion feature on
Series C redeemable preferred stock.... -- -- 19,800 --
--------------- ------------- ------------- --------------
NET LOSS AVAILABLE FOR COMMON STOCKHOLDERS... $ (31,587) $ (19,735) $ (129,779) $ (35,524)
=============== ============= ============= ==============
NET LOSS PER COMMON SHARE:
Basic.................................. $ (0.71) $ (0.85) $ (3.52) $ (1.53)
=============== ============= ============= ==============
Diluted................................ $ (0.71) $ (0.85) $ (3.52) $ (1.53)
=============== ============= ============= ==============
WEIGHTED AVERAGE NUMBER OF SHARES:
Basic.................................. 44,487 23,153 36,866 23,153
=============== ============= ============= ==============
Diluted................................ 44,487 23,153 36,866 23,153
=============== ============= ============= ==============
The accompanying notes are an integral part of these financial statements.
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VALUE AMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars, except share data)
(unaudited)
Nine Months Ended September 30,
------------------------------
1999 1998
------------- -------------
Cash Flows From Operating Activities:
Net loss........................................................ $ (97,817) $ (28,954)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization................................ 2,927 389
Loss on sale of fixed assets................................. 6 --
Stock-based compensation..................................... 863 607
Professional fee............................................. -- 1,700
Amortization of debt issuance costs.......................... 19,454 --
Changes in assets and liabilities:
Accounts receivable.......................................... (7,733) (2,629)
Inventory.................................................... (1,166) (1,145)
Notes receivable from officers............................... (950) (250)
Other assets................................................. (3,004) (78)
Accounts payable............................................. 12,058 11,411
Accrued expenses............................................. 2,897 --
Deferred revenue............................................. 2,357 968
Other liabilities............................................ (1,017) --
------------- -------------
Net Cash Used In Operating Activities................................. (71,125) (17,981)
------------- -------------
Cash Flows From Investing Activities:
Restricted cash................................................. 1,250 (5,250)
Purchases of short-term investments............................. (30,674) --
Acquisitions of businesses, net of cash acquired................ (1,353) --
Proceeds from sale of fixed assets.............................. 23 --
Capital expenditures............................................ (8,752) (1,833)
------------- -------------
Net Cash Used In Investing Activities................................. (39,506) (7,083)
------------- -------------
Cash Flows From Financing Activities:
Principal payments under capital lease obligations.............. (1,148) (35)
Proceeds from issuance of common stock.......................... 126,700 --
Proceeds from issuance of preferred stock and warrants.......... 60,000 18,830
Proceeds from exercise of common stock warrants................. 10 --
Proceeds from exercise of common stock options.................. 705 --
Payment of offering costs....................................... (13,134) (2,946)
Proceeds from issuance of debt and warrants..................... 5,000 700
Dividends paid.................................................. (1,915) (270)
------------- -------------
Net Cash Provided By Financing Activities............................. 176,218 16,279
------------- -------------
Net Increase In Cash and Cash Equivalents............................ 65,588 (8,785)
Cash and Cash Equivalents, Beginning of Period........................ 20,127 10,341
============= =============
Cash and cash equivalents, end of period.............................. $ 85,714 $ 1,556
============= =============
Non-cash investing and financing transactions:
Accretion and dividends on redeemable preferred stock........... $ 12,162 $ 6,570
============= =============
Beneficial conversion feature related to issuance of
preferred stock................................................. $ 19,800 $ --
============= =============
Issuance of warrants with notes payable......................... $ 4,539 $ --
============= =============
Issuance of common stock on preferred stock conversion.......... $ 117,388 $ --
============= =============
Issuance of common stock on exercise of warrants................ $ 49,509 $ --
============= =============
Fair value adjustment to securities available-for-sale.......... $ (1,033) $ --
============= =============
Acquisition of assets under capital lease....................... $ 8,516 $ --
============= =============
The accompanying notes are an integral part of these financial statements.
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VALUE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
(unaudited)
1. Description of Business
Value America, Inc. ("Value America"or 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, Value America develops and maintains custom multi-media
presentations for the products and services featured on its online store and
offers opportunities for advertising on its online store. On May 5, 1999, the
Company formed ServeAmerica.com, Inc. ("ServeAmerica"), a Delaware corporation.
ServeAmerica, a wholly owned subsidiary of the Company, was capitalized with
1,000 shares of $0.001 par value common stock. ServeAmerica had 100 shares of
common stock issued and outstanding at September 30, 1999. ServeAmerica has not
conducted any operations from inception through September 30, 1999. On September
2, 1999 the Company formed Value America Automotive Group, Inc. ("VAAG"), a
Virginia corporation. VAAG, a wholly owned subsidiary of the Company, was
capitalized with 5,000 shares of no par common stock. VAAG had 100 shares of
common stock issued and outstanding at September 30, 1999. On September 3, 1999,
VAAG acquired all of the outstanding common stock of Dealer Financial Services,
Inc. ("DFS") and Dealer Development Services, Inc. ("DDS"). The acquisitions
resulted in $1.4 million of goodwill which is being amortized over a period of
10 years.
2. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles and, in the
opinion of management, reflect all adjustments (consisting only of normal
recurring adjustments) considered necessary to fairly present Value America's
financial position, results of operations and cash flows for the periods
presented. These financial statements should be read in conjunction with the
Company's audited financial statements for the year ended December 31, 1998 and
notes thereto included in the Company's Registration Statement on Form S-1 filed
with the Securities and Exchange Commission (the "SEC"). The results of
operations for the three- and nine-month periods ended September 30, 1999 are
not necessarily indicative of the results to be expected for any subsequent
quarter or for the year ending December 31, 1999. Certain prior
years'information has been reclassified to conform with the current year's
presentation.
3. Net Loss Available for Common Stockholders
Net loss available for common stockholders is comprised of net loss
plus accretion on Series A, B and C redeemable preferred stock, dividends on
Series A, B and C preferred stock and the beneficial conversion feature on the
Series C redeemable preferred stock. The accretion and dividends on Series A
redeemable preferred stock were adjustments to net loss for the first and second
quarters of 1999 and all quarters of 1998. The accretion and dividends on Series
B redeemable preferred stock were adjustments to net loss for the first and
second quarters of 1999 and the third and fourth quarters of 1998. The
accretion, dividends and beneficial conversion feature on the Series C
redeemable preferred stock were adjustments to net loss for the first and second
quarters of 1999. Net loss available for common shareholders for the three- and
nine-month periods ended September 30, 1999 was $31.6 million ($0.71 per share)
and $129.8 million ($3.52 per share), respectively. Net loss prior to
consideration of accretion and dividends on the Series A, B and C redeemable
preferred stock and the beneficial conversion feature on the Series C redeemable
preferred stock was $31.6 million ($0.71 per share) and $97.8 million ($2.65 per
share), respectively, for the three- and nine-month periods ended September 30,
1999 and $15.6 million ($0.67 per share) and $29.0 million ($1.25 per share)for
the three- and nine-month periods ended September 30, 1998. The accretion and
dividends on Series A, Series B and Series C redeemable preferred stock
represent the recording of the periodic increases in the carrying value of these
securities to increase their value to the redemption value by the redemption
date. The recording of accretion does not affect the Company's cash flows. The
beneficial conversion feature on preferred stock represents the difference
between the fair market value of the common stock underlying the Series C
redeemable preferred stock issued on January 12, 1999 and the conversion price
of the preferred stock. The recording of the beneficial conversion feature does
not affect the Company's cash flows.
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4. Commitments and Contingencies
On March 24, 1999, Coupons, Inc., a Georgia corporation allegedly doing
business as "Value America," filed a complaint against Value America in the
United States District Court for the Northern District of Georgia, Atlanta
Division. This action relates to the use of the mark "Value America" by Value
America in connection with its marketing plan. A third party granted Value
America an option to obtain an assignment of the "Value America" mark in
December 1997. In March 1998, Value America exercised this option and obtained
an assignment of the mark. In connection with this assignment, the third party
retained the exclusive right to use the "Value America" mark for preparing and
disseminating advertising matter, including direct mail advertising. The third
party subsequently assigned his retained rights to Coupons, Inc. In the
complaint, Coupons, Inc. alleges that Value America's use of the "Value America"
mark in its marketing activities is violative of Coupons, Inc.'s retained rights
to the mark. The complaint alleges that Value America's actions constitute
violations of federal trademark law, state law and common law. Coupons, Inc.
seeks all profits from Value America's use of the mark, restitution for an
unspecified amount of damages, as well as punitive damages in the amount of
$1,000,000. In addition, Coupons, Inc. requested the court to issue an
injunction preventing use of the "Value America" mark and order the cancellation
of Value America's trademark registration for the "Value America" mark. On
November 4, 1999, Value America's motion to dismiss was denied, and Value
America expects to file an answer to the complaint asserting valid defenses to
each of the claims asserted by Coupons, Inc.
From time to time, Value America may be involved in litigation relating
to claims arising out of its operations in the normal course of business. Value
America currently is not aware of any such legal proceedings or claims that it
believes will have, individually or in the aggregate, a material adverse effect
on its business, prospects, financial condition and operating results.
The Company has an agreement to purchase certain information technology
services and licenses through January 1, 2000. The total commitments remaining
under the agreement approximated $3.9 million as of September 30, 1999. In
addition the company has committed approximately $6.5 million under capital
lease arrangements for the purchase of equipment and maintenance agreements.
