<Page>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
OMB Approval Expires: Approval Pending
OMB Number: xxxx-xxxx Estimated Average Burden Hours Per Response:
1.0
(Mark One)
/X/ Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended SEPTEMBER 30, 2001
/ / Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from _____________ to _____________.
Commission file number 0-23356
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Earful of Books, Inc.
---------------------
(Name of Small Business Issuer in Its Charter)
Delaware 74-3014422
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(State or Other Jurisdiction of IRS Employer
Incorporation or Organization) Identification
907 W. Fifth Street Austin, Texas 78703.
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
512-343-2620
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(Issuer's Telephone Number, Including Area Code)
American Absorbents Natural Products, Inc.
------------------------------------------
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
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 past 90 days.
Yes X No .
----------- -----------
APPLICABLE ONLY TO ISSUERS INVOLVED IN
BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS
Check whether the Registrant filed all documents and reports required to
be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution
of securities under a plan confirmed by a court.
Yes No
----------- -----------
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date: SEPTEMBER 30,
2001-----17,934,923 ($0.001 PAR VALUE) COMMON SHARES
-0- ($0.001 PAR VALUE) PREFERRED SHARES
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
EARFUL OF BOOKS, INC.
TABLE OF CONTENTS
----------
<Table>
<Caption>
PAGE(S)
-------
Consolidated and Combined Financial Statements:
Consolidated and Combined Balance Sheet as of
September 30, 2001 (unaudited) 1
Consolidated and Combined Statement of Operations
for the three months and nine months ended
September 30, 2001 and 2000 (unaudited) 2
Condensed Consolidated and Combined Statement
of Cash Flows for the nine months ended
September 30, 2001 and 2000 (unaudited) 3
Consolidated and Combined Statement of
Stockholders' Deficit for the nine months
ended September 30, 2001 (unaudited) 4
Notes to Consolidated and Combined Financial
Statements 5
</Table>
i
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EARFUL OF BOOKS, INC.
CONSOLIDATED AND COMBINED BALANCE SHEET
SEPTEMBER 30, 2001
----------
<Table>
<Caption>
SEPTEMBER 30,
2001
(UNAUDITED)
-------------
ASSETS
Current assets:
Cash and cash equivalents $ 15,497
Receivables 136,621
Merchandise inventories 347,958
Other assets 27,042
-----------
Total current assets 527,118
Property and equipment, net 840,127
Mining claims 2,774,995
Receivable from stockholder 91,474
Other assets 35,843
-----------
Total assets $ 4,269,557
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Book overdraft $ 269,579
Accounts payable 909,864
Accrued liabilities 1,185,797
Current portion of long-term debt 1,660,650
Notes payable to stockholders 1,692,452
-----------
Total current liabilities 5,718,342
Long-term debt, net of current portion 190,658
-----------
Total liabilities 5,909,000
Commitments and contingencies
Stockholders' deficit:
Common stock, $.001 par value; 50,000,000
shares authorized, 19,358,733 shares issued,
17,934,923 shares outstanding 19,359
Additional paid-in capital 6,739,590
Unissued common stock -
Stock subscription receivable (30,000)
Accumulated deficit (7,410,392)
Treasury stock (958,000)
-----------
Total stockholders' deficit (1,639,443)
-----------
Total liabilities and stockholders'
deficit $ 4,269,557
===========
</Table>
See accompanying notes.
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EARFUL OF BOOKS, INC.
