<PAGE>
Page 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
(Mark One)
-- REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
-- EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2000
OR
-- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-26308
FANTOM TECHNOLOGIES INC.
---------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Ontario, Canada
----------------------------------------------------------
(Jurisdiction of incorporation or organization)
1110 Hansler Road, Welland, Ontario L3B 5S1
----------------------------------------------------------
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
None
Securities registered or to be registered pursuant to Section 12(g) of the Act:
Common Shares, without par value
--------------------------------
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act: None
Indicate the number of outstanding shares of the issuer's classes of capital or
common stock covered by this registration statement: 9,130,408 Common Shares as
of June 30, 2000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
X Yes No
Indicate by check mark which financial statement item registrant has elected to
follow:
Item 17 X Item 18
<PAGE>
Page 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
Exchange Rates of the Canadian Dollar................................................ 3
Item 1. Description of the Business.................................................. 4
Item 2. Description of Property...................................................... 14
Item 3. Legal Proceedings............................................................ 14
Item 4. Control of Company........................................................... 14
Item 5. Nature of Trading Market..................................................... 15
Item 6. Exchange Controls and Other Limitations Affecting Security Holders........... 16
Item 7. Taxation..................................................................... 16
Item 8. Selected Financial Data...................................................... 18
Item 9. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................... 19
Item 9A. Quantitative and Qualitative Disclosures About Market Risk.................. 26
Item 10. Directors and Officers of the Company....................................... 28
Item 11. Compensation of Directors and Officers...................................... 30
Item 12. Options to Purchase Securities from Company of Subsidiaries................. 32
Item 13. Interest of Management in Certain Transactions.............................. 34
Item 14. Description of Securities to be Registered.................................. 34
Item 15. Defaults Upon Senior Securities............................................. 34
Item 16. Changes in Securities and Changes in Security for Registered Securities..... 34
Item 17. Financial Statements........................................................ 34
Item 18. Financial Statements........................................................ 34
Item 19. Financial Statements and Exhibits........................................... 35
Signatures........................................................................... 37
</TABLE>
<PAGE>
Page 3
The historical financial statements of Fantom Technologies Inc. (the
"Company") contained in this annual report are reported in Canadian dollars and
have been prepared in accordance with accounting principles generally accepted
in Canada ("Canadian GAAP"). To the extent applicable to the historical
financial statements of the Company included elsewhere in the annual report,
these principles conform in all material respects with accounting principles
generally accepted in the United States ("U.S. GAAP"), except as described in
Note 14 to the historical financial statements of the Company.
All dollar amounts in this annual report are expressed in Canadian
dollars, except where otherwise indicated. References to "Cdn$" or "$" are to
Canadian dollars and references to "US$" are to U.S. dollars.
EXCHANGE RATES OF THE CANADIAN DOLLAR
The following table sets forth, for the periods indicated, the high and low
exchange rates, the average of the exchange rates on the last day of each month
during such period, and the period-end exchange rate of the Canadian dollar in
exchange for United States dollars, based upon the inverse of exchange rates
reported by the Federal Reserve Bank of New York as the noon buying rates in New
York City for cable transfers payable in Canadian dollars as certified for
customs purposes (the "Noon Buying Rate").
Fiscal Year Ended June 30
----------------------------------------------------------
2000 1999 1998 1997 1996
----- ----- ----- ----- -----
High .6988 .6921 .7320 .7513 .7527
Low .6591 .6311 .6772 .7145 .7235
Average .6788 .6622 .7054 .7308 .7349
Period End .6754 .6835 .6808 .7241 .7322
On December 27, 2000, the Noon Buying Rate (expressed in U.S. dollars) was
Cdn$1.00 = US$0.6619.
<PAGE>
Page 4
PART I
Item 1. Description of the Business
The Company
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.
Business of the Company
Products
The Company's principal product line currently consists of its full-size,
upright and canister dual-cyclonic vacuum cleaners.
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, 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.
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 a more powerful version of the original
FANTOM(R) vacuum. This product is called the FANTOM(R) THUNDER(R) vacuum.
<PAGE>
Page 5
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 4:1 stretch,
steel reinforced hose; (d) a HEPA filter certified by its manufacturer; (e) on-
board attachments; (f) one or two headlights; (g) a quick release, see-through
bin designed for convenient emptying; (h) a height adjustment dial; and (i) 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-
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(R) 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 attaches 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) 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; and (l) a two-year limited
warranty.
In March 1999, the Company introduced a premium, dual-cyclonic upright, the
FANTOM(R) CYCLONE XT(R) vacuum. This product, 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.
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.
The Company's most recent dual-cyclonic entry, the FANTOM(R) FURY(R)
Limited Edition vacuum, was introduced in July 2000. This product is an updated
version of the original FANTOM(R) FURY(R) vacuum and features new styling and a
new above-floor cleaning system that incorporates a telescopic wand.
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 catalogs 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 short-form (60 second and 120 second) TV
spots for this product. In March 1996, the Company commenced airing in Canada
the TV infomercial and
<PAGE>
Page 6
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. Additional long-form (30-minute) and short-form (30-second, 60-second
and 120-second) direct-response TV commercials were developed and aired in
subsequent years in the United States and Canada for the various models of the
Company's line of dual-cyclonic vacuums. While direct-response television
advertising has remained an important component of the Company's promotional mix
since the Fall of 1993, the Company has recently reduced advertising
expenditures as part of its tactical plan to contend with lower margins and
sales volumes resulting from heightened competition.
Sales of dual-cyclonic products (including spare parts and accessories)
through all channels of distribution amounted to $207.6 million in fiscal 2000
compared with $242.0 million in fiscal 1999 and $176.0 million in fiscal 1998,
with over 87% of such sales being to customers in the United States in fiscal
2000 and over 90% in the previous two fiscal years. Direct-response television
sales in fiscal 2000 were $9.7 million compared to $12.2 million in fiscal 1999
and $16.4 million in fiscal 1998. See Item 9, "Management 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 a number of different
vendors to satisfy its plastic injection-molding 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 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; 4,826,515; 4,853,008; 4,853,011; 5,078,761;
5,160,356; 5,558,697; 5,755,007; and D382,679; and Canadian Patent Nos.:
1,182,613; 1,241,158; 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 the air stream instead of forcing it through a
traditional filter bag. Larger dirt particles are separated from the air stream
by being hurled to the edge of the outer cyclone and smaller dirt particles are
separated from the air stream 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.
<PAGE>
Page 7
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.
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 Company's cyclonic-bagless
technology, most of the Company's competitors have now 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 is no longer able to distinguish
its products to consumers to the same extent it could prior to the introduction
of competing cyclonic-bagless products. This has had a material adverse effect
on the Company's sales and net income.
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 441 employees as of June 30, 2000. Of these
employees, 72%, 17%, 10% and 1% were engaged in production, marketing/sales,
administration and engineering, respectively. As of June 30, 2000,
approximately 53% of the
<PAGE>
Page 8
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 2000, five
customers accounted for 48.6% of the Company's revenue. In fiscal 1999, the
same five customers accounted for 43.4% of the Company's revenue. One specific
customer accounted for 16% and 23% of sales in fiscal 2000 and fiscal 1999,
respectively.
Sales Data
<TABLE>
<CAPTION>
Fiscal Year Ended June 30
-------------------------
2000 1999 1998
----------- ----------- -----------
(in dollars)
<S> <C> <C> <C>
Total sales 207,646,115 242,045,457 177,585,454
Sales by method of distribution
Via direct-response television and the Internet 9,670,209 12,249,642 16,441,591
To retailers and distributors 197,975,906 229,795,815 161,143,863
Sales by territory
Canada Total 25,753,313 22,830,933 12,178,219
Dual-cyclonic and related products 25,760,718 22,707,089 10,550,894
All other (7,405) 123,844 1,627,325
United States Total 181,892,802 219,214,524 165,407,235
Dual-cyclonic and related products 181,892,802 219,214,524 165,407,235
Sales of dual-cyclonic and related products
Total 207,653,520 241,921,613 175,958,129
Fantom(R) vacuums 207,621,420 241,489,013 175,681,451
Via direct-response television and the Internet 9,670,209 12,249,642 16,441,591
To retailers and distributors 197,951,211 229,239,371 159,239,860
Capture(R) carpet shampooer and related products 32,100 432,600 276,678
</TABLE>
Sales and Marketing
The Company's main products are its FANTOM(R) vacuums which the Company
sells in two ways: (a) to various types of retailers, including mass merchants,
catalog and catalog-showroom retailers, warehouse clubs, department stores,
hardware stores, television shopping networks and independent vacuum dealers;
and (b) to end-users through direct-response television and its Internet
website. The independent vacuum dealers also serve as product repair centers.
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 plant to handle inquiries that FANTOM owners and
potential purchasers have about its products. The Company has been focusing on
maintaining distribution and sell-through of its FANTOM(R) vacuums in retail
outlets,
<PAGE>
Page 9
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.; Consolidated Stores Corp.; Costco Wholesale Inc.; Fingerhut Companies
Inc.; Fred Meyer, Inc.; Home Shopping Network Inc.; JC Penney Company, Inc.;
Kmart Corporation; Kohl's Department Stores; Lowe's Companies, Inc.; Meijer,
Inc.; Service Merchandise Company, Inc.; Shopko Stores Inc.; Spiegel, Inc.;
Target Stores and Wal-Mart Stores, Inc. 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. The Company's products
are also sold by several hundred independent vacuum dealers across the United
States and Canada.
In addition to the above channels of distribution, during Fiscal 2000 the
Company entered into transactions with a barter and media company. The
transactions principally consisted of the sale of refurbished vacuum cleaners
for a combination of cash and barter credits.
Research and Development
The Company has 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. 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. The Company is combining
its expertise in product design, engineering, manufacturing and marketing with
Omachron's broad scientific knowledge for the purpose of developing innovative
new products with ground-breaking technologies. Eighty-six patent applications
have been filed for technologies the Company is either acquiring or exclusively
licensing through its association with Omachron. Of these, twenty-five have
been allowed by the United States patent office.
Pursuant to the agreements entered into during the last three years, the
Company has rights to certain proprietary technology on a worldwide basis and
will be evaluating opportunities for marketing products and licensing technology
and 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 2000 totaled $7.0 million, net
of research and development tax credits of $0.5 million. Of the total spending,
$2.7 million was capitalized, net of research and development tax credits of
$0.1 million, and was mainly for various technologies that 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 $2.1 million, net of research and development tax credits of $0.3
million, and consisted mainly of expenditures related to the Company's new
microbiological water processor and "wireless" floor-care product. Amounts
expensed were $2.2 million, net of $0.1 million of research and development tax
credits, and were mainly for research and development staff and materials.
<PAGE>
Page 10
The following chart details research and development spending for Fiscal
2000, 1999 and 1998 (in millions):
<TABLE>
<CAPTION>
Fiscal Years ended June 30,
----------------------------------------------
2000 1999 1998
----- ----- -----
<S> <C> <C> <C>
Capital spending - gross $ 2.8 $ 3.1 $ 0.2
Research and development tax credits (0.1) - -
----- ----- -----
Capital spending - net $ 2.7 $ 3.1 $ 0.2
Additions to deferred costs - gross $ 2.4 $ 1.2 $ 0.9
Research and development tax credits (0.3) - -
----- ----- -----
Additions to deferred costs - net $ 2.1 $ 1.2 $ 0.9
Research and development expense - gross $ 2.3 $ 2.0 $ 1.1
Research and development tax credits (0.1) (0.6) -
----- ----- -----
Research and development expense - net $ 2.2 $ 1.4 $ 1.1
Total Research and development spending - gross $ 7.5 $ 6.3 $ 2.2
Research and development tax credits (0.5) (0.6) -
----- ----- -----
Total Research and development spending - net $ 7.0 $ 5.7 $ 2.2
</TABLE>
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 $20 million in any
given year for tooling, manufacturing equipment and pre-launch marketing
activities and materials. 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. The Company believes that its cash
flow from operations together with its borrowing arrangements with a Canadian
chartered bank will be sufficient to provide for its product development
programs in the floor-care and water-treatment fields. The Company is also
developing a new universal thermal energy cell and is uncertain as to what its
capital requirements will be to commercialize this technology and whether it
will be able to satisfy its financing requirements for commercialization from
its current line of credit.
Counter-Top Microbiological Water Processor
In early 2001, the Company plans to launch a counter-top, microbiological
water-treatment appliance, the CALYPSO(R) Microbiological Water Processor, the
first of a line of water-treatment products planned for the Company. The
kitchen counter-top unit is designed to kill microorganisms such as Giardia, E.
coli and Cryptosporidium, all of which can seriously affect the health of people
who have weakened immune systems; 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
like benzene, atrazine, trihalomethanes and 2,4-D. The product leaves in
fluoride as well as minerals such as calcium, magnesium and potassium. It
incorporates a computer-controlled monitoring system to check various aspects of
its operation and to provide information to users regarding the status of the
system.
The Microbiological Water Processor utilizes ozone to kill micro-organisms
as well as a custom-formulated carbon-block filter to remove many other
contaminants. The Company's technological developments enable relatively strong
concentrations of ozone to be produced in small, low-cost embodiments with small
energy inputs.
The Company plans to sell the water processor 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, exposure on
television shopping networks, and public-relations programs.
<PAGE>
Page 11
In order to support certain performance claims the Company wishes to attach
to the CALYPSO(R) product, such performance claims must be substantiated by
independent testing. In addition, in order sell the CALYPSO(R) product in
certain states in the United States, the Company must receive certification for
the product from such states. Any delay in successfully completing independent
testing or in obtaining certification from those states that require such
certification will have an adverse effect on distribution and sales of the
product.
The Company expects that it can develop international licensing and joint-
venture opportunities for the CALYPSO(R) product and ozone technology employed
in such product. The Company recently signed a letter of intent with Matsushita
Seiko Co., Ltd of Japan to license Matsushita Seiko to manufacture and market
Fantom's CALYPSO(R) Microbiological Water Processor in the Far East and to
utilize Fantom's ozone technology in humidifiers in the Far East. The license
is subject to further evaluation of the CALYPSO(R) product and ozone
technology by Matsushita Seiko and completion of a definitive agreement.
