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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 December 31, 1999
Commission File Number 0-22619
VALUESTAR CORPORATION
(Exact name of registrant as specified in its charter)
Colorado 84-1202005
-------- ----------
(State or other jurisdiction of (I.R.S. Empl. Ident. No.)
incorporation or organization)
360-22nd Street, #210, Oakland, California 94612
- ------------------------------------------ -----
(Address of principal executive offices) (Zip Code)
(510) 808-1400
--------------
(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 11,822,674
- ------------------------------- ----------
(Class) (Outstanding at February 7, 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 December 31, 1999
and June 30, 1999 3
Consolidated Statements of Operations for the three
and six months ended December 31, 1999 and 1998 4
Consolidated Statements of Cash Flows for the six
months ended December 31, 1999 and 1998 5
Notes to Interim Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
2
<PAGE>
<TABLE>
VALUESTAR CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
<CAPTION>
December 31, June 30,
1999 1999
-------------- -------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 7,579,577 $ 270,149
Receivables 329,359 409,806
Inventory 1,982 4,008
Prepaid expenses 72,438 59,446
-------------- -------------
Total current assets 7,983,356 743,409
PROPERTY AND EQUIPMENT 897,330 501,605
DEFERRED COSTS 145,806 100,839
INTANGIBLE AND OTHER ASSETS 231,046 194,130
-------------- -------------
Total assets $ 9,257,538 $ 1,539,983
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 591,219 461,825
Accrued liabilities and other payables 277,794 189,759
Deferred revenues 28,755 27,430
Note payable - shareholder 290,000 280,000
Current portion of capitalized leases 47,322 30,018
Current portion of long-term debt 449,759 1,032,664
-------------- -------------
Total current liabilities 1,684,849 2,021,696
CAPITAL LEASE OBLIGATIONS, net of current portion 150,180 113,541
LONG-TERM DEBT, net of current portion 903,107 1,795,438
-------------- -------------
Total liabilities 2,738,136 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 December 31, 1999 (liquidation
preference of $10.00 per share) 56 --
800,000 shares designated Series B Convertible, with 517,157
shares issued and outstanding at December 31, 1999 (liquidation
preference of $17.50 to $30.00 per share, see note 8) 129 --
Common stock, $.00025 par value; 20,000,000 shares
authorized, 11,428,073 and 9,374,132 shares issued
and outstanding, respectively 2,857 2,344
Additional paid-in capital 20,279,728 6,485,373
Unearned stock-based compensation (130,167) --
Accumulated deficit (13,633,201) (8,878,409)
-------------- -------------
Total stockholders' equity 6,519,402 (2,390,692)
-------------- -------------
Total liabilities and stockholders' equity $ 9,257,538 $ 1,539,983
============== =============
<FN>
See accompanying notes to interim consolidated financial statements.
</FN>
</TABLE>
-3-
<PAGE>
<TABLE>
VALUESTAR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
1999 1998 1999 1998
-------------- ------------ -------------- --------------
<S> <C> <C> <C> <C>
REVENUES $ 470,003 $ 470,608 $ 1,192,128 $ 1,076,268
-------------- ------------ -------------- --------------
OPERATING EXPENSES
Cost of revenues 445,364 257,257 827,640 450,604
Selling 619,973 327,723 1,268,693 709,943
Marketing and promotion 229,352 134,583 779,420 428,912
Product development 907,611 -- 1,181,480 --
General and administrative 388,098 427,391 826,661 760,094
Stock-based compensation 42,336 -- 75,833 60,000
-------------- ------------ -------------- --------------
2,632,734 1,146,954 4,959,727 2,409,553
-------------- ------------ -------------- --------------
LOSS FROM OPERATIONS (2,162,731) (676,346) (3,767,599) (1,333,285)
-------------- ------------ -------------- --------------
OTHER INCOME (EXPENSE)
Interest income 18,410 -- 25,334 --
Interest expense - cash (102,487) (41,692) (214,739) (84,002)
Non-cash interest expense (651,228) (34,817) (719,111) (52,066)
Miscellaneous -- (1,330) (800) (5,399)
-------------- ------------ -------------- --------------
(735,305) (77,839) (909,316) (141,467)
-------------- ------------ -------------- --------------
NET LOSS $ (2,898,036) $ (754,185) $ (4,676,915) $ (1,474,752)
============== ============ ============== ==============
NET LOSS AVAILABLE TO COMMON
STOCKHOLDERS (NOTE 11) $ (27,831,217) $ (754,185) $ (29,642,973) $ (1,474,752)
============== ============ ============== ==============
LOSS PER COMMON SHARE $ (2.81) $ (0.09) $ (3.07) $ (0.17)
============== ============ ============== ==============
WEIGHTED AVERAGE OF COMMON SHARES
OUTSTANDING 9,910,757 8,689,018 9,642,447 8,685,756
============== ============ ============== ==============
<FN>
See accompanying notes to interim consolidated financial statements.
