<PAGE> 1
U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998.
COMMISSION FILE NUMBER 00-29266
CVF TECHNOLOGIES CORPORATION
- - --------------------------------------------------------------------------------
(Name of Small Business Issuer in its charter)
NEVADA 87-0429335
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
916 Center Street
LEWISTON, NEW YORK 14092
---------------------------------------- ------------------------------------
(Address of principal executive offices) (Zip Code)
(716) 754-7883
----------------------------------
(Issuer's telephone number)
Securities registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- - ------------------- -----------------------------------------
Common Stock ($0.001 par value) American Stock Exchange
Securities registered under Section 12(g) of the Act: NONE
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
State issuers revenues for most recent year: $7,357,996.
Aggregate market value of voting stock held by non-affiliates (based on the
closing price on the American Stock Exchange) on March 24, 1999 was
approximately $23,323,954. For purposes of determining this amount only,
Registrant has defined affiliates as including (a) the executive officers named
in Part III of this 10-K report, (b) all directors of Registrant, and (c) each
shareholder that has informed Registrant by March 24, 1999 that it is the
beneficial owner of 10% or more of the outstanding common stock of Registrant.
Indicate the number of shares outstanding of each of the Registrant's classes of
Common Stock, as of March 24, 1999:
Common Stock: 6,727,428 shares
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference in their Form 10-KSB:
None
Transitional Small Business Disclosure Format: Yes |_| No |X|
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PART IV
PART I
ITEM 1. DESCRIPTION OF BUSINESS
(a) History of CVF
CVF Technologies Corporation (the "CVF" or the "Company") was incorporated on
January 10, 1986, under the laws of the State of Utah under the name of Sierra
Growth Corporation. On December 30, 1993, CVF changed its name to Western Growth
Corporation and its domicile to the State of Nevada in connection with a
re-incorporation merger.
Canadian Venture Founders Limited Partnership ("CVFLP") was formed under the
laws of Ontario, Canada in 1989, to engage in the business of developing and
managing early stage and start-up companies engaged in the information and
environmental technologies areas. In August 1989, CVFLP completed a private
securities offering in which commitments for approximately$14,600,000 were
received from a number of pension funds, insurance companies and corporate
groups, which commitments were paid for between 1989 and 1995. Since 1989, CVFLP
acquired ownership interests in each of the following privately held Canadian
corporations: Biorem Technologies Inc., Canadian Venture Founders Leasing
Corp, Dantec Systems Corporation, Ecoval Inc., Omphalos Recovery Systems
Inc. (now known as GemprintTM Corporation), Solaria Research Enterprises Ltd.,
and Turbotak Technologies, Inc. (the "Corporations"). CVFLP worked to start,
build and grow the Corporations.
On August 20, 1995, The Company entered into an asset purchase agreement (the
"Asset Purchase Agreement") with CVFLP, under which CVF agreed to purchase all
of the assets and assume all of the liabilities of CVFLP. Pursuant to the terms
of the Asset Purchase Agreement, CVF 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. At a Special Stockholders' Meeting held September 12,
1995, CVF's stockholders approved proposals to: (i) approve the Asset Purchase
Agreement and the issuance of the securities of CVF to CVFLP; (ii) change the
name of CVF from Western Growth Corporation to CVF Corp.; (iii) effect a 1-for-2
reverse split of the Common Shares; and (iv) elect Jeffrey Dreben, Malcolm
Gissing, Robert Nally and P. Anthony Bordes, Jr. as the directors of CVF.
Following the consummation of the above transactions, L. Dee Hall resigned as a
director of CVF.
During the period from September 1995 to the present, CVF has conducted the
business formerly owned by CVFLP. In September 1998, CVF changed its name from
CVF Corporation to CVF Technologies Corporation.
(b) STRATEGY OF THE BUSINESS
CVF is primarily involved in the business of developing and managing early stage
and start-up companies engaged in the information and environmental technologies
areas. CVF'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, to explore such e-commerce potential as they may have and through
them to engage in the businesses engaged in by such companies.
CVF's plan is to generate revenue and profit through the consolidation of the
revenues and profits from these companies and also through the sale of all or a
portion of its holdings in these companies when CVF determines that its funds
can be better deployed in other industries or companies. The Company's goal is
to maximize the value of its holdings in these companies for it's shareholders,
often through taking its companies public at the appropriate time as it has done
with Certicom Corp. which became a public company in 1996.
These acquired companies generally require additional capital to meet their
business plans beyond CVF's initial involvement, consequently, the Company
actively assists in the obtaining of additional capital either from its own
resources or via other participants.
The following is a list of the holdings (the "Corporations") of CVF showing the
percentage ownership:
<TABLE>
<CAPTION>
NAME OF PERCENTAGE OWNERSHIP
CORPORATION OF VOTING SECURITIES
- - ----------- --------------------
<S> <C> <C>
1. Canadian Venture Founders
Leasing Corp 100%
2. Eastview Marketing One LLC 100%
3. Grand Island Marketing Two LLC 100%
4. Grand Island Marketing Inc 100%
5. Biorem Technologies Inc. 69%
6. GemprintTM Corporation 67%
7. Solaria Research Enterprises Ltd. 67%
8. Petrozyme Technologies, Inc. 50%
9. Dantec Systems Corporation 54%
10. Ecoval Inc. 27%
11. TurboSonic, Inc. 13%
12. RDM Corporation 18%
13. Certicom 0%
</TABLE>
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The Corporations
With the exception of TurboSonic, RDM and Certicom, each of the above
Corporations are non-public companies. The following paragraphs provide a brief
description of each of the above Corporations. Each has its own business plan,
history and financial statements. As well each has completed the development of
products, established markets and distribution channels, has sold products and
has put management teams in place or is currently working to improve its
management teams.
The additional capital required by each of the Corporations is primarily for
expansion of sales and production capability to enable the Corporations to
realize their commercial potential over the next three to five years. As is
common with early stage technology companies, each of the Corporations has
historically operated at a loss or at break-even and many will continue to
operate at a loss for at least the foreseeable future.
Consolidated Entities:
Consolidated entities are those companies where The Company has greater than a
50% ownership of the voting stock. The total assets and liabilities of
consolidated entities are included within the financial results and position of
CVF for the year ended December 31, 1998 and the comparative balances for the
previous two years are shown in the financial statements included in Part II
Item 7 of this 10-KSB document. The entities consolidated within the financial
results of The Company are as follows:
1. Canadian Venture Founders Leasing Corp ("CVFLC").
CVFLC was founded in order to offer equipment leases to the Corporations as well
as to offer short-term funding to the Corporations for such items as inventory
and receivables. CVFLC is a wholly owned subsidiary of CVF and is managed by the
management team of CVF. It is located in Oakville, Ontario Canada.
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2. Eastview Marketing One LLC ("Eastview")
Eastview 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. The commercial was completed and tested in 1998
and may be re-used in selective markets in 1999.
3. Grand Island Marketing Two LLC ("Grand Island 2")
Grand Island Marketing Two LLC was incorporated on December 17, 1997 in the
state of New York. Grand Island 2 was established to 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.
4. Grand Island Marketing Inc ("Grand Inc.")
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., 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 $1,065,000 and has an economic interest of 51%
and a Voting Partnership Interest of 69.25% in Elements. Elements was formed to
carry on the business of operating retail stores offering natural health and
food products and health services including naturopathic and homeopathic
medicine and chiropractic services, as well as products manufactured by Ecoval.
Elements during 1998 has opened two stores in Toronto, Ontario, as part of its
eventual development of a franchise group of stores throughout the US and
Canada. Elements is in the process of developing an e-commerce website to sell
its products and services over the internet. In the event that the Partnership
does not meet its Business Plan within the two (2) years of opening its first
store, then seventeen per cent (17%) of 21st Century's Partnership Interest,
shall immediately be transferred to CVF for one dollar ($1.00) paid by CVF.
5. Biorem Technologies, Inc. ("Biorem")
Biorem is an industrial biotech company that is 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 (biofilters) and for use in the food processing, agriculture and
pharmaceutical manufacturing industries. Biorem has certain proprietary
industrial fermentation techniques which enable it to produce new biological
materials for use in bioremediation. Biorem provides on-site turn key
remediation capability. Biorem has developed technology for economical and
effective cleaning of contaminated soils and organic air streams.
Biorem is still considered to be an early developing company and as such has
incurred operating losses over the last four years. With the establishment of
Grand Island 2 (above), Biorem hopes, although there can be no assurance, to
increase sales and net income through the marketing of its services.
6. GemprintTM Corporation ("GemprintTM")
GemprintTM Corporation, is in the business of providing products and services to
the consumer and wholesale jewlery 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 data base for later
verification and recovery of lost or stolen gems. GemprintTM currently sells
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its RSi 2000 laser GemprintTM machine to jewelers for $15,000. Currently, each
consumer who gets his or her gem "Gemprinted"TM by the jeweler's RSi 2000
machine pays the jeweler $35 of which $15 goes to GemprintTM pursuant to
licensing agreements. GemprintTM owns and operates the GemprintTM data base. Law
enforcement agencies and many insurance companies support the GemprintTM system
(approximately 25 insurance companies offer a 10% discount on diamond insurance
policies if a gem is GemprintedTM).
Currently 120 jewelers own GemprintTM machines throughout North America and
actively use the system. An agreement with Stuller Settings Inc. was ratified
and Stullers GemprintTMs diamonds for supply to the retail trade. All its
diamond stock will be GemprintTMed before it is sold to several thousand jewelry
store clients throughout the United States. Letters of intent have been signed
with some North Anerican regional jewelry chains to offer its GemprintTMing
services.
GemprintTM has recently developed a next generation machine with built-in
appraisal software. The additional expense of developing and marketing this
machine is expected to result in operating losses at least until the end of the
current fiscal year.
GemprintTM has signed an agreement with HRD Canada Inc, a subsidiary of the High
Diamond Council of Belgium, stating that HRD Canada will distribute GemprintTM
ISI equipment throughout North America. This agreement was signed in December
1998 with an effective date of January 1, 1999. This agreement will position
GemprintTM firmly in the diamond industry, working with major actors in the
global diamond industries.
GemprintTM has an agreement in place with Sirius Diamonds Ltd. stating that all
diamonds that it purchases through Canadian sources in the Northwest Territories
will be GemprintedTM. GemprintTM has the enabling technology that will allow an
Internet based trading system for diamonds, this business opportunity is
currently being explored.
7. Solaria Research Enterprises Ltd. ("Solaria")
Solaria is in the business of developing, manufacturing and marketing a family
of low cost, high efficiency programmable electronic motor speed control
products for industrial electric vehicles such as material handling equipment
(fork lift trucks, etc.). Solaria supplies both original equipment manufacturers
("OEM") and the after-market with products. A North American distribution
network of 28 distributors having 113 branches has been set up over the past
three years. Solaria is now marketing the latest version of its product. Solaria
has entered into a strategic OEM joint venture with a North American
manufacturer of fork lift trucks to develop and manufacture a range of
electronic controllers for their direct current (DC) engines. During 1998
Solaria, under this OEM joint venture, began full production of these electronic
controls.
During 1998 development continued on new controllers and new OEM joint ventures
are being negotiated with other manufacturers.
8. Dantec Corporation ("Dantec")
On June 30, 1998 Dantec Systems Corporation, and 1246680 Ontario Limited and
Dantec Electronics Limited amalgamated to form a new corporation called Dantec
Corporation.
Dantec, an industrial automation company, using unique process control
algorithms developed at the University of Waterloo, Ontario is in the business
of developing, manufacturing and marketing a range of advanced automated process
control systems for the food processing, wood processing, pharmaceutical,
polymer and various other material processing markets and industries. Its
strategy now includes the provision of turnkey, fully automated process controls
which may include outsourcing of certain components of the systems being sold.
Dantec Corporation has sold its systems to various North American corporations
in the above mentioned industries.
Equity Investees:
Equity investees are those companies in which The Company has less than or equal
to 50% ownership but more than or equal to 20% ownership. Only the net incomes
or losses of CVF's equity investments are included in the financial statements
of CVF in proportion to the percentage holdings of these entities.
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These equity investees and their businesses are described below:
9. Petrozyme Technologies, Inc. ("Petrozyme")
Petrozyme is a Waterloo, Ontario, private company in the business of developing
and marketing process industrial bio-reactors for the degradation and recovery
of petroleum and other industrial waste products. Petrozyme is an early stage
developing company and has not yet generated significant revenue streams.
However, Petrozyme's bio-reactors are now operational in Venezuela and
successful pilot tests have been completed in Mexico (PMEX) and Canada (Shell)
with additional pilot tests targeted for the U.S. and Middle East.
10. Ecoval Inc. ("Ecoval")
Ecoval Inc. Ecoval is a Montreal, Quebec-based company formed to manufacture
and market a range of 100% natural fertilizers, environmentally friendly organic
herbicides and tree recovery systems. Ecoval has received U.S. patents for its
herbicide and its 4-4-8 tree recovery fertilizer. Research results show the
herbicide to be non-toxic and bio-degradable and more effective than chemical
products. Ecoval's herbicide is currently going through the registration and
approval process with Agriculture Canada, and has received approval from the
Environmental Protection Agency in the U.S. Ecoval launched its herbicide
product in the United States in 1997. CVF also has proprietary binder technology
to enable the granulation of gypsum, limestone and feathermeal and other 100%
natural ingredients. CVF has shipped its product to customers in New England as
well as Florida, California and Texas and throughout Canada. The brand name for
its products in the US is Nature's Glory. A number of retail stores and
municipalities in Ontario have purchased and re-ordered the product, along with
many professional lawn care and landscaping contractors. Additional sales have
been made to golf courses in Canada and the United States.
A plant with 25,000 ton per year capability was constructed in Montreal in order
to meet the demand for its product. Ecoval receives an average price of
approximately $600 per ton for its products.
Ecoval is now developing an e-commerce website to sell not only its own
proprietary products, but a full range of garden supply products. The home
gardening market is currently $27 billion per year in the United States.
