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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended March 31, 2000
Commission File Number 0-22619
VALUESTAR CORPORATION
(Exact name of registrant as specified in its charter)
Colorado 84-1202005
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(State or other jurisdiction of (I.R.S. Empl. Ident. No.)
incorporation or organization)
360-22nd Street, #210, Oakland, California 94612
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(Address of principal executive offices) (Zip Code)
(510) 808-1300
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(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES _X_ NO ___
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Common Stock, $.00025 par value 15,242,059
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(Class) (Outstanding at April 28, 2000)
Transitional Small Business Disclosure Format (check one): YES ___ NO _X_
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<PAGE>
VALUESTAR CORPORATION
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited):
Consolidated Balance Sheets as of March 31, 2000 and
June 30, 1999 3
Consolidated Statements of Operations for the three
and nine months ended March 31, 2000 and 1999 4
Consolidated Statements of Cash Flows for the nine
months ended March 31, 2000 and 1999 5
Notes to Interim Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
2
<PAGE>
<TABLE>
VALUESTAR CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
<CAPTION>
March 31, June 30,
2000 1999
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 10,533,486 $ 270,149
Receivables 388,844 409,806
Inventory 22,771 4,008
Prepaid expenses 213,903 59,446
------------ ------------
Total current assets 11,159,004 743,409
PROPERTY AND EQUIPMENT 2,422,441 501,605
DEFERRED COSTS 60,433 100,839
INTANGIBLE AND OTHER ASSETS 84,536 194,130
------------ ------------
Total assets $ 13,726,414 $ 1,539,983
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 996,576 461,825
Accrued liabilities and other payables 256,194 189,759
Deferred revenues 55,160 27,430
Note payable - shareholder 295,000 280,000
Current portion of capitalized leases 42,423 30,018
Current portion of long-term debt 506,485 1,032,664
------------ ------------
Total current liabilities 2,151,838 2,021,696
CAPITAL LEASE OBLIGATIONS, net of current portion 100,709 113,541
LONG-TERM DEBT, net of current portion 114,397 1,795,438
------------ ------------
Total liabilities 2,366,944 3,930,675
STOCKHOLDERS' EQUITY
Preferred stock, $.00025 par value; 5,000,000 shares authorized:
500,000 shares designated Series A Convertible, with 225,000
shares issued and outstanding at March 31, 2000 (liquidation
preference of $10.00 per share) 56 --
800,000 shares designated Series B Convertible, with 688,586
shares issued and outstanding at March 31, 2000 (liquidation
preference of $17.50 to $30.00 per share, see note 8) 172 --
Common stock, $.00025 par value; 50,000,000 shares
authorized, 14,500,123 and 9,374,132 shares issued
and outstanding, respectively 3,625 2,344
Additional paid-in capital 29,331,155 6,485,373
Unearned stock-based compensation (98,917) --
Subscribed common stock 837,150 --
Accumulated deficit (18,713,771) (8,878,409)
------------ ------------
Total stockholders' equity 11,359,470 (2,390,692)
------------ ------------
Total liabilities and stockholders' equity $ 13,726,414 $ 1,539,983
============ ============
<FN>
See accompanying notes to interim consolidated financial statements.
</FN>
</TABLE>
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<PAGE>
<TABLE>
VALUESTAR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES $ 478,750 $ 693,485 $ 1,670,878 $ 1,769,753
------------ ------------ ------------ ------------
OPERATING EXPENSES
Cost of revenues 195,072 259,966 1,022,711 710,570
Selling 1,163,815 474,183 2,432,509 1,184,126
Marketing and promotion 957,917 221,422 1,737,337 650,334
Product and content development 1,664,051 -- 2,845,531 --
General and administrative 565,517 405,323 1,378,349 1,225,417
Stock-based compensation 66,250 -- 142,083 --
------------ ------------ ------------ ------------
4,612,622 1,360,894 9,558,520 3,770,447
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (4,133,872) (667,409) (7,887,642) (2,000,694)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Interest income 118,900 -- 144,234 --
Interest expense - cash (71,724) (94,271) (286,463) (230,339)
Non-cash interest and financing costs (945,296) -- (1,678,236) --
Miscellaneous (3,578) 3,690 (4,378) (1,709)
------------ ------------ ------------ ------------
(901,698) (90,581) (1,824,843) (232,048)
------------ ------------ ------------ ------------
NET LOSS $ (5,035,570) $ (757,990) $ (9,712,485) $ (2,232,742)
============ ============ ============ ============
NET LOSS AVAILABLE TO COMMON
STOCKHOLDERS (NOTE 11) $(13,866,280) $ (757,990) $(43,509,253) $ (2,232,742)
============ ============ ============ ============
LOSS PER COMMON SHARE $ (1.17) $ (0.08) $ (4.19) $ (0.25)
============ ============ ============ ============
WEIGHTED AVERAGE OF COMMON SHARES
OUTSTANDING 11,873,812 9,159,173 10,380,824 8,841,258
============ ============ ============ ============
<FN>
See accompanying notes to interim consolidated financial statements.
</FN>
</TABLE>
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<PAGE>
<TABLE>
VALUESTAR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Nine Months Ended
March 31,
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (9,712,485) $ (2,232,742)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation 307,798 51,961
Amortization of intangible assets 174,076 --
Amortization of bond discount 1,491,936 30,850
Change in allowance for doubtful accounts (3,783) --
Other non-cash interest 12,224 23,695
Stock-based compensation 142,083 60,000
Changes in:
Receivables 24,745 (60,125)
Inventory (18,763) 15,064
Prepaid expenses (154,457) (6,169)
Deferred costs 40,406 52,527
Intangibles and other assets (64,482) --
Accounts payable 534,751 364,385
Accrued liabilities and other payables 66,435 86,861
Deferred revenues 27,730 6,495
------------ ------------
Net cash used by operating activities (7,131,786) (1,607,198)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Property and equipment acquisitions (2,198,634) (118,836)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of preferred stock, net of issuance cost 12,935,255 --
Proceeds from sale of common stock, net of issuance cost 5,645,635 597,875
Proceeds from subscribed common stock 837,150 --
Proceeds from debt 250,000 2,445,000
Payments on capital leases (30,427) (7,657)
Payments on debt (43,856) (6,975)
------------ ------------
Net cash provided by financing activities 19,593,757 3,028,243
------------ ------------
NET INCREASE IN CASH 10,263,337 1,302,209
CASH, beginning of period 270,149 398,604
------------ ------------
CASH, end of period $ 10,533,486 $ 1,700,813
============ ============
SUPPLEMENTAL CASH-FLOW INFORMATION
Cash paid during the year for:
Interest $ 214,739 $ 175,794
Non-cash investing and financing activities:
Stock, options and warrants issued for services 241,000 60,000
Warrants issued for other assets -- 40,000
Accrued dividends on Series A Preferred Stock 122,877 --
Warrants issued in connection with Series B preferred stock 400,000 --
Equipment acquired under capital leases 30,000 125,303
8% Secured Notes converted to Series B Stock 1,000,000 --
Shareholder advances converted to Series B Stock 250,000 --
12% notes converted upon warrant exercise 625,000 --
6% Convertible Notes and interest converted to equity 546,274 --
8% Secured Notes converted upon warrant exercise 1,450,000 --
12% subordinated notes converted upon warrant exercise 31,250 --
<FN>
See accompanying notes to interim consolidated financial statements.
</FN>
</TABLE>
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<PAGE>
VALUESTAR CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
March 31, 2000
1. OPERATIONS
The Company, a Colorado corporation, conducts its operations through ValueStar,
Inc., a wholly-owned subsidiary. ValueStar, Inc. was incorporated in California
in 1991, and is a rating company that has developed business certification marks
including ValueStar Certified(R) - - the symbol of high customer satisfaction.
ValueStar's ratings enable consumers to quickly determine the best local service
providers. The Company is expanding its ratings and creating a new proprietary
rating database of credential content on a large number of service providers in
the United States.
The Company currently generates revenues by rating local service companies in
300 industries; certifying highly rated businesses; and selling ancillary
materials and services. The Company communicates information about rated service
and professional firms to consumers through various media including its Internet
Web site (www.valuestar.com) and the ValueStar Report, a bi-annual publication.
The Company's revenues are primarily from rating and certification fees, and are
recognized when all related services are provided to the business customer.
Rating services include a verification of credential information and a customer
satisfaction research survey of prior customers and the delivery of a research
report. Services associated with certification include an orientation on
becoming a ValueStar Certified business and the delivery of certification
materials and manuals. Businesses must reapply for certification each year.
Sales of marketing materials and Web advertising and other services are
recognized as materials are shipped or over the period services are rendered.
The Company operates in eight market regions in the United States. In early
December 1999, in all market regions except Northern California, the Company
changed from a fixed certification and rating fee to a percentage based fee. The
Company also began collecting and aggregating a database of credential data on
many service providers throughout the United States. The Company is entering
into agreements with rated companies providing for the payment of a commission
fee based on the value of transactions conducted with buyers registered with the
Company. The Company is developing the systems to register buyers and monitor
transactions. Until this system is operating and buyers are registered, the
Company is not collecting fees and does not anticipate any significant revenues
from these seven markets. The Company continues to charge a fixed certification
fee in its Northern California market region.
Costs incurred in printing and distributing the Company's ValueStar Report
consumer publication published in January and July, and any related revenues are
recognized upon publication.
2. STATEMENT PRESENTATION
The accompanying unaudited interim financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information. They do not include all information and footnotes required by
generally accepted accounting principles. The interim financial statements and
notes thereto should be read in conjunction with the Company's audited financial
statements and notes thereto for the year ended June 30, 1999.
The interim consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. The Company has experienced
recurring losses from operations and the use of cash from operations.
Management's plan is to market and promote its existing program and develop new
rating content for consumers to achieve revenue growth and, ultimately,
profitable operations. Future financing may not be available and it is unlikely
cash flows from operations will be sufficient to enable the Company to meet its
future obligations. The Company could be forced to reduce its level of
operations and this would have a material adverse impact on the Company's
operations. These interim consolidated financial statements do not give effect
to any adjustments which would become necessary should the Company be unable to
continue as a going concern and therefore be required to realize its assets and
discharge its liabilities in other than the normal course of business and at
amounts different from those reflected in the accompanying interim consolidated
financial statements.
In the opinion of management, the interim financial statements reflect all
adjustments of a normal recurring nature necessary for a fair statement of the
results for interim periods. Operating results for the nine month period ended
March 31, 2000 are not necessarily indicative of the results that may be
expected for the year ending June 30, 2000.
6
<PAGE>
VALUESTAR CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
March 31, 2000
3. PRODUCT AND CONTENT DEVELOPMENT COSTS
Prior to the current fiscal year, development expenses associated with the
design, development and testing of programs and services have not been material.
In the first quarter of fiscal 2000, the Company commenced the design,
development and testing of a new Internet initiative using existing and newly
developed data on service businesses. This initiative consists of developing a
proprietary database of credential data on the majority of service businesses in
the United States and developing an Internet-based system that generates
commissions from transactions between buyers and sellers. The credential data
includes information on licensing, insurance, legal and finance, company
profiles and related data important to buyers. Service providers with verified
credentials become rated and are also eligible to earn ValueStar's top rating by
passing a customer satisfaction research survey of prior customers. During the
third quarter the Company continued to develop computer and related systems to
support this new initiative. Product and content development expenses are being
charged to operations as incurred. These expenses include costs of developing
systems and creating the content.
4. INVENTORY
Inventory is recorded at the lower of cost (using the first-in first-out method
of accounting) or market. Inventory consists of brochures and related materials
for resale.
5. DEFERRED COSTS
All direct costs related to marketing and advertising the ValueStar
certification to businesses and consumers are expensed in the period incurred,
except for direct-response advertising costs, which are capitalized and
amortized over the expected period of future benefits. Deferred costs are
periodically evaluated to determine if adjustments for impairment are necessary.
6. NOTE PAYABLE - SHAREHOLDER
The Company is obligated pursuant to a 15% unsecured subordinated note to a
company related to a shareholder/director in the principal amount of $300,000
due June 30, 2000.
7. LONG-TERM DEBT
Long-term debt at March 31, 2000, consists of the following:
12% Notes; principal of $68,750; unsecured; interest is paid
monthly, with a balloon principal payment due in March
2001; net of unamortized note discount of $1,364 $ 67,386
12% Subordinated Notes: principal of $375,000; unsecured:
interest is paid monthly, with a balloon principal payment
due in June 2000; net of unamortized note discount of
$2,523 372,477
15% Equipment Note due to related party; due in monthly
installments of principal and interest of $2,022 to
maturity in August 2003; secured by equipment and software 64,562
15% Equipment Note due to related party; due in monthly
installments of principal and interest of $5,055 to
maturity in June 2002; secured by equipment and software 116,457
---------
620,882
Less current portion 506,485
---------
$ 114,397
The Company's $2,450,000 of 8% Senior Secured Notes Payable ("Senior Notes")
were exchanged for equity securities during the nine months ended March 31,
2000. In connection with a $1,000,000 principal reduction of the Senior Notes in
December 1999 the Company accelerated the amortization of the related note
discount by $563,126. In connection with the reduction of the $1,450,000
principal balance of the Senior Notes in March 2000 the Company amortized the
balance of the note discount of $741,022 and amortized $153,333 of other
previously capitalized finance costs. Likewise on the reduction in the 12%
Subordinated Notes by $625,000 from the exercise of warrants, the Company
accelerated the amortization of the related note discount by $7,982. These
amortization accelerations increased non-cash expenses by $571,108 for the
second quarter and $894,355 in the third quarter.
7
<PAGE>
VALUESTAR CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
March 31, 2000
8. STOCKHOLDERS' EQUITY
<TABLE>
The following table summarizes equity transactions during the nine months ended
March 31, 2000:
<CAPTION>
Preferred Stock Common Stock Additional
--------------------------- -------------------------- Paid-In
Shares Amount Shares Amount Capital
----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance July 1, 1999 -- -- 9,374,132 $ 2,344 $ 6,485,373
Issuance of Series A Convertible
Preferred Stock, net of issuance
costs of $40,000 225,000 56 -- -- 2,209,944
Accrued 8% dividends on Series A
Preferred Stock -- -- -- -- 122,877
Issuance of Series B Convertible
Preferred Stock, net of issuance
costs of $75,000 and value assigned
to warrants granted of $400,000 688,586 172 -- -- 11,575,083
Value assigned to warrants granted
in connection with Series B Stock -- -- -- -- 400,000
Stock issued on conversion of 6%
convertible notes and interest -- -- 546,274 136 546,138
Stock issued on exercise of warrants
reducing 12% subordinated notes -- -- 500,000 125 624,875
Stock issued on exercise of warrants
reducing 12% notes 25,000 6 31,244
Stock issued on exercise of warrants
retiring 8% Senior Secured Notes 1,977,382 494 1,449,506
Sale of stock at $5.85 per unit for cash,
consisting of one share and one warrant
for each ten shares, net of issuance
costs of $25,000 663,000 166 3,853,384
Stock issued on exercise of warrants
for cash -- -- 1,355,000 339 1,743,411
Stock issued on exercise of options
for cash 59,335 15 48,320
Unearned stock-based compensation -- -- -- -- 241,000
Amortization of stock-based
compensation -- -- -- -- --
Subscribed stock -- -- -- -- --
Net loss -- -- -- -- --
----------- ----------- ---------- ----------- -----------
Balance March 31, 2000 913,586 $ 228 14,500,123 $ 3,625 $29,331,155
=========== =========== =========== =========== ===========
Unearned Subscribed
Stock-Based Common Accumulated
Compensation Stock Deficit Total
------------ ------------ ------------ ------------
Balance July 1, 1999 -- -- $ (8,878,409) $ (2,390,692)
Issuance of Series A Convertible
Preferred Stock, net of issuance
costs of $40,000 -- -- -- 2,210,000
Accrued 8% dividends on Series A
Preferred Stock -- -- (122,877) --
Issuance of Series B Convertible
Preferred Stock, net of issuance
costs of $75,000 and value assigned
to warrants granted of $400,000 -- -- -- 11,575,255
Value assigned to warrants granted
in connection with Series B Stock -- -- -- 400,000
Stock issued on conversion of 6%
convertible notes and interest -- -- -- 546,274
Stock issued on exercise of warrants
reducing 12% subordinated notes -- -- -- 625,000
Stock issued on exercise of warrants
reducing 12% notes -- -- -- 31,250
Stock issued on exercise of warrants
retiring 8% Senior Secured Notes -- -- -- 1,450,000
Sale of stock at $5.85 per unit for cash,
consisting of one share and one warrant
for each ten shares, net of issuance
costs of $25,000 -- -- -- 3,853,550
Stock issued on exercise of warrants
for cash -- -- -- 1,743,750
Stock issued on exercise of options
for cash -- -- 48,335
Unearned stock-based compensation (241,000) -- --
Amortization of stock-based
compensation 142,083 -- 142,083
Subscribed stock -- 837,150 -- 837,150
Net loss -- -- (9,712,485) (9,712,485)
------------ ------------ ------------ ------------
Balance March 31, 2000 $ (98,917) $ 837,150 $(18,713,771) $ 11,359,470
============ ============ ============ ============
</TABLE>
During the first quarter the Company issued 225,000 shares of Series A
Convertible Preferred Stock, par value $.00025 ("Series A Stock") for cash of
$10 per share for gross proceeds of $2,250,000. Dividends of 8% per annum
compounded are payable in additional shares of Series A Stock. The dollar amount
of Series A Stock is convertible into shares of common stock at a conversion
price equal to $2.00 per share, and are automatically converted on the
occurrence of certain events. The Series A Stock has certain antidilution and
registration rights, has a liquidation preference of $10 per share plus accrued
and unpaid dividends, and has voting rights equal to the number of common shares
into which it is convertible. In addition, as long as there are at least 100,000
shares of Series A Stock outstanding, then the holders are entitled to elect one
member of the Company's Board of Directors.
In connection with the Series A Stock financing the Company incurred legal and
related costs of $40,000. At March 31, 2000 the Series A Stock was convertible
into 1,186,438 shares of common stock.
In December 1999 and January 2000 the Company issued 688,586 shares of Series B
Convertible Preferred Stock, par value $.00025 ("Series B Stock") at $17.50 per
share for gross proceeds of $12,050,255. A total of $1,000,000 of the Company's
outstanding 8% Senior Secured Notes and $250,000 of shareholder advances were
converted into 71,429 of these shares of Series B Convertible Stock.
8
<PAGE>
VALUESTAR CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
March 31, 2000
8. STOCKHOLDERS' EQUITY (Cont'd)
The dollar amount of Series B Stock is convertible into shares of common stock
at a conversion price equal to $1.75 per share, and are automatically converted
on the occurrence of certain events. The Series B Preferred Stock has certain
antidilution and registration rights. The Series B Stock has a liquidation
preference, after payment of the preferential amount for the Series A Stock, of
$17.50 per share. Thereafter the holders of Series B Stock, on an as-converted
basis, and the holders of common stock, shall be paid pro-rata, from remaining
assets until the holders of Series B Stock shall have received an aggregate
preference price of $30.00 per share. Holders of Series B Stock are entitled to
receive non-cumulative dividends at an annual rate of 8% only when and if
declared by the Board of Directors. However no cash dividends shall be paid to
common stock holders unless a like cash dividend amount has been paid to holders
of Series B Stock on an as-converted basis. As long as there are at least
200,000 shares of Series B Stock outstanding, then the holders are entitled to
elect two members of the Company's Board of Directors.
