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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, 1999
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)
360 - 22nd Street, Suite 210
Oakland, California 94612
(510) 808-1300
(Address and telephone number of principal executive offices)
1120A Ballena Blvd., Alameda, California 94501
(Former Address)
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 ___
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. $2,329,219
The aggregate market value of the issuer's common stock held by non-affiliates
as of August 31, 1999 (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 $9,727,500.
As of August 31, 1999 there were 9,374,132 shares of ValueStar Corporation
common stock, par value $.00025, outstanding.
Documents Incorporated By Reference: The information required by Items 9, 10, 11
and 12 of Part III of this Report is incorporated by reference from ValueStar's
definitive proxy statement relating to the annual meeting of stockholders to be
held in 1999, which definitive proxy statement shall be filed with the
Securities and Exchange Commission within 120 days after the end of the fiscal
year to which this Report relates.
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 10
ITEM 6. Management's Discussion and Analysis or Plan of Operation 12
ITEM 7. Financial Statements 21
ITEM 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 21
PART III
ITEM 9. Directors, Executive Officers, Promoters and Control Persons; 21
Compliance With Section 16(a) of the Exchange Act
ITEM 10. Executive Compensation 23
ITEM 11. Security Ownership of Certain Beneficial Owners and Management 24
ITEM 12. Certain Relationships and Related Transactions 26
ITEM 13. Exhibits and Reports on Form 8-K 27
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 is developing America's leading customer satisfaction
rating system for local service and professional businesses. Our ratings
facilitate both traditional commerce and the rapidly growing market for
electronic commerce between quality-conscious buyers (consumers and business
consumers) and local service businesses. Businesses that pass a four-step rating
process become eligible to use our certification mark, ValueStar Certified(R),
the symbol of high customer satisfaction. Consumers are able to use ValueStar
Certified when shopping to quickly find the best, top-rated companies. We are
based in Oakland, California and started rating businesses in Northern
California in
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1992. We began regional expansion in July 1998 by starting rating sales to
businesses in Southern California. We have expanded rating sales during the last
twelve months to Chicago, Dallas/Fort Worth, Seattle, Philadelphia, Atlanta and
Washington, D.C.
We generate recurring revenues from business customers by (a) conducting
customer satisfaction research on local service companies in 300 industries
(auto, home health, personal and professional), (b) certifying highly rated
businesses, and (c) selling ancillary materials and services. We build ValueStar
Certified brand recognition through advertising and cooperative branding with
our certified business customers. Our ratings are delivered on the Internet at
www.valuestar.com, through our Consumer ValueStar Report publication listing our
top-rated companies and through interactions between buyers and certified
businesses. To assure buyers that our ratings are independent, accurate and
unbiased, we use university partners to audit each customer satisfaction study.
We have auditing relationships with the Public Research Institute of San
Francisco State University and the Consumer Law Project of the University of
Houston.
Our branded ratings provide important buying information for buyers shopping or
researching services on the Internet. In addition to providing buyers our
listings of highly rated businesses on the Internet, we developed and now
operate the ValueStar SmartShopper(TM) service, allowing buyers to directly
access and communicate with our top-rated service companies through e-mail and
e-mail to fax links. After conducting a search for a specific type of top-rated
business, buyers can conduct a personal "shopping auction" by sending their
service requirements simultaneously to selected top-rated companies. We believe
SmartShopper is an important service enabling electronic commerce for services
on the Internet.
Participating businesses use our ValueStar Certified logo in their own sales and
marketing communications. Our certification mark piggybacks on the phone and
in-person sales presentations of our business customers and often is included in
their Yellow Page, newspaper, flyer, brochure, TV, radio and other advertising -
generating millions of buyer impressions of our rating brand each year. We
believe this cooperative branding (co-branding) helps create a powerful brand,
widening buyer awareness, driving buyers to our Web site and Consumer ValueStar
Report publication and increasing sales of affiliated information materials and
services.
During the last three years we have conducted approximately 400,000 individual
customer satisfaction surveys and distributed to local buyers over 1.5 million
copies of Consumer ValueStar Report, our semi-annual publication of top rated
local service companies. During the last three years we have grown from 319 to
1,455 certified businesses at June 30, 1999, while maintaining renewal rates of
our certified businesses averaging more than 66%. We estimate that each
certified business generates approximately $1,500 in revenue to us during the
first twelve months after applying for rating and similar recurring revenues in
future years. We believe the buyer enthusiasm generated by our rating format,
acceptance by certified businesses and the knowledge and experience we have
gained from pioneering, operating and expanding our business provide the
foundation and experience for further growth and territorial expansion.
Our objective is to become America's rating system for local service companies
and establish ValueStar Certified as the premium rating brand. Our goals are (a)
to expand marketing and rating activities into additional regions in North
America and internationally, (b) maintain high business renewal rates, (c)
increase brand recognition, and (d) develop new products, services and
incremental revenue opportunities. We focus significant management and financial
resources to roll out our program to new regions. We are also developing new
products for buyers and businesses to expand our services. Our future growth
will require additional financing and management. There can be no assurance we
can obtain expansion financing or develop management depth to continue to expand
to new markets or develop new products and services or that such expansion, if
possible, will ever be profitable. See "Item 6. Management's Discussion and
Analysis or Plan of Operation - Business Risks."
History of Development
Our operations are conducted through our wholly owned California subsidiary,
ValueStar, Inc. During late 1990 and 1991, James Stein (our President, Chief
Executive Officer and a Director) developed the basic operating concept of
ValueStar Certified. In March 1991, Mr. Stein engaged San Francisco State
University to conduct a buyer feasibility study to determine the potential
influence of ValueStar Certified on buyers. A service business feasibility study
was conducted to determine the potential market for ValueStar Certified among
providers of services in the San Francisco Bay area. In October 1991, base-line
buyer satisfaction and additional feasibility research was completed by The
Institute of Social Research at California State - Stanislaus.
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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, we
developed initial marketing and support materials. We also began a relationship
in 1992 by engaging The Public Research Institute, an auxiliary unit of San
Francisco State University to perform or audit surveys of each business
applicant's former customers to provide confidential, unbiased and scientific
surveys of customer satisfaction. In June 1999, we initiated our first regional
audit agreement by engaging the Consumer Law Project of the University of
Houston to audit our customer satisfaction ratings on a regional basis.
Our sales and licensing activities commenced in the greater San Francisco Bay
area in 1992. In mid-1994, we added our Consumer ValueStar Report publication
and on January 1, 1996, we launched our Internet strategy on the World Wide Web
at WWW.VALUESTAR.COM. We continue to expand our program and services to buyers
and businesses. In 1997, we expanded our Internet services by adding
SmartShopper, a communication link between buyers and highly rated businesses.
We are currently marketing our program to service businesses in a total of eight
market regions. The following table summarizes the market regions in which we
operate:
Market Region Month of Launch
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Northern California (greater San January 1992
Francisco Bay area and Sacramento)
Southern California (Los Angeles July 1998
and Orange County)
Chicago February 1999
Dallas/Fort Worth April 1999
Seattle July 1999
Atlanta July 1999
Philadelphia August 1999
Washington, D.C./Baltimore August 1999
At June 30, 1999, we had 1,455 active certified businesses and over 400
applicant businesses going through our rating process. We have not established
any specific timetable for further market region expansion.
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. Marketing News estimated that over $320 million of
market research expenditures were for customer satisfaction research.
The result of each successful customer satisfaction research and service rating
is delivered to buyers in the form of a certification mark. The certification
mark industry includes trade association and various accrediting marks. Examples
of these marks include the Good Housekeeping Seal, AAA Approved Auto Repair,
J.D. Powers, ISO 9000 and various lodging and restaurant industry ratings and
marks. Since we believe we provide a valuable resource for consumers to contact
to obtain a particular category of business, we share aspects of referral
services and agencies like 1-800 Dentists, 1-800 Plumber, and medical and
contractor referrals. And since we publish and distribute a periodic listing of
businesses rated high in customer satisfaction, we share industry
characteristics of service guide publishers and the yellow pages industry. And
finally, we maintain an Internet site of qualifying service businesses and buyer
information sharing aspects of the growing market for Internet content such as
electronic yellow pages, directories, and city guide information services.
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The total dollar value of buyer 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. We believe 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. We believe that the more than six million businesses in the United
States (estimated from data supplied by American Business Information) that make
up the service and professional business market provide a large opportunity for
ratings. 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, our research indicates buyers want
to know which companies have been rated high in customer satisfaction.
ValueStar and the Internet
The Internet has emerged as a global medium enabling millions of people
worldwide to share information and content, to communicate and to conduct
commerce electronically. 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, a leading technology research
organization, estimates that the number of web users worldwide will increase
from approximately 97 million at the end of 1998 to 320 million by the year
2002. International Data also estimates that transactions on the web will grow
from $32 billion at the end of 1998 to $426 billion by the year 2002. 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. We believe that although certain services
such as travel are experiencing rapid Internet growth, the lack of standardized,
independent and unbiased buyer information will impede the growth of local
services being transacted on the Internet. As a result, we believe that ratings
of local service businesses deliver over the Internet will be a catalyst for
increased shopping of local services on the Internet.
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. Although Forrester Research projects Internet advertising
expenditures in the U.S. to increase from $1.3 billion in 1998 to $10.4 billion
in 2002 and some Internet sites are charging consumers, we do not believe either
model has achieved broad based financial success. While providing our branded
content of top-rated service businesses on the Internet is a valuable component
of our strategy to reach buyers and support businesses, we are not dependent on
the Internet as our basic revenue source. However, we are researching and
developing opportunities, products and services to leverage our content to
generate additional Web and Web-related revenues.
The ValueStar Solution
We believe there is a compelling buyer and business market need for unbiased
ratings of local services. North America contains fragmented, highly competitive
local service industries. This creates a large number of choices for buyers. Our
concept of a local standardized rating of service and professional firms by
their own customers was created on the premise that buyers are inundated with
claims from businesses communicated through a growing media base and have
rightly become increasingly skeptical. For businesses, it is increasingly
difficult and costly to differentiate on quality or customer satisfaction due to
the proliferation of claims, the growth of new media outlets, competition and
increasing buyer skepticism. We believe buyers want to know which businesses are
better than others and to have the ability to cut through the media glut of
information. This 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 factors affecting the selection of a local service are different than those
involving a widely available product: (a) typically, compared to a product
purchase, a buyer has more service provider choices from which to discern, (b)
the quality level of services is less consistent, (c) it is more difficult to
experience or compare a service prior to purchase, (d) services cannot be
returned, and (e) therefore the entire decision process is riskier and more
frustrating for buyers. ValueStar Certified is designed to respond to these
factors by providing buyers 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.
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We believe the rapidly growing Internet environment is an excellent medium for
delivery of our rating content and information. Our searchable database of
top-rated local companies leverages a chief advantage of the Internet the
ability to access changing information through a simple user interface, 24 hours
a day, 7 days a week. Our listing of quality businesses, consumer information
and ValueStar's SmartShopper utility 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 Buyers
Buyers use our 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. Our rating is based
on high customer satisfaction, which we believe is intuitively logical to most
buyers. A study conducted by Public Research Institute in 1993 and updated
through 1996 concluded that 2 out of 3 customers who knew a business had earned
ValueStar Certified were influenced by this factor in selecting a business.
Our semi-annual distribution of our Consumer ValueStar Report provides buyers
with an easy reference list of businesses rated high in customer satisfaction, a
quality "yellow page" listing. The July 1999 semi-annual edition was distributed
to 315,000 homes and businesses in three market regions. This included
approximately 40,000 to requesting Consumer ValueStar Club members developed
through phone, mail and Internet queries. The Consumer ValueStar Club members
receive the Consumer ValueStar Report publication free every six months along
with other benefits offered from time to time. We intend to add additional club
member benefits in future periods to further enhance our offering to buyers.
In addition to anytime access to ValueStar ratings, buyers can directly access
and communicate with top-rated service companies through e-mail and Web links
from our Web site. After conducting a search for a specific type of top-rated
business, buyers are able to conduct their own personal "shopping auction" by
using our SmartShopper service to send requirements to selected top-rated
companies with one simple form. We intend to continue to enhance our Internet
offering to buyers and add features, products, services and additional benefits.
We use marketing and promotion activities to create and enhance buyer and
business awareness of the meaning and significance of the ValueStar Certified
certification mark and the value of our rating process. These activities include
public relations efforts, community involvement and direct advertising. Buyers
are also broadly exposed to our certification mark through the advertising and
promotional efforts of businesses who use our certification mark to distinguish
themselves as being rated high in customer satisfaction. Since the certification
mark is displayed in a wide variety of media, buyers use the certification
information quickly and conveniently, all at no charge.
We believe that as each market area matures, buyers 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
Our certified businesses use the ValueStar Certified program to (a) bring in
more customers, (b) convert shoppers to buyers, (c) reduce pricing pressure on
services, (d) distinguish services from competitors, (e) improve customer
loyalty, (f) increase customer referral rates, (g) speed up the selling cycle,
(h) improve employee morale, (i) enhance marketing and advertising promotions,
and (j) improve business reputation. Research conducted for us by The Institute
of Social Research at California State - Stanislaus in 1991 indicated that 70%
of consumers would pay 10% or more for services from companies that could
indicate they earned ValueStar Certified.
One of the most critical factors indicating business satisfaction of our
services and which directly relates to our long-term success are renewal rates
of certified businesses. During the last two fiscal years ending June 30, 1999
an average of 66% of certified businesses renewed their licenses indicating
business acceptance of our program.
Our Consumer ValueStar Report provides certified businesses important and
credible exposure to new customers. Our free listing of qualified businesses on
the Internet offers small business owners a presence on the Web at no additional
cost. Our SmartShopper service offers businesses Web generated traffic. We also
offer businesses the opportunity to expand their listings for an additional fee
and to link their Internet site with our Web site.
Our field consultants provide a personal orientation to each passing business
owner and their employees informing them of the significance of earning our
certification mark and educating them on how to use the achievement in
promotional programs and customer encounters. A comprehensive ValueStar manual
is delivered to certified businesses reflecting our substantial experience in
effective use of our mark by businesses. We use periodic newsletters to further
educate
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businesses on customer satisfaction topics and ways to use the mark to improve
business. Many certified businesses purchase copies of our customized Certified
Profile Brochure, which explains to their customers how they qualified for
ValueStar Certified.
Our brand recognition is enhanced by daily use by businesses in all manners of
advertising and media supplementing our marketing and promotion activities to
create and enhance buyer, business and brand awareness.
ValueStar Strategies
Our objective is to become America's rating system for local service companies
and establish ValueStar Certified as the premium rating brand. We intend to
leverage our pioneer position by (a) establishing our program in the most
attractive market regions, (b) developing a dominant position in those market
regions, and (c) using our rating service as a platform for multiple revenue
streams. Our target U.S. market consists of approximately 6 million service and
professional businesses. The following are key elements of our strategy:
Continue Penetration of the California Market - We believe renewal
rates (averaging 66% during the last two fiscal years) indicate
business satisfaction with the program in California. Renewals provide
a continuing source of predictable recurring revenues. An expanding
business base also pressures other service businesses to apply to be
rated. Our sales, marketing and promotion activities are designed to
increase new business, maintain high renewal rates and generate
ancillary product and service sales. A growing base of businesses
produces more promotions and buyer interactions increasing brand
recognition and awareness.
Leverage California's Success to New Markets - We believe we have a
competitive advantage to enter new regions as a result of our
experience in California. We have developed a comprehensive program
built on a significant base of buyer and business research. We have
created proprietary methods, training programs and systems to minimize
the number of personnel, costs and effort associated with expanding to
new market regions. And we have developed loyalty with existing
certified businesses and buyers that serves as important references for
new customers. We intend to leverage our knowledge, experience and
low-cost centralized structure in our geographical expansion and
continue to build barriers to entry by competitors. Our rollout process
enables us to commence selling to businesses in a new market within
three months of selection and to report initial revenues within two
months of initial sales while minimizing capital and personnel costs.
Create Strong Brand Recognition and Market Awareness - We believe we
have created the leading brand name for local service ratings in
California. Our brand franchise helps our marketing to new businesses.
Our strategy is to promote, advertise and increase our visibility
through a variety of marketing, public relations and promotion
activities. We employ public relations, co-branding and paid
advertising to increase awareness. Our Consumer ValueStar Report and
our Web site are important marketing elements of our program. Our brand
building strategy also relies heavily on promotions and awareness
developed by certified businesses in their promotions, advertising and
buyer interactions.
Develop New Revenue Opportunities - We seek to expand our services and
benefits to buyers and service businesses. We believe there are
opportunities to develop incremental revenue opportunities from service
businesses, buyers and from use of our content. We believe the growing
use of the Internet by buyers provides opportunities to use our current
content and develop additional content that will be attractive to
buyers and a variety of Web sites. We are currently investing product
development funds to create new content for buyers. A growing base of
loyal ValueStar buyers also provides additional revenue opportunities
in the future.
Expand Strategic Alliances and Partnerships - The majority of our
growth results from direct marketing efforts and buyer and business
referrals. We also develop alliances and obtain endorsements of
industry associations, chambers of commerce and other organizations. As
our business and buyer membership grows we expect more opportunities to
enter into partnerships or strategic alliances to (a) more rapidly
expand certifications nationally and internationally, (b) generate
additional ancillary revenues, (c) facilitate brand awareness, (d)
provide content to others, (e) facilitate consumer/business
transactions, and (f) enhance third party offerings to consumers and
businesses, among other possibilities. We have no current plans,
proposals, arrangements or understandings regarding any business or
product acquisitions.
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Our execution of the above strategies will require additional financing and
management. There can be no assurance we can obtain additional financing or add
to our management team. See "Item 6. Management's Discussion and Analysis or
Plan of Operation - Business Risks."
ValueStar Operations
All service businesses and professionals located in market regions we serve may
apply to be rated. These include more than 300 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).
Our marketing and sales activities focus on a targeted group of service and
professional businesses resulting from our research which identifies the high
priority accounts among the larger population of service and professional
businesses in each market region. We use direct mail, advertising, telephone
sales, videotapes and other materials emphasizing the benefits of becoming a
ValueStar certified business. Our field consultant personnel make certification
licensing, renewals and ancillary sales.
We modify our certification and rating fees from time to time. From time to time
we also offer discounts, incentives and satisfaction guarantees to applicants
and also from time to time extend payment terms on fees. Our fees scale upward
with business size and for multiple location businesses. We estimate that each
new certifying business provides average annual revenue of approximately $1,500
from all sources.
Once a prospective business agrees to be rated and pays an initial research fee
ranging up to $570 (subject to promotional discounts), our research and rating
process begins. We conduct a complaint bureau status check, business license
verification and insurance verification. We perform customer satisfaction
research surveys that are independently audited by the Public Research Institute
resulting in a statistically computed rating score. To pass and qualify for
ValueStar certification, an applicant must score in the range of very good to
outstanding.
At June 30, 1999 we employed 26 full-time equivalent research and rating persons
engaged in conducting buyer research and processing new and renewal business
certifications.
In order to assure buyers that ratings performed by ValueStar are independent,
scientific, accurate and unbiased, we maintain agreements with university
partners to audit our customer satisfaction research and reports. In 1992, we
engaged The Public Research Institute, an auxiliary unit of San Francisco State
University, to perform or audit surveys of each applicant's former customers. In
June 1999, we engaged our first regional auditor, the Consumer Law Project of
the University of Houston, to audit our customer satisfaction ratings on a
regional basis.
All business applicants receive a ValueStar Research and Rating Report with the
results of our research. Successful applicants may license the use of the
ValueStar Certified mark, pursuant to contractual guidelines specified in the
terms of our certification agreement, in their advertising, collateral and sales
materials, stationery, signage, announcements, bid forms, etc. A certified
business also receives a ValueStar plaque, program manual and labels for their
doors and letterhead. Certified businesses are listed in our semi-annual
Consumer ValueStar Report publication and on our Internet site.
We structure staffing, territories, training and compensation plans to provide
continuity of field consultant contact with each certified business. We provide
ongoing training to our employees on new business and renewal development and in
methods to support businesses in using ValueStar Certified to improve
operations.
Each year we solicit renewals from certified businesses. Each year renewal
accounts must pass elements of our research and rating process and every second
year they must pass our entire research and rating process.
At June 30, 1999, we had 48 marketing, sales and field consultant persons
engaged in making sales to new service providers and promoting our services and
brand.
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Product Development
To date, our development expenses associated with the design, development and
testing of our programs and services have not been material. These expenditures
have been included in sales and marketing or general and administrative
expenses. In the first quarter of fiscal 2000, we commenced the design,
development and testing of an expanded Internet program using existing and new
content. The goal of this development is to position ValueStar as the dominant
infomediary linking buyers with local service businesses. We plan to capitalize
on our existing expertise in customer satisfaction rating systems to create a
new Internet service. The completion of development and the launch of this
program will require additional personnel and financing. We have not yet
determined the timing, requirements and required funding for this program. We
expect to spend more than $300,000 in product development costs in the first
quarter of fiscal 2000.
Competition
We are not aware of a directly competitive mark or service targeted for a broad
range of service industries. However, we expect competitive offerings to develop
in the future. We compete 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.
The Internet is 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
buyers and greater informational content including service business listings,
referrals and information. A number of Internet sites are providing site or
business rankings or ratings, for example BizRate.com, deja.com and gomez.com.
But to date, most have focused on rating sites or product providers. We expect
Internet competition to develop and intensify in the future.
We believe we provide a valuable performance rating our customers can use to
distinguish themselves from competitors. We believe ValueStar Certified provides
buyers a convenient and easy method of selecting service businesses and
improving shopping decisions. The principal competitive factors affecting our
market include the quality and nature of our content, ease of buyer use,
marketing and sales methods and brand recognition. We are establishing a market
awareness and brand recognition in California. Barriers to entry by new
competitors are limited and in addition to the direct effects of new
competition, new entrants may cause marketplace confusion. This could make sales
efforts more difficult and may result in adverse pricing pressure. There can be
no assurance we can maintain our competitive position or be able to compete
against existing or new competitors in the future. Furthermore, as a strategic
response to changes in the competitive environment, we may make certain pricing,
service or marketing decisions or enter into new ventures or arrangements that
could have a material adverse effect on our business, financial condition and
results of operations.
Trademarks, Service Marks and Other Proprietary Rights
We own a U.S. federally registered certification mark on "ValueStar" and the
"ValueStar Certified" symbol and have applied for protection on ValueStar in
Canada. We have also received a registration for "Only the Best Pass the Test"
as a service mark in the U.S. We consider our trademarks and symbol to be
material to our business. We intend to vigorously protect and defend our
trademarks against infringement and other unauthorized use. We are reviewing
with counsel one registration of ValueStar in another field of use that we
believe could create consumer confusion in the future. We are not aware of any
other significant infringement or other unauthorized use of our trademarks. We
cannot assure that we can protect our trademarks and symbol. The loss or
infringement of our ValueStar trademark and symbol or our inability to protect
our mark adequately would have a material adverse effect on our business and
operations. It is possible that competitors or others will adopt service names
similar to "ValueStar", thereby impeding our ability to build brand identity and
possibly leading to customer and consumer confusion.
We copyright our materials and publications and seek to maintain certain aspects
of our business operations as trade secrets. We have developed consumer and
business databases, training systems, software and systems that are proprietary.
With the increased use of patents to protect service products and techniques, we
are currently reviewing the use of patent applications as an additional tool to
protect new products and services we are developing. There can be no assurance
of future patents or protection.
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Government Regulation and Legal Issues
We are not currently subject to direct regulation other than federal and state
regulation applicable to businesses generally.
Our operations require that our certification mark only be used by qualifying
companies and that its use be discontinued if a business ceases to be a
licensee. We vigorously defend our contract rights, including taking legal
action as required. As we expand to new areas and our certification becomes more
recognized and valuable, it may be increasingly difficult to police unauthorized
use of our certification mark or confusing marks.
Although we are not a direct referral service, we may be subject to claims by
buyers for the actions of certified businesses. Although we do not believe a
claim would have merit, the costs of defense could be substantial. There is no
assurance our errors and omissions insurance would adequately cover any claims.
To date we have not been subject to any material claims by customers of
licensees.
Employees
As of June 30, 1999, we employed 82 full-time persons, of which 6 are in senior
management, 48 in marketing and sales, 17 in research and rating, and 10 in
accounting and administration. We employ up to 40 part-time personnel from time
to time and use outside contractors from time to time for various marketing and
other services. None of our employees are represented by a collective bargaining
arrangement and we have experienced no work stoppages.
We consider our relations with employees to be favorable.
Our future success will depend in large measure upon the continued contributions
of our President and CEO, James Stein, and our ability to attract and retain
quality sales and management personnel. We experience competition for qualified
sales personnel who are in demand by many competitors and businesses with other
sales activities. The loss of the services of Mr. Stein could have a material
adverse effect on our business. We entered into a three-year employment contract
with Mr. Stein effective July 1, 1998. We own a $3 million "key man" life
insurance policy on Mr. Stein, of which $2 million is assigned as collateral for
senior debt.
Item 2. Description of Property
Our corporate and operating offices are located in approximately 14,900 square
feet of improved office space located at 360 - 22nd Street, Oakland, California.
This facility accommodates administration, sales and marketing and research and
rating personnel. This facility is leased pursuant to a five-year lease
effective June 1999 at a monthly rate of approximately $17,900. This facility is
adequate for present operations but should we continue to expand or elect to
provide new products or services, then we may require additional space in the
future. We have certain rights of first refusal on empty space at our current
location. We believe that additional office space at reasonable leaseing rates
is available in the greater Oakland area should additional space be required in
the future.
Item 3. Legal Proceedings
We are 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.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Market Information
On May 28, 1997 our common stock commenced trading and is quoted on the National
Association of Securities Dealers, Inc. ("NASD") OTC Electronic Bulletin Board
(symbol "VLST"). The market for our common stock has often been sporadic and
limited.
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The following table sets forth the high and low bid quotations for the common
stock for the fiscal years ended June 30, 1999 and 1998 as provided by the NASD.
Bid Quotations
High Low
---- ---
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
Fiscal Year Ending June 30, 1999
First Quarter $ 0.7813 $ 0.5313
Second Quarter $ 0.9375 $ 0.625
Third Quarter $ 1.4375 $ 0.75
Fourth Quarter $ 1.6563 $ 1.1875
The above quotations reflect inter-dealer prices, without retail markup,
markdown or commission and may not represent actual transactions.
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, our 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 our 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
ValueStar or our competitors, quarterly variations in operating results,
announcements of technological or service innovations, the introduction of new
products or services, changes in pricing policies by us 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 our 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.
Our common stock is defined as a "penny stock" 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 penny stock rules generally
impose additional sales practice and disclosure requirements upon broker-dealers
who sell our 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
$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 our shares and
thus may also affect the ability of purchasers of shares to resell shares in the
public markets.
We had 130 holders of record of our common stock at June 30, 1999, which we
believe represents approximately 300 beneficial owners. We have never paid a
cash dividend on our common stock and do not expect to pay cash dividends in the
foreseeable future, although we may be obligated to pay stock dividends to our
holders of Series A preferred stock.
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Recent Sales of Unregistered Securities
No equity securities were sold during the year ended June 30, 1999 under an
exemption from the Securities Act that were not previously reported in prior
quarterly filings. All such sales were made under an exemption from either
Section 4(2) or Rule 506 of Regulation D under the Securities Act.
Subsequent Sale of Preferred Stock
Subsequent to year end, during July and August we issued 225,000 shares of
Series A Convertible preferred stock, par value $.001 for cash of $10 per share
for gross proceeds of $2,250,000. Dividends of 8% per annum compounded are
payable in additional shares of Series A stock. The dollar amount of Series A
stock is convertible into shares of common stock at a conversion price of $2.00
per share and are automatically converted on the occurrence of certain events.
The Series A stock has a liquidation preference of $10 per share plus accrued
and unpaid dividends. The Series A stock has certain antidilution and
registration rights and has voting rights equal to the number of shares of
common stock that it is convertible. In addition, as long as there are at least
100,000 shares of Series A stock outstanding, then the holders thereof are
entitled to elect one member of our board of directors.
We sold the Series A stock without an underwriter and no commissions were paid.
The Series A stock was offered and sold without registration under the
Securities Act solely to "accredited" investors in reliance on the exemption
provided by Regulation D and Section 4(2) thereunder and an appropriate legend
was placed on the Series A stock and will be placed on the shares issuable on
conversion unless registered under the Securities Act prior to issuance.
Item 6. Management's Discussion and Analysis or Plan of Operation.
Overview
We are a research and rating company and have designed a rating system and
certification mark, ValueStar Certified(R), for service businesses. Our rating
system is designed to enable buyers to quickly determine those local service
businesses that have attained the highest level of customer satisfaction. Our
ratings are provided on the Internet at www.valuestar.com, in print in the
Consumer ValueStar Report and through customer promotions and buyer
interactions.
Our 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 our business model is the recurring nature of revenues from businesses
renewing their certification.
Certification fees, ranging from $995 to approximately $2,000 depending on
business size, are recognized when material services or conditions relating to
the certification have been performed. The material services are the delivery of
certification materials along with an orientation and the material condition is
the execution of the certification agreement specifying the conditions and
limitations on using the certification. Research and rating fee revenue, ranging
up to $570, is deferred until the research report is delivered. Sales of
marketing materials and Web advertising and other services are recognized as
materials are shipped or over the period services are rendered. From time to
time we provide discounts, incentives from basic pricing and payment terms on
fees.
We expense research and rating costs as incurred. Costs incurred in printing and
distributing our Consumer ValueStar Report publication for buyers, currently
published in January and July, and any related revenues are recognized upon
publication. Accordingly, the costs and revenues from this publication impact
the revenues and costs in our first and third fiscal quarters.
Certain direct-response advertising costs are deferred and amortized over the
expected period of future benefits. These costs, which relate directly to
targeted new business solicitations, primarily include targeted direct-response
advertising programs consisting of direct telemarketing costs. No indirect costs
are included in deferred advertising costs. Costs incurred for other than
specific targeted customers, including general marketing and promotion expenses,
are expensed as incurred.
Prior to July 1, 1998, we amortized deferred costs on a straight-line basis over
twelve months. Based on an ongoing evaluation of the expected period of future
benefits from direct-response advertising, we reduced the period of amortization
from twelve months to sixty days. Revenues associated with the direct-response
advertising costs, which are primarily certification fees from new businesses,
are being recognized approximately sixty days after the telemarketing
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costs are incurred. This change in estimate of the amortization period resulted
in a one-time, non-cash increase in selling expenses of $81,788 in the first
fiscal quarter ended September 30, 1998.
Deferred costs are periodically evaluated to determine if adjustments for
impairment are necessary.
Since inception, we have been growing and developing our business and have
incurred losses in each year. At June 30, 1999, we had an accumulated deficit of
$8,878,409. There can be no assurance of future profitability.
Effect of Growth in Certified Businesses and Renewals
Our business revenue model, similar to other membership based organizations, is
predicated on a growing number of certified businesses and maintaining high
renewal rates. Certified businesses that renew contribute higher gross margins
than new applicants due to reduced sales and rating costs. Also, a growing and
larger base of certified businesses reduces the costs (relative to revenues)
associated with printing and distributing our Consumer ValueStar Report to
buyers, maintaining our www.valuestar.com Internet site and providing other
services. The marginal fixed costs associated with increased numbers of
certified businesses are minimal compared to these base printing, distribution
and maintenance costs.
Since considerable portions of our operations are engaged towards the
solicitation of new service and professional business applicants, we incur
substantial costs towards this activity. Currently, we defer direct telephone
sales costs and amortize them at the time of certification, an average of
approximately 60 days. Other costs are expensed as incurred.
At June 30, 1999, we had 1,455 certified businesses, compared to 319, 745 and
1,151 licensees on June 30, 1996, 1997 and 1998, respectively. The following
table illustrates the changes in certified businesses and renewal rates for the
fiscal years ended June 30, 1999 and 1998:
Fiscal Year Ended June 30,
1999 1998
----- -----
Licensees - beginning of period 1,151 745
Adjustments (1) (46) (20)
Licensees up for renewal 1,105 725
Renewals 682 532
Renewal Percentage 62% 73%
New licensees 773 619
Licensees - end of period 1,455 1,151
(1) Non passing renewals, out-of-period renewals and terminations.
Businesses fail to renew their certification for a variety of reasons including
ownership and management changes, insufficient funds to pay for our program and
dissatisfaction. We endeavor to communicate and demonstrate the value of our
services to business owners on an ongoing basis. Although our renewal rate
declined in fiscal 1999 due to our focusing of resources on new market regions
and limitations of staffing and funding, we have made changes in our operations
resulting in improved renewal rates. During the first two months of fiscal 2000,
renewal rates have approximated 67%. Our goal is to maintain renewal rates in
the 65% to 70% range.
As a market region matures and we attain a larger base of certified businesses,
fixed and indirect costs decline as a percentage of revenues. New market regions
provide additional revenues to cover certain base fixed selling, marketing,
administration and overhead costs. Our more established Northern California
market has achieved a base of certificate holders sufficient to provide positive
regional operating margins (prior to allocation of corporate administration,
overhead and elective advertising and promotion costs). We believe we could
reduce operating costs to achieve break-even operations on reduced levels of new
sales and by maintaining the existing base of renewing businesses in California.
However, any dramatic cutbacks would curtail growth and our ability to expand in
the future.
Future operations are impacted by changes in cost structure and elections
regarding advertising, promotions and growth rates (due to the lower margins in
the first year). We have recently increased numbers of sales, marketing and
support personnel. Rapid growth, due to the nature of our operations, is
expected to contribute to continued operating losses in the foreseeable future.
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During the last fiscal year (ended June 30, 1999), we added personnel, upgraded
computer systems and increased overhead to support expansion into new market
regions. This increased our operating losses. Our personnel have grown from 44
full-time persons at June 30, 1998 to 82 full-time persons at June 30, 1999. We
also incurred marketing, selling and administrative costs in connection with new
region startups contributing to our larger operating losses.
At June 30, 1999, we had 452 (424 new and 28 renewal) business customers in the
application and rating phase compared to 410 (349 new and 61 renewal) at June
30, 1998. The total at June 30, 1999, represents approximately 60 days sales. We
recently installed new hardware, software and systems to more automate our
research and rating process and have reduced average the rating processing time.
Business customers in the rating phase are expected to represent approximately
$300,000 of revenues that should be recognized in the first quarter of fiscal
2000 (generally analogous to backlog).
Results of Operations
Revenues. Revenues consist of certification and rating fees from new and renewal
business applicants, sale proceeds from information materials and premium
listings in our Consumer ValueStar Report and on our Web site, and other
ancillary revenues. We reported total revenues of $2,329,219 for the fiscal year
ended June 30, 1999, a 45% increase over revenues of $1,601,406 for the prior
fiscal year. During fiscal 1999, certification fees accounted for 76% of
revenue, the same as the prior year. The growth in revenues is the result of our
regional expansion, improved new sales velocity and the impact of a larger base
of business member renewals in Northern California. Revenues for the fourth
fiscal quarter ended June 30, 1999, were $559,466 compared to $508,829 for the
prior year comparable quarter or a 10% increase. We believe this limited
increase in the fourth quarter was due in part to the delays and disruption of
our move to new facilities near the end of the fourth quarter.
Revenues for the year from premium listings in our Consumer ValueStar Report and
on our Web site were $222,100, an increase of 112% over the $104,640 for the
prior year. The increase resulted from expanded distribution and more aggressive
marketing of listings.
Our revenues can vary from quarter to quarter due to (a) the impact of
distributing the semi-annual Consumer ValueStar Report to buyers, (b)
seasonality, (c) effectiveness of sales methods and promotions, (d) levels of
expenditures targeted at prospective businesses, (d) the numbers of certificate
holders up for renewal, (e) renewal rates, (f) pricing policies, (g) timing of
completion of research and ratings, and (h) other factors, some of which are
beyond our control.
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. Cost of revenues represented 44% of sales
during the fiscal year ended June 30, 1999 (58% in the fourth quarter), an
increase from 36% for the fiscal year ended June 30, 1998 (33% for the fourth
quarter). We made changes in fiscal 1999 to make our ratings more timely and
efficient. However, during the last quarter of the year we incurred increased
rating costs on a higher number of businesses that elected not to become
certified, primarily in new markets where the value of our services is less
recognized. We have increased our training of field personnel and during the
first two months of fiscal 2000 have improved our certification rates. We also
believe our move to new facilities impacted rating operations during the fourth
quarter increasing costs. We have made operating changes to address this matter
and believe we can improve percentage results in the future. Cost of revenues
may vary significantly from quarter to quarter both in amount and as a
percentage of sales.
Selling Costs. Selling costs consist primarily of personnel costs for outside
sales consultants interacting with customers and direct marketing costs
including lead generation and telemarketing costs. Selling costs for the fiscal
year ended June 30, 1999, were $1,776,390, or 76% of revenues, compared to
$902,320, or 56% of revenues for the prior year. The current year's first
quarter included an $81,788 one-time, non-cash expense resulting from the change
in estimate for deferred costs. Also in fiscal 1999 we commenced rating
businesses in seven new market regions, incurring an estimated $300,000 of
non-deferred selling costs associated with early startup of these regions. New
market regions provide only nominal revenues in the first quarter of opening due
to the approximately 60 to 90 day lag from selling activities to initial
revenues. Other than direct targeted telemarketing costs, we expense selling
costs as incurred. We expect selling 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,
the number of new market regions opened and other factors, some beyond our
control.
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Marketing and Promotion Expenses. Marketing and promotion expenses aggregated
$778,435, or 33% of revenues during fiscal 1999, comparable to $746,639, or 47%
of revenues for fiscal 1998. Included in marketing and selling expenses are
printing and distribution costs of our Consumer ValueStar Report publication
targeted at buyers. Printing and distribution costs of $266,000 in fiscal 1999
compared to the fiscal 1998 total of $232,000, as we printed and distribute more
copies with additional pages. During fiscal 1999, we expended $206,000 on paid
advertising targeted at expanding consumer awareness of ValueStar Certified.
Paid advertising of $310,000 was employed in the prior year. We limited media
spending during fiscal 1999 due to limited financial resources. During fiscal
1999, we expended $134,000 on promotions compared to $49,000 for the prior year
with the increase due to an increased number of promotions in the period.