5. Related Party Transactions
During the three- and nine-month periods ended September 30, 1999,
Value America received notes from its officers in the amount of $500,000 and
$950,000, respectively. The notes bear interest between 5.50% and 6.75% annually
with interest and principal due over a two year period.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation
The following "Management's Discussion and Analysis of Financial
Condition and Results of Operations"of Value America, Inc. ("Value America" or
the "Company") contains forward-looking statements based on current
expectations, estimates and projections about the Company's industry,
management's beliefs and certain assumptions made by management. All statements,
trends, analyses and other information contained in this report relative to
trends in net sales, gross margin, anticipated expense levels, liquidity and
capital resources, as well as other statements, including, but not limited to,
words such as "anticipate,""believe,""plan,""estimate,""expect,""seek"and
"intend,"and other similar expressions, constitute forward-looking statements.
These forward-looking statements involve risks and uncertainties, and actual
results may differ materially from those anticipated or expressed in such
statements. Potential risks and uncertainties include, among others, those set
forth in "Overview,""Liquidity and Capital Resources,"and "Additional Factors
That May Affect Future Results"included in this "Management's Discussion and
Analysis of Financial Condition and Results of Operations"and in the "Risk
Factors"section of the Company's prospectus filed with the SEC pursuant to Rule
424(b)(1) on April 8, 1999. Particular attention should be paid to the
cautionary statements involving the Company's limited operating history, the
unpredictability of its future revenues, the unpredictable and evolving nature
of its business model, the intensely competitive online commerce and retail
industries, and the risks associated with capacity constraints, systems
development, management of growth, acquisitions, any new products and
international or domestic business expansion. Except as required by law, the
Company undertakes no obligation to update any forward-looking statement,
whether as a result of new information, future events or otherwise. Readers,
however, should carefully review the factors set forth in other reports or
documents that the Company files from time to time with the SEC.
OVERVIEW
Value America's revenues are derived from three sources: (a) sales of
products through Value America's online store, (b) fees collected from
manufacturers for the preparation and hosting of product presentations and
listing of manufacturers' products available for purchase on the online store,
and (c) advertising on the online store. Value America's vendors ship products
directly to the customer typically within one to two days after a customer
places an order. Revenues from product sales are recognized upon shipment from
the vendor. Value America is responsible for selling the merchandise, collecting
payment from the customer, ensuring that the shipment reaches the customer and
processing returns. Value America generally takes title to products upon
shipment and bears the risk of loss for collection, delivery and merchandise
returns from customers. Value America occasionally purchases merchandise prior
to receiving customer orders and records such merchandise as inventory until
shipped to customers. Value America accrues a reserve for estimated product
returns at the time of sale.
Value America has contractual agreements with many of its suppliers
under which Value America develops and maintains multi-media product
presentations on Value America's online store. These agreements provide for the
development of the presentations, the posting of the presentations and the
listing of the manufacturers' products on Value America'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. Value
America recognizes the costs of developing presentations and listing products on
its Internet site 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 not yet earned, are
reflected as deferred revenue. Certain of these agreements provide that
suppliers pay a renewal fee to continue product listings beyond the initial
listing periods. Revenues from these renewal fees are recognized ratably over
the renewal term.
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Value America sells advertising space to vendors on its online store.
Innovative multimedia advertisements highlight products and their features,
functions, benefits and applications. Additionally, Value America sends
Electronic Direct Mail ("EDM") to its members to keep them informed about
special promotions. Advertising revenue is recognized over the period in which
the related advertisement is offered on the online store or when the EDM is
sent. Value America recognizes the costs of developing these advertisements and
EDMs as incurred.
To date, payments for products purchased through Value America's online
store have been primarily made with credit cards. Value America generally
receives payment from a customer's credit card within one to four business days
from customer order. In the third quarter of fiscal 1998, Value America began to
extend trade credit terms, typically net 30 days, to certain large customers
that Value America has evaluated for creditworthiness. Value America typically
pays its vendors for goods within 30 to 60 days.
Value America 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 to support new strategic vendor
relationships. Value America expects to incur substantial operating losses for
the foreseeable future. Although Value America has experienced significant
growth in revenue, there can be no assurance that Value America's revenue will
continue at its current level or increase. Value America has a limited operating
history upon which to base an evaluation of Value America and its business.
Value America'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.
RESULTS OF OPERATIONS
Third Quarter 1999 Compared with Third Quarter 1998
Revenues
Revenues primarily consist of product sales including shipping through
Value America's online store, product presentation and listing fees, advertising
and shipping. For the quarter ended September 30, 1999, revenues totaled $57.6
million representing a 269% increase from $15.6 million for the quarter ended
September 30, 1998. Revenues from product sales were $56.3 million for the
quarter ended September 30, 1999, compared to $15.3 million for the quarter
ended September 30, 1998, representing an increase of 268%. The growth in
product sales reflects the growth of Value America's customer base, repeat
purchases from existing customers, increases in the volume of merchandise sold
and an overall increase in demand for Value America's expanding array of
merchandise.
