<PAGE> 1
----------
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-KSB/A
AMENDMENT TO FORM 10-KSB
Filed Pursuant to
THE SECURITIES EXCHANGE ACT OF 1934
CVF CORPORATION
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
AMENDMENT NO. 1
The undersigned registrant hereby amends the following items, financial
statements, exhibits or other portions of its Annual Report on Form 10-KSB for
the year ended December 31, 1997 as set forth in the pages attached hereto:
Part II.
Item 6. Management's Discussion and Analysis or Plan of Operation.
Item 7. Financial Statements.
Part III.
Item 13. Exhibits and Reports on Form 8-K.
Exhibit 27 Financial Data Schedule
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this amendment to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: April 30, 1998
CVF CORPORATION
By: /s/ Jeffrey Dreben
----------------------------------------
Jeffrey Dreben
Chief Executive Officer and President
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CONSOLIDATED OPERATING RESULTS
Item 6
The following discussion and analysis should be read in conjunction
with the Consolidated Financial Statements and the related notes thereto which
appear elsewhere in this Prospectus. In particular, see notes 2 and 4 to the
Consolidated Financial Statements under the heading "Principles of
consolidation" for an explanation of the accounting treatment and impact of a
Holding's financial results on the Company's financial statements which varies
on the Company's percentage investment in a holding.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
Sales and costs of sales reflect the activity of the consolidated
entities of the Company. In 1997, the gross margin decreased by 29% to
US$593,578 from US$836,538 in 1996. Of this US$242,960 gross margin decline,
US$417,618 is related to sales decreases totaling US$741,418 in Biorem and
Solaria. However, the four months of activity of Dantec Electronics compensated
for these declines by contributing gross margin of US$215,790.
Selling, general and administrative expenses increased to US$5,367,541
from US$3,342,739 for the year ended December 31, 1996 for an increase of 61%.
This increase from 1996 to 1997 is mainly due to US$1,500,000 in bonuses paid by
the Company related to a series of transactions in which the Company purchased
601,932 of its common shares from a company owned by officers of the Company and
subsequently issued options to these officers to repurchase these shares. The
exercise of the options triggered personal tax consequences which were
reimbursed by the Company through the issuance of bonuses. (See "Executive
Compensation") Selling, general and administration expenses are expected to
remain stable or decline over the next year due to the one-time nature of the
1997 bonuses.
Research and development expenses increased by US$164,303 for the year
ended December 31, 1997 to a total of US$422,216, representing a 64% increase
from the year ended December 31, 1996. This was due primarily to an increase in
research and development expenses in Gemprint as it updated its technology.
Interest income was US$448,684 for the year ended December 31, 1997
compared to interest expense of US$47,700 for the year ended December 31, 1996.
This increase is due to cash received by the Company from the sales of the
shares in Certicom during late 1996 and throughout 1997. Since this cash is used
in the continuing support of the Company's entities and further investments, the
related interest income is expected to decline.
Losses from Equity Investees has decreased by 51% to a loss of
US$145,165 for the year ended December 31, 1997 compared to a loss of US$296,762
for the year ended December 31, 1996. These amounts are a reflection of the
activities of the entities in which the Company has a 50% or less ownership
interest as well as the effect of changes in the ownership percentage and equity
transactions between investee companies and third parties which can provide
gains or losses, depending upon the overall net book value of these entities.
Since most of these entities have had sustained losses over the past three years
and the Company has varied its ownership percentages over past years and expects
to continue to do so in the future, the results from Equity Investees is
dependent upon the success of their operations. (See "Risk Factors")
<PAGE> 3
The combined net sales of Ecoval, Dantec Systems and Petrozyme were
US$1,560,122 for the year ended December 31, 1997 compared to US$1,396,027 in
1996, an increase of 12%. The combined net losses of these companies was
US$7,152,634 for the year ended December 31, 1997 with CVF's share of these
losses being US$1,899,287. The comparable proportion of losses which CVF
included for the year ended December 31, 1996 was US$840,929. The increase in
equity entity losses was primarily due to increased costs of supplies of raw
materials in one of these companies.
Over the last two years, the Company has benefitted from the ownership
of common shares of Certicom which it managed and supported in accordance with
the nature of the Company's business. During the year ended December 31, 1996
Certicom became a public company and the value of its publicly-traded shares
increased such that the Company was able to sell its holdings for gains of
US$3,204,185 for the year ended December 31, 1996 and US$19,758,954 for the year
ended December 31, 1997. Subsequent to December 31, 1997, the Company sold its
remaining common shares of Certicom for additional net proceeds of approximately
US$375,000.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
For the year ended December 31, 1996 the Company recorded a loss of
US$293,799 as compared to a loss of US$1,306,806 in 1995. There were two major
components to the substantial reduction in loss.
Affecting the Company's financial performance in 1996 was a gain of
US$3,204,185 realized upon the Company's sale of 316,667 shares of Certicom. The
Company did not sell any of its publicly traded holdings in the year ended
December 31, 1995. Also contributing substantially to the Company's financial
performance for the year ended December 31, 1996 was a US$1,103,167 increase in
sales and a US$604,069 increase in gross profit compared to 1995. CVF, on an
unconsolidated basis, does not have sales from operations. Sales and gross
profit from sales reflect the operations of the Company's consolidated
subsidiaries.
For the year ended December 31, 1996, the Company recorded selling,
general and administrative expenses of US$3,342,739 compared to US$2,379,488 for
the year ended December 31, 1995, an increase of US$963,251. About 83% of this
increase is attributable to increased costs of one subsidiary. Selling, general
and administrative expenses for CVF were US$529,000 on a non-consolidated basis.
The balance of the expenses was attributable to the subsidiaries.
At December 31, 1996, the Company recorded total stockholders' equity
of US$17,079,780 compared to US$3,588,520 to stockholders' equity at December
31, 1995. The biggest contribution to the increase was the gain on the 1996 sale
of Certicom shares and a reclassification of the remaining Certicom shares owned
by the Company. This reclassification permitted the Company to carry these
shares at their public market value (US$22,302,960) on the December 31, 1996
balance sheet compared to cost-basis on the 1995 balance sheet. The Company
recorded a current ratio (current assets to current liabilities) of 0.84 to 1.00
at December 31, 1996 compared to .70 TO 1 at December 31, 1995. However, the
Company's liquidity at December 31, 1996 was substantial, taking into account
its holdings of Certicom common shares available for sale with a market value of
US$22,302,960, which holdings are not carried as a current asset.
LIQUIDITY AND CAPITAL REQUIREMENTS
The most significant transactions during the year ended December 31,
1997 were the sales of the Certicom common shares. Proceeds from the sale of
these shares were US$20,389,424 compared to US$3,683,362 for the year ended
December 31, 1996. The cash realized on the sale of the Certicom
<PAGE> 4
common shares has provided significant liquidity for the Company. The Company
expects to use this liquidity to continue to support the marketing and other
working capital requirements in its current holdings. No significant or material
commitments for capital assets, increase in employees or further investments are
contemplated at this time.
During the year ended December 31, 1997, the Company repurchased
252,900 of its common shares at a cost of US$1,807,038 compared to 10,000 common
shares repurchased during the year ended December 31, 1996 for a cost of
US$55,011. In addition, the Company used its liquidity to advance additional
debt and equity financing of US$865,605 for the year ended December 31, 1997 to
its equity investees compared to US$1,066,596 for the year ended December 31,
1996 and US$317,304 for the year ended December 31, 1995.
Because of the cash contributions from the sale of the Certicom common
shares, debt borrowing decreased to US$121,365 during the year ended December
31, 1997 from borrowings of US$991,108 for the year ended December 31, 1996.
Cash of US$682,361 was deposited in restricted investments in 1997 to support
debt guarantees of Biorem and Gemprint. In the prior year, these debt guarantees
were supported by the common shares of Certicom.
