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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1998
Commission file number 0-22619
VALUESTAR CORPORATION
(Name of Small Business Issuer in its charter)
Colorado 84-1202005
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1120A Ballena Blvd.
Alameda, California 94501
(510) 814-7070
(Address and telephone number of principal executive offices)
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, par value $0.00025
(Title of class)
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
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year. $1,601,406
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The aggregate market value of the issuer's Common Stock held by non-affiliates
as of August 31, 1998 (assuming for this purpose that only directors, officers
and 10% or more shareholders of registrant are affiliates of registrant), based
on the average of the closing bid and asked prices on that date, was
approximately $3,195,000.
As of August 31, 1998 there were 8,682,496 shares of ValueStar Corporation
Common Stock, par value $.00025, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
Transitional Small Business Disclosure Format (check one): Yes No X
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TABLE OF CONTENTS
Page
PART I
ITEM 1. Description of Business 2
ITEM 2. Description of Property 10
ITEM 3. Legal Proceedings 10
ITEM 4. Submission of Matters to a Vote of Security Holders 10
PART II
ITEM 5. Market for Common Equity and Related Stockholder Matters 11
ITEM 6. Management's Discussion and Analysis or Plan of Operation 12
ITEM 7. Financial Statements 19
ITEM 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 19
PART III
ITEM 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act 19
ITEM 10. Executive Compensation 21
ITEM 11. Security Ownership of Certain Beneficial Owners and Management 23
ITEM 12. Certain Relationships and Related Transactions 24
ITEM 13. Exhibits and Reports on Form 8-K 25
SIGNATURES
FORWARD-LOOKING STATEMENTS
IN ADDITION TO HISTORICAL INFORMATION, THIS ANNUAL REPORT CONTAINS
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995 AND THE COMPANY DESIRES TO TAKE ADVANTAGE OF THE
"SAFE HARBOR" PROVISIONS THEREOF. THEREFORE, THE COMPANY IS INCLUDING THIS
STATEMENT FOR THE EXPRESS PURPOSE OF AVAILING ITSELF OF THE PROTECTIONS OF SUCH
SAFE HARBOR WITH RESPECT TO ALL OF SUCH FORWARD-LOOKING STATEMENTS. THE
FORWARD-LOOKING STATEMENTS IN THIS REPORT REFLECT THE COMPANY'S CURRENT VIEWS
WITH RESPECT TO FUTURE EVENTS AND FINANCIAL PERFORMANCE. THESE FORWARD-LOOKING
STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES, INCLUDING THOSE
DISCUSSED HEREIN, THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
HISTORICAL RESULTS OR THOSE ANTICIPATED. IN THIS REPORT, THE WORDS
"ANTICIPATES," "ESTIMATES," "BELIEVES," "EXPECTS," "INTENDS," "FUTURE," "GOAL,"
"OBJECTIVE" AND SIMILAR EXPRESSIONS IDENTIFY FORWARD-LOOKING STATEMENTS. READERS
ARE CAUTIONED TO CONSIDER THE SPECIFIC RISK FACTORS DESCRIBED BELOW 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 THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR
CIRCUMSTANCES THAT MAY ARISE AFTER THE DATE HEREOF.
Part I
Item 1. Description of Business.
Overview
ValueStar Corporation (the "Company" or "ValueStar") is a rating company that
has pioneered a new rating system and certification mark (ValueStar Certified(R)
) - - signifying high customer satisfaction - - enabling consumers to quickly
determine the best local service businesses. ValueStar generates recurring
revenues by conducting customer satisfaction research on local service companies
in 150 industries (auto, home health, personal and professional), licensing the
certification mark to highly rated businesses and selling ancillary materials
and services. ValueStar Certified brand recognition is built through the
co-branding promotional efforts of the Company and its business licensees.
ValueStar's independent rating and certification format leverages the
substantial experience consumers demonstrate in using product
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ratings and reduces the guesswork involved in selecting a service business among
those businesses making competing and unsubstantiated claims. ValueStar's
proprietary branded ratings provides new content for the rapidly growing
Internet shopping industry -- making interactive shopping possible for consumers
purchasing local services. The Company believes the consumer enthusiasm
generated by this new rating format, business acceptance evidenced by high
renewals and the knowledge and experience gained from pioneering, operating and
expanding throughout Northern California provide the foundation for further
growth and territorial expansion.
During the past two years while operating exclusively in Northern California,
ValueStar has received over 200,000 consumer visits to its Internet Web site, a
proprietary searchable database of top rated local companies. During the same
period the Company has conducted more than 250,000 individual customer
satisfaction surveys and distributed to local consumers over 1 million copies of
Consumer ValueStar Report ("CVR"), its semi-annual listing of the area's top
rated service companies. During the last two years the Company has grown from
319 ValueStar Certified licensees to 1,188 at June 30, 1998 while maintaining
renewal rates of more than 70%. Management estimates that each licensee
generates an average of $1,500 in revenue during the first twelve months and
additional recurring revenues in future periods from renewals. The Company's
goal in Northern California is to attain a base of 2,000 - 3,000 business
licensees during the next two years while expanding to new major metropolitan
regions of the U.S.
The Company believes that there is a compelling consumer and business market
need for unbiased ratings of local services throughout America. All regions of
the country are believed to contain fragmented, highly competitive local service
industries - creating a large number of choices for consumers. The proliferation
of media and billions of dollars of local business advertising containing
conflicting quality claims increases the risk to consumers in selecting between
competing services. And the Company expects that the large number of dual
working households contribute to reducing the time available for shoppers' to
perform their own research. Management believes similar factors have contributed
to the growing popularity and extensive use of various product ratings by
consumers.
The Company's searchable database of top-rated local companies leverages a chief
advantage of the Internet - the ability to access changing
"pocketbook-important" information through a simple user interface, 24 hours a
day, 7 days a week. In addition to anytime access to ValueStar ratings,
consumers directly access and communicate with top-rated service companies
through e-mail and Web links within ValueStar's WWW.VALUESTAR.COM Web site.
After conducting a search for a specific type of top-rated business, consumers
are also able to conduct their own "shopping auction" by using ValueStar's
SmartShopper(TM) service to send their requirements to selected top-rated
companies with one simple form.
Each ValueStar licensed business uses the ValueStar Certified logo in their own
sales and marketing communications. ValueStar's certification mark piggybacks on
the phone and in-person sales presentations of licensees and in their Yellow
Page, newspaper, flyer, brochure, TV, radio and other advertising - generating
millions of consumer impressions of the Company's rating brand each year. In
Northern California, the Company estimates that its growing base of 1,188
business licensees will use the ValueStar Certified logo in more than $24
million of local advertising and sales promotions in the next year. This
cooperative branding (co-branding) helps to create a powerful brand with wide
consumer awareness, drives consumers to the Company's Web site and CVR
publication and increases sales of affiliated information materials and services
to licensees.
As creator of this new category, the Company's objective is to leverage its
leading position in Northern California to become the leading national rating
brand of local service companies. The Company's goal is to expand marketing and
rating activities into additional regions in the United States while maintaining
high business renewal rates, increasing brand recognition and developing
incremental revenue opportunities. The Company will be required to focus
significant management and financial resources to roll out the sales, marketing
and research model used in Northern California to new regions. The Company's
planned growth will require additional financing and more management and there
can be no assurance the Company can obtain expansion financing or develop
management depth to expand to new markets from its Northern California base. See
"Item 6. Management's Discussion and Analysis or Plan of Operation - Business
Risks."
History of Development
The Company was incorporated in the State of Colorado on January 28, 1987 as
Carson Capital Corporation and on September 21, 1992 its name was changed to
ValueStar Corporation. The Company was inactive until entering into an Agreement
and Plan of Reorganization dated June 27, 1992 with ValueStar, Inc., a
California corporation and its sole shareholder James Stein (currently
President, Chief Executive Officer and a Director) whereby ValueStar, Inc.
became a wholly-owned subsidiary of the Company. The acquisition was accounted
for as a recapitalization of ValueStar, Inc. with
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ValueStar, Inc. as the acquirer of ValueStar Corporation in a reverse
acquisition. On September 21, 1992 the total authorized shares was reduced from
500,000,000 common shares to 20,000,000 common shares with a par value of
$.00025 per share. On April 16, 1997 the Company's shareholders approved the
amendment of the Company's articles of incorporation to authorize the issuance
of a maximum of 5,000,000 shares of preferred stock, $.00025 par value per
share. No preferred shares are outstanding.
The Company's operations are conducted through its wholly-owned subsidiary
ValueStar, Inc. which was incorporated on September 5, 1991. Initial business
organization and development activities commenced September 22, 1990 and until
September 5, 1991 the business was operated as a sole proprietorship by James
Stein.
During late 1990 and 1991, James Stein developed the basic operating concept of
ValueStar Certified. In March 1991, Mr. Stein engaged San Francisco State
University (SFSU) to conduct a consumer feasibility study to determine the
potential influence of ValueStar Certified on consumers and a service business
feasibility study to determine the potential market for ValueStar Certified
among providers of consumer services (service providers) in the Bay area. In
October 1991 base-line consumer satisfaction and additional consumer feasibility
research was completed by The Institute of Social Research at California State -
Stanislaus (ISR). This research provided an average or benchmark customer
satisfaction rating for individual service and professional industries targeted
by the Company.
Based on the information from those studies and research and using Mr. Stein's
own research and prior experience in the Yellow Page publishing industry, during
late 1991 the Company developed initial marketing and support materials. The
Company also began a relationship by engaging The Public Research Institute
(PRI), an auxiliary unit of SFSU to perform or audit surveys of each ValueStar
business applicant's former customers to provide a confidential, unbiased and
scientific survey of customer satisfaction. PRI is operated by faculty of SFSU
and employs students and others to conduct research and surveys primarily for
governmental organizations. Although PRI commenced providing individual business
surveys in early 1992, the relationship was formalized into a written contract
in October 1992, with the latest renewal contract effective April 30, 1997.
The Company's sales and licensing activities commenced in the greater San
Francisco, California area (Bay area) in 1992. In mid-1994 the Company added the
CVR publication to the program and on January 1, 1996 the Company launched its
Internet strategy with its own World Wide Web ("Web") site at WWW.VALUESTAR.COM.
In July 1996 the Company expanded to the greater Sacramento, California area and
in 1998 expanded to two additional Northern California counties. At June 30,
1998 the Company was rating businesses in 17 counties in Northern California
which it considers as one market region.
Based on its success in Northern California, in July 1998 the Company commenced
initial marketing to service businesses in the greater Los Angeles area targeted
as its second major market region.
Industry Background
The U.S. market research industry consists of a number of large national
research companies and many small specialty research companies. Total U.S.
market research expenditures exceeded $3.8 billion in 1997 according to the June
1998 issue of Marketing News. And Marketing News estimated that over $320
million of market research expenditures were for customer satisfaction research.
The result of the Company's customer satisfaction research and service rating is
delivered to consumers in the form of a certification mark. The certification
mark industry includes trade association and various accrediting marks. Examples
of such marks include the Good Housekeeping Seal, AAA Approved Auto Repair and
various lodging and restaurant industry ratings and marks. Since ValueStar
provides a resource for consumers to contact to obtain a particular category of
business it also shares aspects of referral services and agencies such as 1-800
Dentists, medical and contractor referrals. And since the Company publishes and
distributes a periodic listing of businesses rated high in customer satisfaction
it also shares industry characteristics of service guide publishers and the
yellow pages industry. And finally the Company maintains an Internet site of
qualifying service businesses and consumer information sharing aspects of the
growing market for Internet content such as electronic yellow pages,
directories, and city guide information services.
The total dollar value of consumer services transacted in the United States in
categories rated by ValueStar is estimated at over one trillion dollars annually
based on U.S. Department of Commerce statistics. The Company believes that most
of these services are transacted on a localized basis and there is a need and a
demand for local ratings of service providers comparable to that available on
many products. Management believes, other than Northern California, that the
more than
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six million businesses in the United States (estimated by the Company from data
supplied by American Business Information) that make up the service and
professional business market are not currently being rated on customer
satisfaction. And although directory type information is available from yellow
page listings and city guide services and certain information about complaints
is available through the Better Business Bureau, the Company's research
indicates consumers want to know which companies have been rated high in
customer satisfaction.
ValueStar and the Internet
The Internet and its World Wide Web is an increasingly significant global
interactive medium for communications, content and commerce. The Internet
provides organizations and individuals with new means to conduct business.
Commercial uses of the Internet include business-to-business and
business-to-consumer transactions, product marketing, advertising,
entertainment, electronic publishing, electronic services and customer support.
International Data Corporation ("IDC") estimates that the number of Web users
worldwide will increase from 69 million at the end of 1997 to 320 million by the
year 2002. IDC estimates that the total value of goods and services purchased on
the Internet was $2.6 billion in 1996 and will increase to $220 billion by the
year 2001. According to a CommerceNet/Nielson survey, as of March 1997, shopping
was one of the most popular activities on the Internet and that a large growing
majority of Internet users (73%) spend some portion of their time on-line
searching for information about a specific product or service.
For consumers, the Web brings information and services to the home with
unparalleled usefulness and immediacy. The Company believes that although
certain services such as travel are experiencing rapid Internet growth, the lack
of standardized, independent and unbiased consumer information will impede the
growth of local services being transacted on the Internet. As a result, the
Company believes that Internet directory listings will only add to the consumer
information overload.
Many Internet content providers rely on an advertising model like magazines and
broadcast television or are seeking a formula to charge consumers for use like
cable television. To date, the Company does not believe either model has had
broad based financial success. While providing ValueStar's proprietary branded
content of top-rated service businesses on the Internet is a valuable component
of the Company's strategy to reach consumers and support its licensees, the
Company is not dependent on the Internet as its basic revenue source. However,
the Company believes there are opportunities to leverage its proprietary content
to generate future Web and Web-related revenues.
The ValueStar Solution
The Company's concept of a local standardized rating of service and professional
firms by their own customers was created and developed on the premise that
consumers are inundated with claims from businesses communicated through a
growing media base and have rightly become increasingly skeptical. For
businesses, the Company believes it is increasingly difficult and costly for
them to differentiate on quality or customer satisfaction due to the
proliferation of claims, the growth of new media outlets, competition and
increasing consumer skepticism. The Company also believes consumers want to know
which businesses are better than others and to have the ability to cut through
the media glut of information. The Company believes this desire and need for
unbiased information has been a factor in the growth of Consumer Reports
magazine (product evaluations and ratings), J.D. Powers (customer satisfaction
ratings on vehicles, computers and other businesses) and the growth experienced
by consumer and market research companies.
The Company believes the factors affecting the selection of a local service are
different than those involving a widely available product. Typically, compared
to a product purchase, a consumer has more service provider choices from which
to discern, the quality level of services is less consistent, it is more
difficult to experience or compare a service prior to purchase, services cannot
be returned and therefore the entire decision process is riskier and more
frustrating for consumers. ValueStar Certified is designed to respond to these
factors by providing consumers and businesses with important customer
satisfaction information delivered in various media through a recognizable and
easy-to-use certification mark. One of the most important attributes of a
certification mark is its availability at the moment of decision.
The Company believes the rapidly growing Internet environment is an excellent
medium for delivery of ValueStar Certified rating content and related
information. The Company's searchable database of top-rated local companies
leverages a chief advantage of the Internet - the ability to access changing
"pocketbook-important" information through a simple user interface, 24 hours a
day, 7 days a week. The Company also believes that "pocketbook" or financial
related referential information is a rapidly growing use of the Internet and is
sought after by on-line users. ValueStar's listings of
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quality businesses and consumer information is available to Internet users free
of charge allowing them to reduce the risk and guesswork associated with
selecting local service or professional businesses.
ValueStar Services to Consumers
Consumers use ValueStar Certified ratings to quickly identify top-rated local
service and professional businesses (including auto, home, health, personal and
professional providers of services) and to make better shopping choices. The
Company's rating is based on high customer satisfaction which management
believes is intuitively logical to most consumers. In a study conducted by PRI
in 1993 and updated through 1996, PRI stated that 2 of 3 customers who knew a
business had earned ValueStar Certified were influenced by this factor in
selecting the business.
The Company's semi-annual distribution of the CVR publication provides consumers
with an easy reference list of businesses rated high in customer satisfaction, a
quality "yellow pages" listing. The July 1998 semi-annual edition was
distributed to approximately 200,000 homes and businesses in the Northern
California market including approximately 25,000 to requesting Consumer
ValueStar Club members developed through phone, mail and Internet queries.
ValueStar Consumer Club members receive the CVR publication free each six months
along with prizes and other benefits offered from time to time by the Company.
The Company intends to add to its club member benefits in future periods to
further enhance the ValueStar offering to consumers.
In addition to anytime access to ValueStar ratings, consumers can directly
access and communicate with top-rated service companies through e-mail and Web
links within ValueStar's WWW.VALUESTAR.COM Web site. After conducting a search
for a specific type of top-rated business, consumers are also able to conduct
their own "shopping auction" by using ValueStar's SmartShopper service to send
their requirements to selected top-rated companies with one simple form. The
Company intends to continue to enhance its Internet offering to consumers and
add features and additional benefits.
The Company engages in marketing and promotion activities to create and enhance
consumer and business awareness of the meaning and significance of the ValueStar
Certified certification mark and the value of the Company's rating process.
These activities include public relations efforts, community involvement and
direct advertising. Consumers are also broadly exposed to the certification mark
through the advertising and promotional efforts of licensees who use the
certification mark to distinguish themselves as being rated high in customer
satisfaction. Since the certification mark is displayed in a wide variety of
media, consumers use the certification information quickly and conveniently, all
at no charge.
The Company believes that as a given market area matures, consumers will
increasingly rely on ValueStar Certified in their shopping decisions as a result
of growing awareness and a larger base of qualified businesses.
ValueStar Services to Business Owners
ValueStar business licensees use ValueStar Certified to bring in more customers,
convert shoppers to buyers, reduce pricing pressure on services (research
conducted for the Company by ISR in 1991 indicated that 70% of consumers would
pay 10% or more for services from companies that could indicate they earned
ValueStar Certified), distinguish services from competitors, improve customer
loyalty, increase customer referral rates, speed up the selling cycle, improve
employee morale, enhance marketing and advertising promotions and improve
business reputation.
Management believes that one of the most critical factors indicating business
satisfaction of the Company's services and which directly relates to the
long-term success of the Company are renewal rates of licensees. During the last
two fiscal years ending June 30, 1998 more than 70% of licensed businesses have
renewed their licenses each year indicating strong business acceptance of the
ValueStar Certified program.
The Company's CVR publication provides licensees important and credible exposure
to new prospective customers. Management believes the publication also enhances
the business offering and provides a periodic deadline to encourage applicants
to apply for rating by a specific date. The Company's free listing of qualified
businesses on its Internet site offers the small business owner a presence on
the World Wide Web at no additional cost. The Company's ValueStar SmartShopper
service offers businesses Web generated traffic at minimal cost. ValueStar
offers businesses the opportunity to expand their CVR and Internet listings for
an additional fee and to link their Internet site with the ValueStar Web site.
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An important part of the ValueStar program is its daily use by qualified
licensees. A ValueStar field consultant provides a personal orientation to each
passing business owner and their employees informing them of the significance of
earning the certification mark and educating them on how to use the achievement
in promotional programs and customer encounters. A comprehensive ValueStar
manual is provided to licensees reflecting the Company's substantial experience
in use of the mark by businesses. Periodic newsletters are used to further
educate businesses on customer satisfaction topics and use of the mark to
improve business operations. Many licensees purchase copies of a Certified
Profile Brochure (customized by ValueStar for each licensee) which explains to
their customers how they qualified for ValueStar Certified.
The Company's brand recognition is significantly enhanced by its daily use by
licensees in all manners of advertising and media supplementing the Company's
marketing and promotion activities to create and enhance consumer, business and
brand awareness.
The Company intends to develop and offer other innovative features to its
program and offer new services to business members in the future. ValueStar also
intends to create alliances to link its proprietary information content to other
Internet yellow page sites, city guides and similar services.
At June 30, 1998, the Company had 1,188 active licensees in Northern California.
ValueStar Strategies
The Company's objective is to be the leading rating brand of local service
companies in America. The Company intends to leverage its pioneer position by
focusing its strategy on rapidly rolling out its service in the most attractive
markets, establish a dominant position in these markets and use its rating
service as a platform for multiple revenue streams. The target U.S. market
consists of over 6 million service and professional businesses and the Company's
research has targeted 2.1 million such businesses as high priority accounts in
30 major prospective market regions. The following are key elements of the
Company's strategy:
Continue Penetration of the Northern California Market - The Company
believes its renewal rates (averaging over 70% during the last two
fiscal years) indicate licensees' satisfaction with the program in
Northern California. Renewals provide the Company a continuing source
of predictable recurring revenues and an expanding licensee base
pressures other service provides to apply for the rating. The Company's
sales, marketing and promotion activities are designed to increase new
licensees, maintain high renewal rates and generate ancillary product
and service sales. A growing base of licensed businesses produces more
promotions and consumer interactions increasing ValueStar's brand
recognition and awareness. The Company intends to continue to increase
licensees in Northern California and add additional services.
Leverage Northern California's Success to New Markets - The Company
believes it has a competitive advantage to enter new regions as a
result of its experience in Northern California. The Company has
developed a comprehensive program built on a significant base of
consumer and business research. The Company has created proprietary
methods, training programs and systems necessary to minimize the number
of personnel, costs and effort associated with expanding to new
regions. And ValueStar has developed loyalty with existing business
licensees and consumers which serve as important references for new
customers. ValueStar intends to leverage its knowledge, experience and
low-cost centralized structure in its geographical expansion and
continue to build barriers to entry by competitors. Management has
designed and developed a detailed roll-out for new markets and intends
to refine this plan based on the experience being gathered from the Los
Angeles area expansion. The Company's roll-out process is expected to
enable it to commence selling to businesses in a new market within four
months of selection and to report initial revenues within six months of
initial sales while minimizing capital and personnel costs.
Create Strong Brand Recognition and Market Awareness - The Company
believes it has created the leading brand name for local service
ratings in the Northern California region. The Company believes its
brand franchise helps in marketing to business licensees and providing
benefits to consumers. In the markets it serves, the Company's strategy
is to promote, advertise and increase its visibility through a variety
of marketing, public relations and promotion activities. The Company
employs public relations, co-branding and paid advertising to increase
awareness. The CVR publication and ValueStar's Web site are important
elements of the Company's marketing and promotion activities. The
Company's brand building strategy also relies heavily on promotions and
awareness developed by business licensees in their promotions,
advertising and consumer interactions.
