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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 March 31, 1999
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)
1120A Ballena Blvd., Alameda, California 94501
- ---------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(510) 814-7070
--------------
(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 9,347,496
- ------------------------------- ---------
(Class) (Outstanding at May 10, 1999)
Transitional Small Business Disclosure Format (check one): YES NO X
--- ---
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<PAGE>
VALUESTAR CORPORATION
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited):
Consolidated Balance Sheets as of March 31, 1999
and June 30, 1998 3
Consolidated Statements of Operations for the three
and nine months ended March 31, 1999 and 1998 4
Consolidated Statements of Cash Flows for the six
months ended March 31, 1999 and 1998 5
Notes to Interim Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 17
2
<PAGE>
<TABLE>
VALUESTAR CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<CAPTION>
MARCH 31, JUNE 30,
1999 1998
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 1,700,813 $ 398,604
Receivables 421,494 361,369
Inventory 9,332 24,396
Prepaid expenses 10,071 3,902
----------- -----------
Total current assets 2,141,710 788,271
PROPERTY AND EQUIPMENT - net 245,720 56,697
DEFERRED COSTS 78,403 130,930
OTHER ASSETS - net 183,155 --
----------- -----------
Total assets $ 2,648,988 $ 975,898
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Bank line of credit $ -- $ 250,000
Accounts payable 561,795 197,410
Accrued liabilities and other payables 232,306 145,445
Current portion of long-term debt 39,719 --
Deferred revenues 33,515 27,020
Shareholder loans 300,000 --
----------- -----------
Total current liabilities 1,167,335 619,875
----------- -----------
LONG-TERM DEBT 2,725,854 1,525,357
----------- -----------
STOCKHOLDERS' DEFICIT
Common stock, $.00025 par value; 20,000,000 shares
authorized, 9,312,996 and 8,682,496 shares
issued and outstanding, respectively 2,329 2,171
Additional paid-in capital 6,404,877 4,247,160
Accumulated deficit (7,651,407) (5,418,665)
----------- -----------
Total stockholders' deficit (1,244,201) (1,169,334)
----------- -----------
Total liabilities and stockholders' deficit $ 2,648,988 $ 975,898
=========== ===========
<FN>
See accompanying notes to interim consolidated financial statements.
</FN>
</TABLE>
3
<PAGE>
<TABLE>
VALUESTAR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES $ 693,485 $ 300,884 $ 1,769,753 $ 1,092,577
----------- ----------- ----------- -----------
OPERATING EXPENSES
Cost of revenues 259,966 158,088 710,570 412,346
Selling 474,183 176,649 1,184,126 547,170
Marketing and promotion 221,422 295,349 650,334 590,465
General and administrative 405,323 243,466 1,225,417 562,236
----------- ----------- ----------- -----------
1,360,894 873,552 3,770,447 2,112,217
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS (667,409) (572,668) (2,000,694) (1,019,640)
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE)
Interest expense (94,271) (34,790) (230,339) (49,987)
Miscellaneous 3,690 -- (1,709) --
----------- ----------- ----------- -----------
(90,581) (34,790) (232,048) (49,987)
----------- ----------- ----------- -----------
NET LOSS $ (757,990) $ (607,458) $(2,232,742) $(1,069,627)
=========== =========== =========== ===========
LOSS PER COMMON SHARE $ (0.08) $ (0.07) $ (0.25) $ (0.13)
=========== =========== =========== ===========
WEIGHTED AVERAGE OF COMMON SHARES
OUTSTANDING 9,159,173 8,591,246 8,841,258 8,439,695
=========== =========== =========== ===========
<FN>
See accompanying notes to interim consolidated financial statements.
</FN>
</TABLE>
4
<PAGE>
<TABLE>
VALUESTAR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
Nine Months Ended
March 31,
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(2,232,742) $(1,069,627)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation 51,961 7,073
Amortization of bond discount 30,850 --
Non-cash interest 23,695 --
Warrants and stock issued for services 60,000 108,398
Changes in:
Receivables (60,125) (16,741)
Inventory 15,064 24,769
Prepaid expenses (6,169) (3,088)
Deferred costs 52,527 (71,825)
Accounts payable 364,385 (208,963)
Accrued liabilities and other payables 86,861 4,927
Deferred revenues 6,495 409
----------- -----------
Net cash used by operating activities (1,607,198) (1,224,668)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Property and equipment acquisitions (118,836) (6,741)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of stock 597,875 227,500
Net proceeds from senior debt 2,310,000 --
Net borrowings (payments) under line of credit (250,000) 150,000
Proceeds from debt 385,000 1,000,000
Payments on capital leases (7,657) --
Payments on debt (6,975) --
----------- -----------
Net cash provided by financing activities 3,028,243 1,377,500
----------- -----------
NET INCREASE IN CASH 1,302,209 146,091
CASH, beginning of period 398,604 44,225
----------- -----------
CASH, end of period $ 1,700,813 $ 190,316
=========== ===========
SUPPLEMENTAL CASH-FLOW INFORMATION:
Cash paid during the period for:
Interest $ 175,794 $ 49,987
Income taxes $ -- $ --
Non-cash investing and financing activities:
Stock and warrants issued for services $ 60,000 $ 108,398
Warrants issued for other assets $ 40,000 $ --
Notes converted to stock $ -- $ 30,000
Capital lease obligations incurred for equipment $ 125,303 $ --
<FN>
See accompanying notes to interim consolidated financial statements
</FN>
</TABLE>
5
<PAGE>
VALUESTAR CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
March 31, 1999
1. OPERATIONS
The Company, a Colorado corporation, conducts its operations through ValueStar,
Inc., a wholly-owned subsidiary. ValueStar, Inc. was incorporated in California
in 1991, and is a rating company that has pioneered a new business certification
mark (ValueStar Certified(R)) - signifying high customer satisfaction - -
enabling consumers to quickly determine the best local service businesses. The
Company generates revenues by conducting customer satisfaction research on local
service companies in 300 industries; certifying highly rated businesses; and
selling ancillary materials and services. The Company's activities are currently
concentrated within one industry segment in four major market territories
(Northern California, Southern California, Chicago and Dallas). The Company
communicates information about highly rated service and professional firms that
have earned "ValueStar Certified" to consumers through various media including
its Internet Web site (www.valuestar.com) and the Consumer ValueStar Report
("CVR"), a bi-annual publication.
