<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, 1999.
COMMISSION FILE NUMBER 00-29266
CVF TECHNOLOGIES CORPORATION
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(Name of Small Business Issuer in its charter)
NEVADA 87-0429335
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
916 Center Street
LEWISTON, NEW YORK 14092
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(Address of principal executive offices) (Zip Code)
(716) 754-7883
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(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
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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. [ X ]
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State issuer's revenues for most recent year: $16,689,360.
Aggregate market value of voting stock held by non-affiliates (based on the
closing price on the American Stock Exchange) on March 21, 2000 was
approximately $27,685,920. 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 21, 2000 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 21, 2000:
Common Stock: 6,915,622 shares
Transitional Small Business Disclosure Format: Yes No X
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<PAGE> 2
PART IV
PART I
ITEM 1. DESCRIPTION OF BUSINESS
CVF Technologies Corporation ("CVF" or the "Company") is involved in the
business of developing and managing start-up and early stage companies primarily
engaged in the information technology and environmental technology sectors with
an emphasis on e-commerce. CVF's current holding include investments made in its
investee companies during the period from 1989 to the present. The Company's
mandate is to acquire significant holdings in new and emerging technology
companies and then to assist them in their management, explore such e-commerce
potential as they may have and through them to engage in their respective
businesses.
CVF's plan is to generate revenues and profits through consolidation of the
operating results of its investee companies. CVF also plans to realize gains
through the eventual sale of all or a portion of its holdings in these companies
at such time as management determines that CVF's funds can be better deployed in
other industries or companies. CVF's goal is to maximize the value of its
holdings in its investee companies for the Company's shareholders. One important
way that CVF accomplishes this is by taking an investee company public at the
appropriate time. This has been done with the investee companies Certicom
Corporation, RDM Corporation and TurboSonic Technologies, Inc. CVF plans to
offer its shareholders the opportunity to directly participate in public
offerings of its investee companies, where this is considered appropriate.
After CVF's initial investment, an investee company often requires additional
capital to meet its business plan. Consequently, the Company actively assists
its investee companies in obtaining additional capital which is usually sourced
through CVF's own resources or via other participants.
The following is a list of CVF's investee companies (the "Corporations"),
showing the Company's percentage ownership:
<TABLE>
<CAPTION>
CVF's PERCENTAGE OWNERSHIP
CORPORATION OF VOTING SECURITIES
<S> <C>
1. Canadian Venture Founders Leasing Corp. 100%
2. CVF Technologies International, Inc. 100%
3. Eastview Marketing One LLC 100%
4. Grand Island Marketing Two LLC 100%
5. Grand Island Marketing Inc. 100%
6. Solaria Research Enterprises Ltd. 75%
7. Gemprint(TM) Corporation 73%
8. Biorem Technologies Inc. 69%
9. Dantec Corporation 54%
10. Petrozyme Technologies Inc. 50%
11. Ecoval Inc. 27%
12. RDM Corporation 16%
13. TurboSonic Technologies, Inc. 13%
14. NETrageous Inc. 3%
</TABLE>
<PAGE> 3
The Corporations
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With the exception of RDM Corporation and TurboSonic Technologies Inc., all of
the Corporations are private companies. The following paragraphs provide a brief
description of each Corporation. Each Corporation has its own business plan,
history and financial statements. Also, each Corporation has completed the
development of its own products; established markets and distribution channels;
sold its products; and put effective management teams in place or is currently
working to improve its management.
Proceeds from any additional funding received by the Corporations will be
utilized, in each case, primarily for expansion of production and sales
capability to enable the Corporation to realize its 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 some of the Corporations will probably continue to operate at a
loss for the foreseeable future.
Consolidated Entities:
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'Consolidated Entities' refers to those Corporations in which CVF has greater
than a 50% ownership of the voting stock. The total assets and liabilities of
the Consolidated Entities are included within the financial results and position
of CVF for the year ended December 31, 1999 and the comparative balances for the
previous two years as shown in the Financial Statements included in Part II,
Item 7 of this Form 10-KSB.
The Consolidated Entities which are consolidated within the financial results of
CVF are as follows:
1. Canadian Venture Founders Leasing Corporation ("CVFLC")
CVFLC was founded in order to make equipment leases available to the
Corporations as well as to provide 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.
2. CVF Technologies International, Inc. ('CVF International')
CVF International was incorporated in the State of Delaware on January 29, 1999
for the purpose of providing a base for the expansion of the sales and marketing
efforts of the Corporations into the large and rapidly growing markets of the
southeastern U.S. CVF International is a wholly owned subsidiary of CVF and the
CVF management team manages its small office located in Charlotte, NC.
3. Eastview Marketing One LLC ("Eastview")
Eastview was incorporated in the State of New York on December 19, 1997 for the
purpose of developing an infomercial to market in the U.S. natural fertilizers
and environmentally safe organic herbicides manufactured by Ecoval Inc. The
commercial was completed and tested in 1998 and may be re-used in selective
markets in the future.
4. Grand Island Marketing Two LLC ("Grand Island 2")
Grand Island 2 was incorporated on December 17, 1997 in the State of New York.
Grand Island 2 is not currently active.
5. Grand Island Marketing Inc. ("Grand Inc.")
Grand Inc. was incorporated in the State of Delaware on January 28, 1998. On
January 29, 1998 Grand Inc. entered into an agreement with 21st Century Health
Care (1996) Inc. ("21st Century"), a company incorporated in the Province of
Ontario and an individual (the "Partnership Agreement") to form a partnership
known as "Elements". Grand Inc. made an initial contribution of $1,065,000 in
1998 and an additional contribution of $232,000 in 1999 and has an economic
interest of 61% and a Voting Partnership Interest of 69% in Elements. The
Partnership Agreement provides that in the event that Elements does not meet its
business plan within two years of opening its first store, then 17% of 21st
Century's partnership interest shall immediately be transferred to CVF for one
dollar. Elements, based in Toronto, Ontario, 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 Inc. During 1999 Elements
opened one additional store, for a total of 3 stores, all currently operating in
Toronto. Elements intends eventually to develop a franchise group of stores
throughout the U.S. and Canada. Elements has also developed an e-commerce
website to sell its products and services over the Internet and is currently in
the process of establishing Internet links and alliances.
6. Solaria Research Enterprises Ltd. ("SRE")
SRE, based in Waterloo, Ontario, is 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.). SRE supplies its controller
products to both original equipment manufacturers ("OEM") and the after-market.
SRE continuously improves and updates its product line to bring the latest
technological benefits to its customers. In 1999 SRE continued its strategic OEM
relationship with a North American fork lift truck manufacturer. SRE's products
enjoy strong acceptance in North America and the product line has been further
extended to include some European versions.
<PAGE> 4
During 1999 and continuing into 2000, SRE successfully initiated business
relationships with a number of OEM accounts in new market areas, including
manufacturers of electric scissor lifts and airport ground support vehicles.
Development work is continuing on SRE's next generation of controllers.
7. Gemprint(TM) Corporation ("Gemprint")
Gemprint, a Toronto, Ontario based company, is in the business of providing
products and services to the jewelry industry 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. Gemprint's Isi
system has application with all segments of the diamond supply chain:
cutter/polishers, grading laboratories, manufacturers, wholesalers, retailers
and Internet traders. Gemprint's Isi system sells for approximately $5,000
depending on the application and a fee based on volume is charged to the user
for each registration on the Gemprint international database -- which is owned
and maintained by Gemprint. Law enforcement agencies and many insurance
companies support the Gemprint system (approximately 25 insurance companies
offer a 10% discount on diamond insurance policies if a gem is gemprinted).
Gemprint has recently signed three important agreements employing the use of its
technology: (1) a contract with the Government of the Northwest Territories of
Canada to design a 'Northern' diamond certificate, to establish an on-site data
base and to gemprint northern diamonds with two major diamond manufacturers
involved in the program; (2) an exclusive distribution agreement with Breebaart
Group of Rotterdam covering the territory of Europe; and (3) a contract to
develop a unique brand of diamond using a special application of the Gemprint
technology. In addition, Gemprint has a contract in effect with Stuller Settings
of Lafayette, LA under which Gemprint certificates are offered as a value add-on
for all diamonds sold by Stuller.
Gemprint is already sited by some 20 Internet diamond traders and Gemprint's
current activities include a strong penetration of this growing Internet trade.
8. Biorem Technologies Inc. ("Biorem")
Biorem, an industrial biotech company based in Guelph, Ontario, is engaged in
the business of applying bioconversion and biotransformation technology to
municipal and industrial environmental applications. These applications include
the treatment of industrial waste streams for liquids or air (biofilters) common
to the food processing, agriculture, chemical and pharmaceutical manufacturing
industries as well as the treatment or clean-up of organic toxic chemicals in
soil or groundwater. Biorem has certain proprietary industrial fermentation
techniques which enable it to produce new biological materials for use in
bioremediation. Biorem has developed technology for economical and effective
cleaning of contaminated soils and organic air streams.
Biorem is still considered to be an early stage developing company and as such
has incurred operating losses over the last five years. However, in 1999 Biorem
made significant progress in the commercialization of its biofilter technology
with several large-scale biofilter installations being completed in the U.S. and
Canada. With continued focus on its biofilter business and building on the
success achieved in 1999, Biorem expects its revenue growth to carry forward
into 2000.
9. Dantec Corporation ("Dantec")
Dantec, a technology company based in Waterloo, Ontario, specializes in on-line
product and total process optimization through the development and
implementation of advanced process controls. Dantec's technology utilizes
sophisticated process control algorithms developed at the University of
Waterloo, Ontario. Dantec's technology has been applied to many different
processes in the food processing industry from natural grains to aquaculture and
snack foods. Other industrial applications include wood, mined, pharmaceutical
and petrochemical products.
Dantec's strategy is to provide turnkey, fully automated processes, advanced
control solutions and enterprise-wide information systems to its customers
worldwide.
In 1999 Dantec focused on growing its business in the industrial market sectors
mentioned above. It will continue this focus in 2000 and will continue to
develop its strategy of delivering a turnkey approach to its clients on an
exclusive basis. Dantec also intends to pursue a strategy of further growth
through acquisition.
Equity Investees:
"Equity Investees" are those companies in which CVF holds 50% or less equity
ownership but more than or equal to 20% ownership. The Equity Investees'
accounts are not consolidated in CVF's financial statements and the net incomes
or losses of CVF's Equity Investees are included in CVF's financial statements
only to the extent of CVF's percentage holdings of these entities.
The Equity Investees and their businesses are described below:
10. Petrozyme Technologies Inc. ("Petrozyme")
Petrozyme is a Waterloo, Ontario based company engaged 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 revenues.
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.
<PAGE> 5
In 1999 the U.S. Environmental Protection Agency completed a study confirming
that oil refinery wastes otherwise classified as hazardous have the potential to
be de-classified and listed as non-hazardous when treated with Petrozyme's
proprietary process. Petrozyme is currently exploring the possibility of
partnering with US refinery service companies to increase its access to this
market.
11. Ecoval Inc. ("Ecoval")
Ecoval, an Oakville, Ontario based business, was formed to manufacture and
market a variety of 100% natural fertilizers, environmentally friendly organic
herbicides and tree recovery systems targeted primarily for the lawn and garden
retail/consumer market and specialty agricultural markets. The home gardening
market alone in the U.S. is currently estimated at $27 billion per year.
Ecoval has received U.S. patents for its herbicide and its 4-4-8 tree recovery
fertilizer. Research results show the herbicide to be efficacious, non-toxic,
bio-degradable and faster than comparable chemical products. Ecoval's herbicide
is currently going through the registration and approval process in Canada and
has received approval from the Environmental Protection Agency in the U.S.
Ecoval also has a proprietary binder technology to enable the granulation of
gypsum, limestone and feathermeal along with other micro-nutrients.
In 1997 Ecoval launched a major marketing campaign in the U.S. The brand name
for the U.S. products is Nature's Glory(TM). Ecoval's U.S. operations are
conducted through its wholly owned subsidiary, Ecoval USA, Inc., from its
office in Greenwich, CT. In 1999 Ecoval's manufacturing facility located in
Montreal, Canada was closed down and its assets surrendered to the creditors in
order to more cost effectively manufacture its products. Ecoval has since
out-sourced its production, packaging and shipping functions in an effort to
achieve cost savings and reposition the business primarily in the U.S. market.
