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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended December 31, 2000
Commission File Number 0-22619
VALUESTAR CORPORATION
(Exact name of registrant as specified in its charter)
Colorado 84-1202005
-------- ----------
(State or other jurisdiction of (I.R.S. Empl. Ident. No.)
incorporation or organization)
360-22nd Street, #400, Oakland, California 94612
(Address of principal executive offices) (Zip Code)
(510) 808-1300
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(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 ____
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Common Stock, $.00025 par value 15,674,990
- ------------------------------- ----------
(Class) (Outstanding at January 31, 2001)
Transitional Small Business Disclosure Format (check one): YES NO X
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VALUESTAR CORPORATION
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited):
Consolidated Balance Sheets as of December 31, 2000 and
June 30, 2000 3
Consolidated Statements of Operations for the three and six
months ended December 31, 2000 and 1999 4
Consolidated Statements of Cash Flows for the six
months ended December 31, 2000 and 1999 5
Notes to Interim Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
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 20
SIGNATURES 20
VALUESTAR CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
December 31, June 30,
2000 2000
------------ ------------
CURRENT ASSETS
Cash $ 143,486 $ 5,287,385
Receivables 283,652 454,233
Inventory 8,768 16,898
Prepaid expenses 530,513 416,573
------------ ------------
Total current assets 966,419 6,175,089
PROPERTY AND EQUIPMENT 6,536,499 5,415,358
RESTRICTED CASH 296,000 296,000
DEFERRED COSTS -- 23,949
OTHER ASSETS 93,993 89,489
------------ ------------
Total assets $ 7,892,911 $ 11,999,885
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,713,232 $ 1,665,030
Accrued liabilities and other payables 1,814,627 1,254,035
Deferred revenues 504,277 137,520
Current portion of capitalized leases 301,950 285,458
Current portion of long-term debt 653,450 450,503
------------ ------------
Total current liabilities 4,987,536 3,792,546
CAPITAL LEASE OBLIGATIONS, net of current portion 253,260 408,492
LONG-TERM DEBT, net of current portion 1,099,051 853,997
------------ ------------
Total liabilities 6,339,847 5,055,035
------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock, $.00025 par value; 5,000,000 shares authorized:
500,000 shares designated Series A Convertible, with
225,000 shares issued and outstanding 56 56
800,000 shares designated Series B Convertible, with
688,586 shares issued and outstanding 172 172
1,333,333 shares designated Series C Convertible, with
238,469 shares issued and outstanding at December 31, 2000 60 --
Common stock, $.00025 par value; 50,000,000 shares
authorized, 15,674,990 and 15,587,543 shares issued
and outstanding respectively 3,919 3,897
Additional paid-in capital 37,762,275 32,162,473
Accumulated deficit (36,213,418) (25,221,748)
------------ ------------
Total stockholders' equity 1,553,064 6,944,850
------------ ------------
Total liabilities and stockholders' equity $ 7,892,911 $ 11,999,885
============ ============
<FN>
See accompanying notes to interim consolidated financial statements.
</FN>
3
VALUESTAR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
December 31, December 31,
-------------------------------- ---------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
REVENUES $ 234,491 $ 470,003 $ 508,238 $ 1,192,128
------------ ------------ ------------ ------------
OPERATING EXPENSES
Buyer benefits 38,944 31,524 105,522 45,216
Ratings and content 150,600 413,839 323,818 782,424
Sales and marketing 1,615,218 849,325 4,087,621 2,048,113
Product and content development 1,782,725 907,611 4,108,630 1,181,480
General and administrative 684,735 351,120 1,361,752 763,707
Depreciation and amortization 607,642 79,315 1,176,725 138,787
------------ ------------ ------------ ------------
4,879,864 2,632,734 11,164,068 4,959,727
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (4,645,373) (2,162,731) (10,655,830) (3,767,599)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Interest Income 31,509 18,410 75,236 25,334
Interest expense (99,243) (753,715) (192,123) (933,850)
Miscellaneous -- -- 377 (800)
------------ ------------ ------------ ------------
(67,734) (735,305) (116,510) (909,316)
------------ ------------ ------------ ------------
NET LOSS $ (4,713,107) $ (2,898,036) $(10,772,340) $ (4,676,915)
============ ============ ============ ============
NET LOSS AVAILABLE TO COMMON
STOCKHOLDERS $ (6,599,770) $(11,593,283) $(14,386,562) $(13,404,039)
============ ============ ============ ============
LOSS PER COMMON SHARE $ (0.42) $ (1.17) $ (0.92) $ (1.39)
============ ============ ============ ============
WEIGHTED AVERAGE OF COMMON SHARES
OUTSTANDING 15,674,990 9,910,757 15,650,644 9,642,447
============ ============ ============ ============
<FN>
See accompanying notes to interim consolidated financial statements.
</FN>
4
VALUESTAR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
December 31,
2000 1999
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(10,772,340) $ (4,676,915)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation 1,176,231 124,959
Amortization of intangible assets 494 13,828
Amortization of bond discount 19,905 706,887
Change in allowance for doubtful accounts (4,606) (10,826)
Accrued interest included in long-term debt -- 12,224
Options issued for services -- 75,833
Gain on disposal of assets (1,898) --
Changes in:
Receivables 175,187 91,273
Inventory 8,130 2,026
Prepaid expenses (113,940) (12,992)
Deferred costs 23,949 (44,967)
Other assets (4,998) (50,744)
Accounts payable 48,202 129,394
Accrued liabilities and other payables 560,592 88,035
Deferred revenues 366,757 1,325
------------ ------------
Net cash used by operating activities (8,518,335) (3,550,660)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Property and equipment acquisitions, net of dispositions (2,295,474) (451,684)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of preferred stock 5,330,553 9,935,247
Proceeds from sale of common stock 50,001 1,170,280
Proceeds from debt 732,796 250,000
Payments on capital leases (138,740) (15,057)
Payments on debt (304,700) (28,698)
------------ ------------
Net cash provided by financing activities 5,669,910 11,311,772
------------ ------------
NET INCREASE (DECREASE) IN CASH (5,143,899) 7,309,428
CASH, beginning of period 5,287,385 270,149
------------ ------------
CASH, end of period $ 143,486 $ 7,579,577
============ ============
SUPPLEMENTAL CASH-FLOW INFORMATION
Cash paid during the period for:
Interest $ 172,217 $ 214,739
Non-cash investing and financing activities:
Accrued dividends on Series A Preferred Stock 96,260 77,877
Accrued dividends on Series C Preferred Stock 123,070 --
Warrants issued in connection with Series B preferred stock -- 400,000
Equipment acquired under capital leases -- 69,000
8% Secured Notes converted to Series B Stock -- 1,000,000
Shareholder advances converted to Series B Stock -- 250,000
12% notes converted upon warrant exercise -- 609,375
6% Convertible Notes and interest converted to equity -- 546,274
<FN>
See accompanying notes to interim consolidated financial statements
</FN>
5
VALUESTAR CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
December 31, 2000
1. OPERATIONS
The Company, a Colorado corporation, conducts its operations through ValueStar,
Inc., a wholly owned subsidiary, in major metropolitan areas located in
California, Washington, Texas, Illinois, Georgia, Pennsylvania, and the District
of Columbia. ValueStar, Inc. was incorporated in California in 1991, and is a
provider of branded ratings on local service businesses. The Company generates
revenues from research and rating fees and is developing a new commission system
to generate revenues by connecting member service businesses with member buyers.