"Wireless" Vacuum Cleaner
The Company plans to introduce a full-power "wireless" vacuum cleaner in
mid-calendar 2001. This product is designed to provide performance similar to
that of top-of-the-line corded vacuums, to operate for up to about an hour
before its energy system needs to be regenerated, and to be quiet during use.
The product is expected to compete in a retail price segment higher than that of
the Company's dual-cyclonic vacuums.
Power-Control Technology
The Company has developed power-control technology for use with its
"wireless" vacuum and other household appliances. The power-control technology
transfers energy in the form of a specially-tuned electronic signal, called a
"pulse-train", that is neither alternating nor direct current. It is designed
to reduce the power requirements of electromechanical systems as well as extend
the output and reduce the recharging time of batteries. The Company believes
that, over time, this might enable many cordless products to perform more
equivalently to traditional plug-ins. The Company has acquired exclusive rights
to the power-control technology for a range of consumer products and plans to
incorporate the technology into its own product lines and to offer licenses to
allow the technology to be used by other companies.
Universal Thermal Energy Cell
The Company is developing a universal thermal energy cell that it believes
employs several novel concepts that could enable it to operate efficiently as an
electrical generator or as a heat pump. Potential applications span a broad
spectrum of household products including small appliances such as vacuum
cleaners, lawn mowers and leaf blowers. Additional uses may include portable
power generators; portable light emitters; gas-fired furnaces; and air
conditioning, refrigeration, freezing and cryo-cooling systems.
Industry Overview
The electric floor-care industry is highly competitive and has several
product segments including canisters, uprights, 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-size vacuums (canister, upright and stick
vacuums) within the United States in calendar 1999, as estimated by the Vacuum
Cleaner Manufacturers Association, were 18.0 million units compared with 16.3
million units for 1998 and 15.7 million units for 1997.
<PAGE>
Page 12
Shipments of upright vacuums in 1999 were 12.7 million units compared with 11.3
million units for 1998 and 10.8 million units for 1997. Shipments of canister
vacuums in 1999 were 1.7 million units compared with 1.7 million units for 1998
and 1.6 million units for 1997. The Canadian market for full-size 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. Of these major competitors, Eureka
Co., Hoover Company, Matsushita Electric Works, Ltd. and Royal Appliance Mfg.
Co. all have forms of cyclonic-bagless vacuums that compete directly with the
Company's line of dual-cyclonic vacuums. These companies, as well as others,
are expected to introduce further new products that will compete with those of
the Company. The introduction of competitive cyclonic-bagless products had a
significant negative impact on sales of the Company's dual-cyclonic products
during fiscal 2000. The Company is uncertain as to the extent of the negative
impact these and other new products will have on its sales and net income in
future periods.
Business Strategies
During the next 12 months the Company intends to focus on:
(1) introducing enhancements to its existing product line including new
models, aesthetics and features;
(2) introducing a new "wireless" floor-care product;
(3) introducing the new CALYPSO(R) Microbiological Water Processor;
(4) building awareness and demand for its existing products and new
products by employing direct-response television advertising in long-form
and short-form formats, by gaining exposure on television shopping
networks, by securing trade promotions and by engaging in public-relations
programs;
(5) further developing its universal thermal energy cell so that its
performance characteristics can be assessed by third parties and its
commercial viability evaluated;
(6) pursuing international licensing and joint-venture opportunities; and
(7) continuing to develop other new products.
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:
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
<PAGE>
Page 13
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 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 to use the technology is dependent upon
the Company meeting certain 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.
The Company's upcoming products, including the CALYPSO(TM) Microbiological Water
Processor and "wireless" vacuum, are protected by proprietary technologies which
the Company has acquired or exclusively licensed from a third party. The
Company's ability to capitalize on these proprietary technologies depends on the
extent to which patent protection can be obtained for them. In addition, the
continued right to use the technologies requires the Company to meet certain
obligations under its various agreements. The inability of the Company to
obtain patent protection or the loss of the Company's right to use and exploit
the various technologies 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 cyclonic-bagless
products that compete directly with the Company's products. In the Company's
fiscal 2000 year, this heightened competition caused the Company to reduce
prices for its products and to experience a decline in sales. This had a
significant negative impact on the Company's results of operations. 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 or that it will be able
to maintain listings for its products with such customers. The loss of listings
with key customers could have a significant negative effect on the Company's
sales and results of operations. 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.
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 is highly dependent on a small number of scientists, and in
particular one chief scientist, to direct research activities for the
development of new technologies and product
<PAGE>
Page 14
embodiments based on such technologies. The loss of availability of the chief
scientist could have a material adverse effect on the Company's outlook and
future results of operations.
Impact of Exchange Rate Fluctuations. The Company publishes its financial
statements in Canadian dollars, but is a U.S. dollar generator. 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 2000 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 $0.4 million.
Banking Covenants. The Company is currently in the process of
renegotiating its banking arrangements and expects the new arrangements will
provide appropriate levels of financing on acceptable terms and conditions. The
loss of banking support could have an immediate adverse effect on the Company's
financial position and outlook.
Item 2. Description of 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, and 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 was renewed in September 2000 for five years.
All of the Company's appliances 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 $207 million for the fiscal year
ended June 30, 2000, the Company's production facilities were 64% utilized
during such period.
The Company leases a small sales office in Toronto, Ontario which houses
marketing and sales personnel. The lease on the Toronto sales office expires in
2004.
The Company also leases offices and laboratory space in Hampton, Ontario
which it utilizes for its research and development activities in conjunction
with Omachron.
Item 3. Legal Proceedings
The Company is not involved in any material legal proceedings to which any
director, officer or affiliate of the Company, or any associate of any such
director, officer or affiliate of the Company or any of its subsidiaries, other
than ordinary routine litigation incidental to the Company's business. The
Company is not aware of any material proceedings currently being contemplated by
governmental authorities.
Item 4. Control of Company
<PAGE>
Page 15
As of December 13, 2000, there were 9,130,408 common shares ("Common
Shares") of the Company issued and outstanding. Holders of Common Shares are
entitled to vote on all matters requiring the vote or consent of the
shareholders of the Company.
To the knowledge of the Company, the following table sets forth the names
of shareholders owning of record or beneficially, directly or indirectly, more
than 10% of the outstanding Common Shares of the Company, and the number of
Common Shares owned directly and indirectly by the directors and officers of the
Company as a group as at December 13, 2000:
<TABLE>
<CAPTION>
Percentage of
Outstanding Common
Name Common Shares Owned Shares /(1)/
<S> <C> <C>
Gintel Asset Management, Inc. 1,270,000 13.9%
Guardian Capital Inc. 1,032,400 11.3%
Directors and officers as a group /(2)/ 1,433,033 15.7%
</TABLE>
Notes:
(1) Percentage of outstanding Common Shares is based on 9,130,408 Common Shares
outstanding on December 13, 2000.
(2) Includes Common Shares issuable upon the exercise of options exercisable
prior to February 26, 2000.
The Company is not directly or indirectly owned or controlled by
another corporation or foreign government and there are no arrangements known to
the Company which may at a subsequent date result in a change in control of the
Company.
Item 5. Nature of Trading Market
The Common Shares are listed and posted for trading on the Nasdaq Stock
Market and on The Toronto Stock Exchange, the exclusive non-United States
trading market for such securities. The Company's Common Shares commenced
trading 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 for the Company's Common Shares on The
Toronto Stock Exchange and the Nasdaq Stock Market during each quarter of the
2000 and 1999 fiscal years were as follows:
<TABLE>
<CAPTION>
The Toronto Stock Exchange Nasdaq
------------------------------- -----------------------------
Volume High Low Volume High Low
--------- --------- --------- ------- --------- ---------
Fiscal year ended June 30, 2001
--------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Second Quarter (to Dec 19, 2000) 2,362,100 CDN$12.90 CDN$6.55 171,000 US$8.500 US$4.250
First Quarter 154,700 CDN$9.00 CDN$5.45 130,100 US$5.875 US$3.750
Fiscal year ended June 30, 2000
--------------------------------------
Fourth Quarter 810,400 CDN$15.50 CDN$10.85 97,100 US$10.688 US$7.125
Third Quarter 1,395,810 CDN$21.50 CDN$13.00 148,000 US$14.438 US$9.5000
Second Quarter 1,155,120 CDN$20.25 CDN$14.75 191,000 US$14.000 US$10.063
First Quarter 1,293,100 CDN$24.00 CDN$16.95 476,900 US$16.250 US$11.250
Fiscal year ended June 30, 1999
--------------------------------------
Fourth Quarter 1,475,640 CDN$20.20 CDN$14.80 358,800 US$13.750 US$10.000
Third Quarter 1,006,180 CDN$19.25 CDN$13.90 202,700 US$13.000 US$9.188
Second Quarter 784,000 CDN$16.25 CDN$11.00 143,200 US$10.125 US$6.875
First Quarter 207,200 CDN$17.00 CDN$10.75 166,700 US$11.125 US$7.00
</TABLE>
<PAGE>
Page 16
The volume of trading of the Common Shares on Nasdaq is, on average, a
small percentage of the value of trading on the TSE.
Based on information supplied to the Company by CIBC Mellon Trust Company,
the Company's transfer agent, the Company estimates that on December 13, 2000,
11 persons holding in the aggregate 2,229,810 Common Shares were residents of
the United States, representing approximately 24.4% of the outstanding Common
Shares as of such date. Furthermore, as of December 13, 2000, 5,070,468 Common
Shares were held by holding companies, representing a total of 55.5% of the
outstanding Common Shares as of such date. The Company is unable to determine
how many of these shares are held by residents of the United States.
Item 6. Exchange Controls and Other Limitations Affecting Security Holders
There are no governmental laws, decrees or regulations in Canada that
restrict the export or import of capital, including, but not limited to, foreign
exchange controls, or that affect the remittance of dividends, interest or other
payments to nonresident holders of the Common Shares, other than withholding tax
requirements. Any such remittances, however, are subject to withholding tax.
There is no limitation imposed by Canadian law or by the charter or other
constituent documents of the Company on the right of nonresident or foreign
owners to hold or vote Common Shares, other than as provided in the Investment
Canada Act (Canada) (the "Investment Canada Act"). The following summarizes the
principal features of the Investment Canada Act.
The Investment Canada Act requires certain "non-Canadian" (as defined in
the Investment Canada Act) individuals, governments, corporations and other
entities who wish to acquire control of a "Canadian business" (as defined in the
Investment Canada Act) to file either a notification or an application for
review with the Director of Investments appointed under the Investment Canada
Act. The Investment Canada Act requires that in certain cases an acquisition of
control of a Canadian business by a "non-Canadian" must be reviewed and approved
by the Minister responsible for the Investment Canada Act on the basis that the
Minister is satisfied that the acquisition is "likely to be of net benefit to
Canada", having regard to criteria set forth in the Investment Canada Act.
With respect to acquisitions of voting shares, only those acquisitions of
voting shares of a corporation that constitute acquisitions of control of such
corporation are reviewable under the Investment Canada Act. The Investment
Canada Act provides detailed rules for the determination of whether control has
been acquired, and, pursuant to those rules, the acquisition of one-third or
more of the voting shares of a corporation may, in some circumstances, be
considered to constitute an acquisition of control. Certain reviewable
acquisitions of control may not be implemented before being approved by the
Minister. If the Minister does not ultimately approve a reviewable acquisition
which has been completed, the non-Canadian person or entity may be required,
among other things, to divest itself of control of the acquired Canadian
business. Failure to comply with the review provisions of the Investment Canada
Act could result in, among other things, a court order directing the disposition
of assets or shares.
Item 7. Taxation
The following is a summary of the principal Canadian federal income tax
considerations generally applicable to a person who is a U.S. Holder. In this
summary, a "U.S. Holder" means a person who, for the purposes of the Canada-
United States Income Tax Convention (1980) (the "Convention"), is a resident of
the United States and not of Canada and who, for the purposes of the Income Tax
Act (Canada) (the "Canadian Tax Act"), deals at arm's length with the Company,
<PAGE>
Page 17
does not use or hold and is not deemed to use or hold the Common Shares in
carrying on business in Canada, is not an insurer carrying on business in Canada
and elsewhere and who holds the Common Shares as capital property. Generally,
Common Shares will be considered to be capital property to a U.S. Holder
provided the U.S. Holder does not hold the Common Shares in the course of
carrying on a business and has not acquired the Common Shares in one or more
transactions considered to be an adventure in the nature of trade. This summary
is not applicable to a U.S. Holder that is a "financial institution" for
purposes of the mark-to-market rules in the Canadian Tax Act.
The summary is based upon the Convention, the current provisions of the
Canadian Tax Act, the regulations thereunder, and proposed amendments to the
Canadian Tax Act and regulations publicly announced by or on behalf of the
Minister of Finance, Canada prior to the date hereof. It does not otherwise
take into account or anticipate any changes in law, whether by legislative,
governmental or judicial decision or action. The discussion does not take into
account the tax laws of the various provinces or territories of Canada. It is
intended to be a general description of the Canadian federal income tax
considerations and does not take into account the individual circumstances of
any particular shareholder.
A dividends paid, credited or deemed to be paid or credited on a Common
Share will be subject to Canadian withholding tax at a rate of 25% under the
Canadian Tax Act. However, under the Convention, the rate of withholding tax
generally applicable to U.S. Holders who beneficially own the dividend is
reduced to 15%. In the case of a U.S. Holder that is a corporation which
beneficially owns at least 10% of the voting stock of the Company, the
applicable withholding tax rate on dividends is 5%. In the case of Common
Shares owned by a partnership, the Company will be required to withhold tax on
dividends at a rate of 25% unless the partnership obtains a waiver of
withholding from the Canada Customs and Revenue Agency based on the residential
status of its partners.
A purchase of Common Shares by the Company (other than in the open market
in the manner in which shares are normally purchased by a member of the public)
will give rise to a deemed dividend equal to the amount paid by the Company on
the purchase in excess of the paid-up capital of such shares, determined in
accordance with the Canadian Tax Act. Any such deemed dividend will be subject
to non-resident withholding tax, as described above, and will reduce the
proceeds of disposition to a holder of Common Shares for the purposes of
computing the amount of his capital gain or loss arising on the disposition.