</FN>
</TABLE>
-4-
<PAGE>
<TABLE>
VALUESTAR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Six Months Ended
December 31,
1999 1998
--------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (4,676,915) $ (1,474,752)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation 124,959 21,278
Amortization of intangible assets 13,828 --
Amortization of bond discount 706,887 36,316
Change in allowance for doubtful accounts (10,826) --
Other non-cash interest 12,224 --
Stock-based compensation 75,833 60,000
Changes in:
Receivables 91,273 25,248
Inventory 2,026 9,496
Prepaid expenses (12,992) 3,902
Deferred costs (44,967) 73,979
Intangibles and other assets (50,744) --
Accounts payable 129,394 236,422
Accrued liabilities and other payables 88,035 31,159
Deferred revenues 1,325 2,886
--------------- --------------
Net cash used by operating activities (3,550,660) (974,066)
--------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Property and equipment acquisitions (451,684) (110,952)
--------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of preferred stock, net of issuance cost 9,935,247 --
Proceeds from sale of common stock 1,170,280 300,000
Proceeds from debt 250,000 485,000
Payments on capital leases (15,057) --
Payments on debt (28,698) (3,911)
--------------- --------------
Net cash provided by financing activities 11,311,772 781,089
--------------- --------------
NET INCREASE (DECREASE) IN CASH 7,309,428 (303,929)
CASH, beginning of period 270,149 398,604
--------------- --------------
CASH, end of period $ 7,579,577 $ 94,675
=============== ==============
SUPPLEMENTAL CASH-FLOW INFORMATION
Cash paid during the year for:
Interest $ 214,739 $ 84,002
Non-cash investing and financing activities:
Accrued dividends on Series A Preferred Stock 77,877 --
Warrants issued in connection with Series B preferred stock 400,000 --
Equipment acquired under capital leases 69,000 --
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 609,375 --
6% Convertible Notes and interest converted to equity 546,274 --
<FN>
See accompanying notes to interim consolidated financial statements.
</FN>
</TABLE>
-5-
<PAGE>
VALUESTAR CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
December 31, 1999
1. OPERATIONS
The Company, a Colorado corporation, conducts its operations through ValueStar,
Inc., a wholly-owned subsidiary. ValueStar, Inc. was incorporated in California
in 1991, and is a rating company that has pioneered a new business certification
mark (ValueStar Certified(R)) - - signifying high customer satisfaction - -
enabling consumers to quickly determine the best local service businesses. The
Company generates revenues by conducting customer satisfaction research on local
service companies in 300 industries; certifying highly rated businesses; and
selling ancillary materials and services. The Company communicates information
about highly rated service and professional firms that have earned "ValueStar
Certified" to consumers through various media including its Internet Web site
(www.valuestar.com) and the ValueStar Report, a bi-annual publication.
The Company's revenues are primarily from certification and rating fees, and are
recognized when all related services are provided to the business customer.
Rating services include a research survey of prior customers and the delivery of
a research report. Services associated with certification include an orientation
on becoming a ValueStar Certified business and the delivery of certification
materials and manuals. Businesses must reapply for certification each year.
Sales of marketing materials and Web advertising and other services are
recognized as materials are shipped or over the period services are rendered.
The Company currently operates in eight market regions in the United States. In
early December 1999, in all markets except Northern California, the Company
changed from a fixed certification and rating fee to a percentage based fee
based on the value of future transactions between buyers registered with the
Company and certified companies. The Company is currently developing the systems
to register buyers and monitor these transactions. Until this system is
operating, the Company does not anticipate any significant revenues from these
markets. The Company continues to charge a fixed certification fee in Northern
California.
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
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 six month period ended
December 31, 1999 are not necessarily indicative of the results that may be
expected for the year ending June 30, 2000.
3. PRODUCT 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
6
<PAGE>
VALUESTAR CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
December 31, 1999
3. PRODUCT DEVELOPMENT COSTS (Cont'd)
testing of a new Internet initiative using existing and new content. This
initiative consists of developing proprietary content on the majority of service
businesses in the United States and developing an Internet-based system that
generates commissions from transactions driven by the content. During the second
quarter the Company continued to develop computer and related systems to support
this new initiative. Product development expenses are being charged to
operations as incurred.
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. There is a $10,000 discount being amortized over the term of
the note.
<TABLE>
7. LONG-TERM DEBT
Long-term debt at December 31, 1999, consists of the following:
<CAPTION>
<S> <C>
8% Senior Secured Notes Payable; principal of $1,450,000; interest is paid
monthly, with the principal repayable in ten quarterly payments of $153,125
commencing in March 2002, and maturing June 2004; net of unamortized note
discount of $774,345 $ 675,655
12% Notes; principal of $100,000; unsecured; interest is paid monthly, with a
balloon principal payment due in March 2001; net of unamortized note discount
of $4,545 95,455
12% Subordinated Notes: principal of $390,625; unsecured: interest is paid monthly,
with a balloon principal payment due in June 2000; net of unamortized note
discount of $5,046 385,579
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 68,119
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 128,058
----------
1,352,866
Less current portion 449,759
----------
$ 903,107
==========
</TABLE>
Subsequent to December 31, 1999 the 12% Subordinated Notes were reduced by
$15,625 due to the exercise of warrants.
In connection with the sale of Series B Stock (see Note 8), the Senior Note
holders executed certain waivers and consents and the Company agreed to increase
the interest rate on the $1,450,000 balance of Senior Secured Notes from the
current 8% to a maximum of 12% at the rate of 1% per calendar quarter commencing
April 1, 2000 when the rate will increase from 8% to 9%.
7
<PAGE>
VALUESTAR CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
December 31, 1999
7. LONG-TERM DEBT (Cont'd)
In connection with the reduction in the principal of the Senior Secured Notes by
$1,000,000, the Company accelerated the amortization of the related note
discount by $563,126. Likewise on the reduction in the 12% Subordinated Notes by
$609,375 from the exercise of warrants, the Company accelerated the amortization
of the related note discount by $7,982. These amounts increased non-cash
interest expense by $571,108 for the second quarter.
