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 October 31, 1997 ransition report under Section 13 or 15(d) of the Exchange Act For the transition period from to . Commission file number 0-23356 AMERICAN ABSORBENTS NATURAL PRODUCTS, INC. (Name of Small Business Issuer in Its Charter) Utah 87-0421089 . (State or Other Jurisdiction of Incorporation or Organization) IRS Employer Identification 3800 Hudson Bend Road, Ste. 300, Austin, Texas 78734 . (Address of Principal Executive Offices) (Zip Code) 512-266-2481 . (Issuer's Telephone Number, Including Area Code) _____________________________________________________________________________ (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 Section13 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: October 31, 1997----5,968,218 ($0.001 par value) common shares PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. AMERICAN ABSORBENTS NATURAL PRODUCTS, INC. AND SUBSIDIARY (A Development Stage Company) Consolidated Financial Statements For the Nine Months Ended October 31, 1997 and 1996 (Unaudited) AMERICAN ABSORBENTS NATURAL PRODUCTS, INC. AND SUBSIDIARY (A Development Stage Company) Consolidated Balance Sheets October 31, 1997 and January 31, 1997 (unaudited) ASSETS October 31, January 31, 1997 1997 CURRENT ASSETS Cash $ 159,358 $ 1,078 Accounts receivable (Note 1) Trade 44,706 18,144 Other -0- -0- Prepaid expenses (Note 1) 64,583 57,208 Inventory (Note 1) 89,970 99,952 Total Current Assets 358,617 176,382 PROPERTY AND EQUIPMENT (Note 7) 302,954 214,598 OTHER ASSETS Mining claims (Note 8) 5,081,669 5,081,669 Notes receivable (Note 5) 5,000 5,000 Business development costs (Note 1) -0- -0- Product tradenames (Note 9) -0- -0- Total Other Assets 5,086,669 5,086,669 $ 5,748,240 $ 5,477,649 The accompanying notes are an integral part of these financial statements AMERICAN ABSORBENTS NATURAL PRODUCTS, INC. AND SUBSIDIARY (A Development Stage Company) Consolidated Balance Sheets (Continued) October 31, 1997 and January 31, 1997 (unaudited) LIABILITIES AND STOCKHOLDERS' EQUITY October 31, January 31, 1997 1997 CURRENT LIABILITIES Accounts payable and accrued expenses $ 10,625$ 49,119 Current portion of note payable - 202,385 202,385 related party (Note 10) Note payable (Note 11) 125,000 125,000 Total Current Liabilities 338,010 376,504 LONG-TERM DEBT Notes payable-related party-less current -0- -0- portion (Note 10) STOCKHOLDERS' EQUITY Common stock; authorized 50,000,000 common shares at $0.001 par value; 5,968,218 and 5,017,354 shares issued and outstanding, respectively 5,969 5,361 Capital in excess of par value 7,953,935 7,270,816 Deficit accumulated during the development stage (2,549,674) (2,175,032) Total Stockholders' Equity 5,410,230 5,101,145 $ 5,748,240 $ 5,477,649 The accompanying notes are an integral part of these financial statements AMERICAN ABSORBENTS NATURAL PRODUCTS, INC. AND SUBSIDIARY (A Development Stage Company) Consolidated Statements of Operations October 31, 1997 and 1996 (unaudited) From Inception Nine Months Ended Nine Three Months EndedThree Months Ended(February 9, 1997) Oct. Months Oct. Oct. 31, 1996 to Oct. 31, 1997 Ended 31, 1997 31, 1997 Oct. 31, 1996 REVENUES Net sales $ $ $ $ $ 45,250 56,147 13,322 284,906 8,796 Cost of goods sold 40,359 39,597 8,804 3,178 193,049 Gross Profit 4,891 16,550 (8) 10,144 91,857 EXPENSES General and administrative 365,941 289,944 128,288 135,975 2,554,481 Depreciation 13,592 14,342 6,198 3,697 84,603 and amortization Total expenses 379,533 304,286 134,486 139,672 2,639,084 Net loss before provisionfor income taxes (374,642) (287,736) (134,494) (129,528) (2,547,227) Provision for -0- -0- -0- -0- 2,447 income taxes Net loss $ (287,736)$ (134,494)$ (129,528)$ (2,549,674) (374,642) Weighted average $ $ $ $ $ loss per share (.06) (.06) (.03) (1.27) (.02) Average shares outstanding5,968,2185,220,6475,968,218 5,040,855 2,000,000 The accompanying notes are an integral part of these financial statements AMERICAN ABSORBENTS NATURAL PRODUCTS, INC. AND SUBSIDIARY (A Development Stage Company) Consolidated Statements of Stockholders' Equity From Inception on February 9, 1984 to October 31, 1997 (unaudited) Deficit Accumulated Additional During the Common Stock Paid-in Development Shares Amount Capital Stage Balance at Inception-February 9, 1984 - $ - $ - $ - Issuance of common stock for cash 37,500 38 962 - (Note 3) Expenses paid by shareholders for the years ended January 31, 1990 - - 518 - Net loss for the years ended January - - - (1,618) 31, 1990 Balance, January 31, 1990 37,500 $ $ 1,480 $(1,618) 38 Issuance of common stock for services 391,000 391 7,429 - rendered in August 1990 Issuance of common stock in September 1990 for various 50,000 50 198,890 - assets from Austin-Young, Inc. (Note 5) Issuance of common stock for distribution licenses from Global Environmental Industries (GEI) for UT 50,000 50 37,070 - & WA, September 1990 (Note 3) Contribution from Austin-Young, Inc. - - 13,500 - Issuance of common stock for services 12,500 12 37,488 - rendered in October 1990 Net loss for the year ended January - - - (57,756) 31, 1 991 Balance, January 31, 1991 541,000 541$295,857 $(59,374) Common stock returned in exchange for common stock of GEI in March 1991 (17,000) (17) (85,423) - (Note 5) Repurchase of common stock from Austin-Young, Inc. in (338,000) (338) (64,682) - May 1991 (Note 5) Cancellation of common shares (20,000) (20) 20 - Issuance of common stock for the purchase of product from 10,000 10 74,990 - Steelhead Specialty Minerals in August 1991 (Note 6) The accompanying notes are an integral part of these financial statements AMERICAN ABSORBENTS NATURAL PRODUCTS, INC. AND SUBSIDIARY (A Development Stage Company) Consolidated Statements of Stockholders' Equity (Continued) From Inception on February 9, 1984 to October 31, 1997 (unaudited) Deficit Accumulated Additional During the Common Stock Paid-in Development Shares Amount Capital Stage Issuance of common stock for the purchase of mining claims in 13,214 13 184,987 - October 1991 (Note 8) Common stock canceled by (20,000) (20) 20 - officers/directors in January 1992 Contribution from Austin-Young, Inc. - - 17,000 - Net loss for the year ended January 31, 1992 - - - (93,315) Balance, January 31, 1992 169,214 $ 169$ 422,769$(152,689) Issuance of common stock for the acquisition of Geo- 701,800 702 96,442 - Environment Services, Inc. in February 1992 (Note 5) Issuance of common stock for the purchase of mining claims 243,000 243 4,859,757 - in March 1992 (Note 5) Common stock canceled by officers and directors in June 1992 (32,430) (32) 32 - (Note 6) Cancellation of fractional shares due to reverse stock split (21) - - - Contribution by Austin-Young, Inc. - - 10,000 - Issuance of common stock (pursuant to a repurchase agreement in May, 1991) to Austin-Young, Inc. for 3,380,000 3,380 61,620 - relief of debt in July 1992 (Note 5) Net loss for the year ended January 31, 1993 - - - (136,304) Balance, January 31, 1993 4,461,563$ 4,462 5,450,620$(288,993) Issuance of common stock for services rendered in June 1993 17,800 18 26,682 - (Note 6) Issuance of common stock to Austin-Young, Inc. in June 1993 12,000 12 35,988 - (Note 5) Issuance of common stock for cash 66,667 67 199,936 - October 1993 (Note 12) The accompanying notes are an integral part of these financial statements AMERICAN ABSORBENTS NATURAL PRODUCTS, INC. AND SUBSIDIARY (A Development Stage Company) Consolidated Statements of Stockholders' Equity (Continued) From Inception on February 9, 1984 to October 31, 1997 (unaudited) Deficit Accumulated Additional During the Common Stock Paid-in Development Shares Amount Capital Stage Issuance of common stock as down payment on building 6,000 6 29,994 - October 1993 (Note 5) Issuance of common stock for services rendered October 1993 17,000 17 50,983 - (Note 6) Issuance of common stock for cash 80,072 80 191,321 - December 1993 (Note 12) Contribution by Austin-Young, Inc. - - 36,000 - Net loss for the year ended January - - - (310,862) 31, 1994 Balance, January 31, 1994 4,661,102 $ 4,662 $ 6,021,524$ (599,855) Issuance of common stock for services rendered February 6,000 6 29,994 - 1994 (Note 6) Issuance of common stock for services rendered in June 1994 (Note 6) 41,750 42 175,458 - Issuance of common stock in a private offering 22,500 22 89,978 - Issuance of common stock for services rendered in November 15,000 15 46,235 - 1994 (Note 6) Contribution by Austin-Young, Inc. - - 36,000 - Net loss for the year ended January - - - (709,048) 31, 1995 Balance, January 31, 1995 4,746,352 $ 4,747 $ 6,399,189$(1,308,903) Issuance of common stock for services 9,000 9 22,391 - (Note 6) Issuance of common stock in a private 214,168 214 394,148 - offering (Note 12) Contribution by Austin-Young, Inc. - - 36,000 - Net loss for the year ended January - - - (401,467) 31, 1996 Balance at January 31, 1996 4,969,520 $ 4,970 $ 6,851,728$(1,710,370) The accompanying notes are an integral part of these financial statements AMERICAN ABSORBENTS NATURAL PRODUCTS, INC. AND SUBSIDIARY (A Development Stage Company) Consolidated Statements of Stockholders' Equity (Continued) From Inception on February 9, 1984 to October 31, 1997 (unaudited) Deficit Accumulated Additional During the Common Stock Paid-in Development Shares Amount Capital Stage Issuance of common stock for cash in a private offering 130,960 131 156,729 - (Note 12) Issuance of common stock for services 259,620 260 262,359 - (Note 5 & 6) Net loss for the year ended January - - - (464,662) 31, 1997 Balance, January 31, 1997 5,360,100 $ 5,361$ 7,270,816$(2,175,032) Issuance of common stock for cash in a private offering 512,000 513 584,287 - (Note 12), Net of commissions Issuance of common stock for services 75,287 75 74,520 - (Note 6) Issuance of common stock for equipment 20,831 20 24,312 - Net loss for the nine months ended - - - (374,642) October 31, 1997 Balance, October 31, 1997 5,968,218 $ 5,969$ 7,953,935$(2,549,674) The accompanying notes are an integral part of these financial statements AMERICAN ABSORBENTS NATURAL PRODUCTS, INC. AND SUBSIDIARY (A Development Stage Company) Consolidated Statements of Cash Flows From Inception(February 9, 1997) Nine Months Ended Nine Three Months EndedThree Months Ended to Oct. Oct. Months Oct. Oct. 31, 1996 31, 1997 31, 1997 Ended 31, 1997 Oct. 31, 1996 CASH FLOWS FROM OPERATINGACTIVITIES Net Loss (374,642)$ (287,736) $ $ $ (2,549,674) (134,494) (129,528) Depreciation 13,592 14,342 6,198 3,697 84,603 and amortization (increase) decrease in (26,562) (9,417) (6,152) (17,194) (44,706) receivables Decrease (increase) in (7,375) (28,926) (22,125) (57,062) (52,583) prepaid expenses Decrease 9,982 22,065 (375) 9,052 (16,795) (increase) in inventory Increase (38,494) 7,323 643 7,494 9,635 (decrease) in payables Loss from -0- -0- -0- -0- 1,560 disposal of fixed asset Stock issued 74,595 145,417 12,301 128,667 734,384 for services Expenses paid -0- -0- -0- -0- 149,018 by shareholder Net cash used by operating (348,904) (136,932) (144,004) (54,874) (1,684,558) activities CASH FLOWS FROM INVESTINGACTIVITIES Purchase of (77,616) -0- (6,535) -0- (295,761) fixed assets Issue stock -0- -0- (8,970) -0- (8,970) for equipment Purchase of -0- -0- -0- -0- (26,958) product tradenames Purchase of -0- -0- -0- -0- (5,000) note receivable Organization costs -0- -0- -0- -0- (1,524) Purchase/sale of mining -0- -0- -0- -0- 7,920 development costs Purchase of -0- -0- -0- -0- (58,599) mining claims Sale of licenses -0- -0- -0- -0- 150,000 Purchase of stock -0- -0- -0- -0- (65,000) Net cash used by investing (77,616) -0- (15,505) -0- (303,892) activities CASH FLOWS FROM FINANCINGACTIVITIES Issuance of 584,800 139,875 317,439 52,127 1,755,423 common stock Issuance of -0- 125,000 -0- 125,000 647,210 notes payable Principal payments on -0- (127,520) -0- (122,283) (254,825) long-term debt Net cash provided by 584,800 137,355 317,439 54,844 2,147,808 financing activities Net (decrease) $ $ $ 157,930 $ $ increase in cash 158,280 423 (30) 159,358 Cash at beginning $ $ $ $ $ of period 1,078 1,107 1,428 1,560 -0- Cash at end of period $ $ $ 159,358 $ $ 159,358 1,530 1,530 159,358 The accompanying notes are an integral part of these financial statements AMERICAN ABSORBENTS NATURAL PRODUCTS, INC. AND SUBSIDIARY (A Development Stage Company) Consolidated Statements of Cash Flows (Continued) From Inception(February 9, 1997) Nine Months Ended Nine Three Months EndedThree Months Ended to Oct. Oct. Months Oct. 31, 1997Oct. 31, 1996 31, 1997 31, 1997 Ended Oct. 31, 1996 SUPPLEMENTAL CASH FLOWINFORMATION: CASH PAID FOR: Interest $ $ $ $ $ 15,942 15,137 5,136 4,985 77,327 Income Taxes -0- -0- -0- -0- 2,447 NON-CASH TRANSACTIONS: Stock issued -0- -0- -0- -0- 5,045,000 for mining claims Stock issued for down payment -0- -0- -0- -0- 30,000 on building Stock issued 74,595 145,417 12,301 128,667 734,384 for services Stock issued for stock of Geo- -0- -0- -0- -0- 97,144 Environmental Services, Inc. Stock issued -0- -0- -0- -0- 75,000 for inventory Stock issued for assets of Austin-Young, -0- -0- -0- -0- 236,060 Inc. and Global Environmental Industries Stock issued 24,332 -0- 8,970 -0- 24,332 for mill equipment The accompanying notes are an integral part of these financial statements AMERICAN ABSORBENTS NATURAL PRODUCTS, INC. AND SUBSIDIARY (A Development Stage Company) Notes to the Consolidated Financial Statements October 31, 1997 and 1996 (unaudited) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business Organization American Absorbents Natural Products, Inc. was incorporated on February 9, 1984 under the laws of the State of Utah and under the name of TPI Land, Inc. as a wholly-owned subsidiary of TPI, Inc. On September 14, 1990, the Company changed its name to Environmental Fuels, Inc. and began developing its involvement in various phases of the conversion of vehicles to operating on compressed natural gas. That developing business was sold on April 23, 1991 (see Note 3). On May 6, 1991, the Company changed its name to Geo-Environmental Resources, Inc. and is now developing its involvement in the distribution of zeolite, a mineral product which is an absorbent and has many potential uses such as oil and gas well cleanup, shoe and refrigerator freshener, landfill absorption, and other agricultural uses. On February 6, 1992, the Company acquired the outstanding stock of Geo-Environment Services, Inc., a wholly owned subsidiary involved in marketing of the zeolite products. The transaction was accounted for at historical cost in a manner similar to that in pooling of interest accounting for business combinations. In June 1995, the Company changed its name to American Absorbents Natural Products, Inc. and the name of its subsidiary to American Absorbents, Inc. Principles of Consolidation The consolidated financial statements include the accounts of American Absorbents Natural Products, Inc. and its subsidiary American Absorbents, Inc. Collectively, these entities are referred to as the Company. All significant intercompany transactions and accounts have been eliminated. Method of Accounting The Company recognized income and expenses according to the accrual method of accounting. Expenses are recognized when performance is substantially complete and income is recognized when earned. Earnings (loss) per share are computed based on the weighted average method. Stock options currently outstanding were not used in calculating earnings per share since the effect would be antidilutive. The fiscal year of the Company ends January 31 of each year. The financial statements reflect activity from inception, February 9, 1984. Cash and Cash Equivalents For purposes of the statements of cash flows, the Company considers all highly liquid debt instruments with a maturity of three months or less to be cash equivalents. Nonmonetary Transactions Nonmonetary transactions are transactions for which no cash was exchanged and for which shares of common stock were exchanged for assets. These transactions are recorded at fair market value as determined by the board of directors. AMERICAN ABSORBENTS NATURAL PRODUCTS, INC. AND SUBSIDIARY (A Development Stage Company) Notes to the Consolidated Financial Statements October 31, 1997 and 1996 (unaudited) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Inventories Inventories are stated