Filed Pursuant to Rule 424(b)(1)
File Number 333-70961
333-75873
[VALUE AMERICA LOGO HERE]
5,500,000 SHARES
COMMON STOCK
Value America, Inc. is offering 5,500,000 shares of its common stock. This
is our initial public offering and no public market currently exists for our
shares. Our common stock has been approved for quotation on the Nasdaq National
Market under the symbol "VUSA."
---------------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 7.
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<TABLE>
<CAPTION>
PER SHARE TOTAL
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<S> <C> <C>
Public offering price .......................... $ 23.00 $126,500,000
Underwriting discounts and commission .......... $ 1.61 $ 8,855,000
Proceeds to Value America, Inc. ................ $ 21.39 $117,645,000
</TABLE>
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS
HAVE NOT APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Two of our executive officers have granted the underwriters a 30-day
option to purchase up to an additional 825,000 shares of common stock to cover
over-allotments.
---------------------
BANCBOSTON ROBERTSON STEPHENS
VOLPE BROWN WHELAN & COMPANY
THE ROBINSON-HUMPHREY COMPANY
THE DATE OF THIS PROSPECTUS IS APRIL 8, 1999.
<PAGE>
[Reproduction of page from Value America Web site showing logos of
products
"Value America -- Value America Shopping By Brand, Page 2 -- Microsoft
Internet Explorer" appears on the top line.
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," "http://www.valueamerica.com/thecompanywekeep" and
"Links" appear on the next line.
In the principal portion of the page, the word "Help" appears in the upper
lefthand corner and the Value America logo appears in the upper righthand
corner. A photograph depicting a family is located in the center of the top
line.
Guide words "Search," "Shopping List," "Sign In," "Account Info,"
"Checkout," "Help" and "Pick a Department" appear on the next line.
The words "Main" and "Help" and the phrase "We're known by the company we
keep..." appear on the next line.
The caption "We're known by the company we keep..." is above names and
logos for the following:
IBM
Hewlett-Packard Expanding Possibilities
Amana
3Com U.S. Robotics
Microsoft
Panasonic
Canon
Philips Magnavox
GE Appliances
FujiFilm
Hitachi Mobilized Computing
Weber
JVC
DeLonghi
Pendaflex
Compaq
Epson
zenith
Samsung
Kensington
Seiko
Casio
NEC
Olympus
Polaroid
Bushnell
Norelco
Singer
Avery
Oxford
Delta
Skil
3M
Rawlings
RCA
Pitney Bowes
Spalding
Taylor Made
brother
BIC
TearDrop Golf
KitchenAid
West Bend
Imation
Acco Brands
Titleist
Ames
Hoover
Toshiba
Sony
Braun
Wilson
Technics
Altec Lansing
shopovac corporation
Ram Golf
Armour Golf
Sharp
Callaway Golf
Pulsar
Kodak ds
adidas
Hammermill Papers
Mitsubishi Mobile Computing
Sanyo
Newell Office Products
Black & Decker
Vidal Sasoon
Lexmark
iomega
The phrases "The company we keep" and "Internet zone" appear at the bottom of
the page.]
<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 1,000 trusted brands. Selection: choices from technology to office
products, from consumer electronics to jewelry. Value: Internet technology
enables Value America to sell the best for less. Service: personalized customer
assistance makes shopping fast and easy. Convenience: Value America's store is
in the home and on the desk at work. Information: interactive multimedia
presentations communicate each product's features and benefits.
SHOPPING SMARTER
Value America is a smart way to shop. Multimedia 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.va.com. Customers can shop from their
homes or offices, 24 hours a day, 7 days a week. [Simulation of screen from the
Value America Web site]
BENEFITS OF MEMBERSHIP
Everyone is welcome, but members enjoy special privileges, starting with
lower prices. The personal shopping assistance they receive helps them keep
track of their receipts, warranties, related products, important dates, and
discounts, and makes checkout faster and easier. [Simulation of screen from the
Value America Web site]
BRAND LOYALTY
Value America sells over 1,000 brands in numerous product categories. We
allow customers to shop in exclusive departments arranged by brand. [Simulation
of screen from the Value America Web site]
SHOP YOUR WAY
How many retailers are willing to rearrange their entire store for each
shopper? Value America does just that. Customers can shop within each category
by product, by brand name, or by what's on sale. [Simulation of screen from
Value America Web site]
INTERACTIVITY
Value America is not a collection of static catalog Web pages. Everything
is dynamically assembled and presented to each individual customer from our
database using Value America's proprietary authoring and administration
software. [Simulation of screen from the Value America Web site]
BE SELECTIVE
Value America is a factory authorized reseller for many brands. Our broad
product assortment ensures that customers can make the right choice, because
they actually have a choice! [Simulation of screen from the Value America Web
site]
REASONS TO BUY
Value America's multimedia product presentations provide insights into the
products' features, benefits, applications and use. [Simulation of screen from
the Value America Web site]
<PAGE>
MULTIMEDIA SHOPPING
Product presentations are researched and written in-house, and are
empowered by our exclusive Internet authoring system. The presentations 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"]
PRODUCT PURCHASING INFORMATION
Each product category is introduced with a list of the products available
in that category. This list features a small photo, a short description and the
price. Selecting an item reveals detailed specifications, features, options and
a close-up photo, as well as access to its multimedia product presentation.
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 its low overhead and
aggressive pricing.
VALUE DOLLARS
When members make purchases, they earn Value Dollars that can be used to
buy products the next time they shop. Value Dollars encourage frequent visits
and increase customer value. [Drawing of coins]
BUYING IS EASY
Value America holds customers' selections until they are ready to check
out. The database 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. [Photograph depicting woman using
computer]
CHARITY DOLLARS
We think it's important to give something back. One percent is donated to
a charity of the member's choice. [Drawing of a heart]
DOING BUSINESS
We serve customers better by serving brands better. Our brand
relationships provide four things we believe manufacturers want most. They want
to broaden their distribution, and at the same time create closer customer
contact. They want to present and sell their products based on the products'
merits, not on price alone. They want to operate more efficiently. To
accomplish this, Value America has created an automated and informative link to
bring people and products together. [Photograph depicting people working]
<PAGE>
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO
BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE
PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF
THE DATE THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS PROSPECTUS
OR OF ANY SALE OF COMMON STOCK.
----------------
TABLE OF CONTENTS
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PAGE
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Summary .............................................................................. 4
Risk Factors ......................................................................... 7
Use of Proceeds ...................................................................... 17
Dividend Policy ...................................................................... 17
Capitalization ....................................................................... 18
Dilution ............................................................................. 19
Selected Financial Data .............................................................. 21
Management's Discussion and Analysis of Financial Condition and Results of Operations 22
Business ............................................................................. 30
Management ........................................................................... 47
Certain Transactions ................................................................. 63
Principal Stockholders ............................................................... 66
Description of Capital Stock ......................................................... 68
Shares Eligible for Future Sale ...................................................... 74
Underwriting ......................................................................... 75
Legal Matters ........................................................................ 77
Experts .............................................................................. 77
Where You Can Find More Information .................................................. 77
Index to Financial Statements ........................................................ F-1
</TABLE>
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VALUE AMERICA is our registered service mark. All other service marks,
trademarks or trade names referred to in this prospectus are the property of
their respective owners.
3
<PAGE>
SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS
PROSPECTUS. THIS SUMMARY MAY NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD
CONSIDER BEFORE INVESTING IN OUR COMMON STOCK. YOU SHOULD READ THE ENTIRE
PROSPECTUS CAREFULLY.
OUR COMPANY
Value America is an Internet retailer offering a wide selection of
technology, office and consumer products through our online store at
WWW.VALUEAMERICA.COM and WWW.VA.COM. We sell brand name goods from
manufacturers in many industries, including goods from Hewlett-Packard, IBM,
Olympus, Panasonic and Weber. Customers can take advantage of our online store
format by shopping at their convenience and purchasing brand name products at
value prices. Our store features information-rich, multi-media product
presentations that help consumers make informed buying decisions. Manufacturers
can benefit from these presentations because the features and benefits of their
products are communicated directly to consumers. Our store provides
manufacturers with ready access to the large and growing base of online
consumers. We promote our online store in newspapers, magazines, direct
mailings, and television and radio commercials, as well as through Internet
portals. We earn revenues principally from the sale of products. We also
receive revenues from manufacturers for the creation of product presentations
for our online store.
OUR INDUSTRY
In recent years, a number of companies have introduced 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 a broad selection of merchandise in a single industry.
Volume discount retailers such as Sam's Wholesale Club and Price/Costco
generally seek to attract customers by offering very low prices on a limited
selection of products and with little or no traditional retail service. In
order to remain competitive, many traditional retailers have responded by
lowering prices and seeking to reduce costs by offering lower quality
merchandise and employing fewer and less experienced customer service and sales
employees.
The market for electronic commerce is large and growing, and electronic
commerce has the potential to further alter the competitive environment in the
retailing industry. One industry research firm estimates that the total value
of goods and services purchased over the Internet by individuals, businesses
and governmental agencies ranged between $55 billion and $80 billion in 1998
and projects this market may grow to between $1 trillion and $2 trillion by
2002. Sales of technology, office and consumer products are generating
significant online revenues for retailers such as Dell Computer and Amazon.com.
Unlike traditional retailers, online retailers are not limited by the
constraints of real estate selection, store construction or shelf space.
Internet retailers can react quickly and cost-effectively to change product
descriptions, pricing and mix. We believe that the unique nature of the
Internet provides online stores such as Value America with the ability to offer
a compelling retail solution by furnishing consumers with:
o high quality goods at lower prices,
o convenient in-home or in-office access 24-hours-a-day, 365-days-a-year,
o increased product selection and
o detailed information about product features, benefits and applications.
4
<PAGE>
OUR STRATEGY
We believe that our strategy of using traditional off-line media to
generate online sales enables us to reach a broader audience and rapidly build
the Value America brand name. In addition, we believe we can benefit from large
advertising and promotional investments of brand name manufacturers, which
increase customer demand and help generate product sales through our online
store.
Our objective is to create the leading online store for technology, office
and consumer products. In order to achieve this objective, we are:
o initially emphasizing the sale of technology and office products,
o moving rapidly into the business-to-consumer market,
o expanding our brand offerings,
o continuing to enhance our customers' online shopping experiences and
o developing and expanding direct response marketing campaigns and
strategic business relationships.
OUR ADDRESS
We incorporated in March 1996 in the State of Nevada and reincorporated in
October 1997 in the Commonwealth of Virginia. Our principal executive offices
are located at 1560 Insurance Lane, Charlottesville, Virginia 22911, and our
telephone number is (804) 817-7700.
THE OFFERING
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<S> <C>
Common stock offered by Value America ...................... 5,500,000 shares
Common stock to be outstanding after this offering ......... 43,434,862 shares
Use of proceeds ............................................ Working capital and other general
corporate purposes, including advertising
and promotion, development of system
enhancements, expansion of facilities, and
potential acquisitions of complementary
businesses and technologies.
Nasdaq National Market symbol .............................. VUSA
</TABLE>
The number of shares of common stock to be outstanding after this offering
is based on shares outstanding as of April 3, 1999. This number excludes:
o 6,134,625 shares issuable upon the exercise of stock options outstanding as
of April 3, 1999 at a weighted average exercise price of $7.14 per share,
o 115,375 shares reserved for issuance under our stock incentive plan as of
April 3, 1999 and
o 2,902,913 shares issuable upon the exercise of warrants outstanding as of
April 3, 1999 at a weighted average exercise price of $7.85 per share,
which price is based on warrant terms that will apply if the trading price
of the common stock is $14.00 or more at any time on or before December 31,
1999. See "Description of Capital Stock -- Warrants."
5
<PAGE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(MARCH 13, 1996) YEAR ENDED DECEMBER 31,
THROUGH --------------------------
DECEMBER 31, 1996 1997 1998
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STATEMENT OF OPERATIONS DATA:
Total revenues ................................................. $ -- $ 134 $ 41,544
Total cost of revenues ......................................... 97 486 40,776
Gross profit (loss) ............................................ (97) (352) 768
Total operating expenses ....................................... 331 1,519 51,661
Operating loss ................................................. (428) (1,871) (50,893)
Other income (expense), net .................................... 3 18 (2,723)
Net loss ....................................................... (425) (1,853) (53,616)
Net loss per share -- basic and diluted ........................ $ (0.02) $ (0.09) $ (2.80)
Weighted average number of shares -- basic and diluted ......... 22,500 22,616 23,154
</TABLE>
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<CAPTION>
DECEMBER 31, 1998
-----------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
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BALANCE SHEET DATA:
Cash and cash equivalents ...................... $ 20,127 $83,747 $199,192
Working capital ................................ 2,046 68,595 184,040
Total assets ................................... 60,098 97,623 213,068
Long-term debt ................................. 83 83 83
Mandatorily redeemable preferred stock ......... 37,822 -- --
Total stockholders' (deficit) equity ........... (31,564) 72,807 188,252
</TABLE>
In the Pro Forma column, we have adjusted the Actual numbers to reflect
the following events that have occurred since December 31, 1998:
o our issuance in January 1999 of $5.0 million principal amount of notes
payable and related warrants, for which we have reflected a debt issuance
cost equal to the $4.5 million fair value of the warrants,
o our issuance in January 1999 of 20,000 shares of common stock at a price of
$10.00 per share,
o our issuance in January 1999 of 6,000,000 shares of Series C convertible
preferred stock and related warrants, for which we have allocated the
proceeds to convertible preferred stock and warrants based upon the
relative fair values of $48.6 million for the Series C convertible
preferred stock and $11.4 million for the warrants, and
o our allocation in January 1999 of the Series C convertible preferred
stock's beneficial conversion feature of $19.8 million.
We have further adjusted the Actual numbers to reflect the following events
that will occur immediately prior to the closing of this offering:
o the conversion of all of the outstanding shares of our convertible
preferred stock into 10,737,162 shares of common stock,
o the exercise of warrants, resulting in the cancellation of the $34.0
million principal amount of notes payable and the issuance of 3,400,000
shares of our common stock,
o the write-off of unamortized debt issuance costs of $8.1 million as
interest expense and $22.5 million to common stock, upon cancellation of
the $34.0 million principal amount of notes payable, and
o the payment of approximately $1.0 million of accrued dividends on our
Series A and B convertible preferred stock.
See "Capitalization" and notes 4, 5 and 12 of notes to financial statements.
In the Pro Forma as Adjusted column, we have further adjusted the Pro
Forma numbers to give effect to our sale of the shares of common stock in this
offering at the initial public offering price of $23.00 per share and to our
receipt and application of the estimated net proceeds of this offering. See
"Use of Proceeds."
6
<PAGE>
RISK FACTORS
AN INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU
SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS IN ADDITION TO THE
REMAINDER OF THIS PROSPECTUS BEFORE MAKING AN INVESTMENT DECISION.
WE MAY NOT BE PROFITABLE IN THE FUTURE
We may never generate significant revenues or be profitable. Since we
began operations in January 1997, we have incurred significant start-up and
other expenses. We have incurred substantial losses as a result of these
expenses. In 1998 we incurred a net loss of $53.6 million, and in 1997 we
incurred a net loss of $1.9 million. At December 31, 1998, we had an
accumulated deficit of $65.6 million.
We expect to continue to incur substantial losses for the foreseeable
future because we intend to continue to invest heavily in marketing,
advertising and promotion, increase the number of our employees, and develop
our technology and operating infrastructure. Our product gross margins are
small or sometimes negative, and we will not become profitable unless we
significantly increase purchases from our online store at acceptable gross
margins. If we do not accomplish the following tasks, we may never generate
substantial revenues or achieve significant profitability:
o implement and execute our unproven business model,
o establish name recognition and a reputation for value with consumers,
o improve the effectiveness of our advertising,
o manage fulfillment operations electronically,
o develop the technology underlying our online store,
o provide effective customer support,
o anticipate and adapt to a developing market,
o develop business relationships with merchandise manufacturers and
o hire, motivate and retain skilled employees.
OUR QUARTERLY RESULTS MAY FLUCTUATE AND CAUSE THE PRICE OF OUR COMMON STOCK TO
FALL
Our quarterly revenues and operating results are difficult to predict and
may fluctuate significantly from quarter to quarter. If our quarterly revenues
or operating results fall below the expectations of investors or public market
analysts, the price of our common stock could fall significantly.
We began operating in January 1997, and we did not begin our sales and
marketing program until January 1998. Thus, we have only a short track record
in the electronic commerce market. Since January 1998, we have modified our
operations and substantially varied our monthly advertising expenditures. As a
result, we have only a limited basis on which to evaluate the effect of these
changes on our revenues. In evaluating our business prospects, you should also
consider that the electronic commerce market is new and rapidly developing. As
a result of these factors, we cannot accurately predict our revenues.
We have based our expense levels on our investment plans and our estimates
of future revenues. To a large extent, with the exception of advertising
expenditures, our expenses are fixed. Our sales and operating results generally
depend on the timing and volume of orders and our ability to fulfill those
orders. These factors are difficult to forecast. We may be unable to adjust
spending in time to compensate for any unexpected revenue shortfall. We may
also need to adjust our prices, services and marketing plans in response to
changes in the competitive environment. For example, in the third quarter of
fiscal 1998, we wrote down our inventory by approximately $350,000 due to
competitive pricing pressure. Any significant shortfall in revenues or
unexpected changes could significantly hurt our operating results and cause our
stock price to decline.
7
<PAGE>
Other factors, many of which are outside of our control, could cause
variations in our quarterly revenues and operating results. Some of these
factors are:
o the extent to which consumers use and accept the Internet and other online
services as a way to buy technology, office and consumer products,
o the announcement or introduction of new Web sites, services and products by
us or our competitors,
o the level of traffic on our Web site,
o price competition or higher vendor prices for the products we offer,
o our ability to upgrade our systems and infrastructure,
o the occurrence of technical difficulties, system downtime or Internet
"brownouts,"
o the amount and timing of our operating costs and capital expenditures,
o delays in revenue recognition as a result of shipping or logistical
problems,
o the level of merchandise returns we experience and
o the level and nature of our sales and marketing initiatives.
WE ARE IN AN EARLY STAGE OF DEVELOPMENT AND MAY BE UNABLE TO MANAGE FUTURE
GROWTH
Our early stage of development and our recent rapid growth are placing a
significant strain on our managerial, operational and financial resources. From
January 1, 1998 to April 3, 1999, the number of our full-time employees
increased from 30 to 332. To be successful, we must effectively manage a number
of risks:
IF WE DO NOT BROADEN OUR PRODUCT OFFERINGS, CUSTOMERS MAY NOT SHOP AT OUR
STORE
The success of our business model depends upon our ability to offer
customers a complete selection of brand name products in a wide variety of
product categories. If we do not broaden our product selection, customers may
not choose to shop at our store. We may be unable to establish or maintain
relationships with vendors that will enable us to offer a complete selection of
brand name products in all categories. Our failure to offer a satisfactory
product selection could discourage customers from shopping at our online store.
IF WE DO NOT MAINTAIN AND UPDATE OUR FINANCIAL SYSTEMS, WE COULD INCUR
UNPLANNED COSTS, DAMAGE OUR CREDIBILITY AND FACE LITIGATION
Our rapid growth has challenged our ability to ensure that our financial
systems keep pace with that growth. In connection with their audit of our
financial statements for the three months ended March 31, 1998, our independent
accountants advised us of a significant deficiency in our internal control
structure resulting from our inability to determine product shipment dates and
order statuses on a timely basis. This deficiency made it difficult for us to
produce accurate financial reports on a timely basis. Our financial systems
required significant manual effort during the first three fiscal quarters of
1998. Continued rapid growth, changes in our business model or the addition of
a significant number of new or revised business relationships will present
additional challenges and could require further modification of our accounting
and reporting systems. Any breakdown or deficiencies in our financial and
control systems could cause unplanned costs and inaccurate financial reporting,
the results of which could include damaged credibility with investors and
litigation against us. Moreover, if we fail to maintain an effective system of
internal controls, the Securities and Exchange Commission may seek to
deregister and thereby suspend the trading of our common stock.
IF WE DO NOT IMPROVE OUR OPERATIONAL SYSTEMS AND CUSTOMER SERVICE
CAPABILITIES, WE COULD LOSE CUSTOMERS AND DAMAGE OUR REPUTATION.
To support an increase in purchases from our online store, we must improve
automated systems to track the delivery of products from vendors to customers,
provide additional customer service and efficiently handle product returns. If
we fail to maintain and improve these systems, system disruptions and slower
response
8
<PAGE>
times may impair the quality of our customer service and slow our product
fulfillment. These problems could cause customers to cancel orders or to decide
not to shop at our store in the future.
We use an internally developed system for our Internet site, product
presentations and substantially all aspects of order fulfillment, including
order management, purchasing and shipping. We have only recently integrated
this order fulfillment system with our accounting system. If this integration
fails or if we fail to successfully integrate any new modules that we develop
or purchase, we could experience similar problems.
If we fail to establish and use reliable electronic data interchange, or
EDI, connections with vendors, we could experience delays in product ordering,
shipping, confirmations and fulfillment. Any such delay could lead to customer
dissatisfaction and could harm our business. Our agreements with product
vendors generally require us to place product orders through EDI. We have not
yet integrated other vendors onto our EDI platform, and we may not be able to
integrate all of our current and prospective vendors.
In addition, if we fail to enhance our existing customer service, we could
lose customers and damage our reputation. In 1998, a significant portion of our
business depended upon telephone ordering, telephone support and e-mail replies
to customer questions. We have had periods during which our employees were
unable to meet targeted response times for customer service calls or questions
or otherwise to respond satisfactorily to the needs of our customers.
IF OUR ONLINE STORE BECAME UNAVAILABLE, WE COULD LOSE CUSTOMERS
We could lose existing or potential customers if they do not have ready
access to our online store or if our online store, transaction processing
systems and computer systems do not perform reliably and to our customers'
satisfaction, we could lose customers. Any network interruptions or other
computer system shortcomings, such as inadequate capacity, could:
o prevent customers from accessing our online store,
o reduce our ability to fulfill orders,
o reduce the attractiveness of our product offerings,
o reduce the number of products sold,
o cause customer dissatisfaction or
o seriously damage our reputation.
We have experienced brief computer system interruptions in the past, and these
interruptions may recur from time to time. If traffic through our online store
or the number of orders that our customers place increases substantially, we
will need to expand and upgrade the technology underlying our online store. We
may be unable to predict accurately changes in the volume of customer traffic
and orders and therefore may be unable to expand and upgrade our systems and
infrastructure in time to avoid system interruptions.
All of our computer and communications equipment is located at two sites
in Charlottesville, Virginia. This equipment is vulnerable to interruption or
damage from fire, flood, power loss, telecommunications failure and earthquake.
Some of the components of our computer and communication systems do not have
immediate automatic backup equipment. The failure of any of these components
could result in down time for our online store and cause us to lose potential
sales. Our property damage and business interruption insurance may not protect
us from any loss that we may suffer.
Our computer and communications systems are also vulnerable to computer
viruses, physical or electronic break-ins and other disruptions. These problems
could lead to interruptions, delays, loss of data or the ineffective operation
of our online store.
9
<PAGE>
WE MAY BE UNABLE TO ATTRACT CUSTOMERS AND PROCESS SALES IF WE DO NOT MAINTAIN
AND BUILD RELATIONSHIPS WITH MANUFACTURERS, VENDORS AND OTHER THIRD PARTIES
We are entirely dependent upon manufacturers and distributors to provide
merchandise for sale in our online store. In 1998, goods manufactured by IBM
represented approximately 58% of our net sales and goods manufactured by
Hewlett-Packard represented approximately 9% of net sales. 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, in
February 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.
We rely on product vendors to fulfill a number of traditional retail
functions, such as maintaining inventory, accepting product returns and
preparing merchandise for shipment to individual customers. Our vendors may not
be willing to provide these services at competitive rates. In addition, vendors
may refuse to develop the communication technology necessary to support our
direct shipment infrastructure. We have no effective means to ensure that our
vendors perform these services to our satisfaction. Our customers could become
dissatisfied and cancel their orders or decline to make future purchases if we
or our vendors fail to:
o arrange for the timely delivery of products,
o accept product returns,
o provide good customer service or
o prepare merchandise properly for shipment to customers.
Our product vendors have no obligation to make any products available for sale
to our customers and may terminate their relationships with us at any time
without penalty. Because we have not established regular purchasing patterns
with most of our product vendors, a vendor with limited inventory may not give
us priority in allocating its available inventory. We cannot always determine
whether an item is available for sale before we accept an order. Consequently,
we may accept customer orders for certain products that we are unable to
provide on a timely basis.
We have long-term agreements to purchase certain types of office and other
products exclusively from certain vendors. These agreements do not obligate the
vendors to make merchandise available for sale in our online store, to continue
particular payment terms or to extend credit to us. These agreements may
preclude us from obtaining such merchandise on the best terms.
Our operations also depend heavily upon a number of other third parties,
including Internet service providers and product delivery services. We cannot
control the actions of these third parties, and we do not have long-term
contractual relationships with any of them. For example, we rely on MCI
WorldCom to connect our online store to the Internet. Our agreements with our
Internet service providers limit our ability to obtain recompense from them for
their failure to maintain our connection to the Internet. We also use third-
party delivery services, including United Parcel Service and Roadway Express,
to deliver all of our products to our customers. Increases in our delivery
costs or inefficient delivery as a result of strikes or other reasons could
seriously harm our profitability.
We have agreed with The Union Labor Life Insurance Company to use
union-represented delivery services unless no viable union transportation
option is available. This agreement may limit our ability to use the most
cost-effective or readily available delivery services.
10
<PAGE>
YOU MAY MAKE AN INAPPROPRIATE INVESTMENT DECISION IF YOU RELY ON STATEMENTS
MADE IN THE PRESS
We have received, and may continue to receive, media coverage that is not
directly attributable to statements by our executive officers and employees. We
and the underwriters have not confirmed, endorsed or adopted any of these
third-party statements. You may make an inadvisable investment decision if you
base your decision on the media coverage. In particular:
o On January 19, 1999, William L. Hunt III, our Divisional Vice President --
Housewares Merchandise, made several statements relating to our recent
growth and contemplated initial public offering to a meeting of hosiery
manufacturers. These statements were reported by Dow Jones Online News
later that day. These statements included assertions that we were then in
registration, that we intended to file a registration statement with the
Securities and Exchange Commission in the near future and that our growth
in sales was double that of other electronic commerce retailers. While we
had begun the registration process at the time of Mr. Hunt's statement, we
had not filed a registration statement at that time. We cannot validate the
statements relating to our growth in sales.
o In February 1999, CHIEF EXECUTIVE magazine published an article relating to
electronic commerce and Value America. The article included statements
attributed to Craig A. Winn, our Chairman. The article states that we are
working with GE to create a custom store. We cannot assure you that a
custom store with GE will be implemented.
o In February 1999, a Charlottesville, Virginia periodical, C-VILLE WEEKLY,
published an article regarding Value America. The article included
statements attributed to Craig A. Winn, our Chairman, and Rex Scatena, our
Vice Chairman and General Counsel. The article stated that Frederick W.
Smith is a member of our board of directors; in fact, Mr. Smith will stand
for election at Value America's 1999 annual meeting of stockholders.
o The CHIEF EXECUTIVE and C-VILLE WEEKLY articles both referred to purchases
of our securities by certain investors, including Frederick W. Smith, the
founder of Federal Express, and Vulcan Ventures Incorporated, a widely
followed investment entity organized by Paul Allen, a founder of Microsoft.
You should not construe these statements as an endorsement of our company,
our business plan, or our future prospects by these investors, or as a
recommendation by these investors to purchase any shares of common stock in
this offering.
We and the underwriters disclaim all of the statements in these articles.
You should not rely on any of the statements in these articles to the extent
that they are inconsistent with or conflict with the information in this
prospectus or otherwise relate to information in this prospectus.
WE MAY BE UNABLE TO OBTAIN ADDITIONAL FINANCING WE NEED
We have funded our business primarily by selling our securities to
investors. We may need to raise additional funds through public or private
financings after this offering. We may be unable to obtain sufficient
additional financing on favorable terms, or at all. If we raise additional
funds by selling our equity securities, the relative ownership of our existing
investors could be diluted or the new investors could obtain terms more
favorable than those of our existing investors. If we raise additional funds
through debt financing, we could incur significant borrowing costs. If we
cannot obtain sufficient financing, we may have to delay, reduce or eliminate
our marketing and promotion campaign, which could significantly limit our
revenues.
