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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-SB/A
Amendment No. 1
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 7389 84-1202005
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(State or other jurisdiction of (Standard (I.R.S. Employer
incorporation or organization) Industrial Code) Identification No.)
1120A Ballena Blvd., Alameda, California, 94501
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number (510) 814-7070
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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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The Company hereby amends the following items of its Form 10-SB filed May 29,
1997 through this Amendment No. 1.
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.
Part I
Item 1. Description of Business.
Business Development
ValueStar Corporation ("Issuer" or "Company") was incorporated in the State of
Colorado on January 28, 1987 as Carson Capital Corporation and on September 21,
1992 its name was changed to ValueStar Corporation. The Company was inactive
until entering into an Agreement and Plan of Reorganization dated June 27, 1992
with ValueStar, Inc., a California corporation and its sole shareholder James
Stein (currently President, Chief Executive Officer and a Director) whereby
ValueStar, Inc. became a wholly-owned subsidiary of the Company. Prior to the
acquisition the Company had 10,000,000 common shares, par value $.00001, issued
and outstanding. In connection with the acquisition 9,350,000 outstanding common
shares were canceled, and 1,225,000 common shares were issued to James Stein for
100% of the outstanding shares of ValueStar, Inc. and an additional 187,500
common shares were issued to James Stein for cash with the $75,000 proceeds used
to retire a loan obligation of ValueStar, Inc. which had financed initial
development operations. In connection with the acquisition, in July 1992 the
Company completed a private placement of 437,500 units (one common share and a
one year warrant exercisable at $0.40 per share) at $0.40 per unit for gross
proceeds of $175,000 resulting in 2,500,000 common shares being issued and
outstanding upon completion of the acquisition and the private financing. The
acquisition was accounted for as a recapitalization of ValueStar, Inc. with
ValueStar, Inc. as the acquirer of ValueStar Corporation in a reverse
acquisition. On September 21, 1992 the total authorized shares was reduced from
500,000,000 common shares to 20,000,000 common shares with a par value of
$.00025 per share.
The Company's operations are conducted through its wholly-owned subsidiary
ValueStar, Inc. which was incorporated on September 5, 1991. Initial business
organization and development activities commenced September 22, 1990 and until
September 5, 1991 the business was operated as a sole proprietorship by James
Stein.
The Company's operations have been funded primarily through private placements
of common stock and exercise of warrants. At July 31, 1997 the Company had a
total of 8,326,246 common shares issued and outstanding. On April 16, 1997 the
Company's shareholders approved the amendment of the Company's articles of
incorporation to authorize the issuance of a maximum of 5,000,000 shares of
preferred stock, $.00025 par value per share. No preferred shares are
outstanding.
Business of Issuer
Overview
The Company through its wholly-owned subsidiary, ValueStar, Inc., is a provider
of service and professional business rating information. The rating information
is available free to consumers to assist them in selecting from only the highest
ranked service providers in a local area (including auto, home, health, personal
and professional providers of
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services). The Company's activities commenced in the greater San Francisco,
California area (Bay area) in 1992 and in July 1996 were expanded to include the
greater Sacramento, California area.
The Company through ValueStar, Inc. licenses the use of its certification
trademark, "ValueStar(R) Certified" to qualifying businesses which through
independent research are rated high in customer satisfaction. The Company
employs The Public Research Institute (PRI), an auxiliary unit of San Fancisco
State University to conduct independent customer satisfaction research or audit
independent research conducted by other outside firms on service and
professional businesses. The Company pays for such independent research through
arrangements providing for a combination of per unit research and hourly
charges. The Company entered into a three year contract with PRI effective
January 1, 1997 related to the provision of these services.
The Company derives its revenue from rating and research fees paid by both
passing and non-passing certification applicants, by initial and renewal
licensing fees paid by passing applicants and through the sale of affiliated
information materials such as brochures and additional services including
expanded Internet listings, voice-text (automated telephone listing information)
services and fees for premium listings in Company publications.
The Company engages in licensee (customer) support activities to create and
enhance consumer and business awareness of the meaning and significance of the
ValueStar Certified certification mark and the value of the Company's rating
process. These activities include public relations efforts, direct advertising
and periodic distribution to households and businesses of the Company's Consumer
ValueStar Report, a free publication explaining the concept of ValueStar
Certified, listing qualifying businesses in a given market area and providing
general consumer information. Comparable information is also available on the
Internet at the Company's site at WWW.VALUESTAR.COM and through the Company's
computerized voice-text program. Consumers are exposed to the certification mark
through the advertising and promotional efforts of licensees who use the
certification mark in brochures, advertisements, commercials, direct selling
situations and promotions to distinguish themselves as being rated high in
customer satisfaction. Since the certification mark is displayed in media,
consumers use the certification information at no charge.
The Company believes its rating information is a valuable tool allowing
consumers to conveniently select from only those companies ranked high in
customer satisfaction.
History of Operations
During late 1990 and 1991, James Stein, President and CEO of the Company,
developed the basic operating concept of ValueStar Certified. In March 1991, Mr.
Stein engaged San Francisco State University (SFSU) to conduct a consumer
feasibility study to determine the potential influence of ValueStar Certified on
consumers and a service business feasibility study to determine the potential
market for ValueStar Certified among providers of consumer services (service
providers) in the Bay area. In October 1991 base-line consumer satisfaction and
additional consumer feasibility research was completed by The Institute of
Social Research at California State - Stanislaus (ISR). This research provided
an average or benchmark customer satisfaction rating for individual service and
professional industries targeted by the Company.
Based on the information from those studies and research and using Mr. Stein's
prior experience in the Yellow Page publishing industry, during late 1991 the
Company developed initial marketing and support materials. The Company also
began a relationship with an auxiliary unit of SFSU, The Public Research
Institute (PRI). PRI is operated by faculty of SFSU and employs students to
conduct research and surveys primarily for governmental organizations. The
Company engaged PRI to perform or supervise surveys of each ValueStar business
applicant's former customers to provide a confidential, unbiased and scientific
survey of customer satisfaction. Although PRI commenced providing individual
business surveys in early 1992, the relationship was formalized into a written
contract in October 1992, with the latest renewal contract effective April 30,
1997.
The Company commenced business rating and licensing activities and public
relations activities to develop consumer and business awareness of the ValueStar
Certified program in the Bay area in early 1992. Management believes that one of
the most critical factors relating to long-term success of the business are
renewal rates of licensees. During the last three fiscal years ending June 30,
1996 more than 75% of licensed businesses have renewed their licenses each year
which management believes indicates strong business acceptance of the ValueStar
Certified program.
