FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________ to ___________
Commission file number: 000-25689
Value America, Inc.
(Exact name of Registrant as specified in its charter)
Virginia 330712568
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1560 Insurance Lane, Charlottesville, Virginia 22911
(Address of principal executive offices) (Zip code)
1(804)817-7700
(Registrant's telephone number including area code)
Not applicable
(Former name, former address, and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
As of August 9, 1999, there were 44,430,393 shares of common stock
outstanding.
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Value America, Inc.
FORM 10-Q
For the Quarter Ended June 30, 1999
INDEX
<S> <C>
Page
Part I - Financial Information................................................................... 3
Item 1. Consolidated Financial Statements.................................................... 3
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations....................................................................................
9
Item 3. Quantitative and Qualitative Disclosures About Market Risk........................... 18
Part II - Other Information...................................................................... 19
Item 1. Legal Proceedings.................................................................... 19
Item 2. Changes in Securities and Use of Proceeds............................................ 19
Item 3. Defaults Upon Senior Securities...................................................... 19
Item 4. Submission of Matters to a Vote of Security Holders.................................. 19
Item 5. Other Information.................................................................... 19
Item 6. Exhibits and Reports on Form 8-K..................................................... 19
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Part I. Financial Information
Item 1. Consolidated Financial Statements
VALUE AMERICA, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars, except share data)
June 30, December
1999 31, 1998
------------- -------------
(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents................................................. $ 111,645 $ 20,127
Restricted cash........................................................... 2,250 5,000
Short-term investments.................................................... 31,397 --
Accounts receivable, net of allowance of $1,534 and $1,021................ 7,334 3,011
Debt issuance costs....................................................... -- 26,095
Inventory................................................................. 2,014 639
Other current assets...................................................... 2,691 --
------------- ------------
Total Current Assets................................................... 157,331 54,872
------------- ------------
Equipment, furniture and fixtures, net.......................................... 6,331 2,061
Restricted cash................................................................. 1,500 1,500
Deferred offering costs......................................................... -- 1,369
Notes receivable from officers.................................................. 700 250
Other assets.................................................................... 326 45
============= ============
Total Assets........................................................... $ 166,188 $ 60,097
============= ============
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS'EQUITY (DEFICIT)
Current Liabilities:
Accounts payable.......................................................... $ 15,893 $ 15,568
Accrued expenses.......................................................... 5,413 4,515
Deferred revenue.......................................................... 3,586 2,204
Accrued stock-based compensation.......................................... 1,649 1,372
Notes payable............................................................. -- 29,024
Other current liabilities................................................. 270 143
------------- ------------
Total Current Liabilities.............................................. 26,811 52,826
------------- ------------
Deferred revenue................................................................ 697 930
Other liabilities............................................................... 343 83
------------- ------------
Total Liabilities...................................................... 27,851 53,839
------------- ------------
Commitments and contingencies
Mandatorily Redeemable Preferred Stock:
Series A, without par value, convertible, 5% cumulative dividend;
5,000,000 shares authorized, 0 and 5,000,000 issued and outstanding at
June 30, 1999 and December 31, 1998, respectively; redeemable for
$4.00 per share....................................................... -- 14,440
Series B, without par value, convertible, 5% cumulative dividend; 617,979
shares authorized, 0 and 617,979 issued and outstanding at June 30,
1999 and December 31, 1998, respectively; redeemable for $60.94 per
share................................................................ -- 23,382
Series C, without par value, convertible, 5% cumulative dividend;
6,000,000 shares authorized (0 at December 31, 1998), 0 issued and
outstanding; redeemable for $20.00 per share.......................... -- --
Stockholders'Equity (Deficit):
Preferred Stock, without par value; 25,000,000 shares authorized (0 at
December 31, 1998); 0 shares issued and outstanding....................... -- --
Common stock, without par value, 500,000,000 shares authorized and
44,421,203 shares issued and outstanding at June 30, 1999; 100,000,000
shares authorized and 23,777,700 shares issued and outstanding at
December 31, 1998..................................................... 289,190 7,482
Warrants.................................................................. 14,926 26,585
Unrealized loss on securities available-for-sale.......................... (41) --
Accumulated deficit....................................................... (165,738) (65,631)
------------- ------------
Total Stockholders'Equity (Deficit).................................... 138,337 (31,564)
------------- ------------
Total Liabilities, Mandatorily Redeemable Preferred Stock
and Stockholders'Equity (Deficit)..................................
$ 166,188 $ 60,097
============= ============
The accompanying notes are an integral part of these financial statements.
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VALUE AMERICA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands of dollars, except per share data)
(unaudited)
Three Months Ended June 30, Six Months Ended June 30,
------------------------------- -------------------------------
1999 1998 1999 1998
------------- ------------ ------------- ------------
Total Revenues.............................. $ 35,804 $ 5,113 $ 63,806 $ 7,352
Total Cost of Revenues...................... 34,516 4,677 61,460 7,050
------------- ------------ ------------- ------------
Gross Margin (loss)......................... 1,288 436 2,346 302
------------- ------------ ------------- ------------
Operating Expenses:
Sales, advertising and marketing...... 21,588 6,845 39,420 9,135
General and administrative............ 4,552 1,154 8,006 1,995
Technical and system development...... 3,236 622 5,571 995
Professional fee...................... -- 1,700 -- 1,700
------------- ------------ ------------- ------------
Total operating expenses........... 29,376 10,321 52,997 13,825
------------- ------------ ------------- ------------
Operating loss.............................. (28,088) (9,885) (50,651) (13,523)
Other Income and Expenses:
Interest (expense) income, net........ (3,683) 50 (15,579) 148
------------- ------------ ------------- ------------
Net Loss.................................... (31,771) (9,835) (66,230) (13,375)
Accretion and dividends on Series
A, Series B and Series C
redeemable preferred stock............ 1,606 1,254 12,162 2,414
Beneficial conversion feature on
Series C redeemable preferred
stock................................. -- -- 19,800 --
------------- ------------ ------------- ------------
Net loss available for common
stockholders................................ $ (33,377) $ (11,089) $ (98,192) $ (15,789)
============== ============= ============== =============
Net Loss Per Common Share:
Basic................................. $ (0.79) $ (0.48) $ (2.97) $ (0.68)
============== ============= ============== =============
Diluted............................... $ (0.79) $ (0.48) $ (2.97) $ (0.68)
============== ============= ============== =============
Weighted Average Number of Shares:
Basic................................. 42,316 23,153 33,056 23,153
============== ============= ============== =============
Diluted............................... 42,316 23,153 33,056 23,153
============== ============= ============== =============
The accompanying notes are an integral part of these financial statements.
