##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-QSB þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended April 30, 2004 OR o
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
  Commission file number: 1-31642 INTERNATIONAL ABSORBENTS INC.  Province of British Columbia, Canada
(State or other jurisdiction of incorporation or organization)
    
    None
(IRS Employer Identification Number)
 1569 Dempsey Road
North Vancouver, British Columbia
Canada V7K 1S8
(Address of principal executive offices) (604) 681-6181
(Issuers telephone number, including area code) 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 þ No o State the number of shares outstanding of each of the issuers classes of
common stock, as of June 3, 2004. Title of Class
    
    No. of SharesCommon Shares, no par value
    
    5,861,585




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##### 



INTERNATIONAL ABSORBENTS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(US dollars, in thousands) As at
    
    As atApril 30,
    
    January 31,2004
    
    2004(unaudited)
    
    (audited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    1,735
    
    
    $
    1,453Restricted cash
    
    
    
    
    
    
    432Short term investments
    
    
    215
    
    
    
    211Accounts receivable, net
    
    
    1,914
    
    
    
    1,525Inventories
    
    
    1,410
    
    
    
    1,335Prepaid expenses
    
    
    203
    
    
    
    148Income taxes receivable
    
    
    6
    
    
    
    271Deferred income tax asset
    
    
    31
    
    
    
    31Total current assets
    
    
    5,514
    
    
    
    5,406Property, plant and equipment
    
    
    11,923
    
    
    
    10,348Intangible assets
    
    
    31
    
    
    
    39Other assets, net
    
    
    146
    
    
    
    150Total assets
    
    $
    17,614
    
    
    $
    15,943Liabilities and Stockholders EquityCurrent liabilities:Accounts payable and accrued liabilities
    
    $
    1,893
    
    
    $
    1,976Related party payable
    
    
    12
    
    
    
    4Current portion of long-term debt
    
    
    271
    
    
    
    142Total current liabilities
    
    
    2,176
    
    
    
    2,122Deferred income tax liability
    
    
    454
    
    
    
    384Long-term debt
    
    
    3,786
    
    
    
    2,934Total liabilities
    
    
    6,416
    
    
    
    5,440Stockholders equity:Common stock, no par value;Authorized - 100,000,000 shares
5,811,585 and 5,773,970 issued and outstanding at
April 30, 2004 and January 31, 2004, respectively
    
    
    7,336
    
    
    
    7,256Additional paid in capital
    
    
    502
    
    
    
    489Retained earnings
    
    
    3,360
    
    
    
    2,758Total stockholders equity
    
    
    11,198
    
    
    
    10,503Total liabilities and stockholders equity
    
    $
    17,614
    
    
    $
    15,943
 2




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##### 



INTERNATIONAL ABSORBENTS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(US dollars, in thousands, except for per share amounts) Three Months EndedApril 30,
    
    April 30,2004
    
    2003Sales
    
    $
    5,501
    
    
    $
    4,518Cost of goods sold
    
    
    3,156
    
    
    
    2,9292,345
    
    
    
    1,589Corporate and administrative expenses:Marketing and sales
    
    
    756
    
    
    
    609General and administrative
    
    
    607
    
    
    
    4801,363
    
    
    
    1,089Income from operations
    
    
    982
    
    
    
    500Interest expense
    
    
    (38
    )
    
    
    Interest income
    
    
    3
    
    
    
    8Income before provision for income taxes
    
    
    947
    
    
    
    508Current income tax provision
    
    
    (70
    )
    
    
    Deferred income tax provision
    
    
    (275
    )
    
    
    (190
    )Net income
    
    $
    602
    
    
    $
    318Basic earnings per share
    
    $
    .10
    
    
    $
    .06Fully diluted earnings per share
    
    $
    .10
    
    
    $
    .05Weighted average number of shares outstanding
(in thousands)Basic
    
    
    5,802
    
    
    
    5,668Diluted
    
    
    6,146
    
    
    
    5,840
 INTERNATIONAL ABSORBENTS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(US dollars, in thousands) Three Months EndedApril 30,
    
    April 30,2004
    
    2003Cash flows from operating activities:
    
    
    841
    
    
    
    451Cash flows from investing activities:
    
    
    (1,620
    )
    
    
    (2,381
    )Cash flows from financing activities:
    
    
    1,061
    
    
    
    2,926Net change in cash
    
    $
    282
    
    
    $
    996Cash and cash equivalents, beginning of period
    
    $
    1,453
    
    
    $
    3,051Cash and cash equivalents, end of period
    
    $
    1,735
    
    
    $
    4,047Cash paid for interest
    
    $
    44
    
    
    $
    Cash paid for income taxes
    
    $
    
    
    
    $
    
 3




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##### 



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (US dollars, in thousands, except where otherwise noted)  1.
    
    Significant Accounting Policies Basis of consolidation and presentation The consolidated financial statements include the accounts of International
Absorbents Inc. (the Company) and its wholly owned subsidiary Absorption Corp
(Absorption), a Nevada corporation doing business in Washington State. These unaudited interim condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles in the
United States and include the accounts of the Company and its wholly owned
subsidiary. All significant inter-company transactions and balances have been
eliminated upon consolidation. Our accompanying interim condensed consolidated
financial statements do not include all notes normally included in our audited
annual financial statements and 10-KSB, and therefore should be read in
conjunction with our annual financial statements. The accompanying financial
statements include all normal recurring adjustments, which, in the opinion of
management, are necessary to present fairly the Companys financial position at
April 30, 2004 and January 31, 2004, and its results of operations and
statement of cash flows for the three months ended April 30, 2004 and 2003. Stock-based employee compensation Statement of Financial Accounting Standards No. 148, Accounting for
Stock-Based Compensation-Transition and Disclosure, an Amendment of FASB
Statement No. 123, amends the disclosure requirements of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (SFAS 123), to require more prominent disclosures in both
annual and interim financial statements regarding the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The Company accounts for stock-based employee and non-employee directors
compensation arrangements in accordance with the provisions of Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees
(APB No. 25), and complies with the disclosure provisions of Statement of
Financial Accounting Standards No. 123 Accounting for Stock-Based
Compensation (SFAS No. 123). Under APB No. 25, compensation expense is
recognized based on the difference, if any, on the date of grant between the
fair value of the Companys common stock and the amount the employees and
non-employee directors must pay to acquire the common stock. Compensation
expense is recognized ratably over the option-vesting period. Compensation expense recognized under APB No. 25 for the grant of options to
employees and non-employee directors was $-0- during the three months ended
April 30, 2004 and 2003. Had the Company determined compensation costs based
on fair value at the date of grant for its awards under the method prescribed
by SFAS No. 123, the Companys net income and earnings per share would be as
follows: 4