Currently, Ecoval has products distributed in 26 states at both the retail and
commercial level. Customers include retail garden centers nurseries,
landscapers, estate caretakers, municipalities, professional lawn care
contractors and golf courses.
Ecoval has developed an e-commerce website to sell not only its own proprietary
products, but also a full range of garden supply products.
Less Than 20% Owned:
'Less Than 20% Owned' refers to those investee companies in which CVF has a less
than 20% ownership interest. The direct financial results of the Less Than 20%
Owned investee companies are not included in CVF's consolidated financial
results. The Less Than 20% Owned companies which are publicly traded are carried
at market value. CVF provides management expertise and/or financing for some of
these entities. It is the intention of CVF to hold its positions in these
companies until it is considered that the invested funds can be better utilized
in other current or new holdings.
The Less Than 20% Owned investee companies are as follows:
12. RDM Corporation ("RDM")
RDM, a Waterloo, Ontario public company (CDNX: RC), is a leading developer of
specialized software and hardware products for both Internet e-commerce and
paper payment processing. RDM provides its technologies and solutions to banks,
printers and payment processors in over 35 countries.
CVF holds 1,868,072 common shares of RDM (representing a 16% ownership interest)
which were acquired in late 1997, early 1998 and early 1999 at a cost of
$991,811. At March 21, 2000, based on the closing market per share price of
$2.45, the market value of CVF's holding in RDM was $4,576,776.
13. TurboSonic Technologies, Inc. ("TurboSonic")
TurboSonic, a Waterloo, Ontario public company (OTC Bulletin Board: TSTA),
designs and markets proprietary air pollution control technologies to industrial
customers worldwide. Its products are designed to meet and exceed the strictest
emissions regulations, improve performance, reduce operating costs and recover
valuable by-products. Industries served include pulp & paper, metals & mining,
cement, waste processing and incineration, power generation and petrochemicals.
CVF holds 1,337,979 common shares of TurboSonic (representing a 13% ownership
interest) which were acquired prior to 1999 at a cost of $368,487. At March 21,
2000, based on the closing market per share price of $1.81, the market value of
CVF's holding in TurboSonic was $2,421,742.
14. NETrageous Inc.("NETrageous")
NETrageous, a private company incorporated in the State of Delaware, is in the
business of developing websites. CVF invested a total of $250,000 in NETrageous
on January 22, 1999 in exchange for approximately 3% of the issued and
outstanding common shares.
Number of Employees
As of January 1, 2000, CVF and its Consolidated Entities had a total of 81
full-time employees.
<PAGE> 6
ITEM 2 DESCRIPTION OF PROPERTY
On February 3, 1998 CVF entered into a 2 year lease (with a 1 year extension)
for its principal executive offices at 916 Center Street, Lewiston, New York
14092. Lease payments are $25,200 annually. The remainder of the Consolidated
Entities locations are leased facilities. These facilities serve as
administrative offices and manufacturing (where appropriate) facilities. Each
business segment, namely Machine Controls, Identification Systems, Retail
Products, Corporate Administration, and All Other uses leased facilities. The
facilities generally range in size from 2,000 to 6,000 square feet. The lease
terms expire in 2001 to 2004. The Company believes that its present leased
facilities are adequate to support its current and anticipated future needs.
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
During the fourth quarter of 1999 no matter was submitted to a vote of security
holders, through the solicitation of proxies or otherwise.
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 of CVF 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 the 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,
markdown or 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.
<TABLE>
<CAPTION>
LOW HIGH
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<S> <C> <C>
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 2.625 4.25
- 2nd Quarter 2.00 6.75
- 3rd Quarter 2.875 5.50
- 4th Quarter 2.50 4.00
2000 - 1st Quarter (until 3/21/00) 2.563 6.50
</TABLE>
As of March 21, 2000, there were 6,915,622 shares of CVF Common Stock
outstanding held by holders of record.
(b) Holders of Record
At March 21, 2000 there were approximately 297 holders of record for the
outstanding CVF 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.
<PAGE> 7
(d) Recent Sales of Unregistered Securities
The following is a summary of all securities of the Company sold within the past
year 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
"accredited investors".
<TABLE>
<CAPTION>
NAME DATE AMOUNT OF SECURITIES
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<S> <C> <C>
Everest Capital
Corporation December 31, 1999 137,500
</TABLE>
The securities issued to Everest Capital Corporation represented common shares
and were exchanged for 1,871,581 Class B shares of Gemprint held by Everest.
(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 1998, and 1999, The Company repurchased 162,500 common shares and 10,800
common shares respectively. The total amount of shares repurchased to December
31, 1999 was 436,200 Common Shares.
ITEM 6 MANAGEMENT DISCUSSION AND ANALYSIS
Special Note Regarding Forward-Looking Statements
Certain statements in this Annual Report on Form 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 CVF plans to build on the momentum created by the successes
and advances achieved by its investee companies in 1999. It will continue its
efforts to assist all of its investee companies to realize their full potential,
while maintaining a strong focus, established in 1999, on developing the
e-commerce parts of their businesses.
The five major Consolidated Entities, Elements, SRE, Gemprint, Biorem and
Dantec each made significant progress in 1999 and each is positioned to
consolidate and expand in 2000.
Elements' Internet website, designed and built to provide consumers with a user
friendly information platform for purchasing all their natural healthcare
products, is now operating. In 2000 Elements intends to continue its efforts to
launch a national franchise retail chain, explore entry into European markets
where natural medicines enjoy high levels of acceptance and expand its online
presence through additional weblinks and alliances.
SRE's strategic OEM relationship together with breakthrough sales in the
scissors and boom market and in the airport ground support equipment market
enabled it to increase its revenues to $12,650,200 in 1999 compared to
$4,316,000 in 1998, representing a 193% increase. SRE believes it has
accomplished major strides in new product development that will enhance results
significantly in the near future. In the longer term, SRE is positioning for
major growth in the on-road electric vehicle market which it believes will
inevitably occur as energy storage and fuel cell technology improves.
<PAGE> 8
Gemprint's strategy of targeting all links in the diamond supply chain bore
fruit in 1999 with the completion of the Canadian Northwest Territories
Agreements and the commencement of Gemprinting of cut diamonds sourced in the
new Canadian diamond fields. In 2000 Gemprint plans to leverage off its new
business relationships to increase sales to wholesalers, laboratories and
manufacturers in North America, Europe and the Far East. At the same time
Gemprint will work to capitalize on its identification technology and its
international data base to become the preferred enabler for securely trading
diamonds over the Internet.
Biorem's biofilter marketing efforts paid off in 1999 with a revenue growth of
1,113%, from $109,274 in 1998 to $1,325,771 in 1999. Its product line has been
expanded to include modular biofilter package systems which has opened up new
market opportunities. In,particular, Biorem plans to develop an e-commerce
Internet program for this product line which will provide another avenue for
continued rapid sales expansion. Although Biorem expects its rapid internal
growth to continue in 2000, it also intends to explore the possibility of
achieving additional growth through acquisition.
Dantec had a year of solid accomplishments in 1999, adding several major
accounts with high growth potential to a client list that already includes
Weston's, Frito-Lay, Cargill, Kraft General Foods, Kelloggs, Ralston Purina,
Mars and Maple Leaf Foods. In 1999 Dantec initiated an e-commerce program with
its Natural Grain Drying Controls and it is now setting up web links with
related businesses, trade journals and associations. In 2000 Dantec intends to
continue sales expansion through its expanded base of major industrial companies
with worldwide multi-plant operations. Dantec also plans to pursue the
possibility of further growth through acquisition.
CVF's two Equity Investees, Petrozyme and Ecoval also showed steady development
in 1999 and are positioned to make further progress in 2000.
Petrozyme's highlight in 1999 was its receipt of early indication from the U.S.
EPA that materials produced by oil refineries falling within the hazardous
materials classification can be declassified and achieve non-hazardous
classification when treated with the Petrozyme Process. In 2000 Petrozyme will
utilize this development in marketing to U.S. refineries. One important goal is
to convert a number of demonstration installations to full scale, operating,
revenue-producing bio-reactors. Petrozyme is also exploring the possibility of
partnering with U.S. refinery service companies to increase its access to this
market.
Ecoval continued development of its Nature's Glory(TM) product line in 1999 with
the submission of patent applications for several new natural products including
a herbicide, a plant growth regulator, an insecticide, a fungicide and a
pre-emergent herbicide. The insecticide and fungicide have been granted EPA
exemption and can be marketed immediately. A European distributor for Ecoval's
herbicide is now in the process of applying for registration. In 2000 Ecoval
will continue its efforts to generate sales revenues through direct marketing
efforts, by establishing key distributor relationships in North America and
abroad and by further development of e-commerce potential through Internet
marketing alliances.
CVF's two Less Than 20% Owned investee companies both made dramatic progress in
1999, continuing into 2000. Since both are publicly traded companies, this
success is reflected in the significant appreciation in value of CVF's holdings
that occurred over the past several months.
RDM achieved record revenues in 1999 of $3,141,500, an increase of 63% over
1998. Major agreements were concluded including the VeriFone License Agreement
for RDM's MICR technology and a purchase order agreement with Fidelity Express
and a pilot agreement with the Federal Reserve Bank of Boston for RDM's EC500Oi
point-of-sale (POS) systems. In 2000 RDM plans to launch eCheck as an Internet
payment choice for business-to-business transactions and to continue to develop
key strategic partnerships and marketing relationships for EC500Oi and eCheck.
TurboSonic accomplished a 35% increase in sales in 1999 to $3,856,842 from
$2,848,560 in 1998 and converted a loss of $1,041,895 in 1998 to a profit of
$169,311 in 1999. Although most of TurboSonic's revenue was generated in U.S.
markets, orders were received from all over the world. In 2000 TurboSonic plans
continued expansion into U.S. and worldwide markets, further development of a
worldwide network of sales representatives and expansion of its capacity to
benefit from Internet-sourced E-commerce and marketing opportunities.
CVF will continue to provide equity and debt financing to its group of investee
companies as it assesses their needs. CVF will accomplish this by effecting
additional private placements or public offerings for itself or by assisting its
investee companies in completing private placements or public offerings for
themselves, as and when appropriate.
For those shares it holds in its public investee companies, RDM and TurboSonic,
CVF will continue to monitor the market value of these holdings with the view to
gaining from their future sale.
Individual investee companies are expected to continue approximately the same
level of research and development that 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
<PAGE> 9
Comparison of Consolidated Results 1999 and 1998
Consolidated sales of CVF for fiscal year amounted to $16,689,360, representing
an increase of $9,331,364 (127%) compared to sales of $7,357,996 for 1998.
CVF, 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 Grand Island Marketing Inc. ("Elements"),
Solaria Research Enterprises Ltd. ("SRE"), Gemprint(TM) Corporation
("Gemprint"), Biorem Technologies Inc. ("Biorem"), Dantec Corporation
("Dantec"), Canadian Venture Founders Leasing Corporation ("CVFLC"), Eastview
Marketing One LLC ("Eastview") and Grand Island Marketing Two LLC ("Grand
Island 2"). Investee companies in which CVF has less than 50% or less ownership
are not included in the consolidation. These companies include Petrozyme
Technologies Inc. ("Petrozyme"), Ecoval Inc. ("Ecoval"), RDM Corporation
("RDM"), TurboSonic Technologies, Inc. ("TurboSonic") and NETrageous Inc.
("NETrageous").
During 1999 SRE continued full production on a strategic relationship contract
(which began in the third quarter of 1998) with a major original equipment
manufacturer. This resulted in SRE's sales for 1999 increasing by $8,334,200
(193%) over 1998. Biorem enjoyed a $1,216,497 (1,113%) increase in sales in 1999
compared to the same period in 1998 due to accelerating new business in
biofilter sales. Elements had a $187,498 (28%) increase in sales in 1999 due to
2 stores being open for the entire year which operated for only a portion of the
1998 period (a third store was opened in August, 1999).
CVF's gross profit as a percentage of sales declined from 31.3% in 1998 to 16.2%
for 1999. This decrease is mainly due to SRE reducing its usual gross profit on
the OEM relationship referred to above in order to increase market share. SRE
plans to increase its margins on future contracts. Biorem's gross profit
increased by $398,503 compared to 1998 due to the sales increase.
Selling, general and administrative expenses on a consolidated basis amounted to
$7,051,947 for 1999. This represents a decrease of $710,240 or 9.2% compared to
1998. The lower selling, general and administrative costs incurred in 1999 are
due to advertising costs incurred in 1998 including an informercial for Eastview
produced for $922,000 and a decrease in pension expense in 1999 of $439,982.
