<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 13D
UNDER THE SECURITIES EXCHANGE ACT OF 1934
VALUESTAR CORPORATION
(Name of Issuer)
COMMON STOCK, PAR VALUE $.00025 PER SHARE
(Title of Class of Securities)
919910 10 9
(CUSIP Number)
EBEN S. MOUTON
SEACOAST CAPITAL PARTNERS LIMITED PARTNERSHIP
55 FERNCROFT ROAD
DANVERS, MASSACHUSETTS 01923
TELEPHONE (978) 750-1300
(Name, Address and Telephone Number of Person
Authorized to Receive Notices and Communications)
MARCH 31, 1999
(Date of Event which Requires Filing of this Statement)
If the filing person has previously filed a statement on Schedule 13G
to report the acquisition which is the subject of this Schedule 13D, and is
filing this schedule because of Rule 13d-1(b)(3) or (4), check the following box
[ ].
Check the following box if a fee is being paid with the statement [X].
(A fee is not required only if the reporting person: (1) has a previous
statement on file reporting beneficial ownership of more than five percent of
the class of securities described in Item 1; and (2) has filed no amendment
subsequent thereto reporting beneficial ownership of five percent or less of
such class.) (See Rule 13d-7).
Note: Six copies of this statement, including all exhibits, should be
filed with the Commission. See Rule 13d-1(a) for other parties to whom copies
are to be sent.
*The remainder of this cover page shall be filled out for a reporting
person's initial filing on this form with respect to the subject class of
securities, and for any subsequent amendment containing information which would
alter disclosures provided in a prior cover page.
The information required on the remainder of this cover page shall not
be deemed to be "filed" for the purpose of Section 18 of the Securities Exchange
Act of 1934 ("Act") or otherwise subject to the liabilities of that section of
the Act but shall be subject to all other provisions of the Act (however, see
the Notes).
<PAGE> 2
CUSIP No. 919910 10 9
- --------------------------------------------------------------------------------
(1) Name of Reporting Persons. I.R.S. Identification Nos. of
Above Persons (entities only)
Seacoast Capital Partners Limited
Partnership; 04-3232653
- --------------------------------------------------------------------------------
(2) Check the Appropriate Box if a Member of a Group (a) [X]
(b) [ ]
- --------------------------------------------------------------------------------
(3) SEC Use Only
- --------------------------------------------------------------------------------
(4) Source of Funds WC
- --------------------------------------------------------------------------------
(5) Check Box if Disclosure of Legal Proceedings is Required [ ]
Pursuant To Items 2(d) or 2(e)
- --------------------------------------------------------------------------------
(6) Citizenship or Place of Organization Delaware
- --------------------------------------------------------------------------------
Number of Shares (7) Sole Voting Power 1,899,528
Beneficially Owned by ---------------------------------------------------
Each Reporting Person (8) Shared Voting Power 0
With ---------------------------------------------------
(9) Sole Dispositive Power 1,899,528
---------------------------------------------------
(10) Shared Dispositive Power 0
- --------------------------------------------------------------------------------
(11) Aggregate Amount Beneficially Owned by Each Reporting 1,899,528
Person
- --------------------------------------------------------------------------------
(12) Check Box if the Aggregate Amount in Row (11) Excludes [ ]
Certain Shares
- --------------------------------------------------------------------------------
(13) Percent of Class Represented by Amount in Row (11) 16.8
- --------------------------------------------------------------------------------
(14) Type of Reporting Person PN
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PAGE 2 OF 11
<PAGE> 3
CUSIP No. 919910 10 9
- --------------------------------------------------------------------------------
(1) Name of Reporting Persons. I.R.S. Identification Nos. of
Above Persons (entities only)
Eben S. Moulton
- --------------------------------------------------------------------------------
(2) Check the Appropriate Box if a Member of a Group (a) [X]
(b) [ ]
- --------------------------------------------------------------------------------
(3) SEC Use Only
- --------------------------------------------------------------------------------
(4) Source of Funds AF
- --------------------------------------------------------------------------------
(5) Check Box if Disclosure of Legal Proceedings is Required [ ]
Pursuant To Items 2(d) or 2(e)
- --------------------------------------------------------------------------------
(6) Citizenship or Place of Organization United States
- --------------------------------------------------------------------------------
Number of Shares (7) Sole Voting Power 1,899,528*
Beneficially Owned by ------------------------------------------------
Each Reporting Person (8) Shared Voting Power 0
With ------------------------------------------------
(9) Sole Dispositive Power 1,899,528*
------------------------------------------------
(10) Shared Dispositive Power 0
- --------------------------------------------------------------------------------
(11) Aggregate Amount Beneficially Owned by Each Reporting 1,899,528*
Person
- --------------------------------------------------------------------------------
(12) Check Box if the Aggregate Amount in Row (11) Excludes [ ]
Certain Shares
- --------------------------------------------------------------------------------
(13) Percent of Class Represented by Amount in Row (11) 16.8
- --------------------------------------------------------------------------------
(14) Type of Reporting Person IN
- --------------------------------------------------------------------------------
* Mr. Moulton disclaims beneficial ownership of these securities.
PAGE 3 OF 11
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CUSIP No. 919910 10 9
- --------------------------------------------------------------------------------
(1) Name of Reporting Persons. I.R.S. Identification Nos.
of Above Persons (entities only)
Walter H. Leonard
- --------------------------------------------------------------------------------
(2) Check the Appropriate Box if a Member of a Group (a) [X]
(b) [ ]
- --------------------------------------------------------------------------------
(3) SEC Use Only
- --------------------------------------------------------------------------------
(4) Source of Funds AF
- --------------------------------------------------------------------------------
(5) Check Box if Disclosure of Legal Proceedings is Required [ ]
Pursuant To Items 2(d) or 2(e)
- --------------------------------------------------------------------------------
(6) Citizenship or Place of Organization United States
- --------------------------------------------------------------------------------
Number of Shares (7) Sole Voting Power 1,899,528*
Beneficially Owned by ------------------------------------------------
Each Reporting Person (8) Shared Voting Power 0
With ------------------------------------------------
(9) Sole Dispositive Power 1,899,528*
------------------------------------------------
(10) Shared Dispositive Power 0
- --------------------------------------------------------------------------------
(11) Aggregate Amount Beneficially Owned by Each Reporting 1,899,528*
Person
- --------------------------------------------------------------------------------
(12) Check Box if the Aggregate Amount in Row (11) Excludes [ ]
Certain Shares
- --------------------------------------------------------------------------------
(13) Percent of Class Represented by Amount in Row (11) 16.8
- --------------------------------------------------------------------------------
(14) Type of Reporting Person IN
- --------------------------------------------------------------------------------
* Mr. Leonard disclaims beneficial ownership of these securities.
PAGE 4 OF 11
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CUSIP No. 919910 10 9
- --------------------------------------------------------------------------------
(1) Name of Reporting Persons. I.R.S. Identification Nos. of
Above Persons (entities only)
Gregory A. Hulecki
- --------------------------------------------------------------------------------
(2) Check the Appropriate Box if a Member of a Group (a) [X]
(b) [ ]
- --------------------------------------------------------------------------------
(3) SEC Use Only
- --------------------------------------------------------------------------------
(4) Source of Funds AF
- --------------------------------------------------------------------------------
(5) Check Box if Disclosure of Legal Proceedings is Required [ ]
Pursuant To Items 2(d) or 2(e)
- --------------------------------------------------------------------------------
(6) Citizenship or Place of Organization United States
- --------------------------------------------------------------------------------
Number of Shares (7) Sole Voting Power 1,899,528*
Beneficially Owned by ------------------------------------------------
Each Reporting Person (8) Shared Voting Power 0
With ------------------------------------------------
(9) Sole Dispositive Power 1,899,528*
------------------------------------------------
(10) Shared Dispositive Power 0
- --------------------------------------------------------------------------------
(11) Aggregate Amount Beneficially Owned by Each Reporting 1,899,528*
Person
- --------------------------------------------------------------------------------
(12) Check Box if the Aggregate Amount in Row (11) Excludes [ ]
Certain Shares
- --------------------------------------------------------------------------------
(13) Percent of Class Represented by Amount in Row (11) 16.8
- --------------------------------------------------------------------------------
(14) Type of Reporting Person IN
- --------------------------------------------------------------------------------
* Mr. Hulecki disclaims beneficial ownership of these securities.
PAGE 5 OF 11
<PAGE> 6
CUSIP No. 919910 10 9
- --------------------------------------------------------------------------------
(1) Name of Reporting Persons. I.R.S. Identification Nos. of
Above Persons (entities only)
Anixter International, Inc.; 94-1658138
- --------------------------------------------------------------------------------
(2) Check the Appropriate Box if a Member of a Group (a) [X]
(b) [ ]
- --------------------------------------------------------------------------------
(3) SEC Use Only
- --------------------------------------------------------------------------------
(4) Source of Funds AF
- --------------------------------------------------------------------------------
(5) Check Box if Disclosure of Legal Proceedings is Required [ ]
Pursuant To Items 2(d) or 2(e)
- --------------------------------------------------------------------------------
(6) Citizenship or Place of Organization Delaware
- --------------------------------------------------------------------------------
Number of Shares (7) Sole Voting Power 1,899,528*
Beneficially Owned by ------------------------------------------------
Each Reporting Person (8) Shared Voting Power 0
With ------------------------------------------------
(9) Sole Dispositive Power 1,899,528*
------------------------------------------------
(10) Shared Dispositive Power 0
- --------------------------------------------------------------------------------
(11) Aggregate Amount Beneficially Owned by Each Reporting 1,899,528*
Person
- --------------------------------------------------------------------------------
(12) Check Box if the Aggregate Amount in Row (11) Excludes [ ]
Certain Shares
- --------------------------------------------------------------------------------
(13) Percent of Class Represented by Amount in Row (11) 16.8
- --------------------------------------------------------------------------------
(14) Type of Reporting Person CO
- --------------------------------------------------------------------------------
* Anixter International, Inc. disclaims beneficial ownership of these
securities.
PAGE 6 OF 11
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ITEM 1 SECURITY AND ISSUER
The class of securities to which this statement relates is 1,899,528 shares
(the "Shares") of common stock, par value $.00025 per share (the "Common
Stock"), of Valuestar Corporation, a Colorado corporation (the "Issuer"), the
principal executive offices of which are located at 360-22nd Street, Suite 210,
Oakland, California 94612. 500,000 of the Shares are issuable upon conversion
of certain shares of Series A Preferred Stock, par value $.00025 per share, of
the Issuer (the "Preferred Stock") issued to Seacoast Capital Partners Limited
Partnership, a Delaware limited partnership ("Seacoast"). The remaining
1,399,528 Shares are issuable upon the exercise of warrants to purchase Common
Stock held by Seacoast.
ITEM 2 IDENTITY AND BACKGROUND
(a) This statement is being filed on behalf of Seacoast, Eben S. Moulton,
Walter H. Leonard, Gregory A. Hulecki (Messrs. Moulton, Leonard and
Hulecki are collectively referred to as the "Individual Control
Persons") and Anixter International, Inc., a Delaware corporation
("Anixter" and, collectively with the Individual Control Persons, the
"Control Persons"). Each of the Individual Control Persons are
directors of Seacoast Capital Corporation, a Delaware corporation and
the sole general partner of Seacoast ("SCC"). In addition, Mr. Moulton
is an executive officer of SCC and Anixter is the indirect 100 percent
stockholder of SCC. As a result, each Control Person may be deemed a
beneficial owner of the Shares, although each Control Person disclaims
such beneficial ownership.
(b) The principal office of Seacoast is located at 55 Ferncroft Road,
Danvers, Massachusetts 01923. The principal office of Anixter is
located at 4711 Golf Road, Skokie, Illinois 60076. The business address
of each of the Individual Control Persons is 55 Ferncroft Road,
Danvers, Massachusetts 01923.
(c) Seacoast is engaged in the principal business of acquiring and holding
securities for investment purposes. Each of the Individual Control
Persons is primarily engaged as an investment principal for Seacoast.
Anixter is engaged in the principal business of providing cabling
solutions for private network infrastructure requirements.
(d) None.
(e) None.
ITEM 3 SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION
Beneficial ownership of the reported securities was acquired by Seacoast
through the utilization of working capital derived from contributions of
capital by its partners and in consideration for an investment in the Issuer.
ITEM 4 PURPOSE OF TRANSACTION
Seacoast acquired the Shares for investment purposes.
ITEM 5 INTEREST IN SECURITIES OF THE ISSUER
The following item sets forth certain information regarding the beneficial
ownership of the Shares by Seacoast. Each Control Person can be deemed to
beneficially own the Shares only through its affiliation with Seacoast.
(a) Seacoast beneficially owns 1,899,528 shares of Common Stock, which
represents 16.8 percent of the total shares of Common Stock
outstanding.
(b) Seacoast exercises sole voting power with regard to 1,899,528 shares
of Common Stock and shares voting power with respect to none of such
shares. Seacoast exercises sole dispositive power with regard to
1,899,528 shares of Common Stock and shares dispositive power with
respect to none of such shares.
PAGE 7 OF 11
<PAGE> 8
(c) None
(d) None
(e) Not applicable
ITEM 6 CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS WITH RESPECT
TO SECURITIES OF THE ISSUER
The relative rights and preferences of the Preferred Stock are set forth in a
Certificate of Designation dated July 21, 1999 (the "Certificate of
Designation"). Seacoast and the Issuer, among others, have entered into a
Warrant Purchase Agreement dated March 31, 1999 (the "Warrant Agreement"); (b)
a Shareholder Agreement dated March 31, 1999 (the "Shareholder Agreement"); and
(c) a Registration Rights Agreement and Shareholder Agreement Amendment dated
as of July 21, 1999 (the "Registration Agreement" and, collectively with the
Certificate of Designation, Warrant Agreement and Shareholder Agreement, the
"Agreements").
The Agreements grant Seacoast the right to designate a member of the Issuer's
board of directors until (a) Seacoast holds less than 20 percent of the
warrants issued pursuant to the Warrant Agreement (the "Warrants") and the
shares of Common Stock issuable upon exercise of the Warrants (the "Warrant
Shares") or (b) the occurrence of certain liquidity events as set forth in the
Agreements. In addition, each party to the Shareholder Agreement has agreed to
vote its shares of Common Stock for the slate of directors of the Issuer
nominated in accordance with the provisions of the Shareholder Agreement. The
Agreements also require that the Issuer will not enter into any agreement other
that the Agreements modifying or restricting the rights of any securities
holder to vote securities of the Issuer.
The Agreements grant Seacoast the preemptive right to purchase, pro rata in
accordance with its equity ownership of the Issuer, any securities issued by
the Issuer. The Agreements forbid the declaration or payment of any dividend
without the consent of Seacoast. If any dividend is paid by the Issuer, the
Agreements require the Issuer to pay Seacoast a dilution fee.
The Agreements provide that, under certain circumstances, Seacoast has the
right to require certain other parties to the Shareholder Agreement to sell
their shares of Common Stock to a buyer designated by Seacoast. In addition,
under certain circumstances, the Issuer has the right to require Seacoast to
sell the Shares to the Issuer at a price determined by reference to certain
financial data of the Issuer. The Agreements also provide that Seacoast has a
right of first refusal regarding and a right to participate in any proposed
sales by other parties to the Shareholder Agreement.
The Agreements include provisions that the Issuer will not issue any capital
stock other than Common Stock and Common Stock equivalents, and will not permit
any subsidiary of the Issuer to issue capital stock other than shares of
capital stock owned, directly or indirectly, by the Issuer. Further, the Issuer
will not (A) issue its capital stock or capital stock of any subsidiary, other
than pursuant to the Agreements; (B) dissolve, liquidate or effect any
consolidation or merger of the Issuer or any of its subsidiaries; or (C) effect
any reclassification, corporate reorganization, stock split or reverse stock
split, or other change in any capital stock.
The foregoing is intended to be only a summary of certain provisions of the
Agreements and is qualified in its entirety by reference to such Agreements,
copies of which are filed as Exhibits to this Schedule and are incorporated
herein by reference.
PAGE 8 OF 11
<PAGE> 9
ITEM 7 MATERIAL TO BE FILED AS EXHIBITS
99.1 Warrant Purchase Agreement, dated as of March 31, 1999, among the
Issuer, Seacoast and the other parties thereto.
99.2 Certificate Of Designation of Series A Convertible Preferred
Stock of the Issuer dated July 21, 1999.
99.3 Shareholder Agreement, dated as of March 31, 1999, among the
Issuer, Seacoast and the other parties thereto.
99.4 Registration Rights Agreement and Shareholder Agreement
Amendment, dated as of July 21, 1999, among the Issuer, Seacoast
and the other parties thereto.
PAGE 9 OF 11
<PAGE> 10
After reasonable inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true, complete and
correct.
SEACOAST CAPITAL PARTNERS LIMITED PARTNERSHIP
By: Seacoast Capital Corporation.,
its general partner
By: /s/ Eben S. Moulton
--------------------------------------
Name: Eben S. Moulton
Title: President
Date: October 12, 1999
By: /s/ Eben S. Moulton
-----------------------------------
Name: Eben S. Moulton
Date: October 12, 1999
By: /s/ Walter H. Leonard
-----------------------------------
Name: Walter H. Leonard
Date: October 12, 1999
By: /s/ Gregory A. Hulecki
-----------------------------------
Name: Gregory A. Hulecki
Date: October 12, 1999
ANIXTER INTERNATIONAL CORPORATION
By: /s/ James E. Knox
-----------------------------------
Name: James E. Knox
Title: Senior Vice President of Law
Date: October 12, 1999
PAGE 10 OF 11
<PAGE> 11
ATTACHED EXHIBITS
99.1 Warrant Purchase Agreement, dated as of March 31, 1999, among the
Issuer, Seacoast and the other parties thereto.
99.2 Certificate Of Designation of Series A Convertible Preferred
Stock of the Issuer dated July 21, 1999.
99.3 Shareholder Agreement, dated as of March 31, 1999, among the
Issuer, Seacoast and the other parties thereto.
99.4 Registration Rights Agreement and Shareholder Agreement
Amendment, dated as of July 21, 1999, among the Issuer, Seacoast
and the other parties thereto.
PAGE 11 OF 11
<PAGE> 1
EXHIBIT 99.1
================================================================================
WARRANT PURCHASE AGREEMENT
VALUESTAR CORPORATION
THE "COMPANY"
JIM STEIN
JAMES A. BARNES
JERRY E. POLIS
COLLECTIVELY THE "SHAREHOLDER"
AND
SEACOAST CAPITAL PARTNERS LIMITED PARTNERSHIP
PACIFIC MEZZANINE FUND, L.P.