<PAGE> 5
CONSOLIDATED FINANCIAL STATEMENTS
CVF CORPORATION
[Expressed in United States Currency]
DECEMBER 31, 1997
<PAGE> 6
Item 7 Financial Statements
CVF CORPORATION
INDEX TO FINANCIAL STATEMENTS
PAGE NUMBER
REPORT OF INDEPENDENT AUDITORS' F-2
PRIOR INDEPENDENT AUDITORS' REPORT F-3
CONSOLIDATED BALANCE SHEETS F-4
CONSOLIDATED STATEMENTS OF OPERATIONS F-6
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY F-7
CONSOLIDATED STATEMENTS OF CASH FLOWS F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-9
F-1
<PAGE> 7
REPORT OF INDEPENDENT AUDITORS'
To the Stockholders and
Board of Directors of
CVF CORPORATION
We have audited the accompanying consolidated balance sheet of CVF CORPORATION
as of December 31, 1997 and the related consolidated statements of operations,
stockholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the 1997 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of CVF Corporation
at December 31, 1997 and the consolidated results of its operations and its cash
flows for the year then ended in conformity with accounting principles generally
accepted in the United States.
/s/ Ernst & Young
Kitchener, Canada, Ernst & Young
March 16, 1998. Chartered Accountants
[Except for note 15 which is as of April 29, 1998.]
F-2
<PAGE> 8
INDEPENDENT AUDITORS' REPORT
To the Shareholders and
Board of Directors of
CVF CORPORATION
We have audited the accompanying consolidated balance sheet of CVF
Corporation and Subsidiaries as of December 31, 1996 and the related statements
of operations, stockholders' equity and cash flows for the years ended December
31, 1996 and 1995. These 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 an audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of CVF Corporation and
Subsidiaries as of December 31, 1996, and the results of its operations and cash
flows for each of the years ended December 31, 1996 and 1995, in conformity with
generally accepted accounting principles.
/s/ Feldman Sherb Ehrlich & Co., P.C.
Feldman Sherb Ehrlich & Co., P.C.
Certified Public Accountants
(Formerly known as Feldman Radin & Co., P.C.)
New York, New York
March 14, 1997
[Except for note 15 which is as of April 29, 1998.]
F-3
<PAGE> 9
<TABLE>
<CAPTION>
CVF CORPORATION
CONSOLIDATED BALANCE SHEETS
[Restated - see note 15]
As of December 31 [Expressed in U.S. Currency]
1997 1996
$ $
- ------------------------------------------------------------------------------------------------------
ASSETS
CURRENT
<S> <C> <C>
Cash and cash equivalents 9,931,906 1,895,276
Restricted cash [note 6] 682,361 --
Trade receivables 557,998 510,289
Inventory [note 3] 390,125 225,209
Prepaid expenses and other 326,896 72,110
- ------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 11,889,286 2,702,884
- ------------------------------------------------------------------------------------------------------
Property and equipment, net of accumulated depreciation 169,851 217,579
Holdings, carried at cost or equity [note 4] 2,107,060 2,051,913
Holdings, available for sale, at market [note 4] 1,562,194 22,302,960
Goodwill, net of accumulated amortization [note 5] 4,023,825 2,186,619
- ------------------------------------------------------------------------------------------------------
TOTAL ASSETS 19,752,216 29,461,955
- ------------------------------------------------------------------------------------------------------
<FN>
[Restated - see note 15]
</TABLE>
F-4
<PAGE> 10
<TABLE>
<CAPTION>
1997 1996
$ $
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank indebtedness [note 6] 824,577 707,324
Trade payables 461,697 410,254
Accrued expenses 1,403,740 1,057,385
Bonuses payable [note 9] 500,000 --
Dividends payable on Series A preferred stock [note 9] 52,500 --
Dividends payable on subsidiary's shares [note 11] 165,200 155,000
Income taxes payable 1,820,598 892,790
- -----------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 5,228,312 3,222,753
- -----------------------------------------------------------------------------------------------------
Long-term debt [note 7] 559,697 438,332
Deferred income taxes [note 8] 251,822 7,451,840
Preferred stock of subsidiaries [note 11] 1,193,000 813,000
Redeemable Series A preferred stock, $0.001 par value,
authorized 500,000 shares,
issued and outstanding 25,000 shares [note 9] 456,250 456,250
- -----------------------------------------------------------------------------------------------------
2,460,769 9,159,422
- -----------------------------------------------------------------------------------------------------
7,689,081 12,382,175
- -----------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY [note 9]
Common stock, $0.001 par value, authorized 50,000,000 shares,
outstanding 5,729,449 [1996; 5,982,349]
and in treasury 262,900 [1996; 10,000] 5,992 5,992
Additional paid in capital 13,657,950 12,930,787
Treasury stock (1,862,049) (55,011)
Translation adjustment 374,959 (277,252)
Unrealized gain on available for sale securities 305,818 13,840,070
Accumulated deficit (419,535) (9,364,806)
- -----------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 12,063,135 17,079,780
- -----------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 19,752,216 29,461,955
- -----------------------------------------------------------------------------------------------------
<FN>
See accompanying notes
[Restated - see note 15]
</TABLE>
F-5
<PAGE> 11
<TABLE>
<CAPTION>
CVF CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
[Restated - see note 15]
Year ended December 31 [Expressed in U.S. Currency]
1997 1996 1995
$ $ $
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SALES 1,685,399 1,866,176 763,009
Cost of sales 1,091,821 1,029,638 530,540
- -----------------------------------------------------------------------------------------------------------
GROSS MARGIN 593,578 836,538 232,469
- -----------------------------------------------------------------------------------------------------------
EXPENSES
Selling, general and administrative 5,367,541 3,342,739 2,379,488
Research and development 422,216 257,913 215,003
- -----------------------------------------------------------------------------------------------------------
5,789,757 3,600,652 2,594,491
- -----------------------------------------------------------------------------------------------------------
(Loss) from operations (5,196,179) (2,764,114) (2,362,022)
- -----------------------------------------------------------------------------------------------------------
OTHER INCOME AND (EXPENSES)
Interest income (expense), net 448,684 (47,700) (94,923)
Other income, net 52,642 102,933 246,533
(Loss) income from equity investees (145,165) (296,762) 881,091
Gain on sale of holdings [note 4] 19,758,954 3,204,185 --
Minority interest -- 400,449 22,515
- -----------------------------------------------------------------------------------------------------------
20,115,115 3,363,105 1,055,216
- -----------------------------------------------------------------------------------------------------------
Income (loss) before provision
for income taxes 14,918,936 598,991 (1,306,806)
Provision for income taxes [note 8] 5,919,665 892,790 --
- -----------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) 8,999,271 (293,799) (1,306,806)
- -----------------------------------------------------------------------------------------------------------
BASIC EARNINGS (LOSS) PER SHARE [NOTE 10] 1.52 (0.05) (0.26)
- -----------------------------------------------------------------------------------------------------------
DILUTED EARNINGS (LOSS) PER SHARE [NOTE 10] 1.49 (0.05) (0.26)
- -----------------------------------------------------------------------------------------------------------
BASIC WEIGHTED AVERAGE SHARES [NOTE 10] 5,870,553 5,989,849 4,978,115
- -----------------------------------------------------------------------------------------------------------
DILUTED WEIGHTED AVERAGE SHARES [NOTE 10] 6,009,708 5,989,849 4,978,115
- -----------------------------------------------------------------------------------------------------------
<FN>
See accompanying notes
[Restated - see note 15]
</TABLE>
F-6
<PAGE> 12
<TABLE>
<CAPTION>
CVF CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
[Restated - note 15]
Year ended December 31 [Expressed in U.S. Currency]
ADDITIONAL
COMMON STOCK PAID-IN ACCUMULATED TREASURY
SHARES AMOUNT CAPITAL DEFICIT STOCK
- -----------------------------------------------------------------------------------------------------------------------------
$ $ $ $
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE - JANUARY 1, 1995 4,578,096 4,578 12,636,955 (7,764,201) --
Sale of shares 185,822 186 486,017 -- --
Shares issued in connection
