-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UwumVMi8KBPllL6g3RCnBmtkTeWtu8frVtU4jooLCrMsammtQOxiD4KmPhv7nb+P Pt+RovTg6YVvyOAz3T4qtw== 0000889812-97-002058.txt : 19970929 0000889812-97-002058.hdr.sgml : 19970929 ACCESSION NUMBER: 0000889812-97-002058 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970926 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMBI INC CENTRAL INDEX KEY: 0000744962 STANDARD INDUSTRIAL CLASSIFICATION: BIOLOGICAL PRODUCTS (NO DIAGNOSTIC SUBSTANCES) [2836] IRS NUMBER: 112653613 STATE OF INCORPORATION: NY FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-12106 FILM NUMBER: 97686377 BUSINESS ADDRESS: STREET 1: 771 OLD SAW MILL RIVER ROAD CITY: TARRYTOWN STATE: NY ZIP: 10591 BUSINESS PHONE: 9143475767 MAIL ADDRESS: STREET 1: 771 OLD SAW MILL RIVER ROAD CITY: TARRYTOWN STATE: NY ZIP: 10591 FORMER COMPANY: FORMER CONFORMED NAME: APPLIED MICROBIOLOGY INC DATE OF NAME CHANGE: 19920703 10-K405 1 ANNUAL REPORT SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Fiscal Year ended June 30, 1997 Commission File Number 0-14983 AMBI INC. (Exact Name of Registrant as Specified in its Charter) New York 11-2653613 - ---------------------------------------- --------------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number 771 Old Saw Mill River Road Tarrytown, New York 10591 - ---------------------------------------- --------- (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including Area Code: (914) 347-5767 -------------- Securities registered pursuant to Section 12(b) of the Act: Common Stock (par value $.005 per share) ---------------------------------------- Securities registered pursuant to Section 12(g) of the Act: Common Stock (par value $.005 per share) ---------------------------------------- Title of Class Redeemable Warrants ------------------- Title of Class Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve (12) months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past ninety (90) days. Yes X No ---- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the registrant's best knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of voting stock held by non-affiliates of the Registrant was approximately $30,058,163 as of September 22, 1997. The number of shares outstanding of Registrant's Common Stock as of September 22, 1997: 19,283,342. FORM 10-K REPORT INDEX
10-K Part and Item No. Page No. - ----------------------------------------------------------------------------------------------- PART I Item 1 Business .................................................................. 3 Item 2 Properties ................................................................ 10 Item 3 Legal Proceedings ......................................................... 10 Item 4 Submission of Matters to a Vote of Security Holders ....................... 11 PART II Item 5 Market Price of Registrant's Common Equity and Related Stockholder Matters ............................................... 12 Item 6 Selected Financial Data ................................................... 13 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations ....................................... 14 Item 8 Financial Statements and Supplementary Data ............................... 18 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ....................................... 18 PART III Item 10 Directors and Executive Officers of the Registrant ........................ 19 Item 11 Executive Compensation .................................................... 23 Item 12 Security Ownership of Certain Beneficial Owners and Management ............................................................ 29 Item 13 Certain Relationships and Related Transactions ............................ 30 PART IV Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K ....................................................... 32
-2- PART I Item 1. BUSINESS The Company AMBI Inc. (the "Company") is a New York corporation which was incorporated on June 29, 1983. The Company currently concentrates its business in two areas: Pharmaceuticals and Nutrition Products. The Company engages in the following activities for these areas: research, development, manufacturing, and sales. On December 12, 1996, the Company completed the sale of its UK-based food ingredients subsidiary, Aplin & Barrett Limited ("A&B") to Burns Philp & Company Limited ("BP") for $13.5 million in cash and the return to the Company of 2.42 million shares of the Company's Common Stock held by BP. In addition, BP provided the Company with a revolving line of credit of up to $2.5 million. Any borrowings under this line of credit can be forgiven under certain circumstances. As of the date of filing this Form 10-K, no amount has been drawn under this line of credit. The sale included the Company's nisin-based food preservative business. The Company retained exclusive rights to its nisin-based pharmaceutical and animal healthcare business. See Item 13. Certain Relationships and Related Transactions. On August 11, 1997, the Company acquired the entire beneficial interest in Nutrition 21, a limited partnership. Nutrition 21 is engaged in the business of developing, producing, and marketing proprietary nutrition products and dietary supplements. The purchase price for the acquisition was $10,000,000 (the "Cash Purchase Price"), plus 500,000 restricted shares of Common Stock of the Company, and additional cash payments which are contingent upon the achievement of certain sales levels in the next four years. The Company will also pay royalties to the sellers on sales of certain patented products. Part of the Cash Purchase Price was provided pursuant to a Revolving Credit and Term Loan Agreement (the "Loan Agreement") with State Street Bank and Trust Company (the "Bank") and the remainder came from internal working capital. The loans bear interest at the Bank's prime rate plus one percent and are due February 1, 1998 unless extended pursuant to certain conditions set forth in the Loan Agreement. Nutrition Products Nutrition Products may take the form