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VALUE AMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars, except share data)
(unaudited)
Six Months Ended June 30,
------------------------------
1999 1998
------------- -------------
Cash Flows From Operating Activities:
Net loss........................................................ $ (66,230) $ (13,375)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization................................ 1,037 185
Stock-based compensation..................................... 277 291
Amortization of debt issuance costs.......................... 19,454 1,700
Changes in assets and liabilities:
Accounts receivable.......................................... (4,323) (1,541)
Inventory.................................................... (1,375) (5)
Notes receivable from officers............................... (450) --
Other assets................................................. (2,972) 13
Accounts payable............................................. 325 6,832
Accrued expenses............................................. 898 --
Deferred revenue............................................. 1,149 2,616
Other liabilities............................................ 21 --
------------ ------------
Net Cash Used In Operating Activities................................. (52,189) (3,284)
------------ ------------
Cash Flows From Investing Activities:
Restricted cash................................................. 2,750 (2,250)
Purchases of short-term investments............................. (31,438) --
Capital expenditures............................................ (4,852) (1,085)
------------ ------------
Net Cash Used In Investing Activities................................. (33,540) (3,335)
------------ ------------
Cash Flows From Financing Activities:
Principal payments under capital lease obligations.............. (89) (35)
Proceeds from issuance of common stock.......................... 126,700 --
Proceeds from issuance of preferred stock and warrants.......... 60,000 18,830
Proceeds from exercise of common stock warrants................. 10 --
Proceeds from exercise of common stock options.................. 675 --
Payment of offering costs....................................... (13,134) (2,119)
Proceeds from issuance of debt and warrants..................... 5,000 --
Dividends paid.................................................. (1,915) (145)
------------ ------------
Net Cash Provided By Financing Activities............................. 177,247 16,531
------------ ------------
Net Increase In Cash and Cash Equivalents............................ 91,518 9,912
Cash and Cash Equivalents, Beginning of Period........................ 20,127 10,341
============ ============
Cash and cash equivalents, end of period.............................. $ 111,645 $ 20,253
============ ============
Non-cash investing and financing transactions:
Accretion and dividends on redeemable preferred stock........... $ 12,162 $ 2,414
============ ============
Beneficial conversion feature related to issuance of
preferred stock................................................. $ 19,800 $ --
============ ============
Issuance of warrants with notes payable......................... $ 4,539 $ --
============ ============
Issuance of common stock on preferred stock conversion.......... $ 117,388 $ --
============ ============
Issuance of common stock on exercise of warrants................ $ 49,073 $ --
============ ============
Fair value adjustment to securities available-for-sale.......... $ 41 $ --
============ ============
Acquisition of assets under capital lease....................... $ 455 $ --
============ ============
The accompanying notes are an integral part of these financial statements.
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VALUE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
(unaudited)
1. Description of Business
Value America, Inc. ("Value America" or the "Company") is an
Internet-based retailer that sells a large selection of high quality, brand name
products and services at competitive prices to both consumers and businesses.
Additionally, Value America develops and maintains custom multi-media
presentations for the products and services featured on its online store and
offers opportunities for advertising on its online store. On May 5, 1999, the
Company formed ServeAmerica.com, Inc. ("ServeAmerica"), a Delaware corporation.
ServeAmerica, a wholly owned subsidiary of the Company, was capitalized with
1,000 shares of $0.001 par value common stock. ServeAmerica had 100 shares of
common stock issued and outstanding at June 30, 1999. ServeAmerica has not
conducted any operations from inception through June 30, 1999.
2. Basis of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles and, in the opinion of
management, reflect all adjustments (consisting only of normal recurring
adjustments) considered necessary to fairly present Value America's financial
position, results of operations and cash flows for the periods presented. These
financial statements should be read in conjunction with the Company's audited
financial statements for the year ended December 31, 1998 and notes thereto
included in the Company's Registration Statement on Form S-1 filed with the
Securities and Exchange Commission (the "SEC"). The results of operations for
the three- and six-month periods ended June 30, 1999 are not necessarily
indicative of the results to be expected for any subsequent quarter or for the
year ending December 31, 1999. Certain prior years' information has been
reclassified to conform with the current year's presentation.
3. Initial Public Offering
On April 13, 1999 the Company closed its initial public offering with
the sale of 5,500,000 shares of common stock at an initial public offering price
of $23 share. Upon the closing of the initial public offering the following
events occurred:
o all of the outstanding shares of Value America's convertible preferred
stock converted into 10,737,162 shares of common stock,
o $34.0 million principal amount of notes payable was cancelled
through the exercise of Type B warrants resulting in the issuance
of 3,400,000 shares of common stock,
o unamortized debt issuance costs of $3.7 million were expensed as
interest expense and $12.5 million was reclassified to common
stock, upon cancellation of the $34.0 million principal amount of
notes payable, and
o accrued dividends of approximately $1.9 million on Value America's
Series A, B and C convertible preferred stock were paid.
The net proceeds to the Company from the Offering, after deducting underwriting
discounts, commissions and expenses, were $113.4 million. The proceeds of the
offering, which will be used by the Company for working capital and other
general corporate purposes, have been invested in money market funds, commercial
paper with at least an A1P1 rating, auction rate preferred securities and
government securities.
