Third Quarter
Report to
The Best of Shareholders
Science and
Technology
Committed to [PICTURE APPEARS HERE]
Humanity
FOR THE NINE MONTHS ENDED MARCH 31, 2001
[FANTOM LOGO] [FANTOM LOGO]
TO OUR SHAREHOLDERS
Fantom Technologies, Inc.
REVENUE
The Company's revenue in the third quarter of fiscal 2001 declined 47.5% from
the year-earlier period to $29.9 million. The United States accounted for
86.8% of total revenue compared with 91.3% for the year-earlier period. Unit
shipments of vacuums decreased 32.6% (United States: 33.7%; Canada: 21.4%).
The Company's revenue, when compared to the same period in the previous year,
was adversely affected by heightened competitive activity within the bagless
segment of the vacuum-cleaner market. This resulted in price reductions and
cutbacks in listings by retailers of the Company's products. In addition, some
retailers reduced inventory levels of Fantom products in anticipation of
replacing existing models with new models scheduled for introduction.
For the nine months ended March 31, 2001, revenue declined 32.5% from the
year-earlier period to $119.0 million. The United States accounted for 86.7%
of total revenue compared with 87.6% for the year-earlier period. Unit
shipments of vacuums decreased 15.4% (United States: 15.2%; Canada: 17.2%).
In the third quarter of the current fiscal year, the Company changed its method
of accounting for sales returns on shipments to customers. The Company now
reduces sales of products and earnings based on its best estimate of the
portion of such products that will be returned by its customers. Previously,
sales returns were recorded as they occurred. The accounting change was
applied by retroactively restating the
financial statements of prior periods.The accounting change had no material
impact on earnings for fiscal 2000 and for prior periods in fiscal 2001, but
did reduce retained earnings as at the beginning of fiscal 2000 by $4.6
million.
GROSS MARGIN
The Company's gross margin declined to 6.3% in the third quarter of fiscal 2001
from 34.2% in the third quarter of fiscal 2000. The standard margin on sales
of new units was 38.0%, down from 44.6% in the year-earlier period due to
price reductions resulting from the competitive environment. During the third
quarter of the current year, there was a standard margin loss of $1.6 million
resulting from the weak aftermarket for refurbished vacuums, compared with a
positive standard margin of $2.8 million for sales of refurbished vacuums
during the same period in the previous year. In addition, $2.7 million of
costs were incurred in the third quarter of the current year due to lower
manufacturing activity and increases in inventory reserves, and a further $1.4
due to exchange losses resulting from the devaluation of the Canadian dollar
relative to the U.S. dollar.
For the first nine months of fiscal 2001, the Company's gross margin declined to
19.5% from 36.4% in the year-earlier period. The standard margin on sales of
new units was 38.3%, compared with 45.8% in the year-earlier period. There was
a standard margin loss of $0.9 million associated with the sale of refurbished
vacuums, compared with a positive standard margin of $3.4 million for the same
period in the previous year. Costs of $3.7 million were incurred due to lower
manufacturing activity and increases inreserves, and $2.0 million due to
exchange losses, compared with $0.6 million and $0.7 million respectively for
the first nine months of fiscal 2000.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased 27.2% in the third
quarter of fiscal 2001 to $12.4 million. As a percentage of sales, they
increased to 41.5% from 29.9% in the year-earlier period. Co-op advertising
spending (which encompasses advertising controlled by the retailer that
includes the supplier's product and for which the supplier agrees to pay a
portion of the costs, as well as other costs agreed to with the retailer for
promotional activity) increased to $4.8 million or 16.1% of sales from $3.2
million or 5.6% of sales for the year-earlier period. A significant component
of co-op spending in the third quarter of the current year related to
realigning retail price points. Freight costs associated with shipping
products to retailers decreased to $1.2 million or 4.0% of sales from $1.6
million or 2.8% of sales in the year-earlier period. Media spending decreased
to $0.7 million or 2.3% of sales from $4.1 million or 7.2% of sales in the
year-earlier period.
For the nine months ended March 31, 2001, selling, general and administrative
expenses decreased 23.2% from the comparable period in the previous year to
$37.7 million. As a percentage of sales, they increased to 31.6% from 27.8% in
the year-earlier period. Co-op advertising increased to $11.4 million or 9.6%
of sales, compared with $8.2 million or 4.6% of sales for the first nine
months of the previous year. Media spending decreased to $4.1 million or 3.4%
of sales from $13.9 million or 7.9% of sales in the year-earlier period.
RESEARCH AND DEVELOPMENT SPENDING
Research and development spending in the third quarter of fiscal 2001 totaled
$1.1 million (net of amortization of $0.1 million). Of this total, $0.5
million was capitalized, $0.3 million was allocated against deferred costs
(net of amortization of $0.1 million) and $0.3 million was expensed.