Revenues from advertising and other were $1.3 million for the quarter
ended September 30, 1999, an increase of 333% compared to $0.3 million for the
quarter ended September 30, 1998. The increase in advertising revenues is driven
by two new initiatives that commenced in the first quarter of 1999: advertising
on Value America's web site and direct advertising through EDM. Value America
recognized approximately $0.8 million in web site advertising and EDM
advertising in the quarter ended September 30, 1999, compared to $0 in the
quarter ended September 30, 1998. Product presentation listing fees increased to
approximately $0.5 million in the third quarter of 1999 compared to $0.3 million
in the third quarter of 1998. This increase in product presentation listing fees
reflects the increase in brand offerings on Value America's online store.
Charges to customers for shipping, which represent approximately $1.6
million and $0.3 million of revenue for the quarters ended September 30, 1999
and 1998, respectively, are classified in revenue. Prior to January 1, 1999,
revenue generated from shipping was recorded as a reduction of the related cost
of shipping. All 1998 amounts presented have been adjusted to reflect this
classification change. For the quarters ended September 30, 1999 and 1998, the
charge for product returns, including returns resulting from malfunctioning
products, erroneous shipments and other quality-related issues, as a percentage
of sales, was approximately 4.6% and 0.1%, respectively.
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Cost of Revenues
Cost of revenues primarily consists of payments to third party
suppliers for merchandise and shipping. Value America incurred $54.2 million of
cost of revenues for the quarter ended September 30, 1999. For the quarter ended
September 30, 1998, cost of revenues totaled $15.2 million. Cost of revenues
represent 94.0% and 97.1% of revenues for the quarters ended September 30, 1999
and 1998, respectively.
Value America's gross margin has increased from $0.4 million for the
quarter ended September 30, 1998 to $3.5 million for the quarter ended September
30, 1999. This increase is due to the strong margins earned on certain
technology products and advertising revenues. Product sales resulted in gross
margins of $2.3 million (4.1% of sales) and $0.2 million (1.6% of sales) for the
quarters ended September 30, 1999 and 1998, respectively. Value America
continues to utilize a short-term strategy of selectively accepting narrow
margins on selected product sales and losses on shipping charges to maximize
sales volumes and brand awareness.
Sales, Advertising and Marketing
Sales, advertising and marketing expenses consist of costs associated
with promoting Value America's online store to potential customers and vendors,
as well as payroll and related expenses and credit card fees. Sales, advertising
and marketing expenses increased from $12.3 million for the quarter ended
September 30, 1998 to $27.5 million for the quarter ended September 30, 1999.
The increase primarily reflected an increase in the number of merchandising,
advertising and promotion department employees and a general increase in the
level of Value America's promotional activities. As a percent of revenues these
expenses have decreased from 78.5% for the quarter ended September 30, 1998 to
47.7% for the quarter ended September 30, 1999. Advertising and promotional
expenses increased from $11.4 million for the quarter ended September 30, 1998
to $19.8 million for the quarter ended September 30, 1999, net of cooperative
advertising of approximately $1.8 for the quarter ended September 30, 1998 and
$1.7 million for the quarter ended September 30, 1999. Payroll expenses relating
to merchandising, advertising and promotion departments increased from $1.1
million for the quarter ended September 30, 1998 to $5.0 million for the quarter
ended September 30, 1999. Value America intends to continue to increase its
sales, advertising and marketing expenses as it continues to expand its
operations.
General and Administrative
General and administrative expenses consist of management and executive
compensation, professional services, bad debts and general corporate expenses,
such as facilities and telephone expenses. General and administrative expenses
increased from $2.3 million for the quarter ended September 30, 1998 to $4.8
million for the quarter ended September 30, 1999. This increase reflected the
hiring of additional executive management and increased facilities charges to
support rapidly expanding operations. Payroll expenses relating to general and
administrative personnel increased from $0.5 million for the quarter ended
September 30, 1998 to $2.1 million in the quarter ended September 30, 1999.
Value America expects that general and administrative expenses will continue to
increase as it continues to expand its operations and enters new markets.
Technical and System Development
Technical and system development expenses consist primarily of expenses
incurred for the development and maintenance of the software required to support
Value America'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 Value America's business, these expenses have generally been
expensed as incurred. During the second and third quarters of 1999, the Company
devoted significant resources to the implementation of SAP and Siebel software.
Since this Enterprise Resource Planning ("ERP") system will provide a strong
foundation to support the Company's continued growth, the Company has
capitalized $1.4 million during the quarter ended September 30, 1999 in
connection with the purchase price of software, consultant fees and certain
employee payroll costs related to this project. Technical and system development
expenses increased from $1.6 million for the quarter ended September 30, 1998 to
$4.4 million, net of $0.3 million of salaries capitalized as development costs
in the Company's ERP implementation project, for the quarter ended September 30,
1999. This increase principally reflected higher payroll, consulting expenses
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and increased depreciation charges in connection with the increase in computer
hardware and software needed to support the Company's operations. Payroll
expenses related to technical and system development increased from $0.6 million
for the quarter ended September 30, 1998 to $1.1 million for the quarter ended
September 30, 1999. Payments to outside consultants to support general systems
maintenance totaled $1.2 million for the quarter ended September 30, 1998 and
$1.3 million for the quarter ended September 30, 1999. Depreciation charges
increase from $0.2 million for the quarter ended September 30, 1998 to $1.4
million for the quarter ended September 30, 1999 primarily due to capital
expenditures made and leases entered into during the quarter of approximately
$10.0 million. Value America expects that technical and systems development
expenses will continue to increase for the foreseeable future.