TANGENT GROWTH FUND, L.P.
COLLECTIVELY THE "PURCHASER"
MARCH , 1999
----
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Article I Definitions.......................................................
Article II The Warrant
2.01 The Warrant..............................................
2.02 Legend...................................................
2.03 Exercise Price...........................................
2.04 Exercise.................................................
2.05 Taxes....................................................
2.06 Warrant Register.........................................
2.07 Transfer and Exchange....................................
2.08 Adjustments to Number of Warrant
Shares Purchasable...................................
2.09 Lost, Stolen, Mutilated, or
Destroyed Warrants...................................
2.10 Stock Legend.............................................
Article III Representations and Warranties....................................
3.01 Representations and Warranties of the
Company and the Shareholder..........................
3.02 Representations and Warranties of the
Purchasers...........................................
Article IV Covenants.........................................................
4.01 Financial Statements.....................................
4.02 Laws
4.03 Inspection...............................................
4.04 Certain Actions..........................................
4.05 Records..................................................
4.06 Accountants..............................................
4.07 Existence................................................
4.08 Notice...................................................
4.09 Taxes....................................................
4.10 Warrant Rights...........................................
4.11 Board of Directors.......................................
4.12 Small Business Investment Act............................
4.13 Non-Compete Agreement....................................
</TABLE>
ii
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<TABLE>
<S> <C> <C>
Article V Conditions........................................................
5.01 Opinion..................................................
5.02 Note Agreement Conditions................................
5.03 Material Change..........................................
5.04 Shareholder Agreement....................................
5.05 Representations and Agreements...........................
5.06 Proceedings; Consents....................................
5.07 Small Business Concern Documents.........................
Article VI Miscellaneous.....................................................
6.01 Indemnification..........................................
6.02 Default..................................................
6.03 Integration..............................................
6.04 Headings.................................................
6.05 Severability.............................................
6.06 Notices..................................................
6.07 Successors...............................................
6.08 Remedies.................................................
6.09 Survival.................................................
6.10 Fees.....................................................
6.11 Counterparts.............................................
6.12 Other Business...........................................
6.13 Choice of Law............................................
6.14 Duties Among Holders.....................................
6.15 Small Business Investment Act............................
6.16 Confidentiality..........................................
</TABLE>
ANNEX A Form of Shareholder Agreement
ANNEX B-1 Form of Warrant A
ANNEX B-2 Form of Warrant B
ANNEX B-3 Form of Warrant C
SCHEDULE 3.01(a)
SCHEDULE 3.01(d)
iii
<PAGE> 4
WARRANT PURCHASE AGREEMENT
WARRANT PURCHASE AGREEMENT (the "Agreement") made as of March 31,1999,
by and between VALUESTAR CORPORATION, a Colorado corporation, (the "Company"),
Jim Stein, James A. Barnes and Jerry E. Polis (individually and collectively,
the "Shareholder"), and 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"), (individually and collectively,
"Purchaser").
W I T N E S S E T H:
WHEREAS, the Company owns beneficially and of record all of the issued
and outstanding capital stock of the ValueStar, Inc., a California corporation
(or "Borrower");
WHEREAS, the Borrower and Purchaser have entered into a Note Purchase
Agreement (the "Note Agreement") dated of even date with this Agreement;
WHEREAS, the Company, the Purchaser and the Shareholder have entered
into a Shareholder Agreement (the "Shareholder Agreement") dated of even date
with this Agreement; and
WHEREAS, Purchaser is willing to enter into and consummate the
transactions contemplated by the Note Agreement only if, among other things, the
Company and the Shareholder enter into, and perform under, this Agreement and
the Shareholder Agreement.
NOW, THEREFORE, in consideration of the foregoing, the mutual covenants
contained in this Agreement, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, Purchaser, the
Shareholder, and the Company, intending to be legally bound, agree as follows:
ARTICLE I
DEFINITIONS
As used in this Agreement, the following terms have the meanings
indicated:
Act. This term is defined in Section 3.01(k).
Additional Securities. This term is defined in Section 2.08(a)(iv).
Affiliate. 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
1
<PAGE> 5
the management and policies of such corporation, whether through the
ownership of voting securities, by contract, or otherwise.
Agreement. This term is defined in the preamble.
Appraised Value. The value determined in accordance with the following
procedures. For a period of thirty (30) days after the date of a
Valuation Event (the "Negotiation Period"), each party to this
Agreement agrees to negotiate in good faith to reach agreement upon the
Appraised Value of the securities or property at issue, as of the date
of the Valuation Event, which will be the fair market value of such
securities or property, without premium for control or discount for
minority interests, illiquidity, or restrictions on transfer. In the
event that the parties are unable to agree upon the Appraised Value of
such securities or other property by the end of the Negotiation Period,
then the Appraised Value of such securities or property will be
determined for purposes of this Agreement by a recognized appraisal or
investment banking firm mutually agreeable to the Holders and the
Company (the "Appraiser"). If the Holders and the Company cannot agree
on an Appraiser within fifteen (15) days after the end of the
Negotiation Period, the Company, on the one hand, and the Holders, on
the other hand, shall each select an Appraiser within twenty-one (21)
days after the end of the Negotiation Period and those two Appraisers
shall select within twenty-five (25) days after the end of the
Negotiation Period an independent Appraiser to determine the fair
market value of such securities or property, without premium for
control or discount for minority interests. Such independent Appraiser
shall be directed to determine fair market value of such securities or
property as soon as practicable, but in no event later than thirty (30)
days from the date of its selection. The determination by an Appraiser
of the fair market value will be conclusive and binding on all parties
to this Agreement. Appraised Value of each share of Common Stock at a
time when (i) the Company is not a reporting company under the Exchange
Act and (ii) the Common Stock is not traded in the organized securities
markets, will, in all cases, be calculated by determining the Appraised
Value of the entire Company taken as a whole (plus the exercise price
of all Common Stock Equivalents having an exercise price per share less
than the Fair Market Value of such Common Stock Equivalents) and
dividing that value by the sum of (x) the number of shares of Common
Stock then outstanding plus (y) the number of shares of Common Stock
Equivalents having an exercise price per share less than the Fair
Market Value of such Common Stock Equivalents, without premium for
control or discount for minority interests, illiquidity, or
restrictions on transfer. The costs of the Appraiser will be borne
equally by the Company and Purchaser. In no event will the Appraised
Value of the Common Stock or Other Securities be less than the per
share consideration received or receivable with respect to the Common
Stock or securities or property of the same class as the Other
Securities, as the case may be, in connection with a pending
transaction involving a sale, merger, recapitalization, reorganization,
consolidation, or share exchange, dissolution of the Company, sale or
transfer of all or a majority of its assets or revenue or income
generating capacity, or similar transaction. The prevailing market
prices for any security or property will not be dispositive of the
Appraised Value thereof.
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<PAGE> 6
Appraiser. This term is defined in the definition of Appraised Value.
Average Market Value. The average of the Closing Price for the
security in question for the thirty (30) trading days immediately
preceding the date of determination.
Business Day. This term is defined in Section 11.1 of the Note
Agreement.
Buyer. This term is defined in Section 6.02(a)(ii) of the Shareholder
Agreement.
Call Option. This term is defined in Section 5.01 of the Shareholder
Agreement.
Call Option Closing. This term is defined in Section 5.04 of the
Shareholder Agreement.
Call Option Period. This term is defined in Section 5.01 of the
Shareholder Agreement.
Capital Stock. As to any Person, its common stock and any other capital
stock of such Person authorized from time to time, and any other
shares, options, interests, participations, or other equivalents
(however designated) of or in such Person, 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.
Closing Date. March 31, 1999.
Closing Price.
(a) If the primary market for the security in question is a
national securities exchange registered under the Exchange Act, the
National Association of Securities Dealers Automated Quotation System
-- National Market System, or other market or quotation system in which
last sale transactions are reported on a contemporaneous basis, the
last reported sales price, regular way, of such security for such day,
or, if there has not been a sale on such trading day, the highest
closing or last bid quotation therefor on such trading day (excluding,
in any case, any price that is not the result of bona fide arm's length
trading); or
(b) If the primary market for such security is not an exchange
or quotation system in which last sale transactions are
contemporaneously reported, the highest closing or last bona fide bid
or asked quotation by disinterested Persons in the over-the-counter
market on such trading day as reported by the National Association of
Securities Dealers through its Automated Quotation System or its
successor or such other generally accepted source of publicly reported
bid quotations as the Holders designate.
Common Stock. The common stock, .00025 par value, of the Company.
3
<PAGE> 7
Common Stock Equivalent. Any option, warrant, right, or similar
security exercisable into, exchangeable for, or convertible to Common
Stock.
Commission. The Securities and Exchange Commission and any successor
federal agency having similar powers.
Company. ValueStar Corporation and any successor or assign, and, unless
the context requires otherwise, the term Company includes any
Subsidiary, including Borrower.
Co-Sell Shares. This term is defined in Section 6.02(d) of the
Shareholder Agreement.
Co-Sellers. This term is defined in Section 6.02(d) of the Shareholder
Agreement.
Dilution Fee. This term is defined in Article III of the Shareholder
Agreement.
Drag-Along Call Option. This term is defined in Section 4.02 of the
Shareholder Agreement.
Drag-Along Call Option Closing. This term is defined in Section 4.05 of
the Shareholder Agreement.
Drag-Along Call Option Period. This term is defined in Section 4.02 of
the Shareholder Agreement.
Drag-Along Call Option Price. This term is defined in Section 4.03 of
the Shareholder Agreement.
Drag-Along Call Option Shares. This term is defined in Section 4.03 of
the Shareholder Agreement.
Election Notice. This term is defined in Section 6.02(b) of the
Shareholder Agreement.
Exchange Act. The Securities Exchange Act of 1934, as amended, and the
rules and regulations thereunder.
Exchange Common Stock. This term is defined in Section 7.12 of the
Shareholder Agreement.
Exchange Company. This term is defined in Section 7.12 of the
Shareholder Agreement.
Exchange Notice. This term is defined in Section 7.12 of the
Shareholder Agreement.
Exercise Price. The price per share specified in Section 2.03 as
adjusted from time to time pursuant to the provisions of this
Agreement.
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Fair Market Value.
(a) As to securities regularly traded in the organized
securities markets, the higher of (i) the Average Market Value
determined on a per share basis, (ii) the value of the securities as
carried on the books of the Company, determined on a per share basis or
(iii) an amount determined using the value attributable to equity in a
concurrent Public Offering or sale of business or merger,
consolidation, reorganization, share exchange, recapitalization, or
similar transaction or series of related transactions involving a
change of control of the Company or disposition of all or substantially
all of the assets or revenue or income generating capacity of the
Company, determined on a per share basis; provided, however, that, at
the election of the Holders, the Fair Market Value of such securities
and other property will be the Appraised Value; and
(b) as to all securities not regularly traded in the
securities markets and other property, (i) the fair market value of
such securities or property as determined in good faith by the Board of
Directors of the Company at the time it authorizes the transaction (a
"Valuation Event") requiring a determination of Fair Market Value under
this Agreement, determined on a per share basis, (ii) the value of the
securities as carried on the books of the Company, determined on a per
share basis or (iii) an amount determined using the value attributable
to equity in a concurrent sale of business or merger, consolidation,
reorganization, share exchange, recapitalization, or similar
transaction or series of related transactions involving a change of
control of the Company or disposition of all or substantially all of
the assets or revenue or income generating capacity of the Company,
determined on a per share basis; provided, however, that, at the
election of the Holders, the Fair Market Value of such securities and
other property will be the Appraised Value.
GAAP. The 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 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 Company may not change the
use or application of any accounting method, practice or principle
without the prior written consent of Purchaser, which 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.
Holders. Purchaser, and all Persons holding Registrable Securities,
except that neither the Company nor any Shareholder nor any Affiliate
of the Company or the Shareholder (other than Purchaser) will at any
time be a Holder. Unless otherwise provided in this Agreement or in the
Intercreditor Agreement (as defined in the Note Agreement), in each
instance that the Holders are required to request, consent, amend,
modify, waive or terminate in concert with respect to any provision in
this Agreement or to an action
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<PAGE> 9
directly or indirectly relating to this Agreement, the Holders will be
deemed to have undertaken or approved such action if the Holders of a
majority-in-interest of the Registrable Securities so request or
consent.
Indebtedness. 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 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).
Indemnified Party. This term is defined in Section 6.01 hereof and in
Section 11.01 of the Shareholder Agreement.
Initial Holders. Each Purchaser and any Affiliate of Purchaser to which
any of the Warrants or any part of or interest in the Warrants is
assigned.
Issuable Warrant Shares. Shares of Common Stock or Other Securities
issuable on exercise of the Warrants.
Issued Warrant Shares. Shares of Common Stock or Other Securities
issued on exercise of the Warrants.
Lien. 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.
Negotiation Period. This term is defined in the definition of Appraised
Value.
New Securities. Any Capital Stock other than the Warrant Shares and the
Permitted Stock.
Non-Compete Agreements. This term is defined in Section 11.1 of the
Note Agreement.
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Note. All or any portion of any of the Senior Note (as defined in the
Note Agreement) and any and all documents evidencing the indebtedness
under the Note and any refinancing, refunding, or replacement of the
Note.
Note Agreement. This term is defined in the preamble and includes the
Note Purchase Agreement of even date with this Agreement between the
Company and Purchaser and all documents evidencing indebtedness
thereunder or otherwise related to the Note Agreement as the same may
be amended from time to time, and any refinancing, refunding, or
replacements of the indebtedness under the Note Agreement.
Notice of Proposed Drag-Along Sale. This term is defined in Section
4.01 of the Shareholder Agreement.
Notice of Sale. This term is defined in Section 6.02(a) of the
Shareholder Agreement.
Other Securities. Any stock, other securities, property, or other
property or rights (other than Common Stock) that the Holders become
entitled to receive upon exercise of the Warrants.
Permitted Stock. Any stock issued or issuable by the Company pursuant
to any securities outstanding on the Closing Date as disclosed on
Schedules 3.01 (a) or 3.01 (d) and up to 385,900 shares reserved for
issuance but not yet issued under the Company's 1992, 1996 and 1997
Stock Option Plans (and the reissuance of any cancelled or expired
options issued thereunder).
Person. This term will be interpreted broadly to include any
individual, sole proprietorship, partnership, joint venture, trust,
unincorporated organization, association, corporation, company, entity,
or government authority (whether national, federal, state, county,
city, municipal, or otherwise, including, without limitation, any
instrumentality, division, agency, body, or department of any of the
foregoing).
Proposed Sale. This term is defined in Section 4.01 of the Shareholder
Agreement.
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.
Purchaser. This term is defined in the preamble.
Qualified Liquidation Event. Either (i) a Public Offering of common
stock completed by and resulting in proceeds (before underwriting
discounts and commissions and adjusted for any stock splits, stock
dividends, reorganization, reverse stock split, or any other change in
the Capital Stock of the Company) to the Company or Subsidiary, as
applicable, of at least $15,000,000, at a price of not less than $5.00
per share (adjusted for any stock splits, stock dividends,
reorganization, reverse stock split, or any other change in the
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Capital Stock of the Company) and which results in an aggregate
valuation of all of the outstanding shares of Common Stock of the
Company on a fully diluted basis immediately prior to the consummation
of such offering of at least $40,000,000, or (ii) a sale of stock or
assets of the Company in an amount not less than $40,000,000, provided
that the Purchaser receives cash consideration of not less than (x)
$5.00 per Warrant Share (adjusted for any stock splits, stock
dividends, reorganization, reverse stock split, or any other change in
the Capital Stock of the Company) if such sale occurs on or before
March 31, 2002, or (y) $7.00 per Warrant Share (adjusted for any stock
splits, stock dividends, reorganization, reverse stock split, or any
other change in the Capital Stock of the Company) if such sale occurs
after March 31, 2002.
Qualified Liquidity Milestone. A date on which the Common Stock has
qualified for and is trading on the National Association of Securities
Dealers Automated Quotation System -- National Market System or the New
York Stock Exchange with one calendar quarter of average trading volume
of 25,000 shares per day with an average share price during such
quarter at $5.00 (such price to be adjusted for any stock split, stock
dividend, reverse stock split or other subdivision of the Common Stock)
if the quarter occurs within the first three (3) years of the date
hereof and $7.00 (such price to be adjusted for any stock split, stock
dividend, reverse stock split or other subdivision of the Common Stock)
per share thereafter.
Register, registered, and registration refer to a registration effected
by preparing and filing a registration statement in compliance with the
Securities Act, and the declaration or ordering of the effectiveness of
such registration statement.
Registrable Securities. (a) The Issuable Warrant Shares and (b) the
Issued Warrant Shares that have not been previously sold to the public.
Related Party. An entity wholly owned by a Selling Shareholder or one
or more Related Parties.
Revenue. The gross revenue of the Company calculated in accordance with
GAAP.
Revenue Value. Shall mean the sum of (a) the product of (i) three and
one half (3.5) times (ii) Revenue for such period, less (b) funded
Indebtedness (excluding trade accounts payable more than 120 days due)
and the liquidation or redemption value of any outstanding preferred
stock, plus (c) the exercise price of any Common Stock Equivalents,
that have a Fair Market Value greater than the exercise price of such
Common Stock Equivalents, plus (d) cash of the Company, cash
equivalents and the Fair Market Value of marketable securities held by
or for the Company; and dividing that value by the sum of (x) the
number of shares of Common Stock then outstanding plus (y) the number
of shares of Common Stock Equivalents having an exercise price per
share less than the Fair Market Value of such Common Stock Equivalents,
without premium for control or discount for minority interests,
illiquidity, or restrictions on transfer, provided, however, the
Revenue Value will be equal to the value determined using either (aa)
the twelve (12) month period
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<PAGE> 12
comprising the immediately preceding fiscal year, or (bb) the
immediately preceding twelve (12) calendar months, prior to the date
notice is given of the exercise of the Drag-Along Call Option,
whichever is greater.
Selling Shareholder. This term is defined in Section 6.02 of the
Shareholder Agreement.
Securities Act. The Securities Act of 1933, as amended, and the rules
and regulations thereunder.
Shareholder. This term is defined in the preamble.
