SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
/ X / QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to _________
Commission file number 33-96882-LA
CARING PRODUCTS INTERNATIONAL, INC.
(Name of small business issuer in its charter)
------------------------
DELAWARE 98-0134875
(State or other jurisdiction of (IRS Employer Identification No.)
------------------------
200 FIRST AVENUE WEST, SUITE 200, SEATTLE, WASHINGTON 98119
(Address of principal executive offices)
(206) 282-6040
(Issuer's telephone number, including area code)
------------------------
Securities registered under Section 12(b) of the Exchange Act: None.
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.01 par value
Warrants to purchase common stock.
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS
Not applicable.
APPLICABLE ONLY TO CORPORATE REGISTRANTS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of August 7, 1998, the Registrant
had 2,781,343 shares of Common Stock outstanding.
Transitional Small Business Disclosure Format (check one):
Yes No X
--- ---
1
CARING PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARIES
FORM 10-QSB
FOR THE QUARTER ENDED JUNE 30, 1998
PAGE
INDEX NUMBER
PART I FINANCIAL INFORMATION
Item 1 Consolidated Balance Sheets at March 31, 1997 and June 30, 1998. 3
Consolidated Statements of Operations each of the three-month
periods ended June 30, 1997 and 1998. 4
Consolidated Statements of Cash Flows for the three-month periods
ended June 30, 1997 and 1998 5
Notes to Consolidated Financial Statements. 6
Item 2 Management's Discussion and Analysis of Financial Condition
And Results of Operations 9
PART II OTHER INFORMATION
Item 1 Legal Proceedings. 13
Item 2 Changes in Securities. 13
Item 3 Defaults Upon Senior Securities 13
Item 4 Submission of Matters to a Vote of Security Holders 13
Item 5 Other Information 13
Item 6 Exhibits and Reports on Form 8-K 13
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CARING PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, June 30,
- --------------------------------------------------------------------------------------------------------------------------
1998 1998
- --------------------------------------------------------------------------------------------------------------------------
(Unaudited)
ASSETS
------------------------------------------------------------
Current assets:
Cash $ 3,415,569 $ 2,144,371
Accounts receivable, less allowance for doubtful
accounts of $23,378 at March 31, 1998 and June 30, 1998 600,795 1,108,852
Inventories 2,263,333 2,048,136
Prepaid expenses 15,782 3,116
----------------------------
Total current assets 6,295,479 5,304,475
Equipment, net 221,245 227,755
Intangible assets, net 204,205 200,484
Other assets 18,041 18,041
----------------------------
$ 6,738,970 $ 5,750,755
----------------------------
----------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------------------------------
Current liabilities:
Accounts payable $ 1,040,096 $ 581,606
Accrued liabilities 49,600 52,877
Current portion of lease obligations 8,770 8,770
----------------------------
Total current liabilities 1,098,466 643,253
Commitments, contingencies and subsequent events
Lease obligations, less current portion 10,418 8,400
----------------------------
Total liabilities 1,108,884 651,653
----------------------------
Stockholders' equity:
Preferred stock, no shares outstanding --
Common stock, 2,781,343 shares outstanding at March 31, 1998
and June 30, 1998 27,814 27,814
Additional paid-in capital 19,686,115 19,686,115
Accumulated deficit (14,083,843) (14,614,827)
------------ ------------
Total stockholders' equity 5,630,086 5,099,102
------------ ------------
$ 6,738,970 $ 5,750,755
----------------------------
----------------------------
See accompanying notes to consolidated financial statements.
