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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-SB/A
Amendment No. 3
GENERAL FORM FOR REGISTRATION OF SECURITIES OF
SMALL BUSINESS ISSUERS
Under Section 12(b) or (g) of the Securities Exchange Act of 1934
VALUESTAR CORPORATION
(Name of Small Business Issuer in its charter)
Colorado 84-1202005
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1120A Ballena Blvd., Alameda, California, 94501
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number (510) 814-7070
Securities to be registered under Section 12 (b) of the Act: NONE
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, $.00025 par value
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(Title of Class)
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<PAGE>
The Company hereby amends the following: Part I, Item 2 and Part II, Part F/S
and Part III, Item 1 and 2, of its Form 10-SB filed May 29, 1997 as amended by
Form 10-SB/A, Amendment No. 1 filed on August 18, 1997 and Form 10-SB/A,
Amendment No. 2 filed on September 18, 1997.
FORWARD-LOOKING STATEMENTS
THE FORWARD-LOOKING STATEMENTS IN THIS REGISTRATION STATEMENT REFLECT THE
COMPANY'S CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND FINANCIAL PERFORMANCE.
THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES,
INCLUDING THOSE DISCUSSED HEREIN, AND UNDER BUSINESS RISKS, THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM HISTORICAL RESULTS OR THOSE
ANTICIPATED. IN THIS REPORT, THE WORDS "ANTICIPATES," "BELIEVES," "EXPECTS,"
"INTENDS," "FUTURE" AND SIMILAR EXPRESSIONS IDENTIFY FORWARD-LOOKING STATEMENTS.
READERS ARE CAUTIONED TO CONSIDER THE SPECIFIC RISK FACTORS DESCRIBED BELOW AND
NOT TO PLACE UNDUE RELIANCE ON THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN,
WHICH SPEAK ONLY AS OF THE DATE HEREOF. THE COMPANY UNDERTAKES NO OBLIGATION TO
PUBLICLY REVISE THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR
CIRCUMSTANCES THAT MAY ARISE AFTER THE DATE HEREOF.
Item 2. Management's Discussion and Analysis or Plan of Operation.
Overview
The Company's revenues are generated primarily from research and rating fees
paid by new and renewal businesses, license fees from qualified applicants and
renewals and from the sale of information products and services. The Company
from time to time provides discounts, incentives from basic pricing and may
provide satisfaction guarantees to first time applicants and also from time to
time extends payment terms on the annual license fee.
License fees are recognized when material services or conditions relating to the
certification have been performed. The material services are the delivery of
certification materials and manuals along with an orientation and the material
condition is the execution of the license agreement specifying the conditions
and limitation on using the certification. The Company currently charges
businesses $995 and up for use of the certification which must be renewed each
year.
Research and rating fee revenue is deferred until the research report is
delivered. The basic research and rating price is $470. The Company currently
offers a $400 promotional discount to new applicants. For most licensees the
research covers a two year period and the Company charges $70 for mid-term
ratings. Approximately 70% of applicants successfully pass the Company's
research and rating requirements and are eligible for certification and more
than 90% of eligible applicants license the certification. More than 90% of
renewal applicants pass subsequent ratings. The Company provides reserves for
any satisfaction guarantees. Sales of information materials and other services
are recognized as materials are delivered or shipped or services rendered.
Commencing in January 1995, the Company changed the third-party research portion
of its licensee qualifications from qualifying an applicant for a one year
period to a two year period. The Company expenses research and rating costs as
incurred. Prior to the restatements described below, the Company had previously
deferred a portion of rating costs to match the mid-term rating.
Costs incurred in printing and distributing the Company's Consumer ValueStar
Report publication published in January and July and any related revenues are
recognized upon publication. Prior to the restatements described below, the
Company had previously amortized such costs over the six month life of each
publication.
Effective July 1, 1994, with the adoption by the Company of Statement of
Position No. 93-7 (SOP 93-7), Reporting on Advertising Costs, certain customer
acquisition costs are deferred and amortized over a twelve month period on a
straight-line method starting in the month incurred. These costs, which relate
directly to targeted new licensee solicitations, primarily include targeted
direct-response advertising programs consisting of telephone sales, printing and
mailing costs. No indirect costs are included in deferred customer acquisition
costs. Costs incurred for other than specific targeted customers, including
general marketing and customer support expenses, are expensed as incurred.
Effective January 1, 1997, the Company modified new licensee solicitation
primarily to telephone sales targeted directly and specifically to direct
revenue-generating responses. No change was made to the amortization period. Any
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direct mail, advertising or costs associated with supporting telemarketing or
generating leads and other general marketing expenses, are expensed as incurred.
The net effect of capitalizing and amortizing deferred costs was a reduction in
costs and expenses of $13,781 and $35,506 for the nine months ended March 31,
1997 and 1996, respectively and $59,964 and $9,198 for the fiscal years ended
June 30, 1996 and 1995, respectively.
The Company estimates new licensees have an average life exceeding four years.
Since the Company's annual licensee renewal rate has averaged more than 75%
during the last three fiscal years and renewals provide margin in excess of
renewal costs, the Company believes deferred costs will be realized from future
operations. Deferred costs are periodically evaluated to determine if
adjustments for impairment are necessary.
Since inception the Company has been growing and developing its business and has
incurred losses in each year since inception and at March 31, 1997 had an
accumulated deficit of $3,688,285. There can be no assurance of future
profitability.
Effect of Growth in New Licensees and License Renewals
Since a considerable portion of the Company's operations are engaged towards the
solicitation of new service and professional business applicants in order to
expand the base of licensees, the Company incurs substantial costs towards this
activity. Currently the Company is only deferring direct telephone sales costs
and amortizing them over twelve months.
The Company's renewal licensees contribute higher gross margins than new
applicants due to reduced sales costs. Also a growing and larger base of
licensees reduces the costs (relative to revenues) associated with printing and
distributing the Company's Consumer ValueStar Report, maintaining the
ValueStar.com Internet site, providing voice-text services and other marketing
and promotion expenses. The marginal costs of including more licensees in these
media is minimal compared to the base printing, distribution and maintenance
costs.
The Company believes as a market territory matures and the Company has a larger
base of licensees then many fixed and indirect costs will decline as a
percentage of revenues. The Company's operations require that it achieve a
critical mass of licensees sufficient to cover general management, overhead and
indirect costs of operations. Management estimates based on the current cost
structure that this critical mass is approximately 900 licensees. There can be
no assurance the Company can achieve this level of licensees and thereafter, if
achieved, operations can be impacted by changes in the cost structure and growth
rates (due to the lower margins associated with first year licensees).
The following table illustrates the changes in licensees and renewal rates for
the nine months ended March 31, 1997 and for the fiscal years ended June 30,
1996 and 1995.
Nine Months Ended Fiscal Year Ended June 30,
March 31, 1997 1996 1995
Licensees - beginning of period 319 158 140
Licensees up for renewal (201) (158) (140)
Renewals 155 123 119
Renewal Percentage 77% 78% 85%
New licensees 379 206 44
Adjustments (1) (4) (10) (5)
Licensees - end of period 648 319 158
(1) Non passing renewals, out-of-period renewals and terminations.
At March 31, 1997 the Company had 315 (275 new and 40 renewal) prospective
licensees in the application and rating phase. Generally there is a 60 day
period between the initial signup of an applicant and the execution of a license
agreement for successful applicants. Based on management's experience, these 315
prospective licensees are expected to represent approximately $350,000 of
revenues that should be recognized in the fourth fiscal quarter (generally
analogous to backlog).
Effective January 1, 1997 the Company changed its new business marketing focus
to telephone sales from a field sales force. Initial response has resulted in a
significant increase in applicants for ratings and reduced unit sales costs.
During
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the third fiscal quarter ended March 31, 1997, 352 businesses applied to be
rated versus 241 for the comparable quarter of the prior year (when a direct
sales force was the major marketing component).