In connection with the Series B Stock financing the Company incurred legal and
related costs of $75,000. The Company also issued a warrant to purchase 75,000
shares of common stock at $2.50 per share until December 2004 as a placement
fee. The value assigned to the warrant was $400,000. At March 31, 2000 the
Series B Stock was convertible into 6,885,860 shares of common stock.
In March 2000 the Company issued 663,000 shares of common stock in a unit
financing at $5.85 per unit ("585 Units") for gross proceeds of $3,878,550. For
each ten units purchased, the Company granted investors a warrant to purchase
one share of common stock at $5.85 per share resulting in warrants on 66,300
shares of common stock. The Company incurred legal and related costs of $25,000.
Subsequent to March 31, 2000, on April 4, 2000, the Company issued an additional
647,087 of 585 Units at $5.85 per share for gross proceeds of $3,785,458. A
total of 462,757 units were issued for cash and 184,320 units were issued in
exchange for call proceeds of certain warrants by the Company (see Note 9). A
total of $837,150 of these second closing funds were received prior to March 31,
2000 and are recorded as subscribed common stock at March 31, 2000.
9. STOCK OPTIONS AND WARRANTS
Stock Options
The Company has reserved 250,000 shares of common stock for each of its 1992 ISO
Plan and 1992 NSO Plan, 300,000 shares of common stock for the 1996 Stock Option
Plan and 1,250,000 shares of common stock for the 1997 Stock Option Plan. The
Company has also reserved shares and granted options on 871,600 shares outside
of the option plans as of March 31, 2000. The following table summarizes option
activity for the period ended March 31, 2000:
Weighted Average Weighted
Shares Exercise Price Average Life
------ -------------- ------------
Outstanding July 1, 1999 1,111,100 $ 0.78 2.49
Granted 1,947,922 $ 4.98
Canceled (437,499) $ 3.09
Exercised (59,335) $ 0.81
Expired (15,000) $ 0.50
---------
Outstanding March 31, 2000 2,547,188 $ 3.60 3.37
---------
Exercisable at March 31, 2000 968,172 $ 0.99
=========
Subsequent to March 31, 2000 a total of 17,467 options were exercised providing
proceeds of $8,467.
9
<PAGE>
VALUESTAR CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
March 31, 2000
9. STOCK OPTIONS AND WARRANTS (Cont'd)
Warrants
At March 31, 2000 the Company had the following stock purchase warrants
outstanding each exercisable into one common share:
Number Exercise Price Expiration Date
------ -------------- ---------------
25,000 $1.25 March, 2001
187,500(1) $1.25 September, 2002
20,000(1) $1.25 December, 2002
66,300(2) $5.85 March, 2003
50,000 $1.75 May, 2003
12,500(3) $2.00 April, 2003
350,000(1) $1.00 December, 2003
152,728 $1.375 March, 2004
30,000(1) $1.50 March, 2004
75,000 $2.50 December, 2004
77,382 $1.00 March, 2009 (A Warrants)
231,132(4) $1.00 March, 2009 (C Warrants)
---------
1,277,542
(1) These warrants are callable at a stock price of $5.00 per share subject to
certain conditions.
(2) These warrants are callable at a stock price of $15.00 per share subject to
certain conditions.
(3) These warrants are callable at a stock price of $4.50 per share subject to
certain conditions.
(4) These warrants may be repurchased by the Company at $6.00 per share until
March 31, 2004 subject to certain conditions.
In connection with the sale of the Senior Notes on March 31, 1999 (see note 7)
the noteholders were granted warrants to purchase an aggregate of 1,527,250
shares of Common Stock of the Company at an exercise price of $1.00 per share
("A Warrants"), warrants to purchase an aggregate of 527,514 shares of Common
Stock at a nominal per share exercise price of $0.00025 ("B Warrants") and
warrants to purchase an aggregate of 231,132 shares of Common Stock at an
exercise price of $1.00 per share ("C Warrants"). The C Warrants or underlying
shares of Common Stock could be repurchased by the Company at $6.00 per share
(less any unpaid exercise price) on an all or none basis until March 31, 2004 as
long as the Company is not in default with respect to the Senior Notes or
related agreements.
In March 2000 the noteholders applied the $1,450,000 principal balance of the
Senior Notes towards the exercise of the 527,514 B Warrants and 1,449,868 A
Warrants. The Company agreed, in connection with the Senior Note cancellation,
to call the C Warrants effective April 4, 2000 and the holders agreed to apply
the proceeds of the call towards the purchase of 585 Units (see Note 8). On
April 4, 2000 the holders of the C Warrants converted the net call proceeds of
$5.00 per share, $1,155,660 in the aggregate, into 77,382 shares of common stock
(A Warrant exercise) and 184,320 units of the 585 Unit financing. The call of
the C Warrants and issuance of the 585 Units was on a cashless basis.
Subsequent to March 31, 2000, in connection with the second closing of the 585
Unit financing, the Company issued 64,713 warrants exercisable at $5.85 per
share exercisable until April 4, 2003. In connection with this second closing
the Company also issued a warrant to purchase 50,000 shares of common stock at
$10.00 per share until April 2003 and a warrant to purchase 30,000 shares of
common stock at $5.85 per share until April 2005. Also subsequent to March 31,
2000 the Company issued a warrant to purchase 22,802 shares of common stock at
$6.14 per share until April 11, 2005 in connection with lease financing (see
Note 14).
10. INCOME TAXES
At March 31, 2000 a valuation allowance has been provided to offset the net
deferred tax assets as management has determined that it is more likely than not
that the deferred tax asset will not be realized. The Company has for federal
income tax purposes net operating loss carryforwards of approximately $8 million
which expire through 2019 of which certain amounts are subject to limitations
under the Internal Revenue Code, as amended.
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VALUESTAR CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
March 31, 2000
11. LOSS PER COMMON SHARE
Loss per common share is computed using the weighted average number of common
shares outstanding. Since a loss from operations exists, a diluted earnings per
common share number is not presented because the inclusion of common stock
equivalents in the computation would be antidilutive. Common stock equivalents
associated with warrants, stock options and preferred stock, which are
exercisable into approximately 10.3 million shares of common stock at March 31,
2000 could potentially dilute earnings per share in future periods.
The provisions of the Series A Stock provide for cumulative 8% dividends payable
in additional shares of preferred stock and provide, upon conversion, a similar
accretion whether or not such dividends have been declared by the Board of
Directors. This amount increases the net loss available to common stockholders.
Net loss available to common stockholders was also increased by $24,888,181 in
computing net loss per share for the second quarter and $8,785,710 in the third
quarter by an imputed deemed dividend from a discount provision included in the
Series B Stock providing for a conversion price less than the market price on
the date of issuance. The imputed dividend is not a contractual obligation on
the part of the Company to pay such imputed dividend.
<TABLE>
Net loss available to common stockholders is computed as follows:
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net loss $ (5,035,570) $ (757,990) $ (9,712,485) $ (2,232,742)
Imputed Series B stock dividend based on discount
provision (8,785,710) -- (33,673,891) --
Accrued dividends on Series A Stock (45,000) -- (122,877) --
------------ ------------ ------------ ------------
Net loss available to common stockholders $(13,866,280) $ (757,990) $(43,509,253) $ (2,232,742)
============ ============ ============ ============
</TABLE>
12. RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued SFAS No. 133 "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 is effective for
fiscal years beginning after June 15, 2000, and requires companies to record
derivatives on the balance sheet as assets or liabilities, measured at fair
market value. Gains or losses resulting from changes in the values of those
derivatives are accounted for depending on the use of the derivative and whether
it qualifies for hedge accounting. The key criterion for hedge accounting is
that the hedging relationship must be highly effective in achieving offsetting
changes in fair value or cash flows. The Company does not expect the adoption of
SFAS No. 133 to have a material effect on the Company's consolidated financial
statements.
13. YEAR 2000 COMPLIANCE
The Company has not experienced any material Year 2000 problems in its computer
systems or operations. Prior to December 31, 1999 the Company had assessed its
exposure with respect to Year 2000 technology compliance as limited. Although
the Company, or companies with which it does business, could experience latent
Year 2000 problems, management does not expect any interruption in normal
business activities. The costs of Year 2000 compliance have not been material.
14. SUBSEQUENT EVENTS
In addition to the subsequent stock, option and warrant transactions described
in Notes 8 and 9, on April 19, 2000 the Company received proceeds of $1,278,737
from a leasing institution in connection with a software and equipment leasing
commitment of $2 million. These funds financed software, equipment and related
costs incurred by the Company prior to March 31, 2000.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
THE FOLLOWING DISCUSSION INCLUDES FORWARD-LOOKING STATEMENTS WITH RESPECT TO THE
COMPANY'S FUTURE FINANCIAL PERFORMANCE. ACTUAL RESULTS MAY DIFFER MATERIALLY
FROM THOSE CURRENTLY ANTICIPATED AND FROM HISTORICAL RESULTS DEPENDING UPON A
VARIETY OF FACTORS, INCLUDING THOSE DESCRIBED BELOW AND IN THE COMPANY'S ANNUAL
REPORT ON FORM 10-KSB FOR THE YEAR ENDED JUNE 30, 1999.
Overview
We are a provider of branded rating content on local service businesses. As an
infomediary we enhance online and offline commerce between buyers and sellers of
services by offering ratings enabling buyers to quickly determine the best local
service providers. Our ratings (ValueStar Certified(R) and other marks in
development) are provided on the Internet at www.valuestar.com, in print in our
ValueStar Report, through promotions by, and buyer interactions with, rated
businesses.
In the first quarter of fiscal 2000, capitalizing on our expertise in customer
satisfaction research and ratings, we commenced the design, development and
testing of an expanded Internet initiative. This initiative consists of (a)
developing proprietary content and ratings on a large number of service
providers in the United States, and (b) developing an Internet-based system that
generates commissions from transactions driven by the content. The content being
developed includes credential information such as licensing, insurance, legal
and finance, company profiles and related information. During the current fiscal
year we have expended significant resources (approximately $2.8 million) to
generate database information and develop computer and related systems for this
new service. The goal of our development is to position ValueStar as the
dominant rating system for local service providers.
In addition to creating proprietary content on America's service companies, we
are also developing strategic relationships to provide data and to increase the
distribution of ValueStar's branded rating content:
o In January 2000 we entered into a strategic data alliance with Experian, a
leading provider of global information solutions. This alliance provides
financial and legal status on local service businesses as a part of our
content development. We will provide Experian with the results of our
branded proprietary research on local service businesses for distribution
to their clients.
o In February 2000 we entered into an alliance with OurHouse.com an online
destination providing quality, home improvement products, services and
how-to information. This one-year alliance provides OurHouse.com access to
ValueStar's database of rated companies and creates an opportunity for
OurHouse.com suppliers to be rated by ValueStar.
We have established an eight person business development team to develop other
alliances and relationships to expand our content, add highly rated service
providers, extend our brand and distribute our ratings to consumers and other
buyers of local services.
Our present operations are conducted in eight market regions in the United
States. In December 1999, in all markets except Northern California, we changed
from a fixed certification and rating fee to a percentage based fee based on the
value of future transactions between buyers registered with us and participating
companies rated and authorized by us. We are currently developing the systems to
register buyers and monitor transactions. Until this system is operating, we do
not anticipate any significant revenues from these markets. We will continue to
incur selling costs and rating costs associated with enrolling participating
service providers in our program. We believe this investment will accelerate the
launch of our new program by allowing us to have a number of verified and
authorized service companies already enrolled by the time we launch our
transaction fee system. We continue to charge a fixed certification fee in
Northern California but expect to also change this market to the new program at
a later date, not yet determined.
Our plan is to have the systems to monitor, record and collect on a transaction
basis during the second half of calendar year 2000. However unknown technical
issues and barriers could arise that could delay implementation or preclude us
from executing this plan. In such an event we may be required to revert to a
fixed fee basis.
Our present revenues are generated primarily from research and rating fees paid
by new and renewal businesses, certification fees from qualified applicants and
renewals and from the sale of information products and services. An important
aspect of our business model is the recurring nature of revenues from businesses
renewing their certification. In the future we expect a majority of our revenues
to be derived from commissions from transactions between registered buyers and
sellers of local services.
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Currently our fixed certification fees range from $995 to approximately $2,000
depending on business size. They are recognized as revenue when material
services or conditions relating to the certification have been performed. The
material services are the delivery of certification materials along with an
orientation and the material condition is the execution of the certification
agreement specifying the conditions and limitations on using the certification.
Research and rating fee revenue, ranging up to $570, is deferred until the
research report is delivered. Sales of marketing materials and Web advertising
and other services are recognized as materials are shipped or over the period
services are rendered. From time to time we provide discounts, incentives from
basic pricing and payment terms on fees.
We expense research and rating costs as incurred. Costs incurred in printing and
distributing our ValueStar Report publication for buyers, currently published in
January and July, and any related revenues are recognized upon publication.
Accordingly, the costs and revenues from this publication impact the revenues
and costs in our first and third fiscal quarters.
Certain direct-response advertising costs are deferred and amortized over the
expected period of future benefits, approximately 60 days. These costs, which
relate directly to targeted new business solicitations, primarily include
targeted direct-response advertising programs consisting of direct telemarketing
costs. No indirect costs are included in deferred advertising costs. Costs
incurred for other than specific targeted customers, including general marketing
and promotion expenses, are expensed as incurred. Deferred costs are
periodically evaluated to determine if adjustments for impairment are necessary.
Since inception, we have been growing, developing and changing our business and
have incurred losses in each year. At March 31, 2000, we had an accumulated
deficit of $18.5 million. There can be no assurance of future profitability.
Changing Revenue Model
Our current business revenue model, similar to other membership based
organizations, is predicated on a growing number of certified businesses and
maintaining high renewal rates. Certified businesses that renew contribute
higher gross margins than new applicants due to reduced sales and rating costs.
As discussed above we are migrating to a transaction based revenue model where
our business will be predicated on creating and maintaining a growing number of
registered buyers and sellers transacting commerce in local services.
Considerable portions of our operations are engaged towards the solicitation of
new service and professional business applicants and we incur substantial costs
towards this activity. We expect that these will continue to be significant
costs in the future. During the nine months ended March 31, 2000 we also
incurred significant product, system and database development costs consisting
of (a) capturing and verifying credential data on a large number of service
companies in the United States (our proprietary content), (b) developing systems
to store, monitor and update this content, (c) developing systems to register
consumers and (d) developing systems to monitor and generate commissions based
on transactions between buyers and sellers of local services. We expect these
product, system and content development costs to continue at high levels during
the balance of fiscal 2000 and early fiscal 2001. After our content databases
are developed, we will incur costs to maintain and update the data on an ongoing
basis. Exact amounts and timing of these expenditures and costs are subject to a
variety of factors and are not currently determinable by management.
Future operations will be impacted by changes in cost structure and elections
regarding new product development, advertising, promotions and growth rates. We
have recently increased numbers of sales, marketing, development and support
personnel. Rapid growth, due to the nature of our operations, is expected to
contribute to continued operating losses in the foreseeable future.
At March 31, 2000 we had 2,005 certified businesses. At March 31, 2000, we also
had 1,137 (1,068 new and 34 renewal) business customers in the application and
rating phase. The total represents approximately 130 days of sales to new
businesses. Northern California business customers in the rating phase are
expected to represent approximately $190,000 of revenues that should be
recognized in the fourth quarter of fiscal 2000 (generally analogous to
backlog).
Results of Operations
Revenues. Revenues consist of certification and rating fees from new and renewal
business applicants, sale proceeds from information materials and premium
listings in our ValueStar Report and on our Web site, and other ancillary
revenues. We reported total revenues of $1,670,878 for the nine months ended
March 31, 2000, a 5% decrease from revenues of $1,769,753 for the first nine
months of the prior year. In early December 1999 we ceased charging and
collecting fixed certification fees in seven markets outside of Northern
California and commenced enrolling highly rated businesses in our
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transaction-based program providing for future commissions. Accordingly since
December we have obtained revenues only from the Northern California market
region. We do not expect revenues from other market regions until our
transaction system is fully developed and successfully operating.
During the nine months ended March 31, 2000, certification fees accounted for
75% of revenue, compared to 74% for the first nine months of the prior year.
Revenues for the three months ended March 31, 2000 were $478,750 compared to
$693,485 reported in the comparable prior period. The decline of $214,735 is
attributable primarily to the change in our revenue model described above with
the third quarter revenues being only from the Northern California market
region.
We reported approximately $124,000 in brochure and other revenue, $190,000 for
premium Web and ValueStar Report listings and $105,000 in rating fees for the
first nine months of the year. This compares to $92,000, $214,000 and $161,000
respectively for the first nine months of the prior year. Brochure revenue is up
35% from the prior year due to aggressive efforts in this area and an increase
in the number of qualified service providers. Revenues for premium web listings
and the ValueStar Report are down 11% from the same period last year due to a
shift in management focus toward brochure sales and introductory free listings
for certified firms in new markets. Rating fees are down 34% because of an
increase in rating discounts to new customers offered during the current period
and free ratings in the seven market regions.
Our revenues can vary from quarter to quarter due to (a) the changes being made
to our revenue model, (b) the impact of revenues from upgraded profiles in the
semi-annual ValueStar Report, (c) seasonality, (d) effectiveness of sales
methods and promotions, (e) levels of expenditures targeted at prospective
businesses, (f) the numbers of certificate holders up for renewal, (g) renewal
rates, (h) pricing policies, (i) customer passing and sign-up rates (j) timing
of completion of research and ratings, and (k) other factors, some of which are
beyond our control.
Cost of Revenues. Cost of revenues consists primarily of rating costs incurred
for performing customer satisfaction research on business applicants for those
businesses which are charged a fixed certification fee, costs related to
verifying insurance and complaint status for these same businesses, Web site
operating costs and costs of information products. Cost of revenues totaled
$1,022,711 and represented 61% of sales during the nine months ended March 31,
2000. This is an increase from 41% for the nine months ended March 31, 1999.
Rating costs totaled $195,072 for the three months ended March 31, 2000 or 41%
of revenues compared to $259,966 and 38% of revenues for the third quarter of
the prior year. The increase in the current year is attributable primarily to
increased staffing and related costs from expanding our rating department to
handle increased volume in anticipation of the transaction-based system. Cost of
revenues may vary significantly from quarter to quarter both in amount and as a
percentage of sales. We expect to incur significant continued costs of rating
businesses without corresponding levels of revenues until we are able to launch
our transaction-based systems. In future quarters the costs of rating and
certifying businesses may exceed our revenues.
Rating costs estimated at $530,000 have been included in product and content
development costs for those businesses being added to our content database in
the seven markets in which we are not currently generating revenues. We believe
the advance rating of businesses under transaction-based contracts in these
market regions is a strategic investment in new content. We believe it is
necessary to have a base of rated service companies available in key markets as
we prepare to launch our transaction-based systems in the second half of
calendar 2000.
Selling Costs. Selling costs consist primarily of personnel costs for outside
sales consultants interacting with customers and direct marketing costs
including lead generation and telemarketing costs. Selling costs for the nine
months ended March 31, 2000, were $2,432,509, or 146% of revenues, compared to
$1,184,126, or 67% of revenues for the first nine months of the prior year. In
fiscal 1999 we commenced rating businesses in seven new market regions and we
continue to incur increased selling costs associated with startup of these new
regions compared to the more mature Northern California market. Selling costs
for the third quarter totaled $1,163,815 or 243% of revenues representing an
increase from the $474,183 or 68% for the prior period. The significant increase
in selling costs during the most recent periods (nine months and third quarter)
reflect in part the costs associated with selling businesses in seven regions
late in the second quarter and in the third quarter without corresponding fixed
rating and certification fees. Other than direct targeted telemarketing costs,
we expense selling costs as incurred.
