1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
CVF CORPORATION
(Exact name of small business issuer as specified in its charter)
NEVADA 0-29266 87-0429335
(State or other jurisdiction (Commission File (I.R.S. Employer
of incorporation or organization) Number) Identification No.)
916 CENTER STREET
LEWISTON, NEW YORK 14221
(716) 754-7883
(Address, including zip code, and telephone number,
including area code, of issuer's principal executive offices)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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
--- ---
As of May 12, 1998, there were 5,767,628 shares of common stock, $0.001 par
value per share, of the issuer outstanding.
Transitional Small Business Disclosure Format (check one): Yes No X
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Page 1 of 11 Pages
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
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CVF CORPORATION AND SUBSIDIARIES
--------------------------------
CONSOLIDATED BALANCE SHEET
--------------------------
(UNAUDITED)
-----------
March 31, December 31,
1998 1997
------------ ------------
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 3,405,650 $ 9,931,906
Restricted cash 695,870 682,361
Marketable securities, at market 141,201 -
Trade receivables 787,242 557,998
Inventory 504,872 390,125
Prepaid expenses and other 521,424 326,896
------------ ------------
TOTAL CURRENT ASSETS 6,056,259 11,889,286
PROPERTY AND EQUIPMENT, net of accumulated depreciation 224,800 169,851
HOLDINGS, carried at cost or equity 2,710,227 2,107,060
HOLDINGS AVAILABLE FOR SALE, at market 1,829,187 1,562,194
GOODWILL, net of accumulated amortization 4,434,584 4,023,825
------------ ------------
$ 15,255,057 $ 19,752,216
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Bank indebtedness $ 135,240 $ 824,577
Trade payables 977,831 461,697
Accrued expenses 807,080 1,903,740
Dividends payable 237,301 217,700
Income taxes payable - 1,820,598
------------ ------------
TOTAL CURRENT LIABILITIES 2,157,452 5,228,312
------------ ------------
LONG TERM DEBT 868,680 559,697
DEFERRED INCOME TAXES 198,800 251,822
MINORITY INTEREST 356,162 -
PREFERRED STOCK OF SUBSIDIARIES 1,193,000 1,193,000
REDEEMABLE SERIES A PREFERRED STOCK 456,250 456,250
STOCKHOLDERS' EQUITY:
Common stock, $0.001 par value, authorized 50,000,000 shares,
6,132,528 issued (5,992,349; 1997) and 364,900 in treasury (262,900; 1997) 6,133 5,992
Additional paid in capital 14,178,666 13,657,950
Treasury stock (2,342,667) (1,862,049)
Translation adjustment (104,813) 374,959
Unrealized gain on available for sale securities 298,200 305,818
Retained earnings (accumulated deficit) (2,010,806) (419,535)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 10,024,713 12,063,135
------------ ------------
$ 15,255,057 $ 19,752,216
============ ============
See notes to consolidated financial statements
Page 2 of 11 Pages
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CVF CORPORATION AND SUBSIDIARIES
--------------------------------
CONSOLIDATED STATEMENT OF OPERATIONS
------------------------------------
(UNAUDITED)
-----------
Three months ended March 31,
----------------------------
1998 1997
------------ ------------
(RESTATED)
SALES $ 647,753 $ 261,855
COST OF SALES 420,535 85,668
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GROSS PROFIT 227,218 176,187
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EXPENSES:
Selling, general and administrative 2,840,364 818,046
Research and development - 11,579
------------ ------------
TOTAL EXPENSES 2,840,364 829,625
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INCOME (LOSS) FROM OPERATIONS (2,613,146) (653,438)
------------ ------------
OTHER INCOME AND (EXPENSES):
Interest income (expense), net 290,935 76,111
Other income (expense), net 258,751 196,899
Income (loss) from equity affiliates (302,473) (165,780)
Gain (loss) on sale of investments 372,294 18,160,425
Minority interest 328,028 -
------------ ------------
TOTAL OTHER INCOME AND (EXPENSES) 947,535 18,267,655
------------ ------------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES (1,665,611) 17,614,217
Provision (benefit) for income taxes (79,800) 7,294,890
------------ ------------
NET INCOME (LOSS) $ (1,585,811) $ 10,319,327
============ ============
NET INCOME (LOSS) PER SHARE - BASIC $ (0.26) $ 1.73
============ ============
NET INCOME (LOSS) PER SHARE - DILUTED $ (0.26) $ 1.60
============ ============
WEIGHTED SHARES USED IN COMPUTATION - BASIC 6,215,403 5,974,716
============ ============
WEIGHTED SHARES USED IN COMPUTATION - DILUTED 6,215,403 6,441,580
============ ============
See notes to consolidated financial statements.