Results of Operations
Revenues. Revenues consist of license fees from new and renewal business
licensees, rating fees from new and renewal business applicants, sale proceeds
from information materials and premium listings, and other ancillary revenues.
The Company reported total revenues of $410,269 for the fiscal year ended June
30, 1996, a 65% increase over fiscal 1995 revenues of $248,776. Revenues for the
nine months ended March 31, 1997 were $578,175 a 129% increase over revenues of
$252,501 for the comparable period of fiscal 1996. During the fiscal year ended
June 30, 1996 license fees accounted for 74% of revenue (62% for the prior year)
and for the nine months ended March 31, 1997 license fees accounted for 72% of
revenues (68% prior comparable period). The growth in revenues is the result of
improved new sales velocity and the impact of a larger base of renewals.
In January 1995 the Company changed to a two year rating period which over time
reduces costs of sales. During fiscal 1996 and the first half of fiscal 1997 the
Company experimented with various direct mail and direct sales methods.
Effective January 1, 1997 the Company changed from a field sales force to
telephone sales to obtain new rating applicants. The Company believes, based on
its over 75% renewal rate, that investments in new licensees will contribute to
greater recurring revenues in future periods. At March 31, 1997 the Company had
315 applicants in various stages of rating, effectively a (anticipated revenue)
backlog estimated at $350,000 to be recognized in the fourth fiscal quarter
ending June 30, 1997 from license fees. Primarily as a result of this
anticipated revenue, management believes, but there can be no assurance, that
the fourth quarter will be a record revenue quarter exceeding $450,000 compared
to $157,768 for the fourth quarter of the prior year. This anticipated result is
due, in part, to improved telephone sales and a growing mass of renewing
licensees.
Cost of Revenues. Cost of revenues consist primarily of rating costs paid to
third parties for performing customer satisfaction research on business
applicants, in-house staffing and costs related to auditing and rating of
applicants and costs of information products and licensing materials. Cost of
revenues represented 59% of sales in fiscal 1996, an increase from the 38%
incurred in 1995. During fiscal 1996, the Company expanded its audit and rating
staff to handle increased volume. Also during fiscal 1996 the Company increased
its use of rating discounts to attract new licensees, thereby reducing revenues
from first year licensees. For the nine months ended March 31, 1997 costs of
revenues were 55% of revenues compared to 51% for the comparable prior period.
The increase results from early year price increases for third party rating and
the increased percentage of first year rating amortization. Commencing
approximately November, 1996 the Company made internal changes to make ratings
more efficient and arranged for improved third party pricing with the goal of
reducing future rating costs. Management anticipates that cost of revenues
should decline as a percentage of revenues in future periods resulting from such
changes and revenue growth.
Selling, Marketing and Promotion Expenses. Marketing and selling costs in fiscal
1996 aggregated $602,585 compared to $171,288 in fiscal 1995. At the end of
fiscal 1995 the Company had 3 sales and marketing personnel which increased to
17 at the end of fiscal 1996. Marketing and sales personnel costs increased to
$365,000 in fiscal 1996, $301,000 more than fiscal 1995. This included the
addition of a sales manager and significant increases in direct sales personnel.
Included in marketing and selling expenses in fiscal 1996 and 1995 are marketing
and promotion expenses consisting primarily of printing and distribution costs
of the Company's Consumer ValueStar Report publication targeted at consumers.
Printing and distribution costs increased from $60,000 in fiscal 1995 to $89,000
in fiscal 1996 from increased quantities and broader distribution. Other
marketing and promotion expenses associated with expanding awareness of
ValueStar Certified increased from $31,000 in fiscal 1995 to $74,000 in fiscal
1996. During fiscal 1996 the Company expended $26,000 developing and supporting
its voice-text services whereas in fiscal 1995 the Company expended $8,000.
For the nine months ended March 31, 1997 the Company expanded its income
statement classification to segregate marketing and promotion expenses as a
separate category from direct sales costs due to the increased level of
expenditures and a significant paid media effort targeted at consumers to
increase awareness of ValueStar's program. Sales costs for the nine months ended
March 31, 1997 were $697,358 compared to $295,496 for the comparable prior
period. The $401,862 increase included a $321,000 increase in personnel costs to
$565,000 due to increased staffing and the addition of one senior marketing
manager. Direct mail costs increased by $83,500 to $100,800 due to significant
increases in business awareness mailings which are expensed as incurred.
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Marketing and promotion expenses consist of costs associated with efforts to
raise awareness of ValueStar Certified and the ValueStar program. These
expenditures are not required by the Company's license agreements but tend to
enhance consumer awareness to benefit the Company's marketing and brand
awareness. Marketing and promotion expenses for the nine months ended March 31,
1997 were $546,375 or 94% of revenues compared to $103,680 for the nine months
ended March 31, 1996, an increase of $442,695. Expenses associated with the
publication and distribution of the Consumer ValueStar Report were $173,600
during the nine months ended March 31, 1997 compared to $68,000 in the prior
period, an increase of $105,600 due primarily to increased units and expanded
pages. During the nine months ended March 31, 1997 the Company expended $189,000
on paid advertising targeted at supporting licensees by expanding consumer
awareness of ValueStar Certified. No paid advertising was employed in the prior
year. In fiscal 1997 the Company added a full-time public relations manager and
expended $107,000 on public relations, communications and events targeted at
increasing brand awareness. This compares to $10,000 for the prior nine month
period. And during the nine months ended March 31, 1997 the Company expended
$24,000 for voice-text and Internet listings compared to $5,000 in 1996.
Sales and marketing expenses are subject to significant variability based on
decisions regarding the timing and size of distribution of Consumer ValueStar
Report and decisions regarding direct mail activities, paid advertising, public
relations and market awareness efforts. The Company anticipates continuing to
make significant expenditures in marketing and promotion efforts as the Company
supports a growing licensee base but anticipates a decreasing percentage of
revenues as revenues grow.
General and Administrative Expenses. General and administrative expenses consist
primarily of expenses for finance, office operations, administration and general
management activities, including legal, accounting and other professional fees.
They totaled $330,421 for fiscal 1996 compared to $196,763 for fiscal 1995. The
major increases included a $37,000 increase in personnel costs due to additional
personnel, a $66,000 increase in occupancy related costs primarily due to
expanded space and telephone expenses, and a $30,000 increase in corporate costs
including legal and accounting. As most of the Company's efforts are in sales
and marketing and customer support, the Company does not anticipate as large of
increases in general and administrative costs as in other costs as revenues
increase. For the nine months ended March 31, 1997 general and administrative
costs were $354,707 compared to $209,326 for the comparable prior period. The
major increases include a $40,000 increase in personnel costs to $128,000 due to
additional personnel, a $60,000 increase in occupancy related costs to $125,000
including expanded space and telephone expenses, and a $10,000 increase in
corporate costs to $31,000.
To date development expenses associated with the design, development and testing
of the Company's programs and services have not been material and are included
in sales and marketing or general and administrative expenses (if performed by
executive management). In the future, as the Company develops new programs or
services, it anticipates that it may segregate development expenses as an
expense category.
The Company had a loss of $772,700 in fiscal 1996 compared to a loss of $649,303
in fiscal 1995 which included a $428,750 non-cash compensation expense related
to the release of escrow shares. The net loss for the nine months ended March
31, 1997 was $1,344,613 compared to $490,250 for the nine months ended March 31,
1996. The increased loss resulted primarily from increased selling and marketing
and customer support expenses targeted at growing the Company's program. The
Company anticipates it will continue to experience operating losses until it
achieves a mass base of renewing licensees as it pursues aggressive growth in
new licensees. Achievement of positive operating results will require obtaining
a sufficient base of licensees and renewal licensees to support operating and
corporate costs. There can be no assurance the Company can sustain renewal rates
or achieve a profitable base of operations.