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Eastview (above) has produced an infomercial that was televised in the spring of
1998 through the United States which promoted the "Nature's Glory" natural
products of Ecoval. In addition, Elements is providing retail exposure to
products manufactured by Ecoval. Through these and other promotions, Ecoval
hopes to increase its sales and net income during 1999 and future years.
Holdings at less than 20% ownership
The direct financial results of those companies in which The Company has less
than 20% ownership are not included in the consolidated financial results of the
Company. Those of the following companies which are publicly traded are recorded
at market value. CVF provides management expertise and/or financing for some of
these entities. It is the intention of CVF to hold their positions in these
companies until it is deemed that their investment can be better utilized in
other current or new holdings. These companies are as follows:
11. TurboSonic, Inc. ("TurboSonic")
The Company's holdings in TurboSonic began with Turbotak Technologies, Inc.
which was a spin-off from the University of Waterloo and is engaged in the
business of researching, developing and marketing a range of air pollution
control products and systems for a variety of industries worldwide. It has
developed a volatile organic compound ("VOC") removal and recovery technology
for the printing, automobile, wood, bakery and numerous other industries which
produce VOC's. This technology is cost effective in that the solvents are
recovered for resale or reuse. TurboSonic sells its products in the pulp and
paper industry and also in a variety of other markets. TurboSonic has jointly
developed and is marketing with Dow Chemicals a proprietary SO2 recovery system
for smokestack Industries to produce commercial grade sulfuric acid.
The Company acquired an additional 3,000 shares of TurboSonic in 1998. At March
24, 1999 the market value of each share of TurboSonic was approximately $0.41
U.S. such that the value of shares owned by CVF was $548,571 U.S..
12. RDM Corporation ("RDM") (formerly Mindflight Corporation)
RDM changed its name from Mindflight Corporation in 1998. RDM a Waterloo,
Ontario public company is in the business of developing and supplying
technologies for both paper and electronic based payment systems. CVF's CND
$1,000,000 [U.S. $700,000] investment in RDM represents a private placement
purchase of 1,428,572 special warrants allowing the Company to receive one
common share per warrant of RDM at no additional cost. These warrants were
converted June 5, 1998 for an equal number of common shares of RDM. On Oct. 13,
1998 CVF acquired an additional 270,000 common shares in a private placement,
with a share purchase warrant certificate authorizing an additional 270,000
common shares of RDM to be purchased. The Company purchased an additional 69,500
common shares on the open market during 1998. At March 24, 1999, the market
value of shares of RDM listed on the Vancouver Stock Exchange was CND. $0.99 [US
per share $.65]. Robert B. Nally a director of CVF holds approximately 20% of
the common shares of RDM.
RDM has developed and is now marketing the e-check software which is being used
in field trials with the U.S. government, Bank Boston and Bank America. E-check
has potential for enabling e-commerce electronic payment.
13. Certicom Corp. ("Certicom")
Certicom is a Toronto, Ontario public company in the business of digital
information security products. In January and February of 1998 CVF disposed its
remaining common shares of Certicom for net proceeds of about $537,418 CND (U.S.
$351,203) During March of 1999 the remaining 29,881 non-marketable preferred
shares of Certicom held by CVF, are scheduled to be redeemed for approximately
$217,058 USD.
Number of employees
As Of March 12, 1999, CVF and its consolidated entities have a total of 77
full-time employees.
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ITEM 2 DESCRIPTION OF PROPERTY
On February 3, 1998 CVF entered into a 2 year lease for its principal executive
offices at 916 Center Street, Lewiston, New York 14092. Lease payments are
$25,200 annually and CVF has an option to purchase the building for $210,000.
ITEM 3 LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings, and, to
the best of its knowledge, no such action by or against CVF has been threatened.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders, through the solicitation
of proxies or otherwise, during the fourth quarter of 1998.
PART II
ITEM 5 MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(a) Market Information
Until January 28, 1998 the Common Shares were traded in the over-the-counter
market and quoted on the NASD 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. exchange. On
January 29, 1998 shares of CVF began trading on the American Stock Exchange. For
the period prior to January 29, 1998, the following table sets forth the high
and low bid price quotations for the Common Shares in the over-the-counter
market as provided by the National Quotation Bureau, Inc. during the periods
indicated. The quotations reflect inter-dealer prices, without retail markup
mark-down on commission and may not represent actual transactions. All prices
are shown in U.S. dollars. For the period following January 29, 1998, the
following table sets forth the high and low sales prices per Common Share on the
American Stock Exchange.
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<TABLE>
<CAPTION>
LOW HIGH
------------- -------------
<S> <C> <C> <C>
1997 - 1st Quarter 6.50 7.25
- 2nd Quarter 6.875 7.25
- 3rd Quarter 5.625 7.125
- 4th Quarter 4.1875 6.25
1998 - 1st Quarter 2.50 7.25
- 2nd Quarter 5.375 6.25
- 3rd Quarter 2.625 5.625
- 4th Quarter 2.625 8.125
1999 - 1st Quarter 2.875 4.125
</TABLE>
As of March 24, 1999, there were 6,727,428 outstanding shares of Common Stock,
held by holders of record.
(b) Holders of Record
At March 24, 1999 there were approximately 307 holders of record for the
outstanding common shares.
(c) Dividends
The Company has never paid a dividend on the Common Shares. The payment of any
future dividends will be at the sole discretion of CVF's Board of Directors. CVF
intends to retain earnings to finance the expansion of its business and does not
anticipate paying dividends on the Common Shares in the foreseeable future.
(d) Recent Sales of Unregistered Securities
The following is a summary of all securities, as of March 25, 1999, of CVF sold
since January 1, 1998 which were not registered under the Securities Act of
1933, as amended (the "Act"). All of the sales listed below were exempt from
registration under the Act in that they did not involve a public offering within
the meaning of section 4(2) of the Act and Regulation D, promulgated thereunder.
All such sales were to persons CVF reasonably believed to be "accredited
investors".
<TABLE>
<CAPTION>
NAME DATE AMOUNT OF SECURITIES
- - ---------------------------- --------------- ------------------------
<S> <C> <C>
Banyan Investment March 4, 1998 8,036
Company
Noland H. Schneider March 4, 1998 32,143
Family Living Trust
Murray Sinclair March 17, 1998 100,000
C.A. Misener Enterprises Inc June 3, 1998 25,570
</TABLE>
Each of the above securities represent common shares of CVF.
The securities sold to Banyon Investment Company and Noland H. Schnieder Family
Living Trust were partial consideration for common shares of Ecoval Inc.
purchased by CVF
The unregistered securities sold to Murray Sinclair were for cash proceeds of
$400,000. Net proceeds to CVF after commissions were $360,000
Securities issued to C.A. Misener Enterprises Inc. were exchanged for 720,000
Class A shares of GemprintTM held by Misener.
(e) Purchase of Treasury Stock
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, up to 300,000 Common Shares. In the fall of
1997 CVF announced plans to purchase up to an additional 100,000 shares. On
September 16, 1998 the Board of Directors approved the repurchase of up to an
additional 100,000 Common Shares bringing the total number of Common Shares
under the repurchase program to 500,000.
During 1997, and 1998, The Company repurchased 252,900 Common Shares and 162,500
Common Shares respectively. The total amount of shares repurchased to December
31, 1998 was 425,400 Common Shares. After December 31, 1998, CVF repurchased an
additional 2,500 Common Shares.
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ITEM 6 MANAGEMENT DISCUSSION AND ANALYSIS
Special Note Regarding Forward-Looking Statements
Certain statements in this Annual Report on 10-KSB, under the captions "The
Corporations," "Financial Considerations" and elsewhere, constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"). Such forward-looking
statements involve unknown and uncertain risks, uncertainties and other factors
which may cause the actual results, performance or achievements of CVF, or
industry results, to be materially different from any future results,
performance, or achievements expressed or implied by such forward-looking
statements. See "Financial Considerations". Given these uncertainties,
prospective investors are cautioned not to place undo reliance on such
forward-looking statements.
Plan of Operation
Over the next year The Company plans to focus its efforts on developing the
E-Commerce parts of its business. For example, this means the developing of
E-Commerce Web Sites for Elements to sell and distribute natural nutritional and
herbal products (a $12 billion per year annual market). Ecoval plans to sell and
distribute home gardening supplies (a $27 billion annual market). GemprintTM is
working towards establishing an Internet based diamond trading system. Also, RDM
is commercializing its Internet based paperless check payment system. This means
that four of the nine CVF companies will be focusing on e-commerce based
activities.
Dantec will continue to focus on entering new markets and further developing its
strategy of providing a turnkey approach to industrial automation solutions in
such markets. It also plans to pursue the possibility of further growth through
acquisitions.
Solaria Research Enterprises Ltd. is focusing on entering new OEM markets in the
category of electric vehicles such as scissor lift and airport conveyance
vehicles. It also working on developing its next generation of controller.
Biorem continues to focus on its core bioremidation business but it is also
aggressively developing its biofilter activities.
Petrozyme will continue to focus on the remediation and recovery of waste
material from oil and other industrial plants.
Eastview Marketing has produced an info-mercial to promote the products of
Ecoval Technologies Inc. on television throughout the United States.
Grand Island 2 is seeking to form relationships with land developers to provide
remediation of contaminated soils on property owed by these developers, and
share in the profit from their future sale. Grand Island will enlist the
services of Biorem to aid in the clean up of these properties.
Grand Inc. has entered into a partnership agreement on January 29, 1998 with
21st Century Health Care (1996) Inc. and an individual to carry on the business
of operating retail stores offering natural health food products and health
services including naturopathic medicine and chiropractic services. In addition
these stores are obligated to provide shelf space for natural horticulture
products produced by Ecoval Technologies Inc.
GemprintTM has signed an agreement to provide its GemprintTM services to Stuller
Settings Inc., a Louisiana based wholesaler of diamonds and other gemstones.
Stuller GemprintsTM diamonds for supply to the retail trade. GemprintTM has also
signed an agreement with the HRD Group of Belgium (The High Diamond Council of
Belgium)stating that the HRD Group will distribute GemprintTM ISI equipment
throughout North America and Europe. This agreement was signed in December 1998
with an effective date of January 1, 1999. GemprintTM is also exploring the
possibility of setting up an internet based diamond trading business. With this
and other marketing efforts the financial results of GemprintTM are expected to
improve in the next 12 months.
CVF will continue to provide equity and debt financing to its group of companies
as it assesses their needs. This will be accomplished through CVF either
preparing additional private placements or public offering for itself or in
assisting its group of companies to prepare private placements or public
offering for themselves as and when appropriate.
For those shares it holds in its public companies, TurboSonic Inc. and RDM
Corporation, CVF will continue to monitor their market value with the view to
gaining from their future sale.
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Individual companies are expected to continue approximately the same level of
research and development they have performed in the past two years. There are no
expectations for significant increases in plant or equipment or in the number of
employees for these companies over the next 12 months.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Comparison of Consolidated Results 1998 and 1997
Sales for the current fiscal year increased by $5,672,597 or 337% to $7,357,996
from $1,685,399 in 1997. CVF Technologies Corporation, on a stand-alone basis,
has no sales from operations. Sales and gross profit from sales reflect the
operations of CVF's consolidated subsidiaries only. These subsidiaries include
Canadian Venture Founders Leasing, Biorem, Dantec Corporation, Solaria, Eastview
Marketing, GemprintTM, Grand Island Marketing (Elements), Solaria and Grand
Island Marketing Two. Companies that are not consolidated include, Ecoval,
Petrozyme, RDM (formerly Mindflight), and TurboSonic.
Solaria started full production on a joint venture with a major original
equipment manufacturer. This resulted in their sales increasing by $3,679,183
over 1997, with the majority of this increase coming in the last two fiscal
quarters of 1998. This growth should continue into 1999 since this joint venture
will be active for the entire year plus Solaria is pursuing joint ventures with
other original equipment manufacturers. Also making a substantial contribution
to the growth in sales was Dantec Corporation (the amalgamated entity of Dantec
Electronics and Dantec Systems, which took place on June 30, 1997) and Elements,
which commenced business in 1998. These two companies had combined sales of
$2,759,941 in 1998 with comparable sales in 1997 being only $513,711.
Gross margin on a consolidated basis increased by $1,711,224 or 288%, to
$2,304,802 from $593,578, one year earlier. As with the sales the main
contributors to this increase are Solaria, Dantec Corporation and Elements. The
gross margin as a percent of sales declined from 35% in 1997 to 31% in 1998
mainly due to the fact that one of the subsidiary companies reduced its profit
percentage on a major contract, in order to increase market share. That
subsidiary plans to increase its margins on future contracts.
Selling, general and administrative expenses on a consolidated basis increased
by $2,394,646 or 45% in fiscal 1998, as compared to fiscal 1997. Advertising
costs for an infomercial for Eastview Marketing in the amount of $922,336 plus
Dantec and Elements contributed $1,773,380 to the increase in selling, general
and administrative cost. Also one of the companies, due to its increase in
volume, experienced an increase of $366,577 in its cost. The increase in the
selling, general and administrative expenses of the subsidiaries was partially
offset by a decrease in officer's bonuses from 1997 to 1998.
Research and development expenses increased by $19,442 to a total of $441,658,
or 4.6% increase from 1997. In 1998 the majority of R&D cost were expended in
Solaria in order to develop new electric controllers to expand its market share.
Net Interest income decreased by $298,410 or 66% for the year ended December 31,
1998 from $448,684 in 1997 to $150,274 for 1998. This decrease is the result of
the cash received in 1997 by CVF from the sale of the shares in Certicom being
used in 1998 to continue the support of The Company's entities and further
investments.
Losses from equity holdings, entities in which CVF has a 50% or less ownership,
of CVF rose from $145,165 in 1997 to $1,152,190 in 1998. These losses are caused
by both activities of these holdings and equity transactions between the equity
holding and third parties, which can provide gains, or losses depending upon the
overall net book value of these entities. The 1997 loss was offset by a 3rd
party dilution gain of 1,754,122. No similar gain occurred in 1998.
