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FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Report of Foreign Issuer
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934
For the month of November, 1999
Fantom Technologies Inc.
(Registrant's name)
1110 Hansler Road
Welland, Ontario, Canada L3B 5S1
(905) 734-7476
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports
under cover Form 20-F or Form 40-F:
Form 20-F Form 40-F X
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Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes No X
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Documents Included as Part of this Report
No. Document
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1. Annual Information Form of the Registrant for the fiscal year ended
June 30, 1999.
2. Consolidated Financial Statements of the Registrant for the year ended
June 30, 1999, including a reconciliation to United States generally
accepted accounting principles.
3. Management's Discussion and Analysis of the Registrant for the year
ended June 30, 1999.
2
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: November 17, 1999
FANTOM TECHNOLOGIES INC.
By: "Walter J. Palmer"
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Name: Walter J. Palmer
Title: Secretary
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FANTOM TECHNOLOGIES INC.
1999
ANNUAL INFORMATION FORM
NOVEMBER 15, 1999
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TABLE OF CONTENTS
Page
----
DOCUMENTS INCORPORATED BY REFERENCE.............. 3
INCORPORATION.................................... 3
GENERAL DEVELOPMENT OF THE BUSINESS.............. 3
NARRATIVE DESCRIPTION OF THE BUSINESS............ 4
Products................................ 4
Raw Materials and Suppliers............. 7
Dual-Cyclonic Technology................ 7
Employees............................... 9
Customer Concentration.................. 9
Sales Data.............................. 10
Sales and Marketing..................... 10
New Product Development................. 11
Industry Overview....................... 13
Business Strategies..................... 13
Property................................ 14
Risk Factors and Cautionary Statements.. 14
SELECTED CONSOLIDATED FINANCIAL INFORMATION...... 16
MANAGEMENT'S DISCUSSION AND ANALYSIS............. 19
MARKET FOR SECURITIES............................ 19
DIRECTORS AND OFFICERS........................... 20
Board of Directors...................... 22
Board Committees........................ 22
ADDITIONAL INFORMATION........................... 23
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DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference in this 1999 Annual
Information Form of Fantom Technologies Inc.:
. Management's Discussion and Analysis found on pages 16 to 21 of the
1999 Annual Report of Fantom Technologies Inc.
. The Consolidated Financial Statements and Auditors' Report to the
Shareholders found on pages 22 to 31 of the 1999 Annual Report of
Fantom Technologies Inc.
All dollar amounts herein are expressed in Canadian dollars. On November
15, 1999, the exchange rate based on the noon buying rate in the City of New
York for cable transfers in Canadian dollars as certified for customs purposes
by the Federal Reserve Bank of New York was approximately Cdn.$0.68 per
U.S.$1.00.
INCORPORATION
Fantom Technologies Inc. (the "Company") was formed by articles of
amalgamation on May 12, 1986 under the Business Corporations Act (Ontario). The
articles of the Company were amended on May 1, 1997 to change the Company's name
from its former name of Iona Appliances Inc. The Company has three operating
subsidiaries: Fantom Technologies Direct, Inc., a wholly-owned subsidiary
incorporated under the Business Corporations Act (Ontario); and Fantom
Technologies U.S.A., Inc. and Fantom Technologies Intellectual Property, Inc.,
both wholly-owned subsidiaries incorporated under the General Corporation Law of
the State of Delaware. The Company's registered and principal executive office
is located at 1110 Hansler Road, Welland, Ontario, Canada L3B 5S1.
The Company's fiscal year ends on June 30 of each year.
GENERAL DEVELOPMENT OF THE BUSINESS
The Company was formed in 1986 as Iona Appliances Inc. and changed its name
to Fantom Technologies Inc. on May 1, 1997.
The Company, through predecessor companies, played an important role in
developing the lightweight stick vacuum business in Canada, with its products
being merchandised by several leading Canadian retailers. A corded hand-held
vacuum was also marketed by the Company commencing in the mid-1980's.
Starting in 1986, the Company committed itself to developing new cleaning
products based on patented, dual-cyclonic vacuuming technology. In 1988, the
Company
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introduced its first dual-cyclonic product, a carpet dry-cleaning machine called
CAPTURE/(R)/. (CAPTURE/(R)/ is a trademark of Milliken Research Corporation.) In
1991, the Company introduced its second dual-cyclonic product, an upright vacuum
cleaner called the FANTOM/(R)/ vacuum. This product gave the Company its first
entry into the mainstream, full-size, vacuum cleaner market. In January 1996,
the Company commenced marketing a new upright model of the FANTOM/(R)/ vacuum
called the FANTOM/(R)/ FURY/(R)/ vacuum. This is a smaller, lighter version of
the original FANTOM/(R)/ vacuum and has a lower retail price point. In March
1996, the Company began shipping to the U.S. market a more powerful version of
the original FANTOM/(R)/ vacuum. This product is called the FANTOM/(R)/
THUNDER/(R)/ vacuum. In the Fall of 1997, the Company introduced a major line
extension to the FANTOM/(R)/ vacuum line in the United States and Canada. This
product is a dual-cyclonic canister vacuum and is called the FANTOM/(R)/
LIGHTNING/(R)/ vacuum. The Company's newest dual-cyclonic entry, the FANTOM/(R)/
CYCLONE XT/(R)/ upright, was introduced in the United States and Canada in March
1999. This is a premium vacuum and commands the highest retail price among the
line of FANTOM/(R)/ uprights.
The Company's main products are its FANTOM/(R)/ vacuums which the Company
sells in two ways: (a) to end-users through direct-response television and its
Internet website; and (b) to various types of retailers, including mass
merchants, catalogue and catalogue-showroom retailers, warehouse clubs,
department stores, television shopping networks and independent vacuum dealers.
The independent vacuum dealers also serve as product repair centres. The
Company uses a combination of its own sales personnel and manufacturers'
representatives to call on accounts. It also has a small group of product
trainers to instruct in-store sales personnel on the features and benefits of
its products. In addition, the Company maintains a special toll-free call
centre in its Welland, Ontario facility to handle inquiries that FANTOM/(R)/
owners and potential purchasers have about its products. The Company has been
focusing on increasing distribution and sell-through of its FANTOM/(R)/ vacuums
in retail outlets, and has been relying on the consumer awareness generated by
its direct-response television advertising, exposure on television shopping
networks, and trade promotions, to drive retail sales in these accounts.
The Company has also been focussing on acquiring new technologies through
an association it has formed with Omachron Technologies, Inc. ("Omachron"), and
on developing new products incorporating such technologies in the floor care,
household water-treatment and other consumer product fields.
NARRATIVE DESCRIPTION OF THE BUSINESS
Products
The Company's principal product line currently consists of its full-size,
upright and canister dual-cyclonic vacuum cleaners.
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Stick Vacuums. The Company, through predecessor companies, played an
important role in developing the lightweight stick vacuum business in Canada,
with its products being merchandised by several leading Canadian retailers.
These products were sold under the IONA/(R)/, ELECTRIKBROOM/(R)/ and
SPEEDVAC/(R)/ trademarks. With the development of the Company's dual-cyclonic
products, coupled with increased competitive activity in the stick-vacuum
segment, stick vacuums became increasingly less significant to the Company's
operations and the product line was discontinued. Sales of residual inventory
of these products amounted to $0.1 million in the Company's fiscal year ended
June 30, 1999.
Hand-Held Vacuums. A corded hand-held vacuum was also marketed by the
Company commencing in the mid-1980's. This product had a market share
significantly less than that of the Company's stick vacuum line of products and
the Company ceased the manufacturing of this product in March 1996.
Dual-Cyclonic Products. Starting in 1986, the Company committed itself to
developing new cleaning products based on patented, dual-cyclonic vacuuming
technology. The Company believes that this technology is significant for two
reasons: (a) it eliminates the use of filter bags; and (b) it provides constant
peak cleaning power versus the declining cleaning power often experienced with
conventional vacuums using filter bags.
In 1988, the Company introduced its first dual-cyclonic product, a carpet
dry-cleaning machine called CAPTURE/(R)/. The manufacturing of this product
line was discontinued in 1997 due to low sales.
In 1991, the Company introduced its second dual-cyclonic product, an
upright vacuum cleaner called the FANTOM/(R)/ vacuum. This product gave the
Company its first entry into the mainstream, full-size, vacuum cleaner market.
In January 1996, the Company commenced marketing a new upright model of the
FANTOM/(R)/ vacuum called the FANTOM/(R)/ FURY/(R)/ vacuum. This is a smaller,
lighter version of the original FANTOM/(R)/ vacuum and has a lower retail price
point. In March 1996, the Company began shipping to the U.S. market a more
powerful version of the original FANTOM/(R)/ vacuum. This product is called the
FANTOM/(R)/ THUNDER/(R)/ vacuum.
Included among the current features of household models of the FANTOM/(R)
/FURY/(R)/ and FANTOM/(R) /THUNDER/(R) /vacuums are the following: (a) a 12-amp
rating; (b) a handle which detaches and becomes a cleaning wand; (c) a 5:1
stretch, steel reinforced hose; (d) a HEPA filter certified by its manufacturer;
(e) a minimum of three on-board attachments, including a crevice tool, a
dusting/upholstery brush and a floor nozzle; (f) one or two headlights; (g) a
quick release, see-through bin designed for convenient emptying; (h) a height
adjustment dial; (i) a how-to-use video; and (j) a two-year limited warranty.
In the Fall of 1997, the Company introduced a major line extension to the
FANTOM/(R)/ vacuum line in the United States and Canada. This product is a
dual-
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cyclonic canister vacuum and is called the FANTOM/(R)/ LIGHTNING/(R)/ vacuum.
Included among the standard features of the FANTOM/(R)/ LIGHTNING/(R)/ canister
are the following: (a) a unique STAIRHUGGER feature which allows the machine to
sit firmly on steps while the user vacuums stairs; (b) a 12-amp rating; (c) a 6-
foot, electrified hose and metal wand, which attach to a powerhead that features
a rotating brush for cleaning carpets; the rotating brush can be turned off for
cleaning bare floors; (d) an electronic system in the powerhead that turns the
rotating brush off and prevents the drive belt from breaking, should the
rotating brush become jammed; (e) a HEPA filter certified by its manufacturer;
(f) a retractable power cord; (g) three on-board attachments; (h) an
ergonomically designed handle at the end of the metal wand; (i) an easily
released, see-through bin designed for convenient emptying; (j) a height
adjustment dial; (k) 360 swiveling hose attachments; (l) a how-to-use video; and
(m) a two-year limited warranty.
The Company currently sells versions of the FANTOM/(R)/ THUNDER/(R)/ and
FANTOM/(R)/ LIGHTNING/(R)/ vacuums to Sears, Roebuck and Co. under private label
arrangements.
The Company's most recent dual-cyclonic entry, the FANTOM/(R)/ CYCLONE
XT/(R)/ upright, was introduced in March 1999. This vacuum is a premium model
and, in addition to having the standard features found on the FANTOM/(R)/
FURY/(R)/ and FANTOM/(R)/ THUNDER/(R)/ uprights, incorporates two motors, one to
rotate the brush and a second to create airflow, thereby improving the vacuum's
cleaning performance through specialization of tasks. Importantly, the brush
motor automatically shuts off when an object jams the brush, thus saving the
belt from breaking; it also shuts off when the vacuum is in the upright
position, thus saving wear and tear on the carpet as the user cleans with the
wand. It has an improved air path, a more ergonomically positioned handle, a
re-designed collection bin and a tool compartment at the top of the vacuum.
Until the Fall of 1993, the main marketing effort behind the household
models of the Company's dual-cyclonic products was to sell them to retailers in
the United States and Canada, which retailers typically had trained floor sales
personnel to demonstrate the products to consumers or catalogues in which to
present them. This effort was hampered by a marketplace which became
increasingly competitive and which forced several retailers to reduce their
trained floor sales personnel, a resource which the Company needed to
demonstrate effectively the features and benefits of its products. In response,
the Company developed a communications strategy for its FANTOM/(R)/ vacuum aimed
at significantly building consumer awareness and expanding retail distribution.
This strategy utilized infomercials, a television format which lends itself to
demonstrating the features and benefits of the Company's products.
In the Fall of 1993, the Company commenced airing a 30 minute direct-
response TV infomercial on U.S. television for its FANTOM/(R)/ vacuum. No
similar media was purchased in Canada due to regulatory restrictions on the
airing of full-motion, long-form commercials. In February 1995, the Company
commenced airing short-form (60 second and 120 second) direct-response TV spots
in the U.S. to supplement its 30 minute infomercial. In February 1996, the
Company commenced airing in the U.S. a new 30 minute TV infomercial for its
FANTOM/(R)/ FURY/(R)/ vacuum and, in March 1996, new
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short-form (60 second and 120 second) TV spots for this product. In June 1996,
the Company commenced airing in the U.S. short-form (60 second and 120 second)
TV spots for its FANTOM/(R)/ THUNDER/(R)/ vacuum. In March 1996, the Company
commenced airing in Canada the TV infomercial and short-form TV spots for its
FANTOM/(R)/ FURY/(R)/ vacuum. This followed the easing of regulatory
restrictions on the airing of full-motion, long-form commercials in Canada.
Similarly, the launch of the FANTOM/(R)/ LIGHTNING/(R) /vacuum in the Fall of
1997 was supported by a 30 minute TV infomercial which commenced airing in the
U.S. in January 1998 and in Canada in February 1998, and by short-form TV spots
which commenced airing in the U.S. in February 1998 and in Canada in March 1998.
Finally, the introduction of the FANTOM/(R)/ CYCLONE XT/(R)/ model was supported
by national television advertising in both the U.S. and Canada, including a 30
minute TV infomercial which began airing in March 1999 and a 60 second TV spot
that first appeared in April 1999.