Liquidity and Capital Resources
Since the Company commenced operations it has had significant negative cash flow
from operating activities. The negative cash flow from operating activities was
$722,518 for the fiscal year ended June 30, 1996, and $212,423 for the fiscal
year ended June 30, 1995. At June 30, 1996 the Company had working capital of
$277,681. For the nine months ended March 31, 1997 negative cash flow from
operating activities was $1,163,390 due to the heavy investment in licensee
growth and support. Working capital at March 31, 1997 was a deficit of $167,211.
Included in working capital at June 30, 1996 was net accounts receivable of
$93,020 representing approximately 83 days of revenues and an annual turnover
ratio based on total revenues of approximately 4.4. At March 31, 1997 net
accounts receivable were $203,994 representing approximately 97 days of revenues
and an annual turnover ratio of approximately 3.8. The increase in accounts
receivable and reduced turnover results from an increased use of extended terms
and lower ratio of full pay renewals. Management also spent efforts in the third
fiscal quarter expanding the telephone sales department and less effort on
collections which have been renewed in the fourth quarter. Management believes
that 80 to 90 days sales in
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receivables is reasonable based on the nature of the Company's business. At
March 31, 1997 the Company has not experienced and does not anticipate any
significant accounts receivable recoverability problems.
The Company has financed its operations primarily through the sale of common
equity and shareholder loans subsequently converted to common stock which
combined provided $1,439,200 during fiscal 1995 and 1996. During this same
period $934,941 of cash was used in operating activities, $39,839 for capital
expenditures and $48,600 to reduce shareholder loans. During the two year period
cash increased from $12,888 to $454,809. For the nine months ended March 31,
1997 the Company obtained $790,000 from the sale of common equity and $100,000
from short-term notes renegotiated with a maturity of September 30, 1998. During
this period $1,163,390 of cash was used in operating activities and $17,565 for
capital expenditures.
Other than cash on hand of $163,854 at March 31, 1997 and accounts receivable of
$203,994, the Company has no material unused sources of liquidity at this time
and the Company expects to incur additional but reduced operating losses in
future fiscal quarters as a result of continued operations and planned
investments in licensee growth. The timing and amounts of these expenditures and
the extent of operating losses will depend on many factors, some of which are
beyond the Company's control. At March 31, 1997, based on management's
experience, the 315 prospective licensees in various stages of rating are
expected to represent approximately $350,000 of revenues that should be
recognized in the fourth fiscal quarter. New and renewal sales in April, 1997
should also be recognized in the fourth quarter bringing management's fourth
quarter revenue estimate to over $400,000 with no significant changes in fixed
operating costs.
On June 30, 1997 the Company completed the sale of $200,000 of equity financing
to supplement its working capital and fund growth in licensees.
The Company believes, but there can be no assurance, given the above sources of
liquidity and the combination of anticipated renewal revenues, expanded new
sales efforts and licensee growth, that it will require approximately $300,000
of additional funding for the next twelve months. However should actual results
differ significantly from management's plans, then the Company may require
substantially greater additional operating funds. There can be no assurance that
additional funding will be available or on what terms. Potential sources of such
funds include shareholder and other debt financing or additional equity
offerings. In such an event without additional funding the Company will be
required to curtail or scale back staffing and operations in more reliance on
higher profitable renewals and limit new licensee growth.
The Company intends to expand operations beyond the greater Bay and Sacramento
areas in the future, however any significant expansion will require additional
funds. Potential sources of any such funds may include shareholder and other
debt financing or additional offerings of the Company's equity securities. There
can be no assurance that any funds will be available from these or other
potential sources.
<TABLE>
Restatement of Financial Statements:
The Company restated its financial statements for the years ended June 30, 1996
and 1995 to reflect the following changes in accounting methods: expensing
certain costs associated with its rating and research fees that had previously
been deferred and amortized; expensing marketing and selling costs associated
with the printing and distribution of the Company's consumer publication that
had been previously deferred and amortized; and to recognize the fair value of
1,225,000 shares of common stock released from escrow as a non-cash charge to
income in the period in which the shares were released. The Company believes the
deferral changes better reflect the matching of costs with related revenues. As
a result of these changes deferred costs at June 30, 1995 were reduced by
$50,632 with a corresponding decrease on total assets and stockholders' equity
and deferred costs at June 30, 1996 were reduced by $64,004 with a corresponding
decrease on total assets and stockholders' equity. The impact of these
accounting changes on the Company's financial results as originally reported are
as follows:
<CAPTION>
Fiscal 1996 Fiscal 1995
As Reported As Restated As Reported As Restated
<S> <C> <C> <C> <C>
Net loss $(759,328) $(772,700) $(169,921) $(649,303)
Net loss per share $(0.14) $(0.14) $(0.04) $(0.16)
</TABLE>
Corresponding adjustments were made in the interim statements consistent with
restatements of results for the fiscal years ended June 30, 1996 and 1995. At
March 31, 1997 deferred costs were reduced by $166,533 with a corresponding
decrease on total assets and stockholders' equity. As a result of this
adjustment and a like adjustment at the prior interim
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period, the net loss for the nine months ended March 31, 1997 and 1996 was
increased by $102,529 ($0.01 per share) and $43,586 ($0.01 per share),
respectively.
Tax Loss Carryforwards
As of June 30, 1996, the Company had approximately $1,800,000 of tax loss
carryforwards. A valuation allowance has been recorded for the net deferred tax
asset of $700,000 arising primarily from tax loss carryforwards because, in the
Company's assessment, it is more likely than not that the deferred tax asset
will not be realized.
New Accounting Pronouncements
The Financial Accounting Standards Board has recently issued Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets" and SFAS No. 123, "Accounting for Stock Based
Compensation." SFAS No. 121 requires that long-lived assets and certain
identifiable intangibles be reported at the lower of the carrying amount or
their estimated recoverable amount. The adoption of this statement in the first
quarter of fiscal 1997 by the Company did not have an impact on the financial
statements.
SFAS No. 123 encourages the accounting for stock-based employee compensation
programs to be reported within the financial statements on a fair value based
method. If the fair value based method is not adopted, then the statement
requires pro-forma disclosure of net income and earnings per share as if the
fair value based method had been adopted. While the Company is evaluating the
impact of the pronouncement, it expects to continue to account for stock options
utilizing the "intrinsic value based method" as is allowed by the statement and
therefore does not expect SFAS No. 123 to have a material impact on its
financial position, results of operations and cash flows.
Business Risks
This registration statement contains a number of forward-looking statements
which reflect the Company's current views with respect to future events and
financial performance. These forward-looking statements are subject to certain
risks and uncertainties, including those discussed below, that could cause
actual results to differ materially from historical results or those
anticipated. In this report, the words "anticipates," "believes," "expects,"
"intends," "future" and similar expressions identify forward-looking statements.
Readers are cautioned to consider the specific risk factors described below and
not to place undue reliance on the forward-looking statements contained herein,
which speak only as of the date hereof. The Company undertakes no obligation to
publicly revise these forward-looking statements, to reflect events or
circumstances that may arise after the date hereof.
Absence of Profitable Operations and Possible Insufficiency of Capital - The
Company has incurred significant operating losses since inception. The Company
incurred an operating loss of $763,450 for the fiscal year ended June 30, 1996
and $1,339,613 for the nine months ended March 31, 1997. The Company has had
limited financial results upon which investors may base an assessment of its
potential. There can be no assurance profitable operations can be achieved or
that additional capital will not be required.
Possible Inability to Continue as a Going Concern - The Company has suffered
recurring losses from operations. This factor, in combination with (i) reliance
upon debt and equity financing to fund losses from operations and cash flow
deficits, (ii) material net losses and cash flow deficits from operations and
(iv) the possibility that the Company may be unable to meet its debts as they
come due, raise doubt about the Company's ability to continue as a going
concern. The Company's ability to continue as a going concern is dependent upon
obtaining additional capital and ultimately achieving and maintaining profitable
operations, as to which no assurance can be given.