WE DEPEND ON THE SERVICES OF A NUMBER OF KEY PERSONNEL, AND A LOSS OF ANY OF
THOSE PERSONNEL COULD DISRUPT OUR OPERATIONS AND RESULT IN REDUCED REVENUES
We depend heavily on the continued services and performance of our current
senior management and other key personnel. In particular, we rely on the
services of:
o Craig A. Winn, our Chairman and one of our Founders,
o Rex Scatena, our Vice Chairman and General Counsel and one of our Founders,
o Thomas Morgan, our Chief Executive Officer,
11
<PAGE>
o Glenda M. Dorchak, our President and Chief Operating Officer,
o Dean M. Johnson, our Executive Vice President, Chief Financial Officer and
Secretary,
o Joseph L. Page, our Executive Vice President -- Engineering and Chief
Technology Officer,
o Paul F. Ewert, our President -- Technology Products Division,
o Richard L. Gerhardt, our President -- Consumer Products Division,
o Jerry K. Goode, our Vice President -- Engineering and Chief Information
Officer, and
o Marcus F. Nucci, our Vice President -- Systems Development.
These individuals may terminate their employment with us at any time without
penalty. The loss of the services of any of these individuals could seriously
impair our ability to operate and improve our online store, which could reduce
our revenues.
In order to achieve our business objectives, we must hire additional
personnel to fill certain key managerial positions. Our future success will
depend upon the ability of our current executive officers to establish clear
lines of responsibility and authority, to work effectively as a team, and to
gain the trust and confidence of our other employees. We must also identify,
attract, train, motivate and retain other highly skilled, technical,
managerial, merchandising, engineering, accounting, marketing and customer
service personnel. We compete intensely for these personnel and we may be
unable to achieve our personnel goals. Our failure to achieve any of these
goals could seriously limit our ability to improve our operations and financial
results.
CUSTOMERS MAY BE UNWILLING TO USE THE INTERNET TO PURCHASE GOODS
Our long-term future depends heavily upon the general public's willingness
to use the Internet as a means to purchase goods. The failure of the Internet
to develop into an effective commercial tool would seriously damage our
operations. Internet commerce is a new concept, and large numbers of customers
may never begin or continue to use the Internet to purchase goods. The demand
for and acceptance of products sold over the Internet are highly uncertain, and
few Internet commerce businesses have more than a short track record. If either
manufacturers or consumers are unwilling to use the Internet to conduct
business and exchange information, our business may not develop profitably. The
Internet may not succeed as a medium of commerce because of delays in
developing elements of the needed Internet infrastructure, such as a reliable
network, high-speed modems, high-speed communication lines and other enabling
technologies. Moreover, the number of Internet users has been increasing
dramatically in the recent past. The Internet may not expand effectively to
meet new levels of demand. In addition, delays in the development or adoption
of new standards and protocols or increased governmental regulation could stop
or delay the growth of the Internet as a means to purchase goods and services.
Other considerations, including security, reliability, accessibility and
quality of service, may adversely affect the growth of the Internet. These
considerations have not been, and may never be, resolved to the satisfaction of
many potential Internet customers.
WE FACE INTENSE COMPETITION FROM MANY PARTICIPANTS IN THE ELECTRONIC COMMERCE
INDUSTRY
The electronic commerce industry is new, rapidly evolving and extremely
competitive. We expect competition in our industry to increase. Barriers to
entry into the electronic commerce market are relatively low. Moreover, all of
the products that we sell in our online store are available through traditional
retail outlets. Accordingly, we must compete with both companies in the
electronic commerce market and in the traditional retail industry.
Most of our competitors and potential competitors have longer operating
histories, more customers, greater brand recognition and substantially larger
financial and other resources than we do. Our competitors may receive
investments from or establish commercial or other business relationships with
larger, well-financed companies. Our competitors may be able to acquire
merchandise from vendors on more favorable terms. In addition, our competitors
may be able to respond more quickly to changes in customer preferences, spend
more on marketing and promotional campaigns, adopt more aggressive pricing and
inventory policies,
12
<PAGE>
and devote more resources to developing their online stores. For example, a
number of Internet companies offer search engines and other tools that locate
multiple vendors of particular products. The pervasive use of these search
engines could result in severe price competition. This level of competition
could reduce our revenues and result in increased losses or reduced profits.
Some of our competitors have exclusive or semi-exclusive rights to sell
certain popular products. The number of these exclusive vendor relationships
could increase and could permit competitors to rapidly acquire a significant
portion of the market. In addition, companies that provide access to
transactions through network access or Web browsers could grant exclusive
access rights to our competitors or charge us substantial fees to obtain such
rights. New technologies may also increase the competitive pressures we face.
THE SECURITY RISKS OF ELECTRONIC COMMERCE MAY DISCOURAGE CUSTOMERS FROM
PURCHASING GOODS FROM US
In order for the electronic commerce market to develop successfully, we
and other market participants must be able to transmit confidential information
securely over public networks. Third parties may have the technology or
know-how to breach the security of our customer transaction data. Any such
breach could cause customers to lose confidence in the security of our online
store and choose not to shop at our online store. If someone is able to
circumvent our security measures, he or she could destroy or steal valuable
information or disrupt the operation of our online store. We expect that we
will need to dedicate substantial resources to prevent or remedy any security
breach. Concerns about the security and privacy of transactions over the
Internet could inhibit the growth of the Internet and electronic commerce. Our
security measures may not effectively prohibit others from obtaining improper
access to the information in our online store. Any security breach could expose
us to risks of loss, litigation and liability and could seriously disrupt our
operations.
THE TECHNOLOGY OF THE INTERNET IS CHANGING RAPIDLY AND COULD RENDER OUR ONLINE
STORE OBSOLETE
The technology of the Internet and electronic commerce is evolving rapidly
for many reasons, including:
o customers frequently change their requirements and preferences,
o competitors frequently introduce new products and services and
o industry associations and others create new industry standards and
practices.
These changes could render our existing online store obsolete. Our ability
to attract customers could be seriously impaired if we do not accomplish the
following tasks:
o continually enhance and improve our online store,
o identify, select and obtain leading technologies useful in our business,
o enhance our existing services,
o develop new technologies that address the increasingly sophisticated needs
of our customers and potential customers and
o respond to technological advances and emerging industry standards in a
cost-effective manner and on a timely basis.
THE ADMINISTRATIVE BURDENS OF COLLECTING ADDITIONAL TAXES MAY HINDER OUR
ABILITY TO OPERATE
We do not currently collect sales or other taxes for the sale of goods
into states other than Virginia. If we establish operations in other states, we
will need to collect sales and other taxes imposed by those states. Other
governmental authorities may require us to collect taxes for sales into the
areas they control. These taxes could discourage customers from making
purchases through our online store. If any additional governmental authorities
require us to collect and remit taxes, the administrative burdens could be
cumbersome and expensive.
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<PAGE>
WE MAY BE UNABLE TO PROTECT OUR PROPRIETARY TECHNOLOGY
Our success depends to a significant degree upon our protection of our
software and other proprietary intellectual property rights. We may be unable
to deter misappropriation of our proprietary information, detect unauthorized
use and take appropriate steps to enforce our intellectual property rights. Our
competitors could, without violating our proprietary rights, develop
technologies that are as good as or better than our technology.
We have registered various forms of the "Value America" service mark in
the United States for limited uses and have applied to register another form of
that service mark in the United States. Our application could be denied, and
issued registrations could be challenged. The legal protection for these
service marks that we are able to obtain may not be sufficient for our business
purposes. For example, other companies could use the name "Value America" and
similar names to identify their products and services. Any such use could
confuse our customers and impair our ability to build our brand identity. If we
are unable to protect the name "Value America" or any of the other names that
we use, our business could suffer serious harm. On March 24, 1999, a party
filed a lawsuit against us alleging violations of federal trademark law, state
law and common law. The party seeks monetary damages, an injunction barring use
of the "Value America" mark and cancellation of our trademark registration for
the "Value America" mark. See "Business -- Litigation."
Because the protection of intellectual property rights is often critically
important to the success of companies in our industry, our competitors or
others could assert additional claims that our use of proprietary rights or our
technologies infringe their proprietary rights. We may not have the resources
to pursue any litigation to a final judgment and we may not prevail in such
litigation. In defending such litigation, we could incur significant legal and
other expenses and our management could be distracted from our principal
business operations. If any party making a claim against us were to prevail in
litigation against us, we may have to pay substantial damages. The court could
also grant injunctive or other equitable relief that could prevent us from
offering our products and services without a license or other permission from
others.
OUR MANAGEMENT AND DIRECTORS WILL CONTINUE TO CONTROL VALUE AMERICA, AND THEY
MAY TAKE ACTIONS AS STOCKHOLDERS THAT REDUCE THE MARKET PRICE OF OUR STOCK
After we complete this offering, our executive officers, directors and
director-nominees will control 77.7% of our outstanding common stock. As a
result, they will collectively control:
o the election of directors,
o the approval of any merger, consolidation or sale of substantially all of
our assets,
o the approval of any other matter requiring shareholder approval and
o our affairs and policies.
This concentration of ownership will make it difficult to remove our
executive officers and directors. Our executive officers and directors, acting
together, will be able to delay or prevent a change of control or a merger or
other form of takeover that our other stockholders might find attractive. This
situation could adversely affect the market price of our common stock.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES MAY HINDER OUR ABILITY TO OPERATE
The application of existing laws to the Internet, particularly with
respect to property ownership, the payment of sales taxes, libel, and personal
privacy, is uncertain and may take years to resolve. Because the Internet and
electronic commerce are becoming increasingly popular, various governments may
seek to adopt laws and regulations to control their use. These laws and
regulations could apply to privacy, pricing and the characteristics and quality
of products and services. The growth and development of electronic commerce may
also prompt calls for more stringent consumer protection laws. These laws may
impose additional burdens on companies conducting business over the Internet.
The adoption of any of these laws or regulations may reduce Internet usage,
which, in turn, could decrease the demand for our products, increase our costs.
14
<PAGE>
Several telecommunications carriers have asked the Federal Communications
Commission, or the FCC, to regulate telecommunications over the Internet,
regulate Internet service providers, and online service providers and impose
access fees on those providers. If the FCC grants these requests, the costs of
communicating on the Internet could increase substantially, which could reduce
Internet usage. Any relief granted by the FCC could harm our business.
In addition, U.S. and foreign laws regulate our ability to use customer
information and to develop, buy and sell mailing lists. New restrictions in
this area could limit our ability to operate as planned and result in
significant compliance costs.
PROBLEMS RELATED TO THE YEAR 2000 ISSUE COULD CAUSE SYSTEM FAILURES THAT IMPAIR
OUR OPERATIONS
Many currently installed computer systems and software products only
accept two digits to identify the year in any date. These systems or products
might interpret the year 2000 as 1900. This could result in system failures,
delays or miscalculations. Computer systems and software that have not been
developed or enhanced recently may need to be upgraded or replaced to comply
with Year 2000 requirements.
Our computer systems may not be fully Year 2000 compliant. Based on our
Year 2000 assessment program, we believe that the portions of our computer
systems that we developed are Year 2000 compliant. Our computer system also
uses third-party equipment and software which may not be Year 2000 compliant.
We are currently assessing the third-party equipment and software for Year 2000
compliance. We are currently unable to predict whether Year 2000 issues will
affect the operations of our customers or vendors. The failure of our computer
system or the computer systems of our vendors or Internet service providers
could cause us to incur significant expenses to remedy problems and could
reduce our revenues. In particular, most of our business is dependent upon
purchases made with credit cards via the Internet, and we could lose
significant revenues if credit card vendors do not adequately address Year 2000
concerns.
We have not incurred significant costs to date complying with Year 2000
requirements. We expect to spend up to $250,000 in the future to ensure
compliance with Year 2000 concerns. If we discover significant Year 2000 errors
or defects, we could incur substantial costs and our operations could be
seriously disrupted.
SALES OF SHARES OF OUR COMMON STOCK COULD DEPRESS THE MARKET PRICE OF OUR
COMMON STOCK
The market price of our common stock could drop as a result of sales of
shares of our common stock in the public market or in response to the
perception that such sales could occur. The 5,500,000 shares sold in this
offering will be freely tradable. The remaining 37,934,862 shares outstanding
after this offering will be "restricted securities" under applicable securities
laws. The holders of these restricted securities have agreed, with certain
limited exceptions, not to sell or otherwise transfer those shares until 180
days after the date of this prospectus. BancBoston Robertson Stephens can
release shares from these "lock-up" agreements without our approval. When this
180-day period expires, 28,103,412 of such shares will be eligible for
immediate sale in the public market and 9,831,450 of such shares will become
eligible for sale at various times thereafter upon expiration of applicable
holding periods required by federal securities laws. Approximately 90 days
after we complete this offering, we intend to register for sale in the public
market 6,250,000 shares of common stock that we have reserved for issuance
under our stock incentive plan. In addition, the holders of approximately
15,158,483 restricted securities, including shares that we may issue upon
exercise of warrants, can require that we register those shares for sale in the
public market.
VIRGINIA LAW AND OUR CHARTER DOCUMENTS CONTAIN ANTI-TAKEOVER AND
INDEMNIFICATION PROVISIONS THAT MAY DEPRESS THE MARKET PRICE OF OUR COMMON
STOCK
Virginia corporate law and our charter documents contain certain
provisions that could delay or prevent a change of control or a merger or other
form of takeover that our stockholders might find attractive. Certain of these
provisions:
o provide for a staggered board of directors, under which it would take three
successive annual meetings to replace all directors,
o restrict the ability of our stockholders to remove our directors and
15
<PAGE>
o require our stockholders to provide us advance notice if they intend to
nominate individuals to serve as directors or if they intend to propose
matters for our stockholders to act upon at a meeting.
These provisions could limit the price that investors will pay for shares of
our common stock.
Our charter documents require us to indemnify our executive officers and
directors against certain liabilities and expenses that they may incur while
defending lawsuits brought against them as executive officers or directors. In
most cases, these indemnification provisions will prevent our stockholders from
recovering damages from our executive officers and directors for their acts or
omissions on our behalf.
INVESTORS WILL BE SUBJECT TO MARKET RISKS ASSOCIATED WITH INITIAL PUBLIC
OFFERINGS
Before this offering, there has been no public market for our common
stock. An active trading market may not develop or be sustained after this
offering. The initial public offering price of our common stock has not been
determined by market forces; rather, it has been determined by negotiations
among the underwriters and us. Accordingly, the initial public offering price
may bear no relation to the price at which our common stock will trade in the
public market.
THE MARKET PRICE OF OUR COMMON STOCK MAY BE EXTREMELY VOLATILE
The market price of our common stock may be extremely volatile for many
reasons, including:
o actual or anticipated variations in our revenues and operating results,
o announcements of the development of improved technology,
o the implementation of new sales formats by us or our competitors,
o changes in estimates of our financial performance by securities analysts,
o conditions and trends in the Internet and electronic commerce industries,
o adoption of new accounting standards and
o general market conditions.
Recently, the stock markets have experienced extreme price and volume
fluctuations that have dramatically affected the market prices of the stocks of
many Internet companies. These fluctuations have often 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 far above historical market averages. This
trend may end at any time without warning. These factors may adversely affect
the market price of our common stock.
VOLATILITY IN OUR STOCK PRICE MAY LEAD TO SECURITIES LITIGATION
Stockholders frequently commence securities class action litigation
against a company after a significant decrease in the company's stock price. If
our stock price drops and our stockholders commence litigation against us, we
could incur significant legal and other expenses defending the litigation and
our management could be distracted from our principal business operations.
WE WILL HAVE BROAD DISCRETION IN HOW WE USE OUR PROCEEDS FROM THIS OFFERING
We have not identified specific uses for most of our proceeds of this
offering, and we will have broad discretion in how we use them. You will not
have the opportunity to evaluate the economic, financial or other information
on which we base our decisions on how to use the proceeds.
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<PAGE>
USE OF PROCEEDS
The net proceeds to Value America from the sale of the 5,500,000 shares of
common stock offered hereby are estimated to be $115.4 million, after deducting
underwriting discounts and commissions and estimated offering expenses.
Value America intends to use the net proceeds of this offering for working
capital and other general corporate purposes. Value America currently expects
to utilize a majority of the net proceeds in connection with its advertising
and promotional campaign. During 1998, Value America spent approximately $33.2
million on advertising and promotional expenses. Value America expects to
increase its average monthly advertising and promotional expenses significantly
following the completion of this offering. Value America also intends to use a
portion of the net proceeds for the development of system enhancements and the
expansion of corporate facilities. In the normal course of business, Value
America evaluates potential acquisitions of businesses and technologies that
could complement or expand its business. A portion of Value America's net
proceeds may be used for one or more of these acquisitions. Value America has
no present understandings, commitments or agreements, and is not currently
engaged in any negotiations, with respect to any such acquisition. Value
America has not identified specific uses for its net proceeds, and Value
America's management will have broad discretion in the application of the net
proceeds. Pending such uses, Value America intends to invest the net proceeds
in short-term, investment-grade, interest-bearing securities.
DIVIDEND POLICY
In March and July 1998, Value America paid $145,000 and $125,000,
respectively, in dividends on outstanding shares of its Series A convertible
preferred stock. Value America has not paid dividends on the shares of its
Series B or Series C convertible preferred stock. Value America expects to pay
additional dividends of approximately $1.0 million to the holders of its
convertible preferred stock immediately prior to the closing of this offering.
Value America has never declared or paid dividends on its common stock.
Value America intends to retain its earnings, if any, for use in operations and
does not intend to pay cash dividends on the common stock in the foreseeable
future. Value America's board of directors has the discretion, after analyzing
various factors, including Value America's financial condition, operating
results, and current and anticipated cash needs to declare dividends. 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 Value America as of
December 31, 1998.
<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
ACTUAL
------------
<S> <C>
Short-term debt .......................................................................... $ 29,024
==========
Long-term debt ........................................................................... $ 83
----------
Mandatorily redeemable preferred stock:
Series A convertible preferred stock, without par value, 5% cumulative dividend;
5,000,000 shares authorized, issued and outstanding, actual; 0 shares authorized,
issued
and outstanding, pro forma and pro forma as adjusted .................................. 14,440
Series B convertible preferred stock, without par value, 5% cumulative dividend; 617,979
shares authorized, issued and outstanding, actual; 0 shares authorized, issued and
outstanding, pro forma and pro forma as adjusted ...................................... 23,382
----------
Series C convertible preferred stock, without par value, 5% cumulative dividend; 0
shares
authorized, issued and outstanding, actual, pro forma and pro forma as adjusted ....... --
----------
Stockholders' equity (deficit):
Preferred stock, without par value; 0 shares authorized, actual; 25,000,000 shares
authorized, pro forma and pro forma as adjusted; 0 shares issued and outstanding,
actual, pro forma and pro forma as adjusted ........................................... --
Common stock, without par value; 100,000,000 shares authorized, actual; 500,000,000
shares authorized, pro forma and pro forma as adjusted; 23,777,700 shares issued and
outstanding, actual; 37,934,862 shares issued and outstanding, pro forma; 43,434,862
shares issued and outstanding, pro forma as adjusted .................................. 7,482
Warrants ............................................................................... 26,585
Accumulated deficit .................................................................... (65,631)
----------
Total stockholders' equity (deficit) ................................................ (31,564)
----------
Total capitalization .............................................................. $ 6,341
==========
<CAPTION>
DECEMBER 31, 1998
----------------------------
PRO FORMA
PRO FORMA AS ADJUSTED
--------------- ------------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt .......................................................................... $ -- $ --
========== =========
Long-term debt ........................................................................... $ 83 $ 83
---------- ---------
Mandatorily redeemable preferred stock:
Series A convertible preferred stock, without par value, 5% cumulative dividend;
5,000,000 shares authorized, issued and outstanding, actual; 0 shares authorized,
issued
and outstanding, pro forma and pro forma as adjusted .................................. -- --
Series B convertible preferred stock, without par value, 5% cumulative dividend; 617,979
shares authorized, issued and outstanding, actual; 0 shares authorized, issued and
outstanding, pro forma and pro forma as adjusted ...................................... -- --
---------- ---------
Series C convertible preferred stock, without par value, 5% cumulative dividend; 0
shares
authorized, issued and outstanding, actual, pro forma and pro forma as adjusted ....... -- --
---------- ---------
Stockholders' equity (deficit):
Preferred stock, without par value; 0 shares authorized, actual; 25,000,000 shares
authorized, pro forma and pro forma as adjusted; 0 shares issued and outstanding,
actual, pro forma and pro forma as adjusted ........................................... -- --
Common stock, without par value; 100,000,000 shares authorized, actual; 500,000,000
shares authorized, pro forma and pro forma as adjusted; 23,777,700 shares issued and
outstanding, actual; 37,934,862 shares issued and outstanding, pro forma; 43,434,862
shares issued and outstanding, pro forma as adjusted .................................. 148,293 263,738
Warrants ............................................................................... 18,699 18,699
Accumulated deficit .................................................................... (94,185) (94,185)
---------- ---------
Total stockholders' equity (deficit) ................................................ 72,807 188,252
---------- ---------
Total capitalization .............................................................. $ 72,890 $ 188,335
========== =========
</TABLE>
In the Pro Forma column, the Actual numbers have been adjusted to reflect
the following events that have occurred since December 31, 1998:
o the issuance in January 1999 of $5.0 million principal amount of notes
payable and related warrants, which resulted in a debt issuance cost equal
to the $4.5 million fair value of the warrants,
o the issuance in January 1999 of 20,000 shares of common stock at a price of
$10.00 per share,
o the issuance in January 1999 of 6,000,000 shares of Series C convertible
preferred stock and related warrants, for which the proceeds were allocated
to convertible preferred stock and warrants based upon the relative fair
values of $48.6 million for the Series C convertible preferred stock and
$11.4 million for the warrants, and
o the allocation in January 1999 of the Series C convertible preferred
stock's beneficial conversion feature of $19.8 million.
The Actual numbers have been further adjusted to reflect the following events
that will occur immediately prior to the closing of this offering:
o the conversion of all of the outstanding shares of Value America's
convertible preferred stock into 10,737,162 shares of common stock,
o the exercise of warrants, resulting in the cancellation of the $34.0
million principal amount of notes payable and the issuance of 3,400,000
shares of common stock,
o the write-off of unamortized debt issuance costs of $8.1 million as
interest expense and $22.5 million to common stock, upon cancellation of
the $34.0 million principal amount of notes payable, and
o the payment of approximately $1.0 million of accrued dividends on Value
America's Series A and B convertible preferred stock.
See notes 4, 5 and 12 of notes to financial statements.
In the Pro Forma as Adjusted column, the Pro Forma numbers have been
adjusted to give effect to the sale of the shares of common stock in this
offering at the initial public offering price of $23.00 share and to the
receipt and application of the estimated net proceeds of this offering. See
"Use of Proceeds."
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<PAGE>
DILUTION
The pro forma net tangible book value of Value America as of December 31,
1998 was approximately $72.9 million, or $1.92 per share of common stock. Pro
forma net tangible book value per share represents the amount of total tangible
assets less total liabilities, divided by the number of shares of common stock
outstanding after giving effect, as of December 31, 1998, to
o the issuance in January 1999 of $5.0 million principal amount of notes
payable and related warrants, which resulted in a debt issuance cost equal
to the $4.5 million fair value of the warrants,
o the issuance in January 1999 of 20,000 shares of common stock at a price of
$10.00 per share,
o the issuance in January 1999 of 6,000,000 shares of Series C convertible
preferred stock and related warrants, for which the proceeds were allocated
to convertible preferred stock and warrants based upon the relative fair
values of $48.6 million for the Series C convertible preferred stock and
$11.4 million for the warrants,
o the allocation in January 1999 of the convertible preferred stock's
beneficial conversion feature of $19.8 million, and
o the following events that will occur immediately prior to the closing of
this offering:
- the conversion of all of the outstanding shares of Value America's
convertible preferred stock into 10,737,162 shares of common stock,
- the exercise of warrants resulting in the cancellation of the $34.0
million principal amount of notes payable and the issuance of
3,400,000 shares of common stock,
- the write-off of unamortized debt issuance costs of $8.1 million as
interest expense and $22.5 million to common stock, upon
cancellation of the $34.0 million principal amount of notes payable
and
- the payment of approximately $1.0 million of accrued dividends on
Value America's Series A and B convertible preferred stock.
After giving effect to the sale of the common stock offered hereby (after
deducting underwriting discounts and commissions and estimated offering
expenses), the pro forma net tangible book value of Value America as of
December 31, 1998 would have been approximately $188.3 million, or $4.34 per
share. This amount represents an immediate increase in pro forma net tangible
book value of $2.42 per share to existing stockholders and an immediate
dilution of $18.66 per share to new investors. The following table illustrates
this per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share ................................ $ 23.00
Pro forma net tangible book value per share as of December 31, 1998 .. $ 1.92
Increase per share attributable to new investors ..................... 2.42
-------
Pro forma net tangible book value per share after the offering ......... 4.34
--------
Dilution per share to new investors .................................... $ 18.66
========
</TABLE>
19
<PAGE>
The following table summarizes, on a pro forma as adjusted basis as of
December 31, 1998, after giving effect to the adjustments described in the
bulleted clauses in the first paragraph above:
o the number of shares of common stock purchased from Value America,
o the total consideration paid to Value America and
o the average price per share paid by the existing stockholders and by the
investors purchasing shares of common stock in this offering, based upon
the initial public offering price of $23.00 per share, which price does
not include deductions for underwriting discounts and commissions and
estimated offering expenses.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------------ --------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ --------- --------------- --------- --------------
<S> <C> <C> <C> <C> <C>
Existing stockholders ......... 37,934,862 87.3% $130,323,144 50.7% $ 3.44
New investors ................. 5,500,000 12.7 126,500,000 49.3 23.00
---------- ----- ------------ -----
Total ...................... 43,434,862 100.0% $256,823,144 100.0%
========== ===== ============ =====
</TABLE>
The foregoing tables assume no exercise of outstanding stock options and
warrants and no issuance of shares reserved for future issuance under Value
America's stock incentive plan. As of December 31, 1998, there were
outstanding:
o stock options to purchase an aggregate of 4,129,475 shares of common
stock at a weighted average exercise price of $3.43 per share and
o warrants to purchase an aggregate of 3,905,070 shares of common stock at
a weighted average exercise price of $8.65 per share.
To the extent that these options and warrants are exercised, there will be
further dilution to new investors. See "Management -- Stock Incentive Plan,"
"Description of Capital Stock -- Warrants" and note 6 of notes to financial
statements.
20
<PAGE>
SELECTED FINANCIAL DATA
The statement of operations data set forth below for the period from
inception, March 13, 1996, through December 31, 1996 and the years ended
December 31, 1997 and 1998 and the balance sheet data at December 31, 1997 and
1998 have been derived from Value America's audited financial statements
included elsewhere herein. The balance sheet data at December 31, 1996 have
been derived from Value America's audited financial statements not included in
this prospectus. The data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements, including notes thereto, included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
PERIOD
FROM INCEPTION YEAR ENDED
(MARCH 13, 1996) DECEMBER 31,
THROUGH -----------------------------
DECEMBER 31, 1996 1997 1998
------------------- ----------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Net sales ..................................................... $ -- $ 48 $ 40,269
Product presentations ......................................... -- 86 1,275
------- -------- ---------
Total revenues .............................................. -- 134 41,544
------- -------- ---------
Cost of revenues:
Cost of goods sold ............................................ -- 31 40,051
Product presentations ......................................... 97 455 725
------- -------- ---------
Total cost of revenues ...................................... 97 486 40,776
------- -------- ---------
Gross profit (loss) ............................................ (97) (352) 768
------- -------- ---------
Operating expenses:
Sales, advertising and marketing .............................. 44 488 38,486
General and administrative .................................... 152 544 7,366
Technical and system development .............................. 135 487 4,109
Professional fee .............................................. -- -- 1,700
------- -------- ---------
Total operating expenses .................................... 331 1,519 51,661
------- -------- ---------
Operating loss ................................................. (428) (1,871) (50,893)
------- -------- ---------
Interest income (expense), net ................................. 3 18 (2,723)
------- -------- ---------
Net loss ....................................................... $ (425) $ (1,853) $ (53,616)
======= ======== =========
Accretion and dividends on Series A and Series B
redeemable preferred stock .................................. -- (188) (11,160)
------- -------- ---------
Net loss available for common stockholders ..................... $ (425) $ (2,041) $ (64,776)
======= ======== =========
Net loss per common share -- basic and diluted ................. $ (0.02) $ (0.09) $ (2.80)
Weighted average number of shares -- basic and diluted ......... 22,500 22,616 23,154
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1996 1997 1998
--------- ---------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents ...................... $ 81 $ 10,341 $ 20,127
Working capital (deficit) ...................... (116) 9,329 2,046
Total assets ................................... 144 10,994 60,098
Long-term debt ................................. -- 50 83
Mandatorily redeemable preferred stock ......... -- 9,466 37,822
Stockholders' deficit .......................... (275) (1,310) (31,564)
</TABLE>
The professional fee in 1998 resulted from a transaction in which Craig A.
