AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH , 1999
REGISTRATION NO. 333-58469
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- - --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
VALUE AMERICA, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
VIRGINIA
(State or other jurisdiction
of incorporation or organization)
5999
(Primary Standard
Industrial Classification Code Number)
33-0712568
(I.R.S. Employer
Identification Number)
VALUE AMERICA, INC.
1550 INSURANCE LANE
CHARLOTTESVILLE, VIRGINIA 22911
(804) 817-7700
(Address, including zip code and telephone number, including
area code, of registrant's principal executive offices)
----------------
DEAN M. JOHNSON
EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND SECRETARY
VALUE AMERICA, INC.
1550 INSURANCE LANE
CHARLOTTESVILLE, VIRGINIA 22911
(804) 817-7700
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
COPIES OF COMMUNICATIONS TO:
<TABLE>
<S> <C>
GARY D. LECLAIR, ESQ. MARK L. JOHNSON, ESQ.
BRADLEY A. HANEBERG, ESQ. JOHN D. HANCOCK, ESQ.
LECLAIR RYAN, A PROFESSIONAL CORPORATION FOLEY, HOAG & ELIOT LLP
707 EAST MAIN STREET, SUITE 1100 ONE POST OFFICE SQUARE
RICHMOND, VIRGINIA 23219 BOSTON, MASSACHUSETTS 02109
(804) 783-2003 (617) 832-1000
</TABLE>
----------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable on
or after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]_______
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] __________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] __________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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- - --------------------------------------------------------------------------------
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL SECURITIES, AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES, IN
ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED MARCH 18, 1999
[VALUE AMERICA LOGO]
5,000,000 SHARES
COMMON STOCK
Value America, Inc. is offering 5,000,000 shares of its common stock. This
is our initial public offering and no public market currently exists for our
shares. We have applied for approval for quotation of our common stock on the
Nasdaq National Market under the symbol "VUSA." We anticipate that the initial
public offering price will be between $15.00 and $17.00 per share.
---------------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 7.
---------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
----------- -------------
<S> <C> <C>
Public offering price .......................... $ $
Underwriting discounts and commission .......... $ $
Proceeds to Value America, Inc. ................ $ $
</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.
We and two of our executive officers have granted the underwriters a
30-day option to purchase up to an additional 750,000 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 , 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.
UNTIL , 1999, ALL DEALERS THAT BUY, SELL OR TRADE OUR COMMON STOCK,
WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS REQUIREMENT IS IN ADDITION TO THE DEALERS' OBLIGATION TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
----------------
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
Summary .............................................................................. 4
Risk Factors ......................................................................... 7
Use of Proceeds ...................................................................... 18
Dividend Policy ...................................................................... 18
Capitalization ....................................................................... 19
Dilution ............................................................................. 20
Selected Financial Data .............................................................. 22
Management's Discussion and Analysis of Financial Condition and Results of Operations 23
Business ............................................................................. 31
Management ........................................................................... 48
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>
----------------
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 leverage large
advertising and promotional investments of brand name manufacturers to 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 1550 Insurance Lane, Charlottesville, Virginia 22911, and our
telephone number is (804) 817-7700.
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by Value America ...................... 5,000,000 shares
Common stock to be outstanding after this offering ......... 42,934,862 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.
Proposed 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 March 15, 1999. This number excludes:
o 5,674,175 shares issuable upon the exercise of stock options outstanding,
or issuable under contracts, as of March 15, 1999 at a weighted average
exercise price of $6.53 per share,
o 575,825 shares reserved for issuance under our stock incentive plan as of
March 15, 1999 and
o 2,902,913 shares issuable upon the exercise of warrants outstanding as of
March 15, 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
------------------ ----------- ------------
<S> <C> <C> <C>
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 (2,463)
Net loss ....................................................... (425) (1,853) (53,356)
Net loss per share -- basic and diluted ........................ $ (0.02) $ (0.09) $ (2.79)
Weighted average number of shares -- basic and diluted ......... 22,500 22,616 23,154
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------------ ----------- ------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents ...................... $ 20,127 $83,747 $156,647
Working capital (deficit) ...................... (426) 68,595 141,595
Total assets ................................... 57,626 97,623 170,523
Long-term debt ................................. 83 83 83
Mandatorily redeemable preferred stock ......... 37,822 -- --
Total stockholders' (deficit) equity ........... (34,036) 72,807 145,707
</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 $4.2 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 $13.8 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 $7.5 million as
interest expense and $12.4 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 an assumed initial public offering price of $16.00 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 $53.4 million, and in 1997 we
incurred a net loss of $1.9 million. At December 31, 1998, we had an
accumulated deficit of $65.4 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 seriously harm our business.
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 March 15, 1999, the number of our full-time employees
increased from 30 to 290. 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 seriously harm our business.
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, THE QUALITY OF OUR CUSTOMER
SERVICE AND THE SPEED OF OUR PRODUCT FULFILLMENT COULD SUFFER
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
8
<PAGE>
product returns. If we fail to maintain and improve these systems, system
disruptions and slower response times may impair the quality of our customer
service and slow our product fulfillment.
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.
IF WE DO NOT ENHANCE OUR CUSTOMER SERVICE CAPABILITIES, WE COULD LOSE
CUSTOMERS AND DAMAGE OUR REPUTATION
If we fail to improve our customer service, we could lose customers,
damage our reputation and cause serious harm to our business. 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 could seriously harm our
business. 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. Any of these outcomes could seriously harm our business.
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WE DEPEND ON 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, our business could suffer serious
harm. 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 business.
We have agreed with The Union Labor Life Insurance Company to use
union-represented delivery services unless they are not reasonably available.
This agreement may limit our ability to use the most cost-effective or readily
available delivery services.
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YOU SHOULD NOT 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. 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 seriously harm our business.
WE DEPEND ON THE SERVICES OF A NUMBER OF KEY PERSONNEL
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,
o Glenda M. Dorchak, our President and Chief Operating Officer,
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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
harm our business.
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 harm our business.
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 harm our business.
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. Our
competitors or potential competitors include:
o online retailers that specialize in a limited variety 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!,
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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.
We believe that participants in our industry compete on the basis of the
following factors:
o breadth of product selection,
o quality of product brands,
o price,
o convenience,
o customer service,
o reliability and
o speed of order fulfillment.
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, 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 seriously harm our business.
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.
We may not compete effectively in this rapidly developing market, and our
failure to do so could seriously harm our business.
THE SECURITY RISKS OF ELECTRONIC COMMERCE MAY SERIOUSLY HARM OUR BUSINESS
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 could seriously harm our business. 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 harm our business.
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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
business could suffer serious harm 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.
We may be unable to adapt our business to this rapidly changing
environment, and our failure to do so could seriously harm our business.
THE ADMINISTRATIVE BURDENS OF COLLECTING ADDITIONAL TAXES MAY ADVERSELY AFFECT
OUR BUSINESS
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 could adversely affect our business.
WE MAY BE UNABLE TO PROTECT OUR PROPRIETARY TECHNOLOGY
Our business could be seriously harmed if we are unable to adequately
protect our proprietary 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 the "Value America" service mark in the United States
for limited uses and have applied to register that service mark in the United
States for several other uses. Our applications could be denied. 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 15, 1999, a party filed a lawsuit against us alleging violations of
federal trademark law, state law and common law. The party seeks monetary
damages 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
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offering our products and services without a license or other permission from
others. Any of these outcomes could seriously harm our business.
OUR MANAGEMENT AND DIRECTORS WILL CONTINUE TO CONTROL VALUE AMERICA
After we complete this offering, our executive officers, directors and
director-nominees and related persons will control 79.2% 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 could 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 ADVERSELY AFFECT OUR BUSINESS
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
or otherwise seriously harm our business.
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 adversely affect our business.
OUR SYSTEMS MAY NOT BE YEAR 2000 COMPLIANT
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, could reduce
our revenues or could otherwise seriously damage our business. In particular,
most of our business is dependent upon purchases made with credit cards via the
Internet, and our business could suffer if credit card vendors do not
adequately address Year 2000 concerns.
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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 5,000,000 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 ADVERSELY AFFECT STOCKHOLDERS
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
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 will not be
determined by market forces; rather, it will be 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,
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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.
Either of these outcomes could seriously harm our business.
WE WILL HAVE BROAD DISCRETION IN HOW WE USE OUR PROCEEDS FROM THIS OFFERING
We will have broad discretion in how we use our proceeds from this
offering. If we fail to apply these funds effectively, our business could
suffer serious harm.
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USE OF PROCEEDS
The net proceeds to Value America from the sale of the 5,000,000 shares of
common stock offered hereby are estimated to be $72.9 million ($84.1 million if
the underwriters' over-allotment option is exercised in full), assuming an
initial public offering price of $16.00 per share and after deducting estimated
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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CAPITALIZATION
The following table sets forth the capitalization of Value America as of
December 31, 1998.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------------- --------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Short-term debt ............................................................ $29,024,444 $ -- $ --
=========== ========= =========
Long-term debt ............................................................. $ 83 $ 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 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 outstanding pro forma and pro forma as adjusted ................ 23,382 -- --
----------- --------- ---------
Series C convertible preferred stock, without par value, 5% cumulative
dividend; 6,000,000 shares authorized pro forma; 0 shares issued and
outstanding actual, pro forma and pro forma as adjusted ................. -- -- --
----------- --------- ---------
Stockholders' equity (deficit):
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; 42,934,862
shares issued and outstanding, pro forma as adjusted .................... 7,482 142,097 214,997
Warrants ................................................................. 23,852 18,062 18,062
Accumulated deficit ...................................................... (65,370) (87,352) (87,352)
----------- --------- ---------
Total stockholders' equity (deficit) .................................. (34,036) 72,807 145,707
----------- --------- ---------
Total capitalization ................................................ $ 3,869 $ 72,890 $ 145,790
=========== ========= =========
</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 $4.2 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 $13.8 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 $7.5 million as
interest expense and $12.4 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 an assumed initial public offering price of $16.00 share and to the
receipt and application of the estimated net proceeds of this offering. See
"Use of Proceeds."
19
<PAGE>
DILUTION
The pro forma net tangible book value of Value America as of December 31,
1998 was approximately $72.9 million, or $1.93 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 $4.2 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 $13.8 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 $7.5 million as
interest expense and $12.4 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 (based
upon an assumed initial public offering price of $16.00 per share and after
deducting estimated 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 $145.8 million, or $3.40 per
share. This amount represents an immediate increase in pro forma net tangible
book value of $1.47 per share to existing stockholders and an immediate
dilution of $12.60 per share to new investors. The following table illustrates
this per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share ................................ $ 16.00
Pro forma net tangible book value per share as of December 31, 1998 .. $ 1.93
Increase per share attributable to new investors ..................... 1.47
-------
Pro forma net tangible book value per share after the offering ......... 3.40
--------
Dilution per share to new investors .................................... $ 12.60
========
</TABLE>
20
<PAGE>
The following table summarizes, on a pro forma as adjusted basis as of
December 31, 1998, after giving effect to:
o 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 an
assumed initial public offering price of $16.00 per share, which price does
not include estimated 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 88.4% $130,323,144 62.0% $ 3.44
New investors ................. 5,000,000 11.6 80,000,000 38.0 16.00
---------- ----- ------------ -----
Total ...................... 42,934,862 100.0% $210,323,144 100.0%
========== ===== ============ =====
</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.
21
<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 (2,463)
------- -------- ---------
Net loss ....................................................... $ (425) $ (1,853) $ (53,356)
======= ======== =========
Accretion and dividends on Series A and Series B
redeemable preferred stock .................................. -- (188) (11,159)
------- -------- ---------
Net loss available for common stockholders ..................... $ (425) $ (2,041) $ (64,515)
======= ======== =========
Net loss per common share -- basic and diluted ................. $ (0.02) $ (0.09) $ (2.79)
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 (426)
Total assets ................................... 144 10,994 57,626
Long-term debt ................................. -- 50 83
Mandatorily redeemable preferred stock ......... -- 9,466 37,822
Stockholders' deficit .......................... (275) (1,310) (34,036)
</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.
22
<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
23
<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 $346,000 write down of
inventory on hand 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
24
<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 $2.5 million for the year ended December 31, 1998
consisted primarily of the amortization of $2.0 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.
25
<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.
26
<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 (2,692)
-------- -------- -------- -------- --------- ---------
Net loss .................................. $(495) $ (1,000) $ (3,540) $ (9,835) $ (15,579) $ (24,402)
======= ======== ======== ======== ========= =========
</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.
27
<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 $28.1 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 $53.4 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
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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
include: computers, computer accessories, electronics and cameras, footwear,
general merchandise, health and beauty, home furnishings, home improvement,
housewares and gifts, jewelry and watches, major appliances, office products,
pharmaceuticals, 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 800 total 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: computers,
computer accessories, electronics and cameras, footware, general merchandise,
health and beauty, home furnishings, home improvement, housewares and gifts,
jewelry and watches, major appliances, office products, pharmaceuticals,
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 15, 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>
COMPUTER ACCESSORIES
3COM U.S. Robotics Communications
3M Ergonomic and Glare
Acer Scanners and Monitors
Altec Lansing Speakers
APC Power Supply
Boca Research Networking
Brother Printers and Copiers
Canon Printers, Copiers and Fax
Casio Digital Imaging
Creative Graphic and Sound
Cross Electronic Pad
CTX Monitors
Curtis Computer Accessories
Curtis Mathes Convergence
Diamond Video and Sound Cards
Epson Printers, Scanners and Fax
Fellowes Ergonomic, Cables and
Input
FujiFilm Imaging
Hewlett-Packard Printers, Drives and
Imaging
Hitachi Monitors
IBM Monitors and Modems
Imation Data Storage and Media
Iomega Data Storage Drives
Kensington Computer Accessories
Kingston Data
Kodak Writeable CDs
Lexmark Printers and Supplies
Microsoft Input Devices
Microtek Scanners
NEC Monitors and Printers
Nokia Monitors
Okidata Printers and Supplies
Panamax Surge Protection
Perfect Data Cleaning
Philips/Magnavox Monitors
Polaroid Anti-Glare Screens
Read Right Computer Care Products
Samsung Monitors
Smart Modular Modems
Sony Data Storage Media
Southland Micro Memory
Targus Computer Notebook Bags
Tripplite Surge Protection
UMAX Scanners
UUNet Internet Connection
Verbatim Data Storage Media
Viewsonic Monitors
Visioneer Scanners
</TABLE>
<TABLE>
<CAPTION>
BRANDS PRODUCTS
<S> <C>
COMPUTERS
Compaq:
Armada Notebook Computers
DeskPro Business Computers
Proliant Business Servers
ProSignia Business Servers
Hewlett-Packard:
Pavilion Home Computers
Vectra Business Computers
IBM:
Aptiva Home Computers
GL Series Business Computers
IntellStation Business Computers
Netfinity Business Servers
ThinkPad Notebook Computers
Mitsubishi Notebook Computers
NEC Desktop and Notebook PCs
Packard Bell Desktop and Notebook PCs
Palm Pilot Palm Top Computer
Panasonic Notebook Computers
Toshiba:
Libretto Palm Top Computers
Portege Notebook Computers
Satellite Pro Notebook Computers
Tecra Notebook Computers
ELECTRONICS & CAMERAS
Bazooka Speaker Systems
Canon 35mm Cameras
Casio Personal TVs
C-Phone Video Conferencing
Curtis Mathes Audio Device Convergence
Duracell Batteries
Epson Digital Cameras
Fisher Shelf Audio Systems
FujiFilm Digital and Film Cameras
General Electric Telephones
Hewlett-Packard Digital 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
Polaroid Instant and Digital
Cameras
RCA TVs and Camcorders
Sanyo Telephones
Sonance Wall Speakers
Sony Playstation Video Game Systems
Technics Audio Systems
</TABLE>
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<TABLE>
<CAPTION>
BRANDS PRODUCTS
<S> <C>
Toshiba TVs, VCRs, DVDs and
Phones
Zenith TV and VCR
FOOTWEAR
Georgio Brutini Men's Dress Shoes
Herman Survivor Footwear
Tretorn Athletic Footwear
Yukon Casual Shoes
GENERAL MERCHANDISE
Folgers Coffee
Francodex Pet Grooming
Ham I Am Specialty Meats
Hartmann Luggage
Hazel Briefcases
Jerbeau Chocolate Chocolate
J.W. Pet Pet Toys
Lazzaroni Desserts
Maurice Gerard Leather Bags
Midwest Pet Supplies
Millstone Coffee
Omaha Steaks Specialty Meats
PrevuePet Pet Travel Cages
Pringles Snack Food
Solo Luggage
Stebco Business Cases
Targus Computer Cases
Tobacco Source Cigars
HEALTH & BEAUTY AND PHARMACY
Alka Seltzer Stomach Remedy
Allergan Eye Care
Always Feminine Hygiene
Aspercreme Medicated Rubs
Aveeno Skin Care
Band-Aid First Aid and Bandages
Bayer Pain Relief
Benadryl Allergy Medication
Braun Small Appliances
Chloraseptic Respiratory
Clearasil Skin Care
Coast Personal Cleansing
Cortaid Itch and Rash Treatment
Cover Girl Cosmetics
Crest Toothpaste
Dramamine Motion Sickness
Doxidan Laxitive
Dreft Powder
Edge Shaving
Emetrol Nausea
First Aid Gauze
Fixodent Denture cleaner
Galaxy Wheelchairs
Ginkoba Dietary Supplement
Ginsana Dietary Supplement
Giorgio Fragrances
Head & Shoulders Hair Care
Herbal Essences Hair Care
Imodium Anti-Diarrheal
Intelligent Nutrition Vitamins
Ivory Personal Cleansing
Johnson & Johnson Health Care Products
</TABLE>
<TABLE>
<CAPTION>
BRANDS PRODUCTS
<S> <C>
Kaopectate Anti-Diarrheal
Lactaid Dairy Digestant
Listerine Oral Care
L'Oreal Hair Care
Lubriderm Lotion
Luvs Diapers and Wipes
Max Factor Cosmetics
Metamucil Laxative
Micatin Antifungal
Monistat 7 Health Care
Motrin Pain Relief
Movana Dietary
Murine Eye Care
Mylanta Antacid
Neosporin First Aid Creams
Neutrogena Skin and Hair Care
Nicoderm Stop Smoking
Nicorette Stop Smoking
Norelco Shavers
Noxzema Skin Care
Oil of Olay Skin Care
Old Spice Anti-Perspirant/Deodorant
Oral B Plaque Removal
Pampers Diapers and Wipes
Pantene Hair Care
PediaCare Baby Care
Pepcid AC Antacid
Pepto-Bismol Stomach Remedy
Pert Hair Care
Polo Fragrances
Polysporin First Aid
Progaine Hair Care
Puffs Facial Tissue
Robitussin Cough Remedies
Rogaine Hair Loss Preventative
Rolaids Stomach Care
Safeguard Personal Cleansing
Scope Mouthwash
Secret Anti-Perspirant/Deodorant
Selsun Blue Hair Care
Silk-Epil Hair Removal
Sinex Nasal Spray
Slimfast Diet Products
Sportscreme Skin Care
Sure Anti-Perspirant/Deodorant
Tampax Feminine Hygiene
Thermoscan Temperature Devices
Tylenol Pain Relief
Unicap Vitamins
Variel Portable Steam Baths
Vicks Formula 44 Respiratory
Vicks Vapo Rub Respiratory
Vidal Sassoon Hair Care
Vitasana Vitamins
Wings Fragrances
Zantac Health Care
Zest Personal Cleansing
HOME FURNISHINGS
American Heritage Ceiling Fans
Angelo Lighting
Beaulieu Floorcovering
</TABLE>
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<TABLE>
<CAPTION>
BRANDS PRODUCTS
<S> <C>
Bush Furniture
Dorel Futons and Beds
Fashion Bed Bedroom Furniture
Galaxy Adjustable Beds
Global Chairs and Desks
Heirloom Clocks
Holmes Lighting
InterMetro Shelving
Milliken Floorcoverings
N.D. Cass Juvenile
Oriental Weavers Floorcoverings
Pelonis Ceiling Fan Accessories
Replogle Decorative Accessories
Rose Hill Furniture
Seiko Clocks
Sunroca Casual Furniture
Vantage Point Entertainment
HOME IMPROVEMENT
3M Air Purifiers
Alsons Hand Held Showers
Amana Major Appliances
American Heritage Ceiling Fans
American Shower Bath Enclosures
Amerock Hardware
Ames Lawn and Garden
Angelo Lighting
AromaSpa Steam Bath
Black and Decker Power Tools
Bosch Power Tools
Campbell Hausfeld Generators and Power Tools
Chamberlain Garage Openers
Closetmaid Storage
Cooper Hand Tools
Cosco Step Stools
Culligan Water Purification
Crawford Ladders
DeLonghi Portable Heaters
Delta Faucets and Showers
Delta Power Tools
Design House Decorative Products
Dewalt Power Tools
Flexon Garden Hoses
Flowtron Lawn and Garden
Frost King Home Products
Garrity Flashlights
General Electric Major Appliances
Growmaster Tools
Holmes Heaters
Keller Ladders
Kidde Home Safety
Kindred Sinks
Kwikset Security Locks
Lighting America Electronic Lighting
Liteway Lighting
L.R. Nelson Lawn and Garden
Peerless Faucets and Shower
Pelonis Heaters
Pennington Seed Lawn and Garden
Pentair Power Tools
Plano Molding Tool Boxes
Porter Cable Power Tools
</TABLE>
<TABLE>
<CAPTION>
BRANDS PRODUCTS
<S> <C>
Reeleasy Hose Products
Satco Lighting
ShopoVac Wet-Dry Vacs
Skil Power Tools
Stack-On Tool Cabinets
Stanley/Whistler Door Openers
Step 2 Mail Boxes
Sunroca Outdoor Furniture
Wells Lamont Work Gloves
Weber Barbecue Grills
Weiser Lock Door Locks
HOUSEHOLD PRODUCTS
Bounce Fabric Softner
Bounty Paper Towels
Boyds Ultra Violet Car Care
Cascade Dish Care
Charmin Bath Tissue
Cheer Laundry Detergent
Comet Cleanser
Dawn Dish Care
Downy Conditioner
Dreft Laundry
Duracell Batteries
Febreze Air and Fabric Freshener
Gain Laundry Detergent
Ivory Dish Care
Joy Dish Care
Off Insect Control
Philips Lighting Lightbulbs
Ray-O-Vac Batteries
Simple Green Household Cleaning
Spic & Span Household Cleaning
Stack-On Storage Products
Tide Laundry Detergent
Westinghouse Specialty Lightbulbs
Windex Cleaning Products
Woolite Fabric Care
HOUSEWARES AND GIFTS
3M Housewares
Amana Major Appliances
Bissell Floor Care
Braun Small Appliances
Briel Espresso
Chantal Cookware
Chicago Cutlery Knives
Culligan Water Purification
DeLonghi Small Appliances
General Electric Major Appliances
General Housewares Housewares
Hoover Floor Care
KitchenAid Small Appliances
Norelco Kitchen Appliances
Nybro Fine Crystal
Panasonic Appliances
Philips Lignting and Appliances
Profile Microwave Ovens
Pur Water Purifiers
Safety 1st Juvenile Products
Sanyo Appliances
Seiko Clocks
</TABLE>
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<TABLE>
<CAPTION>
BRANDS PRODUCTS
<S> <C>
Sentry Fire Proof Safes
Sharp Kitchen Appliances
Singer Sewing Machines
SmartWater Water Purification
Springfield Thermometers and Clocks
Weber Barbecue Accessories
West Bend Kitchen Appliances
JEWELRY & WATCHES
Armitron Watches
Breitling Watches
Casio Sport Watches
Connoisseurs Jewelry Cleaning
Elgin Watches
Jacques Laurent Watches
Jules Jurgensen Fashion Watches
Lorus Watches
Movado Watches
Nobel Watches
Pulsar Watches
Seiko Watches
Swiss Army Knives and Watches
Wenger Knives and Watches
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
Bates Punches and Fasteners
BIC Pens and Pencils
BPI Office Furniture
Brother Word Processors, Fax
Machines and Printers
Bush Desks and Workstations
Canon Printer Supplies
Cardinal Binders and Portfolios
Casio Calculators
Champion International Office Paper
Charles Leonard Fasteners
Cross Writing Instruments
DayMinder Appointment Books
Day-Timer Dated Goods and
Organizers
Deskjet Printer Supplies
Duracell Batteries
Dymo Labelmakers
Eaton Papers and Envelopes
Eldon Desk Accessories
Epson Printer Supplies
Esselte Office Products
Fellowes Accessories
Fireking Fireproof Storage
Franklin Covey Dated Goods
</TABLE>
<TABLE>
<CAPTION>
BRANDS PRODUCTS
<S> <C>
GBC Quartet Presentation
Geobook Word Processors
Gillette Writing Instruments
Global Office Furniture
Great White Paper
Hammermill Paper
Hewlett Packard Paper and Printer
Accessories
Hi-Liter Highlighters
IBICO Binding
InterMetro Wire Furniture
Kensington Office Accessories
Laserjet Toner, Film and Paper
Lexmark Printing Products
Marks-a-Lot Markers
Martin Yale Mailroom Machines
Merriam-Webster Reference and Dictionaries
Newell Office Products
Officejet Ink Cartridges
Okidata Printer Supplies
Oxford Filing Systems
P-Touch Labeling Systems
Panasonic Telephones and
Transcribers
Parker Writing Instruments
Pelouze Postal and Stamp Machines
Pendaflex File Folders
Perma Storage Files
Plantronics Telephone Headsets
Polaroid Business Imaging Products
Post-It Adhesive Note Pads
Powershred Shredders
Quality Park Business Envelopes
Quartet Office Supplies
Rolodex Files and Organization
Rubbermaid Office Furniture
Safco Office Furniture
Sanford Writing Instruments
Sanyo Telephones
Schwab Safes and Storage
Scotch Adhesives and Tape
Sentry Safes and Storage
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
Targus Computer Cases
Tenex Desk Accessories
Texas Instruments Calculators
Tyvek Envelopes
Victor Calculators
Waterman Writing Instruments
Wilson Jones Binders, Shredders and
Files
Wite-Out Correction Supplies
</TABLE>
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<TABLE>
<CAPTION>
BRANDS PRODUCTS
<S> <C>
SOFTWARE
3DO Entertainment
Activision Entertainment
Adobe Graphic
Blizzard Entertainment
Block Financial
Bungie Entertainment
Corel Productivity
Cybermedia Productivity
Day-Timer Organizational
Disney Entertainment
Dragon Voice Recognition
Dr. Solomon Productivity
EIDOS Entertainment
Encarta Reference
Filemaker Organizational
Hasbro Entertainment
Interplay Entertainment
Maxis Entertainment
Microsoft:
Magic School Bus Entertainment
Office 97 Business
Windows 98 Operating
Windows NT Business Operating
SPORTING GOODS
Adams Football Equipment
Adams Tight Lies Golf Clubs
Air Football Equipment
All-Star Football Equipment
American Camper Camping 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
Healthrider Exercise Equipment
Huffy Bicycles
King Cobra Golf Clubs
MacCabee Camping Equipment
Maxfli Golf Balls
</TABLE>
<TABLE>
<CAPTION>
BRANDS PRODUCTS
<S> <C>
Odyssey Putters
Ping Putters
Pinnacle Golf Balls
Pro Athletic Supports
Proform Exercise
Quantum Fishing Equipment
Ram Golf Golf Clubs and Children's
Golf
Rawlings Sporting Goods
Riddell Football
Mikasa Volleyballs
Mitre Soccer Shoes
Neumann Sports Gloves
Puma Sports Accessories
Reusch Sporting Gloves
Spalding Sporting Goods
Tachikara Volleyballs
Taylor Made Golf Clubs
TearDrop Golf Golf Equipment
Titleist Golf Clubs and Balls
Top-Flite Golf Balls
Wenger Knives
Wilson Sporting Goods
World Sports In-Line Skates
Zebco Fishing Equipment
TOYS & GAMES
Baby Jogger Jogging Stroller
Barbie Entertainment Software
Disney Software
Flexible Flyer Sleds
Fundex Games Family Games
Galoob Toys Toys
Hasbro Software
Hedstrom Swing Sets
Huffy Bicycles
Kiddesigns Toys
Mega Bloks Toys
Microsoft Software
Sierra Software
Team Concepts Children's Computers
World Sports In-Line Skates
Zebco Children's Fishing Gear
</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
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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.
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 225,000 as of March 1, 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
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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. 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 some or all of their
employees unless such shipping arrangements are not reasonably 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
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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 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
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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 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 a registered service mark for "Value America" and
two other variations of such name. Value America also owns six pending
applications for federal service mark registration of other variations 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
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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.
Value America believes that its trademarks, software and other proprietary
rights do not infringe on the proprietary rights of third parties. On March 15,
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 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.
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 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
45
<PAGE>
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 March 15, 1999, Value America had 290 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 19 were in advertising and promotion,
o 66 were in sales and customer service,
o 44 were in operations and fulfillment,
o 9 were in finance and human resources and
o 23 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.
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 15, 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
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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 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.
47
<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 March 15,
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 (1) 44 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 (2) 43 Director
John L. Motley III 48 Director
Michael R. Steed (2) 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
Sandra T. Watson 42 Senior Vice President -- Finance and Controller
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) Mr. Harris is expected to begin employment with Value America on or about
March 26, 1999.
(2) 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 Code, and in July 1994 it ceased being a publicly traded
company. Relying on his experience with Dynasty,
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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.
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.
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.
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 is expected to join Value America on or about March 26,
1999 as an Executive Vice President. Mr. Harris has spent more than 19 years
with Costco Wholesale, where he most recently served as Vice President --
Operations from November 1993 to March 1999. Mr. Harris received a B.S. in
Finance from San Diego State University.
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
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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.
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 President and 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
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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.
SANDRA T. WATSON has been Senior Vice President -- Finance since March
1998 and Controller since November 1997. From August 1993 to August 1997, Ms.
Watson was financial and regulatory manager for CFW Cable, Inc. a wireless
cable television company, and the controller of Charlottesville Quality Cable,
a company acquired by the parent-corporation of CFW Cable, Inc. From July 1979
to August 1993, she was at Coopers & Lybrand, most recently as Audit Manager.
Ms. Watson is a certified public accountant. She received a B.B.A. from the
College of William & 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 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.
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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.
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
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<PAGE>
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 ("Separate Account
P"). 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.
