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2000
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934.
FOR THE FISCAL YEAR ENDED JANUARY 31, 2000
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934. For the transition period from January 31, 1999 to January
31, 2000.
COMMISSION FILE NUMBER 0-15673
INTERNATIONAL ABSORBENTS INC.
(Name of Small Business issuer as specified in its charter)
British Columbia, Canada Not applicable
(State or other jurisdiction of incorporation) (IRS Employer Identification No.)
1569 Dempsey Road
North Vancouver, British Columbia
Canada V7K 1S8
Telephone: (604) 681-6181
(Address of principal executive offices)
Securities registered under to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class: Name of exchange on which registered
-------------------- ------------------------------------
Common Shares, without par value Over the Counter Bulletin Board
Check whether the issuer (1) has 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 [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not 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
or any amendment to this Form 10-KSB. [ ]
State the issuer's revenues: Sales of $7,761,000 were for the fiscal year ended
January 31, 2000.
The aggregate market value of the voting stock (Common Shares) held by
non-affiliates of the Registrant was $19,390,112 on April 3, 2000 computed by
reference to the closing sale price of the Common Shares on the OTC Bulletin
Board on such date. The aggregate number of Common Shares outstanding on April
3, 2000 was 22,287,485.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement prepared for the Company's Annual General
Meeting of Shareholders to be held June 12, 2000 are incorporated by reference
in Part III. The Exhibit Index is located on page 35.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
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INTERNATIONAL ABSORBENTS INC.
Annual Report on Form 10-KSB
FOR THE FISCAL YEAR ENDED JANUARY 31, 2000
TABLE OF CONTENTS
<TABLE>
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ITEM PAGE
NUMBER NUMBER
PART I
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1. Business................................................................................................3
2. Properties.............................................................................................11
3. Legal Proceedings......................................................................................11
4. Submission of Matters to a Vote of Security Holders....................................................11
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters..................................11
6. Management's Discussion and Analysis of Financial Condition and
Results of Operation...................................................................................13
7. Financial Statements...................................................................................17
8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure...................................................................................32
PART III
9. Directors and Executive Officers of the Registrant.....................................................32
10. Executive Compensation.................................................................................32
11. Security Ownership of Certain Beneficial Owners and Management.........................................32
12. Certain Relationships and Related Transactions.........................................................32
PART IV
13. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.......................................33
SIGNATURES......................................................................................................34
EXHIBIT INDEX...................................................................................................35
</TABLE>
Unless otherwise indicated, all dollar amounts in this report are U.S. dollars.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
International Absorbents, Inc., primarily through a wholly-owned U.S.
subsidiary, Absorption Corp ("Absorption"), is engaged in the development,
manufacturing, and marketing of reclaimed industrial waste cellulose sorbent
products for the animal bedding, pet litter markets and general industrial or
maintenance repair operating ("MRO"), marine spill clean-up markets. The Company
was incorporated on May 13, 1983 under the laws of British Columbia, Canada.
Absorption was incorporated in the State of Nevada, and is licensed to do
business in the State of Washington and is the Company's core operating
subsidiary. It leases two properties from the Port of Bellingham, Washington: a
manufacturing site on which it has built and owns a 13,000 square foot
manufacturing plant and administration facility, and a 12,000 square foot leased
building which houses inventory and Absorption's cellulose pad and roll
manufacturing equipment. It also leases a 4,000 square foot structure from a
private company in Lynden, Washington in which it manufactures animal litter
products.
Total Absorb Inc. ("TAI") is another wholly-owned subsidiary, formed on January
31, 1993 pursuant to the laws of British Columbia by the amalgamation of three
preceding subsidiaries. These companies operated at differing periods of time as
manufacturers and marketers of the Company's products in Canada. The industrial
sales operations of TAI were closed in February 1993 as a result of the
appointment of an independent, international marketing organization as the
Company's exclusive sales agent for Canada. TAI continues to operate on an
administrative basis only, processing Canadian sales of animal care products.
DEVELOPMENTS DURING FISCAL 2000
During the year, ended January 31, 2000, a number of events and factors affected
the Company's financial resources and operating results as follows:
SALES REVENUES for fiscal 2000 were $7,761,000, an increase of 30% over the
fiscal 1999 total of $5,969,000, as greater product sales volume was achieved
for the Company's Animal Care product lines. The Company earned a PROFIT during
fiscal 2000 of $1,334,000 or $0.07 per common share as compared to a profit for
fiscal 1999 of $519,000 or $0.03 per common share.
Towards achieving continued future profitability and revenue growth, the Company
completed the following during fiscal 2000:
a) The Animal Care sales efforts focused on increasing shelf space
with existing pet retailers, increased promotional activity with
key retailers, and filling in distribution voids in geographical
markets not adequately serviced.
b) International sales by the Industrial Division have continued to
expand.
c) Gross margins continued to improve as more efficiencies were
achieved in the production process. These improvements were a
result of increased production rates, new equipment, and improved
methods.
d) Last year's restructuring of management and continued focus on
general and administrative expenses has contributed to our
increasing profits. This, along with the already discussed
improvements in gross margin, has enhanced our profitability.
GROSS PROFIT on total sales for fiscal 2000 were $3,412,000 (or 44%) versus
$2,263,000 (or 38%) for the prior fiscal year. This increase was primarily due
to continued improvements in manufacturing processes and value related
efficiencies, as well as higher sales revenues.
Total CORPORATE AND ADMINISTRATIVE EXPENSES for fiscal 2000 increased to
$2,075,000 from $1,756,000 for fiscal year 1999, principally due to increases in
costs related to the company's growth.
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PRODUCTS MANUFACTURED BY THE COMPANY
During fiscal 2000, the following cellulose-based animal care and industrial
absorbent products were manufactured.
ANIMAL BEDDING/PET LITTER PRODUCTS
CAREFRESH(R)
CAREFRESH(R) is a cellulose-based bedding product manufactured in Bellingham,
Washington. CAREFRESH(R) is designed specifically for use as a small animal
bedding for rodents, rabbits, reptiles, and hand-fed exotic birds. It is the
Company's primary product. It has the following attributes: superior ammonia
odor control, high absorbency, and is lightweight. These attributes make it an
ideal alternative to traditional wood shavings and corncob products.
CAREFRESH(R) is sold through all major pet store chains in the U.S. and to
professional animal care facilities worldwide.
AGRAFRESH(R)
AGRAFRESH(R) is bedding for cattle and other selected farm animals. This new
product was introduced to dairy farmers in Washington State during 1996 and has
been accepted with great enthusiasm.
CATWORKS(R)
In February 1994, the CATWORKS(R) cat litter business was acquired from Pet
Products Plus, Inc., an eastern U.S.-based pet food company. It is a pelletized
cat litter made from grain by-products under a contract with Purina Mills in the
Eastern United States.
ECOFRESH(TM)
In March 1994, the ECOFRESH(TM) cat litter business was acquired from a small
company in southern Ontario, Canada. This low cost cellulose-based product which
is designed to compete more on price than performance (in comparison to the
CAREFRESH(R) products) is sold as ECOFRESH(TM) in limited U.S. markets. The
product is now produced in our own facility and sold in the pet specialty and
grocery distribution channels.
HEALTHYPET(TM)
HEALTHYPET(TM) is a cellulose, small animal bedding using the same proven
technology as our CAREFRESH(TM) pet bedding. HEALTHYPET(TM) is sold in mass
merchandiser channels in the eastern U.S.
INDUSTRIAL PRODUCTS
ABSORBENT W(TM)
ABSORBENT W(TM) is specially processed to fully absorb and retain hydrocarbons
while simultaneously repelling water. It is manufactured and sold in loose
particulate form, booms, and pillows. Standard or custom spill kits are also
available. ABSORBENT W(TM) 's effectiveness is particularly distinguished by its
ability to remove all visible hydrocarbon sheen from water surfaces.
Applications range from control of fuel and lubricant spills on land in the
presence of water, to "water-polishing", to oil/water filtration, and marine oil
spill cleanup and control.
ABSORBENT GENERAL PURPOSE(TM) ("GP"), SPILLSORB(TM), AND SPILL-DRI(TM)
ABSORBENT GP(TM) is designed specifically to be universal in application in
absorbing all types of liquids (including oil, water, and chemical based
fluids), and it can be applied in virtually all situations where unwanted
liquids occur. It is manufactured and sold in loose particulate form, socks and
pillows. Standard or custom spill kits are also available. Its
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lightweight, dust-free content makes it easier to handle and, like ABSORBENT
W(TM) and GP(TM), has greater absorbency and retention capacities than
competitive products. However, ABSORBENT GP(TM) is more susceptible to "blowing"
in windy conditions than the heavier silica based (clay) sorbents and may be
less effective in completely cleaning up the sheen left by hydrocarbon-based
liquids on hard (e.g., concrete) surfaces. Additionally, ABSORBENT GP(TM)'s
light weight, absorbency, and retention attributes also make it an excellent
packaging material.
SPILL-DRI(TM) is developed to compete directly against traditional clay-type
industrial sweep products. A higher density product than GP(TM), SPILL-DRI(TM)
is less susceptible to "blowing" and utilizes a special organic "sheen removal"
additive.
SPILLSORB(TM) is a floor sweep product, less expensive than SPILL-DRI(TM) and
made from a different type of waste wood pulp. It, too, is less susceptible to
blowing. It is designed to be a silica-free replacement for, and an improvement
upon, competitive sweep products.
RAW MATERIALS
Absorption Corp's products are from raw materials that are readily available
from a number of suppliers. The main component for its Bellingham, Washington
manufactured products is a cellulose fiber by-product. The pulp and paper mills
that are the source of this raw material include Georgia-Pacific West, Inc.,
Weyerhauser, and Scott Paper. Production rates can be fully supported by
combinations of fiber from these and other pulp and paper mills in the
Northwest. This diversification of raw material sources improved our ability to
fulfill our fiber needs, and it improves the quality of our product.
Other raw materials used in the production of our products include chemical
binders and other waste fiber, all of which are readily available from several
suppliers. We believe that the loss of one or more of its suppliers would not
have a material effect on its operations. The loss of any supplier may cause an
increase in incoming freight costs, the amount of which would depend on the
distance to the alternative source and which source is utilized. Our operations
could be adversely affected if a general shortage of raw material was to occur
and persist, but the likelihood of this happening is believed to be remote. We
have not experienced any serious production delay because of failures of our
suppliers to provide raw materials.