<TABLE>
8. STOCKHOLDERS' DEFICIT
The following table summarizes equity transactions during the six months ended
December 31, 1999:
<CAPTION>
Preferred Stock Common Stock Additional Unearned
--------------- ------------ Paid-In Stock-Based Accumulated
Shares Amount Shares Amount Capital Compensation Deficit Total
------ ------ ------ ------ ------- ------------ ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance July 1, 1999 -- -- 9,374,132 $2,344 $ 6,485,373 -- $ (8,878,409) $(2,390,692)
Issuance of Series A Convertible
Preferred Stock, net of issuance
costs of $40,000 225,000 56 -- -- 2,209,944 -- -- 2,210,000
Accrued 8% dividends on Series A
Preferred Stock -- -- -- -- 77,877 -- (77,877) --
Issuance of Series B Convertible
Preferred Stock, net of issuance
costs of $75,000 and value assigned
to warrants granted of $400,00 517,157 129 -- -- 8,575,118 -- -- 8,575,247
Value assigned to warrants granted
in connection with Series B Stock -- -- -- -- 400,000 -- -- 400,000
Stock issued on conversion of 6%
convertible notes and interest -- -- 546,274 136 546,138 -- -- 546,274
Stock issued on exercise of warrants
reducing 12% subordinated notes -- -- 487,500 122 609,253 -- -- 609,375
Stock issued on exercise of warrants
for cash -- -- 992,500 248 1,152,865 -- -- 1,153,113
Stock issued on exercise of options
for cash -- -- 27,667 7 17,160 -- -- 17,167
Unearned stock-based compensation -- -- -- -- 206,000 (206,000) -- --
Amortization of stock-based
compensation -- -- -- -- -- 75,833 -- 75,833
Net loss -- -- -- -- -- -- (4,676,915) (4,676,915)
------- ------ ---------- ------ ----------- --------- ------------ -----------
Balance December 31, 1999 742,157 $ 185 11,428,073 $2,857 $20,279,728 $(130,167) $(13,633,201) $ 6,519,402
======= ====== ========== ====== =========== ========= ============ ===========
</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. 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.
During the second quarter the Company issued 517,157 shares of Series B
Convertible Preferred Stock, par value $.00025 ("Series B Stock") at $17.50 per
share. 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 shares of
Series B Convertible Stock at $17.50 per share. 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
8
<PAGE>
VALUESTAR CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
December 31, 1999
8. STOCKHOLDERS' DEFICIT (Cont'd)
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.
Subsequent to December 31, 1999 the Company sold an additional 171,429 shares of
Series B Stock at $17.50 per share providing cash proceeds of $3,000,000.
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 issued options on 510,000 shares outside of the option plans as
of December 31, 1999. The following table summarizes option activity for the
period ended December 31, 1999:
Weighted Average Weighted
Shares Exercise Price Average Life
Outstanding July 1, 1999 1,111,100 $ 0.78 2.49
Granted 1,004,600 $ 2.13
Canceled (64,999) $ 1.69
Exercised (27,667) $ 0.62
Expired (15,000) $ 0.50
---------
Outstanding December 31, 1999 2,008,034 $ 1.43 3.30
=========
Exercisable at December 31, 1999 929,107 $ 0.77
=========
Warrants
In connection with the sale of the 8% Senior Secured Notes on March 31, 1999
(see note 7) the noteholders were granted warrants to purchase an aggregate of
1,527,250 shares of Common Stock of the Company at an exercise price of $1.00
per share ("A Warrants"), warrants to purchase an aggregate of 527,514 shares of
Common Stock at a nominal per share exercise price of $0.00025 ("B Warrants")
and warrants to purchase an aggregate of 231,132 shares of Common Stock at an
exercise price of $1.00 per share ("C Warrants"). The C Warrants or underlying
shares of Common Stock may be repurchased by the Company at $6.00 per share
(less any unpaid exercise price) on an all or none basis until March 31, 2004 as
long as the Company is not in default with respect to the Senior Notes or
related agreements. The warrants expire on the earlier of six years from the
date the Senior Notes are paid in full or March 31, 2009. The warrants may be
exercised by payment of cash, cancellation of debt or on a cashless basis. The
holders of the A, B and C Warrants were granted antidilution provisions,
registration rights and certain equity and debt preemptive rights.
In connection with the sale of the Series B Stock (Note 8) the A, B and C
Warrant holders terminated certain drag along rights which had provided the
Warrant holders additional consideration in certain instances upon a sale of the
Company.
At December 31, 1999 the Company had the following stock purchase warrants
outstanding each exercisable into one common share:
Number Exercise Price Expiration Date
------ -------------- ---------------
12,500 (1) $1.25 December, 2000
50,000 $1.25 March, 2001
187,500 (1) $1.25 September, 2002
20,000 (1) $1.25 December, 2002
9
<PAGE>
VALUESTAR CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
December 31, 1999
9. STOCK OPTIONS AND WARRANTS (Cont'd)
Number Exercise Price Expiration Date
------ -------------- ---------------
50,000 $1.75 May, 2003
12,500 (2) $1.25 April, 2003
262,500 (3) $2.00 April, 2003
100,000 $0.75 October, 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
1,527,250 $1.00 March, 2009 (A Warrants)
527,514 $0.00025 March, 2009 (B Warrants)
231,132 (4) $1.00 March, 2009 (C Warrants)
----------
3,588,624
==========
(1) These warrants are callable at a stock price of $5.00 per share
subject to certain conditions.
(2) These warrants are callable at a stock price of $3.00 per share
subject to certain conditions.
(3) These warrants are callable at a stock price of $4.50 per share
subject to certain conditions.
(4) These warrants may be repurchased by the Company at $6.00 per share
until March 31, 2004 subject to certain conditions.
Subsequent to December 31, 1999 a total of 375,000 warrants were exercised
providing cash proceeds of $590,625 and reducing debt by $15,625. Subsequent to
December 31, 1999 options on 19,601 common shares were exercised providing cash
proceeds of $17,101.