The Company's revenues are primarily from certification and rating fees, and are
recognized when all related services are provided to the customer. Rating
services include a research survey of prior customers and the delivery of a
research report. Services associated with certification include an orientation
on becoming a ValueStar Certified business and the delivery of certification
materials and manuals. Businesses must reapply for certification each year.
Sales of marketing materials and Web advertising and other services are
recognized as materials are shipped or over the period services are rendered.
Costs incurred in printing and distributing the Company's CVR consumer
publication published in January and July, and any related revenues are
recognized upon publication.
2. STATEMENT PRESENTATION
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, 1998.
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 nine month
periods are not necessarily indicative of the results that may be expected for
the year.
Certain reclassifications have been made in the prior year to conform to the
current period presentation.
3. INVENTORY
Inventory is recorded at the lower of cost (using the first-in first-out method
of accounting) or market. Inventory consists of brochures and related materials
for resale.
4. DEFERRED COSTS
All direct costs related to marketing and advertising the ValueStar
certification to businesses and consumers are expensed in the period incurred,
except for direct-response advertising costs, which are capitalized and
amortized over the expected period of future benefits. Deferred costs are
periodically evaluated to determine if adjustments for impairment are necessary.
Based on an ongoing evaluation of the expected period of future benefits from
the direct-response advertising, the period of amortization has been reduced
from twelve months to sixty days. Revenues associated with the direct-response
advertising costs, which are primarily certification fees from businesses new to
ValueStar, are being recognized approximately sixty days after the
direct-response telemarketing costs are incurred. This change in estimate of the
amortization period resulted in a one-time, non-cash increase in selling
expenses of $81,788 in the first fiscal quarter ended September 30, 1998.
6
<PAGE>
VALUESTAR CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
March 31, 1999
5. LINE OF CREDIT
The Company retired its bank line of credit at March 31, 1999.
6. SHAREHOLDER LOAN
The Company is obligated pursuant to a 15% unsecured subordinated note to a
company related to a shareholder/director in the amount of $300,000 due June 30,
1999.
7. LONG-TERM DEBT
<TABLE>
Long-term debt at March 31, 1999, consists of the following:
<CAPTION>
<S> <C>
8% Senior Secured Notes Payable ("Senior Notes") with a principal
balance of $2,450,000 were issued on March 31, 1999 with detachable
warrants and are secured by substantially all assets of the Company and
its subsidiary, including a key person life insurance policy, bear
interest at 8% payable monthly. Principal on the Senior Notes is due in
16 quarterly installments of $153,125 commencing in March 2002, with
the final payment scheduled in December 2005. Certain events, including
the loss of Jim Stein as President, may result in certain prepayment
penalties and the acceleration of payment under the Senior Notes. The
Senior Notes also contain various financial covenants, primarily
relating to minimum net worth, maximum debt, capital additions and net
income or loss. The Company recorded a debt discount and allocated
$1,450,000 of the proceeds to the value of the
detachable stock warrants (see Note 9). $1,000,000
12% Notes Payable - $100,000 of Notes payable with interest at 12%
payable monthly; with all principal due on March 31, 2001, or sooner at
the Company's discretion; unsecured; net of unamortized bond discount
of $7,273 92,727
12% Subordinated Notes Payable - $1,000,000 principal of subordinated
notes payable with interest at 12% payable monthly; with all principal
due on June 30, 2000, or sooner at the Company's discretion; unsecured.
Net of unamortized bond discount of $33,620 966,380
6% Convertible Notes Payable - $525,000 principal of subordinated
convertible notes payable with interest at 6% payable in kind on
conversion or at maturity on June 30, 2001; no prepayment is allowed;
unsecured; convertible at $1.00 per common share. Net of unamortized
bond discount of $43,725. Includes accrued interest of $29,520 due at
maturity 510,795
15% Term Equipment Note - $85,000 of principal, payable in monthly
installments of principal and interest of $2,022 to maturity in August
2003; secured by equipment and software 78,025
Capitalized lease obligations 117,646
----------
2,765,573
Less current portion 39,719
----------
$2,725,854
==========
</TABLE>
In connection with the issuance of the Senior Notes the Company incurred costs
of $180,000 including $40,000 assigned to warrants issued in connection with
arranging the financing (see Note 9). These costs have been included in other
assets and will be amortized over the life of the debt.
At March 31, 1999, the 6% Convertible Notes and accrued interest thereon would
have been convertible into 552,875 common shares.
7
<PAGE>
VALUESTAR CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
March 31, 1999
8. STOCKHOLDERS' DEFICIT
<TABLE>
The following table summarizes equity transactions during the nine months ended
March 31, 1999:
<CAPTION>
Shares Par Value Paid in Capital Total $
------ --------- --------------- -------
<S> <C> <C> <C> <C>
Balance June 30, 1998 8,682,496 $ 2,171 $4,247,160 $4,249,331
Private placement at $1.00 per unit, consisting of
one share and one warrant 500,000 125 499,875 500,000
Proceeds from stock warrants exercised 130,500 33 97,842 97,875
Value assigned to 50,000 warrants granted for
note refinancing -- -- 10,000 10,000
Value assigned to 200,000 warrants issued for services -- -- 60,000 60,000
Value assigned to 2,285,896 warrants issued in
connection with Senior Notes (see note 9) -- -- 1,450,000 1,450,000
Value assigned to 152,728 warrants issued
for services (see note 9) -- -- 40,000 40,000
---------- ---------- ---------- ----------
Balance March 31, 1999 9,312,996 $ 2,329 $6,404,877 $6,407,206
========== ========== ========== ==========
</TABLE>
9. STOCK OPTIONS AND WARRANTS
The Company has reserved 250,000 shares of common stock for each of its 1992 ISO
Plan and 1992 NSO Plan, 300,000 shares of common stock for the 1996 Stock Option
Plan and 500,000 shares of common stock for the 1997 Stock Option Plan. The
Company has also issued options on 200,000 shares outside of the option plans.