Competition and Technological Change - The possibility exists that a business
rating service and certification mark similar to or competitive with that of the
Company will be developed. It is also possible that future competition will try
to duplicate the Company's concept. The Company could face head-on competition
from vastly larger and better financed companies with the means to launch a
high-impact campaign locally or nationally. Technological changes in the manner
of selecting service businesses and communicating information to consumers could
also have a negative impact on the Company's business. As a provider of consumer
information through the Internet and various media the Company will be required
to adapt to new and changing technologies. There can be no assurance that the
Company's services will remain viable or competitive in face of technological
change.
Dependence on Officers and Directors - The Company is substantially dependent
upon the experience and knowledge of its officers and directors. The loss to the
Company of such persons, particularly Mr. James Stein, could be detrimental to
the Company's development, especially since it may not have the funds to hire
management personnel with the requisite expertise.
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Managing a Growing and Changing Business - The Company continues to experience
changes in its operations resulting from expansion of its business and other
factors which has and may place demands on its administrative, operational and
financial resources. The Company's future performance will depend in part on its
ability to manage growth and to adapt its administrative, operational and
financial control systems to the needs of an expanding entity. The failure of
management to anticipate, respond to and manage changing business conditions
could have a material adverse effect on the Company's business and results of
operations.
Government Regulation and Legal Uncertainties - The Company is not currently
subject to direct regulation other than federal and state regulation applicable
to businesses generally. The Company may also be subject to uninsured claims by
consumers for actions of licensees or other claims incident to its business
operations.
Stock Trading Risks and Uncertainties - See Part II - Item 1 "Market Price of
and Dividends on the Registrant's Common Equity and Other Shareholder Matters.
Part II - Part F/S
INDEX TO FINANCIAL STATEMENTS
The following is an index of the consolidated financial statements that follow
immediately after this index to financial statements:
Page
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Independent Accountants' Report F-2
Consolidated Balance Sheets as of June 30, 1996 and 1995 F-3
Consolidated Statements of Operations for the years F-4
ended June 30, 1996 and 1995
Consolidated Statements of Stockholders' Equity for F-5
the years ended June 30, 1996 and 1995
Consolidated Statements of Cash Flows for the years F-6
ended June 30, 1996 and 1995
Notes to Consolidated Financial Statements F-7
Consolidated Balance Sheets as of March 31, 1997 and
June 30, 1996 (unaudited) F-15
Consolidated Statements of Operations for the nine
months ended March 31, 1997 and 1996 (unaudited) F-16
Consolidated Statements of Cash Flows for the nine
months ended March 31, 1997 and 1996 (unaudited) F-17
Notes to Interim Consolidated Financial Statements F-18
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VALUESTAR CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996 AND 1995
F-1
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To the Board of Directors
and Shareholders of
ValueStar Corporation
INDEPENDENT ACCOUNTANTS' REPORT
We have audited the accompanying consolidated balance sheets of ValueStar
Corporation as of June 30, 1996 and 1995, and the related consolidated
statements of operations, shareholders' equity and cash flows for the years then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
ValueStar Corporation as of June 30, 1996 and 1995, and the results of its
operations, shareholders' equity and cash flows for the years then ended in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has incurred losses from
operations, and has relied on the sale of its common stock, which raises
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 1. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
As more fully described in Note 9 to the financial statements, non-cash
compensation expense has been recorded to reflect the release of escrow shares
during the year ended June 30, 1995 and certain amounts previously deferred as
of June 30, 1995 and 1996, have been expensed in the respective years.
Accordingly, the 1995 and 1996 financial statements have been restated.
/s/ MOHLER, NIXON & WILLIAMS
MOHLER, NIXON & WILLIAMS
Accountancy Corporation
Campbell, California
August 23, 1996, except as to the
information in Note 9, for which
the date is October 9, 1997
F-2
<PAGE>
<TABLE>
VALUESTAR CORPORATION
Consolidated balance sheets as of June 30,
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 454,809 $ 12,977
Accounts receivable, net 93,020 27,154
Employee receivables 6,900 500
Inventories 15,330 9,469
Prepaid expenses and other 3,108 3,543
- ------------------------------------------------------------------------------------------------------------------------------------
Total current assets 573,167 53,643
Deferred costs 69,162 9,198
Property, equipment and intangible assets, net 46,347 12,274
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $ 688,676 $ 75,115
====================================================================================================================================
Liabilities and shareholders' equity
Notes payable to shareholders $ 23,600
Accounts payable $ 157,528 43,401
Other accrued expenses 87,219 53,844
Deferred revenue 50,739 14,980
- ------------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 295,486 135,825
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 295,486 135,825
- ------------------------------------------------------------------------------------------------------------------------------------
Common stock - par value $.00025;
20,000,000 shares authorized;
7,026,818 and 4,747,286 shares issued
and outstanding at June 30, 1996 and
1995, respectively 1,757 1,186
Paid in capital 2,735,105 1,509,076
Accumulated deficit (2,343,672) (1,570,972)
- ------------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity (deficit) 393,190 (60,710)
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity (deficit) $ 688,676 $ 75,115
====================================================================================================================================
<FN>
See independent accountants' report and accompanying
notes to consolidated financial statements.
</FN>
</TABLE>
F-3
<PAGE>
VALUESTAR CORPORATION
Consolidated statements of operations for the years ended June 30,
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
Net sales $ 410,269 $ 248,776
Cost of sales 240,713 93,593
- --------------------------------------------------------------------------------
Gross profit 169,556 155,183
Marketing and selling 602,585 171,288
General and administrative 330,421 196,763
Non-cash compensation expense related to
release of escrow shares -- 428,750
- --------------------------------------------------------------------------------
Total operating expenses 933,006 796,801
- --------------------------------------------------------------------------------
Loss from operations (763,450) (641,618)
Interest expense (4,099) (8,790)
Other expense (5,151) (611)
Other income 1,716
- --------------------------------------------------------------------------------
Net loss $ (772,700) $ (649,303)
================================================================================
Net loss per share $ (0.14) $ (0.16)
================================================================================
Weighted average number of shares 5,432,615 4,131,755
================================================================================
See independent accountants' report and accompanying
notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
VALUESTAR CORPORATION
Consolidated statements of shareholders' equity for the years ended June 30, 1996 and 1995
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Common stock
------------
Total
Par Paid in Accumulated shareholders'
Shares amount capital deficit equity (deficit)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
June 30, 1994 4,097,000 $ 1,024 $ 867,888 $ (921,669) $ (52,757)
Sale of stock at $0.20
per share 100,000 25 19,975 20,000
Sale of stock at $0.35
per share 357,143 89 124,911 125,000
Conversion of debt to
stock at $0.35 per share 193,143 48 67,552 67,600
Expense related to release of
escrow shares -- -- 428,750 428,750
Net loss (649,303) (649,303)
- ------------------------------------------------------------------------------------------------------------------------------------
June 30, 1995 4,747,286 1,186 1,509,076 (1,570,972) (60,710)
- ------------------------------------------------------------------------------------------------------------------------------------
Sale of stock at $0.35
per share 310,000 77 108,423 108,500
Sale of stock at $0.50
per share 1,100,000 275 549,725 550,000
Conversion of debt to
stock at $0.50 per share 136,200 34 68,066 68,100
Sale of 666,666 shares of stock at
$0.75 per share, plus 66,666 shares
issued for net offering costs 733,332 185 499,815 500,000
Net loss (772,700) (772,700)
- ------------------------------------------------------------------------------------------------------------------------------------
June 30, 1996 7,026,818 $ 1,757 $ 2,735,105 $(2,343,672) $ 393,190
====================================================================================================================================
<FN>
See independent accountants' report and accompanying
notes to consolidated financial statements.
