1 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, 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: October 31 , 1999----4,565,252 ($0.001 par value) common shares 274,584 ($0.001 par value) preferred shares -1- 2 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. The following interim consolidated financial statements as of October 31, 1999 and for the nine 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. SAFE HARBOR UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Forward looking statements made herein are based on current expectations of the Company that involve a number of risks and uncertainties and should not be considered as guarantees of future performance. These statements are made under the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. The factors that could cause actual results to differ materially include but are not limited to: interruptions or cancellation of existing contracts, impact of competitive products and pricing, product demand and market acceptance risks, the presence of competitors with greater financial resources than the Company, product development and commercialization risks and an inability to arrange additional debt or equity financing. -2- 3 AMERICAN ABSORBENTS NATURAL PRODUCTS, INC. AND SUBSIDIARY (A Development Stage Company) Consolidated Financial Statements For the Three Months Ended October 31, 1999 and 1998 (Unaudited) INDEX PART I. FINANCIAL INFORMATION PAGE NUMBERS Item 1. Financial Statements (Unaudited) 4 Consolidated Balance Sheets at October 31, 1999 and January 31, 1999 4-5 Consolidated Statement of Operations for the nine months and quarter 6 ended October 31, 1999 Consolidated Statements of Stockholders' Equity from inception on 7-10 February 9, 1984 through October 31, 1999 Consolidated Statement of Cash Flows for the nine months and quarters 11-12 ended October 31, 1999 and 1998 and from inception to October 31, 1999 Notes to the Consolidated Financial Statements 13-17 Item 2. Management's Discussion and Analysis of Financial Condition and 18-20 Results of Operations PART II. OTHER INFORMATION Item 1. Legal Proceedings 20 Item 2. Changes in Securities 20 Item 3. Defaults Upon Senior Securities 20 Item 4. Submission of Matters to a Vote of Security-Holders 20 Item 5. Other Information 20 Item 6. Exhibits and Reports on Form 8-K 21 Signatures 22 Exhibit 1, Statement of Earnings (Loss) Per Share Exhibit 2, Subsidiary of the Registrant -3- 4 AMERICAN ABSORBENTS NATURAL PRODUCTS, INC. AND SUBSIDIARY (A Development Stage Company) Consolidated Balance Sheets October 31, 1999 and January 31, 1999 (unaudited) ASSETS October 31, 1999 January 31, 1999 ---------------- ---------------- CURRENT ASSETS Cash $ 43,906 $ 4,966 Accounts receivable Trade 20,230 53,005 Other 1,118 730 Prepaid expenses 38,239 17,208 Inventory 340,790 262,121 ---------- ---------- Total Current Assets 444,283 338,030 ---------- ---------- PROPERTY AND EQUIPMENT 675,142 749,844 ---------- ---------- OTHER ASSETS Mining claims 5,081,569 5,081,569 Notes receivable 5,000 Certificates of deposit 15,000 15,000 Trademarks & product development cost 24,140 ---------- ---------- Total Other Assets 5,120,709 5,101,569 ---------- ---------- TOTAL ASSETS $6,240,134 $6,189,443 ========== ========== The accompanying notes are an integral part of these financial statements -4- 5 AMERICAN ABSORBENTS NATURAL PRODUCTS, INC. AND SUBSIDIARY (A Development Stage Company) Consolidated Balance Sheets (Continued) October 31, 1999 and January 31, 1999 (unaudited) LIABILITIES AND STOCKHOLDERS' EQUITY October 31, 1999 January 31, 1999 ---------------- ---------------- CURRENT LIABILITIES Accounts payable and accrued expenses $ 275,596 $ 61,394 Notes payable--shareholders 223,262 50,000 Note payable 150,868 14,281 Current portion of long-term debt 118,800 ----------- ----------- Total current liabilities 768,526 125,675 ----------- ----------- COMMITMENTS AND CONTINGENCIES (See Notes) LONG-TERM LIABLITIES Notes payable--shareholders 712,800 STOCKHOLDERS' EQUITY Common stock; authorized 50,000,000 common shares at $0.001 par value; 7,455,252 and 7,391,251 shares issued, respectively (2,890,000 in treasury; 4,565,252 outstanding) 7,455 7,392 Preferred stock; authorized 10,000,000 preferred shares at 275 $0.001 par value; 274,584 shares issued and outstanding Capital in excess of par value 9,996,358 9,682,203 Deficit accumulated during the development stage (4,300,280) (3,625,827) Treasury stock (cost of 2,890,000 shares held by the company) (945,000) ----------- ----------- Total Stockholders' Equity 4,758,808 6,063,768 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,240,134 $ 6,189,443 =========== =========== The accompanying notes are an integral part of these financial statements -5- 6 AMERICAN ABSORBENTS NATURAL PRODUCTS, INC. AND SUBSIDIARY (A Development Stage Company) Consolidated Statements of Operations October 31, 1999 and 1998 (unaudited) Third