<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 4, 1998
REGISTRATION NO. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------------------
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
------------------------------------------------
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. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
---------------------------------------------------
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
TITLE OF EACH CLASS OF AMOUNT TO BE PROPOSED PROPOSED
SECURITIES TO BE REGISTERED REGISTERED (1)(2) MAXIMUM MAXIMUM AMOUNT OF
OFFERING PRICE AGGREGATE REGISTRATION FEE
PER UNIT (2) OFFERING PRICE (2)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Shares, $0.001 par value... 4,715,000 shares $6.375 $30,058,125 $8,867
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes Common Shares that the Underwriters have the option to purchase
solely to cover over-allotments, if any.
(2) Estimated solely for purposes of determining the registration fee in
accordance with Rule 457 and based on a bona fide estimate of the maximum
number of shares to be offered and the maximum offering price.
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED MAY 4, 1998
Information contained herein is subject to completion or amendment. A
Registration Statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the Registration Statement
becomes effective. This Prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws
of any such State.
<PAGE>
PROSPECTUS
CVF CORPORATION
Maximum of $ ( Common Shares) and
Minimum of $ ( Common Shares)
This offering (the "Offering") of Common Shares of CVF Corporation ("CVF"
or the "Company") consists of a new issue of a minimum of and a maximum of
Common Shares by the Company and a secondary offering (the "Secondary
Offering") of 100,000 Common Shares by a selling shareholder (the "Selling
Shareholder"). See "Selling Shareholder". The Company will not receive any
part of the proceeds of the sale by the Selling Shareholder. 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
Shareholder 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 , 1998 by Cdn$ ,
representing dilution of % after giving effect to the minimum offering and
by Cdn$ , representing dilution of % 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 April 28, 1998, the last
reported sale price of the Common Shares on the American Stock Exchange was
US$6.375. See "Trading of the Common Shares".
-------------------------------------------
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 7 OF THIS PROSPECTUS.
-------------------------------------------------
<TABLE>
<CAPTION>
<S><C>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
Price to the Public Agent's Net Net
Commission(1)(5) Proceeds to Proceeds to
Company(3) Selling Shareholder(3)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share................... US$ US$ US$ US$
Total Minimum(2)(4)......... US$ US$ US$ US$
Total Maximum(2)(4)......... US$ US$ US$ US$
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
</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 $ , the Agent's Commission will be $ and the net
proceeds to the Company will be $ . The net proceeds to the Selling
Shareholder will not be affected by the exercise of the Over-Allotment
Option. See "Plan of Distribution".
<PAGE>
(3) Before deducting expenses of the Offering estimated at US$ 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 Common Shares are sold. The
maximum offering assumes that 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 , 1998, but in any
event not later than , 1998. Subscription proceeds will be held pursuant
to a Depository Agreement with until subscriptions have been received for
the minimum offering. If subscriptions for a minimum of 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".
, 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 purposed by the Federal Reserve Bank of New York (the "Noon Buying
Rate").
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995 1994 1993
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Low.............. $1.3356 $1.3310 $1.3286 $1.3103 $1.2429
High............. 1.4399 1.3822 1.4238 1.4079 1.3442
Average........ 1.3891 1.3643 1.3686 1.3695 1.2932
Period end.... 1.4288 1.3697 1.3656 1.4029 1.3256
</TABLE>
On April 28, 1998, the Noon Buying Rate was $1.4390 per US$1.00. References to
Canadian dollars in this Prospectus have been calculated based on the Noon
Buying Rate on April 28, 1998, except where otherwise indicated.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Prospectus, including under "Risk Factors" and
"Business of CVF Corporation" as well as elsewhere in this Prospectus,
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company, or industry results, to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. See "Risk Factors."
Given these uncertainties, prospective investors are cautioned not to place
undue reliance on such forward-looking statements.
-1-
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING INFORMATION IS A SUMMARY ONLY AND IS QUALIFIED IN ITS ENTIRETY BY
THE MORE DETAILED INFORMATION AND THE CONSOLIDATED FINANCIAL STATEMENTS,
INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS.
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FACTORS SET FORTH HEREIN
UNDER "RISK FACTORS" AND ARE URGED TO READ THIS PROSPECTUS IN ITS ENTIRETY.
UNLESS OTHERWISE SPECIFICALLY INDICATED, ALL INFORMATION IN THIS PROSPECTUS
ASSUMES NO EXERCISE OF THE AGENT'S OVER-ALLOTMENT OPTION. ALL DOLLAR REFERENCES
IN THIS PROSPECTUS ARE TO CANADIAN DOLLARS UNLESS OTHERWISE SPECIFICALLY
INDICATED. REFERENCES TO US$ 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"), Dantec Electronics Limited ("Dantec Electronics"),
Eastview Marketing One, LLC ("Eastview"), Biorem Technologies, Inc. ("Biorem"),
Grand Island Marketing Two, LLC ("Grand Island 2"), Grand Island Marketing, Inc.
("Grand Inc."), Gemprint Corporation ("Gemprint"), Solaria Research Enterprises,
Ltd. ("Solaria"), Petrozyme Technologies Inc. ("Petrozyme"), Dantec Systems
Corporation ("Dantec Systems"), Certicom Corp. ("Certicom"), TurboSonic Canada
Inc. ("TurboSonic Canada"), Mindflight Corporation ("Mindflight") and Ecoval
Inc. ("Ecoval"), (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 $33.9 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.
Mindflight, 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 special warrants
exercisable into 17% of the voting shares of Mindflight.
PROCESS CONTROL/INDUSTRIAL AUTOMATION HOLDINGS
Dantec Electronics designs, manufactures and markets computerized control
systems for the drying of grains, including corn, soybeans and rice. CVF
indirectly owns 100% of the voting equity in Dantec Electronics through 1246680.
Dantec Systems designs, manufactures and markets industrial automation
control systems. CVF
-2-
<PAGE>
holds a 42% interest in Dantec Systems. Dantec Systems and Dantec Electronics
have entered into a non-binding letter of intent with respect to the proposed
merger of these two companies, following which, CVF would own approximately 51%
of the voting shares of the merged entity.
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.
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 Island 2 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 Inc."), a public New Jersey-based company whose shares are quoted
on the OTC Bulletin Board. TurboSonic Inc. 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 Inc.
OTHER HOLDINGS
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
-3-
<PAGE>
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.
THE HOLDINGS
Each Holding has its own business plan and financial reporting systems.
With the exception of Leasing, Eastview, Grand Inc. and Grand Island 2, 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 Island
2 and Eastview. Some of these companies, including Mindflight and Dantec
Systems, 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 and a maximum of Common Shares. An
additional Common Shares may be offered upon exercise of the
Over-Allotment Option granted by the Company to the Agent.
AMOUNT: MAXIMUM OFFERING
New Issue: $ Common Shares
Secondary Offering: $ 100,000 Common Shares
------------ ---------------------
Total $ Common Shares
------------ ---------------------
------------ ---------------------
MINIMUM OFFERING
New Issue: $ Common Shares
Secondary Offering: $ 100,000 Common Shares
----------- ---------------------
Total $ Common Shares
---------- ---------------------
---------- ---------------------
PRICE: $ per Common Share.
-4-
<PAGE>
COMMON SHARES
TO BE OUTSTANDING
AFTER THE OFFERING:(1)
USE OF PROCEEDS: The net proceeds from this Offering to the Company are
estimated to be approximately $ million (maximum
offering)/$ million (minimum offering) ($ million 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. 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 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 "Dividend Policy and Record."
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
- ---------------------
(1) Based on 5,767,628 Common Shares outstanding as of April 28, 1998.
Excludes (i) options outstanding at April 28, 1998 to purchase up to 53,750
Common Shares, all of which options were then exercisable at US$5.00, and (ii)
warrants outstanding at April 28, 1998 to purchase up to 952,784 Common Shares,
of which, to the best of the Company's knowledge, warrants to acquire 125,973
Common Shares were then exercisable at $3.05.
-5-
<PAGE>
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."
-6-
<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 Island 2 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 Inc., TurboSonic Canada's parent company, Ecoval and Mindflight) 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
-7-
<PAGE>
been taken from or is based upon documentation and information provided by such
private Holdings to the Company.
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 Island 2 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 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.
-8-
<PAGE>
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.
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 that 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
-9-
<PAGE>
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 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
-10-
<PAGE>
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 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 become 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
-11-
<PAGE>
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.
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.
-12-
<PAGE>
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.
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, the Company's
officers, directors and the principal shareholders owning five percent or more
of the Company own, as of April 28, 1998, approximately 76.9% of the outstanding
Common Shares ( % on a fully-diluted basis) prior to giving effect to the
Offering. 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. The voting power of these
shareholders under certain circumstances could have the delaying or preventing a
change in control 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."
-13-
<PAGE>
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 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
, 1998 by $ , representing dilution of % after giving effect to the
minimum offering and by $ , representing dilution of % 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
-14-
<PAGE>
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.
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.
-15-
<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% | | | | 67% | |
| | _|__________ __|___________ | _|__________ | | | _|__________ | |
| | | Biorem | | Canadian | | |Grand Island| | | | |Gemprint | | |
| | |Technologies| | Venture | | | Marketing | | | | |Corporation | | |
| | | Inc. | | Founders | | | Two, LLC | | | | |(Ontario) | | |
| | | (Ontario) | | Leasing Corp.| | | (New York, | | | | |____________| | |
| | | | | (Ontario) | | | U.S.A.) | | | | | |
| | |____________| |______________| | |____________| | | | | |
| | | | | | | | |
| |67% | | 17% | 50% | | 100% | 100% | 100%
| _____|___________ | _____|______ ___|________ | __|__________ ___|_______ __|________
| |Solaria Research | | | Mindflight| | Petrozyme || |Grand Island | | Eastview | | 1246680 |
| |Enterprises, Ltd.| | | Corporation| |Technologies|| | Marketing, | | Marketing | | Ontario |
| | (Ontario) | | | (Canada) | | Inc. || | Inc. | | One, LLC | | Limited |
| | | | |____________| | (Ontario) || | (Delaware, | | (New York,| | (Ontario) |
| | | | |____________|| | U.S.A.) | | U.S.A.) | | |
| |_________________| | | |_____________| |___________| |___________|
| | | | 51% | 100%
| |_________________________________ | | |
| | 6% | 13%(2) | 7% | | |
| ___|_______ _|_________ ___|____ | __|_________ __|_________
| 35% | Dantec | |TurboSonic | | ECOVAL | 20% | | Elements | | Dantec(1) |
| |Systems(1) | |Canada Inc.| | Inc. | | |Partnership | | Electronics|
|____________________________|Corporation| | (Ontario) | |(Quebec)|______| | | | Limited |
| (Ontario) | | | | | | | | (Ontario) |
|___________| |___________| |________| |____________| |____________|
</TABLE>
NOTES:
(1) Dantec Electronics and Dantec Systems have entered into a non-binding
letter of intent, dated March 3, 1998, with respect to the proposed merger
of the two companies. As a result of the merger, CVF would directly and
indirectly hold approximately 51% of the outstanding voting securities of
the merged company. See "Business of CVF Corporation - The Subsidiaries -
Dantec Electronics Limited."
(2) CVF owns directly and indirectly a total of 1,334,977 Class B shares in
TurboSonic Canada which, at the election of the Company, are exchangeable
into approximately 13% of the outstanding common shares of TurboSonic Inc.,
a publicly-traded, New Jersey based air pollution products company and the
parent of TurboSonic Canada.
-16-
<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
Technologies Inc.) and organized Certicom's initial financing. Later, CVF
also participated in recruiting Certicom's key management personnel.
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 $33,969,987. See
"Business of CVF Corporation - Material Dispositions."
IDENTIFICATION, SELECTION AND GROWTH OF INVESTMENT OPPORTUNITIES
The success of the Company will depend upon its ability, firstly, to
identify attractive investment opportunities at various stages of
development, secondly, to select and invest in those companies with the
greatest growth potential and, thirdly, to assist companies to maximize their
growth potential.
-17-
<PAGE>
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 Systems, TurboSonic
Canada's parent company and Petrozyme) evolved out of research originally
conducted at the University of Waterloo. Dantec Systems, 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 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.
-18-
<PAGE>
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 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.
-19-
<PAGE>
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 Systems, Gemprint, Solaria and Petrozyme.
SUMMARY OF INTEREST IN HOLDINGS
As of the date hereof, the Company has direct and indirect interests in the
following companies:
<TABLE>
<CAPTION>
MONIES
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
- -----------------------------------------------------------------------------------------------------------------------------------
1246680 Ontario holding company common shares 1,750,000 100 see Dantec
Ontario, Canada Electronics
- ----------------------------------------------------------------------------------------------------------------------------------
Dantec Electronics computerized grain-drying common shares 200 100
Limited(2)(3) controls class A non-voting shares 22 100 ---------
Ontario, Canada Total Equity 1,615,000
- ----------------------------------------------------------------------------------------------------------------------------------
Eastview Marketing One, U.S. distribution company units 1,000 units 100 1,434,478(4)
LLC for all-natural products and
New York, U.S.A. services
- -----------------------------------------------------------------------------------------------------------------------------------
Grand Island Marketing environmental services for units 1,000 units 100 Nil
Two, LLC for "brownfields" real estate
New York, U.S.A.