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##### 



Three months endedApril 30,
    
    April 30,2004
    
    2003Net income
    
    $
    602
    
    
    $
    318Stock based compensation recognized
under APB No. 25, net of related tax effects
    
    
    
    
    
    
    Compensation expense calculated in accordance
accordance with SFAS 123, net of related tax effects
    
    
    (128
    )
    
    
    (60
    )Pro forma net income
    
    $
    474
    
    
    $
    258Basic earnings per shareAs reported
    
    $
    0.10
    
    
    $
    0.06Pro forma
    
    $
    0.08
    
    
    $
    0.05Diluted earnings per shareAs reported
    
    $
    0.10
    
    
    $
    0.05Pro forma
    
    $
    0.08
    
    
    $
    0.04
 The pro forma compensation expense reflected above has been estimated using the
Black-Scholes option-pricing model. Assumptions used in the pricing model
included: 2005
    
    2004a) risk free interest rate
    
    
    2.37
    %
    
    
    2.00
    %b) expected volatility
    
    
    108.3
    %
    
    
    103.50
    %c) expected dividend yield
    
    
    0.00
    %
    
    
    0.00
    %d) estimated average life (in years)
    
    
    4.40
    
    
    
    3.00
 Other stock based compensation The Company accounts for equity instruments issued in exchange for the receipt
of goods or services from other than employees and non-employee directors in
accordance with SFAS No. 123 and the conclusions reached by the Emerging Issues
Task Force in Issue No. 96-18, Accounting for Equity Instruments That Are
Issued to Other Than Employees for Acquiring or in Conjunction with Selling,
Goods or Services (EITF 96-18). Costs are measured at the estimated fair
market value of the consideration received or the estimated fair value of the
equity instruments issued, whichever is more reliably measurable. The value of
equity instruments issued for consideration other than employee services is
determined on the earlier of a performance commitment or completion of
performance by the provider of goods or services as defined by EITF 96-18.
Stock based compensation recognized under SFAS No. 123 and EITF 96-18 was
$5,000 during both three month periods ended April 30, 2004 and 2003.  2.
    
    Share Capital Common Shares Shares
    
    CapitalCommon shares outstanding, January 31, 2004
    
    
    5,774
    
    
    $
    7,256Common shares outstanding, April 30, 2004
    
    
    5,812
    
    
    $
    7,336
 5




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##### 



Options Stock options outstanding at April 30, 2004 and January 31, 2004 were 843,910
and 581,255, respectively. During the three months ended April 30, 2004 the
Company issued 285,800 options and had 15,395 options exercised. Warrants During the three months ended April 30, 2004, a warrant was exercised to
acquire 22,220 common shares at $2.25 per share. Warrants outstanding at April
30, 2004 and January 31, 2004 were nil and 22,220, respectively. No stock-based
compensation expense was recognized as no warrants were granted for both three
month periods ended April 30, 2004 and 2003.  3.
    
    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 products. The Company operates principally in three business
segments: the animal care industry, the industrial cleanup industry and the
hydro-mulch industry. Management of the Company evaluates these 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 inter-segment
transactions or significant differences between segment accounting and
corporate accounting basis. 6




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##### 



Business Segment Data  Three Months Ended April 30, 2004 Animal
    
    
    
    
    
    Hydro-Care
    
    Industrial
    
    Mulch
    
    ConsolidatedRevenues
    
    $
    5,160
    
    
    $
    255
    
    
    $
    86
    
    
    $
    5,501Operating cost and expenses
    
    
    3,978
    
    
    
    214
    
    
    
    169
    
    
    
    4,361Operating income (loss) before depreciation and amortization
    
    
    1,182
    
    
    
    41
    
    
    
    (83
    )
    
    
    1,140Depreciation and amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (158
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (38
    )Interest Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3Net income before taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    947Capital expenditures
    
    $
    1,980
    
    
    $
    2
    
    
    $
    1
    
    
    $
    1,983
 Business Segment Data  Three Months Ended April 30, 2003 Animal
    
    
    
    
    
    Hydro-Care
    
    Industrial
    
    Mulch
    
    ConsolidatedRevenues
    
    $
    4,149
    
    
    $
    265
    
    
    $
    104
    
    
    $
    4,518Operating cost and expenses
    
    
    3,556
    
    
    
    245
    
    
    
    130
    
    
    
    3,931Operating income (loss) before depreciation and amortization
    
    
    593
    
    
    
    20
    
    
    
    (26
    )
    
    
    587Depreciation and amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (87
    )Interest Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8Net income before taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    508Capital expenditures
    
    $
    1,472
    
    
    $
    91
    
    
    $
    21
    
    
    $
    1,584
 Assets Animal
    
    
    
    
    
    Hydro-Care
    
    Industrial
    
    Mulch
    
    ConsolidatedAt April 30, 2004
    
    $
    15,540
    
    
    $
    750
    
    
    $
    1,324
    
    
    $
    17,614At January 31, 2004
    
    $
    13,881
    
    
    $
    731
    
    
    $
    1,331
    
    
    $
    15,943
 7




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##### 



4.
    
    Inventories components April 30,
    
    January 31,2004
    
    2004Raw materials and supplies
    
    $
    660
    
    
    $
    498Finished goods
    
    
    750
    
    
    
    837$
    1,410
    
    
    $
    1,335
  5.
    
    Property, Plant and Equipment April 30,
    
    January 31,2004
    
    2004Property, plant and equipment
Land
    
    $
    1,626
    
    
    $
    1,626Buildings
    
    
    4,689
    
    
    
    4,657Leasehold improvements
    
    
    629
    
    
    
    629Equipment
    
    
    4,842
    
    
    
    4,616Construction in progress
    
    
    2,760
    
    
    
    1,297$
    14,546
    
    
    $
    12,825Less: Accumulated depreciation
    
    
    (2,623
    )
    
    
    (2,477
    )$
    11,923
    
    
    $
    10,348
 During the three months ended, April 30, 2004, we incurred interest costs of
$44,000, of which $6,000 was capitalized as part of the new facility located in
Jesup, Georgia and $38,000 was interest expense. Total project cost for the
new facility in Jesup, Georgia is estimated at $6,155,000. Of the total cost,
approximately $4,700,000 is being financed through a long-term debt instrument.  6.
    