of either foods or beverages and can include vitamins, minerals, enteral and parenteral supplements, other dietary supplements, healthy foods, functional foods, special dietary foods, medical foods, and are sometimes referred to colloquially as nutraceuticals. Medical Foods are foods that supply particular dietary needs or that may aid in the dietary management of diseases or conditions. -3- In October, 1995, the Company acquired an exclusive license for a Medical Food from a division of Orion Corporation ("Orion"), the largest pharmaceutical company in Finland, to sell Orion's patented salt alternative in the United States. The Company began selling the salt alternative in April 1996 under the trademark Cardia(TM) Salt Alternative in Florida and Pennsylvania, and announced the national availability of Cardia Salt Alternative in January 1997. This product has significantly less sodium than regular salt and contains potassium and magnesium, essential minerals that may help in the dietary management of high blood pressure. High blood pressure, or hypertension, affects approximately 50 million Americans. The Company has conducted and is continuing to conduct clinical trials on Cardia Salt Alternative that demonstrate its safety and effectiveness as a dietary aid in the management of high blood pressure. The Company is evaluating other proprietary Nutrition Products in the areas of cardiovascular disease, diabetes, infectious disease, and gastrointestinal disorders. The Company markets Nutrition Products that are regulated by the 1994 Dietary Supplement Health and Education Act (DSHEA) and the Orphan Drug Act to physicians, pharmacists, dietitians, and patients, and supports the use of these products with data from clinical studies. In addition, the Company intends to conduct its own clinical studies to further strengthen the clinical and scientific rationale for these products. Nutrition 21 Nutrition 21 develops, manufactures, and markets essential trace elements used primarily as ingredients in nutritional supplements. Currently, Nutrition 21's primary product is chromium picolinate, which is protected by 4 patents which cover the composition and its use as a dietary supplement. The composition patent is exclusively licensed for its duration to Nutrition 21 by the United States Department of Agriculture ("USDA"), and expires August 8, 2000. Nutrition 21 owns patents for the use of chromium picolinate in the management of high cholesterol, glucose control, and the conversion of fat to lean body mass, which patents expire in 2009. Chromium picolinate is marketed by Nutrition 21 under its registered trademark "Chromax." In addition, Nutrition 21 also markets zinc picolinate, manganese picolinate, and selenium formulations. Nutrition 21 has funded and continues to fund research studies investigating the uses of chromium picolinate and other micro-nutrients or minerals as dietary supplements with preventative and therapeutic benefits to humans. Nutrition 21 has its products manufactured and formulated to its specifications by contract manufacturers as bulk raw materials. Nutrition 21 then sells the raw materials to customers who incorporate them into over 900 finished products such as vitamin/mineral formulas, dietary supplements, baked goods, beverages and other products. These products are sold by the customers under a variety of brands throughout the world through natural/health food stores, supermarkets, and drug stores, and also through direct sales and catalogues sales. Nutrition 21 has approximately 50 customers. During the year ended June 30, 1997, Leiner Health Products accounted for 14.8% of Nutrition 21's revenues. -4- In 1996, chromium picolinate was approved by the U.S. Food and Drug Administration ("FDA") for use as a supplement in animal feed for swine. Nutrition 21 is developing new micro-nutrients such as arginine silicate for which Nutrition 21 has an allowed patent, and magnesium taurate for which Nutrition 21 has patent protection, and may commercialize these or other products. Pharmaceuticals Antibacterials The Company is developing the compound nisin, a member of the lanthocin class of peptides, in different proprietary formulations as a potential treatment for diseases caused by serious bacterial infections, including hospital-acquired infections, for infections of the colon, and for ulcer disease. In addition, the Company is developing lysostaphin, an enzyme, as a potential treatment for hospital-acquired infections. During each phase of the drug development process, scientific and business evaluations of the cost, risk, and potential return on investment are undertaken on a product by product basis. There can be no assurance that the development programs will continue should there be a negative evaluation of the cost and risks of continuing to develop a particular product. The development of nisin and lysostaphin as therapeutic agents for these and other indications can be a long, difficult, and expensive process. There can be no assurance that a drug product will be approved by the FDA or its regulatory equivalent in a foreign country. See "Governmental Regulation." Infections of the colon -- AMBI has developed an oral delivery form of nisin for the treatment of antibiotic-associated diarrhea caused by Clostridium difficile (C. difficile) and for the eradication of Vancomycin Resistant Enterococci (VRE) that inhabit the colon. These infections can be especially severe for patients with cancer, AIDS, or those who are in intensive care units. Nisin is able to kill C. difficile and VRE without affecting the normal flora of the colon. In June 1997, AMBI announced results of a human study demonstrating that nisin was successfully delivered orally, in the form of a tablet, to the colon. Nisin has the potential to be the first peptide that can be taken orally as a treatment for a serious infectious disease of the colon. It is anticipated that an Investigational New Drug Application (IND) will be filed with the FDA by the end of the second fiscal quarter (December 31, 