CONSOLIDATED AND COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
-----------
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- ------------------------------
2001 2000 2001 2000
----------- ----------- ------------ ------------
Revenue:
Rental revenue $ 183,735 $ 198,979 $ 534,695 $ 527,821
Merchandise sales 26,818 58,310 94,848 135,708
Franchise fee revenue - 30,491 25,000 75,000
Other revenue 57,902 85,026 122,524 128,656
----------- ----------- ------------ ------------
Total revenue 268,455 372,806 777,067 867,185
----------- ----------- ------------ ------------
Cost of sales:
Cost of rental revenue 443,792 319,275 1,051,651 707,354
Cost of merchandise sold 7,722 26,382 29,794 58,701
Cost of franchise revenue 22,270 65,046 91,000 185,742
Cost of other revenue 9,029 - 9,029 -
----------- ----------- ------------ ------------
Total cost of sales 482,813 410,703 1,181,474 951,797
----------- ----------- ------------ ------------
Gross profit (loss) (214,358) (37,897) (404,407) (84,612)
----------- ----------- ------------ ------------
Operating expenses:
General and administrative 605,498 503,917 1,506,217 1,298,461
Depreciation and amortization 53,192 31,187 104,721 91,794
----------- ----------- ------------ ------------
Total operating expenses 658,690 535,104 1,610,938 1,390,255
----------- ----------- ------------ ------------
Operating income (loss) (873,048) (573,001) (2,015,345) (1,474,867)
----------- ----------- ------------ ------------
Other income (expenses):
Interest income (expense) (43,703) (32,678) (279,585) (84,863)
Gain (loss) on disposal of
assets - - - (66,675)
----------- ----------- ------------ ------------
Total other income (expenses) (43,703) (32,678) (279,585) (151,538)
----------- ----------- ------------ ------------
Net loss before minority interest (916,751) (605,679) (2,294,930) (1,626,405)
----------- ----------- ------------ ------------
Minority interest - - - 68,000
----------- ----------- ------------ ------------
Net loss $ (916,751) $ (605,679) $ (2,294,930) $ (1,558,405)
=========== =========== ============ ============
Basic and diluted net loss per
common share $ (0.05) $ (0.04) $ (0.13) $ (0.10)
=========== =========== ============ ============
Weighted average shares
outstanding 17,958,176 16,588,711 17,483,021 16,159,607
========== ========== =========== ===========
</Table>
See accompanying notes.
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EARFUL OF BOOKS, INC.
CONDENSED CONSOLIDATED AND COMBINED STATEMENT OF CASH FLOWS FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
----------
(UNAUDITED)
<Table>
<Caption>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------------
2001 2000
----------- -----------
Cash flows from operating activities:
Net loss $(2,294,930) $(1,558,405)
Adjustments to reconcile net loss to net cash
provided by operating activities 232,034 997,784
----------- -----------
Net cash used in operating activities (2,062,896) (560,621)
----------- -----------
Cash flows from investing activities:
Capital expenditures (184,441) (304,815)
Net proceeds from sale of assets - 14,800
Investment in affiliated company - (25,000)
----------- -----------
Net cash used in investing activities (184,441) (315,015)
----------- -----------
Cash flows from financing activities:
Increase in book overdraft 164,014 77,984
Proceeds from notes payable to stockholders 924,640 276,000
Repayments on notes payable to stockholders (106,486) (31,262)
Proceeds from long-term debt 1,376,000 500,000
Repayment of long-term debt (95,334) (46,021)
Contribution from minority stockholders - 50,000
----------- -----------
Net cash provided by financing activities 2,262,834 826,701
----------- -----------
Increase (decrease) in cash and cash equivalents 15,497 (48,935)
Cash and cash equivalents, beginning of period - 48,935
----------- -----------
Cash and cash equivalents, end of period $ 15,497 $ -
=========== ===========
Cash paid for interest and income taxes:
Cash paid for interest $ 125,885 $ 26,768
=========== ===========
Cash paid for taxes $ - $ -
=========== ===========
Non-cash investing and financing activities:
Issuance of common stock for note receivable $ 121,500 $ -
=========== ===========
Issuance of common stock for interest $ 174,439 $ 10,125
=========== ===========
Issuance of common stock for payables $ 39,000 $ -
=========== ===========
Common stock exchanged for net assets acquired $ 2,718,550
===========
</Table>
See accompanying notes.
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EARFUL OF BOOKS, INC.
CONSOLIDATED AND COMBINED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
----------
<Table>
<Caption>
ADDITIONAL STOCK
COMMON STOCK PAID-IN UNISSUED SUBSCRIPTION ACCUMULATED TREASURY
SHARES AMOUNT CAPITAL STOCK RECEIVABLE DEFICIT STOCK TOTAL
---------- ------- ---------- --------- ------------ ------------ -------- ------------
Balance at December 31, 2000 2,064,990 $20,650 $2,533,718 $ 206,094 $ (30,000) $(5,115,462) $ - $(2,385,000)
Stock issued for debt
guarantees and interest 237,282 2,373 172,064 - - - - 174,437
Stock issued for note
receivable 91,127 911 120,589 - - - - 121,500
Issuance of unissued stock 38,191 382 205,712 (206,094) - - - -
Return of stock issued for
services - - - - - - (13,000) (13,000)
Net effect of merger 16,797,143 (5,087) 3,668,637 - - - (945,000) 2,718,550
Stock issued for payables 130,000 130 38,870 - - - - 39,000
Net loss - - - - - (2,294,930) - (2,294,930)
---------- ------- ---------- --------- ------------ ------------ -------- ------------
Balance at September 30,
2001 19,358,733 $19,359 $6,739,590 $ - $ (30,000) $(7,410,392) $(958,000) $(1,639,443)
========== ======= ========== ========= =========== =========== ========= ===========
See accompanying notes to unaudited consolidated and combined financial statements.
