<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 7, 1998
REGISTRATION NO. 333-51757
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO.1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
--------------------------------------
CVF CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEVADA
(PROVINCE, STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)
9999
(PRIMARY STANDARD INDUSTRIAL CLASSIFICATION CODE NUMBER)
87-0429335
(I.R.S. EMPLOYER IDENTIFICATION NO.)
916 CENTER STREET
LEWISTON, NEW YORK 14092
(716) 754-7883
(ADDRESS (INCLUDING POSTAL OR ZIP CODE) AND TELEPHONE NUMBER (INCLUDING AREA
CODE) OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
JEFFREY DREBEN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
916 CENTER STREET
LEWISTON, NEW YORK 14092
(716) 754-7883
(NAME, ADDRESS (INCLUDING ZIP CODE) AND TELEPHONE NUMBER
(INCLUDING AREA CODE) OF AGENT FOR SERVICE)
--------------------------------------
Copies to:
CHRISTOPHER W. MORGAN, ESQ. RICHARD SUTIN, ESQ.
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP MEIGHEN DEMERS
200 BAY STREET, ROYAL BANK PLAZA 200 KING STREET WEST
NORTH TOWER, SUITE 1820 MERRILL LYNCH CANADA TOWER
TORONTO, ON M5J 2J4 SUITE 1100, BOX 11
(416) 777-4700 TORONTO, ON M5H 3T4
(416) 977-8400
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
<PAGE>
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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<PAGE>
PROSPECTUS
CVF CORPORATION
Maximum of Cdn$24,000,000 (3,000,000 Common Shares) and
Minimum of Cdn$8,000,000 (1,000,000 Common Shares)
This offering (the "Offering") of up to 3,000,000 Common Shares of CVF
Corporation ("CVF" or the "Company") consists of a new issue of a minimum of
874,430 and a maximum of 2,874,430 Common Shares by the Company and a
secondary offering (the "Secondary Offering") of 125,570 Common Shares by two
selling shareholders (the "Selling Shareholders"). See "Principal and
Selling Shareholders." The Company will not receive any part of the proceeds
of the sale by the Selling Shareholders. The Common Shares will not be
offered for sale in the United States. The price of the Common Shares was
determined by negotiation between the Company, the Selling Shareholders and
Moss, Lawson & Co. Limited (the "Agent"). After giving effect to the
Offering (assuming no exercise of the Over-Allotment Option referred to
below), the offering price of each Common Share distributed hereunder exceeds
the pro forma net tangible book value thereof as at March 31, 1998 by
Cdn$6.46, representing dilution of 80.72% after giving effect to the minimum
offering and by Cdn$5.15, representing dilution of 64.40% after giving effect
to the maximum offering. See "Plan of Distribution" and "Dilution."
The outstanding Common Shares are listed for trading on the American Stock
Exchange under the symbol "CNV." Prior to January 29, 1998, the Company's
Common Shares were listed on the over-the-counter market in the United States
and quoted on the National Association of Securities Dealers' OTC Bulletin
Board (the "OTC Bulletin Board") under the symbol "CVFJ". On July 2, 1998,
the last reported sale price of the Common Shares on the American Stock
Exchange was US$5.25. See "Trading of the Common Shares."
---------------------
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6 OF THIS PROSPECTUS.
----------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
NET PROCEEDS TO
---------------
AGENT'S NET PROCEEDS TO SELLING
------- --------------- -------
PRICE TO THE PUBLIC COMMISSION(1)(5) COMPANY(3) SHAREHOLDERS(3)
------------------- ---------------- ---------- ---------------
<S> <C> <C> <C> <C>
Per Common Share Cdn$8.00 Cdn$0.56 Cdn$7.44 Cdn$8.00
Maximum Offering(2)(4) Cdn$24,000,000 Cdn$1,609,681 Cdn$21,385,759 Cdn$1,004,560
Minimum Offering (2)(4) Cdn$8,000,000 Cdn$489,681 Cdn$6,505,759 Cdn$1,004,560
</TABLE>
(1) The Agent will also receive on closing non-assignable warrants (the
"Compensation Warrants") to purchase up to 10% of the total number of
Common Shares sold pursuant to the Offering (excluding the Secondary
Offering) at the Offering price hereunder. The Compensation Warrants shall
be exercisable for a period of 18 months after the date on which a receipt
is issued for the final prospectus by the securities regulatory authorities
in each of the Provinces of Canada, except Quebec.
(2) The Company has granted the Agent an option (the "Over-Allotment Option"),
exercisable within 60 days of the closing of the Offering, to purchase up
to 15% of the total number of Common Shares sold pursuant to the Offering
on the same terms set forth above solely to cover over-allotments, if any,
and for market stabilization purposes. If the Over-Allotment Option is
exercised in full, assuming the maximum offering, the total price to the
public will be Cdn$27,600,000, the Agent's Commission will be Cdn$1,861,681
and the net proceeds to the Company will be Cdn$24,733,759. The net
proceeds to the Selling Shareholder will not be affected by the exercise of
the Over-Allotment Option. See "Plan of Distribution".
(3) Before deducting expenses of the Offering estimated at Cdn$625,000 which,
together with the Agent's Commission, will be paid by the Company. There
is no commission payable on the Secondary Offering.
(4) There will be no closing unless at least 1,000,000 Common Shares are sold.
The maximum offering assumes that 3,000,000
<PAGE>
Common Shares are sold.
(5) The Company has agreed to indemnify the Agent against certain liabilities,
including liabilities under the United States Securities Act of 1933, as
amended (the "U.S. Securities Act"). See "Plan of Distribution".
The Agent conditionally offers the Common Shares for sale on a "best efforts"
basis, subject to acceptance of subscriptions and prior sale if, as and when
issued by the Company in accordance with the conditions contained in the
Agency Agreement referred to under "Plan of Distribution". Subscriptions will
be received subject to rejection or allotment in whole or in part and the
right is reserved to close the subscription books at any time without notice.
It is expected that certificates for the Common Shares will be available for
delivery at closing which will take place on or about July 14, 1998, but in
any event not later than July 31, 1998. Subscription proceeds will be held
pursuant to a Depository Agreement with CIBC Mellon Trust Company until
subscriptions have been received for the minimum offering. If subscriptions
for a minimum of 1,000,000 Common Shares are not received on or before
closing, the Offering will be cancelled and all subscription proceeds will be
returned to the subscribers, without interest or deduction. See "Plan of
Distribution".
July 6, 1998
<PAGE>
PRESENTATION OF FINANCIAL INFORMATION
The historical consolidated financial statements of the Company (the
"Consolidated Financial Statements") contained in this Prospectus are reported
in U.S. dollars and have been prepared in accordance with accounting principles
generally accepted in the United States ("U.S. GAAP"). These principles conform
in all material respects with accounting principles generally accepted in Canada
("Canadian GAAP"), except as described in Note 15 to the Consolidated Financial
Statements.
All dollar amounts in this Prospectus are expressed in Canadian dollars,
except where otherwise indicated. References to "$" are to Canadian dollars,
and references to "US$" are to U.S. dollars.
EXCHANGE RATE INFORMATION
The following table sets forth, for each period indicated, the high and low
exchange rates for U.S. dollars expressed in Canadian dollars, the average of
such exchange rates on the last day of each month during such period, and the
exchange rate at the end of such period, based on the noon buying rate in The
City of New York for cable transfers in Canadian dollars as certified for
customs purposes by the Federal Reserve Bank of New York (the "Noon Buying
Rate").
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31 YEAR ENDED DECEMBER 31
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1998 1997 1997 1996 1995 1994
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Low. . . . . . $1.4637 $1.3356 $1.3356 $1.3310 $1.3286 $1.3103
High . . . . . 1.4075 1.3835 1.4399 1.3822 1.4238 1.4079
Average. . . . 1.4337 1.3657 1.3891 1.3643 1.3686 1.3695
Period
end. . . . . . 1.4219 1.3835 1.4288 1.3697 1.3656 1.4029
</TABLE>
On June 29, 1998, the Noon Buying Rate was $1.4721 per US$1.00. References
to Canadian dollars in this Prospectus have been calculated based on the Noon
Buying Rate on June 29, 1998, except where otherwise indicated.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Prospectus, including under "Risk Factors" and
"Business of CVF Corporation" as well as elsewhere in this Prospectus,
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company, or industry results, to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. See "Risk Factors."
Given these uncertainties, prospective investors are cautioned not to place
undue reliance on such forward-looking statements.
-1-
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING INFORMATION IS A SUMMARY ONLY AND IS QUALIFIED IN ITS
ENTIRETY BY THE MORE DETAILED INFORMATION AND THE CONSOLIDATED FINANCIAL
STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS.
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FACTORS SET FORTH HEREIN
UNDER "RISK FACTORS" AND ARE URGED TO READ THIS PROSPECTUS IN ITS ENTIRETY.
UNLESS OTHERWISE SPECIFICALLY INDICATED, ALL INFORMATION IN THIS PROSPECTUS
ASSUMES NO EXERCISE OF THE AGENT'S OVER-ALLOTMENT OPTION. ALL DOLLAR REFERENCES
IN THIS PROSPECTUS ARE TO CANADIAN DOLLARS UNLESS OTHERWISE SPECIFICALLY
INDICATED. REFERENCES TO US$ ARE TO U.S. DOLLARS. CAPITALIZED TERMS HAVE THE
MEANINGS ASCRIBED TO SUCH TERMS ELSEWHERE IN THIS PROSPECTUS.
THE COMPANY
CVF Corporation, ("CVF" or the "Company") is primarily involved in the
business of selecting, developing and managing early stage and start-up
companies in three business sectors: (1) information technology/security
systems, (2) process control/industrial automation, and (3) environmental
solutions/natural products. The Company's aim is to acquire significant holdings
in new and emerging companies primarily, but not exclusively, in these areas, to
assist in the management of such companies and to help finance their growth by
assisting them to obtain additional capital, either from CVF's own resources or
other sources.
As of the date hereof, the Company has interests in each of the
following corporations: Canadian Venture Founders Leasing Corp. ("Leasing"),
1246680 Ontario Limited ("1246680"), Eastview Marketing, One, LLC
("Eastview"), Biorem Technologies, Inc. ("Biorem"), Grand Island Marketing,
Two, LLC ("Grand Island2"), Grand Island Marketing, Inc. ("Grand Inc."),
Gemprint Corporation ("Gemprint"), Solaria Research Enterprises, Ltd.
("Solaria"), Dantec Corporation ("Dantec"), Petrozyme Technologies, Inc.
("Petrozyme"), Ecoval Inc. ("Ecoval"), TurboSonic Canada Inc. ("TurboSonic
Canada"), RDM Corporation ("RDM") and Certicom Corp. ("Certicom"),
(collectively, the "Holdings").
INFORMATION TECHNOLOGY/SECURITY SOLUTION HOLDINGS
CVF was a founding investor in Certicom. From 1989 to 1994, CVF made a
series of investments in Certicom, a company which provides encryption
technologies, totaling approximately $2.5 million. Certicom went public in
1995, and between 1996 and early 1998, the Company sold its common shares in
Certicom for net proceeds of approximately $34 million. CVF's remaining
investment in Certicom consists of preferred shares and a debenture.
Gemprint provides products and services to the retail, wholesale and
consumer jewelry markets to enable diamond and other precious gems to be
identified. CVF holds 67% of the voting shares of Gemprint.
RDM, a public company listed on the Vancouver Stock Exchange, develops and
supplies technologies that enable secure and accurate payments for both
paper-based and electronic payment systems. CVF owns 16% of the common shares
of RDM.
PROCESS CONTROL/INDUSTRIAL AUTOMATION HOLDINGS
Dantec designs, manufactures and markets industrial automation control
systems. CVF holds a 53% interest in Dantec.
Solaria manufactures and markets microprocessor-based electronic
controllers for direct current motors used in battery powered industrial
vehicles. CVF has an interest of approximately 67% of the voting shares in
Solaria.
-2-
<PAGE>
ENVIRONMENTAL SOLUTIONS/NATURAL PRODUCTS HOLDINGS
Ecoval, a reporting issuer in the Provinces of Ontario, Alberta and Quebec,
manufactures and markets a range of all natural, environmentally safe
fertilizers and herbicides. The Company currently holds 27% of the voting
shares of Ecoval. Eastview markets some of Ecoval's products through direct to
consumer television advertising. Eastview is a wholly owned subsidiary of the
Company.
Biorem is an industrial biotechnology company that utilizes technologies
developed for the bioconversion and biotransformation of organic contaminants
in the environment. CVF owns 69% of Biorem's common shares.
Grand Inc. has a 51% economic interest in Elements, a partnership formed to
carry on the business of operating retail stores which offer natural food
products, nutritional supplements and health services. Grand Inc. is a wholly
owned subsidiary of the Company.
Grand Island2 is a wholly owned subsidiary of the Company that has not yet
commenced operations. It was founded by the Company to market and arrange
environmental clean-up services with real estate developers acquiring properties
with environmental problems using the services of Biorem, Petrozyme and other
soil remediation companies.
Petrozyme has developed proprietary solutions for the treatment of wastes
or oil recovery originating from the oil production and refining industries,
including oil-based wastes such as emulsions and sludge. CVF owns 50% of the
voting equity in Petrozyme.
TurboSonic Canada is a subsidiary of TurboSonic Technologies, Inc.
("TurboSonic Technologies"), a public New Jersey-based company whose shares are
quoted on the OTC Bulletin Board. TurboSonic Technologies markets, develops
and supplies air pollution control systems and spray nozzles to a range of
industries worldwide. CVF owns shares in TurboSonic Canada which are
exchangeable into a 13% equity interest in TurboSonic Technologies.
OTHER HOLDING
Leasing, a wholly owned subsidiary of the Company, provides financial
services to some of the Holdings and is used by CVF to acquire interests in some
of the Holdings.
FORM OF INVESTMENTS
The Company seeks to acquire ownership interests in suitable businesses
commensurate with the funding and the managerial assistance required to be
provided by the Company. The form of the Company's positions in its Holdings is
negotiated with each particular investee company, taking into account the need
of CVF and its management team to play an active role in the investee business
in collaboration with the investee business' existing management teams, the
long-term business requirements of the investee business, the potential to make
significant rates of return and tax considerations. CVF generally will not
invest in a business unless it can exert some degree of influence on its
operations.
The Company's interests in investee businesses may take the form of debt
(with or without conversion features), debt with warrants to acquire shares or
participation in cash flow or earnings, preferred shares (with or without
conversion features) or common shares. Certain investments may involve a
combination of these instruments.
-3-
<PAGE>
THE HOLDINGS
Each Holding has its own business plan and financial reporting systems.
With the exception of Leasing, Eastview, Grand Inc. and Grand Island2, each of
the Holdings has completed the development of their original products, has set
up markets and distribution channels, has sold products and has put management
teams in place and/or is currently working to strengthen and expand its
management teams. The majority of the Holdings are working to improve their
marketing capabilities. The additional capital required by each of the Holdings
is primarily for expansion of sales, marketing and continuation of research and
development to enable the Holdings to realize their commercial potential over
the next three to five years. As is common with early stage technology
companies, each of the Holdings has historically operated at a loss or at
break-even. While some of the Holdings are currently operating profitably,
others are expected to operate at a loss for at least the next year if not
longer, including Ecoval, Gemprint, Biorem, Petrozyme, Grand Inc., Grand Island2
and Eastview. Some of these companies, including RDM and Dantec, may show
losses due to substantial investment in research and development. These
companies may continue to need additional financing from CVF or other sources in
order to continue operations and CVF plans to use a portion of the proceeds of
this offering to further fund these companies and other Holdings.
THE OFFERING
OFFERING: A minimum of 1,000,000 and a maximum of 3,000,000 Common Shares.
Up to an additional 450,000 Common Shares may be offered upon
exercise of the Over-Allotment Option granted by the Company to
the Agent.
<TABLE>
<CAPTION>
AMOUNT: MAXIMUM OFFERING
<S> <C> <C>
New Issue: $22,995,440 2,874,430 Common Shares
Secondary Offering: $ 1,004,560 125,570 Common Shares
----------- -----------------------
Total $24,000,000 3,000,000 Common Shares
----------- -----------------------
----------- -----------------------
<CAPTION>
MINIMUM OFFERING
New Issue: $6,995,440 874,430 Common Shares
Secondary Offering: $1,004,560 125,570 Common Shares
----------- -----------------------
Total $8,000,000 1,000,000 Common Shares
----------- -----------------------
----------- -----------------------
</TABLE>
PRICE: $8.00 per Common Share.
USE OF PROCEEDS: The net proceeds from this Offering to the Company are
estimated to be approximately $20,760,759 (maximum
offering)/$5,880,759 (minimum offering) ($24,108,759 if
the Agent's Over-Allotment Option is exercised in full)
and after deducting the expenses of the issue, including
the Agent's Commission. Of the net proceeds
approximately: (i) one-third will be used to fund the
growth of the Holdings in order to enable them to meet
their respective business plans and, in particular, the
expansion of the sales and marketing efforts of the
Holdings; (ii) one-third will be used for the purpose of
strategic mergers and acquisitions of businesses that are
directly related to the existing Holdings; and (iii)
one-third will be used to acquire significant holdings in
companies engaged primarily, but not exclusively, in the
information technology, process control and environmental
sectors. If only the minimum offering is realized, the
Company intends to increase the percentage allocated to
fund the needs of its current holdings and reduce the
percentage allocated to new acquisitions. The Company
expects that approximately 70% of the proceeds allocated
to new
-4-
<PAGE>
acquisitions will be used to acquire positions in private
companies and that approximately 30% of the such proceeds
will be used to acquire positions in public companies
with market capitalization of less than US$10 million.
In each case, the Company intends to acquire interests in
companies with established products and management and,
in most cases, revenues of less than US$3.0 million.
Proceeds of the Offering are expected to be utilized over
the next three to four years and will be invested in
short term, interest-bearing, investment grade securities
until such time as the funds are invested as described
herein. See "Use of Proceeds."
AMERICAN STOCK
EXCHANGE SYMBOL: "CNV"
DIVIDEND POLICY: The Company's current intention is to reinvest its earnings
to finance additional investments in the Holdings or in new
business opportunities and the Company does not anticipate
paying dividends on the Common Shares in the foreseeable
future. See "Dividends."
RIGHTS OFFERING: CVF has agreed to use its best efforts to cause some of its
Holdings completing an Initial Public Offering to complete
a concurrent Rights Offering to such Holding's shareholders.
The Company has also agreed to distribute the rights that it
receives from a Holding to the holders of its Common Shares
by way of a taxable dividend, subject to any restriction
imposed by applicable laws. See "Dividends".
RISK FACTORS: An investment in the Common Shares may be considered
speculative and is subject to a number of risks, including:
the nature of the Company's investment in the Holdings and
risks generally associated with emerging companies including
the concentration of the Company's investment in a
relatively small number of Holdings and reliance by the
Company on publicly available or limited information in
respect of particular Holdings; history of losses by the
Holdings and uncertainty of future results; risks associated
with companies in the technology industry; the Holding's and
the Company's need for additional financing;
misappropriation of the Holding's proprietary technology and
infringement of other's technologies; dependence of the
Company and the Holdings on the personal efforts of two of
the Company's senior executives and the need for the Company
to recruit additional personnel; several of the Holdings are
subject to environmental and regulatory regulations, the
compliance with which may result in additional costs to the
Holdings without any corresponding revenue; the reliance of
certain of the Holdings on one or a few products; the risks
associated with the Company's acquisition policies; the
risks associated with doing business internationally; the
ownership of the Company's shares are concentrated with a
small number of persons who may be in a position to direct
the affairs of the Company; the exposure to exchange rate
fluctuations; and limited liquidity in the public market.
The completion of the Offering will result in immediate and
substantial dilution to shareholders. See "Risk Factors."
-5-
<PAGE>
RISK FACTORS
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS
AND OTHER INFORMATION CONTAINED IN THIS PROSPECTUS BEFORE DECIDING TO PURCHASE
COMMON SHARES.
NATURE OF INVESTMENT; EARLY STAGE FOCUS
The business of the Company is to acquire significant holdings in new and
emerging companies primarily in the technology area, and to assist in the
management of such companies. The Company's investments are concentrated in a
relatively small number of Holdings and there can be no assurance that
additional suitable investments will be found. There is no guarantee that an
investment in the Common Shares will earn a specified rate of return or any
return in the short or the long term.
Investments of the kind to be made by the Company involve a longer
commitment than that typical for other types of businesses. Many such Holdings
require between three to five years in order to mature and generate the returns
expected by investors. There can be no assurance that any of the Holdings will
mature and generate the returns, or permit invested capital to be recouped. As
well, losses on unsuccessful Holdings are often realized before gains on
successful Holdings are realized. An investment in the Common Shares is only
appropriate for investors able to make a long-term commitment and with the
capacity to absorb a loss of some or all of their investment.
Some of the Holdings (including Petrozyme, Grand Inc., Grand Island2 and
Eastview) are subject to various risks common to early-stage development
companies including lack of a customer base, lack of name recognition and
credibility, the need to bring in experienced management and the need to develop
and refine the business.
The Company's ability to achieve an acceptable rate of return on any
particular investment in a Holding is subject to a number of risk factors often
beyond its control, including increased competition and lack of market share,
quality of management, cyclical or uneven financial results, technological
obsolescence and regulatory delays.
The value of the Common Shares is based on the value of the securities of
the businesses the Company invests in and therefore the value of the Common
Shares will increase or decrease with the value of the Holdings. The value of
the securities of such businesses will fluctuate with general economic
conditions including the level of interest rates, corporate earnings, economic
activity, the Canadian dollar and other factors. Early stage technology
businesses, by virtue of their size and state of development, will be affected
more than larger, more mature entities by external events, including downturns
in general economic conditions.
In addition, the majority of the Holdings are private companies and, as
such, the Company's investments in such Holdings are not readily marketable and
the Company may not be able to easily divest its investment in such Holdings.
The information contained in this Prospectus concerning the public Holdings
(TurboSonic Technologies (TurboSonic Canada's parent company), Ecoval and RDM)
has been taken or is based upon publicly available documentation and information
on file with Canadian and/or U.S. securities regulatory authorities and other
public sources. The information contained in this Prospectus concerning the
private Holdings has been taken from or is based upon documentation and
information provided by such private Holdings to the Company.
-6-
<PAGE>
LIMITED OPERATING HISTORIES; UNCERTAINTY OF FUTURE OPERATING RESULTS
The profitability of the Company is significantly affected by the
activities and financial results of the Holdings. Certain of the Holdings have
not yet achieved profitable operations and Ecoval, Gemprint, Biorem, Petrozyme,
Grand Inc., Grand Island2 and Eastview are expected to operate at a loss for at
least the next year, if not longer. As a result, the Company has sustained
losses, on a consolidated basis in fiscal years 1996 and 1997. A number of the
Holdings' products have only recently been introduced to the market or have not
yet been commercially exploited. Accordingly, several of the Holdings have
limited operating histories upon which an evaluation of their businesses and
prospects can be based. Due to the Holdings' limited operating histories, there
can be no assurance that the Company's revenue will grow, or that the Company
will be able to achieve sustained profitability on a quarterly or annual basis.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations".
TECHNOLOGY RISK FACTORS
Many of the Holdings and businesses that the Company may invest in are
developing products that will require significant additional development,
testing and financial support prior to commercialization. There can be no
assurance that such products will be successfully developed, be capable of being
produced in commercial quantities at reasonable costs or be successfully
marketed. The likelihood of the long-term success of the Company must be
considered in light of the expenses, difficulties and delays frequently
encountered in connection with the development of new technology and the
competitive environments of the technology industry. Summarized below are
certain risks generally applicable to companies in the technology industry.
RAPID TECHNOLOGICAL CHANGE
The markets for many of the Holdings' products are generally characterized
by rapid and significant technological advancements, the frequent introduction
of new products utilizing new technologies, changes in customer needs and
demands and evolving industry standards. Because of the rapid technological
change, the life span of the Holdings' products is difficult to estimate. The
adoption of new technologies or industry standards can render the Holdings'
products obsolete and unmarketable. This presents substantial risks for the
Company because the Holdings' products typically have lengthy development and
sales cycles. The Holdings' future success will depend on their ability to
address the increasingly sophisticated needs of customers by designing,
developing, testing, marketing and selling enhancements to their products on a
timely and cost-effective basis that keep pace with technological developments,
emerging industry standards and end-user requirements. There can be no
assurance that the Holdings will be successful in developing and marketing
enhancements to their products or in developing new products that respond to
technological changes, evolving industry standards or customer requirements,
that the Holdings will not experience difficulties or new products, or that such
enhancements or new products will adequately address the requirements of the
marketplace and achieve any significant degree of market acceptance. There can
be no assurance that the Holdings will continue to keep their products
technologically competitive.
COMPETITION
The market for the Holdings' products is intensely competitive, rapidly
evolving and subject to technological change. To maintain and improve their
competitive position, the Holdings must continue to develop and introduce, in a
timely and cost-effective manner, new products and product features that keep
pace with offerings provided by competitors. The principal competitive factors
in the technology industry are quality, performance, price, customer support,
reputation and product attributes such as compatibility, functionality and ease
of use.
-7-
<PAGE>
The Company expects competition in the technology industry to persist,
increase and intensify in the future. Many of the Holding's current and
potential competitors have longer operating histories and substantially greater
financial, technical and marketing resources and name recognition than the
Holdings. The Holdings' current or potential customers may develop products
comparable or superior to those developed by the Holdings or adapt more quickly
to the Holdings to new technologies, evolving industry standards, new product
introductions, or changing customer requirements. If a competitor develops
products comparable or superior to those developed by one of the Holdings,
significant price competition might develop which could force the Holding to
lower its prices. This could have an adverse effect on the Company's business,
results of operations and financial condition.
PRODUCT DEFECTS AND PRODUCT LIABILITY
Many of the products offered by the various Holdings, may contain design
defects that are difficult to detect and correct. There can be no assurance
that errors will not be found in new products after commencement of commercial
shipments or, if discovered that the Company will be able to successfully
correct such errors in a timely manner or at all. In addition, despite testing,
some design defects or errors may only become apparent when the products after
they have been shipped, which could result in loss of or delay in market
acceptance of the Holdings' products, and alleviating such errors and failures
in the Holdings' products could require significant expenditure of capital and
other resources by the Holdings. Moreover, the reputational harm resulting from
product errors and failures would be damaging to the business of the Holdings.
The consequences of such errors and failures could have a material adverse
effect on the Company's business, results of operations and financial condition.
POTENTIAL FLUCTUATIONS IN OPERATING RESULTS; LENGTHY SALES CYCLES
Companies in the technology industry typically experience significant
fluctuations in quarterly or annual results caused by a number of factors.
Products are often included as part of a complex and time-consuming bid process
that is subject to numerous delays and approvals that are beyond the control of
the company. For these and other reasons, the sales cycles associated with the
Holdings' products are often lengthy and subject to significant delays. To the
extent that implementations of the Holdings' products are delayed for any
reason, the Holdings' ability to recognize revenue with respect to any contract
may be impaired, which in turn could materially adversely affect the Holdings'
quarterly or annual operating results.
Quarterly sales and operating results depend generally on the volume and
timing of orders within the quarter. The tendency of sales in the technology
industry to occur late in fiscal quarters and the ability of the Holdings to
fill orders received within the quarter, all of which are difficult to forecast
and manage, could have a material adverse effect on the Holdings' quarterly or
annual results. There also may be other factors that significantly affect the
Holdings' quarterly or annual results which are difficult to forecast given the
Holdings' limited operating histories, including changes in demand for the
Holdings' products, the introduction or enhancement of products by the Holdings
and their competitors and market acceptance of those enhancements or products,
delays in the introduction of products or enhancements by the Holdings, order
deferrals in anticipation of upgrades and new products and changes in the
Holdings' pricing policies or those of their competitors. Operating results are
affected by the mix of distribution channels through which products are sold,
the mix of products, the mix of international and North American revenues,
regulatory changes, foreign currency exchange rates, the timing and level of
capital expenditures of the various Holdings' customers and general economic
conditions. As a result, the magnitude of quarterly fluctuations may not become
evident until late in, or after the close of, a particular quarter. The
Holdings' operating expenses are based in part on expectations as to future
revenue levels and to a large extent may be fixed in
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<PAGE>
the short term; therefore, a shortfall in quarterly sales could lead to a
quarterly operating loss which could have a material adverse effect on the
Holdings.
The Company's operating results have historically been, and will continue
to be, subject to quarterly and annual fluctuations due to a variety of factors.
Any shortfall in revenues in a given quarter may impact the Company's results of
operations due to an inability to adjust expenses during the quarter to match
the level of revenues for the quarter. There can be no assurance that the
Company will be able to grow in future periods or that it will be able to
sustain its level of total revenues or its revenue growth on a quarterly or
annual basis.
YEAR 2000 BUSINESS RISKS
Many existing computer programs use only two digits to identify a year in
the date field. These programs were designed and developed without considering
the impact of the upcoming change in the century. If not corrected, many
computer applications could fail or create erroneous results by or at the year
2000. The "year 2000" issue affects virtually all companies and organizations.
The Company and, to the best of the knowledge of the Company, the Holdings
are currently identifying year 2000 issues related to their internal systems.
There can be no assurance that the Company or any of the Holdings will not
experience unanticipated material costs caused by undetected errors or defects
in their internal systems. Delays in the implementation or a failure to
identify year 2000 issues could result in material adverse consequences
including delays in the delivery or sale of the Holdings' products.
In addition to the Company's and the Holdings' internal systems, the
Holdings' products may contain undetected errors or defects stemming from the
year 2000 issue. There can be no assurance that the Holdings' products do not
contain such undetected errors or that a Holding's products will be able to
function when it is integrated with noncompliant products, including third party
hardware and software. The inability of one or more of the Holdings to make
their products year 2000 compliant could have a material adverse effect on the
Company's business, operations and financial condition.
The Holdings' customers are also impacted by the year 2000 issue. Should
the Holdings' customers and potential customers be required to allocate
substantial resources to resolve their specific year 2000 problems, then the
Holdings could experience a reduced demand for their products and services,
which could have a material adverse effect on the Company's business, results of
operations and financial condition.
NEED FOR ADDITIONAL FINANCING
Each of the Holdings generally requires additional capital to meet its
business plans beyond the Company's initial involvement. The Company intends to
actively assist the Holdings in obtaining additional capital, either from its
own resources or other participants. To meet such capital requirements, the
Company will consider additional public or private financing (including the
issuance of additional equity securities). In addition, the Company also
requires additional capital to invest in new companies. If additional funds are
raised by issuing equity securities, further dilution to shareholders may
result. There can be no assurance that additional funding will be available or,
if available, that it will be available on terms acceptable to the Company or
that the Holdings will be able to raise sufficient amounts to remain in business
and/or to meet their respective business plans. Several of the Holdings rely on
financial support from the Company, which includes the accrual of payment of
interest on debt instruments, and without additional financial support from CVF
or other investors, would likely cease operations. In addition, changes
affecting the Holdings or other changes affecting the Company's operating
expenses may result in unanticipated increases in expenditures of the Company.
There can be no assurance that the Company will be able to raise additional
capital if its
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<PAGE>
capital resources are exhausted. The inability of the Company and the Holdings
to raise additional funds required to meet their business plans would have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Working Capital."
RISKS ASSOCIATED WITH INTELLECTUAL PROPERTY; INFRINGEMENT CLAIMS
The Company's success depends significantly upon the Holdings' proprietary
technology. The Holdings generally rely on a combination of patent, trademark
and trade secret laws and non-disclosure agreements and other contractual
provisions to establish, maintain and protect their proprietary rights, all of
which afford only limited protection. Certain of the Holdings have patents and
registered trademarks and pending patent and trademark applications which cover
certain aspects of their technology and business. There can be no assurance
that any pending or future patent or trademark applications will be granted in
respect of the Holdings' technology and business or that any current or future
patents or trademarks will not be challenged, invalidated or circumvented or
that the rights granted under such patents or trademarks will provide
competitive advantages to the Holdings. In addition, until recently, the
Holdings have not generally sought patent protection for their products and
there can be no assurance that other persons have not applied or will not apply
for patent protection for products which utilize the same or similar processes
as the Holdings' products. Litigation may be necessary to protect the Holdings'
proprietary technology. The inability of the Holdings to adequately protect
their proprietary rights could have a material adverse effect on the Company's
business, results of operations and financial condition.
Despite the Holdings' efforts to protect their proprietary rights,
unauthorized parties may copy aspects of the Holdings' products or obtain and
use information that the Holdings regard as proprietary. Moreover, effective
patent and trade secret protection may be unavailable or limited in certain
foreign countries, making the possibility of misappropriation of the Holdings'
proprietary technology more likely. There can be no assurance that the steps
taken by the Holdings to protect their proprietary technology will prevent
misappropriation of such technology and such protections may not preclude
competitors from developing products with functionality or features similar to
the Holdings' products.
Although the Company does not believe that any of the Holdings are
infringing the intellectual property rights of others, claims of infringement
are becoming increasingly common as the number of products and competitors in
the technology industry grows, the functionality of products in different
industry segments overlaps, and legal protections, including patents, are
applied to products made by the Holdings' competitors. There can be no
assurance that the third parties will not assert that the Holdings' products
infringe, or may infringe, the proprietary rights of third parties. The defense
of any such claims, with or without merit, could be time consuming, result in
costly litigation and diversion of technical and management personnel, cause
product shipment delays or require the Holdings to develop non-infringing
technology or enter into royalty or licensing agreements. Such royalty or
licensing agreements, if required, may not be available on terms acceptable to
the Company or at all. In the event of a successful claim of product
infringement against any of the Holdings and the failure or inability of the
Holdings to develop non-infringing technology or to license the infringed or
similar technology, the Company's business, results of operations and financial
condition could be materially adversely affected.
-10-
<PAGE>
DEPENDENCE UPON KEY PERSONNEL; ABILITY TO RECRUIT PERSONNEL
The success of the Corporation is largely dependent on the personal efforts
of Jeffrey Dreben, the Company's President and Chief Executive Officer, and
Robert Nally, the Company's Secretary and Treasurer, neither of whom have
entered into employment contracts with the Corporation. The loss of the
services of such persons would have a material adverse effect on the business,
results of operations and financial condition of the Company, and, as a result
of their active involvement in the management of certain of the Holdings, as
well as many of the Holdings. The Company's success will also depend on its and
the Holdings' ability to attract and retain highly qualified management and
technical personnel, including the hiring of a permanent chief financial officer
by the Company. There can be no assurance that the Company of the Holdings will
be successful in attracting and retaining qualified personnel as necessary, and
the failure to do so could have a material adverse effect on the Company's
business, results of operations and financial condition.
ENVIRONMENTAL AND REGULATORY RISKS
Certain of the Holdings' operations are subject to various comprehensive
laws and regulations related to protection of the environment. Such laws and
regulations, among other things, regulate the nature of treatment that the
Holdings can provide. Because Holdings which provide their customers with
services designed to protect the environment by cleaning and removing materials
or substances at their customers' sites that must be properly handled, recycled
or, in some cases removed for proper disposal, such Holdings are subject to
regulations which impose liability on persons involved in handling, processing
or transporting hazardous materials. These requirements may also be imposed as
conditions or operating permits or licenses that are subject to renewal,
modification or revocation. These laws and regulations have become and are
likely to continue to become increasingly stringent. Existing laws and
regulations, and new laws and regulations, may require such Holdings to modify,
supplement, replace or curtail their operating methods at costs which may be
substantial without any corresponding increase in revenues. In addition, the
demand for certain of the Holdings' environmental services may be adversely
affected by the amendment or repeal of federal, state or provincial laws and
regulations. Any such changes could have a material adverse effect on the such
Holdings' business, results of operations and financial condition.