    Long-term debt In March 2003, we completed a $2,910,000 bond financing. The proceeds of the
financing were used for the construction of the facility in Whatcom County,
Washington, which houses production lines, warehouse space and corporate
offices. The bonds are comprised of $2,355,000 as tax exempt and $555,000 as
taxable. The bonds were issued through the Washington Economic Development
Finance Authority in Washington State. The purchaser and holder of the bonds
is GE Capital Public Finance. The tax exempt bonds have a fixed rate of 5.38%.
The term of these bonds is 190 months, with interest-only payments for the
first 52 months. The taxable bonds have a fixed rate of 5.53%. The term of
these bonds is 52 months. The indebtedness underlying our bonds is secured by
a mortgage on our real property located in Whatcom County, Washington and a
security interest in our equipment assets located on that property. At April
30, 2004 the balance outstanding was $2,355,000 on the tax-exempt and $430,000
on the taxable bonds. On August 20, 2003 we signed a loan agreement with Branch Banking & Trust Co.
to borrow up to $4,691,500 to be used for the construction and equipping of our
new facility in Jesup, Georgia. The loan agreement allows for up to 85% of the
appraised value of property and plant to be borrowed and up to 80% of the value
of equipment to be borrowed. The interest rate for the credit facility is the one-month LIBOR rate (1.1% on April 30,
2004) plus 2.25%. The property and plant portion of this loan is being
amortized over 15 years with a five-year balloon payment on the outstanding
balance due August 20, 2009. The equipment portion of this loan is being
amortized over seven years with a five-year balloon payment on the outstanding 8




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##### 



balance due on August 20, 2009. Funds are drawn on the account as construction
takes place. At April 30, 2004, $1,273,000 had been drawn on this loan. ITEM  2.     MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion is intended to further the readers understanding of the
consolidated financial statements, financial condition, and results of
operations of International Absorbents, Inc. It should be read in conjunction
with the consolidated financial statements, notes and tables which are included
elsewhere in this quarterly report. Overview International Absorbents Inc. is the parent company of its wholly owned
subsidiary Absorption Corp. International Absorbents is a holding company and
Absorption Corp is its operating entity. Management divides the activities of
the operating company into three segments. These segments are animal care
products, industrial absorbent products, and hydro-mulch products. We
manufacture, distribute and sell this spectrum of products to both distributors
and direct buying retailers. Absorption Corp is a leading manufacturer and seller of premium small animal
bedding in North America. The primary product that it sells in this market is a
small animal bedding sold under the brand name CareFRESH®. We consider the
activities that surround the manufacture and distribution of CareFRESH®to be
our core business. Our business strategy is to promote and grow our core
business, and to create diversification in our market channels, our production
methods, and our product lines in an effort to add strength and breadth to our
business structure. As a result, we are dedicating significant resources to
both building infrastructure for the support of our core business and to
creating more product and customer diversification. We believe that this
strategy has started to provide results. Specifically, we continue to grow
sales in our core business and improve the production process of our core
CareFRESH®product while expanding sales of new products and existing products
in new market channels. Even though we are currently experiencing significant
initial costs, we believe our progress with the sales of new product lines will
continue to move us toward developing multiple sources of income, which we
anticipate will help reduce our risk of significant economic hardship due to
reduced reliance on sales from only one significant product. 9




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##### 



Results of Operations The following table illustrates our financial results for the first quarter of
fiscal year 2005 as compared to the first quarter of fiscal year 2004 (in
thousands of U.S. dollars): April 30,
    
    Percent
    
    April 30,
    
    Percent
    
    Percentage2004
    
    of Sales
    
    2003
    
    of Sales
    
    ChangeSales
    
    $
    5,501
    
    
    
    100
    %
    
    $
    4,518
    
    
    
    100
    %
    
    
    22
    %Cost of Goods Sold
    
    
    3,156
    
    
    
    57
    %
    
    
    2,929
    
    
    
    65
    %
    
    
    8
    %Gross Profit
    
    
    2,345
    
    
    
    43
    %
    
    
    1,589
    
    
    
    35
    %
    
    
    48
    %Corporate &
Administrative ExpensesMarketing & sales
    
    
    756
    
    
    
    14
    %
    
    
    609
    
    
    
    13
    %
    
    
    24
    %General & Administrative
    
    
    607
    
    
    
    11
    %
    
    
    480
    
    
    
    11
    %
    
    
    26
    %1,363
    
    
    
    25
    %
    
    
    1,089
    
    
    
    24
    %
    
    
    25
    %Income from operations
    
    
    982
    
    
    
    18
    %
    
    
    500
    
    
    
    11
    %
    
    
    96
    %Interest Income
    
    
    3
    
    
    
    0
    %
    
    
    8
    
    
    
    0
    %
    
    
    -63
    %Interest Expense
    
    
    (38
    )
    
    
    -1
    %
    
    
    0
    
    
    
    0
    %Income before provision
for income taxes
    
    
    947
    
    
    
    17
    %
    
    
    508
    
    
    
    11
    %
    
    
    86
    %Current & deferred
income tax provision
    
    
    (345
    )
    
    
    -6
    %
    
    
    (190
    )
    
    
    -4
    %
    
    
    82
    %Net Income
    
    $
    602
    
    
    
    11
    %
    
    $
    318
    
    
    