A U.S. Holder will not be subject to tax under the Canadian Tax Act in
respect of any capital gain arising on a disposition of Common Shares (including
on a purchase by the Company) unless such shares constitute taxable Canadian
property and the U.S. Holder is not entitled to relief under the Convention.
Generally, Common Shares will not constitute taxable Canadian property of a U.S.
Holder unless, at any time during the five year period immediately preceding the
disposition of the Common Shares, not less than 25% of the issued shares of any
class or series of a class of the capital stock of the Company belonged to the
U.S. Holder, to persons with whom the U.S. Holder did not deal at arm's length
or to any combination thereof. In any event, under the Convention, gains
derived by a U.S. Holder from the disposition of Common Shares will generally
not be taxable in Canada unless the value of the Company's shares is derived
principally from real property situated in Canada.
Common Shares will constitute taxable Canadian property of a U.S. Holder
who is a former Canadian resident and who made an election under the Canadian
Tax Act to be deemed not to dispose of such shares on the U.S. Holder's
departure from Canada. Such U.S. Holders may not be eligible to claim the
exemption provided in the Convention for gains realized on a disposition of
Common Shares if they were resident in Canada at any time during the ten year
period preceding the disposition.
<PAGE>
Page 19
Item 8. Selected Financial Data
The following tables provide a summary of certain financial information for
fiscal years 1996 through 2000. The selected financial data set forth below as
of June 30, 2000, 1999, 1998, 1997, and 1996 have been derived from the
Company's audited consolidated financial statements which are prepared in
accordance with Canadian GAAP. To the extent applicable to the audited
consolidated financial statements of the Company, Canadian GAAP conforms in all
material respect with U.S. GAAP, except as described in Note 14 to the Financial
Statements of the Company. The information presented should be read in
conjunction with such "Consolidated Financial Statements" and related Notes
thereto and "Management's Discussion and Analysis" included elsewhere in this
annual report.
Consolidated Statement of Operations Data (Canadian GAAP)
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
-----------------------------------------------------------------------
2000 1999 1998 1997 1996
------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Sales $207,646,115 $242,045,457 $177,585,454 $150,213,517 $98,428,527
Cost of Goods Sold 135,507,033 155,492,659 113,661,329 96,246,860 66,586,407
------------ ------------ ------------ ------------ -----------
72,139,082 86,552,798 63,924,125 53,966,657 31,842,120
Selling, General and
Administrative Expenses 66,793,648 63,116,152 47,675,507 41,999,459 25,409,225
Research and Development 2,212,574 1,359,072 -- -- --
Finance Charges (152,140) (75,826) 48,527 464,595 718,045
------------ ------------ ------------ ------------ -----------
68,854,082 64,399,398 47,724,034 42,464,054 26,127,270
Income Before Taxes 3,285,000 22,153,400 16,200,091 11,502,603 5,714,850
Income Taxes 1,230,000 7,971,000 5,882,564 4,142,000 504,200
Net Income $ 2,055,000 $ 14,182,400 $ 10,317,527 $ 7,360,603 $ 5,210,650
Net Income Per Share $ 0.23 $ 1.58 $ 1.18 $ 0.88 $ 0.72
Net Income Per Share -
Fully Diluted $ 0.23 $ 1.51 $ 1.11 $ 0.86 $ 0.69
</TABLE>
Consolidated Statement of Operations Data (U.S. GAAP)
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Sales $203,887,147 $242,045,457 $177,585,454 $150,213,517 $98,428,527
Cost of Goods Sold 135,507,033 155,766,889 112,608,551 95,563,860 65,426,946
------------ ------------ ------------ ------------ -----------
68,380,114 86,278,568 64,976,903 54,649,657 33,001,581
Selling, General and
Administrative Expenses 67,312,101 63,329,737 47,891,407 42,088,959 25,579,225
Research and Development 4,410,891 2,567,012 1,992,000 770,000 565,000
Finance Charges (372,140) (75,826) 48,527 464,595 718,045
------------ ------------ ------------ ------------ -----------
71,350,852 65,820,923 49,931,934 43,323,554 26,862,270
Other Income - 10,129,742 (3,453,615) - -
Income Before Taxes (2,970,738) 30,587,387 11,591,354 11,326,103 6,139,311
Income Taxes (871,000) 11,171,000 4,377,064 4,131,800 547,200
Net Income $ (2,099,738) $ 19,416,387 $ 7,214,290 $ 7,194,303 $ 5,592,111
Net Income Per Share $ (0.23) $ 2.16 $ 0.82 $ 0.86 $ 0.77
Net Income Per Share -
Fully Diluted $ (0.23) $ 2.12 $0.81 $ 0.85 $ 0.75
</TABLE>
<PAGE>
Page 20
Consolidated Balance Sheet Data (Canadian GAAP)
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
----------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total Assets $104,037,994 $98,796,105 $83,465,157 $60,760,190 $42,666,839
Long-term Debt -- -- $ 15,098 $ 238,273 $ 378,710
Shareholders' Equity $ 60,342,395 $59,066,197 $45,013,222 $34,420,695 $19,959,472
</TABLE>
Consolidated Balance Sheet Data (U.S. GAAP)
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
----------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total Assets $100,497,500 $97,594,228 $85,113,471 $61,700,744 $43,874,723
Long-term Debt -- -- $ 15,098 $ 238,273 $ 378,710
Shareholders' Equity $ 59,384,919 $61,362,016 $42,583,569 $34,908,849 $20,493,956
</TABLE>
Cash Dividends Declared
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
--------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Cash Dividends per Share - Cdn $ $0.20 $0.14 $0.03 - -
Cash Dividends per Share - U.S. $ /(1)/ $0.14 $0.09 $0.02 - -
</TABLE>
Note:
(1) Cash dividends per Common Share in U.S. dollars have been calculated by
using the closing exchange rate at each dividend payment date.
The Company commenced paying quarterly dividends in the first quarter of
fiscal 1999 at the rate of $0.03 per Common Share per quarter, and increased the
amount of such dividends to $0.05 per Common Share per quarter in the first
quarter of fiscal 2000. 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.
Item 9. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Summary
The following table summarizes the Company's results of operation for the
2000, 1999, and 1998 fiscal years:
<PAGE>
Page 21
<TABLE>
<CAPTION>
Percentage of Sales % Change
------------------- --------
2000 1999 1998 2000-1999 1999-1998
---- ---- ---- --------- ---------
<S> <C> <C> <C> <C> <C>
Sales 100% 100% 100% -14% 36%
Gross profit 35% 36% 36% -17% 35%
Selling, general and administrative expenses 32% 26% 27% 6% 32%
Research and development 1% 1% - 63% -
Tax provision 1% 3% 3% -85% 36%
Net income 1% 6% 6% -86% 37%
</TABLE>
Note 14 of the Notes to the Company's Consolidated Financial Statements
contains a discussion of the differences between Canadian GAAP and U.S. GAAP and
the extent to which such differences impact the Company's financial statements.
See Item 18 - Financial Statements.
Fiscal 2000 Compared with Fiscal 1999
Results of Operations
Sales and other income. The Company's revenue in fiscal 2000 declined
14.2% from the previous year to $207.6 million. Unit shipments of vacuums
decreased 16.4%. The average revenue per vacuum increased 1.0% due to a shift in
mix in favour of the higher priced FANTOM(R) CYCLONE XT(R) model. Price
reductions were implemented across all models during the course of the fiscal
year and averaged 4.7%.
Shipments to the United States in fiscal 2000 accounted for 87.6% of total
revenue, compared with 90.6% for fiscal 1999. 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:
Sales (Millions of Dollars)
<TABLE>
<CAPTION>
United States Canada Total
------------- ------ -----
2000 1999 2000 1999 2000 1999
------ ------ ----- ----- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Retailers $172.7 $207.5 $25.3 $22.3 $198.0 $229.8
Direct-response 9.2 11.7 0.5 0.5 9.7 12.2
Total $181.9 $219.2 $25.8 $22.8 $207.6 $242.0
</TABLE>
Shipments of FANTOM(R) vacuums to retailers in the United States in fiscal
2000 decreased 16.8% from the previous year due mainly to increased competitive
activity within the bagless segment of the vacuum-cleaner market. Aggregate
sales of products to the Company's five largest customers were $100.9 million,
comprising 48.6% of total revenue, compared to $122.7 million and 50.7%
respectively for the previous year.
Sales through the Company's direct-response programs in fiscal 2000
declined $2.5 million from the previous year to $9.7 million. Total media
spending was $17.8 million compared to $17.1 million in fiscal 1999; all of the
spending in both years was for television time. Of the total media spending in
fiscal 2000, 78.1% was for short-form spots (30, 60 and 120 seconds in length),
and the remaining 21.9% for 30-minute infomercials. This compares with 73.5% and
26.5% respectively for fiscal 1999.
Cost of Goods Sold. Cost of goods sold, as a percentage of sales, was
65.3% in fiscal 2000 compared with 64.2% in fiscal 1999. Positive impacts on
margin included the drop in value of the Canadian dollar relative to the United
States dollar, net of hedging effects (approximately 3.1 percentage points); a
shift in mix toward higher margin models (approximately 1.5 percentage points);
and the year-over-year impact of the Company's cost reduction programs
(approximately 0.5 percentage points). Offsetting these were the impact of price
reductions (approximately 4.7
<PAGE>
Page 22
percentage points) and negative production variances resulting from operating
the Company's two factories at lower production volumes (approximately 1.5
percentage points).
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 5.8% in fiscal 2000 to $66.8 million. As a
percentage of sales, they increased to 32.2% from 26.1% in fiscal 1999. Media
spending increased 4.5% over fiscal 1999 to $17.8 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 $12.0 million from $10.3 million. Warranty costs increased
to $3.5 million from $1.5 million in fiscal 1999 due to the increasing number of
FANTOM(R) vacuums in consumers' homes and a higher incidence level of repairs
for the Company's LIGHTNING(R) canister. The higher level of repairs for the
LIGHTNING(R) canister was largely due to manufacturing issues which occurred
prior to fiscal 1999. Expenses associated with refurbishing product rose to $5.7
million from $4.3 million, due mainly to increased volumes.
Research and Development. Research and development spending in fiscal 2000
totaled $7.0 million (fiscal 1999 - $5.7 million), net of research and
development tax credits of $0.5 million (fiscal 1999 - $0.6 million). Of the
total spending, $2.7 million was capitalized (fiscal 1999 - $3.1 million), net
of research and development tax credits of $0.1 million (fiscal 1999 - nil), and
was mainly for various technologies that 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 $2.1 million
(fiscal 1999 - $1.2 million), net of research and development tax credits of
$0.3 million (fiscal 1999 - nil), and consisted mainly of expenditures related
to the Company's new microbiological water processor and "wireless" floor-care
product. Amounts expensed were $2.2 million (fiscal 1999 - $1.4 million), net of
$0.1 million of research and development tax credits (fiscal 1999 - $0.6
million), and were mainly for research and development staff and materials.
Net Income. Net income in fiscal 2000 was $2.1 million compared with $14.2
million in fiscal 1999. The decrease was due mainly to the decline in revenue
and the impact of absorbing fixed costs over lower production volumes.
Liquidity and Capital Resources
During fiscal 2000, $2.5 million of cash was used for operations compared
with $16.9 million generated in fiscal 1999. The decrease in cash flow from
operations in fiscal 2000 was due mainly to the decrease in net income. The
investment in non-cash operating working capital increased by $8.1 million due
mainly to an increase in income taxes receivable of $7.3 million and a decrease
in income taxes payable of $1.1 million. During fiscal 1999, cash in the amount
of $6.0 million was generated from closing currency-hedging contracts that 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, $3.8 million was
recognized in fiscal 2000 pre-tax income, and a further $2.2 million was
deferred until fiscal 2001. Items not requiring cash in fiscal 2000 included
depreciation of $3.3 million and a deferred tax increase of $3.6 million.
Cash in the amount of $1.0 million was provided in fiscal 2000 from the
exercise of stock options. Capital expenditures during the year were $9.1
million and were mainly for tooling and equipment for the new FANTOM(R)
CALYPSO(R) Microbiological Water Processor ($3.6 million); for the acquisition
of new technologies, industrial designs for new products and patent applications
for new technologies and products ($2.7 million); and for replacements and
betterments to tools for existing products and expenditures related to
manufacturing and infrastructure ($2.8 million).
<PAGE>
Page 23
The Company's bank indebtedness as at June 30, 2000 was $6.3 million
compared with a positive cash balance of $9.4 million at June 30, 1999. Key
ratios compared to the previous year were as follows:
As at June 30,
--------------
2000 1999
---- ----
Current Assets to Current Liabilities 1.75 2.00
Total Liabilities to Tangible Net Worth 0.72 0.67
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 $35.0 million for operating
purposes, $4.0 million for capital expenditures, and $20.0 million to assist
with research and development expenditures. The research and development
facility is renewed annually at the Company's request and the Bank's option. The
facility was renewed during fiscal 2000 and extended to January 2001. 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,
$20.0 million of the general operating line, and the $20.0 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. As at June
30, 2000 the unused amount available under the facility was $52.6 million versus
$58.9 million as at June 30, 1999.
Fiscal 1999 Compared with Fiscal 1998
Results of Operations
Sales and other income. 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 sales between the United States and Canada, and between
retailers (including distributors) and direct-response programs, was as follows:
Sales (Millions of Dollars)
United States Canada Total
------------- ------ -----
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
Retailers $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
Total $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.
<PAGE>
Page 24
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.
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. 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 CYCLONE XT 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.
Liquidity and Capital Resources
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
<PAGE>
Page 25
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
Impact of Inflation and Changing Prices
The Company has not experienced any material net inflationary cost
increases during the past three fiscal years. The Company has enjoyed a period
of overall product cost reductions from fiscal 1998 to 2000 due primarily to the
additional purchasing leverage associated with the Company's volume growth.