Interest Income (Expense), Net
Interest income of $1.6 million for the quarter ended September 30,
1999, which consisted primarily of income earned on the proceeds from the
Company's IPO in the second quarter of 1999, was offset by interest expense
incurred in connection with assets held under capital leases.
Income Taxes
Value America provided $0 for income taxes for the three- and
nine-month periods ended September 30, 1999 and 1998, since it incurred a net
loss for those periods.
RESULTS OF OPERATIONS
Nine Months 1999 Compared with Nine Months 1998
Revenues
For the first nine months of 1999, revenues totaled $121.4 million up
from $23.0 million for the first nine months of 1998, an increase of 429%.
Revenues from product sales were $117.1 million for the nine months ended
September 30, 1999, compared to $22.1 million for the nine months ended
September 30, 1998, an increase of 429%. The growth in product sales reflects
the growth of Value America's customer base, repeat purchases from existing
customers, increases in the volume of merchandise sold and an overall increase
in demand for Value America's expanding array of merchandise.
Revenues from advertising and other were $4.3 million for the nine
months ended September 30, 1999, compared to $0.9 million for the nine months
ended September 30, 1998. The increase in advertising revenues is driven by two
new initiatives in 1999: advertising on Value America's web site and direct
advertising through EDM. Value America recognized approximately $2.9 million in
web site advertising and EDM advertising in the nine months ended September 30,
1999, compared to $0 in the nine months ended September 30, 1998. Product
presentation listing fees, which are also included in advertising and other
revenue, increased to approximately $1.5 million in the first nine months of
1999, compared to $0.9 million in the first nine months of 1998. This increase
in product presentation listing fees reflects the increase in brand offerings on
Value America's online store.
Charges to customers for shipping, which represent approximately $4.2
million and $0.4 million of revenue for the nine months ended September 30, 1999
and 1998, respectively, are reported as revenue. Prior to January 1, 1999,
revenue generated from shipping was recorded as a reduction of the related cost
of shipping. All 1998 amounts presented have been adjusted to reflect this
classification change. For the nine months ended September 30, 1999 and 1998,
the charge for product returns, including returns resulting from malfunctioning
products, erroneous shipments and other quality-related issues, as a percentage
of sales, was approximately 4.8% and 0.1%, respectively.
Cost of Revenues
Value America incurred $115.6 million of cost of revenues for the nine
months ended September 30, 1999. For the nine months ended September 30, 1998,
cost of revenues totaled $22.2 million. Cost of revenues represent 95.2% and
96.7% of revenues for the nine months ended September 30, 1999 and 1998,
respectively.
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Value America's gross margin has increased from $0.7 million for the
nine months ended September 30, 1998 to $5.8 million for the nine months ended
September 30, 1999. This increase is due to the strong margins earned on
advertising revenues and certain technology products. Gross margin on product
sales increased to $2.0 million from $0.5 million for the nine months ended
September 30, 1999 and 1998, respectively. The increase relates to the mix of
products being sold.
Sales, Advertising and Marketing
Sales, advertising and marketing expenses increased from $21.4 million
for the nine months ended September 30, 1998 to $66.9 million for the nine
months ended September 30, 1999. The increase primarily reflected an increase in
the number of merchandising, advertising and promotion department employees and
a general increase in the level of Value America's promotional activities.
Advertising and promotional expenses increased from $18.4 million for the nine
months ended September 30, 1998 to $51.1 million for the nine months ended
September 30, 1999, net of cooperative advertising of approximately $1.8 million
for the nine months ended September 30, 1998 and $5.6 million for the nine
months ended September 30, 1999. Payroll expenses relating to merchandising,
advertising and promotion departments increased from $2.1 million for the nine
months ended September 30, 1998 to $9.7 million for the nine months ended
September 30, 1999. Value America intends to continue to increase its sales,
advertising and marketing expenses as it continues to expand its operations and
enters new markets.
General and Administrative
General and administrative expenses increased from $4.0 million for the
nine months ended September 30, 1998 to $12.1 million for the nine months ended
September 30, 1999. 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 Value
America's operation, all of which were undertaken in late 1997 and continued
into 1998 and 1999. Payroll expenses relating to general and administrative
personnel increased from $1.2 million for the nine months ended September 30,
1998 to $4.8 million in the nine months ended September 30, 1999. Value America
expects that general and administrative expenses will continue to increase as it
continues to expand its operations.
