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Exhibits Summary, Observations, Conclusions and
Recommendations
TAB Content Description
1. MKG Powerpoint Presentation MKG Cartridge Systems Inc. has been in business since 1989. Its primary business is the
2. Engagement letter between Bank of Montreal and Deloitte & Touche Inc. remanufacturing of toner cartridges for laser printers and copiers. The business grew
3. steadily through the 1990's with peak sales of $28 million in fiscal 2000 reducing
Company Forecast to September 30,2002
slightly to $26 million in fiscal 2001.
4. Company Forecast for fiscal 2003
5. Accounts receivable listings (CDN & US) as at July 3 1, 2002 In the first half of calendar 2002, the Company suffered a number of material revenue set
backs. In particular, Xerox US, which had represented $9.2 million (or 34%) of the
6. Inventory quantity and costing list as at June 30,2002
Company's sales in 2001, advised that they were reducing their orders by 75%. The
7. Accounts payable listings (CDN & US) as at July 3 1,2002 Xerox reduction appears to have been tied directly to Xerox's loss of Office Depot and
Office Max as customers. In addition to the Xerox loss, the Company has lost ~ a &as a
customer effective August 2002. In fiscal 2001, Katun represented $5.5 million (or
20%) of the Company's sales. The loss of the Katun business appears to be tied to a
quality issue experienced in early 2002 and a recent change in the ownership of Katun.
Management advises that the quality issue was traced back to the supplier who provides
toner to MKG. The combined reduction of Xerox business and the loss of the Katun
business represents roughly $12 million or 44% of the Company's 2001 revenue base.

The material reduction in revenue necessitated a number of cost cuttinglcash generating

initiatives by the Company in order to "right size" the cost base and manufacturing
capacity to the expected new level of revenue. The initiatives included:

laying off 16 salaried employees and 100 plant employees and consolidating
operations to one shift;

subletting former storage and manufacturing premises on Bramalea Road,

Mississauga to consolidate operations to Lorimar Road, Mississauga;

reducing sales and administration costs in discretionary areas - advertising and

promotion, travel and accommodation and general office expenses;

focusing on reducing cost of sales by managing expenditures related to shop

supplies, plant maintenance, materials and dutyhrokeragelfreight; and

reducing inventory from $3,200M in January 2002 to $2,100M the end of June 2002
and focusing on reducing inventory further to $1,30OM by the end of September
2002.

These initiatives are complete or will be fully completed by September 30,2002, which
is the end of the Company's fiscal 2002 year. Management believes that these initiatives
will have successfully "right sized" the Company for the $16 million in sales that it is
forecasting for 2003 and, as a result, the Company is anticipating earning a profit of
M81M in 2003.
We have had extensive discussions with management regarding their cost cutting
initiatives, sales, the industry, current financial position and forecast for the balance of
fiscal 2002 and for 2003. The details of o w discussions, investigations and analysis are
provided in the balance of this report. We have also attached, under Tab 1, a PowerPoint
presentation titled "MKG Operation Review - 2002" prepared by MKG, which provides
background information on the Company, discussion of events in 2002 and the outlook
for 2003.
Below, we have outlined our more significant observations and conclusions followed by
ow recommendations.
Observations and Conclusions
The remanufactured toner cartridge industry is fragmented and dominated by small
private enterprises.
=
The OEM's are attempting to make the business of remanufacturingcartridges more
difficult by making cartridges more complex and therefore more difficult to
remanufacture. They are also attempting to limit the quantity of empty cases
available for remanufacturing by providing incentives to return empty cartridges to
the OEM for destruction. In addition, the number of different cartridges has been
expanding as the OEM's rush to get new technology to market in order to maintain
and grow their share of the equipment market. It is in the OEM's interest to thwart
the efforts of the remanufacturers in order to preserve their margins through the sale
of OEM replacement cartridges. The remanufacturing industry is challenging some
of the tactics of the OEM's in bourt although no decisions appear to have been
rendered yet.
The Company has previously been focused on remanufacturing and selling to a
relatively small group of significant customers who have large distribution networks
that can deliver the product directly to end-users or to re-sellers. Last year the
Company began to focus on selling directly to more re-sellers and will continue this
focus going forward. In addition to selling the Company's manufactured product,
the Company has started to re-sell remanufactured or non-OEM inkjet and thermal
pnhter cartridges. The Company advises that they have started this program in order
to broaden their appeal to re-sellers. We believe that the increased emphasis on
. smaller customers (re-sellers)may ultimately have the effect of:
o reducing the average transaction size;
o increasing the average collection time for receivables, as we believe that
smaller customers generally pay slower;
o reducing the quality of receivables as a result of smaller balances and
longer aging;
o requiring the Company to maintain higher levels of finished goods
inventoryin order to provide efficient fulfilling of small orders;
o requiring the Company to become more efficient in remanufacturing
small batches or continue longer production runs (and increase
inventory) in order to maintain efficiency; and
increasing the costs of the selling effort.
Offsetting some of these negative implications, a broader customer base would
diversify the Company's risk and dependence on large customers. The Company
also believes that they will be able to increase their margins by selling to smaller
customers.
Unfortunately, the success of the focus on smaller customers can only be proven or
dis-proven over time.
The Company's cash flow is being stressed as it is being used to finance Mr. Grist's
purchase of 50% of the Company. In 2002, Mr. Grist withdrew an additional $300M
in salary in order to fund the repayment schedule with Mr. Gibb and a further $40M
to fund personal loan payments to the Bank of Montreal in relation to the purchase.
The net payment requirement for Mr. Gibb was approximatelyS180M which roughly
equates to the after-tax equivalent of the $300M in salary. In 2003, the Company is
proposing to reduce the cash outflow to $180M by making payment on account of
the shareholder loan rather than as salary. The Bank of Montreal will have to
consent to this change as there is a covenant regarding a minimum shareholder loan
balance.
Mr. Grist's compensation for his position as president of the Company is roughly
$215M per annum if the additional compensation to fund payments to Mr. Gibb and
the personal loan are not considered.
The Company faces challenges in estimating sales as there is not significant lead-
time in receiving orders. This also can play havoc with the Company's production
scheduling as they do not know what mix of product will be ordered. The challenges
of scheduling can make production inefficient and more costly. As noted above, in
order to manage costs and production requirements, the Company may have to
become more efficient at smaller production runs or will have to carry larger
inventories in order to maintain longer production runs.
We have estimated the security position of the Bank and, based on this analysis, it
appears that the Bank's collateral coverage deteriorates from a range of S934M to
$2,298M as at luly 31, 2002 to a range of (S82M) to S769M as at September 30,
2002. The deterioration results from the fact that significant cash generated from the
reduction of accounts receivable and inventory is used, primarily, to pay accounts
payable and cover outstanding cheques. We have also presented a realization
scenario based upon a going concern sale. In this scenario, the Bank's collateral
value coverage is roughly $1,60OM at both luly 3 1 and September 30,2002.
We believe that morale among the Company's employees has been negatively
impacted by the series of cost cutting initiatives undertaken by the Company over the
past 6 months. It is difficult to measure the impact, if any, of lower employee only other obvious sources for the decline would be sales prices being lower on
morale. average, production costs being higher on average or opening inventory being
overstated. Without doing a detailed investigation, we are unable to make a
It appears that the Company has "right-sized" their cost structure for the anticipated conclusion as to the reasons for the decline in gross margin in 2002.
volume of sales in 2003. However, the Company's ability to realize their forecast is
tied directly to their ability to achieve the forecast sales levels and, in particular, a
19.7% gross margin. The sales level appears reasonable given the performance in
2002, however, the Company's ability to achieve the 19.7% gross margin is really The Bank should restructure its margin availability calculation to ensure that the
based on management's assertions, with no tangible empirical evidence. Only time
empties credits that are accounted for in accrued liabilities are set-off against
will prove whether or not the Company can achieve the forecast gross margin. For
receivables before calculating the lending value.
reference, each 1% change in the gross margin percentage impacts gross margin and
EBlTDA by $163M, assuming the sales targets are achieved. The Company faces challenges in costing finished goods because of the varied
production specificationsand component costs of products that are visually identical.
The Company has successfullymitigated the carrying cost of their former expansion The Bank uses the Company's standard cost of finished goods as the basis for the
premises on Brarnalea Road, Mississauga by subletting the premises. However, the
lending value calculation. In our view, the Company lending value should be
sublet only runs until July 15, 2003 whereas the lease runs to October, 2004. In the determined on a cost base that is the lower of cost or market where cost is
event that the Company is unable to sublet the premises for the remainder of the determined to be market value less a specified gross margin. The sale prices of the
lease term, it will have to carry a monthly cost of approximately$16M per month on
products are a more objective basis for valuing than the Company's standard cost.
account of rent, taxes and common costs.
Inventory should be costed monthly and appropriate adjustments made to the
The Company is forecasting a reduction in their funding requirements from Bank of
accounts. The Company maintains a perpetual inventory of the quantities of all
Montreal to $1,844M as at September 30, 2002 and to $765M as at September 30,
materials and finished goods. We believe that a process could be developed to cost
2003. Both of these figures are book values and the actual drawn amounts would
the goods on a monthly basis. This could be assisted though the complete
typically be lower due to outstandingcheques. installation and implementation of the inventory accounting package for Accpac.
Our review of the accounting systems found them to be generally well organized and We believe that more cost accounting information would be beneficial to the
current.
Company in order to understand the profitability of the various contracts and sales
channels. At present, we do not believe that the Company has sufficiently
Our review of the production processes and plant operations found both to be
segmented and detailed information to properly assess these matters.
reasonably organized without obvious deficiencies.
The Company has been issuing cheques on the accounting system but not releasing
We interacted with many of the senior management team in completing the field
them until there is availability on the operating facility. This procedure has the
work for this report. The individuals that we dealt with were all accessible,
effect of understating accounts payable and overstating the book value of bank
cooperative and professional in dealing with us. Based upon our review, we believe
indebtedness. The Company should only write cheques on the accounting system if
that the management group has the necessary skills to manage the Company.
they are actually going to release them.
Finished goods inventory is valued using a standard cost which is based on the use of
At present, Mr. Ellerby makes the bank deposits and oversees the accounting for the
high cost virgin cartridges and mostly new parts. However, actual finished goods
deposits. As an internal control, it may be prudent to segregate these duties.
can be comprised of visually identical product that is remanufactured at a lower cost
with non-virgin cartridges and some re-used parts. In addition, we tested a number
of finished goods prices to the cost in inventory. It appears that the difference
between the cost and the price does not support a gross margin of 20%. As a result
of the foregoing, we are of the view the finished goods inventory may be overstated.

The Company experienced a decline in gross margin in fiscal 2002 which we have
estimated to be the equivalent of $1,300M. Part of the decrease in gross margin is
attributable to the inherent time-lag in adjusting variable costs as the sales were
declining, however, we are not satisfied that this accounts for the entire decline. The

Engagement Management
Pursuant to a letter of engagement dated August 6, 2002, Deloitte & Touche LLP was
engaged by the Bank of Montreal (the "Bank") to review the operations and current
financial position of MKG Cartridge Systems Inc. (the "Company"). The Company
consented to the engagement. A copy of our letter of engagement is attached under Tab 2
of this report.
Our review included, but was not limited to:
a review and evaluation of the present operations of the Company;
a review of the management of the Company;
a review and assessment of the Company's current financial position and
considerationof historical operating results;
an evaluation of the Company's significant assets and liabilities and assessment of
the current security position of the Bank,
a review and assessment of the Company's fmancial forecasts, including projected
short-term cash flows and the reasonableness of the underlying assumptions;
Lome Doyle, Procurement Manager
Mary Jarret, Ofice Manager
Fred Marufi, Shipping Manager
John Abel, Buyer
All of these individuals were very accessible and cooperative in assisting us and, to the
extent requested information was available, it was provided in a timely and professional
manner.
Our procedures and enquiries did not include verification work or constitute an audit in
accordance with generally accepted auditing standards. In the event any of the
information upon which we relied was inaccurate or incomplete, the results of our
analysis could be materially affected. We reserve the right to review all calculations
included or referred to in this report and, if we consider it necessary, to revise our
calculations or conclusions in light of new information existing at the date of this report.
Insofar as our observations and conclusions are based on forecasts and projections
prepared by the Company, it should be noted that there will be differences between
actual and forecasted results, as events and circumstances frequently do not occur as
expected, and those differences may be material.

a review and assessment of the Company's business plan to September 30.2002 and
any future projections thereafter, including future business prospects and the
financial impact of the plan on the future viability of the Company;

any other matters which appear to the Bank to be relevant to an assessment of the
Bank's security position and future course of action.