These amounts are partially offset by an increase in 1999 of $524,274 (79%) in
sales and marketing expenses, and an increase of $274,946 (20.7%) in
salaries/wages. In addition, management continues to undertake a concerted
effort to effect an overall reduction in administrative costs.
Research and development expenses for 1999 amounted to $638,146 compared to
$441,658 for 1998 (a 44.5% increase). Gemprint, Dantec and SRE all have ongoing
new product development and product enhancement projects moving forward which
contributed to the increase.
Loss from operations decreased to $4,980,996 in 1999 from $5,899,043 in 1998, a
decrease of $918,047 (or 16%). This decrease can be attributed to higher sales
and a concerted effort during 1999 to contain spending.
Net interest income (expense) decreased from interest income of $150,274 for
1998 to interest expense of $60,325 for 1999. Investment of large cash balances
during a portion of 1998 gave rise to the 1998 interest income. These balances
were invested in investee companies during 1998 and were not available to earn
interest in 1999.
Other income decreased from $709,805 in 1998 to $282,395 in 1999. 1998 income
included interest revenue that had been previously written off for debt in
Certicom of $205,592, and a gain on the transfer of technology by Solaria to a
customer of $322,790. These two items did not re-occur in 1999.
Losses of CVF from equity holdings, entities in which CVF has a 50% or less
ownership, increased from $1,152,190 in 1998 to $1,292,600 in 1999. This
increase is attributable to the Company's increased share of the losses of
Ecoval and Petrozyme.
Gain on sale of holdings decreased from $579,775 in 1998 to a loss of $97,720
in 1999. In 1998 the Company sold the remainder of its holdings in Certicom
Corp.
A tax benefit of $920,467 was booked for 1999. This is the result of CVF being
able to carry current losses back to 1997 when the Company made significant
gains on the sale of shares of one of its investments. The tax benefit is based
on losses incurred by the consolidated wholly owned U.S. entities being carried
back. Losses incurred by Canadian subsidiaries are not available to recover U.S.
taxes paid but will be utilized when each such entity has taxable income in
Canada.
Cumulative effect of a change in accounting principle for 1999 reflects a charge
of $253,154 net of tax, for the write off of previously recorded start-up costs.
The Accounting Standards Executive Committee (AcSEC) issued Statement of
Position (SOP) 98-5, which is effective for fiscal years commencing after
December 15, 1998. SOP 98-5, "Reporting on the Costs of Start-up Activities",
prescribes that start-up costs should be expensed as incurred. The SOP states
that its adoption should be reported as a cumulative effect of a change in
accounting principle.
Minority interest on the Statement of Operations increased from a loss of
$144,329 in 1998 to a gain of $395,780 in 1999. The 1998 loss was primarily due
to minority interest sharing in the 1998 net income of Dantec. In 1999, minority
interest shared in the net losses of Dantec, Elements, and Solaria.
As a result of the operations described above, the Company recorded a net loss
of $5,086,153 in 1999 as compared to a net loss of $4,660,705 incurred in 1998.
COMPARISON OF CONSOLIDATED RESULTS 1998 AND 1997
<PAGE> 10
Sales for the 1998 fiscal year increased by $5,672,597 or 337% to $7,357,996
from $1,685,399 in 1997. CVF, 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 CVFLC, Elements, SRE,
Gemprint, Biorem, Dantec, Eastview and Grand Island 2. Companies that are not
consolidated include Petrozyme, Ecoval, RDM and TurboSonic.
In 1998 SRE started full production on an arrangement with a major original
equipment manufacturer. This resulted in SRE's sales increasing by $3,679,183
over 1997, with the majority of this increase coming in the last two fiscal
quarters of 1998. Also making a substantial contribution to the 1998 growth in
sales were Dantec and Elements, which commenced business in 1998. These two
latter companies had combined sales of $2,759,941 in 1998 with comparable sales
in 1997 being only $513,711.
In 1998 the 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 1998 sales
increase, the main contributors to this increase are SRE, Dantec 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 in 1998 SRE reduced its profit percentage on the
major OEM contract referred to above in order to increase market share. SRE
plans to increase its margins on future contracts.
In fiscal 1998 selling, general and administrative expenses on a consolidated
basis increased by $2,394,646 or 45% as compared to fiscal 1997. Advertising
costs for an infomercial for Eastview in the amount of $922,336 plus costs
incurred by Dantec and Elements in 1998 contributed $1,773,380 to the increase
in selling, general and administrative cost. Also one of the investee 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 (a
4.6% increase) in 1998 over 1997. In 1998 the majority of R&D costs were
expended by SRE in order to develop new electric controllers to expand its
market share.
Net interest income decreased by $298,410 or 66% in fiscal 1998 from $448,684
earned in 1997 to $150,274 in 1998. This decrease was 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 investee companies and to make
further investments.
Losses from equity holdings, entities in which CVF has a 50% or less ownership,
decreased from $2,076,573 in 1997 to $1,152,190 in 1998. These losses were
caused by both the activities of these holdings and equity transactions between
the equity holdings 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 third party dilution gain of $1,931,378. No similar gain occurred
in 1998.
The combined sales of Ecoval, Petrozyme and Dantec (for the six months prior to
the Dantec amalgamation on June 30, 1998) were $1,114,138 for the 1998 fiscal
year compared to $1,560,122 for 1997. The combined net losses of these companies
for 1998 was $3,016,717 with CVF's share of these loses being approximately
$953,000. The comparable proportion of losses, 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 CVF sold most of its holdings in Certicom Corp. with the gain in 1998
being a result of the sale of the remainder of the Certicom shares and a gain
realized on the sale of a portion of one of CVF's other 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 which the 1998 loss
was carried back, thereby enabling the establishment of the tax benefit.
LIQUIDITY AND CAPITAL RESOURCES:
At December 31, 1999, stockholders' equity was $9,654,385 as compared to
$10,539,132 at December 31, 1998. This net decrease of $884,747 is primarily
attributable to the net loss of $5,086,153 incurred in 1999 and the purchase of
10,800 treasury shares of the Company for $37,585. These declines are partially
offset by the Series B Convertible Preferred Stock investment during 1999
totalling $3,090,000 net of related costs.
In October 1999, CVF sold 350,000 shares of convertible preferred stock and
215,384 warrants to acquire Common Shares for aggregate consideration of $3.5
million. Net proceeds of the offering were approximately $3.05 million.
The current ratio of the Company as at December 31, 1999 is 1.7 to 1. Although
the current ratio has declined from 2.3 to 1 at December 31, 1998 it still
remains strong. This decline in the current ratio is attributable to the use of
cash and cash equivalents to fund ongoing operations and investments during
1999.
In the future, as it did in 1999, CVF plans to raise additional funds through
either private placement or public offering. These funds will be primarily used,
as in the past, to further augment the growth of CVF's investee companies and
will be employed to acquire additional positions in these companies or to
acquire companies that are synergistic to the current portfolio. Also, as the
investee companies mature, CVF will endeavor to assist them in obtaining
financing from other sources in order to position them for future growth.
The Company's subsidiary Elements had loans in default of certain covenants at
year end. To the extent that Elements are unable to remedy the defaults with its
bank, the Company plans to assist with this financing.
Impact of Year 2000
In prior years, the Company discussed the nature and progress of its plans to
become Year 2000 ready. In late 1999, the Company completed its remediation and
testing of systems. As a result of those planning and implementation efforts,
the Company experienced no significant disruptions in mission critical
information technology and non-information technology systems and believes
those systems successfully responded to the Year 2000 date change. The Company
expensed approximately $5,000 during 1999 in connection with remediating its
systems. The Company is not aware of any material problems resulting from Year
2000 issues, either with its products, its internal systems, or the products
and services of third parties. The Company will continue to monitor its mission
critical computer applications and those of its suppliers and vendors
throughout the year 2000 to ensure that any latent Year 2000 matters that may
arise are addressed promptly.
Financial Considerations
Early Stage Development Companies. Each of the Corporations (other than Canadian
Venture Founders Leasing Corp.) 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.
<PAGE> 11
Quarterly Fluctuations. CVF's operating results have historically been, and will
continue to be, subject to quarterly and annual fluctuations due to a variety of
factors. Any shortfall in revenues in a given quarter may impact the Company's
results of operations due to an inability to adjust expenses during the quarter
to match the level of revenues for the quarter. There can be no assurance that
the Company will be able to grow in future periods or that it will be able to
sustain its level of total revenues or its revenue growth on a quarterly or
annual basis.
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.
<PAGE> 12
ITEM 7 FINANCIAL STATEMENTS
CVF TECHNOLOGIES CORPORATION
INDEX TO FINANCIAL STATEMENTS
PAGE NUMBER
REPORT OF INDEPENDENT AUDITORS' F-2
CONSOLIDATED BALANCE SHEETS F-3
CONSOLIDATED STATEMENTS OF OPERATIONS F-5
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS F-8
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-10
F-1
<PAGE> 13
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 as of December 31, 1999 and 1998 and the related
consolidated statements of operations, stockholders' equity, cash flows, and
comprehensive income for each of the three years in the period ended
December 31, 1999. 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, 1999 and 1998, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1999 in conformity with accounting principles generally
accepted in the United States.
As discussed in Note 2 to the financial statements, in 1999 the Company changed
its method of accounting for start-up activities.
