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 March 31, 2000
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.)
337 West Rio Road, Charlottesville, Virginia 22901
(Address of principal executive offices) (Zip code)
(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 April 30, 2000, there were 45,455,170 shares of common stock
outstanding.
<PAGE>
Value America, Inc.
FORM 10-Q
For the Quarter Ended March 31, 2000
INDEX
Page
Part I - Financial Information................................................2
Item 1. Consolidated Financial Statements..............................2
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.....................................12
Item 3. Quantitative and Qualitative Disclosures About Market Risk....12
Part II - Other Information..................................................13
Item 1. Legal Proceedings.............................................13
Item 2. Changes in Securities and Use of Proceeds.....................14
Item 3. Defaults Upon Senior Securities...............................14
Item 4. Submission of Matters to a Vote of Security Holders...........14
Item 5. Other Information.............................................14
Item 6. Exhibits and Reports on Form 8-K..............................14
<PAGE>
Part I. Financial Information
Item 1. Consolidated Financial Statements
<TABLE>
<S> <C> <C> <C>
VALUE AMERICA, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars, except share data)
March 31, December
31,
2000 1999
-------------- -------------
ASSETS (unaudited)
CURRENT ASSETS:
Cash and cash equivalents..........................................$ 21,453 $ 52,182
Restricted cash.................................................... 12,816 6,016
Short-term investments............................................. - 15,363
Accounts receivable, net of allowance of $2,770 and $1,021......... 7,709 8,971
Inventory.......................................................... 5,572 3,532
Other current assets............................................... 1,436 3,453
-------------- -------------
TOTAL CURRENT ASSETS............................................ 48,986 89,517
-------------- -------------
Equipment, software, furniture and fixtures, net......................... 24,123 22,081
Restricted cash.......................................................... - 1,500
Long-term investments.................................................... - 1,332
Note receivable from officer............................................. 200 450
Goodwill................................................................. 1,278 1,311
Other assets............................................................. 196 128
-------------- -------------
TOTAL ASSETS....................................................$ 74,783 $ 116,319
============== =============
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable...................................................$ 17,488 $ 15,753
Accrued expenses................................................... 7,192 12,807
Deferred revenue................................................... 2,261 8,441
Accrued Value America Dollar liability............................. 2,910 3,175
Accrued restructuring and other activities......................... 1,529 4,140
Other current liabilities.......................................... 3,561 4,502
-------------- -------------
TOTAL CURRENT LIABILITIES....................................... 34,941 48,818
-------------- -------------
Deferred revenue................................................... 26 26
Other liabilities.................................................. 2,878 2,820
-------------- -------------
TOTAL LIABILITIES............................................... 37,845 51,664
-------------- -------------
Commitments and contingencies
STOCKHOLDERS' EQUITY:
Preferred Stock, without par value; 25,000,000 and 0 shares
authorized; 0 shares issued and outstanding.................... - -
Common stock, without par value, 500,000,000 shares
authorized; 45,425,170 and 45,311,459 shares issued and
outstanding.................................................... 294,693 293,996
Warrants........................................................... 12,970 13,001
Deferred stock-based compensation.................................. (2,172) (2,055)
Unrealized gain on securities available-for-sale................... - 832
Accumulated deficit................................................ (268,553) (241,119)
-------------- -------------
TOTAL STOCKHOLDERS' EQUITY...................................... 36,938 64,655
-------------- -------------
TOTAL LIABILITIES, PREFERRED STOCK AND STOCKHOLDERS'
EQUITY......................................................$ 74,783 $ 116,319
============== =============
The accompanying notes are an integral part of these financial statements.