The following table summarizes option activity for the period ended March 31,
1999:
Weighted Average Weighted
Shares Exercise Price Average Life
------ -------------- ------------
Outstanding July 1, 1998 877,550 $0.59 2.45
Granted 368,600 $1.15
Canceled (147,050) $0.73
Exercised --
Expired --
Outstanding March 31, 1999 1,099,100 $0.75 2.67
========= ===== ====
Exercisable at March 31, 1999 750,636 $0.57
========= ====
Subsequent to March 31, 1999 a total of 15,000 stock options were exercised
providing cash proceeds of $11,250.
In connection with the sale of the Senior Notes on March 31, 1999 (see note 7)
the noteholders were granted warrants to purchase an aggregate of 1,527,250
shares of Common Stock of the Company at an exercise price of $1.00 per share
("A Warrants"), warrants to purchase an aggregate of 527,514 shares of Common
Stock at a nominal per share exercise price of $0.00025 ("B Warrants") and
warrants to purchase an aggregate of 231,132 shares of Common Stock at an
exercise price of $1.00 per share ("C Warrants"). The C Warrants or underlying
shares of Common Stock may be repurchased by the Company at $6.00 per share
(less any unpaid exercise price) on an all or none basis until March 31, 2004 as
long as the Company is not in default with respect to the Senior Notes or
related agreements. The warrants expire on the earlier of six years from the
date the Senior Notes are paid in full or March 31, 2009. The warrants may be
exercised by payment of cash, cancellation of debt or on a cashless basis.
The holders of the A, B and C Warrants were granted antidilution provisions,
registration rights and certain equity and debt preemptive rights. Prior to 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), qualified sale (valuation of
at least $40 million and minimum proceeds of $5.00 to $7.00 per share to
Holders) or a qualifying stock market listing (Nasdaq National Market or New
York Stock Exchange and minimum price and trading volume), in the event of a
sale or disposition of the Company or substantially all of its assets, the
number of shares of Common Stock for which the Warrants may be exercised may be
increased, without a corresponding increase in the aggregate consideration, to
provide additional consideration to the holders of the warrants based on a
revenue based valuation. A sale may also be initiated by the warrant holders in
certain instances as described in the next paragraph.
8
<PAGE>
VALUESTAR CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
March 31, 1999
9. STOCK OPTIONS AND WARRANTS (Cont'd)
The holders of the A, B and C Warrants have certain "Drag Along Rights". Until a
qualifying public offering or sale is completed by the Company or a qualifying
market listing is achieved, then upon either (i) a change in control (the
current three directors owning less than 20% of the Company on a fully diluted
basis), or (ii) the loss of Mr. Stein as President without a replacement
acceptable to the holders, or (iii) a non-qualifying public offering, or (iv)
certain defaults under the Senior Notes, and (v) at any time between April 2004
and April 2009 (unless the rights are earlier terminated), the holders of the A,
B, and C Warrants may seek a buyer for the Company or its assets and the Company
and the current three directors are obligated to cooperate and take such actions
to complete a sale, consistent with their fiduciary duties. Upon such a sale,
the A, B and C Warrants may be exercised for additional shares of Common Stock
resulting in additional dilution to existing shareholders of the Company. This
dilution could be material should the Drag Along Rights become exercisable and
subsequently exercised by the holders.
The Company determined the fair value of the A, B and C Warrants at $1,450,000
(see Note 7). The Company also issued warrants on 152,728 shares of common stock
to two individuals in connection with arranging the Senior Note financing.
At March 31, 1999 the Company had the following stock purchase warrants
outstanding each exercisable into one common share:
Number Exercise Price Expiration Date
------ -------------- ---------------
19,500 (6) $0.75 April, 2002
200,000 (1) $1.25 June, 2002
300,000 (1) $1.25 September, 2002
200,000 (1) $1.25 December, 2002
500,000 (1) $1.25 December, 2000
262,500 (2) $1.25 April, 2003
262,500 (3) $2.00 April, 2003
50,000 $1.75 May, 2003
50,000 $1.25 March, 2001
200,000 $0.75 October, 2003
500,000 (1) $1.00 December, 2003
152,728 (4) $1.375 March, 2004
1,527,250 $1.00 March, 2009 (A Warrants)
527,514 $0.00025 March, 2009 (B Warrants)
231,132 (5) $1.00 March, 2009 (C Warrants)
---------
4,983,124
=========
(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 $3.00 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 $2.75 per share subject to
certain conditions.
(5) These warrants may be repurchased by the Company at $6.00 per share until
March 31, 2004 subject to certain conditions.
(6) Subsequent to March 31, 1999 these warrants were exercised into 19,500
common shares providing cash proceeds of $14,625.
The Company has authorized 5 million shares of capital stock as preferred stock,
with a par value of $0.00025 per share. No preferred stock is issued or
outstanding.
10. INCOME TAXES
At March 31, 1999 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 $4,800,000
which expire through 2013 of which certain amounts are subject to limitations
under the Internal Revenue Code, as amended.
9
<PAGE>
VALUESTAR CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
March 31, 1999
11. NET LOSS PER SHARE
Basic EPS includes no dilution and is computed by dividing income available to
common stockholders by the weighted average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution of securities that
could share in the earnings of an entity, similar to fully diluted earnings per
share. The Company's net losses for the periods presented cause the inclusion of
potential common stock instruments outstanding to be antidilutive and,
therefore, in accordance with SFAS No. 128, the Company is not required to
present a diluted EPS. Stock options, warrants and convertible notes exercisable
into 6,635,099 shares of common stock were outstanding at March 31, 1999. These
securities were not included in the computation of diluted EPS because of the
net losses but could potentially dilute EPS in future periods.