Shareholder Agreement. This term is defined in the preamble and
includes the Shareholder Agreement dated as of the Closing Date between
the Company, the Shareholder and Purchaser in substantially the form
attached to this Agreement as Annex A and incorporated in this
Agreement by reference.
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.
Valuation Event. This term is defined in the definition of Fair Market
Value.
Warrant Agreement. This term is defined in the preamble to the
Shareholder Agreement and includes this Agreement and all documents
related to this Agreement as this Agreement may be amended from time to
time.
Warrants. This term means collectively the "A Warrant," the "B Warrant"
and the "C Warrant" referred to in Section 2.01, dated as of the
Closing Date, issued to Initial Holders, and all Warrants issued upon
the transfer or division of, or in substitution for, such Warrants.
Warrant Shares. The Issued Warrant Shares and the Issuable Warrant
Shares.
ARTICLE II
THE WARRANTS
2.01 The Warrants. On the Closing Date, each Purchaser agrees to
purchase from the Company for the purchase price set forth beneath the name of
each Purchaser on the signature page of this Agreement, and the Company agrees
to issue to each Purchaser, certain warrants designated as the "A Warrant," the
"B Warrant" and the "C Warrant" each in substantially the form attached to this
Agreement as Annex B-1, B-2 and B-3, respectively, and incorporated in this
Agreement by reference
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to purchase the number of shares of Common Stock corresponding to the type of
Warrant set forth beneath the name of each Purchaser on the signature page of
this Agreement, all in accordance with the terms and conditions of this
Agreement.
2.02 Legend. The Company will deliver to each Purchaser on the Closing
Date one or more certificates representing the A Warrant, the B Warrant, and the
C Warrant purchased by each Purchaser in such denominations as such Purchaser
requests. Such certificates will be issued in each Purchaser's name or in the
name or names of its designee or designees, as the case may be. It is understood
and agreed that the certificates evidencing the Warrants will bear the following
legend:
"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."
"THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF ARE
SUBJECT TO THE TERMS AND PROVISIONS OF A WARRANT PURCHASE AGREEMENT AND
A SHAREHOLDER AGREEMENT, EACH DATED AS OF MARCH 31, 1999, BETWEEN
VALUESTAR CORPORATION (THE "COMPANY"), JAMES STEIN, JAMES A. BARNES,
AND JERRY E. POLIS, SEACOAST CAPITAL PARTNERS LIMITED PARTNERSHIP,
PACIFIC MEZZANINE FUND, L.P. AND TANGENT GROWTH FUND, L.P. (AS SUCH
AGREEMENTS MAY BE SUPPLEMENTED, MODIFIED, AMENDED, OR RESTATED FROM
TIME TO TIME, THE "AGREEMENTS"). COPIES OF THE AGREEMENTS ARE AVAILABLE
AT THE EXECUTIVE OFFICES OF THE COMPANY."
2.03 Exercise Price.
(a) The Exercise Price in connection with the A Warrant per
share will be $1.00 for each share of Common Stock covered by the A
Warrant; provided, however, that in no event will the aggregate
Exercise Price for all of the shares of Common Stock covered by all A
Warrants exceed $1,527,250 whether as a result of any change in the par
value of the Common Stock or Other Securities, as a result of any
change in the number of shares purchasable as provided in this Article
II, or otherwise; provided, further, that such limitation of the
aggregate Exercise Price will have no effect whatsoever upon the amount
or number of Warrant Shares for which the A Warrant may be exercised.
(b) The Exercise Price in connection with the B Warrant per
share will be $0.00025 for each share of Common Stock covered by the B
Warrant; provided, however, that in no event will the aggregate
Exercise Price for all of the shares of Common Stock covered by all B
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Warrants exceed $131.88, whether as a result of any change in the par
value of the Common Stock or Other Securities, as a result of any
change in the number of shares purchasable as provided in this Article
II, or otherwise; provided, further, that such limitation of the
aggregate Exercise Price will have no effect whatsoever upon the amount
or number of Warrant Shares for which the B Warrant may be exercised.
(c) The Exercise Price in connection with the C Warrant per
share will be $1.00 for each share of Common Stock covered by the C
Warrant; provided, however, that in no event will the aggregate
Exercise Price for all of the shares of Common Stock covered by all C
Warrants exceed $231,132 whether as a result of any change in the par
value of the Common Stock or Other Securities, as a result of any
change in the number of shares purchasable as provided in this Article
II, or otherwise; provided, further, that such limitation of the
aggregate Exercise Price will have no effect whatsoever upon the amount
or number of Warrant Shares for which the C Warrant may be exercised.
2.04 Exercise.
(a) Each of the Warrants may be exercised at any time or from
time to time on or after the Closing Date and prior to the earlier of
(i) six (6) years from the date the Note is paid in full or (ii) ten
(10) years from the date hereof, on any day that is a Business Day, for
all or any part of the number of Issuable Warrant Shares purchasable
upon its exercise. In order to exercise any Warrant, in whole or in
part, the Holder will deliver to the Company at the address designated
by the Company pursuant to Section 6.06, (x) a written notice of such
Holder's election to exercise its Warrant, which notice will specify
the number of Issuable Warrant Shares to be purchased pursuant to such
exercise, (y) payment of the Exercise Price, in an amount equal to the
aggregate purchase price for all Issuable Warrant Shares to be
purchased pursuant to such exercise, and (z) the Warrant. Such notice
will be substantially in the form of the Subscription Form appearing at
the end of the Warrants. Upon receipt of such notice, the Company will,
as promptly as practicable, and in any event within ten (10) Business
Days (or such longer period of time as is reasonably necessary to
complete any required calculations or determinations), execute, or
cause to be executed, and deliver to such Holder a certificate or
certificates representing the aggregate number of full shares of Common
Stock and Other Securities issuable upon such exercise, as provided in
this Agreement. The stock certificate or certificates so delivered will
be in such denominations as may be specified in such notice and will be
registered in the name of such Holder, or such other name as designated
in such notice. Warrants will be deemed to have been exercised, such
certificate or certificates will be deemed to have been issued, and
such Holder or any other Person so designated or named in such notice
will be deemed to have become a holder of record of such shares for all
purposes, as of the date that such notice, together with payment of the
Exercise Price and the Warrant, is received by the Company. If the
Warrant has been exercised in part, the Company will, at the time of
delivery of such certificate or certificates, deliver to such Holder a
new Warrant evidencing the rights of such Holder to purchase a number
of Issuable Warrant Shares with respect to which the Warrant has not
been exercised, which new Warrant will, in all other respects, be
identical with the Warrants, or, at the request of such Holder,
appropriate notation may be made on the Warrant and the Warrant
returned to such Holder.
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(b) Payment of the Exercise Price will be made, at the option
of the Holder, by (i) company or individual check, certified or
official bank check, (ii) cancellation of any debt and/or accrued
interest owed by the Company to the Holder, or (iii) cancellation of
Warrant Shares, valued at Fair Market Value (but no Appraised Value
shall be required for purposes of this calculation). If the Holder
surrenders a combination of cash or cancellation of any debt owed by
the Company to the Holder or Warrants, the Holder will specify the
respective number of shares of Common Stock to be purchased with each
form of consideration, and the foregoing provisions will be applied to
each form of consideration with the same effect as if the Warrant were
being separately exercised with respect to each form of consideration;
provided, however, that a Holder may designate that any cash to be
remitted to a Holder in payment of debt be applied, together with other
monies, to the exercise of the portion of the Warrant being exercised
for cash; provided further, that so long as any amounts due under the
Note remain outstanding, Holder will first apply such outstanding debt
due under the Note towards the cost of exercising Warrants before
applying any value in Warrants or Warrant Shares towards such exercise
cost, but only if, such priority does not result in a greater tax
liability than if Holder applied such outstanding debt due under the
Note towards the cost of exercising Warrants after applying any value
in Warrants or Warrant Shares towards such exercise cost.
2.05 Taxes. The issuance of any Common Stock or Other Securities upon
the exercise of the Warrant will be made without charge to any Holder for any
tax, other than income taxes assessed on such Holder, in respect of such
issuance.
2.06 Warrant Register. The Company will, at all times while any of the
Warrants remain outstanding and exercisable, keep and maintain at its principal
office a register in which the registration, transfer, and exchange of the
Warrants will be provided for. The Company will not at any time, except upon the
dissolution, liquidation, or winding up of the Company, close such register so
as to result in preventing or delaying the exercise or transfer of any Warrant.
2.07 Transfer and Exchange. The Warrants and all options and rights
under the Warrants are transferable, as to all or any part of the number of
Issuable Warrant Shares purchasable upon its exercise, by the Holders of the
Warrants, in person or by duly authorized attorney, on the books of the Company
upon surrender of the Warrants at the principal offices of the Company, together
with the form of transfer authorization attached to the Warrants duly executed.
Absent any such transfer and subject to the Shareholder Agreement, the Company
may deem and treat the registered Holders of the Warrants at any time as the
absolute owners of the Warrants for all purposes and will not be affected by any
notice to the contrary. If any Warrant is transferred in part, the Company will,
at the time of surrender of such Warrant, issue to the transferee a Warrant
covering the number of Issuable Warrant Shares transferred and to the transferor
a Warrant covering the number of Issuable Warrant Shares not transferred.
2.08 Adjustments to Number of Shares Purchasable.
(a) The Warrants will be exercisable for the number of shares
of Common Stock in such manner that, following the complete and full
exercise of the Warrant of each Holder, the
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amount of Common Stock issued to all Holders will equal the aggregate
number of shares of Common Stock set forth beneath the name of
Purchaser on the signature pages of this Agreement in connection with
each type of Warrant, as adjusted, to the extent necessary, to give
effect to the following events:
(i) In case at any time or from time to
time, the holders of any class of Common Stock or Common Stock
Equivalent have received, or (on or after the record date
fixed for the determination of shareholders eligible to
receive) have become entitled to receive, without payment
therefor:
(A) consideration (other than cash) by
way of dividend or distribution; or
(B) consideration (including cash) by
way of spin-off, split-up, reclassification
(including any reclassification in connection with a
consolidation or merger in which the Company is the
surviving corporation), recapitalization,
combination of shares into a smaller number of
shares, or similar corporate restructuring;
other than additional shares of Common Stock issued as a
stock dividend or in a stock-split (adjustments in respect
of which are provided for in Sections 2.08(a)(ii) and
(iii)), then, and in each such case, the Holders, on the
exercise of the Warrants, will be entitled to receive for
each share of Common Stock issuable under the Warrants as of
the record date fixed for such distribution, the greatest
per share amount of consideration received by any holder of
any class of Common Stock or Common Stock Equivalent or to
which such holder is entitled less the amount of any
Dilution Fee actually and irrevocably paid to such Holders.
All such consideration receivable upon exercise of the
Warrant with respect to such a distribution will be deemed
to be outstanding and owned by such Holder for purposes of
determining the amount of consideration to which such Holder
is entitled upon exercise of the Warrant with respect to any
subsequent distribution.
(ii) If at any time there occurs any stock
split, stock dividend, reverse stock split, or other
subdivision of the Common Stock, then the number of shares of
Common Stock to be received by the Holder of the Warrant and
the Exercise Price, subject to the limitations set forth in
this Agreement, will be proportionately adjusted.
(iii) In the case of any reclassification or
change of outstanding shares of any class of Common Stock or
Common Stock Equivalent (other than a change in par value, or
from par value to no par value, or from no par value to par
value), or in the case of any consolidation of the Company
with, or merger or share exchange of the Company with or into,
another Person, or in the case of any sale of all or a
majority of the property, assets, business, income or revenue
generating capacity, or goodwill of the Company, the Company,
or such successor or other Person, as the case may be, will
provide in writing that the Holder of this Warrant will
thereafter be entitled to
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receive the highest per share kind and amount of
consideration received or receivable (including cash) upon
such reclassification, change, consolidation, merger, share
exchange, or sale by any holder of any class of Common Stock
or Common Stock Equivalent that the Warrant entitles the
Holder to receive immediately prior to such
reclassification, change, consolidation, merger, share
exchange, or sale (as adjusted pursuant to Section
2.08(a)(i) and otherwise in this Agreement). Any such
successor Person, which thereafter will be deemed to be the
Company for purposes of the Warrants, will provide for
adjustments that are as nearly equivalent as may be possible
to the adjustments provided for by this Section 2.08.
(iv) If at any time the Company issues or
sells any shares of any Common Stock or any Common Stock
Equivalent, other than Permitted Stock, at a per unit or share
consideration (which consideration will include the price paid
upon issuance plus the minimum amount of any exercise,
conversion, or similar payment made upon exercise or
conversion of any Common Stock Equivalent) less than the then
current Fair Market Value per share of Common Stock
immediately prior to the time such Common Stock or Common
Stock Equivalent is issued or sold (the "Additional
Securities"), then:
(A) the Exercise Price will be reduced
to the lower of the prices calculated by:
(I) dividing (x) an amount equal to
the sum of (1) the number of shares of
Common Stock outstanding on a fully diluted
basis immediately prior to such issuance or
sale multiplied by the then existing
Exercise Price plus (2) the aggregate
consideration, if any, received by the
Company upon such issuance or sale, by (y)
the total number of shares of Common Stock
outstanding immediately after such issuance
or sale on a fully diluted basis; and
(II) multiplying the then existing
Exercise Price by a fraction, the numerator
of which is (x) the sum of (1) the number of
shares of Common Stock outstanding on a
fully diluted basis immediately prior to
such issuance or sale, multiplied by the
Fair Market Value per share of Common Stock
immediately prior to such issuance or sale,
plus (2) the aggregate consideration
received by the Company upon such issuance
or sale, (y) divided by the total number of
shares of Common Stock outstanding on a
fully diluted basis immediately after such
issuance or sale, and the denominator of
which is the Fair Market Value per share of
Common Stock immediately prior to such
issuance or sale (for purposes of this
subsection (II), the date as of which the
Fair Market Value per share of Common Stock
will be computed will be the earlier of the
date upon which the Company (aa) enters into
a firm contract for the issuance of such
shares, or (bb) issues such shares); and
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(B) the number of shares of Common Stock
for which any of the Warrants may be exercised at the
Exercise Price resulting from the adjustment
described in subsection (A) above will be equal to
the product of the number of shares of Common Stock
purchasable under such Warrants immediately prior to
such adjustment multiplied by a fraction, the
numerator of which is the Exercise Price in effect
immediately prior to such adjustment and the
denominator of which is the Exercise Price resulting
from such adjustment.
(v) In the case any event occurs as to which
the preceding Sections 2.08(a)(i) through (iv) are not
strictly applicable, but as to which the failure to make any
adjustment would not fairly protect the purchase rights
represented by the Warrants in accordance with the essential
intent and principles of this Agreement, then, in each such
case, the Holder may appoint an independent investment bank or
firm of independent public accountants, which will give its
opinion as to the adjustment, if any, on a basis consistent
with the essential intent and principles established in this
Agreement, necessary to preserve the purchase rights
represented by the Warrants. Upon receipt of such opinion, the
Company will promptly deliver a copy of such opinion to the
Holder and will make the adjustments described in such
opinion. The fees and expenses of such investment bank or
independent public accountants will be borne by the Company.
(vi) In the event of, and as a condition
precedent to the effectiveness of, any sale or other
disposition of all or substantially all of the stock or assets
of the Company or any of its Subsidiaries in a single
transaction or series of transactions prior to the occurrence
of a Qualified Liquidation Event or a Qualified Liquidity
Milestone (a "Sale"), the number of shares of Common Stock for
which the Warrants may be exercised shall be increased so that
each Holder's share of the proceeds from any such Sale is not
less than the Revenue Value of each Holder's Warrant Shares
(calculated immediately prior to the consummation of such Sale
after deducting the Exercise Price). The adjustments set forth
in the immediately preceding sentence are in addition to, and
not in lieu of, any other adjustments to the Warrants, the
Warrant Shares and/or the Exercise Price provided for in this
Agreement.
(b) The Company and the Shareholder will not by any action
including, without limitation, amending, or permitting the amendment
of, the charter documents, bylaws, or similar instruments of the
Company or through any reorganization, reclassification, transfer of
assets, consolidation, merger, share exchange, dissolution, issue or
sale of securities, or any other similar voluntary action, avoid or
seek to avoid the observance or performance of any of the terms of this
Agreement or the Warrants, but will at all times in good faith assist
in the carrying out of all such terms and in the taking of all such
actions as may be necessary or appropriate to protect the rights of the
Holders against impairment or dilution. Without limiting the generality
of the foregoing, each of the Company and the Shareholder will (i) use
their reasonable efforts to take all such action as may be necessary or
appropriate in order that
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the Company may validly and legally issue fully paid and nonassessable
shares of Common Stock and Other Securities, free and clear of all
liens, encumbrances, equities, and claims and (ii) use its reasonable
efforts to obtain all such authorizations, exemptions, or consents from
any public regulatory body having jurisdiction as may be necessary to
enable the Company to perform its obligations under the Warrants.
(c) Any calculation under this Section 2.08 will be made to
the nearest one ten-thousandth of a share and the number of Issuable
Warrant Shares resulting from such calculation will be rounded up to
the next whole share of Common Stock or Other Securities comprising
Issuable Warrant Shares.
(d) The Company will not permit any Subsidiary to issue any
Capital Stock other than to the Company.
2.09 Lost, Stolen, Mutilated, or Destroyed Warrants. Upon receipt of
evidence satisfactory to the Company of the loss, theft, mutilation or
destruction of any Warrants and, in the case of any such loss, theft or
destruction, upon delivery of a bond of indemnity in such form and amount as
shall be reasonably satisfactory to the Company or, in the event of such
mutilation upon surrender and cancellation of the Warrants, the Company, without
charge to the Holder thereof, will make and deliver a new Warrant of like tenor
and the same series in lieu of such lost, stolen, destroyed or mutilated
Warrant. If any such lost, stolen or destroyed Warrant is owned by Purchaser or
any other Holder whose credit is satisfactory to the Company, then the affidavit
of an authorized officer of such owner setting forth the fact of loss, theft or
destruction and of its ownership of the Warrant at the time of such loss, theft
or destruction shall be accepted as satisfactory evidence thereof, and no
further indemnity shall be required as a condition to the execution and delivery
of a new Warrant, other than a written agreement of such owner (in form
reasonably satisfactory to the Company) to indemnify the Company.