1997). Ulcer -- AMBI has developed a different oral form of nisin for the eradication of Helicobacter pylori (H. pylori), the causative agent of peptic ulcer disease. Most ulcers, as well as other gastric disorders such as chronic gastritis and cancer of the stomach, are caused by H. pylori, a bacterium that colonizes the human stomach. -5- Nisin has been shown to be safe in two clinical studies in almost 100 human subjects. Recent studies in animals have confirmed nisin's efficacy against H. pylori. Hospital-acquired infections -- Hospital-acquired infections occur most frequently among the sickest patients, such as those people who are immunocompromised or have just had surgery. For some infections e.g., those caused by Methicillin Resistant Staphylococcus Aureus (MRSA), Vancomycin Resistant Staphylococcus Aureus (VRSA), and VRE, there are now virtually no therapeutic agents that show consistent high rates of efficacy, and therefore, certain serious infections can often be fatal. When administered by injection, both nisin and lysostaphin have been found to be effective in curing lethal systemic bacterial infections in mice. Pharmaceutical Partners In March 1994, the Company entered into an exclusive License and Supply Agreement with the Astra/Merck Group of Merck & Co., Inc. (now Astra Merck) to develop and market in the U.S. drug products based on nisin for the treatment of gastrointestinal disorders, including ulcers. In March 1996, the Company entered into an exclusive Agreement with Nippon Shoji Kaisha, Ltd. of Osaka, Japan, to develop and market in Japan, certain Asian countries, Australia and New Zealand drug products based on nisin for the treatment of hospital acquired infections and infections of the colon. Dairy Hygiene Products The Company manufactures and sells a preparation of nisin which the Company markets under its trademark Ambicin(R) N, which is the active ingredient in an animal hygiene product applied to the udders of lactating dairy cattle before and after milking. The Company has developed a germicidal solution based on Ambicin N that is applied to the teats of cows as a dip or spray before and after milking in order to prevent the spread of mastitis. This dermatological preparation is a potent broad spectrum germicide that acts rapidly against the bacteria that cause mastitis. On December 15, 1988, the Company entered into a License and License Option Agreement ("Agreement"), as amended November 25, 1991, July 1, 1993 and February 9, 1996, with Babson Brothers ("Babson") of Naperville, Illinois. Under the Agreement, Babson is granted licenses for certain exclusive territories which include North America and Puerto Rico to manufacture and market Ambicin N based mastitis preventatives, other than udder wipes, which are exclusively reserved for manufacture and marketing by the Company. The Company supplies Ambicin N to Babson. In July 1991, Babson commenced manufacturing and marketing an Ambicin N-based teat dip product in the U.S. under its trademark Consept. -6- Under a July 1991 agreement with CFPI, a French specialty chemical manufacturer, the Company licensed CFPI to manufacture and market Ambicin N-based formulations for use as topical germicides in the prevention of mastitis in nine European countries. CFPI introduced its product in France in 1992. The agreement with CFPI was terminated as of July 31, 1997, and the Company is considering other approaches to the European market. The Company developed a moistened towel using an Ambicin N-based formulation that is for use in preparing dairy cows for milking. Trials in dairy cows at Cornell Veterinary College showed the product to be effective. The Company launched the product under its trademark Wipe Out(TM) Dairy Wipes on a test basis in February 1996, and nationally in April 1996. Governmental Regulation Healthcare Products which are intended for use in the diagnosis, cure, mitigation, treatment or prevention of disease in humans or animals are subject to extensive governmental regulation. All such products must undergo extensive characterization, and are subject to regulation for quality assurance, toxicology and safety. Products containing such agents must undergo thorough preclinical and clinical evaluations of performance as to safety and efficacy under approved protocols. The Company intends to pursue regulatory approval for the pharmaceutical and related uses of its drug products. The Company's proposed pharmaceutical products will be subject to the regulatory approval processes for new drugs. To take a pharmaceutical product from the discovery stage through research and preclinical development to the point where the Company and/or its partners can make the necessary filings (to the FDA and governmental agencies outside the U.S.) to conduct human clinical trials may take several years. Regulatory requirements for human clinical trials are substantial, depend upon a variety of factors, vary by country, and will further add to the time necessary to determine whether a product candidate can be approved for human use. There can be no assurance that the Company's proposed drug products will prove to be safe and effective under these regulatory procedures. Depending upon the ingredients of a specific product, some nutrition products will be marketed in the U.S. under DSHEA or the Orphan Drug Act. Prior to the Company's acquisition of Nutrition 21, Nutrition 21 and the Federal Trade Commission (FTC) entered into a consent order, which, among other things, requires that claims or representations for dietary supplements be supported by competent and reliable evidence on benefits, performance, efficacy and safety. The order requires that Nutrition 21 advise its customers who resell chromium picolinate to the public not to make certain claims which the FTC deems not to be sufficiently supported. -7- Research and Development The Company conducts research and development to expand uses of its pharmaceutical product candidates, to identify new antibacterial products, and to improve the production processes for the