-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SpEK+e8dnq4FrpFEvmEe2CfkjwQe5KrA99fwnKNnDzociKVX1n3VRIlX8qoZn1+E FVYTh+tbANgCWMbyg626Og== 0001021408-00-004530.txt : 20010101 0001021408-00-004530.hdr.sgml : 20010101 ACCESSION NUMBER: 0001021408-00-004530 CONFORMED SUBMISSION TYPE: 20-F PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20001229 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FANTOM TECHNOLOGIES INC CENTRAL INDEX KEY: 0000864300 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC HOUSEWARES & FANS [3634] IRS NUMBER: 980103552 FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 20-F SEC ACT: SEC FILE NUMBER: 000-26308 FILM NUMBER: 798381 BUSINESS ADDRESS: STREET 1: 1110 HANSLER RD STREET 2: P O BOX 1004 CITY: WELLAND ONTARIO CANA STATE: A6 BUSINESS PHONE: 3016587581 MAIL ADDRESS: STREET 1: 1110 HANSLER ROAD, PO BOX 1004 STREET 2: WELLAND CITY: ONTARIO FORMER COMPANY: FORMER CONFORMED NAME: IONA APPLIANCES INC DATE OF NAME CHANGE: 19950710 20-F 1 0001.txt FORM 20-F 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 2 TABLE OF CONTENTS 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
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 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 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 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 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 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
Fiscal Year Ended June 30 ------------------------- 2000 1999 1998 ----------- ----------- ----------- (in dollars) 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
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 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 10 The following chart details research and development spending for Fiscal 2000, 1999 and 1998 (in millions):
Fiscal Years ended June 30, ---------------------------------------------- 2000 1999 1998 ----- ----- ----- 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
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 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 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 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 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 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:
Percentage of Outstanding Common Name Common Shares Owned Shares /(1)/ 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%
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:
The Toronto Stock Exchange Nasdaq ------------------------------- ----------------------------- Volume High Low Volume High Low --------- --------- --------- ------- --------- --------- Fiscal year ended June 30, 2001 - -------------------------------------- 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
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 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 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)
Fiscal Year Ended June 30, ----------------------------------------------------------------------- 2000 1999 1998 1997 1996 ------------ ------------ ------------ ------------ ----------- 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
Consolidated Statement of Operations Data (U.S. GAAP)
Fiscal Year Ended June 30, ------------------------------------------------------------------------ 2000 1999 1998 1997 1996 ------------ ------------ ------------ ------------ ----------- 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
Page 20 Consolidated Balance Sheet Data (Canadian GAAP)
Fiscal Year Ended June 30, ---------------------------------------------------------------- 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- 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
Consolidated Balance Sheet Data (U.S. GAAP)
Fiscal Year Ended June 30, ---------------------------------------------------------------- 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- 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
Cash Dividends Declared
Fiscal Year Ended June 30, -------------------------------------------------------------- 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- Cash Dividends per Share - Cdn $ $0.20 $0.14 $0.03 - - Cash Dividends per Share - U.S. $ /(1)/ $0.14 $0.09 $0.02 - -
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 21
Percentage of Sales % Change ------------------- -------- 2000 1999 1998 2000-1999 1999-1998 ---- ---- ---- --------- --------- 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%
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)
United States Canada Total ------------- ------ ----- 2000 1999 2000 1999 2000 1999 ------ ------ ----- ----- ------ ------ 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
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 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 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 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 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 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 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 28 notional amounts generally are used to calculate the contractual payments to be exchanged under the contract.
(Cdn $ in 000's) 2001 2002 2003 2004 2005 Total Fair Value 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
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 29 Item 10. Directors and Officers of the Company
Name and Municipality Officer Director Since/(1) of Residence Principal Occupation Since/(1) (2)/ (2)/ - -------------------------------- ------------------------------------------------- ------------------ ------------------- 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
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 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 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 $52,000. The following table is a summary of compensation for all services in all capacities to the Company and its subsidiaries for the fiscal years ended June 30, 2000, 1999 and 1998 earned by each individual who was, at June 30, 2000, (i) the chief executive officer, and (ii) the other four most highly compensated executive officers other than the chief executive officer determined in accordance with the Regulation made under the Securities Act (Ontario) (collectively with the chief executive officer, the "Named Executive Officers").
Annual Compensation Long-Term Compensation ------------------- ---------------------- Awards Payouts ------ ------- Restricted Other Securities Shares or Annual Under Restricted All Other Compen- Options Share Compen- Name and Principal Salary Bonus sation Granted Units LTIP sation Position (1) Year ($) ($) ($) (#) ($) Payouts ($) 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
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 32
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 - ------------------------------------------------------------------------------------------------------------------------------- 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
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 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 34
Number Under Exercise Price per ------------ ------------------ Recipient Option Share Expiry Date - --------- ------ ----- ----------- 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
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 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 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:
Page Number ------ (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
(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 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 37 (3.24) Commitment Letter from a Canadian chartered bank (the "Bank") to the Company dated January 20, 1999. Page F 1 Consolidated Financial Statements of FANTOM TECHNOLOGIES INC. 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 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 F 4 FANTOM TECHNOLOGIES INC. Consolidated Statements of Income and Retained Earnings (in Canadian dollars)
- ----------------------------------------------------------------------------------------------------------- Year ended June 30 2000 1999 1998 - ----------------------------------------------------------------------------------------------------------- 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 - -----------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. Page F 5 FANTOM TECHNOLOGIES INC. Consolidated Statements of Cash Flows (in Canadian dollars)
- ----------------------------------------------------------------------------------------------------------- Year ended June 30 2000 1999 1998 - ----------------------------------------------------------------------------------------------------------- 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 - -----------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 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 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 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 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 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 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 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 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: -------------------------------------------------------------------- Shares Amount -------------------------------------------------------------------- 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 --------------------------------------------------------------------
(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 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 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 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 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 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:
------------------------------------------------------------------------------------- 2000 1999 1998 ------------------------------------------------------------------------------------- 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 -------------------------------------------------------------------------------------
9. Commitments: 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 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:
----------------------------------------------------------------------------- 2000 1999 1998 ----------------------------------------------------------------------------- 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)
Page F 21 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) ============================================================================
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:
----------------------------------------------------------------------------------------- 2000 1999 1998 ----------------------------------------------------------------------------------------- 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 -----------------------------------------------------------------------------------------
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 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 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:
- -------------------------------------------------------------------------------------- Year ended June 30 2000 1999 1998 - -------------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------------
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 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 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:
---------------------------------------------------------------------------------- June 30 2000 1999 ---------------------------------------------------------------------------------- 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) ----------------------------------------------------------------------------------
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 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 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:
------------------------------------------------------------------------------------------------------- Year ended June 30 2000 1999 1998 ------------------------------------------------------------------------------------------------------- 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 -------------------------------------------------------------------------------------------------------
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 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 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 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 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 F 34 financial statement carrying amounts of existing assets and liabilities and their respective tax bases. 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 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 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.
---------------------------------------------------------------------------- Income (loss) Shares Per share (Numerator) (Denominator) Amount ---------------------------------------------------------------------------- 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 ----------------------------------------------------------------------------
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 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:
----------------------------------------------------------------------------- 2000 1999 1998 ----------------------------------------------------------------------------- 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 ----------------------------------------------------------------------------
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 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 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 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 F 42 Fantom Technologies Inc. Schedule II Valuation and Qualifying Accounts (in Canadian dollars)
Balance at Add: Add: Recovery beginning Charged to of previous Deduct: Balance at end of Year Expenses Write-Offs Write-Offs of Year ---------- ---------- ------------- -------------- -------------- 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
Balance at Add: beginning Charged to Deduct: Balance at end of Year Expenses Write-Offs of Year -------- --------- ---------- -------------- Reserve for slow-moving and non-salable inventory: Year ended June 30, 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
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 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. (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. EX-2 2 0002.txt EXHIBIT 2.1 - SHAREHOLDER PROTECTION RIGHTS AGREE. Exhibit 2.1 SHAREHOLDER PROTECTION RIGHTS AGREEMENT Dated as of August 12, 1999 BETWEEN FANTOM TECHNOLOGIES INC. - and - CIBC MELLON TRUST COMPANY as Rights Agent TABLE OF CONTENTS ARTICLE I - INTERPRETATION 1.1 Certain Definitions .......................................................................... 1 1.2 Currency ..................................................................................... 14 1.3 Number and Gender ............................................................................ 14 1.4 Descriptive Headings and References .......................................................... 14 1.5 Acting Jointly or in Concert ................................................................. 14 1.6 Holder ....................................................................................... 14 ARTICLE 2 - THE RIGHTS 2.1 Legend on Common Share Certificates........................................................... 15 2.2 Initial Exercise Price; Exercise of Rights; Detachment of Rights ............................. 15 2.3 Adjustments to Exercise Price; Number of Rights .............................................. 18 2.4 Date on Which Exercise is Effective .......................................................... 24 2.5 Execution, Authentication, Delivery and Dating of Rights Certificates ........................ 24 2.6 Registration, Registration of Transfer and Exchange .......................................... 25 2.7 Mutilated, Destroyed, Lost and Stolen Rights Certificates .................................... 25 2.8 Persons Deemed Owners ........................................................................ 26 2.9 Delivery and Cancellation of Certificates .................................................... 26 2.10 Agreement of Rights Holders .................................................................. 26 ARTICLE 3 - ADJUSTMENTS TO THE RIGHTS IN THE EVENT OF A FLIP-IN EVENT 3.1 Flip-in Event ................................................................................ 27 ARTICLE 4 - THE RIGHTS AGENT 4.1 General ...................................................................................... 29 4.2 Merger or Consolidation or Change of Name of Rights Agent .................................... 30 4.3 Duties of Rights Agent ....................................................................... 30 4.4 Change of Rights Agent ....................................................................... 32 ARTICLE 5 - MISCELLANEOUS 5.1 Redemption of Rights ......................................................................... 32 5.2 Waiver of Flip-In Events ..................................................................... 33 5.3 Expiration ................................................................................... 34 5.4 Issuance of New Rights Certificates .......................................................... 34 5.5 Supplements and Amendments ................................................................... 34 5.6 Fractional Rights and Fractional Shares ...................................................... 36 5.7 Rights of Action ............................................................................. 36 5.8 Holder of Rights Not Deemed a Shareholder .................................................... 37 5.9 Notice of Proposed Actions ................................................................... 37 5.10 Notices ...................................................................................... 37 5.11 Costs of Enforcement.......................................................................... 38 5.12 Successors ................................................................................... 38 5.13 Benefits of this Agreement ................................................................... 38 5.14 Governing Law ................................................................................ 38 5.15 Counterparts ................................................................................. 39 5.16 Severability ................................................................................. 39 5.17 Determinations and Actions by the Board of Directors ......................................... 39 5.18 Effective Date ............................................................................... 39 5.19 Regulatory Approvals ......................................................................... 39 Exhibit A - Form of Rights Certificate
SHAREHOLDER PROTECTION RIGHTS AGREEMENT SHAREHOLDER PROTECTION RIGHTS AGREEMENT dated as of August 12, 1999 between FANTOM TECHNOLOGIES INC., a corporation incorporated under the Business Corporations Act (Ontario) (the "Corporation") and CIBC MELLON TRUST COMPANY, a trust company incorporated under the laws of Canada, as rights agent (the "Rights Agent", which term shall include any successor Rights Agent hereunder). WHEREAS the Board of Directors has determined that it is advisable and in the best interests of the Corporation to adopt a shareholder protection rights plan (the "Rights Plan") to ensure, to the extent possible, that all shareholders of the Corporation are treated fairly in connection with any take-over offer for the Corporation; AND WHEREAS in order to implement the Rights Plan, the Board of Directors has: (a) authorized and declared a distribution of one right (a "Right") effective the Close of Business (as hereinafter defined) on August 12, 1999 in respect of each Common Share (as hereinafter defined) outstanding at the Record Time (as hereinafter defined); and (b) authorized the issuance of one Right in respect of each Common Share issued after the Record Time and prior to the earlier of the Separation Time (as hereinafter defined) and the Expiration Time (as hereinafter defined); AND WHEREAS each Right entitles the holder thereof, after the Separation Time, to purchase securities of the Corporation pursuant to the terms and subject to the conditions set forth herein; AND WHEREAS the Rights Agent has agreed to act on behalf of the Corporation in connection with the issuance, transfer, exchange and replacement of Rights Certificates (as hereinafter defined), the exercise of Rights and other matters referred to herein; NOW THEREFORE, in consideration of the premises and the respective agreements set forth herein, the Corporation and the Rights Agent hereby agree as follows: ARTICLE I - INTERPRETATION 1.1 Certain Definitions For purposes of this Agreement, the following terms have the meanings indicated: "Acquiring Person" shall mean any Person who is the Beneficial Owner of 20% or more of the outstanding Voting Shares; provided, however, that the term "Acquiring Person" shall not include: (i) the Corporation or any Subsidiary of the Corporation; -2- (ii) any Person who becomes the Beneficial Owner of 20% or more of the outstanding Voting Shares as a result of one or any combination of: (A) a Voting Share Reduction which, by reducing the number of Voting Shares outstanding, increases the percentage of Voting Shares Beneficially Owned by such Person to 20% or more of the Voting Shares then outstanding, (B) a Pro Rata Acquisition, (C) a Permitted Bid Acquisition, (D) an Exempt Acquisition, or (E) a Convertible Security Acquisition, provided further, however, that if a Person shall become the Beneficial Owner of 20% or more of the Voting Shares then outstanding by reason of one or any combination of a Voting Share Reduction, a Pro Rata Acquisition, a Permitted Bid Acquisition, an Exempt Acquisition or a Convertible Security Acquisition and thereafter becomes the Beneficial Owner of more than an additional 1% of the outstanding Voting Shares (other than pursuant to a Voting Share Reduction, a Pro Rata Acquisition, a Permitted Bid Acquisition, an Exempt Acquisition or a Convertible Security Acquisition), then as of the date that such Person becomes the Beneficial Owner of such additional Voting Shares, such Person shall become an Acquiring Person; (iii) for the period of 10 days after the Disqualification Date (as hereinafter defined), any Person who becomes the Beneficial Owner of 20% or more of the outstanding Voting Shares as a result of such Person becoming disqualified from relying on Clause (v) of the definition of Beneficial Owner solely because such Person makes or has announced a current intention to make a Take-over Bid alone or by acting jointly or in concert with any other Person (the first date of public announcement (which, for purposes of this definition, shall include, without limitation, a report filed pursuant to Section 101 of the Securities Act (Ontario)) by such Person or the Corporation of facts indicating that any Person is making or has announced a current intention to make a Take-over Bid being herein referred to as the "Disqualification Date"); (iv) an underwriter or member of a banking or selling group that acquires Voting Shares from the Corporation in connection with a distribution of securities pursuant to a prospectus or by way of private placement; and (v) a Grandfathered Person, provided, however, that if such Person shall thereafter become the Beneficial Owner (other than pursuant to a Voting Share Reduction, a Pro Rata Acquisition, a Permitted Bid Acquisition, an Exempt Acquisition or a Convertible Security Acquisition) of additional Voting Shares constituting more than 1% of the number of Voting Shares then outstanding, such Person shall -3- become an Acquiring Person as of the date and time of acquisition of such additional Voting Shares. "Affiliate", when used to indicate a relationship with a specified Person, shall mean a Person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such specified Person. "Agreement" shall mean this shareholder protection rights agreement dated as of August 12, 1999 between the Corporation and the Rights Agent, as may be amended and/or supplemented or restated from time to time. "Associate", when used to indicate a relationship with a specified Person, shall mean (i) a spouse of such specified Person, (ii) any Person of either sex with whom such specified Person is living in a conjugal relationship outside marriage, or (iii) any relative of such specified Person or of a Person mentioned in Clauses (i) or (ii) of this definition if that relative has the same residence as the specified Person. "Beneficial Owner": a Person shall be deemed the "Beneficial Owner" and to have "Beneficial Ownership" of and to "Beneficially Own": (i) any securities of which such Person or any of such Person's Affiliates or Associates is the owner at law or in equity; (ii) any securities as to which such Person or any of such Person's Affiliates or Associates has the right to become the owner at law or in equity, where such right is exercisable immediately or within 60 days of the date of the determination of Beneficial Ownership and whether or not on condition or the occurrence of any contingency or the making of any payment, upon the exercise of any conversion right, exchange right or purchase right attaching to Convertible Securities, or pursuant to any agreement, arrangement, pledge or understanding, written or oral (other than customary agreements with and between underwriters and/or banking group and/or selling group members with respect to a distribution of securities pursuant to a prospectus or by way of private placement and other than pursuant to pledges of securities in the ordinary course of business); and (iii) any securities which are Beneficially Owned within the meaning of Clauses (i) or (ii) of this definition by any other Person with which, and in respect of which securities, such Person is acting jointly or in concert; provided, however, that a Person shall not be deemed the "Beneficial Owner" of, or to have "Beneficial Ownership" of, or to "Beneficially Own", any security: (iv) by reason of: (A) such security having been deposited or tendered pursuant to a Take-over Bid made by such Person or any of such Person's Affiliates or Associates or any other Person referred to in Clause (iii) of this definition, until the earlier of such deposited or tendered security being accepted -4- unconditionally for payment or exchange or being taken up and paid for; or (B) the holder of such security having agreed pursuant to a Permitted Lock-up Agreement to deposit or tender such security pursuant to a Take-over Bid made by any such Person or any of such Person's Affiliates or Associates or any other Person referred to in Clause (iii) of this definition; (v) by reason of such Person, any of such Person's Affiliates or Associates or any other Person referred to in Clause (iii) of this definition holding such security, provided, however, that: (A) the ordinary business of the Person (in this definition, a "Manager") includes the management of investment funds for others and such security is held by the Manager in the ordinary course of such business in the performance of such Manager's duties for the account of any other Person (in this definition, a "Client"); (B) the Person (in this definition, a "Trust Company") is licensed to carry on the business of a trust company under applicable law and, as such, acts as a trustee or administrator or in a similar capacity in relation to the estates of deceased or incompetent Persons (each, in this definition, an "Estate Account") or in relation to other accounts (each, in this definition, an "Other Account") and holds such security and is acting in the ordinary course of such duties for the Estate Account or for such Other Accounts; (C) such Person is a Crown agent or agency (in this definition, a "Crown Agent"); (D) the Person is established by statute for purposes that include, and the ordinary business or activity of such Person (in this definition, a "Statutory Body") includes, the management of investment funds for employee benefit plans, pension plans and insurance plans of various public bodies and the Statutory Body holds such security for the purposes of its activities as such; or (E) the Person (in this definition, an "Administrator") is the administrator or trustee of one or more pension funds or plans (each, in this definition, a "Plan") registered under the laws of Canada or any province thereof or the corresponding laws of the jurisdiction by which such Plan is governed or is such a Plan and the Administrator or Plan holds such security for the purposes of its activities as such; but only if the Manager, the Trust Company, the