with reverse acquisition 1,228,431 1,228 (192,185) -- --
Net (loss) -- -- -- (1,306,806) --
Translation adjustment -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 1995 5,992,349 5,992 12,930,787 (9,071,007) --
Purchase of treasury stock -- -- -- -- (55,011)
Net (loss) -- -- -- (293,799) --
Unrealized gain on securities
available for sale, net of taxes -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 1996 5,992,349 5,992 12,930,787 (9,364,806) (55,011)
Purchase of treasury stock -- -- -- -- (1,807,038)
Net income -- -- -- 8,999,271 --
Dividends on Series A preferred stock -- -- -- (54,000) --
Sale of available for sale securities -- -- -- -- --
Tax benefit of employee
stock transaction [note 9] -- -- 727,163 -- --
Unrealized gain on securities
available for sale, net of taxes -- -- -- -- --
Translation adjustment -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 1997 5,992,349 5,992 13,657,950 (419,535) (1,862,049)
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
UNREALIZED GAIN TOTAL
ON AVAILABLE FOR TRANSLATION STOCKHOLDERS'
SALE SECURITIES ADJUSTMENT EQUITY
- ----------------------------------------------------------------------------------------
$ $ $
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
BALANCE - JANUARY 1, 1995 -- (407,719) 4,469,613
Sale of shares -- -- 486,203
Shares issued in connection
with reverse acquisition -- -- (190,957)
Net (loss) -- -- (1,306,806)
Translation adjustment -- 130,467 130,467
- ----------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 1995 -- (277,252) 3,588,520
Purchase of treasury stock -- -- (55,011)
Net (loss) -- -- (293,799)
Unrealized gain on securities
available for sale, net of taxes 13,840,070 -- 13,840,070
- ----------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 1996 13,840,070 (277,252) 17,079,780
Purchase of treasury stock -- -- (1,807,038)
Net income -- -- 8,999,271
Dividends on Series A preferred stock -- -- (54,000)
Sale of available for sale securities (13,840,070) -- (13,840,070)
Tax benefit of employee
stock transaction [note 9] -- -- 727,163
Unrealized gain on securities
available for sale, net of taxes 305,818 -- 305,818
Translation adjustment -- 652,211 652,211
- ----------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 1997 305,818 374,959 12,063,135
- ----------------------------------------------------------------------------------------
<FN>
See accompanying notes
[Restated - see note 15]
</TABLE>
F-7
<PAGE> 13
<TABLE>
<CAPTION>
CVF CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
[Restated - see note 15]
Year ended December 31 [Expressed in U.S. Currency]
1997 1996 1995
$ $ $
- --------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income (loss) 8,999,271 (293,799) (1,306,806)
Adjustments to reconcile net income (loss)
from operating activities [note 12] (19,256,776) (3,025,413) (702,600)
Changes in operating assets and liabilities [note 12] 1,844,331 1,097,738 478,743
- --------------------------------------------------------------------------------------------------------------
CASH (APPLIED TO) OPERATING ACTIVITIES (8,413,174) (2,221,474) (1,530,663)
- --------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of property and equipment -- (174,316) (50,998)
Investments in and advances to equity investees (865,605) (1,066,596) (317,304)
Proceeds from sale of holdings 20,389,424 3,683,362 --
Acquisitions, net of cash acquired (686,272) -- (190,957)
- --------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY (APPLIED TO) INVESTING ACTIVITIES 18,837,547 2,442,450 (559,259)
- --------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase in bank indebtedness 58,179 -- --
Borrowings of debt 121,365 991,108 85,962
(Payments) of debt -- (160,586) (23,643)
(Payments) borrowings of debt to related parties -- (133,561) 1,026
Issuance of equity securities -- -- 504,000
Deposits of restricted cash (682,361) -- --
Purchase of treasury stock (1,807,038) (55,011) --
Minority investments in subsidiaries -- 586,835 292,000
- --------------------------------------------------------------------------------------------------------------
CASH (APPLIED TO) PROVIDED BY FINANCING ACTIVITIES (2,309,855) 1,228,785 859,345
- --------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on
cash and cash equivalents (77,888) -- (33,667)
- --------------------------------------------------------------------------------------------------------------
CASH PROVIDED (APPLIED) DURING YEAR 8,036,630 1,449,761 (1,264,244)
Cash, beginning of year 1,895,276 445,515 1,709,759
- --------------------------------------------------------------------------------------------------------------
CASH, END OF YEAR 9,931,906 1,895,276 445,515
- --------------------------------------------------------------------------------------------------------------
Cash paid during the year for interest 163,346 116,616 33,390
- --------------------------------------------------------------------------------------------------------------
Cash paid during the year for income taxes 4,200,000 -- --
- --------------------------------------------------------------------------------------------------------------
<FN>
See accompanying notes
[Restated - see note 15]
</TABLE>
F-8
<PAGE> 14
CVF CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 [Expressed in U.S. Currency]
1. ORGANIZATION AND BUSINESS DESCRIPTION
CVF Corporation [the "Company"] is a company incorporated under the laws of the
State of Nevada. In September 1995, the Company acquired all of the assets and
assumed all of the liabilities of Canadian Venture Founders Limited Partnership
["CVFLP"] in exchange for the issuance of its equity securities to the partners
of CVFLP. Pursuant to this transaction, the Company issued to CVFLP 4,763,918
common shares, 25,000 shares of its Series "A" Preferred Stock [the "Preferred
Shares"] and warrants [the "Warrants"] entitling CVFLP to purchase approximately
952,784 additional common shares.
The transaction has been accounted for as a reverse acquisition under the
purchase method for business combinations. Accordingly, the merger of the two
companies is recorded as a recapitalization of CVFLP, with CVFLP being treated
as the continuing entity. Prior to consummating the share exchange, the Company
did not have any significant operations. The cost of the acquisition was
recorded at the value of the Company's [the acquired company] net monetary
liabilities of $190,957 on the date of the exchange, in accordance with
Securities and Exchange Commission guidelines.
The Company is engaged primarily in the business of developing and managing
early stage and start-up companies engaged in the information and environmental
technologies areas. The Company's mandate is to acquire significant holdings in
new and emerging companies primarily in the technology area, to assist in the
management of such companies and through them to engage in the businesses
engaged in by such companies. The Company holds majority ownership positions
directly or indirectly in the following companies:
CANADIAN VENTURE FOUNDERS LEASING CORP. ["LEASING"], a wholly-owned subsidiary,
provides funding to various investees of the Company.
BIOREM TECHNOLOGIES, INC. ["BIOREM"] is an industrial biotech company located in
Waterloo, Canada engaged in the business of applying bioconversion and
biotransformation technology to a variety of industrial applications such as the
treatment or clean-up of organic toxic chemicals in soil or groundwater, the
treatment of industrial waste streams for liquids or air and for use in the food
processing, agriculture and pharmaceutical manufacturing industries. At December
31, 1997, the Company had a 69% [69% in 1996] ownership interest in Biorem.
GEMPRINT CORPORATION ["GEMPRINT"] is in the business of providing products and
services to the insurance industry, as well as the consumer and wholesale
jewelry markets to enable diamonds and other precious gems to be uniquely
identified non-invasively using a low power laser imaging system unique to
Gemprint. The results are stored in a database for later verification and
recovery of lost or stolen gems. At December 31, 1997, the Company had a 67%
[64% in 1996] ownership interest in Gemprint.
F-9
<PAGE> 15
CVF CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 [Expressed in U.S. Currency]
1. ORGANIZATION AND BUSINESS DESCRIPTION cont'd
SOLARIA RESEARCH ENTERPRISES, LTD. ["Solaria"] is a Waterloo, Canada company in
the business of developing, manufacturing and marketing a line of electronic
motor speed control products for battery-operated vehicles. At December 31,
1997, the Company had a 67% [51% in 1996] ownership interest in Solaria.