4. Debt
Value America entered into a Revolving Credit Agreement ("Agreement")
with a preferred shareholder and additional participants in October 1998, which
was amended in November and December 1998 and January 1999. Borrowings under the
Agreement bear interest at 11% annually with interest and principal payable on
August 17, 1999.
In January 1999, in accordance with the Agreement, Value America
borrowed $5.0 million and issued 60,000 Type A warrants and 500,000 Type B
warrants. Value America allocated the $4.5 million fair value of the Type A and
B warrants, as determined by an independent valuation, to stockholders' equity
and is amortizing the resulting debt issuance costs as interest expense using
the effective interest method until maturity or conversion. As of March 31,
1999, Value America had issued 408,000 Type A warrants, 3,400,000 Type B
warrants and 325,000 Type C warrants in connection with the amendments to the
Agreement.
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On April 13, 1999, the closing date of Value America's initial public
offering ("IPO"), the principal amount of the debt was repaid through exercise
of the Type B warrants for common stock pursuant to the Agreement. The
unamortized portion of the debt issuance costs attributable to the Type B
warrants of $12.5 million was recorded in the equity accounts and the
unamortized portion of the debt issuance costs attributable to the Type A and
Type C warrants of $3.7 million was recorded as interest expense. This
amortization does not affect Value America's cash flows. During the three month
period ended June 30, 1999, 166,500 Type A warrants were exercised. As of June
30, 1999, Value America had 241,500 Type A warrants, no Type B warrants and
325,000 Type C warrants outstanding.
5. Mandatorily Redeemable Preferred Stock and Stockholders' Equity
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 D 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.
The Type D warrants have an exercise price of $10.00 per share of
common stock and are exercisable upon issuance until April 13, 2002. 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 April 13, 2002. 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 market value equal to the exercise price.
Value America allocated $11.4 million for the Type D, E and F warrants
to stockholders' equity and $48.6 million to the Series C preferred stock, based
upon their relative fair values. Value America recorded the Series C preferred
stock's beneficial conversion feature of $19.8 million at issuance, which
represents the difference between the Series C conversion price and the fair
market value of the common stock times the 6,000,000 shares issued.
On April 13, 1999, the closing date of Value America's IPO, the Series
C preferred stock converted into common stock in accordance with the terms of
the Series C Preferred Stock Agreement. In addition, the Type E warrants lapsed
in accordance with the Type E Warrant Agreement. On June 30, 1999, Value America
had 1,800,000 Type D warrants, no Type E warrants, and 36,660 Type F warrants
outstanding.
Value America paid finders' fees of $1.0 million to a stockholder for
the placement of the Series C preferred stock. This amount was recorded as a
reduction of the related proceeds.
In January 1999, Value America sold 20,000 shares of common stock at
$10 per share to third parties.
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6. Net Loss Available for Common Stockholders
Net loss available for common stockholders is comprised of net loss plus
accretion, dividends and the beneficial conversion feature on the Series C
redeemable preferred stock. Net loss available for common shareholders for the
three- and six-month periods ended June 30, 1999 was $33.4 million ($0.79 per
share) and $98.2 million ($2.97 per share), respectively. Net loss prior to
consideration of accretion, dividends and the beneficial conversion feature on
the Series C redeemable preferred stock was $31.8 million ($0.75 per share) and
$66.2 million ($2.00 per share), respectively, for the three- and six-month
periods ended June 30, 1999 and $9.8 million and $13.4 million for the three-
and six-month periods ended June 30, 1998. The accretion and dividends on Series
A, Series B and Series C redeemable preferred stock represents the recording of
the periodic increases in the carrying value of these securities to increase
their value to the redemption value by the redemption date. The recording of
accretion does not affect the Company's cash flows. The beneficial conversion
feature on preferred stock represents the difference between the fair market
value of the common stock underlying the Series C redeemable preferred stock
issued on January 12, 1999 and the conversion price of the preferred stock. The
recording of the beneficial conversion feature does not affect the Company's
cash flows.
7. Commitments and Contingencies
From time to time, Value America may be involved in litigation relating
to claims arising out of its operations in the normal course of business. On
March 24, 1999, Coupons, Inc., a Georgia corporation allegedly doing business as
"Value America," filed a complaint against Value America in the United States
District Court for the Northern District of Georgia, Atlanta Division. This
action relates to the use of the mark "Value America" by Value America in
connection with its marketing plan. A third party granted Value America an
option to obtain an assignment of the "Value America" mark in December 1997. In
March 1998, Value America exercised this option and obtained an assignment of
the mark. In connection with this assignment, the third party retained the
exclusive right to use the "Value America" mark for preparing and disseminating
advertising matter, including direct mail advertising. The third party
subsequently assigned his retained rights to Coupons, Inc. In the complaint,
Coupons, Inc. alleges that Value America's use of the "Value America" mark in
its marketing activities is violative of Coupons, Inc.'s retained rights to the
mark. The complaint alleges that Value America's actions constitute violations
of federal trademark law, state law and common law. Coupons, Inc. seeks all
profits from Value America's use of the mark, restitution for an unspecified
amount of damages, as well as punitive damages in the amount of $1,000,000. In
addition, Coupons, Inc. requested the court to issue an injunction preventing
use of the "Value America" mark and order the cancellation of Value America's
trademark registration for the "Value America" mark. We have filed a motion to
dismiss and believe that we have valid disputes to each of the claims asserted
by Coupons, Inc.
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.
The Company has an agreement to purchase certain information technology
services and licenses through January 1, 2000. The total commitments remaining
under the agreement approximated $3.9 million as of June 30, 1999. In addition
the company has committed approximately $1.4 million under capital lease
arrangements for the purchase of equipment and maintenance agreements.
