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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________
FORM 10-KSB/A
(Mark One)
/X/ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EX-
CHANGE ACT OF 1934
For the fiscal year ended March 31, 1997
OR
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission file number 33-96882-LA
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CARING PRODUCTS INTERNATIONAL, INC.
(Name of small business issuer in its charter)
__________________
DELAWARE 98-0134875
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
__________________
200 FIRST AVENUE WEST, SUITE 200, SEATTLE, WASHINGTON 98119
(Address of principal executive offices)
(206) 282-6040
(Issuer's telephone number, including area code)
__________________
Securities registered under Section 12(b) of the Exchange Act: None.
Securities registered under Section 12(g) of the Exchange Act: None.
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
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Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB/A./X/
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State issuer's revenues for its most recent fiscal year. $2,287,497
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State the aggregate market value of the voting stock held by
non-affiliates computed by reference to the price at which the stock was
sold, or the average bid and asked prices of such stock, as of a specified
date within the past 60 days. (SEE definition of affiliate in Rule 12b-2 of
the Exchange Act.): Cdn. $11,070,567 as of July 4, 1997.
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ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PAST FIVE YEARS
Not applicable.
APPLICABLE ONLY TO CORPORATE REGISTRANTS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of July 4, 1997: 4,125,375 shares of common stock, $.01
par value (the "Common Stock") (after giving effect to a one-for-six reverse
stock split of the Company's Common Stock, which was effected on June 16,
1997).
Transitional Small Business Disclosure Format (check one):
Yes No X
DOCUMENTS INCORPORATED BY REFERENCE
Part III - Certain exhibits Included in prior filings made
listed in response to Item 13(a) under the Securities Act of 1933.
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PART I
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ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
Caring Products International, Inc. and its subsidiaries (collectively,
the "Company") have designed and market a line of proprietary urinary
incontinence products with disposable liners which are sold under the Rejoice
name in the United States and Canada. These comfortable, effective products
provide a practical and affordable solution to the special needs of
incontinent adults and children over the age of four. All of the Company's
products incorporate a two-piece incontinence management system and offer the
advantages of breathable, light-weight material, highly absorbent bladder
control protection, ease of changing and fashionable appearance. The products
are manufactured by various independent contractors which produce the pants
and the liner raw material and convert the liner raw material into various
sized liners to fit the Company's specific product requirements. The
Company's finished products are shipped through various third party storage
and delivery companies located in the United States and Canada. All of the
Company's sales efforts are dedicated to expanding distribution of its
Rejoice adult and children's incontinence product line. The Company's
marketing efforts are designed to capitalize upon niche market opportunities
in the retail and healthcare incontinence product markets.
CORPORATE HISTORY
The Company, a Delaware corporation, resulted from a series of corporate
reorganizations and related transactions, as follows:
First West Canada Capital Corporation ("FWCC") was originally
incorporated under the laws of the Province of British Columbia on December
6, 1984. On December 20, 1993, FWCC renounced its original jurisdiction of
incorporation and became a Wyoming corporation. On December 23, 1993, FWCC
merged into FWCC Merger Corp., a wholly-owned subsidiary of FWCC, which was
incorporated in the State of Delaware on December 7, 1993. Prior to the
merger, which effected the reincorporation of FWCC as a Delaware corporation,
FWCC was an inactive corporation. Immediately following the merger, FWCC
Merger Corp. was an inactive corporation.
On November 4, 1992, Caring Products International, Inc. was
incorporated under the laws of the State of Delaware ("Old Caring Products").
On December 30, 1993, Old Caring Products merged with and into FWCC Merger
Corp., and FWCC Merger Corp. became the surviving corporation. In connection
with this merger, the name of the surviving entity was changed to Caring
Products International, Inc. Caring Products Industries, Ltd., a British
Columbia corporation, is a wholly-owned subsidiary of Caring Products
International, Inc. and until March 1996 principally engaged in pant
production activities. C.P. International, Inc., a Delaware corporation, is
also a wholly-owned subsidiary of Caring Products International, Inc., and
its principal business is the sale and marketing of the Company's products.
The term, the "Company" as used herein, refers to the surviving entity in the
merger, Caring Products
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International, Inc. and its wholly-owned subsidiaries, Caring Products
Industries, Ltd. and C.P. International, Inc.
PRODUCTS
Since the Company's inception in late 1992, the Company has focused
primarily on the design and development of a line of adult and children's
incontinence products that it believes will offer enhanced product
absorbency, convenience, fit and conventional undergarment appearance,
coupled with the benefits of natural fabric, at a price below conventional
disposable adult diapers. Many adult incontinence brand products available
today are very similar in design, appearance and comfort to standard baby
diapers. These disposable diaper products, adult diapers and belted
undergarments, are used by either men or women with moderate to heavier
bladder control problems. The competing incontinence products designed for
individuals with lighter bladder control problems are similar to many
feminine hygiene products which can be bulky and do not prevent side seepage
when a person is moving or sitting down. The Company has designed its
products specifically for the needs of the adult incontinence sufferers
living or recuperating at home with light and moderate incontinence. The
Company has not designed products for the incontinence sufferer, usually
bedridden individuals, that require products for heavier bladder control and
protection for bed linen.
All of the Company's products are designed with a two-piece incontinence
management system, consisting of a reusable/washable cotton pant and a highly
absorbent, thin disposable liner. The reusable/washable cotton pant looks
and wears like conventional underwear but incorporates a proprietary channel
that holds the liner securely in place and provides enhanced protection
against side seepage when the wearer is moving or sitting down. The
Company's pants are produced in a pull-on style and are offered in a variety
of men's, women's, boys' and girls' sizes.
The Company currently offers for sale the following Rejoice products
specifically designed for the adult and children's incontinence markets:
REJOICE. The Company's principal product which is sold under the
Rejoice name is a men's and women's pull-on pant with an 11-inch disposable
liner. Rejoice pants have been designed to look and feel like conventional
underwear. Rejoice is targeted for more active people presently using a
full-sized disposable diaper, belted undergarment or guard in a consumer
outpatient setting. Other users of Rejoice include patients within a home
healthcare or outpatient rehabilitation setting, disabled individuals,
especially people using wheelchairs, individuals with disease-related
incontinence and individuals recovering from a stroke or who have serious
arthritis and cannot manage a disposable diaper or standard pull-on underwear
by themselves. The Rejoice product is available in several discreet,
non-bulky pull-on cotton pant sizes and complementary liners that are easy to
change and offer enhanced leg mobility while providing leak protection to
people with disabilities. The product is sold through retail stores and the
healthcare market.
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REJOICE EXTRACARE. Rejoice ExtraCare is an 18-inch disposable liner
product as well as various styles of men's and women's pants. This product is
sold only through the healthcare market.
REJOICE FOR CHILDREN. Rejoice for Children is a line of pant products
designed for older children with incontinence due to disease, birth defects
or bed wetting. Each Rejoice for Children pant, in either boys' or girls'
sizes, is designed to accommodate either the Rejoice 11-inch or the Rejoice
ExtraCare 18-inch liner. Historically, parents of these older children with
specialized needs have purchased the smaller-sized adult diapers, reusable
training pant products, disposable bed sheets, plastic underpads for
protection or have used baby diapers to be placed inside a plastic pant.
These products are sold solely through the healthcare market.
The Company has developed a toddler toilet training product to be sold
under the name BumberChute. This product was designed for boys and girls
aged 19 months to four years, where both the children and parents seek a
grown-up style cotton underwear product that offers an effective method in
easing and expediting the toilet training of toddlers. BumberChute is a
standard style pull-on pant designed to encourage toilet training, for both
night-time bed wetting and daily wear. The Company believes that its
BumberChute product has a strong potential for commercialization but will
require the expenditure of greater resources for marketing and advertising
than its Rejoice products because of the highly competitive nature of the
market. In addition, the period of use per consumer is shorter than that for
its Rejoice adult incontinence products. Accordingly, the Company has
dedicated its limited resources to the marketing and promotion of its Rejoice
products and is seeking a licensing or joint venture partner or partners to
assist in bringing its BumberChute product to the national and international
retail markets.
SALES AND MARKETING
The Company's marketing efforts for the Rejoice products are focused
both in the retail and healthcare markets. The Company has developed and is
implementing different marketing strategies for the retail and healthcare
segments of its business. For the retail side of the Company's operations,
the Company has organized a nationwide network of brokers or manufacturers
representatives which are assisting in securing meetings with buyers and
monitoring store placement and sales activity. With regard to certain health-
care markets in the United States, the Company has packaged its basic Rejoice
pant and liner product into a more suitable package for healthcare market
distribution by Medline Industries, Inc., a healthcare supply company
headquarted in Mundelein, Illinois ("Medline").
RETAIL MARKET
To gain market share in the growing outpatient consumer market, the
Company is concentrating on establishing distribution relationships with drug
store chains, grocery store
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chains which offer pharmacy services, retail chains, independent pharmacy
stores and nationwide drug wholesale or product distributors. In addition,
the Company is seeking distribution relationships with specialty catalog
companies or home delivery service providers.
The Company is currently selling Rejoice in approximately 6,000 stores,
which include several retail, drug and grocery chains, as well as drug
wholesalers and independent pharmacies. Among such stores are SAVON drug
stores, OSCO drug stores, Revco drug stores, K&B drug stores, Bartells drug
stores, Thrifty-Pay Less drug stores, Genovese drug stores and Longs drug
stores.
HEALTHCARE MARKETS
The primary market for healthcare sales of incontinent products is to
inpatient and outpatient hospital facilities, rehabilitation facilities, home
healthcare providers, nursing homes, hospice centers and surgical supply
stores. The Company's marketing strategy for the healthcare market is to sell
its products through hospital distribution companies, home healthcare
companies, medical/surgical suppliers and distributors, durable medical
equipment ("DME") suppliers and hospital buying groups.
In late 1996, the Company signed a three and one-half year distribution
agreement with Medline for the distribution of various Rejoice products to
hospitals, home healthcare nursing agencies, DME's and other healthcare
accounts. In April 1997, The Company completed a specialty packaged Rejoice
product that is being sold exclusively by Medline to varied healthcare
accounts. The Company also has developed marketing materials for Medline and
is supporting Medline's sales efforts through the training of their field
representatives, direct mail and brochure development, telemarketing and
training customer service support.
In January 1997, Rejoice was approved for Standardized Stock Ordering by
the United States Veterans Hospitals. This simplified national purchasing
program for preferred product vendors is expected to help facilitate the
Company's sales efforts to the 160 Veterans Hospitals in the United States.
The Company is targeting healthcare accounts which serve patients
during recovery and rehabilitation. Rejoice is being positioned as a more
dignified, comfortable product which does not restrict or discourage patient
movement or participation while in physical therapy. The Company is marketing
Rejoice to healthcare markets through trade show participation, direct mail
of product information to physicians' offices and healthcare buyers, the
marketing support of the Company's medical advisory board and public
relations activities.
The Company is currently selling Rejoice products to a nominal number of
healthcare accounts, including Medline.
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MANUFACTURING AND FULFILLMENT
In order to focus more of its resources on sales and maintaining a
streamlined system of operations and product delivery, the Company has been
"outsourcing" certain processes and functions, and it expects to continue to
do so for the foreseeable future. The Company currently subcontracts
production of pants in Canada and Mexico and for conversion of
thermally-bonded raw liner material in the United States.
PANT MANUFACTURING. Historically, the Company has manufactured its own
pant requirements in its facilities in the Vancouver, British Columbia
metropolitan area. The Company ceased in-house pant production in March 1996
and will sell off various pant manufacturing equipment during fiscal 1998.
The Company has been subcontracting production in Vancouver (Le Genereux
Clothing Company, Ltd.) and Mexico (Teycon s.a.de c.v.). The Company has a
non-exclusive production agreement with Le Genereux which will expire in
November 1997, and no formal agreement with Teycon, with whom the arrangement
is to submit purchase orders as needed. The Company's Vancouver subcontractor
has produced approximately 200,000 pants per year. The Company has been
advised by the Mexican manufacturer that it has the capacity to produce
90,000 pants per month which it can expand to meet any foreseeable monthly
demand by the Company. Although the Company has made the strategic decision
to subcontract its pant manufacturing, it is not materially dependent on any
single contractor and believes it could quickly commence pant assembly or
full construction with other manufacturers in Mexico, Puerto Rico, Taiwan or
China. The Company's Vancouver manufacturer has filed a lawsuit against the
Company, which the Company believes is wholly without merit. See "Item 3.
Legal Proceedings."
LINER MANUFACTURING AND CONVERSION. The raw material for the Company's
liners is manufactured in an air-laid thermal bonding process using SAPs.
This process creates biodegradable cloth-like products made from natural
cellulose fibers that are stronger, softer and more absorbent than
conventional wet laid paper products. In the air-laid process, wood pulp is
dried into individual fibers, transported by air (rather than water as in
conventional paper making) and then deposited uniformly with the assistance
of a vacuum. Once the fibers are laid uniformly, the rest of the paper making
process concentrates on progressively strengthening the material through
compaction under heat and pressure and the application of adhesive binders.
The use of an air-laid process allows multi-layer introduction of SAPs
uniformly over the entire liner product.
The raw material for the Company's liners are manufactured under a
supply agreement with a remaining term of approximately six years with Merfin
Hygienic Products Ltd. ("Merfin"), a public-traded British Columbia firm.
Merfin is a leading producer of air-laid paper. Under the Merfin agreement,
the Company is required to meet certain annual minimum purchase requirements,
and until such minimum is met, is required to purchase all of its
requirements from Merfin. The price at which the Company is entitled to
purchase the material from Merfin is negotiated on an annual basis. The
agreement provides that Merfin may not sell its SAP raw material to any other
company that uses a two-piece system incorporating a liner, thereby making
the agreement exclusive for the Company's purposes. To date, the Company has
not met its annual minimum purchase requirements, and Merfin could, as a
result, terminate the agreement.