Crown Agent, the Statutory Body, the Administrator or the Plan, as the case may be, is not then making and has not announced a current intention to make a Take-over Bid, other than an Offer to Acquire Voting Shares or other securities pursuant to a distribution by the Corporation or by means of ordinary market transactions (including -5- prearranged trades entered into in the ordinary course of business of such Person) executed through the facilities of a stock exchange or an organized over-the-counter market, alone or by acting jointly or in concert with any other Person; (vi) because such Person: (A) is a Client of the same Manager as another Person on whose account the Manager holds such security; (B) has an Estate Account or an Other Account with the same Trust Company as another Person on whose account the Trust Company holds such security; or (C) is a Plan with the same Administrator as another Plan on whose account the Administrator holds such security; (vii) because such Person: (A) is a Client of a Manager and such security is owned at law or in equity by the Manager; (B) has an Estate Account or an Other Account with a Trust Company and such security is owned at law or in equity by the Trust Company; or (C) is a Plan and such security is owned at law or in equity by the Administrator of the Plan; or (viii) because such Person is the registered holder of such security as a result of carrying on the business of, or acting as nominee for, a securities depositary. "Board of Directors" shall mean the board of directors of the Corporation. "Business Corporations Act (Ontario)" shall mean the Business Corporations Act, R.S.O. 1990, c.B-16, as amended, and the regulations made thereunder and any comparable or successor laws or regulations thereto. "Business Day" shall mean any day other than a Saturday, a Sunday or a day on which banking institutions in Toronto are authorized or obliged by law to close. "Close of Business" on any given date shall mean the time on such date (or, if such date is not a Business Day, the time on the next succeeding Business Day) at which the office of the transfer agent for the Common Shares in the City of Toronto (or, after the Separation Time, the office of the Rights Agent in the City of Toronto) is closed to the public. "Common Shares" shall mean the common shares in the capital of the Corporation. "Competing Permitted Bid" shall mean a Take-over Bid that: -6- (i) is made after a Permitted Bid or another Competing Permitted Bid has been made and prior to the expiry of that Permitted Bid or Competing Permitted Bid (in this definition, the "Prior Bid"); (ii) satisfies all the provisions of the definition of a Permitted Bid other than the requirements set out in Clauses (ii)(A) and (D) of the definition of Permitted Bid; and (iii) contains, and the take-up and payment for securities tendered or deposited thereunder are subject to, irrevocable and unqualified conditions that: (A) no Voting Shares shall be taken up or paid for pursuant to such Take-over Bid (x) prior to the Close of Business on a date that is not earlier than the later of 21 days after the date of such Take-over Bid and the sixtieth day after the earliest date on which any Prior Bid in existence was made, and (y) then only if, at the time that such Voting Shares are first taken up or paid for, more than 50% of the then outstanding Voting Shares held by Independent Shareholders have been deposited or tendered pursuant to such Take-over Bid and not withdrawn; and (B) in the event that the requirement set forth in Subclause (iii)(A)(y) of this definition is satisfied, the Offeror will make a public announcement of that fact and the Take-over Bid will remain open for deposits and tenders of Common Shares for not less than 10 Business Days from the date of such public announcement. "controlled": a body corporate is "controlled" by another Person or two or more Persons acting jointly or in concert if: (i) securities entitled to vote in the election of directors carrying more than 50% of the votes for the election of directors are held, directly or indirectly, by or on behalf of the other Person or two or more Persons acting jointly or in concert; and (ii) the votes carried by such securities are entitled, if exercised, to elect a majority of the board of directors of such body corporate; and "controls", "controlling" and "under common control with" shall be interpreted accordingly. "Co-Rights Agent" shall have the meaning attributed thereto in Subsection 4.1(a). "Convertible Securities" shall mean at any time any securities issued by the Corporation (including rights, warrants and options but excluding the Rights) carrying any purchase, exercise, conversion or exchange right, pursuant to which the holder thereof may acquire Voting Shares or other securities convertible into or exercisable or exchangeable for Voting Shares (in each case, whether such right is exercisable immediately or after a specified period and whether or not on condition or the happening of any contingency). -7- "Convertible Security Acquisition" shall mean the acquisition of Voting Shares upon the exercise of Convertible Securities acquired by a Person pursuant to a Permitted Bid Acquisition, an Exempt Acquisition or a Pro Rata Acquisition. "Election to Exercise" shall have the meaning attributed thereto in Subsection 2.2(d). "Exempt Acquisition" shall mean an acquisition of Voting Shares or Convertible Securities (i) in respect of which the Board of Directors has waived the application of Section 3.1 pursuant to the provisions of Section 5.2, or (ii) pursuant to a distribution of Voting Shares or Convertible Securities made by the Corporation pursuant to a prospectus or a securities exchange take-over bid circular or by way of a private placement (provided that (x) all necessary stock exchange approvals for such private placement have been obtained and such private placement complies with the terms and conditions of such approvals, and (y) the purchaser does not become the Beneficial Owner of Voting Shares equal in number to more than 25% of the Voting Shares outstanding immediately prior to the private placement, and in making this determination, the securities to be issued to such purchaser on the private placement shall be deemed to be held by such purchaser but shall not be included in the aggregate number of outstanding Voting Shares immediately prior to the private placement) or pursuant to an amalgamation, merger or other statutory procedure requiring shareholder approval. "Exercise Price" shall mean, as of any date, the price at which a holder of a Right may purchase the securities issuable upon exercise of one whole Right. Until adjustment thereof in accordance with the terms hereof, the Exercise Price shall equal $60.00. "Expansion Factor" shall have the meaning attributed thereto in Subsection 2.3(b)(x). "Expiration Time" shall mean the earlier of (i) the Termination Time, and (ii) the termination of the annual meeting of the shareholders of the Corporation in the year 2002. "Flip-in Event" shall mean a transaction in which any Person becomes an Acquiring Person. "Grandfathered Person" shall mean any Person who is the Beneficial Owner of 20% or more of the outstanding Common Shares of the Corporation at the Record Time. "Independent Shareholders" shall mean holders of Voting Shares, other than (i) any Acquiring Person, (ii) any Offeror, (iii) any Affiliate or Associate of any Acquiring Person or Offeror, (iv) any Person acting jointly or in concert with any Acquiring Person or Offeror, and (v) any employee benefit plan, deferred profit sharing plan, stock participation plan or trust for the benefit of employees of the Corporation or a wholly- owned Subsidiary of the Corporation, unless the beneficiaries of such plan or trust direct the manner in which such Voting Shares are to be voted or direct whether the Voting Shares are to be tendered to a Take-over Bid. "Market Price" per security of any securities on any date of determination shall mean the average of the daily closing prices per security of such securities (determined as -8- described below) on each of the 20 consecutive Trading Days through and including the Trading Day immediately preceding such date; provided, however, that if an event of a type analogous to any of the events described in Section 2.3 shall have caused the closing prices used to determine the Market Price on any Trading Day not to be fully comparable with the closing price on such date of determination (or, if the date of determination is not a Trading Day, on the immediately preceding Trading Day), each such closing price so used shall be appropriately adjusted in a manner analogous to the applicable adjustment provided for in Section 2.3 in order to make it fully comparable with the closing price on such date of determination (or, if the date of determination is not a Trading Day, on the immediately preceding Trading Day). The closing price per security of any securities on any date shall be: (i) the closing board lot sale price or, in case no such sale takes place on such date, the average of the closing bid and asked prices for each of such securities as reported by the principal stock exchange in Canada on which such securities are listed or admitted to trading; or (ii) if for any reason none of such prices described in (i) above is available for such date or the securities are not listed or admitted to trading on a Canadian stock exchange, the last sale price or, if such price is not available, the average of the closing bid and asked prices, for each such security on such date as reported by such other securities exchange on which such securities are listed or admitted to trading; or (iii) if for any reason none of such prices described in (i) and (ii) above is available for such date or the securities are not listed or admitted to trading on a Canadian stock exchange or other securities exchange, the last sale price, or if no sale takes place, the average of the high bid and low asked prices for each such security on such date in the over-the-counter market, as quoted by any reporting system then in use (as determined by the Board of Directors); or (iv) if for such date none of such prices described in (i), (ii) and (iii) above is available or the securities are not listed or admitted to trading on a Canadian stock exchange or any other securities exchange and are not quoted by any such reporting system, the average of the closing bid and asked prices for such date as furnished by a professional market maker making a market in the securities selected in good faith by the Board of Directors; provided, however, that if on any such date none of such prices is available, the closing price per security of such securities on such date shall mean the fair value per security of such securities on such date as determined in good faith by a recognized investment banking firm selected by the Board of Directors. "Offer Date" shall mean the date of a Take-over Bid. "Offer to Acquire" shall include: (i) an offer to purchase, or a solicitation of an offer to sell, Voting Shares; and -9- (ii) an acceptance of an offer to sell Voting Shares, whether or not such offer to sell has been solicited; or any combination thereof, and the Person accepting an offer to sell shall be deemed to be making an Offer to Acquire to the Person that made the offer to sell. "Offeror" shall mean a Person who has announced an intention to make or who has made a Take-over Bid (including a Permitted Bid or Competing Permitted Bid but excluding an Offer to Acquire Common Shares or other securities of the Corporation made by a Manager, Trust Company, Crown Agent, Statutory Body, Administrator or Plan referred to in Clause 1.1 (d)(v) of the definition of Beneficial Owner pursuant to a distribution by the Corporation or by means of ordinary market transactions (including pre- arranged trades entered into in the ordinary course of business of such Person) in the circumstances contemplated in said Clause 1.1 (d)(v)) but only so long as the Take-over Bid so announced or made has not been withdrawn or terminated and has not expired. "Offeror's Securities" shall mean the aggregate of the Voting Shares Beneficially Owned on the date of an Offer to Acquire by an Offeror. "Permitted Bid" shall mean a Take-over Bid which is made by means of a take-over bid circular and which also complies with the following additional provisions: (i) the Take-over Bid is made to all holders of record of Voting Shares, other than the Offeror; and (ii) the Take-over Bid shall contain, and the take-up and payment for securities tendered or deposited thereunder shall be subject to, irrevocable and unqualified conditions that: (A) no Voting Shares shall be taken up or paid for pursuant to the Take-over Bid (x) prior to the Close of Business on a date which is not earlier than 60 days following the Offer Date, and (y) then only if, at the Close of Business on the date Voting Shares are first taken up or paid for under the Take-over Bid, more than 50% of the then outstanding Voting Shares held by Independent Shareholders have been deposited or tendered pursuant to the Take-over Bid and not withdrawn; (B) Voting Shares may be deposited pursuant to such Take-over Bid, unless such Take-over Bid is withdrawn, at any time prior to the Close of Business on the date Voting Shares are first taken up or paid for under the Take-over Bid; (C) any Voting Shares deposited pursuant to the Take-over Bid may be withdrawn until taken up and paid for; and (D) in the event that the requirement set forth in Subclause (ii)(A)(y) of this definition is satisfied, the Offeror will make a public announcement of that fact and the Take-over Bid will remain open for deposits and tender of -10- Voting Shares for not less than 10 Business Days from the date of such public announcement; provided, however, always that a Permitted Bid will cease to be a Permitted Bid at any time when such bid ceases to meet any of the provisions of this definition and any acquisition of Voting Shares made pursuant to such Permitted Bid will cease to be a Permitted Bid Acquisition. "Permitted Bid Acquisition" shall mean an acquisition of Voting Shares or Convertible Securities made pursuant to a Permitted Bid or a Competing Permitted Bid. "Permitted Lock-Up Agreement" shall mean an agreement between a Person and one or more holders of Voting Shares or Convertible Securities (each a "Locked-up Person") (the terms of which are publicly disclosed and a copy of which is made available to the public (including the Corporation) not later than the date the Lock-up Bid (as defined below) is publicly announced or, if the Lock-up Bid has been made prior to the date on which such agreement is entered into, not later than the date of such agreement), pursuant to which each such Locked-up Person agrees to deposit or tender Voting Shares or Convertible Securities (or both) to a Take-over Bid (the "Lock-up Bid") made or to be made by the Person or any of such Person's Affiliates or Associates or any other Person referred to in Clause (iii) of the definition of Beneficial Owner, provided, however, that: (i) the agreement: (A) permits any Locked-up Person to terminate its obligation to deposit or tender to or not to withdraw Voting Shares or Convertible Securities (or both) from the Lock-up Bid in order to tender or deposit such securities to another Take-over Bid or support another transaction where the price or value per Voting Share or Convertible Security offered under such other Take-over Bid or transaction is higher than the price or value per Voting Share or Convertible Security offered under the Lock-up Bid; or (B) permits any Locked-up Person to terminate its obligation to deposit or tender to or not to withdraw Voting Shares or Convertible Securities (or both) from the Lock-up Bid in order to tender or deposit such securities to another Take-over Bid or support another transaction if: (a) the price or value per Voting Share or Convertible Security offered under the other Take-over Bid or transaction exceeds by as much as or more than a specified amount (the "Specified Amount") the price or value per Voting Share or Convertible Security offered under the Lock-up Bid, provided that such Specified Amount is not greater than 7% of the price or value per Voting Share or Convertible Security offered under the Lock-up Bid; or (b) the number of Voting Shares or Convertible Securities to be purchased under the other Take-over Bid or transaction exceeds by as much as or more than a specified number (the "Specified -11- Number") the number of Voting Shares or Convertible Securities that the Offeror has offered to purchase under the Lock-up Bid at a price or value per Voting Share or Convertible Security that is not less than the price or value per Voting Share or Convertible Security offered under the Lock-up Bid, provided that the Specified Number is not greater than 7% of the number of Voting Shares or Convertible Securities offered under the Lock-up Bid; and, for greater clarity, the agreement may contain a right of first refusal or require a period of delay to give such Person an opportunity to match a higher price in another Take-over Bid or other similar limitation on a Locked-up Person's right to withdraw Voting Shares or Convertible Securities (or both) from the agreement, so long as the limitation does not preclude the exercise by the Locked-up Person of the right to withdraw Voting Shares or Convertible Securities (or both) during the period of the other Take-over Bid or transaction; and (ii) no "break-up" fees, "top-up" fees, penalties, expenses or other amounts that exceed in the aggregate the greater of: (A) the cash equivalent of 2.5% of the price or value payable under the Lock-up Bid to a Locked-up Person; and (B) 50% of the amount by which the price or value payable under another Take-over Bid or transaction to a Locked-up Person exceeds the price or value of the consideration that such Locked- up Person would have received under the Lock-up Bid, shall be payable by a Locked-up Person pursuant to the agreement in the event a Locked-up Person fails to deposit or tender Voting Shares or Convertible Securities (or both) to the Lock-up Bid, withdraws Voting Shares or Convertible Securities (or both) previously tendered thereto or supports another transaction. "Person" shall include any individual, firm, partnership, syndicate, association, trust, trustee, executor, administrator, legal personal representative, government, governmental body or authority, corporation or other incorporated or unincorporated organization. "Pro Rata Acquisition" shall mean an acquisition by a Person of Voting Shares or Convertible Securities (i) as a result of a stock dividend, a stock split or other event pursuant to which such Person receives or acquires Voting Shares or Convertible Securities on the same pro rata basis as all other holders of Voting Shares or Convertible Securities of the same class or series of the Corporation; (ii) pursuant to a regular dividend reinvestment or other plan of the Corporation made available by the Corporation to the holders of Voting Shares where such plan permits the holder to direct that the dividends paid in respect of such Voting Shares be applied to the purchase from the Corporation of further securities of the Corporation; or (iii) pursuant to the receipt and/or exercise of rights (other than the Rights) issued by the Corporation to all of the holders of a series or class of Voting Shares on a pro rata basis to subscribe for or -12- purchase Voting Shares or Convertible Securities, provided that such rights are acquired directly from the Corporation and not from any other Person. "Record Time" shall mean the Close of Business on August 12, 1999. "Redemption Price" shall have the meaning attributed thereto in Subsection 5.1(a). "Regular Periodic Cash Dividend" shall have the meaning attributed thereto in Section 2.3(d). "Rights" shall mean the herein described rights to purchase securities pursuant to the terms and subject to the conditions set forth herein. "Rights Certificate" shall mean the certificates representing the Rights after the Separation Time which shall be substantially in the form attached hereto as Exhibit A or such other form as the Corporation and the Rights Agent may agree. "Rights Register" and "Rights Registrar" shall each have the meaning attributed thereto in Subsection 2.6(a). "Securities Act (Ontario)" shall mean the Securities Act, R.S.O. 1990, c. S-5, as amended, and the regulations made thereunder and any comparable or successor laws or regulations thereto. "Separation Time" shall mean the Close of Business on the tenth Trading Day after the earliest of: (i) the Stock Acquisition Date; (ii) the date of the commencement of, or first public announcement of the intent of any Person (other than the Corporation or any Subsidiary of the Corporation) to commence, a Take-over Bid (other than a Permitted Bid or Competing Permitted Bid); and (iii) the date upon which a Permitted Bid or Competing Permitted Bid ceases to be such; or such later date as may be determined by the Board of Directors in good faith, provided, however, that if any Take-over Bid referred to in Clause (ii) above expires or is cancelled, terminated or otherwise withdrawn prior to the Separation Time, such Take-Over Bid shall be deemed, for the purposes of this definition, never to have been made. "Stock Acquisition Date" shall mean the first date of public announcement (which, for purposes of this definition, shall include, without limitation, a report filed pursuant to Section 101 of the Securities Act (Ontario)) by the Corporation or an Acquiring Person of facts indicating that an Acquiring Person has become such. "Subsidiary": a body corporate is a Subsidiary of another body corporate if: -13- (i) it is controlled by (A) that other, or (B) that other and one or more bodies corporate, each of which is controlled by that other, or (C) two or more bodies corporate, each of which is controlled by that other; or (ii) it is a Subsidiary of a body corporate that is that other's Subsidiary. "Take-over Bid" shall mean an Offer to Acquire Voting Shares or Convertible Securities (or both), where the Voting Shares subject to the Offer to Acquire together with the Voting Shares which the securities subject to the Offer to Acquire are convertible into, exchangeable for or otherwise entitled to acquire and the Offeror's Securities, constitute in the aggregate 20% or more of the outstanding Voting Shares at the date of the Offer to Acquire. "Termination Time" shall mean the time at which the right to exercise Rights shall terminate pursuant to Section 5.1 or Section 5.18. "Trading Day", when used with respect to any securities, shall mean a day on which the principal Canadian securities exchange on which such securities are listed or admitted to trading is open for the transaction of business or, if the securities are not listed or admitted to trading on any Canadian securities exchange, a Business Day. "Voting Share Reduction" shall mean an acquisition or a redemption by the Corporation of Voting Shares. "Voting Shares" shall mean collectively the Common Shares of the Corporation and any other shares in the capital stock or voting interests of the Corporation entitled to vote generally in the election of directors. For the purposes of this Agreement, the percentage of Voting Shares Beneficially Owned by any Person shall be and be deemed to be the product determined by the formula: 100 x A --- B where A = the number of votes for the election of all directors generally attaching to the Voting Shares Beneficially Owned by such Person; and B = the number of votes for the election of all directors generally attaching to all outstanding Voting Shares. Where any Person is deemed to Beneficially Own unissued Voting Shares, such Voting Shares shall be deemed to be outstanding for the purposes of both A and B above, but no other unissued Voting Shares shall, for the purposes of such calculation, be deemed to be outstanding. -14- 1.2 Currency All sums of money which are referred to in this Agreement are expressed in lawful money of Canada, unless otherwise specified. 1.3 Number and Gender Wherever the context so requires, terms used herein importing the singular number only shall include the plural and vice versa and words importing any one gender shall include all others. 1.4 Descriptive Headings and References Descriptive headings and the Table of Contents appear herein for convenience of reference only and shall not affect the meaning or construction of any of the provisions hereof. All references to Articles, Sections, Subsections, Clauses and Exhibits are to the articles, sections, subsections, clauses and exhibits forming part of this Agreement unless otherwise indicated. The words "hereto", "herein", "hereof", "hereunder", "this Agreement" and similar expressions refer to this Agreement including the Exhibits, as the same may be amended, modified or supplemented from time to time. 1.5 Acting Jointly or in Concert For purposes of this Agreement, a Person is acting jointly or in concert with every other Person who is a party to any agreement, commitment or understanding, whether formal or informal and whether or not in writing, with the first mentioned Person to acquire or offer to acquire Voting Shares (other than customary agreements with and between underwriters and/or banking group and/or selling group members with respect to a distribution of securities pursuant to a prospectus or by way of private placement and other than pursuant to pledges of securities in the ordinary course of business). 