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In mid-1994 the Company added the Consumer ValueStar Report publication, a
directory of qualified and licensed businesses and consumer information, to the
program. This publication is distributed to consumers and businesses. For
consumers it is designed as an easy reference list of businesses rated high in
customer satisfaction, a quality "yellow pages" listing. For ValueStar
licensees, the distribution of the publication is targeted to provide important
and credible exposure to prospective customers. For the Company, management
believes the publication enhances the business offering to prospective
applicants and provides a periodic deadline to encourage businesses to apply for
rating by a specific date. The January 1997 semi-annual edition was distributed
to 260,000 homes and businesses in the San Francisco Bay and Sacramento areas.
On January 1, 1996 the Company launched its Internet strategy with its own World
Wide Web site WWW.VALUESTAR.COM. The site contains information on the ValueStar
Certified program and a listing of ValueStar Certified licensees. The Company
added a computerized voice-text service in August 1996 allowing consumers to
connect directly to licensees. Consumers can access free lists of qualifying
service businesses through the Consumer ValueStar Report publication, by
accessing WWW.VALUESTAR.COM, or by simply calling 808-STAR for a voice-text
recording of businesses. Information about qualifying businesses and the
ValueStar Certified program is available through licensee promotions including
yellow page listings, newspaper and radio advertisements, brochures, fliers and
other media.
In July 1996, the Company expanded its services beyond the San Francisco Bay
area to include the greater Sacramento, California area.
Industry Background
The Company's concept of a local standardized rating of service and professional
firms by their own customers was developed on the premise that consumers are
inundated with claims from businesses and have become increasingly skeptical.
For businesses the Company believes it is increasingly difficult and costly for
them to differentiate on quality or customer satisfaction due to the
proliferation of claims, competition and increasing consumer skepticism.
ValueStar believes consumers want to know which businesses are better than
others. ValueStar believes this desire and need for unbiased information has
been a factor in the growth of Consumer Reports magazine (product evaluations
and ratings), J.D. Powers (customer satisfaction ratings on vehicles and
computers) and consumer and market research companies.
ValueStar Certified is part of the certification mark industry which includes
trade association and various accrediting marks. Examples of such marks include
the Good Housekeeping Seal, AAA Approved Auto Repair and various lodging and
restaurant industry ratings and marks. Since ValueStar Certified provides a
resource for consumers to contact to obtain a particular category of business it
shares aspects of referral services and agencies such as 1-800 Dentists, medical
and contractor referrals. And since ValueStar publishes and distributes a
periodic listing of businesses rated high in customer satisfaction it also
shares industry characteristics of service guide publishers and the yellow pages
industry. And finally ValueStar maintains an Internet site of qualifying service
businesses and consumer information sharing aspects of the growing Internet
yellow pages, directories, and city guide information services.
The Company believes the factors affecting the selection of a local service are
different than those involving a widely available product. Typically, compared
to a product purchase, a consumer has more company choices from which to
discern, the quality level of services is less consistent, it is more difficult
to experience or compare a service prior to purchase, services cannot be
returned and therefore the entire decision process is riskier and more
frustrating for consumers. ValueStar Certified is designed to respond to these
factors by providing businesses and consumers with important customer
satisfaction information delivered in various media through a recognizable and
easy-to-use certification mark.
ValueStar and the Internet
The Internet is a rapidly growing global web of computer networks permitting
users to communicate throughout the world. The Internet provides organizations
and individuals with new means to conduct business. Commercial uses of the
Internet include business-to-business and business-to-consumer transactions,
product marketing, advertising, entertainment, electronic publishing, electronic
services and customer support. While industry estimates of the number of
Internet users varies widely, a survey conducted by CommerceNet-Nielsen Media
Research in December 1996 and January 1997 indicates that 50.6 million persons
in the U.S. and Canada use the Internet more than doubling from 1995.
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The Company believes the Internet environment is an excellent medium for
delivery of ValueStar Certified rating information. The Company also believes
that "pocketbook" or financial related referential information is a rapidly
growing use of the Internet and is sought after by Internet users. The Company's
listings of quality businesses and consumer information is available to Internet
users free allowing them to reduce the risk and guesswork associated with
selecting local service or professional businesses.
Many Internet content providers rely on an advertising model like broadcast
television or are seeking a formula to charge consumers for use like cable
television. To date, the Company does not believe either model has had broad
based financial success. While providing ValueStar content on the Internet is a
valuable component of the Company's strategy to reach consumers and support its
licensees, the Company is not dependent on the Internet for its basic revenue.
ValueStar offers businesses the opportunity to expand their listings and link
their sites with ValueStar. Further ValueStar's strategy is to create alliances
to link its proprietary information content to other Internet yellow page, city
guides and similar services.
Description of ValueStar Certified Services
All service businesses and professionals located in the territory served by the
Company and for which the Company has established an average or benchmark rating
may apply to be licensed. These include more than 100 industry categories within
five broad groups: Automobile Services (examples including auto body shops, auto
repair, and towing firms), Health and Well Being Services (examples including
ambulance services, physicians and dentists and health clubs), Home Services and
Repairs (examples including alarm companies, carpet cleaners, movers, locksmiths
and roofers), Personal Services (examples including beauty salons, day care
centers and travel agents) and Professional Services (examples including
accountants, attorneys, employment services, insurance and real estate brokers).
The Company's marketing and sales activities in the Bay and Sacramento areas
focus on a targeted group of service and professional businesses numbering
approximately 70,000 representing the Company's estimate of the high priority
accounts among the approximately 175,000 service and professional businesses in
the area (as computed by the Company from information provided by American
Business Information).
Once a prospective licensee agrees to be rated and pays an initial research fee
approximating $470 (subject to promotional discounts, currently up to $400), the
research and rating process begins. ValueStar conducts a complaint bureau status
check, license verification and insurance verification. A rating is performed or
audited by PRI (The Public Research Institute, an auxiliary unit of San
Francisco State University). To pass the rating, an applicant must exceed the
higher of the benchmark score developed by the Company's base-line research for
a particular industry or the minimum standard set by ValueStar.
All applicant companies receive a Research and Rating Report providing specific
results of the customer survey and how the business rates in customer
satisfaction compared to the average rating in their industry. For an additional
fee of $375 and up, some applicants submit additional questions to be included
at the time the customer satisfaction rating is conducted.
Successful applicants may license the use of the ValueStar Certified mark
(according to agreed-upon guidelines specified by the terms of the license
agreement) in their advertising, collateral and sales materials, stationery,
signage, announcements, bid forms, etc. A licensee also receives a ValueStar
plaque, program manual and labels for their doors and letterhead. Licensees are
also listed in the Company's semi-annual Consumer ValueStar Report publication
and on the Company's Internet site.