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However, Merfin has continued to accept purchase orders from the Company and
has indicated its willingness to continue to build its own sales revenues
through its relationship with the Company. To date, the Company has not
encountered any difficulties in obtaining its requisite supply of liner raw
material from Merfin, and the Company believes Merfin's capacity to provide
raw material needed for the Company's product liners will be sufficient to
meet the Company's needs for the foreseeable future. In addition to the
supply arrangement, which is of great significance to the Company, it is
expected that Merfin's research and development department will work with the
Company in the future on further product improvements.
In May 1997, Merfin was acquired by Buckeye Cellulose Corporation, a
United States manufacturer of cellulose products. There has been no
indication that Merfin will terminate or seek to change its relationship with
the Company. The Company has been dependent on its relationship with Merfin.
However, the Company believes that there are alternative sources of the liner
raw material available from a limited number of suppliers. Accordingly, the
Company does not believe that the termination of its arrangement with Merfin
as a result of the recent change of control or otherwise would have a
material adverse impact on the Company's operations or financial results.
The liner rollstock material produced by Merfin is shipped to an
independent diaper manufacturer in the United States where it is converted
into finished liners according to the Company's specifications. The process
of liner conversion involves slitting the finished rolls of raw material into
designated liner lengths and cover each liner core with a soft cotton
coverstock. The liners are then packaged, boxed and shipped to one of the
Company's fulfillment centers in Harrisburg, Pennsylvania, Sparks, Nevada or
Canada. (See "--Warehousing and Fulfillment.")
The Company's liners are converted by two conversion companies in the
United States, both of which have ample capacity to satisfy the Company's
liner conversion needs. There are also several other companies located in the
United States who could perform liner conversion services for the Company.
Management believes that there are several additional diaper and liner
production facilities available should the Company require additional
capacity.
WAREHOUSING AND FULFILLMENT. The Company currently uses fulfillment
services in Harrisburg Pennsylvania, Sparks, Nevada, Vancouver, British
Columbia and Toronto, Ontario. However, the Company believes that there are
numerous options for obtaining warehousing and fulfillment services and that
it would not be difficult to make arrangements for additional or different
service providers if the need were to arise in the future.
RESEARCH AND DEVELOPMENT
From its inception, the Company has devoted significant time and
resources to research and development activities to develop its current
products and improvements on those products. The Company anticipates that
certain of its research and development activities in the future will be
conducted in conjunction with Merfin's research and development department,
although there currently is no formal research and development contract
between the two entities. Research and development expenditures represented
less than 1.4% of the Company's total expenditures
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including cost of goods sold, in Fiscal 1997; and represented 1.7% of the
Company's total expenditures in Fiscal 1996.
BACKLOG
The Company generally ships within three to ten days of receipt of a
purchase order depending upon the size of the order. Accordingly, backlog is
not significant for the Company.
COMPETITION
The disposable incontinence products industry is highly competitive and
consists of several large and medium sized companies as well as numerous
smaller companies. Many of the Company's competitors have financial,
marketing and other resources substantially greater than those of the
Company, as well as a history of operations which the Company currently
lacks. Competition in the industry is generally based on price, performance
and comfort. The Company believes that its ability to compete depends on
elements both within and outside its control, including the success and
timing of new product developments by the Company and its competitors,
product performance and price, distribution and customer service. The Company
believes that its products represent an improvement over plastic-cased diaper
products in terms of consumer comfort and dignity, cost, product discretion
and protection against side-seepage. Although the Company believes it offers
products with price and performance characteristics competitive with other
manufacturers' products, there is no assurance that products can be
developed, manufactured or marketed successfully in the future. In order to
be successful, the Company must continue to respond promptly and effectively
to its competitors' innovations. There is no assurance that the Company will
be able to compete successfully in the disposable incontinence products
industry.
The retail market is dominated by major national brand product
manufacturers, including Kimberly Clark's Depend--Registered Trademark-- and
Poise--Registered Trademark-- brands, Johnson & Johnson's
Serenity--Registered Trademark-- brand and Procter & Gamble's
Attends--Registered Trademark-- brand. In addition to these companies, which
collectively dominate the market, the retail market for disposable
incontinence products is made of up medium size and small companies, as well
as a small, but fast growing, private label segment currently dominated by
Confab, Inc. and INBRAND Corporation.
The healthcare market is dominated by Proctor & Gamble Company,
Kimberly Clark Corporation and INBRAND Corporation. Several medium size and
numerous smaller firms account for the balance of the clinical market.
PATENTS, TRADEMARKS AND PROPRIETARY RIGHTS
The Company has filed three patent applications with the U.S. Patent and
Trademark Office covering two "channel" pant designs (applications were made
for two variations on one design) and has filed additional applications in
certain European markets. In November 1994, a patent was issued by the U.S.
Patent and Trademark Office and thereafter the Company abandoned its then two
pending applications for the variations on the issued patent. The issued
patent expires on July 30, 2012. Management believes that favorable rulings
on certain patent
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claims will help protect against new entrants into the combination two-piece
incontinence and training pant markets with similar designs that specifically
guard against side seepage.
The Company uses a number of trademarks and logos in connection with the
sale and advertising of its products. The Company believes that its
trademarks and logos are of considerable value to its business and intends to
continue to protect them to the fullest extent possible. The Company takes
reasonable measures to assure that any product bearing a Company trademark
reflects the consistence and quality associated with the Company's products.
Rejoice is a registered trademark of the Company in the United States,
Canada, the United Kingdom and Germany. An application for registration of
Rejoice is pending in several other countries. BumberChute is a registered
trademark in Canada, France, the United Kingdom and Germany. An application
for registration of BumberChute is pending in the United States.
The Company also relies upon trade secrets, know-how, improvements to
technology, confidentiality agreements and the pursuit of collaborative and
licensing opportunities to develop and maintain its competitive position.
Although the Company protects its proprietary technology in part by
confidentiality agreements with its employees, consultants and certain
contractors, there can be no assurance that these agreements will not be
breached, that the Company will have adequate remedies for any breach or that
the Company's trade secrets will not otherwise become known or be
independently discovered by its competitors.
EMPLOYEES
As of July 1, 1997, the Company employed approximately 15 persons on a
full-time basis. Of these employees, approximately two are employed in
manufacturing, two in operations and marketing, six in sales and five in
administration and finance. In addition, the Company employs approximately 25
to 35 people on a part-time basis. These employees largely perform customer
service, marketing and administrative functions for the Company. The Company
does not have a collective bargaining agreement with any of its employees,
and the Company considers its employees relations to be good.
ITEM 2. DESCRIPTION OF PROPERTIES.
The Company maintains a marketing office at 200 First Avenue West,
Seattle, Washington. The office, covering approximately 4,800 square feet, is
rented pursuant to a lease that expires in July 2000. The annual base rent is
$72,163 ($6,013.58 per month).
ITEM 3. LEGAL PROCEEDINGS.
In March 1996, Le Genereux Clothing Company, Ltd.("Le Genereux"), one of
the Company's subcontractors for pant manufacturing, filed a Writ of Summons
and Statement of Claim in the Supreme Court of British Columbia alleging
breach of contract to purchase pants pursuant to the Manufacturing Agreement
between the parties. (See "Item 1. Description of Business--Manufacturing and
Fulfillment.") The plaintiff claims it is entitled to liquidated damages in
the amount of Cdn. $913,607.30, plus interest and costs. The Company believes
this
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litigation is a frivolous nuisance action, wholly without merit, and intends
to vigorously defend itself. The Company does not believe that this
litigation will have a material adverse impact on its results of operations.
Despite the litigation, Le Genereux continues to assemble pants for the
Company, and the Company continues to be current on its billing obligations
to Le Genereux.
In May 1996, HUB, Inc., a Minnesota corporation, Thomas M. Vertin and
The Harold G. Goodman 1984 Grantor Trust, all of whom were involved in
providing a short-term bridge loan to the Company in 1995, filed a summons
and complaint against the Company in the U.S. District Court for the District
of Minnesota, Case No. 3-96-396. This suit alleges, primarily, breach of
contract and seeks an award of 54,167 warrants to purchase the Company's
Common Stock as additional compensation for the provision of the loan. The
loan was repaid in full on its due date and pursuant to its terms. The
Company believes this litigation is without merit. The Company has submitted
the plaintiffs' demand to the Vancouver Stock Exchange, as required, and has
received a ruling that the additional warrants are not authorized as part of
the loan agreement. The Company intends to vigorously defend this action and
does not believe this litigation will have a material adverse impact on its
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company did not submit any matters to a vote of its security holders
during the fourth quarter of the fiscal year ending March 31, 1997.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a)(1) MARKET INFORMATION
The Company's Common Stock has traded on the Vancouver Stock Exchange
("VSE") under the symbol "CPI" since January 1994, following its merger with
FWCC Merger Corp. Unless otherwise indicated, all share and per share data
give effect to a one-for-six reverse stock split (the "Reverse Stock Split")
of the Company's Common Stock approved by the Company's Board of Directors
and stockholders, which was effected on June 16, 1997.
The following table sets forth the high and low closing prices for the
Common Stock on the VSE for the periods indicated. All prices are stated in
Canadian dollars and do not reflect the Reverse Stock Split.
HIGH LOW
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Fiscal Year Ended
March 31, 1995
First Quarter.............. $1.95 $1.15
Second Quarter............. 2.20 1.35
Third Quarter.............. 1.75 1.30
Fourth Quarter............. 1.74 1.30
Fiscal Year Ended
March 31, 1996
First Quarter.............. $1.61 $1.56
Second Quarter............. 1.65 0.86
Third Quarter.............. 1.32 0.85
Fourth Quarter............. 0.98 1.25
Fiscal Year Ended
March 31, 1997
First Quarter.............. $1.25 $0.50
Second Quarter............. 0.97 0.65
Third Quarter.............. 1.10 0.38
Fourth Quarter............. 1.00 0.52
On July 4, 1997, the closing price of the Common Stock on the Vancouver
Stock Exchange was Cdn. $2.80 after giving effect to the Reverse Stock Split.
(a)(2) RECENT SALES OF UNREGISTERED SECURITIES
No securities that were not registered under the Securities Act of 1933,
as amended (the "Act") have been issued or sold by the Registrant within the
past three years, except as described below. See "Item 1. Description of
Business--Corporate History" for an explanation of the various entities
mentioned in this Item 5. The share information below reflects the Reverse
Stock Split.
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1. On January 12, 1994, the Registrant issued 427,500 shares for cash
consideration of Cdn. $5.58 per share to a single offshore investor (Caring
Products Holdings Limited, Hong Kong, which is a 100% subsidiary of Allied
Industries International Limited ("Allied"), a Hong Kong widely-held public
company of which Allied Group Limited, also a Hong Kong public company, held
57.2% and SHK Hong Kong Industries Limited holds 11.5%). In addition, the
investor was issued 427,500 warrants, in which two and one-half warrants
entitled the holder to purchase one additional share of Common Stock (for a
total of 171,000 shares), at an exercise price of Cdn. $9.00. The warrants
expired on November 22, 1995. Because the shares were not issued to a U.S.
person, the transaction was not subject to the Act. However, the transaction
was conducted in a manner consistent with the requirements for a valid
exemption under Section 4(2) of the Act. These securities were privately
transferred to a subsequent holder, Comite de Retraite et des Assurances
Collective (MCPED), in the quarter ended December 31, 1995.
2. On June 3, 1994, the Registrant issued 15,000 shares of Common Stock to
Susan A. Schreter, the Registrant's President and a Director. The shares were
issued to Ms. Schreter for repayment of debt incurred when Ms. Schreter
transferred 15,000 of her shares to two individuals in settlement of a
technology purchase and relinquishment of royalties agreement. This
transaction was made in reliance upon the exemption provided by Section 4(2)
of the Act. As an officer and director of the Registrant, Ms. Schreter had
access to all information about the Registrant necessary to make an informed
investment decision. In addition, she represented that she was acquiring the
securities for investment and not with a view to distribution, and her
certificate bears appropriate legends restricting transfer.
3. On April 28, 1995, the Registrant issued an aggregate of 50 units, for
aggregate gross proceeds of $2,500,000. Each unit consisted of one $50,000
12% convertible secured promissory note and one two-year warrant entitling
the holder to purchase up to 1,167 shares of Common Stock at an exercise
price of $0.30 per share until the first anniversary of issuance and $0.60
per share thereafter. The units were issued to the following accredited
investors:
NAME OF INVESTOR NUMBER OF UNITS AMOUNT INVESTED
---------------- --------------- ---------------
PURCHASED ($)
--------- ---
HUB, Inc. (1) 10 500,000
Harold G. Goodman
1984 Grantor
Trust (2) 5 250,000
Thomas M. Vertin 10 500,000
Stirling Unit Trust (3) 25 1,250,000
- --------------------
(1) The beneficial owners include: Charles E. Underbrink and Douglas E. Heitne.
(2) The beneficial owners include: H. Greg Goodman and Alan D. Feinsilver.
(3) No one person holds a greater than 10% beneficial ownership interest in the
Stirling Unit Trust. The settlor of the Trust is the Blake Settlement.
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Offers and sales were made in a private offering in reliance upon the
exemption provided by Section 4(2) of the Act. Each investor was furnished
with information concerning the offering and the Registrant and each had the
opportunity to verify the information supplied. Additionally, the Registrant
obtained a representation from each investor of such investor's intent to
acquire the securities for the purpose of investment only, and not with a
view toward the subsequent distribution thereof. The securities bear
appropriate restrictive legends.
All of the foregoing offers and sales were made to individuals or
entities that had access to information enabling them to evaluate the merits
and risks of the investment by virtue of their relationship to the Registrant
or their economic bargaining power. The share certificates representing all
shares issued in non-public offerings were stamped with a legend restricting
transfer of the Common Stock represented thereby, and the Registrant issued
stop transfer instructions to its transfer agent.