- -----------------------------------------------------------------------------------------------------------------------------------
Biorem Technologies Inc. bioremediation services common shares 830,113 69
Ontario, Canada and bio-filter installations class A preferred shares 219,781 100
(non-voting) -----------
Total Equity 1,061,191
demand promissory
notes (5) (15) -- -- 476,218
- -----------------------------------------------------------------------------------------------------------------------------------
Grand Island Marketing, majority general partner common shares 1,000 100 US$1,500,000
Inc.(6) of Elements, an all-
Delaware, U.S.A. natural products and
supplements retail
company
</TABLE>
-20-
<PAGE>
<TABLE>
<CAPTION>
MONIES
NAME AND JURISDICTION NO. OF % OF INVESTED
OF INCORPORATION NATURE OF PRINCIPAL BUSINESS CLASS SHARES CLASS TO DATE ($)
- ---------------------- ---------------------------- ----- --------- ----- ------------
<S> <C> <C> <C> <C> <C>
Gemprint Corporation gem identification class A voting shares 18,331,74 69
Ontario, Canada(7) technology and database class B voting shares 1,871,581 40
services class C voting shares 1,871,581 100 -----------
Total Equity 4,016,914
convertible debenture (15) -- -- 175,000
convertible debenture (15) -- -- 122,618
demand convertible
promissory notes (15) -- -- 1,160,000
- -----------------------------------------------------------------------------------------------------------------------------------
Solaria Research high efficiency class A voting shares 430,845 79 1,251,896
Enterprises Ltd. programmable controller convertible debenture -- -- 1,000,000
Ontario, Canada (8) technology for industrial convertible debenture (15) -- -- 651,332
and electrical vehicles
- -----------------------------------------------------------------------------------------------------------------------------------
Petrozyme solutions for oil waste common shares 50 50
Technologies, Inc. processing and recovery class C non-voting
Ontario, Canada shares 250,000 100 ---------
Total Equity 250,000
demand promissory
notes (9) -- -- 600,000
- -----------------------------------------------------------------------------------------------------------------------------------
Dantec Systems advanced optimization, common shares 34,700 41 2,247,450
Corporation(3) control and monitoring demand convertible
Ontario, Canada for factory automation promissory
systems notes (10)(15) -- -- 525,000
- -----------------------------------------------------------------------------------------------------------------------------------
Ecoval Inc. natural fertilizers, common shares 1,330,550 27 5,347,895(11)
Quebec, Canada herbicides and other
products
- -----------------------------------------------------------------------------------------------------------------------------------
TurboSonic Canada air pollution control class B shares 1,334,977 13(12) 1,025,045
Inc.(12) systems
Ontario, Canada
- -----------------------------------------------------------------------------------------------------------------------------------
Mindflight technologies for check special warrants 1,428,572 17 1,000,000
Corporation(13) processing and electronic
Canada commerce solutions
- -----------------------------------------------------------------------------------------------------------------------------------
Certicom Corp. encryption technologies preferred non-voting
Ontario, Canada(14) shares (14) 29,881 100% 298,813
debentures (14) 33,333
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTES:
(1) Net of intercompany advances. These funds have been used to make
investments and additional advances to certain of the Holdings.
(2) The Company holds all of its common shares in Dantec Electronics
through 1246680, of which the Company owns all voting equity. There
are 960,000 Class A non-voting shares of 1246680 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. If Dantec Electronics has not gone pubic by August 1999, a
total of 850,000 of these shares are redeemable for $1.00 per share at
the holder's option
-21-
<PAGE>
after that date. Conversion of such Class A shares into common shares
of 1246680 would result in CVF owning 65% of Dantec Electronics.
(3) Dantec Electronics and Dantec Systems have entered into a non-binding
letter of intent, dated March 3, 1998, with respect to the proposed
merger of the two companies. As a result of the merger, CVF would
directly and indirectly hold approximately 51% of the outstanding
voting securities of the merged company. See "Business of CVF
Corporation - The Subsidiaries - Dantec Electronics Limited".
(4) Based on an exchange rate of US$1.4051 = Cdn. $1.00 as at March 31,
1998.
(5) Interest is payable on this note at the rate of Canadian prime plus
2%.
(6) 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."
(7) The $175,000 investment relates to a convertible demand debenture.
The $122,618 investment relates to a convertible debenture purchased
by CVF at a discount. 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. Interest is payable on the convertible debentures
and the promissory notes at the rate of prime plus 2%. The debentures
and the promissory notes are all convertible into Gemprint Class A
shares at any time at CVF's option. Gemprint currently owes CVF an
additional $95,000 in fees related to CVF bank guarantees.
(8) 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. 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.
(9) Interest is payable on this note at the rate of Canadian prime plus
2%. The Company has waived interest payments on this note to date.
(10) Interest is payable on these notes at the rate of Canadian prime plus
2%.
(11) 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.
(12) CVF owns, directly or indirectly, a total of 1,334,977 Class B shares
in TurboSonic Canada which, at the election of the Company, are
exchangeable into approximately 13% of the outstanding common shares
of TurboSonic Inc., a publicly-traded, New Jersey based air pollution
products company and the parent of TurboSonic Canada.
(13) These figures assume the exercise of all 1,428,572 special warrants of
Mindflight held by the Company. Each special warrant entitles the
Company to acquire one common share of Mindflight for no additional
consideration. The common shares of Mindflight issuable upon the
exercise of the special warrants have been qualified for distribution
in British Columbia.
-22-
<PAGE>
(14) 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 $348,362. The Company intends
to exercise its right to retract the Preferred Shares and redeem the
debenture on that date.
(15) It is CVF's policy to allow interest payments on these instruments to
be accrued.
THE HOLDINGS
With the exception of Mindflight, Certicom and Ecoval, each of the Holdings
is a private company. The securities of TurboSonic Inc., into which the
securities of TurboSonic Canada held by the Company are exchangeable, are quoted
on the OTC Bulletin Board. The Mindflight common shares are listed on the
Vancouver Stock Exchange. While Ecoval is a reporting issuer in the provinces
of British Columbia, 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 Island 2, 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 Island
2 and Eastview. Some of these companies, including Mindflight and Dantec
Systems, 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 information contained in this Prospectus concerning the public Holdings
(TurboSonic Inc., TurboSonic Canada's parent, Ecoval and Mindflight) 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.
-23-
<PAGE>
DANTEC ELECTRONICS LIMITED
OVERVIEW OF DANTEC ELECTRONICS
Dantec Electronics of Waterloo, Ontario was incorporated in 1975 and
designs, manufactures and markets computerized control systems for the drying of
grains. Dantec Electronics' Dryer Master-TM- controllers improve the drying of
corn, soybeans, rice, and other grains internationally. 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 Electronics' customer
service. Modems allow Dantec Electronics' support center staff to connect to
installed systems, remotely analyze performance and assist dryer operators with
any needs they may have. Dantec Electronics 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
Electronics 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 Electronics' customers have
included such companies as Cargill Corporation and Peavey, a division of
Con-Agra Inc. Dantec Electronics 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.
Dantec Electronics is managed by the management team of Dantec Systems,
with active involvement from CVF. See "Business of CVF Corporation - The Equity
Holdings- Dantec Systems Corporation".
Dantec Electronics recently entered into a non-binding letter of intent
dated March 3, 1998, with Dantec Systems regarding the merger of the two
companies. The merger is expected to be completed in May 1998, resulting in CVF
indirectly owning approximately 51% of the outstanding voting securities of the
merged entity. The letter of intent provides for the Company's right to appoint
50% of the board of directors of the merged company, including the right to
appoint the chairman of the board of directors. Dantec Systems and Dantec
Electronics share a 10,000 square foot facility in Waterloo, Ontario which is
leased from two of Dantec Electronics' 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.
Four months of activity of Dantec Electronics have been included in the
Consolidated Financial Statements of the Company for the year ended December 31,
1997. Net income for this short period is not significant.
DESCRIPTION OF CVF INVESTMENT
In August 1997, CVF acquired all of the 200 outstanding common shares and
22 Class A shares of Dantec Electronics through 1246680, a holding company
formed for the purpose of acquiring Dantec Electronics. CVF holds all of the
outstanding Common Shares of 1246690. There are 960,000 Class A non-voting
shares of 1246680 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. If Dantec Electronics has not gone public by August
1999, a total of 850,000 of these shares will be redeemable for $1.00 per share
at the holders' option after that date. Conversion of these shares would result
in CVF owning 65% of Dantec Electronics.
-24-
<PAGE>
CVF INVESTMENT RATIONALE AND RISKS
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. There is also a strong strategic fit with Dantec Systems
which originated from technology originally developed at Dantec Electronics.
The two companies have strong synergy and commonality in terms of technology and
sharing of marketing and administrative facilities. Risks include, among
others, the inability of Dantec Electronics to successfully market its products;
possible misappropriation of Dantec Electronics' proprietary technology;
fluctuations in operating results as a result of the seasonal nature of the
business and sensitivity of the company's sales to agricultural commodity
prices; 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 two of its officers on the two member board of directors of
1246680. CVF management has been actively involved since the purchase of Dantec
Electronics in formulating business strategy, arranging the proposed merger with
Dantec Systems and working on integration of management of the two companies.
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. 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 in 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 high-margin 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".
-25-
<PAGE>
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.
GRAND ISLAND MARKETING TWO, LLC
OVERVIEW OF GRAND ISLAND 2
The Company established Grand Island 2 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 Island 2 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 Island 2.
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 Island 2 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 financing of such a joint effort to
purchase brownfields properties would likely require additional funding from
outside sources in addition to any contribution made by CVF. If such funding is
not available, Grand Island 2 would restrict itself to the marketing of
environmental services throughout the United States. Once operational, risks
may include, among others, environmental risks associated with the on-site
remediation of hazardous materials; uncertainty of future operating results;
and inability to obtain financing to purchase brownfields properties. See
"Risk Factors".
-26-
<PAGE>
CVF INVOLVEMENT
George Khouri, a director of the Company, is currently devoting much of his
time to developing a business plan for Grand Island 2 and meeting with potential
managers and real-estate developers. He is also reviewing financing options for
Grand Island 2.
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 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 Island 2, 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 represent 69% of Biorem's
outstanding common shares and 219,780 Class A preferred shares which represent
all outstanding preferred shares. CVF also holds secured demand promissory
notes from Biorem in the aggregate amount of $476,218 and has
-27-
<PAGE>
guaranteed bank lines of credit provided to Biorem of up to $715,000. Biorem
also has equipment lease obligations to Leasing of $185,051.
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.
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 Island 2".
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 US$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."
-28-
<PAGE>
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 June 1998. 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.
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. and is able to make use of any
losses in Elements up to the first $1.5 million and proportionately thereafter
for tax purposes. 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 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. 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
-29-
<PAGE>
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 method of gem identification in the world.
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.
Gemprint has recently developed a new version of the machine with built-in
appraisal software. The additional expense of developing this machine is
expected to result in operating losses at least until the fiscal year ended
March 31, 1998.
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 network 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 67% 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 $1,160,000. Gemprint has been unable to pay any interest on
these debentures and notes and CVF has agreed to allow same to be accrued. CVF
has in the past guaranteed bank lines of credit for Gemprint of up to $250,000
and is likely to continue to do so.
One of Gemprint's shareholders issued a retraction notice to Gemprint on
October 30, 1997 for the repurchase by Gemprint of Class C 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
-30-
<PAGE>
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 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 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
-31-
<PAGE>
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 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. In fiscal 1997, Solaria's sales increased over fiscal 1996 sales by
approximately 65%. As a result, 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.
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 common 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
-32-
<PAGE>
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 key customer;
risks associated with international sales; product liability risks; and other
risk 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.
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.
-33-
<PAGE>
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.
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 Refinacion 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 joinging Petrozyme, he spent three years with the
Deloitte Touche Consulting Group.
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 amount of $600,000. Interest is not being
accrued on this note.
-34-
<PAGE>
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.
DANTEC SYSTEMS CORPORATION
OVERVIEW OF DANTEC SYSTEMS
Dantec Systems 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 Systems 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, The Iams Company.
Dantec Systems 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 Systems also works with a number of integrators who install factory
automation systems and base-level programmable logic controls. The competitors
for Dantec Systems' products and services include in-house engineering
departments of large companies as well companies such as The Foxboro Company,
which manufactures and markets process automation systems.
-35-
<PAGE>
Dantec Systems believes that it has competitive advantages due to its sensor
technology and real-time software solutions. Sales remained flat during the
1996 fiscal year compared to 1995; however, several contracts were signed in
1997 which are expected to increase Dantec Systems' revenues. However, there
is no assurance that this will occur.
John McFarland has been the President and Chief Financial Officer of Dantec
Systems since January 1996. 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 form Belfast Technical College. He attended Babson
College and has completed the Harvard Business School executive development
program.
DESCRIPTION OF CVF INVESTMENT
CVF owns, directly and indirectly, 41% of the total outstanding voting
securities of Dantec Systems. Under the terms of the proposed merger of Dantec
Electronics and Dantec Systems, based on a letter of intent dated March 3, 1998,
CVF would own approximately 51% of the outstanding voting shares of the merged
entity. See "Business of CVF Corporation - The Subsidiaries - Dantec Electronics
Limited".
The Company has entered into a shareholders' agreement with the other
shareholders of Dantec which contains customary provisions restricting the sale
and transfer of Dante's shares without the agreement of its shareholders.
CVF INVESTMENT RATIONALE AND RISKS
At the time of initial investment, Dantec Systems 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. The current risks to Dantec Systems include,
among others, limited operating history and uncertainty of future operating
results; possible misappropriation of Dantec System'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 Systems 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".
-36-
<PAGE>
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 continues to
be active in all aspects of strategic business planning including the proposed
merger of Dantec Systems and Dantec Electronics.
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.
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 the majority of 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 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.
For the year ended October 31, 1997, Ecoval reported revenues of $1,357,741
with a net loss of $8,923,254. For the quarter ended January 31, 1998, Ecoval
reported revenues of $125,975, with a net loss of $894,601.
-37-
<PAGE>
Mark Greene, President and Chief Executive Officer 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. in
1996, 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 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 risk 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.
-38-
<PAGE>
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 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, SonicEnvironmental Systems, Inc. ("Sonic"), a publicly-traded, New
Jersey-based, air-pollution control products company merged with Turbotak and
shareholders of Turbotak received common stock of Sonic. The transaction was
treated for accounting purposes as an acquisition of Sonic by Turbotak. As a
result of the transaction, Turbotak shareholders acquired approximately 82% of
the outstanding common stock of the newly merged company, TurboSonic Inc..
TurboSonic Canada is a subsidiary of TurboSonic Inc., which is a publicly-traded
New Jersey-based company that markets, develops and supplies a variety of air
pollution control systems and spray nozzles to a range of industries worldwide.
The shares of TurboSonic Inc. are quoted on the OTC Bulletin Board under the
symbol "TSTA".
TurboSonic Inc. has obtained over 20 patents for its products and has 10
pending patent applications which are at various stages in the application
process. TurboSonic Inc. offers waste and pollution solutions for the pulp and
paper industry, power generation facilities and automotive and metallurgical
manufacturing. TurboSonic Inc. 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
sulphur dioxide which can help create a payback for the installation.