DANTEC ELECTRONICS LIMITED, ["DANTEC ELECTRONICS"] was purchased August 31, 1997
and at December 31, 1997 the Company has a 100% ownership interest in Dantec
Electronics. The Company's investment in Dantec Electronics is held through
1246680 Ontario Limited, a wholly-owned subsidiary. Dantec Electronics, located
in Waterloo, Canada, manufactures and sells electronic moisture detection and
control systems with agricultural applications.
EASTVIEW MARKETING, ONE, LLC ["EASTVIEW"] a wholly-owned subsidiary, was
incorporated in the state of New York on December 19, 1997 for the purpose of
developing an infommercial to market in the United States natural fertilizers
and environmentally safe organic herbicides manufactured by Ecoval Inc., an
equity holding of CVF Corporation.
GRAND ISLAND MARKETING, TWO, LLC ["GRAND ISLAND2"] a wholly-owned subsidiary,
was incorporated on December 17, 1997 in the state of New York. When operations
begin in 1998, Grand Island2 will market and arrange environmental clean up
contracts with real estate developers in the United States using the services of
Biorem Technologies, Inc., and other soil remediation companies.
In 1997, CVF Corp. changed its name to CVF Corporation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These consolidated financial statements have been prepared by management in
accordance with accounting principles generally accepted in the United States.
Principles of Consolidation
The financial statements include the accounts of the Company and its
majority-owned subsidiaries. All material intercompany accounts and transactions
have been eliminated.
The fiscal year-ends of the subsidiaries vary, in some cases, from those of the
Company. The consolidated financial statements combine periods which are within
three months of the Company's recording period, for all the companies.
F-10
<PAGE> 16
CVF CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 [Expressed in U.S. Currency]
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES cont'd
Holdings in which the Company has a 20-50% ownership position and significant
influence are accounted for under the equity method of accounting, such that the
Company records profits and losses to the extent of the Company's total holdings
in the investee, comprising its equity interest, advances and loans.
Holdings in debt securities are classified as "held to maturity", if the Company
has the intent and ability to hold the security to maturity. Holdings held to
maturity are carried at cost.
Other holdings are classified as "available for sale", and are revalued at each
period-end with the unrealized gain or loss, net of tax effect, recorded as an
element of stockholders' equity. The available for sale classification includes
debt and equity securities which are carried at fair value. Gains or losses on
sales of securities are recognized by the specific identification method.
Foreign currency translation
The Company uses the U.S. dollar as the reporting currency of its consolidated
financial statements. However, the functional currency of the Company and its
Canadian subsidiaries is the Canadian dollar. Accordingly, all balance sheet
amounts of the Company and its Canadian subsidiaries are translated to U.S.
dollars using the exchange rates in effect at the applicable year-end. Income
statement amounts of the Company and its Canadian subsidiaries are translated to
U.S. dollars at the average exchange rate for the applicable year. The gains and
losses resulting from the translation of the Company's financial statements into
U.S. currency are recorded as an element of stockholders' equity.
Transactions and balances denominated in currencies other than the functional
currencies of the Company or its subsidiaries are remeasured in the applicable
functional currency. Translation adjustments arising on such remeasurement are
included in the determination of net income (loss).
Cash and cash equivalents
The Company considers all highly liquid temporary cash investments, with an
original maturity of three months or less when purchased, to be cash
equivalents.
Trade receivables
Trade receivables are presented net of allowance for doubtful accounts. The
allowance was $59,300 at December 31, 1997 [$29,200 at December 31, 1996].
Amounts charged to expense were $8,500 during the year ended December 31, 1997
[$29,200 in 1996; $3,600 in 1995].
F-11
<PAGE> 17
CVF CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 [Expressed in U.S. Currency]
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES cont'd
INVENTORY
Inventory is stated at the lower of cost or market using first-in, first-out
method of costing.
ADVERTISING
The Company expenses the production costs of broadcast advertising upon the
first airing of the advertisement. Total unamortized advertising costs included
in prepaid expenses at December 31, 1997 were $234,771 [$nil in 1996 and 1995]
respectively. Other types of advertising costs are expensed as incurred.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated using the
straight-line and declining balance methods over the estimated useful lives of
the assets, which range from 5 to 10 years. Accumulated depreciation at December
31, 1997 was $484,134 [$309,816 in 1996].
GOODWILL
Goodwill is recorded in connection with the acquisition of subsidiaries.
Goodwill also exists in connection with the acquisition of equity basis
holdings, representing the difference between the underlying equity interest
purchased and the amount paid for the interest. All goodwill is being amortized
over a period of 15 years. Amounts amortized in connection with subsidiaries are
charged to amortization expense. Amounts amortized in connection with equity
basis holdings are expensed as a reduction in the carrying value of the
holdings.
The Company assesses the recoverability of goodwill by determining whether the
amortization of goodwill over its remaining life can be recovered through
projected, undiscounted, future cash flows of the related companies.
MINORITY INTEREST
Minority common equity interests are charged with their proportionate share of
subsidiary losses to the extent positive equity-adjusted holdings are available.
Where excess losses are incurred by the parent they will be charged against
minority interests in the event future income becomes available or minority
interests contribute additional equity.
F-12
<PAGE> 18
CVF CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 [Expressed in U.S. Currency]
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONT'D
NET INCOME (LOSS) PER SHARE
The Company has adopted Statement of Financial Accounting Standard No. 128
["SFAS 128"], Earnings per Share. Net income (loss) per common share has been
restated for all periods presented to conform to the provisions of SFAS 128.
Basic earnings (loss) per share is computed by dividing net income (loss)
available to common stockholders by the weighted average number of common shares
outstanding during the period. Diluted earnings (loss) per share reflects the
per share amount that would have resulted if diluted potential common stock had
been converted to common stock, as prescribed by SFAS 128.
REVENUE RECOGNITION
Revenue is recognized when products are shipped or services are performed.
STOCK-BASED COMPENSATION
The Company and its subsidiaries account for stock and options issued for
services in accordance with APB Opinion 25, Accounting for Stock Issued to
Employees, by reference to the fair market value of the Company's stock on the
date of stock issuance or option grant. The companies use the "intrinsic" method
for determining compensation expense whereby expense is recorded for the quoted
market price of the stock issued, or in the case of options, for the difference
between the stock's quoted market price on the date of grant and the option
exercise price. Where the exercise price approximates the price of the
underlying shares no compensation expense is recorded. All compensation options
issued by the Company and its subsidiaries have been issued with an exercise
price greater than or equal to the market price of the shares.
RESEARCH AND DEVELOPMENT
Research costs and development costs are expensed as incurred. Research and
development expenditures are reduced by any related investment tax credits and
government grants.
F-13
<PAGE> 19
CVF CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 [Expressed in U.S. Currency]
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONT'D
INCOME TAXES
The Company accounts for income taxes using the liability method in which a
deferred tax asset or liability is determined based upon the tax effect of the
differences between the financial statement and tax basis of assets and
liabilities, as measured by the enacted rates which will be in effect when these
differences reverse. Provision is made for all applicable U.S. and foreign
income taxes pursuant to this standard. Canadian tax credits attributable to
research and development expenditures which are refundable regardless of whether
there is taxable income, are accounted for as a reduction in research and
development expense.
USE OF ESTIMATES
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, disclosure of contingent
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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheet for cash and cash
equivalents, receivables and accounts payable approximate fair value based on
the short-term maturity of these instruments. Management believes that the fair
market value of advances and notes receivable, included in holdings, and
long-term debt is not materially different than the carrying value.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, The Financial Accounting Standards Board issued Statement No. 131,
Disclosures about Segments of an Enterprise and Related Information, which is
required to be adopted for the Company's financial statements for the year ended
December 31, 1998. Under the new requirements, financial information about
operating segments should be reported on the basis that is used internally by
the Company for evaluating operating segments and resource allocation decisions.
The Company has not determined the effect, if any, of this pronouncement on the
segment disclosures in its consolidated financial statements.
COMPARATIVE FIGURES
Certain amounts on the previously reported 1996 balance sheet have been
reclassified in order to conform with the current year's presentation.
