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 April 30, 1999 Transition 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, Suite 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: April 30, 1999----7,420,252 ($0.001 par value) common shares PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. The following interim consolidated financial statements as of April 30, 1999 and for the three months and quarter then ended, are unaudited, but in the opinion of managment, have been prepared in conformity with generally accepted accounting principles applied on a basis consistent with those of the annual audited financial statements and in conformity with the instructions provided in Item 310(b) of Regulation S-B. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete audited financial statements. Such interim financial statements reflect all adjustments (consisting of normal recurring adjustments and accruals) which management considered necessary for a fair presentation of the financial position and the results of operations for the quarters presented. The results of operations for the quarters presented are not necessarily indicative of the results to be expected for the year ending January 31, 2000. The interim consolidated financial statements should be read in connection with the audited consolidated financial statements for the year ended January 31, 1999. AMERICAN ABSORBENTS NATURAL PRODUCTS, INC. AND SUBSIDIARY (A Development Stage Company) Consolidated Financial Statements For the Three Months Ended April 30, 1999 and 1998 (Unaudited) INDEX PART I. FINANCIAL INFORMATION PAGE NUMBERS Item 1. Financial Statements (Unaudited) 4 Consolidated Balance Sheets at April 30, 4-5 1999 and January 31, 1999 Consolidated Statement of Operations for 6 the three months and quarter ended April 30, 1999 Consolidated Statements of Stockholders' 7-10 Equity from inception on February 9, 1984 through April 30, 1999 Consolidated Statement of Cash Flows for 11-12 the three months ended April 30, 1999 and 1998 and from inception to April 30, 1999 Notes to the Consolidated Financial Statements 13-17 Item 2. Management's Discussion and Analysis of 18-21 Financial Condition and Results of Operations PART II.OTHER INFORMATION Item 1. Legal Proceedings 21 Item 2. Changes in Securities 21 Item 3. Defaults Upon Senior Securities 21 Item 4. Submission of Matters to a Vote of Security-Holders 21 Item 5. Other Information 21 Item 6. Exhibits and Reports on Form 8-K 22 Signatures 23 AMERICAN ABSORBENTS NATURAL PRODUCTS, INC. AND SUBSIDIARY (A Development Stage Company) Consolidated Balance Sheets April 30, 1999 and January 31, 1999 (unaudited) ASSETS CURRENT ASSETS April 30, 1999 January 31, 1999 Cash $64,149 $ 4,966 Accounts Recievable Trade 48,859 53,005 Other 730 730 PrePaid expenses 9,833 17,208 Inventory 294,859 262,121 Total Current Assets 418,430 338,030 Property and Equipment 702,018 749,844 OTHER ASSETS Mining Claims 5,081,569 5,081,569 Notes Receivable 5,000 Certificates of Deposit 15,000 15,000 Total Other Assets 5,096,569 5,101,569 TOTAL ASSETS 6,217,017 6,189,443 AMERICAN ABSORBENTS NATURAL PRODUCTS, INC. AND SUBSIDIARY (A Development Stage Company) Consolidated Balance Sheets (Continued) April 30, 1999 and January 31, 1999 (unaudited) LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES April 30, 1999 January 31, 1999 Accounts payable and accrued expenses $ 109,208 $ 61,394 Notes Payable Shareholders 230,400 50,000 Note Payable 868 14,281 Total Current liabilities 340,548 125,675 COMMENTS AND CONTINGENCIES (See Notes) STOCKHOLDERS EQUITY Common stock; authorized 50,000,000 common shares at $0.001 par value; 7,420,252 and 7,391,251 shares issued and outstanding, respectively 7,420 7,392 Capital in excess of Par Value 9,712,174 9,682,203 Deficit accumulated during the development stage (3,823,125) (3,625,827) Treasury stock (cost of 90,000 shares held by the comapny) (20,000) Total Stockholders' Equity 5,876,469 6,063,768 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 6,217,017 6,189,443 AMERICAN ABSORBENTS NATURAL PRODUCTS, INC. AND SUBSIDIARY (A Development Stage Company) Consolidated Statements of Operations April 30, 1999 and 1998 (unaudited) From Inception Three Months Ended (February 9, 1984) April 30, 1999 April 30, 1998 to April 30, 1999 REVENUES Net Sales $ 10,140 $ 4,548 $ 451,141 Cost of Good sold 7,098 3,254 293,989 Gross Profit 3,042 1,294 157,152 EXPENSES General and administrative 179,278 141,558 3,848,090 Depreciation and amortization 23,845 11,865 167,468 Other Income (Expense) Rent 2,610 2,148 19,042 Interest 173 185 1,086 Gain on sale of assets 17,800 Net Loss before provision fro income taxes (197,298) (149,796) (3,820,478) Provision for income taxes 0 0 2,647 Net Loss $ (197,298) $ (149,796) $ (3,823,125) Weighted average loss per share $ (0.03) $ (0.02) Average shares outstanding 7,362,858 6,863,350 AMERICAN ABSORBENTS NATURAL PRODUCTS, INC. AND