RESEARCH AND DEVELOPMENT
Current research and development activities include refining existing, as well
as developing new, sorbent products and related manufacturing processes for both
the animal care industry and the industrial industry. Analyzing and testing
competitive products, and determining new applications for our existing
products, are also functions of our research and development department.
The Company and its subsidiaries expense general research. Development costs are
expensed, unless certain criteria are met, in which case they are capitalized.
All expenditures incurred for the acquisition of license rights, patents and
trademarks, development of sorbent processes and products, and pre-production
costs are capitalized. When technology is no longer in use, related unamortized
costs are written off.
During the year ended January 31, 2000, we incurred research and development
costs of $45,000 primarily to analyze competitive products and develop new
product applications, as compared to $14,000 in fiscal 1999 and $55,000 in
fiscal 1998.
MARKETS AND COMPETITION
The prime target markets for the Company's products are the general industrial
or maintenance/repair/operation (MRO), marine spill cleanup, and animal
bedding/pet litter markets. The following is an overview of each market area.
GENERAL INDUSTRIAL/MRO SORBENT MARKET.
Our general/industrial sorbent products are currently marketed under the
ABSORBENT GP(TM), ABSORBENT W(TM), SPILLSORB(TM), and SPILL-DRI(TM) trade names
in Canada, the United States, Europe, and the Pacific Rim. A number of clients
have converted to our general purpose absorbents because their previous clean-up
products (clay in many cases) are being
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discarded or replaced, because of the relative weight, performance, or health
problems they pose (See "Marketing and Distribution, Industrial Products,"
below).
We are not aware of any accurate independent estimates of the North American
market for general industrial clean-up (or "sweep") products. Major product
users are those engaged in virtually any type of MRO activities, ranging from
garages to large scale machine/assembly plants, and commercial janitorial
services. The primary competition in this marketplace is mineral-based products
composed of clay or diatomaceous earth (a clay-like mineral having less dust and
similar weight of clay). Based on our own investigation of competitors, there
are three clay-like product manufacturers that market nationally in Canada and
the U.S. Of these, one company (Oil-Dri Corporation) is believed to be dominant.
Corncobs and other organic products also compete in this marketplace.
Because clay products are very cheap, they continue to hold a very large share
of the price-sensitive MRO marketplace. The Company's general industrial
ABSORBENT products have not captured a significant market share.
MARINE SPILL CLEAN-UP MARKET
The Company's marine spill clean-up products are currently marketed under the
ABSORBENT W(TM) name in Canada, thE United States, the Pacific Rim, South
America, Europe and Africa.
The Company believes that catastrophic events such as the Exxon Valdez disaster
in Alaska has caused regulatory agencies of the U.S. and Canadian to reevaluate
the effectiveness of traditional marine spill cleanup products and to recognize
that alternative marine oil spill cleanup products are needed. This underscores
our assessment that alternative products are needed and, more importantly, that
these products should be friendly to the environment should the products be
"lost" during the cleanup process.
The Company is not aware of any accurate estimates of the North American market
for marine spill clean-up products. Based on our own research of competitors,
there are believed to be five manufacturers of such products that market
nationally in Canada and the U.S. The currently predominant marine spill
clean-up products are polypropylene or derivatives of polypropylene. Organic
marine spill clean-up products include cellulose-based products such as
Absorption's, and products made of peat moss, wool, and cotton. We have
identified two other manufacturers of cellulose-based marine spill sorbent
products, both of which appear to have limited regional distribution in the U.S,
at this time.
The Company believes that its ABSORBENT W(TM) products have the unique ability
to repel water and retain virtually any type of petroleum-based materials. In
addition, the products have enhanced biodegradability and incineration
attributes. The Company believes these characteristics not only make ABSORBENT
W(TM) an ideal oil spill cleanup product, but also potentially opens up a large
market for its use in filtering and recycling petroleum contaminated waste
water. The Company's ABSORBENT W(TM) products offer unique absorption
characteristics and are competitively priced with other products.
The Company's marine spill products have not obtained a significant market
share.
ANIMAL CARE MARKET
Our animal care products consist of CAREFRESH(R) pet bedding, CAREFRESH(R)
laboratory bedding, CATWORKS(R) cat litTER, ECOFRESH(TM) cat litter,
AGRAFRESH(R) livestock bedding, and HEALTHYPET(TM) pet bedding. The two
CAREFRESH(R) products contribute most of the revenue and profits of the animal
care market.
CAREFRESH(R) pet bedding is sold throughout North America in the pet specialty
channel. This includes independent pet stores serviced by wholesale pet
distributors and direct buying multi-unit pet retailers. The primary market is
pet owners with rodents, rabbits, reptiles, and bird breeders who hand feed baby
birds. Because CAREFRESH(R) controls ammonia odors better and is safer for pets,
it is superior to pine shavings, cedar shavings, and corncobs with which it
competes.
Industry figures are difficult to come by in the pet specialty channel, but
estimates put the pet bedding market at $60 million. CAREFRESH(R) is currently
available in 48 of the top 50 retail consumer markets. It is sold through 27 of
the top 31 multi-unit pet retailers in the country. Fifty percent of the pet
bedding sold in the US is sold through mass
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merchandisers. We introduced HEALTHYPET(TM) bedding during the fourth quarter of
the current fiscal year to enter the mass merchandiser distribution channels.
Significant revenue contribution is not expected for several quarters.
CAREFRESH(R) laboratory animal bedding is used by major universities,
biotechnology firms, and federal agencies. It is used primarily as a contact
bedding for rodents, and as a non-contact bedding for rabbits and other species.
A significant portion of our laboratory animal sales come from a private label
agreement to package our laboratory bedding for Harlan Teklad. Harlan Teklad is
the second largest laboratory diet manufacturer in the U.S., as well as the
second largest laboratory small rodent breeder in the world.
CATWORKS(R) maintained existing sales levels. Consolidation of pet distributors
and retail chains caused downward pressure on CATWORKS(R) sales. The Company
offset these losses by trade promotions, consumer advertising and emphasizing
sales to direct buying retail chains. ECOFRESH(TM) cat litter sales increased
dramatically during the fourth quarter with the opening of our production
facility. ECOFRESH(TM) is our first entry into the grocery saleS channel. There
is a large market potential, but there is also a high cost of entry. Store
response time by retailers will slow revenue expectations during the early
quarters of our next fiscal year.
AGRAFRESH(R) dairy bedding sold well in the Northwest Washington dairy market
through the first half of the year. During the last half of the year, low priced
sawdust competition and low national milk prices pushed down sales volumes and
margins. Renewed marketing efforts and lower margins are being used to regain
lost market share.
BUSINESS SEGMENTS
The Company defines its business segments based upon the market in which its
customers sell products. The Company operates principally in two business
segments, the animal care industry and the industrial cleanup industry.
The Company management team evaluates segments based upon operating income
before depreciation and amortization generated by each segment. Depreciation and
amortization are managed on a consolidated basis and as such are not allocated
to individual segments. There are no intersegment transactions or significant
differences between segment accounting and corporate accounting basis.
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JANUARY 31, 2000 BUSINESS SEGMENT DATA
(in $1,000)
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ANIMAL CARE INDUSTRIAL CONSOLIDATED
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Revenues $ 6,472 $ 1,289 $ 7,761
Operating costs and expenses 4,955 1,290 6,245
------- ------- -------
Operating income/(loss) before
Depreciation & amortization 1,517 (1) 1,516
Depreciation and amortization (144)
-------
Net income/(loss) before taxes $ 1,372
=======
Assets $ 3,155 $ 525 $ 3,680
Capital Expenditures $ 284 $ 10 $ 294
JANUARY 31, 1999 BUSINESS SEGMENT DATA
(in $1,000)
ANIMAL CARE INDUSTRIAL CONSOLIDATED
----------- ---------- ------------
Revenues $ 4,733 $ 1,236 $ 5,969
Operating costs and expenses 4,043 1,289 5,332
------- ------- -------
Operating income/(loss) before
Depreciation & amortization 690 (53) 637
Depreciation & amortization (118)
-------
Net income/(loss) before taxes $ 519
=======
Assets $ 1,788 $ 475 $ 2,263
Capital Expenditures $ 84 $ 22 $ 106
JANUARY 31, 1998 BUSINESS SEGMENT DATA
(in $1,000's)
ANIMAL CARE INDUSTRIAL CONSOLIDATED
----------- ---------- ------------
Revenues $ 3,593 $ 1,577 $ 5,170
Operating costs and expenses 3,826 1,809 5,635
------- ------- -------
Operating income/(loss) before
Depreciation & amortization (233) (232) (465)
Depreciation & amortization (127)
-------
Net income/(loss) before taxes $ (592)
=======
Assets $ 1,512 $ 679 $ 2,191
Capital Expenditures $ 15 $ 7 $ 22
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MARKETING AND DISTRIBUTION
The Company's primary function is that of a financing and management entity and
does not intend to be directly engaged in the marketing of its products. All
marketing and distribution is carried out by its subsidiaries or, in turn, their
manufacturer's representatives and their distributors. As of March 2000, the
subsidiary presently has a total of seven in-house and three field marketing and
sales personnel. The subsidiary plans to expand the number of sales personnel in
the future as sales volumes increase.
The Company is working diligently to expand its North American and international
distributor network with high caliber organizations for all of its product
lines. Presently international distribution is in place in Australia, New
Zealand,
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Malaysia, Indonesia, Singapore, India, Japan, Taiwan, South Korea, Denmark,
Germany, United Kingdom, Israel, Nigeria, Mexico, Trinidad, Brazil, and
Argentina.
The Company's sales strategy is to utilize distribution services where they
exist and to sell directly where they do not. This drives all the elements of
our sales and marketing activities. In general, we have two types of
distributors: those that cover a specific geographic area, and those that focus
on specific (usually national) market segments or channels. In either case, the
Company's commitment is to provide distributors with effective and efficient
support in such areas as:
- Lead generation and referral
- Technical and product information
- Product development input and feedback
- Literature, samples, and sales support tools
- Training and education
- Pull-through sales
- Efficient freight options
While distributorships are generally not granted exclusive territories, we try
to minimize distributor overlap within geographic area and industry segment so
long as market share and sales volume are achieved and maintained. Recognizing
the financial effort and emotional commitment required to successfully
distribute an innovative product, we believe we are contributing everything
commercially possible to facilitate our distributors' success.