<PAGE>
VALUE AMERICA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands of dollars, except per share data)
(unaudited)
Quarter Ended March 31,
--------------------------------
2000 1999
-------------- -------------
TOTAL REVENUES......................................$ 47,155 $ 28,002
TOTAL COST OF REVENUES.............................. 43,092 25,693
-------------- -------------
GROSS MARGIN........................................ 4,063 2,309
-------------- -------------
OPERATING EXPENSES:
Sales, advertising and marketing............... 18,851 19,083
General and administrative..................... 7,287 3,266
Technical and system development............... 5,357 2,523
-------------- -------------
Total operating expenses.................... 31,495. 24,872
-------------- -------------
OPERATING LOSS...................................... (27,432) (22,563)
Other (expense), net........................... (2) (11,896)
-------------- -------------
NET LOSS............................................ (27,434) (34,459)
Accretion and dividends on Series A,
Series B and Series C redeemable
preferred stock................................ - (19,800)
Beneficial conversion feature on Series C
redeemable preferred stock..................... - (10,556)
-------------- -------------
NET LOSS AVAILABLE FOR COMMON STOCKHOLDERS..........$ (27,434) $ (64,815)
============== =============
NET LOSS PER COMMON SHARE:
Basic and diluted..............................$ (0.60) $ (2.72)
============== =============
WEIGHTED AVERAGE NUMBER OF SHARES:
Basic and diluted.............................. 45,373 23,796
============== =============
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)
(unaudited)
Quarter Ended March 31,
---------------------------------
2000 1999
--------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.......................................................$ (27,434) $ (34,459)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................... 2,559 416
Stock-based compensation.................................... 398 405
Amortization of debt issuance costs......................... - 12,869
Provision for doubtful accounts............................. 2,493 532
Loss on long-term investments............................... 400 -
Changes in assets and liabilities:
Accounts receivable......................................... (104) (4,821)
Inventory................................................... (3,167) 223
Note receivable from officer................................ 250 -
Other assets................................................ 1,949 (149)
Accounts payable............................................ 1,735 (244)
Accrued expenses............................................ (5,615) 474
Accrued Value America Dollar liability...................... (265) -
Accrued restructuring and other activities.................. (2,611) -
Deferred revenue............................................ (6,180) (99)
Other liabilities........................................... (186) -
--------------- --------------
NET CASH USED IN OPERATING ACTIVITIES................................ (35,778) (24,853)
--------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Restricted cash................................................ (5,300) 1,500
Sale of short-term investments................................. 15,463 -
Proceeds from sale of fixed assets............................. 5 -
Capital expenditures........................................... (3,913) (1,637)
--------------- --------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES.................. 6,255 (137)
--------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under capital lease obligations............. (1,357) (33)
Proceeds from issuance of common stock......................... - 200
Proceeds from issuance of preferred stock and warrants......... - 60,000
Proceeds from exercise of common stock warrants................ 13 -
Proceeds from exercise of common stock options................. 138 -
Payment of offering costs...................................... - (1,723)
Proceeds from issuance of debt and warrants.................... - 5,000
--------------- --------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES................. (1,206) 63,444
--------------- --------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS................ (30,729) 38,454
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD....................... 52,182 20,127
--------------- --------------
CASH AND CASH EQUIVALENTS, END OF PERIOD.............................$ 21,453 $ 58,581
=============== ==============
Non-cash investing and financing transactions:
Accretion and dividends on redeemable preferred stock..........$ - $ 10,556
=============== ==============
Beneficial conversion feature on Series C redeemable
preferred stock................................................$ - $ 19,800
=============== ==============
Issuance of warrants with notes payable........................$ - $ 4,539
=============== ==============
Issuance of common stock on exercise of warrants...............$ 31 $ -
=============== ==============
Acquisition of assets under capital lease......................$ 660 $ -
=============== ==============
Deferred stock-based compensation..............................$ 515 $ -
=============== ==============
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
VALUE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000
(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. Value America
has two wholly owned subsidiaries, ServeAmerica.com, Inc. ("ServeAmerica") and
Value America Automotive Group, Inc. ("VAAG"). On May 5, 1999, Value America
formed ServeAmerica, a Delaware corporation. ServeAmerica has not conducted any
operations from inception through March 31, 2000. On September 2, 1999, Value
America formed VAAG, a Virginia corporation. On September 3, 1999, VAAG
purchased in a cash transaction all of the outstanding stock of Dealer Financial
Services, Inc. ("DFS") and Dealer Development Services, Inc. ("DDS"). The
acquisitions resulted in $1.4 million of goodwill which is being amortized over
a period of ten years.
2. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles and, in the
opinion of management, reflect all adjustments (consisting only of normal
recurring adjustments) considered necessary to fairly present Value America's
financial position, results of operations and cash flows for the periods
presented. These financial statements should be read in conjunction with the
Company's audited financial statements for the year ended December 31, 1999 and
notes thereto included in the Company's Form 10-K, as amended, filed with the
Securities and Exchange Commission (the "SEC"). The financial statements for the
year ended December 31, 1999 contained a going concern explanatory paragraph to
the independent auditor's opinion. The results of operations for the three-month
period ended March 31, 2000 are not necessarily indicative of the results to be
expected for any subsequent quarter or for the year ending December 31, 2000.