    7
    %
    
    
    89
    %
 Revenues Our sales continued to grow from $4,518,000 during the first quarter of fiscal
year 2004 to $5,501,000 during the same period in fiscal year 2005, which was
approximately equal to the growth rate of the previous year. Our core product,
CareFRESH®, showed significant growth during this period due to the additional
package sizes being offered. Our strategy of diversification also showed some
success with the continued growth of pet products such as CareFRESH® Ultra and
Critter Care. Our strategy in regard to our industrial line of products has
remained the same, which is basic maintenance of existing sales as such sales
remained flat for the first quarter of fiscal year 2005 as compared to the
first quarter of fiscal year 2004. Sales of our hydro-mulch product were lower
during the first quarter of fiscal year 2005 than during the same period in
fiscal year 2004, due to a dry spring planting season in the Northwest United
States. During the next quarter of fiscal year 2005, sales of CareFRESH®are expected
to continue to grow at or near the rate at which they grew during the first
quarter of the fiscal year. We anticipate that CareFRESH®will continue to
represent the majority of our sales through the balance of the current fiscal
year. We also expect that during the balance of fiscal year 2005 we will
experience expansion in sales of our new bedding lines in the pet specialty
channel as well as increased sales of bedding lines introduced recently in the
mass merchandise and grocery channels. We will continue to look for
opportunities to diversify our small animal product lines. Our industrial line
of products is expected to remain flat due to the anticipated maintenance of
our existing strategy. We also expect to show growth in the sales of our hydro
mulch product. Overall, we are currently projecting annual net sales for
fiscal year 2005 to increase 15% to 20% over our annual net sales of fiscal
year 2004. 10




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##### 



Gross Profit By focusing on the operations portion of our business plan over the previous
six months we have significantly improved our gross margin. Three areas of
focus are the primary factors for this improvement. First, by moving into our
new Ferndale facility we eliminated approximately $450,000 in annual lease
payments. Second, we converted customers to products that are packaged with
more labor efficient methods and are more cost-effective to ship. Third, we
have continued to increase production rates while reducing some of the
associated fixed costs. The result is that our gross margin (gross profit
divided by sales) increased from 35% in the first quarter of fiscal year 2004
to 43% in the first quarter of fiscal year 2005, while gross profit increased
from $1,589,000 for the first quarter of fiscal year 2004 to $2,345,000 for the
first quarter of fiscal year 2005. We believe that this is an indicator of the
success of our facilities expansion and improvement program, because this
program has improved our gross profits. We also experienced general cost
increases in the areas of materials, labor, utilities and especially
maintenance. During the balance of fiscal year 2005, we expect that our gross profit
percentage will decrease slightly due to the following factors. Recent
petroleum and natural gas price increases will add to our manufacturing
expenses by increasing material and utility costs. Even though we intend to
implement a small price increase during the second quarter of the year in
response to these cost increases, we believe that the maturity of the market
for our core product will limit our ability to increase prices to fully
mitigate these cost increases. Another major factor in reducing our gross
margin is anticipated to be the costs associated with bringing our new Jesup,
Georgia facility up to an efficient level of production. These costs are
currently being estimated at approximately $500,000, the majority of which will
occur in the third fiscal quarter of the year, with the balance occurring in
the fourth fiscal quarter. Because this facility will not be in full
production until near the end of fiscal year 2005, these commissioning costs
are not projected to be offset by freight savings this year. As stated in the
revenues section above, we are projecting increases in the sale of our non-core
products. As such, even though these products will contribute positively to
gross profits, they will reduce the gross margin as they are generally lower
margin products. These products include small animal diets, alternative
beddings and hydro-mulch. Because some of these products are relatively new to
their markets, we cannot predict how much sales growth they will experience. Sales and Marketing During the first quarter we continued to invest in marketing activities to
support the diversification portion of our business plan. We have also grown
to the point that our competition has taken notice of us and our products. As
such, we have had to invest in marketing programs focused on protecting our
growing market share. These two areas of marketing investment have resulted in
an overall increase in marketing expenses as compared to the same quarter of
the previous year. Our marketing and sales expenses increased from $609,000 in
the first quarter of fiscal year 2004 to $756,000 in the first quarter fiscal
year 2005. During the balance of the year, we will continue our marketing initiatives. We
also intend to expand our sales staff to provide more regional exposure at the
retail store level, which we believe will increase both retail placement of new
products and sales velocity for all pet products. As such, our sales and
marketing costs will increase as we invest in our future. General and Administrative Our general and administrative expenses have increased as compared to the first
quarter of fiscal year 2004, due to increased depreciation resulting from our
capital expansion and increased costs related to additional requirements
recently imposed on public companies. Our general and administrative expenses
increased from $480,000 in the first quarter of fiscal year 2004 to $607,000 in
the first quarter of fiscal year 2005. These general and administrative expenses (net of depreciation) are anticipated
to remain relatively flat in fiscal year 2005. We anticipate that any additional savings
we might generate will be off-set by additional overhead resulting from the
Jesup, GA facility. Also attempts to reduce general and administrative
expenses will likely be mitigated by rising costs of being a publicly held
company. 11




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Interest Expense For the first time in several years we have interest expense as a result of the
financing of our capital expansion. We started expensing the interest on our
bonds in Whatcom County, WA during the third quarter of fiscal year 2004. Fiscal year 2005 will be our first full year of interest expense on this
Washington facility. Interest expense will be incurred on the debt for the
Jesup facility when that facility becomes operational. This will occur
sometime during the fourth quarter of the current fiscal year. Income Taxes Since fiscal year 1999, Absorption has been profitable for income tax purposes
and has been able to offset the payment of income taxes in the United States
with the accumulated losses from previous years. Absorption has, for its U.S.
operations, fully utilized as of the second quarter of fiscal 2004 all of its
U.S. tax net operating losses. Over the next year, this provision is expected
to continue to be partially deferred due to accelerated tax deductions related
to our investment in new production facilities. The Company has recorded a
valuation allowance for the parent companys Canadian income tax losses. Net Income Over the past year we have been putting into place several components of our
business plan. These include investments in capital infrastructure, sales and
marketing plans, and cost management plans. The first quarter of fiscal year
2005 shows the results of having successfully completed the implementation of
the components of our business plan. We believe that the increase in net
income from $318,000 in the first quarter of fiscal year 2004 to $602,000 in
the first quarter of fiscal year 2005 was the result of our employees being
able to successfully execute on the plan. Implementation of the key components
of our business plan has resulted in the continued increases in net revenues,
improvements in gross profits and continued controls over overhead expenses.
These steps have allowed us to continue to invest in sales and marketing
activities and capital infrastructure, which we anticipate will strengthen the
Company in the future. We believe that our strong results for the first quarter of fiscal year 2005
will help us absorb the significant start up costs which will result from the
Jesup, Georgia production facility later this year. We continue to estimate
that there will not be a significant increase in our net income this year over
the previous year. If the commissioning period of the new production facility
in Jesup, Georgia takes longer than we are currently projecting, then the net
income results for fiscal year 2005 could be lower than they were for fiscal
year 2004. We are continuing to pursue new sales and marketing initiatives
with the objective to increase both sales and net income during fiscal year
2005. LIQUIDITY AND CAPITAL RESOURCES We are currently in the middle of the second phase of our three-phase capital
expansion plan. This three-phase plan includes: the building of the new
manufacturing and warehousing facility in Ferndale, Washington, which is now
complete; the building of a new production facility in Jesup, Georgia,
construction of which is underway and is estimated to be completed in late
August of 2004; and the move of the Bellingham manufacturing facility to the
Ferndale location, which will begin in approximately one year. The intent of
this capital expansion plan is first to protect our core business by reducing
our production costs and decreasing the cost of shipping product to our
customers, and second to give us the ability to manufacture, warehouse, and
distribute a wider diversity of products. 12