2.10 Stock Legend. Unless there is an effective registration statement
and qualification respecting the Warrant Shares under the Securities Act or
under applicable state securities laws, any stock certificate issued pursuant to
the exercise of a Warrant will bear the following legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE (A) 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 AND (B) ARE SUBJECT TO THE TERMS OF AND PROVISIONS OF A WARRANT
PURCHASE AGREEMENT AND A SHAREHOLDER AGREEMENT, EACH DATED AS OF MARCH
31, 1999 BETWEEN VALUESTAR CORPORATION (THE "COMPANY"), JAMES STEIN,
JAMES A. BARNES AND JERRY E. POLIS, SEACOAST CAPITAL PARTNERS LIMITED
PARTNERSHIP, PACIFIC MEZZANINE FUND, L.P. AND TANGENT GROWTH FUND. L.P.
(AS SUCH AGREEMENTS MAY BE SUPPLEMENTED, MODIFIED,
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AMENDED, OR RESTATED FROM TIME TO TIME, THE "AGREEMENTS"). COPIES OF
THE AGREEMENTS ARE AVAILABLE AT THE OFFICES OF THE COMPANY."
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.01 Representations and Warranties of the Company. The Company
represents and warrants to Purchaser that:
(a) The Company is a corporation duly organized and existing
and in good standing under the laws of its state of incorporation and
is qualified or licensed to do business in all other countries, states,
and jurisdictions the laws of which require it to be so qualified or
licensed, where the failure to so qualify or license would have a
Material Adverse Effect on the Company. The Company has no Subsidiaries
or debt or equity investment in any Person other than Borrower. Except
as set forth on Schedule 3.01(a), no Person has any rights, whether
granted by the Company or any other Person, to acquire any portion of
the equity interest of the Company or the assets of the Company. The
Company owns 100% of the equity interest of the Borrower free and clear
of all liens, claims, and encumbrances, and no Person has any rights,
whether granted by the Borrower, the Company or any other Person, to
acquire any portion of the equity interest of the Borrower or the
assets of the Borrower.
(b) The Company has, and at all times that this Agreement is
in force will have, the right and power, and is duly authorized, to
enter into, execute, deliver, and perform this Agreement, the
Shareholder Agreement, and the Warrants, and the officers of Company
executing and delivering this Agreement, the Shareholder Agreement, and
the Warrants are duly authorized to do so. This Agreement, the
Shareholder Agreement, and the Warrants have been duly and validly
executed, issued, and delivered and constitute the legal, valid, and
binding obligations of Company, enforceable in accordance with their
respective terms.
(c) The execution, delivery, and performance of this
Agreement, the Shareholder Agreement, and the Warrants will not, by the
lapse of time, the giving of notice, or otherwise, constitute a
violation of any applicable provision contained in the charter, bylaws,
or organizational documents of the Company or contained in any
agreement, instrument, or document to which the Company is a party or
by which it is bound.
(d) As of the Closing Date, the authorized capital stock of
the Company consists of 25,000,000 shares of capital stock, of which
20,000,000 are Common Stock .00025 par value, 5,000,000 are preferred
stock .00025 par value, and of which 9,312,996 shares of Common Stock
are issued and outstanding and no shares of preferred stock are
outstanding. One million five hundred twenty-seven thousand two hundred
fifty (1,527,250) shares of Common Stock are reserved for issuance on
exercise of the A Warrants. Five hundred twenty-seven thousand five
hundred fourteen (527,514) shares of Common Stock are reserved for
issuance on exercise of the B Warrants. Two hundred thirty-one thousand
one hundred thirty-two (231,132) shares of Common Stock are reserved
for issuance on exercise of the C
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Warrants. All such issued and outstanding shares have been duly
authorized and validly issued, are fully paid and nonassessable, and
have been offered, issued, sold, and delivered by Company free from
preemptive rights, rights of first refusal, or similar rights and in
compliance with applicable federal and state securities laws. Except as
disclosed on Schedule 3.01(a) and pursuant to this Agreement, the
Company is not obligated to issue or sell any Capital Stock, and,
except for this Agreement and the Shareholder Agreement, the Company is
not party to, or otherwise bound by, any agreement affecting the voting
of any Capital Stock. Except as disclosed on Schedule 3.01(d) and the
Shareholder Agreement, the Company is not, nor will it be, a party to,
or otherwise bound by, any agreement obligating it to register any of
its Capital Stock.
(e) The shares of Common Stock issuable on exercise of the
Warrants have been duly and validly authorized and reserved for
issuance and, when issued in accordance with the terms of the Warrants
will be validly issued, fully paid, and nonassessable and free of
preemptive rights, rights of first refusal, or similar rights.
(f) The Company has good, indefeasible, merchantable, and
marketable title to, and ownership of, all of its assets free and clear
of all liens, pledges, security interests, claims, or other
encumbrances except those in favor of (i) the Purchaser pursuant to the
Note Agreement or (ii) the Permitted Liens (as defined in the Note
Agreement).
(g) There is not now, and at no time during the term of this
Agreement or the Shareholder Agreement will there be, any agreement,
arrangement, or understanding by and between the Company and any
security holder, other than this Agreement, the Shareholder Agreement,
and the documents contemplated hereby and thereby, modifying,
restricting, or in any way affecting the rights of any security holder
to vote securities of the Company in contravention of this Agreement or
the Shareholder Agreement.
(h) Each of the representations and warranties made by the
Company pursuant to the Note Agreement and the Shareholder Agreement is
true and correct.
(i) None of the documents, instruments, or other information
furnished to the Purchaser by the Company, 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 Company in this
Agreement, the Note Agreement, or the Shareholder 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 Company or any of
its Subsidiaries that has not been disclosed in the documents provided
to Purchaser.
(j) Small Business Concern. The Company is a "small business
concern" as defined in Section 103(5) of the Small Business Investment
Act of 1958, as amended and in
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effect from time to time, and the regulations promulgated thereunder
(the "Act"), which for purposes of size eligibility meets the
applicable criteria set forth in Section 121.802(a)(3) of Title 13 of
the Code of Federal Regulations.
3.02 Representations and Warranties of Purchaser. Each of the
representations and warranties of each of the Purchasers set forth in Article
III of the Note Agreement is hereby restated and incorporated by reference in
this Agreement as though set forth in this Agreement and is made by each
Purchaser as representations and warranties of each Purchaser, with respect to
itself and not with respect to any other Purchaser, for the benefit of the
Company. Each Purchaser also represents and warrants to the Company with respect
to itself and not with respect to any other Purchaser as follows:
(a) Seacoast represents and warrants to the Company that it is
a limited partnership duly organized and existing and in good standing
under the laws of the state of its organization.
(b) Pacific represents and warrants to the Company that it is
a limited partnership duly organized and existing in good standing
under the laws of the State of its organization.
(c) Tangent represents and warrants to the Company that it is
a limited liability company duly organized and existing in good
standing under the laws of the State of its organization.
(d) Each Purchaser represents and warrants to the Company that
it has the right and power and is duly authorized to enter into,
execute, deliver, and perform this Agreement and the Shareholder
Agreement, and its partners, officers or agents executing and
delivering this Agreement and the Shareholder Agreement are duly
authorized to do so. This Agreement and the Shareholder Agreement have
been duly and validly executed, issued, and delivered and constitute
the legal, valid, and binding obligation of Purchaser, enforceable in
accordance with its terms.
(e) Each Purchaser represents and warrants to the Company that
it, (i) is an "accredited investor," as that term is defined in
Regulation D under the Securities Act; and (ii) has such knowledge,
skill, and experience in business and financial matters, based on
actual participation, that it is capable of evaluating the merits and
risks of an investment in the Company and the suitability thereof as an
investment for Purchaser.
(f) Each Purchaser represents and warrants to the Company
that, except as otherwise contemplated by this Agreement and the
Shareholder Agreement, Purchaser is acquiring its Warrant and any
securities issuable upon exercise of the Warrant for investment for its
own account and not with a view to any distribution thereof in
violation of applicable securities laws.
(g) Each Purchaser represents and warrants to the Company that
it agrees that the certificates representing its Warrant and any Issued
Warrant Shares will bear the legends referenced in this Agreement, and
such Warrant or securities issuable upon exercise of the
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Warrant and pursuant to the Shareholder Agreement, as the case may be,
will not be offered, sold, or transferred in the absence of
registration or exemption under applicable securities laws.
ARTICLE IV
COVENANTS
The Company covenants and agrees as follows:
4.01 Financial Statements. The Company will furnish to each Purchaser:
(a) As soon as available, and in any event within ninety (90)
days after the end of each fiscal year of the Company, beginning with the fiscal
year ending June 30, 1999, (i) a copy of the annual audit report of the Company
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, in each case setting forth in
comparative form the figures for the preceding fiscal year, all in reasonable
detail and audited and certified by independent certified public accountants of
recognized standing selected by the Company and consented to by Purchaser
(provided Purchaser's consent shall not unreasonably be withheld) to the effect
that such report has been prepared in accordance with GAAP; (ii) a certificate
delivered to Purchaser by such independent certified public accountants
confirming the calculations set forth in the officers' certificate delivered to
Purchaser simultaneously therewith in accordance with Section 6.2(a); and (iii)
a comparison of the actual results during such fiscal year to those originally
budgeted by the Company prior to the beginning of such fiscal year, together
with a summary analysis of variances prepared by the Company's management. The
Company shall deliver copies of all material reports and correspondence sent to
the Company or the Company by its independent certified public accountants
promptly upon receipt thereof.
(b) As soon as available, and in any event within thirty (30)
days after the end of each calendar month, a copy of an unaudited consolidated
financial report of the Company as of the end of such calendar month and for the
portion of the fiscal year then ended (with notes as to any consolidating
entries), containing consolidated balance sheets, statements of income, and
statements of cash flow, in each case setting forth in comparative form the
figures for the corresponding period of the preceding fiscal year, together with
a comparison of the actual results during such period to those originally
budgeted by the Company for such period together with a written summary analysis
of variances prepared by the Company's management.
(c) 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 Company 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), in each case setting forth in comparative form the
figures for the corresponding period of the preceding fiscal year, together with
a comparison of the actual results during such period to those originally
budgeted by the Company for such period together with a written summary analysis
of variances prepared by the Company's management.
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(d) On or before thirty (30) days prior to the beginning of
each fiscal year of the Company, an annual budget or business plan for such
fiscal year on a monthly basis, including projected consolidated balance sheets,
income statements, and cash flow statements for each month of such fiscal year
(with notes as to any consolidating entries), and, at the beginning of each
fiscal quarter, all revisions thereto approved by the board of directors of the
Company.
4.02 Laws. The Company will comply with all applicable statutes,
regulations, and orders of the United States, domestic and foreign states, and
municipalities, agencies, and instrumentalities of the foregoing applicable to
the Company.
4.03 Inspection. Subject to Section 6.16 of this Agreement, the Company
will permit any representative designated by the Holders to (a) visit and
inspect any of the properties of the Company; (b) examine the corporate and
financial records of the Company and make copies thereof or extracts therefrom;
and (c) discuss the affairs, finances, and accounts of the Company with the
directors, officers, key employees, and independent accountants of the Company.
4.04 Certain Actions. Without the prior written consent of the Holders
(except that with respect to Sections 4.04(c), (d) and (i), in which case the
consent of each Holder shall be required), which consent may be withheld in the
sole discretion of the Holders, the Company will not:
(a) permit to occur any amendment, alteration, or modification
of its Articles of Incorporation, Bylaws or other charter or
organizational documents of the Company, as constituted on the date of
this Agreement, the effect of which, in the sole judgment of the
Holders, would be to alter, impair, or affect adversely, either the
rights and benefits of the Holders or the duties and obligations of
Company or the Shareholder under this Agreement, the Warrants, or the
Shareholder Agreement;
(b) declare or make any dividends or distributions of its
cash, stock, property, or assets or redeem, retire, purchase, or
otherwise acquire, directly or indirectly, any of the Capital Stock or
capital stock or securities of any Affiliate of the Company, or any
securities convertible or exchangeable into Capital Stock or capital
stock or securities of any Affiliate of the Company;
(c) effect any sale, lease, assignment, transfer, or other
conveyance of any portion of the assets or operations or the revenue or
income generating capacity of the Company in excess of $25,000 in the
aggregate (other than inventory in the ordinary course of business and
other assets reasonably and in good faith determined by the Company to
be obsolete or no longer necessary to the business of the Company) or
to take any such action that has the effect of any of the foregoing;
(d) except pursuant to this Agreement or the Shareholder
Agreement, issue or sell, or otherwise dispose of any Capital Stock of
any Subsidiary, dissolve or liquidate, or effect any consolidation or
merger involving the Company or any Subsidiary or any reclassification,
corporate reorganization, stock split or reverse stock split, or other
change of any class of Capital Stock;
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(e) enter into any business that the Company is not conducting
on the date of this Agreement or acquire any substantial business
operation or assets (through a stock or asset purchase or otherwise);
(f) enter into any transaction or transactions with any
director, officer, employee, or 5% or greater shareholder of the
Company, who is not an officer, director or employee of the Company, or
the Shareholder, or any Affiliate or relative of the foregoing except
upon terms that, in the opinion of the Holders, are fair and reasonable
and that are, in any event, at least as favorable as would result in a
comparable arm's-length transaction with a Person not a director,
officer, employee, shareholder, or Affiliate of the Company or the
Shareholder or any Affiliate or related party of the foregoing, or
advance any monies to any such Persons, except for travel advances in
the ordinary course of business;
(g) increase the amount of benefits payable under any benefit
plan in the aggregate, or increase, beyond the amounts permitted
pursuant to the Note Agreement as of the date of this Agreement, the
aggregate amount of salary and any other direct and indirect
remuneration (including, but not limited to, employee benefits,
professional, management, and consulting fees and expenses, and bonuses
under any plans) paid or accrued by the Company during any fiscal year
to or for the direct or indirect benefit of any of its officers,
directors, Affiliates or any 5% or greater shareholder of the Company;
(h) acquire any debt or equity interest in any Person or
establish or acquire a Subsidiary or make any additional capital
contribution or purchase any additional equity in any Subsidiary or
make any advances or loans to any Subsidiary except Borrower or
transfer any technology or assets to any Subsidiary except Borrower;
(i) modify, amend, terminate or waive any provision of the
Non-Compete Agreement or consent to James Stein ceasing to perform the
functions of president and chief executive officer of the Company;
(j) allow the aggregate par value of the Capital Stock subject
to the Warrants from time to time to exceed the price payable upon
exercise of the Warrants, as adjusted from time to time; or
(k) agree to take, permit or enter into any of the events
described in subsections (a) through (j) above.
4.05 Records. The Company and each of its Subsidiaries will keep books
and records of account in which full, true, and correct entries will be made of
all dealings and transactions in relation to its business and affairs in
accordance with GAAP.
4.06 Accountants. The Company will retain independent public
accountants who will certify the consolidated financial statements of the
Company at the end of each fiscal year, and in the event that the services of
the independent public accountants so selected, or any firm of independent
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public accounts hereafter employed by Company, are terminated, the Company will
promptly thereafter notify each Holder and upon the Holders' request, the
Company will request the firm of independent public accountants whose services
are terminated to deliver (without liability for such firm) to each Holder a
letter of such firm setting forth the reasons for the termination of their
services and in its notice to each Holder the Company will state whether the
change of accountants was recommended or approved by the board of directors of
the Company or any committee thereof.
4.07 Existence. The Company will maintain in full force and effect its
corporate existence, rights, and franchises and all licenses and other rights to
use intellectual property where such failure would have a Material Adverse
Effect on the Company.
4.08 Notice.
(a) In the event of (i) any setting by the Company of a record
date with respect to the holders of any class of Capital Stock for the
purpose of determining which of such holders are entitled to dividends,
repurchases of securities or other distributions, or any right to
subscribe for, purchase or otherwise acquire any shares of Capital
Stock or other property or to receive any other right; or (ii) any
capital reorganization of the Company, or reclassification or
recapitalization of the Capital Stock or any transfer of all or a
majority of the assets, business, or revenue or income generating
capacity of the Company, or consolidation, merger, share exchange,
reorganization, or similar transaction involving the Company; or (iii)
any voluntary or involuntary dissolution, liquidation, or winding up of
the Company; or (iv) any proposed issue or grant by the Company of any
Capital Stock, or any right or option to subscribe for, purchase, or
otherwise acquire any Capital Stock (other than the issue of Issuable
Warrant Shares upon exercise of the Warrants or the issuance of
Permitted Stock), then, in each such event, the Company will deliver or
cause to be delivered to the Holders a notice specifying, as the case
may be, (A) the date on which any such record is to be set for the
purpose of such dividend, distribution, or right, and stating the
amount and character of such dividend, distribution, or right; (B) the
date as of which the holders of record will be entitled to vote on any
reorganization, reclassification, recapitalization, transfer,
consolidation, merger, share exchange, conveyance, dissolution,
liquidation, or winding-up; (C) the date on which any such
reorganization, reclassification, recapitalization, transfer,
consolidation, merger, share exchange, conveyance, dissolution,
liquidation, or winding-up is to take place and the time, if any is to
be fixed, as of which the holders of record of any class of Capital
Stock will be entitled to exchange their shares of Capital Stock for
securities or other property deliverable upon such event; (D) the
amount and character of any Capital Stock, property, or rights proposed
to be issued or granted, the consideration to be received therefor,
and, in the case of rights or options, the exercise price thereof, and
the date of such proposed issue or grant and the Persons or class of
Persons to whom such proposed issue or grant will be offered or made;
and (E) such other information as the Holders may reasonably request.
Any such notice will be deposited in the United States mail, postage
prepaid, at least twenty (20) days prior to the date therein specified,
and notwithstanding anything in this Agreement or the Warrants to the
contrary the Holders may exercise the Warrants within twenty (20) days
from the receipt of such notice.
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(b) If there is any adjustment as provided above in Article
II, or if any Other Securities become issuable in lieu of shares of
such Common Stock upon exercise of the Warrants, the Company will
immediately cause written notice thereof to be sent to the each Holder,
which notice, if requested by Holder, will be accompanied by a
certificate of the independent public accountants of the Company
setting forth in reasonable detail the basis for the Holders' becoming
entitled to receive such Other Securities, the facts requiring any such
adjustment in the number of shares receivable after such adjustment, or
the kind and amount of any Other Securities so purchasable upon the
exercise of the Warrants, as the case may be. At the request of any
Holder and upon surrender of the Warrant of such Holder, the Company
will reissue the Warrant of such Holder in a form conforming to such
adjustments.
4.09 Taxes. The Company will file all required tax returns, reports,
and requests for refunds on a timely basis and will pay on a timely basis all
taxes imposed on either of it or upon any of its assets, income, or franchises.