at the lower of cost (FIFO method) or market, and consist of finished goods and packaging materials. Accounts Receivable Accounts receivable are shown net of the allowance for doubtful accounts. This amount was determined to be $0 and $0 at October 31, 1997 and 1996 after writing off all accounts determined to be uncollectible. Prepaid Expenses Prepaid expenses at October 31, 1997 and 1996 consist of the following: 1997 1996 Prepaid mining land lease $ $ 24,584 24,583 Prepaid fees 40,000 40,000 $ 64,583 $ 64,584 Business Development Costs Business Development costs mainly consist of video production cost for a business promotional video and product packaging design. These costs are amortized over the estimated useful life of the cost, which is 5 years, The costs and accumulated amortization at October 31, 1997 are as follows: Business development costs $ 3,026 Accumulated amortization (3,026) - Mining Claims Mining claims are stated at the lower of cost or market, whichever is lower. Any costs incurred for the betterment or to increase the expected efficiency of the operations related to the extraction from the Company mining claims are capitalized and charged off to operations over the expected economic life of the claims. The Company has adopted SFAS statement #121 which requires a review of any potential for the impairment of value of any long-lived assets. It is the policy of the Company to annually review the future economic benefit of all long- lived assets and to charge off to operations any potential impairment of value of long-lived assets when applicable. AMERICAN ABSORBENTS NATURAL PRODUCTS, INC. AND SUBSIDIARY (A Development Stage Company) Notes to the Consolidated Financial Statements October 31, 1997 and 1996 (unaudited) NOTE 2 - DEVELOPMENT STAGE ENTERPRISE The Company, per FASB Statement No. 7, is properly accounted for and reported is a development stage enterprise. Substantially all of the Company's efforts since its formation have been devoted to establishing its new business. No significant revenue has been earned as of the balance sheet date. Operations have been devoted to raising capital, purchasing zeolite property and establishing a marketing plan. Continuation of the development effort is contingent upon the Company raising sufficient capital from shareholders or other sources. It is management's' intent to raise capital and further develop the marketing of its zeolite products. (See Note 15) NOTE 3 - COMMON STOCK AND STOCKHOLDERS' EQUITY During the periods shown, the Company had a one-for-two reverse stock split and a one-for-ten reverse stock split. The financial statements have been retroactively restated to reflect the stock splits. Stock of the Company has been issued for cash, license agreements, mining claims, compensation for services, and in exchange for other stock. On February 10, 1984, the Company issued 37,500 shares of its stock to TPI, Inc. for $1,000 cash. On June 30, 1984, TPI, Inc. distributed the 37,500 shares to its stockholders in a partial liquidating dividend. In August and September 1990, control of the Company was acquired by Austin-Young, Inc. and shares of stock were issued to Austin-Young, Inc. and to some of its officers and directors (see Note 5). In September 1990, the Company acquired four license agreements to distribute the products of Natural Gas Resources, Inc., (NGRI) a wholly-owned subsidiary of Global Environmental Industries, Inc. NGRI was engaged in the business of licensing the operations of compressed natural gas conversion centers and natural gas refueling stations. NGRI had certain patented products used in the conversion of vehicles from gasoline and diesel to the use of natural gas. Under these license agreements, the Company acquired the right to distribute the products of NGRI in San Antonio, Texas (metropolitan area); Burnet County, Texas; state of Utah; and the state of Washington. On April 23, 1991, the Company sold the license agreements along with stock of Global Environmental Industries, Inc. and Natural Gas Industries, Inc. for $150,000. All assets were sold at book value and no gain or loss was recognized on the sale. In August of 1991 the Company issued 10,000 shares of stock at $7.50 per share for the rights to two zeolite products of Steelhead Specialty Mineral, Inc. (see Note 9). In October 1991 the Company issued 13,214 shares of stock at $14 per share for mining claims in Harney County, Oregon and in March 1992, issued 243,000 shares at $20 per share for additional zeolite mining claims in the same area (see Note 8). AMERICAN ABSORBENTS NATURAL PRODUCTS, INC. AND SUBSIDIARY (A Development Stage Company) Notes to the Consolidated Financial Statements October 31, 1997 and 1996 (unaudited) NOTE 3 - COMMON STOCK AND STOCKHOLDERS' EQUITY (Continued) In February 1992 the Company issued 701,800 shares at $0.14 per share for all the outstanding stock of American Absorbents, Inc. (AAI) which became a wholly owned subsidiary. AAI had, prior to being acquired, purchased zeolite mining claims in Mohave County, Arizona (see Note 5). NOTE 4 - INCOME TAXES The Company adopted Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" in the fiscal year ended January 31, 1996 and has applied the provisions of the statement on a retroactive basis to the previous fiscal year which resulted in no significant adjustment. Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" requires an assset and liability approach for financial accounting and reporting for income tax purposes. This statement recognizes (a) the amount of taxes payable or refundable for the current year and (b) deferred tax liabilities and assets for future tax consequences of events that have been recognized in the financial statements or tax returns. Deferred income taxes result from temporary differences in the recognition of accounting transactions for tax and financial reporting purposes. There were no temporary differences at January 31, 1997 and earlier years, accordingly, no deferred tax liabilities have been recognized for all years. The Company had cumulative net operating loss carryforwards of approximately $2,550,000 at October 31, 1997 and $1,935,000 at October 31, 1996. No effect has been shown in the financial statements for the net operating loss carryforwards as the likelihood of future tax benefit from such net operating loss carryforwards is not presently determinable. Accordingly, the potential tax benefits of the net operating loss carryforwards, estimated based upon current tax rates at October 31, 1997 and at October 31, 1996 have been offset by valuation reserves. NOTE 5 - RELATED PARTY TRANSACTIONS The majority of the outstanding shares of the Company are owned by Austin-Young, Inc., a Utah corporation that has its primary office in Austin, Texas. Some individuals are officers and directors in both Austin-Young, Inc. and the Company. During the periods shown, there were several transactions involving the majority shareholder and the Company's officers and directors, as follows: August 10, 1990 - Common investment shares of 250,000 were issued to Austin-Young, nc. and 1,000 shares were issued to two officers and directors of the Company for services rendered. AMERICAN ABSORBENTS NATURAL PRODUCTS, INC. AND SUBSIDIARY (A Development Stage Company) Notes to the Consolidated Financial Statements October 31, 1997 and 1996 (unaudited) NOTE 5 - RELATED PARTY TRANSACTIONS (Continued) August 13, 1990 - Common investment shares of 100,000 were issued to Terry Young, president of the Company, for serving as president. Such shares were subsequently sold to Austin- Young, Inc. August 13, 1990 - Common investment shares of 5,000 were issued to Susan Young for bookkeeping services. Susan Young was the wife of Terry Young at the time of issuance. August 17, 1990 - An option was given to Austin-Young, Inc. to purchase an additional 2,000,000 shares (pre-split)(100,000 shares post-split) of stock at the price of one cent per share. Also, an option plan was approved which provides that the board of directors is authorized to issue up to 1,000,000 shares (pre-split) (50,000 shares post-split) to current and future