SUBSIDIARY (A Development Stage Company) Consolidated Statements of Stockholders' Equity From Inception on February 9, 1984 to April 30, 1999 (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 - 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. Issuance of common stock for distribution licenses from Global Environmental Industries (GEI) for UT 50,000 50 37,070 - & WA, September 1990 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, 1991 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) - Repurchase of common stock from Austin-Young, Inc. in (338,000) (338) (64,682) - May 1991 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 AMERICAN ABSORBENTS NATURAL PRODUCTS, INC. AND SUBSIDIARY (A Development Stage Company) Consolidated Statements of Stockholders' Equity (Continued) From Inception on February 9, 1984 to April 30, 1999 (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 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$(152,689) Issuance of common stock for the acquisition of Geo- 701,800 702 96,442 - Environment Services, Inc. in February 1992 Issuance of common stock for the purchase of mining claims 243,000 243 4,859,757 - in March 1992 Common stock canceled by officers and directors in (32,430) (32) 32 - June 1992 Cancellation of fractional shares due to reverse stock split (21) - - - Contribution by Austin-Young, Inc. - - 10,000 - Issuance of common stock (pursuant to a repurchase agreement in May, 1991) to Austin-Young, Inc. for 3,380,000 3,380 61,620 - relief of debt in July 1992 Net loss for the year ended January 31, 1993 - - - (136,304) Balance, January 31, 1993 4,461,563$ 4,462 5,450,620$(288,993) Issuance of common stock for services rendered in 17,800 18 26,682 - June 1993 Issuance of common stock to Austin-Young, Inc. in 12,000 12 35,988 - June 1993 Issuance of common stock for cash 66,667 67 199,936 - October 1993 AMERICAN ABSORBENTS NATURAL PRODUCTS, INC. AND SUBSIDIARY (A Development Stage Company) Consolidated Statements of Stockholders' Equity (Continued) From Inception on February 9, 1984 to April 30, 1999 (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 Issuance of common stock for services rendered in 17,000 17 50,983 - October 1993 Issuance of common stock for cash 80,072 80 191,321 - December 1993 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 Issuance of common stock for services rendered in June 1994 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 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 - Issuance of common stock in a private offering 214,168 214 394,148 - 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) AMERICAN ABSORBENTS NATURAL PRODUCTS, INC. AND SUBSIDIARY (A Development Stage Company) Consolidated Statements of Stockholders' Equity (Continued) From Inception on February 9, 1984 to April 30, 1999 (unaudited) Deficit Accumulated Additional During the Common Stock Paid in Development Shares Amount Capital Stage Balance at Januaru 31,1996 (from prior page) 4,969,520 4,970 6,851,728 (1,710,370) Issuance of common stock for cash in private offering 130,960 131 156,729 Issuance of common stock for services 259,620 260 262,359 Net Loss for the year ended January 31, 1997 (464,662) Balance January 31,1997 5,360 5,361 7,270,816 (2,175,032) Issuance of common stock for cash in private offering 582,000 582 729,843 Issaunce of common stock for services 129,784 130 131,782 Issuance of common stock for purchase of equipment 13,555 13 15,236 Issuance of common stock pursuant to stock option plan 25,000 25 9,350 Issuance of common stock for partial redemtion of a note pursuant to a stock option plan 100,000 100 37,400 Net loss for the year ended January 31, 1998 (489,525) Balance January 31, 1998 6,210,439 6,211 8,194,427 (2,664,557) Issuance of common stock for cash in a private offering 963,269 963 1,218,676 Issuance fo common stock for services 135,480 136 147,628 Issuance of common stock for purchase of equipment 82,063 82 121,472 Net loss for the year ended January 31, 1999 (961,270) Balance January 31,1999 7,391,251 7,392 9,682,203 (3,625,827) Issuance of common stock for cash in a private offering 29,001 28 29,971 Net loss foe the three months ended April 30, 1999 (197,298) Balance April 30,1999 7,420,252 7,420 9,712,174 (3,823,125) AMERICAN ABSORBENTS NATURAL PRODUCTS, INC. AND SUBSIDIARY (A Development Stage Company) Consolidated Statements of Cash Flows From Inception Three Months ended (Fenruary 9, 1984) April 30, 1999 April 30, 1998 to April 30, 1999 Cash flows from operating activities Net Loss $ (197,302) $ (149,796) $3,823,125) Deprciation and Amortization 20,513 11,865 164,136 (Increase) decreas in receivables 9,146 (7,149) (44,589) Decrease (increase) in prepaid expenses 7,375 (7,535) 2,167 Increase (decrease in payables 1,560 Stock issued for services 5,250 939,465 Epenses paid by shareholder 149,018 Unlocated difference in prior numbers 14,910 Net cash used by operating