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Develop Incremental Revenue Opportunities - The Company seeks to
continually expand its services and benefits to consumers and
licensees. The Company believes that a significant opportunity exists
to develop incremental revenue opportunities from licensed businesses,
consumers and from use of the Company's proprietary content. This
includes expanding the product mix to businesses such as the premium
CVR and Web site listings which were added in 1996 and 1997. The
Company also believes that a high volume of quality seeking consumer
traffic on its Web site provides an attractive feature to other
businesses. A growing base of loyal ValueStar consumers is expected to
provide multiple revenue opportunities in the future.
Expand Strategic Alliances and Partnerships - The majority of the
Company's licensee growth has resulted from the Company's direct
marketing efforts and consumer and business referrals. The Company
recently developed an alliance and obtained the endorsement of the
California Optometric Association. The Company believes that as its
business and consumer membership grows there will be many more
opportunities to enter into partnerships or strategic alliances with
third parties to (i) more rapidly expand licensing nationally and
internationally, (ii) generate additional ancillary revenues, (iii)
facilitate brand awareness, (iv) provide important content to others,
(v) facilitate consumer/business transactions, and (vi) enhance third
party offerings to consumers and businesses, among other possibilities.
Management views this strategy as important to the Company's future
development. The Company has no current plans, proposals, arrangements
or understandings regarding any business or product acquisitions.
The Company's execution of the above strategies and expansion to new markets
will require additional financing and management. There can be no assurance the
Company can obtain additional expansion financing, add to its management team or
successfully leverage to new markets its Northern California experience. See
"Item 6. Management's Discussion and Analysis or Plan of Operation - Business
Risks."
ValueStar Operations
All service businesses and professionals located in market territories served by
the Company may apply to be licensed. These include more than 150 industry
categories within five broad groups: Automobile Services (examples including
auto body shops, auto repair, and towing firms), Health and Well Being Services
(examples including acupuncture, physicians and dentists and health clubs), Home
Services and Repairs (examples including alarm companies, carpet cleaners,
movers, locksmiths and roofers), Personal Services (examples including beauty
salons, limousine services and travel agents) and Professional Services
(examples including accountants, attorneys, employment services, insurance and
real estate brokers).
The Company's marketing and sales activities in Northern California have focused
on a proprietary targeted group of service and professional businesses numbering
approximately 50,000 resulting from the Company's research identifying the high
priority accounts among the approximately 175,000 service and professional
businesses in the area (as computed by the Company from information provided by
American Business Information).
The Company uses direct mail, advertising, telephone sales, videotapes and other
materials designed for businesses and emphasizing the benefits of becoming a
ValueStar licensee. Effective January 1, 1997 substantially all new
solicitations and rating sales were consolidated in a telephone sales
department. Licensing, renewals and ancillary sales are made by field consultant
personnel.
The Company has modified its licensing and rating fees from time to time. The
Company from time to time provides discounts, incentives and satisfaction
guarantees to first time applicants and also from time to time extends payment
terms on the annual license fees. The licensing fee for businesses scales upward
with business size and for multiple location businesses. The Company estimates
that each new licensee provides average annual revenue of approximately $1,500
from all sources.
Once a prospective licensee agrees to be rated and pays an initial research fee
approximating $470 (subject to promotional discounts), the research and rating
process begins. ValueStar employees conduct a complaint bureau status check,
license verification and insurance verification. Customer satisfaction research
surveys are performed by the Company and independently audited by PRI resulting
in a statistically computed rating score. To pass and qualify for licensing, an
applicant must score in the range of very good to outstanding as established by
ValueStar and PRI.
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At June 30, 1998 the Company employed 22 full-time equivalent research and
rating persons engaged in conducting consumer research and processing new and
renewal business licenses.
All applicant companies receive a ValueStar Research and Rating Report providing
the results of how the business rates in customer satisfaction. Successful
applicants may license the use of the ValueStar Certified mark (according to
agreed-upon guidelines specified by the terms of the license agreement) in their
advertising, collateral and sales materials, stationery, signage, announcements,
bid forms, etc. A licensee also receives a ValueStar plaque, program manual and
labels for their doors and letterhead. Licensees are listed in the Company's
semi-annual CVR publication and on the Company's Internet site.
Staffing, territories, training and compensation plans are structured to provide
continuity of field consultant contact with each licensee. The Company also
provides ongoing training emphasizing both new business and renewal development,
supports lead generation and provides sales personnel with computerized sales
support and data base systems.
Each year the Company solicits renewals from licensees. Each year renewal
accounts must pass elements of the research and rating process and every second
year they must pass the entire research and rating process.
At June 30, 1998 the Company had 12 marketing, sales and field consultant
persons engaged in making sales to new service providers and promoting the
Company's services and brand.
Competition
Although the Company is not aware of a directly competitive mark or service
targeted for a broad range of service industries, competitive offerings are
expected to develop in the future. The Company currently competes for the
limited budgets for spending on advertising and promotions among service and
professional businesses. Therefore current and potential competition includes
Yellow Page publishers, newspapers and periodicals, radio and television
stations, Internet directories and other forms of advertising employed in the
consumer service marketplace. Other current and potential competitors include
referral agencies, telephone services, complaint agencies, service guide
publishers, industry specific certification marks and others. The competition
for service business advertising and promotional funds is intense. There are a
large number of competing firms and a wide variety of product offerings. Most of
these firms are substantially larger and have greater financial resources than
the Company.
The Internet is new, rapidly evolving and intensely competitive with limited
barriers to entry. There are a number of potentially competitive companies
engaged in facilitating business on the Internet including providing more
security for consumers and greater informational content including service
business listings and information. Therefore the Company expects Internet
competition to develop and intensify in the future.
The Company believes that it provides value to licensees by providing them with
a performance rating they can use to distinguish themselves from their
competitors. The Company also believes that ValueStar Certified provides
consumers a convenient and easy-to-use method of selecting service businesses
and improving their shopping decisions. The Company believes the principal
competitive factors affecting its market include the quality and nature of its
content, ease of consumer use, marketing and sales methods and brand
recognition. Although the Company believes it is establishing a market awareness
and brand recognition in Northern California, barriers to entry by new
competitors are not significant and any such new competitors, in addition to the
direct effects of competition, may cause marketplace confusion making sales
efforts more difficult and may result in adverse pricing pressure. There can be
no assurance that the Company can maintain its competitive position or will be
able to continue to compete against existing or new competitors in the future.
Furthermore, as a strategic response to changes in the competitive environment,
the Company may make certain pricing, service or marketing decisions or enter
into new ventures or arrangements that could have a material adverse effect on
the Company's business, financial condition and results of operations.
Trademarks, Service Marks and Other Proprietary Rights
The Company owns a U.S. federally registered certification mark on "ValueStar"
and the "ValueStar Certified" symbol and has applied for protection on ValueStar
in Canada. The Company has also received a registration for "Only the Best Pass
the Test" as a service mark in the U.S. The Company considers its trademarks and
symbol to be material to the business of the Company. The Company vigorously
seeks to protect and intends to defend its trademarks against infringement and
other unauthorized use. The Company is unaware of any significant infringement
or other unauthorized use of its trademarks since inception. There can be no
assurance the Company can protect its trademarks and symbol. The loss or
infringement of the ValueStar trademark and symbol or the inability to protect
the mark adequately would have a
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material adverse effect on the business and operations of the Company. It is
possible that competitors or others will adopt service names similar to
"ValueStar" thereby impeding the Company's ability to build brand identity and
possibly leading to customer and consumer confusion.
The Company copyrights its materials and publications and seeks to maintain
certain aspects of its business operations as trade secrets. The Company has
developed consumer and business databases, training systems, software and
systems that are proprietary to the Company.
Government Regulation and Legal Issues
The Company is not currently subject to direct regulation other than federal and
state regulation applicable to businesses generally.
The Company's operations require that its certification mark only be used by
qualifying companies and that its use be discontinued if a business ceases to be
a licensee. The Company vigorously defends its contract rights including taking
legal action as required. However when and as the Company expands to new areas
and the certification becomes more recognized and valuable it will be
increasingly difficult to police unauthorized use of its certification mark or
confusing marks.
Although the Company is not a direct referral service, it may be subject to
claims by consumers for the actions of licensees. Although the Company does not
believe such a claim would have merit, the costs of defense could be
substantial. The Company does not currently carry specific insurance against
such claims and there is no assurance that the Company's general liability
coverage would cover such claims. To date the Company has not been subject to
any material claims by customers of licensees.
Employees
As of June 30, 1998, the Company employed 44 full-time persons. Two are in
senior management, 20 in marketing and sales, 19 in research and rating, and 5
in accounting and administration. The Company employs part-time personnel from
time to time and uses outside contractors for various marketing services. None
of the Company's employees are represented by a collective bargaining
arrangement and the Company has experienced no work stoppages. The Company
considers its relations with employees to be favorable.
The Company's future success will depend in large measure upon the continued
contributions of its President and CEO, James Stein and the Company's ability to
attract and retain quality sales personnel. The Company experiences competition
for qualified sales personnel who are in demand by many competitors, many with
more resources than the Company. The loss of the services of Mr. Stein could
have a material adverse effect on the Company's business. The Company entered
into a new three year employment contract with Mr. Stein effective July 1, 1998
and has a $2 million "key man" insurance policy on Mr. Stein.
Item 2. Description of Property
The Company's corporate and operating offices are located in approximately 4,800
square feet of improved office space located at 1120 and 1150 Ballena Blvd. in
Alameda, California. This facility accommodates administration, sales and
marketing and research and rating personnel. This facility is leased pursuant to
a month to month lease re-negotiated effective July 1998 at a monthly rate of
approximately $5,700. The Company or the landlord is required to provide 90 day
notice prior to any termination or vacating of the premises. The Company
believes this facility is adequate for present operations but should the Company
continue to expand into new market regions management expects additional space
will be required during the next twelve months. Management believes that
additional office space is available in the greater Oakland area should
expansion be required or should the Company be required to vacate the current
premises.
Item 3. Legal Proceedings
The Company is not involved in any threatened or pending legal proceeding other
than in the ordinary course of business.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted during the fourth quarter of the fiscal year to a vote
of security holders.
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PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Market Information
On May 28, 1997 the Company's Common Stock commenced trading and is quoted on
the National Association of Securities Dealers, Inc. ("NASD") OTC Electronic
Bulletin Board (symbol "VSTR"). The market for the Company's Common Stock has
often been sporadic and limited.
The following table sets forth the high and low bid quotations for the Common
Stock for the fiscal years ended June 30, 1998 and 1997 as provided by the NASD.
Bid Quotations
High Low
---- ---
Fiscal Year Ending June 30, 1997
Fourth Quarter (May 28, 1997 to June 30, 1997) $1.25 $1.0625
Fiscal Year Ending June 30, 1998
First Quarter $1.4375 $0.9375
Second Quarter $1.4375 $1.21875
Third Quarter $1.21875 $0.90625
Fourth Quarter $0.96875 $0.625
The above quotations reflect inter-dealer prices, without retail markup,
markdown or commission and may not represent actual transactions. Prior to
initiation of trading there was no public trading market for the Company's
Common Stock since the Company's inception in 1987.
The OTC Electronic Bulletin Board, is a screen-based trading system administered
by the NASD. Securities traded on the Bulletin Board are, for the most part
thinly traded and subject to special regulations (described below) not imposed
on securities listed or traded on the National Association of Securities Dealers
Automated Quotation ("NASDAQ") system or on a national securities exchange.
Like that of securities of other small, growth-oriented companies, the Company's
shares are expected to experience future significant price and volume
volatility, increasing the risk of ownership to investors. Sales of substantial
amounts of Common Stock in the public market by one or more holders could
adversely and dramatically affect the prevailing market price of the Common
Stock due to its thinly traded attributes. Future changes in market price and
volume cannot be predicted as to timing or extent. Any historical performance
that may develop does not guarantee or imply future performance. Future
announcements concerning the Company or its competitors, quarterly variations in
operating results, announcements of technological or service innovations, the
introduction of new products or services, changes in pricing policies by the
Company or competitors, litigation relating to services or other litigation,
changes in performance estimates by analysts or others, issuances of or
registration of additional securities, or other factors could cause the market
price of the Common Stock to fluctuate substantially. In addition, the stock
market has from time to time experienced significant price and volume
fluctuations that have particularly affected the market price of small companies
and have often been unrelated to the operating performance of particular
companies.
The Company's Common Stock is currently defined as "penny stocks" under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and rules of
the Securities and Exchange Commission thereunder. The Exchange Act and such
penny stock rules generally impose additional sales practice and disclosure
requirements upon broker-dealers who sell the Company's securities to persons
other than certain "accredited investors" (generally, institutions with assets
in excess of $5,000,000 or individuals with net worth in excess of $1,000,000 or
annual income exceeding $200,000, or
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$300,000 jointly with spouse) or in transactions not recommended by the
broker-dealer. For transactions covered by the penny stock rules, the
broker-dealer must make a suitability determination for each purchaser and
receive the purchaser's written agreement prior to the sale. In addition, the
broker-dealer must make certain mandated disclosures in penny stock
transactions, including the actual sale or purchase price and actual bid and
offer quotations, the compensation to be received by the broker-dealer and
certain associated persons, and deliver certain disclosures required by the
Securities and Exchange Commission. Consequently, the penny stock rules may
affect the ability of broker-dealers to make a market in or trade the Company's
shares and thus may also affect the ability of purchasers of shares to resell
those shares in the public markets.
The Company had 142 holders of record of its Common Stock at June 30, 1998,
which the Company believes represents approximately 300 beneficial owners. The
Company has never paid a cash dividend on its Common Stock and does not expect
to pay dividends in the foreseeable future.
Recent Sales of Unregistered Securities
The following is a description of equity securities sold by the Company during
the year ended June 30, 1998 that were not registered under the Securities Act
and not previously reported in prior quarterly filings:
On May 15, 1998 the Company completed the private offering and sale for
cash of an aggregate of $525,000 of unsecured 6% Convertible
Subordinated Promissory Notes due June 30, 2001 ("Notes") to four
investors. The principal and interest amount of each Note may at the
election of the Note holder be converted, in whole or in part, into
fully paid and nonassessable shares of common stock, $.00025 par value,
of the Company, at a conversion price of $1.00 per share. The Notes may
be called by the Company for conversion if the closing bid price of the
Company's common stock equals or exceeds $2.00 per share for ten
consecutive trading days and certain other conditions are met.
The Note purchasers were granted warrants to purchase an aggregate of
262,500 common shares of the Company at an exercise price of $1.25 per
share ("A-Warrants") and warrants to purchase an aggregate of 262,500
common shares of the Company at an exercise price of $2.00 per share
("B-Warrants") until April 30, 2003 (collectively the "Warrants"). The
A-Warrants are redeemable by the Company at $.01 per share if the
closing bid price of the Company's common stock equals or exceeds $3.00
per share for twenty consecutive trading days and certain other
conditions are met. The B-Warrants are also redeemable by the Company
at $.01 per share if the closing bid price of the Company's common
stock equals or exceeds $4.50 per share for twenty consecutive trading
days and certain other conditions are met.
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 Regulation D thereunder and an appropriate legend
was placed on the Notes and Warrants and will be placed on the shares
issuable upon conversion of the Notes or exercise of the Warrants
unless registered under the Act prior to issuance. The securities were
sold by the Company without an underwriter. The Company has agreed to
file a registration statement on the common stock obtained on
conversion of the Notes and Warrants and to certain piggy-back
registration rights, subject to certain limitations.
Item 6. Management's Discussion and Analysis or Plan of Operation.
Overview
The Company's revenues are 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. 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 license agreement specifying the conditions and limitations
on using the certification. Research and rating fee revenue, ranging from $470
to $570, is deferred until the research report is delivered. Sales of
information materials and other services are recognized as materials are
delivered or shipped or services rendered. The Company from time to time
provides discounts, incentives
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from basic pricing and may provide satisfaction guarantees to first time
applicants and also from time to time extends payment terms on the certification
fee.
The Company expenses research and rating costs as incurred. Costs incurred in
printing and distributing the Company's 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 a twelve month
period on a straight-line method. These costs, which relate directly to targeted
new licensee solicitations, primarily include targeted direct-response
advertising programs consisting primarily of telephone sales 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.
The net effect of capitalizing and amortizing deferred costs was an increase in
costs and expenses of $3,000 for the fiscal year ended June 30, 1998 and a
reduction in costs and expenses of $65,000 for the fiscal year ended June 30,
1997.
The Company estimates new licensees have an average life exceeding four years
based on historical renewal rates. Accordingly, the Company believes deferred
costs (which are amortized over twelve months) will be realized from future
operations. 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 June 30, 1998 had an
accumulated deficit of $5,418,665. There can be no assurance of future
profitability.
Effect of Growth in New Licensees and License Renewals
The Company's business revenue model, similar to other membership based
organizations or recurring revenue businesses, is predicated on growing new
members (certification licensees) and maintaining high renewal rates. The
Company's renewal licensees contribute higher gross margins than new applicants
due to reduced sales and rating costs. Also a growing and larger base of
licensees reduces the costs (relative to revenues) associated with maintaining
the VALUESTAR.COM Internet site, marketing and promoting the Company's brand
including printing and distributing the Company's CVR publication, and
maintaining general and administrative support. The marginal fixed costs
associated with more licensees is minimal compared to base marketing, printing,
distribution and general and administrative 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 licensees, the Company incurs substantial costs towards this
activity. Currently the Company is only deferring direct telephone sales costs
and amortizing them over twelve months. Other costs are expensed as incurred.
At June 30, 1998, the Company had 1,188 licensees, compared to 319 licensees on
June 30, 1996 an increase of 272%. The following table illustrates the changes
in licensees and renewal rates for the fiscal years ended June 30, 1998 and 1997
in one market region, Northern California:
Fiscal Year Ended June 30,
1998 1997
---- ----
Licensees - beginning of period 745 319
Adjustments (1) (20) (4)
Licensees up for renewal 725 315
Renewals 532 235
Renewal Percentage 73% 75%
New licensees 619 510
Licensees - end of period 1,188 745
(1) Non passing renewals, out-of-period renewals and terminations.
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The Company believes as a market region matures, and the Company has a larger
base of licensees, fixed and indirect costs will decline as a percentage of
revenues. The Company also believes that the opening of new markets will provide
additional revenues to cover certain fixed selling, marketing, administration
and overhead costs. With the establishment of the new Southern California region
(Los Angeles area) in July 1998, the Company intends to monitor each region's
operating results and their contribution to corporate administration and costs.
Management believes that the Northern California market has achieved a licensee
base sufficient to provide positive regional operating margins (prior to
allocation of corporate administration and overhead) in future periods, although
there can be no assurance thereof. Management also estimates that it could
reduce costs to achieve break-even operations on the current level of new sales
and the existing base of renewing licensees.
Future operations are impacted by changes in the cost structure and elections
regarding advertising, promotions and growth rates (due to the lower margins
associated with first year licensees). 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.
Effective January 1, 1997 the Company changed its business marketing focus to
telephone sales from a field sales force. This has resulted in an increase in
applicants for ratings and reduced unit sales costs. In December 1997 the
Company made a change from using an outside vendor to perform customer
satisfaction research on applicants to in-house employees. The Company expensed
approximately $40,000 in startup costs for this change in the third quarter of
fiscal 1998 related to setting up the in-house research call center and hiring
and training employees. This change has reduced unit rating costs and management
believes it has improved quality control over the research and rating process.
However the change resulted in a delay in completing pending ratings during
fiscal 1998 thereby reducing reported revenues. Management expects to complete
any delayed ratings in the first six months of fiscal 1999.
Because of the changes, at June 30, 1998 the Company had 410 (349 new and 61
renewal) prospective licensees in the application and rating phase. At current
new sales rates the normal number of pending prospective licensees would be
approximately 345. Generally there is a 60 day period between the initial
sign-up of an applicant and the execution of a license agreement for successful
applicants. Based on management's experience, these 410 prospective licensees
are expected to represent over $330,000 of revenues that should be recognized in
the first quarter of fiscal 1999 (generally analogous to backlog).
Results of Operations
Revenues. Revenues consist of certification fees from new and renewal business
licensees, rating fees from new and renewal business applicants, sale proceeds
from information materials and premium listings, and other ancillary revenues.
The Company reported total revenues of $1,601,406 for the fiscal year ended June
30, 1998, a 52% increase over revenues of $1,054,530 for the prior fiscal year.
During fiscal 1998 certification license fees accounted for 76% of revenue (also
76% for the prior year). The growth in revenues is the result of improved new
sales velocity and the impact of a larger base of business member renewals.
Revenues for the fourth fiscal quarter ended June 30, 1998 were $508,829
compared to $476,355 for the prior year comparable quarter or a 7% increase.
Management believes this limited increase is the direct result of June 30, 1998
pending prospective licensees. The higher number of pending prospective
licensees at June 30, 1998 over normal levels represents an estimated $60,000 of
pending revenue expected to be realized in the first six months of fiscal 1999
rather than the fourth quarter of fiscal 1998 due to this timing difference.
Management expects by the end of the second fiscal quarter of 1999 that the
number of pending licensees will represent approximately 60 days or less of
licensable sales.
Revenues can vary from quarter to quarter due to the impact of distributing the
semi-annual Consumer ValueStar Report ("CVR") publication to consumers,
seasonality, effectiveness of sales methods and promotions, levels of
expenditures targeted at prospective licensees, the numbers of certification
licensees 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 licensing 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. Included in cost
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of revenues in the third fiscal quarter of 1998 were startup costs of
approximately $40,000. Cost of revenues represented 36% of sales during the
fiscal year ended June 30, 1998 (33% in the fourth quarter), a reduction from
50% for the fiscal year ended June 30, 1997 (45% for the fourth quarter). During
the current year, the Company made changes to make ratings more efficient and
more economical. The increased volume of revenues in the current year also
reduces the percentage of revenues associated with certain fixed rating costs.
Cost of revenues may vary significantly from quarter to quarter both in amount
and as a percentage of sales.
Sales Costs. Sales costs for the fiscal year ended June 30, 1998 were $902,320,
or 56% of revenues, compared to $749,100, or 71% of revenues for the prior year.
In the prior year, the Company relied on a direct sales force supported by
direct mail to generate sales. In the current year, the Company had implemented
the telephone sales approach, also supported by direct mail. This has resulted
in reduced unit selling costs. Also in the current year approximately 37% of
certification license fees came from renewals with limited sales costs, compared
to approximately 12% of license fees coming from renewals in the prior year. 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, 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
$746,639 during fiscal 1998 comparable to $739,455 incurred for fiscal 1997.
Included in marketing and selling expenses in each year were printing and
distribution costs of the Company's CVR publication targeted at consumers.
Printing and distribution costs of $232,000 in fiscal 1998 were comparable to
the fiscal 1997 total of $233,000, however the company was able to print and
distribute more copies with additional pages due to better pricing. During
fiscal 1998 the Company expended $310,000 on paid advertising targeted at
expanding consumer awareness of ValueStar Certified. Paid advertising of
$170,000 was employed in the prior year. During fiscal 1998 the Company expended
$77,000 less on general marketing and staff costs and $65,000 less on
communications staffing and production, electing to focus on paid advertising to
build brand and consumer awareness. Generally the first and third fiscal
quarters have increased costs because the CVR publication is printed and
distributed during these quarters. Also, the Company generally expends less
advertising in the second fiscal quarter due to higher media costs in this
calendar fourth quarter.