Most licensees purchase copies of a Certified Profile Brochure (customized by
ValueStar for each licensee) which explains to their potential customers how
their business qualified for ValueStar Certified. A Company representative
provides a personal orientation to a business owner and employees informing them
of the significance of earning the certification trademark and educating them on
how to use the achievement in promotional programs and customer encounters. The
Company supports licensees in their efforts to use ValueStar Certified to bring
in more customers, convert shoppers to buyers, reduce pricing pressure on
services, improve customer loyalty, increase customer referral rates, speed up
the selling cycle, improve employee morale, enhance marketing and advertising
promotions and improve business reputation.
Each year the Company solicits renewals from licensees. Each year renewal
accounts must pass the audit portion of the rating process and every second year
they must pass the entire research and rating process.
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Since the mark is displayed in media and actively used and promoted by licensees
and since the Consumer ValueStar Report is distributed free, consumers have free
access to and use of the certification information. In a study conducted by PRI
in 1993 and updated through 1996, PRI stated that 2 of 3 customers who knew a
business had earned ValueStar Certified were influenced by this factor in
selecting the business. Prior research by ISR (The Institute of Social Research
at California State - Stanislaus) in 1991 indicated that 70% of consumers would
pay 10% or more for services from companies that could indicate they earned
ValueStar Certified. Business acceptance of ValueStar Certified is supported by
the more than 75% renewal rate (inception in 1992 through March 1997) of
businesses earning ValueStar Certified.
At March 31, 1997, the Company had 648 active licensees.
Sales, Marketing and Customer Support Strategies
The Company's objective is to enhance the market position for its program and
grow the ValueStar Certified mark into a widely recognized and valued symbol of
customer satisfaction in the areas its serves. Increasing consumer awareness of
ValueStar Certified and thereby the selection and use of licensees by consumers
is an important element of the Company's strategy.
The Company's sales and marketing activities are designed to increase new
licensee penetration while maintaining high renewal rates and high ancillary
product and service sales. Accordingly, staffing, territories, training and
compensation plans are structured to provide continuity of sales person contact
with each licensee. The Company also provides ongoing training emphasizing both
new business and renewal development, supports lead generation and provides
sales personnel with computerized sales support and data base systems.
The Company uses direct mail, advertising, telephone sales, videotapes and other
materials designed for businesses and emphasizing the benefits of becoming a
ValueStar licensee. Effective January 1, 1997 substantially all new
solicitations and rating sales were consolidated in a telephone sales
department. Licensing, renewals and ancillary sales are made by field consultant
personnel.
At March 31, 1997 the Company had 17 marketing, sales and customer support
persons.
The Company has modified its licensing and rating fees from time to time. The
Company from time to time provides discounts, incentives and satisfaction
guarantees to first time applicants and also from time to time extends payment
terms on the annual license fees. The licensing fee for businesses scales upward
with business size and for multiple location businesses. The Company estimates
that each new licensee provides average annual revenue of approximately $1,500
annually from all sources.
The Company believes its renewal rates (averaging over 75% during the last three
fiscal years) indicate licensees' satisfaction with the program. These renewals
provide the Company a continuing source of revenues from renewal fees and sales
of ancillary products and services. Management believes the prospect of
recurring revenues justify the use of new applicant discounts and incentives to
expand the base of new business licensees. Management also believes an expanding
licensee base pressures other providers of services to apply for the rating to
meet the competition.
The Company's public relations and customer support activities are primarily
designed to increase awareness of ValueStar Certified among consumers to benefit
licensees. In August 1996 the Company entered into a one year agreement with
KPIX television in San Francisco to syndicate a consumer directed news segment
under the ValueStar Certified banner three times each week. The Company employs
public relations, cooperative arrangements and paid advertising to increase
awareness to consumers. The Consumer ValueStar Report publication and Internet
and computerized voice-text programs are important elements of the Company's
customer support activities.
The Company's longer term objective is to expand ValueStar Certified to
additional metropolitan areas in North America through direct expansion and
overseas through expansion or licensing. The Company has no current plans,
proposals, arrangements or understandings regarding any business or product
acquisitions.
Competition
Although the Company is not aware of a directly competitive mark or service
targeted for a broad range of service industries, the Company competes for the
limited budgets for spending on advertising and promotions among service
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and professional businesses. Competition therefore includes Yellow Page
publishers, newspapers and periodicals, radio and television stations and other
forms of advertising. Other competitors include referral agencies or telephone
services, complaint agencies, service guide publishers, industry specific
certification marks and others. The competition for service business advertising
and promotional funds is intense. There are a large number of competing firms
and a wide variety of product offerings. Most of these firms are substantially
larger and have greater financial resources than the Company.
The Company believes that it provides value to licensees allowing them to
distinguish themselves from their competitors. The Company also believes that
ValueStar Certified provides consumers a convenient and easy-to-use method of
selecting service businesses.
Although the Company believes it is establishing a market awareness and presence
in the San Francisco Bay area, barriers to entry by new competitors are not
significant and any such new competitors, in addition to the direct effects of
competition, may cause marketplace confusion making sales efforts more difficult
and may result in pricing pressure. There can be no assurance that the Company
will be able to continue to compete against existing or new competitors.
Trademarks, Service Marks and Other Proprietary Rights
The Company owns a federally registered certification mark on ValueStar(R) and
the ValueStar Certified symbol. The Company considers the mark and symbol to be
material to the business of the Company. The Company vigorously seeks to protect
and intends to defend its mark against infringement and other unauthorized use.
The Company is unaware of any significant infringement or other unauthorized use
of its mark since inception. There can be no assurance the Company can protect
its mark and symbol. The loss or infringement of ValueStar mark and symbol could
have a material adverse effect on the business and operations of the Company.
The Company copyrights its materials and publications and seeks to maintain
certain aspects of its business operations as trade secrets. The Company has
developed consumer and business databases and software and systems that are
proprietary to the Company.
Government Regulation and Legal Issues
The Company is not currently subject to direct regulation other than federal and
state regulation applicable to businesses generally.
The Company's operations require that its certification mark only be used by
qualifying companies and that its use be discontinued if a business ceases to be
a licensee. The Company intends to vigorously defend its contract rights
including taking legal action as required. However when and as the Company
expands to new areas and the certification becomes more recognized and valuable
it will be increasingly difficult to police unauthorized use of its
certification mark or confusing marks.
Although the Company is not a direct referral service, it may be subject to
claims by consumers for the actions of licensees. Although the Company does not
believe such a claim would have merit, the costs of defense could be
substantial. The Company does not currently carry specific insurance against
such claims and there is no assurance that the Company's general liability
coverage would cover such claims. To date the Company has not been subject to
any material claims by customers of licensees.