employees at a price of one cent per share. None of these options were exercised. These options were later rescinded by the board of directors in July 1993. August 17, 1990 - Common investment shares of 12,500 were issued to an officer and director for services. September 3, 1990 - 50,000 shares were issued at $3.98 per share to Austin-Young, Inc. in exchange for distributorship license agreements, stock in Global Environmental Industries, Inc. and Natural Gas Industries, Inc., and cash. The assets acquired in the transaction were recorded at historical cost. The Company subsequently transferred 178,000 shares of Global stock back to the original transferor in exchange for 17,000 shares of Company stock. The remaining 200,000 shares of Global stock were sold as part of the transaction which occurred on April 23, 1991 (see Note 3). May 13,1991 - 3,380,000 shares of common stock were purchased for $65,000 cash from Austin- Young, Inc. and canceled. The Company agreed that Austin-Young, Inc. had the right to repurchase these shares for the same price at any time up to June 1, 1993 (see July, 1992 comment below). February 1992 - the Company issued 701,800 shares of common stock at $0.14 per share to the shareholders of Geo Environment Services, Inc., (now AAI) for their stock. Officers of the corporation were major shareholders of AAI. July 1992 - 3,380,000 shares of common stock were issued at $0.02 per share to Austin -Young, Inc. for debt relief of $65,000. February 1, 1993 - the Company issued to Austin-Young, Inc. an option to purchase up to 1,000,000 shares (12,000 exercised to date for $36,000) of common stock at a price of $3 per share. This option was voluntarily returned to the Company for cancellation on June 17, 1997. July 27, 1993 - the Company issued an option to the employees, officers and directors to purchase up to a maximum of 250,000 shares of common stock at a price of $3 per share. This option was canceled on June 5, 1995. AMERICAN ABSORBENTS NATURAL PRODUCTS, INC. AND SUBSIDIARY (A Development Stage Company) Notes to the Consolidated Financial Statements October 31, 1997 and 1996 (unaudited) NOTE 5 - RELATED PARTY TRANSACTIONS (Continued) October 8, 1993 - 6,000 shares of stock were issued at $5 per share to Susan Young as down payment on the purchase of a building. During 1994, Austin-Young, Inc. issued several promissory notes to the Company to cover cash shortages. Total promissory notes issued was $61,424. (See Note 10) In June 1995, the Company adopted a 1995 stock option plan for the employees, officers and directors to purchase up to 1,000,000 shares of common stock at market price. The options expire in seven years from the date of offer. The Company is leasing its office space from a related party pursuant to a 60 month lease agreement dated July 30, 1996 on a month to month basis at $1,900 per month. During 1996, Austin-Young, Inc. issued $38,000 in promissory notes to cover cash shortages. $5,000 was paid back during the year. For the years 1990 to 1996, The Company's major stockholder, Austin-Young, Inc. provided compensation to one of the Company's officers and directors while working on projects related to Company business. The compensation is shown as an expense to the Company and capital contribution. For 1997, the Company issued 128,869 shares of common stock in lieu of cash to its officers and directors for services performed. The stock was valued at $128,869, or $1 per share, the trading value of the stock at the time of issuance. In 1997, the Company was required to pay a balloon payment due on its warehouse in September, 1996. Instead of finding long term funding through a mortgage company, Austin-Young, Inc., the majority shareholder provided $125,000 in certificates of deposit for collateral on a one year note of $125,000 provided by a local bank to pay the balloon payment. The note is due in September, 1997 (See Note 11). In 1997, the Company issued 16,751 shares of stock to Austin-Young, Inc. for rent for the use of office space. Total rent for fiscal year 1997 was $13,000. The office space is rented pursuant to a 60 month lease agreement. In 1997, the Company contracted with American Crisis Publishing (a wholly owned subsidiary of Austin-Young, Inc.) to provide $40,000 (40,000 shares of common stock) of future "mail out" services for company literature and future advertising promotions. American Crisis Publishing specializes in "the creation and preparation of booklets and mailouts for the dissemination of information to the public." The services have not yet been performed and are classified as a prepaid expense. In 1997, the Company purchased for $5,000 from Austin-Young, Inc. a $20,000 note receivable from a former officer and director for the purchase of common stock. The note was AMERICAN ABSORBENTS NATURAL PRODUCTS, INC. AND SUBSIDIARY (A Development Stage Company) Notes to the Consolidated Financial Statements October 31, 1997 and 1996 (unaudited) NOTE 5 - RELATED PARTY TRANSACTIONS (Continued) discounted due to the poor probability of collection. The Company intends to make a demand for payment on the note or cancel the shares that were issued under the note. In January, 1997, the Board of Directors approved a compensation package for David Redding, President, at $7,000 per month, $3,500 cash and $3,500 in stock until the Company could compensate entirely with cash. In future years, when the Company operations become more fully developed, the compensation will increase in proportion to the time and expertise given by the officer/director and will be paid directly from company funds. During the quarter ended October 31, 1997, the Company paid $5,700 to Austin Young, Inc. for rent on the office space and equipment used by the Company. NOTE 6 - NONMONETARY TRANSACTIONS Nonmonetary transactions consist of the transactions detailed in Note 5 above and the transfer of common investment shares to individuals and corporations for services and distributorship license agreements, as follows: September 24, 1990 - 50,000 shares of common stock were issued at $0.74 per share to two corporations for distributorship license agreements. October 25, 1990 - 12,500 shares of common stock were issued at $3 per share to individuals for services. August 1991 - 10,000 shares of stock were issued at $7.50 per share for trademarks and patents for two zeolite products. October 1991 - 13,214 shares of stock were issued at $14 per share for zeolite mining claims (see Note 8). January, 1992 - 20,000 shares of common stock were returned to the treasury and canceled. February 1992 - 701,800 shares were issued at $0.14 per share for 100% of the shares of Geo- Environment Services, Inc. (see Note 5). March 1992 - 243,000 shares were issued at $20 per share for zeolite mining claims (see Note 8). June 1992 - 32,430 shares were canceled by officers and directors. June 1993 - 17,800 shares were issued at $1.50 per share for services performed. October 1993 - 6,000 shares were issued at $5 per share for down payment on plant facility. AMERICAN ABSORBENTS NATURAL PRODUCTS, INC. AND SUBSIDIARY (A Development Stage Company) Notes to the Consolidated Financial Statements October 31, 1997 and 1996 (unaudited) NOTE 6 - NONMONETARY TRANSACTIONS (Continued) October 1993 - 17,000 shares were issued at $3 per share for advisory services. February 1994 - 6,000 shares were issued at $5 per shares for legal services. June 1994 - 25,750 shares were issued at $4 per shares for services rendered. June 1994 - 11,000 shares were issued at $5 per share for services rendered. June 1994 - 5,000 shares were issued at $3.50 per share for services rendered. November 1994 - 10,000 shares were issued at $3.50 per share for services rendered. November 1994 - 5,000 shares were issued at $2.25 per share for services rendered. During 1995 - 9,000 shares were issued at an average price of $2.49 per share for services rendered. During 1997, 259,620 shares (185,620 related party) were issued at an average price of $1.01 per share for various services rendered. During the quarter ended October 31, 1997, 12,948 shares were issued at an average price of $0.95 per share