Marketing and promotion expenses are subject to significant variability based on
decisions regarding the timing and size of distribution of CVR 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 supports a growing licensee base
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
management activities, including legal, accounting and other professional fees.
They totaled $827,955 for the fiscal year ended June 30, 1998, compared to
$523,854 for the comparable prior year, an increase of $304,101. The major
increases include a $47,000 increase due to costs of increased personnel, a
$22,000 increase in occupancy costs due to additional personnel and the startup
of in-house research, a $32,000 increase in guarantees and allowance for bad
debts due to increased volumes, a $90,000 increase in corporate costs (legal,
accounting, filing, and consulting) due to the public trading of common shares
of the Company and the incurrence of $112,000 of non-cash compensation expenses
related to consulting and guarantees on financings during the 1998 fiscal year.
Management anticipates that general and administrative costs will continue to
exceed prior period levels due to increased personnel, added facilities and
related expenses 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 fiscal 1998 of $119,023, an increase of
$110,023 from the prior year, resulting from the use of debt financing to fund
operations. The $119,023 included $12,532 of non-cash interest resulting from
the amortization of the discount attributable to the value assigned to warrants
issued with debt.
Net Loss. The Company had a net loss of $1,577,181 for the fiscal year ended
June 30, 1998, compared to a net loss of $1,497,812 for the fiscal year ended
June 30, 1997. The Company anticipates it will continue to experience operating
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losses until it achieves a critical mass base of renewing licensees as it
pursues aggressive growth in new licensees. As the Company is rapidly increasing
its business volume (new and renewal) 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 licensees and renewal licensees 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 $1,629,721 for the fiscal year ended June 30, 1998, and $1,519,799 for the
fiscal year ended June 30, 1997. At June 30, 1998 the Company had working
capital of $168,396. For the fiscal year ended June 30, 1998 the negative cash
flow from operating activities was due to the continued operating losses, heavy
investment in new licensee growth and startup of the in-house research
department. Included in working capital at June 30, 1998 is net accounts
receivable of $361,369, representing approximately 82 days of revenues and an
annualized turnover ratio of approximately 4.4 times. This compares favorably to
approximately 102 days of revenues and turnover of approximately 3.6 times at
June 30, 1997. The improved turnover and reduced accounts receivable level
results from increased revenues and concentrated collection efforts. Management
believes that 60 to 90 days sales in receivables is reasonable based on the
nature of the Company's business and the terms it provides licensees. At June
30, 1998 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, shareholder loans subsequently converted to common stock and debt
financing. During fiscal year ended June 30, 1998 the Company obtained $250,000
from a bank line of credit, $1,000,000 in a 12% Note financing, $525,000 in 6%
Convertible Subordinated Promissory Notes and $227,500 from common stock sales.
The bank line of credit is guaranteed by certain officers, directors and a
shareholder. Other than the credit line, 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.
Other than cash on hand of $398,604 at June 30, 1998 and net accounts receivable
of $361,369, 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 licensee
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 has plans to expand into new markets and expects that it will
require, in addition to refinancing or repaying the $250,000 bank line of
credit, a minimum of $750,000 to finance planned expanded operations during the
next twelve months. This estimate is based on anticipated renewal revenues,
anticipated sales levels, licensee growth and expected operating costs. However
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 additional funds not be available or planned operations
not meet management's expectations, the Company may be required to curtail or
scale back staffing, advertising and other marketing expenditures and general
operations in more reliance on higher profitable renewals and limit new licensee
growth. There can be no assurance that additional funding will be available or
on what terms. Potential sources of such funds include exercise of outstanding
warrants and options, loans from existing shareholders or other debt financing
or additional equity offerings.
Tax Loss Carryforwards
As of June 30, 1998, the Company had approximately $4,839,300 of federal tax
loss carryforwards. A valuation allowance has been recorded for the net deferred
tax asset of $1,452,000 arising primarily from tax loss carryforwards because,
in the Company's assessment, it is more likely than not that the deferred tax
asset will not be realized.
New Accounting Pronouncements
The Financial Accounting Standards Board ("FASB") has issued SFAS No. 130
"Reporting Comprehensive Income", SFAS No. 131 "Disclosures About Segments of an
Enterprise and Related Information", SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits" and SFAS No. 133 "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 130 establishes
standards for reporting and display of comprehensive income, its components and
accumulated balances. Comprehensive income is defined to include all changes in
equity except those resulting from investments by owners and distributions to
owners. Among other disclosures, SFAS No. 130 requires that all items that are
required to be recognized under current accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial
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statements. SFAS No. 131 supersedes SFAS No. 14 "Financial Reporting for
Segments of a Business Enterprise." SFAS No. 131 establishes standards on the
way that public companies report financial 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 disclosure regarding products and services,
geographic areas and major customers. SFAS No. 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. SFAS No. 132
standardizes the disclosure requirements for pensions and other postretirement
benefits and requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis. SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including derivative instruments embedded in other
contracts, and for hedging activities.
SFAS No. 130 and No. 131 are effective for financial statements for periods
beginning after December 15, 1997 and require comparative information for
earlier years to be restated. 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. The adoption of these statements will have no material impact on the
Company's consolidated financial statements and the results of operations and
financial position will be unaffected by their implementation.
Year 2000 Compliance
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.
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. 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.
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. The
Company is currently taking steps to ensure that its computer systems and
services will continue to operate on and after January 1, 2000. However, there
can be no assurance that Year 2000 problems will not occur with respect to the
Company's computer systems. Furthermore, the Year 2000 problem may impact other
entities with which the Company transacts business, and the Company cannot
predict the effect of the Year 2000 problem on such entities or the resulting
effect on the Company. As a result, if preventative and/or corrective actions by
the Company and those the Company does business with are not made in a timely
manner, the Year 2000 issue could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
has not yet developed a contingency plan to operate in the event that any
noncompliant critical systems are not remedied by January 1, 2000, but the
Company intends to develop such a plan in the near future.
Business Risks
This quarterly report contains a number of forward-looking statements which
reflect the Company's current views with respect to future events and financial
performance. These forward-looking statements are subject to certain risks and
uncertainties, including those discussed below, that could cause actual results
to differ materially from historical results or those anticipated. In this
report, the words "anticipates," "believes," "expects," "intends," "future,"
"goal," "objective" and similar expressions identify forward-looking statements.
Readers are cautioned to consider the specific risk factors described below 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 these forward-looking statements, to reflect events or
circumstances that may arise after the date hereof.
Absence of Profitable Operations and Possible Insufficiency of Capital
- The Company has incurred significant operating losses since
inception. The Company incurred an operating loss of $1.5 million for
the fiscal year ended June 30, 1997 and $1.5 million for the fiscal
year ended June 30, 1998. The Company has had limited financial results
upon which investors may base an assessment of its potential. Further,
the Company's operating results have fluctuated in the past and are
expected to fluctuate in the future due to a number of factors, many of
17
<PAGE>
which are outside the Company's control. There can be no assurance that
profitable operations can be achieved, and additional capital will be
required to maintain growth.
Possible Inability to Continue as a Going Concern - The Company has
suffered recurring losses from operations. This factor, in combination
with (i) reliance upon debt and equity financing to fund losses from
operations and cash flow deficits, (ii) material net losses and cash
flow deficits from operations and (iii) the possibility that the
Company may be unable to meet its debts as they come due, raise doubt
about the Company's ability to continue as a going concern. The
Company's ability to continue as a going concern is dependent upon
achieving and maintaining profitable operations, cutting back on the
rate of growth or obtaining additional capital, as to which no
assurance can be given.
Competition and Technological Change - The possibility exists that a
business rating service and certification mark similar to or
competitive with that of the Company will be developed. It is also
possible that future competition will try to duplicate the Company's
concept. The Company could face head-on competition from vastly larger
and better financed companies with the means to launch a high-impact
campaign locally or nationally. Technological changes in the manner of
selecting service businesses and communicating information to consumers
could also have a negative impact on the Company's business. As a
provider of consumer information through the Internet and various
media, the Company will be required to adapt to new and changing
technologies. There can be no assurance that the Company's services
will remain viable or competitive in the face of technological change.
Dependence on Officers and Directors - The Company is substantially
dependent upon the experience and knowledge of its officers and
directors. The loss to the Company of such persons, particularly Mr.
James Stein, could be detrimental to the Company's development,
especially since it may not have the funds to hire management personnel
with the requisite expertise. The Company has a $2 million key-man life
insurance policy on Mr. Stein.
Reliance on Other Third Parties - The Company's operations depend on a
number of third parties. The Company has limited control over these
third parties and other than PRI, has no long-term relationships with
them. The Company does not own a gateway onto the Internet, but instead
relies on an Internet service provider to connect the Company's Web
site to the Internet. Disruption, temporary or prolonged, of its Web
site could have a material adverse effect on the Company's business.
The Company is dependent on third parties for printing and distribution
of its CVR report. Failure to maintain satisfactory relationships on
acceptable commercial terms with such third parties could affect the
timing and quality of the Company's services to customers and adversely
affect its operating results.
Developing Market; Uncertain Acceptance - Although the Company believes
that the factors driving its business acceptance in the Northern
California market are similar throughout the United States, there can
be no assurance of widespread acceptance. As a new and evolving
business format, demand and market acceptance are subject to a high
level of uncertainty. The Company believes that the evolution of its
business will depend in part on increasing brand recognition.
Development and awareness of the Company's rating brand will depend on
the co-branding efforts of the Company and its licensees and the
success in maintaining its position as a leader in the rating of local
service businesses.
Managing a Growing and Changing Business - The Company continues to
experience changes in its operations resulting from expansion of its
business and other factors which has and may place demands on its
administrative, operational and financial resources. The Company's
future performance will depend in part on its ability to manage growth
and to adapt its administrative, operational and financial control
systems to the needs of an expanding entity. The failure of management
to anticipate, respond to and manage changing business conditions could
have a material adverse effect on the Company's business and results of
operations. Future growth will also require additional management.
There can be no assurance that the Company can attract appropriate
personnel in the future to manage a growing and changing business.
Reliance on and Protection of Trademarks and Intellectual Property -
The Company regards its trademarks, copyrights, trade secrets and
similar intellectual property as critical to its success and the
Company relies on a combination of copyright and trademark laws, trade
secret protection, confidentiality and contractual provisions with
certain employees and third parties to establish and protect its
proprietary rights. There can be no assurance
18
<PAGE>
that third parties will not infringe upon or misappropriate the
Company's proprietary rights. Any misappropriation by competitors or
unauthorized use by service businesses of the trademark ValueStar or
the ValueStar Certified certification mark could have a material
adverse impact on the Company's operations. A number of companies claim
proprietary rights to certain aspects of Internet operations. Although
the Company is not aware of any aspect of its operations that may
infringe on the rights of other companies, there is no assurance such
claims will not arise in the future. Although the Company has limited
resources to protect its rights, the Company intends to take aggressive
actions to protect its certification mark.
Government Regulation and Legal Uncertainties - The Company is not
currently subject to direct regulation other than federal and state
regulation applicable to businesses generally. However, the liability
for Internet content is an evolving area of litigation and regulation
and the Company's operations may be impacted by such litigation and
regulation in the future. The Company may also be subject to uninsured
claims by consumers for actions of licensees or other claims incident
to its business operations.
Stock Trading Risks and Uncertainties - See Part II - Item 5 "Market
for Common Equity and Related Stockholder Matters."
Item 7. Financial Statements
The consolidated financial statements of the Company required to be included in
this Item 7 are set forth in a separate section of this report and commence on
Page F-1 immediately following page 27.
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
On July 25, 1997 the Company engaged Moss Adams LLP to serve as the Company's
independent accountants to report on the fiscal year ended June 30, 1997. The
firm of Mohler, Nixon & Williams, which had reported on the Company's financial
statements for the fiscal years ended June 30, 1996 and 1995 was dismissed by
the Company on July 25, 1997. The change of independent accountants for the 1997
fiscal year was initiated and made by the Board of Directors. The report of the
former accountants for the prior two fiscal years did not contain an adverse
opinion or disclaimer of opinion but included a modifying paragraph describing
that the statements were prepared assuming a going concern. There were no
disagreements on any matters of accounting principles or practices, financial
statement disclosures, or auditing scope or procedure with the former
accountants in connection with the audit of fiscal 1995 and 1996 nor through
July 25, 1997. The Company did not consult the new firm on any application of
accounting principles or the type of audit opinion that might be rendered.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
With Section 16(a) of the Exchange Act
Identification of Directors and Executive Officers
The present directors and executive officers of the Company, their ages,
positions held in the Company and duration as director, are as follows:
Name Age Position and Offices Director Since
James Stein 40 Director, President and CEO 1992
James A. Barnes 43 Director, Treasurer and Secretary 1995
Jerry E. Polis 66 Director 1995
Robert J. Muller 44 Chief Information Officer n/a
Michael J. Kelly 28 Controller n/a
The terms of all directors will expire at the next annual meeting of the
Company's shareholders, or when their successors are elected and qualified.
Directors are elected each year, and all directors serve one-year terms.
Officers serve at the pleasure of the Board of Directors. There are no
arrangements or understandings between the Company and any other person pursuant
to which he was or is to be selected as a director, executive officer or nominee
therefor.
19
<PAGE>
Biographical Information
James Stein has been a director and President and CEO of the Company since 1992
and was a director and executive officer of ValueStar, Inc. since its inception
in September, 1991. Prior to commencing the ValueStar operations as a sole
proprietorship in 1990, Mr. Stein served as President and CEO from 1983 to 1990
of Direct Language, Inc., a San Francisco based publisher of Asian and Hispanic
Yellow Pages and El Mensajero, a Spanish-language weekly newspaper.
James A. Barnes was elected as a director in July 1995 and appointed
Secretary/Treasurer. In March 1997 he resigned as Secretary but was re-appointed
in August 1998. Since 1984 he has been President of Sunrise Capital, Inc., a
wholly-owned venture capital and consulting firm. He previously practiced as a
certified public accountant and management consultant with Ernst & Ernst
(1976-1977), Touche Ross & Co. (1977-1980) and as a principal in J. McDonald &
Co. Ltd., Phoenix, Arizona (1980-1984). He graduated from the University of
Nebraska with a B.A. Degree in Business Administration in 1976. Mr. Barnes
devotes only part-time services to the Company.
Jerry E. Polis was elected as a director in July 1995. Since 1963 he has been
self-employed primarily in real estate investments, and since 1964 he has owned
and operated Polis Realty. From 1968 to sale of his ownership in January, 1997,
he was active as 50% owner of the Taco Bell franchises for the State of Nevada
(operated under privately-owned Las Cal Corporation). In 1994 he co-founded
Commercial Bank of Nevada (CBN), an unlisted publicly owned bank located in Las
Vegas, Nevada which was sold through a merger in June 1998. He was a director of
CBN from 1994 and Chairman from May, 1996 until its sale. Mr. Polis graduated
from Penn State University with a B.A. Degree in Commerce in 1953.
Robert J. Muller was appointed Chief Information Officer in August 1998. From
July 1995 to August 1998 he was founder and a partner in Poesys Associates, a
San Francisco systems and software consultancy company. Also from September 1997
to August 1998 he served as Senior Software Engineer and Engineering Project
Manager for Aurigin Systems Inc., an intellectual property management company.
From July 1993 to July 1995 he served as Product Development Manager and
Technical Documentation Manager for Blyth Software, Inc. Mr. Muller's prior
experience includes positions as Engineering Manager for Symantec Corporation,
Product Manager and Customer Service Representative for Oracle Corporation and
Statistical Computing Consultant for the Massachusetts Institute of Technology.
Mr. Muller has an A.B. in Political Science from the University of California,
Berkeley (1976) and an S.M. in Political Science (1978) and a Ph.D. in Political
Science (1983) from the Massachusetts Institute of Technology. He is also the
author or co-author of seven books and other publications on Oracle and other
database systems and project management.
Michael J. Kelly was appointed controller in August 1998. From October 1995 to
August 1998 he was Operations Manager and Network Administrator for Silicon
Valley Shelving, San Jose, California, a privately held distributor of material
handling equipment and static control products. From October 1994 to October
1995 he was a sales representative for Innerspace Engineering of San Mateo,
California and from June 1992 to October 1994 he was Operations Manager and
Controller for James A. Old & Son of Hayward, California, both companies being
distributors of material handling equipment. Mr. Kelly obtained a B.A. in
Economics and a B.A. in Russian Studies from the University of Notre Dame in
1992.
Mr. Stein and Mr. Barnes serve as the Compensation Committee for the 1996 and
1997 Stock Plans, otherwise the Company does not have any standing audit,
nominating or other compensation committees of the Board of Directors.
Advisory Board
In 1993 the Company established an advisory board to provide guidance to
management on the Company's program for consumers and businesses. The current
advisory board members have served since 1993. They are:
Commissioner Jessie Knight - is one of the five commissioners of the California
Public Utilities Commission. He is responsible for setting policy and tariffs
for utilities and telecommunications industries in California. His background
includes positions as Vice President of the San Francisco Chamber of Commerce
and Vice President of Marketing at the San Francisco Newspaper Agency (Chronicle
and Examiner newspapers). He was formerly a Marketing Director at Dole Foods Co.
He is experienced in marketing, finance and strategic planning.
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<PAGE>
L.M. Ashmore - is a Senior Vice President of the consulting firm Omega
Performance. Ms. Ashmore was formerly Director, Corporate Service Quality for
Charles Schwab, Co. and Director of Service Quality for Citibank CA. She has
extensive experience in human resources, ethics, customer satisfaction, service
quality and customer loyalty.
Jack McSorley - has extensive business experience in the broadcast industry. As
a partner in BayCom Partners he has been active in the acquisition, finance and
management of broadcast properties. He is experienced in marketing, media,
finance and corporate issues.
Advisory board members are compensated in the form of stock options.
Compliance With Section 16(a) of the Exchange Act
Section 16(a) of the Exchange Act requires the Company's officers, directors and
persons who own more than 10% of a class of the Company's securities registered
under Section 12(g) of the Exchange Act to file reports of ownership and changes
in ownership with the Securities and Exchange Commission ("SEC"). Officers,
directors and greater than 10% shareholders are required by SEC regulation to
furnish the Company with copies of all Section 16(a) forms they file.
Based solely on a review of copies of such reports furnished to the Company and
written representations that no other reports were required during the fiscal
year ended June 30, 1998, the Company believes that all persons subject to the
reporting requirements pursuant to Section 16(a) filed the required reports on a
timely basis with the SEC, except as follows: Mr. Polis filed in July 1998 a
late Form 4 reporting one market purchase transaction effected in June 1998, and
Mr. Barnes amended and filed in January 1998 a Form 4 previously filed in
December 1997 to report two previously unreported purchase transactions from the
Company effected in December 1997.
Item 10. Executive Compensation.
<TABLE>
There is shown below information concerning the compensation of the Company's
chief executive officer (a Named Officer) for the fiscal years ended June 30,
1998, 1997 and 1996. No other executive officer's salary and bonus exceeded
$100,000 during the fiscal year ended June 30, 1998.
<CAPTION>
Summary Compensation Table
--------------------------
Annual Compensation Long Term Compensation
------------------- -----------------------
Name and Fiscal Other Options All Other
Principal Position Year Salary Bonus Annual (# of Shares) Compensation
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
James Stein, Chief Executive 1998 $90,000 -0- -0- 50,000 -0-
Officer and President 1997 $90,000 -0- -0- -0- -0-
1996 $90,000 -0- -0- 15,000 -0-
</TABLE>
Option Grants
Shown below is further information on grants of stock options to the Named
Officer reflected in the Summary Compensation Table shown above for the fiscal
year ended June 30, 1998.
Option Grants Table for Fiscal Year Ended June 30, 1998
-------------------------------------------------------
Percent of Total
Number of Options Granted Exercise Expiration
Name Options Granted to Employees in Fiscal Year Price Date
---- --------------- --------------------------- ----- ----
James Stein 50,000 26.2% $1.00 3/3/2003
Aggregated Option Exercises and Fiscal Year-End Values
There were no options exercised by the Named Officer during the fiscal year
ended June 30, 1998. The following table provides information on unexercised
options at June 30, 1998:
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<PAGE>
Fiscal Year-End Option Values
-----------------------------
Number of Unexercised Value of Unexercised
Options Held At In-The-Money Options At
June 30, 1998 June 30, 1998 (1)
------------- -----------------
Name Exercisable Exercisable
----------- -----------
James Stein 315,000 $66,406
(1) At June 30, 1998 the last sale price was $0.65625 per share.
The Company does not have any stock appreciation rights plans in effect and has
no long-term incentive plans, as those terms are defined in Securities and
Exchange Commission regulations. During the fiscal year ended June 30, 1998, the
Company did not adjust or amend the exercise price of stock options awarded to
the Named Officer nor other persons, and the Company has no defined benefit or
actuarial plans covering any person.
Compensation of Directors
The Company has no standard arrangements for direct or indirect remuneration to
the directors in their capacity as directors other than the granting of stock
options. No direct or indirect remuneration other than in the form of
reimbursement of expenses of attending directors' meetings was paid to directors
during the fiscal year ended June 30, 1998 other than the grant of a five year
stock option on 50,000 common shares exercisable at $1.00 per share granted to
each of the Company's three directors. It is anticipated that during the next
twelve months the Company will not pay any direct or indirect remuneration to
any directors of the Company in their capacity as directors other than in the
form of reimbursement of expenses of attending directors' or committee meetings
and the granting of stock options from time to time.
Employment Contract
Mr. Stein is employed and compensated through the Company's subsidiary pursuant
to a contract with the Company. Effective July 1, 1998 the Company entered into
a new employment agreement with Mr. Stein for a term of three years. The terms
of the agreement include Mr. Stein serving as President and CEO and includes
termination, confidentiality, indemnification and non-competition clauses
customary in such agreements. The contract provides for compensation of $10,000
per month with bonuses and increases at the discretion of the Board of
Directors. The Company may terminate the employment with or without good cause
(as defined), but termination without good cause (other than disability or
death) results in a severance payment equal to twelve months of the then monthly
base salary and prorated earned bonus payable in one lump sum. Likewise upon a
change in control, as defined in the agreement, Mr. Stein may elect to terminate
employment and obtain a payment equal to the remaining months of the agreement
multiplied by the base salary and any earned but unpaid bonus payable in one
lump sum.