/s/ Ernst & Young LLP
Kitchener, Canada, Ernst & Young LLP
March 24, 2000. Chartered Accountants
F-2
<PAGE> 14
CVF TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
As of December 31 [Expressed in U.S. Currency]
1999 1998
$ $
- ---------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT
Cash and cash equivalents 3,557,706 4,297,177
Restricted cash [note 6] 185,900 169,945
Marketable securities [note 4] -- 101,522
Trade receivables 2,112,478 3,129,862
Inventory [note 3] 975,027 790,467
Prepaid expenses and other 69,044 333,262
Income taxes receivable 1,162,253 998,750
- ---------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 8,062,408 9,820,985
- ---------------------------------------------------------------------------------------
Property and equipment, net of accumulated depreciation 479,732 517,444
Holdings, carried at cost or equity [note 4] 2,162,198 1,777,744
Holdings, available for sale, at market [note 4] 2,160,028 1,332,538
Goodwill, net of accumulated amortization [note 5] 7,539,917 7,691,584
Deferred income taxes [note 10] -- 95,275
- ---------------------------------------------------------------------------------------
TOTAL ASSETS 20,404,283 21,235,570
- ---------------------------------------------------------------------------------------
</TABLE>
F-3
<PAGE> 15
<TABLE>
<CAPTION>
1999 1998
$ $
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank indebtedness [note 6] 377,144 130,098
Current portion of long-term debt [note 7] 249,264 281,648
Loans in default [note 7] 248,273 --
Trade payables 1,970,672 2,525,737
Accrued liabilities 993,544 876,958
Dividends payable on Series A and B preferred stock [note 11] 144,592 69,434
Dividends payable on subsidiary's shares [note 13] 267,266 203,239
Income taxes payable -- 238,570
Debt equivalent [note 8] 567,768 --
- -------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 4,818,523 4,325,684
- -------------------------------------------------------------------------------------------------
Long-term debt [note 7] 275,675 662,928
Deferred income taxes [note 10] 51,841 --
Minority interest 4,374,664 3,622,122
Pension obligation [note 9] 517,848 506,463
Preferred and other non-voting stock of subsidiaries [note 13] 255,097 1,122,991
- -------------------------------------------------------------------------------------------------
5,475,125 5,914,504
- -------------------------------------------------------------------------------------------------
Redeemable Series A preferred stock, $0.001 par value,
redeemable at $18.25 per shares, authorized 500,000 shares,
issued and outstanding 25,000 shares [note 11] 456,250 456,250
- -------------------------------------------------------------------------------------------------
10,749,898 10,696,438
- -------------------------------------------------------------------------------------------------
Commitments [note 17]
- -------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY [note 11]
Common stock, $0.001 par value, authorized 50,000,000 shares,
outstanding 6,856,628 [1998; 6,729,928]
and in treasury 436,200 [1998; 425,400] 7,293 7,155
Series B convertible preferred stock
$0.001 par value, liquidation preference of
30% of Stated Value, authorized, issued and outstanding
350,000 shares 350 --
Additional paid in capital 22,582,146 18,951,228
Treasury stock (2,699,779) (2,662,194)
Accumulated other comprehensive income 22,963 (655,736)
Accumulated deficit (10,258,588) (5,101,321)
- -------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 9,654,385 10,539,132
- -------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 20,404,283 21,235,570
- -------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes
F-4
<PAGE> 16
CVF TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31 [Expressed in U.S. Currency]
<TABLE>
<CAPTION>
1999 1998 1997
$ $ $
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SALES 16,689,360 7,357,996 1,685,399
Cost of sales 13,980,263 5,053,194 1,091,821
- --------------------------------------------------------------------------------------------------
GROSS MARGIN 2,709,097 2,304,802 593,578
- --------------------------------------------------------------------------------------------------
EXPENSES
Selling, general and administrative 7,051,947 7,762,187 5,367,541
Research and development 638,146 441,658 422,216
- --------------------------------------------------------------------------------------------------
7,690,093 8,203,845 5,789,757
- --------------------------------------------------------------------------------------------------
(Loss) from operations (4,980,996) (5,899,043) (5,196,179)
- --------------------------------------------------------------------------------------------------
OTHER INCOME AND (EXPENSES)
Interest (expense) income, net (60,325) 150,274 448,684
Other income, net 282,395 709,805 52,642
(Loss) from equity investees (1,292,600) (1,152,190) (2,076,543)
Dilution gain on reduction of
ownership in equity investees -- -- 1,931,378
(Loss) Gain on sale of holdings (97,720) 579,775 19,758,954
- --------------------------------------------------------------------------------------------------
(1,168,250) 287,664 20,115,115
- --------------------------------------------------------------------------------------------------
(Loss) income before provision
for income taxes (6,149,246) (5,611,379) 14,918,936
(Recovery of) provision for
income taxes [note 10] (920,467) (1,095,003) 5,919,665
- --------------------------------------------------------------------------------------------------
(Loss) income before cumulative
effect of a change in accounting
principle and minority interest (5,228,779) (4,516,376) 8,999,271
- --------------------------------------------------------------------------------------------------
Cumulative effect of a change in
accounting principle net of tax [note 2] (253,154) -- --
Minority interest 395,780 (144,329) --
- --------------------------------------------------------------------------------------------------
NET (LOSS) INCOME (5,086,153) (4,660,705) 8,999,271
- --------------------------------------------------------------------------------------------------
Basic (loss) earnings per share [note 12]
(Loss) earnings before cumulative effect of a
change in accounting principle (0.73) (0.75) 1.52
Cumulative effect of a change in
accounting principle (0.04) -- --
- --------------------------------------------------------------------------------------------------
Net (loss) earnings [note 12] (0.77) (0.75) 1.52
==================================================================================================
DILUTED (LOSS) EARNINGS PER SHARE [note 12] (0.77) (0.75) 1.49
- --------------------------------------------------------------------------------------------------
BASIC WEIGHTED AVERAGE SHARES [note 12] 6,722,997 6,215,586 5,870,553
- --------------------------------------------------------------------------------------------------
DILUTED WEIGHTED AVERAGE SHARES [note 12] 6,722,997 6,215,586 6,009,708
- --------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes
F-5
<PAGE> 17
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, 1997 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)
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
TREASURY COMPREHENSIVE TOTAL
STOCK INCOME EQUITY
$ $ $
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BALANCE - JANUARY 1, 1997 (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>
F-6
<PAGE> 18
CVF TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY CONT'D
Year ended December 31 [Expressed in U.S. Currency]
<TABLE>
<CAPTION>
SERIES B
CONVERTIBLE ADDITIONAL
COMMON STOCK PREFERRED PAID-IN
SHARES AMOUNT STOCK CAPITAL
$ $ $
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE - DECEMBER 31, 1998 7,155,328 7,155 -- 18,951,228
Purchase of treasury stock -- -- -- --
Net (loss) -- -- -- --
Dividends on Series A preferred stock -- -- -- --
Dividends on Series B convertible
preferred stock -- -- -- --
Issuance of Series B convertible
preferred stock -- -- 350 3,499,650
Fees on issuance of Series B preferred stock -- -- -- (410,000)
Shares on acquisition of interest in Gemprint 137,500 138 -- 541,268
Unrealized gain on securities
available for sale, net of taxes -- -- -- --
Translation adjustment -- -- -- --
- ------------------------------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 1999 7,292,828 7,293 350 22,582,146
- ------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
ACCUMULATED TREASURY COMPREHENSIVE TOTAL
DEFICIT STOCK INCOME EQUITY
$ $ $ $
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE - DECEMBER 31, 1998 (5,101,321) (2,662,194) (655,736) 10,539,132
Purchase of treasury stock -- (37,585) -- (37,585)
Net (loss) (5,086,153) -- -- (5,086,153)
Dividends on Series A preferred stock (22,814) -- -- (22,814)
Dividends on Series B convertible
preferred stock (48,300) -- -- (48,300)
Issuance of Series B convertible
preferred stock -- -- -- 3,500,000
Fees on issuance of Series B preferred stock -- -- -- (410,000)
Shares on acquisition of interest in Gemprint -- -- -- 541,406
Unrealized gain on securities
available for sale, net of taxes -- -- 371,152 371,152
Translation adjustment -- -- 307,547 307,547
- -------------------------------------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 1999 (10,258,588) (2,699,779) 22,963 9,654,385
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes
F-7
<PAGE> 19
CVF TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31 [Expressed in U.S. Currency]
<TABLE>
<CAPTION>
1999 1998 1997
$ $ $
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net (loss) income (5,086,153) (4,660,705) 8,999,271
Adjustments to reconcile net (loss) income
from operating activities [note 15] 2,191,717 1,816,153 (19,256,776)
Changes in operating assets and liabilities [note 15] 400,445 (4,375,213) 1,844,331
- ----------------------------------------------------------------------------------------------------------
CASH (APPLIED TO) OPERATING ACTIVITIES (2,493,991) (7,219,765) (8,413,174)
- ----------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of property and equipment (46,217) (295,212) --
Investments in and advances to equity investees (1,585,175) (1,672,650) (865,605)
Purchase of holdings available for sale (557,296) (362,860) --
Repayment from equity investees -- 235,032 --
Proceeds from sale of holdings 229,616 914,680 20,389,424
Acquisitions, net of cash acquired -- (993,608) (686,272)
- ----------------------------------------------------------------------------------------------------------
CASH (APPLIED TO) PROVIDED BY INVESTING ACTIVITIES (1,959,072) (2,174,618) 18,837,547
- ----------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
(Decrease) increase in bank indebtedness 232,873 (753,176) 58,179
Borrowings of debt -- 79,588 121,365
(Payments) of debt (221,477) -- --
Issuance of common stock -- 4,977,111 --
Issuance of preferred stock, net of expenses 3,090,000 -- --
(Deposits) reductions of restricted cash (5,682) 482,168 (682,361)
Purchase of treasury stock (37,585) (790,664) (1,807,038)
Minority investments in subsidiaries 731,085 -- --
Redemption of preferred and other non-voting
stock of subsidiaries (20,214) -- --
- ----------------------------------------------------------------------------------------------------------
CASH PROVIDED BY (APPLIED TO) FINANCING ACTIVITIES 3,769,000 3,995,027 (2,309,855)
- ----------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on
cash and cash equivalents (55,408) (235,373) (77,888)
- ----------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS (APPLIED) PROVIDED
DURING YEAR (739,471) (5,634,729) 8,036,630
Cash and cash equivalents, beginning of year 4,297,177 9,931,906 1,895,276
- ----------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR 3,557,706 4,297,177 9,931,906
- ----------------------------------------------------------------------------------------------------------
Cash paid during the year for interest 102,361 212,510 163,346
- ----------------------------------------------------------------------------------------------------------
Cash paid during the year for income taxes 242,326 1,735,751 4,200,000
- ----------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes
F-8
<PAGE> 20
CVF TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME
Year ended December 31 [Expressed in U.S. Currency]
<TABLE>
<CAPTION>
1999 1998 1997
$ $ $
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET (LOSS) INCOME (5,086,153) (4,660,705) 8,999,271
- -------------------------------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME, NET OF TAX [note 11]
Foreign currency translation adjustments
[net of tax effect] 307,547 (1,021,341) 652,211
Unrealized holding gains (losses):
Unrealized holding gains (losses) arising during
period [net of taxes of $234,139, $(15,218), and
$42,190 for the years ended
December 31, 1999, 1998 and 1997] 361,043 (25,323) 63,948
Reclassification adjustments for previously
recognized unrealized holding gains (losses) [net
of taxes of $6,556, ($156,072), and ($7,322,108)
for the years ended December 31, 1999, 1998 and 1997] 10,109 (289,849) (13,598,200)
- -------------------------------------------------------------------------------------------------
Net unrealized holding gains (losses) 371,152 (315,172) (13,534,252)
- -------------------------------------------------------------------------------------------------
Total other comprehensive income (loss) 678,699 (1,336,513) (12,882,041)
- -------------------------------------------------------------------------------------------------
COMPREHENSIVE (LOSS) INCOME DURING YEAR (4,407,454) (5,997,218) (3,882,770)
=================================================================================================
</TABLE>
See accompanying notes
F-9
<PAGE> 21
CVF TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 [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 with a focus on
e-commerce, 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, 1999, the Company had a 69% [69% in 1998] 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,
1999, the Company had a 73% [67% in 1998] 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,
1999, the Company had a 75% [67% in 1998] ownership interest in Solaria.
F-10
<PAGE> 22
CVF TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 [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 Island 2"] a wholly-owned subsidiary,
was incorporated on December 17, 1997 in the state of New York. When operations
begin sometime in the future, Grand Island 2 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 61%
[51% in 1998] 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 has also developed 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 industrial applications. At
December 31, 1999, the Company had a 54% [54% in 1998] 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> 23
CVF TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 [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 included
in comprehensive 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> 24
CVF TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 [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 $85,977 at December 31, 1999 [$77,052 at December 31, 1998].
Amounts charged to expense were $197,560 during the year ended December 31, 1999
[$25,681 in 1998; $8,500 in 1997]. One customer represents 29% of trade
receivables at December 31, 1999 [one customer represented 71% in 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
Advertising costs are expensed as incurred. Total advertising expenses were
$76,881 [$1,088,500 in 1998; $82,733 in 1997].
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, 1999 was $739,588 [$588,549 in 1998]. Depreciation expense was $147,716
[$119,558 in 1998; $97,958 in 1997].
F-13
<PAGE> 25
CVF TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 [Expressed in U.S. Currency]
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONT'D
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 obligations 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 stock market values. Those 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, the Company had the following
Canadian dollar demominated financial instruments (converted to the US
equivalents):
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Cash $1,152,806 $ 797,177
Trade Receivables 1,197,909 829,862
Trade Payables 1,209,272 1,025,737
Long-term debt 773,212 944,576
</TABLE>
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 fair value of identifiable
net assets of the underlying equity interest purchased and the amount paid for
the interest. Goodwill is amortized over a period of 15 years. Amounts
amortized in connection with subsidiaries are charged to amortization expense.
The amortization of goodwill implied in the cost of equity investments is
charged to gain or loss from equity investees.
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. Goodwill is
written down to the extent that projected undiscounted future cash flows do not
allow for the recovery of goodwill over its remaining life.
F-14
<PAGE> 26
CVF TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 [Expressed in U.S. Currency]
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONT'D
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 and B 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.
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" value
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 equals the market 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.
F-15
<PAGE> 27
CVF TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 [Expressed in U.S. Currency]
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONT'D
INCOME TAXES
The Company accounts for income taxes using the liability method in which a
deferred tax asset or liability is determined based upon the tax effect of the
differences between the financial statement and tax basis of assets and
liabilities, as measured by the enacted rates which will be in effect when these
differences reverse. Provision is made for all applicable U.S. and foreign
income taxes pursuant to this standard. Canadian research and development tax
credits of subsidiaries are credited to the applicable costs when such credits
are recognized as more likely than not to be realized.
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.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
COSTS OF START-UP ACTIVITIES
During 1999, the Company adopted Statement of Position 98-5 [issued by the
Accounting Standards Executive Committee of the American Institute of Certified
Public Accountants]: "Reporting on the cost of start-up activities", prescribing
that start-up costs should be expensed as incurred. A cumulative catch-up charge
of $253,154, net of tax of $130,414, was recorded during 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, 2001. The Company has not determined the impact, if any, SFAS 133 will have
on its financial statements.