Sales of dual-cyclonic products (including spare parts and accessories)
through all channels of distribution amounted to $242.0 million in the Company's
fiscal year ended June 30, 1999, compared with $176.0 million in fiscal 1998 and
$147.7 million in fiscal 1997, with over 90% of such sales being to customers in
the United States in all three years. Direct-response television sales in
fiscal 1999 were $12.2 million compared to $16.4 million in fiscal 1998 and
$23.0 million in fiscal 1997. See "Management's Discussion and Analysis".
Raw Materials and Suppliers
The Company currently conducts product assembly operations at its Welland,
Ontario facility and at a facility in West Columbia, South Carolina which
commenced operations in June 1998. The Company relies on several different
vendors to satisfy its plastic injection moulding needs. With the exception of
motors, the raw materials and components used by the Company in its
manufacturing operations are readily available from a number of Canadian, United
States and offshore suppliers. The Company is largely dependent on two
suppliers for its main suction motors. The Company does not have any formal
agreement with either of such suppliers regarding the Company's purchase of
motors. The Company believes it has an excellent relationship with both of such
suppliers and has not experienced any significant quality or supply problems
during its relationships with them. Nevertheless, the Company's inability to
acquire the type and number of motors needed to satisfy demand for its products
could have a material adverse effect on the Company's financial condition and
results of operations.
Dual-Cyclonic Technology
The Company's upright and canister vacuum cleaners are based on patented
dual-cyclonic technology which the Company licenses from Prototypes Limited and
Notetry Limited (collectively, the "Licensor") and is protected by several
patents in the United States and Canada, including (without limitation) United
States Patent Nos.: 4,593,429; 4,643,748; 4,826,515; 4,853,008; 4,853,011;
5,078,761; 5,160,356; 5,558,697; 5,755,007; 5,937,477; and D382,679; and
Canadian Patent Nos.: 1,182,613; 1,238,869; 1,241,158; 1,241,809; 1,321,960; and
2,056,161. The dual-cyclonic technology involves two cyclones, one inside the
other, through which air whirls in sequence to separate dirt from
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the airstream instead of forcing it through a traditional filter bag. Larger
dirt particles are separated from the airstream by being hurled to the edge of
the outer cyclone and smaller dirt particles are separated from the airstream by
being hurled to the edge of the inner cyclone.
The Company has entered into a series of technology transfer agreements
with the Licensor pursuant to which the Company has the exclusive right (except
for the Amway Corporation ("Amway") license discussed below) to sell upright,
canister and back-pack vacuum-cleaning devices utilizing the dual-cyclonic
technology in the United States and Canada. The Company also has the non-
exclusive right to manufacture upright, canister and back-pack vacuum-cleaning
devices utilizing the dual-cyclonic technology in the United States, Canada and
other countries, not including Japan. The Company agreed in 1998 to the
termination of its right to manufacture and sell upright dry-powder carpet
shampooers utilizing the dual-cyclonic technology, but continues to have the
right to sell any remaining inventory of such product.
The Company's right to continue using the dual-cyclonic technology is
subject to the continued performance of its obligations under the various
technology transfer agreements, which include an on-going obligation to pay
royalties based upon a fixed percentage of sales of products utilizing the dual-
cyclonic technology. The Company must pay a minimum annual royalty in order to
preserve the exclusive nature of its rights to use the dual-cyclonic technology.
Other than the Company's obligation to make royalty payments and submit periodic
reports to the Licensor substantiating the basis for such royalty payments, the
Company has no other material on-going obligations under the technology transfer
agreements. In the absence of the Company's bankruptcy or a default by the
Company in the performance of its obligations under the technology transfer
agreements, the licensing arrangements may not be terminated by the Licensor and
continue in effect until the last of the patents covered by the agreements
expires. The Company's obligations under the technology transfer agreements
expire upon the expiration of the various agreements.
Many of the patents which the Company licenses have been in existence for
over ten years, during which time the Licensor and the Company have diligently
protected their rights in and to the dual-cyclonic technology. As part of a
comprehensive settlement with Amway in 1991 arising out of various legal
proceedings relating to the dual-cyclonic technology, Amway was granted the
perpetual right to manufacture and sell upright vacuum cleaners utilizing the
dual-cyclonic technology in the United States and Canada for household use only.
Amway has an on-going obligation to pay royalties on sales of dual-cyclonic
products based upon a fixed percentage of Amway's regularly listed selling price
to its distributors. Amway may market and sell dual-cyclonic products only
through Amway's private-party distributors and direct-mail catalogues, but by no
other means. Due to the significant limitations imposed on Amway's ability to
market and sell products utilizing the dual-cyclonic technology, the Company
does not believe that Amway's right to use the dual-cyclonic technology will
have a material adverse effect on the Company's financial condition and results
of operations. The Company believes that, to date, Amway's sales of dual-
cyclonic upright vacuum cleaners in each of the United States and Canada have
not constituted a significant percentage of the total upright vacuum cleaners
sold in either such country.
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The loss of the Company's right to use and exploit the dual-cyclonic
technology for vacuum cleaning devices could have a material adverse effect on
the Company's financial condition and results of operations.
Because of market recognition achieved by the dual-cyclonic technology,
some of the Company's competitors have introduced new products which compete
with the Company's products and utilize a form of cyclonic action. As a result
of this competition, the Company has recently adopted a strategy of reducing
prices on some of its products.
The patents which the Company licenses for use with its dual-cyclonic
products have been issued to the Licensor over a number of years. The first to
expire of the basic patents in the United States for the dual-cyclonic
technology does not expire until June 10, 2003, assuming that all necessary
renewal fees are paid and such patent is not invalidated by court action prior
to such time. As the patents expire, the ability of competitors to develop
products which are more functionally similar to the Company's dual-cyclonic
products will be enhanced. The Company is uncertain what effect the expiry of
the licensed patents will have on its future sales and net income.
Employees
The Company had approximately 442 employees as of June 30, 1999. Of these
employees, 76%, 14%, 9% and 1% were engaged in production, marketing/sales,
administration and engineering, respectively. As of June 30, 1999,
approximately 60% of the employees in the Company's Welland, Ontario
manufacturing facility were unionized and were members of The United Steel
Workers of America (the "Union"). The Company has an agreement with the Union
which expires March 31, 2003. The Company's relationship with the Union has
been satisfactory and uneventful, except for a week long strike in December
1993. The strike occurred after the Union had rejected the Company's first
contract offer. Any significant labour disruption could have a material adverse
effect on the Company's ability to manufacture products and accordingly could
have a material adverse effect on its financial position and resources and a
long-term material adverse effect on its sales.
Customer Concentration
Over the last few years, a small number of retailers have accounted for a
significant portion of the Company's total sales. In fiscal 1999, five
customers accounted for 50.7% of the Company's revenue. In fiscal 1998, the
same five customers accounted for 60% of the Company's revenue. One specific
customer accounted for 23% and 25% of sales in fiscal 1999 and fiscal 1998,
respectively.
The Company is continuing to expand its retail distribution of the
FANTOM/(R)/ vacuum product line in the United States and Canada with the
assistance of direct-response television commercials. While this expansion is
intended to increase the number of retailers the Company sells to, it may not
reduce the Company's dependence on a small number of retailers for a significant
portion of its sales.
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Sales Data
<TABLE>
<CAPTION>
Fiscal Year Ended June 30
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1999 1998 1997
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(in dollars)
<S> <C> <C> <C>
Total sales 242,045,457 177,585,454 150,213,517
Sales by method of distribution
Via direct-response television and internet 12,249,642 16,441,591 23,007,342
To retailers and distributors 229,795,815 161,143,863 127,206,175
Sales by territory
Canada Total 22,830,933 12,178,219 4,356,025
Dual-cyclonic and related products 22,707,089 10,550,894 1,817,046
All other 123,844 1,627,325 2,538,979
United States Total 219,214,524 165,407,235 145,857,492
Dual-cyclonic and related products 219,214,524 165,407,235 145,857,492
Sales of dual-cyclonic and related products
Total 241,921,613 175,958,129 147,674,538
Fantom/(R)/ vacuums 241,489,013 175,681,451 146,664,274
Via direct-response television and internet 12,249,642 16,441,591 23,007,342
To retailers and distributors 229,239,371 159,239,860 123,656,932
Capture/(R)/ carpet shampooer and related products 432,600 276,678 1,010,264
</TABLE>
Sales and Marketing
The Company's main products are its FANTOM/(R)/ vacuums which the Company
sells in two ways: (a) to end-users through direct-response television and its
Internet website; and (b) to various types of retailers, including mass
merchants, catalogue and catalogue-showroom retailers, warehouse clubs,
department stores, television shopping networks and independent vacuum dealers.
The independent vacuum dealers also serve as product repair centres. The
Company uses a combination of its own sales personnel and manufacturers'
representatives to call on accounts. It also has a small group of product
trainers to instruct in-store sales personnel on the features and benefits of
its products. In addition, the Company maintains a special toll-free call
centre in its Welland, Ontario facility to handle inquiries that FANTOM/(R)/
owners and potential purchasers have about its products. The Company has been
focusing on increasing distribution and sell-through of its FANTOM/(R)/ vacuums
in retail outlets, and has been relying on the consumer awareness generated by
its direct-response television advertising, exposure on television shopping
networks, and trade promotions, to drive retail sales in these accounts.
The Company's FANTOM/(R)/ vacuums are currently listed in the United States
by prominent retailers including Ames Department Stores, Inc., Best Buy Co.
Inc., B. J. Wholesale Club, Inc., Consolidated Stores Corp., Costco Wholesale
Inc., Damark International Inc., Fingerhut Companies Inc., Fred Meyer, Inc.,
Home Shopping Network
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Inc., JC Penney Company, Inc., Kmart Corporation, Kohl's Department Stores,
Lowe's Companies, Inc., Meijer, Inc., Montgomery Ward Co. Inc., Sears, Roebuck
and Co., Service Merchandise Company, Inc., Shopko Stores Inc., Spiegel, Inc.
and Target Stores. The Company's products are also being tested in several
hundred outlets of Wal-Mart Stores, Inc. They are also sold by several hundred
independent vacuum dealers. In Canada, the FANTOM/(R)/ vacuums are listed by The
Bay, Canadian Tire Corporation, Limited, Costco Canada Inc., Costco Wholesale
Corporation, Future Shop Ltd., Home Hardware Stores Ltd., The Shopping Channel,
Wal-Mart Canada, Inc. and Zellers Inc.
New Product Development
The Company conducts on-going new product development activities through an
engineering team which currently has a complement of seven personnel. Capital
expenditures for new products were $5.1 million in fiscal 1999, excluding
spending on research and development, $6.5 million in fiscal 1998 and $2.1
million in fiscal 1997.
Research and Development
The Company has entered into arrangements with Omachron covering the
acquisition and development of a number of technologies for various household
appliances and other consumer and commercial products. The principal scientists
of Omachron have been working together for almost two decades on a wide range of
civilian and non-civilian projects, many of which have direct application to
consumer products. Pursuant to these arrangements, the Company is combining its
expertise in product design, manufacturing and marketing with Omachron's broad
scientific knowledge for the purpose of developing innovative new products with
ground-breaking technologies. Over fifty utility patent applications have been
filed for technologies the Company is either acquiring or exclusively licensing
through its association with Omachron.
Pursuant to the agreements entered into during the last two years, the
Company will have rights to certain proprietary technology on a worldwide basis
and will be evaluating opportunities for marketing products internationally.
The Company believes the technologies it is developing and acquiring are
significant and that this could lead to substantial business growth. Due to the
uncertainties associated with the development of the various technologies and
the marketing of products that would incorporate them, the Company is unable to
estimate with any reasonable degree of accuracy the impact on results of
operations.
Research and development spending in fiscal 1999 totaled $5.7 million, net
of research and development tax credits of $0.6 million. Of the total spending,
$3.1 million was capitalized and was mainly for various technologies which were
acquired, industrial designs for a number of new products under development and
patent applications for new technologies and products. Additions to deferred
costs totaled $1.2 million, net of amortization, and consisted mainly of
development costs for the FANTOM/(R)/ CYCLONE XT/(R)/ vacuum, as well as costs
for other new products under development. Amounts expensed were $1.4 million,
net of $0.6 million of research and development tax credits, and were mainly for
engineering and product development staff.
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The Company intends to spend significant amounts on research and
development over at least the next three years, with expenditures expected to be
not less than $5 million per year. In addition, depending on the speed with
which new products are developed, it could spend as much as $15 million to $20
million in any given year for tooling, manufacturing equipment and pre-launch
marketing expenditures. The Company has been financing the capital expenditures
and working capital requirements for these projects from its line of credit with
a Canadian chartered bank and from its cash on hand. The Company believes that
its cash flow from operations together with the current borrowing limit of $59
million under its line of credit will be sufficient to provide for its product
development programs.
Counter-Top Water Purifier
In the year 2000, the Company plans to launch a counter-top,
microbiological water-treatment appliance, the first of a line of water-
treatment products planned for the Company. The kitchen counter-top unit is
designed to kill micro-organisms like Giardia, E. coli and Cryptosporidium, all
of which can seriously affect people who have weakened immune systems; reduce
heavy metals such as mercury and lead as well as oils, fats, grease, pesticides,
herbicides, chlorine and other trace impurities; eliminate a wide range of
volatile organic compounds like benzene, heptachlor, styrene, trihalomethanes
and 2,4-D; provide good-tasting water, leaving in desirable levels of fluoride,
calcium, magnesium and potassium; incorporate a computer-controlled monitoring
system to ensure that the dispensed water is disinfected; and treat the carbon-
block filter used in the system to prevent bacterial growth.
The purification process utilizes activated oxygen, known as ozone, to kill
micro-organisms. This same process is used in more than 3,000 state-of-the-art
municipal water-treatment systems around the world, including over 200 in the
United States. The Company's technology enables strong concentrations of ozone
to be produced in small, low-cost embodiments with small energy inputs. It also
enables the ozonation process to be monitored actively, to ensure effective
performance. The Company's water-treatment product produces no harmful
emissions.