The Company's revenues have been primarily from rating and certification
services. Rating services consist primarily of a survey of a business'
customers, verification of credential information and the delivery of ratings
reports. Services associated with certification include an orientation and the
delivery of certification materials and manuals. Sales of marketing materials
and other services are recognized as materials are shipped or services are
rendered.
In December 1999, in all market areas except Northern California, the Company
changed from a fixed rating and certification fee to a percentage commission fee
based on the value of transactions between member service companies and member
buyers. The Company has also changed its program to provide benefits to buyers
purchasing from member businesses. The Company has not completed development of
the systems required to commence collection of commission fees and will not
collect fees or incur certain benefit costs, which include loyalty points and
customer satisfaction guarantees, until the systems are operational. In the
future the Company expects the majority of its revenues to be derived from
transaction commissions.
Due to the change in the Company's program, the Company will recognize
commission revenues as reported and earned. Because of the changes in the
program and method of generating revenue, commencing July 1, 2000 the Company
began recognizing fixed rating and certification fees on a straight-line basis
over the term of a participating business license, generally one year. Costs of
benefits provided to buyers are recognized as provided, with accruals for any
future benefit obligations.
Because of the changes in the Company's program certain amounts in the current
period are not comparable to the prior period and certain amounts in the
consolidated interim statements have been reclassified to conform to the fiscal
2001 presentation.
The Securities and Exchange Commission's staff (the "Staff") issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"), in December 1999, which provides guidance on the recognition,
presentation and disclosure of revenue in financial statements of all public
companies. The provisions of SAB 101 are effective for transactions beginning in
the Company's current fiscal year. The Company believes it is recognizing
revenues within the guidance provided by SAB 101.
2. STATEMENT PRESENTATION AND CHANGE IN ACCOUNTING PRINCIPLES
The accompanying unaudited interim financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information. They do not include all information and footnotes required by
generally accepted accounting principles. The interim financial statements and
notes thereto should be read in conjunction with the Company's audited financial
statements and notes thereto for the year ended June 30, 2000.
During the second fiscal quarter, the Company adopted Emerging Issues Task Force
Issue No. 00-27, "Application of EITF Issue No. 98-5, Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios, to Certain Convertible Instruments", which is effective for
all such instruments. This issue clarifies the accounting for instruments with
beneficial conversion features or contingently adjustable conversion ratios. The
Company has modified the previous calculation of the beneficial conversion
features associated with previously issued convertible preferred stock. Based on
further clarification, the beneficial conversion feature should be calculated by
allocating the proceeds received in each financing to the convertible instrument
and to any detachable warrants included in the transaction, and measuring the
intrinsic value based on the effective conversion price based on the allocated
proceeds. The previous calculation was based on a comparison of the stated
conversion price in the terms of the instrument to the fair value of the
issuer's common stock at the commitment date. The Company has presented the
effect of adoption as a cumulative change in
6
VALUESTAR CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
December 31, 2000
2. STATEMENT PRESENTATION (Cont'd)
accounting principles as allowed for in EITF No. 00-27. Accordingly, the Company
has recognized an additional $1,715,000 in imputed deemed dividends based on a
discount at issuance of previously issued convertible preferred stock. See Note
9 below.
The Company has experienced recurring losses and the use of cash from
operations. A substantial portion of the losses is attributable to research and
development of the Company's transaction system, and marketing and promotion
costs associated with increasing consumers' awareness of the meaning of
ValueStar; marketing to businesses the advantages of becoming ValueStar members;
and discounting certain fees to encourage businesses to become ValueStar
members.
It is management's plan to seek additional financing through private placements
as well as other means. Management believes, but there can be no assurances,
that the additional capital it is seeking will be available in the future and
will enable the Company to achieve sales growth and, ultimately, profitable
operations.
The consolidated interim financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. Cash flows from future operations
may not be sufficient to enable the Company to meet its obligations, and market
conditions and the Company's financial position may inhibit its ability to
achieve profitable operations.
In the opinion of management, the interim financial statements reflect all
adjustments of a normal recurring nature necessary for a fair statement of the
results for interim periods. Operating results for the three and six month
periods ended December 31, 2000 are not necessarily indicative of the results
that may be expected for the year ending June 30, 2001.
3. RESEARCH AND DEVELOPMENT COSTS
Research and development expenses are charged to operations as incurred. Certain
internal software and web site development costs, which are related to the
Company's new revenue model, have been capitalized as prescribed by the American
Institute of Certified Public Accountant's Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," and the Emerging Issues Task Force consensus at EITF 00-2,
"Accounting for Web Site Development Costs."
4. INVENTORY
Inventory consists of promotional materials for sale to ValueStar member
businesses and direct advertising material, and is stated at the lower of cost
(first-in, first-out method) or market.