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The table below illustrates the effects this capital expansion plan has had on
our financial statements (in $1,000s of US dollars): As of April 30,
    
    As of January 31,2004
    
    2004Financial ConditionTotal Assets
    
    $
    17,614
    
    
    $
    15,943Total Liabilities
    
    
    6,416
    
    
    
    5,440Total Equity
    
    $
    11,198
    
    
    $
    10,503Debt/equity ratio
    
    
    0.57
    
    
    
    0.52Assets/debt ratio
    
    
    2.75
    
    
    
    2.93Working CapitalCurrent assets
    
    $
    5,514
    
    
    $
    5,406Current liabilities
    
    $
    2,176
    
    
    $
    2,122Current ratio
    
    
    2.53
    
    
    
    2.55Cash
PositionCash, restricted cash & short term investments
    
    $
    1,950
    
    
    $
    2,096Cash generated from operations
    
    $
    841
    
    
    $
    1,733
    ** for the entire year ended January 31, 2004
 Financial Condition During the first quarter of fiscal year 2005, our assets continued to increase
as we built capital infrastructure, a portion of which was paid for through
long-term debt, and a portion through cash, and as we continued to generate
cash from operations. Our total assets increased from $15,943,000 at January
31, 2004 to $17,614,000 at April 30, 2004. We also had an increase in total
liabilities from $5,440,000 at January 31, 2004 to $6,416,000 at April 30, 2004
as we increased our outstanding long-term debt to finance a portion of the new
Jesup, Georgia facility by drawing on the existing loan as construction
progressed. This facility was put into place on August 20, 2003 when we signed
a loan agreement with Branch Banking & Trust Co. to borrow up to $4,691,500 to
be used for the construction and equipping of our new facility in Jesup,
Georgia. Of this amount, $1,827,500 is to be used for property and plant. The
balance of $2,864,000 is for production equipment in the facility. The loan
agreement allows for up to 85% of the appraised value of property and plant to
be borrowed and up to 80% of the value of equipment to be borrowed. The
interest rate is the one month LIBOR rate (1.1089 % on May 4, 2004) plus 2.25%.
The property and plant portion is amortized over 15 years with a five-year
balloon payment on the outstanding balance due August 20, 2009. Funds are
drawn on the account as construction takes place. At January 31, 2004,
$1,273,000 had been drawn on this loan. The equipment portion is amortized
over seven years with a five-year balloon payment on the outstanding balance
due on August 20, 2009. If we are in default under the agreements governing
our indebtedness, the creditors may be able to foreclose on our property and
assets, which would substantially harm our business and financial condition.
During the second quarter of the current fiscal year we are intending to
convert this loan to an Industrial Revenue Bond and as such should be able to
reduce the related long-term interest expense. On April 30, 2004, the purchase
obligations relating to outstanding contracts for building the new facility in
Jesup, Georgia totaled $237,000. Working Capital We believe that our existing cash on hand, long-term debt and available line of
credit currently provides us with enough cash to meet our existing needs for
the foreseeable future. Our balance of cash and cash equivalents, restricted
cash and short term investments decreased slightly between January 31, 2004 and
April 30, 2004 from $2,096,000 to $1,950,000 primarily due to cash used for the
purchase of property, plant and equipment. Current liabilities, mostly in the
area of accounts payable, increased slightly, while current assets 13




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also
increased slightly. This resulted in our current ratio remaining flat for the
first quarter of fiscal year 2005 as compared to the first quarter of fiscal
year 2004, although the ratio remained at a relatively high level. Our current
ratio is expected to decrease during fiscal year 2005 as additional investments
are made in our new production facility located in Jesup, Georgia. Cash Position Cash and short-term investments decreased slightly during the first quarter of
fiscal year 2005 from $2,096,000 at January 31, 2004 to $1,950,000 at April 30,
2004 primarily as a result of cash invested in capital assets. We expect to
continue to use cash in expanding our production infrastructure, mainly in
Jesup, Georgia, during fiscal year 2005. Because cash generated from
operations will be less than the amount of cash we will need to complete our
capital expansion, we expect to use both a portion of our cash on hand and debt
to complete the current phase of our capital expansion plan. We will continue
to closely monitor both current liabilities and current assets as they relate
to the generation of cash with an emphasis on maximizing potential sources of
cash. Cash Generated from Operations We continued to generate cash from operations during the first quarter of
fiscal year 2005. This strong generation of cash was primarily the result of
increased sales, improved gross profit margins and continued control and
maintenance of both current assets and current liabilities. We continue to be
able to limit the growth of our accounts receivable and inventories, even
though we had a significant growth in sales, which resulted in additional cash.
We do expect to see a significant cash increase in inventory during the fourth
quarter of the current fiscal year as a result of the start of operations at
the Jesup, Georgia facility. If our sales continue to increase and we are
able to continue to profitably produce our product, we should be able to
continue to generate cash from operating activities, although it cannot be
assured that this will be the case. Financing and Investing Activities Cash from financing activities during the first quarter of fiscal year 2005
provided $1,061,000. The majority of the cash received, $981,000, was the
result of drawing on the loan from BB&T to pay for a portion of the
construction in Jesup, Georgia, the balance was from the issuance of shares as
a result of the exercise of stock options, $80,000. A significant amount of
cash was used in the first quarter of fiscal year 2005 in investing activities
which were a result of our capital expansion plan. Cash used in investing
activities for the quarter just completed totaled $1,620,000. The majority of
the cash was used to purchase property, plant and equipment (our new east coast
production facility) located in Jesup, Georgia. During the year ended January 31, 2004, the Company renewed its short-term bank
line of credit for up to $1,500,000, which is secured by the accounts
receivable and inventory of Absorption. Interest is payable on funds advanced
at the U.S. rate of prime plus 0.75%. The line of credit matures in January
2005. The funds available for advance to the Company by the lender is limited
to 75% of Absorptions eligible accounts receivable and 40% of Absorptions
eligible inventory. The Company has not drawn any funds from the line of
credit. During the balance of fiscal year 2005, we plan to continue the implementation
of the second phase of our three-phase production expansion plan. The funding
to complete this portion of the plan will come from cash on hand, cash
generated from operations and the debt facility arranged with Branch Banking &
Trust Co., as described above. As already stated, we intend to convert this
debt facility to an Industrial Revenue Bond. The first phase of our production expansion plan was substantially completed
during the third quarter of fiscal year 2004. This was the construction of our
new west coast facility located in Whatcom County, Washington. We had been
operating in five separate leased facilities in Whatcom County. This new
facility, which was financed approximately half through debt and half through
cash, has consolidated four of these leased facilities, resulting in what we
anticipate to be an annual saving in cost of goods sold and general and
administrative expenses of approximately $450,000 in lease payments. The
consolidation of these facilities has also provided us with savings in other
expenses caused by inefficient logistics. We expect that interest on the debt
for the balance of fiscal year 2005 will be approximately $110,000. 14