10. INCOME TAXES
At December 31, 1999 a valuation allowance has been provided to offset the net
deferred tax assets as management has determined that it is more likely than not
that the deferred tax asset will not be realized. The Company has for federal
income tax purposes net operating loss carryforwards of approximately $8 million
which expire through 2019 of which certain amounts are subject to limitations
under the Internal Revenue Code, as amended.
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 convertible notes and preferred
stock, which are exercisable into approximately 10.9 million shares of common
stock at December 31, 1999 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 by an imputed deemed
dividend from a discount provision included in the Series B Stock. The imputed
dividend is not a contractual obligation on the part of the Company to pay such
imputed dividend. In January 2000 the Company sold an additional 171,429 shares
of Series B Stock and estimates it will report an imputed dividend of
approximately $8.8 million in its third fiscal quarter.
10
<PAGE>
VALUESTAR CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
December 31, 1999
11. LOSS PER COMMON SHARE (Cont'd)
<TABLE>
Net loss available to common stockholders is computed as follows:
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss $ (2,898,036) $ (754,185) $ (4,676,915) $ (1,474,752)
Imputed Series B stock dividend based on discount
provision (24,888,181) -- (24,888,181) --
Accrued dividends on Series A Preferred Stock (45,000) -- (77,877) --
------------ ------------ ------------ ------------
Net loss available to common stockholders $(27,831,217) $ (754,185) $(29,642,973) $ (1,474,752)
============ ============ ============ ============
</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 our 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.
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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 research and rating company and have designed a rating system and
certification mark, ValueStar Certified(R), for service businesses. Our rating
system is designed to enable buyers to quickly determine those local service
businesses that have attained the highest level of customer satisfaction. Our
ratings are provided on the Internet at www.valuestar.com, in print in our
ValueStar Report, through promotions by, and buyer interactions with, certified
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 on the majority of service businesses in the
United States, and (b) developing an Internet-based system that generates
commissions from transactions driven by the content. During the second quarter
we expended additional resources to generate content for this planned initiative
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 businesses.
In addition to creating proprietary content on America's service companies, we
are also developing strategic relationships to provide complementary content and
to increase the distribution of the ValueStar brand and related content. 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. We are also working
to develop other alliances and relationships to expand our content, add highly
rated service businesses to our program, extend our brand and distribute our
ratings to consumers.
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 enrolled and/or rated by us. We are currently developing the systems
to register buyers and monitor future 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 companies in our program. We believe this investment will
accelerate the launch of our new program by allowing us to have a number of
registered 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.
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.
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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 December 31, 1999, we had an accumulated
deficit of $13.6 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.
We plan to migrate 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 six months ended December 31, 1999 we also
incurred significant product development costs consisting of (a) capturing
information on a large number of service companies in the United States (our new
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 development costs to continue
during the balance of fiscal 2000 and early fiscal 2001. Exact amounts and
timing 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 December 31, 1999 we had 1,755 certified businesses. At December 31, 1999, we
also had 497 (473 new and 24 renewal) business customers in the application and
rating phase. The total represents approximately 75 days of sale to new
businesses. Northern California business customers in the rating phase are
expected to represent approximately $325,000 of revenues that should be
recognized in the third quarter of fiscal 2000 (generally analogous to backlog).
Results of Operations
Revenues. Revenues consist of certification and rating fees from new and renewal
business applicants, sale proceeds from information materials and premium
listings in our Consumer ValueStar Report and on our Web site, and other
ancillary revenues. We reported total revenues of $1,192,128 for the six months
ended December 31, 1999, a 11% increase over revenues of $1,076,268 for the
first six months of the prior year. During the period, certification fees
accounted for 79% of revenue, compared to 74% for the first six months of the
prior year. Revenues for the three months ended December 31, 1999 were $470,003
comparable to the $470,608 reported in the comparable prior period. The growth
in revenues for the six months is primarily the result of growth in Northern
California, our most established market, which contributed 59% of total
revenues. In early December 1999 we ceased charging and collecting fixed
certification fees in our other seven markets and commenced enrolling highly
rated businesses in our transaction program. Accordingly our revenues declined
in December and revenues are expected to be minimal in these markets until we
are able to launch our transaction-based systems.
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We reported approximately $78,000 in brochure and other revenue, $104,000 for
premium Web and ValueStar Report listings and $78,000 in rating fees for the
first six months of the year. This compares to $43,000, $127,000 and $107,000
respectively for the first six months of the prior year. Brochure revenue is up
82% from the same period last 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 18% 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 27% because of
an increase in rating discounts to new customers offered during the current
period.
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 Consumer 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, costs
related to verifying insurance and complaint status, Web site operating costs
and costs of information products. Cost of revenues totaled $827,640 and
represented 69% of sales during the six months ended December 31, 1999. This is
an increase from 42% for the six months ended December 31, 1998. Rating costs
totaled $445,364 for the three months ended December 31, 1999 or 95% of revenues
compared to $257,257 and 55% of revenues for the second quarter of the prior
year. The increase in the six month period of the current year and the
significant increase in the second quarter is attributable primarily to
increased staffing and related costs expanding our rating department to handle
increased volume. Also in the second quarter we incurred an estimated $280,000
of rating costs associated with the seven markets where we are rating and
certifying businesses without any immediate revenue. 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. We believe the advance rating of these
businesses is a strategic investment necessary to have a base of rated service
companies available in key markets as we prepare to launch our transaction-based
systems.