INDUSTRIAL PRODUCTS
The competition in the industrial marketplace is primarily clay and
polypropylene. Both are manufactured from non-renewable resources and generate
unwanted waste streams during manufacture and after use. ABSORBENT products are
derived from renewable resources and utilize waste pulp that would otherwise
create a disposal problem. We believe that this environmental understanding
coupled with our ABSORBENT products' better performance, will take on more
importance as the environmental movement accelerates.
Additionally, workplace health issues have been raised about the use of sorbents
containing airborne silica. Health and environmental agencies in both Canada and
the U.S. have investigated the potential effects on health when using various
sorbents. Clay-based sorbent products contain silica which health agencies have
determined can create health hazards which could result in cancer, lung disease,
and silicosis.
The U.S. Workplace Act, S.B.C. 1985, C. 34, B.C. Regulation 258/88, and the U.S.
Worker's Compensation Act, R.S.B.C., 19079, C. 437 (Workplace Hazardous
Materials Information System Regulation), specify that graphic warning labels
are to be placed on certain dangerous products such as clay-based absorbents. As
our products are not hazardous and do not need to be labeled with such warnings,
the Company believes that it has a competitive advantage.
The State of California has enacted regulations (Title 22 of the California Code
of Regulations) that require specific warnings on products that are potential
health hazards. Bags of clay-based absorbents are required to be labeled,
stating that the contents could be a health hazard. We believe that there are
many situations where this requirement will render clay-based products unusable,
because organizations are not likely to accept the responsibility of using a
material that is potentially hazardous to an employee's health. Similarly, some
employee groups, particularly those in unionized workplaces, may not allow the
use of such material. We believe that millions of tons of clay-based absorbents
are used annually. The Company's products are cellulose fiber-based,
biodegradable, non-toxic, user friendly, and a natural substitute for clay
products. SpillSorb has been developed specifically for the purpose of competing
in this marketplace.
Beyond product sales, a significant potential exists to use our patented
technology in businesses such as oil/water filtration, cogeneration/fuel
blending, waste stewardship, and bioremediation. Each of these is presently
under review for strategic and economic viability.
In the marketing of ABSORBENT W(TM), our sales efforts have been directed toward
those entities directly responsible for the purchase of marine spill clean-up
products and oil/water filtration media. Lobbying efforts with local, state,
provincial, and
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federal government officials will also be aggressively maintained using company
representatives, outside consultants, or our representatives in the Coalition of
Organic Absorbent Producers. Our industrial sales representatives have primary
responsibility for selling and servicing users and resellers of sorbents.
We will continue to maintain our distribution center at our Bellingham,
Washington plant. When a sale of ABSORBENT products is made, the order is
shipped directly from product inventories located at our Bellingham facility
(FOB Bellingham). We strive to maintain a 30 day supply of Industrial products
and seven day supply of Animal Care products in our inventory.
In the future our focus will be on products which bring a reasonable profit
whether they are sold through the Animal Care sales division or the Industrial
sales division.
ANIMAL CARE PRODUCTS
The Company will continue to market the CAREFRESH(R), CATWORKS(R), and
ECOFRESH(TM) products through various channels of distribution in Canada and the
United States, concentrating primarily on small animal bedding.
We have entered the grocery distribution channel with our ECOFRESH(TM) cat
litter. Our HEALTHYPET(TM) pet bedding brand is a mass merchandiser brand for
small pets known as pocket pets. These new distribution channels offer large
potential markets, but will require a financial investment and a different sales
approach from our traditional distribution channels. Steady sales growth is
expected.
To enhance our cat litter line beyond CATWORKS(R) and ECOFRESH(TM), and to
better leverage our animal care distribution base, we are exploring co-packaging
and joint venture opportunities with other non-clay cat litter manufacturers.
We will continue to explore synergistic product lines so that we will be in a
position to be more of a strategic partner to retailers and distributors.
GOVERNMENT REGULATIONS
The Company's manufacturing operations in Bellingham, Washington are required to
comply with air emission standards enforced by the Northwest Air Pollution
Authority. We believe we are currently in compliance with those standards.
Non-compliance with such standards could result in the closure of the Company's
particulate manufacturing operations, expenditures for necessary corrective
actions, or the possible imposition of fines.
PRODUCT PROTECTION
Absorption holds three United States patents (and corresponding Canadian patents
and patent applications) on various degradable particulate absorbent materials
and its manufacturing process. These patents expire fifteen years from their
respective grant dates (June 1990, February 1992, and October 1994).
NUMBER OF EMPLOYEES
As of March 2000, International Absorbents, Inc. (including its subsidiaries)
has 39 full-time and 1 part-time employee, none of which are represented by
labor unions. In addition, we employed a small number of temporary employees and
contractors to provide management, administration, and marketing services.
FINANCIAL INFORMATION RELATING TO GEOGRAPHIC/INDUSTRY SEGMENTS
We are involved primarily in the development, manufacture, distribution, and
sales of absorbent products. Our assets are located, and our operations are
primarily conducted in the United States.
MAJOR CUSTOMERS
The Company has one customer who accounts for more than 10% of its sales as a
whole but is not dependent upon any other customer or few customers.
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ITEM 2. PROPERTIES
PLANT, SALES/ADMINISTRATION FACILITIES AND WAREHOUSE, BELLINGHAM, WA
Absorption leases approximately 0.7 acres of land from the Port of Bellingham in
Washington State, where its absorbent manufacturing facility is situated. This
facility also houses sales and administration offices. The lease agreement
requires a current monthly rental payment of $1,336 until the agreement's
expiration on August 31, 2000. Under the lease, Absorption must maintain a
performance bond and pay for all maintenance, taxes, and insurance on the
property. Absorption has an option, which it intends to exercise, to extend the
lease for an additional five year period at rates to be negotiated.
The Company constructed the manufacturing facility in 1987 for approximately
$1.3 million. The building is approximately 13,000 square feet. The site is
serviced by rail, is within fifty meters of ocean frontage, and has easy access
to interstate freeways. The facility can currently produce 10,000 tons of
ABSORBENT particulate each year. The Company believes this facility will be
adequate for its manufacturing needs for the immediate future.
On June 10, 1997, the Company entered into an 18-month term sub-lease, renewable
annually, covering 12,000 square feet of warehouse space. The lease requires
monthly payments of $3,480 and has been renewed for an additional one-year term,
with an option for a third year. The company has exercised its option for the
third year. The warehouse is located within three miles of the Bellingham plant
and will be adequate to store raw materials and finished goods at expected
volumes for the next year. If the company chooses not to continue leasing this
warehouse, there are several nearby facilities that could be used for
approximately the same cost.
COMPANY HEAD OFFICE, VANCOUVER, BC
International Absorbents, Inc. and its subsidiaries share 1,640 square feet of
office space with related companies at 1569 Dempsey Road, North Vancouver,
British Columbia, V7K 1S8, Canada. The terms of a rental agreement call for
monthly payments of Cdn $5,000 towards the office space and include the use of
office furniture and equipment (see Part III, Item 12 "Certain Relationships and
Related Transactions").
ITEM 3. LEGAL PROCEEDINGS
Except for ordinary routine litigation incidental to its business, there are no
material legal proceedings pending to which the Company or any of its
subsidiaries is a party, or of which any of their properties is the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended January 31, 2000.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Common Shares of the Company are listed on OTC Bulletin Board under the
trading symbol IABS. This is the principal trading market. Shown below are the
high and low sale prices for the Common Shares for each of the fiscal years
ending January 31, 2000 and 1999.
2000 1999
HIGH LOW HIGH LOW
First quarter $0.55 $0.22 $0.29 $0.11
Second quarter $0.43 $0.26 $0.19 $0.10
Third quarter $0.41 $0.26 $ .25 $0.08
Fourth quarter $0.65 $0.34 $0.33 $0.18
11
<PAGE> 12
SHAREHOLDERS
The Company had 560 shareholders of record at January 31, 2000. The articles of
the Company do not contain any restrictions on the right to hold or vote the
Company's Common Shares.
DIVIDENDS
The Company has not paid any dividends to its common shareholders since
inception. The decision to pay dividends and the amount thereof is at the
discretion of the Board of Directors of the Company and will be governed by such
factors as earnings, capital requirements, and the operating and financial
condition of the Company. Upon achieving profitability, the Company intends to
retain its earnings to finance the growth of its business and, thus, does not
intend to pay dividends in the foreseeable future.
EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS
Canada has no system of exchange controls. There are no restrictions on the
remittance of dividends, interest or other similar payments to nonresident
holders of the registrant's securities.
There are generally no restrictions on the right of nonresidents of Canada to
hold or vote securities in a Canadian company. However, the Investment Canada
Act (the "Investment Act") requires prior notification to the Government of
Canada on the acquisition of control of Canadian businesses by non-Canadians.
The term "acquisition of control" is defined as any one or more non-Canadian
persons acquiring all or substantially all of the assets used in the Canadian
business or the acquisition of the voting shares of a Canadian corporation
carrying on the Canadian business or the acquisition of an entity controlling or
carrying on the Canadian business. The acquisition of the majority of the
outstanding shares is deemed to be an "acquisition of control" of a corporation
unless it can be established that the purchaser will not control the
corporation.
Subject to the exceptions noted below for World Trade Organization ("WTO")
investors, investments which require prior notification under the Investment Act
are all direct acquisitions of Canadian businesses with assets of (Cdn)
$5,000,000 or more and all indirect acquisitions of Canadian businesses with
assets of more than (Cdn) $50,000,000 or with assets between (Cdn) $5,000,000
and (Cdn) $50,000,000 which represent more than 50% of the value of the total
international operations. In addition, specific acquisitions or businesses in
designated types of activities related to Canada's cultural heritage or national
identity could be reviewed if the government considers it to be in the public
interest to do so.