Stock Option and Compensation Plans
During 1992 the Company adopted and the shareholders approved the 1992 Incentive
Stock Option Plan, as amended, for key employees, (the "1992 ISO Plan") and the
1992 Non-Statutory Stock Option Plan, as amended, for employees, directors and
consultants (the "1992 NSO Plan"). Both plans expire on May 29, 2002. The
Company has reserved a maximum of 250,000 common shares to be issued upon the
exercise of options granted under each plan (a maximum of a total of 500,000
common shares).
The Board of Directors adopted on January 19, 1996 the 1996 Stock Option Plan
covering an aggregate of 400,000 shares of the Company's common stock. On March
20, 1997 the Board of Directors amended and restated the 1996 Stock Plan (the
"1996 Stock Plan") to reduce the aggregate number of shares to 300,000. On March
20, 1997 the Board of Directors adopted the 1997 Stock Option Plan (the "1997
Stock Plan") covering an aggregate of 200,000 shares of the Company's common
stock. The 1996 Stock Plan and the 1997 Stock Plan were approved by the
shareholders on April 16, 1997 and have substantially the same terms and
provisions except that the 1996 Stock Plan is available for non-qualified option
grants only. On March 31, 1998 the Board of Directors increased the number of
shares authorized for issue pursuant to the 1997 Stock Plan to an aggregate of
500,000 shares of common stock, subject to shareholder approval.
On March 14, 1997 the Company adopted the 1997 Employee Stock Compensation Plan
providing for the issuance of up to 4,000 common shares to non-executive
employees.
22
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of August 31, 1998, the stock ownership of
each officer and director of the Company, of all officers and directors of the
Company as a group, and of each person known by the Company to be a beneficial
owner of 5% or more of its Common Stock. Except as otherwise noted, each person
listed below is the sole beneficial owner of the shares and has sole investment
and voting power as to such shares. No person listed below has any option,
warrant or other right to acquire additional securities of the Company within
sixty days, except as noted.
Name and Address Amount & Nature
Title of Beneficial of Beneficial Percent
of Class Owner Ownership (1) of Class (1)
- -------- ---------------- ------------- ------------
Common stock James Stein 1,619,276 (2) 17.9%
par value 1120A Ballena Blvd.
$.00025 Alameda, California 94501
SAME James A. Barnes 1,267,198 (3) 14.3%
9029 Opus Drive
Las Vegas, Nevada 89117
SAME Jerry E. Polis 820,417 (4) 9.2%
925 E. Desert Inn Road
Las Vegas, Nevada 89109
SAME Bryant I. Pickering 554,496 (5) 6.4%
9012 Opus Drive
Las Vegas, Nevada 89117
SAME Robert M. Brennan 1,333,333 (6) 15.4%
6446 Shearwater Ct.
Avila Beach, California
SAME Canusa Trading Ltd. 768,172 (7) 8.6%
37 Reid Street
Hamilton, Bermuda
All directors & officers 3,706,891 (8) 39.1%
as a group (5 persons)
(1) Number of shares and percentage ownership include shares issuable
pursuant to options and warrants held by the person in question
within 60 days after August 31, 1998. Percentages are based on
8,682,496 shares outstanding as of August 31, 1998.
(2) Includes 315,000 common shares issuable upon the exercise of
outstanding stock options and 62,500 common shares issuable upon
the exercise of a stock purchase warrant. Includes 3,000 common
shares held by his wife and minor children.
(3) Represents 363,510 shares held of record by Sunrise Capital, Inc.
("SCI"), 595,225 shares held of record by Tiffany Investments
("TI"), 97,629 shares held of record by Tiffany Investments Limited
Partnership ("TILP"), 13,334 shares held of record by Sunrise
Management, Inc. Profit Sharing Plan ("SMIPS"), 115,000 shares
issuable upon the exercise of outstanding stock options and 82,500
common shares issuable upon the exercise of stock purchase
warrants. Mr. Barnes is President and owner of SCI, General Partner
of TI and TILP and Trustee of SMIPS and has investment and voting
power over these shares.
(4) Includes 366,667 shares held of record by the Jerry E. Polis
Family Trust and 150,000 shares held by record by Davric
Corporation over which Mr. Polis exercises voting and investment
power. Also includes 100,000 shares issuable upon the exercise of
outstanding stock options and 127,500 common shares issuable upon
the exercise of a stock purchase warrant.
(5) Includes 544,496 shares held by Odne Limited Partnership all such
shares of which Dr. Pickering exercises voting and investment
power.
23
<PAGE>
(6) As reported to the Company by Mr. Brennan who has represented to
the Company that he has sole voting and investment power with
respect to 1,263,333 shares and shares voting and investment power
with his spouse with respect to 70,000 shares.
(7) As reported to the Company by Canusa Trading Ltd. Includes 295,000
common shares issuable upon the exercise of stock purchase
warrants.
(8) Includes 2,904,391 shares issued and outstanding, 530,000 shares
issuable upon exercise of stock options and 272,500 shares issuable
upon the exercise of stock purchase warrants.
The Company is aware of no arrangements which may result in a change in control
of the Company.
Item 12. Certain Relationships and Related Transactions
During the last two fiscal years there has not been, nor is there currently
proposed, any transaction or series of similar transactions to which the Company
was or is to be a party in which the amount involved exceeds $60,000 and in
which any director, executive officer or holder of more than 5% of the common
stock of the Company had or will have a direct or indirect material interest
other than (i) compensation arrangements that are described in Item 10 above and
(ii) the transactions described below.
Certain of the Company's shareholders, including officers and directors, have
from time to time, provided short-term interest bearing advances to the Company.
At June 30, 1998, no such advances were outstanding. On December 9, 1997 the
Company granted Stock Purchase Warrants to four persons for a bank guarantee of
the Company's $250,000 credit line. The Stock Purchase Warrants are exercisable
into an aggregate of 250,000 common shares at $1.25 per share until September
30, 2002 (62,500 shares to each individual). Among the four guarantors were
officers/directors James Stein and James A. Barnes and director Jerry E. Polis.
The Company believes it would have been unable to obtain the line of credit
without the inducement of the personal guarantees by such officers and
directors.
On March 31, 1998 the Company issued 91,250 shares for services in connection
with the Company's debt financing valued at $88,398. A total of 76,250 of these
shares were issued to Mr. Polis, a director, and 5,000 shares issued to Mr.
Barnes, an officer and director.
In July 1998, in connection with a new three year employment agreement, the
Company granted Mr. Stein options on 100,000 shares which become vested and
exercisable after January 7, 1999 and then only upon the achievement of certain
future common share prices commencing at $2.50 per share. In July 1998,
directors Polis and Barnes were each granted similar options on 50,000 common
shares, as directors.
In July 1998 the Company restructured the due date on $100,000 of 12% notes due
September 30, 1998 and extended the date to March 31, 2001 and granted the two
holders an aggregate of 50,000 non-detachable warrants to purchase common stock
at $1.25 per share. One holder of a $50,000 note and 25,000 warrants is the
spouse of Mr. Polis, a director of the Company.
In August 1998 the Company obtained an $85,000 five year term loan secured by
certain equipment and software from a Company affiliated with Mr. Polis, a
director. The Company believes the terms of the loan are comparable to those
that could have been obtained from an independent party.
Certain conflicts of interest may arise between the Company and its directors
due to the fact that they have other employment or business interests to which
they devote attention, and they are expected to continue to do so. The Company
has not established policies or procedures for the resolution of current or
potential conflicts of interest between the Company and its management or
management-affiliated entities. There can be no assurance that members of
management will resolve all conflicts of interest in the Company's favor. The
officers and directors are accountable to the Company as fiduciaries, which
means that they are legally obligated to exercise good faith and integrity in
handling the Company's affairs. Failure by them to conduct the Company's
business in its best interests may result in liability to them. The Company's
Articles of Incorporation provide that directors have the right to contract with
the Company if any financial interest is disclosed or the transaction is fair or
reasonable to the Company.
24
<PAGE>
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits
Each exhibit marked with an asterisk is filed with this Annual Report on Form
10-KSB. Each exhibit not marked with an asterisk is incorporated by reference to
the exhibit of the same number (unless otherwise indicated) previously filed by
the Company as indicated below.
Exhibit
Number Description of Exhibit
------- ----------------------
3.1 Articles of Incorporation of the Carson Capital Corporation
(Colorado) as filed on January 28, 1987 and filed as Exhibit 2.1 to
the Company's Registration Statement on Form 10-SB, as amended
3.1.1 Amendment to Articles of Incorporation as filed on September 21,
1992 and filed as Exhibit 2.1.1 to the Company's Registration
Statement on Form 10-SB, as amended
3.1.2 Amendment to Articles of Incorporation as filed on April 24, 1997
and filed as Exhibit 2.1.2 to the Company's Registration Statement
on Form 10-SB, as amended
3.2 Bylaws of the Company filed as Exhibit 2.2 to the Company's
Registration Statement on Form 10-SB, as amended
4.1 Form of Certificate evidencing Common Stock of the Company filed as
Exhibit 3.1 to the Company's Registration Statement on Form 10-SB,
as amended
4.3* Form of 12% Promissory Note with Non-Detachable Stock Purchase
Warrants Due March 31, 2001 as amended and restated (aggregate of
$100,000 principal with two lenders) (individual agreements differ
as to payee)
4.4 Form of Stock Purchase Warrant dated April 30, 1997 granted to five
persons exercisable into an aggregate of 150,000 common shares at
$0.75 per share until April 30, 2002 (Individual warrants differ as
to holder and number of shares) filed as Exhibit 3.4 to the
Company's Registration Statement on Form 10-SB, as amended
4.5 Form of Stock Purchase Warrant dated June 30, 1997 granted to three
investors exercisable into an aggregate of 200,000 common shares at
$1.25 per share until June 30, 2002 filed as Exhibit 3.5 to the
Company's Registration Statement on Form 10-SB, as amended
4.6 Form of Stock Purchase Warrant dated October 27, 1997 granted to
two investors exercisable into an aggregate of 50,000 common shares
at $1.25 per share until September 30, 2002 (individual warrants
are for 25,000 shares each and differ as to holder) filed as
Exhibit 4.6 to the Company's Form 10-QSB for the quarter ended
December 31, 1997.
4.7 Form of Stock Purchase Warrant dated December 9, 1997 granted to
four persons for bank guarantee exercisable into an aggregate of
250,000 common shares at $1.25 per share until September 30, 2002
(individual warrants are for 62,500 shares each and differ as to
holder). Holders include officers/directors James Stein and James
A. Barnes and director Jerry E. Polis. Filed as Exhibit 4.7 to the
Company's Form 10-QSB for the quarter ended December 31, 1997.
4.8 Form of Stock Purchase Warrant dated December 12, 1997 granted to
three investors exercisable into an aggregate of 200,000 common
shares at $1.25 per share until December 31, 2002 (individual
warrants differ as to number and holder). Officer/director James A.
Barnes is holder of a warrant on 20,000 of these shares. Filed as
Exhibit 4.8 to the Company's Form 10-QSB for the quarter ended
December 31, 1997
25
<PAGE>
4.9 Form of unsecured 12% Subordinated Promissory Notes due June 30,
2000 granted to investors (individual notes differ as to date,
principal amount and holder). Filed as Exhibit 4.9 to the Company's
Form 10-QSB for the quarter ended December 31, 1997.
4.10 Form of Stock Purchase Warrant granted to 12% Subordinated
Promissory Note holders (at the rate of warrants on 500 common
shares for each $1,000 of notes) exercisable at $1.25 per common
share until December 31, 2000 (each individual warrant differs as
to number of shares, date and holder). Filed as Exhibit 4.10 to the
Company's Form 10-QSB for the quarter ended December 31, 1997.
4.11 Form of unsecured 6% Convertible Subordinated Promissory Notes due
June 30, 2001 (individual notes aggregating $525,000 were granted
to four investors and differ as to principal amount and holder).
Filed as Exhibit 4.11 to the Company's Form 8-K dated May 21, 1998.
4.12 Form of Stock Purchase Warrant granted to 6% Convertible
Subordinated Promissory Note holders (on an aggregate of 262,500
common shares) exercisable at $1.25 per common share until April
30, 2003 (each individual warrant differs as to number of shares
and holder). Filed as Exhibit 4.12 to the Company's Form 8-K dated
May 21, 1998.
4.13 Form of Stock Purchase Warrant granted to 6% Convertible
Subordinated Promissory Note holders (on an aggregate of 262,500
common shares) exercisable at $2.00 per common share until April
30, 2003 (each individual warrant differs as to number of shares
and holder). Filed as Exhibit 4.13 to the Company's Form 8-K dated
May 21, 1998.
4.14* Stock Purchase Warrant between the Company and Jackson Strategic,
Inc. dated May 18, 1998 (for 50,000 shares exercisable at $1.75 per
share)
10.1 Research and Rating Agreement between the Public Research Institute
of San Francisco State University and ValueStar, Inc. effective
April 30, 1997 filed as Exhibit 6.1 to the Company's Registration
Statement on Form 10-SB, as amended
10.2(1) 1992 Incentive Stock Option Plan, As Amended and filed as Exhibit
6.2 to the Company's Registration Statement on Form 10-SB, as
amended
10.2.1 Standard form of Incentive Stock Option Plan Agreement filed as
Exhibit 6.2.1 to the Company's Registration Statement on Form
10-SB, as amended
10.3(1) 1992 Non-Statutory Stock Option Plan, As Amended and filed as
Exhibit 6.3 to the Company's Registration Statement on Form 10-SB,
as amended
10.3.1 Standard form of Non-Statutory Stock Option Plan Agreement filed as
Exhibit 6.3.1 to the Company's Registration Statement on Form
10-SB, as amended
10.4*(1)Employment Agreement between the Company and James Stein dated as
of July 1, 1998
10.6 Property Lease Agreement between Ballena Isle Marina and ValueStar,
Inc. dated July 14, 1995 filed as Exhibit 6.6 to the Company's
Registration Statement on Form 10-SB, as amended
10.6.1* Amendments to Property Lease Agreement between Ballena Isle Marina
and ValueStar, Inc. dated as of July 1 and August 1, 1998
10.7(1) 1996 Stock Option Plan, as amended and restated and filed as
Exhibit 6.7 to the Company's Registration Statement on Form 10-SB,
as amended
10.7.1 Standard form of 1996 Stock Plan Agreement filed as Exhibit 6.7.1
to the Company's Registration
26
<PAGE>
Statement on Form 10-SB, as amended
10.8(1) 1997 Stock Option Plan filed as Exhibit 6.8 to the Company's
Registration Statement on Form 10-SB, as amended
10.8.1 Standard form of 1997 Stock Plan Agreement filed as Exhibit 6.8.1
to the Company's Registration Statement on Form 10-SB, as amended
10.8.2*(1) First Amendment to 1997 Stock Option Plan dated March 31, 1998
10.9(1) 1997 Employee Stock Compensation Plan filed as Exhibit 6.9 to the
Company's Registration Statement on Form 10-SB, as amended
10.10* Form of Non-Qualified Stock Option Agreement dated as of July 6,
1998 between the Company and three directors covering an aggregate
of 200,000 shares (individual agreements vary as to number of
shares and holder, Mr. Stein as to 100,000 shares and Mr. Polis and
Mr. Barnes as to 50,000 shares each)
10.11* Promissory Note between the Company and Davric Corporation dated
August 14, 1998.
16.1 Letter on Change in Accountant filed as Exhibit 16.1 to the
Company's Registration Statement on Form 10-SB, as amended
21.1* Subsidiary of the Company
27.1* Financial Data Schedule
- ----------------------------
* Filed herewith.
(1) Indicates management contract or compensatory plan.
(b) Reports on Form 8-K.
The Company filed one report on Form 8-K during the last fiscal quarter of the
year ended June 30, 1998. The report dated May 21, 1998 reported an Item 5 event
related to the placement of $525,000 of unsecured 6% Convertible Subordinated
Promissory Notes due June 30, 2001.
27
<PAGE>
- --------------------------------------------------------------------------------
CONTENTS
PAGE
INDEPENDENT AUDITOR'S REPORT.................................................F-1
CONSOLIDATED FINANCIAL STATEMENTS
Balance sheet...........................................................F-2
Statements of operations................................................F-3
Statements of stockholders' deficit.....................................F-4
Statements of cash flows................................................F-5
Notes to financial statements...........................................F-6
- --------------------------------------------------------------------------------
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Valuestar Corporation
We have audited the accompanying consolidated balance sheet of Valuestar
Corporation, as of June 30, 1998, and the related consolidated statements of
operations, stockholders' deficit, and cash flows for the years ended June 30,
1998 and 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements as of and for the year
ended June 30, 1998, present fairly, in all material respects, the financial
position of the Company as of June 30, 1998, and the results of its operations
and cash flows for the years ended June 30, 1998 and 1997, in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note 2, the
Company's recurring losses from operations and its inability to generate
sufficient cash flows from operations to meet its obligations, raises
substantial doubt about the Company's ability to continue as a going concern.
The consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ MOSS ADAMS LLP
Santa Rosa, California
August 20, 1998
F-1
<PAGE>
VALUESTAR CORPORATION
CONSOLIDATED BALANCE SHEET
June 30, 1998
- --------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash $ 398,604
Receivables 361,369
Inventory 24,396
Prepaid expenses 3,902
-----------
Total current assets 788,271
PROPERTY AND EQUIPMENT 56,697
DEFERRED COSTS 130,930
-----------
Total assets $ 975,898
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Bank line of credit $ 250,000
Accounts payable 197,410
Accrued liabilities and other payables 145,445
Deferred revenues 27,020
-----------
Total current liabilities 619,875
-----------
LONG-TERM DEBT 1,525,357
-----------
STOCKHOLDERS' DEFICIT
Common stock, $.00025 par value; 20,000,000 shares
authorized, 8,682,496 shares issued and outstanding 2,171
Additional paid-in capital 4,247,160
Accumulated deficit (5,418,665)
-----------
Total stockholders' deficit (1,169,334)
-----------
Total liabilities and stockholders' deficit $ 975,898
===========
The accompanying notes are an integral part of these financial statements
- --------------------------------------------------------------------------------
F-2
<PAGE>
VALUESTAR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended June 30, 1998 and 1997
- --------------------------------------------------------------------------------
1998 1997
------------ -------------
REVENUES $ 1,601,406 $ 1,054,530
------------ -------------
OPERATING EXPENSES
Cost of revenues 580,041 532,133
Selling 902,320 749,100
Marketing and promotion 746,639 739,455
General and administrative 827,955 523,854
------------ ------------
3,056,955 2,544,542
------------ -------------
LOSS FROM OPERATIONS (1,455,549) (1,490,012)
------------ ------------
OTHER INCOME (EXPENSE)
Interest expense (119,023) (9,000)
Miscellaneous (2,609) 1,200
------------ ------------
(121,632) (7,800)
------------ ------------
NET LOSS $ (1,577,181) $ (1,497,812)
============ ============
LOSS PER COMMON SHARE $ (0.19) $ (0.20)
============ ============
WEIGHTED AVERAGE OF COMMON SHARES
OUTSTANDING 8,500,228 7,330,831
============ ============
The accompanying notes are an integral part of these financial statements
- --------------------------------------------------------------------------------
F-3
<PAGE>
<TABLE>
VALUESTAR CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
Years Ended June 30, 1998 and 1997
- --------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Common Stock Additional
----------------------- Paid-in Accumulated
Shares Amount Capital Deficit Total
----------- -------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1996 7,026,818 $ 1,757 $ 2,735,105 $ (2,343,672) $ 393,190
Sale of stock at $.75 per share 1,000,000 250 749,750 -- 750,000
Conversion of debt to stock
at $.75 per share 43,195 11 32,385 -- 32,396
Sale of stock at $.75 per share 53,333 13 39,987 -- 40,000
Stock issued to employees 2,900 1 2,174 -- 2,175
Sale of stock at $1.00 per share 200,000 50 199,950 -- 200,000
Net loss -- -- -- (1,497,812) (1,497,812)
----------- -------- ------------ ------------ ------------
Balance, June 30, 1997 8,326,246 2,082 3,759,351 (3,841,484) (80,051)
Sale of stock at $1,00 per unit, consisting
of one share and one warrant 220,000 55 219,945 -- 220,000
Conversion of debt to stock at $1.00 per unit,
consisting of one share and one warrant 30,000 7 29,993 -- 30,000
Stock issued for services at $.96875 per share 91,250 23 88,375 -- 88,398
Stock on option exercise at $.50 per share 15,000 4 7,496 -- 7,500
Issuance of warrants for bank guarantee -- -- 20,000 -- 20,000
Issuance of warrants with debt -- -- 118,000 -- 118,000
Issuance of warrants for services -- -- 4,000 -- 4,000
Net loss -- -- -- (1,577,181) (1,577,181)
----------- -------- ------------ ------------ ------------
Balance, June 30, 1998 8,682,496 $ 2,171 $ 4,247,160 $ (5,418,665) $ (1,169,334)
=========== ======== ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements
- --------------------------------------------------------------------------------
F-4
<PAGE>
<TABLE>
VALUESTAR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 1998 and 1997
- ------------------------------------------------------------------------------------------
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITES
Net Loss $(1,577,181) $(1,497,812)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depereciation 11,125 9,885
Change in allowance for doubtful accounts 45,000 23,207
Warrants issued for services 24,000 --
Common stock issued for services 88,398 --
Amortization of bond discount 12,532 --
Changes in:
Receivables (110,827) (218,829)
Inventory 3,467 (12,533)
Prepaid expenses 3,133 (3,927)
Deferred costs 3,155 (64,923)
Accounts payable (175,816) 215,698
Accrued liabilities and other payables 38,993 57,454
Deferred revenues 4,300 (28,019)
----------- -----------
Net cash used by operating activities (1,629,721) (1,519,799)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Property and equipment acquisitions (18,400) (12,960)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of stock 227,500 992,175
Net borrowings under line of credit 250,000 --
Proceeds from debt 1,525,000 130,000
----------- -----------
Net cash provided by financing activities 2,002,500 1,122,175
----------- -----------
NET INCREASE (DECREASE) IN CASH 354,379 (410,584)
CASH, beginning of year 44,225 454,809
----------- -----------
CASH, end of year $ 398,604 $ 44,225
=========== ===========
SUPPLEMENTAL CASH-FLOW INFORMATION:
Cash paid during the year for:
Interest $ 89,666 $ 9,000
Income taxes $ 800 $ 800
Non-cash investing and financing activities:
Conversion of debt to equity $ 30,000 $ 32,396
Issuance of warrants with debt $ 118,000 $ --
- -------------------------------------------------------------------------------------------
Page F-5
</TABLE>
<PAGE>
VALUESTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Description of 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 150
industries; licensing the certification mark to highly rated businesses; and
selling ancillary materials and services. The Company's activities are currently
concentrated within one industry segment in California.
Principles of consolidation - The consolidated financial statements include the
accounts of Valuestar Corporation and its wholly-owned subsidiary. All material
intercompany transactions and balances have been eliminated.