1.6 Holder As used in this Agreement, unless the context otherwise requires, the term "holder" of any Rights shall mean the registered holder of such Rights (or, prior to the Separation Time, of the associated Common Shares). -15- ARTICLE 2 - THE RIGHTS 2.1 Legend on Common Share Certificates Common Share certificates issued after the Record Time and prior to the Close of Business on the earlier of the Separation Time and the Expiration Time shall evidence one Right for each Common Share represented thereby and shall have impressed on, printed on, written on or otherwise affixed to them a legend, substantially in the following form: "Until the Separation Time (as such term is defined in the Shareholder Protection Rights Agreement referred to below), this certificate also evidences and entitles the holder hereof to certain Rights as set forth in the Shareholder Protection Rights Agreement dated as of August 12, 1999 as amended from time to time (the "Rights Agreement") between Fantom Technologies Inc. (the "Corporation") and CIBC Mellon Trust Company, as Rights Agent, the terms of which are hereby incorporated herein by reference and a copy of which is on file and may be inspected during normal business hours at the head office of the Corporation. In certain circumstances, as set forth in the Rights Agreement, such Rights may be amended, may be redeemed, may expire, may become void or may be evidenced by separate certificates and may no longer be evidenced by this certificate. The Corporation will mail or arrange for the mailing of a copy of the Rights Agreement to the holder of this certificate without charge promptly after the receipt of a written request therefor." Certificates representing Common Shares that are issued and outstanding at the Record Time shall also evidence one Right for each Common Share evidenced thereby, notwithstanding the absence of the foregoing legend, until the earlier of the Separation Time and the Expiration Time. 2.2 Initial Exercise Price; Exercise of Rights; Detachment of Rights (a) Subject to adjustment as herein set forth, each Right will entitle the holder thereof, from and after the Separation Time and prior to the Expiration Time, to purchase one Common Share for the Exercise Price (which Exercise Price and number of Common Shares are subject to adjustment as set forth below). Notwithstanding any other provision of this Agreement, any Rights held by the Corporation or any of its Subsidiaries shall be void. (b) Until the Separation Time, (i) the Rights shall not be exercisable and no Right may be exercised, and (ii) for administrative purposes, each Right will be evidenced by the certificate for the associated Common Share registered in the name of the holder thereof (which certificate shall be deemed to represent a Rights Certificate) and will be transferable only together with, and will be transferred by a transfer of, such associated Common Share. (c) From and after the Separation Time and prior to the Expiration Time, the Rights may be exercised and the registration and transfer of the Rights shall be separate from -16- and independent of Common Shares. Promptly following the Separation Time, the Corporation will prepare and the Rights Agent will mail to each holder of record of Common Shares as of the Separation Time (other than an Acquiring Person, any other Person whose Rights are or become void pursuant to the provisions of Subsection 3.1(b) and, in respect of any Rights Beneficially Owned by such Acquiring Person which are not held of record by such Acquiring Person, the holder of record of such Rights), at such holder's address as shown by the records of the Corporation (the Corporation hereby agreeing to furnish copies of such records to the Rights Agent for this purpose): (i) a Rights Certificate in substantially the form set out in Exhibit "A" hereto, appropriately completed, representing the number of Rights held by such holder at the Separation Time and having such marks of identification or designation and such legends, summaries or endorsements printed thereon as the Corporation may deem appropriate and as are not inconsistent with the provisions of this Agreement, or as may be required to comply with any law or with any rule or regulation or judicial or administrative order made pursuant thereto or with any rule or regulation of any self-regulatory organization, stock exchange or quotation system on which the Rights may from time to time be listed or traded, or to conform to usage; and (ii) a disclosure statement prepared by the Corporation describing the Rights; provided, however, that a nominee shall be sent the materials provided for in Clauses (i) and (ii) above in respect of all Common Shares held of record by it which are not Beneficially Owned by an Acquiring Person. In order for the Corporation to determine whether any Person is holding Common Shares which are Beneficially Owned by another Person, the Corporation may require such first-mentioned Person to furnish such information and documentation as the Corporation deems necessary or appropriate to make such determination. (d) Rights may be exercised in whole or in part on any Business Day after the Separation Time and prior to the Expiration Time by submitting to the Rights Agent at its office in the City of Toronto, Canada or, with the approval of the Rights Agent, at any other office of the Rights Agent in the cities designated from time to time for that purpose by the Corporation: (i) the Rights Certificate evidencing such Rights with an election to exercise (an "Election to Exercise") substantially in the form attached to the Rights Certificate appropriately completed and duly executed by the holder or his executors or administrators or other personal representatives or his legal attorney duly appointed by an instrument in writing in form and executed in a manner satisfactory to the Rights Agent; and (ii) payment by certified cheque or money order payable to the order of the Corporation, of a sum equal to the Exercise Price multiplied by the number of Rights being exercised and a sum sufficient to cover any transfer tax or charge which may be payable in respect of the transfer or delivery of Rights Certificates or the issuance or delivery of certificates -17- for Common Shares in a name other than that of the holder of the Rights being exercised. (e) Upon receipt of a Rights Certificate, with a completed Election to Exercise appropriately completed and duly executed which does not indicate that such Right is null and void as provided by Subsection 3.1(b), accompanied by payment as set forth in Clause 2.2(d)(ii), the Rights Agent (unless otherwise instructed in writing by the Corporation) will thereupon promptly: (i) requisition from the transfer agent of the Common Shares certificates for the number of Common Shares to be purchased (the Corporation hereby irrevocably agreeing to authorize its transfer agent to comply with all such requisitions); (ii) after receipt of such certificates referred to in Clause 2.2(e)(i), deliver such certificates to or upon the order of the registered holder of such Rights Certificate, registered in such name or names as may be designated by such holder; (iii) when appropriate, requisition from the Corporation the amount of cash to be paid in lieu of issuing fractional Common Shares; (iv) after receipt, deliver such cash referred to in Clause 2.2(e)(iii) to or to the order of the registered holder of the Rights Certificate; and (v) tender to the Corporation all payments received on exercise of the Rights. (f) In case the holder of any Rights shall exercise less than all the Rights evidenced by such holder's Rights Certificate, a new Rights Certificate evidencing the Rights remaining unexercised will be issued by the Rights Agent to such holder or to such holder's duly authorized assigns. (g) The Corporation covenants and agrees that it will: (i) take all such action as may be necessary and within its power to ensure that all Common Shares delivered upon exercise of Rights shall, at the time of delivery of the certificates for such Common Shares (subject to payment of the Exercise Price), be duly and validly authorized, executed, issued and delivered as fully paid and non-assessable; (ii) take all such action as may be necessary and within its power to comply with any applicable requirements of the Business Corporations Act (Ontario), the Securities Act (Ontario) and the securities statute or comparable legislation of each of the other provinces and territories of Canada, and other applicable securities laws and the rules and regulations thereunder, and any other applicable law, rule or regulation, in connection with the issuance and delivery of the Rights Certificates and the issuance of any Common Shares upon exercise of Rights; -18- (iii) use reasonable efforts to cause all Common Shares issued upon exercise of Rights to be listed upon issuance on The Toronto Stock Exchange and each other stock exchange on which the Common Shares are then listed or admitted to trading at that time; and (iv) pay when due and payable any and all Canadian and United States federal, provincial and state transfer taxes (not in the nature of income or withholding taxes) and charges which may be payable in respect of the original issuance or delivery of the Rights Certificates or certificates for Common Shares, provided that the Corporation shall not be required to pay any transfer tax or charge which may be payable in respect of the transfer or delivery of Rights Certificates or the issuance or delivery of certificates for Common Shares in a name other than that of the holder of the Rights being transferred or exercised. 2.3 Adjustments to Exercise Price; Number of Rights (a) The Exercise Price, the number and kind of securities subject to purchase upon exercise of each Right and the number of Rights outstanding are subject to adjustment from time to time as provided in this Section 2.3. (b) In the event the Corporation shall at any time after the Record Time and prior to the Expiration Time: (i) declare or pay a dividend on the Common Shares of the Corporation payable in Common Shares or other capital stock of the Corporation (or securities exchangeable for or convertible into or giving a right to acquire Common Shares) other than pursuant to any optional stock dividend program; (ii) subdivide or change the then outstanding Common Shares into a greater number of Common Shares; (iii) consolidate or change the then outstanding Common Shares into a smaller number of Common Shares; or (iv) issue any Common Shares or other capital stock of the Corporation (or securities exchangeable for or convertible into or giving a right to acquire Common Shares) in respect of, in lieu of, or in exchange for existing Common Shares; the Exercise Price and the number of Rights outstanding, or, if the payment or effective date therefor shall occur after the Separation Time, the securities purchasable upon exercise of Rights, shall be adjusted in the manner set forth below. If the Exercise Price and number of Rights outstanding are to be adjusted: (x) the Exercise Price in effect after such adjustment will be equal to the Exercise Price in effect immediately prior to such adjustment divided by -19- the number of Common Shares (the "Expansion Factor") that a holder of one Common Share immediately prior to such dividend, subdivision, change, consolidation or issuance would hold thereafter as a result thereof (assuming the exercise of all such exchange, conversion or acquisition rights, if any); and (y) each Right held prior to such adjustment will become that number of Rights equal to the Expansion Factor and the adjusted number of Rights will be deemed to be distributed among the Common Shares with respect to which the original Rights were associated (if they remain outstanding) and the Common Shares issued or issuable in respect of such dividend, subdivision, change, consolidation or issuance, so that each such Common Share will have exactly one Right associated with it. For greater certainty, if the securities purchasable upon exercise of Rights are to be adjusted, the securities purchasable upon exercise of each Right after such adjustment will be the securities that a holder of the securities purchasable upon exercise of one Right immediately prior to such dividend, subdivision, change, consolidation or issuance would hold thereafter as a result thereof. To the extent that such rights of exchange, conversion or acquisition are not exercised prior to the expiration thereof, the Exercise Price shall be readjusted to the Exercise Price which would then be in effect based on the number of Common Shares (or securities convertible into or exchangeable for Common Shares) actually issued upon the exercise of such rights. If after the Record Time and prior to the Expiration Time the Corporation shall issue any shares of capital stock other than Common Shares in a transaction of a type described in Clauses 2.3(b)(i) or (iv), shares of such capital stock shall be treated herein as nearly equivalent to Common Shares as may be practicable and appropriate under the circumstances and the Corporation and the Rights Agent shall amend this Agreement in order to effect such treatment. If an event occurs which would require an adjustment under both this Section 2.3 and Section 3.1, the adjustment provided for in this Section 2.3 shall be in addition to, and shall be made prior to, any adjustment required pursuant to Section 3.1. If the Corporation shall at any time after the Record Time and prior to the Separation Time issue any Common Shares otherwise than in a transaction referred to in this Subsection 2.3(b), each such Common Share so issued shall automatically have one new Right associated with it, which Right shall be evidenced by the certificate representing such associated Common Share. (c) In the event the Corporation shall at any time after the Record Time and prior to the Separation Time fix a record date for the issuance to all holders of Common Shares of rights, options or warrants entitling them (for a period expiring within 45 days after such record date) to subscribe for or purchase Common Shares (or securities convertible into or exchangeable for or carrying a right to acquire Common Shares) at a price per Common Share (or, if a security convertible into or exchangeable for or carrying a right to acquire Common Shares, having a conversion, exchange or exercise price, including -20- the price required to be paid to purchase such convertible or exchangeable security or right, per share) less than the Market Price per Common Share on such record date, the Exercise Price shall be adjusted. The Exercise Price in effect after such record date will equal the Exercise Price in effect immediately prior to such record date multiplied by a fraction, of which the numerator shall be the number of Common Shares outstanding on such record date plus the number of Common Shares which the aggregate offering price of the total number of Common Shares so to be offered (and/or the aggregate initial conversion, exchange or exercise price of the convertible or exchangeable securities or rights so to be offered (including the price required to be paid to purchase such convertible or exchangeable securities or rights)) would purchase at such Market Price per Common Share and of which the denominator shall be the number of Common Shares outstanding on such record date plus the number of additional Common Shares to be offered for subscription or purchase (or into which the convertible or exchangeable securities or rights so to be offered are initially convertible, exchangeable or exercisable). In case such subscription price may be paid by delivery of consideration part or all of which shall be in a form other than cash, the value of such consideration shall be as determined in good faith by the Board of Directors. To the extent that such rights of exchange, conversion or acquisition are not exercised prior to the expiration thereof, the Exercise Price shall be readjusted to the Exercise Price which would then be in effect based on the number of Common Shares (or securities convertible into or exchangeable for Common Shares) actually issued upon the exercise of such rights. For purposes of this Agreement, the granting of the right to purchase Common Shares (whether from treasury shares or otherwise) pursuant to any dividend or interest reinvestment plan and/or any Common Share purchase plan providing for the reinvestment of dividends or interest payable on securities of the Corporation and/or the investment of periodic optional payments and/or employee benefit or similar plans (so long as such right to purchase is in no case evidenced by the delivery of rights or warrants) shall not be deemed to constitute an issue of rights or warrants by the Corporation; provided, however, that, in the case of any dividend or interest reinvestment plan, the right to purchase Common Shares is at a price per share of not less than 90 percent of the current market price per share (determined as provided in such plans) of the Common Shares. (d) In the event the Corporation shall at any time after the Record Time and prior to the Separation Time fix a record date for the making of a distribution to all holders of Common Shares of evidences of indebtedness or assets (other than a Regular Periodic Cash Dividend (as defined below) or a dividend paid in Common Shares) or rights, options or warrants (excluding those referred to in Subsection 2.3(c)), the Exercise Price shall be adjusted. The Exercise Price in effect after such record date will equal the Exercise Price in effect immediately prior to such record date less the fair market value (as determined in good faith by the Board of Directors) of the portion of the assets, evidences of indebtedness, rights or warrants so to be distributed applicable to the securities purchasable upon exercise of one Right. For the purpose of this Subsection 2.3(d), "Regular Periodic Cash Dividend" shall mean cash dividends paid at regular intervals in any fiscal year of the Corporation to the extent that such cash dividends do not exceed, in the aggregate, the greatest of: -21- (i) 200% of the aggregate amount of cash dividends declared payable by the Corporation on its Common Shares in its immediately preceding fiscal year; (ii) 300% of the arithmetic mean of the aggregate amounts of cash dividends declared payable by the Corporation on its Common Shares in its three immediately preceding fiscal years; and (iii) 100% of the aggregate consolidated net income of the Corporation, before extraordinary items, for its immediately preceding fiscal year. (e) Each adjustment made pursuant to this Section 2.3 shall be made as of: (i) the payment or effective date for the applicable dividend, subdivision, change, consolidation or issuance, in the case of an adjustment made pursuant to Subsection 2.3(b) above; and (ii) the record date for the applicable dividend or distribution, in the case of an adjustment made pursuant to Subsection 2.3(c) or (d) above. (f) In the event the Corporation shall at any time after the Record Time and prior to the Separation Time issue any shares of capital stock (other than Common Shares), or rights, options or warrants to subscribe for or purchase any such capital stock, or securities convertible into or exchangeable for any such capital stock in a transaction referred to in Clauses 2.3(b)(i) or (iv), if the Board of Directors acting in good faith determines that the adjustments contemplated by Subsections 2.3(b), (c) and (d) above in connection with such transaction will not appropriately protect the interests of the holders of Rights, the Board of Directors may determine what other adjustments to the Exercise Price, number of Rights and/or securities purchasable upon exercise of Rights would be appropriate and, notwithstanding Subsections 2.3(b), (c) and (d) above, but subject to the prior consent of the holders of Common Shares or Rights obtained as set forth in Subsection 5.5(b) or 5.5(c) as applicable, such adjustments, rather than the adjustments contemplated by Subsections 2.3(b), (c) and (d) above, shall be made. The Corporation and the Rights Agent shall amend this Agreement as appropriate to provide for such adjustments. (g) Notwithstanding anything herein to the contrary, no adjustment of the Exercise Price shall be required unless such adjustment would require an increase or decrease of at least 1% in such Exercise Price; provided, however, that any adjustments which by reason of this Subsection 2.3(g) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All adjustments made pursuant to this Section 2.3 shall be made to the nearest cent or to the nearest ten-thousandth of a Common Share, as the case may be. (h) If as a result of an adjustment made pursuant to Section 3.1, the holder of any Right thereafter exercised shall become entitled to receive any securities other than Common Shares, thereafter the number of such other shares so receivable upon exercise of any Right and the applicable Exercise Price thereof shall be subject to adjustment from -22- time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Common Shares contained in the provisions of this Section 2.3 and the provisions of this Agreement with respect to the Common Shares shall apply on like terms to any such other securities. (i) All Rights originally issued by the Corporation subsequent to any adjustment made to an Exercise Price hereunder shall evidence the right to purchase, at the adjusted Exercise Price, the number of Common Shares purchasable from time to time hereunder upon exercise of the Rights, all subject to further adjustment as provided herein. (j) Unless the Corporation shall have exercised its election, as provided in Subsection 2.3(k), upon each adjustment of the Exercise Price as a result of the calculations made in Subsections 2.3(c) and (d), each Right outstanding immediately prior to the making of such adjustment shall thereafter evidence the right to purchase, at the adjusted Exercise Price, that number of Common Shares obtained by: (i) multiplying (A) the number of Common Shares covered by a Right immediately prior to such adjustment, by (B) the relevant Exercise Price in effect immediately prior to such adjustment of the relevant Exercise Price; and (ii) dividing the product so obtained by the relevant Exercise Price in effect immediately after such adjustment of the relevant Exercise Price. (k) The Corporation may elect on or after the date of any adjustment of an Exercise Price to adjust the number of Rights, in lieu of any adjustment in the number of Common Shares purchasable upon the exercise of a Right. Each of the Rights outstanding after the adjustment in the number of Rights shall be exercisable for the number of Common Shares for which a Right was exercisable immediately prior to such adjustment. Each Right held of record prior to such adjustment of the number of Rights shall become the number of Rights (calculated to the nearest one ten-thousandth) obtained by dividing the relevant Exercise Price in effect immediately prior to adjustment of relevant Exercise Price by the relevant Exercise Price in effect immediately after adjustment of the relevant Exercise Price. The Corporation shall make a public announcement of its election to adjust the number of Rights, indicating the record date for the adjustment, and, if known at the time, the amount of the adjustment to be made. This record date may be the date on which the relevant Exercise Price is adjusted or any day thereafter, but, if the Rights Certificates have been issued, shall be at least 10 days later than the date of the public announcement. If Rights Certificates have been issued, upon each adjustment of the number of Rights pursuant to this Subsection 2.3(k), the Corporation shall, as promptly as practicable, cause to be distributed to holders of record of Rights Certificates on such record date, Rights Certificates evidencing, subject to Section 5.6, the additional Rights to which such holders shall be entitled as a result of such adjustment, or, at the option of the Corporation, shall cause to be distributed to such holders of record in substitution and replacement for the Rights Certificates held by such holders prior to the date of adjustment, and upon surrender thereof if required by the Corporation, new Rights Certificates evidencing all the Rights to which such holders shall be entitled after such adjustment. Rights Certificates so to be distributed shall be issued, executed and -23- countersigned in the manner provided for herein and may bear, at the option of the Corporation, the relevant adjusted Exercise Price and shall be registered in the names of holders of record of Rights Certificates on the record date specified in the public announcement. (l) Irrespective of any adjustment or change in the securities purchasable upon exercise of the Rights, the Rights Certificates theretofore and thereafter issued may continue to express the securities so purchasable which were expressed in the initial Rights Certificates issued hereunder. (m) In any case in which this Section 2.3 shall require that an adjustment in the Exercise Price be made effective as of a record date for a specified event, the Corporation may elect to defer until the occurrence of such event the issuance to the holder of any Right exercised after such record date of the number of Common Shares and other securities of the Corporation, if any, issuable upon such exercise over and above the number of Common Shares and other securities of the Corporation, if any, issuable upon such exercise on the basis of the relevant Exercise Price in effect prior to such adjustment; provided, however, that the Corporation shall deliver to such holder a due bill or other appropriate instrument evidencing such holder's right to receive such additional Common Shares (fractional or otherwise) or other securities upon the occurrence of the event requiring such adjustment. (n) Notwithstanding anything in this Section 2.3 to the contrary, the Corporation shall be entitled to make such reductions in the Exercise Price, in addition to those adjustments expressly required by this Section 2.3, as and to the extent that in its good faith judgment the Board of Directors shall determine to be advisable in order that any (i) subdivision or consolidation of the Common Shares, (ii) issuance (wholly or in part for cash) of Common Shares at less than the applicable Market Price, (iii) issuance (wholly for cash) of any Common Shares or securities that by their terms are exchangeable for or convertible into or give a right to acquire Common Shares, (iv) stock dividends, or (v) issuance of rights, options or warrants referred to in this Section 2.3, hereafter made by the Corporation to holders of its Common Shares, subject to applicable taxation laws, shall not be taxable to such shareholders. (o) After the Separation Time, the Corporation will not, except as permitted by the provisions hereof, take (or permit any Subsidiary of the Corporation to take) any action if at the time such action is taken it is reasonably foreseeable that such action will diminish substantially or otherwise eliminate the benefits intended to be afforded by the Rights. (p) Whenever an adjustment to the Exercise Price or a change in the securities purchasable upon the exercise of Rights is made pursuant to this Section 2.3, the Corporation shall promptly: (i) prepare a certificate setting forth such adjustment and a brief statement of the facts accounting for such adjustment; (ii) file with the Rights Agent and with each transfer agent for the Common Shares, a copy of such certificate; and -24- (iii) cause notice of the particulars of such adjustment or change to be given to the holders of the Rights. Failure to file such certificate or to cause such notice to be given as aforesaid, or any defect therein, shall not affect the validity of any such adjustment or change. 2.4 Date on Which Exercise is Effective Each Person in whose name any certificate for Common Shares or other securities, if applicable, is issued upon the exercise of Rights shall for all purposes be deemed to have become the holder of record of the Common Shares or other securities, if applicable, represented thereby, and such certificate shall be dated the date upon which the Rights Certificate evidencing such Rights was duly surrendered in accordance with Subsection 2.2(e) (together with a duly completed Election to Exercise) and payment of the Exercise Price for such Rights (and any applicable transfer taxes and other governmental charges payable by the exercising holder hereunder) was made; provided, however, that if the date of such surrender and payment is a date upon which the Common Share transfer books of the Corporation are closed, such Person shall be deemed to have become the record holder of such shares on, and such certificate shall be dated, the next succeeding Business Day on which the Common Share transfer books of the Corporation are open. 2.5 Execution, Authentication, Delivery and Dating of Rights Certificates (a) The Rights Certificates shall be executed on behalf of the Corporation by its President and its Chief Financial Officer, under its corporate seal reproduced thereon attested by its Secretary. The signature of any of these officers on the Rights Certificates may be manual or facsimile. Rights Certificates bearing the manual or facsimile signatures of individuals holding the above offices of the Corporation shall bind the Corporation, notwithstanding that such individuals or any of them have ceased to hold such offices prior to the countersignature and delivery of such Rights Certificates. (b) Promptly after the Corporation learns of the Separation Time, the Corporation will notify the Rights Agent in writing of such Separation Time and will deliver Rights Certificates executed by the Corporation to the Rights Agent for countersignature, and the Rights Agent shall countersign (manually or by facsimile signature in a manner satisfactory to the Corporation) and deliver such Rights Certificates to the holders of the Rights pursuant to Subsection 2.2(c). No Rights Certificate shall be valid for any purpose until countersigned by the Rights Agent as aforesaid. (c) Each Rights Certificate shall be dated the date of countersignature thereof. -25- 2.6 Registration, Registration of Transfer and Exchange (a) From and after the Separation Time, the Corporation will cause to be kept a register (the "Rights Register") in which, subject to such reasonable regulations as it may prescribe, the Corporation will provide for the registration and transfer of Rights. The Rights Agent is hereby appointed "Rights Registrar" for the purpose of maintaining the Rights Register for the Corporation and registering Rights and transfers of Rights as herein provided. In the event that the Rights Agent shall cease to be the Rights Registrar, the Rights Agent will have the right to examine the Rights Register at all reasonable times. After the Separation Time and prior to the Expiration Time, upon surrender for registration of transfer or exchange of any Rights Certificate, and subject to the provisions of Subsection 2.6(c), the Corporation will execute, and the Rights Agent will countersign and deliver, in the name of the holder thereof or the designated transferee or transferees, as required pursuant to the holder's instructions, one or more new Rights Certificates evidencing the same aggregate number of Rights as did the Rights Certificates so surrendered. (b) All Rights issued upon any registration of transfer or exchange of Rights Certificates shall be the valid obligations of the Corporation, and such Rights shall be entitled to the same benefits under this Agreement as the Rights surrendered upon such registration of transfer or exchange. (c) Every Rights Certificate surrendered for registration of transfer or exchange shall be duly endorsed, or be accompanied by a written instrument of transfer in form satisfactory to the Corporation or the Rights Agent, as the case may be, duly executed, by the holder thereof or such holder's attorney duly authorized in writing. As a condition to the issuance of any new Rights Certificate under this Section 2.6, the Corporation may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Rights Agent) connected therewith. (d) The Corporation shall not be required to register the transfer or exchange of any Rights after the Rights have been terminated pursuant to the provisions of this Agreement. 