For the first nine months of the current fiscal year, research and development
spending was $4.7 million (net of tax credits of $0.2 million and amortization
of $0.3 million) of which $2.1 million was capitalized, $1.4 million was
allocated against deferred costs (net of amortization of $0.3 million) and
$1.2 million was expensed (net of tax credits of $0.2 million).
NET INCOME
There was a net loss for the third quarter of the current year of $6.8 million
or $0.75 per share (based on 9,130,408 shares outstanding) compared with net
income of $1.4 million or $0.16 per share (based on 9,099,181 shares
outstanding) for the year-earlier period.
For the first nine months of the current year, the Company recorded a net loss
of $10.3 million or $1.12 per share (based on 9,130,408 shares outstanding)
compared with net income of $9.0 million or $0.99 per share (based on
9,080,971 shares outstanding) for the year-earlier period.
FINANCIAL CONDITION
During the third quarter of fiscal 2001, $12.6 million of cash was used in
operations compared with $8.4 million in the year-earlier period. Capital
expenditures were $3.8 million and were mainly for tooling and equipment for
Fantom's new WILDCAT(TM) and wireless vacuums ($2.2 million); for ongoing
replacement tools, product-modification tools, and expenditures relating to
manufacturing and infrastructure ($0.7 million); for the acquisition of new
technologies, industrial designs for new products and patent applications for
new technologies and products ($0.5 million); and for tooling and equipment
for the FANTOM(R) CALYPSO(TM) Microbiological Water Processor ($0.4 million).
Additions to deferred development costs totaled $0.4 million.
For the first nine months of fiscal 2001, $9.2 million of cash was used in
operations compared with $5.3 million in the year-earlier period. Capital
expenditures totaled $8.1 million and were mainly for tooling and equipment
for the WILDCAT(TM) and wireless vacuums ($3.6 million); for the acquisition
of new technologies, industrial designs for new products and patent
applications for new technologies and products ($2.2 million); for ongoing
replacement tools, product- modification tools, and expenditures relating to
manufacturing and infrastructure ($1.3 million), and for tools and equipment
for the CALYPSO(TM) appliance ($1.0 million). Additions to deferred
development costs totaled $1.7 million and dividends paid totaled $0.9
million.
The Company's net cash position as at March 31, 2001 was negative $26.3 million
compared with negative $5.6 million as at March 31, 2000 and negative $6.3
million as at June 30, 2000.
On May 4, 2001 the Company entered into a new secured, non-revolving, term
credit facility with Trimin Capital Corp. for $10 million. This facility,
which is in addition to the existing $30 million demand operating facility
with a Canadian chartered bank, will become due on March 31, 2002. The Company
has drawn $3 million against this new facility as at May 24, 2001 and the
balance of $7 million is available in $1 million increments.
In conjunction with the new facility, the Company issued to Trimin a warrant
expiring on May 4, 2004 to purchase the Company's common shares. Each advance
of $1 million under the credit facility entitles Trimin to purchase 60,000
common shares to a maximum of 600,000 common shares if the full $10 million is
advanced.
The Company believes that this facility, in combination with the bank facility,
will provide it with the funds it needs to introduce and establish its new
products in the marketplace over the next several months. The Company is
pursuing alternative financing options to replace the Trimin facility before
its expiration date.
OUTLOOK
The Company is aggressively pursuing its strategy of developing and introducing
innovative new products to increase its revenue and realize higher margins.
The Company commenced shipping its first water- treatment product - the
FANTOM(R) CALYPSO(TM) Microbiological Water Processor - in Canada in late
March. Sales to the United States are now beginning following the recent
approval of the product by Underwriters Laboratories Inc. This approval
permits the Company to market its CALYPSO(TM) machine in 48 of the 50 states.
Two states, Iowa and California, have separate certification requirements that
the Company is continuing to pursue.
The CALYPSO(TM) product incorporates processes used by the world's most advanced
municipal water- treatment facilities and water-bottling plants. In the first
stage of the treatment process, ozone, one of the most powerful and safe
disinfecting agents available for water treatment, is bubbled through the
water to kill pathogenic bacteria such as Escherichia coli (E. coli) 0157:H7
and Salmonella typhimurium and human enteric viruses such as Coxsackie,
Norwalk and Polio. In the second stage, the water is pumped through a custom-
blended, carbon-block filter to eliminate effectively microorganisms such as
Cryptosporidium and Giardia, and to reduce many other contaminants such as
mercury, lead, asbestos and chlorine.
The appliance has been thoroughly tested for its disinfection efficacy and
filtration efficiency by third-party laboratories specializing in water
testing, including GAP EnviroMicrobial Services and NSF International (an
independent, not-for-profit organization known around the world for the
development of voluntary consensus standards, product testing procedures, and
certification services in the areas of public-health safety and the
environment).