Company's antibacterial products. In addition, the Company conducts preclinical, formulation, and clinical trials on its Nutrition Products and product candidates. These efforts are conducted with industrial and academic co-workers in various countries. During the fiscal year ended June 30, 1997, approximately $4,833,000 was spent on research and development by the Company. Proprietary Rights Ambicin is a registered trademark of the Company in the U.S. and other countries. Cardia is a trademark used by the Company in the U.S. and Wipe Out is a trademark of the Company with applications for registration filed in the U.S. and other countries. Chromax, Selenomax, Zinmax, and Magnemax are among the registered trademarks owned by Nutrition 21: Chromax for chromium picolinate; Selenomax for high selenium yeast and yeast-free selenium; Zinmax for zinc picolinate; and Magnemax for manganese picolinate. The Company also owns 158 patents relating to, among other things, the expression and production of proteins by recombinant Bacillus strains; plasmid vectors and methods of construction in gram positive bacteria; expression and production of recombinant lysostaphin; novel bacteriocin compositions and their use as broad spectrum bactericides; the use of bacteriocin compositions to treat bovine mastitis; the use of bacteriocin compositions in oral healthcare; the use of bacteriocin compositions on skin for healthcare and hygiene; and the use of bacteriocin compositions in gastrointestinal healthcare. Nutrition 21 has an exclusive license from the USDA for the duration of a patent which covers the composition of chromium picolinate and its uses, which patent expires August 8, 2000. Nutrition 21 also owns 6 U.S. patents relating to, among other things, chromium picolinate treatments, and magnesium taurate. Under an agreement with the University of Maryland, the Company has obtained exclusive licenses under patents and applications relating to the cloning, expression and alteration of genes encoding nisin, subtilin, and related peptides, and their production and compositions. Under an agreement with the Institute of Food Research, Norwich, U.K., the Company owns certain strains of bacteria producing nisin and related patents, and may obtain exclusive licenses to certain nisin-related mutants and related patents. Under an agreement with the New York University Medical Center, the Company owns patent rights to the parenteral treatment of drug-resistant bacterial infections with lanthocins and other agents. -8- Under a Pre-Clinical Study Agreement for work being performed at the McGuire Veterans Administration Hospital, the Company owns patent rights to the parenteral treatment of drug-resistant bacterial infections with lanthocins and other agents. The Company maintains trade secret protection for bacterial strains, technical know-how, and other information it considers proprietary and beneficial for the manufacture, use, regulatory approval, and marketing of the Company's products. The Company maintains non-disclosure safeguards, including confidentiality agreements, with employees, certain consultants, and Scientific Advisory Board members. There can be no assurance, however, that others may not independently develop similar technology or that secrecy will not be breached despite any agreements which exist. Manufacturing The Company's products , e.g. Ambicin N and Cardia Salt Alternative, are manufactured for the Company by subcontractors who manufacture to the Company's specifications and use the Company's manufacturing technology. The Company subcontracted purchases of nisin from BP for pharmaceutical and animal healthcare uses from December 11, 1996 until September 26, 1997. Nisin-based products for pharmaceutical and animal healthcare are currently being manufactured for the Company by another subcontractor. Nutrition 21's products, e.g. chromium picolinate, are manufactured for Nutrition 21 by subcontractors who manufacture to Nutrition 21's specifications and use Nutrition 21's manufacturing technology. Marketing and Sales The Company markets its nutrition product lines through a network of distributors and agents, and markets its Wipe Out Dairy Wipes product through direct sales efforts. Financial Information About Industry Segments The Company's business historically was in a single industry segment, the research, development, production and marketing of antibacterial proteins for various applications. In April 1996, the Company began selling a salt alternative as a Medical Food that may help in the dietary management of hypertension, and on August 11, 1997 the Company acquired Nutrition 21 which sells nutritional supplements. For financial data pertaining to the amount of revenue and operating profit and loss of the Company, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Financial Statements." Employees As of June 30, 1997, the Company had 36 full-time employees, of whom 4 were executive employees, 9 were administrative, 4 were engaged in marketing and sales, and 19 were involved in research, process development, and manufacturing. On December 12, 1996, the Company sold its -9- nisin-based food preservative business to BP, which resulted in the transfer of 72 employees to BP. On August 11, 1997, the Company acquired Nutrition 21 which has 11 employees. Neither the Company nor Nutrition 21 has a collective bargaining agreement with any of its personnel and each considers its relationship with its employees to be satisfactory. Item 2. PROPERTIES The Company's headquarters are located at 771 Old Saw Mill River Road, Tarrytown, New York 10591 (Tel: 914-347-5767, Fax: 914-347-6370). These facilities include office space as well as the Company's laboratories where the Company conducts its pharmaceutical research and development. Pursuant to a seven year lease entered into February 1995, the Company is paying an annual rent in the amount of $488,400, which sum is due in monthly installments. The rent is subject to annual increases over the term of the lease. The Company's U.K. facilities