Generally, the first and third fiscal quarters have increased costs because our
Consumer ValueStar Report publication is printed and distributed during these
quarters. Also, we generally expend less advertising in our second fiscal
quarter (fourth calendar quarter) due to higher media rates associated with the
holiday season.
Marketing and promotion expenses are subject to significant variability based on
decisions regarding the timing and size of distribution of our Consumer
ValueStar Report and decisions regarding paid advertising, public relations and
market and brand awareness efforts. We anticipate continuing to make significant
expenditures on marketing and promotion efforts to support a growing business
base but anticipate these costs will decrease as an annual percentage of
revenues as revenues grow. However, amounts and percentages on a quarterly basis
may vary significantly.
General and Administrative Expenses. General and administrative expenses consist
primarily of expenses for finance, office operations, administration and general
and executive management activities, including legal, accounting and other
professional fees. They totaled $1,802,564 or 77% of revenues for the year ended
June 30, 1999, compared to $827,955 or 52% of revenues for the prior year, an
increase of $974,609. The major increases include a $478,000 increase in
compensation and benefits due primarily to the increased number of executive and
management personnel added in connection with regional expansion; a $341,000
increase in occupancy and telephone costs due to additional personnel and
expanded operations; a $51,000 increase in bad debt and guarantee provisions
versus the prior comparable period; an $80,000 increase in depreciation due to
additional equipment; and a $31,000 increase in travel and entertainment due to
expanded operations. General and administrative costs increased to $577,147 or
103% of revenues during the fourth quarter of fiscal 1999 compared to $265,719
or 52% of revenues for the prior year's fourth quarter. Management anticipates
that general and administrative costs will continue to exceed prior period
levels due to increased personnel added to support future growth, increased
general computer, operating, occupancy and corporate costs.
To date, our development expenses associated with the design, development and
testing of our programs and services have not been material. These expenditures
have been included in sales and marketing or general and administrative
expenses. In the first quarter of fiscal 2000 we commenced the design,
development and testing of an expanded Internet program using existing and new
content. We expect to spend more than $300,000 in product development costs in
the first quarter of fiscal 2000 and segregate these costs as product
development costs. Future levels of product development expenses will depend on
decisions and factors not currently estimable by our management.
We incurred interest expense for the year ended June 30, 1999 of $395,890 that
included $114,506 of non-cash amortization of bond discount and accrued
paid-in-kind interest. Interest for the prior comparable year was $119,023. The
increase resulted from the significant additions to our debt to finance growth
and our related losses.
Net Loss. We had a net loss of $3,459,744 for the fiscal year ended June 30,
1999, compared to a loss of $1,577,181 for the fiscal year ended June 30, 1998.
Our increased loss is attributable primarily to (a) increased selling costs
resulting from the expansion of sales personnel to new market regions and (b)
increased general and administrative costs associated with additional management
and support for new market regions. We anticipate we will continue to experience
operating losses until we achieve a critical mass base of renewing certificate
holders. We are increasing our business volume (new and renewal certifications)
and future quarterly results will be greatly impacted by future decisions
regarding new markets, advertising and promotion expenditures and growth rates.
Achievement of positive operating results will require that we obtain a
sufficient base of new and renewal business certifications to support our
operating and corporate costs. There can be no assurance we can sustain renewal
rates or achieve a profitable base of operations.
Liquidity and Capital Resources
Since we commenced operations, we have had significant negative cash flow from
operating activities. Our negative cash flow from operating activities was
$2,941,846 for the year ended June 30, 1999 and $1,629,721 for the year ended
June 30, 1998. At June 30, 1999, we had a working capital deficit of $1,278,287,
including $1,032,664 representing the current portion of long-term debt. For the
year ended June 30, 1999, our negative cash flow from operating activities was
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due primarily to our continued operating losses, expansion to new market
regions, addition of new executive management and investment in business growth.
At June 30, 1999, our net accounts receivables were $409,806, representing
approximately 64 days of revenues and an annualized turnover ratio of
approximately 5.7 times. This compares favorably to approximately 82 days of
revenues and turnover of approximately 4.4 times at June 30, 1998. Our improved
turnover and reduced accounts receivable level results primarily from increased
revenues and more diligent collection efforts. We believe that 60 to 90 days
revenues in receivables is reasonable based on the nature of our business and
the terms we provide certifying companies on certain fees. At June 30, 1999, we
have not experienced and we do not anticipate any significant accounts
receivable recoverability problems.
We have financed our operations primarily through the sale of common equity and
debt financing. On March 31, 1999 we obtained net proceeds of $2,310,000 from
the sale of secured promissory notes. Also during the year ended June 30, 1999,
we obtained $545,000 in net note and debt financing and $623,750 from common
stock sales. In July and August 1999, we sold $2,250,000 of Series A preferred
stock for cash. These funds are being used for operations and product
development. We have no commitments for future investments and there can be no
assurance that we can continue to finance our operations through these or other
sources. In the past, shareholders, including from time to time directors, have
advanced funds and at times converted debt funds to equity financing on terms of
new forms of financing. There can be no assurance that shareholders or directors
or others will provide any future financing to ValueStar.
Other than cash on hand of $270,149 at June 30, 1999, net accounts receivable of
$409,806, and the proceeds from the sale of Series A stock, we have no material
unused sources of liquidity at this time. We expect to incur additional
operating losses in future fiscal quarters as a result of continued operations,
product development expenditures and investments in growth. The timing and
amounts of these expenditures and the extent of operating losses will depend on
many factors, some of which are beyond our control.
We have expanded operations into additional new market regions with seven
additional regions in the last fifteen months (total of eight in the aggregate).
There can be no assurance we can successfully penetrate the business community
in new market regions. We expect that we will require a minimum of $3 million of
additional capital to finance operations during the next twelve months. This
estimate is based on the first fiscal 2000 quarter level of operations,
anticipated renewal revenues, anticipated sales levels in current markets, and
budgeted product development and operating costs. To expand into new market
regions or launch new products or services, we would require additional
financing. Our actual results could differ significantly from plan and,
therefore, we may require substantially greater operating funds. Should required
and/or additional funds not be available or planned operations not meet our
expectations, we may be required to significantly curtail or scale back
staffing, advertising, marketing expenditures and general operations. We may
also have to curtail the number of market regions in which we operate, with more
reliance on more established market regions providing potentially higher
profitable renewals. There can be no assurance that additional funding will be
available to us or on what terms. Potential sources of funds include exercise of
warrants and options, loans from existing shareholders or other debt financing
or additional equity offerings.
New Accounting Pronouncements and Issues
The Financial Accounting Standards Board has issued new pronouncements as
discussed in the footnotes to our financial statements. As discussed in the
notes to our financial statements, the implementation of these new
pronouncements is not expected to have a material effect on our financial
statements.
On September 28, 1998, the SEC issued a press release and stated that the "SEC
will formulate and augment new and existing accounting rules and interpretations
covering revenue recognition, restructuring reserves, materiality, and
disclosure;" for all publicly-traded companies. In response the SEC's Division
of Corporation Finance has established an Earnings Management Task Force to
focus staff resources on the review of filings where potential earnings
management issues may be present. Until such time as the SEC staff issues
interpretative guidelines, it is unclear what, if any, impact such
interpretative guidance and review of filings will have on our current
accounting practices. Our practices have been consistently applied since our
initial filing and review by the SEC in 1997. However, the potential changes in
accounting practice being considered by the SEC staff, if applied to
certifications in a manner different than currently recognized by us, could have
a material impact on the manner in which we recognize revenue. Any changes would
have no effect on reported cash flow or the economic value of our certification
business.
Year 2000 Readiness Disclosure
We are 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
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sensitive information when the year changes to 2000. Systems that do not
properly recognize information could generate erroneous data or cause a system
to fail. The Year 2000 problem is pervasive and complex as the computer
operation of virtually every company will be affected in some way which could
lead to business disruptions in the U.S. and internationally.
We have identified the following areas that could be impacted by the Year 2000
issue. They are (a) our products, (b) internally used systems and software,
(c)products or services provided by key third parties, and (d) the inability of
certifying businesses and prospective customers to process business transactions
relating to certifying revenue and product sales.
During the first calendar quarter ended March 31, 1999, we completed an initial
review of our internal systems. The review consisted of an evaluation of
significant internal hardware systems and major software application programs
that are primarily packaged third party "off-the-shelf" software programs. As a
result of this review, we have identified certain systems which require further
review and probable upgrades to be Year 2000 ready, the costs of which are
included in our estimates outlined below. We are currently evaluating new
business software applications and one major selection and evaluation criterion
is full compliance with Year 2000. We do not believe our certification and other
products have any material Year 2000 problems.
In addition, we are in the process of assessing the compliance of our customers,
suppliers and vendors. We believe that third-party relationships upon which we
rely represent the greatest risk with respect to the Year 2000 issue, because we
cannot guarantee that third parties will be able to adequately assess and
address their Year 2000 compliance issues in a timely manner. As a consequence,
we can give no assurances that issues related to Year 2000 will not have a
material adverse effect on our future results of operations or financial
condition.
Total costs relating to our compliance efforts, based on management's best
estimates range from $10,000 to $20,000, consisting primarily of obtaining,
installing and testing new computers and upgrades of third party "off-the-shelf"
software programs. To date, there have been no material direct out-of-pocket
costs. Maintenance or modification costs will be expensed as incurred, while the
costs of new computers or software will be capitalized and amortized over the
respective useful life.
Should we not be completely successful in mitigating internal and external Year
2000 risks, the likely worst case scenario could be a system failure causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, deliver certifications and products, send invoices or
engage in similar normal business activities at our office or with our vendors
and suppliers. If we determine certain suppliers are not Year 2000 compliant, we
may have to arrange for alternative sources of supply and the stockpiling of
inventory (mainly brochures) in the fall of 1999 in preparation for the Year
2000. We cannot estimate at this time the cost or effect on our financial
condition of any stockpiling of inventory. We currently do not have any other
contingency plans with respect to potential Year 2000 failures of our suppliers
or customers and at the present time, after an initial evaluation, we do not
intend to develop one. If these failures would occur, depending upon their
duration and severity, they could have a material adverse effect on our
business, results of operations and financial condition.
The information set forth above under this caption "Year 2000 Readiness
Disclosure" relates to our efforts to address the Year 2000 concerns regarding
our (a) operations, (b) products and technologies licensed or sold to third
parties and (c) major suppliers and customers. Such statements are intended as
Year 2000 Statements and Year 2000 Readiness Disclosures and are subject to the
"Year 2000 Information Readiness Act."
Tax Loss Carryforwards
As of June 30, 1999, we had approximately $8 million of federal tax loss
carryforwards. These losses create a deferred tax asset. We have recorded a
valuation allowance to reduce the net deferred tax asset to zero because, in our
assessment, it is more likely than not that the deferred tax asset will not be
realized. There may also be limitations on the utilization of tax loss
carryforwards to offset any future taxes.
Business Risks
This report contains a number of forward-looking statements that reflect our
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
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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. We undertake no obligation to publicly revise these
forward-looking statements, to reflect events or circumstances that may arise
after the date hereof.
Because We Have a History of Losses and Anticipate Continued Losses in
Fiscal 2000, We May Not Have Sufficient Capital - We have incurred
significant operating losses since our inception and anticipate a
continuation of losses in fiscal 2000. Our operating results have
fluctuated in the past and are expected to fluctuate in the future due
to a number of factors, many of which are outside our control. There
can be no assurance that we can achieve profitable operations. We will
require additional capital to continue our operations and growth. The
failure to obtain additional capital would require us to curtail growth
and operations that would adversely impact operating results.
We May Not be Able to Continue as a Going Concern Without Additional
Capital - Our 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. Our reliance upon debt
and equity financing to fund losses from operations and cash flow
deficits, our material net losses and cash flow deficits from
operations and the possibility that we may be unable to meet our debts
as they come due, raise doubt about our ability to continue as a going
concern. If we are unable to obtain additional capital or reduce growth
and operating costs to achieve operating stability, we may not be able
to continue as a going concern.
Additional Funding May Dilute Shareholders - Additional financing may
not be available on favorable terms or at all. If we raise additional
funds by selling stock, the percentage ownership of our then current
stockholders will be reduced. Our future capital requirements are not
known and depend upon numerous factors, including the rate we expand,
results of operations, the extent we develop and launch new products
and services, the effects of competition and other factors, many of
which are outside our control.
Terms of Recent Financings May Result in Adverse Consequences to
Shareholders in the Future - We have entered into a senior secured debt
financing and a convertible preferred financing of which three
institutional investor control a majority of each series of securities.
These securities contain terms and conditions that, although customary
in our opinion for a company in our circumstances and associated
financial condition, could have adverse consequences to shareholders.
The three institutional investors have the ability to enforce certain
rights or remedies, including the following:
o The three institutional investors effectively have
the right through a voting agreement entered into in
connection with our recent debt financing and the
terms of the Series A preferred stock to appoint
three directors to ValueStar's board. Although we
have authorized five director positions, at the
current time we have four directors. The preferred
shareholders have appointed one director. Should the
senior note holders elect to appoint two additional
directors, then these investors could effectively
change control of the company. This could have an
adverse impact on current shareholders as the
interests of the senior debt and preferred
shareholders may differ from those of common
shareholders.
o The senior debt investors received warrants. Prior to
a qualifying public offering, qualifying sale or a
qualifying senior stock market listing, in the event
of a sale or disposition of ValueStar or
substantially all of our assets, the number of shares
of common stock for which the warrants may be
exercised may be increased, without a corresponding
increase in the aggregate consideration. This would
provide additional consideration to warrant holders
based on a revenue-based valuation. This could
significantly reduce the proceeds available to other
common shareholders from a sale.
o The senior debt warrant holders have "Drag Along
Rights". Until a qualifying public offering or sale
is completed by ValueStar or a qualifying market
listing is achieved, then upon either (a) a change in
control, or (b) the loss of Mr. Stein as President
without a replacement acceptable to the warrant
holders, or (c) a non-qualifying public offering, or
(d) certain defaults under the senior notes, and (e)
at any time between April 2004 and April 2009 (unless
the rights are earlier
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terminated), the warrant holders may seek a buyer for
ValueStar or its assets and ValueStar and three of
our current directors (Jim Stein, Jerry E. Polis and
James A. Barnes) are obligated to cooperate and take
such actions to complete a sale, consistent with
their fiduciary duties. Upon such a sale, the
warrants may be exercised for additional common
shares resulting in additional dilution and less
proceeds to existing shareholders. This dilution
could be material should the Drag Along Rights become
exercisable and subsequently exercised by the warrant
holders.
o The securities contain a number of provisions,
including antidilution provisions, registration
rights and equity and debt preemptive rights. Upon
the occurrence of future events, these provisions
could be dilutive to shareholders. Also should the
holders elect to exercise their registration rights
and sell large amounts of securities in the market
this could have an adverse effect on the price of our
shares.
o Our senior debt agreement contains a number of
restrictive covenants. There can be no assurance we
can stay within such restrictions and failure to do
so without waivers from the lenders could result in
an acceleration in the term of senior debt. Should
our senior debt be accelerated, it is unlikely that
we could continue as a going concern and we may be
required to seek bankruptcy protection. This would
have a material adverse impact on shareholders. The
debt holders have waived from time to time certain
restrictions and amended or waived certain financial
covenants.
The documents related to the debt financing were filed as exhibits to
our Form 8-K dated April 13, 1999. The documents related to the Series
A preferred stock financing are filed as exhibits to this Form 10-KSB.
Competition and Technological Changes May Affect Our Business - The
possibility exists that a business rating service and certification
mark similar to or competitive to ours will be developed. It is also
possible that future competition will try to duplicate our concept. We
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 our business. As a provider of consumer information
through the Internet and various media, we will be required to adapt to
new and changing technologies. There can be no assurance that our
services will remain viable or competitive in the face of technological
change.
We Depend on Our President and CEO as the Public Image of ValueStar -
We are substantially dependent upon the experience and knowledge of our
President and CEO, James Stein. Mr. Stein is becoming a leader in
customer satisfaction issues and is our public spokesperson for events,
including customer meetings and various radio and television
appearances. The loss of Mr. Stein could be detrimental to the our
development, especially since we may not have the funds to hire a
replacement with the requisite expertise. We have a $3 million key-man
life insurance policy on Mr. Stein of which $2 is assigned to our
senior debt holders.
We Rely on Third Parties for Important Services - Our operations depend
on a number of third parties. We have limited control over these third
parties and other than Public Research Institute, we have no long-term
relationships with them. We do not own a gateway onto the Internet, but
instead rely on an Internet service provider to connect our Web site to
the Internet. Disruption, temporary or prolonged, of our Web site could
have a material adverse effect on our business. We are dependent on
third parties for printing and distribution of our Consumer ValueStar
Report. Failure to maintain satisfactory relationships on acceptable
commercial terms with these third parties could affect the timing and
quality of our services to customers and adversely affect our operating
results.
We are Developing New Markets with No Proven Acceptance - Although we
believe the factors driving our business acceptance in the 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. We believe the evolution of our business will depend in
part on increasing brand recognition. Development and awareness of our
rating brand will depend on co-branding, with certified businesses and
our success in maintaining our position as a leader in the rating of
local service businesses.
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The Failure to Establish the ValueStar Brand Would Impair our
Competitive Position - We are highly dependent on establishing and
maintaining our brand. Any event or circumstance that negatively
impacts our brand could have a direct and material adverse effect on
our business, results of operations and financial condition. As
competition develops, we believe that brand strength will become
increasingly important. The reputation of our brand will depend on our
ability to provide quality services to our customers and maintain
quality and the integrity of our rating and certification service to
businesses and consumers. We cannot assure you we will be successful in
maintaining our brand and delivering quality to customers and
consumers. If customers and consumers are not satisfied, their negative
experiences might result in publicity that could damage our reputation
and our competitive position could suffer.
We Face Risks in Managing a Growing and Changing Business - We continue
to experience changes in our operations resulting from expansion of our
business and other factors which have and may place demands on our
administrative, operational and financial resources. Our future
performance will depend in part on our ability to manage growth and to
adapt our administrative, operational and financial control systems to
the needs of an expanding entity. The failure of our management to
anticipate, respond to and manage changing business conditions could
have a material adverse effect on ours business and results of
operations. Future growth will also require additional management.
There can be no assurance we can attract appropriate personnel in the
future to manage a growing and changing business.
We Need to Protect Our Trademarks and Intellectual Property - We regard
our trademarks, copyrights, trade secrets and similar intellectual
property as critical to our success. We rely 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 our proprietary rights. There can be no assurance
that third parties will not infringe upon or misappropriate our
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
our operations. A number of companies claim proprietary rights to
certain aspects of Internet operations. Although we are not aware of
any aspect of our operations that may infringe on the rights of other
companies, there is no assurance these claims will not arise in the
future. Although we have limited resources to protect our rights, we
intend to take aggressive actions to protect our certification mark.
Year 2000 Compliance Issues Could Adversely Impact our Business - We
have identified certain of our systems which require further review and
probable upgrades to be Year 2000 ready. We are evaluating new business
software applications and one major selection and evaluation criterion
is full compliance with Year 2000. We are assessing the compliance of
our customers, suppliers and vendors. We believe that third-party
relationships upon which we rely represent the greatest risk with
respect to the Year 2000 issue, because we cannot guarantee that third
parties will be able to adequately assess and address their Year 2000
compliance issues in a timely manner. As a consequence, known or
unknown errors or defects that affect the operation of our software and
systems and those of third parties and customers, could result in delay
or loss of revenue, interruption of services, cancellation of customer
contracts, damage to our reputation, increased operating costs, and
litigation costs, any of which could harm our business.
We May Become Subject to Government Regulation- We are 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 our
operations may be impacted by litigation and regulation in the future.
We May Face Legal Uncertainties That Could Harm Our Business - We may
be subject to claims by consumers for the actions of certified
businesses. Although we do not believe a claim would have merit, the
costs of defense could be substantial. There is no assurance our errors
and omissions insurance would adequately cover any claims. In addition
to the direct legal and defense costs, litigation could negatively
impact our reputation and make selling to and certifying businesses
more difficult.
Stock Trading Risks and Uncertainties Increase Risk to Investors - See
Part II - Item 5 "Market for Common Equity and Related Stockholder
Matters."
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Item 7. Financial Statements
The consolidated financial statements of the ValueStar 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 24.
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
The information called for by Items 9, 10, 11 and 12 of Part III of Form 10-KSB
(consisting of Item 9 - Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act, Item 10 - Executive
Compensation, Item 11 - Security Ownership of Certain Beneficial Owners and
Management, and Item 12 - Certain Relationships and Related Transactions) is
incorporated by reference from ValueStar's definitive proxy statement, which
will be filed with the Securities and Exchange Commission within 120 days after
the end of the fiscal year to which this Report relates.
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
us 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.
3.3* Certificate of Designation of Series A Convertible preferred
stock filed with the State of Colorado on July 21, 1999.
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) and filed as Exhibit 4.3 to the Company's
Form 10-KSB for the year ended June 30, 1998.
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.
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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.
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) filed as Exhibit 4.14 to the
Company's Form 10-KSB for the year ended June 30, 1998.
4.15 Stock Purchase warrant between the Registrant and Viking Group,
L.L.C., dated October 20, 1998 (for 200,000 shares exercisable
at $0.75 per share) filed as Exhibit 4.15 to the Company's
Registration Statement on Form S-3 dated October 27, 1998.
4.16 Form of Stock Purchase Warrant granted in December 1998 and
January 1999 to seven investors exercisable into an aggregate
of 500,000 common shares at $1.00 per share until December 31,
2003 (individual warrants differ as to number, date and holder)
filed as Exhibit 4.16 to the Company's Form 10-QSB for the
quarter ended December 31, 1998. Officer/director James A.
Barnes is the indirect holder of a warrant on 25,000 of these
shares.
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4.17 Note Purchase Agreement between the Company's wholly-owned
subsidiary (ValueStar, Inc.) and three institutional investors
dated March 31, 1999 filed as Exhibit 4.17 to the Company's
report on Form 8-K dated April 13, 1999.
4.17.1* First Amendment to Note Purchase Agreement dated September 20,
1999 between the Company and the Company's wholly-owned
subsidiary (ValueStar, Inc.) and three institutional investors
4.18 Form of 8% Senior Note dated March 31, 1999 between ValueStar,
Inc. and three institutional investors for an aggregate of
$2.45 million (individual notes differ as to holder and amount)
filed as Exhibit 4.18 to the Company's report on Form 8-K dated
April 13, 1999.
4.19 Shareholder Agreement between the Company, three institutional
investors and certain stockholders of the Company dated March
31, 1999 filed as Exhibit 4.19 to the Company's report on Form
8-K dated April 13, 1999.
4.19.1* Waiver Agreement between the Company, three institutional
investors and certain stockholders of the Company dated July
21, 1999.
4.20 Warrant Purchase Agreement between the Company, three
institutional investors and certain stockholders of the Company
dated March 31, 1999 filed as Exhibit 4.20 to the Company's
report on Form 8-K dated April 13, 1999.
4.21 Form of A, B and C Warrants issued by the Company to three
institutional investors dated March 31, 1999 (individual
warrants differ as to holder and number) filed as Exhibit 4.21
to the Company's report on Form 8-K dated April 13, 1999.
4.22 Security Agreement dated March 31, 1999 between ValueStar, Inc.
and three institutional investors filed as Exhibit 4.22 to the
Company's report on Form 8-K dated April 13, 1999.
4.23 Trademark Security Agreement dated March 31, 1999 between
ValueStar, Inc. and three institutional investors filed as
Exhibit 4.23 to the Company's report on Form 8-K dated April
13, 1999.
4.24 Form of Stock Purchase Warrant dated March 31, 1999 issued to
two individuals by the Company for an aggregate of 152,728
shares of common stock at an exercise price of $1.375
(individual warrants differ as to holder) filed as Exhibit 4.24
to the Company's report on Form 8-K dated April 13, 1999.
4.24.1* Form of First Amendment to Stock Purchase Warrant dated March
31, 1999. The Amendment is dated effective July 15, 1999.
4.25* Stock Purchase Warrant dated June 30, 1999 between the Company
and Davric Corporation for an aggregate of 30,000 common shares
at an exercise price of $1.50 per share.
4.26* Form of Series A preferred stock Purchase Agreement dated as of
July 21, 1999 between the Company and purchasers of Series A
stock (including two directors).
4.27* Form of Registration Rights Agreement and Shareholders
Agreement Amendment dated July 21, 1999 between the Company,
senior note holders, two directors and Series A stock
purchasers.
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
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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 Employment Agreement between the Company and James Stein dated
as of July 1, 1998 filed as Exhibit 10.4 to the Company's Form
10-KSB for the year ended June 30, 1998.
10.5* Office Lease between the Company's Subsidiary and Broadlake
Partners dated April 20, 1999.
10.6 (not used)
10.7 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 Statement on Form 10-SB, as
amended
10.8 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 First Amendment to 1997 Stock Option Plan dated March 31, 1998
and filed as Exhibit 10.8.2 to the Company's Form 10-KSB for
the year ended June 30, 1998.
10.9 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) filed as
Exhibit 10.10 to the Company's Form 10-KSB for the year ended
June 30, 1998.
10.11 Promissory Note between the Company and Davric Corporation
dated August 14, 1998 filed as Exhibit 10.11 to the Company's
Form 10-KSB for the year ended June 30, 1998.
10.12 Promissory Note between the Company and Davric Corporation
dated November 15, 1998 filed as Exhibit 10.12 to the Company's
Form 10-QSB for the quarter ended December 31, 1998.
10.12.1* First Amendment to Promissory Note between the Company and
Davric Corporation dated June 30, 1999.
10.13 Press release issued by the Company on April 1, 1999 filed as
Exhibit 10.13 to the Company's Form 8-K dated April 13, 1999.
21.1* Subsidiary of the Company
23.1* Consent of Moss Adams LLP
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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, 1999. The report dated April 13, 1999 reported an Item 5
event related to placement of $2.45 million of senior debt.
25
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- --------------------------------------------------------------------------------
VALUESTAR CORPORATION
INDEPENDENT AUDITOR'S REPORT
AND
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 and 1998
- --------------------------------------------------------------------------------
<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
- --------------------------------------------------------------------------------
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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, 1999, and the related consolidated statements of
operations, stockholders' deficit, and cash flows for the years ended June 30,
1999 and 1998. 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements as of and for the year
ended June 30, 1999, present fairly, in all material respects, the financial
position of the Company as of June 30, 1999, and the results of its operations
and cash flows for the years ended June 30, 1999 and 1998, 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 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 9, 1999, except for Note 15,
which is as of August 30, 1999
Page F-1
<PAGE>
VALUESTAR CORPORATION
CONSOLIDATED BALANCE SHEET
June 30, 1999
- --------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash $ 270,149
Receivables 409,806
Inventory 4,008
Prepaid expenses 59,446
-----------
Total current assets 743,409
PROPERTY AND EQUIPMENT 501,605
DEFERRED COSTS 100,839
INTANGIBLE AND OTHER ASSETS 194,130
-----------
Total assets $ 1,539,983
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 461,825
Accrued liabilities and other payables 189,759
Deferred revenues 27,430
Note payable - shareholder 280,000
Current portion of capitalized leases 30,018
Current portion of long-term debt 1,032,664
-----------
Total current liabilities 2,021,696
CAPITAL LEASE OBLIGATIONS, net of current portion 113,541
LONG-TERM DEBT, net of current portion 1,795,438
-----------
Total liabilities 3,930,675
-----------
STOCKHOLDERS' DEFICIT
Common stock, $.00025 par value; 20,000,000 shares
authorized, 9,374,132 shares issued and outstanding 2,344
Additional paid-in capital 6,485,373
Accumulated deficit (8,878,409)
-----------
Total stockholders' deficit (2,390,692)
-----------
Total liabilities and stockholders' deficit $ 1,539,983
===========
The accompanying notes are an integral part of these financial statements.
- --------------------------------------------------------------------------------
Page F-2
<PAGE>
VALUESTAR CORPORATION
CONSOLIDATED STATEMENTS OF 0PERATIONS
Years Ended June 30, 1999 and 1998
- --------------------------------------------------------------------------------
1999 1998
----------- -----------
REVENUES $ 2,329,219 $ 1,601,406
----------- -----------
OPERATING EXPENSES
Cost of revenues 1,035,401 580,041
Selling 1,776,390 902,320
Marketing and promotion 778,435 746,639
General and administrative 1,802,564 827,955
----------- -----------
5,392,790 3,056,955
----------- -----------
LOSS FROM OPERATIONS (3,063,571) (1,455,549)
----------- -----------
OTHER INCOME (EXPENSE)
Interest expense (395,890) (119,023)
Miscellaneous (283) (2,609)
----------- -----------
(396,173) (121,632)
----------- -----------
NET LOSS $(3,459,744) $(1,577,181)
=========== ===========
LOSS PER COMMON SHARE $ (0.39) $ (0.19)
=========== ===========
WEIGHTED AVERAGE OF COMMON SHARES
OUTSTANDING 8,966,203 8,500,228
=========== ===========
The accompanying notes are an integral part of these financial statements.
- --------------------------------------------------------------------------------
Page F-3
<PAGE>
<TABLE>
VALUESTAR CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
Years Ended June 30, 1999 and 1998
- ---------------------------------------------------------------------------------------------------------------------
<CAPTION>
Common Stock Additional
------------------------- Paid-in Accumulated
Shares Amount Capital Deficit Total
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
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)
Sale of stock at $1.00 per unit, consisting
of one share and one warrant 500,000 125 499,875 -- 500,000
Exercise of warrants at $0.75 per share 150,000 37 112,463 -- 112,500
Options exercised at $0.75 per share 15,000 4 11,246 -- 11,250
Conversion of debt to stock
at $1.00 per share 26,636 7 26,629 -- 26,636
Issuance of warrants with debt -- -- 1,520,000 -- 1,520,000
Issuance of warrants for services -- -- 60,000 -- 60,000
Issuance of options for services -- -- 8,000 -- 8,000
Net loss -- -- -- (3,459,744) (3,459,744)
----------- ----------- ----------- ----------- -----------
Balance, June 30, 1999 9,374,132 $ 2,344 $ 6,485,373 $(8,878,409) $(2,390,692)
=========== =========== =========== =========== ===========
<FN>
The accompanying notes are an integral part of these financial statements.
- ----------------------------------------------------------------------------------------------------------------------
Page F-4
</FN>
</TABLE>
<PAGE>
<TABLE>
VALUESTAR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 1999 and 1998
- ----------------------------------------------------------------------------------------
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(3,459,744) $(1,577,181)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation 89,988 11,125
Amortization of intangible assets 7,657 --
Amortization of bond discount 84,645 12,532
Change in allowance for doubtful accounts (30,921) 45,000
Accrued interest included in long-term debt 29,861 --
Warrants and options issued for services 68,000 24,000
Common stock issued for services -- 88,398
Changes in:
Receivables (17,516) (110,827)
Inventory 20,388 3,467
Prepaid expenses (55,544) 3,133
Deferred costs 30,091 3,155
Other assets (17,890) --
Accounts payable 264,415 (175,816)
Accrued liabilities and other payables 44,314 38,993
Deferred revenues 410 4,300
----------- -----------
Net cash used by operating activities (2,941,846) (1,629,721)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Property and equipment acquisitions (381,326) (18,400)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of stock 623,750 227,500
Proceeds from senior debt 2,450,000 --
Debt acquisition fee (140,000) --
Net borrowings (repayments) under line of credit (250,000) 250,000
Proceeds from debt 781,150 1,525,000
Payments on capital leases (13,908) --
Payments on debt (256,275) --
----------- -----------
Net cash provided by financing activities 3,194,717 2,002,500
----------- -----------
NET INCREASE (DECREASE) IN CASH (128,455) 354,379
CASH, beginning of year 398,604 44,225
----------- -----------
CASH, end of year $ 270,149 $ 398,604
=========== ===========
SUPPLEMENTAL CASH-FLOW INFORMATION
Cash paid during the year for:
Interest $ 272,425 $ 89,666
Income taxes $ 800 $ 800
Non-cash investing and financing activities:
Equipment acquired under capital leases $ 157,467 --
Conversion of debt to equity $ 25,000 $ 30,000
Warrants issued with debt $ 20,000 $ 118,000
Intangible assets acquired with warrants $ 40,000 --
<FN>
The accompanying notes are an integral part of these financial statements.
- ----------------------------------------------------------------------------------------
Page F-5
</FN>
</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) -- signifying
high customer satisfaction -- enabling consumers to quickly determine the best
local service businesses. The Company generates revenues by conducting customer
satisfaction research on local service companies in 300 industries; certifying
highly rated businesses; and selling ancillary materials and services. The
Company's activities are currently conducted in eight regional markets.
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 three
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 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, 1999.
Loss per common share - Loss per common share is computed using the weighted
average number of common shares outstanding. Since a loss from operations
exists, a diluted earnings per share number is not presented because the
inclusion of common stock equivalents in the computation would be antidilutive.
Common stock equivalents associated with warrants, stock options and convertible
notes, which are exercisable into 6,270,977 and 3,241,490 shares of common stock
at June 30, 1999 and 1998, respectively, could potentially dilute earnings per
share 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.
- --------------------------------------------------------------------------------
Page F-6
<PAGE>
VALUESTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
NOTE 1 - DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
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.
An ongoing evaluation of the expected period of future benefits from
direct-response advertising resulted in the period of amortization being reduced
from twelve months to sixty days in the first quarter of fiscal 1999. Revenues
associated with the direct-response advertising costs, which are primarily
certification fees from businesses new to ValueStar, are being recognized
approximately sixty days after the direct-response costs are incurred. This
change in estimate of the amortization period resulted in a one-time, non-cash
increase in selling expenses of $81,788 in the first fiscal quarter of the year
ended June 30, 1999.
Intangible assets - Intangible assets are stated at cost and amortized using the
straight line method over estimated useful lives. Deferred financing costs
resulting from the issuance of the Company's senior debt are being amortized
over the term of the debt, and logo costs are being amortized over five years.
Management evaluates, on an ongoing basis, the carrying value of intangible
assets and makes a specific provision against an asset when an impairment is
identified.
Stock-based compensation - The Company accounts for stock-based employee
compensation arrangements in accordance with the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB No. 25"), and complies with the disclosure provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). Under APB No. 25, compensation expense is the
excess, if any, of the fair value of the Company's stock at a measurement date
over the amount that must be paid to acquire the stock. SFAS No. 123 requires a
fair value method to be used when determining compensation expense for stock
options and similar equity instruments. SFAS No. 123 permits a company to
continue to use APB No. 25 to account for stock-based compensation to employees,
but proforma disclosures of net income and earnings per share must be made as if
SFAS No. 123 had been adopted in its entirety. Stock options issued to
non-employees are valued under the provisions of SFAS No 123.
Comprehensive income - The Company has adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130") effective
June 30, 1999. 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 with the same prominence as other financial statements. For
the years ended June 30, 1999 and 1998, there were no items of comprehensive
income.
Segment information - The Company adopted the provisions of Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131 requires
public companies to report financial and descriptive information about their
reportable operating segments. The Company identifies its operating segments
based on how management internally evaluates separate financial information (if
available), business activities and management responsibility. The Company
believes it operates in a single business segment and adoption of this standard
did not have a material impact on the Company's consolidated financial
statements. Through June 30, 1999, there have been no material foreign
operations.
Recent accounting pronouncements - The Financial Accounting Standards Board has
issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 is effective for fiscal years beginning after June 15,
2000, and requires companies to record derivatives on the balance sheet as
assets or liabilities, measured at fair market value. Gains or losses resulting
from changes in the values of those derivatives are accounted for depending on
the use of the derivative and whether it qualifies for hedge accounting. The key
criterion for hedge accounting is that the hedging relationship must be highly
effective in achieving offsetting changes in fair value or cash flows. The
Company does not expect the adoption of SFAS No. 133 to have a material effect
on the Company's consolidated financial statements.
- --------------------------------------------------------------------------------
Page F-7
<PAGE>
VALUESTAR CORPORATION NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
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 (see Note 15). 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 $453,885
Less allowance for doubtful accounts 44,079
--------
$409,806
========
NOTE 4 - PROPERTY AND EQUIPMENT
Computer equipment $336,575
Fixtures and equipment 58,056
Office equipment 14,079
Equipment and software under capital leases 157,467
Leasehold improvements 46,994
--------
613,171
Less accumulated depreciation and amortization 111,566
--------
$501,605
========
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 sixty-day period. At June 30, 1999, $100,839 of
direct-response advertising costs were capitalized and reported as an asset.
Advertising and promotion costs charged to expense were $1,273,400 and $964,500
for the years ended June 30, 1999 and 1998, respectively.
NOTE 6 - INTANGIBLE AND OTHER ASSETS
Deferred financing costs $180,000
Security deposits 17,890
Logos 4,949
--------
202,839
Less accumulated amortization 8,709
--------
$194,130
========
- --------------------------------------------------------------------------------
Page F-8
<PAGE>
VALUESTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
NOTE 6 - INTANGIBLE AND OTHER ASSETS (Continued)
In connection with the issuance of the Senior Notes (Note 10), the Company
incurred costs of $180,000, which included $40,000 as the value assigned to
warrants issued in connection with arranging the financing.
NOTE 7 - ACCRUED LIABILITIES AND OTHER PAYABLES
Payroll and payroll taxes $118,880
Accrued vacation costs 32,782
Accrued interest 11,000
Other 27,097
--------
$189,759
========
NOTE 8 - RELATED PARTY DEBT
The Company is obligated to a company affiliated with a director for a $300,000,
15%, unsecured subordinated promissory note that is due June 30, 2000. This
note, issued in November 1998, was due on June 30, 1999, but was renegotiated at
that date. In connection with the extension of the due date, the Company granted
warrants on 30,000 shares of common stock, which are exercisable at $1.50 per
share for a period of five years. The Company allocated $20,000 of the note
proceeds to the value of detachable stock warrants, and is amortizing the
resulting debt discount over the term of the note.
The 12% Notes Payable (Note 10) includes $50,000 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.
The two 15% Equipment Notes (Note 10), aggregating $224,875 at June 30, 1999,
are due to a company affiliated with a Company director.
NOTE 9 - CAPITAL LEASE OBLIGATIONS
The Company has entered into certain capital lease obligations related to the
purchase of equipment. The leases bear interest at rates ranging from 10% to 24%
and require monthly payments of principal and interest. The leases are secured
by the equipment and mature during 2002 through 2004.