Quarter (three months) Nine Months Ended Oct. 31 Ended October 31 From Inception -------------------------- --------------------------- (February 9, 1984) 1999 1998 1999 1998 to October 31, 1999 ----------- ----------- ----------- ----------- ------------------- REVENUES Net sales $ 26,480 $ 139,079 $ 7,941 $ 112,855 $ 467,480 Cost of goods sold 18,536 83,354 5,559 64,984 305,427 ----------- ----------- ----------- ----------- ----------- Gross Profit 7,944 55,725 2,382 47,871 162,053 ----------- ----------- ----------- ----------- ----------- EXPENSES General and administrative 619,476 561,326 224,877 206,866 4,288,288 Depreciation and amortization 71,276 49,940 23,928 26,825 214,899 ----------- ----------- ----------- ----------- ----------- Total expenses 690,752 611,266 248,805 233,691 4,503,187 ----------- ----------- ----------- ----------- ----------- Other Income Rent 7,830 5,917 2,610 1,801 24,262 Interest 526 565 181 195 1,439 Gain on sale of assets 17,800 Net loss before provision ----------- ----------- ----------- ----------- ----------- for income taxes (674,452) (549,059) (243,632) (183,824) (4,297,633) Provision for income taxes 0 0 0 0 2,647 ----------- ----------- ----------- ----------- ----------- Net loss $ (674,452) $ (549,059) $ (243,632) $ (183,824) $(4,300,280) =========== =========== =========== =========== =========== Weighted average loss per share $ (0.11) $ (0.08) $ (0.05) $ (0.03) =========== =========== =========== =========== Average shares outstanding 6,134,087 7,198,718 4,540,524 7,198,718 =========== =========== =========== =========== The accompanying notes are an integral part of these financial statements -6- 7 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, 1999 (unaudited) Deficit Accumulated Common Stock Additional During the --------------------- 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 31, 1990 -- -- -- (1,618) --------- --------- --------- --------- Balance, January 31, 1990 37,500 $ 38 $ 1,480 $ (1,618) Issuance of common stock for services rendered in August 1990 391,000 391 7,429 -- Issuance of common stock in September 1990 for various assets from Austin-Young, Inc. 50,000 50 198,890 -- Issuance of common stock for distribution licenses from Global Environmental Industries (GEI) for UT & WA, September 1990 50,000 50 37,070 -- Contribution from Austin-Young, Inc. -- -- 13,500 -- Issuance of common stock for services rendered in October 1990 12,500 12 37,488 -- Net loss for the year ended January 31, 1991 -- -- -- (57,756) --------- --------- --------- --------- 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 May 1991 (338,000) (338) (64,682) -- Cancellation of common shares (20,000) (20) 20 -- Issuance of common stock for the purchase of product from Steelhead Specialty Minerals in August 1991 10,000 10 74,990 -- The accompanying notes are an integral part of these financial statements -7- 8 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, 1999 (unaudited) Deficit Accumulated Common Stock Additional During the ----------------------- Paid-in Development Shares Amount Capital Stage ---------- ---------- ---------- ----------- Issuance of common stock for the purchase of mining claims in October 1991 13,214 13 184,987 -- Common stock canceled by officers/directors in January 1992 (20,000) (20) 20 -- 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- Environment Services, Inc. in February 1992 701,800 702 96,442 -- Issuance of common stock for the purchase of mining claims in March 1992 243,000 243 4,859,757 -- Common stock canceled by officers and directors in June 1992 (32,430) (32) 32 -- 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 relief of debt in July 1992 3,380,000 3,380 61,620 -- 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 -- Issuance of common stock to Austin-Young, Inc. in June 1993 12,000 12 35,988 -- Issuance of common stock for cash October 1993 66,667 67 199,936 -- The accompanying notes are an integral part of these financial statements -8- 9 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, 1999 (unaudited) Deficit Accumulated Common Stock Additional During the ------------------------- Paid-in Development Shares Amount Capital Stage ----------- ----------- ----------- ----------- Issuance of common stock as down payment on building October 1993 6,000 6 29,994 -- Issuance of common stock for services rendered in October 1993 17,000 17 50,983 -- Issuance of common stock for cash December 1993 80,072 80 191,321 -- Contribution by Austin-Young, Inc. -- -- 36,000 -- Net loss for the year ended January 31, 1994 -- -- -- (310,862) ----------- ----------- ----------- ----------- Balance, January 31, 1994 4,661,102 $ 4,662 $ 6,021,524 $ (599,855) Issuance of common stock for services rendered February 1994 6,000 6 29,994 -- 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 1994 15,000 15 46,235 -- Contribution by Austin-Young, Inc. -- -- 36,000 -- Net loss for