TurboSonic Inc. recently announced a marketing agreement and strategic
partnership with Dow Chemical Company in respect of TurboSonic Inc.'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 Inc.'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 quarter ended December 31, 1997, (the first consolidated quarter)
TurboSonic Inc. had revenues of US$765,754 with a net loss of US$250,428. These
results are not consolidated in the Company's Consolidated Financial Statements.
Dr. Donald R. Spink is Chairman of TurboSonic Inc.. 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.
-39-
<PAGE>
Edward Spink, President and Chief Operating Officer of TurboSonic Inc. has
been a senior executive with TurboSonic Inc. 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 Inc. 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, upon the merger of Turbotak and Sonic, converted into the
common shares of TurboSonic Canada. CVF currently holds 1,334,935 shares in
TurboSonic Canada which are exchangeable into shares of TurboSonic Inc. on a
one-for-one basis at any time at CVF's option and, upon such exchange, would
represent 13% of the outstanding common shares of TurboSonic Inc. At April 28,
1998, the last trading price of the shares of TurboSonic Inc. on the OTC
Bulletin Board was US$0.75.
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 Inc. 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 Inc.'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 Inc.;
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
and Mr. Forde; and other risk 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 Inc. in bringing in management personnel,
helping to develop the strategic business plan and introducing potential
customers, acquisition candidates and strategic alliances. CVF currently has
one officer on the seven member board of directors of TurboSonic Inc.
-40-
<PAGE>
MINDFLIGHT 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 MINDFLIGHT
Mindflight of Waterloo, Ontario was founded in 1987. The common shares
of Mindflight are listed for trading on the Vancouver Stock Exchange. Through
its wholly-owned operating subsidiary, RDM Corporation ("RDM"), it develops and
supplies technologies that enable secure and accurate payments for both
paper-based and electronic payment systems. Mindflight has been providing
banks, printers and payment processors with financial document and check print
quality control technologies since 1987. Mindflight 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, Mindflight'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 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.
Mindflight 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.
Mindflight's other major initiative is in the area of electronic commerce.
E-Check, a product developed by Mindflight, 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. Mindflight 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., Sun Microsystems Inc.
Mindflight and RDM retain the rights 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 Mindflight 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 the
world's largest issuer of paper checks, an enhanced all-electronic replacement
for the paper check.
For the year ended December 31,1997, Mindflight had revenues of $2,537,922
with a net loss of $310,545.
-41-
<PAGE>
Patrick Pavlik, President and Chief Executive Officer of Mindflight, 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 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 Mindflight at
a price of $0.70 per special warrant for a total purchase price of $1,000,000.
These special warrants are exercisable into 1,428,572 common shares of
Mindflight (17% of the outstanding common shares). The common shares of
Mindflight issuable upon the exercise of the special warrants have been
qualified for distribution in British Columbia.
On April 28, 1998, the closing price of common shares of Mindflight on the
Vancouver Stock Exchange was $1.30 per share.
CVF INVESTMENT RATIONALE AND RISKS
CVF invested in Mindflight 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 Mindflight may not
be able to establish E-Check as an accepted form of payment in the banking
industry. There can be no assurance that Mindflight will successfully launch
these products. In addition, to implement marketing of both of these new
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
Mindflight 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 1,688,999
common shares of Mindflight representing approximately 20% of the outstanding
shares in Mindflight (assuming exercise of the 1,428,572 special warrants of
Mindflight held by CVF) and 46,875 options to purchase Mindflight common shares
at $0.45 per share. CVF has observer status at board of directors' meetings
through a CVF officer, other than Mr. Nally.
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 $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.
-42-
<PAGE>
The Company currently holds 29,881 preferred shares in Certicom and a
debenture with a principal amount remaining of $33,333. The preferred shares
will be retracted and the debenture redeemed by the Company in March 1999 for
aggregate gross proceeds, including dividends and interest of $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, including a permanent Chief Financial Officer, in the near future.
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 patents
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 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 which varies
on the Company's percentage investment in a Holding.
-43-
<PAGE>
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
Sales and costs of sales reflect the activity of the consolidated entities
of the Company. In 1997, the gross margin decreased by 29% to US$593,578 from
US$836,538 in 1996. Of this US$242,960 gross margin decline, US$417,618 is
related to sales decreases totaling US$741,418 in Biorem and Solaria. However,
the four months of activity of Dantec Electronics compensated for these declines
by contributing gross margin of US$215,790.
Selling, general and administrative expenses 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%. This increase is mainly due to US$1,500,000 in
bonuses paid by the Company related to a series of transactions in which the
Company purchased 601,932 of its common shares from a company owned by officers
of the Company and subsequently issued options to these officers to repurchase
these shares. The exercise of the options triggered personal tax consequences
which were reimbursed by the Company through the issuance of bonuses. See
"Executive Compensation". Selling, general and administration expenses are
expected to remain stable or decline over the next year due to the one-time
nature of the 1997 bonuses.
Research and development expenses increased by US$164,303 for the year
ended December 31, 1997 to a total of US$422,216, representing a 64% increase
from the year ended December 31, 1996. This was due primarily to an increase in
research and development expenses in Gemprint 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.
Losses from Equity Holdings has decreased by 51% to a loss of US$145,165
for the year ended December 31, 1997 compared to a loss of US$296,762 for the
year ended December 31, 1996. These amounts are a reflection of the activities
of the entities in which the Company has a 50% or less ownership interest as
well as the effect of changes in the ownership percentage and equity
transactions between investee companies and third parties which can provide
gains or losses, depending upon the overall net book value of these entities.
Since most of these entities have 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".
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.
Over the last two years, the Company has benefitted from the ownership of
common shares of Certicom which it managed and supported in accordance with the
nature of the Company's business. During
-44-
<PAGE>
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 was able to
sell 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 .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
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.
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
-45-
<PAGE>
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$682,361 was deposited in restricted investments in 1997 to
support debt guarantees of Biorem and Gemprint. In the prior year, these debt
guarantees were supported by the common shares of Certicom.
CONSOLIDATED CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as at the date indicated and as adjusted to give effect to the Offering
and the application of the net proceeds therefrom. See "Use of Proceeds". This
table is presented in U.S. dollars and in accordance with U.S. GAAP. This table
should be read in conjunction with the Consolidated Financial Statements of the
Company, the notes thereto and the other financial data included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------------------
ACTUAL AS ADJUSTED
------ -----------
US$ US$
<S> <C> <C>
INDEBTEDNESS
Bank indebtedness................... 824,577(1) 824,577(1)
Long Term Debt...................... 559,697(2) 559,697(2)
Preferred Stock of Subsidiaries..... 1,193,000(3) 1,193,000(3)
Series "A" Preferred Stock(4)....... 456,250 456,250
(authorized - 500,000 shs.) (25,000 shares) (25,000 shares)
--------------- ---------------
Total Indebtedness............. $3,033,524 $3,033,524
----------- -------------
SHAREHOLDERS' EQUITY
Common Shares(5)(6)................. 5,992
(authorized - 50,000,000 shs.) (5,792,449 shares) ( shares)
Additional Paid in Capital.......... 13,657,950 13,657,950
Treasury Stock...................... (1,862,049) (1,862,049)
Translation Adjustment.............. 374,959
Warrants(6)......................... -- --
(952,784 warrants) (952,784 warrants)
Accumulated Deficit................. (419,535) (419,535)
----------- -------------
TOTAL CAPITALIZATION................ $14,790,841 $
----------- -------------
----------- -------------
</TABLE>
-46-
<PAGE>
NOTES:
(1) See Note 6 in the Company's Consolidated Financial Statements.
(2) See Note 7 in the Company's Consolidated Financial Statements.
(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.
USE OF PROCEEDS
The net proceeds from this Offering to the Company are estimated to be
approximately $ million (maximum offering)/$ million (minimum offering)
($ million 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. 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 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.
-47-
<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 Dreben(1) 53 Director, Chief Executive Chief Executive
Lewiston, U.S.A. Officer and President Officer and President
of the Company
Robert Nally(1) (2) 50 Director, Secretary and Secretary and
Waterloo, Ontario Treasurer Treasurer of the
Company
George Khouri 51 Director and consultant Consultant to the
Greenwich, Company
Connecticut
Lawrence Casse 41 Vice-President Vice-President of the
Toronto, Ontario Company
Robert Glazier(1) 49 Director President and Chief
Jefferson County, Executive Officer of
Iowa Donatech Corporation
</TABLE>
NOTES:
(1) Member of the audit committee.
(2) Mr. Nally is also the acting Chief Financial Officer of the Company.
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 and
Casse, as indicated in their respective biographies below.
The Company intends to appoint two additional independent directors and a
permanent Chief Financial Officer prior to 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 original
co-founder with Mr. Nally. 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
-48-
<PAGE>
of its co-founders. Prior to that time, Mr. Nally provided commercial
development consulting services to 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.
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.
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
-49-
<PAGE>
the Company who were serving as executive officers at December 31, 1997 and
whose total salary and bonus exceeded $100,000 (the "Named Executive Officers").
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ANNUAL COMPENSATION LONG-TERM COMPENSATION
---------------------------------------------------------------------
AWARDS PAYOUTS
---------------------------------
SECURITIES RESTRICTED
OTHER UNDER SHARES OR
YEAR ANNUAL OPTIONS RESTRICTED ALL OTHER
ENDED COMPENSATION /SARS SHARE LTIP COMPEN-
DECEMBER SALARY BONUS(2) (1) GRANTED UNITS PAYOUTS SATION
NAME AND PRINCIPAL POSITION 31, (US$) (US$) (US$) (#) (US$) (US$) (US$)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Jeffrey Dreben 1997 200,000 500,000 -- -- -- -- 591,900(2)
President and Chief Executive 1996 102,765 Nil -- -- -- -- --
Officer 1995 26,273 Nil -- -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Robert Nally(3) 1997 140,000 500,000 -- -- -- -- 591,900(2)
Secretary and Treasurer 1996 80,543 -- -- -- -- -- --
1995 -- -- -- -- -- -- --
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
NOTES:
(1) 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.
(2) Other compensation relates to the exercise of stock options issued to
Messrs. Dreben and Nally. 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. A bonus of $500,000 was paid to each of the
Named Executive Officers as compensation for the personal tax
liabilities related to the exercise of the options. These bonuses are
not expected to re-occur in the future.
(3) Mr. Nally's salary was paid by Leasing, a wholly-owned subsidiary of
the Company.
OPTION/SAR GRANTS DURING THE MOST RECENTLY COMPLETED FINANCIAL YEAR
The following table sets forth individual issuances of stock options to
acquire Common Shares of the Company or the securities of any Subsidiary granted
during the fiscal year ended December 31, 1997 to each of the Named Executive
Officers.
The options set forth in the table below were granted by the Company in
exchange for the repurchase of Common Shares for a nominal amount. See Note 2
under the heading "Executive Compensation - Summary Compensation Table."
-50-
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
MARKET VALUE OF
% OF TOTAL SECURITIES UNDERLYING
SECURITIES UNDER OPTIONS GRANTED EXERCISE OR BASE OPTIONS ON THE DATE
NAME OPTIONS GRANTED (#) TO EMPLOYEES IN PRICE ($/SECURITY) OF GRANT ($/SECURITY) EXPIRATION DATE
FINANCIAL YEAR
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Jeffrey Dreben 200,644 45.2% US$0.05 US$6.625 Feb 5, 2007
President and Chief
Executive Officer
- ----------------------------------------------------------------------------------------------------------------------------------
Robert Nally 200,644 45.2% US$0.05 US$6.625 Feb 5, 2007
Secretary and Treasurer
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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>
- ----------------------------------------------------------------------------------------------------------------------------------
VALUE OF UNEXERCISED IN-THE-
SECURITIES ACQUIRED ON AGGREGATE VALUE UNEXERCISED OPTIONS AT MONEY OPTIONS AT DECEMBER 31,
NAME EXERCISE REALIZED DECEMBER 31, 1997 (#) 1997
EXERCISABLE/ EXERCISABLE/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.
George 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.
-51-
<PAGE>
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
GRANTED(1)(2) MARKET PRICE ON
(#) DATE OF GRANT EXERCISE PRICE EXPIRY DATE DATE OF GRANT
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Executive Officers of
Company
(2) 100,00 Gemprint class A Jan. 27, 1998 $0.21 May 31, 2001 N/A
shares
- -----------------------------------------------------------------------------------------------------------------------------------
Director who is not
an executive officer
(1)
11,250 CVF Common Shares Sept. 22, 1997 US$5.00 Sept. 30, 2000 US$6.00
(1) 11,250 CVF Common Shares Dec. 31, 1997 US$5.00 Dec. 31, 2000 US$4.1875
(1) 11,250 CVF Common
Shares March 31, 1998 US$5.00 March 31, 2000 US$6.4375
- -----------------------------------------------------------------------------------------------------------------------------------
Executive Officers of
all Subsidiaries
(1) Biorem common shares:
10,000 Dec. 15, 1995 $1.82 Dec. 15, 2000 N/A
60,000 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 class A Sept. 1, 1996 $0.26 May 31, 1998 N/A
shares
-52-
<PAGE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
DESCRIPTION AND NUMBER OF
SECURITIES UNDER OPTIONS
GRANTED(1)(2) MARKET PRICE ON
(#) 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 shares (2)
200,000 Feb. 28, 1997 $0.26 Feb. 28, 2000 N/A
100,000 Jan. 27, 1998 $0.21 May 31, 2001 N/A
- -----------------------------------------------------------------------------------------------------------------------------------
All other employees
of Company
(1)
20,000 CVF Common Shares Aug. 11, 1997 US$5.00 Aug. 11, 2000 US$6.25
- -----------------------------------------------------------------------------------------------------------------------------------
All other employees
of Subsidiaries
Biorem Employees
Biorem Common Shares
(1) 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.
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 April 28, 1998 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 Shareholder.