PRODUCT CONCENTRATION
A number of Holdings such as Gemprint, Solaria and Ecoval, currently have
only one or a few products. A decline in the demand for such products as a
result of competition, technological change, reduction in capital spending by
customers or other factors could have a material adverse effect on such
Holdings' business, results of operations and financial condition.
RISKS ASSOCIATED WITH ACQUISITIONS
The Company's acquisitions could subject the Company to numerous risks.
The negotiation and completion of such transactions involve the diversion of
Company resources. In addition, acquisitions could result in immediate and
substantial dilution to the Company's existing shareholders, large one-time
write-offs or the creation of goodwill or other intangible assets that could
result in significant amortization expenses. The failure to successfully
evaluate, negotiate and effect an acquisition could have a material adverse
effect on the Company's business, results of operations and financial condition.
-11-
<PAGE>
EXPANSION INTO INTERNATIONAL MARKETS
The Company expects certain of the Holdings such as Dantec Electronics to
conduct a substantial portion of their business internationally. In addition to
the uncertainty as to the Holdings' ability to expand their international
presence, there are certain difficulties and risks inherent in doing business
internationally, including greater difficulty in accounts receivable collection,
the burden of complying with multiple and conflicting regulatory requirements,
foreign exchange controls, longer payment cycles, import and export restrictions
and tariffs, potentially adverse tax consequences, currency fluctuations and
political and economic instability.
CONTROL BY PRINCIPAL SHAREHOLDERS
To the knowledge of the directors and officers of CVF, subsequent to the
completion of the Offering, the Company's officers, directors and the principal
shareholders owning five percent or more of the Company will own approximately
48.0% (after giving effect to the maximum offering) or 62.4% (after giving
effect to the minimum offering) of the outstanding Common Shares. Accordingly,
they are able to exert significant influence in connection with the election of
the Company's directors and, generally, be in a position to direct the affairs
of the Company.
CURRENCY FLUCTUATION RISK
Although the Company's Consolidated Financial Statements are reported in
U.S. dollars, a significant portion of the Holdings' sales and operating costs
are denominated in Canadian dollars. Significant long term fluctuations in
relative currency values could adversely affect the Company's results of
operations. In particular, the Company may be adversely affected by the
weakening of the U.S. dollar against the Canadian dollar.
International sales by the various Holdings also entail risks associated
with currency fluctuations. As international sales increase, risks associated
with currency fluctuations may increase. Given the number of currencies that
may be involved, the constantly changing currency exposures and the substantial
volatility of currency exchange rates, the Company cannot predict the effect of
exchange rate fluctuations upon future operating results of the Holdings. There
can be no assurance that the Holdings will not experience currency losses in the
future which could have a material adverse effect on the Company's business,
results of operations and financial condition. Neither the Company nor any of
the Holdings engage in hedging transactions to cover their currency exposure.
See "Risk Factors - Expansion into International Markets."
NEED TO MANAGE GROWTH AND EXPANSION
The growth and expansion of the Company's business has placed, and is
expected to continue to place, a significant strain on the Company's management,
operational and financial resources and has increased demands on its internal
systems, procedures and controls. To manage its growth, the Company must
continue to implement and improve its operational, financial and management
systems and to hire additional qualified personnel. The inability of the
Company to manage future growth effectively could have a material adverse effect
on the Company's business, results of operations and financial condition.
VOLATILITY OF STOCK PRICE AND STOCK MARKET
In recent years, the stock markets have experienced extreme price and
volume fluctuations and market prices for securities of many companies have
experienced wide fluctuations, not necessarily related to the operating
performance of such companies. Further, from time to time, the market price of
the Company's
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<PAGE>
Common Shares has been affected and may continue to be affected by various
factors, including announcements of new investments; major announcements by the
Holdings and new commercial products, product licenses or patents; the
development of proprietary rights by the Holdings or their competitors; actual
or anticipated variations in the Company's operating results due to a number of
factors including, among others, the level of development expenses, changes in
financial estimates by securities analysts, and conditions and trends in the
information and environmental technologies areas; general market conditions; and
other factors. As a result, it is possible that the Company's operating results
will be below the expectations of market analysts and investors, which likely
would have an adverse effect on the prevailing market price of the Company's
Common Shares. The prevailing market price of the Common Shares may also be
adversely affected by future sales of the Common Shares by current shareholders.
No prediction can be made as to the effect, if any, that sales of Common Shares
or the availability of such shares for sale will have on the market prices
prevailing from time to time. Nevertheless, the possibility that substantial
amounts of Common Shares may be sold in the public market may adversely affect
prevailing market prices for the Common Shares and could impair the Company's
ability to raise capital though the sale of its equity securities.
NO DIVIDENDS
To date, the Company has not paid any dividends on its Common Shares and
does not intend to declare any dividends in the foreseeable future. See
"Dividends."
DILUTION
After giving effect to the Offering, the offering price per Common Share
exceeds the pro forma net tangible book value per Common Share as at March 31,
1998 by Cdn$6.46, representing dilution of 80.72% after giving effect to the
minimum offering and by Cdn$5.15, representing dilution of 64.40% after giving
effect to the maximum offering. As a result, purchasers of the Common Shares
will suffer an immediate significant dilution in the value of their investment.
See "Dilution".
ENFORCEABILITY OF PROCEEDINGS AGAINST THE COMPANY
As the majority of the Company's directors and officers are located outside
of Canada, it may be difficult or impossible for Canadian shareholders to
realize upon judgments of Canadian courts against such persons, even though the
Company and the non-Canadian directors and officers have appointed Robert Nally
as their agent for service of process in the Provinces of Canada (except Quebec)
and attorned to the non-exclusive jurisdiction of the courts of those provinces.
In addition, it is uncertain that any action predicated solely upon violations
of Canadian securities laws will be enforced by courts in the United States,
whether or not any such action is based upon a judgment of a Canadian court.
PUBLIC MARKET LIQUIDITY AND DETERMINATION OF OFFERING PRICE
The offering price of the Common Shares offered hereunder has been
determined by negotiations between the Company and the Agent. The Common Shares
are listed for trading on the American Stock Exchange. However, there is no
assurance that an active trading market will develop after this Offering or, if
developed, that such a market will be sustained.
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<PAGE>
BUSINESS OF CVF CORPORATION
HISTORY AND CORPORATE STRUCTURE
The Company's predecessor, Canadian Venture Founders Limited Partnership
("CVFLP") was formed under the laws of Ontario in 1989 to engage in the business
of developing and managing early stage and start-up companies in the information
and environmental technologies industries. In August 1989, CVFLP completed a
private placement whereby approximately $20,000,000 in funding commitments was
raised from a number of pension funds, insurance companies and corporate groups.
Some of the original limited partners in CVFLP included The Prudential Insurance
Company of America, Westinghouse Canada Inc.-Pension Master Trust, Dofasco
Pension Fund, Gulf Canada Resources Limited Pension Plan, Pratt & Whitney
Pension Fund, Sun Life Assurance Company of Canada and Noranda Inc.. The
proceeds from that offering were drawn down over a four year period.
On August 20, 1995, CVFLP entered into an asset purchase agreement (the
"Asset Purchase Agreement") with Western Growth Corporation ("Western"), the
common shares of which at the time were listed on the over-the-counter market in
the United States and traded on the OTC Bulletin Board. Pursuant to the Asset
Purchase Agreement, Western agreed to purchase all of the assets and assume all
of the liabilities of CVFLP in exchange for the issuance to the partners of
CVFLP of 4,763,918 common shares of Western, representing 79.5% of its
outstanding voting securities, 25,000 shares of Series "A" Preferred Stock of
Western and warrants to acquire 952,784 additional common shares of Western.
Western was incorporated on December 22, 1993 under the laws of Nevada. On
December 30, 1993 by Articles of Merger, Sierra Growth Corporation ("Sierra"), a
corporation incorporated on December 31, 1985 under the laws of Utah, was merged
with and into Western. The merged entity retained the corporate name of
Western. Western conducted no material business and had no material operations
from the date of its incorporation until the date it entered into the Asset
Purchase Agreement. By Articles of Amendment dated September 20,1995, Western
changed its name to CVF Corp. and by Articles of Amendment dated August 21,
1997, CVF Corp. changed its name to CVF Corporation.
The Company's registered address and principal place of business is located
at 916 Center Street, Lewiston, New York, U.S.A. 14092 and its telephone number
is (716) 754-7883.
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<PAGE>
CORPORATE STRUCTURE
The following diagram depicts the current shareholdings of the Company and
the Holdings together with the jurisdictions of incorporation of each Holding:
<TABLE>
<S><C>
|------------------------------------|
| CVF Corporation |
| (Nevada, U.S.A.) |
|------------------------------------|
|
|---|----------|-------------------|------------------------|----|-------------------|------|----|-------|-------------------|
| | | | | | | | | | |
| | | | | | | | | | |
| | |69% |100% | |100% | | | | 69% |
| | |-------------------| |-------------------| | |-------------------| | | | |-------------------| |
| | | Biorem | | Canadian | | | Grand Island | | | | | Gemprint | |
| | | Technologies, | | Venture | | | Marketing | | | | | Corporation | |
| | | Inc. | | Founders | | | Two, LLC | | | | | (Ontario) | |
| | | (Ontario) | | Leasing Corp. | | | (New York, | | | | | | |
| | | | | (Ontario) | | | U.S.A.) | | | | | | |
| | |-------------------| |-------------------| | |-------------------| | | | |-------------------| |
| | | | | | | |
| | | | | | | |
| | 67% | | 16% 50% | | | 100% 100% |
| |-------------------| | |-------------------| |---------------| | |--------------| |-------------|
| | Solaria Research | | | RDM | | Petrozyme | | | Grand Island | | Eastview |
| | Enterprises, Ltd. | | | Corporation | | Technologies,| | | Marketing, | | Marketing, |
| | (Ontario) | | | (Canada) | | Inc. | | | Inc. | | One, LLC |
| | | | | | | (Ontario) | | | (Delaware, | | (New York, |
| | | | | | | | | | U.S.A.) | | U.S.A.) |
| |-------------------| | |-------------------| |---------------| | |--------------| |-------------|
| | | |
| | | |51%
| |-------------------|------------------------| | |
| | | | | |
| | 3% | 13%(1) | 7% | |
| |---------------| |---------------| |---------------| | |---------------|
| 50% | Dantec | | TurboSonic | | Ecoval Inc. | | | Elements |
| | Corporation | | Canada Inc.(1)| | (Quebec) | 20% | | Partnership |
|-----------------------------| (Ontario) | | (Ontario) | | |-----| | (Ontario) |
| | | | | | | |
| | | | | | | |
|---------------| |---------------| |---------------| |---------------|
</TABLE>
NOTES:
(1) CVF owns directly and indirectly a total of 1,334,977 exchangeable
shares in TurboSonic Canada which, at the election of the Company, are
exchangeable into approximately 13% of the outstanding common shares
of TurboSonic Technologies, a publicly-traded, New Jersey based air
pollution products company and the parent of TurboSonic Canada.
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<PAGE>
BUSINESS STRATEGY
The Company is primarily involved in the business of developing and
managing early stage and start-up companies in three business sectors: (1)
information technology/security systems, (2) process control/industrial
automation, and (3) environmental solutions/natural products. The Company's aim
is to acquire significant holdings in new and emerging companies primarily, but
not exclusively, in the technology area, to assist in the management of such
companies and to help finance their growth. Each of the Holdings requires
additional capital beyond the Company's initial involvement in order to meet its
business plan. The Company assists in the management of the Holdings as well as
in obtaining additional capital, either from its own resources or other sources.
There can be no assurance that each Holding will raise sufficient amounts of
capital to remain in business and/or to meet its respective business plan.
The Company's success is solely dependent upon the success of the Holdings.
The Company plans to generate revenue and profit through the consolidation of
revenues and profits of the Holdings and also through the sale of all or a
portion of its interests in the Holdings when the Company determines that its
funds can be better deployed in other companies or industries. The Company's
goal is to maximize the value of its interests in these companies for its
shareholders, which will include taking a company public, where appropriate.
See "Business of CVF Corporation - Certicom".
The Company conducts its business operations so as not to be deemed to be
an investment company and thereby be subject to the United States Investment
Company Act of 1940, which would require it to register as an investment company
under such Act. This will be achieved by CVF's policy of acquiring only
significant portions of the voting capital in suitable businesses and playing an
active role in their management.
CERTICOM
CVF's business strategy toward early-stage investments has been
successfully implemented in the case of Certicom of Mississauga, Ontario, a
developer of digital encryption technologies. Certicom was CVF's first
investment in 1989. An executive officer and director of CVF helped create the
initial business plan for Certicom (originally founded as Cryptech Systems Inc.)
and organized Certicom's initial financing. Later, CVF also participated in
recruiting Certicom's key management personnel and helped structure its
product development and marketing plan.
CVF made a series of investments in Certicom between 1989 and 1994 totaling
approximately $2.5 million. Certicom completed its initial public offering in
Canada in 1995, and the Company disposed of all of its common shares of Certicom
from 1996 to early 1998 for aggregate net proceeds of $33,969,882. See
"Business of CVF Corporation - Material Dispositions."
IDENTIFICATION, SELECTION AND GROWTH OF INVESTMENT OPPORTUNITIES
The success of the Company will depend upon its ability to: identify
attractive investment opportunities at various stages of development; select
and invest in those companies with the greatest growth potential; and assist
companies to maximize their growth potential.
IDENTIFYING OPPORTUNITIES
Senior management and directors of the Company each have a network of
contacts within the Canadian and U.S. business communities, particularly in the
technology area, as well as among universities involved in the research sector.
The Company draws on these contacts in order to source investment opportunities.
For example, five of the Holdings (Certicom, Biorem, Dantec, TurboSonic Canada's
parent company and Petrozyme) evolved out of research originally conducted at
the University of Waterloo. Dantec, TurboSonic Canada's parent company and
Certicom have licensed technology from the University of Waterloo. The
University of Waterloo is also a minority shareholder in Biorem. Robert Nally,
a senior
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<PAGE>
officer and director of the Company, previously served as Technology Transfer
and Commercial Development Officer for the University of Waterloo and has
experience in the development and commercial exploitation of academic research.
The University of Waterloo is a leading Canadian university in the fields of
computer science, mathematics, engineering and environmental research.
SELECTING SUITABLE BUSINESSES
Following the identification of an investment opportunity, the Company
proceeds to select a suitable business which can capitalize on such opportunity.
After the initial selection of a business, the Company then completes a
substantial assessment and due diligence process prior to making any final
investment decision.
With respect to businesses in the research and development and early
commercialization stages, the criteria for selection of suitable businesses are
influenced by:
- the credibility and commitment of the management team;
- the uniqueness and global competitiveness of the technology;
- the potential to protect the intellectual property; and
- the market potential for commercial applications.
With respect to businesses in the commercialization stage of development,
the Company will assess such businesses with the assistance of other experts as
required, in terms of the following criteria:
- the commercial potential of the expected applications;
- quality of the management team;
- the potential for sustainable competitive advantage associated with
superior technology, patented products, market positions and
distribution in the market; and
- demonstration of proprietary scientific or technological excellence.
MAXIMIZING THE GROWTH OF SUITABLE BUSINESSES
After the Company has completed its initial investment in a business, it
works actively to maximize the growth of each such business. This "business
building" is achieved by:
- developing agreed performance targets and milestones;
- monitoring progress towards those targets and milestones;
- assisting in identifying strategic partners and/or strategic
acquisitions;
- assisting in the recruitment of management; and
- coordinating long-term financial needs.
Management must be satisfied that there is a demonstrated scientific or
technological excellence as well as research capability that gives reasonable
assurance that progress will be made and that the commercial potential of the
expected applications compares favourably to potential competitive
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<PAGE>
developments. Management consults with legal counsel concerning the protection
of intellectual property and seeks the advice of other consultants, as needed,
in order to verify and assess the commercial potential of a business.
It is difficult to predict the nature and timing of the returns on
investment, if any, on the Company's present Holdings as well as its future
ownership interests in North American and international technology businesses.
The Company's success will depend in large part on the availability of capital
and the business opportunities presented to the Company. The Company expects to
identify suitable opportunities and invest monies received from the Offering
over a period of approximately three to four years.
FORM OF INVESTMENTS
The Company seeks to acquire ownership interests in suitable businesses
commensurate with the funding and the managerial assistance required to be
provided by the Company. The form of the Company's positions in its Holdings is
negotiated with each particular investee company, taking into account the need
of CVF and its management team to play an active role in the investee business
in collaboration with the investee business' existing management teams, the
long-term business requirements of the investee business, the potential to make
significant rates of return and tax considerations. CVF generally will not
invest in a business unless it can exert some degree of influence on its
operations.
The Company's interest may take the form of debt (with or without
conversion features), debt with warrants to acquire shares or participation in
cash flow or earnings, preferred shares (with or without conversion features) or
common shares. Certain investments may involve a combination of these
instruments.
The Company typically seeks to protect invested capital through floating
charge security and financial covenants (if in the form of debt), obligations in
respect of Board of Director's representation and continuous financial and other
disclosure requirements and share ownership arrangements (if in the form of
equity). It is CVF's policy to accrue interest on all its debt instruments and
advances to its Holdings in order that cash may be re-invested in the growth of
the businesses. Currently, interest on all of CVF's debt investments is being
accrued, with the exception of Petrozyme where no interest has been accrued to
date.
In connection with equity investments in private companies, the Company
enters into agreements with the other shareholders of such companies which
contain customary provisions that restrict the sale and transfer of the shares
of the private company without the agreement of its shareholders, including CVF.
CVF has entered into shareholders' agreements with the shareholders of each of
Biorem, Dantec, Gemprint, Solaria and Petrozyme.
-18-
<PAGE>
SUMMARY OF INTEREST IN HOLDINGS
As of the date hereof, the Company has direct and indirect interests in the
following companies:
<TABLE>
<CAPTION>
AMOUNT
NAME AND JURISDICTION NO. OF % OF INVESTED
OF INCORPORATION NATURE OF PRINCIPAL BUSINESS CLASS SHARES CLASS TO DATE ($)
- --------------------- ---------------------------- ----- ------ ----- -----------
<S> <C> <C> <C> <C> <C>
Canadian Venture financial services to the common shares 5,690,206 100 $5,553,132(1)
Founders Leasing Corp. Holdings
Ontario, Canada
- ------------------------------------------------------------------------------------------------------------------------------
Eastview Marketing, U.S. distribution company for units 1,000 units 100 1,434,478 (2)
One, LLC all-natural products and
New York, U.S.A. services
- ------------------------------------------------------------------------------------------------------------------------------
Grand Island Marketing environmental services for units 1,000 units 100 Nil
Two, LLC "brownfields" real estate
New York, U.S.A.
- ------------------------------------------------------------------------------------------------------------------------------
Biorem Technologies, bioremediation services and common shares 830,113 69
Inc. bio-filter installations class A preferred shares 219,780 100
Ontario, Canada (non-voting) ---------
Total Equity 1,061,191
demand promissory
notes (3) (13) -- -- 561,218
- ------------------------------------------------------------------------------------------------------------------------------
Grand Island majority general partner of common shares 1,000 100 $1,500,000
Marketing, Inc.(4) Elements, an all-natural
Delaware, U.S.A. products and supplements retail
company
- ------------------------------------------------------------------------------------------------------------------------------
Gemprint Corporation gem identification technology class A voting shares 19,051,748 72
Ontario, Canada(5) and database services class B voting shares 1,871,581 40
class C voting shares 1,871,581 100 ---------
Total Equity 4,166,914
convertible debenture (13) -- -- 175,000
convertible debenture (13) -- -- 122,618
demand convertible
promissory notes (13) -- -- 1,610,000
- ------------------------------------------------------------------------------------------------------------------------------
Solaria Research high efficiency programmable class A voting shares 430,845 79 1,251,869
Enterprises Ltd. controller technology for convertible debenture (13) -- -- 1,000,000
Ontario, Canada (6) industrial and electrical convertible debenture (13) -- -- 651,332
vehicles
- ------------------------------------------------------------------------------------------------------------------------------
Petrozyme solutions for oil waste common shares 50 50
Technologies, Inc. processing and recovery class C non-voting shares 250,000 100 -------
Ontario, Canada Total Equity 250,000
demand promissory
notes (7) -- -- 650,000
- ------------------------------------------------------------------------------------------------------------------------------
Dantec Corporation(8) advanced optimization, control common shares 4,845,000 53 4,387,450
Ontario, Canada and monitoring for factory demand convertible
automation systems promissory
note(9) (13) -- -- 130,000
- ------------------------------------------------------------------------------------------------------------------------------
-19-
<PAGE>
NAME AND JURISDICTION NO. OF % OF INVESTED
OF INCORPORATION NATURE OF PRINCIPAL BUSINESS CLASS SHARES CLASS TO DATE ($)
- --------------------- ---------------------------- ----- ------ ----- -----------
Ecoval Inc. natural fertilizers, herbicides common shares 1,330,550 27 5,347,895(10)
Quebec, Canada and other products
- ------------------------------------------------------------------------------------------------------------------------------
TurboSonic Canada Canadian subsidiary of exchangeable shares 1,334,977 1,025,045
Inc.(11) TurboSonic Technologies, Inc.
Ontario, Canada
TurboSonic air pollution control systems common shares 3,000 1,770
Technologies, Inc. -----
New Jersey, USA 13(11)
- ------------------------------------------------------------------------------------------------------------------------------
Certicom Corp. encryption technologies preferred non-voting
Ontario, Canada(12) shares (12) 29,881 100% 298,813
debentures (12) 33,333
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTES:
(1) These funds have been used to make investments and additional advances to
certain of the Holdings.
(2) Based on an exchange rate of US$1.4051 = Cdn. $1.00 as at March 31, 1998.
(3) Interest is payable on this note at the rate of Canadian prime plus 2%.
(4) Grand Inc. has a 69% voting interest and a 51% economic interest in
Elements, an Ontario partnership. If the Elements partnership fails to
meet its business plan by January 27, 2000, Grand Inc. will be able, for a
nominal investment, to increase its economic interest in the Elements
partnership to 68%. See "Business of CVF Corporation - The Subsidiaries -
Grand Island Marketing, Inc."
(5) Amount invested to date includes 25,570 Common Shares issued by CVF in June
1998 in connection with the acquisition of 720,000 Class A shares of
Gemprint. For the purposes of the transaction, the Common Shares were
valued at $5.87 per share, a price that was agreed upon in January 1998.
CVF currently holds a 69% interest in the outstanding voting shares of
Gemprint. In addition, the Company has made a $175,000 investment which
relates to a convertible demand debenture, which is convertible into
875,000 Class A voting shares and a $122,618 investment which relates to a
convertible debenture purchased by CVF at a discount which is convertible
into 937,500 Class A voting shares. It has a face value of $187,500 and
matures on the earlier of February 7, 2000 and the date on which Gemprint
becomes a reporting issuer in Ontario or obtains similar status in any
other Province of Canada. The demand convertible notes of $1,610,000 are
convertible into 8,050,000 Class A voting shares. Interest is payable on
the convertible debentures and the promissory notes at the rate of Canadian
prime plus 2%. The debentures and the promissory notes are all convertible
into Gemprint Class A shares at any time at CVF's option and upon such
conversion, CVF would hold 76% of the Gemprint voting shares. Gemprint
currently owes CVF an additional $95,000 in fees related to CVF bank
guarantees.
(6) The Class A voting shares of Solaria are convertible at the holder's option
on a one-for-one basis into common shares. Upon conversion of these Class
A shares, CVF would hold 67% of the outstanding common shares. There are
two convertible debentures which may be converted into common shares at any
time at CVF's option. The $651,322 debenture bears interest at the rate of
Canadian prime plus 2% and matures on September 17, 1999 and the $1,000,000
debenture bears interest at the rate of Canadian prime plus 2% and matures
on March 17, 2002. These debentures are convertible into 198,577 and
304,878 Class A voting shares, respectively. If, in addition to the Class
A voting shares, both debentures were converted to common shares, CVF would
hold 81% of the outstanding voting equity of Solaria.
-20-
<PAGE>
(7) Interest is payable on these notes at the rate of Canadian prime plus 2%.
The Company has waived interest payments on these notes to date.
(8) CVF holds approximately 53% of the outstanding voting securities of Dantec.
CVF also holds a demand convertible promissory note in the amount of
$130,000 which is convertible into 130,000 common shares of Dantec. Upon
conversion of such note, CVF's interest in Dantec would increase to 54%.
In addition, Dantec has issued 960,000 Class A special non-voting shares to
minority investors which can be converted into an equivalent number of
common shares in the event of a public offering or a merger with a public
company and are redeemable at $1.00 per share at the holders' option,
110,000 shares at any time and the remaining 850,000 shares after August
1999. Conversion of such Class A shares into common shares of Dantec would
reduce CVF's ownership to 48% of Dantec.
(9) Interest is payable on the Dantec note at the rate of Canadian prime plus
2%.
(10) The amount invested to date includes 40,179 Common Shares issued by CVF in
March 1998 (together with $592,776, based on an exchange rate of US$1.4051
= $1.00 as at March 31, 1998) in connection with the acquisition of 120,000
shares of Ecoval from two Ecoval shareholders. For the purpose of the
transaction, the Common Shares issued were valued at $5.62 (US$4.00) per
share.
(11) CVF owns, directly or indirectly, a total of 1,334,977 exchangeable shares
in TurboSonic Canada which, at the election of the Company, are
exchangeable into common shares of TurboSonic Technologies, a
publicly-traded, New Jersey based air pollution products company and the
parent of TurboSonic Canada. CVF also owns 3,000 shares in TurboSonic
Technologies, which together with the exchangeable shares, represents a
13% interest in the equity of TurboSonic Technologies.
(12) The Certicom preferred shares and debenture remain from CVF's original
investment in Certicom. CVF has sold all of its common shares in Certicom.
See "Business of CVF Corporation - Material Dispositions". On March 31,
1999, the remaining preferred shares can be retracted and the debenture
redeemed for aggregate gross proceeds, including accumulated interest and
dividends, of approximately $348,362. The Company intends to exercise its
right to retract the preferred shares and redeem the debenture on that
date.
(13) It is CVF's policy to allow interest payments on these instruments to be
accrued.
THE HOLDINGS
With the exception of RDM, Certicom and Ecoval, each of the Holdings is a
private company. The securities of TurboSonic Technologies, into which the
securities of TurboSonic Canada held by the Company are exchangeable, are quoted
on the OTC Bulletin Board. The RDM common shares are listed on the Vancouver
Stock Exchange. While Ecoval is a reporting issuer in the provinces of Alberta,
Ontario and Quebec, its shares are not listed on any stock exchange.
Each Holding has its own business plan and financial reporting systems.
With the exception of Leasing, Eastview, Grand Inc. and Grand Island2, each of
the Holdings has completed the development their original products, has set up
markets and distribution channels, has sold products and has put management
teams in place and/or is currently working to strengthen and expand its
management teams. The majority of the Holdings are working to improve their
marketing capabilities. The additional capital required by each of the Holdings
is primarily for expansion of sales, marketing and continuation of research and
development to enable the Holdings to realize their commercial potential over
the next three to five years. As is common with early stage technology
companies, each of the Holdings has historically operated at a loss or at
break-even. While some of the Holdings are currently operating profitably,
others are expected to operate at a loss for at least the next year if not
longer, including Ecoval, Gemprint, Biorem, Petrozyme, Grand Inc., Grand Island2
and Eastview. Some of these companies, including RDM and Dantec, may show
losses due to substantial investment in research and development. These
companies may continue to need additional financing from CVF or other sources in
order to continue operations and CVF plans to use a portion of the proceeds of
this offering to further fund these companies and other Holdings.
-21-
<PAGE>
The information contained in this Prospectus concerning the public Holdings
(TurboSonic Technologies, TurboSonic Canada's parent, Ecoval and RDM) has been
taken from or is based upon publicly available documentation and information on
file with Canadian and/or U.S. securities regulatory authorities and other
public sources. The information contained in this Prospectus concerning the
private Holdings has been taken from or is based upon documentation and
information provided by such private Holdings to the Company.
THE SUBSIDIARIES
The subsidiaries of CVF are those companies in which CVF has a greater than
50% interest in the voting securities thereof (the "Subsidiaries"). The total
assets and liabilities of the Subsidiaries as well as results of operations and
cashflows are included in the Consolidated Financial Statements of the Company
found elsewhere in this Prospectus. The following is a description of the
businesses of the Subsidiaries.
EASTVIEW MARKETING, ONE, LLC
OVERVIEW OF EASTVIEW
Eastview, a limited-liability company organized under the laws of New York
and wholly-owned by CVF, was established by CVF in December 1997 to facilitate
the distribution and direct marketing in the United States of various
all-natural horticultural products produced by Ecoval and by other producers of
all-natural and organic products. An agreement between Eastview and Ecoval
dated April 16, 1998 gives Eastview exclusive rights to sell Ecoval's "Nature's
Glory" line of products through direct-to-customer television advertising in
Canada and the United States. See "Business of CVF Corporation - The Equity
Holdings - Ecoval Inc."
DESCRIPTION OF CVF INVESTMENT
CVF owns 100% of Eastview. CVF has assisted in financing production of an
"infomercial" promoting the sale of Ecoval's line of all-natural fertilizers and
herbicides (to be sold under the brand-name "Nature's Glory" in the United
States) through direct customer response advertising and has assisted with the
purchase of television broadcast time across the United States.
CVF INVESTMENT RATIONALE AND RISKS
CVF believes that there is a growing consumer interest in healthier
lifestyles and natural products, and thus it sees many potential
opportunities for developing the distribution and marketing of related
products. The risks include, among others: limited operating history and
uncertainty of future operating results; competition from established and
potential competitors; product concentration; and the potential lack of
consumer response to the initial "infomercial". See "Risk Factors".
CVF INVOLVEMENT
CVF established Eastview to enhance and finance the marketing of Ecoval's
products. In the future, Eastview may explore other opportunities to engage in
the distribution, development and marketing of natural and organic products
manufactured by other producers. One CVF officer is the Manager of Eastview.
CVF management has also been involved in the development of Ecoval's
"infomercial" and its advertising strategy.
-22-
<PAGE>
GRAND ISLAND MARKETING, TWO, LLC
OVERVIEW OF GRAND ISLAND2
The Company established Grand Island2 in the State of New York in December
1997. It is currently an inactive subsidiary of the Company. When operations
begin, (expected in the second half of 1998), Grand Island2 will attempt to
negotiate environmental clean-up contracts with real estate developers in the
United States, to share in the profits resulting from the clean up of
"brownfields" properties, using the services of Biorem, Petrozyme and other soil
remediation companies. See "Business of CVF Corporation - The Subsidiaries -
Biorem Technologies, Inc." and "Petrozyme Technologies, Inc."
DESCRIPTION OF CVF INVESTMENT
No material investment has been made to date in Grand Island2.
CVF INVESTMENT RATIONALE AND RISKS
CVF has reviewed the successful operations of a number of real-estate
developers who have purchased "brownfields" properties at deep discounts and
have successfully sold or re-developed them after remediating the properties.
"Brownfields" are abandoned, idled, or under-used industrial and commercial
lands or facilities where expansion or redevelopment is complicated by real or
perceived environmental contamination. Since 1995, the United States
Environmental Protection Agency (the "EPA") has provided funding to 121 states,
cities, towns, counties and reserves for brownfields assessment pilots. These
funds have been used to bring together community groups, investors, lenders,
developers, and other parties to address the issues of cleaning up sites
contaminated with hazardous substances and returning them to appropriate,
productive use. CVF intends to draw on the expertise of Biorem and Petrozyme in
the remediation of contaminated soil and water, noxious odors, oil-contaminated
wastes and emulsions and a variety of environmental problems. The objective of
Grand Island2 is to partner the available expertise of Biorem and Petrozyme in
problems of environmental remediation with the expertise of experienced
real-estate developers. The intended goal is to provide the expertise and
services of Biorem and Petrozyme in exchange for participating interests in
brownfields real estate projects. The purchase of the properties will be the
responsibility of the developers and not Grand Island2. Once operational, risks
may include, among others: environmental risks associated with the on-site
remediation of hazardous materials; uncertainty of future operating results;
and the inability to find developers to purchase brownfields properties. See
"Risk Factors".
CVF INVOLVEMENT
George Khouri, a director of the Company, is currently devoting much of his
time to developing a business plan for Grand Island2 and meeting with potential
managers and real-estate developers. He is also reviewing financing options for
Grand Island2.
-23-
<PAGE>
BIOREM TECHNOLOGIES, INC.
OVERVIEW OF BIOREM
CVF invested in Biorem in January 1994 in order to capitalize on the
research conducted at the University of Waterloo. Biorem is an industrial
biotechnology company that utilizes technologies developed for the
bioconversion and biotransformation of organic contaminants in the
environment. This technology is used for treatment and clean-up of organic
toxic chemicals in soil, groundwater, wastewater and air emissions. Biorem's
primary business lies in two main areas: the bioremediation of contaminated
soils and the turn-key installation of large scale industrial biofilters for
the removal of noxious odors and volatile organic compounds. Large scale
biofilters are typically installed outdoors adjacent to the industrial plant
at ground level. They are particularly suitable for large air flows from
10,000 cubic feet per minute to in excess of 100,000 cubic feet per minute.
Demand for odor control comes from the food industry, municipal solid waste
composting operations and sewage treatment plants. In addition to air
applications, Biorem has developed technology for the economical and
effective cleaning of contaminated soil. In addition to more common
petroleum hydrocarbons, Biorem's technologies can treat toxic plasticizer
chemicals and other EPA priority chemicals from industrial waste sites.
Biorem provides comprehensive laboratory biofeasibility studies and provides
biological laboratory services. Biorem's customers have included Monsanto
Chemical Corp., Polysar Corporation, Ultramar Corporation,
Alpha/Owens-Corning Ltd., Philip Environmental Inc., Canadian Pacific Ltd.
and Akzo Nobel Ltd. Biorem is registered as a Hazardous Waste Generator with
the Ministry of the Environment of Ontario for the receipt and disposal of
small samples of hazardous materials brought into the laboratory facilities
for testing purposes.
Biorem is seeking to partner with a number of land developers for the
remediation of "brownfields" properties. Competition comes from both
contractors with limited scientific knowledge and technical skills and large
integrated waste management companies (some of which sub-contract work to
Biorem).
Biorem is an early stage developing company which began in 1994 and as
such, has incurred operating losses over the last three years. With the
formation of Grand Island2, Biorem expects, although there can be no assurance
thereof, to increase sales and net income through the marketing of its services.
See "Business of CVF Corporation - The Subsidiaries - Grand Island Marketing
Two, LLC".
Brian Herner, Vice-President and General Manager of Biorem, has extensive
management experience in the areas of business and technology development in the
environmental field. He has technical experience with problems in municipal and
industrial water systems, deposit control in the pulp and paper industry and
environmental biological processes for soil remediation, bio-filters and
wastewater. He was previously Vice-President of Zenon Environmental Systems and
General Manager of Calgon Canada Inc.