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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 $225,000 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.
Paul F. Ewert joined Value America in March 1999 as its Senior Vice
President and President -- Technology Products Division. Mr. Ewert's current
salary is $280,000 per year. See " -- Employment Arrangements" for a
description of Mr. Ewert's employment arrangement.
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<PAGE>
Thomas Morgan joined Value America in March 1999 as its Chief Executive
Officer. Mr. Morgan's current salary is $395,000 per year. See " -- Employment
Arrangements" for a description of Mr. Morgan's employment arrangement.
Neal B. Harris is expected to join Value America on or about March 26,
1999 as an Executive Vice President. Mr. Harris' salary will be $295,000 per
year. See " -- Employment Arrangements" for a description of Mr. Harris'
employment arrangement.
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>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
---------------------------------------------------------- ANNUAL RATES OF STOCK
NUMBER OF PERCENT OF
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 15.4% $ 10.16 2008 $2,076,610 $5,262,538
</TABLE>
Value America granted options to three additional executive officers in
March 1999. Value America granted Thomas Morgan options to purchase an
aggregate of 350,000 shares of common stock. These options have an exercise
price of $15.00 per share and expire on February 28, 2009. At an assumed annual
rate of stock price appreciation of 5%, these options possess a potential
realizable value of $3,301,697. At a 10% assumed rate, the options have a
potential realizable value of $8,367,148. Value America also granted Paul F.
Ewert options to purchase an aggregate of 200,000 shares of common stock. These
options have an exercise price of $15.00 per share and expire on February 28,
2009. At an assumed annual rate of stock price appreciation of 5% these options
possess a potential realizable value of $1,886,684. At a 10% assumed rate, the
options possess a potential realizable value of $4,781,227. Value America
contemplates granting Neal B. Harris, on his initial date of employment,
options to purchase an aggregate of 325,000 shares of common stock. These
options will have an exercise price of $15.00 per share and will expire on
February 28, 2009. At an assumed annual rate of stock price appreciation of 5%,
these options will possess a potential realizable value of $3,065,861. At a 10%
assumed rate, the options will possess a potential realizable value of
$7,769,494.
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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 assumed initial public offering price of
$16.00 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 -- $1,898,000
Dean M. Johnson ........... 105,000 120,000 $1,504,650 1,719,600
Rex Scatena ............... -- -- -- --
Joseph L. Page ............ 342,852 521,523 5,286,778 8,041,885
</TABLE>
Thomas Morgan received options to purchase an aggregate of 350,000 shares
of common stock in March 1999. These options are currently unexercisable and,
assuming an initial public offering price of $16.00 per share, have a value of
$350,000. 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, assuming an initial public offering price of $16.00 per share, have a
value of $200,000. Value America contemplates granting Neal B. Harris, on his
initial date of employment, options to purchase an aggregate of 325,000 shares
of common stock. At the time of grant, these options will be unexercisable and,
assuming an initial public offering price of $16.00 per share, will have a
value of $325,000.
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
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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.
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.
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<PAGE>
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 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
58
<PAGE>
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
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 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.
59
<PAGE>
Thomas Morgan joined Value America in March 1999 as its Chief Executive
Officer. Mr. Morgan currently receives a salary of $395,000 per year. Value
America and Mr. Morgan are currently negotiating an employment agreement.
Value America and Glenda M. Dorchak, President and Chief Operating Officer
of Value America, entered into an employment agreement as of October 5, 1998
pursuant to which Ms. Dorchak accepted the positions of President and Chief
Operating Officer. Under the agreement, Ms. Dorchak receives a salary at the
rate of $250,000 per year until December 31, 1999 and will receive a salary of
at least $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 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 November 13, 1997. The agreement has a term of two years and
renews automatically for additional periods of one year until either party
gives notice of non-renewal at least 30 days before the expiration date of the
agreement. Value America agreed to pay Mr. Johnson a salary of $100,000 per
year, subject to adjustment at any time in the sole discretion of Value
America. Value America increased Mr. Johnson's annual salary to $225,000 as of
September 1, 1998. Mr. Johnson is generally entitled to participate in any
employee benefit plans from time to time in effect for all employees. The
agreement provides that, in the event of Mr. Johnson's death, Value America
will pay his beneficiary or his estate an amount equal to one month's salary.
Mr. Johnson may terminate his employment under the agreement by giving 30 days'
notice to Value America. Value America may terminate Mr. Johnson's employment
immediately with or without cause by giving him written notice of termination.
If Mr. Johnson is an officer of Value America on the date of his termination,
he will be entitled to 30 days' salary and, if Value America does not waive Mr.
Johnson'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 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.
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Mr. Scatena's current 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.
Paul F. Ewert joined Value America in March 1999 as its Senior Vice
President and President -- Technology Products Division. Mr. Ewert currently
receives a salary of $280,000 per year. Value America and Mr. Ewert are
currently negotiating an employment agreement.
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 entered into an employment agreement as
of March 15, 1999. Under the agreement, Mr. Harris is expected to begin
employment with Value America on or about March 26, 1999 as an Executive Vice
President at a salary at the rate of $295,000 per year, subject to annual
increases, if any. 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
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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.
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 a Revolving Loan Agreement, dated October 14, 1998, as amended
and restated from time to time, 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
including Gary Winnick and Thomas Casey 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.
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 March 15, 1999, and
as adjusted to reflect the sale of the 5,000,000 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,
including Neal B. Harris, who is expected to join Value America before the
closing of this offering.
<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% 35.3%
Rex Scatena (2) .......................................... 6,562,200 17.3 15.3
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 19.0
Michael R. Steed (7) ..................................... 3,544,229 9.3 8.2
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 18.9
The Union Labor Life Insurance Company (13) .............. 3,544,229 9.3 8.2
FDX Corporation (14) ..................................... 650,000 1.7 1.5
All executive officers, directors and director-nominees as
a group (15 persons) (15) ............................... 36,709,399 88.7 79.2
</TABLE>
- - ----------
* Less than one percent (1%)
(1) The address of Mr. Winn is c/o Value America, Inc., 1550 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., 1550 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., 1550 Insurance Lane,
Charlottesville, Virginia 22911. Includes 514,278 shares of common stock
underlying options exercisable within 60 days of March 15, 1999.
(4) The address of Mr. Johnson is c/o Value America, Inc., 1550 Insurance Lane,
Charlottesville, Virginia 22911. Includes 105,000 shares of common stock
underlying options exercisable within 60 days of March 15, 1999, 30,000
shares of common stock underlying warrants exercisable within 60 days of
March 15, 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., 1550 Insurance Lane,
Charlottesville, Virginia 22911.
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(6) Includes 6,476,861 shares of common stock and 2,009,201 shares of common
stock underlying warrants exercisable within 60 days of March 15, 1999
held of record by Vulcan Ventures Incorporated ("Vulcan"). Mr. Savoy is
the Vice President of Vulcan. Mr. Savoy's address is c/o Vulcan Northwest
Inc., 110 110th Avenue Northeast, Suite 550, Bellevue, Washington 98004.
(7) Consists of 3,389,854 shares of common stock and 154,375 shares of common
stock underlying warrants exercisable within 60 days of March 15, 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 March 15, 1999.
(9) Includes 55,002 shares of common stock underlying options exercisable
within 60 days of March 15, 1999 and 30,000 shares of common stock
underlying warrants exercisable within 60 days of March 15, 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
March 15, 1999 held of record by FDX Corporation, a Delaware 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 2,009,201
shares of common stock underlying warrants exercisable within 60 days of
March 15, 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 March 15,
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 March 15, 1999.
(15) Includes 899,280 shares of common stock underlying options exercisable
within 60 days of March 15, 1999 and 2,424,384 shares of common stock
underlying warrants exercisable within 60 days of March 15, 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 March 15, 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 March 15, 1999, which figure includes shares converted from the
convertible preferred stock upon the closing of this offering, and 42,934,862
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 333,333 and 133,333 shares of common stock, respectively,
solely to cover over-allotments. If the underwriters exercise the
over-allotment option in full, Mr. Winn will beneficially own 14,813,979 shares
of common stock, or 34.5% of the common stock outstanding after this offering,
and Mr. Scatena will beneficially own 6,428,867 shares of common stock, or
15.0% 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, 5,000,000 shares of Series A convertible preferred
stock, 617,979 shares of Series B convertible preferred stock and 5,000,000
shares of Series C convertible preferred stock. Upon the closing of this
offering, all of the outstanding shares of Series A, Series B and Series C
convertible preferred stock will automatically convert into shares of common
stock.
The following summary of certain provisions of the common stock does not
purport to be complete and is subject to, and qualified in its entirety by,
Value America's articles and bylaws and the provisions of applicable law.
COMMON STOCK
As of March 15, 1999, and assuming events that will occur immediately
prior to the closing of this offering, there were 37,934,862 shares of common
stock outstanding that were held of record by 118 stockholders and there were
options and warrants outstanding, or issuable under contracts, to purchase an
aggregate of 5,674,175 shares and 2,902,913 shares of common stock,
respectively. See "Management -- Stock Incentive Plan" and "Description of
Capital Stock -- Warrants." Based on the number of shares of common stock
outstanding as of March 15, 1999, there will be 42,934,862 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.
WARRANTS
As of March 15, 1999, and assuming events that will occur immediately
prior to the closing of this offering, there were outstanding warrants to
purchase an aggregate of 2,902,913 shares of common stock that were held of
record by 76 persons.
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
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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 $21.2 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.
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.
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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 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,
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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 March 15, 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,
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.
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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%.
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
72
<PAGE>
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 has applied to have its common stock approved for quotation
on the Nasdaq National Market under the proposed symbol "VUSA."
73
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, Value America will have 42,934,862
shares of common stock outstanding, based on shares outstanding on March 15,
1999. Of the outstanding shares, the 5,000,000 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 328,897 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 March 15, 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.
74
<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. .........
Volpe Brown Whelan & Company, LLC ..........
The Robinson-Humphrey Company, LLC .........
Total ................................... 5,000,000
=========
</TABLE>
The representatives have 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 $ per share, of which $ may
be reallowed to other dealers. After the initial public offering, the public
offering price, concession and reallowance to dealers may be reduced by the
representatives. No such reduction shall change the amount of proceeds to be
received by 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"), and Value America have granted to the
underwriters an option, exercisable during the 30-day period after the date of
this prospectus, to purchase up to 750,000 additional shares of common stock at
the same price per share as Value America will receive for the 5,000,000 shares
that the underwriters have agreed to purchase. To the extent that the
underwriters exercise such option, each of the underwriters will have a firm
commitment to purchase approximately the same percentage of such additional
shares that the number of shares of common stock to be purchased by it shown in
the above table represents as a percentage of the 5,000,000 shares offered
hereby. If purchased, such additional shares will be sold by the underwriters
on the same terms as those on which the 5,000,000 shares are being sold. The
selling stockholders and Value America 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 5,000,000 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 ............................... $ $ $
Underwriting discounts and commissions .............. $ $ $
Proceeds, before expenses, to Value America ......... $ $ $
Proceeds to selling stockholders .................... $ $ -- $
</TABLE>
The expenses of the offering are estimated at $1.5 million and are payable
entirely by Value America. BancBoston Robertson Stephens Inc. expects to
deliver the shares of common stock to purchasers on , 1999.
75
<PAGE>
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.
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."
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 will be determined through negotiations between
Value America and the representatives. Among the factors to be considered in
such negotiations are 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.
76
<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
<PAGE>
(This Page Intentionally Left Blank)
<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 .................................................... -- 23,623,324 --
Inventory .............................................................. -- 639,613 639,613
Other current assets ................................................... 7,128 -- --
------------ ------------- -------------
TOTAL CURRENT ASSETS .................................................. 10,806,120 52,400,607 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 $ 57,625,900 $ 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
(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 (0 in 1997 and
pro forma); redeemable for $60.94 per share ........................... -- 23,381,772 --
Series C, without par value, convertible, 5% cumulative dividend;
6,000,000 shares authorized pro forma, (0 issued and outstanding
1997, 1998 and pro forma); redeemable for $20.00 per share ............ -- -- --
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, no par value, 100,000 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) 7,481,718 142,096,696
Warrants ............................................................... 23,852,818 18,062,464
Accumulated deficit .................................................... (854,951) (65,370,397) (87,352,048)
------------ ------------- -------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) .................................. (1,310,451) (34,035,861) 72,807,112
------------ ------------- -------------
TOTAL LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT) ....................................... $ 10,994,078 $ 57,625,900 $ 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 (2,463,149)
------------ ---------- ------------
NET LOSS ............................................ (425,074 ) (1,853,259 ) (53,355,693)
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 ) $(64,515,446)
============ =============== =============
NET LOSS PER COMMON SHARE:
Basic .............................................. $ (0.02) $ (0.09 ) $ (2.79)
============ =============== =============
Diluted ............................................ $ (0.02) $ (0.09 ) $ (2.79)
============ =============== =============
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 ........................... -- -- 23,852,818 -- 23,852,818
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 ........................... -- -- -- (53,355,693) (53,355,693)
---------- ---------- ----------- -------------- --------------
BALANCE, DECEMBER 31, 1998 ......... 23,777,700 $7,481,718 $23,852,818 $(65,370,397) $(34,035,861)
========== ========== =========== ============== ==============
</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) $ (53,355,693)
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 ................................. -- -- 2,017,344
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 issurance 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 .............................. $ -- $ -- $ 24,192,059
========= ============= =============
</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 $4.2 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 $13.8 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 $7.5
million as interest expense and $12.4 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 years ended December 31, 1996, 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 $23.9 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 $23.6 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 $2.0 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
Value America has reserved for issuance 25,000,000, no par value, shares
of preferred stock. Through December 31, 1998, 5,617,979 shares of preferred
stock were issued and outstanding (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) $ (53,355,693)
============ =============
Pro forma .............................. $ (1,855,509) $ (53,427,490)
============ =============
NET LOSS PER SHARE:
As reported, basic and diluted ......... $ (0.09) $ (2.79)
============ =============
Pro forma, basic and diluted ........... $ (0.09) $ (2.79)
============ =============
</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 31, 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) $ (53,355,693)
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) $ (64,515,446)
=========== ============= ==============
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) $ (2.79)
=========== ============= ==============
</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 $19.9 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 $49.7 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 18,899,116
Other .................................... 5,700 167,890
---------- -------------
Gross deferred tax assets ................ 651,493 20,746,747
Tax liabilities:
Depreciation ............................. -- (193,879)
---------- -------------
Gross deferred tax liabilities ........... -- (193,879)
Net deferred tax asset ................... 651,493 20,552,868
Valuation allowance ....................... (651,493) (20,552,868)
---------- -------------
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 $65.0 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 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 stock, based upon
their relative fair values. Upon conversion of the Series C 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 stock's beneficial conversion
feature of $13.8 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>
[GRAPHIC OMITTED]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all expenses, other than underwriting
discounts and commissions, payable by Value America in connection with the sale
of the common stock being registered. All amounts shown are estimates, except
for the Securities and Exchange Commission registration fee, the National
Association of Securities Dealers, Inc. fee and the Nasdaq National Market
filing fee. Value America will pay all expenses, other than underwriting
commissions and discounts, related to any sale of shares by the Selling
stockholders.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee ................. $ 27,175
National Association of Securities Dealers, Inc. filing fee ......... 10,275
Nasdaq National Market fee .......................................... 95,000
Accounting fees and expenses ........................................ 600,000
Legal fees and expenses ............................................. 500,000
Printing and engraving expenses ..................................... 200,000
Blue sky fees and expenses .......................................... 20,000
Transfer agent and registrar fees and expenses ...................... 10,000
Miscellaneous ....................................................... 27,550
----------
Total .............................................................. $1,500,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Value America's articles of incorporation implement the provisions of the
Virginia Stock Corporation Act which provide for the indemnification of Value
America's directors and officers in a variety of circumstances, which may
include indemnification for liabilities under the Securities Act. Under Sections
13.1-697 and 13.1-702 of the Virginia Stock Corporation Act, a Virginia
corporation generally is authorized to indemnify its directors and officers in
civil and criminal actions if they acted in good faith and believed their
conduct to be in the best interests of the corporation and, in the case of
criminal actions, had no reasonable cause to believe that the conduct was
unlawful. Value America's Articles of Incorporation require indemnification of
directors and officers with respect to certain liabilities, expenses and other
amounts imposed upon them by reason of having been a director or officer, except
in the case of willful misconduct or a knowing violation of criminal law. In
addition, as permitted by the Virginia Stock Corporation Act, Value America's
articles of incorporation eliminate the liability of a director or officer in a
stockholder or derivative proceeding. This elimination of liability will not
apply in the event of willful misconduct or a knowing violation of the criminal
law or any federal or state securities law.
Value America has purchased officers' and directors' liability insurance
policies. Within the limits of their coverage, the policies insure (a) the
directors and officers of Value America against certain losses resulting from
claims against them in their capacities as directors and officers to the extent
that such losses are not indemnified by Value America and (b) Value America to
the extent that it indemnifies such directors and officers for losses as
permitted under the Virginia Stock Corporation Act.
The underwriting agreement contains provisions by which the underwriters
have agreed to indemnify Value America, each person, if any, who controls Value
America within the meaning of Section 15 of the Securities Act of 1933, each
director of Value America, and each officer of Value America who signs this
Registration Statement, with respect to information furnished in writing by or
on behalf of the underwriters for use in this Registration Statement.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since March 13, 1996, Value America's date of incorporation, Value America
has sold and issued the following unregistered securities:
II-1
<PAGE>
(1) On May 24, 1996, Value America issued an aggregate of 19,125,000
shares of common stock to Craig A. Winn, Value America's Chairman, and
Rex Scatena, Value America's Vice Chairman and General Counsel, for an
aggregate of $127,500.
(2) On August 13, 1996, Value America issued an aggregate of 3,375,000
shares of common stock to Mr. Winn and Mr. Scatena for an aggregate of
$22,500.
(3) On November 13, 1997, Value America completed the issuance of an
aggregate of 427,500 shares of common stock and warrants to purchase an
aggregate of 213,750 shares of common stock to a total of 14 accredited
investors. Value America issued the shares of common stock at $1.50 per
share and the warrants at $0.33 per warrant. In addition, Value America
issued 150,000 shares of common stock to a single, accredited investor
at $1.67 per share.
(4) On December 17, 1997, Value America issued 5,000,000 shares of Series
A preferred stock to The Union Labor Life Insurance Company pursuant to
the terms of a Preferred Stock Purchase Agreement of even date
therewith. The aggregate purchase price of the Series A preferred stock
was $10,000,000. In connection with this transaction, Value America
paid a $500,000 finder's fee to one of Value America's existing
shareholders.
(5) On June 24, 1998, Mr. Winn sold 288,321 shares of common stock to a
single investor for $2,000,000 or $6.94 per share.
(6) On June 26, 1998, Value America issued an aggregate of 617,979 shares
of Series B preferred stock to 18 accredited investors (collectively,
the "Series B Investors") pursuant to a Preferred Stock Purchase
Agreement of even date therewith. The aggregate purchase price of the
Series B preferred stock was $18,829,894 or $30.47 per share. In
connection with such offering, Mr. Winn and Mr. Scatena sold an
aggregate of 617,979 shares of common stock to certain of the Series B
Investors for an aggregate purchase price of $6,276,607 or $10.16 per
share.
(7) On July 1, 1998, Mr. Winn sold an aggregate of 28,350 shares of common
stock to three investors for an aggregate of $289,942 or $10.16 per
share.
(8) On or about December 31, 1998, Value America issued an aggregate of
645,200 shares of common stock and warrants to purchase an aggregate of
118,320 shares of common stock to 62 accredited investors. These
investors paid an aggregate of $6,452,000 for these securities.
(9) Pursuant to a Revolving Loan Agreement dated October 14, 1998, as
amended and restated from time to time, ULLICO and certain participants
loaned Value America an aggregate of $34.0 million. In connection with
this loan, Value America issued ULLICO and the participants warrants to
purchase an aggregate of 4,133,000 shares of common stock. Upon the
closing, and subject to the payment by Value America of all accrued
interest thereon, 3,400,000 of these warrants, each with an exercise
price of $10.00 per share, will be automatically exercised in
consideration for the cancellation of the principal amount of Value
America's underlying debt.
(10) On January 15, 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 three accredited investors for an aggregate purchase price of
$60,000,000. In addition, in connection with this offering, Value
America issued warrants to purchase 511,567 shares of common stock to
certain of its existing investors.
(11) Value America has issued an aggregate of 5,896,430 options to purchase
common stock with exercise prices ranging from $0.58 to $16.00 per
share under the stock incentive plan.
The offers and sales of securities in the above transactions were deemed
to be exempt under the Securities Act by virtue of Section 4(2) thereof and/or
Regulation D and/or Rule 701 promulgated thereunder as transactions not
involving any public offering.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following exhibits are filed herewith:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- - ---------- ----------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement
3.1 Articles of Incorporation of Value America, as amended*
3.2 Amended and Restated Bylaws of Value America*
4.1 Form of Common Stock Certificate*
5.1 Opinion of LeClair Ryan, A Professional Corporation**
10.1 Consent Agreement, dated as of December 3, 1997, by and between Value America
and Stephen S. Freedman relating to the mark "Value America"*
10.2 Agreement, dated as of December 3, 1997, by and between Stephen S. Freedman
and Value America relating to the mark "Value America," with Personal Guaranty of
Rex and Jane Scatena*
10.3 Lease, dated as of September 17, 1997, by and between 2300 Commonwealth
Building and Value America relating to property located at 2300 Commonwealth
Drive, Charlottesville, Virginia*
10.4 Tenant Lease, dated as of March 16, 1998, by and between Preston O. Stallings and
Value America relating to property located at 2340 Commonwealth Avenue, Suites
102, 103 and B-1, Charlottesville, Virginia*
10.5 Lease Agreement, dated as of June 26, 1998, by and between Charles W. Hurt and
Value America relating to property located at 1524 Insurance Lane, 1534 Insurance
Lane, 1540 Insurance Lane, 1550 Insurance Lane, and 1560 Insurance Lane,
Charlottesville, Virginia*
10.6 Professional Services Agreement, executed by Value America on February 11, 1998,
by and between Business Data Services, Inc. and Value America*
10.7 Loan Agreement, executed by Value America on April 8, 1998, by and between
Jefferson National Bank (predecessor of Wachovia Bank, N.A.) and Value America*
10.8 Assignment, Pledge and Subordination Agreement, dated as of April 16, 1998, by
and among First Data Merchant Services Corp. Wachovia Bank, N.A. and Value
America*
10.9 Bank Asset Collateral Agreement and Limited Power of Attorney, dated as of
March 23, 1998, by and among Deutsche Financial Services Corporation, Jefferson
National Bank (predecessor of Wachovia Bank, N.A.) and Value America*
10.10 Warrant, dated November 20, 1997 to purchase 10,000 shares of common stock of
Value America issued to Dean M. Johnson*
10.11 Warrant, dated December 31, 1998 to purchase 3,000 shares of common stock of
Value America issued to Glenda M. Dorchak*
10.12 Warrant, dated December 31, 1998 to purchase 3,000 shares of common stock of
Value America issued to Richard L. Gerhardt*
10.13 Warrant, dated January 15, 1999 to purchase 473,724 shares of common stock of
Value America issued to Vulcan Ventures Incorporated*
10.14 Form of Type A warrant to purchase shares of common stock of Value America
(description of warrant included in note 13 to notes to financial statements)*
10.15 Form of Type B warrant to purchase shares of common stock of Value America
(description of warrant included in note 13 to notes to financial statements)*
10.16 Form of Type C and Type D warrants to purchase shares of common stock of Value
America (description of warrants included in note 13 to notes to financial
statements)*
10.17 Form of Type F warrant to purchase shares of common stock of Value America
(description of warrant included in note 13 to notes to financial statements)*
10.18 Employment Agreement, dated as of April 1, 1996, by and between Joseph L. Page
and Value America, Inc., a Nevada corporation (predecessor of Value America)*
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- - ------------ ---------------------------------------------------------------------------------
<S> <C>
10.19 Employment Agreement, dated as of August 1, 1997, by and between John L.
Motley, Director and Value America, Inc., a Nevada corporation (predecessor of
Value America)*
10.20 Employment Agreement, dated as of November 13, 1997, by and between Dean M.
Johnson and Value America*
10.21 Employment Agreement, dated as of October 5, 1998, by and between Value
America and Glenda M. Dorchak*
10.22 Employment Agreement, dated as of January 19, 1999, by and between Value
America and Craig A. Winn*
10.23 Employment Agreement, dated as of January 19, 1999, by and between Value
America and Rex Scatena*
10.24 Form of Developments, Noncompete and Nondisclosure Agreement, by and between
Value America and each of Value America's employees*
10.25 1997 Stock Incentive Plan adopted on August 1, 1997 by Value America, Inc., as
amended
10.26 Registration Rights Agreement, dated as of June 3, 1998, by and between Value
America and Capital Advisers, L.L.C.*
10.27 Registration Rights Agreement, dated as of November 17, 1998, by and among
Value America and The Union Labor Life Insurance Company, acting on behalf of
its Separate Account P, as amended*
10.28 Second Amended and Restated Registration Rights Agreement, dated as of
January 12, 1999, by and among Value America and those entities and individuals
listed on Annex A thereto*
10.29 Amended and Restated Stockholders Agreement, dated as of June 26, 1998, by and
among Value America, Craig A. Winn, Director, Rex Scatena, Director, Crystal
Investments, L.L.C. Frostine, L.L.C. and the holders of Value America's Series A
preferred stock and Value America's Series B preferred stock, as amended*
10.30 Consulting Agreement, dated as of November 18, 1998, by and between Value
America and The Union Labor Life Insurance Company, acting on behalf of its
Separate Account P*
10.31 Voting Agreement, dated as of June 26, 1998, by and among Value America,
Craig A. Winn, Director, Rex Scatena, Director, Crystal Investments, L.L.C.,
Frostine, L.L.C. and the holders of Value America's Series B preferred stock*
10.32 Preferred Stock Purchase Agreement, dated as of December 17, 1997, by and
between The Union Labor Life Insurance Company, acting on behalf of its Separate
Account P and Value America, as amended*
10.33 Preferred Stock Purchase Agreement, dated as of June 26, 1998, by and among
Value America and those entities and individuals listed on Annex A thereto, as
amended*
10.34 Preferred Stock and Warrant Purchase Agreement, dated as of January 12, 1999, by
and among Value America, Vulcan Ventures Incorporated, FDX Corporation and
Frederick W. Smith*
10.35 Stock Purchase Agreement, dated as of June 26, 1998, by and among Craig A.
Winn, Director, Rex Scatena, Director, The Union Labor Life Insurance Company,
acting on behalf of its Separate Account P, United Association of Journeyman and
Apprentices of the Plumbing and Pipefitting Industry of the United States and
Canada, General Fund, and The Annette M. and Theodore N. Lerner Family
Foundation*
10.36 Product Listing Agreement, dated October 8, 1997, by and between Toshiba
America Information Systems and Value America*
10.37 Product Listing Agreement, dated June 3, 1997, by and between Toshiba America
Information Systems and Value America*
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- - ------------ -----------------------------------------------------------------------------------
<S> <C>
10.38 Category Presentation Agreement, dated January 21, 1998, by and between IBM and
Value America*
10.39 Product Listing Agreement, dated April 16, 1997, by and between Hewlett-Packard
and Value America*
10.40 Employment Agreement, dated as of March 15, 1999, by and between Value
America and Neal B. Harris
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of LeClair Ryan, A Professional Corporation (included in Exhibit 5.1)**
24.1 Power of Attorney*
27.1 Financial Data Schedule
99.1 Letter, dated January 21, 1998, from Value America to Mr. Robert A. Bayless, Chief
Accountant of the Division of Corporation of the Securities and Exchange
Commission, relating to Value America's revenue recognition for product sales*
99.2 Agreement, dated March 15, 1999, by and among Craig A. Winn, Rex Scatena and
Neal Harris
</TABLE>
- - ----------
* Filed previously.
** To be filed by amendment.
(b) The following financial statement schedules are filed herewith:
All financial statement schedules have been omitted because they are not
required, are not applicable or the information is included in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS.
The undersigned hereby undertakes to provide to the underwriters at the
closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 14 above, or
otherwise, the Registrant has been advised that in the opinion of the SEC such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities, other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The undersigned hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1)
or (4) or 497(h) under the Securities Act shall be deemed to be part of
this Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Amendment No. 1 to this Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the city of
Charlottesville, Commonwealth of Virginia, on the fifteenth day of March, 1999.
VALUE AMERICA, INC.
By: -------------------------------
Dean M. Johnson
Executive
Financial Officer and Secretary
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below on the fifteenth day of March,
1999, by the following persons in the capacities indicated.