Certain prior years' information has been reclassified to conform with the
current year's presentation.
3. BUSINESS CONDITIONS AND FUNDING ACTIVITIES
After an extensive analysis, the Company restructured its operations in
December, 1999. This restructuring enabled the Company to reduce the number of
its suppliers in order to focus on key vendors whose products provided a
majority of the Company's revenues. The restructuring is expected to allow the
Company to streamline its operations, improve fulfillment and customer service,
reduce expenses and focus on selling products with higher gross margins. The
Company also believes the investment it has made in a new computer
infrastructure will allow it to support substantial growth in the future. The
Company will continue to pursue opportunities to make its operations more
efficient in the future in order to minimize its losses from operations.
As shown in the financial statements during the quarter ended March 31,
2000 and the years ended December 31, 1999, 1998 and 1997, the Company incurred
losses of $27.4 million, $143.5 million, $53.6 million and $1.9 million,
respectively. The Company expects to incur additional but declining losses for
at least the next two years that will result in negative cash flows from
operations. In April 1999, the Company raised $114.4 million from an initial
public offering of its stock. As of March 31, 2000, the Company had $21.5
million of unrestricted cash and cash equivalents. The Company does not expect
these resources will be sufficient to fund its operations through the first
quarter of 2001.
In December 1999, the Board of Directors formed a Special Committee to
explore strategic opportunities for Value America. The Special Committee has
retained Deutsche Banc Alex. Brown, as its financial advisors, to review
financial opportunities available to the Company
On May 10, 2000, the Company announced financing agreements that combined
will provide the Company with up to $90 million in additional equity. Existing
investors and others have committed to investing an additional $30 million and
Acqua Wellington North America Equities Fund, Ltd ("Acqua Wellington") will
provide the Company with access to up to $60 million in equity financing through
periodic sales of its common stock to Acqua Wellington over the next 14 months.
Actual proceeds from Acqua Wellington will vary based on Value America's stock
price and the number of shares the Company offers for sale to Acqua Wellington.
Value America will issue shares of a new issue of convertible preferred stock
and common stock warrants to the purchasers. The Company will continue to pursue
opportunities for additional funding and both management and the Board of
Directors are confident that these opportunities will generate cash resources
sufficient to fund operations in 2000. There can be, however, no assurance that
such continuing efforts will be successful.
4. RESTRUCTURING AND OTHER ACTIVITIES
In the fourth quarter of 1999, the Board of Directors appointed a new
executive management team to the Company. In December 1999, the new executive
management team and the Board of Directors decided to refocus the Company's
operations on its core lines of business. On December 28, 1999, the Board of
Directors approved a plan, prepared by the new executive management team, to
restructure Value America's operations. As a result, significant brands and
product lines previously sold by the Company were discontinued, and the Company
changed the direction of its resources to focus on several core product
categories: computers, software, consumer electronics, media, office supplies
and other complementary products. This change in focus has reduced the number of
vendors from over 450 to fewer than 75.
The restructuring plan was begun in the fourth quarter of 1999 and is
expected to be completed by June 30, 2000. The plan required the termination of
202 employees and cancellation of four office leases. The employee terminations
represented a 50% reduction in headcount. The restructuring charge of $2.7
million is comprised of $2.2 million for employee terminations, $0.1 million for
lease terminations and $0.4 million for professional fees. These amounts were
classified in "restructuring and other activities" on the statement of
operations for the year ended December 31, 1999.
All employees were notified of their terminations during the week ended
December 31, 1999. The employee groups terminated included all functional areas
within the Company. The employees received two months of severance plus one week
of additional severance for each completed year of service. The majority of
these severance costs were paid in the first quarter of 2000 out of existing
cash resources of the Company.
Also in the fourth quarter of 1999, the Company recorded $2.2 million of
expenses for other activities. These charges related to contract settlements to
eliminate product lines ($0.5 million), executive severance unrelated to the
restructuring ($1.1 million), settlement of certain purchase commitments ($0.5
million) and other ($0.1 million).
As of March 31, 2000, the restructuring liabilities are as follows: $0.4
million for severance and personnel costs and $0.2 million for other exit costs.