Similar to rating and certification costs described above, we expect to incur
significant continued selling costs to attract new businesses without
corresponding levels of revenues until we are able to launch our
transaction-based systems. In future quarters the costs of selling may continue
to exceed aggregate revenues until we achieve a higher base of revenues. We also
expect selling costs as a percentage of revenues will vary in future periods,
resulting from levels of future revenues, variances in renewal rates, the effect
of new sales promotions and costs thereof, timing of research and rating
completions,
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<PAGE>
level and percentage of fixed selling costs, the number of new market regions
opened and other factors, some beyond our control.
Marketing and Promotion Expenses. Marketing and promotion expenses aggregated
$1,737,337, or 104% of revenues during the first nine months of fiscal 2000,
compared to $650,334, or 37% of revenues for the prior period. Marketing and
promotion expenses for the third quarter were $957,917 compared to $221,422 for
the prior year's third quarter. Included in marketing and promotion expenses are
printing and distribution costs of our ValueStar Report publication targeted at
buyers. Printing and distribution costs were $333,000 in the first nine months
of fiscal 2000 compared to $265,000 in the prior year's first nine months, as we
printed and distributed more copies with additional pages. Most of these costs
are incurred in the first and third quarter of each fiscal year. During the
first nine months of fiscal 2000, we expended $593,000 on paid advertising
targeted at expanding consumer awareness of ValueStar. Paid advertising of
$150,000 was employed in the prior year's first nine months. These increased
costs reflect management decisions to increase advertising over prior year
levels and advertising rate inflation in general. During the first nine months
of fiscal 2000, we expended $120,000 on promotions which was comparable to the
prior year. Generally, the first and third fiscal quarters have increased costs
because our ValueStar Report publication is printed and distributed during these
quarters. Also, we generally expend less advertising in our second fiscal
quarter (fourth calendar quarter) due to higher media rates associated with the
holiday season.
Marketing and promotion expenses are subject to significant variability based on
decisions regarding the timing and size of distribution of our ValueStar Report
and decisions regarding paid advertising, public relations and market and brand
awareness efforts. We anticipate continuing to make significant expenditures on
marketing and promotion efforts to support a growing business base but
anticipate these costs will decrease as an annual percentage of revenues when
and as revenues grow. However, amounts and percentages on a quarterly basis may
vary significantly.
Product and Content Development Expenses. In prior years development expenses
associated with the design, development and testing of our programs and services
have not been material. In the first quarter of fiscal 2000 we commenced the
design, development and testing of an expanded Internet initiative using
existing and new content. During the nine months ended March 31, 2000 we
expended $2,845,531 on new program development and segregated these costs as
product and content development costs. Third quarter product development costs
were $1,664,051, an increase from the $907,611 in the second quarter of this
fiscal year. The major component of product development costs during the nine
months were compensation and related costs of $1,780,000. We expect, subject to
adequate financing, that product and content development expenses will increase
in the fourth quarter due to increased numbers of personnel and the use of
outside branding, computer and system consultants employed to develop our
transaction-based system. Future levels of product development costs will depend
on many factors not currently estimable by management.
General and Administrative Expenses. General and administrative expenses consist
primarily of expenses for finance, office operations, administration and general
and executive management activities, including legal, accounting and other
professional fees. They totaled $1,378,349 or 82% of revenues for the nine
months ended March 31, 2000, compared to $1,225,417 or 69% of revenues for the
prior year's first nine months. General and administrative costs in the third
quarter were $565,517, an increase from the $405,323 for the third quarter of
the prior period. The major increases during the nine months are an increase in
occupancy costs of $353,000 due to additional personnel and expanded office
facilities. Management anticipates that general and administrative costs will
continue to exceed prior period levels due to increased personnel added to
support growth and increased general computer, operating, occupancy and
corporate costs.
We incurred $142,083 of stock-based compensation during the nine months ended
March 31, 2000 resulting from non-employee options compared to $60,000 for the
prior comparable period which resulted from warrants issued for services. We use
stock options, warrants and other forms of non-cash equity compensation from
time to time to provide incentives to employees, directors and consultants and
others and to preserve cash resources.
We incurred interest expense for the nine months ended March 31, 2000 of
$1,964,699 that included $286,463 of cash interest and $1,678,236 of non-cash
amortization of bond discount, paid-in-kind interest and amortized financing
costs. Included in the $1,678,236 of non-cash interest and financing costs are
$1,312,130 of lump sum amortization resulting from the early payoff of debt and
$153,333 of lump sum amortization of capitalized financing costs associated with
senior debt converted to common stock. Interest for the prior comparable period
was $230,339 with the increase, other than lump sum amortization, resulting from
increased amounts of debt in the current period over the prior years' period.
Net Loss. We had a net loss of $9,712,485 for the nine months ended March 31,
2000, compared to a loss of $2,232,742 for the nine months ended March 31, 1999.
Our increased loss is attributable to (a) increased rating and selling costs
resulting
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from the expansion of personnel to new market regions and for non-revenue
accounts, (b) increased marketing and promotion costs due to increased market
regions, (c) product and content development costs in the current period, (d)
the commencement in the seven market regions outside of Northern California of
enrolling businesses in our transaction-based model instead of charging fixed
certification fees and (e) increased general and administrative costs associated
with additional management and support for new market regions. We anticipate we
will continue to experience operating losses until we achieve a critical mass
base of revenues. Future quarterly results will be greatly impacted by future
decisions regarding new markets, advertising and promotion expenditures,
launching of new products and services and growth rates. Achievement of positive
operating results will require that we obtain a sufficient base of revenues to
support our operating and corporate costs. There can be no assurance we can
achieve a profitable base of operations.
The loss available to common stockholders for the nine months ended March 31,
2000 of $43,509,253 includes $33,673,891 of deemed dividends due to the Series B
Preferred Stock being convertible at a discount to the market price on the date
of issuance and $122,877 of accrued dividends on Series A Convertible Preferred
Stock. The imputed dividend is not a contractual obligation on our part to pay
such imputed dividend. Management believes the Series B financing, which was
negotiated when the stock was at lower levels and includes two strategic
institutional investors which are assisting the Company in its growth plans and
new Internet initiative, has allowed the Company to finance development of the
new initiative.
Liquidity and Capital Resources
Since we commenced operations, we have had significant negative cash flow from
operating activities. Our negative cash used by operating activities was $7.1
million for the nine months ended March 31, 2000. At March 31, 2000, we had
working capital of $9 million. For the nine months ended March 31, 2000, our
negative cash flow from operating activities was due primarily to our continued
operating losses, losses in the seven market regions in which we are not
currently collecting revenues, addition of new executive management and
investment in new products, content and business growth. At March 31, 2000, our
net accounts receivables were $388,844 representing approximately 64 days of
revenues and an annualized turnover ratio of approximately 5.7 times. This is
the same as the 64 days of revenues and turnover of approximately 5.7 times at
June 30, 1999. We believe that 60 to 90 days revenues in receivables is
reasonable based on the nature of our business and the terms we provide
certifying companies on certain fees. At March 31, 2000, we have not experienced
and we do not anticipate any significant accounts receivable recoverability
problems.
We have financed our operations primarily through the sale of equity and debt
financing. In July and August 1999, we sold $2.25 million of Series A preferred
stock for cash. In December and January we raised $10.8 million in cash from the
Sale of Series B preferred stock with an additional $1,250,000 of Series B
preferred stock converted from debt. In March we obtained $3.9 million from the
sale of common stock with warrants. During the nine months ended March 31, 2000
we also obtained $1.8 million from the exercise of warrants and options for
cash. These funds are being used for operations and product and content
development. Subsequent to March 31, 2000 we obtained $2.7 million cash from the
sale of additional shares of common stock with warrants and $1.3 million of
lease financing for software and equipment previously purchased by cash. We have
no commitments for future investments. In the past, shareholders and debt
holders, including from time to time directors, have advanced funds and at times
some have converted debt funds to equity financing on terms of new forms of
financing. There can be no assurance that we can continue to finance our
operations through existing or new investors or from other sources. There can be
no assurance that shareholders or directors or others will provide any future
financing to ValueStar.
Other than cash on hand of $10,533,486 at March 31, 2000, net accounts
receivable of $388,844, and the funds received subsequent to March 31, 2000
described above and approximately of $0.7 million of leasing credit, we have no
material unused sources of liquidity at this time. We expect to incur
significant additional operating losses in future fiscal quarters as a result of
continued operations, product and content development expenditures and
investments in growth. The timing and amounts of these expenditures and the
extent of operating losses will depend on many factors, some of which are beyond
our control.
Based on the most recent quarter's level of operating expenditures, and assuming
no revenues from our transactions based system, we believe we will require a
minimum of $5 million of additional capital to finance operations during the
next twelve months. Our actual results could differ significantly from prior
expenditures and, therefore, we may require a greater or lesser amount of
additional operating funds for the next twelve months. We are incurring
significant costs to develop systems and the content for our new Internet
initiative. Many of these costs are non-recurring and the timing and amount of
such expenditures is generally controllable by management. Management has not
determined the level of planned future expenditures which will depend in part on
decisions on the rate of growth, availability of additional funding and other
factors including some beyond the control of management.
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Management also believes, but there can be no guarantee, that it could curtail
and/or delay certain expenditures and modify operations such that existing cash
could finance operations for the next twelve months.
We estimate that we will require approximately $3 million of software and
equipment during the next twelve months to support our expanded operations and
new products and services. We are seeking additional lease financing to pay for
some of these capital costs. To finance our planned endeavors or more rapidly
implement our transaction revenue system, we may require additional financing.
Should required and/or additional funds not be available or planned operations
not meet our expectations, we may be required to curtail or scale back staffing,
product and content development, advertising, marketing expenditures and general
operations. We may also have to curtail the number of market regions in which we
operate. There can be no assurance that additional future funding will be
available to us or on what terms. Potential sources of funds include exercise of
warrants and options, loans from existing shareholders or other debt financing
or additional equity offerings.
New Accounting Pronouncements and Issues
The Financial Accounting Standards Board has issued new pronouncements as
discussed in the footnotes to our interim financial statements. As discussed in
the notes to our interim financial statements, the implementation of these new
pronouncements is not expected to have a material effect on our financial
statements.
On September 28, 1998, the SEC issued a press release and stated that the "SEC
will formulate and augment new and existing accounting rules and interpretations
covering revenue recognition, restructuring reserves, materiality, and
disclosure;" for all publicly-traded companies. In response on December 3, 1999
the SEC issued Staff Accounting Bulletin No. 101 - Revenue Recognition in
Financial Statements (SAB No. 101) which summarizes certain of the SEC staff's
views in applying generally accepted accounting principles to revenue
recognition in financial statements. Our practices have been consistently
applied since our initial filing and review by the SEC in 1997. We do not
believe the interpretations outlined in SAB No. 101 impact our accounting for
certification revenue. However there can be no assurance, given the uncertainty
in this area, that the SEC staff may not take a contrary position. Any potential
changes could have a material impact on the manner in which we recognize
certification revenue. Any such changes would have no effect on reported cash
flow or the underlying economic value of our certification business.
Year 2000 Readiness Disclosure
We are aware of the issues associated with the programming code in existing
computer systems because of the Year 2000. The "Year 2000" problem is concerned
with whether computer systems properly recognize date sensitive information
connected with year changes to 2000. Systems that do not properly recognize such
information can generate erroneous data or cause a system to fail. To date, we
have not experienced any Year 2000 problems in our computer systems or
operations. However, other companies, including us, could experience latent Year
2000 problems.
We have identified the following areas that could be impacted by the Year 2000
issue. They are (a) our products, (b) internally used systems and software, (c)
products or services provided by key third parties, and (d) the inability of
certifying businesses and prospective customers to process business transactions
relating to certifying revenue and product sales.
While we are not currently aware of any internal or external Year 2000 failures
impacting our operations, we continue to monitor the compliance of our major
customers, suppliers and vendors. We believe that third-party relationships upon
which we rely represent the greatest risk with respect to the Year 2000 issue,
because we cannot guarantee that third parties have adequately assessed and
addressed their Year 2000 compliance issues in a timely manner. As a
consequence, we can give no assurances that issues related to Year 2000 will not
have a material adverse effect on our future results of operations or financial
condition.
To date, there have been no material direct out-of-pocket costs associated with
our Year 2000 compliance effort. Maintenance or modification costs are expensed
as incurred, while the costs of new computers or software are capitalized and
amortized over the respective useful life.
Should we not be completely successful in mitigating internal and external Year
2000 risks, the likely worst case scenario could be a system failure causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, deliver certifications and products, send invoices or
engage in similar normal business activities at our office or with our vendors
and suppliers. We currently do not have any contingency plans with respect to
potential Year 2000 failures of our suppliers or customers and at the present
time we do not intend to develop one. If these failures occur, depending
17
<PAGE>
upon their duration and severity, they could have a material adverse effect on
our business, results of operations and financial condition.
The information set forth above under this caption "Year 2000 Readiness
Disclosure" relates to our efforts to address the Year 2000 concerns regarding
our (a) operations, (b) products and technologies licensed or sold to third
parties and (c) major suppliers and customers. Such statements are intended as
Year 2000 Statements and Year 2000 Readiness Disclosures and are subject to the
"Year 2000 Information Readiness Act."
Tax Loss Carryforwards
As of June 30, 1999, we had approximately $8 million of federal tax loss
carryforwards. These losses create a deferred tax asset. We have recorded a
valuation allowance to reduce the net deferred tax asset to zero because, in our
assessment, it is more likely than not that the deferred tax asset will not be
realized. There may also be limitations on the utilization of tax loss
carryforwards to offset any future taxes.
Forward-Looking Statements and Business Risks
This Form 10-QSB includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended. The words "anticipate," "believe,"
"expect," "plan," "intend," "project," "forecasts," "could" and similar
expressions are intended to identify forward-looking statements. All statements
other than statements of historical facts included in this Form 10-QSB regarding
our financial position, business strategy, budgets and plans and objectives of
management for future operations are forward-looking statements. Although we
believe that the expectations reflected in such forward-looking statements are
reasonable, no assurance can be given that actual results may not differ
materially from those in the forward-looking statements herein for reasons
including the effect of competition, the level of sales and renewal
certifications, marketing, product development and other expenditures, economic
conditions, the legislative and regulatory environment and the condition of the
capital and equity markets.
Readers are cautioned to consider the specific business risk factors described
in our annual report on Form 10-KSB for the fiscal year ended June 30, 1999 and
not to place undue reliance on the forward-looking statements contained herein,
which speak only as of the date hereof. We undertake no obligation to publicly
revise forward-looking statements to reflect events or circumstances that may
arise after the date hereof.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
(a) None
(b) None
(c) The following is a description of equity securities sold by the Company
during the third fiscal quarter ended March 31, 2000 that were not
registered under the Securities Act:
1. On January 18, 2000 the Company completed the private offering and
sale of 171,429 shares of Series B Convertible Preferred Stock, par
value $0.00025 ("Series B Stock"), at $17.50 per preferred share
(each share of which is initially convertible into ten shares of
common stock). These shares were sold on the same terms and
conditions as the 517,157 shares of Series B Stock sold by the
Company in December 1999 as reported in the Company's Form 10-QSB
for December 31, 1999. The aggregate gross proceeds of $3,000,000
were from one strategic investor, TMCT Ventures.
The Series B Stock was sold to TMCT Ventures without an underwriter
or cash commission. The securities were offered and sold without
registration under the Securities Act of 1933, as amended (the
"Act"), in reliance upon the exemption provided by Section 4(2)
thereunder and/or Regulation D, Rule
18
<PAGE>
506 and appropriate legends were placed on the Series B Stock and
will be placed on the shares of common stock issuable upon
conversion unless registered under the Act prior to issuance.
The descriptions of the above Series B transaction is qualified in
its entirety by the full text of the agreements filed as exhibits
to the Company's Form 8-K dated December 13, 1999.
2. On March 24, 2000 the Company completed the first closing of a
private offering and sale of 663,000 units. Each unit consisted of
one share of common stock at $5.85 per share and one warrant for
each ten shares ("585 Unit"), each warrant granting the right to
purchase one common share at $5.85 for a period of three years.
Warrants for an aggregate of 66,300 shares of common stock were
issued. The aggregate proceeds were $3,878,550 and will be used for
working capital.
In connection with the sale of the 585 Units, the Company entered
into an Investors Rights Agreement with the __ investors providing
the investors with certain piggyback registration rights.
While the securities were sold by the Company without an
underwriter or cash commission, the Company upon the second closing
of an additional 647,087 units on April 4, 2000 issued to an
outside financial advisor warrants to purchase an aggregate of
30,000 shares of common stock at an exercise price of $5.85 per
share until April 4, 2005 and issued the lead investor, in
consideration of guaranteeing the purchase of a minimum of
1,000,000 units, warrants to purchase an aggregate of 50,000 shares
of common stock at an exercise price of $10.00 per share until
April 4, 2003.
All of the securities were offered and sold without registration
under the Securities Act of 1933, as amended (the "Act"), in
reliance upon the exemption provided by Section 4(2) thereunder
and/or Regulation D, Rule 506 and appropriate legends were placed
on the shares of common stock and warrants and will be placed on
the shares of common stock issuable upon exercise of the warrants
unless registered under the Act prior to issuance.
The descriptions of the 585 Unit financing is qualified in its
entirety by the full text of the agreements files as exhibits to
this quarterly report.
(d) None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
4.29.1 First Amended ValueStar Corporation Investor Rights Agreement
dated as of March 24, 2000 between the Company and certain
Series A, Series B and 585 Unit Investors
4.31 Form of Securities Purchase Agreement dated as of March 24, 2000
between the Company and 585 Unit Investors
4.32 Form of Stock Purchase Warrant dated as of March 24, 2000
between the Company and 585 Unit Investors
10.18 Non-Qualified Stock Option Agreement dated as of January 28,
2000 between the Company and Robert Sick.
10.19 Non-Qualified Stock Option Agreement dated as of January 28,
2000 between the Company and Robert Sick.
19
<PAGE>
10.20 Incentive Stock Option Agreement dated as of January 28, 2000
between the Company and Robert Sick.
27 Financial Data Schedule
(b) Reports on Form 8-K:
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
VALUESTAR CORPORATION
Date: May 3, 2000 By: /s/ JAMES A. BARNES
-----------------------
James A. Barnes
Secretary and Treasurer
(Principal Financial Officer and duly
authorized to sign on behalf of the
Registrant)
20
EXHIBIT 4.29.1
FIRST AMENDED
VALUESTAR CORPORATION
INVESTORS RIGHTS AGREEMENT
THIS FIRST AMENDED INVESTORS RIGHTS AGREEMENT (this "Amendment") is
dated effective as of March 24, 2000, 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"), eCOMPANIES VENTURE GROUP,
L.P., a Delaware limited partnership ("eCompanies") and TMCT VENTURES, L.P.
("TMCT") (each a "holder" and, collectively, the "holders") and the entities or
individuals set forth on Schedule 1 attached hereto and incorporated herein by
reference as may be amended from time to time (the "Securities Holders") to
reflect all parties who comprise holders of the "Securities" held by all
"Purchasers" under that certain Securities Purchase Agreement dated for
reference purposes only on even date herewith (the "Securities Purchase
Agreement").
RECITALS
A. On December 8, 1999, Seacoast, Pacific and Tangent, among other
parties thereto, entered into an Investors Rights Agreement with the Company as
amended on January 4, 2000, with the addition of TMCT as a party thereto (the
"Rights Agreement"), whereby such agreement granted certain preemptive rights
and registration rights to the Holders.