F-14
<PAGE> 20
CVF CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 [Expressed in U.S. Currency]
<TABLE>
<CAPTION>
3. INVENTORY
Inventory consists of the following:
1997 1996
$ $
- --------------------------------------------------------------------------------
<S> <C> <C>
Raw material 201,019 32,850
Work-in-process -- 5,950
Finished goods 189,106 186,409
- --------------------------------------------------------------------------------
390,125 225,209
- --------------------------------------------------------------------------------
</TABLE>
4. HOLDINGS
The Company accounts for its holdings in the following companies using the
equity method:
a. Ecoval Inc. ["Ecoval"], a Montreal, Canada, private company which
manufactures and markets natural fertilizers and environmentally safe
organic herbicides.
b. Dantec Systems Corporation ["Dantec Systems"], a Waterloo, Canada, private
company in the business of developing, manufacturing and marketing a range
of automated, precision moisture detection and manufacturing control
systems.
c. Petrozyme Technologies, Inc. ["Petrozyme"], a Waterloo, Canada, private
company in the business of developing and marketing processes for the
degradation of petroleum waste products.
In addition, the Company has holdings in debt and equity securities of the
following companies:
a. Certicom Corp. ["Certicom"], a Toronto, Canada public company in the
business of digital information security products.
b. TurboSonic, Inc. ["TurboSonic"], a Waterloo, Canada public company in the
business of air pollution control.
c. Mindflight Corporation ["Mindflight"], a Waterloo, Canada public company in
the business of developing and supplying technologies for both paper and
electronic based payment systems.
F-15
<PAGE> 21
CVF CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 [Expressed in U.S. Currency]
<TABLE>
<CAPTION>
4. HOLDINGS CONT'D
Holdings consisted of the following at December 31, 1997:
HOLDINGS
HOLDINGS AVAILABLE FOR
PERCENTAGE AT COST OR EQUITY SALE AT FAIR VALUE
OWNERSHIP $ $
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Ecoval
1,210,550 common shares [i] 24% 840,157
- -----------------------------------------------------------------------------------------------------
Dantec Systems
34,700 common shares [ii] 41% 419,662
- -----------------------------------------------------------------------------------------------------
Notes and advances [vi] 367,500
- -----------------------------------------------------------------------------------------------------
787,162
Petrozyme
50 common shares 50% (286,750)
250,000 Class C non-voting shares 100% 250,000
Notes and advances [vi] 245,000
- -----------------------------------------------------------------------------------------------------
208,250
Certicom
15,605 common shares [iii] [note 14] 0.5% 469,711
59,763 preferred shares 251,677
- -----------------------------------------------------------------------------------------------------
251,677 469,711
TurboSonic
1,334,977 common shares [iv] 13% 392,483
- -----------------------------------------------------------------------------------------------------
Mindflight
1,428,572 special warrants [v] 17% 700,000
- -----------------------------------------------------------------------------------------------------
Other notes and advances [vi] 19,814
- -----------------------------------------------------------------------------------------------------
Total 2,107,060 1,562,194
- -----------------------------------------------------------------------------------------------------
</TABLE>
F-16
<PAGE> 22
<TABLE>
<CAPTION>
CVF CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 [Expressed in U.S. Currency]
4. HOLDINGS CONT'D
Holdings consisted of the following at December 31, 1996:
HOLDINGS
HOLDINGS AVAILABLE FOR
PERCENTAGE AT COST OR EQUITY SALE AT FAIR VALUE
OWNERSHIP $ $
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Ecoval
11,733 common shares 30% (2,838,006)
Notes and advances [vi] 3,119,660
- ---------------------------------------------------------------------------------------------------------
281,654
Dantec Systems
34,360 common shares 41% 742,748
- ---------------------------------------------------------------------------------------------------------
Petrozyme, 50 common shares 50% (109,288)
- ---------------------------------------------------------------------------------------------------------
250,000 Class C non-voting shares 100% 250,000
- ---------------------------------------------------------------------------------------------------------
140,712
Certicom
898,605 common shares 12% 22,302,960
89,645 preferred shares 509,670
- ---------------------------------------------------------------------------------------------------------
509,670 22,302,960
Turbotak
Notes and advances [vi] 367,099
- ---------------------------------------------------------------------------------------------------------
Other notes and advances [vi] 10,030
- ---------------------------------------------------------------------------------------------------------
Total 2,051,913 22,302,960
- ---------------------------------------------------------------------------------------------------------
<FN>
[i] During 1997, notes of $2,569,000 of Ecoval were converted into 11,898
common shares of Ecoval. Subsequent to this transaction, all shares of
Ecoval were subdivided on a 50:1 basis. In addition, the Company paid cash
of $126,875 for an additional 29,000 shares.
[ii] During 1997, notes of $17,500 of Dantec Systems were converted into 340
common shares of Dantec Systems.
</TABLE>
F-17
<PAGE> 23
CVF CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 [Expressed in U.S. Currency]
4. HOLDINGS CONT'D
[iii]During 1997, the Company disposed of 883,000 common shares of Certicom for
proceeds of $20,389,424, realizing a gain of $19,409,357. As at December
31, 1997, the common shares of Certicom have a carrying value of $16,822.
Accordingly, aggregate unrealized gains of $289,849 [net of deferred income
taxes of $163,040] have been recorded as an element of stockholders' equity
for the year ended December 31, 1997.
[iv] During 1997, notes of $732,099 of Turbotak were converted into 315,572
common shares of Turbotak. Turbotak Technologies Inc. merged with Sonic
Environmental, Inc. during 1997 to form TurboSonic, Inc. The conversion
rate to TurboSonic shares was 4.23 shares for each share of Turbotak. As at
December 31, 1997, the common shares of TurboSonic have a carrying value at
cost of $367,532. Accordingly, aggregate unrealized gains of $15,969 [net
of deferred income taxes of $8,982] have been recorded as an element of
stockholders' equity for the year ended December 31, 1997.
[v] The investment in Mindflight represents a private placement purchase of
1,428,572 special warrants allowing the Company to receive one common share
of Mindflight at no additional cost. At December 31, 1997, the market value
of shares of Mindflight listed on the Vancouver Stock Exchange was Cdn.
$0.70 [U.S. $0.49] per share. An officer and director of the Company holds
approximately 20% of the common shares of Mindflight.
[vi] The notes and advances bear interest at prime plus 2%, are unsecured,
payable on demand, and denominated in Canadian currency. Canadian prime
rate at December 31, 1997 was 6% [4.75% in 1996]. The notes have been
classified as long-term as the Company does not intend to demand repayment
in the next year.
F-18
<PAGE> 24
CVF CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 [Expressed in U.S. Currency]
<TABLE>
<CAPTION>
4. HOLDINGS CONT'D
The following table gives certain combined summarized financial information
related to the Company's equity holdings:
1997 1996 1995
INCOME STATEMENT DATA $ $ $
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales 1,560,122 1,396,027 1,090,773
Gross (loss) profit on sales (16,114) 70,789 237,524
Net loss (7,152,634) (2,713,912) (1,644,736)
- --------------------------------------------------------------------------------------------------------
CVF CORPORATION'S SHARE OF NET LOSS (1,899,287) (840,929) (563,113)
- --------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
Current assets 2,665,662 1,260,130 1,820,937
Non-current assets 4,029,052 5,924,516 8,232,657
- --------------------------------------------------------------------------------------------------------
TOTAL ASSETS 6,694,714 7,184,646 10,053,594
- --------------------------------------------------------------------------------------------------------
Current liabilities 1,077,528 1,204,872 1,904,558
Non-current liabilities 2,811,313 11,581,846 9,798,172
Equity (deficit) 2,805,873 (5,602,072) (1,649,136)
- --------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND EQUITY 6,694,714 7,184,646 10,053,594
- --------------------------------------------------------------------------------------------------------
CVF CORPORATION'S SHARE OF
EQUITY (ACCUMULATED DEFICIT) 573,360 (1,659,763) (1,030,388)
- --------------------------------------------------------------------------------------------------------
</TABLE>
F-19
<PAGE> 25
CVF CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 [Expressed in U.S. Currency]
<TABLE>
<CAPTION>
4. HOLDINGS CONT'D
The amount of CVF Corporation's above share of net loss differs from income
(loss) from equity investees appearing in the statement of operations primarily
due to gains on the reduction of ownership in equity investees of approximately
$1,930,000 and amortization of goodwill. The goodwill related to equity
investees is as follows:
ACCUMULATED NET BOOK
COST AMORTIZATION VALUE
AS AT DECEMBER 31, 1997 $ $ $
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Ecoval 1,947,502 288,147 1,659,355
Petrozyme 129,500 12,950 116,550
Dantec Systems 971,603 356,553 615,050
- -------------------------------------------------------------------------------------------------------
3,048,605 657,650 2,390,955
- -------------------------------------------------------------------------------------------------------
ACCUMULATED NET BOOK
COST AMORTIZATION VALUE
AS AT DECEMBER 31, 1996 $ $ $
- -------------------------------------------------------------------------------------------------------
Ecoval 1,502,478 200,331 1,302,147
Petrozyme 135,050 1,501 133,549
Dantec Systems 964,800 304,286 660,514
- -------------------------------------------------------------------------------------------------------
2,602,328 506,118 2,096,210
- -------------------------------------------------------------------------------------------------------
</TABLE>
During 1997, amortization of goodwill related to equity investees totaled
$177,256 [$185,233 in 1996; $151,174 in 1995].