The combined sales of the following equity entities Ecoval, Petrozyme and Dantec
Systems (for the six months prior to the Dantec amalgamation on June 30, 1998)
was $1,114,138 for the year ended December 31, 1998 compared to $1,560,122 for
1997. The combined net loses of these companies was $3,016,717 for 1998 with The
Company's share of these loses being approximately $953,000. The comparable
proportion of loses which CVF included for 1997 was approximately $1,900,000.
Gain on sale of holdings decreased from $19,758,954 in 1997 to $579,775 in 1998.
In 1997 The Company sold most of its holdings in Certicom Corp. with the gain in
1998 being the remainder of the Certicom shares and a gain on the selling of a
portion of one of The Company's holdings.
Taxes decreased from a $5,919,665 expense in 1997 to a tax benefit of $1,095,003
in 1998. The gain on the sale of the Certicom Corp. shares in 1997 created the
large tax expense and also generated the taxable income to carry the 1998 loss
back to, enabling the establishment of the tax benefit.
Comparison of Consolidated Results 1997 and 1996
Sales and costs of sales reflect the activity of the consolidated entities of
The Company and in 1997 the gross margin decreased to $593,578 from $836,538 in
1996 partially because of the 1997 decline in the exchange rate of the Canadian
dollar with respect to the reporting US currency but also due to a decline in
sales activity of Biorem. This was compensated by an increase in activity of
Solaria.
Selling, general and administrative expenses have increased from $3,342,739 in
1996 to $5,367,541 in 1997 or a $2,024,802 increase. The increase from 1996 to
1997 is mainly due to increases in bonuses paid by CVF. This was related to a
series of transactions in which CVF purchased approximately 600,000 of its
shares from a company owned by officers of the Company and subsequently issued
options to these officers to repurchase these shares. The exercise of these
options triggered personal tax consequences which were reimbursed by CVF through
the issuance of these bonuses. These 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 $164,303 in 1997 to a total of
$422,216 or a 64% increase from 1996. This was due to an increase in R&D
expenses in GemprintTM as it updated its technology.
Interest income increased from a loss of 47,700 in 1996 to $448,684 in 1997.
This is because of the significant amounts of cash The Company received from the
sales of the shares in Certicom during late 1996 and throughout 1997. As this
cash is used in the continuing support of the Companies entities and further
investments the related interest income is expected to decline.
Income (loss) from equity investees has varied significantly over the last three
years. In 1995 The Company recorded income of $881,091 but this was followed by
losses of $296,762 and $145,165 in 1996 and 1997 respectively. These amounts are
a reflection of the activities of the entities in which The Company has a 50% or
less ownership 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. As most of these entities have had sustained losses over the past
three years and The Company has varied its ownership percentages over the years
and expects to do so in the future the results from equity investees is
dependent upon the success of their operations.
The combined sales of the following equity entities Ecoval, Petrozyme and Dantec
Systems was $1,560,122 for the year ended December 31, 1997 compared to
$1,396,027 in 1996. The combined net losses of these companies was $7,152,634
for 1997 with CVF's share of these losses being approximately $1,900,000.
Comparable proportion of losses which CVF included for 1996 prior was $840,929.
The increase in equity entity losses was primarily due to increased costs of
supplies of raw materials in one of these companies.
Over the last two years The Company has benefited from the ownership of common
shares of Certicom Corp. which it managed and supported in accordance with the
nature of The Company's business. In 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 $3,204,185 in 1996 and $19,758,954 in 1997.
11
<PAGE> 12
LIQUIDITY AND CAPITAL RESOURCES:
At December 31, 1998 stockholders equity was $10,539,132 as compared to
$12,063,155 at December 31, 1997. This decline of $1,524,023 was attributed to
the net loss of $4,660,705 in 1998, the purchase of 162,500 treasury shares of
The Company for $800,145 and the decline of the Canadian dollar which caused the
currency translation adjustment to decline by $1,021,341. These declines were
offset by additional capital of $5,294,411 being raised through a public
offering which closed on July 13, 1998, a private placement of stock, plus
shares being issued in acquisitions.
The current ratio of The Company at December 31, 1998 remains strong at 2.3 to 1
the same as it was at December 31, 1997. This current ratio was maintained even
with the decline of cash and cash equivalents of $5,635,000 from December 31,
1997 to 1998.
As it did in 1998, CVF plans to raise additional funds through either private
placement or public offering in order to further augment the growth of its
companies. The money raised will be used to acquire additional positions in its
existing companies or to acquire companies that are synergistic to the current
portfolio.
Also as the CVF group of companies mature, we will assist them in obtaining
private placement financing in order to prepare them for their IPO stage of
growth.
Impact of Year 2000 Compliance
The Year 2000 problem, which is a pervasive issue throughout the industrial,
financial and service sectors, arises because most computer software was
originally created with a two digit date code and would read "00," "01," etc. as
meaning 1900, 1901, etc. not 2000, 2001, etc. The Company has completed the
upgrade of its software and computer systems to make them Year 2000 (Y2K)
compliant. The cost of this upgrade was approximately $20,000, including
software and hardware. The Company's management has surveyed its subsidiary
companies and, based upon their responses, does not expect any major malfunction
in their internal systems.
Company management has reviewed potential problems associated with the Y2K,
especially from third party suppliers and providers of services over which The
Company has no control. CVF and its subsidiaries have done an extensive review
of their external third party suppliers. All financial institutions with which
CVF does business with have responded that they are either now Y2K compliant or
will be by December 31, 1999. Also all major suppliers and customers have given
assurances that they will be Y2K compliant. While there can be no assurance that
there will be no material, adverse consequences, the Company believes that there
will be no material additional cost incurred to become Y2K compliant and does
not consider contingency plans to deal with Y2K to be necessary.
Financial Considerations
Early Stage Development Companies. Each of the Corporations (other than Canadian
Venture Founders Leasing Corporation) is an early stage development Company with
a limited relevant operating history upon which an evaluation of its prospects
can be made. As such, there can be no assurance of the future success of any of
the Corporations.
Quarterly Fluctuations. CVF's operation 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.
Rapid Technological Change. The markets for the Corporations' products are
generally characterized by rapidly changing technology, evolving industry
standards, changes in customer needs and frequent new product introductions. The
Corporations' future success will depend on their ability to enhance current
products, develop new products on a timely and cost-effective basis that meet
changing customer needs and to respond to emerging industry standards and other
technological changes. There can be no assurance that the Corporations will be
successful in developing new products or enhancing their existing products on a
timely basis, or that such new products or product enhancements will achieve
market acceptance.
12
<PAGE> 13
ITEM 7 FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
PAGE NUMBER
REPORT OF INDEPENDENT AUDITORS' F-2
PRIOR INDEPENDENT AUDITORS' REPORT F-3
CONSOLIDATED BALANCE SHEETS F-4
CONSOLIDATED STATEMENTS OF OPERATIONS F-6
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY F-7
CONSOLIDATED STATEMENTS OF CASH FLOWS F-8
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-10
<PAGE> 14
REPORT OF INDEPENDENT AUDITORS'
To the Stockholders and
Board of Directors of
CVF TECHNOLOGIES CORPORATION
We have audited the accompanying consolidated balance sheets of CVF TECHNOLOGIES
CORPORATION (formerly CVF Corporation) as of December 31, 1998 and 1997 and the
related consolidated statements of operations, stockholders' equity, cash flows
and comprehensive income for the years 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 audits.
We conducted our audits 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 audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of CVF Technologies
Corporation as of December 31, 1998 and 1997, and the consolidated results of
its operations and its cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Kitchener, Canada, Ernst & Young LLP
March 31, 1999. Chartered Accountants
F-2
<PAGE> 15
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Board of Directors
of CVF Technologies Corporation
We have audited the accompanying consolidated statements of operations,
stockholders' equity, cash flows and comprehensive income of CVF Technologies
Corporation for the year ended DECEMBER 31, 1996. 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 generally accepted auditing
standards. 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 financial statements referred to above present
fairly, the results of its operations and its cash flows for CVF Technologies
Corporation for the year ended December 31, 1996, in conformity with generally
accepted accounting principles.
/s/ Feldman Sherb Ehrlich & Co., P.C.
Feldman Sherb Ehrlich & Co., P.C.
Certified Public Accountants
(formerly Feldman Radin & Co., P.C.)
New York, New York
March 14, 1997
F-3
<PAGE> 16
CVF TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEETS
As of December 31 [Expressed in U.S. Currency]
<TABLE>
<CAPTION>
1998 1997
$ $
- - -------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT
Cash and cash equivalents 4,297,177 9,931,906
Restricted cash [note 6] 169,945 682,361
Marketable securities [note 4] 101,522 --
Trade receivables 3,129,862 557,998
Inventory [note 3] 790,467 390,125
Prepaid expenses and other 333,262 326,896
Income taxes receivable 998,750 --
- - --------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 9,820,985 11,889,286
- - --------------------------------------------------------------------------------------------------
Property and equipment, net of accumulated depreciation 517,444 169,851
Holdings, carried at cost or equity [note 4] 1,777,744 2,107,060
Holdings, available for sale, at market [note 4] 1,332,538 1,562,194
Goodwill, net of accumulated amortization [note 5] 7,691,584 4,023,825
Deferred income taxes [note 9] 215,101 --
- - --------------------------------------------------------------------------------------------------
TOTAL ASSETS 21,355,396 19,752,216
==================================================================================================
</TABLE>
F-4
<PAGE> 17
<TABLE>
<CAPTION>
1998 1997
$ $
- - --------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank indebtedness [note 6] 130,098 824,577
Current portion of long-term debt [note 7] 281,648 196,000
Trade payables 2,525,737 461,697
Accrued liabilities 876,958 1,151,740
Bonuses payable -- 500,000
Dividends payable on Series A preferred stock [note 10] 69,434 52,500
Dividends payable on subsidiary's shares [note 12] 203,239 165,200
Income taxes payable 238,570 1,820,598
- - --------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 4,325,684 5,172,312
- - --------------------------------------------------------------------------------------------------
Long-term debt [note 7] 662,928 615,697
Deferred income taxes [note 9] 119,826 251,822
Minority interest 3,622,122 --
Pension obligation [note 8] 506,463 --
Preferred and other non-voting stock of subsidiaries [note 12] 1,122,991 1,193,000
Redeemable Series A preferred stock, $0.001 par value,
authorized 500,000 shares,
issued and outstanding 25,000 shares [note 10] 456,250 456,250
- - --------------------------------------------------------------------------------------------------
6,490,580 2,516,769
- - --------------------------------------------------------------------------------------------------
10,816,264 7,689,081
- - --------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY [note 10]
Common stock, $0.001 par value, authorized 50,000,000 shares,
outstanding 6,729,928 [1997; 5,729,449]
and in treasury 425,400 [1997; 262,900] 7,155 5,992
Additional paid in capital 18,951,228 13,657,950
Treasury stock (2,662,194) (1,862,049)
Accumulated other comprehensive income (655,736) 680,777
Accumulated deficit (5,101,321) (419,535)
- - --------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 10,539,132 12,063,135
- - --------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 21,355,396 19,752,216
==================================================================================================
</TABLE>
See accompanying notes
F-5
<PAGE> 18
CVF TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31 [Expressed in U.S. Currency]
<TABLE>
<CAPTION>
1998 1997 1996
$ $ $
- - --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SALES 7,357,996 1,685,399 1,866,176
Cost of sales 5,053,194 1,091,821 1,029,638
- - --------------------------------------------------------------------------------------------------
GROSS MARGIN 2,304,802 593,578 836,538
- - --------------------------------------------------------------------------------------------------
EXPENSES
Selling, general and administrative 7,762,187 5,367,541 3,342,739
Research and development 441,658 422,216 257,913
- - --------------------------------------------------------------------------------------------------
8,203,845 5,789,757 3,600,652
- - --------------------------------------------------------------------------------------------------
(Loss) from operations (5,899,043) (5,196,179) (2,764,114)
- - --------------------------------------------------------------------------------------------------
OTHER INCOME AND (EXPENSES)
Interest income (expense), net 150,274 448,684 (47,700)
Other income, net 709,805 52,642 102,933
(Loss) from equity investees (1,152,190) (145,165) (296,762)
Gain on sale of holdings 579,775 19,758,954 3,204,185
Minority interest (144,329) -- 400,449
- - --------------------------------------------------------------------------------------------------
143,335 20,115,115 3,363,105
- - --------------------------------------------------------------------------------------------------
(Loss) income before provision
for income taxes (5,755,708) 14,918,936 598,991
(Recovery of) provision for
income taxes [note 9] (1,095,003) 5,919,665 892,790
- - --------------------------------------------------------------------------------------------------
NET (LOSS) INCOME (4,660,705) 8,999,271 (293,799)
==================================================================================================
BASIC (LOSS) EARNINGS PER SHARE [NOTE 11] (0.75) 1.52 (0.05)
==================================================================================================
DILUTED (LOSS) EARNINGS PER SHARE [NOTE 11] (0.75) 1.49 (0.05)
==================================================================================================
BASIC WEIGHTED AVERAGE SHARES [NOTE 11] 6,215,586 5,870,553 5,989,849
==================================================================================================
DILUTED WEIGHTED AVERAGE SHARES [NOTE 11] 6,215,586 6,009,708 5,989,849
==================================================================================================
</TABLE>
See accompanying notes
F-6
<PAGE> 19
CVF TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Year ended December 31 [Expressed in U.S. Currency]
<TABLE>
<CAPTION>
ADDITIONAL
COMMON STOCK PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT
- - --------------------------------------------------------------------------------------------------------------------------
$ $ $
- - --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE - JANUARY 1, 1996 5,992,349 5,992 12,930,787 (9,071,007)
Purchase of treasury stock -- -- -- --
Net (loss) -- -- -- (293,799)
Unrealized gain on securities
available for sale, net of taxes -- -- -- --
- - --------------------------------------------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 1996 5,992,349 5,992 12,930,787 (9,364,806)
Purchase of treasury stock -- -- -- --
Net income -- -- -- 8,999,271
Dividends on Series A preferred stock -- -- -- (54,000)
Sale of available for sale securities -- -- -- --
Tax benefit of employee
stock transaction -- -- 727,163 --
Unrealized gain on securities
available for sale, net of taxes -- -- -- --