The WTO investor exception to the Investment Act provides special review
thresholds in the case of acquisitions by such investors. WTO investors include
individuals who are a national of a WTO member or who has the right of permanent
residence in relation to a WTO member, governments of WTO members and entities
that are not Canadian controlled but which are WTO investor controlled. The
United States is a member of the WTO. The WTO review thresholds are calculated
using a formula and for 1996 and 1997 are (Cdn) $168,000,000 and (Cdn)
$172,000,000.
Based on the current amount of the Company's assets, the review provisions of
the Investment Act will not be applicable to the Company. However, there can be
no assurance that it will not become applicable to the Company in the future.
CANADIAN FEDERAL INCOME TAX CONSIDERATIONS
The Company has been advised of the following Canadian federal income tax
consequences under the Income Tax Act (Canada) (the "Act"), the regulations
thereunder (the "Regulations") and the Canada-United States Income Tax
Convention, 1980 (the "Treaty") which apply to a beneficial holder of Common
Shares who, at the date of acquisition of the Common Shares and at all material
times thereafter, is not a resident of Canada for purposes of the Act; does not
carry on business in Canada within the meaning of the Act; is a resident of the
United States for purposes of the Treaty; held the Common Shares as a capital
asset; and did not, at any time during a period of five years immediately
preceding a disposition or deemed disposition by him of Common Shares (either
alone or together with persons with whom he does not deal at arm's length) own
25% or more of the Common Shares or shares of any other class of the Company.
Such a person will be subject to Canadian federal withholding tax of 15% on the
amount of any dividends paid on the Common Shares unless such person is a
company which owns at least 10% of the voting stock of the Company, in which
case the rate of such tax may not exceed 5%. Such a person will also not be
subject to the rules of the Act or the Regulations with respect to any gain or
loss realized
12
<PAGE> 13
or deemed to be realized upon a disposition of his Common Shares held as a
capital asset and, therefore, will not be subject to Canadian federal income tax
with respect to such capital gain. A disposition or deemed disposition of Common
Shares to a Canadian corporation with whom the person does not deal at arm's
length can result in a deemed dividend in certain circumstances.
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The Company has been advised that dividends paid on the Common Shares to a
holder who is a U.S. citizen or domestic corporation will be taxed as ordinary
income for United States federal income tax purposes to the extent of the
Company's current and accumulated earnings and profits. As discussed above in
"Canadian Federal Income Tax Considerations," such dividends will also be
subject to a Canadian withholding tax. The deduction for dividends received
which is usually available to corporate shareholders is not available for
dividends paid from a foreign corporation such as the Company.
Pursuant to Sections 164 and 901 of the Internal Revenue Code of 1986, as
amended, a U.S. citizen, resident or domestic corporation holding such Common
Shares may generally elect, for United States federal income tax purposes, to
claim either a deduction from gross income for such Canadian withholding taxes
or a credit against its United States federal income taxes with respect to such
Canadian taxes. The choice of taking a deduction or claiming a credit is up to
the taxpayer.
The amount of the foreign tax credit that may be claimed is limited to that
proportion of the United States tax against which the credit is taken that the
holder's taxable income from non-United States sources bears to the holder's
entire taxable income for that taxable year. That foreign tax credit limitation
is applied separately to different categories of income. Generally, for purposes
of applying such foreign tax credit limitation, dividends are included in the
portfolio income category.
If Common Shares are held as a capital asset, any gain or loss on a sale,
exchange or other disposition will be a capital gain or loss, and if the holder
has held the Common Shares for more than one year, will qualify as a long term
capital gain or loss. Effective August 5, 1997 changes to the existing tax
legislation resulted in significant changes to the taxation of capital gains
resulting from the disposition of shares held by an individual. Where shares
have been held for more than 12 months, the maximum tax rate applied to
individuals is 20%. In general, a gain from a sale, exchange or other
disposition of Common Shares by a United States person will be treated as
United States source income.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS FROM OPERATIONS
PROFITS for the year 2000 were $1,334,000, which was an improvement from a
profit of $519,000 for fiscal 1999, and a loss of $(593,000) for fiscal 1998.
Our increase in profit was achieved through increased sales revenues, improved
gross profits, and continued controls on marketing and administrative expenses.
We intend to continue to maintain cost controls over marketing and
administrative expenses, while looking for additional ways to increase revenues.
These management efforts are expected to keep our financial results profitable.
SALES REVENUE for the year ended January 31, 2000 net of discounts and
allowances, were $7,761,000, an increase of 30% in comparison to the fiscal year
1999 total of $5,969,000. This increase in sales revenues was achieved primarily
due to continued increased sales volumes of our Animal Care product lines.
Sales volumes for the Company's CAREFRESH(R) products increased 37% during
fiscal year 2000, due to the efforts of our regional distributors, existing
sales managers, and sales to direct buying retailers. Sales to these accounts
increased significantly. The sales volume for our Industrial product lines
increased from the previous year. Our strategy during this fiscal year has been
to maintain the division's market share, while investing in company resources in
other divisions that bring higher rates of return. For the first time in recent
years, sales have increased.
The 15% increase in sales revenues for fiscal 1999 over the fiscal 1998 total of
$5,170,000 was primarily due to the increased sales volumes of the Company's
Animal Care product lines. During the same period Industrial sales revenues
13
<PAGE> 14
decreased, while its product line was re-evaluated and its distribution strategy
analyzed. Emphasis was placed on new products, sales strategies, and the
products' superior performance.
Sales revenue for fiscal 2001 is expected to increase due to the continued
growing demand for our Animal Care products by both regional distributors and
consumers. New animal care products launched in fiscal 2000 will also begin to
add to our sales results. Sales of Industrial products are expected to increase
only slightly as our resource are expended in other product areas. We will
continue to evaluate potential markets for Industrial products and maintain a
position from which we can capitalize on any that are found.
GROSS PROFITS on net sales were $3,412,000 (or 44%) for the year ended January
31, 2000, in comparison to $2,263,000 (or 38%) in fiscal 1999, and $1,610,000
(or 31%) in fiscal 1998.
The gross profit increase in fiscal 2000 was primarily due to production
efficiencies achieved through increased volumes and improvements to our
manufacturing process. Product prices were not significantly increased.
The gross profit increase in fiscal 1999 was primarily due to the installation
of new production equipment, which significantly increased our Bellingham
plant's capacity without any major production cost increases. This increased
capacity, along with improved efficiencies achieved from large production
volumes, also contributed to the improvement in gross margin.
A price increase in the company's Animal Care line and efficiencies from
increased production volumes contributed to the gross margin improvement in
fiscal 1998.
Gross profit margins are expected to improve slightly in fiscal 2001, but not at
the rate they improved during the past two years.
MARKETING AND SALES EXPENSES increased to $1,018,000 for the year ended January
31, 2000 from $823,000 in fiscal 1999 and down from $828,000 in fiscal 1998. The
increase in fiscal 2000 was primarily due to an increase of Animal Care
marketing programs to support our increased sales to direct buying retailers. We
are maintaining current Industrial marketing department costs, while new sales
strategies are being developed.
The decrease in fiscal 1999 was primarily due to a reduction in Industrial
products sales staff. We took other steps to reduce the costs of the Industrial
marketing department, while new sales strategies are being developed.
The decrease in fiscal 1998 was primarily due to a reduction in the sales staff
and the elimination of the industrial sales trade show program.
Total marketing and sales costs are expected to increase slightly for fiscal
2001, but decrease as a percentage of sales revenues. Animal Care marketing
programs will focus on new product lines and locating new distributors.
Industrial programs will be developed to support the new sales strategy. New
distributors and strategic national accounts will be established on the basis of
competitive pricing and superior performance. The marketing departments of both
divisions will be investing in the introduction of new product lines.
GENERAL AND ADMINISTRATIVE EXPENSES increased to $965,000 for the year ended
January 31, 2000, from $830,000 in fiscal 1999, which was down from $1,313,000
in fiscal 1998. The increase in fiscal 2000 was primarily due to increased
support costs related to our sales and profit growth. We were able to keep the
growth rate of these costs to less than our sales or profit growth rates.
The decrease in fiscal year 1999 was primarily due to restructuring management
and an emphasis on across-the-board cost reductions.
The decrease from fiscal 1998 was primarily due to an absence of write downs and
government relations expenses, which occurred in previous years, as well as a
focus on controlling general and administrative expenses.
Total general and administrative expenses for fiscal 2001 are expected to grow,
but at a rate which is less than sales revenues.
14
<PAGE> 15
RESEARCH AND DEVELOPMENT EXPENSES increased to $45,000 in fiscal 2000 from
$14,000 in fiscal 1999 which was down from $55,000 in fiscal 1998.
The increase in fiscal 2000 was primarily due to our new focus on product and
process development. The decrease in fiscal 1999 was primarily due to a
reduction in research and development staff. The increase in fiscal 1998 was due
to an increased staffing in this area.
Our research and development costs will increase during fiscal 2001 and may
increase significantly as we expand our product lines.
INTEREST EXPENSE for the fiscal year ended January 31, 2000 totaled $47,000 in
comparison to $89,000 for fiscal year 1999, and $84,000 for fiscal year $1998.
This expense decreased in fiscal 2000, because we paid off our existing line of
credit during the third quarter of this year. During fiscal 1999 our interest
expense increased due to the use of our credit facility during the first two
quarters of the year.
We expect to have a minimal interest expense during fiscal 2001, simply to
maintain a stand-by line of credit with our bank. Any major capital project to
improve or increase production could result in a significant increase to our
interest expense.
LIQUIDITY AND CAPITAL RESOURCES
As of January 31, 2000 we had $1,324,000 in cash and cash equivalents as
compared to $195,000 in 1999, representing an increase of $1,129,000. The
company expects to continue to improve its liquidity in fiscal 2001, unless any
significant capital investment is made to increase or improve production.
CASH FLOW GENERATED FROM OPERATIONS improved in fiscal 2000 to $1,478,000 from
$637,000 in fiscal 1999. Cash flow required for operations in fiscal 1998 was
$288,000. We expect to continue generating cash from operations, even though we
may use various credit facilities to finance manufacturing improvements for
introduction of new product lines.