Winn, the Chairman and a Founder of Value America, sold 288,321 shares of
common stock to an entity that had assisted in the promotion of private
placements of Value America's securities. Value America recognized the excess
of the fair value of the common stock sold by Mr. Winn over the consideration
he received 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. VALUE AMERICA'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 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, Value America's primary activities related to
establishing relationships with manufacturers, creating product presentations,
and developing internal systems and operating procedures. Value America has
been selling merchandise on the Internet since the third quarter of 1997.
Accordingly, Value America has a limited operating history and is still in an
early stage of development.
Currently, revenues are derived from two sources: (a) sales of products
through Value America's online store and (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. Value
America's vendors ship products directly to the customer typically within one
to two days after a customer places an order with Value America. 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 will be recognized ratably over the renewal
term.
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. 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 establish 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
22
<PAGE>
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.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
REVENUES
Revenues consist of product sales through Value America's online store and
product presentation and listing fees. Value America opened its online store
late in the third quarter of 1997, and generated $48,000 of net sales and
$86,000 of product presentation fees for the year ended December 31, 1997. For
the year ended December 31, 1998, net sales totaled $40.3 million and product
presentation fees recognized were $1.3 million. The growth in net sales
reflects a significant increase in units sold due to 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. The growth in product presentation
fees is primarily due to an increase in interest from vendors to have
merchandise presented in the Value America online store and the timing of
revenue recognition. For the year ended December 31, 1998, product returns and
cancellations, including product returns resulting from malfunctioning
products, erroneous shipments and other quality-related issues, were
approximately 4% 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. Value America incurred $31,000 of cost
of goods sold for the year ended December 31, 1997. For the year ended December
31, 1998, cost of goods sold totaled $40.1 million, representing 99% of net
sales. The narrow gross margin on product sales was due to Value America's
short-term strategy to selectively accept narrow or negative margins in order
to attain increased volumes and brand awareness, and a write down of inventory
on hand of approximately $350,000 to the lower of cost or market in the third
quarter of 1998. To provide a better comparison with similar companies'
reporting practices, credit card fees, which represented approximately 2% of
net sales for the years ended December 31, 1997 and 1998, have been
reclassified as sales, advertising and marketing expenses for all periods
presented.
Cost of product presentations consists of direct costs associated with the
production of multimedia product presentations, together with payroll and
related expenses. Cost of product presentations increased from $455,000 for the
year ended December 31, 1997 to $725,000 for the year ended December 31, 1998.
In the year ended December 31, 1998, cost of product presentations represented
57% of product presentation and listing revenues. The dollar increase of
$270,000 in the cost of product presentations was due primarily to increases in
payroll and related expenses of $219,000 and to increases in video and
production expenses of $65,000. 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.
Additionally, margins on product presentations and listing services improved
during the year ended December 31, 1998 compared to prior periods due to
improved efficiencies in the development of multimedia product presentations.
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 $488,000 for the year ended December 31,
1997 to $38.5 million for the year ended December 31, 1998. The increase
primarily reflected the commencement of Value America'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 Value
America's promotional activities. Advertising and promotional expenses
increased from $194,000 for the year ended December 31, 1997 to $33.2 million
for the year ended December 31, 1998, net of cooperative advertising of
approximately $0 at December 31, 1997 and $2.0 million at December 31, 1998.
These 1998 expenditures were primarily for advertising in regional and national
newspapers and magazines, direct mailings and
23
<PAGE>
regional radio commercials. Payroll expenses relating to merchandising,
advertising and promotion departments increased from $191,000 for the year
ended December 31, 1997 to $3.6 million for the year ended December 31, 1998.
Value America intends to increase its sales, advertising and marketing expenses
significantly following the completion of the offering. See "Use of Proceeds."
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist of management and executive
compensation, customer service compensation, professional services, bad debts
and general corporate expenses, such as rent, depreciation and telephone
expenses. General and administrative expenses increased from $544,000 for the
year ended December 31, 1997 to $7.4 million for the year ended December 31,
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 Value
America's operation, all of which were undertaken in late 1997 and continued
into 1998. Bad debt expense increased from $49,000 in the year ended December
31, 1997 to $972,000 in the year ended December 31, 1998. The increase is due
to reserves recorded against Value America's growing receivable balance for
potentially uncollectible and aged outstanding receivables. Payroll expenses
relating to general and administrative personnel increased from $213,000 for
the year ended December 31, 1997 to $2.4 million in the year ended December 31,
1998. Value America expects that general and administrative expenses will
continue to increase significantly for the foreseeable future, as it 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 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 are expensed
as incurred. Technical and system development expenses increased from $487,000
for the year ended December 31, 1997 to $4.1 million for the year ended
December 31, 1998. This increase principally reflected higher payroll and
consulting expenses. Payroll expenses related to technical and system
development increased from $434,000 for the year ended December 31, 1997 to
$1.8 million for the year ended December 31, 1998. Payments to outside
consultants totaled $10,000 for the year ended December 31, 1997 and $1.7
million for the year ended December 31, 1998. During the year ended December
31, 1998, Value America hired consultants to assist in modifying its
information systems to improve its reporting and tracking abilities. Value
America expects that technical and systems development expenses will continue
to increase for the foreseeable future.
PROFESSIONAL FEE
In June 1998, Craig A. Winn, Value America's Chairman and one of its
Founders, 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 convertible preferred stock. Value America
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 $1.7 million.
See Note 6 of notes to financial statements.
INTEREST INCOME (EXPENSE), NET
Interest expense of $2.7 million for the year ended December 31, 1998
consisted primarily of the amortization of $2.3 million in debt issuance costs
related to the $29.0 million note payable. The $18,000 of interest income for
the year ended December 31, 1997 related primarily to interest earned on the
sale of Series A convertible preferred stock in December 1997.
INCOME TAXES
Value America provided $0 for income taxes for the year ended December 31,
1997, since it had elected to be an S Corporation under the Internal Revenue
Code. Value America provided $0 for income taxes in the year ended December 31,
1998, since it incurred a net loss for that period.
24
<PAGE>
YEAR ENDED DECEMBER 31, 1997 COMPARED TO PERIOD FROM INCEPTION (MARCH 13, 1996)
THROUGH DECEMBER 31, 1996
REVENUES
Value America 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
Value America 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, ADVERTISING AND MARKETING
Sales, advertising 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 payroll related expenses. Advertising and promotional
expenses totaled $194,000 for the year ended December 31, 1997 and $0 for 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 $191,000 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 Value America's
operations, 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.
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.
25
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth unaudited quarterly financial data of Value
America commencing with the quarter ended September 30, 1997, the first quarter
during which Value America sold merchandise on the Internet. The information
has been derived from unaudited financial statements that, in the opinion of
management, reflect all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the quarterly information.
The quarterly information for the periods prior to the quarter ended September
30, 1997 is not presented because it is not considered meaningful to Value
America's current operations. The operating results for any quarter are not
necessarily indicative of the results to be expected for any future period.
<TABLE>
<CAPTION>
1997 QUARTER ENDED 1998 QUARTER ENDED
------------------------ -------------------------------------------------
SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31
------------ ----------- ----------- ----------- ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Net sales ................................ $ 5 $ 43 $ 2,005 $ 4,761 $ 14,990 $ 18,513
Product presentations .................... -- 86 206 312 334 423
----- -------- -------- -------- --------- ---------
Total revenues .......................... 5 129 2,211 5,073 15,324 18,936
----- -------- -------- -------- --------- ---------
Cost of revenues:
Cost of goods sold ....................... 5 26 2,015 4,506 14,756 18,774
Product presentations .................... 45 267 330 131 122 142
----- -------- -------- -------- --------- ---------
Total cost of revenues .................. 50 293 2,345 4,637 14,878 18,916
----- -------- -------- -------- --------- ---------
Gross profit (loss) ....................... (45) (164) (134) 436 446 20
----- -------- -------- -------- --------- ---------
Operating expenses:
Sales, advertising and marketing ......... 205 283 2,290 6,845 12,257 17,094
General and administrative ............... 110 327 841 1,154 2,264 3,107
Technical and system development ......... 134 247 373 622 1,585 1,529
Professional fee ......................... -- -- -- 1,700 -- --
----- -------- -------- -------- --------- ---------
Total operating expenses ................ 449 857 3,504 10,321 16,106 21,730
----- -------- -------- -------- --------- ---------
Operating loss ............................ (494) (1,021) (3,638) (9,885) (15,660) (21,710)
Interest income (expense), net ........... (1) 21 98 50 81 (2,952)
-------- -------- -------- -------- --------- ---------
Net loss .................................. $(495) $ (1,000) $ (3,540) $ (9,835) $ (15,579) $ (24,662)
======= ======== ======== ======== ========= =========
</TABLE>
Value America'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 Value America's control. As a strategic response to
changes in the competitive environment, Value America may from time to time
make certain service, marketing or supply decisions or acquisitions that could
have a material adverse effect on Value America's quarterly results of
operations and financial condition. In future quarters Value America'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, Value America 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, Value America
received proceeds of $10.2 million from the sale of Series A convertible
preferred stock, common stock and warrants. During the year ended December 31,
1998, Value America issued:
o $18.8 million of Series B convertible preferred stock,
o $29.0 million of notes payable and related warrants to purchase 3,573,000
shares of common stock and
o 625,200 shares of common stock and related warrants to purchase 118,320
shares of common stock for $6.3 million.
26
<PAGE>
In January 1999, Value America issued:
o $60.0 million of Series B convertible 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 and
o 20,000 shares of common stock for $200,000.
Value America allocated the $31.1 million fair value of the total common stock
warrants issued in December 1998 and January 1999 to stockholders' equity based
upon the fair value of the warrants. The resulting debt issuance costs are
being amortized as interest expense until the earlier of maturity or
conversion. Value America anticipates that the interest expense from the
amortization of the debt issuance costs will have a material effect on its net
loss in the quarter and year in which this offering is completed. This
amortization will not affect Value America's cash flows.
Upon the closing of this offering, the Series C convertible preferred
stock will convert into common stock. The remaining discount from its
redemption value will be recorded as accretion and it is anticipated to have a
material effect on net income or loss available to common stockholders in the
quarter and year in which this offering is completed. This accretion will not
affect Value America's cash flows.
Net cash used in operating activities was $166,000 for the period ended
December 31, 1996, $338,000 for the year ended December 31, 1997 and $30.0
million for the year ended December 31, 1998. Net cash used in operating
activities in the year ended December 31, 1998 was due primarily to (a) the net
loss of $53.6 million and (b) a $2.6 million increase in accounts receivable
and a $640,000 increase in inventory, both associated with the growth in
revenues and increased cash required to fund operating activities. The
increases in accounts receivable and inventory were offset by an increase in
accounts payable of $15.4 million and accrued expenses of $4.4 million. Value
America has financed its operating activities primarily through the
aforementioned capital contributions by stockholders.
Value America has a $5.0 million line of credit from Wachovia Bank, N.A.
that is backed by cash deposits. 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% and expires on May 31, 1999.
Value America has obtained stand-by letters of credit in favor of vendors
totaling $5.0 million. Each letter of credit is secured by a certificate of
deposit. These standby letters of credit expire through August 1999 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, to cover potential charge backs,
has a first priority lien and security interest in a $1,500,000 cash deposit
account. 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 $2.5 million in the year
ended December 31, 1998. These expenditures are 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.
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. Value America may be required to use the proceeds of
this offering to finance capital expenditures, increased
27
<PAGE>
accounts receivable and inventory from product sales, marketing and advertising
expenses, and growth in operating expenses.
Value America believes that its existing capital resources and the net
proceeds of this offering will be sufficient to fund its operations for at
least 12 months from the date of this prospectus. 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. The sale of additional
equity or convertible debt securities could result in additional dilution to
Value America's stockholders. There can be no assurance that financing will be
available to Value America in amounts
sufficient to fund Value America's operations or on terms acceptable to Value
America. See "Risk Factors -- We may be unable to obtain additional financing
we need" and "Certain Transactions."
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. 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. Value America'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 Value America's online store, Value America's results of operation
and financial condition would be materially and adversely affected.
Value America has completed its assessment of its Year 2000 readiness.
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. For its proprietary computer
systems, Value America conducts Year 2000 compliance verification and
validation with internal resources. 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.
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.
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 requested statements of Year
2000 compliance from third party technology providers associated with Value
America's core information systems infrastructure.
Value America is in the process of initiating formal communications with
all of the manufacturers and distributors 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. In some cases,
corporate systems or EDI mappings have been designed to avoid Year 2000
problems. For other suppliers with which Value America communicates order,
invoice, and inventory information via EDI, Value America is switching to a
Year 2000 compliant standard format. Beginning in January 1999, Value America
is encouraging its suppliers to migrate to the Year 2000 compliant EDI format.
Value America believes that its current vendors either are in compliance with
Year 2000 requirements, or efforts will be undertaken to ensure their Year 2000
compliance by June 30, 1999. In the event Year 2000 compliance is not achieved
by some manufacturers offering products in Value America's online store, these
manufacturers may be unable to effectively operate. Consequently, Value America
may seek additional manufacturers of quality products to replace those burdened
with Year 2000 remediation difficulties. In the event Year 2000 compliance is
not achieved by some distributors, Value America may seek to identify alternate
distributors for the affected products. Because Value America's order
processing systems can transparently maintain multiple distributors for
products, it can obtain contingency distributors with only minor administrative
and EDI setup costs.
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In addition, Value America is evaluating 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. Due to the complexity of these transaction processing
systems and the fact that Value America has no direct control over them, Value
America is in the process of securing a secondary source for financial
transaction processing as a backup measure. Value America has a contingency
plan for switching to a new processor in the event its current credit card
processor is not able to be Year 2000 compliant by the middle of fiscal 1999.
This contingency plan can be implemented in a matter of hours, as the
proprietary computer systems have been designed to interface with payment
service providers through a generic interface that can be easily modified.
Value America believes that appropriate transaction processing relationships
will be pre-established by June 30, 1999, and that the effort required to
implement switching to a new processor, if necessary, will be primarily
administrative.
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 $55,000. Additional costs for
hardware and outside staffing resources for Year 2000 integration testing
environments could amount up to $75,000. Value America has contracted with GE
Information Systems to test and validate Value America's primary EDI trading
partners for Year 2000 readiness and produce a findings report. The cost of
this engagement is approximately $35,000. There are currently no identified
Year 2000 issues that will require equipment to be replaced; however, the
Windows 95 operating system on Value America's internal desktop devices will be
upgraded to Windows 98 and there may be software upgrades associated with other
equipment. The upgrades are covered under current licensing agreements at no
cost, and administrative costs of the upgrades are expected to be less than
$25,000. 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.
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BUSINESS
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 United States and Canada have purchased at least one
product or service over the Internet. The number of households world-wide that
shop online was expected to double in 1998. One industry research firm
estimates that the total value of goods and services purchased by businesses
and consumers on the Internet by individuals, businesses and governmental
agencies ranged between $55 billion and $80 billion in 1998 and projects that
the market may grow to between $1 trillion and $2 trillion 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, or 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 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 a broad selection of merchandise in a single
industry. 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 presentation,
consistency of product offerings and breadth of merchandise in order 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. These cost reductions result, in part, from offering
lower quality merchandise and hiring fewer and 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, Value America believes that retail
customers do not receive sufficient information to make informed purchasing
decisions and may frequently purchase products that fail to meet their
expectations.
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 effectively change product
offerings and customers 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
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a store location. Internet retailers have the ability to react quickly to
update product descriptions, pricing and mix without incurring substantial
costs.
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 efficiently.
Value America believes that its electronic commerce strategy can enable it
to provide a comprehensive solution to the difficulties associated with the
traditional retail market. Value America has identified three market segments
that are particularly attractive for electronic commerce: technology products,
office products and 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.
o 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 relatively complex distribution channel whereby
certain value-added resellers, system integrators, distributors and direct
marketers sell to end-users.
o OFFICE PRODUCTS include office 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.
o 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, pet supplies, and health and beauty aids. These
sales principally occur in traditional brick-and-mortar stores and through
catalog shopping.
THE VALUE AMERICA SOLUTION
Value America offers a wide selection of technology, office and consumer
products for sale on its online store. Individual and business customers visit
Value America's online store as a result of its traditional advertising, direct
response marketing, online promotions and affinity marketing programs, as well
as through Internet browsing. The store provides the customer with entertaining
and informative multi-media product presentations. Customers purchase products
online by selecting the items they wish to buy and providing payment and
shipping information. Value America 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, Value America 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 superior value to both
consumers and manufacturers. Value America provides customers with value by
offering them 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 efficient
distribution, direct exposure to individual consumers and businesses, and the
ability to sell products based upon their merits.
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Value America believes that its online store offers customers a number of
benefits that differentiate it from traditional retailers and distributors:
o QUALITY AND SELECTION FROM RECOGNIZED BRANDS. As an online store, Value
America has virtually unlimited shelf space. This allows it to offer a
broad variety of products, from a large number of leading manufacturers in
many industries. Value America believes that customers shopping on the
Internet, a relatively new commercial medium, will be more comfortable
purchasing products from recognized brands.
o VALUE PRICING. Value America's virtual storefront and direct distribution
process are designed to enable Value America to offer brand name products
at lower prices.
o INFORMATION-RICH MARKETING. In order to educate customers and enable them
to make informed purchase decisions, Value America's online store provides
valuable interactive multi-media presentations that reveal the features,
benefits and applications of the products sold by Value America.
o CUSTOMER CONVENIENCE. Value America believes that customers benefit when
they can buy a wide variety of products to meet home and business needs in
one convenient place. Value America's online store is open 24-hours-a-day,
365-days-a-year and is available to both individual and business customers
through any computer with Internet access. Value America's graphic user
interface and database design enable each customer to organize the store
in a manner specifically designed to meet his or her shopping style.
Customers can shop by category, product, brand or price.
o PERSONALIZED SERVICE. Value America'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 products they have purchased. Value America
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.
Value America believes that its electronic commerce model offers four key
benefits to manufacturers:
o BROADER REACH. Value America'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.
o CLOSER CUSTOMER CONTACT. Value America creates a direct link between
factories and consumers. Value America collects, retains and shares
aggregate customer demographic information with product manufacturers.
This enables manufacturers to improve their marketing strategies. Value
America solicits each manufacturer's suggestions regarding the development
of multi-media product presentations in order to properly present product
information to customers.
o EMPHASIS ON PRODUCT MERITS. The multi-media product presentations in
Value America's online store provide manufacturers with the opportunity to
inform potential customers as to the benefits and features associated with
their products. Consequently, manufacturers are able to sell products on
their merits, rather than on price alone.
o EFFICIENT DISTRIBUTION. Value America's technology platform is capable of
transmitting customer orders 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.
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STRATEGY
Value America's objective is to be the leading online retailer of
technology, office and consumer products. To achieve this objective, Value
America is implementing the following strategies:
INITIALLY EMPHASIZE SALE OF BUSINESS TECHNOLOGY AND OFFICE PRODUCTS. Value
America has focused its initial strategy on business technology and office
products. Value America 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. Value America has formed relationships with
manufacturers of more than 200 business technology and office products brands,
including:
o technology manufacturers such as Hewlett-Packard, IBM, NEC and Toshiba,
o computer peripheral manufacturers such as 3Com U.S. Robotics, Brother,
Canon, Epson and Lexmark, and
o office products suppliers such as Avery, Fellows, Quartet and Targus.
MOVE RAPIDLY INTO THE BUSINESS-TO-CONSUMER MARKET. Value America intends
to offer consumers a wide selection of products from a variety of categories.
Value America believes that both individual consumer use of the Internet and
electronic commerce as a means to purchase consumer products will increase. The
categories for consumer products in Value America's online store currently
consist of: apparel and footwear, computers, computer accessories, electronics
and cameras, general merchandise, health and beauty, home furnishings, home
improvement, housewares and gifts, jewelry and watches, major appliances,
office products, pharmacy, software, sporting goods, and toys and games. Value
America has, for example, entered into a relationship with Procter & Gamble
which provides more than 50 brands of household and personal care products for
the Value America online store.
EXPAND BRAND OFFERINGS. Currently, Value America offers products from more
than 1,000 brands on its online store. Value America intends to continue to
expand the number of recognized brand name manufacturers and products within
the store. Value America believes that relationships with brand name
manufacturers are essential to its ability to continue to build its reputation
as an online destination store. Furthermore, Value America believes that the
high-quality reputation of leading brands is essential to building consumer
confidence in online shopping. Value America intends 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. Value America utilizes multi-media
product presentations to inform its customers of product features, benefits and
applications prior to a sale. Manufacturers pay Value America to create
presentations that combine sound, video, copy and visual elements to
demonstrate product merits in an informative and entertaining online
environment. Value America recognized approximately $1.3 million in product
presentation revenues for the year ended December 31, 1998 and had
approximately $2.4 million in deferred product presentation revenues as of
December 31, 1998. Value America currently estimates that it will recognize
such deferred revenues over the next 12 to 30 months. Value America 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. Value America plans to continue to implement
additional technological upgrades 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 expand EDI relationships with manufacturers and suppliers.
DEVELOP AND EXPAND DIRECT RESPONSE ADVERTISING AND PARTNERSHIPS. Value
America intends to continue to develop and expand upon its direct response
advertising and partnership strategies. For the year ended December 31, 1998,
Value America spent approximately $33.2 million on advertising and promotional
expenses. Value America also may partner with certain manufacturers to conduct
exclusive direct response campaigns. Value America intends to increase its
sales, advertising and marketing expenses significantly following the
completion of this offering.
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THE VALUE AMERICA STORE
Customers enter Value America's online store at WWW.VALUEAMERICA.COM or
WWW.VA.COM. Customers can register for membership or shop as a guest. They may
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. Value America's online store
offers customers the following key features:
MULTIPLE METHODS OF SHOPPING. The customer interface enables customers to
organize the online store to suit their own shopping preferences. The store
permits shopping by category, brand or specific 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 distinctive logos associated with each brand name product
available in a particular category.
INFORMATIVE PRODUCT PRESENTATIONS. Each of the products Value America
offers is accompanied by at least one of four different types of product
presentations which it has created and produced under contract with the
product's manufacturer. The four types of presentations are:
o a standard picture listing, which presents a digital and compressed color
picture of the product, lists the product's most important specifications
and provides specific product purchasing information,
o a basic presentation, which adds to the picture listing by providing
several pages of copy and visual images to describe features and
benefits,
o a multi-media presentation, which provides a further in-depth look at the
product through a combination of photographs, illustrations, special
effects and audio streaming, and
o a video presentation, which 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 Value
America and obtain access to the benefits of Value America'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
many other member benefits. 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 access receipts, product warranties and
information relating to past Value America purchases. Membership in Value
America has been free to date. Value America is currently contemplating
charging a small membership fee, such as $5.00 per quarter, for individual
memberships.
CONVENIENT WAYS TO ORDER. Customers may order products either through
Value America's Internet site or via a toll-free telephone number and may pay
for purchases by credit or debit card or by check. Business customers who have
established trade credit with Value America may also use a purchase order.
Regardless of the purchasing method selected by the customer, substantially all
purchases are routed through the technological platform that supports Value
America's online store so as to allow every customer access to his or her order
status 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 brand names in the Value America store include names
of manufacturers, product lines and, in some cases, specific products; Value
America believes these names are well-known to potential purchasers. Value
America organizes its products into the following categories: apparel and
footwear, computers, computer accessories, electronics and cameras, general
merchandise, health and beauty, home furnishings, home improvement, housewares
and gifts, jewelry and watches, major appliances, office products, pharmacy,
software, sporting goods, and toys and games.
The following is a partial listing of the brand names and products that
Value America presented in its online store as of March 31, 1999. Value America
has selected these brand names and products based upon its
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assessment of their brand awareness among Value America's targeted customer
base. Value America has not selected these brands and products on the basis of
actual or projected unit or dollar sales, and no inference should be drawn as
to whether Value America has received or will receive significant revenues from
sales of any particular brand of products listed below. Value America's product
vendors have no obligation to make any of these brand name products available
for sale to Value America's customers and may terminate their relationships
with Value America at any time and without penalty.