-53-
<PAGE>
<TABLE>
<CAPTION>
NAME AND
MUNICIPALITY OF
RESIDENCE OF COMMON SHARES BENEFICIALLY COMMON SHARES BENEFICIALLY
HOLDER OWNED PRIOR TO OFFERING (1) OWNED AFTER OFFERING (1)
- ------------------ --------------------------- SHARES ---------------------------
NUMBER PERCENTAGE (2) OFFERED NUMBER PERCENTAGE(2)
------ -------------- ------- ------ -------------
<S> <C> <C> <C> <C> <C>
EXECUTIVE
OFFICERS AND
DIRECTORS
Jeffrey Dreben(3)(5) 228,899 3.9% -- %
Lewiston, New York
Robert Nally(3) 228,899 3.9% -- %
Waterloo, Ontario
Directors and 491,548 8.5% -- %
Officers of
Company as a
Group
(5 persons)(4)
OTHER 5%
SHAREHOLDERS
Brant 1,534,905 26.6% -- %
Investments
Limited(5)
Toronto, Ontario
Prudential 610,750 10.6% -- %
Insurance Co. of
America
Mutual Life 359,200 6.2% -- %
Assurance
Company of
Canada
Waterloo,
Ontario
Westinghouse
Canada 359,200 6.2% -- %
Pension Master
Trust
Hamilton,
Ontario
BCE Inc. 339,200 5.9% -- %
Montreal, Quebec
Malcolm 228,824 3.9% -- %
Gissing(5)(6)
Oakville,
Ontario
SELLING
SHAREHOLDER
Murray Sinclair 100,000 1.7% 100,000 $
Toronto, Ontario
</TABLE>
NOTES:
(1) A person is deemed to be the beneficial owner of securities that can
be acquired by such person with 60 days of April 28, 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.
-54-
<PAGE>
(2) Percentage ownership of Common Shares is based on 5,767,628 Common
Shares outstanding on April 28, 1998 and Common Shares
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."
(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.
(6) Attributed to Mr. Gissing, a former director of the Company, are
28,180 of the Common Shares issuable upon exercise of warrants because
of Mr. Gissing's ownership of approximately 22.37% of the beneficial
interest in CVF Management Limited, holder of the warrants. See Note
3 above. 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".
As at the date hereof, Robert Nally, one of the directors and senior
officers of CVF, beneficially owns, directly or indirectly, 1,688,999 common
shares of Mindflight representing 20% of the outstanding common shares of
Mindflight, assuming the exercise of 1,420,572 outstanding special warrants of
Mindflight. None of the directors or senior officers of CVF hold voting
securities in any other of the Holdings.
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, 5,767,628 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
-55-
<PAGE>
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 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.
As at December 31, 1997, an amount of US$52,500 been accrued in respect of
cumulative unpaid dividends on the Series "A" Preferred Shares (of which
US$12,500 relates to 1997 and US$40,000 relates to prior years).
-56-
<PAGE>
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 December
31, 1997, after giving effect to this Offering (assuming no exercise of the
Over-Allotment Option).
<TABLE>
<CAPTION>
MINIMUM MAXIMUM
OFFERING OFFERING
-------- --------
<S> <C> <C> <C> <C>
Offering price ......................... $ $
Net tangible book value before this
Offering ............................... $ $
Increase in net tangible book value
attributable to this Offering(1) ....... $ $
Pro forma net tangible book value after
this Offering .......................... $ $
Dilution to subscribers ................ $ $
Percentage of dilution in relation to
the offering price ..................... % %
</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 $ per Common Share
for the maximum offering, representing a dilution to purchasers of Common Shares
hereunder of $ per Common Share or % of the offering price
(maximum offering).
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.
-57-
<PAGE>
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 (to April 28) 6.375 6.75 105,300
</TABLE>
On April 28, 1998 , the closing price of the Common Shares on the American
Stock Exchange was US$6.375 and there were 5,767,628 Common Shares outstanding
and held of record by approximately 327 shareholders.
-58-
<PAGE>
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 April 28, 1998, 90,000 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. 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 to indefinitely defer operation of the Service Agreement. 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 Mindflight. As
compensation for his services as Chairman, Mr. Nally receives $25,000 per year
and has received options to acquire 46,875 shares of Mindflight at $0.45 per
share.
-59-
<PAGE>
PLAN OF DISTRIBUTION
Under an agreement (the "Agency Agreement") dated ,
1998 among the Company, the Selling Shareholder and Moss, Lawson & Co. Limited
(the "Agent"), the Company and the Selling Shareholder 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
Common Shares, at a price of $ 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 $ 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 and will be released at
closing to the Company and the Selling Shareholder, as applicable, in payment
for Common Shares only if a minimum of 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 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
$ 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.
-60-
<PAGE>
The offering price for the Common Shares was determined by negotiation
between the Company, the Selling Shareholder 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 Shareholder. The
right is reserved to close the subscription books at any time without notice.
Closing will take place on or such later date as may
be agreed upon by the Company, the Selling Shareholder and the Agent, but in any
event before .
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 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.
-61-
<PAGE>
The consolidated balance sheet of the Company as of December 31, 1997 and
the related consolidated statements of operations, stockholders' equity and cash
flows 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 and cash flows 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 known as 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 New York City
and at its principal office in Toronto, Ontario.
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
-62-
<PAGE>
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.
-63-
<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 and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the 1997 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of CVF Corporation
at December 31, 1997 and the consolidated results of its operations and its cash
flows for the year then ended in conformity with accounting principles generally
accepted in the United States.
Kitchener, Canada, Ernst & Young
March 16, 1998. Chartered Accountants
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of CVF Corporation
We have audited the accompanying consolidated balance sheet of
CVF Corporation and Subsidiaries as of December 31, 1996 and the related
statements of operations, stockholders' equity and cash flows for the years
ended December 31, 1996 and 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CVF Corporation and
Subsidiaries as of December 31, 1996, and the results of its operations and cash
flows for each of the years ended December 31, 1996 and 1995, in conformity with
generally accepted accounting principles.
Feldman Sherb Ehrlich & Co., P.C.
(formerly known as Feldman Radin & Co., P.C.)
Certified Public Accountants
New York, New York
March 14, 1997
F-2
<PAGE>
CVF CORPORATION
CONSOLIDATED BALANCE SHEETS
[Expressed in U.S. Dollars]
As of December 31
<TABLE>
<CAPTION>
1997 1996
$ $
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT
Cash and cash equivalents 9,931,906 1,895,276
Restricted cash [NOTE 6] 682,361 --
Trade receivables 557,998 510,289
Inventory [NOTE 3] 390,125 225,209
Prepaid expenses and other 326,896 72,110
- ----------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 11,889,286 2,702,884
- ----------------------------------------------------------------------------------------------
Property and equipment, net of accumulated depreciation 169,851 217,579
Holdings, carried at cost or equity [NOTE 4] 2,107,060 2,051,913
Holdings, available for sale, at market [NOTE 4] 1,562,194 22,302,960
Goodwill, net of accumulated amortization [NOTE 5] 4,023,825 2,186,619
- ----------------------------------------------------------------------------------------------
TOTAL ASSETS 19,752,216 29,461,955
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
</TABLE>
F-3
<PAGE>
CVF CORPORATION
CONSOLIDATED BALANCE SHEETS (CONT.)
[Expressed in U.S. Dollars]
As of December 31
<TABLE>
<CAPTION>
1997 1996
$ $
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank indebtedness [NOTE 6] 824,577 707,324
Trade payables 461,697 410,254
Accrued expenses 1,403,740 1,057,385
Bonuses payable [NOTE 9] 500,000 --
Dividends payable on Series A preferred stock [NOTE 9] 52,500 --
Dividends payable on subsidiary's shares [NOTE 11] 165,200 155,000
Income taxes payable 1,820,598 892,790
- ----------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 5,228,312 3,222,753
- ----------------------------------------------------------------------------------------------
Long-term debt [NOTE 7] 559,697 438,332
Deferred income taxes [NOTE 8] 251,822 7,451,840
Preferred stock of subsidiaries [NOTE 11] 1,193,000 813,000
Redeemable Series A preferred stock, $0.001 par value,
authorized 500,000 shares,
issued and outstanding 25,000 shares [NOTE 9] 456,250 456,250
- ----------------------------------------------------------------------------------------------
2,460,769 9,159,422
- ----------------------------------------------------------------------------------------------
7,689,081 12,382,175
- ----------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY [NOTE 9]
Common stock, $0.001 par value, authorized 50,000,000 shares,
outstanding 5,729,449 [1996; 5,982,349]
and in treasury 262,900 [1996; 10,000] 5,992 5,992
Additional paid in capital 13,657,950 12,930,787
Treasury stock (1,862,049) (55,011)
Translation adjustment 374,959 (277,252)
Unrealized gain on available for sale securities 305,818 13,840,070
Accumulated deficit (419,535) (9,364,806)
- ----------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 12,063,135 17,079,780
- ----------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 19,752,216 29,461,955
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
</TABLE>
On behalf of the Board:
(Signed) JEFFREY DREBEN (Signed) ROBERT NALLY
Director Director
SEE ACCOMPANYING NOTES
F-4
<PAGE>
CVF CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
[Expressed in U.S. Dollars]
Year ended December 31
<TABLE>
<CAPTION>
1997 1996 1995
$ $ $
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SALES 1,685,399 1,866,176 763,009
Cost of sales 1,091,821 1,029,638 530,540
- -----------------------------------------------------------------------------------------------
GROSS MARGIN 593,578 836,538 232,469
- -----------------------------------------------------------------------------------------------
EXPENSES
Selling, general and administrative 5,367,541 3,342,739 2,379,488
Research and development 422,216 257,913 215,003
- -----------------------------------------------------------------------------------------------
5,789,757 3,600,652 2,594,491
- -----------------------------------------------------------------------------------------------
(Loss) from operations (5,196,179) (2,764,114) (2,362,022)
- -----------------------------------------------------------------------------------------------
OTHER INCOME AND (EXPENSES)
Interest income (expense), net 448,684 (47,700) (94,923)
Other income, net 52,642 102,933 246,533
(Loss) income from equity investees (145,165) (296,762) 881,091
Gain on sale of holdings [NOTE 4] 19,758,954 3,204,185 --
Minority interest -- 400,449 22,515
- -----------------------------------------------------------------------------------------------
20,115,115 3,363,105 1,055,216
- -----------------------------------------------------------------------------------------------
Income (loss) before provision
for income taxes 14,918,936 598,911 (1,306,806)
Provision for income taxes [NOTE 8] 5,919,665 892,790 --
- -----------------------------------------------------------------------------------------------
NET INCOME (LOSS) 8,999,271 (293,799) (1,306,806)
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
BASIC EARNINGS (LOSS) PER SHARE [NOTE 10] 1.52 (0.05) (0.26)
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
DILUTED EARNINGS (LOSS) PER SHARE [NOTE 10] 1.49 (0.05) (0.26)
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
BASIC WEIGHTED AVERAGE SHARES [NOTE 10] 5,870,553 5,989,849 4,978,115
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
DILUTED WEIGHTED AVERAGE SHARES [NOTE 10] 6,009,708 5,989,849 4,978,115
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES
F-5
<PAGE>
CVF CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Year ended December 31 [Expressed in U.S. Dollars]
<TABLE>
<CAPTION>
UNREALIZED
COMMON STOCK ADDITIONAL GAIN ON
PAID -IN ACCUMULATED TREASURY AVAILABLE TOTAL
SHARES AMOUNT CAPITAL DEFICIT STOCK FOR SALE TRANSLATION SHAREHOLDERS'
SECURITIES ADJUSTMENT EQUITY
$ $ $ $ $ $ $ $
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE - JANUARY 1, 1995 4,578,096 4,578 12,636,955 (7,764,201) -- -- (407,719) 4,469,613
SALE OF SHARES 185,822 186 486,017 -- -- -- -- 486,203
SHARES ISSUED IN CONNECTION
WITH REVERSE ACQUISITION 1,228,431 1,228 (192,185) -- -- -- -- (190,957)
NET (LOSS) -- -- -- (1,306,806) -- -- -- (1,306,806)
TRANSLATION ADJUSTMENT -- -- -- -- -- -- 130,467 130,467
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 1995 5,992,349 5,992 12,930,787 (9,071,007) -- -- (277,252) 3,588,520
PURCHASE OF TREASURY STOCK -- -- -- -- (55,011) -- -- (55,011)
NET (LOSS) -- -- -- (293,799) -- -- -- (293,799)
UNREALIZED GAIN ON SECURITIES
AVAILABLE FOR SALE, NET OF -- -- -- -- -- 13,840,070 -- 13,840,070
TAXES
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 1996 5,992,349 5,992 12,930,787 (9,364,806) (55,011) 13,840,070 (277,252) 17,079,780
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-6
<PAGE>
CVF CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Year ended December 31 [Expressed in U.S. Dollars]
<TABLE>
<CAPTION>
UNREALIZED
COMMON STOCK ADDITIONAL GAIN ON
PAID -IN ACCUMULATED TREASURY AVAILABLE TOTAL
SHARES AMOUNT CAPITAL DEFICIT STOCK FOR SALE TRANSLATION SHAREHOLDERS'
SECURITIES ADJUSTMENT EQUITY
$ $ $ $ $ $ $ $
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE - DECEMBER 31, 1996 5,992,349 5,992 12,930,787 (9,364,806) (55,011) 13,840,070 (277,252) 17,079,780
Purchase of treasury stock -- -- -- -- (1,807,038) -- -- (1,807,038)
Net income -- -- -- 8,999,271 -- -- -- 8,999,271
Dividends on Series A
preferred stock -- -- -- (54,000) -- -- -- (54,000)
Sale of available for sale -- -- -- -- -- (13,840,070) -- (13,840,070)
securities
Tax benefit of employee stock
transaction [NOTE 9] -- -- 727,163 -- -- -- -- 727,163
Unrealized gain on securities
available for sale, net of -- -- -- -- -- 305,818 -- 305,818
taxes
Translation adjustment -- -- -- -- -- -- 652,211 652,211
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 1997 5,992,349 5,992 13,657,950 (419,535) (1,862,049) 305,818 374,959 12,063,135
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES
F-7
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31 [Expressed in U.S. Dollars]
<TABLE>
<CAPTION>
1997 1996 1995
$ $ $
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
NET INCOME (LOSS) 8,999,271 (293,799) (1,306,806)
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS)
FROM OPERATING ACTIVITIES [NOTE 12] (19,256,776) (3,025,413) (702,600)
CHANGES IN OPERATING ASSETS AND
LIABILITIES [NOTE 12] 1,844,331 1,097,738 478,743
- -----------------------------------------------------------------------------------------------
CASH (APPLIED TO) OPERATING ACTIVITIES (8,413,174) (2,221,474) (1,530,663)
- -----------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
PURCHASE OF PROPERTY AND EQUIPMENT -- (174,316) (50,998)
INVESTMENTS IN AND ADVANCES TO EQUITY INVESTEES (865,605) (1,066,596) (317,304)
PROCEEDS FROM SALE OF HOLDINGS 20,389,424 3,683,362 --
ACQUISITIONS, NET OF CASH ACQUIRED (686,272) -- (190,957)
- -----------------------------------------------------------------------------------------------
CASH PROVIDED BY (APPLIED TO) INVESTING ACTIVITIES 18,837,547 2,442,450 (559,259)
- -----------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
INCREASE IN BANK INDEBTEDNESS 58,179 -- --
BORROWINGS OF DEBT 121,365 991,108 85,962
(PAYMENTS) OF DEBT -- (160,586) (23,643)
(PAYMENTS) BORROWINGS OF DEBT TO RELATED PARTIES -- (133,561) 1,026
ISSUANCE OF EQUITY SECURITIES 504,000
DEPOSITS OF RESTRICTED CASH (682,361) -- --
PURCHASE OF TREASURY STOCK (1,807,038) (55,011) --
MINORITY INVESTMENTS IN SUBSIDIARIES -- 586,835 292,000
- -----------------------------------------------------------------------------------------------
CASH (APPLIED TO) PROVIDED BY FINANCING ACTIVITIES (2,309,855) 1,228,785 859,345
- -----------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON
CASH AND CASH EQUIVALENTS (77,888) -- (33,667)
- -----------------------------------------------------------------------------------------------
CASH PROVIDED (APPLIED) DURING YEAR 8,036,630 1,449,761 (1,264,244)
CASH, BEGINNING OF YEAR 1,895,276 445,515 1,709,759
- -----------------------------------------------------------------------------------------------
CASH, END OF YEAR 9,931,906 1,895,276 445,515
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
CASH PAID DURING THE YEAR FOR INTEREST 163,346 116,616 33,390
- -----------------------------------------------------------------------------------------------
CASH PAID DURING THE YEAR FOR INCOME TAXES 4,200,000 -- --
- -----------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in U.S. Dollars]
1. ORGANIZATION AND BUSINESS DESCRIPTION
CVF Corporation [the "Company"] is a company incorporated under the laws of the
State of Nevada. In September 1995, the Company acquired all of the assets and
assumed all of the liabilities of Canadian Venture Founders Limited Partnership
["CVFLP"] in exchange for the issuance of its equity securities to the partners
of CVFLP. Pursuant to this transaction, the Company issued to CVFLP 4,763,918
common shares, 25,000 shares of its Series "A" Preferred Stock [the "Preferred
Shares"] and warrants [the "Warrants"] entitling CVFLP to purchase approximately
952,784 additional common shares.