In accordance with the terms of our engagement, we have prepared this report to the
Bank. This report is intended to assist the Bank in their assessment of its security
position with respect to the Company and is not intended for general distribution or
circulation, nor is it to be reproduced or used for any other purpose without our express
written consent.

In order to perform our assessment, we have relied on fmancial, operational and other
information that has been provided to us, either verbally or in writing, by the following
individuals:

Michael Grist, President

Rob Ellerby, Controller

Brenda Miller, Human Resource Manager

Mehdi Oskui,Director of Manufacturing& Quality


Background
Current Organization I Ownership Structure
Below, is the current corporate organization chart together with the shareholding
structure. The main operating company is MKG Cartridge Systems Inc. ('MKG" or the
"Company"). Clear Print Technologies Ltd. ("CPT') does not have significant
operations. CPT's main purpose is to sell reproductions of a cartridge drum recoating
machine that was designed by CPT. 1492950 Ontario Inc. ("1492950") was set-up as a
tax effective means for Michael Grist to acquire the other 50% of MKG from Kevin
Gibb. We are advised that 1492950 has no assets or liabilities other than its share
interest in MKG.
Michael
Grist
1492950
71.5%
Ontario Inc.
Clear Print MKG Cartridge
Technologies Ltd. Systems Ine.
History of the Company
The Company was incorporated in 1988 and began business in 1989. The original
shareholders of the Company were Mr. Gibb and Martin Kompa. Mr. Gibb is the
brother-in-law of Mr. Grist. Mr. Gibb was a photocopier technician with Nashua and
Panasonic and Mr. Kompa had a similar background. In 1989190, Mr. Kompa exited the
business and Mr. Gibb became the sole shareholder. In 1991, Mr. Grist joined Mr. Gibb
in the Company as an employee. At that time the Company had only three employees.
In 1992, Mr. Grist purchased a 49% interest in the Company from Mr. Gibb and
ultimately, in 1997, Mr. Grist increased his interest to 50%. In 2001, Mr. Grist
purchased the balance of the Company from Mr. Gibb and became the sole shareholder.
This purchase transaction is described in more detail in the section titled Shareholder
Buyout on page 50.
Mr. Gibb and Mr. Grist also jointly owned a company called Price Right Data Supplies
Limited ("Price Right"). Mr. Grist bought full control of Price Right in 1999 and then
sold the company in consideration for a 35% interest in Echo F& (a Quebec based
company). MKG sold product to Echo Fax and ultimately became its largest creditor.
Echo Fax went bankrupt in 1999 with the result that MKG wrote-off its $230M
receivable from Echo Fax.
After leaving the Company, Mr. Gibb started another business focused on laser print
labels. Mr. Grist advises that this business does not compete in any way with the
Company.
MKG's business of remanufacturing toner cartridges grew consistently through the
1990's. In 1999, the Company started to expand its Xerox relationship and this
necessitated the expansion of the Company's manufacturing capabilities to another
location (Bramalea Road, Mississauga) in addition to its existing facility at 1090
Lorimar, Mississauga. The Company had expanded to meet anticipated sales growth
which did not fully materialize. As a result, the Company surrendered part of the
Brarnalea Road expansion space back to the landlord in January 2001.
In the first half of 2002, the Company faced three major set backs. First, in January
2002, Xerox advised the Company that it would be cutting its orders in half. Second, in
June 2002, Xerox further reduced its orders by 50% of their then remaining sales. Third,
in July 2002, Katun terminated its relationship with the Company. On a combined basis,
Xerox and Katun represented approximately 55% of the Company's sales in fiscal 2001.
The impact of these sales reductions was material and the Company implemented a
series of cost cutting and cash generation actions in order to mitigate the damage,
including:
Laying off 50 plant employees in February 2002;
Listing the remaining Bramalea Road premises for sublease and, in June 2002,
successfully subletting the premises for a 13 month period,
Reducing sales and administration costs in discretionary areas - advertising and
promotion, travel and accommodationand general office expenses;
Focusing on reducing cost of sales by managing expenditures related to shop
supplies, plant maintenance, materials and dutyhrokeragelfreight;
Reducing inventory from $3,20OM in January 2002 to $2,100M the end of June
2002;
Laying off 8 salaried employees in April/May 2002;
Laying off a further 50 plant employees and 8 - 10 salaried employees in July 2002;
Consolidatingoperations to one shift effective August 12th, 2002; and
m Focusing on reducing inventory to $1,300M by the end of September.
The reduction in sales and the resulting cost cutting initiatives have been material events
impacting the Company. At this time, the Company believes that it has "right-sized" its
cost structure to the level necessary to support its forecast level of sales for fiscal 2003
and the Company is forecastinga significantprofit for 2003.
Management of the Company
The management structure of the Company is depicted in the following chart.
As noted previously, in preparing this report, we have had discussions with many of the
individuals noted in the organization chart The individuals that we dealt with were all
accessible, cooperative and professional in dealing with us. Based upon our review, we
believe that the management group has the necessary skills to manage the Company.
Below, we have provided some brief descriptions of the background of a number of key
employees.
Michael Grist, President and CEO - Mr. Grist is indirectly the sole shareholder of the
Company. He owned 50% of the Company from 1992 until 2001 at which time he
acquired the other 50% from Mr. Kevin Gibb. This purchase transaction is described
under the heading Shareholder Buyout on page 50 of this report. Prior to joining the
Company in 1991, Mr. Grist spent approximately four and a half years at Xerox in a
sales capacity.
Mr. Grist is the leader of the Company and is responsible for all strategic and material
day-knhy management decisions. To support him in his management of the Company,
Mr. Grist has formed a management team comprised of Rob Ellerby, Lome Doyle,
Valerie Clarke and Mehdi Oskui.
Mehdi Oskui, Director of Manufacturing and Quality Control - Mr. Oskui has been
with the Company since December 1995. Prior to this time, he worked for Bayer for 7
years in three different countries and then for Standard Products in Canada for 6 years.
Mr. Oskui is responsible for a significant part of the operations of the Company as the
manufacturing, quality control and product development groups all report to him.
Robert Ellerby, Controller - Mr. Ellerby is a CMA and has been with the Company
since August 1999. Initially Mr. Ellerby was the accounting manager and reported to the
Company's CFO. Mr. Grist advises that the CFO was terminated in late 2001 as a result
of poor management of the Company's financial operations. Mr. Grist is fulfilling the
function of the CFO in conjunction with Mr. Ellerby. Mr. Ellerby is responsible for the
accounting department and produces financial reports and some forecasts. Mr. Ellerby -
has worked as an accounting manager or controller in the manufacturing sector since
1984.
Valerie Clark, General Sales Manager - Ms. Clark has been employed by the
Company since August 1993. Ms. Clark has responsibility for the sales department
which is comprised of three sales associates and three customer service representatives.
Mr. Grist maintains a lead sales roll for large customers and also involves Mr. Doyle in
pricing analysis and bidding on large orders.
Lorne Doyle, Empties Procurement & Special Projects Manager - Mr. Doyle has
been employed by the Company since November 1999. He manages the purchase and
sale of cartridgeempties and has been in the cartridge remanufacturing business for eight
years. Mr. Doyle spent several years at Katun as the North American Sales and Product
Manager of rebuilt cartridges. Mr. Doyle is also actively involved in pursuing new
market opportunitiesand in pricing large orders.
The Facility and Operation
All of the Company's operations are conducted from premises at 1090 Lorimar Drive,
Mississauga. The building is leased and includes both office and manufacturing plant
facilities.
The Company's primary business is the remanufacturing of toner cartridges for laser
printer and fax machines. The Company reverse engineers the cartridges in order to
develop a process and parts specifications for production of the remanufactured
cartridges. The Company claims to remanufacture a range of cartridges that covers
roughly 90% of the laser printer market including high volume and specialty cartridges.
The two most significant components of a remanufactured cartridge are the plastic
cartridge shell and the print drum. The cartridge shells are used OEM cartridges. The
Company purchases the used toner cartridges or they are returned to the Company by
customers pursuant to an empty return program The used cartridges are tested to
determine which parts must be replaced and which can be re-used. The cartridges are
then taken apart and the parts are replaced andlor cleaned and re-used and new toner is
added. Every remanufactured cartridge is tested before packaging to ensure that it
works. In addition, for higher volume cartridges, one or two cartridges per one hundred
is run until empty. The testing is a necessary part of the Company's IS0 9002 quality
Program
The remanufacturing of cartridges is a very manual process. Electronic testing
equipment is used to test the cartridge prior to remanufacturing. Also, the Company uses
it proprietary Clear Print technology to recoat print drums. Other than these two
processes, virtually all other processes are manual.
Purchases, payables, payments:
The Company's manufacturing and plant employees are unionized. The current contract
does not expire until July 2004. Managerial and office employees are not unionized.
Effective mid-August 2002, the Company has reduced its production to one shift per day.
In addition, it bas recently instituted a work sharing program. In this program the hourly
staff work four days and get the fifth day off. The federal employment insurance
program pays 55% of the employees regular pay for the day off and the Company pays
nothing. This program allows the Company to maintain flexibility in its production
scheduling without bearing the full cost. The Company informs staff which days are
intended to be off, however, if there is a change in scheduling and the staff are needed,
they must be available to work. Where the employees do work on a Friday, the
Company is responsible for their full compensationon that day.
Accounting Systems
The Company uses Accpac software for order management, sales, accounts receivable,
purchasing, payables and general ledger. They have not yet fully implemented the
inventory management component of the software and inventory is managed primarily
with manual and computer based sub-systems. Payroll is outsourced to ADP.
Below we have provided a brief descriptionof the major accounting processes.
Sales, receivables, receipts:
sales orders are generally received by telephone and are manually recorded. The
orders are subsequently entered into the order processing system where they remain
"open" until the product is shipped. The open orders are reviewed daily and, where
the product is available, it is shipped immediately. Once the product is shipped, the
shipping documentation flow causes an invoice to be generated on the same day.
Inventory:
Open orders are reviewed daily in order to manage production scheduling and fulfill
orders where product is not on hand.
The Company has set credit limits for each customer. If the customer does not have
sufficientcredit for an open order, the product will not be shipped unless Mr. Ellerby
or Ms. Jarret approve tbe shipment. slow paying customer; are not shipped until
arrangements are made. These arrangements include prepayment.
The Company maintains accounts receivable sub-ledgers for US and Canadian dollar
denominated accounts receivable. Credit terms are generally 30 days with the
primary exception of Xerox which is 45 days.
Payments are usually made by credit card or cheque. The Company maintains bank
accounts at HSBC in the US and at CIBC in Canada to facilitate the payment by
Visa. Cheques are deposited daily to the Bank of Montreal US and Canadian dollar
denominated accounts.
John Able (Buyer) determines what is needed for the production purchases. He
generates the purchase orders and sends them to the vendors. Purchase orders go to
the open purchase order file. Nothing happens until goods are received. The various
packing slip and shipment information is given to Farida Tawdrous (Accounting
Clerk) and she confirms that the order received is what was ordered, signed off on
the applicable receiving date and generates a receiving slip. The receiving slip
creates an accrued liability.
Invoices received are matched against the applicable receiving slip. Discrepancies
result in invoice amounts and overlunder shipments are investigated and
correctionsladjustmentsare made after appropriate approval. Once the reconciliation
is completed, an account payable is created in the accounting system. The Company
maintains US and Canadian dollar denominated accounts payable sub-ledgers.
On a weekly basis, a precheque register is generated to show what is due up to that
day. The Pre-cheque registered is created and the appropriate invoices are matched
to the pre-cheque register. The precheque register and matched invoices are given
to Mr. Ellerby for verification. Once Mr. Ellerby approves the pre-cheque batch, the
batch is processed and given to Mr. Grist for his signature. Mr. Grist is the only
signing authority for the Company.
Once signed, the cheques go into an un-released cheques file. Cash flow and margin
availability is monitored daily by Mr. Ellerby who determines when the cheques can
be released to the vendor. This process has the effect of understating accounts
payable and overstating outstanding cheques since printed cheques are not actually
released immediately.
The Company maintains perpetual inventory records for all parts used in the
remanufacturing of the various cartridges. With the execution of empty cartridges,
these parts are maintained in a "cage" within the production facility and must be
signed&. This perpetual system maintains quantities only. Minimum stock levels
are set for each part and actual quantities are reviewed daily in conjunction with
production schedules in order to determine if more must be ordered.
 Empty cartridges and f ~ s h e dgoods are counted at the end of the production every
day. These quantity counts are used for managing economic inventory levels and for
determining production requirements. The empty cartridge quantities are also used
to determine if the Company needs to source or sell empty cartridges to support
production.
share in Canada with 2.5%. Today, the Company believes that it is still in the top 5-10
players in the North American market.
Privately owned companies dominate the remanufactured cartridge industry, therefore,
financial information and performance numbers are not publicly available. The