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 six
months ended December 31, 1999, were $1,268,693, or 106% of revenues, compared
to $709,943, or 66% of revenues for the first six 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 second quarter totaled $619,973 or 132% of revenues representing an
increase from the $327,723 or 70% for the prior period. The significant increase
in selling costs during the most recent periods (six months and second quarter)
reflect in part the costs associated with selling businesses in seven regions
late in the second 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, 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
$779,420, or 65% of revenues during the first six months of fiscal 2000,
compared to $428,912, or 40% of revenues for the prior period. Marketing and
promotion expenses for the second quarter were $229,352 compared to $134,583 for
the prior year's second 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 $175,000 in the first six months
of fiscal 2000 compared to $110,000 in the prior year's first six months, as we
printed and distributed more copies with additional pages. Most of these costs
were incurred in the first quarter of each fiscal year. During the first six
months of fiscal 2000, we expended $305,000 on paid advertising targeted at
expanding consumer awareness of ValueStar Certified. Paid advertising of
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$150,000 was employed in the prior year's first six months. These increased
costs reflect management decisions to increase advertising over prior year
levels and advertising rate inflation caused in part by increased Internet
advertising in general. During the first six months of fiscal 2000, we expended
$106,000 on promotions compared to $100,000 for the prior year's first six
months. 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 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 six months ended December 31, 1999 we expended
$1,181,480 on new program development and segregated these costs as product
development costs. Second quarter product development costs were $907,611 an
increase from the $273,869 in the first quarter of this fiscal year. The major
component of product development costs during the six months were compensation
and related costs of $620,258. We expect, subject to adequate financing, that
product development expenses will increase in the third quarter due to increased
numbers of personnel and the use of outside branding, computer and system
consultants employed to develop our transaction-based systems. Future levels of
product development costs will depend on many factors not currently estimable by
our 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 $826,661 or 70% of revenues for the six months
ended December 31, 1999, compared to $760,094 or 71% of revenues for the prior
year's first six months, an increase of $66,567. General and administrative
costs in the second quarter were $388,098, a decrease from the $427,391 for the
second quarter of the prior period. The major increases during the six months
are an increase in occupancy costs 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 $75,833 of stock-based compensation during the six months ended
December 31, 1999 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 six months ended December 31, 1999 of
$933,850 that included $214,739 of cash interest and $719,111 of non-cash
amortization of bond discount and paid-in-kind interest. Included in the
$719,111 of non-cash interest is $571,108 of lump sum amortization resulting
from the early payoff of debt as a result of warrant conversions against debt
and senior debt converted to preferred stock. Interest for the prior comparable
period was $136,068 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 $4,676,915 for the six months ended December 31,
1999, compared to a loss of $1,474,752 for the six months ended December 31,
1998. Our increased loss is attributable to (a) increased rating and selling
costs resulting 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 development costs in the current period,
and (d) 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.
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The loss available to common stockholders for the six months ended December 31,
1999 of $29,642,973 includes $24,888,181 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 $77,877 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. In January 2000 we sold additional shares of Series B
preferred stock and estimate we will report an imputed dividend of approximately
$8.8 million in our third fiscal quarter. Management believes these financings,
which included two strategic investors currently assisting the Company in its
growth plans, have allowed the Company to move forward on its new product
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
$3,550,660 for the six months ended December 31, 1999. At December 31, 1999, we
had working capital of $6,298,507. For the six months ended December 31, 1999,
our negative cash flow from operating activities was due primarily to our
continued operating losses, losses in new market regions, addition of new
executive management and investment in new products and business growth. At
December 31, 1999, our net accounts receivables were $329,359 representing
approximately 50 days of revenues and an annualized turnover ratio of
approximately 7.2 times. This compares favorably to approximately 64 days of
revenues and turnover of approximately 5.7 times at June 30, 1999. Our improved
turnover and reduced accounts receivable level results primarily from more
diligent collection efforts. We believe that 60 to 90 days revenues in
receivables is reasonable based on the nature of our business and the terms we
provide certifying companies on certain fees. At December 31, 1999, we have not
experienced and we do not anticipate any significant accounts receivable
recoverability problems.
We have financed our operations primarily through the sale of equity and debt
financing. In July and August 1999, we sold $2.25 million of Series A preferred
stock for cash. In December we raised $7.8 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. During the six months ended December 31, 1999 we also
obtained $1.1 million from the exercise of warrants and options for cash. These
funds are being used for operations and product development. Subsequent to
December 31, 1999 we obtained $3 million from the sale of additional Series B
Stock and $532,726 from the exercise of warrants and options for 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 $7,579,577 at December 31, 1999, net accounts
receivable of $329,359, and the funds received subsequent to December 31, 1999
described above, 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 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 quarters level of operations we believe we have
sufficient capital to finance operations during the next twelve months. Our
actual results could differ significantly from prior expenditures and,
therefore, we may require additional operating funds for the next twelve months.
However we expect to expend additional funds during the next twelve months to
expand operations to new market regions, develop new products and systems and to
launch new Internet based services. 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. We estimate that we will require approximately
$5 million of software and equipment during the next twelve months to support
our expanded operations and new products and services. We are seeking lease
financing to pay for some of these capital costs. To finance our planned
endeavors, 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, 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.
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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 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.
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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 second fiscal quarter ended December 31, 1999
that were not registered under the Securities Act:
On December 9, 1999 the Company completed the private offering
and sale of 517,157 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). A total of 800,000 shares of
preferred stock have been designated by the Company as Series
B Stock.
The aggregate gross proceeds of $9,050,000 included $6,050,000
in cash from lead strategic investor, eCompanies Venture
Group, L.P. (the "Lead Investor"). A total of $1,405,000 was
purchased by three institutional holders of the Company's
wholly-owned subsidiary's Senior 8% Secured Notes ("Senior
Notes") of which $1,000,000 was applied to reduce the
outstanding principal of the Senior Notes from $2,450,000 to
$1,450,000. A total of $250,000 had been advanced by three
investors on November 24 and November 29, 1999 and was applied
towards their Series B Stock purchase. The balance of
$1,345,000 was paid in cash by sixteen individual investors.