the year ended January 31, 1995 -- -- -- (709,048) ----------- ----------- ----------- ----------- 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 31, 1996 -- -- -- (401,467) ----------- ----------- ----------- ----------- 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 -9- 10 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, 1999 (unaudited) Deficit Accumulated Common Stock Additional During the --------------------------- Paid-in Development Shares Amount Capital Stage ----------- ----------- ----------- ------------ Balance at January 31, 1996 (from prior page) 4,969,520 4,970 6,851,728 (1,710,370) Issuance of common stock for cash in a 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 5,360,100 5,361 7,270,816 (2,175,032) Issuance of common stock for cash in a private offering 582,000 582 729,843 Issuance 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 a stock 25,000 25 9,350 option plan Issuance of common stock for partial redemption of a 100,000 $ 100 $ 37,400 note pursuant to a stock option plan 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 of 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 for the three months ended April 30, 1999 (197,298) ----------- ----------- ----------- ----------- BALANCE, APRIL 30, 1999 7,420,252 7,420 9,712,174 (3,823,125) Net loss for the three months ended July 31, 1999 (233,523) ----------- ----------- ----------- ----------- BALANCE, JULY 31, 1999 7,420,252 7,420 9,712,174 $(4,056,648) Issuance of common stock for services by officers 35,000 35 11,445 Net loss for the three months ended October 31, 1999 (243,632) ----------- ----------- ----------- BALANCE, OCTOBER 31, 1999 7,455,252 $ 7,455 $(4,300,280) =========== =========== =========== PREFERRED STOCK -------------------------- Shares Amount Issuance of preferred stock in a private offeing 274,584 $ 275 272,739 ----------- --------- ----------- Balance, October 31, 1999 274,584 $ 275 $ 9,996,358 ============ ========= =========== The accompanying notes are an integral part of these financial statements -10- 11 AMERICAN ABSORBENTS NATURAL PRODUCTS, INC. AND SUBSIDIARY (A Development Stage Company) Consolidated Statements of Cash Flows Third Quarter (three months) Nine Months Ended Ended From Inception ------------------------------- ------------------------------ (2/9/84) Oct. 31, 1999 Oct. 31, 1998 Oct. 31, 1999 Oct. 31, 1998 to Oct. 31, 1999 ------------- ------------- ------------- ------------- ---------------- CASH FLOWS FROM OPERATING ACTIVITIES Net Loss $ (675,522) $ (549,059) $ (244,697) $ (183,824) $(4,301,349) Depreciation and amortization 67,944 49,940 23,928 26,825 $ 211,567 (Increase) decrease in receivables 37,386 (101,104) 6,470 (92,671) $ (16,349) Decrease (increase) in prepaid expenses (21,031) 24,625 (35,781) (22,129) $ (26,239) Decrease (increase) in inventory (78,670) (60,668) (5,740) 57,680 $ (267,616) Increase (decrease) in payables 193,475 (155,245) 51,269 107 $ 268,046 Loss from disposal of fixed asset 1,560 Stock issued for services 11,480 68,379 11,480 24,201 950,945 Expenses paid by shareholder 149,018 UNLOCATED DIFFERENCE 30,000 ----------- ----------- ----------- ----------- ----------- Net cash used by operating activities (464,938) (693,132) (193,071) (189,811) (3,030,417) ----------- ----------- ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of fixed assets (37,105) (330,422) (33,687) (125,632) (735,175) Purchase certificates of deposit (15,000) Purchase of product tradenames/marks (1,715) (28,673) Purchase of note receivable (5,000) Organization costs (1,524) Purchase/sale of mining development costs 7,920 Business development costs (8,168) (45,259) (8,168) Purchase of mining claims (58,599) Sale of licenses & other assets 29,607 1,045 179,607 Purchase of treasury stock (945,000) (1,010,000) ----------- ----------- ----------- ----------- ----------- Net cash used by investing activities (962,381) (375,681) (32,642) (125,632) (1,674,612) ----------- ----------- ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Issuance of common stock 30,000 1,287,905 276,124 3,160,062 Issuance of preferred stock 273,014 273,014 273,014 Issuance of notes payable 1,163,245 24,655 1,810,455 Principal payments on long-term debt (236,379) (1,027) (494,596) ----------- ----------- ----------- ----------- ----------- Net cash from financing activities 1,466,259 1,076,181 273,014 275,097 4,748,935 ----------- ----------- ----------- ----------- ----------- Net (decrease) increase in cash 38,940 7,368 47,301 (40,346) 43,906 Cash at beginning of period 4,966 24,642 (3,395) 72,356 ----------- ----------- ----------- ----------- ----------- Cash at end of period $ 43,906 $ 32,010 $ 43,906 $ 32,010 $ 43,906 =========== =========== =========== =========== =========== The accompanying notes are an integral part of these financial statements -11- 12 AMERICAN ABSORBENTS NATURAL PRODUCTS, INC. AND SUBSIDIARY (A Development Stage Company) Consolidated