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</Table>
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EARFUL OF BOOKS, INC.
NOTES TO UNAUDITED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
----------
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB of
Regulation S-B. They do not include all information and footnotes required
by generally accepted accounting principles for complete financial
statements. However, except as disclosed herein, there has been no material
change in the information disclosed in the notes to the financial
statements for the year ended December 31, 2000 included in the Company's
Form 8-K and 10-KSB filed with the Securities and Exchange Commission. The
interim unaudited financial statements should be read in conjunction with
those financial statements included in the Form 8-K and 10-KSB. In the
opinion of Management, all adjustments considered necessary for a fair
presentation, consisting solely of normal recurring adjustments, have been
made. Operating results for the three and nine month periods ended
September 30, 2001 are not necessarily indicative of the results that may
be expected for the year ending December 31, 2001.
2. ORGANIZATION AND OPERATIONS
Earful of Books, Inc. ("Earful" or the "Parent Company") is an audiobook
retailer founded in 1992. The Parent Company, one of its subsidiaries,
Earful of Books of Houston, Inc. and an affiliated company, Earful of
Books, LLP, currently own and operate seven corporate retail stores located
throughout Texas. In 1998 the Company began its franchise operations
through its subsidiary, Earful of Books Franchising Company, Inc. (the
"Franchising Company"), and currently has eight operating franchise stores
located throughout the United States.
During 2000 the Company acquired an internet web site through one of its
subsidiaries, Audiobookcafe.com, LLC, in an effort to provide online
destinations for audio books on-demand and other audio-based literary
entertainment.
On July 6, 2001, the Company consumated a reverse merger with American
Absorbents Natural Products, Inc. ("AANP"), a publicly traded company, in
which AANP was the surviving legal corporation. Under the terms of the
merger agreement the stockholders of the Company received 13,531,480
shares of the common stock of AANP for all of the common stock of the
Company. The acquisition was accounted for using the purchase method of
accounting. Accordingly, the operations of AANP will be included in the
consolidated and combined financial statements beginning July 6, 2001. The
following represents proforma information as if the acquisition occurred on
January 1, 2000:
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
---------- ------------ ----------- -----------
Total revenue $ 268,455 $ 386,836 $ 780,520 $ 950,891
========== ============ =========== ===========
Net loss $ (983,452) $(1,005,785) $(2,388,281) $(2,267,980)
========== =========== =========== ===========
Loss per share (basic
and fully diluted) $ (0.06) $ (0.06) $ (0.14) $ (0.14)
========== =========== =========== ===========
</Table>
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EARFUL OF BOOKS, INC.
NOTES TO UNAUDITED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
----------
3. INCOME TAXES
The difference between the 34% federal statutory income tax rate and
amounts shown in the accompanying interim financial statements is primarily
attributable to an increase in the valuation allowance applied against the
tax benefit from utilization of net operating loss carryforwards.
4. NOTES PAYABLE
During the nine months ended September 30, 2001, the Company received
proceeds from notes issued to financial institutions of $1,076,000 at an
interest rate of prime plus 1.5%. Interest is due monthly and principal is
due on demand. The notes are collateralized by the Company's common stock
and are guaranteed by a stockholder of the Company.
On August 8, 2000, the Company entered into a binding letter of intent with
a consulting company whereby that company was to facilitate the secure
electronic distribution of digital asset and electronic commerce with an
initial focus on establishing a digital courier service for the Company and
its franchise stores. On January 9, 2001, the letter of intent was
cancelled and the parties entered into a Settlement Agreement whereby the
consulting company agreed to loan $300,000 to Earful at 7% per annum with
principal and interest due January 9, 2002. This note is collateralized by
the right, title and interest in Audiobookcafe.com.