DESCRIPTION OF CVF INVESTMENT
CVF owns 830,113 common shares of Biorem which represents 69% of Biorem's
outstanding common shares and 219,780 Class A preferred shares which represents
all outstanding preferred shares. CVF also holds demand promissory notes from
Biorem in the aggregate amount of $561,218 and has guaranteed bank lines of
credit provided to Biorem of up to $715,000. Biorem also has equipment lease
obligations to Leasing of $195,040.
The Company has entered into a shareholders' agreement with the other
shareholders of Biorem which contains customary provisions restricting the sale
and transfer of Biorem's shares without the agreement of its shareholders.
-24-
<PAGE>
CVF INVESTMENT RATIONALE AND RISKS
CVF was involved in the establishment of Biorem. One of the main reasons
for CVF's investment was the expertise of Dr. Owen Ward, a leading industrial
microbiologist and currently Chairman and Technical Director of Biorem. See
"Business of CVF Corporation - The Equity Holdings - Petrozyme Technologies,
Inc." Dr. Ward led the research and development of the technology utilized by
Biorem. Dr. Ward is an expert in bio-conversion and the microbial
bioremediation of air, soils and water. CVF believes that there is a
significant worldwide market for cost-effective technology in this area. Risks
include, among others: environmental risks associated with the on-site
remediation of hazardous materials; history of losses; and competition from
current and potential competitors, many of which have longer operating histories
and substantially greater financial, technical and marketing resources and name
recognition than Biorem. See "Risk Factors". Biorem has been dependent on
financial backing from CVF and may require further capital infusions to meet its
current marketing plans.
CVF INVOLVEMENT IN BIOREM
CVF has been involved in establishing Biorem from its inception with
technologies developed by Dr. Owen Ward. CVF hired a consultant to do an
initial market study and provide a market focus to the technologies and has been
actively involved in all phases of establishing Biorem. Two CVF officers
currently sit on the three member board of directors of Biorem. CVF was
actively involved in recruiting the current Vice-President and General Manager,
Brian Herner. CVF has recently been involved in assessing potential acquisition
candidates and re-focusing Biorem on the area of bio-filters.
George Khouri, one of CVF's directors, is currently reviewing potential
partners for the purchase and remediation of abandoned industrial lands for
re-development which would require the remediation services of companies such as
Biorem. See "Business of CVF Corporation - The Subsidiaries - Grand Island2".
GRAND ISLAND MARKETING INC.
OVERVIEW OF GRAND INC. AND ELEMENTS
The Company incorporated Grand Inc. in the State of Delaware on January 28,
1998. On January 29, 1998, Grand Inc. entered into an agreement with 21st
Century Health Care (1996) Inc. ("21st Century"), a company incorporated in the
Province of Ontario, and an individual investor to form an Ontario 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 Elements. Elements was
formed to carry on the business of operating retail stores offering natural
health and food products, including products manufactured by Ecoval, and health
services, including naturopathic and homeopathic medicine and chiropractic
services. See "Business of CVF Corporation - The Equity Holdings - Ecoval Inc."
Elements has entered into an agreement with the Canadian College of
Naturopathic Medicine whereby Elements has been granted the exclusive rights
to recruit from within the college for its in-store clinics. Elements opened
its first retail location in February 1998 in Toronto, Ontario and plans to
open a second location in Toronto by the end of July 1998 and a third
location by the end of 1998. Elements' business plan calls for the expansion
over the next two years of stores throughout North America, subject to
availability of sufficient financing. There can be no assurance that such
expansion will take place. Each location will include a full-time
naturopathic doctor, massage therapy, other complementary services and other
therapies. Steven P. Page, the President and Chief Executive Officer of
Elements, is the co-founder of Body Wise International (Canada) Inc., a
company specializing in formulating and distributing premium nutritional
supplements which he profitably sold in 1996.
-25-
<PAGE>
DESCRIPTION OF CVF INVESTMENT
CVF currently has a 69% voting interest and a 51% economic interest in
Elements as the general partner of Grand Inc. If Elements fails to meet certain
projected targets set out in its business plan within two years, CVF, through
Grand Inc. will be able to purchase for a nominal amount an additional 17%
economic interest from the minority partner, 21st Century, thereby increasing
CVF's economic interest in Elements to 68%. CVF has provided a guarantee in the
amount of $62,500 in connection with a bank loan by Elements.
CVF INVESTMENT RATIONALE AND RISKS
There has been an increase in the popularity of alternative health
therapies across North America. The focus has broadened from treatment alone
to include factors such as disease prevention. However, most existing retail
outlets do not provide consumers the detailed knowledge of natural treatments
they require. CVF was impressed with the entrepreneurial abilities of Mr.
Page and the expertise of other members of Element's management team in the
natural supplements industry as well as the high profit margins in the sale
of these products. CVF is also interested in the potential for distribution
of Ecoval products and other future natural product lines. Risks include,
among others, limited operating history and uncertainty of future operating
results; intense competition in the retail market for vitamins and
nutritional supplements and the need for the company to establish a unique
retail identity; dependence upon Mr. Page; product liability; and risks
associated with the provision of naturopathic and homeopathic medicine by a
naturopathic doctor. See "Risk Factors". The retail market for vitamins and
nutritional supplements is highly competitive and the success of Elements
will depend on its marketing strategy and its ability to establish a unique
retail identity.
CVF INVOLVEMENT
CVF has been working with Mr. Page in choosing store locations, marketing
and strategic planning.
GEMPRINT CORPORATION
OVERVIEW OF GEMPRINT
Gemprint provides products and services to the retail, wholesale and
consumer jewelry markets to enable diamonds and other precious gems to be
uniquely identified non-invasively (fingerprinted) using a patented low-power
laser imaging system. The results are stored in a database for later
verification and recovery of lost or stolen gems. Gemprint currently sells
or leases its ISi laser Gemprint machine to jewelers. Each consumer who gets
his or her gem "Gemprinted" by the jeweler's ISi machine pays the jeweler,
who in turn pays license fees to Gemprint pursuant to licensing agreements.
Gemprint owns and operates the Gemprint database at its Toronto facility.
This database is capable of interacting with and receiving information from
ISi machines on a worldwide basis. Company management believes there are
few, if any, other non-invasive positive methods of gem identification in the
world. GEMPRINT-TM- is a registerd trademark of Gemprint.
Across North America, law enforcement agencies and many insurance companies
support the Gemprint system (approximately 25 insurance companies offer a 10%
discount on diamond insurance policies if the diamond has been "Gemprinted").
The system has also been used for confirming evidence in court cases and has
been instrumental in gem recoveries in several jurisdictions. The value lost
annually through jewelry theft is believed to be second only to car theft.
Since the inception of the ISi machine in January 1996, several placements have
been made with U.S. jewelry chains as well as with manufacturers who are using
the system for purposes of inventory control. Currently, 110 jewelers throughout
North America actively use the Gemprint system. Gemprint has recently signed a
letter of intent with a large jewelry manufacturer and wholesaler in the United
States, whereby all its diamond stock will be Gemprinted before it is sold to
several thousand jewelry store clients throughout the United States. Additional
letters of intent have been signed with several United States regional jewelry
chains.
-26-
<PAGE>
Gemprint has recently developed a new version of the machine with
built-in appraisal software. The additional expense of developing this
machine and taking it to market is expected to result in operating losses at
least until the fiscal year ended March 31, 1999.
John J. Shepherd, the Chairman of Gemprint was formerly the founder and
Chairman of Leigh Instruments Ltd. ("Leigh"), a major international avionics
manufacturer, founded in 1961. At Leigh, a public company subsequently acquired
by Plessey plc in 1990, Mr. Shepherd spent many years developing export and
domestic markets, primarily in the aerospace sector. Mr. Shepherd was also
founding Chairman of the Defence Science Advisory Board in Ottawa, Canada, has
held a number of positions in the Canadian electronics industry prior to
founding Leigh.
Stephen Burke, the President and Chief Executive Officer of Gemprint, prior
to joining Gemprint in February 1997, was Canadian Sales Manager at Logica Inc.
from September 1995 to January 1997, where he led the marketing of software to
the Canadian financial services industry. He was also Director of Sales at
DST/Corfax, a division of Corfax Benefit Systems Limited, from December 1987 to
August 1995, with responsibility for the development and marketing of a
specialized information networks for the pension industry. Prior thereto, Mr.
Burke had seven years of sales management experience with Bell Canada where he
was instrumental in launching the marketing of a number of data and voice
communication services.
DESCRIPTION OF CVF INVESTMENT
CVF currently holds 69% of the outstanding voting shares of Gemprint. In
addition, CVF also holds secured convertible debentures due in May 2001 and
February 2000 in the principal amounts of $175,000 and $185,500 (purchased by
CVF for $122,618), respectively, and holds demand convertible promissory notes
in the amount of $1,610,000. Upon conversion of the debentures and promissory
notes, CVF would hold 76% of the voting shares of Gemprint. Gemprint has been
unable to pay any interest on these debentures and notes and CVF has agreed to
allow same to be accrued. In addition, CVF currently guarantees bank lines of
credit for Gemprint of up to $250,000 and Gemprint currently owes an additional
$95,000 in fees to CVF related to these guarantees.
One of Gemprint's shareholders issued a retraction notice to Gemprint on
October 30, 1997 for the repurchase by Gemprint of Class B shares held by it in
the amount of $250,000. Following the issuance of this retraction notice,
under the terms of Gemprint's constating documents, CVF was obliged to issue a
notice of retraction for its Class C shares or lose the right to retract its
Class C shares on a pro rata basis with the other shares being retracted. On
December 24, 1997, CVF issued a retraction notice in respect of 1,871,581 Class
C shares held by it with a retraction value of approximately $2.4 million plus
unpaid dividends thereon. Gemprint is currently unable to fund the repurchase
of these Class B and Class C shares and is prohibited under corporate law from
redeeming these shares until Gemprint's financial position would allow it to do
so.
The Company has entered into a shareholders' agreement with the other
shareholders of Gemprint which contains customary provisions restricting the
sale and transfer of Gemprint's shares without the agreement of its
shareholders.
CVF INVESTMENT RATIONALE AND RISKS
CVF identified Gemprint as an investment opportunity because of its
proprietary technology for identifying diamonds and other precious gems, the
size of its potential market and the potential to realize high-margins from what
is essentially a database business. Theft and fraud related to precious gems is
a major problem involving billions of dollars annually for the jewelry industry,
insurance companies, law enforcement agencies and consumers. At the time of
CVF's original involvement, Gemprint did not have a technology acceptable to the
jewelry industry. Since its investment in the Company, Gemprint has developed
the technology for the Gemprint system, has marketed the system in North America
and has begun
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marketing worldwide. These initial risks have been overcome and Gemprint has
established lower priced outsourced manufacturing of the ISi2000 units and
improved its software. It has also established key customers in the retail,
wholesale and manufacturing sectors of the jewelry business. The current risks
facing Gemprint include, among others: the inability of Gemprint to fund the
repurchase of its preferred shares and the risk of insolvency should the
shareholder enforce its rights under the retraction notice; inability to obtain
additional, required financing; limited operating history and uncertainty of
future operating results; possible misappropriation of Gemprint's proprietary
technology; reliance upon a single product; risks associated with international
sales; and other risks generally associated with emerging technology companies.
See "Risk Factors".
CVF INVOLVEMENT
CVF has been actively involved in all aspects of developing the growth of
Gemprint. CVF recruited a research and development company to establish the
scanner technology and software in a form capable of transmitting data
electronically and has been active in efforts to commercialize the technology.
CVF management helped develop market and technology strategies and brought in
the current management and market contacts. Two CVF officers currently sit on
the six member board of directors of Gemprint and CVF has been actively involved
in all aspects of developing the company.
SOLARIA RESEARCH ENTERPRISES, LTD.
OVERVIEW OF SOLARIA
Solaria of Waterloo, Ontario manufactures and markets high-efficiency,
programmable microprocessor-based electronic motor speed controllers for direct
current motors, primarily for battery powered industrial vehicles such as
fork-lift trucks, personnel carriers, sweepers, airplanes, tractors, and
various other industrial and recreational applications. Solaria's controllers
consist of electronics and embedded software which sits between the battery and
the motor and provides controlled voltage and current to the motor in response
to the operator's inputs. The controllers are programmable through a handheld
device. Use of Solaria products results in higher energy efficiency and reduced
maintenance which provides cost-savings in terms of less motor wear, longer
battery life and the need for fewer vehicles in a given fleet.
Solaria's proprietary technology is represented by two international
patents issued July 19, 1994 and July 26, 1994 expiring in 2011 combining both
electronics and software. Circuit board assembly is out-sourced and final
assembly and testing is done at a 10,000 square foot facility in Waterloo,
Ontario leased by Solaria. Solaria ships to both the vehicle manufacturing
market (OEM) and the vehicle repair aftermarket. In the aftermarket, Solaria
has built up a distribution network of 28 distributors having 113 branches, to
which, over the last three years, it has provided training and support. Solaria
has entered into a strategic OEM contract with a North American manufacturer of
fork-lift trucks to develop and manufacture a range of electronic controllers
for their direct current motors. Another generation of controller is now under
development for expected launch in the fall of 1998 for application in several
new markets. Solaria's customers and distributors include Potomac Industrial
Trucks Limited, Forklifts, Inc., Louisiana Lift and Equipment Inc. and J.H.
Ryder Machinery Ltd. End-users of Solaria's products include Boeing Corporation
and Coca-Cola Enterprises Inc.
Solaria's major competitors are the Electric Vehicles Division of General
Electric, Curtis Instruments Inc. and Tech/Ops Sevcon Inc. Solaria believes
that it has competitive advantages through technology, patent protection, lower
pricing and better service and support. The OEM market for electric vehicle
controllers is estimated by the management of the Company to be $100,000,000
annually. Although Solaria currently does not have a large share of the OEM
market, CVF management believes that Solaria can increase its market share over
the next two years.
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Mr. Harold C. (Hal) Dickout joined Solaria as President in 1993. He was
previously President of Square D Canada Ltd., a major electrical manufacturer of
control and distribution equipment. Mr. Dickout was Vice-President of General
Electric Canada Inc.'s Power Systems division from 1981 to 1985 and has a
Bachelor of Science in Electrical Engineering from the University of Alberta.
DESCRIPTION OF CVF INVESTMENT
CVF holds 430,845 Class A voting shares of Solaria representing 79% of such
class and 67% of the outstanding Solaria voting shares. In addition, CVF holds
a convertible debenture in the principal amount of $1,000,000 maturing September
17, 1999 and a convertible debenture in the principal amount of $651,332
maturing on March 17, 2002. If both debentures as well as all of the Class A
voting shares were converted to common shares CVF would hold 81% of the
outstanding voting equity of Solaria.
The Company has entered into a shareholders' agreement with the other
shareholders of Solaria which contains customary provisions restricting the sale
and transfer of Solaria's shares without the agreement of its shareholders.
CVF INVESTMENT RATIONALE AND RISKS
At the time of CVF's initial involvement in January 1992, Solaria had an
entrepreneurial team with a low-cost, highly efficient electrical motor
controller technology that was superior to that of the competition. CVF was
impressed by the very large market opportunity: there are over one million
electric fork-lifts in the U.S. market which will eventually require new
controllers. The market for electric vehicles such as forklifts and other
industrial vehicles is growing; according to the Industrial Trucks Association,
the growth in the number of the industrial electric vehicles has been 15%
annually for the last three years. Risks include, among others: competition
from current and potential competitors, many of which have longer operating
histories and substantially greater financial, technical and marketing resources
and name recognition than Solaria; possible misappropriation of Solaria's
proprietary technology; product concentration; dependence upon a key customer;
risks associated with international sales; product liability risks; and other
risks generally associated with emerging technology companies. See "Risk
Factors".
CVF INVOLVEMENT
CVF has actively been involved in Solaria since its initial investment in
Solaria in January 1992. In addition to providing funding through a number of
early years and bringing in other investors, CVF helped develop Solaria's
business plan and brought in a number of technical experts who assisted in the
development of the product and the patenting of the technology. CVF management
also helped Solaria obtain a major OEM contract with a U.S. electrical vehicle
manufacturer pursuant to which Solaria is currently shipping several thousand
controllers per year on a renewable contract. This customer currently
represents about 20% of Solaria's revenues. Three of CVF's officers currently
sit on the five member board of directors of Solaria.
CANADIAN VENTURE FOUNDERS LEASING CORP.
OVERVIEW OF LEASING
Leasing was founded in 1992 and provides financial services to some of the
Holdings, including inventory and receivable financing. It is also used to
acquire interests directly in some of the Holdings. Leasing's results for the
year ended December 31, 1997 include revenues of approximately US$106,000 in
interest income from short-term financing to the Holdings. Expenses incurred by
Leasing are primarily consulting expenses. The net result for the 1997 fiscal
year was a loss of approximately US$500,000. Future results are dependent on
Leasing earning additional interest and the consolidated results of its
Holdings. Its leased principal office is located in Oakville, Ontario, Canada.
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DESCRIPTION OF CVF INVESTMENT
CVF directly owns 100% of the outstanding common shares of Leasing.
CVF INVESTMENT RATIONALE
Leasing was founded by CVF in order to offer equipment leases to the
Holdings as well as to offer short-term funding to the Holdings for such items
as inventory and receivables.
CVF INVOLVEMENT
Leasing is managed by the management team of the Company. Two officers of
CVF sit on the two member board of directors of Leasing and approve all spending
decisions.
THE EQUITY HOLDINGS
Equity Holdings are those companies in which CVF has less than or equal to
50% ownership but more than or equal to 20% ownership. The net incomes or
losses of the Equity Holdings are included in the consolidated financial
statements of the Company in proportion to the percentage holdings of these
entities and the Company's investment in these Holdings are shown as an asset
of the Company on its balance sheet. See Note 4 to the Consolidated Financial
Statements.
DANTEC CORPORATION
OVERVIEW OF DANTEC
Dantec was created on June 30, 1998 on the amalgamation of a wholly-owned
subsidiary of the Company, Dantec Electronics Limited ("Dantec Electronics")
with Dantec Systems Corporation ("Dantec Systems"), a company in which CVF had a
41% interest. Dantec is an industrial automation company based in Waterloo,
Ontario which uses proprietary advanced process-control algorithms originally
developed in cooperation with the University of Waterloo to develop, manufacture
and market a range of automated precision moisture-detection, measurement and
manufacturing control systems that can be used where bulk raw materials are
converted into a mass-produced product. Dantec sells a combination of hardware
and software controls based on real-time operating systems and associated
proprietary transducers that enable real-time monitoring and analysis of
processing and manufacturing systems. Customers have included Kellogg Company,
Kraft-General Foods (a division of Philip Morris), The Quaker Oats Company, Koch
Agricultural, Johnson & Johnson, Ralston Purina Company, Colgate-Palmolive
Company and The Iams Company.
Dantec recently made a strategic decision to focus its marketing on a
number of key areas including food processing, pharmaceutical manufacturing,
engineered wood processing and petroleum and petrochemical processing and
mineral processing that require advanced automated real-time processing. Its
strategy includes the provision of turn-key, fully automated process controls
which may include outsourcing of certain components of the systems being sold.
Dantec also works with a number of integrators who install factory automation
systems and base-level programmable logic controls. The competitors for Dantec's
products and services include in-house engineering departments of large
companies as well as companies such as The Foxboro Company, which manufactures
and markets process automation systems. Dantec believes that it has competitive
advantages due to its sensor technology and real-time software solutions.
Dantec also designs, manufactures and markets computerized control systems
for the drying of grains. Dantec's Dryer Master-TM- controllers are utilized
internationally to improve the drying of corn, soybeans, rice, and other grains.
Dryer Master-TM- controllers use advanced process control to dry grain more
consistently and closer to the operator's target moisture level. This results
in increased yields, reduced spoilage, energy savings and a higher quality
product.
Dryer Master-TM- systems are supported by Dantec's customer service.
Modems allow Dantec's support center staff to connect to installed systems,
remotely analyze performance and assist dryer operators with any needs they may
have. Dantec works with most major grain-dryer manufacturers worldwide,
providing monitoring systems (including both software and hardware) on both an
original equipment manufacturer ("OEM") basis to grain-dryer manufacturers and
on a retrofit basis. Some of the Dantec OEM customers have included grain-dryer
manufacturers such as Zimmerman (a division of FFI Corporation), Behland
Manufacturing Co. and Delux Manufacturing Company Inc., as well as numerous
local and regional agricultural co-operatives and grain elevators. Other Dantec
customers have included such companies as Cargill Corporation and Peavey, a
division of Con-Agra Inc. Dantec believes the market for grain drying systems
worldwide is experiencing significant growth due to cost-savings from lower
spoilage rates and better grain quality, particularly in Asia and the Far East.
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Dantec operates in a 10,000 square foot facility in Waterloo, Ontario which
is leased from two of Dantec's minority shareholders at market rates. All
circuit-board assembly is outsourced to third parties and only final assembly
and tests of electronic parts is performed on site.
John McFarland has been the President and Chief Executive Officer of Dantec
Systems since January 1996 and is the President and Chief Executive Officer of
Dantec. Prior to joining Dantec Systems, Mr. McFarland was President and
General Manager of ENSR Operations (Canada Ltd.) ("ENSR") for a period of six
years. Prior to joining ENSR, Mr. McFarland was the worldwide business manager
for Norton Co. (chemical process division). During his 14-year tenure with the
Norton Co. he also held positions as Regional Manager for southern United States
and Mexico, Worldwide Business Manager (selexol process) and Canadian Regional
Manager. Mr. McFarland was co-founder of Phase Remediation Inc. an
environmental company in Nova Scotia. Mr McFarland was educated in Northern
Ireland where he received a National Certificate in Mechanical Engineering from
Belfast Technical College. He attended Babson College and has completed the
Harvard Business School executive development program.
Following the amalgamation of Dantec Electronics and Dantec Systems,
Dantec has become a consolidated subsidiary of the Company such that the
assets, liabilities and operations of the amalgamated company will be
consolidated in the Company's Consolidated Financial Statements for the first
time for the Company's June 30, 1998 quarter end. Prior to the amalgamation,
the financial statements of Dantec Electronics, then a wholly owned
subsidiary of the Company, were fully consolidated in the Consolidated
Financial Statements, while 41% of the operating results of Dantec Systems
were included in the Consolidated Financial Statements. At March 31, 1998 the
assets and liabilities of Dantec Systems were $439,713 (US$312,196) and
$964,420 (US$684,738) respectively.
DESCRIPTION OF CVF INVESTMENT
CVF owns, directly and indirectly, 4,845,000 common shares of Dantec,
representing 53% of the total outstanding voting securities of Dantec. In
addition, CVF holds a demand convertible promissory note issued by Dantec in the
principal amount of $130,000 which if converted, would increase CVF's voting
interest in Dantec to 54%. There are 960,000 Class A special non-voting shares
of Dantec held by minority investors which can be converted into an equivalent
number of common shares in the event of a public offering or a merger with a
public company and are redeemable at $1.00 per share at the holders' option,
110,000 shares at any time and the remaining 850,000 shares after August 1999.
Conversion of these shares would result in CVF owning 48% of Dantec. There are
also 338,433 options to purchase common shares of Dantec outstanding, which, if
exercised, would result in further dilution of CVF's interest in Dantec.
The Company has entered into a shareholders' agreement with the other
shareholders of Dantec which contains customary provisions restricting the sale
and transfer of Dantec's shares without the agreement of its shareholders.
CVF INVESTMENT RATIONALE AND RISKS
At the time of CVF's initial investment in Dantec Systems, it had developed
in conjunction with the University of Waterloo a model-based control system for
process control in the food, polymer, pharmaceutical and wood-processing
industries that could provide very precise automated control of moisture,
density, colour and other material characteristics through a combination of
software and sensor technologies. CVF believes that this technology has
worldwide potential in industrial automation. Since CVF's initial involvement,
Dantec Systems has successfully implemented its technology with a number of
major corporate customers in the food processing and agricultural industries and
has expanded its management team.
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CVF acquired Dantec Electronics because it believes there is significant
international potential in advanced grain-drying controls. Dantec Electronics
has an existing customer base of more than 1,000 installations and the Company
believes, based on internal studies, that there is market potential for at least
10,000 installations. The Company sought to effect a merger between Dantec
Systems and Dantec Electronics because the two companies have strong synergy and
commonality in terms of technology and sharing of marketing and administrative
facilities. The current risks to Dantec include, among others, limited
operating history and uncertainty of future operating results; possible
misappropriation of Dantec's proprietary technology; product liability risks;
inability to obtain additional financing; dependence upon Mr. McFarland;
inability to recruit qualified technical personnel; and other risks generally
associated with emerging technology companies. While Dantec has undertaken an
extensive internal review of its embedded software and believes it is free of
the defects associated with the Year 2000 issue, there can be no guarantee of
absence of such defects in boards and hardware provided by external suppliers.
See "Risk Factors".
CVF INVOLVEMENT
CVF's management has been actively involved in Dantec Systems from its
inception and the members of CVF's management were founding investors in the
company. They obtained the original licensing of the technologies, brought in
other co-investors, and arranged for the hiring of the current President. CVF
continues to be active in developing Dantec Systems' current business plan which
takes it beyond the original focus on the food-processing industry and into
other large markets for process automation including the petrochemical,
wood-processing, pharmaceutical and ore-processing industries. CVF management
has been actively involved since its purchase of Dantec Electronics in 1997 in
formulating business strategy and has arranged and overseen the merger of the
two companies. CVF will continue to be active in all aspects of strategic
business planning of the merged company and has the right to appoint 50% of the
board of directors of the merged company, and has the right to appoint the
Chairman of the board.
PETROZYME TECHNOLOGIES, INC.
OVERVIEW OF PETROZYME
Petrozyme of Guelph, Ontario was incorporated in 1996 and is an early-stage
company engaged in the commercialization and development of proprietary
technologies for the treatment of wastes and recovery of oil from the oil
production and refining sectors. The Petrozyme process is a reactor-based
biological process for recovery and degradation of oily sludge wastes and
emulsions that utilizes advanced fermentation and absorption technology to
recover and/or degrade most of the major hydrocarbon components in petroleum
waste.
Existing treatment solutions often require expensive transportation costs
to a "central treatment facility" operated by a third party. The Petrozyme
process can be operated on a producer's site by the producer's own personnel,
thereby saving expensive freight charges, potential liability from spills in
transport and the expensive overheads of a central treatment facility.
Petrozyme believes that it has recently made some significant technical
advancements in the treatment of oil-based emulsions and sludges and has three
patents pending on new processes. Petrozyme's original process for
biodegradation of refinery petroleum sludge has been implemented at a Venezuelan
refinery. The initial customers to date are Petro-Canada Products (Oakville,
Ontario refinery), and Representacion DCL Venezuela CA of Cardin, Venezuela for
testing at the Centro de Refineria Paraguana at Maraven, Venezuela.
Dr. Owen Ward, the President and Technical Director of Petrozyme, has 25
years of successful experience in the development and commercialization of
industrial fermentation technology, enzyme technology and bioremediation-based
processes for a variety of companies in Europe and North America in the
pharmaceutical, food, chemical and environmental sectors. He established, and
since 1986 has directed, the Microbial Biotechnology Laboratory at the
University of Waterloo and is the author of more than 150 scientific papers.
Dr. Ward has served as President of the Canadian Society of Microbiologists and
as a Director of the U.S. Society for Industrial Microbiology.
Hugh Dimock joined Petrozyme in early 1998 as the Vice-President and
General Manager. Mr. Dimock has a Bachelor of Science degree in
microbiology from the University of Guelph, a Master's of Science from McGill
University and a Master's of Business Administration in International
Business Management from McGill University. Prior to joining Petrozyme, he
spent three years with the Deloitte Touche Consulting Group.
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DESCRIPTION OF CVF INVESTMENT
CVF owns 100% of the Class C non-voting shares and 50% of the outstanding
common shares of Petrozyme. In addition, CVF holds demand promissory notes
issued by Petrozyme in the aggregate principal amount of $650,000. Interest has
not been accrued to date on this note.
The Company has entered into a shareholders' agreement with the other
shareholders of Petrozyme which contains customary provisions restricting the
sale and transfer of Petrozyme's shares without the agreement of its
shareholders.
CVF INVESTMENT RATIONALE AND RISKS
CVF originally invested in Petrozyme in 1996 because of the expertise of
Dr. Owen Ward and the proprietary nature of the technologies he had developed
for oil waste bio-remediation. CVF believes that the solutions Petrozyme can
provide address potential markets which include multi-national oil producers,
oil service companies and environmental contractors. Petrozyme's management
believes that Petrozyme's technologies can provide a cost-effective treatment
for the serious problem of disposal of the oil-based emulsions and oil waste as
well as the recovery of oil from emulsions, oily sludge and oil waste that is
contaminated and mixed with sand or liquid wastes. The current risks include,
among others, environmental risks associated with the cleaning of hazardous
materials; risks associated with international sales; dependence of the business
upon the efforts of Dr. Ward and Mr. Dimock; competition from current and
potential competitors, many of which have longer operating histories and name
recognition than Petrozyme; limited operating history and uncertainty of future
operating results; possible misappropriation of Petrozyme's proprietary
technology; and other risks generally associated with emerging technology
companies. See "Risk Factors". The company is not yet profitable and has been
dependent on advances from CVF and may require additional investment to meet its
business plan.
CVF INVOLVEMENT
CVF has one officer currently on the two member board of directors of
Petrozyme and has been involved actively in all phases of development of
Petrozyme, from developing a business strategy to hiring management.
ECOVAL INC.
The information contained below has been taken from or is based upon
publicly available documentation and information on file with Canadian
securities regulatory authorities and other public sources.
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OVERVIEW OF ECOVAL
Ecoval is a Montreal, Quebec-based company which manufactures and
markets a range of natural, environmentally safe fertilizers and a
bio-degradable natural herbicide. Independent research shows the herbicide
to be bio-degradable and faster-acting than most of the chemical products
available on the market. Research conducted by the Turf Grass Institute of
the University of Guelph and Laval University show the fertilizer to be
effective in promoting uniformity in lawns and reducing incidence of diseases
in turf grass. Ecoval's United States sales and marketing operations are
through its wholly owned subsidiary, Ecoval U.S., Inc. ("Ecoval US"). Ecoval
has recently received EPA approval for use of its herbicide in the United
States and is currently going through the approval process with Agriculture
Canada. Ecoval also has proprietary technology to enable the granulation of
gypsum, bloodmeal, bonemeal, feathermeal and other all natural ingredients.
Ecoval's proprietary formulas relating to its herbicide and tree recovery
systems are represented by four international patents issued in 1995 and
1996, expiring in 2015 and 2016.
Ecoval markets its products to the consumer-retail market, landscapers,
golf courses and municipalities. The market for organic fertilizers is highly
fragmented with no dominant player with significant market share. Ecoval
internal management's studies reveal that the fertilizer and herbicide niche
markets that Ecoval is targeting are both in excess of $1 billion annually in
North America. Ecoval has recently introduced a newly-designed line of organic
fertilizers for the U.S. consumer market under the brand-name "Nature's Glory".
Ecoval's herbicide offers retail and commercial users a range of benefits not
found with chemical-based competitive products, including the fact that it does
not contain any carcinogens, does not damage concrete or asphalt, has no
detrimental effect on soil micro-organisms, and leaves no residue, which means
that soil can be re-seeded within two days.
Ecoval's facility contains a plant with 25,000 ton-per-year capacity that
is capable of meeting expected demand for its product. In February 1997, Ecoval
obtained net proceeds of approximately $5.5 million from a private placement of
equity to a group of U.S. and Canadian investors to provide working capital for
operations and market expansion. Ecoval's customers include Canadian Tire
Corporation, Limited, Wal-Mart Canada Inc. and Weall & Cullen Nurseries Ltd.
For the year ended October 31, 1997, Ecoval reported revenues of $1,357,741
with a net loss of $8,923,254. For the six months ended April 30, 1998, Ecoval
reported revenues of $679,760, with a net loss of $1,746,270.
Mark Greene, President and Chief Executive Officer of Ecoval US and
acting president of Ecoval, has extensive experience in the marketing of
consumer and environmental products. Prior to joining Ecoval in 1997, he
served as President of Geoclean Environmental Inc, an environmental
remediation firm based in Bridgeport, Connecticut. From 1988 to 1995, he
founded and ran Connecticut Charcoal Co. Inc., a company which produces
specialty hardwood charcoal aimed at the upscale consumer market which he
successfully sold in 1995. Mr. Greene has also worked for a number of major
international advertising firms, including Young and Rubicam Inc.,
specializing in new product development, product expansion and strategic
planning.
DESCRIPTION OF CVF INVESTMENT
CVF currently owns, directly and indirectly, 1,330,550 common shares in
Ecoval representing an interest of 27% of the outstanding voting shares of
Ecoval. While Ecoval is a reporting issuer in the Provinces of Ontario, Alberta
and Quebec, its shares are not listed on any stock exchange.
CVF INVESTMENT RATIONALE AND RISKS
CVF believes that Ecoval possesses unique and proprietary formulas for
all-natural herbicides and fertilizers and proprietary manufacturing processes
for granulation. Current risks related to Ecoval include, among others: history
of losses and uncertainty of future operating results; intense competition from
other manufacturers of fertilizers, including manufacturers of chemical
fertilizers, many of which have longer
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operating histories and substantially greater financial, technical and marketing
resources and name recognition than Ecoval; dependence upon Mr. Greene;
uncertainty of approval from Agriculture Canada and other regulatory
authorities; exposure to fluctuations in the cost of its raw materials which
has resulted in lower than expected gross margins in the past and may continue
to affect the company's profitability in the future; lack of consumer awareness
of Ecoval's brand names in the United States; and other risks generally
associated with emerging companies. See "Risk Factors". If the company's
current marketing campaign does not succeed and sales are not significantly
increased then Ecoval will have a need for additional outside funding to finance
continued operations.
CVF INVOLVEMENT
CVF was the founding investor in Ecoval, creating the company based on
ideas and research done by a plant pathologist who originally worked at Uniroyal
Chemical Canada. CVF was involved in all aspects of developing Ecoval including
the development of a business plan and market strategy, executive recruitment,
development and commercialization of the manufacturing process and research and
development strategy. CVF was also involved in recruiting Ecoval's current
President and helped to arrange an equity private placement of $5,474,670 (net
of commission and expenses) which closed in February 1997, as well as arranging
earlier rounds of financing. CVF has also made initial investments in companies
that may serve in distributing and marketing Ecoval's products such as Eastview
and Grand Inc. (majority partner in the Elements partnership). See "Eastview
Marketing, One, LLC" above and "Grand Island Marketing, Inc." below. One CVF
officer currently sits on the five member board of directors of Ecoval.
LIMITED HOLDINGS
The earnings and losses of those companies in which the Company has less
than 20% ownership (the "Limited Holdings") are not included in the
Consolidated Financial Statements of the Company. Those Limited Holdings which
are publicly traded are recorded at market value in the Consolidated Financial
Statements of the Company in accordance with U.S. GAAP. All of the Holdings
listed below are publicly traded. The Company provides management expertise
and/or short term financing for each of these entities. The Company intends to
hold its positions in these companies until it determines that its investment
can be better utilized in other current or new holdings. The Limited Holdings
are as follows:
TURBOSONIC CANADA
The information contained below has been taken from or is based upon
publicly available documentation and information on file with U.S. securities
regulatory authorities and other public sources.
OVERVIEW OF TURBOSONIC TECHNOLOGIES, INC. AND TURBOSONIC CANADA
CVF made its original investment in 1991 in Turbotak Technologies Inc.