F-16
<PAGE> 28
CVF TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 [Expressed in U.S. Currency]
3. INVENTORY
Inventory consists of the following:
<TABLE>
<CAPTION>
1999 1998
$ $
- --------------------------------------------------------------------------------
<S> <C> <C>
Raw material 437,581 261,859
Finished goods 537,446 528,608
- --------------------------------------------------------------------------------
975,027 790,467
- --------------------------------------------------------------------------------
</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 licenses
the production and distribution of its proprietary 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. TurboSonic Canada, Inc. ["TurboSonic"], a Waterloo, Canada private 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.
b. 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.
c. NETrageous Inc., a private company incorporated in the state of Delaware,
in the business of developing internet websites.
F-17
<PAGE> 29
CVF TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 [Expressed in U.S. Currency]
4. HOLDINGS CONT'D
Holdings consisted of the following at December 31, 1999:
<TABLE>
<CAPTION>
HOLDINGS
HOLDINGS AVAILABLE FOR
AT COST FOR SALE AT
PERCENTAGE OR EQUITY FAIR VALUE
OWNERSHIP $ $
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Ecoval
1,330,550 common shares [i] 27% --
notes and advances [v] 1,554,757
- ----------------------------------------------------------------------------------------------------
1,554,757
- ----------------------------------------------------------------------------------------------------
Petrozyme
50 common shares 50% --
250,000 Class C non-voting shares 100% --
notes and advances [v] 260,092
- ----------------------------------------------------------------------------------------------------
260,092
- ----------------------------------------------------------------------------------------------------
TurboSonic
1,337,979 common shares [ii] 13% 355,354
- ----------------------------------------------------------------------------------------------------
RDM
1,868,072 common shares [iii] 16% 1,637,027
- ----------------------------------------------------------------------------------------------------
NETrageous
500,000 common shares [iv] 3% 250,000
- ----------------------------------------------------------------------------------------------------
Other notes and holdings [v] 97,349 167,647
- ----------------------------------------------------------------------------------------------------
TOTAL 2,162,198 2,160,028
- ----------------------------------------------------------------------------------------------------
</TABLE>
F-18
<PAGE> 30
CVF TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 [Expressed in U.S. Currency]
4. HOLDINGS CONT'D
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>
Ecoval
1,330,550 common shares [i] 27% 535,807
notes and advances [v] 415,654
- --------------------------------------------------------------------------------------------------
951,461
- --------------------------------------------------------------------------------------------------
Petrozyme
50 common shares 50% --
250,000 Class C non-voting shares 100% --
notes and advances [v] 480,049
- --------------------------------------------------------------------------------------------------
480,049
- --------------------------------------------------------------------------------------------------
Certicom
29,881 non-marketable
preferred shares [vi] 217,058
- --------------------------------------------------------------------------------------------------
TurboSonic
1,337,979 common shares [ii] 13% 250,884
- --------------------------------------------------------------------------------------------------
RDM
1,768,072 common shares [iii] 18% 982,120
- --------------------------------------------------------------------------------------------------
Safeguard Scientific
3,700 common shares 101,522
- --------------------------------------------------------------------------------------------------
Other notes and holdings [v] 129,176 99,534
- --------------------------------------------------------------------------------------------------
TOTAL 1,777,744 1,332,538 101,522
==================================================================================================
</TABLE>
F-19
<PAGE> 31
CVF TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 [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] 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, 1999, the market of the shares was U.S. $0.27 [U.S. $0.19
in 1998] per share. As at December 31, 1999, the common shares of
TurboSonic have an original cost of $368,487. Accordingly, aggregate
unrealized losses of $7,880 [net of deferred income tax benefit of
$5,253] have been recorded as an element of accumulated other
comprehensive income for the year ended December 31, 1999.
[iii] The investment in RDM represents a private placement purchase of 100,000
shares for Cdn. $100,000 [U.S. $67,380] in 1999 and 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, 1999, the market value
of shares of RDM listed on the Canadian Venture Exchange was Cdn. $1.27
[U.S. $0.88] per share. As at December 31, 1999, the shares have an
original cost of $1,010,194. Accordingly, aggregate unrealized gains of
$376,100 [net of deferred income taxes of $250,733] 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.
[iv] On January 22, 1999, the Company purchased 500,000 shares in NETrageous
Inc. to acquire approximately 3% ownership interest. The total
consideration paid for the shares was $250,000.
[v] The notes and advances to Ecoval and Petrozyme and others bear interest
at prime plus 2%, are unsecured, payable on demand, some denominated in
Canadian currency and others in U.S. currency. Canadian prime rate at
December 31, 1999 was 6.5% [6.75% in 1998]. U.S. prime rate at December
31, 1999 was 8.5% [7.8% in 1998]. The Company does not intend to demand
repayment of these notes in the next year.
During the year, Ecoval restructured its business, resulting in the
closure of its Canadian subsidiary and surrender of related assets as
settlement of debts of that subsidiary. Ecoval has repositioned its
business with its U.S. subsidiary. As part of the restructuring and
repositioning, the Company advanced loans to Ecoval of Cdn. $1,985,800
[U.S. $1,374,968]. The carrying value of these loans has been reduced by
the Company's share of losses of the investee.
F-20
<PAGE> 32
CVF TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 [Expressed in U.S. Currency]
4. HOLDINGS CONT'D
[vi] During the year, the Company disposed of its investment in Certicom at
their cost amount.
The Company advanced loans to Petrozyme of Cdn. $400,000 [U.S. $276,960] during
1999 [Cdn. $800,000 [U.S. $522,800] in 1998]. The carrying value of these loans
has been reduced by the Company's share of losses of the investee.
The following table gives certain combined summarized financial information
related to the Company's equity holdings:
<TABLE>
<CAPTION>
1999 1998 1997
INCOME STATEMENT DATA $ $ $
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales 758,933 1,114,138 1,560,122
Gross profit (loss) on sales 152,168 12,394 (16,114)
Net (loss) (1,705,928) (3,016,717) (7,152,634)
CVF TECHNOLOGIES CORPORATION'S SHARE
OF NET (LOSS) (1,052,462) (953,244) (1,899,287)
=================================================================================================
BALANCE SHEET DATA
Current assets 1,120,435 873,292 2,665,662
Non-current assets 524,904 3,358,824 4,029,052
- -------------------------------------------------------------------------------------------------
TOTAL ASSETS 1,645,339 4,232,116 6,694,714
=================================================================================================
Current liabilities 960,728 857,013 1,077,528
Non-current liabilities 3,134,934 3,210,449 2,811,313
Equity (deficit) (2,450,323) 164,654 2,805,873
- -------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND EQUITY 1,645,339 4,232,116 6,694,714
- -------------------------------------------------------------------------------------------------
CVF TECHNOLOGIES CORPORATION'S SHARE OF
(ACCUMULATED DEFICIT) EQUITY (1,346,882) (108,133) 573,360
- -------------------------------------------------------------------------------------------------
CVF TECHNOLOGIES CORPORATION'S SHARE OF
NON-CURRENT LIABILITIES 3,134,934 3210,449 2,805,873
=================================================================================================
</TABLE>
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 amortization of goodwill of $240,138 [$198,946 in
1998, $177,256 in 1997].
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> 33
5. GOODWILL
<TABLE>
<CAPTION>
ACCUMULATED NET BOOK
COST AMORTIZATION VALUE
AS AT DECEMBER 31, 1999 $ $ $
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Elements 703,870 72,394 631,476
Solaria 406,519 188,232 218,287
Biorem 179,028 70,299 108,729
Gemprint 2,710,957 713,459 1,997,498
Dantec 5,646,657 1,062,730 4,583,927
- ---------------------------------------------------------------------------------
9,647,031 2,107,114 7,539,917
=================================================================================
</TABLE>
<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 5,199,432 517,741 4,681,691
- ---------------------------------------------------------------------------------
8,959,801 1,268,217 7,691,584
=================================================================================
</TABLE>
During 1999, amortization of goodwill in subsidiaries totalled $618,936
[$462,403 in 1998; $204,197 in 1997].
F-22
<PAGE> 34
CVF TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 [Expressed in U.S. Currency]
6. BANK INDEBTEDNESS
<TABLE>
<CAPTION>
1999 1998
$ $
- ------------------------------------------------------------
<S> <C> <C>
Gemprint [a] 131,888 124,478
Biorem [b] 13,968 5,620
Dantec [c] 120,504 --
Solaria [d] 110,784 --
- ------------------------------------------------------------
377,144 130,098
- ------------------------------------------------------------
</TABLE>
The weighted average interest rate on bank indebtedness during 1999 was 7.64%
[7.66% in 1998].
[a] Gemprint has bank indebtedness of Cdn. $190,479 [U.S. $131,883] [Cdn.
$190,479 - U.S. $124,478 in 1998] with a Canadian chartered 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. $268,486 [U.S. $185,900] [Cdn. $260,054 [U.S.
$169,945] in 1998].
[b] Biorem has a bank overdraft of Cdn. $20,174 [U.S. $13,968] [$8,600 [U.S.
$5,620] in 1998].
[c] Dantec has a line of credit with a Canadian chartered bank which is
available, based as a fixed percentage of accounts receivable, to a limit
of Cdn. $400,000. The loans against this line bear interest at prime plus
2%. The loan is guaranteed by the CVF and 170,000 common shares of CVF
have been pledged as collateral.
[d] Solaria has a line of credit with a Canadian chartered bank which is
available, based on a fixed percentage of accounts receivable, to a limit
of Cdn. $250,000. Loans against this line bear interest at prime plus
0.5%. Solaria has pledged a general security agreement as collateral.
F-23
<PAGE> 35
CVF TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 [Expressed in U.S. Currency]
7. LONG-TERM DEBT
Long-term debt comprises the following:
<TABLE>
<CAPTION>
1999 1998
$ $
- -------------------------------------------------------------------------------------------------
<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 Cdn. $730,000. 265,938 250,997
Settlement with ISM Information Systems Management
Corporation and Gemprint, of Cdn. $360,000 interest-free
to August 1998, with interest charged at prime plus 1%,
thereafter, currently due on demand. 249,264 235,260
Small business loan issued by a Canadian chartered bank 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%.
A general security agreement has been provided as
collateral by Elements. 129,517 147,036
Small business loan issued by a Canadian chartered bank 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%.
A general security agreement has been provided as
collateral by Elements. 118,756 134,819
Other 9,737 176,464
- ------------------------------------------------------------------------------------------------
Total long-term debt 773,212 944,576
Less: current portion of long-term debt (249,264) (281,648)
loans in default of covenants (248,273) --
================================================================================================
LONG-TERM DEBT EXCLUDING CURRENT PORTION 275,675 662,928
================================================================================================
</TABLE>
F-24
<PAGE> 36
CVF TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 [Expressed in U.S. Currency]
7. LONG-TERM DEBT CONT'D
Scheduled repayments are as follows:
<TABLE>
<CAPTION>
$
- --------------------------------------------------------------------
<S> <C>
2000 497,537
2001 275,675
- --------------------------------------------------------------------
773,212
- --------------------------------------------------------------------
</TABLE>
The current portion of long-term debt includes the full amount of the ISM
settlement, as such debt is due on demand. In addition, the full amounts of the
Elements small business loans have been included in current liabilities, as
Elements was unable to comply with certain requirements of the related loan
agreements, giving the lender the right to demand repayment.
Interest expense on long-term debt during the year was $37,209 [$20,790 in 1998;
$30,825 in 1997].
8. DEBT EQUIVALENT
Effective October 14, 1999, Dantec entered into an agreement with a Dantec
shareholder holding 850,000 Class A special shares to redeem a minimum of 10,000
Class A special shares per month, at Cdn. $1 per share, commencing October 30,
1999. Each month, the shareholder is entitled to redeem additional shares in an
amount equal to 20% of the preceding month's net profits before taxes. The
shareholder has the right to call upon Dantec to satisfy its obligation in full
at any time should it be deemed necessary by the shareholder. Should Dantec
become a publicly traded company during the period of redemption, the
shareholder will be entitled to convert any non-redeemed shares to free trading
stock. Based on payment terms, the amount owing of Cdn. $820,000 [U.S. $567,768]
at December 31, 1999 has been classified as a debt equivalent in these
consolidated financial statements.