- Every fiscal quarter, the physical inventory is costed and the accounting records are
adjusted to actual. We have provided comments on the costing of inventory, empty
Company's major competitors in North America are:

GRC, Nukote (www.nukote.com) and Dataproducts (www.dDc.com') in the US and

cartridges and finished goods in particular, later in this report.
Techn-0-Laser (www.techn-o-laser.com),Multi Laser (www.multilaser.com) , LCS,
and Laser Networks ( ~ ~ a ~ e . m e t w . ~ _ f _inkCanada.
~~com~
Laser Toner Cartridge Industry
According to management, the industry is in a stage of consolidation with the survivors
The laser toner cartridge industry is a lucrative and highly price sensitive market with obtaining a sizeable piece of this lucrative market. This assertion is partially supported
many competitors and no single market dominant entity. According to the Evans by the fact that, in January 2001, the Company received an expression of interest from
Research Corporation's 2001 report on the laser printer cartridge market in Canada, Kor-Rec-Type (Canada) Ltd. to purchase 70% of the Company for $1,25OM
based on a survey conducted in December 2001, the cartridge market in Canada is
expected to rise by 10% in 2002 and 2003 and then continue to grow in the mid single
digit range through 2004 and 2005. Black toner cartridge revenue in 2001 in thousands
was $496 million The dominant original equipment manufacturer (OEM) player in the
laser cartridge share in 2001 was HP with 33.1% of the market followed by Lexmark
with 9.2% and Xerox with just 4.2%. However, 41.7% of the total market share in this
category belongs to remanufacturers (CIPRA - Canadian Imaging Products
Remanufacturers Association). In 2001, although CIPRA revenues were up only 15%,
cartridge shipments increased by 57% indicating that CIPRA is increasing its presence
and market share. Although not stated in the report, these statistics would appear to
indicate that there is significant downward pricing pressure.

According to a June 10,2002 article that appeared in the USA Today, printer makers are
attempting to re-gain control of the lucrative toner cartridge market from cartridge
remanufacturers. This is being done in several different ways. HP and Epson have
started to put computer chips into cartridges that render them non-reusable. Lexmark,
the number three printer maker, is trying to get consumers to send empties back to it as
opposed to others. Lexmark is doing this by offering consumers two versions of the
same printer cartridge. However, one costs about $30 US less than the other and the
difference is that customers who buy the cheaper cartridge must agree to send the empty
back to Lexmark. These kinds of tactics are being opposed by remanufacturers as being
unfair and anticompetitive. Last year, the Arizona Cartridge Remanufacturers
Association filed a lawsuit in California to stop what it says are Lexmark's anti-
competitive practices. The case is pending.

The February 4, 2002 issue of Waste News states that some 5000 U.S. remanufacturers
sell about 25-30 percent of all cartridges to businesses and consumers. This is supported
by the Company's internal market analysis that was done in 2001. The Company found
that the North American Market is highly fragmented with the top 13 players making up
approximately 13% of the market. From the Company's analysis, it believed it was one
of the top 3 players in North America and had the largest share of laser toner market
Annual Historical & Forecast Financial Results
-1- 100.0% 100.0% 100.0% 100.0% 100.0% 100.00h
Below we have presented a summary of the annual historical and forecast financial C a t of m a l r
Inventory - beginning 5.6% 6.6% 11.7% 10.4% 13.9% 8 0%
results for the Company. On the following page, we have presented the same financial Material and supply purchases 58.3% 62.5% 52.4% 57.1% 51.9% 56.8%
results on a common-sized comparative basis. The figures for 1998 through 2001 were Shipping 2.5% 3.2% 2.6% 3.0% 3.4% 2.2%
DL-& wages and benefits 20.0% 21.Ph 22.5% 21.1% 22.2% 19.4%
taken from the audited financial statements of the Company. The 2002 figures represent Shap supplias and rnaintenanca 3.2% 3.2% 3.2% 2.7% 2.5% 1.8%
actual results for ten months and the Company's forecast for the balance of two months. -
lrwenta& dosing -7.7%
81.9%
-12.2%
85.2%
-9.7%
82.9%
-11.9%
82.3%
-5.8%
88.1%
-8.0%
80.3%
The 2003 figures represent the Company's forecast for that year. Gromm margin 18.1% 14.6% 17.1% 17.7% 11.9% 19.7%
Adrnini*tntive expenmm
Pay& - administrationand binge 11.5% 7.4% 7.4% 8.8% 8.6% 8.4%
Advefiminalbrornotion 0.3% 0.7% 1.0% 1.0% 0.6% 0.4%
Bad debts- '
travel la coo mod at^
-1- S 22,991 $ 26.944 $ 28.085 S 26.257 S 22.475 S 16.308 lnsurarvs
C a t of s d w Training courses
-
hentory beginning 1.295 1.781 3,296 2.720 3.121 1,300 O k a expense
Materialandsupplypurchases 13,410 16,832 14.723 14.985 11.672 9,264 Telephone
Shipping 578 8 8 742 789 764 358 Vahidas
Dieclw aw and benehts 4,605 5,910 6.326 5.545 4,986 3.170 PmfessPnal and consulng
S b suwliis and maintenance 734 867 912 698 553 300 Rent
lnv&to&-- cbsiw (1,781) (3.296) (2.720) (3.121) (1.300) (1,300) Uliliaias
18,841 22,951 23.279 21,616 19,796 13,092 Taxes and liamses 0.3% 0.4% 0.6% 0.6% 0.5% 0.6%
Grosm margin 4,150 3,993 4.806 4,641 2,679 3.216 15.8% 12.8% 15.2% 15.3% 13.6% 13.5%
EBITDA 2.3% 2.0% 1.9% 2.4% -1.7% 6.3%
Payml - adminstralionand fringe 2,656 1.992 2,079 2.314 1,935 1.367 Bank charges and intersst 0.4% 0.7% 1.0% 0.8% 0.9% 1.1%
Advatiiin&romotion 70 186 292 252 127 60 Interest on LTD 0.1% 0.1% 0.1% 0.0% 0.1% 0.1%
Bad debis 4 85 269 13 1 16 0.5% 0.7% 1.1% 0.9% 0.9% 1.2%
Travellacmmadatiin 64 92 47 48 31 42 EBTDA 1.7% 1.3% 0.8% 1.5% -2.6% 5.1%
Inwrana, 26 27 22 26 23 32 Taxes 0.2% 0.2% 0.0% 0.2% -0.8% 0.8%
Training courses 28 11 23 21 18 12 EBDA 1.6% 1.1% 0.8% 1.3% -1.8% 4.3%
OHim expense 69 91 141 166 138 108 Dspreciatii 0.7% 0.8% 0.8% 0.9% 1.0% 1.3%
Tale- 34 44 57 49 54 51 NET INCOME 0.9% 0.4% 0.1% 0.5% -2.8% 2.9%
Vehidas 51 41 45 38 32 36
Rolessional end consuiting 178 214 256 394 141 60
Rml 295 490 808 468 361 263
Ulilities 73 77 79 86 87 54 Revenues
Taxes and licenses 79 100 156 146 105 93
3.626 3.450 4.274 4.021 3.053 2.194
EBITDA 524 543 532 620 (374) 1.022
The Company's revenues are derived primarily from the sale of remanufactured toner
Bank charges and inlerest 98 178 276 217 195 180 cartridges for laser faxes and printers. The following table summarizes the customer and
l n t d &LTD 24 17 20 12 13 11 geographic sources of the Company's revenue.
122 195 296 229 208 191
EBTDA 402 348 236 391 1582) 831
Taxes 4 4 4 4 - 42 ii75j 1%
EBDA 358 3W 236 349 (407) 695 Canadian B a e d
Depreciation
Nm INCOME
159
199
209
95
213
23
226
123
214
(621)
214
481 - -rty
Cmp Express
KaUn
KRT
LVreco
MCSl
Xerox
Other