Several individual cost components have increased thereby reducing the amount of
the overall cost reduction, notably the cost of corrugated material and the cost
of the Company's labour agreements; however, the overall impact on product costs
for these items has been less than 2% of product costs.
In the Company's fiscal 2000 year, heightened competition in the electric
floor-care industry caused the Company to reduce prices for its products and to
experience a decline in sales. This had a significant negative impact on the
Company's results of operations. 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.
Outlook
The Company believes that it is positioned to expand its business in North
America and abroad by introducing the CALYPSO(R) Microbiological Water
Processor, by launching a new full-power, long-life "wireless" vacuum, and by
enhancing its line of dual-cyclonic vacuums. The two new products are expected
to begin to have a materially positive impact on financial results in fiscal
2002. Longer term, the Company believes it can further increase revenue by
introducing additional new products arising from its research and development
efforts with Omachron.
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
<PAGE>
Page 26
the United States and Canada, and the exclusive right to sell canister and
backpack products utilizing the same 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. Of these major
competitors, Eureka Co., Hoover Company, Matsushita Electric Works, Ltd. and
Royal Appliance Mfg. Co. all have forms of cyclonic vacuums that compete
directly with the Company's line of dual-cyclonic vacuums. These companies, as
well as others, are expected to introduce further new products that will compete
with those of the Company. The introduction of competitive cyclonic products had
a significant negative impact on sales of the Company's dual-cyclonic products
during fiscal 2000. The Company is uncertain as to the extent of the negative
impact these and other new products will have on its sales and net income in
future periods.
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 $20 million in any given year for tooling,
manufacturing equipment, and pre-launch marketing activities and materials.
Eighty-six utility patent applications had been filed for technologies the
Company is either acquiring or exclusively licensing through its association
with Omachron Technologies, Inc. Of these, twenty-five had already been allowed
by the United States patent office.
The Company believes that the technologies it has, and is continuing to
acquire and develop, are significant and could lead to substantial business
growth. The Company is targeting to launch two new products by mid-calendar
2001: the CALYPSO(R) Microbiological Water Processor and the full-power
"wireless" vacuum.
The Company plans to sell the water processor 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. The Company
expects that this product will be the first of a line of water-treatment
products, and that it may lead to international licensing opportunities.
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
microbiological water processor, or its effect on net income, with any degree of
accuracy.
The full-power "wireless" floor-care product the Company plans to introduce
is targeted to enable the Company to compete in a retail price segment higher
than that of its dual-cyclonic vacuums. Up-front spending for design and
development, tooling and assembly equipment, and pre-launch marketing materials
is expected to amount to approximately $7 million. Due to the uncertainties
associated with a new product launch and with competing in a higher price
segment, it is not possible to forecast sales of the new product, or its effect
on net income, with any degree of accuracy.
Based upon the uncertainty associated with the development and application
of new technology, the Company is unable to determine the extent to which future
commercialization of these technologies will impact the Company's results.
The Company is highly dependent on a small number of scientists, and in
particular one chief scientist, to direct research activities for the
development of new technology and product
<PAGE>
Page 27
embodiments based on such technology. The Company has a commitment for the
services of the chief scientist that extends, at the Company's option, until
2005. The loss of availability of the chief scientist could have a material
adverse effect on the Company's outlook and future results of operations.
During fiscal 2000 the Company entered into transactions with a barter and
media company. The transactions principally consisted of the sale of refurbished
vacuum cleaners for a combination of cash and barter credits. The inventory
value of the goods sold was $8.3 million. As the goods were not physically
shipped from the Company's premises prior to the fiscal 2000 year-end, nor any
significant amounts of cash and barter credits realized, no material accounting
entries were made in fiscal 2000 regarding the transactions. The Company is
uncertain as to how long it will take to realize the full value of the goods
sold by way of the cash and barter credits.
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. dollar. 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 (see Item 9A). 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 2000 results, a rise in value of the Canadian
dollar of 1 cent, without the protection of hedging, would adversely affect net
income by approximately $0.4 million.
Effective for the Company's fiscal period beginning July 1, 2000, the
Canadian Institute of Chartered Accountants (CICA) changed the accounting rules
applying to both pension benefits and post-employment benefits other than
pensions. The latter change is similar to the changes made in 1993 in the United
States under SFAS 106. The new rules move the accounting for non-pension
benefits to an accrual basis from the cash accounting basis presently used by
most companies, and also require that a prescribed year-end market rate be used
for valuing the future liabilities of both non-pension and pension benefits.
Also effective July 1, 2000, the CICA changed the accounting rules applying
to corporate income tax. Under the new standard, tax assets and tax liabilities
must be measured by using tax rates and laws that are expected to apply to
taxable income in the periods when the assets or liabilities are expected to be
realized or settled.
Management has not completed the determination of the impact of these
accounting changes on the financial position of the Company at June 30, 2000.
These accounting changes do not affect cash flow of the Company.
Item 9A. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risks from changes in foreign currency
exchange rates and interest rates which may adversely affect its operating
results and financial condition. The Company seeks to minimize these risks
through its regular operating and financing activities and, when deemed
appropriate, through the use of derivative financial instruments. The Company
does not hold or issue financial instruments for trading purposes.
Exchange Rate Risk
The Company realizes a significant portion of its sales in U.S. dollars and
enters into various types of foreign exchange contracts in managing its foreign
exchange risk. The table below presents information about the Company's
derivative financial instruments, particularly foreign currency forward exchange
agreements. The table summarizes information on instruments that are sensitive
to foreign currency exchange rates, and presents the notional amounts and
weighted average exchange rates by expected (contractual) maturity dates. These
<PAGE>
Page 28
notional amounts generally are used to calculate the contractual payments to be
exchanged under the contract.
<TABLE>
<CAPTION>
(Cdn $ in 000's)
2001 2002 2003 2004 2005 Total Fair Value
<S> <C> <C> <C> <C> <C> <C> <C>
Forward Exchange Agreements
(Receive $Cdn/ Sell $US)
Contract Amount $110,313 $ 86,554 - - - $196,867 $79
Average Contractual Ex Rate 1.47084 1.46701 - - - 1.4692
</TABLE>
During fiscal 1999, the Company settled certain foreign exchange contracts prior
to their maturity dates at a gain. As at June 30, 1999, $5,993,621 of these
gains were deferred until the sales transactions originally hedged are
recognized. As at June 30, 2000, $2,245,544 of these gains remain deferred.
For U.S. purposes, these gains are not deferred, but are recognized as Other
Income in the year the contracts are settled.
Interest Rate Exposure
The carrying amount and estimated fair values of the Company's outstanding
financial instruments as at June 30, 2000 are as follows:
Carrying Amount Fair Value
Cdn $ Cdn $
Bank Indebtedness (6,332,500) (6,332,500)
The interest rate on the Company's bank indebtedness at June 30, 2000 was 7.5%.
Credit Risk
The Company does not have a significant exposure to any individual customer
other than the customers noted in Note 1(g) of the Consolidated Financial
Statements appearing under Item 19 hereof. 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 Canadian 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, 2000 was $395,700 (fiscal 1999:
$660,000).
<PAGE>
Page 29
Item 10. Directors and Officers of the Company
<TABLE>
<CAPTION>
Name and Municipality Officer Director Since/(1)
of Residence Principal Occupation Since/(1) (2)/ (2)/
-------------------------------- ------------------------------------------------- ------------------ -------------------
<S> <C> <C> <C>
Arthur H. Crockett /(3)/ Corporate Director -- 1984
Toronto, Ontario
Kenneth Kelman Director of the Company -- 1984
Toronto, Ontario
James D. Meekison Chairman, Trimin Capital Corp. -- 2000
Toronto, Ontario (public investment company)
Rikki Meggeson /(3), (4)/ 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/(5)/ Partner, Fasken Martineau DuMoulin LLP 1996 1999
Toronto, Ontario (barristers and solicitors)
Alan Steinert Jr. Consultant -- 1990
Cambridge, Massachusetts
Joseph H. Wright /(3)/ Managing Partner, Crosbie & Company Inc. -- 2000
Toronto, Ontario (specialty investment bank)
Stephen J. Doorey Vice President and Chief Financial Officer 1997 --
Mississauga, Ontario
Alan C. Hussey Senior Vice President and General Manager 1995 --
Welland, Ontario
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.
<PAGE>
Page 30
(1) Member of the Audit Committee.
(2) Daughter of Kenneth Kelman.
(3) Mr. Palmer is Secretary of the Company.
Board of Directors
The mandate of the Board of Directors (the "Board") is to oversee the
conduct of the Company's business and each year approve its strategic plan with
the objective of maximizing 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 is responsible for reviewing overall business risks and the
Company's practices and policies for dealing with such risks. The Board
approves the Company's annual budget, supervises the Company's management and
approves major new product development programs and debt and equity financing.
The Board also approves and revises, as appropriate, guidelines on
corporate governance issues, and oversees the Company's communications policy
which requires management to be available to shareholders to respond to
questions and concerns and to report to the Board in such regard.
The Chair of the Board is responsible for ensuring that the Board functions
properly and independently of management. The Chair submits to the Corporate
Governance Committee candidates for nomination to the Board, provides an
orientation and education program for each new director, and recommends to the
Board nominees to its Committees.
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 fulfill 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 assesses the principal risks which the Company faces
and, where appropriate, proposes to the Board the implementation of risk-
management systems. This Committee also overseas the integrity of the Company's
internal control and management-information systems. In addition, the Audit
Committee recommends to the Board the auditors to be appointed as the Company's
auditors at each 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 review the
annual performance of the President and Chief Executive Officer and to make
recommendations to the Board with respect to his or her remuneration. The
Compensation Committee also reviews the adequacy and form of compensation of
directors and oversees the operation of the Company's pension plans.
Corporate Governance Committee. The Corporate Governance Committee is
responsible for developing the Company's approach to governance issues,
including monitoring developments in corporate governance theory and practice,
reviewing the mandates of the Board's Committees and recommending changes, and
assisting in selecting the Chair of the Board.
<PAGE>
Page 31
The Corporate Governance Committee also approves the engagement of outside
advisers, at the request of individual directors, to advise on matters in
relation to the Company. In addition, this Committee recommends nominees to the
Board, from those submitted by the Chair of the Board.
Item 11. Compensation of Directors and Officers
The aggregate amount of compensation paid by the Company and its
subsidiaries during the Company's 2000 fiscal year to all directors and officers
as a group for services in all capacities was approximately $2,016,685. The
aggregate amount set aside or accrued by the Company and its subsidiaries during
the last fiscal year of the Company to provide pension, retirement or similar
benefits for directors or officers, pursuant to any existing plan provided or
contributed to by the Company or its subsidiaries was approximately $52,000.
The following table is a summary of compensation for all services in all
capacities to the Company and its subsidiaries for the fiscal years ended June
30, 2000, 1999 and 1998 earned by each individual who was, at June 30, 2000, (i)
the chief executive officer, and (ii) the other four most highly compensated
executive officers other than the chief executive officer determined in
accordance with the Regulation made under the Securities Act (Ontario)
(collectively with the chief executive officer, the "Named Executive Officers").
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
------------------- ----------------------
Awards Payouts
------ -------
Restricted
Other Securities Shares or
Annual Under Restricted All Other
Compen- Options Share Compen-
Name and Principal Salary Bonus sation Granted Units LTIP sation
Position (1) Year ($) ($) ($) (#) ($) Payouts ($)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ALLAN D. MILLMAN 2000 372,000 46,500 30,000 21,688
President and Chief 1999 372,000 186,000 10,000 22,075
Executive Officer 1998 285,000 106,875 -- 22,998
NICK E. VARANAKIS (2) 2000 177,000 22,125 20,000 19,780
Vice President, Sales 1999 181,440 90,720 10,000 24,006
1998 145,257 54,471 -- 13,111
ALAN C. HUSSEY 2000 162,200 16,250 20,000 14,248
Senior Vice President 1999 130,000 65,000 10,000 15,893
and General Manager 1998 120,000 45,000 -- 17,882
PAUL F. SMITH 2000 142,600 16,250 20,000 6,353
Vice President, Sales 1999 130,000 65,000 10,000 9,350
1998 130,000 48,750 -- 4,030
STEPHEN J. DOOREY 2000 132,200 16,250 20,000 14,545
Vice President and Chief 1999 130,000 65,000 10,000 12,473
Financial Officer 1998 115,000 44,250 -- 7,532
</TABLE>
Notes:
(1) Positions indicated are those at June 30, 2000.
(2) The salary of this Named Executive Officer is expressed in U.S.
dollars. For purposes of the table, his salary was converted to
Canadian dollars using the simple average of the closing exchange rate
on the last day of each month during the relevant fiscal year.
Aggregated Option Exercises During the Fiscal Year Ended June 30, 2000
The following table sets out the options exercised by each of the Named
Executive Officers during the fiscal year ended June 30, 2000 and held as at
June 30, 2000 by each of the Named Executive Officers.
<PAGE>
Page 32
<TABLE>
<CAPTION>
Common Shares
-------------------------------
Value of Unexercised
Unexercised Options at in-the-Money Options at June
Aggregate June 30, 2000 30, 2000
Acquired on Value (#) ($)
Exercise Realized Exercisable/ Exercisable/
Name (#) ($) Unexercisable Unexercisable
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ALLAN D. MILLMAN Nil Nil 45,000/35,000 20,000/0
NICK E. VARANAKIS Nil Nil 25,000/25,000 20,000/0
ALAN C. HUSSEY Nil Nil 25,000/25,000 20,000/0
PAUL F. SMITH 4,800 95,640 20,200/25,000 0/0
STEPHEN J. DOOREY Nil Nil 15,000/25,000 0/0
</TABLE>
Termination of Employment Contracts
The Company has entered into an agreement with each of its Named Executive
Officers pursuant to which the Company has agreed that in the event the
employment of such officer is terminated following a change of control of the
Company, the terminated officer will be entitled to receive a lump sum retiring
allowance varying from one and one-half to two and one-half times the annual
salary of the terminated officer and will also be entitled to continuation of
normal employee benefits for an equivalent period.