2.7 Mutilated, Destroyed, Lost and Stolen Rights Certificates (a) If any mutilated Rights Certificate is surrendered to the Rights Agent prior to the Expiration Time, the Corporation shall execute and the Rights Agent shall countersign and deliver in exchange therefor a new Rights Certificate evidencing the same number of Rights as did the Rights Certificate so surrendered. (b) If there shall be delivered to the Corporation and the Rights Agent prior to the Expiration Time (i) evidence to their satisfaction of the destruction, loss or theft of any Rights Certificate, and (ii) such security or indemnity as may be required by them to save each of them and any of their agents harmless, then, in the absence of notice to the -26- Corporation or the Rights Agent that such Rights Certificate has been acquired by a bona fide purchaser, the Corporation shall execute and upon its request the Rights Agent shall countersign and deliver, in lieu of any such destroyed, lost or stolen Rights Certificate, a new Rights Certificate evidencing the same number of Rights as did the Rights Certificate so destroyed, lost or stolen. (c) As a condition to the issuance of any new Rights Certificate under this Section 2.7, the Corporation may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Rights Agent) connected therewith. (d) Every new Rights Certificate issued pursuant to this Section 2.7 in lieu of any destroyed, lost or stolen Rights Certificate shall evidence a contractual obligation of the Corporation, whether or not the destroyed, lost or stolen Rights Certificate shall be at any time enforceable by anyone, and shall be entitled to all the benefits of this Agreement equally and proportionately with any and all other Rights duly issued hereunder. 2.8 Persons Deemed Owners Prior to due presentment of a Rights Certificate (or, prior to the Separation Time, the associated Common Share certificate) for registration of transfer, the Corporation, the Rights Agent and any agent of the Corporation or the Rights Agent may deem and treat the Person in whose name such Rights Certificate (or, prior to the Separation Time, such Common Share certificate) is registered. as the absolute owner thereof and of the Rights evidenced thereby for all purposes whatsoever. 2.9 Delivery and Cancellation of Certificates All Rights Certificates surrendered upon exercise or for redemption, registration of transfer or exchange shall, if surrendered to any Person other than the Rights Agent, be delivered to the Rights Agent and, in any case, shall be promptly cancelled by the Rights Agent. The Corporation may at any time deliver to the Rights Agent for cancellation any Rights Certificates previously countersigned and delivered hereunder which the Corporation may have acquired in any manner whatsoever, and all Rights Certificates so delivered shall be promptly cancelled by the Rights Agent. No Rights Certificate shall be countersigned in lieu of or in exchange for any Rights Certificates cancelled as provided in this Section 2.9, except as expressly permitted by this Agreement. The Rights Agent shall destroy all cancelled Rights Certificates and deliver a certificate of destruction to the Corporation. 2.10 Agreement of Rights Holders Every holder of Rights, by accepting such Rights, consents and agrees with the Corporation and the Rights Agent and with every other holder of Rights that: (a) such holder shall be bound by and subject to the provisions of this Agreement, as amended from time to time in accordance with the terms hereof, in respect of all Rights held; -27- (b) prior to the Separation Time, each Right will be transferable only together with, and will be transferred by a transfer of, the associated Common Share certificate representing such Right; (c) after the Separation Time, the Rights will be transferable only on the Rights Register as provided herein; (d) prior to due presentment of a Rights Certificate (or, prior to the Separation Time, the associated Common Share certificate) for registration of transfer, the Corporation, the Rights Agent and any agent of the Corporation or the Rights Agent may deem and treat the Person in whose name the Rights Certificate (or, prior to the Separation Time, the associated Common Share certificate) is registered as the absolute owner thereof and of the Rights evidenced thereby (notwithstanding any notations of ownership or writing on such Rights Certificate or the associated Common Share certificate made by anyone other than the Corporation or the Rights Agent) for all purposes whatsoever, and neither the Corporation nor the Rights Agent shall be affected by any notice to the contrary; (e) such holder of Rights is not entitled to receive any fractional Rights or fractional Common Shares or other securities upon the exercise of Rights; (f) without the approval of any holder of Rights or Voting Shares and upon the sole authority of the Board of Directors acting in good faith, this Agreement may be supplemented or amended from time to time in accordance with the provisions of Section 5.5 and the third last paragraph of Subsection 2.3(b); and (g) notwithstanding anything in this Agreement to the contrary, neither the Corporation nor the Rights Agent shall have any liability to any holder of a Right or to any other Person as a result of its inability to perform any of its obligations under this Agreement by reason of any preliminary or permanent injunction or other order, decree or ruling issued by a court of competent jurisdiction or by a government, regulatory or administrative agency or commission, or any statute, rule, regulation or executive order promulgated or enacted by any governmental authority, prohibiting or otherwise restraining performance of such obligation. ARTICLE 3 - ADJUSTMENTS TO THE RIGHTS IN THE EVENT OF A FLIP-IN EVENT 3.1 Flip-in Event (a) Subject to Subsection 3.1(b), Section 5.1 and Section 5.2, in the event that prior to the Expiration Time a Flip-in Event shall occur, each Right shall constitute, effective from and after the Close of Business on the tenth Trading Day following the Stock Acquisition Date, the right to purchase from the Corporation, upon exercise thereof in accordance with the terms hereof, that number of Common Shares of the Corporation having an aggregate Market Price on the date of consummation or occurrence of such Flip-in Event equal to twice the Exercise Price for an amount in cash equal to the Exercise Price (such right to be appropriately adjusted in a manner analogous to the applicable adjustment provided for in Section 2.3 in the event that after such date of -28- consummation or occurrence an event of a type analogous to any of the events described in Section 2.3 shall have occurred with respect to such Common Shares). (b) Notwithstanding anything in this Agreement to the contrary, upon the occurrence of a Flip-in Event, any Rights that are or were Beneficially Owned on or after the earlier of the Separation Time or the Stock Acquisition Date by: (i) an Acquiring Person (or any Affiliate or Associate of an Acquiring Person, or any Person acting jointly or in concert with an Acquiring Person or with any Associate or Affiliate of an Acquiring Person); or (ii) a transferee or other successor-in-title, directly or indirectly, from an Acquiring Person (or from any Affiliate or Associate of an Acquiring Person, or any Person acting jointly or in concert with an Acquiring Person or with any Associate or Affiliate of an Acquiring Person) in a transfer of Rights, whether or not for consideration, that the Board of Directors has determined is part of a plan, understanding or scheme of an Acquiring Person (or of any Affiliate or Associate of an Acquiring Person or any Person acting jointly or in concert with an Acquiring Person or any Affiliate or Associate of an Acquiring Person) that has the purpose or effect of avoiding the provisions of Clause 3.1(b)(i); shall become null and void without any further action and any holder of such Rights (including transferees or other successors-in-title) shall thereafter have no right to exercise or transfer such Rights under any provision of this Agreement and shall have no other rights whatsoever with respect to such Rights, whether under any provision of this Agreement or otherwise. The holder of any Rights represented by a Rights Certificate which is submitted to the Rights Agent upon exercise or for registration of transfer or exchange which does not contain the necessary certifications set forth in the Rights Certificate establishing that such Rights are not void under this Subsection 3.1(b) shall be deemed to be an Acquiring Person for the purposes of this Section 3.1 and such Rights shall become null and void. (c) Any Rights Certificate that represents Rights Beneficially Owned by a Person described in either Clause 3.1(b)(i) or Clause 3.1(b)(ii) or transferred to any nominee of any such Person, and any Rights Certificate issued upon transfer, exchange, replacement or adjustment of any other Rights Certificate referred to in this sentence, shall contain the following legend: "The Rights represented by this Rights Certificate were issued to a Person who was an Acquiring Person, or an Affiliate or an Associate of an Acquiring Person, or a Person acting jointly or in concert with any of them (as such terms are defined in the Shareholder Protection Rights Agreement). This Rights Certificate and the Rights represented hereby shall become void in the circumstances specified in Subsection 3.1(b) of the Shareholder Protection Rights Agreement." -29- provided, however, that the Rights Agent shall not be under any responsibility to ascertain the existence of facts that would require the imposition of such legend but shall be required to impose such legend only if instructed to do so in writing by the Corporation or if a holder fails to certify upon transfer or exchange in the space provided on the Rights Certificate that such holder is not a Person described in such legend. The issuance of a Rights Certificate without the legend referred to in this Subsection 3.1(c) shall be of no effect on the provisions of Subsection 3.1(b). ARTICLE 4 - THE RIGHTS AGENT 4.1 General (a) The Corporation hereby appoints the Rights Agent to act as agent for the Corporation and the holders of Rights in accordance with the terms and conditions hereof, and the Rights Agent hereby accepts such appointment. The Corporation may from time to time appoint one or more co-rights agents (each a "Co-Rights Agent") as it may deem necessary or desirable, subject to the approval of the Rights Agent. In the event the Corporation appoints one or more Co-Rights Agents, the respective duties of the Rights Agent and Co-Rights Agents shall be as the Corporation may determine with the approval of the Rights Agent and the Co-Rights Agents. The Corporation agrees to pay to the Rights Agent reasonable compensation for all services rendered by it hereunder and, from time to time, on demand of the Rights Agent, its reasonable expenses and counsel fees and other disbursements incurred in the administration and execution of this Agreement and the exercise and performance of its duties hereunder. The Corporation also agrees to indemnify the Rights Agent and its directors, officers, employees and agents for, and to hold it harmless against, any loss, liability or expense, incurred without negligence, bad faith or wilful misconduct on the part of the Rights Agent, for anything done or omitted by the Rights Agent in connection with the acceptance and administration of this Agreement, including the costs and expenses of defending against any claim of liability, which right to indemnification will survive the termination of this Agreement and the resignation or removal of the Rights Agent. (b) The Rights Agent shall be protected and shall incur no liability for or in respect of any action taken, suffered or omitted by it in connection with its administration of this Agreement in reliance upon any certificate for Common Shares, Rights Certificate, certificate for other securities of the Corporation, instrument of assignment or transfer, power of attorney, endorsement, affidavit, letter, notice, direction, consent, certificate, statement or other paper or document believed by it to be genuine and to be signed, executed and, where necessary, verified or acknowledged, by the proper Person or Persons. (c) The Corporation shall inform the Rights Agent in a reasonably timely manner of events which may materially affect the administration of this Agreement by the Rights Agent and, at any time upon request, shall provide to the Rights Agent an incumbency certificate certifying the then current officers of the Corporation. -30- 4.2 Merger or Consolidation or Change of Name of Rights Agent (a) Any corporation into which the Rights Agent or any successor Rights Agent may be merged or amalgamated or with which it may be consolidated, or any corporation resulting from any merger, amalgamation or consolidation to which the Rights Agent or any successor Rights Agent is a party, or any corporation succeeding to the shareholder services business of the Rights Agent or any successor Rights Agent, will be the successor to the Rights Agent under this Agreement without the execution or filing of any paper or any further act on the part of any of the parties hereto, provided that such corporation would be eligible for appointment as a successor Rights Agent under the provisions of Section 4.4. In case at the time such successor Rights Agent succeeds to the agency created by this Agreement any of the Rights Certificates have been countersigned but not delivered, any such successor Rights Agent may adopt the countersignature of the predecessor Rights Agent and deliver such Rights Certificates so countersigned; and in case at that time any of the Rights Certificates have not been countersigned, any successor Rights Agent may countersign such Rights Certificates either in the name of the predecessor Rights Agent or in the name of the successor Rights Agent; and in all such cases such Rights Certificates will have the full force provided in the Rights Certificates and in this Agreement. (b) In case at any time the name of the Rights Agent is changed and at such time any of the Rights Certificates shall have been countersigned but not delivered, the Rights Agent may adopt the countersignature under its prior name and deliver such Rights Certificates so countersigned; and in case at that time any of the Rights Certificates have not been countersigned, the Rights Agent may countersign such Rights Certificates either in its prior name or in its changed name; and in all such cases such Rights Certificates will have the full force provided in the Rights Certificates and in this Agreement. 4.3 Duties of Rights Agent The Rights Agent undertakes the duties and obligations imposed by this Agreement upon the following terms and conditions, by all of which the Corporation and the holders of Rights Certificates, by their acceptance thereof, shall be bound: (a) The Rights Agent may retain and consult with legal counsel (who may be legal counsel for the Corporation), and the opinion of such counsel will be full and complete authorization and protection to the Rights Agent as to any action taken or omitted by it in good faith and in accordance with such opinion and the Rights Agent may also retain and consult with such other experts or advisors as the Rights Agent shall consider necessary or appropriate to properly carry out the duties and obligations imposed under this Agreement (at the Corporation's expense) and the Rights Agent shall be entitled to act and rely in good faith on the advice of such experts or advisors. (b) Whenever in the performance of its duties under this Agreement, the Rights Agent deems it necessary or desirable that any fact or matter be proved or established by the Corporation prior to taking or suffering any action hereunder, such fact or matter (unless other evidence in respect thereof be herein specifically prescribed) may be deemed to be conclusively proved and established by a certificate signed by an individual -31- believed by the Rights Agent to be the President, the Chief Financial Officer or the Secretary of the Corporation and delivered to the Rights Agent; and such certificate will be full authorization to the Rights Agent for any action taken, omitted or suffered in good faith by it under the provisions of this Agreement in reliance upon such certificate. (c) The Rights Agent will be liable hereunder only for its own negligence, bad faith or wilful misconduct. (d) The Rights Agent will not be liable for or by reason of any of the statements of fact or recitals contained in this Agreement or in the certificates for Common Shares or the Rights Certificates (except its countersignature thereof) or be required to verify the same, but all such statements and recitals are and will be deemed to have been made by the Corporation only. (e) The Rights Agent will not be under any responsibility in respect of the validity of this Agreement or the execution and delivery hereof (except the due authorization, execution and delivery hereof by the Rights Agent) or in respect of the validity or execution of any Common Share certificate or Rights Certificate (except its countersignature thereof); nor will it be responsible for any breach by the Corporation of any covenant or condition contained in this Agreement or in any Rights Certificate; nor will it be responsible for any change in the exercisability of the Rights (including the Rights becoming void pursuant to Subsection 3.1(b)) or any adjustment required under the provisions of Section 2.3 or responsible for the manner, method or amount of any such adjustment or the ascertaining of the existence of facts that would require any such adjustment (except with respect to the exercise of Rights after receipt of the certificate contemplated by Subsection 2.3(p) describing any such adjustment); nor will it by any act hereunder be deemed to make any representation or warranty as to the authorization of any Common Shares to be issued pursuant to this Agreement or any Rights or as to whether any Common Shares will, when issued, be duly and validly authorized, executed, issued and delivered and fully paid and non-assessable. (f) The Corporation will perform, execute, acknowledge and deliver or cause to be performed, executed, acknowledged and delivered all such further and other acts, instruments and assurances as may reasonably be required by the Rights Agent for the carrying out or performing by the Rights Agent of the provisions of this Agreement. (g) The Rights Agent is hereby authorized and directed to accept instructions with respect to the performance of its duties hereunder from any individual believed by the Rights Agent to be the President, the Chief Financial Officer or the Secretary of the Corporation, and to apply to such individuals for advice or instructions in connection with its duties, and it shall not be liable for any action taken, omitted or suffered by it in good faith in accordance with instructions of any such individual. (h) The Rights Agent and any shareholder, director, officer or employee of the Rights Agent may buy, sell or deal in Common Shares, Rights or other securities of the Corporation or become pecuniarily interested in any transaction in which the Corporation may be interested, or contract with or lend money to the Corporation or otherwise act as fully and freely as though it were not Rights Agent under this Agreement. Nothing -32- herein shall preclude the Rights Agent from acting in any other capacity for the Corporation or for any other legal entity. (i) The Rights Agent may execute and exercise any of the rights or powers hereby vested in it or perform any duty hereunder either itself or by or through its attorneys or agents, and the Rights Agent will not be answerable or accountable for any act, default, neglect or misconduct of any such attorneys or agents or for any loss to the Corporation resulting from any such act, default, neglect or misconduct, provided reasonable care was exercised in the selection and continued employment thereof. 4.4 Change of Rights Agent The Rights Agent may resign and be discharged from its duties under this Agreement upon 60 days' notice (or such lesser notice as is acceptable to the Corporation) in writing mailed to the Corporation and to the transfer agent of Common Shares by registered or certified mail. The Corporation may remove the Rights Agent upon 60 days' notice in writing, mailed to the Rights Agent and to the transfer agent of the Common Shares by registered or certified mail, and to the holders of the Rights in accordance with Section 5.10. If the Rights Agent should resign or be removed or otherwise become incapable of acting, the Corporation will appoint a successor to the Rights Agent. If the Corporation fails to make such appointment within a period of 30 days after such removal or after it has been notified in writing of such resignation or incapacity by the resigning or incapacitated Rights Agent (at the Corporation's expense) or by the holder of any Rights (which holder shall, with such notice if given after the Separation Time, submit such holder's Rights Certificate for inspection by the Corporation), then the holder of any Rights may apply to any court of competent jurisdiction for the appointment of a new Rights Agent. Any successor Rights Agent, whether appointed by the Corporation or by such a court, shall be a corporation incorporated under the laws of Canada or a province thereof authorized to carry on the business of a trust company in the Province of Ontario. After appointment, the successor Rights Agent will be vested with the same powers, rights, duties and responsibilities as if it had been originally named as Rights Agent without further act or deed; but the predecessor Rights Agent, upon receipt of any and all outstanding amounts owing to it pursuant to this Agreement, shall deliver and transfer to the successor Rights Agent any property at the time held by it hereunder, and execute and deliver any further assurance, conveyance, act or deed necessary for the purpose. Not later than the effective date of any such appointment, the Corporation will file notice thereof in writing with the predecessor Rights Agent and the transfer agent of the Common Shares, and mail a notice thereof in writing to the holders of the Rights. Failure to give any notice provided for in this Section 4.4, however, or any defect therein, shall not affect the legality or validity of the resignation or removal of the Rights Agent or the appointment of the successor Rights Agent, as the case may be. ARTICLE 5 - MISCELLANEOUS 5.1 Redemption of Rights (a) With the prior consent of the holders of Voting Shares or Rights obtained in accordance with Subsection 5.5(b) or (c), as applicable, the Board of Directors, at any time prior to the occurrence of a Flip-in Event as to which the application of Section 3.1 -33- has not been waived pursuant to Section 5.2, may elect to redeem all but not less than all of the then outstanding Rights at a redemption price of $0.001 per Right, appropriately adjusted in a manner analogous to the applicable adjustment to the Exercise Price provided for in Section 2.3 if an event analogous to any of the events described in Section 2.3 shall have occurred (such redemption price being herein referred to as the "Redemption Price"). (b) If a Person acquires, pursuant to a Permitted Bid or a Competing Permitted Bid or pursuant to an Exempt Acquisition occurring under Subsection 5.2(b), outstanding Voting Shares, other than Voting Shares Beneficially Owned at the date of such Permitted Bid, Competing Permitted Bid or Exempt Acquisition by such Person, the Board of Directors of the Corporation shall, notwithstanding the provisions of Subsection 5.1(a), immediately upon such acquisition and without further formality be deemed to have elected to redeem the Rights at the Redemption Price. (c) Where a Take-over Bid that is not a Permitted Bid or Competing Permitted Bid expires, is withdrawn or is otherwise terminated after the Separation Time has occurred and prior to the occurrence of a Flip-in Event, the Board of Directors may elect to redeem all of the outstanding Rights at the Redemption Price. (d) If the Board of Directors elects to or is deemed to have elected to redeem the Rights and, in circumstances where Subsection 5.1(a) is applicable, the requisite consent is given by the holders of Voting Shares or Rights, as applicable, (i) the right to exercise the Rights will thereupon, without further action and without notice, terminate and the only right thereafter of the holders of Rights shall be to receive the Redemption Price, and (ii) subject to Subsection 5.1(f), no further Rights shall thereafter be issued. (e) Within 10 Business Days of the Board of Directors electing or having been deemed to have elected to redeem the Rights or, if Subsection 5.1(a) is applicable, within 10 Business Days after the requisite consent is given by the holders of Voting Shares or Rights, as applicable, the Corporation shall give notice of redemption to the holders of the then outstanding Rights by mailing such notice to each such holder at his last address as it appears upon the Rights Register or, prior to the Separation Time, on the register of Voting Shares maintained by the Corporation's transfer agent or transfer agents. Each such notice of redemption shall state the method by which the payment of the Redemption Price shall be made. (f) Upon the Rights being redeemed pursuant to Subsection 5.1(c), all the provisions of this Agreement shall continue to apply as if the Separation Time had not occurred and Rights Certificates representing the number of Rights held by each holder of record of Voting Shares as of the Separation Time had not been mailed to each such holder and, for all purposes of this Agreement, the Separation Time shall be deemed not to have occurred. 5.2 Waiver of Flip-In Events (a) With the prior consent of the holders of Voting Shares obtained in accordance with Subsection 5.5(b), the Board of Directors may, at any time prior to the occurrence of -34- a Flip-in Event that would occur by reason of an acquisition of Voting Shares otherwise than pursuant to a Take-over Bid made by means of a take- over bid circular to all holders of record of Voting Shares or otherwise than in the circumstances set forth in Subsection 5.2(c), waive the application of Section 3.1 to such Flip-in Event by written notice delivered to the Rights Agent. In the event it proposes to grant such a waiver, the Board of Directors shall extend the Separation Time to a date at least 10 Business Days subsequent to the meeting of shareholders called to approve such waiver. (b) The Board of Directors may, at any time prior to the occurrence of a Flip-in Event that would occur as a result of a Take-over Bid made by way of a take-over bid circular sent to all holders of record of Voting Shares (which, for greater certainty, shall not include the circumstances described in Subsection 5.2(c)), waive the application of Section 3.1 to such Flip-in Event by written notice delivered to the Rights Agent, provided, however, that if the Board of Directors waives the application of Section 3.1 to such a Flip-in Event, the Board of Directors shall be deemed to have waived the application of Section 3.1 to any other Flip-in Event occurring by reason of any Take-over Bid which is made by means of a take- over bid circular to all holders of record of Voting Shares prior to the expiry of any Take-over Bid in respect of which a waiver is, or is deemed to have been, granted under this Subsection 5.2(b). (c) The Board of Directors may waive the application of Section 3.1 to a Flip-in Event provided that the following conditions are satisfied: (i) the Board of Directors has determined that the Acquiring Person became an Acquiring Person by inadvertence and without any intention to become, or knowledge that it would become, an Acquiring Person; and (ii) such Acquiring Person has reduced its Beneficial Ownership of Voting Shares such that, at the time of the waiver pursuant to this Subsection 5.2(c), it is no longer an Acquiring Person. 5.3 Expiration No Person shall have any rights pursuant to this Agreement or in respect of any Right after the Expiration Time, except the Rights Agent as specified in Subsection 4.1(a). 5.4 Issuance of New Rights Certificates Notwithstanding any of the provisions of this Agreement or of the Rights to the contrary, the Corporation may, at its option, issue new Rights Certificates evidencing Rights in such form as may be approved by the Board of Directors to reflect any adjustment or change in the number or kind or class of shares purchasable upon exercise of Rights made in accordance with the provisions of this Agreement. 