Statements of Cash Flows (Continued) Second Quarter (three months) Nine Months Ended Ended From Inception ---------------------------- ---------------------------- (February 9, 1984) Oct. 31, 1999 Oct. 31, 1998 Oct. 31, 1999 Oct. 31, 1998 to Oct. 31, 1999 ------------- ------------- ------------- ------------- ----------------- SUPPLEMENTAL CASH FLOW INFORMATION: CASH PAID FOR: Interest 13,238 7,750 $ 6,611 $ 1,350 $ 46,058 Income taxes 2,547 NON-CASH TRANSACTIONS: Stock issued for mining claims 5,045,000 Stock issued for down payment on building 30,000 Stock issued for services 11,480 63,101 11,480 24,201 950,945 Stock issued for stock of Geo-Environmental Services, Inc. (name changed to American Absorbents, 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 121,600 121,600 136,803 Stock issued for partial redemption of note 37,500 The accompanying notes are an integral part of these financial statements -12- 13 AMERICAN ABSORBENTS NATURAL PRODUCTS, INC. AND SUBSIDIARY (A Development Stage Company) Notes to the Consolidated Financial Statements October 31, 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 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 or services. These transactions are recorded at fair market value as determined by the board of directors. -13- 14 AMERICAN ABSORBENTS NATURAL PRODUCTS, INC. AND SUBSIDIARY (A Development Stage Company) Notes to the Consolidated Financial Statements October 31, 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 October 31, 1999 and 1998 after writing off all accounts determined to be uncollectible. Prepaid Expenses Prepaid expenses consist of the following: October 31, 1999 January 31, 1999 ---------------- ---------------- Prepaid mining land lease $24,583 $17,208 Prepaid Property/Workers Comp Insurance $13,656 $ -- ======= ======= Total Prepaid Expenses $38,239 $17,208 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 1998. 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. -14- 15 AMERICAN ABSORBENTS NATURAL PRODUCTS, INC. AND SUBSIDIARY (A Development Stage Company) Notes to the Consolidated Financial Statements October 31, 1999 (unaudited) NOTE 3 - COMMON STOCK AND STOCKHOLDERS' EQUITY 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. -15- 16 AMERICAN ABSORBENTS NATURAL PRODUCTS, INC. AND SUBSIDIARY (A Development Stage Company) Notes to the Consolidated Financial Statements October 31, 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 October 31, 1999, notes payable decreased by $4,638 from the previous quarter. The notes payable are primarily to stockholders and bear interest at the rate of 8% approximately. In addition to the notes payable to shareholders, American Absorbents Natural Products secured a $150,000 loan from Frost National Bank on September 2, 1999. The company's Austin warehouse secures the note that is due September 2, 2000. The interest rate is Prime plus 1% (9.25% as of October 31, 1999 and 9.5% as of the filing date of this 10QSB). Proceeds from this loan were used to retire a $50,000 note payable to one shareholder and to reduce another note by $7,500. Additional transactions this quarter included four shareholders converting their debt into the preferred stock offering for a total of $90,000. NOTE 6 - PRIVATE PLACEMENT OF COMMON STOCK or PREFERRED STOCK During the third quarter ended October 31, 1999, there was no issuance of private placements of common stock; 35,000 shares of common stock were issued to officers for services rendered. The Company issued 274,584 shares in a serial preferred stock offering. 142,084 shares were issued to offset outstanding notes payables to shareholders for $142,054; 7,500 for $7,500 in professional services; and 125,000 for $125,000 in cash investments. -16- 17 AMERICAN ABSORBENTS NATURAL PRODUCTS, INC. AND SUBSIDIARY (A Development Stage Company) Notes to the Consolidated Financial Statements October 31, 1999 (unaudited) NOTE 7 - COMMITMENTS AND CONTINGENCIES The Company has sold two private placements that include a royalty payment. The first private placement 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 company sold 91 units of this private placement. The second private placement includes a $2 per ton per minimum investment on 10,000 tons of zeolite mined and sold. Total royalties paid per minimum investment will be $20,000. The Company sold 143.64 units of this private placement. 