3
CARING PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three-Month Periods Ended June 30, 1997 and 1998
(Unaudited)
1997 1998
- -------------------------------------------------------------------------------
Revenues $ 818,403 $ 788,960
Cost of sales 385,471 453,372
-----------------------------------
Gross profit 432,932 335,588
----------------------------
Operating expenses:
Selling 548,950 589,000
General and administrative 289,467 295,652
Amortization and depreciation 14,278 16,568
----------------------------
Total operating expenses 852,695 901,220
----------------------------
Loss from operations (419,763) (565,632)
----------------------------
Other income (expense):
Interest income 22,499 33,823
Interest expense (152,155) (462)
Other, net (74,090) 1,287
----------------------------
(203,746) 34,648
----------------------------
Net loss $(623,509) $ (530,984)
----------------------------
----------------------------
Net loss per common share $ (0.63) $ (0.19)
----------------------------
Weighted average common shares 987,014 2,781,343
----------------------------
See accompanying notes to consolidated financial statements
4
CARING PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three-Month Periods ended June 30, 1997 and 1998
- -----------------------------------------------------------------------------------------------------------------------------
1997 1998
- -----------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $ (623,509) $ (530,984)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization and depreciation 26,341 17,835
Deemed interest 34,081 --
Change in operating assets and liabilities:
Decrease (increase) in accounts receivable (326,790) (508,057)
Decrease (increase) in inventories (677,861) 215,197
Decrease in prepaid expenses 9,987 12,666
Increase in other assets (8,847) --
Increase (decrease) in accounts payable (13,268) (458,489)
Increase (decrease) in accrued liabilities (34,522) 3,277
----------------------------
Net cash used in operating activities (1,614,388) (1,248,555)
Cash flows from investing activities:
Capital expenditures -- (14,808)
Loss from disposal of equipment -- (5,815)
----------------------------
Net cash used in investing activities -- (20,623)
----------------------------
Cash flows from financing activities:
Decrease in restricted cash, net 157,080 --
Proceeds from lines of credit, net 1,274,439 --
Repayment of long-term debt (3,491) --
Proceeds from notes payable to related parties 950,400 --
Repayment of notes payable to related parties (741,700) --
Repayment of lease obligations (8,033) (2,018)
--------- --------
Net cash provided (used) by financing activities 1,628,695 (2,018)
Increase (decrease) in cash 14,307 (1,271,196)
Cash at beginning of period 118,573 3,415,569
----------------------------
Cash at end of period $ 132,880 $ 2,144,371
----------------------------
Supplemental disclosure of cash flow information - cash paid during the
period for interest $ 147,468 $ 147
----------------------------
Supplemental schedule of noncash investing and financing activities:
Estimated fair market value of warrants issued
recorded as deemed interest $ 163,592 --
See accompanying notes to consolidated financial statements.
5
CARING PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE-MONTH PERIODS ENDED JUNE 30, 1997 AND 1998
(1) PRESENTATION OF INTERIM INFORMATION
The unaudited consolidated financial statements and related notes are
presented as permitted by Form 10-QSB, and do not contain certain
information included in the Company's audited consolidated financial
statements and notes for the fiscal year ended March 31, 1998. The
information furnished reflects, in the opinion of management, all
adjustments, consisting of normal recurring accruals, necessary for a
fair presentation of the results of the interim periods presented. The
results of operations for interim periods are not necessarily indicative
of the results to be expected for the entire fiscal year ending March
31, 1999. The accompanying unaudited consolidated financial statements
and related notes should be read in conjunction with the audited
consolidated financial statements and the Form 10-KSB of Caring Products
International, Inc. and its subsidiaries (the "Company") and notes
thereto, for its fiscal year ended March 31, 1998.
6
CARING PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE-MONTH PERIODS ENDED JUNE 30, 1997 AND 1998
(2) INVENTORIES
Inventories consisted of the following:
June 30, 1998 March 31, 1998
(Unaudited)
Finished goods $1,905,599 $2,154,395
Work in process 86,228 86,228
Raw materials 49,008 15,409
Packaging 7,301 7,301
---------- ----------
$2,048,136 $2,263,333
---------- ----------
7
CARING PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE-MONTH PERIODS ENDED JUNE 30, 1997 AND 1998
(3) LOSS PER SHARE
In February 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 128, EARNINGS PER SHARE. SFAS 128 establishes standards for
computing and presenting earnings per share ("EPS") and applies to entities
with publicly held common stock or potential common stock. This statement
is effective for financial statements issued for periods ending December
15, 1997, including interim periods, and requires dual presentation of
basic and diluted earnings per share on the face of the income statement.