Future minimum lease payments on capital lease obligations are as follows:
Year Ending June 30,
--------------------
2000 $ 57,957
2001 57,957
2002 43,016
2003 26,528
2004 11,914
--------
197,372
Less portion representing interest 53,813
--------
Present value of net minimum lease payments 143,559
Less current portion 30,018
--------
$113,541
========
- --------------------------------------------------------------------------------
Page F-9
<PAGE>
VALUESTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
NOTE 10 - LONG-TERM DEBT
8% Senior Secured Notes; principal of $2,450,000; interest is paid
monthly, with the principal repaid in 16 quarterly payments of
$153,125 commencing in March 2002, and maturing December 2005;
net of unamortized note discount of $1,415,501 $1,034,499
12% Notes; unsecured; interest is paid monthly, with a balloon
principal payment due in March 2001; net of unamortized note
discount of $6,364 93,636
12% Subordinated Notes; unsecured; interest is paid monthly,
with a balloon principal payment due in June 2000; net of
unamortized note discount of $26,896 973,104
6% Convertible Notes; subordinated and unsecured;
interest is payable in kind on conversion or at maturity
in June 2001; includes $34,050 of accrued interest;
net of unamortized note discount of $32,062 501,988
15% Equipment Note due to related party; due in monthly
installments of principal and interest of $2,022 to maturity in
August 2003; secured by equipment and software 74,875
15% Equipment Note due to related party; due in monthly
installments of principal and interest of $5,550 to maturity
in June 2002; secured by equipment and software 150,000
----------
2,828,102
Less current portion 1,032,664
----------
$1,795,438
==========
The 8% Senior Secured Notes ("Senior Notes") were issued with detachable
warrants to three institutional investors on March 31, 1999, and are secured by
substantially all assets of the Company and its subsidiary, including a key
person life insurance policy. Certain events, including the loss of James Stein
as President, may result in certain prepayment penalties and the acceleration of
payment under the Senior Notes. The Senior Notes also contain various financial
covenants, primarily relating to minimum net worth, maximum debt, capital
additions and net income or loss. The noteholders have waived and modified
certain covenants through June 30, 1999. The Company recorded a debt discount
and allocated $1,450,000 of the proceeds to the value of detachable stock
warrants (see Note 13).
The 6% Convertible Notes, and the accrued interest thereon, are convertible into
common stock at $1.00 per common share.
Maturities of long-term debt are as follows:
Year Ending June 30,
--------------------
2000 $1,045,654
2001 652,994
2002 357,602
2003 612,500
2004 612,500
Thereafter 918,750
----------
$4,200,000
==========
- --------------------------------------------------------------------------------
Page F-10
<PAGE>
VALUESTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
NOTE 11 - 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, for tax purposes, of various
reserves and 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:
1999 1998
----------- -----------
Federal tax loss carryforward $ 2,030,000 $ 1,156,000
State tax loss carryforward 336,000 215,000
Reserves and allowances 25,000 48,000
State tax deferrals (109,000) --
Unamortized bond discount 508,000 33,000
----------- -----------
2,790,000 1,452,000
Less valuation allowance 2,790,000 1,452,000
----------- -----------
$ -- $ --
=========== ===========
The Company's federal and state net operating losses that are available for
carryforward will expire as follows:
Date of Expiration Federal California
------------------ --------------- ---------------
2000 $ - $ 736,000
2001 - 763,000
2002 - 579,900
2003 1,753,000
2007 98,900 -
2008 410,500 -
2009 365,700 -
2010 178,600 -
2011 736,900 -
2012 1,525,000 -
2013 1,299,400 -
2019 3,505,000 -
--------------- ---------------
$ 8,120,000 $ 3,831,900
============== ==============
NOTE 12 - CAPITAL 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, 1999. See Note 15 for the subsequent
issuance of preferred stock.
- --------------------------------------------------------------------------------
Page F-11
<PAGE>
VALUESTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
NOTE 13 - STOCK OPTIONS AND WARRANTS
Stock options - 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.
In 1997 the stockholders approved the 1997 Stock Option Plan. The plan expires
in 2007 and reserves 500,000 shares of common stock for Incentive or
Nonqualified Stock Options. Options under the plan expire over a period not to
exceed ten years from the date of grant.
The following tables summarize the number of options granted and exercisable at
June 30, 1999, and the weighted average exercise prices and remaining
contractual lives of the options:
Weighted
Average
Shares Exercise Price
--------- --------------
Balance, July 1, 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
Granted 395,600 $ 1.18
Canceled (147,050) $ 0.73
Exercised (15,000) $ 0.75
Expired -- --
---------
Balance, June 30, 1999 1,111,100 $ 0.78
=========
Exercisable at June 30, 1999 743,303 $ 0.58
=========
<TABLE>
<CAPTION>
Weighted Weighted average
average exercise price
Number Number Weighted remaining of options
Range of outstanding at exercisable at average contractual exercisable at
exercise prices June 30, 1999 June 30, 1999 exercise price life June 30, 1999
- ------------------ ------------------ ---------------- ---------------- --------------- --------------------
<S> <C> <C> <C> <C> <C>
$ 0.40-0.50 550,000 550,000 $ 0.43 1.03 $ 0.43
$ 0.75 25,000 18,334 $ 0.75 2.15 $ 0.75
$ 1.00-1.375 515,100 173,969 $ 1.11 3.96 $ 1.02
$ 1.69 21,000 1,000 $ 1.69 4.76 $ 1.69
------------------ ----------------
1,111,100 743,303 $ 0.78 2.49 $ 0.58
================== ================
</TABLE>
The non-exercisable options vest over a period of up to three years.
During fiscal 1999, the Company recorded non-cash compensation expense of $8,000
under its stock option plans to non-employees through the granting of 15,000
options.
- --------------------------------------------------------------------------------
Page F-12
<PAGE>
VALUESTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
NOTE 13 - STOCK OPTIONS AND WARRANTS (Continued)
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:
1999 1998
----------- -----------
Loss for the year $(3,459,744) $(1,577,181)
Compensation expense (93,766) (50,000)
----------- -----------
Pro forma net loss $(3,553,510) $(1,627,181)
=========== ===========
Pro forma loss per common share $ (0.40) $ (0.19)
=========== ===========
The fair value of each option and warrant granted during 1999 and 1998 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
48% to 81% in 1999 and 25% in 1998, (3) risk free interest rate of 4.6% to 5.5%,
and (4) an expected life of the options of from 3 to 5 years. Options issued
during 1999 and 1998 have an estimated weighted average fair value of $0.28 and
$0.30, respectively.
Stock Warrants - In connection with the sale of the Senior Notes on March 31,
1999 (see Note 10), the noteholders were granted warrants to purchase an
aggregate of 1,527,250 shares of Common Stock of the Company at an exercise
price of $1.00 per share ("A Warrants"), warrants to purchase an aggregate of
527,514 shares of Common Stock at a nominal per share exercise price of $0.00025
("B Warrants"), and warrants to purchase an aggregate of 231,132 shares of
Common Stock at an exercise price of $1.00 per share ("C Warrants"). The C
Warrants or underlying shares of Common Stock may be repurchased by the Company
at $6.00 per share (less any unpaid exercise price) on an all or none basis
until March 31, 2004 as long as the Company is not in default with respect to
the Senior Notes or related agreements. The warrants expire on the earlier of
six years from the date the Senior Notes are paid in full or March 31, 2009. The
warrants may be exercised by payment of cash, cancellation of debt or on a
cashless basis.
The holders of the A, B and C Warrants were granted antidilution provisions,
registration rights and certain equity and debt preemptive rights. Prior to a
qualifying public offering (proceeds of $15 million at a price of at least $5.00
per share and a valuation of at least $40 million), qualified sale (valuation of
at least $40 million and minimum proceeds of $5.00 to $7.00 per share to
Holders) or a qualifying stock market listing (Nasdaq National Market or New
York Stock Exchange and minimum price and trading volume), in the event of a
sale or disposition of the Company or substantially all of its assets, the
number of shares of Common Stock for which the Warrants may be exercised may be
increased, without a corresponding increase in the aggregate consideration, to
provide additional consideration to the holders of the warrants based on a
revenue determined valuation. A sale may also be initiated by the warrant
holders in certain instances as described in the next paragraph.
The holders of the A, B and C Warrants have certain "Drag Along Rights." Until a
qualifying public offering or sale is completed by the Company or a qualifying
market listing is achieved, then upon either (i) a change in control (the
current three directors owning less than 20% of the Company on a fully diluted
basis), or (ii) the loss of Mr. Stein as President without a replacement
acceptable to the holders, or (iii) a non-qualifying public offering, or (iv)
certain defaults under the Senior Notes, and (v) at any time between April 2004
and April 2009 (unless the rights are earlier terminated), the holders of the A,
B, and C Warrants may seek a buyer for the Company or its assets and the Company
and the current three directors are obligated to cooperate and take such actions
to complete a sale, consistent with their fiduciary duties. Upon such a sale,
the A, B and C Warrants may be exercised for additional shares of Common Stock
resulting in additional dilution to existing shareholders of the Company. This
dilution could be material should the Drag Along Rights become exercisable and
subsequently exercised by the holders.
The Company determined the fair value of the A, B and C Warrants at $1,450,000.
The Company also issued warrants on 152,728 shares of common stock to two
individuals in connection with arranging the Senior Note financing.
- --------------------------------------------------------------------------------
Page F-13
<PAGE>
VALUESTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
NOTE 13 - STOCK OPTIONS AND WARRANTS (Continued)
At June 30, 1999, the Company had the following stock purchase warrants
outstanding, each exercisable into one common share:
Number Exercise Price Expiration Date
-------------- -------------------- -----------------------
500,000 (1) $ 1.25 December, 2000
50,000 $ 1.25 March, 2001
200,000 (1) $ 1.25 June, 2002
300,000 (1) $ 1.25 September, 2002
200,000 (1) $ 1.25 December, 2002
50,000 $ 1.75 May, 2003
262,500 (2) $ 1.25 April, 2003
262,500 (3) $ 2.00 April, 2003
200,000 $ 0.75 October, 2003
500,000 (1) $ 1.00 December, 2003
152,728 (1) $ 1.38 March, 2004
30,000 (1) $ 1.50 March, 2004
1,527,250 $ 1.00 March, 2009
527,514 $ 0.00025 March, 2009
231,132 (4) $ 1.00 March, 2009
--------------
4,993,624
==============
(1) These warrants are callable at a stock price of $5.00 per share subject to
certain conditions.
(2) These warrants are callable at a stock price of $3.00 per share subject to
certain conditions.
(3) These warrants are callable at a stock price of $4.50 per share subject to
certain conditions.
(4) These warrants may be repurchased by the Company at $6.00 per share until
March 31, 2004, subject to certain conditions.
An aggregate of 327,500 of the above warrants are held by officers and directors
of the Company or their affiliates. Some warrants contain certain registration
rights.
NOTE 14 - COMMITMENTS AND CONTINGENCIES
The Company has assessed its exposure with respect to Year 2000 technology
compliance as limited, although it is not possible to quantify the effects Year
2000 compliance issues will have on customers or suppliers, and does not expect
any interruption in its normal business activities. The Company has identified
and evaluated the changes to its computer systems necessary to achieve a Year
2000 date conversion, and any required conversion efforts are underway. The
Company is also communicating with suppliers, financial institutions, and others
with which it does business to understand the impact of Year 2000 issues on the
Company. The Company does not believe the cost of achieving Year 2000 compliance
to be material. Additionally, the Company believes, based on available
information, that it will be able to manage its total Year 2000 transition
without any material adverse effect on its business operations, products or
financial prospects.
The president of the Company has an employment agreement that provides, in part,
severance benefits equal to the amount of his annual base salary, $120,000, plus
bonuses.
In June 1999, the Company leased 14,900 square feet of improved office space in
Oakland, California. The lease expires on June 29, 2004. Office rent expense for
the years ended June 30, 1999 and 1998 was $88,000 and $48,000, respectively.
- --------------------------------------------------------------------------------
Page F-14
<PAGE>
VALUESTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
NOTE 14 - COMMITMENTS AND CONTINGENCIES (Continued)
Minimum future commitments under the operating lease are as follows:
Year Ending June 30,
--------------------
2000 $ 214,680
2001 214,680
2002 214,680
2003 214,680
2004 214,680
--------------
$ 1,073,400
==============
NOTE 15 - SUBSEQUENT EVENT
During July and August 1999 the Company issued 225,000 shares of Series A
Convertible Preferred Stock, par value $.001 ("Series A stock") for cash of $10
per share. Dividends of 8% per annum compounded are payable in additional shares
of Series A stock. The dollar amount of Series A stock is convertible into
shares of common stock at a conversion price equal to $2.00 per share, and are
automatically converted on the occurrence of certain events. The Series A Stock
has certain antidilution and registration rights, has a liquidation preference
of $10 per share plus accrued and unpaid dividends, and has voting rights equal
to the number of shares into which it is convertible. In addition, as long as
there are at least 100,000 shares of Series A Stock outstanding, then the
holders are entitled to elect one member to the Company's Board of Directors.
- --------------------------------------------------------------------------------
Page 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 22, 1999
<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 22, 1999
------------------------- and Director
James Stein (principal executive officer)
/s/ MICHAEL J. KELLY Controller September 22, 1999
------------------------- (principal accounting officer)
Michael J. Kelly
/s/ JAMES A. BARNES Treasurer, Secretary and Director September 22, 1999
------------------------- (principal financial officer)
James A. Barnes
/s/ JERRY E. POLIS Director September 22, 1999
-------------------------
Jerry E. Polis
/s/ FRITZ T. BEESEMYER Director September 22, 1999
-------------------------
Fritz T. Beesemyer
</TABLE>
EXHIBIT 3.3
-----------
CERTIFICATE OF DESIGNATION
OF
SERIES A CONVERTIBLE PREFERRED STOCK
OF
VALUESTAR CORPORATION
VALUESTAR CORPORATION, a corporation organized and existing under the
Colorado Business Corporation Act (the "Corporation"), in accordance with Colo.
Rev. Stat. Section 7-106-102,
HEREBY CERTIFIES:
1. The name of the Corporation is: Valuestar Corporation.
2. The text of the amendment determining the designations, preferences,
limitations, and relative rights of the class or series of shares is as
set forth on Exhibit "A", attached hereto and by this reference
incorporated herein.
3. This amendment was adopted on July 20, 1999.
4. This amendment was duly adopted by the Board of Directors of the
Corporation.
The undersigned does hereby confirm, under penalties of perjury, that
the foregoing Certificate of Designation of Valuestar Corporation constitutes
the act and deed of the Corporation, and that the facts stated herein are true.
Executed at Oakland, California on July 20, 1999
/s/ JIM STEIN
Jim Stein, Chief Executive Officer
<PAGE>
Exhibit "A"
RESOLVED, that pursuant to the authority granted to the Board of
Directors by Article THIRD, Paragraph I of the Articles of Incorporation of the
Corporation, as amended (the "Articles"), Certificatethere is hereby created,
and the Corporation be, and it hereby is, authorized to issue one million
(1,000,000) shares of a series of convertible preferred stock, designated
"SERIES A CONVERTIBLE PREFERRED STOCK," which Series A Convertible Preferred
Stock (also referred to herein as "Series A Stock" or "Series A Preferred
Stock") shall have, in addition to the rights, restrictions, preferences and
privileges set forth in the Articles Certificate, the following terms,
conditions, rights, restrictions, preferences and privileges:
"A. DIVIDENDS.
1. Generally. Each holder of outstanding shares of Series A
Stock shall be entitled to receive, when and if declared by the Board of
Directors and out of any funds legally available therefor, cumulative dividends
at the annual rate of $0.80 per share (the "Series A Preferential Dividend"),
accruing quarterly at the end of each calendar quarter, and compounded annually,
whether or not earned or declared, and payable in shares of Series A Preferred
Stock at the rate of one share for each $10.00 of such accrued Series A
Preferential Dividend during each fiscal year of this Corporation and in
preference to any declaration or payment (payable other than in Common Stock) on
any other equity security of the Company. No cash dividends shall be declared
and paid on the Common Stock or any other equity of the Company unless a like
cash dividend amount has been paid to the Series A Stock on an as converted
basis. Notwithstanding anything to the contrary hereunder, however, upon the
conversion of any share of Series A Stock, all of such Series A Preferential
Dividend accrued thereon shall be paid upon such conversion whether or not such
Series A Preferential Dividend has been declared by the Board of Directors.
2. Payment Other Than Cash. If the Corporation shall declare a
distribution payable in securities of persons other than this Corporation,
evidences of indebtedness issued by the Corporation or other persons, assets
(excluding cash dividends) or options or rights to purchase any such securities
or evidences of indebtedness, then, in each such case, the holders of Series A
Preferred Stock shall be entitled to a proportionate share of any such
distribution as though the holders of Series A Preferred Stock were the holders
of the number of shares of Common Stock of the Corporation into which their
respective shares of Series A Preferred Stock are convertible as of the record
date fixed for the determination of the holders of Common Stock of the
Corporation who are entitled to receive such distribution.
3. Dividend Adjustment. The Series A Preferential Dividend and
number of Series A Stock shares issued as a dividend shall be appropriately
adjusted for any stock splits, dividends, combinations, recapitalizations and
the like ("Appropriately Adjusted").
B. PREFERENCE ON LIQUIDATION.
1. Preference Price. Except upon a "Qualified Liquidation
Event," in the event of any liquidation, dissolution or winding up of this
Corporation, whether voluntary or involuntary, the holders of the outstanding
shares of Series A Stock shall be entitled to be paid out of the assets of this
Corporation available for distribution to its shareholders, whether from
capital, surplus funds or earnings, before any payment is made in respect of the
shares of Common Stock or any other equity security of this Corporation , in an
amount equal to $10.00 per share (Appropriately Adjusted), together with an
amount equal to the greater of (A) eight percent (8%) of such $10.00 compounded
annually at the rate of 8%, for each year (or fraction thereof) after the date
of the issuance of each such share of Series A Stock , less the amount, if any,
of any cash dividends actually paid to the Series A Stock through the date of
liquidation, or (B) any declared and unpaid dividends thereon (the "Preference
Price"). After payment of the
2
<PAGE>
Preference Price to the holders of Series A Preferred Stock, the remaining
assets of the Corporation shall be distributed to the holders of shares of
Common Stock.
2. Partial Payment. If, upon any such liquidation, dissolution
or winding up of this Corporation, whether voluntary or involuntary, the assets
of this Corporation available for distribution to its shareholders shall be
insufficient to pay in full the Preference Price required to be paid to the
holders of the outstanding shares of Series A Stock, then all of the assets of
this Corporation legally available for distribution to the holders of equity
securities shall be distributed ratably among the holders of the outstanding
shares of Series A Preferred Stock in proportion to the Preference Price upon
liquidation that each Series A Preferred Stock holder is otherwise entitled to
receive.
3. Certain Transactions. The following shall be deemed to be a
liquidation, dissolution or winding up within the meaning of this Section B with
respect to the Series A Stock: (A) a sale of all or substantially all of the
Corporation's assets; or (B) a consolidation, merger or reorganization of the
Corporation with or into any other corporation or corporations if the
Corporation's shareholders do not control a majority of the outstanding voting
securities of such consolidated, merged or reorganized corporation(s). The
Corporation shall provide written notice of each of the above transactions to
each holder of Series A Stock at least ten (10) days prior to such transaction
in accordance with Section D.14 (below).
4. Liquidation Adjustment. The Preference Price shall be
Appropriately Adjusted.
C. VOTING.
1. Generally. Except as otherwise required by law or expressly
provided herein, each share of Series A Preferred Stock shall be entitled to
vote on all matters submitted or required to be submitted to a vote of the
shareholders of the Corporation and shall be entitled to the number of votes
equal to the number of whole shares of Common Stock into which such shares of
Series A Preferred Stock are convertible pursuant to the provisions hereof, at
the record date for the determination of shareholders entitled to vote on such
matters or, if no such record date is established, at the date such vote is
taken or any written consent of shareholders is solicited. In each such case,
except as otherwise required by law or expressly provided herein, the holders of
shares of Series A Preferred Stock and Common Stock shall vote together and not
as separate classes.
2. Special Voting for the Election of Directors. The Board of
Directors shall be elected as follows:
(i) So long as at least One Hundred Thousand
(100,000) shares of Series A Preferred Stock are issued and outstanding
(Appropriately Adjusted), the holders of Series A Preferred Stock shall be
entitled, voting as a separate class, to elect one (1) and only one (1) member
to the Corporation's Board of Directors; and
(ii) The remaining authorized members of the Board of
Directors shall be elected by the holders of Common Stock.
3. Removals or Resignations. Any vacancy created on the
Corporation's Board of Directors shall be filled by a successor Director who
shall be elected in a manner by which his or her predecessor was elected as
provided above. Any Director who has been elected to the Corporation's Board of
Directors as provided above may be removed during his term of office in
accordance with the General Corporation Law of the State of Colorado, and any
vacancy thereby created shall be filled as provided in this subparagraph.
D. CONVERSION. The holders of the outstanding shares of Series A Stock
shall have the following conversion rights (the "Conversion Rights"):
3
<PAGE>
1. Right to Convert. Each share of Series A Stock shall be
convertible, at the option of the holder thereof, at any time after the date of
issuance of such shares, at the office of this Corporation or any transfer agent
for the Corporation's shares into that number of shares of Common Stock which is
equal to the quotient obtained by dividing $10.00 for each share of Series A
Stock by the Series A Conversion Price (as such term is hereinafter defined) in
effect immediately prior to the time of such conversion. The initial price at
which shares of Common Stock shall be deliverable upon conversion of shares of
Series A Stock shall be $2.00 (as adjusted from time to time as herein provided,
the "Series A Conversion Price").
2. Mechanics of Conversion. Each holder of outstanding shares
of Series A Stock who desires to convert the same into shares of Common Stock
shall surrender the certificate or certificates therefor, duly endorsed, at the
office of this Corporation or of any transfer agent for the Corporation's shares
and shall give written notice to this Corporation at such office that such
holder elects to convert the same and shall state therein the number of shares
of Series A Stock being converted. Thereupon, this Corporation shall issue and
deliver at such office to such holder a certificate or certificates for the
number of shares of Common Stock to which such holder is entitled and shall
promptly pay all declared but unpaid dividends on the shares being converted.
Such conversion shall be deemed to have been made immediately prior to the close
of business on the date of such surrender of the certificate or certificates
representing the shares to be converted, and the person entitled to receive the
shares of Common Stock issuable upon such conversion shall be treated for all
purposes as the record holder of such shares of Common Stock on such date.
3. Adjustment for Stock Splits and Combinations. If this
Corporation at any time or from time to time after the date that this
Certificate of Designation was filed with the Colorado Secretary of State (the
"Filing Date") effects a division of the outstanding shares of Common Stock, the
Series A Conversion Price shall be proportionately decreased and, conversely, if
this Corporation at any time, or from time to time, after the Filing Date
combines the outstanding shares of Common Stock, the Series A Conversion Price
shall be proportionately increased. Any adjustment under this Section D.3 shall
be effective on the close of business on the date such division or combination
becomes effective.
4. Adjustment for Certain Dividends and Distributions. If this
Corporation at any time or from time to time after the Filing Date pays or fixes
a record date for the determination of holders of shares of Common Stock
entitled to receive a dividend or other distribution in the form of shares of
Common Stock, or rights or options for the purchase of, or securities
convertible into, Common Stock, then in each such event the Series A Conversion
Price shall be decreased, as of the time of such payment or, in the event a
record date is fixed, as of the close of business on such record date, by
multiplying the Series A Conversion Price by a fraction (i) the numerator of
which shall be the total number of shares of Common Stock outstanding
immediately prior to the time of such payment or the close of business on such
record date and (ii) the denominator of which shall be (A) the total number of
shares of Common Stock outstanding immediately prior to the time of such payment
or the close of business on such record date plus (B) the number of shares of
Common Stock issuable in payment of such dividend or distribution or upon
exercise of such option or right of conversion; provided, however, that if a
record date is fixed and such dividend is not fully paid or such other
distribution is not fully made on the date fixed therefor, the Series A
Conversion Price shall not be decreased as of the close of business on such
record date as hereinabove provided as to the portion not fully paid or
distributed and thereafter the Series A Conversion Price shall be decreased
pursuant to this Section 4 as of the date or dates of actual payment of such
dividend or distribution.
5. Adjustments for Other Dividends and Distributions. If this
Corporation at any time or from time to time after the Filing Date pays, or
fixes a record date for the determination of holders of shares of Common Stock
entitled to receive, a dividend or other distribution in the form of securities
of this Corporation other than shares of Common Stock or rights or options for
the purchase of, or securities convertible into, Common Stock, then in each such
event provision shall be made so that the holders of outstanding shares of
Series A Stock shall receive upon conversion thereof, in addition to the number
of shares of Common Stock receivable thereupon, the amount of securities of this
Corporation which they would have received had their respective shares of Series
A Stock been converted into shares of Common Stock on the date of such event and
had such holders thereafter, from the date of such event to and
4
<PAGE>
including the actual date of conversion of their shares, retained such
securities, subject to all other adjustments called for during such period under
this Section D with respect to the rights of the holders of the outstanding
shares of Series A Stock.
6. Adjustment for Reclassification, Exchange and Substitution.
If, at any time or from time to time after the Filing Date, the number of shares
of Common Stock issuable upon conversion of the shares of Series A Stock is
changed into the same or a different number of shares of any other class or
classes of stock or other securities, whether by recapitalization,
reclassification or otherwise (other than a recapitalization, division or
combination of shares or stock dividend or a reorganization, merger,
consolidation or sale of assets provided for elsewhere in this Section D), then
in any such event each holder of outstanding shares of Series A Stock shall have
the right thereafter to convert such shares of Series A Stock into the same kind
and amount of stock and other securities receivable upon such recapitalization,
reclassification or other change, as the maximum number of shares of Common
Stock into which such shares of Series A Stock could have been converted
immediately prior to such recapitalization, reclassification or change, all
subject to further adjustment as provided herein.
7. Reorganizations, Mergers, Consolidations or Sales of
Assets. If, at any time or from time to time after the Filing Date, there is a
capital reorganization of the Common Stock (other than a recapitalization,
division, combination, reclassification or exchange of shares provided for
elsewhere in this Section D) or a merger or consolidation of this Corporation
into or with another corporation or a sale of all or substantially all of this
Corporation's properties and assets to any other person, then, as a part of such
capital reorganization, merger, consolidation or sale, provision shall be made
so that the holders of outstanding shares of Series A Stock shall thereafter
receive upon conversion thereof the number of shares of stock or other
securities or property of this Corporation, or of the successor corporation
resulting from such merger or consolidation or sale, to which a holder of the
number of shares of Common Stock into which their shares of Series A Stock were
convertible would have been entitled on such capital reorganization, merger,
consolidation or sale. In any such case, appropriate adjustment shall be made in
the application of the provisions of this Section D) with respect to the rights
of the holders of the outstanding shares of Series A Stock after the capital
reorganization, merger, consolidation, or sale to the end that the provisions of
this Section D) (including adjustment of the Series A Conversion Price and the
number of shares into which the shares of Series A Stock may be converted) shall
be applicable after that event and be as nearly equivalent to such Conversion
Prices and number of shares as may be practicable.
8. Sale of Shares Below Conversion Price.
(i) If, at any time or from time to time after the
Filing Date, this Corporation issues or sells, or is deemed by the express
provisions of this Section 8 to have issued or sold, Additional Shares of Common
Stock (as hereinafter defined) for an Effective Price (as hereinafter defined)
less than the then current Series A Conversion Price, other than (A) as a
dividend or other distribution on any class of stock as provided in Section D.4
above or (B) upon a division or combination of shares of Common Stock as
provided in Section D.3 above, then, in any such event, the Series A Conversion
Price shall be reduced, as of the close of business on the date of such issuance
or sale, to an amount determined by multiplying the Series A Conversion Price by
a fraction (A) the numerator of which shall be (x) the number of shares of
Common Stock outstanding at the close of business on the day immediately
preceding the date of such issuance or sale, plus (y) the number of shares of
Common Stock which the aggregate consideration received (or by the express
provisions hereof deemed to have been received) by this Corporation for the
total number of Additional Shares of Common Stock so issued or sold would
purchase at such Series A Conversion Price and (B) the denominator of which
shall be the number of shares of Common Stock outstanding at the close of
business on the date of such issuance or sale after giving effect to such
issuance or sale of Additional Shares of Common Stock. For the purpose of the
calculation described in this Section 8, the number of shares of Common Stock
outstanding shall include, in addition to the number of shares of Common Stock
actually outstanding, (A) the number of shares of Common Stock into which the
then outstanding shares of Series A Stock could be converted if fully converted
on the day immediately preceding the issuance or sale or deemed issuance or sale
of Additional Shares of Common Stock; and (B) the number of shares of Common
Stock which would be obtained through the exercise or conversion of all rights,
5
<PAGE>
options and Convertible Securities (as hereinafter defined) outstanding on the
day immediately preceding the issuance or sale or deemed issuance or sale of
Additional Shares of Common Stock.
(ii) For the purpose of making any adjustment
required under this Section 8, the consideration received by this Corporation
for any issuance or sale of securities shall (A) to the extent it consists of
property other than cash, be the fair value of that property as reasonably
determined in good faith by a disinterested majority of the Board of Directors;
and (B) if Additional Shares of Common Stock, Convertible Securities (as
hereinafter defined) or rights or options to purchase either Additional Shares
of Common Stock or Convertible Securities are issued or sold together with other
stock or securities or other assets of this Corporation for a consideration
which covers both, be the portion of the consideration so received reasonably
determined in good faith by a disinterested majority of the Board of Directors
to be allocable to such Additional Shares of Common Stock, Convertible
Securities or rights or options.
(iii) For the purpose of the adjustment required
under this Section 8, if this Corporation issues or sells any rights or options
for the purchase of, or stock or other securities convertible into, Additional
Shares of Common Stock (such convertible stock or securities being hereinafter
referred to as "Convertible Securities") and if the Effective Price (as defined
in Clause (v) below) of such Additional Shares of Common Stock is less than the
then current Series A Conversion Price, this Corporation shall be deemed to have
issued, at the time of the issuance of such rights, options or Convertible
Securities the maximum number of Additional Shares of Common Stock issuable upon
exercise or conversion thereof and to have received as consideration therefor an
amount equal to (A) the total amount of the consideration, if any, received by
this Corporation for the issuance of such rights or options or Convertible
Securities plus (B) in the case of such rights or options, the minimum amount of
consideration, if any, payable to this Corporation upon the exercise of such
rights or options or, in the case of Convertible Securities, the minimum amount
of consideration, if any, payable to this Corporation upon the conversion
thereof. Thereafter, no further adjustment of the Series A Conversion Price
shall be made as a result of the actual issuance of Additional Shares of Common
Stock on the exercise of any such rights or options or the conversion of any
such Convertible Securities. If any such rights or options or the conversion
privilege represented by any such Convertible Securities shall expire or
otherwise terminate without having been exercised, the Series A Conversion Price
shall thereafter be the Series A Conversion Price which would have been in
effect had an adjustment been made on the basis that the only Additional Shares
of Common Stock so issued were the Additional Shares of Common Stock, if any,
actually issued or sold on the exercise of such rights or options or rights of
conversion of such Convertible Securities, and were issued or sold for the
consideration actually received by this Corporation upon such exercise plus (A)
the consideration, if any, actually received for the granting of all such rights
or options, whether or not exercised, (B) the consideration, if any, actually
received by issuing or selling the Convertible Securities actually converted and
(C) the consideration, if any, actually received on the conversion of such
Convertible Securities. However, if any such rights or options or Convertible
Securities by their terms provide, with the passage of time or otherwise, for
any increase in the consideration payable to the Corporation, upon the exercise,
conversion or exchange thereof, the Series A Conversion Price for the Series A
Stock, and any subsequent adjustments based thereon, shall upon any such
increase or decrease becoming effective be recomputed to reflect such increase
or decrease insofar as it affects such rights, options or the rights of
conversion or exchange under such Convertible Securities.
(iv) For the purpose of any adjustment required under
this Section D.8, if (a) this Corporation issues or sells any rights or options
for the purchase of Convertible Securities and (b) if the Effective Price of the
Additional Shares of Common Stock underlying such Convertible Securities is less
than the Series A Conversion Price, then in each such event this Corporation
shall be deemed to have issued at the time of the issuance of such rights or
options the maximum number of Additional Shares of Common Stock issuable upon
conversion of the total number of Convertible Securities covered by such rights
or options (as set forth in the legal instruments setting forth the terms of
such Convertible Securities) and to have received as consideration for the
issuance of such Additional Shares of Common Stock an amount equal to the amount
of consideration, if any, received for the issuance of such rights or options
plus (A) the minimum amount of consideration, if any, payable upon the exercise
of such rights or options and (B) the minimum amount of consideration, if any,
payable upon the conversion of such Convertible Securities. No
6
<PAGE>
further adjustment of the Series A Conversion Price shall be made as a result of
the actual issuance of the Convertible Securities upon the exercise of such
rights or options or upon the actual issuance of Additional Shares of Common
Stock upon the conversion of such Convertible Securities. The provisions of
Section D.8.(iii) for the adjustment of the Series A Conversion Price upon the
expiration of rights or options or the rights of conversion of Convertible
Securities shall apply mutatis mutandis upon the expiration of the rights,
options and Convertible Securities referred to in this Clause D.8.(iv).
(v) "Additional Shares of Common Stock" shall mean
all shares of Common Stock issued or deemed to be issued under this Section D.8
after the Filing Date, other than (A) shares of Common Stock issued upon
conversion of the shares of Series A Stock; (B) shares of Common Stock (or
options, warrants or rights therefor) granted or issued hereafter to employees,
officers, directors, contractors, consultants or advisers to, the Corporation or
any subsidiary pursuant to incentive agreements, stock purchase or stock option
plans, stock bonuses or awards, warrants, contracts or other arrangements that
are unanimously approved by the Board of Directors; (C) securities issued by the
Corporation in connection with any credit, financing or leasing agreements or
similar instruments with equipment lessors or other persons providing equipment
lease or other equipment financing; (D) securities issued in connection with or
pursuant to the acquisition of all or any portion of another company by the
Company whether by merger or any other reorganization or by the purchase of all
or any portion of the assets of another company, pursuant to a plan, agreement
or other arrangement unanimously approved by the Board of Directors; (E)
securities issued to or in connection with an arrangement or venture with a
strategic partner of the Company, provided such issuance is unanimously approved
by the Board of Directors; (F) shares of Common Stock or Preferred Stock issued
or issuable upon the exercise of any warrants, options or other rights that are
outstanding as of the Filing Date (or issued or issuable after the reissuance of
any such expired or terminated options, warrants or rights and net of any such
issued shares repurchased by the Corporation); (G) the reissuance or assignment
by the Corporation of any shares of Common Stock outstanding as of the Filing
Date to a different person from the holder of such shares; and (H) shares of
Common Stock issued by way of dividend or other distribution on shares of
Preferred Stock and Common Stock excluded from the definition of Additional
Shares of Common Stock by the foregoing clauses (A), (B), (C), (D), (E), (F),
(G) and this clause (H). The "Effective Price" of Additional Shares of Common
Stock shall mean the quotient obtained by dividing the total number of
Additional Shares of Common Stock issued or sold, or deemed to have been issued
or sold, under this Section 8 into the aggregate consideration received, or
deemed to have been received for such Additional Shares of Common Stock.
9. Certificate of Adjustment. Upon the occurrence of each
adjustment or readjustment of the Series A Conversion Price, the Corporation, at
its sole expense, shall promptly compute such adjustment or readjustment in
accordance with the terms hereof and prepare and furnish to each holder of
Series A Stock a certificate setting forth such adjustment or readjustment and
showing in detail the facts upon which such adjustment or readjustment is based.
10. Notices of Record Date. In the event of (i) any taking by
this Corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend or other distribution or (ii) any capital reorganization of this
Corporation, any reclassification or recapitalization of the capital stock of
this Corporation, any merger or consolidation of this Corporation with or into
any other corporation, or any transfer of all or substantially all of the assets
of the Corporation, or any voluntary or involuntary dissolution, liquidation or
winding up of this Corporation, this Corporation shall mail to each holder of
shares of Series A Stock at least twenty (20) days prior to the record date
specified therein, a notice specifying (i) the date on which any such record is
to be taken for the purpose of such dividend or distribution and a description
of such dividend or distribution; (ii) the date on which any such
reorganization, reclassification, transfer, consolidation, merger, dissolution,
liquidation or winding up, is expected to become effective and the specific
details thereof; and (iii) the date, if any, that is to be fixed as to when the
holders of record of shares of Common Stock (or other securities) shall be
entitled to exchange their shares of Common Stock (or other securities) for
securities or other property deliverable upon such reorganization,
reclassification, transfer, consolidation, merger, dissolution, liquidation or
winding up.
11. Automatic Conversion.
7
<PAGE>
(i) "Qualified Liquidation Event." Each share of
Series A Stock shall automatically be converted into shares of Common Stock
based upon the Series A Conversion Price upon (A) the closing of an underwritten
public offering pursuant to an effective registration statement under the
Securities Act of 1933, as amended, covering the offering and sale of shares of
Common Stock for the account of the Corporation (other than a registration
statement effected solely to implement an employee benefit plan, a transaction
in which Rule 145 of the Securities and Exchange Commission is applicable or any
other form or type of registration in which the shares of Common Stock issuable
upon conversion of the shares of Series A Stock cannot be included pursuant to
the Securities and Exchange Commission rules or practices) which results in
aggregate gross cash proceeds to the Corporation of at least $15,000,000 at a
per share price equal to at least $5.00 (Appropriately Adjusted) and an
aggregate value of the Corporation immediately prior to the offering of at least
$40,000,000, which aggregate value shall be determined by multiplying (x) the
number of outstanding shares of Common Stock of the Corporation, on a
fully-diluted, as-converted basis, immediately prior to the offering, times (y)
the initial per share price of the Corporation's Common Stock as offered to the
public in the offering, or (B) (x) a merger or consolidation of this Corporation
with or into another corporation or entity, or (y) the sale of all or
substantially all of this Corporation's properties and assets, or (z) a sale of
the shares of this Corporation's Common Stock, in each circumstance in which
each holder of Series A Stock concurrently receives cash and/or marketable
securities in an aggregate amount equal to at least $25.00 per share of Series A
Stock (Appropriately Adjusted) if such event occurs on or before March 31, 2002,
or $35.00 per share of Series A Stock (Appropriately Adjusted) if such event
occurs after March 31, 2002, and the aggregate gross consideration received by
the Corporation and/or its shareholders is at least $40,000,000 (each a
"Qualified Liquidation Event").