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8. Related Party Transactions
During the quarter ended June 30, 1999, Value America received notes
from its officers in the amount of $450,000. The notes bear interest at 6.75%
annually with interest and principal due in one year and over a two year period.
9. Subsequent Events
On July 2, 1999, the Company purchased 200,000 shares of common stock
from WebGalaxy, Inc. for $2 per share and detachable warrants to purchase
200,000 shares of common stock at $3 per share until July 2000 and $4 per share
thereafter.
On July 15, 1999, the Board of Directors of the Company adopted the
Value America, Inc. 1999 Stock Incentive Plan (the "Plan"). The Company has
reserved 2,350,000 shares of common stock for issuance under the Plan.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation
The following "Management's Discussion and Analysis of Financial
Condition and Results of Operations"of Value America, Inc.("Value America" or
the "Company") contains forward-looking statements based on current
expectations, estimates and projections about the Company's industry,
management's beliefs and certain assumptions made by management. All statements,
trends, analyses and other information contained in this report relative to
trends in net sales, gross margin, anticipated expense levels, liquidity and
capital resources, as well as other statements, including, but not limited to,
words such as "anticipate,""believe,""plan,""estimate,""expect,""seek"and
"intend,"and other similar expressions, constitute forward-looking statements.
These forward-looking statements involve risks and uncertainties, and actual
results may differ materially from those anticipated or expressed in such
statements. Potential risks and uncertainties include, among others, those set
forth in "Overview,""Liquidity and Capital Resources,"and "Additional Factors
That May Affect Future Results"included in this "Management's Discussion and
Analysis of Financial Condition and Results of Operations"and in the "Risk
Factors"section of the Company's prospectus filed with the SEC pursuant to Rule
424(b)(1) on April 8, 1999. Particular attention should be paid to the
cautionary statements involving the Company's limited operating history, the
unpredictability of its future revenues, the unpredictable and evolving nature
of its business model, the intensely competitive online commerce and retail
industries, and the risks associated with capacity constraints, systems
development, management of growth, acquisitions, any new products and
international or domestic business expansion. Except as required by law, the
Company undertakes no obligation to update any forward-looking statement,
whether as a result of new information, future events or otherwise. Readers,
however, should carefully review the factors set forth in other reports or
documents that the Company files from time to time with the SEC.
Overview
Value America's revenues are derived from three sources: (a) sales of
products through Value America's online store, (b) fees collected from
manufacturers for the preparation and hosting of product presentations and
listing of manufacturers' products available for purchase on the online store,
and (c) advertising on the online store. Value America's vendors ship products
directly to the customer typically within one to two days after a customer
places an order. Revenues from product sales are recognized upon shipment from
the vendor. Value America is responsible for selling the merchandise, collecting
payment from the customer, ensuring that the shipment reaches the customer and
processing returns. Value America generally takes title to products upon
shipment and bears the risk of loss for collection, delivery and merchandise
returns from customers. Value America occasionally purchases merchandise prior
to receiving customer orders and records such merchandise as inventory until
shipped to customers. Value America accrues a reserve for estimated product
returns at the time of sale.
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Value America has contractual agreements with many of its suppliers
under which Value America develops and maintains multi-media product
presentations on Value America's online store. These agreements provide for the
development of the presentations, the posting of the presentations and the
listing of the manufacturers' products on Value America's Internet site,
typically for a specified period. For agreements entered into prior to January
1, 1998, the listing period generally extended for 36 months; for agreements
entered into after that date, the period generally has been 12 months. Value
America recognizes the costs of developing presentations and listing products on
its Internet site as incurred and recognizes the product presentation and
listing revenues ratably over the period of the related agreement. Amounts that
are billed under the terms of these agreements, but not yet earned, are
reflected as deferred revenue. Certain of these agreements provide that
suppliers pay a renewal fee to continue product listings beyond the initial
listing periods. Revenues from these renewal fees are recognized ratably over
the renewal term.
Value America sells advertising space to vendors on its online store.
Innovative multimedia advertisements highlight products and their benefits.
Additionally, Value America sends Electronic Direct Mail ("EDM") to its members
to keep them informed about special promotions. Advertising revenue is
recognized over the period in which the related advertisement is offered on the
online store or when the EDM is sent. Value America recognizes the costs of
developing these advertisements and EDMs as incurred.
To date, payments for products purchased through Value America's online
store have been primarily made with credit cards. Value America generally
receives payment from a customer's credit card within one to four business days.
In the third quarter of fiscal 1998, Value America began to extend trade credit
terms, typically net 30 days, to certain large customers that Value America has
evaluated for creditworthiness. Value America typically pays its vendors for
goods within 30 to 60 days.
Value America expects that its operating expenses will increase
significantly during the foreseeable future as the result of its plans to:
increase expenditures on marketing, advertising and promotion, hire additional
personnel, enhance existing store operations and to support new strategic vendor
relationships. Value America expects to incur substantial operating losses for
the foreseeable future. Although Value America has experienced significant
growth in revenue, there can be no assurance that Value America's revenue will
continue at its current level or increase. Value America has a limited operating
history upon which to base an evaluation of Value America and its business.
Value America's business and prospects must be considered in light of the risks,
expenses and difficulties frequently encountered by companies in early stages of
development, particularly companies in new and rapidly evolving markets such as
electronic commerce.
Results Of Operations
Second Quarter 1999 Compared with Second Quarter 1998
Revenues
Revenues primarily consist of product sales including shipping through
Value America's online store, product presentation and listing fees, advertising
and shipping. For the quarter ended June 30, 1999, revenues totaled $35.8
million representing a 600% increase from $5.1 million for the quarter ended
June 30, 1998. Revenues from product sales were $34.4 million for the quarter
ended June 30, 1999, compared to $4.8 million for the quarter ended June 30,
1998, representing an increase of 617%. The growth in product sales reflects the
growth of Value America's customer base, repeat purchases from existing
customers, increases in the volume of merchandise sold and an overall increase
in demand for Value America's expanding array of merchandise.