B. In consideration of the Company's sale of certain securities in
accordance with the terms and provisions set forth under the Securities Purchase
Agreement dated on even date herewith (the "Securities") the Holders desire to
amend the Rights Agreement in accordance with the terms set forth in this
Amendment. All Capitalized terms not defined herein shall have the meanings
established in the Rights Agreement or identified in the Rights Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual agreements, covenants,
representations and warranties contained in this Amendment, the parties hereto
hereby agree as follows:
1. Registration Rights.
a. Incidental Registration. Solely for purposes of Section 2.b
of the Rights Agreement (piggyback registration rights) and any other provision
under Section 2 of the Rights Agreement applicable thereto, including but not
limited to Sections 2.e, 2.m and 2.n (but specifically excluding Sections 2.a,
2.c, and 2.k), the Holders hereby agree and give their consent
<PAGE>
as required under Section 2.k of the Rights Agreement that the definition of
Registrable Securities for purposes of Section 2.b shall include the "Shares,"
"Warrants" and "Warrant Shares" as such terms are defined under the Securities
Purchase Agreement and the definition of "holder" for purposes of Section 2.b
shall include the Securities Holders. Notwithstanding the foregoing, the
Securities Holders shall be entitled to notice under Sections 2.a and 2.c and to
participate in such registrations as if they were the Holders of Registrable
Securities thereunder with respect to their Shares, Warrants and Warrant Shares.
In no event will a Securities Holder be required to exercise his Warrants as a
condition to the registration of such Warrant or Warrant Shares thereunder.
b. Termination/Rule 144 Availability. Notwithstanding the
foregoing, the Company will not be obligated to register any of the Securities
Holders' Registrable Securities (i) if counsel reasonably acceptable to a
majority in interest of the Holders renders an opinion in form and substance
satisfactory to such Holders to the effect that such Registrable Securities are
freely saleable without limitation as to volume under Rule 144 under the
Securities Act of 1933, as amended or (ii) after the fifth anniversary date of
the earlier to occur of a "Qualified Liquidity Milestone" or "Qualified
Liquidation Event."
c. Holdback Agreements. In connection with any underwritten
public offering, each Securities 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 (i) 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, and (ii)
each Holder and Securities Holder shall be proportionately cutback only in
accordance with the provisions of Section 2.b of the Rights Agreement.
2. Waiver of Preemptive Rights. Each of the Holders hereby waives its
preemptive rights set forth in Section 3 of the Rights Agreement applicable to
any of the securities sold or to be sold under the Purchase Agreement.
3. Miscellaneous.
a. Headings. The headings in this Amendment are for
convenience and reference only and are not part of the substance of this
Amendment.
<PAGE>
b. Severability. The parties to this Amendment 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 Amendment 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 Amendment) and
the remainder of this Amendment, as amended, will remain binding upon the
parties to this Amendment, unless the inoperative provision would cause
enforcement of the remainder of this Amendment to be inequitable under the
circumstances.
c. Notices. Whenever it is provided herein that any notice,
demand, request, consent, approval, declaration, or other communication be given
to or served upon any of the parties by another, such notice, demand, request,
consent, approval, declaration, or other communication will be in writing and
will be deemed to have been validly served, given, or delivered (and "the date
of such notice" or words of similar effect will mean the date) five (5) days
after deposit in the United States mails, certified mail, return receipt
requested, with proper postage prepaid, or upon receipt thereof (whether by
non-certified mail, telecopy, telegram, express delivery, or otherwise),
whichever is earlier, and addressed to the party to be notified as follows:
If to the Company, at ValueStar Corporation
360 22nd Street, Suite 210
Oakland, CA 94612
FAX: (510) 808-1400
Attention: Jim Stein
with courtesy copies to: Bay Venture Counsel, LLP
1999 Harrison Street, Suite 1300
Oakland, California 94612
Attention: Donald C. Reinke, Esq.
Fax: (510) 834-7440
If to any
Securities Holder: As set forth on Schedule 1 to the
Securities Purchase Agreement.
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
<PAGE>
address to which notices are to be sent under this Amendment. 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 Amendment.
d. Successors/Amendments. This Amendment will be binding upon
and inure to the benefit of the parties and their respective successors and
permitted assigns. Except as otherwise expressly provided herein, the provisions
of this Amendment may be amended and the Company may take any action herein
prohibited, or omit to perform any act herein required to be performed by it,
only if it has obtained the written consent of Holders holding at least
sixty-six and two-thirds percent (66-2/3%) or more of the then outstanding
Registrable Securities; provided, however, that any amendment or action which
would adversely affect only one class of Holders shall also require the written
consent of the Holders holding at least sixty-six and two-thirds percent
(66-2/3%) or more of the then outstanding Registrable Securities of such class.
Notwithstanding the foregoing, this Section 3.d. shall not be amended without
the consent of all Holders.
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 Amendment. 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. Counterparts. This Amendment may be executed in any number
of counterparts, which will individually and collectively constitute one
agreement.
g. Choice of Law. THIS AMENDMENT 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
<PAGE>
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.
<PAGE>
Corporation Investors Rights Agreement Signature Pages to First Amended
ValueStar
IN WITNESS WHEREOF, the parties have executed and delivered this
Amendment as of the date first above written.
COMPANY:
VALUESTAR CORPORATION
By: /s/ JAMES STEIN
Name: James I. Stein
Its: President and Chief Executive Officer
eCOMPANIES VENTURE GROUP, L.P.
By:
Name: Steven Ledger
Its: Managing General Partner
SEACOAST CAPITAL PARTNERS LIMITED
PARTNERSHIP
By: Seacoast Advisors, LLC,
A Delaware limited liability company
By: /s/ JEFFREY J. HOLLAND
Name: Jeffrey J. Holland
Its: Member & Manager
PACIFIC MEZZANINE FUND, L.P.
By: Pacific Private Capital
its general partner
By: /s/ ANDREW B. DUMKE
Name: Andrew B. Dumke
Its: General Partner
TANGENT GROWTH FUND, L.P.
By: Tangent Fund Management, LLC
its general partner
By: /s/ MARK P. GILLES
Name: Mark P. Gilles
Its: Vice President
<PAGE>
Corporation Investors Rights Agreement Signature Pages to First Amended
ValueStar
TMCT VENTURES, L.P.
Under management by Rustic Canyon Partners,
LLC
By: /s/ MICHAEL SONG
Name: Michael Song
Title: Partner, TMCT Ventures
<PAGE>
Schedule 1
(Individual Pages Differ as to Holder's Name and Personal Information)
SECURITIES HOLDERS
-----------------------------------
Name of Holder
----------------------------------
Authorized Signature
-----------------------------------
Print Name and Title of Signatory
EXHIBIT 4.31
SECURITIES PURCHASE AGREEMENT
Securities Purchase Agreement (the "Agreement"), dated effective as of
March 24, 2000, by and among ValueStar Corporation, a Colorado corporation (the
"Company"), and each of the purchasers set forth on the signature pages hereto
(individually, a "Purchaser" and, collectively, the "Purchasers").
WHEREAS, the Company proposes to issue and sell to the Purchasers for
cash, or in exchange for cancellation or conversion of outstanding indebtedness,
or in lieu of certain callable warrant proceeds, an aggregate maximum of
2,500,000 shares (individually, a "Share" and, collectively, the "Shares") of
common stock, par value $0.00025 per share, of the Company (the "Common Stock")
and warrants to purchase shares of Common Stock (as further described below);
and
WHEREAS, the Company, among other things, has agreed to provide certain
registration rights under the Securities Act of 1933, as amended (the
"Securities Act") with respect to the Shares and the warrants that are being
issued to the Purchasers pursuant to this Agreement.
NOW THEREFORE, in consideration of the above recitals and the mutual
covenants set forth herein, the parties hereto agree as follows:
1. Sale of Stock and Delivery of Warrants; Closing.
(a) Purchase and Sale. Subject to the terms and conditions
hereof, the Company shall issue and sell to each of the Purchasers, and each
Purchaser, severally, shall purchase from the Company, the number of Shares set
forth opposite such Purchaser's name on Schedule 1 hereto at a purchase price of
$5.85 per Share for an aggregate purchase price set forth on such Schedule 1.
The Company shall deliver to each Purchaser warrants to purchase, at an exercise
price of $5.85 per share, such number of shares of Common Stock set forth
opposite such Purchaser's name on Schedule 1 hereto (the "Warrants"). The shares
of Common Stock issued or issuable upon exercise of the Warrants are hereinafter
referred to as the "Warrant Shares." The number of Warrant Shares shall equal
ten percent (10%) of the Shares of Common Stock purchased hereunder. The
Warrants shall be in the form of Exhibit A hereto.
(b) First Closing. The first closing of the purchase and sale
of the Shares and Warrants (the "First Closing") shall take place at the offices
of Bay Venture Counsel, LLP, 1999 Harrison Street, Suite 1300, Oakland, CA 94556
at 10:00 A.M. on March 17, 2000, or such later date on which the conditions set
forth in Sections 4(a) and 5(a) hereof shall have been satisfied or waived;
provided, however, that the First Closing, in no event, shall occur later than
March 22, 2000. The date of the First Closing shall be hereinafter referred to
as the "First Closing Date".
(c) Second Closing. The Second Closing of the purchase and
sale of the Shares and Warrants (the "Second Closing") shall take place at the
offices of the Company, on or before April 4, 2000 such earlier date on which
the conditions set forth in Section 4(b) and 5(b) hereof shall have been
satisfied or waived, provided that:
<PAGE>
Purchasers participating in the Second Closing shall become a party to and agree
to be bound by the provisions of this Agreement and each other Transaction
Documents (as defined below). The date of the Second Closing shall be
hereinafter referred to as the "Second Closing Date", the First Closing Date and
the Second Closing Date are each referred to individually as a "Closing Date"
and, collectively as the "Closing Dates".
(d) Delivery. At each Closing, the Company shall deliver to
each Purchaser a stock certificate representing the Shares purchased by such
Purchaser and the Warrants to be delivered to such Purchaser, against payment of
the purchase price therefor by check, payable to the order of the Company, by
wire transfer of immediately available funds to the Company in accordance with
the Company's wiring instructions, or by cancellation or conversion of
indebtedness or in lieu of certain callable warrant proceeds, or some
combination thereof. In addition, the Company shall deliver to each Purchaser
such other agreements, documents and certificates as specified in this Agreement
or as may reasonably be requested by such Purchaser.
2. Representations and Warranties of Purchasers. Each of the Purchasers
represents and warrants, severally, to the Company as follows:
(a) Authorization. The Purchaser has the full power and
authority to execute and deliver this Agreement and to perform its obligations
hereunder. The execution and delivery of, and the performance under, this
Agreement by the Purchaser will not conflict with any rule, regulation, judgment
or agreement applicable to the Purchaser.
(b) Investment Purpose. The Purchaser is purchasing the Shares
and acquiring the Warrants, and will purchase the Warrant Shares (together with
the Shares and the Warrants, the "Securities"), for investment purposes and not
with a present view to, or for sale in connection with, a distribution thereof
within the meaning of the Securities Act. The Purchaser understands that it must
bear the economic risk of this investment indefinitely, unless the Securities
are registered pursuant to the Securities Act and any applicable state
securities or blue sky laws or an exemption from such registration is available.
(c) Reliance On Exemptions. The Purchaser understands that the
Securities are being offered and sold in reliance upon specific exemptions from
the registration requirements of Federal and state securities laws and that the
Company is relying upon the truth and accuracy of the representations and
warranties of the Purchaser set forth herein in order to determine the
availability of such exemptions and the eligibility of the Purchaser to acquire
the Securities.
(d) Information. The Purchaser has been furnished all
documents relating to the business, finances and operations of the Company which
the Purchaser requested from the Company. The Purchaser has been afforded the
opportunity to ask questions of the Company's representatives concerning the
Company in making the decision to purchase the Shares and acquire the Warrants,
and such questions have been answered to its satisfaction. However, neither the
foregoing nor any other due diligence investigation conducted by the Purchaser
or on its behalf shall limit, modify or affect the representations and
warranties of the Company in Section 3 of this Agreement or the right of the
Purchaser to rely thereon.
<PAGE>
(e) Governmental Review. The Purchaser understands that no
Federal or state agency or any other government or governmental agency has
passed upon or made any recommendation or endorsement of the Securities.
(f) Purchaser's Qualifications. The Purchaser is an
"accredited investor" as defined in Rule 501 under Regulation D of the
Securities Act ("Regulation D"). The Purchaser is capable of evaluating the
merits and risks of an investment in the Securities.
(g) Restrictions on Transfer. The Purchaser understands that
it may not transfer any of the Securities unless such Securities are registered
under the Securities Act or unless an exemption from registration and
qualification requirements are available under the Securities Act and applicable
state securities laws. The Purchaser understands that certificates representing
the Shares, the Warrants, the Warrant Shares and shares of Common Stock issued
pursuant to Section 4 of this Agreement shall bear the following, or a
substantially similar, legend until such time as they have been registered under
the Securities Act or otherwise may be sold under Rule 144 under the Securities
Act:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR QUALIFIED
UNDER ANY STATE SECURITIES LAW, AND MAY NOT BE SOLD, TRANSFERRED,
ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN EFFECTIVE REGISTRATION
STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES, OR THE HOLDER
RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THE SECURITIES
SATISFACTORY TO THE COMPANY STATING THAT SUCH SALE, TRANSFER,
ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND
PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT AND THE QUALIFICATION
REQUIREMENTS UNDER STATE LAW."
The Company shall be entitled to enter stop transfer notices on its
stock books with respect to the Shares until the conditions as set
forth in the legend above with respect to the transfer of such
securities have been met.
(h) Residence. The Purchaser is a resident of the jurisdiction
set forth under its name on the signature pages hereto.
(i) Investment Experience. The Purchaser has experience as an
investor in securities of Internet - related and technology companies and
acknowledges that it is able to fend for itself, can bear the economic risk of
its investment, and has such knowledge and experience in financial or business
matters that it is capable of evaluating the merits and risks of the investment
in the Securities. If other than an individual, the Purchaser also represents it
has not been organized for the purpose of acquiring the Securities.
<PAGE>
3. Representations and Warranties of the Company. Except as set forth
on a Schedule of Exceptions attached hereto and incorporated herein by
reference, the Company represents and warrants to each Purchaser as of the First
Closing as follows:
(a) Corporate Existence and Authority.
(i) The Company (i) is a corporation duly organized,
validly existing, and in good standing under the laws of Colorado; (ii) has all
requisite corporate power and authority to own its assets and carry on its
business as now conducted; and (iii) is qualified to do business in all
jurisdictions in which the nature of its business makes such qualification
necessary and where failure to so qualify would have a material adverse effect
in the business, assets, financial condition, results of operations, affairs or
prospects of the Company of any of its subsidiaries (A "Material Adverse
Effect"). The Company has the corporate power and authority to execute, deliver,
and perform its obligations under this Agreement to which it is, or in
connection with the transactions contemplated hereby, may become, a party.
(ii) ValueStar, Inc., a California corporation and
wholly owned subsidiary of the Company (the "Subsidiary") (i) is a corporation
duly organized, validly existing, and in good standing under the laws of
California; (ii) has all requisite corporate power and authority to own its
assets and carry on its business as now conducted; and (iii) is qualified to do
business in all jurisdictions in which the nature of its business makes such
qualification necessary and where failure to so qualify would have a Material
Adverse Effect.
(b) Financial Statements and Reports. The Company has timely
filed all required forms, reports, statements and documents with the SEC, all of
which have complied in all material respects with all applicable requirements of
the Exchange Act of 1934, as amended (the "Exchange Act"), and the Securities
Act of 1933, as amended (the "Securities Act"), as the case may be. The Company
has delivered or made available to each Purchaser true and complete copies of
(i) the Company's Annual Report on Form 10-KSB for the fiscal year ended June
30, 1999, (ii) its proxy statement relating to the Company's annual stockholders
meeting held November 19, 1999, (iii) all other forms, reports, statements and
documents filed by the Company with the SEC pursuant to the Exchange Act since
June 30, 1999, and (iv) all reports, statements and other information provided
by the Company to its stockholders since January 1, 1999 (collectively, the "SEC
Reports"). As of their respective dates, the SEC Reports did not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading. Each of the
consolidated financial statements of the Company included or incorporated by
reference in the SEC Reports (including any such SEC Report filed after the date
of this Agreement until the First Closing) were prepared in accordance with GAAP
applied on a consistent basis (except as otherwise stated in such financial
statements or, in the case of audited statements, the related report thereon of
independent certified public accounts), and present fairly the financial
position and results of operations, cash flows and of changes in stockholders'
equity of the Company and its consolidated subsidiaries as of the dates and for
the periods indicated, subject, in the case of unaudited interim financial
statements, to normal year-end audit adjustments, and except that the unaudited
interim financial statements do not contain all of the disclosures required by
GAAP. Since June 30, 1999
<PAGE>
there has been no change in any of the significant accounting (including tax
accounting) policies, practices, or procedures of the Company or any of its
consolidated subsidiaries. The Company is and has been subject to the reporting
requirements of the Exchange Act and has timely filed with the SEC all periodic
reports required to be filed by it pursuant thereto and all reports required to
be filed under Sections 13, 14 or 15(d) of the Exchange Act since June 30, 1999.
(c) Default. Except as disclosed on Schedule 3(c), neither the
Company nor the Subsidiary is in default under any loan agreement, indenture,
mortgage, security agreement, lease, franchise, permit, license or other
agreement or obligation to which it is a party or by which any of its properties
may be bound which default would cause a Material Adverse Effect. The Company is
paying its debts as they become due.
(d) Authorization and Compliance with Laws and Material
Agreements. Except as set forth on Schedule 3(d), the execution, delivery and
performance by the Company of this Agreement have been or prior to the
consummation of such transactions will be duly authorized by all requisite
action on the part of the Company and do not and will not violate any of the
Company's Certificate of Designations, or the Company's Articles of
Incorporation or Bylaws or any law or any order of any court, governmental
authority or arbitrator, and do not and will not upon the consummation of the
transactions contemplated hereby conflict with, result in a breach of, or
constitute a default under, or result in the imposition of any lien upon any
assets of the Company pursuant to the provisions of any loan agreement,
indenture, mortgage, security agreement, franchise, permit, license or other
instrument or agreement by which the Company or any of its properties is bound.
Except as set forth on Schedule 3(d), no authorization, approval or consent of,
and no filing or registration with, any court, governmental authority or third
person is or will be necessary for the execution, delivery or performance by the
Company of this Agreement or the validity or enforceability thereof. All such
authorizations, approvals, consents, filings and registrations described in
Schedule 3(d) have been obtained. The Company is not in violation of any term of
its Articles of Incorporation or Bylaws or any contract, agreement, judgment or
decree and is in full compliance with all applicable laws, regulations and rules
where such violation would cause a Material Adverse Effect. All officers of the
Company to the best of their knowledge have complied with all material
applicable laws, regulations and rules in the course and scope of their
employment with the Company.
(e) Litigation and Judgments. Except as disclosed on Schedule
3(e), there is no suit, action, proceeding or investigation pending or, to the
best knowledge of the Company, threatened against or affecting the Company or
the Subsidiary, the outcome of which, in the reasonable judgment of the Company,
is likely to have a Material Adverse Effect, nor is there any judgment, decree,
injunction, ruling or order of any court, governmental, regulatory or
administrative department, commission, agency or instrumentality, arbitrator or
any other person outstanding against the Company or the Subsidiary having, or
which is reasonably likely to have, a Material Adverse Effect.