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 October 31, 1999, the Company was involved in two legal proceedings: -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 has been set for trial in February 2000 and an outcome can not be determined at this time but the Company will vigorously contest Caulkins' claims. The Company is also involved in a dispute over the lease of its office space in Austin, Texas. The building was sold in August, 1999, and the new owner filed a lawsuit, in state district court, Travis County, Texas, on August 27, 1999 challenging the existing lease and seeking damages. The Company filed an answer and counterclaim. In addition, the new owner filed an eviction proceeding in Travis County, Texas, Justice of the Peace Court, locked the Company out of the premises for a brief period of time and then dropped the eviction proceeding and ceased the lockout. The Company filed a response and claim for attorney's fees. The Company and the new owner have conducted two mediations in an effort to resolve the matter. To date, there is no settlement and the Company intends to remain in its current location until the completion of its lease in August 2001. The Company believes the owner's lawsuit is without merit and will vigorously contest it and seek damages if a settlement cannot be reached. 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. -17- 18 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. RESULTS OF OPERATIONS The Company is a development stage enterprise and has incurred losses in each of its fiscal years ended January 31, 1997, 1998 and 1999 and for the quarters ended April 30, 1999, July 31, 1999 and October 31, 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. A net loss of $243,632 was incurred in the three month period ended October 31, 1999, compared to a net loss of $183,824 for the same quarter of the previous year. For the nine month period ended October 31, 1999, a net loss of $674,452 was incurred, compared to a net loss of $549,059 for the nine month period ended October 31, 1998. Revenues for the quarter ended October 31, 1999 decreased to $7,941 from $112,855 (which included non-reoccurring revenue of $63,000 from the sale of our shoe product division) for the same quarter of the previous year. Revenues for the nine month period ended October 31, 1999, decreased to $26,480 from $139,079 855 (which included non-reoccurring revenue of $63,000 from the sale of our shoe product division) for the same nine month period of the previous year. The sale of the Company's shoe product division to Hickory Brands in October 1998 for $63,000 accounts for 60% and 56% of the quarter to quarter and year-to-date decreases. General and administrative expenses increased by approximately $58,000 from $561,326 to $619,476 during the nine months ended October 31, 1999 as compared to the same period of the previous year mostly due to increases in number of personnel, salary increases, legal fees, health insurance and worker compensation costs. Depreciation expense increased by approximately $21,000 during this period from depreciating the new milling equipment. For the three months ended October 31, 1999, the Company realized gross profit margins of 30% on revenues of $7,941. The Company is currently reviewing previous gross profit margin computations. The ratio of current assets to current liabilities (current ratio) was 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 previous major stockholder of the Company. Current ratios at October 31, 1999 and 1998 were .58 and 2.69, respectively. LIQUIDITY AND FINANCIAL CONDITION The Company has financed its operations to date primarily through the sale of equity securities and borrowings from stockholders. The Company has been unprofitable since of its inception and has incurred net losses in each year, including a net loss of $243,632 for quarter ended October 31, 1999. Previously, Austin Young, Inc., the former major stockholder of the Company, had provided, through loans and equity funding, any deficiencies to working capital during the development stage. The Company will have to rely on funding from private placements, cash flows and other offerings for future operating and development costs. The Company owed $50,000 to Austin Young, Inc. at October 31, 1998 and $123,262 at October 31, 1999, not including $831,600 in debt related to stock purchases -18- 19 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 former major stockholder, additional shareholders or gross profits from its limited marketing efforts. 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. At October 31, 1999, the Company had $275,596 in accounts payable and accrued expenses; a year ago at October 31, 1998, the Company had $61,394. Notes payable, current and long-term, totaled $1,205,730 at October 31, 1999, versus $64,281 at October 31, 1998. Management believes it will be able to raise capital to provide for operations and debt service. However, there can be no assurance that additional financing will be available at all or, if available, such financing would be obtainable on terms acceptable to the Company. If adequate financing is not available, the Company may be required to curtail its operation significantly or to obtain funds through entering collaborative agreements or other arrangements on less favorable terms. The failure of the Company to raise capital on acceptable terms would have a material adverse effect on the Company's business, financial condition, and results of operations. 