Composition of the Compensation Committee
During the fiscal year ended June 30, 2000, the Compensation Committee of
the Board of Directors consisted of Messrs. Arthur H. Crockett, Maxwell Goldhar
(until his death in December 1999) and James D. Meekison (who was appointed on
February 23, 2000).
Report of the Compensation Committee
The Compensation Committee is mandated to ensure that the Company's
compensation policies are adequate to attract and retain highly qualified and
experienced executives.
The Company's compensation policy for Named Executive Officers (as defined
below), including the chief executive officer, primarily emphasizes annual cash
compensation. The Compensation Committee obtains survey data on executive
compensation from independent professional compensation consultants, which it
reviews with a view to assessing the Company's salary ranges and to determining
its policies on executive compensation. At present, the target level for
executive salaries is the 75 percent quartile level of companies of comparable
size and in comparable businesses (Canadian companies for Company executives
based in Canada and United States companies for the Company executive based in
the United States).
The Company has an Executive Gain Sharing Plan which relates a portion of
the total executive compensation to the Company's overall performance. Under
this plan, each of the Named Executive Officers was entitled during the 2000
fiscal year to receive a bonus based on the amount by which the Company's actual
pre-tax income exceeded a pre-established target level.
In addition, executives are periodically granted options to purchase Common
Shares as a longer term component of their compensation.
Compensation of Directors
The Company does not pay any compensation to the Named Executive Officer
who is a director for his services as a director. During the fiscal year ended
June 30, 2000, the Company paid each of its remaining directors who were not
employees of the Company, with the exception of Ms. Rikki Meggeson who is Chair
of the Board, a flat fee of Cdn$10,000 per calendar quarter
<PAGE>
Page 33
plus out-of-pocket expenses incurred by him in attending meetings. Ms. Rikki
Meggeson was paid an annual salary of Cdn$65,000, effective the date she became
Chair of the Board, November 1, 1999, plus out-of-pocket expenses incurred by
her in attending meetings. No additional amounts were payable for committee
participation or special assignments.
During the fiscal year ended June 30, 2000, four non-employee directors
were granted options to purchase an aggregate of 40,000 Common Shares at a price
of $21.50 per Common Share under the Outside Director Share Option Plan and two
non-employee directors granted options to purchase an aggregate of 20,000 Common
Shares at a price of $17.25 under the Outside Director Share Option Plan. Mr.
Palmer, a director of the Company, is a partner of Fasken Martineau DuMoulin
LLP, Toronto, Ontario, which has provided legal services to the Company for a
number of years.
Directors' and Officers' Liability Insurance
Under the existing policy of insurance, the Company is entitled to be
reimbursed for indemnity payments it is required or permitted to make to
directors and officers which are in excess of $10,000 deductible per occurrence,
to a maximum of $50,000,000 in each policy year. The directors and officers of
the Company are insured for losses arising from claims against them for certain
of their acts, errors or omissions for which the Company does not indemnify
them, to a maximum of $50,000,000 in each policy year. As at the date hereof,
all of the directors and officers of the Company and its subsidiaries are
included as insureds under the policy. All premiums for the policy are paid by
the Company. The annual premium paid for directors' and officers' liability
insurance was $98,000 for fiscal 2000. The premiums for the insurance are not
allocated between directors and officers as separate groups.
Indebtedness of Directors and Officers
None of the directors or senior officers of the Company or their respective
associates or affiliates are or have been indebted to the Company since the
beginning of the last completed fiscal year of the Company.
Item 12. Options to Purchase Securities from Company or Subsidiaries
The following table describes options to acquire Common Shares of the
Company outstanding as at December 13, 2000:
<PAGE>
Page 34
<TABLE>
<CAPTION>
Number Under Exercise Price per
------------ ------------------
Recipient Option Share Expiry Date
--------- ------ ----- -----------
<S> <C> <C> <C>
Outside Directors 80,000 $ 9.30 January 9, 2002
Outside Directors 40,000 $ 15.00 August 17, 2003
Outside Directors 40,000 $ 21.50 August 16, 2004
Outside Directors 20,000 $ 17.25 January 24, 2005
TOTAL FOR OUTSIDE DIRECTORS 180,000
Officers 5,000 $ 8.50 April 10, 2001
Officers 50,000 $ 9.30 January 8, 2002
Officers 105,200 $ 12.30 April 16, 2002
Officers 80,000 $ 15.00 August 17, 2003
Officers 80,000 $ 21.50 August 16, 2004
Officers 91,000 $ 17.25 January 24, 2005
Employees 5,000 $ 12.30 April 16, 2002
Employees 22,000 $ 17.25 February 22, 2005
TOTAL FOR OFFICERS AND EMPLOYEES 438,200
TOTAL FOR ALL DIRECTORS AND OFFICERS 591,200
Independent Consultant 10,000 $ 21.50 August 16, 2004
TOTAL FOR INDEPENDENT CONSULTANTS 10,000
</TABLE>
Stock Option Plans
The Company has established a Key Employees' Share Option and Share
Appreciation Rights Plan (the "ESOP") and an Outside Director Share Option and
Share Appreciation Rights Plan (the "DSOP").
An aggregate of 580,000 Common Shares has been reserved for issuance
pursuant to the ESOP. Under the ESOP, the Company's Board of Directors may
grant to full-time employees of the Company or its subsidiaries options to
purchase such number of Common Shares as the Board in its discretion considers
appropriate. The exercise price for the Common Shares covered by each option 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. Such options
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. Options
granted under the ESOP are non-assignable and expire on the earlier of (a) five
years from the date of grant and (b) the earliest of (i) the first anniversary
of the optionee's retirement, (ii) 180 days after the optionee's death, and
(iii) 90 days after any other termination of the employee's employment with the
Company. As of December 12, 2000, options had been granted with respect to
520,000 Common Shares and options remained outstanding in respect of 438,200
Common Shares.
Pursuant to the DSOP, an aggregate of 535,000 Common Shares has been
reserved for issuance to directors who are not full-time employees of the
Company. The DSOP entitles the Board of Directors to grant options thereunder
at an exercise price determined by the Board of Directors, which must not be
less than the greater of $1.10 per Common Share and the fair market value of the
Common Shares on the date of grant. Options granted under the DSOP are fully
vested on the first anniversary following the date of grant and must be
exercised within five years from the date of grant. At December 12, 2000,
options in respect of an aggregate of 420,000 Common Shares had been granted
under the Outside Director Plan, of which options in respect of 180,000 Common
Shares remain outstanding.
Effective July 1, 2000, the ESOP and the DSOP were amended to allow holders
of options to elect between exercising (i) options to purchase Common Shares, or
(ii) in lieu thereof tandem stock appreciation rights entitling the holder to
receive a cash payment equal to the excess of the fair market value of the
Common Shares subject to the option over the exercise
<PAGE>
Page 35
price for such Common Shares. Any payment in respect of the tandem stock
appreciation rights will be recorded as compensation expense at the time of
payment.
The Board of Directors of the Company is entitled to amend both the ESOP
and the DSOP subject to the approval of The Toronto Stock Exchange, which
approval would require shareholder approval in certain circumstances.
The Company also has outstanding an option to purchase 10,000 Common Shares
which was granted to an independent consultant.
The Company does not provide financial assistance to optionees to
facilitate the purchase of Common Shares under any of its stock option plans.
Item 13. Interest of Management in Certain Transactions
Not Applicable
PART II
Item 14. Description of Securities to be Registered
Not Applicable.
PART III
Item 15. Defaults Upon Senior Securities
None.
Item 16. Changes in Securities and Changes in Security for Registered Securities
None.
PART IV
Item 17. Financial Statements.
Not Applicable.
Item 18. Financial Statements.
The financial statements of the Company have been prepared on the basis of
Canadian GAAP. A reconciliation to U.S. GAAP appears in Note 14 thereto. See
Item 19.
<PAGE>
Page 35
Item 19. Financial Statements and Exhibits
(a) The following financial statements, financial statement schedules and
related materials are filed as part of this annual report:
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
(1) Auditors' Report to the Directors
(2) Consolidated Balance Sheets as at June 30, 2000 and 1999 (audited)
(3) Consolidated Statements of Income and Retained Earnings for the
fiscal years ended June 30, 2000, 1999 and 1998 (audited)
(4) Consolidated Statements of Changes in Financial Position for the
fiscal years ended June 30, 2000, 1999 and 1998 (audited)
(5) Notes to Consolidated Financial Statements
(6) Auditors' Report as to Financial Statement Schedule
(7) Schedule II - Valuation and Qualifying Accounts
</TABLE>
(b) The following exhibits are filed as part of this annual report:
(1) Articles of incorporation and by-laws.
(1.1)* The Company's Articles of Incorporation (Amalgamation), including
all amendments thereto
(1.2)* The Company's By-Laws, including all amendments thereto
(2) Instruments defining the rights of holders of registered equity
securities.
(2.1) Shareholder Protection Rights Agreement dated August 12, 1999
between the Company and CIBC Mellon Trust Company
(2.2) Amended and Restated Outside Director Share Option and Share
Appreciation Rights Plan dated July 1, 2000
(2.3) Amended and Restated Key Employees' Share Option and Share
Appreciation Rights Plan dated July 1, 2000
(2.4) Deferred Share Unit Plan for Outside Directors dated August 17,
2000
(3) Contracts not made in the ordinary course of business.
(3.1)* Technology Transfer Agreement****
(3.2)* Technology Transfer Agreement****
(3.3)* U.S. Technology Transfer Agreement****
(3.4)* Umbrella Agreement****
(3.5)** Agreement dated September 13, 1996 between Prototypes Limited,
Notetry Limited and the Company****
(3.6)* Agreement dated April 14, 1988 between the Company and Allan D.
Millman
* Incorporated by reference to File No. 0-26308, Registration Statement on
Form 20-F/A dated November 11, 1995.
** Incorporated by reference to File No. 0-26308, Registration Statement on
Form 20-F dated November 14, 1996.
*** Incorporated by reference to File No. 0-26308, Annual Report on Form 20-F
dated December 22, 1997.
**** Filed pursuant to Rule 24b-2 under which the Company has requested
Confidential Treatement certain portions of this exhibit.
<PAGE>
Page 36
(3.7)* Agreement dated September 10, 1992 between the Company and Nick
E. Varanakis
(3.8)* Agreement dated April 14, 1988 between the Company and Norman V.
Soler
(3.9)** Commitment Letter from a Canadian chartered bank (the "Bank") to
the Company dated May 22, 1996
(3.10)** General Security Agreement dated September 27, 1996 made by
Company in favour of the Bank
(3.11)** General Assignment of Book Debts, etc., dated September 27, 1996
made by the Company in favour of the Bank
(3.12)** Form 2 Charge/Mortgage of Land issued by the Company to the Bank
with regard to the real property municipally known as 1110
Hansler Road, Welland, Ontario
(3.13)** Notice of Intention to give Security under Section 427 of the
BANK ACT (Canada) dated September 27, 1996 made by the Company in
favour of the Bank
(3.14)** Agreement as to loans and advances and security therefore under
Section 427 of the BANK ACT (Canada) dated September 27, 1996
made by the Company in favour of the Bank
(3.14)** Agreement re: operating credit line dated September 27, 1996
between the Bank and the Company
(3.15)** Acceptance Agreement dated September 27, 1996 made by the Company
in favour of the Bank
(3.16)** Guarantee dated September 27, 1996 made by Fantom Technologies
Direct, Inc. ("Fantom Direct") in favour of the Bank
(3.17)** General Security Agreement dated September 27, 1996 made by
Fantom Direct in favour of the Bank
(3.18)** General Assignment of Book Debts, etc. dated September 27, 1996
made by Fantom Direct in favour of the Bank
(3.19)** Agreement dated September 8, 1995 between the Company and Alan C.
Hussey
(3.20)** Agreement dated September 8, 1995 between the Company and Linda
L. Watson
(3.21)*** Agreement dated May 8, 1997 between the Company and Joseph A.
Shillington
(3.22)*** Agreement dated May 20, 1997 between the Company and Paul Smith
(3.23)*** Agreement dated July 14, 1997 between the Company and Stephen
Doorey
* Incorporated by reference to File No. 0-26308, Registration Statement on
Form 20-F/A dated November 11, 1995.
** Incorporated by reference to File No. 0-26308, Registration Statement on
Form 20-F dated November 14, 1996.
*** Incorporated by reference to File No. 0-26308, Annual Report on Form 20-F
dated December 22, 1997.
**** Filed pursuant to Rule 24b-2 under which the Company has requested
Confidential Treatement certain portions of this exhibit.
<PAGE>
Page 37
(3.24) Commitment Letter from a Canadian chartered bank (the "Bank") to
the Company dated January 20, 1999.
<PAGE>
Page F 1
Consolidated Financial Statements of
FANTOM TECHNOLOGIES
INC.
<PAGE>
Page F 2
AUDITORS' REPORT TO THE SHAREHOLDERS
We have audited the consolidated balance sheets of Fantom Technologies Inc. as
at June 30, 2000 and 1999 and the consolidated statements of income and retained
earnings and cash flows for each of the years in the three year period ended
June 30, 2000. 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.
With respect to the consolidated financial statements for the year ended June
30, 2000, we conducted our audit in accordance with Canadian generally accepted
auditing standards and United States generally accepted auditing standards.
With respect to the consolidated financial statements for each of the years in
the two-year period ended June 30, 1999, we conducted our audits in accordance
with Canadian 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, 2000 and
1999 and the results of its operations and its cash flows for each of the years
in the three year period ended June 30, 2000 in accordance with Canadian
generally accepted accounting principles.
Canadian general accepted accounting principles vary in certain significant
respects from accounting principles generally accepted in the United States.
Application of accounting principles generally accepted in the United States
would have affected results of operations for each of the years in the three
year period ended June 30, 2000 and shareholders' equity as at June 30, 2000 and
1999 to the extent summarized in note 14 to the consolidated financial
statements.
(Signed) KPMG LLP
Chartered Accountants
Hamilton, Canada
August 18, 2000
<PAGE>
Page F 3
FANTOM TECHNOLOGIES INC.
