1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-QSB
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
CVF TECHNOLOGIES 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 2
-- --
As of November 13, 1998, there were 6,736,128 shares of common stock,
$0.001 par value per share, of the issuer outstanding.
Transitional Small Business Disclosure Format (check one): Yes No X
-- --
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
CVF TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
September 30,
1998
---------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,975,055
Restricted cash 647,505
Marketable securities, at market 94,766
Trade receivables 2,445,891
Inventory 722,450
Prepaid expenses and other 529,205
Income taxes receivable 927,992
----------------
TOTAL CURRENT ASSETS 11,342,864
PROPERTY AND EQUIPMENT, net of accumulated depreciation 430,170
HOLDINGS, carried at cost or equity 1,336,732
HOLDINGS AVAILABLE FOR SALE , at market 1,772,680
GOODWILL, net of accumulated amortization 4,265,315
----------------
$ 19,147,761
================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank indebtedness $ 721,152
Trade payables 2,091,982
Accrued expenses 869,575
Dividends payable 190,868
----------------
TOTAL CURRENT LIABILITIES 3,873,577
----------------
LONG TERM DEBT 1,025,254
DEFERRED INCOME TAXES 173,416
MINORITY INTEREST 226,675
PREFERRED STOCK OF SUBSIDIARIES 1,122,303
REDEEMABLE SERIES A PREFERRED STOCK 456,250
STOCKHOLDERS' EQUITY:
Common stock, $0.001 par value,
authorized 50,000,000 shares,
7,155,328 issued and 400,300 in treasury 7,155
Additional paid in capital 18,794,612
Treasury stock (2,599,240)
Accumulated other comprehensive income (57,804)
Retained earnings (accumulated deficit) (3,874,437)
----------------
TOTAL STOCKHOLDERS' EQUITY 12,270,286
----------------
$ 19,147,761
================
See notes to consolidated financial statements
3
CVF TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
Three months ended September 30, Nine months ended September 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
(Restated) (Restated)
SALES $ 2,510,404 $ 240,609 $ 4,014,768 $ 795,850
COST OF SALES 1,487,456 115,616 2,360,791 253,566
------------ ------------ ------------ ------------
GROSS PROFIT 1,022,948 124,993 1,653,977 542,284
------------ ------------ ------------ ------------
EXPENSES:
Selling, general and administrative 1,440,933 1,404,195 6,142,728 2,992,115
Research and development 264,683 3,107 264,683 15,026
------------ ------------ ------------ ------------
TOTAL EXPENSES 1,705,616 1,407,302 6,407,411 3,007,141
------------ ------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS (682,668) (1,282,309) (4,753,434) (2,464,857)
------------ ------------ ------------ ------------
OTHER INCOME AND (EXPENSES):
Interest income (expense), net 160,470 264,900 549,447 423,163
Other income (expense), net 322,416 15,473 430,215 150,311
Income (loss) from equity affiliates (584,585) (402,995) (1,388,294) (363,111)
Gain (loss) on investments (69,944) 0 316,318 18,332,223
Minority interest 67,365 0 425,689 0
------------ ------------ ------------ ------------
TOTAL OTHER INCOME AND (EXPENSES) (104,278) (122,622) 333,375 18,542,586
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES (786,946) (1,404,931) (4,420,059) 16,077,729
Provision (benefit) for income taxes (35,206) 452,806 (1,019,592) 7,142,236
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ (751,740) $ (1,857,737) $ (3,400,467) $ 8,935,493
============ ============ ============ ============
NET INCOME (LOSS) PER SHARE - BASIC $ (0.11) $ (0.31) $ (0.57) $ 1.49
============ ============ ============ ============
NET INCOME (LOSS) PER SHARE - DILUTED $ (0.11) $ (0.31) $ (0.57) $ 1.38
============ ============ ============ ============
WEIGHTED SHARES USED IN COMPUTATION - BASIC 6,598,287 5,960,349 6,040,234 5,981,682
============ ============ ============ ============
WEIGHTED SHARES USED IN COMPUTATION - DILUTED 6,598,287 5,960,349 6,040,234 6,448,546
============ ============ ============ ============
See notes to consolidated financial statements
4
CVF TECHNOLOGIES CORPORATION AND SUBSIDIARIES
---------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
------------------------------------
(UNAUDITED)
-----------
Nine Months Ended September 30
-----------------------------
1998 1997
------------ ------------
(Restated)
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) (3,400,467) $ 8,935,493
------------ ------------
Adjustments to reconcile net income (loss) to net cash from operating
activities:
Depreciation and amortization 339,655 154,937
(Income) loss from equity affiliates 1,388,294 363,111
Gain on sale of investments (316,318) (18,332,223)
Deferred tax benefit (78,406) 0
Minority interest in earnings (losses) of subsidiaries (425,689) 0
Changes in operating assets and liabilities (net of acquisitions):