activiies (162,274) (312,497) (2,727,753) Cash flows from investing activities Purchase of fixed assets (1,250) (79,514) (699,320) Purchase of certificates of deposit (15,000) Purchase of product tradenames (26,958) Purchase of note receivable (5,000) Organizations costs (1,524) Purchase/sale of mining development costs 7,920 Purchase of mining claims (58,599) Sales of licenses & other assets 28,562 178,562 Purchase of stock 20,000 (85,000) net cash used by investing activities 7,312 (79,514) (704,919) Cash flows from financing activities Issuance of comon stock 30,000 729,904 3,160,062 Issuance of notes payable 184,145 24,655 831,355 Prinicpal payments on long-term debt (81,052) (494,596) Net cash provided by financing activities 214,145 673,507 3,496,821 Net (decrease) increase in cash 59,182 281,496 64,149 Cash at begining of period 4,966 26,642 n/a Cash at end of period $ 64,149 $ 306,138 $ 64,149 AMERICAN ABSORBENTS NATURAL PRODUCTS, INC. AND SUBSIDIARY (A Development Stage Company) Consolidated Statements of Cash Flows (Continued) From Inception Three Months ended (February 9, 1984) April 30, 1999 April 30, 1998 to April 30, 1999 Supplemental cash floe information Cash paid for: Interest $ 1,810 $ 4,623 $ 34,630 Income taxes 2,547 Non-cash transaction: Stock issued for mining claims 5,045,000 Stock issued for down payment on building 30,000 Stock issued for services 5,250 939,465 Stock issued for stock of Geo-environmental Services, Inc. 97,144 Stock issued for inventory 75,000 Stock issued for assets of Austin-Young, Inc. and Global Environmental Industries 236,060 Stock issued for purchase of equipment 136,803 Stock issued for partial redemtion of note 37,500 AMERICAN ABSORBENTS NATURAL PRODUCTS, INC. AND SUBSIDIARY (A Development Stage Company) Notes to the Consolidated Financial Statements April 30, 1999 (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. 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 o f 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 debtinstruments 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 April 30, 1999 (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 April 30, 1999 and 1998 after writing off all accounts determined to be uncollectible. Prepaid Expenses Prepaid expenses consist of the following: 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. NOTE 2 - DEVELOPMENT STAGE ENTERPRISE The Company, per FASB Statement No. 7, is properly accounted for and reported as 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. The Company completed its plant in Oregon and began operation in 1999. 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. AMERICAN ABSORBENTS NATURAL PRODUCTS, INC. AND SUBSIDIARY (A Development Stage Company) Notes to the Consolidated Financial Statements April 30, 1999 (unaudited) 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. 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). 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. NOTE 4 - 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. AMERICAN ABSORBENTS NATURAL PRODUCTS, INC. AND SUBSIDIARY (A Development Stage Company) Notes to the Consolidated Financial Statements April 30, 1999 (unaudited) NOTE 4 - MINING CLAIMS (Continued) 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 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 5 - NOTES PAYABLE During the quarter ended April 30, 1999, the note payable to the major shareholder increased by $80,400. Two shareholders also loaned the company $50,000 each, and these notes are secured by the Company's warehouse in Austin, Texas. NOTE 6 - PRIVATE PLACEMENT OF COMMON STOCK During the quarter ended April 30, 1999, 29,001 shares of common stock were issued in a private placement for $30,000. NOTE 7 - COMMITMENTS AND CONTINGENCIES The Company has sold two private placements that include a royalty payment. The first private placement sold includes a $3 per ton per minimum investment on 6,000 tons of zeolite mined and sold. Total royalties paid per minimum investment will be $18,000. The second private placement sold includes a $2 per ton per minimum investment on 10,000 tons AMERICAN ABSORBENTS NATURAL PRODUCTS, INC. AND SUBSIDIARY (A Development Stage Company) Notes to the Consolidated Financial Statements April 30, 1999 (unaudited) NOTE 7 - COMMITMENTS AND CONTINGENCIES (Continued) of zeolite mined and sold. Total royalties paid per minimum investment will be $20,000. The royalties will be paid simultaneously ($5 per ton) to the shareholders proportionately once the zeolite has been mined and sold. The Company may increase the amount of the royalty payment to any holder of the royalty right above the specified dollar per ton royalty, but in no event will the total royalty payment exceed the maximum per investment. The increase in the royalty amount paid would only decrease the time limit in which the holder of a royalty right would receive the total royalty amount. Royalty