In addition, approximately $0.9 million of other activities remain to be paid
primarily related to contract settlements to eliminate product lines.
5. COMMITMENTS AND CONTINGENCIES
On March 24, 1999, the Company was served with a complaint that was filed
in the United States District Court for the Northern District of Georgia,
Atlanta Division, by Coupons, Inc., a Georgia corporation ("Coupons"). On April
9, 1999, Coupons served an amended complaint, joining Stephen S. Freedman as an
additional plaintiff and alleging several causes of action, including unfair
competition, fraudulent registration of service marks, common law trademark
infringement, unfair competition, deceptive trade practices, false advertising,
fraud, fraudulent misrepresentations, and rescission of contract and, in the
alternative, breach of contract. The complaint seeks rescission of a December 3,
1997 agreement between Stephen S. Freedman, injunctive relief barring most uses
by the Company of the "VALUE AMERICA" mark, treble damages and an accounting of
profits under the Trademark Act of 1946, as amended, punitive damages of at
least $1.0 million and cancellation of the Company's "VALUE AMERICA" service
mark registrations. The Company believes that the claims asserted in the
foregoing action are without merit and intends to defend the action vigorously.
The Company and four former officers have been named as defendants in a
securities fraud action filed in the United States District Court for the
Western District of Virginia, Charlottesville Division on January 10, 2000 by
Marvin E. Sikes, as representative of a putative class of plaintiffs who
purchased or otherwise acquired shares of the Company's common stock between
April 7, 1999 through December 28, 1999 (the "Class Period"). On February 11,
2000, three similar actions were filed against the Company. These actions allege
that the Company's public statements contained misrepresentations or omissions
of material adverse information regarding the Company's financial condition that
allegedly caused the market price of the Company's common stock to be
artificially inflated during the Class Period. Counsel to the Company filed a
motion to consolidate all actions against the Company on February 17, 2000.
Based on its preliminary review of the complaint, Value America believes that it
has valid defenses to each of the claims asserted by the plaintiffs.
The Company received a Pre-Filing Notice to Prospective Defendant, dated as
of October 22, 1999, from the Consumer Protection Unit of the District Attorney
for Marin County, California in connection with an investigation into alleged
advertising and sale of computer components designed for use by an original
equipment manufacturer as retail computer components in California. The District
Attorney informed the Company that the investigation into the alleged
advertising deficiencies has been terminated. Based on its preliminary review of
the Notice, the Company believes that it has valid defenses to the claims
presented.
The Federal Trade Commission ("FTC") has instituted an inquiry into the
advertisement of free or reduced-cost personal computer systems, the discounts
on which are contingent upon the customers' subscription to an Internet service
provider's services for a fixed period of time. Specifically, the FTC asserts
that the disclosure of this contingency was not sufficiently clear from the
contents and layout of the Company's advertisements. The Company has produced
documents to the FTC pursuant to its requests , and met with the FTC in April to
discuss the investigation. Based on its meetings with the FTC and ongoing review
of the investigation, the Company believes that it is close to a resolution with
the FTC.
The Company has been named as a defendant in an action filed in the United
States District Court for the Western District of Virginia, Charlottesville
Division on March 30, 2000 by shareholder Gibralt US, Inc. This action alleges
that the Company wrongfully refused to register transfer of the plaintiff's
shares, wrongfully deprived the plaintiff of its shares, and wrongfully denied
the plaintiff permission to sell the shares. Based on its preliminary review of
the complaint, Value America believes that it has valid defenses to each of the
claims asserted by the plaintiff.
On March 24, 2000, the Company received a letter regarding the potential
infringement of certain Internet security patents allegedly held by Leon
Stambler. The Company is currently reviewing the validity and applicability of
the patents to its business.
The Company believes that the foregoing lawsuits will not have a material
adverse effect upon its business, financial condition or results of operations.
6. RELATED PARTY TRANSACTIONS
During the three-month period ended March 31, 2000, the Company forgave a
$0.3 million note receivable from one of its officers.
<PAGE>
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" and "Liquidity and Capital Resources" included in this "Management's
Discussion and Analysis of Financial Condition and Results of Operations", in
"Additional Factors that May Affect Future Results" included in "Management's
Discussion and Analysis of Financial Condition and Results of Operations in the
Company's Form 10-K for the year ended December 31, 1999, as amended, 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 sales of products through Value
America's online store and advertising on the online store. Value America's
vendors ship products directly to the customer after a customer places an order.