for various services rendered. During the quarter ended July 31, 1997, 250,000 options from the 1995 Stock Option Plan were granted to officers and directors at the closing bid price of $0.375 per option on the date of grant. All nonmonetary transactions, with related parties and non related parties, transacted with stock of the Company were measured either at the estimated fair value of the stock being issued (stock market quotations) or fair value of goods or services being rendered, whichever was more readily measurable. NOTE 7 - PROPERTY AND EQUIPMENT Property and equipment consists of the following: October 31, 1997 1996 Plant $ $ 244,978 244,978 Machinery and equipment 112,529 12,382 Accumulated depreciation (54,553) (37,929) $ 302,954$ 219,431 Machinery and equipment is depreciated on the straight-line method over the estimated useful lives of five (5) years. Plant is being depreciated over the estimated useful life of 20 years. AMERICAN ABSORBENTS NATURAL PRODUCTS, INC. AND SUBSIDIARY (A Development Stage Company) Notes to the Consolidated Financial Statements October 31, 1997 and 1996 (unaudited) NOTE 7 - PROPERTY AND EQUIPMENT (Continued) Depreciation expense is $6,197 and $3,697 for the quarters ended October 31, 1997 and 1996 respectively. Amortization expense is $0 and $0 for the quarters ended October 31, 1997 and 1996 respectively. The Company has agreements with various vendors to do the mining and milling of its zeolite mineral and products; this has resulted in minimal investment in machinery and equipment. In October, 1995, the Company purchased from a defunct logging operation, a 103,125 square foot building containing approximately 3,500,000 cubic feet of milling, packaging and inventory storage space for a cash price of $65,000. The building is to be used to house the Company's zeolite milling operations in Oregon. The Company has completed approximately $10,000 worth of repairs that needed to be made to the building. Farmers Group Insurance, which insures the building, has determined that the replacement value of the building is $2,049,172. During the quarter ended July 31, 1997, the Company completed the acquisition of milling equipment and began the installation of the equipment in its facility in Hines/Burns, Oregon. NOTE 8 - MINING CLAIMS The Company has purchased several zeolite mining claims in three different regions in the western United States. All purchases were acquired through stock issuance and are described below. In April 1991 (before acquisition by Geo-Environmental Resources) (now American Absorbents Natural Products, Inc.), the Company's subsidiary issued 440,000 shares of its stock for mining claims containing zeolite in the Mohave County, Arizona region, and the stock given was originally valued at $.50 per share. Thus the mining claims were originally valued at $220,000. Since the value of the mining claims was not readily determined the mining claims were written down to a nominal value. In October 1991 the Company acquired twenty zeolite mining claims in Harney County, Oregon. The value of the claims was agreed to be $185,000 by the seller and purchaser and 13,214 (132,143 pre-split) shares of common stock were issued. The stock was quoted on the market at $1.40 per share, thus determining the number of shares to be issued for the claims. In December 1991, the Company acquired an additional 203 zeolite mining claims in the Harney County, Oregon region. A geological study was conducted and reserves were estimated at over 477,600,000 tons. The value per ton was also estimated based on mining costs and market value of other companies in the industry. The reserves were then discounted AMERICAN ABSORBENTS NATURAL PRODUCTS, INC. AND SUBSIDIARY (A Development Stage Company) Notes to the Consolidated Financial Statements October 31, 1997 and 1996 (unaudited) NOTE 8 - MINING CLAIMS (Continued) 99 1/2% and a value was determined to be approximately $4,800,000. Stock was then issued at market price to equal the value given to the claims. On July 10, 1997, the Company was granted, by the Department of the Interior Bureau of Land Management, its Permanent Mining Permit and Plan of Operations approval to mine its Harney County, Oregon zeolite properties. To date no depletion has been taken on any of these claims. Depletion of these assets will begin once material mining operations on these claims begins. NOTE 9 PRODUCT TRADENAMES In August of 1991 the Company purchased for common stock, notes payable and cash, the nventory and the trade names for two shoe products. The inventory was valued at $115,000 and the remainder of the purchase price of $25,000 was attributed to the tradenames of the products. The tradenames are amortized on the straight-line method over a five (5) year period. NOTE 1 0 - RELATED PARTY NOTES PAYABLE The notes payable-related party consist of advances from Austin-Young, Inc., a major shareholder of the Company. The balances are as follows: October 31, 1997 1996 Notes payable - Austin-Young, bearing interest at 7% and payable in 1997. Unsecured. $ $ 182,539 - Notes payable - Austin-Young, bearing interest at 7% and payable on demand. Unsecured. 202,385 - Less current portion (202,385) - Totals $ $ 182,539 - AMERICAN ABSORBENTS NATURAL PRODUCTS, INC. AND SUBSIDIARY (A Development Stage Company) Notes to the Consolidated Financial Statements October 31, 1997 and 1996 (unaudited) NOTE 11- NOTES PAYABLE Notes Payable consist of the following: October 31, 1997 1996 Note payable to a bank, bearing interest at Prime + 3%, due August, 1998. Secured by $125,000 CD's (see Note 5) $ 125,000$ 125,000 Totals $ 125,000$ 125,000 NOTE 12 - PRIVATE PLACEMENT OF COMMON STOCK During October 1993, the Company issued 66,667 shares of restricted common stock in a private placement. The shares sold for $3 per share and carried an option to purchase additional shares within 120 days. During December 1993, the Company issued 38,170 and 41,902 shares of restricted common stock in a private placement at $3 and $1.84 per share, respectively. The shares issued wereunder an option agreement as part of the private placement that occurred during October 1993. On July 5, 1994, 22,500 shares of common stock were issued at $4 per share in a Regulation D private stock offering. In 1996, the Company issued 214,168 shares of common stock in a Regulation D private placement for total consideration of $394,362. In 1997, the Company issued 130,960 shares of common stock in a Regulation D private placement for total consideration of $156,860. During the quarter ended October 31, 1997, 320,400 shares of common stock were issued in a private placement for total consideration of $388,000. NOTE 13 - RESEARCH AND DEVELOPMENT The Company expenses all research and development costs as incurred. The Company is accounted for as a development stage enterprise, and a portion of expenses incurred since inception have been directly related to research and development. The research and development expenses incurred for the years ended January 31, 1997 and 1996 respectively are as follows: AMERICAN ABSORBENTS NATURAL PRODUCTS, INC. AND SUBSIDIARY (A Development Stage Company) Notes to the Consolidated Financial Statements October 31, 1997 and 1996 (unaudited) NOTE 13 - RESEARCH AND DEVELOPMENT (Continued) 1997 1996 Labor and wages $ - $ 8,115 Materials and supplies - - Rent allocation - - $ - $ 8,115 Research and development of the Company primarily relate to product and package design and market research. NOTE 14 - ECONOMIC DEPENDENCY During the fiscal year ended January 31, 1997, the Company had an overseas customer that provided 58% of the years sales volume. NOTE 15 - SUBSEQUENT EVENTS In January, 1997, the Company authorized a private placement of up to $500,000 to be used to purchase milling equipment to be used in the milling plant in Oregon, to begin mining and milling operations, increase inventories and for working capital. During the first quarter of the 1998 fiscal year, the Company raised approximately $180,000 and began the purchasing process for the milling equipment. This portion of the private placement was sold in Units consisting