Employees
As of March 31, 1997, the Company employed 21 full-time persons. Two are in
senior management, 17 in marketing, sales and customer support, one in rating
and auditing, and one in accounting and administration. The Company employs
part-time personnel from time to time and uses outside contractors for various
marketing and rating services. None of the Company's employees is represented by
a collective bargaining arrangement and the Company has experienced no work
stoppages. The Company considers its relations with employees to be favorable.
The Company's future success will depend in large measure upon the continued
contributions of its President and CEO, James Stein and the Company's ability to
attract and retain quality sales personnel. The Company experiences competition
for qualified telemarketing and sales personnel who are in demand by many
competitors, many with more resources than the Company. The loss of the services
of Mr. Stein could have a material adverse effect on the Company's business. The
Company has a $500,000 "key man" insurance policy on Mr. Stein.
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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. Accordingly, certain direct customer rating costs
incurred for the rating are deferred to coincide with second year renewals with
60% expensed in the month incurred and the balance of 40% amortized at the
twelve month license renewal. Such percentages reflect the Company's renewal
experience and are subject to modification in the future based on experience.
Costs incurred in printing and distributing the Company's Consumer ValueStar
Report publication published in January and July are capitalized and amortized
over six months, the life of the publication and the period during which it is
distributed to consumers.. Related revenues are deferred and amortized over six
months. As a result of the current publication schedule, generally there are no
deferred publication costs at each fiscal year end of June 30.
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
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 $116,310 and $79,092 for the nine months ended March 31,
1997 and 1996, respectively and $73,336 and $59,830 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.
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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 $3,521,752. 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 customer
support 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 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
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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 $450,000compared
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. Certain
direct customer rating costs are deferred with 60% expensed in the month
incurred and the balance of 40% amortized at the twelve month license renewal.
At March 31, 1997, $114,447 was deferred to be applied in future periods not
exceeding twelve months. Cost of revenues represented 45% of sales in fiscal
1996, an increase from the 34% 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 47% of revenues compared to
39% for the comparable prior period. The increase results from early year price
increases for third party rating. 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 and Marketing Expenses and Customer Support Expenses. Marketing and
selling costs in fiscal 1996 aggregated $643,334 compared to $130,539 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 customer
support 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 $20,000 in fiscal 1995 to $129,000 in
fiscal 1996 from increased quantities and broader distribution. Other customer
support 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 customer support expenses as a separate
category due to the increased level of expenditures and a significant paid media
effort targeted at consumers to increase awareness of ValueStar's program for
the benefit of licensees. Selling and marketing expenses 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.
Customer support expenses consist of costs associated with supporting licensees
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 licensees. Customer support expenses
for the nine months ended March 31, 1997 were $494,289 or 85% of revenues
compared to $89,827 for the nine months ended March 31, 1996, an increase of
$404,462. 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
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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 supporting
licensees. 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 supporting
licensee awareness through voice-text and Internet listings compared to $5,000
in 1996.
Sales and marketing expenses and customer support 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 customer
support 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 $759,328 in fiscal 1996 compared to a loss of $598,671
in fiscal 1995 which included a $428,750 non-cash expense related to the release
of escrow shares. The net loss for the nine months ended March 31, 1997 was
$1,242,084 compared to $446,664 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 was net accounts receivable of $93,020 representing
approximately 62 days of revenues and an annual turnover ratio based on total
revenues of approximately 5.8 which management believes reasonable based on the
nature of the Company's business. 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.
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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.
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.
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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 $750,078 for the fiscal year ended June 30, 1996
and $1,237,084 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.
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.
Item 7. Certain Relationships and Related Transactions.
Since the Company became active upon entering into the Agreement and Plan of
Reorganization dated June 27, 1992 with ValueStar, Inc., there have been no
reportable transactions or series of transactions involving more than $60,000
between the Company and any current executive officer, director, promoter, 5%
beneficial owner of the Company's Common Shares or any member of the immediate
family of any of the foregoing in which one or more of the foregoing individuals
or entities has a material interest, except as follows.
In connection with the acquisition of ValueStar, Inc. 9,350,000 outstanding
common shares of the Company were canceled by then controlling shareholders
leaving 650,000 common shares issued and outstanding. A total of 1,225,000
common shares were issued to James Stein for 100% of the outstanding shares of
ValueStar, Inc. and an additional 187,500 common shares were issued to James
Stein for cash with the $75,000 proceeds used to retire a loan obligation of
ValueStar, Inc., such loan being repaid to Mr. Stein's mother-in-law.
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The 1,225,000 shares issued to Mr. Stein were made subject to the terms of an
Share Escrow Agreement dated June 27, 1992 providing earnout provisions based on
formulas of future gross revenues and pretax profits or otherwise released by
affirmative action of a majority of disinterested shareholders. On July 20, 1995
in compliance with the provisions of the agreement, the shareholders approved
the release of 1,225,000 shares (200,000 of which were already releasable under
the earnout provisions of the agreement) thereby terminating the agreement. In
connection with the termination of the escrow agreement, Mr. Stein entered into
a Lockup Agreement dated July 20, 1995 with respect to 1,025,000 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.
Certain of the Company's shareholders, including officers and directors, have
from time to time, provided short-term interest bearing advances to the Company.
At March 31, 1997 no such advances were outstanding, however the Company owed
$50,000 on a 12% subordinated note due to the spouse of a director and $50,000
on the same terms to an unrelated party.
Certain conflicts of interest may arise between the Company and its directors
due to the fact that they have other employment or business interests to which
they devote attention and they are expected to continue to do so. The Company
has not established policies or procedures for the resolution of current or
potential conflicts of interest between the Company and its management,
management-affiliated entities, 5% beneficial owners, promoters or any of their
immediate family, except that all transactions by the Company with such persons
are required to be approved by the Board of Directors of the Company. There can
be no assurance that members of management will resolve all conflicts of
interest in the Company's favor. The officers and directors are accountable to
the Company as fiduciaries, which means that they are legally obligated to
exercise good faith and integrity in handling the Company's affairs. Failure by
them to conduct the Company's business in its best interests may result in
liability to them. The Company's Articles of Incorporation provide that
directors have the right to contract with the Company if any financial interest
is disclosed or the transaction is fair and reasonable to the Company.