("Turbotak") of Waterloo, Ontario, a company founded by Dr. Donald Spink, a
former professor of Chemical Engineering at the University of Waterloo. In
1997, TurboSonic Technologies (then known as Sonic Environmental Systems, Inc.)
a publicly-traded, New Jersey based, air-pollution control products company, its
wholly-owned Canadian subsidiary TurboSonic Canada and Turbotak were combined
pursuant to a Plan of Arrangement under the Business Corporations Act (Ontario)
(the "Plan of Arrangement"). Pursuant to the Plan of Arrangement, all of the
common shares of Turbotak were exchanged for exchangeable shares in the capital
of TurboSonic Canada, which in turn can be exchanged for common shares
approximating, at present, an 82% interest in the capital of TurboSonic
Technologies. This indirect interest also provides, through the mechanisms of
the Plan of Arrangement, equivalent direct voting rights with respect to
TurboSonic Technologies. This transaction is treated for accounting purposes as
an acquisition of TurboSonic Technologies by Turbotak although TurboSonic
Technologies now holds all of the outstanding common shares of Turbotak. The
common shares of TurboSonic Technologies are quoted on the OTC Bulletin Board
under the symbol "TSTA".
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Turbotak and TurboSonic Technologies (collectively, "TurboSonic") have
obtained over 20 patents for its products and has 10 pending patent applications
which are at various stages in the application process. TurboSonic offers waste
and pollution solutions for the pulp and paper industry, power generation
facilities and automotive and metallurgical manufacturing. TurboSonic has
developed a variety of sophisticated, proprietary solutions for the treatment of
emissions of sulfur dioxide and volatile organic compounds. The company's
solutions also allow the recapture of sulfur dioxide which can help create a
payback for the installation.
TurboSonic recently announced a marketing agreement and strategic
partnership with Dow Chemical Company in respect of TurboSonic's proprietary
regenerable amine process for removing sulfur dioxide from gas streams. The
amine will be manufactured by Dow and supplied to all licensed customers of the
TurboSonic FGD (Flue Gas Desulfurization Systems). The TurboSonic process is
believed to be more cost-effective and provide better performance than other
available technologies. In large concentrations, sulfur dioxide is a harmful
substance and is considered to be a prime contributor to air pollution. Acid
plants, pulp and paper mills, and power generating facilities are just a few of
the industries required to limit sulfur dioxide emissions. TurboSonic's
customers to date have included many of the major companies in the pulp and
paper industry including International Paper Company, Rayonier, Inc., Fort James
Corporation, Fletcher Challenge Paper, Willamette Industries, Inc., and
Georgia-Pacific Corporation.
For the nine months ended March 31, 1998, TurboSonic Technologies reported
revenues of US$2,359,732 with a net loss of US$554,727. These results are not
consolidated in the Company's Consolidated Financial Statements.
Dr. Donald R. Spink is Chairman of TurboSonic Technologies Dr. Spink's
business career includes 16 years with Amax Specialty Metals Co. (a division of
American Metal Climax Inc.) in various technical management levels, including
Vice-President Technical, related to the extractive metallurgy of reactive
metals (e.g. titanium, zirconium and hafnium). He joined the Department of
Chemical Engineering at the University of Waterloo as a full Professor in 1968,
where he focused his research activities in air pollution and extractive
metallurgy.
Edward Spink, President and Chief Executive Officer of TurboSonic
Technologies has been a senior executive with TurboSonic Technologies or its
predecessor since 1980. He received an Honours B.A. in Business Administration
from Wilfrid Laurier University, following which he spent several years at Ford
Motor Credit in finance management positions.
Patrick J. Forde has been Secretary and Treasurer of TurboSonic
Technologies since August 1997. Prior thereto and from 1986 he was a director
of Turbotak. Mr. Forde has served as Vice-President, Corporate Planning for
Turbotak since 1996. He was Chairman and Chief Executive Officer of Borg
Textile Corporation from 1982 to 1995. Mr. Forde has been Chairman of Waterloo
Scientific Inc, a laser microscope company.
DESCRIPTION OF CVF INVESTMENT
The Company's original investment was in a convertible debenture issued by
Turbotak which was converted into common shares of Turbotak prior to the
effective date of the Plan of Arrangement. CVF currently holds 1,334,977
exchangeable shares in TurboSonic Canada which are exchangeable into common
shares of TurboSonic Technologies on a one-for-one basis at any time at CVF's
option and 3,000 common shares of TurboSonic Technologies, which, upon the
exchange of the TurboSonic Canada exchangeable shares, represents approximately
13% of the outstanding common shares of TurboSonic Technologies At July 3,
1998, the last trading price of the shares of TurboSonic Technologies on the OTC
Bulletin Board was US$0.375.
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CVF INVESTMENT RATIONALE AND RISKS
CVF originally invested in Turbotak in 1991 because of its proprietary
technologies for air-pollution control systems for the removal of sulfur dioxide
and volatile organic compounds from industrial emissions which continue to be a
worldwide environmental problem requiring cost-effective solutions. At the time
of the original investment, Turbotak had a client-base in the pulp and paper
industry and had developed a business in selling its patented nozzles which were
capable of producing micron-size droplets. The risks at the time of CVF's
investment in Turbotak related to the need for Turbotak to establish worldwide
marketing in an area that requires a very long sales cycle. There was also
competition from older, but less effective technologies. In addition, Turbotak
needed to diversify its customer base away from the pulp and paper industry
which remains highly cyclical and which went into a deep recession in the early
1990's.
Since the time of CVF's initial investment, TurboSonic has expanded its
sales and gained major new corporate customers. However, it still remains
dependent to a large degree on customers from the pulp and paper industry.
Risks include, among others: history of losses and uncertainty of future
operating results; possible misappropriation of TurboSonic's proprietary
technology; intense competition from current and potential competitors, some of
which have longer operating histories and substantially greater financial,
technical and marketing resources and name recognition than TurboSonic;
fluctuation in operating results as a result of the cyclical nature of its
customers' business; dependence of the business upon the efforts of Dr. Spink,
Mr. Spink and Mr. Forde; and other risks generally associated with emerging
technology companies. See "Risk Factors".
CVF INVOLVEMENT
Subsequent to its initial investment in 1991 until mid-1997, CVF was
actively involved with TurboSonic in bringing in management personnel, helping
to develop the strategic business plan and introducing potential customers,
acquisition candidates and strategic alliances.
RDM CORPORATION
The information contained below has been taken from or is based upon
publicly available documentation and information on file with Canadian
securities regulatory authorities and other public sources.
OVERVIEW OF RDM
RDM of Waterloo, Ontario was founded in 1987. RDM, formerly known as
Mindflight Corporation, changed its name to RDM Corporation on June 19, 1998.
The common shares of RDM are listed for trading on the Vancouver Stock Exchange.
RDM develops and supplies technologies that enable secure and accurate payments
for both paper-based and electronic payment systems. RDM has been providing
banks, printers and payment processors with financial document and check print
quality control technologies since 1987. RDM has a suite of products that
provide MICR (Magnetic Image Character Recognition) image quality control and
document authentication to companies (primarily financial institutions and
security printers) in over 30 countries.
Currently, RDM's efforts are focused on two new product initiatives. The
first is a new point-of-sale imaging product called EasyCheck POS. The product
is a small inexpensive check MICR and image capture device targeted at retail
and bank teller counters. In retail, EasyCheck POS will enable a cashier to
convert a check into an electronic debit payment and give the used check back to
the consumer at point of sale while maintaining an image record for the
retailer. In the banking industry, EasyCheck POS will enable the earliest
possible capture of check images in order to automate check processing.
Existing competition consists of
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heavy and bulky equipment more than ten times the price proposed for EasyCheck
POS. Other applications include a variety of remittance, coupon and certificate
processing tasks wherever an image and automatic processing are required.
RDM has successfully demonstrated prototypes and is initiating outsourced
manufacturing to meet initial orders for the EasyCheck POS product. These
initial orders are expected to be shipped in the second half of 1998.
RDM's other major initiative is in the area of electronic commerce.
E-Check, a product developed by RDM, is an internet-based, all-electronic
payment instrument which has been modeled after the paper check. E-check uses
public key encryption technology to replace physical signatures with digital
signatures. RDM has been developing this software technology as part of the
Financial Services Technical Consortium (the "FSTC"), a group of major U.S.
banks and equipment vendors formed to enhance technology in the U.S. financial
services industry. E-Check project members participating in the FSTC include
NationsBank, Bank of Boston, Citibank, IBM Inc. and Sun Microsystems Inc. RDM
has a non-exclusive right to all intellectual property relating to E-Check
developed through their participation in the FSTC. A pilot program with the
U.S. Department of the Treasury (the "Treasury") began in April 1998 pursuant
to which RDM is supplying the E-Check payment system software to the Treasury
and the U.S. Department of Defense who will receive electronic checks from the
Treasury. This software will give the Treasury, currently one of the world's
largest issuer of paper checks, an enhanced all-electronic replacement for the
paper check.
For the year ended September 30, 1997, RDM reported revenues of $2,537,922
with a net loss of $310,545. For the six month period ended March 31, 1998, RDM
reported revenues of $1,255,344 with a net loss of $605,527. These results are
not consolidated in the Company's Consolidated Financial Statements.
Patrick Pavlik, President and Chief Executive Officer of RDM, and one of
the original founders of RDM, holds a Professional Engineering designation and
has a Masters degree in engineering from the University of Waterloo and has
taken courses in the executive training program at the Graduate School of
Business at Stanford University. He previously worked from 1985 to 1987 at GE
Reuter Stokes, a division of General Electric Canada Inc. in Cambridge, Ontario,
a company that produces sensors for the nuclear power industry, where he was
involved in product marketing.
DESCRIPTION OF CVF INVESTMENT
In December 1997, CVF purchased 1,428,572 special warrants in RDM at a
price of $0.70 per special warrant for a total purchase price of $1,000,000.
Upon qualification for distribution in British Columbia, the special warrants
were exercised in June 1998 into 1,428,572 common shares of RDM, representing
approximately 16% of the outstanding common shares of RDM.
On July 3, 1998, the closing price of common shares of RDM on the
Vancouver Stock Exchange was $1.80 per share.
CVF INVESTMENT RATIONALE AND RISKS
CVF invested in RDM because of its existing core business in check and
print inspection technologies and the reputation it has developed in the banking
technology industry. CVF also believes there is potential for the two new
product lines. Electronic commerce and security-related technologies remain a
focus for CVF. The risks with respect to the EasyCheck POS product involve
taking the product to market and setting up appropriate distribution channels.
The risks with respect to the E-Check product involve the need to further test
and develop the technology and if successful, the risk that RDM may not be able
to establish E-Check as an accepted form of payment in the banking industry.
There can be no assurance that RDM will successfully launch these products. In
addition, to implement marketing of both of these new
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product lines, additional financing will be required. Other risks include
possible misappropriation of proprietary technology; dependence upon Mr. Pavlik;
and the need to recruit qualified technical personnel.
CVF INVOLVEMENT
Robert Nally, an officer and director of CVF, has been Chairman of RDM
since 1995. He is one of the original founders of RDM and has been a director
of RDM since its inception in 1987. He beneficially owns 1,735,874 common
shares of RDM representing approximately 19.5% of the outstanding shares in RDM.
CVF has observer status at board of directors' meetings through a CVF officer,
other than Mr. Nally.
OTHER INVESTMENTS
The Company has invested US$100,000 in Powertrusion 2000 International,
Inc. ("Powertrusion") for 50,000 convertible preferred shares which if
converted, would represent less than 1% of voting equity of Powertrusion.
Powertrusion is a private company operating in Scottsdale, Arizona which
manufactures lightweight, safe composite poles to replace wooden utility poles.
MATERIAL DISPOSITIONS
During 1997, the Company sold 883,000 common shares of Certicom for
proceeds of US$20,389,424, realizing a gain of US$19,409,357. In January and
February of 1998, the Company disposed of its remaining common shares of
Certicom for additional net proceeds of approximately US$375,000. On March 31,
1998, the Company retracted a portion of its preferred shares of Certicom and
redeemed a portion of a Certicom debenture for total proceeds of $348,362,
including dividends and interest.
The Company currently holds 29,881 preferred shares in Certicom and a
debenture with a principal amount remaining of $33,333. The preferred shares
can be retracted and the debenture redeemed by the Company on March 31, 1999
for aggregate gross proceeds, including dividends and interest, of approximately
$348,362.
PERSONNEL
As of the date hereof, the Company has 6 full-time employees and its
Subsidiaries have a total of 53 full-time employees and one part-time employee.
None of the employees are represented by a labor union or are subject to a
collective bargaining agreement.
If appropriate candidates are found, the Company plans to hire additional
employees.
PRINCIPAL PROPERTIES
The Company's principal executive offices are located at 916 Center Street,
Lewiston, New York 14092. Lease payments are US$25,200 annually and the Company
has an option to purchase the building for US$210,000. The Company believes
that its facilities are adequate for its current needs and that suitable
additional space will be available as required.
INTELLECTUAL PROPERTY
The Company places a high priority on intellectual property and is unlikely
to invest in a technology business unless it has significant intellectual
property protection. The Holdings rely on various combinations of trade secret,
patent, copyright and trademark laws, nondisclosure and other contractual
agreements and technical measures to protect their proprietary rights. Several
of the Holdings have obtained patents for their products or have patent
applications pending. There can be no assurance that such patent applications
will be granted or that the Holdings' products will not infringe patent rights
of other persons. Nor can there be
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any assurance that other persons have not or will not apply for patent
protection for products which utilize the same or similar processes as the
Holdings' products. Litigation may be necessary to protect the Holdings'
proprietary technology. Any claims or litigation can be time-consuming and
expensive. While the Company endeavors to ensure the protection of confidential
developments, the inability of the Holdings to adequately protect their
proprietary rights could have a material adverse effect on the Company's
business, results of operations and financial condition. The Company is not
aware of any claim or pending claims in respect of any of the Holdings'
intellectual property rights.
See "Risk Factors - Risks Associated with Intellectual Property;
Infringement Claims."
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CONSOLIDATED OPERATING RESULTS
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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1997
Sales for the first quarter of 1998 were up 147% or US$385,898 to
US$647,753 as compared to sales of US$261,855 in the same period in 1997. This
increase relates to the inclusion of revenue totaling approximately US$295,000
from two new subsidiaries, Dantec Electronics and Grand Inc., as well as an
increase in revenue from Solaria of approximately US$135,000. CVF, on an
unconsolidated basis, has no sales from operations. Sales and gross profit from
sales reflect the operations of the Company's consolidated subsidiaries only.
These subsidiaries include Biorem, Gemprint, Solaria, Dantec Electronics,
Leasing, Eastview, Grand Inc., and Grand Island2. Entities that are not
consolidated include Ecoval, Dantec Systems, RDM, Petrozyme, and TurboSonic.
In the first three months of 1998 the Company recorded a net loss of
US$1,585,811 as compared to a net profit of US$10,319,327 in the comparable
period of 1997.
The decline in net profit of US$11,905,138 was mainly attributable to:
(a) the decline in the gain on sale of investments of US$17,788,131.
During the first quarter of 1997, the majority of the Company's shares
of Certicom were sold, creating a pre-tax gain of US$18,160,425. In
the first quarter of 1998, the remainder of the Certicom stock was
sold, accounting for the majority of the US$372,294 gain on sale of
investments; and
(b) an operating loss of US$2,613,146 for the first quarter 1998, compared
to an operating loss of US$653,428 in 1997. The majority of this
change relates to an increase of US$2,022,318 in selling, general, and
administrative expenses. Of this amount, approximately US$604,000
relates to start up costs in Grand Inc., and US$776,000 relates to
advertising costs for an infomercial for Eastview. Both of these
marketing companies are entities created in the last quarter of fiscal
1997 and first quarter of 1998. In addition, Dantec Electronics' (a
subsidiary acquired in mid 1997) selling and administrative expenses
were included in 1998 but not in 1997.
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Interest income (expense), net, increased US$214,824 as compared to the
same quarter in 1997, related to increases in both CVF and Leasing. This is due
to higher levels of cash during the first quarter of 1998, compared to the prior
period, due to dispositions of Certicom stock during 1997.
The minority interest benefit of US$328,028 recorded in the first quarter
of 1998 relates to the 49% minority interest's share of the first quarter loss
on the Elements Partnership, of which Grand Inc. holds 51%.
The tax provision for the first quarter of 1997 was US$7,294,890 versus a
benefit of US$79,800 in 1998. The high tax provision in 1997 related to the
gain on the sale of Certicom stock. The benefit in 1998 is due to the
elimination of the tax liability related to expenses incurred in Eastview in
1998.
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. Sales for the year ended December 31, 1997 were US$1,685,399
compared to US$1,866,176 for the year ended December 31, 1996. 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 for the year ended December
31, 1997 increased to US$5,367,541 from US$3,342,739 for the year ended
December 31, 1996 for an increase of 61% or US$2,024,802 is mainly due to
US$1,500,000 in bonuses paid by the Company related to a series of offsetting
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 net after-tax cost to the
Company of these bonuses was US$250,000. The exercise of the options
triggered personal tax consequences which were reimbursed by the Company
through the issuance of these bonuses. See "Executive Compensation". In
addition, there was US$246,596 in selling, general and administrative
expenses of Dantec Electronics (a subsidiary acquired in mid-1997). The
remainder related to increases in wages, legal expenses, and other selling
general and administrative expenses increases, particularly in the Company.
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 relating to the update of its
technology.
Interest income increased to US$448,684 for the year ended December 31,
1997 compared to an 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 interest income is expected to decline in 1998.
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
Ecoval's raw materials.
However, the Company's losses in its Equity Holdings, as recorded in the
Consolidated Financial Statements, have 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
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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 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 Holdings
is dependent upon the success of their operations. See "Risk Factors".
Over the last two years, the Company has benefitted from the ownership of
common shares of Certicom which it originally participated in founding and
supported in accordance with the nature of the Company's business. During the
fiscal year ended December 31, 1996 Certicom became a public company and the
value of its publicly-traded shares increased such that the Company sold its
holdings for gains of US$3,204,185 for the year ended December 31, 1996 and
US$19,409,357 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 for the year ended December 31,
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 the year ended
December 31, 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. Approximately 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 0.70 to 1.00 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
At March 31, 1998 the Company recorded stockholders' equity of
US$10,024,713 as compared to US$12,063,135 at December 31, 1997. This net
decrease of US$2,038,422 was primarily attributable to:
(1) the Company expending US$480,618 on the repurchase of 102,000 Common
Shares of treasury stock;
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(2) the net loss of US$1,585,811 for the quarter ended March 31, 1998; and
(3) an increase of approximately US$521,000 in paid in capital as
additional Common Shares were issued during the first quarter of 1998.
The current ratio of the Company at March 31, 1998 improved to 2.8 to 1 as
compared to 2.3 to 1 at December 31, 1997. This is the result of a decline in
cash of US$6,526,256 combined with declines in income taxes payable of
US$1,820,598 and accrued expenses of US$1,096,660. The taxes payable at
December 31, 1997 were paid off during the first quarter of 1998, and the
accrued expenses were higher at December 31, 1997 as the balance included legal
expenses and bonuses.
The Company experienced a net decrease in cash and cash equivalents of
US$6,526,256 at March 31, 1998 compared to an increase in cash of US$17,119,264
in the same period of 1997, which was related to the sale of Certicom shares in
the first quarter of 1997. The decline in cash from December 31, 1997 to March
31, 1998 relates to payment of bonuses of US$500,000 accrued at year end,
$1,500,000 invested in Grand Island Marketing, payment of the tax liability of
US$1,820,598 at year end, and increased selling, general and administrative
costs compared to the same period in 1997.
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 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 of its Holdings. No significant or material commitments for
capital assets or further investments are contemplated at this time.
In the first quarter of 1998, the Company repurchased 102,000 of its common
shares at a cost of US$480,618. 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 the Equity Holdings 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 by US$121,365 during the year ended December
31, 1997. Cash of US$682,361 was deposited in restricted investments in 1997 to
support debt guarantees of Biorem and Gemprint. In the prior year, these debt
guarantees were supported by the common shares of Certicom.
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CONSOLIDATED CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as at the date indicated and as adjusted to give effect to the Offering
and the application of the net proceeds therefrom. See "Use of Proceeds". This
table is presented in U.S. dollars and in accordance with U.S. GAAP. This table
should be read in conjunction with the Consolidated Financial Statements of the
Company, the notes thereto and the other financial data included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1998 MAY 31, 1998
-------------- ----------------------------------------------------
ACTUAL ACTUAL AS ADJUSTED AS ADJUSTED
-------------- ------------- ----------- -----------
(UNAUDITED) (UNAUDITED) MINIMUM MAXIMUM
------------- ----------- -----------
OFFERING OFFERING
----------- -----------
(UNAUDITED) (UNAUDITED)
US$ US$ US$ US$
<S> <C> <C> <C> <C>
INDEBTEDNESS
Bank indebtedness. . . . . . . . . . . 135,240(1) 135,240(1) 135,240(1) 135,240(1)
Long Term Debt . . . . . . . . . . . . 868,680(2) 868,680(2) 868,680(2) 868,680(2)
Minority Interest. . . . . . . . . . . 356,162 356,162 356,162 356,162
Preferred Stock of Subsidiaries. . . . 1,193,000(3) 1,193,000(3) 1,193,000(3) 1,193,000(3)
Series "A" Preferred 456,250 456,250 456,250 456,250
Stock(4) . . . . . . . . . . . . . . . (25,000 shares) (25,000 shares) (25,000 shares) (25,000 shares)
--------------- --------------- --------------- ---------------
(authorized - 500,000 shs.)
Total Indebtedness. . . . . . . . 3,009,872 3,009,872 3,009,872 3,009,872
--------- --------- --------- ----------
SHAREHOLDERS' EQUITY
Common Shares(5)(6). . . . . . . . . . 6,133 6,133 7,033(9) 9,033(9)
(authorized - 50,000,000 (5,767,628 (5,767,628 (6,667,628 shares) (8,667,628 shares)
shs.) shares) shares)
Additional Paid in Capital . . . . . . 14,178,666 14,178,666 19,068,366 29,934,366
Treasury Stock . . . . . . . . . . . . (2,342,667) (2,342,667) (2,342,667) (2,342,667)
Translation Adjustment . . . . . . . . (104,813) (104,813)(7) (104,813)(7) (104,813)(7)
Warrants(6). . . . . . . . . . . . . . -- -- -- --
(952,784 (952,784 (952,784 (952,784
warrants) warrants) warrants) warrants)
Accumulated Deficit. . . . . . . . . . (2,010,806) (2,010,806)(8) (2,010,806)(8) (2,010,806)(8)
----------- ----------- ----------- -----------
TOTAL CAPITALIZATION . . . . . . . . . 12,735,845 12,735,845 17,626,985 28,494,985
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
NOTES:
(1) See Note 6 in the Company's Consolidated Financial Statements.
(2) See Note 7 in the Company's Consolidated Financial Statements.
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(3) See Note 11 in the Company's Consolidated Financial Statements.
(4) The shares of Series "A" Preferred Stock, issued to the partners of
CVFLP in connection with the Asset Purchase Agreement, are redeemable
at any time by the Company and a holder thereof may require the
Company to redeem such shares at any time after August 20, 2000. See
Note 9 in the Company's Consolidated Financial Statements.
(5) As at the date hereof, options to purchase an aggregate of 53,750
Common Shares are outstanding. See "Options to Purchase Securities".
(6) Pursuant to the terms of the Asset Purchase Agreement, the Company
issued to CVFLP warrants entitling it to purchase 952,784 Common
Shares. Each warrant entitles the holder to purchase one Common Share
at a price of $3.05 per share. CVFLP has assigned the warrants to
Canadian Venture Founders Management Limited, its general partner at
that time ("CVF Management Limited"). Until September 20, 2000, the
warrants may only be exercised to the extent that former limited
partners of CVFLP sell any Common Shares which were issued in
connection with the Asset Purchase Agreement. In such event, the
warrant holders may purchase one Common Share for each five Common
Shares sold by a limited partner. Any warrants not exercised before
September 20, 2000, may be exercised by the holder during the
six-month period immediately following that date. Currently CVF
Management Limited holds 885,653 Warrants. To the best of the
Company's knowledge, 125,973 warrants are exercisable. Common Shares
issuable upon exercise of the warrants will be restricted securities
as that term is defined in Rule 144 under the United States Securities
Act of 1933, as amended.
(7) Translation adjustment as of March 31, 1998.
(8) Deficit as of March 31, 1998.
(9) Includes 25,570 Common Shares issued on June 3, 1998 in exchange for
720,000 Class A shares of Gemprint, but excludes (i) Common Shares
issuable on exercise of the Over-Allotment Option; (ii) Common Shares
issuable on exercise of the Compensation Warrants; (iii) Common Shares
issuable upon the exercise of options currently outstanding; and (iv)
952,784 Common Shares issuable upon exercise of the warrants described
in note 6 above.
USE OF PROCEEDS
The net proceeds from this Offering to the Company are estimated to be
approximately $20,760,759 (maximum offering)/$5,880,759 (minimum offering)
($24,108,759 if the Agent's Over-Allotment Option is exercised in full) after
deducting the expenses of the issue, including the Agent's Commission. Of the
net proceeds approximately: (i) one-third will be used to fund the growth of
the Holdings in order to enable them to meet their respective business plans
and, in particular, the expansion of the sales and marketing efforts of the
Holdings; (ii) one-third will be used for the purpose of strategic mergers
and acquisitions of businesses that are directly related to the existing
Holdings; and (iii) one-third will be used to acquire significant holdings in
companies engaged primarily, but not exclusively, in the information
technology, process control and environmental sectors. If only the minimum
offering is realized, the Company intends to increase the percentage
allocated to fund the needs of its current holdings and reduce the percentage
allocated to new acquisitions. The Company expects that approximately 70% of
the proceeds allocated to new acquisitions will be used to acquire positions
in private companies and that approximately 30% of the such proceeds will be
used to acquire positions in public companies with market capitalization of
less than US$10 million. In each case, the company intends to acquire
interests in companies with established products and management and, in most
cases, revenues of less than US$3.0 million. Proceeds of the Offering are
expected to be utilized over the next three to four years and will be
invested in short term, interest-bearing, investment grade securities until
such time as the funds are invested as described herein.
-45-
<PAGE>
DIRECTORS AND OFFICERS
The name, municipality of residence, position held with the Company and
principal occupation of each of the directors and officers of the Company are as
follows:
<TABLE>
<CAPTION>
NAME AND MUNICIPALITY
OF RESIDENCE AGE POSITION WITH THE COMPANY PRINCIPAL OCCUPATION
--------------------- --- ------------------------- --------------------
<S> <C> <C> <C>
Jeffrey I. Dreben(1) 53 Director, Chief Executive Chief Executive Officer and
Lewiston, New York Officer and President President of the Company
Robert B. Nally(1) (2) 50 Director, Secretary and Secretary and Treasurer of
Waterloo, Ontario Treasurer the Company
George A. Khouri 51 Director and consultant Consultant to the Company
Greenwich, Connecticut
Lawrence M. Casse 42 Vice-President Vice-President of the
Toronto, Ontario Company
Robert H. Glazier(1) 50 Director President and Chief
Jefferson County, Iowa Executive Officer of
Donatech Corporation
Robert J. Seyler(2) 50 Chief Financial Officer Chief Financial Officer of
Ransomville, New York the Company
</TABLE>
NOTES:
(1) Member of the audit committee.
(2) Mr. Nally is also the acting Chief Financial Officer of the Company
until Mr. Seyler joins the Company in July 1998.
All of the foregoing persons have held executive positions with the same
company or its predecessor for the past five years except for Messrs. Khouri,
Casse and Seyler as indicated in their respective biographies below.
The Company intends to appoint one or more additional independent directors
shortly after the closing of the Offering.
JEFFREY DREBEN
Jeffrey Dreben has been President, Chief Executive Officer and a
director of the Company since September 1995. From 1989 until September
1995, Mr. Dreben was Vice President and Treasurer of CVF Management Limited
and was its founder. CVF Management Limited was the general partner of
CVFLP. Mr. Dreben has worked in the investment industry since 1979,
beginning his career with Merrill Lynch and subsequently founding his own
firm. Mr. Dreben has worked in the venture capital industry in the United
States and Canada since 1985. Mr. Dreben received an Honors Bachelor of Arts
degree from Loyola College of the University of Montreal.
ROBERT NALLY
Robert Nally has been Secretary, Treasurer and a director of the Company
since September 1995. From 1989 until 1995, Mr. Nally was Vice President and
Secretary of CVF Management Limited and one of its co-founders. Prior to that
time, Mr. Nally provided commercial development consulting services to
-46-
<PAGE>
the University of Waterloo as Technology Transfer and Commercial Development
Officer. Prior to joining the University of Waterloo, he worked for NCR Canada,
Ltd. for 10 years as Manager of Strategic Planning and New Business Development
and Director of Engineering. He earned a Bachelor of Science degree in
electrical engineering and a Master of Science degree from the University of
Waterloo. Mr. Nally is also a director of Virtek Vision International Inc., a
company specializing in laser inspection systems whose shares are quoted for
trading on the Canadian Dealing Network Inc..
GEORGE KHOURI
George Khouri has been a consultant to and a director of the Company since
April 1997. From May 1993 until September 1996, Mr. Khouri was initially a
director and subsequently Managing Director-Capital Markets for Nomura
Securities International Inc. From September 1992 to May 1993, Mr. Khouri was a
member of Trigon Group, an investment banking firm, and served as President of
Prudential Bache Capital Partners from December 1989 to February 1992. Mr.
Khouri received a Bachelor of Arts degree from Tufts University and a Masters of
Business Administration, Investments, from New York University.
LAWRENCE CASSE
Lawrence Casse has been a special consultant to the Company since March
1997 and was appointed as Vice President in April 1998. From December 1993 to
March 1997, Mr. Casse was President of Resonance Capital Corporation, a company
involved in the business of advising and financing technology-based companies in
Canada and the United States. Mr. Casse has been actively involved in numerous
technology-based companies as an investment banker, investor and consultant.
Prior to December 1993, Mr. Casse was an investment analyst at Credifinance
Securities Limited specializing in technology-based companies and had worked for
a number of Canadian investment firms. Mr. Casse earned a Bachelor of Arts
degree from the University of Toronto and has since taken numerous courses in
electronics and software programming.
ROBERT GLAZIER
Robert Glazier was elected to the board of directors of the Company on
January 27, 1998. Mr. Glazier is the founder of Donatech Corporation
("Donatech"), an Iowa-based computer software consulting company, and has been
Donatech's President and Chief Operating Officer since its founding in 1987.
Since 1987, Donatech has provided software expertise to the telecommunications,
insurance, avionics and industrial machine industries with specialization in
embedded systems and real-time operating systems. Before founding Donatech, Mr.
Glazier was a manager on the Cruise Missile Program with General Dynamics
Corporation from 1982 to 1984. Mr. Glazier also held management positions in
California at Oak Industries Inc. developing cable television decoders. Mr.
Glazier holds a Masters degree in Engineering from the University of California
at Berkeley and a Bachelors degree in Engineering from Purdue University.
ROBERT SEYLER
Robert Seyler will become Chief Financial Officer of the Company in July
1998. Mr. Seyler was previously Controller for Root, Neal & Company of Buffalo,
N.Y. a privately owned company specializing in distributing industrial parts and
refrigerants to heavy industry where he had responsibility for all financial
functions of the company. From 1973 to 1995 he was employed by C.H. Heist
Corporation of Buffalo, New York, a public company with operations in Canada and
the United States specializing in industrial maintenance and placement services,
where he served as Controller from 1979 to 1994 and Treasurer/Chief Accounting
Officer from 1994 to 1995. From 1970 to 1973 he was an auditor for KPMG Peat
Marwick in Buffalo, New York. Mr. Seyler has a Bachelor of Business
Administration degree from Niagara University.
-47-
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following Summary Compensation Table sets forth information concerning
the compensation paid by the Company or its Subsidiaries to the Chief Executive
Officer and the other executive officers of the Company who were serving as
executive officers at December 31, 1997 and whose total salary and bonus
exceeded $100,000 (the "Named Executive Officers").
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------
ANNUAL COMPENSATION LONG-TERM COMPENSATION
---------------------------------------------------------------------
AWARDS PAYOUTS
-------------------------------------
SECURITIES
OTHER UNDER RESTRICTED
YEAR ANNUAL OPTIONS SHARES OR ALL OTHER
ENDED COMPEN- /SARS RESTRICTED LTIP COMPEN-
DECEMBER SALARY BONUS SATION (2) GRANTED SHARE UNITS PAYOUTS SATION
NAME AND PRINCIPAL POSITION 31 (US$) (US$) (US$) (#) (US$) (US$) (US$)
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Jeffrey Dreben 1997 200,000 Nil -- -- -- -- 1,091,900(1)
President and Chief Executive 1996 102,765 Nil -- -- -- -- --
Officer 1995 26,273 Nil -- -- -- -- --
------------------------------------------------------------------------------------------------------------------------------
Robert Nally(3) 1997 140,000 Nil -- -- -- -- 1,091,900(2)
Secretary and Treasurer 1996 80,543 -- -- -- -- -- --
1995 -- -- -- -- -- -- --
------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTES:
(1) Other compensation relates to the value of stock options issued to and
exercised by Messrs. Dreben and Nally and a one-time sum of
US$500,000 paid to each of the Named Executive Officers as
compensation for the personal tax liabilities related to the exercise
of the options. The Common Shares underlying the stock options were
originally owned by CVF, Inc., a management company owned by Jeffrey
Dreben, Robert Nally and Malcolm Gissing, a former officer and
director of the Company. In order to restructure the ownership of
these shares so that they would be directly held by Messrs. Dreben,
Nally and Gissing, in February 1997, the Company repurchased 601,932
of its Common Shares from CVF, Inc. for an aggregate nominal
consideration of US$10. The Company simultaneously issued to Messrs.
Dreben, Nally and Gissing options to purchase an equal number of
Common Shares exercisable at US$0.05 per share. The Company recorded
no expense effect on this exchange. The fair market value of the
Common Shares at the time of the exercise of the option, was US$3.00
per share. On this sequence of transactions, the Company recorded a
US$727,163 tax benefit as an increase in additional paid in capital.
The net, after tax cash disbursement cost to the Company was
approximately US$250,000 (US$83,000 per officer).
(2) Perquisites and other personal benefits did not exceed the lesser of
US$50,000 or 10% of the total annual salary and bonus for the Named
Executive Officers.
(3) Mr. Nally's salary was paid by Leasing, a wholly-owned subsidiary of
the Company.
The Company has entered into a service agreement dated February 10, 1997
(the ""Service Agreement'') with D and N Consulting Corporation ("D and N"),
pursuant to which D and N provides a variety of administrative, managerial
and clerical services to the Company. Messrs. Dreben and Nally are each
officers and 50% shareholders of D and N. The Service Agreement has an
initial term of five years and is renewable thereafter for successive one
year terms by either party upon six months written notice.
OPTION/SAR GRANTS DURING THE MOST RECENTLY COMPLETED FINANCIAL YEAR
The following table sets forth individual issuances of stock options to
acquire Common Shares of the Company or the securities of any Subsidiary granted
during the fiscal year ended December 31, 1997 to each of the Named Executive
Officers.
The options set forth in the table below were granted by the Company in
exchange for the repurchase of Common Shares for a nominal amount. See Note 2
under the heading "Executive Compensation - Summary Compensation Table."