<TABLE>
<CAPTION>
BRANDS PRODUCTS
<S> <C>
APPAREL AND FOOTWEAR
Cudas Casual Footwear
Cutter & Buck Casual Apparel
Georgio Brutini Men's Dress Shoes
Herman Survivor Footwear
Hi-Tek Hiking Shoes
Ryka Athletic Footwear
Tretorn Athletic Footwear
Yukon Casual Shoes
COMPUTER ACCESSORIES
Altec Lansing Speakers
APC Power Supply
Brother Printers and Copiers
Creative Graphic and Sound
Curtis Computer Accessories
Diamond Video and Sound Cards
Epson Printers, Scanners and Fax
Fellowes Ergonomic, Cables and
Input
Kensington Media Storage, Computer
Cases and Input Devices
Lexmark Printers and Supplies
Panamax Surge Protection
Perfect Data Cleaning
Read Right Computer Care Products
Targus Computer Cases
Tripplite Surge Protection
COMPUTERS
3COM U.S. Robotics Modems
Acer Scanners and Monitors
Boca Research Networking
Casio Digital Imaging
Compaq:
Armada Notebook Computers
DeskPro Business Computers
Proliant Business Servers
ProSignia Business Servers
CTX Monitors
Dazzle Multimedia Digital Imaging
Geobook Word Processors
Hewlett-Packard:
Pavilion Home Computers
Vectra Business Computers
Hitachi Monitors
IBM:
Aptiva Home Computers
GL Series Business Computers
IntellStation Business Computers
Netfinity Business Servers
ThinkPad Notebook Computers
Imation Data Storage and Media
Intel Networking and Processors
Iomega Data Storage Drives
</TABLE>
<TABLE>
<CAPTION>
BRANDS PRODUCTS
<S> <C>
KDS Monitors
Kingston Data
Lexar Media Digital Film Readers
Microtek Scanners
Mitsubishi Notebook Computers
NEC Desktop and Notebook
PCs, Monitors and
Printers
Nokia Monitors
Okidata Printers and Supplies
Palm Pilot Palm Top Computer
Proview Monitors
Samsung Monitors
Smart Modular Modems
Southland Micro Memory
Toshiba:
Libretto Palm Top Computers
Portege Notebook Computers
Satellite Pro Notebook Computers
Tecra Notebook Computers
UMAX Scanners
UUNet Internet Connection
Verbatim Data Storage Media
Viewsonic Monitors
Visioneer Scanners
Yamaha CDRW Drives
ELECTRONICS & CAMERAS
Bazooka Speaker Systems
Canon 35mm Cameras
Curtis Mathes Audio Device Convergence
Fisher Shelf Audio Systems
FujiFilm Digital and Film Cameras
Hometech Speakers
Kodak Digital Cameras
Magnavox TVs, VCRs and Audio
Olympus Digital and Film Cameras
Panasonic Audio, TVs, VCRs,
Camcorders and DVDs
Philips Video and Audio
Phonemate Telephones and Answering
RCA TVs and Camcorders
Sonance Wall Speakers
Technics Audio Systems
Zenith TVs and VCRs
GENERAL MERCHANDISE
Bounce Fabric Softener
Bounty Paper Towels
Cascade Dish Care
Charmin Bath Tissue
Cheer Laundry Detergent
Cinch Glass Cleaner
Comet Cleanser
</TABLE>
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<TABLE>
<CAPTION>
BRANDS PRODUCTS
<S> <C>
Dawn Dish Care
Downy Conditioner
Dreft Laundry
Febreze Air and Fabric Freshnener
Folgers Coffee
Francodex Pet Grooming
Gain Laundry Detergent
Hartmann Luggage
Helmac Clothing Care
Ivory Dish Care
J.W. Pet Pet Toys
Lysol Cleanser
Maurice Gerard Leather Bags
Midwest Pet Supplies
Millstone Coffee
PrevuePet Pet Travel Cages
Pringles Snack Food
Puffs Facial Tissue
Seven Oars Luggage
Simple Green Household Cleaning
Solo Luggage
Spic & Span Household Cleaning
Tide Laundry Detergent
Woolite Fabric Care
HEALTH & BEAUTY
Allergan Eye Care
Always Feminine Hygiene
Aquafresh Toothpaste
Arm & Hammer Toothpaste
Aveeno Skin Care
Ban Anti-Perspirant/Deodorant
Banana Boat Sun Care
Carefree Feminine Hygiene
Centrum Vitamins
Chaps After Shave Lotion
Clearasil Skin Care
Clear Blue Pregnancy Test
Coast Personal Cleansing
Cortaid Itch and Rash Treatment
Cover Girl Cosmetics
Crest Toothpaste
Curel Lotion
Dry Idea Anti-Perspirant/Deodorant
Edge Shaving
Fixodent Denture cleaner
Galaxy Wheelchairs and
Adjustable Beds
Ginkoba Dietary Supplement
Ginsana Dietary Supplement
Giorgio Fragrances
Hawaiian Tropic Sun Care
Head & Shoulders Hair Care
Herbal Essences Hair Care
Intelligent Nutrition Vitamins
Johnson & Johnson Health Care Products
L'Oreal Hair Care
Lubriderm Lotion
Luvs Diapers and Wipes
Max Factor Cosmetics
Monistat 7 Health Care
Movana Dietary
</TABLE>
<TABLE>
<CAPTION>
BRANDS PRODUCTS
<S> <C>
Neutrogena Skin and Hair Care
Noxzema Skin Care
Obsession Fragrances
Oil of Olay Skin Care
Old Spice Anti-Perspirant/Deodorant
Opium Fragrances
Pampers Diapers and Wipes
Pantene Hair Care
Pert Hair Care
Polident Oral Care
Polo Fragrances
Progaine Hair Care
Rogaine Hair Loss Preventative
Safeguard Personal Cleansing
Scope Mouthwash
Secret Anti-Perspirant/Deodorant
Selsun Blue Hair Care
Slimfast Diet Products
Sure Anti-Perspirant/Deodorant
Tampax Feminine Hygiene
Unicap Vitamins
Vaseline Lotion
Vidal Sassoon Hair Care
Vitasana Vitamins
White Diamond Fragrances
Wings Fragrances
Zest Personal Cleansing
HOME FURNISHINGS
American Heritage Ceiling Fans
Beaulieu Floorcovering
Bush Furniture
Congoleum Floorcovering
Cosco Step Stools
Design House Ceiling Fans
Dorel Futons and Beds
Fashion Bed Bedroom Furniture
Holmes Lighting
InterMetro Shelving
Milliken Floorcoverings
N.D. Cass Juvenile
Oriental Weavers Floorcoverings
Pelonis Ceiling Fan Accessories
Rose Hill Furniture
Safety 1st Juvenile Products
Sunroca Casual and Outdoor
Furniture
Vantage Point Entertainment
HOME IMPROVEMENT
Alsons Hand Held Showers
American Shower Bath Enclosures
Amerock Hardware
Ames Lawn and Garden
Angelo Lighting
AromaSpa Steam Bath
Black and Decker Power Tools
Bosch Power Tools
Boyds Ultra Violet Car Care
Campbell Hausfeld Generators and Power Tools
Chamberlain Garage Openers
Char-Broil Barbeque Grills
</TABLE>
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<TABLE>
<CAPTION>
BRANDS PRODUCTS
<S> <C>
Closetmaid Storage
Cooper Hand Tools
Crawford Ladders
Culligan Water Purification
DeLonghi Portable Heaters
Delta Power Tools
Delta Faucets Faucets and Showers
Design House Decorative Products
Dewalt Power Tools
Flexon Garden Hoses
Flowtron Lawn and Garden
Frost King Home Products
Garrity Flashlights
Keller Ladders
Kidde Home Safety
Kindred Sinks
Kryptonite Security Locks
Kwikset Security Locks
Lighting America Electronic Lighting
Liteway Lighting
L.R. Nelson Lawn and Garden
Off Insect Control
Peerless Faucets and Shower
Pennington Seed Lawn and Garden
Pentair Power Tools
Plano Molding Tool Boxes
Porter Cable Power Tools
Reeleasy Hose Products
Satco Lighting
Skil Power Tools
SmartWater Water Purification
Stack-On Storage Products and Tool
Cabinets
Stanley/Whistler Door Openers
Step 2 Mail Boxes
Wells Lamont Work Gloves
Weber Barbecue Grills
Weiser Lock Door Locks
Westinghouse Specialty Lightbulbs
HOUSEWARES AND GIFTS
Bissell Floor Care
Braun Small Appliances
Briel Espresso
Chantal Cookware
General Housewares Housewares
Good Tidings Christmas Accessories
Ham I Am Specialty Meats
Heirloom Clocks
Hoover Floor Care
Jerbeau Chocolate Chocolate
KitchenAid Small Appliances
Lazzaroni Desserts
Nana's Sauces Gourmet Dessert Sauces
Norelco Kitchen Appliances and
Shavers
Nybro Fine Crystal
Omaha Steaks Specialty Meats
Oral B Plaque Removal
Panasonic Appliances
Philips Lighting Lighting
Pur Water Purifiers
</TABLE>
<TABLE>
<CAPTION>
BRANDS PRODUCTS
<S> <C>
Replogle Decorative Accessories
Sanyo Appliances
Sharp Kitchen Appliances
ShopoVac Wet-Dry Vacs
Silk-Epil Hair Removal
Singer Sewing Machines
Springfield Thermometers and Clocks
Timex Clock Radios
Tobacco Source Cigars
Thermoscan Temperature Devices
West Bend Kitchen Appliances
JEWELRY & WATCHES
Armitron Watches
Connoisseurs Jewelry Cleaning
Elgin Watches
Coeur De Lion Mens Jewelry
Jacques Laurent Watches
Jules Jurgensen Fashion Watches
Lara Diamond Jewelry
Lorus Watches
Movado Watches
Nobel Watches
Pulsar Watches
Seiko Watches
Swiss Army Knives and Watches
Wenger Knives and Watches
MAJOR APPLIANCES
Amana Dishwashers, Ranges and
Refrigerators
General Electric Microwave Ovens and
Refrigerators
Profile Microwave Ovens
OFFICE PRODUCTS
3M Presentation, Projectors
and Papers
ACCO Fasteners
Acme United First Aid Kits
American Tombow Writing Instruments
Ampad Notepads
Apollo Presentation Products
Artistic Desk Accessories
At-A-Glance Dated Goods and Diaries
ATAPCO Binders and Portfolios
Avery Labels and Presentation
BALT Office Furniture
Bates Punches and Fasteners
Bayer Pain Relief
Beautone File Folders
BIC Pens and Pencils
BPI Office Furniture
Cardinal Binders and Portfolios
Champion International Office Paper
Charles Leonard Fasteners
C-Phone Video Conferencing
Cross Writing Instruments
Dan Wood Office Furniture
DayMinder Appointment Books
Day-Timer Dated Goods and
Organizers
</TABLE>
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<TABLE>
<CAPTION>
BRANDS PRODUCTS
<S> <C>
Deskjet Printer Supplies
Duracell Batteries
Dymo Labelmakers
Eaton Papers and Envelopes
Eldon Desk Accessories
Esselte Office Products
Fireking Fireproof Storage
Franklin Covey Dated Goods
GBC Quartet Presentation
Gillette Writing Instruments
Global Office Furniture
Great White Paper
Hammermill Paper
Hazel Briefcases
Hi-Liter Highlighters
IBICO Binding
Laserjet Toner, Film and Paper
Listerine Oral Care
Marks-a-Lot Markers
Martin Yale Mailroom Machines
Merriam-Webster Reference and Dictionaries
Newell Office Products
Officejet Ink Cartridges
Oxford Filing Systems
P-Touch Labeling Systems
Parker Writing Instruments
Pelouze Postal and Stamp Machines
Pendaflex File Folders
Perma Storage Files
Plantronics Telephone Headsets
Polaroid Business Imaging Products,
Instant Cameras
Post-It Adhesive Note Pads
Powershred Shredders
Quality Park Business Envelopes
Quartet Office Supplies
Ray-O-Vac Batteries
Rolodex Files and Organization
Rubbermaid Office Furniture
Safco Office Furniture
Sanford Writing Instruments
Schwab Safes and Storage
Scotch Adhesives and Tape
Sentry Safes and Storage Products
Sharp Office Electronics
Sharpie Markers
ShredMaster Shredders
Sirco Office Furniture
Smead File Folders
Southworth Office Papers and
Stationery
Stebco Business Cases
Survivor Envelopes and Mailers
Swingline Staplers
Tenex Desk Accessories
Texas Instruments Calculators
Tyvek Envelopes
Victor Calculators
Waterman Writing Instruments
Wilson Jones Binders, Shredders and
Files
Windex Cleaning Products
</TABLE>
<TABLE>
<CAPTION>
BRANDS PRODUCTS
<S> <C>
Wite-Out Correction Supplies
Xerox Copiers and Supplies
PHARMACY
Advil Pain Relief
Aleve Pain Relief
Alka Seltzer Stomach Remedy
Aspercreme Medicated Rubs
Band-Aid First Aid and Bandages
Benadryl Allergy Medication
Ben-Gay Pain Relief
Chloraseptic Respiratory
Doxidan Laxative
Dramamine Motion Sickness
Emetrol Nausea
First Aid Gauze
Gas-X Antacids
Imodium Anti-Diarrheal
Kaopectate Anti-Diarrheal
Lactaid Dairy Digestant
Metamucil Laxative
Micatin Antifungal
Motrin Pain Relief
Mylanta Antacid
Neosporin First Aid Creams
Nicoderm Stop Smoking
Nicorette Stop Smoking
Nuprin Pain Relief
PediaCare Baby Care
Pepcid AC Antacid
Pepto-Bismol Stomach Remedy
Polysporin First Aid
Robitussin Cough Remedies
Rolaids Stomach Care
Sinex Nasal Spray
Sportscreme Skin Care
Tagamet HB Antacids
Tums Antacids
Tylenol Pain Relief
Unisom Sleep Aids
Vicks Formula 44 Respiratory
Vicks Vapo Rub Respiratory
Visene Eye Drops
Zantac Health Care
SOFTWARE
3DO Entertainment
Activision Entertainment
Adobe Graphic
Blizzard Entertainment
Block Financial
Broderbund Entertainment
Bungie Entertainment
Corel Productivity
Cybermedia Productivity
Delorme Reference
Disney Entertainment
Dragon Voice Recognition
Dr. Solomon Productivity
EIDOS Entertainment
Encarta Reference
Filemaker Organizational
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
BRANDS PRODUCTS
<S> <C>
Hasbro Entertainment
Interplay Entertainment
Intuit Financial
LucasArts Entertainment
Maxis Entertainment
MacAfee Utilities Tools
Microsoft:
Magic School Bus Entertainment
Office 97 Business
Windows 98 Operating
Windows NT Business Operating
Monolith Entertainment
Peachtree Financial
Rand McNally Reference
SmithMicro Communications
Symantec Communications
Visio Presentation and Design
SPORTING GOODS
Adams Football Equipment
Adams Tight Lies Golf Clubs
Adidas Soccer Equipment
Air Football Equipment
All-Star Football Equipment
Armour Golf Clubs
Baby Jogger Jogging Stroller
Bike Protective Gear
Brine Sports Gear
Burton Golf Bags
Bushnell Binoculars and Range
Finder
Callaway Golf Clubs
Caloi Bicycles
Flexible Flyer Sleds
Healthrider Exercise Equipment
Huffy Bicycles
Image Fitness Equipment
King Cobra Golf Clubs
MacCabee Camping Equipment
Maxfli Golf Balls
Mikasa Volleyballs
</TABLE>
<TABLE>
<CAPTION>
BRANDS PRODUCTS
<S> <C>
Mitre Soccer Shoes
Neumann Sports Gloves
Odyssey Putters
Ping Putters
Pinnacle Golf Balls
Precise Pedometers
Pro Athletic Supports
Proform Exercise
Puma Sports Accessories
Quantum Fishing Equipment
Ram Golf Golf Clubs and Children's
Golf
Rawlings Sporting Goods
Reusch Sporting Gloves
Riddell Football
Schutt Football Equipment
Slazenger Golf Balls
Spalding Sporting Goods
Tachikara Volleyballs
Taylor Made Golf Clubs
TearDrop Golf Golf Equipment
Titleist Golf Clubs and Balls
Top-Flite Golf Balls
Wenzel Camping Equipment
Wilson Sporting Goods
World Sports In-Line Skates
Zebco Fishing Equipment
Zebra Golf Clubs
TOYS & GAMES
Barbie Electronic Toys
Fundex Games Family Games
Galoob Toys Toys
Hedstrom Swing Sets
Kiddesigns Toys
Mega Bloks Toys
Playhut Toys
Sierra Software
Sony Playstation Video Game Systems
Team Concepts Children's Computers
</TABLE>
MARKETING AND PROMOTION
Value America believes that its strategy of using traditional off-line
media to generate online sales enables it to reach a broader audience, build
its brand name, more effectively control its promotional budgets and
effectively tie advertising to revenue. Following this offering, Value America
expects to significantly increase its investment in both off-line and online
advertising and promotion to continue to sell products and attract and retain
customers. Value America employs a variety of promotional activities and
utilizes various media to accomplish its marketing goals, including:
TRADITIONAL ADVERTISING. Value America has implemented a program of print
advertising in general circulation newspapers such as THE BOSTON GLOBE, LOS
ANGELES TIMES, THE NEW YORK TIMES, SAN FRANCISCO CHRONICLE, THE WALL STREET
JOURNAL, USA TODAY and THE WASHINGTON POST, as well as in approximately 20
other major urban daily newspapers and selected magazines. Value America 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. Value America uses magazine
advertising to target specific products to specific target markets. In
addition, Value America advertises on national television outlets such as ABC,
CNN and TBS, as well as on local television outlets. Value America's national
radio advertising coverage features stations in each of the following markets:
Atlanta, Baltimore, Boston, Denver, Houston, Miami, New York, Orlando,
Philadelphia, San Diego and Washington, D.C.
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DIRECT MARKETING. Value America utilizes direct response marketing to sell
products, promote its online store and increase brand name reach. Value America
coordinates its own direct response efforts with certain manufacturers to
create a unified marketing approach for products. Elements of Value America'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. Value America has conducted cooperative
marketing activities with brands such as Amana, Brother, Canon, GBC Quartet,
Hewlett-Packard, IBM, Panasonic, Toshiba and Weber. Value America intends to
further develop coordinated marketing plans with certain manufacturers. By
creating such affiliations, Value America can reduce its marketing expenses,
increase the level of its advertising and develop customer recognition of the
connection between the Value America online store and the manufacturers' brand
name products.
ONLINE ADVERTISING. In addition to its off-line advertising program, Value
America advertises on Internet portals and targeted content sites. Value
America manages its Internet promotional campaigns in-house.
Value America believes it receives favorable rates and strong positioning
with a well-targeted presence from a wide variety of popular Internet sites.
Value America promotes online with ABC News.com, Better Homes & Gardens.com,
Big Yellow, Bloomberg Financial, Broadcast.com, CBS Sportsline, Classifieds
2000, Compare.net, CNN.com, Computer Shopper.com, Excite, Flycast, GeoCities,
HotBot, Infoseek, Lycos, MSN AudioNet, NetAddress, Netscape, NYTimes on the
Web, PCWorld, Pointcast and USAToday.com.
In October 1998, Value America established a business relationship with
Yahoo!. Pursuant to this relationship, Value America is entitled to 336.5
million impressions and six two-week front page promotional campaigns on
Yahoo!'s home page. This relationship includes the anchor position in Yahoo!'s
Small Business Center and exclusivity in the consumer electronics shopping
category. The Yahoo! Consumer Electronics Merchant Program is exclusive to
Value America. Every visitor that searches for information on more than 200
consumer electronics keywords is directed to Value America's Consumer
Electronics Department. Value America also enjoys exclusivity with the Yahoo!
Build-a-Computer Module. This feature enables shoppers to locate the right
machine for their needs through a selection of pull-down menus that direct the
user to Value America's store by specific manufacturer and computer type.
AFFINITY AND AFFILIATE MARKETING. Value America has established custom
stores for organizations such as Federal Express, Fannie Mae, The Bon Vivant
Foundation, the University of Virginia, the University of Michigan, IBM Small
and Medium Business, and The National Small Business Union. It intends to seek
to develop custom stores for additional corporations, governmental agencies,
unions, universities and charities. Value America can select any sub-set of
products for any custom store and then establish discounts, charity
contributions and Value America Dollars for that store. Value America is also
establishing a unique network of affiliates who will be rewarded for creating
links to Value America's Web site. Affiliates will be compensated for purchases
made by shoppers who click into the Value America online store from the
affiliates' Web sites.
MEMBERSHIPS
As of June 30, 1998, Value America had approximately 17,000 members. In
the third and fourth quarters of 1998, Value America began to feature the value
of membership in Value America's print advertising campaign and feature
membership promotions in the online store. This increased visibility, along
with a strategy to retain customers through expansion of Value America's
customer support center, dramatically increased Value America's membership
base, which numbered in excess of 260,000 as of April 3, 1999. To date, Value
America has not charged any membership fees.
Value America members enjoy a number of important benefits. Members enjoy
a price advantage of 5% on most products in the store. Members also benefit
from Value America's account management feature, which enables members to have
a private space that maintains a record of all of their past purchases and
access to their receipts and manufacturer's warranties. This feature can be
particularly helpful for small businesses because it enables them to track
office supply and office technology expenditures even if they are purchased by
several employees from multiple vendors. Members are awarded "Value America
Dollars" with every purchase. Value America Dollars equal 1% or more of the
purchase price on most products in the store.
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Value America Dollars can be used as currency for future purchases at the Value
America online store. Value America also allows its members to select a
favorite charity to which 1% of their purchases is automatically awarded. Value
America members can keep a record of the birthdays, anniversaries and other
important dates, and Value America will remind members of these events in time
to choose a gift.
ORDER FULFILLMENT
Value America fulfills orders primarily by arranging for direct shipment
of products from the manufacturer or its 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 such as
certain high-demand technology products. Value America's order fulfillment
systems are designed to choose the best product price and availability if
multiple distributors offer the same product. As of December 31, 1998, Value
America had EDI connections with vendors that accounted for approximately 90%
of Value America's revenues and 73% of its number of product orders. Value
America has established two-way EDI connections with vendors whose products
accounted for approximately 54% of Value America's revenues for the year ended
December 31, 1998. Vendors representing an additional 7% of Value America's
1998 revenues use both EDI and automated document servers to place product
orders, and Value America uses automated document servers to create purchase
orders for vendors representing the final 3% of Value America's 1998 revenues.
Value America expects the process of ordering and fulfillment to become
increasingly automated. Value America'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 include
information stored within Value America'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. Value America currently ships
most products with United Parcel Service and Roadway Express. As part of its
relationship with The Union Labor Life Insurance Company, or ULLICO, Value
America has agreed that so long as ULLICO remains a stockholder of Value
America, Value America will only use shippers which have recognized one or more
unions as the collective bargaining representative of their employees unless no
viable union transportation option is available. See "Certain Transactions."
CUSTOMER SERVICE AND CALL CENTER
Value America believes that its ability to establish and maintain
long-term relationships, earn trust, provide service and encourage repeat
visits and purchases largely depends upon the strength of its customer support
and service operations and staff. Value America believes this approach allows
it to sell high value products, such as products costing over $1,000, in an
online environment and to reach a broader customer base. Value America
encourages frequent communication with, and feedback from, its customers in
order to continually improve its product and service offerings. To this end, it
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 Value America'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. Value America's telephone system
provides automatic call distribution and call statistics reporting. Currently
its online store provides customers with automatic e-mail updates for a change
in order status. Value America has installed e-mail management software that
allows its customer support and service personnel to handle a large volume of
e-mail more efficiently by providing for prioritization and routing.
Value America believes that the convergence of computers, televisions and
telephones with the Internet will ultimately form a unified communication,
education, entertainment and commerce enabled medium. In
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addition, Value America believes that this convergence will require leading
electronic commerce companies to integrate call centers into their business
models. Value America believes online shoppers will require electronic commerce
companies to combine the efficiency and anonymity of the Internet with the
sense of community and personal service of a traditional store.
Value America's call center features built-in redundancy, scalability,
intelligent agent selection and automated voice messaging. Its software systems
allow Value America to capitalize on data mining efficiencies for up-selling
and customer retention and to track the relative performance of a wide variety
of promotional campaigns. Voice-over-data and screen-pop functionality makes it
possible to create a more seamless shopping experience. Inbound call routing
ensures that customers are automatically paired with a representative specially
trained to handle their specific product category needs. Inbound sales
opportunities are routed to consumer products, technology products, office
products or affinity program representatives. Each representative is trained to
help phone buyers become more comfortable buying on the Internet by providing
information about security, navigation and the convenience of online commerce.
The call center is the focal point for Value America's outbound,
business-to-business sales effort. The call center includes professional
account managers who manage up to 300 accounts in designated territories. They
sell Value America's full product offering including systems, peripherals,
office supplies and furnishings. This solution is a "one stop shop" for the
small business market.
MANUFACTURER RELATIONSHIPS
Value America typically forms relationships directly with manufacturers.
Value America has listing agreements with manufacturers under which Value
America develops and hosts multi-media product presentations on Value America's
online store. Certain of these agreements require Value America to maintain
product listings for a minimum period of time, typically 12 or 36 months.
For the year ended December 31, 1998, goods manufactured by IBM accounted
for approximately 58% of net sales, and goods manufactured by Hewlett-Packard
represented approximately 9% of net sales.
o IBM. IBM provides its technology products for sale through Value
America's online store. IBM offers its products to Value America at
competitive prices and provides Value America with cooperative advertising
support. Value America, in turn, identifies IBM as an alliance partner,
provides Web access to IBM products through its online store and
advertises IBM products in major media outlets.
o HEWLETT-PACKARD. In 1997, Value America entered into agreements with
Hewlett-Packard pursuant to which Hewlett-Packard authorized Value America
to sell Hewlett-Packard's Pavilion line of home personal computers,
consumer and business printing and imaging products, and selected business
computer systems. Hewlett-Packard also provides Value America with
cooperative advertising support.
SYSTEMS INFRASTRUCTURE, TECHNOLOGY AND SECURITY
Value America has designed and developed a scalable system for transacting
business on the Internet. Value America's hardware and software infrastructure
is capable of supporting multiple online stores, as well as internal systems
for customer service, order processing, EDI, fulfillment, accounting and
management of product data.
DEPLOYMENT NETWORK. Value America has developed a secure, fault tolerant
network for hosting its Web site. The network utilizes high quality, industry
standard hardware including Cisco routers, IBM Netfinity servers, RAID arrays
and redundant Hewlett-Packard tape libraries. Value America acquired an
Autonomous System Number, or ASN, and maintains a set of Internet routing
tables to provide optimal routing for its network traffic and to support its
internal network architecture. Value America has redundant connections to the
Internet via UUNet and MCI.
Value America maintains an "N+1" philosophy for capacity and redundancy
planning; that is, Value America implements at least one unit of capacity above
the expected requirements for peak load. For example, (a) Web servers are added
as loads increase so that failure of any single server will not significantly
degrade
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performance, (b) network bandwidth is increased symmetrically on both Internet
connections to ensure performance in the event of failure in either path, and
(c) all mission critical data is stored in RAID configurations. A network and
server monitoring system has been implemented to aid in network management and
to notify operators of potential problems.
SOFTWARE SYSTEMS. Value America has developed custom software that makes
extensive use of relational database technology to implement its online store.
The system is deployed on a network of Windows NT and Unix servers. Value
America has developed multiple proprietary internal support systems to
facilitate sales, support customer service and manage product and store
content. These systems utilize EDI to exchange information with trading
partners. Value America has worked with GE Information Systems to develop EDI
mappings with trading partners, and EDI transactions have been implemented in
certain instances for purchase orders, purchase order acknowledgements,
invoices, and inventory and price updates. Value America utilizes the Netscape
ECXpert system to manage EDI processing. Credit card transactions are
automatically verified and cleared through PaymentNet.
SOFTWARE ARCHITECTURE. As a user navigates the Value America 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. This proprietary separation of data from presentation allows product
content to be added to the site without any software updates. Proprietary
authoring and content management tools have been created to add products and
multi-media product presentations to the virtual store in a standardized way.
These tools do not require that users learn HTML or understand any complex
technology. Multi-media presentations are implemented with RealAudio and
RealVideo technology, with the streaming media remotely hosted on MCI and
RealNetwork's servers. In addition, the system architecture supports the
concept of multiple storefronts with custom product selections and custom
pricing for products in any given store.
The order processing pipeline ensures that orders flow through the system
with minimum 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, cost and product availability. An integrated fraud prevention system
filters out potential fraudulent orders and routes them to the fraud department
for investigation.
SECURITY. Value America'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, or SSL, to ensure the security of customer information.
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
Value America 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. Value America does not currently hold any
patents or have any patent applications pending for itself or its products.
Value America has obtained nine federal registrations of service marks for
"Value America" and variations of that name. Value America also owns one
pending application for federal service mark registration of another variation
of the "Value America" name. Value America retains certain intellectual
property rights associated with the multi-media product presentations developed
by Value America for the brand name manufacturers whose products are featured
in Value America's store. Value America 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
Value America's proprietary technology, that Value America will be able to
prevent competitors from developing software with similar functionality, or
that third parties will not infringe upon or misappropriate Value America's
intellectual property rights.
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Value America believes that its trademarks, software and other proprietary
rights do not infringe on the proprietary rights of third parties. On March 24,
1999, a party filed a lawsuit against Value America alleging violations of
federal trademark law, state law and common law. The party seeks monetary
damages, injunctive relief and cancellation of Value America's trademark
registration for the "Value America" mark. See "Business -- Litigation." Value
America is a recent entrant in the market for sale of merchandise on the
Internet, and there can be no assurance that other third parties will not
assert additional infringement or other claims against Value America in the
future with respect to current or future product offerings, trademarks or other
Value America works. The presently asserted claim or other future claims may
require Value America to enter into royalty arrangements or result in costly
litigation. Value America is also dependent upon obtaining licenses to utilize
existing technology related to its operations. To the extent that new
technological developments are unavailable to Value America on terms acceptable
to it, or at all, Value America may be unable to continue to implement its
business plan, which would have a material adverse effect on Value America's
business, financial condition and results of operations.
COMPETITION
The electronic commerce industry is new, rapidly evolving and extremely
competitive. Barriers to entry are minimal, allowing current and new
competitors to launch new Web sites at a relatively low cost. Value America
currently or potentially competes with a variety of companies in the electronic
commerce market and in the traditional retail industry, including:
o online retailers that specialize in a limited number of products,
including Amazon.com, Buy.com, CDNow, Cyberian Outpost, Dell Computer and
Gateway International,
o online retailers that offer a broad selection of products, including
Cendant, Internet Shopping Network, iQVC, ONSALE and Wal-Mart Online,
o other online companies that offer centralized access to a broad selection
of products, including eBay and iMall,
o indirect competitors that generate a substantial portion of their
revenues from electronic commerce, including America Online, Excite,
Infoseek, Lycos, Microsoft and Yahoo!,
o mail order catalog operators, including Lands' End, Micro Warehouse,
Sharper Image, Spiegel and Williams-Sonoma,
o retail and warehouse/discount stores, including Circuit City, Home Depot,
Office Depot, Price/Costco, Staples and Target, and
o other national and international retail, catalog, distribution and
manufacturing companies.
Value America 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
service, customer service and quality of site content.
GOVERNMENT REGULATION
Value America 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, or the application of existing laws and
regulations to the
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Internet and other commercial online services, could have a material adverse
effect on Value America'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 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 Value America'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. Value America
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 Value
America.
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.
Value America 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
Value America 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 Value America's business, financial condition, and results of
operations.
FACILITIES
Value America's principal administrative, computer, marketing and customer
service facilities are located in seven office buildings in Charlottesville,
Virginia encompassing an aggregate of approximately 45,000 square feet. The
facilities occupied by Value America are subject to leases that expire from
February 2000 through September 2000. The leases provide for aggregate monthly
rental charges of approximately $37,000.
EMPLOYEES
As of April 3, 1999, Value America had 332 full-time equivalent employees,
of which
o 60 were in technology and system management,
o 29 were in merchandising and vendor partnerships,
o 35 were in product presentation and marketing,
o 22 were in advertising and promotion,
o 97 were in sales and customer service,
o 55 were in operations and fulfillment,
o 23 were in finance and human resources and
o 11 were in executive and business development.
Value America 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 Value America believes that it can attract
and retain qualified personnel, there can be no assurance that Value America
will be able to do so.
Value America believes its relationships with its employees are good. None
of Value America's employees is represented by a collective bargaining agent,
and Value America has never experienced a work stoppage.
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In connection with Value America's sale of preferred stock, Value America
agreed that so long as ULLICO is a preferred or common stockholder of Value
America:
o Value America will recognize any union attempting to represent Value
America's employees upon a showing of majority support through a formal
gathering of cards for such union and
o in connection with any organizing activities being performed by a union,
Value America will refrain from actively campaigning in opposition to the
designation of such union as the representative of Value America's
employees.
LEGAL PROCEEDINGS
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.
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. Stephen S. Freedman 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, Mr. Freedman
retained the exclusive right to use the "Value America" mark for preparing and
disseminating advertising matter, including direct mail advertising. Mr.
Freedman 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. requests 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. Based on its preliminary review of the complaint, Value America believes
that it has valid defenses to each of the claims asserted by Coupons, Inc., and
that the lawsuit will not have a material adverse effect upon its business,
financial condition or results of operations.
Except as described above, Value America is not currently party to any
litigation or other legal proceedings, nor is Value America 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 Value
America's business, financial condition and results of operations.