Revenues from advertising and other were $1.4 million for the quarter
ended June 30, 1999, an increase of 367% compared to $0.3 million for the
quarter ended June 30, 1998. The increase in advertising revenues is driven by
two new initiatives that commenced in the first quarter of 1999: advertising on
Value America's web site and direct advertising through EDM. Value America
recognized approximately $0.9 million in web site advertising and EDM
advertising in the quarter ended June 30, 1999, compared to $0 in the quarter
ended June 30, 1998. Product presentation listing fees, which are included in
advertising and other revenue increased to approximately $0.5 in the second
quarter of 1999, compared to $0.3 in the second quarter of 1998. This increase
in product presentation listing fees reflects the increase in brand offerings on
Value America's online store.
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Charges to customers for shipping, which represent approximately $1.6
million and $40,000 of revenue for the quarters ended June 30, 1999 and 1998,
respectively, are classified in revenue. For the quarter ended June 30, 1999,
product returns as a percentage of sales due to defective products and shipping
damage were approximately 2.86%. Returns due to customer satisfaction were
approximately 2.78%. Returns due to other reasons were approximately 0.58%. For
the quarter ended June 30, 1998, total product returns as a percentage of sales
were approximately 0.4%.
Cost of Revenues
Cost of revenues primarily consists of payments to third party
suppliers for merchandise and shipping. Value America incurred $34.5 million of
cost of revenues for the quarter ended June 30, 1999. For the quarter ended June
30, 1998, cost of revenues totaled $4.7 million. Cost of revenues represent
96.4% and 91.5% of revenues for the quarters ended June 30, 1999 and 1998,
respectively.
Value America's gross margin has increased from $0.4 million for the
quarter ended June 30, 1998 to $1.3 million for the quarter ended June 30, 1999.
This increase is due to the strong margins earned on advertising revenues.
Product sales resulted in gross margins of $54,000 and $255,000 for the quarters
ended June 30, 1999 and 1998, respectively. Value America continues to utilize a
short-term strategy of selectively accepting narrow margins on product sales and
losses on shipping charges to maximize sales volumes and brand awareness.
Sales, Advertising and Marketing
Sales, advertising and marketing expenses consist of costs associated
with promoting Value America's online store to potential customers and vendors,
as well as payroll and related expenses and credit card fees. Sales, advertising
and marketing expenses increased from $6.8 million for the quarter ended June
30, 1998 to $21.6 million for the quarter ended June 30, 1999. The increase
primarily reflected the beginning 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. As a percent of sales these expenses have
decreased from 134% for the quarter ended June 30, 1998 to 60% for the quarter
ended June 30, 1999. Advertising and promotional expenses increased from $6.1
million for the quarter ended June 30, 1998 to $15.5 million for the quarter
ended June 30, 1999, net of cooperative advertising of approximately $0 for the
quarter ended June 30, 1998 and $1.3 million for the quarter ended June 30,
1999. Payroll expenses relating to merchandising, advertising and promotion
departments increased from $0.6 million for the quarter ended June 30, 1998 to
$2.6 million for the quarter ended June 30, 1999. Value America intends to
increase its sales, advertising and marketing expenses significantly for the
foreseeable future, as it continues to expand its operations.
General and Administrative
General and administrative expenses consist of management and executive
compensation, professional services, bad debts and general corporate expenses,
such as rent, depreciation and telephone expenses. General and administrative
expenses increased from $1.2 million for the quarter ended June 30, 1998 to $4.6
million for the quarter ended June 30, 1999. This increase reflected the hiring
of additional executive management and increased facilities charges to support
rapidly expanding operations. Payroll expenses relating to general and
administrative personnel increased from $0.5 million for the quarter ended June
30, 1998 to $1.8 million in the quarter ended June 30, 1999. Value America
expects that general and administrative expenses will continue to increase
significantly for the foreseeable future, as it continues to expand its
operations.
11
<PAGE>
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 $0.6 million
for the quarter ended June 30, 1998 to $3.2 million for the quarter ended June
30, 1999. This increase principally reflected higher payroll and consulting
expenses. Payroll expenses related to technical and system development increased
from $0.2 million for the quarter ended June 30, 1998 to $1.7 million for the
quarter ended June 30, 1999. Payments to outside consultants totaled $0.3
million for the quarter ended June 30, 1998 and $0.5 million for the quarter
ended June 30, 1999. Value America expects that technical and systems
development expenses will continue to increase for the foreseeable future.
Interest Income (Expense), Net
Interest expense of $5.3 million for the quarter ended June 30, 1999,
which consisted primarily of the amortization of $3.7 million in debt issuance
costs related to the $34.0 million note payable, was offset by interest income
earned on the proceeds from the debt and preferred stock issuances in the fourth
quarter of 1998 and the first quarter of 1999 of $1.6 million. This charge has
no effect on the Company's cash flows.
Income Taxes
Value America provided $0 for income taxes for the three- and six-month
periods ended June 30, 1999 and 1998, since it incurred a net loss for those
periods.
Net Loss Available for Common Stockholders
Net loss available for common stockholders is comprised of net loss
plus accretion and dividends on the Series C redeemable preferred stock. Net
loss available for common shareholders for the quarter ended June 30, 1999, was
$33.4 million or $0.79 per share. Net loss prior to consideration of accretion
and dividends on preferred stock was $31.8 million or $0.75 per share for the
quarter ended June 30, 1999. The accretion and dividends on Series A, Series B
and Series C redeemable preferred stock represents the recording of the periodic
increases in the carrying value of these securities to increase their value to
the redemption value by the redemption date. There will be no future accretion
or dividend charges in connection with Series A, Series B and Series C because
these securities were converted to common upon the closing of the IPO. The
recording of accretion does not affect the Company's cash flows.