7
VALUESTAR CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
December 31, 2000
5. LONG-TERM DEBT
Long-term debt at December 31, 2000 consists of the following:
15% Equipment Note due in monthly installments of principal and interest of
$39,023 through March 2003, with a balloon payment of $191,810 due on April 1,
2003; secured by equipment; net of unamortized note discount of $86,250 $ 939,516
15% Equipment Note due in monthly installments of principal and interest of
$22,363 through July 2003, with a balloon payment of $109,919 due on
September 1, 2003; secured by equipment 646,027
15% Equipment Note due to a company affiliated with a stockholder and
director; due in monthly installments of principal and interest of $5,500 to
maturity in June 2002; secured by equipment and software 45,144
12% Notes; interest is paid monthly, with a balloon payment due in March 2001;
net of unamortized note discount of $114; unsecured; $50,000 of the
notes is due a relative of a stockholder and director 68,750
15% Equipment Note due to a company affiliated with a stockholder and
director; due in monthly installments of principal and interest of $2,022 to
maturity in August 2003; secured by equipment and software 53,064
------------
1,752,501
Less current portion 653,450
------------
$1,099,051
============
6. STOCKHOLDERS' EQUITY
The following table summarizes equity transactions during the six months ended
December 31, 2000:
Preferred Stock Common Stock Additional
--------------- ------------ Paid-In Accumulated
Shares Amount Shares Amount Capital Deficit Total
------ ------ ------ ------ ------- ------- -----
Balance July 1, 2000 913,586 $ 228 15,587,543 $ 3,897 $ 32,162,473 $(25,221,748) $ 6,944,850
Issuance of Series C Convertible
Preferred Stock, net of issuance
costs of $35,000 238,469 60 -- -- 5,330,493 -- 5,330,553
Accrued 8% dividends on Series A
and Series C Preferred Stock -- -- -- -- 219,330 (219,330) --
Stock issued on exercise of options -- -- 87,447 22 49,979 50,001
Net loss -- -- -- -- -- (10,772,340) (10,772,340)
---------- ------- ------------ --------- ------------ ------------ ------------
Balance December 31, 2000 1,152,055 $ 288 15,674,990 $ 3,919 $ 37,762,275 $(36,213,418) $ 1,553,064
========== ======= ============ ========= ============ ============ ============
8
VALUESTAR CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
December 31, 2000
6. STOCKHOLDERS' EQUITY (Cont'd)
During the first six months of fiscal 2001 the Company issued 238,469 shares of
Series C Convertible Preferred Stock, par value $.00025 ("Series C Stock") for
cash of $22.50 per share. Cumulative dividends of 8% per annum are payable when
and if declared by the Board of Directors or upon liquidation or conversion. The
dollar amount of Series C Stock is convertible into shares of common stock at a
conversion price equal to $2.25 per common share, and are automatically
converted on the occurrence of certain events. The Series C Stock has certain
antidilution and registration rights, has a liquidation preference, after
payment of the preferential amount for the Series A and Series B preferred
stock, of $22.50 per share plus accrued and unpaid dividends. The Series C Stock
has voting rights equal to the number of common shares into which it is
convertible. In addition, as long as there are at least 200,000 shares of Series
C Stock outstanding, then the holders are entitled to elect one member of the
Company's Board of Directors.
In connection with the sale of the Series C Stock, the Company granted the
purchasers warrants exercisable at $2.25 per share into an aggregate of
1,192,345 shares of common stock (" C-Warrants"). These C-Warrants have a three
year term and are callable by the Company if the common stock price exceeds
$6.00 per share, subject to certain additional conditions.
The Company has agreed to issue to an outside financial advisor warrants to
purchase an aggregate of approximately 102,937 shares of common stock at an
exercise price of $2.25 per share with a five year term in connection with the
sale of the Series C Stock.
At December 31, 2000 the Company's Series A, B and C convertible preferred stock
were convertible into approximately 10.6 million shares of common stock.
Subsequent to December 31, 2000, on January 4, 2001, the Company authorized the
issuance of up to 500,000 shares of Series CC Convertible Preferred Stock, par
value $.00025 ("Series CC Stock") for $45.00 per share payable in cash, by
cancellation of debt, by agreement to perform services or in exchange for two
shares of Series C Stock for each share of Series CC Stock. The dollar amount of
Series CC Stock is convertible into shares of common stock at a conversion price
equal to $0.75 per common share, and are automatically converted on the
occurrence of certain events. Purchasers of Series CC Stock are granted a
warrant to purchase 30 shares of common stock exercisable at $0.75 per share
("CC-Warrant") for each share of Series CC Stock. Those persons exchanging
Series C Stock must surrender the related C-Warrant in exchange for Series CC
Stock and the CC-Warrant.
Through the date of this report the Company had sold 64,922 additional shares of
Series CC Stock and issued CC-Warrants on 1,947,660 common shares for cash
proceeds of $1,421,320 and had exchanged 76,092 shares of Series CC Stock and
issued CC-Warrants on 2,282,760 common shares for 152,187 shares of Series C
Stock and related C-Warrants. An aggregate of 108,772 shares of Series CC Stock
and related CC-Warrants sold and/or exchanged were issued to entities affiliated
with directors of the Company.
9
VALUESTAR CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
December 31, 2000
7. STOCK OPTIONS AND WARRANTS
The following table summarizes option activity for the period ended December 31,
2000:
Weighted Average Weighted
Shares Exercise Price Average Life
------ -------------- ------------
Outstanding July 1, 2000 2,233,938 $4.19 3.75
Granted 901,000 $3.49
Canceled (538,812) $6.82
Exercised (90,001) $0.64
Expired (5,000) $0.50
-------
Outstanding December 31, 2000 2,501,125 $3.55 3.80
=========
Exercisable at December 31, 2000 986,594 $2.69 3.12
=======
At December 31, 2000 the Company had the following stock purchase warrants
outstanding each exercisable into one common share:
Number Exercise Price Expiration Date
------ -------------- ---------------
25,000 $1.25 March 2001
187,500 (1) $1.25 September 2002
20,000 (1) $1.25 December 2002
66,300 (2) $5.85 March 2003
64,713 (2) $5.85 April 2003
30,000 $5.85 April 2005
50,000 $10.00 April 2003
12,500 (3) $2.00 April 2003
50,000 $1.75 May 2003
1,192,345 (4) $2.25 September 2003
350,000 (1) $1.00 December 2003
152,728 (1) $1.375 March 2004
30,000 (1) $1.50 March 2004
75,000 $2.50 December 2004
25,852 (5) $5.42 April 2005
----------------
2,331,938
<FN>
(1) These warrants are callable at a stock price of $5.00 per share subject to certain conditions.
(2) These warrants are callable at a stock price of $5.00 per share subject to certain conditions.
(3) These warrants are callable at a stock price of $4.50 per share subject to certain conditions.
(4) These warrants are callable at a stock price of $6.00 per share subject to certain conditions.
These C-Warrants may be exchanged for CC-Warrants as described in Note 6 above.
(5) These warrants have certain antidilution adjustments subject to certain conditions.
</FN>
8. INCOME TAXES
At December 31, 2000 a valuation allowance has been provided to offset the net
deferred tax assets as management has determined that it is more likely than not
that the deferred tax asset will not be realized. The Company has for federal
income tax purposes net operating loss carryforwards of approximately $26.5
million which expire through 2020 of which certain amounts are subject to
limitations under the Internal Revenue Code, as amended. The Company has for
state income tax purposes net operating loss carryforwards of approximately $13
million which expire through 2005 of which certain amounts are subject to
limitations under the laws of California.