payments will be made quarterly after the Company has made its quarterly financial statement filing with the Securities and Exchange Commission and determined the total tonnage that has been mined, milled and sold during the quarter. At April 30, 1999, the Company was involved in one legal proceeding: -American Absorbents Natural Products, Inc. v. Calkins A former independent contractor hired to construct the Oregon plant has placed a mechanics lien on the Oregon plant for alleged unpaid claims and the Company has sued to remove the mechanics liens since the claims are being contested. Calkins has filed a counter claim seeking damages in addition to his lien. The case is in initial stages and an outcome cannot be determined at this time. During the quarter ended April 30, 1999, the Company settled these legal matters: -McLean v. American Absorbents Natural Products, Inc. A former employee was seeking workers compensation coverage for alleged injuries sustained on the job at the Oregon plant. During the quarter, all administrative hearings were completed and the Company was found not to be liable. -American Absorbents Natural Products, Inc. V. Charles Walden During the quarter, the Company settled the employee stock purchase case in arbitration by Mr. Walden's return to the Company of 90,000 of the common shares, a $15,000 payment by the Company to Mr. Walden and the Company's forgiveness of the stock purchase note. Mr. Walden was allowed to keep the remaining 110,000 shares. The 90,000 shares are reported on the balance sheet as treasury stock. The Company is currently investigating certain allegations of improprieties involving former officers of the Company. The Company does not believe that the improprieties even if true would have a materially adverse impact on the Company. NOTE 8 - 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. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION, RESULTS OF OPERATIONS 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, 1999 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. During the quarter ended April 30, 1998, the Company's milling plant in Burns/Hines, Oregon was completed and placed into production processing the 10,000 tons of zeolite minerals that were mined from the Company's claims in Oregon in December, 1997. LIQUIDITY AND FINANCIAL CONDITION Austin Young, Inc., the major stockholder of the Company, has provided, through loans and equity funding, any deficiencies to the necessary working capital during the development stage, but expects funding from private placements and other offerings will be sufficient for future development costs. Austin Young, Inc. provided a small portion ($7,000) of the Company's operating capital during fiscal year 1998 through advances on behalf of the Company. The Company owed $100,000 to Austin Young, Inc. at April 30, 1998 and $130,400 at April 30, 1999, plus accrued interest. During the quarter, two shareholders loaned the company $50,000 each, and the loans are secured by the warehouse in Austin, Texas. The loans are interest only and are payable on April 30, 2000. All or part of the loans may be converted into securities if the Company sells securities in a private placement. Revenues to date have provided insufficient funding of working capital. 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 packaged products to a minimum. During the development stage, the Company has also relied on favorable office space and equipment leases from Austin Young, Inc. to maintain a lower overhead and conserve its limited resources. During the development stage the Company has paid for almost everything as it was acquired including the build up in inventory levels. As a result, and now that the milling facility is in production, the future cash flow of the Company will benefit as the inventory is converted into sales with the implementation of the marketing efforts. During the development stage the Company incurred losses that reflect the development stage activity of researching and test marketing its products. 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 years ended January 31, 1997, 1998 and 1999. 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. As the Company moves into the marketing phase, its need for the warehouse space in Austin, Texas has diminished somewhat and the Company has leased a portion of the warehouse to a tenant for approximately $900 per month with the Company continuing to use the remainder of the space. 