<TABLE>
<CAPTION>
NAME TITLE
- - ------------------------------------ -------------------------------------
<S> <C>
Chief Executive Officer (Principal
- - -----------------------------------
THOMAS MORGAN Executive Officer)
Executive Vice President,
- - -----------------------------------
DEAN M. JOHNSON Chief Financial Officer
(Principal Financial Officer),
Secretary and Director
Senior Vice President -- Finance and
- - -----------------------------------
SANDRA T. WATSON Controller (Principal Accounting
Officer)
Chairman and Director
- - -----------------------------------
CRAIG A. WINN
Vice Chairman and Director
- - -----------------------------------
REX SCATENA
President, Chief Operating Officer
- - -----------------------------------
GLENDA M. DORCHAK and Director
Director
- - -----------------------------------
JOHN L. MOTLEY
Director
- - -----------------------------------
GARY D. LECLAIR
Director
- - -----------------------------------
MICHAEL R. STEED
</TABLE>
*By:
-------------------------------
Dean M. Johnson
Attorney-in-Fact
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- - ---------- ----------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement
3.1 Articles of Incorporation of Value America, as amended*
3.2 Amended and Restated Bylaws of Value America*
4.1 Form of Common Stock Certificate*
5.1 Opinion of LeClair Ryan, A Professional Corporation**
10.1 Consent Agreement, dated as of December 3, 1997, by and between Value America
and Stephen S. Freedman relating to the mark "Value America"*
10.2 Agreement, dated as of December 3, 1997, by and between Stephen S. Freedman
and Value America relating to the mark "Value America," with Personal Guaranty of
Rex and Jane Scatena*
10.3 Lease, dated as of September 17, 1997, by and between 2300 Commonwealth
Building and Value America relating to property located at 2300 Commonwealth
Drive, Charlottesville, Virginia*
10.4 Tenant Lease, dated as of March 16, 1998, by and between Preston O. Stallings and
Value America relating to property located at 2340 Commonwealth Avenue, Suites
102, 103 and B-1, Charlottesville, Virginia*
10.5 Lease Agreement, dated as of June 26, 1998, by and between Charles W. Hurt and
Value America relating to property located at 1524 Insurance Lane, 1534 Insurance
Lane, 1540 Insurance Lane, 1550 Insurance Lane, and 1560 Insurance Lane,
Charlottesville, Virginia*
10.6 Professional Services Agreement, executed by Value America on February 11, 1998,
by and between Business Data Services, Inc. and Value America*
10.7 Loan Agreement, executed by Value America on April 8, 1998, by and between
Jefferson National Bank (predecessor of Wachovia Bank, N.A.) and Value America*
10.8 Assignment, Pledge and Subordination Agreement, dated as of April 16, 1998, by
and among First Data Merchant Services Corp. Wachovia Bank, N.A. and Value
America*
10.9 Bank Asset Collateral Agreement and Limited Power of Attorney, dated as of
March 23, 1998, by and among Deutsche Financial Services Corporation, Jefferson
National Bank (predecessor of Wachovia Bank, N.A.) and Value America*
10.10 Warrant, dated November 20, 1997 to purchase 10,000 shares of common stock of
Value America issued to Dean M. Johnson*
10.11 Warrant, dated December 31, 1998 to purchase 3,000 shares of common stock of
Value America issued to Glenda M. Dorchak*
10.12 Warrant, dated December 31, 1998 to purchase 3,000 shares of common stock of
Value America issued to Richard L. Gerhardt*
10.13 Warrant, dated January 15, 1999 to purchase 473,724 shares of common stock of
Value America issued to Vulcan Ventures Incorporated*
10.14 Form of Type A warrant to purchase shares of common stock of Value America
(description of warrant included in note 13 to notes to financial statements)*
10.15 Form of Type B warrant to purchase shares of common stock of Value America
(description of warrant included in note 13 to notes to financial statements)*
10.16 Form of Type C and Type D warrants to purchase shares of common stock of Value
America (description of warrants included in note 13 to notes to financial
statements)*
10.17 Form of Type F warrant to purchase shares of common stock of Value America
(description of warrant included in note 13 to notes to financial statements)*
10.18 Employment Agreement, dated as of April 1, 1996, by and between Joseph L. Page
and Value America, Inc., a Nevada corporation (predecessor of Value America)*
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- - ------------ ---------------------------------------------------------------------------------
<S> <C>
10.19 Employment Agreement, dated as of August 1, 1997, by and between John L.
Motley, Director and Value America, Inc., a Nevada corporation (predecessor of
Value America)*
10.20 Employment Agreement, dated as of November 13, 1997, by and between Dean M.
Johnson and Value America*
10.21 Employment Agreement, dated as of October 5, 1998, by and between Value
America and Glenda M. Dorchak*
10.22 Employment Agreement, dated as of January 19, 1999, by and between Value
America and Craig A. Winn*
10.23 Employment Agreement, dated as of January 19, 1999, by and between Value
America and Rex Scatena*
10.24 Form of Developments, Noncompete and Nondisclosure Agreement, by and between
Value America and each of Value America's employees*
10.25 1997 Stock Incentive Plan adopted on August 1, 1997 by Value America, Inc., as
amended*
10.26 Registration Rights Agreement, dated as of June 3, 1998, by and between Value
America and Capital Advisers, L.L.C.*
10.27 Registration Rights Agreement, dated as of November 17, 1998, by and among
Value America and The Union Labor Life Insurance Company, acting on behalf of
its Separate Account P, as amended*
10.28 Second Amended and Restated Registration Rights Agreement, dated as of
January 12, 1999, by and among Value America and those entities and individuals
listed on Annex A thereto*
10.29 Amended and Restated Stockholders Agreement, dated as of June 26, 1998, by and
among Value America, Craig A. Winn, Director, Rex Scatena, Director, Crystal
Investments, L.L.C. Frostine, L.L.C. and the holders of Value America's Series A
preferred stock and Value America's Series B preferred stock, as amended*
10.30 Consulting Agreement, dated as of November 18, 1998, by and between Value
America and The Union Labor Life Insurance Company, acting on behalf of its
Separate Account P*
10.31 Voting Agreement, dated as of June 26, 1998, by and among Value America,
Craig A. Winn, Director, Rex Scatena, Director, Crystal Investments, L.L.C.,
Frostine, L.L.C. and the holders of Value America's Series B preferred stock*
10.32 Preferred Stock Purchase Agreement, dated as of December 17, 1997, by and
between The Union Labor Life Insurance Company, acting on behalf of its Separate
Account P and Value America, as amended*
10.33 Preferred Stock Purchase Agreement, dated as of June 26, 1998, by and among
Value America and those entities and individuals listed on Annex A thereto, as
amended*
10.34 Preferred Stock and Warrant Purchase Agreement, dated as of January 12, 1999, by
and among Value America, Vulcan Ventures Incorporated, FDX Corporation and
Frederick W. Smith*
10.35 Stock Purchase Agreement, dated as of June 26, 1998, by and among Craig A.
Winn, Director, Rex Scatena, Director, The Union Labor Life Insurance Company,
acting on behalf of its Separate Account P, United Association of Journeyman and
Apprentices of the Plumbing and Pipefitting Industry of the United States and
Canada, General Fund, and The Annette M. and Theodore N. Lerner Family
Foundation*
10.36 Product Listing Agreement, dated October 8, 1997, by and between Toshiba
America Information Systems and Value America*
10.37 Product Listing Agreement, dated June 3, 1997, by and between Toshiba America
Information Systems and Value America*
</TABLE>
II-8
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- - ------------ -----------------------------------------------------------------------------------
<S> <C>
10.38 Category Presentation Agreement, dated January 21, 1998, by and between IBM and
Value America*
10.39 Product Listing Agreement, dated April 16, 1997, by and between Hewlett-Packard
and Value America*
10.40 Employment Agreement, dated as of March 15, 1999, by and between Value
America and Neal B. Harris
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of LeClair Ryan, A Professional Corporation (included in Exhibit 5.1)**
24.1 Power of Attorney*
27.1 Financial Data Schedule
99.1 Letter, dated January 21, 1998, from Value America to Mr. Robert A. Bayless, Chief
Accountant of the Division of Corporation of the Securities and Exchange
Commission, relating to Value America's revenue recognition for product sales*
99.2 Agreement, dated March 15, 1999, by and among Craig A. Winn, Rex Scatena and
Neal Harris
</TABLE>
- - ----------
* Previously filed.
** To be filed by amendment.
II-9
5,000,000 Shares
VALUE AMERICA, INC.
Common Stock
FORM OF
UNDERWRITING AGREEMENT
, 1999
BANCBOSTON ROBERTSON STEPHENS INC.
VOLPE BROWN WHELAN & COMPANY, LLC
THE ROBINSON-HUMPHREY COMPANY, LLC
As Representatives of the several Underwriters
c/o BancBoston Robertson Stephens Inc.
555 California Street, Suite 2600
San Francisco, California 94104
Ladies and Gentlemen:
Value America, Inc., a Virginia corporation (the "Company"), and Craig A.
Winn and Rex Scatena (together the "Selling Stockholders") address you as the
Representatives of each of the persons, firms and corporations listed in
Schedule A hereto (herein collectively called the "Underwriters") and hereby
confirm their respective agreements with the several Underwriters as follows:
1. Description of Shares. The Company proposes to issue and sell 5,000,000
shares of its authorized and unissued common stock, without par value, to the
several Underwriters (the "Firm Shares"). The Company and the Selling
Stockholders propose to grant, severally and not jointly, to the Underwriters an
option to purchase up to 750,000 additional shares of the Company's common
stock, without par value (the "Option Shares"), as provided in Section 7 hereof.
As used in this Agreement, the term "Shares" shall refer collectively to the
Firm Shares and the Option Shares. All shares of the Company's common stock,
without par value, to be outstanding after giving effect to the sales
contemplated hereby, including the Shares, are hereinafter referred to as
"Common Stock."
2. Representations, Warranties and Agreements of the Company and the
Selling Stockholders.
I. The Company represents and warrants to and agrees with each
Underwriter that:
(a) A registration statement on Form S-1 (File No. 333-58469) with
respect to the Shares, including a prospectus subject to completion, has
been prepared by the Company in conformity with the requirements of the
Securities Act of 1933, as amended (the "Act"), and the applicable rules
and regulations (the "Rules and Regulations") of the Securities and
Exchange Commission (the "Commission") under the Act and has been filed
with the Commission; such amendments to such registration statement, such
amended prospectuses subject to completion and such abbreviated
registration statements pursuant to Rule 462(b) of the Rules and
Regulations as may have been required prior to the date hereof have been
similarly prepared and filed with the Commission; and the Company will file
such additional amendments to such registration statement, such amended
prospectuses subject to completion and such abbreviated registration
statements as may hereafter be required. Copies of such registration
statement and amendments, of each related prospectus subject to completion
(the "Preliminary Prospectuses") and of any abbreviated registration
statement pursuant to Rule 462(b) of the Rules and Regulations have been
delivered to you.
- - --------------------
1 Plus an option to purchase up to 750,000 additional shares from the Company
and certain stockholders of the Company to cover over-allotments.
<PAGE>
If the registration statement relating to the Shares has been
declared effective under the Act by the Commission, the Company will
prepare and promptly file with the Commission the information omitted from
the registration statement pursuant to Rule 430A(a) or, if BancBoston
Robertson Stephens Inc., on behalf of the several Underwriters, shall agree
to the utilization of Rule 434 of the Rules and Regulations, the
information required to be included in any term sheet filed pursuant to
Rule 434(b) or (c), as applicable, of the Rules and Regulations pursuant to
subparagraph (1), (4) or (7) of Rule 424(b) of the Rules and Regulations or
as part of a post-effective amendment to the registration statement
(including a final form of prospectus). If the registration statement
relating to the Shares has not been declared effective under the Act by the
Commission, the Company will prepare and promptly file an amendment to the
registration statement, including a final form of prospectus, or, if
BancBoston Robertson Stephens Inc., on behalf of the several Underwriters,
shall agree to the utilization of Rule 434 of the Rules and Regulations,
the information required to be included in any term sheet filed pursuant to
Rule 434(b) or (c), as applicable, of the Rules and Regulations. The term
"Registration Statement" as used in this Agreement shall mean such
registration statement, including financial statements, schedules and
exhibits, in the form in which it became or becomes, as the case may be,
effective (including, if the Company omitted information from the
registration statement pursuant to Rule 430A(a) or files a term sheet
pursuant to Rule 434 of the Rules and Regulations, the information deemed
to be a part of the registration statement at the time it became effective
pursuant to Rule 430A(b) or Rule 434(d) of the Rules and Regulations) and,
in the event of any amendment thereto or the filing of any abbreviated
registration statement pursuant to Rule 462(b) of the Rules and Regulations
relating thereto after the effective date of such registration statement,
shall also mean (from and after the effectiveness of such amendment or the
filing of such abbreviated registration statement) such registration
statement as so amended, together with any such abbreviated registration
statement. The term "Prospectus" as used in this Agreement shall mean the
prospectus relating to the Shares as included in such Registration
Statement at the time it becomes effective (including, if the Company
omitted information from the Registration Statement pursuant to Rule
430A(a) of the Rules and Regulations, the information deemed to be a part
of the Registration Statement at the time it became effective pursuant to
Rule 430A(b) of the Rules and Regulations); provided, however, that if in
reliance on Rule 434 of the Rules and Regulations and with the consent of
BancBoston Robertson Stephens Inc., on behalf of the several Underwriters,
the Company shall have provided to the Underwriters a term sheet pursuant
to Rule 434(b) or (c), as applicable, prior to the time that a confirmation
is sent or given for purposes of Section 2(10)(a) of the Act, the term
"Prospectus" shall mean the "prospectus subject to completion" (as defined
in Rule 434(g) of the Rules and Regulations) last provided to the
Underwriters by the Company and circulated by the Underwriters to all
prospective purchasers of the Shares (including the information deemed to
be a part of the Registration Statement at the time it became effective
pursuant to Rule 434(d) of the Rules and Regulations). Notwithstanding the
foregoing, if any revised prospectus shall be provided to the Underwriters
by the Company for use in connection with the offering of the Shares that
differs from the prospectus referred to in the immediately preceding
sentence (whether or not such revised prospectus is required to be filed
with the Commission pursuant to Rule 424(b) of the Rules and Regulations),
the term "Prospectus" shall refer to such revised prospectus from and after
the time it is first provided to the Underwriters for such use. If in
reliance on Rule 434 of the Rules and Regulations and with the consent of
BancBoston Robertson Stephens Inc., on behalf of the several Underwriters,
the Company shall have provided to the Underwriters a term sheet pursuant
to Rule 434(b) or (c), as applicable, prior to the time that a confirmation
is sent or given for purposes of Section 2(10)(a) of the Act, the
Prospectus and the term sheet, together, will not be materially different
from the prospectus in the Registration Statement.
<PAGE>
(b) The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus or instituted proceedings
for that purpose, and each such Preliminary Prospectus has conformed in all
material respects to the requirements of the Act and the Rules and
Regulations and, as of its date, has not included any untrue statement of a
material fact or omitted to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; and at the time the Registration Statement became or
becomes, as the case may be, effective and at all times subsequent thereto
up to and on the Closing Date (hereinafter defined) and on any later date
on which Option Shares are to be purchased, (i) the Registration Statement
and the Prospectus, and any amendments or supplements thereto, contained
and will contain all material information required to be included therein
by the Act and the Rules and Regulations and will in all material respects
conform to the requirements of the Act and the Rules and Regulations, (ii)
the Registration Statement, and any amendments or supplements thereto, did
not and will not include any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make
the statements therein not misleading, and (iii) the Prospectus, and any
amendments or supplements thereto, did not and will not include any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements therein, in the light of the circumstances under which
they were made, not misleading; provided, however, that none of the
representations and warranties contained in this subparagraph (b) shall
apply to information contained in or omitted from the Registration
Statement or Prospectus, or any amendment or supplement thereto, in
reliance upon, and in conformity with, written information relating to any
Underwriter furnished to the Company by such Underwriter specifically for
use in the preparation thereof.
(c) The Company has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the Commonwealth of
Virginia, with full power and authority (corporate and other) to own, lease
and operate its properties and conduct its business as described in the
Prospectus; the Company is duly qualified to do business as a foreign
corporation and is in good standing in each jurisdiction in which the
ownership or leasing of its properties or the conduct of its business
requires such qualification, except where the failure to be so qualified or
be in good standing would not have a material adverse effect on its
condition (financial or otherwise), earnings, operations, business or
business prospects; no proceeding has been instituted in any such
jurisdiction revoking, limiting or curtailing, or seeking to revoke, limit
or curtail, such power and authority or qualification; the Company is in
possession of and operating in compliance with all authorizations,
licenses, certificates, consents, orders and permits from state, federal
and other regulatory authorities that are material to the conduct of its
business, all of which are valid and in full force and effect; the Company
is not in violation of its articles of incorporation or bylaws or in
default in the performance or observance of any material obligation,
agreement, covenant or condition contained in any bond, debenture, note or
other evidence of indebtedness, or in any material lease, contract,
indenture, mortgage, deed of trust, loan agreement, joint venture or other
agreement or instrument to which the Company is a party or by which it or
its properties may be bound; and Company is not in violation of any law,
order, rule, regulation, writ, injunction, judgment or decree of any court,
government or governmental agency or body, domestic or foreign, having
jurisdiction over the Company or its properties of which it has knowledge,
except for violations that, in the aggregate, would not have a material
adverse effect on the Company's condition (financial or otherwise),
earnings, operations, business or business prospects. The Company does not
own or control, directly or indirectly, any corporation, association or
other entity.
<PAGE>
(d) The Company has full legal right, power and authority to enter
into this Agreement and perform the transactions contemplated hereby. This
Agreement has been duly authorized, executed and delivered by the Company
and is a valid and binding agreement on the part of the Company,
enforceable in accordance with its terms, except as rights to
indemnification hereunder may be limited by applicable law and except as
the enforcement hereof may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
creditors' rights generally or by general equitable principles; the
performance of this Agreement and the consummation of the transactions
herein contemplated will not result in a material breach or violation of
any of the terms and provisions of, or constitute a default under, (i) any
bond, debenture, note or other evidence of indebtedness, or under any
lease, contract, indenture, mortgage, deed of trust, loan agreement, joint
venture or other agreement or instrument to which the Company is a party or
by which it or its properties may be bound, (ii) the articles of
incorporation or bylaws of the Company, or (iii) any law, order, rule,
regulation, writ, injunction, judgment or decree of any court, government
or governmental agency or body, domestic or foreign, having jurisdiction
over the Company or its properties. No consent, approval, authorization or
order of or qualification with any court, government or governmental agency
or body, domestic or foreign, having jurisdiction over the Company or its
properties is required for the execution and delivery of this Agreement and
the consummation by the Company of the transactions herein contemplated,
except such as may be required under the Act, the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), or under state or other
securities or Blue Sky laws, all of which requirements have been satisfied
in all material respects.
(e) There is not any pending or, to the best of the Company's
knowledge, threatened action, suit, claim or proceeding against the Company
or any of its officers, properties, assets or rights before any court,
government or governmental agency or body, domestic or foreign, having
jurisdiction over the Company or its officers, properties or otherwise that
(i) might result in any material adverse change in the condition (financial
or otherwise), earnings, operations, business or business prospects of the
Company or might materially and adversely affect their properties, assets
or rights, (ii) might prevent consummation of the transactions contemplated
hereby or (iii) is required to be disclosed in the Registration Statement
or Prospectus and is not so disclosed; and there are no agreements,
contracts, leases or documents of the Company of a character required to be
described or referred to in the Registration Statement or Prospectus or to
be filed as an exhibit to the Registration Statement by the Act or the
Rules and Regulations that have not been accurately described in all
material respects in the Registration Statement or Prospectus or filed as
exhibits to the Registration Statement.
<PAGE>
(f) All outstanding shares of capital stock of the Company
(including the Option Shares to be sold by the Selling Stockholders) have
been duly authorized and validly issued and are fully paid and
nonassessable, have been issued in compliance with all federal and state
securities laws, were not issued in violation of or subject to any
preemptive rights or other rights to subscribe for or purchase securities,
and the authorized and outstanding capital stock of the Company is as set
forth in the Prospectus under the caption "Capitalization" and conforms in
all material respects to the statements relating thereto contained in the
Registration Statement and the Prospectus (and such statements correctly
state in all material respects the substance of the instruments defining
the capitalization of the Company); the Firm Shares and the Option Shares
to be sold by the Company hereunder have been duly authorized for issuance
and sale to the Underwriters pursuant to this Agreement and, when issued
and delivered by the Company against payment therefor in accordance with
the terms of this Agreement, will be duly and validly issued and fully paid
and nonassessable, and will be sold free and clear of any pledge, lien,
security interest, encumbrance, claim or equitable interest; and no
preemptive right, co-sale right, registration right, right of first refusal
or other similar right of stockholders exists with respect to any of the
Firm Shares or Option Shares to be sold by the Company hereunder or the
issuance and sale thereof other than those that have been expressly waived
prior to the date hereof and those that will automatically expire upon and
will not apply to the consummation of the transactions contemplated on the
Closing Date. No further approval or authorization of any stockholder, the
Board of Directors of the Company or others is required for the issuance
and sale or transfer of the Shares except as may be required under the Act,
the Exchange Act or under state or other securities or Blue Sky laws.
Except as disclosed in the Prospectus and the financial statements of the
Company, and the related notes thereto, included in the Prospectus, the
Company does not have any outstanding options to purchase, or any
preemptive rights or other rights to subscribe for or to purchase, any
securities or obligations convertible into, or any contracts or commitments
to issue or sell, shares of its capital stock or any such options, rights,
convertible securities or obligations. The description of the Company's
stock option, stock bonus and other stock plans or arrangements, and the
options or other rights granted and exercised thereunder, set forth in the
Prospectus accurately and fairly presents in all material respects the
information required to be shown with respect to such plans, arrangements,
options and rights.
(g) PricewaterhouseCoopers LLP, which has examined the financial
statements of the Company, together with the related schedules and notes,
as of December 31, 1997 and 1998 and for the period from March 13, 1996
(inception) through December 31, 1996 and the years ended December 31, 1997
and 1998, filed with the Commission as a part of the Registration
Statement, which are included in the Prospectus, are independent
accountants within the meaning of the Act and the Rules and Regulations;
the audited financial statements of the Company, together with the related
schedules and notes, forming part of the Registration Statement and
Prospectus, fairly present the financial position and the results of
operations of the Company at the respective dates and for the respective
periods to which they apply; and all audited financial statements of the
Company, together with the related schedules and notes, filed with the
Commission as part of the Registration Statement, have been prepared in
accordance with generally accepted accounting principles consistently
applied throughout the periods involved except as may be otherwise stated
therein. The selected and summary financial and statistical data included
in the Registration Statement present fairly the information shown therein
and have been compiled on a basis consistent with the audited financial
statements presented therein. No other financial statements or schedules
are required to be included in the Registration Statement.
(h) Subsequent to the respective dates as of which information is
given in the Registration Statement and Prospectus, there has not been (i)
any material adverse change in the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company, (ii)
any transaction that is material to the Company, except transactions
entered into in the ordinary course of business, (iii) any material
obligation, direct or contingent, incurred by the Company, except any
obligation incurred in the ordinary course of business, (iv) any material
change in the capital stock or outstanding indebtedness of the Company
(other than exercises, if any, of options outstanding as disclosed in the
Prospectus), (v) any dividend or distribution of any kind declared, paid or
made on the capital stock of the Company, or (vi) any loss or damage
(whether or not insured) to the property of the Company that has been
sustained or will have been sustained and that has a material adverse
effect on the condition (financial or otherwise), earnings, operations,
business or business prospects of the Company.
<PAGE>
(i) Except as set forth in the Registration Statement and
Prospectus, (i) the Company has good and marketable title to all properties
and assets described in the Registration Statement and Prospectus as owned
by it, free and clear of any pledge, lien, security interest, encumbrance,
claim or equitable interest, other than such as would not have a material
adverse effect on the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company, (ii) the
agreements to which the Company is a party described in the Registration
Statement and Prospectus are valid agreements, enforceable by the Company,
except as the enforcement thereof may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating to or
affecting creditors' rights generally or by general equitable principles
and, to the best of the Company's knowledge, the other contracting party or
parties thereto are not in material breach or material default under any of
such agreements, and (iii) the Company has valid and enforceable leases for
all properties described in the Registration Statement and Prospectus as
leased by it, except as the enforcement thereof may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other
similar laws relating to or affecting creditors' rights generally or by
general equitable principles. Except as set forth in the Registration
Statement and Prospectus, the Company owns or leases all such properties as
are necessary to its operations as now conducted or as proposed to be
conducted.
(j) The Company has timely filed all necessary federal, state and
foreign income and franchise tax returns and has paid all taxes shown
thereon as due, and there is no tax deficiency that has been or, to the
best of the Company's knowledge, might be asserted against the Company that
might have a material adverse effect on the condition (financial or
otherwise), earnings, operations, business or business prospects of the
Company; and all tax liabilities are adequately provided for on the books
of the Company.
(k) The Company maintains insurance with insurers of recognized
financial responsibility of the types and in the amounts generally deemed
adequate for its business and consistent with insurance coverage maintained
by similar companies in similar businesses, including insurance covering
real and personal property owned or leased by the Company against theft,
damage, destruction, acts of vandalism and all other risks customarily
insured against, all of which insurance is in full force and effect; the
Company has not been refused any insurance coverage sought or applied for;
and the Company does not have any reason to believe that it will not be
able to renew its existing insurance coverage as and when such coverage
expires or to obtain similar coverage from similar insurers as may be
necessary to continue its business at a cost that would not materially and
adversely affect the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company.
(l) To the best of Company's knowledge, no labor disturbance by
the employees of the Company exists or is imminent; and the Company is not
aware of any existing or imminent labor disturbance by the employees of any
of its licensors or its significant customers that might be expected to
result in a material adverse change in the condition (financial or
otherwise), earnings, operations, business or business prospects of the
Company. No collective bargaining agreement exists with any of the
Company's employees and, to the best of the Company's knowledge, no such
agreement is imminent.
(m) The Company owns or possesses adequate rights to use all
patents, patent rights, inventions, trade secrets, know-how, trademarks,
service marks, trade names and copyrights that are necessary to conduct its
businesses as described in the Registration Statement and Prospectus; the
expiration of any patents, patent rights, trade secrets, trademarks,
service marks, trade names or copyrights would not have a material adverse
effect on the condition (financial or otherwise), earnings, operations,
business or business prospects of the Company; the Company has not received
any notice of, and has no knowledge of, any infringement of or conflict
with asserted rights of the Company by others with respect to any patent,
patent rights, inventions, trade secrets, know-how, trademarks, service
marks, trade names or copyrights; and the Company has not received any
notice of, and has no knowledge of, any infringement of or conflict with
asserted rights of others with respect to any patent, patent rights,
inventions, trade secrets, know-how, trademarks, service marks, trade names
or copyrights that, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, might have a material adverse
effect on the condition (financial or otherwise), earnings, operations,
business or business prospects of the Company.
(n) The Common Stock has been approved for quotation on the Nasdaq
National Market, subject to official notice of issuance.
<PAGE>
(o) The Company has been advised concerning the Investment Company
Act of 1940, as amended, and the rules and regulations thereunder, and has
in the past conducted, and intends in the future to conduct, its affairs in
such a manner as to ensure that it will not become an "investment company"
within the meaning of the Investment Company Act of 1940, as amended, and
the rules and regulations thereunder.
(p) The Company has not distributed and will not distribute prior
to the later of (i) the Closing Date, or any date on which Option Shares
are to be purchased, as the case may be, and (ii) completion of the
distribution of the Shares, any offering material in connection with the
offering and sale of the Shares other than any Preliminary Prospectuses,
the Prospectus, the Registration Statement and other materials, if any,
permitted by the Act.
(q) The Company has not at any time during the last five years (i)
made any unlawful contribution to any candidate for foreign office or
failed to disclose fully any contribution in violation of law or (ii) made
any payment to any federal or state governmental officer or official, or
other person charged with similar public or quasi-public duties, other than
payments required or permitted by the laws of the United States or any
jurisdiction thereof.
(r) The Company has not taken and will not take, directly or
indirectly, any action designed to or that might reasonably be expected to
cause or result in stabilization or manipulation of the price of the Common
Stock to facilitate the sale or resale of the Shares.
<PAGE>
(s) Each officer, director and director-nominee of the Company and
each record owner of shares of Common Stock named in Schedule C hereto has
agreed in writing that such person will not, for a period of 180 days after
the date of the Prospectus (the "Lock-Up Period"), offer to sell, contract
to sell, or otherwise sell, dispose of, loan, pledge or grant any rights
with respect to (collectively, a "Disposition") any shares of Common Stock,
any options or warrants to purchase any shares of Common Stock or any
securities convertible into or exchangeable for shares of Common Stock
(collectively, "Securities") now owned or hereafter acquired directly by
such person or with respect to which such person has or hereafter acquires
the power of disposition, otherwise than (i) as a bona fide gift or a
distribution to limited partners, members or partners or shareholders of
such person, provided that the donees or distributees thereof (as the case
may be) agree in writing to be bound by the terms of this restriction or
(ii) with the prior written consent of BancBoston Robertson Stephens Inc.
The foregoing restriction has been expressly agreed to preclude the holder
of the Securities from engaging in any hedging or other transaction which
is designed to or reasonably expected to lead to or result in a Disposition
of Securities during the Lock-Up Period, even if such Securities would be
disposed of by someone other than such holder. Such prohibited hedging or
other transactions would include any short sale (whether or not against the
box) or any purchase, sale or grant of any right (including any put or call
option) with respect to any Securities or with respect to any security
(other than a broad-based market basket or index) that includes, relates to
or derives any significant part of its value from the Securities.
Notwithstanding the foregoing, this restriction shall not prohibit (i) the
sale of Option Shares to the Underwriters pursuant to this Agreement or
(ii) resales of shares of Common Stock acquired either in the public
offering to which the Registration Statement relates or in subsequent
open-market purchases. Furthermore, such person also has agreed and
consented to the entry of stop transfer instructions with the Company's
transfer agent against the transfer of the Securities held by such person
except in compliance with this restriction. The Company has provided to
Foley, Hoag & Eliot LLP, counsel for the several Underwriters
("Underwriters' Counsel"), a complete and accurate list of all
securityholders of the Company and the number and type of securities held
by each securityholder. The Company has provided to Underwriters' Counsel
true, accurate and complete copies of all of the agreements pursuant to
which its officers, directors and stockholders have agreed to such or
similar restrictions (the "Lock-Up Agreements") presently in effect or
effected hereby. The Company hereby represents and warrants that it will
not release any of its officers, directors or other stockholders from any
Lock-Up Agreements currently existing or hereafter effected without the
prior written consent of BancBoston Robertson Stephens Inc.
(t) Except as set forth in the Registration Statement and
Prospectus, (i) the Company is in compliance with all rules, laws and
regulations relating to the use, treatment, storage and disposal of toxic
substances and protection of health or the environment ("Environmental
Laws") that are applicable to its business, (ii) the Company has received
no notice from any governmental authority or third party of an asserted
claim under Environmental Laws, which claim is required to be disclosed in
the Registration Statement and the Prospectus, (iii) the Company will not
be required to make future material capital expenditures to comply with
Environmental Laws and (iv) no property that is owned, leased or occupied
by the Company has been designated as a Superfund site pursuant to the
Comprehensive Response, Compensation, and Liability Act of 1980, as amended
(42 U.S.C. ss. 9601, et seq.), or has been otherwise designated as a
contaminated site under applicable state or local law.
(u) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are
executed in accordance with management's general or specific
authorizations, (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for assets, (iii)
access to assets is permitted only in accordance with management's general
or specific authorization and (iv) the recorded accountability for assets
is compared with existing assets at reasonable intervals and appropriate
action is taken with respect to any differences.
(v) There are no outstanding loans, advances (except normal
advances for business expenses in the ordinary course of business) or
guarantees of indebtedness by the Company to or for the benefit of any of
the officers or directors of the Company or any of the members of the
families of any of them, except as disclosed in the Registration Statement
and the Prospectus.