4. On September 28, 1995, the Company borrowed $2,500,000, on a secured
basis, and issued warrants to purchase 4,731 shares of Common Stock,
exercisable at Cdn. $7.20 until October 1, 1997. The lender, Trimin
Enterprises, Inc., is a non U.S. person, the beneficial owners of which
include a widely-held Canadian public company listed on The Toronto Stock
Exchange, the sole beneficial owner of 10% or more of the outstanding shares
of which is James D. Meekison, an Ontario resident. The Company issued the
securities in accordance with Regulation S.
5. On October 5, 1995, the Registrant issued an aggregate 1,666,667 Special
Warrants for aggregate gross proceeds of Cdn. $8,775,000 (approximately U.S.
$6,500,000) to a total of 11 investors, all of whom are non-U.S. persons. The
Special Warrants were deemed converted, for no additional consideration, into
1,666,667 shares and warrants to purchase up to 833,333 additional shares as
of February 27, 1996. The Special Warrants were issued to the following
non-U.S. investors:
NUMBER OF SPECIAL
NAME OF INVESTOR WARRANTS PURCHASED AMOUNT INVESTED (CDN.$)
---------------- ------------------ -----------------------
BPI Capital Management Corp. 429,500 $2,261,317.50
Comite de retraite et des assurances 150,833 794,137.50
collectives (MCPED)
Laurentian American Equity Ltd. 110,000 579,150.00
Laurentian International, Ltd. 55,833 293,962.50
Robert G. Atkinson 136,666 719,550.00
James R. Tuer 37,500 197,437.50
Royal Canadian Small Cap Fund 216,667 1,140,750.00
AGF Growth Equity Fund Ltd. 189,333 996,840.00
Montreal Trust Company of Canada 283,333 1,491,750.00
Michael Steele 28,500 150,052.50
Griffiths McBurney & Partners 28,500 150,052.50
Total 1,666,667 $8,775,000.00
14
<PAGE>
Offers and sales were made in an off-shore transaction to non-U.S.
Persons in reliance upon Regulation S promulgated under the Act. With the
exception of Messrs. Atkinson, Tuer and Steele, all of whom are individuals
and purchased their Special Warrants beneficially, and with the exception of
Montreal Trust Company of Canada, each of the purchasers is a widely-held
Canadian investment fund which, the Company believes, has purchased on behalf
of specific mutual funds. Montreal Trust Company of Canada is a widely-held,
federally-chartered Canadian trust company which, the Company believes,
purchased on behalf of fully-managed accounts for clients.
In connection with the offering of the Special Warrants, Brenark
Securities Ltd., which acted as placement agent, was issued a special right
(the "Special Right"), which is exercisable for warrants to purchase 133,333
shares of Common Stock, at Cdn. $4.86 per share through October 5, 1996 and
Cdn. $5.67 per share from October 6, 1996 to October 5, 1997. These warrants
were also issued pursuant to Regulation S.
6. From time to time during the past three years, the Company has granted
options and issued warrants to officers, directors and employees of the
Company. These grants have been made at exercise prices ranging from U.S.
$3.00 to U.S. $7.50. An aggregate of 629,671 shares of Common Stock have been
issued upon exercise of warrants and no shares of Common Stock have been
issued upon exercise of options. To the extent options or warrants have been
issued by the Company to U.S. persons, they have been issued pursuant to the
exemption for transactions not including a public offering provided in
Section 4(2) of the Act, and the securities have been appropriately legended.
(b) HOLDERS
The number of record holders of the Company's Common Stock as of March
31, 1997 was 117.
(c) DIVIDENDS
The Company has never paid a dividend on its Common Stock. It is the
present policy of the Company not to pay cash dividends on the Common Stock.
Any payment of cash dividends on the Common Stock in the future will be
dependent upon the Company's financial condition, results of operations,
current and anticipated cash requirements, plans for expansion, as well as
other factors that the Board of Directors deems relevant.
15
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
THE FOLLOWING ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL
CONDITION OF THE COMPANY SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, OF THE COMPANY CONTAINED
ELSEWHERE IN THIS FORM 10-KSB/A.
OVERVIEW
From the date of the Company's incorporation in November 1992 through
September 1995 when it began marketing Rejoice, the Company was principally
engaged in various activities, including product development, technology
acquisition, recruitment of employees, identification of sources of
subcontracted production, organization of marketing and production
headquarters, market research and testing, trademark and patent filings and
the raising of funds to support the Company's substantial development
expenses. Revenues from various product test marketing programs in retail,
catalog, direct mail and healthcare markets during that period were nominal.
In order to consolidate the Company's marketing and production management
activities into a single location, the Company moved its headquarters to
Seattle, Washington from New York in August 1995.
Until March 1996, the Company produced pants in its own facility in
Burnaby, British Columbia. Thereafter, the facility provided cutting and
other services to support its Canadian pant subcontractor. The Company
expects to complete its relationship with this subcontractor and close its
Burnaby, British Columbia location in September 1997.
The Company's new source of pant production is from a large underwear
manufacturer located in Northern Mexico. That producer offers the Company a
lower per unit pant cost than the Company's per unit pant cost at its own
facility in Canada or through a Canadian-based pant subcontractor. In
addition, the Company anticipates that it will derive additional cost
reductions from the elimination of certain overhead, labor and administrative
costs associated with operating the Burnaby facility. No material expenses
or losses are expected from the closing of the Burnaby facility and sale of
certain sewing equipment.
The Company anticipates that it will continue to manufacture its pant and
liner products through subcontractors located in the United States and Mexico.
In September 1995, the Company shipped product to its first drug store
chain for store-wide distribution and shelf placement in approximately 300
stores. In each subsequent fiscal quarter the number of drug stores,
independent pharmacies and surgical supply stores that sell the Company's
products has increased. As of June 30, 1997, the Company distributed its
products to approximately 6,000 drug, pharmacy and surgical supply stores.
In late 1996, the Company signed a distribution agreement with Medline, a
hospital supply company. This relationship will support the Company's
interests in entering the healthcare markets, which includes inpatient and
outpatient hospital facilities, rehabilitation facilities, home healthcare
providers, nursing homes, hospice centers and surgical supply stores. The
Company is currently training various Medline healthcare representatives to
sell the Company's products and producing
16
<PAGE>
customized sales literature to support these efforts. The Company
anticipates that sales to the healthcare market will increase as a percentage
of the Company's total revenues in future quarters.
As discussed below, the fiscal years ended March 31, 1996 and March 31,
1997 were characterized by nominal sales offset by significant expenses
associated with financing, manufacturing and promoting the Company's
products. The Company expects to continue to incur losses during the rollout
of its products to the healthcare, retail and international markets.
RESULTS OF OPERATIONS
COMPARISON OF THE FISCAL YEAR ENDED MARCH 31, 1996 TO THE FISCAL YEAR
ENDED MARCH 31, 1997
The components of the Company's revenues for the fiscal year ended
March 31, 1996 ("Fiscal 1996") and the fiscal year ended March 31, 1997
("Fiscal 1997") were as follows:
1996 1997
---------- ----------
Rejoice pants $ 479,481 $ 889,149
Rejoice liners 635,902 1,390,611
Other 3,103 7,737
---------- ----------
Total $1,118,486 $2,287,497
---------- ----------
---------- ----------
Revenues increased from $1,118,486 in Fiscal 1996 to $2,287,497 in Fiscal
1997, an increase of 105%. Sales of the Company's adult pants and liners
represented virtually all of the Company's revenues in both years. The
increase in revenues resulted primarily from the increase in the number of
retail outlets which sell the Company's products from approximately 1,200 at
the end of Fiscal 1996 to approximately 6,000 at the end of Fiscal 1997. The
increase in retail outlets carrying the Rejoice products resulted from the
broad-based promotional activities of the Company to support brand
introduction and consumer awareness of the brand. There was no significant
change in the Company's pricing to its wholesale customers from Fiscal 1996
to Fiscal 1997. Total liner sales are expected to continue to be higher than
pant sales because the average consumer will need to purchase more disposable
liners than reusable pants.
Cost of goods sold increased from $1,031,896 in Fiscal 1996 to $1,727,607
in Fiscal 1997, an increase of 67% reflecting product costs associated with
the increased amount of sales. Gross profit on sales increased from $86,590
in Fiscal 1996 to $559,890 in Fiscal 1997. The improvement in gross profit
reflected lower unit cost of goods sold due to the transfer during Fiscal
1997 of virtually all pant production to subcontractors from a significant
amount of in-house pant production. Gross profit as a percentage of revenues
(gross profit margin) increased from 8% in Fiscal 1996 to 24% in Fiscal 1997.
Gross profit margins may fluctuate in the future depending on changes in the
mix of products sold, the mix of sales by distribution channels and other
factors such as the sale of inventory with lower gross profit margins.
17
<PAGE>
Total operating expenses increased 4% from $3,241,483 in Fiscal 1996 to
$3,362,288 in Fiscal 1997. Of the Fiscal 1997 amount, $2,083,173 was related
to selling expenses, including advertising creative costs, consumer physician
promotion and education materials, radio advertising placement, trade show,
salaries and travel costs. Selling expenses increased 5% over Fiscal 1996.
The Company expects that selling expenses will continue to be the largest
component of the Company's operating expenses. General and administrative
expenses in Fiscal 1997 were $1,198,148, an increase of 6% as compared to
$1,126,815 in Fiscal 1996. Legal and accounting expenses during both periods
were a significant portion of general and administrative expenses. These
expenses primarily relate to various registrations and filings in the United
States and Canada. During Fiscal 1996, the Company also incurred expenses
related to completing a bridge financing, including a $250,000 finder's fee
and deemed interest of $413,000 as a result of the valuation of the warrants
issued in such financing. Research and development expenses continued to
decline during the two periods, from $74,704 in Fiscal 1996 to $8,679 in
Fiscal 1997 because all significant research and development regarding the
Company's existing products is complete. Research and development expenses
are not expected to be a significant cost to the Company during Fiscal 1998
as a result of the Company's intention to continue its focus on expanding
sales of its existing products rather than on developing new products.
Interest income generated during Fiscal 1997 was $163,986 as compared to
$112,671 in Fiscal 1996. The increase was attributable to higher average
deposit balances throughout the year. Interest expense increased 121% during
the two periods from $92,314 to $204,203 reflecting the higher average
balance of outstanding debt.
Improved pant gross profit margins are expected in future periods as a
result of increasing the volume of pants produced by lower cost production in
Mexico as compared to its subcontractor in Canada. The Company is scheduled
to close its factory location in Burnaby, British Columbia in September 1997,
at which time there is expected to be a reduction in certain overhead and
facility costs related to supporting pant production in Canada. No material
losses associated with the closure of this facility are expected. No similar
facility support is required for subcontracted pant production in other
locations that are currently used by the Company. While no assurances can be
provided, the Company expects that increased demand for both pants and liners
will enable the Company to negotiate volume discounts which might positively
affect gross profit margins. In addition, no assurance can be provided that
increased pant production through lower cost subcontractors will lead to
profitable operations. During Fiscal 1996 and Fiscal 1997, the Company
subcontracted production of all of its liners through subcontracted liner
converters in the United States.
The net loss for Fiscal 1997 was $2,904,886 as compared to a net loss of
$3,959,940 for Fiscal 1996, representing a decrease of $1,055,054 or 27%.
The net loss per share was $0.74 in Fiscal 1997 as compared to $1.84 in
Fiscal 1996.
Although the Company cannot accurately determine the precise effect of
inflation on its operations, it does not believe inflation has had a material
effect on sales or results of operations in Fiscal 1996 and Fiscal 1997.
18
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations through private
placements of its equity securities as well as various debt financing
transactions. During Fiscal 1996, the Company received net proceeds of
$5,707,123 from the sale of 1,666,667 special warrants (the "Private
Placement"). During Fiscal 1996, the Company supported its operations from
the proceeds of several small borrowings and incurred short-term debt of $2.5
million in the form of promissory notes issued together with warrants as part
of a bridge financing. These notes were subsequently repaid with the
proceeds of a short-term secured promissory note issued by the Company to a
single investor in September 1995. In October 1995, the Company secured a
revolving line of credit in the amount of $2.5 million from Seattle First
National Bank and repaid the secured promissory note issued in September
1995. The loan bears interest at 6.91% per annum, payable monthly, and is
secured by a deposit of $2.5 million.
During Fiscal 1997, the Company supported its operations from various
short-term, unsecured borrowings from related parties which totaled $571,300
at March 31, 1997. In April 1997, $366,300 of such borrowings were repaid
using proceeds received from the Company's bank line of credit.
In April 1997, Bradstone Equity Partners Inc., f/k/a H.J. Forest
Products Inc. ("Bradstone"), guaranteed a Cdn. $1.75 million credit facility
for the Company from the Toronto Dominion Bank. Borrowings under the line of
credit bear interest at the Canadian prime rate plus .25% (5% at March 31,
1997) and are due on demand. The Company issued to the guarantor warrants to
purchase 126,667 shares of Common Stock exercisable at $1.86 per share at any
time until May 8, 1998 and thereafter at $2.16 per share until May 8, 1999.
The warrants were recorded on issuance at their estimated fair market value
of $163,592 with a corresponding reduction in the recorded value of the line
of credit. The debt discount will be amortized to interest expense over the
term of the line of credit. In May 1997, the Company borrowed $780,000 out
of a total possible draw down of $1.25 million under a note payable to
Bradstone. Interest is payable thereunder at the Canadian prime rate plus 3%
(7.75% at March 31, 1997) and the principal is due in May 1998. Repayment of
the note is secured by substantially all of the Company's assets and the
Common Stock owned by William H.W. Atkinson and Susan A. Schreter, the
Company's Chief Executive Officer and President, respectively.