-48-
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
MARKET VALUE OF
% OF TOTAL OPTIONS SECURITIES
GRANTED TO UNDERLYING OPTIONS
NAME SECURITIES UNDER EMPLOYEES IN EXERCISE OR BASE ON THE DATE OF GRANT
OPTIONS GRANTED (#) FINANCIAL YEAR PRICE ($/SECURITY) ($/SECURITY) EXPIRATION DATE
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Jeffrey Dreben 200,644(1) 45.2% US$0.05 US$6.625 Feb. 5, 2007
President and Chief
Executive Officer
--------------------------------------------------------------------------------------------------------------------------------
Robert Nally 200,644(1) 45.2% US$0.05 US$6.625 Feb. 5, 2007
Secretary and Treasurer
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTES:
(1) The Common Shares underlying the stock options granted were originally
owned by CVF, Inc., a management company owned by Jeffrey Dreben,
Robert Nally and Malcolm Gissing, a former officer and director of the
Company. In order to restructure the ownership of these shares so
that they would be directly held by Messrs. Dreben, Nally and Gissing,
in February 1997, the Company repurchased 601,932 of its Common Shares
from CVF, Inc. for an aggregate nominal consideration of US$10. The
Company simultaneously issued to Messrs. Dreben, Nally and Gissing
options to purchase an equal number of Common Shares exercisable at
US$0.05 per share. The Company recorded no expense effect on this
exchange. The fair market value of the Common Shares at the time of
the exercise of the option, was US$3.00 per share.
AGGREGATED OPTION EXERCISES DURING THE MOST RECENTLY COMPLETED
YEAR AND FINANCIAL YEAR-END OPTION VALUES
The following table sets forth each exercise of option during the fiscal
year ended December 31, 1997 by each of the Named Executive Officers.
The securities set forth in the table below were acquired on the exercise
of options granted by the Company in exchange for the repurchase of Common
Shares for a nominal amount. See Note 2 under the heading "Executive
Compensation - Summary Compensation Table."
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS
SECURITIES DECEMBER 31, 1997 AT DECEMBER 31, 1997
ACQUIRED ON AGGREGATE (#) EXERCISABLE/ EXERCISABLE/
NAME EXERCISE VALUE REALIZED UNEXERCISABLE UNEXERCISABLE
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Jeffrey Dreben 200,644 US$591,900 Nil/Nil Nil/Nil
President and Chief
Executive Officer
- -------------------------------------------------------------------------------------------------------
Robert Nally 200,644 US$591,900 Nil/Nil Nil/Nil
Secretary and Treasurer
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
</TABLE>
COMPENSATION OF DIRECTORS
Except as stated below, the directors of the Company, during the fiscal
year ended December 31, 1997, did not receive any compensation for acting as
directors and attending meetings during such year.
-49-
<PAGE>
Mr. Khouri became a full-time consultant to the Company in June 1997 and is
paid US$10,500 per month in director and consulting fees by the Company.
Mr. Glazier, appointed as a Director in January 1998, is entitled to
receive US$750 per Board meeting attended in person and US$375 per telephone
meeting.
DIRECTORS' AND OFFICERS' INSURANCE
The Company maintains liability insurance for its directors and officers.
The policy limit for such insurance coverage is US$10 million in each policy
year with a US$250,000 deductible for claims relating to violations of U.S.
securities laws and a deductible of US$100,000 for all other claims. The annual
premium is US$120,000, no part of which is payable by the directors and officers
of the Company.
OPTIONS TO PURCHASE SECURITIES
The following table sets forth as of the date hereof, all outstanding
options to purchase securities of the Company or any of its Subsidiaries. The
Company does not have a formal stock option plan.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
DESCRIPTION AND
NUMBER OF SECURITIES
UNDER OPTIONS MARKET PRICE ON
(#) GRANTED(1)(2) DATE OF GRANT EXERCISE PRICE EXPIRY DATE DATE OF GRANT
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Executive Officers
of Company
(2) 100,000 Gemprint Jan. 27, 1998 $0.21 May 31, 2001 N/A
class A shares
- ---------------------------------------------------------------------------------------------------------------------------------
Director who is not
an executive officer
(1)
11,250 CVF Common Sept. 22, 1997 US$5.00 Sept. 30, 2000 US$6.00
Shares
(1)
11,250 CVF Common Dec. 31, 1997 US$5.00 Dec. 31, 2000 US$4.1875
Shares
(1) 11,250 CVF Common March 31, 1998 US$5.00 March 31, 2000 US$6.4375
Shares
- ---------------------------------------------------------------------------------------------------------------------------------
Executive Officers
of all Subsidiaries
(1) Biorem common
shares:
10,000 Dec. 15, 1995 $1.82 Dec. 15, 2000 N/A
50,000 Dec. 15, 1996 $1.82 Dec. 15, 2001 N/A
15,000 Dec. 15, 1997 $1.82 Dec. 15, 2002 N/A
(1) 701,584 Gemprint Sept. 1, 1996 $0.26 May 31, 1998 N/A
class A shares
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-50-
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
DESCRIPTION AND
NUMBER OF SECURITIES
UNDER OPTIONS MARKET PRICE ON
(#) GRANTED(1)(2) DATE OF GRANT EXERCISE PRICE EXPIRY DATE DATE OF GRANT
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Directors of
Subsidiaries,
excluding executive
officers
Gemprint Directors Gemprint class A
(2) shares
100,000 Jan. 27, 1998 $0.21 May 31, 2001 N/A
- ---------------------------------------------------------------------------------------------------------------------------------
All other employees
of Company
(1)
20,000 CVF Common Aug. 11, 1997 US$5.00 Aug. 11, 2000 US$6.25
Shares
- ---------------------------------------------------------------------------------------------------------------------------------
All other employees
of Subsidiaries
Biorem Employees
Biorem Common
(1) Shares
7,000 April 15, 1995 $1.82 April 15, 2000 N/A
(2)
10,000 Dec. 15, 1995 $1.82 Dec. 15, 2000 N/A
(3)
11,000 Dec. 15, 1996 $1.82 Dec. 15, 2001 N/A
(4)
21,000 Dec. 15, 1997 $1.82 Dec. 15, 2002 N/A
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTES:
(1) CVF has also issued 952,784 Warrants to purchase Common Shares. See
"Description of Share Capital - Warrants".
(2) To the best of the knowledge of the directors and officers of the
Company, an additional 4,816,217 of options to purchase Gemprint
Class A Shares are outstanding.
-51-
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
To the knowledge of the directors and officers of the Company, the
following table sets forth certain information concerning the beneficial
ownership of the Common Shares as at the date hereof and as adjusted to reflect
the sale of the Common Shares offered hereby for: (i) each person or entity
known by the Company to own beneficially five percent or more of the Common
Shares prior to the Offering; (ii) each of the Company's directors; (iii) each
of the Named Executive Officers; (iv) all directors and officers of the Company
as a group; and (v) the Selling Shareholders.
<TABLE>
<CAPTION>
NAME AND MUNICIPALITY OF COMMON SHARES BENEFICIALLY SHARES COMMON SHARES BENEFICIALLY
RESIDENCE OF OWNED PRIOR TO OFFERING (1) OFFERED OWNED AFTER OFFERING (1)
HOLDER
----------------------------- ---------------------------- ------------- ---------------------------------------------
EXECUTIVE OFFICERS AND
DIRECTORS NUMBER PERCENTAGE (2) NUMBER PERCENTAGE(2)
(MAXIMUM/MINIMUM OFFERING)
<S> <C> <C> <C> <C> <C>
Jeffrey Dreben(3)(5) 232,290 4.0% -- 232,290 3.5%/2.7%
Lewiston, New York
Robert Nally(3) 232,290 4.0% -- 232,290 3.5%/2.7%
Waterloo, Ontario
Directors and Officers of 491,548 8.5% -- 491,548 1.4%/5.7%
Company as a Group
(6 persons)(4)
OTHER 5% SHAREHOLDERS --
Brant Investments Limited(5) 1,534,905 26.5% -- 1,534,905 23.0%/17.7%
Toronto, Ontario
Prudential Insurance Co. of 610,750 10.5% -- 610,750 9.2%/7.0%
America
Scarborough, Ontario
Mutual Life Assurance 359,200 6.2% -- 359,200 5.4%/4.1%
Company of Canada
Waterloo, Ontario
Westinghouse Canada --
Pension Master Trust 359,200 6.2% 359,200 5.4%/4.1%
Hamilton, Ontario
BCE Inc. 339,200 5.9% -- 339,200 5.1%/3.9%
Montreal, Quebec
</TABLE>
-52-
<PAGE>
<TABLE>
<CAPTION>
NAME AND MUNICIPALITY OF COMMON SHARES BENEFICIALLY SHARES COMMON SHARES BENEFICIALLY
RESIDENCE OF OWNED PRIOR TO OFFERING (1) OFFERED OWNED AFTER OFFERING (1)
HOLDER
- ------------------------------ ---------------------------- ----------- --------------------------------------
NUMBER PERCENTAGE (2) NUMBER PERCENTAGE(2)
------ ---------- ------ -------------
(MAXIMUM/MINIMUM
OFFERING)
<S> <C> <C> <C> <C> <C>
SELLING SHAREHOLDERS
--------------------
Murray Sinclair 100,000 1.7% 100,000 0 N/A
Toronto, Ontario
C.A. Misener Enterprises Inc. 25,570 less than 25,570 0 N/A
Toronto, Ontario 1%
</TABLE>
NOTES:
(1) A person is deemed to be the beneficial owner of securities that
can be acquired by such person within 60 days of June 30, 1998,
whether pursuant to the exercise of options, conversion of
securities or otherwise. Unless otherwise noted in the footnotes
below, the Company believes all persons named in the table have
sole voting power and investment power with respect to all Common
Shares beneficially owned by them.
(2) Percentage ownership of Common Shares is based on 5,793,198
Common Shares outstanding as of the date hereof and 6,667,628
(minimum offering) and 8,667,628 Common Shares (maximum offering)
outstanding immediately following the Offering.
(3) Includes Common Shares currently exercisable by CVF Management
Limited upon the exercise of warrants and attributed to each of
Messrs. Dreben and Nally (28,255 Common Shares each) because Joan
Dreben, Mr. Dreben's spouse and Margaret Nally, Mr. Nally's
spouse, each own approximately 22.43% of the beneficial interest
in CVF Management Limited. Each of Messrs. Dreben and Nally
expressly disclaims beneficial ownership in the Common Shares
issuable upon exercise of the warrants. Upon exercise of these
warrants, the Common Shares acquired would be restricted
securities as that term is defined in Rule 144 under the U.S.
Securities Act. See "Description of Share Capital - Warrants."
Also includes 3,391 of the 10,175 Common Shares owned by Canadian
Venture Founders Holding Corporation, a company owned equally by
Messrs. Dreben, Nally and Gissing, a former officer and director
of the Company.
(4) Includes 33,750 Common Shares acquirable upon the exercise of
stock options held by George Khouri.
(5) Brant Investments Limited is the registered holder of these
Common Shares. The Company is not aware of the identity of any
of the beneficial holders of these shares.
As at the date hereof, Robert Nally, one of the directors and senior
officers of CVF, beneficially owns, directly or indirectly, 1,735,874
common shares of RDM representing approximately 19.5% of the outstanding
common shares of RDM. None of the directors or senior officers of CVF hold
voting securities in any other of the Holdings other than options disclosed
in option table above. See "Options to Purchase Securities".
-53-
<PAGE>
DESCRIPTION OF SHARE CAPITAL
The Company's authorized capital consists of 50,000,000 Common Shares,
US$0.001 par value, and 500,000 preferred shares (the "Preferred Shares"),
US$0.001 par value. As of the date hereof, 5,793,198 Common Shares and 25,000
Preferred Shares are issued and outstanding.
COMMON SHARES
Holders of Common Shares are entitled to one vote per share on each matter
submitted to vote at any meeting of shareholders. In the event of liquidation
of the Company, the Common Shares are entitled to share equally in corporate
assets after satisfaction of all liabilities. All of the Common Shares
currently issued and outstanding are fully paid and non-assessable.
Holders of Common Shares are entitled to receive such dividends as the
board of directors may from time to time declare out of funds legally available
for the payment of dividends.
PREFERRED SHARES
Preferred Shares may be issued from time to time in one or more series as
may from time to time be determined by the board of directors. Each series
shall be distinctly designated. All shares of any one series shall be alike in
every particular, except that there may be different dates from which dividends
thereon, if any, shall be cumulative, if made cumulative. The powers,
preferences, participating, optional, and other rights of each of such series
and the qualifications, limitations, or restrictions thereof, if any, may differ
from those of any and all other series at any time outstanding. Except as
provided in the Company's Certificate of Incorporation, the board of directors
of the Company is expressly granted authority to fix by resolution or
resolutions adopted prior to the issuance of each particular series of Preferred
Shares the designation, powers, preferences, and relative participating,
optional, and other rights and the qualifications, limitations, and restrictions
thereof, if any, of such series.
The Company currently has outstanding a series of Preferred Shares
designated as Series "A" Preferred Shares. Each Series "A" Preferred Share has
a stated value (the "Stated Value") of the U.S. dollar equivalent of $25.00
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 Shares will be entitled to fixed
preferential cumulative dividends, as and when declared by the board of
directors of the Company, at the rate of five percent per annum of the Stated
Value plus accrued but unpaid dividends. The dividends will have priority over
any payments of dividends on the Common Shares and on all other preferred shares
ranking junior to the Series "A" Preferred Shares. Except as otherwise required
by Nevada law, the holders of Series "A" Preferred Shares shall not have any
voting rights.
The Series "A" Preferred Shares are not convertible into Common Shares or
into any other security of the Company. The Company may, at its option, redeem
all or part of the Series "A" Preferred Shares from the holders thereof.
Additionally, at any time after five years from the date of issuance, a holder
of Series "A" Preferred Shares may require the Company to redeem any or all of
the Series "A" Preferred Shares held by such holder. The redemption price shall
be the Stated Value plus all accrued but unpaid dividends.
WARRANTS
Pursuant to the terms of the Asset Purchase Agreement, the Company issued
to CVFLP 952,784 warrants entitling it to purchase an equivalent number of
Common Shares at a price of $3.05 per share. CVFLP distributed the warrants to
CVF Management Limited, its former general partner. During the last fiscal
year, CVF Management Limited exchanged a total of 67,131 warrants to two
companies unrelated to CVF or its directors in repayment of debentures totaling
US$174,160. CVF Management Limited currently holds 885,653 warrants. Until
September 20, 2000, the warrants may only be exercised to the extent that former
limited partners of CVFLP sell any Common Shares which were issued in connection
with the transaction. In such event, the holders of warrants
-54-
<PAGE>
may purchase one Common Share for each five Common Shares sold by a former
limited partner. To the best of the Company's knowledge, currently 125,973
warrants are exercisable. Any warrants not exercised before September 20, 2000,
may be exercised by the holder during the six month period immediately
thereafter. All Common Shares issuable upon exercise of the warrants will be
restricted securities as that term is defined in Rule 144 under the U.S.
Securities Act.
DIVIDENDS
The Company has never paid any dividends on the Common Shares. The payment
of any future dividends will be at the sole discretion of the Company's Board of
Directors. The Company currently intends to retain earnings to finance the
operation and expansion of its business and, therefore, does not anticipate
paying dividends on the Common Shares in the foreseeable future.
CVF has agreed to use its best efforts to cause some of its Holdings
completing an Initial Public Offering to complete a concurrent Rights Offering
to such Holding's shareholders. The Company has also agreed to distribute the
rights that it receives from a Holding to the holders of its Common Shares by
way of a taxable dividend, subject to any restriction imposed by applicable
laws.
As at March 31, 1998, an amount of US$58,788 has been accrued in respect of
cumulative unpaid dividends on the Series "A" Preferred Shares (of which
US$6,288 relates to the three months ended March 31, 1998, US$12,500 relates to
1997 and US$40,000 relates to prior years).
DILUTION
The following table sets forth the dilution per Common Share calculated by
reference to the net tangible book value of the Company's assets as at March 31,
1998, after giving effect to this Offering (assuming no exercise of the
Over-Allotment Option).
<TABLE>
<CAPTION>
MINIMUM OFFERING MAXIMUM OFFERING
-------------------- ------------------
<S> <C> <C> <C> <C>
Offering price . . . . . . . . . . . . . . . . . . $8.00 $8.00
Net tangible book value before this Offering . . . $ 0.806 $ 0.806
Increase in net tangible book value attributable to
this Offering(1) . . . . . . . . . . . . . . . . . $ 0.736 $ 2.042
Pro forma net tangible book value after this
Offering . . . . . . . . . . . . . . . . . . . . . $ 1.542 $ 2.848
Dilution to subscribers . . . . . . . . . . . . . . $ 6.458 $ 5.152
----------- -----------
Percentage of dilution in relation to the offering
price . . . . . . . . . . . . . . . . . . . . . . . 80.72% 64.40%
----------- -----------
----------- -----------
</TABLE>
NOTES:
(1) After deducting the Agent's Commission and the expenses of the
Offering. See "Plan of Distribution".
If the Over-Allotment Option is exercised in full, the pro forma net
tangible book value of the Company's assets would be $3.07 per Common Share,
representing a dilution to purchasers of Common Shares hereunder of $4.93 per
Common Share or 61.67% of the offering price (maximum offering).
-55-
<PAGE>
TRADING OF THE COMMON SHARES
The Common Shares are listed and traded on the American Stock Exchange
under the symbol "CNV". Prior to January 29, 1998, the Common Shares were
traded in the over-the-counter market in the United States and quoted on the OTC
Bulletin Board, a regulated quotation service that captures and displays
real-time quotes and indications of interest in securities not listed on the
Nasdaq Stock Market or any U.S. stock exchange. The following table sets forth
for the fiscal periods indicated (i) the high and low bid price quotations and
trading volume for the Common Shares in the over-the-counter market as provided
by the National Quotation Bureau, Inc. and (ii) the high and low sale prices per
share and trading volume for the Common Shares as reported by the American Stock
Exchange. The OTC Bulletin Board quotations reflect inter-dealer prices,
without retail markup, mark-down or commission and may not represent actual
transactions.
OTC BULLETIN BOARD
<TABLE>
<CAPTION>
PRICE PER SHARE
US$
LOW HIGH TRADING VOLUME
--- ---- --------------
<S> <C> <C> <C>
1996 - 1st Quarter
(excluding January 8) 2.75 3.25 56,800
2nd Quarter 2.75 3.625 248,300
3rd Quarter 3.50 5.375 346,400
4th Quarter 5.00 6.875 434,800
1997 - 1st Quarter 6.50 6.875 187,700
2nd Quarter 7.00 7.07 410,900
3rd Quarter 5.625 7.00 208,000
October 5.25 6.125 58,100
November 4.25 5.18 28,800
December 4.37 5.06 39,100
1998 - January 1 - 28 4.25 5.12 90,400
AMERICAN STOCK EXCHANGE
1998 - January 29 - 31 4.25 5.00 12,100
February 5.37 6.25 150,200
March 5.75 7.06 215,000
April 6.125 6.75 119,300
May 5.50 6.125 52,400
June 5.375 6.125 139,200
July (to July 2) 5.25 5.375 3,000
</TABLE>
-56-
<PAGE>
On July 2, 1998 , the closing price of the Common Shares on the American
Stock Exchange was US$5.25 and there were 5,793,198 Common Shares outstanding
and held of record by approximately 319 shareholders.
REPURCHASE OF COMMON SHARES
In October 1996, the Company instituted a stock repurchase program pursuant
to which it commenced the repurchase in the marketplace or otherwise, in
accordance with all applicable securities laws, of up to 300,000 Common Shares.
On November 7, 1997, the Company announced that it intended to periodically
repurchase in the marketplace or otherwise, up to an additional 100,000 Common
Shares.
During 1996 and 1997, the Company repurchased 262,900 Common Shares.
Between December 31, 1997 and July 3, 1998 102,000 additional Common Shares
were repurchased by the Company.
INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS
Effective June 30, 1995, the Company issued to CVF, Inc., a management
company, 601,932 Common Shares as payment in full for its interests in CVFLP as
well as consulting and intermediary services rendered to the Company in
connection with the Company's proposal to acquire the assets of CVFLP. The
shareholders of CVF, Inc. included Jeffrey Dreben, Malcolm Gissing and Robert
Nally, all of whom, with the exception of Mr. Gissing, are directors of the
Company. Mr. Gissing was a director of the Company from September 1995 to
August 1997. On September 20, 1995, 10,175 Common Shares were issued to
Canadian Venture Founders Holding Corporation, a company owned equally by
Messrs. Dreben, Gissing and Nally in payment for its indirect interest in CVFLP.
Pursuant to a stock purchase agreement, dated February 5, 1997, the Company
repurchased the 601,932 Common Shares from CVF, Inc., for an aggregate purchase
price of US$10.00. Also on February 5, 1997, the Company issued an aggregate of
601,932 options to purchase Common Shares for US$.05 per share to Messrs.
Dreben, Gissing and Nally. The transactions of February 5, 1997 were structured
to be an equivalent value exchange with no effect on earnings.
On May 30, 1997, these options were exercised and a tax benefit of
US$727,163 was recorded. Subsequently, the officers received bonuses totaling
US$1,500,000 to primarily compensate them for the personal tax obligations on
the exercise of these options. The net, after tax, cash contribution of the
Company resulting from this series of events was approximately US$250,000.
The Company has entered into a service agreement dated February 10, 1997
(the "Service Agreement") with D and N Consulting Corporation ("D and N"),
pursuant to which D and N provides a variety of administrative, managerial
and clerical services to the Company. Under the Service Agreement, D and N
would be responsible for all administrative requirements of the Company,
including, but not limited to, maintaining the books of the Company,
preparing periodic reports to the board of directors of the Company and
providing office facilities and travel expenses. In return for the above
services, D and N is to be paid a service fee based on an annual budget
prepared by D and N and approved by the full board of directors of the
Company. Messrs. Dreben and Nally are each officers and 50% shareholders of
D and N. The Company and D and N have mutually agreed, up to this time, to
indefinitely defer operation of the Service Agreement with respect to the
payment of service fees thereunder. Instead, the services continue to be
provided by officers, employees and consultants of the Company, and the
Company has neither paid nor accrued service fees under the Service
Agreement. However, D and N reserves the right to do so in the future.
Mr. Nally is Chairman of the Board of Directors of RDM. As compensation
for his services as Chairman, Mr. Nally receives $25,000 per year and has
received options to acquire 46,875 shares of RDM at $0.45 per share which were
exercised on May 26, 1998.
-57-
<PAGE>
PLAN OF DISTRIBUTION
Under an agreement (the "Agency Agreement") dated July 6, 1998 among the
Company, the Selling Shareholders and Moss, Lawson & Co. Limited (the "Agent"),
the Company and the Selling Shareholders have appointed the Agent to offer the
Common Shares for sale to the public in Canada on a "best efforts" basis. The
Common Shares will be offered, subject to a minimum subscription of 1,000,000
Common Shares, at a price of $8.00 per Common Share. The Agent has represented
and agreed that it will not offer the Common Shares for sale in the United
States.
In consideration for its services, the Agent shall be entitled to: (i) an
aggregate commission equal to $0.56 for each Common Share issued pursuant to the
Offering (excluding the Common Shares offered pursuant to the Secondary
Offering); and (ii) non-assignable warrants (the "Compensation Warrants") to
purchase up to 10% of the total number of Common Shares sold pursuant to the
Offering (excluding the Secondary Offering) at the Offering price per share,
exercisable for a period of 18 months after the date on which a receipt is
issued for the final prospectus by each of the securities regulatory authorities
in each of the Provinces of Canada, other than the province of Quebec, subject
to any requisite regulatory approvals or conditions that may be applicable. The
Compensation Warrants and the Common Shares underlying such warrants are not
being registered under the U.S. Securities Act and will be restricted securities
within the meaning of Rule 144 under the U.S. Securities Act.
The Agent may form selling groups consisting of persons registered to sell
securities in jurisdictions where the Common Shares may be lawfully offered for
sale. While the Agent has agreed to sell the Common Shares offered hereby on a
reasonable best efforts basis, it is not obligated to purchase any such Common
Shares. Funds received by the Agent from prospective purchasers will be held in
trust pursuant to a Depository Agreement with CIBC Mellon Trust Company and will
be released at closing to the Company and the Selling Shareholders, as
applicable, in payment for Common Shares only if a minimum of 1,000,000 Common
Shares have been subscribed for. Under the terms of the Agency Agreement, the
Agent may, at its discretion on the basis of its assessment of the state of the
financial markets and upon the occurrence of certain stated events, terminate
the Agency Agreement. In the event that the closing of the Offering does not
occur for any reason, funds deposited with CIBC Mellon Trust Company pursuant to
the Depository Agreement will be returned to such purchasers forthwith without
interest or deduction.
The Company has granted the Agent an option (the "Over-Allotment Option")
to purchase up to 15% of the total number of Common Shares sold pursuant to the
Offering. The Agent may exercise the Over-Allotment Option in whole or in part
at any time on or before the close of business on the day which is 60 days
following the closing of the Offering to cover over-allotments, if any, and for
market stabilization purposes. To the extent that the Over-Allotment Option is
exercised, the additional Common Shares will be purchased by the Agent at the
Offering price hereunder and the Agent will be entitled to a commission of Cdn
$0.56 per share in respect of each share purchased.
The Company has agreed to indemnify the Agent against certain liabilities,
including liabilities under the U.S. Securities Act and under Canadian
securities legislation, and to contribute to payments the Agent may be required
to make in respect thereof.
The offering price for the Common Shares was determined by negotiation
between the Company, the Selling Shareholders and the Agent.
Subscriptions for Common Shares will be received subject to rejection
or allotment in whole or in part by the Company and the Selling Shareholders.
The right is reserved to close the subscription books at any time without
notice. Closing will take place on July 14, 1998 or such later date as may be
agreed upon by the Company, the Selling Shareholders and the Agent, but in
any event before July 31, 1998.
Pursuant to policy statements of certain Canadian securities regulators the
Agent may not, throughout the period of distribution, bid for or purchase Common
Shares. The foregoing restriction is subject to certain exceptions, on the
condition that the bid or purchase not be engaged in for the purpose of creating
actual or apparent
-58-
<PAGE>
active trading in, or raising the price of the Common Shares. Such exceptions
include a bid or purchase permitted under applicable by-laws and rules of
relevant self-regulatory authorities relating to market stabilization and
passive market making activities and a bid or purchase made for and on behalf of
a customer where the order was not solicited during the period of distribution.
Pursuant to the first-mentioned exception, in connection with this Offering, the
Agent may over-allot or effect transactions which stabilize or maintain the
market price of the Common Shares at levels other than those which might
otherwise prevail on the open market. Such transactions, if connected, may be
discontinued at any time.
This Prospectus may be used in connection with sales of the Common Shares,
including Common Shares initially sold outside of the United States, to persons
located in the United States.
LEGAL PROCEEDINGS
The Company is not aware of any material pending legal proceedings to which
the Company is a party or to which any properties of the Company are subject,
nor are any such proceedings known to be contemplated.
LEGAL MATTERS
Certain matters relating to the issue and sale of the Common Shares offered
hereby will be passed upon for the Company by Meighen Demers, Toronto and
Skadden, Arps, Slate, Meagher & Flom LLP, Toronto, Cohne, Rappaport & Segal,
Salt Lake City and for the Agent by Cassels Brock & Blackwell, Toronto.
AUDITORS, TRANSFER AGENT AND REGISTRAR
The auditors of the Company are Ernst & Young, Kitchener, Ontario. Prior
to October 28, 1997, the auditors of the Company were Feldman Sherb Ehrlich &
Co. P.C. (formerly known as Feldman Radin & Co., P.C.), New York, New York.
The consolidated balance sheet of the Company as of December 31, 1997 and
the related consolidated statements of operations, stockholders' equity, cash
flows and comprehensive income included in this Prospectus have been included
herein in reliance on the report of Ernst & Young, independent auditors, as
stated in their report, given on the authority of that firm as experts in
accounting and auditing.
The consolidated balance sheet of the Company as of December 31, 1996 and
the related statements of operations, stockholders' equity, cash flows and
comprehensive income for the years ended December 31, 1996 and 1995 included in
this Prospectus have been included herein in reliance on the report of Feldman
Sherb Ehrlich & Co., P.C. (formerly Feldman Radin & Co., P.C.), independent
auditors, as stated in their report, given on the authority of that firm as
experts in accounting and auditing.
The co-transfer agents and co-registrars for the Company's Common Shares
are Colonial Stock Transfer Company at its principal office in Salt Lake City,
Utah, Registrar and Transfer Company at its principal office in Cranford, New
Jersey and CIBC Mellon Trust Company at its principal office in Toronto,
Ontario.
-59-
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
SB-2 (together with all amendments and supplements thereto, the "Registration
Statement") under the Securities Act with respect to the Common Shares offered
hereby. This Prospectus, which forms a part of the Registration Statement, does
not contain all the information set forth in the Registration Statement, certain
parts of which have been omitted in accordance with the rules and regulations of
the Commission. For further information with respect to the Corporation and the
Common Shares offered hereby, reference is made to the Registration Statement
and to the exhibits filed therewith. Statements contained in this Prospectus as
to the contents of certain documents are not necessarily complete, and, in each
instance, reference is made to the copy of the document filed as an exhibit to
the Registration Statement. Each such statement is qualified in its entirety by
such reference. The Registration Statement and the exhibits thereto can be
inspected and copied at the Public Reference Section of the Commission at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's
regional offices at Seven World Trade Center, 13th Floor, New York, New York
10048; and 500 West Madison Street, 14th Floor, Chicago, Illinois 60661.
Copies of such material can also be obtained from the Commission at prescribed
rates through its Public Reference Section at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549.
The Corporation is subject to the informational requirements of the
Exchange Act, and in accordance therewith files reports and other information
with the Commission. Any information filed with the Commission may be
inspected, without charge, at the Public Reference Section of the Commission at
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional
offices of the Commission located at Seven World Trade Center, 13th Floor, New
York, New York 10048; and 500 West Madison Street, 14th Floor, Chicago,
Illinois 60661. Copies of all or any portion of such materials may be obtained
from the Public Reference Section of the Commission, upon payment of prescribed
fees. Such reports and other information are also publicly available through
the Commission's web site (http://www.sec.gov). The Common Shares are listed on
the American Stock Exchange. Reports and other information above may be
inspected and copied at facilities maintained by the American Stock Exchange, 86
Trinity Place, New York, New York 10006.
-60-
<PAGE>
REPORT OF INDEPENDENT AUDITORS'
To the 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, cash flows and comprehensive income 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.
Kitchener, Canada, Ernst & Young
March 16, 1998. Chartered Accountants
(Except for note 14[a] which is as of
July 6, 1998)
F-1-
<PAGE>
CVF CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as at March 31, 1998 and for the three months ended March 31, 1998
and 1997 is unaudited)
[Expressed in U.S. Dollars]
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
March 31, 1998, the Company had a 69% [69% at December 31, 1997; 69% at December
31, 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 March 31, 1998, the Company had a 67% [67%
at December 31, 1997; 64% at December 31, 1996] ownership interest in Gemprint.
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 March 31, 1998,
the Company had a 67% [67% at December 31, 1997; 51% at December 31, 1996]
ownership interest in Solaria.
DANTEC ELECTRONICS LIMITED, ["DANTEC ELECTRONICS"] was purchased August 31, 1997
and at March 31, 1998 the Company has a 100% [100% at December 31, 1997]
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.
F-13-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as at March 31, 1998 and for the three months ended March 31, 1998
and 1997 is unaudited)
1. ORGANIZATION AND BUSINESS DESCRIPTION (CONT'D)
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.
GRAND ISLAND MARKETING, INC. ["Grand Inc."] a wholly-owned subsidiary, was
incorporated on January 28, 1998 in the state of Delaware. Grand Inc. has a 51%
economic interest in a partnership, known as "Elements". 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.
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.
These principles conform in all material respects to accounting principles
generally accepted in Canada except as described in Note 15.
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.
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 comprehensive income. 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.
F-14-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as at March 31, 1998 and for the three months ended March 31, 1998
and 1997 is unaudited)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
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 comprehensive income.
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 $57,600 at March 31, 1998 [$59,300 at December 31, 1997, $29,200
at December 31, 1996]. Amounts charged to expense were $nil during the three
months ended March 31, 1998 [$nil during the three months ended March 31, 1997,
$8,500 during the year ended December 31, 1997, $29,200 in 1996, $3,600 in
1995].
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. These costs were expensed during the three months ended March 31,
1998. 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].
F-15-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as at March 31, 1998 and for the three months ended March 31, 1998
and 1997 is unaudited)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
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.
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.
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-16-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as at March 31, 1998 and for the three months ended March 31, 1998
and 1997 is unaudited)
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, restricted cash, marketable securities, trade receivables, accounts
payable, and bank indebtedness 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.
COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, REPORTING COMPREHENSIVE INCOME ["SFAS
130"], which was adopted by the Company January 1, 1998. SFAS 130 establishes
new rules for the reporting and display of comprehensive income and its
components; however, the adoption of this Statement had no impact on the
Company's net income or shareholders' equity. SFAS 130 requires unrealized
gains or losses on the Company's available-for-sale securities and foreign
currency translation adjustments, which prior to adoption were reported
separately in shareholders' equity, to be included in other comprehensive
income. Prior year financial statements have been reclassified to conform to
the requirements of SFAS 130.
F-17-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as at March 31, 1998 and for the three months ended March 31, 1998
and 1997 is unaudited)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
Disclosure of accumulated balances related to each component of other
comprehensive income is as follows:
<TABLE>
<CAPTION>
UNREALIZED GAIN FOREIGN CURRENCY ACCUMULATED OTHER
ON SECURITIES TRANSLATION COMPREHENSIVE INCOME
$ $ $
---------------------------------------------------------------------
<S> <C> <C> <C>
BALANCE - JANUARY 1, 1995 -- (407,719) (407,719)
Current year comprehensive income -- 130,467 130,467
---------------------------------------------------------------------
BALANCE - DECEMBER 31, 1995 -- (277,252) (277,252)
Current year comprehensive income 13,840,070 -- 13,840,070
---------------------------------------------------------------------
BALANCE - DECEMBER 31, 1996 13,840,070 (277,252) 13,562,818
Current year comprehensive income (13,534,252) 652,211 (12,882,041)
---------------------------------------------------------------------
BALANCE - DECEMBER 31, 1997 305,818 374,959 680,777
---------------------------------------------------------------------
---------------------------------------------------------------------
BALANCE - DECEMBER 31, 1996 13,840,070 (277,252) 13,562,818
Comprehensive income for the three months ended
March 31, 1997 (12,993,629) -- (12,993,629)
---------------------------------------------------------------------
BALANCE - MARCH 31, 1997 846,441 (277,252) 569,189
---------------------------------------------------------------------
---------------------------------------------------------------------
BALANCE - DECEMBER 31, 1997 305,818 374,959 680,777
Comprehensive income for the three months ended
March 31, 1998 (7,618) (479,772) (487,390)
---------------------------------------------------------------------
BALANCE - MARCH 31, 1998 298,200 (104,813) 193,387
---------------------------------------------------------------------
---------------------------------------------------------------------
</TABLE>
F-18-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as at March 31, 1998 and for the three months ended March 31, 1998
and 1997 is unaudited)
3. INVENTORY
Inventory consists of the following:
As of December 31
<TABLE>
<CAPTION>
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, 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, and accounts for these holdings under the cost method:
a. Certicom Corp. ["Certicom"], a Toronto, Canada public company in the
business of digital information security products.
b. TurboSonic Canada, Inc. ["TurboSonic"], a Waterloo, Canada company which is
in the business of air pollution control products. The shares of
TurboSonic Canada, Inc. are exchangeable for an equal number of shares of
its parent, TurboSonic Technologies, Inc., a New Jersey public company.
c. RDM Corporation, formerly known as Mindflight Corporation ["RDM"], a
Waterloo, Canada public company in the business of developing and supplying
technologies for both paper and electronic based payment systems.
d. Powertrusion 2000 Int. Inc. ["Powertrusion"], a Scottsdale, Arizona private
company in the business of creating a lightweight, safe composite pole to
replace wooden utility poles and reduce deforestation.