of 4,800 shares of restricted common stock and a $3.00 per ton royalty on 6,000 tons of zeolite mineral as it is mined, milled and sold. The Company has expanded the total amount of capital to be raised up to $500,000 and has engaged Northstar Securities to sell the remaining $320,000 of the private placement to accredited investors only. Each purchaser will receive their pro-rata share of the royalty payment based upon the number of Units purchased elative to the total number of Units sold. The royalty payments will be paid from the first tonnage of zeolite mineral mined and sold by the Company. The Company may increase the amount of the royalty payment above the $3.00 amount per ton, but in no event will the total royalty payment to any holder of Units exceed $18,000.00 per Unit held. The increase in the royalty amount paid would only decrease the time limit in which the holder of a Unit would receive the total royalty amount. Royalty payments will be made quarterly after the Company has made its quarterly financial statement filings with the Securities and Exchange Commission and determined the total tonnage that has been mined, milled and sold during the reporting quarter. In June, 1997, the Company signed an agreement to purchase equipment to begin equipping the mill at its location in Oregon. AMERICAN ABSORBENTS NATURAL PRODUCTS, INC. AND SUBSIDIARY (A Development Stage Company) Notes to the Consolidated Financial Statements October 31, 1997 and 1996 (unaudited) NOTE 15 - SUBSEQUENT EVENTS (Continued) The Company authorized an additional private placement in the amount of $1,500,000 to be used for inventory increases and marketing expenses relating to the engagement of Bill Frye and Associates to introduce the Company's products into the retail markets. NOTE 16 - USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. In these financial statements, assets, liabilities and earnings involve extensive reliance on management's estimates. Actual results could differ from those estimates. NOTE 17 - FAIR VALUES OF FINANCIAL INSTRUMENTS The following listing of the estimated fair value of financial instruments is made in accordance with the requirements of SFAS No. 107, "Disclosure About Fair Value of Financial Instruments". The carrying amounts and fair value of the Company's financial instruments at October 31, 1997 and 1996 are as follows: October 31, 1997 October 31, 1996 CarryingAmountsFairCarryingAmountsFair Values Values Cash and Cash Equivalents$ 5,000$ -0-$ -0-$ -0- Notes Payable IncludingCurrent Maturities 327,385 327,385 307,539 307,539 The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: Cash and Cash Equivalents The carrying amounts reported on the balance sheet for cash and cash equivalents approximate their fair value. Notes Receivable The fair value of notes receivable are based upon the interest rate the Company would receive on market rates available for savings and investment. Notes Payable The fair values of notes payable are estimated using discounted cash flow analyses based on the Company's incremental borrowing rate as the discount rate. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATIONS. The Company, per FASB statement No. 7, is properly accounted for and reported as a development stage enterprise. The Company's efforts since entering its current business have been devoted primarily to Company capitalization, acquisition of mining properties, packaging and milling facility acquisitions and product and market development. The Company has realized limited sales in each of its fiscal years ended January 31, 1992 through January 31, 1997 from limited test marketing programs for its products while in the development stage. During the development stage the Company has developed over a dozen products and test marketed these products in various parts of the country. LIQUIDITY Austin-Young, Inc., the major stockholder of the Company, provided a portion of the Company's operating capital during fiscal years 1993, 1994, 1995, 1996 and 1997 through loans and equity funding and the Company owed approximately $182,539 to Austin-Young, Inc. at January 31, 1996. The balance owing to Austin-Young, Inc. increased to 202,385 at January 31, 1997 due to the rolling of accrued interest into the note and $7,000 of advances made to the Company. Balances owed to Austin-Young, Inc. were $202,385 and $202,385, respectively, for the nine months ended October 31, 1997 and 1996. Revenues to date have provided insignificant funding of working capital because of the development stage status of the company and the limited test marketing programs. During the fiscal years 1995, 1996 and 1997, the Company incurred losses that reflect the development stage activity of researching and test marketing its products. The company has paid $140,739, $8,115 and $0.00 for research and development for the years 1995, 1996 and 1997, respectively. The Company paid $91,700 to the Bureau of Land Management in the fiscal year ended January 31, 1996 and $29,500 in the fiscal year ended January 31, 1997. In the future, approximately $29,500 will be due to the Bureau of Land Management in August of each year to satisfy claim maintenance fees on existing claims. Austin-Young, Inc. has provided, through loans and equity funding, any deficiencies to the necessary funding during the development stage, but expects funding from private placements and other offerings will be sufficient for future development costs. When possible, the Company has issued stock for the acquisition of assets or services to reduce the need for additional operating capital from the major stockholder, additional shareholders or gross profits from its limited marketing efforts. A large part of the Company's zeolite mineral deposits were acquired by stock issuance which is expected to play an integral part of maintaining a competitive edge by keeping supply costs of the principle ingredient of its products to a minimum. During the development stage, the Company has also relied on the time and talents of Austin-Young, Inc. personnel and office space and equipment to maintain a lower overhead to conserve its limited resources for product and market development. During the fiscal year ended January 31, 1996, the Company issued 214,168 shares in a private placement for $394,362 and issued 9,000 shares for artwork and packaging design services rendered to the Company and valued at $22,400. During the fiscal year ended January 31, 1997, the Company issued 130,960 shares in private placements for $156,860 and issued 259,620 shares for services rendered to the Company and valued at $262,219. During the nine months ended October 31, 1997, the Company issued 512,000 shares in a private placement for $584,800 and issued 75,287 shares for services rendered to the Company and valued at $74,595. During the nine months ended October 31, 1996, the Company issued 113,960 shares in a private placement for $139,875 and issued 137,167 shares for services rendered to the Company and valued at $145,417. Net General and Administrative Expenses increased by approximately $75,000 during the fiscal year ended January 31, 1997, from $393,000 to $468,000. Of this increase in general and administrative expenses, legal and accounting expenses increased by $9,700, interest expense by $2,400, rent expense by $13,000, repairs and maintenance by $1,200, miscellaneous expense by $2,200 and professional services by $190,000. Professional services included shares of stock that were issued to officers and directors as compensation for their services. Decreases to the general and administrative accounts include zeolite lease expense ($52,500), printing, postage and office expenses ($11,100), travel and entertainment ($7,700), advertising ($5,700), business promotion ($2,950), contract labor ($4,000), insurance ($4,000), salaries and wages ($27,000), property taxes ($700), and payroll taxes $1,200). Other accounts accounted for the remaining difference. Net General and Administrative Expenses increased by approximately $76,000 from $290,000 for the nine months ended October 31, 1996 to $366,000 for the nine months ended October 31, 