were transferred to BP on December 12, 1996 as part of the sale of the nisin-based food preservative business to BP. Nutrition 21's headquarters are located at 1010 Turquoise Street, San Diego, California 92109 (Tel: 619-488-1021, Fax: 619-488-7316). These facilities include an office complex together with a laboratory, and receiving and shipping areas. Pursuant to a leased which expires in August 1998, Nutrition 21 is paying an annual rent in the amount of $57,000. Item 3. LEGAL PROCEEDINGS No material proceedings are pending to which the Company, Nutrition 21 or any of their property is subject. -10- Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the annual meeting of shareholders of the Company held on December 17, 1996, the following actions were taken: 1. holders of 17,097,503 shares of common stock approved a change in the name of the Corporation from Applied Microbiology, Inc. to AMBI Inc. The change was opposed by the holders of 46,942 shares of common stock, and 191,425 abstained; and 2. holders of 17,319,646 shares of common stock ratified the appointment of KPMG Peat Marwick LLP as the Company's independent auditors. The appointment was opposed by the holders of 64,520 shares of common stock, and 80,067 abstained. The following persons were elected as directors: Name For Against - -------------------------------------------------------------------------------- Fredric D. Price 17,268,878 195,355 Sheldon G. Gilgore 17,268,878 195,355 Audrey T. Cross 17,268,883 195,350 Robert Flynn 17,268,383 195,850 Colin Kop 17,266,583 197,650 Robert E. Pollack 17,269,083 195,150 At a special meeting of shareholders of the Company held on July 15, 1997, the following actions were taken: 1. holders of 10,519,484 shares of common stock approved the issuance of all shares of common stock which are issuable upon the conversion of Series D Preferred Stock in order that the Company not be required to make cash redemptions upon conversion. The issuance was opposed by the holders of 457,751 shares of common stock, and 121,306 abstained; and 2. holders of 14,759,821 shares of common stock approved an increase in the authorized common stock from 40,000,000 shares to 65,000,000 shares. The increase was opposed by the holders of 509,919 shares of common stock, and 97,145 abstained. -11- PART II Item 5. MARKET PRICE OF REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is traded on the Nasdaq National Market System under the symbol "AMBI" and the Company's warrants are traded on Nasdaq Small Cap Market under the symbol "AMBIW". The Company has not paid a cash dividend to its public shareholders on its Common Stock. The Company intends to retain all earnings for the foreseeable future for use in the operation and expansion of its business and, accordingly, the Company does not contemplate paying any cash dividends on its Common Stock in the near future. The following table sets forth prices quoted for the Common Stock which represent actual sale prices. The high and low bid quotations for the Company's Warrants have been reported by the National Association of Securities Dealers, Inc. and represent quotations by dealers without adjustments for retail mark-ups, mark-downs or commissions and may not represent actual transactions. Common Stock Warrants ------------ -------- Fiscal Quarter High Low High Low - -------------------------------------------------------------------------- Ended September 30, 1995 $4.50 $1.375 $1.125 $0.3125 Ended December 31, 1995 $5.875 $3.375 $1.9375 $0.6875 Ended March 31, 1996 $5.5625 $3.1875 $1.625 $0.6875 Ended June 30, 1996 $8.1875 $4.875 $3.75 $1.125 Ended September 30, 1996 $6.625 $3.250 $2.625 $1.250 Ended December 31, 1996 $4.250 $2.1875 $1.5625 $0.500 Ended March 31, 1997 $4.750 $2.6875 $1.5625 $0.625 Ended June 30, 1997 $3.0625 $1.750 $0.750 $0.125 -12- Item 6. SELECTED FINANCIAL DATA The following tables summarize certain financial data that are qualified by the more detailed financial statements included herein. Figures are stated in thousands of United States Dollars, except per share amounts. Year ended June 30 1997(1) 1996 1995 1994 1993(2) - -------------------------------------------------------------------------------- Sales 10,356 14,157 11,264 9,614 12,083 Write-off of Purchased Research and Development -- -- -- -- 22,504 Other Costs and Expenses 27,022 20,776 11,337 8,374 8,891 Tax Expense 152 285 254 185 423 Net (Loss)/Income (6,813) (4,719) 283 1,756 (19,423) Net (Loss)/Earnings per Share (0.37) (0.27) 0.01 .09 (1.37) Selected Balance Sheet Data: 1997(1) 1996 1995 1994 1993(2) - -------------------------------------------------------------------------------- (As of June 30) Working Capital 7,055 14,812 7,333 7,352 5,750 Total Assets 12,754 23,367 13,788 11,808 10,724 Total Liabilities 5,144 6,221 3,163 1,544 2,255 Long Term Obligations and Redeemable Preferred Stock 2,184 4,408 2,267 1,500 1,500 Stockholders' Equity 7,610 15,646 9,125 8,764 6,969 - ---------- (1) The results for the year ended June 30, 1997, are those of the Company and Aplin & Barrett for the period July 1, 1996 through December 11, 1996 and those of the Company for the full year (see Item 13). (2) In connection with the consummation of certain transactions with BP (see Item 13), which for financial accounting purposes were accounted for as a reverse acquisition, and pursuant to which the Company acquired its A&B subsidiary (the "BP Transactions"), the results for the year ended June 30, 1993, are those of A&B for the full year and those of the Company other than A&B for the period from September 1, 1992 through June 30, 1993. -13- The Company has not paid a cash dividend to its public shareholders on its Common Stock. The Company intends to retain all earnings for the foreseeable future for use in the operation and expansion of its business and, accordingly, the Company does not contemplate paying any cash dividends on its Common Stock in the near future. Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Consolidated Financial Statements and related notes thereto of the Company included elsewhere herein. General The Company's historical revenues have been primarily attributable to sales of its own products. The Company has acted in the past as selling agent for certain products of both affiliated as well as unaffiliated companies. Effective July 1, 1995, the Company assumed responsibility for selling products in the US on behalf of an affiliated company. This relationship was discontinued effective September 11, 1996. The Company also receives royalty income from users of its patented technology and milestone payments from research partners. The Company completed the sale of its UK-based food preservative business, Aplin & Barrett, Ltd. ("A&B"), to Burns Philp & Company Ltd. on December 12, 1996. As a result, the operations of A&B are included in the financial statements through that date. Cost of sales includes both direct and indirect manufacturing costs. Research expenses include internal expenditures as well as expenses associated with third party collaborators. Selling, general and administrative expenses include salaries and overheads, third party fees and expenses, and costs associated with the selling of the Company's products. The Company capitalizes patent costs and amortizes them over periods of nine months to fifteen years. Results of Operations The Company has an accumulated deficit due primarily to the write-off of purchased goodwill (amortized over five years from 1986 - 1990) and purchased research and development costs (written-off in the year ended June 30, 1993) in connection with the BP Transactions, and the current year loss. Three years ended June 30, 1997, 1996 and 1995 Revenues Revenues decreased 30% to $11.3 million in the fiscal year ended June 30, 1997 ("fiscal 1997") from $16.0 million in the fiscal year ended June 30, 1996 ("fiscal 1996"). A decline of $7.4 million was attributable to the divestiture of the Company's A&B subsidiary which occurred December 12, 1996. A further $0.9 million decline was due to lower receipts of milestone and -14- research payments from third party research collaborators. Sales of new products launched in 1996 fiscal year increased $3.6 million during the year - Cardia Salt Alternative ($3.6 million in fiscal 1997 up from $0.7 million in fiscal 1996) and Wipe Out Dairy Wipes ($1.2 million in fiscal 1997 up from $0.5 million in fiscal 1996). Revenues increased 37% to $16.0 million in fiscal 1996 from $11.7 million in the fiscal year ended June 30, 1995 ("fiscal 1995"). $1.2 million of this increase was attributable to new products launched during the year - Cardia Salt Alternative ($0.7 million) and Wipe Out Dairy Wipes ($0.5 million). A further $0.4 million in new business was recorded as a result of the Company assuming responsibility for selling products in the US on behalf of an affiliate. Sales of Nisaplin, a food preservative sold by A&B, increased 6% in fiscal 1996; and accounted for 65% of the total sales, compared with 77% in fiscal 1995. Other operating income increased by $1.4 million due to milestone and research payments received from third party research collaborators. Cost of Sales Cost of sales was $4.4 million in fiscal 1997, a decline of 31% from the fiscal 1996 figure of $6.4 million. As a percentage of revenues, it was nearly unchanged at 39% in fiscal 1997, compared to 40% in fiscal 1996. Cost of sales was $6.4 million in fiscal 1996, an increase of 95% from the fiscal 1995 figure of $3.3 million. As a percentage of revenues, it increased to 40%, compared to 28% in fiscal 1995. This was largely due to a change in the sales mix, with a higher proportion of sales representing lower margin products (for which the company acted solely as a distributor) versus the prior year. Selling, General and Administrative Expenses Selling, general and administrative expenses ("SG&A") were $16.9 million, $11.2 million, and $5.4 million in fiscal 1997, fiscal 1996 and fiscal 1995, respectively, representing increases of 51% in fiscal 1997 from fiscal 1996, and 106% in fiscal 1996 from fiscal 1995. SG&A as a percentage of revenue was 150%, 70%, and 46% in fiscal 1997, fiscal 1996, and fiscal 1995, respectively. The main component of the increase in SG&A in fiscal 1997 was marketing and sales expenditures incurred in continuing support of the two new products Cardia Salt Alternative and Wipe Out Dairy Wipes. The main component of the increase in SG&A in fiscal 1996 was marketing and sales expenditures incurred in the launch of these same two new products. Research Expenses Research expenses were $4.8 million, $2.3 million, and $1.8 million in fiscal 1997, fiscal 1996, and fiscal 1995, respectively, representing increases of 111% in fiscal 1997 from fiscal 1996, and 25% in fiscal 1996 from fiscal 1995. Research expenses as a percentage of revenue -15- were 43%, 14% and 16% in fiscal 1997, 1996, and 1995, respectively. The increases in expenses in fiscal 1997 and fiscal 1996 were related to added spending to support ongoing programs. Operating Loss/Income The Company had an operating loss of $15.6 million in fiscal 1997, compared with an operating loss of $4.6 million in fiscal 1996. This increase in the loss was a result of increased expenditures in the areas of SG&A and research referred to above and reduced revenue. The Company had an operating loss of $4.6 million in fiscal 1996, compared with operating income of $0.4 million in fiscal 1995. This loss was a result of increased expenditures in the areas of SG&A and research referred to above. Sale of Aplin & Barrett The Company completed the sale of its UK-based food preservative business, Aplin & Barrett, Ltd., to Burns Philp & Company Ltd. on December 12, 1996. Key terms of the transaction included the payment to AMBI of $13.5 million in cash and the return of 2.42 million shares of AMBI common stock held by Burns Philp. In addition, Burns Philp has provided AMBI with a revolving line of credit of up to $2.5 million that could be forgiven under certain circumstances related to the performance of the food preservative business through June 