<PAGE>
SECOND
QUARTER
REPORT TO
SHAREHOLDERS
For the Six
Months ended
December 31, 1997
[LOGO]
<PAGE>
TO OUR SHAREHOLDERS
- --------------------------------------------------------------------------------
FANTOM TECHNOLOGIES INC.
The Company added an excellent second quarter to its 1998 fiscal year.
For the three months ended December 31, 1997 net income rose 63% over the year-
earlier period to $2.6 million. Earnings per share increased to 29 cents
(based on 8,899,137 shares outstanding) from 19 cents (based on 8,378,767
shares outstanding) for the same period in the previous year, while revenue
advanced 22% to $42.9 million.
For the six months ended December 31, 1997 net income rose 68% from the year-
earlier period to $4.3 million. Earnings per share expanded to 50 cents
(based on 8,646,289 shares outstanding) compared with 31 cents (based on
8,341,799 shares outstanding) for the same period in the previous year, and
revenue grew 15% to $73.0 million.
In late November, the Company began shipping its new FANTOM-Registered
Trademark- LIGHTNING-Registered Trademark- canister vacuum to the United
States market. This product marks the Company's first entry into the
canister segment of the vacuum-cleaner market and, just like the
FANTOM-Registered Trademark- THUNDER-Registered Trademark- and
FANTOM-Registered Trademark- FURY-Registered Trademark- uprights, features
the Company's proprietary dual-cyclonic vacuuming technology. This
technology eliminates the use of filter bags and provides constant peak
cleaning power, versus the declining cleaning power often experienced with
conventional vacuums using filter bags. The LIGHTNING-Registered Trademark-
vacuum's many other features include its unique STAIRHUGGER-TM- design,
which allows the product to sit on stairs while the user vacuums; a
powerhead that cleans carpets with a rotating brush, and bare floors when
the rotating brush is turned off; and a certified HEPA filter, which cleans
air exiting the machine to a very high level.
Sales for the FANTOM-Registered Trademark- LIGHTNING-Registered Trademark-
canister accounted for a small proportion of the Company's revenue in the
second quarter, but are expected to grow substantially in future periods as
manufacturing ramps up, retail distribution is established and
direct-response advertising builds consumer awareness. The Company has
produced a new 30-minute TV infomercial for the LIGHTNING-Registered
Trademark- canister, and this commenced airing in the U.S. in mid-January.
Short-form (60 and 120 second) TV spots are being produced and should be on
air shortly.
Also in the second quarter, the Company was awarded ISO 9001 registration by the
Quality Management Institute (QMI) after completion of a stringent quality
audit. ISO stands for International Organization for Standardization and is
a worldwide federation responsible for developing internationally recognized
quality standards for the manufacture of products and the delivery of
services. ISO 9001 is the most comprehensive designation of the ISO 9000
series because it includes the design of products as well as their
production.
We are also pleased to advise that the Company has its new website in operation,
which you can visit, if you are on the net, to read the latest information
on our Company and FANTOM-Registered Trademark- vacuums. Our website is at
www.fantom.com.
On behalf of the Board,
/s/ Kenneth Kelman /s/ Allan D. Millman
KENNETH KELMAN ALLAN D. MILLMAN,
CHAIRMAN OF THE BORAD PRESIDENT AND CHIEF EXECUTIVE OFFICER
FEBRUARY 2, 1998
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CONSOLIDATED STATEMENTS OF INCOME
AND RETAINED EARNINGS
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FANTOM TECHNOLOGIES INC.
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
December 31 (Unaudited) December 31 (Unaudited)
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Sales $ 72,958,314 $ 63,381,851 $ 42,938,732 $ 35,153,653
Costs of goods sold 46,272,309 39,974,209 28,086,838 22,134,489
---------------------------------- ---------------------------------------
26,686,005 23,407,642 14,851,894 13,019,164
Expenses:
Selling, general and
administrative 19,930,163 19,046,275 10,793,444 10,362,631
Finance charges (966) 346,714 16,302 180,400
---------------------------------- ---------------------------------------
19,929,197 19,392,989 10,809,746 10,543,031
---------------------------------- ---------------------------------------
Income before
income taxes 6,756,808 4,014,653 4,042,148 2,476,133
Income taxes
Current 1,689,000 1,004,000 1,011,000 619,500
Deferred 744,000 442,000 445,000 272,500
---------------------------------- ---------------------------------------
2,433,000 1,446,000 1,456,000 892,000
---------------------------------- ---------------------------------------
Net Income 4,323,808 2,568,653 2,586,148 1,584,133
Retained earnings
at beginning of period 7,698,105 337,407 9,435,765 1,321,927
---------------------------------- ---------------------------------------
Retained earnings
at end of period $ 12,021,913 $ 2,906,060 $ 12,021,913 $ 2,906,060
---------------------------------- ---------------------------------------
Net income per share* $ 0.50 $ 0.31 $ 0.29 $ 0.19
---------------------------------- ---------------------------------------
</TABLE>
*Net income per share has been calculated using the weighted average number of
common and series 1, class A preferred shares outstanding during the respective
periods. For the six months ended December 31, these were 8,646,289 shares for
1997 and 8,341,799 shares for 1996. For the three months ended December 31,
these were 8,899,137 shares for 1997 and 8,378,767 shares for 1996.