Third party testing of prototype units has confirmed the efficacy of the
product, including its ability to eliminate 99.99999% of micro-organisms.
New Floor Care Product Line
In the year 2000, the Company plans to introduce a new line of floor care
products, designed to establish a new market segment. Some elements of the
technology to be incorporated into the product line are still in the research
and development phase, and full working prototypes of the product line have not
yet been constructed. The Company is targeting to have working prototypes built
and tested by the end of the first quarter of calendar 2000.
-12-
<PAGE>
Other New Product Initiatives
Research and development activities are continuing in an effort to develop
additional new consumer products. The Company hopes to release information on
one initiative in the first quarter of calendar 2000, assuming the successful
construction and testing of prototypes.
Industry Overview
The electric floor-care industry is highly competitive and has several
product segments including canister, upright and stick vacuums, hand-held
vacuums, extractors and wet/dry vacuums. Products are sold in a variety of
retail outlets, on a door-to-door basis and through television shopping networks
and various direct-response formats.
Industry shipments of full-sized vacuums (canister, upright and stick
vacuums) within the United States in calendar 1998, as estimated by the Vacuum
Cleaner Manufacturers Association, were 16.3 million units compared with 15.7
million units for 1997 and 16.2 million units for 1996. Shipments of upright
vacuums in 1998 were 11.3 million units compared with 10.8 million units for
1997 and 11.2 million units for 1996. Shipments of canister vacuums in 1998
were 1.7 million units compared with 1.6 million units for 1997 and 1.8 million
units for 1996. The Canadian market for full-sized vacuums is estimated by the
Vacuum Cleaner Manufacturers Association to be approximately 6% of the size of
the U.S. market.
The Company is aware of several major competitors in the United States and
Canada including Bissell Inc.; Eureka Co.; Hoover Company; Matsushita Electric
Works, Ltd.; and Royal Appliance Mfg. Co. Some of these competitors have
introduced new products which compete with the Company's FANTOM/(R)/ vacuums; in
some instances the competitive products utilize a form of cyclonic action.
These competitors, or others, are expected to introduce further new products
which compete with those of the Company. As a result of this competition, the
Company has recently adopted a strategy of reducing prices on some of its
products.
Business Strategies
During the next 12 months the Company intends to focus on:
1) further expanding distribution for its dual-cyclonic vacuum products.
In this regard, the Company's products are currently being tested in
several hundred outlets of Wal-Mart Stores, Inc. in the United States;
2) continuing to build consumer awareness and retail demand for its dual-
cyclonic vacuums, mainly by employing direct-response television
advertising in long form and short form formats, and by having the
products featured on television shopping networks and in retailer
flyers;
3) introducing a new line of floor care products;
-13-
<PAGE>
4) introducing the Company's new microbiological water-treatment
appliance; and
5) continuing the research and development of other new consumer products
and preparing for the introduction of at least one of these products.
In the longer term, the Company is seeking to develop international sales
opportunities for its new products by establishing licensing, joint venture and
distributorship arrangements.
Property
The Company's main manufacturing operations and administrative offices are
located at a facility which it owns in Welland, Ontario, Canada. The facility
is situated on approximately 53 acres of land, which is subject to a mortgage in
favour of a Canadian chartered bank. The Welland, Ontario facility was
constructed in 1973 and has approximately 79,000 square feet of factory space
and 12,000 square feet of office space. In June 1998, the Company commenced
manufacturing operations at a leased facility in West Columbia, South Carolina
which has approximately 35,000 square feet of factory space. The lease of the
West Columbia facility expires in September 2000, but may be extended at the
Company's option for five years.
All of the Company's motorized products are currently made at its Welland,
Ontario or West Columbia, South Carolina facilities. The Company believes these
two current production facilities as presently configured are suitable for an
annual sales volume in excess of $325 million. Based upon annual capacity of
$325 million and the Company's total sales of $242 million for the fiscal year
ended June 30, 1999, the Company's production facilities were 74% utilized
during such period.
The Company leases a small sales office in Toronto, Ontario which houses
marketing and sales personnel. The present lease on the Toronto sales office
expires in 2004.
The Company also occupies space in Hampton, Ontario which it utilizes for
its research and development activities in conjunction with Omachron.
Risk Factors and Cautionary Statements
This Annual Information Form contains statements which are forward-looking
statements under Section 21E of the United States Securities Exchange Act of
1934 as Amended. In addition, the Company and persons acting on its behalf from
time to time make statements which contain such forward-looking statements. The
Company cautions that all such forward-looking statements are qualified by
important factors that could cause actual results to differ materially from
those in the forward-looking statements, including, among others, the following:
-14-
<PAGE>
Dependence upon Suppliers
The Company's ability to manufacture products to meet customer demand is
dependent upon the timely availability from suppliers of components and raw
materials. In particular, the Company relies on only two suppliers of the main
suction motors used in the manufacturing of its products. While the Company
believes it has excellent relationships with both suppliers and has not
experienced any significant quality or supply problems during such
relationships, the Company does not have any formal agreement with either
supplier regarding the Company's purchase of motors. The Company's inability to
acquire the type and amount of motors needed to satisfy demand for its products
could have a material adverse effect on the Company's ability to manufacture
products and accordingly have a material adverse effect on its financial
condition and results of operations.
Dependence on Patents
The Company's current FANTOM/(R)/ products are based on patented dual-
cyclonic technology which the Company licenses from a third party and which is
protected by several registered patents in the United States and Canada. The
Company's right to continue using the dual-cyclonic technology is subject to the
continued performance by the Company of its obligations under the various
agreements with the third party licensor. The loss of the Company's right to
use and exploit the dual-cyclonic technology could have a material adverse
effect on the Company's financial condition and results of operations.
Competition
The electric floor-care industry is highly competitive and the Company's
competitors have introduced a number of new products, some of which are based on
new technology (in some instances incorporating a form of cyclonic action) that
could render the products marketed by the Company less attractive. The
Company's future success will depend in large part upon its ability to assess
the future market potential for products in a rapidly changing environment in
order that its products continue to be in demand by consumers.
Customer Concentration
Over the last few years, a small number of retailers have accounted for a
significant portion of the Company's total sales. While the Company continues
to have good relationships with such customers, there is no guarantee that these
relationships will last. In addition, a significant number of retailers in the
North American retail industry have experienced financial difficulties during
the last few years. In light of these difficulties and the Company's
concentration of customers, the Company would be at risk if any major customer
of the Company at any time became unable to pay its accounts receivable to the
Company, to the extent such accounts receivable were not covered by insurance.
Any such failure to pay could have both an immediate effect on the Company's
financial position and resources and a long-term effect on its sales.
-15-
<PAGE>
New Technologies and Products
The development of new products, in particular products based upon new
technologies which have not previously been incorporated into commercial
products, is time-consuming and risky. Taking an invention or innovative
concept from the theoretical stage through to a working model and then to a
marketable product capable of being manufactured at a commercially viable price
is often not possible and can regularly involve unanticipated costs and time
delays. This process can be further complicated by the need to obtain any
required regulatory approvals.
The Company's new product program is exposed to the further risk that the
development of some of the concepts underlying certain products are dependent on
the skills of a small number of scientists who are associated with an
independent entity retained by the Company. The unavailability of one or more
of such scientists could cause serious delays or even result in the Company
abandoning certain proposed products.
Impact of Exchange Rate Fluctuations
The Company, which publishes its financial statements in Canadian dollars,
is a U.S. dollar generator, and therefore the level of the Canadian dollar
relative to the U.S. dollar has a direct effect on its profitability. In order
to protect its earnings against adverse movement in the exchange rate between
Canadian and U.S. dollars, the Company has since November 1995 entered into
foreign exchange contracts to reduce the exposure resulting from a strengthening
in the Canadian dollar relative to the U.S. dollar. Based on the Company's
fiscal 1999 results, a rise in value of the Canadian dollar of one cent, without
the protection of hedging, would materially adversely affect net income by
approximately $0.5 million.
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following tables provide a summary of certain financial information for
fiscal years 1995 through 1999. The selected financial data set forth below as
of June 30, 1999, 1998, 1997, 1996 and 1995 have been derived from the Company's
audited consolidated financial statements which are prepared in accordance with
generally accepted accounting principles in Canada ("Canadian GAAP"), which are
different in some respects from generally accepted accounting principles in the
United States ("U.S. GAAP"). The information presented below should be read in
conjunction with the "Consolidated Financial Statements" and related Notes
thereto and "Management's Discussion and Analysis" incorporated by reference in
this Annual Information Form.
-16-
<PAGE>
Consolidated Statement of Operations Data (Canadian GAAP)
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
-------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Sales and Other Income $242,045,457 $177,585,454 $150,213,517 $98,428,527 $59,421,732
Cost of Goods Sold 155,492,659 113,661,329 96,246,860 66,586,407 37,604,534
------------ ------------ ------------ ----------- -----------
86,552,798 63,924,125 53,966,657 31,842,120 21,817,198
Selling, General and
Administrative Expenses 63,116,152 47,675,507 41,999,459 25,409,225 18,269,770
Research and Development 1,359,072 -- -- -- --
Finance Charges (75,826) 48,527 464,595 718,045 523,632
------------ ------------ ------------ ----------- -----------
64,399,398 47,724,034 42,464,054 26,127,270 18,793,402
Income Before Taxes 22,153,400 16,200,091 11,502,603 5,714,850 3,023,796
Income Taxes 7,971,000 5,882,564 4,142,000 504,200 --
Net Income $ 14,182,400 $ 10,317,527 $ 7,360,603 $ 5,210,650 $ 3,023,796
Net Income Per Share $ 1.58 $ 1.18 $ 0.88 $ 0.72 $ 0.48
Net Income Per Share -
Fully Diluted $ 1.51 $ 1.11 $ 0.86 $ 0.69 $ 0.43
</TABLE>
Reconciled Consolidated Statement of Operations Data (U.S. GAAP) /(1)/
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
-------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Sales and Other Income $251,753,969 $174,067,454 $150,213,517 $98,428,527 $59,421,732
Cost of Goods Sold 155,345,659 112,544,166 95,563,860 65,426,946 36,683,256
------------ ------------ ------------ ----------- -----------
96,408,310 61,523,288 54,649,657 33,001,581 22,738,476
Selling, General and
Administrative Expenses 63,329,737 47,891,407 42,088,959 25,579,225 18,269,770
Research and Development 2,567,012 1,992,000 770,000 565,000 400,000
Finance Charges (75,826) 48,527 464,595 718,045 523,632
------------ ------------ ------------ ----------- -----------
65,820,923 49,931,934 43,323,554 26,862,270 19,193,402
Income Before Taxes 30,587,387 11,591,354 11,326,103 6,139,311 3,545,074
Income Taxes 11,171,000 4,377,064 4,131,800 547,200 --
Net Income $ 19,416,387 $ 7,214,290 $ 7,194,303 $ 5,592,111 $ 3,545,074
Net Income Per Share $ 2.16 $ 0.82 $ 0.86 $ 0.77 $ 0.56
Net Income Per Share -
Fully Diluted $ 2.12 $ 0.81 $ 0.85 $ 0.75 $ 0.52
</TABLE>
Note:
- -----
/(1)/ The financial information is stated here giving the effect of
reconciliation to U.S. GAAP from Canadian GAAP, which are the accounting
principles under which the Company's primary financial statements are
presented.
-17-
<PAGE>
Consolidated Balance Sheet Data (Canadian GAAP)
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
--------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total Assets $98,796,105 $83,465,157 $60,760,190 $42,666,839 $24,459,624
Long-term Debt -- $ 15,098 $ 238,273 $ 378,710 $ 27,337
Shareholders' Equity $59,066,197 $45,013,222 $34,420,695 $19,959,472 $ 8,028,092
</TABLE>
Reconciled Consolidated Balance Sheet Data (U.S. GAAP) /(1)/
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
---------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total Assets $97,983,553 $85,113,471 $61,700,744 $43,874,723 $24,319,445
Long-term Debt -- $ 15,098 $ 238,273 $ 378,710 $ 27,337
Shareholders' Equity $61,362,016 $42,583,569 $34,908,849 $20,493,956 $ 8,011,111
</TABLE>
Note:
- -----
/(1)/ The financial information is stated here giving the effect of a
reconciliation to U.S. GAAP from Canadian GAAP, which are the accounting
principles under which the Company's primary financial statements are
presented.
Quarterly Financial Data
<TABLE>
<CAPTION>
Fiscal Year Ended June 30, 1999
----------------------------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Sales and Other Income 55,114,160 60,005,350 65,628,821 61,297,126
Basic Earnings Per Share:
Net Income $ 3,273,056 $ 3,595,123 $ 3,985,901 $ 3,328,320
Shares 8,972,809 9,003,108 9,008,802 9,017,751
Basic Earnings Per Share $ 0.36 $ 0.40 $ 0.44 $ 0.37
Fully Diluted Earnings Per Share:
Net Income - Adjusted $ 3,312,185 $ 3,642,367 $ 4,031,449 $ 3,369,824
Shares - Fully Diluted 9,423,760 9,538,108 9,535,608 9,535,608
Fully Diluted Earnings Per Share $ 0.35 $ 0.38 $ 0.42 $ 0.35
</TABLE>
-18-
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Ended June 30, 1998
----------------------------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Sales and Other Income 30,019,582 42,938,732 52,124,311 52,502,829
Basic Earnings Per Share:
Net Income $ 1,737,660 $ 2,586,148 $ 2,873,508 $ 3,120,211
Shares 8,393,441 8,899,137 8,927,275 8,941,267
Basic Earnings Per Share $ 0.21 $ 0.29 $ 0.32 $ 0.36
Fully Diluted Earnings Per Share:
Net Income - Adjusted $ 1,762,077 $ 2,610,469 $ 2,897,304 $ 3,143,258
Shares - Fully Diluted 8,823,441 9,340,608 9,340,608 9,340,608
Fully Diluted Earnings Per Share $ 0.20 $ 0.28 $ 0.31 $ 0.34
</TABLE>
The Company commenced paying quarterly dividends in the first quarter of
fiscal 1999 at the rate of $0.03 per share per quarter, and increased the amount
of such dividends to $0.05 per share per quarter in the first quarter of fiscal
2000. Although the Company currently intends to pay quarterly dividends to its
shareholders, the declaration and payment of dividends are at the sole
discretion of the Board of Directors of the Company and depend upon the
Company's results of operations, financial condition, cash requirements and
other factors deemed relevant by the Board of Directors. The ability of the
Company to pay dividends is also subject to the Company fulfilling certain
conditions with respect to its line of credit with a Canadian chartered bank.