(w) The Company has complied with all provisions of Section
517.075, Florida Statutes relating to doing business with the Government of
Cuba or with any person or affiliate located in Cuba.
II. Each Selling Stockholder, severally and not jointly, represents and
warrants to and agrees with each Underwriter and the Company that:
(a) Such Selling Stockholder now has, and on any later date on
which Option Shares are purchased, will have valid marketable title to the
Option Shares to be sold by such Selling Stockholder, free and clear of any
pledge, lien, security interest, encumbrance, claim or equitable interest
other than pursuant to this Agreement; and upon delivery of such Option
Shares hereunder and payment of the purchase price as herein contemplated,
each of the Underwriters will obtain valid marketable title to the Option
Shares purchased by it from such Selling Stockholder, free and clear of any
pledge, lien, security interest pertaining to such Selling Stockholder or
such Selling Stockholder's property, encumbrance, claim or equitable
interest, including any liability for estate or inheritance taxes, or any
liability to or claims of any creditor, devisee, legatee or beneficiary of
such Selling Stockholder.
<PAGE>
(b) Such Selling Stockholder has duly authorized, executed and
delivered, in the form heretofore furnished to the Representatives, an
irrevocable Power of Attorney (the "Power of Attorney") appointing Dean M.
Johnson and Sandra T. Watson as attorneys-in-fact (collectively, the
"Attorneys" and individually, an "Attorney") and a Letter of Transmittal
and Custody Agreement (the "Custody Agreement") with the Company, as
custodian (the "Custodian"); each of the Power of Attorney and the Custody
Agreement constitutes a valid and binding agreement on the part of such
Selling Stockholder, enforceable in accordance with its terms, except as
the enforcement thereof may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating to or
affecting creditors' rights generally or by general equitable principles;
and each of such Selling Stockholder's Attorneys, acting alone, is
authorized to execute and deliver this Agreement and the certificate
referred to in Section 6(h) hereof on behalf of such Selling Stockholder,
to determine the purchase price to be paid by the several Underwriters to
such Selling Stockholder as provided in Section 3 hereof, to authorize the
delivery of the Option Shares to be sold by such Selling Stockholder under
this Agreement and to duly endorse (in blank or otherwise) the certificate
or certificates representing such Option Shares or a stock power or powers
with respect thereto, to accept payment therefor, and otherwise to act on
behalf of such Selling Stockholder in connection with this Agreement.
(c) All consents, approvals, authorizations and orders required
for the execution and delivery by such Selling Stockholder of the Power of
Attorney and the Custody Agreement, the execution and delivery by or on
behalf of such Selling Stockholder of this Agreement and the sale and
delivery of the Option Shares to be sold by such Selling Stockholder under
this Agreement (other than, at the time of the execution hereof (if the
Registration Statement has not yet been declared effective by the
Commission), the issuance of the order of the Commission declaring the
Registration Statement effective and such consents, approvals,
authorizations or orders as may be necessary under state or other
securities or Blue Sky laws) have been obtained and are in full force and
effect; and such Selling Stockholder has full legal right to enter into and
perform its obligations under this Agreement and such Power of Attorney and
Custody Agreement, and to sell, assign, transfer and deliver the Shares to
be sold by such Selling Stockholder under this Agreement.
(d) Such Selling Stockholder will not, during the Lock-Up Period,
effect the Disposition of any Securities now owned or hereafter acquired
directly by such Selling Stockholder or with respect to which such Selling
Stockholder has or hereafter acquires the power of disposition, otherwise
than (i) as a bona fide gift, provided that the donees thereof agree in
writing to be bound by this restriction, or (ii) with the prior written
consent of BancBoston Robertson Stephens Inc. The foregoing restriction is
expressly agreed to preclude the holder of the Securities from engaging in
any hedging or other transaction which is designed to or reasonably
expected to lead to or result in a Disposition of Securities during the
Lock-Up Period, even if such Securities would be disposed of by someone
other than the Selling Stockholder. Such prohibited hedging or other
transactions would include any short sale (whether or not against the box)
or any purchase, sale or grant of any right (including any put or call
option) with respect to any Securities or with respect to any security
(other than a broad-based market basket or index) that includes, relates to
or derives any significant part of its value from the Securities.
Notwithstanding the foregoing, this restriction shall not prohibit (i) the
sale of Option Shares to the Underwriters pursuant to this Agreement or
(ii) resales of shares of Common Stock acquired either in the public
offering to which the Registration Statement relates or in subsequent
open-market purchases. Such Selling Stockholder also agrees and consents to
the entry of stop transfer instructions with the Company's transfer agent
against the transfer of Securities held by such Selling Stockholder except
in compliance with this restriction.
(e) Certificates in negotiable form for all Option Shares to be
sold by such Selling Stockholder under this Agreement, together with a
stock power or powers duly endorsed in blank by such Selling Stockholder,
have been placed in custody with the Custodian for the purpose of effecting
delivery hereunder.
<PAGE>
(f) This Agreement has been duly executed and delivered by or on
behalf of such Selling Stockholder and is a valid and binding agreement of
such Selling Stockholder, enforceable in accordance with its terms, except
as rights to indemnification hereunder may be limited by applicable law or
public policy and except as the enforcement hereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally or by general
equitable principles; and the performance of this Agreement and the
consummation of the transactions herein contemplated will not result in a
breach or violation of any of the terms and provisions of or constitute a
default under any bond, debenture, note or other evidence of indebtedness,
or under any lease, contract, indenture, mortgage, deed of trust, loan
agreement, joint venture or other agreement or instrument to which such
Selling Stockholder is a party or by which such Selling Stockholder, or any
Option Shares to be sold by such Selling Stockholder hereunder, may be
bound or, to the best of such Selling Stockholder's knowledge, result in
any violation of any law, order, rule, regulation, writ, injunction,
judgment or decree of any court, government or governmental agency or body,
domestic or foreign, having jurisdiction over such Selling Stockholder or
over the properties of such Selling Stockholder.
(g) Such Selling Stockholder has not taken and will not take,
directly or indirectly, any action designed to or that might reasonably be
expected to cause or result in stabilization or manipulation of the price
of the Common Stock to facilitate the sale or resale of the Shares.
(h) Such Selling Stockholder has not distributed and will not
distribute any prospectus or other offering material in connection with the
offering and sale of the Shares.
(i) All information furnished by or on behalf of such Selling
Stockholder relating to such Selling Stockholder and the Option Shares that
is contained in the representations and warranties of such Selling
Stockholder in such Selling Stockholder's Power of Attorney or set forth in
the Registration Statement or the Prospectus is, and at the time the
Registration Statement became or becomes, as the case may be, effective and
at all times subsequent thereto up to and on any date on which Option
Shares are to be purchased, was or will be, true, correct and complete, and
does not, and at the time the Registration Statement became or becomes, as
the case may be, effective and at all times subsequent thereto up to and on
any date on which Option Shares are to be purchased, will not, contain any
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make such information not
misleading.
(j) Such Selling Stockholder will review the Prospectus and will
comply with all agreements and satisfy all conditions on its part to be
complied with or satisfied pursuant to this Agreement on or prior to any
date on which Option Shares are to be purchased and will advise one of its
Attorneys and BancBoston Robertson Stephens Inc. prior to such date on
which Option Shares are to be purchased if any statement to be made on
behalf of such Selling Stockholder in the certificate contemplated by
Section 6(h) would be inaccurate if made as of such date on which Option
Shares are to be purchased.
<PAGE>
(k) Such Selling Stockholder does not have, or has waived prior to
the date hereof, any preemptive right, co-sale right or right of first
refusal or other similar right to purchase any of the Shares that are to be
sold by the Company or the other Selling Stockholder to the Underwriters
pursuant to this Agreement; such Selling Stockholder does not have, or has
waived prior to the date hereof, any registration right or other similar
right to participate in the offering made by the Prospectus, other than
such rights of participation as have been satisfied by the participation of
such Selling Stockholder in the transactions to which this Agreement
relates in accordance with the terms of this Agreement; and such Selling
Stockholder does not own any warrants, options or similar rights to
acquire, and does not have any right or arrangement to acquire, any capital
stock, rights, warrants, options or other securities from the Company,
other than those described in the Registration Statement and the
Prospectus.
(l) Such Selling Stockholder hereby confirms the truth and
accuracy of each of the representations and warranties of the Company set
forth in Section 2.I. above, as if such representations and warranties were
set forth in this Section 2.II.
This Section 2.II shall not be of any force or effect if the Representatives do
not exercise, in whole or in part, the option provided for in Section 7(a)
hereof,
3. Purchase, Sale and Delivery of Shares. On the basis of the
representations, warranties and agreements herein contained, but subject to the
terms and conditions herein set forth, the Company agrees to sell the Firm
Shares to the Underwriters, and each Underwriter agrees, severally and not
jointly, to purchase the Firm Shares from the Company at a purchase price of $
per share. The obligation of each Underwriter to the Company shall be to
purchase from the Company that number of Firm Shares that (as nearly as
practicable, as determined by you) is in the same proportion to the total number
of Firm Shares to be purchased by all the Underwriters under this Agreement as
the number of Firm Shares set forth opposite the name of such Underwriter in
Schedule A hereto (subject to adjustment as provided in Section 10) is to the
total number of Firm Shares to be purchased by all the Underwriters under this
Agreement.
Delivery of definitive certificates for the Firm Shares to be purchased
by the Underwriters pursuant to this Section 3 shall be made against payment of
the purchase price therefor by the several Underwriters by certified or official
bank check or checks drawn in or by wire transfer of same-day funds, payable to
the order of the Company at the offices of LeClair Ryan, A Professional
Corporation, 707 East Main Street, Richmond, Virginia (or at such other place as
may be agreed upon among the Representatives and the Company), at 7 A.M., San
Francisco time, (a) on the third full business day following the first day that
Shares are traded, (b) if this Agreement is executed and delivered after 1:30
P.M., San Francisco time, the fourth full business day following the day that
this Agreement is executed and delivered or (c) at such other time and date not
later than seven full business days following the first day that Shares are
traded as the Representatives and the Company may determine (or at such time and
date to which payment and delivery shall have been postponed pursuant to Section
10 hereof), such time and date of payment and delivery being herein called the
"Closing Date"; provided, however, that if the Company has not made available to
the Representatives copies of the Prospectus within the time provided in Section
4(d) hereof, the Representatives may, in their sole discretion, postpone the
Closing Date until no later than two full business days following delivery of
copies of the Prospectus to the Representatives. The certificates for the Firm
Shares to be so delivered will be made available to you at such office or such
other location, including in New York City, as you may reasonably request for
checking at least one full business day prior to the Closing Date and will be in
such names and denominations as you may request, such request to be made at
least two full business days prior to the Closing Date. If the Representatives
so elect, delivery of the Firm Shares may be made by credit through full fast
transfer to the accounts at The Depository Trust Company designated by the
Representatives.
It is understood that you, individually, and not as the Representatives
of the several Underwriters, may (but shall not be obligated to) make payment of
the purchase price on behalf of any Underwriter or Underwriters whose check or
checks shall not have been received by you prior to the Closing Date for the
Firm Shares to be purchased by such Underwriter or Underwriters. Any such
payment by you shall not relieve any such Underwriter or Underwriters of any of
its or their obligations hereunder.
<PAGE>
After the Registration Statement becomes effective, the several
Underwriters intend to make an initial public offering (as such term is
described in Section 11 hereof) of the Firm Shares at an initial public offering
price of $ per share. After the initial public offering, the several
Underwriters may, in their discretion, vary the public offering price.
The information set forth in the last paragraph on the front cover page
(insofar as such information relates to the Underwriters), on the inside front
cover concerning stabilization and over-allotment by the Underwriters, and under
the second, sixth and eighth paragraphs and the third sentence of the fifth
paragraph under the caption "Underwriting" in any Preliminary Prospectus and in
the Prospectus constitutes the only information furnished by the Underwriters to
the Company for inclusion in any Preliminary Prospectus, the Prospectus or the
Registration Statement, and you, on behalf of the respective Underwriters,
represent and warrant to the Company and the Selling Stockholders that the
statements made therein do not include any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading.
<PAGE>
4. Further Agreements of the Company. The Company agrees with the several
Underwriters that:
(a) The Company will use its best efforts to cause the Registration
Statement and any amendment thereof, if not effective at the time and date
that this Agreement is executed and delivered by the parties hereto, to
become effective as promptly as possible; the Company will use its best
efforts to cause any abbreviated registration statement pursuant to Rule
462(b) of the Rules and Regulations as may be required subsequent to the
date the Registration Statement is declared effective to become effective
as promptly as possible; the Company will notify you, promptly after it
shall receive notice thereof, of the time when the Registration Statement,
any subsequent amendment to the Registration Statement or any abbreviated
registration statement has become effective or any supplement to the
Prospectus has been filed; if the Company omitted information from the
Registration Statement at the time it was originally declared effective in
reliance upon Rule 430A(a) of the Rules and Regulations, the Company will
provide evidence satisfactory to you that the Prospectus contains such
information and has been filed, within the time period prescribed, with the
Commission pursuant to subparagraph (1) or (4) of Rule 424(b) of the Rules
and Regulations or as part of a post-effective amendment to such
Registration Statement as originally declared effective that is declared
effective by the Commission; if the Company files a term sheet pursuant to
Rule 434 of the Rules and Regulations, the Company will provide evidence
satisfactory to you that the Prospectus and term sheet meeting the
requirements of Rule 434(b) or (c), as applicable, of the Rules and
Regulations, have been filed, within the time period prescribed, with the
Commission pursuant to subparagraph (7) of Rule 424(b) of the Rules and
Regulations; if for any reason the filing of the final form of Prospectus
is required under Rule 424(b)(3) of the Rules and Regulations, it will
provide evidence satisfactory to you that the Prospectus contains such
information and has been filed with the Commission within the time period
prescribed; it will notify you promptly of any request by the Commission
for the amending or supplementing of the Registration Statement or the
Prospectus or for additional information; promptly upon your request, it
will prepare and file with the Commission any amendments or supplements to
the Registration Statement or Prospectus that, in the reasonable opinion of
Underwriters' Counsel, may be necessary or advisable in connection with the
distribution of the Shares by the Underwriters; it will promptly prepare
and file with the Commission, and promptly notify you of the filing of, any
amendments or supplements to the Registration Statement or Prospectus that
may be necessary to correct any statements or omissions, if, at any time
when a prospectus relating to the Shares is required to be delivered under
the Act, any event shall have occurred as a result of which the Prospectus
or any other prospectus relating to the Shares as then in effect would
include any untrue statement of a material fact or omit to state a material
fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; in case any
Underwriter is required to deliver a prospectus nine months or more after
the effective date of the Registration Statement in connection with the
sale of the Shares, it will prepare promptly upon request, but at the
expense of such Underwriter, such amendment or amendments to the
Registration Statement and such prospectus or prospectuses as may be
necessary to permit compliance with the requirements of Section 10(a)(3) of
the Act; and it will file no amendment or supplement to the Registration
Statement or Prospectus that shall not previously have been submitted to
you a reasonable time prior to the proposed filing thereof or to which you
shall reasonably object in writing, subject, however, to compliance with
the Act and the Rules and Regulations and the provisions of this Agreement.
(b) The Company will advise you, promptly after it shall receive notice
or obtain knowledge, of the issuance of any stop order by the Commission
suspending the effectiveness of the Registration Statement or of the
initiation or threat of any proceeding for that purpose; and it will
promptly use its best efforts to prevent the issuance of any stop order or
to obtain its withdrawal at the earliest possible moment if such stop order
should be issued.
(c) The Company will use its best efforts to qualify the Shares for
offering and sale under the securities laws of such jurisdictions as you
may designate and to continue such qualifications in effect for so long as
may be required for purposes of the distribution of the Shares, except that
the Company shall not be required in connection therewith or as a condition
thereof to qualify as a foreign corporation or to execute a general consent
to service of process in any jurisdiction in which it is not otherwise
required to be so qualified or to so execute a general consent to service
of process. In each jurisdiction in which the Shares shall have been
qualified as above provided, the Company will make and file such statements
and reports in each year as are or may be required by the laws of such
jurisdiction.
(d) The Company will furnish to you, as soon as available, and, in the
case of the Prospectus and any term sheet or abbreviated term sheet under
Rule 434, in no event later than the first full business day following the
first day that Shares are traded, copies of the Registration Statement
(three of which will be signed and which will include all exhibits), each
Preliminary Prospectus, the Prospectus and any amendments or supplements to
such documents, including any prospectus prepared to permit compliance with
Section 10(a)(3) of the Act, all in such quantities as you may from time to
time reasonably request. Notwithstanding the foregoing, if BancBoston
Robertson Stephens Inc., on behalf of the several Underwriters, shall agree
to the utilization of Rule 434 of the Rules and Regulations, the Company
shall provide to you copies of a Preliminary Prospectus updated in all
respects through the date specified by you in such quantities as you may
from time to time reasonably request.
(e) The Company will make generally available to its securityholders as
soon as practicable, but in any event not later than the forty-fifth day
following the end of the fiscal quarter first occurring after the first
anniversary of the effective date of the Registration Statement, an
earnings statement (which will be in reasonable detail but need not be
audited) complying with the provisions of Section 11(a) of the Act and
covering a twelve-month period beginning after the effective date of the
Registration Statement.
<PAGE>
(f) During a period of five years after the date hereof, the Company
will furnish to its stockholders as soon as practicable after the end of
each respective period, annual reports (including financial statements
audited by independent certified public accountants) and unaudited
quarterly reports of operations for each of the first three quarters of the
fiscal year, and will furnish to you and the other several Underwriters
hereunder, upon request (i) concurrently with furnishing such reports to
its stockholders, statements of operations of the Company for each of the
first three quarters in the form furnished to the Company's stockholders,
(ii) concurrently with furnishing to its stockholders, a balance sheet of
the Company as of the end of such fiscal year, together with statements of
operations, of stockholders' equity, and of cash flows of the Company for
such fiscal year, accompanied by a copy of the certificate or report
thereon of independent certified public accountants, (iii) as soon as they
are available, copies of all reports (financial or other) mailed to
stockholders, (iv) as soon as they are available, copies of all reports and
financial statements furnished to or filed with the Commission, any
securities exchange or the National Association of Securities Dealers, Inc.
(the "NASD"), (v) every material press release and every material news item
or article in respect of the Company or its affairs that was delivered to
stockholders in their capacities as stockholders of the Company, and (vi)
any additional information of a public nature concerning the Company, or
its business that you may reasonably request. During such five-year period,
if the Company shall have any active subsidiaries, the foregoing financial
statements shall be on a consolidated basis to the extent that the accounts
of the Company and such subsidiaries are consolidated and shall be
accompanied by similar financial statements for any significant subsidiary
that is not so consolidated.
(g) The Company will apply the net proceeds from the sale of the Shares
being sold by it in the manner set forth under the caption "Use of
Proceeds" in the Prospectus.
(h) The Company will maintain a transfer agent and, if necessary under
the jurisdiction of incorporation of the Company, a registrar (which may be
the same entity as the transfer agent) for its Common Stock.
(i) If the transactions contemplated hereby are not consummated by
reason of any failure, refusal or inability on the part of the Company or
either Selling Stockholder to perform any agreement on their respective
parts to be performed hereunder or to fulfill any condition of the
Underwriters' obligations hereunder, or if the Company shall terminate this
Agreement pursuant to Section 11(a) hereof, or if the Underwriters shall
terminate this Agreement pursuant to Section 11(b)(i), the Company will
reimburse the several Underwriters for all out-of-pocket expenses
(including fees and disbursements of Underwriters' Counsel) reasonably
incurred by the Underwriters in investigating or preparing to market or
marketing the Shares.
(j) If at any time during the ninety-day period after the Registration
Statement becomes effective, any rumor, publication or event relating to or
affecting the Company shall occur as a result of which in your opinion the
market price of the Common Stock has been or is likely to be materially
affected (regardless of whether such rumor, publication or event
necessitates a supplement to or amendment of the Prospectus), the Company
will, after written notice from you advising the Company to the effect set
forth above, forthwith prepare, consult with you concerning the substance
of and disseminate a press release or other public statement, reasonably
satisfactory to you, responding to or commenting on such rumor, publication
or event.
(k) During the Lock-Up Period, the Company will not, without the prior
written consent of BancBoston Robertson Stephens Inc., effect the
Disposition of, directly or indirectly, any Securities other than the sale
of the Company Shares and the Option Shares to be sold by the Company
hereunder and the Company's issuance of options or Common Stock under the
Company's presently authorized 1997 Stock Incentive Plan.
(l) During a period of ninety days from the effective date of the
Registration Statement, the Company will not file a registration statement
registering shares under the Company's presently authorized 1997 Stock
Incentive Plan or any other benefit plan.
<PAGE>
5 Expenses.
(a) The Company and the Selling Stockholders agree with each
Underwriter that:
(i) The Company will pay and bear all costs and expenses in
connection with the preparation, printing and filing of the
Registration Statement (including financial statements, schedules and
exhibits), Preliminary Prospectuses and the Prospectus and any
amendments or supplements thereto; the issuance and delivery of the
Shares hereunder to the several Underwriters, including transfer taxes,
if any, the cost of all certificates representing the Shares, and
transfer agents' and registrars' fees; the fees and disbursements of
counsel for the Company; all fees and other charges of the Company's
independent certified public accountants; the cost of furnishing to the
several Underwriters copies of the Registration Statement (including
appropriate exhibits), Preliminary Prospectuses and the Prospectus and
any amendments or supplements to any of the foregoing; NASD filing fees
and the cost of qualifying the Shares under the laws of such
jurisdictions as you may designate (including filing fees and fees and
disbursements of Underwriters' Counsel in connection with such NASD
filings and Blue Sky qualifications); and all other expenses directly
incurred by the Company and the Selling Stockholders in connection with
the performance of their obligations hereunder. Any additional expenses
incurred as a result of the sale of the Shares by the Selling
Stockholders will be borne collectively by the Company and the Selling
Stockholders. The provisions of this Section 5(a)(i) are intended to
relieve the Underwriters from the payment of the expenses and costs
that the Company and the Selling Stockholders hereby agree to pay, but
shall not affect any agreement that the Company and the Selling
Stockholders may make, or may have made, for the sharing of any of such
expenses and costs. Such agreements shall not impair the obligations of
the Company and the Selling Stockholders hereunder to the several
Underwriters.
(ii)In addition to its other obligations under Section 8(a)
hereof, the Company agrees that, as an interim measure during the
pendency of any claim, action, investigation, inquiry or other
proceeding described in Section 8(a) hereof, it will reimburse the
Underwriters on a monthly basis for all reasonable legal or other
expenses incurred in connection with investigating or defending any
such claim, action, investigation, inquiry or other proceeding,
notwithstanding the absence of a judicial determination as to the
propriety and enforceability of the Company's obligation to reimburse
the Underwriters for such expenses and the possibility that such
payments might later be held to have been improper by a court of
competent jurisdiction. To the extent that any such interim
reimbursement payment is so held to have been improper, the
Underwriters shall promptly return such payment to the Company together
with interest, compounded daily, determined on the basis of the prime
rate (or other commercial lending rate for borrowers of the highest
credit standing) listed from time to time in The Wall Street Journal
that represents the base rate on corporate loans posted by a
substantial majority of the nation's thirty largest banks (the "Prime
Rate"). Any such interim reimbursement payments that are not made to
the Underwriters within thirty days of a request for reimbursement
shall bear interest at the Prime Rate from the date of such request.
<PAGE>
(iii) In addition to his other obligations under Section 8(b)
hereof, each Selling Stockholder agrees that, as an interim measure
during the pendency of any claim, action, investigation, inquiry or
other proceeding described in Section 8(b) hereof relating to such
Selling Stockholder, it will reimburse the Underwriters on a monthly
basis for all reasonable legal or other expenses incurred in connection
with investigating or defending any such claim, action, investigation,
inquiry or other proceeding, notwithstanding the absence of a judicial
determination as to the propriety and enforceability of such Selling
Stockholder's obligation to reimburse the Underwriters for such
expenses and the possibility that such payments might later be held to
have been improper by a court of competent jurisdiction, provided, that
if such claim, action, investigation or other proceeding is within the
purview of Section 8(a) hereof, the Underwriters shall first demand
interim reimbursement from the Company pursuant to Section 5(a)(ii)
hereof and shall have failed to be so reimbursed in full within fifteen
days of such demand prior to invoking their rights against such Selling
Stockholder pursuant to this Section 5(a)(iii). To the extent that any
such interim reimbursement payment is so held to have been improper,
the Underwriters shall promptly return such payment to the Selling
Stockholders, together with interest, compounded daily, determined on
the basis of the Prime Rate. Any such interim reimbursement payments
that are not made to the Underwriters within thirty days of a request
for reimbursement shall bear interest at the Prime Rate from the date
of such request.
(b) In addition to their other obligations under Section 8(c) hereof,
the Underwriters severally and not jointly agree that, as an interim
measure during the pendency of any claim, action, investigation, inquiry or
other proceeding described in Section 8(c) hereof, they will reimburse the
Company and each Selling Stockholder on a monthly basis for all reasonable
legal or other expenses incurred in connection with investigating or
defending any such claim, action, investigation, inquiry or other
proceeding, notwithstanding the absence of a judicial determination as to
the propriety and enforceability of the Underwriters' obligation to
reimburse the Company and each such Selling Stockholder for such expenses
and the possibility that such payments might later be held to have been
improper by a court of competent jurisdiction. To the extent that any such
interim reimbursement payment is so held to have been improper, the Company
and each such Selling Stockholder shall promptly return such payment to the
Underwriters together with interest, compounded daily, determined on the
basis of the Prime Rate. Any such interim reimbursement payments that are
not made to the Company and each such Selling Stockholder within thirty
days of a request for reimbursement shall bear interest at the Prime Rate
from the date of such request.
(c) It is agreed that any controversy arising out of the operation of
the interim reimbursement arrangements set forth in Sections 5(a)(ii),
5(a)(iii) and 5(b) hereof, including the amounts of any requested
reimbursement payments, the method of determining such amounts and the
basis on which such amounts shall be apportioned among the reimbursing
parties, shall be settled by arbitration conducted under the provisions of
the Constitution and Rules of the Board of Governors of the New York Stock
Exchange, Inc. or pursuant to the Code of Arbitration Procedure of the
NASD. Any such arbitration must be commenced by service of a written demand
for arbitration or a written notice of intention to arbitrate, therein
electing the arbitration tribunal. In the event the party demanding
arbitration does not make such designation of an arbitration tribunal in
such demand or notice, then the party responding to said demand or notice
is authorized to do so. Any such arbitration will be limited to the
operation of the interim reimbursement provisions contained in Sections
5(a)(ii), 5(a)(iii) and 5(b) hereof and will not resolve the ultimate
propriety or enforceability of the obligation to indemnify for expenses
that is created by the provisions of Sections 8(a), 8(b) and 8(c) hereof or
the obligation to contribute to expenses that is created by the provisions
of Section 8(e) hereof.
6 Conditions of Underwriters' Obligations. The obligations of the several
Underwriters to purchase and pay for the Shares as provided herein shall be
subject to the accuracy, as of the date hereof and the Closing Date and any
later date on which Option Shares are to be purchased, as the case may be, of
the representations and warranties of the Company and the Selling Stockholders
herein, to the performance by the Company and the Selling Stockholders of their
respective obligations hereunder and to the following additional conditions:
<PAGE>
(a) The Registration Statement shall have become effective not later
than 2 P.M., San Francisco time, on the date following the date of this
Agreement, or such later date as shall be consented to in writing by you;
and no stop order suspending the effectiveness thereof shall have been
issued and no proceedings for that purpose shall have been initiated or, to
the knowledge of the Company, either Selling Stockholder or any
Underwriter, threatened by the Commission, and any request of the
Commission for additional information (to be included in the Registration
Statement or the Prospectus or otherwise) shall have been complied with to
the reasonable satisfaction of Underwriters' Counsel.
(b) All corporate proceedings and other legal matters in connection
with this Agreement, the form of Registration Statement and the Prospectus,
and the registration, authorization, issue, sale and delivery of the
Shares, shall have been reasonably satisfactory to Underwriters' Counsel,
and Underwriters' Counsel shall have been furnished with such papers and
information as they may reasonably have requested to enable them to pass
upon the matters referred to in this Section.
(c) Subsequent to the execution and delivery of this Agreement and
prior to the Closing Date, or any later date on which Option Shares are to
be purchased, as the case may be, there shall not have been any change in
the condition (financial or otherwise), earnings, operations, business or
business prospects of the Company from that set forth in the Registration
Statement or Prospectus that, in your reasonable judgment, is material and
adverse and that makes it, in your reasonable judgment, impracticable or
inadvisable to proceed with the public offering of the Shares as
contemplated by the Prospectus.
(d) You shall have received on the Closing Date and on any later date on
which Option Shares are to be purchased, as the case may be, the following
opinion of LeClair Ryan, A Professional Corporation, counsel for the Company
and the Selling Stockholders, dated the Closing Date or such later date on
which Option Shares are to be purchased, addressed to the Underwriters and
with reproduced copies or signed counterparts thereof for each of the
Underwriters, to the effect that:
(i) The Company has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the Commonwealth of
Virginia.
(ii) The Company has the corporate power and authority to own, lease
and operate its properties and to conduct its business as described in
the Prospectus.
(iii) The authorized, issued and outstanding capital stock of the
Company is as set forth in the Prospectus under the caption
"Capitalization" as of the dates stated therein. The issued and
outstanding shares of capital stock of the Company (including the Option
Shares to be sold by the Selling Stockholders) have been duly and
validly issued and are fully paid and nonassessable and, to such
counsel's knowledge, have not been issued in violation of or subject to
any preemptive right, co-sale right, registration right, right of first
refusal or other similar right.
(iv) The Firm Shares or the Option Shares, as the case may be, to be
issued by the Company pursuant to the terms of this Agreement have been
duly authorized and, upon issuance and delivery against payment therefor
in accordance with the terms hereof, will be duly and validly issued and
fully paid and nonassessable, and will not have been issued in violation
of or subject to any preemptive right, co-sale right, registration
right, right of first refusal or other similar right.
(v) The Company has the corporate power and authority to enter into
this Agreement and to issue, sell and deliver to the Underwriters the
Shares to be issued and sold by it hereunder.