Revenues from product sales are recognized upon delivery to the customer. Value
America is responsible for establishing product pricing, advertising, selling
the merchandise, providing customer service, arranging shipping, insuring goods
during shipment, collecting payment from the customer, and processing returns.
Value America takes title to products upon shipment and bears the risk of loss
for collection, delivery and merchandise returns from customers. Many of the
Company's vendors grant merchandise return privileges. Value America
occasionally purchases merchandise prior to receiving customer orders and
records such merchandise as inventory until shipped to customers. Value America
accrues a returns reserve to reduce revenues and cost of revenues for estimated
product returns at the time of sale.
Value America sells advertising space to vendors on its online store.
Innovative multimedia advertisements highlight products and their features,
functions, benefits and applications. Additionally, Value America sends
Electronic Direct Mail ("EDM") to its members to keep them informed about
special promotions. Advertising revenue is recognized over the period in which
the related advertisement is offered on the online store or when the EDM is
sent. Value America recognizes the costs of developing these advertisements and
EDMs as incurred.
To date, payments for products purchased through Value America's online
store have been primarily made with credit cards. Value America generally
receives payment from a customer's credit card within one to four business days
from customer order. Value America also extends 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 of shipment by the vendor to the customer.
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.
<PAGE>
RESULTS OF OPERATIONS
First Quarter 2000 Compared with First Quarter 1999
Revenues
Revenues primarily consist of product sales through Value America's online
store, advertising and shipping charged to customers. For the quarter ended
March 31, 2000, total revenues were $47.2 million representing a 68.4% increase
from $28.0 million for the quarter ended March 31, 1999. Revenues from product
sales were $46.7 million for the quarter ended March 31, 2000, compared to $26.5
million for the quarter ended March 31, 1999, representing an increase of 76.5%.
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
merchandise.
Revenues from advertising and other were $0.4 million for the quarter ended
March 31, 2000, a decrease of 72.2% compared to $1.5 million for the quarter
ended March 31, 1999. Value America recognized approximately $0.1 million in web
site advertising and EDM advertising in the quarter ended March 31, 2000
compared to $1.1 in the quarter ended March 31, 1999. The decrease in
advertising revenues was driven by the drastic reduction of advertising
performed by the Company while management focused its attention on the Company's
strategic restructuring. Product presentation listing fees decreased to
approximately $0.3 million in the first quarter of 2000 compared to $0.4 million
in the first quarter of 1999. This decrease in product presentation listing fees
reflects the Company's decision to discontinue the practice of charging
customers for the preparation of future multimedia presentations.
Charges to customers for shipping, which represent approximately $1.0
million and $0.9 million of revenue for the quarters ended March 31, 2000 and
1999, respectively, are classified in revenue. The Company records a reserve to
reduce revenues and cost of revenues for an amount equal to the estimated
product returns. For the quarters ended March 31, 2000 and 1999, the charge for
product returns, including returns resulting from malfunctioning products,
erroneous shipments and other quality-related issues, as a percentage of sales,
was approximately 11.9% and 4.1%, respectively.
Cost of Revenues
Cost of revenues primarily consists of payments to third party suppliers
for merchandise. Value America incurred $43.1 million of cost of revenues for
the quarter ended March 31, 2000 representing a 40.4% increase from $25.7
million for the quarter ended March 31, 1999. Cost of revenues represent 91.4%
and 91.8% of revenues for the quarters ended March 31, 2000 and 1999,
respectively.
Value America's gross margin has increased from $2.3 million for the
quarter ended March 31, 1999, to $4.1 million for the quarter ended March 31,
2000. This increase is due to the strong margins earned on certain technology
products partially offset by a decrease advertising revenues. Product sales
resulted in gross margins of $3.6 million (7.8% of sales) and $0.9 million (3.4%
of sales) for the quarters ended March 31, 2000 and 1999, respectively. Value
America continues to utilize a short-term strategy of selectively accepting
narrow margins on selected product sales to maximize sales volumes, brand
awareness and product selection.