9. PENSION OBLIGATION
In recognition of past service contributions by a retired, 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 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-25
<PAGE> 37
CVF TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
10. INCOME TAXES
Details of the income tax (recovery) provision are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
$ $ $
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current
U.S. (1,197,997) (1,003,089) 5,839,765
Foreign -- -- --
- -------------------------------------------------------------------------------------------------
Total current taxes (1,197,997) (1,003,089) 5,839,765
- -------------------------------------------------------------------------------------------------
Deferred
U.S. 147,116 (91,914) 79,900
Foreign -- -- --
- -------------------------------------------------------------------------------------------------
Total deferred taxes 147,116 (91,914) 79,900
- -------------------------------------------------------------------------------------------------
INCOME TAX (RECOVERY) PROVISION (1,050,881) (1,095,003) 5,919,665
=================================================================================================
</TABLE>
Income tax (recovery) provision reconciles to the statements of operations as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
$ $ $
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(Recovery of) provision for income taxes (920,467) (1,095,003) 5,919,665
Tax related to cumulative effect of a change in
accounting principle (130,414) -- --
- -------------------------------------------------------------------------------------------------
(1,050,881) (1,095,003) 5,919,665
=================================================================================================
(Loss) Income before provision for income taxes
U.S. (2,200,136) (2,745,226) 19,332,764
Foreign (3,949,110) (2,866,153) (4,413,828)
- -------------------------------------------------------------------------------------------------
(Loss) Income before provision for income taxes (6,149,246) (5,611,379) 14,918,936
=================================================================================================
</TABLE>
F-26
<PAGE> 38
CVF TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
10. INCOME TAXES CONT'D
The recovery of (provision for) income tax differs from the amount computed by
applying the statutory income tax rate to net (loss) income before (recovery
of) provision for income taxes as follows:
<TABLE>
<CAPTION>
1999 1998 1997
$ $ $
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Statutory income tax rate 34.0% 34.0% 35.0%
======================================================================================================
Increase (decrease) in income tax resulting from:
Non-deductible goodwill amortization -4.3% -3.9% 0.9%
Loss in subsidiaries not recognized for tax purposes -8.4% -7.0% 5.1%
Other -4.2% -4.1% -1.3%
- ------------------------------------------------------------------------------------------------------
Effective income tax rate 17.1% 19.0% 39.7%
======================================================================================================
</TABLE>
The components of the temporary differences which created the deferred tax
provision (recovery) are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
$ $ $
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Change in pension obligation (3,985) (177,262) --
Change in accounting principle (130,414) -- --
Change in unrealized gains attributable to
securities available for sale valued at market 247,435 (2,875) --
Change in exchange of shares upon the amalgamation
forming Dantec Corporation 5,251 88,223 --
Change in prepaids expensed for tax purposes -- -- 79,900
Change in miscellaneous 28,829 -- --
Change in income tax losses available for carryforward
in subsidiaries 758,000 1,475,000 730,000
Change in valuation allowance (758,000) (1,475,000) (730,000)
- ------------------------------------------------------------------------------------------------------
147,116 (91,914) 79,900
======================================================================================================
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and liabilities are presented below:
<TABLE>
<CAPTION>
1999 1998
$ $
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
U.S.
Related to pension obligation 181,247 177,262
Related to a change in accounting principle 130,414 --
Related to the unrealized gains attributable to
securities available for sale valued at market -- 6,236
===========================================================================================================
311,661 183,498
- -----------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
U.S.
Related to the exchange of shares upon the
amalgamation forming Dantec Corporation 93,474 88,223
Related to the unrealized gains attributable to
securities available for sale valued at market 241,199 --
Miscellaneous 28,829 --
- -----------------------------------------------------------------------------------------------------------
363,502 88,223
- -----------------------------------------------------------------------------------------------------------
NET DEFERRED TAX (LIABILITY) ASSET (51,841) 95,275
- -----------------------------------------------------------------------------------------------------------
Deferred tax assets:
Foreign
Income tax losses available for carryforward in subsidiaries 4,833,000 4,075,000
Less valuation allowance (4,833,000) (4,075,000)
Income tax on foreign currency
Translation adjustments included in comprehensive income 115,204 219,770
Less valuation allowance (115,204) (219,770)
- -----------------------------------------------------------------------------------------------------------
Net deferred tax asset - foreign -- --
===========================================================================================================
</TABLE>
At December 31, 1999, the Company has losses available for carryforward in
certain of its Canadian subsidiaries of approximately $13,808,694 [$11,644,420
in 1998] available to reduce future years' income for tax purposes in these
subsidiaries. These losses expire as follows:
<TABLE>
<CAPTION>
$
- -----------------------------------------------------------------------------------------------------------
<S> <C>
2000 1,073,483
2001 1,362,256
2002 1,326,248
2003 1,804,499
2004 2,632,911
Beyond 5,609,297
- -----------------------------------------------------------------------------------------------------------
13,808,694
===========================================================================================================
</TABLE>
F-27
<PAGE> 39
CVF TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 [Expressed in U.S. Currency]
11. STOCKHOLDERS' EQUITY
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 10,800 [162,500 in 1998] common
shares for aggregate cash consideration of $37,585 [$800,145 in 1998].
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-28
<PAGE> 40
CVF TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 [Expressed in U.S. Currency]
11. 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,
1999, an amount of $96,292 has been accrued in respect of cumulative unpaid
dividends.
In 1999, the Company issued 350,000 shares of newly created Series B, 6%
cumulative, Convertible Preferred Stock ["Series B Preferred"]. The Series B
Preferred is senior to each other class of the Company's capital stock,
including the Company's common stock and Series A Preferred Stock, and has a
preference on dividends and on liquidation. The liquidation preference is 30% of
the Stated Value [Stated Value is $10 per share]. In addition, the holders of
the Series B Preferred have the right to vote as a class on certain matters,
including any action that would change the rights and preferences of the Series
B Preferred and any action that would create a new class or series of capital
stock having a preference over the Series B Preferred or increase the authorized
number of Series B Preferred.
As at December 31, 1999, an amount of $48,300 has been accrued in respect of
dividends on the Series B Preferred Stock.
WARRANTS
As at December 31, 1999 and 1998, 1,269,986 and 952,784 Warrants were
outstanding, respectively.
952,784 of the Warrants outstanding in fiscal 1999 and 1998 [the CVFLP Warrants]
allow one 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 assumed all of the
liabilities of Canadian Venture Founders Limited Partnership [CVFLP]. CVFLP
distributed the CVFLP Warrants to Canadian Venture Founders Management Limited,
its general partner at that time. Until September 20, 2000, the CVFLP 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 events, the CVFLP
Warrant holders may purchase one common share for each five common shares sold
by such limited partner. Any CVFLP Warrants not exercised before September 20,
2000, may be exercised by the holder during the six month period immediately
following September 20, 2000.
F-29
<PAGE> 41
CVF TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 [Expressed in U.S. Currency]
11. STOCKHOLDERS' EQUITY CONT'D
WARRANTS CONT'D
317,202 of the Warrants outstanding at December 31, 1999 [the Series B Warrants]
relate to the Series B 6% Convertible Preferred Stock issued in 1999. The
Warrants are exercisable until October 8, 2002, at a price of $3.78. All shares
issuable upon exercise of the Series B Warrants will be restricted securities as
that term is defined in Rule 144 under the 1933 Securities Act of the United
States.
COMPREHENSIVE INCOME
SFAS 130 requires unrealized gains or losses on the Company's available-for-sale
securities and foreign currency translation adjustments to be included in other
comprehensive income.
Disclosure of accumulated balances related to each component of other
comprehensive income is as follows:
<TABLE>
<CAPTION>
UNREALIZED GAINS
(LOSSES) ON FOREIGN ACCUMULATED OTHER
SECURITIES CURRENCY COMPREHENSIVE
(NET OF TAX) TRANSLATION INCOME
$ $ $
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BALANCE - JANUARY 1, 1997 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)
Current year comprehensive income 371,152 307,547 678,699
- -----------------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 1999 361,798 (338,835) 22,963
===============================================================================================
</TABLE>
The details of unrealized holding gains and losses included in comprehensive
income net of reclassification adjustments are as follows:
<TABLE>
<CAPTION>
GAINS (LOSSES) TAXES NET
$ $ $ $
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997 477,840 (21,292,010) (7,279,918) (13,534,252)
1998 94,030 (580,492) (171,290) (315,172)
1999 626,833 (14,986) 240,695 371,152
</TABLE>
F-30
<PAGE> 42
CVF TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 [Expressed in U.S. Currency]
12. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
1999 1998 1997
$ $ $
--------------------------------------------
<S> <C> <C> <C>
Numerator:
Net (loss) income (5,086,153) (4,660,705) 8,999,271
Dividends on Series A preferred stock (22,814) (21,081) (54,000)
Dividends in Series B preferred stock (48,300) -- --
--------------------------------------------
Numerator for basic and diluted (loss) earnings
per share - (loss) income available to common
stockholders (5,157,267) (4,681,786) 8,945,271
--------------------------------------------
Denominator:
Denominator for basic (loss) earnings per share -
weighted average shares outstanding 6,722,997 6,215,586 5,870,553
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 6,722,997 6,215,586 6,009,708
--------------------------------------------
Basic (loss) earnings per share (0.77) (0.75) 1.52
============================================
Diluted (loss) earnings per share (0.77) (0.75) 1.49
============================================
</TABLE>
F-31
<PAGE> 43
CVF TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 [Expressed in U.S. Currency]
13. BUSINESS ACQUISITION AND SUPPLEMENTARY SUBSIDIARY INFORMATION
GEMPRINT
During 1999, the Company's ownership interest in Gemprint increased by 6%. On
December 31, 1999, the Company issued 137,500 shares [valued at U.S. $541,406]
as full consideration for 1,871,581 Class B Gemprint shares held by another
shareholder. The purchase was accounted for as a step acquisition and the
purchase price was allocated entirely to goodwill.
During 1998, the Company's ownership interest in Gemprint increased by 2%. On
June 3, 1998, the Company exchanged 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
1998. This resulted in a 2% reduction in the Company's ownership.
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 $267,266 [$203,239 in 1998] 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 its 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 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 61%, and
its voting interest will be unchanged.
F-32
<PAGE> 44
CVF TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 [Expressed in U.S. Currency]
13. BUSINESS ACQUISITION AND SUPPLEMENTARY SUBSIDIARY INFORMATION CONT'D
The initial 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>
1998
$
- -----------------------------------------------------------------------------
<S> <C>
Assets [including cash of $71,392] 389,454
Goodwill 848,230
Liabilities (172,684)
- -----------------------------------------------------------------------------
TOTAL CONSIDERATION 1,065,000
=============================================================================
</TABLE>
On April 1, 1999, Grand Inc. invested an additional Cdn. $350,000 [U.S.
$231,980] in Elements. Through this transaction, it increased its economic
interest to 61%. Of the total invested, $212,557 was allocated to goodwill.
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.
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 938,425 Special Class A
non-voting shares with a value of $649,765. 118,425 of these shares have been
included in Preferred and other non-voting stock of subsidiaries. The remaining
820,000 shares are included in Debt equivalent [Note 8]. 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%.
F-33
<PAGE> 45
CVF TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 [Expressed in U.S. Currency]
13. BUSINESS ACQUISITION AND SUPPLEMENTARY SUBSIDIARY INFORMATION CONT'D
SOLARIA
During 1999, the Company's ownership interest in Solaria increased by 8%. The
investment by the Company totalled Cdn. $2,951,332 [U.S. $2,006,000] by
conversion of debt of Cdn. $1,951,332 [U.S. $1,326,400] and purchase by cash of
Cdn. $1,000,000 [U.S. $679,600]. The net tangible assets equalled the cost of
the acquisition.
14. STOCK BASED COMPENSATION
During 1999, the Company granted 530,000 [342,500 in 1998] stock options to some
of its officers, employees, directors. The option exercise price equals 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, 1997 42,500 $3.25 42,500
Granted 342,500 $3.25 342,500
- ------------------------------------------------------------------------------------
Outstanding Dec. 31, 1998 385,000 $3.25 385,000
Granted 530,000 $2.88 530,000
- ------------------------------------------------------------------------------------
Outstanding Dec. 31, 1999 915,000 $3.04 915,000
====================================================================================
</TABLE>
At December 31, 1999, the weighted average life of outstanding and exercisable
options was 4.9 years [4.3 in 1998]. The per share weighted average fair value
of stock options granted during 1999 was $1.88 [$1.52 in 1998, $1.00 in 1997]
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 5% [4.6% in 1998, 5% in 1997], volatility of 76.2%
[43% in 1998] and an expected life of five years. If these options were valued,
as prescribed by SFAS 123, pro forma (net loss) net income would have been
approximately ($5,076,500) [($5,000,000) for 1998, $8,975,000 for 1997] and
(loss) earnings per share would have been ($0.76) for 1999 [($0.78) in 1998,
$1.52 in 1997].