Part II
Item 3. Changes In and Disagreements With Accountants
On July 25, 1997 the Company engaged Moss Adams LLP to serve as the Company's
independent accountants to report on the fiscal year ended June 30, 1997. The
firm of Mohler, Nixon & Williams had reported on the Company's financial
statements for the fiscal years ended June 30, 1996 and 1995. The change of
independent accountants for the latest fiscal year was initiated and made by the
Board of Directors. The report of the former accountants for the prior two
fiscal years did not contain an adverse or disclaimer opinion but included a
modifying paragraph describing that the statements were prepared assuming a
going concern. There were no disagreements on any matters of accounting
principle or practices, financial statement disclosures, or auditing scope or
procedure with the former accountants in connection with the audit of fiscal
1995 and 1996 nor through July 25, 1997, which disagreements, if not resolved to
the auditing firm's satisfaction, would have caused them to make reference in
such firm's report on the subject matter of such disagreement. The Company did
not consult the new firm on any application of accounting principles or the type
of audit opinion that might be rendered.
Item 4. Recent Sales of Unregistered Securities.
During the past three years, the Company issued and sold securities not
registered under the Securities Act of 1933, as amended (the "Act"), as
described below.
(1) On June 30, 1994, the Company issued 1,000,000 shares of its Common Stock,
valued at $.35 per share, to four of its shareholders upon cancellation of an
aggregate of $350,000 in cash demand loans made by such shareholders to the
Company. The issuances were exempt by reason of Rule 903 of Regulation S
promulgated under the Act and Section 4(2) of the Act.
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<PAGE>
(2) On May 16, 1995, the Company issued and sold 171,429 shares of its Common
Stock at a price of between $0.20 and $0.35 per share to three of its
shareholders for an aggregate cash consideration of $45,000. The issuances and
sales were exempt by reason of Section 4(2) of the Act.
(3) On June 30, 1995, the Company issued 193,143 shares of its Common Stock,
valued at $0.35 per share, to three of its shareholders upon cancellation of an
aggregate of $67,600 in cash demand loans made by such shareholders to the
Company, and also issued and sold 285,714 shares of its Common Stock at a price
of $0.35 per share to two of its shareholders for an aggregate cash
consideration of $100,000. The issuances were exempt by reason of Rule 903 of
Regulation S promulgated under the Act and Section 4(2) of the Act.
(4) On August 11, 1995, the Company issued and sold 110,000 shares of its Common
Stock at a price of $0.35 per share to one of its shareholders and two investors
for an aggregate cash consideration of $38,500. The issuances and sales were
exempt by reason of Rule 903 of Regulation S promulgated under the Act and
Section 4(2) of the Act.
(5) On December 11, 1995, the Company issued and sold 200,000 shares of its
Common Stock at a price of $0.35 per share to one director for an aggregate cash
consideration of $70,000. The issuance and sale was exempt by reason of Section
4(2) of the Act.
(6) Between December 1995 and March 1996, the Company offered and sold 1,000,000
shares of Common Stock at a price of $0.50 per share to 18 investors (including
two directors), three of such investors of whom were not accredited investors.
The aggregate cash consideration to the Company was $500,000. The offers and
sales were exempt by reason of Rule 505 of Regulation D promulgated under the
Act.
(7) On March 6, 1996, the Company issued 136,200 shares of its Common Stock,
valued at $0.50 per share, to two of its shareholders and one director upon
cancellation of an aggregate of $68,100 in cash demand loans made by such
shareholders and director to the Company. The issuances were exempt by reason of
Rule 903 of Regulation S promulgated under the Act and Section 4(2) of the Act.
(8) On April 25, 1996, the Company issued and sold 100,000 shares of its Common
Stock at a price of $0.50 per share to two investors for an aggregate cash
consideration of $50,000. The issuances and sales were exempt by reason of Rule
903 of Regulation S promulgated under the Act.
(9) In June 1996, the Company issued and sold 666,666 shares of its Common Stock
at a price of $0.75 per share to one investor for an aggregate cash
consideration of $500,000. The issuance and sale was exempt by reason of Section
4(2) of the Act.
(10) On June 28, 1996, the Company issued 66,666 shares of its Common Stock to
an investor for consulting services rendered to the Company throughout Fiscal
1996 that included structuring and advising on the Company's various capital
raising transactions. The board of directors determined the value of the
services at $50,000 or $0.75 per share. The issuance was exempt by reason of
Section 4(2) of the Act.
(11) Between October 1996 and March 1997, the Company offered and sold 1,000,000
shares of Common Stock at a price of $0.75 per share to 12 investors (including
three directors and four shareholders), three of whom were not accredited
investors. The aggregate cash consideration to the Company was $750,000. The
offers and sales were exempt by reason of Rule 505 of Regulation D promulgated
under the Act.
(12) On March 14, 1997, the Company issued 43,195 shares of its Common Stock,
valued at $0.75 per share, to four of its shareholders and one director upon
cancellation of an aggregate of $32,396 in accrued and unpaid interest on prior
cash demand loans made by such shareholders and director to the Company. The
issuances were exempt by reason of Section 4(2) of the Act.
(13) On March 21, 1997, the Company issued 2,900 shares of its Common Stock,
valued at $0.75 per share, to 29 of its non-executive employees pursuant to the
Company's 1997 Employee Stock Compensation Plan. The shares were awarded to such
employees for services rendered to the Company. The issuances were exempt by
reason of Rule 701 promulgated under Section 3(b) of the Act.
15
<PAGE>
(14) On March 31, 1997, the Company issued to two investors warrants to purchase
an aggregate of 10,000 shares of Common Stock at an exercise price of $0.75 per
share through September 30, 1998 and promissory notes due September 30, 1998 in
the aggregate principal amount of $100,000 in exchange for prior cash demand
loans of $100,000. The issuances were exempt by reason of Section 4(2) under the
Act.
(16) On April 4, 1997, the Company issued and sold 53,333 shares of its Common
Stock at a price of $0.75 per share to a director for an aggregate cash
consideration of $40,000. The issuance and sale was exempt by reason of Section
4(2) of the Act.
(17) On April 30, 1997, the Company issued to five investors warrants to
purchase an aggregate of 150,000 shares of Common Stock at an exercise price of
$0.75 per share through April 30, 2002 in connection with consulting services.
The issuances were exempt by reason of Section 4(2) under the Act.
(18) On June 30, 1997, the Company issued 200,000 shares of its Common Stock and
warrants to purchase 200,000 shares at $1.25 per share, to three of its
shareholders for cash of $200,000 or $1.00 per unit. The issuances were exempt
by reason of Rule 903 of Regulation S promulgated under the Act and Section 4(2)
of the Act.
In all of the transactions described above, (i) the Company obtained a signed
representation from each person to whom the securities were issued, other than
from employees awarded shares under the 1997 Employee Stock Compensation Plan,
that such person was a sophisticated investor, (ii) each certificate
representing the securities issued contains a legend indicating that the
securities represented thereby cannot be sold without registration or an opinion
of counsel that registration is not required, (iii) a stop transfer was entered
on the transfer agents records with respect to the shares, and (iv) the
securities were sold by officers and directors of the Company without the
assistance of any underwriter and without the payment of any sales commissions.