During the nine months ended September 30, 2001, the Company received
proceeds from notes issued to stockholders of $924,640. The notes bear
interest at rates ranging from 10% to 12% and are not collateralized. Notes
payable to stockholders also increased by $435,298 as a result of the
merger with AANP. During the nine months ended September 30, 2001, the
Company made cash payments of $106,486 to reduce its notes payable to
stockholders.
5. STOCK OPTIONS AND WARRANTS
In 2001, the Company entered into agreements with employees to buy back
options to purchase 67,750 shares of the Company's common stock that were
outstanding at December 31, 2000 at a repurchase price of $0.50 per share.
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EARFUL OF BOOKS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
----------
6. RELATED PARTY TRANSACTIONS
Certain members of the Company's board of directors guarantee certain bank
loans and have provided $1,692,452 and $944,738 of other loans to the
Company as of September 30, 2001 and 2000, respectively. The Company has
issued 237,282 and 4,859 shares of the Company's common stock as
consideration for such guarantees and interest payments during the nine
months ended September 30, 2001 and 2000, respectively. Included in the
consolidated and combined statement of operations for the nine months ended
September 30, 2001 and 2000 is $174,439 and $10,125 interest expense
related to the issuance of this common stock.
Included in accrued liabilities in the accompanying consolidated and
combined balance sheet is accrued interest of $47,471 and $172,759 owed to
these related parties as of September 30, 2001 and 2000.
The Company and certain franchisees purchase its insurance through an
insurance agency owned by the father of a major stockholder of the Company.
During the nine months ended September 30, 2001 and 2000, $62,184 and
$13,951 of insurance premiums were paid to this insurance agency.
7. CONTINGENCIES
On January 25, 2001, Electrocast filed suit for alleged breach of contract
concerning an agreement by the Company to have Electrocast process certain
books on tape to digital format. Amount claimed as damages by Electrocast
is approximately $3.725 million. The Company has filed a general denial.
The Company believes that it has a valid defense of repudiation of the
contract upon which the suit is brought by Electrocast and that damages, if
any, are greatly overstated in that the amount being sought is for the
gross amount of the contract, not lost profit. Minimal discovery has
occurred and no date for trial has been set.
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<Page>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION, RESULTS
OF OPERATIONS AND PLAN OF OPERATIONS.
FORWARD-LOOKING STATEMENTS
The statements included in this report that are not historical are
forward-looking statements, including statements regarding the Company's
expectations, intentions, beliefs or statements regarding the future.
Forward-looking statements include the Company's statements regarding liquidity,
anticipated cash needs and availability and anticipated expense and revenue
levels. All forward-looking statements included in this report are based on
information available to the Company on the date hereof, and the Company assumes
no obligation to update any such forward-looking statements. It is important to
note that the Company's actual results could differ materially from those in
such forward-looking statements. Additionally, the following discussion and
analysis should be read in conjunction with the Financial Statements and notes
thereto appearing elsewhere in this report.
GENERAL OVERVIEW
Earful of Books, Inc, established in 1992, is one of the largest and oldest
audiobook-only retailers in the country. The company currently has seven
company-owned stores and eight franchise stores. Earful's stores typically carry
up to 7,000 audiobooks for rent and for sale. Rental comprises the majority of
each store's revenue. Earful's customer base is made up of commuters,
salespeople, exercisers, repetitive task job-holders and students (particularly
those who are dyslexic and/or have Attention Deficit Disorder). Earful competes
for the sale of audiobooks with national retailers such as Barnes & Noble and
Borders and mail order or web based operations such as Audio Book Club/Mediabay.
In the rental area, Earful mainly competes with Cracker Barrel restaurants,
independent video stores, and/or mail order entities such as Books On Tape,
Blackstone Audio, and Recorded Books.
Earful merged with American Absorbent Natural Products (AANP) on July 6, 2001.
Prior to the merger, AANP was engaged in the mining, processing and sale of
zeolite through its operations in Hines, Oregon. The company owns mining
equipment, a 103,000 square foot production facility constructed of sheet metal
and over 500,000 board feet of Douglass Fir timbers and 295 mining claims
estimated to be in excess of one billion tons of zeolite, making it one of the
largest deposits in the United States. There are currently no material mining or
processing operations occurring. These assets are being actively marketed by
Earful and the company anticipates that their sale will generate substantial
cash for debt reduction, expansion and working capital.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2000
Total revenue of $268,000 for the three months ended September 30, 2001
decreased approximately $105,000, or 28%, from $373,000 for the three months
ended September 30, 2000. The decrease was primarily attributable to a decrease
in rental revenue of $15,000, a decrease in merchandise sales of $31,000, a
$30,000 decrease in franchise revenue and a $27,000 decrease in other income.