46
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY PERSONNEL
The executive officers, directors, director-nominees, founders and other
key personnel of Value America, and their ages and positions as of April 3,
1999, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- -------------------------- ----- -----------------------------------------------------------------
<S> <C> <C>
EXECUTIVE OFFICERS, DIRECTORS, DIRECTOR-NOMINEES AND FOUNDERS
Craig A. Winn 44 Chairman and Founder
Rex Scatena 49 Vice Chairman, General Counsel and Founder
Thomas Morgan 44 Chief Executive Officer
Glenda M. Dorchak 44 President, Chief Operating Officer and Director
Dean M. Johnson 40 Executive Vice President, Chief Financial Officer, Secretary and
Director
Joseph L. Page 29 Executive Vice President and Chief Technology Officer
Neal B. Harris 44 Executive Vice President
Thomas J. Starnes 39 Executive Vice President
Paul F. Ewert 50 Senior Vice President and President -- Technology Products
Division
Richard L. Gerhardt 47 President -- Consumer Products Division
Gary D. LeClair (1) 43 Director
John L. Motley III 48 Director
Michael R. Steed (1) 49 Director
William D. Savoy 34 Director -- Nominee
Frederick W. Smith 54 Director -- Nominee
Thomas J. Casey 46 Director -- Nominee
KEY PERSONNEL
Kenneth J. Erickson, Jr. 37 Senior Vice President -- Merchandising
Kenneth R. Power 53 Senior Vice President -- Advertising
John A. Steele 43 Senior Vice President -- Operations
Sandra T. Watson 42 Senior Vice President -- Finance
Jerry K. Goode 35 Vice President -- Engineering and Chief Information Officer
Melissa M. Monk 32 Vice President -- Sales
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 Value America, has been Chairman
since co-founding Value America in March 1996. Mr. Winn also served as the
Chief Executive Officer of Value America from March 1996 to March 1999 and
President from August 1998 to October 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 President, 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 million 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
provided him with an appreciation of the challenges facing suppliers and how
the suppliers' electronic data interchange and distribution systems operate. In
October 1993 Dynasty filed a petition for relief under Chapter 11 of the United
States Bankruptcy
47
<PAGE>
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 debt. Mr. Winn received a B.S. in
Business Administration, MAGNA CUM LAUDE, from the University of Southern
California.
REX SCATENA co-founded Value America with Mr. Winn in March 1996 and
currently serves as its Vice Chairman and General Counsel. Mr. Scatena has
served as a director since March 1996. From August 1998 to March 1999, he
served as Executive Vice President -- Business Development. From June 1998
until August 1998, Mr. Scatena served as President -- Consumer Products
Division. From Value America's inception until August 1998, Mr. Scatena served
as Value America's President. From July 1988 to August 1997, Mr. Scatena was
Managing Partner of the law firm of 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.
THOMAS MORGAN joined Value America in March 1999 as its Chief Executive
Officer. From November 1997 to February 1999, he served as President and Chief
Executive Officer of U.S. Office Products Co., an office and educational
product supplier. From June 1997 to November 1997, Mr. Morgan was President and
Chief Operating Officer of U.S. Office Products. From February 1997 to June
1997, he served as President of the North American Office Products Group of
U.S. Office Products. Prior to joining U.S. Office Products, Mr. Morgan spent
more than 20 years with Genuine Parts Company where he most recently served as
Executive Vice President of S.P. Richards Company, a national products
wholesaler.
GLENDA M. DORCHAK has been President and Chief Operating Officer since
October 1998. She served as Senior Vice President -- Marketing and Advertising
of Value America from August 1998 to October 1998. 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 launched IBM's first personal computer telemarketing operation in
1991.
DEAN M. JOHNSON joined Value America in November 1997 as Executive Vice
President, Chief Financial Officer and director. In December 1997, Mr. Johnson
became Value America'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 a B.S. in Industrial Administration from General Motors
Institute and an M.B.A. from the University of Virginia.
JOSEPH L. PAGE has been Executive Vice President and Chief Technology
Officer of Value America 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.
NEAL B. HARRIS joined Value America in March 1999 as an Executive Vice
President. From November 1993 to March 1999, Mr. Harris was Vice President --
Operations of Costco Wholesale, where he held a variety of positions from 1980
to March 1999. Mr. Harris received a B.S. in Finance from San Diego State
University.
THOMAS J. STARNES joined Value America in April 1999 as an Executive Vice
President. From September 1997 to April 1999, he served as Senior Vice
President of Sales and Marketing and Senior Vice President of Business
Development of U.S. Office Products Co., an office and educational product
supplier.
48
<PAGE>
From August 1993 to September 1997, Mr. Starnes was a Vice President of Barnes,
Morris, Pardoe & Foster (now Insignia/ESG), a commercial property firm. Mr.
Starnes received a B.S. in Business Administration from the University of
Tennessee and an M.B.A. from the Harvard Business School.
PAUL F. EWERT joined Value America in March 1999 as its Senior Vice
President and President -- Technology Products Division. From May 1997 to
February 1997, Mr. Ewert served as Senior Vice President -- Merchandising of
CompUSA. From February 1996 to May 1997, he served as CompUSA's President --
Merchandising and General Merchandise Manager. Mr. Ewert received a B.A. in
History from Macalester College.
RICHARD L. GERHARDT joined Value America in September 1998 as President --
Consumer Products Division. From February 1996 to June 1997, he served as
Director of Merchandising and Catalog Production for Maintenance Warehouse, a
division of Home Depot. From September 1993 to February 1996, Mr. Gerhardt was
a Vice President of Merchandising, Product Planning and Sales for Price Quest,
an electronic catalog operated by Price/Costco. From September 1989 to
September, 1993, he served as President and Vice Chairman of Dynasty.
GARY D. LECLAIR has been a director of Value America since November 1997.
Mr. LeClair has been Chairman of LeClair Ryan, A Professional Corporation,
legal counsel to Value America, 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.B.A. 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 Value America since November
1997. Since 1980, Mr. Motley has been the President of John Motley Associates,
Inc., an office products manufacturers' representative company that he founded.
Mr. Motley has served as a part-time employee of Value America 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 Value America 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.
WILLIAM D. SAVOY has been nominated to serve as a director of Value
America 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., Ticketmaster
Online -- City Search, USA Networks, Inc. and U.S. Satellite Broadcasting. Mr.
Savoy holds a B.S. in computer science, accounting and finance from Atlantic
Union College.
FREDERICK W. SMITH is Chairman, President and Chief Executive Officer of
FDX Corporation, a global transportation and logistics holding company that was
formed when Federal Express Corporation acquired Caliber System, Inc. in
January 1998. He founded Federal Express in 1971 and was President of Federal
Express from 1971 to 1975 and from 1983 to January 1998. Mr. Smith was Chief
Executive Officer of Federal Express from 1977 to January 1998 and has served
as its Chairman since 1975. He is responsible for providing strategic direction
for all FDX Corporation business units, including Federal Express, RPS, Viking
Freight, Robert Express and FDX Global Logistics. Mr. Smith has served on the
boards of several large public companies. He is a director of the Business
Roundtable, the CATO Institute, the Library of Congress James Madison Council
and the Mayo Foundation, and he serves as Vice Chairman of the U.S.-China
Business Council. Mr. Smith received a B.S. in economics from Yale University.
49
<PAGE>
THOMAS J. CASEY has been Vice Chairman of Global Crossing, Ltd., an
independent developer, owner and operator of open access and undersea
fiberoptic global telecommunications networks since December 1998. He has also
served as Managing Director of Global Crossing since September 1998. Since
September 1998, Mr. Casey has been a director of Pacific Capital Group, a Los
Angeles-based merchant banking firm. From October 1995 to September 1998, Mr.
Casey was Managing Director of Merrill Lynch's Global Communications Investment
Banking Group. In this position, he oversaw equity, debt and merger and
acquisition assignments for United States, European and Asian
telecommunications, media and technology information services companies. From
January 1990 to September 1995, he served as a partner and co-head of the
telecommunications and media group for the law firm of Skadden, Arps, Slate,
Meagher and Flom. Mr. Casey received a B.A. from Boston College and a J.D. from
George Washington University Law School.
KENNETH J. 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.
KENNETH R. POWER has been Senior Vice President -- Advertising since April
1997 and Creative Director of Value America since August 1996. In addition, he
served as Vice President -- Advertising from August 1996 to April 1997. 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.
JOHN A. STEELE joined Value America in April 1999 as Senior Vice President
- -- Operations. From October 1993 to April 1999, Mr. Steele served as Vice
President -- Operations Support for Genuine Parts Company, an auto and
industrial replacement parts and office products company. Mr. Steele received a
B.S. and an M.S. each in Industrial Management from Georgia Tech and a J.D.
from Cleveland State University.
SANDRA T. WATSON has been Senior Vice President -- Finance since March
1998 and was Controller from November 1997 until February 1999. 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 & Mary.
JERRY K. GOODE joined Value America 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.
MELISSA M. MONK joined Value America in October 1998 as Vice President --
Sales. From March 1997 to October 1998, Ms. Monk was the Director of North
American Marketing Organization, North American Marketing Operations Manager
and Manager of Small and Medium Business Programs for the IBM Personal Systems
Group. From November 1995 to March 1997, Ms. Monk served as the Director of
Business Development for Avnet Computer Marketing Group, a reseller and value
added distributor of PC products. From October 1994 to August 1995, Ms. Monk
was Corporate Division Manager for Insight Direct, a mail order reseller of
PCs. From December 1993 to October 1994, Ms. Monk worked as Site Manager for
AMBRA, a PC subsidiary of IBM. Prior to December 1993, Ms. Monk worked for Dell
Computer, a manufacturer of PCs. She received a B.S. in Business Administration
from the University of Texas.
MARCUS F. NUCCI joined Value America 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
50
<PAGE>
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 Value America 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 Value
America.
BOARD OF DIRECTORS
The articles provide that Value America'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:
o Ms. Dorchak and Messrs. Johnson and Motley will be classified as Class I
directors and will serve until Value America's 1999 annual meeting of
stockholders,
o Messrs. Savoy and Scatena will be classified as Class II directors and
will serve until the 2000 annual meeting of stockholders and
o Messrs. Winn, LeClair and Steed will be classified as Class III directors
and will serve until the 2001 annual meeting of stockholders.
Mr. Motley will not stand for re-election as a director of Value America at the
1999 annual meeting of stockholders, and Mr. Casey will stand for election to
the Class I directorship previously held by Mr. Motley. Mr. Smith will stand
for election as a Class II director at Value America's 1999 annual meeting of
stockholders. Each successor to a director whose term expires at an annual
meeting of stockholders will be elected to serve until the third annual meeting
after his or her election and until his or her successor has been duly elected
and qualified. Any director chosen to fill a vacancy on the board of directors
shall hold office until the next election of the class for which he or she
shall have been chosen and until his or her successor has been duly elected and
qualified. Vacancies in the board of directors can be filled only by the
stockholders of Value America. Directors may be removed only by stockholders
and only with cause, as defined in the articles.
COMMITTEES OF THE BOARD OF DIRECTORS
Value America's board of directors has established an Audit Committee and
a Compensation Committee. Messrs. Steed and LeClair serve as the members of
both committees. Under the bylaws, Mr. Winn, as Value America's Chairman, is an
EX OFFICIO member of both committees. The Audit Committee recommends the annual
appointment of Value America's independent auditors, with whom the Audit
Committee reviews the scope of audit and non-audit assignments and related
fees, accounting principles used by Value America in financial reporting,
internal auditing procedures, the quality and integrity of Value America's
financial statements, and the adequacy of internal accounting controls. The
Compensation Committee determines the salaries and bonuses paid to the
executive officers of Value America and determines the amounts annually
available for bonuses pursuant to any bonus plan or formula approved by the
board of directors. Under the articles, the Compensation Committee must approve
all matters affecting the compensation of any officer or director of Value
America or any employee of or consultant to Value America 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 of directors or any committee of the board of directors under the
stock 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 Value America. The Compensation Committee also has oversight
responsibilities for all employee compensation and benefit programs.
51
<PAGE>
DIRECTOR COMPENSATION
Directors of Value America do not receive cash compensation for their
services as directors but are reimbursed for their reasonable expenses in
attending meetings of the board of directors and the committees on which they
serve. Directors who are not employees of Value America are eligible to receive
incentive awards under Value America's stock incentive plan.
o On August 1, 1997, Value America granted Mr. Motley, as a part-time
employee of Value America, 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.
o On November 13, 1997, Value America 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.
o On November 18, 1998, Value America granted non-qualified options to
purchase 22,500 shares of common stock to The Union Labor Life Insurance
Company, acting on behalf of its Separate Account P, an account formed to
hold investments supporting payments under certain group annuity
contracts. 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. Value
America intended to grant these options to Mr. Steed for his services as a
director of Value America. For reasons relating to his fiduciary
obligations, Mr. Steed requested that Value America issue these options to
Separate Account P.
Upon a change in control, as defined in Value America's stock 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:
o provide for the assumption of options granted under the stock incentive
plan,
o provide for substitution of appropriate new options awards covering the
stock of a successor corporation to Value America or an affiliate thereof
or
o 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 Value America'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. Value America may grant
additional non-qualified options to non-employee directors in the future.
52
<PAGE>
EXECUTIVE COMPENSATION
The following table provides information on the compensation earned during
fiscal 1997 and 1998 by: (a) the chief executive officer of Value America and
(b) each other executive officer of Value America whose bonus and salary
exceeded $100,000 in 1998. The persons named in the table are referred to as
the "Named Executive Officers."
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
--------------------------------- -----------------------
NAME AND SECURITIES UNDERLYING ALL OTHER
PRINCIPAL POSITION(S) YEAR SALARY ($) BONUS ($) OPTIONS (#)(1) COMPENSATION ($)
- ---------------------------------- ------ ------------------- ----------- ----------------------- -------------------
<S> <C> <C> <C> <C> <C>
Craig A. Winn,
Chairman ........................ 1998 $ 233,718 (2) -- -- --
1997 45,000 (3) -- -- --
Glenda M. Dorchak,
President and
Chief Operating Officer ......... 1998 57,780 (4) $62,364 325,000 $ 266,042 (5)
1997 -- -- -- --
Dean M. Johnson,
Executive Vice President,
Chief Financial Officer
and Secretary ................... 1998 146,074 (6) -- -- --
1997 13,269 (7) -- 225,000 --
Rex Scatena,
Vice Chairman and
General Counsel ................. 1998 177,692 (8) -- -- --
1997 52,500 -- -- --
Joseph L. Page,
Executive Vice President
and Chief Technology
Officer ......................... 1998 129,327 (9) -- -- --
1997 68,015 -- 864,375 --
</TABLE>
- ----------
(1) Represents options granted pursuant to Value America's stock incentive
plan.
(2) Mr. Winn's current salary is $295,000 per year.
(3) 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.
(4) Ms. Dorchak joined Value America in August 1998. Her current salary is
$250,000 per year and her minimum bonus for 1999 is $150,000. See " --
Employment Arrangements" for a description of Ms. Dorchak's employment
agreement.
(5) This amount represents $16,042 for relocation expenses and a $250,000 loan
from Value America at an interest rate of 6% per year.
(6) Mr. Johnson's current salary is $250,000 per year.
(7) Mr. Johnson joined Value America in November 1997.
(8) Mr. Scatena's current salary is $180,000 per year.
(9) Mr. Page's current salary is $150,000 per year.
Thomas Morgan, who joined Value America in March 1999 as its Chief
Executive Officer, has a current salary of $395,000 per year. Neal B. Harris,
who joined Value America in March 1999 as an Executive Vice President, has a
current salary of $295,000 per year. Paul F. Ewert, who joined Value America in
March 1999
53
<PAGE>
as its Senior Vice President and President -- Technology Products Division, has
a current salary of $280,000 per year. Thomas J. Starnes, who joined Value
America in April 1999 as an Executive Vice President, has a current salary of
$250,000. See " -- Employment Arrangements."
OPTION GRANTS DURING FISCAL 1998
The following table provides information on the grants of stock options to
the only Named Executive Officer who received options during the fiscal year
ended December 31, 1998. The last two columns reflect amounts that may be
realized upon exercise of the options immediately before the expiration of
their term, assuming the specified compound rates of appreciation of 5% and 10%
on the market value of the common stock on the date of option grant over the
term of the options. These numbers are calculated based on rules promulgated by
the Securities and Exchange Commission and do not reflect Value America's
estimate of future stock growth. Actual gains, if any, on stock option
exercises and common stock holdings are dependent on the timing of exercise and
the future performance of the common stock. There can be no assurance that the
rates of appreciation assumed in this table can be achieved or that the amounts
reflected will be received by individuals.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
---------------------------------------------------------- VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION --------------------------------
GRANTED FISCAL YEAR PER SHARE DATE 5% 10%
------------ -------------- ------------ ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Glenda M. Dorchak ......... 325,000 15.8% $ 10.16 8/24/08 $2,076,610 $5,262,538
</TABLE>
Value America granted options to five additional executive officers in
March and April 1999. The following information is provided supplementally with
respect to those five grants:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
----------------------------------------- VALUE AT ASSUMED
NUMBER OF ANNUAL RATES OF STOCK
SECURITIES PRICE APPRECIATION FOR
UNDERLYING EXERCISE OR OPTION TERM
OPTIONS BASE PRICE EXPIRATION --------------------------------
GRANTED PER SHARE DATE 5% 10%
------------ ------------ ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Thomas Morgan ............. 400,000 $ 15.00 2/28/09 $3,773,368 $9,562,455
Neal B. Harris ............ 325,000 $ 15.00 2/28/09 $3,065,861 $7,769,494
Paul F. Ewert ............. 200,000 $ 15.00 2/28/09 $1,886,684 $4,781,227
Dean M. Johnson ........... 50,000 $ 15.00 2/28/09 $ 471,671 $1,195,307
Thomas J. Starnes ......... 200,000 $ 15.00 4/03/09 $1,886,684 $4,781,227
</TABLE>
FISCAL YEAR-END OPTION VALUES
The following table provides information on the number and value of
unexercised options held by each of the Named Executive Officers on December
31, 1998. No Named Executive Officers exercised stock options during the fiscal
year ended December 31, 1998. The last two columns represent the difference
between the exercise price and the initial public offering price of $23.00 per
share.
<TABLE>
<CAPTION>
NUMBER OF SHARES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT FISCAL YEAR-END AT FISCAL YEAR-END
------------------------------- ------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------- ------------- --------------- ------------- --------------
<S> <C> <C> <C> <C>
Craig A. Winn ............. -- -- -- --
Glenda M. Dorchak ......... -- 325,000 -- $ 4,173,000
Dean M. Johnson ........... 105,000 120,000 $2,239,650 2,599,600
Rex Scatena ............... -- -- -- --
Joseph L. Page ............ 342,852 521,523 7,686,742 11,692,546
</TABLE>
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Thomas Morgan received options to purchase an aggregate of 400,000 shares
of common stock in March 1999. These options are currently unexercisable and
have a value of $3,200,000. Neal B. Harris received options to purchase an
aggregate of 325,000 shares of common stock in March 1999. These options are
currently unexercisable and have a value of $2,600,000. Paul F. Ewert received
options to purchase an aggregate of 200,000 shares of common stock in March
1999. These options are currently unexercisable and have a value of $1,600,000.
Thomas J. Starnes received options to purchase an aggregate of 200,000 shares
of common stock in April 1999. These options are currently unexercisable and
have a value of $1,600,000.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the board of directors was formed in
December 1997 to make recommendations to the board of directors regarding the
compensation and benefits for Value America's executive officers and to
administer Value America's stock 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 Value America's executive officers. No executive officer of Value America
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 Value
America's board of directors or Compensation Committee.
Gary D. LeClair serves as a member of the Compensation Committee of the
board of directors. Mr. LeClair also serves as the Chairman of LeClair Ryan, A
Professional Corporation, Value America'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 3,544,229 shares of
Value America's common stock.
STOCK INCENTIVE PLAN
Value America adopted the stock incentive plan on August 1, 1997. The
stock incentive plan provides for the granting of incentive awards to
employees, officers, directors, consultants and certain non-employees of Value
America. 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 stock incentive plan is 6,250,000, subject to adjustment in the event of a
stock split, stock dividend or other change in the common stock or capital
structure of Value America. The Compensation Committee administers the stock
incentive plan. Subject to the provisions of the stock incentive plan, the
Compensation Committee is authorized to determine who may participate in the
stock 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 stock incentive plan and to adopt rules and
regulations to carry out the stock incentive plan.
OPTIONS. Options granted under the stock 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 Value America,
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 Value America. The per share
exercise price of the common stock subject to any option granted pursuant to
the stock 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 stock 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.
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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 of employment, other than for cause as defined in the
stock 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 stock 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 stock incentive plan may
provide for the payment of the exercise price in cash or by delivery to Value
America 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 stock 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 Value
America 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 stock incentive
plan is subject to the following general restrictions: (a) 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 stock incentive plan; and (b) if a holder of restricted stock
ceases to be employed by Value America, 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 stock 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 Value America
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
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<PAGE>
compensation income, which is subject to income tax withholding by Value
America, 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 Value America, 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 stock 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 stock 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.
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, the
participant will be considered to have made a taxable disposition of the
statutory option stock. The applicable holding periods are two years from grant
and one year from exercise.
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 Value
America.
Upon exercise of a tax offset right, a participant generally will
recognize ordinary compensation income, which is subject to income tax
withholding by Value America, equal to the cash received.
Subject to certain limitations, Value America 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:
o provide for the assumption of incentive awards granted under the stock
incentive plan,
o provide for substitution of appropriate new incentive awards covering the
stock of a successor corporation to Value America or an affiliate thereof
or
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o 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 Value America'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 stock incentive plan, a "change
in control" transaction generally is defined to constitute any of the
following:
o approval by the stockholders of a reorganization, merger or consolidation
in which holders of outstanding voting securities of Value America would
receive less than 50% of the voting securities of the surviving or
resulting corporation,
o approval by the stockholders of a complete liquidation or dissolution of
Value America,
o approval by the stockholders of the sale or transfer of substantially all
of the assets of Value America or
o the acquisition other than from Value America by a person or group of
related persons of beneficial ownership of 50% or more of the outstanding
voting securities of Value America.
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 Code, certain highly-compensated employees would likely be
subject to payment of a 20% excise tax on their incremental gain, as defined.
EMPLOYMENT ARRANGEMENTS
Value America and Craig A. Winn, Value America's Chairman and one of its
Founders, entered into an employment agreement as of January 19, 1999. 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. Value America will pay Mr.
Winn an agreed-upon annual salary, subject to adjustment at any time in the
sole discretion of Value America. Mr. Winn's current annual salary is $295,000.
Mr. Winn 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. Winn's death, Value America will pay his beneficiary or his
estate an amount equal to one month's salary. Mr. Winn may terminate his
employment under the agreement by giving 30 days' notice to Value America.
Value America may terminate Mr. Winn's employment immediately with or without
cause by giving him written notice of termination. If Mr. Winn is terminated
without cause, he will be entitled to any unpaid salary due to him through the
date of termination and any accrued but unpaid vacation pay.
Value America and Rex Scatena, Value America's Vice Chairman and General
Counsel and one of its Founders, entered into an employment agreement as of
January 19, 1999. 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. Value America will pay Mr. Scatena an agreed-upon annual salary,
subject to adjustment at any time in the sole discretion of Value America. Mr.
Scatena's current annual salary is $180,000. Mr. Scatena 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. Scatena's
death, Value America will pay his beneficiary or his estate an amount equal to
one month's salary. Mr. Scatena may terminate his employment under the
agreement by giving 30 days' notice to Value America. Value America may
terminate Mr. Scatena's employment immediately with or without cause by giving
him written notice of termination. If Mr. Scatena is terminated without cause,
he will be entitled to any unpaid salary due to him through the date of
termination and any accrued but unpaid vacation pay.
Value America and Thomas Morgan, Chief Executive Officer of Value America,
entered into an employment agreement as of March 1, 1999. Under the agreement,
Mr. Morgan currently receives an annual salary of $395,000. Beginning 75 days
after the closing of this offering, Mr. Morgan will receive an annual
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salary of $495,000, subject to increases. The term of the agreement continues
through December 31, 2004 and then renews automatically for additional periods
of one year until either party gives notice of non-renewal not more than six
and at least three months before the expiration date of the agreement. Mr.
Morgan is also eligible for quarterly incentive compensation. For the period
from March 1, 1999 to June 30, 1999, Value America will pay Mr. Morgan a bonus
of $66,667. Thereafter, based upon achieving corporate and individual
performance and other criteria as established by the Compensation Committee,
Mr. Morgan may earn a bonus each quarter, provided that the minimum bonuses for
the years ending December 31, 1999 and 2000 will amount to, in the aggregate,
$166,667 and $200,000. Value America also has agreed to pay Mr. Morgan a bonus
equal to the lesser of (A) $1,000,000 or (B) an amount equal to 1% of the
amount by which the aggregate market capitalization of Value America increases
from the day following the closing date of this offering to the earliest of:
o the first anniversary of the day following the closing date of this
offering,
o the date of a change of control of Value America and
o the termination date of Mr. Morgan's employment because of death,
disability or for other than due cause.
"Aggregate market capitalization" on a given date means an amount equal to the
product of (a) the number of then-outstanding shares of common stock and (b)
the last reported sale price of common stock on that day. Mr. Morgan may
voluntarily terminate his employment at any time under the agreement. Value
America may terminate Mr. Morgan's employment with or without due cause by
giving him written notice of termination. If Mr. Morgan is terminated by Value
America for due cause, he will receive his salary through the date of
termination. If Value America terminates his employment other than for due
cause prior to March 1, 2001, Mr. Morgan will be entitled to the sum of:
o twice his annual salary at the time and
o a pro rata portion of any bonus he may have earned under the agreement if
he had been employed for a full calendar year.
If Value America terminates his employment other than for due cause after March
1, 2001, Mr. Morgan will be entitled to the sum of:
o his annual salary at the time and
o a pro rata portion of any bonus he may have earned under the agreement if
he had been employed for a full calendar year.
Value America and Glenda M. Dorchak, President and Chief Operating Officer
of Value America, entered into an employment agreement as of October 5, 1998.
Under the agreement, Ms. Dorchak receives an annual salary of $250,000 until
December 31, 1999 and will receive an annual salary of $300,000 every year
thereafter, subject to increases. The term of the agreement continues through
December 31, 2001 and then renews automatically for additional periods of one
year until either party gives notice of non-renewal at least three months
before the expiration date of the agreement. Ms. Dorchak is also eligible for
quarterly incentive compensation. During the first year of her employment,
Value America will pay Ms. Dorchak a bonus of $37,500 per calendar quarter. In
each subsequent year of her employment, and based upon achieving corporate and
individual performance and other criteria as established by the Compensation
Committee, Ms. Dorchak may earn quarterly bonuses amounting to, in the
aggregate, a minimum of $150,000 per year. Value America also has agreed to pay
Ms. Dorchak a bonus not to exceed $390,000 in an amount equal to the product of
(a) $6.50 multiplied by (b) up to an aggregate of no more than 60,000 shares of
common stock to be purchased by Ms. Dorchak upon the exercise of a stock option
received under the stock incentive plan. Such bonus, if granted by Value
America, will be deemed earned on and will be paid on the date of the exercise
of such stock option. Value America also has loaned Ms. Dorchak $250,000 with
interest of 6% per annum. Ms. Dorchak is generally entitled to participate in
any employee benefit plans from time to time in effect for all employees. Ms.
Dorchak may voluntarily terminate her employment at any time under the
agreement. Value America may terminate Ms. Dorchak's employment with or without
due cause by giving her written
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notice of termination. If Ms. Dorchak is terminated by Value America for due
cause, she will receive her salary through the date of termination. If Value
America terminates her employment other than for due cause, Ms. Dorchak will be
entitled to the sum of:
o her annual salary at the time and
o if the effective date of termination is on or before December 31, 1999,
then $150,000; if the effective date of termination is after December 31,
1999, then a pro rata portion of any bonus she may have earned under the
agreement if she had been employed for a full calendar year. If Ms. Dorchak
is terminated other than for due cause prior to December 31, 1999, Value
America will also reduce by $150,000 the amount she owes on the $250,000
loan from Value America.
Value America and Dean M. Johnson, Executive Vice President, Chief
Financial Officer and Secretary of Value America, entered into an employment
agreement as of April 1, 1999. Under the agreement, Mr. Johnson currently
receives an annual salary of $250,000 per year. The term of the agreement
continues through December 31, 2004 and then renews automatically for
additional periods of one year until either party gives notice of non-renewal
not more than six and at least three months before the expiration date of the
agreement. Mr. Johnson is also eligible for quarterly incentive compensation
based upon achieving corporate and individual performance and other criteria as
established by the Compensation Committee. Mr. Johnson is generally entitled to
participate in any employee benefit plans from time to time in effect for all
employees. Mr. Johnson may voluntarily terminate his employment at any time
under the agreement. Value America may terminate Mr. Johnson's employment with
or without due cause by giving him written notice of termination. If Mr.