Translation adjustment -- -- -- --
- - --------------------------------------------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 1997 5,992,349 5,992 13,657,950 (419,535)
Issuance of shares for cash 997,230 997 4,616,112 --
Purchase of treasury stock -- -- -- --
Net (loss) -- -- -- (4,660,705)
Dividends on Series A preferred stock -- -- -- (21,081)
Sale of available for sale securities -- -- -- --
Shares issued on acquisition of interest
in Ecoval 40,179 40 160,676 --
Private placement sale for cash 100,000 100 359,900 --
Shares on acquisition of interest in Gemprint 25,570 26 156,590 --
Unrealized gain (loss) on securities
available for sale, net of taxes -- -- -- --
Translation adjustment -- -- -- --
- - --------------------------------------------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 1998 7,155,328 7,155 18,951,228 (5,101,321)
==========================================================================================================================
<CAPTION>
ACCUMULATED
TREASURY OTHER COMPREHENSIVE TOTAL
STOCK INCOME EQUITY
- - ---------------------------------------------------------------------------------------------------
$ $ $
- - ---------------------------------------------------------------------------------------------------
<S> <C> <C>
BALANCE - JANUARY 1, 1996 -- (277,252) 3,588,520
Purchase of treasury stock (55,011) -- (55,011)
Net (loss) -- -- (293,799)
Unrealized gain on securities
available for sale, net of taxes -- 13,840,070 13,840,070
- - ---------------------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 1996 (55,011) 13,562,818 17,079,780
Purchase of treasury stock (1,807,038) -- (1,807,038)
Net income -- -- 8,999,271
Dividends on Series A preferred stock -- -- (54,000)
Sale of available for sale securities -- (13,840,070) (13,840,070)
Tax benefit of employee
stock transaction -- -- 727,163
Unrealized gain on securities
available for sale, net of taxes -- 305,818 305,818
Translation adjustment -- 652,211 652,211
- - ---------------------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 1997 (1,862,049) 680,777 12,063,135
Issuance of shares for cash -- -- 4,617,109
Purchase of treasury stock (800,145) -- (800,145)
Net (loss) -- -- (4,660,705)
Dividends on Series A preferred stock -- -- (21,081)
Sale of available for sale securities -- (289,849) (289,849)
Shares issued on acquisition of interest
in Ecoval -- -- 160,716
Private placement sale for cash -- -- 360,000
Shares on acquisition of interest in Gemprint -- -- 156,616
Unrealized gain (loss) on securities
available for sale, net of taxes -- (25,323) (25,323)
Translation adjustment -- (1,021,341) (1,021,341)
- - ---------------------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 1998 (2,662,194) (655,736) 10,539,132
===================================================================================================
</TABLE>
See accompanying notes
F-7
<PAGE> 20
CVF TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31 [Expressed in U.S. Currency]
<TABLE>
<CAPTION>
1998 1997 1996
$ $ $
- - ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net (loss) income (4,660,705) 8,999,271 (293,799)
Adjustments to reconcile net (loss) income
from operating activities [note 14] 1,816,153 (19,256,776) (3,025,413)
Changes in operating assets and liabilities [note 14] (4,252,856) 1,844,331 1,097,738
- - ---------------------------------------------------------------------------------------------------
CASH (APPLIED TO) OPERATING ACTIVITIES (7,097,408) (8,413,174) (2,221,474)
- - ---------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of property and equipment (295,212) -- (174,316)
Investments in and advances to equity investees (1,672,650) (865,605) (1,066,596)
Purchase of holdings available for sale (362,860) -- --
Purchase of marketable securities (122,357) -- --
Repayment from equity investees 235,032 -- --
Proceeds from sale of holdings 914,680 20,389,424 3,683,362
Acquisitions, net of cash acquired (993,608) (686,272) --
- - ---------------------------------------------------------------------------------------------------
CASH (APPLIED TO) PROVIDED BY INVESTING ACTIVITIES (2,296,975) 18,837,547 2,442,450
- - ---------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
(Decrease) increase in bank indebtedness (753,176) 58,179 --
Borrowings of debt 79,588 121,365 991,108
(Payments) of debt -- -- (160,586)
(Payments) borrowings of debt to related parties -- -- (133,561)
Issuance of equity securities 4,977,111 -- --
Reductions (deposits) of restricted cash 482,168 (682,361) --
Purchase of treasury stock (790,664) (1,807,038) (55,011)
Minority investments in subsidiaries -- -- 586,835
- - ---------------------------------------------------------------------------------------------------
CASH PROVIDED BY (APPLIED TO) FINANCING ACTIVITIES 3,995,027 (2,309,855) 1,228,785
- - ---------------------------------------------------------------------------------------------------
Effect of exchange rate changes on
cash and cash equivalents (235,373) (77,888) --
- - ---------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS (APPLIED) PROVIDED
DURING YEAR (5,634,729) 8,036,630 1,449,761
Cash and cash equivalents, beginning of year 9,931,906 1,895,276 445,515
- - ---------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR 4,297,177 9,931,906 1,895,276
===================================================================================================
Cash paid during the year for interest 212,510 163,346 116,616
- - ---------------------------------------------------------------------------------------------------
Cash paid during the year for income taxes 1,735,751 4,200,000 --
- - ---------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes
F-8
<PAGE> 21
CVF TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME
Year ended December 31 [Expressed in U.S. Currency]
<TABLE>
<CAPTION>
1998 1997 1996
$ $ $
- - ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET (LOSS) INCOME (4,660,705) 8,999,271 (293,799)
- - --------------------------------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME, NET OF TAX [note 10]
Foreign currency translation adjustments
[net of $nil tax effect] (1,021,341) 652,211 --
Unrealized holding gains:
Unrealized holding (losses) gains arising during
period [net of taxes of $(15,218), $42,190 and
$7,451,840 for the years ended December 31, 1998,
1997 and 1996] (25,323) 63,948 13,840,070
Reclassification adjustments for previously recognized
unrealized holding gains [net of taxes of $nil,
$7,322,108 and $nil for the years ended December 31,
1998, 1997 and 1996] (289,849) (13,598,200) --
- - --------------------------------------------------------------------------------------------------
Net unrealized holding (losses) gains (315,172) (13,534,252) 13,840,070
- - --------------------------------------------------------------------------------------------------
Total other comprehensive (loss) income (1,336,513) (12,882,041) 13,840,070
- - --------------------------------------------------------------------------------------------------
COMPREHENSIVE (LOSS) INCOME DURING YEAR (5,997,218) (3,882,770) 13,546,271
==================================================================================================
</TABLE>
See accompanying notes
F-9
<PAGE> 22
CVF TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 [Expressed in U.S. Currency]
1. ORGANIZATION AND BUSINESS DESCRIPTION
CVF Technologies Corporation [the "Company"] is a company incorporated under the
laws of the State of Nevada.
In 1998, CVF Corporation changed its name to CVF Technologies Corporation. In
1997, CVF Corp. changed its name to CVF Corporation.
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 (bio-filters) and for
use in the food processing, agriculture and pharmaceutical manufacturing
industries. At December 31, 1998, the Company had a 69% [69% in 1997] ownership
interest in Biorem.
GEMPRINT CORPORATION ["GEMPRINT"] is in the business of providing products and
services to 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,
1998, the Company had a 67% [67% in 1997] ownership interest in Gemprint.
SOLARIA RESEARCH ENTERPRISES, LTD. ["SOLARIA"] is a Waterloo, Canada company in
the business of developing, manufacturing and marketing a line of electronic
motor speed control products for industrial electric vehicles. At December 31,
1998, the Company had a 67% [67% in 1997] ownership interest in Solaria.
F-10
<PAGE> 23
CVF TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 [Expressed in U.S. Currency]
1. ORGANIZATION AND BUSINESS DESCRIPTION CONT'D
EASTVIEW MARKETING, ONE, LLC ["EASTVIEW"] a wholly-owned subsidiary, was
incorporated in the state of New York on December 19, 1997 for the purpose of
developing an infommercial to market in the United States natural fertilizers
and environmentally safe organic herbicides manufactured by Ecoval Inc., an
equity holding of CVF Technologies 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 1999, Grand Island2 will market and arrange environmental clean up
contracts with real estate developers in the United States using the services of
Biorem Technologies, Inc., and other soil remediation companies.
GRAND ISLAND MARKETING, INC. ["GRAND INC."] a wholly-owned subsidiary, was
incorporated on January 28, 1998 in the state of Delaware. Grand Inc. has a 51%
economic interest in a partnership, known as "Elements". Elements was formed to
carry on the business of operating retail stores offering natural health and
food products and health services including naturopathic and homeopathic
medicine and chiropractic services as well as products manufactured by Ecoval.
Elements is also developing an e-commerce website to market its products and
services.
DANTEC CORPORATION ["DANTEC"] was formed on June 30, 1998, with the amalgamation
of Dantec Electronics Limited, Dantec Systems Corporation, and 1246680 Ontario
Limited. Dantec Corporation, located in Waterloo, Canada, manufactures and sells
advanced process control systems for a variety of industries applications. At
December 31, 1998, the Company had a 54% ownership interest in Dantec.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These consolidated financial statements have been prepared by management in
accordance with accounting principles generally accepted in the United States.
PRINCIPLES OF CONSOLIDATION
The financial statements include the accounts of the Company and its
majority-owned subsidiaries. All material intercompany accounts and transactions
have been eliminated.
The fiscal year-ends of the subsidiaries vary, in some cases, from those of the
Company. The consolidated financial statements combine periods which are within
three months of the Company's fiscal year-end, for all the companies.
F-11
<PAGE> 24
CVF TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 [Expressed in U.S. Currency]
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONT'D
Holdings in which the Company has a 20-50% ownership position and significant
influence are accounted for under the equity method of accounting, such that the
Company records losses to the extent of the Company's total holdings in the
investee, comprising its equity interest, advances and loans.
The Company accounts for holdings of less than 20% ownership position according
to SFAS 115, as follows:
Holdings in 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.
Holdings in securities that are bought and held principally for the purpose of
selling in the near term are classified as "marketable securities". Marketable
securities are reported at fair value, with the unrealized gain or loss, net of
tax effect, included in income.
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 in other comprehensive income.
Transactions and balances denominated in currencies other than the functional
currencies of the Company or its subsidiaries are remeasured in the applicable
functional currency. Translation adjustments arising on such remeasurement are
included in the determination of net income (loss).
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid temporary cash investments, with a
maturity of three months or less when purchased, to be cash equivalents.
F-12
<PAGE> 25
CVF TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 [Expressed in U.S. Currency]
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONT'D
TRADE RECEIVABLES
Trade receivables are presented net of allowance for doubtful accounts. The
allowance was $77,052 at December 31, 1998 [$59,300 at December 31, 1997].
Amounts charged to expense were $25,681 during the year ended December 31, 1998
[$8,500 in 1997; $29,200 in 1996]. One customer represents 71% of trade
receivables at December 31, 1998.
INVENTORY
Finished goods are stated at the lower of cost or market using the first-in,
first-out method of costing. Raw materials are stated at the lower of cost or
replacement value.
ADVERTISING
The Company expenses the production costs of broadcast advertising upon the
first airing of the advertisement. Total deferred advertising costs included in
prepaid expenses at December 31, 1998 were $nil [$234,771 in 1997]. Other types
of advertising costs are expensed as incurred. Total advertising expenses were
$1,088,500 [$82,733 in 1997, $35,061 in 1996].
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, 1998 was $588,549 [$484,134 in 1997]. Depreciation expense was $119,558
[$97,958 in 1997, $81,591 in 1996.]
FINANCIAL INSTRUMENTS
The Company's financial instruments, cash and cash equivalents, restricted cash,
trade receivables, income taxes receivable, bank indebtedness, trade payables,
accrued liabilities, dividends payable, and income taxes payable, are carried at
cost which approximates fair value due to the short-term maturity of these
instruments. The Company's long-term debt and pension obligation are carried at
cost which approximates fair value, as the debt bears interest at rates
approximating current market rates. Marketable securities and holdings
available for sale at market are valued at the published related stock market
values. These values are subject to market value risks as stock prices may
fluctuate from day to day. Those holdings carried at cost or equity and the
non-voting stock of subsidiaries are related to private companies whose fair
market value is not readily determinable.
The majority of the Company's subsidiaries are located in Canada and, although a
significant portion of revenues are earned in U.S. dollars, those financial
instruments which are denominated in currencies other than U.S. dollars are
subject to exchange rate risk. At December 31, 1998, cash of approximately
$3,500,000, trade receivables of about $2,300,000, income taxes receivable of
$998,750 and accounts payable of about $1,500,000 are denominated in U.S.
dollars.
F-13
<PAGE> 26
CVF TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 [Expressed in U.S. Currency]
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONT'D
GOODWILL
Goodwill is recorded in connection with the acquisition of subsidiaries.
Goodwill also exists in connection with the acquisition of equity basis
holdings, representing the difference between the underlying equity interest
purchased and the amount paid for the interest. Goodwill is amortized over a
period of up to 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
and the Company's share of their earnings (losses).
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 (credited) with their proportionate
share of subsidiary losses (net income) to the extent positive equity-adjusted
holdings are available. Where excess losses are recorded by the Company they
will be charged against minority interests in the event future income becomes
available or minority interests contribute additional equity.
EARNINGS (LOSS) PER SHARE
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. The net income (loss) available to common
stockholders consists of net income (loss) reduced by the dividends on the
Company's Series A preferred stock. Diluted earnings (loss) per share reflects
the per share amount that would have resulted if dilutive 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.
F-14
<PAGE> 27
CVF TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 [Expressed in U.S. Currency]
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONT'D
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 share at the date of
grant.
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.
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.
F-15
<PAGE> 28
CVF TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 [Expressed in U.S. Currency]
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONT'D
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
COSTS OF START-UP ACTIVITIES
In April 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 98-5,
"Reporting on the Costs of Start-Up Activities", which is required to be adopted
for the Company's financial statements for the year ended December 31, 1999.
Under the new requirements, costs of start-up activities, including organization
costs, should be expensed as incurred. The Company intends to apply these
standards prospectively in 1999.