Within the floor-care field, the Company recently commenced shipments to the
United States of enhanced versions of two of its existing uprights under the
CROSSWIND(R) trademark. Shipments to Canada are scheduled to begin shortly.
These pearl-blue products, a departure from Fantom's traditional black
vacuums, feature new, proprietary technology that provides improved
performance, and incorporate a filtration system requiring no replacement
parts.
The Company has also commenced shipping to the United States a new upright
vacuum under the WILDCAT(TM) trademark. Shipments to Canadian customers are
expected to begin in upcoming weeks. This product is being offered in striking
new colours and is the Company's most powerful, yet lightest weighing, vacuum.
The WILDCAT(TM) product is positioned to sell at higher retail price points
than the Company's current range of uprights and will be supported by national
television advertising in the United States and Canada.
In late summer, the Company plans to broaden its line further with the launch
of its full-performance wireless vacuum. When all of these floor-care
introductions are complete, the Company will have a much broader assortment of
vacuum products, available in a variety of colours and industrial designs, and
spanning a wide range of retail price points.
The Company is also continuing to develop a universal thermal energy cell
designed to convert heat from fossil fuels, solar energy or chemicals that can
be regenerated, into rotary-mechanical and/or electrical outputs. It is also
designed to act as a heat pump, converting electrical energy into heating or
cooling.
Since May 1998, ninety-one utility patent applications have been filed for
technologies the Company is either acquiring or exclusively licensing through
its association with Omachron Technologies, Inc. Of these, forty have already
been allowed by the United States patent office.
In addition to developing new technologies and introducing new products
incorporating such technologies, the Company is also focusing on improving
profitability by reducing manufacturing costs and expanding sources of revenue
through global partnerships and international licensing agreements.
While the transition to new products has required a significant amount of time
and financial resources, the Company believes it is positioned to capitalize
on this investment and emerge as a global competitor.
The foregoing information includes certain statements relating to the Company
which are forward-looking statements under Section 21E of the United States
Securities Exchange Act of 1934. The words "believes", "strategy",
"anticipated", "scheduled", "expected", "plans", "designed" and similar
expressions, as they relate to the Company or its management, are intended to
identify forward-looking statements. Such statements are based on assumptions
made by, and information available to, the Company. However, there are
important factors that could cause actual results to differ materially from
those in such forward-looking statements including, among others, the
contingencies arising from the uncertainties which are inherent in the
development of new technology and the unanticipated costs and time delays
which often arise in the process of developing new products based on
innovative technology. The Company does not intend, and assumes no obligation,
to update the forward-looking statements to reflect actual results, changes in
assumptions or changes in other factors affecting such statements.
On behalf of the Board,
/s/ Rikki Meggeson /s/ Allan D. Millman
Rikki Meggeson Allan D. Millman
Chair of the Board President and Chief Executive Officer
May 28, 2001
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
- --------------------------------------------------------------------------------
Fantom Technologies Inc.
Nine Months Ended Three Months Ended
March 31 (Unaudited) March 31 (Unaudited)
2001 2000 2001 2000
(Restated) (Restated)
Sales $ 118,995,643 $ 176,392,502 $ 29,860,637 $ 56,907,165
Cost of goods sold 95,838,959 112,140,818 27,976,646 37,447,708
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23,156,684 64,251,684 1,883,991 19,459,457
Expenses:
Selling,
general and
administrative 37,656,431 49,060,564 12,381,231 17,005,093
Research and
development 1,227,808 1,044,552 275,720 108,249
Finance charges 804,915 (96,171) 270,476 55,940
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39,689,154 50,008,945 12,927,427 17,169,282
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Income (loss) before
income taxes (16,532,470) 14,242,739 (11,043,436) 2,290,175
Income taxes (6,280,200) 5,266,554 (4,194,200) 843,581
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Net income (loss) (10,252,270) 8,976,185 (6,849,236) 1,446,594
Retained earnings
at beginning
of period 26,760,697 26,553,548 22,444,621 33,177,744
Dividends (913,042) (1,361,821) -- (456,426)
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Retained earnings
at end of period $ 15,595,385 $ 34,167,912 $ 15,595,385 $ 34,167,912
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Net income (loss)
per share
- Basic* $ (1.12) $ 0.99 $ (0.75) $ 0.16
- Fully Diluted $ (1.12) $ 0.95 $ (0.75) $ 0.16
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* Basic net income per share has been calculated using the weighted average
number of common shares outstanding during the respective periods. For the nine
months ended March 31, these were 9,130,408 shares for 2001 and 9,080,971 shares
for 2000. For the three months ended March 31, these were 9,130,408 shares for
2001 and 9,099,181 shares for 2000.
Effective July 1, 2000 the Company retroactively adopted the new accounting
standards of the Canadian Institute of Chartered Accountants relating to future
income taxes and employee future benefits including pension and non-pension
post-employment benefits.