In respect for each transaction for which an exemption from registration is
claimed under Section 4(2) of the Act or Rule 505 of Regulation D promulgated
under the Act, the Company also obtained a signed representation from each
person to whom securities were issued, except as noted, of such person's intent
to acquire the securities for investment and not with a view to distribution
thereof and that such person was an accredited investor within the meaning of
Regulation D. In addition, in all transactions for which an exemption from
registration is claimed under Rule 903 of Regulation S promulgated under the
Act, (i) the Company obtained a signed representation from each person to whom
securities were issued that such person was not a U.S. person within the meaning
of Regulation S and was not acquiring such securities for the account or benefit
of a U.S. person, (ii) each certificate representing the securities so issued
contains a legend indicating that transfer of the securities represented thereby
is prohibited except in accordance with Regulation S, and (iii) the Company
believes that it complied with the other provisions of Regulation S in respect
of such Regulation S transactions.
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
----
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
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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
17
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VALUESTAR CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996 AND 1995
----------------------
F-1
<PAGE>
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.
/s/ MOHLER, NIXON & WILLIAMS
MOHLER, NIXON & WILLIAMS
Accountancy Corporation
Campbell, California
August 23, 1996
F-2
<PAGE>
VALUESTAR CORPORATION
Consolidated balance sheets as of June 30,
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
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 133,166 59,830
Property, equipment and intangible assets, net 46,347 12,274
- --------------------------------------------------------------------------------
Total assets $ 752,680 $ 125,747
================================================================================
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 (2,279,668) (1,520,340)
- --------------------------------------------------------------------------------
Total shareholders' equity (deficit) 457,194 (10,078)
- --------------------------------------------------------------------------------
Total liabilities and shareholders' equity (deficit) $ 752,680 $ 125,747
================================================================================
See independent accountants' report and accompanying
notes to consolidated financial statements.
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 186,592 83,710
- --------------------------------------------------------------------------------
Gross profit 223,677 165,066
Marketing and selling 643,334 130,539
General and administrative 330,421 196,763
- --------------------------------------------------------------------------------
Total operating expenses 973,755 327,302
- --------------------------------------------------------------------------------
Loss from operations (750,078) (162,236)
Non-cash expense related to release of
escrow shares -- (428,750)
Interest expense (4,099) (8,790)
Other expense (5,151) (611)
Other income 1,716
- --------------------------------------------------------------------------------
Net loss $ (759,328) $ (598,671)
================================================================================
Net loss per share ($ 0.14) ($ 0.14)
================================================================================
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
Net loss (598,671) (598,671)
- -------------------------------------------------------------------------------------------------------------------
June 30, 1995 4,747,286 1,186 1,509,076 (1,520,340) (10,078)
- -------------------------------------------------------------------------------------------------------------------
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 (759,328) (759,328)
- -------------------------------------------------------------------------------------------------------------------
June 30, 1996 7,026,818 $ 1,757 $ 2,735,105 $(2,279,668) $ 457,194
===================================================================================================================
<FN>
See independent accountants' report and accompanying
notes to consolidated financial statements.
</FN>
</TABLE>
F-5
<PAGE>
VALUESTAR CORPORATION
Consolidated statements of cash flows for the years ended June 30,
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $ (759,328) $ (598,671)
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 (73,336) (59,830)
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
See independent accountants' report and accompanying
notes to consolidated financial statements.
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 annual license fee.
F-7
<PAGE>
Annual "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. Costs of the Company's publication,
the Consumer ValueStar Report, are deferred and amortized over a six month
period, which is the estimated useful life of the publication. 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 $243,944
and $61,112 in 1996 and 1995, respectively.
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. Accordingly, certain customer rating
costs are deferred and amortized over a one year period.
Deferred costs are periodically evaluated to determine if adjustments
for impairment are necessary.
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
F-8
<PAGE>
more reliance on higher profitable renewals. Such actions could have an adverse
effect on the Company's business. The 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
---- ----
Rating fees $160,013 $ 25,519
Publishing 81,903 61,123
Telemarketing 69,277 9,478
Direct mail 48,302 3,429
-------- --------
359,495 99,549
Less amortization for the year 226,329 39,719
-------- --------
$133,166 $ 59,830
======== ========
Costs are amortized over periods from six months 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).
F-10
<PAGE>
Stock options -
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.
Information with respect to stock option transactions for the years
ended June 30, 1996 and 1995 is as follows:
Number
Available of Options Price per
for Grant Outstanding Exercisable Share
--------- ----------- ----------- -----
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
======== ========== ===========
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:
There was no provision for income taxes for the years ended June 30,
1996 and 1995.
F-11
<PAGE>
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.
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) 3
Consolidated Statements of Operations for the nine months ended
March 31, 1997 and 1996 (Unaudited) 4
Consolidated Statements of Cash Flows for the nine months ended
March 31, 1997 and 1996 (Unaudited) 5
Notes to Interim Consolidated Financial Statements 6
F-14
<PAGE>
VALUESTAR CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
March 31, June 30,
1997 1996
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 249,476 133,166
Property equipment and intangibles-net 57,916 46,347
----------- -----------
$ 725,909 $ 752,680
=========== ===========
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 (3,521,752) (2,279,668)
----------- -----------
Total Stockholders' Equity 40,181 457,194
----------- -----------
$ 725,909 $ 752,680
=========== ===========
See accompanying notes to interim consolidated financial statements.
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 268,905 98,203
Customer support expenses 494,289 89,827
Selling and marketing expenses 697,358 295,496
General and administrative expenses 354,707 209,326
----------- -----------
Total costs and expenses 1,815,259 692,852
----------- -----------
Loss from operations (1,237,084) (440,351)
Interest expense (5,000) (2,926)
Other income (expense) -- (3,387)
----------- -----------
Net loss $(1,242,084) $ (446,664)
=========== ===========
Net loss per share $ (0.18) $ (0.09)
=========== ===========
Weighted average number of shares 7,067,438 5,128,909
=========== ===========
See accompanying notes to interim consolidated financial statements.
F-16
<PAGE>
VALUESTAR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine months ended
March 31,
1997 1996
Cash Flows from Operating Activities
Net income (loss) $(1,242,084) $ (446,664)
Adjustments to reconcile net loss
to net cash used by operating activities:
Depreciation and amortization 6,496 1,787
Amortization of deferred costs 282,080 105,004
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 (398,390) (184,096)
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
See accompanying notes to interim consolidated financial statements.