(f) Rights in Properties; Liens. Except as disclosed on
Schedule 3(f), the Company and the Subsidiary have good and marketable title to
all properties and
<PAGE>
assets reflected on their balance sheets, and none of such properties or assets
is subject to any liens. The Company and the Subsidiary enjoy peaceful and
undisturbed possession under all leases necessary for the operation of their
other properties, assets, and businesses and all such leases are valid and
subsisting and are in full force and effect. There exists no default under any
provision of any lease which would permit the lessor thereunder to terminate any
such lease or to exercise any rights under such lease which, individually or
together with all other such defaults, could have a Material Adverse Effect. The
Company and the Subsidiary have the right to use all of the patents, patent
rights, patent applications, licenses, inventions, trade secrets, know-how,
proprietary techniques (including processes and substances), trademarks, service
marks, trade names and copyrights (the "Intellectual Property") necessary to
their business as presently conducted, and to the knowledge of the Company and
the Subsidiary, the Company's and the Subsidiary's use of the Intellectual
Property does not infringe on the rights of any other person where such
infringement would not have a Material Adverse Effect. To the best of the
Company's knowledge, no other person is infringing the rights of the Company or
the Subsidiary in any of the Intellectual Property. Neither the Company nor the
Subsidiary owe any royalties, honoraria or fees to any person by reason of its
use of the Intellectual Property.
(g) Enforceability. This Agreement, when delivered, shall
constitute the legal, valid and binding obligation of the Company, enforceable
against the Company in accordance with its terms.
(h) Taxes. Except as set forth on Schedule 3(h), the Company
and the Subsidiary have timely filed all tax returns (federal, state, and local)
required to be filed, including, without limitation, all income, franchise,
employment, property, and sales taxes, and have timely paid all of their tax
liabilities, other than immaterial amounts and taxes that are being contested by
the Company or the Subsidiary in good faith by appropriate actions or
proceedings diligently pursued, and for which adequate reserves in conformity
with GAAP with respect thereto have been established. Neither the Company nor
the Subsidiary know of any pending investigation of the Company or the
Subsidiary by any taxing authority or pending but unassessed tax liability of
the Company or the Subsidiary, except as disclosed on Schedule 3(h). The Company
and the Subsidiary have made no presently effective waiver of any applicable
statute of limitations or request for an extension of time to file a tax return,
and neither the Company nor the Subsidiary are a party to any tax-sharing
agreement.
(i) Disclosure. No representation or warranty made by the
Company in this Agreement or in any 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 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.
<PAGE>
(j) Subsidiaries and Capitalization. The Company has no
Subsidiaries, other than the Subsidiary. All the issued and outstanding shares
of capital stock of the Company are duly authorized, validly issued, fully paid
and nonassessable. The capitalization of the Company on the First Closing Date
is set forth on Schedule 3(j). No violation of any preemptive rights of
shareholders of the Company has occurred by virtue of the transactions
contemplated under this Agreement. There are no outstanding contracts, options,
warrants, instruments, documents or agreements binding upon the Company granting
to any person or group of persons any right to purchase or acquire shares of the
Company's capital stock other than as set forth on Schedule 3(j).
(k) Current Locations. Schedule 3(k) identifies (a) the
Company's principal place of business and chief executive office, (b) all the
locations where the Company maintains any books or records relating to any of
its assets, (c) all other locations where the Company has a place of business,
and (d) each address where any of the Company's assets are located. Schedule
3(k) accurately indicates whether each such location is owned or leased, and, if
leased, identifies the owner of such location. No person other than the Company
has possession of any material amount of the assets of the Company except as
disclosed on Schedule 3(k).
(l) Investment Company Act. Neither the Company, the
Subsidiary nor any company controlling the Company or the Subsidiary is required
to be registered as an "investment company" within the meaning of the Investment
Company Act of 1940, as amended.
(m) Public Utility Holding Company Act. Neither the Company
nor the Subsidiary is a "holding company" or a "subsidiary company" of a
"holding company" or an "affiliate" of a "holding company" or a "public utility"
within the meaning of the Public Utility Holding Company Act of 1935, as
amended.
(n) Securities Laws. Assuming the truthfulness and accuracy of
each Purchaser's representations and warranties in Section 2, the Company has
complied with or is exempt from the registration and/or qualification
requirements of all federal and state securities or blue sky laws applicable to
the issuance or sale of the Securities.
(o) No Labor Disputes. Neither the Company nor the Subsidiary
is involved in any labor dispute. The Company is not a party to any collective
bargaining agreement, and there are no strikes or walkouts or union organization
of any of the Company's or the Subsidiary's employees threatened or in existence
and no labor contract is scheduled to expire during the term of this Agreement.
(p) Brokers. Except as described in Schedule 3(p), neither the
Company nor any of its shareholders has dealt with any broker, finder,
commission agent or other person in connection with the transactions referenced
in or contemplated by this Agreement, nor is the Company or any of its
shareholders under any obligation to pay any broker's fee or commission in
connection with such transactions.
(q) Insurance. The amount and types of insurance carried by
the
<PAGE>
Company and the Subsidiary, and the terms and conditions thereof, are
substantially similar to the coverage maintained by companies in the same or
similar business as the Company and the Subsidiary and similarly situated.
(r) Survival of Representations. All representations made by
the Company in or under this Agreement shall be true and accurate as of the
First Closing and shall survive the First Closing for a period of two (2) years
thereafter (except for those changes contemplated in and provided for by this
Agreement).
4. Conditions to Obligations of the Purchasers at the Closings.
(a) First Closing. The obligation of each Purchaser purchasing
Shares at the First Closing to purchase such Shares shall be subject to the
fulfillment on or prior to the First Closing Date of the following conditions,
any of which may be waived by such Purchaser:
(i) Certificates. The Company shall have delivered to
each such Purchaser a duly executed certificate representing the Shares and the
Warrants issuable to such Purchaser.
(ii) Representations and Warranties; Performance of
Obligations. The representations and warranties of the Company set forth in this
Agreement shall be true and correct when made, and shall be true and correct on
the First Closing Date with the same force and effect as if they had been made
on and as of said date, except for representations and warranties made as of a
specific date which shall be true and correct as of such date. The Company shall
have performed, satisfied and complied with all obligations and conditions
required to be performed or observed by it under this Agreement on or prior to
the First Closing Date.
(iii) Consents and Waivers. The Company shall have
made all filings and obtained any and all consents (including, without
limitation, all governmental or regulatory consents), approvals or
authorizations, permits and waivers necessary or appropriate for consummation of
the transactions contemplated by this Agreement.
(iv) No Litigation or Legislation. No statute, rule,
regulation, decree, ruling or injunction shall have been enacted or entered, and
no litigation, proceeding, government inquiry or investigation shall be pending,
which challenges, prohibits or restricts, or seeks to prohibit or restrict, the
consummation of the transactions contemplated by this Agreement, or restricts or
impairs the ability of the Purchasers to own an equity interest in the Company.
(v) Compliance Certificate. The Company shall have
delivered to the Purchasers a certificate, executed by the Chief Executive
Officer of the Company, dated as of the First Closing Date, certifying to the
fulfillment of the conditions set forth in Sections 4(a)(ii), (iii), (iv), (v)
and (vi) and such other matters as the Purchasers shall reasonably request.
(vi) Registration Rights Agreement. The Company shall
have executed and delivered a Registration Rights Agreement with such Purchasers
in form and substance attached hereto as Exhibit B and incorporated herein by
reference.
<PAGE>
(b) Second Closing. The obligation of each Purchaser
purchasing Shares at the Second Closing to purchase such Shares shall be subject
to the fulfillment on or prior to the Second Closing Date of the following
conditions, any of which may be waived by such Purchaser:
(i) Certificates. The Company shall have delivered to
each such Purchaser a duly executed certificate representing the Shares and the
Warrants issuable to such Purchaser.
(ii) Representations and Warranties; Performance of
Obligations. The representations and warranties of the Company set forth in this
Agreement shall be true and correct when made. The Company shall have performed,
satisfied and complied with all obligations and conditions required to be
performed or observed by it under this Agreement on or prior to the Second
Closing Date.
(iii) Consents and Waivers. The Company shall have
made all filings and obtained any and all consents (including, without
limitation, all governmental or regulatory consents), approvals or
authorizations, permits and waivers necessary or appropriate for consummation of
the transactions contemplated by this Agreement.
(iv) No Litigation or Legislation. No statute, rule,
regulation, decree, ruling or injunction shall have been enacted or entered, and
no litigation, proceeding, government inquiry or investigation shall be pending,
which challenges, prohibits or restricts, or seeks to prohibit or restrict, the
consummation of the transactions contemplated by this Agreement, or restricts or
impairs the ability of the Purchasers to own an equity interest in the Company.
(v) Compliance Certificate. The Company shall have
delivered to each such Purchaser a certificate, executed by the Chief Executive
Officer of the Company, dated as of the Second Closing Date, certifying to the
fulfillment of the conditions set forth in Sections 7(b)(ii),(iii), (iv), (v)
and (vi) and such other matters as the Purchasers shall reasonably request.
(vi) Registration Rights Agreement. The Company shall
have executed and delivered the Registration Rights Agreement with such
Purchasers.
5. Conditions to Obligation of the Company at the Closings.
(a) First Closing. The obligation of the Company to sell and
issue the Shares and the Warrants to the Purchasers at the First Closing shall
be subject to the fulfillment on or prior to the First Closing Date of the
following conditions, any of which may be waived by the Company:
(i) Purchase Price. Each such Purchaser shall have
delivered the purchase price for the Shares to be purchased by such Purchaser
hereunder.
<PAGE>
(ii) Representations and Warranties. The
representations and warranties made by such Purchasers in this Agreement shall
be true and correct when made, and shall be true and correct on the First
Closing Date with the same force and effect as if they had been made on and as
of said date.
(iii) No Litigation or Legislation. No Federal, State
or local statute, rule, regulation, decree, ruling or injunction shall have been
enacted or entered, and no litigation, proceeding, government inquiry or
investigation shall be pending, which challenges, prohibits, restricts, or seeks
to prohibit or restrict, the consummation of the transactions contemplated by
this Agreement or the other agreements referred to herein, or restricts or
impairs the ability of any Purchaser to own an equity interest in the Company.
(b) Second Closing. The obligation of the Company to sell and
issue the Shares and the Warrants to each Purchaser at the Second Closing shall
be subject to the fulfillment on or prior to the Second Closing Date of the
following conditions, any of which may be waived by the Company:
(i) Purchase Price. Each such Purchaser shall have
delivered the purchase price for the Shares to be purchased by such Purchaser
hereunder.
(ii) Representations and Warranties. The
representations and warranties made by such Purchasers in this Agreement shall
be true and correct when made, and shall be true and correct on the Second
Closing Date with the same force and effect as if they had been made on and as
of said date.
(iii) No Litigation or Legislation. No Federal, State
or local statute, rule, regulation, decree, ruling or injunction shall have been
enacted or entered, and no litigation, proceeding, government inquiry or
investigation shall be pending, which challenges, prohibits, restricts, or seeks
to prohibit or restrict, the consummation of the transactions contemplated by
this Agreement or the other agreements referred to herein, or restricts or
impairs the ability of any Purchaser to own an equity interest in the Company.
6. Miscellaneous.
(a) Remedies. Any person having any rights under any provision
of this Agreement will be entitled to enforce such rights specifically, to
recover damages by reason of any breach of any provision of this Agreement, and
to exercise all other rights granted by law, which rights may be exercised
cumulatively and not alternatively.
(b) Consent to Amendments. Except as otherwise expressly
provided herein, the provisions of this Agreement and any exhibit attached
hereto may be amended and the Company take any action herein prohibited, or omit
to perform any act herein required to be performed by it, only if it has
obtained the written consent of Purchasers holding at least sixty-six and
two-thirds percent (66-2/3%) or more of the outstanding Shares. No course of
dealing between the Company and any Purchaser or any delay in exercising any
rights hereunder or under the Corporation's Articles of Incorporation will
operate as a waiver of any rights of any such Purchaser.
<PAGE>
(c) Successors and Assigns. Except as otherwise expressly
provided herein, all covenants and agreements contained in this Agreement by or
on behalf of any of the parties hereto shall bind and inure to the benefit of
the respective successors and assigns of the parties hereto whether so expressed
or not.
(d) Severability. Each provision of this Agreement shall be
interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Agreement is held to be prohibited by or invalid
under applicable law, such provision shall be ineffective only to the extent of
such prohibition or invalidity, without invalidating the remainder of this
Agreement.
(e) Counterparts. This Agreement may be executed in two or
more counterparts, any one of which need not contain the signatures of more than
one party, but all such counterparts when taken together shall constitute one
and the same Agreement.
(f) Descriptive Headings. The descriptive headings of this
Agreement are inserted for convenience only and do not constitute a part of this
Agreement.
(g) Notices. Except as otherwise expressly provided herein,
all communications provided for hereunder shall be in writing and delivered or
mailed by the United States mails, certified mail, return receipt requested, (a)
if to Purchaser, addressed to each Purchaser at the address specified on
Schedule I hereto or to such other address as such Purchaser may in writing
designate, or (b) if to the Company, addressed to the Company at the address set
forth below or to such other address as the Company may in writing designate.
Notices shall be deemed to have been validly served, given or delivered (and
"the date of such notice or words of similar effect shall mean the date) five
(5) days after deposit in the United States mails, certified mail, return
receipt requested, with proper postage prepaid, or upon actual receipt thereof
(whether by noncertified mail, telecopy, telegram, facsimile, express delivery
or otherwise), whichever is earlier.
If to Purchasers:
To the Addresses set forth on the
Signature Pages
If to the Corporation
Valuestar Corporation
Attn: Jim Stein
360 - 22nd Street, Suite 210
Oakland, CA 94612
FAX: (510) 808-1400
<PAGE>
With a Copy to:
Bay Venture Counsel, LLP
Attn: Donald C. Reinke, Esq.
1999 Harrison Street, Suite 1300
Oakland, CA 94612
FAX: (510) 834-7440
(h) Governing Law. The validity, meaning and effect of this
Agreement shall be determined in accordance with the laws of California
applicable to contracts made and to be performed entirely in California as if by
and between California residents.
(i) Schedules and Exhibits. All schedules and exhibits are an
integral part of this Agreement.
(j) Litigation Costs. If any legal action, arbitration or
other proceeding is brought for the enforcement of this Agreement, or because of
an alleged dispute, breach, default, or misrepresentation in connection with any
of the provisions of this Agreement, the successful or prevailing party or
parties therein shall be entitled to recover reasonable attorneys' fees and
other costs incurred in that action or proceeding, in addition to any other
relief to which it or they may be entitled.
(k) Final Agreement. This Agreement and the exhibits and
schedules attached hereto constitute the only agreement of the parties
concerning the matters herein, and supersedes, merges and renders void all prior
written/oral, and/or contemporaneous agreements and understandings related
thereto.
(l) Confidentiality. Each Purchaser agrees to keep
confidential any information delivered by the Company or Subsidiary to such
Purchaser under this Agreement that the Company or Subsidiary clearly indicates
in writing to be confidential information; provided, however, that nothing in
this Section 6(l) will prevent such Purchaser from disclosing such information
(a) to any affiliate of such Purchaser or any actual or potential purchaser,
participant, assignee, or transferee of such Purchaser's rights or obligations
hereunder that agrees to be bound by the terms of this Section 6(l), (b) upon
order of any court or administrative agency, (c) upon the request or demand of
any regulatory agency or authority having jurisdiction over such Purchaser, (d)
that is in the public domain, (e) that has been obtained from any Person that is
not a party to this Agreement or an affiliate of any such party without breach
by such Person of a confidentiality obligation known to such Purchaser, (f) if
necessary and only to the extent necessary for the exercise of any remedy under
this Agreement, or (g) to the certified public accountants for such Purchaser.
The Company agrees that such Purchaser will be presumed to have met its
obligations under this Section 6(l) to the extent that it exercises the same
degree of care with respect to information provided by the Corporation or
Subsidiary as it exercises with respect to its own information of similar
character.
(m) Public Disclosure. Except as may be required to comply
with applicable law, no Purchaser shall make or cause to be made any press
release or similar public announcement
(SIGNATURES FOLLOW ON NEXT PAGE)
<PAGE>
Signature Page to Securities Purchase Agreement between ValueStar
Corporation and the Undersigned Purchaser
IN WITNESS WHEREOF, the parties hereto have executed this Agreement effective as
of the respective Closing dates.
VALUESTAR CORPORATION
By: /s/ JAMES STEIN
(Signature)
James Stein, President and CEO
Print Name and Title
<PAGE>
Signature Page to Securities Purchase Agreement between ValueStar
Corporation and the Undersigned Purchaser
(Individual Pages Differ as to Holder's Name, Personal Information and Amount
of Investment)
PURCHASER
By: ___________________________________
(Signature)
_______________________________________
Print Name and Title
ADDRESS
_______________________________________
_______________________________________
_______________________________________
_______________________________________
TELEPHONE AND FAX NUMBERS
TEL: __________________________________
FAX: __________________________________
AGGREGATE INVESTMENT AMOUNT
$ _____________________________________
EXHIBIT 4.32
Warrant 585-XX
THE SECURITIES REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE
UPON EXERCISE THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "ACT"), OR UNDER ANY STATE SECURITIES LAWS, AND MAY NOT BE
OFFERED, SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT FOR SUCH SECURITIES UNDER THE ACT OR AN OPINION
OF COUNSEL SATISFACTORY TO THE COMPANY THAT AN EXEMPTION FROM SUCH REGISTRATION
IS AVAILABLE.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS ON TRANSFER SET FORTH HEREIN AND IN THAT CERTAIN SECURITIES
PURCHASE AGREEMENT THEREFOR BETWEEN THE COMPANY AND THE ORIGINAL HOLDER HEREOF.
VALUESTAR CORPORATION
STOCK PURCHASE WARRANT
THIS CERTIFIES THAT, for value received, VALUESTAR CORPORATION, a
Colorado corporation (the "Company"), hereby grants to ____________ ("Holder")
the right to purchase from the Company up to _________________ (_____) shares of
the Common Stock of the Company (the "Warrant Shares"), subject to the following
terms and conditions:
1. Series. This Warrant is one of a duly authorized series of warrants
of the Company (which are identical except for the variations necessary to
express the identification numbers, names of the holder, number of common shares
issuable upon exercise thereof and warrant issue dates) designated as its "585
Warrants."
2. Term. This Warrant may be exercised in whole at any time during the
period from the date of issuance of this Warrant until 5:00 p.m., California
time, on March 24, 2003 (the "Exercise Period").
3. Purchase Price. The purchase price for each Warrant Share
purchasable hereunder shall be Five and 85/100 United States Dollars (U.S.
$5.85) (the "Warrant Exercise Price").
4. Exercise of Warrant. The purchase rights represented by this Warrant
may be exercised by the Holder, in whole or in part, at any time and from time
to time before the end of the Exercise Period by surrender of this Warrant at
the principal office of the Company in Oakland, California (or such other office
or agency of the Company as may be designated by notice in writing to the Holder
at the address of the Holder appearing on the books of the Company), together
with the Notice of Exercise annexed hereto duly completed and executed on behalf
of the Holder accompanied by payment in full of the amount of the aggregate
Warrant Exercise Price. The Warrant Exercise Price shall be made, at the option
of the Holder, (i) in immediately available funds in United States Dollars or
(ii) if the primary market for the Warrant Shares during the ten (10) Trading
Days (as defined in Section 6 below) immediately preceding the date of exercise
is the National Association of Securities Dealers Automated Quotation System -
National Market System or a national securities exchange registered under the
Exchange Act of 1934, as
-1-
<PAGE>
amended, cancellation of Warrant Shares, valued at the average "Closing Price"
(as defined in Section 6 below) of the Company's Common Stock for the ten (10)
consecutive Trading Days immediately preceding the date of exercise.
Certificates for shares purchased hereunder shall be delivered to the Holder
within thirty (30) business days after the date on which this Warrant shall have
been exercised as aforesaid, but Holder shall be deemed the record owner of such
Warrant Shares as of and from the close of business on the date on which this
Warrant shall be surrendered.