Page 3 of 11 Pages
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CVF CORPORATION AND SUBSIDIARIES
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CONSOLIDATED STATEMENT OF CASH FLOWS
------------------------------------
(UNAUDITED)
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Three Months Ended March 31,
----------------------------
1998 1997
------------ ------------
(RESTATED)
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) $ (1,585,811) $ 10,319,327
------------ ------------
Adjustments to reconcile net income (loss) to net cash from operating
activities:
Depreciation and amortization 89,745 76,677
Loss on disposal of fixed assets - 27,676
(Income) loss from equity affiliates 302,473 165,780
Gain on sale of investments (372,294) (18,160,425)
Deferred tax benefit (79,800) -
Minority interest in earnings (losses) of subsidiaries (328,028) -
Changes in operating assets and liabilities (net of acquisitions):
(Increase) decrease in accounts receivable (229,244) 28,091
(Increase) decrease in inventory (54,507) 21,914
(Increase) decrease in prepaid expenses and other (163,162) (344,449)
Increase (decrease) in accounts payable and accrued expenses (796,538) (310,893)
Increase (decrease) in income taxes payable (1,820,598) 6,402,100
------------ ------------
(3,451,953) (12,093,529)
------------ ------------
CASH PROVIDED (USED) IN OPERATING ACTIVITIES (5,037,764) (1,774,202)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (38,574) (2,289)
Investments in and advances to equity affiliates (599,375) (299,444)
Repayments from equity affiliates 235,828 -
Purchase of marketable securities (118,118) -
Acquisitions, net of cash acquired (978,608) -
Proceeds from sale of investments 382,952 19,097,838
------------ ------------
CASH PROVIDED (USED) IN INVESTING ACTIVITIES (1,115,895) 18,796,105
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (payments) of debt (380,354) 192,824
Increase in restricted cash (13,509) -
Sale of common stock 360,000 -
Borrowings (payments) of debt to related parties - 63,135
Purchase of treasury stock (480,618) (158,598)
------------ ------------
CASH PROVIDED (USED) IN FINANCING ACTIVITIES (514,481) 97,361
------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
CASH EQUIVALENTS 141,884 -
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (6,526,256) 17,119,264
CASH AND CASH EQUIVALENTS - beginning of period 9,931,906 1,895,276
------------ ------------
CASH AND CASH EQUIVALENTS - end of period $ 3,405,650 $ 19,014,540
============ ============
See notes to consolidated financial statements
Page 4 of 11 Pages
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CVF CORPORATION AND SUBSIDIARIES
--------------------------------
STATEMENT OF COMPREHENSIVE INCOME
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(UNAUDITED)
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Three Months Ended March 31,
-----------------------------
1998 1997
------------ ------------
Net income (loss) $ (1,585,811) $ 10,319,327
------------ ------------
Other comprehensive income, net of tax:
Foreign currency translation adjustments (net of $ nil tax effect) (104,813) (277,252)
Unrealized holding gains:
Unrealized holding gains arising during period (net of taxes of $280,000 in 1998
and $564,290 in 1997) 298,200 846,441
Reclassification adjustments for previously recognized unrealized holding gains
(net of taxes of $129,000 in 1998 and $6,909,000 in 1997) (55,000) (12,830,000)
------------ ------------
Net unrealized holding gains 243,200 (11,983,559)
------------ ------------
Total other comprehensive income (loss) 138,387 (12,260,811)
------------ ------------
Comprehensive income (loss) during period $ (1,447,424) $ (1,941,484)
============ ============
See notes to consolidated financial statements
Page 5 of 11 Pages
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CVF CORPORATION AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
THREE MONTHS ENDED MARCH 31, 1998
---------------------------------
(UNAUDITED)
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1. BASIS OF PRESENTATION
---------------------
The accompanying financial statements are unaudited, but
reflect all adjustments which, in the opinion of management, are
necessary for a fair presentation of financial position and the results
of operations for the interim periods presented. All such adjustments
are of normal and recurring nature. The results of operations for any
interim period are not necessarily indicative of the results attainable
for a full fiscal year.