The transaction has been accounted for as a reverse acquisition under the
purchase method for business combinations. Accordingly, the merger of the two
companies is recorded as a recapitalization of CVFLP, with CVFLP being treated
as the continuing entity. Prior to consummating the share exchange, the Company
did not have any significant operations. The cost of the acquisition was
recorded at the value of the Company's [the acquired company] net monetary
liabilities of $190,957 on the date of the exchange, in accordance with
Securities and Exchange Commission guidelines.
The Company is engaged primarily in the business of developing and managing
early stage and start-up companies engaged in the information and environmental
technologies areas. The Company's mandate is to acquire significant holdings in
new and emerging companies primarily in the technology area, to assist in the
management of such companies and through them to engage in the businesses
engaged in by such companies. The Company holds majority ownership positions
directly or indirectly in the following companies:
CANADIAN VENTURE FOUNDERS LEASING CORP. ["LEASING"], a wholly-owned subsidiary,
provides funding to various investees of the Company.
BIOREM TECHNOLOGIES, INC. ["BIOREM"] is an industrial biotech company located in
Waterloo, Canada engaged in the business of applying bioconversion and
biotransformation technology to a variety of industrial applications such as the
treatment or clean-up of organic toxic chemicals in soil or groundwater, the
treatment of industrial waste streams for liquids or air and for use in the food
processing, agriculture and pharmaceutical manufacturing industries. At
December 31, 1997, the Company had a 69% [69% in 1996] ownership interest in
Biorem.
GEMPRINT CORPORATION ["GEMPRINT"] is in the business of providing products and
services to the insurance industry, as well as the consumer and wholesale
jewelry markets to enable diamonds and other precious gems to be uniquely
identified non-invasively using a low power laser imaging system unique to
Gemprint. The results are stored in a database for later verification and
recovery of lost or stolen gems. At December 31, 1997, the Company had a 67%
[64% in 1996] ownership interest in Gemprint.
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in U.S. Dollars]
1. ORGANIZATION AND BUSINESS DESCRIPTION CONT'D
SOLARIA RESEARCH ENTERPRISES, LTD. ["SOLARIA"] is a Waterloo, Canada company in
the business of developing, manufacturing and marketing a line of electronic
motor speed control products for battery-operated vehicles. At December 31,
1997, the Company had a 67% [51% in 1996] ownership interest in Solaria.
DANTEC ELECTRONICS LIMITED, ["DANTEC ELECTRONICS"] was purchased August 31, 1997
and at December 31, 1997 the Company has a 100% ownership interest in Dantec
Electronics. The Company's investment in Dantec Electronics is held through
1246680 Ontario Limited, a wholly-owned subsidiary. Dantec Electronics, located
in Waterloo, Canada, manufactures and sells electronic moisture detection and
control systems with agricultural applications.
EASTVIEW MARKETING, ONE, LLC ["EASTVIEW"] a wholly owned subsidiary, was
incorporated in the state of New York on December 19, 1997 for the purpose of
developing an infommercial to market in the United States natural fertilizers
and environmentally safe organic herbicides manufactured by Ecoval Inc., an
equity holding of CVF Corporation.
GRAND ISLAND MARKETING, TWO, LLC ["GRAND ISLAND2"] a wholly owned subsidiary,
was incorporated on December 17, 1997 in the state of New York. When operations
begin in 1998, Grand Island2 will market and arrange environmental clean up
contracts with real estate developers in the United States using the services of
Biorem Technologies, Inc., and other soil remediation companies.
In 1997, CVF Corp. changed its name to CVF Corporation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These consolidated financial statements have been prepared by management in
accordance with accounting principles generally accepted in the United States.
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.
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in U.S. Dollars]
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONT'D
Holdings in which the Company has a 20-50% ownership position and significant
influence are accounted for under the equity method of accounting, such that the
Company records profits and losses to the extent of the Company's total holdings
in the investee, comprising its equity interest, advances and loans.
Holdings in debt securities are classified as "held to maturity", if the Company
has the intent and ability to hold the security to maturity. Holdings held to
maturity are carried at cost.
Other holdings are classified as "available for sale", and are revalued at each
period-end with the unrealized gain or loss, net of tax effect, recorded as an
element of stockholders' equity. The available for sale classification includes
debt and equity securities which are carried at fair value. Gains or losses on
sales of securities are recognized by the specific identification method.
FOREIGN CURRENCY TRANSLATION
The Company uses the U.S. dollar as the reporting currency of its consolidated
financial statements. However, the functional currency of the Company and its
Canadian subsidiaries is the Canadian dollar. Accordingly, all balance sheet
amounts of the Company and its Canadian subsidiaries are translated to U.S.
dollars using the exchange rates in effect at the applicable year-end. Income
statement amounts of the Company and its Canadian subsidiaries are translated to
U.S. dollars at the average exchange rate for the applicable year. The gains
and losses resulting from the translation of the Company's financial statements
into U.S. currency are recorded as an element of stockholders' equity.
Transactions and balances denominated in currencies other than the functional
currencies of the Company or its subsidiaries are remeasured in the applicable
functional currency. Translation adjustments arising on such remeasurement are
included in the determination of net income (loss).
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid temporary cash investments, with an
original maturity of three months or less when purchased, to be cash
equivalents.
TRADE RECEIVABLES
Trade receivables are presented net of allowance
for doubtful accounts. The allowance was $59,300 at December 31, 1997 [$29,200
at December 31, 1996]. Amounts charged to expense were $8,500 during the year
ended December 31, 1997 [$29,200 in 1996, $3,600 in 1995].
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in U.S. Dollars]
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONT'D
INVENTORY
Inventory is stated at the lower of cost or market using first-in, first-out
method of costing.
ADVERTISING
The Company expenses the production costs of broadcast advertising upon the
first airing of the advertisement. Total unamortized advertising costs included
in prepaid expenses at December 31, 1997 were $234,771 [$nil in 1996 and 1995]
respectively. Other types of advertising costs are expensed as incurred.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated using the
straight-line and declining balance methods over the estimated useful lives of
the assets, which range from 5 to 10 years. Accumulated depreciation at
December 31, 1997 was $484,134 [$309,816 in 1996].
GOODWILL
Goodwill is recorded in connection with the acquisition of subsidiaries.
Goodwill also exists in connection with the acquisition of equity basis
holdings, representing the difference between the underlying equity interest
purchased and the amount paid for the interest. All goodwill is being amortized
over a period of 15 years. Amounts amortized in connection with subsidiaries
are charged to amortization expense. Amounts amortized in connection with
equity basis holdings are expensed as a reduction in the carrying value of the
holdings.
The Company assesses the recoverability of goodwill by determining whether the
amortization of goodwill over its remaining life can be recovered through
projected, undiscounted, future cash flows of the related companies.
MINORITY INTEREST
Minority common equity interests are charged with their proportionate share of
subsidiary losses to the extent positive equity-adjusted holdings are available.
Where excess losses are incurred by the parent they will be charged against
minority interests in the event future income becomes available or minority
interests contribute additional equity.
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in U.S. Dollars]
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONT'D
NET INCOME (LOSS) PER SHARE
The Company has adopted Statement of Financial Accounting Standard No. 128
["SFAS 128"], EARNINGS PER SHARE. Net income (loss) per common share has been
restated for all periods presented to conform to the provisions of SFAS 128.
Basic earnings (loss) per share is computed by dividing net income (loss)
available to common stockholders by the weighted average number of common shares
outstanding during the period. Diluted earnings (loss) per share reflects the
per share amount that would have resulted if diluted potential common stock had
been converted to common stock, as prescribed by SFAS 128.
REVENUE RECOGNITION
Revenue is recognized when products are shipped or services are performed.
STOCK-BASED COMPENSATION
The Company and its subsidiaries account for stock and options issued for
services in accordance with APB Opinion 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES, by reference to the fair market value of the Company's stock on the
date of stock issuance or option grant. The companies use the "intrinsic"
method for determining compensation expense whereby expense is recorded for the
quoted market price of the stock issued, or in the case of options, for the
difference between the stock's quoted market price on the date of grant and the
option exercise price. Where the exercise price approximates the price of the
underlying shares no compensation expense is recorded. All compensation options
issued by the Company and its subsidiaries have been issued with an exercise
price greater than or equal to the market price of the shares.
RESEARCH AND DEVELOPMENT
Research costs and development costs are expensed as incurred. Research and
development expenditures are reduced by any related investment tax credits and
government grants.
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in U.S. Dollars]
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONT'D
INCOME TAXES
The Company accounts for income taxes using the liability method in which a
deferred tax asset or liability is determined based upon the tax effect of the
differences between the financial statement and tax basis of assets and
liabilities, as measured by the enacted rates which will be in effect when these
differences reverse. Provision is made for all applicable U.S. and foreign
income taxes pursuant to this standard. Canadian tax credits attributable to
research and development expenditures which are refundable regardless of whether
there is taxable income, are accounted for as a reduction in research and
development expense.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheet for cash and cash
equivalents, receivables and accounts payable approximate fair value based on
the short-term maturity of these instruments. Management believes that the fair
market value of advances and notes receivable, included in holdings, and
long-term debt is not materially different than the carrying value.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, The Financial Accounting Standards Board issued Statement No. 131,
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, which is
required to be adopted for the Company's financial statements for the year ended
December 31, 1998. Under the new requirements, financial information about
operating segments should be reported on the basis that is used internally by
the Company for evaluating operating segments and resource allocation decisions.
The Company has not determined the effect, if any, of this pronouncement on the
segment disclosures in its consolidated financial statements.
COMPARATIVE FIGURES
Certain amounts on the previously reported 1996 balance sheet have been
reclassified in order to conform with the current year's presentation.
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in U.S. Dollars]
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, private company which
manufactures and markets natural fertilizers and environmentally safe
organic herbicides.
b. Dantec Systems Corporation ["Dantec Systems"], a Waterloo, Canada, private
company in the business of developing, manufacturing and marketing a range
of automated, precision moisture detection and manufacturing control
systems.
c. Petrozyme Technologies, Inc. ["Petrozyme"], a Waterloo, Canada, private
company in the business of developing and marketing processes for the
degradation of petroleum waste products.
In addition, the Company has holdings in debt and equity securities of the
following companies:
a. Certicom Corp. ["Certicom"], a Toronto, Canada public company in the
business of digital information security products.
b. TurboSonic, Inc. ["TurboSonic"], a Waterloo, Canada public company in the
business of air pollution control.
c. Mindflight Corporation ["Mindflight"], a Waterloo, Canada public company in
the business of developing and supplying technologies for both paper and
electronic based payment systems.