12. RECENT ACCOUNTING PRONOUNCEMENTS
Effective July 1, 1998, the Company adopted the Financial Accounting Standards
Board SFAS No. 130, "Reporting Comprehensive Income". This statement established
standards for reporting and display of comprehensive income and its components
(revenue, expenses, gains and losses) in a full set of general-purpose financial
statements. Reclassification of financial statements for earlier periods
provided for comparative purposes is required. The adoption of this statement
had no material impact on the Company's financial condition or results of
operation as of March 31, 1999 and for the nine month periods ended March 31,
1999 and 1998. Total comprehensive income did not differ from the Company's net
loss for the nine months ended March 31, 1999 and 1998.
The Company has also adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", which supersedes Statement of Financial
Accounting Standards No. 14, "Financial Reporting for Segments of a Business
Enterprise." SFAS 131 establishes standards for the way that public companies
report information about operating segments in annual financial statements and
requires reporting of selected information about operating segments in interim
financial statements issued to the public. It also establishes standards for
disclosures regarding products and services, geographic areas and major
customers. SFAS 131 defines operating segments as components of a company about
which separate financial information is available that is evaluated regularly by
the chief operating decision maker in deciding how to allocate resources and in
assessing performance. Quarterly disclosures are not required in this first year
of adoption. Management believes that SFAS 131 will not have a significant
impact on the Company's disclosure of segment information in the future.
The Financial Accounting Standards Board ("FASB") has issued SFAS No. 132,
"Employers' Disclosure about Pensions and Other Post-retirement Benefits" and
SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities."
SFAS No. 132 standardizes the disclosure requirements for pensions and other
post-retirement benefits and requires additional information on change in the
benefit obligations and fair values of plan assets that will facilitate
financial analysis. SFAS No. 133 requires companies to record derivatives on the
balance sheet as assets or liabilities, measured at fair market value. Gains or
losses resulting from changes in the values of those derivatives are accounted
for depending on the use of the derivative and whether it qualifies for hedge
accounting. The key criterion for hedge accounting is that the hedging
relationship must be highly effective in achieving offsetting changes in fair
value or cash flows.
SFAS No. 132 is effective for years beginning after December 15, 1997, and
requires comparative information for earlier years to be restated, unless such
information is not readily available. SFAS No. 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. Management believes that
the adoption of SFAS No. 132 and SFAS No. 133 will have no material effect on
its financial statements.
13. YEAR 2000 COMPLIANCE
The Company, like most owners of computer software, will be required to modify
significant potions of its software so that it will function properly in the
year 2000. Preliminary estimates of the total costs to be incurred by the
Company to resolve this problem range from $10,000 to $20,000. Since the Company
mainly uses third party "off-the-shelf" software, it does not anticipate a
problem in resolving the year 2000 problem in a timely manner. Maintenance or
modification costs will be expensed as incurred, while the costs of new software
will be capitalized and amortized over the software's useful life.
10
<PAGE>
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, 1998.
Overview
ValueStar Corporation is a consumer research and rating company that has
designed a new rating system and certification mark, ValueStar Certified(R), for
service businesses. ValueStar's rating system is designed to enable consumers to
quickly determine those local service businesses that have attained the highest
level of customer satisfaction. ValueStar's ratings are provided on the Internet
at www.valuestar.com, in print in the Consumer ValueStar Report and through
service business promotions and customer interactions.
On March 31, 1999 the Company completed an institutional senior debt financing
providing net proceeds of approximately $2.3 million. A portion of these funds
are being used by ValueStar to expand regionally from a centralized base of
operations in Northern California. ValueStar commenced operations in Southern
California in July 1998, the greater Chicago region in February 1999 and opened
the Dallas region in April 1999. Four additional regions are targeted for 1999
opening.
The Company's revenues are generated primarily from research and rating fees
paid by new and renewal businesses, certification fees from highly rated
businesses and from the sale of information products and services. An important
aspect of the Company's business model is the recurring nature of revenues from
businesses renewing their certification.
Certification fees, ranging from $995 to approximately $2,000 depending on
business size, are recognized when material services or conditions relating to
the certification have been performed. The material services are the delivery of
certification materials along with an orientation and the material condition is
the execution of the certification agreement specifying the conditions and
limitations on using the certification. Research and rating fee revenue, ranging
up to $570, is deferred until the research report is delivered. Sales of
marketing materials and Web advertising and other services are recognized as
materials are shipped or over the period services are rendered. The Company from
time to time provides discounts, incentives from basic pricing and payment terms
on fees. Cancellations by certified businesses are nominal, less than 2%.
The Company expenses research and rating costs as incurred. Costs incurred in
printing and distributing the Company's Consumer ValueStar Report ("CVR")
publication for consumers, currently published in January and July, and any
related revenues are recognized upon publication. Accordingly, the revenues and
costs in the Company's first and third fiscal quarters are impacted by the costs
and revenues from the CVR publication.
Effective July 1, 1994, with the adoption by the Company of Statement of
Position No. 93-7 (SOP 93-7), Reporting on Advertising Costs, certain
direct-response advertising costs are deferred and amortized over the expected
period of future benefits. These costs, which relate directly to targeted new
business solicitations, primarily include targeted direct-response advertising
programs consisting of direct telemarketing costs. No indirect costs are
included in deferred advertising costs. Costs incurred for other than specific
targeted customers, including general marketing and promotion expenses, are
expensed as incurred.
Prior to July 1, 1998 the Company was amortizing deferred costs on a
straight-line basis over twelve months. Based on an ongoing evaluation of the
expected period of future benefits from the direct-response advertising, the
period of amortization has been reduced from twelve months to sixty days.