Technical and System Development
Technical and system development expenses increased from $2.8 million
for the nine months ended September 30, 1998 to $10.6 million for the nine
months ended September 30, 1999. This increase principally reflected higher
payroll and consulting expenses. Payroll expenses related to technical and
system development increased from $1.1 million for the nine months ended
September 30, 1998 to $3.8 million, net of $0.5 million of salaries capitalized
as development costs for the Company's ERP implementation project, for the nine
months ended September 30, 1999. Payments to outside consultants totaled $1.2
million for the nine months ended September 30, 1998 and $3.1 million for the
nine months ended September 30, 1999. Depreciation charges increased from $0.2
million for the nine months ended September 30, 1998 to $2.0 million for the
nine months ended September 30, 1999 primarily due to capital expenditures made
and leases entered into during 1999 of approximately $17.3 million. Value
America expects that technical and systems development expenses will continue to
increase for the foreseeable future.
Interest Income (Expense), Net
Interest expense of $14.0 million for the nine months ended September
30, 1999 consisted primarily of the amortization of $17.1 million in debt
issuance costs related to a $34.0 million note payable that was converted to
common stock upon the IPO. This interest expense was offset by interest income
earned on the proceeds from the debt and equity issuances in the fourth quarter
of 1998 and the first and second quarters of 1999. This amortization charge has
no effect on the Company's cash flows.
12
<PAGE>
Net Loss Available for Common Stockholders
Net loss available for common stockholders is comprised of net loss
plus accretion on Series A, B and C redeemable preferred stock, dividends on
Series A, B and C preferred stock and the beneficial conversion feature on the
Series C redeemable preferred stock. The accretion and dividends on Series A
redeemable preferred stock were adjustments to net loss for the first and second
quarters of 1999 and all quarters of 1998. The accretion and dividends on Series
B redeemable preferred stock were adjustments to net loss for the first and
second quarters of 1999 and the third and fourth quarters of 1998. The
accretion, dividends and beneficial conversion feature on the Series C
redeemable preferred stock were adjustments to net loss for the first and second
quarters of 1999. Net loss available for common shareholders for the nine months
ended September 30, 1999, was $129.8 million or $3.52 per share. Net loss prior
to consideration of accretion anddividends on the Series A, B and C redeemable
preferred stock and the beneficial conversion feature on the Series C redeemable
preferred stock was $97.8 million or $2.65 per share. The accretion and
dividends on Series A, Series B and Series C redeemable preferred stock
represents the recording of the periodic increases in the carrying value of
these securities to increase their value to the redemption value by the
redemption date. The recording of accretion does not affect the Company's cash
flows. The beneficial conversion feature on preferred stock represents the
difference between the fair market value of the common stock underlying the
Series C redeemable preferred stock issued on January 12, 1999, and the
conversion price of the preferred stock. The recording of the beneficial
conversion feature does not affect the Company's cash flows. Because the
preferred stock was converted to common stock in April 1999 there will not be
any future accretion or dividend charges in connection with 1998 and first
quarter 1999 issuances of preferred stock.
LIQUIDITY AND CAPITAL RESOURCES
In the nine months ended September 30, 1999, Value America issued:
o $60.0 million of Series C redeemable preferred stock and related
warrants to purchase 2,311,567 shares of common stock;
o $5.0 million of notes payable and related warrants to purchase
560,000 shares of common stock;
o 20,000 shares of common stock for $200,000; and
o 5,500,000 shares of common share at $23 per share resulting in
proceeds of $113.4 million, net of underwriting discounts and
expenses.
Upon the closing of the IPO, the Series A, B and C redeemable preferred
stock were converted into 10,737,162 shares of common stock and the $34.0
million of notes payable were cancelled with the exercise of warrants resulting
in the issuance of 3,400,000 shares of common stock.
In connection with the 1998 and 1999 issuance of notes payable,Value
America allocated $31.1 million to warrants,which represents their fair value.
The resulting debt issuance costs were amortized as interest expense until
conversion on April 13, 1999.
As of April 13, 1999, the outstanding principal amount of the note
payable was converted into common stock. Interest expense of $3.7 million was
recorded in the second quarter of 1999 representing amortization of debt
issuance costs. Value America also recorded $12.6 million to equity,
representing the unamortized issuance costs on Type B warrants. The charge to
interest expense does not affect Value America's cash flows.
In connection with the January 1999 issuance of the Series C preferred
stock and warrants, Value America allocated $11.4 million for the warrants to
stockholders' equity and $48.6 million to the Series C preferred stock, based
upon their relative fair values. Value America recorded accretion to
periodically increase the carrying value of the preferred stock to its
redemption value of $120.0 million by the redemption date. Value America
recorded accretion of $1.3 million in the second quarter of 1999 on the Series
A, Series B and Series C preferred stock. The recording of accretion does not
affect the Company's cash flows.