Inventory - Inventory consists of promotional materials for sale to ValueStar
Certified businesses, and direct advertising material, and is stated at the
lower of cost (first-in, first-out method) or market.
Property and equipment - Property and equipment are stated at cost and
depreciated using the straight line method over estimated useful lives of five
to seven years.
Income taxes - Income taxes are recognized using enacted tax rates, and are
composed of taxes on financial accounting income that is adjusted for
requirements of current tax law and deferred taxes. Deferred taxes are the
expected future tax consequences of temporary differences between the financial
statement carrying amounts and tax bases of existing assets and liabilities.
Use of estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires the Company make estimates and
assumptions affecting the reported amounts of assets, liabilities, revenues and
expenses, and the disclosure of contingent assets and liabilities. The amounts
estimated could differ from actual results.
Revenue recognition - The Company's revenues are primarily from annual
certification and rating fees, and are recognized when all related services are
provided to the customer. Rating services are primarily related to a survey of a
business' customers and the delivery of a ratings report. Services associated
with certification include an orientation on becoming a ValueStar Certified
business 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.
Concentration of credit risk - Financial instruments potentially subjecting the
Company to concentrations of credit risk consist primarily of demand deposits in
excess of FDIC limits and trade receivables. The Company's demand deposits are
placed with major financial institutions. The risk associated with trade
receivables is mitigated by the Company's ability to remove certification
information from the customer's premises. For the periods presented, there were
no customers that accounted for over 10% of revenues generated by the Company or
of accounts receivable at June 30, 1998.
- --------------------------------------------------------------------------------
F-6
<PAGE>
VALUESTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
- --------------------------------------------------------------------------------
NOTE 1 - DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
Loss per common share - The Company has implemented Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share." SFAS No. 128
provides for the calculation of "Basic" and "Diluted" earnings per share
("EPS"). Basic EPS includes no dilution and is computed by dividing income
available to common stockholders, after deduction for cumulative unpaid
dividends, 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 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 3,337,550
shares of common stock were outstanding as of June 30, 1998. These securities
were not included in the computation of diluted EPS because of the losses, but
could potentially dilute EPS in future years.
Fair value of financial instruments - The Company measures its financial assets
and liabilities in accordance with generally accepted accounting principles. The
fair value of a financial instrument is the amount at which the instrument could
be exchanged in a current transaction between willing parties. For certain of
the Company's financial instruments, including cash, accounts receivable and
accounts payable, the carrying amount approximates fair value because of the
short maturities. The carrying amount of the Company's short-term and long-term
debt approximates fair value because interest rates available to the Company for
issuance of similar debt with similar terms and maturities are approximately the
same.
Recent accounting pronouncements - The Financial Accounting Standards Board
("FASB") has issued SFAS No. 130, "Reporting Comprehensive Income"; SFAS No.
131, "Disclosures About Segments of an Enterprise and Related Information"; SFAS
No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits"; and SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 130 establishes standards for reporting and display of
comprehensive income, its components, and accumulated balances. Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures, SFAS
No. 130 requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. SFAS No. 131 supersedes SFAS No. 14, "Financial Reporting
for Segments of a Business Enterprise." SFAS No. 131 establishes standards on
the way that public companies report financial 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 disclosure regarding products and
services, geographic areas and major customers. SFAS No. 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. SFAS No. 132
standardizes the disclosure requirements for pensions and other postretirement
benefits and requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis. SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including derivative instruments embedded in other
contracts, and for hedging activities.
- --------------------------------------------------------------------------------
F-7
<PAGE>
VALUESTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
- --------------------------------------------------------------------------------
NOTE 1 - DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
SFAS No. 130 and No. 131 are effective for financial statements for periods
beginning after December 15, 1997, and require comparative information for
earlier years to be restated. 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. The adoption of these statements will have no material impact on the
Company's consolidated financial statements and the results of operations and
financial position will be unaffected by their implementation.
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.
Reclassifications - Certain reclassifications have been made to the June 30,
1997, financial statements to conform to the current year's presentation.
NOTE 2 - GOING CONCERN
The Company has experienced recurring losses from operations and the use of cash
from operations. A substantial portion of the losses is attributable to
marketing and promotion costs associated with increasing consumers' awareness of
the meaning of ValueStar Certified; marketing to businesses the advantages of
becoming ValueStar Certified; and discounting certain fees to encourage
businesses to become ValueStar Certified.
It is management's plan to seek additional financing through private placements
as well as other means. Management believes 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 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.
These factors, as well as the future availability or inadequacy of financing to
meet future needs, could force the Company to reduce the emphasis on the growth
in new certified businesses and place increased reliance on more profitable
renewals. Such actions could have an adverse impact on the Company's operations.
NOTE 3 - RECEIVABLES
Trade receivables $436,369
Less allowance for doubtful accounts 75,000
--------
$361,369
========
- --------------------------------------------------------------------------------
F-8
<PAGE>
VALUESTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
- --------------------------------------------------------------------------------
NOTE 4 - PROPERTY AND EQUIPMENT
Computer equipment $40,979
Fixtures and equipment 21,162
Office equipment 12,237
Logo design 4,949
-------
79,327
Less accumulated depreciation 22,630
-------
$56,697
=======
NOTE 5 - DEFERRED COSTS
Deferred costs consists of direct-response advertising programs consisting of
telemarketing, printing and mailing costs. These direct costs are capitalized
and amortized over a twelve month period. At June 30, 1998, $130,930 of
direct-response advertising costs were capitalized and reported as an asset.
Advertising and promotion costs charged to expense were $964,500 and $567,000
for the years ended June 30, 1998 and 1997, respectively.
NOTE 6 - BANK LINE OF CREDIT
The Company has a $250,000 revolving bank line of credit, with interest at prime
plus 2%. At June 30, 1998, the Company had no credit available under this line
of credit. The bank's commitment under this agreement matures on November 25,
1998. The line of credit is guaranteed by certain officers, directors and
shareholders of the Company who were granted an aggregate of 250,000 warrants
for their guarantee. The Company calculated the fair value of the warrants at
the date of issuance and expensed the guarantee cost.
NOTE 7 - ACCRUED LIABILITIES AND OTHER PAYABLES
Payroll and payroll taxes $ 83,301
Accrued vacation costs 30,338
Accrued interest 11,000
Other 20,806
--------
$145,445
========
- --------------------------------------------------------------------------------
F-9
<PAGE>
VALUESTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
- --------------------------------------------------------------------------------
NOTE 8 - LONG-TERM DEBT
The principal amount of long-term debt outstanding at June 30, 1998, is as
follows:
12% Notes Payable - Notes payable with interest at 12%
payable monthly; with all principal due on March 31,
2001, or sooner at the Company's discretion; unsecured $ 100,000
12% Subordinated Notes Payable - 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 unamoritzed bond
discount of $53,793 946,207
6% Convertible Notes Payable - 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
$51,675. Includes accrued interest of $5,825 due at
maturity 479,150
----------
$1,525,357
==========
The 12% Notes Payable were due on September 30, 1998, but subsequent to year end
were restructured and restated with a new maturity date of March 31, 2001. In
connection with the restructuring, the Company granted the noteholders an
aggregate of 50,000 warrants (see Note 13). A total of $50,000 of the 12% Notes
Payable is due to a person related to a Company director, and an aggregate of
$80,000 of the 12% Subordinated Notes Payable is due to entities related to a
Company director.
At June 30, 1998, the 6% Convertible Notes Payable and accrued interest thereon
would have been convertible into 530,824 common shares.
Maturities of long-term debt for succeeding years are as follows:
Year Ending June 30,
--------------------
2000 $1,000,000
2001 625,000
-----------
$1,625,000
===========
In connection with the issuance of the 12% Notes Payable and the 6% Convertible
Notes Payable, the Company granted the holders certain warrants to purchase
common stock (see Note 11). The Company calculated the fair value of the
warrants at the date of issuance and is amortizing this amount as interest
expense over the life of the debt.
- --------------------------------------------------------------------------------
F-10
<PAGE>
VALUESTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
- --------------------------------------------------------------------------------
NOTE 9 - INCOME TAXES
The significant temporary differences between the carrying amounts and tax bases
of existing assets and liabilities that give rise to deferred tax assets and
liabilities include deferring the deduction of various reserves and deferring
the deduction, for tax purposes, of various accrued but unpaid expenses.
A valuation allowance is required for those deferred tax assets that are not
likely to be realized. Realization is dependent upon future earnings during the
period that temporary differences and carryforwards are expected to be
available. Because of the uncertain nature of their ultimate utilization, based
upon the Company's past performance, a complete valuation allowance is recorded
against these deferred tax assets.
The Tax Reform Act of 1986 and the California Conformity Act of 1987 impose
restrictions on the utilization of net operating losses in the event of an
"ownership change", as defined by Section 382 of the Internal Revenue Code.
There has not been a determination whether an ownership change has taken place,
but net operating losses available to the Company for use in future years may be
limited because a change in ownership could result from the issuance of
additional stock.
The following table summarizes the components of net deferred tax assets:
1998 1997
---- ----
Federal tax loss carryforward $1,156,000 $1,040,000
State tax loss carryforward 215,000 187,000
Reserves and allowances 48,000 39,000
Unamortized bond discount 33,000 --
---------- ----------
1,452,000 1,266,000
Less valuation allowance 1,452,000 1,266,000
---------- ----------
-- --
========== ==========
The Company's federal and state net operating losses that are available for
carryforward will expire as follows:
Date of Expiration Federal California
------------------ ------- ----------
1999 $ -- $ 178,000
2000 -- 736,000
2001 -- 763,000
2002 -- 761,400
2007 98,900 --
2008 410,500 --
2009 365,700 --
2010 178,600 --
2011 736,900 --
2012 1,525,000 --
2013 1,523,700 --
---------- ----------
$4,839,300 $2,438,400
========== ==========
- --------------------------------------------------------------------------------
F-11
<PAGE>
VALUESTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
- --------------------------------------------------------------------------------
NOTE 10 - PREFERRED STOCK
The Company has designated 5 million shares of capital stock as preferred stock,
with a par value of $0.00025 per share. There were no issued or outstanding
shares of preferred stock at June 30, 1998.
NOTE 11 - STOCK OPTIONS AND WARRANTS
In 1995, the FASB issued SFAS No. 123, "Accounting for Stock-based
Compensation". This standard requires expanded disclosures of stock-based
compensation arrangements with employees and encourages application of the fair
value recognition provisions in the statement.
SFAS No. 123 does not rescind the existing accounting rules for employee
stock-based compensation. Companies may continue following the rules to
recognize and measure compensation as provided by Accounting Principles Board
Opinion Number 25 (APB No. 25), but companies will now be required to disclose
the pro forma amounts of net income and earnings per share that would have been
reported had the Company elected to follow the fair value recognition provisions
of SFAS No. 123. The Company continues to measure its employee stock-based
compensation arrangements under the provisions of APB No. 25.
Had compensation costs for the Company's stock option plans been determined
based upon the fair value at the grant date for awards under these plans
consistent with the methodology prescribed under SFAS 123, the Company's net
loss and loss per common share would have been as follows:
1998 1997
---- ----
Loss for the year $(1,577,181) $(1,497,812)
Compensation expense (50,000) (12,500)
----------- -----------
Pro forma net loss $(1,627,181) $(1,510,312)
=========== ===========
Pro forma loss per common share $ (0.19) $ (0.21)
=========== ===========
The fair value of each option and warrant granted during 1998 and 1997 is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following assumptions: (1) dividend yield of 0%, (2) expected volatility of
25% in 1998 and -0-% in 1997, (3) risk free interest rate of 7%, and (4) an
expected life of the options of from 3 to 5 years. Options issued during 1998
and 1997 have an estimated weighted average fair value of $0.30 and $0.22,
respectively.
In 1992 the Board of Directors approved the 1992 Incentive Stock Option Plan
(ISO Plan) and the 1992 Non-Statutory Stock Option Plan (NSO Plan). Both plans
expire in 2002. Each plan reserves 250,000 shares of common stock for incentive
and nonstatutory stock options. Options under the ISO Plan and NSO Plan expire
over a period not to exceed ten years from the date of grant.
In 1996 the stockholders approved the 1996 Stock Option Plan. The plan expires
in 2006 and reserves 300,000 shares of common stock for nonqualified stock
option. Options under the plan expire over a period not to exceed ten years from
the date of grant.
- --------------------------------------------------------------------------------
F-12
<PAGE>
VALUESTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
- --------------------------------------------------------------------------------
NOTE 11 - STOCK OPTIONS AND WARRANTS (Continued)
In 1997 the stockholders approved the 1997 Stock Option Plan. The plan expires
in 2007 and reserves 200,000 shares of common stock for Incentive Stock Options.
Options under the plan expire over a period not to exceed ten years from the
date of grant. On March 31, 1998, the Board of Directors amended the 1997 Stock
Option Plan increasing the number of shares issuable thereunder by 300,000
shares to an aggregate of 500,000 shares of common stock, subject to shareholder
approval.
The following table summarizes common stock option activity:
Weighted Average
Shares Exercise Price
------ --------------
Balance July 1, 1996 840,000 $ 0.45
Granted 74,000 $ 0.75
Canceled (210,000) $ 0.50
Exercised -- --
Expired -- --
Balance June 30, 1997 704,000 $ 0.47
Granted 190,550 $ 1.00
Canceled (2,000) $ 1.00
Exercised (15,000) $ 0.50
Expired -- --
Balance June 30, 1998 877,550 $ 0.59
======== ========
Exercisable at June 30, 1998 775,666 $ 0.56
======== ========
<TABLE>
The following table summarizes the number of options exercisable at June 30,
1998, and the weighted average exercise prices and remaining contractual lives
of the options:
<CAPTION>
Weighted Weighted average
average exercise price
Range of Number Number Weighted remaining of options
exercise outstanding at exerciseable at average contractual exercisable at
prices June 30, 1998 June 30, 1998 exercise price life June 30, 1998
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.40-$0.50 615,000 591,665 $0.44 1.87 $0.44
$0.75 72,000 34,001 $0.75 2.31 $0.75
$1.00 190,550 150,000 $1.00 4.37 $1.00
------- ------- ----- ---- -----
877,550 775,666 $0.59 2.45 $0.56
======= ======= ===== ==== =====
</TABLE>
The non-exercisable options vest over a period of up to three years.
- --------------------------------------------------------------------------------
F-13
<PAGE>
VALUESTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
- --------------------------------------------------------------------------------
NOTE 11 - STOCK OPTIONS AND WARRANTS (Continued)
At June 30, 1998, the Company had the following stock purchase warrants
outstanding, each exercisable into one common share:
Number Exercise Price Expiration Date
------ -------------- ---------------
150,000 $0.75 April, 2002
10,000 $0.75 September, 1998
200,000 $1.25 June, 2002
300,000 $1.25 September, 2002
200,000 $1.25 December, 2002
500,000 $1.25 December, 2000
262,500 $1.25 April, 2003
262,500 $2.00 April, 2003
50,000 $1.75 May, 2003
----------
1,935,000
==========
An aggregate of 247,500 of the above warrants are held by officers and directors
of the Company. Certain of the warrants are callable by the Company at stock
prices ranging from $3.00 to $5.00 and subject to certain other prerequisites.
Some warrants contain certain registration rights.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
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.
The Company rents office space under a month-to-month operating lease. The
monthly lease payments are currently $5,700. The Company is responsible for its
pro-rata share of common area maintenance fees, which includes utilities,
maintenance and insurance. Rent expense for the years ended June 30, 1998 and
1997, was $48,000 and $33,000, respectively.
- --------------------------------------------------------------------------------
F-14
<PAGE>
VALUESTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
- --------------------------------------------------------------------------------
NOTE 13 - SUBSEQUENT EVENTS
In July 1998, the Company entered into a three year employment agreement with
its President and Chief Executive Officer providing for a minimum salary,
incentive compensation and severance benefits, among other items. In connection
with this agreement, and to also provide compensation for the future services of
the Company's directors, the Company granted an aggregate of 200,000
non-qualified stock options exercisable at $1.25 per share for a period of five
years, vesting only on the achievement of certain future stock prices ranging
from $2.50 per share to $7.50 per share.
In connection with restructuring of the 12% Notes Payable (see Note 8) in July
1998, the Company granted warrants on an aggregate of 50,000 shares at $1.25 per
share until March 2001.
Subsequent to year end, the Company granted options on 67,800 shares,
exercisable at $1.00 per share, to employees pursuant to its stock option plans.
In August 1998, the Company obtained $85,000 of secured five year term debt
financing for the purchase of certain software and equipment from a company
affiliated with a director of the Company.
- --------------------------------------------------------------------------------
F-15
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
VALUESTAR CORPORATION
By: /s/ JAMES STEIN
------------------------
James Stein
President and Chief Executive Officer
Date: September 21, 1998
<TABLE>
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
<CAPTION>
Name Position Date
---- -------- ----
<S> <C> <C>
/s/ JAMES STEIN President, Chief Executive Officer September 21, 1998
----------- and Director
James Stein (principal executive officer)
/s/ MICHAEL J. KELLY Controller September 21, 1998
---------------- (principal accounting officer)
Michael J. Kelly
/s/ JAMES A. BARNES Treasurer, Secretary and Director September 21, 1998
--------------- (principal financial officer)
James A. Barnes
/s/ JERRY E. POLIS Director September 21, 1998
--------------
Jerry E. Polis
</TABLE>
EXHIBIT 4.3
(Individual Notes Differ as to Name of Noteholder)
THIS NOTE AS AMENDED, WARRANTS AND THE SHARES ISSUABLE UPON WARRANT EXERCISE
HAVE NOT BEEN REGISTERED WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION UNDER
THE U.S. SECURITIES ACT OF 1933 ("ACT"), AND THEY MAY NOT BE TRANSFERRED, SOLD,
OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION
STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES UNDER SUCH ACT OR AN OPINION
OF COUNSEL SATISFACTORY TO THE BORROWER THAT SUCH REGISTRATION IS NOT REQUIRED
OR UNLESS SOLD PURSUANT TO RULE 144 OF SUCH ACT.
VALUESTAR CORPORATION
AMENDED AND RESTATED
12% PROMISSORY NOTE
WITH
NON-DETACHABLE STOCK PURCHASE WARRANTS
Due MARCH 31, 2001
Originally dated March 31, 1997 US$50,000.00
and Amended and Restated as of July 6, 1998
Alameda, California
FOR VALUE RECEIVED, ValueStar Corporation, the undersigned Colorado
corporation (together with all successors, "Borrower"), hereby promises to pay
to the order of _________________, or her successors or assigns (collectively,
"Noteholder") at 980 American Pacific Drive, Suite 111, Henderson, Nevada or at
such other address or addresses as Noteholder may subsequently designate in
writing to Borrower, the full and true sum of Fifty Thousand and NO/100 Dollars
($50,000.00), due and payable in one (1) installment on or before March 31,
2001, unless sooner accelerated ("Maturity Date"), plus simple interest thereon
at the rate of twelve percent (12.00%) per annum, in lawful monies of the United
States of America. Interest shall be payable in monthly installments, each
respectively due on 16th day of each month during the term of this Note. If the
Maturity Date should fall on a weekend or national holiday, payment shall be due
on the following business day.
1. Any payment shall be deemed timely made if received by Noteholder within
fifteen (15) calendar days of the due date. Payments received shall be imputed
first to interest payments then due, and next to the remaining principal
balance.
2. Borrower may prepay the principal amount due under this Note at any time
or from time to time in full or in part without penalty, premium or permission.
3. Should interest not be timely paid it shall thereafter bear like
interest as the principal, but such unpaid interest so compounded shall not
exceed an amount equal to simple interest on the unpaid principal at the maximum
rate permitted by law. The entire unpaid principal balance hereunder shall
become immediately due and payable at the option and written demand of the
Noteholder if Borrower fails to pay any interest when due.
4. (a) The Noteholder is entitled to purchase, on or before September 30,
1998 five thousand (5,000) shares of the common stock ("Common Stock") of
Borrower upon exercise of this Warrant along with presentation of the full
purchase price or in the manner prescribed by paragraph 5 below. The purchase
price of the common stock upon exercise of this Warrant ("Warrant Shares") is
equal to the Seventy Five Cents ($0.75) per share (the "Exercise Price"). These
Warrants are granted to Noteholder for valuable consideration received. The
Noteholder, as consideration for extending the date of this Note, is also
entitled to purchase, on or before March 31, 2001 twenty five thousand (25,000)
shares of the common stock ("Common Stock") of Borrower upon exercise of this
Warrant along with presentation of the full purchase price or in the manner
prescribed by paragraph 5 below. The purchase price of
1
<PAGE>
the common stock upon exercise of this Warrant is equal to the One Dollar and
Twenty Five Cents ($1.25) per share (the "Exercise Price").
(b) These Warrants may be exercised one time, in whole only as to each
Warrant, on any business day on or before the expiration date listed above in
the manner prescribed in paragraph 5 or by presentation and surrender hereof to
the Borrower at its principal office of a written exercise request and the
Exercise Price in lawful money of the United States of America in the form of a
wire transfer or check, subject to collection, for the Warrant Shares specified
in the exercise request. Upon receipt by the Borrower of an exercise request and
representations, together with proper payment of the Exercise Price, at such
office, the Noteholder shall be deemed to be the holder of record of the Warrant
Shares, notwithstanding that the stock transfer books of the Borrower shall then
be closed or that certificates representing such Warrant Shares shall not then
be actually delivered to the Noteholder. The Borrower shall pay any and all
transfer agent fees, documentary stamp or similar issue or transfer taxes
payable in respect of the issue or delivery of the Warrant Shares.
(c) The Exercise Price and the number of Shares purchasable upon the
exercise of this Warrant are subject to adjustment from time to time upon the
occurrence of the events enumerated in this paragraph.
(i) In case the Corporation shall at any time after the date of this
Warrant:
(A) Pay a dividend of its shares of its Common Stock or make a
distribution in shares of its Common Stock with respect to its
outstanding Common Stock;
(B) Subdivide its outstanding shares of Common Stock;
(C) Combine its outstanding shares of Common Stock; or
(D) Issue any other shares of capital stock by reclassification of
its shares of Common Stock;
the Exercise Price in effect at the time of the record date of such
dividend, subdivision, combination, or reclassification shall be
proportionately adjusted so that Noteholder shall be entitled to
receive the aggregate number and kind of shares which, if this Warrant
had been exercised prior to such event, Noteholder would have owned
upon such exercise and been entitled to receive by virtue of such
dividend, subdivision, combination, or reclassification. Such
adjustment shall be made successively whenever any event listed above
shall occur.