(Increase) decrease in accounts receivable (1,747,241) 433,777
(Increase) decrease in inventory (197,847) (86,156)
(Increase) decrease in prepaid expenses and other (170,943) 10,213
(Increase) decrease in income taxes receivable (927,992) 0
Increase (decrease) in accounts payable and accrued expenses (58,199) 259,178
Increase (decrease) in income taxes payable (1,820,598) 2,232,861
------------ ------------
(4,015,284) (14,964,302)
------------ ------------
CASH PROVIDED (USED) IN OPERATING ACTIVITIES (7,415,751) (6,028,809)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (232,855) (1,361,450)
Investments in and advances to equity affiliates (555,287) (823,915)
Repayments from equity affiliates 227,515 321,000
Purchase of marketable securities (467,390) 0
Acquisitions, net of cash acquired (978,608)
Proceeds from sale of investments 329,797 19,097,838
------------ ------------
CASH PROVIDED (USED) IN INVESTING ACTIVITIES (1,676,828) 17,233,473
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (payments) of debt 424,204 339,178
Decrease in restricted cash (34,856) 0
Sale of common stock 5,137,825 0
Borrowings (payments) of debt to related parties 1,011,184 105,534
Purchase of treasury stock (737,191) (1,581,748)
------------ ------------
CASH PROVIDED (USED) IN FINANCING ACTIVITIES 5,801,166 (1,137,036)
------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
CASH EQUIVALENTS (665,438) 0
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,956,851) 10,067,628
CASH AND CASH EQUIVALENTS - beginning of period 9,931,906 1,895,276
------------ ------------
CASH AND CASH EQUIVALENTS - end of period $ 5,975,055 $ 11,962,904
============ ============
See notes to consolidated financial statements
5
CVF TECHNOLOGIES CORPORATION AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30, 1998
------------------------------------
(UNAUDITED)
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
Basic earnings (loss) per share is computed by dividing net
income (loss) available to common stockholders by the weighted average
number of common shares outstanding during the period. Diluted earnings
(loss) per share reflects the per share amount that would have resulted
if diluted potential common stock had been converted to common stock,
as prescribed by SFAS 128.
3. INVESTMENTS
The following table gives certain summarized unaudited
financial information related to the Company's equity basis holdings:
Nine Months Ended
September 30,
-------------------------------------------
1998 1997
-------------------------------------------
Net sales $ 1,018,184 $ 1,332,750
Gross profit on sales 99,709 371,333
Income (loss) from continuing operations
(2,341,506) (2,508,488)
Net income (loss) (2,341,506) (2,508,488)
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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 29,
1998.
5. RESTATEMENT
-----------
The financial statements for the quarter ended September 30,
1997 have been restated to reflect the retroactive adoption of SFAS No.
128, "Earnings per Share" and for the effect of a correction 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. Other comprehensive income for the nine
months ended September 30, 1998 consisted of $50,951 of decline in
unrealized gains from available for sale securities and a $639,898 in
loss on foreign currency translation totaling to $690,849. The
amounts for the nine months ended September 30, 1997 consisted of
$12,626,632 decline in unrealized gains, which were converted to a
realized gain on sale of Certicon stock, from available for sale
securities and a $186 gain on foreign currency translation totaling to
$12,626,446.
7. AMALGAMATION OF DANTEC CORPORATION
----------------------------------
Dantec Corporation (Dantec) was created on June 30, 1998 on
the amalgamation of Dantec Electronics Limited, a wholly-owned
subsidiary, with Dantec Systems Corporation, a company in which CVF had
a 41% interest. Dantec is an industrial automation company based in
Waterloo, Ontario that uses proprietary advanced process-control
algorithms to develop, manufacture and market a range of automated
precision moisture-detection, measurement and manufacturing control
systems. CVF Corporation owns, directly and indirectly, 4,845,000
common shares of Dantec, representing 53% of the total outstanding
voting securities of Dantec.
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8. INITIAL PUBLIC OFFERING
-----------------------
In July 1998, CVF Technologies Corporation issued 927,230 shares
pursuant to a Canadian public offering at a gross price of U.S. $5.40 per
share for net cash proceeds of U.S. $4,937,498. Legal and accounting fees
associated with this offering, further reduced the net cash proceeds to
U.S. $4,615,946.
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Item 2. Management's Discussion and Analysis or Plan of Operation.