DERIVATIVES AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities", which is
required to be adopted for the Company's financial statements for the year ended
December 31, 2000. The Company has not determined the impact, if any, SFAS 133
will have on its financial statements.
3. INVENTORY
Inventory consists of the following:
<TABLE>
<CAPTION>
1998 1997
$ $
- - ----------------------------------------------------------------------------
<S> <C> <C>
Raw material 261,859 201,019
Finished goods 528,608 189,106
- - ----------------------------------------------------------------------------
790,467 390,125
============================================================================
</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. 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 Canada, Inc. ["TurboSonic"], a Waterloo, Canada public company
which is in the business of air pollution control products. The shares of
TurboSonic Canada, Inc, are exchangeable for an equal number of shares of
its parent, TurboSonic Technologies, Inc., a New Jersey public company.
F-16
<PAGE> 29
CVF TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 [Expressed in U.S. Currency]
4. HOLDINGS CONT'D
c. RDM Corporation ["RDM"], formerly known as Mindflight Corporation, a
Waterloo, Canada public company in the business of developing and supplying
technologies for both paper and electronic based payment systems.
d. Safeguard Scientific Inc. ["Safeguard"], a Wayne, Pennsylvania public
company in the business of developing small, private companies into
profitable, publicly-traded companies.
Holdings consisted of the following at December 31, 1998:
<TABLE>
<CAPTION>
HOLDINGS MARKETABLE
HOLDINGS AVAILABLE FOR SECURITIES
AT COST FOR SALE AT AT
PERCENTAGE OR EQUITY FAIR VALUE MARKET
OWNERSHIP $ $ $
- - ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Ecoval
1,330,550 common shares [i] 27% 535,807
notes and advances [viii] 415,654
- - ----------------------------------------------------------------------------------------------------
951,461
- - ----------------------------------------------------------------------------------------------------
Petrozyme
50 common shares 50% (434,851)
250,000 Class C non-voting shares 100% 163,375
notes and advances [viii] 751,525
- - ----------------------------------------------------------------------------------------------------
480,049
- - ----------------------------------------------------------------------------------------------------
Certicom
29,881 non-marketable preferred
shares [ii] 217,058
- - ----------------------------------------------------------------------------------------------------
TurboSonic
1,337,979 common shares [iii] 13% 250,884
- - ----------------------------------------------------------------------------------------------------
RDM
1,768,072 common shares [iv] 18% 982,120
- - ----------------------------------------------------------------------------------------------------
Safeguard Scientific
3,700 common shares [v] 101,522
- - ----------------------------------------------------------------------------------------------------
Other notes and holdings [viii] 129,176 99,534
- - ----------------------------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------------------
TOTAL 1,777,744 1,332,538 101,522
====================================================================================================
</TABLE>
F-17
<PAGE> 30
CVF TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 [Expressed in U.S. Currency]
4. HOLDINGS CONT'D
Holdings consisted of the following at December 31, 1997:
<TABLE>
<CAPTION>
HOLDINGS
HOLDINGS AVAILABLE FOR
AT COST FOR SALE AT
PERCENTAGE OR EQUITY FAIR VALUE
OWNERSHIP $ $
- - -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Ecoval
1,210,550 common shares [i] 24% 840,157
- - -------------------------------------------------------------------------------------------------------
Dantec Systems
34,700 common shares [vi] 41% 419,662
notes and advances [viii] 367,500
- - -------------------------------------------------------------------------------------------------------
787,162
- - -------------------------------------------------------------------------------------------------------
Petrozyme
50 common shares 50% (211,750)
250,000 Class C non-voting shares 100% 175,000
notes and advances [viii] 245,000
- - -------------------------------------------------------------------------------------------------------
208,250
- - -------------------------------------------------------------------------------------------------------
Certicom
15,605 common shares [vii] 0.5% 469,711
59,763 non-marketable preferred shares [ii] 251,677
- - -------------------------------------------------------------------------------------------------------
251,677 469,711
TurboSonic
1,334,977 common shares [iii] 13% 392,483
- - -------------------------------------------------------------------------------------------------------
RDM
1,428,572 special warrants [iv] 17% 700,000
- - -------------------------------------------------------------------------------------------------------
Other notes and holdings [viii] 19,814
- - -------------------------------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------------------------------
TOTAL 2,107,060 1,562,194
========================================================================================================
</TABLE>
F-18
<PAGE> 31
CVF TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 [Expressed in U.S. Currency]
4. HOLDINGS CONT'D
[i] On March 4, 1998, the Company purchased 120,000 shares in Ecoval to
increase its holdings to 27% from 24% as at December 31, 1998. The total
consideration for the shares was $582,600, which consisted of 40,179
shares of the Company and cash of $422,000.
[ii] During 1998, the Company redeemed 29,882 of its non-marketable preferred
shares of Certicom. The remaining shares will be redeemed in 1999.
[iii] Shareholdings in TurboSonic are through the Company's ownership of
exchangeable shares of TurboSonic Canada, Inc. which are exchangeable
into TurboSonic Technologies, Inc. common shares on a one for one basis.
At December 31, 1998, the market of the shares was U.S. $0.19 per share.
As at December 31, 1998, the common shares of TurboSonic have an
original cost of $345,481. Accordingly, aggregate unrealized losses of
$56,758 [net of deferred income tax benefit of $37,839] have been
recorded as an element of accumulated other comprehensive income for the
year ended December 31,
1998.
[iv] The investment in RDM represents a private placement purchase of warrants
exercised to acquire 1,698,572 common shares in 1998, plus the purchase
of 69,500 common shares in the open market. At December 31, 1998, the
market value of shares of RDM listed on the Vancouver Stock Exchange was
Cdn. $0.85 [U.S. $0.56] per share. As at December 31, 1998, the shares
have an original cost of $925,702. Accordingly, aggregate unrealized
gains of $56,418 [net of deferred income taxes of $37,612] have been
recorded as an element of accumulated other comprehensive income. An
officer and director of the Company holds approximately 20% of the
common shares of RDM.
[v] The investment in Safeguard represents the purchase of 3,700 common
shares in the open market. At December 31, 1998, the common shares of
Safeguard have a carrying value of $118,400, creating a realized loss of
$16,878.
[vi] During 1998, the Company acquired control of Dantec Systems and it was
subsequently amalgamated with 1246680 Ontario Limited, another company
controlled by the Company, to form Dantec Corporation.
[vii] During January and February 1998, 15,605 common shares of Certicom were
sold for net proceeds of approximately $375,000.
[viii] 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, 1998 was 6.75% [6% in 1997]. The notes have been
classified as long-term as the Company does not intend to demand
repayment in the next year.
The Cdn. $597,500 and U.S. $25,000 notes issued to Ecoval in 1998 are
demand notes.
During 1998 the Company issued Cdn. $800,000 in additional promissory
notes to Petrozyme.
F-19
<PAGE> 32
CVF TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 [Expressed in U.S. Currency]
4. HOLDINGS CONT'D
The following table gives certain combined summarized financial information
related to the Company's equity holdings:
<TABLE>
<CAPTION>
1998 1997 1996
INCOME STATEMENT DATA $ $ $
- - --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales 1,114,138 1,560,122 1,396,027
Gross profit (loss) on sales 12,394 (16,114) 70,789
Net (loss) (3,016,717) (7,152,634) (2,713,912)
- - --------------------------------------------------------------------------------------------------
CVF TECHNOLOGIES CORPORATION'S SHARE
OF NET (LOSS) (953,244) (1,899,287) (840,929)
==================================================================================================
BALANCE SHEET DATA
Current assets 873,292 2,665,662 1,260,130
Non-current assets 3,358,824 4,029,052 5,924,516
- - --------------------------------------------------------------------------------------------------
TOTAL ASSETS 4,232,116 6,694,714 7,184,646
==================================================================================================
Current liabilities 857,013 1,077,528 1,204,872
Non-current liabilities 3,210,449 2,811,313 11,581,846
Equity (deficit) 164,654 2,805,873 (5,602,072)
- - --------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND EQUITY 4,232,116 6,694,714 7,184,646
- - --------------------------------------------------------------------------------------------------
CVF TECHNOLOGIES CORPORATION'S SHARE OF
(ACCUMULATED DEFICIT) EQUITY (108,133) 573,360 (1,659,763)
==================================================================================================
</TABLE>
F-20
<PAGE> 33
CVF TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 [Expressed in U.S. Currency]
4. HOLDINGS CONT'D
The amount of CVF Technologies 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 $nil [$1,930,000 in 1997] 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, 1998 $ $ $
- - --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Ecoval 2,348,394 423,435 1,924,959
Petrozyme 120,898 20,149 100,749
- - --------------------------------------------------------------------------------------------------
2,469,292 443,584 2,025,708
==================================================================================================
ACCUMULATED NET BOOK
COST AMORTIZATION VALUE
AS AT DECEMBER 31, 1997 $ $ $
- - --------------------------------------------------------------------------------------------------
Ecoval 1,947,502 288,147 1,659,355
Petrozyme 129,500 12,950 116,550
Dantec Systems 971,603 356,553 615,050
- - --------------------------------------------------------------------------------------------------
3,048,605 657,650 2,390,955
==================================================================================================
</TABLE>
During 1998, amortization of goodwill related to equity investees totaled
$198,946 [$177,256 in 1997; $185,233 in 1996].
The investee companies have various debt and equity securities and options
outstanding which are convertible into common stock of the respective investee
companies. Such conversions, except where noted, would not materially decrease
or increase the Company's interest in the earnings or net assets of any
investee.
F-21
<PAGE> 34
CVF TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 [EXPRESSED IN U.S. CURRENCY]
5. GOODWILL
<TABLE>
<CAPTION>
ACCUMULATED NET BOOK
COST AMORTIZATION VALUE
AS AT DECEMBER 31, 1998 $ $ $
- - ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Elements 810,449 29,133 781,316
Solaria 406,519 161,232 245,287
Biorem 168,970 55,082 113,888
Gemprint 2,374,431 505,029 1,869,402
Dantec Corporation 5,199,432 517,741 4,681,691
- - ---------------------------------------------------------------------------------------------------
8,959,801 1,268,217 7,691,584
===================================================================================================
</TABLE>
<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
===================================================================================================
</TABLE>
During 1998, amortization of goodwill in subsidiaries totaled $462,403 [$204,197
in 1997; $158,861 in 1996].
6. BANK INDEBTEDNESS
<TABLE>
<CAPTION>
1998 1997
$ $
- - ----------------------------------------
<S> <C> <C>
Gemprint[a] 124,478 133,335
Biorem[b] 5,620 210,000
-- 297,500
Other -- 183,742
- - ----------------------------------------
130,098 824,577
========================================
</TABLE>
The weighted average interest rate on bank indebtedness during 1998 was 7.66%
[5% in 1997].
[a] Gemprint has bank indebtedness of Cdn. $190,479 [U.S. $124,478], [1997 -
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 Technologies Corporation and is collateralized by a term deposit of
Cdn. $260,054 [U.S. $169,945], [1997 - Cdn. $252,387 [U.S. $176,671]].
F-22
<PAGE> 35
CVF TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 [Expressed in U.S. Currency]
6. BANK INDEBTEDNESS CONT'D
[b] Biorem has a bank overdraft of Cdn. $8,600 [U.S. $5,620]. In 1997, Biorem
had bank lines of credit available with two major Canadian banks. The
first line had a maximum availability of Cdn. $300,000 [U.S. $210,000],
bore interest at 3% and was payable on demand. At December 31, 1997, an
amount of Cdn. $300,000 [U.S. $210,000] had been drawn on this line. The
other line had 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 bore interest at
prime plus 1% and was payable on demand. These facilities were guaranteed
by the Company and were collateralized by term deposits of Cdn. $300,000
[U.S. $210,000] and Cdn. $422,414 [U.S. $295,690].
7. LONG-TERM DEBT
Long-term debt comprises the following:
<TABLE>
<CAPTION>
1998 1997
$ $
- - ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Convertible debenture issued by Gemprint,
of Cdn. $384,081, 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
issuance of third party common stock
sale in excess of $730,000. 250,997 268,857
Non-convertible debenture issued by Gemprint,
of Cdn. $187,500, bearing interest at 13.5%,
repayable in February 2000. This debenture was
purchased by the Company during 1998. -- 140,000
Settlement with ISM Information Systems Management
Corporation and Gemprint, of Cdn. $360,000 interest-free
to August 1998, with interest charged at prime plus1%,
thereafter, currently due on demand. 235,260 252,000
Small business loan issued by the Bank of Nova Scotia to
Elements, of Cdn. $224,998. The loan is repayable over
five years to July 2003, with monthly principal payments of
Cdn. $4,167, plus interest of prime rate of 2.50%. 147,036 --
</TABLE>
F-23
<PAGE> 36
CVF TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 [Expressed in U.S. Currency]
<TABLE>
<CAPTION>
7. LONG-TERM DEBT CONT'D
<S> <C> <C>
Small business loan issued by the Canadian Imperial
Bank of Commerce to Elements of Cdn. $206,303. The
loan is repayable over ten years, to November 2008, with
monthly principal payments of Cdn. $1,748 plus interest of
prime plus 2.25%. 134,819 --
Other 176,464 150,840
- - --------------------------------------------------------------------------------------------------
Total long-term debt 944,576 811,697
Less: current portion of long-term debt 281,648 196,000
- - --------------------------------------------------------------------------------------------------
LONG-TERM DEBT EXCLUDING CURRENT PORTION 662,928 615,697
==================================================================================================
Scheduled repayments are as follows:
$
- - --------------------------------------------------------------------------------------------------
1999 281,648
2000 46,388
2001 297,385
2002 46,388
2003 30,200
Beyond 242,567
- - --------------------------------------------------------------------------------------------------
944,576
==================================================================================================
</TABLE>
Interest expense on long-term debt during the year was $20,790 [$30,825 during
1997, $21,671 during 1996].