5. Fractional Interest. The Company shall not be required to issue any
fractional shares on the exercise of this Warrant.
6. Redemption of Warrants. The Company may elect, by written notice as
provided herein (the "Company Notice"), to redeem, pro rata among all holders of
585 Warrants, all outstanding 585 Warrants including this Warrant, in whole or
in part, on a date (the "Redemption Date") fixed by the Company and which shall
be a Trading Day (as defined below) during which a registration statement under
the Securities Act of 1933, as amended, covering the Warrant Shares is effective
at a price of $.01 per Warrant Share then exercisable under such outstanding 585
Warrants (the "Redemption Price") at such time as the average Closing Price (as
defined below) of the Company's Common Stock for the ten (10) consecutive
Trading Days (as defined below) immediately preceding the date of the Company
Notice equals or exceeds Fifteen Dollars ($15.00), (adjusted for stock splits
and combinations); provided, however, that this Warrant may be exercised at any
time prior to 5:00 p.m., California time, on the business day immediately
preceding the Redemption Date. Thereafter, all rights to acquire such Warrant
Shares shall terminate.
For purposes hereof, (i) the term "Trading Day" shall mean any day on
which securities are traded on the applicable securities exchange or in the
applicable securities market; and (ii) the term "Closing Price" in respect of a
Trading Day shall mean the reported closing bid prices on the principal national
securities exchange on which the Common Stock of the Company is listed or
admitted to trading or, if not listed or admitted to trading on any national
securities exchange, on the National Association of Securities Dealers Automated
Quotation System - National Market System.
7. Warrant Confers No Rights of Shareholder. Holder shall not have any
rights as a shareholder of the Company with regard to the Warrant Shares prior
to actual exercise resulting in the purchase of the Warrant Shares.
8. Investment Representation. Neither this Warrant nor the Warrant
Shares issuable upon the exercise of this Warrant have been registered under the
Securities Act of 1933, as amended (the "Securities Act"), or under any
applicable state securities laws. Holder acknowledges by acceptance of this
Warrant that (a) it has acquired this Warrant for investment and not with a view
toward distribution; (b) it has a pre-existing personal or business relationship
with the Company, or its executive officers, or by reason of its business or
financial experience it has the capacity to protect its own interests in
connection with the transaction; and (c) except as so notified to the Company in
writing, it is an accredited investor as that term is defined in Regulation D
promulgated under the Securities Act. Holder agrees that any Warrant Shares
issuable upon exercise of this Warrant will be acquired for investment and not
with a view toward distribution; and acknowledges that to the extent such
Warrant Shares will not be registered under the Securities Act and applicable
state securities laws, that such Warrant Shares may have to be held indefinitely
unless they are subsequently registered or qualified under the Securities Act
and applicable state securities laws; or, based on an opinion of counsel
reasonably satisfactory to the Company, an exemption from such registration and
qualification is available. Holder, by acceptance hereof, consents to the
placement of the following restrictive legends, or similar legends, on each
certificate to be issued to Holder by the Company in connection with the
issuance of such Warrant Shares:
-2-
<PAGE>
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR QUALIFIED
UNDER ANY STATE SECURITIES LAW, AND MAY NOT BE SOLD, TRANSFERRED,
ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN EFFECTIVE REGISTRATION
STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES, OR THE HOLDER
RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THE SECURITIES
SATISFACTORY TO THE COMPANY STATING THAT SUCH SALE, TRANSFER,
ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND
PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT AND THE QUALIFICATION
REQUIREMENTS UNDER STATE LAW."
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS ON TRANSFER SET FORTH IN THAT CERTAIN SECURITIES PURCHASE
AGREEMENT THEREFOR BETWEEN THE CORPORATION AND THE ORIGINAL HOLDER
HEREOF."
9. Reservation of Shares. The Company agrees at all times during the
Exercise Period to have authorized and reserved, for the exclusive purpose of
issuance and delivery upon exercise of this Warrant, a sufficient number of
shares of its Common Stock to provide for the exercise of the rights represented
hereby.
10. Adjustment for Re-Classification of Capital Stock. If the Company
at any time during the Exercise Period shall, by subdivision, combination or
re-classification of securities, change any of the securities to which purchase
rights under this Warrant exist under the same or different number of securities
of any class or classes, this Warrant shall thereafter entitle the Holder to
acquire such number and kind of securities as would have been issuable as a
result of such change with respect to the Warrant Shares immediately prior to
such subdivision, combination or re-classification. If shares of the Company's
common stock are subdivided into a greater number of shares of common stock, the
purchase price for the Warrant Shares upon exercise of this Warrant shall be
proportionately reduced and the Warrant Shares shall be proportionately
increased; and conversely, if shares of the Company's common stock are combined
into a smaller number of common stock shares, the price shall be proportionately
increased, and the Warrant Shares shall be proportionately decreased.
11. Public Offering Lock-Up. In connection with any public registration
of this Company's securities, the Holder (and any transferee of Holder) agrees,
upon the request of the Company or the underwriter(s) managing such underwritten
offering of the Company's securities, not to sell, make any short sale of, loan,
grant any option for the purchase of, or otherwise dispose of this Warrant, any
of the shares of Common Stock issuable upon exercise of this Warrant or any
other securities of the Company heretofore or hereafter acquired by Holder
(other than those included in the registration) without the prior written
consent of the Company and such underwriter(s), as the case may be, for a period
of time not to exceed 30 days before and one hundred eighty (180) days after the
effective date of the registration; 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 of the Company
enters into such an agreement. Upon request by the Company, Holder (and any
transferee of Holder) agrees to enter into any further agreement in writing in a
form reasonably satisfactory to the Company and such underwriter(s). The Company
may impose stop-transfer instructions with respect to the securities subject to
the foregoing restrictions until the end of said 180-day period. Any shares
issued upon exercise of this Warrant shall bear an appropriate legend
referencing this lock-up provision.
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<PAGE>
12. Assignment. With respect to any offer, sale or other disposition of
this Warrant or any underlying securities, the Holder will give written notice
to the Company prior thereto, describing briefly the manner thereof, together
with a written opinion of such Holder's counsel, to the effect that such offer,
sale or other distribution may be effected without registration or qualification
(under any applicable federal or state law then in effect). Furthermore, no such
transfer shall be made unless the transferee meets the same investor suitability
standards set forth in Section 8 of this Warrant. Promptly upon receiving such
written notice and reasonably satisfactory opinion, if so requested, the
Company, as promptly as practicable, shall notify such Holder that such Holder
may sell or otherwise dispose of this Warrant or the underlying securities, as
the case may be, all in accordance with the terms of the written notice
delivered to the Company. If a determination has been made pursuant to this
Section 12 that the opinion of counsel for the Holder is not reasonably
satisfactory to the Company, the Company shall so notify the Holder promptly
after such determination has been made. Each Warrant thus transferred shall bear
the same legends appearing on this Warrant, and underlying securities thus
transferred shall bear the legends required by Section 8. The Company may impose
stop-transfer instructions in connection with such restrictions. Subject to any
restrictions on transfer described elsewhere herein, the rights and obligations
of the Company and the Holder of this Warrant shall be binding upon and benefit
the successors, assigns, heirs, administrators and transferees of the parties
hereto.
13. Notice. Any notice, demand, consent or other communication
hereunder shall be in writing addressed to the other party at its principal
office or, in respect of Holder, as its address as shown on the books of the
Company, or to such other address as such party shall have theretofore furnished
by like notice, and either served personally, sent by express, registered or
certified first class mail, postage prepaid, sent by facsimile transmission, or
delivered by reputable commercial courier. Such notice shall be deemed given (i)
when so personally delivered, or (ii) if mailed as aforesaid, five (5) days
after the same shall have been posted, or (iii) if sent by facsimile
transmission, as soon as sender receives written or telephonic confirmation that
the message has been received and such facsimile is followed the same day by
mailing by prepaid first class mail, or (iv) if delivered by commercial courier,
upon receipt.
14. Governing Law. This Warrant shall be governed by and construed in
accordance with the laws of the State of California, applicable to contracts
between California residents entered into and to be performed entirely within
the State of California.
15. Attorneys' Fees. If any action at law or in equity is necessary to
enforce or interpret the terms of this Warrant, the prevailing party shall be
entitled to reasonable attorneys' fees, costs and disbursements in addition to
any other relief to which such party may be entitled.
16. Descriptive Headings. The headings used herein are descriptive only
and for the convenience of identifying provisions, and are not determinative of
the meaning or effect of any such provisions.
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed
by its duly authorized officer this 24th day of March, 2000.
VALUESTAR CORPORATION
/s/ JAMES I. STEIN
James Stein, President and CEO
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<PAGE>
NOTICE OF EXERCISE
COMMON STOCK PURCHASE WARRANT
To: VALUESTAR CORPORATION
(1) The undersigned hereby elects to purchase ______ shares of Common
Stock of ValueStar Corporation, pursuant to the terms of the attached Warrant,
and tenders herewith payment in full of the purchase price for such shares.
(2) In exercising this Warrant, the undersigned hereby confirms and
acknowledges that the shares of Common Stock are being acquired solely for the
account of the undersigned and not as a nominee for any other party, for
investment, and that the undersigned will not offer, sell or otherwise dispose
of any such shares of Common Stock except under circumstances that will not
result in a violation of the Securities Act of 1933, as amended, or any state
securities laws.
(3) Please issue a certificate representing said shares of Common Stock
in the name of the undersigned.
(4) Please issue a new Warrant for the unexercised portion of the
attached Warrant in the name of the undersigned.
Date: _________________, 2000
(Name)
(Signature)
(Print Address)
-5-
EXHIBIT 10.18
VALUESTAR CORPORATION
NON-QUALIFIED STOCK OPTION AGREEMENT
THIS NON-QUALIFIED STOCK OPTION AGREEMENT ("Agreement") is made and entered into
effective as of the 28th day of January, 2000, by and between VALUESTAR
CORPORATION, a Colorado corporation (the "Company") and Robert Sick (the
"Optionee").
BACKGROUND
A. The Company has determined to reward and to provide incentives to those who
are primarily responsible for the operations of the Company and for shaping and
carrying out the long-range plans of the Company and aiding in its continued
growth and financial success.
B. In furtherance of these purposes, the Board of Directors of the Company has
authorized the grant to Optionee of a stock option to purchase certain shares of
the common stock, par value $.00025 per share, of the Company ("Common Stock")
by resolution dated January 28, 2000.
C. The Company and Optionee wish to confirm the terms, conditions, and
restrictions of this option.
For and in consideration of the premises, the mutual covenants contained herein,
and other good and valuable consideration, the parties hereto agree as follows:
ARTICLE 1
GRANT AND EXERCISE OF OPTION
1.1 GRANT OF OPTION. Subject to the terms, restrictions, limitations, and
conditions stated herein, the Company hereby grants to Optionee an option (the
"Option") to purchase 345,000 shares of Common Stock (the "Option Shares"). The
date first written above shall be the date on which the Option has been granted
(the "Grant Date").
1.2 EXERCISE OF THE OPTION (a) The Option may be exercised with respect to all
or any portion of the vested Option Shares at any time during the Option Period
(as defined below) by the delivery to the Company, at its principal place of
business, of (i) a written notice of exercise which shall be delivered to the
Company no earlier than thirty (30) days and no later than ten (10) days prior
to the date upon which Optionee desires to exercise all or any portion of the
Option (the "Exercise Date"); (ii) a certified check payable to the Company in
the amount of the Exercise Price (as defined below) multiplied by the number of
Option Shares being purchased (the "Purchase Price") OR with the advance
approval of the Company, by delivery of a number of shares of Common Stock,
which have been held by Optionee for at least six months, having a fair market
value, as of the date the Option is exercised, at least equal to the Purchase
Price OR with the advance approval of the Company by a certified check payable
to the Company in an amount less than the Exercise Price and by delivery of a
number of shares of Common Stock, which have been held by Optionee for at least
six months, having a fair market value, as of the date the Option is exercised,
at least equal to the balance of the Purchase Price OR with the advance approval
of the Company by Optionee advising the Company, at the time this Option is
exercised, to withhold
<PAGE>
from exercise under the Option the appropriate number of Option Shares, the
aggregate fair market value of which on the date of exercise of the Option is
equal to the aggregate cash purchase price of the Option Shares being exercised
and purchased under the Option, and such withholding shall constitute full
payment for the non-withheld Option Shares issued upon exercise OR such other
consideration as the Board of Directors may specifically authorize; and (iii)
except as permitted in Paragraph 1.2(b) below, a certified check payable to the
Company in the amount of all withholding tax obligations, if any (whether
federal, state or local), imposed on the Company by reason of the exercise of
the Option, or if applicable the Withholding Election described in Section
1.2(b). Upon acceptance of such notice, receipt of payment in full, the Company
shall cause a certificate representing the shares of Common Stock as to which
the Option has been exercised (less any withheld Option Shares, if applicable)
to be issued and delivered to the Optionee.
(b) In lieu of paying the withholding tax obligation, if any, in cash, as
described in Section 1.2(a) (iii), the Optionee may elect, with the advance
approval of the Company, to have the actual number of shares issuable upon
exercise of the Option reduced by the smallest number of whole shares of Common
Stock which, when multiplied by the fair market value of the Common Stock as of
the date the Option is exercised, is sufficient to satisfy the amount of the
withholding tax obligations imposed on the Company by reason of the exercise
thereof (the "Withholding Election"). The Optionee may take a Withholding
Election only if all of the following conditions are met:
(i) the Withholding Election must be made by electing the Withholding
Election in the written notice of exercise; and by executing and
delivering to the Company a properly completed Notice of Withholding
Election; and
(ii) any Withholding Election made will be irrevocable; however, the
Company may, in its sole discretion, disapprove and not give effect to
any Withholding Election at its discretion or due to its cash position
or based on any other regulatory or statutory factor in its reasonable
judgment.
1.3 EXERCISE PRICE. The exercise price for each share of Common Stock shall be
Seven Dollars ($7.00) (the "Exercise Price").
1.4 TERM AND TERMINATION OF OPTION. Except as otherwise provided herein, the
term of the Option ("Option Period") shall commence on the Grant Date and
terminate on January 27, 2005. Subject to paragraph 1.5 below, this Option shall
become exercisable (vest) based on the passage of services to the Company in
accordance with the following vesting schedule:
20,000 options shares shall vest on June 30, 2000
25,000 options shares shall vest on September 30, 2000
30,000 options shares shall vest on December 31, 2000
22,500 options shares shall vest on March 31, 2001
22,500 options shares shall vest on June 30, 2001
22,500 options shares shall vest on September 30, 2001
22,500 options shares shall vest on December 31, 2001
22,500 options shares shall vest on March 31, 2002
22,500 options shares shall vest on June 30, 2002
22,500 options shares shall vest on September 30, 2002
22,500 options shares shall vest on December 31, 2002
22,500 options shares shall vest on March 31, 2003
22,500 options shares shall vest on June 30, 2003
22,500 options shares shall vest on September 30, 2003
22,500 options shares shall vest on December 31, 2003
2
<PAGE>
Once the right to purchase shares has accrued and vested, such shares may
thereafter be purchased at any time, or in part from time to time, until the
termination date of this Option, subject to the provisions of Paragraph 1.7
below. In no case may this Option be exercised for a fraction of a share. No
shares shall vest after termination of services to the Company unless otherwise
agreed in writing.
Upon the expiration of the Option Period as set forth above, this Option, and
all unexercised rights granted to the Optionee hereunder shall terminate, and
thereafter be null and void.
1.5 ACCELERATION OF VESTING. In the event of a merger, sale or reorganization of
the Company with or into any other corporation or corporations or a sale of all
or substantially all of the assets or outstanding stock of the Company, in which
transaction the Company's stockholders immediately prior to such transaction own
immediately after such transaction less than 50% of the equity securities of the
surviving corporation or its parent, all Option Shares that have not been
terminated in accordance with this agreement, that will become vested within 48
months of the closing date of such merger, sale or reorganization will be
accelerated. In the event of a merger of the Company with or into another
corporation, this outstanding option may be assumed or an equivalent option or
right may be substituted by such successor corporation or a parent or subsidiary
of such successor corporation. For the purposes of this paragraph, this Option
shall be considered assumed if, following the merger, the Option confers the
right to purchase or receive, for each Option Share immediately prior to the
merger, the consideration (whether stock, cash, or other securities or property)
received in the merger by holders of Common Stock for each share held on the
effective date of the transaction (and if the holders are offered a choice of
consideration, the type of consideration chosen by the holders of a majority of
the outstanding shares). If such consideration received in the merger is not
solely common stock of the successor corporation or its Parent, the Board of
Directors of the Company may, with the consent of the successor corporation,
provide for the consideration to be received upon the exercise of this Option,
for each Option Share, to be solely common stock of the successor corporation or
its Parent equal in fair market value to the per share consideration received by
holders of Common Stock in the merger.
1.6 RIGHTS AS STOCKHOLDER. Optionee, or, if applicable, any Transferee (as
defined in Section 3.12 (c)) shall have no rights as a stockholder with respect
to any shares covered by the Option until a stock certificate for the shares is
issued in Optionee's or Transferee's name. No adjustment to the Option shall be
made pursuant to Section 3.1 hereof for dividends paid or declared on or with
respect to Common Stock in cash, securities other than Common Stock, or other
property, for which the record date is prior to the date of exercise hereof.
1.7 EARLY TERMINATION OF OPTION. The Option Period shall terminate on the date
of the first to occur of the following:
(a) January 27, 2005:
(b) Disability or Death as provided by this subparagraph (b). This
Option shall terminate and no further options shall vest thereafter
upon Optionee's death or disability and any vested options at the time
of such death or disability shall no longer be exercisable after the
expiration of twelve (12) months from the date of death or disability
of the Optionee.
3
<PAGE>
(c) If Optionee's services as an employee is terminated for no reason,
or for any reason (voluntarily or otherwise) other than disability or
death, then no further options shall vest thereafter and this Option
shall terminate and no longer be exercisable six months after such
termination. If Optionee shall die within six months after termination
the remaining vested portion shall terminate on the earlier of the
expiration of the Option Period or twelve months after the date of
death.
(d) the date immediately preceding the consummation of the dissolution
or liquidation of the Company. The Company will use its best efforts to
provide written notice to Optionee of such dissolution or liquidation
or like transaction, at least (30) days prior to the closing of such
transaction to permit Optionee to exercise the Option to the extent
vested. In no event will te option be exercisable beyond expiration of
the Option Period.
ARTICLE 2
RESTRICTION ON OPTION AND OPTION SHARES
2.1 RESTRICTIONS ON TRANSFER OF OPTION. The Option evidenced hereby is
non-transferable other than by will or the laws of descent and distribution, and
shall be exercisable during the lifetime of Optionee only by Optionee (or, in
the event of Optionee's death or disability, by a permitted Transferee).
2.2 LOCK-UP PROVISION. In connection with any public registration of the
Company's securities, the Optionee (and any transferee of Optionee) agrees, upon
the request of the Company or the underwriter(s) managing such underwritten
offering of the Company's securities, not to sell, make any short sale of, loan,
grant any option for the purchase of, or otherwise dispose of this Option, any
of the shares of Common Stock issuable upon exercise of this Option or any other
securities of the Company heretofore or hereafter acquired by Optionee (other
than unrestricted securities acquired in the open market and those included in
the registration) without the prior written consent of the Company and such
underwriter(s), as the case may be, for a period of time not to exceed one
hundred eighty (180) days from the effective date of the registration (the
"Lock-Up Period"). Upon request by the Company, Optionee (and any transferee of
Optionee) agrees to enter into any further reasonable agreement in writing in a
form reasonably satisfactory to the Company and such underwriter(s)in
furtherance of such lock-up. The Company may impose stop-transfer instructions
with respect to the securities subject to the foregoing restrictions until the
end of said 180-day period. Any shares issued upon exercise of this Option shall
bear an appropriate legend referencing this lock-up provision (the "Lock-Up
Legend").