4.10 Warrant Rights. The Company covenants and agrees that during the
term of this Agreement and so long as any Warrant is outstanding, (a) the
Company will at all times have authorized and reserved a sufficient number of
shares of Common Stock and Other Securities, to provide for the exercise in full
of the rights represented by the Warrants and the exercise in full of the rights
of the Holders under the Shareholder Agreement; (b) the Company will not
increase or permit to be increased the par value per share or stated capital of
the Issuable Warrant Shares or the consideration receivable upon issuance of its
Issuable Warrant Shares; and (c) in the event that the exercise of the Warrant
would require the payment by the Holder of consideration for the Common Stock or
Other Securities receivable upon such exercise of less than the par or stated
value of such Issuable Warrant Shares, the Company and the Shareholder will
promptly take such action as may be necessary to change the par or stated value
of such Issuable Warrant Shares to an amount less than or equal to such
consideration.
4.11 Small Business Investment Act. At the request of any Holder, the
Company will, and each Shareholder will use his/her/its best efforts to,
promptly correct any defect, error or omission with respect to the Act that may
be discovered in the contents of this Agreement or the documents executed in
connection herewith or in the execution or acknowledgment thereof, and will
execute, acknowledge and deliver such further instruments and do such further
acts as may be necessary for this Agreement and such other documents, and all
transactions contemplated thereby, to comply with the Act.
4.12 Non-Compete Agreement. Subject to any limitations established or
existing under applicable law, the Company will maintain the Non-Compete
Agreement in full force and effect, and will diligently enforce the Non-Compete
Agreement against any parties thereto who violate or attempt to violate such
Non-Compete Agreement.
ARTICLE V
CONDITIONS
The obligations of Purchaser to effect the transactions contemplated by
this Agreement are subject to the following conditions precedent:
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5.01 Opinion. Purchaser will have received favorable opinions, dated
the Closing Date, from Bay Venture Counsel, LLP, counsel for the Company
covering matters raised by the Note Agreement, this Agreement, the Shareholder
Agreement, and such other matters as Purchaser or its counsel may request, and
otherwise in form and substance satisfactory to Purchaser and its counsel, and
written permission from each other firm issuing an opinion to the Company in
connection with this Agreement, the Note Agreement or any Other Agreement, as
defined in the Note Agreement, authorizing Purchaser to rely on such opinions.
5.02 Note Agreement Conditions. All of the conditions precedent to the
obligations of Purchaser under the Note Agreement will have been satisfied in
full.
5.03 Material Change. There will have occurred no material adverse
change in the business, prospects, results, operations, or condition, financial
or otherwise, of the Company.
5.04 Shareholder Agreement. The Company and the Shareholder will have
entered into the Shareholder Agreement with Purchaser.
5.05 Representations and Agreements. Each representation and warranty
of the Company and the Shareholder set forth in this Agreement will be true and
correct when made and as of the Closing Date, and the Company and the
Shareholder will have fully performed all their covenants and agreements set
forth in this Agreement.
5.06 Proceedings; Consents. All proceedings taken in connection with
the transactions contemplated by this Agreement, and all documents necessary to
the consummation of this Agreement, will be satisfactory in form and substance
to Purchaser and their counsel, and Purchaser and their counsel will have
received certificates of compliance and copies (executed or certified as may be
appropriate) of all documents, instruments, and agreements that Purchaser or
such counsel may request in connection with the consummation of such
transactions. All consents of any Person necessary to the consummation of the
transactions contemplated by this Agreement and the Shareholder Agreement will
have been received, be in full force and effect, and not be subject to any
onerous condition.
5.07 Small Business Concern Documents. The Company will have completed,
executed and delivered to Purchaser a Size Status Declaration on SBA Form 480, a
Non-Discrimination Certificate on SBA Form 652-D and shall have provided
Purchaser the information necessary to complete the Portfolio Financing Report
on SBA Form 1031.
ARTICLE VI
MISCELLANEOUS
6.01 Indemnification. In addition to any other rights or remedies to
which Purchaser and the Holders may be entitled, the Company agrees to and will
indemnify and hold harmless Purchaser, the Holders, and their Affiliates and
their respective successors, assigns, officers, directors, employees, attorneys,
and agents (individually and collectively, an "Indemnified Party") from and
against any and
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all losses, claims, obligations, liabilities, deficiencies, diminutions in
value, penalties, causes of action, damages, costs, and expenses (including,
without limitation, costs of investigation and defense, attorneys' fees, and
expenses), including, without limitation, those arising out of the sole or
contributory negligence of any Indemnified Party, that the Indemnified Party may
suffer, incur, or be responsible for, arising or resulting from any
misrepresentation, breach of warranty, or nonfulfillment of any covenant or
agreement on the part of the Company or the Shareholder under this Agreement,
the Shareholder Agreement, or under any other agreement to which the Company or
the Shareholder is a party in connection with this transaction, or from any
misrepresentation in or omission from any certificate or other instrument
furnished or to be furnished to Purchaser or the Holders under this Agreement.
6.02 Default. It is agreed that a violation by any party of the terms
of this Agreement cannot be adequately measured or compensated in money damages,
and that any breach or threatened breach of this Agreement by a party to this
Agreement would do irreparable injury to the nondefaulting party. It is,
therefore, agreed that in the event of any breach or threatened breach by a
party to this Agreement of the terms and conditions set forth in this Agreement,
the nondefaulting party will be entitled, in addition to any and all other
rights and remedies that it may have in law or in equity, to apply for and
obtain injunctive relief requiring the defaulting party to be restrained from
any such breach or threatened breach or to refrain from a continuation of any
actual breach.
6.03 Integration. This Agreement and the Shareholder Agreement
constitute the entire agreement between the parties with respect to the subject
matter hereof and thereof and supersede all previous written, and all previous
or contemporaneous oral, negotiations, understandings, arrangements, and
agreements. This Agreement may not be amended or supplemented except by a
writing signed by Company, the Shareholder and the Holders.
6.04 Headings. The headings in this Agreement are for convenience and
reference only and are not part of the substance of this Agreement. References
in this Agreement to Sections and Articles are references to the Sections and
Articles of this Agreement unless otherwise specified.
6.05 Severability. The parties to this Agreement expressly agree that
it is not the intention of any of them 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, unless the inoperative provision would
cause enforcement of the remainder of this Agreement to be inequitable under the
circumstances.
6.06 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
26
<PAGE> 30
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 the Purchaser, at Seacoast Capital Partners Limited
Partnership
One Sansome Street, Suite 2100
San Francisco, California 94104
Attention: Jeffrey J. Holland
Fax: (415) 956-1459
Seacoast Capital Partners Limited
Partnership
c/o Seacoast Capital Corporation
55 Ferncroft Road
Danvers, Massachusetts 01923
Attention: Walt Leonard
Fax: (508) 750-1301
Pacific Mezzanine Fund, L.P.
2200 Powell Street, Suite 1250
Emeryville, California 94608
Attention: Dave Woodward
Fax: (510) 595-9801
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
27
<PAGE> 31
If to the Company, at ValueStar Corporation
11204 Ballena Boulevard
Almeda, California 94501
Attention: Jim Stein
Fax: (510) 814-9319
with courtesy copies to: Bay Venture Counsel, LLP
1999 Harrison Street, Suite 1300
Oakland, California 94612
Attention: Bruce Johnson, Esq.
Fax: (510) 834-7440
If to the Shareholder, at: James Stein
ValueStar, Inc.
11204 Ballena Boulevard
Almeda, California 94501
Fax: (510) 814-9319
James A. Barnes
9029 Opus Drive
Las Vegas, Nevada 89117
Fax: (702) 254-4212
Jerry E. Polis
980 American Pacific Drive
Suite 111
Henderson, Nevada 89014
Fax: (702) 737-6900
or to such other address as each party may designate for itself by like notice.
Notice to any Holder other than Purchaser will be delivered as set forth above
to the address shown on the stock transfer books of the Company or the Warrant
Register 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 delivering 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.
28
<PAGE> 32
6.07 Successors. This Agreement will be binding upon and inure to the
benefit of the parties and their respective successors and assigns.
6.08 Remedies. The failure of any party to enforce any right or remedy
under this Agreement, or promptly to enforce any such right or remedy, 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.
6.09 Survival. All warranties, representations, and covenants made by
any party in this Agreement or in any certificate or other instrument delivered
by such party or on its behalf under this Agreement will be considered to have
been relied upon by the party to which it is delivered and will survive the
Closing Date, regardless of any investigation made by such party or on its
behalf. All statements in any such certificate or other instrument will
constitute warranties and representations under this Agreement.
6.10 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 be borne and paid by the
Company within ten (10) days of demand by the Holders.
6.11 Counterparts. This Agreement may be executed in any number of
counterparts, which will individually and collectively constitute one agreement.
6.12 Other Business. It is understood and accepted that Purchaser, the
Holders, and their Affiliates have interests in other business ventures that may
be in conflict with the activities of the Company and that nothing in this
Agreement will limit the current or future business activities of such parties
whether or not such activities are competitive with those of the Company. The
Company and the Shareholder agree that all business opportunities in any field
substantially related to the business of the Company will be pursued exclusively
through the Company.
6.13 CHOICE OF LAW. THIS AGREEMENT HAS BEEN EXECUTED, DELIVERED, AND
ACCEPTED BY THE PARTIES IN THE STATE OF CALIFORNIA 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.
6.14 Duties Among Holders. Each Holder agrees that no other Holder will
by virtue of this Agreement be under any fiduciary or other duty to give or
withhold any consent or approval under this Agreement or to take any other
action or omit to take any action under this Agreement, and that each
29
<PAGE> 33
other Holder may act or refrain from acting under this Agreement as such other
Holder may, in its discretion, elect.
6.15 Small Business Investment Act. This Agreement, the other purchase
documents executed in connection herewith, and all transactions contemplated
hereby and thereby are subject to the provisions of the Act, and shall be
governed thereby to the extent of any conflict therewith.
6.16 Confidentiality. Each Holder agrees to keep confidential any
information delivered by the Company to such Holder under this Agreement that
the Company clearly indicates in writing to be confidential information;
provided, however, that nothing in this Section 6.16 will prevent such Holder
from disclosing such information (a) to any Affiliate of such Holder or any
actual or potential purchaser, participant, assignee, or transferee of such
Holder's rights or obligations hereunder that agrees to be bound by the terms of
this Section 6.16, (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 Holder, (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 Holder, (f) in connection with the exercise of any
remedy under this Agreement, or (g) to the certified public accountants for such
Holder. The Company agrees that such Holder will be presumed to have met its
obligations under this Section 6.16 to the extent that it exercises the same
degree of care with respect to information provided by the Company as it
exercises with respect to its own information of similar character.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
30
<PAGE> 34
IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement as of the date first above written.
COMPANY:
VALUESTAR CORPORATION
By:
------------------------------------
Name: James Stein
Title: President and Chief Executive
Officer
SHAREHOLDERS:
---------------------------------------
James Stein
---------------------------------------
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
---------------------------------------
Jerry E. Polis, individually, as
President of Davric Corporation and
Trustee of the Jerry E. Polis Family
Trust
<PAGE> 35
PURCHASER:
SEACOAST CAPITAL PARTNERS
LIMITED PARTNERSHIP
By: Seacoast Capital Corporation,
its general partner
By:
-----------------------------
Jeffrey J. Holland
Vice President
One Sansome Street, Suite 2100
San Francisco, California 94104
Attention: Jeffrey J. Holland
Fax: (415) 956-459
55 Ferncroft Road
Danvers, Massachusetts 01923
Attention: Walt Leonard
Fax: (508) 750-1301
Number of Warrant Shares in connection
with the A Warrant: 935,051
Number of Warrant Shares in connection
with the B Warrant: 322,968
Number of Warrant shares in connection
with the C Warrant: 141,509
<PAGE> 36
PACIFIC MEZZANINE FUND. L.P.
By: Pacific Private Capital
its general partner
By:
------------------------------
David Woodward
General Partner
2200 Powell Street, Suite 1250
Emeryville, California 94608
Attention: David Woodward
Fax: (510) 595-9801
Number of Warrant Shares in connection
with the A Warrant: 374,021
Number of Warrant Shares in connection
with the B Warrant: 129,187
Number of Warrant shares in connection
with the C Warrant: 56,604
<PAGE> 37
TANGENT GROWTH FUND, L.P.
By: Tangent Fund Management LLC,
General Partner
By:
----------------------------------
Mark P. Gilles
Vice President
1 Union Square
180 Geary Street, Suite 500
San Francisco, California 94108
Attention: Mark P. Gilles
Fax: (415) 392-1928
Number of Warrant Shares in connection
with the A Warrant: 218,178
Number of Warrant Shares in connection
with the B Warrant: 75,359
Number of Warrant shares in connection
with the C Warrant: 33,019
<PAGE> 38
SCHEDULE 3.01(a)
<PAGE> 39
SCHEDULE 3.01(d)
<PAGE> 40
ANNEX A
FORM OF SHAREHOLDER AGREEMENT
(SEE ATTACHED)
<PAGE> 41
ANNEX B-1
FORM OF A WARRANT
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.
THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF ARE SUBJECT TO THE
TERMS AND PROVISIONS OF A WARRANT PURCHASE AGREEMENT AND A SHAREHOLDER AGREEMENT
EACH DATED AS OF MARCH ______, 1999, AMONG VALUESTAR, CORPORATION (THE
"COMPANY") JIM STEIN, JAMES A. BARNES AND JERRY E. POLIS (INDIVIDUALLY AND
COLLECTIVELY, THE "SHAREHOLDER") AND SEACOAST CAPITAL PARTNERS LIMITED
PARTNERSHIP (THE "PURCHASER"), PACIFIC MEZZANINE FUND, L.P. ("PACIFIC") AND
TANGENT FUND MANAGEMENT, LLC ("TANGENT") (AS SUCH AGREEMENTS MAY BE
SUPPLEMENTED, MODIFIED, AMENDED, OR RESTATED FROM TIME TO TIME, THE
"AGREEMENTS"). COPIES OF THE AGREEMENTS ARE AVAILABLE AT THE EXECUTIVE OFFICES
OF THE COMPANY.
shares of
- ------------- Warrant No.
Common Stock ---------
WARRANT TO PURCHASE COMMON STOCK OF
VALUESTAR CORPORATION
This is to certify that, in consideration of ten dollars ($10.00) and
other valuable consideration, which is hereby acknowledged as received, the
Purchaser, its successors and registered assigns, is entitled at any time after
the Closing Date (as defined in the Agreements) and prior to the earlier to
occur of (i) the expiration of six (6) years from the date the obligations
evidenced by the Senior Note, dated as of March ___, 1999 executed by ValueStar,
Inc., a California corporation, (the "Subsidiary") and payable to the Purchaser,
as the same may be amended, modified and extended from time to time, are paid in
full pursuant to the terms of the Note Purchase Agreement, dated as of March
_____, 1999, between the Subsidiary and the Purchaser as the same may be amended
from time to time, (ii) 5:00 p.m. March _____, 2009, to
<PAGE> 42
exercise this Warrant to purchase _________________ (________) shares of the
Common Stock of ValueStar Corporation, a Colorado corporation (the "Company"),
as the same shall be adjusted from time to time pursuant to the provisions of
the Agreements at a price per share as specified in the Agreements and to
exercise the other rights, powers, and privileges hereinafter provided, all on
the terms and subject to the conditions specified in this Warrant and in the
Agreements.
This Warrant is issued under, and the rights represented hereby are
subject to the terms and provisions contained in the Agreements, to all terms
and provisions of which the registered holder of this Warrant, by acceptance of
this Warrant, assents. Reference is hereby made to the Agreements for a more
complete statement of the rights and limitations of rights of the registered
holder of this Warrant and the rights and duties of the Company under this
Warrant. Copies of the Agreements are on file at the office of the Company.
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed this ____ day of March, 1999.
VALUESTAR CORPORATION
By:
----------------------------
Name:
--------------------------
Title:
-------------------------
<PAGE> 43
SUBSCRIPTION FORM
(To be executed only upon exercise of Warrant)
The undersigned registered owner of this Warrant irrevocably exercises
this Warrant for and purchases ________ of the number of shares of Common Stock
of ValueStar Corporation purchasable with this Warrant, and herewith makes
payment therefor, all at the price and on the terms and conditions specified in
this Warrant and requests that certificates for the shares of Common Stock
hereby purchased (and any securities or other property issuable upon such
exercise) be issued in the name of and delivered to _______________________
whose address is ___________________________________________, and if such shares
of Common Stock do not include all of the shares of Common Stock issuable as
provided in this Warrant, that a new Warrant of like tenor and date for the
balance of the shares of Common Stock issuable thereunder to be delivered to the
undersigned.
Dated: , .
--------------- -------
-------------------------------
By:
----------------------------
Name:
-------------------------
Title:
-------------------------
Address:
----------------------
----------------------
----------------------
<PAGE> 44
ASSIGNMENT FORM
FOR VALUE RECEIVED the undersigned registered owner of this Warrant
hereby sells, assigns and transfers unto the Assignee named below all of the
rights of the undersigned under this Warrant, with respect to the number of
shares of Common Stock set forth below:
<TABLE>
<CAPTION>
No. of Shares Name and Address of Assignee
------------- ----------------------------
<S> <C>
</TABLE>
and does hereby irrevocably constitute and appoint as attorney
______________________ to register such transfer on the books of ValueStar
Corporation maintained for the purpose, with full power of substitution in the
premises.
Dated: , .
--------------- -------
By:
----------------------------
Name:
-------------------------
Title:
-------------------------
<PAGE> 45
ANNEX B-2
FORM OF B WARRANT
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.
THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF ARE SUBJECT TO THE
TERMS AND PROVISIONS OF A WARRANT PURCHASE AGREEMENT AND A SHAREHOLDER AGREEMENT
EACH DATED AS OF MARCH ______, 1999, AMONG VALUESTAR, CORPORATION (THE
"COMPANY") JIM STEIN, JAMES A. BARNES AND JERRY E. POLIS (INDIVIDUALLY AND
COLLECTIVELY, THE "SHAREHOLDER") AND SEACOAST CAPITAL PARTNERS LIMITED
PARTNERSHIP (THE "PURCHASER"), PACIFIC MEZZANINE FUND, L.P. ("PACIFIC") AND
TANGENT FUND MANAGEMENT, LLC ("TANGENT") (AS SUCH AGREEMENTS MAY BE
SUPPLEMENTED, MODIFIED, AMENDED, OR RESTATED FROM TIME TO TIME, THE
"AGREEMENTS"). COPIES OF THE AGREEMENTS ARE AVAILABLE AT THE EXECUTIVE OFFICES
OF THE COMPANY.
shares of
- ------------- Warrant No.