- - - -.
--

APD 3.804 3.266 3.460 13.9% 14.7% 21.2%

Katun 5.254 2.666 - 19.2% 12.0% 0.0%
Xamx 9,188 6,311 2.640 33.6% 28.3% 16.2%
Olhsr 1.250 709 1,155 4.6% 3.2% 7.1%
19,496 12,952 7,255 71.3% 58.2% 44.5%
S 27.346 S 22.273 S 16.290 100.0% 100.0% 100.0%
There are a number of variances in between the total revenues in the immediately
preceding table and the revenue presented in the Company's financial statements and
forecast as follows:
revenue for 2001 per the customers summary table is $27,346M vs. $26,257M on
financials -a variance of $1,089M,
revenue for 2002 per the customers summary table is $22,273M vs. 522,475M on
forecast - a variance of S202M; and
revenue for 2003 per the customers summary table is $16,29OM vs. $16,308M on
forecast - a variance of $MM.
At the time of writing this report, we were unable to obtain a reconciliation of the
variance as Mr. Ellerby was on vacation. For the purposes of this report, we have made
our comments regarding changes in customer sales levels based upon the immediately
preceding table notwithstanding that the total figures do not tie-into the annual
financials.
Our comments with respect to the revenue figures follow.
The Company was unable to provide us with a breakdown of the revenues (by
customer) prior to fiscal 2001 due to time constraints and an accounting system
change. Prior year figures are available but a special report needs to be written to
extract the information from the former accounting system. Revenues increased
significantly between 1998 and 2000 primarily as a result of new business from
Xerox in the US. The business tapered off moderately in 2001.
From 2001 to 2002, the reduction in revenue of $5,073M results primarily from a
reduction in sales to Katun ($2,644M) and a reduction in sales to Xerox ($2,617M).
From 2002 to 2003 the reduction in revenue of $5,983M results primarily from a
reduction in sales to Katun ($2,855M) and a reduction in sales to Xerox ($3,744M).
Effective August 3 1,2002, Katun will cease using the Company as a supplier in both
Canada and the US. As a result, the Company is forecasting no sales to Katun in
2003. We are advised by the Company that the reasons for the loss of Katun as
customer include:
0 there was a change in ownership of Katun during the year and the new
owners had strategic or other relationships with other suppliers;
n the Company's key contacts in Katun were with product engineers and it
appeared to the Company that, with the change in ownership, decision
making power moved away from the engineers to the sales group where
the Company had little or no contact; and
n there was a quality issue early in the new year that impacted Katun. The
Company advises that they traced the problem back to Fuji and a change
in the formulation of the toner used in the cartridges. This took
considerable effort on the part of the Company and they are in
discussions with Fuji for a cash settlement which will likely be less than
$100M. Notwithstanding that the problem was traced to a supplier of
the Company, damage was done to the relationship with Katun.
Xerox US reduced their order in January 2002 by 50% and then reduced their orders
by a further 50% in June 2002. Xerox US, in 2001, represented 34% of the
Company's sales. Xerox's reduction in orders resulted from their loss of Office
Depot and Office Max as customers for Xerox branded remanufactured toner
cartridges. We are advised by the Company that Office Depot re-sourced their
requirement with Nucoat and that Office Max re-sourced with another North
American remanufacturer.
The revenue forecast for 2003 basically represents the same level of business that the
Company experienced in 2002 with:
no sales to Katun;
Xerox US sales reduced from $6,3 11M to $2,640M3and
o an increase in other US based sales by roughly $540M.
As noted in the preceding point, the Company has effectively only forecast $540M in
real sales growth, from new and existing customers, after adjusting for Katun and
Xerox reductions. The Company will be focusing on building a more diversified
customer base by targeting smaller customers (re-sellers) including the customers of
Katun. The strategy for obtaining these customers is primarily through the use of
direct mailings and telephone solicitation using existing Company infrastructure.
The Company believes that it will have a pricing advantage over Katun and similar
distributors primarily because they will be eliminating the middle-man in the
process.
In addition to pursuing the smaller re-sellers, the Company continues to pursue larger
sale opportunities with existing and new customers. No material sales have been
built into the forecast for 2003 with respect to such potential sales. The Company
having just reduced its operations to one shift has considerable capacity, without
materially increasing fixed costs, to increase sales. To this end, the Company is in
discussions or has bid on new business including the following:
BCE and its affiliates have asked Corporate Express (an existing
customer) to quote on a contract to supply $1,50OM a year in compatible
toner cartridges. If successful, the contract is to be in effect by October
2002;
 o Xerox USA plans to launch one, possibly two, new cartridges with MKG
by the end of the year. The Company expects the contract to generate
approximately $1,00OM per annum;
American Products (APD) in the US is quoting on Pepsi Cola's
compatible toner cartridge business for 2003. APD is an existing
customer of the Company and it is expected that their success will result
in additional sales for the Company; and
o MKG has submitted a quote to build compatible toner cartridges for
NCR USA. S f successful, the contract could generate $3,00OM in sales
per annum starting in January 2003.
The Company typically builds to order for large volume customers and tries to
maintain economic stock levels to senrice smaller customers. There is typically little
lead time for orders and, therefore, the forecast revenue figures are based
substantiallyupon management's estimates as to volumes of sales. As is evidenced
by the Company's recent experience with Katun and Xerox, dealing with large
volume customers can pose significant business risks and a more diversified
customer base would appear to be desirable. The Company's 2003 revenue forecast
does appear to be reasonable in comparison to its 2002 revenues, however, five
customers are forecast to generate 62% of the Company's 2003 revenues and any
reduction in orders could negatively impact the Company's ability to achieve the
sales forecast. To balance this risk, and as discussed in the preceding point, the
Company is pursuing other large volume contracts.
Gross Margin and Cost of Sales
The Company's gross margin from 1998 through 2001 was 18.1%. 14.8%, 17.1% and
17.7% for each of the four years, respectively. In 2002, gross margin decreased
dramatically to 11.9%, which represents a decrease of approximately $1,300M, as
compared to a 17.7% gross margin. The Company attributes this decrease in gross
margin primarily to the practical delay in adjusting variable costs in step with the
material reductions in sales orders from Xerox and Katun.
It is difficult to substantiate by analysis what the components of the $1,30OM reduction
in gross margin can be attributable to. Gross margin is affected by sales prices and cost
of sales. Further, both sales and cost of sales ;a impacted by the mix &d volume of
specific products that are produced and sold. In the Company's case, the sales prices for
the majority of its sales are by negotiated contract due to the volume purchased. The
Company negotiates a price that it believes will generate profits and still be cost
competitive. For smaller sales, the Company uses a pricing grid that it amends
periodically based on market conditions.
The components of cost of sales are difficult to analyse because the Company uses a
periodic inventory system for accounting purposes. With a periodic system, the
Company adjusts its inventory to actual based upon periodic physical inventoq counts
and costing. The Company perfonns inventory counts for costing purposes every three
months; September 30th, December 31st, March 31st and June 30th. Any increase or
decrease in the book value of the inventory as compared to the physical count and
costing is charged to cost of sales.
The Company has developed standard costs for its various products, however, standard
costs are estimated based on the Company's assessment of the average costs of material
components and the physical production capabilities of its labour pool. The Company's
standard costing is based upon the use of virgin cartridges and new parts in each
cartridge that is remanufactured. Virgin cartridges are those cartridges that have never
been remanufactured before. Xerox's specifications required that virgin cartridges and
new parts be used in the production of the products that they purchased. For Xerox then,
the standard costing approach used by the Company appears reasonable. However, other
customers are willing to accept remanufactured products that are built with non-virgin
cartridges, recoated drums and where not all parts are replaced. Non-virgin cartridges
can cost significantly less than virgin cartridges and recoated drums have a lower cost
than new drums. As a result, depending upon the remanufacturing specification, two
products that are visually identical can have significantly different costs. It is the
Company's proposition that the performance of all remanufactured cartridges is very
similar regardless of the use of new or used/remanufactured component parts. The
Company is IS0 9002 registered and performs multi-faceted testing on its products
including testing every cartridge in a printer before packaging for sale.
The issue of costing and valuing inventory is also complicated by the fact that empty
cartridges, whether virgin or non-virgin, can have significantly different costs depending
on how they are acquired. Some types of empty cartridges are more of a commodity and
pricing can fluctuate depending upon supply and demand conditions. The Company
acquires its empty cartridges from brokers, other remanufacturers, customer returns and
direct buying from customers and noncustomers. Each of these buying channels can
generate significantly different costs for exactly the same empty cartridge.
The Company uses the standard cost of remanufactured cartridges (based on virgin
empty cartridges and new parts) for the periodic costing of inventory and for relieving
inventory for sales in the time frames between physical inventory adjustments. The
implications of using the higher standard cost are:
When a physical inventory is taken and costed, the finished goods component of the
inventory will be overstated if the finished goods inventory is not comprised of
cartridges that have been remanufacturedusing virgin cartridges and new parts.
In the months between physical inventory counts, the Company reduces the book
value of the inventory using the standard cost. If the high standard cost is used but
the lower cost remanufactured product is being sold, then this will result in inventory
being understated and cost of sales being overstated.
One of the primary costs that impacts cost of sale is wages and benefits. The Company
had been running two shifts for the past several years. The Company layed off fifty plant
employees in February, eight salaried employees in AprilMay and, in July, layed off
fifty more plant employees, ten more salaried employees and reduced to one shift. Due
to the union contract and labour legislation, it takes time to reduce staff and, as a result,
labour costs reductions lag the reduction in sales and will result in higher cost of sales
and lower gross margin, all things being equal.
The significant reduction in gross margin is also patially premised upon the Company's
assumption that it can reduce inventory to $1,300M, by September 30,2002. Assuming
that the Company's sale forecast is reasonable for the balance of fiscal 2002, if ending
inventory turns out to be higher than $1,300M then the cost of sales will be reduced and
gross margin increased. The Company's ability to reduce the inventory to the $1,300M
level is dependent upon using inventoried parts for current production and sales. To the
extent that the inventoried parts are not correlated to the expected production units, the
inventory will not be reduced. The Company is also pursuing sales of empty cartridges
to other parties in order to reduce inventory. We have not review the detailed production
plans of the Company and correlated them with inventory in order to assess the
plausibility of the inventory reduction assumption. However, we have discussed the
matter with Mr. Grist and are aware that he has been working with his senior
management in order to accomplish the inventory reduction
Overall, we are not completely satisfied that the reduction in gross margin can be solely
attributable to the time-lag in reducing variable costs to meet reduced production and
sales. However, yearend is only one-month away and the majority of costs have been
incurred. The only material variable left to adjust in calculating cost of sales and gross
margin for 2002 will be the level of inventory as at September 30,2002.
With respect to gross margin in 2003, the Company is forecasting that the gross margin
will increase to 19.7% when the highest it has been in the last five years is 18.1% and it
is forecast to be only 11.9% in 2002. The Company attributes the low gross margin in
2003 to the significant losses of Xerox and Katun business so, perhaps, 2002 is not an
appropriate benchmark. Going forward, the Company believes it will be able to achieve
the higher gross margin for the followingreasons:
Xerox US was a high volume purchaser that had high standards for the
remanufactured product, as discussed previously. The Company believes that it can
get the same or similar performance from remanufactured cartridges that use lower
cost and less new parts. Assuming the same sales price, the gross margin will
increase because the cost of the remanufactured cartridges will decrease. We have
reviewed the cost of non-virgin cartridges as compared to virgin cartridges and the
cost difference can be material (>50%) depending upon the particular cartridge; and
The Company will be focusing some of its efforts on selling directly to re-sellers
rather than through a distributor such as Katun. This effectively cuts-out a
middleman and will allow the Company to increase its price. The Company believes
that the costs of direct selling will not exceed the incremental gain in sales price so
that there will be a positive contribution to revenue. Previously, the Company did
not sell directly to resellers as this would cause conflicts with the Company's
distributorcustomers.
The Company does not have empirical evidence to support its forecast increase in gross
margin, however, the logic presented in the preceding point does appear plausible in
support of increasing the gross margin for 2003. Assuming that the Company does
achieve its forecast sales level in 2003, each 1% change in the actual gross margin
percentage will impact gross margin by $163M as compared to the forecast.
Administrative Expenses
We have the following comments with respect to the historical and forecast
administrativeexpenses.
The most significant administrative expense is Payroll. This expense grew steadily
from $1,992M in 1999 to $2,314M in 2001 before reducing to $1,935M in 2002. A
further reduction to $1,367M is forecast for 2003. The reduction in 2002 is the
result of staff reductions tied to the overall reduction in sales volumes. The
reduction between 2002 and forecast 2003 of $568M is a function of two factors:
First, in 2002, Mr. Grist was drawing $50M per month ($600M per
annum) as salary. $18M of the monthly amount was his regular salary,
$25M per month was being used, on an after tax basis, to repay Mr.
Grist's personal indebtedness to Mr. Gibb for the purchase of 50% of the
Company (see Shareholder Buvout on page 50) and a further $3.3M was
being used to fund a personal loan from the Bank of Montreal. The
balance of approximately S3.7M is for insurance premiums. In the
forecast for 2003, the Company has reduced Mr. Grist's compensation to
$25M per month which results in a net savings of $300M per annum.
Mr. Grist intends to repay Mr. Gibb by drawing down S15M per month
from the shareholder loans. The $15M per month shareholder loan
drawdown roughly equates to the net after tax amount Mr. Grist was
receiving as additional salary. The result of this changes is that the
Company saves $300M in expense and reduces cash outflow by $120M
per annum. However, the shareholder loan is being reduced and this
would appear to be in contraventionthe covenants with the Bank.
o Second, the remaining $268M of savings represents the impact of lay-
offs which were effected in 2002.
By way of observation only, it appears that the administrative staff of the Company
have been reduced to a minimal level. We have some concern that remaining
employees are being stretched and that if business levels are sustained, some
additional staff may have to be added back.
Advertising and promotion is a discretionary cost and has been reduced significantly
from a peak of $292M in 2000 to $127M in 2002 and forecast to be $60M in 2003.
In 2000 and 2001, the Company spent significantlyon trade shows in Las Vegas and
Paris. In 2002, the Company only attended the Las Vegas show. In 2003, the
Company intends to attend the Las Vegas show but on a much reduced scale, which
 they estimate to cost $20M vs $100M previously. On this basis, the reduction in
Advertising and promotion expenses in the forecast appears plausible.
With the exception of 2000, the Company has not experienced significant bad debts.
$230M of the $269M bad debt in 2000 is attributableto an inter-company receivable
from Echo Fax which was partially owned by Mr. Grist. The Echo Fax relationship
is described briefly under the heading Histon, of the C o m m on page 10. Based on
the bad debts experience in 2001 and 2002 of $13M and $1M, respectively, the
forecast of $16M for 2003 appears plausible.
Professional and consulting fees were significant in the past four years ended in
200 1. According to management, the high fees were attributableto:
o negotiating the union contract in 1999;
0 legal and accounting fees related to the purchase and sale transaction of
shares between Mr. Grist and Mr. Gibb which was completed at the end
of 2001;
o an operations review contract with CMS with a cost of approximately
$225M. CMS assisted the Company in reviewing its existing production
processes, identifying bottle necks, developing solutions and assisting
the Company with implementation; and
the Company has accrued @OM in 2002 in relation to the preparation of
this report.
The Company does not expect to be engaging any more consultants in 2003 nor are any
extraordinary legal fees expected. Given that most of the expenses appear to have been
non-recurring, the estimate of $60M for 2003 appears plausible. The only exception to
the non-recurring professional fees would be in relation to union contract negotiation,
however, the union contract does not mature until July, 2004 at which time additional
professional fees would be expected.
Rent expense increased dramaticallyfrom 1998 to peak in 2000 and then has reduced
steadily through to forecast 2003. The Company had expanded to additional
premises at 15 Bramalea Road, Mississauga, in 1999 which accounted for the
significant increase in rent cost. It subsequently surrendered to the landlord part of
the expansion space and has since sublet the balance of the expansion space. The
sublet expires on July 15,2003 even though the lease goes until October 2004. The
2003 rent figure represents the net rent obligation for their current facility at 1090
Lnrimar, Mississauga only. The rent may be understated by approximately $24M if
the Company is unable to re-sublet the property after July 15,2003.
Utilities, taxes and licence expenses appear reasonable for 2003 and relate primarily
to the 1090 Lorimar premises. However, as discussed in the preceding point, if the
Company is unable to re-sublet the Bramalea Road premises after July 15,2003, the
taxes and operating expenses may be understated by approximately $17M.
Subject to the foregoing comments, the administrative expense forecast for 2003
appears plausible.
Earnings Before interest, Taxes, Depreciation, Amortization (EBITDA)
We have the following comments with respect to the annual EBITDA.
EBITDA is forecast to be $1,022M in 2003. If the Bank does not agree to allow the
Company to reduce the shareholder loan by $15M per month, it is likely that the
Company will revert to paying Mr. Grist an additional %25Mper month in salary.
This would have the effect of reducing EBITDA to $722M for the forecast year.
The Company will also have to achieve its increase in gross margin percentage to
19.7% in order to achieve this EBlTDA with the forecast level of sales. Each 1%
change in gross margin will impact EBITDA by $163M.
At the forecast gross margin percentage of 19.7%, a 10% change in sales would
impact EBITDA by $321M.
Bank charges and interest
Bank and interest charges relate to the Company's operating facilities with the Bank of
Montreal. Actual interest and bank charges are estimated at $195M for 2002 which
translates into a cost of 9 . m using the average of the beginning and ending bank
balances. Using the same calculation for 2003 yields and cost of 13.9% which appears
high. The Company used a simple estimate of $15M per month for this cost which does
not take into account the significant reductions that the Company is forecasting in its
operating line which is expected to reduce from $1,844M at the end of 2002 to $765M at
the end of 2003.
Monthly Forecast
Attached under Tab 3 is the Company's forecast to the end of fiscal 2002 and under Tab
4 is the Company's forecast for 2003. These monthly forecasts support the annual profit
and loss figures for 2002 and 2003 that were presented above. Our comments regarding
materials assumptions have also been discussed above.
The breakdown of sales and expenses on a monthly basis appear reasonable based on our
discussions with management and subject to our comments in the report. We do caution,
however, that there could be material variations in the working capital items intra-month
and at monthends, as compared to forecast, as a result of timing issues in the collection
of receivables and payment of payables and other expenses. Inventory may also
fluctuate materially depending upon the actual timing of sales as compared the
monthly forecast.
Historical & Forecast Year-End Financial Position
k c o u n t s nceivabb turnover 6.4 6.5 9.5 9.0 7.4
The following table summarizes the historical and forecast year-end balance sheets for
the Company. The figures for 1998 through 2001 were taken from the unaudited Inventory turnover 9.0 77 7.4 9.0 10.1
financial statements of the Company. The 2002 and 2003 figures represent the
Company's forecast for that year. Immediately after the following table is a table which Cumnt ratio
Current assets
provides a series of balance sheet ratios and statistics together with an analysis of the Current liabilities
Company's compliance with Bank of Montreal lending covenants on both the historical
and forecasted balance sheets. Our comments regarding these tables follow immediately Ratlo 1.26 1.12 1.22 1.24 1.19 1.36
EM0 minimum current ratio 120 1.20 1.20 1.20 1.20 1.20
thereafter. PASSIFAIL PASS FAIL PASS PASS FAIL PASS