Results Of Operations
Six Months 1999 Compared with Six Months 1998
Revenues
For the first six months of 1999, revenues totaled $63.8 million up
from $7.4 million for the first six months of 1998,an increase of 768%. Revenues
from product sales were $60.8 million for the six months ended June 30, 1999,
compared to $6.8 million for the six months ended June 30, 1998,an increase of
790%. The growth in product sales reflects the growth of Value America's
customer base, repeat purchases from existing customers, increases in the volume
of merchandise sold and an overall increase in demand for Value America's
expanding array of merchandise.
Revenues from advertising and other were $3.0 million for the six
months ended June 30, 1999, compared to $0.5 million for the six months ended
June 30, 1998. The increase in advertising revenues is driven by two new
initiatives in 1999: advertising on Value America's web site and direct
advertising through EDM. Value America recognized approximately $2.1 million in
web site advertising and EDM advertising in the six months ended June 30, 1999,
compared to $0 in the six months ended June 30, 1998. Product presentation
listing fees, which are also included in advertising and other revenue,increased
to approximately $0.9 million in the first six months of 1999, compared to $0.5
million in the first six months of 1998. This increase in product presentation
listing fees reflects the increase in brand offerings on Value America's online
store.
12
<PAGE>
Charges to customers for shipping, which represent approximately $2.5
million and $68,000 of revenue for the six months ended June 30, 1999 and 1998,
respectively, are reported as revenue. Prior to January 1, 1999, revenue
generated from shipping was recorded as a reduction of the related cost of
shipping. All 1998 amounts presented have been adjusted to reflect this
classification change. For the six months ended June 30, 1999 and 1998, product
returns and cancellations, including product returns resulting from
malfunctioning products, erroneous shipments and other quality-related issues,
as a percentage of sales, were approximately 5.6% and 0.3%, respectively.
Cost of Revenues
Value America incurred $61.5 million of cost of revenues for the six
months ended June 30, 1999. For the six months ended June 30, 1998, cost of
revenues totaled $7.1 million. Cost of revenues represent 96.3% and 95.9% of
revenues for the six months ended June 30, 1999 and 1998, respectively. Revenues
in the six months ended June 30, 1999 include approximately $400,000 of products
sales for which the products were shipped and the related cost of sales were
recorded in 1998.
Value America's gross margin has increased from $0.3 million for the
six months ended June 30, 1998 to $2.3 million for the six months ended June 30,
1999. This increase is due to the strong margins earned on advertising revenues.
The Company incurred a negative product sales margin of $0.3 million and
positive margin of $0.2 million for the six months ended June 30, 1999 and 1998,
respectively. The negative product gross margin is due to Value America's
continued short-term strategy to selectively accept narrow margins on product
sales to attain increased volumes and brand awareness and losses on shipping
charges.
Sales, Advertising and Marketing
Sales, advertising and marketing expenses increased from $9.1 million
for the six months ended June 30, 1998 to $39.4 million for the six months ended
June 30, 1999. The increase primarily reflected the beginning 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 $8.0 million for the six months ended June
30, 1998 to $29.2 million for the six months ended June 30, 1999, net of
cooperative advertising of approximately $0 for the six months ended June 30,
1998 and $3.9 million for the six months ended June 30, 1999. Payroll expenses
relating to merchandising, advertising and promotion departments increased from
$0.9 million for the six months ended June 30, 1998 to $4.7 million for the six
months ended June 30, 1999. Value America intends to increase its sales,
advertising and marketing expenses significantly for the foreseeable future, as
it continues to expand its operations.
General and Administrative
General and administrative expenses increased from $2.0 million for the
six months ended June 30, 1998 to $8.0 million for the six months ended June 30,
1999. This increase reflected the hiring of additional management and customer
service personnel, the incurrence of increased facilities charges and
substantially increased activity levels to support the expansion of Value
America's operation, all of which were undertaken in late 1997 and continued
into 1998 and 1999. Payroll expenses relating to general and administrative
personnel increased from $0.8 million for the six months ended June 30, 1998 to
$2.7 million in the six months ended June 30, 1999. Value America expects that
general and administrative expenses will continue to increase significantly for
the foreseeable future, as it continues to expand its operations.
13
<PAGE>
Technical and System Development
Technical and system development expenses increased from $1.0 million
for the six months ended June 30, 1998 to $5.6 million for the six months ended
June 30, 1999. This increase principally reflected higher payroll and consulting
expenses. Payroll expenses related to technical and system development increased
from $0.4 million for the six months ended June 30, 1998 to $2.6 million for the
six months ended June 30, 1999. Payments to outside consultants totaled $0.4
million for the six months ended June 30, 1998 and $1.9 million for the six
months ended June 30, 1999. Value America expects that technical and systems
development expenses will continue to increase for the foreseeable future.
Interest Income (Expense), Net
Interest expense of $15.6 million for the six months ended June 30,
1999 consisted primarily of the amortization of $17.1 million in debt issuance
costs related to the $34.0 million note payable, which was offset by interest
income earned on the proceeds from the debt and preferred stock issuances in the
fourth quarter of 1998 and the first quarter of 1999. This charge has no effect
on the Company's cash flows.
Net Loss Available for Common Stockholders
Net loss available for common stockholders is comprised of net loss
plus accretion, dividends and the beneficial conversion feature on the Series C
redeemable preferred stock. Net loss available for common shareholders for the
six months ended June 30, 1999, was $98.2 million or $2.97 per share. Net loss
prior to consideration of accretion, dividends and the beneficial conversion
feature on the Series C redeemable preferred stock was $66.2 million or $2.00
per share. The accretion and dividends on Series A, Series B and Series C
redeemable preferred stock represents the recording of the periodic increases in
the carrying value of these securities to increase their value to the redemption
value by the redemption date. The recording of accretion does not affect the
Company's cash flows. The beneficial conversion feature on preferred stock
represents the difference between the fair market value of the common stock
underlying the Series C redeemable preferred stock issued on January 12, 1999,
and the conversion price of the preferred stock. The recording of the beneficial
conversion feature does not affect the Company's cash flows. Because the
preferred stock was converted to common stock there will not be any future
accretion or dividend charges in connection with 1998 and first quarter 1999
issuances of preferred stock.