Consolidated Balance Sheets
At June 30, 2000 and 1999
(in Canadian dollars)
---------------------------------------------------------------------
2000 1999
---------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ - $ 9,439,206
Trade accounts receivable 26,476,312 32,226,182
Other receivables 1,750,779 3,089,162
Income taxes receivable 7,267,496 -
Inventories (note 2) 23,909,087 19,835,717
Prepaid expenses 3,152,299 2,179,522
Deferred income taxes 838,000 954,000
-------------------------------------------------------------------
63,393,973 67,723,789
Advances receivable (note 3) 951,150 -
Deferred development costs, net of amortization 4,140,494 2,062,177
Property, plant and equipment, net (note 4) 35,552,377 29,010,139
---------------------------------------------------------------------
$ 104,037,994 $ 98,796,105
---------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Bank indebtedness $ 6,332,500 $ -
Trade accounts payable 21,764,909 21,175,261
Royalty payable 1,472,890 2,968,355
Co-op advertising accrual 1,974,522 1,864,956
Other payables and accruals 2,496,629 2,686,767
Income taxes payable - 1,092,818
Currency hedging exchange gains 2,245,544 2,510,831
Current portion of capital lease obligations - 21,856
-------------------------------------------------------------------
36,286,994 32,320,844
Currency hedging exchange gains - 3,482,790
Deferred income taxes 7,408,605 3,926,274
Shareholders' equity:
Share capital (note 6) 28,988,827 27,949,287
Retained earnings 31,353,568 31,116,910
-------------------------------------------------------------------
60,342,395 59,066,197
---------------------------------------------------------------------
$ 104,037,994 $ 98,796,105
---------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
<PAGE>
Page F 4
FANTOM TECHNOLOGIES INC.
Consolidated Statements of Income and Retained Earnings
(in Canadian dollars)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
Year ended June 30
2000 1999 1998
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales $207,646,115 $242,045,457 $177,585,454
Cost of goods sold 135,507,033 155,492,659 113,661,329
-----------------------------------------------------------------------------------------------------------
72,139,082 86,552,798 63,924,125
Expenses:
Selling, general and administrative 66,793,648 63,116,152 47,675,507
Research and development 2,212,574 1,359,072 --
Finance charges (152,140) (75,826) 48,527
-----------------------------------------------------------------------------------------------------------
68,854,082 64,399,398 47,724,034
-----------------------------------------------------------------------------------------------------------
Income before income taxes 3,285,000 22,153,400 16,200,091
Income taxes (note 8) 1,230,000 7,971,000 5,882,564
-----------------------------------------------------------------------------------------------------------
Net income 2,055,000 14,182,400 10,317,527
Retained earnings at beginning of year 31,116,910 18,015,632 7,698,105
Dividends (note 6) (1,818,342) (1,081,122) --
-----------------------------------------------------------------------------------------------------------
Retained earnings at end of year $ 31,353,568 $ 31,116,910 $ 18,015,632
-----------------------------------------------------------------------------------------------------------
Net income per share (note 10):
Basic $ 0.23 $ 1.58
$ 1.18
Fully diluted $ 0.23 $ 1.51
$ 1.11
-----------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
Page F 5
FANTOM TECHNOLOGIES INC.
Consolidated Statements of Cash Flows
(in Canadian dollars)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
Year ended June 30
2000 1999 1998
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash provided by (used for):
Operations:
Net income $ 2,055,000 $ 14,182,400 $10,317,527
Items not requiring cash:
Depreciation 3,338,583 2,491,505 1,484,330
Deferred tax provision 3,598,331 463,041 1,083,033
Amortization of deferred development costs 349,286 59,152 299,573
Change in non-cash operating working
capital (note 11) (8,120,007) (5,578,874) (4,245,118)
(Decrease) increase in currency hedging
exchange gains (3,748,077) 5,311,090 682,531
-----------------------------------------------------------------------------------------------------------
(2,526,884) 16,928,314 9,621,876
Financing:
Increase in bank indebtedness 6,332,500 -- --
Payments on capital leases (21,856) (217,617) (258,119)
Issuance of common shares and warrant 1,039,540 951,697 275,000
Dividends paid (1,818,342) (1,081,122) --
-----------------------------------------------------------------------------------------------------------
5,531,842 (347,042) 16,881
Investments:
Additions to property, plant and equipment (9,065,411) (10,484,772) (8,573,305)
Additions to deferred development costs (2,427,603) (1,267,092) (1,153,810)
Increase in advances receivable (951,150) -- --
-----------------------------------------------------------------------------------------------------------
(12,444,164) (11,751,864) (9,727,115)
-----------------------------------------------------------------------------------------------------------
(Decrease) increase in cash (9,439,206) 4,829,408 (88,358)
Cash and cash equivalents, beginning of year 9,439,206 4,609,798 4,698,156
-----------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ -- $ 9,439,206 $ 4,609,798
-----------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
Page F 6
FANTOM TECHNOLOGIES INC.
Notes to Consolidated Financial Statements
Years ended June 30, 2000 and 1999
(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 14, 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.
1. Significant accounting policies:
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.
<PAGE>
Page F 7
(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.
(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.
<PAGE>
Page F 8
FANTOM TECHNOLOGIES INC.
Notes to Consolidated Financial Statements, page 2
Years ended June 30, 2000 and 1999
(in Canadian dollars)
--------------------------------------------------------------------------------
1. Significant accounting policies (continued):
(f) Pension costs:
The assets of the defined benefit pension plans are recorded 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 $181,893,000 (1999:
$219,213,000; 1998: $165,407,000). Property, plant and equipment, net of
accumulated depreciation, located in the United States amounted to
$1,408,000 (1999: $1,554,000).
Sales to two customers for the year ended June 30, 2000 amounted to
approximately 16% and 12% (1999: 23% and 9%; 1998: 25% and 10%) of total
Company sales.
At June 30, 2000 receivables outstanding from these sales were $6,463,000
(June 30, 1999: $7,898,000).
(h) Foreign currency translation:
The translation of foreign currency denominated monetary items is
performed using current exchange rates in effect at the balance sheet
date and of non-monetary items using rates of exchange in effect when the
assets were acquired or obligation incurred. Sales and expense accounts
are translated using average exchange rates during the period. Foreign
exchange losses for the year ended June 30, 2000 of $810,000 (1999 gains:
$1,693,000; 1998 losses: $194,000) 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.
(k) Use of estimates:
<PAGE>
Page F 9
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.
<PAGE>
Page F 10
FANTOM TECHNOLOGIES INC.
Notes to Consolidated Financial Statements, page 3
Years ended June 30, 2000 and 1999
(in Canadian dollars)
--------------------------------------------------------------------------------
1. Significant accounting policies (continued):
(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.
(m) Investment tax credits:
Investment tax credits are recorded, using the cost reduction approach,
when there is reasonable assurance that such credits ultimately will be
realized.
2. Inventories:
Inventories are summarized as follows:
---------------------------------------------------------------------------
2000 1999
---------------------------------------------------------------------------
Raw materials $ 5,106,591 $ 5,941,907
Finished goods 18,802,496 13,893,810
---------------------------------------------------------------------------
$23,909,087 $19,835,717
---------------------------------------------------------------------------
3. Advances receivable:
The Company has 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. The Company has advanced amounts to a company related
to Omachron in conjunction with these arrangements. The advances are non-
interest bearing and due on demand; however, the Company does not expect to
demand payment within the next year. The Company has the right to elect to
recover the advances by reducing certain amounts which may be payable under
the arrangements with Omachron. The advances are secured by a charge against
property of a guarantor.
<PAGE>
Page F 11
FANTOM TECHNOLOGIES INC.
Notes to Consolidated Financial Statements, page 4
Years ended June 30, 2000 and 1999
(in Canadian dollars)
--------------------------------------------------------------------------------
4. Property, plant and equipment:
----------------------------------------------------------------------------
2000 1999
----------------------------------------------------------------------------
Land $ 81,204 $ 81,204
Building 1,879,470 1,538,912
Leasehold improvements 535,596 500,915
Machinery and equipment 6,678,367 5,921,477
Tools and dies 20,523,676 20,005,474
Furniture and fixtures 1,695,480 1,222,956
Computer equipment 3,297,076 2,722,103
Equipment under capital lease 776,815 776,815
Patents 2,408,564 1,572,000
License rights 2,276,250 1,280,000
Construction in progress 6,223,237 874,688
----------------------------------------------------------------------------
46,375,735 36,496,544
Accumulated depreciation (10,823,358) (7,486,405)
----------------------------------------------------------------------------
Net book value $ 35,552,377 $29,010,139
----------------------------------------------------------------------------
5. Bank loan agreements:
The Company has a credit facility with a Canadian chartered bank. The
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
(7.5% at June 30, 2000), 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.
The average effective interest rate on the Company's borrowings under these
arrangements for the year ended June 30, 2000 was 7.2% (1999 and 1998: N/A).
<PAGE>
Page F 12
At June 30, 2000, the unused amount available under the facility was
$52,604,348 (fiscal 1999: $58,900,000).
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.
<PAGE>
Page F 13
FANTOM TECHNOLOGIES INC.
Notes to Consolidated Financial Statements, page 5
Years ended June 30, 2000 and 1999
(in Canadian dollars)
-----------------------------------------------------------
6. Share capital (continued):
(a) Capital stock (continued):
The issued share capital of the Company is as follows:
-------------------------------------------------
2000 1999
-------------------------------------------------
Common shares (note 6(b)) $28,988,627 $ 27,949,087
Warrant 200 200
-------------------------------------------------
$28,988,827 $ 27,949,287
-------------------------------------------------
In August 1998, 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.
(b) Changes in common shares:
<TABLE>
--------------------------------------------------------------------
Shares Amount
--------------------------------------------------------------------
<S> <C> <C>
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
Exercise of stock options 109,800 1,039,540
--------------------------------------------------------------------
Outstanding at June 30, 2000 9,130,408 $ 28,988,627
--------------------------------------------------------------------
</TABLE>
(c) Stock option plans:
The Company has established a Key Employees' Stock Option Plan (the
"ESOP") and an Outside Director Share Option Plan (the "DSOP").
Options to purchase common shares of the Company under the Plans may
be granted by
<PAGE>
Page F 14
the Board of Directors to certain employees and directors of the
Company. In addition, the Board of Directors may grant options to
independent consultants. At June 30, 2000, 199,500 of the 1,125,000
common shares reserved for issuance remain available for future
grants.
<PAGE>
Page F 15
FANTOM TECHNOLOGIES INC.
Notes to Consolidated Financial Statements, page 6
Years ended June 30, 2000 and 1999
(in Canadian dollars)
-------------------------------------------------------------
6. Share capital (continued):
(c) Stock option plans (continued):
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. Options granted mature five years
after the date of grant and vest no later than two years from the date
of grant.
Changes in the outstanding stock options relating to the plans:
-------------------------------------------------------------
Weighted
Average
Number of Exercise
Shares Price
-------------------------------------------------------------
Outstanding at June 30, 1998 387,500 $ 9.75
Granted 130,000 $15.00
Cancelled (2,500) $12.30
Exercised (20,000) $ 7.15
-------------------------------------------------------------
Outstanding at June 30, 1999 495,000 $11.21
Granted 294,000 $19.42
Cancelled (11,000) $21.11
Exercised (109,800) $11.43
-------------------------------------------------------------
Outstanding at June 30, 2000 668,200 $14.94
-------------------------------------------------------------
Stock options granted during the year ended June 30, 2000 include
10,000 options to an independent consultant.
At June 30, 2000, 325,200 (1999: 365,000) options were exercisable at
an average exercisable price of $11.09 (1999: $9.85). The weighted
average remaining contractual life of the options is 3.0 years.
<PAGE>
Page F 16
FANTOM TECHNOLOGIES INC.
Notes to Consolidated Financial Statements, page 7
Years ended June 30, 2000 and 1999
(in Canadian dollars)
________________________________________________________________________________
6. Share capital (continued):
(c) Stock option plans (continued):
The following table summarizes information about fixed stock options
outstanding at June 30, 2000.
-----------------------------------------------------------------------
Options
Options Outstanding Exercisable
-----------------------------------------------------------------------
Exercise Number Remaining Contractual Number
Price Outstanding Life Exercisable
-----------------------------------------------------------------------
$5.00 20,000 0.3 years 20,000
$8.50 5,000 0.8 5,000
$9.30 130,000 1.6 130,000
$12.30 110,200 1.8 110,200
$15.00 120,000 3.1 60,000
$17.25 143,000 4.6 -
$21.50 140,000 4.1 -
-----------------------------------------------------------------------
668,200 325,200
-----------------------------------------------------------------------
Effective July 1, 2000, the ESOP and the DSOP were amended to allow
eligible participants to elect between exercising (i) options to
purchase Common Shares or (ii) in lieu thereof, tandem stock
appreciation rights entitling the participant to receive a cash payment
equal to the value of such options. Any payment in respect of the
tandem stock appreciation rights will be recorded as compensation
expense at the time of payment.
(d) Shareholder rights plan:
On August 12, 1999, the Board of Directors adopted a Shareholder
Protection Rights Plan (the "Plan"). The Plan was confirmed by the
shareholders at the 1999 annual and special meeting of the shareholders
held on October 21, 1999. The Plan will terminate at the annual meeting
of shareholders in the calendar year 2002. The purpose of the 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.
Under the Plan, each shareholder will be issued one right for each
common share. The rights become exercisable at the close of business on
the tenth trading day after the earliest of (i) the first date of
public announcement of facts indicating that a person (an "Acquiring
Person") has acquired beneficial
<PAGE>
Page F 17
ownership of 20% or more of the Company's outstanding voting shares,
subject to certain exceptions; (ii) the date of the commencement of or
first public announcement of the intent of any person (other than the
Company or any subsidiary of the Company) to commence a take-over bid
(other than a Permitted Bid or a competing Permitted Bid); (iii) the date
upon which a Permitted Bid or a competing Permitted Bid ceases to be such
or such later time as may be determined by the Board of Directors. Should a
person become an Acquiring Person (a "Flip-in Event"), each right entitles
the holder to purchase from the Company one common share at a price equal
to 50% of the market price per common share determined at that time,
subject to anti-dilution adjustments.