</FN>
</TABLE>
F-5
<PAGE>
<TABLE>
VALUESTAR CORPORATION
Consolidated statements of cash flows for the years ended June 30,
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (772,700) $ (649,303)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 4,577 3,064
Increase (decrease) in bad debt allowance (207) 7,000
Non-cash expense related to release of
of escrow shares -- 428,750
Changes in assets and liabilities:
Accounts receivable (65,659) (15,247)
Employee receivable (6,400) 128
Inventories (5,861) (7,857)
Prepaid expenses and other 435 (1,171)
Deferred costs (59,964) (9,198)
Accounts payable 114,127 2,184
Other accrued expenses 33,375 32,623
Deferred revenue 35,759 (3,396)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used by operations (722,518) (212,423)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (38,650) (1,189)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (38,650) (1,189)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of capital stock 1,158,500 145,000
Proceeds from debt 68,100 106,500
Repayment of debt (23,600) (25,000)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,203,000 226,500
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 441,832 12,888
Cash and cash equivalents at beginning of year 12,977 89
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 454,809 $ 12,977
====================================================================================================================================
Supplemental cash flow information:
Debt converted to common stock $ 68,100 $ 67,600
Increase in common stock through recognition
of expense related to escrow shares -- $ 428,750
<FN>
See independent accountants' report and accompanying
notes to consolidated financial statements.
</FN>
</TABLE>
F-6
<PAGE>
VALUESTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996 and 1995
Note 1 - The Company and its significant accounting policies:
ValueStar Corporation (the Company) was incorporated in Colorado in
1987 and is the holding company for its wholly owned subsidiary, ValueStar,
Inc., which was incorporated in California in 1991. ValueStar, Inc. issues a
certification mark ("Consumer ValueStar") to those local service and
professional industries, primarily in the San Francisco Bay Area, that can
demonstrate a certain level of customer satisfaction, proper licensing and
adequate insurance. The Company also publishes a listing of service and
professional firms that are awarded the "Consumer ValueStar."
The Company utilizes the services of a third party to perform surveys
of customer satisfaction under a contract which expires December 31, 1998.
Principles of consolidation -
The consolidated financial statements include the accounts of ValueStar
Corporation and ValueStar, Inc. All significant intercompany transactions and
account balances have been eliminated in consolidation.
Cash equivalents -
The Company considers all highly liquid debt instruments purchased with
a maturity of three months or less to be cash equivalents. Cash and cash
equivalents consist of deposits in a single bank in excess of federally insured
limits.
Allowance for doubtful accounts -
The Company utilizes the reserve method of accounting for the
recognition of potentially uncollectible accounts receivable. The allowance for
doubtful accounts was $6,793 and $7,000 at June 30, 1996 and 1995, respectively.
Inventories -
Inventories, which consist of promotional materials for sale to
customers, are stated at the lower of cost or fair market value on a first-in,
first-out basis.
Property and equipment -
Property and equipment are stated at cost. Depreciation is computed on
the straight-line method based on the estimated useful life of five to seven
years of the respective assets.
Revenue and customer cost recognition -
Revenues:
The Company's revenues are primarily from research and rating fees paid
by new and renewal customers, license fees from qualified applicants and renewal
customers, and sales of marketing materials and related services. The Company,
from time to time, provides discounts, incentives and satisfaction guarantees to
first time applicants, and may extend payment terms on the license fee.
F-7
<PAGE>
Consumer ValueStar license fees and customer research and rating fees
are recognized when all related services are provided to the customer. The
Company provides a reserve for customer satisfaction guarantees. Sales of
marketing materials and other services are recognized as materials are delivered
or shipped or services are rendered.
Customer costs:
Effective July 1, 1994, with the adoption by the Company of Statement
of Position No. 93-7 (SOP 93-7), Reporting on Advertising Costs, certain
customer acquisition costs are deferred and amortized over a 12 month period.
These costs, which relate directly to targeted new licensee solicitations,
primarily include targeted direct-response advertising programs consisting of
telemarketing, printing and mailing costs. No indirect costs are included in
deferred customer acquisition costs. Costs incurred for other than specific
targeted customers, including general marketing, are expensed as incurred. The
total amount of advertising costs charged to expense was $203,195 and $101,861
in 1996 and 1995, respectively.
Deferred costs are periodically evaluated to determine if adjustments
for impairment are necessary.
Costs of the Company's consumer publication, the Consumer ValueStar
Report, are recognized upon publication.
Income taxes -
The provision for income taxes is based on income reported in the
consolidated financial statements. Deferred income taxes are provided for
temporary differences between the financial reporting and tax basis of the
Company's assets and liabilities.
Net loss per share -
Net loss per common share is based on the weighted average number of
shares outstanding during the year. Options to purchase stock are not included
in the calculation, as the affect would be anti-dilutive.
Risks and uncertainties -
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Continued operations -
The accompanying consolidated financial statements have been prepared
assuming the Company will continue operating as a going concern, which
contemplates the realization of assets and liquidation of liabilities in the
normal course of business. The Company has incurred operating losses in prior
fiscal years and losses are continuing. The Company's operations have been
funded for the most part from the sale of common stock.
The Company's ability to continue as a going concern is dependent upon
obtaining additional capital and ultimately achieving and maintaining profitable
operations. The Company is working aggressively to increase revenues through
expanding the number of new licensees, maintaining high rates of renewals and
selling additional services to its licensees, which it believes will ultimately
lead to profitable operations. The Company is also seeking additional debt or
equity capital from existing shareholders and others. However, the lack of
additional capital could force the Company to reduce the emphasis on new
licensee growth and curtail or scale back operations in more reliance on higher
profitable renewals. Such actions could have an adverse effect on the Company's
business. The
F-8
<PAGE>
accompanying consolidated financial statements do not include any adjustments
that might result from the outcome of these uncertainties.
Recent accounting pronouncements -
The Financial Accounting Standards Board has recently issued Statement
of Financial Accounting Standards ("SFAS") No. 121, Accounting for the
Impairment of Long-Lived Assets and SFAS No. 123, Accounting for Stock Based
Compensation. SFAS No. 121 requires that long-lived assets and certain
identifiable intangibles be reported at the lower of the carrying amount or
their estimated recoverable amount and the adoption of this statement by the
Company is not expected to have an impact on the financial statements. SFAS No.
123 encourages the accounting for stock-based employee compensation programs to
be reported within the financial statements on a fair value based method. If the
fair value based method is not adopted, then the statement requires pro-forma
disclosure of net income and earnings per share as if the fair value based
method had been adopted. The Company currently does not intend to adopt the fair
value accounting method prescribed by SFAS 123, and will be subject only to the
disclosure requirements prescribed by SFAS 123. However, the Company intends to
continue its analysis of SFAS 123 and may elect to adopt its provisions in the
future. Both statements are effective for fiscal years beginning after December
15, 1995.
Note 2 - Property, equipment and intangible assets:
1996 1995
------- -------
Computer equipment $29,072 $ 6,590
Office equipment 4,954 2,549
Furniture and fixtures 15,013 1,250
Leasehold improvements 446 446
Logo design 4,949 4,949
------- -------
54,434 15,784
Less accumulated depreciation
and amortization 8,087 3,510
------- -------
$46,347 $12,274
======= =======
Depreciation expense for 1996 and 1995 was approximately $4,600 and
$3,100, respectively.
F-9
<PAGE>
Note 3 - Deferred costs:
Deferred costs at June 30 consist of:
1996 1995
-------- --------
Telemarketing $ 69,277 $ 9,478
Direct mail 48,302 3,429
-------- --------
117,579 12,907
Less amortization for the year 48,417 3,709
-------- --------
$ 69,162 $ 9,198
======== ========
Costs are amortized over periods up to one year.
Note 4 - Shareholder debt:
During the years ended June 30, 1996 and 1995, the Company borrowed
$68,100 and $106,500, respectively, from various shareholders. Notes to these
shareholders are due on demand with interest at 12% per annum. Interest on these
notes amounted to $4,099 and $19,507 for 1996 and 1995, respectively. Notes in
the amount of $68,100 and $67,600 were exchanged for common stock as of June 30,
1996 and 1995, respectively, at an exchange rate of $0.50 and $0.35 per share,
respectively. Shareholder notes totaled $23,600 at June 30, 1995. No notes were
outstanding as of June 30, 1996.