ARTICLE 3
GENERAL PROVISIONS
3.1 CHANGE IN CAPITALIZATION. If the number of outstanding shares of the Common
Stock shall be increased or decreased by a change in par value, split-up, stock
split, reverse stock split, reclassification, distribution of common stock
dividend, or other similar capital adjustment, an appropriate adjustment shall
be made by the Board of Directors in the number and kind of shares as to which
the
4
<PAGE>
Option, or the portion thereof then unexercised, shall be or become exercisable,
such that Optionee's proportionate interest shall be maintained as before the
occurrence of the event. The adjustment shall be made without change in the
total price applicable to the unexercised portion of the Option and with a
corresponding adjustment in the Exercise Price. No fractional shares shall be
issued or made subject to the Option in making such adjustment. All adjustments
made by the Board of Directors under this Section shall be final, binding, and
conclusive.
3.2 LEGENDS. Each certificate representing the Option Shares purchased upon
exercise of the Option shall (unless a registration statement covering the
Option Shares is in effect) be endorsed with the following legend and Optionee
shall not make any transfer of the Option shares without first complying with
the restrictions on transfer described in such legend:
TRANSFER IF RESTRICTED
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, (THE "SECURITIES ACT") OR
SIMILAR STATE SECURITIES LAWS APPLICABLE TO SUCH SECURITIES
(COLLECTIVELY THE "ACTS") AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED,
OR HYPOTHECATED UNLESS (1) THERE IS AN EFFECTIVE REGISTRATION UNDER
SUCH ACTS COVERING SUCH SECURITIES, (2) THE TRANSFER IS MADE IN
COMPLIANCE WITH RULE 144 PROMULGATED UNDER THE SECURITIES ACT, OR
SIMILAR STATE SECURITIES LAW, OR (3) THE COMPANY HAS RECEIVED AN
OPINION OF COUNSEL, REASONABLY SATISFACTORY TO THE COMPANY, STATING
THAT SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM
THE REGISTRATION REQUIREMENTS OF THE ACTS.
Optionee agrees that the Company may also include any other legends required by
applicable federal or state securities laws.
3.3 GOVERNING LAWS. This Agreement shall be construed, administered and enforced
according to the laws of the State of California, excluding that body of law
dealing with conflicts of law.
3.4 SUCCESSORS. This Agreement shall be binding upon and inure to the benefit of
the heirs, legal representatives, successors, and permitted assigns of the
parties.
3.5 NOTICE. Except as otherwise specified herein, all notices and other
communications under this Agreement shall be in writing and shall be deemed to
have been given if personally delivered or if sent by registered or certified
United States mail, return receipt requested, postage prepaid, addressed to the
proposed recipient at the last known address of the recipient. Any party may
designate any other address to which notices shall be sent by giving notice of
the address to the other parties in the same manner as provided herein.
3.6 SEVERABILITY. In the event that any one or more of the provisions or portion
thereof contained in this Agreement shall for any reason be held to be invalid,
illegal, or unenforceable in any respect, the same shall not invalidate or
otherwise affect any other provisions of this Agreement, and this Agreement
shall be construed as if the invalid, illegal or unenforceable provision or
portion thereof had never been contained herein.
5
<PAGE>
3.7 ENTIRE AGREEMENT. This Agreement expresses the entire understanding and
Agreement of the parties with respect to the subject matter hereof. This
Agreement may be executed in one or more counterparts, each of which shall be
deemed an original but all of which shall constitute one and the same
instrument.
3.8 VIOLATION. Any transfer, pledge, sale, assignment, or hypothecation of the
Option or any portion thereof made in violation of the terms of this Agreement
shall be void and without effect.
3.9 HEADINGS. Paragraph headings used herein are for convenience of reference
only and shall not be considered in construing this Agreement.
3.10 SPECIFIC PERFORMANCE. In the event of any actual or threatened default in,
or breach of, any of the terms, conditions and provisions of this Agreement, the
party or parties who are thereby aggrieved shall have the right to specific
performance and injunction in addition to any and all other rights and remedies
at law or in equity, and all such rights and remedies shall be cumulative.
3.11 NO EMPLOYMENT RIGHTS CREATED. The grant of the Option hereunder shall not
be construed as giving Optionee the right to continued employment with the
Company.
3.12 CERTAIN DEFINITIONS. The capitalized terms listed below are used herein
with the meaning thereafter ascribed:
(a) "Disability" means (1) the inability of Optionee to perform the
duties of Optionee's employment with the Company due to physical or
emotional incapacity or illness, where such inability is expected to be
of long-continued and indefinite duration or (2) Optionee shall be
entitled to (i) disability retirement benefits under the federal Social
Security Act or (ii) recover benefits under any long-term disability
plan or policy maintained by the Company. In the event of a dispute,
the determination of Disability shall be made by the Board of Directors
and shall be supported by advice of a physician competent in the area
to which such Disability relates.
(b) "Fair Market Value" means of the applicable prices selected from
the following alternatives for the date as of which Fair Market Value
is to be determined as quoted in the Wall Street Journal (or in such
other reliable publication as the committee, in it's discretion, may
determine to rely upon): (i) if the common stock is listed on the New
York Stock Exchange, the mean of highest and lowest sales prices per
share of the Common Stock as quoted in the NYSE - Composite
transactions listing for such or each date, (ii) if the common Stock is
not listed on such exchange, the mean of the highest and lowest sales
prices per share of Common stock for such or each date on (or on any
composite index including) the principal United States Securities
Exchange registered under the 1934 Act on which the Common Stock is
listed, or (iii) if the Common Stock is not listed on any such
exchange, the mean of the highest and lowest sales prices per share of
the Common Stock for such or each date on the National Associates of
Securities Dealers Automated Quotations Systems or any successor system
then in use ("NASDAQ"). If there are no such sales price quotations for
the date as of which Fair Market Value is to be determined but there
are such sales price quotations within a reasonable period both before
and after such date, then Fair Market Value shall be determined by
taking a weighted average of the means between the highest and lowest
sales prices per share
6
<PAGE>
of the Common Stock as so quoted on the nearest date before, and the
nearest date after, the date as of which Fair Market Value is to be
determined. The average should be weighted inversely by the respective
numbers of trading days between the selling dates and the date as of
which Fair Market Value is to be determined. If there are no such sales
price quotations on, or within a reasonable period both before and
after, the date as of which Fair Market Value is to be determined, then
Fair Market Value of the Common Stock shall be the mean between the
bonafide bid and asked prices per share of Common Stock as so quoted
for such date on NASDAQ, or if none, the weighted average of the means
between such bonafide bid and asked prices on the nearest trading date
before, and the nearest trading date after, the date as of which Fair
Market Value is to be determined, if both such dates are within a
reasonable period. If the Fair Market Value of the Common Stock cannot
be determined on the basis set forth in this definition for the date as
of which Fair Market Value is to be determined, the Committee shall in
good faith determine the Fair Market Value of the Common Stock on such
date. Fair Market Value shall be determined without regard to any
restriction, other than a restriction which, by its terms, will never
lapse.
(c) "Transferee" means the estate, or the executor or administrator of
the estate, of a deceased Optionee, or the personal representative of
an Optionee suffering a Disability.
IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year
first set forth above.
VALUESTAR CORPORATION
BY: /s/ JAMES STEIN
ITS: President
ATTESTED:
BY: /s/ MICHAEL KELLY
ITS: Controller
ACCEPTED:
/s/ ROBERT A. SICK
ROBERT SICK
7
EXHIBIT 10.19
VALUESTAR CORPORATION
NON-QUALIFIED STOCK OPTION AGREEMENT
THIS NON-QUALIFIED STOCK OPTION AGREEMENT ("Agreement") is made and entered into
effective as of the 28th day of January, 2000, by and between VALUESTAR
CORPORATION, a Colorado corporation (the "Company") and Robert Sick (the
"Optionee").
BACKGROUND
A. The Company has determined to reward and to provide incentives to those who
are primarily responsible for the operations of the Company and for shaping and
carrying out the long-range plans of the Company and aiding in its continued
growth and financial success.
B. In furtherance of these purposes, the Board of Directors of the Company has
authorized the grant to Optionee of a stock option to purchase certain shares of
the common stock, par value $.00025 per share, of the Company ("Common Stock")
by resolution dated January 28, 2000.
C. The Company and Optionee wish to confirm the terms, conditions, and
restrictions of this option.
For and in consideration of the premises, the mutual covenants contained herein,
and other good and valuable consideration, the parties hereto agree as follows:
ARTICLE 1
GRANT AND EXERCISE OF OPTION
1.1 GRANT OF OPTION. Subject to the terms, restrictions, limitations, and
conditions stated herein, the Company hereby grants to Optionee an option (the
"Option") to purchase 16,600 shares of Common Stock (the "Option Shares"). The
date first written above shall be the date on which the Option has been granted
(the "Grant Date").
1.2 EXERCISE OF THE OPTION (a) The Option may be exercised with respect to all
or any portion of the vested Option Shares at any time during the Option Period
(as defined below) by the delivery to the Company, at its principal place of
business, of (i) a written notice of exercise which shall be delivered to the
Company no earlier than thirty (30) days and no later than ten (10) days prior
to the date upon which Optionee desires to exercise all or any portion of the
Option (the "Exercise Date"); (ii) a certified check payable to the Company in
the amount of the Exercise Price (as defined below) multiplied by the number of
Option Shares being purchased (the "Purchase Price") OR with the advance
approval of the Company, by delivery of a number of shares of Common Stock,
which have been held by Optionee for at least six months, having a fair market
value, as of the date the Option is exercised, at least equal to the Purchase
Price OR with the advance approval of the Company by a certified check payable
to the Company in an amount less than the Exercise Price and by delivery of a
number of shares of Common Stock, which have been held by Optionee for at least
six months, having a fair market value, as of the date the Option is exercised,
at least equal to the balance of the Purchase Price OR with the advance approval
of the Company by Optionee advising the Company, at the time this Option is
exercised, to withhold
<PAGE>
from exercise under the Option the appropriate number of Option Shares, the
aggregate fair market value of which on the date of exercise of the Option is
equal to the aggregate cash purchase price of the Option Shares being exercised
and purchased under the Option, and such withholding shall constitute full
payment for the non-withheld Option Shares issued upon exercise OR such other
consideration as the Board of Directors may specifically authorize; and (iii)
except as permitted in Paragraph 1.2(b) below, a certified check payable to the
Company in the amount of all withholding tax obligations, if any (whether
federal, state or local), imposed on the Company by reason of the exercise of
the Option, or if applicable the Withholding Election described in Section
1.2(b). Upon acceptance of such notice, receipt of payment in full, the Company
shall cause a certificate representing the shares of Common Stock as to which
the Option has been exercised (less any withheld Option Shares, if applicable)
to be issued and delivered to the Optionee.
(b) In lieu of paying the withholding tax obligation, if any, in cash, as
described in Section 1.2(a) (iii), the Optionee may elect, with the advance
approval of the Company, to have the actual number of shares issuable upon
exercise of the Option reduced by the smallest number of whole shares of Common
Stock which, when multiplied by the fair market value of the Common Stock as of
the date the Option is exercised, is sufficient to satisfy the amount of the
withholding tax obligations imposed on the Company by reason of the exercise
thereof (the "Withholding Election"). The Optionee may take a Withholding
Election only if all of the following conditions are met:
(i) the Withholding Election must be made by electing the Withholding
Election in the written notice of exercise; and by executing and
delivering to the Company a properly completed Notice of Withholding
Election; and
(ii) any Withholding Election made will be irrevocable; however, the
Company may, in its sole discretion, disapprove and not give effect to
any Withholding Election at its discretion or due to its cash position
or based on any other regulatory or statutory factor in its reasonable
judgment.
1.3 EXERCISE PRICE. The exercise price for each share of Common Stock shall be
Seven Dollars ($7.00) (the "Exercise Price").
1.4 TERM AND TERMINATION OF OPTION. Except as otherwise provided herein, the
term of the Option ("Option Period") shall commence on the Grant Date and
terminate on January 27, 2005. Subject to paragraph 1.5 below, this Option shall
become exercisable (vest) based on the passage of services to the Company in
accordance with the following vesting schedule:
4,150 options shares shall vest on March 31, 2000 subject to
written approval of the Compensation Committee of the Company
which approval shall be based on an evaluation of performance
4,150 options shares shall vest on June 30, 2000 subject to
written approval of the Compensation Committee of the Company
which approval shall be based on an evaluation of performance
4,150 options shares shall vest on September 30, 2000 subject
to written approval of the Compensation Committee of the
Company which approval shall be based on an evaluation of
performance
4,150 options shares shall vest on December 31, 2000 subject
to written approval of the Compensation Committee of the
Company which approval shall be based on an evaluation of
performance
Once the right to purchase shares has accrued and vested, such shares may
thereafter be purchased at any time, or in part from time to time, until the
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termination date of this Option, subject to the provisions of Paragraph 1.7
below. In no case may this Option be exercised for a fraction of a share. No
shares shall vest after termination of services to the Company unless otherwise
agreed in writing.
Upon the expiration of the Option Period as set forth above, this Option, and
all unexercised rights granted to the Optionee hereunder shall terminate, and
thereafter be null and void.
1.5 ACCELERATION OF VESTING. In the event of a merger, sale or reorganization of
the Company with or into any other corporation or corporations or a sale of all
or substantially all of the assets or outstanding stock of the Company, in which
transaction the Company's stockholders immediately prior to such transaction own
immediately after such transaction less than 50% of the equity securities of the
surviving corporation or its parent, all Option Shares that have not been
terminated in accordance with this agreement, that will become vested within 48
months of the closing date of such merger, sale or reorganization will be
accelerated. In the event of a merger of the Company with or into another
corporation, this outstanding option may be assumed or an equivalent option or
right may be substituted by such successor corporation or a parent or subsidiary
of such successor corporation. For the purposes of this paragraph, this Option
shall be considered assumed if, following the merger, the Option confers the
right to purchase or receive, for each Option Share immediately prior to the
merger, the consideration (whether stock, cash, or other securities or property)
received in the merger by holders of Common Stock for each share held on the
effective date of the transaction (and if the holders are offered a choice of
consideration, the type of consideration chosen by the holders of a majority of
the outstanding shares). If such consideration received in the merger is not
solely common stock of the successor corporation or its Parent, the Board of
Directors of the Company may, with the consent of the successor corporation,
provide for the consideration to be received upon the exercise of this Option,
for each Option Share, to be solely common stock of the successor corporation or
its Parent equal in fair market value to the per share consideration received by
holders of Common Stock in the merger.
1.6 RIGHTS AS STOCKHOLDER. Optionee, or, if applicable, any Transferee (as
defined in Section 3.12 (c)) shall have no rights as a stockholder with respect
to any shares covered by the Option until a stock certificate for the shares is
issued in Optionee's or Transferee's name. No adjustment to the Option shall be
made pursuant to Section 3.1 hereof for dividends paid or declared on or with
respect to Common Stock in cash, securities other than Common Stock, or other
property, for which the record date is prior to the date of exercise hereof.
1.7 EARLY TERMINATION OF OPTION. The Option Period shall terminate on the date
of the first to occur of the following:
(a) January 27, 2005:
(b) Disability or Death as provided by this subparagraph (b). This
Option shall terminate and no further options shall vest thereafter
upon Optionee's death or disability and any vested options at the time
of such death or disability shall no longer be exercisable after the
expiration of twelve (12) months from the date of death or disability
of the Optionee.
(c) If Optionee's services as an employee is terminated for no reason,
or for any reason (voluntarily or otherwise) other than disability or
death,
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then no further options shall vest thereafter and this Option shall
terminate and no longer be exercisable six months after such
termination. If Optionee shall die within six months after termination
the remaining vested portion shall terminate on the earlier of the
expiration of the Option Period or twelve months after the date of
death.
(d) the date immediately preceding the consummation of the dissolution
or liquidation of the Company. The Company will use its best efforts to
provide written notice to Optionee of such dissolution or liquidation
or like transaction, at least (30) days prior to the closing of such
transaction to permit Optionee to exercise the Option to the extent
vested. In no event will te option be exercisable beyond expiration of
the Option Period.
ARTICLE 2
RESTRICTION ON OPTION AND OPTION SHARES
2.1 RESTRICTIONS ON TRANSFER OF OPTION. The Option evidenced hereby is
non-transferable other than by will or the laws of descent and distribution, and
shall be exercisable during the lifetime of Optionee only by Optionee (or, in
the event of Optionee's death or disability, by a permitted Transferee).
2.2 LOCK-UP PROVISION. In connection with any public registration of the
Company's securities, the Optionee (and any transferee of Optionee) agrees, upon
the request of the Company or the underwriter(s) managing such underwritten
offering of the Company's securities, not to sell, make any short sale of, loan,
grant any option for the purchase of, or otherwise dispose of this Option, any
of the shares of Common Stock issuable upon exercise of this Option or any other
securities of the Company heretofore or hereafter acquired by Optionee (other
than unrestricted securities acquired in the open market and those included in
the registration) without the prior written consent of the Company and such
underwriter(s), as the case may be, for a period of time not to exceed one
hundred eighty (180) days from the effective date of the registration (the
"Lock-Up Period"). Upon request by the Company, Optionee (and any transferee of
Optionee) agrees to enter into any further reasonable agreement in writing in a
form reasonably satisfactory to the Company and such underwriter(s)in
furtherance of such lock-up. The Company may impose stop-transfer instructions
with respect to the securities subject to the foregoing restrictions until the
end of said 180-day period. Any shares issued upon exercise of this Option shall
bear an appropriate legend referencing this lock-up provision (the "Lock-Up
Legend").
ARTICLE 3
GENERAL PROVISIONS
3.1 CHANGE IN CAPITALIZATION. If the number of outstanding shares of the Common
Stock shall be increased or decreased by a change in par value, split-up, stock
split, reverse stock split, reclassification, distribution of common stock
dividend, or other similar capital adjustment, an appropriate adjustment shall
be made by the Board of Directors in the number and kind of shares as to which
the Option, or the portion thereof then unexercised, shall be or become
exercisable, such that Optionee's proportionate interest shall be maintained as
before the occurrence of the event. The adjustment shall be made without change
in the total
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price applicable to the unexercised portion of the Option and with a
corresponding adjustment in the Exercise Price. No fractional shares shall be
issued or made subject to the Option in making such adjustment. All adjustments
made by the Board of Directors under this Section shall be final, binding, and
conclusive.
3.2 LEGENDS. Each certificate representing the Option Shares purchased upon
exercise of the Option shall (unless a registration statement covering the
Option Shares is in effect) be endorsed with the following legend and Optionee
shall not make any transfer of the Option shares without first complying with
the restrictions on transfer described in such legend:
TRANSFER IF RESTRICTED
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, (THE "SECURITIES ACT") OR
SIMILAR STATE SECURITIES LAWS APPLICABLE TO SUCH SECURITIES
(COLLECTIVELY THE "ACTS") AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED,
OR HYPOTHECATED UNLESS (1) THERE IS AN EFFECTIVE REGISTRATION UNDER
SUCH ACTS COVERING SUCH SECURITIES, (2) THE TRANSFER IS MADE IN
COMPLIANCE WITH RULE 144 PROMULGATED UNDER THE SECURITIES ACT, OR
SIMILAR STATE SECURITIES LAW, OR (3) THE COMPANY HAS RECEIVED AN
OPINION OF COUNSEL, REASONABLY SATISFACTORY TO THE COMPANY, STATING
THAT SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM
THE REGISTRATION REQUIREMENTS OF THE ACTS.