The Company's WORKING CAPITAL position at January 31, 2000 was $1,737,000
compared to $336,000 at the end of fiscal 1999, and a deficiency of $447,000 at
the end of fiscal 1998. The current ratio improved in fiscal 2000 to 3.48
(current assets to current liabilities) in comparison to year-end of fiscal 1999
ratio of 1.40. Cash generated from operations and the exercise of warrants and
options resulted in the increase in working capital.
CASH USED IN FINANCING ACTIVITIES during fiscal 2000 totaled $1,000 compared
to $279,000 in fiscal 1999 and $235,000 provided in fiscal 1998. The cash used
in fiscal 2000 was due to the net effect of the exercise of options and warrants
and the retirement of the operating line of credit. We expect that additional
cash will be provided by financing activities during fiscal 2001 because of
warrants expiring in the first quarter of the year.
CASH USED IN INVESTING ACTIVITIES during fiscal 2000 totaled $299,000 compared
to $106,000 used in fiscal 1999 and $9,000 used in fiscal 1998. The use of cash
in fiscal 2000 was primarily for equipment expansion in the Bellingham, WA plant
and the addition of a cat litter plant. Cash used in fiscal 1999 was primarily
due to the installation of improved production equipment.
Plans for fiscal 2001 include installing production equipment to improve
efficiencies at our Bellingham, WA plant. The cash required for the new
equipment will be generated from operations. We continue to look for new product
and manufacturing opportunities. Because not all of these opportunities have
been completely defined, management cannot predict the timing of when they will
have an effect on the company's financial statements.
CAPITAL FINANCING may be sought in fiscal 2001 for the construction of buildings
and equipment. Financing has already been made available which may be used for
new manufacturing equipment.
15
<PAGE> 16
YEAR 2000
Historically, certain computerized systems have used two digits rather than four
digits to define the applicable year, which could result in recognizing a date
using "00" as the year 1900 rather than the year 2000. This could result in
major failures or miscalculations and is generally referred to as the "year 2000
issue." The Company recognizes that the impact of the year 2000 issue extends
beyond traditional computer hardware and software to automated plant systems and
instrumentation, as well as to third parties. The year 2000 issue is being
addressed within the Company by its individual departments and progress is
reported periodically to management. The Company has committed resources to
conduct risk assessments and to take corrective action, where required, within
each of the following areas: information technology, plant systems, and external
parties.
Assessments and audits of our information technology systems were completed in
the fourth quarter of fiscal year 1999. We adopted a plan to update all systems,
which may be effected by the year 2000 issue, in the first quarter of fiscal
year 2000. The plan was completed and the information technology systems were
upgraded in the third quarter of fiscal year 2000. We have a backup system in
place in the unlikely event that the year 2000 issue effects our new information
systems. As of the filing date of this document there have been no events
involving our information technology systems, which have materially effected the
operations of the company. In the plant systems area, 100 percent of our systems
have been audited and are not expected to be effected by the year 2000 issue. We
have backup plans for all plant operations systems, which will allow us to
maintain a full production schedule in the unlikely case of a year 2000 failure.
As of the filing date of this document, there have been no year 2000 related
events that have had a material effect on our ability to maintain a full
production schedule. An assessment audit of external parties was completed in
the third quarter of fiscal year 2000. Not all companies have demonstrated a
willingness to respond to year 2000 readiness questions, even with new
legislation on the issue. A significant number of suppliers responded in the
affirmative that they were prepared. No third parties responded in the negative.
A large number did not respond at all, mainly due to legal concerns about
liability. Steps were taken to remediate the unlikely event that a year 2000
issue would effect our ability to service our customers. As of the filing date
of this document, no third party year 2000 events have occurred which has
materially effected the operations of the company.
The total cost of the Company's year 2000 activities did not exceed $40,000.
These costs did not materially effect our operations, liquidity, or capital
resources.
Even though January 1, 2000 has passed, failure to address a year 2000 issue
could still result in business disruptions that may materially affect the
company's operations, liquidity, or capital resources. We have prepared
contingency plans to address year 2000 issues thar may have a material effect.
Typically these contingency plans address the results of single events while the
scope of year 2000 issues may cause multiple events for longer durations. It is
not possible for us to anticipate all multiples of events that may occur. We are
planning for multiple events to the best of our ability and resources.
There is still uncertainty about the scope of the year 2000 issues. At this time
we cannot quantify the potential impact of these failures. Our year 2000 program
and contingency plans have been developed to address issues within our control.
The program minimizes, but does not eliminate the issues of external parties.
FORWARD-LOOKING STATEMENTS
Statements made in the preceding management's discussion and analysis, referring
to the Company's outlook, future sales revenue, gross profits, general and
administrative expenses, marketing expenses, liquidity and capital resources,
and cash flow, that state the Company's management's intentions, hopes,
belief's, expectations, or predictions of the future, are forward-looking
statements. It is important to note that the company's actual results could
differ materially from those projected in such forward-looking statements.
Additional information concerning factors that could cause actual results to
differ materially from those in the forward-looking statements is contained from
time to time in the Company's SEC filings, including but limited to the
Company's report on forms 10-KSB, 10-QSB, and the Company's proxy statement to
shareholders. Copies of these filings may be obtained by contacting the Company
or the SEC.
16
<PAGE> 17
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX
Auditors' Report page 18
Consolidated Balance Sheets as of January 31, 2000 and 1999 page 19
Consolidated Statements of Operations and Deficit for the years
ending January 31, 2000,1999 and 1998 page 20
Consolidated Statements of Cash Flows for the years ending
January 31, 2000,1999 and 1998 page 21
Notes to Consolidated Financial Statements page 22
17
<PAGE> 18
[LOGO PRICEWATERHOUSE]
March 17, 2000
AUDITOR'S REPORT
TO THE SHAREHOLDERS OF
INTERNATIONAL ABSORBENTS INC.
We have audited the consolidated balance sheets of INTERNATIONAL ABSORBENTS INC.
as at January 31, 2000 and 1999 and the consolidated statements of operations
and deficit and cash flow for the three years ended January 31, 2000, 1999 and
1998. 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 Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at January 31, 2000
and 1999 and the results of its operations and its cash flows for the years
ended January 31, 2000, 1999 and 1998 in accordance with generally accepted
accounting principles in Canada. As required by the British Columbia Company
Act, we report that, in our opinion, these principles have been consistently
applied.
/s/ PricewaterhouseCoopers LLP
CHARTERED ACCOUNTANTS
18
<PAGE> 19
CONSOLIDATED BALANCE SHEETS
International Absorbents Inc.
(in thousands of U.S. dollars, except per share amounts)
<TABLE>
<CAPTION>
JANUARY January
ASSETS 2000 1999
------- -------
<S> <C> <C>
Currents assets:
Cash and cash equivalents $ 1,324 $ 195
Accounts receivable 739 630
Inventories (Note 3) 310 283
Prepaid expenses 64 67
------- -------
2,437 1,175
Capital assets (Note 4) 1,183 1,020
Other assets (Note 5) 60 68
------- -------
$ 3,680 $ 2,263
======= =======
LIABILITIES
Current liabilities:
Accounts payable and accrued liabilities $ 659 $ 606
Operating line of credit (Note 6) -- 223
Income taxes payable 38 --
Due to related parties (Note 9) 3 10
------- -------
700 839
SHAREHOLDERS' EQUITY
Share capital (Note 8)
20,771,495 common shares without par values 6,806 6,584
(January 31, 1999 - 19,601,054)
Deficit (3,826) (5,160)
------- -------
2,980 1,424
------- -------
$ 3,680 $ 2,263
======= =======
</TABLE>
Commitments and contingencies (Notes 4 and 14)
Subsequent events (Note 15)
19
<PAGE> 20
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
International Absorbents Inc.
(in thousands of U.S. dollars, except per share amounts)
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31
---------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Sales revenues (net) $ 7,761 $ 5,969 $ 5,170
Cost of goods sold 4,349 3,706 3,560
-------- -------- --------
3,412 2,263 1,610
Corporate and administrative expenses
Marketing and sales 1,018 823 828
General and administrative 965 830 1,313
Research and development 45 14 55
Interest Expense 47 89 84
-------- -------- --------
2,075 1,756 2,280
Income/(Loss) before undernoted item 1,337 507 (670)
Other income 35 12 77
-------- -------- --------
Net Income/(Loss), before income taxes 1,372 519 (593)
Income tax provision 38 -- --
-------- -------- --------
Net Income/(Loss) for the year $ 1,334 $ 519 $ (593)
======== ======== ========
Deficit at beginning of year (5,160) $ (5,679) $ (5,086)
-------- -------- --------
Deficit at end of year (3,826) $ (5,160) $ (5,679)
======== ======== ========
Net Income/(Loss) per common share (Note 2) $ 0.07 $ 0.03 $ (0.04)
Fully diluted net income/(loss) per common share $ 0.05 $ 0.02 $ (0.04)
Weighted average number
of common shares (000's) 19,761 19,398 15,596
</TABLE>
20
<PAGE> 21
CONSOLIDATED STATEMENTS OF CASH FLOWS
International Absorbents Inc.
(in thousands of U.S. dollars, except per share amounts)
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31
---------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss) for the year $ 1,334 $ 519 $ (593)
Items not affecting cash
Amortization of capital and other assets 144 118 127
Write-off of note receivable -- -- 150
Interest on convertible debentures -- 28
------- ------- -------
1,478 637 (288)
Changes in non-cash working capital:
Accounts receivable (108) $ (13) $ (6)
Inventories (28) 73 61
Prepaid expenses 3 5 (37)
Accounts payable and accrued liabilities 53 (134) (9)
Due to related parties (7) (34) (16)
Income taxes payable 38 -- --
------- ------- -------
(49) (103) (7)
------- ------- -------
1,429 534 (295)
Cash flow from financing activities
Net proceeds from issue of common shares 222 216 29
Repayment of convertible debentures -- (214) --
Operating line of credit (223) (281) 206
------- ------- -------
(1) (279) 235
Cash flow from investing activities
Purchase of capital assets (299) (106) (22)
Purchase of other asset -- -- (69)
Investment in Benetech -- -- (18)
Proceeds from disposal of Benetech -- -- 118
------- ------- -------
(299) (106) 9
Increase (decrease) in cash and cash equivalents 1,129 149 (51)
Cash and cash equivalents, beginning of year 195 46 97
------- ------- -------
Cash and cash equivalents, end of year $ 1,324 $ 195 $ 46
======= ======= =======
Interest paid 47 89 86
======= ======= =======
Taxes paid -- -- --
======= ======= =======
</TABLE>
21
<PAGE> 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
International Absorbents Inc.