In accordance with SFAS No. 128, the computation of diluted EPS shall not
assume conversion, exercise, or contingent issuance of securities that
would have an antidilutive effect on earnings per share. SFAS No. 128 also
states that although including those potential common shares in the other
diluted per-share computations may be dilutive to their comparable basic
per-share amounts, no potential common shares shall be included in the
computation of any diluted per-share amount when a loss from continuing
operations exists, even if the entity reports net income.
Due to the net loss position of the Company, only the net loss per common
share is presented on the face of the unaudited consolidated statements of
operations for the three-month periods ended June 30, 1997 and 1998.
(4) YEAR 2000 COMPUTER SOFTWARE CONVERSION
The Company regularly updates its information systems capabilities, and has
evaluated all significant computer software applications for compatibility
with the year 2000. With the system changes implemented to date and other
planned changes, the Company anticipates that its computer software
applications will be compatible with the year 2000. Expenditures
specifically related to software modifications for year 2000 compatibility
are not expected to have a material effect on the Company's operations or
financial position. However, the Company is dependent on numerous vendors
and customers which may incur disruptions as a result of year 2000 software
issues. Accordingly, no assurance can be given that the Company's
results of operations will not be impacted by this industry-wide issue.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
THE FOLLOWING ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL
CONDITION OF THE COMPANY SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, OF THE COMPANY CONTAINED
ELSEWHERE IN THIS FORM 10-QSB.
OVERVIEW
Caring Products International, Inc. (the "Company") has designed and markets
a line of proprietary urinary incontinence products that are sold under the
REJOICE brand name in the United States and Canada. Historically, the
Company's customer base has consisted primarily of drug store chains and
retail stores.
Quarter to quarter, the Company's sales can fluctuate with the introduction
of a large retail or drugstore chain, with higher initial product
requirements to stock store shelves. Additionally, gross margins can
fluctuate based on the mix of sales to healthcare and retail products, as
well as the type of products sold. Gross profit margins are also affected by
the type of product sold as the Company sells down higher costed inventory
produced in Canada. All of the Company's pants are now being produced in
Mexico, where Rejoice pants can be produced at a significant savings compared
to Rejoice pants which had been produced in Canada.
RESULTS OF OPERATIONS
Revenues decreased by 4% from $818,403 for the three-month period ended June
30, 1997 (the "1997 Period") to $788,960 for the three-month period ended
June 30, 1998 (the "1998 Period"). During the 1997 Period, the Company
shipped a large reorder to an existing customer, as well as to several other
smaller customers. During the 1998 Period, the Company shipped an initial
order to one large drug chain. There were no significant changes in the
Company's pricing to its customers in the 1997 Period compared to the 1998
Period.
Cost of sales increased from $385,471 for the three-months ended June 30,
1997 to $453,372 for the three months ended June 30, 1998, an increase of
18%. Although sales were slightly lower in the 1998 Period compared to the
1997 Period, the increase in cost of sales during the 1998 Period is
primarily the result of a higher percentage of sales to healthcare customers
and the sale of certain discontinued healthcare pant styles at a lower gross
profit margin than retail inventory produced by the Company's pant
subcontractor in Mexico. Retail sales typically generate higher gross profit
margins than healthcare sales.