As a result, there can be no assurance that dividends will be declared, or as to
the amount or timing of any dividends that are declared.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Reference is made to the section entitled "Management's Discussion and
Analysis" found on pages 16 to 21 of the Company's 1999 Annual Report, which
section is incorporated herein by reference.
MARKET FOR SECURITIES
The Company's common shares (the "Common Shares") are listed and posted for
trading on The Toronto Stock Exchange (the "TSE") and the Nasdaq Stock Market
("Nasdaq"). The Common Shares commenced trading on the TSE on May 30, 1986, on
the Nasdaq Small Cap Market on November 20, 1995 and on the Nasdaq National
Market on March 18, 1996. The high and low sales prices and volume of trading
for the Common Shares on the TSE during each quarter of the 1999 and 1998 fiscal
years were as follows:
-19-
<PAGE>
<TABLE>
<CAPTION>
High Low
---- ---
Fiscal year ended
June 30, 1999
- -------------------------------------
<S> <C> <C>
Fourth Quarter $20.20 $14.80
Third Quarter $19.25 $13.90
Second Quarter $16.25 $11.00
First Quarter $17.00 $10.75
Fiscal year ended
June 30, 1998
- -------------------------------------
Fourth Quarter $17.00 $13.30
Third Quarter $14.50 $10.50
Second Quarter $15.25 $11.80
First Quarter $14.85 $13.50
</TABLE>
The volume of trading of the Common Shares on Nasdaq is, on average, a
small percentage of the value of trading on the TSE.
DIRECTORS AND OFFICERS
<TABLE>
<CAPTION>
Executive
Name and Municipality Officer Director
of Residence Principal Occupation Since/(1)(2)/ Since/(1)(2)/
- -------------------------------- ------------------------------------------------- --------------------- -----------------
<S> <C> <C> <C>
Arthur H. Crockett /(3)/ Corporate Director -- 1984
Toronto, Ontario
Maxwell Goldhar /(3)/ Vice Chairman, OSF Inc. (manufacturer of store -- 1989
Toronto, Ontario fixtures)
Kenneth Kelman Chairman of the Board of Directors until 1999 -- 1984
Toronto, Ontario
Rikki Meggeson Vice President, First Canada Financial 1999 1989
Toronto, Ontario Corporation Limited (private investment
company)
Chair of the Board of Directors
Allan D. Millman President and Chief Executive Officer 1984 1984
Toronto, Ontario
Walter J. Palmer Partner, Fasken Campbell Godfrey (barristers 1996 1999
Toronto, Ontario and solicitors)
Secretary
Alan Steinert, Jr. Consultant -- 1990
Cambridge, Massachusetts
Stephen J. Doorey Vice President, Finance and Chief Financial 1997 --
Mississauga, Ontario Officer
</TABLE>
-20-
<PAGE>
<TABLE>
<S> <C> <C> <C>
Alan C. Hussey Senior Vice President and General Manager 1995 --
Welland, Ontario
Simon P. Ouellet Vice President, 1998 --
Welland, Ontario Human Resources
Joseph A. Shillington Vice President, 1996 --
Welland, Ontario Information Technology
Paul F. Smith Vice President, Sales 1997 --
Oakville, Ontario
Norman V. Soler Vice President, Engineering 1984 --
Courtice, Ontario
Nick E. Varanakis Vice President, Sales 1989 --
Sandy, Utah, United States
Linda L. Watson Vice President, 1995 --
Mississauga, Ontario Marketing
Norman Wotherspoon Treasurer 1997 --
St. Catharines, Ontario
</TABLE>
Notes:
- ------
/(1)/ All directors are elected and serve until the next annual meeting of
shareholders or until their successors are elected or appointed. All
executive officers of the Company serve at the pleasure of the Company's
Board of Directors.
/(2)/ Each director/officer has served as a director/officer of the Company and
its predecessor continuously since the year set out opposite his/her name.
/(3)/ Member of the Audit Committee.
All of the directors have held the principal occupations identified above
(or another position with the same or associated firms or organizations) for the
past five years except Mr. Steinert. From July 1996 until 1997, Mr. Steinert was
a Special Assistant to the Secretary of the Executive Offices of Health and
Human Services of the Commonwealth of Massachusetts. From October 1995 to July
1996, Mr. Steinert was the Chief of Staff of Health and Human Services of the
Commonwealth of Massachusetts. Prior to October 1995, Mr. Steinert was the
Undersecretary of Environmental Affairs of the Commonwealth of Massachusetts.
All of the officers, who are not also directors, have held their positions
or other executive positions with the Company for the past five years with the
exception of Stephen Doorey, Alan Hussey, Simon Ouellet, Paul Smith and Linda
Watson. Prior to July 1996, Mr. Doorey was Vice President, Finance at Plasticap
Inc. Prior to February 1995, Mr. Hussey was Marketing Manager of Frigidaire
Products of Canada Limited. From July 1996 to April 1997, Mr. Smith was Vice
President, Sales of Regent-Sheffield (Canada), Ltd. and prior to June 1996 he
was National Sales Manager of Wiltshire Canada Inc. Prior to May 1995, Ms.
Watson was Director of Marketing Services and New Opportunities for Fisher Price
Inc.
-21-
<PAGE>
As at September 10, 1999, all directors and senior officers of the Company
as a group beneficially owned, directly or indirectly, or exercised control or
direction over, approximately 10.86% of the Common Shares.
Board of Directors
The mandate of the Board of Directors (the "Board") is to oversee the
conduct of the Company's business. The Board has approved guidelines on
corporate governance issues which set out the manner in which it will discharge
its responsibilities in this regard, in some cases with the assistance of
committees of the Board whose duties are described below.
The Board is responsible for the overall strategic direction of the
Company, and approves major new product development programs and debt and equity
financing.
The objective of the Board is to maximize shareholder value in a manner
which is consistent with good corporate citizenship, including fair treatment of
the Company's employees, customers and suppliers. The Board expects management
to perform in a manner consistent with achieving these objectives.
The majority of the Company's directors are unrelated to the Company, in
that they are independent of management and are free from any interest, business
or other relationship (other than any arising from shareholding) which could, or
could reasonably be perceived to, materially interfere with their ability to act
with a view to the best interests of the Company.
Board Committees
Audit Committee
The mandate of the Audit Committee is to review the Company's audited
annual financial statements and to report on such statements to the Board before
the statements are approved by the Board. To fulfil this responsibility, the
Committee meets with the Company's auditors to discuss the financial statements
and any concerns raised by the auditors with respect to financial presentation
or disclosure, and with respect to the Company's internal financial controls.
The Audit Committee also recommends to the Board the auditors to be appointed as
the Company's auditors at the annual meeting.
Compensation Committee
The Compensation Committee reviews the Company's overall compensation
philosophy, and corporate succession and development plans at the executive
officer level. This Committee has been mandated to recommend to the Board the
corporate objectives which the chief executive officer is responsible for
meeting, to review the annual performance of the chief executive officer in
light of these objectives, and to make recommendations to the Board with respect
to the chief executive officer's remuneration. The Compensation Committee also
oversees the operation of the Company's pension plans.
-22-
<PAGE>
Corporate Governance Committee
The Corporate Governance Committee is responsible for developing the
Company's approach to governance issues, including recommending to the Board
limits to management's responsibilities.
The Corporate Governance Committee's mandate also includes making
recommendations with respect to the size and composition of the Board,
recommending nominees to the Board and the amount and form of directors'
remuneration, assisting in selecting a chair of the Board, and developing and
implementing an orientation and education program for new recruits to the Board.
In addition, the Corporate Governance Committee has been mandated to
develop a process for assessing the effectiveness of the Board as a whole and of
committees of the Board, and for assessing the contribution of individual
directors.
If an individual director wishes to engage an outside adviser at the
expense of the Company, in relation to a matter involving the Company, such
engagement must be approved by the Corporate Governance Committee.
ADDITIONAL INFORMATION
The Company will provide to any person, upon request to the Secretary of
the Company:
(a) when securities of the Company are in the course of a distribution
pursuant to a short form prospectus or a preliminary short form
prospectus which has been filed in respect of a distribution of its
securities,
(i) one copy of this Annual Information Form together with one copy
of any document or the pertinent pages of any document
incorporated by reference herein,
(ii) one copy of the consolidated financial statements of the Company
in respect of its fiscal year ended June 30, 1999 together with
the accompanying report of the auditors and one copy of any
interim financial statements subsequent to the consolidated
financial statements for the year ended June 30, 1999,
(iii) one copy of the information circular of the Company in respect
of the Annual and Special Meeting of Shareholders of the Company
held on October 21, 1999, and
(iv) one copy of any other documents that are incorporated by
reference into such preliminary short form prospectus or short
form prospectus and are not required to be provided under (i) to
(iii) above; or
-23-
<PAGE>
(b) at any other time, one copy of any document referred to in (i), (ii)
and (iii) of (a) above, provided the Company may require the payment
of a reasonable charge if the request is made by a person who is not a
security holder of the Company.
Additional information, including directors' and officers' remuneration and
indebtedness, principal holders of Common Shares, options to purchase Common
Shares and interests of insiders in material transactions, where applicable, is
contained in the Company's information circular for its Annual and Special
Meeting of Shareholders held on October 21, 1999. Additional financial
information is provided in the Company's consolidated financial statements for
the year ended June 30, 1999.
-24-
<PAGE>
Consolidated Financial Statements of
FANTOM TECHNOLOGIES INC.
<PAGE>
AUDITORS' REPORT
To the Board of Directors of
Fantom Technologies Inc.
We have audited the consolidated balance sheets of Fantom Technologies Inc. as
at June 30, 1999 and 1998 and the consolidated statements of income and retained
earnings and changes in financial position for each of the years in the three
year period ended June 30, 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 generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance 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.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at June 30, 1999 and
1998 and the results of its operations and the changes in its financial position
for each of the years in the three year period ended June 30, 1999 in accordance
with generally accepted accounting principles in Canada which, except as
described in note 16, conform in all material respects with accounting
principles generally accepted in the United States.
(Signed) KPMG LLP
Chartered Accountants
Hamilton, Canada
July 30, 1999
(Except as to Note 15 which is as of August 12, 1999)
<PAGE>
FANTOM TECHNOLOGIES INC.
Consolidated Balance Sheets
(in Canadian dollars)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------------
Assets
<S> <C> <C>
Current assets:
Cash and short term deposits $ 9,439,206 $ 4,609,798
Trade accounts receivable 32,226,182 35,521,922
Other receivables 3,089,162 1,249,889
Inventories (note 2) 19,835,717 18,365,622
Prepaid expenses 2,179,522 2,108,827
Deferred income taxes 954,000 259,000
------------------------------------------------------------------------------------
67,723,789 62,115,058
Deferred development costs, net of amortization 2,062,177 854,237
Property, plant and equipment, net (note 3) 29,010,139 20,495,862
- --------------------------------------------------------------------------------------
$98,796,105 $83,465,157
======================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Trade accounts payable $21,175,261 $25,517,364
Royalty payable 2,968,355 2,485,736
Co-op advertising accrual 1,864,956 1,983,464
Other payables and accruals 2,686,767 2,588,001
Income taxes payable 2,708,712 2,187,133
Currency hedging exchange gains 2,510,831 682,531
Current portion of capital lease obligations (note 5) 21,856 224,375
------------------------------------------------------------------------------------
33,936,738 35,668,604
Capital lease obligations, less current portions (note 5) - 15,098
Currency hedging exchange gains 3,482,790 -
Deferred income taxes 2,310,380 2,768,233
Shareholders' equity:
Share capital (note 6) 27,949,287 26,997,590
Retained earnings 31,116,910 18,015,632
------------------------------------------------------------------------------------
59,066,197 45,013,222
- --------------------------------------------------------------------------------------
$98,796,105 $83,465,157
======================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
FANTOM TECHNOLOGIES INC.
Consolidated Statements of Income and Retained Earnings
(in Canadian dollars)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
Year ended June 30
----------------------------------------
1999 1998 1997
<S> <C> <C> <C>
Sales $242,045,457 $177,585,454 $150,213,517
Cost of goods sold 155,492,659 113,661,329 96,246,860
- -----------------------------------------------------------------------------------
86,552,798 63,924,125 53,966,657
Expenses:
Selling, general and administrative 63,116,152 47,675,507 41,999,459
Research and development 1,359,072 - -
Finance charges (75,826) 48,527 464,595
---------------------------------------------------------------------------------
64,399,398 47,724,034 42,464,054
- -----------------------------------------------------------------------------------
Income before income taxes 22,153,400 16,200,091 11,502,603
Income taxes (note 8) 7,971,000 5,882,564 4,142,000
- -----------------------------------------------------------------------------------
Net income 14,182,400 10,317,527 7,360,603
Retained earnings at beginning of year 18,015,632 7,698,105 337,502
Dividends (note 6) (1,081,122) - -
- -----------------------------------------------------------------------------------
Retained earnings at end of year $ 31,116,910 $ 18,015,632 $ 7,698,105
===================================================================================
Net income per share (note 10):
Basic $1.58 $1.18 $0.88
Fully diluted $1.51 $1.11 $0.86
===================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
FANTOM TECHNOLOGIES INC.