Revenues associated with the direct-response advertising costs, which are
primarily certification fees from businesses new to ValueStar, are being
recognized approximately sixty days after the telemarketing costs are incurred.
This change in estimate of the amortization period resulted in a one-time,
non-cash increase in selling expenses of $81,788 in the first fiscal quarter
ended September 30, 1998.
Deferred costs are periodically evaluated to determine if adjustments for
impairment are necessary.
Since inception the Company has been growing and developing its business and has
incurred losses in each year since inception and at March 31, 1999 had an
accumulated deficit of $7,651,407. There can be no assurance of future
profitability.
Effect of Growth in Certified Businesses and Renewals
The Company's business revenue model, similar to other membership based
organizations, is predicated on a growing number of certified businesses and
maintaining high renewal rates. Certified businesses that renew contribute
higher gross
11
<PAGE>
margins than new applicants due to reduced sales and rating costs. Also a
growing and larger base of certified businesses reduces the costs (relative to
revenues) associated with printing and distributing the Company's Consumer
ValueStar Report to consumers, maintaining the www.valuestar.com Internet site
and providing other services. The marginal fixed costs associated with increased
numbers of certified businesses is minimal compared to these base printing,
distribution and maintenance costs.
Since a considerable portion of the Company's operations are engaged towards the
solicitation of new service and professional business applicants in order to
expand the base of certified businesses, the Company incurs substantial costs
towards this activity. Currently the Company is only deferring direct telephone
sales costs and amortizing them at the time of certification, an average of
approximately 60 days. Other costs are expensed as occurred.
At March 31, 1999 the Company had approximately 1,415 certified businesses
(1,085 at March 31, 1998).
The Company believes as a market region matures, and the Company has a larger
base of certified businesses, fixed and indirect costs will decline as a
percentage of revenues. The Company also believes that the opening of new market
regions will provide additional revenues to cover certain base fixed selling,
marketing, administration and overhead costs. Management believes that the more
established Northern California market has achieved a base of certificate
holders sufficient to provide positive regional operating margins (prior to
allocation of corporate administration and overhead). Management also estimates
that it could substantially reduce operating costs to achieve break-even
operations on reduced levels of new sales and by maintaining the existing base
of renewing businesses. However, any such dramatic cutbacks would curtail growth
and the ability to expand regionally in the future.
Future operations are impacted by changes in cost structure and elections
regarding advertising, promotions and growth rates (due to the lower margins in
the first year). Management intends, subject to financial resources, to continue
to expand the business geographically requiring increased numbers of sales,
marketing and support personnel, the exact number which is not currently
estimable and is dependent on decisions regarding expansion. Rapid growth, due
to the nature of the Company's operations, is expected to contribute to
continued operating losses in the foreseeable future.
During the first three quarters of the current year, the Company expanded
personnel, computer systems and overhead to support expansion into Southern
California and to prepare for future regional expansion. This increased
operating losses. The number of personnel has grown to 79 full-time and 43
part-time persons at March 31, 1999. During the first quarter the Company added
four new executive positions to support growth and regional expansion. The
Company also has incurred marketing, selling and administrative costs in
connection with the Southern California, Chicago and Dallas region startups
contributing to the larger operating losses.
At March 31, 1999 the Company had 302 (293 new and 9 renewal) business customers
in the application and rating phase compared to 410 (349 new and 61 renewal) at
June 30, 1998. The total at March 31, 1999 represents approximately 30 days
sales. Management has installed new hardware, software and systems to more
automate the research and rating process which has reduced the rating time and
correspondingly the backlog. Based on management's experience, the business
customers in the rating phase are expected to represent approximately $240 000
of revenues that should be recognized in the fourth quarter of fiscal 1999
(generally analogous to backlog).
Results of Operations
Revenues. Revenues consist of certification and rating fees from new and renewal
business applicants, sale proceeds from information materials and premium
listings in the CVR and on the Web site, and other ancillary revenues. The
Company reported total revenues of $1,769,753 for the nine months ended March
31, 1999, a 62% increase over revenues of $1,092,577 for the first nine months
of the prior year. Revenues for the third quarter were $693,485, a 130% increase
over the third quarter of the prior fiscal year.
The growth in revenues is the result of the regional expansion in the current
year, improved new sales velocity and the impact of a larger base of renewals in
the Northern California region. During the first nine months of fiscal 1999
certification fees accounted for 74% of revenue (72% for the prior year's
comparable nine months). Renewing business revenue grew in dollar amount and
represented 44% of certification fees in the current year's first nine months
compared to 35% in the prior comparable period. In the Company's largest market
region, Northern California, renewals are an important component of the revenue
base. Management expects renewing businesses to continue to grow in dollar
amount, however the percentage contribution attributable to renewals will vary
depending in part on the volume of new businesses being certified in any
particular period.
12
<PAGE>
The Company reported approximately $179,000 of revenue from premium listings in
its CVR publications, an increase of $78,000 from the $101,000 reported in the
first nine months of the prior year. The increase results from improved
marketing efforts focused on expanding ancillary revenues.
Revenues can vary from quarter to quarter due to the impact of distributing the
semi-annual CVR publication to consumers, seasonality, effectiveness of sales
methods and promotions, levels of expenditures targeted at prospective
businesses, the numbers of certificate holders up for renewal, renewal rates,
pricing policies, timing of completion of research and ratings and other
factors, some of which are beyond the control of management.
Cost of Revenues. Cost of revenues consists primarily of rating costs incurred
for performing customer satisfaction research on business applicants, costs
related to verifying insurance and complaint status, Web site operating costs
and costs of information products and certification materials. During December
1997, the Company made a change from using an outside vendor to perform customer
satisfaction research on applicants to in-house employees and related facility
and operating costs. This change has reduced rating costs on a per unit basis
and as a percentage of revenues. Cost of revenues represented 40% of revenues
during the first nine months ended March 31, 1999 (37% in the third quarter)
compared to 38% for the prior year's first nine months (53% for the prior year's
third quarter). The most recent quarter's improvement in gross margin is a
result of the benefits from more automated systems and procedures being employed
making ratings more efficient and economical at increased volumes. Cost of
revenues may vary significantly from quarter to quarter both in amount and as a
percentage of sales.