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Phase two of our production expansion plan is a second production facility
located in Jesup, Georgia. We purchased approximately fifteen acres of real
property in Jesup, Georgia, with an existing 41,000 square foot facility,
during August 2003 for $140,000. We began construction during the fourth
quarter of fiscal year 2004 on this property. The total project cost is
estimated at $6,155,000. Of the total cost, approximately $4,700,000 is being
financed through a long-term bank debt instrument and we anticipate that the
balance will be financed with cash on hand. The annual interest expense of the
debt used to finance this facility is estimated to be approximately $160,000 a
year when the project is completed. By having production on the east coast, we
will expect to have cost savings in excess of additional overhead expenses and
interest on the debt facilities. In addition, we believe that we will better
be able to service our east coast customers and will have added long-term
production security as a result of this diversification of manufacturing
plants. The third phase of our production expansion plan will occur in approximately
one year when we plan to move the Bellingham production facility to the new
Whatcom County plant. The final decision on whether to undertake this move will
depend upon the then-current economic conditions. We believe that this three-phase plan will give us the ability to achieve
significant cost savings, better serve our customers, expand our production
lines, diversify our production capacity and physically move manufacturing in a
manner which is transparent to the users of our products. Environmental Matters We are committed to being an environmentally friendly company and to producing
products which benefit the quality of the environment. Hazardous wastes are
not produced, treated, or stored at any company-owned or operated facilities.
State, federal, and local laws all have jurisdiction over production
activities. We are currently in compliance with these laws and expect to
remain so for the foreseeable future. Critical Accounting Policies Introduction In preparing our financial statements in conformity with accounting principles
generally accepted in the United States, judgments and estimates are made that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reporting period. We
believe that the material estimates that are particularly susceptible to
significant change relate to the determination of the allowance for doubtful
accounts and finance charges, deferred income taxes valuation allowance and
sales incentives. As part of the financial reporting process, our management
collaborates to determine the necessary information on which to base judgment
and develop estimates used to prepare the financial statements. Historical
experience and available information is used to make these judgments and
estimates. However, different amounts could be reported using different
assumptions and in light of different facts and circumstances. Therefore,
actual amounts could differ from the estimates reflected in the financial
statements. In addition to the significant accounting policies described in Note 2 of the
Consolidated Financial Statements of the January 31, 2004 10-KSB, the Company
believes that the following discussion addresses its critical accounting
policies. Inventory Finished goods inventory are valued at the lower of cost (determined on the
first-in, first-out basis) or net realizable value. Cost includes direct
materials, labor and overhead allocation. Raw materials and supplies are valued
at the lower of cost (determined on the first-in, first-out basis) or net
realizable value. Accounts Receivable and Allowance for Doubtful Accounts We typically offer credit terms to our customers without collateral. Finance
charges of 1.5% are assessed when a customer receivable balance becomes 30 days
past due. We record accounts receivable at the face amount less an allowance
for doubtful accounts and an allowance for finance charges. On a regular
basis, we evaluate our accounts receivable and establish these allowances based
on a combination of specific customer 15




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circumstances, as well as credit
conditions and the history of write-offs and collections. Where appropriate,
we obtain credit rating reports and financial statements of the customer to
initiate and modify their credit limits. We obtain credit insurance for
certain accounts that qualify for coverage in order to minimize credit risk
exposure. If circumstances related to specific customers change, our estimates
of the recoverability of receivables could materially change. At April 30,
2004 and January 31, 2004, management considered all accounts receivable in
excess of the allowances for doubtful accounts and finance charges to be fully
collectible. Property, plant and equipment Property, plant and equipment assets are recorded at cost. The Companys
building and equipment are located on owned and leased land. Buildings are
depreciated on a straight line basis over a period of 40 years. Leasehold
improvements are depreciated on a straight line basis over the life of the
lease agreement for property located on leased land. Most of the Companys
equipment is depreciated over its estimated useful life using a 15% declining
balance method, the remainder is depreciated using a straight line method over
5 years. Revenue recognition Revenue from the sale of products is recognized at the time title passes to the
purchaser, which is generally when the goods are conveyed to a carrier.
Promotional allowances are recorded as a reduction of sales, the recognition of
which is determined in accordance with the provisions of EITF 01-9 Accounting
for Consideration Given by a Vendor to a Customer. Income taxes We account for income taxes on the liability method. The liability method
recognizes the amount of tax payable at the date of the financial statements as
a result of all events that have been recognized in the financial statements,
as measured by the provisions of currently enacted tax laws and rates. The
accumulated tax effect of all temporary differences is presented as deferred
federal income tax assets and liabilities within the balance sheet. Impairment of long lived assets We review the carrying amount of long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount may not be
recoverable. The determination of any impairment would include a comparison of
estimated future operating cash flows anticipated to be generated during the
remaining life with the net carrying value of the asset. RISK FACTORS The following risk factors and other information included in this Quarterly
Report should be carefully considered. The risks and uncertainties described
below are not the only ones we face. Additional risks and uncertainties not
presently known to us or that we currently deem immaterial also may impair our
business operations. If any of the following risks occur, our business,
financial condition, operating results and cash flows could be materially
adversely affected. We are still building our market presence and are subject to substantial
competition that could inhibit our ability to succeed as planned. We are one of many small companies that compete in the animal care market. We
are still attempting to build and maintain our market presence as we compete
with both domestic and foreign companies. Any reputation that we may
successfully gain with retailers for quality product does not necessarily
translate into name recognition or increased market share with the end
consumer. Our products may not be well received by the pet owners, or other
companies may surpass us in product innovations. 16