Johnson is terminated by Value America for due cause, he will receive his
salary through the date of termination. If Value America terminates his
employment other than for due cause prior to March 1, 2001, Mr. Johnson will be
entitled to the sum of:
o twice his annual salary at the time and
o a pro rata portion of any bonus he may have earned under the agreement if
he had been employed for a full calendar year.
If Value America terminates his employment other than for due cause after March
1, 2001, Mr. Johnson will be entitled to the sum of:
o his annual salary at the time and
o a pro rata portion of any bonus he may have earned under the agreement if
he had been employed for a full calendar year.
Thomas J. Starnes joined Value America in April 1999 as an Executive Vice
President. Mr. Starnes currently receives an annual salary of $250,000. Value
America and Mr. Starnes are currently negotiating an employment agreement.
Value America and Paul F. Ewert, Senior Vice President and President --
Technology Products Division of Value America, entered into an employment
agreement as of March 1, 1999. Under the agreement, Mr. Ewert receives an
annual salary of $280,000 until December 31, 1999. The term of the agreement
continues through December 31, 2003 and then renews automatically for
additional periods of one year until either party gives notice of non-renewal
at least three months before the expiration date of the agreement. Mr. Ewert is
also eligible for quarterly incentive compensation. During each year of his
employment, and based upon achieving corporate and individual performance and
other criteria as established by the Compensation Committee, Mr. Ewert may earn
quarterly bonuses amounting to, in the aggregate, a minimum of $100,000 per
year. Mr. Ewert is generally entitled to participate in any employee benefit
plans from time to time in effect for all employees. Mr. Ewert may voluntarily
terminate his employment at any time under the agreement. Value America may
terminate Mr. Ewert's employment with or without due cause by giving him
written notice of termination. If Mr. Ewert is terminated by Value America for
due cause, he will receive his salary through the date of termination. If Value
America terminates his employment other than for due cause, Mr. Ewert will be
entitled to the sum of:
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o his annual salary at the time and
o a pro rata portion of any bonus he may have earned under the agreement if
he had been employed for a full calendar year.
Value America and Joseph L. Page, Executive Vice President and Chief
Technology Officer of Value America, entered into an employment agreement as of
April 1, 1996. 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. Value
America agreed to pay Mr. Page a salary of $85,000 per year for the fourth
quarter of 1997 and $100,000 per year, beginning January 1, 1998 subject to
adjustment at any time in the sole discretion of Value America. Mr. Page's
current salary is $150,000 per year. In addition, Mr. Page 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.
Page's death, Value America will pay his beneficiary or his estate an amount
equal to one month's salary. Mr. Page may terminate his employment under the
agreement by giving 30 days' notice to Value America. Value America may
terminate Mr. Page's employment immediately with or without cause. If Mr. Page
is an officer of Value America on the date of his termination, and if he has
completed 90 days of continuous employment with Value America, he will be
entitled to 30 days' salary. In addition, if Value America does not waive Mr.
Page's obligation not to compete with Value America for a period of six months
following the termination of his employment, an additional six months' salary.
Value America and Neal B. Harris, an Executive Vice President of Value
America, entered into an employment agreement as of March 15, 1999. Under the
agreement, Mr. Harris currently receives an annual salary of $295,000, subject
to annual increases. The term of the agreement continues through December 31,
2004 and then renews automatically for additional periods of one year until
either party gives notice of non-renewal at least three months before the
expiration date of the agreement. Mr. Harris is also eligible for quarterly
incentive compensation. During the first year of his employment, Value America
will pay Mr. Harris bonuses amounting to, in the aggregate, $37,500, subject to
certain conditions. In each subsequent year of his employment, and based upon
achieving corporate and individual performance and other criteria as
established by the Compensation Committee, Mr. Harris may earn quarterly
bonuses amounting to, in the aggregate, a minimum of $150,000 per year. Value
America also has agreed to pay Mr. Harris a bonus not to exceed $1,625,000.
This bonus shall equal the product of (a) $5.00 multiplied by (b) up to an
aggregate of no more than 325,000 shares of common stock to be purchased by Mr.
Harris upon the exercise of a stock option received under Value America's stock
incentive plan. Such bonus, if granted by Value America, will be deemed earned
on and will be paid on the date of the exercise of such stock option. Mr.
Harris is generally entitled to participate in any employee benefit plans from
time to time in effect for all employees. Mr. Harris may voluntarily terminate
his employment at any time under the agreement. Value America may terminate Mr.
Harris' employment with or without due cause by giving him written notice of
termination. If Mr. Harris is terminated by Value America for due cause, he
will receive his salary through the date of termination. If Value America
terminates his employment other than for due cause, Mr. Harris will be entitled
to twice the sum of:
o his annual salary at the time and
o a pro rata portion of any bonus he may have earned under the agreement if
he had been employed for a full calendar year.
In connection with Mr. Harris' employment agreement, Mr. Harris entered
into an agreement as of March 15, 1999 with Craig A. Winn, the Chairman and a
Founder of Value America, and Rex Scatena, the Vice Chairman and General
Counsel and a Founder of Value America. Pursuant to this agreement, each of Mr.
Winn and Mr. Scatena, severally, but not jointly, have agreed to pay to Mr.
Harris 50% of any loss amount if Value America terminates Mr. Harris'
employment, for reasons other than death, disability or due cause during the
period beginning one year prior to a change of control and ending on the fifth
anniversary of Mr. Harris' employment. The loss amount shall equal the lesser
of $10,000,000 and the product of:
o the aggregate number of shares underlying Mr. Harris' unvested options and
o the excess, if any, of the fair market value per share of Value America's
common stock over $5.00.
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Value America and John L. Motley III, a director of Value America, entered
into an employment agreement effective as of August 1, 1997 under which Mr.
Motley agreed to serve as an employee of Value America 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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CERTAIN TRANSACTIONS
On August 1, 1997, Value America issued a promissory note to Craig A.
Winn, Value America's Chairman and one of its Founders, 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 Value America
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, Value America 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 Value America, and Gary D. LeClair, a director of Value
America, 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
Value America, 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 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, Value America 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, Value America issued an aggregate of 617,979 shares of
Series B preferred stock to 18 investors for an aggregate purchase price of
$18,829,894 or $30.47 per share of Series B preferred stock, which is
equivalent to a purchase price of $10.16 per share of common stock on an
as-converted basis. Value America granted the holders of Series B preferred
stock certain rights of first refusal, tag-along rights, and demand and
piggy-back registration rights. The terms of the Series B preferred stock also
require Value America to pay quarterly dividends on such shares of stock until
they are redeemed or converted. Mandatory redemption of the Series B preferred
stock may occur if Value America 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 preferred 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 this
transaction, Mr. Winn and Rex Scatena, Value America's Vice Chairman and
General Counsel and one of its Founders, 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 preferred stock and the beneficial holder of
more than 5% of the outstanding shares of the common stock, purchased 7,801
shares of Series B preferred 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.
See Note 5 of Notes to Financial Statements.
On July 2, 1998, Mr. Winn sold an aggregate of 28,350 shares of common
stock to three employees of Value America for an aggregate of $289,942 or
$10.16 per share.
On September 28, 1998, Mr. Winn loaned Value America $300,000. Value
America evidenced this debt by issuing a promissory note for such amount. The
note accrued interest at a rate of 10% per annum. Value America repaid the debt
in full in December 1998.
On September 28, 1998, Mr. Scatena loaned Value America $250,000. Value
America evidenced this debt by issuing a promissory note for such amount. The
note accrued interest at a rate of 10% per annum. Value America repaid the debt
in full in December 1998.
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On September 30, 1998, John L. Motley III, a director of Value America,
loaned Value America $150,000. Value America evidenced this debt by issuing a
promissory note for such amount. The note accrued interest at a rate of 10% per
annum. Value America repaid the debt in full in December 1998.
Pursuant to an Amended and Restated Revolving Loan Agreement, dated
November 17, 1998, as amended, ULLICO (and indirectly certain participants)
loaned Value America an aggregate of $34.0 million. ULLICO is entitled to
receive a commitment fee equal to $340,000 in connection with this transaction.
In connection with this loan, Value America issued to ULLICO and certain
participants (including an affiliate of Sam Belzberg, principals of the Carlyle
Group, George Cooney, Kluge Investments, principals of Pacific Capital Group
and an affiliate of Yuciapa and Ron Berkle) warrants to purchase an aggregate
of 3,808,000 shares of common stock. Of these warrants (a) 408,000 have an
exercise price of $0.01 per share and (b) 3,400,000 have an exercise price of
$10.00 per share. The warrants to purchase common stock at $10.00 per share
shall automatically be exercised immediately prior to the completion of this
offering in exchange for the elimination of Value America's debt to ULLICO
under this loan.
On December 31, 1998, Glenda M. Dorchak, Value America's President and
Chief Operating Officer invested $100,000 in Value America. In connection
therewith, Value America issued Ms. Dorchak 10,000 shares of common stock and
warrants to purchase 3,000 shares of common stock at $10.00 per share. The
warrants vest on December 31, 1999 and expire on December 31, 2008.
On December 31, 1998, Richard L. Gerhardt, Value America's President --
Consumer Products Division invested $100,000 in Value America. In connection
therewith, Value America issued Mr. Gerhardt 10,000 shares of common stock and
warrants to purchase 3,000 shares of common stock at $10.00 per share. These
warrants vest on December 31, 1999 and expire on December 31, 2008.
Pursuant to consulting agreement entered into as of November 18, 1998,
Value America has engaged ULLICO as a consultant to Value America's affinity,
new markets and employee compensation and benefit programs. This agreement ends
when ULLICO no longer holds shares of the Series A or Series B preferred stock.
For these services, ULLICO, acting on behalf of its Separate Account P, will
receive a fee of $244.50 per day for the period commencing June 26, 1998 and
ending June 30, 1998 and $22,005 per quarter commencing July 1, 1998.
Additionally, in consideration of Michael R. Steed serving as a director,
ULLICO, acting on behalf of its Separate Account P, received an option to
purchase up to 22,500 shares of common stock at an exercise price of $3.50 per
share. Separate Account P is an account formed by ULLICO to hold investments
supporting payments under certain group annuity contracts. In consideration of
ULLICO modifying certain terms of its loan agreement, Value America issued
ULLICO warrants to purchase 325,000 shares, which have an exercise price of
either $0.01 per share or $10.00 per share. This variable exercise price will
only equal $0.01 if the aggregate value of Value America's capital stock does
not exceed $600 million on or before December 31, 1999.
As of January 12, 1999, Value America issued 6,000,000 shares of Series C
preferred stock and warrants to purchase 1,800,000 shares of common stock to
Vulcan Ventures Incorporated, a Washington corporation, FDX Corporation, a
Delaware corporation, and Frederick W. Smith, a director-nominee of Value
America for an aggregate purchase price of $60,000,000. The 1,800,000 warrants
have a variable exercise price per share. These warrants are immediately
exercisable and expire on the earlier of January 15, 2009 or the date that is
three calendar years following the closing of Value America's firmly
underwritten initial public offering of common stock. If the aggregate market
price of Value America's equity securities is in excess of $600 million on or
before December 31, 1999, the exercise price will be $10.00 per share. If the
aggregate market value of Value America's equity securities is less than $600
million on the earlier of December 31, 1999 or the closing date of a
change-in-control transaction as defined in the warrants, the exercise price of
the warrants will be $0.01 per share. The terms of the Series C preferred stock
require Value America to pay quarterly dividends on such shares of stock until
they are redeemed or converted. Mandatory redemption of the Series C preferred
stock may occur upon the demand of holders of more that 50% of the outstanding
shares of Series C preferred stock if Value America does not successfully offer
shares of common stock to the public prior to January 15, 2001. In addition,
2,000,000 of the 6,000,000 shares of Series C preferred stock are scheduled for
redemption in January 2003, January 2004 and January 2005. Simultaneously with
the closing of this offering, the shares of Series C preferred stock will
automatically convert into 6,000,000 shares of common stock. Also in
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connection with this offering, Value America issued warrants to purchase an
aggregate of 511,567 to certain existing stockholders, including Vulcan
Ventures Incorporated, a holder of Series B preferred stock, and William D.
Savoy, a director-nominee of Value America. Of these warrants, 473,724 have an
exercise price of $0.01 per share, and vest only if the aggregate market of
Value America's equity securities does not exceed $600 million on or before
December 31, 1999, and otherwise expire. If vested, these warrants expire on
the earlier of January 15, 2009 or the date that is three calendar years
following the closing of Value America's firmly underwritten initial public
offering of common stock. Of the warrants to purchase an aggregate of 511,567
shares of common stock, the remaining 37,843 warrants have an exercise price of
$0.01 per share and are exercisable upon issuance until January 15, 2009.
LeClair Ryan, A Professional Corporation, serves as Value America's legal
counsel. Gary D. LeClair, one of Value America's directors, serves as the
Chairman of such law firm.
See "Management -- Employment Arrangements" for a description of certain
employment and change of control arrangements.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of Value America's common stock as of April 3, 1999, and
as adjusted to reflect the sale of the 5,500,000 shares of common stock offered
hereby by:
o the Named Executive Officers,
o each of Value America's directors and director-nominees,
o each person known by Value America to be the beneficial owner of more
than 5% of the common stock and
o all executive officers, directors and director-nominees as a group.
<TABLE>
<CAPTION>
PERCENT BENEFICIALLY
OWNED
NUMBER OF ----------------------
SHARES BENEFICIALLY BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED OFFERING OFFERING
- ---------------------------------------------------------- -------------------- ---------- ---------
<S> <C> <C> <C>
Craig A. Winn (1) ........................................ 15,147,312 39.9% 34.9%
Rex Scatena (2) .......................................... 6,562,200 17.3 15.1
Joseph L. Page (3) ....................................... 514,278 1.3 1.2
Dean M. Johnson (4) ...................................... 204,900 * *
Glenda M. Dorchak (5) .................................... 10,000 * *
William D. Savoy (6) ..................................... 8,536,478 21.4 18.8
Michael R. Steed (7) ..................................... 3,544,229 9.3 8.1
John L. Motley III (8) ................................... 375,000 1.0 *
Gary D. LeClair (9) ...................................... 145,002 * *
Frederick W. Smith (10) .................................. 1,300,000 3.4 3.0
Thomas J. Casey (11) ..................................... 50,000 * *
Vulcan Ventures Incorporated (12) ........................ 8,486,062 21.2 18.7
The Union Labor Life Insurance Company (13) .............. 3,544,229 9.3 8.1
FDX Corporation (14) ..................................... 650,000 1.7 1.5
All executive officers, directors and director-nominees as
a group (16 persons) (15) ............................... 36,409,399 88.0 77.7
</TABLE>
- ----------
* Less than one percent (1%)
(1) The address of Mr. Winn is c/o Value America, Inc., 1560 Insurance Lane,
Charlottesville, Virginia 22911. 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.
(2) The address of Mr. Scatena is c/o Value America, Inc., 1560 Insurance Lane,
Charlottesville, Virginia 22911. 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.
(3) The address of Mr. Page is c/o Value America, Inc., 1560 Insurance Lane,
Charlottesville, Virginia 22911. Includes 514,278 shares of common stock
underlying options exercisable within 60 days of April 3, 1999.
(4) The address of Mr. Johnson is c/o Value America, Inc., 1560 Insurance Lane,
Charlottesville, Virginia 22911. Includes 105,000 shares of common stock
underlying options exercisable within 60 days of April 3, 1999, 30,000
shares of common stock underlying warrants exercisable within 60 days of
April 3, 1999 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.
(5) The address of Ms. Dorchak is c/o Value America, Inc., 1560 Insurance Lane,
Charlottesville, Virginia 22911.
(6) Includes 6,476,861 shares of common stock and 2,010,384 shares of common
stock underlying warrants exercisable within 60 days of April 3, 1999 held
of record by Vulcan Ventures Incorporated ("Vulcan").
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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) Consists of 3,389,854 shares of common stock and 154,375 shares of common
stock underlying warrants exercisable within 60 days of April 3, 1999 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.
(8) Includes 225,000 shares of common stock underlying options exercisable
within 60 days of April 3, 1999.
(9) Includes 55,002 shares of common stock underlying options exercisable
within 60 days of April 3, 1999 and 30,000 shares of common stock
underlying warrants exercisable within 60 days of April 3, 1999.
(10) The address of Mr. Smith is 6075 Poplar Avenue, Suite 300, Memphis,
Tennessee 38119. Includes 500,000 shares of common stock and 150,000
shares of common stock underlying warrants exercisable within 60 days of
April 3, 1999 held of record by FDX Corporation, a Delaware corporation.
Mr. Smith disclaims beneficial ownership of the shares of common stock
held by FDX Corporation.
(11) The address of Mr. Casey is c/o Pacific Capital Group Inc., 150 El Camino
Drive, Beverly Hills, California 90212.
(12) The address of Vulcan is 110 110th Avenue Northeast, Suite 550, Bellevue,
Washington 98004. Includes 6,476,861 shares of common stock and 2,010,384
shares of common stock underlying warrants exercisable within 60 days of
April 3, 1999.
(13) The address of ULLICO is 111 Massachusetts Avenue, N.W., Washington, D.C.
20001. Includes 3,389,854 shares of common stock and 154,375 shares of
common stock underlying warrants exercisable within 60 days of April 3,
1999.
(14) The address of FDX Corporation is 6075 Poplar Avenue, Suite 300, Memphis,
Tennessee 38119. Includes 150,000 shares of common stock underlying
warrants exercisable within 60 days of April 3, 1999.
(15) Includes 899,280 shares of common stock underlying options exercisable
within 60 days of April 3, 1999 and 2,524,759 shares of common stock
underlying warrants exercisable within 60 days of April 3, 1999.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. 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 April 3, 1999 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 the preceding 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 37,934,862 shares of common stock
outstanding on April 3, 1999, which figure includes shares converted from the
convertible preferred stock upon the closing of this offering, and 43,434,862
shares of common stock to be outstanding after the completion of this offering.
Craig A. Winn and Rex Scatena have granted to the underwriters an option
to purchase up to 577,500 and 247,500 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 14,569,812 shares
of common stock, or 32.9% of the common stock outstanding after this offering,
and Mr. Scatena will beneficially own 6,314,700 shares of common stock, or
14.3% of the common stock outstanding after this offering.
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DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of Value America consists of 500,000,000
shares of common stock and 25,000,000 shares of preferred stock. Of the
25,000,000 shares of authorized preferred stock, 13,382,021 shares are
undesignated and available for issuance. The remaining 11,617,979 authorized
and issued shares of preferred stock will, immediately prior to the closing of
this offering, convert into shares of common stock and thereafter become
available for reissue as preferred stock.
COMMON STOCK
As of April 3, 1999, there were outstanding:
o 37,934,862 shares of common stock held of record by 118 stockholders,
o options to purchase a total of 6,134,625 shares of common stock and
o warrants to purchase a total of 2,902,913 shares of common stock.
The preceding gives effect to the conversion of all outstanding shares of
preferred stock and the exercise of warrants to acquire 3,400,000 shares of
common stock, all of which will occur immediately prior to the closing of this
offering. Based on the number of shares of common stock outstanding as of April
3, 1999, and giving effect to the preferred stock conversions and warrant
exercises to occur immediately prior to the closing of this offering, there
will be 43,434,862 shares of common stock outstanding after this offering is
completed.
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 Value America, the holders of common stock are
entitled to share ratably in all assets remaining after payment of Value
America's liabilities. 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.
PREFERRED STOCK
Value America has authorized and issued three series of preferred stock.
These consist of 5,000,000 shares of Series A convertible preferred stock,
617,979 shares of Series B convertible preferred stock and 6,000,000 shares of
Series C convertible preferred stock. All outstanding shares of preferred stock
will be automatically converted into shares of common stock immediately prior
to the closing of this offering. After the conversion, all of the previously
issued shares of preferred stock will become available for reissue and
ValueAmerica will have 25,000,000 shares of authorized preferred stock.
The board of directors is authorized, subject to any limitations
prescribed by Virginia law, to provide for the issuance of preferred stock in
one or more series. The board of directors is also authorized, subject to the
limitations prescribed by Virginia law, to establish the number of shares to be
included in each series and to fix the voting powers, preferences,
qualifications and special or relative rights or privileges of each series. The
board of directors is authorized to issue preferred stock with voting,
conversion and other rights and preferences that could adversely affect the
voting power or other rights of the holders of common stock.
Value America has no current plans to issue any preferred stock. However,
the issuance of preferred stock or of rights to purchase preferred stock could
have the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from attempting to acquire, a majority of the
outstanding voting stock of Value America.
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WARRANTS
Upon completion of this offering, there will be warrants outstanding to
purchase an aggregate of 2,902,913 shares of common stock that are held of
record by 76 persons, based on warrants outstanding as of April 3, 1999.
In October 1997, Value America issued warrants to purchase an aggregate of
213,750 shares of common stock to 14 accredited investors. All of the warrants
are fully exercisable, have exercise prices of $1.67 per share and expire on
October 31, 2002. In the event Value America 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.
In December 1998, Value America issued warrants to purchase an aggregate
of 3,808,000 shares of common stock to ULLICO and certain participants pursuant
to a revolving loan agreement, as amended and restated from time to time. Of
these warrants, 408,000 have an exercise price of $0.01 per share and 3,400,000
have an exercise price of $10.00 per share.
In consideration of ULLICO modifying certain terms of its loan agreement,
Value America issued ULLICO warrants to purchase 325,000 shares, which have an
exercise price of either $0.01 per share or $10.00 per share. This variable
exercise price will only equal $0.01 if the aggregate value of Value America's
capital stock does not exceed $600 million on or before December 31, 1999. The
warrants to purchase 3,400,000 shares of common stock will be automatically
exercised immediately prior to the closing of this offering in exchange for the
elimination of Value America's debt under the loan agreement.
In January 1999, Value America issued warrants to purchase an aggregate of
2,311,567 shares of common stock to certain investors and existing stockholders
in connection with Value America's private placement of 6,000,000 shares of
Series C convertible preferred stock. Of the warrants granted, warrants to
purchase 1,800,000 shares vest immediately, expire on the earlier of January
15, 2009 or the date that is three calendar years following the closing of
Value America's initial public offering and have a variable exercise price of
either $10.00 or $0.01 per share of common stock. The exercise price of these
warrants will only equal $0.01 per share if the aggregate market value of Value
America's equity securities does not exceed $600 million on or prior to
December 31, 1999. Warrants to purchase 473,724 shares have an exercise price
of $0.01 and will vest only if the aggregate market value of Value America's
equity securities does not exceed $600 million on or before December 31, 1999,
and, if vested, expire on the earlier of January 15, 2009 or the date that is
three calendar years following the closing of Value America's initial public
offering. Warrants to purchase 37,843 shares of common stock vest immediately,
have an exercise price of $0.01 per share and have ten year terms. Assuming an
initial public offering price of at least $14.00 per share the aggregate market
value of Value America's equity securities will exceed $600 million on the
closing of the offering.
As a result of the variable exercise prices of certain of the warrants
described above, if the market value of Value America's equity securities
exceeds $600 million on the applicable date, Value America will receive
additional proceeds of approximately $22.8 million upon the exercise of all of
the warrants. If the aggregate market value of Value America's equity
securities exceeds this level, outstanding warrants will be exercisable for an
aggregate of 2,902,913 shares of common stock at a weighted average exercise
price of $7.85 per share. If the market value of Value America's equity
securities does not exceed this amount, outstanding warrants will be
exercisable for an aggregate of 3,376,637 shares of common stock at a weighted
average exercise price of $0.47 per share. Based upon the number of shares
estimated to be outstanding immediately following this offering, the aggregate
market value of Value America's equity securities will exceed $600 million if
the trading price of its common stock exceeds $14.00 per share at any time on
or before December 31, 1999.
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<PAGE>
REGISTRATION RIGHTS
Pursuant to the Second Amended and Restated Registration Rights Agreement
(the "Preferred Stock Registration Rights Agreement") dated as of January 12,
1999 among Value America and the holders of Series A convertible preferred
stock, the Series B convertible preferred stock and the Series C convertible
preferred stock (the "Preferred Holders"), the Preferred Holders are entitled
to certain rights with respect to the registration under the Securities Act of
1933 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
preferred stock, the Series B preferred stock and the Series C preferred stock
(collectively, the "Registrable Securities"). As of January 15, 1999, after
giving effect to the conversion of the Series A preferred stock, the Series B
preferred stock and Series C preferred stock into common stock upon the closing
of this offering, the Registrable Securities consisted of a total of 10,737,162
shares of common stock. If Value America proposes to register any of its
securities under the Securities Act of 1933, 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 Value America
on not more than eight occasions to file a registration statement under the
Securities Act of 1933 with respect to the Registrable Securities, and Value
America is required to use its best efforts to effect the registration, subject
to certain conditions and limitations. Further, the Preferred Holders may
require Value America, 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 Value America, subject to certain conditions and
limitations. Value America will bear all of the expenses of any such
registration.
In addition, pursuant to a Registration Rights Agreement dated as of June
3, 1998 between Value America and Capital Advisers, L.L.C. ("Capital"), Capital
is entitled to certain rights with respect to the registration under the
Securities Act of 1933 of 288,321 shares of common stock (the "Capital
Registrable Shares"). If Value America proposes to register any of its
securities under the Securities Act of 1933, 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 Value America
on not more than one occasion to file a registration statement on Form S-3
under the Securities Act of 1933 with respect to the Capital Registrable
Securities, and Value America is required to use its best efforts to effect the
registration, subject to certain conditions and limitations. Value America 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.
Pursuant to a Registration Rights Agreement, dated November 17, 1998, as
amended from time to time, among ULLICO and other participants in Value
America's debt financing, (collectively, the "Debt Participants") and Value
America, the Debt Participants are entitled to certain rights with respect to
the registration under the Securities Act of 1933 of the shares of common stock
owned now or in the future by such holders and the shares of common stock
issuable upon exercise of the warrants (the "Debt Warrants") issued in
connection with such debt financing (the "Debt Registrable Shares"). As of
January 13, 1999, after giving effect to the exercise of the Debt Warrants and
excluding shares of common stock that are referenced in the Preferred Stock
Registration Rights Agreement, the Debt Registrable Shares consisted of a total
of 4,133,000 shares of common stock. If Value America proposes to register any
of its securities under the Securities Act of 1933, either for its own account
or for the account of other securityholders, the Debt Participants are entitled
to notice of such registration and are entitled to include the Debt 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, the Debt Participants may require Value America
on not more than two occasions to file a registration statement under the
Securities Act of 1933 with respect to the Debt Registrable Shares, and Value
America is required to use its best efforts to effect the registration, subject
to certain conditions and limitations. Further, the Debt Participants may
require Value America, on not more than six occasions and not more than once in
any six-month period, to register
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the Debt Registrable Shares on Form S-3 when such form becomes available to
Value America, subject to certain conditions and limitations. Value America
will bear all of the expenses of such registration.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE ARTICLES, BYLAWS AND SECURITIES
Value America's articles and bylaws contain provisions that might make
more difficult the acquisition of control of Value America by means of a tender
offer, a proxy contest, open market purchases or otherwise. The articles
provide for Value America'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:
o reduces or eliminates the number of authorized shares of Value America's
capital stock,
o amends or repeals Value America's staggered board of directors,
o amends or repeals the articles' super-majority voting provisions,
o amends or repeals the articles' indemnification provisions,
o amends or repeals the articles' restrictions on the calling of special
meetings of Value America's stockholders or
o amends or repeals the articles' limitations on the removal of Value
America's directors.
The bylaws establish an advance notice procedure for the nomination, other
than by the board of directors of Value America, of candidates for election as
directors and for certain matters to be brought before an annual meeting of
stockholders. A stockholder must give Value America notice not less than 90
days prior to an annual meeting of stockholders to nominate persons to be
elected directors of Value America at such meeting or 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 Value America and to encourage persons seeking
to acquire control of Value America to consult first with Value America's board
of directors to negotiate the terms of any proposed business combination or
offer. The provisions are designed to reduce the vulnerability of Value America
to an unsolicited proposal for a takeover of Value America that does not have
the effect of
o maximizing long-term stockholder value or is otherwise unfair to
stockholders of Value America or
o an unsolicited proposal for the restructuring or sale of all or part of
Value America that could have such effects.
As of April 3, 1999, Value America had issued warrants to purchase an
aggregate of 6,776,637 shares of common stock. Of these warrants, warrants to
purchase 118,320 shares will not vest until December 18, 1999. These warrants
contain provisions that will accelerate vesting in the event of a change in
control, which is defined generally to be
o an acquisition of 50% or more of Value America's common stock by an
unrelated person,
o the approval by Value America's shareholders of a liquidation of Value
America,
71
<PAGE>
o the sale by Value America of substantially all of its assets or
o a reorganization or merger of Value America in which its stockholders will
subsequently hold less than 50% of the resulting entity.