Selling Costs. Selling costs consist primarily of personnel costs for outside
sales consultants interacting with customers and direct marketing costs
including lead generation and telemarketing costs. Sales costs for the first
nine months of fiscal 1999 were $1,184,126, or 67% of revenues, compared to
$547,170, or 50% of revenues for the prior year's first nine months. Third
quarter selling costs were 68% of revenues compared to 59% for the prior year's
third quarter. The current year's first quarter included an $81,788 one-time,
non-cash expense resulting from the change in estimate for deferred costs
described above. Also in the current year the Company initiated sales activities
in several new market regions, incurring an estimated $150,000 of non-deferred
sales costs consisting of $89,000 of outside sales personnel related costs and
$61,000 of lead generation costs. New market regions provide only nominal
revenues due to the approximately 60 day lag from selling activities to initial
revenues. Other than direct targeted telemarketing costs, the Company expenses
sales costs as incurred. The Company expects sales costs as a percentage of
revenues 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, timing and costs of opening
new market regions, level and percentage of fixed selling costs and other
factors, some beyond the control of management.
Marketing and Promotion Expenses. Marketing and promotion expenses aggregated
$650,334 or 37% of revenues during the first nine months of fiscal 1999 compared
to $590,465 or 54% of revenues incurred for the first nine months of fiscal
1999. Marketing and promotion expenses represented 32% of revenues in the third
quarter compared to 98% in the prior years third quarter when the Company
employed more media. The Company limited media in the most recent quarter
pending the closing of the Senior Note financing. Included in marketing and
selling expenses in first and third quarter of each period were printing and
distribution costs of the Company's CVR publication targeted at consumers.
Printing and distribution costs of $265,000 in the first three quarters of
fiscal 1999 increased over the fiscal 1998 comparable period total of $232,000,
resulted from the addition of the first Southern California report. Also the
company has been able to print and distribute more copies with additional pages
due to better pricing resulting from increased volumes. During the first nine
months of fiscal 1999 the Company expended approximately $150,000 on paid
advertising targeted at expanding consumer awareness of ValueStar Certified.
Paid advertising of $240,000 was employed in the prior year's first nine months.
In the first nine months of fiscal 1999 the Company expended $120,000 on
promotions compared to $35,000 for the prior comparable period with the increase
due to an increased number of promotions in the period. Generally the first and
third fiscal quarters have increased marketing and promotions costs because the
CVR publication is printed and distributed as a service to consumers during
these quarters. Also, the Company generally expends less advertising in the
second fiscal quarter due to higher media costs in the calendar fourth quarter.
Marketing and promotion expenses are subject to significant variability based on
decisions regarding the timing and size of distribution of the CVR publication
and decisions regarding paid advertising, public relations and market and brand
awareness efforts. The Company anticipates continuing to make significant
expenditures in marketing and promotion efforts as the Company expands to new
regions but anticipates these costs will decrease as an annual percentage of
revenues as revenues grow. However, amounts and percentages on a quarterly basis
may vary significantly.
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. They totaled $1,225,417 for the nine months ended March 31,
1999, compared to $562,236 for the comparable period of the prior year, an
increase of $663,181. The major increases include a $288,000 increase in
13
<PAGE>
compensation and benefits due primarily to the increased number of executive and
management personnel added in connection with regional expansion; a $168,000
increase in occupancy and telephone costs due to additional personnel and
expanded operations; a $57,000 increase in bad debt and guarantee provisions
versus the prior comparable period; a $44,000 increase in depreciation due to
additional equipment; a $41,000 increase in corporate costs (legal, accounting,
filing, public relations and consulting) due to increased audit and legal costs
as a public company, and; a $23,000 increase in travel and entertainment due to
expanded operations. General and administrative costs increased to $405,323
during the third quarter of fiscal 1999 compared to $243,466 for the prior
year's third quarter. Management anticipates that general and administrative
costs will continue to exceed prior period levels due to increased executive
personnel added to support future growth, increased general computer, operating,
occupancy and corporate costs as a publicly traded company.
To date, development expenses associated with the design, development and
testing of the Company's programs and services have not been material and are
included in sales and marketing or general and administrative expenses (if
performed by executive management). In the future, as the Company develops new
programs or services, it anticipates that it may segregate development expenses
as an expense category.
The Company incurred interest expense in the first nine months of fiscal 1999 of
$230,339 that included $54,545 of non-cash interest from amortization of bond
discount and accrued paid-in-kind interest. Interest for the prior comparable
nine-month period was $49,987. The increase resulted from the significant
additions of debt to finance growth and the related losses incurred by the
Company.
Net Loss. The Company had a net loss of $2,232,742 for the nine months ended
March 31, 1999, compared to a net loss of $1,069,627 for the comparable nine
months ended March 31, 1998. The increased loss is attributable primarily to (a)
the increased selling costs resulting from the expansion of sales personnel to
new market regions and (b) the increased general and administrative costs
associated with additional executive management and support for expanded market
regions. The Company anticipates that it will continue to experience operating
losses until it achieves a critical mass base of renewing certificate holders as
it pursues aggressive growth. As the Company is increasing its business volume
(new and renewal certifications) immediate future quarterly results will be
greatly impacted by decisions regarding new markets and growth rates.
Achievement of positive operating results will require obtaining a sufficient
base of new and renewal business certifications to support operating and
corporate costs. There can be no assurance the Company can sustain renewal rates
or achieve a profitable base of operations.