5.5 Supplements and Amendments (a) The Corporation may from time to time prior to or after the Separation Time supplement or amend this Agreement without the approval of any holders of Rights or Voting Shares in order to correct any clerical or typographical error or to maintain the -35- validity and effectiveness of this Agreement as a result of any change in applicable laws, rules or regulatory requirements. The Corporation may, prior to the date of the annual meeting of the shareholders of the Corporation in the year 1999 referred to in Section 5.18, supplement and amend this Agreement without the approval of the holders of Rights or Voting Shares in order to make any changes which the Board of Directors acting in good faith may deem necessary or desirable. Notwithstanding anything in this Section 5.5 to the contrary, no such supplement or amendment shall be made to the provisions of Article 4 except with the written concurrence of the Rights Agent to such supplement or amendment. (b) Subject to Subsection 5.5(a), the Corporation may, with the prior consent of the holders of Rights and Voting Shares obtained as set forth below, at any time prior to the Separation Time, amend, vary or rescind any of the provisions of this Agreement and the Rights (whether or not such action would materially adversely affect the interests of the holders of Rights generally). Such consent shall be deemed to have been given if the action requiring such approval is authorized by the affirmative vote of a majority of the votes cast by Independent Shareholders present or represented at and entitled to vote at a meeting of the holders of Voting Shares duly called and held in compliance with applicable laws and the articles and by-laws of the Corporation. (c) Subject to Subsection 5.5(a), the Corporation may, with the prior consent of the holders of Rights obtained as set forth below, at any time after the Separation Time, amend, vary or rescind any of the provisions of this Agreement and the Rights (whether or not such action would materially adversely affect the interests of the holders of Rights generally). Such consent shall be deemed to have been given if the action requiring such approval is authorized by the affirmative vote of a majority of the votes cast by the holders of Rights (other than any holder of Rights whose Rights have become null and void pursuant to the provisions hereof) present or represented at and entitled to vote at a meeting of the holders of Rights. For the purposes hereof, the procedures for the calling, holding and conduct of a meeting of the holders of Rights shall be those, as nearly as may be, which are provided in the Corporation's by-laws with respect to meetings of its shareholders and each Right shall be entitled to one vote at any such meeting. (d) Any amendments made by the Corporation to this Agreement pursuant to Subsection 5.5(a) which are required to maintain the validity and effectiveness of this Agreement as a result of any change in any applicable laws, rules or regulatory requirements shall: (i) if made before the Separation Time, be submitted to the holders of Voting Shares at the next meeting of holders of Voting Shares and the holders of Voting Shares may, by the majority referred to in Subsection 5.5(b), confirm or reject such amendment; and (ii) if made after the Separation Time, be submitted to the holders of Rights at a meeting to be called and held in accordance with the provisions of Subsection 5.5(c) and the holders of Rights may, by a majority referred to in Subsection 5.5(c), confirm or reject such amendment. -36- Any such amendment shall, unless the Board of Directors otherwise stipulates, be effective from the date of the resolution of the Board of Directors adopting such amendment, until it is confirmed or rejected or until it ceases to be effective (as described in the next sentence) and, where such amendment is confirmed, it shall continue in effect in the form so confirmed. If such amendment is rejected by the holders of Voting Shares or the holders of Rights or is not submitted to the holders of Voting Shares or holders of Rights as required, then such amendment shall cease to be effective from and after the termination of the meeting at which it was rejected or to which it should have been but was not submitted or if such a meeting of the holders of Rights is not called within 90 days after the date of the resolution of the Board of Directors adopting such amendment, at the end of such period, and no subsequent resolution of the Board of Directors to amend this Agreement to substantially the same effect shall be effective until confirmed by the holders of Voting Shares or holders of Rights as the case may be. 5.6 Fractional Rights and Fractional Shares (a) The Corporation shall not be required to issue fractions of Rights or to distribute Rights Certificates which evidence fractional Rights. Subject to Section 5.3, after the Separation Time there shall be paid to the registered holders of the Rights Certificates with regard to which fractional Rights would otherwise be issuable, an amount in cash equal to the same fraction of the Market Price at the Separation Time of a whole Right in lieu of such fractional Rights. (b) The Corporation shall not be required to issue fractional Common Shares upon exercise of the Rights or to distribute certificates which evidence fractional Common Shares. In lieu of issuing fractional Common Shares, the Corporation shall pay to the registered holder of Rights Certificates at the time such Rights are exercised as herein provided, an amount in cash equal to the same fraction of the Market Price at the date of such exercise of one Common Share. 5.7 Rights of Action Subject to the terms of this Agreement, rights of action in respect of this Agreement, other than rights of action vested solely in the Rights Agent, are vested in the respective holders of the Rights; and any holder of any Rights, without the consent of the Rights Agent or of the holder of any other Rights, may, on such holder's own behalf and for such holder's own benefit and the benefit of other holders of Rights, enforce, and may institute and maintain any suit, action or proceeding against the Corporation to enforce, or otherwise act in respect of, such holder's right to exercise such holder's Rights in the manner provided in such holder's Rights Certificate and in this Agreement. Without limiting the foregoing or any remedies available to the holders of Rights, it is specifically acknowledged that the holders of Rights would not have an adequate remedy at law for any breach of this Agreement and will be entitled to specific performance of the obligations under, and injunctive relief against actual or threatened violations of, the obligations of any Person subject to this Agreement. -37- 5.8 Holder of Rights Not Deemed a Shareholder No holder, as such, of any Rights shall be entitled to vote, receive dividends or be deemed for any purpose the holder of Common Shares or any other securities which may at any time be issuable on the exercise of such Rights, nor shall anything contained herein or in any Rights Certificate be construed to confer upon the holder of any Rights, as such, any of the rights of a shareholder of the Corporation or any right to vote for the election of directors or upon any matter submitted to shareholders at any meeting thereof, or to give or withhold consent to any corporate action, or to receive notice of meetings or other actions affecting shareholders (except as provided in Section 5.9), or to receive dividends or subscription rights or otherwise, until such Rights shall have been exercised in accordance with the provisions hereof. 5.9 Notice of Proposed Actions If after the Separation Time and prior to the Expiration Time: (i) there shall occur an adjustment in the rights attaching to the Rights pursuant to Section 3.1 as a result of the occurrence of a Flip-in Event; or (ii) the Corporation proposes to effect the liquidation, dissolution or winding up of the Corporation or the sale of all or substantially all of the Corporation's assets; then, in each such case, the Corporation shall give to each holder of a Right, in accordance with Section 5.10, a notice of such event or proposed action, which shall specify the date on which such adjustment to the Rights occurred or liquidation, dissolution or winding up is to take place, and such notice shall be so given within 10 Business Days after the occurrence of an adjustment to the Rights and not less than 20 Business Days prior to the date of taking such proposed action by the Corporation. 5.10 Notices Notices or demands authorized or required by this Agreement to be given or made by the Rights Agent or by the holder of any Rights to or on the Corporation shall be sufficiently given or made if delivered or sent by first class mail, postage prepaid or sent by fax, addressed (until another address is filed in writing with the Rights Agent) as follows: Fantom Technologies Inc. 1110 Hansler Road Welland, Ontario L3B 5S1 Attention: President Fax No.: (905) 734-7085 Any notice or demand authorized or required by this Agreement to be given or made by the Corporation or by the holder of any Rights to or on the Rights Agent shall be sufficiently given or made if delivered or sent by first-class mail, postage prepaid or sent by fax, addressed (until another address is filed in writing with the Corporation) as follows: -38- CIBC Mellon Trust Company 320 Bay Street P.O. Box 1 Toronto, Ontario M5H 4A6 Attention: Assistant Vice-President Client Services Fax No.: (416) 643-5570 Notices or demands authorized or required by this Agreement to be given or made by the Corporation or the Rights Agent to or on the holder of any Rights shall be sufficiently given or made if delivered or sent by first-class mail, postage prepaid, addressed to such holder at the address of such holder as it appears upon the Rights Register or, prior to the Separation Time, on the registry books of the Corporation for the Common Shares. Any notice which is mailed to a holder of Rights in the manner herein provided shall be deemed given, whether or not such holder receives the notice. 5.11 Costs of Enforcement The Corporation agrees that, if the Corporation fails to fulfil any of its obligations pursuant to this Agreement, then the Corporation will reimburse the holder of any Rights for the costs and expenses (including legal fees) reasonably incurred by such holder in actions to enforce his rights pursuant to any Rights or this Agreement. 5.12 Successors All the covenants and provisions of this Agreement by or for the benefit of the Corporation or the Rights Agent shall bind and inure to the benefit of their respective successors and assigns hereunder. 5.13 Benefits of this Agreement Nothing in this Agreement shall be construed to give to any Person other than the Corporation, the Rights Agent and the holders of the Rights any legal or equitable right, remedy or claim under this Agreement; this Agreement shall be for the sole and exclusive benefit of the Corporation, the Rights Agent and the holders of the Rights. 5.14 Governing Law This Agreement and each Right issued hereunder shall be deemed to be a contract made under the laws of the Province of Ontario and for all purposes shall be governed by and construed in accordance with the laws of such province applicable to contracts to be made and performed entirely within such province. -39- 5.15 Counterparts This Agreement may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument. 5.16 Severability If any term or provision hereof or the application thereof to any circumstance shall, in any jurisdiction and to any extent, be invalid or unenforceable, such term or provision shall be ineffective as to such jurisdiction to the extent of such invalidity or unenforceability without invalidating or rendering unenforceable the remaining terms and provisions hereof or the application of such term or provision to circumstances other than those as to which it is held invalid or unenforceable. 5.17 Determinations and Actions by the Board of Directors All actions, calculations and determinations (including all omissions with respect to the foregoing) which are done or made by the Board of Directors in good faith, shall not subject the Board of Directors to any liability to the holders of the Rights. 5.18 Effective Date This Agreement is effective from the date hereof. If this Agreement is not confirmed by resolutions passed by a majority of the votes cast by Independent Shareholders who vote in respect of confirmation of this Agreement at a meeting of shareholders to be held not later than February 11, 2000, then this Agreement and all outstanding Rights shall terminate and be void and of no further force and effect on and from that the date which is the earlier of (a) the date of termination of the meeting of shareholders to be held not later than February 11, 2000 under this Section 5.18, and (b) February 11, 2000. 5.19 Regulatory Approvals Any obligation of the Corporation or action or event contemplated by this Agreement, or any amendment or supplement to this Agreement, shall be subject to receipt of any requisite approval or consent from any governmental or regulatory authority having jurisdiction including, while any securities of the Corporation are listed and admitted to trading thereon, The Toronto Stock Exchange. -40- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first above written. FANTOM TECHNOLOGIES INC. Per: (signed) ----------------------------------- Per: (signed) ----------------------------------- CIBC MELLON TRUST COMPANY Per: (signed) ---------------------------------- Per: (signed) ---------------------------------- EXHIBIT A (Form of Rights Certificate) Certificate No. Rights THE RIGHTS ARE SUBJECT TO REDEMPTION, AT THE OPTION OF THE CORPORATION, ON THE TERMS SET FORTH IN THE SHAREHOLDER PROTECTION RIGHTS AGREEMENT. UNDER CERTAIN CIRCUMSTANCES (SPECIFIED IN SUBSECTION 3.1(b) OF THE SHAREHOLDER PROTECTION RIGHTS AGREEMENT), RIGHTS BENEFICIALLY OWNED BY AN ACQUIRING PERSON OR ITS AFFILIATES OR ASSOCIATES OR ANY PERSON ACTING JOINTLY OR IN CONCERT WITH ANY OF THEM (AS SUCH TERMS ARE DEFINED IN THE SHAREHOLDER PROTECTION RIGHTS AGREEMENT) OR TRANSFEREES OF ANY OF THE FOREGOING WILL BECOME VOID WITHOUT FURTHER ACTION. Rights Certificate This certifies that__________________, or registered assigns, is the registered holder of the number of Rights set forth above, each of which entitles the registered holder thereof, subject to the terms, provisions and conditions of the Shareholder Protection Rights Agreement dated as of August 12, 1999 as amended from time to time (the "Rights Agreement") between Fantom Technologies Inc., a corporation incorporated under the laws of Ontario (the "Corporation") and CIBC Mellon Trust Company, a trust company incorporated under the laws of Canada, as Rights Agent (the "Rights Agent", which term shall include any successor Rights Agent under the Rights Agreement), to purchase from the Corporation at any time after the Separation Time and prior to the Expiration Time (as such terms are defined in the Rights Agreement), one fully paid common share of the Corporation (a "Common Share") at the Exercise Price referred to below, upon presentation and surrender of this Rights Certificate with the Form of Election to Exercise duly executed and submitted to the Rights Agent at its principal office in any of the cities of Montreal, Toronto, Calgary and Vancouver. Until adjustment thereof in certain events as provided in the Rights Agreement, the Exercise Price shall be $60.00 (Canadian) per Right. In certain circumstances described in the Rights Agreement, each Right evidenced hereby may entitle the registered holder thereof to purchase more or less than one Common Share, all as provided in the Rights Agreement. This Rights Certificate is subject to all of the terms, provisions and conditions of the Rights Agreement which terms, provisions and conditions are hereby incorporated herein by reference and made a part hereof and to which Rights Agreement reference is hereby made for a full description of the rights, limitations of rights, obligations, duties and immunities thereunder of the Rights Agent, the Corporation and the holders of the Rights. Copies of the Rights Agreement are on file at the head office of the Corporation and are available upon written request. This Rights Certificate, with or without other Rights Certificates, upon surrender at any of the offices of the Rights Agent designated for such purpose, may be exchanged for another Rights -2- Certificate or Rights Certificates of like tenor and date evidencing an aggregate number of Rights equal to the aggregate number of Rights evidenced by the Rights Certificate or Rights Certificates surrendered. If this Rights Certificate shall be exercised in part, the registered holder shall be entitled to receive, upon surrender hereof, another Rights Certificate or Rights Certificates for the number of whole Rights not exercised. Subject to the provisions of the Rights Agreement, the Rights evidenced by this Certificate may be, and under certain circumstances are required to be, redeemed by the Corporation at a redemption price of $0.001 (Canadian) per Right, subject to adjustment in certain events. No fractional Common Shares will be issued upon the exercise of any Right or Rights evidenced hereby, but in lieu thereof, a cash payment will be made, as provided in the Rights Agreement. No holder of this Rights Certificate, as such, shall be entitled to vote or receive dividends or be deemed for any purpose the holder of Common Shares or any other securities which may at any time be issuable upon the exercise hereof, nor shall anything contained in the Rights Agreement or herein be construed to confer upon the holder hereof, as such, any of the rights of a shareholder of the Corporation or any right to vote for the election of directors or upon any matter submitted to shareholders at any meeting thereof, or to give or withhold consent to any corporate action, or to receive notice of meeting or other actions affecting shareholders (except as provided in the Rights Agreement), or to receive dividends or subscription rights, or otherwise, until the Rights evidenced by this Rights Certificate shall have been exercised as provided in the Rights Agreement. This Rights Certificate shall not be valid or obligatory for any purpose until it shall have been countersigned by the Rights Agent. WITNESS the facsimile signature of the proper officers of the Corporation and its corporate seal. Date: FANTOM TECHNOLOGIES INC. - -------------------------- Authorized Signature - -------------------------- Authorized Signature Countersigned: CIBC MELLON TRUST COMPANY - -------------------------- -3- Authorized Signature (To be attached to each Rights Certificate) FORM OF ELECTION TO EXERCISE TO: The undersigned hereby irrevocably elects to exercise -------------------------- whole Rights represented by the attached Rights Certificate to purchase the Common Shares issuable upon the exercise of such Rights and requests that certificates for such shares be issued in the name of: --------------------------------- Name --------------------------------- Address --------------------------------- --------------------------------- Social Insurance, Social Security or Other Taxpayer Identification Number ----------------------------------------- DATED: ------------------------------------ Signature (Signature must correspond to name as written upon the face of this Rights Certificate in every particular, without alteration or enlargement or any change whatsoever) - ------------------------------ Signature Guaranteed Signature must be guaranteed by a Canadian chartered bank, a Canadian trust company or by a medallion guarantee by a member firm of the Securities Transfer Agents Medallion Programme. ............................................................................... (To be completed if true) The undersigned hereby represents, for the benefit of all holders of Rights and Common Shares, that the Rights evidenced by this Rights Certificate are not, and, to the knowledge of the undersigned, have never been, Beneficially Owned by an Acquiring Person or an Affiliate or -2- Associate thereof or by any Person acting jointly or in concert with any of the foregoing (all as defined in the Rights Agreement). ------------------------------------ Signature ................................................................................ NOTICE In the event the certification set forth above is not completed, the Corporation will deem the Beneficial Owner of the Rights evidenced by this Rights Certificate to be an Acquiring Person (as defined in the Rights Agreement) and, accordingly, such Rights shall be null and void and not transferrable or exercisable. (To be executed by the registered holder if such holder desires to transfer the Rights evidenced by this Rights Certificate.) FORM OF ASSIGNMENT FOR VALUE RECEIVED hereby sells, ------------------------------------------ assigns and transfers unto ----------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (please print name and address of transferee) the Rights evidenced by this Rights Certificate, together with all right, title and interest therein, and does hereby irrevocably constitute and appoint ------- attorney, to transfer the within Rights on the books of the within-named Corporation, with full power of substitution. DATED: -------------------------------------- Signature (Signature must correspond to name as written upon the face of this Rights Certificate in every particular, without alteration or enlargement or any change whatsoever) - ------------------------------ Signature Guaranteed Signature must be guaranteed by a Canadian chartered bank, a Canadian trust company or by a medallion guarantee by a member firm of the Securities Transfer Agents Medallion Programme. ................................................................................ (To be completed if true) The undersigned hereby represents, for the benefit of all holders of Rights and Common Shares, that the Rights evidenced by this Rights Certificate are not, and, to the knowledge of the undersigned, have never been, Beneficially Owned by an Acquiring Person or an Affiliate or Associate thereof or by any Person acting jointly or in concert with any of the foregoing (as defined in the Rights Agreement). --------------------------------------- Signature ................................................................................ -2- NOTICE In the event the certification set forth above is not completed, the Corporation will deem the Beneficial Owner of the Rights evidenced by this Rights Certificate to be an Acquiring Person (as defined in the Rights Agreement) and, accordingly, such Rights shall be null and void and not transferrable or exercisable. EX-2 3 0003.txt EXHIBIT 2_2 - OUTSIDE DIRECTOR APPREC. RIGHTS PLAN Exhibit 2.2 FANTOM TECHNOLOGIES INC. AMENDED AND RESTATED OUTSIDE DIRECTOR SHARE OPTION AND SHARE APPRECIATION RIGHTS PLAN - July 1, 2000 Fantom Technologies Inc. (the "Corporation") has established a share option plan known as the Outside Director Share Option Plan which was effective as of September 9, 1993 and was amended on October 20, 1994, October 30, 1995 and May 3, 1996 and was further amended and restated effective as of October 24, 1996, as of January 15, 1998, as of October 22, 1998, and as of October 21, 1999. The Corporation hereby further amends and restates such Plan as the Outside Director Share Option and Share Appreciation Rights Plan (the "Plan") effective as of July 1, 2000. 1. Purposes of the Plan -------------------- The principal purposes of the Plan are to promote a proprietary interest in the Corporation among Outside Directors, to attract and retain Outside Directors and to provide an incentive to Outside Directors who are in a position to contribute to the long-term growth and success of the Corporation. 2. Definitions and Interpretation ------------------------------ 2.1 In and for the purposes of the Plan: "Act" means the Securities Act (Ontario) and the regulations thereto, as the same may be amended or re-enacted from time to time; "associate" has the meaning ascribed in the Act; "Award" has the meaning ascribed in section 5.1; "Award Date" means the date on which an Award is made by the directors to a Recipient; "Common Shares" means the common shares in the capital of the Corporation as constituted at the effective date of the Plan, or any shares or securities into which such shares may have been changed, reclassified, subdivided, consolidated or converted; "Corporation" means Fantom Technologies Inc. and any continuing corporation resulting from the amalgamation of it and any other corporation or resulting from any other form of corporate reorganization; "directors" means the board of directors of the Corporation, and reference to any action by the directors means action taken by them by resolution as a board; -2- "insider" has the meaning ascribed in the Act; "Nominee Corporation" has the meaning ascribed in section 9.2; "Option" means an option to purchase Common Shares granted to a Recipient pursuant to the Plan; "Option Fair Market Value" of a Common Share on any date means the closing board lot sale price per share of Common Shares on the Toronto Stock Exchange on the trading day prior to such date, provided that if there was not a board lot sale thereon on such day then the immediately preceding board lot sale price per share on such Exchange, provided that if there has not been a board lot sale on the Toronto Stock Exchange within a period of two trading days prior thereto then the average of the mean between the bid and ask prices per share for the Common Shares on such Exchange on each of the five trading days prior to such date; "Option Price" has the meaning ascribed in section 5.2; "Outside Director" means an individual who is a member of the board of directors but is not a full-time employee of the Corporation or any subsidiary of the Corporation; "Recipient" means an Outside Director to whom an Award has been made, or the legal personal representative of such Outside Director, as the context requires, provided that such Award continues to be held by such Outside Director or by his Nominee Corporation pursuant to section 9.2; "Release of Financial Results" means the initial release for publication of quarterly or annual summary statements of earnings of the Corporation; "SAR Fair Market Value" of a Common Share on any date means the average of the high and low trading price per share of Common Shares on the Toronto Stock Exchange on each of the five trading days prior to such date on which the Common Shares traded on such Exchange; "Share Appreciation Rights" has the meaning ascribed in section 5.3; "Share Compensation Arrangement" means a share option, share option plan, employee share purchase plan, or any other compensation or incentive mechanisms involving the issuance or potential issuance of shares of the Corporation to one or more service providers, including a share purchase from treasury which is financially assisted by the Corporation by way of a loan, guarantee or otherwise; and "subsidiary" has the meaning ascribed in the Act. -3- 2.2 The masculine gender shall include the feminine gender and the singular shall include the plural and vice versa, unless the context otherwise requires. 3. Administration -------------- The Plan shall be administered by the directors who shall have full authority to interpret the Plan, to establish, amend and rescind rules and regulations with regard thereto, and to make all other determinations necessary for its administration. 4. Common Shares Reserved for the Plan ----------------------------------- Subject to adjustment under the provisions of section 10.1, an aggregate of 325,000 Common Shares continue to be reserved for issuance under the Plan. If an Award expires without being exercised for all of the Common Shares and/or the corresponding Share Appreciation Rights comprising the Award, the remaining Common Shares shall again be made available for the purposes of the Plan. 5. Grants of Options and Share Appreciation Rights ----------------------------------------------- 5.1 The directors may, in their discretion, from time to time grant to an Outside Director an award (the "Award") consisting of (i) an Option to purchase a stated number of Common Shares from the Corporation, as may be determined by the directors, and (ii) an equal number of Share Appreciation Rights. A Recipient may hold more than one Award at any time. Upon the exercise of an Option under an Award to purchase a number of Common Shares, an equal number of Share Appreciation Rights granted as part of the Award shall automatically terminate. Upon the exercise of a number of Share Appreciation Rights under an Award, the Option granted as part of the Award shall automatically terminate as to an equal number of Common Shares. 