<PAGE>
(vi) This Agreement has been duly authorized by all necessary
corporate action on the part of the Company and has been duly executed
and delivered by the Company and, assuming due authorization, execution
and delivery by you, is a valid and binding agreement of the Company,
enforceable in accordance with its terms, except insofar as
indemnification provisions may be limited by applicable law and except
as enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws relating to or affecting
creditors' rights generally or by general equitable principles.
(vii) The Registration Statement has become effective under the Act,
and to such counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement has been issued and no
proceedings for that purpose have been instituted or are pending or
threatened under the Act.
(viii) The Registration Statement and the Prospectus, and each
amendment or supplement thereto (other than the financial statements,
including supporting schedules, and financial data derived therefrom, as
to which such counsel need express no opinion), as of the effective date
of the Registration Statement, complied as to form in all material
respects with the requirements of the Act and the applicable Rules and
Regulations.
(ix) The information in the Prospectus under the caption
"Description of Capital Stock," to the extent that it constitutes
matters of law or legal conclusions, has been reviewed by such counsel
and is a fair summary of such matters and conclusions; and the forms of
certificates evidencing the Common Stock and filed as exhibits to the
Registration Statement comply with the corporation law of the
Commonwealth of Virginia.
(x) The description in the Registration Statement and the Prospectus
of the articles of incorporation and bylaws of the Company and of
statutes are accurate and fairly present the information required to be
presented by the Act and the applicable Rules and Regulations.
(xi) To such counsel's knowledge, there are no agreements,
contracts, leases or documents to which the Company is a party of a
character required to be described or referred to in the Registration
Statement or Prospectus or to be filed as an exhibit to the Registration
Statement that are not described or referred to therein or filed as
required.
(xii) The performance of this Agreement and the consummation of the
transactions herein contemplated (other than performance of the
Company's indemnification obligations hereunder, concerning which no
opinion need be expressed) will not (a) result in any violation of the
Company's articles of incorporation or bylaws or (b) to such counsel's
knowledge, result in a material breach or violation of any of the terms
and provisions of, or constitute a default under, (1) any bond,
debenture, note or other evidence of indebtedness, or any lease,
contract, indenture, mortgage, deed of trust, loan agreement, joint
venture or other agreement or instrument known to such counsel to which
the Company is a party or by which its properties are bound, (2) any
applicable statute, rule or regulation known to such counsel or (3) any
order, writ or decree known to such counsel of any court, government or
governmental agency or body having jurisdiction over the Company or any
of its properties or operations.
<PAGE>
(xiii) No consent, approval, authorization or order of or
qualification with any court, government or governmental agency or body
having jurisdiction over the Company or any of its properties or
operations is necessary in connection with the consummation by the
Company of the transactions herein contemplated, except such as have
been obtained under the Act or such as may be required under state or
other securities or Blue Sky laws in connection with the purchase and
the distribution of the Shares by the Underwriters.
(xiv) To such counsel's knowledge, there are no legal or
governmental proceedings pending or threatened against the Company of a
character required to be disclosed in the Registration Statement or the
Prospectus by the Act or the Rules and Regulations, other than those
described therein.
(xv) To such counsel's knowledge, the Company is not presently (a)
in material violation of its articles of incorporation or bylaws or (b)
in material breach of any applicable statute, rule or regulation known
to such counsel or, to such counsel's knowledge, any order, writ or
decree of any court or governmental agency or body having jurisdiction
over the Company or any of its properties or operations.
(xvi) To such counsel's knowledge, except as set forth in the
Registration Statement and Prospectus, no holders of Common Stock or
other securities of the Company have registration rights with respect to
securities of the Company and, except as set forth in the Registration
Statement and Prospectus, all holders of securities of the Company
having rights known to such counsel to registration of such shares of
Common Stock or other securities, because of the filing of the
Registration Statement by the Company have, with respect to the offering
contemplated thereby, waived such rights or such rights have expired by
reason of lapse of time following notification of the Company's intent
to file the Registration Statement or have included securities in the
Registration Statement pursuant to the exercise of and in full
satisfaction of such rights.
(xvii) The Power of Attorney and Custody Agreement of each Selling
Stockholder has been duly executed and delivered by or on behalf of such
Selling Stockholder; and the Power of Attorney and Custody Agreement of
each Selling Stockholder constitutes the valid and binding agreement of
such Selling Stockholder, enforceable in accordance with its terms,
except as the enforcement thereof may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating to
or affecting creditors' rights generally or by general equitable
principles.
(xviii) Each of the Selling Stockholders has full right to enter
into and to perform its obligations under this Agreement and to sell,
transfer, assign and deliver the Option Shares to be sold by such
Selling Stockholder hereunder.
(xix) This Agreement has been duly executed and delivered by or on
behalf of each Selling Stockholder.
(xx) Upon the delivery of and payment for the Option Shares as
contemplated in this Agreement, each of the Underwriters will receive
valid marketable title to the Option Shares purchased by it from such
Selling Stockholder, free and clear of any pledge, lien, security
interest, encumbrance, claim or equitable interest. In rendering such
opinion, such counsel may assume that the Underwriters are without
notice of any defect in the title of the Option Shares being purchased
from the Selling Stockholders.
<PAGE>
In addition, such counsel shall state that such counsel has
participated in conferences with officials and other representatives of the
Company, the Representatives, Underwriters' Counsel and the independent
certified public accountants of the Company, at which such conferences the
contents of the Registration Statement and Prospectus and related matters
were discussed, and although they have not verified the accuracy or
completeness of the statements contained in the Registration Statement or
the Prospectus, nothing has come to the attention of such counsel that leads
them to believe that, at the time the Registration Statement became
effective and at all times subsequent thereto up to and on the Closing Date
and on any later date on which Option Shares are to be purchased, the
Registration Statement and any amendment or supplement thereto (other than
the financial statements, including supporting schedules, and other
financial and statistical information derived therefrom, as to which such
counsel need express no comment) contained any untrue statement of a
material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, or at
the Closing Date or any later date on which the Option Shares are to be
purchased, as the case may be, the Registration Statement, the Prospectus
and any amendment or supplement thereto (except as aforesaid) contained any
untrue statement of a material fact or omitted to state a material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading.
Counsel rendering the foregoing opinion may rely as to questions of
law not involving the laws of the United States or the Commonwealth of
Virginia upon opinions of local counsel, and as to questions of fact upon
representations or certificates of officers of the Company, of the Selling
Stockholders, and of government officials, in which case their opinion is to
state that they are so relying and that they have no knowledge of any
material misstatement or inaccuracy in any such opinion, representation or
certificate. Copies of any opinion, representation or certificate so relied
upon shall be delivered to you, as Representatives of the Underwriters, and
to Underwriters' Counsel.
(e) You shall have received on the Closing Date and on any later date on
which Option Shares are to be purchased, as the case may be, an opinion of
Underwriters' Counsel, in form and substance satisfactory to you, with
respect to the sufficiency of all such corporate proceedings and other legal
matters relating to this Agreement and the transactions contemplated hereby
as you may reasonably require, and the Company shall have furnished to
Underwriters' Counsel such documents as they may have requested for the
purpose of enabling them to pass upon such matters.
<PAGE>
(f) You shall have received on the Closing Date and on any later date on
which Option Shares are to be purchased, as the case may be, a letter from
PricewaterhouseCoopers LLP addressed to the Underwriters, dated the Closing
Date or such later date on which Option Shares are to be purchased, as the
case may be, confirming that they are independent certified public
accountants with respect to the Company within the meaning of the Act and
the applicable published Rules and Regulations and based upon the procedures
described in such letter delivered to you concurrently with the execution of
this Agreement (herein called the "Original Letter"), but carried out to a
date not more than five business days prior to the Closing Date or such
later date on which Option Shares are to be purchased, as the case may be,
(i) confirming, to the extent true, that the statements and conclusions set
forth in the Original Letter are accurate as of the Closing Date or such
later date on which Option Shares are to be purchased, as the case may be,
and (ii) setting forth any revisions and additions to the statements and
conclusions set forth in the Original Letter that are necessary to reflect
any changes in the facts described in the Original Letter since the date of
such letter, or to reflect the availability of more recent financial
statements, data or information. The letter shall not disclose any change in
the condition (financial or otherwise), earnings, operations, business or
business prospects of the Company from that set forth in the Registration
Statement or Prospectus that, in your sole judgment, is material and adverse
and that makes it, in your sole judgment, impracticable or inadvisable to
proceed with the public offering of the Shares as contemplated by the
Prospectus. The Original Letter from PricewaterhouseCoopers LLP shall be
addressed to or for the use of the Underwriters in form and substance
satisfactory to the Underwriters and shall (i) represent that they are
independent certified public accountants with respect to the Company within
the meaning of the Act and the applicable published Rules and Regulations,
(ii) set forth their opinion with respect to their examination of the
balance sheets of the Company as of December 31, 1997 and 1998 and related
statements of operations, stockholders' equity, and cash flows for the
period from March 13, 1996 (inception) through December 31, 1996 and the
years ended December 31, 1997 and 1998, and (iii) address other matters
agreed upon by PricewaterhouseCoopers LLP and you. In addition, you shall
have received from PricewaterhouseCoopers LLP a letter addressed to the
Company and made available to you for the use of the Underwriters stating
that they had reviewed the Company's system of internal accounting controls
to the extent they deemed necessary in establishing the scope of their
examination of the Company's financial statements as of December 31, 1998;
such letter shall not disclose any weakness in internal controls that
PricewaterhouseCoopers LLP deemed to constitute a reportable condition.
(g) You shall have received on the Closing Date and on any later date on
which Option Shares are to be purchased, as the case may be, a certificate
of the Company, dated the Closing Date or such later date on which Option
Shares are to be purchased, as the case may be, signed by the Chief
Executive Officer or the President of the Company and the Chief Financial
Officer of the Company, to the effect that, and you shall be satisfied that:
(i) The representations and warranties of the Company in this
Agreement are true and correct, as if made on and as of the Closing Date
or any later date on which Option Shares are to be purchased, as the
case may be, and the Company has complied with all the agreements and
satisfied all the conditions on its part to be performed or satisfied at
or prior to the Closing Date or any later date on which Option Shares
are to be purchased, as the case may be;
(ii) No stop order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose have been
instituted or are pending or threatened under the Act;
(iii) When the Registration Statement became effective and at all
times subsequent thereto up to the delivery of such certificate, the
Registration Statement and the Prospectus, and any amendments or
supplements thereto, contained all material information required to be
included therein by the Act and the Rules and Regulations and in all
material respects conformed to the requirements of the Act and the Rules
and Regulations, the Registration Statement, and any amendment or
supplement thereto, did not and does not include any untrue statement of
a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, the
Prospectus, and any amendment or supplement thereto, did not and does
not include any untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading, and, since
the effective date of the Registration Statement, there has occurred no
event required to be set forth in an amended or supplemented Prospectus
that has not been so set forth; and
<PAGE>
(iv) Subsequent to the respective dates as of which information is
given in the Registration Statement and Prospectus, there has not been
(a) any material adverse change in the condition (financial or
otherwise), earnings, operations, business or business prospects of the
Company, (b) any transaction that is material to the Company, except
transactions entered into in the ordinary course of business, (c) any
material obligation, direct or contingent, incurred by the Company,
except obligations incurred in the ordinary course of business, (d) any
change in the capital stock or outstanding indebtedness of the Company
that is material to the Company (other than exercises, if any, of
options outstanding as disclosed in the Prospectus), (e) any dividend or
distribution of any kind declared, paid or made on the capital stock of
the Company, or (f) any loss or damage (whether or not insured) to the
property of the Company that has been sustained or will have been
sustained and that has a material adverse effect on the condition
(financial or otherwise), earnings, operations, business or business
prospects of the Company.
(h) You shall be satisfied that, and you shall have received a
certificate dated any date on which Option Shares are to be purchased from
the Attorneys for each Selling Stockholder to the effect that, as of such
date on which Option Shares are to be purchased they have not been informed
that:
(i) The representations and warranties made by such Selling
Stockholder herein are not true or correct in any material respect on
such date on which Option Shares are to be purchased; or
(ii) Such Selling Stockholder has not complied with any obligation
or satisfied any condition that is required to be performed or satisfied
on the part of such Selling Stockholder at or prior to such date on
which Option Shares are to be purchased.
(i) The Company shall have obtained and delivered to you an agreement
from each officer, director and director-nominee of the Company and each
record owner of Common Stock (including each Selling Stockholder) in writing
prior to the date hereof that such person will not, during the Lock-Up
Period, effect the Disposition of any Securities now owned or hereafter
acquired directly by such person or with respect to which such person has or
hereafter acquires the power of disposition, otherwise than (i) as a bona
fide gift or a distribution to limited partners, members or shareholders of
such person, provided that the donees or distributees thereof (or as the
case may be) agree in writing to be bound by the terms of this restriction
or (ii) with the prior written consent of BancBoston Robertson Stephens Inc.
The foregoing restriction shall have been expressly agreed to preclude the
holder of the Securities from engaging in any hedging or other transaction
which is designed to or reasonably expected to lead to or result in a
Disposition of Securities during the Lock-Up Period, even if such Securities
would be disposed of by someone other than the such holder. Such prohibited
hedging or other transactions would include any short sale (whether or not
against the box) or any purchase, sale or grant of any right (including any
put or call option) with respect to any Securities or with respect to any
security (other than a broad-based market basket or index) that includes,
relates to or derives any significant part of its value from the Securities.
Notwithstanding the foregoing, this restriction shall not prohibit (i) the
sale of Shares to the Underwriters pursuant to this Agreement or (ii)
resales of shares of Common Stock acquired either in the public offering to
which the Registration Statement relates or in subsequent open-market
purchases. Furthermore, such person will have also agreed and consented to
the entry of stop transfer instructions with the Company's transfer agent
against the transfer of the Securities held by such person except in
compliance with this restriction.
(j) The Company and the Selling Stockholders shall have furnished to you
such further certificates and documents as you shall reasonably request
(including certificates of officers of the Company and of the Selling
Stockholders as to the accuracy of the representations and warranties of the
Company and the Selling Stockholders herein, as to the performance by the
Company and the Selling Stockholders of their respective obligations
hereunder and as to the other conditions concurrent and precedent to the
obligations of the Underwriters hereunder.
All such opinions, certificates, letters and documents will be in
compliance with the provisions hereof only if they are reasonably satisfactory
to Underwriters' Counsel. The Company and the Selling Stockholders will furnish
you with such number of conformed copies of such opinions, certificates, letters
and documents as you shall reasonably request.
<PAGE>
7. Option Shares.
(a) On the basis of the representations, warranties and agreements
herein contained, but subject to the terms and conditions herein set forth,
the Company and the Selling Stockholders hereby grant, severally and not
jointly, to the several Underwriters, for the purpose of covering
over-allotments in connection with the distribution and sale of the Firm
Shares only, nontransferable options to purchase the respective number of
Option Shares as set forth opposite the names of the Company and the Selling
Stockholders in Schedule B hereto, all at the purchase price per share for
the Firm Shares set forth in Section 3 hereof. Such option may be exercised
by the Representatives on behalf of the several Underwriters on one or more
occasions in whole or in part during the period of thirty days after the
date on which the Firm Shares are initially offered to the public, by giving
written notice to the Company and the Selling Stockholders in accordance
with Section 12 hereof. The number of Option Shares to be purchased by each
Underwriter upon the exercise of such option shall be the same proportion of
the total number of Option Shares to be purchased by the several
Underwriters pursuant to the exercise of such option as the number of Firm
Shares purchased by such Underwriter (set forth in Schedule A hereto) bears
to the total number of Firm Shares purchased by the several Underwriters
(set forth in Schedule A hereto), adjusted by the Representatives in such
manner as to avoid fractional shares. In the event such option is exercised
for less than all of the Option Shares, the Option Shares to be purchased
shall be purchased (i) first, from the Selling Stockholders on a pro rata
basis, adjusted by the Representatives in such manner as to avoid fractional
shares and, second, to the extent the aggregate number of Option Shares for
which such option has been exercised exceeds 466,666, from the Company.
The certificates in negotiable form for the Option Shares to be sold
by the Selling Stockholders pursuant to the exercise of the option granted
by this Section 7 have been placed in custody (for delivery under this
Agreement) under the Custody Agreement. Each Selling Stockholder agrees that
the certificates for the Option Shares of such Selling Stockholder so held
in custody are subject to the interests of the Underwriters hereunder, that
the arrangements made by such Selling Stockholder for such custody,
including the Power of Attorney is to that extent irrevocable and that the
obligations of such Selling Stockholder hereunder shall not be terminated by
the act of such Selling Stockholder or by operation of law, whether by the
death or incapacity of such Selling Stockholder or the occurrence of any
other event, except as specifically provided herein or in the Custody
Agreement. If either Selling Stockholder should die or be incapacitated, or
if any other such event should occur, before the delivery of the
certificates for the Option Shares to be sold by such Selling Stockholder,
such Option Shares shall, except as specifically provided herein or in the
Custody Agreement, be delivered by the Custodian in accordance with the
terms and conditions of this Agreement as if such death, incapacity or other
event had not occurred, regardless of whether the Custodian shall have
received notice of such death or other event.
<PAGE>
Delivery of definitive certificates for the Option Shares to be
purchased by the several Underwriters pursuant to the exercise of the option
granted by this Section 7 shall be made against payment of the purchase
price therefor by the several Underwriters by certified or official bank
check or checks drawn in same-day funds or by wire transfer of same-day
funds, payable to the order of the Company with regard to the Option Shares
being purchased from the Company, and to the order of the Custodian for the
respective accounts of Selling Stockholders with regard to the Option Shares
being purchased from the Selling Stockholders. Such delivery and payment
shall take place at the offices of LeClair Ryan, A Professional Corporation,
707 East Main Street, Richmond, Virginia, or at such other place as may be
agreed upon among the Representatives, the Company and the Attorneys (i) on
the Closing Date, if written notice of the exercise of such option is
received by the Company and the Selling Stockholders at least two full
business days prior to the Closing Date, or (ii) on a date that shall not be
later than the third full business day following the date the Company and
the Selling Stockholders receive written notice of the exercise of such
option, if such notice is received by the Company and the Selling
Stockholders less than two full business days prior to the Closing Date.
The certificates for the Option Shares to be so delivered will be
made available to you at such office or such other location, including in
New York City, as you may reasonably request for checking at least one full
business day prior to the date of payment and delivery and will be in such
names and denominations as you may request, such request to be made at least
two full business days prior to such date of payment and delivery. If the
Representatives so elect, delivery of the Option Shares may be made by
credit through full fast transfer to the accounts at The Depository Trust
Company designated by the Representatives.
It is understood that you, individually, and not as the
Representatives of the several Underwriters, may (but shall not be obligated
to) make payment of the purchase price on behalf of any Underwriter or
Underwriters whose check or checks shall not have been received by you prior
to the date of payment and delivery for the Option Shares to be purchased by
such Underwriter or Underwriters. Any such payment by you shall not relieve
any such Underwriter or Underwriters of any of its or their obligations
hereunder.
(b) Upon exercise of any option provided for in Section 7(a) hereof, the
obligations of the several Underwriters to purchase such Option Shares will
be subject (as of the date hereof and as of the date of payment and delivery
for such Option Shares) to the accuracy of and compliance with the
representations, warranties and agreements of the Company and the Selling
Stockholders herein, to the accuracy of the statements of the Company, the
Selling Stockholders and officers of the Company made pursuant to the
provisions hereof, to the performance by the Company and the Selling
Stockholders of their respective obligations hereunder, to the conditions
set forth in Section 6 hereof, and to the condition that all proceedings
taken at or prior to the payment date in connection with the sale and
transfer of such Option Shares shall be reasonably satisfactory in form and
substance to you and to Underwriters' Counsel, and you shall have been
furnished with all such documents, certificates and opinions as you may
reasonably request in order to evidence the accuracy and completeness of any
of the representations, warranties or statements, the performance of any of
the covenants or agreements of the Company and the Selling Stockholders or
the satisfaction of any of the conditions herein contained.
8. Indemnification and Contribution.
<PAGE>
(a) The Company agrees to indemnify and hold harmless each Underwriter
against any losses, claims, damages or liabilities, joint or several, to
which such Underwriter may become subject (including in its capacity as an
Underwriter or as a "qualified independent underwriter" within the meaning
of Schedule E of the Bylaws of the NASD), under the Act, the Exchange Act or
otherwise, specifically including losses, claims, damages or liabilities (or
actions in respect thereof) arising out of or based upon (i) any breach of
any representation, warranty, agreement or covenant of the Company herein
contained, (ii) any untrue statement or alleged untrue statement of any
material fact contained in the Registration Statement or any amendment or
supplement thereto, or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading or (iii) any untrue statement or alleged
untrue statement of any material fact contained in any Preliminary
Prospectus or the Prospectus or any amendment or supplement thereto, or the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading, and agrees to
reimburse each Underwriter for any legal or other expenses reasonably
incurred by it in connection with investigating or defending any such loss,
claim, damage, liability or action; provided, however, that the Company
shall not be liable in any such case to the extent that any such loss,
claim, damage, liability or action arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made
in the Registration Statement, such Preliminary Prospectus or the
Prospectus, or any such amendment or supplement thereto, in reliance upon,
and in conformity with, written information relating to any Underwriter
furnished to the Company by such Underwriter, directly or through you,
specifically for use in the preparation thereof and, provided further that
the indemnity agreement provided in this Section 8(a) with respect to any
Preliminary Prospectus shall not inure to the benefit of any Underwriter
from whom the person asserting any losses, claims, damages, liabilities or
actions based upon any untrue statement or alleged untrue statement of
material fact or omission or alleged omission to state therein a material
fact purchased Shares, if a copy of the Prospectus (or any amendment or
supplement thereto, to the extent available at the time) in which such
untrue statement or alleged untrue statement or omission or alleged omission
was corrected had not been sent or given to such person within the time
required by the Act and the Rules and Regulations, unless such failure is
the result of noncompliance by the Company with Section 4(d) hereof.
The indemnity agreement in this Section 8(a) shall extend upon the
same terms and conditions to, and shall inure to the benefit of, each
person, if any, who controls any Underwriter within the meaning of the Act
or the Exchange Act. This indemnity agreement shall be in addition to any
liabilities that the Company may otherwise have.
(b) Subject to Section 8(f), each Selling Stockholder, severally and not
jointly, agrees to indemnify and hold harmless each Underwriter against any
losses, claims, damages or liabilities, joint or several, to which such
Underwriter may become subject (including in its capacity as an Underwriter)
under the Act, the Exchange Act or otherwise, specifically including losses,
claims, damages or liabilities (or actions in respect thereof) arising out
of or based upon (i) any breach of any representation, warranty, agreement
or covenant of such Selling Stockholder herein contained, (ii) any untrue
statement or alleged untrue statement of any material fact contained in the
Registration Statement or any amendment or supplement thereto, or the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading,
or (iii) any untrue statement or alleged untrue statement of any material
fact contained in any Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto, or the omission or alleged omission to
state therein a material fact necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading,
in the case of subparagraphs (ii) and (iii) of this Section 8(b) to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in reliance upon and in
conformity with written information furnished to the Company or such
Underwriter by such Selling Stockholder, directly or through such Selling
Stockholder's representatives, specifically for use in the preparation
thereof, and agrees to reimburse each Underwriter for any legal or other
expenses reasonably incurred by it in connection with investigating or
defending any such loss, claim, damage, liability or action; provided,
however, that:
<PAGE>
(i) any payment obligation of the Selling Stockholders under this
Section 8(b) shall be limited to the amount of losses, claims, damages
and liabilities that are not paid by the Company pursuant to Section
8(a), and any payment by the Selling Stockholders under this Section
8(b) shall not be required until after (A) compliance with the
provisions of Section 8(d) with respect to the obligations of the
Company under Section 8(a) and (B) demand for payment has been made by
the Underwriters first upon the Company and such payment has not made by
the Company within fifteen days of such demand, provided, however, that
this clause (i) shall not apply with respect to any Selling Stockholder
in the event and to the extent that any such loss, claim, damage or
liability arises out of or is based upon an untrue statement or alleged
untrue statement or omission or alleged omission made in the
Registration Statement, any Preliminary Prospectus or the Prospectus, or
any amendment or supplement thereto, in reliance upon, and in conformity
with, written information relating to such Selling Stockholder furnished
to the Company by such Selling Stockholder specifically for use in the
preparation thereof; and
(ii) the indemnity agreement provided in this Section 8(b) with
respect to any Preliminary Prospectus shall not inure to the benefit of
any Underwriter from whom the person asserting any losses, claims,
damages, liabilities or actions based upon any untrue statement or
alleged untrue statement of a material fact or omission or alleged
omission to state therein a material fact purchased Shares, if a copy of
the Prospectus in which such untrue statement or alleged untrue
statement or omission or alleged omission was corrected had not been
sent or given to such person within the time required by the Act and the
Rules and Regulations, unless such failure is the result of
noncompliance by the Company with Section 4(d) hereof.
The indemnity agreement in this Section 8(b) shall extend upon the
same terms and conditions to, and shall inure to the benefit of, each
person, if any, who controls any Underwriter within the meaning of the Act
or the Exchange Act. This indemnity agreement shall be in addition to any
liabilities that such Selling Stockholder otherwise may have.
(c) Each Underwriter, severally and not jointly, agrees to indemnify and
hold harmless the Company and each Selling Stockholder against any losses,
claims, damages or liabilities, joint or several, to which the Company or
such Selling Stockholder may become subject under the Act or otherwise,
specifically including losses, claims, damages or liabilities (or actions in
respect thereof) arising out of or based upon (i) any breach of any
representation, warranty, agreement or covenant of such Underwriter herein
contained, (ii) any untrue statement or alleged untrue statement of any
material fact contained in the Registration Statement or any amendment or
supplement thereto, or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading or (iii) any untrue statement or alleged
untrue statement of any material fact contained in any Preliminary
Prospectus or the Prospectus or any amendment or supplement thereto, or the
omission or alleged omission to state therein a material fact necessary to
make the statements therein, in the light of the circumstances under which
they were made, not misleading, in the case of subparagraphs (ii) and (iii)
of this Section 8(c) to the extent, but only to the extent, that such untrue
statement or alleged untrue statement or omission or alleged omission was
made in reliance upon and in conformity with written information furnished
to the Company by such Underwriter, directly or through you, specifically
for use in the preparation thereof, and agrees to reimburse the Company and
each such Selling Stockholder for any legal or other expenses reasonably
incurred by the Company and each such Selling Stockholder in connection with
investigating or defending any such loss, claim, damage, liability or
action.
The indemnity agreement in this Section 8(c) shall extend upon the
same terms and conditions to, and shall inure to the benefit of, each
officer of the Company who signed the Registration Statement and each
director of the Company, each Selling Stockholder and each person, if any,
who controls the Company or either Selling Stockholder within the meaning of
the Act or the Exchange Act. This indemnity agreement shall be in addition
to any liabilities that each Underwriter may otherwise have.
<PAGE>
(d) Promptly after receipt by an indemnified party under this Section 8
of notice of the commencement of any action, such indemnified party shall,
if a claim in respect thereof is to be made against any indemnifying party
under this Section 8, notify the indemnifying party in writing of the
commencement thereof but the omission so to notify the indemnifying party
will not relieve it from any liability that it may have to any indemnified
party otherwise than under this Section 8. In case any such action is
brought against any indemnified party, and it notified the indemnifying
party of the commencement thereof, the indemnifying party will be entitled
to participate therein and, to the extent that it shall elect by written
notice delivered to the indemnified party promptly after receiving the
aforesaid notice from such indemnified party, to assume the defense thereof,
with counsel reasonably satisfactory to such indemnified party; provided,
however, that if the defendants in any such action include both the
indemnified party and the indemnifying party and the indemnified party shall
have reasonably concluded that there may be legal defenses available to it
and/or other indemnified parties that are different from or additional to
those available to the indemnifying party, the indemnified party or parties
shall have the right to select separate counsel to assume such legal
defenses and to otherwise participate in the defense of such action on
behalf of such indemnified party or parties. Upon receipt of notice from the
indemnifying party to such indemnified party of the indemnifying party's
election so to assume the defense of such action and approval by the
indemnified party of counsel, the indemnifying party will not be liable to
such indemnified party under this Section 8 for any legal or other expenses
subsequently incurred by such indemnified party in connection with the
defense thereof unless (i) the indemnified party shall have employed
separate counsel in accordance with the proviso to the next preceding
sentence (it being understood, however, that the indemnifying party shall
not be liable for the expenses of more than one separate counsel (together
with appropriate local counsel) approved by the indemnifying party
representing all the indemnified parties under Section 8(a), 8(b) or 8(c)
hereof who are parties to such action), (ii) the indemnifying party shall
not have employed counsel satisfactory to the indemnified party to represent
the indemnified party within a reasonable time after notice of commencement
of the action or (iii) the indemnifying party has authorized the employment
of counsel for the indemnified party at the expense of the indemnifying
party; provided that in no event shall the indemnifying party be liable to
such indemnified party for any legal fees or expenses in excess of
reasonable legal fees and expenses. In no event shall any indemnifying party
be liable in respect of any amounts paid in settlement of any action unless
the indemnifying party shall have approved the terms of such settlement;
provided that such consent shall not be unreasonably withheld. No
indemnifying party shall, without the prior written consent of the
indemnified party, effect any settlement of any pending or threatened
proceeding in respect of which any indemnified party is or could have been a
party and indemnification could have been sought hereunder by such
indemnified party, unless such settlement includes an unconditional release
of such indemnified party from all liability on all claims that are the
subject matter of such proceeding.
<PAGE>
(e) In order to provide for just and equitable contribution in any
action in which a claim for indemnification is made pursuant to this Section
8 but it is judicially determined (by the entry of a final judgment or
decree by a court of competent jurisdiction and the expiration of time to
appeal or the denial of the last right of appeal) that such indemnification
may not be enforced in such case notwithstanding the fact that this Section
8 provides for indemnification in such case, all the parties hereto shall
contribute to the aggregate losses, claims, damages or liabilities to which
they may be subject (after contribution from others) in such proportion so
that, except as set forth in Section 8(f) hereof, the Underwriters severally
and not jointly are responsible pro rata for the portion represented by the
percentage that the underwriting discount bears to the initial public
offering price, and the Company and the Selling Stockholders are responsible
for the remaining portion, provided, however, that (i) no Underwriter shall
be required to contribute any amount in excess of the amount by which the
underwriting discount applicable to the Shares purchased by such Underwriter
exceeds the amount of damages that such Underwriter has otherwise required
to pay and (ii) no person guilty of a fraudulent misrepresentation (within
the meaning of Section 11(f) of the Act) shall be entitled to contribution
from any person who is not guilty of such fraudulent misrepresentation. The
contribution agreement in this Section 8(e) shall extend upon the same terms
and conditions to, and shall inure to the benefit of, each person, if any,
who controls any Underwriter, the Company or either Selling Stockholder
within the meaning of the Act or the Exchange Act and each officer of the
Company who signed the Registration Statement and each director of the
Company.