Total Debt ITanglble Net Worth

Total liabll'aes $ 4.252 $ 8,852 $ 5,468 $ 5,598 $ 4,065 $ 3.289
Less submgated SM loan (550) (566) (750) (690) (900) (720)
Total Debt $ 3.702 $ 8,286 $ 4,718 $ 4,908 $ 3,165 $ 2,569
Assas
Accounts receivable Share capital $ - $ - $ - $ - $ - $ -
Inventory Retainedearnings 918 1.013 1,036 1.159 538 1.019
Prepaid and other Subogated SM loan 550 566 750 690 900 720
Income taxes recwerable 54 - IntercompanyreceivaMes - (15) -
Current assets 4.483 9,075 5,663 5,869 3,706 3,505 Leaseholdimprovements (NBV) (51) (36) (39) (54) (43) (31)
25% of pre-tax protit (61) (35) (6) (41) 199 (154)
-
Fixed assets cost Tangible Net Worth $ 1,356 $ 1,508 $ 1.726 $ 1,754 $ 1.594 $ 1,554
Accumulated depreciation
Fixed assets - net Ratio 2.73 5.49 2.73 2.80 1.99 1.65
Due from affilieted company BMO maxlmum ratio 2.50 2.50 2.50 2.50 2.50 2.50
Long-term assets PASSIFAIL FAIL FAIL FAIL FAIL PASS PASS

Caeh Coverage Ratio

UaMlnies Net i m m e $ 199 $ 95 $ 23 $ 123 $ (621) $ 481
Bank indebtedness De~redaticn 159 209 213 226 214 214
Accounts payable B accrued Interest expense 122 195 296 229 208 191
l m m e taxes $ 480 $ 499 $ 532 $ 578 $ (199) $ 886
Current partlon of long-termdebt
Current liabilitles Interest expense $ 122 $ 195 $ 296 $ 229 $ 208 $ 191
Principal repayment 107 107 115 112 113 112
Due to shareholders $ 229s 302 $ 411 $ 341 $ 321 $ 303
Long-tw debt
Due to associatedcompany 17 - 1 - Ratio 2.10 1.65 1.29 1.70 (0.62) 2.92
Long-termliabilities 692 743 820 849 945 720 BMO minimum ratio 1.10 1.1 1.1 1.10 1.10 1.10
Total liabilities 4,252 8,852 5.468 5,598 4.065 3,289 PASSIFAIL PASS PASS PASS PASS FAIL PASS

Shamholden' Equity
CaDitd stock
~ekned earnings 918 1,013 1,036 1.159 538 1,019
918 1,013 1.036 1.159 538 1,019 Accounts receivable, turnover relatively quickly. The Company forecasts accounts
$ 5,170 $ 9,865 $ 6,504 $ 6,757 $ 4,603 $ 4.308 receivable assuming a 45 day collection cycle and this is reflected in the turnover
ratio of 7 . 4 ~in 2003. It appears that the Company is being conservative in its
collection assumption, however, the Company has historically dealt with a limited
number of large credit worthy customers that follow contacted payment terms. As
the Company moves to selling more directly to smaller re-sellers, they could be
exposed to a longer collection cycle. This may be partially offset by some of the
sales being cash or credit card Overall, the Company's accounts receivable
assumptionappears reasonable.
 In 2000 and 2001 inventory turned over roughly 7 . 5 ~ . In 2002 the Company's
expectation is to increase the turnover to 9 . 0 ~and then to 1 0 . 1 ~
in 2003. The year-
end inventory figures for 2002 and 2003 are management estimates and they are
implementing plans to achieve these goals. However, the forecasted inventory levels Net incorns $ 199 $ 95 $ 23 $ 123 $ (621) $ 481
and improved turnover ratios do appear to be aggressive and will require very Add: depmciation 159 209 213 226 214 214
358 304 236 349 (407) 695
focused management to achieve. Cash fmm (med In) working capital
Accounts receivable (737) (3.081) 2,904 125 416 201
The Company is forecasting the acquisition of roughly $]OM per month of fixed Inventory (486) (1.515) 576 (401) 1.821 -
assets. Most of this expense is related to the purchase of printers to be used in the Prepaid ard other (24) 4 (14) 16 (74) -
Income taxes (7) 7 (61) 78 (228) 136
testing of remanufactured cartridges.
Accounts payable 433 3,005 (2,538) 377 (1,155) 459
(821) (1,580) 867 195 780 796
Bank indebtedness is simply a function of the profitability of the Company combined
with changes to investment in working capital and other assets. At the end of this Cash from (used in) financing activities
Due to shareholders 400 16 184 (60) 210 (180)
section, we have provided a summary of the Statement of Changes in Financial Long-termdebt (ind. current portion) 56 52 (99) 85 (1 13) (112)
Position which highlights the components of the changes in cash on a year by year Due to associated company 32 (17) (15) 16 (I) -
basis. 488 51 70 41 96 (292)

= The shareholders loan account balance is impacted by advances from shareholders

and withdrawals. In 2002, Mr. Grist advanced $220M to the Company in order to Net cash from (used In) operations (434) (1.537) 924 297 246 1.079
allow Xerox to take a credit (for return of empties - see Accrued Liabilities on page
40). In 2003, as previously discussed, Mr. Grist is proposing to reduce the Opaning bank indebtmdness (1,340) (1.774) (3.311) (2.387) (2,090) (1.844)
shareholder loan account by $15M per month in order to generate personal funds that Clo~lnabank Indebtenerr $ (1,774) 5 (3,311) 5 (2,387) 5 (2.090) $ (1,844) $ (765)
will be used to paydown his obligation to Mr. Gibb.