----------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO
SEPTEMBER 30, 1997:
Sales for the nine months ended September 30, 1998 are $4,015,000 up 404% or
$3,219,000 compared to sales of $796,000 in 1997. CVF Technologies Corporation,
on a consolidated 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 Corporation,
Canadian Venture Founders Leasing, Eastview Marketing, Grand Island Marketing
(Elements) and Grand Island Marketing Two. Companies that are not consolidated
include, Ecoval, RDM (formerly Mindflight), Petrozyme and TurboSonic. Solaria
started full production on a joint venture with an original equipment
manufacturer, Crown Equipment, Inc. This resulted in their sales increasing by
$1,503,000 over the same period in 1997. Also making a substantial contribution
to the growth in sales was Dantec Corporation (the amalgamated entity of Dantec
Electronics and Dantec Systems, which took place on June 30, 1997) and Elements.
These two companies had combined sales of $1,766,000 in 1998 with no comparable
sales, on a consolidated basis, in 1997.
Cost of sales increased by $2,107,000 or 831%. Cost of sales increased at a
greater rate than sales, mainly due to one of the subsidiary companies, in
order to increase market share, reduced its profit share on one of its major
contracts. Dantec Corporation and Elements accounted for $803,000 of the
increase, with neither being consolidated in the period ended September 30,
1997.
In the first nine months of 1998 the Company recorded a net loss of $3,400,000
as compared to a net profit of $8,963,000 in the comparable period of 1997. The
decline in net profit of $12,363,000 was mainly attributed to the decline in the
one time gain on investments of $18,016,000. During the first nine months of
1997, the majority of the Certicom shares were sold, creating a pre-tax gain of
$18,332,000. In the first quarter of 1998, the remainder of the Certicom stock
was sold, making up the majority of the $316,000 gain on investments plus an
operating loss of $4,753,000 for the nine months ended September 30, 1998
compared to an operating loss of $2,446,000 in the comparable period in 1997.
Selling, general and administrative expenses increased by $3,169,000 accounting
for this increase in operating expenses. Advertising costs for an infomercial
for Eastview Marketing in the amount of $938,000 and start up costs of
approximately $604,000 for Grand Island Marketing account for a portion of this
increase. Grand Island Marketing also had $527,000 selling, general and
administrative cost in the current year and were not in operation last year.
Dantec Corporation is also contributing $715,000 to this increase with no
corresponding cost in the prior year as a result of not being consolidated in
1997.
Interest income increased by $126,000 as compared to the same period in 1997,
due to higher levels of cash in CVF Technologies Corporation and in Canadian
Venture Founders Leasing during the first nine months of 1998, compared to the
prior period. This cash was due to dispositions of Certicom stock during 1997
plus the public offering of stock, which closed on July 13, 1998.
The 49% minority interest in the Elements Partnership (Grand Island Marketing
holds 51%) was charged for their 49% portion of the partnerships loss for the
first nine months of 1998 creating the minority interest benefit of $426,000
recorded in the first nine months of 1998.
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The tax provision for the first nine months of 1997 was $7,142,000 compared to a
tax benefit of $1,020,000 in 1998. The high tax provision in 1997 is related to
the gain on the sale of Certicom stock. The tax benefit is the result of being
able to carry the current year loss back to prior years.
LIQUIDITY AND CAPITAL RESOURCES:
At September 30, 1998 stockholders equity was $12,270,000 as compared to
$12,063,000 at December 31, 1997. This net increase of $207,000 was primarily
attributed to:
1) The company spending $737,000 on the purchase of 145,400 shares of treasury
stock;
2) The decline of the Canadian dollar which caused the translation adjustment
to decline by $640,000.
3) The net loss of $3,400,000 for the nine months ended September 30, 1998.
4) An increase of approximately $521,000 in paid in capital as additional
shares were issued during the first quarter of 1998.
5) A net increase of $4,616,000 in paid in capital as a result of the public
offering which closed on July 13, 1998.
The current ratio of the Company at September 30, 1998 increased to 2.9 to 1 as
compared to 2.3 to 1 at December 31, 1997. This increase in the current ratio
was possible, even with cash and cash equivalents declining by $3,957,000 from
December 31, 1997, because a number of other current assets increased since
December 31, 1997 and income taxes payable of $1,821,000 at December 31, 1997
were paid. Trade receivables increased by $1,888,000 from December 31, 1997 as a
result of the increase in the sales volume in the current period. Also income
taxes receivable of $928,000 were established in the current period as a result
of the net loss.