Although the Company opened two additional stores during the quarter, rental
revenue and merchandise revenue decreased as a result of the early stages of the
stores development and current market conditions. Franchise revenue declined as
a result of the Company's decreased focus on this aspect of its business.
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<Page>
Cost of sales and services for the three months ended September 30, 2001
amounted to approximately $483,000, or 180% of total revenue, compared to
approximately $411,000, or 110% of total revenue, for the three months ended
September 30, 2000. The increase was primarily attributable to the opening of
two corporate stores.
Operating, selling, general and administrative expenses for the three months
ended September 30, 2001 amounted to approximately $659,000, or 245% of total
revenue, compared to $535,000, or 143% of total revenue for the three months
ended September 30, 2000. Selling, general and administrative expenses increased
as a result of the Company's continued expansion, business development efforts
and expenses associated with the merger.
Interest expense for the three months ended September 30, 2001 amounted to
approximately $44,000 compared to approximately $33,000 for the three months
ended September 30, 2000. Interest expense increased as a result of the
overall increase in the average debt balance outstanding during the
respective periods and due to $174,439 of common stock issued to stockholders
during the nine months ended September 30, 2001 for interest and the
guarantee of the Company's indebtedness.
NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 2000
Total sales of $777,000 for the nine months ended September 30, 2001 decreased
approximately $90,000, or 10%, from $867,000 for the nine months ended September
30, 2000. The decrease was primarily attributable to a $41,000 decrease in
merchandise sales and a $50,000 decrease in franchise revenue. Although the
Company opened two additional stores during the quarter, rental revenue and
merchandise revenue decreased as a result of the early stages of the stores
development and current market conditions. Franchise revenue declined as a
result of the Company's decreased focus on this aspect of its business.
Cost of sales and services for the nine months ended September 30, 2001 amounted
to approximately $1,181,000, or 152% of total revenue, compared to approximately
$952,000, or 110% of total revenue, for the nine months ended September 30,
2000. The increase was primarily attributable to the opening of two corporate
stores.
Operating, selling, general and administrative expenses for the nine months
ended September 30, 2001 amounted to approximately $1,611,000, or 207% of total
revenue, compared to $1,390,000, or 160% of total revenue for the nine months
ended September 30, 2000. Selling, general and administrative expenses increased
as a result of the Company's continued expansion, business development efforts
and expenses associated with the merger.
Interest expense for the nine months ended September 30, 2001 amounted to
approximately $280,000 compared to approximately $85,000 for the nine months
ended September 30, 2000. Interest expense increased as a result of the overall
increase in the average debt balance outstanding during the respective
periods and due to $179,439 of common stock issued to stockholders during the
nine months ended September 30, 2001 for interest and the guarantee of the
Company's indebtedness.
Net cash used in operating activities for the nine months ended September 30,
2001 increased approximately $1,502,000 to $2,063,000. The increase is primarily
the result of the expansion of the Company and the Company's increase in net
cash provided by financing activities of $1,436,000, which was used to finance
the operations of the Company during the nine months ended September 30, 2001.
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<Page>
LIQUIDITY AND FINANCIAL CONDITION
The Company's accumulated deficit through September 30, 2001 was $7,410,392
compared to $5,115,462 at December 31, 2000. The Company has a working
capital deficit of $5,191,224 at September 30, 2001, and year-to-date
operating losses have continued through the date of this report. The Company
has financed its operations for the most recent two years primarily through
the sale of equity securities and proceeds from shareholder loans and debt to
financial institutions. During the quarter ended September 30, 2001, the
Company's primary sources of working capital were revenues from operations of
$268,000 and short-term loans of $200,000 from shareholders and $600,000 from
financial institutions.
During the last two years, the Company has incurred losses as it has pursued
various opportunities to substantially expand its business. It has pursued
expansion through franchising and currently has eight franchise stores.