All other warrants have vested.
ELIMINATION OF LIABILITY AND INDEMNIFICATION
The articles eliminate the liability of the officers and directors of
Value America to Value America or its stockholders for monetary damages in any
proceeding brought by or on behalf of stockholders of Value America 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 Value America who is, was, or is
threatened to be made a party to a proceeding, including a proceeding by or in
the right of Value America because
o he or she is or was a director or officer of Value America or
o he or she is or was serving as a director, trustee, partner or officer of
or another legal entity at the request of Value America,
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 Value America to enter into
agreements to indemnify its officers and directors to 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 Value America as to which indemnification is being sought, and
Value America 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 Value America'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 Value America to maintain
insurance on behalf of any person who is or was a director, officer, employee,
or agent of Value America, whether or not Value America would have the power to
provide indemnification to such person.
CERTAIN CORPORATE GOVERNANCE PROVISIONS OF THE VIRGINIA ACT
Value America 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 Value America and any person (an "Interested
Stockholder") who beneficially owns more than 10% of any class of Value
America'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 Value America first had 300 stockholders
of record or whose acquisition of shares making such person an Interested
Stockholder was previously approved by a majority of Value America's
Disinterested Directors. "Disinterested Director" means, with respect to a
particular Interested Stockholder, a member of Value America's board of
directors who was a member on the date on which an Interested Stockholder
became an Interested Stockholder or was 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
Value America proposed by or on behalf of an Interested Stockholder, or any
reclassification, including a reverse stock split, recapitalization or merger
of Value America with its subsidiaries, which increases the percentage of
voting shares beneficially owned by an Interested Stockholder by more than 5%.
72
<PAGE>
The "affiliated transaction" provisions of the Virginia Act prohibit Value
America 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
o be in cash or in the form of consideration used by the Interested
Stockholder to acquire the largest number of its shares and
o 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.
Value America is also subject to the "control share acquisitions"
provision of the Virginia Act, which provides that shares of Value America'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 Value America. 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: one-fifth, one-third or 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 Value America 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. Value America 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 value of their shares from Value America. 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
Value America'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 Value America.
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. Value America has not
elected to exempt itself from coverage under these statutes.
TRANSFER AGENT AND REGISTRAR
American Securities Transfer & Trust, Inc. serves as Value America's
transfer agent and registrar.
LISTING
Value America's common stock has been approved for quotation on the Nasdaq
National Market under the proposed symbol "VUSA."
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, Value America will have 43,434,862
shares of common stock outstanding, based on shares outstanding on April 3,
1999. Of the outstanding shares, the 5,500,000 shares sold in this offering
will be freely tradable without restriction under the Securities Act of 1933
unless purchased by "affiliates" of Value America, as that term is defined in
Rule 144 under the Securities Act of 1933. All of the remaining 37,934,862
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 of 1933 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 Rule 144 under the Securities Act of 1933, 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 28,103,412 of these shares will be eligible for immediate resale
in the public market under Rule 144 under the Securities Act of 1933.
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 will be
entitled to sell within any three-month period a number of shares that does not
exceed the greater of:
o 1% of the number of shares of common stock then outstanding, or
approximately 434,349 shares immediately after this offering, or
o 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
Value America. Under Rule 144(k), a person who is not deemed to have been an
affiliate of Value America 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, which includes 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 Value America or an affiliate of Value America.
Approximately 90 days after the closing of this offering, Value America
intends to file a registration statement on Form S-8 under the Securities Act
of 1933 covering shares of common stock subject to incentive awards outstanding
or reserved for issuance under Value America's stock incentive plan. Based on
the number of shares subject to outstanding options at April 3, 1999, and
currently reserved for issuance under all such plans, such registration
statement will cover 6,250,000 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 Value America, and, in the case of
existing stockholders, subject to the expiration of the 180-day lock-up
agreements described above.
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<PAGE>
UNDERWRITING
The underwriters named below, acting through their representatives,
BancBoston Robertson Stephens Inc., Volpe Brown Whelan & Company, LLC and The
Robinson-Humphrey Company, LLC, have severally agreed with Value America,
subject to the terms and conditions set forth in the underwriting agreement, to
purchase from Value America the numbers 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. ......... 2,430,000
Volpe Brown Whelan & Company, LLC .......... 2,160,000
The Robinson-Humphrey Company, LLC ......... 810,000
E*trade Securities ......................... 100,000
---------
Total ................................... 5,500,000
=========
</TABLE>
Value America has been advised 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 $.97 per share, of which $.10 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 Value America as set forth on the cover page of this prospectus.
Craig A. Winn, the Chairman and a Founder of Value America, and Rex
Scatena, the Vice Chairman and General Counsel and a Founder of Value America
(the "selling stockholders"), have granted to the underwriters an option,
exercisable during the 30-day period after the date of this prospectus, to
purchase up to 825,000 additional shares of common stock at the same price per
share as Value America will receive for the 5,500,000 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 5,500,000 shares offered hereby. If
purchased, such additional shares will be sold by the underwriters on the same
terms as those on which the 5,500,000 shares are being sold. The selling
stockholders 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 5,500,000
shares of common stock offered hereby.
The following table shows the per share and total underwriting discounts
and commissions to be paid by Value America and the selling stockholders to the
underwriters. This information is presented assuming either no exercise or full
exercise by the underwriters of their over-allotment option.
<TABLE>
<CAPTION>
WITHOUT
PER SHARE OPTION WITH OPTION
----------- --------------- ---------------
<S> <C> <C> <C>
Public offering price ............................... $ 23.00 $126,500,000 $145,475,000
Underwriting discounts and commissions .............. $ 1.61 $ 8,855,000 $ 10,183,250
Proceeds, before expenses, to Value America ......... $ 21.39 $117,645,000 $117,645,000
Proceeds to selling stockholders .................... $ 21.39 $ -- $ 17,646,750
</TABLE>
The expenses of the offering are estimated at $2.2 million and are payable
entirely by Value America. BancBoston Robertson Stephens Inc. expects to
deliver the shares of common stock to purchasers on April 13, 1999.
The underwriting agreement contains covenants of indemnity among the
underwriters, Value America and the selling stockholders against certain civil
liabilities, including liabilities under the Securities Act of 1933 and
liabilities arising from breaches of representations and warranties contained
in the underwriting agreement.
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<PAGE>
Each of Value America's executive officers, directors, director-nominees
and other stockholders of record has agreed with the representatives, for a
period of 180 days after the date of this prospectus (the "Lock-Up Period"),
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 Inc.
However, BancBoston Robertson Stephens Inc. 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 Value America's stockholders providing consent by the representatives to
the sale of shares prior to the expiration of the Lock-Up Period. In addition,
Value America has agreed that, during the Lock-Up Period, it will not, subject
to certain exceptions, without the prior written consent of BancBoston
Robertson Stephens Inc., (a) consent to the disposition of any shares held by
stockholders prior to the expiration of the Lock-Up Period or (b) 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 Value America's sale of shares in the offering, its issuance of
common stock upon the exercise of currently outstanding options and warrants,
and its issuance of incentive awards under its stock incentive plan. See
"Shares Eligible for Future Sale."
At the request of Value America, the underwriters have reserved up to
385,000 shares of common stock for sale, at the initial public offering price,
to employees, business associates and other friends of Value America through a
directed share program. The number of shares of common stock available for sale
to the general public in the offering will be reduced to the extent
participants in the directed share program purchase the reserved shares.
The underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
Prior to this offering, there has been no public market for the common
stock of Value America. Consequently, the initial public offering price for the
common stock offered hereby has been determined through negotiations between
Value America and the representatives. Among the factors considered in such
negotiations were prevailing market conditions, certain financial information
of Value America, market valuations of other companies that Value America and
the representatives believe to be comparable to Value America, estimates of the
business potential of Value America, the present state of Value America's
development and other factors deemed relevant.
The Robinson-Humphrey Company, LLC, which is serving as one of the
representatives, identified an entity that made a short-term loan of $5.0
million to Value America in October 1998. The loan was repaid in December 1998.
For its services, Robinson-Humphrey received a fee of $150,000 from Value
America.
STABILIZATION. The representatives have advised Value America that,
pursuant to Regulation M under the Securities Exchange Act of 1934, 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 Value
America that such transactions may be effected on the Nasdaq National Market or
otherwise and, if commenced, may be discontinued at any time.
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<PAGE>
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for Value America by LeClair Ryan, A Professional Corporation, Richmond,
Virginia. Gary D. LeClair, the Chairman of LeClair Ryan, A Professional
Corporation, is a director of Value America, and Mr. LeClair and certain of his
partners beneficially own, in the aggregate, 201,252 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 December 31, 1997
and 1998, and for the period from inception (March 13, 1996) through December
31, 1996 and for the years ended December 31, 1997 and 1998, 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.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form S-1 with the Securities and
Exchange Commission. This prospectus, which is a part of the registration
statement, does not contain all of the information included in the registration
statement. Certain information is omitted and you should refer to the
registration statement and its exhibits. With respect to references made in
this prospectus to any contract, agreement or other document of Value America,
such references are not necessarily complete and you should refer to the
exhibits attached to the registration statement for copies of the actual
contract, agreement or other document. You may review a copy of the
registration statement, including exhibits, at the Securities and Exchange
Commission's public reference room at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at Seven World Trade Center, 13th Floor, New York, New
York 10048 or at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Please call 1-800-SEC-0330 for further information about the
operation of the public reference rooms.
We will file annual, quarterly and current reports, proxy statements and
other information with the Securities and Exchange Commission. You may read and
copy any reports, statements or other information on file at the public
reference rooms. You can also request copies of these documents, for a copying
fee, by writing to the Securities and Exchange Commission.
The registration statement and our other Securities and Exchange
Commission filings can also be reviewed by accessing the Securities and
Exchange Commission's Internet site at HTTP://WWW.SEC.GOV, which contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Securities and Exchange
Commission.
77
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<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Accountants ........................................................ F-2
Financial Statements:
Balance Sheets as of December 31, 1997 and 1998 ......................................... F-3
Statements of Operations for the period from Inception (March 13, 1996) through December
31, 1996, and the years ended December 31, 1997 and 1998 .............................. F-4
Statements of Changes in Stockholders' Equity (Deficit) for the period from Inception
(March 13, 1996) through December 31, 1996, and the years ended December 31, 1997
and 1998 ............................................................................. F-5
Statements of Cash Flows for the period from Inception (March 13, 1996) through December
31, 1996, and the years ended December 31, 1997 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, 1997 and 1998, and the results of its operations
and its cash flows for the period from Inception (March 13, 1996) through
December 31, 1996, and the years ended December 31, 1997 and 1998 in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of Value America'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
McLean, Virginia
March 5, 1999
F-2
<PAGE>
VALUE AMERICA, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
BALANCE
DECEMBER 31, SHEET AT
-------------------------------- DECEMBER 31,
1997 1998 1998 (NOTE 1)
--------------- ---------------- ----------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .............................................. $ 10,340,987 $ 20,126,707 $ 83,746,956
Restricted cash ........................................................ -- 5,000,000 5,000,000
Accounts receivable, net of allowance of $49,000 and $1,021,000 ........ 458,005 3,010,963 3,010,963
Debt issuance costs .................................................... -- 26,095,090 --
Inventory .............................................................. -- 639,613 639,613
Other current assets ................................................... 7,128 -- --
------------ ------------- -------------
TOTAL CURRENT ASSETS .................................................. 10,806,120 54,872,373 92,397,532
------------ ------------- -------------
Equipment, furniture and fixtures, net ................................... 167,800 2,061,801 2,061,801
Restricted cash .......................................................... -- 1,500,000 1,500,000
Deferred offering costs .................................................. -- 1,368,884 1,368,884
Note receivable from officer ............................................. -- 250,000 250,000
Other assets ............................................................. 20,158 44,608 44,608
------------ ------------- -------------
TOTAL ASSETS .......................................................... $ 10,994,078 $ 60,097,666 $ 97,622,825
============ ============= =============
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable ....................................................... $ 126,643 $ 15,568,171 $ 15,568,171
Accrued expenses ....................................................... 707,133 4,514,531 4,514,531
Deferred revenue ....................................................... 352,500 2,204,270 2,204,270
Accrued stock-based compensation ....................................... 273,000 1,372,416 1,372,416
Notes payable .......................................................... -- 29,024,444 --
Other current liabilities .............................................. 18,041 142,841 142,841
------------ ------------- -------------
TOTAL CURRENT LIABILITIES ............................................. 1,477,317 52,826,673 23,802,229
------------ ------------- -------------
Deferred revenue ......................................................... 1,294,586 930,101 930,101
Other liabilities ........................................................ 66,644 83,383 83,383
------------ ------------- -------------
TOTAL LIABILITIES ..................................................... 2,838,547 53,840,157 24,815,713
------------ ------------- -------------
Commitments and contingencies
MANDATORILY REDEEMABLE PREFERRED STOCK:
Series A, without par value, convertible, 5% cumulative dividend;
5,000,000 shares authorized, issued and outstanding, actual
(0 pro forma); redeemable for $4.00 per share ......................... 9,465,982 14,439,832 --
Series B, without par value, convertible, 5% cumulative dividend;
617,979 shares authorized, issued and outstanding, actual (0 in
1997 and pro forma); redeemable for $60.94 per share .................. -- 23,381,772 --
Series C, without par value, convertible, 5% cumulative dividend; 0
shares authorized, issued and outstanding, actual and pro forma;
redeemable for $20.00 per share ....................................... -- -- --
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, without par value, 0 shares authorized, actual;
25,000,000 shares authorized, pro forma; 0 shares issued and
outstanding, actual and pro forma .....................................
Common stock, without par value, 100,000,000 shares authorized,
actual; 500,000,000 shares authorized, pro forma; 23,152,500 and
23,777,700 shares issued and outstanding, actual (37,934,862 pro
forma) ................................................................ (455,500) 7,481,718 148,293,322
Warrants ............................................................... 26,584,714 18,698,763
Accumulated deficit .................................................... (854,951) (65,630,527) (94,184,973)
------------ ------------- -------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) .................................. (1,310,451) (31,564,095) 72,807,112
------------ ------------- -------------
TOTAL LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT) ....................................... $ 10,994,078 $ 60,097,666 $ 97,622,825
============ ============= =============
</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, YEAR ENDED
1996) THROUGH DECEMBER 31,
DECEMBER 31, ---------------------------------------
1996 1997 1998
-------------- ---------------- -----------------
<S> <C> <C> <C>
REVENUES:
Net sales .......................................... $ -- $ 47,677 $ 40,269,018
Product presentations .............................. -- 85,764 1,274,570
---------- ---------- ------------
Total revenues ................................... -- 133,441 41,543,588
---------- ---------- ------------
COST OF REVENUES:
Cost of goods sold ................................. -- 31,025 40,050,715
Product presentations .............................. 96,680 454,617 725,112
---------- ---------- ------------
Total cost of revenues ........................... 96,680 485,642 40,775,827
---------- ---------- ------------
Gross (loss) margin ................................. (96,680) (352,201) 767,761
---------- ---------- ------------
OPERATING EXPENSES:
Sales, advertising and marketing ................... 43,863 487,626 38,485,228
General and administrative ......................... 152,018 544,479 7,365,651
Technical and system development ................... 135,896 486,776 4,109,208
Professional fee ................................... -- -- 1,700,218
---------- ---------- ------------
Total operating expenses ......................... 331,777 1,518,881 51,660,305
---------- ---------- ------------
Operating loss ..................................... (428,457) (1,871,082) (50,892,544)
OTHER INCOME AND EXPENSES:
Interest income (expense), net ..................... 3,383 17,823 (2,723,279)
---------- ---------- ------------
NET LOSS ............................................ (425,074) (1,853,259) (53,615,823)
Accretion and dividends on Series A
and Series B redeemable preferred
stock ............................................ -- (188,368) (11,159,753)
---------- ---------- ------------
Net loss available for common stockholders ......... $ (425,074) $(2,041,627) $(64,775,576)
============ =========== ============
NET LOSS PER COMMON SHARE:
Basic .............................................. $ (0.02) $ (0.09) $ (2.80)
============ =========== ============
Diluted ............................................ $ (0.02) $ (0.09) $ (2.80)
============ =========== ============
WEIGHTED AVERAGE NUMBER OF SHARES:
Basic .............................................. 22,500,000 22,615,625 23,154,213
============ =========== ============
Diluted ............................................ 22,500,000 22,615,625 23,154,213
============ =========== ============
</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)
<TABLE>
<CAPTION>
COMMON STOCK
------------------------------
ACCUMULATED
SHARES AMOUNT WARRANTS DEFICIT TOTAL
---------- ---------- ----------- ------------ ------------
<S> <C> <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 reincorporation as a
C-corporation ..................... -- (1,611,750) -- 1,611,750 --
Sale of common stock and
warrants .......................... 577,500 962,500 -- -- 962,500
Accrual of preferred stock
dividends ......................... -- -- -- (37,500) (37,500)
Accretion of redeemable
preferred stock ................... -- -- -- (150,868) (150,868)
Net loss ........................... -- -- -- (1,853,259) (1,853,259)
---------- ---------- ----------- ------------ ------------
BALANCE, DECEMBER 31, 1997 ......... 23,152,500 (455,500) -- (854,951) (1,310,451)
---------- ---------- ----------- ------------ ------------
Sale of common stock and
warrants .......................... 625,200 6,252,000 -- -- 6,252,000
Stock issuance costs ............... -- (15,000) -- (15,000)
Issuance of warrants with notes
payable ........................... -- -- 26,584,714 -- 26,584,714
Accrual of preferred stock
dividends ......................... -- -- -- (1,747,344) (1,747,344)
Accretion of redeemable
preferred stock ................... -- -- -- (9,412,409) (9,412,409)
Professional fee ................... -- 1,700,218 -- -- 1,700,218
Net loss ........................... -- -- -- (53,615,823) (53,615,823)
---------- ---------- ----------- ------------ ------------
BALANCE, DECEMBER 31, 1998 ......... 23,777,700 $7,481,718 $26,584,714 $(65,630,527) $(31,564,095)
========== ========== =========== ============ ============
</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,
1996) THROUGH YEAR ENDED DECEMBER 31,
DECEMBER 31, -----------------------------------
1996 1997 1998
--------------- ---------------- -----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ............................................................. $(425,074) $ (1,853,259) $ (53,615,823)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization ....................................... 9,137 45,946 642,979
Common stock granted as employee compensation ....................... -- 43,750
Stock-based compensation ............................................ -- 273,000 1,099,416
Professional fee .................................................... -- -- 1,700,218
Amortization of debt issuance costs ................................. -- -- 2,277,474
Interest expense added to debt principal ............................ -- -- 24,444
Changes in assets and liabilities:
Accounts receivable ................................................. (12,500) (445,505) (2,552,958)
Inventory ........................................................... -- -- (639,613)
Note receivable from officer ........................................ -- -- (250,000)
Other assets ........................................................ (1,894) (25,392) (17,322)
Accounts payable .................................................... 29,744 96,899 15,441,528
Accrued expenses .................................................... 25,052 89,810 4,399,669
Deferred revenue .................................................... 210,000 1,437,086 1,487,285
Other liabilities ................................................... -- -- --
--------- ------------- -------------
NET CASH USED IN OPERATING ACTIVITIES ................................. (165,535) (337,665) (30,002,703)
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Restricted cash ...................................................... -- -- (6,500,000)
Capital expenditures ................................................. (57,715) (165,168) (2,536,980)
--------- -------------- -------------
NET CASH USED IN INVESTING ACTIVITIES ................................. (57,715) (165,168) (9,036,980)
--------- -------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from assets placed under capital lease ...................... 5,558 46,892 269,593
Principal payments under capital lease obligations ................... (1,406) (16,359) (128,054)
Proceeds from issuance of common stock ............................... 150,000 962,500 6,252,000
Proceeds from issuance of preferred stock ............................ -- 10,000,000 18,829,894
Payment of offering costs ............................................ -- (130,115) (3,339,886)
Proceeds from issuance of debt and warrants .......................... -- -- 29,000,000
Payment of debt issuance costs ....................................... -- -- (1,787,850)
Borrowings ........................................................... 150,000 50,000 5,700,000
Debt repayments ...................................................... -- (150,000) (5,700,000)
Dividends paid ....................................................... -- -- (270,294)
--------- ------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES ............................. 304,152 10,762,918 48,825,403
--------- ------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS ............................. 80,902 10,260,085 9,785,720
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ........................ -- 80,902 10,340,987
--------- ------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD .............................. $ 80,902 $ 10,340,987 $ 20,126,707
========= ============= =============
Non-cash investing and financing transactions:
Issuance of common stock to an employee as compensation .............. $ -- $ 43,750 $
========= ============= =============
Increase in accrued expenses related to preferred stock offering costs $ -- $ 592,271 $
========= ============= =============
Accretion and dividends on redeemable preferred stock ................ $ -- $ 188,368 $ 11,159,753
========= ============= =============
Issuance of warrants with notes payable .............................. $ -- $ -- $ 26,584,714
========= ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
VALUE AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Value America, Inc. ("Value America") 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. Value America was
considered to be a development stage enterprise until the first quarter of
1998.
RISKS AND UNCERTAINTIES
Value America 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, competitive nature of the industry, dependence on the
Internet and related security risks, development and maintenance of efficient
information technologies to support the business, and uncertain ability to
protect proprietary intellectual properties.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Value America considers all highly-liquid investments purchased with
original maturities of three months or less to be cash equivalents.
RESTRICTED CASH
Through December 31, 1998, Value America entered into letter of credit
agreements with vendors whereby Value America granted security interests and
limited powers of attorney over certificates of deposit totaling $5.0 million.
The letters of credit are callable if Value America defaults in the payments of
trade payables to the secured vendors and expire through August 1999. The $5.0
million in certificates of deposit is included in restricted cash as of
December 31, 1998.
In April 1998, Value America entered into a two-year agreement for credit
card clearing services which required Value America to establish a $1.5 million
cash deposit account to cover potential chargebacks. Although the agreement may
be terminated without penalty by either party, the credit card processor can
require Value America 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 deposit account until the funds are released to
Value America. This cash deposit is included in restricted cash as of December
31, 1998.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of Value America's financial instruments, which include
accounts receivable, accounts payable, notes payable, accrued expenses, and
mandatorily redeemable preferred stock, is considered to approximate fair value
due to the relatively short maturities of the respective instruments.
INVENTORY AND COST OF GOODS SOLD
Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market. Value America periodically commits to purchase
quantities of merchandise from vendors prior to receiving customer
F-7
<PAGE>
VALUE AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- Continued
orders. The inventory remains at the manufacturer or distributor that provides
fulfillment services for Value America until it is sold to a third party. At
December 31, 1998, Value America was not committed to any significant inventory
purchases.
In the year ended December 31, 1998, Value America purchased goods from
one manufacturer that accounted for approximately 58% of net sales. The amount
of net sales related to purchases from this manufacturer is minimal for the
comparable period in 1997. Value America has no long-term contracts or
arrangements with any of its manufacturers that guarantee the availability of
merchandise, the continuation of particular payment terms, or the extension of
credit. There can be no assurance that Value America's current manufacturers
will continue to sell merchandise to Value America on current terms or that
Value America will be able to establish new or extend current relationships to
ensure acquisition of merchandise in a timely manner and on acceptable
commercial terms. If Value America were unable to develop and maintain
relationships that would allow it to obtain sufficient quantities of
merchandise on acceptable commercial terms, such inability could have a
material adverse effect on Value America's financial position, results of
operations and cash flows.
EQUIPMENT, FURNITURE AND FIXTURES
Equipment, furniture and fixtures are recorded at cost. Value America
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
Value America's online store showcases products and services using
multi-media presentations that allow customers to learn about the features and
benefits of the products and to purchase the products from Value America.
Vendors ship products directly to the customer upon receipt of an order from
Value America. Revenue from product sales is recognized upon shipment from the
vendor. Value America is responsible for selling the merchandise, collecting
payment from the customer, ensuring shipment to the customer and processing
returned goods. Value America takes title to the product upon shipment and
bears the risk of loss for collection, delivery and merchandise returns from
customers. Value America accrues a reserve for estimated product returns at the
time of sale.
Value America has contractual agreements with vendors under which Value
America prepares and maintains multi-media product presentations and lists
vendors' merchandise in Value America's online store. These agreements provide
for both the development and the Internet-access of these presentations for
established contractual periods. Value America recognizes product presentation
and listing revenue ratably over the period of the related agreement, beginning
upon availability of the presentation in Value America's online store, and
recognizes the costs of developing and maintaining presentations as incurred.
At December 31, 1997 and 1998, Value America had total deferred revenue
associated with product presentations of approximately $1.6 million and $2.4
respectively, which it will recognize over varying terms through 2000. The
agreements generally provide for the payment of a renewal fee for presentations
and merchandise listings beyond the initial agreement period. Revenues from
renewal fees are recognized ratably over the renewal term.
Value America also has deferred revenue of approximately $752,000 at
December 31, 1998 associated with cash received for product sales in advance of
the shipment of the underlying product, which will be recognized as revenue
upon product shipment.
F-8
<PAGE>
VALUE AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
ADVERTISING
Advertising costs are expensed as incurred. Cash received from cooperative
advertising agreements is recorded as a reduction of advertising expense.
Advertising expense for the years ended December 31, 1997 and 1998 was
approximately $194,000 and $33.2 million, net of cooperative advertising of
approximately $0 and $2.0 million respectively.
VALUE AMERICA DOLLARS
On certain purchases, Value America offers customers "Value America
Dollars", which can be used against future purchases of merchandise from Value
America's online store. Value America records a liability for Value America
Dollars at the time of the sale on which the Value America Dollars are earned.
At December 31, 1997 and 1998, Value America had recorded approximately $2,000
and $206,000, respectively, in accrued expenses for Value America Dollars.
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 weighted average number
of common shares outstanding during the period. Diluted earnings per share is
computed using the weighted average number of common and potential common
shares outstanding during the period, except if anti-dilutive. Potential common
shares used in the diluted earnings per share calculation consist of (i) the
incremental common shares issuable upon conversion of the mandatorily
redeemable preferred stock (using the if-converted method) and (ii) shares
issuable upon the exercise of stock options and warrants (using the treasury
stock method).
STOCK-BASED COMPENSATION
FAS 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, defines a fair value
based method of accounting for employee stock options or similar equity
instruments. This statement allows companies to recognize compensation expense
associated with stock-based awards either by the fair value method prescribed
by FAS 123 or the intrinsic value method prescribed by Accounting Principles
Board (APB) Opinion No. 25. Value America uses the method prescribed by APB
Opinion No. 25 for employee stock options and makes supplemental disclosures
(Note 6) to show the effects of using the fair value-based measurement
criteria. Value America accounts for options granted to non-employees as
prescribed by 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 software to support
Value America's web site and order fulfillment systems. Through December 31,
1998, technical and system development costs have been expensed as incurred.
F-9
<PAGE>
VALUE AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
STOCK SPLIT
On July 1, 1998, Value America's board of directors approved a
three-for-one split of Value America's common stock, which was effective 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
reflect the stock split.
RECLASSIFICATIONS
Certain reclassifications were made to the 1997 financial statements to
conform to the 1998 presentation.
NEW ACCOUNTING PRONOUNCEMENTS
In 1998, Value America 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 Value
America's net loss or stockholders' equity as the comprehensive loss was the
same as Value America's net loss.
In 1998, Value America adopted FAS 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION. This statement 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. Value America currently operates in one
operating and geographic segment. The adoption of FAS 131 does not have a
material effect on the current operating or disclosure requirements.
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 Value America's fiscal year ending December
31, 1999. Value America is currently evaluating the prospective impact of this
pronouncement on Value America's financial condition, results of operations and
cash flows.
PRO FORMA BALANCE SHEET
The accompanying unaudited pro forma balance sheet at December 31, 1998
reflects (i) the issuance in January 1999 of $5.0 million principal amount of
notes payable and related warrants, which resulted in a debt issuance cost
equal to the $4.5 million fair value of the warrants, (ii) the issuance in
January 1999 of 20,000 shares of common stock at a price of $10.00 per share,
(iii) the issuance in January 1999 of 6,000,000 shares of Series C convertible
preferred stock and related warrants, for which the proceeds were allocated to
convertible preferred stock and warrants based upon the relative fair values of
$48.6 million for the Series C convertible preferred stock and $11.4 million
for the warrants, (iv) the allocation in January 1999 of the Series C
convertible preferred stock's beneficial conversion feature of $19.8 million,
(v) the conversion of all of the outstanding shares of Value America's
convertible preferred stock into 10,737,162 shares of common stock, (vi) the
exercise of warrants, resulting in the cancellation of the $34.0 million
principal amount of notes payable and the issuance of 3,400,000 shares of
common stock, (vii) the write-off of unamortized debt issuance costs of $8.1
million as interest expense and $22.5 million to common stock, upon
cancellation of the $34.0 million principal amount of notes payable, and (viii)
the payment of approximately $1.0 million of accrued dividends on Value
America's Series A and B convertible preferred stock, assuming consummation of
the offering.