Liquidity and Capital Resources
Since the Company commenced operations, it has had significant negative cash
flow from operating activities. The negative cash flow from operating activities
was $1,607,198 for the nine months ended March 31, 1999 and $1,629,721 for the
fiscal year ended June 30, 1998. At March 31, 1999 the Company had working
capital of $974,375. For the nine months ended March 31, 1999 the negative cash
flow from operating activities was due to the continued operating losses,
expansion to new market regions, addition of new executive management and
investment in business growth. Included in the working capital at March 31, 1999
is net accounts receivable of $421,494, representing approximately 65 days of
revenues and an annualized turnover ratio of approximately 5.6 times. This
compares favorably to approximately 82 days of revenues and turnover of
approximately 4.4 times at June 30, 1998. The improved turnover and reduced
accounts receivable level results primarily from increased revenues and more
diligent collection efforts. Management believes that 60 to 90 days revenues in
receivables is reasonable based on the nature of the Company's business and the
terms it provides certifying companies. At March 31, 1999 the Company has not
experienced and does not anticipate any significant accounts receivable
recoverability problems.
The Company has financed its operations primarily through the sale of common
equity and debt financing. On March 31, 1999 the Company obtained gross proceeds
of $2,450,000 from the sale of Senior Notes resulting in net proceeds of
approximately $2,310,000. Also during the nine months ended March 31, 1999 the
Company obtained $385,000 in note and debt financing and approximately $600,000
from common stock sales. There are no commitments for future investments and
there can be no assurance that the Company can continue to finance its
operations through these or other sources. In the past shareholders, including
from time to time directors, have advanced funds and at times converted funds to
debt or equity financing on terms of new forms of financing. There can be no
assurance that such shareholders or directors or others will provide any future
financing to the Company.
Other than cash on hand of $1,700,813 at March 31, 1999 and net accounts
receivable of $421,494, the Company has no material unused sources of liquidity
at this time, and the Company expects to incur additional operating losses in
future fiscal quarters as a result of continued operations 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 the Company's
control.
The Company is expanding operations into additional new market regions with four
addition regions (total of eight in the aggregate) targeted for the fourth
fiscal quarter. There can be no assurance the Company can successfully open new
market
14
<PAGE>
regions. The Company expects that it will require a minimum of $1,000,000 to
finance operations during the next twelve months. This estimate is based on a
base level of operations, anticipated renewal revenues, anticipated sales levels
in current markets, and budgeted operating costs. The Company has plans to
continue to expand into new market regions and would require and is seeking
additional financing for such expansion. The Company's actual results could
differ significantly from management's plans, and therefore the Company may
require substantially greater additional operating funds. In such an event,
should the required and/or additional funds not be available or planned
operations not meet management's expectations, the Company may be required to
significantly curtail or scale back staffing, advertising and other marketing
expenditures and general operations in more reliance on higher profitable
renewals and limit new growth. There can be no assurance that additional funding
will be available or on what terms. Potential sources of such funds include
exercise of warrants and options, loans from existing shareholders or other debt
financing or additional equity offerings.
New Accounting Pronouncements and Issues
The Financial Accounting Standards Board has issued a number of new
pronouncements as discussed in the footnotes to the Company's interim financial
statements (see page 10, Note 12). As discussed in the notes to the interim
financial statements, the implementation of these new pronouncements is not
expected to have a material effect on the financial statements.
On September 28, 1998, the SEC issued a press release and stated the "SEC will
formulate and augment new and existing accounting rules and interpretations
covering revenue recognition, restructuring reserves, materiality, and
disclosure;" for all publicly-traded companies. Until such time as the SEC staff
issues such interpretative guidelines, it is unclear what, if any, impact such
interpretative guidance will have on the Company's current accounting practices.
The Company's practices have been consistently applied since its initial filing
and review by the SEC in 1997. However, the potential changes in accounting
practice being considered by the SEC staff, if applied to certifications in a
manner different than currently recognized by the Company, could have a material
impact on the manner in which the Company recognizes revenue. Any such changes
would have no effect on reported cash flow or the economic value of the
Company's certifications.
Year 2000 Readiness Disclosure
The Company is aware of the issues associated with the programming code in
existing computer systems as the Year 2000 approaches. The "Year 2000" problem
is concerned with whether computer systems will properly recognize date
sensitive information when the year changes to 2000. Systems that do not
properly recognize such information could generate erroneous data or cause a
system to fail. The Year 2000 problem is pervasive and complex as the computer
operation of virtually every company will be affected in some way which could
lead to business disruptions in the U.S. and internationally.
The Company has identified the following areas which could be impacted by the
Year 2000 issue. They are: Company products; internally used systems and
software; products or services provided by key third parties; and the inability
of certifying businesses and prospective customers to process business
transactions relating to certifying revenue and product sales.
During the first calendar quarter ended March 31, 1999 the Company completed an
initial review its internal systems. The review consisted of an evaluation of
significant internal hardware systems and major software application programs
which are primarily packaged third party "off-the-shelf" software programs. As a
result of this review the Company has identified certain systems which require
further review and probable upgrades to be Year 2000 ready, the costs of which
are included in management's estimates outlined below. The Company is currently
evaluating new business software applications and one major selection and
evaluation criterion will be full compliance with Year 2000. The Company's
certification and other products do not have any material Year 2000 problems.
In addition, the Company is in the process of assessing the compliance of its
customers, suppliers and vendors. Management believes that third-party
relationships upon which the Company relies represent the greatest risk with
respect to the Year 2000 issue, because the Company cannot guarantee that third
parties will be able to adequately assess and address their Year 2000 compliance
issues in a timely manner. As a consequence, the Company can give no assurances
that issues related to Year 2000 will not have a material adverse effect on
future results of operations or financial condition.
Total costs relating to the Company's compliance efforts, based on management's
best estimates range from $10,000 to $20,000 consisting primarily of obtaining,
installing and testing new computers and upgrades of third party "off-the-shelf"
software programs. To date there have been no material direct out-of-pocket
costs. Maintenance or modification costs will be expensed as incurred, while the
costs of new computers or software will be capitalized and amortized over the
respective useful life.