10
VALUESTAR CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
December 31, 2000
9. LOSS PER COMMON SHARE
Loss per common share is computed using the weighted average number of common
shares outstanding. Since a loss from operations exists, a diluted earnings per
common share number is not presented because the inclusion of common stock
equivalents in the computation would be antidilutive. Common stock equivalents
associated with warrants, stock options and preferred stock, which are
exercisable into approximately 15.4 million shares of common stock at December
31, 2000 could potentially dilute earnings per share in future periods.
The provisions of the Series A and Series C Stock provide for cumulative 8%
dividends and provide, upon conversion, a similar accretion whether or not such
dividends have been declared by the Board of Directors. These amounts increase
the net loss available to common stockholders. Net loss attributable to common
stockholders was also increased by imputed deemed dividends from a discount
provision included in the Series C Stock, which provided for an effective
conversion price, after allocating a fair value of the proceeds to detachable
warrants, less than the market price on the date of issuance. The imputed
non-cash dividends are not a contractual obligation on the part of the Company
to pay such dividend. Net loss available to common stockholders is computed as
follows:
Three Months Ended Six Months Ended
December 31, December 31,
2000 1999 2000 1999
---- ---- ---- ----
Net loss $(4,713,107) $(2,898,036) $(10,772,340) $(4,676,915)
Imputed deemed dividend on Series C Stock based on
discount at issuance (17,013) - (1,679,892) -
Imputed deemed dividend on Series B Stock based on
discount at issuance - (8,650,247) - (8,650,247
Accrued dividends on Series A and Series C Stock (154,650) (45,000) (219,330) (77,877)
----------- ----------- ------------ -----------
Net loss available to common stockholders before
cumulative effect of a change in accounting principles $(4,884,770) $(11,593,283) $(12,671,562) $(13,404,039)
Cumulative effect of a change in accounting
principles (note 2) (1,715,000) - (1,715,000) -
----------- --------------- --------------------------
Net loss available to common stockholders $(6,599,770) $(11,593,283) $(14,386,562) $(13,404,039)
============ ============= ============= =============
10. SUBSEQUENT EVENT
Subsequent to December 31, 2000 the Company authorized and sold Series CC Stock
as described in Note 6. Purchasers included First Data Merchant Services
Corporation (FDMS), a subsidiary of First Data Corporation ("FDC"). On January
16, 2001 FDMS made a strategic investment of $2 million consisting of $0.5
million in cash and $1.5 million in a binding and irrevocable agreement to build
and maintain a transaction engine on behalf of ValueStar. At December 31, 2000
FDMS had invested $750,000 into this transaction engine and this amount has been
capitalized and is reflected in Accrued Liabilities on the balance sheet. Once
completed, this asset will be depreciated over the life of the contract through
September 2005. The Company has two existing strategic agreements with
subsidiaries of FDC. The Company has also entered into an additional investment
and marketing Agreement with FDMS providing: (a) an option to FDMS or affiliates
to purchase for cash up to $8 million of additional Series CC Stock and related
warrants until March 31, 2001, (b) certain marketing exclusivity wherein the
Company will not sign certain marketing agreements with non-FDMS and affiliate
customer banks for six months, and (c) so long as FDC owns 50% of the securities
purchased, FDMS shall have the right to designate a nominee to be elected to the
Company's board of directors.
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
THE FOLLOWING DISCUSSION INCLUDES FORWARD-LOOKING STATEMENTS WITH RESPECT TO THE
COMPANY'S FUTURE FINANCIAL PERFORMANCE. ACTUAL RESULTS MAY DIFFER MATERIALLY
FROM THOSE CURRENTLY ANTICIPATED AND FROM HISTORICAL RESULTS DEPENDING UPON A
VARIETY OF FACTORS, INCLUDING THOSE DESCRIBED BELOW AND IN THE COMPANY'S ANNUAL
REPORT ON FORM 10-KSB FOR THE YEAR ENDED JUNE 30, 2000.
Overview
We are a provider of branded rating content on local service businesses. As an
infomediary we enhance online and offline commerce between buyers and sellers of
services by offering ratings enabling buyers to quickly determine the best local
service providers. Our ValueStar ratings are provided on the Internet at , on
other partner Internet sites, in our ValueStar Report and through promotions by
rated businesses.
Capitalizing on our expertise in customer satisfaction research and ratings, we
have been developing a new program consisting of (a) developing proprietary
content and ratings on a large number of service providers in the United States,
and (b) developing an Internet-based system that generates commissions from
transactions driven by the content. The content includes credential information
such as licensing, insurance, legal and finance, company profiles and related
information. During fiscal year 2000 we expended significant resources
(approximately $5.8 million) to generate database information and develop
computer and related systems for this new program. During the first six months
of fiscal 2001 we expended approximately $4.1 million towards these activities.
The goal of our new program is to position ValueStar as the dominant rating
system for local service providers and operate a commission based system to
match buyers and sellers of local services. Our services are free to consumers.
Our plan is to have the systems to monitor, record and collect on a transaction
basis during the first quarter of calendar year 2001 (third fiscal quarter of
2001). However, we have experienced delays in the past and unknown technical
issues and barriers could arise that could further delay implementation or
preclude us from executing this plan. In such an event we may be required to
revert to a fixed fee basis. Due to the change in our program and until we can
recognize sufficient commission revenues we expect comparative revenues in
current periods to be less than prior periods.
In addition to creating proprietary content on America's service companies, we
are also developing strategic relationships to provide data and to increase the
distribution of ValueStar's branded ratings:
o In January 2000 we entered into a strategic data agreement with
Experian, a provider of global information solutions. This alliance
provides financial and legal status on local service businesses as a
part of our content development. We provide Experian with the results
of our branded proprietary research on local service businesses for
distribution to their clients.
o In April 2000 we entered into an alliance with Netcentives to manage
our ValueStar Rating Points award program. As a part of this
relationship, we expect the four million consumer members of
Netcentives shopping network, ClickRewards(TM), will become trial
ValueStar members for opt-in activation.
o Commencing in May 2000 we began to form distribution partnerships with
Internet portals and service referral companies to broadly distribute
our ratings. Our roster of distribution partners includes home service
portal Ourhouse.com, technology provider NextDoor Networks; and other
vertical portals such as eAttorney.com and rentals.com.
o In June 2000 we entered into a database agreement with InfoUSA, Inc. to
provide certain raw database information.
o We are developing Internet-based software to match transactions between
licensed businesses and registered member buyers. We are working with
several processors of credit card transactions to support our program.
o In September 2000 we announced a pilot program for the San Francisco
Bay area credit card holders of First National Bank of Omaha.
o In November 2000 we announced two strategic and marketing alliance
agreements with global electronic commerce and payments leader First
Data Corp. First Data is marketing the ValueStar Customer-Rated program
to merchants through participating clients, while marketing cardholder
benefits through participating issuer clients. First Data has also
agreed to develop and operate a matching system to match transactions
between registered buyers and licensed ValueStar rated service
businesses.
o In January 2001 we entered into a ratings distribution agreement with
BellSouth RealPages.com. ValueStar expects to be a primary third-party
content partner for RealPages.com to supplement service business
listings.