Certain of the Company's subsidiaries have outstanding compensatory options
granted 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, 1999 for those consolidated entities which have
issued options are as follows:
F-34
<PAGE> 46
CVF TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
14. STOCK BASED COMPENSATION CONT'D
[a] Under the terms of an employment contract, Dantec 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, 1999. Three other individuals each
have been granted options to acquire 30,766 Class A shares, vesting over
five years, commencing April 15 of 1998, 1999, 2000, 2001, and 2002.
[b] In 1996, 1997, and 1999, Gemprint granted various compensatory options to
certain employees and directors to acquire 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. Gemprint has a total of 33,941,660
shares outstanding as at December 31, 1999.
[c] A total of 209,000 options to purchase shares of Biorem remain
outstanding, 106,000 of which have fully vested at December 31, 1999.
These options were granted in 1995, 1996 and 1997 at a weighted average
exercise price of $1.20 per share. Biorem has a total of 1,421,430 shares
outstanding as at December 31, 1999.
[d] In 1999, Solaria granted 7,370 options to an employee to purchase its
common shares at a price of $3.48 per share. The shares vest over four
years, beginning on the date of grant. Solaria has a total of
1,566,149 shares outstanding as at December 31, 1999.
F-35
<PAGE> 47
CVF TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 [Expressed in U.S. Currency]
15. SUPPLEMENTARY INFORMATION ON CASH FLOWS
Adjustments to net (loss) income from operating activities for the years ending
December 31, are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
$ $ $
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash from operating activities:
Depreciation and amortization 766,652 668,508 277,113
Loss from equity investees 1,292,600 1,152,190 145,165
Cumulative effect of change in
accounting principle 253,154 -- --
Loss (gain) on sale of holdings 97,720 (579,775) (19,758,954)
Minority interest in losses of
subsidiaries (395,780) 144,329 --
Deferred income tax expense (benefit) 147,116 (91,914) 79,900
Pension expense 30,255 522,815 --
- -------------------------------------------------------------------------------------------------
2,191,717 1,816,153 (19,256,776)
================================================================================================
</TABLE>
F-36
<PAGE> 48
CVF TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 [Expressed in U.S. Currency]
15. SUPPLEMENTARY INFORMATION ON CASH FLOWS CONT'D
Changes in operating assets and liabilities for the years ending December 31,
are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
$ $ $
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Decrease (increase) in marketable securities 112,357 (122,357) --
Decrease (increase) in trade receivables 1,171,356 (2,557,043) 511,075
(Increase) decrease in inventory (133,813) (305,543) 41,433
Decrease (increase) in prepaid expenses
and other 276,425 (39,633) (261,946)
(Increase) in income taxes receivable (163,503) (1,020,351) --
(Decrease) increase in trade payables (686,462) 1,864,509 51,443
Increase (decrease) in accrued liabilities 62,655 (204,675) 632,969
(Decrease) in bonuses payable -- (481,857) --
(Decrease) increase in income taxes payable (238,570) (1,508,263) 887,468
(Decrease) in deferred revenue -- -- (18,111)
- -------------------------------------------------------------------------------------------------
400,445 (4,375,213) 1,844,331
=================================================================================================
</TABLE>
16. SEGMENTED INFORMATION
In 1999, as a result of changes in the scope of activities of investee
companies, the Company has reallocated business units to business segments to
more appropriately group units for chief operating decision purposes and
reporting in accordance with FAS 131. This changes has been applied on a
retroactive basis. The Company has four reportable segments: machine controls:
precious gem identification, retail products, and general corporate. The machine
controls division designs, manufactures and sells electric motor controls to
machine manufacturers. The gem identification segment consists of one company
that has developed identification and database systems, and markets its products
and services to the companies in the precious gem business, including producers,
cutters, distributors and retailers. The Company's retail segment consists of
one company that sources and sells natural health services and products to
consumers. The Company's general corporate segment includes one company which
provides funding and management overview services to the holdings. This
segment's profits include interest income and gains on sales of its various
holdings.
The Company evaluates performance and allocates resources based on profit or
loss from operations before income taxes, depreciation and research and
development. 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.
F-37
<PAGE> 49
CVF TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 [Expressed in U.S. Currency]
16. SEGMENTED INFORMATION CONT'D
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.
Sales of approximately $12,990,000 [$6,000,000 in 1998] of the machine controls
segment were to customers in the U.S. The remainder of the consolidated sales
were primarily to customers in Canada. The basis for attributing revenues from
external customers to individual countries is the location of the customer.
Virtually all of the long-lived assets of the Company are located in Canada.
During the year ended December 31, 1999 and December 31, 1998, the Company,
through one of its subsidiaries, was economically dependent on one key
customer for its revenues such that sales from this customer in the machine
controls segment, represents approximately 73% [52% in 1998] of the Company
consolidated sales. Such dependence did not exist in 1997. In addition,
consistent with the nature and business plans 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.
Other income includes income from government grants and leasing income.
F-38
<PAGE> 50
<TABLE>
<CAPTION>
CVF TECHNOLOGIES CORPORATION
Year ended December 31 [Expressed in U.S. Currency]
16. SEGMENTED INFORMATION CONT'D
MACHINE IDENTIFICATION RETAIL CORPORATE
CONTROLS SYSTEMS PRODUCTS ADMINISTRATION ALL OTHER TOTAL
1999 $ $ $ $ $ $
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SALES 12,650,194 184,943 868,596 -- 2,985,627 16,689,360
- -----------------------------------------------------------------------------------------------------------------------------------
(Loss) income from operations before
depreciation and research and
development 267,541 (652,734) (758,634) (1,123,731) (950,607) (3,218,165)
Depreciation and research and development 499,713 82,228 53,451 998,118 129,321 1,762,831
- -----------------------------------------------------------------------------------------------------------------------------------
(Loss) from operations (232,172) (734,962) (812,085) (2,121,849) (1,079,928) (4,980,996)
Interest income 11,364 914 111 87,519 11,960 111,868
Interest expense (17,568) (63,070) (25,417) (52,361) (13,777) (172,193)
Other income 20,919 -- -- 163,390 98,086 282,395
(Loss) from equity investees -- -- -- (1,292,600) -- (1,292,600)
(Loss) on sale of holdings -- -- -- (97,720) -- (97,720)
- -----------------------------------------------------------------------------------------------------------------------------------
Segment (loss) before provision for
income taxes (217,457) (797,118) (837,391) (3,313,621) (983,659) (6,149,246)
- -----------------------------------------------------------------------------------------------------------------------------------
(Recovery) of income taxes -- -- -- (882,696) (37,771) (920,467)
- -----------------------------------------------------------------------------------------------------------------------------------
Net (loss) before cumulative effect of
a change in accounting principle and
minority interest (217,457) (797,118) (837,391) (2,430,925) (945,888) (5,228,779)
- -----------------------------------------------------------------------------------------------------------------------------------
Cumulative effect of a change in
accounting principle, net of tax -- -- (253,154) -- -- (253,154)
Minority interest -- -- -- 395,780 -- 395,780
- -----------------------------------------------------------------------------------------------------------------------------------
NET (LOSS) (217,457) (797,118) (1,090,545) (2,035,145) (945,888) (5,086,153)
- -----------------------------------------------------------------------------------------------------------------------------------
Depreciation and amortization 32,762 9,558 53,451 998,118 30,796 1,124,685
Capital expenditures 3,567 -- 22,308 4,296 16,046 46,217
Segment assets 119,764 52,976 198,256 39,398 69,338 479,732
</TABLE>
F-39
<PAGE> 51
<TABLE>
<CAPTION>
CVF TECHNOLOGIES CORPORATION
Year ended December 31 [Expressed in U.S. Currency]
16. SEGMENTED INFORMATION CONT'D
MACHINE IDENTIFICATION RETAIL CORPORATE
CONTROLS SYSTEMS PRODUCTS ADMINISTRATION ALL OTHER TOTAL
1998 $ $ $ $ $ $
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SALES 4,315,965 162,083 711,316 -- 2,168,632 7,357,996
- -----------------------------------------------------------------------------------------------------------------------------------
(Loss) income from operations before
depreciation and research and
development (68,300) (914,291) (490,448) (2,254,052) (1,148,333) (4,875,424)
Depreciation and research and development 325,389 26,419 37,466 472,515 161,830 1,023,619
- -----------------------------------------------------------------------------------------------------------------------------------
(Loss) from operations (393,689) (940,710) (527,914) (2,726,567) (1,310,163) (5,899,043)
Interest income -- 1,931 7,829 314,691 38,333 362,784
Interest expense (48,394) (52,099) (8,984) (38,426) (64,607) (212,510)
Other income 322,791 463 -- 31,250 355,301 709,805
(Loss) from equity investees -- -- -- (1,152,190) -- (1,152,190)
Gain on sale of holdings -- -- -- 579,775 -- 579,775
- -----------------------------------------------------------------------------------------------------------------------------------
Segment (loss) before provision for
income taxes (119,292) (990,415) (529,069) (2,991,467) (981,136) (5,611,379)
- -----------------------------------------------------------------------------------------------------------------------------------
(Recovery) of income taxes -- -- -- (1,019,546) (75,457) (1,095,003)
- -----------------------------------------------------------------------------------------------------------------------------------
Net (loss) before minority interest (119,292) (990,415) (529,069) (1,971,921) (905,679) (4,516,376)
- -----------------------------------------------------------------------------------------------------------------------------------
Minority interest -- -- -- (144,329) -- (144,329)
- -----------------------------------------------------------------------------------------------------------------------------------
NET (LOSS) (119,292) (990,415) (529,069) (2,116,250) (905,679) (4,660,705)
- -----------------------------------------------------------------------------------------------------------------------------------
Depreciation and amortization 34,405 12,981 37,466 472,515 24,594 581,961
Capital expenditures 74,071 187,901 147,692 61,457 18,900 490,021
Segment assets 67,443 59,270 217,061 53,529 120,141 517,444
</TABLE>
F-40
<PAGE> 52
<TABLE>
<CAPTION>
CVF TECHNOLOGIES CORPORATION
Year ended December 31 [Expressed in U.S. Currency]
16. SEGMENTED INFORMATION CONT'D
MACHINE IDENTIFICATION CORPORATE
CONTROLS SYSTEMS ADMINISTRATION ALL OTHER TOTAL
1997 $ $ $ $ $
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SALES 636,782 134,249 -- 914,368 1,685,399
- --------------------------------------------------------------------------------------------------------------------------
(Loss) income from operations before
depreciation and research and
development (191,206) (998,540) (2,741,404) (568,549) (4,499,699)
Depreciation and research and development 14,508 286,829 191,526 203,617 696,478
- --------------------------------------------------------------------------------------------------------------------------
(Loss) from operations (205,714) (1,285,369) (2,932,930) (772,166) (5,196,179)
Interest income -- 5,140 602,448 16,442 624,030
Interest expense (33,763) (58,102) (27,086) (56,395) (175,346)
Other income -- -- -- 52,642 52,642
(Loss) from equity investees -- -- (2,076,543) -- (2,076,543)
Dilution gain on reduction of ownership
and equity investees -- -- 1,931,378 -- 1,931,378
Gain on sale of holdings -- -- 19,758,954 -- 19,758,954
- --------------------------------------------------------------------------------------------------------------------------
Segment (loss) before provision for
income taxes (239,477) (1,338,331) 17,256,221 (759,477) 14,918,936
- --------------------------------------------------------------------------------------------------------------------------
(Recovery) of income taxes -- -- 5,919,665 -- 5,919,665
- --------------------------------------------------------------------------------------------------------------------------
Net (loss) before minority interest (239,477) (1,338,331) 11,336,556 (759,477) 8,999,271
- --------------------------------------------------------------------------------------------------------------------------
Minority interest -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------
NET (LOSS) (239,477) (1,338,331) 11,336,556 (759,477) 8,999,271
- --------------------------------------------------------------------------------------------------------------------------
Depreciation and amortization 14,508 54,624 181,236 23,896 274,264
Capital expenditures -- -- -- -- --
Segment assets 29,458 50,181 4,082 86,131 169,852
</TABLE>
F-41
<PAGE> 53
CVF TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 [Expressed in U.S. Currency]
17. COMMITMENTS
The Company leases office equipment and property under operating leases expiring
in various years through 2004.