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in U.S. Dollars]
4. HOLDINGS CONT'D
Holdings consisted of the following at December 31, 1997:
<TABLE>
<CAPTION>
HOLDINGS
PERCENTAGE 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] [NOTE 14] 0.5% 469,711
59,763 preferred shares 251,677
- -------------------------------------------------------------------------------
251,677 469,711
TurboSonic
1,334,977 common shares [iv] 13% 392,483
- -------------------------------------------------------------------------------
Mindflight
1,428,572 special warrants [v] 17% 700,000
- -------------------------------------------------------------------------------
Other notes and advances [vi] 19,814
- -------------------------------------------------------------------------------
Total 2,107,060 1,562,194
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in U.S. Dollars]
4. HOLDINGS cont'd
Holdings consisted of the following at December 31, 1996:
<TABLE>
<CAPTION>
HOLDINGS
HOLDINGS AVAILABLE FOR
PERCENTAGE AT COST OR EQUITY SALE AT FAIR
- -------------------------------------------------------------------------------
VALUE
OWNERSHIP $ $
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Ecoval
11,733 common shares 30% (2,838,006)
Notes and advances [vi] 3,119,660
- -------------------------------------------------------------------------------
281,654
Dantec Systems
34,360 common shares 41% 742,748
- -------------------------------------------------------------------------------
Petrozyme
50 common shares 50% (109,288)
250,000 Class C non-voting shares 100% 250,000
140,712
- -------------------------------------------------------------------------------
Certicom
898,605 common shares 12% 22,302,960
89,645 preferred shares 509,670
- -------------------------------------------------------------------------------
509,670 22,302,960
Turbotak
Notes and advances [vi] 367,099
- -------------------------------------------------------------------------------
Other notes and advances [vi] 10,030
- -------------------------------------------------------------------------------
Total 2,051,913 22,302,960
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</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.
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in U.S. Dollars]
4. HOLDINGS CONT'D
[iii] During 1997, the Company disposed of 883,000 common shares of Certicom
for proceeds of $20,389,424, realizing a gain of $19,409,357. As at
December 31, 1997, the common shares of Certicom have a carrying value of
$16,822. Accordingly, aggregate unrealized gains of $289,849 [net of
deferred income taxes of $163,040] have been recorded as an element of
stockholders' equity for the year ended December 31, 1997.
[iv] During 1997, notes of $732,099 of Turbotak were converted into 315,572
common shares of Turbotak. Turbotak Technologies Inc. merged with Sonic
Environmental, Inc. during 1997 to form TurboSonic, Inc. The conversion
rate to TurboSonic shares was 4.23 shares for each share of Turbotak. As
at December 31, 1997, the common shares of TurboSonic have a carrying
value at cost of $367,532. Accordingly, aggregate unrealized gains of
$15,969 [net of deferred income taxes of $8,982] have been recorded as an
element of stockholders' equity for the year ended December 31, 1997.
[v] The investment in Mindflight represents a private placement purchase of
1,428,572 special warrants allowing the Company to receive one common
share of Mindflight at no additional cost. At December 31, 1997, the
market value of shares of Mindflight listed on the Vancouver Stock
Exchange was Cdn. $0.70 [U.S. $0.49] per share. An officer and director
of the Company holds approximately 20% of the common shares of
Mindflight.
[vi] The notes and advances bear interest at prime plus 2%, are unsecured,
payable on demand, and denominated in Canadian currency. Canadian prime
rate at December 31, 1997 was 6% [4.75% in 1996]. The notes have been
classified as long-term as the Company does not intend to demand
repayment in the next year.
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in U.S. Dollars]
4. HOLDINGS CONT'D
The following table gives certain combined summarized financial information
related to the Company's equity holdings:
<TABLE>
<CAPTION>
1997 1996 1995
INCOME STATEMENT DATA $ $ $
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales 1,560,122 1,396,027 1,090,773
Gross (loss) profit on sales (16,114) 70,789 237,524
Net loss (7,152,634) (2,713,912) (1,644,736)
- -------------------------------------------------------------------------
CVF CORPORATION'S SHARE OF NET LOSS (1,899,287) (840,929) (563,113)
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
BALANCE SHEET DATA
Current assets 2,665,662 1,260,130 1,820,937
Non-current assets 4,029,052 5,924,516 8,232,657
- -------------------------------------------------------------------------
TOTAL ASSETS 6,694,714 7,184,646 10,053,594
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
Current liabilities 1,077,528 1,204,872 1,904,558
Non-current liabilities 2,811,313 11,581,846 9,798,172
Equity (deficit) 2,805,873 (5,602,072) (1,649,136)
- -------------------------------------------------------------------------
TOTAL LIABILITIES AND EQUITY 6,694,714 7,184,646 10,053,594
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
CVF CORPORATION'S SHARE OF
EQUITY (ACCUMULATED DEFICIT) 573,360 (1,659,763) (1,030,388)
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
</TABLE>
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in U.S. Dollars]
4. HOLDINGS cont'd
The amount of CVF Corporation's above share of net loss differs from income
(loss) from equity investees appearing in the statement of operations primarily
due to gains on the reduction of ownership in equity investees of approximately
$1,930,000 and amortization of goodwill. The goodwill related to equity
investees is as follows:
<TABLE>
<CAPTION>
ACCUMULATED NET BOOK
COST AMORTIZATION VALUE
AS AT DECEMBER 31, 1997 $ $ $
- -------------------------------------------------------------------------
<S> <C> <C> <C>
ECOVAL 1,947,502 288,147 1,659,355
PETROZYME 129,500 12,950 116,550
DANTEC SYSTEMS 971,603 356,553 615,050
- -------------------------------------------------------------------------
3,048,605 657,650 2,390,955
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
<CAPTION>
ACCUMULATED NET BOOK
COST AMORTIZATION VALUE
AS AT DECEMBER 31, 1996 $ $ $
- -------------------------------------------------------------------------
ECOVAL 1,502,478 200,331 1,302,147
PETROZYME 135,050 1,501 133,549
DANTEC SYSTEMS 964,800 304,286 660,514
- -------------------------------------------------------------------------
2,602,328 506,118 2,096,210
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
</TABLE>
During 1997, amortization of goodwill related to equity investees totaled
$177,256 [$185,233 in 1996, $151,174 in 1995].
The investee companies have various debt and equity securities outstanding which
are convertible into common stock of the respective investee companies. Any
such conversions would not materially decrease or increase the Company's
interest in the earnings or net assets of any investee.
F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in U.S. Dollars]
5. GOODWILL
<TABLE>
<CAPTION>
ACCUMULATED NET BOOK
COST AMORTIZATION VALUE
AS AT DECEMBER 31, 1997 $ $ $
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Solaria 435,444 143,674 291,770
Biorem 223,566 46,936 176,630
Gemprint 2,391,709 379,018 2,012,691
Dantec Electronics 1,576,911 34,177 1,542,734
- -------------------------------------------------------------------------
4,627,630 603,805 4,023,825
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
<CAPTION>
ACCUMULATED NET BOOK
COST AMORTIZATION VALUE
AS AT DECEMBER 31, 1996 $ $ $
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Solaria 360,183 125,819 234,364
Biorem 188,750 33,220 155,530
Gemprint 2,057,468 260,743 1,796,725
- -------------------------------------------------------------------------
2,606,401 419,782 2,186,619
- -------------------------------------------------------------------------
</TABLE>
During 1997, amortization of goodwill in subsidiaries totaled $204,197 [$158,861
in 1996; $157,027 in 1995].
6. BANK INDEBTEDNESS
Biorem has bank lines of credit available with two major Canadian banks. The
first line has a maximum availability of Cdn. $300,000 [U.S. $210,000], bears
interest at 3% and is payable on demand. At December 31, 1997, an amount of
Cdn. $300,000 [U.S. $210,000] has been drawn on this line. The other line has a
maximum availability of Cdn. $415,000 [U.S. $290,500] with a balance of Cdn.
$425,000 [U.S. $297,500] outstanding at December 31, 1997. The amount drawn on
this facility bears interest at prime plus 1% and is payable on demand.
Canadian prime rate at December 31, 1997 was 6%. These facilities are
guaranteed by the Company and are secured by term deposits of Cdn. $300,000
[U.S. $210,000] and Cdn. $422,414 [U.S. $295,690].
Gemprint has bank indebtedness of Cdn. $190,479 [U.S. $133,335] with a major
Canadian bank. The demand operating loan bears interest at prime plus 1%. The
loan is guaranteed by CVF Corporation and is secured by a term deposit of Cdn.
$250,797 [U.S. $175,558].
F-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in U.S. Dollars]
6. BANK INDEBTEDNESS cont'd
The weighted average interest rate on bank indebtedness during 1997 was 5%.
In 1996, Biorem had bank lines of credit available with two major Canadian
banks. The first line had a maximum availability of Cdn. $466,000 [U.S.
$326,200], bore interest at 3% and was payable on demand. At December 31, 1996,
an amount of Cdn. $385,000 [U.S. $269,500] had been drawn on this line. The
other line had a maximum availability of Cdn. $300,000 [U.S. $210,000] with a
balance of Cdn. $300,000 [U.S. $210,000] outstanding at December 31, 1997. The
amount drawn on this facility bore interest at prime plus 1.5% and was payable
on demand. Canadian prime rate at December 31, 1996 was 4.75%. In 1996,
Gemprint had bank indebtedness of Cdn. $190,479 [U.S. $133,335] with a major
Canadian bank. The operating loan bore interest at prime plus 1%. The weighted
average interest rate on bank indebtedness during 1996 was 6.1%.
7. LONG TERM DEBT
Long-term debt comprises the following:
<TABLE>
<CAPTION>
1997 1996
$ $
- -------------------------------------------------------------------------
<S> <C> <C>
Convertible debenture issued by Gemprint,
denominated in Canadian dollars, bearing
interest at 5% per annum and due May 1,
2001. Convertible at the option of the
holder into Gemprint common stock at a
price predicated on the price paid
in the next third party common stock
sale in excess of $730,000. 268,857 219,000
Non-convertible debenture issued by Gemprint,
denominated in Canadian dollars, bearing
interest at 13.5%, repayable in February 2000. 140,000 136,875
Other 150,840 82,457
- -------------------------------------------------------------------------
559,697 438,332
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
</TABLE>
The fair values of long-term debt instruments approximate their carrying value.
F-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in U.S. Dollars]
8. INCOME TAXES
Details of the income tax provision are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
$ $ $
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Current - U.S. 5,839,765 892,790 --
Deferred - U.S. 79,900 -- --
- -------------------------------------------------------------------------
INCOME TAX PROVISION 5,919,665 892,790 --
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
</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>
1997 1996 1995
$ $ $
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory U.S. Federal income tax rate 35% 35% 35%
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
Income tax (provision) benefit
computed at statutory rate (5,235,000) (248,000) 373,000
Tax benefit of net operating loss
carryforward -- 32,000 --
Tax effected losses of equity
investees not available for
deduction (684,665) (676,790) (341,000)
Tax benefit of net operating
losses not recognized -- -- (32,000)
- -------------------------------------------------------------------------
PROVISION FOR INCOME TAXES REPORTED (5,919,665) (892,790) --
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
</TABLE>
As of December 31, 1997, the Company had net deferred tax assets of $nil [$nil
in 1996] after a valuation allowance of $2,600,000 [$1,870,000 in 1996].
Deferred income tax liabilities of $172,022 [$7,451,840 in 1996] are recorded in
connection with the unrealized gain attributable to the securities available for
sale valued at market. An additional $79,800 is related to prepaids expensed
for tax purposes.
F-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in U.S. Dollars]
8. INCOME TAXES cont'd
At December 31, 1997, the Company had losses available for carryforward in
certain of its Canadian subsidiaries of approximately $7,431,220 available to
reduce future years' income for tax purposes in these subsidiaries. These
losses expire as follows:
<TABLE>
<CAPTION>
$
- -------------------------------------------------------------------------
<S> <C>
1998 48,458
1999 609,166
2000 970,577
2001 1,377,208
2002 857,429
Beyond 3,568,382
- -------------------------------------------------------------------------
7,431,220
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
</TABLE>
9. STOCKHOLDERS' EQUITY
The Company's authorized capital consists of 50,000,000 common shares, $0.001
par value, and 500,000 Preferred shares, $0.001 par value.
COMMON SHARES
Holders of the common shares are entitled to one vote per share on each matter
submitted to vote at any meeting of the shareholders. Common shares do not
carry cumulative voting rights, and, therefore, holders of a majority of the
outstanding shares of common shares will be able to elect the entire Board of
Directors, and, if they do so, minority shareholders would not be able to elect
any members to the Board of Directors. The Company's Board of Director's has
authority, without the action by the Company's shareholders, to issue all or any
portion of the authorized but unissued common shares, which would reduce the
percentage ownership of the Company of its shareholders and which may dilute the
book value of the common shares. Dividends declared on the common shares are
payable in U.S. dollars.
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
F-24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in U.S. Dollars]
9. STOCKHOLDERS' EQUITY CONT'D
officers primarily as compensation for the related personal tax liabilities.
The net cash outlay to the Company was approximately $250,000.
During the year, the Company also repurchased 252,900 common shares for
aggregate cash consideration of $1,807,038.
REDEEMABLE PREFERRED STOCK
Preferred shares may be issued in one or more series as may from time to time be
determined by the Board of Directors. Each series shall be distinctly
designated.
The Company currently has outstanding a series of non-voting Preferred Stock
designated as Series "A" Preferred Stock. Each share of Series "A" Preferred
Stock has a stated value [the "Stated Value"] of the U.S. dollar equivalent of
Cdn. $25 determined at the date of issuance by reference to the noon spot rate
for conversion of Canadian dollars into U.S. dollars as published by the
National Bank of Canada on the business day immediately preceding the date of
issuance. The holders of Series "A" Preferred Stock are entitled to cumulative
dividends at the rate of 5% annually of the Stated Value plus accrued but unpaid
dividends, to be paid in U.S. dollars. The dividends have priority over any
payments of dividends on common shares and on all other shares of preferred
stock ranking junior to the Series "A" Preferred Stock.
The Company may, at its option and at any time, redeem all or part of the Series
"A" Preferred Stock from the holders thereof. Additionally, at any time after
August 20, 2000, a holder of the Series "A" Preferred Stock may require the
Company to redeem any or all of the Series "A" Preferred Stock held by such
holder. The redemption price shall be the Stated Value plus all accrued but
unpaid dividends. In light of the future mandatory redemption feature, the
preferred stock is classified outside of permanent equity. As at December 31,
1997, an amount of $52,500 has been accrued in respect of cumulative unpaid
dividends, of which $12,500 relates to 1997 and $40,000 relates to prior years.