30, 1999. The Company recorded a gain of $8.6 million in fiscal 1997 related to the sale of Aplin & Barrett. Loss Before Tax Expense The Company had a loss before tax expense of $6.7 million in fiscal 1997, compared with a loss of $4.4 million in fiscal 1996. The increase in the loss was a result of increased expenditures in the areas of SG&A and research referred to above and reduced revenue. The loss was partially offset by the $8.6 million gain on the sale of A&B. The loss before tax expense was $4.4 million in 1996, compared with income before tax of $0.5 million in fiscal 1995. The loss was a result of the Company's increased expenditures in the areas of SG&A and research referred to above. Tax Expense The Company had a tax expense in fiscal 1997, despite having a loss before tax expense, because of profits generated from its UK subsidiary prior to the sale on December 12, 1996. Refer to Note 12 of the Notes to the Consolidated Financial Statements for a further analysis of the tax charge. Fourth Quarter Results Revenues in the fourth quarter of fiscal 1997 were $0.8 million, a decrease of $5.0 million or 86% from the corresponding quarter for the previous year. The absence of A&B sales ($3.9 million in the fourth quarter of fiscal 1996), accounted for 78% of the decline, with decreases in -16- Cardia Salt Alternative, Wipe Out Dairy Wipes, and research payment revenues representing the remainder. Operating losses for the quarter were $3.8 million, compared to a loss of $2.3 million the previous fiscal year. Quarterly Variations On a quarter-to-quarter basis, the Company's sales and income may vary widely, as a result of various factors, including, for example, customers placing orders in anticipation of a price increase and customers adjusting finished goods inventory levels. As a result, the Company may report sales increases or declines and/or income gains or losses for a particular quarter that may not reflect end-customer usage of the Company's products. Liquidity and Capital Resources As of June 30, 1997, the Company had working capital of $7.1 million, which included cash and cash equivalents of $8.6 million. On June 30, 1996, working capital was $14.8 million, which included cash and cash equivalents of $8.4 million. The Company raised $18.1 million during fiscal 1997 as a result of the sale of Aplin & Barrett ($13.5 million) and the issuance of preferred stock ($4.2 million) and common stock ($0.4 million). $14.2 million was used in operating activities, mainly to fund the operating loss of $15.6 million. $1.3 million was used in investing activities including $0.9 million for the purchase of property and equipment and $0.4 million for patent costs and licensing fees. An additional $2.5 million was used in financing activities representing the redemption of the redeemable preferred ($1.5 million), repayments of capital leases ($0.8 million) and cash used for the payment of preferred stock dividends ($0.2 million). The Company anticipates a decline in research and SG&A expenditures as it seeks to find pharmaceutical partners to fund research. In addition, the Company is eliminating expenditures that are not critical to the process of generating sales or meeting drug development milestones. The Company may report Operating Income during the fiscal year ending June 30, 1998 as a result of the aforementioned expense reduction combined with operating income provided from the recent acquisition of Nutrition 21 on August 12, 1997 (see Note 17, Notes to the Consolidated Financial Statements for further explanation). Inflation and Prevailing Economic Conditions The Company does not believe inflation has had a significant impact on the Company's operations. The Company does not believe exchange rates have had a significant impact on the Company's operations. Seasonality -17- The Company does not believe there is any significant seasonal effect on the Company's operations. There may be variations between quarters due to other factors. See "Quarterly Variations." Recently Issued Accounting Standards In February 1997, FASB issued SFAS No. 128, "Earnings Per Share" and SFAS No. 129, "Disclosure of Information about Capital Structure". SFAS No. 128 specifies the computation, presentation, and disclosure requirements for earnings per share (EPS) for entities with publicly held common stock or potential common stock. SFAS No. 128 replaces the presentation of primary EPS and fully diluted EPS with basic EPS and diluted EPS. It also requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. SFAS No. 129 was issued in connection with SFAS No. 128 and specifies the required disclosures about capital structure. Both SFAS No. 128 and No. 129 are effective for financial statements for both interim and annual periods ending after December 31, 1997. It is not expected that the adoption of either of these statements will have a material impact on the Company's financial position or operating results. Item 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements are included herein commencing on page F-1. Item 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. -18- PART III Item 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Officers and Directors The officers and directors of the Company are as follows:
Year Joined Name Company Position - ------------------------------------------------------------------------------- Fredric D. Price (51) 1994 President, Chief Executive Officer, Acting Chief Financial Officer and Director Sheldon G. Gilgore, M.D. (65) 1995 Chairman of the Board Audrey T. Cross, Ph.D. (52) 1995 Director Robert E. Flynn (64) 1996 Director Peter E. Herring (46) 1996 Controller Colin Kop (35) 1996 Director Solomon L. Mowshowitz, Ph.D. (54) 1996 Vice President-Research and Development Robert E. Pollack, Ph.D. (57) 1995 Director Benjamin Sporn (59) 1986 Vice President-Legal and Secretary