(ii) "Qualified Liquidity Milestone." Each share of
Series A Stock shall automatically be converted into shares of Common Stock
based upon the Series A Conversion Price effective as of the first date on which
the Corporation's Common Stock is qualified for listing and is trading on the
NASDAQ National Market System ("NMS") or the New York Stock Exchange ("NSYE")
and the Corporation has had, for any three consecutive months (a "Quarter"), (i)
average trading volume of at least 25,000 (Appropriately Adjusted) shares per
trading day, and (ii) an average daily high-bid and low-ask price, if the shares
are listed and traded on the NMS, or closing price, if the shares are listed and
traded on the NYSE, during such Quarter of at least $5.00 per share
(Appropriately Adjusted), if such Quarter commences on or before April 1, 2002,
or $7.00 per share (Appropriately Adjusted), if such Quarter commences after
April 1, 2002.
(iii) Upon Vote of 75% of Series A Preferred Stock.
Each share of Series A Preferred Stock shall automatically be converted into
shares of Common Stock based upon the Series A Conversion Price then applicable
upon the affirmative vote of the holders of at least seventy-five percent (75%)
of the outstanding shares of Series A Preferred Stock.
Upon the occurrence of an event specified in this Section 11, the
outstanding shares of Series A Stock shall be converted into outstanding shares
of Common Stock, whether or not the certificates representing such shares are
surrendered to the Corporation or its transfer agent. Upon the automatic
conversion of the outstanding shares of Series A Stock, the Corporation shall
notify the holders of the outstanding shares of Series A Stock and thereafter
such holders shall surrender the certificates representing such shares at the
office of the Corporation or any transfer agent for the shares. Thereupon there
shall be issued and delivered to such holder, promptly at such office and in its
name as shown on such surrendered certificate or certificates, a certificate or
certificates for the number of shares of Common Stock into which the surrendered
shares of Series A Stock of such holder were convertible on the date on which
such automatic conversion occurred.
12. Fractional Shares. Fractional shares of Common Stock shall
be issued upon conversion of the shares of Series A Stock.
13. Reservation of Stock Issuable Upon Conversion. The
Corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock, solely for the purpose of
8
<PAGE>
effecting the conversion of the shares of Series A Stock, such number of shares
of Common Stock as shall from time to time be sufficient to effect the
conversion of all outstanding shares of Series A Stock. If at any time the
number of authorized but unissued shares of Common Stock shall not be sufficient
to effect the conversion of all then outstanding shares of Series A Stock, the
Corporation shall take such action as may, in the opinion of its counsel, be
necessary to increase its authorized but unissued shares of Common Stock to such
number of shares as shall be sufficient for such purpose.
14. Notices. Any notice required by the provisions of this
Section D to be given to a holder of shares of Series A Stock shall be deemed
given upon actual receipt or if receipt is refused or does not occur, then the
second attempted delivery as evidenced by appropriate third-party commercial
documentation (i.e., Postal Service, Federal Express, etc.).
15. No Dilution or Impairment. The Corporation shall not amend
its Certificate of Incorporation or participate in any reorganization, transfer
of assets, consolidation, merger, dissolution, issue or sale of securities or
any other voluntary action for the purpose of avoiding or seeking to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by the Corporation, but will at all times in good faith assist in
carrying out all such action as may be reasonably necessary or appropriate in
order to protect the rights of the holders of the shares of Series A Stock
against dilution (as contemplated herein) or other impairment of their rights.
E. NO RE-ISSUANCE. No share or shares of Series A Stock acquired by the
Corporation by reason of redemption, purchase or otherwise shall be reissued,
and all such shares shall be canceled, retired and eliminated from the shares
which the Corporation shall be authorized to issue."
9
FIRST AMENDMENT TO NOTE PURCHASE AGREEMENT
September 20, 1999
This First Amendment to Note Purchase Agreement (this "Amendment"),
dated as of September 20, 1999, is by and among VALueStar, INC., a California
corporation (the "Company"), VALUESTAR CORPORATION, a Colorado corporation (the
"Corporation"), SEACOAST CAPITAL PARTNERS LIMITED PARTNERSHIP, a Delaware
limited partnership ("Seacoast"), and PACIFIC MEZZANINE FUND, L.P., a California
limited partnership, ("Pacific") and Tangent GROWTH FUND, L.P., a California
limited partnership ("Tangent"). Seacoast, Pacific and Tangent are sometimes
individually ("Purchaser") or collectively referred to as the ("Purchasers").
RECITALS
A. On March 31, 1999, the Purchasers entered into various agreements
with the Company, Corporation and others including but not limited to a Note
Purchase Agreement (the "Note Purchase Agreement") and a Warrant Purchase
Agreement (the "Warrant Purchase Agreement") or collectively the Agreements.
B. The Purchasers desire to amend certain provisions and waive certain
rights from the provisions of the Agreements.
C. Capitalized terms not defined herein shall have the meanings
established in the underlying Agreements and are incorporated herein by
reference.
AGREEMENT
Note Purchase Agreement Amendments and Restatements
The following sections of the Note Purchase Agreement (7.8 and 7.9) are
hereby amended and restated in their entirety as follows:
7.8 Capital Expenditures. The Company will not make any
Capital Expenditures if, as a result thereof, the Capital Expenditures
of the Company exceed $300,000 for the fiscal quarter ending June
30,1999. For each fiscal year following 1999, the Company will not make
any Capital Expenditures if, as a result thereof, the Capital
Expenditures of the Company exceed $250,000 (except that the Company
may also make Capital Expenditures in fiscal year 2000 in an additional
amount equal to any unutilized portion of the $300,000 of permitted
Capital Expenditures for the fiscal quarter ending June 30, 1999).
7.9 Financial Covenants.
(a) Minimum Net Worth. At all times during the periods set
forth below, the Company shall not permit the Parent's Net Worth to be
less than the amounts set forth below (with the amount set forth below
increased by the amount of any adjustment to Net Worth from the sale of
securities of the Company or the Parent) for the period corresponding
thereto:
Period Amount
------ ------
April 1, 1999 - June 30, 1999 ($4,500,000)
July 1, 1999 - September 30, 1999 ($6,300,000)
October 1, 1999 - December 31, 1999 ($8,500,000)
January 1, 2000 - March 31, 2000 ($9,600,000)
April 1, 2000 - June 30, 2000 ($10,300,000)
July 1, 2000 and thereafter Net Worth Covenant Amount
(b) Minimum EBITDA. The Company shall not permit the Parent's
EBITDA for any fiscal quarter (determined on a consolidated basis) to
be less than the amounts set forth during the periods specified below,
measured as of the last day of each fiscal quarter:
EBITDA for
Period Each Fiscal Quarter
------- -------------------
April 1, 1999 - June 30, 1999 Waived
July 1, 1999 - September 30, 1999 ($2,200,000)
1
<PAGE>
October 1, 1999 - December 31, 1999 ($2,100,000)
January 1, 2000 - March 31, 2000 ($1,050,000)
April 1, 2000 - June 30, 2000 ($600,000)
July 1, 2000 - June 30, 2001 $150,000
Thereafter $300,000
<TABLE>
(c) Minimum Net Income. The Company shall not permit Parent's
Minimum Net Income for any fiscal quarter to be less than the amounts
set forth during the periods specified below, measured as of the last
day of each fiscal quarter:
<CAPTION>
Net Income
Period Per Fiscal Quarter
--------- ------------------
<S> <C>
April 1, 1999 - June 30, 1999 Waived
July 1, 1999 - September 30, 1999 ($2,400,000)
October 1, 1999 - December 31, 1999 ($2,300,000)
January 1, 2000 - March 31, 2000 ($1,300,000)
April 1, 2000 - June 30, 2000 ($800,000)
July 1, 2000 - June 30, 2001 $-0-
July 1, 2001 - June 30, 2002 and thereafter $150,000
</TABLE>
(d) Maximum Indebtedness. The Company shall not permit its
Indebtedness at any time to exceed $5,350,000, reduced by scheduled
payments of principal and without giving effect to any reborrowing,
other than reborrowing under a revolving line of credit as permitted
hereunder and increased by any Permitted Future Debt to the extent the
Company is permitted to incur such Permitted Future Debt hereunder.
(e) Operating Leases. The Company will not enter into any
lease (other than a capital lease for fixed assets) if, as a result
thereof, the liability of such Persons under all such leases to which
such Persons are a party would exceed $450,000 per annum.
(end of restatement)
Other Amendments and Waivers
The definition of Net Worth Covenant Amount in Section 11.1 of the Note
Purchase Agreement is amended by inserting $(10,300,000) to replace
$(5,500,000).
The requirement for an independent accountant's certificate referred to
in Section 6.1 (a) (ii) of the Note Purcchase Agreement is waived for the fiscal
year ended June 30, 1999. The Purchasers have been previously provided with the
officer certificate provided by Section 6.2 (a) of the agreement. Purchasers are
also in receipt of the budget provided by Section 6.1 (d) and this amendment
confirms prior consents allowing late delivery and adoption of the budget for
fiscal 2000.
The Purchasers have been advised that the Board of Directors of the
Corporation has approved an increase in the authorized shares of common stock
from 20,000,000 to 50,000,000 and the directors have scheduled an annual meeting
of the shareholders to approve such amendment to the articles of incorporation.
Purchasers consent to the increase in authorized common stock.
The Board of Directors of the Corporation has also approved an increase
in the authorized shares available for grant pursuant to the 1997 stock option
plan from 500,000 shares to 1,250,000 shares, subject to shareholder approval at
the annual meeting. Purchasers hereby agree that the number of shares issuable
under the 1997 stock option plan, as amended, shall be Permitted Stock as
defined in Article I of the Warrant Purchase Agreement.
Purchasers hereby waive any notices required pursuant to the documents,
including but not limited to the notices required under Section 4.08 of the
Warrant Purchase Agreement, in connection with the transactions described in
this Amendment.
2
<PAGE>
The Company and Corporation hereby agree with the foregoing provisions
and agrees and acknowledges that the foregoing amendments, waivers and consents
(a) shall in no event be construed or be deemed to obligate Purchasers to agree
to any subsequent waiver or consent; (b) shall in no event be construed or be
deemed as a waiver of any of the other terms and conditions of the Agreements
described herein; and (c) shall in no event be construed or be deemed to (i)
impair, prejudice or otherwise adversely affect Purchaser's right at any time to
exercise any right, privilege, or remedy in connection with the Agreements, (ii)
amend or alter any provision of the Agreements, or (iii) constitute any course
of dealing or other basis or altering any obligation of the Company or
Corporation or any right, privilege or remedy of Purchasers under the
Agreements.
IN WITNESS WHEREOF, the Company, the Corporation and Purchasers have
caused this Amendment to be executed and delivered by their respective officers
thereunto duly authorized. This Amendment may be executed in multiple
counterparts and by facsimile signature.
COMPANY:
VALUESTAR, INC.
By: /s/ JAMES A. BARNES
Name: James A. Barnes
Its: Chief Financial Officer
CORPORATION:
VALUESTAR CORPORATION
By: /s/ JAMES A. BARNES
Name: James A. Barnes
Its: Secretary and Treasurer
PURCHASER:
SEACOAST CAPITAL PARTNERS LIMITED
PARTNERSHIP
By: Seacoast Capital Corporation,
its general partner
By: /s/ JEFFREY J. HOLLAND
Name: Jeffrey J. Holland
Title: Vice President
PACIFIC MEZZANINE fund, L.P., a limited
partnership
By: Pacific Private Capital
its general partner
By: /s/ DAVID WOODWARD
Name: David Woodward
Title: General Partner
TANGENT GROWTH FUND, L.P.
By: Tangent Fund Management LLC
its general partner
By: /s/ MARK P. GILLES
Name: Mark P. Gilles
Title: Vice President
3
EXHIBIT 4.19.1
--------------
VALUESTAR CORPORATION
VALUESTAR, INC.
WAIVER AGREEMENT
THIS WAIVER AGREEMENT (this "Agreement") is dated effective as of July
21, 1999, by and among SEACOAST CAPITAL PARTNERS LIMITED PARTNERSHIP, a Delaware
Limited Partnership ("Seacoast"), PACIFIC MEZZANINE FUND, L.P. a California
limited partnership ("Pacific") and TANGENT GROWTH FUND, L.P., a California
limited partnership ("Tangent") (each a "Lender" and collectively, the
"Lenders") and VALUESTAR CORPORATION, a Colorado corporation (the "Company" or
"ValueStar").
RECITALS
--------
A. On March 31, 1999, the Lenders entered into various agreements with
ValueStar, ValueStar, Inc., a California corporation and the Company's
wholly-owned subsidiary ("Subsidiary"), James A. Barnes ("Barnes") and/or Jerry
E. Polis ("Polis"), including but not limited to a Note Purchase Agreement (the
"Note Purchase Agreement"), a Warrant Purchase Agreement (the "Warrant Purchase
Agreement") and individual Pledge and Security Agreements with each of Polis and
Barnes (collectively, the "Pledge Agreements") (and collectively the "Lender
Transaction Documents").
B. The Lenders desire to waive certain rights and/or exclude certain
securities from the provisions of the Lender Transaction Documents in
consideration of the purchase by the Lenders, Polis, Barnes and certain other
parties of shares of the Company's Series A Convertible Preferred Stock pursuant
to that certain ValueStar Series A Preferred Stock Purchase Agreement dated on
even date herewith by and among Lenders, Polis, Barnes and various other
purchasers that may become parties thereto on, or before, August 31, 1999 (the
"Purchase Agreement").
C. "C"apitalized terms not defined herein shall have the meanings
established in the Lender Transaction Documents and are incorporated herein by
reference.
AGREEMENT
---------
NOW, THEREFORE, in consideration of the mutual agreements, covenants,
representations and warranties contained in this Agreement, the parties hereto
hereby agree as follows:
1. Pledge and Security Agreements. Lenders hereby agree that the
Company's Series A Convertible Preferred Stock (and any other Capital Stock
issued hereafter in connection therewith) acquired by Barnes or Polis pursuant
to the Purchase Agreement is expressly excluded from the definition of Pledged
Property under the Pledge Agreements and shall not be subject to the provisions
or restrictions of the Pledge Agreements.
2. Warrants. Lenders hereby agree that the number of shares issuable
under the Warrants shall not be adjusted pursuant to Section 2.08 of the Warrant
Purchase Agreement or any other provision of the Transaction Documents as a
result of the issuance of the Series A Convertible Preferred Stock (or any other
Capital Stock issued hereafter in connection therewith) or as a result of the
issuance after the date hereof of any Capital Stock excluded from the definition
of "Additional Shares of Common Stock" set forth in the Company's Certificate of
Designation establishing the Company's Series A Convertible Preferred Stock.
3. Notices Waiver. Lenders hereby waive any notices required pursuant
to the Lender Transaction Documents, including but not limited to the notices
required under Section 4.08 of the Warrant Purchase Agreement, in connection
with the transactions to be consummated and the actions to be taken pursuant to
the Purchase Agreement and/or filing of the Company's Certificate of
Designation.
4. Waiver of EBITDA/Minimum Net Income Defaults. Effective as of June
30, 1999, the Lenders hereby waive the Company's default under Section 7.9(b)
and Section 7.9(c) of the Note Purchase Agreement for the Company's failure to
incur no more than (i) an EBITDA loss amount of ($800,000) and (ii) a net income
loss of $1,000,000, respectively, for the fiscal quarter ending June 30, 1999,
and agree that such failures shall not be deemed a default under any provision
of the Lender Transaction Documents, including but not limited to Article VIII
of the Note Purchase Agreement and Section 4.01(a)(iv) of the Shareholder
Agreement.
5. Waiver of Notice of Board Meeting. Lenders hereby waive any notices
required pursuant to the Lender Transaction Documents, including but not limited
to the notices required under Section 6.19 of the Note Purchase Agreement, in
connection with the special meeting of the Board of Directors of the Company
held on July 20, 1999 for the purpose of authorizing the Series A Preferred
Stock and the transactions contemplated under that Series A Preferred Stock
Purchase Agreement.
<PAGE>
6. No Deemed Future Waivers. The Company hereby agrees with the
foregoing provisions and agrees and acknowledges that the foregoing waivers and
consents (a) shall in no event be construed or be deemed to obligate Lenders to
agree to any subsequent waiver or consent; (b) shall in no event be construed or
be deemed as a waiver of any of the other terms and conditions of the Lender
Transaction Documents; and (c) shall in no event be construed or be deemed to
(i) impair, prejudice or otherwise adversely affect Lenders' right at any time
to exercise any right, privilege, or remedy in connection with the Lender
Transaction Documents, (ii) amend or alter any provision of the Lender
Transaction Documents, or (iii) constitute any course of dealing or other basis
or altering any obligation of the Company or any right, privilege or remedy of
Lenders under the Lender Transaction Documents.
IN WITNESS WHEREOF, the Lenders and Company have executed and
delivered this Waiver as of the date first above written.
SEACOAST CAPITAL PARTNERS LIMITED
PARTNERSHIP
By: Seacoast Capital Corporation,
its general partner
By: /s/ JEFFREY J. HOLLAND
----------------------
Name: Jeffrey J. Holland
Its: Vice President
PACIFIC MEZZANINE FUND, L.P.
By: Pacific Private Capital
its general partner
By: /s/DAVID WOODWARD
-----------------
Name: David Woodward
Its: General Partner
TANGENT GROWTH FUND, L.P.
By: Tangent Fund Management, LLC
its general partner
By: /s/ MARK P. GILLES
------------------
Name: Mark P. Gilles
Its: Vice President
VALUESTAR CORPORATION
By: /s/ JAMES STEIN
---------------
Name: James Stein
Its: President and Chief Executive Officer
/s/ JAMES A. BARNES
-------------------
James A. Barnes, individually, as President of Sunrise
Capital, Inc. and General Partner of Tiffany Investments,
and as General Partner of Tiffany Investments Limited
Partnership
/s/ JERRY E. POLIS
------------------
Jerry E. Polis, individually, as President of Davric
Corporation and Trustee of the Jerry E. Polis Family
Trust
2
Exhibit 4.24.1
--------------
FIRST AMENDMENT TO
STOCK PURCHASE WARRANT
RIGHT TO PURCHASE 76,364 SHARES OF COMMON STOCK
DATED MARCH 31, 1999
THIS FIRST AMENDMENT to the Stock Purchase Warrant Agreement between ValueStar
Corporation (the "Corporation" or "Company") and _______________ (Holder) shall
be effective this 15th day of July 1999. The Stock Purchase Warrant is amended
as follows:
Section 2 - Redemption is hereby amended to such that the redemption
may only be triggered by a Closing Bid Price (as defined) of 363.63%
(initially $5.00) of the Warrant Exercise Price. This amount shall be
adjusted consistent and proportionate to the adjustments described in
Section 3 therein.
In addition the following two new sections are added to the Stock Purchase
Warrant:
10. Registration Rights.
As long as the cashless option described in Section 1(b) of the Stock Purchase
Warrant is not exercised then the holder shall have the following registration
rights subject to the following lockup limitation.
Holder shall have the right, at any time and from time to time until March 31,
2004, 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 thirty (30) 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, (i) 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 or (ii) in the sole opinion of the Corporation, such
registration would conflict with the rights or impair the success of any
registration effected by the Corporation, whether pursuant to the registration
rights granted under that certain Shareholders Agreement dated March 31, 1999,
and any amendments thereto or otherwise. 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/or its managing
underwriter in their sole discretion. Except for the expenses of each Holder's
underwriting fees, discounts, or commissions relating to its sale of Registrable
Shares, all costs or expenses, incident to the registration, qualification or
listing of such securities shall be paid by the Corporation. The Corporation
shall comply with all reasonable requests of Holder made in connection with the
registration, qualification, listing or sale of Registrable Shares under the
provisions set forth herein.
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
1
<PAGE>
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).
11. 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 fourteen
(14) days before and one hundred eighty (180) days after 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.
IN WITNESS WHEREOF, the Corporation has caused this First Amendment to the Stock
Purchase Warrant to be executed by its duly authorized officers and the
corporate seal hereunto affixed effective on the 15th day of July, 1999.
VALUESTAR CORPORATION ACCEPTANCE BY HOLDER
/s/ JAMES STEIN __________________________
James Stein, President and CEO
/s/ JAMES A. BARNES
James A. Barnes, Secretary
2
EXHIBIT 4.25
99Davric#1
"THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE BEEN
ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO OR FOR SALE IN CONNECTION WITH
THE DISTRIBUTION HEREOF. THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE
HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
ANY STATE SECURITIES LAWS, AND MAY NOT BE PLEDGED, SOLD, OFFERED FOR SALE,
TRANSFERRED, OR OTHERWISE DISPOSED OF IN THE ABSENCE OF REGISTRATION UNDER OR
EXEMPTION FROM SUCH ACT AND ALL APPLICABLE STATE SECURITIES LAWS."
STOCK PURCHASE WARRANT
RIGHT TO PURCHASE 30,000 SHARES OF COMMON STOCK
THIS CERTIFIES THAT Davric Corporation and all registered and permitted assigns
("Holder") is entitled to purchase, on or before June 30, 2004, THIRTY THOUSAND
(30,000) shares of the common stock ("Common Stock" or "Shares") of VALUESTAR
CORPORATION (the "Corporation" or "Company") 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 Fifty Cents ($1.50) per share (the "Exercise Price").
1. Exercise.
This Warrant may be exercised one or more times, in whole or minimum increments
of 10,000 shares (or the balance of the Warrant), 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 certified or official bank check 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.
2. Redemption of Warrants.
The Corporation may elect on one occasion, by written notice as provided herein
(the "Company Notice"), to redeem all of this Warrant, in whole but not in part,
on any date (the "Redemption Date") fixed by the Company at a price of $.01 per
effective Warrant Share (the "Redemption Price") following such time as the
Closing Bid Price (as defined below) of the Company's Common Stock for the ten
(10) consecutive Trading Days (as defined below) equals or exceeds $5.00 (Five
Dollars) per common share (Minimum Trading Price); provided, however, that this
Warrant may be exercised by the Holder at any time prior to 5:00 p.m.,
California time, on the business day immediately preceding the Redemption Date.
For purposes hereof, (i) the term "Trading Day" shall mean any day on which
securities are traded on the applicable securities exchange or in the applicable
securities market; and (ii) the term "Closing Bid Price" in respect of a Trading
Day shall mean the reported last closing bid price, on the principal national
securities exchange on which the Common Stock of the Company is listed or
admitted to trading or, if not listed or admitted to trading on any national
securities exchange, on the Nasdaq Stock Market or, if not admitted to trading
or quoted on the Nasdaq Stock Market, the closing bid price in the
over-the-counter market as furnished by any quotation medium or any member firm
of a national securities exchange or the Nasdaq Stock Market selected from time
to time by the Company for that purpose.
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<PAGE>
The Company shall provide at least 10 days written notice to the Holder
("Company Notice") prior to the Redemption Date specified in such written
notice.
3. Adjustment of Exercise Price and Number of Shares Deliverable Upon Exercise
of Warrant.
The Exercise Price, Redemption Price, Minimum Trading 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 number of Warrant Shares 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.
If shares of the Corporation's common stock are subdivided into a greater number
of shares of common stock, the Exercise Price and Redemption Price for the
Warrant Shares upon exercise of this Warrant shall be proportionately reduced
and the Warrant Shares shall be proportionately increased and the Minimum
Trading Price proportionately reduced; and conversely, if shares of the
Corporation's common stock are combined into a smaller number of common stock
shares, the Exercise Price, Redemption Price and Minimum Trading Price shall be
proportionately increased, and the Warrant Shares shall be proportionately
decreased.
(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 bid 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.
4. Investment Representation.
Neither this Warrant nor the Warrant Shares issuable upon the exercise of this
Warrant have been registered under the Securities Act of 1933, or any state
securities laws. The Holder acknowledges by acceptance of the Warrant that as of
the date of this Warrant and at the time of exercise (a) he has acquired this
Warrant or the Warrant Shares, as the case may be, for investment and not with a
view to distribution; and either (b) he has a pre-existing personal or business
relationship with the Corporation, or its executive officers, or by reason of
his business or financial experience he has the capacity to protect his own
interests in connection with the transaction; and (c) he is an accredited
investor as that term is defined in Regulation D promulgated under the
Securities Act. The Holder agrees that any Warrant Shares issuable upon exercise
of this Warrant will be acquired for investment and not with a view to
distribution and such Warrant Shares will not be registered under the Securities
Act and applicable state securities laws and that such Warrant Shares may have
to be held
2
<PAGE>
indefinitely unless they are subsequently registered or qualified under the
Securities Act and applicable state securities laws or, based on an opinion of
counsel reasonably satisfactory to the Corporation, an exemption from such
registration and qualification is available. The Holder, by acceptance hereof,
consents to the placement of the following restrictive legends, or substantially
similar legends, on each certificate to be issued to the Holder by the
Corporation in connection with the issuance of such Warrant Shares: "THESE
SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO OR FOR SALE
IN CONNECTION WITH THE DISTRIBUTION HEREOF. THESE SECURITIES HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES
LAWS, AND MAY NOT BE PLEDGED, SOLD, OFFERED FOR SALE, TRANSFERRED, OR OTHERWISE
DISPOSED OF IN THE ABSENCE OF REGISTRATION UNDER OR EXEMPTION FROM SUCH ACT AND
ALL APPLICABLE STATE securities LAWS."
5. Registration Rights.
Holder shall have the right, at any time and from time to time until June 30,
2004, 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 thirty (30) 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, (i) 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 or (ii) in the sole opinion of the Corporation, such
registration would conflict with the rights or impair the success of any
registration effected by the Corporation, whether pursuant to the registration
rights granted under that certain Shareholders Agreement dated March 31, 1999,
and any amendments thereto or otherwise. 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/or its managing
underwriter in their sole discretion. Except for the expenses of each Holder's
underwriting fees, discounts, or commissions relating to its sale of Registrable
Shares, all costs or expenses, incident to the registration, qualification or
listing of such securities shall be paid by the Corporation. The Corporation
shall comply with all reasonable requests of Holder made in connection with the
registration, qualification, listing or sale of Registrable Shares under the
provisions set forth herein.
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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<PAGE>
6. 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 fourteen
(14) days before and one hundred eighty (180) days after 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.
7. Loss, Theft, Destruction or Mutilation of Warrant.
Upon receipt by the Corporation of evidence reasonably satisfactory to it of the
loss, theft, destruction or mutilation of any Warrant or stock certificate, and
in case of loss, theft or destruction, of indemnity or security reasonably
satisfactory to it, and upon reimbursement to the Corporation of all reasonable
expenses incidental thereto, and upon surrender and cancellation of such Warrant
or stock certificate, if mutilated, the Corporation will make and deliver a new
Warrant or stock certificate of like tenor and dated as of such cancellation, in
lieu of this Warrant or stock certificate.
8. Assignment.
With respect to any offer, sale or other disposition of this Warrant or any
underlying securities, the Holder will give written notice to the Corporation
prior thereto, describing briefly the manner thereof, together with a written
opinion of such Holder's counsel, to the effect that such offer, sale or other
distribution may be effected without registration or qualification (under any
applicable federal or state law then in effect). Furthermore, no such transfer
shall be made unless the transferee meets the same investor suitability
standards set forth in Section 4 of this Warrant. Promptly upon receiving such
written notice and reasonably satisfactory opinion, if so requested, the
Corporation, as promptly as practicable, shall notify such Holder that such
Holder may sell or otherwise dispose of this Warrant or the underlying
securities, as the case may be, all in accordance with the terms of the written
notice delivered to the Corporation. If a determination has been made pursuant
to this Section 6 that the opinion of counsel for the Holder is not reasonably
satisfactory to the Corporation, the Corporation shall so notify the Holder
promptly after such determination has been made. Each Warrant thus transferred
shall bear the same legends appearing on this Warrant, and underlying securities
thus transferred shall bear the legends required by Section 4. The Corporation
may issue stop transfer instructions to its transfer agent in connection with
such restrictions. Warrants and underlying securities issued upon transfers
after the expiration date of the Lock-Up Period shall be issued without the
Lock-Up Legend.
9. 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.
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<PAGE>
10. 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.
11. Governing Law.
This Warrant shall be governed by and construed in accordance with the laws of
the State of California applicable to contracts between California residents
entered into and to be performed entirely within the State of California.
IN WITNESS WHEREOF, the Corporation has caused this Warrant to be executed by
its duly authorized officers and the corporate seal hereunto affixed as of this
30th day of June 1999.
VALUESTAR CORPORATION ACCEPTANCE BY HOLDER
/s/ JAMES STEIN /s/ JERRY E. POLIS
James Stein, President and CEO ------------------
Davric Corporation
980 American Pacific Drive, Suite 111
/s/ JAMES A. BARNES Henderson, Nevada 89014
James A. Barnes, Secretary
5
EXHIBIT 4.26
SERIES A PREFERRED STOCK PURCHASE AGREEMENT
THIS SERIES A PREFERRED STOCK PURCHASE AGREEMENT (the "Agreement") is
dated for reference purposes only as of July 21, 1999, by and between VALUESTAR
CORPORATION, a Colorado corporation (the "Corporation"), and those investors set
forth on Annex 1 attached hereto (individually, a "Purchaser" and collectively,
the "Purchasers").
R E C I T A L S:
----------------
A. The Corporation, through its subsidiary, Valuestar, Inc., a
California corporation, is in the business of rating and certifying customer
satisfaction of commercial businesses.
B. The Purchasers are interested in investing capital in the
Corporation and the Corporation desires to obtain capital from the Purchasers on
the terms and conditions hereinafter set forth.
A G R E E M E N T:
------------------
NOW, THEREFORE, in consideration of the above recitals and the mutual
agreements, covenants, representations and warranties contained below in this
Agreement, the parties agree as follows:
1. DEFINITIONS.
"Agreement" means, and the words "herein", "hereof", "hereunder" and
words of similar import refer to, this instrument and any amendments hereto.
"Act" means the Small Business Investment Act of 1958, as amended and
in effect from time to time, and the regulations promulgated thereunder.
"Affiliate" means any Person directly or indirectly controlling,
controlled by, or under common control with, the Person in question. A Person
shall be deemed to control a corporation if such Person possesses, directly or
indirectly, the power to direct or cause the direction of the management and
policies of such corporation, whether through the ownership of voting
securities, by contract, or otherwise.
"Certificate of Designation" means the Certificate of Designation of
the Corporation attached hereto as Exhibit A, which sets forth the rights,
privileges and preferences of the Series A Convertible Preferred Stock.
"Code" means the Internal Revenue Code of 1986, as amended and in
effect from time to time, and the regulations promulgated thereunder.
"Controlled Group" means any group of organizations within the meaning
of Section 414(b), (c), (m) or (o) of the Code of which the Corporation is a
member.
"Employee Benefit Plan" means any employee benefit plan, as defined in
Section 3(3) of ERISA, which is, previously has been or will be established or
maintained by any member of a Controlled Group.
"Environmental Laws" means all federal, state, or local laws,
ordinances, rules, regulations, interpretations and orders of courts or
administrative agencies or authorities relating to pollution or protection of
the environment (including, without limitation, ambient air, surface water,
ground water, land surface, and subsurface strata), and other laws relating to
(a) Polluting Substances or (b) the manufacture, processing, distribution, use,
treatment, handling, storage, disposal, or transportation of Polluting
Substances.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
or any similar Federal statute which replaces said Exchange Act and the rules
and regulations of the SEC thereunder, all as the same shall be in effect at the
time.
"GAAP" means generally accepted accounting principles, applied on a
consistent basis, as set forth in Opinions of the Accounting Principles Board of
the American Institute of Certified Public Accountants and/or in statements of
<PAGE>
the Financial Accounting Standards Board and/or their respective successors and
which are applicable in the circumstances as of the date in question; provided,
that the Corporation may not change the use or application of any accounting
method, practice or principle without the prior written consent of Purchaser,
which shall not be unreasonably withheld, such consent may require that an
adjustment be made to any and all the financial covenants and the capital
expenditure covenant set forth herein. Accounting principles are applied on a
"consistent basis" when the accounting principles observed in a current period
are comparable in all material respects to those accounting principles applied
in a preceding period.
"Indebtedness" means for any Person: (a) all indebtedness, whether or
not represented by bonds, debentures, notes, securities, or other evidences of
indebtedness, for the repayment of money borrowed, (b) all indebtedness
representing deferred payment of the purchase price of property or assets, (c)
all indebtedness under any lease which, in conformity with GAAP, is required to
be capitalized for balance sheet purposes and leases of property or assets made
as a part of any sale and lease-back transaction if required to be capitalized,
(d) all indebtedness under guaranties, endorsements, assumptions, or other
contractual obligations, including any letters of credit, or the obligations in
respect of, or to purchase or otherwise acquire, indebtedness of others, (e) all
indebtedness secured by a Lien existing on property owned, subject to such Lien,
whether or not the indebtedness secured thereby shall have been assumed by the
owner thereof, (f) trade accounts payable more than one hundred twenty (120)
days past due, (g) all amendments, renewals, extensions, modifications and
refundings of any indebtedness or obligations referred to in clauses (a), (b),
(c), (d), (e) or (f).
"Intellectual Property" means all patents, patent rights, patent
applications, licenses, inventions, trade secrets, know-how, proprietary
techniques (including processes and substances), trademarks, service marks,
trade names and copyrights.
"Lien" means any lien, mortgage, security interest, tax lien, pledge,
encumbrance, financing statement, or conditional sale or title retention
agreement, or any other interest in property designed to secure the repayment of
Indebtedness or any other obligation, whether arising by agreement, operation of
law, or otherwise.
"Material Adverse Effect" means (a) a material adverse effect upon the
business, operations, properties, assets or condition (financial or otherwise)
of the Corporation or, as the case may be, Corporation and the Subsidiary, taken
as a whole or (b) the impairment of the ability of any party other than any
Purchaser to perform its obligations under this Agreement or any of the Other
Agreements to which it is a party. In determining whether any individual event
would result in a Material Adverse Effect, notwithstanding that such event does
not of itself have such effect, a Material Adverse Effect shall be deemed to
have occurred if the cumulative effect of such event and all other then existing
events would result in a Material Adverse Effect.
"Other Agreements" means the Registration Rights Agreement and all
other agreements, instruments and documents and all renewals, amendments,
modifications and extensions thereof, whether heretofore, now or hereafter
executed by or on behalf of the Corporation or Subsidiary and delivered to and
for the benefit of Purchaser under this Agreement or any of the transactions
contemplated by this Agreement.
"Party" or "parties" means the Corporation and/or any Purchaser.
"Pension Plan" means any employee pension benefit plan, as defined in
Section 3(2) of ERISA, which is, was or will be established or maintained by any
member of the Controlled Group.
"Person" means any individual, sole proprietorship, corporation,
business trust, unincorporated organization, association, company, partnership,
joint venture, governmental authority (whether a national, federal, state,
county, municipality or otherwise, and shall include without limitation any
instrumentality, division, agency, body or department thereof), or other entity.
"Polluting Substances" means all pollutants, contaminants, chemicals,
or industrial, toxic or hazardous substances or wastes and shall include,
without limitation, any flammable explosives, radioactive materials, oil,
hazardous materials, hazardous or solid wastes, hazardous or toxic substances or
related materials defined in the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, the Superfund Amendments and
Reauthorization Act of 1986, the Resource Conservation and Recovery Act of 1976,
the Hazardous and Solid Waste Amendments of 1984, and the Hazardous Materials
Transportation Act, as any of the same are hereafter amended, and
2
<PAGE>
in the regulations adopted and publications promulgated thereto; provided, in
the event any of the foregoing Environmental Laws is amended so as to broaden
the meaning of any term defined thereby, such broader meaning shall apply
subsequent to the effective date of such amendment and, provided, further, to
the extent that the applicable laws of any state establish a meaning for
"hazardous substance," "hazardous waste," "hazardous material," "solid waste,"
or "toxic substance" which is broader than that specified in any of the
foregoing Environmental Laws, such broader meaning shall apply.
"Reportable Event" means (i) any of the events set forth in Sections
4043(b) (other than a merger, consolidation or transfer of assets in which no
Pension Plan involved has any unfunded benefit liabilities), 4068(f) or 4063(a)
of ERISA, (ii) any event requiring any member of the Controlled Group to provide
security under Section 401(a)(29) of the Code, or (iii) any failure to make
payments required by Section 412(m) of the Code.
"Securities Act" means the Securities Act of 1933, as amended, or any
similar Federal statute which replaces such Securities Act and the rules and
regulations of the SEC thereunder, all as the same shall be in effect at the
time.
"SEC" means the Securities and Exchange Commission.
"Subsidiary" means Valuestar, Inc., a California corporation.
"Registration Rights Agreement" means the Restated Registration Rights
Agreement and Shareholder Agreement Amendment attached hereto as Exhibit B.
"SBA Letter" means each SBA letter attached hereto in the form of
Exhibit C to this Agreement, executed by the Corporation in favor of each
Purchaser.
"Series A Stock" means the shares of Series A Convertible Preferred
Stock of the Corporation issued to the Purchasers pursuant to this Agreement.
"Series A Convertible Preferred Stock" means all shares of Series A
Convertible Preferred Stock of the Corporation issued and outstanding from time
to time.
2. SALE AND ISSUANCE OF SERIES A STOCK
2.1 Purchase and Sale of Series A Stock. The Corporation agrees to sell
to each Purchaser meeting the suitability standards set forth in Article VI,
and, subject to the terms and conditions set forth herein, each such Purchaser
agrees to purchase from the Corporation, the Series A Stock set forth opposite
its name in Schedule 1 attached hereto at a per share purchase price of $10.00
per share.
2.2 Issuance and Payment The initial closing of the sale and purchase
of at least one hundred seventy five thousand (175,000) shares of the Series A
Stock will take place at the offices of BAY VENTURE COUNSEL, LLP, 1999 Harrison
Street, Suite 1300, Oakland, California 94612, at 10:00 a.m. on July 21, 1999,
or such other time and place as the parties may mutually agree (the "Initial
Closing"). At each "Closing" (as defined in Section 2.3), the Corporation will
deliver to each Purchaser a duly issued and executed certificate of the Series A
Stock to be purchased by it, registered in the Purchaser's name, against payment
of the purchase price thereof as set forth in Schedule 1, by certified check, by
wire transfer of immediately available funds, or by any combination of the
foregoing.