2. INCOME (LOSS) PER SHARE
-----------------------
Per share information is computed based on the weighted
average number of shares outstanding during the period with net income
(loss) reduced by cumulative preferred stock dividends.
3. HOLDINGS
--------
The following table gives certain summarized unaudited
financial information related to the Company's equity basis holdings:
Three Months Ended
March 31,
----------------------
1998 1997
----------------------
Net sales $ 330,116 $ 186,137
Gross profit on sales 70,938 48,627
Income (loss) from continuing operations (776,350) (160,919)
Net income (loss) (776,350) (160,919)
Page 6 of 11 Pages
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4. INTERIM FINANCIAL STATEMENT DISCLOSURES
---------------------------------------
Certain information and footnote disclosures normally included
in financial statements presented in accordance with generally accepted
accounting principles have been condensed or omitted from the
accompanying unaudited interim financial statements. Reference is made
to the Company's audited financial statements for the year ended
December 31, 1997 included in the Company's Annual Report on Form
10-KSB/A filed with the Securities and Exchange Commission on April 30,
1998.
5. RESTATEMENT
-----------
The financial statements for the quarter ended March 31, 1997
have been restated to reflect the retroactive adoption of SFAS No. 128,
"Earnings per Share" and for the effect of a change in accounting
previously reported in the Company's Form 10-KSB/A for the year ended
December 31, 1997.
6. ADOPTION OF ACCOUNTING STANDARD
-------------------------------
During the quarter ended March 31, 1998, the Company adopted
SFAS No. 130, "Reporting Comprehensive Income". Statement No. 130
requires the reporting of comprehensive income in addition to net
income from operations. Comprehensive income is a more inclusive
financial reporting methodology that includes disclosures of certain
financial information that historically has not been recognized in the
calculation of net income. The Company has included a Statement of
Comprehensive Income in the accompanying financial statements.
Page 7 of 11 Pages
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Item 2. Management's Discussion and Analysis or Plan of Operation.
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Results of Operations.
Three months ended March 31, 1998 compared to March 31, 1997.
Sales for the first quarter of 1998 were up 147% or $385,898 to
$647,753 as compared to sales of $261,855 in the same period in 1997.
This increase relates to the inclusion of revenue totaling
approximately $295,000 from two new subsidiaries, Dantec Electronics
and Grand Island Marketing, as well as an increase in revenue from
Solaria of approximately $135,000. CVF Corporation, on an
unconsolidated basis, has no sales from operations. Sales and gross
profit from sales reflect the operations of the Company's consolidated
subsidiaries only. These subsidiaries include Biorem, Gemprint,
Solaria, Dantec Electronics, Canadian Venture Founders Leasing,
Eastview Marketing, Grand Island Marketing, and Grand Island Marketing
Two. Entities that are not consolidated include Ecoval, Dantec
Systems, Mindflight, Petrozyme, and TurboSonic.
In the first three months of 1998 the Company recorded a net loss of
$1,585,811 as compared to a net profit of $10,319,327 in the comparable
period of 1997.
The decline in net profit of $11,905,138 was mainly attributable to:
(1) The decline in the gain on sale of investments of $17,788,131.
During the first quarter of 1997, the majority of the Certicom shares
were sold, creating a pre-tax gain of $18,160,425. In the first quarter
of 1998, the remainder of the Certicom stock was sold, making up the
majority of the $372,294 gain on sale of investments.