5.2 The subscription price ("Option Price") for each Common Share which may be purchased on the exercise of an Option shall be an amount determined by the directors in respect of the particular Award, which shall be not less than the greater of $1.10 per Common Share and the Option Fair Market Value of a Common Share on the Award Date. 5.3 Share Appreciation Rights under an Award are a right in the Recipient, upon the exercise of a stated number of such rights, to surrender the Option granted as part of the Award unexercised as to an equal number of Common Shares and to receive, without payment to the Corporation, an amount equal to the excess of (i) the aggregate SAR Fair Market Value, on the effective date of exercise of such rights, of that number of Common Shares in respect of which the Option is surrendered, over (ii) the aggregate Option Price of such Common Shares. -4- -4- 6. Limitations on Grant -------------------- The aggregate number of Common Shares in respect of which Awards have been granted and remain outstanding under the Plan shall not at any time: (a) when taken together with all of the Corporation's Share Compensation Arrangements then either in effect or proposed, be such as could result, within a one-year period, in the issuance: (i) to insiders of a number of Common Shares exceeding 10%; or (ii) to any one insider and such insider's associates of a number of Common Shares exceeding 5%; of the number of issued and outstanding Common Shares (on a non- diluted basis) as at the commencement of such one-year period; (b) in the case of any one Outside Director, exceed 5% of the number of issued and outstanding Common Shares (on a non-diluted basis) at that time; or (c) when taken together with all of the Corporation's Share Compensation Arrangements then either in effect or proposed, exceed 10% of the issued and outstanding Common Shares (on a non-diluted basis) at that time. 7. Term of Awards -------------- 7.1 An Award may be exercised, in whole or in part, at any time and from time to time, to the extent vested and exercisable in accordance with section 8.1, during the period commencing on the Award Date of such Award and ending at the close of business on the fifth anniversary of the Award Date of such Award; provided that: (a) if a Recipient ceases to be a member of the board of directors for any reason other than by reason of his death, the Award held by him will terminate at the close of business on the earlier of the fifth anniversary of the Award Date and the 45th day following the first Release of Financial Results after the date on which the Recipient ceased to be a member of the board of directors; and (b) if a Recipient ceases to be a member of the board of directors by reason of his death, the Award held by him will terminate at the close of business on the earlier of the fifth anniversary of the Award Date and the 90th day following the first Release of Financial Results after the date of his death. 7.2 Any Award that is unexercised at the expiry of the applicable period for exercise shall automatically terminate. -5- 8. Exercise of Award ----------------- 8.1 An Award shall be exercisable only to the extent that the Award has vested. Subject to article 7 and to the following provisions of this article 8, each Award granted pursuant to section 5.1 shall become fully vested and exercisable, provided the Recipient continues as a member of the board of directors at the relevant time, on the first anniversary of the Award Date of such Award. In the event of the death of a Recipient or his ceasing to be a member of the board of directors for any other reason, the Award held by him will only be vested and exercisable to the extent it was so vested and exercisable on the date he ceased to be a member of the board of directors. 8.2 An Option shall be exercised by the Recipient (or, in the circumstances contemplated by section 9.2, a Nominee Corporation) by written notice given to the Vice President, Chief Financial Officer of the Corporation specifying the number of Common Shares in respect of which the Option is being exercised at such time, accompanied by a certified cheque (payable at par in Welland, Canada) in payment for such Common Shares at the Option Price per share specified in such Option, whereupon the purchase pursuant to such Option of the Common Shares so specified shall be deemed for all purposes to have been completed and such Option exercised to such extent. Upon receipt of a notice of exercise of an Option and payment of the Option Price, the Corporation shall, within 10 days thereafter, issue to the Recipient (or, in the circumstances contemplated by section 9.2, to the Nominee Corporation) the number of Common Shares in respect of which the Option is exercised. 8.3 Share Appreciation Rights shall be exercised by the Recipient (or, in the circumstances contemplated by section 9.2, a Nominee Corporation) by written notice given to the Vice President, Chief Financial Officer of the Corporation specifying the number of Share Appreciation Rights being exercised at such time. Upon receipt of a notice of exercise of Share Appreciation Rights, the Corporation shall, within 10 days thereafter, pay to the Recipient (or, in the circumstances contemplated by section 9.2, to the Nominee Corporation) an amount equal to the excess of (i) the aggregate SAR Fair Market Value, on the effective date of exercise of such rights, of that number of Common Shares in respect of which the Option is surrendered over (ii) the aggregate Option Price of such Common Shares in respect of which the Option is surrendered. 8.4 Any notice delivered under this article 8 may relate in part to the exercise of an Option and in part to the exercise of Share Appreciation Rights. 9. Non-Assignability ----------------- 9.1 Except as provided in section 9.2: (a) no Award shall be assignable, negotiable or otherwise transferable other than by will or the laws relating to intestacy; and -6- (b) an Award may be exercised during a Recipient's lifetime only by the Recipient and, after his death, only by his legal personal representative. 9.2 A Recipient may, with the prior consent of the directors and the Toronto Stock Exchange, request that all but not less than all of his Award be held by such corporation (the "Nominee Corporation") as may be designated by the Recipient provided that: (a) the Recipient delivers to each of the Corporation and the Toronto Stock Exchange a written undertaking in form and substance satisfactory to each of them that during his lifetime (i) the Recipient shall retain all beneficial right and title to and interest in the Award; and (ii) so long as he remains competent and able to act as such, the Recipient shall remain the sole director, officer and shareholder of the Nominee Corporation; and (b) the Recipient, the Nominee Corporation and the Corporation enter into an agreement in form and substance satisfactory to the Corporation amending the agreement previously entered into between the Recipient and the Corporation relating to the Award. 10. Miscellaneous ------------- 10.1 In the event that there is any change in the Common Shares by way of merger, amalgamation, reorganization, subdivision, consolidation or otherwise, or in the event that a stock dividend or special dividend is declared on the Common Shares, and the directors determine that an adjustment should be made, the number of Common Shares subject to the Plan, the number of Common Shares to which the Awards relate under the Plan and/or the Option Price per share, shall be equitably adjusted as the directors may, in their sole discretion, determine. 10.2 The directors may, from time to time, without further approval of the shareholders of the Corporation but subject to the approval of the Toronto Stock Exchange, amend any of the provisions of the Plan, but no amendment shall divest any Recipient of his rights under an Award or increase the number of Common Shares reserved under the Plan, except as required by section 10.1. 10.3 The directors may terminate the Plan at any time, provided that all rights and obligations created prior to such time shall not be affected thereby. 10.4 The Plan shall not be construed as giving any Recipient the right to be or to continue to be a director of the Corporation. 10.5 Nothing contained herein shall restrict or limit or be deemed to restrict or limit the rights or powers of the directors in connection with any allotment and issuance of shares in the capital of the Corporation which are not allotted and issued under the Plan. -7- 10.6 The Plan is established under the laws of the Province of Ontario and the rights of all parties and the construction and effect of each and every provision of the Plan shall be according to the laws of the Province of Ontario. 10.7 The Plan shall be binding upon the Corporation and its successors and assigns and shall enure to the benefit of a Recipient and his personal representative. 10.8 Upon the communication to a Recipient of the granting of an Award, he shall be given a copy of the Plan as the same may have been amended to that time. 10.9 Each Award shall be evidenced by a written agreement between the Corporation and the Recipient, which agreement shall be consistent with the terms of the Plan as the same may have been amended to that time. 11. Effective Date -------------- This Plan shall have an effective date of July 1, 2000. EX-2 4 0004.txt EXHIBIT 2.3 - KEY EMPLOYEES' APPREC. RIGHTS PLAN Exhibit 2.3 FANTOM TECHNOLOGIES INC. AMENDED AND RESTATED KEY EMPLOYEES' SHARE OPTION AND SHARE APPRECIATION RIGHTS PLAN - JULY 1, 2000 1. Purposes of the Plan -------------------- The principal purposes of this Key Employees' Share Option and Share Appreciation Rights Plan (the "Plan") are to promote a proprietary interest in the Corporation among Employees, to attract and retain Employees and to provide an incentive to Employees who are in a position to contribute to the long-term growth and success of the Corporation. 2. Definitions and Interpretation ------------------------------ 2.1 In and for the purposes of the Plan: "Act" means the Securities Act (Ontario) and the regulations thereto, as the same may be amended or re-enacted from time to time; "associate" has the meaning ascribed in the Act; "Award" has the meaning ascribed in section 5.1; "Award Date" means the date on which an Award is made by the directors to a Recipient; "Common Shares" means the common shares of the capital of the Corporation as constituted at the effective date of the Plan, or any shares or securities into which such shares may have been changed, reclassified, subdivided, consolidated or converted; "Corporation" means Fantom Technologies Inc. and any continuing corporation resulting from the amalgamation of it and any other corporation or resulting from any other form of corporate reorganization; "directors" means the board of directors of the Corporation, and reference to any action by the directors means action taken by them by resolution as a board; "Employee" means and includes any full-time employee of the Corporation or any subsidiary; "employment" means full-time employment with the Corporation or any subsidiary; "formal bid" has the meaning ascribed in the Act; "insider" has the meaning ascribed in the Act; -2- "Option" means an option to purchase Common Shares granted to a Recipient pursuant to the Plan; "Option Fair Market Value" of a Common Share on any date means the closing board lot sale price per share of Common Shares on the Toronto Stock Exchange on the trading day prior to such date, provided that if there was not a board lot sale thereon on such day then the immediately preceding board lot sale price per share on such Exchange, provided that if there has not been a board lot sale on the Toronto Stock Exchange within a period of two trading days prior thereto then the average of the mean between the bid and ask prices per share for the Common Shares on such Exchange on each of the five trading days prior to such date; "Option Price" has the meaning ascribed in section 5.2; "Recipient" means an Employee to whom an Award has been made, or the legal personal representative of the Employee, as the context requires; "SAR Fair Market Value" of a Common Share on any date means the average of the high and low trading price per share of Common Shares on the Toronto Stock Exchange on each of the five trading days prior to such date on which the Common Shares traded on such Exchange; "Share Appreciation Rights" has the meaning ascribed in section 5.3; "Share Compensation Arrangement" means a share option, share option plan, employee share purchase plan, or any other compensation or incentive mechanisms involving the issuance or potential issuance of shares of the Corporation to one or more service providers, including a share purchase from treasury which is financially assisted by the Corporation by way of a loan, guarantee or otherwise; "subsidiary" has the meaning ascribed in the Act; "take-over bid" has the meaning ascribed in the Act, and includes a take- over bid which is defined in the Act as an exempt take-over bid; and "termination of employment" means termination of employment for any reason other than death or retirement but does not include a mere change in employment between the Corporation and any subsidiary or between two subsidiaries. 2.2 The masculine gender shall include the feminine gender and the singular shall include the plural and vice versa, unless the context otherwise requires. 3. Administration -------------- The Plan shall be administered by the directors who shall have full authority to interpret the Plan, to establish, amend and rescind rules and regulations -3- with regard thereto, and to make all other determinations necessary for its administration. 4. Common Shares Reserved for the Plan ----------------------------------- Subject to adjustment under the provisions of section 10.2, an aggregate of 532,700 Common Shares continue to be reserved for issuance under the Plan. If an Award expires without being exercised for all of the Common Shares and/or the corresponding Share Appreciation Rights comprising the Award, the remaining Common Shares shall again be made available for the purposes of the Plan. 5. Grant of Options and Share Appreciation Rights ---------------------------------------------- 5.1 The directors may, in their discretion, from time to time grant to an Employee an award (the "Award") consisting of (i) an Option to purchase a stated number of Common Shares from the Corporation, as may be determined by the directors, and (ii) an equal number of Share Appreciation Rights. A Recipient may hold more than one Award at any time. Upon the exercise of an Option under an Award to purchase a number of Common Shares, an equal number of Share Appreciation Rights granted as part of the Award shall automatically terminate. Upon the exercise of a number of Share Appreciation Rights under an Award, the Option granted as part of the Award shall automatically terminate as to an equal number of Common Shares. 5.2 The subscription price ("Option Price") for each Common Share which may be purchased on the exercise of an Option shall be an amount determined by the directors in respect of a particular Award, which shall not be less than the Option Fair Market Value of the Common Shares on the Award Date. 5.3 Share Appreciation Rights under an Award are a right in the Recipient, upon the exercise of a stated number of such rights, to surrender the Option granted as part of the Award unexercised as to an equal number of Common Shares and to receive, without payment to the Corporation, an amount equal to the excess of (i) the aggregate SAR Fair Market Value, on the effective date of exercise of such rights, of that number of Common Shares in respect of which the Option is surrendered, over (ii) the aggregate Option Price of such Common Shares. 6. Limitations on Grant -------------------- The aggregate number of Common Shares in respect of which Awards have been granted and remain outstanding under the Plan shall not at any time: (a) when taken together with all of the Corporation's Share Compensation Arrangements then either in effect or proposed, be such as could result, within a one-year period, in the issuance: (i) to insiders of a number of Common Shares exceeding 10%; or -4- (ii) to any one insider and such insider's associates of a number of Common Shares exceeding 5%; of the number of issued and outstanding Common Shares (on a non- diluted basis) as at the commencement of such one-year period; (b) in the case of any one person, exceed 5% of the number of issued and outstanding Common Shares (on a non-diluted basis) at that time; or (c) when taken together with all of the Corporation's Share Compensation Arrangements then either in effect or proposed, exceed 10% of the issued and outstanding Common Shares (on a non-diluted basis) at that time. 7. Term of Awards -------------- 7.1 An Award may be exercised, in whole or in part, at any time and from time to time, to the extent vested and exercisable in accordance with section 8.1, during the period commencing on the Award Date of such Award and ending at the close of business on the fifth anniversary of the Award Date of such Award; provided that: (a) if the employment of a Recipient as an Employee of the Corporation or a subsidiary terminates by reason of his death, the legal personal representative of the Recipient will be entitled to exercise, during the period ending 180 days after the date of the Recipient's death, any unexercised Awards which were exercisable at the date of death, failing which exercise the Award shall terminate; (b) if the employment of a Recipient as an Employee of the Corporation or a subsidiary terminates by reason of retirement in accordance with then-prevailing retirement policy of the Corporation or a subsidiary, the Recipient will be entitled to exercise, during the period ending on the first anniversary of the date of retirement, any unexercised Awards which were exercisable at the date of retirement, failing which exercise the Award shall terminate; provided that if a retired Recipient dies prior to such first anniversary, the provisions of the preceding clause (a) shall govern except that such right to exercise shall end on the earlier such first anniversary and the expiry of 180 days from the date of the Recipient's death; (c) if the employment of a Recipient as an Employee of the Corporation or a subsidiary terminates for any reason other than as provided in the preceding clauses (a) or (b), the Recipient will be entitled to exercise, during the period ending 90 days following the date on which such employment terminated, any unexercised Awards which were exercisable at such termination date, failing which exercise the Award shall terminate; and (d) if a notice is given pursuant to section 10.1 of the Plan, the Recipient will be entitled to exercise, during the period specified in such notice, any unexercised -5- Awards which were exercisable at the date of delivery of such notice, failing which exercise the Award shall terminate. 7.2 Nothing contained in clauses (a), (b), (c) or (d) of section 7.1 shall extend the period during which an Award may be exercised beyond the five years first referred to in section 7.1. 8. Exercise of Award ----------------- 8.1 An Award shall be exercisable only to the extent that the Award has vested. Subject to article 7 and to the following provisions of this article 8, each Award granted pursuant to section 5.1 shall become fully vested and exercisable, provided the Recipient continues to be an Employee at the relevant time, on the first anniversary of the Award Date of such Award as to one-half (1/2) of the number of Common Shares (or the number of Share Appreciation Rights) comprising the Award, and on the second anniversary of the Award Date as to the balance of the number of Common Shares (or the number of Share Appreciation Rights) comprising the Award. 8.2 An Option shall be exercised by the Recipient by written notice given to the Vice President, Chief Financial Officer of the Corporation specifying the number of Common Shares in respect of which the Option is being exercised at such time, accompanied by a certified cheque (payable at par in Welland, Canada) in payment for such Common Shares at the Option Price per share specified in such Option, whereupon the purchase pursuant to such Option of the Common Shares so specified shall be deemed for all purposes to have been completed and such Option exercised to such extent. Upon receipt of a notice of exercise of an Option and payment of the Option Price, the Corporation shall, within 10 days thereafter, issue to the Recipient the number of Common Shares in respect of which the Option is exercised. 8.3 Share Appreciation Rights shall be exercised by the Recipient by written notice given to the Vice President, Chief Financial Officer of the Corporation specifying the number of Share Appreciation Rights being exercised at such time. Upon receipt of a notice of exercise of Share Appreciation Rights, the Corporation shall, within 10 days thereafter, pay to the Recipient an amount equal to the excess of (i) the aggregate SAR Fair Market Value, on the effective date of exercise of such rights, of that number of Common Shares in respect of which the Option is surrendered over (ii) the aggregate Option Price of such Common Shares in respect of which the Option is surrendered. 8.4 Any notice delivered under this article 8 may relate in part to the exercise of an Option and in part to the exercise of Share Appreciation Rights. 8.5 Notwithstanding any other provision of the Plan, no Options may be exercised during the period (i) commencing with the announcement of an offeror's intention to make a formal bid which is a take-over bid for the Corporation and (ii) ending on the expiry of such take-over bid, unless the directors issue a directors' circular which recommends acceptance of the take-over bid. 8.6 Notwithstanding any other provision of the Plan, no Share Appreciation Rights may be exercised during the period (i) commencing with the announcement of an offeror's -6- intention to make a formal bid which is a take-over bid for the Corporation and (ii) ending on the expiry of such take-over bid, unless the directors pass a resolution expressly authorizing the exercise of Share Appreciation Rights during such period or issue a directors' circular which recommends acceptance of the take-over bid. 9. Non-Assignability ----------------- No Award shall be assignable, negotiable or otherwise transferable other than by will or the laws relating to intestacy. An Award may be exercised during a Recipient's lifetime only by the Recipient and, after his death, only by his legal personal representative. 10. Miscellaneous ------------- 10.1 Notwithstanding anything herein contained, in the event of a proposed reconstruction, reorganization or recapitalization of the Corporation, or its consolidation, amalgamation or merger into or with another corporation, or the sale of all or substantially all of the assets of the Corporation, the Corporation shall have the right to give written notice to the Recipient specifying the period (not shorter than 30 days following the delivery of such notice) at the expiry of which the Recipient's Award shall terminate, whereupon such Award shall terminate accordingly at the expiry of such period. 10.2 Appropriate adjustments in the number of Common Shares to which Awards relate under the Plan, and/or in the Option Price per share, both as to Awards granted or to be granted, may be made by the directors in their discretion to give effect to adjustments in the number of Common Shares which result from subdivisions, consolidations or reclassifications of the Common Shares, the payment of share dividends by the Corporation, or other relevant changes in the capital of the Corporation. 10.3 The directors may amend or discontinue the Plan at any time but, subject to sections 10.1 and 10.2, no such amendment may (without all necessary regulatory approvals) increase the aggregate maximum number of Common Shares to which the Award relates, change the manner of determining the Option Price or extend the term of any Award beyond five years or, without the consent of the Recipient, alter (except as contemplated by the agreement entered into pursuant to section 10.8) or impair any Award previously granted to a Recipient under the Plan. 10.4 Nothing contained herein shall restrict or limit or be deemed to restrict or limit the rights or powers of the directors in connection with any allotment and issuance of shares in the capital of the Corporation which are not allotted and issued under the Plan. 10.5 The Plan is established under the laws of the Province of Ontario and the rights of all parties and the construction and effect of each and every provision of the Plan shall be according to the laws of the Province of Ontario. 10.6 The Plan shall be binding upon the Corporation and its successors and assigns and shall enure to the benefit of a Recipient and his personal representative. -7- 10.7 Upon the communication to a Recipient of the granting of an Award, he shall be given a copy of the Plan as the same may have been amended to that time. 10.8 Each Award shall be evidenced by a written agreement between the Corporation and the Recipient, which agreement shall be consistent with the terms of the Plan as the same may have been amended to that time. 11. Effective Date -------------- This Plan shall have an effective date of July 1, 2000. EX-2 5 0005.txt EXHIBIT 2.4 - DEFERRED SHARE UNIT PLAN FOR OUT. DIR. Exhibit 2.4 FANTOM TECHNOLOGIES INC. DEFERRED SHARE UNIT PLAN FOR OUTSIDE DIRECTORS 1. Purposes of the Plan -------------------- The principal purposes of the Fantom Technologies Inc. Deferred Share Unit Plan for Outside Directors are to promote a proprietary interest in the Corporation among Outside Directors, to attract and retain Outside Directors and to provide an incentive to Outside Directors who are in a position to contribute to the long-term growth and success of the Corporation. 2. Definitions and Interpretation ------------------------------ 2.1 In and for the purposes of the Plan: "Board" means the board of directors of the Corporation, and reference to any action taken by the Board means action taken by them by resolution as a Board; "Common Share" means the common shares in the capital of the Corporation as constituted at the Effective Date, or any shares or securities into which such shares may have been changed, reclassified, subdivided, consolidated or converted; "Corporation" means Fantom Technologies Inc. and any continuing corporation resulting from the amalgamation of it and any other corporation or resulting from any other form of corporate reorganization; "Deferred Share Unit" means a bookkeeping entry, equivalent in value to a Common Share, credited to the account of an Outside Director in accordance with the provisions hereof; "Director's Base Compensation" means the minimum amount of cash compensation which, but for this Plan, would be payable by the Corporation to an Outside Director in respect of his services as a director; for greater certainty, "Director's Base Compensation" shall exclude any amounts payable for attendance at meetings of the Board or a committee thereof, for acting as chair of the Board or a committee thereof or for other services provided in respect of the business of the Corporation, and shall further exclude any amounts paid or reimbursed to the Outside Director in respect of expenses incurred by him; "Effective Date" shall mean the effective date of the Plan set out in section 3 hereof; "Fair Market Value" of a Common Share on any date means the closing board lot sale price per share of Common Shares on the Toronto Stock Exchange on the trading day prior to such date, provided that if there was not a board lot sale thereon on such day then the immediately preceding board lot sale price per share on such Exchange, provided that if there has not been a board lot sale on the Toronto Stock Exchange within a period of two trading days prior thereto then the average of the mean between the bid and ask -2- prices per share for the Common Shares on such Exchange on each of the five trading days prior to such date; "Fiscal Quarter" means each three month period ending on a Reference Date within a fiscal year of the Corporation; "Outside Director" means an individual who is a member of the Board but is not a full-time employee of the Corporation or any subsidiary of the Corporation; "Plan" means this Fantom Technologies Inc. Deferred Share Unit Plan for Outside Directors; "Reference Date" shall be, unless otherwise determined by the Board, the last day of each of September, December, March and June; "Settlement Date" shall have the meaning set out in section 10 hereof; "subsidiary" has the meaning ascribed in the Securities Act (Ontario), as the same may be amended or re-enacted from time to time; and "Termination" in respect of an Outside Director means the earliest date on which both of the following conditions are satisfied: (i) the Outside Director has ceased to be a director of the Corporation by reason of his death or retirement or loss of office as a director; and (ii) he is neither an employee nor a member of the board of directors of the Corporation or of any person related to the Corporation for the purposes of the Income Tax Act (Canada). 2.2 The masculine gender shall include the feminine gender and the singular shall include the plural and vice versa, unless the context otherwise requires. 3. Effective Date -------------- The Plan shall be effective on and as of August 17, 2000. 4. Participation in the Plan ------------------------- All Outside Directors may participate in the Plan and enjoy the benefits of the Plan as set out below from the Effective Date, or, for an Outside Director elected or appointed to the Board after the Effective Date, from the date of his election or appointment. 5. Administration -------------- The Plan shall be administered by the Board, which shall have full authority to interpret the Plan, to establish, amend and rescind rules and regulations with regard thereto, and to make all other determinations necessary for its administration. The Board may correct any -3- defect or supply any omission or reconcile any inconsistency in the Plan in the manner and to the extent the Board deems necessary or desirable. Any decision of the Board in the interpretation, construction and administration of the Plan, or any action, all as described herein, shall lie within its sole and absolute discretion and shall be final, conclusive and binding on all parties concerned for all purposes. Notwithstanding the foregoing, all actions of the Board shall be such that the Plan continuously meets the conditions of paragraph 6801(d) of the Regulations under the Income Tax Act (Canada). 