1997. This included increases to advertising and promotion ($19,275), legal and accounting ($4,575), interest ($805), meals and entertainment ($2,150), telephone ($4,400), rent ($9,800), repairs and maintenance ($18,410), salaries and wages ($49,300), payroll taxes ($3,600), travel ($15,225), equipment rental ($1,270), public company expenses ($2,500), insurance ($3,475), commissions ($7,200), dues and publications ($475) and decreases to contract labor ($14,700), professional services ($48,975), depreciation and amortization ($750), postage ($450) and mining leases ($5,700). Other small accounts made up the difference. For the fiscal years ended January 31, 1996, January 31, 1997 and for the period from the inception date on February 9, 1984 to January 31, 1997, the Company had average gross profit margins of 35%, 30% and 36%, respectively. For the nine months ended October 31, 1997 and 1996, the Company realized gross profit margins of 11% and 29%, respectively on revenues of $45,250 and $56,147, respectively. At current operating expense levels and with the anticipated product sales mix, the Company estimates its break-even at approximately $125,000 in sales per month. The Company has $125,000 in bank debt outstanding. This bank debt is secured by an equivalent amount of CD's that are owned by Austin-Young, Inc., the major stockholder of the Company. Austin-Young, Inc. does not receive any compensation for the use of its CD's as collateral. The debt includes interest only payments to the bank in the approximate amount of $850 per month. This bank debt was incurred to pay off an existing mortgage on the Austin, Texas warehouse facility. The Company intends to pay the principal amount of the bank debt from proceeds of a public or private stock offering. All accounts payable and accrued expenses are paid when due or sooner when discounts are available. RESULTS OF OPERATIONS Because the Company is a development stage enterprise, it has incurred losses in each of its fiscal years ended January 31, 1995, 1996 and 1997. This is due to the Company incurring operating expenses during a time when most of the efforts were expended in product and market development and other areas not directly related to marketing while positioning the Company to implement various marketing programs. In fiscal 1992, the Company began test marketing products that it had developed and/or to which it had acquired the rights from other companies. Revenues increased from $11,388 in 1992 to $43,115 in 1993 due to test marketing of existing products in limited market areas. During the fiscal year ended January 31, 1994, the Company concentrated on attractive packaging of its products, Company capitalization and distribution networks, with less emphasis on product research as it prepared to implement various marketing programs for its products. Sales for the fiscal year indicated no growth over the previous year and, in fact, showed a decline in sales to $20,323. Sales for the fiscal year ended January 31, 1995, increased to $69,467, or 242% over the previous year, as the Company expanded the test marketing of products into more outlets. During the fiscal year ended January 31, 1996, sales declined to $26,070 as the Company's management concentrated on the revamping of existing marketing structures in retail outlets, the design of a marketing program to market agricultural products through feed dealers, the development of the conceptual framework for marketing the smaller packaged products through a direct sales organization, the development of a relationship with an import company in France to market products in France and the acquisition of a milling facility in Oregon. During the fiscal year ended January 31, 1997 revenues increased to $69,293, or 166% over the previous year, as the Company began to realize revenues from the agricultural marketing programs in the United States and France. Even in the test marketing programs, the Company has maintained gross profit margins of 30% and 35%, respectively, for the fiscal years ended January 31, 1997 and 1996. The gross profit margin for the fiscal year ended January 31, 1995, was negative primarily due to a write-off of obsolete and excess inventory in the amount of $42,702 and to product promotions that involved free product to new customers in introductory offers. Gross profit margins have averaged 32% for the period from inception on February 9, 1984 through October 31, 1997. Profit margins should increase and then stabilize once production and marketing costs become reasonable with higher production levels and higher sales volume. Bringing the Oregon milling facility into production should also decrease costs, thereby allowing the Company to increase gross profit margins or reduce selling prices to facilitate increasing market share on each of the products sold by the Company. Quantity discounts on bag purchases for certain of the Company's products could result in up to a 30% increase in the gross profit percent. Ownership of its own zeolite deposits should allow the Company to better control its cost of sales since zeolite is the major raw material used in its products. The Company also has negotiated mining arrangements with mining companies to eliminate large capital requirements that would be necessary to acquire equipment. Also, milling, packaging, and inventory arrangements have eliminated the need to spend additional money for capital equipment necessary for these processes in past years. General and administrative expenses have increased steadily since January 31, 1991, as the Company developed more products and added personnel to test market products. Depreciation and amortization expenses since inception have remained low because the Company has contracted many of its needs that would otherwise require capital expenditures. A significant portion (approximately $251,000) of the Company's January 31, 1995 operating expenses relating to consulting services were funded through the issuance of common stock pursuant to S-8 Registration Statements. Approximately $22,400 of the operating expenses for the fiscal year ended January 31, 1996, were funded through S-8 Registration Statements. Approximately $262,000 of services were acquired during the fiscal year ended January 31, 1997 through the issuance of common stock. In addition, another $157,000 of common stock was issued in private placements to cover other overhead expenses. During the nine months ended October 31, 1997, 75,287 shares of stock at an average price of $1.00 per share were issued for services provided to the Company. Another $584,800 was provided through the issuance of 512,000 shares, the proceeds of which were used to cover overhead and purchase milling equipment to begin equipping the Oregon mill facility. An additional 20,831 shares valued at an average price of $1.17 per share were issued as part of the purchase price of milling equipment during the nine months ended October 31, 1997. The Company's note payable to its major stockholder increased by approximately $65,000 during the fiscal year ended January 31, 1995, and by another $46,000 during the fiscal year ended January 31, 1996 as the Company borrowed funds to help cover overhead expenses and accrued rent expenses owing to Austin Young, Inc. During the fiscal year ended January 31, 1997, the note payable to the major stockholder increased by only $20,000 mostly due to accrued interest that was rolled into the note plus approximately $7,000 of advances made to the Company. The balance of the note is expected to be paid from future earnings of the Company. In August, 1996, the Company paid off a note payable of approximately $125,000 on the warehouse/plant facility in Austin, Texas from the proceeds of a bank loan that was secured by using CD's owned by the Company's major stockholder. The Company has maintained current ratios of 0.47, 1.10 and 1.84, respectively, for the fiscal years ended January 31, 1997, 1996 and 1995. The lower current ratio for the fiscal year ended January 31, 1997, results from the classification as short term debt of $202,385 owing to Austin-Young, Inc., the major stockholder of