(f) The liability of each Selling Stockholder under the indemnity and
contribution agreements contained in the provisions of this Section 8 shall
be limited to an amount equal to the initial public offering price of any
Option Shares sold by such Selling Stockholder to the Underwriters minus the
amount of the underwriting discounts and commissions paid thereon to the
Underwriters by such Selling Stockholder. Without limiting the foregoing, if
no Option Shares are sold by the Selling Stockholders to the Underwriters,
the Selling Stockholders, as such, shall have no liability under this
Section 8. The Company and such Selling Stockholders may agree, as among
themselves and without limiting the rights of the Underwriters under this
Agreement, as to the respective amounts of such liability for which they
each shall be responsible.
(g) The parties to this Agreement hereby acknowledge that they are
sophisticated business persons who were represented by counsel during the
negotiations regarding the provisions hereof including the provisions of
this Section 8, and are fully informed regarding said provisions. They
further acknowledge that the provisions of this Section 8 fairly allocate
the risks in light of the ability of the parties to investigate the Company
and its business in order to assure that adequate disclosure is made in the
Registration Statement and Prospectus as required by the Act and the
Exchange Act.
9. Representations, Warranties, Covenants and Agreements to Survive
Delivery. All representations, warranties, covenants and agreements of the
Company, the Selling Stockholders and the Underwriters herein or in certificates
delivered pursuant hereto, and the indemnity and contribution agreements
contained in Section 8 hereof shall remain operative and in full force and
effect regardless of any investigation made by or on behalf of any Underwriter
or any person controlling any Underwriter within the meaning of the Act or the
Exchange Act, or by or on behalf of the Company or either Selling Stockholder,
or any of their officers, directors or controlling persons within the meaning of
the Act or the Exchange Act, and shall survive the delivery of the Shares to the
several Underwriters hereunder or termination of this Agreement.
10. Substitution of Underwriters. If any Underwriter or Underwriters shall
fail to take up and pay for the number of Firm Shares agreed by such Underwriter
or Underwriters to be purchased hereunder upon tender of such Firm Shares in
accordance with the terms hereof, and if the aggregate number of Firm Shares
that such defaulting Underwriter or Underwriters so agreed but failed to
purchase does not exceed ten percent of the Firm Shares, the remaining
Underwriters shall be obligated, severally in proportion to their respective
commitments hereunder, to take up and pay for the Firm Shares of such defaulting
Underwriter or Underwriters.
<PAGE>
If any Underwriter or Underwriters so defaults and the aggregate number
of Firm Shares that such defaulting Underwriter or Underwriters agreed but
failed to take up and pay for exceeds ten percent of the Firm Shares, the
remaining Underwriters shall have the right, but shall not be obligated, to take
up and pay for (in such proportions as may be agreed upon among them) the Firm
Shares that the defaulting Underwriter or Underwriters so agreed but failed to
purchase. If such remaining Underwriters do not, at the Closing Date, take up
and pay for the Firm Shares that the defaulting Underwriter or Underwriters so
agreed but failed to purchase, the Closing Date shall be postponed for
twenty-four hours to allow the several Underwriters the privilege of
substituting within twenty-four hours (including non-business hours) another
underwriter or underwriters (which may include any nondefaulting Underwriter)
satisfactory to the Company. If no such underwriter or underwriters shall have
been substituted as aforesaid by such postponed Closing Date, the Closing Date
may, at the option of the Company, be postponed for a further twenty-four hours,
if necessary, to allow the Company the privilege of finding another underwriter
or underwriters, satisfactory to you, to purchase the Firm Shares that the
defaulting Underwriter or Underwriters so agreed but failed to purchase. If it
shall be arranged for the remaining Underwriters or substituted underwriter or
underwriters to take up the Firm Shares of the defaulting Underwriter or
Underwriters as provided in this Section 10, (i) the Company shall have the
right to postpone the time of delivery for a period of not more than seven full
business days, in order to effect whatever changes may thereby be made necessary
in the Registration Statement or the Prospectus, or in any other documents or
arrangements, and the Company agrees promptly to file any amendments to the
Registration Statement, supplements to the Prospectus or other such documents
that may thereby be made necessary, and (ii) the respective number of Firm
Shares to be purchased by the remaining Underwriters and substituted underwriter
or underwriters shall be taken as the basis of their underwriting obligation. If
the remaining Underwriters shall not take up and pay for all such Firm Shares so
agreed to be purchased by the defaulting Underwriter or Underwriters or
substitute another underwriter or underwriters as aforesaid and the Company
shall not find or shall not elect to seek another underwriter or underwriters
for such Firm Shares as aforesaid, then this Agreement shall terminate.
In the event of any termination of this Agreement pursuant to the
preceding paragraph of this Section 10, neither the Company nor either Selling
Stockholder shall be liable to any Underwriter (except as provided in Sections 5
and 8 hereof) nor shall any Underwriter (other than an Underwriter who shall
have failed, otherwise than for some reason permitted under this Agreement, to
purchase the number of Firm Shares agreed by such Underwriter to be purchased
hereunder, which Underwriter shall remain liable to the Company, the Selling
Stockholders and the other Underwriters for damages, if any, resulting from such
default) be liable to the Company or either Selling Stockholder (except to the
extent provided in Sections 5 and 8 hereof).
The term "Underwriter" in this Agreement shall include any person
substituted for an Underwriter under this Section 10.
11. Effective Date of this Agreement and Termination.
(a) This Agreement shall become effective at the earlier of (i) 6:30
A.M., San Francisco time, on the first full business day following the
effective date of the Registration Statement or (ii) the time of the initial
public offering of any of the Shares by the Underwriters after the
Registration Statement becomes effective. The time of the initial public
offering shall mean the time of the release by you, for publication, of the
first newspaper advertisement relating to the Shares, or the time at which
the Shares are first generally offered by the Underwriters to the public by
letter, telephone, telegram or telecopy, whichever shall first occur. By
giving notice as set forth in Section 12 before the time this Agreement
becomes effective, you, as Representatives of the several Underwriters, or
the Company, may prevent this Agreement from becoming effective without
liability of any party to any other party, except as provided in Sections
4(j), 5 and 8 hereof.
<PAGE>
(b) You, as Representatives of the several Underwriters, shall have the
right to terminate this Agreement by giving notice as hereinafter specified
at any time on or prior to the Closing Date or on or prior to any later date
on which Option Shares are to be purchased, as the case may be, (i) if the
Company or either Selling Stockholder shall have failed, refused or been
unable to perform any agreement on its part to be performed, or because any
other condition of the Underwriters' obligations hereunder required to be
fulfilled is not fulfilled, including any change in the condition (financial
or otherwise), earnings, operations, business or business prospects of the
Company from that set forth in the Registration Statement or Prospectus
that, in your sole judgment, is material and adverse, or (ii) if additional
material governmental restrictions, not in force and effect on the date
hereof, shall have been imposed upon trading in securities generally or
minimum or maximum prices shall have been generally established on the New
York Stock Exchange or on the American Stock Exchange or in the
over-the-counter market by the NASD, or trading in securities generally
shall have been suspended on either such exchange or in the over-the-counter
market by the NASD, or if a banking moratorium shall have been declared by
federal, New York or California authorities, or (iii) if the Company shall
have sustained a loss by strike, fire, flood, earthquake, accident or other
calamity of such character as to interfere materially with the conduct of
the business and operations of the Company regardless of whether or not such
loss shall have been insured or (iv) if there shall have been a material
adverse change in the general political or economic conditions or financial
markets as in your reasonable judgment makes it inadvisable or impracticable
to proceed with the offering, sale and delivery of the Shares, or (v) if
there shall have been an outbreak or escalation of hostilities or of any
other insurrection or armed conflict or the declaration by the United States
of a national emergency that, in the reasonable opinion of the
Representatives, makes it impracticable or inadvisable to proceed with the
public offering of the Shares as contemplated by the Prospectus. In the
event of termination pursuant to subparagraph (i) above, the Company shall
remain obligated to pay costs and expenses pursuant to Sections 4(j), 5 and
8 hereof. Any termination pursuant to any of subparagraphs (ii) through (v)
above shall be without liability of any party to any other party except as
provided in Sections 5 and 8 hereof.
If you elect to prevent this Agreement from becoming effective or to
terminate this Agreement as provided in this Section 11, you shall promptly
notify the Company by telephone, telecopy or telegram, in each case
confirmed by letter. If the Company shall elect to prevent this Agreement
from becoming effective, the Company shall promptly notify you by telephone,
telecopy or telegram, in each case, confirmed by letter.
12. Notices. All notices or communications hereunder, except as herein
otherwise specifically provided, shall be in writing and if sent to you shall be
mailed, delivered, telegraphed (and confirmed by letter) or telecopied (and
confirmed by letter) to you c/o BancBoston Robertson Stephens Inc., 555
California Street, Suite 2600, San Francisco, California 94104, telecopier
number (415) 781-0278, Attention: General Counsel; if sent to the Company, such
notice shall be mailed, delivered, telegraphed (and confirmed by letter) or
telecopied (and confirmed by letter) to Value America, Inc., 2300 Commonwealth
Drive, Charlottesville, Virginia 22901, telecopier number (804) 817-7884,
Attention: Chief Executive Officer; if sent to one or more of the Selling
Stockholders, such notice shall be sent mailed, delivered, telegraphed (and
confirmed by letter) or telecopied (and confirmed by letter) to Dean M. Johnson,
as Attorney-in-Fact for the Selling Stockholders, at Value America, Inc., 2300
Commonwealth Drive, Charlottesville, Virginia 22901, telecopier number (804)
817-7884.
13. Parties. This Agreement shall inure to the benefit of and be binding
upon the several Underwriters, the Company and the Selling Stockholders and
their respective executors, administrators, successors and assigns. Nothing
expressed or mentioned in this Agreement is intended or shall be construed to
give any person or entity, other than the parties hereto and their respective
executors, administrators, successors and assigns, and the controlling persons
within the meaning of the Act or the Exchange Act, officers and directors
referred to in Section 8 hereof, any legal or equitable right, remedy or claim
in respect of this Agreement or any provisions herein contained, this Agreement
and all conditions and provisions hereof being intended to be and being for the
sole and exclusive benefit of the parties hereto and their respective executors,
administrators, successors and assigns and said controlling persons and said
officers and directors, and for the benefit of no other person or entity. No
purchaser of any of the Shares from any Underwriter shall be construed a
successor or assign by reason merely of such purchase.
<PAGE>
In all dealings with the Company under this Agreement, you shall act on
behalf of each of the several Underwriters, and the Company and the Selling
Stockholders shall be entitled to act and rely upon any statement, request,
notice or agreement made or given by you jointly or by BancBoston Robertson
Stephens Inc. on behalf of you.
14. Applicable Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of New York.
15. Construction. The headings in this Agreement are included only for
convenience and shall not affect the meaning or interpretation of this
Agreement. The words "herein" and "hereof" and other words of similar import
refer to this Agreement as a whole and not to any particular part of this
Agreement. The word "including" as used herein shall not be construed so as to
exclude any other thing not referred to or described.
16. Counterparts. This Agreement may be signed in several counterparts, each
of which will constitute an original.
If the foregoing correctly sets forth the understanding among the Company,
the Selling Stockholders and the several Underwriters, please so indicate in the
space provided below for that purpose, whereupon this letter shall constitute a
binding agreement among the Company, the Selling Stockholders and the several
Underwriters.
Very truly yours,
VALUE AMERICA, INC.
By_______________________________________
Chairman
SELLING STOCKHOLDERS
By_______________________________________
Attorney-in-Fact for the Selling
Stockholders
named in Schedule B hereto
Accepted as of the date first above written:
BANCBOSTON ROBERTSON STEPHENS INC.
VOLPE BROWN WHELAN & COMPANY, LLC
THE ROBINSON-HUMPHREY COMPANY, LLC
On their behalf and on behalf of each of the
several Underwriters named in Schedule A hereto
By BancBoston Robertson Stephens Inc.
By____________________________________________
Authorized Signatory
<PAGE>
SCHEDULE A
- - -------------------------------------------------------------------------------
Number of
Firm Shares
To Be
Underwriters Purchased
- - ------------ -----------
BancBoston Robertson Stephens Inc.................................
Volpe Brown Whelan & Company, LLC.................................
The Robinson-Humphrey Company, LLC................................
---------
Total........................................................ 5,000,000
=========
<PAGE>
SCHEDULE B
- - -------------------------------------------------------------------------------
Number
of Option
Shares To
Company or Selling Stockholder Be Sold
- - ------------------------------ ---------
Value America, Inc...................................................... 283,334
Craig A. Winn........................................................... 333,333
Rex Scatena............................................................. 133,333
-------
Total............ ................................................. 750,000
=======
<PAGE>
SCHEDULE C
Name of Stockholder Subject to Lock-Up Agreement
EXHIBIT 10.25
VALUE AMERICA, INC.
1997 STOCK INCENTIVE PLAN
1. Purpose. The purpose of this Value America, Inc. 1997 Stock
Incentive Plan (the "Plan") is to further the long term stability and financial
success of Value America, Inc. (the "Company") by attracting and retaining
personnel, including employees, directors, officers, consultants, agents,
advisors and independent contractors, through the use of stock incentives. It is
believed that ownership of Company stock will stimulate the efforts of those
persons upon whose judgment and interest the Company is and will be largely
dependent for the successful conduct of its business. It is also believed that
Incentive Awards granted to such persons under this Plan will strengthen their
desire to remain with the Company or to continue to contribute to the growth of
the business of the Company and will further the identification of their
interests with those of the Company's shareholders. The Plan is intended to
conform to the provisions of Securities and Exchange Commission Rule 16b-3
promulgated under the 1934 Act, if the Company shall register its Common Stock
under Section 12 of the 1934 Act.
2. Definitions. As used in the Plan, the following terms have the
meanings indicated:
(a) "Agreement" means a written agreement (including any
amendment or supplement thereto) between the Company and a Participant
specifying the terms and conditions of an Incentive Award granted to such
Participant.
(b) "Applicable Withholding Taxes" means the aggregate amount
of federal, state, and local income and payroll taxes that the Company is
required to withhold in connection with any exercise of a Nonstatutory Stock
Option, SAR, or Tax Offset Right, any lapse of restrictions on Restricted Stock,
or any grant of Performance Stock.
(c) "Affiliate" means any "parent" or "subsidiary" corporation
(within the meaning of Code Section 424) of the Company.
(d) "Board" means the Board of Directors of the Company.
(e) "Cause" means dishonesty, fraud, misconduct, gross
incompetence, gross negligence, breach of a material fiduciary duty, material
breach of an agreement with the Company or any of its Subsidiaries, unauthorized
use or disclosure of confidential information or trade secrets, or conviction or
confession of a crime punishable by law (except minor violations), in each case
as determined by the Committee, which determination shall be binding.
(f) "Change of Control" means:
(i) The acquisition, other than from the Company, by
any individual, entity, or group (within the meaning of
Section 13(d)(3) or 14(d)(2) of the 1934 Act), of beneficial
ownership (within the meaning of Rule 13d-3 promulgated under
the 1934 Act) of 50% or more of either the then outstanding
shares of Common Stock or the combined voting power of the
then outstanding voting securities of the Company entitled to
vote generally in the election of directors (collectively,
"Voting Securities"), but excluding for this purpose, any such
acquisition by the Company or any of its subsidiaries, or any
employee benefit plan (or related trust) of the Company or its
subsidiaries, or any corporation with respect to which,
following such acquisition, more than 50% of the then
outstanding shares of Voting Securities of such is then
beneficially owned, directly or indirectly, by the individuals
and entities who were the beneficial owners of Voting
Securities of the Company immediately prior to such
acquisition in substantially the same proportion as their
ownership, immediately prior to such acquisition, of the then
outstanding shares of Voting Securities of the Company;
provided, however, that a Change of Control shall not result
from beneficial ownership of 50% or more of either the then
outstanding shares of Voting Securities of the Company by any
individual, entity, or group who is the beneficial owner of
such securities as of the effective date of this Plan so long
as such individual, entity, or group does not thereafter
acquire beneficial ownership of additional shares of such
securities that in the aggregate exceed 5% of the outstanding
shares of Voting Securities of the Company without the prior
approval of the Board; or
(ii) Approval by the shareholders of the Company of
(A) a reorganization, merger or consolidation with respect to
which the individuals and entities who were the respective
beneficial owners of the Voting Securities of the Company
immediately prior to such reorganization, merger or
consolidation do not, following such reorganization, merger or
consolidation, beneficially own, directly or indirectly, more
than 50% of the then outstanding shares of Voting Securities
of the corporation resulting from such reorganization, merger
or consolidation, or (B) a complete liquidation or dissolution
of the Company, or (C) any sale, lease, exchange, or other
disposition in one transaction or a series of related
transactions of all or substantially all of the Company's
assets other than a disposition of the Company's assets to a
majority-owned Subsidiary.
(g) "Code" means the Internal Revenue Code of 1986, as
amended.
(h) "Committee" means the Compensation Committee appointed by
the Board from time to time as described under Section 19 hereof, or in the
absence of such Committee, the Board.
(i) "Common Stock" means Common Stock, no par value, of the
Company. If the par value of the Common Stock is changed, or in the event of a
change in the capital structure of the Company (as provided in Section 15), the
shares resulting from such a change shall be deemed to be Common Stock within
the meaning of the Plan.
(j) "Company" means Value America, Inc., a Nevada corporation.
(k) "Date of Grant" means the date on which an Incentive Award
is granted by the Committee. If, however, the Committee designates in a
resolution a later date as the date an Incentive Award is to be granted, then
such later date shall be the Date of Grant.
(l) "Disability" or "Disabled" means, as to an ISO, a
Disability within the meaning of Code Section 22(e)(3). As to all other
Incentive Awards, the Committee shall determine whether a Disability exists,
which determination shall be conclusive.
(m) "Fair Market Value" means, on any given date, the value of
a share of Common Stock. If the Common Stock is not publicly traded on the date
of valuation, the value shall be determined by the Committee in good faith using
any reasonable method. If the Common Stock is publicly traded, then Fair Market
Value shall equal (i) if the Common Stock is listed on the Nasdaq National
Market, the average of the high and low per share sales prices for the Common
Stock as reported by the Nasdaq National Market for a single trading day or (ii)
if the Common Stock is listed on the New York Stock Exchange or the American
Stock Exchange, the average of the high and low per share sales prices for the
Common Stock as such price is officially quoted in the composite tape of
transactions on such exchange for a single trading day. If there is no such
reported price for the Common Stock for the date in question, then such price on
the last preceding date for which such price exists shall be determinative of
the Fair Market Value.
(n) "Immediate Family Member" means, with respect to a
particular Participant, the Participant's spouse, children, stepchildren,
grandchildren, parents, grandparents, siblings, and adopted individuals.
(o) "Incentive Award" means any form of an Option, Stock
Appreciation Right, Performance Stock, Restricted Stock, or Tax Offset Right
granted under the Plan.
(p) "Incentive Stock Option" or "ISO" means an Option intended
to meet the requirements of, and qualify for favorable federal income tax
treatment, under Code Section 422.
(q) "Insider" means a person subject to Section 16(b) of the
1934 Act.
(r) "1934 Act" means the Securities Exchange Act of 1934,
as amended.
(s) "1933 Act" means the Securities Act of 1933, as amended.
(t) "Nonstatutory Stock Option" means an Option that does not
meet the requirements of Code Section 422, or, even if meeting the requirements
of Code Section 422, is not intended to be an ISO and is so designated.
(u) "Option" means a right to purchase Common Stock granted
under the Plan, at a price determined in accordance with the Plan and set forth
in an Agreement.
(v) "Participant" means an individual to whom an Incentive
Award is granted under the Plan.
(w) "Performance Stock" means Common Stock awarded when
performance goals are achieved pursuant to an incentive program as provided in
Section 7.
(x) "Permitted Transferee" has the meaning provided in
Section 11(b).
(y) "Plan" means the Value America, Inc. 1997 Stock
Option Plan.
(z) "Reload Feature" means a feature of an Option described in
an Agreement that authorizes the automatic grant of a Reload Option in
accordance with the provisions of Section 10(c).
(aa) "Reload Option" means an Option automatically granted to
a Participant equal to the number of shares of already owned Common Stock
delivered by the Participant to exercise an Option having a Reload Feature.
(bb) "Restricted Stock" means Common Stock awarded upon the
terms and subject to the restrictions set forth in Section 6.
(cc) "Rule 16b-3" means Rule 16b-3 of the Securities and
Exchange Commission promulgated under the 1934 Act. A reference in the Plan to
Rule 16b-3 shall include a reference to any corresponding rule (or number
redesignation) of any amendments to Rule 16b-3 enacted after the effective date
of the Plan's adoption.
(dd) "Stock Appreciation Right" or "SAR" means a right to
receive amounts from the Company granted under Section 9.
(ee) "Ten Percent Shareholder" means any individual who owns,
directly or indirectly, more than 10% of the total combined voting power of all
classes of stock of the Company or of an Affiliate. Indirect ownership of stock
shall be determined in accordance with Code Section 424(d).
(ff) "Tax Offset Right" means a right to receive cash amounts
related to Applicable Withholding Taxes from the Company as described in Section
12 of the Plan.
3. General. All types of Incentive Awards may be granted under the
Plan. Options granted under the Plan may be ISOs or Nonstatutory Stock Options.
4. Stock. Subject to Section 17 of the Plan, there shall be reserved
for issuance under the Plan an aggregate of 6,250,000 shares of Common Stock,
which shall be authorized, but unissued shares. Incentive Awards may be made and
exercised as to whole shares or fractional shares, at the discretion of the
Committee. Shares that have not been issued and shares allocated to options or
portions thereof that expire or otherwise terminate unexercised after the
effective date of the Plan may be subjected to an Incentive Award under the
Plan. If an Incentive Award is terminated or expires, in whole or in part, for
any reason other than its exercise, the number of shares of Common Stock
allocated to the Incentive Award or portion thereof may be reallocated to other
Incentive Awards to be granted under this Plan. Shares of Common Stock subject
to repurchase or forfeiture which are subsequently repurchased or reacquired by
the Company shall also be available for issuance in connection with future
grants of Incentive Awards. For purposes of determining the number of shares
that are available for Incentive Awards under the Plan, such number shall, to
the extent permissible under Rule 16b-3, include the number of shares
surrendered by a Participant or retained by the Company in payment of Applicable
Withholding Taxes; provided, however, that for purposes of Code Section 162(m),
any such shares shall be counted in accordance with the requirements of such
Code Section.
5. Eligibility.
(a) Subject to the sole discretion of the Committee, any
employee, director, officer, consultant, agent, advisor, or independent
contractor of the Company (or any Affiliate including a corporation that becomes
an Affiliate after the adoption of this Plan) is eligible to receive Incentive
Awards; provided that only employees of the Company or its Affiliates may be
granted ISO's. The Committee has the sole discretion to determine for each
Participant the terms and conditions, the nature of the award, and the number of
shares to be allocated to each Participant as part of each Incentive Award. Any
Incentive Award granted under this Plan shall be evidenced by an Agreement which
shall be subject to the applicable provisions of this Plan and to other such
provisions as the Committee may impose.
(b) The grant of an Incentive Award shall not obligate the
Company or any Affiliate to pay a Participant any particular amount of
remuneration, to continue the employment of a Participant after the grant, or to
make further grants to the Participant at any time thereafter.
6. Restricted Stock Awards.
(a) Whenever the Committee deems it appropriate to grant
Restricted Stock, notice shall be given to the Participant stating the number of
shares of Restricted Stock granted and the terms and conditions to which the
Restricted Stock is subject. This notice, when accepted in writing by the
Participant, shall become an Agreement and certificates representing the shares
shall be issued and delivered to the Participant. Restricted Stock may be
awarded by the Committee in its discretion without cash consideration.
(b) Restricted Stock issued pursuant to the Plan shall be
subject to the following restrictions:
(i) No shares of Restricted Stock may be sold,
assigned, transferred, or disposed of by an Insider within a
six-month period beginning on the Date of Grant, and
Restricted Stock may not be pledged, hypothecated, or
otherwise encumbered within a six-month period beginning on
the Date of Grant if such action would be treated as a sale or
disposition under Rule 16b-3.
(ii) No shares of Restricted Stock may be sold,
assigned, transferred, pledged, hypothecated, or otherwise
encumbered or disposed of until the restrictions on such
shares as set forth in the Participant's Agreement have lapsed
or been removed pursuant to paragraph (d) or (e) below.
(iii) If a Participant ceases to be employed by the
Company or an Affiliate, the Participant shall forfeit to the
Company any shares of Restricted Stock on which the
restrictions have not lapsed or been removed pursuant to
paragraph (d) or (e) below on the date such Participant shall
cease to be so employed and the Company shall have no
obligation to pay any amounts with respect to such forfeiture,
unless the Committee determines to the contrary.
(c) Upon the acceptance by a Participant of an award of
Restricted Stock, such Participant shall, subject to the restrictions set forth
in paragraph (b) above, have all the rights of a shareholder with respect to
such shares of Restricted Stock, including, but not limited to, the right to
vote such shares of Restricted Stock and the right to receive all dividends and
other distributions paid thereon. Certificates representing Restricted Stock
shall bear a legend referring to the restrictions set forth in the Plan and the
Participant's Agreement.
(d) The Committee shall establish as to each award of
Restricted Stock the terms and conditions upon which the restrictions set forth
in paragraph (b) above shall lapse. Such terms and conditions may include,
without limitation, the lapsing of such restrictions as a result of the
Disability, death or Retirement of the Participant or the occurrence of a Change
of Control.
(e) Notwithstanding the provisions of paragraphs (b)(ii) and
(iii) above, the Committee may at any time, in its sole discretion, accelerate
the time at which any or all restrictions will lapse or remove any and all such
restrictions.
(f) Until the requirements of Section 12 have been met, no
stock certificate free of a legend reflecting the restrictions set forth in
paragraph (b) above shall be issued to such Participant.
7. Performance Stock Awards.
(a) Performance Stock may be issued pursuant to the Plan in
connection with incentive programs established from time to time by the
Committee when performance criteria established by the Committee as part of the
incentive program have been achieved.
(b) Whenever the Committee deems it appropriate, the Committee
may establish an incentive program and notify Participants of their
participation in and the terms of the incentive program. More than one incentive
program may be established by the Committee and they may operate concurrently or
for varied periods of time and a Participant may be permitted to participate in
more than one incentive program at the same time. Performance Stock will be
issued only subject to the incentive program and the Plan and consistent with
meeting the performance goals set by the Committee. A Participant in an
incentive program shall have no rights as a shareholder until Performance Stock
is issued. Performance Stock may be issued without cash consideration.
(c) A Participant's interest in an incentive program may not
be sold, assigned, transferred, pledged, hypothecated, or otherwise encumbered.
8. Stock Options.
(a) Whenever the Committee deems it appropriate to grant
Options, a written agreement shall be given to the Participant stating the
number of shares for which Options are granted, the Option price per share,
whether the Options are ISOs or Nonstatutory Stock Options, the extent to which
SARs are granted (as provided in Section 9), and the conditions to which the
grant and exercise of the Options are subject. This written agreement, when duly
accepted in writing by the Participant, shall become an Agreement.
(b) The exercise price of shares of Common Stock covered by an
ISO shall be not less than 100% of the Fair Market Value of such shares on the
Date of Grant; provided that if an ISO is granted to a Participant who, at the
time of the grant, is a Ten Percent Shareholder, then the exercise price of the
shares covered by the ISO shall be not less than 110% of the Fair Market Value
of such shares on the Date of Grant.
(c) The exercise price of shares covered by a Nonstatutory
Stock Option shall be not less than 85% of the Fair Market Value of such shares
on the Date of Grant unless the Compensation Committee otherwise unanimously
consents.
(d) Options may be exercised in whole or in part at such times
as may be specified by the Committee in the Participant's Agreement, subject to
Section 13; provided that no ISO may be exercised after ten years (or, in the
case of an ISO granted to a Ten Percent Shareholder, five years) from the Date
of Grant. Except as otherwise provided in this Plan, no ISO may be exercised
unless the Participant is employed by the Company or an Affiliate at the time of
the exercise and has been employed by the Company or an Affiliate of the Company
at all times since the Date of Grant. An ISO by its terms, shall be exercisable
in any calendar year only to the extent that the aggregate Fair Market Value
(determined at the Date of Grant) of the Common Stock with respect to which ISOs
are exercisable for the first time during the calendar year does not exceed
$100,000 (the "Limitation Amount"). ISOs granted after 1986 under the Plan and
all other plans of the Company and any Affiliate shall be aggregated for
purposes of determining whether the Limitation Amount has been exceeded. The
Board may impose such conditions as it deems appropriate on an ISO to ensure
that the foregoing requirement is met. If ISOs that first become exercisable in
a calendar year exceed the Limitation Amount, the excess will be treated as
Nonstatutory Stock Options to the extent permitted by law.
(e) To obtain certain tax benefits afforded to ISOs under
Section 422 of the Code, the Participant must hold the shares issued upon the
exercise of an ISO for two years after the Date of Grant of the ISO and one year
from the date of exercise. A Participant may be subject to the alternative
minimum tax at the time of exercise of an ISO. The Committee may require a
Participant to give the Company prompt notice of any disposition of shares
acquired by the exercise of an ISO before the expiration of such holding
periods.
(f) Notwithstanding the foregoing, no Option shall be
exercisable within the first six months after it is granted; provided that, this
restriction shall not apply if the Participant becomes Disabled or dies during
the six-month period.
(g) The Committee may, in its sole discretion, grant Options
that by their terms become fully exercisable upon a Change of Control,
notwithstanding other conditions on exercisability in the Agreement.