12
We have a four-person business development team to develop other alliances and
relationships to expand our content, add highly rated service providers, extend
our brand and distribute our ratings to consumers and other buyers of local
services.
Changing Revenue Model
During fiscal 2000 our revenues were generated primarily from research and
rating fees paid by new and renewal businesses, certification fees from
qualified applicants and renewals and from the sale of information products and
services. In December 1999, in all eight current markets except Northern
California, we changed from a fixed rating and certification fee to a percentage
commission fee based on the value of transactions between buyers registered with
us and participating companies rated and licensed with us. We are currently
developing the systems to register buyers and monitor transactions. Until this
system is operating, we do not anticipate any significant revenues from these
markets. We will continue to incur selling costs and rating costs associated
with enrolling participating service businesses in our program. We believe this
investment will accelerate the launch of our new program by allowing us to have
a number of rated and licensed service companies already enrolled by the time we
launch our transaction fee system. We continue to charge a fixed certification
fee in Northern California but expect to also change this market to the new
program at a later date, not yet determined.
At December 31, 2000 we had approximately 7,260 licensed service businesses
compared to approximately 1,755 at December 31, 1999. We expect these businesses
and new businesses being enrolled to produce commission revenue in future
periods. In our new business model our business will be predicated on creating
and maintaining a growing number of registered buyers and sellers transacting
commerce in local services. In the future we expect a majority of our revenues
to be derived from commissions from transactions between registered buyers and
sellers of local services. Renewals of businesses from year to year will still
impact future operations as we expend funds on enrolling new businesses in our
licensing program.
During the first six months of fiscal 2001 we incurred product, system and
database development costs consisting of (a) capturing and verifying new
credential data on a large number of service companies in the United States (our
proprietary content), (b) testing systems to store, monitor and update this
content, (c) developing and testing systems to register buyers and (d)
developing and testing systems to monitor and generate commissions based on
transactions between buyers and sellers of local services. We expect these
product, system and content development costs to reduce in the third quarter as
we expect to begin operating our new commission program.
Our staffing has varied significantly during the last year as we have developed
new content and systems. We have in the past and expect to continue to use
outside contractors for certain services. We reduced our staffing from 140 in
December 2000 to approximately 85 at the date of this report in connection with
the substantial completion of the development activities listed above. This has
reduced monthly operating costs as we streamline operations to focus our
resources on our First Data strategic relationship. After our content databases
are developed, we will incur costs to maintain and update the data on an ongoing
basis. Exact amounts and timing of these expenditures and costs are subject to a
variety of factors and are not currently determinable by management.
Future operations will be impacted by changes in cost structure and elections
regarding new product development, advertising, promotions and growth rates.
Rapid growth, due to the nature of our operations, is expected to contribute to
continued operating losses in the foreseeable future.
During the first quarter we refined our measurement criteria for ValueStar
Verified or ValueStar Top-Rated businesses listed on our Web site. At January
31, 2001 we listed approximately 720,000 ValueStar Verified or ValueStar
Top-Rated businesses and had licensed approximately 7,300 of these businesses as
members in either our commission program or our fixed-fee license program.
Revenue and Cost Recognition
During fiscal 2000 a majority of our revenues were from fixed certification fees
ranging from $995 to approximately $2,000 depending on business size. In fiscal
2000 these fees were recognized as revenue when material services or conditions
relating to the certification had been performed. Due to the change in our
product offering and the benefits to be supplied to consumers, we changed the
method of recording fixed fee revenue effective July 1, 2000. We recognize fixed
fees on a straight-line basis over the term of a participating business license,
generally one year. We will recognize
13
commission revenues as reported and earned. Costs of benefits provided to buyers
are recognized as provided, with accruals for any future benefit obligations.
In late fiscal 2001 we expect a growing amount of revenues to be derived from
commissions from transactions between registered buyers and sellers of local
services. In certain industries where collection of commissions is not allowed
and in other instances we expect to obtain a fixed annual license fee. We may
provide payment terms and discounts from time to time. We have also changed our
program offering by providing a package of buyer benefits applicable for the
term of the business license.
We expense rating and content maintenance costs as incurred. Costs incurred in
printing and distributing our ValueStar Report publication to buyers, currently
published in January and July, and any related revenues are recognized upon
publication.
The Securities and Exchange Commission's staff (the "Staff") issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"), in December 1999, which provides guidance on the recognition,
presentation and disclosure of revenue in financial statements of all public
companies. The provisions of SAB 101 are effective for transactions beginning in
our current fiscal year. We believe we are recognizing revenues within the
guidance provided by SAB 101.
Results of Operations
Revenues. Revenues consist of rating and certification fees from new and renewal
business applicants, sale proceeds from information materials and premium
listings in our ValueStar Report and on our Web site, and other ancillary
revenues. We reported total revenues of $508,238 for the six months ended
December 31, 2000 compared to $1,192,128 for the first six months of the prior
fiscal year. The decrease in revenues is due to the commencement in July 2000 of
recognizing fixed fee revenues on a straight-line basis over the term of the
annual license corresponding to the term we expect to provide benefits to buyers
transacting with a business. This change is due to the change in our product
offering and the change in benefits to be supplied to consumers. If the Company
had recognized revenues in the prior year's first six months using the current
fiscal year method, we would have reported total revenues of approximately
$525,000. During the first six months of the current fiscal year, certification
fees accounted for 44% of revenue, compared to 79% for the prior year period.
Revenues for the three months ended December 31, 2000 were $234,491 comparable
to the $470,003 reported in the comparable prior period. In fiscal 2001 we are
earning fixed new and renewal certification fees from only one market with seven
markets converted to the commission program.
We reported approximately $85,000 of revenue from premium listings in our
ValueStar Report and on our Web site, a decrease of $19,000 from the $104,000
reported in the first six months of the prior year. The decrease results from a
shift in focus from licensing merchants on a fixed fee basis to licensing
merchants into our commission based systems. We expect ValueStar Report revenues
and Web site revenues may increase in future periods when we have an active
transaction-based relationship with sellers.