2.3 Subsequent Sale of Series A Preferred Stock. The Corporation may
sell up to an additional three hundred twenty-five thousand (325,000) shares of
Series A Stock, to such Persons as the Corporation may determine at any time
after the Initial Closing and on or before August 31, 1999 upon the same terms
and conditions as those contained herein; provided, however, that the
Corporation shall not sell more than an aggregate of five hundred thousand
(500,000) authorized but unissued shares of Series A Stock under all Closings,
including any shares of Series A Stock sold and purchased in the Initial
Closing, without the prior written consent of the Purchasers of a majority of
the shares of Series A Stock originally issued and sold in the Initial Closing.
Any such sale which is upon the same terms and conditions as those contained
herein shall entitle such persons or entities to become parties to this
Agreement and the Registration Rights Agreement, each dated as of even date
herewith, by and among the Corporation and the Purchasers,
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and shall have the rights and obligations of a Purchaser hereunder and
thereunder. The Initial Closing and each subsequent closing shall be referred to
herein as a "Closing."
3. CONDITIONS OF THE PURCHASERS' OBLIGATIONS.
The obligation of each Purchaser to consummate the transactions
contemplated herein at the Closing is subject to the satisfaction on or before
the date of the Closing of the following conditions, all or any of which may be
waived in writing by each Purchaser as to its obligation to consummate the
transaction so contemplated:
3.1 Representations and Warranties. Each of the representations and
warranties of the Corporation contained in this Agreement, including without
limitation those in Article V, and in any other documents delivered by the
Corporation to the Purchasers at or prior to the Initial Closing will be true
and correct at and as of the date of the Initial Closing as though then made,
except to the extent of changes caused by the transactions expressly
contemplated herein; the Corporation's business and assets shall not have been
adversely affected in any material way prior to the Initial Closing; and the
Corporation shall have performed all obligations and conditions herein required
to be performed or observed by the Corporation on or prior to the Initial
Closing; and the Corporation shall have delivered a certificate executed by the
President and Secretary of the Corporation to such effect.
3.2 Closing Documents. The Corporation will have delivered to the
Purchasers copies of the following specifically named documents referenced in
this Agreement or the Schedules hereto, including but not limited to a fully
executed Registration Rights Agreement, and all of the following documents:
(a) an Officers' Certificate from the Corporation dated the
date of the Initial Closing, stating that all the preconditions specified in
this Article III have been satisfied;
(b) correct and complete copies of the resolutions adopted by
the board of directors of the Corporation certified to such effect on the date
of the Initial Closing by the Secretary of the Corporation authorizing the
execution, delivery and performance of this Agreement and any other agreements
contemplated hereby, and authorizing all other transactions contemplated by this
Agreement;
(c) correct and complete copies of the Corporation's Bylaws,
as amended, and Certificate of Designation and all currently contemplated or
proposed amendments thereto, as approved by the board of directors and
shareholders of the Corporation, all certified to such effect on the date of the
Initial Closing by the Secretary of the Corporation;
(d) a good standing certificate dated within ten (10) business
days of the Initial Closing issued by the Colorado Secretary of State;
(e) an opinion of counsel dated as of the Initial Closing from
the Corporation's counsel, Bay Venture Counsel, LLP, reasonably acceptable to
Purchasers; and
(f) such other documents referenced within any Schedule or
relating to the transactions contemplated by this Agreement as the Purchasers
may reasonably request.
3.3 Proceedings. All corporate and other proceedings taken or to be
taken in connection with the transactions contemplated hereby to be consummated
at or prior to the Initial Closing and all documents incident thereto or
required to be delivered prior to or at the Closing will be satisfactory in form
and substance to the Purchasers.
3.4 Examination of Books and Records. The Corporation shall have made
available to the Purchasers (who may appoint representatives to perform such
inspection) during normal business hours, for inspection and copying, all of the
Corporation's books, records, contracts and documents of or relating to the
Corporation.
3.5 Suits/Proceedings. No action, suit, proceeding or investigation by
or before any court, administrative agency or other governmental authority shall
have been instituted or threatened to restrain, prohibit or invalidate the
transactions contemplated by this Agreement.
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3.6 Authorization of Issuance. The Corporation's board of directors
will have authorized the issuance and sale by it to the Purchasers pursuant to
this Agreement of the Series A Stock.
3.7 Reservation of Stock. The Corporation's board of directors will
have reserved sufficient shares of its authorized but unissued Common Stock for
the exclusive purpose of issuance upon conversion of the Series A Stock.
3.8 Capital Outstanding. As of the Initial Closing (but without giving
effect thereto), the Corporation will have a total of no more than that number
of shares of Preferred Stock and Common Stock issued and outstanding as listed
and described in Schedule 5.14(b). The Corporation will have outstanding no
options, convertible securities or warrants other than as listed and described
on Schedule 5.14(c) as of the Initial Closing.
3.9 Consent. The Corporation shall have obtained any and all consents
(including all governmental or regulatory consents, approvals or authorizations
required in connection with the valid execution and delivery of this Agreement),
permits and waivers necessary or appropriate for consummation of the
transactions contemplated by this Agreement.
3.10 SBA Documents. The Corporation shall have provided each Purchaser
that is a Small Business Investment Company (a) with all information and
documentation that such Purchaser shall have requested in connection with the
preparation and completion of the Portfolio Financing Report on SBA Form 1031,
and (b) originals executed by the Corporation of each of (i) the SBA Letter,
(ii) the Size Status Declaration on SBA Form 480, and (iii) the Assurance of
Compliance on SBA Form 652.
4. CONDITIONS OF THE CORPORATION'S OBLIGATIONS.
The obligation of the Corporation to issue the Series A Stock with
respect to any one Purchaser is subject to the satisfaction on or before the
date of the Closing of the following conditions with respect to such Purchaser,
all or any of which may be waived in writing by the Corporation:
4.1 Performance. Each such Purchaser shall have duly performed and
complied in all material respects with each of the terms, agreements and
conditions required by this Agreement to be performed or complied with by it
prior to or at the Closing.
4.2 Representations and Warranties. The representations and warranties
of each Purchaser contained in Article VI and in any other documents delivered
at or prior to the Closing shall be true and accurate on and as of the Closing
with the same effect as though made on and as of the date of the Closing.
4.3 Instruments and Documents. All instruments and documents required
to carry out this Agreement or incidental thereto shall be reasonably
satisfactory to the Corporation and its counsel.
4.4 Suits/Proceedngs. No action, suit, proceeding or investigation by
or before any court, administrative agency or other governmental authority shall
have been instituted or threatened to restrain, prohibit or invalidate the
transactions contemplated by this Agreement.
4.5 Covenants. All covenants, agreements and conditions contained in
this Agreement to be performed by the Purchasers on or prior to the Closing
shall have been performed or complied with in all material respects.
5. REPRESENTATIONS AND WARRANTIES OF THE CORPORATION.
Except as set forth on any Schedules attached hereto and incorporated
herein by reference, the Corporation hereby represents and warrants to each
Purchaser as of the date hereof and as of the Initial Closing as follows:
Corporate Existence and Authority.
(a) The Corporation (i) is a corporation duly organized,
validly existing, and in good standing under the laws of Colorado; (ii) has all
requisite corporate power and authority to own its assets and carry on its
business as now conducted; and (iii) is qualified to do business in all
jurisdictions in which the nature of its business makes such qualification
necessary and where failure to so qualify would have a Material Adverse Effect.
The Corporation has the
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corporate power and authority to execute, deliver, and perform its obligations
under this Agreement and all Other Agreements to which it is, or in connection
with the transactions contemplated hereby, may become, a party.
(b) The Subsidiary (i) is a corporation duly organized,
validly existing, and in good standing under the laws of California; (ii) has
all requisite corporate power and authority to own its assets and carry on its
business as now conducted; and (iii) is qualified to do business in all
jurisdictions in which the nature of its business makes such qualification
necessary and where failure to so qualify would have a Material Adverse Effect.
5.2 Financial Statements. The Corporation has delivered to each
Purchaser (a) audited consolidated financial statements of the Corporation as at
and for the fiscal year ended June 30, 1998, and (b) unaudited financial
statements of the Corporation for the nine month period ended March 31, 1999,
and for the two month period ended May 31, 1999. The financial statements
referred to in clauses (a) and (b) of this Section 5.2 are true and correct in
all material respects, have been prepared in accordance with GAAP (except as
otherwise noted therein or on Schedule 5.2), and fairly present both the
financial condition of the Corporation and the Subsidiary on a consolidated
basis as of the respective dates indicated therein and the results of the
Corporation's and the Subsidiary's operations for the respective periods
indicated therein. At May 31, 1999, neither the Corporation nor the Subsidiary
has any liabilities or obligations (absolute, accrued, contingent or otherwise)
of a nature required by GAAP to be reflected in such financial statements which
are, individually or in the aggregate, material to the condition, financial or
otherwise, or operations of the Corporation or the Subsidiary as of that date
which are not reflected on such financial statements or disclosed on Schedule
5.2. There has been no material adverse change in the condition, financial or
otherwise, or operations of the Corporation or the Subsidiary since May 31,
1999, nor has there otherwise occurred a Material Adverse Effect.
5.3 Default. Except as disclosed on Schedule 5.3, neither the
Corporation nor the Subsidiary is in default under any loan agreement,
indenture, mortgage, security agreement, lease, franchise, permit, license or
other agreement or obligation to which it is a party or by which any of its
properties may be bound which default would cause a Material Adverse Effect. The
Corporation is paying its debts as they become due.
5.4 Authorization and Compliance with Laws and Material Agreements.
Except as set forth on Schedule 5.4, the execution, delivery and performance by
the Corporation of this Agreement and the Other Agreements to which it is or may
in connection with the transactions contemplated hereby become a party, have
been or prior to the consummation of such transactions will be duly authorized
by all requisite action on the part of the Corporation and do not and will not
violate the Certificate of Designation, or the Corporation's Articles of
Incorporation or Bylaws or any law or any order of any court, governmental
authority or arbitrator, and do not and will not upon the consummation of the
transactions contemplated hereby conflict with, result in a breach of, or
constitute a default under, or result in the imposition of any Lien upon any
assets of the Corporation pursuant to the provisions of any loan agreement,
indenture, mortgage, security agreement, franchise, permit, license or other
instrument or agreement by which the Corporation or any of its properties is
bound. Except as set forth on Schedule 5.4, no authorization, approval or
consent of, and no filing or registration with, any court, governmental
authority or third Person is or will be necessary for the execution, delivery or
performance by the Corporation of this Agreement and the Other Agreements to
which it is a party or the validity or enforceability thereof. All such
authorizations, approvals, consents, filings and registrations described in
Schedule 5.4 have been obtained. The Corporation is not in violation of any term
of its Articles of Incorporation or Bylaws or any contract, agreement, judgment
or decree and is in full compliance with all applicable laws, regulations and
rules where such violation would cause a Material Adverse Effect. All officers
of the Corporation to the best of their knowledge have complied with all
material applicable laws, regulations and rules in the course and scope of their
employment with the Corporation.
5.5 Environmental Condition of the Property. Except as disclosed on
Schedule 5.5:
(a) The location, construction, occupancy, operation and use
of the Corporation's properties do not violate any applicable law, statute,
ordinance, rule, regulation, order or determination of any governmental
authority or other body exercising similar functions, or any restrictive
covenant or deed restriction (recorded or otherwise) affecting such properties,
including, without limitation, all applicable zoning ordinances and building
codes, flood disaster, occupational health and safety laws and Environmental
Laws and regulations (as referred to in this Section 5.5, collectively,
"applicable laws") where such violation would cause a Material Adverse Effect;
(b) Without limitation of clause (a) of this Section 5.5,
neither the Corporation, the Subsidiary nor such properties are subject to any
existing, pending or threatened investigation or inquiry by any governmental
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authority or subject to any remedial obligations due to violations of applicable
laws;
(c) Neither the Corporation nor the Subsidiary is subject to
any liability or obligation relating to (i) the environmental conditions on,
under or about such properties, including, without limitation, the soil and
ground water conditions at such properties, or (ii) the use, management,
handling, transport, treatment, generation, storage, disposal, release or
discharge of any Polluting Substance which would cause a Material Adverse
Effect;
(d) There is no Polluting Substance or other substance that
may pose any risk to safety, health or the environment on, under or about any
such properties which would cause a Material Adverse Effect;
(e) The Corporation and/or the Subsidiary, whichever is
applicable, have taken reasonable steps to determine and hereby represents and
warrants that no Polluting Substances have been disposed of or otherwise
released on, onto, into, or from their properties by the Corporation or the
Subsidiary, and the use which the Corporation and/or the Subsidiary makes and
intends to make of such properties does not and will not result in the disposal
or other release of any Polluting Substances on, onto, into or from such
properties; and
(f) The Corporation and/or the Subsidiary, whichever is
applicable, have been issued all required federal, state and local licenses,
certificates or permits relating to, and their properties, the Corporation, the
Subsidiary and the Corporation's and the Subsidiary's facilities, business,
assets, leaseholds and equipment are all in compliance in all material respects
with all applicable federal, state and local laws, rules and regulations
relating to, air emissions, water discharge, noise emissions, solid or liquid
waste disposal, Polluting Substances, or other environmental, health or safety
matters where non-compliance would have a Material Adverse Effect.
5.6 Litigation and Judgments. Except as disclosed on Schedule 5.6,
there is no action, suit, proceeding or investigation before any court,
governmental authority or arbitrator pending, or to the knowledge of the
Corporation threatened, against or affecting the Corporation, the Subsidiary,
this Agreement and/or the Other Agreements. Except as disclosed on Schedule 5.6,
there are no outstanding judgments against the Corporation or the Subsidiary.
None of the matters listed on Schedule 5.6 could reasonably be expected to have,
either individually or in the aggregate, a Material Adverse Effect.
5.7 Rights in Properties; Liens. Except as disclosed on Schedule 5.7,
the Corporation and the Subsidiary have good and marketable title to all
properties and assets reflected on their balance sheets, and none of such
properties or assets is subject to any Liens. The Corporation and the Subsidiary
enjoy peaceful and undisturbed possession under all leases necessary for the
operation of their other properties, assets, and businesses and all such leases
are valid and subsisting and are in full force and effect. There exists no
default under any provision of any lease which would permit the lessor
thereunder to terminate any such lease or to exercise any rights under such
lease which, individually or together with all other such defaults, could have a
Material Adverse Effect. The Corporation and the Subsidiary have the exclusive
right to use all of the Intellectual Property necessary to their business as
presently conducted, and the Corporation's and the Subsidiary's use of the
Intellectual Property does not infringe on the rights of any other Person where
such nonexclusivity or infringement would not have a Material Adverse Effect. To
the best of the Corporation's knowledge, no other Person is infringing the
rights of the Corporation or the Subsidiary in any of the Intellectual Property.
Neither the Corporation nor the Subsidiary owe any royalties, honoraria or fees
to any Person by reason of its use of the Intellectual Property.
5.8 Enforceability. This Agreement and the Other Agreements to which
the Corporation is a party, when delivered, shall constitute the legal, valid
and binding obligations of the Corporation, enforceable against the Corporation
in accordance with their respective terms.
5.9 Indebtedness. Except as disclosed on the financial statements
identified in Section 5.2 and on Schedule 5.9, neither the Corporation nor the
Subsidiary have any Indebtedness. All Indebtedness owed by the Corporation or
the Subsidiary to any Affiliate is set forth on Schedule 5.9.
5.10 Taxes. Except as set forth on Schedule 5.10, the Corporation and
the Subsidiary have timely filed all tax returns (federal, state, and local)
required to be filed, including, without limitation, all income, franchise,
employment, property, and sales taxes, and have timely paid all of their tax
liabilities, other than immaterial amounts and taxes that are being contested by
the Corporation or the Subsidiary in good faith by appropriate actions or
proceedings diligently pursued, and for which adequate reserves in conformity
with GAAP with respect thereto have
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been established. Neither the Corporation nor the Subsidiary know of any pending
investigation of the Corporation or the Subsidiary by any taxing authority or
pending but unassessed tax liability of the Corporation or the Subsidiary,
except as disclosed on Schedule 5.10. The Corporation and the Subsidiary have
made no presently effective waiver of any applicable statute of limitations or
request for an extension of time to file a tax return, and neither the
Corporation nor the Subsidiary are a party to any tax-sharing agreement.
5.11 Use of Proceeds; Margin Securities. Neither the Corporation nor
the Subsidiary are engaged principally, or as one of its important activities,
in the business of extending credit for the purpose of purchasing or carrying
margin stock (within the meaning of Regulations T, U or X of the Board of
Governors of the Federal Reserve System), and no part of the proceeds of any
extension of credit under this Agreement will be used to purchase or carry any
such margin stock or to extend credit to others for the purpose of purchasing or
carrying margin stock. Neither the Corporation, the Subsidiary nor any Person
acting on their behalf has taken any action that might cause the transactions
contemplated by this Agreement or any Other Agreements to violate Regulations T,
U or X or to violate the Securities Exchange Act of 1934, as amended.
5.12 ERISA. All members of any Controlled Group have complied with all
applicable minimum funding requirements and all other applicable and material
requirements of ERISA and the Code, applicable to the Employee Benefit Plans it
or they sponsor or maintain, and there are no existing conditions that would
give rise to material liability thereunder. With respect to any Employee Benefit
Plan, all members of any Controlled Group have made all contributions or
payments to or under each Employee Benefit Plan required by law, by the terms of
such Employee Benefit Plan or the terms of any contract or agreement. No
Termination Event has occurred in connection with any Pension Plan, and there
are no unfunded benefit liabilities, as defined in Section 4001(a)(18) of ERISA,
with respect to any Pension Plan which poses a risk of causing a Lien to be
created on the assets of the Corporation or which will result in the occurrence
of a Reportable Event. No member of any Controlled Group has been required to
contribute to a multiemployer plan, as defined in Section 4001(a)(3) of ERISA,
since September 2, 1974. No material liability to the Pension Benefit Guaranty
Corporation has been, or is expected to be, incurred by any member of a
Controlled Group. The term "liability", as referred to in this Section 5.12,
includes any joint and several liability. No prohibited transaction under ERISA
or the Code has occurred with respect to any Employee Benefit Plan which could
have a Material Adverse Effect or a material adverse effect on the condition,
financial or otherwise, of an Employee Benefit Plan.
5.13 Disclosure. No representation or warranty made by the Corporation
in this Agreement or in any of the documents, instruments, or other information
furnished to the Purchaser by the Corporation, contains any untrue statement of
a material fact or omits to state any material fact necessary in order to make
any statements made therein not misleading. No representation, warranty, or
statement made by the Corporation in this Agreement, the Registration Rights
Agreement, or in any document, certificate, exhibit or schedule attached hereto
or thereto or delivered in connection herewith or therewith, contains or will
contain any untrue statement of a material fact, or omits or will omit to state
a material fact necessary to make any statements made herein or therein not
misleading. There is no fact that materially and adversely affects the condition
(financial or otherwise), results of operations, business, properties, or
prospects of the Corporation or any of its Subsidiaries that has not been
disclosed in the documents provided to Purchaser.
5.14 Subsidiaries and Capitalization. The Corporation has no
Subsidiaries, other than the Subsidiary. The Subsidiary has no Subsidiaries
except as otherwise set forth on Schedule 5.14 (a). All the issued and
outstanding shares of capital stock of the Corporation are duly authorized,
validly issued, fully paid and nonassessable. The capitalization of the
Corporation on the Initial Closing Date is set forth on Schedule 5.14 (b). No
violation of any preemptive rights of shareholders of the Corporation has
occurred by virtue of the transactions contemplated under this Agreement or any
Other Agreement. There are no outstanding contracts, options, warrants,
instruments, documents or agreements binding upon the Corporation granting to
any Person or group of Persons any right to purchase or acquire shares of the
Corporation's capital stock other than as set forth on Schedule 5.14(c).
5.15 Current Locations. Schedule 5.15 identifies (a) the Corporation's
principal place of business and chief executive office, (b) all the locations
where the Corporation maintains any books or records relating to any of its
assets, (c) all other locations where the Corporation has a place of business,
and (d) each address where any of the Corporation's assets are located. Schedule
5.15 accurately indicates whether each such location is owned or leased, and, if
leased, identifies the owner of such location. No Person other than the
Corporation has possession of any material amount of the assets of the
Corporation except as disclosed on Schedule 5.15.
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5.16 Investment Corporation Act. Neither the Corporation, the
Subsidiary nor any company controlling the Corporation or the Subsidiary is
required to be registered as an "investment company" within the meaning of the
Investment Corporation Act of 1940, as amended.
5.17 Public Utility Holding Corporation Act. Neither the Corporation
nor the Subsidiary is a "holding company" or a "subsidiary company" of a
"holding company" or an "affiliate" of a "holding company" or a "public utility"
within the meaning of the Public Utility Holding Corporation Act of 1935, as
amended.
5.18 Securities Laws. Assuming the truthfulness and accuracy of each
Purchaser's representations and warranties in Article 6, the Corporation has
complied with or is exempt from the registration and/or qualification
requirements of all federal and state securities or blue sky laws applicable to
the issuance or sale of the Series A Stock.
5.19 No Labor Disputes. Neither the Corporation nor the Subsidiary is
involved in any labor dispute. The Corporation is not a party to any collective
bargaining agreement, and there are no strikes or walkouts or union organization
of any of the Corporation's or the Subsidiary's employees threatened or in
existence and no labor contract is scheduled to expire during the term of this
Agreement.
5.20 Brokers. Except as described in Schedule 5.20, Neither the
Corporation nor any of its shareholders has dealt with any broker, finder,
commission agent or other Person in connection with the transactions referenced
in or contemplated by this Agreement, nor is the Corporation or any of its
shareholders under any obligation to pay any broker's fee or commission in
connection with such transactions.
5.21 Insurance. The amount and types of insurance carried by the
Corporation and the Subsidiary, and the terms and conditions thereof, are
substantially similar to the coverage maintained by companies in the same or
similar business as the Corporation and the Subsidiary and similarly situated.
5.22 Conduct of Business. On the Initial Closing Date, the Corporation
and the Subsidiary are engaged only in businesses of the type described in
Schedule 5.22.
5.23 Small Business Concern. The Subsidiary is a "small business
concern" as defined in Section 103(5) of the Act, which for purposes of size
eligibility meets the applicable criteria set forth in Section 121.301(c) of
Title 13 of the Code of Federal Regulations.
5.24 Survival of Representations. All representations made by the
Corporation in or under this Agreement shall be true and accurate as of the
Initial Closing and shall survive the Initial Closing for a period of two (2)
years thereafter (except for those changes contemplated in and provided for by
this Agreement).
6. REPRESENTATIONS AND WARRANTIES OF PURCHASERS
As of the Closing, each Purchaser represents and warrants to
the Corporation as to itself that:
6.1 Investment. The Purchaser is acquiring the Series A Stock
and any Common Stock issuable upon conversion of the Series A Stock for
investment purposes only for its own account, and not with a view to, or for
resale in connection with, any distribution thereof, and it has no present
intention of selling or distributing any such securities. Purchaser understands
that the Series A Stock (and any shares of Common Stock issued upon conversion
of the Series A Stock) have not been registered under the Securities Act by
reason of a specific exemption from the registration provisions of the
Securities Act which depends upon, among other things, the bona fide nature of
the investment as expressed herein. All such securities are hereinafter
collectively referred to as the "Securities".
6.2 Rule 144. The Purchaser acknowledges that because the
Securities have not been registered under the Securities Act, the Securities
must be held indefinitely unless subsequently registered under the Securities
Act or an exemption from such registration is available. It is aware of the
provisions of Rule 144 promulgated under the Securities Act which permits
limited resale of shares purchased in a private placement under certain
circumstances.
6.3 Access to Data. The Purchaser has had an opportunity to
discuss the Corporation's business, management and financial affairs with its
management and to obtain any additional information necessary or appropriate for
deciding whether or not to purchase the Securities.
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6.4 Knowledge And Experience. Purchaser has such knowledge and
experience in financial and business matters, including investments in other
companies that are in a financial condition substantially similar to the
Corporation's financial condition immediately prior to the Initial Closing, that
it is capable of evaluating the merits and risks of the investment in the
Securities, and it is able to bear the economic risk of such investment.
Further, the individual executing this Agreement has such knowledge and
experience in financial and business matters that he or she is capable of
utilizing the information made available to him or her in connection with the
offering of the Securities, of evaluating the merits and risks of an investment
in the Securities and of making an informed investment decision with respect to
the Securities.
6.5 Requisite Power. The Purchaser has all requisite power and
authority necessary to enter into and to carry out the provisions of this
Agreement and the transactions contemplated hereby.
6.6 Duly Authorized. All action on the part of the Purchaser
necessary for the purchase of its Series A Stock and the performance of the
Purchaser's obligations hereunder has been taken or will be taken prior to the
Closing. This Agreement is a legal, valid and binding obligation of the
Purchaser enforceable in accordance with its terms, except as such enforcement
may be limited by bankruptcy, insolvency, reorganization, moratorium or other
laws and equitable principles relating to or affecting the enforcement of
creditors' rights in general and by general principles of equity.
6.7 Accredited Investor. Purchaser is an "accredited investor"
as that term is defined in Regulation D promulgated by the Securities and
Exchange Commission. The term "Accredited Investor" under Regulation D refers
to:
(i) A person or entity who is a director or executive
officer of the Corporation;
(ii) Any bank as defined in Section 3(a)(2) of the
Securities Act, or any savings and loan association or other institution as
defined in Section 3(a)(5)(A) of the Securities Act whether acting in its
individual or fiduciary capacity; any broker or dealer registered pursuant to
Section 15 of the Exchange Act; insurance Corporation as defined in Section
2(13) of the Securities Act; investment Corporation registered under the
Investment Corporation Act of 1940; or a business development Corporation as
defined in Section 2(a)(48) of that Act; Small Business Investment Corporation
licensed by the U.S. Small Business Administration under Section 301(c) or (d)
of the Small Business Investment Act of 1958; any plan established and
maintained by a state, its political subdivisions, or any agency or
instrumentality of a state or its political subdivisions for the benefit of its
employees, if such plan has total assets in excess of $5,000,000; employee
benefit plan within the meaning of the Employee Retirement Income Security Act
of 1974, if the investment decision is made by a plan fiduciary, as defined in
Section 3(21) of such Act, which is either a bank, savings and loan association,
insurance Corporation, or registered investment adviser, or if the employee
benefit plan has total assets in excess of $5,000,000 or, if a self-directed
plan, with investment decision made solely by persons that are accredited
investors;
(iii) Any private business development Corporation as
defined in Section 202(a)(22) of the Investment Advisers Act of 1940;
(iv) Any organization described in Section 501(c)(3)
of the Internal Revenue Code, corporation, Massachusetts or similar business
trust, or partnership, not formed for the specific purpose of acquiring the
Securities offered, with total assets in excess of $5,000,000;
(v) Any natural person whose individual net worth, or
joint net worth with that person's spouse, at the time of his purchase exceeds
$1,000,000;
(vi) Any natural person who had an individual income
in excess of $200,000 during each of the previous two years or joint income with
that person's spouse in excess of $300,000 in each of those years and has a
reasonable expectation of reaching the same income level in the current year;
(vii) Any trust, with total assets in excess of
$5,000,000, not formed for the specific purpose of acquiring the Securities
offered, whose purchase is directed by a person who has such knowledge and
experience in financial and business matters that he is capable of evaluating
the merits and risks of the prospective investment; or
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(viii) Any entity in which all of the equity owners
are accredited investors.
As used in this Section 6.8, the term "net worth" means the
excess of total assets over total liabilities. For the purpose of determining a
person's net worth, the principal residence owned by an individual should be
valued at fair market value, including the cost of improvements, net of current
encumbrances. As used in this Section 6.8, "income" means actual economic
income, which may differ from adjusted gross income for income tax purposes.
Accordingly, the undersigned should consider whether it should add any or all of
the following items to its adjusted gross income for income tax purposes in
order to reflect more accurately its actual economic income: Any amounts
attributable to tax-exempt income received, losses claimed as a limited partner
in any limited partnership, deductions claimed for depletion, contributions to
an IRA or Keogh retirement plan, and alimony payments.
6.9 Resident. Purchaser has its, his or her principal
residence in the state indicated on Annex 1.
7. RESTRICTIONS ON TRANSFER OF SECURITIES.
The Securities are not transferable except upon the conditions
specified in this Article VII, which conditions are intended to ensure
compliance with the provisions of the Securities Act and state securities laws
in respect of the transfer of any of such securities. Each instrument
representing the Securities shall be stamped or otherwise imprinted with legends
substantially in the following form until such time as the conditions set forth
in such legends have been met:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR QUALIFIED UNDER ANY STATE
SECURITIES LAW, AND MAY NOT BE SOLD, TRANSFERRED,
ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN
EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT
COVERING SUCH SECURITIES, OR THE HOLDER RECEIVES AN
OPINION OF COUNSEL FOR THE HOLDER OF THE SECURITIES
STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT OR
HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND
PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT AND THE
QUALIFICATION REQUIREMENTS UNDER STATE LAW."
The Corporation shall be entitled to enter stop transfer notices on its
stock books with respect to the Securities until the conditions as set forth in
the legend above with respect to the transfer of such securities have been met.
VIII. AFFIRMATIVE COVENANTS
The Corporation covenants and agrees that so long any Purchaser holds
at least four percent (4%) of all shares of the Series A Stock issued and sold
in the Closings, the Corporation shall furnish the following to such Purchaser:
8.1 Financial Statements.
(a) As soon as available, and in any event within ninety (90)
days after the end of each fiscal year of the Corporation, beginning with the
fiscal year ending June 30, 1999, (i) a copy of the annual audit report of the
Corporation for such fiscal year containing a balance sheet, statement of
income, statement of stockholders' equity, and statement of cash flow as at the
end of such fiscal year and for the fiscal year then ended, all in reasonable
detail and audited and certified by independent certified public accountants of
recognized standing.
(b) As soon as available, and in any event within forty-five
(45) days after the end of each fiscal quarter, a copy of an unaudited financial
report of the Corporation as of the end of such fiscal quarter and for the
portion of the fiscal year then ended, containing consolidated balance sheets,
statements of income, and statements of cash flow, (with notes as to any
consolidating entries).
(c) Corporation shall provide to any Purchaser entitled to
receive financial information under this Article VIII, on or before thirty (30)
days after receipt by Corporation of written request for such information, which
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request may only be given during the last quarter of any fiscal year of the
Corporation, an annual budget or business plan of the Corporation for the next
fiscal year approved by a majority of the Board of Directors.
8.2 Books and Records. The Corporation will keep (a) proper books of
record and account in which full, true and correct entries will be made of all
dealings or transactions of or in relation to its business and affairs; (b) set
up on its books accruals with respect to all taxes, assessments, charges, levies
and claims; and (c) on a reasonably current basis set up on its books from its
earnings allowances against doubtful receivables, advances and investments and
all other proper accruals (including, without limitation, by reason of
enumeration, accruals for premiums, if any, due on required payments and
accruals for depreciation, obsolescence, or amortization of properties), which
should be set aside from such earnings in connection with its business. All
determinations pursuant to this subsection shall be made in accordance with, or
as required by, GAAP consistently applied.
IX. REGISTRATION RIGHTS AGREEMENT.
The Corporation shall at the Initial Closing enter into an Registration
Rights Agreement in form and substance substantially as attached hereto as
Exhibit B granting each Purchaser the registration rights set forth therein.
X. MISCELLANEOUS.
10.1 Remedies. Any Person having any rights under any
provision of this Agreement will be entitled to enforce such rights
specifically, to recover damages by reason of any breach of any provision of
this Agreement, and to exercise all other rights granted by law, which rights
may be exercised cumulatively and not alternatively.
10.2 Consent to Amendments. Except as otherwise expressly
provided herein, the provisions of this Agreement may be amended and the
Corporation may take any action herein prohibited, or omit to perform any act
herein required to be performed by it, only if it has obtained the written
consent of Purchasers holding at least seventy-five percent (75%) or more of the
outstanding shares of Series A Stock. No course of dealing between the
Corporation and any Purchaser or any delay in exercising any rights hereunder or
under the Corporation's Articles of Incorporation will operate as a waiver of
any rights of any such Purchaser. Notwithstanding the foregoing, this Section
10.2 shall not be amended without the consent of all Purchasers holding Series A
Stock.
10.3 Survival of Representations and Warranties. All
representations and warranties contained herein or made in writing by any party
in connection herewith will survive the execution and delivery of this Agreement
for a period of two (2) years after the Initial Closing.
10.4 Successors and Assigns. Except as otherwise expressly
provided herein, all covenants and agreements contained in this Agreement by or
on behalf of any of the parties hereto shall bind and inure to the benefit of
the respective successors and assigns of the parties hereto whether so expressed
or not.
10.5 Severability. Each provision of this Agreement shall be
interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Agreement is held to be prohibited by or invalid
under applicable law, such provision shall be ineffective only to the extent of
such prohibition or invalidity, without invalidating the remainder of this
Agreement.
10.6 Counterparts. This Agreement may be executed in two or
more counterparts, any one of which need not contain the signatures of more than
one party, but all such counterparts when taken together shall constitute one
and the same Agreement.
10.7 Descriptive Headings. The descriptive headings of this
Agreement are inserted for convenience only and do not constitute a part of this
Agreement.
10.8 Notices. Except as otherwise expressly provided herein,
all communications provided for hereunder shall be in writing and delivered or
mailed by the United States mails, certified mail, return receipt requested, (a)
if to Purchaser, addressed to each Purchaser at the address specified on Annex I
hereto or to such other address as such Purchaser may in writing designate, or
(b) if to the Corporation, addressed to the Corporation at the address set forth
below or to such other address as the Corporation may in writing designate.
Notices shall be deemed to have been
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validly served, given or delivered (and "the date of such notice or words of
similar effect shall mean the date) five (5) days after deposit in the United
States mails, certified mail, return receipt requested, with proper postage
prepaid, or upon actual receipt thereof (whether by noncertified mail, telecopy,
telegram, facsimile, express delivery or otherwise), whichever is earlier.
If to Purchasers: To the Addresses set forth on Annex 1
With a Copy to: Patton Boggs LLP
Attn: Charles P. Miller
2200 Ross Avenue, Suite 900
Dallas, Texas 75201
FAX: (214) 871-2688
If to the Corporation: Valuestar Corporation
Attn: Jim Stein
360 22nd Street, Suite 210
Oakland, CA 94612
FAX: (510) 808-1400
With a Copy to: Bay Venture Counsel, LLP
Attn: Donald C. Reinke, Esq.
1999 Harrison Street, Suite 1300
Oakland, CA 94612
FAX: (510) 834-7440
10.9 Governing Law. The validity, meaning and effect of this
Agreement shall be determined in accordance with the laws of California
applicable to contracts made and to be performed entirely in California as if by
and between California residents.
10.10 Schedules and Exhibits. All schedules and exhibits are
an integral part of this Agreement.
10.11 Litigation Costs. If any legal action, arbitration or
other proceeding is brought for the enforcement of this Agreement, or because of
an alleged dispute, breach, default, or misrepresentation in connection with any
of the provisions of this Agreement, the successful or prevailing party or
parties therein shall be entitled to recover reasonable attorneys' fees and
other costs incurred in that action or proceeding, in addition to any other
relief to which it or they may be entitled.
10.12 Final Agreement. This Agreement and the exhibits and
schedules attached hereto constitute the only agreement of the parties
concerning the matters herein, and supersedes, merges and renders void all prior
written/oral, and/or contemporaneous agreements and understandings related
thereto.
10.13 Confidentiality. Each Purchaser agrees to keep
confidential any information delivered by the Corporation or Subsidiary to such
Purchaser under this Agreement that the Corporation or Subsidiary clearly
indicates in writing to be confidential information; provided, however, that
nothing in this Section 10.13 will prevent such Purchaser from disclosing such
information (a) to any Affiliate of such Purchaser or any actual or potential
purchaser, participant, assignee, or transferee of such Purchaser's rights or
obligations hereunder that agrees to be bound by the terms of this Section
10.13, (b) upon order of any court or administrative agency, (c) upon the
request or demand of any regulatory agency or authority having jurisdiction over
such Purchaser, (d) that is in the public domain, (e) that has been obtained
from any Person that is not a party to this Agreement or an Affiliate of any
such party without breach by such Person of a confidentiality obligation known
to such Purchaser, (f) if necessary and only to the extent necessary for the
exercise of any remedy under this Agreement, or (g) to the certified public
accountants for such Purchaser. The Corporation agrees that such Purchaser will
be presumed to have met its obligations under this Section 10.13 to the extent
that it exercises the same degree of care with respect to information provided
by the Corporation or Subsidiary as it exercises with respect to its own
information of similar character.
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IN WITNESS WHEREOF, the parties hereto have executed this
Agreement effective as of the respective Closing dates.
IN WITNESS WHEREOF, the Corporation and Purchaser have caused this
Agreement to be executed and delivered by their respective officers thereunto
duly authorized.
CORPORATION:
VALUESTAR CORPORATION
By: /s/ JAMES STEIN
---------------
Name: James Stein
Its: President and Chief Executive Officer
PURCHASER:
---------------------------------------
Name of Investor
---------------------------------------
Authorized Signature
---------------------------------------
Print Name and Title of Signatory
ADDRESS
---------------------------------------
---------------------------------------
---------------------------------------
INVESTMENT AMOUNT
$--------------------------------------
14
EXHIBIT 4.27
VALUESTAR CORPORATION
REGISTRATION RIGHTS AGREEMENT
AND SHAREHOLDERS AGREEMENT AMENDMENT
THIS REGISTRATION RIGHTS AGREEMENT AND SHAREHOLDERS AGREEMENT AMENDMENT
(this "Agreement") is dated effective as of July 21, 1999, by and among
VALUESTAR CORPORATION, a Colorado corporation (the "Company"), SEACOAST CAPITAL
PARTNERS LIMITED PARTNERSHIP, a Delaware Limited Partnership ("Seacoast"),
PACIFIC MEZZANINE FUND, L.P. a California limited partnership ("Pacific"),
TANGENT GROWTH FUND, L.P., a California limited partnership ("Tangent"), James
A. Barnes ("Barnes"), and Jerry E. Polis ("Polis"), and the additional entities
or individuals set forth on Schedule 1 attached hereto and incorporated herein
by reference who have entered into the ValueStar Corporation Series A Preferred
Stock Purchase Agreement dated on even date herewith (the "Purchase Agreement")
(individually, each such individual or entity as well as Seacoast, Pacific,
Tangent, Barnes and Polis a "Holder" and collectively, all such individuals and
entities, the "Holders").