The investee companies have various debt and equity securities outstanding which
are convertible into common stock of the respective investee companies. Any such
conversions would not materially decrease or increase the Company's interest in
the earnings or net assets of any investee.
F-20
<PAGE> 26
CVF CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 [Expressed in U.S. Currency]
<TABLE>
<CAPTION>
5. GOODWILL
ACCUMULATED NET BOOK
COST AMORTIZATION VALUE
AS AT DECEMBER 31, 1997 $ $ $
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Solaria 435,444 143,674 291,770
Biorem 223,566 46,936 176,630
Gemprint 2,391,709 379,018 2,012,691
Dantec Electronics 1,576,911 34,177 1,542,734
- ----------------------------------------------------------------------------------------------------
4,627,630 603,805 4,023,825
- ----------------------------------------------------------------------------------------------------
<CAPTION>
ACCUMULATED NET BOOK
COST AMORTIZATION VALUE
AS AT DECEMBER 31, 1996 $ $ $
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Solaria 360,183 125,819 234,364
Biorem 188,750 33,220 155,530
Gemprint 2,057,468 260,743 1,796,725
- ----------------------------------------------------------------------------------------------------
2,606,401 419,782 2,186,619
- ----------------------------------------------------------------------------------------------------
</TABLE>
During 1997, amortization of goodwill in subsidiaries totaled $204,197 [$158,861
in 1996; $157,027 in 1995].
6. BANK INDEBTEDNESS
Biorem has bank lines of credit available with two major Canadian banks. The
first line has a maximum availability of Cdn. $300,000 [U.S. $210,000], bears
interest at 3% and is payable on demand. At December 31, 1997, an amount of Cdn.
$300,000 [U.S. $210,000] has been drawn on this line. The other line has a
maximum availability of Cdn. $415,000 [U.S. $290,500] with a balance of Cdn.
$425,000 [U.S. $297,500] outstanding at December 31, 1997. The amount drawn on
this facility bears interest at prime plus 1% and is payable on demand. Canadian
prime rate at December 31, 1997 was 6%. These facilities are guaranteed by the
Company and are secured by term deposits of Cdn. $300,000 [U.S. $210,000] and
Cdn. $422,414 [U.S. $295,690].
Gemprint has bank indebtedness of Cdn. $190,479 [U.S. $133,335] with a major
Canadian bank. The demand operating loan bears interest at prime plus 1%. The
loan is guaranteed by CVF Corporation and is secured by a term deposit of Cdn.
$250,797 [U.S. $175,558].
F-21
<PAGE> 27
CVF CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 [Expressed in U.S. Currency]
6. BANK INDEBTEDNESS CONT'D
The weighted average interest rate on bank indebtedness during 1997 was 5%.
In 1996, Biorem had bank lines of credit available with two major Canadian
banks. The first line had a maximum availability of Cdn. $466,000 [U.S.
$326,200], bore interest at 3% and was payable on demand. At December 31, 1996,
an amount of Cdn. $385,000 [U.S. $269,500] had been drawn on this line. The
other line had a maximum availability of Cdn. $300,000 [U.S. $210,000] with a
balance of Cdn. $300,000 [U.S. $210,000] outstanding at December 31, 1997. The
amount drawn on this facility bore interest at prime plus 1.5% and was payable
on demand. Canadian prime rate at December 31, 1996 was 4.75%. In 1996, Gemprint
had bank indebtedness of Cdn. $190,479 [U.S. $133,335] with a major Canadian
bank. The operating loan bore interest at prime plus 1%. The weighted average
interest rate on bank indebtedness during 1996 was 6.1%.
<TABLE>
7. LONG TERM DEBT
Long-term debt comprises the following:
<CAPTION>
1997 1996
$ $
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Convertible debenture issued by Gemprint,
denominated in Canadian dollars, bearing interest
at 5% per annum and due May 1, 2001. Convertible
at the option of the holder into Gemprint common
stock at a price predicated on the price paid
in the next third party common stock sale in
excess of $730,000. 268,857 219,000
Non-convertible debenture issued by Gemprint,
denominated in Canadian dollars, bearing
interest at 13.5%, repayable in February 2000. 140,000 136,875
Other 150,840 82,457
- ------------------------------------------------------------------------------------------------------
559,697 438,332
- ------------------------------------------------------------------------------------------------------
The fair values of long-term debt instruments approximates their carrying value.
</TABLE>
F-22
<PAGE> 28
CVF CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 [Expressed in U.S. Currency]
<TABLE>
<CAPTION>
8. INCOME TAXES
Details of the income tax provision are as follows:
1997 1996 1995
$ $ $
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current - U.S. 5,839,765 892,790 --
Deferred - U.S. 79,900 -- --
- -------------------------------------------------------------------------------------------------------
INCOME TAX PROVISION 5,919,665 892,790 --
- -------------------------------------------------------------------------------------------------------
The benefit (provision) for income taxes differs from the amount computed by applying the statutory
income tax rate to net income (loss) before provision for income taxes as follows:
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
$ $ $
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory U.S. Federal income tax rate 35% 35% 35%
- -------------------------------------------------------------------------------------------------------
Income tax (provision) benefit computed at statutory rate (5,235,000) (248,000) 373,000
Tax benefit of net operating loss carryforward -- 32,000 --
Tax effected losses of equity investees
not available for deduction (684,665) (676,790) (341,000)
Tax benefit of net operating losses not recognized -- -- (32,000)
- -------------------------------------------------------------------------------------------------------
PROVISION FOR INCOME TAXES REPORTED (5,919,665) (892,790) --
- -------------------------------------------------------------------------------------------------------
As of December 31, 1997, the Company had net deferred tax assets of $nil [$nil
in 1996] after a valuation allowance of $2,600,000 [$1,870,000 in 1996].
Deferred income tax liabilities of $172,022 [$7,451,840 in 1996] are recorded in
connection with the unrealized gain attributable to the securities available for
sale valued at market. An additional $79,800 is related to prepaids expensed for
tax purposes.
</TABLE>
F-23
<PAGE> 29
CVF CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 [Expressed in U.S. Currency]
<TABLE>
<CAPTION>
8. INCOME TAXES CONT'D
At December 31, 1997, the Company had losses available for carryforward in
certain of its Canadian subsidiaries of approximately $7,431,220 available to
reduce future years' income for tax purposes in these subsidiaries. These losses
expire as follows:
$
- --------------------------------------------------------------------------------
<S> <C>
1998 48,458
1999 609,166
2000 970,577
2001 1,377,208
2002 857,429
Beyond 3,568,382
- --------------------------------------------------------------------------------
7,431,220
- --------------------------------------------------------------------------------
</TABLE>
9. STOCKHOLDERS' EQUITY
The Company's authorized capital consists of 50,000,000 common shares, $0.001
par value, and 500,000 Preferred shares, $0.001 par value.