Common Stock ---------
WARRANT TO PURCHASE COMMON STOCK OF
VALUESTAR CORPORATION
This is to certify that, in consideration of ten dollars ($10.00) and
other valuable consideration, which is hereby acknowledged as received, the
Purchaser, its successors and registered assigns, is entitled at any time after
the Closing Date (as defined in the Agreements) and prior to the earlier to
occur of (i) the expiration of six (6) years from the date the obligations
evidenced by the Senior Note, dated as of March ___, 1999 executed by ValueStar,
Inc., a California corporation, (the "Subsidiary") and payable to the Purchaser,
as the same may be amended, modified and extended from time to time, are paid in
full pursuant to the terms of the Note Purchase Agreement, dated as of March
_____, 1999, between the Subsidiary and the Purchaser as the same may be amended
from time to time, (ii) 5:00 p.m. March _____, 2009, to
<PAGE> 46
exercise this Warrant to purchase _________________ (________) shares of the
Common Stock of ValueStar Corporation, a Colorado corporation (the "Company"),
as the same shall be adjusted from time to time pursuant to the provisions of
the Agreements at a price per share as specified in the Agreements and to
exercise the other rights, powers, and privileges hereinafter provided, all on
the terms and subject to the conditions specified in this Warrant and in the
Agreements.
This Warrant is issued under, and the rights represented hereby are
subject to the terms and provisions contained in the Agreements, to all terms
and provisions of which the registered holder of this Warrant, by acceptance of
this Warrant, assents. Reference is hereby made to the Agreements for a more
complete statement of the rights and limitations of rights of the registered
holder of this Warrant and the rights and duties of the Company under this
Warrant. Copies of the Agreements are on file at the office of the Company.
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed this ____ day of March, 1999.
VALUESTAR CORPORATION
By:
-------------------------
Name:
-----------------------
Title:
----------------------
<PAGE> 47
SUBSCRIPTION FORM
(To be executed only upon exercise of Warrant)
The undersigned registered owner of this Warrant irrevocably exercises
this Warrant for and purchases ________ of the number of shares of Common Stock
of ValueStar Corporation purchasable with this Warrant, and herewith makes
payment therefor, all at the price and on the terms and conditions specified in
this Warrant and requests that certificates for the shares of Common Stock
hereby purchased (and any securities or other property issuable upon such
exercise) be issued in the name of and delivered to _______________________
whose address is ___________________________________________, and if such shares
of Common Stock do not include all of the shares of Common Stock issuable as
provided in this Warrant, that a new Warrant of like tenor and date for the
balance of the shares of Common Stock issuable thereunder to be delivered to the
undersigned.
Dated: , .
--------------- -------
-------------------------------
By:
----------------------------
Name:
-------------------------
Title:
-------------------------
Address:
----------------------
----------------------
----------------------
<PAGE> 48
ASSIGNMENT FORM
FOR VALUE RECEIVED the undersigned registered owner of this Warrant
hereby sells, assigns and transfers unto the Assignee named below all of the
rights of the undersigned under this Warrant, with respect to the number of
shares of Common Stock set forth below:
<TABLE>
<CAPTION>
No. of Shares Name and Address of Assignee
------------- ----------------------------
<S> <C>
</TABLE>
and does hereby irrevocably constitute and appoint as attorney
______________________ to register such transfer on the books of ValueStar
Corporation maintained for the purpose, with full power of substitution in the
premises.
Dated: , .
--------------- -------
By:
----------------------------
Name:
-------------------------
Title:
-------------------------
<PAGE> 49
ANNEX B-3
FORM OF C WARRANT
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.
THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF ARE SUBJECT TO THE
TERMS AND PROVISIONS OF A WARRANT PURCHASE AGREEMENT AND A SHAREHOLDER AGREEMENT
EACH DATED AS OF MARCH ______, 1999, AMONG VALUESTAR, CORPORATION (THE
"COMPANY") JIM STEIN, JAMES A. BARNES AND JERRY E. POLIS (INDIVIDUALLY AND
COLLECTIVELY, THE "SHAREHOLDER") AND SEACOAST CAPITAL PARTNERS LIMITED
PARTNERSHIP (THE "PURCHASER"), PACIFIC MEZZANINE FUND, L.P. ("PACIFIC") AND
TANGENT FUND MANAGEMENT, LLC ("TANGENT") (AS SUCH AGREEMENTS MAY BE
SUPPLEMENTED, MODIFIED, AMENDED, OR RESTATED FROM TIME TO TIME, THE
"AGREEMENTS"). COPIES OF THE AGREEMENTS ARE AVAILABLE AT THE EXECUTIVE OFFICES
OF THE COMPANY.
shares of
- -------------
Common Stock Warrant No.
---------
WARRANT TO PURCHASE COMMON STOCK OF
VALUESTAR CORPORATION
This is to certify that, in consideration of ten dollars ($10.00) and
other valuable consideration, which is hereby acknowledged as received, the
Purchaser, its successors and registered assigns, is entitled at any time after
the Closing Date (as defined in the Agreements) and prior to the earlier to
occur of (i) the expiration of six (6) years from the date the obligations
evidenced by the Senior Note, dated as of March ___, 1999 executed by ValueStar,
Inc., a California corporation, (the "Subsidiary") and payable to the Purchaser,
as the same may be amended, modified and extended from time to time, are paid in
full pursuant to the terms of the Note Purchase Agreement, dated as of March
_____, 1999, between the Subsidiary and the Purchaser as the same may be amended
from time to time, (ii) 5:00 p.m. March _____, 2009, to
<PAGE> 50
exercise this Warrant to purchase _________________ (________) shares of the
Common Stock of ValueStar Corporation, a Colorado corporation (the "Company"),
as the same shall be adjusted from time to time pursuant to the provisions of
the Agreements at a price per share as specified in the Agreements and to
exercise the other rights, powers, and privileges hereinafter provided, all on
the terms and subject to the conditions specified in this Warrant and in the
Agreements.
This Warrant is issued under, and the rights represented hereby are
subject to the terms and provisions contained in the Agreements, to all terms
and provisions of which the registered holder of this Warrant, by acceptance of
this Warrant, assents. Reference is hereby made to the Agreements for a more
complete statement of the rights and limitations of rights of the registered
holder of this Warrant and the rights and duties of the Company under this
Warrant. Copies of the Agreements are on file at the office of the Company.
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed this ____ day of March, 1999.
VALUESTAR CORPORATION
By:
--------------------------
Name:
------------------------
Title:
-----------------------
<PAGE> 51
SUBSCRIPTION FORM
(To be executed only upon exercise of Warrant)
The undersigned registered owner of this Warrant irrevocably exercises
this Warrant for and purchases ________ of the number of shares of Common Stock
of ValueStar Corporation purchasable with this Warrant, and herewith makes
payment therefor, all at the price and on the terms and conditions specified in
this Warrant and requests that certificates for the shares of Common Stock
hereby purchased (and any securities or other property issuable upon such
exercise) be issued in the name of and delivered to _______________________
whose address is ___________________________________________, and if such shares
of Common Stock do not include all of the shares of Common Stock issuable as
provided in this Warrant, that a new Warrant of like tenor and date for the
balance of the shares of Common Stock issuable thereunder to be delivered to the
undersigned.
Dated: , .
--------------- -------
-------------------------------
By:
----------------------------
Name:
-------------------------
Title:
-------------------------
Address:
----------------------
----------------------
----------------------
<PAGE> 52
ASSIGNMENT FORM
FOR VALUE RECEIVED the undersigned registered owner of this Warrant
hereby sells, assigns and transfers unto the Assignee named below all of the
rights of the undersigned under this Warrant, with respect to the number of
shares of Common Stock set forth below:
<TABLE>
<CAPTION>
No. of Shares Name and Address of Assignee
------------- ----------------------------
<S> <C>
</TABLE>
and does hereby irrevocably constitute and appoint as attorney
______________________ to register such transfer on the books of ValueStar
Corporation maintained for the purpose, with full power of substitution in the
premises.
Dated: , .
--------------- -------
By:
----------------------------
Name:
-------------------------
Title:
-------------------------
<PAGE> 1
EXHIBIT 99.2
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___ thereof,
HEREBY CERTIFIES:
That pursuant to the authority conferred upon the Board of Directors by
the Corporation's Certificate of Amendment to the Articles of Incorporation
("Certificate") filed with the Secretary of State of the State of Colorado on
_______, the Board of Directors, on July __, 1999, unanimously adopted the
following resolution authorizing and creating a series of 1,000,000 shares of
convertible preferred stock designated as "Series A Convertible Preferred
Stock:"
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 __, 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 , 1999
--
----------------------------------
Jim Stein, Chief Executive Officer
<PAGE> 2
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"), Certificate there 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.
<PAGE> 3
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 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.
<PAGE> 4
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"):
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
<PAGE> 5
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 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.
<PAGE> 6
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
<PAGE> 7
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, 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
<PAGE> 8
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 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
<PAGE> 9
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.
(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
<PAGE> 10
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 ("NYSE")
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 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.
<PAGE> 11
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."
Executed at Oakland, California on July __, 1999
- ----------------------------------
Jim Stein, Chief Executive Officer
- ----------------------------------
James Barnes, Treasurer
<PAGE> 1
EXHIBIT 99.3
================================================================================
SHAREHOLDER AGREEMENT
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Article I Definitions.......................................................
Article II Holders' Preemptive Rights........................................
2.01 Equity Preemptive Right...........................................
2.02 Debt Preemptive Rights............................................
2.03 Notice to Holders.................................................
2.04 Allocation of Unsubscribed New Securities.........................
Article III Dilution Fee......................................................
Article IV Option............................................................
4.01 Drag Along Rights.................................................
4.02 Grant of Option...................................................
4.03 Price.............................................................
4.04 Exercise of Option................................................
4.05 Certain Remedies..................................................
4.06 Option Closing....................................................
Article V Call Option.......................................................
5.01 Grant of Option...................................................
5.02 Call Price........................................................
5.03 Exercise of Call Option...........................................
5.04 Call Option Closing...............................................
Article VI First Refusal and Co-Sale Rights..................................
6.01 Rights of Co-Sale.................................................
6.02 Method of Electing Sale; Allocation of Sales......................
6.03 Sales to Related Parties..........................................
Article VII Liquidity.........................................................
7.01 Required Registration.............................................
7.02 Incidental Registration...........................................
7.03 Form S-3 Registrations............................................
7.04 Rule 144 Availability.............................................
7.05 Registration Procedures...........................................
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C> <C>
7.06 Allocation of Expenses............................................
7.07 Listing on Securities Exchange....................................
7.08 Holdback Agreements...............................................
7.09 Rule 144..........................................................
7.10 Rule 144A.........................................................
7.11 Limitation on Subsequent Registration Rights......................
7.12 Exchange Rights...................................................
7.13 Other Rights......................................................
Article VIII Directors.........................................................
8.01 Voting Agreement..................................................
8.02 Board of Directors................................................
Article IX Representations and Warranties; Covenants.........................
9.01 Representations and Warranties and Covenants of the
Company and the Shareholder.......................................
9.02 Representations and Warranties of the Shareholder.................
9.03 Representation and Warranties of Purchaser........................
9.04 Covenants of Shareholder..........................................
Article X Conditions........................................................
10.01 Note Agreement and Warrant Agreement Conditions...................
10.02 Proceedings.......................................................
Article XI Miscellaneous.....................................................
11.01 Indemnification...................................................
11.02 Default...........................................................
11.03 Integration.......................................................
11.04 Headings..........................................................
11.05 Severability......................................................
11.06 Notices...........................................................
11.07 Successors........................................................
11.08 Remedies..........................................................
11.09 Survival..........................................................
11.10 Fees..............................................................
11.11 Counterparts......................................................
11.12 Other Business....................................................
11.13 Choice of Law.....................................................
11.14 Nominees for Beneficial Owners....................................
11.15 Fiduciary Duties..................................................
11.16 Duties Among Holders..............................................
11.17 Confidentiality...................................................
</TABLE>
ii
<PAGE> 4
SHAREHOLDER AGREEMENT
SHAREHOLDER AGREEMENT (the "Agreement") made as of March 31, 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") and TANGENT GROWTH FUND, L.P., a California limited partnership
("Tangent") (individually and collectively, "Purchaser"), and Jim Stein
("Stein"), James A. Barnes ("Barnes"), and Jerry E. Polis ("Polis")
(individually and collectively, the "Shareholder").
W I T N E S S E T H:
WHEREAS, ValueStar, Inc., a wholly owned subsidiary of the Company (the
"Borrower"),and the Purchaser have entered into a Note Purchase Agreement (the
"Note Agreement") dated of even date with this Agreement pursuant to which the
Company has issued 8% Senior Notes in the stated principal amount of $2,450,000
to Purchaser (the "Note");
WHEREAS, the Company, the Shareholder and Purchaser have entered into a
Warrant Purchase Agreement (the "Warrant Agreement") dated of even date with
this Agreement;
WHEREAS, Purchaser is willing to enter into and consummate the
transactions contemplated by the Note Agreement only if, among other things, the
Company and the Shareholder enter into, and perform under, this Agreement and
the Warrant Agreement.
NOW, THEREFORE, in consideration of the foregoing, the mutual covenants
contained in this Agreement, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, Purchaser, the
Shareholder, and the Company, intending to be legally bound, agree as follows:
ARTICLE I
DEFINITIONS
All terms used in this Agreement will have the meanings ascribed to
them in the Warrant Agreement unless otherwise specifically defined in this
Agreement.
1
<PAGE> 5
ARTICLE II
HOLDERS' PREEMPTIVE RIGHTS
2.01 Equity Preemptive Right. The Company will not issue or sell any
New Securities without first complying with this Article II. The Company hereby
grants to each Holder the preemptive right to purchase, pro rata, any part of
the New Securities that the Company may, from time to time, propose to sell or
issue. In the event New Securities are offered or sold as part of a unit with
other New Securities, the preemptive right granted by this Article II will apply
to such units and not to the individual New Securities composing such units.
Each Holder's pro rata share for purposes of Article II is the ratio that the
number of shares of Common Stock issuable to such Holder upon exercise of its
Warrant plus the number of shares of Common Stock that are Issued Warrant Shares
owned by such Holder immediately prior to the issuance of the New Securities,
bears to the sum of (x) the total number of shares of Common Stock then
outstanding, plus (y) the number of shares of Common Stock issuable upon
exercise of all Warrants and Common Stock Equivalents then outstanding. Any
payment due from Holder in connection with the exercise of the preemptive right
granted pursuant to this Section 2.01 may be satisfied, at the option of the
Holder, by (i) cancellation of any debt and/or accrued interest owed by the
Company to the Holder or (ii) cancellation of Warrant Shares, valued at Fair
Market Value.
2.02 Debt Preemptive Right. The Company will not incur any additional
debt other than the debt due under the Note or any Permitted Indebtedness, (as
defined in the Note Agreement) without first complying with this Article II and
Section 12.15 of the Note Agreement.
2.03 Notice to Holders.
(a) In the event the Company proposes to issue or sell New
Securities, it will give each Holder written notice of its intention,
describing the type of New Securities and the price and terms upon
which the Company proposes to issue or sell the New Securities. Each
Holder will have fifteen (15) days from the date of receipt of any such
notice and such information as the Holders may reasonably request to
facilitate their investment decision to agree to purchase up to its
respective pro rata share of the New Securities for the price (valued
at Fair Market Value for any noncash consideration) and upon the terms
specified in the notice by giving written notice to the Company stating
the quantity of New Securities agreed to be purchased.
(b) In the event the Company proposes to incur additional debt
to which Section 2.02 above would apply, (the "New Financing"), the
Company shall first offer to each Holder, on a pari passu and pro rata
basis, based upon the principal amount of the Senior Obligations
outstanding to each Holder (except that if the Senior Obligations have
been paid in full, based upon the amount of Capital Stock owned by each
Holder), the right to provide all or any part of the New Financing
proposed to be incurred, on the most favorable terms for lender(s) to
be providing such New Financing. Such offer shall describe the New
Financing
2
<PAGE> 6
in reasonable detail. Thereafter, each Holder shall have fifteen (15)
days in which to accept the Company's offer and closing of the
transaction shall take place within sixty (60) days of acceptance. If
any Holder does not accept the offer or accepts only a part of it, such
Holder shall notify the Company and the other Holders, and the other
Holders shall thereupon have the right, within an additional ten (10)
day period, to agree to provide on a pro rata basis the New Financing
not so provided by the non-accepting Holder, and closing of such
transaction shall take place within sixty (60) days of acceptance. If
no Holder accepts the offer, or if each Holder elects to provide only a
part of the New Financing offered, then the Company may then offer to
third parties such New Financing, or a portion thereof not provided by
any Holder, on terms and conditions no more favorable to the lenders
thereof than those provided by, or offered to, the Holders, provided
that any such funding occurs within one hundred eighty (180) days of
the Holders' non-acceptance or partial acceptance of the Company's
original offer. Any New Financing thereafter must first be reoffered to
each Holder under the terms of this Section 2.03(b).
2.04 Allocation of Unsubscribed New Securities. In the event a Holder
fails to exercise such equity preemptive right within such fifteen (15) day
period, the other Holders, if any, will have an additional five (5) day period
to purchase such Holder's portion not so agreed to be purchased in the same
proportion in which such other Holders were entitled to purchase the New
Securities (excluding for such purposes such nonpurchasing Holder). Thereafter,
the Company will have ninety (90) days to sell the New Securities not elected to
be purchased by the Holders at the same price and upon the same terms specified
in the Company's notice described in Section 2.03(a). In the event the Company
has not sold the New Securities within such ninety (90) day period, the Company
will not thereafter issue or sell any New Securities without first offering such
securities in the manner provided above.
2.05 Termination of Preemptive Rights. The rights granted pursuant to
this Article II shall terminate upon the earlier to occur of (i) a Qualified
Liquidation Event, (ii) a Qualified Liquidity Milestone or (iii) the repayment
of any and all Senior Obligations (as defined in the Note Agreement) owed to
such Purchaser and the sale in excess of 80% of such Purchaser's Warrant Shares.