(ii) In case of any reorganization of the Corporation, or in case of
any reclassification or change of outstanding Common Stock issuable
upon exercise of this Warrant (other than a change in par value, or
from par value to no par value, or from no par value to par value, or
as a result of a subdivision or split-up or combination of the Common
Stock), or in case of any consolidation or merger of the Borrower with
or into another entity (other than a consolidation or merger with a
subsidiary or a continuing corporation), or in case of any sale or
conveyance to another entity of all or substantially all of the
property of the Corporation, then, as a condition of such
reorganization, reclassification, change, consolidation, merger, sale,
or conveyance, the Corporation or such successor or purchasing entity,
as the case may be, shall forthwith provide to Noteholder a
supplemental warrant (the "Supplemental Warrant") which will make
lawful and adequate provision whereby Noteholder shall have the right
thereafter to receive, upon exercise of such Supplemental Warrant, the
kind and amount of shares and other securities and property which would
have been received upon such reorganization, reclassification, change,
consolidation, merger, sale, or conveyance by a holder of a number of
shares of Common Stock equal to the number of Shares issuable upon
exercise of this Warrant immediately prior to such reorganization,
reclassification, change, consolidation, merger, sale, or conveyance.
Such Supplemental Warrant shall include provisions for adjustments
which shall be as nearly equivalent as may be practicable to the
adjustments provided for in this paragraph. The above provisions of
this paragraph shall similarly apply to successive reorganizations,
reclassifications, and changes of Common Stock and to successive
consolidations, mergers, sales, or conveyances.
2
<PAGE>
(d) Noteholder has been advised and understands that the Warrants and
the Shares purchasable thereby are characterized as "restricted securities"
under the federal securities laws because they are being acquired from Borrower
in a transaction not involving a public offering and that under such laws and
applicable regulations such securities may be resold without registration under
the Act only in certain limited circumstances. Noteholder further understands
that the certificates evidencing the Shares will bear the following legend:
"These securities have not been registered under the Securities Act of 1933.
They may not be sold, offered for sale, pledged or hypothecated in the absence
of a registration statement in effect with respect to the securities under such
Act or an opinion of counsel satisfactory to the Borrower that such registration
is not required or unless sold pursuant to Rule 144 of such Act." The Noteholder
understands that the Borrower may place, and may instruct any transfer agent or
depository for the Shares to place, a stop transfer notation in the securities
records in respect of the Shares.
(e) This Warrant is non-detachable and may only be exercised by the
Noteholder, her successors or assigns, at the time of exercise. Should this Note
be prepaid in full, then upon surrender and cancellation of this Note, the
Borrower shall issue a separate non-transferable Warrant to the Noteholder on
the date of final payment.
5. (a) A portion of the principal amount of this Note may, at any time but
one time only and not in part, be applied at the option of the Noteholder to
exercise the Warrant Shares described in paragraph 4 above.
(b) Noteholder's election to apply principal to the warrant exercise
shall be made in writing which unequivocally expresses Noteholder's intent to
effect the exercise. Exercise shall be deemed to occur on the date such writing
is presented to Borrower. Upon such exercise duly made, Borrower shall deliver
such common stock to Noteholder. Borrower shall bear all expenses and charges of
issuing and delivering the warrant shares.
6. This Note when duly executed and accepted by Noteholder replaces and
cancels that certain Promissory Note dated September 10, 1996 between the
Borrower and Noteholder in the same amount and restates and cancels that 12%
Promissory Note With Non-Detachable Stock Purchase Warrants dated March 31,
1997. Noteholder shall upon receipt and acceptance of this Note tender the
original of the previous notes to the Borrower for cancellation.
7. In the event that this Note is placed with an attorney for collection or
that Noteholder resorts to legal process in order to enforce any rights under
this Note, Borrower shall pay all reasonable costs, including attorneys' fees,
thereby incurred by the Noteholder.
IN WITNESS WHEREOF, the undersigned Borrower has executed this Promissory
Note.
VALUESTAR CORPORATION
By /s/ JAMES STEIN
Authorized Officer
Noteholder Acknowledgment:
- --------------------------
3
EXHIBIT 4.14
THIS WARRANT AND THE SHARES ISSUABLE UPON ITS EXERCISE HAVE NOT BEEN REGISTERED
WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION UNDER THE U.S. SECURITIES ACT
OF 1933 ("ACT"), AND THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT
TO THE SECURITIES UNDER SUCH ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE
COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.
STOCK PURCHASE WARRANT
RIGHT TO PURCHASE 50,000 SHARES OF COMMON STOCK
THIS CERTIFIES THAT JACKSON STRATEGIC, INC., and all registered and permitted
assigns ("Holder") is entitled to purchase, on or before May 17, 2003, FIFTY
THOUSAND (50,000) shares of the common stock ("Common Stock" or "Shares") of
VALUESTAR CORPORATION (the "Corporation") upon exercise of this Warrant along
with presentation of the full purchase price as provided herein. The purchase
price of the common stock upon exercise (the "Warrant Shares") is equal to One
Dollar and Seventy Five Cents ($1.75) per share (the "Exercise Price"). This
Warrant is granted for valuable consideration received.
1. Exercise.
(a) This Warrant may be exercised one time, in whole or minimum increments of
10,000 shares, on any business day on or before the expiration date listed above
by presentation and surrender hereof to the Corporation at its principal office
of a written exercise request and the Exercise Price in lawful money of the
United States of America in the form of a wire transfer or check, subject to
collection, for the Warrant Shares specified in the exercise request. If this
Warrant should be exercised in part only, the Company shall, upon surrender of
this Warrant, execute and deliver a new Warrant evidencing the rights of the
Holder hereof to purchase the balance of the Warrant Shares purchasable
hereunder. Upon receipt by the Corporation of an exercise request and
representations, together with proper payment of the Exercise Price, at such
office, the Holder shall be deemed to be the holder of record of the Warrant
Shares, notwithstanding that the stock transfer books of the Corporation shall
then be closed or that certificates representing such Warrant Shares shall not
then be actually delivered to the Holder. The Corporation shall pay any and all
transfer agent fees, documentary stamp or similar issue or transfer taxes
payable in respect of the issue or delivery of the Warrant Shares.
(b) At any time during the period from issuance to expiration (the "Exercise
Period"), the Holder may, at its option, exchange this Warrant, in whole or
minimum increments of 10,000 shares (a "Warrant Exchange"), into the number of
Warrant Shares determined in accordance with this Section (1)(b), by
surrendering this Warrant at the principal office of the Company, accompanied by
a written notice stating such Holder's intent to effect such exchange, the
number of Warrant Shares to be exchanged and the date on which the Holder
requests that such Warrant Exchange occur (the "Notice of Exchange"). The
Warrant Exchange shall take place on the date the Notice of Exchange is received
by the Company or such later date as may be specified in the Notice of Exchange
(the "Exchange Date"). Certificates for the shares issuable upon such Warrant
Exchange and, if applicable, a new Warrant of like tenor evidencing the balance
of the shares remaining subject to this Warrant, shall be issued as of the
Exchange Date and delivered to the Holder within ten (10) days following the
Exchange Date. In connection with any Warrant Exchange, this Warrant shall
represent the right to subscribe for and acquire the number of Warrant Shares
(rounded to the next highest integer) equal to (i) the number of Warrant Shares
specified by the Holder in its Notice of Exchange (the "Total Number") less (ii)
the number of Warrant Shares equal to the quotient obtained by dividing (A) the
product of the Total Number and the existing Exercise Price by (B) the current
market value of a share of Common Stock. Current market value shall be the
average closing trading price for the 5 trading day period prior to the Exchange
Date.
1
<PAGE>
2. Adjustment of Exercise Price and Number of Shares Deliverable Upon Exercise
of Warrant.
The Exercise Price and the number of Shares purchasable upon the exercise of
this Warrant are subject to adjustment from time to time upon the occurrence of
the events enumerated in this paragraph.
(a) In case the Corporation shall at any time after the date of this Warrant:
(i) Pay a dividend of its shares of its Common Stock or make a
distribution in shares of its Common Stock with respect to its
outstanding Common Stock;
(ii) Subdivide its outstanding shares of Common Stock;
(iii) Combine its outstanding shares of Common Stock; or
(iv) Issue any other shares of capital stock by reclassification of
its shares of Common Stock;
the Exercise Price in effect at the time of the record date of such dividend,
subdivision, combination, or reclassification shall be proportionately adjusted
so that Holder shall be entitled to receive the aggregate number and kind of
shares which, if this Warrant had been exercised prior to such event, Holder
would have owned upon such exercise and been entitled to receive by virtue of
such dividend, subdivision, combination, or reclassification. Such adjustment
shall be made successively whenever any event listed above shall occur.
(b) In case the Corporation shall fix a record date for the issuance of rights,
options, or warrants or make a distribution of shares of Common Stock to all
(but not less than all) holders of its outstanding Common Stock entitling them
to subscribe for or purchase shares of Common Stock (or securities convertible
into shares of Common Stock) at a price per share (or having a conversion price
per share, if a security convertible into Common Stock) less than the market
price of the shares (based on the closing price on the record date on NASDAQ or
a listed securities exchange of the Corporation's Common Stock, or if no such
quote is available, the shareholders equity on the date of the last financial
statement divided by the total number of shares outstanding) (the "Market
Price"), the Exercise Price to be in effect after such record date shall be
determined by multiplying the then current Exercise Price in effect immediately
prior to such record date by a fraction, of which the numerator shall be the
number of shares of Common Stock outstanding on such record date plus the number
of shares of Common Stock which the aggregate offering price of the total number
of shares of Common Stock so to be offered (or the aggregate initial conversion
price of the convertible securities so to be offered) would purchase at such
Market Price and of which the denominator shall be the number of shares of
Common Stock outstanding on such record date plus the number of additional
shares of Common Stock to be offered for subscription or purchase (or into which
the convertible securities so to be offered are initially convertible). Such
adjustment shall be made successively whenever such a record date is fixed; and
in the event that such rights or warrants are not so issued, the Exercise Price
shall again be adjusted to be the Exercise Price which would then be in effect
if such record date had not been fixed.
(c) In case of any reorganization of the Corporation, or in case of any
reclassification or change of outstanding Common Stock issuable upon exercise of
this Warrant (other than a change in par value, or from par value to no par
value, or from no par value to par value, or as a result of a subdivision or
split-up or combination of the Common Stock), or in case of any consolidation or
merger of the Company with or into another entity (other than a consolidation or
merger with a subsidiary or a continuing corporation), or in case of any sale or
conveyance to another entity of all or substantially all of the property of the
Corporation, then, as a condition of such reorganization, reclassification,
change, consolidation, merger, sale, or conveyance, the Corporation or such
successor or purchasing entity, as the case may be, shall forthwith provide to
Holder a supplemental warrant (the "Supplemental Warrant") which will make
lawful and adequate provision whereby Holder shall have the right thereafter to
receive, upon exercise of such Supplemental Warrant, the kind and amount of
shares and other securities and property which would have been received upon
such reorganization, reclassification, change, consolidation, merger, sale, or
conveyance by a holder of a number of shares of Common Stock equal to the number
of Shares issuable upon exercise of this Warrant immediately prior to such
reorganization, reclassification, change, consolidation, merger, sale, or
conveyance. Such Supplemental Warrant shall include provisions for adjustments
which shall be as nearly equivalent as may be practicable to the adjustments
provided for in this paragraph. The above provisions of this paragraph shall
similarly apply to successive reorganizations, reclassifications, and changes of
Common Stock and to successive consolidations, mergers, sales, or conveyances.
2
<PAGE>
3. Restrictions on Transfer.
Holder has been advised and understands that the Warrants and the Warrant Shares
purchasable thereby are characterized as "restricted securities" under the
federal securities laws because they are being acquired from Corporation in a
transaction not involving a public offering and that under such laws and
applicable regulations such securities may be resold without registration under
the Act only in certain limited circumstances. Holder further understands that
the certificates evidencing the Warrant Shares will bear the following or
comparable legend: "These securities have not been registered under the
Securities Act of 1933. They may not be sold, offered for sale, pledged or
hypothecated in the absence of a registration statement in effect with respect
to the securities under such Act or an opinion of counsel satisfactory to the
Company that such registration is not required or unless sold pursuant to Rule
144 under such Act."
The Holder understands that the Company may place, and may instruct any transfer
agent or depository for the Warrant Shares to place, a stop transfer notation in
the securities records in respect of the Warrant Shares.
4. Registration Rights.
Holder shall have the right, at any time and from time to time until May 17,
2003, to include all of the shares purchased or purchasable upon the exercise of
this Warrant ( the "Registrable Shares") within any Registration Statement of
the Corporation filed by the Corporation covering shares of its Common Stock
other than a Registration Statement filed solely with respect to any employee
benefit plan of the Corporation or an offering solely related to an acquisition
or for which such Registrable Shares cannot, in the sole judgment of the
Company, be appropriately registered. The Corporation shall promptly give
written notice to Holder of any intended registration of its Common Stock not
less than forty-five (45) days prior to the anticipated effective date of the
Registration Statement, and Holder shall, within fifteen (15) days of receipt
thereof, notify the Corporation of the number of Registrable Shares it desires
to include in the Registration Statement. The number of Registrable Shares which
may be included by the Holder in any such Registration Statement may be
restricted by the Corporation if, in the opinion of the Corporation's managing
underwriter, the number of shares proposed to be sold by the Holder and by the
Corporation in such offering exceeds the number of securities which can be sold
in such offering. In such event, the Registrable Shares of Holder to be included
within such Registration Statement shall not exceed the number approved for
inclusion therein by the Corporation and its managing underwriter. All costs or
expenses, incident to the registration, qualification or listing of such
securities shall be paid by the Corporation, and the Corporation shall comply
with all reasonable requests of Holder made in connection with the registration,
qualification, listing or sale of Registrable Shares.
Each Holder of Warrants and Warrant Shares to be sold pursuant to any
Registration Statement (each, a "Distributing Holder") shall severally, and not
jointly, indemnify and hold harmless the Company, its officers and directors,
each underwriter and each person, if any, who controls the Company and such
underwriter, against any loss, claim, damage, expense or liability, joint or
several, as incurred, to which any of them may become subject under the
Securities Act or any other statute or at common law, in so far as such loss,
claim, damage, expense or liability (or actions in respect thereof) arises out
of or is based upon any untrue statement or alleged untrue statement of any
material fact contained in any such Registration Statement, any preliminary
prospectus or final prospectus contained therein, or any amendment or supplement
thereto, or any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading, in each
case to the extent, but only to the extent, that such untrue statement or
alleged untrue statement or omission or alleged omission was made in reliance
upon and in conformity with written information furnished to the Company by such
Distributing Holder specifically for use therein. Such Distributing Holder shall
reimburse the Company, such underwriter and each such officer, director or
controlling person for any legal or other expenses reasonably incurred by any of
them in connection with investigating or defending any such liability, as
incurred. Notwithstanding the foregoing, such indemnity with respect to such
preliminary prospectus or such final prospectus shall not inure to the benefit
of the Company, its officers or directors, or such underwriter (or such
controlling person of the Company or the underwriter) if the person asserting
any such loss, claim, damage, expense or liability purchased the securities that
are the subject thereof and did not receive a copy of the final prospectus (or
the final prospectus as then amended, revised or supplemented) at or prior to
the time such furnishing is required by the Securities Act in any case where any
such untrue statement or omission of a material fact contained in the
preliminary prospectus was corrected in the final prospectus (or, if contained
in the final prospectus, was subsequently corrected by amendment, revision or
supplement).
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5. Public Offering Lock-Up.
In connection with any public registration of this Company's securities, the
Holder (and any transferee of Holder) agrees, upon the request of the Company or
the underwriter(s) managing such underwritten offering of the Company's
securities, not to sell, make any short sale of, loan, grant any option for the
purchase of, or otherwise dispose of this Warrant, any of the shares of Common
Stock issuable upon exercise of this Warrant or any other securities of the
Company heretofore or hereafter acquired by Holder (other than those included in
the registration) without the prior written consent of the Company and such
underwriter(s), as the case may be, for a period of time not to exceed one
hundred eighty (180) days from the effective date of the registration. Upon
request by the Company, Holder (and any transferee of Holder) agrees to enter
into any further agreement in writing in a form reasonably satisfactory to the
Company and such underwriter(s). The Company may impose stop-transfer
instructions with respect to the securities subject to the foregoing
restrictions until the end of said 180-day period. Any shares issued upon
exercise of this Warrant shall bear an appropriate legend referencing this
lock-up provision.
6. Assignment or Loss of Warrant.
(a) The Holder of this Warrant shall be entitled, without obtaining the consent
of the Corporation, to assign its interest in this Warrant, or any of the
Warrant Shares, in whole or in part to any person, provided, however, that the
transferee, prior to any such transfer, provides the Corporation with a legal
opinion, in form and substance satisfactory to the Company, that such transfer
will not violate the Act or any applicable state securities or blue sky laws.
Otherwise without obtaining the prior written consent of the Company, Holder
shall not transfer or assign its interest in this Warrant, or any of the Warrant
Shares prior to exercise, in whole or in part to any transferee.
(b) Upon receipt of evidence satisfactory to the Company of the loss, theft,
destruction or mutilation of this Warrant, and (in the case of loss, theft or
destruction) of indemnification satisfactory to the Company, and upon surrender
and cancellation of this Warrant, if mutilated, the Company shall execute and
deliver a new Warrant of like tenor and date.
7. Reservation of Shares.
The Company hereby agrees that at all times there shall be reserved for issuance
and delivery upon exercise or exchange of this Warrant all shares of its Common
Stock or other shares of capital stock of the Company from time to time issuable
upon exercise or exchange of this Warrant. All such shares shall be duly
authorized and, when issued upon the exercise or exchange of the Warrant in
accordance with the terms hereof, shall be validly issued, fully paid and
nonassessable, free and clear of all liens, security interests, charges and
other encumbrances or restrictions on sale (other than as provided in the
Company's articles of incorporation and any restrictions on sale set forth
herein or pursuant to applicable federal and state securities laws) and free and
clear of all preemptive rights.
The Holder shall not have any rights as a shareholder of the Company with regard
to the Warrant Shares prior to actual exercise resulting in the purchase of the
Warrant Shares.
8. Arbitration. In the event that a dispute arises between the Corporation and
the holder of this Warrant as to any matter relating to this Warrant, the matter
shall be settled by arbitration in Alameda County, California in accordance with
the Rules of the American Arbitration Association and the award rendered by such
arbitrator(s) shall not be subject to appeal and may be entered in any federal
or state court located in Alameda County having jurisdiction thereof, and
actions or proceedings shall be brought in no other forum or venue.
IN WITNESS WHEREOF, the Corporation has caused this Warrant to be executed by
its duly authorized officers and the corporate seal hereunto affixed on this
18th day of May, 1998.
VALUESTAR CORPORATION
/s/ JAMES STEIN
James Stein, President and CEO
/s/ BENJAMIN A. PITTMAN
Benjamin A. Pittman, Secretary
4
EXHIBIT 10.4
EMPLOYMENT AGREEMENT
THIS AGREEMENT is entered into effective as of the 1st day of July, 1998,
between VALUESTAR CORPORATION, a Colorado publicly traded corporation and/or its
operating subsidiary (the "Company"), and James Stein ("Employee").
Employee, in consideration of the covenants and agreements hereinafter
contained, agrees as follows with respect to the employment of the Company of
Employee and Employee's future business activities.
1. Employment: Term of Employment. The Company hereby employs Employee and
Employee hereby accepts such employment upon the terms and conditions
hereinafter set forth. Subject to the provisions for termination as hereinafter
provided, Employee's term of employment by the Company shall be from the date of
this Agreement until June 30, 2001, and said employment shall continue after
such date until either party shall deliver written notice to the other party
hereto to the effect that the employment hereunder shall terminate thirty (30)
days from the giving of such notice. This Agreement will supersede all prior
written and oral agreements entered into by and between Company and Employee
concerning employment other than any and all outstanding stock option, stock
warrant and stock agreements. These include but are not limited to two
agreements dated May 10, 1995 and other agreements dated August 2, 1995,
December 9, 1997 and March 4, 1998.
2. Services to be Rendered by Employee. Employee shall be subject to the
direction of the Board of Directors, or a duly authorized committee thereof and
his duties shall be those generally vested in the office of President and Chief
Executive Officer for the Company and he shall have such other powers and duties
as may be reasonably prescribed by the Board of Directors, or a duly authorized
committee thereof, and shall perform such duties as from time to time may be
decided upon by the Board of Directors, or a duly authorized committee thereof,
of the Company, including but not limited to, speaking for and promoting the
sale of the Company's services and products as public spokesman both in print,
television ads and other media.
The Company shall have the non-exclusive right to use Employee's name, picture
or other likeness and biographical material concerning him, in connection with
advertising, promotion and publicizing the Company and its activities, so long
as this Agreement is in effect (and for a reasonable period, not to exceed one
year, thereafter to utilize expendable materials and supplies). The Company
shall have the right to use non-expendable media thereafter at its discretion
(e.g. historical media, media productions for consumers and businesses, etc.).
Such use shall be fair and not misleading or unflattering and when practical
indicate Employee is not affiliated with the Company. Employee shall be allowed
to review and approve all such uses prior to initial use or publication.
The Employee agrees that he will serve the Company faithfully, diligently,
competently and to the best of his abilities, devoting all his business time,
efforts, energy, skills and attention to the activities of the Company and the
promotion of its interests. Employee shall not serve as an officer or director
or similar capacity with any other entity except with the prior consent of the
Company.
3. Compensation.
(a) For the services to be rendered by Employee during his employment by the
Company, the Company shall pay Employee a Base Salary of One Hundred Twenty
Thousand Dollars ($120,000) per annum during the term of this Agreement,
prorated for any partial period and paid in conformity with the Company's normal
payroll period. Employee's salary shall be reviewed by the Board of Directors,
or a duly authorized committee thereof, from time to time in its discretion, and
Employee will receive such salary increases, if any, as the Board of Directors,
or a duly authorized committee thereof, in their sole discretion determines.
(b) Employee shall be shall be eligible for bonuses, at such time and in such
amounts as shall be determined at the discretion of the Board of Directors, or a
duly authorized committee thereof, based on its assessment of Employee's
performance of his duties and on the financial performance of the Company.
(c) The Employee's place of employment shall be considered Alameda County,
California (or other mutually agreed upon location).
(d) Employee shall be entitled to participate in and receive benefits under the
Company's executive benefit plans as in effect from time to time, including,
medical insurance, sick leave, and vacation time, subject to and on a basis
consistent with the
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terms, conditions and overall administration of such plans and Company policies.
Should this Agreement be terminated for any reason, Employee shall have the
option, to the extent allowable by the policies, to continue any insurance in
force by taking over the payment of the premiums for Employee and his family.
(e) The Company shall pay or reimburse Employee for all expenses normally
reimbursed by the Company and reasonably incurred by him in furtherance of his
duties hereunder and authorized by the Company, including without limitation,
expenses for entertainment, traveling, meals, hotel accommodations,
out-of-pocket home office expenses and the like upon submission by him of
vouchers or an itemized list thereof as the Company; may from time to time adopt
and authorize, and as may be required in order to permit such payments as proper
deductions to the Company under the Internal Revenue Code of 1986 and the rules
and regulations adopted pursuant thereto now or hereafter in effect.