<PAGE>
Page F 18
FANTOM TECHNOLOGIES INC.
Notes to Consolidated Financial Statements, page 8
Years ended June 30, 2000 and 1999
(in Canadian dollars)
--------------------------------------------------------------------------------
6. Share capital (continued):
(d) Shareholder rights plan:
A Permitted Bid is a take-over bid made to all holders of the
Company's voting shares and that is open for acceptance for not less
than 60 days.
Other than as described above, the rights are not exercisable and
cannot be transferred apart from the common shares. At any time prior
to a Flip-in Event, the Board of Directors may redeem the rights in
whole at a redemption price of $0.001 per right (subject to adjustment
for any anti-dilution) and subject to shareholder approval.
(e) Dividends:
Dividends declared during fiscal 2000 on common shares were $0.20 per
share (fiscal 1999: $0.12) or $1,818,342 (fiscal 1999: $1,081,122). No
dividends were declared in 1998.
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, 2000
the accrued benefit obligation of the defined benefit pension plans was
approximately $5,109,000 (June 30, 1999: $4,769,000) and the market value
of the related pension fund assets was $5,293,000 (June 30, 1999:
$4,379,000).
8. Components of consolidated income taxes:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
2000 1999 1998
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
Provision based on statutory combined
federal and provincial income tax
rates (2000: 44.5%, 1999 and 1998: 44.6%) $1,462,000 $ 9,880,000 $ 7,225,000
Manufacturing and processing profits
deduction (297,000) (1,994,000) (1,458,000)
Other 65,000 85,000 115,564
--------------------------------------------------------------------------------------
$1,230,000 $ 7,971,000 $ 5,882,564
-------------------------------------------------------------------------------------
</TABLE>
9. Commitments:
<PAGE>
Page F 19
(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 fiscal 2001 amount to approximately
$1,180,800. 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
calendar 2003.
<PAGE>
Page F 20
FANTOM TECHNOLOGIES INC.
Notes to Consolidated Financial Statements, page 9
Years ended June 30, 2000 and 1999
(in Canadian dollars)
--------------------------------------------------------------------------------
9. Commitments (continued):
(b) Under the technology agreements with Omachron, the Company has an
obligation to pay fees as each product using a particular technology is
accepted and fees based upon sales of the products. The Company may
elect to cancel its rights to a product at any time and thereby remove
any future obligation. At June 30, 2000, payments remaining on products
accepted amount to $350,000 US per year for each fiscal year from 2001
to 2004.
(c) At June 30, 2000 the Company had committed to spend $1,405,000 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 fiscal
years. These were 9,092,228 shares for fiscal 2000, 9,002,060 shares for
fiscal 1999 and 8,777,290 shares for fiscal 1998.
The fiscal 2000 net income for the calculation of fully diluted net income
per share has been increased by $267,000 (fiscal 1999: $169,000; 1998:
$95,000) being the after-tax effect of the investment at 5% (1999 and 1998:
4%) 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 9,716,824 for fiscal 2000, 9,485,608 for fiscal 1999 and 9,340,608 for
fiscal 1998. For fiscal 2000, the calculation of fully diluted earnings per
share results in no dilution of earnings per share.
11. Consolidated Statements of Cash Flows:
(a) Changes in non-cash operating working capital are as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
2000 1999 1998
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Trade accounts receivable $ 5,749,870 $ 3,295,740 $(11,411,287)
Other receivables 1,338,383 (1,839,273) 2,293,873
Income taxes receivable (7,267,496) - -
Inventories (4,073,370) (1,470,095) (3,435,263)
Prepaid expenses (972,777) (70,695) (1,306,734)
Trade accounts payable 589,648 (4,342,103) 9,132,846
Royalty payable (1,495,465) 482,619 245,855
Co-op advertising accrual 109,566 (118,508) 1,140,744
Other payables and accruals (190,138) 98,766 (60,277)
</TABLE>
<PAGE>
Page F 21
<TABLE>
<S> <C> <C> <C>
Income taxes payable (1,092,818) (1,094,315) (113,173)
----------------------------------------------------------------------------
$(7,304,597) $(5,057,864) $ (3,513,416)
============================================================================
Relating to operating activities $(8,120,007) $(5,578,874) $ (4,245,118)
Relating to investing activities 815,410 521,010 731,702
----------------------------------------------------------------------------
$(7,304,597) $(5,057,864) $ (3,513,416)
============================================================================
</TABLE>
<PAGE>
Page F 22
FANTOM TECHNOLOGIES INC.
Notes to Consolidated Financial Statements, page 10
Years ended June 30, 2000 and 1999
(in Canadian dollars)
--------------------------------------------------------------------------------
11. Consolidated Statements of Cash Flows (continued):
(b) Supplemental cash flow information:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
2000 1999 1998
-----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash paid during the year for:
Income taxes, net of refunds $5,376,224 $7,632,635 $4,913,000
Interest 277,823 8,085 49,000
Dividends 1,818,342 1,081,122 -
Cash received from interest 189,655 67,089 103,133
Non-cash financing and investing activities:
Additions to property, plant and equipment
through working capital (815,410) (521,010) (731,702)
Change in non-cash working capital relating
to investments 815,410 521,010 731,702
-----------------------------------------------------------------------------------------
</TABLE>
12. Financial instruments:
(a) Foreign currency rate risk:
The Company realizes a significant portion of its sales in a foreign
currency 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, 2000 the
Company held forward foreign exchange contracts with an aggregate
notional amount of $134,000,000 U.S. to sell U.S. dollars at an
average rate of 1.4692 Canadian per U.S. dollar expiring at various
dates to April 2002. At June 30, 2000 these contracts had a positive
fair value of $79,000 based on quotations from the Company's bank.
During fiscal 1999, the Company settled certain foreign exchange
contracts prior to their maturity dates at a gain. As at June 30,
1999, $5,993,621 of these gains were deferred until the sales
transactions originally hedged are recognized. As at June 30, 2000,
$2,245,544 of these gains remain deferred.
(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
<PAGE>
Page F 23
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, 2000 was $395,700 (fiscal 1999: $660,000).
<PAGE>
Page F 24
FANTOM TECHNOLOGIES INC.
Notes to Consolidated Financial Statements, page 11
Years ended June 30, 2000 and 1999
(in Canadian dollars)
--------------------------------------------------------------------------------
13. Related party transactions:
During fiscal 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. 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
2000 1999 1998
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income for the
period, as reported $ 2,055,000 $14,182,400 $10,317,527
Development expenses (a) (2,078,317) (1,207,940) (854,237)
Valuation of forward foreign exchange
contracts (b) (3,758,968) 9,708,512 (3,518,000)
Pension expense (c) 169,000 147,000 (20,600)
Retiree benefits expense (d) (169,000) - -
Valuation of options and warrant (e) (518,453) (213,585) (215,900)
Capitalization of interest (h) 220,000 - -
Valuation of advances receivable (i) (120,000) - -
Income tax expense (f) 2,101,000 (3,200,000) 1,505,500
--------------------------------------------------------------------------------------
Net income (loss) for the period in accordance
with United States accounting
principles (2,099,738) 19,416,387 7,214,290
Minimum pension liability adjustment (c) 382,990 (722,100) -
--------------------------------------------------------------------------------------
Comprehensive income (loss) for the period in
accordance with United States accounting
principles $(1,716,748) $18,694,287 $ 7,214,290
--------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Page F 25
FANTOM TECHNOLOGIES INC.
Notes to Consolidated Financial Statements, page 12
Years ended June 30, 2000 and 1999
(in Canadian dollars)
------------------------------------------------------------------------------
14. Reconciliation to United States Generally Accepted Accounting Principles
(continued):
-----------------------------------------------------------------------------
Year ended June 30
2000 1999 1998
-----------------------------------------------------------------------------
Net income (loss) per share in accordance
with United States accounting
principles (i) - Basic $(0.23) $2.16 $0.82
- Diluted $(0.23) $2.12 0.81
-----------------------------------------------------------------------------
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, 2000 are $4,411,000 (1999:
$2,567,000; 1998: $1,992,000).
(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 as
other income 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.
<PAGE>
Page F 26
The U.S. pronouncement, Statement of Financial Accounting Standards
No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits", was effective for the Company's fiscal year
ending June 30, 1999. The Standard identifies disclosure requirements
without changing the recognition or measurement of pension or other
postretirement benefit plans.
<PAGE>
Page F 27
FANTOM TECHNOLOGIES INC.
Notes to Consolidated Financial Statements, page 13
Years ended June 30, 2000 and 1999
(in Canadian dollars)
--------------------------------------------------------------------------------
14. Reconciliation to United States Generally Accepted Accounting Principles
(continued):
The following table sets forth the change in projected benefit
obligation, change in plan assets, funded status and amounts which
would have been recognized in the consolidated balance sheet under
United States accounting principles:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
June 30
2000 1999
----------------------------------------------------------------------------------
<S> <C> <C>
Projected benefit obligation, beginning of year $ 5,874,500 $ 4,765,600
Service cost 306,000 255,200
Interest cost 364,300 306,900
Actuarial (gain) loss (641,357) 384,900
Benefits paid (171,943) (218,700)
Plan amendments - 380,600
----------------------------------------------------------------------------------
Projected benefit of obligation, end of year $ 5,731,500 $ 5,874,500
----------------------------------------------------------------------------------
Fair value of plan assets, beginning of year $ 4,378,500
$ 4,188,000
Company contributions 589,400 604,300
Actual return on plan assets 497,043 (89,200)
Transfer to defined contribution component - (105,900)
Benefits paid (171,943) (218,700)
----------------------------------------------------------------------------------
Fair value of plan assets, end of year $ 5,293,000 $ 4,378,500
----------------------------------------------------------------------------------
Funded status $ (438,500) $ (1,496,000)
Unrecognized transition asset (76,426) (95,626)
Unrecognized net loss 844,396 1,667,800
Unrecognized prior service cost 782,000 813,300
Adjustment to recognize minimum
liability (1,320,270) (1,959,474)
----------------------------------------------------------------------------------
Net pension asset (liability) $ (208,800) $ (1,070,000)
----------------------------------------------------------------------------------
</TABLE>
During 2000, an adjustment to reduce the net pension asset by
$1,320,270 (1999: $1,959,474) is required to recognize the minimum
pension liability
<PAGE>
Page F 28
required by SFAS No. 87. An intangible asset equal to the unrecognized
prior service cost of $782,000 (1999: $813,300) is also recognized.
The net reduction in total assets, net of deferred tax impact of
$199,160 (1999: $424,074) of $339,110 (1999: $722,000) is reflected as
accumulated comprehensive income within shareholders' equity.
<PAGE>
Page F 29
FANTOM TECHNOLOGIES INC.
Notes to Consolidated Financial Statements, page 14
Years ended June 30, 2000 and 1999
(in Canadian dollars)
------------------------------------------------------------------------------
14. Reconciliation to United States Generally Accepted Accounting Principles
(continued):
Assumptions used in developing projected benefit obligation were as
follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
Year ended June
30
2000 1999 1998
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate 7.0% 6.0% 6.25%
Rate of increase in salary compensation 4.0% 4.0% 4.0%
Rate of return on plan assets 8.75% 8.75% 8.75%
-------------------------------------------------------------------------------------------------------
Net pension expense under United States accounting principles was calculated as follows:
-------------------------------------------------------------------------------------------------------
Year ended June
30
2000 1999 1998
-------------------------------------------------------------------------------------------------------
Defined benefit components:
Service cost on benefits
earned during the
period $ 306,000 $ 255,200 $ 251,302
Interest cost on projected
benefit obligation 364,300 306,900 321,530
Expected return on plan assets (387,000) (381,800) (346,996)
Net amortization 84,100 63,400 15,080
-------------------------------------------------------------------------------------------------------
367,400 243,700 240,916
Defined contributions component 227,000 201,300 166,872
-------------------------------------------------------------------------------------------------------
$ 594,400 $ 445,000 $ 407,788
-------------------------------------------------------------------------------------------------------
</TABLE>
The Company's pension plan assets include short-term notes and
treasury bills, bonds, common and preferred stocks and pooled fund
investments.
(d) During 2000, the Company agreed to provide health, dental and life
insurance benefits to its employees after their retirement date. Under
Canadian accounting principles the cost of these benefits for the year
ended June 30,
<PAGE>
Page F 30
2000 would be expensed only if benefit payments were required. The
U.S. pronouncement, Statement of Financial Accounting Standards No.
106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions", requires accrual, during the years that the employee
renders the necessary service, of the expected cost of providing
postretirement benefits.
<PAGE>
Page F 31
FANTOM TECHNOLOGIES INC.
Notes to Consolidated Financial Statements, page 15
Years ended June 30, 2000 and 1999
(in Canadian dollars)
-------------------------------------------------------------------
14. Reconciliation to United States Generally Accepted Accounting
Principles (continued):
The following table sets forth the change in projected benefit
obligation, funded status and amounts which would have been
recognized in the consolidated balance sheet under United
States accounting principles at June 30, 2000:
--------------------------------------------------------------
Projected benefit obligation, beginning of year $ -
Plan amendments 710,200
Service cost 68,000
Interest cost 46,000
Benefits paid (14,000)
--------------------------------------------------------------
Projected benefit obligation, end of year $ 810,200
Assets at fair value, beginning and end of year -
--------------------------------------------------------------
Funded status (810,200)
Unrecognized prior service cost 641,200
--------------------------------------------------------------
Net retirement benefits liability $ 169,000
--------------------------------------------------------------
Company contributions to fund benefit payments during 2000 were
$14,000.
Assumptions used in developing the projected benefit obligation
include a discount rate of 7.0% and a rate of increase in
salary compensation of 4.0%. Health care costs are assumed to
increase by 11% next year and decrease to 5.5% in year seven
and thereafter.