F-19-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as at March 31, 1998 and for the three months ended March 31, 1998
and 1997 is unaudited)
4. HOLDINGS (CONT'D)
Holdings consisted of the following at March 31, 1998:
<TABLE>
<CAPTION>
HOLDINGS HOLDINGS AVAILABLE
PERCENTAGE AT COST OR EQUITY FOR SALE AT FAIR
OWNERSHIP VALUE
$ $
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Ecoval
1,330,550 common shares [viii] 27% 1,149,906
Dantec Systems
34,700 common shares 41% 453,034
Notes and advances [vi] 372,750
---------
825,784
Petrozyme
50 common shares 50% (351,619)
250,000 Class C non-voting shares 100% 250,000
Notes and advances [vi] 426,000
---------
324,381
Certicom
59,763 preferred shares [iii] 255,272
TurboSonic
1,334,977 common shares [iv] 13% 372,782
RDM
1,428,572 special warrants 17% 1,207,000
Powertrusion
Deposit[vii] -- 249,405
Other notes and advances [vi] 154,844
- -----------------------------------------------------------------------------------------------------------------------
TOTAL 2,710,227 1,829,187
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
F-20-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as at March 31, 1998 and for the three months ended March 31, 1998
and 1997 is unaudited)
4. HOLDINGS (CONT'D)
Holdings consisted of the following at December 31, 1997:
<TABLE>
<CAPTION>
PERCENTAGE HOLDINGS HOLDINGS AVAILABLE FOR
OWNERSHIP AT COST OR EQUITY SALE AT FAIR
VALUE
$ $
- ---------------------------------------------------------------------------------------------------------------------------
<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] 0.5% 469,711
59,763 preferred shares 251,677
TurboSonic
1,334,977 common shares [iv] 13% 392,483
ROM
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-21-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as at March 31, 1998 and for the three months ended March 31, 1998
and 1997 is unaudited)
4. HOLDINGS (CONT'D)
Holdings consisted of the following at December 31, 1996:
<TABLE>
<CAPTION>
PERCENTAGE HOLDINGS HOLDINGS AVAILABLE FOR
OWNERSHIP AT COST OR EQUITY SALE AT FAIR
VALUE
$ $
- -----------------------------------------------------------------------------------------------------------------------
<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
Turbotak
Notes and advances [vi] 367,099
Other notes and advances [vi] 10,030
- -----------------------------------------------------------------------------------------------------------------------
TOTAL 2,051,913 22,302,960
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
[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.
[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. In January
and February 1998, 15,605 common shares of Certicon were sold for net
proceeds of approximately $375,000.
F-22-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as at March 31, 1998 and for the three months ended March 31, 1998
and 1997 is unaudited)
4. HOLDINGS (CONT'D)
[iv] Shareholdings in TurboSonic are through the Company's ownership of
exchangeable shares of TurboSonic Canada, Inc. which are exchangeable
into TurboSonic Technologies, Inc. common shares. 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 Technologies, 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 RDM represents a private placement purchase of
1,428,572 special warrants allowing the Company to receive one common
share of RDM at no additional cost. At December 31, 1997, the market
value of shares of RDM 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 RDM.
[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.
[vii] During the three months ended March 31, 1998, the Company subscribed for
125,000 convertible preferred shares of Powertrusion for total
consideration of $250,000. Subsequent to March 31, 1998, the Company's
subscription was reduced to 50,000 shares for $100,000.
[viii] 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 the shares was $421,875 and 40,179 shares of the
Company.
The following table gives certain combined summarized financial information
related to the Company's equity holdings:
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED DECEMBER 31
MARCH 31
----------------------------------------------------------------------
INCOME STATEMENT DATA 1998 1997 1997 1996 1995
$ $ $ $ $
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net Sales 330,117 186,137 1,560,122 1,396,027 1,090,773
Gross (loss) profit on sales 70,938 48,627 (16,114) 70,789 237,524
Net loss (776,350) (241,959) (7,152,634) (2,713,912) (1,644,736)
----------------------------------------------------------------------
CVF CORPORATION'S SHARE OF
NET LOSS (240,761) (83,921) (1,899,287) (840,929) (563,113)
----------------------------------------------------------------------
----------------------------------------------------------------------
</TABLE>
F-23-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as at March 31, 1998 and for the three months ended March 31, 1998
and 1997 is unaudited)
4. HOLDINGS (CONT'D)
<TABLE>
<CAPTION>
AS AT
----------------------------------------------------------------------
MARCH 31 DECEMBER 31
----------------------------------------------------------------------
1998 1997 1997 1996 1995
BALANCE SHEET DATA $ $ $ $ $
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Current assets 2,064,336 1,382,027 2,665,662 1,260,130 1,820,937
Non-current assets 3,971,213 8,297,284 4,029,052 5,924,516 8,232,657
----------------------------------------------------------------------
Total assets 6,035,549 9,679,311 6,694,714 7,184,646 10,053,594
----------------------------------------------------------------------
Current liabilities 576,675 1,151,720 1,077,528 1,204,872 1,904,558
Non-current liabilities 3,404,706 12,348,163 2,811,313 11,581,846 9,798,172
Equity (deficit) 2,054,168 (3,820,572) 2,805,873 (5,602,072) (1,649,136)
----------------------------------------------------------------------
TOTAL LIABILITIES AND EQUITY 6,035,549 9,679,311 6,694,714 7,184,646 10,053,594
----------------------------------------------------------------------
----------------------------------------------------------------------
----------------------------------------------------------------------
CVF CORPORATION'S SHARE OF
EQUITY (ACCUMULATED DEFICIT) 417,702 (1,133,777) 573,360 (1,659,763) (1,030,388)
----------------------------------------------------------------------
----------------------------------------------------------------------
</TABLE>
F-24-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as at March 31, 1998 and for the three months ended March 31, 1998
and 1997 is unaudited)
4. HOLDINGS (CONT'D)
The amount of CVF Corporation's above share of net loss at December 31, 1997
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:
<TABLE>
<CAPTION>
COST ACCUMULATED NET BOOK
AMORTIZATION VALUE
$ $ $
<S> <C> <C> <C>
AS AT MARCH 31, 1998
--------------------
Ecoval 2,648,284 1,009,361 1,638,923
Petrozyme 131,350 15,324 116,026
Dantec Systems 985,483 378,072 607,411
---------------------------------------
3,765,117 1,402,757 2,362,360
---------------------------------------
---------------------------------------
<CAPTION>
COST ACCUMULATED NET BOOK
AMORTIZATION VALUE
$ $ $
AS AT DECEMBER 31, 1997
-----------------------
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
---------------------------------------
---------------------------------------
COST ACCUMULATED NET BOOK
AMORTIZATION VALUE
$ $ $
<CAPTION>
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 the three months ended March 31, 1998, amortization of goodwill related
to equity investees totalled $61,867 [$5,102 during the three months ended March
31, 1997, $177,256 during the year ended December 31, 1997, $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-25-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as at March 31, 1998 and for the three months ended March 31, 1998
and 1997 is unaudited)
5. GOODWILL
<TABLE>
<CAPTION>
COST ACCUMULATED NET BOOK
AMORTIZATION VALUE
$ $ $
<S> <C> <C> <C>
AS AT MARCH 31, 1998
--------------------
Solaria 438,184 153,088 285,096
Biorem 183,578 51,386 132,192
Gemprint 2,315,000 422,452 1,892,548
Dantec Electronics 1,599,438 61,322 1,538,116
Elements 596,575 9,943 586,632
---------------------------------------
5,132,775 698,191 4,434,584
---------------------------------------
COST ACCUMULATED NET BOOK
AMORTIZATION VALUE
$ $ $
AS AT DECEMBER 31, 1997
-----------------------
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
---------------------------------------
---------------------------------------
COST ACCUMULATED NET BOOK
AMORTIZATION VALUE
$ $ $
AS AT DECEMBER 31, 1996
-----------------------
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 the three months ended March 31, 1998, amortization of goodwill in
subsidiaries totalled $89,849 [$9,148 during the three months ended March 31,
1997, $204,197 during the year ended December 31, 1997, $158,861 in 1996,
$157,027 in 1995].
F-26-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as at March 31, 1998 and for the three months ended March 31, 1998
and 1997 is unaudited)
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. $297,073].
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]. 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%.
7. LONG-TERM DEBT
Long-term debt comprises the following:
<TABLE>
<CAPTION>
THREE MONTHS YEAR ENDED DECEMBER 31
ENDED MARCH 31
---------------------------------------
1998 1997 1996
$ $ $
--------- -------- --------
<S> <C> <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. 405,823 268,857 219,000
Non-convertible debenture issued by Gemprint, denominated in
Canadian dollars, bearing interest at 13.5%, repayable in
February 2000. 177,500 140,000 136,875
Other 285,357 150,840 82,457
---------------------------------------
TOTAL 868,680 559,697 438,332
---------------------------------------
---------------------------------------
</TABLE>
The fair values of long-term debt instruments approximate their carrying value.
F-27-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as at March 31, 1998 and for the three months ended March 31, 1998
and 1997 is unaudited)
8. INCOME TAXES
Details of the income tax provision are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED DECEMBER 31
MARCH 31
--------------------------------------------------------------------------------------
1998 1997 1997 1996 1995
$ $ $ $ $
--------- ---------- ---------- --------- --------
<S> <C> <C> <C> <C> <C>
Current - U.S. (79,800) 7,294,890 5,839,765 892,790 -
Deferred - U.S. - - 79,900 - -
--------------------------------------------------------------------------------------
INCOME TAX (BENEFIT) PROVISION (79,800) 7,294,890 5,919,665 892,790 -
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
</TABLE>
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>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED DECEMBER 31
MARCH 31
--------------------------------------------------------------------------------------
1998 1997 1997 1996 1995
$ $ $ $ $
--------- ---------- ---------- --------- --------
<S> <C> <C> <C> <C> <C>
Statutory U.S. Federal income tax
rate 35% 35% 35% 35% 35%
--------------------------------------------------------------------------------------
Income tax benefit (provision)
computed at statutory rate 555,034 (6,164,976) (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 (706,045) (1,129,914) (684,665) (676,790) (341,000)
Tax benefit (provision) of net
operating losses not recognized 230,811 - - - (32,000)
--------------------------------------------------------------------------------------
BENEFIT (PROVISION) FOR INCOME
TAXES REPORTED 79,800 (7,294,890) (5,919,665) (892,790) -
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
</TABLE>
F-28-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as at March 31, 1998 and for the three months ended March 31, 1998
and 1997 is unaudited)
8. INCOME TAXES (CONT'D)
As of March 31, 1998, the Company had net deferred tax assets of $nil arising
from tax loss carryforwards after a valuation allowance of $2,800,000. Deferred
income tax liabilities of $198,800 are recorded in connection with unrealized
gain attributable to the securities available for sale valued at market.
As of December 31, 1997, the Company had net deferred tax assets arising from
tax loss carryforwards 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.
At March 31, 1998, the Company had losses available for carryforward in certain
of its Canadian subsidiaries of approximately $8,000,000 available to reduce
future years' income for tax purposes in these subsidiaries. These losses
expire as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 $
----------------------------------------------
<S> <C>
1998 50,000
1999 610,000
2000 970,000
2001 1,400,000
2002 850,000
Beyond 4,120,000
----------------------------------------------
8,000,000
-----------------------------------------------
-----------------------------------------------
</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 Directors 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-29-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as at March 31, 1998 and for the three months ended March 31, 1998
and 1997 is unaudited)
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 three months ended March 31, 1998, the Company also repurchased
102,000 common shares for aggregate cash consideration of $480,618 [252,900
common shares for aggregate cash consideration of $1,807,038 for the year ended
December 31, 1997].
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 March 31, 1998
an amount of $58,788 has been accrued in respect of cumulative unpaid dividends,
of which $6,288 relates to the three months ended March 31, 1998, $12,500
relates to 1997 and $40,000 relates to prior years.
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-30-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as at March 31, 1998 and for the three months ended March 31, 1998
and 1997 is unaudited)
10. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MARCH 31 DECEMBER 31
---------------------------------------------------------------------------------------
1998 1997 1997 1996 1995
$ $ $ $ $
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Numerator:
Net (loss) income (1,585,811) 10,319,327 8,999,271 (293,799) (1,306,806)
Dividends on Series A preferred stock (5,460) (5,703) (54,000) -- --
---------------------------------------------------------------------------------------
Numerator for basic and diluted earnings
(loss) per share - income (loss)
available to common stockholders (1,591,271) 10,313,624 8,945,271 (293,799) (1,306,806)
---------------------------------------------------------------------------------------
Denominator:
Denominator for basic earnings (loss)
per share - weighted average shares
outstanding 5,748,539 5,974,716 5,870,553 5,989,849 4,978,115
Effect of dilutive securities
Warrants -- 466,864 139,155 -- --
---------------------------------------------------------------------------------------
Dilutive potential common shares
Denominator for diluted earnings (loss)
per share - adjusted weighted-average
shares and assumed conversions. 5,748,539 6,441,580 6,009,708 5,989,849 4,978,115
---------------------------------------------------------------------------------------
Basic earnings (loss) per share (0.28) 1.73 1.52 (0.05) (0.26)
---------------------------------------------------------------------------------------
Diluted earnings (loss) per share (0.28) 1.60 1.49 (0.05) (0.26)
---------------------------------------------------------------------------------------
</TABLE>
F-31-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as at March 31, 1998 and for the three months ended March 31, 1998
and 1997 is unaudited)
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.
In addition to Class A voting shares, Gemprint has issued Class B and C voting
shares which have cumulative dividend rates of 10%, are retractable 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 have been accrued in these consolidated statements.
F-32-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as at March 31, 1998 and for the three months ended March 31, 1998
and 1997 is unaudited)
11. BUSINESS ACQUISITION AND SUPPLEMENTARY SUBSIDIARY INFORMATION (CONT'D)
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.
ELEMENTS
On January 28, 1998 the Company incorporated a wholly-owned subsidiary called
Grand Island Marketing, Inc. ["Grand Inc."]. On January 29, 1998 Grand Inc.
entered into an agreement with 21st Century Health Care (1996) Inc. and an
individual to form a partnership known as "Elements". The Company's total
consideration was Cdn. $1,500,000 [U.S.$1,065,000] for a 51% economic interest
in Elements.
Grand Inc. has a 69% voting interest in Elements. 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%.
This acquisition was accounted for as a purchase, with the results of operations
of Elements included in the Company's accounts from the date of acquisition.
The Company's share of assets and liabilities acquired at fair values is
summarized as follows:
<TABLE>
<CAPTION>
$
- --------------------------------------------------------------------------------
<S> <C>
Assets [including cash of $590,223] 683,230
Goodwill 596,574
Liabilities (214,804)
- --------------------------------------------------------------------------------
Total consideration 1,065,000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
STOCK OPTIONS
The unconsolidated Company and certain of its subsidiaries have outstanding
options granted to employees and directors. 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 entities which are included in the consolidation of accounts that have
issued options are as follows:
F-33-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as at March 31, 1998 and for the three months ended March 31, 1998
and 1997 is unaudited)
11. BUSINESS ACQUISITION AND SUPPLEMENTARY SUBSIDIARY INFORMATION (CONT'D)
<TABLE>
<CAPTION>
NAME OF NUMBER TOTAL NUMBER OF
ENTITY OF OPTIONS VOTING SHARES OUTSTANDING
- --------------------------------------------------------------------------------
<S> <C> <C>
Biorem 124,000 1,201,650
Gemprint 3,572,383 32,986,168
Solaria 4,000 646,815
CVF Corporation (unconsolidated) 42,500 5,729,449
</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. 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 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED DECEMBER 31
MARCH 31
---------------------------------------------------------------------------------
1998 1997 1997 1996 1995
$ $ $ $ $
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
CASH FROM OPERATING ACTIVITIES:
Depreciation and amortization 89,745 104,353 277,113 282,459 201,006
Loss (income) from equity investees 302,473 165,780 145,165 296,762 (881,091)
Gain on sale of holdings (372,294) (18,160,425) (19,758,954) (3,204,185) --
Minority interest in earnings
(losses) of subsidiaries (328,028) -- -- (400,449) (22,515)
Deferred income tax (benefit) expense (79,800) -- 79,900 -- --
--------------------------------------------------------------------------------
(387,904) (17,890,292) (19,256,776) (3,025,413) (702,600)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
</TABLE>
F-34-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as at March 31, 1998 and for the three months ended March 31, 1998
and 1997 is unaudited)
12. SUPPLEMENTARY INFORMATION ON CASH FLOWS (CONT'D)
Changes in operating assets and liabilities are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED DECEMBER 31
MARCH 31
--------------------------------------------------------------------------------------
1998 1997 1997 1996 1995
$ $ $ $ $
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(Increase) decrease in trade
receivable (229,244) 28,091 511,075 (172,437) (201,536)
(Increase) decrease in inventory (54,507) 21,914 41,433 (3,617) (170,543)
(Increase) decrease in prepaid expenses
and other (163,162) (344,449) (261,946) 15,010 59,346
Decrease (increase) in other assets -- -- -- 68,588 (64,609)
Increase in trade payables -- -- 51,443 -- --
(Decrease) increase in accounts payable
and accrued expenses (796,538) (310,893) 632,969 378,326 855,059
(Decrease) increase in income taxes
payable (1,820,598) 6,402,100 887,468 892,790 --
(Decrease) in deferred revenue -- -- (18,111) -- --
(Decrease) increase in other current
liabilities -- -- -- (80,922) 1,026
--------------------------------------------------------------------------------------
(3,064,049) 5,796,763 1,844,331 1,097,738 478,743
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
</TABLE>
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 July 6, 1998 the Company filed a final prospectus with security
regulators in all of the Provinces of Canada (except Quebec) for the
purpose of issuing a minimum of 874,430 and a maximum of 2,874,430
common shares at an issue price of Cdn. $8.00[U.S.$5.43]. Estimated issue
costs will be approximately Cdn.$1,115,000 [U.S. $757,000] and
approximately Cdn.$2,235,000[U.S.$1,518,000] for the mininum and maximum
offering respectively. The net proceeds will be approximately
Cdn.$5,881,000[U.S.$3,995,000] and approximately Cdn.$20,761,000
[U.S.$14,103,000] for the minimum and maximum offering respectively.
[b] On June 3, 1998 the Company issued 25,570 Common Shares of the Company in
exchange for 720,000 class A shares in Gemprint.
[c] On June 30, 1998 Dantec Systems, Dantec Electronics and 1246680 Ontario
Limited amalgamated to form Dantec Corporation. CVF will own 53% of the
outstanding common shares of the newly formed company.
F-35-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as at March 31, 1998 and for the three months ended March 31, 1998
and 1997 is unaudited)
15. SUMMARY OF MATERIAL DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GAAP) IN THE UNITED STATES AND CANADA
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States ["US GAAP"] which
conform in all material respects with accounting principles generally accepted
in Canada ["Canadian GAAP"] except as set forth below [adjustments where
appropriate are net of related income tax effects] for the periods ended:
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED DECEMBER 31
MARCH 31
----------------------------------------------------------------------------------------------------
1998 1997 1997 1996 1995
$ $ $ $ $
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net earnings (loss) under
US GAAP (1,585,811) 10,319,327 8,999,271 (293,799) (1,306,806)
Adjustments (net of
income taxes thereon):
Deferred development
costs (b) (12,618) 19,721 95,311 12,037 (12,079)
Consolidation of
Petrozyme (c) (61,487) (86,823) (156,474) (114,665) --
----------------------------------------------------------------------------------------------------
NET EARNINGS (LOSS) UNDER
CANADIAN GAAP (1,659,916) 10,252,225 8,938,108 (396,427) (1,318,885)
----------------------------------------------------------------------------------------------------
</TABLE>
F-36-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as at March 31, 1998 and for the three months ended March 31, 1998
and 1997 is unaudited)
15. SUMMARY OF MATERIAL DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GAAP) IN THE UNITED STATES AND CANADA (CONT'D)
US GAAP
<TABLE>
<CAPTION>
THRE MONTHS YEAR ENDED DECEMBER 31
ENDED MARCH 31
----------------------------------------------
1998 1997 1997 1996 1995
$ $ $ $ $
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
EARNINGS (LOSS) PER SHARE (e)
Basic earnings (loss) per share (0.28) 1.73 1.52 (0.05) (0.26)
Fully diluted earnings per share (0.28) 1.60 1.49 (0.05) (0.26)
(e)
----------------------------------------------
<CAPTION>
CANADIAN GAAP
THREE MONTHS YEAR ENDED DECEMBER 31
ENDED MARCH 31
----------------------------------------------
1998 1997 1997 1996 1995
$ $ $ $ $
---- ---- ---- ---- ----
Earnings (loss) per share (e)
Basic earnings (loss) per share (0.29) 1.71 1.51 (0.07) (0.26)
Fully diluted earnings per (0.29) 1.59 1.32 (0.07) (0.26)
share (e)
----------------------------------------------
</TABLE>
F-37-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as at March 31, 1998 and for the three months ended March 31, 1998
and 1997 is unaudited)
15. SUMMARY OF MATERIAL DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GAAP) IN THE UNITED STATES AND CANADA (CONT'D)
<TABLE>
<CAPTION>
THREE MONTHS YEAR ENDED DECEMBER 31
ENDED MARCH 31
------------------------------------------
1998 1997 1996
$ $ $
---- ---- ----
<S> <C> <C> <C>
TOTAL ASSETS UNDER US GAAP 15,255,057 19,752,216 29,461,955
Adjustments:
Holdings, available for sale, at (497,000) (477,840) (21,291,910)
market (a)
Deferred development costs (b) (12,798) 92,663 8,787
Consolidation of Petrozyme (c) (196,369) (76,633) 124,252
------------------------------------------
TOTAL ASSETS UNDER CANADIAN GAAP 14,548,890 19,290,406 8,303,084
------------------------------------------
------------------------------------------
<CAPTION>
THREE MONTHS YEAR ENDED DECEMBER 31
ENDED MARCH 31
------------------------------------------
1998 1997 1996
$ $ $
---- ---- ----
TOTAL LIABILITIES UNDER US GAAP 5,230,344 7,689,081 12,382,175
Adjustments:
Deferred income taxes on available- (198,800) (172,022) (7,451,840)
for sale shares (a)
Consolidation of Petrozyme (c) 38,045 29,346 103,867
------------------------------------------
TOTAL LIABILITIES UNDER CANADIAN GAAP 5,069,589 7,546,405 5,034,202
------------------------------------------
------------------------------------------
</TABLE>
F-38-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as at March 31, 1998 and for the three months ended March 31, 1998
and 1997 is unaudited)
15. SUMMARY OF MATERIAL DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GAAP) IN THE UNITED STATES AND CANADA (CONT'D)
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED DECEMBER 31
MARCH 31
----------------------------------------------------
1998 1997 1996
$ $ $
---- ---- ----
<S> <C> <C> <C>
TOTAL SHAREHOLDERS' EQUITY UNDER US GAAP 10,024,713 12,063,135 17,079,780
Adjustments:
Unrealized gain on available for sale securities (a) (298,200) (305,818) (13,840,070)
Deferred development costs (b) (12,798) 92,663 8,787
Consolidation of Petrozyme (c) (234,414) (105,979) 20,385
----------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY UNDER CANADIAN GAAP 9,479,301 11,744,001 3,268,882
----------------------------------------------------
----------------------------------------------------
</TABLE>
The areas of material difference between Canadian and U.S. GAAP and their impact
on the consolidated financial statements are described as follows:
(a) HOLDINGS, AVAILABLE FOR SALE, AT MARKET
Under US GAAP, debt and equity securities which have readily determinable fair
values and are not bought and held principally for the purpose of trading in the
near term or holding to maturity are classified as "available-for-sale
securities" and are recorded at fair value. Any unrealized gains or losses on
available-for-sale securities are reported as a net amount in a separate
component of comprehensive income until realized. Under Canadian GAAP, such
securities are recorded at cost and any gains or losses are recorded in the
statement of earnings when realized. Deferred taxes recorded on the increase or
decrease of unrealized gains which are recorded for US GAAP purposes are not
recorded under Canadian GAAP.
(b) DEFERRED PRE-PRODUCTION, DEVELOPMENT COSTS
Under US GAAP, all pre-production and development costs are included in the
statement of earnings as incurred. Under Canadian GAAP, costs which meet
specific criteria may be deferred and amortized over the periods benefited.
(c) CONSOLIDATION OF PETROZYME
Under both US and Canadian GAAP an entity is consolidated when it is controlled
by another enterprise. Under US GAAP, the usual condition for a controlling
financial interest in an entity is ownership, directly or indirectly, of over
50% of its outstanding voting shares. Canadian GAAP defines control of an
enterprise as the ability to determine the strategic operating, investing and
financing policies without the co-operation of others. The current financial
relationship between Petrozyme and the Corporation indicate that CVF has such
ability and consequently Petrozyme would be consolidated under Canadian GAAP.
F-39-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as at March 31, 1998 and for the three months ended March 31, 1998
and 1997 is unaudited)
15. SUMMARY OF MATERIAL DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GAAP) IN THE UNITED STATES AND CANADA (CONT'D)
(d) INCOME TAXES
For U.S. GAAP purposes, the Company uses SFAS No. 109, ACCOUNTING FOR INCOME
TAXES. SFAS 109 uses an asset and liability method such that deferred tax assets
and liabilities are recognized on the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax basis. The rate of taxes must be
adjusted to reflect expected tax rates at which the tax liability will be
discharged. Recent changes in Canadian GAAP for income taxes will require
companies to use a liability method which, in most respects, is consistent with
SFAS No. 109. Earlier adoption of this new pronouncement has been encouraged. If
the Company had applied these new requirements there would be no material
differences in accounting for income taxes between US and Canadian GAAP.
(e) EARNINGS (LOSS) PER SHARE
There are no significant differences in the computation of basic earnings per
share under Canadian GAAP and US GAAP. The calculation of fully diluted
earnings per share under Canadian GAAP gives effect to dilutive securities as if
they had been issued at the beginning of the period regardless of whether
conversion is contingent upon certain events. US GAAP permits inclusion of
contingently issuable shares only if certain criteria are met. Fully diluted
earnings per share under both Canadian and US GAAP excludes securities which are
antidilutive.
16. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE (UNAUDITED)
The Year 2000 Issue arises because many computerized systems use two digits
rather than four to identify a year. Date sensitive systems may recognize the
year 2000 as 1900 or some other date, resulting in errors when information using
year 2000 dates is processed. In addition, similar problems may arise in some
systems which use certain dates in 1999 to represent something other than a
date. The effects of the Year 2000 issue may be experienced before, on, or
after January 1, 2000 and if not addressed, the impact on operations and
financial reporting may range from minor errors to significant system failure
which could affect an entity's ability to conduct normal business operations.
The Company and, to the best of its knowledge, the Holdings, are in the process
of identifying Year 2000 issues with respect to their internal systems. It is
not possible to be certain that all aspects of the Year 2000 Issue affecting the
Company, including those related to the efforts of customers, suppliers, or
other third parties, will be fully resolved.
F-40-
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE
COMMON SHARES IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
_______________
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S><C>
Presentation of Financial Information. . . . . . . . . . . . . . . . . . . . -1-
Exchange Rate Information. . . . . . . . . . . . . . . . . . . . . . . . . . -1-
Special Note Regarding Forward-looking
Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -1-
Prospectus Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -2-
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -6-
Business of CVF Corporation. . . . . . . . . . . . . . . . . . . . . . . . .-14-
Management's Discussion and Analysis of
Consolidated Operating Results . . . . . . . . . . . . . . . . . . . . .-40-
Consolidated Capitalization. . . . . . . . . . . . . . . . . . . . . . . . .-44-
Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .-45-
Directors and Officers . . . . . . . . . . . . . . . . . . . . . . . . . . .-46-
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . .-48-
Options to Purchase Securities . . . . . . . . . . . . . . . . . . . . . . .-50-
Principal and Selling Shareholders . . . . . . . . . . . . . . . . . . . . .-52-
Description of Share Capital . . . . . . . . . . . . . . . . . . . . . . . .-54-
Dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .-55-
Dilution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .-55-
Trading of the Common Shares . . . . . . . . . . . . . . . . . . . . . . . .-56-
Repurchase of Common Shares. . . . . . . . . . . . . . . . . . . . . . . . .-57-
Interest of Management and Others in
Material Transactions. . . . . . . . . . . . . . . . . . . . . . . . . .-57-
Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . .-58-
Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .-59-
Legal Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .-59-
Auditors, Transfer Agent and Registrar . . . . . . . . . . . . . . . . . . .-59-
Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . .-60-
Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . . -F-1-
</TABLE>
_______________
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CVF CORPORATION
COMMON SHARES
_____________
PROSPECTUS
_____________
JULY 6, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
In accordance with the Nevada Corporation Law, the Company's Certificate of
Incorporation provides that a director of the Company will not have any personal
liability to the Company or its stockholders for damages for breach of fiduciary
duty as a director or officer of the Company, except for (i) acts or omissions
which involve intentional misconduct, fraud or a knowing violation of law or
(ii) the willful or grossly negligent payment of unlawful distributions in
violation of section 78.300 of the Nevada Revised Statutes.
The Nevada Corporation Law and the Company's Certificate of Incorporation
and By-Laws authorize indemnification of a director, officer, employee or agent
of the Company against expenses incurred by him or her in connection with any
action, suit or proceeding to which such person is named a party by reason of
having acted or served in such capacity, if he acted in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the corporation and, with respect to any criminal proceeding, had
no reasonable cause to believe his conduct was unlawful. With respect to
judgments or settlements obtained against a director, officer, employee or agent
of the Company resulting from lawsuits filed by the Company or derivative suits
filed on behalf of the Company, such a person cannot be indemnified for such
expenses unless and only to the extent that a court determines that, in view of
all the circumstances, the person is fairly and reasonably entitled to indemnity
for such expenses.
The Company maintains liability insurance for its directors and officers.
The policy limit for such insurance coverage is US$10 million in each policy
year with a US$250,000 deductible for claims relating to violations of U.S.
securities laws and a deductible of US$100,000 for all other claims. The annual
premium is US$120,000, no part of which is payable by the directors and officers
of the Company.
Reference is made to Item 27 for the undertakings of the Registrant with
respect to indemnification for liabilities arising under the Securities Act of
1933, as amended (the "Securities Act").
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTIONS
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee . . . . . . . Cdn$ 13,053
Ontario Securities Commission registration fee. . . . . . . . . . 20,000
American Stock Exchange Fee . . . . . . . . . . . . . . . . . . . 25,762
The Toronto Stock Exchange Fee. . . . . . . . . . . . . . . . . . 20,000
*Printing and engraving expenses . . . . . . . . . . . . . . . . 16,185
*Legal fees and expenses. . . . . . . . . . . . . . . . . . . . . 350,000
*Transfer Agent and Registrar fees. . . . . . . . . . . . . . . . 10,000
*Accounting fees and expenses . . . . . . . . . . . . . . . . . . 170,000
-------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cdn$625,000
</TABLE>
______________________
* Estimated.
II-1
<PAGE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
(a) Securities sold:
1. On June 3, 1998, the Company issued 25,570 Common Shares to C.A.
Misener Enterprises Inc. ("Misener"), one of the Selling Shareholders, in
exchange for 720,000 Class A shares of Gemprint Corporation held by
Misener. The Common Shares were valued at US$4.50 per share, a price that
ws agreed upon in January 1998. The transaction was exempt under
Regulation S under the Securities Act.
2. On March 17, 1998, the Company issued 100,000 Common Shares to the
Murray Sinclair, one of the Selling Shareholders, pursuant to a private
placement in Canada. Moss, Lawson & Co. Limited acted as agent in
connection with the private placement and received fees (including
reimbursement of expenses) aggregating Cdn$40,000. The transaction was
exempt under Regulation S under the Securities Act.
3. On March 4, 1998, the Company issued 40,179 Common Shares to
shareholders of Ecoval Inc. as partial consideration for 120,000 common
shares of Ecoval Inc. held by such shareholders and purchased by the
Company. The transactions were exempt under Section 4(2) of the Securities
Act.
4. On August 20, 1995, Canadian Venture Founders Limited Partnership
("CVFLP") entered into an asset purchase Agreement (the "Asset Purchase
Agreement") with Western Growth Corporation., pursuant to which Western
agreed to purchase all of the assets and assume all of the liabilities of
CVFLP in exchange for the issuance to the partners of CVFLP of 4,763,918
common shares of Western, 25,000 shares of Series "A" Preferred Stock of
Western and warrants to acquire 952,784 additional common shares of
Western. The transaction was exempt under Regulation S under the
Securities Act. On September 20, 1995, Western changed its name to CVF
Corp. and on August 21, 1997, CVF Corp. changed its name to CVF
Corporation. Alpine Securities Corp. and Noland Schneider acted as agents
with respect to the Asset Purchase Agreement and received 5,000 and 20,000
common shares of Western, respectively, as compensation for their services.
Such sales to Alpine Securities Corp. and Noland Schneider were exempt
under Section 4(2) of the Securities Act.
5. On June 30, 1995, the Company issued 601,932 Common Shares to CVF,
Inc., a management company owned by Jeffrey Dreben, Robert Nally and
Malcolm Gissing, in consideration of management fees owing to CVF, Inc. In
order to structure the ownership of these shares so that they would be
directly held by Messrs. Dreben, Nally and Gissing, in February 1997, the
Company repurchased the shares for an aggregate nominal consideration of
US$10. The Company simultaneously issued to Messrs. Dreben, Nally and
Gissing options to purchase an equal number of Common Shares exercisable at
US$0.05 per share. The options were exercised by Messrs. Dreben, Nally and
Gissing on May 10, 1998. The transactions were exempt under Section 4(2)
under the Securities Act.
(b) Underwriters and Other Purchasers.
See (a) above.
(c) Consideration.
See (a) above.
(d) Exemption from Registration Claimed.