8. PENSION OBLIGATION
In recognition of past service contributions by a retired, former executive
officer, the Company has agreed to provide a Cdn. $6,000 [U.S. $4,000] monthly
pension benefit for life. The accrued pension obligation, which has been
expensed in the current year, represents the actuarial value of a life annuity
using a discount rate of 6%. This obligation will be adjusted annually based on
payments made and changes in actuarial assumptions. The Company expects to fund
the obligation from operating cash flows.
F-24
<PAGE> 37
CVF TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 [Expressed in U.S. Currency]
9. INCOME TAXES
Details of the income tax provision are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
$ $ $
- - ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current - U.S. (1,003,089) 5,839,765 892,790
Deferred - U.S. (91,914) 79,900 --
- - ------------------------------------------------------------------------------------------------------
INCOME TAX (RECOVERY) PROVISION (1,095,003) 5,919,665 892,790
======================================================================================================
</TABLE>
The recovery of (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>
1998 1997 1996
$ $ $
- - ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory U.S. Federal income tax rate 34% 35% 35%
======================================================================================================
Income tax recovery (provision) computed at
statutory rate 1,957,000 (5,235,000) (248,000)
Tax benefit of net operating loss carryforward -- -- 32,000
Tax effected losses of equity investees
not available for deduction (861,997) (684,665) (676,790)
Tax benefit of net operating losses not recognized -- -- --
- - ------------------------------------------------------------------------------------------------------
RECOVERY OF (PROVISION FOR) INCOME TAXES 1,095,003 (5,919,665) (892,790)
======================================================================================================
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are presented below:
<TABLE>
<CAPTION>
1998 1997
$ $
- - ------------------------------------------------------------------------------------------------------
<S> <C> <C>
DEFERRED TAX ASSETS:
Related to pension obligation 177,262 --
Related to unrealized losses attributable to
securities available for sale valued at market 37,839 --
- - ------------------------------------------------------------------------------------------------------
215,101 --
======================================================================================================
</TABLE>
F-25
<PAGE> 38
CVF TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 [Expressed in U.S. Currency]
9. INCOME TAXES CONT'D
<TABLE>
<CAPTION>
1998 1997
$ $
- - ------------------------------------------------------------------------------------------------------
<S> <C> <C>
DEFERRED TAX LIABILITIES:
Related to the exchange of shares upon the
amalgamation forming Dantec Corporation 88,223 --
Related to the unrealized gains attributable to
securities available for sale valued at market 31,603 172,022
Related to prepaids expensed for tax purposes -- 79,800
- - ------------------------------------------------------------------------------------------------------
119,826 251,822
======================================================================================================
</TABLE>
As of December 31, 1998, the Company had deferred tax assets of $nil [$nil in
1997] related to loss carryforwards, after a valuation allowance of $4,075,000
[$2,600,00 in 1997].
At December 31, 1998, the Company had losses available for carryforward in
certain of its Canadian subsidiaries of approximately $11,644,420 [$7,431,220 in
1997] available to reduce future years' income for tax purposes in these
subsidiaries. $2,133,057 of these loss carryforwards were acquired from Dantec
Systems, upon the amalgamation of Dantec Corporation on June 30, 1998. These
losses expire as follows:
<TABLE>
<CAPTION>
$
- - --------------------------------------------------------------------------------------------------
<S> <C>
1999 568,700
2000 1,013,173
2001 1,285,723
2002 1,251,737
2003 1,703,120
Beyond 5,821,967
- - --------------------------------------------------------------------------------------------------
11,644,420
==================================================================================================
</TABLE>
F-26
<PAGE> 39
CVF TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 [Expressed in U.S. Currency]
10. STOCKHOLDERS' EQUITY
The Company's authorized capital consists of 50,000,000 common shares, $0.001
par value, and 500,000 Preferred shares, $0.001 par value.
COMMON SHARES
Holders of the common shares are entitled to one vote per share on each matter
submitted to vote at any meeting of the shareholders. Common shares do not carry
cumulative voting rights, and, therefore, holders of a majority of the
outstanding shares of common shares will be able to elect the entire Board of
Directors, and, if they do so, minority shareholders would not be able to elect
any members to the Board of Directors. The Company's Board of Directors has
authority, without the action by the Company's shareholders, to issue all or any
portion of the authorized but unissued common shares, which would reduce the
percentage ownership of the Company of its shareholders and which may dilute the
book value of the common shares. Dividends declared on the common shares are
payable in U.S. dollars.
During the year, the Company also repurchased 162,500 [252,900 in 1997] common
shares for aggregate cash consideration of $800,145 [$1,807,038 in 1997].
REDEEMABLE PREFERRED STOCK
Preferred shares may be issued in one or more series as may from time to time be
determined by the Board of Directors. Each series shall be distinctly
designated.
The Company currently has outstanding a series of non-voting Preferred Stock
designated as Series "A" Preferred Stock. Each share of Series "A" Preferred
Stock has a stated value [the "Stated Value"] of the U.S. dollar equivalent of
Cdn. $25 determined at the date of issuance by reference to the noon spot rate
for conversion of Canadian dollars into U.S. dollars as published by the
National Bank of Canada on the business day immediately preceding the date of
issuance. The holders of Series "A" Preferred Stock are entitled to cumulative
dividends at the rate of 5% annually of the Stated Value plus accrued but unpaid
dividends, to be paid in U.S. dollars. The dividends have priority over any
payments of dividends on common shares and on all other shares of preferred
stock ranking junior to the Series "A" Preferred Stock.
F-27
<PAGE> 40
CVF TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 [Expressed in U.S. Currency]
10. STOCKHOLDERS' EQUITY CONT'D
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,
1998, an amount of $69,434 has been accrued in respect of cumulative unpaid
dividends, of which $20,422 relates to 1998, $20,422 relates to 1997, and
$28,590 relates to prior years.
WARRANTS
As at December 31, 1998 and 1997, 952,784 Warrants are outstanding. Each
Warrant entitles the holder to purchase one common share at a price of Cdn.
$3.05 per share. In 1995, the Company acquired all of the assets and
liabilities of Canadian Venture Founders Limited Partnership (CVFLP). 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 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, 1998 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.
COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income ["SFAS
130"], which was adopted by the Company on January 1, 1998. SFAS 130 established
new rules for the reporting and display of comprehensive income and its
components; however, the adoption of this Statement had no impact on the
Company's net income or shareholders' equity. SFAS 130 requires unrealized gains
or losses on the Company's available-for-sale securities and foreign currency
translation adjustments, which prior to adoption were reported separately in
shareholders' equity, to be included in other comprehensive income. Prior year
financial statements have been reclassified to conform to the requirements of
SFAS 130.
F-28
<PAGE> 41
CVF TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 [Expressed in U.S. Currency]
10. STOCKHOLDERS' EQUITY CONT'D
Disclosure of accumulated balances related to each component of other
comprehensive income is as follows:
<TABLE>
<CAPTION>
UNREALIZED FOREIGN ACCUMULATED OTHER
GAIN ON CURRENCY COMPREHENSIVE
SECURITIES TRANSLATION INCOME
$ $ $
- - ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BALANCE - JANUARY 1, 1996 -- (277,252) (277,252)
Current year comprehensive income 13,840,070 -- 13,840,070
- - ------------------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 1996 13,840,070 (277,252) 13,562,818
Current year comprehensive income (13,534,252) 652,211 (12,882,041)
- - ------------------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 1997 305,818 374,959 680,777
Current year comprehensive income (315,172) (1,021,341) (1,336,513)
- - ------------------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 1998 (9,354) (646,382) (655,736)
================================================================================================
</TABLE>
F-29
<PAGE> 42
CVF TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 [Expressed in U.S. Currency]
11. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
1998 1997 1996
$ $ $
-------------- -------------- --------------
<S> <C> <C> <C>
Numerator:
Net (loss) income (4,660,705) 8,999,271 (293,799)
Dividends on Series A preferred stock (21,081) (54,000) --
-------------- -------------- --------------
Numerator for basic and diluted (loss) earnings
per share - (loss) income available to common
stockholders (4,681,786) 8,945,271 (293,799)
-------------- -------------- --------------
Denominator:
Denominator for basic (loss) earnings per share
- weighted average shares outstanding 6,215,586 5,870,553 5,989,849
Effect of dilutive securities
Warrants -- 139,155 --
-------------- -------------- --------------
Dilutive potential common shares Denominator
for diluted (loss) earnings per share -
adjusted weighted-average shares and
assumed conversions. 6,215,586 6,009,708 5,989,849
============== ============== ==============
Basic (loss) earnings per share (0.75) 1.52 (0.05)
============== ============== ==============
Diluted (loss) earnings per share (0.75) 1.49 (0.05)
============== ============== ==============
</TABLE>
12. BUSINESS ACQUISITION AND SUPPLEMENTARY SUBSIDIARY INFORMATION
GEMPRINT
During 1998, the Company's ownership interest in Gemprint increased by 2%. On
June 3, 1998, the Company issued 25,570 of the Company's shares, [valued at
U.S. $156,616] as full consideration for 720,000 Gemprint shares held by another
shareholder. The purchase was accounted for as a step acquisition and the
purchase price was allocated entirely to goodwill.
Gemprint issued an additional 955,492 Class A shares to third parties during
the year. This resulted in a 2% reduction in the Company's ownership.
F-30
<PAGE> 43
CVF TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 [Expressed in U.S. Currency]
12. 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 retractable by the
holder at face value plus dividends in arrears, and are convertible to Class A
common shares on a one-to-one basis. The Class B shares held by third parties
have been classified as a liability. The remaining Class B and all of the Class
C shares are held by CVF. The timing of these retractions are restricted to
specific time periods and Gemprint has received a notice to retract Cdn.
$250,000 by a third party investor. Cumulative dividends payable to third party
investees of $203,239 have been accrued in these consolidated statements.
ELEMENTS
On January 28, 1998, the Company incorporated a wholly-owned subsidiary called
Grand Island Marketing Inc. ["Grand Inc."]. On January 29, 1998 Grand Inc.
entered into an agreement with 21st Century Health Care (1996) Inc. and an
individual to form a partnership known as "Elements". The Company's total
consideration was Cdn. $1,500,000 [U.S. $1,065,000] for a 51% economic interest
in Elements. The minority partners contributed primarily net assets, various
agreements and contracts, and intellectual property.
Grand Inc. has a 69% voting interest and a 51% economic interest in Elements.
If the Elements partnership fails to meet its business plan by January 27,
2000, Grand Inc. will be able to, for a nominal investment, increase its
economic interest to 68% from 51%, and its voting interest will be unchanged.
This acquisition was accounted for as a purchase, with the results of operations
of Elements included in the Company's accounts from the date of acquisition. The
Company's share of assets and liabilities acquired at fair values is summarized
as follows:
<TABLE>
<CAPTION>
$
- - ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets [including cash of $71,392] 389,454
Goodwill 848,230
Liabilities (172,684)
- - ---------------------------------------------------------------------------------------------------
TOTAL CONSIDERATION 1,065,000
===================================================================================================
</TABLE>
DANTEC CORPORATION
On June 30, 1998, Dantec Systems Corporation (DSC) and 1246680 Ontario Limited
(124Co) amalgamated to form a new corporation called Dantec Corporation. At the
time of the amalgamation DSC and 124Co were under common control of the
Company.
F-31
<PAGE> 44
CVF TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 [Expressed in U.S. Currency]
12. BUSINESS ACQUISITION AND SUPPLEMENTARY SUBSIDIARY INFORMATION CONT'D
Upon amalgamation, the Company exchanged its shares in 124Co and DSC for 53.5%
of the shares in the new company, Dantec Corporation. This exchange of shares
for the Company's previously owned interests of DSC and 124Co was accounted for
as a reorganization of entities under common control at historical costs. The
related exchange of shares to minority interests was accounted for by the
Company using the purchase method of accounting, using fair values.
The effect of the purchase of minority interests is an increase in consolidated
goodwill of approximately $3,500,000 and an increase in minority interest of
about $2,950,000.
Dantec Corporation has outstanding to third parties 968,425 Special Class A
non-voting shares with a value of $632,866. These shares have been included in
Preferred and other non-voting stock of subsidiaries. The shares have no
interest or dividend provisions but are convertible to either cash or an equal
number of common shares depending on the occurrence and timing of a public
offering of Dantec Corporation. Should a conversion to common shares occur the
Company's 53.5% ownership position would be diluted to approximately 46%.
13. STOCK BASED COMPENSATION
During 1998, the Company granted 322,500 stock options to some of its employees,
directors and consultants. The option exercise price approximates the fair
market value at the date of grant. A summary of stock option activity follows:
<TABLE>
<CAPTION>
WEIGHTED OPTIONS
AVERAGE EXERCISABLE
SHARES EXERCISE PRICE AT YEAR-END
- - -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding Dec. 31, 1996 -- -- --
Granted 42,500 $3.25 42,500
- - -------------------------------------------------------------------------------------------------
Outstanding Dec. 31, 1997 42,500 $3.25
Granted 322,500 $3.25
- - -------------------------------------------------------------------------------------------------
Outstanding Dec. 31, 1998 365,000 $3.25 365,000
=================================================================================================
</TABLE>
F-32
<PAGE> 45
CVF TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 [Expressed in U.S. Currency]
13. STOCK BASED COMPENSATION CONT'D
At December 31, 1998, the weighted average life of outstanding and exercisable
options was 4.3 years. The per share weighted average fair value of stock
options granted during 1998 was $1.52 (1997, $1) on the date of grant using the
Black Scholes option-pricing model with the following weighted average
assumptions: expected dividend yield none, risk-free interest rate of 4.6%
(1997, 5%), volatility of 43% (1997, 25%) and an expected life of five years. If
these options were valued, as prescribed by SFAS 123, proforma (net loss) net
income would have been approximately ($5,000,000) and $8,975,000 and (loss)
earnings per share would have been (0.78) and 1.52 for 1998 and 1997.
Certain of the Company's subsidiaries have outstanding compensatory options
granted to some consultants, to employees and directors, as described below.