(in thousands of U.S. dollars except per share amounts)
1. OPERATIONS
International Absorbents Inc. ("IABS") is a Canadian company operating
in the State of Washington, U.S.A. through its wholly-owned subsidiary,
Absorption Corp ("Absorption"), IABS is engaged in the development and
sale of value added products made from waste short fiber pulp ("SFP")
utilizing proprietary technology. Absorption markets and sells
SFP-based products used for general industrial spill cleanup, marine
oil-cleanup, and oil/water filtration. In addition, animal and pet
bedding products are sold in consumer retail and commercial bedding
markets. The company has established distribution primarily in North
America with minor distribution in South America, the Middle East, the
European Economic Community, Africa, and Pacific Rim countries.
2. SIGNIFICANT ACCOUNTING POLICIES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
These financial statements have been prepared in accordance with
accounting principles generally accepted in Canada ("Canadian GAAP").
Differences with respect to accounting principles generally accepted in
the United States ("US GAAP") are disclosed in Note 12.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of IABS and
its wholly-owned subsidiaries Absorption Corp, a Nevada company doing
business in Washington State, and Total Absorb Inc. ("TAI"), a British
Columbia company, doing business in Canada.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes cash and deposits of varying
maturity dates within 90 days of the original date of acquisition.
INVENTORIES
Finished goods inventories are valued at the lower of cost (determined
on the first-in first-out basis) and net realizable value. Raw
materials and supplies are valued at the lower of cost (determined on
the first-in first-out basis) and replacement cost.
CAPITAL ASSETS
Capital assets are recorded at cost. The Company's building and
equipment are located on leased land. Amortization is applied to
amortize the cost of capital assets over their estimated useful lives
as follows:
Building 5% Straight-line basis
Equipment 15% Declining-balance basis
OTHER ASSETS
The Company capitalizes all expenditures incurred for the acquisition
of license rights, patents, and trademarks. Capitalized costs are
amortized on a straight-line basis over three to seven years.
Unamortized costs are written off where the recoverability of costs is
uncertain or a patent application is abandoned.
REVENUE RECOGNITION
Revenue from the sale of products is recognized at the time title
passes to the purchaser, which is when the goods are conveyed to a
carrier.
FOREIGN CURRENCY TRANSLATION
The company has adopted the United States dollar as its reporting
currency. IABS and its subsidiaries are considered to be integrated
operations, and the accounts are translated using the temporal method
as follows:
22
<PAGE> 23
Monetary assets and liabilities at the rates of exchange in effect at
the balance sheet dates; non-monetary assets and liabilities at
historical rates; revenue and expense items (except depreciation and
amortization) at the average rates for the year; depreciation and
amortization at the same rates as for the assets to which they relate.
The net effect of the foreign currency translation is included in
operations.
NET INCOME/(LOSS) PER SHARE
Net income/(loss) per common share is calculated on the basis of the
weighted average number of common shares outstanding during the year.
The calculation of fully diluted earnings per share assumes that, if a
dilutive effect is produced, all outstanding options and warrants had
been exercised at the later of the beginning of the fiscal year and the
option issue date, and includes an allowance for imputed earnings net
of tax derived from the investment of funds which would have been
received. In fiscal 1998, the effect of potential issues of shares
under warrant or share option arrangements is not dilutive.
INCOME TAXES
The Company follows the accrual method of accounting for income taxes.
STOCK OPTION PLAN
The Company has one stock option plan, which is described in Note 8. No
compensation expense is recognized for this plan when stock or stock
options are issued to employees. Any consideration paid by employees on
exercise of stock options or purchase of stock is credited to share
capital. If stock or stock options are repurchased from employees, the
excess of the consideration paid over the carrying amount of the stock
or stock option cancelled is charged to retained earnings.
USE OF ESTIMATES
The preparation of financial statements that conform with generally
accepted accounting principles requires management to make estimates
and assumptions which affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at
the date of the financial statements and revenues and expenses for the
period reported. Actual results could differ from those estimates.
COMPARATIVE AMOUNTS
Certain amounts from the previous years have been restated to conform
with the current year's presentation.
RESEARCH AND DEVELOPMENT
Research costs are expenses as incurred. Development costs which meet
generally accepted criteria, including reasonable assurance regarding
future benefits, are deferred and amortized over their estimated useful
economic lives.
3. INVENTORIES
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Raw materials $190 $193
Finished goods 120 90
---- ----
$310 $283
==== ====
</TABLE>
23
<PAGE> 24
4. CAPITAL ASSETS
<TABLE>
<CAPTION>
ACCUMULATED
COST AMORTIZATION NET
------ ------------ ------
<S> <C> <C> <C>
2000
Building $ 552 $ 299 $ 253
Equipment $1,973 $1,043 $ 930
------ ------ ------
$2,525 $1,342 $1,183
====== ====== ======
1999
Building $ 548 $ 271 $ 277
Equipment 1,690 947 743
------ ------ ------
$2,238 $1,218 $1,020
====== ====== ======
</TABLE>
The majority of the Company's capital assets are located on land and in
warehouse space leased from the Port of Bellingham in Washington State. The
lease agreements require payments of approximately $5,000 per month to
August 31, 2000 with the Company's option for an additional five year
period at rates to be negotiated on the plant location and October 31, 2000
on the warehouse location.
5. OTHER ASSETS
<TABLE>
<CAPTION>
ACCUMULATED
COST AMORTIZATION NET
---- ------------ ----
<S> <C> <C> <C>
2000
Patents, trademarks and designs $198 $138 $ 60
==== ==== ====
1999
Patents, trademarks and designs $196 $128 $ 68
==== ==== ====
</TABLE>
In fiscal 1997 the Company contributed $250,447 in consideration for a 50%
interest in a joint venture named Benetech, LLC, which contracted for a
facility to manufacture low cost large animal bedding. During fiscal 1998,
the Company made further contributions of $18,000 to Benetech.
On June 12, 1997 the Company agreed to sell all of its interests in
Benetech for consideration consisting of $118,000 in cash, a $150,000 note
receivable, and the release of the Company from all loan guarantees. The
note receivable was repayable over a five-year period and paid interest at
9%. The Company's proportionate interest in Benetech's results from
operations from inception to January 31, 1997 were not material.
<TABLE>
<CAPTION>
June 12, 1997
-------------
<S> <C>
TOTAL ASSETS $381,191
========
LIABILITIES 180,437
PARTNERS' CAPITAL 203,754
--------
LIABILITIES AND PARTNERS' CAPITAL $384,191
========
</TABLE>
6. OPERATING LINE OF CREDIT
During the year ended January 31, 2000, the Company secured a short-term
bank line of credit for up to $350,000, which is secured by the accounts
receivable and other assets of Absorption. Interest is payable on funds
advanced at the rate of prime plus 0.75%. The funds available for advance
to the Company by the lender are limited to 70% of accounts receivable. The
Company has not drawn any funds from the line of credit since it was
established.
24
<PAGE> 25
The Company paid off a previous asset-based line of credit in September
1999 upon termination of the contract. This line of credit was for up to
$1,000,000, secured by accounts receivable and other assets of the company,
at an interest rate of prime plus 1.5%. The funds available for advance
were limited to 80% of accounts receivable. The lender also granted a term
loan of up to $300,000 with a capital expenditures line of $100,000, for
the purchase of plant equipment. The term loan was also repaid in September
1999 and the capital expenditure line was never utilized.
7. CONVERTIBLE DEBENTURE
Pursuant to agreements entered into in July 1996, the Company issued an
aggregate $625,000 of convertible debentures to private lenders in
consideration for cash. The debentures paid interest at an annual rate of
8% and where convertible, at the option of the holder, to common shares of
the Company at a price of $0.50 per share or less, dependent upon the
market price of the Company's shares on NASDAQ at the time of conversion.
In March of 1998 the remaining $241,250 outstanding debentures were retired
through a combination of conversions and purchases through funds raised
from a private common stock placement.
25
<PAGE> 26
8. SHARE CAPITAL
AUTHORIZED
100,000,000 common shares (1999 and 1998 - 100,000,000) without par value.
<TABLE>
<CAPTION>
COMMON SHARES ISSUED SHARES AMOUNT
---------- -----------
<S> <C> <C>
BALANCE AS OF JANUARY 31, 1997 14,687,148 $ 5,951
For cash
Exercise of warrants 65,000 33
Conversion of debentures 1,943,789 353
---------- -----------
Issued during the year 2,008,789 386
Share issue and registration expenses -- (4)
---------- -----------
BALANCE AS OF JANUARY 31, 1998 16,695,937 $ 6,333
For cash
Private Placement 3,013,867 256
Purchase of Escrow shares (560,000) (50)
Conversion of debentures 451,250 45
---------- -----------
Issued during the year 2,905,117 251
---------- -----------
BALANCE AS OF JANUARY 31, 1999 19,601,054 $ 6,584
For cash
Exercise of options 737,500 146
Exercise of warrants 432,941 76
---------- -----------
Issued during the year 1,170,441 222
---------- -----------
BALANCE AS OF JANUARY 31, 2000 20,771,495 $ 6,806
========== ===========
</TABLE>
SHARE TRANSACTIONS (EXCLUDING THE EXERCISE OF OPTIONS AND WARRANTS) DURING
THE YEARS-ENDED JANUARY 31, 2000, 1999 AND 1998
Pursuant to Regulation D, subscription agreements were entered into in
March of 1998; 3,013,867 common shares were issued through an employee
stock purchase at a price of $0.085 per share for total proceeds of
$256,179. As part of the subscription agreement, purchasers of the units
were issued warrants to purchase 1,506,930 common shares with an exercise
price of $0.25, expiring March 4, 2000. No finder's fees were payable as a
result of this subscription.