The adoption of these new standards had no material impact on the results of
operations or on the financial position as presented in the Financial Statements
included with this report.
Certain comparative figures have been reclassified and restated to conform with
the financial statement presentation and change in accounting treatment adopted
in the current year.
Financial information in this report is expressed in Canadian dollars, unless
otherwise noted.
CONSOLIDATED BALANCE SHEETS
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Fantom Technologies Inc.
March 31
(Unaudited)
2001 2000
(Restated)
ASSETS
Current assets:
Cash and cash equivalents $ - $ -
Trade accounts receivable 24,903,303 43,752,418
Other receivables 2,466,812 1,865,369
Income taxes recoverable 7,539,036 -
Inventories 17,254,242 19,120,893
Prepaid expenses 5,477,697 3,413,076
Future income taxes - 1,094,124
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57,641,090 69,245,880
Deferred development costs,
net of amortization 5,535,714 2,886,114
Other assets:
Deferred pension costs 1,160,000 907,500
Long term trade credits receivable 4,749,505 82,229
Long term receivable 641,150 951,150
Property, plant and
equipment, net 40,938,144 34,513,231
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$ 110,665,603 $ 108,586,104
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank indebtedness $ 26,252,951 $ 5,647,989
Trade accounts payable 22,851,828 23,439,408
Other payables and accruals 14,129,278 11,501,416
Currency hedging exchange gains - 2,879,274
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63,234,057 43,468,087
Future income taxes 2,627,330 2,169,778
Other liabilities 220,000 127,500
Shareholders' equity:
Share capital 28,988,831 28,652,827
Retained earnings 15,595,385 34,167,912
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44,584,216 62,820,739
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$ 110,665,603 $ 108,586,104
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CONSOLIDATED STATEMENTS OF CASH FLOWS
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Fantom Technologies Inc.
Nine Months Ended Three Months Ended
March 31 (Unaudited) March 31 (Unaudited)
2001 2000 2001 2000
(Restated) (Restated)
CASH PROVIDED BY (USED FOR):
Operations:
Net income (loss) $(10,252,270) $ 8,976,185 $ (6,849,236) $ 1,446,594
Items not
requiring cash:
Depreciation 2,751,700 2,506,585 968,137 841,389
Future income taxes (2,139,053) (109,729) 709,103 540,824
Amortization of deferred
development costs 255,507 261,964 94,640 87,321
Change in non-cash
operating working capital 6,849,950 (12,798,760) (8,790,032) (11,007,920)
(Increase) decrease
in other assets (4,489,505) (1,160,879) 1,226,961 126,521
Increase
in other liabilities 50,000 127,501 - 42,500
Decrease
in currency hedging
exchange gains (2,245,544) (3,114,347) - (489,156)
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(9,219,215) (5,311,480) (12,640,427) (8,411,927)
Financing:
Increase in bank
indebtedness 19,920,451 5,647,989 16,851,830 5,647,989
Payments on
capital leases - (21,856) - -
Issuance of common
shares and warrant - 703,540 - 29,520
Dividends paid (913,042) (1,361,821) - (456,426)
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19,007,409 4,967,852 16,851,830 5,221,083
Investments:
Additions to property,
plant and equipment (8,137,467) (8,009,677) (3,766,853) (3,584,141)
Additions to deferred
development costs (1,650,727) (1,085,901) (444,550) (423,494)
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(9,788,194) (9,095,578) (4,211,403) (4,007,635)
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Increase (decrease)
in cash - (9,439,206) - (7,198,479)
Cash and cash equivalents,
beginning of period - 9,439,206 - 7,198,479
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Cash and cash equivalents,
end of period $ - $ - $ - $ -
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[LOGO OF FANTHOM TECHNOLOGIES]
FANTOM TECHNOLOGIES INC.
Head office and Canadian manufacturing facility:
1110 Hansler Road, P.O. Box 1004
Welland, Ontario L3B 5S1
Voice: (905) 734-7476 Fax: (905) 734-9955
United States manufacturing facility:
102 Corporate Blvd., Carolina Center Business Park
West Columbia, South Carolina 29169
Voice: (803) 739-1151 Fax: (803) 939-0730
Toronto sales office:
Suite 414, 1 Eva Road, Toronto, Ontario M9C 4Z5
Voice: (416) 622-9740 Fax: (416) 626-0674
Toronto Stock Exchange: FTM NASDAQ: FTMTF
Website: www.fantom.com E-mail: fantom@fantom.com
Transfer Agent & Registrar:
CIBC Mellon Trust Company
320 Bay Street, P.O. Box 1, Toronto, Ontario M5H 4A1
FANTOM(R), CROSSWIND(R), WILDCAT(TM) and CALYPSO(TM) are trademarks of Fantom
Technologies Inc.