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 fiscal year ended January 31, 1998, the Company issued 582,000 shares in private placements for $815,000, 129,784 shares for services rendered to the Company and valued at $132,380, 13,555 shares for equipment valued at $15,250, 25,000 shares through the exercise of an option to a director for $9,375 and 100,000 shares through the exercise of an option to an officer and director for $37,500 in debt relief. During the year ended January 31, 1999 the Company raised $1,219,639 (net of commissions of $53,428) through the sale of 963,269 restricted common shares. Additional milling equipment to increase the capacity of the Oregon milling facility and valued at $121,554 was acquired through the issuance of 82,063 restricted common shares. Another 135,480 restricted common shares were issued for professional services rendered to the Company and valued at $147,764. During the three months ended April 30, 1998, the Company issued 520,976 shares in a private placement for $730,204, 3,500 shares for services rendered to the Company and valued at $5,250 and issued 81,763 shares for equipment valued at $121,000. During the three months ended April 30, 1999, the Company issued 29,001 shares of common stock in a private placement for $30,000. The Company realizes gross profit margins generally ranging from 20% to 35% on its product sales depending on product line and pricing levels. While still in the test marketing phase, for the fiscal years ended January 31, 1997, January 31, 1998, January 31, 1999 and for the period from the inception date on February 9, 1984 to January 31, 1999, the Company had average gross profit margins of 30%, 30%, 34% and 34% respectively. 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. For the period from the inception date on February 9, 1984 to April 30, 1999, the Company had an average gross profit margin of 34%. For the three months ended April 30, 1999 and 1998, the Company realized gross profit margins of 30% and 28%, respectively on revenues of $10,140 and $4,548, respectively. At April 30, 1998, the Company had $125,000 in bank debt outstanding relative to its Austin, Texas warehouse facility. This debt was paid off by the Company subsequent to the end of the quarter ended April 30, 1998. At April 30, 1999, the Company had $100,000 in debt outstanding to two shareholders relative to its Austin, Texas warehouse facility. 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, 1997, 1998 and 1998 and for the quarters ended April 30, 1998 and April 30, 1999. 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. During the fiscal year ended January 31, 1998 revenues decreased to $47,472 from $69,293 the previous year, or, 31%, due to lower orders from the French distributor resulting from milder weather conditions in France. During the fiscal year ended January 31, 1999, sales increased to $153,873. Revenues for the quarter ended April 30, 1999 increased to $10,140 from $4,548 for the same quarter of the previous year. 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 over the last several years. In the year ended January 31, 999, general and administrative expense increased to $983,873 from $496,585 in fiscal 1998. A large portion of the increase is attributable to extra expense associated with the production facility, marketing personnel and marketing expense. Salary and payroll expenses increased by $202,000 with the addition of production employees and management salary increases. Additional marketing personnel also contributed to the increase. Advertising, postage and printing expenses increased by approximately $126,000 due to increased promotion levels with the introduction of new marketing programs. Insurance expense increased by $28,200 due to the increased valuation of the Oregon willing facility and the addition of health and hospitalization insurance to certain employees as a benefit. Interest expense decreased by $13,700 during the current fiscal year due to the repayment of approximately $250,000 of bank debt and debt owed to the major shareholder. Travel expenses decreased by $8,150 and outside service expense decreased by $3,100 due to more personnel on the payroll. Professional services increased by $92,500 due to executive benefits awarded in the form of restricted common stock and charged to professional services. Legal expenses increased by $46,950 due to legal fees incurred in the Charles Walden and David Calkins lawsuits as well as legal fees incurred relating to private stock offerings. Net General and Administrative Expenses increased by approximately $38,000 during the quarter ended April 30, 1999 as compared to the same quarter of the previous year mostly due to increases in number of personnel, salary increases, legal fees, and health insurance and worker compensation costs. Depreciation expense increased by approximately $12,000 during this period from depreciating the new milling equipment. 