In the event the options granted by its subsidiaries are exercised, the
Company's interest in those subsidiaries will be diluted. A summary of the
stock options and shares outstanding at December 31, 1998 for those
consolidated entities which have issued options are as follows:
[a] Under the terms of an employment contract, Dantec Corporation has granted
an employee options to acquire at total of 369,200 of its common shares,
vesting in four equal amounts of 92,300, commencing March 1 of 1997, 1998,
1999 and 2000 at prices ranging from $0.89 to $1.14 per share. These
options are exercisable within a two year period of vesting. None of these
options have been exercised as at December 31, 1998. Using a Black Scholes
option valuation model, the weighted average fair value of the options was
approximately $0.25 using the following assumptions, expected dividend
yield of nil, weighted average risk free rates of 6%, and average expected
life of 4 years. The proforma net losses of Dantec Corporation and the
Company would not be materially affected had Dantec followed the
recommendations of SFAS 123. Dantec Corporation has a total of 9,053454
shares outstanding as at December 31, 1998.
[b] In 1996 and 1997, Gemprint Corporation granted various compensatory options
to some employees, directors and consultants a total of 1,901,126 to
purchase its common shares at a weighted average price of $0.20 per share.
Of these total options, 999,542 have expired leaving 901,584 outstanding
and currently exercisable. Using a Black Scholes option valuation model the
weighted average fair value of the options was approximately $0.10 using
the following assumptions, expected dividend yield of nil, weighted average
risk free rates of 6%, and average expected life of 5 years. The proforma
net losses of Gemprint and the Company would not be materially affected had
they followed the recommendations of SFAS 123. Gemprint has a total of
33,941,660 shares outstanding as at December 31, 1998.
F-33
<PAGE> 46
CVF TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 [Expressed in U.S. Currency]
13. STOCK BASED COMPENSATION CONT'D
[c] A total of 124,000 options to purchase shares of Biorem Technologies Inc.
remain outstanding, 106,000 of which have fully vested at December 31,
1998. These options were granted in 1995, 1996 and 1997 at weighted average
exercise price of $1.20 per share and had weighted average value of $0.50
using a Black Scholes option valuation model using an expected dividend
yield of nil, weighted average risk free rates of 6%, and average expected
life of 5 years. The proforma net losses of Gemprint and the Company would
not be materially affected had they followed the recommendations of SFAS
123. Biorem has a total of 1,421,430 shares outstanding as at December 31,
1998.
14. SUPPLEMENTARY INFORMATION ON CASH FLOWS
Adjustments to net (loss) income from operating activities for the years ending
December 31, are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
$ $ $
- - ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash from operating activities:
Depreciation and amortization 668,508 277,113 282,459
Loss from equity investees 1,152,190 145,165 296,762
Gain on sale of holdings (579,775) (19,758,954) (3,204,185)
Minority interest in earnings
(losses) of subsidiaries 144,329 -- (400,449)
Deferred income tax (benefit) expense (91,914) 79,900 --
Pension expense 522,815 -- --
- - ----------------------------------------------------------------------------------------------------
1,816,153 (19,256,776) (3,025,413)
====================================================================================================
</TABLE>
F-34
<PAGE> 47
CVF TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 [EXPRESSED IN U.S. CURRENCY]
14. SUPPLEMENTARY INFORMATION ON CASH FLOWS CONT'D
Changes in operating assets and liabilities for the years ending December 31,
are as follows;
<TABLE>
<CAPTION>
1998 1997 1996
$ $ $
- - ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(Increase) decrease in trade receivables (2,557,043) 511,075 (172,437)
(Increase) decrease in inventory (305,543) 41,433 (3,617)
(Increase) decrease in prepaid expenses
and other (39,633) (261,946) 15,010
Decrease in other assets -- -- 68,588
(Increase) in income taxes receivable (1,020,351) -- --
Increase in trade payables 1,792,833 51,443 --
(Decrease) increase in accrued liabilities (204,675) 632,969 378,326
(Decrease) in bonuses payable (481,857) -- --
Increase in dividends payable
on Series A preferred stock 21,081 -- --
Increase in dividends payable
on subsidiary's shares 50,595 -- --
(Decrease) increase in income taxes payable (1,508,263) 887,468 892,790
(Decrease) in deferred revenue -- (18,111) --
(Decrease) in other current liabilities -- -- (80,922)
- - ----------------------------------------------------------------------------------------------------
(4,252,855) 1,844,331 1,097,738
====================================================================================================
</TABLE>
15. SEGMENTED INFORMATION
In June 1997, The Financial Accounting Standards Board issued Statement No. 131,
Disclosures about Segments of an Enterprise and Related Information, which was
adopted by the Company for the year ended December 31, 1998. Under the new
requirements, financial information about operating segments is reported on the
basis that is used internally by the Company for evaluating operating segments
and resource allocation decisions.
The Company has three reportable segments: information technology,
environmental products and services and general corporate. The Company's
information technology segment consists of three companies that develop and sell
electronic motor controllers, advanced process control systems and precious gem
identification services to manufacturers, wholesale distributors and retailers.
The Company's environmental products and services segment has three [one in
1997] operating companies. One develops bioremediation methods to clean soil,
air and water which are marketed to heavy industrial manufacturers and
municipalities. The other company is in the retail selling of natural products.
The Company's general corporate segment includes two companies which hold
various entities, and provide funding to the holdings. This segment's profits
arise from interest income and gains on sales of its various holdings.
F-35
<PAGE> 48
CVF TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 [Expressed in U.S. Currency]
15. SEGMENTED INFORMATION CONT'D
The Company evaluates performance and allocates resources based on profit or
loss from operations before income taxes, not including gains and losses on the
Company's investment portfolio. The accounting policies of the reportable
segments are the same as those described in the summary of significant
accounting policies.
There are no intersegment sales, transfers or profit or loss.
The Company's reportable segments are business units that offer different
products and services. The reportable segments are each managed separately
because they develop, manufacture and distribute different products and
services. Segmented information for 1996 has not been included as it is not
practicable to do so.
Sales of approximately $6,000,000 of the information technology segment were to
US customers. The remainder of the consolidated sales were to primarily to
customers in Canada. Virtually all of the long lived assets of the three
segments are located in Canada.
In 1998, over 80% [0% in 1997] of revenues in the environmental products and
services segment were from retail sales of natural products. Over 95% of 1998
sales [89% in 1997] in the information technology segment were from sales of
electronic motor controllers and process control systems.
During the year ended December 31, 1998, the Company, through one of its
subsidiaries, was dependent on one customer for its revenues such that sales
from this customer in the information technology segment, represents 52% of the
Company's consolidated sales. In addition, consistent with the nature and
business plan of the Company, many of its subsidiaries and equity holdings are
dependent on the companies in the general corporate segment for funding to
enable them to meet their business objectives.
<TABLE>
<CAPTION>
INDUSTRY SEGMENTS
1998 INFORMATION ENVIRONMENTAL GENERAL TOTAL
TECHNOLOGY PRODUCTS AND CORPORATE
SERVICES
- - ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SALES 6,526,573 831,323 -- 7,537,996
- - ---------------------------------------------------------------------------------------------------
(Loss) from operations (1,553,420) (1,748,070) (2,597,553) (5,899,043)
Interest income 2,366 7,829 352,589 362,784
Interest expense (100,493) (39,631) (72,386) (212,510)
Other income 323,254 40,535 346,016 709,805
(Loss) from equity investees (1,152,190) (1,152,190)
Gain (loss) on investments 579,775 579,775
Minority interest (144,329) (144,329)
- - ---------------------------------------------------------------------------------------------------
(Losses) before provision
for taxes (1,472,622) (1,739,337) (2,543,749) (5,755,708)
(Recovery of) income taxes (75,457) (498,131) (521,415) (1,095,003)
- - ---------------------------------------------------------------------------------------------------
NET (LOSS) (1,397,165) (1,241,206) (2,022,334) (4,660,705)
===================================================================================================
</TABLE>
F-36
<PAGE> 49
CVF TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 [EXPRESSED IN U.S. CURRENCY]
15. SEGMENTED INFORMATION CONT'D
<TABLE>
<CAPTION>
INFORMATION ENVIRONMENTAL GENERAL TOTAL
TECHNOLOGY PRODUCTS AND CORPORATE
SERVICES
- - ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Depreciation and amortization 481,145 177,046 10,317 668,508
Capital expenditures 162,659 265,905 61,457 490,021
Segment assets 200,018 263,210 54,216 517,444
1997 INFORMATION ENVIRONMENTAL GENERAL TOTAL
TECHNOLOGY PRODUCTS AND CORPORATE
SERVICES
- - ---------------------------------------------------------------------------------------------------
SALES 1,284,742 400,657 -- 1,685,399
- - ---------------------------------------------------------------------------------------------------
(Loss) from operations (1,499,391) (215,243) (3,481,545) (5,196,179)
Interest income 10,171 613,859 624,030
Interest expense (103,967) (70,648) (731) (175,346)
Other income 52,642 52,642
(Loss) from equity investees (145,165) (145,165)
Gain on investments 19,758,954 19,758,954
- - ---------------------------------------------------------------------------------------------------
Income (loss) before provision
for income taxes (1,593,187) (285,891) 16,798,014 14,918,936
Provision for income taxes 5,919,665 5,919,665
- - ---------------------------------------------------------------------------------------------------
NET INCOME (LOSS) (1,593,187) (285,891) 10,878,349 8,999,271
===================================================================================================
Depreciation and amortization 234,327 32,702 10,084 277,113
Capital expenditures -- -- -- --
Segment assets 108,166 56,659 5,026 169,851
</TABLE>
F-37
<PAGE> 50
CVF TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 [Expressed in U.S. Currency]
16. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE
The Year 2000 Issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize the
year 2000 as 1900 or some other date, resulting in errors when information using
year 2000 dates is processed. In addition, similar problems may arise in some
systems which use certain dates in 1999 to represent something other than a
date. The effects of the Year 2000 Issue may be experienced before, on, or after
January 1, 2000, and, if not addressed, the impact on operations and financial
reporting may range from minor errors to significant systems failure which could
affect an entity's ability to conduct normal business operations. It is not
possible to be certain that all aspects of the Year 2000 Issue affecting the
Company, including those related to the efforts of customers, suppliers, or
other third parties, will be fully resolved.
17. SUBSEQUENT EVENTS
On January 22, 1999, the Company purchased 500,000 shares of NETrageous, Inc. a
company incorporated in the state of Delaware, in the business of developing WEB
sites. The shares were purchased for $250,000, and give the Company a 3%
ownership interest.
18. COMPARATIVE FIGURES
Certain of the prior year comparative figures have been reclassified to conform
with the current year's presentation.
F-38
<PAGE> 51
ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company's former principal independent accountants, Feldman Radin & Co.,
P.C. were dismissed by the Company on October 28, 1997 and Ernst & Young was
subsequently appointed as the independent accountants by the Board of Directors.
The above was disclosed in the Company's Current Report on Form 8-K filed
October 28, 1997.
There has been no adverse or disclaimer of opinion nor modification of the
opinion on the financial statements for either of the past two years and there
have been no disagreements with the former accountants.
PART III
ITEM 9 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS,
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
(a) Directors and Executive Officers
The directors and executive officers of CVF are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- - -------------- --- ------------------------------------------------
<S> <C> <C>
Jeffrey Dreben 53 Director; Chairman, Chief Executive Officer; and President
Robert Nally 50 Director; Secretary; and Treasurer
George Khouri 52 Director; Consultant
Robert Glazier 50 Director
Lawrence Casse 42 Vice-President
Robert Seyler 50 Chief Financial Officer
</TABLE>
Jeffrey Dreben has been President, Chief Executive Officer and Director of the
Company since September 1995. From 1989 until September 1995, Mr. Dreben was
Vice President and Treasurer of Canadian Venture Founders Management Limited
("CVF Management") and was its original founder. Mr. Dreben has been working in
the investment industry since 1979, beginning his career with Merrill Lynch and
subsequently founding his own firm. Mr. Dreben has been working 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 has been Secretary, Treasurer and Director of CVF since September
1995. From 1989 until 1995, Mr. Nally was Vice President and Secretary of CVF
Management and one of its cofounders. 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
13
<PAGE> 52
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.
George Khouri has been a consultant to and a Director of CVF since April 1997.
Since February 1999 Mr. Khouri has acted in the role of Managing Director of
Avalon Group Ltd. From 1993 until September 1996, Mr. Khouri was managing
Director-Capital Markets for Nomura Securities International Inc. Prior to that
time, Mr. Khouri was a member of Trigon Group, an investment Banking boutique,
and has served as President of Prudential Bache Capital Partners. Mr. Khouri
received a Bachelor of Arts degree from Tufts University and a masters degree in
Business Administration, Investments, from New York University.
Robert Glazier has been an outside Director of CVF since January 1998. Mr.
Glazier is founder, President and CEO of Donatech Corporation, an Iowa-based
computer software consulting company. Before founding Donatech in 1986, Mr.
Glazier was a manager on the cruise missile program with General Dynamics
Corporation for 3 years. He also held management positions at Oak Industries,
California. Mr. Glazier holds a Masters Degree in Engineering from the
University of California Berkley and a Bachelors degree in Engineering from
Purdue University.
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 Seyler has been Chief Financial Officer of CVF since July 1998. Mr.
Seyler was previously Controller for Root, Neal & Company of Buffalo, N.Y. a
privately owned company specializing in distributing industrial parts and
refrigerants to heavy industry where he had responsibility for all financial
functions of the company. From 1973 to 1995 he was employed by C.H. Heist
Corporation of Buffalo, New York, a public company with operations in Canada and
the United States specializing in industrial maintenance and placement services,
where he served as Controller from 1979 to 1994 and Treasurer/Chief Accounting
Officer from 1994 to 1995. From 1970 to 1973 he was an auditor for KPMG Peat
Marwick in Buffalo, New York. Mr. Seyler has a Bachelor of Business
Administration Degree from Niagara University.
Section 16(a) Beneficial Ownership Reporting Compliance
During the fiscal year 1998 none of the officers and directors of CVF, to the
knowledge of CVF, were late in filing a report under section 16(a) of the
Exchange Act. In addition, Stepworth Holdings (which disclosed as at
December 31, 1997 that it owned more than 10% of CVF's Common Shares) has not
filed a report on Form 3 under section 16(a) of the Exchange Act.