F-10
<PAGE>
VALUE AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
2. ACCOUNTS RECEIVABLE
Accounts receivable primarily represent amounts billed for multi-media
product presentations, products shipped to business customers, receivables from
vendors for returned products, product discounts, and cooperative advertising.
Agreement terms permit Value America to bill 50% of the total product
presentation agreement value at signing with the remainder billable when the
presentations become available to customers on Value America's web site.
Business customers that are extended credit are billed upon product shipment.
Receivables from vendors for returned products are used as credits against
future product purchases. Product discounts are billed upon shipment and
cooperative advertising is billed upon airing of the respective advertisement.
Value America recorded approximately $0, $49,000, and $972,000 in bad debt
expense during the period from Inception (March 13, 1996) to December 31, 1996,
and the years ended December 31, 1997 and 1998, respectively. There were no
write-offs of accounts receivable in 1996, 1997, and 1998.
3. EQUIPMENT, FURNITURE AND FIXTURES
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------- DEPRECIABLE
1997 1998 LIVES
------------ -------------- ------------
<S> <C> <C> <C>
Computer hardware and software ................ $ 179,072 $ 2,153,254 2 years
Office furniture and equipment ................ 37,580 469,890 2-5 years
Other ......................................... 6,231 136,719 2 years
--------- -----------
222,883 2,759,863
Accumulated depreciation ...................... (55,083) (698,062)
--------- -----------
Net equipment, furniture and fixtures ......... $ 167,800 $ 2,061,801
========= ===========
</TABLE>
Computer equipment with a capitalized cost of approximately $51,000 and
$270,000, and accumulated depreciation of approximately $34,000 and $15,000, at
December 31, 1997 and 1998, respectively, was held under capital lease
agreements.
4. NOTES PAYABLE AND LINE OF CREDIT
At December 31, 1997 and 1998, Value America had a note payable to an
employee in the amount of $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 1998.
On April 8, 1998, Value America entered into a line of credit agreement
with a bank, which provides for borrowings up to $5.0 million. Such borrowings
are 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 outstanding under this line of credit at December 31,
1998.
Value America entered into a Revolving Credit Agreement ("Agreement") with
a preferred stockholder and additional participants in October 1998, which was
amended in November and December 1998 and January 1999. In connection with each
amendment, warrants were issued to the preferred stockholder and the
participants. Amounts outstanding under the Agreement and subsequent amendments
totaled approximately $29.0 million at December 31, 1998 and $34.0 million at
January 12, 1999 (Note 12). Borrowings under the Agreement bear interest at 11%
annually with interest and principal payable on August 17, 1999. Upon a
qualifying public offering, principal amounts outstanding under the Agreement
are repayable through the exercise of common stock warrants.
At December 31, 1998 Value America had issued 348,000 Type A common stock
warrants, 2,900,000 Type B common stock warrants and 325,000 Type C common
stock warrants in connection with the amendments to the Agreement.
F-11
<PAGE>
VALUE AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
4. NOTES PAYABLE AND LINE OF CREDIT -- Continued
Type A Warrants have an exercise price of $0.01 per share of common stock
and are exercisable upon the earlier of November 17, 1999, a qualifying public
offering or a change in control, and until November 17, 2008. The exercise
price is payable in cash or by Value America not issuing that number of shares
having a fair market value equal to the exercise price.
Type B Warrants have an exercise price of $10.00 per share of common stock
and are exercisable upon issuance until November 17, 2008. The exercise price
is payable in cash or by Value America not issuing that number of shares having
a fair market value equal to the exercise price.
Type B Warrants are mandatorily exercisable upon the closing of a
qualifying public offering. Upon mandatory exercise, the holder must pay the
exercise price by cancellation of the indebtedness outstanding under the
Agreement.
Type C Warrants have an exercise price of $10.00 per share of common stock
and are exercisable upon issuance until the earlier of January 15, 2009 or
three calendar years following a qualifying public offering. If the aggregate
fair value of Value America's common stock does not exceed $600.0 million on or
before the "Evaluation Date" (the earlier of December 31, 1999 or a change in
control, as defined), the exercise price of the warrants changes to $0.01. The
exercise price is payable in cash or by Value America not issuing that number
of shares having a fair market value equal to the exercise price.
Value America allocated the $26.6 million fair value of the Type A, B and
C common stock warrants to stockholders' equity based upon the fair value of
the warrants as determined by an independent valuation, and amortizes the
resulting debt issuance costs as interest expense using the effective interest
method until the earliest of maturity or conversion. Additionally, Value
America recorded approximately $1.7 million in debt issuance costs paid in
cash. Upon repayment of the debt through the exercise of the Type B warrants
for common stock, the unamortized portion of the debt issuance costs
attributable to the Type B warrants will be recorded to the equity accounts and
the unamortized portion of the debt issuance costs attributable to the Type A
and Type C warrants will be recorded as interest expense. Value America
anticipates that the interest expense from the amortization of the debt
issuance costs will have a material effect on its net loss in the quarter and
year in which this public offering is completed. This amortization will not
affect Value America's cash flows. At December 31, 1998, Value America had
unamortized debt issuance costs of approximately $26.1 million associated with
the Agreement, inclusive of approximately $1.5 million in debt issuance costs
paid in cash. In the year ended December 31, 1998, Value America recorded
interest expense of approximately $2.3 million related to amortization of debt
issuance costs.
Value America has an agreement with the lender to pay a one percent
commitment fee on the borrowing capacity under the Revolving Credit Agreement.
Commitment fees are immediately payable upon increases in the borrowing
capacity. Value America paid $290,000 in commitment fees in the year ended
December 31, 1998.
Additionally, Value America has an agreement with a stockholder to pay
finders' fees in connection with the aforementioned Revolving Credit Agreement.
In the year ended December 31, 1998, fees were paid to this stockholder of
approximately $323,000. In the event principal amounts outstanding under the
Revolving Credit Agreement convert to equity prior to March 30, 1999, the
stockholder is entitled to an additional fee of approximately $646,000, which
will be recorded as interest expense.
5. MANDATORILY REDEEMABLE PREFERRED STOCK
In December 1997, Value America sold 5,000,000 shares of 5% Cumulative
Convertible Series A preferred stock ("Series A") for $10.0 million. Value
America recorded proceeds from this sale, net of related issuance costs, of
$9.3 million. These shares are convertible at any time at the option of the
holder at a rate
F-12
<PAGE>
VALUE AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
5. MANDATORILY REDEEMABLE PREFERRED STOCK -- Continued
such that one preferred share is convertible into the number of common shares
which results from dividing $2.00 by the $3.47 conversion price (subject to
adjustment). Series A stockholders are entitled to the number of votes equal to
the largest number of common shares 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 Value America does not successfully offer common shares to the public
before December 19, 1999, the 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 December 19, 1999, 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. The carrying amount of these securities is
periodically adjusted to increase the carrying value to the redemption value of
$20.0 million at December 19, 1999. Accretion for the years ended December 31,
1997 and 1998 was approximately $188,000 and $5.2 million, 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 $25.0 million with a minimum common
share price of $3.82, the Series A preferred shares will automatically convert
to common shares, with certain registration rights.
In June 1998, Value America sold 617,979 shares of 5% Cumulative
Convertible Series B preferred stock ("Series B") for $18.8 million. Value
America recorded proceeds from this sale, net of related offering costs, of
$17.5 million. These shares are convertible at any time at the option of the
holder at a rate such that one preferred share is convertible into three shares
of common stock (subject to adjustment). Series B stockholders are entitled to
the number of votes equal to the largest number of common shares into which the
shares can be converted.
If Value America does not successfully offer common shares to the public
before December 19, 1999, the Series B shares may be redeemed at the option of
the stockholder for $60.94 per share plus any unpaid dividends. 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 plus any unpaid dividends. In addition, if there is no successful public
offering by December 19, 1999, 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. The carrying amount of these securities is
periodically adjusted to increase the carrying value to the redemption value of
$37.7 million at December 19, 1999. Accretion for the year ended December 31,
1998 was approximately $5.9 million, 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 $25.0 million with a minimum common
share price of $3.82, the Series B preferred shares will automatically convert
to common shares, with certain registration rights.
Certain of the Series B investors also acquired 617,979 shares of common
stock from the two founders of Value America for $6.3 million.
Value America paid finders' fees of $500,000 and $1.1 million,
respectively, for the placement of the Series A and Series B preferred stock.
These amounts are recorded as a reduction of the related proceeds.
F-13
<PAGE>
VALUE AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
6. STOCKHOLDERS' EQUITY (DEFICIT)
COMMON STOCK
During 1996, Value America was capitalized with the issuance of an
aggregate of 22,500,000 shares of common stock, without par value, to two
founders for $150,000. A common stockholder is entitled to one vote for each
common share held.
In October and November 1997, Value America 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.
In June 1998, Value America'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
$1.0 million in cash and $1.0 million in notes payable to the stockholder, due
June 30, 2003. The note is not payable unless the fair market value of the
shares, as defined, exceeds $6.0 million on the determination date. The excess
of the fair value of the stock sold by the principal stockholder over the
consideration received was recognized as a period expense (with a corresponding
increase in common stock) in the amount of approximately $1.7 million. The fair
value of the note was determined by an independent valuation to be $226,000.
In December 1998, Value America sold 625,200 shares of common stock and
118,320 warrants for $6.3 million. Of the total issuances, 175,620 shares of
common stock and 52,686 warrants were issued to related parties and 449,580
shares of common stock and 65,634 warrants were issued to third parties. The
warrants allow the holder to purchase one share of common stock for $10.00 and
are exercisable after the vesting date, which is the earlier of December 18,
1999 or a qualifying public offering, until December 18, 2008.
PREFERRED STOCK
At December 31, 1998, 5,617,979 shares of preferred stock, without par
value, were authorized, issued and outstanding. In January 1999, the authorized
shares of preferred stock were increased to 25,000,000. (Notes 5 and 12).
INCENTIVE PLAN
In connection with Value America's Incentive Plan ("Plan"), Value
America's board of directors has reserved 6,250,000 shares of common stock to
grant nonqualified and incentive stock options to employees, officers,
directors and certain non-employees. The exercise price of each option granted
under the Plan is determined by the Compensation Committee of Value America's
board of directors and is generally equal to the fair market value of Value
America's common stock on the date of grant. The Plan also provides for the
issuance of stock appreciation rights, restricted stock and incentive stock.
The terms of option grants and issuances of stock appreciation rights,
restricted stock and incentive stock, including vesting and terms of exercise,
are determined by the Compensation Committee. Options granted through December
31, 1998 generally vest over periods up to five years and expire upon the
earlier of ten years from the date of grant or upon termination of employment.
Through December 31, 1998 no stock appreciation rights, restricted stock or
incentive stock had been granted.
F-14
<PAGE>
VALUE AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
6. STOCKHOLDERS' EQUITY (DEFICIT) -- Continued
A summary of stock option activity is as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER OF OPTIONS EXERCISE PRICE
------------------- -----------------
<S> <C> <C>
Outstanding, December 31, 1996 ................... -- $ --
Granted .......................................... 2,591,625 0.88
Exercised ........................................ -- --
Expired/forfeited ................................ (6,000) 1.67
--------- ------
Outstanding, December 31, 1997 ................... 2,585,625 0.88
Granted .......................................... 2,062,105 6.70
Exercised ........................................ -- --
Expired/forfeited ................................ (518,255) 3.74
--------- ------
Outstanding, December 31, 1998 ................... 4,129,475 $ 3.43
========= =======
Exercisable at December 31, 1996 ................. -- $ --
--------- -------
Exercisable at December 31, 1997 ................. 441,426 $ .69
========= =======
Exercisable at December 31, 1998 ................. 953,904 $ .83
========= =======
Available for grant at December 31, 1998 ......... 2,120,525 $ --
========= =======
</TABLE>
The following table summarizes information about stock options at December
31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------ ---------------------------------
WEIGHTED AVERAGE
REMAINING
RANGE OF NUMBER CONTRACTUAL WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING LIFE (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ----------------- ------------- ----------------- ------------------ ------------- -----------------
<S> <C> <C> <C> <C> <C>
$0.58-$ 1.67 2,414,625 9 $ 0.81 944,904 $ 0.81
$3.47-$ 3.50 744,750 9 $ 3.50 9,000 $ 3.50
$6.67-$10.16 970,100 10 $ 9.91 -- $ --
--------- -------
4,129,475 953,904
========= =======
</TABLE>
Certain options were issued during 1997 and 1998 which provide for cash
bonuses upon exercise. Value America recorded approximately $273,000 and
$267,000 in compensation for the years ended December 31, 1997 and 1998,
respectively, related to these bonus provisions. Additional expense to be
recognized related to these bonus provisions is as follows: 1999 -- $320,000;
2000 -- $52,000.
Additionally, Value America issued options through December 31, 1998 with
exercise prices less than the fair market value at the date of grant, resulting
in compensation expense of approximately $832,000 for the year ended December
31, 1998. Additional expense to be recognized related to these options is as
follows: 1999 -- $668,000; 2000 -- $420,000; 2001 -- $274,000; 2002 --
$135,000; 2003 -- $20,000.
Value America applies APB Opinion No. 25 and related interpretations in
accounting for its Plan and recognizes compensation expense for its employee
stock-based awards based upon the intrinsic value method. If Value America had
elected to recognize compensation expense using the fair value method
prescribed by FAS 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 years ended December 31, 1997 and 1998 Value America's net loss and net
loss per share would have been as follows:
F-15
<PAGE>
VALUE AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
6. STOCKHOLDERS' EQUITY (DEFICIT) -- Continued
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1997 1998
---------------- -----------------
<S> <C> <C>
NET LOSS:
As reported ............................ $ (1,853,259) $ (53,615,823)
============ =============
Pro forma .............................. $ (1,855,509) $ (53,687,620)
============ =============
NET LOSS PER SHARE:
As reported, basic and diluted ......... $ (0.09) $ (2.80)
============ =============
Pro forma, basic and diluted ........... $ (0.09) $ (2.80)
============ =============
</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>
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1998
------------- -------------
<S> <C> <C>
Expected volatility ............. 0.01% 0.01%
Risk-free interest rate ......... 5.7%-5.9% 4.1%-5.6%
Expected life ................... 1-6 years 1-6 years
Expected dividend yield ......... 0% 0%
</TABLE>
Because the determination of the fair value of all options granted after
Value America becomes a public entity will include an expected volatility
factor in addition to the factors described in the preceding table and because
additional option grants are expected to be made each year, the above pro forma
disclosures are not representative of the pro forma effects of option grants on
reported net income (loss) for future years.
EARNINGS PER SHARE
The following table sets forth the calculation for the loss (numerator)
and shares (denominator) for earnings per share:
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(MARCH 13, 1996)
THROUGH YEAR ENDED DECEMBER 31,
DECEMBER 31, --------------------------------------
1996 1997 1998
----------------- ----------------- ------------------
<S> <C> <C> <C>
BASIC AND DILUTED EARNINGS PER SHARE:
LOSS (NUMERATOR):
Net loss ........................................ $ (425,074) $ (1,853,259) $ (53,615,823)
Less: Preferred stock dividends ................. -- (37,500) (1,747,344)
Less: Accretion of preferred stock .............. -- (150,868) (9,412,409)
----------- ------------- --------------
Loss available to common stockholders and assumed
conversions ................................... $ (425,074) $ (2,041,627) $ (64,775,576)
=========== ============= ==============
SHARES (DENOMINATOR):
Weighted average common shares .................. 22,500,000 22,615,625 23,154,213
=========== ============= ==============
Basic and diluted earnings per share ............ $ (0.02) $ (0.09) $ (2.80)
=========== ============= ==============
</TABLE>
During the years ended December 31, 1996, 1997 and 1998, Series A and B
preferred stock convertible into 0, 2,883,225 and 4,737,162 shares of common
stock was outstanding, respectively, but is not included in
F-16
<PAGE>
VALUE AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
6. STOCKHOLDERS' EQUITY (DEFICIT) -- Continued
the earnings per share computation because it is anti-dilutive. During the
years ended December 31, 1996, 1997, and 1998, options and warrants to purchase
0, 2,799,375, and 8,034,545 shares of common stock, respectively, were
outstanding but are not included in the computation because they are
anti-dilutive.
7. INCOME TAXES
From Inception (March 13, 1996) through October 31, 1997, Value America
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 Value America's taxable
income. Accordingly, no provision for income taxes was recorded for this
period. Effective November 1, 1997, Value America terminated its S Corporation
status and recorded gross deferred tax assets of $478,787.
Value America has not recorded a provision or benefit for income taxes for
the period November 1, 1997 through December 31, 1997 and for the year ended
December 31, 1998. The net increase in the valuation allowance of $20.0 million
in 1998 relates primarily to income tax net operating losses generated from the
current year operating loss. Value America has net operating loss carryforwards
of approximately $3,000 and $50.0 million at December 31, 1997 and 1998,
respectively. The net operating loss carryforwards expire in years 2012 through
2018. If certain substantial changes in Value America's ownership should occur,
there would be an annual limitation on the amount of the carryforwards which
can be utilized.
The components of deferred income tax assets (liabilities) are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1997 1998
------------ ----------------
<S> <C> <C>
Tax assets:
Deferred revenue ......................... $ 625,893 $ 1,191,061
Allowance for doubtful accounts .......... 18,620 488,680
Net operating loss carryforwards ......... 1,280 18,997,965
Other .................................... 5,700 167,890
---------- -------------
Gross deferred tax assets ................ 651,493 20,845,596
Tax liabilities:
Depreciation ............................. -- (193,879)
---------- -------------
Gross deferred tax liabilities ........... -- (193,879)
Net deferred tax asset ................... 651,493 20,651,717
Valuation allowance ....................... (651,493) (20,651,717)
---------- -------------
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 Value America's history of operating losses and the
uncertainty surrounding Value America'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 Value America's previous status as an S
Corporation.
F-17
<PAGE>
VALUE AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
7. INCOME TAXES -- Continued
A reconciliation between the statutory federal income tax rate and the
effective rate of income tax expense follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------------
1997 1998
---------- ----------
<S> <C> <C>
Statutory federal income tax rate ................................. 34% 34%
Effect of S corporation status prior to November 1, 1997 ......... (23%) --
State income taxes ............................................... 1% 4%
Stock compensation ............................................... (6%) (1%)
Change in valuation allowance .................................... (6%) (37%)
--- ---
0% 0%
=== ===
</TABLE>
8. EMPLOYEE BENEFIT PLAN
In June 1998, Value America adopted a 401(k) defined contribution savings
plan. The plan covers all full-time employees who are at least 18 years of age.
Participants may contribute up to 15% of pre-tax compensation, subject to
certain limitations. Value America may make discretionary annual profit sharing
contributions as well as discretionary employer matching contributions.
Employees vest in employer matching contributions and profit sharing
contributions over three years of eligible service. Value America has made no
profit sharing or matching contributions, through December 31, 1998.
9. RELATED PARTY TRANSACTIONS
At December 31, 1998, Value America had a note receivable from an officer
in the amount of $250,000. The note bears interest at 6% annually with interest
and principal due in September 2000. Value America has agreed to forgive
$150,000 of the principal amount associated with the note if the officer is
terminated without cause prior to December 31, 1999.
Value America paid finders' fees to a stockholder of approximately
$500,000, $1.4 million, and $1.0 million, respectively, in the years ended
December 31, 1997 and 1998, and in January 1999, in connection with the
placement of the Series A, B and C preferred stock and the Revolving Credit
Agreement. Additional fees of approximately $646,000 are payable to this
stockholder if principal amounts outstanding under the Revolving Credit
Agreement convert to equity prior to March 30, 1999. Fees paid to the
stockholder in conjunction with the placement of the Series A, B, and C
preferred stock are recorded as a reduction of the related proceeds. Fees paid
to the stockholder in conjunction with the Revolving Credit Agreement are
recorded as debt issuance costs and are amortized as interest expense until the
earliest of maturity or conversion (Notes 4 and 5).
During 1998, Value America had notes payable to three shareholders in the
amount of $700,000. Value America repaid all of the $700,000 outstanding
balances of these notes payable and interest accrued at 10% prior to December
31, 1998.
For the year ended December 31, 1997, 13% of net sales, or approximately
$6,000, were to a stockholder. Sales to stockholders and other related parties
were immaterial during the year ended December 31, 1998.
At December 31, 1996, Value America had a non-interest bearing loan of
$150,000 from a stockholder. This note was repaid during 1997.
F-18
<PAGE>
VALUE AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
10. COMMITMENTS AND CONTINGENCIES
Value America 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 Value America.
Value America occasionally commits to purchase specified levels of
inventory from vendors for resale under future product offers to customers. At
December 31, 1998, Value America was not committed to any significant inventory
purchases.
Value America leases certain equipment and office space under
non-cancelable operating leases. Lease terms range from one to two years and
may include renewal options for additional periods. Management expects that in
the normal course of business, leases will be renewed or replaced by other
leases. At December 31, 1998, Value America is committed for the payment of
minimum rentals under operating lease agreements of approximately $668,000,
$277,000 and $228,000 for the years ending December 31, 1999, 2000 and 2001,
respectively. Rent expense was approximately $11,000, $45,000 and $259,000 for
the period from Inception (March 13, 1996) through December 31, 1996, and for
the years ended December 31, 1997 and 1998, respectively.
At December 31, 1997 and 1998, Value America was obligated under various
capital leases for equipment, which were capitalized at the present value of
future minimum lease payments. Interest in connection with these leases was
approximately $600, $5,000, and $6,000 for the period from Inception (March 13,
1996) through December 31, 1996 and for the years ended December 31, 1997 and
1998, respectively. Remaining lease payments under capital leases will
approximate $212,000 and $65,000 for the years ending December 31, 1999 and
2000, respectively.
11. LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998 Value America had approximately $26.6 million in
cash, cash equivalents and restricted cash. For fiscal 1999, Value America'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. In addition, subsequent to December 31, 1998,
Value America received a total of $65.2 million of debt and equity financing
from third parties (see Note 12).
In the first half of fiscal 1999, Value America plans to complete 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 in investments from
levels presently budgeted for 1999. In management's view, were such contingency
actions required and therefore pursued, Value America would have sufficient
liquidity to continue in business at least through fiscal 1999. There can be no
assurance, however, that such contingency actions would be successful.
12. SUBSEQUENT EVENTS
On January 12, 1999, Value America sold 6,000,000 shares of 5% Cumulative
Convertible Series C preferred stock ("Series C") and warrants for $60.0
million. Value America sold 5,000,000 of the Series C shares to a related party
and 1,000,000 of the Series C shares to third party investors. Value America
issued 1,800,000 Type D common stock warrants, 473,724 Type E common stock
warrants and 37,843 Type F common stock warrants in connection with the Series
C preferred stock. These Series C shares are convertible at the option of the
holder into an equal number of shares of common stock upon the earlier of
January 12, 2000, a qualifying public offering or a change in control. Series C
stockholders are entitled to the number of votes equal to the largest number of
common shares into which the shares can be converted.
F-19
<PAGE>
VALUE AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
12. SUBSEQUENT EVENTS -- Continued
If Value America does not successfully offer common shares to the public
before January 15, 2001, the Series C shares may be redeemed at the option of
the holder for $20.00 per share plus any unpaid dividends. If full redemption
is not elected by the stockholder, 2,000,000 shares are mandatorily redeemable
in each of January 2003, 2004 and 2005 at a price of $20.00 per share plus any
unpaid dividends. In addition, if there is no successful public offering by
December 19, 1999, 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. The carrying amount of these securities will
periodically be adjusted to increase the carrying value to the redemption value
of $120.0 million at January 15, 2001.
At the completion of a successful public offering of equity securities
with aggregate gross proceeds of at least $25.0 million and with a minimum
common share price of $3.82, the Series C preferred shares will automatically
convert to common shares, with certain registration rights.
The Type D warrants have an exercise price of $10.00 per share of common
stock and are exercisable upon issuance until the earlier of January 15, 2009
or three calendar years following a qualifying public offering. If the
aggregate fair value of Value America's capital stock does not exceed $600.0
million on or before the "Evaluation Date" (as defined), the exercise price of
the warrants changes to $0.01. The exercise price is payable in cash or by
Value America not issuing that number of shares having a fair market value
equal to the exercise price.
The Type E warrants are only exercisable on the "Evaluation Date" if the
aggregate fair value of Value America's common stock does not exceed $600.0
million on the "Evaluation Date," and otherwise expire. Type E warrants have an
exercise price of $0.01 per share of common stock and, if exercisable as
described in the preceding sentence, are exercisable until the earlier of
January 15, 2009 or three calendar years following a qualifying public
offering. The exercise price is payable in cash or by Value America not issuing
that number of shares having a fair market value equal to the exercise price.
The Type F warrants have an exercise price of $0.01 per share of common
stock and are exercisable upon issuance until January 15, 2009. The exercise
price is payable in cash or by Value America not issuing that number of shares
having a fair market value equal to the exercise price.
Value America will allocate $11.4 million for the Type D, E and F warrants
to stockholders' equity and $48.6 million to the Series C preferred stock,
based upon their relative fair values. Upon conversion of the Series C
preferred stock into common stock, the remaining discount from redemption value
will be recorded as accretion and is anticipated to have a material effect on
net income or loss available to common stockholders in the quarter and year in
which this public offering is completed. This accretion will not affect Value
America's cash flows. Value America will record the Series C preferred stock's
beneficial conversion feature of $19.8 million at issuance, which represents
the difference between the Series C conversion price and the fair market value
of the common stock times the 6,000,000 shares issued.
Value America paid finders' fees of $1.0 million to a stockholder for the
placement of the Series C preferred stock. This amount will be recorded as a
reduction of the related proceeds.
In January 1999, in accordance with the Revolving Credit Agreement (Note
4), Value America borrowed $5.0 million and issued 60,000 Type A warrants and
500,000 Type B warrants. Value America will allocate the fair value of the Type
A and B warrants to stockholders' equity based upon the fair value of the
warrants as determined by an independent valuation, and will amortize the
resulting debt issuance costs as interest expense using the effective interest
method until maturity or conversion. Upon repayment of the debt through
exercise of the Type B warrants for common stock, the unamortized portion of
the debt issuance costs attributable to the Type B warrants will be recorded to
the equity accounts and the unamortized portion of the debt issuance costs
attributable to the Type A warrants will be recorded as interest expense. Value
America
F-20
<PAGE>
VALUE AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
12. SUBSEQUENT EVENTS -- Continued
anticipates that the interest expense from the amortization of the debt
issuance costs will have a material effect on its net loss in the quarter and
year in which this public offering is completed. This amortization will not
affect Value America's cash flows.
In January 1999, Value America sold 20,000 shares of common stock at $10
per share to third parties.
In March 1999, Value America entered into a two year lease for equipment.
Lease payments will approximate $79,000 and $95,000 for the years ending
December 31, 1999 and 2000, respectively.
F-21
<PAGE>
THE MARKETPLACE FOR A NEW MILLENNIUM
Value America is an online store offering business and consumer products.
We are a customer- and brand-centric solution serving each better
by serving both better...
<TABLE>
<S> <C>
[Photograph of woman A COMPREHENSIVE SOLUTION
speaking on telephone] Value America is not a niche player selling goods in one or two
categories. We offer products from over 800 brands because it
is more convenient to shop at one store than in many.
Consumers deserve a store so big that most everything they
need for home and office can be found in one convenient place.
[Photograph of man with BETTER BUYING DECISIONS
laptop computer] We demonstrate products so our customers can become better
buyers. We have built an authoring system to efficiently
produce presentations that blend the written word, visual
imagery, audio and video. Our product presentations are
interactive and communicate -- directly to consumers -- each
product's features, benefits and value.
[Photograph of customer THE BEST OF BOTH WORLDS
service department] Our customers can choose between the anonymity of the online
experience and the personal interaction possible with customer
support. Our people, empowered by technology, provide the
best of both worlds. The convergence of technology with the
human touch enables Value America to sell more complex high
quality products.
[Photograph of woman GETTING OUT THE WORD
with desktop computer] We reach millions of people by using off-line advertising to
drive on-line revenues. Print and broadcast compaigns provide
credibility and elevate consumer trust. Advertising is central to
building our brand and leveraging our brand relationships. It is
the fuel that powers our e-commerce machine, and is a core
competency. Everything is created and produced in-house.
[Picture of man and BRINGING PEOPLE AND PRODUCTS TOGETHER
woman with laptop computer] We enable manufacturers to broaden their distribution and at
the same time create closer customer contact. At Value America
they can present and sell their products based upon merits, and
still serve the customer more efficiently. Value America has
built an automated and informative link that brings people and
products together.
</TABLE>
<PAGE>
[VALUE AMERICA LOGO HERE]