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We may be adversely affected by trends in the retail industry. With the growing trend towards retail trade consolidation, we are increasingly
dependent upon key retailers whose bargaining strength is growing. Our
business may be negatively affected by changes in the policies of our retailer
customers, such as inventory destocking, limitations on access to shelf space,
price demands and other conditions. In addition, as a result of the desire of
retailers to more closely manage inventory levels, there is a growing trend
among retailers to make purchases on a just-in-time basis. This requires us
to shorten our lead time for production in certain cases and more closely
anticipate demand, which could in the future require the carrying of additional
inventories and increase our working capital and related financing requirement. A significant deterioration in the financial condition of one of our major
customers could have a material adverse effect on our sales, profitability and
cash flow. We continually monitor and evaluate the credit status of our
customers and attempt to adjust sales terms as appropriate. Despite these
efforts, a bankruptcy filing by a key customer could have a material adverse
effect on our business, results of operations and financial condition. We depend on a few customers for a significant portion of our business. Our largest customer accounted for approximately 23% and 24% of our net sales
in the first quarter of fiscal year 2005 and 2004, respectively, while our
second largest customer accounted for approximately 22% and 18% of our net
sales in the first quarter of fiscal year 2005 and 2004, respectively. The loss of, or significant adverse change in, our relationship with any of
these key retailers could cause our net sales, income from operations and cash
flow to decrease substantially. The loss of, or reduction in, orders from any
significant customer, losses arising from customer disputes regarding
shipments, fees, merchandise condition or related matters, or our inability to
collect accounts receivable from any major customer could reduce our income
from operations and cash flow. Competition in our industries may hinder our ability to execute our business
strategy, achieve profitability, or maintain relationships with existing
customers. We operate in highly competitive industries. We compete against numerous other
companies, some of which are more established in their industries and have
substantially greater revenue or resources than we do. Our products compete
against national and regional products and private label products produced by
various suppliers. To compete effectively, among other things, we must:  
    
    maintain our relationships with key retailers;
    
    continually develop innovative new products that appeal to consumers;
    
    maintain strict quality standards; and
    
    deliver products on a reliable basis at competitive prices. Competition could cause lower sales volumes, price reductions, reduced profits
or losses, or loss of market share. Our inability to compete effectively could
have a material adverse effect on our business, results of operations and
financial condition. Any increase in the costs, or decreases in the supply, of the raw materials
necessary for our business could have an adverse effect on our financial
condition. Our business places heavy reliance on raw materials being readily available.
Although we believe that there are a number of pulp and paper mills in British
Columbia, Canada and in the State of Washington that can provide us with the
raw materials necessary to conduct our business, any significant decreases in
supplies, or any increase in costs or a greater increase in delivery costs for
these materials, could result in a further decrease in our margins, which would
harm our financial condition. For example, in the third quarter of fiscal year
2004, we experienced an increase in the cost of fiber which we use as
feedstock, which resulted in a decline in our gross profits for the period. 17




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We have significant indebtedness. As of April 30, 2004, we had total long-term indebtedness under our bonds,
capitalized-lease obligations and other asset financings of $4,057,000. We
make interest payments (and principal payments on the taxable bond) on the
indebtedness under our bonds, which are due in 2007 and 2019. In addition, in
August 2003, we entered into a loan agreement to borrow up to $4,691,000 which
has a balloon payment of the principal balance due in August of 2009. We may
incur substantial additional debt in the future. Our indebtedness could limit
our ability to obtain necessary additional financing for working capital,
capital expenditures, debt service requirements or other purposes in the
future; plan for, or react to, changes in technology and in our business and
competition; and react in the event of an economic downturn. There is no
guarantee that we will be able to meet our debt service obligations. If we are
unable to generate sufficient cash flow or obtain funds for required payments,
or if we fail to comply with covenants in our indebtedness, we will be in
default. The indebtedness underlying our bonds is secured by a mortgage on our
real property and a security interest in our assets. If we are in default
under the agreements governing our indebtedness, the creditors may be able to
foreclose on our property and assets, which would substantially harm our
business and financial condition. The ownership of real property and the building of our own manufacturing
facilities expose us to certain risks that could harm our business. We are currently in the process of building a manufacturing facility on real
property in Wayne County, Georgia. Although we believe that we have sufficient
funds to finance this build-out, we may exceed our capital expenditure budget
substantially as a result of project delays, construction cost overruns and
other factors, and we may be required to seek additional sources of funds for
our planned expansion. We cannot assure you that such funds will be available
on satisfactory terms. Failure to obtain such financing could delay or prevent
our planned expansion, which could harm our operating results. In addition, we
cannot assure you that there will not be a decline in the market value of our
properties, which could also have an adverse effect on our financial condition.
Moreover, ownership of real property could expose us to additional
environmental regulations, the noncompliance with which could substantially
harm our business. Our business is subject to many regulations and noncompliance is costly. The manufacture, marketing and sale of our products are subject to the rules
and regulations of various federal, provincial, state and local health
agencies, including, without limitation, the air emission standards enforced by
the Northwest Air Pollution Authority and regulations promulgated by the U.S.
Food and Drug Administration. If a regulatory authority finds that a current
or future product or production run is not in compliance with any of these
regulations, we may be fined, production may be stopped or our product may be
pulled from the shelves, any of which could adversely affect our financial
conditions and
operations. Similarly, any adverse publicity associated with any noncompliance
may damage our reputation and our ability to successfully market our products.
Furthermore, the rules and regulations are subject to change from time to time
and while we closely monitor developments in this area, we have no way of
anticipating whether changes in these rules and regulations will impact our
business adversely. Additional or revised regulatory requirements, whether
labeling, environmental, tax or otherwise, could have a material adverse effect
on our financial condition and results of operations. If we need to raise additional capital for our operating plan, our business
would be harmed if we were unable to do so on acceptable terms. We currently anticipate that our existing capital resources and cash flows from
operations will enable us to maintain our currently planned operations for the
foreseeable future. However, our current operating plan may change as a result
of many factors, including general economic conditions affecting the U.S.
economy which are beyond our control. If we are unable to generate and
maintain positive operating cash flows and operating income in the future, we
may need additional funding. We may also choose to raise additional capital
due to market conditions or strategic considerations even if we believe that we
have sufficient funds for our current or future operating plans. If additional
capital were needed, our inability to raise capital on favorable terms would
harm our business and financial condition. To the extent that we raise
additional capital through the sale of equity or debt securities convertible
into equity, the issuance of these securities could result in dilution to our
stockholders. 18