Our revenues can vary from quarter to quarter due to (a) management's decision
on the mix of sales effort between enrolling local service providers into
commission based vs. fixed fee programs, (b) the impact of distributing the
semi-annual ValueStar Report to buyers, (c) seasonality, (d) effectiveness of
sales methods and promotions, (e) levels of expenditures targeted at prospective
businesses, (f) the numbers of licensees up for renewal, (g) renewal rates, (h)
pricing policies, (i) timing of completion of ratings, and (j) other factors,
many of which are beyond our control. The timing of implementation of our
commission based processing will materially impact future revenues. There can be
no assurance we can successfully implement this program as scheduled in the
third fiscal quarter of 2001. Unknown technical or business issues and barriers
could arise that could delay implementation or preclude us from executing our
commission program. In such an event we may be required to revert to a fixed fee
basis.
Buyer Benefits. Buyer benefits consist of direct product costs for materials and
information provided to buyers, customer service costs for buyers, and in future
periods the costs of loyalty points and customer satisfaction guarantees. These
costs of $105,522 represented 21% of sales during the six months ended December
31, 2000. This is an increase from $45,216 or 4% of revenues for the prior year
comparable period, although the percentage is not directly comparable due to the
change in revenue reporting outlined above. Buyer customer service costs were
$74,500. This department did not exist in the prior period.
14
Ratings and Content. Ratings and content costs consist primarily of the costs of
rating service sellers, ongoing content and technology costs associated with
maintaining our databases and supporting our operations. In future quarters we
expect to incur certain transaction and matching fees with third parties. Rating
and content costs were $323,818, or 64% of revenues, for the six month period
ended December 31, 2000, compared to $782,424 and 66% of revenues for the prior
comparable period. The decrease is due primarily to a reduction in fixed fee
ratings and conversion to the new program, still under development. Ratings
costs totaled $150,600 for the three months ended December 31, 2000 or 65% of
revenues compared to $413,839 and 88% of revenues for the second quarter of the
prior fiscal year.
Selling and Marketing Costs. Selling and marketing costs consist primarily of
personnel costs for outside sales consultants interacting with licensed sellers,
an inside customer service team for licensed sellers, direct marketing costs
including lead generation, telemarketing costs, costs associated with the
ValueStar Report and marketing, advertising and promotion expense. Sales and
marketing costs for the six months ended December 31, 2000, were $4,087,621,
compared to $2,048,113 for the first six months of the prior year. Sales and
marketing costs totaled $1,615,218 for the second fiscal quarter of the current
year, an increase over the $849,325 reported for the prior years second quarter.
Sales related expenses totaled $1,629,587 compared to $1,268,693 for the prior
year's comparable six-month period. The large increase is due to the
commencement in December 1999 of enrolling local service providers into our
commission based program described earlier. Selling costs totaled $680,062 for
the three months ended December 31, 2000 compared to $619,973 for the second
quarter of the prior year. We expect selling costs will vary in future periods,
resulting from levels of future revenues, variances in renewal rates, the effect
of new sales promotions and costs thereof, timing of research and rating
completions, level and percentage of fixed selling costs, the number of new
market regions opened, the mix of sales between fixed fee certifications and
commission based certifications and other factors, some beyond our control.
Marketing and promotion expenses related expenses aggregated $2,458,033 during
the first six months of fiscal 2001, compared to $779,420 for the prior period.
During the period, we expended $278,000 on paid advertising targeted at
expanding consumer awareness of ValueStar Certified. Paid advertising of
$316,000 was employed in the prior year's comparable period. Printing and
distribution costs for the ValueStar Report increased by $26,000 as we printed
and distributed more copies with additional pages. During the six month period,
we expended $363,000 on promotions compared to $131,000 for the prior year's
comparable period with the increase due to a significant increase in the number
of promotions in the period. We spent approximately $370,000 on agency fees and
market research in the current six-month period with no comparable expenses in
the prior comparable quarter. Expenses related to wages and consultants in
marketing were $1,248,000 in the current six months compared to $138,000 in the
prior year's six month period with the large increase due to the hiring of
executives and increased staff in the marketing, product development and
business development departments. Marketing costs totaled $935,156 for the three
months ended December 31, 2000 compared to $229,352 for the second quarter of
the prior year.
Marketing and promotion expenses are subject to significant variability based on
decisions regarding paid advertising, public relations and market and brand
awareness efforts. We anticipate continuing to make significant expenditures on
marketing and promotion efforts to support a growing business base but
anticipate these costs will decrease as an annual percentage of revenues as
revenues grow. However, amounts and percentages on a quarterly basis may vary
significantly.
Product and Content Development Costs. Product and content development costs
consist primarily of expenses associated with the design, development and
testing of our expanded Internet initiative using existing and new content.
These costs include development of our website and the associated back office
solutions, developing our new proprietary ratings content for our website and
wages in our technology department associated with new product and content
development. During the six months ended December 31, 2000 we expended
$4,108,630 on new program development. This compares to $1,181,480 during the
same period last year. The major component of product development costs were
compensation and related costs of $2,530,000, partner and alliance
implementation costs of $400,000 and expenses related to the gathering of new
content of $173,000. During the first six months of fiscal 2001 we allocated
$925,000 of general and administrative costs to product and content development
to reflect the percentage of product and content development expenses relative
to overall expenses.
15
We have capitalized an additional $739,000 of product and content development
costs as website development and software that are specifically related to
internal software development. The Company capitalized $1,001,000 in the prior
fiscal year. The Company will begin depreciation of this asset upon commencement
of tracking transactions between rating partners and local service providers
over a period not to exceed three years.
General and Administrative Expenses. General and administrative expenses consist
primarily of expenses for finance, office operations, administration and general
and executive management activities, including legal, accounting and other
professional fees. General and administrative expenses were $1,361,752 for the
six months ended December 31, 2000, compared to $763,707 for the prior year
comparable period, an increase of $548,045. The major increases include a
$740,000 increase in compensation and benefits due primarily to the increased
number of executive, administrative and finance personnel added in connection
with an expansion of the employee base; a $75,000 increase in travel and
entertainment costs, a $446,000 increase in occupancy and telephone costs due to
additional personnel and expanded office facilities and a $99,000 increase in
legal and accounting expense due to expanded operations and a $27,000 increase
in reserve for doubtful accounts due to conversion of markets outside of San
Francisco to our commission based program. General and administrative costs in
the second quarter were $684,735, an increase from $351,120 for the second
quarter of the prior year. Management anticipates that general and
administrative costs will continue to exceed prior period levels due to
increased personnel added to support growth and increased general computer,
operating, occupancy and corporate costs.