The Series B Stock investors included two directors of the
Company and entities affiliated with such directors for an
aggregate of $302,500 and one executive officer for $50,000.
The dollar amount of the Series B Stock is convertible at the
option of the holder into shares of common stock at an initial
conversion price negotiated with the Lead Investor of $1.75
per share and are automatically converted on the occurrence of
the following events:
o A Qualified Liquidation Event - a qualifying public
offering (proceeds of $15 million at a price of at
least $5.00 per share and a valuation of at least
$40 million) or qualified sale (valuation of at
least $40 million and minimum proceeds of $5.00 to
$7.00 per common share);
o A Qualified Liquidity Milestone - a qualifying stock
market listing (Nasdaq National Market or New York
Stock Exchange and minimum price and trading
volume);
o The conversion of all the shares of the Company's
Series A Convertible Preferred Stock ("Series A
Stock"); or
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o A vote of 66-2/3% of outstanding shares of Series B
Stock.
The Series B Stock has a liquidation preference, after payment
of the preferential amount for the Series A Stock, of $17.50
per share of Series B Stock. 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.
The Series B Stock has antidilution rights for certain
issuances below the conversion price. The Series B Stock has
voting rights equal to the number of shares of common stock on
an as-converted basis. In addition, as long as there are at
least 200,000 shares of Series B Stock issued and outstanding,
the holders are entitled, voting as a separate class, to elect
two members of the Company's board of directors.
In connection with this transaction, the Company increased the
number of authorized directors from five to seven, resulting
in two vacancies. Mr. Steven Ledger, Managing General Partner
of eCompanies Venture Group, L.P. has been appointed as a new
director filling one vacancy and one directorship elected by
the Series B Stockholders. The remaining Series B director
seat is vacant. As a result of this transaction and by the
terms of the Company's Series A Stock, one director is elected
by the Series A Stockholders, two by the Series B Stockholders
and the balance of directors, not elected by any series of
preferred shares then outstanding, by the common stockholders.
As amended by this transaction, the largest holder of Senior
Notes, Seacoast Capital Partners L.P., is entitled through a
voting agreement, to effectively designate one director from
the common class. To date, Seacoast Capital Partners L.P. has
not designated a director.
In connection with the sale of Series B Stock, the Company
entered into an Investors Rights Agreement with the Series B
Stock investors, certain Series A Stockholders and the three
Senior Note holders who also hold certain A, B, and C warrants
to purchase shares of common stock ("Warrants") granted in
connection with the issuance of the Senior Notes. This
agreement provides the parties with certain demand and
piggyback registration rights and grants the Senior Note
holders and each holder of 20% of Series B Stock originally
issued with certain equity preemptive rights. Previously
granted antidilution and preemptive rights granted to the
Warrant holders were terminated. The Senior Note holders
retain certain debt preemptive rights.
In connection with this sale, the Senior Note and Warrant
holders (who also own a majority of Series A Stock), amended
and waived certain provisions of agreements related to the
Senior Notes and the Warrants. These amendments included a
termination of certain drag along rights which provided the
Warrant holders additional consideration in certain instances
upon a sale of the Company. These terminated drag along rights
also had allowed the Warrant holders to force a sale of the
Company in certain instances.
Other amendments executed by Senior Note and Warrant holders
included a modification of key person insurance requirements
and changes to Senior Note financial covenants. The Senior
Note and Warrant holders also executed certain waivers,
including waiving any antidilution adjustment to the Warrants
or Series A Stock as a result of the Series B Stock sale,
waiving the Series A and Series B Stock from the computation
for a change of control default under the Senior Notes and
waiver of any prepayment fee for the $1,000,000 reduction in
the Senior Notes. In connection with these amendments, waivers
and modifications by the Senior Note and Warrant holders, the
Company agreed to increase the interest rate on the $1,450,000
balance of Senior Notes from the current 8% to a maximum of
12% at the rate of 1% per calendar quarter commencing April 1,
2000 when the rate will increase from 8% to 9%.
While the securities were sold by the Company without an
underwriter or cash commission, the Company issued to an
outside financial advisor warrants to purchase an aggregate of
75,000 shares of common stock at an exercise price of $2.50
per share until December 7, 2004 in connection with these
transactions. All of these securities were offered and sold
without registration under the Securities Act of 1933, as
amended (the "Act"), in reliance upon the exemption provided
by Section 4(2) thereunder and/or Regulation D, Rule 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.
19
<PAGE>
The Company incurred cash costs estimated at $75,000 in
connection with the offering. After the application of
$1,250,000 as debt conversions, the balance of net proceeds of
$7,725,000 are intended to supplement working capital and
provide funds to accelerate the development and implementation
of an expanded Internet based rating program for service
companies. There can be no assurance the Company can
successfully develop new services or that the proceeds will be
sufficient for such purpose.
The descriptions of these transactions above are qualified in
their entirety by the full text of the agreements filed as
exhibits to the Company's Form 8-K dated December 13, 1999.
On January 18, 2000 the Company sold an additional 171,429
shares of Series B Stock to strategic investor TMCT Ventures
providing gross proceeds of $3,000,000.
(d) None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's fiscal 1999 Annual Meeting of Stockholders held on November 19,
1999 the following members, constituting all of the members, were elected to the
Board of Directors: James Stein, James A. Barnes, Fritz T. Beesemyer, Josh
Felser and Jerry Polis.