The net decrease in cash and cash equivalents of $3,957,000 from December 31,
1997 to September 30, 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 $1,821,000 at year end, the use of $737,000 to purchase treasury
shares during the current year, and increased selling, general and
administrative costs during the current year.
On July 13, 1998 the Company closed on the public offering filed, by Prospectus,
on July 6, 1998 with Security regulators in all the provinces of Canada (except
Quebec). 997,230 shares were sold in this offering with the Company receiving
net proceeds from the underwriter, HSBC James Capel Canada Inc., of U.S.
$4,937,498 (Cdn. $7,55,391). All costs of the underwriting have been paid with
the Company netting $4,615,946. Half of these proceeds would be used to fund the
growth of the CVF Companies in order to enable them to meet their respective
business plans and, in particular, the expansion of the sales and marketing
efforts of the CVF Companies. The other half will be used for the purpose of
strategic mergers and acquisitions of businesses that are directly related to
the existing CVF Companies
IMPACT OF YEAR 2000 COMPLIANCE:
The year 2000 problem, which is a pervasive issue throughout the industrial,
financial and service sectors, arises because most computer software was
originally created with a two-digit date code and would read "00," "01," etc. as
meaning 1900, 1901, etc. not 2000, 2001, etc. The Company has completed the
upgrade of its software and computer systems to make them Year 2000 (Y2K)
compliant. The cost of this upgrade was approximately $20,000, including
software and hardware. The Company's management has surveyed its subsidiary
companies and, based upon their responses, does not expect any major Y2K
malfunction in their internal systems.
Company management has concern about potential problems associated with the Y2K,
especially from third party suppliers and providers of services over which the
Company has no control. The Company and its subsidiaries will begin an
extensive survey of its external third party suppliers in November 1998 and
complete this initial survey by December 31, 1998. This survey will be sent to
the financial institutions with which the Company does business, one of which
has already given us assurance that it will be Y2K compliant by December 31,
1998. Until this external third party survey is complete, it will be difficult
to assess the extent or total cost of Y2K compliance or to create and assess the
cost of meaningful contingency plans.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
-----------------
None.
Item 2. Changes in Securities and Use of Proceeds.
-----------------------------------------
On June 3, 1998 the Company issued 25,570 Common Shares of the
Company to C.A. Misener Enterprises, Inc., a Canadian Corporation, in exchange
for 720,000 class A shares in Gemprint. The transaction was exempt under
Regulation S of the Securities Act of 1933.
On July 31, 1998 the Company completed its public offering filed on July 6, 1998
with security regulators in all of the provinces of Canada (except Quebec).
997,230 common shares were sold in this offering, with the Company receiving net
proceeds from the underwriter, HSBC James Capel Canada Inc., of U.S $4,937,498
(Cdn. $7,355,391). There was an additional $321,552 of issue costs incurred in
this offering, giving the Company net proceeds from the offering of $4,615,946.
All of the payments, of issue costs, are direct payments, to others; none are to
officers, directors, ten percent holders or affiliates of the issuer. About half
of the proceeds would be used to fund the growth of CVF Companies in order to
enable them to meet their respective business plans and the other half will be
used for the purpose of strategic mergers and acquisitions of businesses that
are directly related to the existing CVF Companies. The SEC file number on this
prospectus is 333-51757. In addition to the 997,230 common shares sold for the
Company, 25,570 common shares were sold for C.A. Misener Enterprises, Inc. for
U.S. $137,321 (Cdn. $204,560) and 100,000 common shares were sold for Murray
Sinclair for U.S. $537,040 (Cdn. $800,000). These two transactions represent the
complete sale of the secondary offering.
Item 3. Defaults Upon Senior Securities.
--------------------------------
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None.
Item 4. Submission of Matters to a Vote of Security Holders.
On September 17, 1998, the Company held its Annual Meeting of
Stockholders. At the Annual Meeting, the following four directors were elected
to serve until the next Annual Meeting.
Name Vote For Vote Withheld
---- -------- -------------
Jeffrey Dreben 4,490,049 11,000
Robert Nally 4,490,049 11,000
George Khouri 4,490,049 11,000
Robert Glazier 4,490,049 11,000
In addition, a proposal to amend the Company's Articles of Incorporation
to change the Company's name from CVF Corporation to CVF Technologies
Corporation was approved.
For 1,014,929
---
Against -0-
-------
Abstain 100
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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: November 13, 1998
CVF CORPORATION
By: /s/ Jeffrey Dreben
--------------------------------------
Name: Jeffrey Dreben
Title: Chairman of the Board, President
and Chief Executive Officer
By: /s/ Robert Seyler
--------------------------------------
Name: Robert Seyler
Title: Chief Financial Officer