3
<PAGE> 7
ARTICLE III
DILUTION FEE
In the event that, during the term of the Warrants, the Company pays
any cash dividend or makes any cash distribution to any holder of any class of
its Capital Stock with respect to such Capital Stock, each Holder of the
Warrants will be entitled to receive in respect of its Warrant a dilution fee in
cash (the "Dilution Fee") on the date of payment of such dividend or
distribution, which Dilution Fee will be equal to the difference between (a) the
highest amount per share paid to any class of Capital Stock times the number of
Issued Warrant Shares then owned by such Holder plus the number of Issuable
Warrant Shares then owned by such Holder, and (b) the amount of such dividend or
distribution otherwise paid to such Holder as a result of its ownership of
Common Stock.
ARTICLE IV
DRAG ALONG RIGHTS AND CALL OPTION UPON EXERCISE OF DRAG ALONG RIGHTS
4.01 Drag Along Rights.
(a) In the event that at any time or times after the earlier to occur
of (i) the fifth (5th) anniversary of the date of this Agreement, or (ii) at any
time or times after the occurrence of any of the events listed in any of clauses
(i), (ii), (iii) or (iv), below but in any event prior to the earlier of (w) the
closing of a Qualified Liquidation Event, (x) the Company achieving a Qualified
Liquidity Milestone, (y) the repayment of any and all Senior Obligations owed to
such Purchaser and the sale in excess of 80% of such Purchaser's Warrant Shares
or (z) the tenth (10th) anniversary of the date of this Agreement (the
"Drag-Along Option Period"), Purchaser shall have the right to cause the
Shareholder to participate in a sale or transfer, with respect to all of the
Capital Stock of the Company held by Shareholder and the Shareholder shall use
its best efforts to participate in a sale or transfer of all or substantially
all of the assets or stock of the Borrower, on the terms set forth in this
Section 4.01:
(i) a change in control of the Company (for purposes of this
subsection a "change of control" will include, without limitation, the
Shareholder ceasing to own, directly, a number of shares of issued and
outstanding voting stock of the Company which is equal to at least 20%
of the fully diluted equity of the Company) or the Company ceasing to
own 100% of the Borrower; or
(ii) completion of a Public Offering by the Company or any of
its Subsidiaries; or
(iii) James Stein ("Key Manager") ceasing to be president or
chief executive officer of the Company and a replacement satisfactory
to each Holder is not found within ninety (90) days of his departure;
or
(iv) after the occurrence and during the continuance of an
Event of Default (as
4
<PAGE> 8
defined in the Note Agreement) pursuant to Sections 8.1(a), (b), (f) or
(h) of the Note Agreement or any failure of the Company in any material
respect to perform any of its obligations hereunder or under the
Warrant Agreement.
(b) In order to exercise the right granted pursuant to Section 4.01(a),
the Holder will deliver or cause to be delivered a written notice to the Company
and each Shareholder (the "Notice of Proposed Drag-Along Sale") of the Holder's
intention to seek one or more buyers for the Company, its Subsidiaries or all or
substantially all of their assets (the "Proposed Sale"). Upon receipt of the
Notice of Proposed Drag-Along Sale, the Company shall have thirty (30) days to
retain an investment banking firm of national standing reasonably acceptable to
the Holder to assist the Company in consummating the Proposed Sale. In the event
that the Company does not retain an investment banking firm of national standing
reasonably acceptable to the Holder within such thirty (30) day period or the
Company does not consummate a Proposed Sale within one hundred eighty (180) days
after retaining such investment banking firm, then Holder may, at the Company's
expense, in Holder's sole discretion take all actions that it deems necessary
and appropriate to consummate the Proposed Sale. Upon receipt of an offer for
the Proposed Sale acceptable to the Holder, the Company and the Shareholder
shall use their best efforts to take all actions to complete the Proposed Sale
in a timely manner and shall fully cooperate with the Holder to consummate the
Proposed Sale on the terms accepted by Holder, subject to and contingent upon
compliance with applicable state corporate and federal securities laws.
(c) Subject to the fiduciary obligations of each Board member of the
Company and Borrower, the Company represents and warrants to Holder that the
provisions of this Section 4.01 are valid and enforceable and do not, and will
not, result in the breach of any obligations or duties of the Company or the
Shareholder. In addition, the Company agrees and acknowledges that the Holder
would not purchase the Senior Notes without being provided the benefits of the
provisions of this Section 4.01.
4.02 Grant of Call Option Upon Exercise of Drag-Along Rights. Upon
receipt of a Notice of Proposed Drag-Along Sale, the Holder hereby grants to the
Company the right to purchase from the Holders (the "Drag-Along Call Option")
all, but not less than all, of the Warrant Shares and any other Capital Stock
purchased in connection with the exercise of its rights granted pursuant to this
Agreement (the "Drag-Along Call Option Shares"). The Company may assign the
rights granted pursuant to this Section 4.02 to the Shareholders. The Drag-Along
Call Option may be exercised at any time after receipt by the Company of a
Notice of Proposed Drag Along Sale and prior to the earlier of (x) the execution
by the Company of a binding agreement for a Proposed Sale, or (y) the expiration
of ninety (90) days following the receipt by the Company of a Notice of Proposed
Drag Along Sale (the "Drag-Along Call Option Period").
4.03 Drag-Along Call Option Price. In the event that the Company
exercises the Drag-Along Call Option, the price (the "Drag-Along Call Option
Price") to be paid to each Holder pursuant to this Agreement will be cash
(denominated in U.S. Dollars) in an amount equal to the sum of (i) the
5
<PAGE> 9
amount determined by multiplying (a) the higher of (I) the Fair Market Value or
(II) the Revenue Value as of the end of the month immediately preceding the date
notice is given of the exercise of the Drag-Along Call Option pursuant to
Section 4.02 (less the Exercise Price of the Warrants, to the extent not already
taken into account in calculating Fair Market Value or Revenue Value) times (b)
the number of Drag-Along Call Option Shares owned by each Holder.
4.04 Exercise of Drag-Along Call Option. The Drag-Along Call Option may
be exercised during the Drag Along Call Option Period with respect to all, but
not less than all, of the Drag-Along Call Option Shares, by the Company giving
notice to each Holder during the Drag-Along Call Option Period of the Company's
election to exercise the Drag-Along Call Option, and the date of the Drag-Along
Call Option Closing (as defined below), which will not be more than ninety (90)
days after the date of such notice.
4.05 Certain Remedies. In the event that the Company defaults in its
obligation to purchase the Drag-Along Call Option Shares upon exercise of the
Drag-Along Call Option, in addition to any other rights or remedies of each
Holder, the unpaid portion of the Drag-Along Call Option Price will bear
interest at the lesser of (i) sixteen percent (16%) or (ii) the highest rate
permitted by applicable law. The Company will, upon the request of any Holder,
execute and deliver to such Holder a promissory note upon terms similar to the
Senior Note (as defined in the Note Agreement) in form and substance
satisfactory to such Holder evidencing such obligation.
4.06 Drag-Along Call Option Closing. The closing for the purchase and
sale of all of the Drag-Along Call Option Shares will take place at the office
of the Company on the date specified in such notice of exercise (a "Drag-Along
Call Option Closing"). At any Drag Along Call Option Closing, to the extent
applicable, the Holder of the Drag-Along Call Option Shares will deliver the
certificate or certificates evidencing the Drag-Along Call Option Shares being
purchased, duly endorsed in blank. In consideration therefor, the Company will
deliver to the Holder the Drag-Along Call Option Price, which will be payable in
cash.
ARTICLE V
CALL OPTION FOR CLASS C WARRANTS
5.01 Grant of Option. The Holders hereby severally grant to the Company
an option to require all Holders to sell to the Company, and each Holder is
obligated to sell to the Company under this option (the "Call Option"), all, but
not less than all, of the C Warrants and the Warrant Shares issued upon any
previous exercise of the C Warrants. The Company may assign its rights granted
pursuant to this Section 5.01 to the Shareholder. The Call Option will be
effective at any time prior to the fifth (5th) anniversary of the Closing Date
(the "Call Option Period"). The provisions of this Article V will only be
applicable if the Company or its Affiliates or Subsidiaries are not in default
under this Agreement, the Shareholder Agreement, the Note Agreement or any Other
Agreement, as defined in the Note Agreement.
6
<PAGE> 10
5.02 Call Price. In the event that the Company exercises the Call
Option, the exercise price to be paid in cash to each Holder will be equal to
$6.00 per share (such price to be adjusted for any stock split, stock dividend,
reverse stock split or other subdivision of the Common Stock) less any
applicable Exercise Price. The Call Option may only be exercised with respect to
all C Warrants and all Warrant Shares issued upon any previous exercise of the C
Warrants.
5.03 Exercise of Call Option. The Call Option may be exercised during
the Call Option Period with respect to all of the C Warrants and the Warrant
Shares issued upon any previous exercise of C Warrants of all Holders, by the
Company giving notice to each Holder during the Call Option Period of the
election of the Company to exercise the Call Option, and the date of the Call
Option Closing (as defined below), which in all events will be within at least
sixty (60) days after the date of such notice. In the event that a Drag-Along
Call Option with respect to any of the C Warrants or the Warrant Shares issued
upon any previous exercise of C Warrants is exercised within the Call Option
Period and the Drag-Along Call Option has not been consummated with respect to
such C Warrants or Warrant Shares, the Company may exercise the Call Option and
the terms of this Article V will be applicable rather than the terms of Article
IV above with respect to all of the C Warrants and the Warrant Shares issued
upon any previous exercise of C Warrants.
5.04 Call Option Closing. The closing for the purchase and sale of all
of the C Warrants and Warrant Shares issued upon any previous exercise of the C
Warrants will take place at the office of the Company, on the date specified in
such notice of exercise (the "Call Option Closing"). At the Call Option Closing,
the Holders of the C Warrants will deliver the C Warrants and the certificate or
certificates representing the Warrant Shares issued upon any previous exercise
of C Warrants, duly endorsed in blank. In consideration therefor, the Company
will deliver to each Holder the purchase price, which will be payable in
immediately available funds.
ARTICLE VI
FIRST REFUSAL; AND CO-SALE RIGHTS
6.01 Rights of Co-Sale.
(a) In the event that any Shareholder intends to sell or
transfer, directly or indirectly, any shares of any class of Capital
Stock held by it to any Person, each Holder will have the right to
participate in such sale or transfer on the terms set forth in this
Article VI; provided, however, none of the provisions of this Article
VI will apply to any sale by the Shareholder of shares of Capital Stock
in a Public Offering, so long as all Holders have had an opportunity to
participate in such offering pursuant to the registration rights under
this Agreement. The rights granted under this Section 6.01 shall expire
with respect to each Purchaser individually upon (i) the repayment of
the Senior Obligations owed to such Purchaser and the sale of in excess
of 80% of such Purchaser's Warrant Shares, (ii) the occurrence of a
Qualified Liquidation Event or (iii) the occurrence of a Qualified
Liquidity Milestone.
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<PAGE> 11
(b) Notwithstanding Section 6.01(a) or Section 6.02, Stein may
sell up to an aggregate amount of 10% (calculated as of the date
hereof) of his equity interest in the Company including stock, options
and/or warrants (the "Stein Equity Interest") without invoking the
Holders' rights pursuant to Section 6.01(a) or Section 6.02 as long as
(i) no sales are made in calendar year 1999 and (ii) no more than 2.5%
of Stein Equity Interest is sold in any single subsequent year. Any
sales which would result in an excess of 10% of the Stein Equity
Interest in the Company being sold will require Purchaser's consent and
be subject to Section 6.01(a) above.
(c) Notwithstanding Section 6.01(a) or Section 6.02, Barnes
may sell up to an aggregate amount of 16% (calculated as of the date
hereof) of his equity interests in the Company including stock, options
and/or warrants (the "Barnes Equity Interest") without invoking the
Holders' rights pursuant to Section 6.01(a) or Section 6.02 as long as
(i) no sales are made in calendar year 1999 and (ii) no more than 4% of
his equity interest is sold in any single subsequent year. Any sales
which would result in an excess of 16% of the Barnes Equity Interest in
the Company being sold will require Purchaser's consent and be subject
to Section 6.01(a) above.
(d) Notwithstanding Section 6.01(a) or Section 6.02, Polis may
sell up to an aggregate amount of 16% (calculated as of the date
hereof) of his equity interests in the Company including stock, options
and/or warrants (the "Polis Equity Interest") without invoking the
Holders' rights pursuant to Section 6.01(a) or Section 6.02 as long as
(i) no sales are made in calendar year 1999 and (ii) no more than 4% of
his equity interest is sold in any single subsequent year. Any sales
which would result in an excess of 16% of the Polis Equity Interest in
the Company being sold will require Purchaser's consent and be subject
to Section 6.01(a) above.
(e) Notwithstanding Section 6.01(a) or Section 6.02, in
addition to any shares excluded by subsections 6.01(b),(c) and (d),
Section 6.01(a) and Section 6.02 shall not apply to any shares of stock
sold by Stein, Barnes or Polis where and to the extent the proceeds of
such sale are used to either (i) pay taxes on any income resulting from
the exercise of options or warrants of the Company held by such
individual from such individual's sale of shares to pay such taxes or
(ii) exercise options or warrants of the Company held by such
individual (collectively, Sections 6.01(b)-(e), the "Released Shares").
6.02 Method of Electing Sale; Allocation of Sales. Except for the
Released Shares or as otherwise provided in Section 6.01, no sale or transfer by
any Shareholder of any shares of Capital Stock will be valid unless the
transferee of such Capital Stock first agrees in writing to be bound by the same
terms and conditions that apply to the Shareholder under this Agreement and the
Warrant Agreement. In addition, before any shares of Capital Stock held,
directly or indirectly, by any Shareholder may be sold or transferred to any
Person, such Shareholder (as such, the "Selling Shareholder") will comply with
the following provisions:
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<PAGE> 12
(a) The Selling Shareholder will deliver or cause to be
delivered a written notice (the "Notice of Sale") to each Holder at
least twenty (20) days prior to making any such sale or transfer. The
Company agrees to provide the Selling Shareholder with a list of the
names and addresses of each such Holder for such purpose. The Notice of
Sale will include (i) a statement of the Selling Shareholder's bona
fide intention to sell or transfer; (ii) the name of and the address of
the prospective transferee (the "Buyer"); (iii) the number of shares of
Capital Stock of the Company to be sold or transferred; (iv) the terms
and conditions of the contemplated sale or transfer; (v) the purchase
price in cash that the Buyer will pay for such shares of Capital Stock;
(vi) the expected closing date of the transaction; and (vii) such other
information as the Holders may reasonably request to facilitate their
decision as to whether or not to exercise the rights granted by this
Article VI.
(b) Any Holder receiving the Notice of Sale may elect to
participate in the contemplated sale or transfer by exercising either
(i) its right of first refusal to purchase such Capital Stock pursuant
to Section 6.02(c) or (ii) its right to co-sell its Capital Stock
pursuant to Section 6.02(d). Either of such rights may be exercised in
the sole discretion of the Holder by delivering a written notice (an
"Election Notice") to the Company and the Selling Shareholder within
ten (10) days after receipt of such Notice of Sale stating the election
of the Holder to exercise either its right of first refusal pursuant to
Section 6.02(c) or its right of co-sale pursuant to Section 6.02(d).
(c) Each Holder may elect to treat the Notice of Sale as an
irrevocable offer to sell to the Holder up to its pro rata share
(determined in a manner consistent with Article II, and including the
pro rata share of Capital Stock not purchased by other Holders) of the
number of shares of Capital Stock proposed to be sold to the Buyer on
the same per share terms and conditions as stated in the Notice of
Sale. Such offer will remain open for a period of twenty (20) days from
delivery to the Shareholder of the Election Notice. Within such twenty
(20) day period, the Holder may elect to accept such offer in whole or
in part by delivering to the Selling Shareholder written notice of its
irrevocable election to accept such offer. If the Holder irrevocably
accepts such offer, the closing of the purchase and sale will occur on
or before the tenth (10th) business day following delivery of the
notice of acceptance. At such closing, the Holder will deliver the
consideration payable to the order of the Selling Shareholder, against
delivery by the Selling Shareholder of the Capital Stock being so
purchased, free and clear of all liens, claims, and encumbrances, other
than this Agreement, endorsed in good form for transfer to the Holder
or its designees. If a Holder does not accept such offer within the
twenty (20) day period specified above, the offer to such Holder will
be deemed to have been rejected, and the Selling Shareholder, subject
to Section 6.02(d), will be free to sell or transfer such Capital Stock
not purchased by the Holders to the Buyer on the same terms set forth
in the Notice of Sale within ninety (90) days of the expiration of such
twenty (20) day period. If the sale to the Buyer is not so consummated,
the terms of this Article VI will again be applicable to any sale or
transfer of Capital Stock by the Shareholder.
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<PAGE> 13
(d) Each Holder may elect to sell or transfer in the
contemplated transaction up to the total of the number of shares of
Capital Stock then held by it (including the Issuable Warrant Shares).
Promptly after the receipt of an Election Notice exercising such right,
the Selling Shareholder will use its best efforts to cause the Buyer to
amend its offer so as to provide for such Buyer's purchase, upon the
same terms and conditions as those contained in the Notice of Sale, of
all of the shares of Capital Stock (including the Issuable Warrant
Shares) elected to be sold in such Election Notices (the "Co-Sell
Shares"). In the event that the Buyer is unwilling to amend its offer
to purchase all of the Co-Sell Shares in addition to the shares of
Capital Stock described in the related Notice of Sale, if the Selling
Shareholder desires to proceed with the sale, the total number of
shares that such Buyer is willing to purchase will be allocated to the
Selling Shareholder and each Holder having given an Election Notice
exercising its right pursuant to this Section 6.02(d) (the
"Co-Sellers") in proportion to the aggregate number of shares of
Capital Stock (including Issuable Warrant Shares) held by each such
Person; provided, however, that no such Person will be so allocated a
number of shares greater than the number of shares that it has sought
to sell to such Buyer in the related Notice of Sale or Election Notice.
All Capital Stock sold or transferred by the Selling Shareholder and
the Co-Sellers with respect to a single Notice of Sale under Section
6.02(b) will be sold or transferred to the Buyer in a single closing on
the terms described in such Notice of Sale, and each such share will
receive the same per share consideration. In the event that the Buyer
for whatever reason, declines to purchase any shares from any Holder
delivering an Election Notice, then (x) the Selling Shareholder will
not be permitted to sell or transfer any shares of Capital Stock to
such Buyer and (y) the shares of Capital Stock of the Selling
Shareholder that were to have been sold or transferred to the Buyer
will be subject to the Holders' right of first refusal pursuant to
Section 6.02(c) for a period of twenty (20) days thereafter on the
terms and conditions that the Buyer would have purchased such shares of
Capital Stock from the Selling Shareholder had it not declined to
purchase shares from the Co-Seller under this Section 6.02(d).