The following proposals were approved at the Company's Annual Meeting of
Stockholders:
<TABLE>
1. Election of Directors: B
a. By Common Stockholders:
<CAPTION>
Affirmative Votes Negative Votes Votes Withheld
----------------- -------------- --------------
<S> <C> <C> <C>
James Stein 7,658,551 -0- 49,000
James A. Barnes 7,658,551 -0- 49,000
Jerry E. Polis 7,658,551 -0- 49,000
Josh Felser 7,658,551 -0- 49,000
</TABLE>
<TABLE>
b. By Series A Stockholders:
<CAPTION>
Affirmative Votes Negative Votes Votes Withheld
----------------- -------------- --------------
<S> <C> <C> <C>
Fritz T. Beesemyer 950,000 -0- -0-
</TABLE>
2. Authorization to approve an amendment to the Company's 1997 Stock
Option Plan to increase the number of shares reserved for issuance
thereunder by 750,000 to an aggregate of 1,250,000 shares.
Affirmative Votes Negative Votes Votes Withheld
----------------- -------------- --------------
5,811,654 109,100 7,600
3. Authorization to increase the number of shares of common stock,
$0.00025 par value, that ValueStar is authorized to issue from
20,000,000 to 50,000,000.
a. Common stock votes:
Affirmative Votes Negative Votes Votes Withheld
----------------- -------------- --------------
7,645,951 54,100 7,600
b. Common and preferred stock votes:
Affirmative Votes Negative Votes Votes Withheld
----------------- -------------- --------------
8,595,951 54,100 7,600
4. Authorization to ratify the selection of Moss Adams LLP as
independent auditors for the Company for fiscal year ending June 30,
2000.
Affirmative Votes Negative Votes Votes Withheld
----------------- -------------- --------------
8,649,751 1,800 6,100
20
<PAGE>
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.8.3 Second Amendment to 1997 Stock Option Plan dated
August 31, 1999 and Approved by the Shareholders on
November 19, 1999.
10.16 Non-Qualified Stock Option Agreement dated as of
September 29, 1999 between the Company and James
Stein.
10.17 Non-Qualified Stock Option Agreement dated as of
November 6, 1999 between the Company and Joshua M.
Felser.
27 Financial Data Schedule
(b) Reports on Form 8-K:
On December 13, 1999 the Company issued Report on Form 8-K
related to an Item 5 - Other Events related to the sale of
Series B preferred stock.
21
<PAGE>
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: February 9, 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)
22
EXHIBIT 10.16
VALUESTAR CORPORATION
NON-QUALIFIED STOCK OPTION AGREEMENT
THIS NON-QUALIFIED STOCK OPTION AGREEMENT ("Agreement") is made and entered into
effective as of the 29th day of September, 1999, by and between VALUESTAR
CORPORATION, a Colorado corporation (the "Company") and James Stein (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 November 6, 1999.
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 250,000 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 from exercise under the Option the appropriate number of
Option Shares, the
<PAGE>
aggregate fair market value of which on the date of exercise of the Option is
equal to the aggregate cash purchase price of the Option Shares being exercised
and purchased under the Option, and such withholding shall constitute full
payment for the non-withheld Option Shares issued upon exercise 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 to have the actual
number of shares issuable upon exercise of the Option reduced by the smallest
number of whole shares of Common Stock which, when multiplied by the fair market
value of the Common Stock as of the date the Option is exercised, is sufficient
to satisfy the amount of the withholding tax obligations imposed on the Company
by reason of the exercise thereof (the "Withholding Election"). The Optionee may
take a Withholding Election only if all of the following conditions are met:
(i) the Withholding Election must be made by electing the Withholding
Election in the written notice of exercise; and by executing and
delivering to the Company a properly completed Notice of Withholding
Election; and
(ii) any Withholding Election made will be irrevocable; however, the
Company may, in its sole discretion, disapprove and not give effect to
any Withholding Election due to its cash position or based on any other
regulatory or statutory factor in its reasonable judgment.
1.3 EXERCISE PRICE. The exercise price for each share of Common Stock shall be
Two Dollars ($2.00) (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 September 28, 2004. 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:
September 28, 2000 62,500 Option Shares shall vest
December 28, 2000 15,625 Option Shares shall vest
March 28, 2001 15,625 Option Shares shall vest
June 28, 2001 15,625 Option Shares shall vest
September 28, 2001 15,625 Option Shares shall vest
December 28, 2001 15,625 Option Shares shall vest
March 28, 2002 15,625 Option Shares shall vest
June 28, 2002 15,625 Option Shares shall vest
September 28, 2002 15,625 Option Shares shall vest
December 28, 2002 15,625 Option Shares shall vest
March 28, 2003 15,625 Option Shares shall vest
June 28, 2003 15,625 Option Shares shall vest
September 28, 2003 15,625 Option Shares shall vest
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) September 28, 2004:
(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 Option, or the portion thereof then unexercised, shall be or become
exercisable,
4
<PAGE>
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 A. BARNES
ITS: Treasurer & Secretary
ATTESTED:
BY: /s/ MICHAEL KELLY
ITS: Controller
ACCEPTED:
/s/ JAMES STEIN
JAMES STEIN
7
EXHIBIT 10.17
VALUESTAR CORPORATION
NON-QUALIFIED STOCK OPTION AGREEMENT
THIS NON-QUALIFIED STOCK OPTION AGREEMENT ("Agreement") is made and entered into
effective as of the 6th day of November, 1999, by and between VALUESTAR
CORPORATION, a Colorado corporation (the "Company") and Joshua M. Felser (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 November 6, 1999.