Pursuant to Regulation D, subscription agreements were entered into in July
1996; holders of convertible debentures (Note 7) in aggregate converted
$45,125 of the original principal amount due, resulting in the issuance of
451,250 common shares from treasury, at a price of $0.10 per share. No
finder's fees were payable as a result of these subscriptions.
ESCROW SHARES
The 560,000 common shares issued in August 1988 to acquire the remaining
shareholdings in Absorption and Canadian Absorption Corp (a predecessor
subsidiary to TAI) were subject to an earn-out escrow agreement which
provided for release of the shares on the basis of cumulative cash flow (as
defined by the agreement) from the Company's operations. Any of the 560,000
earn-out shares that were not released from escrow on or before August 25,
1998 were to be canceled. In March of 1998, the company purchased the
escrow shares for $50,000. The proceeds from the purchase were reinvested
through the employee private placement occurring in March of 1998.
26
<PAGE> 27
Under its stock option plan, the company may grant options to eligible
directors and employees of the company and certain consultants and advisors
as allowed under registration rules, provided that the number of shares
issuable does not exceed the lower of 2,400,000 common shares or 10% of the
issued common shares of the company. Options may be issued under the stock
option plan as determined at the sole discretion of the Compensation
Committee, which consists of two non-employee directors of the company.
Options may be issued for a term of up to 10 years at an exercise price to
be determined by the Compensation Committee, provided that the exercise
price is not less than the fair market value of common stock on the date of
the grant. The period after which options vest can vary and is subject to
the discretion of the Compensation Committee.
A SUMMARY OF THE STATUS OF THE COMPANY'S STOCK OPTION PLAN AS AT JANUARY 31,
2000 IS PRESENTED BELOW:
<TABLE>
<CAPTION>
2000 1999 1998
---------------------- ---------------------- -----------------------
SHARES WEIGHTED SHARES WEIGHTED SHARES WEIGHTED
AVERAGE PRICE AVERAGE PRICE AVERAGE PRICE
------ ------------- ------ ------------- ------ -------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding - Beginning of year 1,427,836 $ 0.21 1,196,500 $ 0.34 1,241,500 0.53
Granted 1,023,400 0.54 703,336 0.23 -- --
Exercised (737,500) 0.20 -- -- -- --
Surrendered or expired (32,336) 0.80 (472,000) 0.56 (95,000) 0.79
Outstanding - End of year 1,681,400 $ 0.41 1,427,836 $ 0.21 1,196,500 0.34
Options exercisable at year end 658,000 $ 0.20 1,177,086 $ 0.22 1,053,500 0.65
</TABLE>
THE FOLLOWING TABLE SUMMARIZES INFORMATION ABOUT OPTIONS OUTSTANDING AT JANUARY
31, 2000:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------------- ----------------------------------------
RANGE OF EXERCISE NUMBER WEIGHTED AVERAGE
PRICES OUTSTANDING AT REMAINING WEIGHTED AVERAGE NUMBER EXERCISABLE WEIGHTED AVERAGE
JANUARY 31, 2000 CONTRACTUAL LIFE EXERCISE PRICE AT JANUARY 31, 2000 EXERCISE PRICE
------------------ ---------------- ---------------- ---------------- ------------------- ----------------
<S> <C> <C> <C> <C> <C>
$ 1.00 45,750 56 months $ 1.00 - -
$ 0.75 45,750 56 months $ 0.75 - -
$0.50 - 0.54 834,150 36 months $ 0.54 - -
$0.25 - 0.34 85,750 45 months $ 0.29 - -
$ 0.20 670,000 19 months $ 0.20 658,000 $ 0.20
------------------ ---------------- ---------------- ---------------- ------------------- ----------------
$0.20 - 1.00 1,681,400 31 months $ 0.41 658,000 $ 0.20
------------------ ---------------- ---------------- ---------------- ------------------- ----------------
</TABLE>
Through a proxy vote of common shareholders, at the Annual General Meeting,
1,146,500 stock options were repriced to $0.20 per share in August of 1998.
27
<PAGE> 28
<TABLE>
<CAPTION>
NO. OF
UNDERLYING
WARRANTS SHARES EXERCISE PRICES
---------- ---------------
<S> <C> <C>
Warrants outstanding, January 31, 1997 1,994,980 $0.50 to $1.75
Exercised (65,000) $0.50
Surrendered or expired (549,980) $0.50 to $0.625
---------- ---------------
Warrants outstanding, January 31, 1998 1,380,000 $0.50 to $1.75
Issued 1,966,930 $0.10 to $0.25
Surrendered or expired (800,000) $0.50 to $1.25
---------- ---------------
Warrants outstanding, January 31, 1999 2,546,930 $0.10 to $1.75
Issued --
Exercised (432,941) $0.10 to $0.25
Surrendered or expired (430,000) $0.50 to $1.75
---------- ---------------
Warrants outstanding, January 31, 2000 1,683,989 $0.10 to $0.25
---------- ---------------
</TABLE>
Warrants outstanding at January 31, 2000 are due to expire from March 4,
2000 to January 7, 2001.
9. RELATED PARTY INFORMATION
Included in expenditures for fiscal 2000 are costs of $50,000 for office
rent, and related services (1999 - $53,000; 1998 - $74,000) which were
incurred on a cost reimbursement basis from a corporation owned and
controlled by an officer and director of the company. At January 31, 2000
an amount of $3,000 (1999, $10,000) was due to this related party.
10. INCOME TAXES
Potential tax benefits relating to operating losses have not been recorded
in the accounts. IABS and its subsidiaries have non-capital loss
carry-forwards from Canadian operations totaling Cdn $4,010,707 (expiring
2000 to 2005), and from United States operations totaling $5,969,902
(expiring 2004 to 2012). These loss carry-forwards are available for offset
against future taxable incomes arising from Canadian and United States
operations.
11. SEGMENTED INFORMATION
The Company is involved primarily in the development, manufacture,
distribution and sale of absorbent products. Its assets are located, and
its operations are primarily conducted in the United States.
The Company defines its business segments based upon the market in which
its customers sell product. The Company operates principally in two
business segments, the animal care industry and the industrial cleanup
industry.
Management of the Company evaluates its segments based upon the operating
income before depreciation and amortization generated by each segment.
Depreciation and amortization are managed on a consolidated basis and as
such are not allocated to individual segments. There are no intersegment
transactions or significant differences between segment accounting and
corporate accounting basis.
28
<PAGE> 29
JANUARY 31, 2000 BUSINESS SEGMENT DATA
<TABLE>
<CAPTION>
ANIMAL CARE INDUSTRIAL CONSOLIDATED
----------- ---------- ------------
<S> <C> <C> <C>
Revenues $ 6,472 $ 1,289 $ 7,761
Operating costs and expenses 4,955 1,290 6,245
----------- ---------- ------------
Operating income/(loss) before
Depreciation & amortization 1,517 (1) 1,516
Depreciation & amortization (144)
------------
Net income/(loss), before taxes $ 1,372
============
Assets $ 3,155 $525 $ 3,680
Capital Expenditures $ 284 $ 10 $ 294
JANUARY 31, 1999 BUSINESS SEGMENT DATA
ANIMAL CARE INDUSTRIAL CONSOLIDATED
Revenues $ 4,733 $ 1,236 $ 5,969
Operating costs and expenses 4,043 1,289 5,332
----------- ---------- ------------
Operating income/(loss) before
Depreciation & amortization 690 (53) 637
Depreciation & amortization (118)
------------
Net income/(loss), before taxes $ 519
============
Assets $1,788 $ 475 $2,263
Capital Expenditures $ 84 $ 22 $ 106
JANUARY 31, 1998 BUSINESS SEGMENT DATA
ANIMAL CARE INDUSTRIAL CONSOLIDATED
Revenues $3,593 $1,577 $5,170
Operating costs and expenses 3,826 1,809 5,635
----------- ---------- ------------
Operating income/(loss) before
depreciation & amortization (233) (232) (466)
Depreciation & amortization (127)
------------
Net income/(loss), before taxes $(593)
============
Assets $1,512 $ 679 $ 2,191
Capital Expenditures $ 15 $ 7 $ 22
</TABLE>
During the year ended January 31, 2000, 91% percent of sales were to United
States customers, 3% to Canadian customers, and 6% to other foreign
customers. Revenues from one customer of our Animal Care segment represents
approximately 18% of the Company's total revenues.
In fiscal 1999 90% of sales were to United States customers, 5% to Canadian
and 5% to foreign. There was one customer who accounted for more than 10%
of sales. In fiscal year 1998 89% of sales were to United States customers,
6% to Canadian and 5% to foreign.
29
<PAGE> 30
12. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES AND
PRACTICES
The consolidated financial statements have been prepared in accordance with
Canadian GAAP which differ in certain respects from those principles and
practices that the company would have followed had it's consolidated
financial statements been prepared in accordance with U.S. GAAP.
The following summary sets out the material adjustments to the Company's
reported liabilities, shareholders' equity and net income/(loss) which
would be made in order to conform to U.S. GAAP:
ADJUSTMENTS TO LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
JANUARY 31, 2000 JANUARY 31, 1999
---------------- ----------------
<S> <C> <C>
Total liabilities under Canadian GAAP $ 700 $ 839
Income taxes (a) 87 77
------- -------
Total liabilities under U.S. GAAP $ 787 $ 916
======= =======
Total shareholders' equity under Canadian GAAP $ 2,980 $ 1,424
Effect of above adjustment (87) (77)
------- -------
Total shareholders' equity under U.S. GAAP (b) (d) $ 2,893 $ 1,347
======= =======
</TABLE>
ADJUSTMENTS TO NET INCOME/(LOSS)
<TABLE>
<CAPTION>
JANUARY 31, 2000 JANUARY 31, 1999 JANUARY 31, 1998
---------------- ---------------- ----------------
<S> <C> <C> <C>
Net income/(loss) for the period under Canadian $ 1,334 $ 519 $ (593)
GAAP
Stock based compensation (f) (14)
Income taxes (a) 429 (12) (4)
------- ------- -------
Net income/(loss) for the period under U.S. GAAP $ 1,749 $ 507 $ (597)
Basic Net income/(loss) per share under U.S. GAAP (d) (e) $ 0.09 $ 0.03 $ (0.04)
Fully diluted net income/(loss) per share under
U.S. GAAP (e) $ 0.08 $ 0.02 --
</TABLE>
(a) The Financial Accounting Standards Board issued Statement Number 109 on
"Accounting for Income Taxes" ("FAS 109") which requires the use of the
assets and liability method of accounting for income taxes, whereas the
deferral method of accounting of income taxes is acceptable under
Canadian GAAP. Under FAS 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to temporary
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 expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.