As of March 31, 1997, the Company's principal sources of liquidity
included cash (including amounts restricted as security for loans) of
$2,813,244, net accounts receivable of $625,085 and inventories of
$2,432,583. The Company's operating activities used cash of $2,982,936 for
the year ended March 31, 1997. Increases in accounts payable of $678,106 and
accounts receivable of $344,407 reflect the Company's increased levels of
operations and sales. Increased inventory of $623,591 supported the
Company's growing sales volume. The Company anticipates that the levels of
both inventories and accounts receivable will vary commensurate with the
Company's sales and, if sales increase, may negatively impact cash resources.
19
<PAGE>
The Company believes that the estimated net proceeds from its
contemplated public offering, together with its various financing
arrangements, will be sufficient to meet its capital requirements for at
least the next 12 months.
OTHER MATTERS
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, EARNINGS PER SHARE
("SFAS 128"). SFAS 128 requires companies with complex capital structures
that have publicly held common stock or common stock equivalents to present
both basic and diluted earnings per share ("EPS") on the face of the income
statement. The presentation of basic EPS replaces the presentation of
primary EPS currently required by Accounting Principles Board Opinion No. 15
("APB No. 15"). Basic EPS is calculated as income available to common
stockholders divided by the weighted average number of common shares
outstanding during the period. Diluted EPS is calculated using the "if
converted" method for convertible securities and the treasury stock method
for options and warrants as prescribed by APB No. 15. This statement is
effective for financial statements issued for interim and annual periods
ending after December 15, 1997. The Company does not believe the adoption of
SFAS 128 in fiscal year 1998 will have a significant impact on the Company's
reported EPS.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 129, DISCLOSURES OF
INFORMATION ABOUT CAPITAL STRUCTURE ("SFAS 129") which establishes standards
for disclosing information about an entity's capital structure. The
disclosures are not expected to have a significant impact on the consolidated
financial statements of the Company. SFAS 129 is effective for financial
statements ending after December 15, 1997.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, REPORTING COMPREHENSIVE INCOME
("SFAS 130") which establishes standards for reporting and displaying
comprehensive income and its components (revenues, expenses, gains and
losses) in a full set of general purpose financial statements. SFAS 130
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. SFAS 130 is effective for years beginning after December 15,
1997. The Company does not anticipate a material impact to its consolidated
financial statements upon adoption of this standard.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION ("SFAS 131") which establishes standards
for the way public business enterprises are to report information about
operating segments in annual financial statements and requires those
enterprises to report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes the
related disclosures about products and services, geographic areas, and major
customers. SFAS 131 replaces the "industry segment" concept of Financial
Accounting Standard No. 14 with a "management approach" concept as the basis
for identifying reportable segments. SFAS 131 is effective for financial
statements for periods beginning after December 15, 1997. The Company does
not anticipate a material impact to its consolidated financial statements
upon adoption of this standard.
FORWARD LOOKING STATEMENTS
This Form 10-KSB/A and other reports and statements filed by the Company
from time to time with the Securities and Exchange Commission (collectively,
the "Filings") contain or may contain forward-looking statements and
information that are based upon beliefs of, and
20
<PAGE>
information currently available to, the Company's management, as well as
estimates and assumptions made by the Company's management.
When used in the Filings, the words "anticipate," "believe," "estimate,"
"expect," "future," "intend," "plan" and similar expressions, as they relate to
the Company or the Company's management, identify forward-looking statements.
Such statements reflect the current view of the Company with respect to future
events and are subject to risks, uncertainties and assumptions relating to the
Company's operations and results of operations, competitive factors and pricing
pressures, shifts in market demand, the performance and needs of the industries
which constitute the customers of the Company, the costs of product development
and other risks and uncertainties, including, in addition to any uncertainties
specifically identified in the text surrounding such statements, uncertainties
with respect to management of growth, increases in sales, the competitive
environment, hiring and retention of employees, pricing, new product
introductions, product productivity, distribution channels, enforcement of
intellectual property rights, possible volatility of stock price and general
industry growth and economic conditions. Should one or more of these risks or
uncertainties materialize, or should the underlying assumptions prove
incorrect, actual results may differ significantly from those anticipated,
believed, estimated, expected, intended or planned.
ITEM 7. FINANCIAL STATEMENTS.
The following consolidated financial statements of Caring Products
International, Inc. are included in Item 7:
Consolidated Balance Sheets at March 31, 1996 and 1997.
Consolidated Statements of Operations for the Years Ended March 31, 1995,
1996 and 1997.
Consolidated Statements of Stockholders' Equity for the Years Ended
March 31, 1995, 1996 and 1997.
Consolidated Statements of Cash Flows for the Years Ended March 31, 1995,
1996 and 1997.
Notes to Consolidated Financial Statements.
21
<PAGE>
CARING PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARIES
Consolidated Financial Statements
March 31, 1996 and 1997
(With Independent Auditors' Report Thereon)
22
<PAGE>
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
The Board of Directors
Caring Products International, Inc.:
We have audited the accompanying consolidated balance sheet of Caring Products
International, Inc. and subsidiaries as of March 31, 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Caring Products
International, Inc. and subsidiaries as of March 31, 1997, and the results of
their operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Seattle, Washington
June 13, 1997
23
<PAGE>
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
The Board of Directors
Caring Products International, Inc.:
We have audited the accompanying consolidated balance sheet of Caring Products
International, Inc. and subsidiaries as at March 31, 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years in the two-year period then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in Canada. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of Caring Products International, Inc.
and subsidiaries as at March 31, 1996 and the results of their operations and
their cash flows for each of the years in the two-year period then ended in
accordance with generally accepted accounting principles in the United States.
/s/ KPMG
Chartered Accountants
Vancouver, Canada
June 14, 1996
24
<PAGE>
CARING PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended March 31, 1995, 1996 and 1997
- --------------------------------------------------------------------------------
1995 1996 1997
- --------------------------------------------------------------------------------
Revenues $ 399,264 1,118,486 2,287,497
Cost of sales 728,783 1,031,896 1,727,607
------------ ----------- -----------
Gross profit (loss) (329,519) 86,590 559,890
------------ ----------- -----------
Operating expenses:
Selling 987,795 1,978,206 2,083,173
General and administrative 848,209 1,126,815 1,198,148
Research and development 101,360 74,704 8,679
Amortization and depreciation 64,647 61,758 72,288
------------ ----------- -----------
Total operating expenses 2,002,011 3,241,483 3,362,288
------------ ----------- -----------
Loss from operations (2,331,530) (3,154,893) (2,802,398)
------------ ----------- -----------
Other income (expense):
Interest income 62,337 112,671 163,986
Interest expense (10,991) (92,314) (204,203)
Costs associated with Bridge Financing - (864,735) -
Other, net (115,758) 39,331 (62,271)
------------ ----------- -----------
(64,412) (805,047) (102,488)
------------ ----------- -----------
Net loss $(2,395,942) (3,959,940) (2,904,886)
------------ ----------- -----------
Net loss per share $ (1.29) (1.84) (0.74)
------------ ----------- -----------
Weighted average common shares and common
equivalent shares outstanding 1,863,995 2,154,955 3,948,054
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
25
<PAGE>
CARING PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 1996 and 1997
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
1996 1997
- -------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
------
Current assets:
Cash $ 1,082,419 118,573
Restricted cash 2,701,350 2,694,671
Accounts receivable, less allowance for doubtful
accounts of $108,966 in 1996 and $91,694 in 1997 280,678 625,085
Inventories 1,808,992 2,432,583
Prepaid expenses 122,724 19,041
----------- -----------
Total current assets 5,996,163 5,889,953
Equipment, net 196,907 251,503
Intangible assets, net 276,084 238,146
Other assets - 8,935
----------- -----------
$ 6,469,154 6,388,537
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable 351,312 1,029,418
Accrued liabilities 78,970 137,092
Line of credit 2,500,000 2,500,000
Notes payable to related parties - 571,300
Current portion of lease obligations 11,550 13,046
Current portion of long-term debt 13,206 12,126
----------- -----------
Total current liabilities 2,955,038 4,262,982
Lease obligations, less current portion 5,931 24,868
Long-term debt, less current portion 16,781 5,485
----------- -----------
Total liabilities 2,977,750 4,293,335
----------- -----------
Stockholders' equity:
Preferred stock, no shares outstanding - -
Common stock, 3,678,208 and 4,125,375 shares
outstanding at March 31, 1996 and 1997, respectively 36,782 41,254
Additional paid-in capital 11,180,899 12,685,111
Accumulated deficit (7,726,277) (10,631,163)
----------- -----------
Total stockholders' equity 3,491,404 2,095,202
Commitments, contingencies and subsequent events
- -------------------------------------------------------------------------------------
$ 6,469,154 6,388,537
- -------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE>
CARING PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY
Years ended March 31, 1995, 1996 and 1997
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Total
Additional stock
Common stock paid-in Accumulated holders'
-----------------------
Shares Amount capital deficit equity
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at March 31, 1994 1,814,037 $ 18,140 4,043,833 (1,370,395) 2,691,578
Issuance of common stock for cash on exercise of
warrants 145,838 1,458 781,060 - 782,518
Issuance of common stock for settlement of debt 15,000 150 151,205 - 151,355
Capital contributions by stockholders - - 80,183 - 80,183
Net loss - - - (2,395,942) (2,395,942)
------------------------------------------------------------------
Balance at March 31, 1995 1,974,875 19,748 5,056,281 (3,766,337) 1,309,692
Issuance of common stock for cash on exercise of
warrants 36,666 367 21,162 - 21,529
Issuance of common stock and warrants for cash
on private placement, net of $697,986 of
issuance costs 1,666,667 16,667 5,690,456 - 5,707,123
Fair value of warrants issued with Bridge Financing - - 413,000 - 413,000
Net loss - - - (3,959,940) (3,959,940)
------------------------------------------------------------------
Balance at March 31, 1996 3,678,208 36,782 11,180,899 (7,726,277) 3,491,404
Issuance of common stock for cash on exercise of
warrants 447,167 4,472 1,504,212 - 1,508,684
Net loss - - - (2,904,886) (2,904,886)
- ------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1997 4,125,375 $ 41,254 12,685,111 (10,631,163) 2,095,202
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1995 1996 1997
------------------------- ------------------------- -------------------------
Preferred Common Preferred Common Preferred Common
stock stock stock stock stock stock
------------------------- ------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C>
Par value $0.01 $0.01 Par value $0.01 $0.01 Par value $0.01 $0.01
Authorized 1,000,000 25,000,000 Authorized 1,000,000 75,000,000 Authorized 1,000,000 75,000,000
Issued - 1,974,875 Issued - 3,678,208 Issued - 4,125,375
Outstanding - 1,974,875 Outstanding - 3,678,208 Outstanding - 4,125,375
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE>
CARING PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended March 31, 1995, 1996 and 1997
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1996 1997
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (2,395,942) (3,959,940) (2,904,886)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization and depreciation 80,372 107,170 127,821
Loss on disposal of equipment - 11,819 -
Deemed interest on Bridge Financing - 413,000 -
Write-off of deferred financing costs - 162,737 -
Change in operating assets and liabilities:
Increase in accounts receivable (136,019) (114,828) (344,407)
Increase in inventories (1,061,203) (584,502) (623,591)
Decrease (increase) in prepaid expenses (236,978) 117,860 103,683
Increase (decrease) in accounts payable 554,322 (394,703) 609,257
Increase (decrease) in accrued liabilities 97,821 (86,642) 58,122
Increase in other assets - - (8,935)
------------------------------------------------
Net cash used in operating activities (3,097,627) (4,328,029) (2,982,936)
------------------------------------------------
Cash flows from investing activities:
Capital expenditures (200,494) (46,264) (43,555)
Acquisition of intangible assets (21,066) (5,688) -
Proceeds from disposition of equipment - 4,214 -
Proceeds on disposition of long-term investment 765,365 - -
------------------------------------------------
Net cash provided by (used in) investing activities 543,805 (47,738) (43,555)
------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of common stock and capital contributions 862,701 5,728,652 1,508,684
Payment of financing costs (162,737) - -
Decrease (increase) in restricted cash, net - (2,701,350) 6,679
Proceeds from line of credit - 2,500,000 -
Proceeds from secured promissory note and Bridge Financing - 5,000,000 -
Repayment of secured promissory note and Bridge Financing - (5,000,000) -
Proceeds from long-term debt 49,645 - 25,998
Repayment of long-term debt (9,061) (10,597) (38,374)
Proceeds from notes payable to related parties - - 571,300
Repayment of notes payable to related parties (6,776) - -
Repayment of lease obligations (12,064) (10,690) (11,642)
Proceeds from short-term loans 250,000 - -
Repayment of short-term loan - (250,000) -
------------------------------------------------
Net cash provided by financing activities 971,708 5,256,015 2,062,645
------------------------------------------------
Increase (decrease) in cash (1,582,114) 880,248 (963,846)
Cash at beginning of year 1,784,285 202,171 1,082,419
------------------------------------------------
Cash at end of year $ 202,171 1,082,419 118,573
------------------------------------------------
Supplemental disclosure of cash flow information - cash paid during the year
for interest $ 10,991 92,314 168,401
------------------------------------------------
Supplemental schedule of noncash investing and financing activities:
Capital expenditures included in accounts payable at end of year $ - - 68,849
Assets acquired through capital leases 7,968 - 32,075
Issuance of common stock for settlement of debt 151,355 - -
Estimated fair market value of warrants issued recorded as deemed interest - 413,000 -
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE>
CARING PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended March 31, 1995, 1996 and 1997
(1) DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
(a)DESCRIPTION OF BUSINESS
Caring Products International, Inc. (CPI) is organized under the
laws of the State of Delaware. CPI's business is the marketing of
proprietary urinary incontinence products for adults and children
over the age of four.