Net retirement benefits expense under United States accounting
principles was calculated as follows for the year ended June 30,
2000:
--------------------------------------------------------------
Service cost on benefits earned during the period $ 68,000
Interest cost on projected benefit obligation 46,000
Amortization of prior service cost 55,000
--------------------------------------------------------------
$ 169,000
--------------------------------------------------------------
<PAGE>
Page F 32
Assumed health care cost trend rates have a significant impact on the
amounts reported for health care plans. A 1% change in assumed health
care cost trend rates would have the following impact:
-----------------------------------------------------------------
1% Increase 1% Decrease
-----------------------------------------------------------------
Effect on total service and interest cost components $ 45,000 $ (25,000)
Effect on accumulated post-retirement benefit
obligation $154,000 $(124,000)
---------------------------------------------------------------
<PAGE>
Page F 33
FANTOM TECHNOLOGIES INC.
Notes to Consolidated Financial Statements, page 16
Years ended June 30, 2000 and 1999
(in Canadian dollars)
--------------------------------------------------------------------------------
14.Reconciliation to United States Generally Accepted Accounting Principles
(continued):
(e) During 2000, the Company issued options to purchase 10,000 common shares
to an independent consultant who is a principal of Omachron Research Inc.,
which provides research and development services to the Company. During
2000 the Company issued options to purchase 60,000 (1999: 50,000) 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.
The fair value of each option issued to a director 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 2000 and 1999
respectively: dividend yield of 0.8% and 0.8%, expected volatility of 57%
and 35%, risk-free interest rates of 7.1% and 5.1% and expected lives of
3.5 and 3 years.
The fair value of each option issued to the consultant has also been
estimated using the Black-Scholes option pricing model at June 30, 2000
with the following assumptions: dividend yield 1.8%, expected volatility
of 57%, risk-free interest rate of 7.2% and expected life of 4.2 years.
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 the independent consultant vest two years from the
date of grant and must be exercised within five years of the date of
grant. The options issued to outside directors vest one year from the date
of grant and must be exercised within five years from the date of the
grant.
(f) 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
<PAGE>
Page F 34
financial statement carrying amounts of existing assets and liabilities
and their respective tax bases.
<PAGE>
Page F 35
FANTOM TECHNOLOGIES INC.
Notes to Consolidated Financial Statements, page 17
Years ended June 30, 2000 and 1999
(in Canadian dollars)
--------------------------------------------------------------------------------
14. Reconciliation to United States Generally Accepted Accounting Principles
(continued):
At June 30, 2000 and 1999 the components of deferred tax balances under
FAS 109 were as follows:
------------------------------------------------
June 30
2000 1999
------------------------------------------------
Deferred tax assets:
Net pension liability $ 77,000 $ 396,000
Accrued liabilities 579,000 712,000
Retirement benefits liability 61,000 -
------------------------------------------------
Net deferred tax assets 717,000 1,108,000
Deferred tax liabilities:
Intangible asset (282,000) (301,000)
Property, plant and equipment (6,223,000) (5,186,000)
Other (189,000) -
------------------------------------------------
Net deferred tax liabilities (6,674,000) (5,487,000)
------------------------------------------------
Net deferred tax balance $(5,957,000) $(4,379,000)
------------------------------------------------
The Company's income before income taxes was substantially earned in the
Canadian tax jurisdiction.
(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.
(h) Under Canadian accounting principles, interest cost has been expensed as
incurred. The U.S. pronouncement, Statement of Financial Accounting
Standards No. 34, Capitalization of Interest Costs, requires interest cost
be capitalized for qualifying assets during construction. During 2000,
interest cost of $278,000 (1999: $8,000; 1998: $49,000) was incurred of
which $220,000(1999 and 1998: nil) was capitalized.
<PAGE>
Page F 36
(i) U.S. Accounting Principles Board Opinion No. 21, Interest on Receivables
and Payables, requires a note receivable, issued without a stated interest
rate, to be valued at its market value using an imputed interest rate.
Using an imputed interest rate of 7.5% and an estimated repayment period
of 3 years, the advances receivable at June 30, 2000 of $951,150 have an
estimated market value of $831,150.
<PAGE>
Page F 37
FANTOM TECHNOLOGIES INC.
Notes to Consolidated Financial Statements, page 18
Years ended June 30, 2000 and 1999
(in Canadian dollars)
--------------------------------------------------------------------------------
14. Reconciliation to United States Generally Accepted Accounting Principles
(continued):
(j) 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.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
Income (loss) Shares Per share
(Numerator) (Denominator) Amount
----------------------------------------------------------------------------
<S> <C> <C> <C>
Year ended June 30, 2000:
Basic EPS $(2,099,738) 9,092,228 $ (0.23)
=======
Effect of Dilutive Securities - - -
----------------------------------------------------------------------------
Diluted EPS $(2,099,738) 9,092,228 $ (0.23)
----------------------------------------------------------------------------
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
----------------------------------------------------------------------------
</TABLE>
At June 30, 2000 there are outstanding stock options and a warrant to
purchase common shares which may cause a dilution of earnings per
share in future periods. For the year ended June 30, 2000 the impact
of these equity instruments is antidilutive.
<PAGE>
Page F 38
FANTOM TECHNOLOGIES INC.
Notes to Consolidated Financial Statements, page 19
--------------------------------------------------------------------------------
Years ended June 30, 2000 and 1999
(in Canadian dollars)
14. Reconciliation to United States Generally Accepted Accounting Principles
(continued):
(k) At June 30, 2000, 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:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
2000 1999 1998
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income (loss) As reported $(2,099,738) $19,416,387 $7,214,290
Pro forma $(2,886,296) $19,034,471 $6,890,890
Basic earnings
(loss) per share As reported $ (0.23) $ 2.16 $ 0.82
Pro forma $ (0.32) $ 2.11 $ 0.79
Diluted earnings (loss)
per share As reported $ (0.23) $ 2.12 $ 0.81
Pro forma $ (0.32) $ 2.08 $ 0.77
----------------------------------------------------------------------------
</TABLE>
The options granted, under the Key Employees Stock Option Plan (see
note 6(c)), 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 2000 and 1999
respectively: dividend yield of 0.8% and 0.8%, expected volatility of
57 and 35 percent, risk-free interest rates of 7.1 and 5.1 percent
and expected lives of 3.5 and 3 years. No options were granted in
1998.
(l) Investment tax credits recorded against taxes otherwise payable
during the year ended June 30, 2000 amounted to $700,000 (1999:
$600,000, 1998: Nil). Accounting for these credits using the deferral
method under United States accounting principles results in the same
accounting as under Canadian accounting principles.
<PAGE>
Page F 39
(m) 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 December 1999, the United States Securities and Exchange
Commission issued Staff Accounting Bulletin No. 101 - Revenue
Recognition in Financial Statements which is effective for the
Company's fiscal year beginning July 1, 2000. Management has not
determined the impact of adoption of SAB 101 on its U.S. GAAP
disclosures.
<PAGE>
Page F 40
FANTOM TECHNOLOGIES INC.
Notes to Consolidated Financial Statements, page 20
Years ended June 30, 2000 and 1999
(in Canadian dollars)
--------------------------------------------------------------------------------
14. 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, 2000 would be to decrease deferred development costs asset by
$4,140,494 (1999: $2,062,177), decrease net pension asset by $160,000
(1999: $107,000), decrease advances receivable by $120,000 (1999:
Nil), increase property, plant and equipment by $220,000 (1999: Nil)
increase intangible pension asset by $782,000 (1999: $813,300),
decrease net deferred tax assets by $121,000 (1999: increase $154,000)
decrease provision for loss on forward foreign exchange contracts by
$186,000 (1999: $196,891), increase retirement benefit liability by
$169,000 (1999: Nil), increase accrued pension liability by $208,800
(1999: $1,070,000), decrease currency hedging gains by $2,245,544
(1999: $5,993,621), decrease deferred tax liability by $528,274 (1999:
increase $1,622,816) and decrease shareholders' equity by $957,476
(1999: increase $2,295,819).
15. 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, 2000, production
costs of $212,000 (1999: $627,000) 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, 2000, under both Canadian and United States accounting
principles, prepaid air time was $ 158,000 (1999: $366,000)
Total media and co-op advertising expense for the year ended June 30, 2000
was $30,262,000 (1999: $28,225,000; 1998: $22,631,000).
16. Comparative figures:
Certain comparative figures have been reclassified to conform with the
financial statement presentation adopted in the current year.
<PAGE>
Page F 41
AUDITORS' REPORT
To The Board Of Directors
Fantom Technologies Inc.
Under date of August 18, 2000, we reported on the consolidated balance sheets of
Fantom Technologies Inc. as of June 30, 2000 and 1999, and the related
consolidated statements of income and retained earnings and cash flows for each
of the years in the three-year period ended June 30, 2000, which are included in
the Form 20-F. In connection with our audits of the aforementioned consolidated
financial statements, we also audited the related consolidated financial
statement schedule in the Form 20-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
August 18, 2000
<PAGE>
Page F 42
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, 2000 $660,000 166,997 60,827 492,096 $395,728
Year ended June 30, 1999 $702,280 1,376,001 48,684 1,466,965 $660,000
Year ended June 30, 1998 $583,773 234,724 40,010 156,227 $702,280
</TABLE>
<TABLE>
<CAPTION>
Balance at Add:
beginning Charged to Deduct: Balance at end
of Year Expenses Write-Offs of Year
-------- --------- ---------- --------------
<S> <C> <C> <C> <C>
Reserve for slow-moving and non-salable inventory:
Year ended June 30, 2000 $630,548 618,000 - $1,248,548
Year ended June 30, 1999 $700,304 538,054 607,810 $ 630,548
Year ended June 30, 1998 $800,000 36,867 136,563 $ 700,304
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the Company certifies that it meets all of the requirements for filing
on Form 20-F and has duly caused this annual report to be signed on its behalf
by the undersigned, thereunto duly authorized.
FANTOM TECHNOLOGIES INC.
December 28, 2000 By: /s/ Allan D. Millman
----------------------------- ------------------------------------
Date Name: Allan D. Millman
Title: President and Chief Executive Officer
<PAGE>
EXHIBIT INDEX
(1) Articles of incorporation and by-laws.
(1.1)* The Company's Articles of Incorporation (Amalgamation), including
all amendments thereto
(1.2)* The Company's By-Laws, including all amendments thereto
(2) Instruments defining the rights of holders of registered equity
securities.
(2.1) Shareholder Protection Rights Agreement dated August 12, 1999
between the Company and CIBC Mellon Trust Company
(2.2) Amended and Restated Outside Director Share Option and Share
Appreciation Rights Plan dated July 1, 2000
(2.3) Amended and Restated Key Employees' Share Option and Share
Appreciation Rights Plan dated July 1, 2000
(2.4) Deferred Share Unit Plan for Outside Directors dated August 17,
2000
(3) Contracts not made in the ordinary course of business.
(3.1)* Technology Transfer Agreement****
(3.2)* Technology Transfer Agreement****
(3.3)* U.S. Technology Transfer Agreement****
(3.4)* Umbrella Agreement****
(3.5)** Agreement dated September 13, 1996 between Prototypes Limited,
Notetry Limited and the Company****
(3.6)* Agreement dated April 14, 1988 between the Company and Allan D.
Millman
(3.7)* Agreement dated September 10, 1992 between the Company and Nick E.
Varanakis
(3.8)* Agreement dated April 14, 1988 between the Company and Norman V.
Soler
(3.9)** Commitment Letter from a Canadian chartered bank (the "Bank") to
the Company dated May 22, 1996
(3.10)** General Security Agreement dated September 27, 1996 made by
Company in favour of the Bank
(3.11)** General Assignment of Book Debts, etc., dated September 27, 1996
made by the Company in favour of the Bank
* Incorporated by reference to File No. 0-26308, Registration Statement on
Form 20-F/A dated November 11, 1995.
** Incorporated by reference to File No. 0-26308, Registration Statement on
Form 20-F dated November 14, 1996.
*** Incorporated by reference to File No. 0-26308, Annual Report on Form 20-F
dated December 22, 1997.
**** Filed pursuant to Rule 24b-2 under which the Company has requested
Confidential Treatment of certain portions of this exhibit.
<PAGE>
(3.12)** Form 2 Charge/Mortgage of Land issued by the Company to the Bank
with regard to the real property municipally known as 1110
Hansler Road, Welland, Ontario
(3.13)** Notice of Intention to give Security under Section 427 of the
BANK ACT (Canada) dated September 27, 1996 made by the Company in
favour of the Bank
(3.14)** Agreement as to loans and advances and security therefore under
Section 427 of the BANK ACT (Canada) dated September 27, 1996
made by the Company in favour of the Bank
(3.14)** Agreement re: operating credit line dated September 27, 1996
between the Bank and the Company
(3.15)** Acceptance Agreement dated September 27, 1996 made by the Company
in favour of the Bank
(3.16)** Guarantee dated September 27, 1996 made by Fantom Technologies
Direct, Inc. ("Fantom Direct") in favour of the Bank
(3.17)** General Security Agreement dated September 27, 1996 made by
Fantom Direct in favour of the Bank
(3.18)** General Assignment of Book Debts, etc. dated September 27, 1996
made by Fantom Direct in favour of the Bank
(3.19)** Agreement dated September 8, 1995 between the Company and Alan C.
Hussey
(3.20)** Agreement dated September 8, 1995 between the Company and Linda
L. Watson
(3.21)*** Agreement dated May 8, 1997 between the Company and Joseph A.
Shillington
(3.22)*** Agreement dated May 20, 1997 between the Company and Paul Smith
(3.23)*** Agreement dated July 14, 1997 between the Company and Stephen
Doorey
(3.24) Commitment Letter from a Canadian chartered bank (the "Bank") to
the Company dated January 20, 1999.
* Incorporated by reference to File No. 0-26308, Registration Statement on
Form 20-F/A dated November 11, 1995.
** Incorporated by reference to File No. 0-26308, Registration Statement on
Form 20-F dated November 14, 1996.
*** Incorporated by reference to File No. 0-26308, Annual Report on Form 20-F
dated December 22, 1997.
**** Filed pursuant to Rule 24b-2 under which the Company has requested
Confidential Treatment of certain portions of this exhibit.