Minimum future rental payments under non-cancelable operating leases having
remaining terms in excess of one year as of December 31, 1999 for each of the
next five years and in aggregate are:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
$
- ----------------------------------------------------------------------
<S> <C>
2000 276,400
2001 124,000
2002 94,100
2003 78,800
2004 9,100
Subsequent to 2004 --
- ----------------------------------------------------------------------
TOTAL MINIMUM FUTURE RENTAL PAYMENTS 582,400
======================================================================
Rental expense for the year was $253,030 [$208,926 for 1998; $46,060
for 1997].
</TABLE>
18. SUBSEQUENT EVENT
In March, 2000, the terms of the Series B Convertible Preferred Stock ("Series B
Preferred") were amended by agreement between CVF and the holder of the Series B
Preferred. The amendments included extending the non-convertible period of the
Series B Preferred to September 1, 2000 and setting a price cap of $4.00 per
Common Share on the conversion amount.
19. COMPARATIVE FIGURES
Certain of the prior year comparative figures have been reclassified to conform
with the current year's presentation.
F-42
<PAGE> 54
ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
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>
Jeffrey I. Dreben 54 Director; Chairman, Chief Executive
Officer; and President
Robert B. Nally 51 Director; Chief Operating Officer, Chief
Technology Officer, Secretary; and Treasurer
George Khouri 53 Director; Consultant
Robert Glazier 51 Director
J. Murray Kierans 55 Vice President
Lawrence Casse 43 Vice President
Robert L. Miller 48 Chief Financial Officer
</TABLE>
Jeffrey I. 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 B. 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
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.
J. Murray Kierans joined CVF as Vice President Corporate Development in January,
1999, having just completed three years in a similar position with a U.S.-based
private venture capital company. Prior to that, Mr. Kierans was engaged for
eighteen years in private practice as a lawyer, specializing in business and
taxation law. Before entering private
<PAGE> 55
law practice, Mr. Kierans served for four years in the Canadian Department of
Finance, two years as Special Assistant to the Minister and two years as Senior
Tax Policy Officer. Prior to that Mr. Kierans worked for four years as an
accountant for a predecessor firm to Ernst & Young LLP. Mr. Kierans holds a
Bachelor of Arts degree and a LL.B degree conferred by the University of Western
Ontario and he is a Chartered Accountant and member of the Canadian and Ontario
Institutes of Chartered Accountants.
Lawrence Casse has been a special consultant devoting his full time efforts 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 L. Miller has been Chief Financial Officer of CVF since June 1999. Mr.
Miller was previously Vice President of Finance/Controller for U.S. Appraisal,
Inc. a national real estate appraisal firm. Prior to that he was with Pratt &
Lambert United, Inc. for seventeen years, most recently as Vice President/
Controller of their Consumer Group. From 1973 to 1979 he was with KPMG
Peat Marwick in Buffalo, New York. Mr. Miller, a New York State Certified Public
Accountant has a Bachelor of Science degree from Fairleigh Dickinson University.
Section 16(a) Beneficial Ownership Reporting Compliance
During the fiscal year 1999 none of the officers and directors of CVF,
were late in filing a report under section 16(a) of the Exchange Act.
ITEM 10 EXECUTIVE COMPENSATION
The following is a summary of the remuneration paid to the chief executive
officer and all other executive officers and others whose total annual
salary and bonus exceeds $100,000 for the period ending December 31, 1999 (the
"Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Name and Other
Principal Salary Bonus Compensation
Position Year $ $ $
- ---------------- ----- ------------- ------------ --------------
<S> <C> <C> <C> <C>
Jeffrey I. Dreben 1997 $200,000 $500,000 (1) $638,863 (1)
CEO and 1998 $200,000 $ 20,000
President 1999 $200,000 $ 25,000
Robert B. Nally 1997 $140,000 $500,000 (1) $622,952 (1)
COO, CTO, 1998 $133,571 (2) $ 13,492 (2)
Secretary and 1999 $134,762 (3) $ 25,000
Treasurer
J. Murray Kierans 1999 $120,000 $ 4,000
Vice President
</TABLE>
(1) 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.
(2) Paid in Canadian currency but translated in the table to U.S. Currency.
Based on the average exchange rate for 1998 of CND $1 = US $.6746
(3) Paid in Canadian currency but translated in the table to U.S. Currency.
Based on the average exchange rate for 1999 of CND $1 = US $.6738
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, 1999 to each of the Named Executive Officers.
<PAGE> 56
<TABLE>
<CAPTION>
Percent of
Number of Total options
Securities Granted to
Underlying Employees in Exercise Expiration
Name Options granted Fiscal Year Price Date
- ----------------- --------------- ------------- -------- ------------
<S> <C> <C> <C> <C>
Jeffrey I. Dreben 100,000 18.9% $2.88 Mar. 4, 2004
Robert B. Nally 100,000 18.9% $2.88 Mar. 4, 2004
J. Murray Kierans 180,000 34.0% $2.88 Mar. 4, 2004
</TABLE>
AGGREGATED OPTION/SAR EXERCISE AND FISCAL YEAR END OPTION/SAR VALUE TABLE
<TABLE>
<CAPTION>
Value of
Unexercised
Unexercised In-the-money
Options at Options at
Shares Dec. 31, 1999 Dec. 31, 1999
Acquired Value Exercisable/ Exercisable/
Name On Exercise Realized Unexercisable Unexercisable
- ------------------ ----------- -------- ---------------- ---------------
<S> <C> <C> <C> <C>
Jeffrey I. Dreben NIL NIL 200,000/NIL $174,500/NIL
Robert B. Nally NIL NIL 200,000/NIL $174,500/NIL
J. Murray Kierans NIL NIL 60,000/120,000 $190,350/NIL
</TABLE>
Employment agreement. In 1999 CVF International entered into an employment
agreement with J. Murray Kierans. Under the terms of the agreement, termination
is subject to 3 months prior notice by either party.
Director's Fees. The Company does not currently pay any additional fees to the
directors who are also officers of or consultants to the Company. Mr. Khouri
became a consultant to the Company in June 1997 and is paid $5,802 per month in
consulting fees. See "Certain Transactions and Relationships."
Robert Glazier, appointed a director in January 1998, is entitled to receive
$750 per Board of Directors meeting attended in person and $375 per telephonic
board meeting in which he participates. Directors do receive share options in
connection with their services as directors of the corporation.
ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Voting Securities and Principal Holders
The following table sets forth, as of March 21, 2000, 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>
NUMBER OF PERCENTAGE OF
COMMON SHARES COMMON SHARES
NAME AND ADDRESS BENEFICIALLY OWNED OWNED
- -------------------- ------------------ -------------
<S> <C> <C>
Jeffrey I. Dreben (1)(4) 608,524 9%
916 Center Street
Lewiston, NY 14092
Robert B. Nally (1)(4) 609,524 9%
189 Mary Street
Waterloo, Ontario
Canada, N2J 1S1
Malcolm I. Gissing (2) 413,782 6%
916 Center Street
Lewiston, NY 14092
Brant Investments Limited 1,235,731 18%
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 9%
C/O Canada Trust Pension
Trust Services
320 Bay Street West, 3rd Floor
Toronto, Ontario
M5H 2P6
Clarica Life Insurance 359,200 5%
Company
227 King Street South
Waterloo, Ontario N2J 4C5
Westinghouse Pension Plan 359,200 5%
11 Stanwix Street
Pittsburgh, PA. 15222
Directors and Officers 1,617,048 21%
as a Group (5 persons) (1)(3)(4)(5)(6)(7)
</TABLE>
<PAGE> 57
(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 exercisable 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) Mr. Khouri has been issued 45,000 options to acquire common shares of the
Company at an option price of $3.25 per share exercisable up to September 30,
2002. On March 4, 1999 Mr. Khouri was issued an additional 30,000 options to
acquire common shares at an option price of $2.88 per share.
(4) Robert Glazier has been issued 20,000 options to acquire Common Shares of
the Company at an option price of $3.25. On March 4, 1999 Mr. Glazier was issued
an additional 30,000 options to acquire common shares at an option price of
$2.88 per share.
(5) Mr. Lawrence Casse a Vice President of the Company has been issued 20,000
options to acquire common shares of the Company at an exercise price of $3.25
per share.
(6) Mr. J. Murray Kierans a Vice President of the Company has been issued
180,000 options to acquire common shares of the Company at an exercise price of
$2.88 per share.
(7) Mr. Robert L. Miller Chief Financial Officer of the Company has been issued
75,000 Options to acquire common shares of the Company at an exercise price of
$2.88 per Share.
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Arrangements with Mr. Gissing. 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.
Service Agreement with D and N Consulting. The Company entered into a Service
Agreement dated February 10, 1997 with D and N Consulting Corporation ("D and
N"), identical to an 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 received $10,500 per month and no
additional fees, other than share options, as a director for a one-year term
which was renewable if mutually agreed to by the parties. This consulting
agreement, which was renewed for another year effective June 1998 may be
terminated by either party upon 90 days notice of the intent to so terminate.
Effective December 1, 1999 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 $5,802 per month and received no other compensation other than
share options as a director for a one-year term which is renewable if mutually
agreed to by the parties. 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.
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 (CN) ($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
and 1999 additional common shares of 339,500 and 100,000 respectively in common
shares of RDM were purchased bringing the total number of shares owned by CVF in
RDM to 1,868,072 shares (approximately 16% of the outstanding shares). RDM
Corporation is a Canadian corporation which develops and supplies technologies
for check processing and electronic e-commerce solutions. Mr.
<PAGE> 58
Nally, an officer, director and nominee of the Company, has been Chairman of RDM
Corporation since 1995 and beneficially owns 1,957,183 common shares
(approximately 17% of the outstanding shares) of RDM Corporation.
ITEM 13 EXHIBITS AND REPORTS ON FORM 8-K
(3)(i) Articles of Incorporation
Incorporated by reference to the filing on Form 10SB dated May 29, 1997
(3)(ii) By-laws
Incorporated by reference to the filing on Form 10SB dated May 29, 1997
(21) Subsidiaries of the Registrant filed herewith as Exhibit 21
(27) Financial Data Schedules, filed herewith as Exhibit 27
SIGNATURE
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized:
CVF Corporation
by: /s/ Jeffrey I. Dreben
--------------------------------
Jeffrey I. Dreben, CEO and
President
date: April 4, 2000
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF CVF TECHNOLOGIES CORPORATION
1. Canadian Venture Founders
Leasing Corporation
2. CVF Technologies International, Inc.
3. Eastview Marketing One LLC
4. Grand Island Marketing Two LLC
5. Grand Island Marketing Inc.
6. Solaria Research Enterprises Ltd.
7. Gemprint(TM) Corporation
8. Biorem Technologies Inc.
9. Dantec Corporation
10. Petrozyme Technologies Inc.
11. Ecoval Inc.
12. RDM Corporation
13. TurboSonic Technologies, Inc.
14. NETrageous, Inc.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF CVF CORPORATION FOR THE YEAR ENDED DECEMBER
31, 1999 AS INCLUDED IN PART II ITEM 7 OF THIS 10-KSB FILING.
</LEGEND>
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 0.6738
<CASH> 3,743,606
<SECURITIES> 0
<RECEIVABLES> 2,198,455
<ALLOWANCES> 85,977
<INVENTORY> 975,027
<CURRENT-ASSETS> 8,062,408
<PP&E> 1,219,320
<DEPRECIATION> 739,588
<TOTAL-ASSETS> 20,404,283
<CURRENT-LIABILITIES> 4,818,523
<BONDS> 275,675
456,250
350
<COMMON> 7,293
<OTHER-SE> 9,646,742
<TOTAL-LIABILITY-AND-EQUITY> 20,404,283
<SALES> 16,689,360
<TOTAL-REVENUES> 16,689,360
<CGS> 13,980,263
<TOTAL-COSTS> 13,980,263
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (6,149,246)
<INCOME-TAX> (920,467)
<INCOME-CONTINUING> (4,798,348)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (253,154)
<NET-INCOME> (5,086,153)
<EPS-BASIC> (0.77)
<EPS-DILUTED> (0.77)
</TABLE>