(b) BASIS OF PRESENTATION
These consolidated financial statements are prepared in
accordance with generally accepted accounting principles
(GAAP) in the U.S. and present the financial position,
results of operations and changes in financial position
of CPI and its wholly-owned subsidiaries (collectively,
the "Company"). All material intercompany balances and
transactions have been eliminated in consolidation.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) RESTRICTED CASH
Restricted cash includes a short-term certificate of deposit of
$2,500,000 at March 31, 1996 and 1997 which is held as security
against the line of credit. In addition, $201,350 and $194,671
of short-term Canadian government securities included in restricted
cash are held as collateral for guarantees made by the Company at
March 31, 1996 and 1997, respectively.
(b) INVENTORIES
Inventories are stated at the lower of cost, as determined by the
first-in, first-out method, or market (replacement cost for raw
materials and packaging and net realizable value for finished
goods).
(c) EQUIPMENT
Equipment is stated at cost. Equipment under capital leases is
stated at the lower of the fair market value of the assets or
the present value of minimum lease payments at the inception of
the leases.
Depreciation is calculated using the straight-line method over the
estimated useful lives of the assets ranging from 2 to 5 years.
Equipment held under capital leases is amortized using the straight-
line method over the shorter of the estimated useful lives of the
assets or the lease terms, ranging from 2 to 5 years.
Expenditures for maintenance and repairs are charged to expense as
incurred. Upon sale or retirement, the cost and related accumulated
depreciation or amortization are removed from the accounts and any
resulting gain or loss is reflected in other income or expense.
29
<PAGE>
CARING PRODUCTS INTERNATIONAL., INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(d) INTANGIBLE ASSETS
Intangible assets, representing technology purchased and costs of
patents and trademarks, are stated at cost. Amortization is recorded
using the straight-line method over the assets' estimated useful
lives which do not exceed 10 years.
(e) REVENUE RECOGNITION
The Company recognizes revenue and establishes provisions for
estimated product returns when its products are shipped to
customers. Products of the Company held by various third party
storage and delivery companies are not recognized in revenue,
but are included in inventory.
(f) MARKETING AND ADVERTISING
The Company recognizes the production costs of advertising in the
period the services are provided. Costs related to one-time listing
allowances (slotting fees) to enter large, retail chains are
expensed as incurred.
(g) RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
(h) FOREIGN CURRENCY TRANSLATION
The Company considers the U.S. dollar to be its functional
currency. The Company has a wholly-owned subsidiary, located
in Canada, which is a direct and integral extension of the
Company. Accordingly, transactions by the subsidiary denominated
in Canadian dollars are re-measured at the exchange rates in
effect at the date of the transaction. At each balance sheet date,
monetary balances denominated in currencies other than the U.S.
dollar are remeasured using current exchange rates.
Gains and losses resulting from foreign currency transactions are
included in other, net in the consolidated statements of operations
Gains and losses arising from these transactions for each of the
years ended March 31 include a loss of $115,755 for 1995, a gain of
$51,150 for 1996 and a loss of $44,367 for 1997.
(i) INCOME TAXES
The Company follows the asset and liability method of accounting
for income taxes. Under the asset and liability method of
accounting for income taxes, deferred tax assets and liabilities
are recognized based on the estimated future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted
tax rates in effect for the year in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
30
<PAGE>
CARING PRODUCTS INTERNATIONAL., INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(j) NET LOSS PER SHARE
Net loss per share is computed based on the weighted average number
of shares of common stock and common stock equivalents outstanding
during the year. Common stock equivalents include all warrants and
stock options which would have a dilutive effect, applying the
treasury stock method.
(k) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED
OF
The Company adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 121, ACCOUNTING FOR THE IMPAIRMENT
OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF,
during 1997. This statement requires that long-lived assets and
certain identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. Recoverability of assets to be
held and used is measured by a comparison of the carrying amount of
an asset to future net cash flows expected to be generated by the
asset. If such assets are considered to be impaired, the impairment
to be recognized is masured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to
be disposed of are reported at the lower of the carrying amount or
fair value less costs to sell. Adoption of this Statement did not
have a material impact on the Company's financial position, results
of operations, or liquidity.
(l) STOCK-BASED COMPENSATION
The Company adopted the provisions of SFAS No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, during 1997. This statement permits a
company to choose either a new fairvalue-based method or the
Accounting Principles Board (APB) Opinion No. 25, ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES, intrinsic-value based method of
accounting for stock-based compensation arrangements. SFAS No. 123
requires pro forma disclosures of net income and earnings per share
computed as if the fair-value-based method had been applied in
financial statements of companies that continue to account for
such arrangements under APB Opinion No. 25. The Company has elected
to continue to record stock-based compensation using the APB Opinion
No. 25 intrinsic-value-based method and, therefore, the adoption of
SFAS No. 123 has not impacted the Company's financial position,
results of operations, or liquidity.
(m) USE OF ESTIMATES
The preparation of consolidated financial statements in conformity
with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
(n) EFFECTS OF NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board (FASB)
issued SFAS No.128, EARNINGS PER SHARE. SFAS 128 establishes
standards for computing and presenting earnings per share and applies
to entities with publicly held common stock or potential common
stock. This statement is effective for financial statements issued
for periods ending after December 15, 1997, including interim
31
<PAGE>
CARING PRODUCTS INTERNATIONAL., INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
periods; earlier application is not permitted. The Company does not
anticipate a material impact to its consolidated financial statements
upon adoption of this standard.
In June 1997, the FASB issued SFAS No.131, DISCLOSURES ABOUT SEGMENTS
OF AN ENTERPRISE AND RELATED INFORMATION. SFAS 131 establishes standards
for the way public companies report information about operating segments
in annual financial statements and requires that those companies report
selected information about operating segments in interim financial
reports issued to stockholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major
customers. This statement is effective for financial statements issued
for periods ending after December 15, 1997, including interim periods;
earlier application is encouraged. The Company does not anticipate a
material impact to its consolidated financial statements upon adoption
of this standard.
(o) RECLASSIFICATIONS
Certain of the 1995 and 1996 balances have been reclassified to
conform with the 1997 presentation.
32
<PAGE>
CARING PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) LIQUIDITY
The Company has experienced net losses since its inception and has an
accumulated deficit of $10,631,163 at March 31, 1997. Management is
presently taking actions to improve operations and obtain additional
debt and equity financing.
On April 7, 1997, the Company signed a letter of intent to proceed with
a public offering (the "Offering"). The Offering is presently contemplated
to consist of units which are exercisable for one share of the Company's
common stock and a five-year warrant to purchase one additional share at a
price equivalent to 150% of the unit price. There can be no assurance that
the Offering will be successful.
(4) CONCENTRATION OF RISK
The Company maintains cash equivalents with various financial
institutions located in the U.S. and Canada. The Company's policy is to
limit the exposure at any one financial institution and to invest solely
in highly liquid investments that are readily convertible to cash.
The Company sells its products to various customers located in the U.S.
and Canada. The Company performs ongoing credit evaluations of its
customers' financial condition, and generally requires no collateral as
security against accounts receivable. Total sales to Canadian customers
represented approximately 25% of total revenues for each of the years
ended March 31, 1996 and 1997.
Approximately 33% of the Company's revenues were from two customers
during the year ended March 31, 1997. During the year ended March 31,
1996, two customers accounted for approximately 25% of total revenues.
During the year ended March 31, 1995, one customer accounted for
approximately 15% of revenues.
At March 31, 1997, one customer accounted for approximately 84% of the
net accounts receivable balance, as the result of an initial purchase
near the Company's year-end.
The Company currently purchases its products from a limited number of
suppliers, some of which are located in Canada or Mexico. As there are
many manufacturers of products similar to the Company's products,
management believes that other suppliers could provide the Company's
products on comparable terms. Management does not believe a change in
suppliers would cause a significant delay in obtaining sufficient
product quantities or result in a significant loss of sales.
33
<PAGE>
CARING PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
(5) INVENTORIES
Inventories at March 31 consist of the following:
1996 1997
-------------------------------
<S> <C> <C>
Finished goods $ 1,489,407 1,848,802
Raw materials 223,856 553,466
Packaging 95,729 30,315
-------------------------------
$ 1,808,992 2,432,583
-------------------------------
-------------------------------
(6) EQUIPMENT
Equipment at March 31 consists of the following:
1996 1997
-------------------------------
Computer equipment $ 101,467 103,592
Office equipment 39,559 43,795
Plant equipment 128,208 234,251
Leasehold improvements 5,670 5,670
Capital leases:
Plant equipment 36,950 36,950
Office equipment 8,001 40,076
-------------------------------
319,855 464,334
Less accumulated depreciation
and amortization 122,948 212,831
-------------------------------
Net equipment $ 196,907 251,503
-------------------------------
-------------------------------
(7) INTANGIBLE ASSETS
Intangible assets at March 31 consist of the following:
1996 1997
-------------------------------
Purchased technology $ 250,000 250,000
Patents and trademarks 127,088 127,088
-------------------------------
377,088 377,088
Less accumulated amortization 101,004 138,942
-------------------------------
Net intangible assets $ 276,084 238,146
-------------------------------
-------------------------------
</TABLE>
34
<PAGE>
CARING PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) RELATED PARTIES
At March 31, 1997, accounts payable included $68,849 in payables to
related parties.
During the year ended March 31, 1997, the Company purchased $106,043 in
plant equipment from and paid approximately $72,000 in consulting fees
to related parties.
(9) LINE OF CREDIT
The Company has a $2,500,000 line of credit with a bank expiring August
1997. Borrowings under the line of credit bear interest at a fixed rate
of 6.91%. The line of credit is secured by a $2,500,000 certificate of
deposit.
In April 1997, the Company obtained an additional line of credit with a
bank in the amount of Cdn. $1,750,000 (U.S. $1,263,812 at March 31,
1997). Borrowings under the line of credit are due on demand and bear
interest at the Canadian prime rate plus .25% (5.0% at March 31, 1997).
The line of credit is secured by a guarantee from a related party of the
Company through April 1, 1998. The guarantor received 126,667 warrants,
each for one share of the Company's common stock. The warrants are
exercisable at $1.86 per share through May 8, 1998 and at $2.16 through
May 8, 1999. The warrants were recorded on issuance at their estimated
fair market value of $163,592 with a corresponding reduction in the
recorded value of the line of credit. The debt discount will be
amortized to interest expense over the term of the line of credit.
(10) NOTES PAYABLE TO RELATED PARTIES
Notes payable to related parties at March 31, 1997 are unsecured and
consist of the following:
<TABLE>
<CAPTION>
<S> <C>
Note payable, interest at 6.75%; interest and principal payable on demand $ 205,000
Note payable, interest at 10% increasing to 20% if principal is not paid at 200,000
maturity; interest payable on demand and principal due February
1997
Note payable, interest at Canadian prime rate plus 2% (6.75% at 100,000
March 31, 1997); interest and principal payable on demand
Note payable, interest at 12%; interest payable on demand and principal 37,500
due March 1997
Notes payable, interest at 12%; interest and principal payable on demand 28,800
----------
Total notes payable to related parties $ 571,300
----------
----------
</TABLE>
In April 1997, outstanding principal balances payable to related parties
of $366,300 were repaid.
In May 1997, the Company entered into an agreement with a related party
to finance $1,250,000 through a note payable. Interest on the note
payable is payable monthly at the Canadian prime rate plus 3% (7.75% at
March 31, 1997). Principal is payable in full in May 1998. The note is
secured by substantially all of the Company's assets and by the common
stock of certain executive officers and directors.
35
<PAGE>
CARING PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(11) LONG-TERM DEBT
Long-term debt at March 31, 1996 consisted of a loan in the original
principal amount of Cdn. $70,000 (U.S. $49,645). During 1997, the
Company refinanced the outstanding balance of the loan. Under the
refinancing, the loan is payable in equal monthly installments of Cdn.
$1,767 (U.S. $1,155 at March 31, 1997), including interest at the
Canadian prime rate plus 1% (5.75% at March 31, 1997).
Scheduled principal maturities of long-term debt at March 31, 1997 are
as follows for each of the following fiscal year-ends:
1998 $ 12,126
1999 5,485
------------
$ 17,611
------------
------------
The loan is secured by the Company's equipment and accounts receivable.
(12) CAPITAL LEASES
The Company leases equipment under capital lease agreements that expire
through January 2002. Aggregate minimum payments to be made under these
agreements at March 31, 1997 are as follows for each of the following
fiscal year-ends:
1998 $ 14,058
1999 8,076
2000 8,076
2001 8,076
2002 7,598
---------
45,884
Less amounts representing interest at rates ranging
from 9% to 11% at March 31, 1997 7,970
---------
$ 37,914
---------
---------
At March 31, 1997, a capital lease for plant equipment is secured by a
letter of credit in the amount of $20,000 which may be reduced by
$10,000 per annum subject to the lessor's prior consent.
36
<PAGE>
CARING PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(13) OPERATING LEASES
The Company leases office facilities and certain equipment under
operating lease agreements that expire through November 2000. Aggregate
minimum rental payments on operating leases as of March 31, 1997 are as
follows for each of the following fiscal year-ends:
1998 $ 90,530
1999 92,484
2000 92,790
2001 33,557
---------
$ 309,361
---------
---------
Total rent expense for operating leases during the years ended March 31,
1995, 1996 and 1997 amounted to $34,758, $80,657 and $134,176,
respectively.
(14) STOCKHOLDERS' EQUITY
(a) BRIDGE FINANCING
In 1995, the Company completed an offering of convertible promissory
notes (Notes) to raise $2,500,000 (Bridge Financing) to provide
interim financing pending the completion of a proposed private
placement (Private Placement).