COMMON SHARES
Holders of the common shares are entitled to one vote per share on each matter
submitted to vote at any meeting of the shareholders. Common shares do not carry
cumulative voting rights, and, therefore, holders of a majority of the
outstanding shares of common shares will be able to elect the entire Board of
Directors, and, if they do so, minority shareholders would not be able to elect
any members to the Board of Directors. The Company's Board of Director's has
authority, without the action by the Company's shareholders, to issue all or any
portion of the authorized but unissued common shares, which would reduce the
percentage ownership of the Company of its shareholders and which may dilute the
book value of the common shares. Dividends declared on the common shares are
payable in U.S. dollars.
F-24
<PAGE> 30
CVF CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 [Expressed in U.S. Currency]
9. STOCKHOLDERS' EQUITY CONT'D
During 1997, the Company purchased 601,932 of its own shares for an aggregate
consideration of $10 from a corporation owned by officers of the Company. The
Company simultaneously issued to these officers options to purchase an equal
number of common shares for $0.05 per share. The Company recorded no income
effect on this exchange. In addition during 1997, the options were exercised at
a time when the quoted market price of the Company's common stock was $3 per
share. On this sequence of transactions the Company recorded a $727,163 tax
benefit as an increase in Additional Paid in Capital. Bonuses of $1,500,000 were
accrued or were paid to these officers primarily as compensation for the related
personal tax liabilities. The net cash outlay to the Company was approximately
$250,000.
During the year, the Company also repurchased 252,900 common shares for
aggregate cash consideration of $1,807,038.
REDEEMABLE PREFERRED STOCK
Preferred shares may be issued in one or more series as may from time to time be
determined by the Board of Directors. Each series shall be distinctly
designated.
The Company currently has outstanding a series of non-voting Preferred Stock
designated as Series "A" Preferred Stock. Each share of Series "A" Preferred
Stock has a stated value [the "Stated Value"] of the U.S. dollar equivalent of
Cdn. $25 determined at the date of issuance by reference to the noon spot rate
for conversion of Canadian dollars into U.S. dollars as published by the
National Bank of Canada on the business day immediately preceding the date of
issuance. The holders of Series "A" Preferred Stock are entitled to cumulative
dividends at the rate of 5% annually of the Stated Value plus accrued but unpaid
dividends, to be paid in U.S. dollars. The dividends have priority over any
payments of dividends on common shares and on all other shares of preferred
stock ranking junior to the Series "A" Preferred Stock.
The Company may, at its option and at any time, redeem all or part of the Series
"A" Preferred Stock from the holders thereof. Additionally, at any time after
August 20, 2000, a holder of the Series "A" Preferred Stock may require the
Company to redeem any or all of the Series "A" Preferred Stock held by such
holder. The redemption price shall be the Stated Value plus all accrued but
unpaid dividends. In light of the future mandatory redemption feature, the
preferred stock is classified outside of permanent equity. As at December 31,
1997, an amount of $52,500 has been accrued in respect of cumulative unpaid
dividends, of which $12,500 relates to 1997 and $40,000 relates to prior years.
F-25
<PAGE> 31
CVF CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 [Expressed in U.S. Currency]
9. STOCKHOLDERS' EQUITY CONT'D
WARRANTS
As at December 31, 1997 and 1996, 952,784 Warrants are outstanding. Each Warrant
entitles the holder to purchase one common share at a price of Cdn. $3.05 per
share. CVFLP distributed the Warrants to Canadian Venture Founders Management
Limited, its general partner at that time. Until September 20, 2000, the
Warrants may only be exercised if a former limited partner of CVFLP sells any
common shares which were issued to such limited partner in connection with the
reverse takeover described in note 1. In such event, the Warrant holders may
purchase one common share for each five common shares sold by such limited
partner. Any Warrants not exercised before September 20, 2000, may be exercised
by the holder during the six month period immediately following September 20,
2000. As of December 31, 1997 there were no Warrants exercisable. All shares
issuable upon exercise of the Warrants will be restricted securities as that
term is defined in Rule 144 under the 1933 Securities Act of the United States.
F-26
<PAGE> 32
CVF CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 [Expressed in U.S. Currency]
<TABLE>
<CAPTION>
10. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
1997 1996 1995
$ $ $
-------------- -------------- --------------
Numerator:
<S> <C> <C> <C>
Net income (loss) 8,999,271 (293,799) (1,306,806)
Dividends on subsidiary's preferred shares (54,000) -- --
-------------- -------------- --------------
Numerator for basic and diluted earnings (loss)
per share - income (loss) available to common
stockholders 8,945,271 (293,799) (1,306,806)
-------------- -------------- --------------
Denominator:
Denominator for basic earnings (loss) per share
- weighted average shares outstanding 5,870,553 5,989,849 4,978,115
Effect of dilutive securities
Warrants 139,155 -- --
-------------- -------------- --------------
Dilutive potential common shares
Denominator for diluted earnings (loss) per
share - adjusted weighted-average shares and
assumed conversions. 6,009,708 5,989,849 4,978,115
-------------- -------------- --------------
Basic earnings (loss) per share 1.52 (0.05) (0.26)
-------------- -------------- --------------
Diluted earnings (loss) per share 1.49 (0.05) (0.26)
-------------- -------------- --------------
</TABLE>
F-27
<PAGE> 33
CVF CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 [Expressed in U.S. Currency]
11. BUSINESS ACQUISITION AND SUPPLEMENTARY SUBSIDIARY INFORMATION
DANTEC ELECTRONICS
On August 28, 1997, the Company acquired 100% of the outstanding common share
capital of Dantec Electronics. The total consideration was Cdn. $2,825,000 [U.S.
$1,977,500] consisting of a cash payment of Cdn. $1,615,000 [U.S. $1,130,500],
Cdn. $250,000 [U.S. $175,000] to be paid in equal monthly installments over 25
months, and 960,000 special Class A shares of 1246680 Ontario Limited, a
wholly-owned subsidiary of the Company which was incorporated for the purpose of
holding the Dantec Electronics investment. These Class A shares are non-voting,
non-cumulative, convertible into common shares of 1246680 Ontario Limited on a
one-for-one basis and redeemable and retractable at Cdn.
$1 per share.
This acquisition was accounted for as a purchase, with the results of operations
of Dantec Electronics included in the Company's accounts from the date of
acquisition. Assets and liabilities acquired at approximate fair values is
summarized as follows:
<TABLE>
<CAPTION>
$
- --------------------------------------------------------------------------------
<S> <C>
Current assets [including cash of $42,000] 799,500
Property and equipment 30,000
Goodwill 1,577,000
Current liabilities (429,000)
- --------------------------------------------------------------------------------
TOTAL CONSIDERATION 1,977,500
- --------------------------------------------------------------------------------
</TABLE>
If the acquisition of Dantec Electronics had occurred on January 1, 1997, the
unaudited pro forma sales and net income of the Company would have been
approximately $1,602,000 and $14,000 respectively.
GEMPRINT
During 1997, the Company's ownership interest in Gemprint increased by 3%. This
is the net effect of two events. The first is a reduction in ownership due to
the dilutive effect of the conversion of 9,600,000 Warrants to common shares,
4,920,000 of which were converted by the Company. The second transaction is the
purchase of a total of 2,182,263 Class A and B voting shares or 6.6% of the
outstanding voting shares of Gemprint. The consideration for this purchase was
Cdn. $500,000 [U.S. $350,000] which was accounted for as an increase in
goodwill.