9. Stock Appreciation Rights.
(a) Whenever the Committee deems it appropriate, SARs may be
granted either in connection with an Option or independent of such. SARs shall
be evidenced in writing as part of the Agreement to which they pertain. The
following provisions apply to all SARs that are granted in connection with
Options:
(i) SARs shall entitle the Participant, upon exercise
of all or any part of the SARs, to surrender to the Company
unexercised that portion of the underlying Option relating to
the same number of shares of Common Stock as is covered by the
SARs (or the portion of the SARs so exercised) and to receive
in exchange from the Company an amount equal to the excess of
(A) the Fair Market Value on the date of exercise of the
Common Stock covered by the surrendered portion of the
underlying Option over (B) the exercise price of the Common
Stock covered by the surrendered portion of the underlying
Option. The Committee may limit the amount that the
Participant will be entitled to receive upon exercise of the
SAR.
(ii) Upon the exercise of a SAR and surrender of the
related portion of the underlying Option, the Option, to the
extent surrendered, shall not thereafter be exercisable.
(iii) Subject to any further conditions upon exercise
imposed by the Board, a SAR shall be exercisable only to the
extent that the related Option is exercisable; provided that
in no event shall a SAR held by an Insider be exercisable
within the first six months after it is awarded even though
the related Option is or becomes exercisable, and a SAR shall
expire no later than the date on which the related Option
expires.
(iv) A SAR may only be exercised at a time when the
Fair Market Value of the Common Stock covered by the SAR
exceeds the exercise price of the Common Stock covered by the
underlying Option.
(b) The manner in which the Company's obligation arising upon
the exercise of a SAR shall be paid shall be determined by the Committee and
shall be set forth in the Participant's Agreement. The Committee may provide for
payment in Common Stock, including fractional shares, or cash, or a combination
thereof, or the Committee may reserve the right to determine the manner of
payment at the time the SAR is exercised. Shares of Common Stock issued upon the
exercise of a SAR shall be valued at their Fair Market Value on the date of
exercise.
10. Method of Exercise of Options and Stock Appreciation Rights.
(a) Options and SARs may be exercised by the Participant
giving written notice of the exercise to the Company, stating the number of
shares the Participant has elected to purchase under the Option or the number of
SARs the Participant has elected to exercise. In the case of the purchase of
shares under an Option, such notice shall be effective only if accompanied by
the exercise price in full in cash; provided that, if the terms of an Option so
permit, the Participant may (i) deliver, or cause to be withheld from the Option
shares, shares of Common Stock (valued at their Fair Market Value on the date of
exercise) that have been held for at least six months if acquired from the
Company and are not subject to any restrictions in satisfaction of all or any
part of the exercise price, (ii) deliver a properly executed exercise notice
together with irrevocable instructions to a broker to deliver promptly to the
Company, from the sale or loan proceeds with respect to the sale of Common Stock
or a loan secured by Common Stock, the amount necessary to pay the exercise
price and, if required by the Committee, Applicable Withholding Taxes, or (iii)
deliver an interest bearing recourse promissory note, payable to the Company, in
payment of all or part of the exercise price together with such collateral as
may be required by the Committee at the time of exercise. The interest rate
under any such promissory note shall be established by the Committee and shall
be at least equal to the minimum interest rate required at the time to avoid
imputed interest under the Code.
(b) The Company may place on any certificate representing
Common Stock issued upon the exercise of an Option or SAR any legend deemed
desirable by the Company's counsel to comply with federal or state securities
laws, and the Company may require a customary written indication of the
Participant's investment intent. Until the Participant has made any required
payment, including any Applicable Withholding Taxes, and has had issued a
certificate for the shares of Common Stock acquired, he shall possess no
shareholder rights with respect to the shares.
(c) If a Participant exercises an Option that has a Reload
Feature by delivering already owned shares of Common Stock in payment of the
exercise price, the Committee shall grant to the Participant a Reload Option.
The Committee shall grant the Reload Option in the same manner as set forth in
Section 8(a). The Reload Option shall be subject to the following restrictions:
(i) The exercise price of shares of Common Stock
covered by a Reload Option shall be not less than 100% of the
Fair Market Value of such shares on the Date of Grant of the
Reload Option;
(ii) If and to the extent required by Rule 16b-3, a
Reload Option shall not be exercisable within the first six
months after it is granted; provided that this restriction
shall not apply if the Participant becomes Disabled or dies
during the six-month period;
(iii) The Reload Option shall be subject to the same
restrictions on exercisability imposed on the underlying
option (possessing the Reload Feature) exercised unless the
Committee specifies different limitations;
(iv) The Reload Option shall not be exercisable until
the expiration of any retention holding period imposed on the
disposition of any shares of Common Stock covered by the
underlying Option (possessing the Reload Feature) delivered;
and
(v) The Reload Option shall not have a Reload Feature.
The Committee may, in its sole discretion, cause the Company to place on any
certificate representing Common Stock issued to a Participant upon the exercise
of an underlying Option (possessing a Reload Feature as evidenced by the
Agreement for such Option) delivered pursuant to this subsection (c), a legend
restricting the sale or other disposition of such Common Stock.
(d) Notwithstanding anything herein to the contrary, at all
times at which the Company has any class of securities registered under Section
12 of the 1934 Act, Options and SARs shall be granted and exercised in such a
manner as to conform to the provisions of Rule 16b-3.
(e) Each Participant shall, before the exercise of any Option,
deliver to the Company any reasonable information the Company deems necessary to
be able to satisfy itself that the shares of Common Stock issuable upon exercise
of an Option will be acquired in accordance with the terms of an applicable
exemption from the securities registration requirements of applicable federal
and state securities law. With respect to Options that are not ISOs and without
limiting the scope of the Company's or the Committee's discretion to withhold
approval or otherwise administer this Plan, approval may be withheld to the
extent that the exercise, either individually or in the aggregate together with
the exercise of other previously exercised Options and/or offers and sales
pursuant to any prior or contemplated offering of securities, would, in the sole
and absolute judgment of the Company, require the filing of a registration
statement with the United States Securities and Exchange Commission or with the
securities commission of any state. The Company shall avail itself of any
exemptions from registration contained in applicable federal and state
securities laws which are reasonably available to the Company on terms which, in
its sole and absolute discretion, it deems reasonable and not unduly burdensome
or costly. If an Option which is not an ISO cannot be exercised at the time it
would otherwise expire due to the restrictions contained in this Section, the
exercise period for that Option shall be extended for successive one-year
periods until that Option can be exercised in accordance with this Section.
11. Nontransferability of Options and Stock Appreciation Rights.
(a) Options and SARs by their terms, shall be exercisable,
during the Participant's lifetime, only by the Participant or, if permitted by
Rule 16b-3, an alternative person under a qualified domestic relations order (as
defined in Code Section 414(p)) ("QDRO"), or by his guardian, duly authorized
attorney-in-fact, executor, administrator, or other legal representative.
(b) An Option or SAR shall not be assigned, alienated,
pledged, attached, sold, transferred, or encumbered by a Participant other than
by will or by the laws of descent and distribution, or in the case of
Nonstatutory Stock Options:
(i) pursuant to a QDRO, or
(ii) by transfer without consideration by a
Participant, subject to such rules as the Committee
may adopt to preserve the purposes of the Plan
(including limiting such transfers to transfers by
Participants who are directors or senior executives),
to
(A) an Immediate Family Member,
(B) a trust solely for the benefit of the
Participant or one or more Immediate Family
Members, or
(C) a partnership or limited liability
company whose only partners or members are
the Participant or one or more Immediate
Family Members,
(each transferee described in (i) - (ii), a "Permitted Transferee"), provided
that the Committee is notified in advance in writing of the terms and conditions
of any proposed transfer intended to be described in (i) or (ii) and it
determines that the proposed transfer complies with the requirements of the Plan
and the applicable option agreement. Any purported assignment, alienation,
pledge, attachment, sale, transfer, or other encumbrance that does not qualify
under (i) or (ii) shall be void and unenforceable against the Company.
(c) The terms of the Option shall apply to the beneficiaries,
executors, and administrators of the Participant and of the permitted
Transferees of the Participant (including the beneficiaries, executors, and
administrators of the Permitted Transferees), including the right to agree to
any amendment of the applicable Agreement, except that Permitted Transferees
shall not transfer any Option other than by will or by the laws of descent and
distribution. In addition, the Permitted Transferee is subject to the same
restrictions as the Participant for purposes of exercise of the Option after
death.
12. Payment of Applicable Withholding Taxes. The Company may require
the Participant to pay to the Company the amount of Applicable Withholding Taxes
with respect to the grant or exercise of any Incentive Award. Subject to the
Plan and applicable law, the Committee may, in its sole discretion, permit the
Participant to satisfy withholding obligations, in whole or in part, by paying
cash, by electing to have the Company withhold shares of Common Stock issuable
upon the exercise of an Incentive Award, or by transferring to the Company
shares of Common Stock that have been held for at least six months if acquired
from the Company and are not subject to any restrictions, in such amounts equal
to the Applicable Withholding Taxes. The Company shall have the right to
withhold from any shares of Common Stock issuable pursuant to an Incentive Award
or from any cash amounts otherwise due or to become due from the Company to the
Participant an amount equal to such taxes. The Company shall have no obligation
to deliver shares of Common Stock until the Applicable Withholding Taxes have
been satisfied.
13. Effect of Death, Disability, or Termination of Employment.
(a) In the event of termination of a Participant's employment
or services for the Company or its Affiliates for any reason other than for
Cause, death, or Disability, such Participant shall have the right to exercise
the Incentive Award at any time within three months after such termination of
employment to the extent of the full number of shares that such Participant was
entitled to purchase under the Incentive Award on the date of termination,
subject to the condition that no Incentive Award shall be exercisable after the
expiration of the term of the Incentive Award.
(b) If a Participant's employment or services is terminated by
the Company or its Affiliates for Cause, his Incentive Awards shall be
terminated as of the date of the misconduct.
(c) If a Participant's employment or services for the Company
or its Affiliates terminate for death or Disability, all Incentive Awards then
held by such Participant under the Plan expire on the earlier of (i) 12 months
from the date of such termination or (ii) the expiration date of such option.
The Incentive Award may be exercised by the personal representatives,
administrators, or guardian of the Participant or by any person or persons to
whom the Incentive Award is transferred by will or the applicable laws of
descent and distribution, but only to the extent of the full number of shares
such Participant was entitled to purchase under the Incentive Award on the date
of such death or termination of employment.
(d) Notwithstanding the foregoing, the Committee shall
establish and set forth in each Incentive Award agreement whether the Incentive
Award will continue to be exercisable, and the terms and conditions of such
exercise, if a Participant ceases to be employed by, or to provide services to,
the Company or its Affiliates, which provisions may be waived or modified by the
Committee at any time. If not so established in the agreement evidencing the
Incentive Award, the Incentive Award will be exercisable according to the
provisions of paragraphs (a), (b), and (c), above, which may be waived or
modified by the Committee at any time. If the Committee extends the
exercisability of an ISO beyond the time provided for in Code Section 422, the
ISO will become a Nonstatutory Stock Option.
<PAGE>
14. Tax Offset Rights.
(a) Whenever the Committee deems it appropriate, Tax Offset
Rights may be granted in connection with Nonstatutory Stock Options, SARs,
Performance Stock, or Restricted Stock. Tax Offset Rights shall be evidenced in
writing as part of the Agreement to which they pertain.
(b) Tax Offset Rights, (i) upon exercise of all or any part of
Nonstatutory Stock Option or SAR, (ii) upon grant of Performance Stock, or (iii)
upon the lapse of restrictions on Restricted Stock, entitle the Participant to
receive in cash from the Company an amount equal to or approximating the
Applicable Withholding Taxes.
(c) A Participant may exercise a Tax Offset Right by giving
the Committee written notice of exercise simultaneously with the exercise of a
Nonstatutory Stock Option or SAR, the receipt of an award of Performance Stock,
or the lapse of restrictions on Restricted Stock. To the extent exercised, the
Tax Offset Right shall lapse.
(d) The Committee may limit the amount the Participant will be
entitled to receive in connection with a Tax Offset Right and may include any
provisions in a Tax Offset Right that the Committee deems appropriate to ensure
that the Tax Offset Right will not be characterized as an "equity security" or
"derivative security" for purposes of Section 16 of the 1934 Act and the rules
and regulations thereunder.
15. Repurchase Rights, Escrow.
(a) The Committee shall have the discretion to authorize the
issuance of unvested shares of Common Stock pursuant to the exercise of an
Incentive Award. In the event of termination of the Participant's employment or
services or breach of a material obligation owed by Participant to the Company
or its Subsidiaries, all shares of Common Stock issued upon exercise of an
Incentive Award which are unvested at the time of cessation of employment or
services shall be subject to repurchase at the exercise price paid for such
shares. The terms and conditions upon which such repurchase right shall be
exercisable (including the period and procedure for exercise) shall be
established by the Committee and set forth in the agreement evidencing such
right. All of the Company's outstanding repurchase rights under this Section
15(a) are assignable by the Company at any time and shall remain in full force
and effect in the event of a Change of Control; provided that if the vesting of
Incentive Awards is accelerated pursuant to Section 18, the repurchase rights
under this Section 15(a) shall terminate and all shares subject to such
terminated rights shall immediately vest in full. The Committee shall have the
discretionary authority, exercisable either before or after the Participant's
cessation of employment or services or breach of a material obligation owed by
Participant to the Company or its Subsidiaries, to cancel the Company's
outstanding repurchase rights with respect to one or more shares purchased or
purchasable by the Participant under an Incentive Award and thereby accelerate
the vesting of such shares in whole or in part at any time.
(b) To ensure that shares of Common Stock acquired upon
exercise of an Incentive Award that are subject to any repurchase right,
stockholders agreement, security for any promissory note, or other restrictions,
including without limitation those set forth in Section 6(b), will be available
for repurchase, the Committee may require the Participant to deposit the
certificate or certificates evidencing such shares with an agent designated by
the Committee under the terms and conditions of escrow and security agreements
approved by the Committee. If the Committee does not require such deposit as a
condition of exercise of an Incentive Award, the Committee reserves the right at
any time to require the Participant to so deposit the certificate or
certificates in escrow. The Company shall bear the expense of the escrow. As
soon as practicable after the expiration of any repurchase rights, stockholders
agreement, or other restrictions, and after full repayment of any promissory
note secured by the shares in escrow, the agent shall deliver to the Participant
the shares no longer subject to such restrictions and no longer security for any
promissory note. In the event shares held in escrow are subject to the Company's
exercise of a repurchase option or stockholders agreement, the notices required
to be given to the Participant shall be given to the agent and any payment
required to be given to the Participant shall be given to the agent. Within 30
days after payment by the Company, the agent shall deliver the shares which the
Company has purchased to the Company and shall deliver the payment received from
the Company to the Participant. In the event of a stock dividend, stock split,
or consolidation of shares or any like capital adjustment of any of the
outstanding securities of the Company, any and all new, substituted or
additional securities or other property to which the Participant is entitled by
reason of ownership of shares acquired upon exercise of an Incentive Award shall
be subject to any repurchase rights, stockholders agreement, and/or security for
any promissory note with the same force and effect as the shares subject to such
repurchase rights, stockholders agreement and/or security interest immediately
before such event
16. Termination, Modification, Change. If not sooner terminated by the
Board, this Plan shall terminate at the close of business ten years after the
effective date as set forth in Section 25 hereof. No Incentive Awards shall be
made under the Plan after its termination. The Board may terminate the Plan or
may amend the Plan in such respects as it shall deem advisable; provided that,
if and to the extent required by the Code or Rule 16b-3, no change shall be made
that increases the total number of shares of Common Stock reserved for issuance
pursuant to Incentive Awards granted under the Plan (except pursuant to Section
17), materially modifies the requirements as to eligibility for participation in
the Plan, or materially increases the benefits accruing to Participants under
the Plan, or unless such change is authorized by the shareholders of the
Company. Notwithstanding the foregoing, the Board may unilaterally amend the
Plan and Incentive Awards as it deems appropriate to ensure compliance with Rule
16b-3 and to cause ISOs to meet the requirements of the Code and regulations
thereunder. Except as provided in the preceding sentence, a termination or
amendment of the Plan shall not, without the consent of the Participant,
adversely affect a Participant's rights under an Incentive Award previously
granted to him.
17. Change in Capital Structure.
(a) In the event of a stock dividend, stock split, combination
of shares, recapitalization, reincorporation, or merger (whether or not the
Company is the surviving corporation), or other change in the Company's capital
stock (including, but not limited to, the creation or issuance to shareholders
generally of rights, options, or warrants for the purchase of common stock or
preferred stock of the Company), the number and kind of shares of stock or
securities of the Company to be subject to the Plan and to Incentive Awards then
outstanding or to be granted thereunder, the maximum number of shares or
securities which may be delivered under the Plan, the exercise price and other
relevant provisions shall be appropriately adjusted by the Committee, whose
determination shall be binding on all persons. The Committee shall have the
authority to cause the surviving corporation in any merger (provided the
surviving corporation agrees) to assume the Plan (including without limitation
all rights and obligations of all parties hereunder and under any Agreement
issued pursuant hereto) with such adjustments, if any, as the Committee shall
deem appropriate, and any such determination by the Committee shall be binding
on all parties. If the adjustment would produce fractional shares with respect
to any unexercised Option, the Committee may, but need not, adjust appropriately
the number of shares covered by the Option so as to eliminate the fractional
shares.
(b) Notwithstanding anything in the Plan to the contrary, the
Committee may take the foregoing actions without the consent of any Participant,
and the Committee's determination shall be conclusive and binding on all persons
for all purposes.
18. Change of Control. Except as otherwise provided in the agreement
that evidences the Incentive Award, in the event of a Change of Control, the
Committee shall determine whether provision will be made in connection with the
Change of Control for an appropriate assumption of the Incentive Awards
theretofore granted under the Plan (which assumption may be effected by means of
a payment to each Participant (by the Company or any other person or entity
involved in the Change of Control), in exchange for the cancellation of the
Incentive Awards held by such Participant, of the difference between the then
Fair Market Value of the aggregate number of shares of Common Stock then subject
to such Incentive Awards and the aggregate exercise price that would have to be
paid to acquire such shares) or for substitution of appropriate new Incentive
Awards covering stock of a successor corporation to the Company or stock of an
Affiliate of such successor corporation. If the Committee determines that such
an assumption or substitution will be made, the Committee shall give notice of
such determination to the Participants, and the provisions of such assumption or
substitution, and any adjustments made (i) to the number and kind of shares
subject to the outstanding Incentive Awards (or to the options in substitution
therefor), (ii) to the exercise prices, and/or (iii) to the terms and conditions
of the stock options, shall be binding on the Participants. Any such
determination shall be made in the sole discretion of the Committee and shall be
final, conclusive, and binding on all Participants. If the Committee, in its
sole discretion, determines that no such assumption or substitution will be
made, the Committee shall give notice of such determination to the Participants,
and each Incentive Award that is at the time outstanding shall automatically
accelerate so that each such Incentive Award shall, immediately before the
specified effective date for the Change of Control, become 100% vested and
exercisable, except that such acceleration will not occur if, in the opinion of
the Company's outside accountants, it would render unavailable "pooling of
interest" accounting for a Change of Control that would otherwise qualify for
such accounting treatment. All such Incentive Awards shall terminate and cease
to remain outstanding immediately following the consummation of the Change of
Control, except to the extent assumed by the successor corporation or an
Affiliate thereof.
19. Administration of the Plan. The Plan shall be administered by the
Committee, which shall consist of not less than two members of the Board, who
shall be appointed by the Board. The Committee shall have general authority to
impose any limitation or condition upon an Incentive Award the Committee deems
appropriate to achieve the objectives of the Incentive Award and the Plan and,
without limitation and in addition to powers set forth elsewhere in the Plan,
shall have the following specific authority:
(a) The Committee shall have the power and sole and complete
discretion to determine (i) which eligible persons shall receive Incentive
Awards and the nature of each Incentive Award, (ii) the number of shares of
Common Stock to be covered by each Incentive Award, (iii) whether Options shall
be ISOs or Nonstatutory Stock Options, (iv) when, whether, and to what extent
SARs shall be granted in connection with Options, (v) when, whether and to what
extent Tax Offset Rights shall be granted and the terms thereof, (vi) the time
or times when an Incentive Award shall be granted, (vii) whether an Incentive
Award shall become vested over a period of time and when it shall be fully
vested, (viii) when Options and SARs may be exercised, (ix) whether a Disability
exists, (x) the manner in which payment will be made upon the exercise of
Options or SARs, (xi) conditions relating to the length of time before
disposition of Common Stock received upon the exercise of Options or SARs is
permitted, (xii) whether to approve a Participant's election (A) to deliver
shares of already owned Common Stock to satisfy Applicable Withholding Taxes or
(B) to have the Company withhold from the shares to be issued upon the exercise
of a Nonstatutory Stock Option or SAR the number of shares necessary to satisfy
Applicable Withholding Taxes, (xiii) the terms and conditions applicable to
Restricted Stock Awards, (xiv) the terms and conditions on which restrictions
upon Restricted Stock shall lapse, (xv) whether to accelerate the time at which
any or all restrictions with respect to Restricted Stock will lapse or be
removed, (xvi) notice provisions relating to the sale of Common Stock acquired
under the Plan, (xvii) the terms of incentive programs, performance criteria,
and other factors relevant to the issuance of Performance Stock, and (xviii) any
additional requirements relating to Incentive Awards that the Committee deems
appropriate. Notwithstanding the foregoing, no "tandem stock options" (where two
stock options are issued together and the exercise of one option affects the
right to exercise the other option) may be issued in connection with ISOs. The
Committee shall have the power to amend the terms of previously granted
Incentive Awards so long as the terms as amended are consistent with the terms
of the Plan and provided that the consent of the Participant is obtained with
respect to any amendment that would be detrimental to him, except that such
consent will not be required if such amendment is for the purpose of complying
with Rule 16b-3 or any requirement of the Code applicable to the Incentive
Award.
(b) The Committee may adopt rules and regulations for carrying
out the Plan. The interpretation and construction of any provision of the Plan
by the Committee shall be final and conclusive. The Committee may consult with
counsel, who may be counsel to the Company, and shall not incur any liability
for any action taken in good faith in reliance upon the advice of counsel.
(c) A majority of the members of the Committee shall
constitute a quorum, and all actions of the Committee shall be taken by a
majority of the members present. Any action may be taken by a written instrument
signed by all of the members, and any action so taken shall be fully effective
as if it had been taken at a meeting.
(d) If and so long as the Common Stock is registered under
Section 12 of the 1934 Act, the Board shall consider in selecting the membership
of the Committee, with respect to any person subject or likely to become subject
to Section 16 of the 1934 Act, the provisions regarding (a) "outside directors"
as contemplated by Code Section 162(m) and (b) "nonemployee directors" as
contemplated by Rule 16b-3 under the 1934 Act. The Committee may consist of two
or more members of the Board, subject to such limitations as the Board deems
appropriate. Committee members shall serve for such terms as the Board may
determine, subject to removal by the Board at any time.
20. Market Standoff.
(a) In connection with any underwritten public offering by the
Company of its equity securities pursuant to an effective registration statement
filed under the 1933 Act, including the Company's initial public offering, a
person shall not sell, or make any short sale of, loan, hypothecate, pledge,
grant any option for the purchase of, otherwise dispose or transfer for value,
or otherwise agree to engage in any of the foregoing transactions with respect
to, any shares issued pursuant to an Incentive Award granted under the Plan
without the prior written consent of the Company or its underwriters. Such
limitations shall be in effect only if and to the extent and for such period of
time as may be requested by the Company or such underwriters and agreed to by
the Company's officers and directors; provided, however, that in no event shall
the weighted average number of days in the portion of such period that occurs
after the effective date of the Company's registration statement exceed 180
days. The limitations of this paragraph shall in all events terminate two years
after the effective date of the Company's initial public offering.
(b) In the event of any stock split, stock dividend,
recapitalization, combination of shares, exchange of shares, or other change
affecting the Company's outstanding Common Stock affected as a class without the
Company's receipt of consideration, then any new, substituted or additional
securities distributed with respect to the purchased shares shall be immediately
subject to the provisions of this Section 20, to the same extent the purchased
shares are at such time covered by such provisions.
(c) To enforce the limitations of this Section 20, the Company
may impose stop-transfer instructions with respect to the purchase shares and
any new, substituted or additional securities distributed with respect to the
purchased shares until the end of the applicable standoff period.
21. Registration.
(a) The Company shall be under no obligation to any
Participant to register for offering or resale or to qualify for exemption under
the 1933 Act, or to register or qualify under state securities laws, any shares
of Common Stock, security or interest in a security paid or issued under, or
created by, the Plan, or to continue in effect any such registrations or
qualifications if made. The Company may issue certificates for shares with such
legends and subject to such restrictions on transfer and stop-transfer
instructions as counsel for the Company deems necessary or desirable for
compliance by the Company with federal and state securities laws.
(b) Inability of the Company to obtain, from any regulatory
body having jurisdiction, the authority deemed by the Company's counsel to be
necessary for the lawful issuance and sale of any shares hereunder or the
unavailability of an exemption from registration for the issuance and sale of
any shares hereunder shall relieve the Company of any liability in respect of
the nonissuance or sale of such shares as to which such requisite authority
shall not have been obtained.
(c) As a condition to the exercise of an Incentive Award, the
Company may require the Participant to represent and warrant at the time of any
such exercise or receipt that such shares are being purchased or received only
for the Participant's own account and without any present intention to sell or
distribute such shares if, in the opinion of counsel for the Company, such a
representation is required by any relevant provision of the aforementioned laws.
At the option of the Company, a stop-transfer order against any such shares may
be placed on the official stock books and records of the Company, and a legend
indicating that such shares may not be pledged, sold or otherwise transferred,
unless an opinion of counsel is provided (concurred in by counsel for the
Company) stating that such transfer is not in violation of any applicable law or
regulation, may be stamped on stock certificates to ensure exemption from
registration. The Committee may also require such other action or agreement by
the Participant as may from time to time be necessary to comply with the federal
and state securities laws.
22. Compliance With Laws and Approval of Regulatory Bodies. No Option
or SAR shall be exercisable, no Common Stock shall be issued, no certificates
for shares of Common Stock shall be delivered, and no payment shall be made
under this Plan except in compliance with all applicable federal and state laws
and regulations (including, without limitation, withholding tax requirements)
and the rules of all domestic stock exchanges on which the Company's shares may
be listed. The Company shall have the right to rely on an opinion of its counsel
as to such compliance. Any share certificate issued to evidence Common Stock for
which an Option or SAR is exercised may bear such legends and statements as the
Committee may deem advisable to assure compliance with federal and state laws
and regulations. No Option or SAR shall be exercisable, no Common Stock shall be
issued, no certificate for shares shall be delivered, and no payment shall be
made under this Plan until the Company has obtained such consent or approval as
the Committee may deem advisable from regulatory bodies having jurisdiction over
such matters. The exercise of any Option granted under this Plan shall
constitute a Participant's full and complete consent to whatever action the
Committee deems necessary to satisfy any federal and state tax withholding
requirements which the Committee, acting in its discretion, deems applicable to
such exercise.
23. Notice. All notices and other communications required or permitted
to be given under this Plan shall be in writing and shall be deemed to have been
duly given if delivered personally or mailed first class, postage prepaid, as
follows: (a) if to the Company - at its principal business address to the
attention of the Treasurer and (b) if to any Participant - at the last address
of the Participant known to the sender at the time the notice or other
communication is sent.
24. Interpretation. The terms of this Plan are subject to all present
and future regulations and rulings of the Secretary of the Treasury or his
delegate relating to the qualification of ISOs under the Code. If any provision
of the Plan conflicts with any such regulation or ruling, then that provision of
the Plan shall be void and of no effect. The terms of this Plan shall be
governed by the laws of the Commonwealth of Virginia.
25. Effective Date of the Plan. This Plan shall be effective on August
1, 1997, and shall be submitted to the shareholders of the Company for approval.
Until (i) the Plan has been approved by the Company's shareholders, and (ii) the
requirements of any applicable State securities laws have been met, no
Restricted Stock shall be awarded, no Performance Stock shall be issued and no
Option or SAR shall be exercisable.
IN WITNESS WHEREOF, the Company has caused this Plan to be adopted as
set forth herein this 1st day of August, 1997.
VALUE AMERICA, INC.
By: /s/ Rex Scatena
---------------
Its: President
Exhibit 10.40
EMPLOYMENT AGREEMENT
AGREEMENT (the "Agreement"), dated as of March 15, between Value America,
Inc., a Virginia corporation (the "Company") and Neal Harris (the "Executive").
The Company and the Executive agree as follows:
1. Position; Term of Employment. The Company agrees to employ the Executive,
and the Executive agrees to serve the Company, as its Executive Vice President.
The parties intend that the Executive shall continue to so serve in the
aforesaid capacity throughout the Term (as such term is defined below).
Subject to earlier termination under the provisions of Paragraph 4 below, the
term of Executive's employment by the Company hereunder shall commence on March
26, 1999 and shall continue through December 31, 2004 and then renew for an
additional one year term on January 1, 2005 and each subsequent annual
anniversary thereof unless at least 3 months prior to January 1, 2005 or a
subsequent annual anniversary thereof either Executive or Company gives to the
other written notice that the term shall not be renewed at such annual
anniversary, in which case the term shall expire on December 31, 2004 or the day
before such subsequent anniversary, as the case may be (the "Term").
2. Duties. The Executive throughout the Term shall devote his full time and
undivided attention during normal business hours to the business and affairs of
the Company and its affiliates, if any ("Affiliates"), except for holidays and
vacations consistent with applicable Company policy and except for illness or
incapacity, but nothing in this Agreement shall preclude the Executive from
serving as a director or a member of an advisory committee of any organization
involving no conflict of interest with the Company (subject to prior approval of
his appointment to such position in certain cases as provided in the next to
last sentence of this Paragraph 2), from engaging in charitable and community
activities, and from managing his personal investments, provided that such
activities do not materially interfere with the performance of his duties and
responsibilities under this Agreement. The Executive shall not accept any
proposed appointment to serve as a director, trustee or the equivalent of any
business organization of which the Executive is not a director, trustee, or the
equivalent on the date hereof, without the prior approval of the Chairman of the
Company's Board. The Executive shall report directly to the Chief Executive
Officer, or in his or her absence, the Board.
<PAGE>
3. Compensation.
(a) Salary. During the Term, the Company shall pay to the Executive a
salary at the minimum rate of $295,000 per year, payable in equal installments
not less frequently than monthly. Such salary shall be reviewed by the
Compensation Committee of the Board at least annually, with any increases taking
into account, among other factors, corporate and individual performance and
increases, if any, in relevant cost of living indices. The Compensation
Committee may not reduce the salary below $295,000 per year.