RECITAL
-------
A. On March 31, 1999, Seacoast, Pacific, Tangent, Barnes, Polis and Jim
Stein ("Stein") entered into a Shareholders Agreement (the "Shareholders
Agreement") which granted certain registration rights pursuant to Article VII
thereunder (the "Registration Agreement").
B. Seacoast, Pacific, Tangent, Polis and Barnes desire to amend and
restate the Registration Agreement in consideration of the purchase by the
Holders of shares of the Company's Series A Convertible Preferred Stock pursuant
to the Purchase Agreement.
AGREEMENT
---------
NOW, THEREFORE, in consideration of the mutual agreements, covenants,
representations and warranties contained in this Agreement, the parties hereto
hereby agree as follows:
1. Definitions.
a. "Commission" means the Securities and Exchange Commission
or any other Federal agency at the time administering the Securities Act.
b. "Capital Stock" means the Company's common stock and any
other capital stock of the Company authorized from time to time, and any other
shares, options, interests, participations, or other equivalents (however
designated) of or in the Company, whether voting or nonvoting, including,
without limitation, common stock, options, warrants, preferred stock, phantom
stock, stock appreciation rights, preferred stock, convertible notes or
debentures, stock purchase rights, and all agreements, instruments, documents,
and securities convertible, exercisable, or exchangeable, in whole or in part,
into any one or more of the foregoing.
c. "Common Stock" means any and all (i) common stock of the
Corporation issued or issuable upon conversion of the Corporation's Series A
Convertible Preferred Stock, (ii) all common stock and Other Securities of the
Corporation issued or issuable pursuant to the Warrants issued under the Warrant
Purchase Agreement (collectively, (i) and (ii) the "Stock"); (iii) any common
stock of the Corporation issued as a dividend or other distribution with respect
to or in replacement of the Stock, and (iv) any common stock of the Corporation
issued in any combination or subdivision of the Stock. In determining the amount
of Common Stock held by any Person, the sum of (i), (ii), (iii) and (iv) shall
be used.
d. "Exchange Act" means the Securities Exchange Act of 1934,
as amended or any similar Federal statue and the rules and regulations of the
Commission thereunder all as the same shall be in effect at the time.
e. "Indebtedness" means for any Person: (a) all indebtedness,
whether or not represented by bonds, debentures, notes, securities, or other
evidences of indebtedness, for the repayment of money borrowed, (b) all
indebtedness representing deferred payment of the purchase price of property or
assets, (c) all indebtedness under any lease which, in conformity with GAAP, is
required to be capitalized for balance sheet purposes and leases
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of property or assets made as a part of any sale and lease-back transaction if
required to be capitalized, (d) all indebtedness under guaranties, endorsements,
assumptions, or other contractual obligations, including any letters of credit,
or the obligations in respect of, or to purchase or otherwise acquire,
indebtedness of others, (e) all indebtedness secured by any lien existing on
property owned, subject to such lien, whether or not the indebtedness secured
thereby shall have been assumed by the owner thereof, (f) trade accounts payable
more than one hundred twenty (120) days past due, (g) all amendments, renewals,
extensions, modifications and refundings of any indebtedness or obligations
referred to in clauses (a), (b), (c), (d), (e) or (f).
f. "Other Securities" Any stock other than the Corporation's
common stock, other securities, property, or other property or rights that the
Holders become entitled to receive upon exercise of the Warrants.
g. "Person" means any individual, corporation, trust,
partnership, association, or other entity.
h. "Public Offering" A public offering of shares of any class
of Capital Stock by the Company issued to the general public pursuant to a
registration statement declared effective by the United States Securities and
Exchange Commission.
i. "Registrable Securities" means the Common Stock.
j. "Securities Act" means the Securities Act of 1933, as
amended, or any similar Federal statute and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time.
k. "Senior Obligations" means and includes any and all
Indebtedness and/or liabilities of the Company to each of Seacoast, Pacific and
Tangent (each a "Noteholder")of every kind, nature and description, direct or
indirect, secured or unsecured, joint, several, joint and several, absolute or
contingent, due or to become due, now existing or hereafter arising, under that
certain "Note Purchase Agreement" and any "Other Agreement" (as such agreements
are referenced under the Warrant Agreement) (regardless of how such Indebtedness
or liabilities arise or by what agreement or instrument they may be evidenced or
whether evidenced by any agreement or instrument) and all obligations of the
Company and any of its subsidiaries to each Noteholder to perform acts or
refrain from taking any action under any of the aforementioned documents,
together with all renewals, modifications, extensions, increases, substitutions
or replacements of any of such Indebtedness.
l. "Series A Stock" means all issued and outstanding Series A
Convertible Preferred Stock of the Company and any common stock shares issuable
upon conversion thereof.
m. "Subsidiary" Each Person of which or in which the Company
or its other Subsidiaries own directly or indirectly fifty-one percent (51%) or
more of (i) the combined voting power of all classes of stock having general
voting power under ordinary circumstances to elect a majority of the board of
directors or equivalent body of such Person, if it is a corporation or similar
person; (ii) the capital interest or profits interest of such Person, if it is a
partnership, joint venture, or similar entity; or (iii) the beneficial interest
of such Person, if it is a trust, association, or other unincorporated
organization.
n. "Warrant Purchase Agreement" means that certain agreement
by and among the parties hereto and Jim Stein dated March 31, 1999. Any terms
not defined herein shall have the meaning set forth in the Warrant Purchase
Agreement.
o. "Warrants" means collectively the "A Warrant," the "B
Warrant" and the "C Warrant" referred to in Section 2.01 of the Warrant Purchase
Agreement and all Warrants issued upon the transfer or division of, or in
substitution for, such Warrants.
2. Registration Rights.
a. Required Registration. At any time, Holders of a majority
of the Registrable Securities held by Seacoast, Pacific and Tangent may, upon
not more than two (2) occasions and not more often than once during any 180-day
period, make a written request to the Company requesting that the Company effect
the registration of Registrable Securities so long as such request is for an
aggregate offering price of not less than Five Million Dollars ($5,000,000).
After receipt of such a request, the Company will, as soon as practicable,
notify all Holders of such request and use its best efforts to effect the
registration of all Registrable Securities that the Company has been so
requested to register by any Holder for sale, all to the extent required to
permit the disposition (in accordance with the intended method or methods
thereof) of the Registrable Securities so registered.
Notwithstanding the foregoing, if the managing underwriter or
underwriters, if any, of such offering deliver a written opinion to each Holder
of such Registrable Securities that the success of the offering under this
Section 2.a. would be materially and adversely affected by the inclusion of any
securities requested to be included in such offering, then the amount of
securities to be offered for the accounts of any Persons will be reduced (i)
first
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according to the securities proposed for registration by any Persons other than
the Holders to the extent necessary to reduce the total amount of securities to
be included in such offering to the amount recommended by such managing
underwriter or underwriters, and then (ii) by any Series A Stock held by any
Holder, and (iii) if such underwriter requires reduction of the securities to be
included in the offering in excess of all issued and outstanding Series A Stock
held by such participating Holders, pro rata among all such Holders (according
to the securities proposed for such registration held by such Holders).
b. Incidental Registration. If the Company at any time
proposes to file on its behalf or on behalf of any of its security holders a
registration statement under the Securities Act on any form (other than a
registration statement on Form S-4 or S-8 or any successor form unless such
forms are being used in lieu of or as the functional equivalent of, registration
rights) for any class that is the same or similar to Registrable Securities, it
will give written notice setting forth the terms of the proposed offering and
such other information as the Holders may reasonably request to all holders of
Registrable Securities at least twenty (20) days before the initial filing with
the Commission of such registration statement, and offer to include in such
filing such Registrable Securities as any Holder may request. Each Holder of any
such Registrable Securities desiring to have Registrable Securities registered
under this Section 2.b. will advise the Company in writing within ten (10) days
after the date of receipt of such notice from the Company, setting forth the
amount of such Registrable Securities for which registration is requested. The
Company will thereupon include in such filing the number of Registrable
Securities for which registration is so requested, and will use its best efforts
to effect registration under the Securities Act of such Registrable Securities.
Notwithstanding the foregoing, if the managing underwriter or
underwriters, if any, of such offering deliver a written opinion to each Holder
of such Registrable Securities that the success of the offering would be
materially and adversely affected by the inclusion of the Registrable Securities
requested to be included, then the amount of securities to be offered for the
accounts of Holders will be reduced pro rata (according to the Registrable
Securities proposed for registration) to the extent necessary to reduce the
total amount of securities to be included in such offering to the amount
recommended by such managing underwriter or underwriters; provided, however,
that if securities are being offered for the account of other Persons as well as
the Company, then with respect to the Registrable Securities intended to be
offered to Holders, the proportion by which the amount of such class of
securities intended to be offered by Holders is reduced will not exceed the
proportion by which the amount of such class of securities intended to be
offered by such other Persons (other than the Company) is reduced.
c. Form S-3 Registrations. In addition to the registration
rights provided in Sections 2.a. and 2.b. above, if at any time the Company is
eligible to use Form S-3 (or any successor form) for registration of secondary
sales of Registrable Securities, any Holder of Registrable Securities may
request in writing that the Company register shares of Registrable Securities on
such form so long as such request is for an aggregate offering price of at least
One Million Dollars ($1,000,000). Upon receipt of such request, the Company will
promptly notify all holders of Registrable Securities in writing of the receipt
of such request and each such Holder may elect (by written notice sent to the
Company within fifteen (15) days of receipt of the Company's notice) to have its
Registrable Securities included in such registration pursuant to this Section
7.03. Thereupon, the Company will, as soon as practicable, use its best efforts
to effect the registration on Form S-3 of all Registrable Securities that the
Company has so been requested to register by such Holder for sale. The Company
will use its best efforts to qualify and maintain its qualification for
eligibility to use Form S-3 for such purposes.
d. Rule 144 Availability. Notwithstanding the foregoing, the
Company will not be obligated to register any Registrable Securities as to which
counsel reasonably acceptable to the Holders renders an opinion in form and
substance satisfactory to the Holders to the effect that such Registrable
Securities are freely saleable without limitation as to volume under Rule 144
under the Securities Act.
e. Registration Procedures. In connection with any
registration of Registrable Securities under this Agreement, the Company will,
as soon as practicable:
(i) prepare and file with the Commission a registration
statement with respect to such Registrable Securities and use its best efforts
to cause such registration statement to become and remain effective until the
earlier of such time as all Registrable Securities subject to such registration
statement have been disposed of or the expiration of one hundred eighty (180)
days;
(ii) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement effective and
to comply with the provisions of the Securities Act with respect to the sale or
other disposition of all Registrable Securities covered by such registration
statement until the earlier of such time as all of
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<PAGE>
such Registrable Securities have been disposed of or the expiration of one
hundred eighty (180) days;
(iii) furnish to each Holder such number of copies of the
registration statement and prospectus (including, without limitation, a
preliminary prospectus) in conformity with the requirements of the Securities
Act (in each case including all exhibits) and each amendment or supplement
thereto, together with such other documents as any Holder may reasonably
request;
(iv) use its best efforts to register or qualify the
Registrable Securities covered by such registration statement under such other
securities or blue sky laws of such jurisdictions within the United States and
Puerto Rico as each Holder reasonably requests, and do such other acts and
things as may be reasonably required of it to enable such holder to consummate
the disposition in such jurisdiction of the securities covered by such
registration statement, except any particular jurisdiction in which the Company
would be required to execute a general consent to service of process in
effecting such registration, qualification or compliance unless the Company is
already subject to service in such jurisdiction;
(v) otherwise use its best efforts to comply with all
applicable rules and regulations of the Commission, and make available to its
securities holders, as soon as practicable, an earnings statement covering the
period of at least twelve months beginning with the first month after the
effective date of such registration statement, which earnings statement will
satisfy the provisions of Section 11(a) of the Securities Act;
(vi) provide and cause to be maintained a transfer agent and
registrar for Registrable Securities covered by such registration statement from
and after a date not later than the effective date of such registration
statement;
(vii) if requested by the underwriters for any underwritten
offering or Registrable Securities on behalf of a Holder of Registrable
Securities pursuant to a registration requested under Section 2.a, the Company
will enter into an underwriting agreement with such underwriters for such
offering, such agreement to contain such representations and warranties by the
Company and such other terms and provisions as are customarily contained in
underwriting agreements with respect to secondary distributions, including,
without limitation, provisions with respect to indemnities and contribution as
are reasonably satisfactory to such underwriters and the Holders; the Holders on
whose behalf Registrable Securities are to be distributed by such underwriters
will be parties to any such underwriting agreement and the representations and
warranties by, and the other agreements on the part of, the Company to and for
the benefit of such underwriters, will also be made to and for the benefit of
such Holders of Registrable Securities; and no Holder of Registrable Securities
will be required by the Company to make any representations or warranties to or
agreements with the Company or the underwriters other than reasonable and
customary representations, warranties, or agreements regarding such Holder, such
Holder's Registrable Securities, such Holder's intended method or methods of
disposition, and any other representation required by law;
(viii) furnish, at the written request of any Holder, on the
date that such Registrable Securities are delivered to the underwriters for sale
pursuant to such registration, or, if such Registrable Securities are not being
sold through underwriters, on the date that the registration statement with
respect to such Registrable Securities becomes effective, (i) an opinion in form
and substance reasonably satisfactory to such Holders, and addressing matters
customarily addressed in underwritten public offerings, of the counsel
representing the Company for the purposes of such registration (who will not be
an employee of the Company and who will be satisfactory to such Holders),
addressed to the underwriters, if any, and to the selling Holders; and (ii) a
letter (the "comfort letter") in form and substance reasonably satisfactory to
such Holders, from the independent certified public accountants of the Company,
addressed to the underwriters, if any, and to the selling Holders making such
request (and, if such accountants refuse to deliver the comfort letter to such
Holders, then the comfort letter will be addressed to the Company and
accompanied by a letter from such accountants addressed to such Holders stating
that they may rely on the comfort letter addressed to the Company); and
(ix) during the period when the registration statement is
required to be effective, notify each selling Holder of the happening of any
event as a result of which the prospectus included in the registration statement
contains an untrue statement of a material fact or omits to state any material
fact required to be stated therein or necessary to make the statements therein
not misleading, and prepare a supplement or amendment to such prospectus so
that, as thereafter delivered to the purchasers of such Registrable Securities,
such prospectus will not contain an untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary to make
the statements therein not misleading. It will be a condition precedent to the
obligation of the Company to take any action pursuant to this Agreement in
respect of the Registrable Securities that are to be registered at the request
of any Holder of Registrable Securities that such Holder furnish to the Company
such information regarding the Registrable Securities held by such Holder
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<PAGE>
and the intended method of disposition thereof as is legally required in
connection with the action taken by the Company. The managing underwriter or
underwriters, if any, for any offering of Registrable Securities to be
registered pursuant to Section 2.a. or 2.c. will be selected by the Holders of a
majority of the Registrable Securities being so registered.
f. Allocation of Expenses. Except as provided in the following
sentence, the Company will bear all expenses arising or incurred in connection
with any of the transactions contemplated by this Agreement, including, without
limitation, (a) all expenses incident to filing with the National Association of
Securities Dealers, Inc.; (b) registration fees; (c) printing expenses; (d)
accounting and legal fees and expenses; (e) expenses of any special audits or
comfort letters incident to or required by any such registration or
qualification; and (f) expenses of complying with the securities or blue sky
laws of any jurisdictions in connection with such registration or qualification.
Each Holder will severally bear the expense of its underwriting fees, discounts,
or commissions relating to its sale of Registrable Securities.
g. Listing on Securities Exchange. If the Company lists any
shares of Capital Stock on any securities exchange or on the National
Association of Securities Dealers, Inc. Automated Quotation System or similar
system, it will, at its expense, list thereon, maintain and, when necessary,
increase such listing of, all Registrable Securities.
h. Holdback Agreements.
(i) If any registration pursuant to Section 2.b is in
connection with an underwritten public offering, each Holder of Registrable
Securities agrees, if so required by the managing underwriter, not to effect any
public sale or distribution of Registrable Securities (other than as part of
such underwritten public offering) during the period beginning seven (7) days
prior to the effective date of such registration statement and ending on the one
hundred eightieth (180th) day after the effective date of such registration
statement; provided, however, that Jim Stein and each Person that is an officer,
director, or beneficial owner of five percent (5%) or more of the outstanding
shares of any class of Capital Stock enters into such an agreement.
(ii) The Company agrees not to effect any public sale or
distribution during the period seven (7) days (or such longer period as may be
prescribed by Regulation M) prior to the effective date of the registration
statement employed in any underwritten public offering and ending on the one
hundred eightieth (180th) day after any such registration statement contemplated
by Sections 2.a. or 2.c. has become effective, except as part of such
underwritten public offering pursuant to such registration statement and except
pursuant to securities registered on Forms S-4 or S-8 of the Commission or any
successor forms, and the Company agrees to use its best efforts to cause each
holder of its equity securities or any securities convertible into or
exchangeable or exercisable for any of such securities, in each case purchased
from the Company at any time after the date of this Agreement (other than in a
public offering), to agree not to effect any such public sale or distribution of
such securities during such period.
i. Rule 144. At all times following completion by the Company
of a Public Offering, the Company will take such action as any Holder may
reasonably request, all to the extent required from time to time to enable such
Holder to sell shares of Registrable Securities without registration pursuant to
and in accordance with (a) Rule 144 under the Securities Act, as such Rule may
be amended from time to time, or (b) any similar rule or regulation adopted by
the Commission. Upon the request of any Holder of Registrable Securities, the
Company will deliver to such Holder a written statement as to whether it has
complied with such requirements.
j. Rule 144A. The Company agrees that, upon the request of any
Holder or any prospective purchaser of Registrable Securities designated by a
Holder, the Company will promptly provide (but in any case within fifteen (15)
days of a request) to such Holder or potential purchaser, the following publicly
available information:
(i) a brief statement of the nature of the business of the
Company and any Subsidiaries and the products and services they offer;
(ii) the most recent consolidated balance sheets and profit
and losses and retained earnings statements, and similar financial statements of
the Company for such part of the two preceding fiscal years prior to such
request as the Company has been in operation (such financial information will be
audited, to the extent reasonably available); and
(iii) such other publicly available information about the
Company, any Subsidiaries, and their business, financial condition, and results
of operations as the requesting Holder or purchaser of such Warrants requests in
order to comply with Rule 144A, as amended, and the antifraud provisions of the
federal and state securities laws. The Company hereby represents and warrants to
any such requesting Holder and any prospective purchaser of Warrants or Warrant
Shares from such Holder that the information provided by the Company pursuant
5
<PAGE>
to this Section 2.j. will not contain any untrue statement of a material fact or
omit to state a material fact necessary in order to make the statements made, in
light of the circumstances under which they were made, not misleading.
k. Limitations on Subsequent Registration Rights. Until (i) a
Qualified Liquidity Milestone, (ii) a Qualified Liquidation Event (as each is
defined in the Company's Certificate of Designation filed with the Colorado
Secretary of State) (iii) the repayment of any and all Senior Obligations owed
to such Noteholder and the sale in excess of 80% of such Noteholder's common
stock shares and Other Securities issued or issuable under the Warrants from and
after the date of this Agreement or until the provisions of Section 2.d. are
applicable, the Company will not, without the prior written consent of the
Holders of a majority of the outstanding Registrable Securities, enter into any
agreement with any holder or prospective holder of any securities of the Company
that would allow such holder or prospective holder (a) to include such
securities in any registration filed under Section 2.a., unless under the terms
of such agreement, such holder or prospective holder may include such securities
in any such registration only to the extent that the inclusion of its securities
will not reduce the amount of the Registrable Securities of the Holders that is
included or (b) to make a demand registration that could result in such
registration statement being declared effective prior to the effectiveness of
the first registration statement effected under Section 2.a. or within one
hundred twenty (120) days of the effective date of any registration effected
pursuant to Section 2.a..
l. Right to Delay a Demand Registration. If, at the time of
any request to register Registrable Securities hereunder, the Company is
preparing a registration statement for a Public Offering (other than a
registration effected solely to implement an employee benefit plan or a
transaction to which Rule 145 of the Commission is applicable) and such
registration statement in fact is filed and becomes effective within ninety (90)
days after the request, then the Company may at its option delay such request
for a period not more than in excess of one hundred twenty (120) days from the
effective date of such offering or the date of commencement of such other
activity, as the case may be. Such right to delay shall be exercised by the
Company not more than once in any twelve (12) month period. Nothing in this
Section 2.l. shall preclude a Holder of Registrable Securities from enjoying
registration rights which it might otherwise possess under this this Agreement.
m. Indemnification by Holders of Registrable Securities. Each
Holder of any Registrable Securities shall, by acceptance thereof, indemnify and
hold harmless each other holder of any Registrable Securities, the Company, its
directors and officers, each above-described underwriter who contracts with the
Company or its agents and each other Person, if any, who controls the Company or
such underwriter, against any liability, joint or several, to which any such
other Holder, the Company, underwriter or any such director or officer of any
such Person may become subject under the Securities Act or any other statute or
at common law, if such liability (or actions in respect hereof) arises out of or
is based upon (i) the disposition by such Holder of such Registrable Securities
in violation of the provisions of this Agreement, (ii) any alleged untrue
statement of any material fact contained in any registration statement under
which securities were registered under the Securities Act at the request of such
Holder, any preliminary prospectus or final prospectus contained therein, or any
amendment or supplement thereto, or (iii) any alleged omission to state therein
a material fact required to be stated therein or necessary to make statement(s)
therein not misleading. Notwithstanding any other provision of this Section, the
indemnification rights set forth in this Section shall be given in the case of
clause (ii) or (iii) only if such alleged untrue statement or alleged omission
supplement thereto was made (1) in reliance upon and in conformity with
information furnished to the Company by such Holder expressly stated for use
therein, and (2) not based on the authority of an expert as to whom the holder
had no reasonable ground to believe, and did not believe, that (A) the
statements made on the authority of such expert were untrue or (B) there was an
omission to state a material fact. Such Holder shall reimburse the Company, such
underwriter or such director, officer, other Person or other Holder for any
reasonable legal fees incurred in investigating or defending any such liability;
provided, however, that no Holder of Registrable Securities shall be required to
indemnify any Person against any liability arising from any untrue or misleading
statement or omission contained in any prospectus or for any liability which
arises out of the failure of any Person to deliver a prospectus as required by
the Securities Act; and provided further, that the obligations of such Holder of
Registrable Securities for the indemnity hereunder shall be limited to an amount
equal to the net proceeds received by such Holder of Registrable Securities upon
disposition thereof and shall not extend to any settlement of claims related
thereto without the express written consent of such Holder of Registrable
Securities, which consent shall not be unreasonably withheld.
3. Waiver of Certain Shareholder Agreement Rights.
a. Preemptive Rights. In consideration of each of Seacoast's,
Pacific's and Tangent's purchase of the Company's Series A Stock under the
Purchase Agreement, each of Seacoast, Pacific and Tangent hereby waive all of
their rights set forth under Article II of the Shareholder Agreement with
respect to the Company's sale of
6
<PAGE>
the Series A Stock pursuant to the Purchase Agreement and the rights accorded
thereunder and this Agreement (and any other Capital Stock issued hereafter in
connection with the Series A Stock).
b. Dilution Fee. Each of Seacoast, Pacific and Tangent hereby
agree that the "Dilution Fee" set forth in Article III of the Shareholder
Agreement shall not apply with respect to any cash dividend or cash distribution
made by the Company on any shares of the Company's Series A Stock (or any other
Capital Stock issued hereafter in connection with the Series A Stock).
c. Drag Along Rights. Each of Seacoast, Pacific and Tangent
hereby agree that for purposes of the drag along rights set forth in Article IV
of the Shareholders Agreement, the issued and outstanding shares of Series A
Stock (or any other Capital Stock issued hereafter in connection with the Series
A Stock) shall not be used in either the numerator or denominator of any
percentage calculation to determine the percentage ownership in the Company of
the number of issued and outstanding voting stock shares of the Company held by
either Barnes, Polis, Stein or their affiliates. For purposes of the definition
of "Shareholder" under the Shareholder Agreement, each of Seacoast, Pacific and
Tangent agree that Shareholder shall collectively include for each of Barnes and
Polis those affiliated entities identified on the signature of the Shareholder
Agreement as being affiliated with each such individual.
d. First Refusal; and Co-Sale Rights. In addition to any other
equity excluded from the provisions of Article VI of the Shareholders Agreement,
each of Seacoast ,Pacific and Tangent hereby agree that the Series A Stock (and
any other Capital Stock issued hereafter in connection with the Series A Stock)
held by Barnes and Polis or their affiliates shall not be subject to the first
refusal or co-sale rights set forth in Article VI of the Shareholder Agreement.
e. Voting Agreement. Each of Seacoast, Pacific and Tangent
hereby agree that Barnes' and Polis' voting obligations under Article VIII of
the Shareholders Agreement with respect to the Capital Stock now owned or later
acquired by them shall expire with respect to any shares of Series A Stock (and
any other Capital Stock issued hereafter in connection with the Series A Stock)
at such time that Barnes or Polis, as the case may be, are no longer the
beneficial owners with respect to such shares of Capital Stock, whether or not
they continue to own other shares of Series A Stock
4. Miscellaneous.
a. Headings. The headings in this Agreement are for
convenience and reference only and are not part of the substance of this
Agreement.
b. Severability. The parties to this Agreement expressly agree
that it is not their intention to violate any public policy, statutory or common
law rules, regulations, or decisions of any governmental or regulatory body. If
any provision of this Agreement is judicially or administratively interpreted or
construed as being in violation of any such policy, rule, regulation, or
decision, the provision, section, sentence, word, clause, or combination thereof
causing such violation will be inoperative (and in lieu thereof there will be
inserted such provision, sentence, word, clause, or combination thereof as may
be valid and consistent with the intent of the parties under this Agreement) and
the remainder of this Agreement, as amended, will remain binding upon the
parties to this Agreement, unless the inoperative provision would cause
enforcement of the remainder of this Agreement to be inequitable under the
circumstances.
c. Notices. Whenever it is provided herein that any notice,
demand, request, consent, approval, declaration, or other communication be given
to or served upon any of the parties by another, such notice, demand, request,
consent, approval, declaration, or other communication will be in writing and
will be deemed to have been validly served, given, or delivered (and "the date
of such notice" or words of similar effect will mean the date) five (5) days
after deposit in the United States mails, certified mail, return receipt
requested, with proper postage prepaid, or upon receipt thereof (whether by
non-certified mail, telecopy, telegram, express delivery, or otherwise),
whichever is earlier, and addressed to the party to be notified as follows:
If to Seacoast, at Seacoast Capital Partners Limited Partnership
One Sansome Street, Suite 2100
San Francisco, California 94104
Attention: Jeffrey J. Holland
Fax: (415) 956-1459
7
<PAGE>
Seacoast Capital Partners Limited Partnership
c/o Seacoast Capital Corporation
55 Ferncroft Road
Danvers, Massachusetts 01923
Attention: Walt Leonard
Fax: (508) 750-1301
If to Pacific, at Pacific Mezzanine Fund, L.P.
2200 Powell Street, Suite 1250
Emeryville, California 94608
Attention: Dave Woodward
Fax: (510) 595-9801
If to Tangent, at Tangent Growth Fund, L.P.
1 Union Square
180 Geary Street, Suite 500
San Francisco, California 94108
Attention: Mark P. Gilles
Fax: (415) 392-1928
with courtesy copies to: Patton Boggs LLP
2200 Ross Avenue, Suite 900
Dallas, Texas 75201
Attention: Charles P. Miller, Esq.
Fax: (214) 871-2688
If to the Company, at ValueStar Corporation
360 22nd Street, Suite 210
Oakland, CA 94612
FAX: (510) 808-1400
Attention: Jim Stein
with courtesy copies to: Bay Venture Counsel, LLP
1999 Harrison Street, Suite 1300
Oakland, California 94612
Attention: Donald C. Reinke, Esq.
Fax: (510) 834-7440
If to Barnes: James A. Barnes
8617 Canyon View Drive
Las Vegas, NV 89117
Facsimile: (702) 254-4212
If to Polis: Jerry E. Polis
980 American Pacific Drive, Suite 111
Henderson, Nevada 89014
Fax: (702) 737-6900
If to any other Holder: As set forth on Schedule 1.
or to such other address as each party may designate for itself by like notice.
Notice to any other Holder will be delivered as set forth above to the address
shown on the stock transfer books of the Company unless such Holder has advised
the Company in writing of a different address to which notices are to be sent
under this Agreement. Failure or delay in
8
<PAGE>
delivering the courtesy copies of any notice, demand, request, consent,
approval, declaration, or other communication to the persons designated above to
receive copies of the actual notice will in no way adversely affect the
effectiveness of such notice, demand, request, consent, approval, declaration,
or other communication. No notice, demand, request, consent, approval,
declaration, or other communication will be deemed to have been given or
received unless and until it sets forth all items of information required to be
set forth therein pursuant to the terms of this Agreement.
d. Successors. This Agreement will be binding upon and inure
to the benefit of the parties and their respective successors and permitted
assigns.
e. Remedies. The failure of any party to enforce any right or
remedy under this agreement, or to enforce any such right or remedy promptly,
will not constitute a waiver thereof, nor give rise to any estoppel against such
party, nor excuse any other party from its obligations under this Agreement. Any
waiver of any such right or remedy by any party must be in writing and signed by
the party against which such waiver is sought to be enforced.
f. Fees. Any and all fees, costs, and expenses, of whatever
kind and nature, including attorneys' fees and expenses, incurred by the Holders
in connection with the defense or prosecution of any actions or proceedings
arising out of or in connection with this Agreement will, to the extent provided
in this Agreement, be borne and paid by the Company within ten (10) days of
demand by the Holders.
g. Counterparts. This Agreement may be executed in any number
of counterparts, which will individually and collectively constitute one
agreement.
h. Choice of Law. THIS AGREEMENT HAS BEEN EXECUTED, DELIVERED,
AND ACCEPTED BY THE PARTIES AND WILL BE DEEMED TO HAVE BEEN MADE IN THE STATE OF
CALIFORNIA AND WILL BE INTERPRETED AND THE RIGHTS OF THE PARTIES DETERMINED IN
ACCORDANCE WITH THE LAWS OF THE UNITED STATES APPLICABLE THERETO AND THE
INTERNAL LAWS OF THE STATE OF CALIFORNIA APPLICABLE TO AN AGREEMENT EXECUTED,
DELIVERED AND PERFORMED THEREIN WITHOUT GIVING EFFECT TO THE CHOICE-OF-LAW RULES
THEREOF OR ANY OTHER PRINCIPLE THAT COULD REQUIRE THE APPLICATION OF THE
SUBSTANTIVE LAW OF ANY OTHER JURISDICTION.
i. Nominees for Beneficial Owners. In the event that any
Registrable Securities are held by a nominee for the beneficial owner of such
Registrable Securities, the beneficial owner of Registrable Securities may, at
its election, be treated as the Holder of such Registrable Securities for
purposes of any request or other action by any Holder or Holders of Registrable
Securities pursuant to this Agreement or any determination of any number or
percentage of shares of Registrable Securities held by any Holder or Holders of
Registrable Securities contemplated by this Agreement. If the beneficial owner
of any Registrable Securities so elects, the Company may require assurances
reasonably satisfactory to it of such owner's beneficial ownership of such
Registrable Securities. In no event will a Holder be required to exercise the
Warrant as a condition to the registration of such Warrant or Registrable
Securities thereunder.
j. No Future Waiver.The Company hereby agrees and acknowledges
that the foregoing waivers and consents (a) shall in no event be construed or be
deemed to obligate either Seacoast, Pacific or Tangent to agree to any
subsequent waiver or consent; (b) shall in no event be construed or be deemed as
a waiver of any of the other terms and conditions of the Shareholder Agreement;
and (c) shall in no event be construed or be deemed to (i) impair, prejudice or
otherwise adversely affect Seacoast's, Pacific's or Tangent's right at any time
to exercise any right, privilege, or remedy in connection with the Shareholder
Agreement, (ii) amend or alter any provision of the Shareholder Agreement, or
(iii) constitute any course of dealing or other basis or altering any obligation
of the Company or any right, privilege or remedy of Seacoast, Pacific or Tangent
under the Shareholder Agreement.
9
<PAGE>
IN WITNESS WHEREOF, the parties have executed and delivered
this Agreement as of the date first above written.
COMPANY:
--------
VALUESTAR CORPORATION
By: /s/ JAMES STEIN
---------------
Name: James Stein
Its: President and Chief Executive Officer
/s/ JAMES A. BARNES
-------------------
James A. Barnes, individually, as President
of Sunrise Capital, Inc. and General Partner
of Tiffany Investments, and as General
Partner of Tiffany Investments Limited
Partnership
/s/ JERRY E. POLIS
------------------
Jerry E. Polis, individually, as President of
Davric Corporation and Trustee of the Jerry
E. Polis Family Trust
SEACOAST CAPITAL PARTNERS LIMITED
PARTNERSHIP
By: Seacoast Capital Corporation,
its general partner
By: /s/ JEFFREY J. HOLLAND
----------------------
Name: Jeffrey J. Holland
Its: Vice President
PACIFIC MEZZANINE FUND, L.P.
By: Pacific Private Capital
its general partner
By: /s/ DAVID WOODWARD
------------------
Name: David Woodward
Its: General Partner
TANGENT GROWTH FUND, L.P.
By: Tangent Fund Management, LLC
its general partner
By: /s/ MARK P. GILLES
------------------
Name: Mark P. Gilles
Its: Vice President
10
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Schedule 1
----------
- ---------------------------------------
Name of Investor
- ---------------------------------------
Authorized Signature
- ---------------------------------------
Print Name and Title of Signatory
ADDRESS
- ---------------------------------------
- ---------------------------------------
- ------------------------------------
11
EXHIBIT 10.5
BROADLAKE PLAZA
---------------
Office Lease
360 22nd Street, Oakland, CA 94612
(510) 832-7285
1
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TABLE OF CONTENTS
-----------------
Page
----
1. Parties 1
2. Lease of Premises 1
3. Term 1
4. Minimum Rent 1
5. Rental Adjustment 2
6. Taxes Payable by Tenant 4
7. Possession 5
8. Use of Premises 6
9. Security Deposit 7
10. Assignment, Subletting and Encumbering 8
11. Maintenance and Repair 9
12. Service and Utilities 10
13. Compliance with Law 12
14. Alterations 13
15. Liens 14
16. Fire and Casualty Insurance 14
17. Damage and Destruction 15
18. Public Liability Insurance 15
19. Subrogation 16
20. Eminent Domain 16
21. Indemnification of Landlord 16
22. Entry by Landlord 17
23. Default 17
24. Remedies 18
25. Late Charges 18
26. Landlord's Right to Cure Default 19
27. Default by Landlord 19
28. Landlord's Option to Relocate Tenant 20
29. Sale of Premises 20
30. Estoppel Certificates 20
31. Nonmerger 21
32. Disclosure 21
33. Demolition of Premises 21
34. Subordination 21
35. Notices 22
36. General Provisions 22
Exhibit A -- Plan Outlining Premises
Exhibit B -- Work Agreement
Exhibit C -- Rules and Regulations
2
<PAGE>
OFFICE LEASE
------------
1. PARTIES
THIS LEASE is made this 20th day of April, 1999 at Oakland by and
between, BROADLAKE PARTNERS, A CALIFORNIA LIMITED PARTNERSHIP as landlord, and
VALUESTAR, INC as Tenant.
WITNESSETH:
-----------
2. LEASE OF PEMISES
Landlord does hereby lease to Tenant and Tenant hereby leases from
Landlord that certain office space (hereinafter called "premises") outlined in
red on Exhibit A attached hereto and hereby by reference made a part hereof,
said premises comprising a rentable area of 14,908 square feet, more or less,
and being situated on the 2nd floor of that certain building known as BROADLAKE
PLAZA in the City of Oakland, County of Alameda, State of California and more
particularly described as:
360 22nd Street, 2nd Floor
Oakland, CA 94612
hereinafter referred to as "Building." This Lease is entered into subject to the
terms, covenants and conditions herein set forth and the Tenant agrees as a
material part of the consideration of this Lease to keep and perform each and
all of said terms, covenants and conditions by it to be kept and performed and
that this Lease is made upon the condition of such performance.
3. TERM
The term of the lease shall be for 5 years commencing on the 30th day
of June, 1999 (hereinafter referred to as the "Commencement Date") or on any
such earlier date on which Tenant first takes possession of the Premises and
ending on the 29th day of June, 2004, unless the term hereof shall be sooner
terminated as herein provided. * See attached Addendum items 2 & 4.
4. MINIMUM RENT
Tenant shall pay to Landlord as rent for the use and occupancy of the Premises,
at the times and in the manner hereinafter provided, the following sums of
money:
(a) Minimum Rent. Tenant shall pay to Landlord, without deduction or
offset and without notice or demand, minimum rent in the amount of Seventeen
Thousand Eight Hundred Ninety ($17,890.00) per month, payable in advance on the
commencement of the term hereof and on or before the first day of each and every
successive calendar month during the term hereof. If
3
<PAGE>
the term commences or ends on other than the first day of a calendar month, the
payment of minimum rent shall be appropriately prorated.
(b) On the third anniversary of this lease the minimum rent
payable by Tenant under this Paragraph 4 shall be increased to an amount
determined by multiplying the minimum rent specified in Paxagraph 4(a) above by
a fraction, the denominator of which shall be the Consumer Price Index-All Urban
Consumers (San Francisco-Oakland Metropolitan Bay Area; All Items; 1982-1984 --
100) prepared by the Bureau of Labor Statistics of the United States Department
of Labor, published for the month immediately preceding the month in which the
term of this Lease commenced and the numerator of vhich shall be said Consumer
Price Index published for the month immediately preceding the date of such
adjustment. Should Landlord lack sufficient data to make the determination
specified in this Paragraph 4(b) on the date of any such adjustment, Tenant
shall continue to pay the Monthly minimum rent payable immediately prior to such
adjustment date. As soon as Landlord obtains the necessary data, it shall
determine the minimum rent payable from and after such adjustment data and
notify Tenant of the adjustment in writing. Should the Monthly minimum rent for
the period following such adjustment date exceed the amount previously paid by
tenant for such period, Tenant shall forthwith pay. the difference to-Landlord.