F-28
<PAGE> 34
CVF CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 [Expressed in U.S. Currency]
11. BUSINESS ACQUISITION AND SUPPLEMENTARY SUBSIDIARY INFORMATION CONT'D
In addition to Class A voting shares, Gemprint has issued Class B and C voting
shares which have cumulative dividend rates of 10%, are retractible by the
holder at face value plus dividends in arrears, and are convertible to Class A
common shares on a one-to-one basis. The Class B shares held by third parties
have been classified as a liability. The remaining Class B and all of the Class
C shares are held by CVF. The timing of these retractions are restricted to
specific time periods and Gemprint has received a notice to retract Cdn.
$250,000 by a third party investor. Cumulative dividends payable to third party
investees of $167,000 have been accrued in these consolidated statements.
SOLARIA
During 1997, the Company acquired an additional 16% ownership interest in
Solaria for cash consideration of Cdn. $123,893 [U.S. $86,725] which was
accounted for as a purchase of goodwill.
Certain of the Company's subsidiaries have debt and equity securities
outstanding which are convertible into common stock of the respective
subsidiaries. Any such conversions would not materially decrease or increase the
Company's interest in the net assets of any subsidiary.
SUBSIDIARY STOCK OPTIONS
The Company and certain of its subsidiaries have outstanding options granted to
employees and directors. A total of 42,500 options were outstanding to employees
of the Company as at December 31, 1997. In the event the options granted by its
subsidiaries are exercised, the Company's interests will be diluted. A summary
of the stock options and shares outstanding as at December 31, 1997 for those
consolidated entities which have issued options are as follows:
<TABLE>
<CAPTION>
TOTAL NUMBER OF
NUMBER OF VOTING SHARES
SUBSIDIARY OPTIONS OUTSTANDING
- -------------------------------------------------------------------------------
<S> <C> <C>
Biorem 124,000 1,201,650
Gemprint 3,572,383 32,986,168
Solaria 4,000 646,815
</TABLE>
For purposes of pro forma disclosures pursuant to SFAS 123 Accounting for
Stock-Based Compensation, the Company has determined the fair value for the
above options at their date of grant using a Black-Scholes option pricing model
which was developed for use in estimating the fair value of traded options which
have no vesting restrictions and are fully transferable.
F-29
<PAGE> 35
CVF CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 [Expressed in U.S. Currency]
11. BUSINESS ACQUISITION AND SUPPLEMENTARY SUBSIDIARY INFORMATION CONT'D
The Company's pro-rata share of the aggregate fair value of these options at
their date of grant was $100,000. Pro forma earnings per share disclosures have
not been made since there would be no material difference to earnings per share.
12. SUPPLEMENTARY INFORMATION ON CASH FLOWS
Adjustments to net income (loss) from operating activities for the years ending
December 31, are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
$ $ $
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash from operating activities:
Depreciation and amortization 277,113 282,459 201,006
Loss (gain) from equity affiliates 145,165 296,762 (881,091)
Gain on sale of holdings (19,758,954) (3,204,185) --
Minority interest in earnings
(losses) of subsidiaries -- (400,449) (22,515)
- ----------------------------------------------------------------------------------------------------------
Deferred income tax expense 79,900 -- --
(19,256,776) (3,025,413) (702,600)
- ----------------------------------------------------------------------------------------------------------
<CAPTION>
Changes in operating assets and liabilities for the years ending December 31, are as follows;
1997 1996 1995
$ $ $
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Decrease (increase) in trade receivables 511,075 (172,437) (201,536)
Decrease (increase) in inventory 41,433 (3,617) (170,543)
(Increase) decrease in prepaid expenses
and other (261,946) 15,010 59,346
Decrease (increase) in other assets -- 68,588 (64,609)
Increase in trade payables 51,443 -- --
Increase in accounts payable and
accrued expenses 632,969 378,326 855,059
Increase in income taxes payable 887,468 892,790 --
(Decrease) in deferred revenue (18,111) -- --
(Decrease) increase in other current liabilities -- (80,922) 1,026
- ----------------------------------------------------------------------------------------------------------
1,844,331 1,097,738 478,743
- ----------------------------------------------------------------------------------------------------------
</TABLE>
F-30
<PAGE> 36
CVF CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 [Expressed in U.S. Currency]
13. SEGMENTED INFORMATION
Substantially, all of the Company's operations and identifiable assets are
located in Canada. Export sales, primarily to the U.S., amounted to
approximately $826,000 for the year ended December 31, 1997 [$1,116,000 in 1996,
$454,000 in 1995].
14. SUBSEQUENT EVENTS
[a] On January 29, 1998 the Company was listed on the American Stock Exchange.
[b] The remaining 15,605 common shares of Certicom were sold in January and
February 1998 for net proceeds of approximately $375,000.
[c] On January 28, 1998 the Company incorporated, in the State of Delaware, a
wholly-owned subsidiary called Grand Island Marketing, Inc. ["Grand Inc."].
[d] On January 29, 1998 Grand Inc. entered into an agreement with 21st Century
Health Care (1996) Inc., a company incorporated in the province of Ontario,
Canada, and an individual to form a partnership known as "Elements". Grand
Inc. paid an initial contribution of $1,500,000 and has a 69% voting
interest and a 51% economic interest in the partnership. If the Elements
partnership fails to meet its business plan by January 27, 2000, Grand Inc.
will be able to, for a nominal investment, increase its economic interest
to 68%. Elements was formed to carry on the business of operating retail
stores offering natural health and food products and health services
including naturopathic and homeopathic medicine and chiropractic services,
as well as products manufactured by Ecoval.
[e] On March 4, 1998 the Company purchased 120,000 shares in Ecoval to increase
its holdings to 27% from 24% as at December 31, 1997. The consideration for
these shares was $421,875 and 40,179 shares of the Company.
[f] The Company completed a private placement of 100,000 of its shares for
total cash proceeds of $400,000 on March 13, 1998.
F-31
<PAGE> 37
CVF CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 [Expressed in U.S. Currency]
15. CHANGE IN ACCOUNTING FOR PREFERRED SHARES OF A SUBSIDIARY
One of the Company's subsidiaries, Gemprint Corporation, has outstanding Class B
voting shares which are cumulative and retractable by the holder at any time at
face value plus unpaid dividends. The Class B shareholders have agreed not to
exercise the retraction right except during the periods of October 3, 1997 to
November 1, 1997 and October 3, 2002 and November 1, 2002. Based on the limited
period for retraction, the shares were previously accounted for as common shares
of Gemprint and no dividends were accrued. The minority interest represented by
these shareholdings on the Company's financial statements had been reduced to
zero as a result of absorbing its share of Gemprint's losses.
The Company's financial statements for all periods presented have been restated
to account for the Class B shares of Gemprint as a liability since they are
retractable by the holder at face value plus accrued dividends at any time. The
effect of this restatement on each year is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
$ $ $
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN
Assets 299,000 324,000 349,000
Liabilities 527,585 676,000 606,000
Stockholders' equity (228,585) (352,000) (242,000)
Net income (loss) (37,000) (110,000) (242,000)
</TABLE>
F-32
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF CVF CORPORATION FOR THE YEAR ENDED DECEMBER
31, 1997 AS INCLUDED IN PART II ITEM 7 OF THIS 10-KSB FILING.
</LEGEND>
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 0.72
<CASH> 10,614,267
<SECURITIES> 0
<RECEIVABLES> 617,290
<ALLOWANCES> 59,300
<INVENTORY> 390,125
<CURRENT-ASSETS> 11,889,286
<PP&E> 653,985
<DEPRECIATION> 509,134
<TOTAL-ASSETS> 19,752,216
<CURRENT-LIABILITIES> 5,228,312
<BONDS> 559,697
456,250
0
<COMMON> 5,992
<OTHER-SE> 12,057,143
<TOTAL-LIABILITY-AND-EQUITY> 19,752,216
<SALES> 1,685,399
<TOTAL-REVENUES> 1,685,399
<CGS> 1,091,821
<TOTAL-COSTS> 1,091,821
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 14,918,936
<INCOME-TAX> 5,919,665
<INCOME-CONTINUING> 8,999,271
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,999,271
<EPS-PRIMARY> 1.52
<EPS-DILUTED> 1.49
</TABLE>