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. During the fiscal year ended January 31, 1998, the balance of the note decreased to $179,052 due to the exercise of options through debt relief in the amount of $37,500 consisting of $23,333 in principal and $14,167 in accrued interest. During the year ended January 31, 1999, the note was reduced by $129,052 in principal to a balance of $50,000. During the three months ended April 30, 1999, the Company borrowed $80,400 from the major shareholder, and $100,000 from two other shareholders for working capital. The Company has maintained current ratios of 2.69, 0.77, and 0.47, respectively, for the fiscal years ended January 31, 1999, 1998 and 1997. The lower current ratio for the fiscal years ended January 31, 1998 and 1997, results from the classification as short term debt of $179,052 and $202,385, respectively, owing to Austin-Young, Inc., the major stockholder of the Company. Current ratios for the three months ended April 30, 1999 and 1998 were 1.22 and 2.53. INFLATION 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 for 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 is using quality, less expensive plastic packaging for its Stall Fresha product and may pursue plastic packaging for other products as well. PLAN OF OPERATIONS Although the Company had turnover of two senior management persons, the Company has hired a chief executive officer, a chief operating officer and a chief financial officer. The Company is now directing its efforts to obtaininglarge sales contracts, tightening cost controls and improving its financial position and the overall management of the Company. The board of directors is being expanded to include persons with significant sales management and/or financial management backgrounds, and the board is currently seeking funding to continue and expand its operations.Management believes that it can continue to fund its operations through external financing until revenues reach the level at which the gross profits attained will sustain and finance the operations. Management has begun a marketing campaign of its products in certain market areas of the United States and in France. Several distributors have been signed to distribute the products and discussions are being held with others and are in different stages of completion. 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. The Company continues to ship some of its agricultural products to E.N.S.R./S.A.R.L., an import company located in France. 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 Company completed a private placement offering in the early part of fiscal 1998 that was sufficient to equip this facility with crushing, milling, drying, screening, packaging and storage equipment. The construction of the milling facility equipment was completed during the quarter ended April 30, 1999 and the plant has begun operating. The Company has purchased additional milling equipment that will at least triple the milling facility's capacity when installed. PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. During the quarter ended April 30, 1999, 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. (SEE NOTE 7 ITEM 2. CHANGES IN SECURITIES. During the quarter ended April 30, 1999, 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 April 30, 1999, 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 April 30, 1999, 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 April 30, 1999, 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. Pages (a) (1) The following financial statements are included in Part I, Item 1: Consolidated Balance Sheets - April 30, 1999 and January 31, 1999-------------------- 4-5 Consolidated Statements of Operations - Three months ended April 30, 1999 and 1998--------------------------- 6 Consolidated Statements of Stockholders' Equity (Deficit) - period ended April 30, 1999------------------ 7-10 Consolidated Statements of Cash Flows - Three months ended April 30,1998 and 1998---------------------------- 11-12 Notes to Consolidated Financial Statements------------------------------------------------ 13-17 (3) The following exhibits for the three months and quarters ended April 30, 1999 and 1998, are submitted herewith: Exhibit 11 - Computation of Per Share Earnings (Loss)---- 24 Exhibit 21 - Subsidiary of the Registrant------------- 25 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 April 30, 1999. 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: _____________________________________________ Robert L. Bitterli, President and Chief Executive Officer Date: June 15, 1999 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 __________________________ President, Chief Executive June 15, 1999 Robert L. Bitterli Officer and Director __________________________ Chief Financial Officer, June 15, 1999 Donald L. Gillespie Principal Accounting Officer and Director AMERICAN ABSORBENTS NATURAL PRODUCTS, INC. EXHIBIT 11 - STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS (LOSS) From Inception (February 9, 1984) Three Months Ended Three Months Ended to Apr. 30, 1998 Apr. 30, 1999 Apr. 30, 1999 Primary and Fully Diluted: Average Shares Outstanding 7,362,858 6,863,650 N/A Net Loss $ (197,298)$ (149,796)$ (2,814,353) Earnings (Loss) $ $ N/A Per Share (.03) (.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.