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, credit card fees and outbound shipping
costs. Value America Dollars offered under promotional programs directed at
attracting new customers or as bonuses to encourage sales of a particular
product are also recorded in sales, advertising and marketing expenses. Value
America Dollars that are not used for promotional purposes are recorded as a
reduction of revenues if they are issued for customer relationship purposes and
in cost of revenues if they are earned on a current sale for use on a future
sale. Sales, advertising and marketing expenses decreased from $19.1 million for
the quarter ended March 31, 1999 to $18.9 million for the quarter ended March
31, 2000. The decrease primarily reflected an decrease in the number of
merchandising, advertising and promotion department employees and a general
decrease in the level of Value America's promotional activities. These decreases
were partially offset by an increase in contract labor, professional fees and
outbound shipping charges. As a percent of revenues these expenses have
decreased from 68.1% for the quarter ended March 31, 1999 to 40.0% for the
quarter ended March 31, 2000. Advertising and promotional expenses decreased
from $14.4 million (including $0.6 million of Value America Dollar promotions)
for the quarter ended March 31, 1999 to $6.0 million (including $0.5 million of
Value America Dollar promotions) for the quarter ended March 31, 2000, net of
cooperative advertising of approximately $2.6 for the quarter ended March 31,
1999 and $1.3 million for the quarter ended March 31, 2000. Contract labor and
professional fees relating to merchandising, advertising and promotion
departments increased from $0.2 million for the quarter ended March 31, 1999 to
$4.2 million for the quarter ended March 31, 2000. Value America intends to
continue to increase its market share through advertising by improving the
overall sales to ad ratio. Value America has not entered into any advertising
for advertising barter arrangements.
Charges for outbound shipping of approximately $2.8 million and $1.3
million are classified in sales, advertising and marketing expenses for the
quarters ended March 31, 2000 and 1999, respectively.
General and Administrative
General and administrative expenses consist of management and executive
compensation, professional services, bad debts and general corporate expenses,
such as facilities and telephone expenses. General and administrative expenses
increased from $3.3 million for the quarter ended March 31, 1999 to $7.3 million
for the quarter ended March 31, 2000. This increase reflected charges for bad
debts, credit card chargebacks by customers and increased professional fees.
Payroll expenses relating to general and administrative personnel increased from
$1.0 million for the quarter ended March 31, 1999 to $1.7 million in the quarter
ended March 31, 2000. Credit card chargebacks from customers for goods shipped
to customers but not returned increased to approximately $1.1 million in the
first quarter of 2000 and bad debt expense was $1.1 million in the first quarter
of 2000 compared to $0.5 million in the first quarter of 1999. Professional fees
increased from $0.3 million to $1.0 for the quarters ended March 31, 1999 and
2000, respectively. Value America expects that general and administrative
expenses will decrease as a percentage of revenues as it continues to broaden
its customer base, increase its market share and revenues and decrease costs as
a result of the strategic restructure that began in the fourth quarter of 1999.
Technical and System Development
Technical and system development expenses consist primarily of expenses
incurred for the maintenance of the software required to support Value America's
online store, including employee compensation and the cost of designing and
maintaining store content, Internet connectivity, operations and reporting.
Technical and system development expenses increased from $2.5 million for
the quarter ended March 31, 1999 to $5.4 million, net of $0.2 million of
salaries capitalized as development costs in the Company's Enterprise Resource
Planning ("ERP") implementation project and website development, for the quarter
ended March 31, 2000. This increase principally reflected higher payroll and
increased depreciation charges in connection with the increase in computer
hardware and software needed to support the Company's operations. Payroll
related expenses totaled $0.7 million for the quarter ended March 31, 1999 and
$1.6 million for the quarter ended March 31, 2000. Depreciation charges increase
from $0.2 million for the quarter ended March 31, 1999 to $2.4 million for the
quarter ended March 31, 2000 primarily due to capital expenditures made and
leases entered into during the quarter and during the second half of 1999 of
approximately $24.2 million.
During the first quarter of 2000, the Company devoted significant resources
to the second phase of its implementation of SAP and Siebel software. Since this
ERP system will provide a strong foundation to support the Company's continued
growth, the Company has capitalized $2.4 million during the quarter ended March
31, 2000 in connection with the consultant fees and certain employee payroll
costs related to this project.
Value America expects that it will continue to incur substantial technical
and systems development expenses.