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. 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 three months ended April 30, 1999, the Company issued 29,001 shares of common stock in a private placement for $30,000. No capital was raised in private placements in the three months ended July 31, 1999. During the three months ended October 31, 1999, 35,000 common shares were issued for services rendered to the company at a value of $11,480. 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 obtaining large 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. The Company has developed seven new retail products in the current quarter -- SWEET PAWS(TM) cat litter; LITTER HELPER(TM), an odor eliminator for cat litter boxes; PET MESS(TM), an odor neutralizer to counter pet stains; AQUA ROCKS(TM), which maintains ammonia control in fish aquariums; CARPET GENIE(TM), an odor eliminator for carpets; PIT STOP(TM), an absorbent for cleaning automobile fluid spills; and AMMONIA DESTROYER(TM), an ammonia remover for fresh and salt water fish tanks. 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 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, 1998 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. -19- 20 INFLATION The Company does not expect inflation to have any material effect on its revenues, costs or overall operation. YEAR 2000 COMPLIANCE The Company believes that it has addressed the Year 2000 issues in its proprietary software products and does not anticipate business interruptions associated with these applications. The Company is in the process of estimating the total cost and time that will be required to address the Year 2000 issue, but does not expect any material adverse impact on its operations. However, no assurance can be given that the failure of one or more of its vendors to become Year 2000 compliant will not have a material adverse effect on the Company's operations. PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. During the quarter ended October 31 , 1999, there were no material pending or threatened legal proceedings against the Company or, to the best of the company's knowledge, 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, to the best of the company's knowledge, 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 COMMITMENTS AND CONTINGENCIES, page 16) ITEM 2. CHANGES IN SECURITIES. During the previous quarter, the capital structure of the Company was modified. The aggregate number of shares of capital stock the Company is authorized to issue was increased to sixty million shares (from fifty million), composed of one class of fifty million shares of Common Stock with the par value of one mil ($.001) per share; and another class of ten million shares of Serial Preferred Stock with the par value of one mil ($.001) per share ITEM 3. DEFAULTS UPON SENIOR SECURITIES. During the quarter ended October 31 , 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.) The Company has issued 274,584 shares of preferred stock in the quarter ending October 31 , 1999). ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS. During the quarter ended October 31 , 1999, no matters were submitted to a vote of security-holders. ITEM 5. OTHER INFORMATION. No reports were filed on Form 8-K during the quarter ended October 31 , 1999. -20- 21 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a)(1) The following financial statements are included in Part I, Item 1: Consolidated Balance Sheets - October 31, 1999 and January 31, 1999 4-5 Consolidated Statements of Operations - Nine months ended 6 October 31, 1999 and 1998 Consolidated Statements of Stockholders' Equity (Deficit) - period 7-10 Ended October 31, 1999 Consolidated Statements of Cash Flows -Nine months ended 11-12 October 31, 1999 and 1998 Notes to Consolidated Financial Statements 13-17 (3) The following exhibits are included for the three months and quarters ended October 31 , 1999 and 1998: Exhibit 1 - Computation of Earnings (Loss) Per Share Exhibit 2 - Subsidiary of the Registrant Exhibit 27 - Financial Data Schedule 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 , 1999. -21- 22 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: /s/ ROBERT L. BITTERLI ------------------------------------------ Robert L. Bitterli, President and Chief Executive Officer Date: December 9, 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 - --------- ----- ---- /s/ Robert L. Bitterli President, Chief Executive December 14, 1999 - ---------------------------- Officer and Director Robert L. Bitterli (Principal Executive Officer) /s/ David C. Scott Chief Financial Officer December 14, 1999 - ---------------------------- (Principal Accounting Officer) David C. Scott -22- 23 INDEX TO EXHIBITS EXHIBIT NUMBER DESCRIPTION - ------ ----------- 1 Computation of Earnings (Loss) Per Share 2 Subsidiary of the Registrant 27 Financial Data Schedule