Liquidity and Capital Resources
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 redeemable
preferred stock, common stock and warrants. During the year ended December 31,
1998, Value America issued:
o $18.8 million of Series B redeemable 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.
In the six months ended June 30, 1999, Value America issued:
o $60.0 million of Series C redeemable preferred stock and related
warrants to purchase 2,311,567 shares of common stock; o $5.0
million of notes payable and related warrants to purchase 560,000
shares of common stock;
o 20,000 shares of common stock for $200,000; and o 5,500,000 shares
of common share at $23 per share resulting in proceeds of $113.4 million,
net of underwriting discounts and expenses.
14
<PAGE>
Upon the closing of the IPO, the Series A, B and C redeemable preferred
stock were converted into 10,737,162 shares of common stock and the $34.0
million of notes payable were cancelled with the exercise of warrants resulting
in the issuance of 3,400,000 shares of common stock.
In connection with the 1998 and 1999 issuance of notes payable,Value
America allocated $31.1 million to warrants,which represents their fair value.
The resulting debt issuance costs were amortized as interest expense until
conversion on April 13, 1999.
As of April 13, 1999, the outstanding principal amount of the note
payable was converted into common stock. Interest expense of $3.7 million was
recorded in the second quarter of 1999 representing amortization of debt
issuance costs. Value America also recorded $12.5 million to equity,
representing the unamortized issuance costs on Type B warrants. The charge to
interest expense does not affect Value America's cash flows.
In connection with the January 1999 issuance of the Series C preferred
stock and warrants, Value America allocated $11.4 million for the warrants to
stockholders' equity and $48.6 million to the Series C preferred stock, based
upon their relative fair values. Value America recorded accretion to
periodically increase the carrying value of the preferred stock to its
redemption value of $120.0 million by the redemption date. Value America
recorded accretion of $1.3 million in the second quarter of 1999 on the Series
A, Series B and Series C preferred stock. The recording of accretion does not
affect the Company's cash flows.
Net cash used in operating activities was $3.3 million for the six
months ended June 30, 1998, and $52.2 million for the six months ended June 30,
1999. Net cash used in operating activities in the six months ended June 30,
1999 was due primarily to (a) the net loss of $66.2 million and (b) a $4.3
million increase in accounts receivable, both associated with the growth in
revenues and increased cash required to fund operating activities. The increase
in accounts receivable was offset by an increase in amortization of debt
issuance costs of $19.5 million. Value America has historically financed its
operating activities primarily through the aforementioned capital contributions
by stockholders and other parties.
Value America has an unsecured $5.0 million line of credit from
Wachovia Bank, N.A. This line bears interest on advanced funds at Prime less
0.5% and expires on June 1, 2000. The terms of the agreement prohibit the
Company from having a significant change in control, ownership, or legal
structure, except for primary and secondary offerings of equity securities to
the public, without Wachovia's consent. In addition, during the agreement the
Company is required to maintain unencumbered liquidity of $25 million. As of
June 30, 1999, we had not drawn any amounts under this line of credit.
Value America has obtained stand-by letters of credit in favor of
vendors totaling $2.3 million. Each letter of credit is secured by a certificate
of deposit. These standby letters of credit expire through August 2000 and are
callable if Value America defaults in the payments of trade payables to the
secured vendors.
Additionally, Value America has a two-year agreement with a credit card
processor in which the credit card processor has a first priority lien and
security interest in a $1.5 million cash deposit account, to cover potential
charge backs. The agreement, which expires in April 2000, may be terminated by
either party and the credit card processor can require Value America to maintain
the cash deposit account for up to 10 months following termination.
Value America incurred capital expenditures of $4.9 million in the six
months ended June 30, 1999 compared to $1.1 in the six months ended June 30,
1998. The increase in expenditures is primarily for computer equipment and
furniture and fixtures associated with Value America's continued new employee
growth, move to new facilities and continued systems development and
procurement.
15
<PAGE>
Value America plans to increase its operating expenses significantly in
order to:
o increase the size of its staff;
o expand its marketing and advertising efforts;
o increase its technical and systems development efforts;
o improve and maintain its controls, systems and procedures; and
o support its growing infrastructure.
As a result, Value America may experience substantial quarterly net losses for
the foreseeable future.
The Company has an agreement to purchase certain information technology
services and licenses through January 1, 2000. The total commitments remaining
under the agreement approximated $3.9 million as of June 30, 1999. In addition
the Company has committed approximately $1.4 million under capital lease
arrangements for the purchase of equipment and maintenance agreements.
Value America believes that its existing capital resources, including
the net proceeds from its IPO will be sufficient to fund its operations for at
least 12 months. However, this period may be shorter if the Company finds and
decides to take advantage of business opportunities that exceed current
expectations but that we determine are desirable and feasible. Thereafter, if
cash generated from operations is insufficient to satisfy Value America's
liquidity requirements, Value America may seek to sell additional equity or
convertible debt securities or obtain a larger credit facility.
Additional Factors that May Affect Future Results
In addition to the factors discussed in the "Overview"section of this
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", including among others, the Company's limited operating history,
the unpredictability of its future revenues and the unpredictable and evolving
nature of its business model, the following additional factors may affect the
Company's future results.