Should the Company not be completely successful in mitigating internal and
external Year 2000 risks, the likely worst case scenario could be a system
failure causing disruptions of operations, including, among other things, a
temporary inability
15
<PAGE>
to process transactions, deliver certifications and products, send invoices or
engage in similar normal business activities at the Company or its vendors and
suppliers. If the Company determines certain suppliers are not Year 2000
compliant, it may have to arrange for alternative sources of supply and the
stockpiling of inventory (mainly brochures) in the fall of 1999 in preparation
for the Year 2000. The Company cannot estimate at this time the cost or effect
on the Company's financial condition of any stockpiling of inventory. The
Company currently does not have any other contingency plans with respect to
potential Year 2000 failures of its suppliers or customers and at the present
time, after an initial evaluation, does not intend to develop one. If these
failures would occur, depending upon their duration and severity, they could
have a material adverse effect on the Company's business, results of operations
and financial condition.
The information set forth above under this caption "Year 2000 Readiness
Disclosure" relates to the Company's efforts to address the Year 2000 concerns
regarding the Company's (a) operations, (b) products and technologies licensed
or sold to third parties and (c) major suppliers and customers. Such statements
are intended as Year 2000 Statements and Year 2000 Readiness Disclosures and are
subject to the "Year 2000 Information Readiness Act."
Tax Loss Carryforwards
As of June 30, 1998, the Company had approximately $4.8 million of federal tax
loss carryforwards. A valuation allowance has been recorded for the net deferred
tax asset arising primarily from such tax loss carryforwards because, in the
Company's assessment, it is more likely than not that the deferred tax asset
will not be realized.
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
the Company's financial position, business strategy, budgets and plans and
objectives of management for future operations are forward-looking statements.
Although the Company believes 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 and other expenditures, economic conditions,
the legislative and regulatory environment and the condition of the capital and
equity markets.
Readers are cautioned to consider the specific business risk factors described
in the Company's annual report on Form 10-KSB for the fiscal year ended June 30,
1998 and not to place undue reliance on the forward-looking statements contained
herein, which speak only as of the date hereof. The Company undertakes 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) None
(b) None
(c) The following is a description of equity securities sold by the
Company during the third fiscal quarter ended March 31, 1999 that
were not registered under the Securities Act:
(1) During January 1999 the Company sold 200,000 shares of its
Common Stock at $1.00 per share in cash and warrants to
purchase 200,000 common shares at $1.00 per share until
December 31, 2003. The Company without an underwriter sold the
securities to five qualified investors including a company
controlled by one director. These securities were offered and
sold without registration under the Act, in reliance upon the
exemption provided by Regulation D thereunder and an
appropriate legend was placed on the shares and warrants.
(2) On March 31, 1999 the Company and its wholly-owned subsidiary
(ValueStar, Inc.) completed the private offering and sale for
cash of an aggregate of $2,450,000 of Senior 8% Secured Notes
("Senior Notes") with detachable stock warrants ("Warrants") to
three institutional investors ("Holders"). The Holders were
granted warrants to purchase an aggregate of 1,527,250 shares
of Common Stock of the Company at an exercise price of $1.00
per share ("A Warrants"), warrants to purchase an aggregate of
527,514 shares of Common Stock at a nominal per share exercise
price of $0.00025 ("B Warrants") and warrants to purchase an
aggregate of 231,132 shares of Common Stock at an exercise
price of $1.00 per share ("C Warrants"). These securities were
offered and sold without registration under the Securities Act
of 1933, as amended
16
<PAGE>
(the "Act"), in reliance upon the exemption provided by Section
4(2) thereunder and appropriate legends were placed on the
Senior Notes and the Warrants and will be placed on the shares
of Common Stock issuable upon exercise of the Warrants unless
registered under the Act prior to issuance. While the
securities were sold by the Company without an underwriter, the
Company issued to two finders warrants to purchase an aggregate
of 152,728 shares of Common Stock at $1.375 per share until
March 31, 2004. The issuance and sale of the warrants was
exempt by reason of Section 4(2) of the Act in reliance on the
private nature of the transaction, restrictions on transfer on
the shares and based on representations of the purchasers. An
appropriate legend was placed on the warrants.
(d) None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K:
The Company filed a report on Form 8-K related to an Item 5
event occurring on March 31, 1999. The Form 8-K was filed on
April 13, 1999.
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: May 13, 1999 By: /s/ JAMES A. BARNES
--------------------
James A. Barnes
Secretary and Treasurer
(Principal Financial Officer and duly
authorized to sign on behalf of the Registrant)
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED
FINANCIAL STATEMENTS FOR NINE MONTHS ENDED MARCH 31, 1999 INCLUDED IN THE
QUARTERLY REPORT ON FORM 10-QSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 1,700,813
<SECURITIES> 0
<RECEIVABLES> 473,178
<ALLOWANCES> 51,684
<INVENTORY> 9,332
<CURRENT-ASSETS> 2,141,710
<PP&E> 308,815
<DEPRECIATION> 63,095
<TOTAL-ASSETS> 2,648,988
<CURRENT-LIABILITIES> 1,167,335
<BONDS> 2,725,854
0
0
<COMMON> 2,329
<OTHER-SE> (1,246,530)
<TOTAL-LIABILITY-AND-EQUITY> 2,648,988
<SALES> 85,020
<TOTAL-REVENUES> 1,769,753
<CGS> 30,675
<TOTAL-COSTS> 710,570
<OTHER-EXPENSES> 3,059,877
<LOSS-PROVISION> 67,772
<INTEREST-EXPENSE> 230,339
<INCOME-PRETAX> (2,232,742)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,232,742)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,232,742)
<EPS-PRIMARY> (0.25)
<EPS-DILUTED> (0.25)
</TABLE>