(2) An operating loss of $2,613,146 for the first quarter 1998,
compared to an operating loss of $653,438 in 1997. The majority of this
change relates to an increase of $2,022,318 in selling, general, and
administrative expenses. Of this amount, approximately $604,000 relates
to start up costs in Grand Island Marketing, and $776,000 relates to
advertising costs for an infomercial for Eastview Marketing. Both of
these marketing companies are new entities created in the last quarter
of fiscal 1997 and first quarter of 1998. In addition, Dantec
Electronics' (a Subsidiary acquired in mid 1997) selling and
administrative expenses were included in 1998, but were not a factor
in 1997.
Interest income increased $214,824 as compared to the same quarter in
1997, related to increases in both CVF Corporation and Canadian Venture
Founders Leasing. This is due to higher levels of cash during the first
quarter of 1998, compared to the prior period, due to dispositions of
Certicom stock during 1997.
The minority interest benefit of $328,028 recorded in the first quarter
of 1998 relates to the 49% minority interest's share of the first
quarter loss on the Elements Partnership, of which Grand Island
Marketing holds 51%.
The tax provision for the first quarter of 1997 was $7,294,890 versus a
benefit of $79,800 in 1998. The high tax provision in 1997 related to
the gain on the sale of Certicom stock. The benefit in 1998 is due to
the elimination of the tax liability related to expenses incurred in
Eastview Marketing in 1998.
Liquidity and Capital Resources.
At March 31, 1998 the Company recorded stockholders' equity of
$10,024,713 as compared to $12,063,135 at December 31, 1997. This net
decrease of $2,038,422 was primarily attributable to: (1) the Company
expending $480,618 on the purchase of 102,000 shares of treasury stock;
(2) the
Page 8 of 11 Pages
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net loss of $1,585,811 for the quarter ended March 31, 1998.
(3) an increase of approximately $521,000 in paid in capital as
additional shares were issued during the first quarter of 1998.
The current ratio of the Company at March 31, 1998 improved to 2.8 to
1 as compared to 2.3 to 1 at December 31, 1997. This is the result of
a decline in cash of $6,526,256 combined with declines in income taxes
payable of $1,820,598 and accrued expenses of $1,096,660. The taxes
payable at December 31, 1997 were paid off during the first quarter
of 1998, and the accrued expenses were higher at December 31, 1997 as
the balance included legal expenses and bonuses.
The Company experienced a net decrease in cash and cash equivalents of
$6,526,256 at March 31, 1998 compared to an increase in cash of
$17,119,264 in the same period of 1997, which was related to the sale
of Certicom shares in the first quarter of 1997. The decline
in cash from December 31, 1997 to March 31, 1998 relates to: payment
of bonuses of $500,000 accrued at year end, $1,500,000 invested in
Grand Island Marketing, payment of tax liability of $1,820,598 at year
end, and increased selling, general and administrative costs compared
to the same period in 1997.
Page 9 of 11 Pages
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
------------------
None.
Item 2. Changes in Securities and Use of Proceeds.
------------------------------------------
On March 17, 1998, the Company issued 100,000 Common Shares to
a Canadian investor, pursuant to a private placement in
Canada. Moss, Lawson & Co. Limited acted as agent in connection with the
private placement and received fees (including reimbursement of expenses)
aggregating Cdn. $40,000. The transaction was exempt under Regulation S under
the Securities Act.
On March 4, 1998, the Company issued 40,179 Common Shares to
shareholders of Ecoval Inc. as partial consideration for 120,000 common shares
of Ecoval Inc. held by such shareholders and purchased by the Company. The
transactions were exempt under Section 4(2) of the Securities Act.
Item 3. Defaults Upon Senior Securities.
--------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
None.
Item 5. Other Information.
------------------
None.
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) Exhibits.
(3)(i) Articles of Incorporation (Incorporated by reference
to the Company's Form 10SB dated May 29, 1997).
(3)(ii) Bylaws (Incorporated by reference to the Company's
Form 10SB dated May 29, 1997).
(27) Financial Data Schedule.
Page 10 of 11 Pages
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SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
DATED: May 15, 1998
CVF CORPORATION
By: /s/ Jeffrey Dreben
-----------------------------------------
Name: Jeffrey Dreben
Title: Chairman of the Board, President
and Chief Executive Officer
By: /s/ Robert Nally
-----------------------------------------
Name: Robert Nally
Title: Secretary and Treasurer
Page 11 of 11 Pages