Other (Expense), Net
Interest income of $2,000 for the quarter ended March 31, 2000, which
consisted primarily of income earned on the proceeds from the Company's initial
public offering in the second quarter of 1999, was offset by interest expense
incurred in connection with assets held under capital leases and realized losses
on long-term investments.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000, the Company's cash and cash equivalents were $21.5
million compared to $52.2 million at December 31, 1999. In April 1999, the
Company consummated its initial public offering by selling an aggregate of
5,500,000 shares of common stock and raising net proceeds of approximately
$114.4 million. Prior to April 1999 the Company primarily financed its
operations through private capital investments.
Net cash used in operating activities was $24.9 million for the three
months ended March 31, 1999, and $35.8 million for the three months ended March
31, 2000. Net cash used in operating activities in the three months ended March
31, 2000 was due primarily to the net loss of $27.4 million, a $6.2 million
decrease in deferred revenue and $5.6 million decrease in accrued expenses
associated with the growth in revenues and increased cash required to fund
operating activities, an increase in inventory of $3.2 million as the result of
holiday season returns, and a $3.3 million reduction in the liability for
restructuring and other activities
Net cash provided by investing activities of $6.3 million for the quarter
ended March 31, 2000 primarily related to the sale of short-term investment
offset in part by increased restricted cash reserves to support increased credit
lines to support the increased volume of business with the Company's vendors and
capital investments made in the Company's ERP implementation.
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 March 31, 2000, we had not
drawn any amounts under this line of credit. As of March 2000, the Company is in
default of the unencumbered liquidity covenant, and, therefore, has no borrowing
capacity available under the line of credit
Value America has obtained stand-by letters of credit in favor of vendors
totaling $7.8 million. Each letter of credit is secured by a certificate of
deposit. These standby letters of credit expire through November 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 $5.0 million cash deposit account, to cover potential
chargebacks. The agreement, which expired in April 2000, permits the credit card
processor to require Value America to maintain the cash deposit account for up
to 10 months following termination. This agreement has been extended by the
credit card processor and the Company while the Company enters into a new
agreement for these services.
Value America incurred capital expenditures of $3.9 million in the three
months ended March 31, 2000 compared to $1.6 million in the three months ended
March 31, 1999.
After an extensive analysis, the Company restructured its operations in
December 1999 (see Note 4 to the unaudited Consolidated Financial Statements).
This restructuring enabled the Company to reduce the number of its suppliers in
order to focus on key vendors whose products provided a majority of the
Company's revenues. The restructuring is expected to allow the Company to
streamline its operations, improve fulfillment and customer service, reduce
expenses and focus on selling products with higher gross margins. The Company
also believes that the investment that it has made in a new computer
infrastructure will allow it to support substantial growth in the future. The
Company will continue to pursue opportunities to make its operations more
efficient in the future in order to minimize its losses from operations.
As of March 31, 2000, the restructuring liabilities are as follows: $0.4
million for severance and personnel costs and $0.2 million for other exit costs.
In addition, approximately $0.9 million of other activities remain to be paid
primarily related to contract settlements to eliminate product lines.
As shown in the financial statements during the quarter ended March 31,
2000 and the years ended December 31, 1999, 1998 and 1997, the Company incurred
losses of $27.4 million, $143.5 million, $53.6 million and $1.9 million,
respectively. The Company expects to incur additional but declining losses for
at least the next two years that will result in negative cash flows from
operations. In April 1999, the Company raised $114.4 million from an initial
public offering of its stock. As of March 31, 2000, the Company had $21.5
million of unrestricted cash and short-term investments. The Company does not
expect these resources will be sufficient to fund its operations through the
first quarter of 2001.
In December 1999, the Board of Directors formed a Special Committee to
explore strategic opportunities for Value America. The Special Committee has
retained Deutsche Banc Alex. Brown, as its financial advisors, to review
financial opportunities available to the Company.
On May 10, 2000, the Company announced financing agreements that combined
will provide the Company with up to $90 million in additional equity. Existing
investors and others have committed to investing an additional $30 million and
Acqua Wellington North America Equities Fund, Ltd ("Acqua Wellington") will
provide the Company with access to up to $60 million in equity financing through
periodic sales of its common stock to Acqua Wellington over the next 14 months.
Actual proceeds from Acqua Wellington will vary based on Value America's stock
price and the number of shares the Company offers for sale to Acqua Wellington.
Value America will issue shares of a new issue of convertible preferred stock
and common stock warrants to the purchasers. The Company will continue to pursue
opportunities for additional funding and both management and the Board of
Directors are confident that these opportunities will generate cash resources
sufficient to fund operations in 2000. There can be, however, no assurance that
such continuing efforts will be successful.
