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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): December 13, 1999
(November 23, 1999)
VALUESTAR CORPORATION
(Exact name of registrant as specified in its charter)
Colorado 0-22619 84-1202005
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(State or other jurisdiction of (Commission File (I.R.S. Employer
incorporation) Number) Identification No.)
360-22nd Street, #210, Oakland, California 94612
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(Address of principal executive offices) (Zip Code)
(510) 808-1300
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(Registrant's telephone number, including area code)
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ITEM 5. OTHER EVENTS
Sale of Series B Convertible Preferred Stock
On December 9, 1999 ValueStar Corporation (the "Company") completed the private
offering and sale of 517,157 shares of Series B Convertible Preferred Stock, par
value $0.00025 ("Series B Stock"), at $17.50 per preferred share (each share of
which is initially convertible into ten shares of common stock). A total of
800,000 shares of preferred stock have been designated by the Company as Series
B Stock.
The aggregate gross proceeds of $9,050,000 included $6,050,000 in cash from lead
strategic investor, eCompanies Venture Group, L.P. (the "Lead Investor"). A
total of $1,405,000 was purchased by three institutional holders of the
Company's wholly-owned subsidiary's Senior 8% Secured Notes ("Senior Notes") of
which $1,000,000 was applied to reduce the outstanding principal of the Senior
Notes from $2,450,000 to $1,450,000. A total of $250,000 had been advanced by
three investors on November 24 and November 29, 1999 and was applied towards
their Series B Stock purchase. The balance of $1,345,000 was paid in cash by
sixteen individual investors.
The Series B Stock investors included two directors of the Company and entities
affiliated with such directors for an aggregate of $302,500 and one executive
officer for $50,000.
The dollar amount of the Series B Stock is convertible at the option of the
holder into shares of common stock at an initial conversion price negotiated
with the Lead Investor of $1.75 per share and are automatically converted on the
occurrence of the following events:
o A Qualified Liquidation Event - a qualifying public offering (proceeds
of $15 million at a price of at least $5.00 per share and a valuation
of at least $40 million) or qualified sale (valuation of at least $40
million and minimum proceeds of $5.00 to $7.00 per common share);
o A Qualified Liquidity Milestone - a qualifying stock market listing
(Nasdaq National Market or New York Stock Exchange and minimum price
and trading volume);
o The conversion of all the shares of the Company's Series A Convertible
Preferred Stock ("Series A Stock"); or
o A vote of 66-2/3% of outstanding shares of Series B Stock.
The Series B Stock has a liquidation preference, after payment of the
preferential amount for the Series A Stock, of $17.50 per share of Series B
Stock. Thereafter the holders of Series B Stock, on an as-converted basis, and
the holders of common stock, shall be paid pro-rata, from remaining assets until
the holders of Series B Stock shall have received an aggregate preference price
of $30.00 per share. Holders of Series B Stock are entitled to receive
non-cumulative dividends at an annual rate of 8% only when and if declared by
the Board of Directors. However no cash dividends shall be paid to common stock
holders unless a like cash dividend amount has been paid to holders of Series B
Stock on an as-converted basis.
The Series B Stock has antidilution rights for certain issuances below the
conversion price. The Series B 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 B Stock issued and outstanding, the
holders are entitled, voting as a separate class, to elect two members of the
Company's board of directors.
In connection with this transaction, the Company increased the number of
authorized directors from five to seven, resulting in two vacancies. Mr. Steven
Ledger, Managing General Partner of eCompanies Venture Group, L.P. has been
appointed as a new director filling one vacancy and one directorship elected by
the Series B Stockholders. The remaining Series B director seat is vacant. As a
result of this transaction and by the terms of the Company's Series A Stock, one
director is elected by the Series A Stockholders, two by the Series B
Stockholders and the balance of directors, not
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elected by any series of preferred shares then outstanding, by the common
stockholders. As amended by this transaction, the largest holder of Senior
Notes, Seacoast Capital Partners L.P., is entitled through a voting agreement,
to effectively designate one director from the common class. To date, Seacoast
Capital Partners L.P. has not designated a director.
In connection with the sale of Series B Stock, the Company entered into an
Investors Rights Agreement with the Series B Stock investors, certain Series A
Stockholders and the three Senior Note holders who also hold certain A, B, and C
warrants to purchase shares of common stock ("Warrants") granted in connection
with the issuance of the Senior Notes. This agreement provides the parties with
certain demand and piggyback registration rights and grants the Senior Note
holders and each holder of 20% of Series B Stock originally issued with certain
equity preemptive rights. Previously granted antidilution and preemptive rights
granted to the Warrant holders were terminated. The Senior Note holders retain
certain debt preemptive rights.