Note 5 - Common stock and options:
Common stock -
The Company has one series of par value common stock authorized and
outstanding. The par value is $.00025 and 20,000,000 shares are authorized.
Under an escrow agreement dated June 27, 1992, resulting from the
acquisition of ValueStar, Inc. by the Company, the release of 1,225,000 shares
of common stock held by James Stein, an officer and director, was contingent on
attaining certain operating results. During the year ended June 30, 1995, the
Board of Directors determined that 200,000 shares could be released from escrow
and authorized the release of the remaining 1,025,000 shares held in escrow
subject to a new lock-up agreement and shareholder approval which was obtained
on July 20, 1995. Under the terms of the lock-up agreement, Mr. Stein may not
sell the released shares until the first to occur of (a) three years from the
release of the shares from escrow, or (b) when audited or unaudited financial
statements of the Company, prepared in accordance with generally accepted
accounting principles, demonstrate that the Company has realized net profits for
two consecutive fiscal quarters.
The Company recorded $428,750 in non-cash expense for the fiscal year
ended June 30, 1995 related to the release from escrow of the 1,225,000 common
shares.
During fiscal 1996, the Company completed stock offerings of 310,000
common shares at $0.35 per share, 1,100,000 common shares at $0.50 per share,
and 666,666 common shares at $0.75 per share plus 66,666 common shares issued
for net offering costs. A total of 136,200 common shares were issued in exchange
for shareholder notes of $68,100 (see Note 4).
Stock options -
F-10
<PAGE>
The 1992 Incentive Stock Option Plan (ISO Plan) expires in 2002 and
allows for the issuance of options to employees to purchase up to 250,000 shares
of common stock. The 1992 Non-Statutory Stock Option Plan (NSO Plan) also
expires in 2002 and allows the issuance of options to employees to purchase up
to 250,000 shares of common stock. The 1996 Stock Option Plan expires in 2006
and allows for the issuance of options to selected employees, directors and
consultants to purchase up to 400,000 shares of common stock. An option granted
under the 1996 Stock Option Plan may be an incentive stock option (ISO), which
may be granted only to employees, or a nonqualified stock option (NQO) as
determined by the Plan Committee.
The option price under each of the plans will not be less than the fair
market value at the date of grant as determined by the Board of Directors. In
the case of a significant shareholder, the option price of shares under the 1992
ISO Plan and the 1996 Stock Option Plan will not be less than 110% of the fair
market value of the share on the date of grant. Options are granted under the
plans for periods not to exceed ten years and become exercisable based on
vesting terms determined by the Board of Directors or Plan Committee at the date
of grant.
<TABLE>
Information with respect to stock option transactions for the years
ended June 30, 1996 and 1995 is as follows:
<CAPTION>
Number
Available of Options Price per
for Grant Outstanding Exercisable Share
--------- ----------- ----------- -----
<S> <C> <C> <C> <C>
1992 ISO Plan:
Balance June 30, 1994 250,000
Granted (200,000) 200,000 $ .40
-------- -------
Balance June 30, 1995 50,000 200,000
Granted (50,000) 50,000 .50
--------- --------
Balance June 30, 1996 - 250,000 230,000
========= ======= =======
1992 NSO Plan:
Balance June 30, 1994 250,000
Granted (200,000) 200,000 .40-.50
-------- -------
Balance June 30, 1995 50,000 200,000
Granted (50,000) 50,000 .50
--------- --------
Balance June 30, 1996 - 250,000 250,000
========= ======= =======
1996 Stock Option Plan:
January 19, 1996 (inception) 400,000
ISO's granted (170,000) 170,000 .50
NQO's granted (170,000) 170,000 .50
-------- -------
Balance June 30, 1996 60,000 340,000 178,833
========= ======= =======
</TABLE>
Options under all plans must be exercised within a five year period
from the date of grant. No shares were exercised under the plans as of June 30,
1996.
Note 6 - Income taxes:
F-11
<PAGE>
There was no provision for income taxes for the years ended June 30,
1996 and 1995.
Temporary differences and carryforwards which result in significant
deferred tax assets as of June 30, 1996 and 1995 approximated $700,000 and
$400,000, respectively.
Under Statement of Financial Accounting Standards No. 109, a valuation
allowance must be established for a deferred tax asset if a tax benefit may not
be realized from the asset. The Company has established a valuation allowance
for the full amount of its deferred tax assets as recognition of these assets is
uncertain due to the Company's recurring losses.
The Company has approximately $1,800,000 of federal net operating loss
carryforwards at June 30, 1996 available to offset future taxable income which
expire in the years 2006 through 2010. The Company has California net operating
loss carryforwards of approximately $900,000 at June 30, 1996 which expire in
the years 1997 through 2002. For federal and California tax purposes, the
Company's net operating loss carryforward may be subject to certain limitations
on annual utilization due to changes in ownership.
Note 7 - Commitments:
The Company entered into a facility lease agreement for a period of
three years which commenced on August 1, 1995 and requires monthly payments
through July 3, 1998 of approximately $1,800. Total rent expense was
approximately $22,500 in 1996 and $22,000 in 1995.
Note 8 - Subsequent event:
In July 1996, the Company opened a new sales territory encompassing
Sacramento and San Joaquin Counties in California.
Note 9 - Restatement of 1995 and 1996 Financial Statements:
The Company has restated its financial statements for the years ended June 30,
1996 and 1995 to reflect the following changes in accounting methods: expensing
certain costs associated with its rating and research fees that had previously
been deferred and amortized; expensing marketing and selling costs associated
with the printing and distribution of the Company's consumer publication that
had been previously deferred and amortized; and to recognize the fair value of
1,225,000 shares of common stock released from escrow as a non-cash charge to
income in the period in which the shares were released (see Note 5). The Company
believes the deferral changes better reflect the matching of costs with related
revenues. As a result of these changes deferred costs at June 30, 1995 were
reduced by $50,632 with a corresponding decrease on total assets and
stockholders' equity and deferred costs at June 30, 1996 were reduced by $64,004
with a corresponding decrease on total assets and stockholders' equity. The
impact of these accounting changes on the Company's financial results as
originally reported are as follows:
Fiscal 1996 Fiscal 1995
As Reported As Restated As Reported As Restated
Net loss $ (759,328) $ (772,700) $ (169,921) $ (649,303)
Net loss per share $ (0.14) $ (0.14) $ (0.04) $ (0.16)
F-12
<PAGE>
VALUESTAR CORPORATION
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
March 31, 1997
F-13
<PAGE>
VALUESTAR CORPORATION
Interim Consolidated Financial Statement Index
Consolidated Balance Sheets as of March 31, 1997 and
June 30, 1996 (Unaudited) F-15
Consolidated Statements of Operations for the nine months ended
March 31, 1997 and 1996 (Unaudited) F-16
Consolidated Statements of Cash Flows for the nine months ended
March 31, 1997 and 1996 (Unaudited) F-17
Notes to Interim Consolidated Financial Statements F-18
F-14
<PAGE>
<TABLE>
VALUESTAR CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<CAPTION>
March 31, June 30,
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 163,854 $ 454,809
Accounts receivable, net 203,994 93,020
Employee receivables 5,500 6,900
Inventories 39,037 15,330
Prepaid and other 6,132 3,108
----------- -----------
418,517 573,167
Deferred costs - net 82,943 69,162
Property equipment and intangibles-net 57,916 46,347
----------- -----------
$ 559,376 $ 688,676
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 416,639 $ 157,528
Accrued expenses 134,649 87,219
Deferred revenue 34,440 50,739
----------- -----------
585,728 295,486
Long-term notes 100,000 --
----------- -----------
Total liabilities 685,728 295,486
Stockholders' Equity
Preferred stock, $.00025 par value,
5,000,000 authorized; no shares issued
and outstanding
Common stock, $.00025 par value,
20,000,000 shares authorized,
8,072,913 and 7,026,818 shares issued and
outstanding respectively 2,018 1,757
Paid in capital 3,519,915 2,735,105
Common stock subscribed 40,000 --
Deficit (3,688,285) (2,343,672)
----------- -----------
Total Stockholders' Equity (126,352) 393,190
----------- -----------
$ 559,376 $ 688,676
=========== ===========
<FN>
See accompanying notes to interim consolidated financial statements.