ITEM 10 EXECUTIVE COMPENSATION
The following is a summary of the remuneration paid for the 1996, 1997 and 1998
fiscal years by CVF to its Chief Executive Officer and all other executive
officers whose cash compensation during the 1998 fiscal year exceeded $100,000.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Name and Other
Principal Salary Bonus Compensation
Position Year $ $ $
- - ------------ ------ ----------- ------------ -------------------
<S> <C> <C> <C> <C>
Jeffrey Dreben 1996 $ 102,765 (1)
CEO and 1997 $ 200,000 $500,000 (2) $638,863 (2)
President 1998 $ 200,000 $ 20,000
Robert Nally 1996 $ 80,543 0 0
Secretary and 1997 $ 140,000 $500,000 (2) $622,952 (2)
Treasurer 1998 $ 133,571 (3) $ 13,492 (3)
<FN>
(1) Paid in Canadian currency but translated in the table to US currency.
Based on the exchange rate of Cdn $1 = U.S. $0.7298 on July 11, 1997.
(2) Other compensation relates primarily to stock options exercised by Messrs.
Dreben and Nally. During 1997, CVF purchased 601,932 of its own shares for
an aggregate consideration of $10 from a corporation owned by officers of
CVF. CVF simultaneously issued to these officers options to purchase an
equal number of common shares for $0.05 per share. CVF recorded no expense
effect on this exchange. During 1997, the options were exercised at a time
when the quoted market price of CVF's common stock was $3 per share. On
this sequence of transactions CVF recorded a $727,163 tax benefit as an
increase in Additional Paid in Capital. [The net, after tax cash
disbursement cost to CVF was approximately $250,000.] The above bonuses
were provided to these officers as compensation for the related personal
tax liabilities. These bonuses and other compensation are not expected to
re-occur in the future. [Other Compensation represents the benefits. The
above bonuses were issued to these officers primarily to compensate them
for the related personal tax liabilities of exercising the options they
received.
(3) Paid in Canadian currency but translated in the table to US currency.
Based on the Average exchange rate for 1998 of Cnd $1 = US $.6746
</FN>
</TABLE>
OPTION/SAR GRANT TABLE
The following table sets forth individual issuance of stock options to
acquire Common Shares of CVF granted during the fiscal year ended December
31, 1998 to each of the named Executive Officers.
<TABLE>
<CAPTION>
Name Number of Percent of Exercise Expiration
Securities Total options Price Date
Underlying Granted to
Options granted Employees in
Fiscal Year
- - ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Jeffrey Dreben 100,000 31.0% $3.25 Sep.16, 2003
Robert Nally 100,000 31.0% $3.25 Sep.16, 2003
Lawrence Casse 20,000 6.2% $3.25 Jun.30, 2003
</TABLE>
AGGREGATED OPTION/SAR EXERCISE AND FISCAL YEAR END OPTION/SAR VALUE TABLE
<TABLE>
<CAPTION>
Name Shares Value Unexercised Value of
Acquired Realized Options at Unexercised
On Exercise Dec. 31, 1998 In-the-money
No. Exercisable/ Options at
Un-exerciseable Dec. 31, 1998
Exercisable/
Un-exercisable
- - ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Jeffrey Dreben NIL NIL 100,000/NIL $50,000/NIL
Robert Nally NIL NIL 100,000/NIL $50,000/NIL
Lawrence Casse NIL NIL 20,000/NIL $10,000/NIL
</TABLE>
14
<PAGE> 53
ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Voting Securities and Principal Holders
The following table sets forth, as of March 24, 1999, the approximate number of
Common Shares of CVF owned of record or beneficially by each person who owned of
record, or was known by CVF to own beneficially, more than 5% of CVF's Common
Shares, and the name and shareholdings of each officer and director, and all
officers and directors as a group.
<TABLE>
<CAPTION>
AMOUNTS OF PERCENTAGE OF
COMMON SHARES COMMON SHARES
NAME AND ADDRESS BENEFICIALLY OWNED OWNED
-------------------- ------------------- -----------------
<S> <C> <C>
Jeffrey I. Dreben (1)(4)(5) 608,524 8%
916 Center Street
Lewiston, NY 14092
Robert B. Nally (1)(4)(5) 609,524 8%
189 Mary Street
Waterloo, Ontario
Canada, N2J 1S1
George A. Khouri 75,000 0
421 Field Point Road
Greenwich, CT 06836
Robert Glazier 50,000
916 Center Street
Lewiston, NY 14092
Malcolm I. Gissing (2) 413,782 5%
916 Center Street
Lewiston, NY 14092
Brant Investments Limited 1,235,731 15%
c/o Royal Trust Company-
Pension Dept.
Royal Trust Tower, 7th Floor
77 King Street West
Toronto, Ontario MSW 1P9
Prudential Insurance Co. 610,750 8%
C/O Canada Trust Pension
Trust Services
320 Bay Street West, 3rd Floor
Toronto, Ontario
M5H 2P6
Mutual Life Assurance 359,200 5%
Company of Canada
227 King Street South
Waterloo, Ontario N2J 4C5
BCE Inc. 339,200 5%
c/o BCE Ventures
1000 Rue de la Gauchetiere West
Suite 3600
Montreal, Quebec H3B 4X7
Directors and Officers 1,543,048 19.1%
as a Group (4 persons) (1)(3)(4)(5)(6)
- - ----------
<FN>
(1) Each of Messrs. Dreben and Nally owns 207,880 Common Shares underlying a
warrant (the "Warrant") exercisable by Canadian Venture Founders
Management Limited, of which Messrs. Dreben and Nally each owns 21.8%.
The wives of Mr. Dreben and Mr. Nally are the registered holders of their
husbands' interests in Canadian Venture Founders Management Limited.
Accordingly, Mr. Dreben and Mr. Nally expressly disclaim beneficial
ownership of the 207,880 Common Shares underlying the Warrant. On
September 16, 1998 Messrs. Dreben and Nally were issued 100,000 options
to acquire common shares of the company at an option price of $3.25 per
share exerciseable up to September 16, 2003. On March 4, 1999 Messrs.
Dreben and Nally were issued an additional 100,000 options to acquire the
Company's common shares at an option price of $2.88 per share.
(2) Mr. Gissing owns 207,309 Common Shares underling a similar warrant
described in (1) above. He holds direct beneficial ownership of these
warrants.
(3) Includes 45,000 options to acquire Common Shares of the Company at an
option price of $3.25 per share and an additional 30,000 options to
acquire common shares at an option price of $2.88 per share.
(4) Includes 20,000 options to acquire Common Shares of the Company at an
option price of $3.25 and an additional 30,000 options to acquire common
shares at an option price of $2.88 per share.
(5) Includes 20,000 options to acquire common shares at an exercise price of
$3.25 per share.
(6) Includes 180,000 options to acquire common shares of the Company at an
exercise price of $2.88 per share.
</FN>
</TABLE>
15
<PAGE> 54
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with the resignation of Mr. Malcolm Gissing in May 1997 The
Company agreed to pay Mr. Gissing a deferred retirement benefit of $6,000 CDN
per month for life.
CERTAIN TRANSACTIONS AND RELATIONSHIPS
Transactions with CVF, Inc. Pursuant to a stock purchase agreement dated
February 5, 1997, the Company repurchased 601,932 Shares from CVF, Inc. for an
aggregate purchase price of $10.00. The shareholders of CVF, Inc. at that time
included Messrs. Dreben and Nally, current directors and nominees for directors
of the Company, and Mr. Gissing, a former director of the Company. Also on
February 5, 1997, the Company issued options to purchase an aggregate of 601,932
shares for $.05 per Share to Messrs. Dreben, Nally and Gissing. The
transactions of February 5, 1997 were structured to be a like-kind exchange
with no effect on earnings. On May 30, 1997, these options were exercised.
Service Agreement with D and N Consulting Corporation. The Company entered
into a Service Agreement dated February 10, 1997 with D and N Consulting
Corporation ("D and N"), identical to its agreement the Company formerly had
with CVF, Inc., the predecessor to D and N, pursuant to which D and N would
provide 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 Board of
Directors of the Company. Messrs. Dreben and Nally are each officers and 50%
shareholders of D and N. D and N and the Company have mutually agreed to 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.
Consulting Arrangement with Mr. Khouri. Pursuant to an Independent
Consultant Agreement, for the months of April and May 1997, Mr. Khouri, a
director of the Company, provided the Company with consulting services, as well
as services as a director, in exchange for which Mr. Khouri received consulting
fees of $750 per day and director fees of $1,000 per month. Effective June 1,
1997 the Company reached a new agreement with Mr. Khouri pursuant to which
Mr. Khouri provides the Company with consulting services and reports directly
to the President of the Company in exchange for which Mr. Khouri receives
$10,500 per month and no additional fees as a director for a one-year term
which is renewable if mutually agreed to by the parties. This consulting
agreement, which was renewed for another year effective June (-) may be
terminated by either party upon 90 days notice of the intent to so terminate.
Upon termination, Mr. Khouri will resign as a director. Periodically, the
President of the Company will review Mr. Khouri's performance and determine
whether to continue Mr. Khouri's consulting arrangement. Through the first
year, Mr. Khouri automatically received options to purchase 45,000 Shares, one
quarter of which (options to purchase 11,250 Shares) vested every three-month
period effective June 1, 1997 and all of such options have an exercise price of
$5.00 per Share. All of these options have now vested.
Transactions with RDM Corporation. In December 1997, the Company purchased
1,428,572 special warrants in RDM Corporation for a total purchase price of
$1,000,000 (CM) ($659,400 (US) based on the conversion price on August 5, 1998
of $1.00 (US) to $1.52 (CN)). The special warrants were exercised in June 1998
and were exchanged for 1,428,572 common shares of RDM Corporation. During 1998
an additional 339,500 c/s of RDM were purchased bringing the total number of
shares owned by CVF in RDM to 1,768,072 shares (approximately 18% of the
outstanding shares). RDM Corporation is a Canadian corporation which develops
and supplies technologies for check processing and electronic commerce
solutions. Mr. Nally, an officer, director and nominee of the Company, has been
Chairman of RDM Corporation since 1995 and beneficially owns 1,735,874 common
shares (approximately 19.5% of the outstanding shares) of RDM Corporation.
ITEM 13 EXHIBITS AND REPORTS ON FORM 8-K
(3)(i) Articles of Incorporation
Filed as an exhibit to CVF's Registration Statement on Form 10SB dated
May 29, 1997 and is incorporated herein by reference
(3)(ii) By-laws
Filed as an exhibit to CVF's Registration Statement on Form 10SB dated
May 29, 1997 and is incorporated herein by reference
(11) Statement re: Computation of Earnings Per Share filed herewith as
Exhibit 11
(16) Letter on Change in Certifying Accountant
Filed as an exhibit to CVF's Form 8-K filed with the SEC on
October 28, 1997 and is incorporated herein by reference
(21) Subsidiaries of the Registrant filed herewith as Exhibit 21
(27) Financial Data Schedule
SIGNATURE
In accordance with Section 13 or 15(d) of the Exchange Act, CVF caused this
report to be signed on its behalf by the undersigned thereunto duly authorized:
CVF Corporation
by: /s/ Jeffrey Dreben /s/ Robert Seyler
-------------------------------- -------------------------------
Jeffrey Dreben, CEO and CFO Principal Accounting Officer
President
Jeffrey Dreben Robert Nally George Khouri
- - ---------------- ------------------ ------------------
Board Member Board Member Board Member
date: March 31, 1999
16
<PAGE> 1
EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
1998 1997 1996
$ $ $
---------------------------------------
<S> <C> <C> <C>
Numerator:
Net income (loss) (4,660,705) 8,999,271 (293,799)
Dividends on Series A preferred stock (21,081) (54,000) --
--------------------------------------
Numerator for basic and diluted earnings (loss) per
share - income(loss) available to common
stockholders (4,681,786) 8,945,271 (293,799)
--------------------------------------
Denominator:
Denominator for basic earnings (loss) per share -
weighted average shares outstanding 6,215,586 5,870,553 5,989,849
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 6,215,586 6,009,708 5,989,849
--------------------------------------
Basic earnings(loss) per share (0.75) 1.52 (0.05)
--------------------------------------
Diluted earnings(loss) per share (0.75) 1.49 (0.05)
--------------------------------------
</TABLE>
<PAGE> 1
Exhibit 21
SUBSIDIARIES OF CVF TECHNOLOGIES CORPORATION
1. Canadian Venture Founders Leasing Corp
2. Eastview Marketing One LLC
3. Grand Island Marketing Two LLC
4. Grand Island Marketing Inc.
5. Biorem Technologies Inc.
6. Gemprint Corporation
7. Solaria Research Enterprises Ltd.
8. Dantec Corporation
9. Petrozyme Technologies, Inc.
10. Ecoval Inc.
11. TurboSonic, Inc.
12. RDM Corporation
13. Certicom Corp.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF CVF TECHNOLOGIES CORPORATION FOR THE YEAR
ENDED DECEMBER 31, 1998 AS INCLUDED IN PART II ITEM 7 OF THIS 10-KSB FILING.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 4,467,122
<SECURITIES> 101,522
<RECEIVABLES> 3,206,914
<ALLOWANCES> 77,052
<INVENTORY> 790,467
<CURRENT-ASSETS> 9,820,985
<PP&E> 1,105,993
<DEPRECIATION> 588,549
<TOTAL-ASSETS> 21,355,396
<CURRENT-LIABILITIES> 4,325,684
<BONDS> 662,928
456,250
0
<COMMON> 7,155
<OTHER-SE> 10,531,977
<TOTAL-LIABILITY-AND-EQUITY> 21,355,396
<SALES> 7,357,996
<TOTAL-REVENUES> 7,357,996
<CGS> 5,053,194
<TOTAL-COSTS> 5,053,194
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (5,755,708)
<INCOME-TAX> (1,095,003)
<INCOME-CONTINUING> (4,660,705)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,660,705)
<EPS-PRIMARY> (0.75)
<EPS-DILUTED> (0.75)
</TABLE>