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. Annual
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.
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
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. Accordingly, certain direct customer rating costs
incurred for the rating are deferred with 60% expensed in the month incurred and
the balance of 40% amortized at the twelve month renewal.
Costs incurred in printing and distributing the Company's Consumer ValueStar
Report publication published in January and July are capitalized and amortized
over six months. Related revenues are deferred and amortized over six months.
F-18
<PAGE>
VALUESTAR CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. DEFERRED COSTS (Continued)
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.
Deferred costs (net) consisted of the following at:
March 31, June 30,
1997 1996
-------- --------
Rating fees $114,447 $ 39,616
Publishing 52,086 54,602
Telephone sales 82,943 38,948
-------- --------
$249,476 $133,166
======== ========
The net effect of capitalizing and amortizing deferred costs was a reduction in
costs and expenses of $116,310 and $79,092 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>
F-19
<PAGE>
VALUESTAR CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. STOCKHOLDERS' EQUITY (Continued)
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.
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.
F-20
<PAGE>
VALUESTAR CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
9. SUBSEQUENT EVENTS (Continued
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.
F-21
<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 untile 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
37
<PAGE>
6.7.1 Standard form of 1996 Stock Plan Agreement
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
27.1* Financial Data Schedules
The exhibits listed above (other than those 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.
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: August 18, 1997
38
EXHIBIT 3.5
THIS WARRANT AND THE SHARES ISSUABLE UPON ITS EXERCISE HAVE NOT BEEN REGISTERED
WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION UNDER THE U.S. SECURITIES ACT
OF 1933 ("ACT"), AND THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT
TO THE SECURITIES UNDER SUCH ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE
COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED OR UNLESS SOLD PURSUANT TO RULE
144 OF SUCH ACT.
STOCK PURCHASE WARRANT
RIGHT TO PURCHASE __________ SHARES OF COMMON STOCK
THIS CERTIFIES THAT _________________________ ("Holder") is entitled to
purchase, on or before June 30, 2002, _______________ (________) shares of the
common stock ("Common Stock") of VALUESTAR CORPORATION (the "Corporation") upon
exercise of this Warrant along with presentation of the full purchase price. The
purchase price of the common stock is equal to One Dollar and Twenty Five Cents
($1.25) per share (the "Exercise Price"). This Warrant is granted for valuable
consideration received.
1. Exercise.
This Warrant may be exercised one time, in whole only, on any business day on or
before the expiration date listed above by presentation and surrender hereof to
the Corporation at its principal office of a written exercise request and the
Exercise Price in lawful money of the United States of America in the form of a
wire transfer or check, subject to collection, for the Warrant Shares specified
in the exercise request. Upon receipt by the Corporation of an exercise request
and representations, together with proper payment of the Exercise Price, at such
office, the Holder shall be deemed to be the holder of record of the Warrant
Shares, notwithstanding that the stock transfer books of the Corporation shall
then be closed or that certificates representing such Warrant Shares shall not
then be actually delivered to the Holder. The Corporation shall pay any and all
transfer agent fees, documentary stamp or similar issue or transfer taxes
payable in respect of the issue or delivery of the Warrant Shares. The
Corporation may at its discretion allow the Holder to exercise this Warrant on
net issuance terms.
This Warrant is redeemable and callable upon 20 days written notice by the
Corporation to the Holder at the price of $0.01 per exercisable share provided
that the closing bid price of the Company's common stock is $5.00 or more for
ten consecutive trading days. The redemption shall be made by the Corporation in
writing (with proof of receipt) specifying the terms of redemption and advising
the Holder the final date to exercise this Warrant to prevent such redemption
and whether any net issuance terms are being offered by the Corporation.
2. Adjustment of Exercise Price and Number of Shares Deliverable Upon Exercise
of Warrant.
The Exercise Price and the number of Shares purchasable upon the exercise of
this Warrant ("Warrant Shares") are subject to adjustment from time to time upon
the occurrence of the events enumerated in this paragraph.
(a) In case the Corporation shall at any time after the date of this Warrant:
(i) Pay a dividend of its shares of its Common Stock or make a
distribution in shares of its Common Stock with respect to its
outstanding Common Stock;
(ii) Subdivide its outstanding shares of Common Stock;
(iii) Combine its outstanding shares of Common Stock; or
(iv) Issue any other shares of capital stock by reclassification of
its shares of Common Stock;
the Exercise Price in effect at the time of the record date of such dividend,
subdivision, combination, or reclassification shall be proportionately adjusted
so that Holder shall be entitled to receive the aggregate number and kind of
shares which, if this Warrant had been exercised prior to such event, Holder
would have owned upon such exercise and been entitled to receive by virtue of
such dividend, subdivision, combination, or reclassification. Such adjustment
shall be made successively whenever any event listed above shall occur.
1
<PAGE>
(b) In case the Corporation shall fix a record date for the issuance of rights,
options, or warrants or make a distribution of shares of Common Stock to all
(but not less than all) holders of its outstanding Common Stock entitling them
to subscribe for or purchase shares of Common Stock (or securities convertible
into shares of Common Stock) at a price per share (or having a conversion price
per share, if a security convertible into Common Stock) less than the market
price of the shares (based on the closing price on the record date on NASDAQ or
a listed securities exchange of the Corporation's Common Stock, or if no such
quote is available, the shareholders equity on the date of the last financial
statement divided by the total number of shares outstanding) (the "Market
Price"), the Exercise Price to be in effect after such record date shall be
determined by multiplying the then current Exercise Price in effect immediately
prior to such record date by a fraction, of which the numerator shall be the
number of shares of Common Stock outstanding on such record date plus the number
of shares of Common Stock which the aggregate offering price of the total number
of shares of Common Stock so to be offered (or the aggregate initial conversion
price of the convertible securities so to be offered) would purchase at such
Market Price and of which the denominator shall be the number of shares of
Common Stock outstanding on such record date plus the number of additional
shares of Common Stock to be offered for subscription or purchase (or into which
the convertible securities so to be offered are initially convertible). Such
adjustment shall be made successively whenever such a record date is fixed; and
in the event that such rights or warrants are not so issued, the Exercise Price
shall again be adjusted to be the Exercise Price which would then be in effect
if such record date had not been fixed.