Gross profit margins on sales continued to improve since the March 31, 1998
fiscal year end (from 34% at March 31, 1998 to 43% at June 30, 1998). Gross
profit on sales was $335,588 for the three month period ended June 30, 1998
compared to $432,932 for the three month period ended June 30, 1997, a
decrease of 22%. The decrease in gross profit margin during the 1998 Period
as compared to the
9
1997 Period primarily reflects the slightly lower sales, the higher
percentage of healthcare sales, and the sale of certain discontinued
healthcare pant styles at a lower gross profit than retail inventory produced
in Mexico. Gross profit margins may fluctuate in the future depending on
changes in the mix of products sold, the mix of sales distribution channels,
and other factors such as the sale of inventory with lower gross profit
margins.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED:
OPERATING EXPENSES
Total operating expenses increased from $852,695 in the 1997 Period to
$901,220 in the 1998 Period, an increase of 6%. During the 1997 Period, the
Company shipped primarily reorders. During the 1998 Period, the Company
shipped an initial order to a large retail chain. The increase during the
1998 Period compared to the 1997 Period was primarily attributable to higher
set-up costs including one-time expenses for merchandising trays, freight
expenses, and sales commissions attributable to the larger number of stores
associated with the initial order shipped during the 1998 Period. During the
1998 Period, the Company also had increased, ongoing participative
promotional expenses such as chain-specific in-store programs associated with
customers obtained subsequent to the 1997 Period. In addition, the Company
had higher legal, consulting, and insurance costs in the 1998 Period than the
1997 Period, which were offset by lower general administrative expenses.
Selling costs increased 7% from $548,950 for the three months ended June
1997 to $589,000 for the three months ended June 30, 1998. The increase was
primarily attributable to higher set-up costs, freight expenses and sales
commissions for the larger number of stores associated with the initial order
shipped during the 1998 Period, and increased promotional expenses for
ongoing participative promotional expenses associated with customers obtained
subsequent to the 1997 Period. These costs include slotting fees, listing
allowances, and one-time merchandising racks and trays.
General and administrative expenses increased 2% from $289,467 in the 1997
Period to $295,652 in the 1998 Period. The increase in general and
administrative expenses was primarily the result of higher legal costs during
the 1998 Period for general corporate purposes, higher consulting fees
related to the development of international manufacturing and sales
opportunities, and higher insurance and franchise taxes associated with
becoming a public company and the resultant changes in the Company's capital
structure. Most of these costs were offset by lower general administrative
expenses such for telephone, office supplies, postage, as well Canadian
filing expenses incurred during the 1997 Period which did not recur during
the 1998 Period.
OTHER INCOME (EXPENSE), NET
The Company generated $33,823 in interest income during the three months
ended June 30, 1998 compared to $22,499 during the three months ended June
30, 1997, an increase of 50%. The increase in interest income is
attributable to higher average deposit balances resulting from funds received
from the Company's public offering which took place in December 1997.
Interest expense decreased from $152,155 in the 1997 Period to $462 in the
1998 Period, a decrease of 99%. The decrease in interest expense related to
the decrease in short-term and long-term borrowing.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations through private
placements of its equity securities as well as various debt financing
transactions.
10
On December 15, 1997, the Company completed a public offering ("the
Offering") of 1,750,000 units at $5.00 per unit, each unit consisting of one
share of the Company's common stock and a five-year warrant to purchase one
additional share at a price equivalent to 150% of the unit price. Proceeds
from the Offering were $6,823,972, net of offering costs. All of the
Company's outstanding debt was repaid in December 1997 with proceeds from the
Offering.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED:
LIQUIDITY AND CAPITAL RESOURCES, CONTINUED:
On October 5, 1995, the Registrant issued an aggregate 10,000,000 Special
Warrants, which were deemed converted as of February 27, 1996, for no
additional consideration, into 416,667 shares (post reverse splits) and
warrants to purchase up to 208,334 additional shares (post reverse splits) of
Common Stock, exerciseable at Cdn. $19.44 per share through October 5, 1996
and Cdn. $22.68 per share until October 5, 1997 and, as extended, until
October 5, 1998. In connection with this offering, Brenark Securities Ltd.,
which acted as agent, was issued a special right (the "Special Right"), which
is exerciseable for warrants to purchase 33,333 shares (post reverse splits)
of Common Stock, at Cdn. $19.44 per share through October 5, 1996 and Cdn.
$22.68 per share from October 5, 1996 to October 5, 1997 and, as extended, to
October 5, 1998.
On May 5, 1998, the Company reduced the exercise price of the Special
Warrants and the exercise price of the warrants that can be exercised under
the Special Right, to $1.875 per share (representing the closing price per
share of the common stock on that date), and increased the number of shares
entitled to be purchased through the Special Warrants and Special Right by
67,855.