6. Deferral of All or a Portion of Outside Director's Base Compensation -------------------------------------------------------------------- Each Outside Director may elect to receive, at his sole discretion, a portion of his Director's Base Compensation in respect of any Fiscal Quarter in the form of Deferred Share Units. An Outside Director wishing to receive a portion of his Director's Base Compensation for a Fiscal Quarter in the form of Deferred Share Units must complete a written election to such effect (including without limitation specifying the applicable portion) and must deliver such election to the Treasurer of the Corporation not less than 30 days prior to the commencement of such Fiscal Quarter. An election made in accordance with the foregoing shall apply to the Director's Base Compensation that is earned commencing with the first Fiscal Quarter commencing after the election is duly made in accordance with the foregoing and in each Fiscal Quarter thereafter until such election is changed by a further written election changing the portion of his Director's Base Compensation to be received in the form of Deferred Share Units provided that, in order to be effective, any such election changing the portion must be received by the Treasurer of the Corporation not less than 30 days prior to the commencement of the Fiscal Quarter in which the change is to take effect. For greater certainty, the portion chosen in any written election may be 0% or 100% or any integral percentage in between. Unless and until an election is made by an Outside Director in accordance with the foregoing, such Outside Director shall be deemed to have elected to be paid his Director's Base Compensation entirely in cash. 7. Credit of Deferred Share Units ------------------------------- Deferred Share Units will be credited as of each Reference Date to an account maintained for each Outside Director on the books of the Corporation. The number of Deferred Share Units (including fractional Deferred Share Units) to be credited to the account of an Outside Director as of each Reference Date shall be determined by dividing: (i) the portion of the Director's Base Compensation payable to the Outside Director in respect of the Fiscal Quarter ending on the Reference Date which is to be paid in Deferred Share Units, by (ii) the Fair Market Value of a Common Share on the Reference Date. 8. Dividend Equivalents -------------------- -4- Each Outside Director's account shall from time to time be credited with additional Deferred Share Units (including fractional Deferred Share Units), the number of which shall be determined by dividing: (i) the product obtained by multiplying the amount of each dividend declared and paid by the Corporation on the Common Shares on a per share basis (excluding stock dividends, but including dividends which may be paid in cash or in shares at the option of the shareholder) by the number of Deferred Share Units recorded in the Outside Director's account on the record date for payment of any such dividend, by (ii) the Fair Market Value of a Common Share on the dividend payment date for such dividend. 9. Adjustments and Reorganizations ------------------------------- In the event of any stock dividend (other than a dividend which may be paid in cash or in shares at the option of the shareholder), stock split, combination or exchange of shares, merger, consolidation, recapitalization, amalgamation, plan of arrangement, reorganization, spin-off or other distribution (other than normal cash dividends) of assets of the Corporation to shareholders or any other change affecting the Common Shares, such adjustments, if any, as the Board in its discretion may deem appropriate to reflect such change, shall be made with respect to the number of Deferred Share Units outstanding under the Plan. 10. Termination as an Outside Director ---------------------------------- At any time after the Termination of an Outside Director to whom Deferred Share Units have been credited under the Plan, but no later than the second to last business day in December of the first calendar year commencing after that Termination, on a day (the "Settlement Date") within such period to be determined by the Outside Director or his representative upon at least 10 days prior written notice to the Corporation, the Outside Director shall receive, in satisfaction of the number of Deferred Share Units credited to his account on the Settlement Date, a lump sum cash payment, net of any applicable withholdings, equal to the number of Deferred Share Units credited to his account as of the Settlement Date multiplied by the Fair Market Value of Common Shares on the Settlement Date. If no written notice is provided by the Outside Director to the Corporation prior to the last business day in December of the first calendar year commencing after the Termination, the Settlement Date will be deemed to be such last business day in December of such calendar year. An Outside Director shall not be entitled to require payment of any amount on account of Deferred Share Units credited to such Outside Director's account prior to Termination. 11. Transferability of Deferred Share Units --------------------------------------- The rights and interests of an Outside Director in respect of the Deferred Share Units held in such Outside Director's account shall not be transferable or assignable other than -5- by will or the laws of succession and then only to the legal representative of the Outside Director or a dependant or relation (as that term is interpreted for the purposes of paragraph 6801(d) of the Regulations under the Income Tax Act (Canada)). 12. No Right to Service ------------------- Neither participation in the Plan nor any action under the Plan shall be construed to give any Outside Director a right to be retained as a director of the Corporation. 13. Unfunded Plan ------------- The Plan shall be unfunded. The Corporation's obligation hereunder shall constitute a general, unsecured obligation, payable solely out of its general assets, and no Outside Director or other person shall have any right to any specific assets of the Corporation. The Corporation shall not segregate any assets for the purpose of funding its obligations with respect to Deferred Share Units credited hereunder. Neither the Corporation nor the Board shall be deemed to be a trustee of any amounts to be distributed or paid pursuant to the Plan. No liability or obligation of the Corporation pursuant to the Plan shall be deemed to be secured by any pledge of, or encumbrance on, any property of the Corporation or any affiliate of the Corporation. 14. No Rights to Shares ------------------- No Outside Director or other person shall have any claim or right to be issued Common Shares on account of Deferred Share Units credited to the account of such Outside Director pursuant to the Plan and under no circumstances shall Deferred Share Units entitle an Outside Director to exercise any voting rights or other rights attaching to the ownership of Common Shares. 15. Withholding Taxes ----------------- The Corporation shall be entitled to deduct any amount of withholding taxes and other withholdings from any amount paid or credited hereunder as required by law. 16. Successors and Assigns ---------------------- The Plan shall be binding on all successors and assigns of the Corporation and an Outside Director, including without limitation the estate of such Outside Director and the executor, administrator or trustee of such estate, or any receiver or trustee in bankruptcy or representative of the Outside Director's creditors. 17. Plan Amendment -------------- The Board may, in its sole discretion and without the consent of any Outside Director (acting in his capacity as a participant in the Plan), amend the Plan at any time; provided, however, that no amendment shall reduce the number of Deferred Share Units credited to any Outside Director prior to such amendment. -6- 18. Plan Termination ---------------- The Board may, in its sole discretion and without the consent of any Outside Director (acting in his capacity as a participant in the Plan), terminate the Plan at any time by giving written notice thereof to each Outside Director. Following termination of the Plan, additional Deferred Share Units shall not be credited to the accounts of Outside Directors except pursuant to section 8 hereof. Notwithstanding termination of the Plan, all amounts distributable under the Plan shall be paid to the persons entitled thereto on the date on which distributions would have been made had the Plan not been terminated. 19. Governing Law ------------- The Plan is established under the laws of the Province of Ontario and the rights of all parties and the construction and effect of each and every provision of the Plan shall be according to the laws of the Province of Ontario. Adopted with effect on the Effective Date. EX-3 6 0006.txt EXHIBIT 3.24 - BANKING AGREEMENT [Scotia LOGO] P.O. Box 247, St. Catharines, Ontario L2R 6T3 January 20, 1999. Fantom Technologies Inc. 1110 Hansler Road Welland, Ontario L3B 5Sl Dear Sirs: We are pleased to confirm that subject to acceptance by you, The Bank of Nova Scotia (the "Bank") will make available to Fantom Technologies Inc. (the "Borrower"), credit facilities on the terms and conditions set out in the attached Terms and Conditions Sheet and Schedule "A". If the arrangements set out in this letter, and in the attached Terms and Conditions Sheet and Schedule "A" (collectively the "Commitment Letter") are acceptable to you, please sign the enclosed copy of this letter in the space indicated below and return the letter to us by the close of business on February 12, 1999, after which date this offer will lapse. This Commitment Letter replaces all previous commitments issued by the Bank to the Borrower. Yours very truly, /s/ R.W. Jeffery Manager The arrangements set out above and in the attached Terms and Conditions Sheet and Schedule "A" (collectively the "Commitment Letter") are hereby acknowledged and accepted by: FANTOM TECHNOLOGIES INC. Name By: /s/ Stephen Doorey & Allen Millman -------------------------------------- Title: Date: 1/29/99 Page 1 TERMS AND CONDITIONS CREDIT NUMBER: 01 AUTHORIZED AMOUNT: $15,000,000 - -------------------------------------------------------------------------------- TYPE Revolving - Operating PURPOSE General operating requirements CURRENCY Canadian dollars and/or U.S. dollar equivalent thereof. AVAILMENT The Borrower may avail the Credit by way of direct advances evidenced by Agreement re Operating Credit Line and/or Bankers' Acceptances in Canadian dollars (in minimum amounts of $500,000 and in multiples of $100,000 and having terms of maturity of 30 to 180 days without grace) and/or by way of direct advances evidenced by Demand Promissory Notes for U.S. Funds. INTEREST RATE/FEES At Borrower's option: (CAD dollars) The Bank's Prime Lending Rate# from time to time, with interest payable monthly. (U.S. dollars) The Bank's U.S. Dollar Base Rate# in Canada, from time to time, with interest payable monthly. (U.S. dollars) The Bank's London Interbank Offer Rate (LIBOR), plus 3/4%# per annum, for periods of 1, 2, 3, 6 or 12 months, the rate to be established at 12:00 noon (London time) two (2) business days prior to each drawdown or rollover (Interest Adjustment Date) with interest payable monthly in arrears. (Bankers' Acceptances) The Bank's Corporate Bankers' Acceptance Fee#, (subject to revision at any time), subject to a minimum fee of $500 per transaction, payable at the time of each acceptance. #NOTE: Interest rate spread as outlined above, will be amended each quarter on January 1st,,April 1st, July 1st and October 1st, based on the Borrower's consolidated Debt: Tangible Net Worth (TNW) position as determined by the Borrower's quarterly consolidated financial statements 3 months prior (for example, pricing as at January 1st will be based on the quarterly financial statement as at September 30th) based on the following pricing grid: Page 2
Debt: TNW Level Pricing --------------- ------- 2.0:1 or below Prime/BRCAN/CORPBA/LIBOR + 3/4% 2.1:1 - 2.5:1 Prime + 1/4%/BRCAN + 1/4%/CORPBA + 1/4%/LIBOR + 1% 2.6:1 - 3.0:1 Prime + 1/2%/BRCAN + 1/2%/CORPBA + 1/2%/LIBOR + 1 1/4% 3.1:1 - 3.5:1 Prime + 3/4%/BRCAN + 3/4%/CORPBA + 3/4%/LIBOR + 1 1/2% Over 3.5:1 Prime + 1%/BRCAN + 1%/CORPBA + 1%/LIBOR + 1 3/4%
DRAWDOWN Direct advances are to be made in minimum multiples of $100,000. REPAYMENT Advances are repayable on demand. SPECIFIC SECURITY The following security, evidenced by documents in form satisfactory to the Bank and registered or recorded as required by the Bank to the extent not already obtained, is to be provided prior to any advances or availment being made under the Credit: Bankers' Acceptance Agreement. Agreement re Operating Credit Line. CREDIT NUMBER 02 AUTHORIZED AMOUNT: $4,000,000 - -------------------------------------------------------------------------------- TYPE Revolving Term PURPOSE To assist with capital expenditures CURRENCY Canadian and/or U.S. dollar equivalent thereof. AVAILMENT The Borrower may avail the Credit by way of direct advances evidenced by Term Promissory Notes and/or Bankers' Acceptances in Canadian dollars (in minimum amounts of $500,000 and in multiples of $100,000 and having terms of maturity of 30 to 180 days without grace) and/or Lease Agreements and/or Conditional Sales Contracts, with appropriate supporting documentation. Page 3 INTEREST RATE At Borrower's option: Direct Advances --------------- (CAD Dollars) The Bank's Prime Lending Rate from time to time, plus 1/2%# per annum with interest payable monthly. (U.S. Dollars) The Bank's U.S. Dollar Base Rate in Canada, from time to time, plus 1/2%# per annum with interest payable monthly. (U.S. Dollars) The Bank's London Interbank Offer Rate (LIBOR), plus 1 1/4%# per annum, for periods of 1, 2, 3, 6 or 12 months, the rate to be established at 12:00 noon (London time) two (2) business days prior to each drawdown or rollover (Interest Adjustment Date) with interest payable at the end of the LIBOR period or if the period is for more than 3 months, payable quarterly in arrears. (Bankers' Acceptances) The Bank's Corporate Bankers' Acceptance Fee, (subject to revision at any time), plus 1/2%# per annum, subject to a minimum fee of $500 per transaction, payable at the time of each acceptance. # NOTE: Interest rate spread, as outlined above, will be amended each ------- quarter on January 1st, April 1st, July 1st and October 1st, based on the Borrower's consolidated Debt: Tangible Net Worth (TNW) position as determined by the Borrower's quarterly consolidated financial statements 3 months prior (for example, pricing as at January 1st will be based on the quarterly financial statement as at September 30th.) based on the following pricing grid:
Debt: TNW Level Pricing --------------- ------- 2.0:1 or below Prime + 1/2%/BRCAN + 1/2%/CORPBA + 1/2%/LIBOR + 1 1/4% 2.1:1 - 2.5:1 Prime + 3/4%/BRCAN + 3/4%/CORPBA + 3/4%/LIBOR + 1 1/2% 2.6:1 - 3.0:1 Prime + 1%/BRCAN + 1%/CORPBA + 1%/LIBOR + 1 3/4% 3.1:1 - 3.5:1 Prime + 1 1/4%/BRCAN + 1 1/4%/CORPBA + 1 1/4%/LIBOR + 2% Over 3.5:1 Prime + 1 1/2%/BRCAN + 1 1/2%/CORPBA + 1 1/2%/LIBOR + 2 1/4%
Lease and/or Conditional Sales Contracts ---------------------------------------- The base payment applicable to each contract will be set on the commencement date of the contract based upon the Bank's Prime Lending Rate plus 1% per annum, or the Bank's U.S. Dollar Base Rate in Canada plus 1% per annum, calculated and payable monthly. The total periodic payment will be adjusted monthly with changes in the Bank's Prime Lending Rate. Page 4 The Borrower has the option to fix the payments for the balance of the term of the contract provided that the Borrower is not then in default under any credits. This option must be exercised prior to the commencement of the last third of the initial term of the contract. Although the fixed rate will be set on the date notification is received by the Bank, the new rate will be effective on the next payment due date (provided the next payment due date is at least 10 days from receipt of the notice). A fee of $200 plus GST per occurrence is payable when this option is exercised. The fixed rate will be quoted on request/based on Scotia Leasing's Base Rate at the time the option to fix the rate is exercised plus 1.25% per annum, calculated and payable monthly. STANDBY FEE A Standby Fee of 1/8% per annum on the daily unused portion of the Credit payable in Canadian dollars, continues to be payable monthly. REPAYMENT Direct Advances --------------- Individual advances are repayable in 36 equal monthly instalments of principal commencing 30 days after drawdown. Scotia Lease/Conditional Sales Contracts ---------------------------------------- Leases and/or conditional sales contracts are repayable in accordance with the terms and conditions of each respective lease or conditional sale contract as established and agreed to by Scotia Leasing. The maximum term of any such lease or conditional sale contract shall not exceed 5 years. Option to Convert to Non-Revolving Term Facility ------------------------------------------------ The Borrower shall have the option up to one year to convert all outstanding direct advances to a Non-revolving facility based on an overall 5 year term and repayment. The interest rate applicable to Non-Revolving loans will be based on the Bank's Prime Lending Rate from time to time, plus 1% per annum with interest payable monthly. PREPAYMENT Direct advances --------------- Provided 2 business days prior written notice has been given to the Bank, prepayment is permitted without fee, premium, bonus or penalty at any time in whole or in part. Prepayments are to be applied against instalments of principal in the inverse order of their maturities. Page 5 Leases/Conditional Sales Contracts ---------------------------------- Contracts are not cancellable, and no prepayments are permitted. SPECIFIC SECURITY The following security, evidenced by documents in form satisfactory to the Bank and registered or recorded as required by the Bank to the extent not already obtained, is to be provided prior to any advances or availment being made under the Credit: Chattel Mortgages/Lease Agreements/Conditional Sales Contracts covering equipment leased/financed. Comprehensive General Liability insurance for a minimum of $2,000,000 per occurrence with the Bank recorded as an additional named insured. All risks insurance covering the replacement value of the equipment with the Bank recorded as loss payee and additional named insured. SPECIFIC CONDITION Until all debts and liabilities under the Credit have been discharged in full, the following condition will apply in respect of the Credit: Direct advances under the Credit are limited to 75% of invoice costs. CREDIT NUMBER 03 AUTHORIZED AMOUNT: $20,000,000 - -------------------------------------------------------------------------------- TYPE Revolving Term - 364 days PURPOSE General Operating requirements CURRENCY Canadian and/or U.S. dollar equivalent thereof. AVAILMENT The Borrower may avail the Credit by way of direct advances evidenced by Term Promissory Notes and/or Bankers' Acceptances in Canadian dollars (in minimum amounts of $500,000 and in multiples of $100,000 and having terms of maturity of 30 to 180 days without grace). Page 6 INTEREST RATE AND FEES At Borrower's option: (CAD dollars) The Bank's Prime Lending Rate# from time to time, with interest payable monthly. (U.S. dollars) The Bank's U.S. Dollar Base Rate# in Canada, from time to time, with interest payable monthly. (U.S. dollars) The Bank's London Interbank Offer Rate (LIBOR), plus 3/4%# per annum, for periods of 1, 2, 3, 6 or 12 months, the rate to be established at 12:00 noon (London time) two (2) business days prior to each drawdown or rollover (Interest Adjustment Date) with interest payable monthly in arrears. (Bankers' Acceptances) The Bank's Corporate Bankers' Acceptance Fee#, (subject to revision at any time), subject to a minimum fee of $500 per transaction, payable at the time of each acceptance. # NOTE: Interest rate spread, as outlined above, will be amended each ----- quarter on January 1st, April 1st, July 1st and October 1st, based on the Borrower's consolidated Debt: Tangible Net Worth (TNW) position as determined by the Borrower's quarterly consolidated financial statements 3 months prior (for example, pricing as at January 1st will be based on the quarterly financial statement as at September 30th) based on the following pricing grid:
Debt: TNW Level Pricing --------------- ------- 2.0:1 or below Prime/BRCAN/CORPBA/LIBOR + 3/4% 2.1:1 - 2.5:1 Prime + 1/4%/BRCAN + 1/4%/CORPBA + 1/4%/LIBOR + 1% 2.6:1 - 3.0:1 Prime + 1/2%/BRCAN + 1/2%/CORPBA + 1/2%/LIBOR + 1 1/4% 3.1:1 - 3.5:1 Prime + 3/4%/BRCAN + 3/4%/CORPBA + 3/4%/LIBOR + 1 1/2% Over 3.5:1 Prime + 1%/BRCAN + 1%/CORPBA + 1%/LIBOR + 1 3/4%
STANDBY FEE A Standby Fee of 1/8% per annum on the daily unused portion of the Credit payable in Canadian dollars, continues to be payable monthly. REPAYMENT The credit shall revolve and may be drawn up to 364 days after acceptance of this Commitment Letter. Upon expiry of the current 364 day term, advances under the credit are repayable in full unless renewed at the Bank's option. Page 7 The Borrower shall have the option to request the Bank annually to extend the availability period for an additional year. The Borrower will make each such request before August 31st in each year and the Bank will reply after completion of the Annual Review. Option to Convert to Non-Revolving Term Facility ------------------------------------------------ The Borrower shall have the option up to one year to convert all outstanding direct advances to a Non-revolving facility based on an overall 5 year term and repayment. The interest rate applicable to Non-Revolving loans will be based on the Bank's Prime Lending Rate from time to time, plus 3/4% per annum with interest payable monthly. Repayment either monthly or quarterly. The Borrower shall have the option to request the Bank annually to extend the availability period for an additional year. The Borrower will make each such request before August 31st in each year and the Bank will reply after completion of the Annual Review. This extension is at the Bank's option. [If the Revolving Term feature is renewed by the Bank (see Repayment above), the Option to Convert to a Non-Revolving facility will be reinstated for a further year inclusive of the 5 year repayment.] PREPAYMENT (If converted to Non-Revolving Facility) Prepayment is permitted without fee, premium, bonus or penalty at any time in whole or in part. Prepayments are to be applied against installments of principal in the inverse order of their maturities. CREDIT NUMBER 04 AUTHORIZED AMOUNT: $20,000,000 - -------------------------------------------------------------------------------- TYPE Non-revolving PURPOSE To assist with research and development expenditures. CURRENCY Canadian and/or U.S. dollar equivalent thereof. AVAILMENT The Borrower may avail the Credit by way of direct advances evidenced by Term Promissory Notes and/or Bankers' Acceptances in Canadian dollars (in minimum amounts of $500,000 and in multiples of $100,000 and having terms of maturity of 30 to 180 days without grace). Page 8 DRAWDOWN The unavailed portion of this Non-Revolving facility is subject to review at the end of five years (from date of acceptance). INTEREST RATE AND FEES At Borrower's option: (CAD dollars) The Bank's Prime Lending Rate plus 1% per annum# from time to time, with interest payable monthly. (U.S. dollars) The Bank's U.S. Dollar Base Rate plus 1% per annum# in Canada, from time to time, with interest payable monthly. (U.S. dollars) The Bank's London Interbank Offer Rate (LIBOR), plus 1 3/4%# per annum, for periods of 1, 2, 3, 6 or 12 months, the rate to be established at 12:00 noon (London time) two (2) business days prior to each drawdown or rollover (Interest Adjustment Date) with interest payable monthly in arrears. (Bankers' Acceptances) The Bank's Corporate Bankers' Acceptance Fee plus 1%#, (subject to revision at any time), subject to a minimum fee of $500 per transaction, payable at the time of each acceptance. # NOTE: Interest rate spread, as outlined above, will be amended each ----- quarter on January 1st, April 1st, July 1st and October 1st, based on the Borrower's consolidated Debt: Tangible Net Worth (TNW) position as determined by the Borrower's quarterly consolidated financial statements 3 months prior (for example, pricing as at January 1st will be based on the quarterly financial statement as at September 30th) based on the following pricing grid:
Debt: TNW Level Pricing --------------- ------- 2.0:1 or below Prime + 1%/BRCAN + 1%/CORPBA + 1%/LIBOR + 1 3/4% 2.1:1 - 2.5:1 Prime + 1 1/4%/BRCAN + 1 1/4%/CORPBA + 1 1/4%/LIBOR + 2% 2.6:1 - 3.0:1 Prime + 1 1/2%/BRCAN + 1 1/2%/CORPBA + 1 1/2%/LIBOR + 2 1/4% 3.1:1 - 3.5:1 Prime + 1 3/4%/BRCAN + 1 3/4%/CORPBA + 1 3/4%/LIBOR + 2 1/2% Over 3.5:1 Prime + 2%/BRCAN + 2%/CORPBA + 2%/LIBOR + 2 3/4%