13
<PAGE>
Net cash used in operating activities was $18.0 million for the nine
months ended September 30, 1998, and $71.1 million for the nine months ended
September 30, 1999. Net cash used in operating activities in the nine months
ended September 30, 1999 was due primarily to (a) the net loss of $97.8 million
and (b) a $7.7 million increase in accounts receivable, both associated with the
growth in revenues and increased cash required to fund operating activities. The
increase in accounts receivable was offset by an increase in amortization of
debt issuance costs of $19.5 million and a $12.1 million increase in accounts
payable. Value America has historically financed its operating activities
primarily through the aforementioned capital contributions by stockholders and
other parties.
Value America has an unsecured $5.0 million line of credit from
Wachovia Bank, N.A. This line bears interest on advanced funds at Prime less
0.5% and expires on June 1, 2000. The terms of the agreement prohibit the
Company from having a significant change in control, ownership, or legal
structure, except for primary and secondary offerings of equity securities to
the public, without Wachovia's consent. In addition, during the agreement the
Company is required to maintain unencumbered liquidity of $25 million. As of
September 30, 1999, we had not drawn any amounts under this line of credit.
Value America has obtained stand-by letters of credit in favor of
vendors totaling $3.8 million. Each letter of credit is secured by a certificate
of deposit. These standby letters of credit expire through August 2000 and are
callable if Value America defaults in the payments of trade payables to the
secured vendors.
Additionally, Value America has a two-year agreement with a credit card
processor in which the credit card processor has a first priority lien and
security interest in a $1.5 million cash deposit account, to cover potential
charge backs. The agreement, which expires in April 2000, may be terminated by
either party and the credit card processor can require Value America to maintain
the cash deposit account for up to 10 months following termination.
Value America incurred capital expenditures of $8.8 million in the nine
months ended September 30, 1999 compared to $1.8 million in the nine months
ended September 30, 1998. Additionally, the Company entered into approximately
$8.5 million of financing leases. The increase in expenditures is primarily for
computer equipment and furniture and fixtures associated with Value America's
continued new employee growth, move to new facilities and continued systems
development and procurement.
Value America plans to increase its operating expenses significantly in
order to:
o increase the size of its staff;
o expand its marketing and advertising efforts;
o increase its technical and systems development efforts;
o improve and maintain its controls, systems and procedures; and
o support its growing infrastructure.
As a result, Value America may experience substantial quarterly net
losses for the foreseeable future.
The Company has an agreement to purchase certain information technology
services and licenses through January 1, 2000. The total commitments remaining
under the agreement approximated $3.9 million as of September 30, 1999. In
addition the Company has committed approximately $6.5 million under capital
lease arrangements for the purchase of equipment and maintenance agreements.
Value America believes that its existing capital resources, including
the net proceeds from its IPO will be sufficient to fund its operations for at
least the next 12 months. However, this period may be shorter if the Company
finds and decides to take advantage of business opportunities that exceed
current expectations but that we determine are desirable and feasible.
Thereafter, if cash generated from operations is insufficient to satisfy Value
America's liquidity requirements, Value America may seek to sell additional
equity or convertible debt securities or obtain a larger credit facility. There
can be no assurance, however, that such efforts will be successful or the terms
acceptable to the Company.
14
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ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
In addition to the factors discussed in the "Overview"section of this
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", including among others, the Company's limited operating history,
the unpredictability of its future revenues and the unpredictable and evolving
nature of its business model, the following additional factors may affect the
Company's future results.
The Company may be unable to attract customers and process sales if
management does not maintain and build relationships with manufacturers, vendors
and other third parties. The Company is entirely dependent upon manufacturers
and distributors to provide merchandise for sale in our online store. In the
nine months of 1999, goods manufactured by IBM represented approximately 35% of
our net sales and goods manufactured by Proteva and Hewlett-Packard represented
approximately 18% and 7% of net sales, respectively. If we do not maintain our
existing relationships with product vendors on acceptable commercial terms or if
we do not establish similar relationships with vendors of other products that
our customers want, we may not be able to offer a desirable selection of
merchandise and customers may choose not to shop at our online store. In
addition, vendors may decide, for reasons outside our control, not to offer
particular products for sale on the Internet. For example, from February 19,
1999 to May 4, 1999 Compaq Computer temporarily suspended sales of its Presario
line of computers through companies that sell exclusively over the Internet,
including Value America. We believe Compaq took this action in order to give it
time to address pricing concerns of traditional resellers.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are
programmed to assume that the century portion of a date is "19" to conserve the
use of storage and memory. This assumption results 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.
Value America has completed its initial assessment of its Year 2000
readiness, and it will continue to assess its readiness as it develops and
expands its infrastructure and operations. This assessment included a review of
Value America's internal information technology systems, non-information
technology systems and the systems of third parties upon which Value America may
rely. Value America is conducting Year 2000 compliance verification and
validation, primarily using internal resources. Although Value America has
developed its proprietary computer systems to specifically address Year 2000
issues, there can be no assurance that Value America's systems, as a whole, are
Year 2000 compliant. This is because Value America utilizes third-party
equipment and software that may or may not be Year 2000 compliant. Consequently,
Value America's ability to address Year 2000 issues is, to a large extent,
dependent upon the remediation activities of third parties. Value America has
obtained statements of Year 2000 compliance from third party technology
providers associated with Value America's core information systems
infrastructure, and Value America is in the process of testing its
infrastructure systems. Value America has confirmed that all of its desktop
hardware and software are Year 2000 compliant.. No internal information
technology projects have been deferred due to Value America's Year 2000
remediation program. Value America believes that the remediation program will
have no material adverse effect on current or anticipated internal information
technology projects.