Depreciation and Amortization. Depreciation and amortization expenses were
$1,176,725 for the six months ended December 31, 2000, compared to $138,787 for
the prior year period. The large increase is due to the acquisition of
technology equipment and software infrastructure to support an expanded employee
base and our new program, our web site and various internal databases.
Interest and Other Expenses. We incurred interest expense for the six months
ended December 31, 2000 of $192,123 that included $19,905 of non-cash
amortization of bond discount. Interest for the prior comparable period was
$933,850, of which $706,887 was non-cash amortization of bond discount. The
decrease is due to conversion of senior and subordinated debt into equity in the
prior fiscal year. The Company generated interest income of $75,236 in the first
six months of fiscal 2001 compared to $25,334 in the comparable prior period.
Net Loss. We had a net loss of $10,772,340 for the six months ended December 31,
2000, compared to a loss of $4,676,915 for the six months ended December 31,
1999. Our increased loss is attributable to (a) increased selling and marketing
costs incurred related to enrolling larger numbers of service businesses in
anticipation of launching our commission program, (b) product and content
development costs associated with developing our commission based program, and
(c) increased general and administrative costs associated with additional
management and support for expanded operations. We anticipate we will continue
to experience operating losses until we achieve a combination of a fully
functional commission program and a critical mass of buying and selling members.
Future quarterly results will be greatly impacted by future decisions regarding
new markets, advertising and promotion expenditures and growth rates.
Achievement of positive operating results will require that we build a working
commission program and that we obtain a sufficient base of buying and selling
members to support our operating and corporate costs. There can be no assurance
we can successfully build a transaction program, sustain sufficient buyer and
seller member rates or achieve a profitable base of operations.
The net loss available to common stockholders includes an increase in the net
loss for the six months ended December 31, 2000 due to the beneficial conversion
feature of the Series C preferred stock issued during the period. Net loss was
increased by $1,679,892 for this one-time non-cash imputed charge and increased
by $219,330 for non-cash accrued dividends on Series A and Series C preferred
stock. In addition, in the second quarter the Company recognized an additional
$1,715,000 in imputed deemed dividends based on a discount at issuance of
previously issued Series C preferred stock due to a change in accounting
principle related to the fair value of warrants as more fully described in Note
2 to the interim statements above. These non-cash imputed amounts had no effect
on our financial position.
Liquidity and Capital Resources
Since we commenced operations, we have had significant negative cash flow from
operating activities. Our negative cash flow from operating activities was
$9,268,335 for the six months ending December 31, 2000. At December 31, 2000, we
had a working capital deficit of $3,271,117, including $653,450 representing the
current portion of long-term debt and $301,950 representing the current portion
of capitalized leases. For the six months ended December 31, 2000, our negative
cash flow from operating activities was due primarily to our continued operating
losses, selling costs associated with enrolling local service companies into our
commission based program with no immediate revenue, product and content
development costs and addition of new executive management. At December 31,
2000, our net accounts receivables were $283,652, representing approximately 100
days of revenues and an annualized turnover ratio of approximately 3.7 times.
16
This compares unfavorably to approximately 50 days of revenues and turnover of
approximately 7.2 times at December 31, 1999. The significant change is due to
the change in the way we recognize revenues. The Company bills fixed fees in
full at the time the contract starts and extends terms throughout the contract
period. As fixed fee revenue recognition builds over the course of the next
twelve months, we expect ratios should return to past levels. Please see our
discussion of the change in revenue recognition practices under the section
Revenue and Cost Recognition above for further information on this. We believe
that 60 to 90 days revenues in receivables is reasonable based on the nature of
our business and the terms we provide licensees. At December 31, 2000, we have
not experienced any significant accounts receivable recoverability problems. Due
to our conversion of markets outside of the San Francisco Bay Area from a fixed
fee to a commission-based program, we have increased our reserve for doubtful
accounts.
We have financed our operations primarily through the sale of equity and debt
financing. In August 2000 we drew down the balance of $732,796 from a commitment
for $2,000,000 in equipment financing obtained in the prior fiscal year. Also
during the six months ended December 31, 2000, we obtained $5,380,554 from the
sale of common and preferred stock. We have no commitments for future
investments and there can be no assurance that we can continue to finance our
operations through these or other sources. In the past, shareholders, including
from time to time directors, have advanced funds and at times cancelled debt for
equity on terms of new forms of financing. There can be no assurance that
shareholders or directors or others will provide us with any future financing.
Other than cash on hand of $143,486 at December 31, 2000, net accounts
receivable of $283,652 and subsequent sales of preferred stock, we have no
material unused sources of liquidity at this time. We expect to incur additional
operating losses in future fiscal quarters as a result of continued operations,
product development expenditures and investments in growth. The timing and
amounts of these expenditures and the extent of operating losses will depend on
many factors, some of which are beyond our control.
Subsequent to December 31, 2000 the Company issued 28,336 shares of Series CC
Stock, for cash of $1,275,000 and an additional 33,333 shares of Series CC Stock
for $1,500,000 paid in kind services. We expect that we will require a minimum
of $8 million of additional capital to finance operations during the next twelve
months. This estimate is based on the second fiscal 2001 quarter level of
operations as subsequently reduced by management, anticipated revenues,
anticipated launch of our commission program and budgeted product development
and operating costs. To expand the enrollment of new member buyers and sellers
or to launch new products or services, we may require further additional
financing. Our actual results could differ significantly from plan and,
therefore, we may require substantially greater operating funds. Should required
and/or additional funds not be available or planned operations not meet our
expectations, we may be required to significantly curtail or scale back
staffing, advertising, marketing expenditures, product and content development
and general operations. We may also have to curtail the number of market regions
in which we operate or revert to some form of fixed fee program. There can be no
assurance that additional funding will be available to us or on what terms.
Potential sources of funds include exercise of warrants and options, loans from
existing shareholders or other debt financing or additional equity offerings.
Tax Loss Carryforwards
As of June 30, 2000, we had approximately $26.5 million of federal tax loss
carryforwards and $13 million in California tax loss carryforwards. These losses
create a deferred tax asset. We have recorded a valuation allowance to reduce
the net deferred tax asset to zero because, in our assessment, it is more likely
than not that the deferred tax asset will not be realized. There may also be
limitations on the utilization of tax loss carryforwards to offset any future
taxes.