As the ratio analysis indicates, the Company is forecast to marginally fail the Bank
of Montreal's current ratio test. Mr. Grist advises that he expects actual results to
exceed forecast so that this ratio will actually be met as at September 30,2002. The
Company's forecast actually shows this ratio at 1.23 vs. our calculation at 1.19. The
difference results from the fact that the Company's calculation does not include the
current portion of the equipment loan in current liabilities whereas our calculation
does.

Due to the significant loss forecast for 2002, the Company's is forecast to fail the
Bank's cash coverage ratio by a wide margin. Based on the Company's forecast for
2003, it appears that all three of the financial ratio covenants will be met.

Overall, subject to the foregoing comments and the impact that any actual variances
in the profitability of the Company for the balance of 2002 and all of 2003, the
forecasted balance sheets appear reasonable.
Current Financial Position
~mericankbbihrlas US 1 714 208 0 (1) 12 934 23.9% S 3 . s
W n US 1 291 - 5 - - 296 7.6% 61.1%
Below, we have provided our comments and observations regarding the significant asset Lyremmra Suppli% CU4 1 246 (0) - - - 246 6.3% 61.3%
and liability accounts included in the Company's July 31,2002, balance sheet. XerorCanada CDN 1 139 51 - - (2) 188 4.8% 72.1%
Addatah CON 1 165 - - - (2) 1M 4.2% 76.3%
Caporaas-s CDN 7 120 - - - - 120 3.1% 79.4%
Bamh Ealm CON 1 70 - 3 - (0) 74 1% 61.3%
Assets H&$kkil~Sdutims US 1 6 3 - - - - 631.6%82.9%
Techrrolsssr Inc U S I S - - - - 50 1.3% 81.2%
Accounts receivable $ 3,903 LeSerNetuokr CDN 1 42 - - - - 42 1.1% 85.2%
Inventory 2,139 ostamlmaiirgaTech. CDN 1 39 39 1.m 86.2%

Preoaids 76
AzertylMedCanada C D N 1 2 9 - - - - 29 0.7% 81.0%
CLBarRintWes C D N 1 9 9 0.2% 81.2%
GST Recoverable Oms N R CON 1 107 107 2.7% 83.9%
hcustomecs CDN 120 211 13 11 (1) 19 253 6 . s Rb.4%
Omer Cuslmars US 40 73 15 15 6 32 141 3.6%91.W
Capital Assets 933
$ 7.080 Sub(dal-LBbasad 45 2,173 373 20 13 66 2.645 61.6%
Subtdd-CONbased 136 1,176 61 14 (1) 15 1,270 32.4%

Liabilities Tobl 161 $3.351 $ 436 $ 34 S 12 S 81 $3.915 1 M . m

Bank Indebtedness &iqdibbihnm 85.6% 11.1% 0.9% 0.3% 2.1% 11.0%
Cunlaliusm 05.6% 967% 91.6% 91.9% 100.0%
Accounts Payable
Accrued Liabilities
Taxes Payable
US denominated accounts receivable have been converted to Canadian dollars at an
Equipment Loan exchange rate of 1.556.
Shareholder Loan
15 accounts represent 90%of accounts receivable.

Shareholders Equity 68% of accounts receivable are generated from customers that reside in the US.
Retained Earnings
Net Income for the Period 86% of accounts receivable are current.

97% of accounts receivable are less than 60 days old.

The Company has no defined method of estimating an allowance for doubtful

Accounts Receivable Trade - accounts. Rather they are determined on a case-bycase basis. At present, the
Company has an allowance account balance of approximately S12M which, when
In the following table we have summarized the accounts receivable of the Company as at deducted from the balance of accounts receivable of S3,915M results in the balance
July 31, 2002. Attached under Tab 5 is the detailed aged listing of accounts receivable of $3,903M which is shown on the July balance sheet. Based on the current aging it
which supports the information in the table. appears that no further material allowancewould be required.

In reviewing the table, it is important to note that the column titled "Current" reflects all
balances that are within the authorized credit terms of the customer. Therefore, if the
customer is authorized by the Company to pay in 45 days, the balance will stay in the
Current column until the end of the 45 days. The remaining columns reflect the number
of days since the invoice date subject to the preceding sentence. .
S208M or 48% of the amount due in the 3 1-60 day category relates to amounts owed
by APD. According to Mr Ellerby, this is due to a recent relationship that APD has
formed with Office Depot in the US whereby the Company drop-ships to Office
Depot's customers. There has been a learning curve on Office Depot's part in terms
of how to confirm that the shipments were made in order to process payment to APD
on the invoice. Recently weekly cheques have been amving and have been reducing
the amount outstanding. It is expected that this situation will correct itself in the
near term
 $200M or 46% of the amount due in the 3 1-60 day category relates to amounts owed
by Xerox and payments are arriving regularly. Xerox's credit terms are 45 days
fiom the date the order is closed and back dated until the first release on the order.
Xerox determines when the different items on the order are to be received.
Consequently, there are occasions when the order is not closed until after 45 days
have passed since the first release on the order. This can result in Xerox's account
king overdue and, in fact, this is the case on the current overdue balance. The
Company fully expects that these outstandingamounts will be paid in full.
According to Mr. Ellerby, the bulk of the amounts that have been outstanding for
91+ days relate to pricing discrepanciesdue to customers taking credit for providing
empty cartridges when in fact the customer did not send an empty cartridge and
therefore should have paid a higher amount. There is ongoing discussion with these
customers to collect the balance due. The Company expects to collect on these
balances.
Datacor Imaging & Technologies is a related Company owned and operated by Ms.
Grist, the owner's spouse. Datacor's account with the Company is current and is
approximately MOK or 1% of the current receivables.
As discussed previously, physical inventory counts are done on a quarterly basis with
the most recent count having been completed on June 30, 2002 in support of the
information in the preceding table. In periods between physical inventory counts,
the Company adjusts the book value of inventory using standard costing. The actual
book value of the inventory as at July 31,2002 was $2,139M as reflected in the July
31, 2002 balance sheet. Due to the Company's periodic system, we are unable to
provide a detailed breakdown and costing of the July 31, 2002 inventory and
therefore have presented the June 30, 2002 inventory. Lnventory has decreased by
$169M between June 30, 2002 and July 31,2002. For the purposes of this analysis,
we have used the June 30,2002 inventory as the basis for review.
Approximately 3600 stock keeping units ("SKUs") are in the system, of which
approximately 1000 relate to inventory that is required and used on a regular basis.
The remaining 2600 SKUs relate to parts and toner that are used only on made to
order rebuilds. These components are purchased when required and are not kept on -
hand.
We tested a number of the quantities on the costing summary back to the physical
inventorycount records and did not encounter any exceptions.

We tested a number of invoices to ensure that they were being aged properly and
also a number of invoices to ensure that the product had been shipped on or before
the invoice date. No exceptions were noted, however,-wedo caution that our testing
was not statistically based and therefore, it may not be appropriate to extrapolate the
results to the entire invoice population.
Finished product accounts for 26.3% of total inventory valuation. Several finished
product cartridges were identified and compared to recent invoices to confirm that
the cost recorded in inventory was less than the price the product was sold for. The
following table shows the findings of our testing. Of the cartridges tested, 45% were
sold for a price lower than the amount on the inventory testing.

Inventory
The following table summarizes the Company's inventory and costing valuation as at 2184 407
Xerox
June 30,2002. Attached under Tab 6 is the Company's detailed listing which supports Xerox 1374 525
this summary. Xerox 648
63 (723)
236
Katun
Katun 32 552
Katun 7 (487)
Katun 5 (1,017)
Katun 4 (882)
Empty Cartridges Katun 3 195
Packaging Katun 2 (515)
Total $461
Used Drums
Weighted average s l i n g prke
Drums
Toner
Bagged Product
Packaging Labels Although the table indicates situations where inventory is both overstated and
Clear Print Drums
understated, as compared to selling price, the overstatement and understatements
Other SKU'S<MOM each nla nla 232 10.1% 100.0%
generally offset one another. On this basis, finished goods inventory appears to fairly
stated. We caution that this analysis is not statistical and the extrapolations we have
Total $ 2,308 100.0%
done may not be reasonable. However, we are concerned that the gross margin
percentage is not reflective of management's estimate of gross margin This may
imply that finished goods inventory is overstated.
Management believes that the results of our price vs. cost testing are misleading.
Management advises that virgin cartridges are significantly more expensive than
non-virgin cartridges. Some customers, like Xerox, require virgin cartridges and pay
a premium for it. The Company costs all of the finished goods inventory as if virgin
cartridges are used, thus inflating the cost for remanufactured cartridges that use
non-virgin cartridges. Where the customer is purchasing a remanufactured non-
virgin cartridge, the sale price is significantly lower. Katun, for example does not
require virgin cartridges. The Company, therefore, attempts to recycle as many of
the parts in the Katun cartridge as possible as this lowers the Company's cost of
production significantly. However, the Company has no system in place to be able
to track whether a non-virgin cartridge was used in the product sold (other than
ensuring the Xerox cartridges are virgin) and therefore accurately cost the non-virgin
remanufactured cartridgesin inventory.
Empty cartridges accounted for 25.5% of the inventory value as at June 30, 2002
with an average cost per empty cartridge of $7.63. According to the Company's
published August empty cartridge buyback price list, the average price offered for
empty cartridges is $7.38. Some research was done to determine a reasonable selling
price for the empty cartridges. ERS Imaging Supplies is a leading cartridge empties
broker in the US. An ERS price list dated August 9,2002 was used to determine the
reasonability of the empty cartridges in inventory. Several of the empties in
inventory were compared to the selling price list. With the exception of the Optra T
drums other than to note that they are costed at less than new drums and this appears
appropriate.
- Used drums account for $242M or 10% of inventory. The used drums are valued at
$1.63/unit. Used drums are those drums removed from empty cartridges that are
bought by or returned to the Company. The Company also purchases used drums
from third parties. These used drums are suitable for recoating after which they
would become Clear Coat drums. It appears that the cost attributed to the used
drums is consistent with the amount paid for used drums that are purchased.
In summary, the Company has some challenges in valuing inventory due to the multiple
channels that it purchases empty cartridges through and because of the different
construction specifications for products that are visually identical. It appears to us that
the inventory may be overvalued and this overvaluationwould be concentrated primarily
in finished goods and used drums which are valued by the Company at $607M and
$242M, respectively.
Prepaid Expenses & Sundries
The $76M of prepaid expenses are comprised of the following:
$43M executive salaries paid one month in advance;
-

Virgin cartridge, all cartridges compared were more expensive on the selling price
list than they were costed in inventory. According to management, the Optra T is a $19M - deposit for annual trade show in Las Vegas;
new cartridge and dramatic price swings are typical until more units become
available. Based on the ERS price list, the Optra T in inventory should be costed $8M - group insurance benefits paid one month in advance; and
around $14M not at the recorded amount of %25Mfor an overstatement of $1 1M. In
spite of this overstatement, it appears that the empty cartridge cost in the inventory $6M - corporate insurance policy paid one month in advance.
listing is reasonable.