Optionee agrees that the Company may also include any other legends required by
applicable federal or state securities laws.
3.3 GOVERNING LAWS. This Agreement shall be construed, administered and enforced
according to the laws of the State of California, excluding that body of law
dealing with conflicts of law.
3.4 SUCCESSORS. This Agreement shall be binding upon and inure to the benefit of
the heirs, legal representatives, successors, and permitted assigns of the
parties.
3.5 NOTICE. Except as otherwise specified herein, all notices and other
communications under this Agreement shall be in writing and shall be deemed to
have been given if personally delivered or if sent by registered or certified
United States mail, return receipt requested, postage prepaid, addressed to the
proposed recipient at the last known address of the recipient. Any party may
designate any other address to which notices shall be sent by giving notice of
the address to the other parties in the same manner as provided herein.
3.6 SEVERABILITY. In the event that any one or more of the provisions or portion
thereof contained in this Agreement shall for any reason be held to be invalid,
illegal, or unenforceable in any respect, the same shall not invalidate or
otherwise affect any other provisions of this Agreement, and this Agreement
shall be construed as if the invalid, illegal or unenforceable provision or
portion thereof had never been contained herein.
3.7 ENTIRE AGREEMENT. This Agreement expresses the entire understanding and
Agreement of the parties with respect to the subject matter hereof. This
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Agreement may be executed in one or more counterparts, each of which shall be
deemed an original but all of which shall constitute one and the same
instrument.
3.8 VIOLATION. Any transfer, pledge, sale, assignment, or hypothecation of the
Option or any portion thereof made in violation of the terms of this Agreement
shall be void and without effect.
3.9 HEADINGS. Paragraph headings used herein are for convenience of reference
only and shall not be considered in construing this Agreement.
3.10 SPECIFIC PERFORMANCE. In the event of any actual or threatened default in,
or breach of, any of the terms, conditions and provisions of this Agreement, the
party or parties who are thereby aggrieved shall have the right to specific
performance and injunction in addition to any and all other rights and remedies
at law or in equity, and all such rights and remedies shall be cumulative.
3.11 NO EMPLOYMENT RIGHTS CREATED. The grant of the Option hereunder shall not
be construed as giving Optionee the right to continued employment with the
Company.
3.12 CERTAIN DEFINITIONS. The capitalized terms listed below are used herein
with the meaning thereafter ascribed:
(a) "Disability" means (1) the inability of Optionee to perform the
duties of Optionee's employment with the Company due to physical or
emotional incapacity or illness, where such inability is expected to be
of long-continued and indefinite duration or (2) Optionee shall be
entitled to (i) disability retirement benefits under the federal Social
Security Act or (ii) recover benefits under any long-term disability
plan or policy maintained by the Company. In the event of a dispute,
the determination of Disability shall be made by the Board of Directors
and shall be supported by advice of a physician competent in the area
to which such Disability relates.
(b) "Fair Market Value" means of the applicable prices selected from
the following alternatives for the date as of which Fair Market Value
is to be determined as quoted in the Wall Street Journal (or in such
other reliable publication as the committee, in it's discretion, may
determine to rely upon): (i) if the common stock is listed on the New
York Stock Exchange, the mean of highest and lowest sales prices per
share of the Common Stock as quoted in the NYSE - Composite
transactions listing for such or each date, (ii) if the common Stock is
not listed on such exchange, the mean of the highest and lowest sales
prices per share of Common stock for such or each date on (or on any
composite index including) the principal United States Securities
Exchange registered under the 1934 Act on which the Common Stock is
listed, or (iii) if the Common Stock is not listed on any such
exchange, the mean of the highest and lowest sales prices per share of
the Common Stock for such or each date on the National Associates of
Securities Dealers Automated Quotations Systems or any successor system
then in use ("NASDAQ"). If there are no such sales price quotations for
the date as of which Fair Market Value is to be determined but there
are such sales price quotations within a reasonable period both before
and after such date, then Fair Market Value shall be determined by
taking a weighted average of the means between the highest and lowest
sales prices per share of the Common Stock as so quoted on the nearest
date before, and the nearest date after, the date as of which Fair
Market Value is to be determined. The average should be weighted
inversely by the respective
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numbers of trading days between the selling dates and the date as of
which Fair Market Value is to be determined. If there are no such sales
price quotations on, or within a reasonable period both before and
after, the date as of which Fair Market Value is to be determined, then
Fair Market Value of the Common Stock shall be the mean between the
bonafide bid and asked prices per share of Common Stock as so quoted
for such date on NASDAQ, or if none, the weighted average of the means
between such bonafide bid and asked prices on the nearest trading date
before, and the nearest trading date after, the date as of which Fair
Market Value is to be determined, if both such dates are within a
reasonable period. If the Fair Market Value of the Common Stock cannot
be determined on the basis set forth in this definition for the date as
of which Fair Market Value is to be determined, the Committee shall in
good faith determine the Fair Market Value of the Common Stock on such
date. Fair Market Value shall be determined without regard to any
restriction, other than a restriction which, by its terms, will never
lapse.
(c) "Transferee" means the estate, or the executor or administrator of
the estate, of a deceased Optionee, or the personal representative of
an Optionee suffering a Disability.
IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year
first set forth above.
VALUESTAR CORPORATION
BY: /s/ JAMES STEIN
ITS: President
ATTESTED:
BY: /s/ MICHAEL KELLY
ITS: Controller
ACCEPTED:
/s/ ROBERT A. SICK
ROBERT SICK
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EXHIBIT 10.20
VALUESTAR CORPORATION
1997 STOCK OPTION PLAN
INCENTIVE AND NON-STATUTORY STOCK OPTION AGREEMENT
This Stock Option Agreement ("Agreement") is made and entered into as of the
Date of Grant indicated below by and between ValueStar Corporation, a Colorado
corporation (the "Company"), and the person named below as Employee or
Participant.
WHEREAS, Employee is an employee of the Company and/or one or more of its
subsidiaries; and
WHEREAS, pursuant to the Company's 1997 Stock Option Plan (the "Plan"), the
committee of the Board of Directors of the Company administering the Plan (the
"Committee") has approved the grant to Employee of an option to purchase shares
of the common stock, $0.00025 par value, of the Company (the "Common Stock" or
"Shares"), on the terms and conditions set forth herein,
NOW, THEREFORE, in consideration of the foregoing recitals and the covenants set
forth herein, the parties hereto hereby agree as follows:
1. Grant of Option: Certain Terms and Conditions. The Company hereby grants to
Employee, and Employee hereby accepts, as of the Date of Grant, an option to
purchase the number of shares of Common Stock indicated below (the "Option
Shares") at the Exercise Price per share indicated below, which option shall
expire at 5:00 o'clock p.m., California time, on the Expiration Date indicated
below and shall be subject to all of the terms and conditions set forth in this
Agreement (the "Option"). The Option shall become exercisable to purchase, and
shall vest with respect to, that number of Option Shares as provided in the
Vesting Schedule provided below.
Employee: ROBERT SICK
Date of Grant: January 28, 2000
Number of shares purchasable: Fifteen Thousand (15,000)
Exercise Price per share: $7.00
Expiration Date: January 27, 2005
Vesting Schedule: All 15,000 shares shall vest on March 31, 2000.
The first 14,000 shares that vest and become exercisable are intended as Options
intended to qualify as an incentive stock option under Section 422 of the
Internal Revenue Code (an "Incentive Stock Option") and consequently:
(a) the Expiration Date shall not be more than 10 years after the Date
of Grant and the Exercise Price per share shall not be less than the
Fair Market Value (as defined in the Plan) per share on the Date of
Grant; provided. however, that if, on the Date of Grant, Employee owns
(after application of the family and other attribution rules of Section
425(d) of the Internal Revenue Code) more than 10% of the total
combined voting power of all classes of stock of the Company or of its
parent or subsidiary corporations, then the Expiration Date shall not
be more than five years after the Date of Grant and the Exercise Price
per share shall not be less than 110% of the Fair Market Value per
share on the Date of Grant; and
(b) the aggregate Fair Market Value (determined as of the date such
options are granted) of the shares of Common Stock with respect to
which Incentive Stock Options are exercisable for the first time by
Employee during any calendar year (under the Plan and all other stock
option plans of the Company and its parent and subsidiary corporations)
shall not exceed $100,000.
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The balance of the shares under Option are not intended to qualify as an
incentive stock option under Section 422 of the Internal Revenue Code (an
"Incentive Stock Option").
2. Acceleration and Termination of Option.
(a) Termination of Employment.
(i) Permanent Disability. If Participant's Employment is Terminated by
reason of Permanent Disability (within the meaning of Section 422(c)(6)
of the Code) of Participant, then (A) the portion of the Option that
has not vested on or prior to the date of such Termination of
Employment shall terminate on such date and (B) the remaining vested
portion of the Option shall terminate upon the earlier of the
Expiration Date or the first anniversary of the date of such
Termination of Employment. Any determination by the Board that
Participant does or does not have a Permanent Disability shall be final
and binding upon the Company and Participant.
(ii) Death During Employment. If Participant's Employment is Terminated
by reason of death of Employee, then (A) the portion of the Option that
has not vested on or prior to the date of such Termination of
Employment shall terminate on such date and (B) the remaining vested
portion of the Option shall terminate upon the earlier of the
Expiration Date or fifteen (15) months after the date of such
Termination of Employment.
(iii) Other Termination. If Participant's Employment is Terminated for
no reason, or for any reason other than Retirement, death or Permanent
Disability, and a Change of Control shall not have occurred within one
year prior thereto, then the Option shall terminate six months after
such Termination of Employment.
(b) Death Following Termination of Employment. Notwithstanding anything to the
contrary in this Agreement, if Participant shall die within not more than six
months after the Termination of his or her Employment and prior to the
Expiration Date, then (i) the portion of the Option that has not vested on or
prior to the date of such death shall terminate on such date and (ii) the
remaining vested portion of the Option shall terminate on the earlier of the
Expiration Date or fifteen (15) months after the date of such death.
(c) Merger. In the event of a merger, sale or reorganization of the Company with
or into any other corporation or corporations or a sale of all or substantially
all of the assets or outstanding stock of the Company, in which transaction the
Company's stockholders immediately prior to such transaction own immediately
after such transaction less than 50% of the equity securities of the surviving
corporation or its parent, all Options that have not been terminated in
accordance with the Stock Option Agreement that will become vested within 48
months of the closing date of such merger, sale or reorganization will be
accelerated. In the event of a merger of the Company with or into another
corporation, each outstanding Option or Stock Purchase Right may be assumed or
an equivalent option or right may be substituted by such successor corporation
or a parent or subsidiary of such successor corporation. If, in such event, an
Option or Stock Purchase Right is not assumed or substituted, the Option or
Stock Purchase Right shall terminate as of the date of the closing of the
merger. For the purposes of this paragraph, the Option or Stock Purchase Right
shall be considered assumed if, following the merger, the Option or Stock
Purchase Right confers the right to purchase or receive, for each Share of
Optioned Stock subject to the Option or Stock Purchase Right immediately prior
to the merger, the consideration (whether stock, cash, or other securities or
property) received in the merger by holders of Common Stock for each Share held
on the effective date of the transaction (and if the holders are offered a
choice of consideration, the type of consideration chosen by the holders of a
majority of the outstanding Shares). If such consideration received in the
merger is not solely common stock of the successor corporation or its Parent,
the Committee may, with the consent of the successor corporation, provide for
the consideration to be received upon the exercise of the Option or Stock
Purchase Right, for each Share of Optioned Stock subject to the Option or Stock
Purchase Right, to be solely common stock of the successor corporation or its
Parent equal in fair market value to the per share consideration received by
holders of Common Stock in the merger.
(d) Other Events Causing Acceleration of Option. The Committee, in its sole
discretion, may accelerate the exercisability of the Option at any time and for
any reason.
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(e) Other Events Causing Termination of Option. Notwithstanding anything to the
contrary in this Agreement, the Option shall terminate upon the consummation of
any of the following events, or, if later, the thirtieth day following the first
date upon which such event shall have been approved by both the Board and the
shareholders of the Company:
(i) the dissolution or liquidation of the Company; or
(ii) a sale or lease of all or substantially all of the property and
assets of the Company, unless the term of such sale or lease shall
provide otherwise.
3. Adjustments. In the event that the outstanding securities of the class then
subject to the Option are increased, decreased or exchanged for or converted
into cash, property and/or a different number or kind of securities, or cash,
property and/or securities are distributed in respect of such outstanding
securities, in either case as a result of a reorganization, merger,
consolidation, recapitalization, reclassification, dividend (other than a
regular, quarterly cash dividend) or other distribution, stock split, reverse
stock split or the like, or in the event that substantially all of the property
and assets of the Company are sold, then, unless such event shall cause the
option to terminate pursuant to Section 2(d) hereof, the Committee shall make
appropriate and proportionate adjustments in the number and type of shares or
other securities or cash or other property that may thereafter be acquired upon
the exercise of the Option; provided. however. that any such adjustments in the
Option shall be made without changing the aggregate Exercise Price of the then
unexercised portion of the Option.
4. Exercise.
(a) The Option shall be exercisable during a Participant's lifetime only by
Participant or by his or her guardian or legal representative, and after
Participant's death only by the person or entity entitled to do so under
Participant's last will and testament or applicable intestate law. The Option
may only be exercised by the delivery to the Company of a written notice of such
exercise, which notice shall specify the number of Option Shares to be purchased
(the "Purchased Shares") and the aggregate Exercise Price for such shares (the
"Exercise Notice"), together with payment in full of such aggregate Exercise
Price in cash or by cashier's or personal check or money order payable to the
Company; provided, however, that at the option of the Committee payment of such
aggregate Exercise Price may instead be made, in whole or in part, by the
delivery to the Company of a certificate or certificates representing shares of
Common Stock, duly endorsed or accompanied by a duly executed stock powers,
which delivery effectively transfers to the Company good and valid title to such
shares, free and clear of any pledge, commitment, lien, claim or other
encumbrance (such shares to be valued on the basis of the aggregate Fair Market
Value (as defined in the Plan) thereof on the date of such exercise), provided
that the Company is not then prohibited from purchasing or acquiring such shares
of Common Stock.
5. Payment of Withholding Taxes. The exercise of any Option is subject to the
condition that if at any time the Company shall determine, in its discretion,
that the satisfaction of withholding tax or other withholding liabilities under
any federal, state or local law is necessary or desirable as a condition of, or
in connection with, such exercise or a later lapsing of time or restrictions on
or disposition of the shares of Common Stock received upon such exercise, then
in such event, the exercise of the Option shall not be effective unless such
withholding shall have been effected or obtained in a manner acceptable to the
Company.
6. Notices. All notices and other communications required or permitted to be
given pursuant to this Agreement shall be in writing and shall be deemed given
if delivered personally or five days after mailing by certified or registered
mail, postage prepaid, return receipt requested, to the Company at 1120A Ballena
Blvd., Alameda, California 95401, Attention: Jim Stein, or to Participant at the
address set forth beneath his or her signature on the signature page hereto, or
at such other addresses as they may designate by written notice in the manner
aforesaid.
7. Applicable Laws. Notwithstanding anything to the contrary in this Agreement,
no shares of stock purchased upon exercise of the Option, and no certificate
representing all or any part of such shares, shall be issued or delivered if in
the opinion of counsel to the Company, such issuance or delivery would cause the
Company to be in violation of or to incur liability under any federal, state or
other securities law, or any requirement of any stock exchange listing agreement
to which the Company is a party, or any other requirement of law or of any
administrative or regulatory body having jurisdiction over the Company. The
issuance of any unregistered Shares upon the exercise of an Option shall be
conditioned upon the Participant providing to the Committee a written
representation that, at the time of exercise, it is the intent of the
Participant to acquire the Shares for investment only and not with a view toward
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distribution. Any unregistered Shares shall be restricted as to transfer by the
Company unless the Company receives an opinion of counsel satisfactory to the
Company to the effect that such restriction is not necessary.
8. Nontransferability. Neither the Option nor any interest therein may be sold,
assigned, conveyed, gifted, pledged, hypothecated or otherwise transferred in
any manner other than by will or the laws of descent and distribution.
9. Plan. The Option is granted pursuant to the Plan, as in effect on the Date of
Grant, and is subject to all the terms and conditions of the Plan, as the same
may be amended from time to time; provided, however, that no such amendment
shall deprive Participant, without his or her consent, of the Option or of any
of Participant's rights under this Agreement. The interpretation and
construction by the Committee of the Plan, this Agreement, the Option and such
rules and regulations as may be adopted by the Committee for the purpose of
administering the Plan shall be final and binding upon Participant. Until the
Option shall expire, terminate or be exercised in full, the Company shall, upon
written request therefor, send a copy of the Plan, in its then-current form, to
Participant or any other person or entity then entitled to exercise the Option.
10. Shareholder Rights. No person or entity shall be entitled to vote, receive
dividends or be deemed for any purpose the holder of any Option Shares until the
Option shall have been duly exercised to purchase such Option Shares in
accordance with the provisions of this Agreement.
11. Unemployment or Contract Rights. No provision of this Agreement or of the
Option granted hereunder shall (a) confer upon Participant any right to continue
in the employ of or contract with the Company or any of its subsidiaries, (b)
affect the right of the Company and each of its subsidiaries to terminate the
employment or contract of Participant, with or without cause, or (c) confer upon
Participant any right to participate in any employee welfare or benefit plan or
other program of the Company or any of its subsidiaries other than the Plan.
Participant hereby acknowledges and agrees that the Company and each of its
subsidiaries may terminate the employment or contract of Participant at any time
and for any reason, or for no reason, unless Participant and the Company or such
subsidiary are party to a written employment, consulting or other agreement that
expressly provides otherwise.
12. Governing Law. This Agreement and the Option granted hereunder shall be
governed by and construed and enforced in accordance with the laws of the State
of California without reference to choice or conflict of law principles.
IN WITNESS WHEREOF, the Company and Participant have duly executed this
Agreement as of the Date of Grant.
VALUESTAR CORPORATION
/s/ JAMES STEIN
By: James Stein
Title: President and CEO
PARTICIPANT
/s/ ROBERT A. SICK
Signature
211 Alberta Ave.
San Carlos, CA 94070
4
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED
FINANCIAL STATEMENTS FOR QUARTER ENDED MARCH 31, 2000 INCLUDED IN THE QUARTERLY
REPORT ON FORM 10-QSB FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> MAR-31-2000
<CASH> 10,533,486
<SECURITIES> 0
<RECEIVABLES> 429,140
<ALLOWANCES> (40,296)
<INVENTORY> 22,771
<CURRENT-ASSETS> 11,159,004
<PP&E> 2,838,949
<DEPRECIATION> (416,508)
<TOTAL-ASSETS> 13,726,414
<CURRENT-LIABILITIES> 2,151,838
<BONDS> 215,106
0
228
<COMMON> 3,625
<OTHER-SE> 11,355,617
<TOTAL-LIABILITY-AND-EQUITY> 13,726,414
<SALES> 112,306
<TOTAL-REVENUES> 1,670,878
<CGS> 70,288
<TOTAL-COSTS> 1,022,711
<OTHER-EXPENSES> 8,502,632
<LOSS-PROVISION> 33,177
<INTEREST-EXPENSE> 1,964,699
<INCOME-PRETAX> (9,712,485)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,712,485)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,712,485)
<EPS-BASIC> (4.19)
<EPS-DILUTED> (4.19)
</TABLE>