Item 3. Quantitative and Qualitative Disclosures 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 March 31, 2000, the change to the Company's interest sensitive investments
would have an immaterial effect on the Company's financial position, results of
operations and cash flows over the next fiscal year.
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
On March 24, 1999, the Company was served with a complaint that was filed
in the United States District Court for the Northern District of Georgia,
Atlanta Division, by Coupons, Inc., a Georgia corporation ("Coupons"). On April
9, 1999, Coupons served an amended complaint, joining Stephen S. Freedman as an
additional plaintiff and alleging several causes of action, including unfair
competition, fraudulent registration of service marks, common law trademark
infringement, unfair competition, deceptive trade practices, false advertising,
fraud, fraudulent misrepresentations, and rescission of contract and, in the
alternative, breach of contract. The complaint seeks rescission of a December 3,
1997 agreement between Stephen S. Freedman, injunctive relief barring most uses
by the Company of the "VALUE AMERICA" mark, treble damages and an accounting of
profits under the Trademark Act of 1946, as amended, punitive damages of at
least $1.0 million and cancellation of the Company's "VALUE AMERICA" service
mark registrations. The Company believes that the claims asserted in the
foregoing action are without merit and intends to defend the action vigorously.
The Company and four former officers have been named as defendants in a
securities fraud action filed in the United States District Court for the
Western District of Virginia, Charlottesville Division on January 10, 2000 by
Marvin E. Sikes, as representative of a putative class of plaintiffs who
purchased or otherwise acquired shares of the Company's common stock between
April 7, 1999 through December 28, 1999 (the "Class Period"). On February 11,
2000, three similar actions were filed against the Company. These actions allege
that the Company's public statements contained misrepresentations or omissions
of material adverse information regarding the Company's financial condition that
allegedly caused the market price of the Company's common stock to be
artificially inflated during the Class Period. Counsel to the Company filed a
motion to consolidate all actions against the Company on February 17, 2000.
Based on its preliminary review of the complaint, Value America believes that it
has valid defenses to each of the claims asserted by the plaintiffs.
The Company received a Pre-Filing Notice to Prospective Defendant, dated as
of October 22, 1999, from the Consumer Protection Unit of the District Attorney
for Marin County, California in connection with an investigation into alleged
advertising and sale of computer components designed for use by an original
equipment manufacturer as retail computer components in California. The District
Attorney informed the Company that the investigation into the alleged
advertising deficiencies has been terminated. Based on its preliminary review of
the Notice, the Company believes that it has valid defenses to the claims
presented.
The Federal Trade Commission ("FTC") has instituted an inquiry into the
advertisement of free or reduced-cost personal computer systems, the discounts
on which are contingent upon the customers' subscription to an Internet service
provider's services for a fixed period of time. Specifically, the FTC asserts
that the disclosure of this contingency was not sufficiently clear from the
contents and layout of the Company's advertisements. The Company has produced
documents to the FTC pursuant to its requests , and met with the FTC in April to
discuss the investigation. Based on its meetings with the FTC and ongoing review
of the investigation, the Company believes that it is close to a resolution with
the FTC.
The Company has been named as a defendant in an action filed in the United
States District Court for the Western District of Virginia, Charlottesville
Division on March 30, 2000 by shareholder Gibralt US, Inc. This action alleges
that the Company wrongfully refused to register transfer of the plaintiff's
shares, wrongfully deprived the plaintiff of its shares, and wrongfully denied
the plaintiff permission to sell the shares. Based on its preliminary review of
the complaint, Value America believes that it has valid defenses to each of the
claims asserted by the plaintiff.
On March 24, 2000, the Company received a letter regarding the potential
infringement of certain Internet security patents allegedly held by Leon
Stambler. The Company is currently reviewing the validity and applicability of
the patents to its business.
The Company believes that the foregoing lawsuits will not have a material
adverse effect upon its business, financial condition or 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 March 31, 2000 Exhibit 27.2
Restated Financial Data Schedule March 31, 1999 Exhibit 27.3 Restated
Financial Data Schedule June 30, 1999 Exhibit 27.4 Restated Financial
Data Schedule September 30, 1999
<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.
May 15, 2000 By: /s/ Michael Waide
Date Michael Waide, Executive Vice President
and Chief Financial Officer
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