Additionally, the Company pursued expansion through co-locating with other
retailers and has expended considerable research and development to determine
the viability of an on-line retail presence. While the Company will continue to
pursue opportunities to expand its business base, it anticipates that most of
its expansion will occur in the addition of Company owned stores and by
providing its expertise to further expand the business of other participants
already successful in other segments of the audiobook market. In addition, the
Company plans to implement a marketing strategy to increase revenue at existing
Company owned stores and franchise stores.
The Company is actively marketing the mining assets acquired in its merger with
American Absorbents Natural Products, Inc. in order to produce working capital
and to reduce its dependence on short-term credit facilities. Management
believes it will sell the mining assets in an amount in excess of the
liabilities associated therewith and thereby provide substantial working capital
for the Company. Further, management believes there are available sources of
long-term capital on terms acceptable to the Company that will provide
additional working capital necessary to expand operations, provide for the
liquidation of a substantial portion of its short-term debt and accounts payable
and provide for the necessary associated debt service. However, there can be no
assurance that there will be additional financing available, or, if available,
such financing would be available on terms acceptable to the Company. If
adequate working capital is not available, the Company may be required to
curtail its operations significantly or obtain funds on less favorable terms
than it might desire. The failure of the Company to raise additional working
capital on acceptable terms would have a material adverse effect on the
Company's business, financial condition, results of operations and its ability
to continue as a going concern. The report of the Company's independent
accountants, which accompanied the consolidated financial statements for the
year ended December 31, 2000, was qualified with respect to these risks.
The Company did not issue any common stock for cash investment during the
quarter ended September 30, 2001. It did issue 130,000 shares of common stock
for services to a vendor during this same period.
INFLATION
The Company does not expect inflation to have any material effect on its revenue
or its overall operations.
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<Page>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
The Company is subject to market risks of changes in lease rates for retail real
estate rental space based on the maturity of current lease agreements. Our
exposure relates primarily to leases that mature in years 2002 through 2006. In
the event lease rates associated with these leases were to increase by $1.00 per
square foot per year, it would increase the cost of goods sold for rental and
sales merchandise by approximately $20,000 per year.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
A suit was filed on January 25, 2001, in the 261st District Court of Travis
County, Texas, styled Electrocast, Inc. vs. Audiobooks of Texas, Inc. This legal
proceeding was previously reported by the Company in the 8-K filed on July 10,
2001 and in the 8-K/A filed September 10, 2001. The suit is for breach of
contract concerning an agreement by the Company to have Electrocast process
certain books on tape to digital format. Amount claimed as damages by
Electrocast is approximately $3.725 million. The Company has filed a general
denial. Counsel to the Company believes that the Company has a valid defense of
repudiation of the contract upon which the suit is brought by Electrocast and
that damages, if any, are greatly overstated in that the amount being sought is
for the gross amount of the contract, not lost profit. Minimal discovery has
occurred and no date for trial has been set.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF THE SECURITY HOLDERS.
On August 24, 2001, subject to a proxy solicitation, the Company held a special
meeting of common stock shareholders wherein 14,144,435 of the common
shareholders voted to approved the change of the state of incorporation of the
Company from the state of Utah to the state of Delaware and in doing so, change
the name of the corporation from American Absorbents Natural Products, Inc. to
Earful of Books, Inc.
ITEM 5. OTHER INFORMATION.
On July 10, 2001, the company filed an 8-K detailing the merger transaction
between American Absorbents Natural Products, Inc. and Audiobooks of Texas, Inc.
Further, on September 10, 2001, the Company filed an 8-K/A updating the
financial information in the 8-K filed on July 6, 2001 to include, among other
matters, audit reports and related financial information for the years ended
December 31, 1999 and 2000 and unaudited financial information for the six month
and three month periods ended June, 30, 2000 and 2001.
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<Page>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
EARFUL OF BOOKS, INC.
By: /s/ Paul A. Rush
----------------
Paul A. Rush,
Chairman of the Board and Chief
Executive Officer
Date: November 19, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Company and in their
capacities and on the dates indicated.
<Table>
<Caption>
Signature Title Date
- --------- ----- ----
/s/ Paul A. Rush Chief Executive November 19, 2001
- ---------------- Officer and Chairman of the Board
Paul A. Rush (Principal Executive Officer)
/s/ Myron E. Sappington Chief Financial Officer November 19, 2001
- ----------------------- (Principal Accounting Officer)
Myron E. Sappington
</Table>
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