F-25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in U.S. Dollars]
9. STOCKHOLDERS' EQUITY cont'd
WARRANTS
As at December 31, 1997 and 1996, 952,784 Warrants are outstanding. Each
Warrant entitles the holder to purchase one common share at a price of Cdn.
$3.05 per share. CVFLP distributed the Warrants to Canadian Venture Founders
Management Limited, its general partner at that time. Until September 20, 2000,
the Warrants may only be exercised if a former limited partner of CVFLP sells
any common shares which were issued to such limited partner in connection with
the reverse takeover described in note 1. In such event, the Warrant holders
may purchase one common share for each five common shares sold by such limited
partner. Any Warrants not exercised before September 20, 2000, may be exercised
by the holder during the six month period immediately following September 20,
2000. As of December 31, 1997 there were no Warrants exercisable. All shares
issuable upon exercise of the Warrants will be restricted securities as that
term is defined in Rule 144 under the 1933 Securities Act of the United States.
F-26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in U.S. Dollars]
10. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
1997 1996 1995
$ $ $
-----------------------------------
<S> <C> <C> <C>
Numerator:
Net income (loss) 8,999,271 (293,799) (1,306,806)
Dividends on Series A preferred
stock (54,000) -- --
-----------------------------------
Numerator for basic and diluted
earnings (loss) per share -
income (loss) available to
common stockholders 8,945,271 (293,799) (1,306,806)
-----------------------------------
Denominator:
Denominator for basic earnings
(loss) per share - weighted
average shares outstanding 5,870,553 5,989,849 4,978,115
Effect of dilutive securities
Warrants 139,155 -- --
-----------------------------------
Dilutive potential common shares
Denominator for diluted earnings
(loss) per share - adjusted
weighted-average shares and
assumed conversions. 6,009,708 5,989,849 4,978,115
-----------------------------------
-----------------------------------
Basic earnings (loss) per share 1.52 (0.05) (0.26)
-----------------------------------
-----------------------------------
Diluted earnings (loss) per share 1.49 (0.05) (0.26)
-----------------------------------
-----------------------------------
</TABLE>
F-27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in U.S. Dollars]
11. BUSINESS ACQUISITION AND SUPPLEMENTARY SUBSIDIARY INFORMATION
DANTEC ELECTRONICS
On August 28, 1997, the Company acquired 100% of the outstanding common share
capital of Dantec Electronics. The total consideration was Cdn. $2,825,000
[U.S. $1,977,500] consisting of a cash payment of Cdn. $1,615,000 [U.S.
$1,130,500], Cdn. $250,000 [U.S. $175,000] to be paid in equal monthly
installments over 25 months, and 960,000 special Class A shares of 1246680
Ontario Limited, a wholly-owned subsidiary of the Company which was incorporated
for the purpose of holding the Dantec Electronics investment. These Class A
shares are non-voting, non-cumulative, convertible into common shares of 1246680
Ontario Limited on a one-for-one basis and redeemable and retractable at Cdn. $1
per share.
This acquisition was accounted for as a purchase, with the results of operations
of Dantec Electronics included in the Company's accounts from the date of
acquisition. Assets and liabilities acquired at approximate fair values is
summarized as follows:
<TABLE>
<CAPTION>
$
- -------------------------------------------------------------------------
<S> <C>
Current assets [including cash of $42,000] 799,500
Property and equipment 30,000
Goodwill 1,577,000
Current liabilities (429,000)
- -------------------------------------------------------------------------
TOTAL CONSIDERATION 1,977,500
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
</TABLE>
If the acquisition of Dantec Electronics had occurred on January 1, 1997, the
unaudited pro forma sales and net income of the Company would have been
approximately $1,602,000 and $14,000 respectively.
GEMPRINT
During 1997, the Company's ownership interest in Gemprint increased by 3%. This
is the net effect of two events. The first is a reduction in ownership due to
the dilutive effect of the conversion of 9,600,000 Warrants to common shares,
4,920,000 of which were converted by the Company. The second transaction is the
purchase of a total of 2,182,263 Class A and B voting shares or 6.6% of the
outstanding voting shares of Gemprint. The consideration for this purchase was
Cdn. $500,000 [U.S. $350,000] which was accounted for as an increase in
goodwill.
F-28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in U.S. Dollars]
11. BUSINESS ACQUISITION AND SUPPLEMENTARY SUBSIDIARY INFORMATION CONT'D
In addition to Class A voting shares, Gemprint has issued Class B and C voting
shares which have cumulative dividend rates of 10%, are retractible by the
holder at face value plus dividends in arrears, and are convertible to Class A
common shares on a one-to-one basis. The Class B shares held by third parties
have been classified as a liability. The remaining Class B and all of the Class
C shares are held by CVF. The timing of these retractions are restricted to
specific time periods and Gemprint has received a notice to retract Cdn.
$250,000 by a third party investor. Cumulative dividends payable to third party
investees of $167,000 have been accrued in these consolidated statements.
SOLARIA
During 1997, the Company acquired an additional 16% ownership interest in
Solaria for cash consideration of Cdn. $123,893 [U.S. $86,725] which was
accounted for as a purchase of goodwill.
Certain of the Company's subsidiaries have debt and equity securities
outstanding which are convertible into common stock of the respective
subsidiaries. Any such conversions would not materially decrease or increase
the Company's interest in the net assets of any subsidiary.
SUBSIDIARY STOCK OPTIONS
The Company and certain of its subsidiaries have outstanding options granted to
employees and directors. A total of 42,500 options were outstanding to
employees of the company as at December 31, 1997. In the event the options
granted by its subsidiaries are exercised, the Company's interests will be
diluted. A summary of the stock options and shares outstanding as at December
31, 1997 for those consolidated entities which have issued options are as
follows:
<TABLE>
<CAPTION>
TOTAL NUMBER
NAME OF NUMBER OF VOTING SHARES
SUBSIDIARY OPTIONS OUTSTANDING
- -------------------------------------------------------------------------
<S> <C> <C>
Biorem 124,000 1,201,650
Gemprint 3,572,383 32,986,168
Solaria 4,000 646,815
</TABLE>
For purposes of pro forma disclosures pursuant to SFAS 123 ACCOUNTING FOR
STOCK-BASED COMPENSATION, the Company has determined the fair value for the
above options at their date of grant using a Black-Scholes option pricing model
which was developed for use in estimating the fair value of traded options which
have no vesting restrictions and are fully transferable. 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.
F-29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in U.S. Dollars]
12. SUPPLEMENTARY INFORMATION ON CASH FLOWS
Adjustments to net income (loss) from operating activities for the years ending
December 31, are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
$ $ $
- -------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FROM OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION 277,113 282,459 201,006
LOSS (GAIN) FROM EQUITY AFFILIATES 145,165 296,762 (881,091)
GAIN ON SALE OF HOLDINGS (19,758,954) (3,204,185) --
MINORITY INTEREST IN EARNINGS
(LOSSES) OF SUBSIDIARIES -- (400,449) (22,515)
DEFERRED INCOME TAX EXPENSE 79,900 -- --
- -------------------------------------------------------------------------
(19,256,776) (3,025,413) (702,600)
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
</TABLE>
Changes in operating assets and liabilities for the years ending December 31,
are as follows;
<TABLE>
<CAPTION>
1997 1996 1995
$ $ $
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Decrease (increase) in trade
receivables 511,075 (172,437) (201,536)
Decrease (increase) in inventory 41,433 (3,617) (170,543)
(Increase) decrease in prepaid
expenses
and other (261,946) 15,010 59,346
Decrease (increase) in other assets -- 68,588 (64,609)
Increase in trade payables 51,443 -- --
Increase in accounts payable and
accrued expenses 632,969 378,326 855,059
Increase in income taxes payable 887,468 892,790 --
(Decrease) in deferred revenue (18,111) -- --
(Decrease) increase in other
current liabilities -- (80,922) 1,026
- -------------------------------------------------------------------------
1,844,331 1,097,738 478,743
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
</TABLE>
F-30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in U.S. Dollars]
13. SEGMENTED INFORMATION
Substantially, all of the Company's operations and identifiable assets are
located in Canada. Export sales, primarily to the U.S., amounted to
approximately $826,000 for the year ended December 31, 1997 [$1,116,000 in 1996,
$454,000 in 1995].
14. SUBSEQUENT EVENTS
[a] On January 29, 1998 the Company was listed on the American Stock Exchange.
[b] The remaining 15,605 common shares of Certicom were sold in January and
February 1998 for net proceeds of approximately $375,000.
[c] On January 28, 1998 the Company incorporated, in the State of Delaware, a
wholly-owned subsidiary called Grand Island Marketing, Inc. ["Grand Inc."].
[d] On January 29, 1998 Grand Inc. entered into an agreement with 21st Century
Health Care (1996) Inc., a company incorporated in the province of Ontario,
Canada, and an individual to form a partnership known as "Elements". Grand
Inc. paid an initial contribution of $1,500,000 and has a 69% voting
interest and a 51% economic interest in the partnership. If the Elements
partnership fails to meet its business plan by January 27, 2000, Grand Inc.
will be able to, for a nominal investment, increase its economic interest
to 68%. Elements was formed to carry on the business of operating retail
stores offering natural health and food products and health services
including naturopathic and homeopathic medicine and chiropractic services,
as well as products manufactured by Ecoval.
[e] On March 4, 1998 the Company purchased 120,000 shares in Ecoval to increase
its holdings to 27% from 24% as at December 31, 1997. The consideration
for these shares was $421,875 and 40,179 shares of the Company.
[f] The Company completed a private placement of 100,000 of its shares for
total cash proceeds of $400,000 on March 13, 1998.
F-31
<PAGE>
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 years ended December
31:
<TABLE>
<CAPTION>
1997 1996 1995
$ $ $
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Net earnings (loss) under US GAAP 8,999,271 (293,799) (1,306,806)
Adjustments (net of income taxes
thereon):
Deferred development costs (b) 95,311 12,037 12,079
Class B common shares of Gemprint (c) (156,474) (114,665) --
- -------------------------------------------------------------------------
NET EARNINGS (LOSS) UNDER
CANADIAN GAAP 8,938,108 (369,427) (1,294,727)
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
US GAAP CANADIAN GAAP
1997 1996 1995 1997 1996 1995
$ $ $ $ $ $
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
EARNINGS (LOSS)
PER SHARE (f)
Basic earnings
(loss) per share 1.52 (0.05) (0.26) 1.51 (0.07) (0.26)
Fully diluted earnings
per share (f) 1.49 (0.05) (0.26) 1.32 (0.07) (0.26)
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1997 1996
$ $
<S> <C> <C>
TOTAL ASSETS UNDER US GAAP 19,752,216 29,461,955
Adjustments:
Holdings, available for sale,
at market
Investments, at equity (a) (477,840) (21,291,910)
Deferred development costs (b) 92,663 8,787
Consolidation of Petrozyme (c) (76,633) 124,252
- ---------------------------------------------------------------------------
TOTAL ASSETS UNDER CANADIAN GAAP 19,290,406 8,303,084
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
</TABLE>
15. SUMMARY OF MATERIAL DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GAAP) IN THE UNITED STATES AND CANADA CONT'D
<TABLE>
<CAPTION>
1997 1996
$ $
F-32
<PAGE>
- -------------------------------------------------------------------------
<S> <C> <C>
TOTAL LIABILITIES UNDER US GAAP 7,869,081 12,382,175
Adjustments:
Deferred income taxes on
available-for sale shares (a) (172,022) (7,451,840)
Consolidation of Petrozyme (c) 29,346 103,867
- -------------------------------------------------------------------------
TOTAL LIABILITIES UNDER CANADIAN GAAP 7,546,405 5,034,202
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
<CAPTION>
1997 1996
$ $
- -------------------------------------------------------------------------
<S> <C> <C>
TOTAL SHAREHOLDERS' EQUITY UNDER US GAAP 12,063,135 17,079,780
Adjustments:
Unrealized gain on available for
sale securities (a) (305,818)(13,840,070)
Deferred development costs (b) 92,663 8,787
Consolidation of Petrozyme (c) 339,079 20,385
- -------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY UNDER
CANADIAN GAAP 12,189,059 3,034,202
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
</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 shareholders' equity 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.
15. SUMMARY OF MATERIAL DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GAAP) IN THE UNITED STATES AND CANADA CONT'D
(b) DEFERRED PRE-PRODUCTION, DEVELOPMENT COSTS
Under US GAAP, all pre-production, 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
F-33
<PAGE>
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.
(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 uncer both Canadian and US GAAP excludes securities which are
antidilutive.
F-34
<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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .-7-
Business of CVF Corporation. . . . . . . . . . . . . . . . . . . . . . . . . . . -15-
Management's Discussion and Analysis of
Consolidated Operating Results . . . . . . . . . . . . . . . . . . . . . . . -43-
Consolidated Capitalization. . . . . . . . . . . . . . . . . . . . . . . . . . . -46-
Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -47-
Directors and Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -48-
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -49-
Options to Purchase Securities . . . . . . . . . . . . . . . . . . . . . . . . . -52-
Principal and Selling Shareholders . . . . . . . . . . . . . . . . . . . . . . . -53-
Description of Share Capital . . . . . . . . . . . . . . . . . . . . . . . . . . -55-
Dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -56-
Dilution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -57-
Trading of the Common Shares . . . . . . . . . . . . . . . . . . . . . . . . . . -57-
Repurchase of Common Shares. . . . . . . . . . . . . . . . . . . . . . . . . . . -59-
Interest of Management and Others in
Material Transactions. . . . . . . . . . . . . . . . . . . . . . . . . . . . -59-
Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -60-
Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -61-
Legal Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -61-
Auditors, Transfer Agent and Registrar . . . . . . . . . . . . . . . . . . . . . -61-
Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -62-
Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . F-1
</TABLE>
--------------
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
CVF CORPORATION
COMMON SHARES
--------------
PROSPECTUS
--------------
, 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 . . US$8,867
*American Stock Exchange Fee . . . . . . . . . . . . . .
*The Toronto Stock Exchange Fee. . . . . . . . . . . . .
*Printing and engraving expenses . . . . . . . . . . . .
*Legal fees and expenses . . . . . . . . . . . . . . . .
*Transfer Agent and Registrar fees . . . . . . . . . . .