Consolidated Statements of Changes in Financial Position
(in Canadian dollars)
<TABLE>
<CAPTION>
====================================================================================
Year ended June 30
---------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------------
Cash provided by (used for):
<S> <C> <C> <C>
Operations:
Net income $ 14,182,400 $10,317,527 $ 7,360,603
Items not requiring cash:
Depreciation 2,491,505 1,484,330 979,003
Loss on sale of property,
plant and equipment - - 52,153
Deferred tax provision (1,152,853) 1,083,033 1,466,800
Amortization of deferred development
costs 59,152 299,573 -
Change in non-cash operating
working capital (note 11) (3,962,980) (4,245,118) (4,458,564)
Increase in currency hedging exchange
gains 5,311,090 682,531 -
- -------------------------------------------------------------------------------------
16,928,314 9,621,876 5,399,995
Financing:
Proceeds from capital leases - - 160,334
Payments on capital leases (217,617) (258,119) (260,488)
Issuance of common shares and warrants 951,697 275,000 7,100,620
Deferred tax benefit related to issuance
of special warrants - - (163,800)
Dividends paid (1,081,122) - -
- -------------------------------------------------------------------------------------
(347,042) 16,881 6,836,666
Investments:
Additions to property, plant and
equipment (11,005,782) (9,305,007) (5,910,165)
Change in non-cash working capital
relating to investments (note 11) 521,010 731,702 -
Additions to deferred development costs (1,267,092) (1,153,810) -
Proceeds on disposal of property, plant
and equipment - - 11,750
------------------------------------------------------------------------------------
(11,751,864) (9,727,115) (5,898,415)
- -------------------------------------------------------------------------------------
Increase (decrease) in cash position 4,829,408 (88,358) 6,338,246
Cash position at beginning of year 4,609,798 4,698,156 (1,640,090)
- -------------------------------------------------------------------------------------
Cash position at end of year $ 9,439,206 $ 4,609,798 $ 4,698,156
=====================================================================================
</TABLE>
Cash position is defined as cash and short term deposits less loan payable.
See accompanying notes to consolidated financial statements.
<PAGE>
FANTOM TECHNOLOGIES INC.
Notes to Consolidated Financial Statements
(in Canadian dollars)
- -------------------------------------------------------------------------------
The consolidated financial statements of Fantom Technologies Inc. (the
"Company") have been prepared by management of the Company in accordance with
accounting principles generally accepted in Canada which, except as described
in note 16, conform in all material respects with accounting principles
generally accepted in the United States and rules and regulations prescribed
by the United States Securities and Exchange Commission.
The Company is incorporated under the Business Corporations Act (Ontario).
The principal business activities are the design, manufacture and sale of
vacuum cleaning devices. On May 1, 1997, Iona Appliances Inc. legally changed
its name to Fantom Technologies Inc.
1. Significant accounting policies:
These financial statements have been prepared on the basis of accounting
principles generally accepted in Canada. The most significant of the policies
followed by the Company are as follows:
(a) Basis of consolidation:
The consolidated financial statements include the accounts of the Company's
100% owned subsidiaries: Fantom Technologies Direct, Inc., Fantom
Technologies USA Holdings, Inc., Fantom Technologies USA, Inc. and Fantom
Technologies Intellectual Property, Inc.
(b) Inventories:
Inventories are stated at the lower of cost (first-in, first-out method) and
net realizable value.
(c) Property, plant and equipment:
Property, plant and equipment are stated at cost. Depreciation is computed
by the straight-line method over the estimated useful asset lives at the
following rates:
-------------------------------------------------------------------
Asset Rate
-------------------------------------------------------------------
Building 2.5%
Machinery and equipment 10.0%
Tools and dies 10.0% to 25.0%
Furniture and fixtures 10.0%
Computer equipment 20.0%
Patents 10.0%
License rights 20.0%
-------------------------------------------------------------------
Leasehold improvements are amortized over the term of the lease.
(d) Amortization of equipment under capital lease:
Amortization of equipment under capital lease is included in depreciation
expense. Such amortization is computed by the straight-line method using
rates of 10.0% to 20.0% per year.
<PAGE>
FANTOM TECHNOLOGIES INC.
Notes to Consolidated Financial Statements, page 2
(in Canadian dollars)
- -------------------------------------------------------------------------------
1. Significant accounting policies (continued):
(e) Research and development:
Expenditures for research are expensed as incurred. Expenditures for
development of new products to be sold are capitalized when management
determines that the product is technically and commercially feasible,
otherwise they are expensed as incurred. Deferred development expenses are
stated at cost and are amortized over a period of 2 to 5 years.
(f) Pension costs:
The assets of the defined benefit pension plans are reported at market
values. The pension expense for the year includes adjustments for plan
amendments and experience gains and losses which are being amortized on a
straight-line basis over the expected average remaining service life of
each plan's participants.
(g) Segmented information:
The Company currently manufactures and markets its products in one
operating segment, that being vacuum cleaning devices. Sales made to
customers located in the United States amounted to $219,213,000 (1998:
$165,391,000; 1997: $145,857,000). Property, plant and equipment, net of
accumulated depreciation, located in the United States amounted to
$1,554,000 (1998: $1,040,000; 1997: Nil).
Sales to two customers for the year ended June 30, 1999 amounted to
approximately 23% and 9% (1998: 25% and 10%; 1997: 29% and 9%) of total
Company sales.
At June 30, 1999 receivables outstanding from these sales were $7,898,000
(June 30, 1998: $9,977,000).
(h) Foreign currency translation:
The translation of foreign currency denominated balance sheet accounts is
performed using current exchange rates in effect at the balance sheet date
and for sales and expense accounts using average exchange rates during the
period. Foreign exchange gains for the year ended June 30, 1999 of
$1,693,000 (1998 losses: $194,000; 1997 losses: $553,000) resulting from
translation are included in the results of operations for the year.
(i) Revenue recognition:
Sales and related costs are recorded by the Company upon shipment of
products.
(j) Warranties:
The Company records a warranty accrual for estimated claims. The warranty
on the Fantom products is for two years. It is the Company's practice to
classify the entire warranty accrual as a current liability.
<PAGE>
FANTOM TECHNOLOGIES INC.
Notes to Consolidated Financial Statements, page 3
(in Canadian dollars)
- -------------------------------------------------------------------------------
1. Significant accounting policies (continued):
(k) Use of estimates:
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets, liabilities, revenue and expenses and
the disclosure of contingent assets and liabilities to prepare these
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
(l) Derivative financial instruments:
The Company uses derivative financial instruments to reduce the risks
related to exchange rate fluctuations on certain transactions.
Accordingly, the Company defers any unrealized gains and losses on these
instruments until such time that the underlying transactions are realized.
2. Inventories:
Inventories are summarized as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Raw materials $ 7,741,950 $ 5,450,094
Finished goods 12,093,767 12,915,528
$19,835,717 $18,365,622
- --------------------------------------------------------------------------------------------
</TABLE>
3. Property, plant and equipment:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
June 30, 1999
- --------------------------------------------------------------------------------------------
Accumulated Net book
Cost depreciation value
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Land $ 81,204 $ - $ 81,204
Building 1,538,912 240,057 1,298,855
Leasehold improvements 500,915 50,601 450,314
Machinery and equipment 5,921,477 1,220,901 4,700,576
Tools and dies 20,005,474 4,669,106 15,336,368
Furniture and fixtures 1,222,956 376,775 846,181
Computer equipment 2,722,103 498,040 2,224,063
Equipment under capital lease 776,815 430,925 345,890
Patents 1,572,000 - 1,572,000
License rights 1,280,000 - 1,280,000
Construction in progress 874,688 - 874,688
- --------------------------------------------------------------------------------------------
$36,496,544 $ 7,486,405 $29,010,139
- --------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
FANTOM TECHNOLOGIES INC.
Notes to Consolidated Financial Statements, page 4
(in Canadian dollars)
- --------------------------------------------------------------------------------
3. Property, plant and equipment (continued):
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
June 30, 1998
- ----------------------------------------------------------------------
Accumulated Net book
Cost depreciation value
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Land $ 81,204 $ - $ 81,204
Building 1,280,256 204,099 1,076,157
Machinery and equipment 4,494,949 745,343 3,749,606
Tools and dies 12,860,274 3,215,726 9,644,548
Furniture and fixtures 993,539 273,463 720,076
Computer equipment 2,085,059 268,985 1,816,074
Equipment under capital lease 776,815 287,285 489,530
Construction in progress 2,918,667 - 2,918,667
- ----------------------------------------------------------------------
$25,490,763 $4,994,901 $20,495,862
- ----------------------------------------------------------------------
</TABLE>
4. Bank loan agreements:
Effective September 1998, the Company modified its existing credit facility
with a Canadian chartered bank. The new facility allows the Company to borrow
up to a maximum of $35,000,000 for general operating requirements, $4,000,000
for capital expenditures and $20,000,000 to assist with research and
development expenditures. The general operating component is subject to an
availability formula based on trade accounts receivable and inventory.
Interest on the general operating component is calculated at the prime rate of
the Canadian chartered bank (6.25% at June 30, 1999), on the capital component
at the prime rate plus 1/2% and on the research and development component at
the prime rate plus 1%. Access to $20,000,000 of the general operating
component, the $4,000,000 capital component and the $20,000,000 research and
development component are subject to a 1/8% per annum standby fee on the daily
unused portion. Any borrowings under this agreement are secured by a general
assignment of book debts, a general security agreement and a mortgage on the
Company's assets.
At June 30, 1999, the unused amount available under the facility was
$58,900,000 (1998: $29,000,000).
<PAGE>
FANTOM TECHNOLOGIES INC.
Notes to Consolidated Financial Statements, page 5
(in Canadian dollars)
- --------------------------------------------------------------------------------
5. Capital lease obligations:
Future minimum lease payments, by year and in aggregate, under capital leases
are as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
1999 1998
- ----------------------------------------------------------------
<S> <C> <C>
Fiscal year:
1999 $ - $232,749
2000 21,951 15,192
- ----------------------------------------------------------------
Total minimum lease payments 21,951 247,941
Amount representing interest (at 10%) 95 8,468
- ----------------------------------------------------------------
Present value of net minimum lease payments 21,856 239,473
Less current portions 21,856 224,375
- ----------------------------------------------------------------
$- $15,098
- ----------------------------------------------------------------
</TABLE>
6. Share capital:
(a) Capital stock:
The authorized share capital of the Company consists of an unlimited number
of common shares, an unlimited number of class A, preferred shares,
issuable in series and an unlimited number of class B, preferred shares,
issuable in series.
The issued share capital of the Company is as follows:
-----------------------------------------------------
1999 1998
-----------------------------------------------------
Common shares (note 6(b)) $27,949,087 $26,997,590
Warrant 200 -
-----------------------------------------------------
$27,949,287 $26,997,590
-----------------------------------------------------
In August 1998, the Company entered into arrangements with Omachron
Technologies, Inc. (Omachron) covering the acquisition and development of a
number of technologies for various household appliances and other consumer
and commercial products. Also, the Company issued to Omachron 50,000
common shares, and a warrant to purchase an additional 20,000 common
shares, for an aggregate subscription price of $808,700. The warrant will
become exercisable on August 10, 2000 and will be exercisable for three
years thereafter at a price of $16.17 per common share.
<PAGE>
FANTOM TECHNOLOGIES INC.
Notes to Consolidated Financial Statements, page 6
(in Canadian dollars)
- -------------------------------------------------------------------------------
6. Share capital (continued):
(a) Capital stock (continued):
During 1998, 1,581,748 series 1, class A preferred shares were converted
into 1,598,915 common shares. At June 30, 1998 and 1999, there were no
series 1, class A preferred shares issued and outstanding.
On June 27, 1997 the Company issued and sold 500,000 special warrants of
the Company for net proceeds of $6,545,000 before corporate income tax
recoveries, relating to issue costs, of $163,800. In October 1997, the
special warrants were exercised and 500,000 common shares were issued.
(b) Changes in common shares:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Shares Amount
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at June 30, 1996 6,663,093 $17,719,712
Exercise of Compensation Warrants 33,600 199,820
Exercise of stock options 115,000 192,000
- ----------------------------------------------------------------------------------------
Outstanding at June 30, 1997 6,811,693 18,111,532
Conversion of preferred shares to common shares 1,598,915 1,902,258
Exercise of special warrants 500,000 6,708,800
Exercise of stock options 40,000 275,000
- ----------------------------------------------------------------------------------------
Outstanding at June 30, 1998 8,950,608 26,997,590
Exercise of stock options 20,000 142,997
Shares issued from treasury for cash 50,000 808,500
- ----------------------------------------------------------------------------------------
Outstanding at June 30, 1999 9,020,608 $27,949,087
- ----------------------------------------------------------------------------------------
</TABLE>
(c) Stock option plans:
The Company has established a Key Employees' Stock Option Plan and an
Outside Director Share Option Plan. Options to purchase common shares of
the Company under the Plans may be granted by the Board of Directors to
certain employees and directors of the Company. In addition, the Board of
Directors may grant options to independent consultants.
The exercise price for the common shares covered by the foregoing option
arrangements is determined by the Board of Directors, but must not be less
than the fair market value of the common shares at the time of the grant of
the option.
<PAGE>
FANTOM TECHNOLOGIES INC.