See (a) above
II-2
<PAGE>
ITEM 27. EXHIBITS
The following exhibits are attached hereto:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER TITLE
<S> <C>
1.1 Form of Agency Agreement
3.1 Articles of the Company (filed as an exhibit to the
Company's Registration Statement on Form 10-SB on February
12, 1997, and incorporated herein by reference)
*3.2 Certificate of Amendment of Articles of Incorporation of the
Company
3.3 By-laws of the Corporation (filed as an exhibit to the
Company's Registration Statement on Form 10-SB on February
12, 1997, and incorporated herein by reference)
4.1 Form of Common Stock Certificate
4.2 Form of Series A Preferred Stock Certificate (filed as an
exhibit to the Company's Registration Statement on Form
10-SB on February 12, 1997, and incorporated herein by
reference)
4.3 Form of Warrant Certificate (filed as an exhibit to the
Company's Registration Statement on Form 10-SB on February
12, 1997, and incorporated herein by reference)
5.1 Opinion of Cohne, Rappaport & Segal
10.1 Asset Purchase Agreement, dated as of August 20, 1995 (filed
as an exhibit to the Company's Registration Statement on
Form 10-SB on February 12, 1997, and incorporated herein by
reference)
10.2 Service Agreement, dated as of February 7, 1997 (filed as an
exhibit to the Company's Registration Statement on Form
10-SB on February 12, 1997, and incorporated herein by
reference)
10.3 Stock Pledge Agreement, dated as of September 20, 1995
(filed as an exhibit to the Company's Registration Statement
on Form 10-SB on February 12, 1997, and incorporated herein
by reference)
*10.4 Service Agreement, dated as of February 10, 1997, between D
and N Consulting Corporation and the Company
16.1 Letter on change in certifying accountant (filed as an
exhibit to the Company's Report on Form 8-K, dated October
28, 1997 and incorporated herein by reference)
*21.1 List of Subsidiaries of the Company
23.1 Consent of Cohne, Rappaport & Segal (included in Exhibit
5.1)
23.2 Consent of Ernst & Young
23.3 Consent of Feldman Sherb Ehrlich & Co., P.C. (formerly known
as Feldman Radin & Co., P.C.)
*24.1 Powers of Attorney (contained on the signature pages of this
Registration Statement)
*27.1 Financial Data Schedule
</TABLE>
____________________
* Filed previously.
II-3
<PAGE>
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes that:
(1) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue; and
(2) For determining any liability under the Securities Act, the
Registrant will treat the information omitted from the form of prospectus filed
as part of this Registration Statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the Registrant under Rule 424(b)(1), or (4) or
497(h) under the Securities Act as part of this registration statement as of the
time the Commission declared it effective.
(3) For determining any liability under the Securities Act, the
Registrant will treat each post-effective amendment that contains a form of
prospectus as a new registration statement for the securities offered in the
registration statement, and that offering of the securities at that time as the
initial BONA FIDE offering of those securities.
II-4
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Amendment No. 1
to the Registration Statement to be signed on its behalf by the undersigned, in
the City of Lewiston, State of New York, on the 7th day of July, 1998.
CVF CORPORATION
By: /S/ JEFFREY DREBEN
---------------------------------
Jeffrey Dreben
President and Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
Amendment No. 1 to the Registration Statement was signed below by the following
persons in the capacities indicated and on the 7th day of July, 1998.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/S/ JEFFREY DREBEN President, Chief
Jeffrey Dreben Executive Officer and Director
(Principal Executive
Officer)
* Secretary, Treasurer,
- --------------------- Acting Chief Financial Officer
Robert Nally and Director
(Principal Financial
Officer and Principal
Accounting Officer)
* Director
- ---------------------------
George Khouri
* Director
- ---------------------
Robert Glazier
* /S/ JEFFREY DREBEN
-------------------
Jeffrey Dreben, Attorney-in-fact
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
------ ----------- ----
<C> <S> <C>
1.1 Form of Agency Agreement...........................................................
3.1 Articles of the Company (filed as an exhibit to the Company's Registration
Statement on Form 10-SB on February 12, 1997, and incorporated herein
by reference)......................................................................
*3.2 Certificate of Amendment of Articles of Incorporation of the Company
By-laws of the Corporation (filed as an exhibit to the Company's Registration
Statement on Form 10-SB on February 12, 1997, and incorporated herein
by reference)......................................................................
4.1 Form of Common Stock Certificate...................................................
4.2 Form of Series A Preferred Stock Certificate (filed as an exhibit to the
Company's Registration Statement on Form 10-SB on February 12, 1997, and
incorporated herein by reference)..................................................
4.3 Form of Warrant Certificate (filed as an exhibit to the Company's Registration
Statement on Form 10-SB on February 12, 1997, and incorporated herein
by reference)......................................................................
5.1 Opinion of Cohne, Rappaport & Segal................................................
10.1 Asset Purchase Agreement, dated as of August 20, 1995 (filed as an exhibit
to the Company's Registration Statement on Form 10-SB on February 12, 1997,
and incorporated herein by reference)..............................................
10.2 Service Agreement, dated as of February 7, 1997 (filed as an exhibit to the
Company's Registration Statement on Form 10-SB on February 12, 1997, and
incorporated herein by reference)..................................................
10.3 Stock Pledge Agreement, dated as of September 20, 1995 (filed as an exhibit to the
Company's Registration Statement on Form 10-SB on February 12, 1997, and
incorporated herein by reference)..................................................
*10.4 Service Agreement, dated as of February 10, 1997, between D and N
Consulting Corporation and the Company.............................................
16.1 Letter on change in certifying accountant (filed as an exhibit to the
Company's Report on Form 8-K, dated October 28, 1997 and incorporated
herein by reference)...............................................................
*21.1 List of Subsidiaries of the Company................................................
23.1 Consent of Cohne, Rappaport & Segal (included in Exhibit 5.1)......................
23.2 Consent of Ernst & Young...........................................................
23.3 Consent of Feldman Sherb Ehrlich & Co., P.C. (formerly known as Feldman
Radin & Co., P.C.).................................................................
*24.1 Powers of Attorney (contained on the signature pages of this
Registration Statement)............................................................
*27.1 Financial Data Schedule............................................................
</TABLE>
- ----------------------
* Filed previously.
<PAGE>
AGENCY AGREEMENT
July 6, 1998
CVF Corporation
916 Center Street
Lewiston, New York
U.S.A. 14092
Attention: Mr. Jeffrey Dreben
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Dear Sirs:
RE: PROPOSED INITIAL PUBLIC OFFERING
Moss, Lawson & Co. Limited (the "Agent") understands that CVF Corporation
(the "Corporation") plans to proceed with an initial public offering (the
"Public Offering") of a minimum of 874,430 and a maximum of 2,874,430 common
shares (the "Shares") from the treasury of the Corporation to raise aggregate
proceeds of a minimum of $6,995,440 and a maximum of $22,995,440. In addition,
the Agent understands that Murray Sinclair and C.A. Misener Enterprises Inc.
(collectively, the "Selling Shareholders") propose to offer (the "Secondary
Offering") an aggregate of 125,570 common shares (the "Secondary Shares") to
raise aggregate proceeds to the Selling Shareholders of $1,004,560. Subject to
the provisions of this Agreement, the Agent is hereby appointed as sole and
exclusive agent for and on behalf of the Corporation and the Selling
Shareholders in connection with the Public Offering and the Secondary Offering.
The completion of the Public Offering and the Secondary Offering are subject to
the provisions of this Agreement and the receipt of all necessary regulatory and
stock exchange approvals which the Corporation agrees to use its best efforts to
obtain.
Subject to the terms and conditions set forth below, the Agent hereby
agrees to solicit, on a best efforts basis, offers to purchase a minimum of
874,430 and a maximum of 2,874,430 Shares for an aggregate purchase price
payable to the Corporation of a minimum of $6,995,440 and a maximum of
$22,995,440 and 125,570 common shares from the Selling Shareholders for an
aggregate purchase price payable to the Selling Shareholders of $1,004,560.
The Shares and the Secondary Shares are collectively referred to as the
"Offered Shares" The Shares shall have an issue and sale price equal to
$8.00 per share and the Secondary Shares shall have a sale price of $8.00 per
share. It is understood and agreed that subject to the provisions contained
herein, the Agent is under no obligation to purchase any Offered Shares
although it may subscribe for and purchase Offered Shares if it so desires.
<PAGE>
-2-
To that end, the Agent understands that the Corporation has filed under
the applicable securities laws of each of the provinces of Canada other than
Quebec (collectively, the "Qualifying Jurisdictions") a preliminary
prospectus dated April 29, 1998 (the "Canadian Preliminary Prospectus") and
will file, without delay, a final prospectus (the "Canadian Prospectus") in
order to qualify the Offered Shares and the Subject Securities (as
hereinafter defined) for distribution to the public in the Qualifying
Jurisdictions. The Corporation has also prepared and filed with the
Securities and Exchange Commission (the "SEC") a registration statement on
Form SB-2 (File No. 333-51757) with respect to the Offered Shares and the
Over-Allotment Shares (as hereinafter defined) in conformity in all material
respects with the UNITED STATES SECURITIES ACT OF 1933, as amended (the "1933
Act") and the rules and regulations of the SEC under the 1933 Act (the "Rules
and Regulations") and has filed with the SEC such amendments thereof as may
have been required to the date of this Agreement.
As used in this Agreement, "Registration Statement" shall mean such
registration statement on Form SB-2 filed with the SEC at the time such
registration statement becomes effective, including the exhibits thereto and
the documents incorporated by reference therein and, in the event any
post-effective amendment thereto becomes effective prior to the Closing Date
(as hereinafter defined), shall also mean such registration statement as so
amended; "U.S. Prospectus" shall mean the prospectus in the form included in
the Registration Statement, including the documents incorporated by reference
therein; "U.S. Preliminary Prospectus" shall mean the prospectus subject to
completion in the form included in the registration statement at the time of
the initial filing of the registration statement with the SEC, and as such
prospectus may have been amended from time to time prior to the date of the
U.S. Prospectus; "Preliminary Prospectuses" shall mean (i) the Canadian
Preliminary Prospectus and (ii) the U.S. Preliminary Prospectus; and
"Prospectuses" shall mean (i) the Canadian Prospectus and (ii) the U.S.
Prospectus.
The terms and conditions of the Public Offering and Secondary Offering are
as follows:
TERMS AND CONDITIONS
1. OVER-ALLOTMENT OPTION - The Corporation agrees to grant to the Agent a
non-assignable option (the "Over-Allotment Option") to purchase up to 15% of
the total number of common shares sold pursuant to the Public Offering (the
"Over-Allotment Shares"), from the Corporation, exercisable in whole or in
part at any time on or before 5:00 p.m. (Toronto time) on the 60th day
following the Closing Date (as hereinafter defined) provided that an
aggregate of 3,000,000 Offered Shares have been sold on the Closing Date, at
a price of $8.00 per Over-Allotment Share purchased. The Agent will be paid
a commission (the "Over-Allotment Commission") equal to 7% of the purchase
price for each Over-Allotment Share. The Agent will notify the Corporation
in writing, no later than the close of business on the following day which is
not a Saturday, Sunday, or a statutory holiday in the City of Toronto (a
"Business Day"), as to the
<PAGE>
-3-
Agent's over-allotment position at the close of business two Business Days
after the Closing Date. The Agent may exercise the Over-Allotment Option in
whole or in part during the currency thereof by delivering written notice to
the Corporation (the "Over-Allotment Notice"), specifying the number of
Over-Allotment Shares which the Agent wishes to purchase. If the Agent
exercises the Over-Allotment Option as aforesaid, the Agent shall, on the
date (the "Over-Allotment Closing") that is not less than two Business Days
and not more than five Business Days after the day of the Over-Allotment
Notice, pay to the Corporation the aggregate purchase price for the
Over-Allotment Shares subscribed for by certified cheque or bank draft
against delivery to the Agent of a certificate in definitive form,
representing the Over-Allotment Shares subscribed for, registered in
accordance with the direction of the Agent and against payment by the
Corporation to the Agent of the Over-Allotment Commission by certified cheque
or bank draft. The applicable terms, conditions and provisions of this
Agreement shall apply mutatis mutandis to the Over-Allotment Closing and the
Over-Allotment Shares. In the event the Corporation shall subdivide,
consolidate or otherwise change its common shares during the currency of the
Over-Allotment Option, the common shares issuable upon the exercise of the
Over-Allotment Option shall similarly be subdivided, consolidated or changed
such that the Agent receives the same number and type of securities that they
would have otherwise received had they exercised in full such options prior
to such subdivision, reclassification or change. The exercise price shall be
adjusted accordingly and notice shall be given to the Agent of such
adjustment. In the event of any dispute as to the required adjustment to the
exercise price, such adjustment shall be determined conclusively by the
auditors of the Corporation.
2. CANADIAN PROSPECTUS AND REGISTRATION STATEMENT - The Corporation shall,
no later than July 14, 1998, have prepared and filed (and obtained a receipt)
under the applicable securities laws of the Qualifying Jurisdictions, the
Canadian Prospectus and shall have taken, to the reasonable satisfaction
of the Agent and its counsel, all other steps and proceedings as are
necessary in order to qualify the Offered Shares, the Over-Allotment Shares,
and to the extent allowable and as disclosed in the Canadian Prospectus, the
Compensation Option (as hereinafter defined), (the "Offered Shares", the
"Over-Allotment Shares", and the "Compensation Option" hereinafter
collectively referred to as the "Subject Securities") for distribution (or
distribution to the public, as the case may be) in the Qualifying
Jurisdictions, subject to any conditions to be fulfilled by the Agent itself
including delivery of the Canadian Prospectus to the persons entitled
thereto. The Corporation shall also prepare and file with the SEC a
Registration Statement with respect to the Offered Shares and the
Over-Allotment Shares in conformity in all material respects with the 1933
Act and the Rules and Regulations and will file with the SEC such amendments
thereof as may be required. The Registration Statement shall have been
declared effective by the SEC on or prior to the Closing Date.
3. THE PUBLIC OFFERING - The Corporation agrees to pay to the Agent a
commission equal to 7% of the aggregate gross proceeds on the sale of the
Shares (the "Commission") provided that such sale occurs, in consideration of
the services to
<PAGE>
-4-
be rendered by the Agent in connection with the Public Offering, which
services shall include:
(i) acting as agent of the Corporation to solicit, on a best efforts
basis, offers to purchase the Shares in the Qualifying
Jurisdictions and in such other jurisdictions outside of the
United States as may be agreed by the Corporation and the Agent;
(ii) assisting in the preparation of the Canadian Prospectus, the
Canadian Preliminary Prospectus and any documents supplemental
thereto or any amending or supplementary prospectus or other
supplementary documents or any similar document (collectively,
the "Supplementary Material") required to be filed under the
applicable securities laws of the Qualifying Jurisdictions (the
"Canadian Securities Laws"); and
(iii) advising the Corporation with respect to the Public
Offering.
The Commission shall be paid in full by the Corporation on the Closing
Date, providing such closing occurs.
As additional consideration for the Agent agreeing to act as agent
in connection with the Public Offering, the Corporation will issue to the
Agent on the Closing Date, a non-assignable option (the "Compensation
Option") in the form of Schedule "A" hereto, to purchase 10% of the total
number of Shares sold pursuant to the Public Offering at a price of $8.00 per
Share, such option to be exercisable commencing on the Closing Date, provided
the Public Offering occurs, and for a period of 18 months from the date on
which a receipt is issued for the Canadian Prospectus by the securities
regulatory authorities in each of the Qualifying Jurisdictions; it being
understood by the Agent that the Compensation Option and the common shares
underlying the Compensation Option are not being registered under the 1933
Act and will be restricted securities within the meaning of Rule 144 under
the 1933 Act.
The Corporation agrees that the Agent will be permitted to appoint other
registered dealers (or other dealers duly qualified in their respective
jurisdictions) as its sub-agents to assist in the Public Offering and that
the Agent may determine the remuneration payable by the Agent to such other
dealers appointed by it, such remuneration to be paid solely by the Agent.
The Corporation and the Agent agree that the Corporation shall be
permitted to appoint other registered dealers (or other dealers qualified in
their respective jurisdictions) who are not part of the selling group formed
by the Agent as of the date hereof, as new member of the selling group (the
"New Members"). The Corporation and the Agent further agree that New Members
brought in by the Corporation shall be entitled to 90% of the Commission
payable and 90% of the
<PAGE>
-5-
Compensation Options issuable by the Corporation in respect of the Shares
sold by such New Members under the Canadian Prospectus.
Without limitation to the other representations, covenants and
warranties herein, the Agent covenants, represents and warrants to the
Corporation that: (i) it will comply with Canadian Securities Laws; (ii) it
did not offer the Offered Shares nor solicit purchasers for the Offered
Shares until the Canadian Preliminary Prospectus was filed in the Qualifying
Jurisdictions and a receipt obtained therefor and it has not and will not
offer or sell Offered Shares in the United States or in any jurisdiction
other than the (A) Qualifying Jurisdictions and (B) such other jurisdictions
as may be agreed to by the Corporation and the Agent; (iii) it is duly
qualified to solicit or procure subscriptions in the Qualifying
Jurisdictions; (iv) it will not, in connection with the Public Offering, make
any representation with respect to the Corporation, or the Subject Securities
except with respect to the terms contemplated by this Agreement, the Canadian
Prospectus or any Supplementary Material (as hereinafter defined) except as
shall be expressly authorized in writing by the Corporation, as the case may
be; (v) it will not, in connection with the Public Offering, provide any
written materials to any potential purchasers of the Offered Shares other
than the Canadian Preliminary Prospectus, the Canadian Prospectus or any
Supplementary Material and as otherwise permitted pursuant to applicable
Canadian securities legislation; and (vi) upon the Corporation obtaining the
necessary final receipt therefor from the securities regulatory authorities
in the Qualifying Jurisdictions, it will forthwith upon receipt of copies of
the Canadian Prospectus deliver one copy of the Canadian Prospectus to
persons who are to acquire Offered Shares pursuant to the Public Offering and
the Secondary Offering.
4. REPRESENTATIONS OF THE CORPORATION - The Corporation represents and
warrants to the Agent and acknowledges that the Agent is relying upon such
representations and warranties, as follows:
(a) each of the Corporation and the Holdings (as hereinafter defined)
has been duly incorporated and organized and is validly existing
under the laws of the jurisdiction of its incorporation, is
current and up-to-date with all material filings required to be
made by it under the corporate laws of its jurisdiction of
incorporation and has all requisite corporate authority and power
to carry on its business, as now conducted and as presently
proposed to be conducted by it, and to own, lease and operate its
property and assets;
(b) the only companies in which the Corporation has an interest (the
"Holdings"), are as set out in Schedule "B" hereto, and the
Corporation, either directly or indirectly, beneficially owns
that number of issued and outstanding shares of each such
Holding, as is set out in Schedule "B" hereto, free and clear of
all mortgages, liens, charges, pledges, security interests,
encumbrances, claims or demands of any kind whatsoever, all of
such shares have been duly authorized and validly issued and are
outstanding as fully paid
<PAGE>
-6-
and non-assessable shares and no person has any right,
agreement or option, present or future, contingent or
absolute, of any right capable of becoming a right, agreement
or option, for the purchase from the Corporation of any
interest in any of such shares and except as described in the
Registration Statement and Prospectuses for the issue or
allotment of any unissued shares in the capital of the
Holdings or any other security convertible into or
exchangeable for any such shares;
(c) each of the Corporation and the Holdings is duly qualified to
carry on business under the laws of each jurisdiction in which it
carries on its business and is in good standing in each
jurisdiction in which it carries on a material portion of its
business or operates, owns or leases any material property or
assets;
(d) the Corporation has full corporate power and authority to issue
the Shares, the Over-Allotment Shares, the Compensation Option
and the Over-Allotment Option (the Compensation Option and the
Over-Allotment Option hereinafter collectively referred to as the
"Options" and the common shares issuable pursuant to the Options
hereinafter collectively referred to as the "Optioned
Securities") as at the Closing Date; the Shares will be duly and
validly authorized, allotted and reserved for issuance and upon
payment therefor such Shares will be issued as fully paid and
non-assessable shares; the Secondary Shares are issued and
outstanding as fully paid and non-assessable shares; the Options
have been duly and validly created and as at the Closing Date
will be issued; the Optioned Securities will be duly and validly
authorized, allotted and reserved for issuance and the issuance
of any of the Optioned Securities upon payment of the exercise
price therefor in accordance with their respective terms on the
exercise thereof will be issued as fully paid and non-assessable;
(e) the Corporation is not in default or breach of, and the execution
and delivery of, and the performance of and compliance with the
terms of this Agreement, the Compensation Option and the other
material agreements to which the Corporation is a party or by
which it is bound, by the Corporation does not and will not
result in any breach of, or constitute a default under, and does
not and will not create a state of facts which, after notice or
lapse of time or both, would result in a breach of or constitute
a default under, any term or provision of the articles, by-laws
or resolutions of the shareholders or directors of the
Corporation or any committee thereof or any indenture, contract,
agreement (written or oral), instrument, lease or other document,
including without limitation the contracts to which the
Corporation is a party or by which it is bound
<PAGE>
-7-
or any judgment, decree, order, statute, rule or regulation
applicable to the Corporation which default or breach might
reasonably be expected to materially adversely affect, on a
consolidated basis, the business, operations, capital or
condition (financial or otherwise) of the Corporation or its
assets or properties;
(f) the Corporation has full corporate power and authority to enter
into this Agreement and to perform its obligations set out herein
and the Corporation has all corporate power and authority to
enter into the Compensation Option and to perform its obligations
therein and this Agreement has and the Compensation Option will,
on the Closing Date, be duly authorized, executed and delivered
by the Corporation, and this Agreement is, and the Compensation
Option will, on the Closing Date, be legal, valid and binding
obligations of the Corporation enforceable against the
Corporation in accordance with their respective terms except that
(i) the enforcement thereof may be limited by bankruptcy,
insolvency and other laws affecting the enforcement of creditors'
rights generally; (ii) equitable remedies including, without
limitation, specific performance and injunction may be granted
only in the discretion of a court; and (iii) rights of indemnity,
contribution and waiver of contribution may be limited under
applicable law;
(g) there has not been any material adverse change in the assets,
liabilities or obligations (absolute, accrued, contingent or
otherwise) of the Corporation from the position set forth in the
Corporation's consolidated financial statements for the year
ended December 31, 1997 (the "Financial Statements") and there
has not been any material adverse change in the business,
operations or condition (financial or otherwise) or results of
the operations of the Corporation for the year ended December 31,
1997, that is not disclosed in the Financial Statements; and
since the dates of the Financial Statements there have been no
material facts, transactions, events or occurrences which could
materially adversely affect the business, operations, capital or
condition (financial or otherwise) of the Corporation or its
assets or properties, on a consolidated basis.
(h) the financial statements of the Corporation and notes thereto
contained in Registration Statement and the Prospectuses, present
fairly, in all material respects the consolidated financial
position of the Corporation as at the dates indicated and the
results of its operations and changes in its financial
position for the periods specified and such financial
statements have been prepared in conformity with United States
generally accepted accounting
<PAGE>
-8-
principles applied, except as otherwise stated therein, on a
consistent basis;
(i) Ernst & Young and Feldman Sherb Ehrlich & Co. P.C., who are
reporting upon the audited financial statements of the
Corporation included in the Registration Statement and the
Prospectuses, are, and during the periods covered by their
reports were, auditors of the Corporation and are independent
auditors as required by the 1933 Act and the Rules and
Regulations and Canadian Securities Laws;
(j) there are no actions, suits, proceedings or inquiries pending or,
to the knowledge of the Corporation, threatened against or
affecting the Corporation at law or in equity or before or by any
federal, provincial, state, municipal or other governmental
department, commission, board, bureau, agency or instrumentality
which in any way materially adversely affects, or may in any way
materially adversely affect, the business, operations or
condition (financial or otherwise) of the Corporation, or any of
its assets or properties or which affects or may affect the
distribution of any of the Subject Securities;
(k) the authorized capital of the Corporation consists of 50,000,000
common shares , US$0.001 par value, and 500,000 preferred shares,
US$0.001 par value, of which at the date hereof 5,793,198 common
shares and 25,000 preferred shares are issued and outstanding as
fully paid and non-assessable;
(l) except as described in the Prospectuses, there is no warrant,
option, right or privilege capable of becoming an agreement for
the purchase, subscription or issuance of any unissued securities
of the Corporation;
(m) except for matters which would not have a material adverse
effect on the Corporation or the Holdings, the Corporation is
not aware of a claim of any infringement or breach by the
Corporation or the Holdings of any industrial, copyright or
other intellectual property rights of any other person, nor
has either the Corporation or the Holdings in which the
Corporation holds more than a 20% equity interest
(collectively, the "Subsidiaries") or, to the best of the
knowledge of the Corporation, the Holdings in which the
Corporation holds a 20% equity interest or less (collectively,
the "Investees") received any notice nor is the Corporation
otherwise aware that the use of the business names,
trademarks, service marks and industrial, copyright or other
intellectual property of either the Corporation or the
Holdings infringes upon or breaches
<PAGE>
-9-
any industrial, copyright or other intellectual property
rights of any other person and the Corporation has no
knowledge of any infringement or violation of any of its or
the Holding's rights in such intellectual, copyright and other
industrial property and is not aware of any state of facts
which casts doubt on the validity or enforceability of any of
such intellectual, copyright or other industrial property
rights;
(n) each of the Corporation and the Subsidiaries and, to the best
of the knowledge of the Corporation, the Investees own or
possess adequate enforceable rights to use all patents, patent
applications, trademarks, service marks, copyrights, trade
secrets, processes or formulations (including software) used
or proposed to be used in the conduct of each of their
respective businesses;
(o) to the best of the knowledge of the Corporation, the conduct of
the business of each of the Corporation and the Holdings does not
infringe upon the trademarks, trade names, service marks or
copyrights, trade secrets, know-how, designs or other proprietary
rights or technology, domestic or foreign, of any other person,
firm or corporation;
(p) other than the Agent, and its agents, there is no person, firm or
corporation acting or purporting to act at the request of the
Corporation, who is entitled to any brokerage or finder's fee in
connection with the Public Offering or the Secondary Offering and
in the event that any person, firm or corporation acting or
purporting to act for the Corporation establishes a claim for any
fee from the Agent in connection with the Public Offering or the
Secondary Offering, the Corporation covenants to indemnify and
hold harmless the Agent with respect thereto and with respect to
all costs reasonably incurred in defence thereof;
(q) each of the Corporation and the Subsidiaries and, to the best of
the knowledge of the Corporation, the Investees has conducted and
is conducting its business in material compliance with all
applicable laws, by-laws, rules and regulations of each
jurisdiction in which a material portion of its business is
carried on and holds all material licences, registrations,
permits, consents or qualifications required in order to enable
its business to be carried on as now conducted and all such
licences, registrations, permits, consents and qualifications are
valid and subsisting and in good standing and the Corporation has
not received any notice of proceedings relating to the revocation
or modification of any such license, registration, permit,
consent or qualification which, if the subject of an unfavourable
decision, ruling or finding, would materially and
<PAGE>
-10-
adversely affect the conduct of the business, operations, capital
condition (financial or otherwise) of the Corporation, on a
consolidated basis;
(r) the Corporation has filed in a timely manner each document or
report required to be filed by it pursuant to its continuous
reporting obligations in the United States under the SECURITIES
EXCHANGE ACT OF 1934, as amended (the "1934 Act") and each such
document or report together with any amendments thereto, at the
time it was filed conformed, as applicable, in all material
respects, to all requirements and none of such documents or
reports contained an untrue statement of any material fact or
omitted to state any material fact required to be stated therein
or necessary in order to make the statements made, in light of
the circumstances under which they were made, not misleading;
(s) there is not in the constating documents or by-laws of the
Corporation any pre-emptive right or other similar right
entitling a holder of securities from acquiring additional
securities or, any restriction upon or impediment to the issuance
of shares or other securities or to the declaration or payment of
dividends by the directors of the Corporation or the payment of
dividends by the Corporation to the holders of its common shares;
(t) the completion of the Public Offering does not require any
consent, approval, authorization or order of any court or
government agency or body, other than (i) the obtaining of a
receipt in respect of the Canadian Prospectus from the securities
regulatory authorities in each of the Qualifying Jurisdictions,
(ii) requirements under the 1933 Act, the 1934 Act and any
applicable U.S. state securities or "Blue Sky" laws
(collectively, "U.S. Securities Laws") which will be satisfied on
or prior to the Closing Date, and (iii) those which have been
obtained as of the date hereof;
(u) the net proceeds derived from the issue and sale of the Shares
pursuant to the Public Offering will be used in the manner
specified in the Prospectuses and for no other purpose;
(v) the minute books of each of the Corporation and the Subsidiaries
provided to counsel to the Agent contain copies of all constating
documents and all resolutions of its directors and
securityholders and all shareholder or voting arrangement
agreements;
(w) each of the Corporation and the Subsidiaries, and to the best
of the knowledge of the Corporation, the Investees has filed all
necessary tax returns and notices and, to the best of the
knowledge of the Corporation, has paid all applicable taxes of
whatever nature for all
<PAGE>
-11-
tax years to the date hereof to the extent such taxes have
become due or have been alleged to be due and none of the
Corporation, the Subsidiaries and, to the best of the knowledge
of the Corporation, the Investees is aware of any tax
deficiencies or interest or penalties accrued or accruing, or
alleged to be accrued or accruing, thereon with respect to itself
where, in any of the above cases it might reasonably be expected
to result in any material adverse change in the business,
operations, capital or condition (financial or otherwise) of the
Corporation, on a consolidated basis;
(x) insofar as Canadian Securities Laws are concerned, the Canadian
Prospectus is true and correct, contains no misrepresentation and
constitutes full, true and plain disclosure of all material facts
relating to the Corporation and the Subject Securities and no
material fact or information has been omitted therefrom; and
(y) at the time of the effectiveness of the Registration Statement or
the effectiveness of any post-effective amendment to the
Registration Statement, and at the Closing Date and the
Over-Allotment Closing, if any, the Registration Statement and
the U.S. Prospectus and any amendments thereof and supplements
thereto will comply in all material respects with the applicable
provisions of the 1933 Act and the Rules and Regulations and will
not contain an untrue statement of a material fact and will not
omit to state any material fact required to be stated therein or
necessary in order to make the statements made, in light of the
circumstances under which they were made, not misleading;
provided, however, that this representation and warranty shall
not apply to statements or omissions made in reliance upon and in
conformity with information relating solely to or provided by the
Agent;
(z) the Corporation is not a party to or otherwise bound by any
material contract (within the meaning of Canadian Securities
Laws) other than the Agency Agreement;
(aa) the Corporation is not and as a result of the sale of the Offered
Shares contemplated hereby will not be, an "investment company" as defined
in the United States INVESTMENT COMPANY ACT OF 1940, as amended;
(bb) the Corporation meets the general eligibility requirements for
use of Form SB-2 under the 1933 Act;
(cc) the Registration Statement will become effective prior to the
Closing Date; no stop order suspending the effectiveness of the
<PAGE>
-12-
Registration Statement will be in effect at the Closing Date, and
no proceedings for such purpose are pending before or, to the
Corporation's knowledge, threatened by the SEC;
(dd) the U.S. Prospectus conforms and will conform to the Canadian
Prospectus except for such deletions therefrom and additions
thereto as are permitted or required by Form SB-2 and the
applicable Rules and Regulations;
(ee) the Corporation has not made and will not make any offer or sale
of or solicitation of an offer to buy the Offered Shares in the United
States or to a U.S. Person (as defined in Regulation S under the 1933
Act); and
(ff) all of the issued and outstanding common shares of the
Corporation are listed and posted for trading on the American Stock
Exchange.
5. COVENANTS OF THE CORPORATION - The Corporation hereby covenants to and with
the Agent that it will:
(a) use its best efforts to resolve as soon as reasonably practicable
any regulatory deficiencies in respect of the Canadian
Preliminary Prospectus on a basis mutually and reasonably
acceptable to the Agent and the Corporation and, as soon as
reasonably practicable after such deficiencies have been resolved
or satisfied, prepare, file and use its best efforts to obtain
receipts under Canadian Securities Laws for the Canadian
Prospectus and take all other steps and proceedings that may be
necessary in order to qualify the Subject Securities for
distribution in the Qualifying Jurisdictions as soon as possible
after such regulatory deficiencies have been resolved and, in no
event later than 5:00 p.m. (Toronto time) on July 14, 1998;
(b) use its best efforts to have the Registration Statement declared
effective on or prior to the Closing Date;
(c) prior to the filing of the Canadian Preliminary Prospectus and
thereafter and prior to the filing of the Canadian Prospectus and
any Supplementary Material, permit the Agent and its counsel to
participate fully in the preparation of such documents and allow
the Agent and its counsel to conduct all due diligence which the
Agent may reasonably require to be conducted in order to fulfill
its obligations under Canadian Securities Laws and in order to
enable
<PAGE>
-13-
the Agent responsibly to execute any certificate required
to be executed by the Agent in connection with the Canadian
Preliminary Prospectus, the Canadian Prospectus or any
Supplementary Material;
(d) deliver in Toronto, within three (3) Business Days of the issue
of a receipt for the Canadian Preliminary Prospectus and the
Canadian Prospectus, as the case may be, and within three (3)
Business Days of execution of any Supplementary Material without
charge to the Agent as many copies of the Canadian Preliminary
Prospectus, the Canadian Prospectus and any Supplementary
Material as the Agent may reasonably request for the purposes
contemplated hereunder and contemplated by the applicable
securities legislation, and such delivery shall constitute: (i)
the consent of the Corporation to the use of such documents in
connection with the distribution of the Subject Securities
subject to the provisions of the Canadian Securities Laws; and
(ii) the Corporation's representation and warranty to the Agent
that, for the purposes of Canadian Securities Laws, at the time
of delivery, the information and statements contained therein
(except information and statements relating solely to or provided
by the Agent) contain no untrue statement of material fact, and
constitute full, true and plain disclosure of all material facts
relating to the Public Offering, the Corporation, and the Subject
Securities;
(e) cause to be delivered to the Agent concurrently with the filing
of the Canadian Prospectus and any Supplementary Material,
comfort letters of the auditors of the Corporation in each case
dated the date of the Canadian Prospectus or the Supplementary
Material to which such letter relates (as the case may be)
addressed to the Agent and to the directors of the Corporation,
in form and substance satisfactory to the Agent, relating to the
financial statements to be included in the Canadian Prospectus
and any Supplementary Material and verifying in accordance with
the Canadian Institute of Chartered Accountants Handbook the
financial information, accounting data and other numerical data
contained in the Canadian Prospectus or any Supplementary
Material and matters involving changes or developments since the
respective dates as of which specified financial information is
given in the Canadian Prospectus or the Supplementary Material to
a date not more than two (2) Business Days prior to the date of
such letter;
(f) subject to the terms of this Agreement, the Corporation will duly
and punctually perform all the obligations to be performed by it
hereunder and under the Compensation Option;
<PAGE>
-14-
(g) ensure that at the respective times of filing of the Canadian
Preliminary Prospectus, the Canadian Prospectus and any
Supplementary Material and thereafter during the distribution of
the Subject Securities, that the Canadian Preliminary Prospectus,
the Canadian Prospectus and any Supplementary Material will fully
comply, in all material respects, with the requirements of
Canadian Securities Laws;
(h) during the period commencing with the date hereof and ending on
the conclusion of the distribution of the Offered Shares or, if
3,000,000 Offered Shares are sold pursuant to the Public Offering
and the Secondary Offering, on the conclusion of the distribution
of the Over-Allotment Shares, the Corporation will give the Agent
prompt written notice of:
(i) any material change (actual, proposed, anticipated or
threatened) in or affecting the business, affairs,
operations, assets, liabilities (contingent or
otherwise), capital or control of the Corporation;
(ii) any material change in or misrepresentation of a
material fact contained or referred to in the
Registration Statement, the Preliminary Prospectuses,
the Prospectuses or any Supplementary Material; and
(iii) the occurrence of a material fact, which (A) insofar as
the 1933 Act is concerned, makes any statement of a
material fact made in the Registration Statement or the
U.S. Prospectus (as then amended or supplemented) untrue
or which requires the making of any additions to or
changes in the Registration Statement or the U.S.