Should the monthly minimum rent for such period be less than the amount
previously paid by Tenant for such period the overpayment shall be credited to
the next installment of rent due hereunder. In the event the federal government
should cease to publish the Consumer Price Index-All Urban Consumers described
above, Landlord and Tenant shall agree upon a similar available price index to
be used in lieu of such the Consumer Price Index-All Urban Consumers for
determining adjusted rent hereunder. If Landlord and Tenant are unable to agree
as to a replacement index, the question of designation of a replacement index
shall be presented for arbitration to a single neutral arbitrator to be
appointed at the request of either Landlord or Tenant by the then-presiding
judge of the Superior Court of the City and County of San Francisco, in
accordance the laws of the State of California then in effect relating to
arbitration, including, without limitation, sections 1280 to 1294.2 of the
California Code of Civil Procedure and any amendments thereto. Each of the
parties hereto shall pay for the services of its attorneys and witnesses plus
one half of any fee charged by the arbitrator appointed and one half of all
other proper costs relatiug to arbitration. * See attached Addendim I, item #1.
5. RENTAL ADJUSTMENT
(a) increases in operating Expemses: Tenant shall pay to Landlord as
additional rent during the term of this Lease Thirteen point Five Five percent
(13.55%) of the amount by which the annual Operating Expenses of the office
Building exceed the operating Expenses incurred by Landlord during the calendar
year 1999 (the "Base Year"). As used herein, the term "Operating Expenses" shall
include all direct costs of operation, maintenance, and management of the
Building that are properly allocable to the office Building and which are
determined by generally accepted accounting practices. By way of.illustration,
but not limitation, Operating Expenses shall include the cost or charges for the
following items: heat, light, water, power and steam, environmental surcharges
imposed by any governmental entity, waste disposal, janitorial services, window
cleaning, air conditioning, materials and supplies, equipment and tools, service
agreements on equipment, insurance, licenses, permits and inspections, wages and
salaries,
4
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employee benefits and payroll taxes, accounting and legal expenses, management
fees, landscaping and exterior maintenance, depreciation on personal property
including, without limitation, window draperies provided by Landlord and
carpeting in public corridors and common areas, the cost of contesting the
validity or applicability of any governmental enactments which may affect
operating expenses, and the reasonably amortized costs of capital improvements
required as a result of government orders rules and regulations. For the
purposes of this Lease, Operating Expenses shall not include taxes covered under
sub-paragraph (b) below, interest expense, leasing comissions, depreciation on
the Building itself, or the cost of capital expenditures, provided, however,
that in the event Landlord makes capital improvements which have the effect of
reducing operating expenses, Landlord may amortize its investment in said
improvements as an operating expense in accordance with standard accounting
practices provided that such amortization is not at a rate greater than the
anticipated savings in the operating expenses. In the event that less than
ninety-five percent (95%) of the office Building is occupied during any calendar
year, all Operating expenses on the statements provided by Landlord shall be
adjusted for each calendar year to equal Landlord's reasonable estimate of
operating Expenses had ninety-five percent (95%) of the total rentable area of
the office Building been occupied. Statements of operating Expenses provided by
Landlord shall- be final and binding upon both Landlord and Tenant. Landlord and
Tenant acknowledge that certain of the costs and charges of operation,
maintenance, and management of the Building and certain of the costs and charges
are to be allocated among the Office Building, the retail building and the
parking garage or parking areas. The determination of such costs and charges and
their allocation shall be in accordance with generally accepted accounting
principles, consistently applied. *See attached Addendum item #13.
(b) Increases in Taxes: Tenant shall pay to Landlord as additional rent
during each tax year (July I through June 30) or part thereof during the term of
this Lease subsequent to the tax year 1999 (the "Base Tax Year"), Thirteen Point
Five Five percent (13.55%) of the total dollar increase, if any, in real and
personal property taxes (and any tax levied wholly or partly in lieu thereof)
levied by any governmental authority (local, state. or Federal) against the
Building and any personal property used in its operation for each such tax year
over such taxes for the base tax year. The term "Taxes" shall include all real
property taxes and assessments on the Building, the Parcel of land underlying
and surrounding the Building, and the various estates in the Building and the
land.
(c) Manner of Payment of Any increase in Operating Expenses and Taxes:
During December of each calendar year or as soon thereafter as practicable,
Landlord shall give Tenant written notice of Landlord's estimate of the
additional rent, if any, payable under this Paragraph 5 for the ensuing calendar
year. On or before the first day of each month during the ensuing calendar year,
Tenant shall pay to Landlord one-twelfth (1/12th) of such estimated additional
rent, provided that if such notice is not given in December, Tenant shall
continue to pay on the basis of the prior year's estimate until the month after
such notice is given. If at any time it appears to Landlord that the additional
rent payable under this Paragraph 5 for the current calendar year will vary from
its estimate by more than ten percent (10%), Landlord shall, by
5
<PAGE>
written notice to Tenant, revise its estimate for such year, and subsequent
payments by Tenant for such year shall be based upon such revised estimate.
(d) Annual Statement and Adjustments: On or before ninety (90) days
after the end of each calendar year, or as soon thereafter as practicable
Landlord shall deliver to Tenant a statement of additional rent payable under
this Paragraph 5 f or the preceding calendar year. If such statement shows an
amount that is less than the estimated payments made by Tenant for such calendar
year, it shall be accompanied by a refund of the excess by Landlord to Tenant,
or, at Landlord's election, by a notice that Landlord shall credit the excess to
the next succeeding monthly installment of rent. If such statement shows an
amount that is more than the estimated payments made by Tenant f or such
calendar year, Tenant shall pay the deficiency to Landlord within thirty (30)
days after delivery of such statement.
(e) If, for any reason other than the default of Tenant, this Lease
shall terminate on a day other than the last day of a calendar Year, the
additional rent payable by Tenant applicable to the calendar year in which such
termination shall occur shall be prorated according to the ratio that the number
of days from the commencement of such calendar year to and including such
termination date bears to three hundred sixty-five (365).
6. TAXES PAYABLE BY TENANT
(a) In addition to the rent and additional rent and other charges to be
paid by Tenant under this Lease, Tenant shall reimburse Landlord upon demand for
any and all taxes required to be paid by Landlord (excluding state, local or
federal personal and corporate income taxes measured by the income of Landlord
from all sources and estate and inheritance taxes), whether or not now customary
or within the contemplation of the parties hereto, when:
(i) said taxes are measured by or reasonably attributable to
the cost or value of Tenant's equipment, furniture, fixtures and other personal
property located in the Premises or by the cost or value of any leasehold
improvements made in or to the Premises by or for Tenant, regardless of whether
title to such improvements shall be vested in Tenant or Landlord;
(ii) said taxes are measured by or reasonably attributable to
the rent and additional rent payable hereunder, or either of them, including
without limitation, any gross income tax or excise tax levied by any
governmental entity (local, state or federal) with respect to the receipt of
such rent;
(iii) said taxes are assessed upon or with respect to the
possession, leasing, operation, management, maintenance, alteration, repair, use
or occupancy by Tenant of the Premises or any portion thereof; and
(iv) said taxes are assessed upon this transaction or any
document to which Tenant is a party creating or transferring an interest or an
estate in the Premises.
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(b) In the event that it shall not be lawful for tenant so to reimburse
landlord, the monthly rent payable to Landlord under this Lease shall be revised
to net Landlord the same net rent after imposition of any such tax upon Landlord
as would have been payable to Landlord prior to the imposition of any such tax.
All taxes payable by Tenant under this Paragraph 6 shall be deemed to be, and
shall be paid as, additional rent.
7. POSSESSION
If Landlord is unable to give possession of the Premises to TTenant on
or before the Commencement Date, Landlord shall not be subject to any liability
for the failure to deliver possession on said date, and such failure shall not
affect the validity of this lease nor the obligations of Tenant hereunder, but
the term hereof shall commence on the earlier of (a) ten (10) days following the
day that Landlord gives Tenant written notice that the installations to be made
by Landlord in accordance with the Agreement for Completion of Premises attached
hereto as Exhibit "B" have been substantially completed; or (b) the day that
Tenant first occupies the Premises, whichever first occurs, and the express
expiration date set forth above shall be extended by that amount of time between
the Commencement Date and the date the term hereof actually commences. If
permission is given to Tenant to occupy the Premises prior to the Commencement
Date, such occupancy shall be subject to all of the Provisions of this lease
including the payment of rent and, if the term hereof commences on a date later
than the Commencement Date pursuant to the provisions set forth above, the
parties hereto agree to execute and acknowledge a written statement setting
forth the date of commencement and the date of expiration of this lease, but
this lease shall not be affected in any manner should either party fail or
refuse to execute such statement. (See Section 36. General Provisions pg. 25
under (s) for definition of "substantial completion.")
8. USE OF PREMISES
(a) The premises shall be used and occupied for rall Call Center and
General- Office and for no other purposes without the prior written consent of
Landlord. Any unauthorized use shall be a breach of this Lease. Tenant, its
employees, agents, customers and invitees are hereby granted the nonexclusive
use of the common corridors and hallvays, stairwells, elevators, rest rooms and
other generally understood Public or common areas of the Building; provided,
however, that Landlord reserves the right to regulate or restrict the use of any
such public or common areas, whether or not specifically set f orth above.
Tenant shall not use the Premises or allow the Premises to be used so as to
create waste or constitute a nuisance, or disturb other tenants located in the
building.
(b) Landlord reserves the right from time to time without unreasonable
interference with Tenant's use of the Premises to alter or relocate any common
facilities, to expand the Building, and to install, use, maintain, repair, and
replace pipes, ducts, conduits, wires, and appurtenant meters and equipment for
service to other parts of the Building above the ceiling surfaces, below the
floor surf aces, within the wall, and in the central core areas, and to relocate
any pipes, ducts,
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conduits, wires, and appurtenant meters and equipment included in the Premises
which are located in the Premises or located elsewhere outside the Premises.
(c) Tenant shall not do or permit anything to be done in or about the
Premises that will in any way obstruct or interfere vith the rights of other
tenants or occupants of the Building or injure or annoy them, or use or allow
the Premises to be used for any unlawful or objectionable purpose. Tenant shall
not cause, maintain or permit anything.to be done in or about the Premises nor
bring or keep anything therein that will in any way increase the existing rate
or affect any fire or other insurance upon the Building or any of its contents,
or cause a cancellation of any insurance policy covering said Building or any
part thereof or any of its contents, nor shall Tenant sell or permit to be
kept,. used, or sold in or about said Premises any articles that may be
prohibited by a standard form policy of fire insurance. Tenant shall not use or
keep in the Premises or the Building any kerosene, gasoline, or any inflammable
combustible or explosive fluid, chemical, or substance, or use any method of
heating or air conditioning other than that supplied by Landlord. Tenant shall
bear any increased insurance costs resulting from a breach of this covenant and
shall upon written demand from Landlord cease any activity prohibited hereunder.
(d) Tenant shall not place anything or allow anything to be placed near
the glass of any window, door, partition, or wall that may appear unsightly from
outside the Premises. No awnings or other projection shall be attached to the
outside walls of the Building without the prior written consent of the Landlord.
No curtains, blinds, shades, or screens shall be attached to or hung in, or used
in connection with any window or door of the Premises without the prior written
consent of Landlord.
(e) Tenant shall not use, keep, or permit to be used or kept any food
or noxious gas substance in the premises, or permit or suffer the Premises to be
occupied or used in a manner offensive or objectionable to other occupants of
the Building by reason of noise, odors, and vibrations, or interfere in any way
with other tenants or those having business therein, nor shall animals or birds
be brought in or kept in or about the Premises or the Building. Tenant shall not
make or permit to be made any unseemly or disturbing noises or disturb or
interfere with occupants of the neighboring buildings or premises of those
having business with them whether by the use of any music instrument, radio,
phonograph, unusual noise, or in any other way. Tenant shall not throw anything
out of doors or down the passageways.
(f) Tenant shall not disturb, solicit, or canvass any occupant of the
Building and shall cooperate to prevent such activity by others.
(g) No vending machine or machines of any description shall be
installed, maintained, or operated upon the Premises without the written consent
of Landlord.
(h) Tenant shall see that the windows and doors of the Premises are
closed and securely locked before leaving the Building. Tenant must observe
strict care and caution that all water faucets or other apparatus are entirely
shut off before Tenant or Tenant's employees leave the
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Building, and that all electricity, gas, or air shall likewise be carefully shut
off so as to prevent waste or damage, and for any default or carelessness,
Tenant shall make good all injuries sustained by other Tenants or occupants of
the Building or Landlord.
9. SECURITY DEPOSIT
Tenant has, upon execution of this lease and concurrently therewith,
deposited with Landlord the sum of Seventeen Thousand Eight Hundred Ninety
Dollars ($17,890.00) as security for the full and faithful performance of every
provision of this Lease to be performed by Tenant. If Tenant defaults with
respect to any provision of this Lease, including but not limited to the
provisions relating to the payment of rent, Landlord may use, apply, or retain
all or any part of this security deposit for the payment of any rent or any
other sum in default, or for the payment of any other amount which Landlord may
spend or become obligated to spend by reason of tenants default. If any portion
of said deposit is so used or applied, Tenant shall, within five (5) days after
written demand thereof, deposit cash with Landlord in an amount sufficient to
restore the security deposit to its original amount, and Tanant's failure to do
so shall be a breach of this Lease. Landlord shall not be required to keep this
security deposit separate from its general funds and Tenant shall not be
entitled to interest on such deposit. If Tenant shall fully and faithfully
perform every provision of this Lease to be performed by it, the security
deposit or any balance thereof shall be returned to Tenant (or, at Landlord's
option, to the last transferee of Tenant's interest hereunder) within a
reasonable time after both the expiration of the lease term and the Tenant's
delivery of the Premises to Landlord, provided, however, that Landlord may
retain the security deposit, until such time as any amount due from Tenant in
accordance with Article 5 hereof has been determined and paid in full.
10. ASSIGNMENT, SUBLETTING, AND ENCUMBERING
(a) Tenant shall not, either voluntarily or by operation of law,
assign, transfer, mortgage, pledge, hypothecate, or encumber this Lease or any
interest herein and shall not sublease the said Premises or any part thereof, or
any right or privilege appurtenant thereto, or suffer any other persons (agents
and servants of Tenant excepted) to occupy or use said Premises or any portion
thereof without the written consent of Landlord first had and obtained, and any
such act done or suffered without first obtaining Landlord's written consent
shall be void, and shall, at the option of Landlord, terminate this Lease.
(b) Tenant shall, by written notice, advise Landlord of its intention
from and after a stated date (which shall not be less than ninety (90) days nor
more than one hundred eighty (180) days after the date- of Tenant's notice) to
sublet the Premises or any portion thereof for any part of the term hereof and
in such event Landlord shall have the right, to be exercised by giving written
notice to Tenant thirty (30) days after receipt of Tenant's notice, to terminate
this Lease as to the portion of the Premises described in Tenant's notice, and
such notice by Landlord shall, if given, terminate this Lease with respect to
the portion of the Premises therein described as of the date stated in Tenant's
notice. Said notice by Tenant shall state the name and address of the proposed
subtenant, and Tenant shall deliver to Landlord a true and complete copy of the
proposed sublease with said notice. If said notice shall specify less than all
of the Premises and Landlord shall give said termination notice with respect
thereto, this Lease shall terminate pursuant to the
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foregoing with respect to less than all the Premises, the rent, the Operating
Expenses and the direct taxes as defined and reserved hereinabove shall be
adjusted on a pro rata basis to the number of square feet retained by Tenant,
and this Lease as so amended shall continue thereafter in full force and effect.
If Landlord, upon. receiving said notice by tenant with respect to any of the
Premises, shall not exercise right to terminate, Landlord will not unreasonably
withhold its consent to Tenant's subletting the Premises specified in said
notice, and landlord shall be entitled to 5O% of any additional rent paid by
subtenant over and above the base rent.
(c) Regardless of Landlord's consent, no subletting or assignment shall
release Tenant from its obligation to perform the terms, covenants and
conditions of this Lease. Furthermore, as a condition to Landlord's prior
written consent, the subtenant or assignee shall agree in writing to comply with
and be bound by all the terms, covenants and conditions of this lease, and
Tenant shall deliver to Landlord, promptly after execution thereof, an executed
copy of each such sublease and assignment. The acceptance of rent by Landlord
from any party other than Tenant shall not be deemed to be a waiver of any
provision of this Lease. Furthermore, Landlord's consent to one assignment,
transfer, mortgage, pledge, hypothecation, encumbrance, subletting, occupation
or use shall not be deemed to be a consent to any subsequent occurrence thereof.
See Addendum I, #9
11. MAINTENANCE AND REPAIR
(a) Landlord shall repair and maintain the structural portions of the
Building in which the Premises are situated, including the exterior walls,
underflooring and roof, basic plumbing, heating, air conditioning and electrical
systems installed or furnished by Landlord, unless such maintenance and repair
become necessary in whole or in part due to the act, neglect, fault or omission
of any duty by the Tenant, its employees, agents, customers or invitees, or due
to damage caused by a breaking and entering, in which case Tenant shall pay to
Landlord the reasonable cost of such maintenance and repair. Landlord shall not
be liable for any failure to make any repair or to perform any maintenance
unless such failure shall persist for an unreasonable time after written notice
of the need for such repair or maintenance is given to Landlord by Tenant. There
shall be no abatement of rent and no liability of Landlord by reason of any
injury to Tenant's business or interference with Tenant's business arising from
the making of any repairs, alterations or improvements to any portion of such
Building or to fixtures, appurtenances and equipment therein. At time of
occupancy, lighting, electrical outlets and HVAC shall be in proper working
order.
(b) Tenant shall keep the Premises and every part thereof in good and
sanitary condition and repair, and Tenant's taking possession of the Premises
shall constitute Tenant's acknowledgment that the Premises are in good and
tenantable condition, and Tenant agrees to surrender the Premises upon the
expiration or termination of this Lease with said appurtenances in the same
condition as when received, reasonable wear and tear and damage by fire,
earthquake, Act of God or the elements excepted. Landlord has no obligation to
alter, add to, improve, repair, remodel or paint the Premises except as
specified herein. Tenant also acknowledges that Landlord has made no
representation or warranty regarding the condition of the Premises or the
Building except as set forth herein. Should any standard or regulation now or
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hereafter be imposed on Landlord or Tenant by any governmental body, state or
federal or local charged with the establishment, regulation and enforcement of
occupational, health or safety standards for employers, employees, landlords or
tenants, then Tenant agrees, at its sole cost and expense to comply promptly
with such standards or regulations.
12. SERVICE AND UTILITIES
(a) Provided Tenant is not in breach hereof, Landlord agrees to furnish
to the Premises during reasonable hours of generally recognized business days,
to be determined by Landlord at its sole discretion, and subject to the Rules
and Regulations of the Building (Exhibit C) of which the Premises are part,
electricity for normal lighting and fractional horsepower office machines, heat
and air conditioning required in Landlord's judgement for the comfortable use
and occupation of the Premises, and janitorial service. Landlord shall also
maintain and keep lighted the common stairs, common entries and toilet rooms in
the Building. Landlord shall not be liable for, and Tenant shall not be entitled
to, any reduction of rental by reason of Landlord's failure to furnish any of
the foregoing when such failure is caused by accident, breakage, repairs,
strikes, lockouts or other labor disturbances or disputes of any character, or
by any other cause, similar or dissimilar, beyond the reasonable control of
Landlord, or by rationing or restrictions on the use of said services and
utilities due to energy shortages or other causes, whether or not any of the
above result from acts or omissions of Landlord. Landlord shall be entitled to
cooperate voluntarily in a reasonable manner with the efforts of national, state
or local governmental bodies or utilities suppliers in reducing energy or other
resources consumption. Furthermore, Landlord shall not be liable under any
circumstances for a loss-or injury to property, however occurring, through or in
connection with or incidental to failure to furnish any.of the foregoing. *See
Addendum I #11.
(b) Tenant shall not, without Landlord's prior written consent, which
shall not be unreasonably withheld, use heat generating machines or equipment or
lighting other than Building Standard lights in the Premises which affect the
temperature otherwise maintained by the air conditioning system. If such consent
is given, Landlord shall have the right to install supplementary air
conditioning units in the Premises, and the cost thereof, including the cost of
installation, operating and maintenance thereof, shall be paid by Tenant to
Landlord upon billing by Landlord. Said cost shall include the cost of
electrical metering necessary to determine the additional operating cost
attributable to the supplementary equipment. Tenant shall not, without
Landlord's prior vritten consent, install lighting requiring power in excess of
that required for normal office use in the building or install equipment
requiring power in excess of that required by normal desk-top office equipment.
If such consent is given, Tenant shall pay Landlord upon billing for the cost of
such excess. All costs payable by Tenant under this Paragraph shall be deemed to
be, and shall be paid as, additional rent.
(c) Tenant shall not employ any person or persons other than the
janitorial service designated by Landlord from time to time for the purpose of
cleaning the Premises unless otherwise agreed to by Landlord. Except with the
written consent of Landlord, no person or persons other than those approved by
Landlord shall be permitted to enter the Building for the purpose of cleaning
the same. Tenant shall not cause any unnecessary labor by reason of its
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carelessness or indifference in the preservation of good order and cleanliness.
Landlord shall in no way be responsible to any Tenant for any loss of property
on the Premises, however occurring, or for any damage done to the effects of any
Tdnant by the janitor or any other employee or any other person. Janitor service
shall include ordinary dusting and cleaning by the janitor assigned to do such
work and shall not include cleaning of carpets or rugs, except normal vacuuming,
or moving of furniture and other special services. Janitor service will not be
furnished on nights when rooms are occupied after 7:30 p.m. or to rooms that are
locked. Window cleaning shall be done only by Landlord at Landlord's discretion
and only between 6:00 a.m. and 5:00 p.m.
(d) On Saturdays, Sundays, and legal holidays, and on other days
between the hours of 6:00 p.m. and 7:00 a.m. the following day, access to the
Building, to the halls, corridors, elevators, or stairways in the Building, or
to the Premises shall be restricted. Tenant may make arrangements with Landlord
to allow access, in which case tenant shall be responsible for seeing that the
access doors are properly locked after entry and exit during these hours.
Landlord shall in no case be liable for damages for any error with regard to the
admission to or exclusion from the Building of any person. In case of invasion,
mob, riot, public excitement, or other commotion, Landlord reserves the right to
prevent access to the Building during the continuance of the same by closing the
doors or otherwise, for safety of Tenants and protection of property in the
Building and the Building. Landlord reserves the right to close and keep locked
all entrance and exit doors of the Building on Saturdays and Sundays and legal
holidays, and on other days between the hours of 6:00 p.m. and 7:00 a.m., and
during such further hours as Landlord may deem advisable for the adequate
protection of said Building and the property therein.
(e) The requirements of Tenant will be attended to only upon
application to the office of the Building. Employees of Landlord shall not
perform any work or do anything outside of their regular duties unless under
special instructions from Landlord and no employee will admit any person (Tenant
or otherwise) to any office without specific instructions from Landlord.
(f) Tenant agrees that it shall comply with all fire and security
regulations that may be issued from time to time by Landlord, and Tenant also
shall provide Landlord with the name of a designated responsible employee to
represent Tenant in all matters pertaining to such fire or security re
regulations.
(g) Landlord shall furnish heating and air conditioning during normal
business hours (7:00 a.m. to 6:00 p.m.), excluding Saturdays, Sundays, and legal
holidays. In the event Tenant requires heating and air conditioning during hours
other than these, normal business hours, Landlord shall, upon seven (7) days
written notice, provide such service at Tenant's expense in an amount to be
agreed upon before said service is provided by Landlord.
(h) Tenant shall pay for prior to delinquency, all telephone and all
other materials, utilities, and services not expressly the obligation -of
Landlord that are furnished to or used on or about the Premises during the term
of this Lease.
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(i) Electric wires, telephones, telegraphs, or other electric apparatus
other than those installed by Landlord at the time Tenant occupies the Premises
shall not be installed in the Premises, except with the approval of Landlord,
and no such installation is to be made without first obtaining written
permission from Landlord to do such vork. Any installation of telephones,
telegraphs, electric wires, or other electric apparatus made without permission
shall be removed by Tenant at Tenant's own expense. No machines other than
standard office machines such as personal computers, word processors,
typewriters and calculators shall be used in the Premises vithout the approval
of Landlord. Tenant will not, vithout Landlord's prior written consent, install
or use any apparatus or device in the Premises that require in excess of 110
volts, or that in the total overload the Building's electrical system in
Landlord's reasonable opinion, or that will in any way increase the amount or
quality of electricity or water usually furnished or supplied for use of the
Premises as general office space, nor shall Tenant connect with electric
current, except through existing electrical outlets in the Premises, or water
pipes, any apparatus or device for the purposes of using electrical current or
water.
13. COMPLIANCE WITH LAW
Tenant shall not do anything-or suffer anything to be done in or about
the Premises which will in any way conflict with any law, statute, ordinance or
other governmental rule, regulation or requirement now in force or which may
hereafter be enacted or promulgated. At its sole cost and expense, Tenant shall
promptly comply with all said governmental measures and also with the
requirements of any board of fire underwriters or other similar body now or
hereafter constituted to deal with the condition, use or occupancy of the
Premises, excluding structural changes not related or affected by Tenant's
alterations, additions or improvements or Tenant's acts. The judgment of any
court of competent jurisdiction or the admission of Tenant in any judicial
action, regardless of whether Landlord is a party thereto, that Tenant has
violated any of the said governmental measures or requirements shall be
conclusive of that fact as between Landlord and Tenant.
14. ALTERATIONS
(a) Tenant shall make no alterations, decorations, additions or
improvements in or to the Premises without Landlord's prior written consent, and
then only by contractors or mechanics approved by Landlord. All such work shall
be done at such times and in such manner as Landlord may from time to time
designate. Tenant covenants and agrees that all work done by or pursuant to the
direction and instruction of Tenant shall be performed in full compliance with
all laws, rules, orders, ordinances, directions, regulations and requirements of
all governmental agencies, offices, departments, bureaus, and boards having
jurisdiction, and in full compliance with the rules, orders, directions,
regulations and requirements of the Pacific Fire Rating Bureau, and of any
similar body. Before commencing any work, Tenant shall give landlord at least
five (5) days written notice of the proposed commencement of such work and
shall, if required by Landlord, secure at Tenant's own cost and expense, a
completion and lien indemnity bond, satisfactory to Landlord, for said work.
Tenant further covenants and agrees that any mechanic's lien filed against the
Premises or against the Building for work claimed to have been done for, or
materials claimed to have been furnished to Tenant, will be discharged by
Tenant, by bond or otherwise, within ten (10) days after the filing thereof, at
the cost and expense of Tenant.
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Landlord shall have the right at all times to post notices of non-responsibility
on the Premises and record verified copies thereof in connection with all work
of any kind upon the Premises. All alterations, decorations, additions or
improvements upon the Premises, made by either party, including (without
limiting the generality of the foregoing) all wallcovering, draperies, floor
coverings, built-in cabinet work, paneling and the likes shall, unless Landlord
elects otherwise, become the property of Landlord, and shall remain upon, and be
surrendered with the Premises, as part thereof, upon expiration or sooner
termination of the term of this Lease, except that Landlord may, by written
notice to Tenant, given at least thirty (30) days prior to the end of the term,
require Tenant to remove all partitions, counters, railings, and the like
installed by or pursuant to the direction and instruction of Tenant, and Tenant
shall repair the Premises or, at Landlord's option, shall pay to the Landlord
all costs arising from such removal.
(b) All articles of personal property and all business and trade
fixtures, machinery and equipment, furniture and movable partitions owned by
Tenant or installed by Tenant at its expense in the Premises shall be and remain
the property of Tenant and may be removed by Tenant at any time during the lease
term when Tenant is not in default hereunder. If Tenant shall fail to remove all
of its effects from said Premises upon termination of the Lease for any cause
whatsoever, Landlord may, at its option, remove the same in any manner that
Landlord shall choose, and store said effects without liability to Tenant for
loss thereof, and Tenant agrees to pay Landlord upon demand any and all expenses
incurred in such removal, including court costs and attorneys' fees and storage
charges on such effects for any length of time that the same shall be in
Landlord's possession, or Landlord may, at its option, without notice, sell said
effects, or any of the same, at private sale and without legal process, for such
prices as Landlord may obtain and apply the proceeds of such sale upon any
amounts due under the Lease from Tenant to Landlord and upon the expense
incident to the removal and sale of said effects.
15. LIENS
Tenant shall keep the Premises, the building, and the property upon
which the Building is situated, free from any liens arising out of the work perf
ormed, materials furnished, or obligations incurred by Tenant.
16. FIRE AND CASUALTY INSURANCE
(a) At Landlord's option, Landlord may maintain during the term of this
lease a policy of insurance insuring the Building against loss by or damage due
to fire and other casualties covered by a standard extended coverage policy.
Such coverage may include the risks of lightning, vandalism and malicious
mischief, and it may include, at the option of Landlord, the risks of
earthquakes and additional hazards. Such policy may also include, at Landlord's
option, a rental loss endorsement and one or more loss payee endorsements in
favor of the holders of any mortgages or deeds of trust encumbering the
interests of Landlord under this Lease.
(b) Tenant shall not use the Premises nor permit the Premises to be
used or acts to be done therein which will (i) increase the premium of any
insurance described above or (ii) cause- a cancellation of any such insurance
policies. Tenant shall not keep in or about the Premises any article which may
be prohibited by any standard form policy of fire insurance. If Tenant's
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conduct or use of the Premises causes any increase in the premium for such
insurance policies, then Tenant shall pay as additional rent hereunder all of
such increase. Tenant shall, at Tenant's expense, comply with all insurance
company requirements pertaining to the use of the Premises so that the Premises
shall at all times be insurable for fire, extended coverage and the risks
specified above.
17. DAMAGE AND DESTRUCTION
If the Premises or the Building are damaged by fire or other casualty,
Landlord shall forthwith repair the same, subject to the provisions of the
paragraph 16, provided such repairs can, in Landlord's opinion, be made within
one hundred twenty (120) days of such damage, and in such event this Lease shall
remain in full force and effect. If such repairs cannot, in Landlord's opinion,
be made within one hundred twenty (120) days of such damage, Landlord at its
option shall give written notice to Tenant vithin sixty (60) days after the date
of such damage either (1) elect to repair or restore such damge, this Lease
continuing in full force and effect or (2) terminate this Lease as of a date
specified in such notice, which date shall not be less than thirty (30) nor more
than sixty (60) days after the date such notice is given. If such fire or other
casualty shall have damaged the Premises or common areas necessary to Tenant's
occupancy, and if such damage is not the result of the negligence or willful
misconduct of Tenant orTenant's employees, contractors, licensees, or invitees,
then during the period the Premises are rendered unusable by such damage Tenant
shall be entitled to a reduction in rent in the proportion that the area of the
Premises rendered unusable by such damage bears to the total area of the
Premises. Landlord shall not be required to repair any injury or damage or to
make any repairs or replacements of any improvements installed on the premises
by or for Tenant, other than Landlord's work under Exhibit B, and Tenant shall,
at Tenant's sole cost and expense, repair and restore its portion of such
improvements. Tenant shall not be entitled to any compensation or damages from
Landlord for damage to any of Tenant's fixtures or personal property, for loss
of use of the Premises or any part thereof, for any damage to Tenant's business,
or for any disturbance to Tenant caused by any casualty or the restoration of
the Premises following such casualty. Notwithstanding anything to the contrary
contained in this Lease, Landlord shall have no obligation whatsoever to repair,
reconstruct or restore the Premises when the damage resulting from any casualty
occurs during the last twelve (12) months of the term or any extension thereof.
A total destruction of the Building shall automatically terminate this Lease.
*SEE ADDENDUM I #15
18. PUBLIC LIABILITY INSURANCE
Tenant agrees to purchase at its own expense and to keep in force
during the term of this Lease a policy or policies ofcomprehensive liability
insurance,including public liability and property damage, in the amount of Five
Hundred Thousand Dollars ($500,000) for property damage and Five Hundred
Thousand Dollars ($500,000) per person and One Million Dollars ($1,000,000) per
occurrence for personal injuries or deaths of persons occurring in or about the
Premises. Said policy or policies shall: (a) name Landlord as an additional
insured and insure Landlord's contingent liability under this Lease; (b) be
issued by an insurance company which is acceptable to landlord and licensed to
do business in the State of California; and (c) provide that said insurance
shall not be cancelled unless ten (10) days' prior written notice shall have
been
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given to Landlord. Said policy or policies or certificates thereof shall be
delivered to landlord by Tenant upon commencement of the term of this Lease and
upon each renewal of said insurance.
19. SUBROGATION
Landlord and Tenant hereby waive any right that each may have against
the other on account of any loss or damage arising in any manner which is
covered by policies of insurance for fire and extended coverage, theft, public
liability, workmen's compensation or other insurance now or hereafter existing
during the term hereof. The parties each agree to have their respective
insurance companies waive any rights of subrogation that such companies may havo
against landlord or Tenant, as the case may be.
20. EMINENT DOMAIN
If the whole of Premises or more than fifty percent (50%) of the
rentable area thereof is taken under power of eminent domain or sold,
transferred or conveyed in lieu thereof, both Landlord and Tenant shall have the
right to terminate this Lease as of the date of such condemnation or as of the
date possession is taken by the condemning authority, whichever is later. If any
part of the Building other than the Premises is taken under power of eminent
domain or sold, transferred or conveyed in lieu thereof, Landlord may terminate
this Lease at its option as of the date of such condemnation or as of the date
possession is taken by the condemning authority, whichever is later. In either
of such events, Landlord shall receive, and Tenant hereby assigns to Landlord,
any award which may be made in such taking or condemnation, together with any
and all rights of Tenant now or hereafter arising in or to the same or any part
thereof whether or not attributable to the value of the unexpired portion of
this Lease; provided, however, that nothing contained herein shall be deemed to
give Landlord any interest in or require Tenant to assign to Landlord any award
made payable to Tenant for the taking of personal property and fixtures
belonging to Tenant and removable by Tenant at the expiration of the term hereof
or for the interruption of or damage to Tenant's business in the event of a
partial taking, or a sale, transfer, or conveyance in lieu thereof, if this
Lease is not terminated by Landlord and/or Tenant, then the rent shall be
apportioned according to the ratio that the remaining rentable area of the
Premises bears to the total rentable area of the Premises.
21. INDEMNFIICATION OF LANDLORD
(a) Tenant hereby waives all claims against Landlord for damage to any
property or injury, illness or death of any person in, upon, or about the
Premises and/or the Building arising at any time and from any cause whatsoever
other than solely by reason of gross negligence or willful act of Landlord, its
employees or contractors.
(b) Tenant shall hold Landlord harmless from and defend Landlord
against any and all claims or liability for any injury or damage to any person
or property whatsoever: (1) occurring in, on or about the Premises or any part
thereof, and (2) occurring in, on or about any facilities (including, without
prejudice to the generality of the term "facilities," elevators, stairways,
passageways, hallways and parking areas), the use of which Tenant may have in
common with other tenants of the Building, when such injury or damage shall be
caused in part or in whole by the act, neglect, fault of or omission of any duty
with respect to the same by Tenant, its agents,
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employees, customers or invitees. The provisions of this paragraph shall survive
the expiration or termination of the Lease with respect to any claims or
liability occurring prior to such expiration or termination. * SEE ADDENDUM I
#12
22. ENTRY BY LANDLORD
Landlord reserves the right at reasonable business hours and upon
reasonable notice to Tenant to enter the Premises to (1) inspect them, (2)
perform services required of Landlord, (3) take possession due to any breach of
this Lease as stated earlier, (4) submit the Premises to prospective purchasers,
mortgagees or tenants (5) post notices of non-responsibility, and (6) alter,
improve or repair the Premises as Landlord deems necessary or desirable.
Landlord may make such entries vithout the abatement of rent and may take such
reasonable steps as required to accomplish the stated purposes. Tenant hereby
waives any claims for damages or for any injuries or inconveniences of
interference with Tenant's business, any loss of occupancy or quiet enjoyment of
the Premises, and any other loss occasioned thereby. Landlord to provide 48 hour
notice for entry except in any emergency.
23. DEFAULT
The occurrence of any of the following shall constitute a material default and
breach of this Lease by Tenant:
(a) Any failure by Tenant to pay the rent or any other monetary sums
required to be paid hereunder (where such failure continues for three (3)
business days after receipt of written notice by Landlord to Tenant;
(b) The vacation of the Premises by Tenant;
(c) A failure by Tenant to observe and perform any other provision of
this lease to be observed or performed by Tenant, where such failure continues
for three (3) days after written notice thereof by Landlord to Tenant;
(d) The making by Tenant of any general assignment or general
arrangement for the benefit of creditors; the filing by or against Tenant of a
petition to have Tenant adjudged a bankrupt (unless, in the case of a petition
filed against Tenant, the same if dismissed within sixty (60) days); the
appointment of a trustee or receiver to take possession of substantially all of
Tenant's assets located at the Premises or of Temant's interest in this Lease,
where possession is not restored to Tenant within thirty (30) days; or the
attachment, execution or other judicial seizure of substantially all of Tenant's
assets located at the Premises or of Tenant's interest in this Lease, where such
seizure is not discharged within thirty (30) days.
24. REMEDIES
In the event of any such material default or breach by Tenant, Landlord
may at any time thereafter, without limiting Landlord in the exercise of any
right of remedy at law or in equity which Landlord may have by reason of such
default or breach:
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(a) Terminate the Lease and recover damages as provided by California
Civil Code Section 1951.2, including but not limited to recovery of the worth at
the time of award of the amount by which the unpaid rent for the balance of the
term after the time of award exceeds the amount of rental loss for the same
period that the Tenant proves could have been reasonably avoided, as computed
pursuant to subsection (b) of Section 1951.2;
(b) Continue the Lease in effect and to enforce all of its rights and
remedies under the Lease, as provided by California Civil Code Section 1951.4,
including the right to recover rent as it becomes due, for so long as Landlord
does not terminate Tenant's right to possession. Acts of maintenance or
preservation efforts to re-let the Premises, or the appointment of a receiver
upon Landlord's initiative to protect its interest under this Lease shall not
constitute a termination of Tenant's right to possession;
(c) Enter the Premises and remove therefrom all persons and property,
store such property in a public warehouse or elsewhere at the cost of and for
the account of Tenant, and sell such property and apply the proceeds therefrom
pursuant to applicable California law, all as attorney-in-fact for Tenant; and
(d) Have a receiver appointed for Tenant, upon application by Landlord,
to take possession of the Premises and to apply any rental collected from the
Premises and to exercise all other rights and remedies granted to Landlord as
attorney-in-fact for Tenant pursuant to subparagraph (c) above.