Notes to Consolidated Financial Statements, page 7
(in Canadian dollars)
- -------------------------------------------------------------------------------
6. Share capital (continued):
(c) Stock option plans (continued):
Changes in the outstanding stock options relating to the plans:
<TABLE>
<CAPTION>
--------------------------------------------------------------
Option Price
Number of Range Per
Shares Share
--------------------------------------------------------------
<S> <C> <C>
--------------------------------------------------------------
Outstanding at June 30, 1996 227,500 $1.10 to $8.50
Granted 350,000 $9.30 to $12.30
Cancelled (2,500) $ 3.90
Exercised (115,000) $1.10 to $4.80
--------------------------------------------------------------
Outstanding at June 30, 1997 460,000 $3.90 to $12.30
Cancelled (32,500) $12.30
Exercised (40,000) $3.90 to $9.30
--------------------------------------------------------------
Outstanding at June 30, 1998 387,500 $3.90 to $12.30
Granted 130,000 $15.00
Cancelled (2,500) $12.30
Exercised (20,000) $3.90 to $12.30
--------------------------------------------------------------
Outstanding at June 30, 1999 495,000 $5.00 to $15.00
--------------------------------------------------------------
</TABLE>
The outstanding options have an average exercise price of $11.21 and expire
at various dates in the period from October 30, 2000 to August 17, 2003.
(d) Dividends:
Dividends declared during 1999 on common shares were $0.12 per share or
$1,081,122. No dividends were declared in 1998 or 1997.
7. Pension plans:
The Company has established two pension plans which cover substantially all of
its employees. One plan is a defined benefit plan and the other has both a
defined benefit and a defined contribution component. As at June 30, 1999 the
accrued benefit obligation of the defined benefit pension plans was
approximately $4,769,000 (June 30, 1998: $3,920,000) and the market value of
the related pension fund assets was $4,379,000 (June 30, 1998: $4,188,000).
<PAGE>
FANTOM TECHNOLOGIES INC.
Notes to Consolidated Financial Statements, page 8
(in Canadian dollars)
- -------------------------------------------------------------------------------
8. Components of consolidated income taxes:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Provision based on statutory combined federal and
provincial income tax rates
(1999, 1998 and 1997: 44.6%) $ 9,880,000 $ 7,225,000 $ 5,130,000
Manufacturing and processing
profits deduction (1,994,000) (1,458,000) (1,035,000)
Other 85,000 115,564 47,000
- --------------------------------------------------------------------------------------------
$ 7,971,000 $ 5,882,564 $ 4,142,000
- --------------------------------------------------------------------------------------------
</TABLE>
9. Commitments:
(a) Under various technology transfer agreements, the Company has an
obligation to pay royalties based upon sales of products using dual-
cyclonic technology. In some instances, the Company must pay a minimum
annual royalty in order to preserve the exclusive nature of its rights.
Minimum royalty payments for 2000 amount to approximately $1,289,000. The
agreements extend until the basic patents expire with bi-annual
adjustments in the royalty rate based on the change in the consumer price
index. The first of the basic patents does not expire until 2003.
(b) At June 30, 1999 the Company had committed to spend $993,000 for equipment
and tooling.
10. Net income per share:
Basic net income per share has been calculated using the weighted monthly
average number of common shares outstanding during the respective years.
These were 9,002,060 shares for 1999 (1998: 8,777,290; 1997: 8,363,599).
The 1999 net income for the calculation of fully diluted net income per share
has been increased by $169,000 (1998: $95,000; 1997: $73,000) being the
after-tax effect of the investment at 4% (1998: 4%; 1997: 6%) of the proceeds
of the exercise of the stock options and warrant mentioned in note 6, and
assuming that the exercise occurred at the later of the beginning of the year
and the issue date. The number of shares outstanding for purposes of
calculating fully diluted net income per share was 9,485,608 for 1999 (1998:
9,340,608; 1997: 8,621,003).
<PAGE>
FANTOM TECHNOLOGIES INC.
Notes to Consolidated Financial Statements, page 9
(in Canadian dollars)
- -------------------------------------------------------------------------------
11. Consolidated Statements of Changes in Financial Position:
(a) Changes in non-cash operating working capital are as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
1999 1998 1997
----------------------------------------------------------------------------
<S> <C> <C> <C>
Trade accounts receivable $ 3,295,740 $(11,411,287) $(6,905,981)
Other receivables (1,839,273) 2,293,873 (1,834,134)
Inventories (1,470,095) (3,435,263) (1,055,450)
Prepaid expenses (70,695) (1,306,734) 927,861
Trade accounts payable (4,342,103) 9,132,846 1,906,941
Royalty payable 482,619 245,855 542,963
Co-op advertising accrual (118,508) 1,140,744 (125,280)
Other payables and accruals 98,766 (60,277) (55,790)
Income taxes payable 521,579 (113,173) 2,140,306
----------------------------------------------------------------------------
$(3,441,970) $ (3,513,416) $(4,458,564)
----------------------------------------------------------------------------
Relating to operating activities $(3,962,980) $ (4,245,118) $(4,458,564)
Relating to investing activities 521,010 731,702 -
----------------------------------------------------------------------------
$(3,441,970) $ (3,513,416) $(4,458,564)
----------------------------------------------------------------------------
</TABLE>
(b) Interest paid:
For the year ended June 30, 1999, the Company paid interest totalling $Nil
(1998: $49,000; 1997: $465,000).
(c) For the year ended June 30, 1999 income taxes paid were $7,348,000 (1998:
$4,913,000; 1997: $211,000).
12. Financial instruments:
(a) Foreign currency rate risk:
The Company realizes a significant portion of its sales in foreign
currencies and enters into various types of foreign exchange contracts in
managing its foreign exchange risk. The Company does not hold or issue
financial instruments for trading purposes. At June 30, 1999 the Company
held forward foreign exchange contracts with an aggregate notional amount of
$112,000,000 to sell U.S. dollars at an average rate of 1.4549 Canadian per
U.S. dollar expiring at various dates to April, 2001. At June 30, 1999 these
contracts had a negative fair value of $269,000 based on quotations from the
Company's bank.
During the year, the Company settled certain foreign exchange contracts
prior to their maturity dates. As a result, gains of $5,993,621 (1998:
$682,531) have been deferred until the sales transactions originally hedged
are recognized.
<PAGE>
FANTOM TECHNOLOGIES INC.
Notes to Consolidated Financial Statements, page 10
(in Canadian dollars)
- -------------------------------------------------------------------------------
12. Financial instruments (continued):
(b) Credit risk:
The Company does not have a significant exposure to any individual customer
other than the customers previously noted in note 1(g). The Company
reviews a new retail customer's credit history before extending credit and
conducts regular reviews of its existing retail customers' credit
performance. The Company currently obtains credit insurance coverage from
the Export Development Corporation on most domestic and export retail
sales. Credit extended on sales made directly to individuals is based on
credit card authorization. An allowance for doubtful accounts is
established based upon factors surrounding the credit risk of specific
customers, historical trends and other information. The allowance for
doubtful accounts at June 30, 1999 was $660,000 (1998: $702,280).
13. Related party transactions:
During 1999, the Company paid $50,000 to a director of the Company for
consulting services provided in addition to his responsibilities as a
director.
14. Uncertainty due to the Year-2000 Issue:
The year-2000 issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize the
year 2000 as 1900 or some other date, resulting in errors when information
using year-2000 dates is processed. In addition, similar problems may arise
in some systems which use certain dates in 1999 to represent something other
than a date. The effects of the year-2000 issue may be experienced before,
on, or after January 1, 2000 and, if not addressed, the impact on operations
and financial reporting may range from minor errors to significant systems
failure which could affect an entity's ability to conduct normal business
operations. It is not possible to be certain that all aspects of the year-
2000 issue affecting the entity, including those related to the efforts of
customers, suppliers, or other third parties, will be fully resolved.
15. Subsequent event:
On August 12, 1999 the Board of Directors approved a Shareholder Protection
Rights Plan (the "Rights Plan") subject to confirmation by the shareholders at
the 1999 annual and special meeting of the shareholders scheduled for October,
1999. The Rights Plan will terminate at the annual meeting of shareholders in
the year 2002. The purpose of the Rights Plan is to protect the Company's
shareholders from unfair, abusive or coercive take-over strategies, including
the acquisition of control of the Company through a take-over bid that does
not treat all shareholders equally or fairly.
<PAGE>
FANTOM TECHNOLOGIES INC.
Notes to Consolidated Financial Statements, page 11
(in Canadian dollars)
- --------------------------------------------------------------------------------
16. Reconciliation to United States Generally Accepted Accounting Principles:
Reconciliations of net income determined in accordance with generally accepted
accounting principles in Canada to net income determined under accounting
principles which are generally accepted in the United States are as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
Year ended June 30
1999 1998 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income for the
period, as reported $14,182,400 $10,317,527 $7,360,603
Development expenses (a) (1,207,940) (854,237) -
Valuation of forward foreign exchange
contracts (b) 9,708,512 (3,518,000) -
Pension expense (c) 147,000 (20,600) (87,000)
Valuation of options and warrant (d) (213,585) (215,900) (89,500)
Income tax expense (e) (3,200,000) 1,505,500 10,200
- ---------------------------------------------------------------------------------------------
Net income for the period in accordance
with United States accounting
principles 19,416,387 7,214,290 7,194,303
Minimum pension liability adjustment (c) 722,100 - -
- ---------------------------------------------------------------------------------------------
Comprehensive income for the period in
accordance with United States accounting
principles $18,694,287 $ 7,214,290 $7,194,303
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
Year ended June 30
1999 1998 1997
- ---------------------------------------------------------------------------------------------
Net income per share in accordance
with United States accounting
principles (h) - Basic $ 2.16 $ 0.82 $ 0.86
- Diluted $ 2.12 0.81 0.85
- ---------------------------------------------------------------------------------------------
</TABLE>
Differences between Canadian and United States accounting principles are as
follows:
(a) Under Canadian accounting principles, development cost, which meet certain
criteria, are deferred and amortized. Under United States accounting
principles, development costs are expensed as incurred. Total research and
development expenses under United States accounting principles for the year
ended June 30, 1999 are $2,567,000 (1998: $1,992,000; 1997: $770,000).
<PAGE>
FANTOM TECHNOLOGIES INC.
Notes to Consolidated Financial Statements, page 12
(in Canadian dollars)
- --------------------------------------------------------------------------------
16. Reconciliation to United States Generally Accepted Accounting Principles
(continued):
(b) Under Canadian accounting principles, forward foreign exchange contracts
may, under certain circumstances, be accounted for as a hedge of
forecasted sales. Under United States accounting principles, as outlined
in Statement of Financial Accounting Standards No. 52, "Foreign Currency
Translation", a forward foreign exchange contract that does not hedge an
identifiable firm foreign currency commitment is treated as speculative
and any gain or loss must be included in the determination of net income.
(c) Pension expense under United States accounting principles (see calculation
which follows) may differ from that expensed under Canadian accounting
principles due to various differences in the respective pronouncements.
These differences may include the assumptions on interest rates and the
method of amortizing experience gains and losses.
The U.S. pronouncement, Statement of Financial Accounting Standards No.
87, "Employers' Accounting for Pensions", would have been effective for
the Company's fiscal year ending June 30, 1990. The Company has
implemented the provisions of the Standard effective July 1, 1991
resulting in a credit to accumulated deficit at July 1, 1991 of $38,274
under United States accounting principles. The transition asset is being
amortized over fifteen years.
The following table sets forth the funded status and amounts which would
have been recognized in the consolidated balance sheet under United States
accounting principles:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
June 30
1999 1998
-----------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of accumulated plan
benefits - vested $ 5,418,000 $4,099,855
- non-vested 30,500 62,434
Effect of estimated future increases in
compensation 426,000 603,222
-----------------------------------------------------------------------
Projected benefit obligation for service
rendered to date 5,874,500 4,765,511
Pension assets at fair value 4,378,500 4,188,007
-----------------------------------------------------------------------
Plan assets in excess of (less than)
projected benefit obligation (1,496,000) (577,504)
Unrecognized transition asset (95,626) (114,818)
-----------------------------------------------------------------------
Unrecognized net loss (gain) 1,667,800 855,161
Unrecognized prior service cost 813,300 472,049
Adjustment to recognize minimum
liability (1,959,474) -
-----------------------------------------------------------------------
Net pension asset (liability) $(1,070,000) $ 634,888
-----------------------------------------------------------------------
</TABLE>
<PAGE>
FANTOM TECHNOLOGIES INC.
Notes to Consolidated Financial Statements, page 13
(in Canadian dollars)
- --------------------------------------------------------------------------------
16. Reconciliation to United States Generally Accepted Accounting Principles
(continued):
During 1999, an adjustment of $1,959,474 to recognize the minimum pension
liability required by SFAS No. 87. The adjustment is offset by an
intangible asset of $813,300 and a charge to shareholders' equity of
$722,100, net of deferred tax impact of $424,074, as required by SFAS No.
87.
Assumptions used in developing projected benefit obligation were as
follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
Year ended June 30
1999 1998 1997
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate 6.0% 6.25% 8.75%
Rate of increase in salary compensation 4.0% 4.0% 4.0%
Rate of return on plan assets 8.75% 8.75% 8.75%
-----------------------------------------------------------------------------
</TABLE>
Effective January 1, 1997, a defined contribution component was added to
the salaried employees' pension plan. All new salaried employees and
existing salaried employees, who so elected, become members of this
component of the plan. The obligations and related assets pertaining to
these employees who have elected to transfer have been removed from the
above disclosures. The cost of settling the obligations for employees who
elected to transfer was expensed in 1997.
Net pension expense under United States accounting principles was
calculated as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------
Year ended June 30
1999 1998 1997
--------------------------------------------------------------------
<S> <C> <C> <C>
Defined benefit components:
Service cost on benefits
earned during the
period $ 255,200 $ 251,302 $ 231,085
Interest cost on projected
benefit obligation 306,900 321,530 308,216
Expected return on plan assets (381,800) (346,996) (314,726)
Net amortization and
deferral 63,400 15,080 15,080
Cost on settlement - - 156,239
--------------------------------------------------------------------
243,700 240,916 395,894
Defined contributions component 201,300 166,872 39,074
--------------------------------------------------------------------
$ 445,000 $ 407,788 $ 434,968
--------------------------------------------------------------------
</TABLE>
The Company's pension plan assets include short-term notes and treasury
bills, bonds, common and preferred stocks and pooled fund investments.