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The indentures governing our bonds and bank debt financing includes financial
covenants that restrict certain of our activities and impose certain financial
tests that we must meet in order to be in compliance with their terms. The terms of the indentures governing our bonds and bank debt financing
restrict our ability to, among other things, incur additional indebtedness, pay
dividends or make other restricted payments on investments, consummate asset
sales or similar transactions, create liens, or merge or consolidate with any
other person or sell, assign, transfer, lease, convey or otherwise dispose of
all or substantially all of our assets. The terms also contain covenants that
require us to meet financial tests. We currently are in compliance with these
restrictions and covenants and expect that we will continue to comply. If we
were not able to do so, we could be materially and adversely affected. The loss of key senior management personnel could negatively affect our
business. We depend on the continued services and performance of our senior management
and other key personnel. We do not have key person life insurance policies.
The loss of any of our executive officers or other key employees could harm our
business. We cannot be certain that our product innovations and marketing successes will
continue. We believe that, to an extent, our past performance has been based upon, and
our future success will partially depend upon, our ability to continue to
improve our existing products through product innovation and to develop, market
and produce new products. We cannot assure you that we will be successful in
the introduction, marketing and production of any new products or product
innovations, or develop and introduce in a timely manner innovations to our
existing products which satisfy customer needs or achieve market acceptance.
Our failure to develop new products and introduce them successfully and in a
timely manner could harm our ability to grow our business and could have a
material adverse effect on our business, results of operations and financial
condition. The inability to successfully obtain or protect our patents could harm our
competitive advantage. Our success will depend, in part, on our ability to maintain protection for our
products under U.S. patent laws, to preserve our trade secrets and to operate
without infringing the proprietary rights of third parties. We have three U.S.
patents issued (and corresponding Canadian patents and patent applications) and
one U.S. patent application pending. Patent applications may not successfully
result in an issued patent. Issued patents are still subject to challenges and
infringements. Furthermore, others may independently develop similar products
or otherwise circumvent our patent protection. Should we fail to obtain and
protect our patents, our competitive advantage will be harmed. The products that we manufacture could expose us to product liability claims. Our business exposes us to potential product liability risks that are inherent
in the manufacture and distribution of certain of our products. Although we
generally seek to insure against such risks, there can be no assurance that
such coverage is adequate or that we will be able to maintain such insurance on
acceptable terms. A successful product liability claim in excess of our
insurance coverage could have a material adverse effect on us and could prevent
us from obtaining adequate product liability insurance in the future on
commercially reasonable terms. The price for our common shares may continue to be volatile. The market price of our securities, like that of many other emerging companies,
has been highly volatile, experiencing wide fluctuations not necessarily
related to the operating performance of such companies. Factors such as our
operating results, announcements by us or our competitors concerning
innovations and new products or systems may have a significant impact on the
market price of our securities. In addition, we have experienced limited
trading volume in our common shares. 19




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The liquidity of our stock depends in part on our continued listing with the
American Stock Exchange. In March 2003, we received official notice from the American Stock Exchange
(AMEX) that our securities had been approved for listing. In order to
continue to have our common shares listed, we must remain in compliance with
the AMEX listing standards, including standards related to stock price, market
capitalization and corporate governance. If we are unable to do so, AMEX could
delist our stock, in which event the liquidity and the value of our shares
could be adversely impacted. ITEM 3. CONTROLS AND PROCEDURES As of the end of the period covered by this report, we performed an
evaluation under the supervision and with the participation of our management,
including the Chief Executive Officer and Chief Financial Officer, of the
effectiveness of our disclosure controls and procedures. Based upon that
evaluation, our management, including the Chief Executive Officer and Chief
Financial Officer, concluded that our disclosure controls and procedures were
effective as of the end of the period covered by this report. No change in our internal control over financial reporting occurred during
our last fiscal quarter that has materially affected, or is reasonably likely
to materially affect, our internal control over financial reporting. 20




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PART II  OTHER INFORMATION ITEM  2.     CHANGES IN SECURITIES AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES  On February 6, 2004, one of the Companys existing stockholders exercised
warrants to purchase 22,220 Common Shares, at an exercise price of $2.25
per share, respectively. This issuance was exempt from registration
pursuant to Section 4(2) of the Securities Act. ITEM  6.     EXHIBITS AND REPORTS ON FORM 8-K a)  Exhibits ExhibitNumber
    
    Exhibit Description3.1
    
    
    Altered Memorandum of Company (Amended) (incorporated by reference to
Exhibit 3.1 to the Companys Form 10-KSB filed on April 3 2003).3.2
    
    
    Articles of the Company (incorporated by reference to the exhibits to the
Companys registration statement filed on February 24, 1992, as amended
(No. 33-45020)).31.1
    
    
    Certification of Gordon Ellis, President and Chief Executive Officer of
International Absorbents Inc., pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934.31.2
    
    
    Certification of David Thompson, Chief Financial Officer of International
Absorbents Inc., pursuant to Rule 13a-14(a) under the Securities Exchange
Act of 1934.32.1
    
    
    Certification of Gordon Ellis, President and Chief Executive Officer of
International Absorbents Inc., pursuant to 18 U.S.C. Section 1350.32.2
    
    
    Certification of David Thompson, Chief Financial Officer of International
Absorbents Inc., pursuant to 18 U.S.C. Section 1350.
 b)  Reports on Form 8-K  1)
    
    None 21




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SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized. INTERNATIONAL ABSORBENTS INC.
(Registrant)Date: June 9, 2004
    /s/ GORDON L. ELLISGordon L. EllisPresident & CEO(Principal Executive Officer) 22