The Bridge Financing consisted of fifty Units, each comprised of
one 12% $50,000 Note and one common share purchase warrant to
purchase 1,167 common shares of the Company at $0.30 until April
28, 1996 and thereafter at $0.60 until April 28, 1997. Under
their terms, the Notes matured on the earlier of September 29,
1995 or ten days following the completion of the Private
Placement or a private placement in substitution thereof.
The warrants were recorded on issuance at their estimated fair
value of $413,000 with a corresponding reduction in the recorded
value of the Notes, resulting in deemed interest expense of
$413,000 which is included in costs associated with Bridge
Financing in the consolidated statements of operations. In
addition, a finder's fee of $250,000 was paid in connection with
the Bridge Financing and is also included in costs associated
with Bridge Financing in the consolidated statements of
operations, upon refinancing. The balance of the costs associated
with Bridge Financing relates to interest and other costs
incurred by the Company that are specifically attributable to the
Bridge Financing.
All warrants issued in conjunction with the Bridge Financing were
exercised prior to March 31, 1997.
37
<PAGE>
CARING PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On September 28, 1995, the Company completed a short-term loan
with an unrelated party consisting of a $2,500,000 secured
promissory note and warrants to purchase 46,865 common shares of
the Company at a price of Cdn. $7.20 per share until October 1,
1997. The proceeds of the secured promissory note were used to
repay the Notes. Subsequently, the secured promissory note was
repaid in October 1995 by funds from the revolving line of credit.
(b) PRIVATE PLACEMENT
On October 5, 1995, pursuant to a warrant indenture made as of
the same date, the Company sold 1,666,667 Units at a price of
Cdn. $5.265 (approximately U.S. $3.90) per Unit. Upon exercise or
deemed exercise by the holders, each Unit was exchanged for one
common share of the Company and one-half of one Share Purchase
Warrant without additional consideration. Each whole Share
Purchase Warrant entitles the holder to acquire one common share
of the Company at a price of Cdn. $4.86 at any time until October
5, 1996, or at anytime thereafter until October 5, 1997 at the
price of Cdn. $5.67. As consideration for services rendered, the
transaction agent was paid $562,500 in addition to 133,333 whole
Share Purchase Warrants which have the same terms as the warrants
discussed above.
(c) WARRANTS
At March 31, 1997, the Company had warrants outstanding to
purchase common shares as follows:
<TABLE>
<CAPTION>
<S> <C>
Warrants issued in conjunction with the Private Placement whereby
one warrant entitles the holder to purchase one share at Cdn.
$5.67 until October 5, 1997 528,583
Warrants issued pursuant to the second short-term loan whereby one
warrant entitles the holder to purchase one share at Cdn.
$7.20 until October 1, 1997 46,865
----------
Total warrants outstanding at March 31, 1997 575,448
----------
----------
</TABLE>
(d) REVERSE STOCK SPLIT
In June 1997, the Company completed a one for six reverse stock
split of its issued and outstanding common stock. These
consolidated financial statements have been restated to reflect
the reverse stock split.
38
<PAGE>
CARING PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(15) EMPLOYEE BENEFIT PLANS
(a) RETIREMENT PLAN
In March 1997, the Company established a 401(k) savings and
retirement plan covering all full time employees who are at least
21 years of age and have at least three months of service. Under
the plan, employees may defer up to 15% of their pretax salary,
but not more than the statutory limits. The Company did not match
employee contributions to the plan for the year ended March 31,
1997.
(b) STOCK OPTION PLANS
As of March 31, 1997, the Company had two stock option plans
which are described below. The Company applies APB Opinion No. 25
and related interpretations in accounting for its plans.
Accordingly, no compensation cost has been recognized for its
stock option awards. Had compensation cost for the Company's
stock option awards been determined consistent with SFAS No. 123,
the Company's net loss would have been increased to the pro forma
amounts indicated below:
1996 1997
----------- ---------
Net loss:
As reported $ 3,959,940 2,904,886
Pro forma 4,489,512 3,228,949
Net loss per share:
As reported $ 1.84 0.74
Pro forma 2.08 0.82
The fair value of option grants is estimated using the
Black-Scholes option pricing model with the following weighted
average assumptions used for grants in fiscal years 1996 and
1997: expected volatility of 55%; risk free interest rate of
6.50%; expected lives of four years; and a zero percent dividend
yield.
A summary of the plans is as follows:
- 1993 INCENTIVE PROGRAM: Under the 1993 Incentive Program,
as amended and restated, 348,668 shares of common stock
plus 10% of any increase in the number of shares of common
stock issued and outstanding from the date of the program
agreement to the date the program was formally adopted by
the Company's Board of Directors are available for grant to
eligible employees and consultants of the Company. The
aggregate fair market value of stock which becomes
exercisable by an individual grantee pursuant to the plan
is limited to $100,000 in any calendar year.
39
<PAGE>
CARING PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock options under the 1993 Incentive Program vest
immediately for individuals on the Board of Directors
of the Company, after two years of service for all
employees, and after two years of affiliation with the
Company for consultants. Although the Program allows stock
options to be issued for a maximum of ten years, all stock
options outstanding have a maximum term of five years from
the date of grant. Stock options are granted at an exercise
price equal to the ten-day trading average of the Company's
common stock as determined by the Company's Board of
Directors and approved by the Vancouver Stock Exchange.
In November 1996, the Company's Board of Directors resolved
that no additional stock options would be granted under the
1993 Incentive Program. At March 31, 1997, 358,933 stock
options remain outstanding under the 1993 Incentive
Program.
1996 INCENTIVE PROGRAM: Under the 1996 Incentive Program,
833,333 shares of common stock less any shares outstanding
under the 1993 Incentive Program, plus any shares forfeited
under the 1996 and 1993 Incentive Programs, shares
purchased by the Company on the open market and shares
surrendered to the Company in payment of the exercise price
of stock options issued under the 1996 and 1993 Incentive
Programs are available for grant to eligible employees and
consultants of the Company. No award may be granted which
will result in the awards outstanding under the plan to be
more than 25% of the total number of shares the Company has
outstanding.
Stock options under the 1996 Incentive Program vest
immediately for individuals on the Board of Directors of
the Company, after two years of service for all employees,
and after two years of affiliation with the Company for
consultants. Although the Program allows stock options to
be issued for a maximum of ten years, all stock options
outstanding have a maximum term of five years from the date
of grant. Stock options are granted at an exercise price
equal to the ten-day trading average of the Company's
common stock as determined by the Company's Board of
Directors and approved by the Vancouver Stock Exchange.
At March 31, 1997, 212,000 stock options are outstanding
and 262,400 are available for future grant under the 1996
Incentive Program.
40
<PAGE>
CARING PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the Company's stock option plans as of March 31 and changes
during the year ended on those dates is presented below:
<TABLE>
<CAPTION>
1995 1996 1997
------------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Number average Number average Number average
of exercise of exercise of exercise
Stock options Options Price Options Price Options Price
-------------------- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 129,817 $ 7.50 114,000 $ 7.50 344,266 $492
Granted - - 410,266 4.92 280,333 3.00
Canceled - - (114,000) 7.50 - -
Forfeited (15,817) 7.50 (66,000) 4.92 (53,666) 4.62
------------- ------------- ------------
Outstanding at end of year 114,000 7.50 344,266 4.92 570,933 4.02
------------- ------------- ------------
------------- ------------- ------------
Options exercisable at year-end 107,333 7.50 267,600 4.92 476,267 4.20
------------- ------------- ------------
------------- ------------- ------------
Weighted-average fair value of
options granted during the year $ 2.16 $ 1.26
</TABLE>
In March 1996, the Company modified the exercise price on 114,000 stock
options granted in February 1994 from $7.50 to $4.92.
The following is a summary of stock options outstanding at March 31,
1997:
Options outstanding
---------------------------------------------------
Weighted-average
Number out- remaining Number of options
Exercise prices standing contractual life exercisable
------------------- ---------------------------------------------------
$ 4.92 299,767 3.50 296,767
3.00 271,166 4.69 179,500
In April 1997, the Company granted 15,833 stock options at an exercise
price of $3.00 and 4,167 stock options at an exercise price of $6.00.
The options are exercisable on various dates between April 1997 and
June 1999.
(16) INCOME TAXES
The Company had net deferred tax assets, primarily consisting of net
operating loss carryforwards, of approximately $2,482,000 and
$3,468,000 for the years ended March 31, 1996 and 1997, respectively.
Total U.S. Federal net operating loss carryforwards of approximately
$6,300,000 at March 31, 1997 expire in the years 2009 to 2012. Total
Canadian operating loss carryforwards of approximately $3,900,000
expire in the years 2009 to 2012.
41
<PAGE>
CARING PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has not recorded an income tax benefit in 1995, 1996 and
1997 due to the recording of a valuation allowance as an offset to the
net deferred tax assets. A valuation allowance is provided due to
uncertainties relating to the realization of the deferred tax assets.
The utilization of net operating loss carryforwards may be limited due
to ownership changes that have occurred as a result of the sale of
common stock.
(17) FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments include cash, receivables, accounts
payable and short- and longterm borrowings. The fair value of these
financial instruments approximates their carrying amounts based on
current market indicators, such as prevailing interest rates.
(18) LITIGATION
The Company is subject to various claims and contingencies related to
lawsuits, taxes and other matters arising in the normal course of
business. Management believes the ultimate liability, if any, arising
from such claims or contingencies is not likely to have a material
adverse effect on the Company's results of operations or financial
condition.
(19) Geographic Information
The Company operates in one industry: the marketing of proprietary
urinary incontinence products for adults and children over the age of
four. A summary of the Company's operations by geographic area follows:
Year ended March 31
----------------------
1996 1997
----------------------
Revenues:
U.S. $ 914,311 1,916,263
Canada 204,175 371,234
-------------------------
Total revenues $ 1,118,486 2,287,497
-------------------------
-------------------------
Year ended March 31
-------------------------
1996 1997
-------------------------
Net loss:
U.S. $ 2,954,312 2,082,450
Canada 1,005,628 822,436
-------------------------
Total net losses $ 3,959,940 2,904,886
-------------------------
-------------------------
42
<PAGE>
CARING PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31
-------------------------
1996 1997
-------------------------
Assets:
U.S. $ 3,015,807 4,939,873
Canada 3,453,347 1,448,664
-------------------------
Total assets $ 6,469,154 6,388,537
-------------------------
-------------------------
March 31
-------------------------
1996 1997
-------------------------
Net assets of Canadian subsidiary $ 4,245,524 1,340,171
-------------------------
-------------------------
43
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT.
The following table sets forth information concerning the directors and
executive officers of the Company as of July 4, 1997:
NAME AGE POSITION
-------------- --------------- ----------------
William H.W. Atkinson(1)(2) 54 Chairman of the Board
and Chief Executive Officer
Susan A. Schreter(1) 36 President, Director
Anthony A. Cetrone (1)(3) 68 Director
Michael M. Fleming(2)(3) 48 Director
Paul Stanton (2) 59 Vice Chairman of the Board
- ------------------------
(1) Member of the Executive Committee.
(2) Member of the Audit Committee.
(3) Member of the Compensation Committee.
The Company's by-laws provide that the size of the Board of Directors shall
initially be fixed by the Incorporator, and thereafter may be changed by
resolution of the Board. The Company's Board of Directors currently is fixed at
eight members, and there are three vacancies. Members of the Board serve until
the next annual meeting of stockholders and until their successors are elected
and qualified. Meetings of the Board are held when and as deemed necessary or
appropriate, but the Board has two regularly scheduled meetings per year.
Officers are appointed by and serve at the discretion of the Board. There are no
family relationships among any of the Company's officers and directors.
WILLIAM H. W. ATKINSON co-founded the Company in November 1992 and has been
Chairman of the Board since inception. He became the Company's Chief Executive
Officer in May 1994. Since January 1994, Mr. Atkinson also has served as the
Chairman of the Board of Caring Products Industries, Inc., Burnaby, British
Columbia, a subsidiary of the Company that engages in healthcare product
manufacturing and distribution. From September 1987 through April 1994, Mr.
Atkinson was Vice-Chairman and a Trustee of Mercer International, Vancouver,
British Columbia, a
44
<PAGE>
NASDAQ-traded company with interests in the financial services, natural
resources and pulp and paper businesses in Europe.
SUSAN A. SCHRETER co-founded the Company in November 1992 and has served
as President, Chief Operating Officer and a director since inception. From July
1985 to December 1992, she was founder and President of Beta International
Inc., New York, New York, a firm providing consulting services to growing
companies, private business investors and buy-out funds in the areas of
acquisition due diligence, cash flow planning, strategic business planning
and capital investment.
ANTHONY A. CETRONE, a director of the Company since September 1993, has
been President and Chief Executive Officer of Micron Medical Products ("Micron
Medical"), Fitchburg, Massachusetts, a medical products company, since April
1988. Micron Medical has been a subsidiary of Arrhythmia Research Technology,
Inc., Austin, Texas, a company that manufactures cardiological medical products
("Arrhythmia Research") since November 1992. Since June 1990, he has also served
as Chairman of the Board of Micron Medical. From January 1993 to February 1995,
Mr. Cetrone also served as the President, Chief Executive Officer and a director
of Arrhythmia Research from November 1992 to March 1995, and has served as
Chairman of the Board of Arrhythmia Research since October 1996.
MICHAEL M. FLEMING has been affiliated with the law firm of Ryan, Swanson &
Cleveland, Seattle, Washington, since November 1992, where he has specialized in
real estate, dispute resolution, securities and environmental matters. He was
associated with the firm on an "of counsel" basis from November 1992 until
January 1996, at which time, he became a partner of the firm. Since July 1988,
Mr. Fleming has also served as the President and owner of Kidcentre, Inc., a
company in the business of providing child care services in Seattle, Washington.