<PAGE>
FANTOM TECHNOLOGIES INC.
Notes to Consolidated Financial Statements, page 14
(in Canadian dollars)
- --------------------------------------------------------------------------------
16. Reconciliation to United States Generally Accepted Accounting Principles
(continued):
(d) During 1997, the Company issued options to purchase 20,000 common shares to
Brean Murray and Company Inc., an independent consultant. During 1999 the
Company issued options to purchase 50,000 (1997: 120,000) common shares
under the Outside Director Share Option Plan (see note 6(c)). Also during
1999, the Company issued a warrant to purchase 20,000 common shares to
Omachron Technologies Inc. (see note 6(a)). Under statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" the
fair value of these options and warrant must be recognized as an expense
and as additional paid in capital over the vesting period of the options
and warrant.
The fair value of each option at the date of grant has been estimated using
the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1999 and 1997 respectively: dividend yield
of 0.8% and Nil, expected volatility of 35 and 35 percent, risk-free
interest rates of 5.1 and 4.8 percent and expected lives of 3 years for the
independent consultant options and 2.5 years for the outside director's
options.
The fair value of the warrant at the date of grant has been estimated using
the same pricing model with the following assumptions used: dividend yield
of 0.8%, expected volatility of 50 percent, risk-free interest rates of 5.5
percent and expected life of 5 years.
The options issued to Brean Murray and Company Inc. vest one year from the
date of grant and must be exercised within five years of the date of grant.
The options issued to outside directors vest no later than two years from
the date of grant and must be exercised within five years from the date of
the grant. An aggregate of 490,000 common shares has been reserved for
issuance under the Outside Director Plan of which 400,000 have been
granted.
(e) Effective July 1, 1993, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS
109"), for its financial statements presented under United States
accounting principles. The adoption of FAS 109 changes the Company's
method of accounting for income taxes from the deferred method, as recorded
under Canadian accounting principles, to an asset and liability approach.
Under the asset and liability method of FAS 109, deferred tax assets and
liabilities are recognized for future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases.
<PAGE>
FANTOM TECHNOLOGIES INC.
Notes to Consolidated Financial Statements, page 15
(in Canadian dollars)
- --------------------------------------------------------------------------------
16. Reconciliation to United States Generally Accepted Accounting Principles
(continued):
At June 30, 1999 and 1998 the components of deferred tax balances under FAS
109 were as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
June 30
1999 1998
-------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Net pension liability $ 396,000 $ -
Share issue costs 119,000 203,000
Forward foreign exchange contracts 100,000 1,512,000
Development costs deferred for tax purposes 764,000 306,000
Other 284,000 270,700
-------------------------------------------------------------------------
Net deferred tax assets 1,663,000 2,291,700
Deferred tax liabilities:
Net pension asset - (229,000)
Intangible asset (301,000) -
Property, plant and equipment (5,387,000) (3,008,000)
Research tax credits (230,000)
Other (124,000) (91,200)
-------------------------------------------------------------------------
Net deferred tax liabilities (6,042,000) (3,328,200)
-------------------------------------------------------------------------
Net deferred tax balance $(4,379,000) $(1,036,500)
-------------------------------------------------------------------------
</TABLE>
The Company's income before income taxes was substantially earned in the
Canadian tax jurisdiction.
(f) United States accounting principles require that bank or similar borrowings
be reflected as a financing activity rather than as a component of cash
position. Also, non-cash transactions such as acquiring property, plant and
equipment under capital lease obligations would not be reflected as
investing and financing activities, respectively. As a result cash position
for the year ended June 30, 1999 would be $9,434,206 (1998: $4,609,798;
1997: $4,698,156), cash provided by (used for) financing activities for the
year ended June 30, 1999 would be $(347,042) (1998: $16,881; 1997:
$4,696,474) and cash used for investing activities for the year ended June
30, 1999 would be $10,484,772 (1998: $8,573,305; 1997: $5,738,081).
(g) Statement of Financial Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments, requires disclosure of the fair value and
the methods and significant assumptions used to estimate fair value for all
financial instruments. Given that trade accounts and other receivables and
trade accounts and royalty payables are all current their book value
approximates fair value.
<PAGE>
FANTOM TECHNOLOGIES INC.
Notes to Consolidated Financial Statements, page 16
(in Canadian dollars)
- --------------------------------------------------------------------------------
16. Reconciliation to United States Generally Accepted Accounting Principles
(continued):
(h) Statement of Financial Accounting Standards No. 128, "Earnings Per
Share", is effective for the Company's fiscal year ending June 30, 1998
and has been applied on a retroactive basis.
- ------------------------------------------------------------------------------
Income Shares Per share
(Numerator) (Denominator) Amount
- ------------------------------------------------------------------------------
Year ended June 30, 1999:
Basic EPS $19,416,387 9,002,060 $ 2.16
=========
Effect of Dilutive Securities:
Stock options 158,807
- ------------------------------------------------------------------------------
Diluted EPS $19,416,387 9,160,867 $ 2.12
- ------------------------------------------------------------------------------
Year ended June 30, 1998:
Basic EPS $ 7,214,290 8,777,290 $ 0.82
=========
Effect of Dilutive Securities:
Stock options 123,722
Special warrants 5,263
- ------------------------------------------------------------------------------
Diluted EPS $ 7,214,290 8,906,275 $ 0.81
- ------------------------------------------------------------------------------
Year ended June 30, 1997:
Basic EPS $ 7,194,303 8,363,599 $ 0.86
=========
Effect of Dilutive Securities:
Stock options 77,397
Compensation warrants 1,659
Special warrants 142
- ------------------------------------------------------------------------------
Diluted EPS $ 7,194,303 8,442,797 $ 0.85
- ------------------------------------------------------------------------------
<PAGE>
FANTOM TECHNOLOGIES INC.
Notes to Consolidated Financial Statements, page 17
(in Canadian dollars)
- --------------------------------------------------------------------------------
16. Reconciliation to United States Generally Accepted Accounting Principles
(continued):
(i) At June 30, 1999, the Company has a stock-based compensation plan which is
described below. The Company applies APB Opinion 25 and related
Interpretations in accounting for compensation costs for the employee
stock option plan for U.S. GAAP purposes. Accordingly, no compensation
cost has been recognized under U.S. GAAP for the plan. Had compensation
cost for the plan been determined based on the fair value at the grant
date for awards under the plan consistent with the method of FASB
Statement 123, the Company's U.S. GAAP net income and earnings per share
would have been reduced to the pro forma amounts indicated below:
--------------------------------------------------------------------
1999 1998 1997
--------------------------------------------------------------------
Net income As reported $19,416,387 $7,214,290 $7,194,303
Pro forma $19,034,471 $6,890,890 $7,092,503
Basic earnings
per share As reported $ 2.16 $ 0.82 $ 0.86
Pro forma $ 2.11 $ 0.79 $ 0.85
Diluted earnings
per share As reported $ 2.12 $ 0.81 $ 0.85
Pro forma $ 2.08 $ 0.77 $ 0.84
--------------------------------------------------------------------
Under the Key Employees Stock Option Plan (see note 6(c)), the Company has
reserved 400,000 shares of common stock. The options granted cannot have
a term exceeding 5 years and become exercisable as to 50% on the first
anniversary of the date of grant and as to the balance on the second
anniversary of the date of grant.
The fair value of each option at the date of grant has been estimated
using the Black-Scholes option pricing model with the following weighted
average assumptions used for grants in 1999 and 1997 respectively:
dividend yield of 0.8% and Nil, expected volatility of 35 and 35 percent,
risk-free interest rates of 5.1 and 5.3 percent and expected lives of 3
years for both years. No options were granted in 1998.
(j) In June 1998, the FASB issued SFAS No. 133 "Derivative Instruments and
Hedging Activities". In June, 1999, the FASB issued SFAS No. 137 which
delayed the date SFAS No. 133 will be effective to for fiscal quarters
beginning after June 15, 2000. SFAS No 133 requires that the Company
report all derivative instruments on the balance sheet at fair value.
Management has not determined the impact of adoption of SFAS No. 133 on
its U.S. GAAP disclosures.
In 1998, the American Institute of Certified Public Accountants (AICPA),
issued Statement of Position ("SOP") 98-05, "Reporting on the Costs of
Start-up Activities", effective for fiscal years beginning after December
15, 1998. SOP 98-05 identifies certain one-time activities as start up
costs which must be expensed as incurred. Management has not determined
the impact of adoption of SOP 98-05 on its U.S. GAAP disclosures.
<PAGE>
FANTOM TECHNOLOGIES INC.
Notes to Consolidated Financial Statements, page 18
(in Canadian dollars)
- --------------------------------------------------------------------------------
16. Reconciliation to United States Generally Accepted Accounting Principles
(continued):
The cumulative effect of the application of the above-noted United States
accounting principles on the balance sheet of the Company as at June 30, 1999
would be to decrease deferred development costs asset by $2,062,177 (1998:
$854,237), decrease net pension asset by $272,675 (1998: increase $469,851),
increase intangible pension asset by $813,300 (1998: nil), increase net
deferred tax assets by $709,000 (1998: $2,032,700), decrease provision for
loss on forward foreign exchange contracts by $196,891 (1998: increase
$3,518,000), increase accrued pension liability by $1,070,000 (1998: nil),
decrease currency hedging gains by $5,993,621 (1998: nil), increase deferred
tax liability by $2,012,141 (1998: $559,967), and increase shareholders'
equity by $2,295,819 (1998: decrease $2,429,653).
17. Advertising costs:
Under Canadian accounting principles, costs of developing direct response
advertising incurred during periods prior to airing of the ads are deferred
and expensed in the period the ads are aired. At June 30, 1999, production
costs of $627,000 (1998: $687,000) related to future direct response
advertising have been recorded as a prepaid expense under Canadian and United
States accounting principles, as outlined in Statement of Position 93-7,
Reporting on Advertising Costs, issued by the AICPA, and will be amortized
based on the expected revenue to be generated by the advertising. Direct
response advertising consists of television infomercials.
Payments made for airtime in advance of the airing of direct response
advertising are recorded as prepaid expenses and expensed when the ad airs.
At June 30, 1999, under both Canadian and United States accounting principles,
prepaid air time was $366,000 (1998: $325,000)
Total media and co-op advertising expense for the year ended June 30, 1999 was
$28,225,000 (1998: $22,481,000; 1997: $17,566,000).
18. Fixed stock option plans:
(a) A summary of the status of the Company's fixed stock option plans as at June
30, 1999 and 1998 and changes during the years then ended are as follows:
----------------------------------------------------------
Weighted Average
Options Exercise Price
----------------------------------------------------------
Outstanding at June 30, 1997 460,000 $ 9.66
Exercised (40,000) $ 6.88
Forfeited (32,500) $12.30
----------------------------------------------------------
Outstanding at June 30, 1998 387,500 $ 9.75
Granted 130,000 $15.00
Exercised (20,000) $ 7.15
Forfeited (2,500) $12.30
----------------------------------------------------------
Outstanding at June 30, 1999 495,000 $11.21
----------------------------------------------------------
<PAGE>
FANTOM TECHNOLOGIES INC.
Notes to Consolidated Financial Statements, page 19
(in Canadian dollars)
- --------------------------------------------------------------------------------
18. Fixed stock option plans (continued):
Options exercisable at June 30, 1999 totalled 365,000 (1998: 200,000) at a
weighted-average exercise price of $9.85 (1998: $9.20). The weighted-average
fair value of options granted during 1999 was $4.46.
(b) The following table summarizes information about fixed stock options
outstanding at June 30, 1999.
- ---------------------------------------------------------------
Options
Options Outstanding Exercisable
- ---------------------------------------------------------------
Weighted Average
Exercise Number Remaining Contractual Number
Price Outstanding Life Exercisable
- ---------------------------------------------------------------
$5.00 30,000 1.3 years 30,000
$7.00 30,000 1.5 30,000
$7.75 10,000 1.6 10,000
$8.50 5,000 1.8 5,000
$9.30 150,000 2.6 150,000
$12.30 140,000 2.8 140,000
$15.00 130,000 4.1 -
- ---------------------------------------------------------------
495,000 365,000
- ---------------------------------------------------------------
19. Comparative figures:
Certain comparative figures have been reclassified to conform with the
financial statement presentation adopted in the current year.
<PAGE>
AUDITORS' REPORT
To The Board Of Directors
Fantom Technologies Inc.
Under date of July 30, 1999, we reported on the consolidated balance sheets of
Fantom Technologies Inc. as of June 30, 1999 and 1998, and the related
consolidated statements of income and retained earnings and changes in financial
position for each of the years in the three-year period ended June 30, 1999,
which are included in the Form 40-F. In connection with our audits of the
aforementioned consolidated financial statements, we also audited the related
consolidated financial statement schedule in the Form 40-F. This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement schedule
based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
(Signed) KPMG LLP
Chartered Accountants
Hamilton, Canada
July 30, 1999
<PAGE>
Fantom Technologies Inc.
Schedule II
Valuation and Qualifying Accounts
(in Canadian dollars)
<TABLE>
<CAPTION>
Balance at Add: Add: Recovery
beginning Charged to of previous Deduct: Balance at end
of Year Expenses Write-Offs Write-Offs of Year
---------- ---------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended June 30, 1999 $702,280 1,376,040 0 1,418,320 $660,000
Year ended June 30, 1998 $583,773 611,335 0 492,828 $702,280
Year ended June 30, 1997 $129,175 934,125 0 479,527 $583,773
Balance at Add:
beginning Charged to Deduct: Balance at end
of Year Expenses Write-Offs of Year
-------- --------- ------- ----------
Reserve for slow-moving and non-salable inventory:
Year ended June 30, 1999 $700,304 588,054 657,810 $ 630,548
Year ended June 30, 1998 $800,000 24,492 124,188 $ 700,304
Year ended June 30, 1997 $874,448 758,490 832,938 $ 800,000
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
This discussion and analysis should be read in conjunction with the financial
statements and related notes included in the 1999 annual report to shareholders.