Prospectus (as then amended or supplemented) in order to
state a material fact required by the 1933 Act or the
Rules and Regulations to be stated therein or necessary
in order to make the statements therein, in light of the
circumstances under which they were made, not
misleading, and (B) insofar as Canadian Securities Laws
are concerned, is or may be, of such a nature as to:
result in a misrepresentation in the Canadian
Preliminary Prospectus, the Canadian Prospectus or any
Supplementary Material; or result in the Canadian
Preliminary Prospectus, the Canadian Prospectus or any
Supplementary Material not complying with Canadian
Securities Laws;
<PAGE>
-15-
provided that if the Corporation is uncertain as to whether a material
change, occurrence or event of the nature referred to in this subparagraph
has occurred, the Corporation shall promptly inform the Agent of the full
particulars of the occurrence giving rise to the uncertainty and shall
consult with the Agent as to whether the occurrence is of such nature;
In this Agreement, insofar as Canadian Securities Laws are concerned, the
terms "material change", "material fact", "misrepresentation" and
"distribution" have the meanings ascribed thereto in the SECURITIES ACT
(Ontario);
(i) during the period commencing with the date hereof and ending on
the conclusion of the distribution of the Offered Shares or, if
3,000,000 Offered Shares are sold pursuant to the Public Offering
and the Secondary Offering, on the conclusion of distribution of
the Over-Allotment Shares, the Corporation will promptly inform
the Agent of:
(i) any request of any Canadian or U.S. securities commission or
similar regulatory authority for any amendment to the
Registration Statement, the Preliminary Prospectuses, the
Prospectuses or for any additional information;
(ii) the issuance by the SEC of any stop order suspending the
effectiveness of the Registration Statement;
(iii) the issuance by any Canadian or U.S. securities
commission or similar regulatory authority, or by any other
competent authority of any order to cease or suspend trading
of any securities of the Corporation or of the institution
or threat of institution of any proceedings for that
purpose; and
(vi) the receipt by the Corporation of any communication from any
Canadian or U.S. securities commission or similar regulatory
authority or any other competent authority relating to the
Registration Statement, the Preliminary Prospectuses, the
Prospectuses or the distribution of the Subject Securities;
and
(j) prepare and file promptly any amendment to the Registration
Statement and the Prospectuses which in the reasonable opinion
of the Agent and the Corporation may be necessary or advisable in
order to comply with applicable Canadian and U.S. securities laws
(to be effected, if necessary, by the filing with the SEC of a
post-effective amendment to the Registration Statement); and
<PAGE>
-16-
(k) if at any time the SEC shall issue or propose to enter any stop
order suspending the effectiveness of the Registration Statement,
the Corporation will use its best efforts to prevent the issuance
of any such order and, if issued, to obtain the withdrawal of
such order at the earliest possible time.
6. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE SELLING SHAREHOLDERS
Each of the Selling Shareholders hereby severally represents, warrants and
covenants as follows to the Agent and acknowledges that the Agent is relying
upon such representations, warranties and covenants in connection with its
execution and delivery of this Agreement:
(a) the Selling Shareholder is or will be at the Time of Closing (as
hereinafter defined) the beneficial owner of and has or will have
at the Time of Closing valid and marketable title to the
Secondary Shares to be sold by such Selling Shareholder, free and
clear of any lien, claim, security interest or other encumbrance,
including, without limitation, any restrictions on transfer or
resale restrictions under Canadian securities legislation, except
such restrictions as shall have been satisfied by the Time of
Closing;
(b) the Selling Shareholder has or will have at the Time of Closing
full legal right, power and authorization, and any approval
required by law, to sell, assign, transfer and deliver the
Secondary Shares to be sold by Time of Closing and upon delivery
of and payment for such shares, the purchaser of such shares will
acquire valid and marketable title to such shares free and clear
of any lien, claim, security interest, or other encumbrance;
(c) this Agreement has been duly authorized, executed and delivered
by the Selling Shareholder and constitutes a valid and binding
obligation of the Selling Shareholder enforceable against the
Selling Shareholder in accordance with its terms, except as
enforcement may be limited by bankruptcy, insolvency,
reorganization, moratorium and other laws relating to or
affecting the rights of creditors generally and except as limited
by the application of equitable principles when equitable
remedies are sought, and by the fact that rights to indemnity,
contribution and waiver, and the ability to sever unenforceable
terms, may be limited by applicable law;
(d) the execution and delivery of this Agreement by the Selling
Shareholder, the sale of the Secondary Shares to be sold by such
Selling Shareholder and the consummation of the transactions
contemplated in this Agreement does not and will not conflict
with
<PAGE>
-17-
or result in a breach or violation of any of the terms or
provisions of, or constitute a default under, (whether after
notice or lapse of time or both) any indenture, mortgage, deed of
trust, loan agreement or other agreement or instrument to which
the Selling Shareholder is a party or by which the Selling
Shareholder is or may be bound or to which any of the Selling
Shareholder's property or assets is subject, which breach or
violation or the consequences thereof would, alone or in the
aggregate, be material, nor does or will such action conflict
with or violate any statute, law, rule, regulation, ruling,
judgment, injunction, order or decree applicable to the Selling
Shareholder or to any property or assets of the Selling
Shareholder.
(e) other than as may be required under U.S. Securities Laws,
Canadian Securities Laws and the rules and by-laws of the
American Stock Exchange and The Toronto Stock Exchange, no
consent, approval, authorization, order, registration or
qualification of or with any court or governmental agency or
body is required for the sale of the Secondary Shares to be
sold by the Selling Shareholder or the consummation of the
transactions contemplated in this Agreement;
and
(f) the Selling Shareholder will do or perform all things within the
control of the Selling Shareholder (i) reasonably required to be
done or performed by the Selling Shareholder prior to the Time of
Closing to satisfy all conditions precedent to the delivery of
the Secondary Shares to be sold by such Selling Shareholder; and
(ii) necessary to give effect to the sale by the Selling
Shareholder of the Secondary Shares to be sold by the Selling
Shareholder as contemplated by this Agreement and the
Prospectuses.
7. CONDITIONS OF CLOSING - The purchase and sale of the Offered Shares and the
Closing (as hereinafter defined) shall be subject to the following conditions,
which conditions shall be satisfied on or prior to the Closing Date:
(a) the Agent shall have received and the Corporation shall have
accepted subscriptions for the Offered Shares for aggregate gross
proceeds of a minimum of $8,000,000;
(b) a receipt for the Canadian Prospectus shall have been issued on
or before July 14, 1998 in the Qualifying Jurisdictions;
(c) the Corporation shall take, or cause to be taken, all steps and
proceedings that may be requisite under Canadian Securities Laws
to qualify the Subject Securities for distribution (or
distribution to the public, as the case may be) in the Qualifying
Jurisdictions
<PAGE>
-18-
through registrants registered under Canadian Securities Laws who
have complied with the relevant provisions of the Canadian
Securities Laws;
(d) the Registration Statement shall have been declared effective by
the SEC and no stop order suspending the effectiveness of the
Registration Statement or any post-effective amendment thereof
shall have been issued and no proceeding for that purpose shall
have been instituted or, to the knowledge of the Corporation,
threatened by the SEC; and all requests for information on the
part of the SEC shall have been complied with;
(e) the Agent having received a certificate of the Corporation dated
the Closing Date signed by each of the President and Chief
Executive Officer and the Chief Financial Officer of the
Corporation or by such other officers acceptable to the Agent
certifying as to certain matters reasonably requested by the
Agent including certification that:
(i) the Corporation has complied, in all material respects, with
all covenants and satisfied all terms and conditions of this
Agreement on its part to be complied with and satisfied up
to the Time of Closing;
(ii) all of the representations and warranties contained in this
Agreement are true and correct as of the Time of Closing
with the same force and effect as if made at and as of the
Time of Closing;
(iii)since the date hereof, there has been no material adverse
change (actual, proposed or prospective, whether financial
or otherwise) in the business, affairs, operations, assets,
liabilities (contingent or otherwise) or capital of the
Corporation, the Subsidiaries and, to the best of the
knowledge of the Corporation, the Investees;
(iv) no order, ruling or determination having the effect of
ceasing or suspending trading in any securities of the
Corporation (including the Subject Securities) has been
issued and no proceedings for such purposes are pending, or,
to the knowledge of such officers, contemplated or
threatened; and
(v) no stop order suspending effectiveness of the Registration
Statement or any post-effective amendment thereof has been
issued and no proceedings therefor have been initiated or to
the knowledge of such officers, threatened by the SEC;
<PAGE>
-19-
(f) the Agent having received from each of the Selling Shareholders
at the Time of Closing a certificate dated the Closing Date and
executed and delivered by such Selling Shareholder, certifying
that the representations and warranties of the Selling
Shareholder contained in this Agreement are true and correct as
of the Time of Closing with the same effect as if made at the
Time of Closing;
(g) the Agent, having received at the Closing, a favourable opinion
of Meighen, Demers, counsel to the Corporation addressed to the
Agent, and counsel to the Agent, acceptable in all reasonable
respects to counsel to the Agent to the effect that:
(i) the Corporation is a corporation validly existing under the
laws of the jurisdiction of its incorporation;
(ii) the Corporation has all requisite corporate capacity, power
and authority to carry on its business as now conducted by
it, to own its assets and to execute and deliver this
Agreement and the Compensation Option and to perform all
transactions contemplated thereby;
(iii) the authorized and issued capital of the Corporation shall
be as set forth under the representations and warranties of
the Corporation in Section 4 hereof, each of which issued
shares shall have been duly and validly created, authorized
and issued and are issued as fully paid and non-assessable
shares;
(iv) immediately prior to the Time of Closing and before giving
effect to the sale of the Secondary Shares, the Selling
Shareholders are the registered holders of at least 125,570
common shares of the Corporation;
(v) each of this Agreement and the Compensation Option has been
or will be duly authorized, executed and delivered by the
Corporation, as the case may be, and constitutes or will
constitute a legal, valid and binding obligation of the
Corporation enforceable in accordance with its terms
(subject to the usual qualifications);
(vi) all necessary corporate action has been taken by the
Corporation to authorize the issuance of the Shares on the
terms and conditions of this Agreement and the Corporation
having received payment in full of the purchase price
<PAGE>
-20-
therefor such shares have been validly issued and are
outstanding as fully paid and non-assessable shares;
(vii) the Optioned Securities have been reserved for issuance
and such shares will, when issued, upon payment of the
exercise price therefor and upon the exercise of the
Compensation Option and the Over-Allotment Option in
accordance with the respective terms thereof, be validly
issued as fully paid and non-assessable shares;
(viii) the Corporation is not in default or breach of, and the
execution and delivery of, and the performance of and
compliance with the terms of this Agreement, each of the
Options and the other material agreements to which the
Corporation is a party or by which it is bound, by the
Corporation does not and will not result in any breach of,
or constitute a default under, and does not and will not
create a state of facts which, after notice or lapse of time
or both, would result in a breach of or constitute a default
under, any term or provision of the articles, by-laws or
resolutions of the shareholders or directors of the
Corporation or any committee thereof or, to the knowledge of
such counsel, any indenture, contract, agreement (written or
oral), instrument, lease or other document, including
without limitation the contracts to which the Corporation is
a party or by which it is bound or any judgment, decree,
order, statute, rule or regulation applicable to the
Corporation which default or breach might reasonably be
expected to materially adversely affect, on a consolidated
basis, the business, operations, capital or condition
(financial or otherwise) of the Corporation or its assets or
properties;
(ix) the form of common share certificate has been approved and
adopted by the directors of the Corporation and conforms
with all applicable corporate legislation, the requirements
of the American Stock Exchange and The Toronto Stock
Exchange;
(x) a registrar and transfer agent duly authorized to carry on
such business in the Qualifying Jurisdictions has been duly
appointed by the Corporation as the registrar and transfer
agent in respect of the common shares of the Corporation;
and
(xi) all necessary documents have been filed and proceedings
taken under Canadian Securities Laws to qualify the Offered
<PAGE>
-21-
Shares for distribution to the public in the Qualifying
Jurisdictions through registrants registered under Canadian
Securities Laws who comply with the relevant provisions of
such laws and with respect to such other securities as
counsel for the Agent and the Corporation shall agree,
acting reasonably.
(xii) the common shares of the Corporation will, once listed on a
prescribed stock exchange, constitute qualified investments
under THE INCOME TAX ACT (Canada) for trusts governed by
registered retirement savings plans, registered retirement
income funds and deferred profit sharing plans
(collectively, "Tax Deferred Plans"), however, the common
shares will be "foreign property" to such Tax Deferred Plans
and will be subject to the foreign property limits set out
in Part XI of the INCOME TAX ACt (Canada);
In giving the opinions contemplated above, counsel to the Corporation
shall be entitled to rely, where appropriate, upon such opinions of
local counsel that counsel to the Corporation opines to the Agent are
in form and substance satisfactory to counsel to the Corporation and
that the Agent is entitled to rely on, and shall be entitled, as to
matters of fact, a certificate of fact of the Corporation signed by
officers in a position to have knowledge of such facts and their
accuracy and certificates of such public officials and other persons
as are necessary or desirable;
(h) the Agent shall have received from Skadden, Arps, Slate, Meagher
& Flom LLP, U.S. securities counsel for the Corporation, an
opinion with respect to the effectiveness and compliance as to
form of the Registration Statement and consents, approvals or
filings required in connection with the transactions
contemplated by this Agreement;
(i) the Agent having received at Closing favourable legal opinions of
the Subsidiaries' counsel addressed to the Agent and counsel to
the Agent, acceptable in all reasonable respects to counsel to
the Agent, to the effect that:
(i) each of the Subsidiaries is a corporation validly existing
under the laws of its jurisdiction of incorporation and is
qualified to carry on business and own its assets under the
laws of each jurisdiction in which it carries on business
and owns its assets;
(ii) each of the Subsidiaries has all requisite corporate
capacity, power and authority to carry on its business as is
now conducted by it and to own its assets; and
<PAGE>
-22-
(iii) the Corporation is the registered holder of all of the
issued and outstanding shares in the capital of the
Subsidiaries, as set out in Schedule "B", hereto.
(j) the Subject Securities shall have been approved for listing on
the Toronto Stock Exchange and the Offered Shares and the
Over-Allotment Shares shall have been approved for listing on the
American Stock Exchange.
(k) the Corporation shall have performed each of the covenants
referred to in Section 5 hereof to be performed by it at or prior
to the Time of Closing.
8. CLOSING - The purchase and sale of the Shares (the "Closing") shall be
completed at the offices of counsel to the Corporation, Meighen, Demers, Suite
1100, 200 King Street West, Toronto, Ontario at 8:00 a.m. (Toronto time) (the
"Time of Closing") on or before July 14, 1998 (the "Closing Date"), or such
later date not later than July 31, 1998 as the parties may agree.
At the Time of Closing, the Corporation shall deliver to the Agent:
(a) certificates representing the Offered Shares duly registered as
the Agent shall have directed, not less than 48 hours prior to
the Time of Closing;
(b) the requisite legal opinions and certificates as contemplated in
Section 6 hereof;
(c) the Compensation Option; and
(d) such further documentation as may be contemplated herein or as
counsel to the Agent or the applicable regulatory authorities may
reasonably require;
against payment of the aggregate purchase price for the Shares by certified
cheques or bank drafts payable to the Corporation in trust or as directed by
the Corporation and payment of the purchase price of the Secondary Shares by
certified cheques or bank drafts payable to the Secondary Shareholders or as
directed by the Secondary Shareholders.
9. EXPENSES - The Corporation will pay all expenses and fees incurred in
connection with the Public Offering, including without limitation, the
reasonable fees and expenses, and applicable GST, incurred by the Agent and of
Agent's counsel; all expenses of or incidental to the creation, issue or
distribution and qualification of the Subject Securities, the fees and expenses
of the Corporation's counsel, and all costs
<PAGE>
-23-
incurred in connection with the preparation of documentation and certificates
relating to the Public Offering including registrar and transfer agent fees,
legal fees, filing fees, local counsel fees, share certificate fees, listing
fees and printing costs. Fees and expenses incurred by the Agent or on its
behalf including fees and expenses of the Agent's counsel shall be payable by
the Corporation immediately upon receiving an invoice therefor from the Agent
and shall be payable by the Corporation whether or not the Public Offering or
any part thereof is completed, subject to the limitations set forth above. The
Agent shall be entitled to deduct such fees and expenses, together with the
Commission, as contemplated herein, from the proceeds available to the
Corporation from the Public Offering, on a net cheque basis.
10. RESTRICTION ON FURTHER EQUITY ISSUES - Provided that an aggregate of
3,000,000 Offered Shares are sold pursuant to the Public Offering and the
Secondary Offering, for a period of 120 days following the Closing Date, the
Corporation shall not, without the prior written consent of the Agent, which
consent shall not be unreasonably withheld, issue, sell or otherwise dispose of
or announce the issuance, sale or disposition of any of its common shares or
other securities, provided that the Corporation may:
(i) issue its common shares issuable upon the exercise of outstanding
convertible securities as described in the Registration Statement
and the Prospectuses;
(ii) issue its common shares issuable upon the exercise of additional
stock options that the Corporation may grant from time to time to
directors, officers, employees and other service provides; and
(iii) in one or more transactions, issue its common shares (or
securities convertible into or exchangeable for such common
shares) in connection with any merger, consolidation or
amalgamation with, or any acquisition of assets or securities
(through any tender or exchange offer, presently negotiated or
otherwise) of any person or persons.
11. INDEMNITIES - The Corporation hereby covenants and agrees to protect,
indemnify and hold harmless the Agent and its directors, officers and employees
and agents (individually, an "Indemnified Party" and, collectively, the
"Indemnified Parties") from and against all expenses, losses (except for loss of
profits), claims, costs, damages or liabilities which they may suffer or incur
caused by or arising directly or indirectly by reason of:
(i) any information or statement (except any information or statement
relating solely to the Agent) contained in the Registration
Statement, the Preliminary Prospectuses, the Prospectuses or any
Supplementary Material being or being alleged to be a
misrepresentation;
<PAGE>
-24-
(ii) the Corporation not complying with any requirement of any
Canadian or U.S. securities laws or regulatory requirements of
the Qualifying Jurisdictions or the United States in connection
with any part of the Public Offering or the Secondary Offering;
(iii) the Selling Shareholders not complying with any requirement of
any Canadian or U.S. securities laws or regulatory requirements
of the Qualifying Jurisdictions or the United States in
connection with any part of the Secondary Offerings;
(iv) the omission to state in the Registration Statement, the
Preliminary Prospectuses, the Prospectuses or any Supplementary
Material a material fact required to be stated therein or
necessary to make the statements contained therein not misleading
in light of the circumstances under which they were made (except
the omission to state a material fact relating solely to the
Agent);
(v) any order made or any inquiry, investigation or proceeding
commenced or threatened by any regulatory authority based upon an
allegation that any untrue statement or alleged omission or any
misrepresentation or alleged misrepresentation in the
Registration Statement, the Preliminary Prospectuses, the
Prospectuses or any Supplementary Material exists (except
information and statements relating solely to the Agent) which
prevents or restricts the trading in or distribution of the
Subject Securities;
(vi) the material breach, inaccuracy or non-performance of or by any
of the Corporation or the Selling Shareholders of any
representation, warranty or covenant of the Corporation or the
Selling Shareholders contained in this agreement.
If any action or claim shall be asserted against an Indemnified Party in
respect of which indemnity may be sought from the Corporation pursuant to the
provisions hereof, or if any potential claim contemplated by this Section shall
come to the knowledge of an Indemnified Party, the Indemnified Party shall
promptly notify the Corporation in writing of the nature of such action or claim
(provided that any failure to so notify shall not affect the Corporation's
liability under this Section unless such delay has prejudiced the defence to
such action or claim). The Corporation shall be entitled but not obliged to
participate in or assume the defence thereof, provided, however that the defence
shall be through legal counsel acceptable to the Indemnified Party, acting
reasonably. In addition, the Indemnified Party shall also have the right to
employ separate counsel in any such action and participate in the defence
thereof, and the fees and expense of such counsel shall be borne by the
Indemnified Party unless: (i) the employment thereof has been specifically
authorized in writing by the Corporation; (ii) the Indemnified Party has been
advised by counsel acceptable to the Corporation,
<PAGE>
-25-
acting reasonably, that representation of the Corporation and the Indemnified
Party by the same counsel would be inappropriate due to actual or potential
differing interests between them; or (iii) the Corporation has failed within a
reasonable time after receipt of such written notice to assume the defence of
such action or claim. It is understood and agreed that the Corporation shall
not, in connection with any suit in the same jurisdiction, be liable for the
legal fees and expenses of more than one separate legal firm to represent the
Indemnified Parties. Neither party shall effect any settlement of any such
action or claim or make any admission of liability without the written consent
of the other parties, such consent not to be unreasonably withheld or delayed.
The indemnity hereby provided for shall remain in full force and effect and
shall not be limited to or affected by any other indemnity in respect of any
matters specified in this Section obtained by the Indemnified Party from any
other person.
To the extent that any Indemnified Party is not a party to this Agreement
the Agent shall obtain and hold the right and benefit of this Section in trust
for and on behalf of such Indemnified Party.
The rights of indemnity contained in this Section 11 shall not apply to any
Indemnified Party if the Corporation has complied with Section 5 and the person
asserting any claim contemplated by this Section 11 was not provided with a copy
of any amendment or other document which corrects any misrepresentation or
alleged misrepresentation which in the case of any such claim was required,
under applicable securities laws, to be delivered to such person by the Agent
and provided further that by the delivery of such amendment or document such
person would have no grounds for such claim.
12. CONTRIBUTION - In the event that, for any reason, the indemnity provided
for in Section 11 hereof is illegal or unenforceable, the Agent and the
Corporation shall contribute to the aggregate of all losses, claims, costs,
damages, expenses or liabilities (except loss of profits) of the nature provided
for in Section 11 hereof such that the Agent shall be responsible for that
portion represented by the percentage that the aggregate Commission payable to
the Agent hereunder bears to the gross proceeds from the Public Offering and the
Corporation shall be responsible for the balance. Notwithstanding the
foregoing, a person guilty of fraudulent misrepresentation shall not be entitled
to contribution from any other party. Any party entitled to contribution will,
promptly after receiving notice of commencement of any claim, action, suit or
proceeding against such party in respect of which a claim for contribution may
be made against another party or parties under this Section 12, notify such
party or parties from whom contribution may be sought. In no case shall such
party from whom contribution may be sought be liable hereunder unless such
notice shall have been provided, but the omission to so notify such party shall
not relieve the party from whom contribution may be sought from any other
obligation it may have otherwise than under this Section. The right to
contribution provided in this Section shall be in addition and not in derogation
of any other right to contribution which the Corporation or the Agent may have
by statute or otherwise by law.
<PAGE>
-26-
13. TERMINATION RIGHTS - The Agent shall be entitled, at its option, to
terminate all of its obligations under this Agreement, and the obligations of
any person from whom the Agent has solicited an order to purchase any securities
of the Corporation, by notice to that effect delivered to the Corporation if
there shall have occurred or occur;
(i) any material adverse change, financial or otherwise, (actual,
proposed or prospective, whether factual or otherwise) in the
business, affairs, operations, assets, liabilities (contingent or
otherwise), prospects or capital of the Corporation; or
(ii) a material change or change in a material fact or new material
fact such as is contemplated in subsection 5(h) hereof;
which, in the opinion of the Agent, would be expected to have an
adverse effect on the business of the Corporation, market price or
value of the Subject Securities,
(iii) the state of the financial markets is such that in the opinion
of the Agent it would be unprofitable to offer or market or
continue to offer or market the Offered Shares for sale
pursuant to the Public Offering and the Secondary Offering;
(iv) there should develop, occur or come into effect any occurrence of
national or international consequence or any action, law or
regulation, inquiry or other occurrence of any nature whatsoever
which, in the opinion of the Agent seriously affects or will
seriously affect the business of the Corporation;
(v) the Corporation is in breach of any material term of this
Agreement;
(vi) any order to cease trading in the securities of the Corporation
is made by a competent securities regulatory authority and such
order is still in effect at the Closing Date;
(vii) any representation or warranty made by any of the Corporation
or the Selling Shareholders in this Agreement is or becomes
false in any material way, as determined by the Agent in its
discretion acting reasonably, prior to the Closing Date; or
(viii) any inquiry or investigation (whether formal or informal) in
relation to the Corporation or the Corporation's directors or
officers is commenced, threatened by any officer or official of
the SEC or any of the securities commissions in Canada or by any
officer or official of any other regulatory authority that is not
settled by the Closing Date.
<PAGE>
-27-
If the Agent terminates this Agreement pursuant to the occurrence of an
event in clause (ii) above such notice shall be delivered to the Corporation
within two (2) Business Days of the date of the Agent being advised in writing
of such event. If the Agent terminates this Agreement pursuant to this Section
13 there shall be no further liability on the part of the Agent or of the
Corporation to the Agent, except in respect of any liability which may have
arisen or may thereafter arise under Sections 9, 11 or 12 hereof.
The right of the Agent to terminate its obligations under this Agreement is
in addition to such other remedies as it may have or has in respect of any
default, act or failure to act of the Corporation or the Selling Shareholders in
respect of any of the matters contemplated by this Agreement. The Agent may
waive, in whole or in part, or extend the time for compliance with, any term and
conditions without prejudice to its rights in respect of any other terms and
conditions or any other or subsequent breach or non-compliance provided,
however, that any waiver or extension must be in writing and signed by the Agent
in order to be binding upon it.
14. NOTICES - Any notice under this Agreement shall be given in writing and
either delivered, telecopied or mailed by prepaid registered post to the party
to receive such notice at the address or telecopy numbers indicated below:
to the Corporation or the Selling Shareholders:
CVF Corporation
916 Center Street
Lewiston, New York
U.S. 14092
Attention: Mr. Jeffrey Dreben, President and
Chief Executive Officer
Fax: (716) 754-7606
with a copy to:
Meighen, Demers
Suite 1100, Box 11
200 King Street West
Toronto, Ontario
M5H 3T4
Attention: Mr. R.S. Sutin
Fax: (416) 977-5239
to the Agent or any Indemnified Party or any registered dealer
appointed by the Agent pursuant to Section 2 hereof:
<PAGE>
-28-
Moss, Lawson & Co. Limited
One Toronto Street
Suite 410
Toronto, Ontario
M5C 2W3
Attention: Mr. John N. McVicar
Fax: (416) 864-2829
with a copy to:
Cassels Brock & Blackwell
Scotia Plaza, Suite 2100
40 King Street West
Toronto, Ontario
M5H 3C2
Attention: Mr. Peter Marrone
Fax: (416) 360-8877
or such other address or telecopy number as such party may hereafter designate
by notice in writing to the other party. If a notice is delivered, it shall be
effective from the date of delivery; if such notice is telecopied (with receipt
confirmed), it shall be effective on the Business Day following the date such
notice is telecopied; if such notice is sent by mail, it shall be effective four
(4) Business Days following the date of mailing, excluding all days when normal
mail service is interrupted.
15. ALTERNATIVE TRANSACTION - Should the Corporation enter into an
Alternative Transaction prior to the Closing Date, the Corporation shall pay
to the Agent a fee equal to $25,000.00. An "Alternative Transaction" means
an issuance of securities of the Corporation in excess of 5% of the total
value or number of securities currently outstanding or a business transaction
involving the Corporation including, without limitation, a merger,
amalgamation, reverse take-over, arrangement, reorganization, joint venture,
sale of all or substantially all assets, exchange of assets or any similar
transaction other than issuances of securities pursuant to or in connection
with the transaction or transactions referred to herein.
16. SURVIVAL - All representations, warranties, and agreements of the
Corporation and the Selling Shareholders contained herein or contained in any
document submitted pursuant to this Agreement or in connection with the Public
Offering and the Secondary Offering shall survive the sale of the Offered Shares
and the issuance of the Optioned Securities and shall continue in full force and
effect unaffected by any subsequent disposition of the Subject Securities, for a
period of three years from the Closing Date.
<PAGE>
-29-
17. ASSIGNMENT - The Agent may not assign this Agreement or any rights
hereunder without the prior written consent of the Corporation.
18. ENTIRE AGREEMENT - The provisions herein contained constitute the entire
agreement between the parties hereto and supersede all previous communications,
representations, understandings and agreements between the parties with respect
to the subject matter hereof, whether verbal or written, including without
limitation the engagement letter between the Corporation and the Agent dated and
accepted by the Corporation on November 2, 1997, as amended.
19. COUNTERPARTS - The execution of this Agreement may be executed in any
number of counterparts all of which when taken together shall be deemed to be
one and the same document and not withstanding their actual date of execution
shall be deemed to be dated as of the date first above written.
20. TIME OF THE ESSENCE - Time shall be of the essence of this agreement.
<PAGE>
-30-
21. GENERAL - The Agreement shall be governed by and interpreted in accordance
with the laws of the Province of Ontario and the laws of Canada applicable
therein and the parties hereto irrevocably attorn to the non-exclusive
jurisdiction of the courts of the Province of Ontario. Time shall be of the
essence hereof.
If the above is in accordance with your understanding, please sign and
return to the Agent a copy of this letter, whereupon this letter and your
acceptance shall constitute a binding agreement among the Corporation, the
Selling Shareholders, and the Agent.
MOSS, LAWSON & CO. LIMITED
Per: ___________________________________
The above offer is hereby accepted and agreed to as of the date first above
written.
CVF CORPORATION
Per: ___________________________________
C.A. MISENER ENTERPRISES INC.
Per: ___________________________________
- ------------------------- -----------------------------------
Witness Murray Sinclair
<PAGE>
CVF CORPORATION
(Incorporated in the State of Nevada)
[SEAL]
[CUSIP 12660F 10 2]
SPECIMEN
THIS CERTIFIES THAT
IS THE REGISTERED HOLDER OF
FULLY PAID AND NON-ASSESSABLE COMMON SHARES WITHOUT PAR VALUE OF
CVF CORPORATION
A TRANSFER OF THE SHARES REPRESENTED BY THIS CERTIFICATE WILL NOT BE REGISTERED
IN A REGISTER OF TRANSFERS OF THE CORPORATION EXCEPT UPON SURRENDER OF THIS
CERTIFICATE DULY ENDORSED BY THE APPROPRIATE PERSON.
THIS CERTIFICATE IS NOT VALID UNTIL COUNTERSIGNED AND REGISTERED BY THE
TRANSFER AGENT AND REGISTRAR OF THE CORPORATION.
IN WITNESS WHEREOF THE CORPORATION HAS CAUSED THIS CERTIFICATE TO BE SIGNED
BY ITS DULY AUTHORIZED OFFICERS.
DATED
THIS CERTIFICATE IS TRANSFERABLE AT THE PRINCIPAL
OFFICE OF CIBC MELLON TRUST COMPANY IN TORONTO OR THE
REGISTRAR AND TRANSFER COMPANY IN NEW YORK OR COLONIAL
STOCK TRANSFER COMPANY IN SALT LAKE CITY.
Countersigned and Registered
CIBC MELLON TRUST COMPANY Toronto, Ont.
Transfer Agent and Registrar
Countersigned and Registered
REGISTRAR AND TRANSFER COMPANY New York, N.Y.
Countersigned and Registered
COLONIAL STOCK TRANSFER COMPANY Salt Lake City, Utah
By___________________________________________________
Authorized Officer
President Secretary
/s/ Jeffrey Dreben /s/ Robert Nally
<PAGE>
For Value Received, ____________ hereby sell, assign and transfer unto
------------------------------------
------------------------------------
PLEASE INSERT SOCIAL INSURANCE NUMBER OF
TRANSFEREE
- --------------------------------------------------------------------------------
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF TRANSFEREE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
_________________________________________________________________________ Shares
of the Capital Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
______________________________________________________________________ Attorney,
to transfer the said Stock on the Books of the within named Corporation, with
full power of substitution in the premises.
Dated ____________________________ 19
----------------------------------------
In presence of
- ---------------------------------------------------------
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION
OR ENLARGEMENT OR ANY CHANGE WHATEVER.
<PAGE>
[LETTERHEAD OF COHNE RAPPAPORT & SEGAL
A PROFESSIONAL CORPORATION
525 EAST FIRST SOUTH, 5TH FLOOR
SALT LAKE CITY, UTAH 84102
(801) 532-2666]
July 6, 1998
CVF Corporation
916 Center Street
Lewiston, NY 14092
Re: Opinion as to Securities Registered on Form SB-2
Gentlemen:
We are acting as special counsel for CVF Corporation, a Nevada
corporation (the "Company"), in connection with the registration under the
Securities Act of 1933, as amended (the "Securities Act") of (i) up to
3,324,430 shares of Common Stock, par value $.001 per share (the "Common
Stock"), of the Company (including 450,000 shares subject to the Agent's
over-allotment option) which are offered by the Company on a minimum,
maximum, best efforts basis, and (ii) 125,570 shares of the Company's Common
stock offered by Selling Shareholders. The Common Stock is to be registered
pursuant to a Registration Statement filed with the Securities and Exchange
Commission on Form SB-2 (the "Registration Statement"). In such capacity we
have examined, among other documents, the Prospectus which is a part of the
Registration Statement, the Company's Amended Certificate of Incorporation
and the Company's Bylaws.
Based on the foregoing and such additional investigation as we have deemed
necessary, we are of the opinion that:
1. The shares of Common Stock to be offered and sold by the Company
pursuant to the Prospectus have been duly authorized and, when issued and sold
by the Company in the manner described in the Prospectus and in accordance with
the resolutions adopted by the Board of Directors of the Company, will be
legally issued, fully paid and nonassessable under the Amended Certificate of
Incorporation of the Company and the laws of the State of Nevada.
2. The Company's shares of Common Stock owned by the Selling
Shareholders, as described in the Registration Statement, have been duly and
validly authorized and created and are fully paid and non-assessable.
<PAGE>
CVF Corporation
July 6, 1998
Page 2
As to factual matters material to our opinions, we have relied upon the
representations and warranties of the Company, upon certificates of persons
who were and who are the officers of the Company and upon certificates of
public officials. In our examination, we have assumed the authenticity of
all documents submitted to us as originals, the genuineness of all signatures
and the conformity to authentic original documents of all documents submitted
to us as certified or photostatic copies. We have also relied on Company
records and have assumed the accuracy and completeness thereof.
We express no opinion as to the laws of any jurisdiction other than
those of the United States of America, and the Business Corporation Act of
the State of Nevada.
We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement on Form SB-2.
Very truly yours,
/s/ Cohne, Rappaport & Segal
2
<PAGE>
CONSENT OF INDEPENDENT AUDITOR
We consent to the reference to our firm under the heading "Auditors, Transfer
Agent and Registrar" in Amendment No. 1 to the Registration Statement (Form
SB-2, File No. 333-51757) and related prospectus of CVF Corporation for the
registration of a minimum of 874,430 and a maximum of 2,874,430 common stock
of the Corporation, and to the use of our report dated March 16, 1998 (except
for note 14(a) which is as at June 30, 1998).
/s/ Ernst & Young
Kitchener, Canada Ernst & Young
July 6, 1998 Chartered Accountants
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in this Amendment No.1 Registration Statement on
Form SB-2 (File No.333-51757) of our report dated March 14, 1997 relating to
the consolidated financial statements of CVF Corporation, and the reference
to our firm under the caption "Auditors. Tranfer Agent and Registrar" in
this Registration Statement.
/s/ Feldman Sherb Ehrlich & Co., P.C.
Certified Public Accountants
(Formerly Feldman Radin & Co., P.C.)
July 6, 1998