Part of the difficulty in valuating the empty cartridges is that there are a number of Capital Assets
different sources from which the cartridges are acquired and there is no system in
The capital assets of the Company as at July 3 1,2002 were comprised of the following:
place to track how many cartridgeswere obtained through any given channel and for
what cost. However, after the June 30, 2002 inventory count was completed, Lome
Doyle, the empties specialist, performed a valuation of the empties separate and
apart from the valuation done by the accounting department. Mr. Doyle valued the
carhidges based on what he believed he could sell them for in the empty cartridge
. .
market. His analysis concluded that the empty cartridge inventory value was Plant ~rinters 101 17 43 75
overstated by % 11M. Office Equipment 110 1 76 35
Computer Hardware 232 41 181 92
New and Clear Coat drums account for 7% of inventory. New drums are valued at Furniture and Fixtures I01 24 59 67
$13.39/unit and we tested pricing for new drums back to invoice and found the Computer Software 93 71 91 74
costing to be reasonable. Clear Coat drums are used drums that have been re-coated Leasehold Improvements 149 6 106 50
using the Clear Coat technology. After re-coating, the drums are suitable for use in
remanufactured product. Clear Coat drums are valued at $10.80/unit. As the Clear Total $ 1.929 $ 223 $ 1,220 8 934
Coat drums are effectively manufactured internally, their cost represents a build-up
of internal manufacturing costs. We have not reviewed the costing of the Clear Coat
Plant machinery and equipment (including plant printers) is primarily comprised of the
shelving, packaging equipment, work centre tables, forklifts and printers for testing. The
Canadian accounts receivable $ 1,271
significant additions to fixed assets are primarily related to the acquisition of three used Less: empties credits $ (174)
forklifts and the upgrade of the accounting system to windows based ACCPAC sofhvare. Less: accounts > 60 days past due (30)
1,067
Lending value 75% $
Bank indebtedness
US amounts receivable (in C$) $ 2,656
The Company's banking is done through the following accounts: Less: accounts > 60 days past due (100)
2,556
Clear Print has a US and CDN account. There appears to be very little activity in Lending value 60% 1,534
either of these accounts. In July 2002, there was one transaction in each account. Inventory at cost $ 2,139
Less: raw materials (1,032)
MKG has both a US and CDN operating account with the Bank of Montreal. There 1107
, -.
is one HSBC account in the US. Per management, the HSBC account is kept to Lending value (max $800M) 50% 554
facilitate US customer's who pay by credit card. MKG also has a CIBC account that
is used for Canadian customers who pay by Visa. The HSBC and CIBC accounts are Total lending value
swept manually when larger balances accumulate.
Availabilitysubjectto $3,0WM max

Bank statement reconciliation is done monthly on each of these accounts. Actual drawn amounts
BMO C$- $ 2,670
Mr. Ellerby actively manages the Company's cash position. Typically, cheque batches -
BMO U$ @ 1.556 (498) $ 2,172
are produced weekly and cheques are released in accordance with the available
margining on the Company's bank account. The Company has a maximum $3,000M Operating facility within available limit YES
operating credit facility with the Bank of Montreal. Subject to the maximum limit, the
availability of advances under the operating credit facility is calculated as the sum of:
As the calculation indicates, the Company's drawn amount is within its available credit
75% of the Bank's value of Canadian dollar accounts receivable. We assume Bank's limit. We caution that we used estimated for the inventory split and applied a credit
value to mean accounts receivable less than 60 days past due against receivables in performing the calculation, as follows:

60% of the Bank's valuation of United States dollar accounts receivable after
deducting accounts past due 60 days and over, other Foreign Accounts,
Intercompany Accounts, Holdbacks, Contra-Accounts and Accounts in dispute; and
50% of Canadian inventory excluding raw materials (Capped at $SOOM)
for determining the raw materials deduction, we assumed that all inventory was raw
materials with the exception of finished remanufactured cartridges and empty
cartridges. We then applied the percentage allocations from the June 30" inventory
costing to the July 3 lS'book balance to estimate the split between finished goods and
raw materials.

Based on the foregoing formula, we have recalculated the available margin as at July 3 1, in accrued liabilities, there are empties credits (for empty cartridges returned) for
2002 and compared the available margin to the actual outstanding balance as follows: Xerox ($37M) and for Axidata (S137M). We have deducted these amounts in
calculating the lending values.

Accounts Payable
In the following table we have summarized the accounts payable of the Company as at
July 31, 2002. Attached under Tab 7 is the detailed aged listing of accounts payable
which supports the information in the table.
 Accrued paymll
CON MCSl empties credit for the period Jan. 2002 to July 2002
Fuhxa Graphle CON
U.S. Full EMrlc hc. us Accrued trade daims (goods received but not invoice)
Tmer Tlms Inc. us Xemx empties credd for the perlod April 2002 to July 2002
BaLsan Hm Prad6lon us
Cmtes Ebcbogrephla hc. us Unpaid noninventory related invoices
m u e t knpax PIBLM us WSlB -this amount is over EcC~ed,should be S2K
C6FCo. us
Unhm Canada Lld. CON US source deductions for former US employees.
Normnpac hc. CON Accrued Vacation Pay
Dmdgrephlx Kopl Inc. CON
Saul Ssrvlces Group hc. CON Union Dues payable
Fedex Tr& N a W m k s Can Inc. CON
Turde Island R-lng Co. hc CON
Total S 514
Ooldrldr mlpd hc. CON
T h n e M d e n l Systems Inc. CON
h 5 LDglstlca CON
Xamx Crnada Lld CON
Other CON The empties credits are accrued as liabilities and applied to accounts receivable when the
Other us
customer requests the application.
-
SubIntel U S based
-
SubIntel CON based

TOM
Aahg dktrbutbn
C u r n u l e h aghg
It is important to note that the outstanding cheques for both the Canadian and US
accounts are significant. Accounts payable balances are reduced when a cheque is
written regardless of when it is released. The actual accounts payable figure should
reflect both the accounts payable balances and the outstanding cheque balance. The
outstanding cheques on the Canadian account total $522M and the outstanding
cheques on the US account total $827M US or $1292M CDN. Therefore, the total
accounts payable for both CDN and US suppliers, in CDN dollars, is E3052M.
- Approximately 70% of the Company's accounts payable are currently due and 22%
are overdue by 30-60 days.
PST Payable
PST Payable represents the Company's obligation for Ontario retail sales taxes collected
on sales. Based on discussion with management, the Company does not file PST
remittances because, as a remanufacturer that does not sell to end users, the Company is
PST exempt. The Company has never had a PST audit done.
GST Payable
The Company files GST remittances monthly. Based on discussions with management,
the Company is usually in a net refund position, as most of the Company's sales are to
US based customers. We reviewed the last four GST returns filed for March through
June 2002 and all were in refund positions.

Approximately 33% of the total balance due is to Static Control Componeflts Inc., a
major supplier of par& required in the remanufacturing process.
The major Canadian and US supplier invoices were reviewed along with various
smaller suppliers to confirm that the invoiced amounts were entered into the system
The payable records appear to be in good order.
Source Deductions Payable
The source deductions payable balance includes amounts withheld from wages and
salaries paid on account of employment insurance (EI), Canada Pension Plan (CPP) and
income taxes together with the employer's portion of EI and CPP. ADP provides payroll
services to the Company remits, for each pay, the source deductions on behalf of the
Company

Accrued Llabllities Payroll is paid bi-weekly, in arrears, and appears to be current. The Company accrues
the payroll obligation and the most that would be due at any given time would be 2
The components of the $514M accrued liability balance are: weeks. For the pay periods between May 10,2002 and July 19,2002 the average payroll
charges for hourly and salaried staff were $217K. Due to staff reductions on August 8,
2002, payroll is expected to decrease on a go forward basis to approximately E180K per
pay period In addition to this amount, Michael Grist and Angela Grist are paid a
combined amount of $43K paid monthly.
Vacation pay is accrued and paid out twice a year. Amounts not included in the average
payroll obligation that were paid in the July 19,2002 payroll include the accrued vacation
pay for hourly staff of $88K, paid out twice a year, and $16.5K in sales commissions,
which are paid out quarterly.
In December 2000 Xerox asked for the Company to payout a S305M credit balance
that was due to them. The credit had accrued in relation to the return of empty
cartridges to MKG. The Company did not have the funds necessary to make the
payment so Mr. Grist advanced the funds to the Company in order to facilitate the
payout.

WSlB Payable Mr Grist advises that the majority of the withdrawals were made in order to fund
personal income tax obligations.
Remittances for the period between April 2002 and July 2002 were all reviewed.
Monthly remittances average approximately $2K per month. The April, May and June
remittances all cleared the bank. The July payment has been written and is to be released
this week. Premium payments appear to be up to date and current. WSIB premiums are
an unsecured claim and would rank subordinate to valid security interests.

Employer Health Tax

Employer Health Tax ( E m ) represents 1.95% of total wages paid by the Company to
the Ontario Ministry of Finance. ADP remits the EHT on the Company's behalf. From
the ADP statements it appears that the EHT obligation is current.

Loan Payable - Bank of Montreal

The equipment loan of $176M is a term loan from the Bank of Montreal that is repayable
in monthly principal instalments of $9,300 plus interest at prime + 1.5%.

Shareholder Loan
The balance of $900M represents amounts due to Mr. Grist. Transactions over the past
year in the shareholder account are noted in the following table.

1-Oct-2001 Opening balance $ 690

28-sep-2001 paymeit to Mr. Grist
10-Oct-2001 Payment to Receiver General
3-Dec-2001 Advance from Mr. Grist re Xerox
21-Dec-2001 Advance from Mr. Grist re Xerox
17-Jan-2002 Advance from Mr. Grist re Xerox
29-Jan-2002 Payment to Receiver General
20-Feb-2002 Payment to Mr. Grist
28-Feb-2002 Payment to Mr. Grist
6-Mar-2002 Advance from Mr. Grist
2-Mav-2002 Pavment to Mr. Grist
27-~ui-2002payment to Mr. ~ r i s t i32j

31-Jul-2002 Closing balance $ 900

PPSA Registrations
We have searched under the Personal Property Security Act (Ontario) for registrations
against the Company, Clear Print and 1492950. Each registration may represent a
potential claim against the respective company or the assets of the company, however,
legal counsel should be consulted to properly determine the implications of each
registration and the relative ranking of each potential claimant.
The following tables summarize the registrations together with the results of our
inquiries of management regarding the registrations. There were no registrations against
1492950. The abbreviations in the "Asset Classes Checked" column are as follows:
Consumer Goods (CG), Inventory (I) ,
Accounts (A), Equipment (E), Other (0). Motor
Vehicle 0.
Estimated Statement of Realizations
Below we have presented an estimated statement of realizations. The statement is
intended to estimate the net proceeds available to satisfy the secured interest of the Bank
of Montreal based on an assumption that the Company was liquidated on July 3 1,2002.
This analysis is intended to be a worst case scenario and should not be viewed as a
recommendation regarding a particular course of action nor as our opinion as to the
outcome of a liquidation. Our assumptions regarding the estimated realizable values of
the various asset classes are noted within the table.