Value America has initiated formal communications with all of the
suppliers presented in Value America's online store to determine the extent to
which Value America is vulnerable to those third parties' failures to remediate
their own Year 2000 issues. For suppliers with which Value America communicates
order, invoice, and inventory information via electronic data interchange
("EDI"), Value America has switched to a Year 2000-compliant standard format.
Since January 1999, Value America has encouraged its suppliers that are not Y2K
compliant to migrate to the Year 2000-compliant EDI format. Value America
contracted with GE Information Systems to test and validate Value America's
primary EDI trading partners for Year 2000 readiness. The results of the testing
showed that all of the tested trading partners were using a Year 2000-compliant
15
<PAGE>
EDI format. Value America has received confirmation from at least 80% of its
critical suppliers that they will be able to process orders from Value America
after December 31, 1999. The remaining critical suppliers are being assessed. If
some suppliers do not achieve Year 2000 compliance, these suppliers may be
unable to effectively operate. Consequently, Value America may seek additional
suppliers of quality products to replace those burdened with Year 2000
remediation difficulties. If it becomes necessary to identify alternative
suppliers, Value America's order processing systems are capable of maintaining
multiple suppliers of products, allowing Value America to switch to such
alternative suppliers with only minor administrative and EDI setup costs.
In addition, Value America has evaluated Year 2000 compliance by credit
card processors and other financial intermediaries through which transactions
are processed when Value America's customers purchase goods from Value America's
online store. Value America's current credit card processor has certified to
Value America that it is Year 2000 compliant.
Value America funds remediation costs internally from existing working
capital. To date, the incremental costs of Value America's Year 2000 remediation
program have been approximately $83,000. Value America's contract with GE
Information Systems to test the Year 2000 compliance of its trading partners
cost approximately $35,000. There are currently no identified Year 2000 issues
that will require equipment to be replaced. The desktop upgrades were covered
under current licensing agreements at no cost, and administrative costs of
compliance verification were less than $5,000. Value America estimates that the
additional incremental costs related to its Year 2000 remediation program will
not exceed $250,000 and will not represent more than 2% of Value America's
operating and capital information technology budget for 1999. In any event,
Value America believes that such costs will not have a material adverse effect
upon its results of operation or financial condition.
Item 3. Changes in Information About Market Risk
The Company is subject to interest rate risk on its investment
portfolio. If market rates were to increase immediately and uniformly by 10%
from the level at September 30, 1999, the change to the Company's interest
sensitive investments would have an immaterial effect on the Company's financial
position, results of operations and cash flows over the next fiscal year.
16
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
On March 24, 1999, Coupons, Inc., a Georgia corporation allegedly doing
business as "Value America," filed a complaint against Value America in the
United States District Court for the Northern District of Georgia, Atlanta
Division. This action relates to the use of the mark "Value America" by Value
America in connection with its marketing plan. A third party granted Value
America an option to obtain an assignment of the "Value America" mark in
December 1997. In March 1998, Value America exercised this option and obtained
an assignment of the mark. In connection with this assignment, the third party
retained the exclusive right to use the "Value America" mark for preparing and
disseminating advertising matter, including direct mail advertising. The third
party subsequently assigned his retained rights to Coupons, Inc. In the
complaint, Coupons, Inc. alleges that Value America's use of the "Value America"
mark in its marketing activities is violative of Coupons, Inc.'s retained rights
to the mark. The complaint alleges that Value America's actions constitute
violations of federal trademark law, state law and common law. Coupons, Inc.
seeks all profits from Value America's use of the mark, restitution for an
unspecified amount of damages, as well as punitive damages in the amount of
$1,000,000. In addition, Coupons, Inc. requested the court to issue an
injunction preventing use of the "Value America" mark and order the cancellation
of Value America's trademark registration for the "Value America" mark. On
November 4, 1999, Value America's motion to dismiss was denied, and Value
America expects to file an answer to the complaint asserting valid defenses to
each of the claims asserted by Coupons, Inc.
From time to time, Value America may be involved in litigation relating
to claims arising out of its operations in the normal course of business. Value
America currently is not aware of any such legal proceedings or claims that it
believes will have, individually or in the aggregate, a material adverse effect
on its business, prospects, financial condition and operating results.
Item 2. Changes in Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
Exhibit 27.1 Financial Data Schedule September 30, 1999
Exhibit 27.2 Restated Financial Data Schedule September 30, 1998
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Value America, Inc.
- ----- By: /s/ Dean M. Johnson
Date Dean M. Johnson, Executive Vice President
and Chief Financial Officer
18
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