<PAGE>
(b) Bonus. During the Term, the Executive shall be entitled to participate
in such bonus programs as the Compensation Committee of the Board from time to
time shall approve. Notwithstanding the foregoing, for each calendar year during
the Term, Executive shall be entitled to a bonus per full calendar quarter of
employment hereunder in such amounts and based upon achievement of such
corporate and individual performance and other criteria as shall be established
by the Compensation Committee of the Board from time to time, considering among
other items input from the Chairman of the Board, the Executive and, if
considered appropriate by the Committee, a compensation consultant, which bonus
shall be paid within 10 days after the end of the calendar quarter, provided
Executive is employed hereunder on the last day of such quarter, and provided
further that (i) the minimum bonus potential for each calendar year during the
Term shall be $150,000, and (ii) the minimum bonus paid for calendar year 1999
will be $37,500, subject only to Executive remaining employed by Company through
June 30, 1999, provided that if Company and Executive do not agree to the 1999
bonus plan for Executive prior to June 30, 1999, Executive's minimum bonus for
1999 will increase by $18,750 with such $18,750 being subject only to Executive
remaining employed by Company through September 30, 1999. As an additional
bonus, the Company agrees that it will pay to Executive an amount (which amount
shall not exceed $1,625,000) equal to the product of (i) $5.00 and (ii) up to an
aggregate of no more than 325,000 shares of stock purchased by Executive from
Company pursuant to his Incentive Stock Option Agreement pursuant to the Notice
of Grant dated March 26, 1999 and his Non-Qualified Stock Option Agreement
pursuant to the Notice of Grant dated March 26, 1999. Such bonus payment will
be made upon the due exercise (provided such exercise occurs either during the
term of Executive's employment by the Company or, if such employment is
terminated (i) because of Executive's death or Disability (as defined in Section
4(b) below) or (ii) by the Company other than for Due Cause within the meaning
of Section 4(d) or Section 4(e) below, within 90 days after the termination of
such employment) of the option to purchase such shares and such bonus will be
deemed earned upon such exercise. The $5.00 and 325,000 amounts will be subject
to proportional adjustment upon a stock split or similar capital stock
adjustment, as determined in good faith by the Company's Board of Directors.
(c) Benefit Plans. During the Term, the Executive shall be entitled to
participate in all retirement and employment benefit plans of the Company that
are generally available to senior executives of the Company. Such participation
shall be pursuant to the terms and conditions of such plans, as the same shall
be amended from time to time. The Executive shall be entitled to no less than 20
business days paid vacation per year. The Company also agrees to reimburse
executive for (i) the out-of-pocket costs incurred by Executive for a moving van
to move his household items to Charlottesville, Virginia and (ii) the rent for
an apartment for Executive in Charlottesville, Virginia for a period not to
extend beyond September 30, 1999. The Company shall also pay to Executive an
additional W-2 compensation up to $570 per month during the term, which
Executive agrees to use to pay the premium on disability insurance covering
Executive.
<PAGE>
(d) Business Expenses. During the Term, the Company shall, in accordance
with policies then in effect with respect to payments of expenses, pay or
reimburse the Executive for all reasonable out-of-pocket travel and other
expenses (other than ordinary commuting expenses) incurred by the Executive in
performing services hereunder. All such expenses shall be accounted for in such
reasonable detail as the Company may require.
(e) Indemnity. As an officer of Company, Executive shall be entitled to
indemnity as provided in the Company's Articles of Incorporation, as the same
shall be amended from time to time.
4. Termination.
(a) Death. In the event of the death of the Executive during the Term, his
employment shall be terminated as of the date of death and his salary for the
month in which his death occurs shall be paid to his designated beneficiary, or
in the absence of such designation, to the estate or other legal representative
of the Executive. Except in accordance with the terms of the Company's benefit
programs and plans then in effect, after his date of death, Executive shall not
be entitled to any other compensation or benefits from the Company or hereunder.
<PAGE>
(b) Disability. In the event of the Executive's Disability, as hereinafter
defined, the employment of the Executive may be terminated by the Company,
effective upon the Disability Termination Date (as defined below). After the
Disability Termination Date, except in accordance with the Company's benefit
programs and plans then in effect, Executive shall not be entitled to any
compensation or benefits from the Company or hereunder.
"Disability," for purposes of this Agreement, shall mean the Executive's
incapacity due to physical or mental illness causing his complete and full-time
absence from his duties, as defined in Paragraph 2, for either a consecutive
period of more than six months or at least 180 days within any 270-day period.
Any determination of the Executive's Disability made in good faith by the Board
shall be conclusive and binding on the Executive, unless within 10 days after
written notice to Executive of such determination, Executive elects by written
notice to Company to challenge such determination, in which case the
determination of Disability shall be made by arbitration pursuant to Section 13
below (provided that Company shall not be required to provide Executive any
compensation or benefits after the determination by the Board unless the
arbitration results in a determination that Executive is not disabled, in which
case the Company shall pay to Executive within 10 days after such arbitration
decision all compensation due through the date of such arbitration decision, and
further provided that Company shall not be deemed to have breached its
obligations related to such compensation and benefits under this Agreement if it
makes such payment within 10 days after such arbitration decision). The
Disability Termination Date shall be the date on which the Board makes such
determination of Executive's Disability unless the arbitration, if any, results
in a determination that Executive is not disabled.
<PAGE>
(c) Termination by the Company for Due Cause. Nothing herein shall prevent
the Company from terminating the Executive's employment for Due Cause. The
Executive shall continue to receive the salary provided for in this Agreement
only through the period ending with the date of such termination. Any rights and
benefits he may have under employee benefit plans and programs of the Company
shall be determined in accordance with the terms of such plans and programs.
Except as provided in the two immediately preceding sentences, after termination
of employment for Due Cause, Executive shall not be entitled to any compensation
or benefits from the Company or hereunder.
The term "Due Cause," as used herein, shall mean (i) repeated material
violation by the Executive of the Executive's obligations hereunder, the DNN
Agreement (as defined in Paragraph 10 below) or a written directive from either
the Chairman of the Board, President or the Board (1) which are willful and
deliberate on the Executive's part, (2) which are not due to the Disability of
the Executive (within the meaning of Paragraph 4(b) but without regard to the
requirement that it continue for more than six months or 180 days within a
270-day period) and (3) which have not been cured by the Executive within 15
business days after written notice to the Executive specifying the nature of
such violations, (ii) an act or acts of dishonesty on the Executive's part which
are intended to or do result in either the Executive's personal enrichment or
material adverse affect upon the Company's assets, business, prospects or
reputation, or (iii) conviction of a felony or a misdemeanor involving fraud,
breach of trust, or misappropriation. Notwithstanding the foregoing, the
Executive shall not be deemed to have been terminated for Due Cause without (1)
written notice to the Executive setting forth the reasons for the Company's
intention to terminate for Due Cause, (2) an opportunity for the Executive,
together with his counsel, to be heard before the Board, and (3) delivery to the
Executive of a Notice of Termination from the Board finding that in the good
faith opinion of at least three-quarters (3/4) of the Board (not counting the
Executive in either the numerator or the denominator), the Executive was guilty
of conduct set forth above in clause (i), (ii) or (iii) hereof, and specifying
the particulars thereof in detail.
(d) Termination by the Company Other than for Due Cause. The foregoing
notwithstanding, the Company may terminate the Executive's employment for
whatever reasons it deems appropriate; provided, however, that in the event such
termination is not due to death, Disability or Due Cause, the Executive shall
(i) be entitled to a Termination Payment as hereinafter defined and (ii) be sent
written notice stating the termination is not due to death, Disability or Due
Cause. The term "Termination Payment" shall mean a cash payment equal to twice
the sum of (i) his annual salary, as in effect immediately prior to such
termination, and (ii) a pro rata portion of the total of any bonus that would
have been payable (including any amounts already paid during such year) to
Executive under 3(b) for such calendar year if he had been employed for the full
calendar year, provided the criteria for such bonus other than Executive's
continued employment are satisfied. Such Termination Payment shall be payable in
12 equal monthly installments beginning 30 days after the date of termination.
In addition, the Company will pay the premium cost for the Executive to receive
any group health coverage that the Company provides under Section 4980B of the
Internal Revenue Code of 1986 ("COBRA Coverage") for the period in which the
Executive is eligible for such COBRA coverage. Following the Executive's
termination of employment under this Paragraph 4(d), the Executive will have no
further obligation to provide services to the Company pursuant to Paragraphs 1
and 2. Except for the Termination Payment and as otherwise provided in
accordance with the terms of the Company's benefit programs and plans then in
effect, after termination by the Company of employment for other than death,
Disability or Due Cause, Executive shall not be entitled to any other
compensation or benefits from the Company or hereunder.
<PAGE>
(e) Constructive Termination of Employment by the Company Without Due
Cause. Termination by the Company without Due Cause under Paragraph 4 (d) shall
be deemed to have occurred if the Executive elects to terminate his employment
as a result of a material breach by the Company of Section 3 of this Agreement
(which breach is not cured within 10 days after written notice thereof by
Executive to each of the Directors of the Company, which notice shall
specifically describe such alleged breach).
(f) Voluntary Termination. In the event that the Executive terminates his
employment at his own volition prior to the expiration of the Term (except as
provided in Paragraph 4(e) above), such termination shall constitute a
"Voluntary Termination" and in such event the Executive shall be limited to the
same rights and benefits as provided in connection with a termination for Due
Cause under Paragraph 4 (c) above.
(g) Election Not to Renew. An election by either Company or Executive
pursuant to Paragraph 1 above not to renew the Term shall not be deemed a
termination of employment by either party. After the expiration of the Term
because of either Company's or Executive's election not to renew, except in
accordance with the terms of the Company's benefit plans and programs then in
effect, Executive shall not be entitled to any other compensation or benefits
from the Company or hereunder.
<PAGE>
(h) Notice of Termination, Resignation and Release. Any termination under
Section 4(c) by the Company for Due Cause or Section 4(b) for Disability or by
the Executive pursuant to a constructive termination under Section 4(e) shall be
communicated by Notice of Termination to the other party thereto given in
accordance with Paragraph 12. For purposes of this Agreement, a "Notice of
Termination" means a written notice which (i) indicates the specific termination
provision in this Agreement relied upon, (ii) sets forth in reasonable detail
the facts and circumstances claimed to provide a basis for termination of the
Executive's employment under the provision so indicated and (iii) if the
termination date is other than the date of receipt of such Notice, specifies the
termination date (which date shall not be prior to the date of such notice or
more than 15 days after the giving of such Notice).
Notwithstanding anything in this Agreement to the contrary, in order to be
eligible to receive any payments or benefits hereunder as a result of the
termination of the Executive's employment, in addition to fulfilling all other
conditions precedent to such receipt, the Executive (if he has the legal
capacity to do so and if not, his legal representative) must within 10 days
after the termination date (i) resign as a member of the Board, if applicable,
and as an officer and employee of the Company and its Affiliates and (ii) on
behalf of the Executive and his estate, heirs and representatives, execute a
release in form and substance reasonably satisfactory to the Company and its
legal counsel releasing the Company, its Affiliates and each of the Company's
and such Affiliate's respective officers, Directors, employees, members,
managers, agents, independent contractors, representatives, shareholders,
successors and assigns (all of which persons and entities shall be third party
beneficiaries of such release with full power to enforce the provisions thereof)
from any and all claims related to any payments or benefits under Section 3 or 4
of this Agreement related to the termination of Executive's employment (provided
that Executive's post-termination of employment obligations under Section 5
shall cease upon the Company's failure to make any such payments when due if
within 15 days after written notice of such failure, Company does not make the
required payment). In the event the Company fails to make when due any payment
under Section 3 or 4 related to the termination of Executive's employment
hereunder, if Executive gives written notice of such failure to Company and the
Company fails to make such payment within 15 days after the receipt of such
written notice, then Executive shall be entitled to interest on such payment at
10% per annum from the date due plus all reasonable costs of collection
(including attorney's fees) and all such payments that are not yet due shall
accelerate and become immediately due and payable.
(i) Earned and Accrued Payments. The foregoing notwithstanding, upon the
termination of the Executive's employment at any time, for any reason, the
Executive shall be paid all amounts that had already been earned and accrued as
of the time of termination, including but not limited to (i) pay for any accrued
and unused vacation; (ii) any bonus that had been earned but not yet paid; and
(iii) reimbursement for any business expenses accrued in accordance with Section
3(d).
<PAGE>
5. Non-Compete and Non-Solicitation. The Executive agrees that during the
Term which he is employed by the Company, and during the period ending two years
after a Voluntary Termination, a termination by the Company for Due Cause or an
expiration of the Term because Executive elects not to renew pursuant to
Paragraph 1 above (the "Non-Compete Period"), he shall not:
(a) compete with by the Company or any of its Affiliates at any time during
the Non-Compete Period. For purposes of this Agreement, the term "compete" shall
mean engaging in an activity on behalf of himself or as a more than 5% equity
holder, an officer, a director, an employee, a partner, a member, a manager, an
agent, a consultant, a sole proprietor, or any other individual or
representative capacity if both (i) it involves a business which sells or
distributes consumer and business products primarily (more than 50%) through the
Internet or which develops or distributes convergence technology products as a
significant aspect of its business or makes significant use of interactive
multimedia to sell its products (i.e., more than 20% of revenues) and (ii) the
location in which the Executive conducts such activities is within 50 miles of
Charlottesville, Virginia, provided that nothing in this Agreement will prohibit
or restrict Executive from working as a consultant or employee of PriceCosco;
(b) on behalf of himself or any other person or entity solicit for
employment any employee of Company or its Affiliates who was such at any time
during the two years immediately preceding and the 6 months after the date of
termination or expiration of the Term or affirmatively induce such an employee
to terminate his or her employment by the Company or its Affiliates (e.g.,
Executive shall not be liable if a close friend or assistant leaves as a result
of the Company terminating Executive); or
<PAGE>
(c) intentionally cause any significant vendor of the Company (i.e., more
than 5% of Company's sales) who was such at any time during the two years
immediately preceding and within six months after the date of termination or
expiration of the Term to (i) cease doing business with or (ii) decrease
significantly (i.e., reduce by more than 50% compared to the monthly average of
the 6 (or such months less than 6 representing the number of months in such
period in which business was done) months with the highest amount of business in
such period) the amount of business done with the Company.
In the event the restrictions contained in this Paragraph 5 shall be
determined by any court of competent jurisdiction to be unenforceable by reason
of extending for too great a period of time or over too great a geographic area
or by reason of being too extensive in any other respect, such restrictions
shall be interpreted to extend only over the maximum period of time for which
they may be enforceable, and over the maximum geographic area as to which they
may be enforceable and to the maximum extent in all other respects as to which
they may be enforceable, all as determined by such court in such action.
6. Protection of Confidential Information, Etc. The Executive acknowledges
that his employment by the Company will, throughout the Term of this Agreement,
bring him into close contact with many confidential affairs of the Company,
including information about costs, profits, markets, sales, products, key
personnel, pricing policies, operational methods, technical processes and
know-how and other business affairs and methods and other information not
readily available to the public, and plans for future developments. The Company
acknowledges that Executive comes to the Company with his own information,
skills and talents of special and unique character. In recognition of the
foregoing, the Executive covenants and agrees that except as required in
connection with enforcing or defending any rights or claims in a legal
proceeding or arbitration pursuant to Section 13 below related to his employment
by the Company, this Agreement or any other agreement between the Executive and
the Company:
<PAGE>
(i) during the Term which the Executive is employed by the
Company and thereafter, regardless of the reasons for termination of
employment, the Executive shall not, without the prior written
consent of the Board or a person authorized thereby, disclose to any
person other than as required by law or court order, or other than
to an employee of the Company or its Affiliates, or to a person to
which disclosure is appropriate in connection with the performance
by the Executive of his duties as an executive of the Company (e.g.,
disclosure to the Company's outside lawyers, accountants or bankers
of financial data properly requested by such persons) any
confidential information obtained by him while in the employ of the
Company and not known by Executive prior to his employment by the
Company with respect to any of the Company's products, services,
customers, suppliers, marketing techniques, methods, or future
plans, the disclosure of which will be damaging to the Company;
provided, however, that confidential information reasonably
available to a diligent researcher not in the Company's employ of
publicly available information (other than as a result of
unauthorized disclosure by the Executive) shall not be subject to
the provisions of this Section 6 (i) after the time it becomes
reasonably available;
(ii) he will deliver promptly to the Company on termination
of his employment, or at any other time the Company may reasonably
so request, at its expense, all memoranda, notes, records, reports,
and other documents (and all copies thereof) relating to the
Company's business, which he may possess or have under his control
other than any agreements or plans related to the Executive's
employment by the Company; and
<PAGE>
(iii) he will transfer and assign to the Company, all rights
of every kind and character, in perpetuity, in and to any written
material and/or ideas created and reduced to writing during the
Term, which were suggested or submitted by the Executive which
relate to the business of the Company and all other results and
proceeds of the Executive's service hereunder. The Executive agrees
to execute and deliver to the Company such assignments or other
instruments as the Company may require from time to time to evidence
its ownership of the results and proceeds of the Executive's
service.
7. Injunctive Relief. The Executive acknowledges that a breach of the
restrictions against engaging in a competitive activity contained in Paragraph 5
and the disclosure of confidential information contained in Paragraph 6 will
cause irreparable damage to the Company, the exact amount of which will be
difficult to ascertain, and that the remedies at law for any such breach will be
inadequate. Accordingly, the Executive and the Company agree that if the
Executive breaches the restrictions on engaging in a competitive activity, on
solicitations, on the disclosure of confidential information or on any other
matter or action contained in Paragraphs 5 and 6, then the Company shall be
entitled to injunctive relief. The prevailing party in any such injunctive
relief proceeding shall be entitled to recover from the other party its costs in
such proceeding, including reasonable attorney's fees.
<PAGE>
8. Successors and Assigns.
(a) Assignment by the Company. This Agreement shall be binding upon and
inure to the benefit of the Company or any corporation or other entity to which
the Company may transfer all or substantially all of its assets and business and
to which the Company may assign this Agreement, in which case the term
"Company," as used herein, shall mean such corporation or other entity, provided
that no such assignment shall relieve the Company from any obligations
hereunder, whether arising prior to or after such assignment.
(b) Assignment by the Executive. The Executive may not assign this
Agreement or any part hereof without the prior written consent of the Company;
provided, however, that nothing herein shall preclude the Executive from
designating one or more beneficiaries to receive any amount that may be payable
following occurrence of his legal incompetency or his death and shall not
preclude the legal representative of his estate from assigning any right
hereunder to the person or persons entitled thereto under his will or, in the
case of intestacy, to the person or persons entitled thereto under the laws of
intestacy applicable to his estate. The term "beneficiaries," as used in this
Agreement, shall mean a beneficiary or beneficiaries so designated to receive
any such amount or, if no beneficiary has been so designated, the legal
representative of the Executive (in the event of his incompetency) or the
Executive's estate.
<PAGE>
9. Governing Law. This Agreement shall be governed by the laws of the
Commonwealth of Virginia.
10. Entire Agreement. This Agreement, the Incentive Stock Option Agreement
pursuant to the Notice of Grant dated March 26, 1999, the Non-Qualified Stock
Option Agreement pursuant to the Notice of Grant dated March 26, 1999 and the
Developments, Noncompete, Nondisclosure Agreement between Executive and Company
dated March 15, 1999 (the "DNN Agreement") contain all of the understandings and
representations between the parties hereto pertaining to the matters referred to
herein, and supersede all undertakings and agreements, whether oral or in
writing, previously entered into by them with respect thereto. This Agreement
may only be modified by an instrument in writing. The terms of this Agreement
and the DNN Agreement shall be interpreted to be interdependent agreements such
that any provision contained in the DNN Agreement which is more restrictive on
the Executive shall be of no further force and effect and this Agreement shall
supersede any conflicting or more restrictive provision of the DNN Agreement
including, without limitation, Sections 1, 2 and 3, 4 and 6 and all subsections
thereof. To the extent such terms are deemed to be inconsistent in any given
circumstance, Executive may request in writing a determination by the Board as
to how such inconsistency shall be resolved.
11. Waiver of Breach. The waiver by any party of a breach of any condition or
provision of this Agreement to be performed by such other party shall not
operate or be construed to be a waiver of a similar or dissimilar provision or
condition at the same or any prior or subsequent time.
<PAGE>
12. Notices. Any notice to be given hereunder shall be in writing and
delivered personally, or sent by certified mail, postage prepaid, return receipt
requested, addressed to the party concerned at the address indicated below or to
such other address as such party may subsequently give notice of hereunder in
writing:
If to the Company:
Value America, Inc.
1550 Insurance Lane
Charlottesville, Virginia 22911
Attn: Corporate Secretary
With a copy to:
Gary D. LeClair, Esquire
LeClair Ryan, A Professional Corporation
707 E. Main Street
11th Floor
Richmond, Virginia 23219
If to the Executive:
Neal Harris
2400 Mare Lane
Oakton, Virginia 22124
13. Arbitration. Any controversy or claim arising out of or relating to this
Agreement, or any breach thereof, shall be settled by arbitration in accordance
with the rules of the American Arbitration Association then in effect in the
Commonwealth of Virginia and judgment upon such award rendered by the
arbitrators may be entered in any court having jurisdiction thereof. The board
of arbitrators shall consist of one arbitrator to be appointed by the Company,
one by the Executive, and one by the two arbitrators so chosen. The arbitration
shall be held at such place as may be agreed upon at the time by the parties to
the arbitration. The cost of arbitration as determined by the arbitrators.
<PAGE>
14. Withholding. Anything to the contrary notwithstanding, all payments
required to be made by the Company hereunder to the Executive or his estate or
beneficiaries shall be subject to the withholding of such amounts relating to
taxes as the Company may reasonably determine it should withhold pursuant to any
applicable law or regulation. In lieu of withholding such amounts, in whole or
in part, the Company may, in its sole discretion, accept other provisions for
payment of taxes and withholdings as required by law, provided it is satisfied
that all requirements of law affecting its responsibilities to withhold have
been satisfied.
15. Severability. In the event that any provision or portion of this
Agreement shall be determined to be invalid or unenforceable for any reason, the
remaining provisions or portions of this Agreement shall be unaffected thereby
and shall remain in full force and effect to the fullest extent permitted by
law.
16. Titles. Titles to the paragraphs in this Agreement are intended solely
for convenience and no provision of this Agreement is to be construed by
reference to the title of any paragraph.
17. Legal Fees. Company agrees to pay the reasonable fees and expenses of
Executive's legal counsel in connection with the negotiation and execution of
this Agreement.
<PAGE>
18. Counsel. This Agreement has been prepared by LeClair Ryan, A Professional
Corporation, as counsel to the Company ("Counsel"), after full disclosure of its
representation of the Company and with the consent and direction of the Company
and the Executive. The Executive has reviewed the contents of this Agreement and
fully understands its terms. The Executive acknowledges that he is fully aware
of his right to the advice of counsel independent from that of the Company, that
Counsel has advised him of such right and disclosed to him the risks in not
seeking such independent advice, and that he fully understands the potentially
adverse interests of the parties with respect to this Agreement. The Executive
further acknowledges that neither the Company nor its Counsel has made
representations or given any advice with respect to the tax or other
consequences of this Agreement or any transactions contemplated by this
Agreement to him, that he has been advised of the importance of seeking
independent counsel with respect to such consequences, and that he had obtained
independent counsel with respect to such consequences. By executing this
Agreement, the Executive represents that he has, after being advised of the
potential conflicts between him and the Company with respect to the future
consequences of this Agreement, either consulted independent legal counsel or
elected, notwithstanding the advisability of seeking such independent legal
counsel, not to consult with such independent legal counsel.
19. Authority. Subject to obtaining Compensation Committee approval, Company
represents that this Agreement has been duly authorized by all appropriate
corporate actions and duly executed and delivered by an officer of the Company
on behalf of it.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the date and year first above written.
VALUE AMERICA, INC.
By: /s/ Dean W. Johnson
---------------------------------
Its: Executive Vice President
---------------------------------
/s/ Neal Harris
--------------------
Neal Harris
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated March 5, 1999, relating
to the financial statements of Value America, Inc., which appears in such
Prospectus. We also consent to the reference to us under the heading "Experts"
in such Prospectus.
/s/ PRICEWATERHOUSECOOPERS LLP
- - -----------------------------------
McLean, Virginia
March 18, 1999
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</TABLE>
Exhibit 99.2
AGREEMENT
THIS AGREEMENT is made by and among (i) CRAIG A. WINN ("Winn"), (ii) REX SCATENA
("Scatena") (Winn and Scatena are hereinafter together referred to as the
"Shareholders"), and (iii) NEAL HARRIS ("Harris").
RECITALS:
A. The Shareholders desire to induce Harris to enter into an Employment
Agreement dated on or about the date hereof (the "Employment Agreement") with
Value America, Inc. (the "Company"). The Shareholders own a significant
percentage of the outstanding and issued shares of the Company.
B. The Shareholders have agreed to make an additional payment to Harris in
the event Harris' employment by the Company is terminated by the Company other
than for death, "Disability," or "Due Cause" (as such terms are defined in
Section 4(d) and Section 4(e) of the Employment Agreement) and provided that an
election not to renew the term of the Employment Agreement shall not be deemed a
termination of employment by the Company, which termination takes place during
the period beginning one (1) year prior to a "Change of Control" and ending on
the 5th anniversary of Harris' employment (such a termination within such time
period being a "Triggering Termination"). For purposes hereof, "Change of
Control" has the meaning set forth in Section 2(f) of the Company's 1997 Stock
Incentive Plan, as amended, except that in subparagraph (i) thereof, the
percentage "50%" shall be changed to "67%" and in subparagraph (ii) thereof, the
introductory clause "Approval by the shareholders of the Company of" shall be
changed to "Consummation by the Company of."
For good and valuable consideration (including, without limitation, the
benefits to the Shareholders as shareholders of the Company), the parties
hereto, intending to be legally bound, do hereby agree as follows:
1. Terms used herein and not otherwise defined shall have the meanings
attributed to them in the Employment Agreement and the agreements related
thereto.
2. Each of Winn and Scatena, severally, but not jointly, agrees to pay to
Harris, fifty percent (50%) of any "Loss Amount" (as hereinafter defined) if
there is a Triggering Termination of Harris' employment by the Company.
3. Loss Amount shall mean the lesser of (i) $10,000,000 and (ii) the
product of (A) the aggregate number of unvested Option Shares on the day after
the date (the "Termination Date") of the Triggering Termination under the
Non-Qualified Stock Option Agreement granted pursuant to the Notice of Grant
dated March 26, 1999 and under the Incentive Stock Option Agreement granted
pursuant to the Notice of Grant dated March 26, 1999 and (B) the excess, if any,
of (x) the Fair Market Value (as defined in Section 2(m) of the Company's 1997
Stock Incentive Plan, as amended) of an Option Share on the Termination Date
over (y) Five Dollars ($5.00) (subject to appropriate pro rata adjustment in the
event of a stock split, subdivision or other similar capital event) per share
less than the exercise price per Option Share on the Termination Date.
<PAGE>
4. Each of Winn and Scatena shall pay 50% of the Loss Amount to Harris
within 30 days after the later of the date of Change of Control or Termination
Date. Such payment shall either be in cash or in the form of the consideration
received by Winn and Scatena in the Change of Control, as determined by Winn and
Scatena in their sole, individual and absolute discretion. In the event any
payment hereunder would adversely effect or prohibit a pooling of interest
treatment for such Change of Control Harris agrees that such payment may be
delayed, but not more than 18 months, to the earliest date that it can be made
without adversely affecting or prohibiting a pooling of interest treatment. If,
as a result of the operation of the preceding sentence, payment to Harris is
delayed, Harris shall be entitled to interest on the amount to which he is
entitled from the due date thereof until paid at the rate of eight percent (8%)
per annum.
5. In the event either Shareholder fails to pay any amount due hereunder on
the date such sum is due and payable and such failure continues for fifteen (15)
days after written notice thereof by Harris to such Shareholder, Harris shall be
entitled to collect interest at the rate of ten percent (10%) per annum on such
defaulted payment until paid, together with all reasonable costs of collection,
including reasonable attorneys' fees and expenses.
6. No party may assign this Agreement or any rights or obligations
hereunder without the consent of all other parties. Notwithstanding the
foregoing, this Agreement shall inure to the benefit of the heirs and estate of
Harris. This Agreement contains the entire agreement among the parties with
respect to the subject matter hereof and supersedes all prior and
contemporaneous oral or written agreements or understandings among the parties
with respect to such subject matter. This Agreement is in addition to the
Employment Agreement and all other agreements between the Company and Harris.
Harris' rights hereunder are in no way limited by any provision of the
Employment Agreement or its related agreements. This Agreement may only be
amended in a writing signed by all parties hereto.
Counsel This Agreement has been prepared by LeClair Ryan, A Professional
Corporation, as counsel to the Company ("Counsel"), after full disclosure of its
representation of the Company, and with the consent and direction of the
Shareholders and Harris. Shareholders and Harris have reviewed the contents of
this Agreement and fully understand its terms. Shareholders and Harris
acknowledge that they are fully aware of their right to the advice of counsel
independent from that of Company, that Counsel has advised Shareholders and
Harris of such rights and has disclosed to Shareholders and Harris the risks in
not seeking such independent advice, and they understand the potentially adverse
interests of the parties with respect to this Agreement. Shareholders and Harris
further acknowledge that no representations have been made to them with respect
to the tax or other consequences of this Agreement and that they have been
advised of the importance of seeking independent counsel with respect to such
consequences. By executing this Agreement, Shareholders and Harris represent
that after being advised of the potential conflicts between the Company, the
Shareholders and Harris with respect to future consequences of this Agreement.
Shareholders and Harris have either consulted independent counsel or elected not
to consult with independent legal counsel, notwithstanding the advisability of
seeking independent legal counsel.
<PAGE>
IN WITNESS WHEREOF, each of the parties has executed and delivered this
Agreement as of March 15, 1999.
/s/ Craig A. Winn (SEAL)
---------------------------
Craig A. Winn
/s/ Rex Scatena (SEAL)
---------------------------
Rex Scatena
/s/ Neal Harris (SEAL)
---------------------------
Neal Harris