The Company may be unable to attract customers and process sales if
management does not maintain and build relationships with manufacturers, vendors
and other third parties. The Company is entirely dependent upon manufacturers
and distributors to provide merchandise for sale in our online store. In the six
months of 1999, goods manufactured by IBM represented approximately 36% of our
net sales and goods manufactured by Proteva and Hewlett-Packard represented
approximately 11% and 9% of net sales, respectively. If we do not maintain our
existing relationships with product vendors on acceptable commercial terms or if
we do not establish similar relationships with vendors of other products that
our customers want, we may not be able to offer a desirable selection of
merchandise and customers may choose not to shop at our online store. In
addition, vendors may decide, for reasons outside our control, not to offer
particular products for sale on the Internet. For example, from February 19,
1999 to May 4, 1999 Compaq Computer temporarily suspended sales of its Presario
line of computers through companies that sell exclusively over the Internet,
including Value America. We believe Compaq took this action in order to give it
time to address pricing concerns of traditional resellers.
Year 2000 Compliance
Many currently installed computer systems and software products are
programmed to assume that the century portion of a date is "19" to conserve the
use of storage and memory. This assumption results in the use of two digits
rather than four to define an applicable year. Accordingly, computer systems
that rely on two digits to define an applicable year may recognize a date using
"00" as the year 1900, rather than the year 2000.
Value America has completed its initial assessment of its Year 2000
readiness, and it will continue to assess its readiness as it develops and
expands its infrastructure and operations. This assessment included a review of
Value America's internal information technology systems, non-information
technology systems and the systems of third parties upon which Value America may
rely. Value America is conducting Year 2000 compliance verification and
validation, primarily using internal resources. Although Value America has
developed its proprietary computer systems to specifically address Year 2000
issues, there can be no assurance that Value America's systems, as a whole, are
Year 2000 compliant. This is because Value America utilizes third-party
equipment and software that may or may not be Year 2000 compliant. Consequently,
16
<PAGE>
Value America's ability to address Year 2000 issues is, to a large extent,
dependent upon the remediation activities of third parties. Value America has
obtained statements of Year 2000 compliance from third party technology
providers associated with Value America's core information systems
infrastructure, and Value America plans to conduct Year 2000 testing on its
systems beginning in the third quarter of 1999 to verify that the systems are
Year 2000 compliant. No internal information technology projects have been
deferred due to Value America's Year 2000 remediation program. Value America
believes that the remediation program will have no material adverse effect on
current or anticipated internal information technology projects.
Value America has initiated formal communications with all of the
suppliers presented in Value America's online store to determine the extent to
which Value America is vulnerable to those third parties' failures to remediate
their own Year 2000 issues. For suppliers with which Value America communicates
order, invoice, and inventory information via electronic data interchange
("EDI"), Value America is switching to a Year 2000-compliant standard format. In
some cases, suppliers use corporate systems or EDI mappings designed to avoid
Year 2000 problems. Since January 1999, Value America has encouraged its
suppliers to migrate to the Year 2000-compliant EDI format. Value America
anticipates that all current suppliers either are in compliance with Year 2000
requirements or will migrate to the Year 2000 compliant format by September 30,
1999. If some suppliers do not achieve Year 2000 compliance, these suppliers may
be unable to effectively operate. Consequently, Value America may seek
additional suppliers of quality products to replace those burdened with Year
2000 remediation difficulties. Because Value America's order processing systems
can transparently maintain multiple suppliers for products, Value America can
obtain contingency suppliers with only minor administrative and EDI setup costs.
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 this
new source in the event its current credit card processor is not able to be Year
2000 compliant by September 30, 1999.
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, all Windows operating systems on
Value America's internal desktop devices will be upgraded to make them Year 2000
compliant, and there may be software upgrades associated with other equipment.
The desktop 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.
Subsequent Events
On July 2, 1999, the Company purchased 200,000 shares of common stock
from WebGalaxy, Inc. for $2 per share and detachable warrants to purchase
200,000 shares of common stock at $3 per share until July 2000 and $4 per share
thereafter.
On July 15, 1999, the Board of Directors of the Company adopted the
Value America, Inc. 1999 Stock Incentive Plan (the "Plan"). The Company has
reserved 2,350,000 shares of common stock for issuance under the Plan.
17
<PAGE>
Item 3. Changes in Information About Market Risk
The Company is subject to interest rate risk on its investment
portfolio. If market rates were to increase immediately and uniformly by 10%
from the level at June 30, 1999, the change tothe Company's interest sensitive
investments would have an immaterial effect on the Company's financial position,
results of operations and cash flows over the next fiscal year.
18
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
From time to time, Value America may be involved in litigation relating
to claims arising out of its operations in the normal course of business. On
March 24, 1999, Coupons, Inc., a Georgia corporation allegedly doing business as
"Value America," filed a complaint against Value America in the United States
District Court for the Northern District of Georgia, Atlanta Division. This
action relates to the use of the mark "Value America" by Value America in
connection with its marketing plan. A third party granted Value America an
option to obtain an assignment of the "Value America" mark in December 1997. In
March 1998, Value America exercised this option and obtained an assignment of
the mark. In connection with this assignment, the third party retained the
exclusive right to use the "Value America" mark for preparing and disseminating
advertising matter, including direct mail advertising. The third party
subsequently assigned his retained rights to Coupons, Inc. In the complaint,
Coupons, Inc. alleges that Value America's use of the "Value America" mark in
its marketing activities is violative of Coupons, Inc.'s retained rights to the
mark. The complaint alleges that Value America's actions constitute violations
of federal trademark law, state law and common law. Coupons, Inc. seeks all
profits from Value America's use of the mark, restitution for an unspecified
amount of damages, as well as punitive damages in the amount of $1,000,000. In
addition, Coupons, Inc. requested the court to issue an injunction preventing
use of the "Value America" mark and order the cancellation of Value America's
trademark registration for the "Value America" mark. We have filed a motion to
dismiss and believe that we have valid defenses to each of the claims asserted
by Coupons, Inc.
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.
Item 2. Changes in Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
Exhibit 27.1 Financial Data Schedule June 30, 1999
Exhibit 27.2 Restated Financial Data Schedule June 30, 1998
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Value America, Inc.
_____ By: /s/ Dean M. Johnson
Date Dean M. Johnson, Executive Vice President
and Chief Financial Officer
20
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