Forward-Looking Statements and Business Risks
This Form 10-QSB includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended. The words "anticipate," "believe,"
"expect," "plan," "intend," "project," "forecasts," "could" and similar
expressions are intended to identify forward-looking statements. All statements
other than statements of historical facts included in this Form 10-QSB regarding
our financial position, business strategy, budgets and plans and objectives of
management for future operations are forward-looking statements. Although we
believe that the expectations reflected in such forward-looking statements are
reasonable, no assurance can be given that actual results may not differ
materially from those in the forward-looking statements herein for reasons
including the effect of competition, the level of sales and renewal
certifications, marketing, product development and other expenditures, economic
conditions, the legislative and regulatory environment and the condition of the
capital and equity markets.
17
Readers are cautioned to consider the specific business risk factors described
in our annual report on Form 10-KSB for the fiscal year ended June 30, 2000 and
not to place undue reliance on the forward-looking statements contained herein,
which speak only as of the date hereof. We undertake no obligation to publicly
revise forward-looking statements to reflect events or circumstances that may
arise after the date hereof.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
(a) See description of Series preferred stock in (c) below.
(b) See description of Series C preferred stock in (c) below.
(c) The following is a description of equity securities sold by the
Company during the second fiscal quarter ended December 31, 2000
that were not registered under the Securities Act:
In November 2000, we sold an aggregate of 4,780 shares of
Series C Convertible Preferred Stock, par value $0.00025
("Series C Stock"), at $22.50 per preferred share (each share
of which is initially convertible into ten shares of common
stock). This sale was made in a private offering. A total of
1,333,333 shares of preferred stock have been authorized and
designated by the Company as Series C Stock and 233,689 shares
of Series C Stock were previously sold in the first fiscal
quarter
In connection with the sale in the second quarter, the Company
issued to the purchasers warrants exercisable at $2.25 per
share into an aggregate of 23,900 shares of common stock
("Warrants"). These Warrants have a three year term and are
callable by the Company if the stock price exceeds $6.00 per
share, subject to certain additional conditions.
The aggregate gross proceeds from the sale of the Series C
Stock in the second quarter were $107,550.
The Series C Stock has a cumulative dividend of 8% per annum
payable when and if declared by the Board of Directors or upon
liquidation or conversion.
The dollar amount of the Series C Stock is convertible at the
option of the holder into shares of common stock at an initial
conversion price, negotiated with outside unaffiliated
investors, of $2.25 per share and are automatically converted
on the occurrence of certain events.
The Series C Stock has a liquidation preference, after payment
of the preferential amount for the Series A and Series B
Stock, of $22.50 per share of Series C Stock plus an
additional amount accruing at the rate of 8% per annum.
The Series C Stock has antidilution rights for certain
issuances below the conversion price. The Series C Stock has
voting rights equal to the number of shares of common stock on
an as-converted basis. In addition, as long as there are at
least 200,000 shares of Series C Stock issued and outstanding,
the holders are entitled, voting as a separate class, to elect
one member of the Company's board of directors.
In connection with the sale of Series C Stock, the Company
entered into a Registration Rights Agreement with the Series C
Stock investors. This agreement provides that within 120 days
following the initial closing on September 15, 2000, that the
Company will use its best efforts to prepare and file a
registration statement on Form S-3 (provided that at such time
the Company is eligible to use S-3 and, if not, use its best
efforts to prepare and file a registration statement on Form
S-3 at such later date as the Company is so eligible).
18
While the securities were sold by the Company without an
underwriter or cash commission, the Company has agreed to
issue to an outside financial advisor warrants to purchase an
aggregate of 8% of the underlying shares of common stock.
All of these securities were offered and sold without
registration under the Securities Act of 1933, as amended (the
"Act"), in reliance upon the exemption provided by Section
4(2) thereunder and/or Regulation D, Rule 506 and appropriate
legends were placed on the Series C Stock and Warrants and
will be placed on the shares of common stock issuable upon
conversion unless registered under the Act prior to issuance.
The descriptions of these transactions are qualified in their
entirety by the full text of the agreements attached as
exhibits to the Company's Form 8-K dated September 29, 2000.
(d) None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's fiscal 2000 Annual Meeting of Stockholders held on November 30,
2000 the following members, constituting all of the members, were elected to the
Board of Directors: James Stein, James A. Barnes, Fritz T. Beesemyer, Josh M.
Felser, J. Mitchell Hull, Jeffrey J. Holland and Steven A. Ledger.
The following proposals were approved at the Company's Annual Meeting of
Stockholders:
1. Election of Directors:
a. By Common Stockholders:
Affirmative Votes Negative Votes Votes Withheld
----------------- -------------- --------------
James Stein 12,808,607 100 8,830
James A. Barnes 12,808,607 100 8,830
Jeffrey J. Holland 12,808,607 6,100 8,830
b. By Series A Stockholders:
Affirmative Votes Negative Votes Votes Withheld
----------------- -------------- --------------
Fritz T. Beesemyer 908,622 -0- -0-
c. By Series B Stockholders:
Affirmative Votes Negative Votes Votes Withheld
----------------- -------------- --------------
Fritz T. Beesemyer 6,081,360 285,720 -0-
Joshua M. Felser 6,367,080 -0- -0-
c. By Series C Stockholders:
Affirmative Votes Negative Votes Votes Withheld
----------------- -------------- --------------
J. Mitchell Hull 1,650,253 -0- -0-
2. Authorization to approve adoption of the Company's 2000 Equity
Incentive Plan adopted by the board of directors on July 21, 2000
reserving an aggregate of 2,500,000 of common stock for issuance under
the 2000 Plan.
Affirmative Votes Negative Votes Votes Withheld
----------------- -------------- --------------
15,995,779 194,683 86,887
3. Authorization to ratify the selection of Moss Adams LLP as
independent auditors for the Company for fiscal year ending June 30,
2001.
Affirmative Votes Negative Votes Votes Withheld
----------------- -------------- --------------
21,716,425 3,380 23,727
19
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.27 Strategic Development, Marketing and Services
Agreement between the Company's subsidiary and First
Data Merchant Services Corporation dated September
29, 2000. [Portions of this Exhibit have been omitted
(based upon a request for confidential treatment) and
have been filed separately with the Securities and
Exchange Commission pursuant to Rule 24b-2]
10.28 Strategic Development and Marketing Agreement between
the Company's subsidiary and First Data Resources
Inc. dated November 1, 2000. [Portions of this
Exhibit have been omitted (based upon a request for
confidential treatment) and have been filed
separately with the Securities and Exchange
Commission pursuant to Rule 24b-2]
27 Financial Data Schedule
(b) Reports on Form 8-K:
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
VALUESTAR CORPORATION
Date: February 14, 2001 By: /s/ JAMES A. BARNES
--------------------
James A. Barnes
Secretary and Treasurer
(Principal Financial Officer and duly
authorized to sign on behalf of the Registrant)
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