*Accounting fees and expenses. . . . . . . . . . . . . .
*Miscellaneous . . . . . . . . . . . . . . . . . . . . . ________
*Total . . . . . . . . . . . . . . . . . . . . . . . . . US$
</TABLE>
- ---------------
* To be supplied by amendment.
The Company has agreed to pay all expenses incident to the offer and sale
of the Selling Shareholder's Common Shares.
II-1
<PAGE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
(a) Securities sold:
1. On March 17, 1998, the Company issued 100,000 Common Shares to the
Murray Sinclair, the Selling Shareholder, 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.
2. 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.
3. 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.
4. 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>
- ---------------
* To be supplied by amendment.
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 Registration
Statement to be signed on its behalf by the undersigned, in the City of Toronto,
Province of Ontario, Canada, on the 4th day of May, 1998.
CVF CORPORATION
By: /S/ JEFFREY DREBEN
-------------------------------------
Jeffrey Dreben
President and Chief Executive Officer
POWERS OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each officer or director of CVF
Corporation whose signature appears below constitutes and appoints Jeffrey
Dreben and Robert Nally, and each of them, with full power to act without the
other, his true and lawful attorneys-in-fact and agents, with full and several
power of substitution, for him and in his name, place and stead, in any and all
capacities, to execute any or all amendments, including post-effective
amendments, and supplements to this Registration Statement, and to file the
same, with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as they or he might or could do
in person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or his or their substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement was signed below by the following persons in the
capacities indicated and on the 4th day of May, 1998.
Signature Title
--------- -----
/S/ JEFFREY DREBEN President, Chief
- ------------------- Executive Officer and Director
Jeffrey Dreben (Principal Executive
Officer)
/S/ ROBERT NALLY Secretary, Treasurer,
- ------------------- Acting Chief Financial Officer
Robert Nally and Director
(Principal Financial
Officer and Principal
Accounting Officer)
/S/ GEORGE KHOURI Director
- -------------------
George Khouri
/S/ ROBERT GLAZIER Director
- -------------------
Robert Glazier
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description Page No.
- ----------- ----------- --------
<S> <C> <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>
- ---------------
* To be supplied by amendment.
<PAGE>
CERTIFICATE OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
CVF CORP.
-----------------------------------------------------
Pursuant to Section 78.390 of the
Nevada General Corporation Law
-----------------------------------------------------
We the undersigned, Jeffrey Dreben and Robert Nally of CVF CORP. (the
"Corporation"), do hereby certify:
That the Board of Directors of said Corporation at a meeting duly
convened, held on the 21st day of August 1997, adopted a resolution to amend the
original articles as follows:
Article I is hereby amended to read in its entirety as follows:
The name of the Corporation (the "Corporation") shall be:
CVF Corporation
That the number of shares of the Corporation outstanding and entitled
to vote on said amendment to the Articles of Incorporation is 5,771,449; that
the said change and amendment has been consented to and approved by a majority
vote of the stockholders holding at least a majority of each class of stock
outstanding and entitled to vote thereon.
/s/ Jeffrey Dreben
------------------------------
Jeffrey Dreben, President
/s/ Robert Nally
------------------------------
Robert Nally, Secretary
STATE OF NEW YORK
ss.
COUNTY OF ERIE
On September 16, 1997 personally appeared before me, a Notary Public,
JEFFREY DREBEN and ROBERT NALLY, who acknowledged that they executed the above
instrument.
[signature unreadable]
------------------------------
Notary Public
<PAGE>
SERVICE AGREEMENT
AGREEMENT dated as of February 10, 1997, by and between D and N
Consulting Corporation, a Delaware corporation (the "Service Company"), and CVF
Corp., a Nevada Corporation ("Newco").
1. PAYMENT OF OPERATING EXPENSES. The Service Company agrees to be
responsible for all administrative requirements of Newco, including, but
not limited to, costs of maintaining the books of Newco, preparing periodic
reports to the Board of Directors of Newco and providing office facilities
and travel expenses, and except those expenses to be borne by Newco which
are described in Section 3 below. The Service Company will also be
responsible for compensating its employees and directors and any other
person or entity employed for the purpose of providing services to Newco
pursuant to this Service Agreement.
2. SERVICE FEE
(a) Subject as set forth below, Newco will pay the Service Company an
annual service fee (the "Service Fee") based on an annual budget
prepared by the Service Company which will be reasonable and
commensurate with administering the business of Newco and approved by
the Board of Directors of Newco. Any fees or other amounts received
by the Service Company, or its respective directors or officers from
investee companies of Newco as financing commitment fees, consulting
fees, directors' fees or otherwise for services rendered to the
investee companies shall be credited against the Service Fee.
(b) The Service Fee for each fiscal year shall be determined in the last
30 days of Newco's prior fiscal year, based upon the budget prepared
by the Service Company and approved by the Board of Directors of
Newco. For the remainder of 1995, the Service Company shall be paid a
Service Fee of $160,000 per quarter.
(c) The Service Fee will be calculated and paid quarterly in advance on
the first day of January, April, July and October of each year.
(d) If the Service Fee shall be payable for any period which is less than
one year, such payments shall be adjusted on a pro rata basis based
upon the number of days that this Service Agreement is in effect
during such period. If this Service Agreement is terminated as of a
<PAGE>
date that is not the last day of March, June, September or December in
any calendar year, then the Service Company shall refund to Newco the
unearned portion of the Service Fee, calculated on a pro rata basis.
(e) The Service Company may, at its option, direct Newco to pay the
Service Fee and any expenses payable to the Service Company to either
Jeffrey Dreben or Robert Nally.
3. EXCEPTIONS TO PAYMENT OF SERVICE FEE.
(a) After fifteen months have elapsed from the date of this Service
Agreement, the Service Company's right to the Service Fee in any
quarter will depend on the trading price of the shares of Newco Common
Stock (the "Newco Common Shares"). If the 90 day weighted average
trading price (the "Trading Price") over the course of the prior
quarter does not, at any time in the prior fiscal quarter of Newco,
exceed the target price (the "Target Price") set out below, the
Service Company will not be entitled to the Service Fee during the
next quarter.
For purposes of this Service Agreement, the Target Price equals $3.05.
In the event that Newco shall at any time after the Closing subdivide
or change the outstanding number of Newco Common Shares, the Target
Price shall be proportionately adjusted.
If at any time in any fiscal quarter the Trading Price of Newco Common
Shares is greater than the Target Price but less than double the
Target Price, then the Service Company will be entitled to a
percentage of the Service Fee for all future quarters (based on the
proportion that the excess of the Trading Price over the Target Price
is of the Target Price).
If, at any time after fifteen months have elapsed from the date of
this Service Agreement, the Trading Price exceeds double the Target
Price, the Service Company will no longer be responsible for any
costs in relation to Newco and the Common Shares pledged by the
Service Company to Newco will be released and the Stock Pledge
Agreement cancelled.
(b) In lieu of satisfying its financial obligations under this Service
Agreement, the Service Company may put its 10.2% Common Share interest
(the "Share Interest") in Newco, or any portion thereof, to
2
<PAGE>
Newco for the PRO RATA cancellation of the Service Company's financial
obligations. The Service Company's financial obligations will
decrease proportionately to the percentage of the Share Interest that
is put to Newco. For instance, if fifty percent of the Share Interest
is put to Newco, then fifty percent of the financial obligations of
Newco will be paid by the Service Company and fifty percent by Newco.
If and when the entire Share Interest is put to Newco, the Service
Company's financial obligations under the Service Agreement will
terminate. Thereafter, Newco will reimburse the Service company for
100 percent of its financial obligations.
4. EXCEPTIONS TO PAYMENT OF EXPENSES BY THE SERVICE COMPANY.
(a) Notwithstanding Section 1, the following specific ongoing expenses of
Newco will not be paid by the Service Company but will be paid by
Newco:
(i) legal fees;
(ii) audit fees;
(iii) interest, taxes, brokerage and other fees and expenses directly
related to the implementation of purchase, sale or other
transactions for Newco's investments or for Newco Common
Shares, including documentation and expenses related to
investor relations; and
(iv) fees (legal or other) associated with compliance with the rules
and regulations of the Securities Act of 1933, as amended, or
the Securities Exchange Act of 1934, as amended.
(v) insurance premiums, if any, incurred to protect Newco.
5. SERVICE COMPANY DUTIES. The Service Company covenants that it will
maintain a staff trained and experienced in the business of identifying and
providing assistance to new and emerging growth-oriented businesses and
adequate for the performance of the Service Company's duties under this
Service Agreement. Services to be rendered by the Service Company shall
include assistance within the areas of expertise of its staff and, when
considered appropriate by the Service Company, the services of its officers
and employees as directors, consultants and advisors to investee companies.
Services to be provided to a investee company by officers and employees of
the Service Company will be performed in good faith, consistent with the
3
<PAGE>
obligations of the Service Company to Newco. Subject to the control and
direction of Newco's Board of Directors, the Service Company shall be
authorized to manage the operations of and act in the name of and bind
Newco. Selection of the Newco investments, shall be made by the Service
Company after consultation with and approval by Newco's Board of Directors.
6. TERM. Commencing on the date hereof, services will be performed for Newco
for an initial term of five years (the "Initial Term"). This service
agreement will automatically renew for successive one year terms upon six
(6) months prior written notice by either party to the other party.
7. TERMINATION.
(a) During the Initial Term, Newco shall be entitled to terminate the
Service Agreement at any time for cause. For purposes of this Service
Agreement, "cause" shall mean (i) the Service Company's material
breach or material failure to perform the services set forth in this
Service Agreement and (ii) the Service Company's or any of its
directors' or officers' conviction for fraud, embezzlement,
misappropriation or other felony related to the services to be
performed under this Service Agreement.
(b) After the Initial Term, this Service Agreement may be terminated with
or without cause and without penalty upon six (6) months prior written
notice by either party to the other party.
8. GOVERNING LAW AND JURISDICTION. This Agreement shall be governed by, and
construed and enforced in accordance with, the laws of the State of
Delaware. The parties hereto irrevocably attorn to the jurisdiction of the
courts of Delaware.
9. SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided herein, the
provisions hereof shall enure to the benefit of, and be binding upon, the
successors, assigns, heirs, executors and administrators of the parties
hereto; provided, however, that the Service Company may not assign its
obligations hereunder to any party (other than a successor by merger to the
Service Company) without the written consent of the Board of Directors of
Newco.
10. SEVERABILITY. In case any provision of the Agreement shall be invalid,
illegal or unenforceable, the validity, legality and enforceability of the
remaining provisions shall not in any way be affected or impaired thereby.
4
<PAGE>
11. COUNTERPARTS. This Agreement may be executed in counterparts, each of
which when so executed and delivered shall constitute a complete and
original instrument but all of which together shall constitute one and the
same agreement, and it shall be necessary when making proof of this
Agreement or any counterpart thereof to account for any other counterpart.
12. ENTIRE AGREEMENT; AMENDMENT. This Agreement can be modified or amended
only by a writing signed by the parties hereto and only with the written
consent of the Board of Directors of Newco. This Agreement constitutes the
full and entire understanding and agreement between the parties with regard
to the subject matter hereof.
IN WITNESS WHEREOF the undersigned have executed this Agreement as of the
date first above written.
D AND N CONSULTING CORPORATION
By: /s/ Jeffrey Dreben
----------------------------------
CVF CORP.
By: /s/ Jeffrey Dreben
----------------------------------
5
<PAGE>
LIST OF SUBSIDIARIES
The Company has direct and indirect interests in the following companies:
<TABLE>
<CAPTION>
NAME JURISDICTION
- ---- ------------
<S> <C>
Canadian Venture Founders Ontario
Leasing Corp.
1246680 Ontario Limited Ontario
Dantec Electronics Limited Ontario
Eastview Marketing One, LLC New York
Grand Island Marketing New York
Two, LLC
Biorem Technologies Inc. Ontario
Grand Island Marketing Inc. Delaware
Gemprint Corporation Ontario
Solaria Research Enterprises Ltd. Ontario
Petrozyme Technologies Inc. Ontario
Dantec Systems Corporation Ontario
Ecoval Inc. Quebec
Turbosonic Canada Inc. Ontario
Mindflight Corporation Canada
Certicom Corp. Ontario
</TABLE>
<PAGE>
[ERNST & YOUNG LETTERHEAD]
We hereby consent to the incorporation in the Prospectus constituting part of
this Registration Statement on Form SB-2 of our report dated March 16, 1998
relating to the consolidated financial statements of CVF Corporation which are
included in such Prospectus. We also consent to the reference to us under the
heading "Auditors, Transfer Agent and Registrar" in such Prospectus.
/s/ Ernst & Young
Chartered Accountant
Kitchener, Canada
April 30, 1998
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form SB-2 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,
Transfer Agent and Registrar" in this Registration Statement.
/s/ Feldman Sherb Ehrlich & Co., P.C.
Feldman Sherb Ehrlich & Co., P.C.
Certified Public Accountants
(Formerly known as Feldman Radin & Co., P.C.)
April 30, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF CVF CORPORATION FOR THE YEAR ENDED DECEMBER
31 1997 AS INCLUDED IN THE PROSPECTUS WHICH FORMS A PART OF THIS REGISTRATION
STATEMENT ON FORM SB-2.
</LEGEND>
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> .72
<CASH> 10,614,267
<SECURITIES> 0
<RECEIVABLES> 617,290
<ALLOWANCES> 59,300
<INVENTORY> 390,125
<CURRENT-ASSETS> 11,889,286
<PP&E> 653,985
<DEPRECIATION> 509,134
<TOTAL-ASSETS> 19,752,216
<CURRENT-LIABILITIES> 5,228,312
<BONDS> 559,697
456,250
0
<COMMON> 5,992
<OTHER-SE> 12,057,143
<TOTAL-LIABILITY-AND-EQUITY> 19,752,216
<SALES> 1,685,399
<TOTAL-REVENUES> 1,685,399
<CGS> 1,091,821
<TOTAL-COSTS> 1,091,821
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 14,918,936
<INCOME-TAX> 5,919,665
<INCOME-CONTINUING> 8,999,271
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,999,271
<EPS-PRIMARY> 1.52
<EPS-DILUTED> 1.49
</TABLE>