Page 9 Fixed Rate Options ------------------ The Borrower has the option available to fix the interest rate for a maximum period of 8 years, providing the loan balance is $5,000,000 or more. Subject to availability, rates will be quoted on request. Based on today's prevailing rates, an indicative rate for a 8 year term would be 7.20%. or Subject to availability, and to execution of mutually satisfactory documentation, based on the Bank's standard International Swap Dealers Association (ISDA) Master Agreement and Schedule, incorporating all security held pursuant to this Commitment Letter, the Borrower shall have the option, available until December 31, 2003 (5 years) to enter into Interest Rate Swap transactions. The Swap transactions are limited to Canadian currency, for terms not exceeding 8 years. The aggregate amount of all outstanding transactions at any one time is not to exceed $20,000,000 Cdn. (Minimum availment $5,000,000 Cdn.). STANDBY FEE A Standby Fee of 1/8% per annum on the daily unused portion of the Credit payable in Canadian dollars, continues to be payable monthly. REPAYMENT Advances are to be repaid over an 8 year term. No principal payments are required in Years 1 and 2, followed by monthly repayment of the original principal amount as follows: Year 3: 5% Year 4: 10% Year 5: 15% Year 6: 20% Year 7: 25% Year 8: 25% (Quarterly payments at Borrower's option.) PREPAYMENT Floating -------- Prepayment is permitted without fee, premium, bonus or penalty at any time in whole or in part. Prepayments are to be applied against installments of principal in the inverse order of their maturities. Page 10 Fixed ----- Prepayment of any individual fixed advance in whole is permitted at any time on payment of an amount equal to the greater of: i) three months simple interest at the rate applicable to the loan on the entire principal amount; and ii) the amount, if any, by which the interest at the rate applicable to the loan exceeds interest at the prevailing rate at the time of prepayment calculated on the entire principal amount for the remaining term of the loan. The "prevailing rate at the time of prepayment" is defined as that rate at which the Bank would then lend to the Borrower, based on the same security, for the remaining term of the loan. Interest Rate Swap ------------------ Any unwinding of a Swap transaction would be subject to the terms and conditions set out in the Master Agreement. SPECIFIC CONDITION Until all debts and liabilities under the Credit have been discharged in full, the following conditions will apply in respect of the Credit: Each individual transaction in excess of $5,000,000 requires the Bank's prior written approval, which will not be unreasonably withheld. (Borrower to provide details of expenditure such as purpose, assets to be acquired, benefits to Borrower, long range impact, etc.) CREDIT NUMBER: 05 AUTHORIZED AMOUNT: $100,000 - -------------------------------------------------------------------------------- TYPE Corporate VISA - Availment, interest rate and repayment as per Cardholder Agreement. CREDIT NUMBER: 06 - ------------------ TYPE Forward Exchange Contracts, terms up to three years. Daily settlement limit $10,000,000. CURRENCY U.S. dollars Page 11 AVAILMENT Subject to availability and execution of mutually satisfactory documentation, the Borrower may enter into Forward Exchange Contracts with the Bank for maximum terms up to three years. Maximum aggregate Forward Exchange Contracts outstanding at any one time are not to exceed $203,000,000 USD. GENERAL FEES, SECURITY TERMS, AND CONDITIONS APPLICABLE TO ALL CREDITS - ---------------------------------------------------------------------- FEES - ---- In addition to, and not in substitution for the obligations of the Borrower and the rights of the Bank upon the occurrence of an event of default herein, the Borrower shall pay to the Bank: A fee of $250 per month (or such higher amount as may be determined by the Bank from time to time) for each month or part thereof during which the Borrower is late in providing the Bank with financial or other information required herein; The imposition or collection of these fees does not constitute an express or implied waiver by the Bank of any event of default or of any of the terms or conditions of the lending arrangements, security or rights arising from any default. Fees may be charged to the Borrower's deposit account when incurred. GENERAL SECURITY - ---------------- The following security, evidenced by documents in form satisfactory to the Bank and registered or recorded as required by the Bank to the extent not already obtained, is to be provided prior to any advances or availment being made under the Credits: General Assignment of Book Debts. Security under Section 427 of the Bank Act with appropriate insurance coverage, loss, if any, payable to the Bank. General Security Agreement over all present and future personal property, to incorporate "intellectual property" i.e., the Dual- Cyclonic technology with appropriate insurance coverage, loss if any, payable to the Bank. Updated/revised addendums or schedules will be required from time to time to enable the Bank to register all newly acquired assets, including intellectual property, patents, etc. Collateral Mortgage providing a first fixed charge over 1110 Hansler Road, Welland, Ontario, with replacement cost fire insurance coverage, loss, if any, payable to the Bank as mortgagee. Page 12 Acknowledged Assignment and Direction To Pay under Export Development Corporation's (EDC) global insurance policy, loss, if any, payable to the Bank. Hypothecation of all common shares of the wholly owned or controlled subsidiaries detailed below under Guarantees. Guarantees given by the following (with corporate seals and resolutions as applicable) in the amounts shown: NAME AMOUNT ---- ------ Fantom Technologies USA Holdings Inc.# Unlimited Fantom Technologies Direct Inc.# Unlimited Fantom Technologies USA Inc.# Unlimited Fantom Technologies Intellectual Property Inc. Unlimited # To be Supported By: General Assignment of Book Debts General Security Agreement over all present and future personal property with appropriate insurance coverage, loss if any, payable to the Bank. Hypothecation of all common shares in wholly owned or controlled subsidiaries now owned or to be owned. GENERAL CONDITIONS - ------------------ Until all debts and liabilities under the Credits have been discharged in full, the following conditions will apply in respect of the Credits: Combined Operating loans and Bankers' Acceptances under Credit 01 and Credit 03 are not to exceed at any time the "Borrowing Base" which is defined as the aggregate of: 75% good quality accounts receivable (inclusive of "Direct Response" accounts of Fantom Technologies Direct Inc. which are limited to a maximum allowance of $2,000,000) excluding accounts over 90 days, accounts due by employees, offsets and inter-company accounts plus 90% of all accounts receivable insured by the Export Development Corporation or an alternate insurer acceptable to the Bank, less security interests or charges against current assets held by other parties and specific payables (i.e. statutory deductions) which have or may have priority over the Bank's security, plus 30% of net inventory, less specific payables. Maximum advances against net inventory are limited to $7,500,000. The quality of uninsured accounts receivable in excess of $50,000 are to be supported by Bank/Credit reports satisfactory to the Bank. Page 13 Net Inventory is defined as the sum of finished goods, raw materials and other categories, valued at the lower of cost or market, less unpaid inventory received from suppliers during the past 30 days. On a consolidated basis, the ratio of Debt (including deferred taxes) to Tangible Net Worth (TNW) is not to exceed 2.5:1. TNW is defined as the sum of share capital, minority interests in affiliates, earned and contributed surplus and postponed funds less ---- (i) amounts due from officers/affiliates, (ii) investments in unconsolidated affiliates, and (iii) intangible assets in accordance with GAAP. On a consolidated basis, the ratio of current assets to current liabilities is to be maintained at all times at 1.1:1 or better. The ratio of EBITDA to interest expenses plus the current portion of long term debt and capital leases, calculated on a rolling four quarter basis, is to be maintained at all times at 1.5:1 or better. No new outside secured debt in excess of $500,000 is to be entered into by the company or any wholly owned/controlled subsidiaries without the Bank's prior written consent. The wholly owned/controlled subsidiaries are not to issue common or preferred stock which would result in the subsidiaries or the Borrower relinquishing control. If Fantom Technologies Inc. disposes of any part of its interest in a wholly owned/controlled subsidiary through a public offering, the proceeds of such offering will be used to pay any advances under Credit No. 4 unless otherwise agreed to by the Bank. Net proceeds in excess of $1,000,000 in aggregate from the sale of any capital assets (if not securing advances under Credit #2) are to be applied against outstanding loans under Credit #4. No mergers, amalgamations or significant change in the Borrower's line of business (from home care products/services) are permitted without the Bank's prior written consent. Consent not to be unreasonably withheld. Subject to annual review. Investments in and/or advances to unconsolidated affiliates or unconsolidated subsidiaries are not in aggregate to exceed $5,000,000 without the Bank's prior written consent. Consent not to be unreasonably withheld. Page 14 Payment of dividends is permitted subject to the conditions outlined in this Commitment Letter being met both before and after such payments and upon the Borrower's ability to continue to meet the conditions during the ensuing year based on the annual financial statement projections as provided. The Bank is to be formally advised of any significant change in ownership of which the Borrower receives formal notification. At the Borrower's option, Montreal Trust is to be given the opportunity to be named Transfer Agent for the Borrower's shares. The Borrower is to provide written authorization for the Borrower and its Auditors to meet with Bank officials annually to discuss the Borrower's affairs with the right of the Borrower to be present at such meeting. Additional terms and conditions in Schedule A are to apply. GENERAL BORROWER REPORTING CONDITIONS - ------------------------------------- Until all debts and liabilities under the Credits have been discharged in full, the Borrower will provide the Bank with the following: Annual Audited Consolidated Financial Statements of the Borrower within 120 days of the Borrower's fiscal year end, duly signed. Annual Prepared Unconsolidated Financial Statements of the Borrower and the Guarantors within 120 days of the Borrower's fiscal end, duly signed. Business Plan and Budget, including financial statement and cash flow projections covering the ensuing year are to be provided annually in conjunction with the year end financial statement reporting, to include Capital Expenditure Program. Annual budget as previously provided will suffice along with copy of 10K filing. Quarterly Unaudited Consolidated Interim Financial Statements of the Borrower, within 60 days of period end. Borrowing Base Calculation monthly, to include information on inventory, accounts receivable and accounts payable, within 30 days of period end. Aged Listing of Accounts Receivable and Accounts Payable upon request. Annual Officer's Certificate of the Chief Financial Officer, that the Borrower has not received notice that it is in default of the terms and conditions of its licence/technology agreements relative to the "Dual-Cyclonic" system within 120 days of the Borrower's fiscal year end. Page 15 Listing of existing patents, certified by the Chief Financial Officer, upon request. CONFLICTS - --------- If there is any conflict or inconsistency between the provisions of this Commitment Letter and the provisions of any security or other agreements, documents or instruments delivered to the Bank in connection herewith, the provisions of this Commitment letter shall govern and apply. Page 16 SCHEDULE A ---------- ADDITIONAL TERMS AND CONDITIONS APPLICABLE ------------------------------------------ TO ALL CREDITS -------------- (In the event of a conflict, the terms and conditions of any lease agreement and/or conditional sale contract supersede the terms and conditions in this Schedule A with regard to such leases and/or conditional sale contracts). Calculation and Payment of Interest - ----------------------------------- 1. Interest on loans/advances made in Canadian dollars will be calculated on a daily basis and payable monthly on the 22nd day of each month (unless otherwise stipulated by the Bank). Interest shall be payable not in advance on the basis of a calendar year for the actual number of days elapsed both before and after demand of payment or default and/or judgment. 2. Interest on loans/advances made in U.S. dollars will be calculated on a daily basis and payable monthly on the 22nd day of each month, (unless otherwise stipulated by the Bank). Interest shall be payable not in advance on the basis of a 360 day year for the actual number of days elapsed both before and after demand of payment or default and/or judgment. The rate of interest based on a 360 day year is equivalent to a rate based on a calendar year of 365 days of 365/360 times the rate of interest that applies to the U.S. dollar loans/advances. Interest on Overdue Interest - ---------------------------- 3. Interest on overdue interest shall be calculated at the same rate as interest on the loans/advances in respect of which interest is overdue, but shall be compounded monthly and be payable on demand, both before and after demand and judgment. Indemnity Provision - ------------------- 4. Applicable to all U.S. dollar credits. If the introduction of, or any change in, or in the interpretation of, or any change in its application to the Borrower of, any law or regulation, or compliance with any guideline from any central bank or other governmental authority (whether or not having the force of law) has the effect of increasing the cost to the Bank of performing its obligations hereunder or otherwise reducing its effective return hereunder or on its capital allocated in support of the credits, then the Bank shall give prompt written notice thereof to the Borrower and upon demand from time to time the Borrower shall compensate the Bank for such cost or reduction pursuant to a certificate reasonably prepared by the Bank. Page 17 (a) Prepayment without fee ---------------------- In the event of the Borrower becoming liable for such costs, the Borrower shall have the right to cancel without fee, premium, bonus or penalty all or any unutilized portion of the affected credit (other than any portion in respect of which the Borrower has requested utilization of the credit in which case cancellation may be effected upon indemnification of the Bank for any reasonable funding breakage costs incurred by the Bank thereby), and to prepay, without fee or penalty the outstanding principal balance thereunder other than the face amount of any document or instrument issued or accepted by the Bank for the account of the Borrower, such as a Letter of Credit, a Guarantee or a Bankers' Acceptance. (b) Prepayment of Fixed Rate Advances --------------------------------- If any prepayment is made, for any reason, of an advance bearing a fixed rate of interest, including without limitation a LIBOR advance, the Borrower shall compensate the Bank for the cost of any early termination of its funding arrangements in accordance with its normal practices, such costs to be notified to the Borrower in a certificate reasonably prepared by the Bank. In the case of any fixed loan under Credit #4, any such cost shall be reduced by any amount paid to the Bank in respect thereof under the prepayment section of that credit. Calculation and Payment of Bankers' Acceptance Fee - -------------------------------------------------- 5. The fee for the acceptance of each Bankers' Acceptance will be payable on the face amount of each Bankers' Acceptance at the time of acceptance of each draft calculated on the basis of a calendar year for the actual number of days elapsed from and including the date of acceptance to the due date of the draft. Calculation and Payment of Standby Fee - -------------------------------------- 6. Standby fees shall be calculated daily and payable monthly on the basis of a calendar year for Canadian dollar credits and on the basis of a 360 day year for U.S. dollar credits from the date of acceptance by the Borrower of this Commitment Letter. Environment - ----------- 7. The Borrower agrees: (a) to obey in all material respects all applicable laws and requirements of any federal, provincial, or any other governmental authority which are material to the environment and the operation of the business activities of the Borrower and/or Guarantors taken as a whole; Page 18 (b) to allow the Bank access at all reasonable times upon reasonable prior notice during nomal business hours to the business premises of the Borrower and/or Guarantors to monitor and inspect all property and business activities of the Borrower and Guarantors provided that such right of access shall be exercised so as not to interfere with the Borrower's or Guarantors' normal business operations; (c) to notify the Bank from time to time of any material change in business activity conducted by the Borrower and/or Guarantors which involves the use or handling of hazardous materials or wastes and which increases the environmental liability of the Borrower and/or Guarantors in any material adverse manner; (d) to notify the Bank of any proposed change in the use or occupation of the property of the Borrower and/or Guarantors which increases the environmental liability of the Borrower or the Guarantor in any material adverse manner prior to any change occurring; (e) to provice the Bank with prompt written notice of any environmental incident which has a material adverse effect on the consolidated property, equipment, or business activities of the Borrower and its consolidated subsidiaries taken as a whole and with any other environmental information reasonably requested by the Bank from time to time; (f) to conduct all environmental investigations and remedial activities which a commercially reasonable person would perform in similar circumstances to meet its environmental responsibilities imposed by applicable law; and (g) to pay for any environmental investigations, assessments or remedial activities with respect to any property of the Borrower and/or Guarantors that may be reasonably performed for or by the Bank from time to time pursuant to its right under subsection (f) above. If the Borrower notifies the Bank of any specified activity or change or provides the Bank with any information pursuant to subsections (c), (d), or (e), or if the Bank receives any environmental information from other sources, the Bank, in its sole discretion, may decide that an adverse change in the environmental condition of the Borrower and/or Guarantors or any of the property, equipment, or business activities of the Borrower and/or Guarantors has occurred which decision will constitute, in the absence of manifest error, conclusive evidence of the adverse change. Following this decision being made by the Bank, the Bank shall notify the Borrower and/or Guarantors of the Bank's decision concerning the adverse change. Page 19 If the Bank decides or is required to incur expenses in compliance or to verify the Borrower's and/or Guarantors' compliance with applicable environmental or other regulations, the Borrower and/or Guarantors shall indemnify the Bank in respect of any such expenses reasonably incurred, which will constitute further advances by the Bank to the Borrower under this Agreement. Notice of Drawdown/Payments/Prepayments - --------------------------------------- 8. The Borrower shall give the Bank prior notice of a drawdown, payment or prepayment of any loan/advance three bank business days when the amount is $7 million dollars or more. Initial Drawdown - ---------------- 9. The right of the Borrower to obtain the initial drawdown under the Credit(s) is subject to the condition precedent that there shall not have been any material adverse changes in the consolidated financial condition or the environmental condition of the Borrower and its consolidated subsidiaries taken as a whole. Judgement Currency - ------------------ 10. The obligation of the Borrower and Guarantors hereunder to make payments in any currency of payment and account shall not be discharged or satisfied by any tender or recovery pursuant to any judgement expressed in or converted into any other currency except to the extent to which such tender or recovery shall result in the effective receipt by the Bank of the full amount of such currency of payment and account so payable and accordingly the obligation of the Borrower and guarantors shall be enforceable as an alternative or additional cause of action for the purpose of recovery in the other currency of the amount (if any) by which such effective receipt shall fall short of the full amount of such currency of payment and account so payable and shall not be affected by any judgement being obtained for any other sums due hereunder. Periodic Review - --------------- 11. The obligation of the Bank to make further advances or other accommodation available under any Credits of the Borrower under which the indebtedness or liability of the Borrower is payable on demand, is subject to periodic review and to no material adverse change occurring in the consolidated financial condition or the environmental condition of the Borrower and its consolidated subsidiaries taken as a whole. Evidence of Indebtedness - ------------------------ 12. The Bank's accounts, books and records constitute, in the absence of manifest error, prima facie evidence of the advances made under this Credit, repayments on account thereof and the indebtedness of the Borrower to the Bank. Page 20 Acceleration - ------------ 13. (a) All indebtedness and liability of the Borrower to the Bank payable on demand, is repayable by the Borrower to the Bank at any time on demand; (b) All indebtedness and liability of the Borrower to the Bank not payable on demand, shall, at the option of the Bank, become immediately due and payable, the security held by the Bank shall immediately become enforceable, and the obligation of the Bank to make further advances or other accommodation available under the Credits shall terminate, if any one of the following Events of Default occurs and is continuing and has not been waived: (i) the Borrower or any guarantor fails to pay when due, whether on demand or at a fixed payment date, by acceleration or otherwise, any payment of principal payable to the Bank under this Commitment Letter; (ii) The Borrower fails to pay when due any interest, fees, commissions or other amounts payable to the Bank under this Commitment Letter and such failure continues for 3 business days after receipt by the Borrower of notice from the Bank of such non-payment; (iii) there is a breach by the Borrower or any guarantor of any other term or condition contained in this Commitment Letter or in any other agreement to which the Borrower and/or any guarantor and the Bank are parties, and such breach continues unremedied for 30 days after receipt by the Borrower of Notice from the Bank of such breach; (iv) any material breach occurs under any security listed in this Commitment Letter under the headings "Specific Security'' or "General Security'' or under any other credit, loan or security agreement to which the Borrower and/or any guarantor is a party and such breach continues to be unremedied for 30 days after receipt by the Borrower of notice from the Bank of each breach; (v) any bankruptcy, re-organization, compromise, arrangement, insolvency or liquidation proceedings or other proceedings for the relief of debtors are instituted by or against the Borrower or any Material guarantor and, if instituted against the Borrower or any Material guarantor, are allowed against or consented to by the Borrower or any guarantor or are not dismissed or stayed within 60 days after such institution. A Material guarantor is defined as a guarantor whose consolidated assets or gross revenues represent more than 5% of the consolidated assets or gross revenue of the Borrower and its consolidated subsidiaries; Page 21 (vi) a receiver is appointed over all or any substantial part of the property of the Borrower and its Consolidated Subsidiaries taken as a whole or any material judgement or material order or any material process of any court becomes enforceable against the Borrower or any Material guarantor or any property of the Borrower or any Material guarantor or any creditor takes possession of all or any substantial part of the property of the Borrower and its consolidated subsidiaries taken as a whole; (vii) any course of action is undertaken by the Borrower or any Material guarantor or with respect to the Borrower or any Material guarantor which would result in the Borrower's or Material guarantor's reorganization, amalgamation or merger with another corporation or the transfer of all or substantially all of the Borrower's or any Material guarantor's assets without the Bank's prior written consent; (viii) any guarantee of indebtedness and liability under the Credit Line is withdrawn or determined by a court of competent jurisdiction to be invalid or otherwise rendered ineffective; (ix) any material adverse change occurs in the consolidated financial condition of the Borrower and its consolidated subsidiaries taken as a whole, (x) any material adverse change occurs in the environmental condition of: (A) the Borrower and its consolidated subsidiaries taken as a whole; or (B) the consolidated property, equipment, or business activities of the Borrower and its consolidated subsidiaries taken as a whole. Costs - ----- 14. All reasonable costs, including reasonable legal and appraisal fees incurred by the Bank relative to security and other documentation and the enforcement thereof, shall be for the account of the Borrower and may be charged to the Borrower's deposit account 10 business days after a detailed invoice thereafter has been provided to the Borrower. Page 22 GENERAL ACCEPTED ACCOUNTING PRINCIPLES - -------------------------------------- Where the character or amount of any asset or liability or terms of revenue or expense is required to be determined, or any consolidation or other accounting computation is required to be made for the purposes of this Commitment Letter or any specific or general security document or other document of instrument issued or accepted by the Bank for the account of the Borrower, such determination or calculation shall, unless the parties otherwise agree, be made in accordance with generally accepted accounting principles applied on a consistent basis. "Generally accepted accounting principles" means generally accepted accounting principles from time to time approved by the Canadian Institute of Chartered Accountants, or any successor institute, including those set out in the Handbook of the Canadian Institute of Chartered Accountants. Notice - ------ Any demand, notice or communication to be made or given hereunder shall be in writing and may be made or given by personal delivery, by registered mail or by transmittal by facsimile addressed to the respective parties as follows: To the Borrower: Fantom Technologies Inc. 1110 Hansler Road Welland, Ontario L3B 5SI Attention: Chief Financial Officer Facsimile: 1-905-734-9955 To the Borrower: The Bank of Nova Scotia P.O. Box 247 St. Catharines, Ontario L2R 6T3 Attention: Manager Facsimile: 1-905-684-8445 or to such other mailing or facsimile address as any party may from time to time notify the others in accordance with this provision. Any demand, notice of communication made or given by personal delivery shall be conclusively deemed to have been given on the day of actual delivery thereof, or, if made or given by registered mail, on the fifth business day following deposit thereof in the mail or, if made or given by facsimile on the first business day following the transmittal thereof. If the party making or giving such demand, notice or communication knows or ought reasonably to know of difficulties with the postal system which might affect the delivery of mail, any such demand, notice or communication shall not be mailed but shall be made or given by personal delivery or by facsimile. -2- (6) The terms and conditions of the Commitment Letter replace all previous commitments issued by the Bank to any of you. In the event of any conflict or inconsistency between the terms and conditions of any prior agreements between the Bank and any of you and the terms and conditions contained in the Commitment Letter and the Banking Documentation, the terms and conditions contained in the Commitment Letter and the Banking Documentation shall prevail. The Bank acknowledges that each of you is entering into the Banking Documentation in reliance upon this agreement. DATED this 14th day of April, 2000 THE BANK OF NOVA SCOTIA Per: /s/ R.W. Jeffery ----------------------------- Authorized Signatory SCHEDULE A Fantom Technologies Inc. - ------------------------ 1. Banker's Acceptances Agreement 2. Agreement re Operating Line of Credit 3. Promissory Note (Credit #2) 4. Promissory Note (Credit #3) 5. Promissory Note (Credit #4) 6. Via Cardholder Agreement 7. General Assignment of Book Debts 8. Application for Credit and Promise to give Bank Act Security 9. Notice of Intention to give Bank Act Security 10. Security under Section 427(1) of the Bank Act 11. Agreement as to Loans and Advances under the Bank Act 12. General Security Agreement 13. Collateral Mortgage over 1110 Hansler Road, Welland, Ontario 14. Acknowledged Assignment and Direction to Pay under Export Development Corporation's global insurance policy (loss payable to Lender) 15. Hypothecation 16. Power of Attorney to transfer securities Fantom Technologies Direct, Inc. - -------------------------------- 17. Guaranty 18. General Assignment of Book Debts 19. General Security Agreement 20. Hypothecation 21. Power of Attorney to transfer Securities Fantom Technologies U.S.A. Holdings, Inc. - ----------------------------------------- 22. Guaranty Agreement TO: FANTOM TECHNOLOGIES INC. FANTOM TECHNOLOGIES U.S.A. HOLDINGS INC. FANTOM TECHNOLOGIES DIRECT, INC. FANTOM TECHNOLOGIES U.S.A. INC. FANTOM TECHNOLOGIES INTELLECTUAL PROPERTY INC. RE: Commitment Letter dated January 20, 1999 between The Bank of Nova Scotia and Fantom Technologies Inc. - -------------------------------------------------------------------------------- Reference is made to the captioned commitment letter (the "Commitment Letter") and the guarantees, security agreements and other documents entered into by each of you in favour of The Bank of Nova Scotia (the "Bank") pursuant to the Commitment Letter, including, without limitation, those agreements listed in the attached Schedule A (collectively the "Banking Documentation"). The Bank agrees with each of you as follows: (1) Unless an Event of Default under the Commitment Letter has occurred and is continuing, the Bank will not contact customers and account debtors or others with whom you conduct business or have dealings to enforce any security under the Banking Documentation. (2) Unless an Event of Default under the Commitment Letter has occurred and is continuing, the Bank will not require any of you to hold any money received by you separate and apart from your other monies or in trust for the Bank. (3) Unless an Event of Default under the Commitment Letter has occurred and is continuing, the Bank will permit any of you or any of your subsidiaries to make payments to any of you or your subsidiaries (whether payment of dividends, payment of intercorporate accounts or otherwise), and will not prohibit any of you or your subsidiaries from receiving any such payments. (4) Unless an Event of Default under the Commitment Letter has occurred and is continuing, the Bank will not act on any power of attorney contained in the Banking Documentation. (5) In the event of any conflict or inconsistency between the terms and conditions of any Banking Documentation and the terms conditions contained in the Commitment Letter (including without limitation reporting and other additional obligations, covenants relating to environmental matters, occurrences or circumstances constituting events of default, enforcement or the manner of giving notice), the terms and conditions of the Commitment Letter shall prevail and the conflicting or inconsistent terms and conditions of the Banking Documentation shall be superceded to the extent necessary to give full force and effect to the Commitment Letter. -2- 23. Security Agreement 24. Pledge Agreement 25. Stock Transfer Power Fantom Technologies U.S.A. Inc. - ------------------------------- 26. Guarantee 27. Security Agreement Fantom Technologies Intellectual Property, Inc. - ----------------------------------------------- 28. Guaranty Agreement 29. Security Agreement -----END PRIVACY-ENHANCED MESSAGE-----