The following table summarizes the significant components of the
Company's tax assets and liabilities:
<TABLE>
<CAPTION>
CANADIAN USA
OPERATIONS OPERATIONS TOTAL
---------- ---------- -----
<S> <C> <C> <C>
Deferred Tax Assets:
Non-capital loss carryforwards $ 1,266 $ 2,030 $ 3,296
Deferred expenditures 31 3 34
------- ------- -------
Gross deferred tax asset 1,297 2,033 3,330
Valuation allowance for deferred tax asset (858) (2,033) (3,330)
------- ------- -------
$ 439 $ -- $ 439
======= ======= =======
Deferred Tax Liabilities:
Fixed assets $ -- $ (87) $ (87)
------- ------- -------
Total $ -- $ (87) $ (87)
======= ======= =======
</TABLE>
30
<PAGE> 31
The amount taken into income as a deferred tax asset must reflect that
portion of the income tax loss carryforwards that is likely to be
realized from future operations. For the year ended January 31, 2000
management determined that it was more likely than not that
approximately $1,290,000 of the Company's losses from its U.S.
operations will be realized. Accordingly, for U.S. GAAP the Company has
recorded a deferred tax asset of $439,000.
(b) Canadian GAAP allows for the elimination of operating deficits by the
reduction of stated capital attributable to common shares with a
corresponding offset to the accumulated deficit. This reclassification,
which the Company made on February 1, 1993, is not permitted under the
U.S. basis and would require an increase in share capital and deficit
of $6,429,272 at January 31, 2000 and 1999.
(c) Under U.S. GAAP, common shares returnable to the issuer if specified
conditions are not met are excluded from the determination of weighted
average number of common shares used for calculation of earnings per
share if those conditions are not currently being attained. The 560,000
common shares escrowed (Note 8) for release pursuant to cumulative cash
flow earned from operations have been excluded for reporting net
income/(loss) per share under U.S. GAAP.
(d) Under U.S. GAAP, comprehensive income/(loss) would consist of net
income/(loss) only.
(e) Under U.S. GAAP the Company's fully diluted earnings per share was
calculated using the treasury stock method. In 1998 the effect of
potential issues of shares under warrants and shares options were
non-dilutive.
(f) The company applies APB Opinion 25, "Accounting for stock issued to
employees", and related interpretations in accounting for the stock
compensation plan. Under APB Opinion 25, because the exercise price of
the Company's employee stock options equals the market price of the
underlying stock at the date of grant, no compensation cost is
recognized.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation", requires the company to attribute a fair
value of equity instruments issued in return for goods or services
received. Under the terms of an agreement entered into with the Wall
Street Group, Inc. ("Wall Street") on September 30, 1999, Wall Street
agreed to provide financial public relations counsel to the Company for
a period of one year from the date of the agreement in return for a
cash fee of $5,000 per month and options to purchase 183,000 common
shares in the Company at varying exercise prices. The company estimated
the fair value of each stock option on September 30, 1999, the date the
Company entered into the contract, by using the Black-Scholes option
pricing model with the following assumptions used for grants in the
year; dividend yield of $nil; expected volatility of 114%; risk free
rate of 5.77% and expected life of five years.
13. FINANCIAL INSTRUMENTS
The fair market value of the Company's financial instruments,
consisting of cash and cash equivalents, accounts receivable, accounts
payable and accrued liabilities and operating line of credit
approximates their carrying values. The fair market value of
instruments due to related parties has not been provided as it is not
practicable to determine such amounts due to the unavailability of
financial instruments with similar terms and conditions.
14. CONTINGENCY
Uncertainty due to the year 2000 Issue The Year 2000 issue arose
because many computerized systems use two digits rather than four to
identify a year. Date-sensitive systems may recognize the year 2000 as
1900 or some other date, resulting in errors when information using
year 2000 dates is processed. In addition, similar problems may arise
in some systems that use certain dates in 1999 to represent something
other than a date. The effects of the Year 2000 Issue may be
experienced after January 1, 2000, and if not addressed, the impact on
operations and financial reporting may range from minor errors to
significant systems failure that could affect an entity's ability to
conduct
31
<PAGE> 32
normal business operations. It is not possible to be certain that all
aspects of the Year 2000 Issue affecting the entity, including those
related to the efforts of customers, suppliers, or other third parties,
will be fully resolved.
15. SUBSEQUENT EVENTS
Subsequent to January 31, 2000:
a) Acquisition - The company entered into a letter of intent with
Puppy-Go-Potty, Inc., a division of Sode Enterprises, Inc., to
purchase the assets of and the rights to sell the Puppy-Go-Potty,
Inc. product. Under the terms of the agreement the company is to
make an initial payment of $100,000 and then make royalty payments
based on gross sales of the product of 2% in years four through
six and 1% in year seven from the date of agreement.
b) Exercise of options - 20,250 stock options, at an exercise price
of $0.20 were exercised.
c) Exercise of warrants - 1,495,742 warrants were exercised at an
exercise price of $0.25. All of these warrants were issued in
March of 1998 as part of the company's private placement (note 8)
and were due to expire on March 4, 2000.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the Company's directors and executive officers and
regarding compliance with Section 16 of the Securities and Exchange Act of 1934
required by this Item, is incorporated by reference to pages 3 through 5 of the
Company's Proxy Statement prepared for the Annual General Meeting of
Shareholders to be held June 12, 2000.
ITEM 10. EXECUTIVE COMPENSATION
The information required by Item 10 is incorporated by reference to pages 5
through 10 of the Company's Proxy Statement prepared for the Annual General
Meeting of Shareholders to be held June 12, 2000.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The information required by Item 11 is incorporated by reference to page 3 of
the Company's Proxy Statement prepared for the Annual General Meeting of
Shareholders to be held June 12, 2000.
ITEM 12. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to page 10 of
the Company's Proxy Statement prepared for the Annual General Meeting of
Shareholders to be held June 12, 2000.
32
<PAGE> 33
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
(A) The following documents are filed as a part of this Report.
(I) FINANCIAL STATEMENTS
The following Report of Independent Chartered Accountants and
Consolidated Financial Statements of the Company:
Consolidated Financial Statements
As at January 31, 2000 and 1999:
Consolidated Balance Sheets
For the Fiscal Years Ended January 31, 2000, 1999 and 1998:
Consolidated Statements of Operations and Deficit
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(II) FINANCIAL STATEMENT SCHEDULES
Financial Statement Schedules have been omitted because they are not
applicable or are not required or the information to be set forth
therein is included in the Consolidated Financial Statements or notes
thereto.
(III) EXHIBITS
The exhibits listed on the Exhibit Index at page 34 are filed as
part of this report.
33
<PAGE> 34
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
INTERNATIONAL ABSORBENTS INC., a
British Columbia, Canada corporation
/s/ Gordon L. Ellis
President and Chief Executive Officer
Dated: April 14, 2000
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Gordon L. Ellis his attorney-in-fact,
each with the power of substitution, for him in any and all capacities, to sign
any amendments to this Report on Form 10-KSB, and to file same, with exhibits
thereto and other documents in connection therewith, with the U.S. Securities
and Exchange Commission, hereby ratifying and confirming all that said
attorney-in-fact, or his substitutes, may do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/Gordon L. Ellis
- ------------------------- Chairman of the Board of Directors April 14, 2000
Gordon L. Ellis President & Chief Executive Officer
/s/Stephen H. Silbernagel
- ------------------------- Director April 14, 2000
Stephen H. Silbernagel
/s/John J. Sutherland
- ------------------------- Director April 14, 2000
John J. Sutherland
/s/Douglas E. Ellis Director April 14, 2000
- -------------------------
Douglas E. Ellis
/s/Shawn M. Dooley Director April 14, 2000
- -------------------------
Shawn M. Dooley
/s/David H. Thompson
- ------------------------- Chief Financial Officer April 14, 2000
David H. Thompson
34
<PAGE> 35
EXHIBIT INDEX
EXHIBIT 3. ARTICLES OF INCORPORATION AND BY-LAWS
3.1 (1) Altered Memorandum of Company
3.2 (1) Articles of the Company
EXHIBIT 10. MATERIAL CONTRACTS
10.1 (3) Supply Agreement between Georgia-Pacific Corp and Absorption Corp
dated February 17, 1994
10.2 (1) Lease for Bellingham, WA plant between Port of Bellingham and
Absorption Corp dated October 8, 1985 (with modifications and
renewals)
10.3 (1) Rental contracts between the Company, Absorption Corp, Canadian
Absorption Corp and ABE (1980) Industries Inc. dated
December 1, 1989
10.4 (1) Office Services Agreement between the Company and ABE (1980)
Industries Inc. dated November 10, 1988
10.5 Office Services Agreement between the Company and ABE (1980)
Industries Inc. dated September 1, 1998.
EXHIBIT 13. ANNUAL REPORT OF SECURITY HOLDERS, FORM 10-Q OR QUARTERLY REPORT
TO SECURITY HOLDERS
13.1 (4) 2000 Annual Report to Shareholders
EXHIBIT 21. SUBSIDIARIES OF THE REGISTRANT
21.1 (2) List of Subsidiaries of the Company
EXHIBIT 23. CONSENTS OF EXPERTS AND COUNSEL
23.1 (4) Consent (Auditor's Report) of PriceWaterhouseCoopers
EXHIBIT 27. FINANCIAL DATA SCHEDULE
27 (4) Financial Data Schedule
- --------------------------------------------------------------------------------
1 Incorporated by reference to the exhibit filed with the Company's
Registration Statement on Form F-1 (No. 33-45919) as amended.
2 Incorporated by reference to the exhibit filed with the Company's Annual
Report of Form 10-K for the fiscal year ended January 31, 1993.
3 Incorporated by reference to the exhibit filed with the Company's Annual
Report of Form 10-K for the fiscal year ended January 31, 1994.
4 Filed herewith.
35
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