(c) In case of any reorganization of the Corporation, or in case of any
reclassification or change of outstanding Common Stock issuable upon exercise of
this Warrant (other than a change in par value, or from par value to no par
value, or from no par value to par value, or as a result of a subdivision or
split-up or combination of the Common Stock), or in case of any consolidation or
merger of the Company with or into another entity (other than a consolidation or
merger with a subsidiary or a continuing corporation), or in case of any sale or
conveyance to another entity of all or substantially all of the property of the
Corporation, then, as a condition of such reorganization, reclassification,
change, consolidation, merger, sale, or conveyance, the Corporation or such
successor or purchasing entity, as the case may be, shall forthwith provide to
Holder a supplemental warrant (the "Supplemental Warrant") which will make
lawful and adequate provision whereby Holder shall have the right thereafter to
receive, upon exercise of such Supplemental Warrant, the kind and amount of
shares and other securities and property which would have been received upon
such reorganization, reclassification, change, consolidation, merger, sale, or
conveyance by a holder of a number of shares of Common Stock equal to the number
of Shares issuable upon exercise of this Warrant immediately prior to such
reorganization, reclassification, change, consolidation, merger, sale, or
conveyance. Such Supplemental Warrant shall include provisions for adjustments
which shall be as nearly equivalent as may be practicable to the adjustments
provided for in this paragraph. The above provisions of this paragraph shall
similarly apply to successive reorganizations, reclassifications, and changes of
Common Stock and to successive consolidations, mergers, sales, or conveyances.
3. Restrictions on Transfer.
Holder has been advised and understands that the Warrants and the Shares
purchasable thereby are characterized as "restricted securities" under the
federal securities laws because they are being acquired from Corporation in a
transaction not involving a public offering and that under such laws and
applicable regulations such securities may be resold without registration under
the Act only in certain limited circumstances. Holder further understands that
the certificates evidencing the Shares will bear the following legend: "These
securities have not been registered under the Securities Act of 1933. They may
not be sold, offered for sale, pledged or hypothecated in the absence of a
registration statement in effect with respect to the securities under such Act
or an opinion of counsel satisfactory to the Company that such registration is
not required or unless sold pursuant to Rule 144 of such Act."
The Holder understands that the Company may place, and may instruct any transfer
agent or depository for the Shares to place, a stop transfer notation in the
securities records in respect of the Shares.
4. Registration Rights.
Holder shall have the right, at any time and from time to time until June 30,
2002, to include all of the shares purchased or purchasable upon the exercise of
this Warrant ( the "Registrable Shares") within any Registration Statement of
the Corporation filed by the Corporation covering shares of its Common Stock
other than a Registration Statement filed solely with respect to any employee
benefit plan of the Corporation or an offering solely related to an acquisition
or for which such Registrable Shares cannot be appropriately registered. The
Corporation shall promptly give written notice to Holder of any intended
registration of its Common Stock not less than forty-five (45) days prior to the
anticipated effective date of
2
<PAGE>
the Registration Statement, and Holder shall, within fifteen (15) days of
receipt thereof, notify the Corporation of the number of Registrable Shares it
desires to include in the Registration Statement. The number of Registrable
Shares which may be included by the Holder in any such Registration Statement
may be restricted by the Corporation if, in the opinion of the Corporation's
managing underwriter, the number of shares proposed to be sold by the Holder and
by the Corporation in such offering exceeds the number of securities which can
be sold in such offering. In such event, the Registrable Shares of Holder to be
included within such Registration Statement shall not exceed the number approved
for inclusion therein by the Corporation and its managing underwriter. All costs
or expenses, incident to the registration, qualification or listing of such
securities shall be paid by the Corporation, and the Corporation shall comply
with all reasonable requests of Holder made in connection with the registration,
qualification, listing or sale of Registrable Shares.
5. Assignment or Loss of Warrant.
(a) The Holder of this Warrant shall be entitled, without obtaining the consent
of the Corporation, to assign its interest in this Warrant, or any of the
Warrant Shares, in whole or in part to any person, provided, however, that the
transferee, prior to any such transfer, provides the Corporation with a legal
opinion, in form and substance satisfactory to the Company, that such transfer
will not violate the Act or any applicable state securities or blue sky laws.
Otherwise without obtaining the prior written consent of the Company, Holder
shall not transfer or assign its interest in this Warrant, or any of the Warrant
Shares prior to exercise, in whole or in part to any transferee.
(b) Upon receipt of evidence satisfactory to the Company of the loss, theft,
destruction or mutilation of this Warrant, and (in the case of loss, theft or
destruction) of indemnification satisfactory to the Company, and upon surrender
and cancellation of this Warrant, if mutilated, the Company shall execute and
deliver a new Warrant of like tenor and date.
6. Reservation of Shares. The Company hereby agrees that at all times there
shall be reserved for issuance and delivery upon exercise or exchange of this
Warrant all shares of its Common Stock or other shares of capital stock of the
Company from time to time issuable upon exercise or exchange of this Warrant.
All such shares shall be duly authorized and, when issued upon the exercise or
exchange of the Warrant in accordance with the terms hereof, shall be validly
issued, fully paid and nonassessable, free and clear of all liens, security
interests, charges and other encumbrances or restrictions on sale (other than as
provided in the Company's articles of incorporation and any restrictions on sale
set forth herein or pursuant to applicable federal and state securities laws)
and free and clear of all preemptive rights.
7. Arbitration. In the event that a dispute arises between the Corporation and
the holder of this Warrant as to any matter relating to this Warrant, the matter
shall be settled by arbitration in Alameda County, California in accordance with
the Rules of the American Arbitration Association and the award rendered by such
arbitrator(s) shall not be subject to appeal and may be entered in any federal
or state court located in Alameda County having jurisdiction thereof, and
actions or proceedings shall be brought in no other forum or venue.
IN WITNESS WHEREOF, the Corporation has caused this Warrant to be executed by
its duly authorized officers and the corporate seal hereunto affixed on this
30th day of June, 1997.
VALUESTAR CORPORATION
/s/ JAMES STEIN
James Stein, President and CEO
/s/ BENJAMIN A. PITTMAN
Benjamin A. Pittman, Secretary
3
<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> 213,366 99,803
<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> 725,909 752,680
<CURRENT-LIABILITIES> 585,728 295,486
<BONDS> 100,000 0
0 0
0 0
<COMMON> 2,018 1,757
<OTHER-SE> 3,131,165 2,735,105
<TOTAL-LIABILITY-AND-EQUITY> 725,909 752,680
<SALES> 0 0
<TOTAL-REVENUES> 578,175 410,269
<CGS> 0 0
<TOTAL-COSTS> 268,905 186,592
<OTHER-EXPENSES> 1,546,354 978,906
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 5,000 4,099
<INCOME-PRETAX> (1,242,084) (759,328)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (1,242,084) (759,328)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,242,084) (759,328)
<EPS-PRIMARY> (0.18) (0.14)
<EPS-DILUTED> (0.18) (0.14)
</TABLE>