Since April 1985, he has also been the President and owner of Fleming Investment
Co., Seattle, Washington, an investment company. In 1997, he was elected to the
Board of Directors of Urban Juice & Soda Co., a public company trading on the
Vancouver Stock Exchange and based in Vancouver, British Columbia. Mr. Fleming
was elected to the Company's Board of Directors in November 1992.
PAUL STANTON was elected to the Board of Directors in September 1996 and is
currently serving as Vice Chairman of the Board. He also has served as a
consultant to the Company since June 1996. Mr. Stanton has been employed by Paul
Stanton & Associates, which provides strategic analysis and consulting services
to product manufacturers and retail drug chains since June 1996. From February
1986 through June 1996, he was Vice President of General Merchandise and Drug
Store Merchandising of Pathmark, an east coast supermarket chain.
In addition, it is contemplated that Dr. Herbert Sohn will be elected to
the Board of Directors of the Company in August 1997. Since 1989, Dr. Sohn
has served as an attending urologist at the Louis A. Weiss Memorial Hospital
in Chicago. He has also served as a clinical associate professor of surgery
at the Abraham Lincoln School of Medicine at the University of Illinois since
1973. A graduate of the Chicago Medical School, Dr. Sohn completed
residencies in urology and surgery at the University Hospitals of Cleveland.
He also received a Juris Doctorate degree from the John Marshall Law School.
45
<PAGE>
COMMITTEES OF THE BOARD OF DIRECTORS
The Company's Board of Directors has established three committees:
Executive Committee, Compensation Committee and Audit Committee. The Board
appoints the members of the various committees and those members serve at the
discretion of the Board.
The Executive Committee has been delegated the authority to exercise all
powers and authority of the Board of Directors in the management of the business
and affairs of the Company, including the right to authorize: (i) the purchase
of stock; (ii) adopt an agreement of merger or consolidation; (iii) recommend to
the stockholders the sale, lease or exchange of all or substantially all of the
Company's properties or assets; (iv) recommend to the stockholders a dissolution
of the Company or a revocation of dissolution; (v) amend the by-laws; or (vi)
authorize the declaration of a dividend. The Executive Committee meets at such
times as it deems appropriate.
The Compensation Committee has been established to review and make
recommendations to the Board regarding the compensation to be paid by the
Company and its subsidiaries to their executive officers, key employees and
consultants, including, without limitation, the grant of incentive awards under
the Company's incentive program. See "Item 10. Executive Compensation- Stock
Option Plans." The Compensation Committee consists solely of independent
directors and meets at such times as it deems appropriate.
The Audit Committee has been established to review and monitor the general
policies and practices of the Company and its subsidiaries with regard to
accounting, financial reporting, internal auditing and financial controls and to
serve as a channel of communication between the Board of Directors and the
Company's independent certified accountants. At least a majority of the Audit
Committee consists of independent directors. The Audit Committee meets at least
two times per year and at such other times as it deems appropriate.
ITEM 10.EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE. The following table sets forth the annual and
long-term compensation for services in all capacities to the Company for the
three fiscal years ended March 31, 1995, 1996 and 1997 of the Company's Chief
Executive Officer and President (the "Named Executive Officers").
46
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE*
LONG-TERM COMPENSATION
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------ ----------- ----------
NAME AND ALL OTHER
PRINCIPAL SALARY BONUS OPTIONS/SARS COMPENSATION
POSITION YEAR ($) ($) (#) ($)
----------- ----- ---------- ------- ------------- ------------
<S> <C> <C> <C> <C> <C>
William 1997 $ 125,000 $0 54,333 $0
H.W. 1996 96,000 0 44,300 0
Atkinson 1995 96,000 0 29,333 0
Chief
Executive
Officer and
Chairman
Susan A. 1997 $ 125,000 $0 54,333 $0
Schreter 1996 96,000 0 44,300 0
President 1995 96,000 0 29,333 0
and Chief
Operating
Officer
</TABLE>
* Columns in the Summary Compensation Table that were not relevant to
the compensation paid to the Named Executive Officers were omitted.
No employee of the Company receives any additional compensation for his
or her services as a director. Non-management directors receive no salary for
their services as such, but receive a fee of $2,000 for each meeting
attended, and may participate in the 1996 Incentive Program described below.
The Board of Directors has also authorized payment of reasonable travel or
other out-of-pocket expenses incurred by non-management directors in
attending meetings of the Board of Directors and committees thereof.
In March 1997, the Company established a 401(k) savings and retirement
plan covering all full-time employees who are at least 21 years of age and
have at least three months of service. Under the plan, employees may defer up
to 15% of their pretax salary, but not more than the statutory limits. The
Company did not match employee contributions to the plan for the year ended
March 31, 1997.
EMPLOYMENT AGREEMENTS. In December 1993, the Company entered into
three-year employment agreements with Mr. Atkinson and Ms. Schreter, the
Company's Chief Executive Officer and President, respectively. Both
agreements were subsequently amended as of March 1996 to provide, among other
things, for an additional three-year term. Each agreement may be terminated
for "cause" (as defined in the agreements) and under other circumstances set
forth in the agreements. Under the terms of the agreements, Mr. Atkinson and
Ms. Schreter are both entitled to receive an annual base salary of $125,000,
or such higher salary as may be approved by the Board of Directors from time
to time. Each year during the term of their agreements, Mr. Atkinson and Ms.
Schreter are entitled to receive stock options in an amount equal to at least
20% of the aggregate number of options offered under the Company's option and
47
<PAGE>
incentive plans to all officers, key executives, directors, professional or
administrative employees or consultants or advisors, any of its subsidiaries
or any of its agents (as defined in the respective plans), or to receive a
cash payment to compensate for the shortfall in the event this provision is
not complied with. Mr. Atkinson and Ms. Schreter also are entitled to
participate in any bonus or profit sharing plan that may be adopted from time
to time by the Company, and to specified additional bonus payments and option
grants upon termination under certain specified circumstances. Upon a change
in control, as defined in the agreements, Mr. Atkinson and Ms. Schreter will
be entitled to receive, in addition to the other compensation and benefits
due to them, his or her then-effective base salary for a period of three
years from the date of termination, plus all benefits, other than the bonus
and stock options (or the value thereof), to which they would have been
entitled had they continued their employment. In addition, the agreements
provide that Mr. Atkinson and Ms. Schreter are entitled to receive all
rights, privileges and fringe benefits afforded to other senior executives of
the Company and to payment or reimbursement for reasonable expenses incurred
in the performance of his or her respective services under the agreement. The
agreements also contain confidentiality provisions.
OPTION GRANTS. The following table shows, for the fiscal year ended March
31, 1997, certain information regarding options granted to the Named
Executive Officers.
OPTION GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
<TABLE>
<CAPTION>
NUMBER OF PERCENT TO
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO
OPTIONS EMPLOYEES IN EXERCISE OR BASE EXPIRATION
NAME GRANTED (#) FISCAL YEAR (1) PRICE ($/SHARE) DATE
- ------------- --------------- ---------------- ---------------- ------------
<S> <C> <C> <C> <C>
William H.W. 54,333(2) 19.4% $.50 11/13/01
Atkinson
Susan A. Schreter 54,333(2) 19.4% $.50 11/13/01
</TABLE>
- ------------
(1) Based on options to purchase 280,333 shares of Common Stock granted
to employees, including executive officers, in fiscal 1997.
(2) The terms of such options are consistent with those of options
granted to other employees and directors under the Company's
Stock Option Plans. The options vested immediately because of length
of service. The Stock Option Plans contain provisions permitting the
Board of Directors to, among other things, accelerate vesting of
options in the event of a change in control of the Company.
FISCAL YEAR-END OPTIONS/OPTION VALUES TABLE. The following table sets
forth information regarding exercises of stock options during the fiscal year
ended March 31, 1997 by the Named Executive Officers and the year-end value of
exercised and unexercised options by such Named Executive Officers.
48
<PAGE>
AGGREGATED OPTION/SAR EXERCISES IN FISCAL YEAR ENDED MARCH 31, 1997
AND FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
FISCAL YEAR END FISCAL YEAR
SHARES (#) END ($)
ACQUIRED ON VALUE REALIZED EXERCISABLE/ EXERCISABLE/
NAME EXERCISE(#) ($) UNEXERCISABLE UNEXERCISABLE
- --------------- ---------- --------------- ----------------- -----------------
<S> <C> <C> <C> <C>
William H.W. 0 $0 127,966(1)/0(2) $0(1)/$0(2)
Atkinson
Susan A. Schreter 0 0 127,966(1)/0(2) $0(1)/$0(2)
</TABLE>
- ---------
(1) Exercisable options.
(2) Unexercisable options.
STOCK OPTION PLANS
The Company's 1993 Incentive Program (the "1993 Stock Option Plan") was
adopted by the Board of Directors and approved by the Company's stockholders
in November 1993. The Company's 1996 Incentive Program (the "1996 Stock
Option Plan") was adopted by the Board of Directors and approved by the
Company's stockholders in November 1996. Pursuant to the terms of the 1996
Stock Option Plan, no further awards will be made under the 1993 Stock Option
Plan. The 1993 Stock Option Plan and the 1996 Stock Option Plan are sometimes
collectively referred to in this Form 10-KSB as the "Stock Option Plans." The
Stock Option Plans were adopted to provide a means by which selected
officers, employees, directors and consultants to the Company could be given
an opportunity to purchase stock in the Company. The purpose of the Stock
Option Plans is to promote the growth of the Company by enabling the Company
to attract and retain the best available persons for positions of substantial
responsibility and to provide certain key employees with additional
incentives to contribute to the success of the Company.
Under the 1993 Stock Option Plan, 348,668 shares of Common Stock were
initially reserved for issuance. The 1993 Stock Option Plan further provides
for an increase of 10% of any increase in the number of shares issued and
outstanding over the number of shares outstanding on December 20, 1993, the
date the 1993 Stock Option Plan was adopted. As of March 31, 1997, a total of
358,933 options were outstanding under the 1993 Stock Option Plan. No further
awards will be made under the 1993 Stock Option Plan.
Under the 1996 Stock Option Plan, the aggregate number of shares of
Common Stock that may be issued or transferred is 833,333; plus (i) any
shares of Common Stock which are forfeited under the 1993 Stock Option Plan
or the 1996 Stock Option Plan after the Board's adoption of the
49
<PAGE>
1996 Stock Option Plan; plus (ii) the number of shares of Common Stock
repurchased by the Company in the open market and otherwise with an aggregate
price no greater than the cash proceeds received by the Company from the sale
of shares under the 1993 Stock Option Plan or the 1996 Stock Option Plan;
plus (iii) any shares of Common Stock surrendered to the Company in payment
of the exercise price of options issued under the 1993 Stock Option Plan or
the 1996 Stock Option Plan; provided, that the aggregate number of shares
available for grants at any given time will be reduced by the aggregate of
all shares previously issued or transferred pursuant to the Stock Option
Plans plus the aggregate of all shares which may become subject to issuance
or transfer under then-outstanding and then-currently exercisable grants
under the Stock Option Plans; and provided, further, that no award may be
issued that would bring the total of all outstanding awards under the 1996
Stock Option Plan to more than 25% of the total number of the shares of
Common Stock at the time outstanding. The maximum number of shares for which
options may be granted under the 1996 Stock Option Plan to any person during
any calendar year is 166,667. As of March 31, 1997, a total of 212,000
options were outstanding under the 1996 Stock Option Plan.
The Stock Option Plans provide for the grant of incentive stock options,
nonqualified stock options, stock appreciation rights in tandem with stock
options or freestanding, restricted stock grants and restored grants
(collectively, "Grants") as approved by the Board of Directors or a committee
thereof (the "Committee"). Incentive stock options granted under the Stock
Option Plans are intended to qualify as "incentive stock options" within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"). Non-qualified stock options granted under the Stock Option Plans are
intended not to qualify as incentive stock options under the Code.
Eligible participants under the Stock Option Plans include executive,
professional or administrative employees, directors, executive officers,
consultants or advisors of the Company and its direct or indirect
subsidiaries, all of whom are collectively referred to as "Grantees."
Incentive stock options may be granted under the Stock Option Plans only to
selected employees (including officers) of the Company and its affiliates.
All Grantees may be awarded Grants other than incentive stock options.
The maximum term of incentive stock options under the Stock Option Plans
is 10 years, except that in certain cases, as discussed below, the maximum
term is five years. The exercise price of incentive stock options under the
Stock Option Plans may not be less than the fair market value of the Common
Stock subject to the option on the date of the option grant and, in some
cases, as discussed below, may not be less than 110% of such fair market
value. The exercise price of non-qualified options under the Stock Option
Plans is determined by the Board.
No incentive stock option may be granted under the Stock Option Plans to
any person who, at the time of the grant, owns (or is deemed to own) stock
possessing more than 10% of the total combined voting power of the Company or
any affiliate of the Company, unless the option exercise price is at least
110% of the fair market value of the stock subject to the option on the date
of grant, and the term of the option does not exceed five years from the date
of grant. For incentive stock options granted under the Stock Option Plans,
the aggregate fair market value, determined at the time of grant, of the
shares of Common Stock with respect to which such options are exercisable for
the first time by any Grantee during any calendar year (under all such plans
of the Company and its affiliates) may not exceed $100,000.
50
<PAGE>
Grants under the 1993 Stock Option Plan terminate within such period
determined by the Board up to 90 days after the grantee ceases to be employed
by the Company or any affiliate of the Company, unless (i) the termination of
employment is due to such person's permanent and total disability (as defined
in the Code), in which case the Grant may be exercised at any time within
twelve months of such termination; (ii) the grantee dies while employed by
the Company or any affiliate of the Company, in which case the Grant may be
exercised (to the extent the option was exercisable at the time of the
grantee's death) within such period determined by the Board between six and
twelve months of the grantee's death by the person or persons to whom the
rights to such option passed by will or by the laws of descent and
distribution; or (iii) the Grant by its terms specifically provides
otherwise. Grants under the 1996 Stock Option Plan may be exercised only
while the Grantee is in the employment or consultancy of the Company, except
that the Board or Committee may provide for partial or complete exceptions to
this requirement. The Stock Option Plans terminate on the tenth anniversary
of their respective effective dates unless terminated earlier by the Board or
extended by the Board.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information, as of July 4, 1997
with respect to the beneficial ownership of the Company's Common Stock by (i)
each stockholder known by the Company to be the beneficial owner of more than
five% of the Company's Common Stock, (ii) each director, (iii) the Named
Executive Officers and (iv) all executive officers and directors as a group.