(f) All amounts payable or which become payable under any provision of this
Agreement will be subject to any deductions authorized in writing by Employee
and any deductions and withholdings required by law.
(g) The Company shall pay costs of and use of an automobile primarily for
business use on terms as approved by the Board of Directors, or a duly
authorized committee thereof, from time to time. Employee shall pay reasonable
amounts for personal use as required under the Internal Revenue Code of 1986 and
the rules and regulations adopted pursuant thereto now or hereafter in effect.
4. Indemnification.
(a) If, after the date of the commencement of the Employment Period, the
Employee is made a party or is threatened to be made a party to any action, suit
or proceeding, whether civil, criminal, administrative or investigative (a
"Proceeding"), by reason of the fact that he is or was an officer of the Company
or is or was serving at the request of the Company as a director, officer,
member, employee or agent of another corporation or partnership, joint venture,
trust or other enterprise, including service with respect to employee benefit
plans, whether or not the basis of such Proceeding is an alleged act or failure
to act in an official capacity as a director, officer, member, employee or
agent, he shall be indemnified and held harmless by the Company to the fullest
extent authorized by Colorado law, as the same exists or may hereafter be
amended, against all expense, liability and loss (including, without limitation,
attorneys' fees, judgments, fines and amounts paid or to be paid in settlement)
reasonably incurred or suffered by the Employee in connection therewith,
including, without limitation, payment of expenses incurred in defending a
Proceeding prior to the final disposition of such Proceeding (subject to receipt
of an undertaking by the Employee to repay such amount if it shall ultimately be
determined that the Employee is not entitled to be indemnified by the Company
under Colorado law), and such indemnification shall continue as to the Employee
even if he has ceased to be an officer, member, employee or agent of the Company
or other enterprise and shall inure to the benefit of his heirs, executors and
administrators.
(b) The right of indemnification and the payment of expenses incurred in
defending a Proceeding in advance of its final disposition conferred in this
Section 4 shall not be exclusive of any other right that the Employee may have
or hereafter may acquire under any statute, provision of the Certificate of
Incorporation or Bylaws of the Company, agreement, vote of shareholders or
disinterested directors or otherwise.
5. Termination of Employment.
(a) The Company shall have the right at its option to terminate the employment
of Employee hereunder by giving written notice thereof to the Employee in the
event of any of the following:
(1) The Company may terminate this Agreement at any time with good
cause, as determined by the Board of Directors of the Company, or a
duly authorized committee thereof, acting in good faith and upon
reasonable grounds, whereupon all compensation to Employee shall cease
as of the effective date of termination. As used in this paragraph, the
term "good cause" shall mean (i) dishonesty by Employee detrimental to
the best interests of the Company, (ii) continuing inattention to or
neglect of the duties to be performed by Employee, (iii) willful
disloyalty of Employee to Company, (iv) engaging in any substantiated
act involving moral turpitude (v) conviction by a court of competent
jurisdiction of Employee in any fraud or felony, (vi) engaging in any
act which, in each case, subjects, or if generally known would subject,
the Company to gross public ridicule or gross embarrassment, (vii)
willful failure or refusal to perform such duties as may be relegated
to Employee commensurate with Employee's position, (viii) the imparting
of any material confidential information by Employee in violation of
this Agreement, or (ix) any breach of this Agreement by Employee.
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(2) If the Company gives Employee thirty days advance written notice of
termination of employment.
(3) If the Employee dies during the term of employment, the Employee's
employment hereunder and Employee's compensation and other rights under
this Agreement and as an employee of the Company (except as to
compensation and rights accrued prior thereto and except as expressly
provided in the next succeeding sentence) shall terminate thirty (30)
days following the date of death. In such event, the Company shall pay
to the Employee's designated executor or administrator of the
Employee's estate, all compensations and benefits accrued which would
otherwise be payable to the Employee through the thirtieth (30) day
following the date of death. Indemnification rights endure as provided
for in Section 4.
(4) If the Employee is unable for any reason to carry out or to perform
the duties required of him hereunder and does not resume his duties
prior to the termination date specified in the Company's written notice
of termination; provided, however, if the Employee shall fail to carry
out or to perform the duties required of him because of mental or
physical disability for a six consecutive month period during the term
hereof and following such period he is unable to perform his duties
hereunder because of mental or physical disability, as determined by
the Board of Directors of the Company, or a duly authorized committee
thereof, acting in good faith and upon reasonable grounds, he shall be
entitled to receive his then Base Salary he would otherwise be entitled
to pursuant to Paragraph 3 hereof for a period of not longer than three
(3) months after the termination of his employment pursuant to this
Paragraph 5(a) (4). If Employee shall receive any amount during the
time of any incapacity by reason of any disability insurance or any
other insurance plan, senior executive loss or income policy,
disability policy or any other plan or scheme of a like nature funded
by the Company, any payments of Base Salary or benefits of this section
may be reduced by a like amount.
(5) If this Agreement is terminated by the Company pursuant to
Paragraph 5(a)(2) hereof, then Employee shall be entitled to severance
payments equal to twelve (12) months of his then monthly Base Salary
plus a bonus payment (prorated based on progress to bonus goals, i.e.
if 30% of a revenue goal is achieved a 30% payout of the bonus is made
for that goal) within thirty (30) days after such effective termination
of Employee's employment by the Company.
(b) The Employee shall have the right at his sole option to terminate employment
hereunder under the following conditions:
(1) at any time upon thirty (30) days written notice.
(2) upon written notice by Employee to the Company within thirty (30)
days of and indicating that a change in control of the Company
("Corporate Transaction") has occurred and therefore Employee elects to
terminate as provided herein. A Corporate Transaction or other
qualifying event shall be deemed to have occurred if (i) any "person"
(as such term is used in Sections 13(d) and 14(d) of the Exchange Act)
is or becomes the "beneficial owner" (as defined in Rule 13d-3 under
the Exchange Act), directly or indirectly, of securities of the Company
representing 50% or more of the combined voting power of the Company's
then outstanding securities; or (ii) the Company sells, transfers or
otherwise disposes of all or substantially all of the assets of the
Company; or (iii) a merger or acquisition in which the Company is not
the surviving entity (except for a merger into a wholly-owned
subsidiary, and except for a transaction the sole purpose of which is
to change domicile).
(3) if termination by the Employee is pursuant to 5 (b) (1) then no
severance or termination payments shall be payable. If termination is
noticed pursuant to 5 (b) (2) hereof then Employee shall be entitled to
a payment equal to the greater of the remaining months of this
Agreement multiplied by the then monthly Base Salary or twelve (12)
multiplied by the then monthly Base Salary, plus any bonus based on
prorata performance as described in Section 5 (b) (2), all payable in
one lump sum within sixty (60) days. In addition, the Employee shall be
entitled to recover legal fees and costs incurred by Employee should
the Company not make timely payment prescribed by this section and
should the Employee prevail in any action filed thereabouts.
(c) Upon termination of this Agreement, Employee shall immediately resign all
offices held with the Company and all Affiliates (any entity with a 30% or more
equity ownership by or of the Company) thereof, and, except as set forth in this
Section 5, Employee shall not be entitled to receive any termination or
severance payment or compensation for loss of office or otherwise. If Employee
fails to immediately resign as herein provided, then Employee irrevocably
appoints the Secretary of the Company in his name and on his behalf to sign any
resignation confirmation or do anything necessary or requisite to give effect to
such resignation(s). On the effective date of termination of this Agreement,
Employee will deliver to the Company, in
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a reasonable state of repair, all property and equipment of the Company, both
real and personal owned, leased or bailed to Employee and used by or in the
possession of Employee.
6. Confidential Information and Trade Secrets. Employee covenants and agrees
with the Company that Employee will not, during the term of this Agreement and
thereafter directly or indirectly use, communicate, disclose or disseminate to
anyone (except to the extent reasonably necessary for Employee to perform
Employee's duties hereunder, except as required by law or except if generally
available to the public otherwise than through use, communication, disclosure or
dissemination by Employee) any Confidential Information (as hereinafter defined)
concerning the businesses or affairs of the Company or of any of its affiliates
or subsidiaries which Employee may have acquired in the course of or as incident
to Employee's employment or prior dealings with the Company or with any of its
affiliates or subsidiaries.
"Confidential Information" shall mean (a) all knowledge, information and
material concerning the Company or its business or the business of any of its
affiliates or subsidiaries that shall become known to Employee as a consequence
of Employee's relationship with the Company, (b) all information that has been
disclosed to the Company by any third party under an agreement or circumstances
requiring such information to be kept confidential, and (c) all knowledge,
information or material concerning Inventions that are, under this Agreement,
owned by Company or assigned by Employee to Company; provided, that Confidential
Information shall not include knowledge, information or material that is or
becomes generally known or available to others in businesses engaged in by the
Company or to the public (other than through unauthorized disclosure).
Confidential Information shall include without limitation (a) information of a
technical nature, such as information regarding past, present and future
research, financial data, product information, marketing plans, computer
programs (whether in source or object code form or other form and whether
contained on program listings, magnetic tape, magnetic disks, CD ROMs or other
media), logic, flow charts, specifications, documentation and ideas relating to
the activities of Company, (b) information of a business nature, such as
information regarding past, present and future client or consumer development,
strategies, procurement specifications, cost and financial data, contracts,
quotations and names of actual and prospective clients, consumers or customers,
and (c) all documents, drawings, reports, client and consumer lists, and other
physical embodiments of all such information.
"Inventions" shall mean each of the following, but only to the extent they
relate to the business of commerce conducted by the Company or its Affiliates or
are made by Employee with the equipment, supplies, facilities or trade secret
information of the Company or which result from any work performed by the
Employee for the Company: all inventions, discoveries, developments, ideas,
works, improvements, enhancements, works of authorship, products and computer
software, whether or not patentable, and anything else that is subject to or
potentially subject to the patent, copyright or trade secret laws of any
jurisdiction.
The Employee agrees that as to any Inventions made by him during the term of his
employment, solely or jointly with others, shall belong to the Company and the
Employee promises to assign such Inventions to the Company. The Employee also
agrees that the Company shall have the right to keep such Inventions as trade
secrets, if the Company chooses. The Employee agrees to assign to the Company
the Employee's rights in any other Inventions where the Company is required to
grant those rights to the United States government or any agency thereof. In
order to permit the Company to claim rights to which it may be entitled, the
Employee agrees to disclose to the Company in confidence all Inventions which
the Employee makes arising out of the Employee's employment and all patent
applications filed by the Employee within one year after the termination of his
employment. The Employee shall assist the Company in obtaining patents on all
Inventions, designs, improvements, and discoveries patentable by the Company in
the United States and in all foreign countries, and shall execute all documents
and do all things necessary to obtain letters patent, to vest the Company with
full and extensive title thereto, and to protect the same against infringement
by others.
7. Non-Competition Covenant. Employee acknowledges that Employee's services and
responsibilities are of particular significance to the Company and that
Employee's position with the Company has given and will give Employee close
knowledge of its policies and trade secrets. Since the Company is in a creative
and competitive information business, Employee's continued and exclusive service
to Company under this Agreement is of a high degree of importance.
Employee covenants and agrees with the Company that Employee will not, during
the term of this Agreement and for a period of two years after the termination
of Employee's employment hereunder in any manner, directly or indirectly, (i)
induce or attempt to influence any present or future officer, employee, lessor,
lessee, licensor or licensee of Company or its subsidiaries or its affiliates to
leave its respective employ; further, during the term described, Employee will
not be involved in or participate in a competitive company that solicits or
diverts or services any of the customers, consumers or clients that the Company
or its subsidiaries or its affiliates has or had in the one (1) year previous to
the date of termination of this Agreement,
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(ii) engage, in the state of California where the Company currently operates or
the other 49 states in America that the Company is planning to do business, in
any businesses that during the term of this Agreement is engaged in by the
Company or its subsidiaries or affiliates, and (iii) except for ownership of no
more than 1% of the capital stock, be a stockholder of any corporation, or
directly or indirectly own, manage, operate, conduct, control or participate in
the ownership, management, operation, conduct, control of, accept employment
with, or be connected in any other manner with, any business which engages in
any direct competitive activity including, without limitation, any business
which engages in rating local service and professional businesses in any
geographic region indicated in this paragraph.
8. Right to Injunctive Relief. Employee acknowledges that the remedy at law for
any breach or threatened breach by Employee of the covenants contained in
paragraphs 6 and 7 would be wholly inadequate, and therefore the Company or its
subsidiaries or its affiliates shall be entitled to preliminary and permanent
injunctive relief and specific performance thereof. Paragraphs 6 and 7
constitute independent and separable covenants that shall be enforceable
notwithstanding rights or remedies that the Company or its subsidiaries or it
affiliates may have under any other provision of this Agreement, or otherwise.
If any or all of the foregoing provisions of paragraphs 6 and 7 are held to be
unenforceable for any reason whatsoever, it shall not in any way invalidate or
affect the remainder or this Agreement which shall remain in full force and
effect. If the period of time or geographical areas specified in paragraphs 6
and 7 are determined to be unreasonable in any judicial proceeding, the period
of time or areas of restriction shall be reduced so that this Agreement may be
enforced in such areas and during such period of time as shall be determined to
be reasonable.
9. Employee Acknowledgment. Employee has carefully read and considered the
provisions hereof, and having done so, agrees that restrictions set forth in
paragraphs 6, 7, and 8 (including, but not limited to, the time periods of
restrictions) are fair and reasonable and are reasonably required for the
protection of the interests of Company.
10. Severability. Each paragraph and subparagraph of this Agreement shall be
construed and considered separate and severable from the validity and
enforceability of any other provision contained in this Agreement.
11. Assignment. The rights of the Company (but not its obligations) under this
Agreement may, without the consent of the Employee, be assigned by the Company
to any parent, subsidiary, or successor of the Company; provided that such
parent, subsidiary or successor acknowledges in writing that it is also bound by
the terms and obligations of this Agreement. Except as provided in the preceding
sentence, the Company may not assign all or any of its rights, duties or
obligations hereunder without prior written consent of Employee. The Employee
may not assign all or any of his rights, duties or obligations hereunder without
the prior written consent of the Company.
12. Notices. All notices, requests, demands and other communications shall be in
writing and shall be defined to have been duly given if delivered or if mailed
by registered mail, postage prepaid:
(a) If to Employee, addressed to him at the following address as may be changed
in writing from time to time:
James Stein
7009 Baker Lane
Sebastopol, California 95472
(b) If to the Company, addressed to:
ValueStar Corporation
1120A Ballena Blvd.
Alameda, California 94501
or to such other address as any party hereto may request by notice given as
aforesaid to the other parties hereto.
13. Title and Headings. Titles and headings to paragraphs hereof are for
purposes of references only and shall in no way limit, define or otherwise
affect the provisions hereof.
14. Governing Law. This Agreement is being executed and delivered and is
intended to be performed in the State of California, and shall be governed by
and construed in accordance with the laws of the State of California.
15. Counterparts. This Agreement may be executed simultaneously in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument. It shall not be necessary
in making proof of this Agreement to produce or account for more than one
original counterpart.
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16. Cumulative Rights. Each and all of the various rights, powers and remedies
of the Company and Employee in this Agreement shall be considered as cumulative,
with and in addition to any other rights, powers or remedies of the Company or
the Employee and no one of them as exclusive of the others or as exclusive of
any other rights, powers and remedies allowed by law. The exercise or partial
exercise of any right, power or remedy shall neither constitute the election
thereof nor the waiver of any other right, power or remedy. Sections 4, 6, 7 and
8 hereof shall continue in full force and effect notwithstanding the Employee's
termination of employment and the termination of this Agreement.
17. Remedies. The Employee and the Company both acknowledge that each may have
no adequate remedy at law if either violates any of the terms contained in
Sections 6, 7 and 8. In such event, either party shall have the right, in
addition to any other rights it may have, to obtain relief to restrain any
breach hereof or otherwise to specifically enforce any of the provisions hereof.
18. Waiver of Breach. The waiver by one party to this Agreement of a breach of
any provision of this Agreement by the other party shall not operate or be
construed as a waiver of any subsequent breach by the said party .
19. Entire Agreement. This Agreement contains the entire agreement of the
parties hereto and may be modified or amended only by a written instrument
executed by parties hereto. Effective on the date hereof, any prior employment
agreements between the Company and the Employee shall terminate.
20. Attorney's Fees. In the event that either party must institute legal action
to compel the other to comply with the terms of this Agreement, the prevailing
party shall be entitled to reasonable attorneys' fees and costs.
21. Good Faith. Each of the parties hereto agrees that he or it shall act in
good faith in all actions taken under this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date first above written.
/s/JAMES A. BARNES July 1, 1998
ValueStar Corporation
James A. Barnes, Treasurer and Director
/s/JAMES STEIN July 1, 1998
James Stein, Employee
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EXHIBIT 10.6.1
<TABLE>
BALLENA ISLE MARINA
Ballena Bay Yacht Harbor
1150 Ballena Blvd. Suite 111
Alameda, CA 94501-3682
(510)523-5528 FAX (510)865-2257
<CAPTION>
OFFICE RENTAL AGREEMENT
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Space 1120 Space 1124 Space 1136 Space 108 Space Locker
Sq. Ft. 1825 Sq. Ft. 384 Sq. Ft. 208 Sq. Ft. 605 Sq. Ft. N/A Total Sq. Ft. 3522
Rent 2008.00 Rent 978.00 Rent 218.00 Rent 749.00 Rent 50.00 Date 8/1/98
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Tenant ValueStar Inc.
Address 1120 Ballena Blvd. Alameda, CA 94501
Telephone: Business (510) 814-7070 Residence (510)
Month To Month Commencing August 1 1998
(See Paragraph 1)
First Month Rent (See Paragraph 2) $ 3998.00
Subsequent Monthly Rent (See Paragraph 2) $ 3998.00
Other $ -0-
Security Deposit (See Paragraph 3) Transfered From Lease $ 2709.00
Use: The premises shall be used and occupied only for the following purpose(s):
General Office
This rental agreement is made this date between Ballena Isle Marina and tenant
concerning the space described herein. The terms, covenants and conditions set
forth in the attached addendum are incorporated herein and made a part hereof.
BALLENA ISLE MARINA
A California Limited Partnership
By: /s/ JACK BOLANDER
Jack Bolander
TENANT
By: /s/ JIM STEIN for ValueStar, Inc.
Jim Stein
Managing Director
<PAGE>
Ballena Isle Marina
1150 Ballena Blvd. Ste 111
Alameda, CA 94501
ADDENDUM TO RENTAL AGREEMENT
1. TERM: The term of this Agreement shall be for the period designated. All
month-to-month terms are for monthly periods beginning on the 1st day of a month
and end on the last day. If the Landlord of Tenant elect to terminate a
month-to-month term without cause, they shall have at least 90 days prior
written notice of such election to the other party. Such termination shall occur
only on the last day of the next succeeding full month following the giving of
such notice.
2. RENT: Tenant agrees to pay Landlord monthly in advance on the first day of
each month such sum as shall be the applicable monthly fee for the use of the
designated space as established by this agreement. Tenant shall receive at least
30 days prior written notice of any change. Set forth herein is amount of such
monthly fee in effect at the date hereof. In the event such fee shall be
increased Tenant agrees to pay the same or shall have the right to elect to
terminate this Agreement effective with the date a new fee shall become
applicable. If Tenant fails to pay the new rent when due, this Agreement is
immediately terminated.
3. (deleted)
4. RISK AND INDEMNITY: This Agreement is a license granting use of space only,
such space to be used at the sole risk of Tenant/ Tenant shall obtain and keep
in force during the term of this Agreement a policy of comprehensive public
liability insurance insuring Landlord and Tenant against any liability arising
out of the ownership, use, occupancy or maintenance of the Premises and all
areas appurtenant thereto.
5. WAIVER OF SUBROGATION: Tenant and Landlord each waive any and all rights of
recovery against the other, or against the officers, employees, agents, and
representatives of the other, for loss of or damage to such waiving party or
it's property or the property of others under it's control, where such loss or
damage is insured against under any insurance policy in force at the time of
such loss or damage.
6. UTILITIES: Tenant shall pay for all electricity based on a pro-rate share of
the meter covering their Premises. Tenant shall pay for all telephones supplied
to the Premises together with any taxes thereon.
<PAGE>
BALLENA ISLE MARINA
Ballena Bay Yacht Harbor
1150 Ballena Blvd. Suite 111
Alameda, CA 94501-3682
(510)523-5528 FAX (510)865-2257
OFFICE RENTAL AGREEMENT
Space 120
Square Footage 1295
Date 7/01/98
Tenant ValueStar Inc.
Address 1150 Ballena Blvd. Suite 120, Alameda CA 94501
Telephone: Business (510) 814-7070 Residence (510)
Month To Month Commencing July 1, 1998
(See Paragraph 1)
First Month Rent (See Paragraph 2) $1685.00
Subsequent Monthly Rent (See Paragraph 2) $1685.50
Other $ -0-
Security Deposit (See Paragraph 3) $ N/A
Use: The premises shall be used and occupied only for the following purpose(s):
General Office
This rental agreement is made this date between Ballena Isle Marina and tenant
concerning the space described herein. The terms, covenants and conditions set
forth in the attached addendum are incorporated herein and made a part hereof.
BALLENA ISLE MARINA
A California Limited Partnership
By: /s/ JACK BOLANDER
Jack Bolander
TENANT
By: /s/ JIM STEIN for ValueStar, Inc.
Jim Stein
Managing Director
<PAGE>
Ballena Isle Marina
1150 Ballena Blvd. Ste 111
Alameda, CA 94501
ADDENDUM TO RENTAL AGREEMENT
1. TERM: The term of this Agreement shall be for the period designated. All
month-to-month terms are for monthly periods beginning on the 1st day of a month
and end on the last day. If the Landlord of Tenant elect to terminate a
month-to-month term without cause, they shall have at least 90 days prior
written notice of such election to the other party. Such termination shall occur
only on the last day of the next succeeding full month following the giving of
such notice.
2. RENT: Tenant agrees to pay Landlord monthly in advance on the first day of
each month such sum as shall be the applicable monthly fee for the use of the
designated space as established by this agreement. Tenant shall receive at least
30 days prior written notice of any change. Set forth herein is amount of such
monthly fee in effect at the date hereof. In the event such fee shall be
increased Tenant agrees to pay the same or shall have the right to elect to
terminate this Agreement effective with the date a new fee shall become
applicable. If Tenant fails to pay the new rent when due, this Agreement is
immediately terminated.
3. (deleted)
4. RISK AND INDEMNITY: This Agreement is a license granting use of space only,
such space to be used at the sole risk of Tenant/ Tenant shall obtain and keep
in force during the term of this Agreement a policy of comprehensive public
liability insurance insuring Landlord and Tenant against any liability arising
out of the ownership, use, occupancy or maintenance of the Premises and all
areas appurtenant thereto.