</FN>
</TABLE>
F-15
<PAGE>
VALUESTAR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Nine months ended
March 31,
1997 1996
----------- -----------
Revenues $ 578,175 $ 252,501
Costs and expenses:
Cost of revenues 319,348 127,936
Sales costs 697,358 295,496
Marketing and promotion 546,375 103,680
General and administrative 354,707 209,326
----------- -----------
Total costs and expenses 1,917,788 736,438
----------- -----------
Loss from operations (1,339,613) (483,937)
Interest expense (5,000) (2,926)
Other income (expense) -- (3,387)
----------- -----------
Net loss $(1,344,613) $ (490,250)
=========== ===========
Net loss per share $ (0.19) $ (0.10)
=========== ===========
Weighted average number of shares 7,067,438 5,128,909
=========== ===========
See accompanying notes to interim consolidated financial statements.
F-16
<PAGE>
<TABLE>
VALUESTAR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
Nine months ended
March 31,
1997 1996
----------- -----------
<S> <C> <C>
Cash Flows from Operating Activities
Net income (loss) $(1,344,613) $ (490,250)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 6,496
1,787
Amortization of deferred costs 86,812
31,986
Common stock issued for services 2,175 --
Changes in assets and liabilities:
Accounts receivable (110,974) (75,270)
Employee receivable 1,400 --
Inventories (23,707) (2,199)
Prepaid expenses and other (3,024) (8,528)
Deferred costs (100,593) (67,492)
Accounts payable 259,111 12,596
Accrued expenses 79,826 3,823
Deferred revenue (16,299) 23,484
----------- -----------
Net Cash Flows Used by Operations (1,163,390) (570,063)
Cash Flows from Investing Activities
Capital expenditures (17,565) (23,772)
----------- -----------
Net Cash Used by Investing Activities (17,565) (23,772)
Cash Flows from Financing Activities
Sale of common stock 750,000 598,000
Common stock subscribed 40,000 --
Proceeds from debt 100,000 95,000
Debt repayment -- (20,000)
----------- -----------
Net Cash Provided by Financing Activities 890,000 673,000
----------- -----------
Increase (Decrease) in Cash and Cash Equivalents (290,955) 79,165
Cash and Cash Equivalents at Beginning of Period 454,809 12,977
----------- -----------
Cash and Cash Equivalents at End of Period $ 163,854 $ 92,142
=========== ===========
Supplemental Cash Flow Information:
Non-cash financing activities:
Debt converted to common stock $ -- $ 78,600
Accrued expenses exchanged for common stock 32,396 --
Value assigned to warrants issued with long-term debt 500 --
Cash paid for interest 5,000 2,926
<FN>
See accompanying notes to interim consolidated financial statements.
</FN>
</TABLE>
F-17
<PAGE>
VALUESTAR CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. OPERATIONS
ValueStar Corporation (the "Company"), through its wholly-owned subsidiary
ValueStar, Inc., issues a certification mark ("ValueStar(R) Certified") to those
local service and professional businesses, in the San Francisco Bay and
Sacramento, California areas, that rate high in customer satisfaction and
maintain proper licensing and insurance. The Company communicates information
about highly rated service and professional firms that have earned "ValueStar
Certified" through various media including its Internet site
(www.valuestar.com), a periodic publication (Consumer ValueStar Reports) and a
voice-text service (808-STAR).
The Company's revenues are primarily from research and rating fees paid by new
and renewal customers, license fees from qualified applicants and renewal
customers, and sales of information services products. The Company, from time to
time, provides discounts, incentives and satisfaction guarantees to first time
applicants, and may extend payment terms on the annual license fee. License fees
and related cost of sales consisting of customer research and rating fees are
recognized when all related services are provided to the customer. The Company
provides a reserve for customer satisfaction guarantees. Sales of information
services are recognized as materials are delivered or shipped or services are
rendered.
Costs incurred in printing and distributing the Company's consumer publication,
Consumer ValueStar Report, 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, 1996.
In the opinion of management, the interim financial statements reflect all
adjustments of a normal recurring nature necessary for a fair statement of the
results for interim periods. Operating results for the nine month periods are
not necessarily indicative of the results that may be expected for the year.
Certain reclassifications have been made in the prior year to conform to the
current period presentation.
3. INVENTORIES
Inventory is recorded at cost using the first-in first-out method of accounting.
Inventories consist of brochures and related materials for resale.
4. DEFERRED COSTS
Effective July 1, 1994, with the adoption by the Company of Statement of
Position No. 93-7 (SOP 93-7), Reporting on Advertising Costs, certain customer
acquisition costs are deferred and amortized over a twelve month period on a
straight-line method starting in the month incurred. These costs, which relate
directly to targeted new licensee solicitations, primarily include targeted
direct-response advertising programs consisting of telephone sales, printing and
mailing costs. No indirect costs are included in deferred customer acquisition
costs. Costs incurred for other than specific targeted customers, including
general marketing expenses, are expensed as incurred.
Effective January 1, 1997, the Company modified new licensee solicitation
primarily to telephone sales targeted directly and specifically to direct
revenue-generating responses. No change was made to the amortization period. Any
direct mail, advertising, costs associated with supporting telephone sales or
generating leads and other general marketing expenses, are expensed as incurred.
At March 31, 1997 net deferred telephone sales costs were $82,943 ($69,612 at
June 30, 1996).
F-18
<PAGE>
VALUESTAR CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. DEFERRED COSTS (Continued)
The net effect of capitalizing and amortizing deferred costs was a reduction in
costs and expenses of $13,781 and $35,506 for the nine months ended March 31,
1997 and 1996, respectively.
The Company estimates new licensees have an average life exceeding four years.
Deferred costs are periodically evaluated to determine if adjustments for
impairment are necessary.
5. LONG-TERM NOTES
The Company is obligated on two 12% notes in the amount of $50,000 each for an
aggregate of $100,000 one of which is payable to the spouse of a director. These
notes are due on September 30, 1998. The Company has granted each note holder a
warrant to purchase 5,000 common shares (an aggregate of 10,000 shares) at an
exercise price of $0.75 per share until September 30, 1998.
<TABLE>
6. STOCKHOLDERS' EQUITY
The following table summarizes equity transactions during the nine months ended
March 31, 1997:
<CAPTION>
Shares Dollars
---------- ----------
<S> <C> <C>
Balance July 1, 1996 7,026,818 $2,736,862
Sale of common stock for cash @ $.75 per share 1,000,000 750,000
Conversion of accrued expenses to stock @ $.75 per share 43,195 32,396
Value assigned to warrants issued with long-term debt -- 500
Common stock subscribed but unissued at March 31, 1997(1) -- 40,000
Issuance of stock to employees @ $.75 per share 2,900 2,175
---------- ----------
Balance March 31, 1997 8,072,913 $3,561,933
========== ==========
<FN>
(1) On April 7, the Company issued 53,333 common shares to a director
at $.75 per share for the subscription for which cash was received
prior to March 31, 1997.