51
<PAGE>
NUMBER OF PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES (1) OWNED
------------------------------------------ ----------- -------
AGF Growth Equity Fund Ltd.(2)................... 284,000 6.88%
443 Queen Street West, 31st Fl.
Toronto, ON M5K 1E9
Canada
BPI Canadian Small Cap Fund(2)................... 413,833 10.03%
161 Bay Street, Suite 9000
Toronto, ON M5J 2S1
Canada
Canagex Associates(2)............................ 390,850 9.47%
800 Victoria Square, Suite 4500
Montreal, PQ H4Z 1C3
Canada
Royal Canadian Small Cap Fund (Royal Bank
Investments)(2)................................. 338,333 8.20%
77 King Street West, Suite 3800
Toronto, ON M5K 1H1
Canada
Sagit Investment Management Ltd.(2).............. 383,300 9.29%
789 West Pender Street
Vancouver, BC V6C 1H2
Canada
Susan A. Schreter(3)(4).......................... 283,546 6.67%
200 First Avenue West, Suite 200
Seattle, Washington 98119
William H.W. Atkinson(5)(6)...................... 279,566 6.57%
5850 Byrne Road, Unit 8
Burnaby, British Columbia
Canada V5J 3J3
Anthony A. Cetrone(7)............................ 38,044 *
Michael M. Fleming(8)............................ 38,044 *
Paul Stanton(9).................................. 29,167 *
All Executive Officers and Directors
as a group (5 persons)(10)....................... 668,366 14.90%
- --------------------------
* Less than 1%.
(1) Beneficial ownership of directors, officers and 5% or more stockholders
includes both outstanding Common Stock and shares issuable upon exercise of
warrants or options that are currently exercisable or will become exercisable
within 60 days of July 4, 1997. Except as indicated in the footnotes to this
table and pursuant to applicable community property laws, the persons named
in the table have sole voting and investment power with respect to all shares
of Common Stock beneficially owned by them.
(2) The stockholder is a large Canadian institution with shares widely held
by its clients.
(3) Of these shares, 46,672 are held in trust by Montreal Trust Company of
Canada, subject to the direction or determination of the Quebec Securities
Commission. The escrowed shares will be released on September 30, 1997. See
"--Escrowed Shares.'' The remaining shares, excluding shares issuable upon
exercise of outstanding options, are pledged to secure the repayment of the
Company's $1.25 million promissory note to Bradstone Equity Partners Inc.
(4) Includes 120,800 shares issuable upon exercise of currently exercisable
stock options.
52
<PAGE>
(5) Of these shares, 45,482 are held in trust by Montreal Trust Company of
Canada, subject to the direction or determination of the Quebec Securities
Commission. The escrowed shares will be released on September 30, 1997. See
"--Escrowed Shares.'' The remaining shares, excluding shares issuable upon
exercise of outstanding options, are pledged to secure the repayment of the
Company's $1.25 million promissory note to Bradstone Equity Partners Inc.
(6) Includes 127,967 shares issuable upon exercise of currently exercisable
stock options.
(7) Includes 37,665 shares issuable upon exercise of currently exercisable
stock options.
(8) Includes 37,665 shares issuable upon exercise of currently exercisable
stock options.
(9) Includes 29,167 shares issuable upon exercise of currently exercisable
stock options.
(10) Includes 360,429 shares issuable upon exercise of currently exercisable
stock options.
The Company's authorized capital consists of 75,000,000 shares of Common
Stock, par value $.01 per share, and 1,000,000 shares of Preferred Stock, par
value $0.01 per share.
COMMON STOCK
As of June 30, 1997, the Company had outstanding 4,125,375 shares of
Common Stock (after giving effect to the Reverse Stock Split). Each share of
Common Stock is entitled to one vote at all meetings of stockholders.
Stockholders are not permitted to cumulate votes in the election of
directors. All shares of Common Stock are equal to each other with respect to
liquidation rights and dividend rights. There are no preemptive rights to
purchase any additional shares of Common Stock. In the event of liquidation,
dissolution or winding up of the Company, holders of the Common Stock will be
entitled to receive on a pro rata basis all assets of the Company remaining
after satisfaction of all liabilities and preferences of the outstanding
Preferred Stock, if any. The outstanding shares of Common Stock and, assuming
issuance in accordance with the terms of the applicable instrument, the
shares of Common Stock issuable in this offering are or will be, as the case
may be, duly and validly issued, fully paid and nonassessable.
PREFERRED STOCK
Shares of Preferred Stock may be issued from time to time in one or
more series with such designations, voting powers, if any, preferences and
relative, participating, optional or other special rights, and such
qualifications, limitations and restrictions thereof, as are determined by
resolution of the Board of Directors. The issuance of such shares of
Preferred Stock, while providing desired flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
making it more difficult for a third party to acquire a majority of the
outstanding voting stock of the Company, thereby delaying, deferring or
preventing a change in control of the Company. Furthermore, holders of such
Preferred Stock may have other rights, including economic rights senior to
the Common Stock, and, as a result, the issuance thereof could have a
material adverse effect on the value of the Common Stock.
WARRANTS
In connection with the Private Financing (see "Item 6. Management's
Discussion and Analysis or Plan of Operation - Liquidity and Capital
Resources"), the Company issued 1,666,667 Special Warrants, which were
exercisable, for no additional consideration, into units of Common Stock and
warrants (the Unit Warrants"). The Special Warrants were exercisable into an
aggregate of up to 1,666,667 shares of Common Stock and were deemed exercised
as of February
53
<PAGE>
27, 1996. The underlying Unit Warrants were exercisable at an
exercise price of Cdn. $4.86 until October 5, 1996 and are exercisable at an
exercise price of Cdn. $5.67 until October 5, 1997. As of March 31, 1997,
Unit Warrants remain outstanding to purchase 542,833 shares of Common Stock.
In connection with the Private Placement, the Company issued a special
right (the "Special Right") to the placement agent as partial consideration
for its services. Upon the deemed exercise of the Special Right, the agent
received warrants to purchase up to 133,333 shares of Common Stock on the
same terms as the Unit Warrants described above.
ESCROWED SHARES
As of March 31, 1997, an aggregate of 92,154 shares of Common Stock
owned by Mr. Atkinson (45,482) and Ms. Schreter (46,672) are held in escrow
by Montreal Trust Company of Canada, subject to direction or determination of
the Quebec Securities Commission. The escrowed shares of Common Stock will be
released on September 30, 1997.
ITEM 12.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Paul Stanton, the Vice Chairman of the Board of Directors of the
Company, has provided consulting services to the Company since June 1996.
Pursuant to an oral arrangement with the Company, Mr. Stanton received
consulting fees of $72,000 in Fiscal 1997 and currently receives a consulting
fee of $6,000 per month.
During Fiscal 1997, the Company purchased plant equipment in the
aggregate amount of $106,043 from Schreter & Associates, a company controlled
by Robert E. Schreter, the father of Susan A. Schreter, the Company's
President.
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K.
(a) EXHIBITS:
3.1(1) Restated Certificate of Incorporation
3.1.1(2) Certificate of Amendment of Certificate of Incorporation
3.2(1) By-laws, as currently in effect
4.1 (1) Specimen Common Stock Certificate
4.2(2) Form of Warrants to Purchase Shares of the Registrant, including
registration rights
4.3(2) Agreement, dated October, 1994 between Project 93 Management,
Ltd. and the Registrant pertaining to registration rights of certain
of the Selling Stockholders(3)
10.1(4) Restated and Amended Employment Agreement between the Registrant and
William H.W. Atkinson dated as of March 13, 1996
10.2(4) Restated and Amended Employment Agreement between Susan A. Schreter
and the Registrant dated as of March 13, 1996
10.3(1) Supply Agreement between the Registrant and Merfin Hygienic Products,
dated August 30, 1993
10.4(1) Assignment by Prakash Banga to the Registrant, dated January 5, 1994
10.5(1) 1993 Incentive Program and accompanying form of Stock Option
Agreement(5)
54
<PAGE>
10.6(1) Lease Agreement between the Registrant and First Avenue West Building
L.L.C., dated May 15, 1995 for the premises located at 200 First
Avenue West, Seattle, Washington
10.7(1) Lease Agreement between the Registrant and Holly Enterprises Ltd. for
the premises located at 5850 Byrne Road, Burnaby, British Columbia,
dated August 18, 1994
10.8(1) Form of short-term Promissory Note between the Registrant and certain
private placement investors, dated April 28, 1995(6)
10.9(2) Manufacturing Agreement between the Registrant and LeGenereux
Clothing Co., Ltd., dated November 3, 1994
10.10(2) Share Purchase Warrant Indenture dated October 5, 1995 between the
Registrant and Montreal Trust Company of Canada
10.11(2) Revolving Line of Credit Agreement and Promissory Note dated October
5, 1995 between the Registrant and Seattle-First National Bank
10.12(7) 1996 Incentive Program (5)
21.1 List of Subsidiaries
27.1 Financial Data Schedule
- ---------------------
(1) Filed as an exhibit to the originally filed Registration Statement on
Form SB-2, File No. 33-96882-LA (the "SB-2 Registration Statement"),
filed with the Commission on September 12, 1995.
(2) Filed as an exhibit to Amendment No. 1 to the Form SB-2 Registration
Statement, filed with the Commission on March 20, 1996.
(3) A schedule of the specific investors who received these Warrants is
attached as an appendix to this exhibit.
(4) Filed as an exhibit to Amendment No. 3 to the Form SB-2 Registration
Statement, filed with the Commission on November 12, 1996.
(5) Managerial contract or compensatory plan or arrangement in which the
Company's directors and officers participate.
(6) A schedule of investors and the amounts of their respective notes is
attached to this exhibit. These notes have been repaid by the
Registrant and have therefore been canceled.
(7) Filed as an exhibit to the original filing of the Registrant's
Form 10-KSB for the fiscal year ended March 31, 1997, filed with the
Commission on July 15, 1997.
(b) REPORTS ON FORM 8-K:
No reports on Form 8-K were filed during the last quarter of the fiscal
year ended March 31, 1997.
55
<PAGE>
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Burnaby, British Columbia, Canada, on September 8, 1997.
CARING PRODUCTS INTERNATIONAL, INC.
By: /s/ William H.W. Atkinson
--------------------------------------
William H.W. Atkinson
Chairman of the Board and
Chief Executive Officer
In accordance with the requirements of the Exchange Act, this report
has been signed by the following persons on behalf of the registrant and in
the capacities and on the dates indicated:
SIGNATURE TITLE DATE
--------- ----- ----
/s/ William H.W. Atkinson Chairman of the Board September 8, 1997
- -------------------------
William H.W. Atkinson and Chief Executive Officer
(Principal Executive Officer
and Principal Financial and
Accounting Officer)
/s/ Susan A. Schreter President and Director September 8, 1997
- --------------------------
Susan A. Schreter
/s/ Anthony A. Cetrone Director September 8, 1997
- --------------------------
Anthony A. Cetrone
/s/ Michael M. Fleming Director September 8, 1997
- --------------------------
Michael M. Fleming
/s/ Paul Stanton Director September 8, 1997
- --------------------------
Paul Stanton
/s/ Herbert Sohn Director September 8, 1997
- --------------------------
Herbert Sohn
56
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF CARING PRODUCTS INTERNATIONAL. INC.
NAME STATE/JURISDICTION OF INCORPORATION
---- -----------------------------------
Caring Products Industries, Ltd. British Columbia
C. P. International, Inc. Delaware
57
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> MAR-31-1996 MAR-31-1997
<PERIOD-START> APR-01-1995 APR-01-1996
<PERIOD-END> MAR-31-1996 MAR-31-1997
<CASH> 3,783,769<F1> 2,813,224<F1>
<SECURITIES> 0 0
<RECEIVABLES> 389,644 716,779
<ALLOWANCES> 108,966 91,694
<INVENTORY> 1,808,992 2,432,583
<CURRENT-ASSETS> 5,996,163 5,889,953
<PP&E> 319,855 464,334
<DEPRECIATION> 122,948 212,831
<TOTAL-ASSETS> 6,469,154 6,388,537
<CURRENT-LIABILITIES> 2,955,038 4,262,982
<BONDS> 22,712 30,353
0 0
0 0
<COMMON> 36,782 41,254
<OTHER-SE> 3,454,622 2,053,948
<TOTAL-LIABILITY-AND-EQUITY> 6,469,154 6,388,537
<SALES> 1,118,486 2,287,497
<TOTAL-REVENUES> 1,118,486 2,287,497
<CGS> 1,031,896 1,727,607
<TOTAL-COSTS> 3,241,483 3,362,288
<OTHER-EXPENSES> 805,047<F2> 102,488
<LOSS-PROVISION> 99,936 117,647
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (3,959,940) (2,904,886)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (3,959,940) (2,904,886)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (3,959,940) (2,904,886)
<EPS-PRIMARY> (1.84) (0.74)
<EPS-DILUTED> 0 0
<FN>
<F1>Cash and cash items balance includes $2,701,350 and $2,694,671 in restricted
cash at March 31, 1996 and 1997, respectively.
<F2>Other expenses include $864,735 in costs associated with the Bridge
Financing for the year ended March 31, 1996.
</FN>
</TABLE>