25. LATE CHARGES
Tenant hereby acknowledges that late payment by Tenant to Landlord of
rent and other sums due hereunder will cause Landlord to incur costs not
contemplated by this Lease, the exact amount of which will be extremely
difficult to ascertain. Such costs include, but are not limited to, processing
and accounting charges and late charges which may be imposed on Landlord by the
terms of any mortgage or deed of trust covering the Premises. Accordingly, if
any installment of rent or any other sun due from Tenant shall not be received
by Landlord or Landlord's designee withiu five (5)* days after such amount shall
be due, Tenant shall pay to Landlord a late charge equal to ten percent (10%) of
such overdue amount. The parties hereby agree that such late charge represents a
fair and reasonable estimate of the costs Landlord will incur by reason of late
payment by Tenant. Acceptance of such late charge by Landlord shall in no event
constitute a waiver of Tenant's default with respect to such overdue amount, nor
prevent Landlord from exercising any of the other rights and remedies granted
hereunder. *business
26. LANDLORD'S RIGHT TO CURE DEFAULT
All covenants and agreements to be kept or performed by Tenant under
the terms of this lease shall be performed by Tenant at Tenant's sole cost and
expense and without any reduction of rent. If Tenant shall be in default on its
obligations under this Lease to pay any sum of money other than rent or to
perform any other act hereunder, and if such default is not cured within the
applicable grace.period provided in Patagraph 23 hereof, Landlord may, but shall
not be obligated to, make any such payment or perform any such act on Tenant's
part without waiving
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its right based upon any default of Tenant and without releasing Tenant from any
obligations hereunder. All sums so paid by Landlord and all incidental costs,
together with interest thereon at the rate of ten percent (10%) per annum from
the date of such payment or the incurrence of such costs by Landlord, whichever
occurs first, shall be paid to Landlord on demand. In the event of non-payment
by Tenant, Landlord shall have, in addition to any other rights or remedies
hereunder, the same rights and remedies as in the case of default by Tenant for
nonpayment of rent.
27. DEFAULT BY LANDLORD
(a) Landlord shall not be in default unless landlord fails to perform
obligations required of Landlord vithin a reasonable time, but in no event later
than thirty (30) days after written notice by Tenant to Landlord and to the
holder of any first mortgage or deed of trust covering the Premises whose name
and. address shall have theretofore been furnished to Tenant in writing,
specifying wherein Landlord has failed to perform such obligations; provided,
however, that if the nature of Landlord's obligation is such that more than
thirty (30) days are required for performance, then landlord shall not be in
default if Landlord commences performance within such thirty (30) day period and
thereafter diligently prosecutes the same to completion. Tenant agrees, however,
that any damages arising out of a money judgment against Landlord shall be
satisfied only out of Landlord' s estate in the Building, and Landlord shall
have no personal liability whatsoever with respect to any such judgment. Tenant
hereby waives, to the extent waivable under law, any right to satisfy said money
judgment against Landlord except from Landlord's estate in the Building. If
Landlord is a partnership, it is understood and agreed that any claims by Tenant
on Landlord shall be limited to the assets of the partnership; furthermore,
Tenant expressly waives any and all rights to proceed against the individual
partners of any partnership which may own the Building or the officers,
directors or shareholders of any incorporated partner or of any corporation
which may own the Building.
28. LANDLORD'S OPTION TO RELOCATE TENANT
None
29. SALE OF PREMISES
Each conveyance of the Premises prior to expiration or termination
hereof by Landlord shall (i) be subject to this lease and (ii) relieve the
grantor of any further obligations or liability as Landlord. Tenant hereby
agrees to attorn to Landlord's successor in interest.
30. ESTOPPEL CERTIFICATES
Within ten (10) days following any written request which Landlord may
make from time to time, Tenant shall execute and deliver to Landlord a statement
certifying: (a) the date of commencement of this Lease; (b) the fact that this
Lease is unmodified and in full force and effect (or, if there have been
modifications hereto, that this Lease is in full force and effect, as modified,
and stating the date and nature of such modifications); (c) the date to which
the rent and other sums payable under this Lease have been paid; (d) the fact
that there are no current defaults under this lease by either Landlord or Tenant
except as specified in Tenant's statement; and (e) such other matters requested
by Landlord. Landlord and Tenant intend that any statement
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delivered pursuant to this paragraph may be relied upon by any mortgagee,
beneficiary purchaser or prospective purchaser of the Building or any interest
therein.
31. NONMERGER
The termination or mutual cancellation of this Lease shall not work a
merger, and shall, at the option of the Landlord, terminate all subleases and
subtenancies (to the extent same are permitted hereunder) or may, at the option
of Landlord, operate as an assigmment to it of any or all such subleases or
subtanancies.
32. DISCLOSURE
Detectable amounts of chemicals known to the State of California to
cause cancer, birth defects, or other reproductive harm may be found in and
around the building, the premises, and the common areas. A report is on file
with the landlord prepared by the engineering firm of Dames & Moore which states
that the building has been abated of all friable asbestos pursuant to federal
and state regulations as of April 17, 1990. Tenant acknowledges that a copy of
said report has been provided to Tenant.
33. DEMOLITION OF PREMISES
If at any time du:ring the term of this Lease Landlord desires to
demolish the building(s) on the demised premises which existed at the
commencement of the term of this Lease in order to construct a new building or
buildings, or if at any time during the term of this Lease, the buildings on the
demised premises are totally or partially destroyed by fire or other casualty
and Landlord chooses not to reconstruct the existing building, notwithstanding
anything to the contrary contained herein, upon written notice from Landlord,
Tenant shall surrender the premises and Landlord and Tenant hereby mutually
agree that in such circumstances the Lease shall be terminated and be of no
further force or effect. In the event that Landlord desires to demolish the
building(s), Landlord shall give Tenant twelve (12) months written notice of his
intention to demolish and terminate the Lease. In the event that Landlord
constructs a building for similar uses on the subject property, Landlord shall
offer Tenant comparable space in the building(s) upon their completion. Tenant
shall have 30 days to accept or reject said offer. In the event Tenant rejects
said offer, Landlord shall reimburse Tenant for its moving expenses which shall
be limited to reasonable moving costs, reprinting costs for letterhead and
business cards, and telephone installation charges.
34. SUBORDINATION
Without the necessity of any additional document being executed by
Tenant for the purpose of affecting a subordination, this Lease shall be subject
and subordinate at all times to: (a) all ground leases or underlying leases
which may now exist or hereafter be executed affecting the Building or the land
upon which the Building is situated, or both, and (b) the lien of any mortgage
or deed of trust which may now exist or hereafter be executed in any amount for
which said Building, land, ground leases or underlying leases or Landlord's
interest or estate in any of said items is specified as security.
Notwithstanding the foregoing, Landlord shall have the right to subordinate or
cause to be subordinated any such ground leases or underlying leases or any such
liens to this Lease. In the event that any ground lease or underlying lease
terminates for any
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reason or any mortgage or deed of trust is foreclosed or a conveyance in lieu of
foreclosure is made for any reason, Tenant shall, notwithstanding any
subordination, attorn to and become the Tenant of the successor in interest to
Landlord, at the option of such successor in interest. Tenant covenants and
agrees to execute and deliver, upon demand by Landlord and in the form requested
by Landlord, any additional documents evidencing the priority or subordination
of this Lease with respect to any such ground leases or underlying leases or the
lien of any such mortgage or deed of trust.
35. NOTICES
Notices, requests, demands and documents required or desired to be
given hereunder shall be in writing and delivered either personally or by
deposit into the United States Mail, first class postage prepaid, addressed as
follows or as Landlord or Tenant may from time to time otherwise designate in
writing.
LANDLORD: BROADLAKE PARTNERS
2960 Camino Diablo, Suite 300
Walnut Creek, CA 94596
Attn: Dale A. Frost
Tenant: VALUESTAR, INC.
360 22nd Street, Second Floor
0akland, CA 94612
Attn: Jim Stein
36. General Provisions
(a) Holding Over: Any holding over after the expiration of the term of
this Lease or any extension thereof with the written consent of Landlord shall
be construed to be a tenancy from month-to-month at the rent, additional rent
and other terms and conditions herein set forth. If Tenant shall retain
possession of the Premises or any part thereof without Landlord's consent
following the expiration or sooner termination of this Lease for any reason,
then Tenant shall pay to Landlord for each day of such retention * the amount of
the daily rent and additional rent for the last period prior to the date of such
expiration or termination. Tenant shall also indemnify and hold Landlord
harmless from any loss or liability resulting from delay by tenant in
surrendering the Premises, including, without limitation, any claims made by any
succeeding tenant founded on such delay. *150%
(b) Waiver: The waiver by Landlord of the breach of any term, covenant
or condition herein contained shall not be deemed to be a waiver of a subsequent
breach of such term, covenant or condition. The subsequent acceptance of rent
hereunder by Landlord shall not be deemed to be a waiver of any preceding breach
by Tenant of any term, covenant or condition of this Lease, other than the
failure of Tenant to pay the particular rent so accepted, regardless of
Landlord's knowledge of such preceding breach at the time of acceptance of such
rent.
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(c) Rules and Regulations: Tenant shall faithfully observe and comply
with the rules and Regulations attached as Exhibit C to this lease, as modified
by Landlord from time to time in writing. Landlord shall not be responsible to
Tenant for the non-performance of any of said rules and regulations by any other
tenants or occupants of the Building.
(d) Successors and Assigns: This Lease and all of the covenants and
conditions herein contained shall be binding upon and shall inure to the benefit
of the heirs, executors, administrators, assigns and other successors in
interest (to the extent permitted under this Lease) of each of the parties.
(e) Captions: The titles or captions in this Lease are for reference
purposes only and have no effect upon the construction or interpretation of any
part hereof. The use herein of the singular includes the plural and vice versa,
and the use herein of the neuter gender includes the masculine and the feminine
and vice versa, whenever and wherever the context so requires.
(f) Joint obligations: If there is more than one Tenant, the
obligations imposed upon Tenant under this Lease shall be joint and several.
(g) Authority: If Tenant is a corporation, each individual executing
this Lease on behalf of said corporation represents and warrants that he is duly
authorized to execute and deliver this Lease on behalf of said corporation, in
accordance with a duly adopted resolution of the board of directors of said
corporation or in accordance with the bylaws of said corporation, and that this
Lease is binding upon said corporation in accordance with its terms.
(h) Time: Time is of the essence in the performance of all obligations
under this Lease.
(i) Entire Agreement: This Lease sets forth the entire understanding
between Landlord and Tenant with respect to all matters referred to herein, and
the provisions hereof may not be changed or modified except by an instrument in
writing signed by both Landlord and Tenant. Tenant acknowledges that in
executing and delivering this Lease it is not relying on. any verbal or written
understanding, promise or representation outside the scope of this Lease and not
described or referred to herein.
(j) Attorneys' Fees: If either party commences litigation against the
other for the specific performance of this Lease, for damages for the breach
hereof or otherwise for enforcement of any remedy hereunder, the prevailing
party shall be entitled to recover from the other party such costs and
reasonable attorneys' fees as may have been incurred.
(k) Choice of Law: This Lease is made and delivered within the state of
California and shall be construed and enforced in accordance with the laws of
the state of California.
(l) Effectiveness: Delivery of this Lease duly executed by Tenant,
constitutes an offer to lease the Premises as herein set forth, and under no
circumstances shall such delivery be deemed to create an option or reservation
to lease the premises for the benefit of Tenant. This Lease shall
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become effective and binding only upon execution hereof by Landlord and delivery
of a signed copy to Tenant.
(m) Severability: If any provision of this Lease or the application
thereof to any person or circumstance shall be invalid or unenforceable to any
extent, the remainder of this Lease and the application of such provision to
other persons or circumstances shall not be affected thereby and shall be
enforced to the greatest extent permitted by law.
(n) Brokers: Tenant warrants that it has had no dealings with any real
estate broker or agent in connection with the negotiation of this Lease
excepting only Grubb & Ellis / Peggy Roth and that it knows of no other real
estate broker or agent who is entitled to a commission in connection with this
Lease. Tenant agrees to indemnify Landlord and hold Landlord harmless from and
against any and all claims, demands, losses, liabilities, lawsuits, judgments,
and costs and expenses (including without limitation reasonable attorneys' fees)
with respect to any leasing commission or equivalent compensation alleged to be
owing on account of Tenant's dealings with any real estate broker or agent other
than that specified herein.
(o) Exhibits: Exhibit A (Plan Outlining the Premises), Exhibit B
(WorkAgreement), Exhibit C (Rules and Regulations), and Addendum I are attached
to this Lease and by this reference made a part hereof.
(p) Additional Provisions: The attached pages, if any, containing
Paragraphs __----__ through __----__ are incorporated herein and made a part
hereof. See Addendum I attached hereto and made a part hereof
(q) Force Majeure: Any prevention, delay, or stoppage due to strikes,
lockouts, labor disputes, acts of God, inability to obtain labor or materials or
reasonable substitutes therefor, governmental restrictions, governmental
regulations, governmental controls, enemy or hostile governmental action, civil
commotion, fire or other casualty, and other causes beyond the reasonable
control of the party obligated to Perform, shall excuse the performance by such
party for a period equal to any such prevention, delay, or stoppage, except the
obligations imposed with regard to Rent and other charges to by paid by Tenant
pursuant to this Lease.
(r) All first floor tenants shall be responsible for replacing broken
windows that are part of their premises resulting from vandalism, fire,
accident, robbery or any other cause. Tenant shall be responsible for taking
whatever precautions are necessary to protect their premises. Any actions taken
by tenant which would have visibility from the street or require alterations to
the premises shall require advance written approval from Landlord.
(s) For purposes of this Lease the definition of Substantial Completion
is as follows: Substantial completion of Landlord's work shall be deemed to have
occurred when the remaining work to be done in the Premises will not materially
interfere with Tenant's use of the Premises or access thereto for the normal
conduct of Tenant's business, and the Premises shall be deemed
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substantially completed not-withstanding the fact that minor details of
construction, mechanical adjustment, or decoration remain to be performed.
IN WITNESS WHEREOF, this Lease has been executed as of the date set forth at the
beginning hereof.
BroadLake Partners, a CA Limited Partnership TENANT: VALUESTAR, INC.
By: Cragganmore Partners,a CA Limited Partnership
Its General Partner -
By: Macallan Invesments, Inc., BY: /s/ James Stein
By: /s/ Dale A. Frost, President ---------------
---------------------------- Name: James Stein
Name: Dale A. Frost Its Managing Director
& President
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EXHIBIT B
WORK AGREEMENT
The Landlord shall provide the following Tenant Improvements at no cost to the
Tenant:
1. Upon request by Tenant, "window line" offices shall have door closers
removed or adjusted to be non-operational that are located in the
southeast suite.
2. The Landlord shall install a double door entry - the location will be
as shown on the attached Exhibit, unless Tenant notifies Landlord of a
different location within one (1) week of Lease execution.
3. The Landlord shall provide one (1) standard lobby directory sign, one
(1) elevator lobby sign and one (1) office suite sign. Signage shall be
of Building standard.
4. Landlord to install a hallway door in the Call Center area at the end
of the west hallway (22nd street exit). The hardware shall be Building
standard.
5. Call Center wall is to be fully extended from the existing sheer wall
shown on the attached plan.
6. In the southeast area, demise the existing hallway along the southeast
wall. Remove the wall and the office adjacent to the sheer wall.
Eliminate three (3) offices and the storage room. Leave two (2) offices
with bullpen access. Permanently lock off three (3) doors providing the
hallway access to the easterly office and demolished offices. All as
shown on the attached plan.
7. Install one (1) exit door at the northeast end of the hallway in the
southeast suite as shown on the attached plan.
8. Build a demising wall at the northeast end of the mailroom, as shown on
the attached plan.
9. Landlord shall paint entire office area using Building standard type
and color or Tenant can choose from Landlord approved samples.
10. Landlord to install new carpet throughout entire office area. Tenant
shall choose from Landlord approved carpet samples.
11. Landlord shall install three (3) new interior office doors opening into
the conference room, storage room and office area from the Call Center,
as shown on the attached plan.
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12. Landlord to demo the existing southwest wall and door in the Call
Center.
13. Landlord to replace any missing or damaged ceiling tiles.
14. Any other Tenant improvements requested by the Tenant prior to
occupancy not listed herein will be provided by Landlord on an actual
cost basis in a lump sum payable by Tenant prior to the time of the
construction.
15. The existing accordion type door located in the Call Center shall be
removed, ceiling to be finished as deemed appropriate by Landlord. No
ceiling grid shall be replaced.
16. Landlord shall install mini blinds where missing. The color shall match
as close as possible to the existing mini blinds.
17. The sink in the northwest suite shall remain.
18. The above excludes phones, computers and special electrical
requirements. Installation of phones, conduit, phone lines, computers
and computer lines are the responsibility of the Tenant. Tenant shall
have the right to access the premises during normal Building hours or
as otherwise approved, in writing, by the Landlord, prior to the Lease
commencement date for the purposes of planning and installing Tenant's
phones and computer lines.
Tenant agrees not to impede Landlords ability to complete the Tenant
improvements by way of interference with Landlords requirements for the
premises.
19. Landlord and Tenant shall do a walk-thru and punch list within thirty
(30) days or less after occupancy or after June 30, 1999.
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EXHIBIT C
RULES AND REGULATIONS
1. No sign, placard, picture, advertisement, name or notice shall be inscribed,
displayed or printed or affixed on or to any part of the outside or inside of
the Building without the written consent of Landlord first hand and obtained and
Landlord shall have the right to remove any such sign, placard, picture
advertisement, name or notice to and at the expense of Tenant.
All approved signs or lettering on doors shall be printed, painted, affixed or
inscribed at the expense of Tenant by a person approved of by Landlord.
Tenant shall not place anything or allow anything to be placed near the glass of
any window, door, partition or wall which may appear unsightly from outside the
Premises; provided, however, that Landlord may furnish and install a Building
standard window covering at all exterior windows. Tenant shall not without prior
written consent of Landlord cover or otherwise sunscreen any window.
2. The sidewalks, halls, passages, exits, entrances, elevators and stairways
shall not be obstructed by any of the Tenants or used by them for any purpose
other than for ingress and egress from their respective Premises.
3. Tenant shall not alter any lock or install any new or additional locks or any
bolts on any doors or windows of the Premises without the written consent of
Landlord.
4. The toilet rooms, urinals, wash bowls and other apparatus shall not be used
for any purpose other than that for which they were constructed and no foreign
substance of any kind whatsoever shall be thrown therein and the expense of any
breakage, stoppage or damage resulting from the violation of this rule shall be
borne by the Tenant who, or whose employees or invitees shall have caused it.
5. Tenant shall not overload the floor of the Premises or in any way deface the
Premises or any part thereof.
6. No furniture, freight or equipment of any kind shall be brought into the
Buildings without prior notice to Landlord and all moving of the same into or
out of the Buildings shall be done at such times and in such manner as Landlord
shall designate. Landlord shall have the right to prescribe the weight, size and
position of all safes and other heavy equipment brought into the Buildings and
also the times and manner of moving the same in and out of the Buildings. Safes
or other heavy objects shall, if considered necessary by Landlord, stand on
supports of such thickness as is necessary to properly distribute the weight.
Landlord will not be responsible for loss of or damage to any such safe or
property from any cause and all damage done to the Buildings by moving or
maintaining any such safe or other property shall be repaired by the
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expense of tenant. There shall not be used in any space, or in the public halls
of the buildings, either by any tenant or others, any hand trucks except those
equipped with rubber tires and sideguards.
7. Tenant shall not use, keep or permit to be used or kept any foul or noxious
gas or substance in the Premises, or permit or suffer the Premises to be
occupied or used in a manner offensive or objectionable to the landlord or other
occupants of the Building by reason of noise, odors and/or vibrations, or
interfere in any way with other tenants or those having business therein, nor
shall any animals.or birds be brought in or kept in or about the Premises of the
Building.
8. No cooking shall be done or permitted by any Tenant on the Premise, nor shall
the Premises be used for the storage of merchandise, or for lodging, except with
the prior written consent of the Landlord.
9. The Tenant shall not do or permit anything to be done in the demised
premises, or bring or keep anything therein, which shall in any way increase the
rate of fire insurance on the building, or on the property kept therein, or
obstruct or interfere with the rights of other Tenants, or in any way injure or
annoy them; or conflict with the regulations of the fire department or fire
laws, or with any insurance policy upon the building, or any part thereof, or
with any rules and ordinances established by the Board of Health or other
governmental authority.
10. Landlord will direct electricians as to where and how telephone and
telegraph wires are to be introduced. No boring or cutting for wires will be
allowed without the consent of the Landlord. The location of telephones, call
boxes and other office equipment affixed to the Premises shall be subject to the
approval of Landlord.
11. On Saturdays, Sundays and legal holidays, and on other days between the
hours of 6:00 p.m. and 7:00 a.m. the following day, access to the Building, or
to the halls, corridors, elevators or stairways in the Buildings, or to the
Premises shall be restricted. Access shall be limited to tenant's employees. The
Landlord shall in no case be liable for damages for any error with regard to the
admission to or exclusion from the Buildings of any person. In case of invasion,
mob, riot, public excitement or other commotion, the Landlord reserves the right
to prevent access to the Buildings during the continuance of the same by closing
of the doors or otherwise, for the safety of the tenants and protection of the
Buildings and of property in the Buildings.
12. Landlord reserves the right to exclude or expel from the Buildings any
person who, in the judgment of Landlord, is intoxicated or under the influence
of liquor or drugs, or who shall in any manner do any act in violation of any of
the rules and regulations of the Building.
13. No vending machine or machines of any description shall be installed,
maintained, or operated upon the Premises without the written consent of the
Landlord.
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<PAGE>
14. Landlord shall have the right, exercisable without notice and without
liability to Tenant, to change the name and street address of the Building of
which the Premises are a part.
15. Tenant shall not disturb, solicit, or canvass any occupant of the Building
and shall cooperate to prevent same.
16. Without the written consent of Landlord, Tenant shall not use the name of
the Building in connection with or in promoting or advertising the business of
Tenant except as Tenant's address.
17. Landlord shall have the right to control and operate the public portions of
the Building, and the public facilities, and heating and air conditioning, as
well as facilities furnished for the common use of the tenants in such manner as
it deems best for the benefit of the tenants generally.
18. Tenant shall see that the windows, transoms, and doors of the premises are
closed and securely locked before leaving the building and must observe strict
care not to leave windows open when it rains and Tenant shall exercise
extraordinary care and caution that all water faucets or water apparatus are
entirely shut off before Tenant or Tenant's employees leave the building, and
that all electricity, gas or air shall likewise be carefully shut off, so as to
prevent waste or damage, and for any default or carelessness Tenant shall make
all injuries sustained by other tenants or occupants of the building or
Landlord.
19. Tenant agrees that it shall comply with all fire and security regulations
that may be issued from time to time by Landlord and Tenant also shall provide
Landlord with the name of a designated responsible employee to represent Tenant
in all matters pertaining to such fire or security regulations.
20. Landlord reserves the right by written notice to Tenant, to rescind, alter
or waive any rule or regulation* at any time prescribed for the Buildings when,
in Landlord's judgment, it is necessary, desirable or proper for the best
interest of the Buildings and its tenants. *in Exhibit C
21. Tenant shall not bring into or keep within the buildings or premises any
motorized vehicles or bicycles except in areas designated for same.
22. * SEE ADDENDUM I #13
23. Tenant assumes any and all responsibility for protecting its Premises from
theft, robbery and pilferage, which includes keeping doors locked and other
means of entry to the premises closed.
24. Tenant shall be responsible for the observance of all of the foregoing Rules
and Regulations by Tenants employees, agents, clients, customers, invitees and
guests.
29
<PAGE>
25. Tenant shall not employ any person or persons other than the janitor of
Landlord for the purpose of cleaning the Premises unless otherwise agreed to by
Landlord. Except with the written consent of Landlord, no person or, persons
other than those approved by Landlord shall be permitted to enter the Building
for the purpose of cleaning the same. Tenant shall not cause any unnecessary
labor by reason of Tenant's carelessness or indifference in the preservation of
good order and cleanliness. Landlord shall in no way be responsible to any
Tenant for any loss of property on the Premises, however occurring, or for any
damage done to the effects of any Tenant by the janitor or any other employee or
any other person. Janitor service shall include ordinary dusting and cleaning by
the janitor assigned to such work and shall not include cleaning of carpets or
rugs, except normal vacuuming, or moving of furniture and other special
services.
30
<PAGE>
ADDENDUM I
This Addendum I is attached hereto and made a part of that certain Lease dated
April 20, 1999 by and between BroadLake Partners, A California Limited
Partnership as Landlord and VALUF-STAR, INC. as Tenant.
1. The Minimum Monthly Rent shall be subject to an increase on the third
(3rd) anniversary date of said Lease, at an amount to be determined in
paragraph 4(b) above; except that the rent increase shall not be less
than two (2%) percent nor more than ten (1O%) percent.
2. Occupancy of the Call Center block of space, shall be made available
within thirty (30) days of the date this Lease is executed by both
parties. The monthly rent shall begin on this suite thirty (30) days
after the execution of this Lease by both parties, so long as Landlord
has delivered the space ready to occupy as agreed to herein. The rent
for said space shall be One Dollar and Twenty Cents ($1.20) per
rentable square foot, which shall include a fifteen percent (15%) load
factor.
3. The cumulative adjustment for any operating expenses and tax increases
shall not exceed six percent (6%) over the initial five (5) year Lease
term.
4. So long as Tenant has not been in default under any of the terms and
conditions of said Lease, including but not limited to the payment of
rent, Tenant shall have the option to extend this Lease for two (2)
successive additional periods of five (5) years each (the "Extended
Term(s)"). The Minimum Monthly Rent during each Extended Term of the
Lease shall be equal to ninety five percent (95%) of the then fair
market rent for comparable office space at the commencement of the
Extended Term of the lease; except that in no event shall the new
Minimum Monthly Rent be less than the total monthly rent being paid by
Tenant in the last year preceding the Extended Term in question. Tenant
shall notify Landlord in writing at least nine (9) months in advance of
the Extended Term in question of its desire to exercise this option to
extend the Lease term. At least six (6) months prior to the
commencement of the Extended Term in question, Landlord and Tenant
shall meet and attempt to agree upon the rental rate during such
Extended Term. If the parties are unable to agree on the fair market
rent for the Extended Term within ninety (90) days prior to the
commencement of the Extended Term in question, then the parties shall
engage in binding arbitration to determine the fair market rent. In
such arbitration each party shall at its own cost, and by giving
written notice to the other party, hire a real estate appraiser with at
least five (5) years full time commercial appraisal experience who is
familiar with the rental value of commercial property in the city of
Oakland to appraise and determine the fair market rent as of the date
of the appraisal. If a party does not appoint an appraiser within ten
(10) days after the other party has given notice of the name of its
appraiser, the single appraiser appointed shall be the sole appraiser
and shall set the fair market rent for the Extended Term. If the two
appraisers are appointed by the parties as stated in this paragraph,
the appraisers selected by Landlord and Tenant shall independently
report in writing on their opinion as to the then
31
<PAGE>
fair market rent of the premises, no later than fifteen (15) days after
such appraisers have been selected by the parties hereto. Each party
shall promptly upon receipt of the appraisal report from its appraiser
exchange same with the other party. If the higher appraisal shall be
equal to or less than one hundred ten percent (110%) of the lower
appraisal, the two (2) appraisals shall be added together and their
total divided by two (2); the resulting quotient shall be deemed fair
market rent of comparable office space. If the higher appraisal is
greater than one hundred ten percent (110%) of the lower appraisal,
then within ten (10) days after receipt of such appraisals by Landlord
and Tenant, the two (2) originally selected appraisers shall choose a
third (3rd) appraiser, meeting the above qualification, who shall not
later than fifteen (15) days after selection determine the fair market
rent of the premises. If the two (2) appraisers are unable to agree on
the third (3rd) appraiser within such ten (10) day period, then either
of the parties may petition to Alameda County Superior Court, or the
President of the Association of Realtors, for the selection of the
third (3rd) appraiser. The third (3rd) appraiser, however selected,
shall be a person who has not acted in any capacity for or against
either party. The three (3) appraisals shall be added together and
their total be divided by three (3); the resulting quotient shall be
the fair market rent of comparable office space. If, however, the low
appraisal is less than ninety percent (90%) of the middle appraisal
and/or the high appraisal is more than one hundred ten percent (110%)
of the middle appraisal, the low appraisal and/or the high appraisal
(as the case may be) shall be disregarded in the calculation. If only
one appraisal is disregarded, the remaining two (2) appraisals shall be
added together and their total be divided by two (2); the resulting
quotient shall be the fair market rent of comparable office space. If
both the low appraisal and the high appraisal are disregarded as
provided in this paragraph, the middle appraisal shall be fair market
rent for comparable office space. Each party shall pay for their own
appraiser, and shall pay fifty percent (50%) of the third (3rd)
appraiser cost if the third (3rd) appraiser is hired.
5. So long as Tenant has not been in default under any of the terms and
conditions of this Lease, including but not limited to the payment in
rent, Tenant shall be granted an option to lease the remaining unrented
space currently available on the second floor of the Building. This
option shall expire at 5:00p.m. on June 30, 2000. If said option is
exercised, Tenant shall notify Landlord in writing at least thirty (30)
days prior to the option expiration date. Landlord shall have thirty
(30) days to make the space ready for Tenant. The space shall be taken
as-is by Tenant, expect that Landlord shall provide new carpet and
paint. If said option is exercised by Tenant, the per square foot rent
shall equal One Dollar and Twenty Cents ($1.20) per square foot with a
fifteen percent (15%) load factor, and the terms shall run concurrent
with the existing Lease. The new space leased by Tenant under this
option shall be incorporated into this Lease by Addendum. All terms and
conditions of the Lease shall remain the same, except where adjusted as
a result of the additional square footage, additional percentage leased
in the Building, and the additional rent.
32
<PAGE>
6. Until June 30, 2000 and so long as Tenant has not been in default under
any of the terms and conditions of this Lease, including but not
limited to the payment of rent, Landlord agrees to first notify Tenant
in writing of Landlord's intention to lease space to a third party on
the third floor of the Building. Landlord shall deliver to Tenant, a
copy of the proposed Lease, Letter of Intent, or other written outline
of the terms and conditions for leasing said space (and it is
acknowledged that such document shall not be a signed Lease or other
binding document, but rather any written outline of the proposed terms
and conditions will suffice).
If Tenant, within seven (7) days after receipt of Landlords written
notice, indicates in writing its agreement to lease said space on the
terms and conditions as specified in the notice given by Landlord,
Landlord shall lease said space on the third floor to Tenant on said
terms and conditions; and the parties shall immediately enter into a
Lease Agreement incorporating such terms and conditions. If within said
seven (7) day period Tenant does not notify Landlord in writing of its
agreement to lease said space on terms and conditions as specified on
Landlord's notice to Tenant, Landlord shall have the right to lease
said space to a third party on terms and conditions similar to those
stated in Landlord's notice; provided that Landlord and third party may
subsequently, in good faith, negotiate and make previously
unanticipated changes in such terms and conditions. If Landlord has not
signed a Lease on said space within one hundred eighty (180) days after
the date of Landlord's notice to Tenant, any further transaction shall
be deemed a new determination by Landlord to lease space on the third
floor, and the provisions of this paragraph shall once again be
applicable. The provisions herein in this right of first refusal shall
expire at 5:00p.m, June 30, 2000.
7. The operation of the Buildings HVAC systems during the weekend,
holidays and after normal Building hours shall be charged to the Tenant
as additional rent, and billed on a monthly basis at the rate of $35.00
per hour. This rate is subject to change depending on the actual costs.
Tenant may audit costs if they desire.
Tenant agrees to provide Landlord a written request not less than three
(3) days prior to the dates required for the operation of the HVAC
during weekends, holidays or any time other than normal Building hours.
8. Exterior Building signage is available to the Tenant at no additional
charge once they occupy and are paying rent on 25,000 square feet or
more in the Building. Tenant would be responsible for all costs of
installation and/or removal of same. At such time as they vacated or no
longer lease 25,000 square feet in the Building, The Building shall be
returned to its previous state at the sole cost of the Tenant. The
signage must be pre-approved, in writing, by the Landlord and would
comply with all governmental regulations.
9. In the event Tenant desires to sub-lease any portion of their space,
the approval to do so will be pursuant to Section #10 of the Lease but
such approval, by Landlord will not be
33
<PAGE>
unreasonably withheld. It is agreed by both parties it would be
reasonable for Landlord to deny Tenant's ability to sublet space if
Landlord believes the sublessee would be non-compatible with the
Building or would disrupt other Tenants in the Building or would make
it more difficult for Landlord to lease space in the Building.
10. Landlord shall request from its lender an attornment and non
disturbance agreement in lender's standard form, as soon as the Lease
has been signed by Tenant. Lender has informed Landlord's
representative that this will be acceptable.
11. So long as Tenant is not in default of any lease term or condition
including the payment of rent, the electrical power to Tenants suite
shall be left on twenty four (24) hours per day, seven (7) days per
week. The rent specified in 4(a) is based on Tenants usage of power
during normal Building hours as specified in 12(g). While Landlord
agrees to provide electrical power to the suite twenty four (24) hours
per day, seven (7) days per week, this is subject to the conditions
otherwise specified in Section 12 of the Lease. If Tenant is running
office equipment after normal Building hours, Landlord shall have the
right to bill Tenant, and Tenant hereby agrees to pay as additional
rent, all electricity costs associated therewith, including but not
limited to lighting usage, if staff is working after normal Building
hours. Landlord may inspect office equipment to determine the
electrical draw of such equipment.*
12. Add to Lease, Paragraph 21(c) to read as follows: Other than as
provided for in this Lease, Landlord hereby waives all claims against
Tenant for damage to any property or injury, illness or death of any
person in Tenants suite arising at any time and from any cause
whatsoever other than solely by reason of gross negligence or willful
act of Tenant, its employees or contractors.
13. In the event Tenant does not exercise their first five (5) year option
to renew their Lease, Tenant shall agree to pay for any carpet damage
caused by chairs rolling directly on the carpets.
14. The initial space as shown on Exhibit A(2) identified as the "Call
Center" shall be made ready within (30) days of Lease signing. The
monthly rent for said space shall be Six Thousand Two Hundred Four
Dollars and Forty Cents ($6,204.40)
15. Paragraph #17 shall be modified to include: If more than thirty (30%)
percent of Tenant space is destroyed and no other space in the Building
is available, Tenant may terminate Lease but only after Landlord has
had the opportunity to repair premises pursuant to the timeframes in
Paragraph # 17.
* It is not the Landlord's intention to charge tenant for minimal after hours
electricity usage. This provision is to protect landlord from electricity usage
that is above normal for other tenants in the building.
34
EXHIBIT 10.12
(ALL AMOUNTS IN U.S. DOLLARS)
VALUESTAR CORPORATION
15% SUBORDINATED PROMISSORY NOTE
(First Amendment to note dated November 15, 1998)
FOR VALUE RECEIVED, ValueStar Corporation, the undersigned Colorado corporation
(together with all successors, the "Company"), and DAVRIC CORPORATION, a Nevada
corporation (Noteholder) hereby renews and amends that certain promissory note
dated November 15, 1998 in the principal amount of $300,000 by amending the
following terms:
o The Maturity Date is amended to June 30, 2000.
The Company in connection with this renewal has issued to Noteholder warrants on
30,000 common shares by separate agreement as additional consideration for the
Note and this renewal.
IN WITNESS WHEREOF, the undersigned Company and Noteholder have executed
this First Amendment effective as of June 30, 1999.
VALUESTAR CORPORATION
By /s/ JAMES A. BARNES
James A. Barnes, Secretary and Treasurer
DAVRIC CORPORATION
By /s/ JERRY E. POLIS
Jerry E. Polis, President
EXHIBIT 21.1
VALUESTAR CORPORATION
LIST OF SUBSIDIARIES
The Company has one subsidiary doing business in its name:
VALUESTAR, INC.
360 22nd St., 2nd Floor
Oakland, CA 94612
(A California Corporation)
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation by reference in ValueStar Corporation's
Registration Statement No. 333-66195 on Form S-3, and in Registration Statement
No. 333-66191 on Form S-8, of our report, dated August 9, 1999, on our audits of
the consolidated financial statements of ValueStar Corporation as of June 30,
1999 and for each of the two years ended June 30, 1999, which is appearing in
the Annual Report on Form 10-KSB of ValueStar Corporation for the year ended
June 30, 1999.
/s/ MOSS ADAMS LLP
Santa Rosa, California
September 20, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM (A) AUDITED FINANCIAL STATEMENTS FOR FISCAL YEAR ENDED JUNE
30, 1999 FINANCIAL STATEMENTS FOR FISCAL YEAR ENDED JUNE 30, 1999
INCLUDED IN THE ANNUAL REPORT ON FORM 10-KSB AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 270,149
<SECURITIES> 0
<RECEIVABLES> 453,885
<ALLOWANCES> 44,079
<INVENTORY> 4,008
<CURRENT-ASSETS> 743,409
<PP&E> 613,171
<DEPRECIATION> 111,566
<TOTAL-ASSETS> 1,539,983
<CURRENT-LIABILITIES> 2,021,696
<BONDS> 1,908,979
2,344
0
<COMMON> 0
<OTHER-SE> (2,393,036)
<TOTAL-LIABILITY-AND-EQUITY> 1,539,983
<SALES> 116,105
<TOTAL-REVENUES> 2,329,219
<CGS> 47,120
<TOTAL-COSTS> 1,035,401
<OTHER-EXPENSES> 4,278,384
<LOSS-PROVISION> 79,005
<INTEREST-EXPENSE> 395,890
<INCOME-PRETAX> (3,459,744)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,459,744)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,459,744)
<EPS-BASIC> (0.39)
<EPS-DILUTED> (0.39)
</TABLE>