</FN>
</TABLE>
At March 31, 1997 the Company had options outstanding pursuant to its 1992 ISO
Plan covering 250,000 common shares with exercise prices of $0.40 to $0.50 per
share expiring in 2000 and 2001. The Company also had options outstanding
pursuant to its 1992 NSO Plan covering 250,000 common shares with exercise
prices of $0.40 to $0.50 per share expiring between 1999 and 2001. The Company
has options outstanding pursuant to its 1996 Stock Option Plan, as amended and
restated, covering 255,000 common shares with an exercise price of $0.50 per
share expiring in 2001 and 2002 and options outstanding pursuant to its 1997
Stock Option Plan covering 52,000 common shares with an exercise price of $0.75
per share expiring in 2002.
On March 14, 1997 the Company adopted the 1997 Employee Stock Compensation Plan
providing for the issuance of up to 4,000 common shares to non-executive
employees. At March 31, 1997 an aggregate of 2,900 common shares had been
granted pursuant to this plan.
The Company's President and CEO has entered into a Lockup Agreement dated July
20, 1995 with respect to 1,025,000 common shares providing for no sale of the
shares until the earliest of (a) July 20, 1998 (b) or upon the achievement and
certification by a resolution of the Board of Directors that the Company has
been profitable, in accordance with generally accepted accounting principles,
for two consecutive fiscal quarters.
F-19
<PAGE>
VALUESTAR CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. INCOME TAXES
At March 31, 1997 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 $1,800,000
which expire through 2002 of which certain amounts are subject to limitations
under the Internal Revenue Code, as amended.
8. NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has recently issued Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets" and SFAS No. 123, "Accounting for Stock Based
Compensation." SFAS No. 121 requires that long-lived assets and certain
identifiable intangibles be reported at the lower of the carrying amount or
their estimated recoverable amount. The adoption of this statement in the first
quarter of fiscal 1997 by the Company did not have an impact on the financial
statements.
SFAS No. 123 encourages the accounting for stock-based employee compensation
programs to be reported within the financial statements on a fair value based
method. If the fair value based method is not adopted, then the statement
requires pro-forma disclosure of net income and earnings per share as if the
fair value based method had been adopted. While the Company is evaluating the
impact of the pronouncement, it expects to continue to account for stock options
utilizing the "intrinsic value based method" as is allowed by the statement and
therefore does not expect SFAS No. 123 to have a material impact on its
financial position, results of operations and cash flows.
9. SUBSEQUENT EVENTS
On April 16, 1997 the Company's shareholders approved the 1996 Stock Option
Plan, as amended and restated to provide for options on up to 300,000 common
shares, and a new 1997 Stock Option Plan providing for options on up to 200,000
common shares. The shareholders also authorized an amendment to the Company's
articles of incorporation to authorize a maximum of 5,000,000 shares of
undesignated preferred stock, par value $.00025 per share.
On April 30, 1997 in connection with consulting services the Company issued
Stock Purchase Warrants exercisable into an aggregate of 150,000 shares of
common stock at $0.75 per share until April 30, 2002.
10. RESTATEMENT OF INTERIM FINANCIAL STATEMENTS
Certain amounts previously capitalized as deferred costs (see Note 4) have been
adjusted in each interim period. At March 31, 1997 deferred costs were reduced
by $166,533 with a corresponding decrease on total assets and stockholders'
equity. As a result of this adjustment, the net loss for the nine months ended
March 31, 1997 and 1996 was increased by $102,529 ($0.01 per share) and $43,586
($0.01 per share), respectively. These changes are consistent with restatements
of results for the fiscal years ended June 30, 1996 and 1995.
F-20
<PAGE>
Part III
Item 1. Index to Exhibits
2. Charter and Bylaws
2.1 Articles of Incorporation of the Carson Capital Corporation
(Colorado) as filed on January 28, 1987
2.1.1 Amendment to Articles of Incorporation as filed on September 21,
1992
2.1.2 Amendment to Articles of Incorporation as filed on April 24, 1997
2.2 Bylaws of the Company
3. Instruments Defining the Rights of Security Holders
3.1 Form of Certificate evidencing Common Stock of the Company
3.2 Lockup Agreement between the Company and James Stein dated July 20,
1995
3.3 Form of 12% Promissory Note with Non-Detachable Stock Purchase
Warrant Due September 30, 1998 (aggregate of $100,000 principal and
10,000 Warrants exercisable at $0.75 per share)
3.4 Form of Stock Purchase Warrant dated April 30, 1997 granted to five
persons exercisable into an aggregate of 150,000 common shares at
$0.75 per share until April 30, 2002 (Individual warrants differ as
to holder and number of shares)
3.5 Form of Stock Purchase Warrant dated June 30, 1997 granted to three
investors exercisable into an aggregate of 200,000 common shares at
$1.25 per share until June 30, 2002.
5. Voting Trust Agreement
None
6. Material Contracts
6.1 Research and Rating Agreement between the Public Research Institute
of San Francisco State University and ValueStar, Inc. effective
April 30, 1997
6.2 1992 Incentive Stock Option Plan, As Amended
6.2.1 Standard form of Incentive Stock Option Plan Agreement
6.3 1992 Non-Statutory Stock Option Plan, As Amended
6.3.1 Standard form of Non-Statutory Stock Option Plan Agreement
6.4 Employment Agreement between the Company and James Stein dated June
27, 1992
6.4.1 Employment Agreement between ValueStar, Inc. and James Stein dated
May 1, 1992
6.5 Employment Agreement between ValueStar, Inc. and Benjamin A.
Pittman dated January 29, 1996
6.6 Property Lease Agreement between Ballena Isle Marina and ValueStar,
Inc. dated July 14, 1995
6.7 1996 Stock Option Plan, as amended and restated
6.7.1 Standard form of 1996 Stock Plan Agreement
29
<PAGE>
6.8 1997 Stock Option Plan
6.8.1 Standard form of 1997 Stock Plan Agreement
6.9 1997 Employee Stock Compensation Plan
7. Material Foreign Patents
None
16.1 Letter on Change in Accountant
27.1* Financial Data Schedules
The exhibits listed above (other than that designated by * which are filed
herewith) were filed as exhibits with the same number with the Company's initial
Form 10-SB filed on May 29, 1997 or Form 10-SB/A, Amendment No. 1 filed on
August 18, 1997 or Form 10-SB/A, Amendment No. 2 filed on September 18, 1997.
Item 2. Description of Exhibits
The documents required to be filed and as listed on the immediately preceding
Index to Exhibits follow immediately after the signatures below.
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant caused this registration statement amendment to be signed on its
behalf by the undersigned, thereunto duly authorized.
VALUESTAR CORPORATION
By: /s/ JAMES STEIN
James Stein, President and Chief
Executive Officer
Date: October 15, 1997
30
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Statements for 9 months ended March 31, 1997 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 12-MOS
<FISCAL-YEAR-END> JUN-30-1997 JUN-30-1996
<PERIOD-START> JUL-01-1996 JUL-01-1995
<PERIOD-END> MAR-31-1997 JUN-30-1996
<CASH> 163,854 454,809
<SECURITIES> 0 0
<RECEIVABLES> 218,866 106,713
<ALLOWANCES> 9,372 6,793
<INVENTORY> 39,037 15,330
<CURRENT-ASSETS> 418,517 573,167
<PP&E> 63,831 54,434
<DEPRECIATION> 5,915 8,087
<TOTAL-ASSETS> 559,376 688,676
<CURRENT-LIABILITIES> 585,728 295,486
<BONDS> 100,000 0
0 0
0 0
<COMMON> 2,018 1,757
<OTHER-SE> 3,519,915 2,735,105
<TOTAL-LIABILITY-AND-EQUITY> 559,376 688,676
<SALES> 0 0
<TOTAL-REVENUES> 578,175 410,269
<CGS> 0 0
<TOTAL-COSTS> 319,348 240,173
<OTHER-EXPENSES> 1,598,440 938,157
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 5,000 4,099
<INCOME-PRETAX> 1,344,613 772,700
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 1,344,613 772,700
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,344,613 772,700
<EPS-PRIMARY> (0.19) (0.14)
<EPS-DILUTED> (0.19) (0.14)
</TABLE>