5. WAIVER OF SUBROGATION: Tenant and Landlord each waive any and all rights of
recovery against the other, or against the officers, employees, agents, and
representatives of the other, for loss of or damage to such waiving party or
it's property or the property of others under it's control, where such loss or
damage is insured against under any insurance policy in force at the time of
such loss or damage.
6. UTILITIES: Tenant shall pay for all electricity based on a pro-rate share of
the meter covering their Premises. Tenant shall pay for all telephones supplied
to the Premises together with any taxes thereon.
EXHIBIT 10.8.2
VALUESTAR CORPORATION
1997 STOCK OPTION PLAN
FIRST AMENDMENT
On March 31, 1998 the Board of Directors authorized this first amendment of the
1997 Stock Option Plan which was originally adopted by the Board of Directors on
March 20, 1997 and ratified by the shareholders on April 16, 1997. The 1997
Stock Option Plan is hereby amended by deleting Section 5 in its entirety to be
replaced by the following Section 5:
5. Shares Subject to the Plan.
For purposes of the Plan, the Committee is authorized to grant Options to
purchase not more than five hundred thousand (500,000) shares of the Company's
common stock, $.00025 par value per share ("Common Stock"), either treasury or
authorized but unissued shares, or the number and kind of shares of stock or
other securities which, in accordance with Section 13, shall be substituted for
such shares of Common Stock or to which such shares shall be adjusted. The
Committee is authorized to grant Options under the Plan with respect to such
shares. Any or all unsold shares subject to an Option which for any reason
expires or otherwise terminates (excluding shares returned to the Company in
payment of the exercise price for additional shares) may again be made subject
to grant under the Plan.
Consistent with Section 3.2 all options granted under this Plan in excess of
options on 200,000 common shares previously ratified by the stockholders of the
Company, are subject to, and may not be exercised before, the approval of this
First Amendment by the holders of a majority of the Company's outstanding shares
on or before the expiration of twelve months from the date of this First
Amendment of this Plan by the Board, and if such approval is not obtained, all
Options previously granted in excess of options on 200,000 common shares, shall
be void.
* * * *
By signature below, the undersigned officers of the Company hereby certify that
the foregoing is a true and correct copy of the First Amendment to the 1997
Stock Option Plan of the Company.
DATED: March 31, 1998
VALUESTAR CORPORATION
By /s/ JAMES STEIN
------------------------------
James Stein, President and CEO
By /s/ BENJAMIN PITTMAN
------------------------------
Benjamin Pittman, Secretary
EXHIBIT 10.10
VALUESTAR CORPORATION
NON-QUALIFIED STOCK OPTION AGREEMENT
THIS NON-QUALIFIED STOCK OPTION AGREEMENT ("Agreement") is made and entered into
effective as of the 6th day of July, 1998, by and between VALUESTAR CORPORATION,
a Colorado corporation (the "Company") and _______ (the "Optionee").
BACKGROUND
A. The Company has determined to reward and to provide incentives to those who
are primarily responsible for the operations of the Company and for shaping and
carrying out the long-range plans of the Company and aiding in its continued
growth and financial success.
B. In furtherance of these purposes, the Board of Directors of the Company has
authorized the grant to Optionee of a stock option to purchase certain shares of
the common stock, par value $.00025 per share, of the Company ("Common Stock")
by resolution dated July 6, 1998.
C. The Company and Optionee wish to confirm the terms, conditions, and
restrictions of this option.
For and in consideration of the premises, the mutual covenants contained herein,
and other good and valuable consideration, the parties hereto agree as follows:
ARTICLE 1
GRANT AND EXERCISE OF OPTION
1.1 GRANT OF OPTION. Subject to the terms, restrictions, limitations, and
conditions stated herein, the Company hereby grants to Optionee an option (the
"Option") to purchase _______ shares of Common Stock (the "Option Shares"). The
date first written above shall be the date on which the Option has been granted
(the "Grant Date").
1.2 EXERCISE OF THE OPTION (a) The Option may be exercised with respect to all
or any portion of the vested Option Shares at any time during the Option Period
(as defined below) by the delivery to the Company, at its principal place of
business, of (i) a written notice of exercise which shall be delivered to the
Company no earlier than thirty (30) days and no later than ten (10) days prior
to the date upon which Optionee desires to exercise all or any portion of the
Option (the "Exercise Date"); (ii) a certified check payable to the Company in
the amount of the Exercise Price (as defined below) multiplied by the number of
Option Shares being purchased (the "Purchase Price") OR with the advance
approval of the Company by delivery of a number of shares of Common Stock, which
have been held by Optionee for at least six months, having a fair market value,
as of the date the Option is exercised, at least equal to the Purchase Price OR
with the advance approval of the Company by a certified check payable to the
Company in an amount less than the Exercise Price and by delivery of a number of
shares of Common Stock, which have been held by Optionee for at least six
months, having a fair market value, as of the date the Option is exercised, at
least equal to the balance of the Purchase Price OR with the advance approval of
the Company by Optionee advising the Company, at the time this Option is
exercised, to withhold from exercise under the Option the appropriate number of
Option Shares, the
<PAGE>
aggregate fair market value of which on the date of exercise of the Option is
equal to the aggregate cash purchase price of the Option Shares being exercised
and purchased under the Option, and such withholding shall constitute full
payment for the non-withheld Option Shares issued upon exercise; and (iii)
except as permitted in Paragraph 1.2(b) below, a certified check payable to the
Company in the amount of all withholding tax obligations (whether federal, state
or local), imposed on the Company by reason of the exercise of the Option, or if
applicable the Withholding Election described in Section 1.2(b). Upon acceptance
of such notice, receipt of payment in full, the Company shall cause a
certificate representing the shares of Common Stock as to which the Option has
been exercised to be issued and delivered to the Optionee.
(b) In lieu of paying the withholding tax obligation in cash, as described in
Section 1.2(a) (iii), the Optionee may elect to have the actual number of shares
issuable upon exercise of the Option reduced by the smallest number of whole
shares of Common Stock which, when multiplied by the fair market value of the
Common Stock as of the date the Option is exercised, is sufficient to satisfy
the amount of the withholding tax obligations imposed on the Company by reason
of the exercise thereof (the "Withholding Election"). The Optionee may take a
Withholding Election only if all of the following conditions are met:
(i) the Withholding Election must be made by electing the Withholding
Election in the written notice of exercise; and by executing and
delivering to the Company a properly completed Notice of Withholding
Election; and
(ii) any Withholding Election made will be irrevocable; however, the
Company may, in its sole discretion, disapprove and not give effect to
any Withholding Election due to its cash position or based on any other
regulatory or statutory factor in its reasonable judgment.
1.3 EXERCISE PRICE. The exercise price for each share of Common Stock shall be
One Dollar and Twenty Five Cents ($1.25) (the "Exercise Price").
1.4 TERM AND TERMINATION OF OPTION. Except as otherwise provided herein, the
term of the Option ("Option Period") shall commence 185 days after the Grant
Date and terminate on June 30, 2003. Subject to paragraph 1.6 below, this Option
shall become exercisable (vest) as to one-third (1/3) of the total number of
Option Shares at such time as the Fair Market Value (as defined below) of the
Common Stock of the Company is equal to or greater than Two Dollars and Fifty
Cents ($2.50) per share, for twenty (20) consecutive trading days. This Option
shall become exercisable as to an additional one-third (1/3) of the total number
of Option Shares at such time as the Fair Market Value of the Common Stock of
the Company is equal or greater than $5.00 Dollars ($5.00) per share, for twenty
(20) consecutive trading days. This Option shall become exercisable as to the
remaining one-third (1/3) of the total number of Option Shares at such time as
the Fair Market Value of the Common Stock of the Company is equal or greater
than Seven Dollars and Fifty Cents ($7.50) per share, for twenty (20)
consecutive trading days. Once the right to purchase shares has accrued and
irregardless of subsequent price changes, such shares may thereafter be
purchased at any time, or in part from time to time, until the termination date
of this Option, subject to the provisions of Paragraph 1.6 below. In no case may
this Option be exercised for a fraction of a share.
Upon the expiration of the Option Period as set forth above, this Option, and
all unexercised rights granted to the Optionee hereunder shall terminate, and
thereafter be null and void.
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<PAGE>
1.5 RIGHTS AS STOCKHOLDER. Optionee, or, if applicable, any Transferee (as
defined in Section 3.13 (d)) shall have no rights as a stockholder with respect
to any shares covered by the Option until a stock certificate for the shares is
issued in Optionee's or Transferee's name. No adjustment to the Option shall be
made pursuant to Section 3.1 hereof for dividends paid or declared on or with
respect to Common Stock in cash, securities other than Common Stock, or other
property, for which the record date is prior to the date of exercise hereof.
1.6 EARLY TERMINATION OF OPTION. The Option Period shall terminate on the date
of the first to occur of the following:
(a) June 30, 2003:
(b) Disability or Death as provided by this subparagraph (b). This
Option shall terminate and no further options shall vest thereafter
upon Optionee's death or disability and any vested options at the time
of such death or disability shall no longer be exercisable after the
expiration of twelve (12) months from the date of death or disability
of the Optionee.
(c) the date immediately preceding the consummation of: (i) dissolution
or liquidation of the Company; (ii) merger of the Company into another
corporation, or any consolidation, share exchange, combination,
reorganization, or like transaction in which the Company is not the
survivor; or (iii) sale or transfer (other than as security of the
Company's obligations) of at least a majority of the assets of the
Company. The Company will use its best efforts to provide written
notice to Optionee of such dissolution, liquidation, merger,
consolidation, acquisition, separation, reorganization, sale, transfer,
or like transaction, at least (30) days prior to the closing of such
transaction to permit Optionee to exercise the Option.
RESTRICTION ON OPTION AND OPTION SHARES
2.1 RESTRICTIONS ON TRANSFER OF OPTION. The Option evidenced hereby is non
transferable other than by will or the laws of descent and distribution, and
shall be exercisable during the lifetime of Optionee only by Optionee (or, in
the event of Optionee's death or Disability, by a permitted Transferee).
2.2 RESTRICTIONS ON TRANSFER OF OPTION SHARES. Any Option Shares acquired upon
exercise of the Option shall be subject to the following restrictions:
(a) Except for transfers made in compliance with Section 2.2(b) below,
or as otherwise required or permitted hereunder, none of the Option
Shares may be conveyed, pledged, assigned, transferred, hypothecated,
encumbered, or otherwise disposed of by the Optionee, or in the case of
exercise of an Option by a Transferee, by such Transferee. The
foregoing notwithstanding, the Company may, but shall not be obligated
to, approve the transfer of such Option Shares upon the condition that
the transferee thereof execute and deliver to the Company such
documents and agreements as the Company shall reasonably require to
evidence the fact that the Option Shares to be owned, either directly
or beneficially, by such transferee shall continue to be subject to all
the restrictions set forth elsewhere herein, and that such transferee
is subject to and bound by such restrictions and provisions. Any Option
Shares transferred by bequest or by operation of the laws of descent
and distribution shall remain subject to the restrictions
3
<PAGE>
set forth in this Section 2.2 and all applicable rights in favor of the
Company set forth elsewhere herein in the hands of any transferee
thereof. Nothing contained herein, however, shall be deemed to impose
any requirement that any transferee be an officer, director, or
employee of, or consultant to, the Company.
(b) The Option Shares may be transferred by the Optionee to a
Transferee upon the death or disability of the Optionee, provided that
all such Option Shares shall remain subject to the restrictions set
forth in this Section 2.2 and all applicable rights in favor of the
Company set forth elsewhere herein in the hands the Transferee and of
any subsequent transferee of the Transferee.
ARTICLE 3
GENERAL PROVISIONS
3.1 CHANGE IN CAPITALIZATION. If the number of outstanding shares of the Common
Stock shall be increased or decreased by a change in par value, split-up, stock
split, reverse stock split, reclassification, distribution of common stock
dividend, or other similar capital adjustment, an appropriate adjustment shall
be made by the Board of Directors in the number and kind of shares as to which
the Option, or the portion thereof then unexercised, shall be or become
exercisable, such that Optionee's proportionate interest shall be maintained as
before the occurrence of the event. The adjustment shall be made without change
in the total price applicable to the unexercised portion of the Option and with
a corresponding adjustment in the Exercise Price. No fractional shares shall be
issued or made subject to the Option in making such adjustment. All adjustments
made by the Board of Directors under this Section shall be final, binding, and
conclusive.
3.2 LEGENDS. Each certificate representing the Option Shares purchased upon
exercise of the Option shall be endorsed with the following legend and Optionee
shall not make any transfer of the Option shares without first complying with
the restrictions on transfer described in such legend:
TRANSFER IF RESTRICTED
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, (THE
"SECURITIES ACT") OR SIMILAR STATE SECURITIES LAWS APPLICABLE
TO SUCH SECURITIES (COLLECTIVELY THE "ACTS") AND MAY NOT BE
SOLD, TRANSFERRED, ASSIGNED, OR HYPOTHECATED UNLESS (1) THERE
IS AN EFFECTIVE REGISTRATION UNDER SUCH ACTS COVERING SUCH
SECURITIES, (2) THE TRANSFER IS MADE IN COMPLIANCE WITH RULE
144 PROMULGATED UNDER THE SECURITIES ACT, OR SIMILAR STATE
SECURITIES LAW, OR (3) THE COMPANY HAS RECEIVED AN OPINION OF
COUNSEL, REASONABLY SATISFACTORY TO THE COMPANY, STATING THAT
SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT
FROM THE REGISTRATION REQUIREMENTS OF THE ACTS.
Optionee agrees that the Company may also include any other legends required by
applicable federal or state securities laws.
3.3 GOVERNING LAWS. This Agreement shall be construed, administered
4
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and enforced according to the laws of the State of California.
3.4 SUCCESSORS. This Agreement shall be binding upon and inure to the benefit of
the heirs, legal representatives, successors, and permitted assigns of the
parties.
3.5 NOTICE. Except as otherwise specified herein, all notices and other
communications under this Agreement shall be in writing and shall be deemed to
have been given if personally delivered or if sent by registered or certified
United States mail, return receipt requested, postage prepaid, addressed to the
proposed recipient at the last known address of the recipient. Any party may
designate any other address to which notices shall be sent by giving notice of
the address to the other parties in the same manner as provided herein.
3.6 SEVERABILITY. In the event that any one or more of the provisions or portion
thereof contained in this Agreement shall for any reason be held to be invalid,
illegal, or unenforceable in any respect, the same shall not invalidate or
otherwise affect any other provisions of this Agreement, and this Agreement
shall be construed as if the invalid, illegal or unenforceable provision or
portion thereof had never been contained herein.
3.7 ENTIRE AGREEMENT. This Agreement expresses the entire understanding and
Agreement of the parties with respect to the subject matter hereof. This
Agreement may be executed in one or more counterparts, each of which shall be
deemed an original but all of which shall constitute one and the same
instrument.
3.8 VIOLATION. Any transfer, pledge, sale, assignment, or hypothecation of the
Option or any portion thereof made in violation of the terms of this Agreement
shall be void and without effect.
3.9 HEADINGS. Paragraph headings used herein are for convenience of reference
only and shall not be considered in construing this Agreement.
3.10 SPECIFIC PERFORMANCE. In the event of any actual or threatened default in,
or breach of, any of the terms, conditions and provisions of this Agreement, the
party or parties who are thereby aggrieved shall have the right to specific
performance and injunction in addition to any and all other rights and remedies
at law or in equity, and all such rights and remedies shall be cumulative.
3.11 NO EMPLOYMENT RIGHTS CREATED. The grant of the Option hereunder shall not
be construed as giving Optionee the right to continued employment with the
Company.
3.12 SPECIAL LIMITATION ON EXERCISE. Notwithstanding anything contained herein
to the contrary, no purported exercise of the Option shall be effective without
the written approval of the Company, which approval may be withheld if the
exercise of this Option, together with the exercise of other previously
exercised stock options and/or offers and sales pursuant to any prior or
contemplated offering of securities, would, in the sole and absolute judgment of
the Company, require the filing of a registration statement with the United
States Securities and Exchange Commission, or with the securities commission of
any state. The Company shall avail itself of any exemptions from registration
contained in applicable federal and state securities laws which are reasonably
available to the Company on terms which, in its sole and absolute discretion, it
deems reasonable and not unduly burdensome or costly. If the Option cannot be
exercised at the time it would otherwise expire due to the restrictions
contained in this Section 3.12, the exercise period may, upon request of
Optionee, be extended for successive one-
5
<PAGE>
year periods until it can be exercised in accordance with this Section 3.12.
Optionee shall deliver to the Company, prior to the exercise of the Option, such
information, representations, and warranties as the Company may reasonably
request in order for the Company to be able to satisfy itself that the Option
Shares to be acquired pursuant to the exercise of the Option are being acquired
in accordance with the terms of an applicable exemption from the securities
registration requirements of applicable federal and state securities laws.
3.13 CERTAIN DEFINITIONS. The capitalized terms listed below are used herein
with the meaning thereafter ascribed:
(a) "Disability" means (1) the inability of Optionee to perform the
duties of Optionee's employment with the Company due to physical or
emotional incapacity or illness, where such inability is expected to be
of long-continued and indefinite duration or (2) Optionee shall be
entitled to (i) disability retirement benefits under the federal Social
Security Act or (ii) recover benefits under any long-term disability
plan or policy maintained by the Company. In the event of a dispute,
the determination of Disability shall be made by the Board of Directors
and shall be supported by advice of a physician competent in the area
to which such Disability relates.
(b) "Fair Market Value" means of the applicable prices selected from
the following alternatives for the date as of which Fair Market Value
is to be determined as quoted in the Wall Street Journal (or in such
other reliable publication as the committee, in it's discretion, may
determine to rely upon): (i) if the common stock is listed on the New
York Stock Exchange, the highest and lowest sales prices per share of
the Common Stock as quoted in the NYSE - Composite transactions listing
for such date, (ii) if the common Stock is not listed on such exchange,
the highest and lowest sales prices per share of Common stock for such
date on (or on any composite index including) the principal United
States Securities Exchange registered under the 1934 Act on which the
Common Stock is listed, or (iii) if the Common Stock is not listed on
any such exchange, the highest and lowest sales prices per share of the
Common Stock for such date on the National Associates of Securities
Dealers Automated Quotations Systems or any successor system then in
use ("NASDAQ"). If there are no such sales price quotations for the
date as of which Fair Market Value is to be determined but there are
such sales price quotations within a reasonable period both before and
after such date, then Fair Market Value shall be determined by taking a
weighted average of the means between the highest and lowest sales
prices per share of the Common Stock as so quoted on the nearest date
before, and the nearest date after, the date as of which Fair Market
Value is to be determined. The average should be weighted inversely by
the respective numbers of trading days between the selling dates and
the date as of which Fair Market Value is to be determined. If there
are no such sales price quotations on, or within a reasonable period
both before and after, the date as of which Fair Market Value is to be
determined, then Fair Market Value of the Common Stock shall be the
mean between the bonafide bid and asked prices per share of Common
Stock as so quoted for such date on NASDAQ, or if none, the weighted
average of the means between such bonafide bid and asked prices on the
nearest trading date before, and the nearest trading date after, the
date as of which Fair Market Value is to
6
<PAGE>
be determined, if both such dates are within a reasonable period. If
the Fair Market Value of the Common Stock cannot be determined on the
basis set forth in this definition for the date as of which Fair Market
Value is to be determined, the Committee shall in good faith determine
the Fair Market Value of the Common Stock on such date. Fair Market
Value shall be determined without regard to any restriction, other than
a restriction which, by its terms, will never lapse.
(c) "Transferee" means the estate, or the executor or administrator of
the estate, of a deceased Optionee, or the personal representative of
an Optionee suffering a Disability.
IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year
first set forth above.
VALUESTAR CORPORATION
BY: __________________
ITS:__________________
ATTESTED:
BY: __________________
ITS:__________________
ACCEPTED:
______________________
7
EXHIBIT 10.11
PROMISSORY NOTE
$85,000, Alameda, California, August 14, 1998, VALUESTAR, INC. after date, for
value received, undersigned promise to pay to DAVRIC CORPORATION, or order, at
980 American Pacific Dr., Suite 111, Henderson, NV 89104, the sum of Eighty Five
Thousand and no/100 DOLLARS, with interest from August 14, 1998 until paid, at
the rate of fifteen (15) per cent per annum, payable $2,022.15 on the 14th of
each month for five years until paid in full. A late charge of 10% will be due
if payment not paid within 10 days of due date.
Should interest not be so paid it shall thereafter bear like interest as the
principal, but such unpaid interest so compounded shall not exceed an amount
equal to simple interest on the unpaid principal at the maximum rate permitted
by law. Should default be made in payment of interest when due the whole sum of
principal and interest shall become immediately due at the option of the holder
of this note. Maker may, without charge or penalty, prepay this Note, in whole
or in part. Principal and interest payable in lawful money of the United States.
If action be instituted on this note I promise to pay such sum as the Court may
fix as attorney's fees in said action. This note shall be construed in
accordance with the laws of the State of Nevada.
VALUESTAR, INC.
/s/ JIM STEIN
Jim Stein
Pres.
There will be a UCC filed in favor of Davric Corporation for the equipment*,
which is collateral for this note.
*equipment more specifically
described as telephone equipment
/s/ JIM STEIN
VALUESTAR, INC.
Pres.
EXHIBIT 21.1
VALUESTAR CORPORATION
LIST OF SUBSIDIARIES
The Company has one subsidiary doing business in its name:
VALUESTAR, INC.
1120A Ballena Blvd.
Alameda, CA 94501
(A California Corporation)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
AUDITED FINANCIAL STATEMENTS FOR FISCAL YEAR ENDED JUNE 30, 1998
INCLUDED IN THE AUNNUAL REPORT ON FORM 10-KSB AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 398,604
<SECURITIES> 0
<RECEIVABLES> 436,369
<ALLOWANCES> 75,000
<INVENTORY> 24,396
<CURRENT-ASSETS> 788,271
<PP&E> 79,327
<DEPRECIATION> 22,630
<TOTAL-ASSETS> 975,898
<CURRENT-LIABILITIES> 619,875
<BONDS> 1,525,357
0
0
<COMMON> 2,171
<OTHER-SE> (1,171,505)
<TOTAL-LIABILITY-AND-EQUITY> 975,898
<SALES> 0
<TOTAL-REVENUES> 1,601,406
<CGS> 0
<TOTAL-COSTS> 580,041
<OTHER-EXPENSES> 2,431,914
<LOSS-PROVISION> 45,000
<INTEREST-EXPENSE> 119,023
<INCOME-PRETAX> (1,577,181)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,577,181)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,577,181)
<EPS-PRIMARY> (0.19)
<EPS-DILUTED> (0.19)
</TABLE>