Registrations against MKG Assets

Accounts receivable - CDN
Account receivable - US
Inventory- finished goods 8 empties
Inventory - other
Bank of Moneeal I, E, A, 0, MV - no description 19911206 Prepald expenses
GST recoverable
Bank of Montreal I, E, A, 0, MV - GSA to support LF 44-guarantee 19940323 Machinery and Equipment
for Price Right Data Supplies Limited Plant Printers
Office Equipment
G.N. Johnston Equipment E, 0, MV 1988Raymond Lift Truck (VM 021D-
- 19991105 Computer Hardware
Co. Ltd. 88-04004), batteries, charger Furniture and Fixtures
Computer Software
Bank of Montreal A, 0 - no description 200001 12 Leasehdd improvements
Gross value before costs $ 7,080 $ 3,282 $ 4,646
The Bank of Montreal registrations appear to relate to the Bank's current lending
Estimated bank exposure
relationship with the Company and the Rank's security interest in all of the assets of the Operating facility
Company. Term loan

The G.N. Johnson Equipment Co. Ltd. registration is in relation to the lease of a forklift
and related equipment. Surplus available before costs of realization and prior claims, if any $ 934 $ 2,298

Registrations against Clear Print

Although the foregoing analysis shows reasonable coverage levels for the Bank's
secured position, the Company is forecasting a reduction in accounts receivable from
$3,903M at the end of July 2002 to $2,70OM and $2,30OM in August and September,
Bank of Montreal I, E, A, MV - no description 200009 18 respectively. Similarly, inventory is forecast to reduce from $2,139M in July to
$1,60OM and $1,30OM in August and September. The cash generated from these
reductions of $1,742M in August and $700M in September is being used predominately
The Bank of Montreal registrations appear to relate to the Bank's current lending to reduce accounts payable by M00M and outstanding cheques (these are effectively
relationship with the Company and the Bank's security interest in all of the assets of the payables) by approximately $1,800M. As a result, the credit exposure of the Bank will
Company. only be reduced by approximately $200M.
Below, we have provided another estimated statement of realizations based upon the
September 30, 2002 forecasted balance sheet and using similar assumptions to the
foregoing analysis.
EBlTDA
(per fmncials or farecabt) 5 524 5 543 t 532 5 620 5 (374) 5 1.022

Add: Managementbonuses eccrued 520 31 - - -

Add: Adtillanal m n p m s a i i i m loans - - 340 40
Assets
Lass: intmmsl on 0peratin~faaliiy (98) (178) (276) (217) (195) (1801
Accounts receivable $ 2,300 63% 88% $ 1,438 $ 2,013
-
Inventory fin. goods & empties (50%) 650 60% 75% 390 488 Adjusted EBrrDA S 946 S 396 5 256 5 403 5 (229) 5 882
-
Inventory other (50%) 650 10% 25% 65 163
GST recoverable 29 100% 100% 29 29
Furniture, fixtures and equipment 897 9% 18% 81 161 In calculating the adjusted EBITDA figure, we have deducted interest on the opemting
Gmss value before costs

Estimated bank exposure

-$ 4,526 $ 2,002 $ 2,853
facility (hut not on the long-term debt) as this is a necessary expense in maintaining
working capital and should be deducted in determining the return on investment.

Operating facility In this case, the Company has generated between $256 and $946 of adjusted EBlTDA in
Term loan the years 1998 through 2001. In 2002, the Company is projecting an adjusted EBlTDA
loss of $403M and then is projecting an adjusted EBlTDA of $882M in 2003. For the
purposes of this analysis, we have assumed that a stabilized adjusted EBITDA of $400 is
Surplus available before costs of realizationand prior claims, if any $ (82) $ 769
supportable.

In compiling the foregoing analysis, we have made a number of assumptions regarding We believe that a multiple of three to four times stabilized adjusted EBlTDA would be
applicable to this Company due to:
the September 30,2002 forecastedassets:

accounts receivable are split between Canadian dollar and US dollar denominated the significantloss the Company will experiencethis year;
receivables on a 50/50 basis;
the material reduction in revenues from existing customers (Xerox and Katun);
the quality and aging of the receivables is roughly the same as it is at the end of July,
the un-proven nature of the forecast;
2002;
the short lead-time to receiving and filling sales orders which makes forecasting
roughly 50% of inventory is finished goods and empties with the balance being other
sales difficult; and
parts and raw materials; and
= dependence on relatively few customers.
the drawn amount under the Bank's operating facility is $200M less than at July 31,
2002. The Company's forecast shows a hank indebtedness figure of $1,844M at the Using multiple of 3.5x, we have estimated the potential net proceeds that could be
end of September and we have assumed that there is roughly $100M in cash deposits available to repay the indebtedness to the Bank. This analysis is based on a number of
in Visa accounts that has the effect of reducing this balance. Based on this
key assumptions which are highlighted after the table. If any of these assumptions is
assumption, the forecast would indicate a hank indebtedness balance associated with materially incorrect, the resulting net proceeds will be materially different from what is
the BMO operating facility of approximately $1,944 which roughly compares to our
shown.
figure of $ 1,927M.

Another way to consider the value of the Company is as a going concern. In a going
concern sale, it would be common to use a multiple of stabilized EBlTDA as the basis of
a valuation and then add current assets purchased and deduct liabilities assumed by the
purchaser in order to anive at net proceeds. We have made a number of adjustments to
the EBITDA in Company's historical results in order to consider a stabilized level, as
follows:
 On a goingconcern sale basis, provided the assumptions used are correct, there would
appear to be little difference in the amount of net proceeds from sale, between July and
September,available to repay the bank's exposure.
Stabilized EBITDA $ 400 $ 400
EBITDA multiple 3.5 3.5 In summary, the liquidation collateral value coverage (in excess of the Bank's exposure)
Value of going concern business 1,400 1,400
ranges from $934M to $2,298M as at July 31, 2002 and is expected to decrease to a
Add: Non-EM0 cash accounts 83 83 range of ($82M) to $769M as at September 30, 2002. From a goingconcern value
Add: Accounts receivable 3,903 2,300 perspective, the collateral value coverage is roughly $1,60OM at both July 31 and
Add: Inventory 2,139 1,300 September 30,2002.
Add: GST recoverable 29 -
Less: 01s cheques (assume payables) (1,814) (100)
Less: accounts payable (1,238) (854)
Less: accrued liabilities (514) (514)
2,588 2,215

Net proceeds from sale 3,988 3,615

Less:
Operating facility
Term Loan

Surplus after sale $ 1,640 $ 1,531

Assumptions:

stabilizedadjusted EBITDA is $400M,

- an adjusted EBITDA multiple of 3.5 is applicable; and

a purchaser would be willing to pay full net book value for the accounts receivable
and inventory

It is also worth noting that Mr. Grist paid $950M for 50% of the business in September
2001 when the outlook for the business was much better. This translates into $1,90OM
for 100% of the business with the purchaser (Mr. Grist) assuming all liabilities. The
$1,90OM would be comparable to the $1,40OM used in the foregoing calculation and
represents a 21% decline in value. Arguably, given the significant changes to the
Company since September 2001, one could speculate that the value should have dropped
more.

Mr. Grist has also provided us with an "indication of interest in purchasing" 70% of the
Company. The indication was received from KO-Rec-Type (Canada) Lid. in January
2001. The price for 70% was $1,25OM which would translate to %1,786Mfor 100% of
the Company. Mr. Grist advises that this offer was the initial basis for buying out Mr.
Gibb's 50% interest in the Company.
Other Matters
Shareholder Buyout
Effective September 30, 2001, Mr. Grist purchased the remaining 50% of the Company
from Mr. Kevin Gibb. As a result of this transaction, Mr. Grist is effectively the sole
shareholder of the Company. The substance of the purchase transactions is as follows:
The purchase price of 50% of the Company was $950,000.
- The purchase price was satisfied as follows:
Mr. Grist paid $136,143 in cash to Mr. Gibb;
Mr. Grist provided a promissory note to Mr. Gibb in the amount of
$271,657. The promissory note bears interest at the rate of 7% per
annum and is to be paid in 72 equal monthly instalments of $3,056 over
the period from September 30, 2001 through August 31, 2007.
According to the amortization schedule, the unpaid balance as at July 3 1,
2002 should be $237,053. The promissory note is secured by a pledge of
14.5% of the outstanding shares of MKG. Mr. Grist actually purchased
28.5% of the shares of MKG from Mr. Gibb; and
D Mr. Grist provided a promissory note to Gibbco Holding Inc. (Mr.
Gibb's holding company) in the amount of $541,500. The promissory
note bears interest at the rate of 7% per annum and is to be paid in 72
equal monthly instalments of $6,092 over the period from September 30,
2001 through August 31,2007. According to the amortization schedule,
the unpaid balance as at July 31, 2002 should be $472,523. The
promissory note is secured by a pledge of the shares of 1492950 that
were purchased by Mr. Grist from Mr. Gibb. 1492950 owns 21.5% of
MKG.
In addition to the foregoing, Mr. Grist purchased Mr. Gibb's loan to MKG for cash
at its face amount of $216,772.
Property Leases
1090 Lorimar Drive, Mississauga
This is the Company's sole operating location and comprises some 45,740 square feet of
plant and oflice area. The property is leased from Standard Life and the Company has
occupied the property since May 1996. The lease was renewed for 5 years commencing
July 1,2001 and expiring June 30,2006. The lease provides for net rent in the first two
years at the rate of $5.75 per square foot ($263,005 per annum) and in the latter 3 years
at the rate of $6.00 per square foot ($274,740 per annum). All taxes, utilities and
operating costs are the responsibilityof the Company. Taxes are paid on a monthly basis
to the landlord The Company pays utility and other operating costs directly. The
Company has the right to renew the lease for a further 5 years at the then prevailing
market rates.
15 Bramalea Road, Unit 104, Mississauga
The property (28,321 square feet) was leased by CPT from ADMNS Brampton
Investment Corporation for an initial term of 5 years commencing June 1, 1999. The
tenants obligations under the lease were guaranteed by MKG. In October 1999. the lease
- -
was amended to expand the premises (from 28,321 to 63,744 square feet) and to extend
the lease term by 5 months to October 31,2004. On January 31,2001, the parties to the
lease agreed to the surrender of the expansion premises back to the original leased
premises although the term remains un-amended. There does not appear to have been
any material cost or penalty associated with the surrender.
Post surrender, the lease provides for net rent of $4.25 per square foot ($127,444 per
annum. All taxes, utilities and operating costs are the responsibility of the Company.
The landlord collects the net rent together with an estimate of taxes and operating costs
on a monthly basis.
Effective February 28, 2002, 1,030 square feet of the 28,321 was surrendered to the
landlord. No material cost was associatedwith the surrender.
The Company has sublet the remaining premises to Quik Run Courier Limited for the
period from June 1, 2002 to July 15, 2003. The rent payable is a gross amount of
$17,852 per month representing $7.85 per square foot which is $3.00 per square foot
greater than the net rent obligation.
Collective Agreement
The plant employees of the Company are members of the United- - - -- - .. ------ - o
Steelwnrkers - -f
~ m e h c a(the -''~nion"). The rel&onship between the Company and the Union is
governed by a collective agreement effective March 1, 2001 (signed on October 21,
2001) and expiring on July 1,2004. Company employees excluded from the bargaining
unit include supervisors and persons above the rank of supervisor, office, clerical and
sales staff.
Minute Books
MKG Cartridge Systems Inc.

Date of Incorporation: December 16, 1988

Director: Michael Grist
Shareholder - Common: 149250 Ontario Inc. - 28.5 shares (28.5% of 01s)
Michael Grist- 71.5 shares (71.5% ofo/s)
Shareholder- Class A: Michael Grist - 333,000 shares (100% of 01s)
Off~ceer Michael Grist President, Secretary and Treasurer
-

Comments: Appears to be current. The last resolutions and minutes are in

respect of the purchase transaction of September 30, 2001
wherein Mr. Grist purchased the remaining 50% of MKG and
security to the Bank of Montreal.

Clear Print Technologies Inc.

Date of Incorporation: January 29, I999

Director: Michael Grist
Shareholder- Common: Michael Grist - 100 shares (100% of 01s)
Officers: Michael Grist - President and Secretary
Comments: Does not appear to be current. The last resolutions are dated
September 13,2000 in respect of the granting of guarantees
and security to the Bank of Montreal.

1492950 Ontario Inc

Date of Incorporation: September 17, 2001

Director: Michael Grist
Shareholder- Common: Michael Grist - 100 shares (100% of 01s)
Shareholder- Class A: Michael Grist - 333,000 shares (100% of 01s)
Off~ceer Michael Grist President, Secretary and Treasurer
-

Comments: Appears to be current. The last resolutions and minutes are in

respect of the purchase transaction of September 30,2001
wherein Mr. Grist purchased the remaining 50% of MKG.