Financial information is expressed in Canadian dollars, unless otherwise noted.
RESULTS OF OPERATIONS
Sales
The Company's revenue in fiscal 1999 increased 36% from the previous year to
$242.0 million. Unit shipments of vacuums increased 50%. The average revenue per
vacuum decreased 8% reflecting the shift in mix to a lower priced model and
price reductions on some models, partially offset by translation gains resulting
from a weaker Canadian dollar relative to the U.S. dollar.
Shipments to the United States in fiscal 1999 accounted for 91% of total
revenue, compared with 93% for fiscal 1998. Essentially all of the Company's
sales in both years consisted of dual-cyclonic vacuums and related accessories.
The distribution of revenue between the United States and Canada, and between
retailers (including distributors) and direct-response programs, was as follows:
Revenue
(Millions of Dollars)
United States Canada Total
1999 1998 1999 1998 1999 1998
Retail 207.5 149.8 22.3 11.3 229.8 161.1
Direct-Response 11.7 15.6 0.5 0.9 12.2 16.4
219.2 165.4 22.8 12.2 242.0 177.6
Shipments of FANTOM(R) vacuums to retailers in fiscal 1999 increased 43% from
the previous year due mainly to the introduction of new models (the FANTOM(R)
LIGHTNING(R) canister in November 1997 and the FANTOM(R) CYCLONE XT(R) upright
in March 1999), the lowering of prices on some models, the addition of new
retailers, and the continued effectiveness of the Company's direct-response
television advertising. Aggregate sales of products to the Company's five
largest customers were $122.7 million, comprising 50.7% of total revenue,
compared to $107.4 million and 60.5% respectively for the previous year.
Sales through the Company's direct-response programs in fiscal 1999 declined 26%
from the previous year, due mainly to increased exposure of FANTOM(R) vacuums in
retail outlets; to increased advertising of FANTOM(R) vacuums in retail flyers;
and to a continued shift in direct-response media spending from the long-form,
30-minute format to the short-form, 60-second format, which the Company believes
tends to act more like general advertising. Total media spending was $17.1
million compared to $14.8 million in fiscal 1998. Essentially all of the
spending in both years was for television time.
<PAGE>
Cost of Goods Sold
Cost of goods sold, as a percentage of sales, was 64.2% in fiscal 1999 compared
with 64.0% in fiscal 1998. Positive impacts on margin included the drop in value
of the Canadian dollar relative to the United States dollar, net of hedging
effects (approximately 3.0 percentage points); a shift in mix towards higher
margin models (approximately 1.0 percentage point); and the year-over-year
impact of the Company's cost reduction programs (approximately 1.0 percentage
point). Offsetting these were the impact of price reductions (approximately 4.0
percentage points) and a greater proportion of sales being to retailers rather
than directly to end-users through the Company's direct-response advertising
programs (approximately 1.0 percentage point).
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 32.4% in fiscal 1999 to
$63.1 million. As a percentage of sales, they decreased to 26.1% from 26.8% in
fiscal 1998. Media spending increased 15.5% over fiscal 1998 to $17.1 million.
Co-op advertising spending (which is advertising controlled by the retailer
which includes the supplier's product and for which the supplier agrees to pay a
portion of the costs) increased to $10.3 million from $6.9 million. Expenses
associated with refurbishing product rose to $4.3 million from $1.8 million, due
mainly to increased volumes and to a greater proportion of repairs being made by
third parties. Freight-out costs rose to $4.8 million from $2.7 million,
reflecting higher overall unit volumes as well as a disproportionate increase in
the number of shipments of smaller order quantities, resulting from increased
sales activity with independent vacuum dealers.
Research and Development Spending
Research and development spending in fiscal 1999 totaled $5.7 million, net of
research and development tax credits of $0.6 million. Of the total spending,
$3.1 million was capitalized and was mainly for various technologies which were
acquired, industrial designs for a number of new products under development, and
patent applications for new technologies and products. Additions to deferred
costs totaled $1.2 million, net of amortization, and consisted mainly of
development costs for the FANTOM(R) CYCLONE XT(R) vacuum, launched in March
1999, as well as costs for other new products under development. Amounts
expensed were $1.4 million, net of $0.6 million of research and development tax
credits, and were mainly for engineering and product-development staff.
Research and development spending in fiscal 1998 was $1.2 million. All of this
spending was allocated against deferred costs and was principally for
development activity for the FANTOM(R) Lightning(R) vacuum and other new
products.
Net Income
Net income in fiscal 1999 was $14.2 million compared with $10.3 million in
fiscal 1998. The improvement was due mainly to the increase in sales and the
reduction in selling, general and administrative expenses as a percentage of
sales, less the incremental expense in research and development.
<PAGE>
FINANCIAL CONDITION
During fiscal 1999, cash generation from operations was $16.9 million compared
with $9.6 million for fiscal 1998. The investment in non-cash operating working
capital increased $4.0 million due mainly to a decrease in trade-accounts
payable of $4.3 million resulting from a general reduction in payable-days
outstanding. Cash in the amount of $5.3 million was generated during the year
from closing currency-hedging contracts which had maturity dates beyond the end
of the fiscal year. This was done to take advantage of opportunistic shifts in
the value of the Canadian dollar relative to the U.S. dollar. Since these gains
were derived as a function of the Company's comprehensive hedging program, they
were deferred until the period in which the original hedge would have matured.
As a result of this, as well as gains resulting from similar hedging activity in
the previous year, $2.5 million of deferred pre-tax income will be realized in
fiscal 2000, and $3.5 million in fiscal 2001. Items not requiring cash in fiscal
1999 included depreciation of $2.5 million and a deferred tax reduction of $1.2
million.
Cash in the amount of $0.8 million was provided from the issuance of 50,000
common shares, and a warrant to purchase an additional 20,000 common shares, to
Omachron Technologies, Inc.; and in the amount of $0.1 million from the exercise
of stock options. Capital expenditures during the year were $11.0 million and
were mainly for tooling and equipment for the new FANTOM(R) CYCLONE XT(R) vacuum
($5.1 million); for the acquisition of new technologies, industrial designs for
new products and patent applications for new technologies and products ($3.1
million); for ongoing replacement tools, returnable containers, assembly
equipment, and other items relating to manufacturing and infrastructure ($2.2
million); and for new software and hardware to support continued advances in
information technology ($0.6 million).
The Company's net cash position as at June 30, 1999 was $9.4 million compared
with $4.6 million at June 30, 1998. Key ratios compared to the previous year
improved as follows:
As at June 30 1999 1998
Current Assets to Current Liabilities 2.00 1.73
Total Liabilities to Tangible Net Worth 0.67 0.85
Effective September 1998, the Company modified its credit arrangement with a
Canadian chartered bank to enhance the Company's ability to exploit potential
opportunities with respect to new product development and growth. The amended
arrangement allows the Company to borrow up to $35 million for operating
purposes, $4.0 million for capital expenditures, and $20 million to assist with
research and development expenditures. Interest on the general operating line is
at the prime rate of the Canadian chartered bank, interest on the capital line
is prime plus 1/2%, and interest on the research and development line is prime
plus 1%. The $4.0 million capital line, $20 million of the general operating
line, and the $20 million research and development line are subject to a 1/8%
per annum standby fee. The availability on the general operating line is subject
to a formula based upon receivable and inventory levels. All loans are secured
by a general assignment of book debts, a general security agreement and a
mortgage on the Company's assets. The facility was unused as at June 30, 1999
except for $ 0.1 million of the capital line utilized for equipment leases.
<PAGE>
Year-2000 Issue
The year-2000 issue arises because some computerized systems identify a year
using two digits rather than four. Accordingly, date-sensitive systems may not
recognize the year 2000 correctly and errors and/or system failures could
result.
The Company believes it has taken appropriate steps to mitigate its exposure to
year-2000 related problems, including the following:
i. Deploying a year-2000 project plan of awareness, assessment, renovation and
contingency planning;
ii. Successfully performing internal year-2000 related testing on the Company's
key SAP R/3 enterprise-information-technology system;
iii. Testing other internal systems and making modifications or replacements
as necessary; and
iv. Assessing and monitoring the year-2000 readiness of all critical suppliers.
While the Company believes reasonable measures have been taken to ensure that
all of its internal systems, as well as those of its significant business
partners, are year-2000 ready, this does not ensure that an unanticipated
problem will not occur on, before, or after the year 2000, which could have a
material adverse impact on the operations of the Company.
Year-2000 related costs incurred in fiscal 1999 were approximately $0.2 million
and were expensed as incurred. In fiscal 2000, year-2000 related costs are
estimated at approximately $0.1 million, assuming that no unanticipated problems
occur.
OUTLOOK
The Company believes that its line of dual-cyclonic FANTOM(R) vacuums can
continue to grow in the United States and Canada as a result of the Company's
advertising campaigns and efforts to expand retail distribution and promotional
activity.
The Company has various agreements with the licensor of its dual-cyclonic
technology which provide it with the exclusive right (except for a special
purpose license to a direct-marketing company) to sell upright vacuum cleaning
devices utilizing dual-cyclonic technology in the United States and Canada, and
the exclusive right to sell canister and backpack products utilizing the
technology in the United States and Canada.
The electric floor-care industry is highly competitive and includes the
following major competitors: Bissell Inc.; Eureka Co.; Hoover Company;
Matsushita Electric Works, Ltd.; and Royal Appliance Mfg. Co. Two of these
companies now have product lines which utilize a form of cyclonic action and
compete with the Company's FANTOM(R) vacuums. These companies, as well as
others, are expected to introduce further new products which compete directly
with those of the Company. The Company is uncertain as to the extent of the
negative impact these products could have on its sales and net income.
<PAGE>
The Company has been pursuing a program to acquire and develop a number of
technologies for various household appliances and other consumer and commercial
products. In August 1998 it entered into a series of agreements with Omachron
Technologies, Inc. to acquire and develop several technologies. The Company
intends to spend significant amounts on research and development over the next
several years, with expenditures expected to be not less than $5 million per
year. In addition, depending on the speed with which new products are developed,
it could spend as much as $15 million in any given year for tooling,
manufacturing equipment, and pre-launch marketing activities and materials. As
of August 12, 1999, forty-four utility patent applications had been filed for
technologies the Company is either acquiring or exclusively licensing pursuant
to agreements entered into over the prior 18 months. The Company has rights to
these technologies on a worldwide basis and will be evaluating opportunities for
marketing products internationally.
The Company believes that the technologies it has, and is continuing to acquire
and develop, are significant and that this could lead to substantial business
growth. The Company is targeting to launch at least two new products within a
12-month time frame. One of these products is in the water-treatment area and
the other is in the floor-care field.
The Company's water-treatment product consists of a counter-top microbiological
water purifier which is designed to kill micro-organisms such as Giardia, E.
coli and Cryptosporidium; to reduce heavy metals such as mercury and lead as
well as oils, fats, grease, pesticides, herbicides, chlorine and other trace
impurities; and to eliminate a wide range of volatile organic compounds such as
benzene, heptachlor, styrene, trihalomethanes and 2,4-D. The product leaves in
desirable levels of fluoride, calcium, magnesium and potassium. It incorporates
a computer-controlled monitoring system to ensure that the dispensed water is
disinfected, and treats the carbon-block filter used in the system to prevent
bacterial growth.
The water-treatment product utilizes ozone in its purifying process. The
Company's technological developments enable strong concentrations of ozone to be
produced in small, low-cost embodiments with small energy inputs. The Company
has also developed technology enabling the ozonation process to be monitored
actively, to ensure effective performance.
The Company plans to sell this product to many of the retailers that purchase
its existing floor-care products, and to build consumer awareness and demand at
retail using direct-response television advertising.
Given the uncertainties inherent in the development of new technology and the
time delays which often arise in the process of developing new products based on
innovative technology, as well as the uncertainties associated with entering a
new market segment, it is not possible to forecast sales of the counter-top
water-treatment product, or its effect on net income, with any degree of
accuracy. Up-front spending for design and development, tooling, assembly and
testing equipment, and pre-launch marketing activities and materials, is
expected to amount to approximately $5.5 million.
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The floor-care product the Company plans to introduce in the next 12 months will
enable it to compete in a different segment of the market than those segments in
which it currently competes. Up-front spending for design and development,
tooling and assembly equipment, and pre-launch marketing materials could amount
to approximately $5 million. Due to the uncertainties associated with a new
product launch, and with competing in a new market segment, it is not possible
to forecast sales of the new product, or its effect on net income, with any
degree of accuracy.
The Company is highly dependent on one scientist to direct research activities
for the development of new technologies and product embodiments based on such
technology. The Company has a commitment for the services of this scientist
which extends, at the Company's option, until 2005. The loss of availability of
the scientist could have a material adverse effect on the Company's outlook and
future results of operations.
Given the Company's extensive sales activities in the United States and
manufacturing operations in Canada, the Company's results are sensitive to
changes in the exchange rate between the Canadian and U.S. dollars. To help
offset the effect of adverse currency fluctuation, the Company maintains a
hedging program consisting mainly of the purchase of forward contracts to sell
U.S. dollars. As of June 30, 1999 the Company held future contracts to sell U.S.
$64.5 million expiring at various dates during fiscal 2000 at an average rate of
Cdn. $1.44; and U.S. $47.5 million expiring at various dates during fiscal 2001
at an average rate of Cdn. $1.47. A protracted rise in the relative value of the
Canadian dollar would have a negative effect on net income for the Company.
Based on the Company's fiscal 1999 results, a rise in value of the Canadian
dollar of 1 cent, without the protection of hedging, would adversely affect net
income by approximately $0.5 million.