In connection with this sale, the Senior Note and Warrant holders (who also own
a majority of Series A Stock), amended and waived certain provisions of
agreements related to the Senior Notes and the Warrants. These amendments
included a termination of certain drag along rights which provided the Warrant
holders additional consideration in certain instances upon a sale of the
Company. These terminated drag along rights also had allowed the Warrant holders
to force a sale of the Company in certain instances.
Other amendments executed by Senior Note and Warrant holders included a
modification of key person insurance requirements and changes to Senior Note
financial covenants. The Senior Note and Warrant holders also executed certain
waivers, including waiving any antidilution adjustment to the Warrants or Series
A Stock as a result of the Series B Stock sale, waiving the Series A and Series
B Stock from the computation for a change of control default under the Senior
Notes and waiver of any prepayment fee for the $1,000,000 reduction in the
Senior Notes. In connection with these amendments, waivers and modifications by
the Senior Note and Warrant holders, the Company agreed to increase the interest
rate on the $1,450,000 balance of Senior Notes from the current 8% to a maximum
of 12% at the rate of 1% per calendar quarter commencing April 1, 2000 when the
rate will increase from 8% to 9%.
While the securities were sold by the Company without an underwriter or cash
commission, the Company issued to an outside financial advisor warrants to
purchase an aggregate of 75,000 shares of common stock at an exercise price of
$2.50 per share until December 7, 2004 in connection with these transactions.
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 B Stock and will be placed on the
shares of common stock issuable upon conversion unless registered under the Act
prior to issuance.
The Company incurred cash costs estimated at $65,000 in connection with the
offering. After the application of $1,250,000 as debt conversions, the balance
of net proceeds of $7,735,000 are intended to supplement working capital and
provide funds to accelerate the development and implementation of an expanded
Internet based rating program for service companies. There can be no assurance
the Company can successfully develop new services or that the proceeds will be
sufficient for such purpose.
The descriptions of these transactions are qualified in their entirety by the
full text of the agreements attached as exhibits hereto.
Other Recent Equity Transactions
On December 1, 1999 the Company issued 546,274 shares to three holders of its
subordinated 6% Convertible Notes in exchange for the conversion of $500,000 of
principal and $46,274 of accumulated interest. These notes were called for
conversion by the Company pursuant to a forced conversion feature in the notes.
The shares were issued pursuant to a current S-3 Registration Statement.
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On November 23, 1999 the Company filed with the Colorado Secretary of State a
Certificate of Amendment to the Articles of Incorporation increasing the
authorized shares of common stock from 20,000,000 to 50,000,000 shares. At the
close of business on December 10, 1999, the Company had 55,000,000 shares
authorized, consisting of 50,000,000 shares of common stock, par value $0.00025
and 5,000,000 shares of preferred stock, par value $0.00025. A total of
10,467,906 common shares were then issued and outstanding. A total of 1,000,000
preferred shares have been designated as Series A Convertible Preferred Stock,
with 225,000 shares issued and outstanding. A total of 800,000 preferred shares
have been designated as Series B Convertible Preferred Stock, with a total of
517,157 shares issued and outstanding.
Reference is also made to the Company's periodic reports filed with the
Securities and Exchange Commission and, in particular, the risk factors set
forth therein.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial statements of businesses acquired.
None
(b) Pro forma financial information.
None
(c) Exhibits
3.1.3 Amendment to Certificate of Incorporation filed with the Secretary of
State of Colorado on November 23, 1999
3.3.1 Certificate of Amendment to the Certificate of Designation of Series
A Convertible Preferred Stock filed with the Secretary of State of
Colorado on December 7, 1999
3.4 Certificate of Designation of Series B Convertible Preferred Stock
filed with the Secretary of State of Colorado on December 7, 1999
4.17.2 Second Amendment to Note Purchase Agreement between the Company's
wholly-owned subsidiary (ValueStar, Inc.) and three institutional
investors dated December 8, 1999
4.19.2 Second Amendment to Shareholder Agreement between the Company, three
institutional investors and certain stockholders of the Company dated
December 8, 1999
4.19.3 Waiver Agreement between the Company and three institutional
investors dated December 8, 1999
4.28 Form of Series B Preferred Stock Purchase Agreement dated as of
December 8, 1999 between the Company and Series B stock purchasers
4.29 Form of Investors Rights Agreement dated as of December 8, 1999
between the Company, three senior note holders, two directors and
Series A and Series B stock purchasers
4.30 Stock Purchase Warrant dated December 8, 1999 between the Company and
Jackson Strategic, Inc. for an aggregate of 75,000 common shares at
$2.50 per share
10.14 Press release issued by the Company on December 9, 1999.
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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 hereunto duly authorized.
VALUESTAR CORPORATION
Date: December 13, 1999 By: /s/ JAMES A. BARNES
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James A. Barnes
Treasurer and Secretary
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