In April 1997, the Company obtained a line of credit with Toronto Dominion
Bank in the amount of Cdn. $1,750,000. Borrowings bore interest at the
Canadian prime rate plus .25%. The Company issued to the guarantor,
Bradstone Equity Partners Inc., f/k/a H.J. Forest Products Inc. ("Bradstone")
warrants to purchase 31,667 shares of the Company's Common Stock, which were
recorded on issuance at their estimated fair market value of $163,592 with a
corresponding reduction in the recorded value of the line of credit. The
debt discount was being amortized to interest expense over the term of the
line of credit. The Company repaid borrowings under the line of credit in
December 1997, which were $1,252,715, net of deemed interest of $163,592.
On May 8, 1997, the Company obtained an additional bank line of credit and
issued to the guarantor thereof, Bradstone Equity Partners Inc. (f/k/a H.J.
Forest Products Inc.), warrants to purchase 31,667 shares (post reverse
splits) of Common Stock at $7.44 per share at any time until May 8, 1998 and
thereafter at $8.64 per share until May 8, 1999. Bradstone Equity Partners
Inc. is a Canadian publicly held corporation. On May 5, 1998, the Company
reduced the exercise price of the warrants to $1.875 per share (representing
the closing price per share of the common stock on that date).
In May and July 1997, the Company borrowed a total of $1,250,000 under a note
payable to Bradstone. Interest on the note was payable monthly at the
Canadian prime rate plus 3%. In December 1997, the note payable to Bradstone
was paid, including accrued interest of $65,983.
On May 5, 1998, the Company canceled and reissued all options outstanding
under the 1993 and 1996 Stock Incentive Plans and reduced the exercise price
to $1.875 per share (representing the closing price per share of the common
stock on that date).
In October and November 1997, Paulson Investment Company, Inc. ("Paulson"),
one of the representatives of the underwriters of the Offering, loaned the
Company a total of $550,000. The loans were non-interest bearing and were to
be repaid by the Company out of the net proceeds of the Offering. These
loans were repaid in December 1997.
11
As of June 30, 1998, the Company's principal sources of liquidity included
cash of $2,144,371, net accounts receivable of $1,108,852, and inventories of
$2,048,136. The Company's operating activities used cash of $1,248,555
during the three month period ended June 30, 1998. The Company anticipates
that the levels of inventories and accounts receivable will vary commensurate
with the Company's sales and, if sales increase, may negatively impact cash
resources.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED:
FORWARD LOOKING STATEMENTS
This Form 10-QSB and other reports and statements filed by the Company from
time to time with the Securities and Exchange Commission (collectively, the
"Filings") contain or may contain forward-looking statements and information
that are based upon beliefs of, and information currently available to, the
Company's management, as well as estimates and assumptions made by the
Company's management.
When used in the Filings, the words "anticipate", "believe", "estimate",
"expect", "future", "intend", "plan" and similar expressions, as they relate
to the Company or the Company's management, identify forward-looking
statements. Such statements reflect the current view of the Company with
respect to future events and are subject to risks, uncertainties and
assumptions relating to the Company's operations and results of operations,
competitive factors and pricing pressures, shifts in market demand, the
performance and needs of the industries which constitute the customers of the
Company, the costs of product development and other risks and uncertainties,
including, in addition to any uncertainties with respect to management of
growth, increases in sales, the competitive environment, hiring and retention
of employees, pricing, new product introductions, product productivity,
distribution channels, enforcement of intellectual property rights, possible
volatility of stock price and general industry growth and economic
conditions. Should one or more of these risks or uncertainties materialize,
or should the underlying assumptions prove incorrect, actual results may
differ significantly from those anticipated, believed, estimated, expected,
intended or planned.
12
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
27.1 - - Financial Data Schedule
(b) Reports on Form 8-K:
None.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this Report to be signed on its behalf
by the undersigned, hereunto duly authorized.
CARING PRODUCTS INTERNATIONAL, INC.
(REGISTRANT)
Date: August 14, 1998 By: /s/ Susan A. Schreter
------------------------
Susan A. Schreter
President
13