the Company. This debt may or may not be paid during the next fiscal year, depending upon profits of the Company. Current ratios for the nine months ended October 31, 1997 and 1996 were 1.06 and 1.17, respectively. The Company does not expect inflation to have any material effect on its revenues, costs or overall operation. Since the Company owns its own zeolite deposits that are the main raw material used in its products, inflation would generally give the Company a competitive edge over companies that do not own their own deposits. The Company expects that any increased paper costs for the packaging used in its products can be off-set by price increases without losing any competitive edges since all other competitors will face the same price increases. The Company has begun using quality, less expensive plastic packaging for its Stall Fresh product. PLAN OF OPERATIONS Management believes that it can continue to fund its operations through private placements or funds received from the major stockholder until a public stock offering can be completed or revenues reach the level (approximately $125,000 per month) at which the gross profits attained will finance the operations. The Company will have to raise a more significant amount of equity in order to expand its operations at a more rapid rate. The Company has signed an engagement letter with an investment firm that has begun raising an additional $1,500,000 of which the Company will net approximately $1,250,000. The proceeds will be used to increase inventory levels, advertising and promotion and working capital. Management has begun a limited marketing campaign, based on available capital, of its agricultural related products in certain market areas of the United States and in France. The Company continues to sell some of its smaller packaged products through several of the retail outlets that participated in the test marketing program for the products. In November, 1995, the Company began shipping some of its agricultural products to E.N.S.R./S.A.R.L., an import company located in France. The Company has completed design and packaging for products such as Mother Earth KittyKat Premium Cat Litter and Soil Enhancer, White Buffalo, Stall Fresh, Stinky Pinkys and Shoe Fresh as well as eight other products. The Company is also working the conceptual framework of various other products using the zeolite materials present in its existing product line. This includes the impregnation of zeolites with pesticides, herbicides and fertilizers for use in fields, pastures and gardens as well as chemicals to help eradicate fire ants. In October, 1995, the Company purchased a production plant containing 103,125 sq. ft. and approximately 3,500,000 cu. ft. of production, packaging and storage space near its zeolite properties in Oregon. The facility is not subject to any existing mortgages. The facility is already equipped with a 70-ton crane. The Company has completed an equity offering that will be used, in part, to equip this facility with crushing, milling, drying, screening, packaging and storage equipment. The Company expects the Oregon milling facility to be in production during the last quarter of 1997. The Company's Permanent Mining Permit and Plan of Operations has been approved and granted by the Department of the Interior Bureau of Land Management and the construction of the milling equipment has begun. PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. During the quarter ended October 31, 1997, there were no material pending or threatened legal proceedings against the Company or its directors, officers, affiliates and owners of record or beneficially of more than five percent of any class of voting securities of the Company nor was there any associate of any such director, officer, affiliate or security-holder who is a party in any action that is adverse to the Company or its subsidiary. ITEM 2. CHANGES IN SECURITIES. During the quarter ended October 31, 1997, there were no material modifications to instruments defining the rights of the holders of any class of registered securities nor were the rights evidenced by any class of registered securities materially limited or qualified by the issuance or modification of any other class of securities. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. During the quarter ended October 31, 1997, there was no material default in the payment of principal, interest, sinking or purchase fund installments, or any other material default not cured within 30 days, with respect to any indebtedness of the Company exceeding five percent of the total assets of the Company, nor was there any material arrearage in the payment of dividends with respect to any class of preferred stock of the Company which is registered or which ranks prior to any class of registered securities, or with respect to any class of preferred stock of any significant subsidiary of the Company ( The Company currently has no dividend policy or preferred stock outstanding). ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS. During the quarter ended October 31, 1997, no matters were submitted to a vote of security-holders through the solicitation of proxies at a Meeting of Shareholders: ITEM 5. OTHER INFORMATION. During the quarter ended October 31, 1997, there was no information not previously reported on Form 8-K to include under this item. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. Page (a) (1) The following financial statements are included in Part I, Item 1: Consolidated Balance Sheets - October 31, 1997 and January 31, 1997-------------------- 3-4 Consolidated Statements of Operations - Nine months and quarters ended October 31, 1997 and 1996---------------------------------------------------------------- 5 Consolidated Statements of Stockholders' Equity (Deficit) - period ended October 31, 1997-------------------------------------------------------- 6-9 Consolidated Statements of Cash Flows - Nine months and quarters ended October 31, 1997 and 1996--------------------------------------------------------------- 10-11 Notes to Consolidated Financial Statements----------------------------------------------- 12-24 (3) The following exhibits for the Nine months and quarters ended October 31, 1997 and 1996, are submitted herewith: Exhibit 11 - Computation of Per Share Earnings (Loss)------------------------------- 31 Exhibit 21 - Subsidiary of the Registrant------------------------------------------------- 32 All other exhibits are omitted since the required information is included in the financial statements or notes thereto, or since the required information is either not present, not present in sufficient amount or is not applicable. (b) No reports were filed on Form 8-K during the quarter ended October 31, 1997. 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. AMERICAN ABSORBENTS NATURAL PRODUCTS, INC. By: _____________________________________________ Terry L. Young, Chairman of the Board and Chief Executive Officer Date: November 14, 1997 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. Signature Title Date __________________________ Chairman, Chief Executive November 14, 1997 Terry L. Young Officer and Director __________________________ President, Chief Financial Officer, November 14, 1997 David W. Redding Treasurer, Principal Accounting Officer and Director AMERICAN ABSORBENTS NATURAL PRODUCTS, INC. EXHIBIT 11 - STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS (LOSS) From Inception Nine Months Ended Nine Three Months EndedThree Months Ended(February 9, 1997) Oct. Months Oct. Oct. 31, 1996 to Oct. 31, 1997 Ended 31, 1997 31, 1997 Oct. 31, 1996 Primary and Fully Diluted: Average Shares Outstanding5,968,2185,220,6475,968,218 5,220,647 2,000,000 Net Loss $ $ (287,736)$ (134,494)$ (129,528)$ (2,549,674) (374,642) Earnings (Loss) $ $ $ $ $ Per Share (.06) (.06) (.03) (1.27) (.02) AMERICAN ABSORBENTS NATURAL PRODUCTS, INC. EXHIBIT 21 - SUBSIDIARY OF THE REGISTRANT Name Jurisdiction of Incorporation American Absorbents, Inc. Texas The corporation listed is a wholly owned subsidiary of the Registrant, and is included in the consolidated financial statements.