6.03 Sales to Related Parties. No sale or transfer of shares of Capital
Stock by the Shareholder to a Related Party will be subject to the provisions of
Section 6.02; provided, however, that such Related Party first agrees to assume
the obligations of the Shareholder (without relieving the Shareholder of any
obligations under this Agreement) under this Agreement with respect to the
shares of Capital Stock thereby acquired by it and to be bound by the same terms
and conditions that apply to the Shareholder under this Agreement and the
Warrant Agreement in a written instrument in a form and substance satisfactory
to the Holders.
6.04 Termination of First Refusal and Co-Sale Rights. The rights
granted pursuant to this Article VI shall terminate upon the earlier to occur of
(i) a Qualified Liquidation Event, (ii) a Qualified Liquidity Milestone or (iii)
the repayment of any and all Senior Obligations owed to such Purchaser and the
sale in excess of 80% of such Purchaser's Warrant Shares.
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ARTICLE VII
LIQUIDITY
7.01 Required Registration. At any time, the Holders 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 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, other than the Holders, will be reduced pro rata
(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.
7.02 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 7.02 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
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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.
7.03 Form S-3 Registrations. In addition to the registration rights
provided in Sections 7.01 and 7.02 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.
7.04 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.
7.05 Registration Procedures. In connection with any registration of
Registrable Securities under this Article VII, the Company will, as soon as
practicable:
(a) 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;
(b) 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 such Registrable
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Securities have been disposed of or the expiration of one hundred
eighty (180) days;
(c) 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;
(d) 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;
(e) 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;
(f) 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;
(g) 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 7.01, 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
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<PAGE> 17
Holder's intended method or methods of disposition, and any other
representation required by law;
(h) 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
(i) 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 Article VII 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 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 7.01 or
7.03 will be selected by the Holders of a majority of the Registrable Securities
being so registered.
7.06 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 Article VII, 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
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<PAGE> 18
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.
7.07 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.
7.08 Holdback Agreements.
(a) If any registration pursuant to Section 7.02 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 the Shareholder 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.
(b) The Company and the Shareholder agree 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 7.01 or 7.03 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.
7.09 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.
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7.10 Rule 144A. The Company agrees that, upon the request of any Holder
or any prospective purchaser of a Warrant or Warrant Shares 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
information:
(a) a brief statement of the nature of the business of the
Company and any Subsidiaries and the products and services they offer;
(b) 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
(c) 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 to this Section 7.10 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.
7.11 Limitations on Subsequent Registration Rights. Until (i) a
Qualified Liquidity Milestone, (ii) a Qualified Liquidation Event or (iii) the
repayment of any and all Senior Obligations owed to such Purchaser and the sale
in excess of 80% of such Purchaser's Warrant Shares from and after the date of
this Agreement or until the provisions of Section 7.04 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 7.01, 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 7.01 or within one hundred twenty
(120) days of the effective date of any registration effected pursuant to
Section 7.01.
7.12 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
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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 7.12 shall preclude a Holder of Registrable Securities from enjoying
registration rights which it might otherwise possess under this Article 7.
7.13 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 Article VII, (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.
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ARTICLE VIII
DIRECTORS
8.01 Voting Agreement. To ensure compliance with this Article VIII, the
Shareholder hereby irrevocably covenants and agrees to vote, or give or withhold
consent with respect to, all shares of Capital Stock now owned or later acquired
by them, all in accordance with the terms of this Article VIII. The agreement to
vote contained in this Article VIII will expire on the earlier to occur of (a)
the day prior to maximum period permitted under applicable law, (b) the date
Purchaser and Affiliates (with respect to such Purchaser) cease to hold 20% of
Warrants or Warrant Shares purchased at Closing or (c) the occurrence of a
Qualified Liquidity Event or Qualified Liquidity Milestone. A counterpart of
this Agreement will be deposited with the Company at its principal place of
business or registered office and will be subject to the same right of
examination by a shareholder of the Company, in person or by agent or attorney,
as are the books and records of the Company.
8.02 Board of Directors. Until the expiration of the agreement to vote
in this Article VIII, subject to applicable state law, Seacoast and Pacific
shall be entitled to designate one (1) member to the Company's Board of
Directors (the "Purchaser Directors"). Neither Seacoast nor Pacific shall have
the obligation to designate a member to the Company's Board of Directors. The
Shareholder shall (i) vote all shares of Capital Stock now owned or later
acquired by such Shareholder (the "Voting Shares") at all regular and special
meetings of the stockholders of the Company called or held for the purpose of
filling positions on the Board of Directors, and in each written consent
executed in lieu of such a meeting of stockholders, and each Shareholder shall
take all actions otherwise necessary, to ensure (to the extent within such
Shareholder's collective control) the election to the Board of Directors of the
Purchaser Directors and (ii) not vote their Voting Shares for the removal of any
Purchaser Director unless requested by the Purchaser party that designated such
Purchaser Director. Any Purchaser Director vacancy created or existing on the
Company's Board of Directors shall be filled by a successor Purchaser Director
who shall be elected in a manner by which his or her predecessor was elected or
entitled to be elected as provided above if so requested by the applicable
Purchaser party.
Subject to the confidentiality provisions set forth in Section 11.17,
the Company will deliver to each Purchaser a copy of the minutes of and all
materials distributed at or prior to all meetings of the Board of Directors
(including the executive committee thereof) or shareholders of the Company,
certified as true and accurate by the Secretary of the Company, promptly
following each such meeting. The Company will (a) permit Holders to designate
three (3) persons to attend all meetings of the Company's Board of Directors
(including executive committee meetings) (so long as Pacific, Tangent and
Seacoast are Holders each of them shall be permitted to designate one (1)
person) unless in the case of Seacoast or Pacific they have a representative as
a member of the Board of Directors, (b) provide such designees not less than
fourteen (14) calendar days' actual notice of all regular meetings and of all
special meetings of the Company's Board of Directors (including the executive
committee thereof) or shareholder, (c) permit such designees to attend such
meetings as an observer and (d) provide to such designees a copy of all
materials distributed at such meetings or otherwise
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to the Board of Directors of the Company. Such meetings shall be held in person
at least quarterly, and the Company will cause its Board of Directors to call a
meeting at any time upon the request of either Seacoast or Pacific not more than
two (2) occasions per calendar year upon fourteen (14) calendar days' actual
notice to the Company. The Company agrees to reimburse each individual referred
to in Subsection (c) above for all reasonable expenses incurred in traveling to
and from such meetings and attending such meetings. All actions that may be
taken at a duly called Board meeting likewise may be taken by unanimous written
consent of each Board member, which consent, if signed by Seacoast or Pacific
either as a Board member or observer shall be deemed effective upon such signing
whether or not the relevant number of advance days' notice has been given as
required if a meeting had been held in lieu of written consent.
ARTICLE IX
REPRESENTATIONS AND WARRANTIES; COVENANTS
9.01 Representations and Warranties and Covenants of the Company. Each
of the representations and warranties set forth in Section 3.01 of the Warrant
Agreement and each of the covenants set forth in Article IV of the Warrant
Agreement are hereby restated and incorporated by reference in this Agreement as
though set forth in this Agreement, and is made by the Company as made in the
Warrant Agreement for the benefit of Purchaser.
9.02 Representations and Warranties of Purchaser. Each of the
representations and warranties of Purchaser set forth in Section 3.02 of the
Warrant Agreement and Article III of the Note Agreement is hereby restated and
incorporated by reference in this Agreement as though set forth in this
Agreement, and is made by Purchaser as representations and warranties of
Purchaser hereunder for the benefit of the Company.
9.03 Covenants of Shareholder. The Shareholder agrees that they shall
take all reasonable shareholder action necessary to permit or enable the Company
to comply with the Company's obligations to the Holder under Article II, Article
IV and Article VI of the Warrant Purchase Agreement (provided that any costs and
expenses relating thereto shall be borne by the Company), and that they shall
refrain from taking any action that would restrict or impair the Company's power
or ability to comply therewith.
ARTICLE X
CONDITIONS
The obligations of Purchaser to effect the transactions contemplated by
this Agreement are subject to the following conditions:
10.01 Note Agreement and Warrant Agreement Conditions. All of the
conditions precedent to the obligations of Purchaser under the Note Agreement
and the Warrant Agreement shall have been satisfied in full or waived.
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10.02 Proceedings. All proceedings taken in connection with the
transactions contemplated by this Agreement, and all documents necessary to the
consummation thereof, will be reasonably satisfactory in form and substance to
Purchaser and its counsel, and Purchaser and its counsel will have received
copies (executed or certified as may be appropriate) of all documents,
instruments, and agreements that Purchaser or its counsel may request in
connection with the consummation of such transactions.
ARTICLE XI
MISCELLANEOUS
11.01 Indemnification. In addition to any other rights or remedies to
which Purchaser and the Holders may be entitled, the Company agrees to and will
indemnify and hold harmless Purchaser, the Holders, and their Affiliates and
their respective successors, assigns, officers, directors, employees, attorneys,
and agents (individually and collectively, an "Indemnified Party") from and
against any and all losses, claims, obligations, liabilities, deficiencies,
diminutions in value, penalties, causes of action, damages, out-of-pocket costs,
reasonable attorneys' fees, and expenses including, without limitation, costs
and expenses of investigation and defense, attorneys' fees and expenses
including, without limitation, those arising out of the sole or contributory
negligence of any Indemnified Party, that any Indemnified Party may suffer,
incur, or be responsible for, arising or resulting from any misrepresentation,
breach of warranty, or nonfulfillment of any agreement on the part of the
Company, the Company, or the Shareholder under this Agreement, the Warrant
Agreement, or under any other agreement to which the Company or the Shareholder
is a party in connection with the transactions contemplated by this transaction,
or from any misrepresentation in or omission from any certificate or other
instrument furnished or to be furnished by the Company or the Shareholder to
Purchaser or the Holders under this Agreement. The foregoing indemnification
includes any such claims, actions, damages, costs and expenses incurred by
reason of the sole or contributory negligence of the Person to be indemnified,
but excludes any of the same incurred by reason of such Person's gross
negligence or willful misconduct.
11.02 Default. It is agreed that a violation by any party of the terms
of this Agreement cannot be adequately measured or compensated in money damages,
and that any breach or threatened breach of this Agreement by a party to this
Agreement would do irreparable injury to the nonbreaching party. It is,
therefore, agreed that in the event of any breach or threatened breach by a
party to this Agreement of the terms and conditions set forth in this Agreement,
the nondefaulting party will be entitled, in addition to any and all other
rights and remedies that it may have in law or in equity, to apply for and
obtain injunctive relief requiring the defaulting party to be restrained from
any such breach, or threatened breach or to refrain from a continuation of any
actual breach.
11.03 Integration. This Agreement, the Note Agreement and the Warrant
Agreement constitute the entire agreement among the parties with respect to the
subject matter hereof and thereof and supersede all previous written, and all
previous or contemporaneous oral, negotiations, understandings, arrangements,
and agreements. This Agreement may not be amended or
20
<PAGE> 24
supplemented except by a writing signed by the Company, the Shareholder, and
each Holder.
11.04 Headings. The headings in this Agreement are for convenience and
reference only and are not part of the substance of this Agreement. References
in this Agreement to Sections and Articles are references to the Sections and
Articles of this Agreement unless otherwise specified.
11.05 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.
11.06 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 the Purchaser, at Seacoast Capital Partners Limited
Partnership
One Sansome Street, Suite 2100
San Francisco, California 94104
Attention: Jeffrey J. Holland
Fax: (415) 956-1459
21
<PAGE> 25
Seacoast Capital Partners Limited
Partnership
c/o Seacoast Capital Corporation
55 Ferncroft Road
Danvers, Massachusetts 01923
Attention: Walt Leonard
Fax: (508) 750-1301
Pacific Mezzanine Fund, L.P.
2200 Powell Street, Suite 1250
Emeryville, California 94608
Attention: Dave Woodward
Fax: (510) 595-9801
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
1120A Ballena Boulevard
Alameda, California 94501
Attention: Jim Stein
Fax: (510) 814-9319
with courtesy copies to: Bay Venture Counsel, LLP
1999 Harrison Street, Suite 1300
Oakland, California 94612
Attention: Bruce Johnson, Esq.
Fax: (510) 834-7440
22
<PAGE> 26
If to the Shareholder, at: James Stein
ValueStar, Inc.
7009 Baker Lane
Sebastopol, California 954724501
Fax: (707) 824-1370
James A. Barnes
9029 Opus Drive
Las Vegas, Nevada 89117
Fax: (702) 254-4212
Jerry E. Polis
980 American Pacific Drive, Suite 111
Henderson, Nevada 89014
Fax: (702) 737-6900
or to such other address as each party may designate for itself by like notice.
Notice to any Holder other than Purchaser will be delivered as set forth above
to the address shown on the stock transfer books of the Company or the Warrant
Register 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 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.
11.07 Successors. This Agreement will be binding upon and inure to the
benefit of the parties and their respective successors and permitted assigns.
11.08 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.
11.09 Survival. All warranties, representations, and covenants made by
any party in this
23
<PAGE> 27
Agreement or in any certificate or other instrument delivered by such party or
on its behalf under this Agreement will be considered to have been relied upon
by the party to which it is delivered and will survive the Closing Date,
regardless of any investigation made by such party or on its behalf. All
statements in any such certificate or other instrument will constitute
warranties and representations under this Agreement.
11.10 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.
11.11 Counterparts. This Agreement may be executed in any number of
counterparts, which will individually and collectively constitute one agreement.
11.12 Other Business. It is understood and accepted that Purchaser, the
Initial Holder, the Holders, and their Affiliates have interests in other
business ventures that may be in conflict with the activities of the Company and
that nothing in this Agreement will limit the current or future business
activities of such parties whether or not such activities are competitive with
those of the Company. The Company and the Shareholder agree that all business
opportunities in any field substantially related to the business of the Company
will be pursued exclusively through the Company.
11.13 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.
11.14 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.
24
<PAGE> 28
11.15 Fiduciary Duties. The Company acknowledges and agrees that, for
so long as any Warrant is outstanding and regardless of whether the Holder has
exercised any portion of its Warrants, (a) the officers and directors of the
Company will owe the same duties (fiduciary and otherwise) to the Holder as are
owed to a stockholder of the Company and (b) the Holder will be entitled to all
rights and remedies with respect to such duties or that are otherwise available
to a stockholder of the Company under the General Corporation Law of the
jurisdiction in which the Company is organized, as amended from time to time.
11.16 Duties Among Holders. The provision relating to actions of the
Holders under the definition of Holder in the Warrant Agreement are incorporated
herein by reference.
11.17 Confidentiality. Each Holder agrees to keep confidential any
information delivered by the Company to such Holder under this Agreement that
the Company clearly indicates in writing to be confidential information;
provided, however, that nothing in this Section 11.17 will prevent such Holder
from disclosing such information (a) to any Affiliate of such Holder or any
actual or potential purchaser, participant, assignee, or transferee of such
Holder's rights or obligations hereunder that agrees to be bound by the terms of
this Section 11.17, (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 Holder, (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 Holder, (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 Holder. The Company agrees that such
Holder will be presumed to have met its obligations under this Section 11.17 to
the extent that it exercises the same degree of care with respect to information
provided by the Company as it exercises with respect to its own information of
similar character.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
25
<PAGE> 29
IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement as of the date first above written.
COMPANY:
VALUESTAR CORPORATION
By:
----------------------------------------
Name: James Stein
Its: President and Chief Executive Officer
SHAREHOLDER:
-------------------------------------------
James Stein
-------------------------------------------
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
-------------------------------------------
Jerry E. Polis, individually, as President
of Davric Corporation and Trustee of the
Jerry E. Polis Family Trust
26
<PAGE> 30
PURCHASER:
SEACOAST CAPITAL PARTNERS LIMITED
PARTNERSHIP
By: Seacoast Capital Corporation,
its general partner
By:
-----------------------------------
Name: Jeffrey J. Holland
Its: Vice President
PACIFIC MEZZANINE FUND, L.P.
By: Pacific Private Capital
its general partner
By:
-----------------------------------
Name: David Woodward
Its: General Partner
TANGENT GROWTH FUND, L.P.
By: Tangent Fund Management, LLC
its general partner
By:
----------------------------------
Name: Mark P. Gilles
Its: Vice President
27
<PAGE> 31
SCHEDULE 7.13
<PAGE> 1
EXHIBIT 99.4
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.
<PAGE> 2
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 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).
<PAGE> 3
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
<PAGE> 4
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 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).
<PAGE> 5
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
<PAGE> 6
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 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
<PAGE> 7
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,
<PAGE> 8
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 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
<PAGE> 9
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
<PAGE> 10
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 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)
<PAGE> 11
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
<PAGE> 12
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 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
<PAGE> 13
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
<PAGE> 14
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
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
<PAGE> 15
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 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.
<PAGE> 16
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
<PAGE> 17
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.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
<PAGE> 18
IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement as of the date first above written.
COMPANY:
VALUESTAR CORPORATION
By:
-------------------------------------
Name: James Stein
Its: President and Chief Executive
Officer
----------------------------------------
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
----------------------------------------
Jerry E. Polis, individually, as
President of Davric Corporation and
Trustee of the Jerry E. Polis Family
Trust
<PAGE> 19
SEACOAST CAPITAL PARTNERS LIMITED
PARTNERSHIP
By: Seacoast Capital Corporation,
its general partner
By:
--------------------------------
Name: Jeffrey J. Holland
Its: Vice President
PACIFIC MEZZANINE FUND, L.P.
By: Pacific Private Capital
its general partner
By:
-------------------------------
Name: David Woodward
Its: General Partner
TANGENT GROWTH FUND, L.P.
By: Tangent Fund Management, LLC
its general partner
By:
-------------------------------
Name: Mark P. Gilles
Its: Vice President
<PAGE> 20
SCHEDULE 1
- ---------------------------------------
Name of Investor
- ---------------------------------------
Authorized Signature
- ---------------------------------------
Print Name and Title of Signatory
ADDRESS
- ---------------------------------------
- ---------------------------------------
- ---------------------------------------