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 60,000 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 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"); and (ii) a certified check payable to the Company
in the amount of the Exercise Price (as defined below) multiplied by the number
of Option Shares being purchased (the "Purchase Price") OR with the advance
approval of the Company, by delivery of a number of shares of Common Stock,
which have been held by Optionee for at least six months, having a fair market
value, as of the date the Option is exercised, at least equal to the Purchase
Price OR with the advance approval of the Company by a certified check payable
to the Company in an amount less than the Exercise Price and by delivery of a
number of shares of Common Stock, which have been held by Optionee for at least
six months, having a fair market value, as of the date the Option is exercised,
at least equal to the balance of the Purchase Price OR with the advance approval
of the Company by Optionee advising the Company, at the time this Option is
exercised, to withhold from exercise under the Option the appropriate number of
Option Shares, the
<PAGE>
aggregate fair market value of which on the date of exercise of the Option is
equal to the aggregate cash purchase price of the Option Shares being exercised
and purchased under the Option, and such withholding shall constitute full
payment for the non-withheld Option Shares issued upon exercise OR such other
consideration as the Board of Directors may specifically authorize. 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.
1.3 EXERCISE PRICE. The exercise price for each share of Common Stock shall be
Three Dollars ($3.00) (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 November 5, 2004. 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:
February 5, 2000 6,667 Option Shares shall vest
May 5, 2000 6,667 Option Shares shall vest
August 5, 2000 6,667 Option Shares shall vest
November 5, 2000 6,666 Option Shares shall vest
February 5, 2001 4,167 Option Shares shall vest
May 5, 2001 4,167 Option Shares shall vest
August 5, 2001 4,167 Option Shares shall vest
November 5, 2001 4,166 Option Shares shall vest
February 5, 2002 4,167 Option Shares shall vest
May 5, 2002 4,167 Option Shares shall vest
August 5, 2002 4,166 Option Shares shall vest
November 5, 2002 4,166 Option Shares shall vest
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 a resignation as director or 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
2
<PAGE>
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) November 5, 2004:
(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 a director 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).
3
<PAGE>
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 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
4
<PAGE>
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
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
5
<PAGE>
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 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.
6
<PAGE>
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: C.E.O
ATTESTED:
BY: /s/ JAMES A. BARNES
ITS: Treasurer
ACCEPTED:
/s/ JOHSUA M. FELSER
JOSHUA M. FELSER
7
EXHIBIT 10.8.3
VALUESTAR CORPORATION
1997 STOCK OPTION PLAN
SECOND AMENDMENT
On August 31, 1999 the Board of Directors authorized this second amendment of
the 1997 Stock Option Plan. The 1997 Stock Option Plan was originally adopted by
the Board of Directors on March 20, 1997 and ratified by the shareholders on
April 16, 1997. The 1997 Stock Option Plan is hereby amended by deleting Section
5 in its entirety to be replaced by the following Section 5:
5. Shares Subject to the Plan.
For purposes of the Plan, the Committee is authorized to grant Options to
purchase not more than one million two hundred fifty thousand (1,250,000) shares
of the Company's common stock, $.00025 par value per share ("Common Stock"),
either treasury or authorized but unissued shares, or the number and kind of
shares of stock or other securities which, in accordance with Section 13, shall
be substituted for such shares of Common Stock or to which such shares shall be
adjusted. The Committee is authorized to grant Options under the Plan with
respect to such shares. Any or all unsold shares subject to an Option which for
any reason expires or otherwise terminates (excluding shares returned to the
Company in payment of the exercise price for additional shares) may again be
made subject to grant under the Plan.
Consistent with Section 3.2 all options granted under this Plan in excess of
options on 500,000 common shares previously ratified by the stockholders of the
Company, are subject to, and may not be exercised before, the approval of this
Second Amendment by the holders of a majority of the Company's outstanding
shares on or before the expiration of twelve months from the date of this Second
Amendment of this Plan by the Board, and if such approval is not obtained, all
Options previously granted in excess of options on 500,000 common shares, shall
be void.
* * * *
By signature below, the undersigned officers of the Company hereby certify that
the foregoing is a true and correct copy of the Second Amendment to the 1997
Stock Option Plan of the Company.
DATED: August 31, 1999
VALUESTAR CORPORATION
By /s/ JAMES STEIN
---------------
James Stein, President and CEO
By /s/ JAMES A. BARNES
-------------------
James A. Barnes, Secretary
<PAGE>
CERTIFICATION OF SECOND AMENDMENT ADOPTION BY THE
SHAREHOLDERS OF VALUESTAR CORPORATION
I, the undersigned Secretary of this Corporation, hereby certify that the
foregoing Second Amendment to the 1997 Stock Option Plan was duly approved by
the requisite number of holders of the issued and outstanding common stock of
this corporation as of the date below.
Date of Shareholder Approval of the Second Amendment: NOVEMBER 19, 1999
/s/ JAMES A. BARNES
------------------
James A. Barnes, Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
UNAUDITED FINANCIAL STATEMENTS FOR QUARTER ENDED DECEMBER 31, 1999 INCLUDED
IN THE QUARTERLY REPORT ON FORM 10-QSB FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 7,599,577
<SECURITIES> 0
<RECEIVABLES> 362,612
<ALLOWANCES> 33,253
<INVENTORY> 1,982
<CURRENT-ASSETS> 7,983,356
<PP&E> 1,133,855
<DEPRECIATION> 236,525
<TOTAL-ASSETS> 9,257,538
<CURRENT-LIABILITIES> 1,684,849
<BONDS> 1,053,287
0
185
<COMMON> 2,857
<OTHER-SE> 6,516,360
<TOTAL-LIABILITY-AND-EQUITY> 9,257,538
<SALES> 66,121
<TOTAL-REVENUES> 1,192,128
<CGS> 45,216
<TOTAL-COSTS> 827,640
<OTHER-EXPENSES> 4,108,266
<LOSS-PROVISION> 23,821
<INTEREST-EXPENSE> 933,850
<INCOME-PRETAX> (4,676,915)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,676,915)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,676,915)
<EPS-BASIC> (3.07)
<EPS-DILUTED> (3.07)
</TABLE>