FINANCIAL INFORMATION IN THIS REPORT IS EXPRESSED IN CANADIAN DOLLARS, UNLESS
OTHERWISE NOTED.
<PAGE>
CONSOLIDATED BALANCE SHEETS
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FANTOM TECHNOLOGIES INC.
<TABLE>
<CAPTION>
December 31
(Unaudited)
1997 1996
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash in bank $ 3,679,978 $ -
Trade accounts receivable 24,720,855 16,974,239
Other receivables 1,589,475 3,416,131
Inventories 13,951,442 12,951,585
Prepaid expenses 2,974,643 1,574,792
------------------------------
46,916,393 34,916,747
PROPERTY, PLANT AND EQUIPMENT,
at cost 20,992,509 12,076,085
Less accumulated depreciation (4,221,618) (3,045,003)
------------------------------
16,770,891 9,031,082
------------------------------
$ 63,687,284 $ 43,947,829
------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Loan payable $ - $ 4,060,898
Trade accounts payable 16,578,028 12,630,451
Other payables and accruals 5,327,913 2,277,891
Income taxes payable 458,403 953,644
Current portion of capital
lease obligations 268,988 247,718
------------------------------
22,633,332 20,170,602
CAPITAL LEASE OBLIGATIONS,
Less current portion 100,251 342,586
DEFERRED INCOME TAXES 2,170,200 565,200
SHAREHOLDERS' EQUITY:
Share capital 26,761,588 19,963,381
Retained earnings 12,021,913 2,906,060
------------------------------
38,783,501 22,869,441
------------------------------
$ 63,687,284 $ 43,947,829
------------------------------
</TABLE>
<PAGE>
CONSOLIDATED STATEMENTS OF
CHANGES IN FINANCIAL POSITION
- --------------------------------------------------------------------------------
FANTOM TECHNOLOGIES INC.
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
December 31 (Unaudited) December 31 (Unaudited)
1997 1996 1997 1996
CASH PROVIDED BY (USED FOR):
OPERATIONS:
<S> <C> <C> <C> <C>
Net income $ 4,323,808 $ 2,568,558 $ 2,586,148 $ 1,584,038
Items not requiring cash:
Depreciation 617,225 361,702 311,840 179,198
Deferred tax provision 744,000 442,000 445,000 272,500
Change in non-cash
operating working
capital (1,900,925) (4,542,179) 4,407,229 675,988
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3,784,108 (1,169,919) 7,750,217 2,711,724
FINANCING:
Proceeds from
capital leases - 117,180 - -
Payments on
capital leases (128,353) (124,622) (64,757) (65,431)
Issuance of common
shares and warrants 38,998 341,411 38,998 12,000
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(89,355) 333,969 (25,759) (53,431)
INVESTMENTS:
Additions to property,
plant and equipment (4,712,931) (1,584,858) $ (2,305,562) (881,342)
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Increase (Decrease)
in cash position (1,018,178) (2,420,808) 5,418,896 1,776,951
Cash position at
beginning of period 4,698,156 (1,640,090) (1,738,918) (5,837,849)
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Cash position at
end of period $ 3,679,978 $ (4,060,898) $ 3,679,978 $ (4,060,898)
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</TABLE>
Cash is comprised of loan payable less cash in bank.
<PAGE>
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FANTOM TECHNOLOGIES INC.
Head Office and Manufacturing Facility:
1110 Hansler Road, P.O. Box 1004
Welland, Ontario, Canada L3B 5S1
Voice: (905) 734-7476 Fax: (905) 734-9955
Toronto Sales Office:
1 Eva Road, Suite 414, Etobicoke, Ontario, Canada M9C 4Z5
Voice: (416) 622-9740 Fax: (416) 626-0674
Toronto Stock Exchange: FTM NASDAQ: FTMTF
http://www.fantom.com
Transfer Agent & Registrar:
CIBC Mellon Trust Company,
393 University Avenue, 5th Floor
Toronto, Ontario, Canada M5G 1E6
FANTOM-Registered Trademark-,
FURY-Registered Trademark-,
LIGHTNING-Registered Trademark-
and STAIRHUGGER are trademarks
of FANTOM TECHNOLOGIES INC.
Printed in Canada Design: Taylor/Sprules Corporation