Fredric Price has been President, Chief Executive Officer and a Director of the Company since September 1994. In addition, he has been the Company's acting Chief Financial Officer since January 1995. From July 1991 to September 1994, he was Vice President, Finance and Administration and Chief Financial Officer of Regeneron Pharmaceuticals, Inc. For more than five years prior to joining Regeneron, he was head of RxFDP, a consulting firm which provided strategic planning, market development, and new product introduction services to pharmaceutical and other health care businesses. From 1973 to 1986 he was at Pfizer Pharmaceuticals, where he was a Vice President with both line and staff responsibilities. Mr. Price is Secretary and on the -19- Executive Committee of the Board of Directors of the New York Biotechnology Association. Mr. Price is also a director of Pharmos Corporation, a biotechnology company engaged primarily in the development of pharmaceuticals for ophthalmic and neurologic indications. He has a BA from Dartmouth College and an MBA from the Wharton School of the University of Pennsylvania. Sheldon G. Gilgore, M.D. was elected Chairman of the Board of Directors of the Company in October 1995. Dr. Gilgore served as Chairman of the Board, Chief Executive Officer, and President of G. D. Searle & Co. from 1986 to April 1995 when he retired. From 1971 to 1986, he was President of Pfizer Pharmaceuticals and was a member of the Board of Directors of Pfizer, Inc. In addition, he served as Chairman of the Pharmaceutical Research Manufacturers of America (PhRMA). Dr. Gilgore received a BS in biology from Villanova University and an MD from Jefferson Medical College. Audrey T. Cross, Ph.D., was elected a Director of the Company in January 1995. Dr. Cross has been Associate Clinical Professor at the Institute of Human Nutrition at the School of Public Health of Columbia University since 1988. She also works as a consultant in the areas of nutrition and health policy. She has served as a special assistant to the United States Secretary of Agriculture as Coordinator for Human Nutrition Policy and has worked with both the United States Senate and the California State Senate on nutrition policy matters. Dr. Cross received a B.S. in dietetics, a Master of Public Health in nutrition and a Ph.D. from the University of California at Berkeley, and a J.D. from the Hastings College of Law at the University of California at San Francisco. Robert E. Flynn was elected a Director of the Company in October 1996. Mr. Flynn is a Senior Advisor to CSC Index, management consultants. He served as Chairman of the NutraSweet Company from June 1990 until he retired in December 1995. Mr. Flynn also served as Chief Executive Officer of the NutraSweet Company from June 1990 until March 1995. From 1981 to 1990, he served in various executive capacities with Fisher Controls International Inc., including Chairman and Chief Executive Officer. Prior thereto from 1957 to 1981, Mr. Flynn held positions of increasing importance with The Carborundum Co. Mr. Flynn is also a member of the Board of Stanley Technology Group. He received a BSc from Loyola College, a BEE from McGill University and an MBA from Rutgers University. Peter E. Herring was appointed Controller of the Company in January 1996. Prior to joining the Company, he was with Pfizer Inc. from 1979 until January 1996. At Pfizer, he served as Director of Finance and Systems in a Corporate Services Division from 1993 until he joined the Company. From 1979 until 1993 he held increasingly responsible financial management positions in both corporate and operating divisions of Pfizer. He received a BS from the University of Tennessee and an MBA from Vanderbilt University. Colin Kop was appointed Vice President - Finance of BP in December 1996. From 1995 to 1996 Mr. Kop served as General Manager Business Development of BP. From 1994 to 1996, Mr. Kop served as General Manager Finance of BP and has served in various financial positions of increasing responsibility with BP since 1983. Mr. Kop was a Director of the Company from 1992 until 1994 and was reelected a Director in May 1996. Mr. Kop is a Certified Practicing -20- Accountant and he earned a Masters of Commerce Degree from the University of New South Wales. Solomon L. Mowshowitz, Ph.D., was appointed Vice President-Research and Development of the Company in January 1996. For the five prior years, Dr. Mowshowitz was President of Diligen, a company that provides scientific and commercial consulting services to biotechnology companies as well as to the venture capital community. From 1983 to 1990, Dr. Mowshowitz held senior research management positions at three biotechnology companies. From 1970 to 1983, he was Assistant Professor in the Department of Microbiology at the Mt. Sinai School of Medicine in New York. Dr. Mowshowitz holds a BA from the University of Pennsylvania and a Ph.D. in biochemistry from the Albert Einstein College of Medicine in New York. Robert E. Pollack, Ph.D., was elected a Director of the Company in January 1995. Dr. Pollack has been a Professor of Biological Sciences at Columbia University since 1978. In addition, from 1982 to 1989 he was Dean of Columbia College. Prior thereto he was Professor of Microbiology at the State University of New York School of Medicine at Stony Brook, Senior Scientist at Cold Spring Harbor Laboratory, Special NIH fellow at the Weizmann Institute in Israel, and NIH Fellow in the Department of Pathology at New York University School of Medicine. He is the author of more than a hundred research papers on the molecular biology of viral oncogenesis, a dozen articles in the popular press, and three books. He received a B.A. in physics from Columbia University and a Ph.D. in biology from Brandeis University. Benjamin Sporn has been legal counsel to the Company since 1990 and has served as Secretary of the Company since 1986. He was an attorney with AT&T from 1964 until December 1989 when he retired from AT&T as a General Attorney for Intellectual Property Matters. Mr. Sporn is also Chairman of the Board of Directors of Micel Corp. Mr. Sporn was a director of the Company from 1986 until 1994. He received a BSE degree from Rensselaer Polytechnic Institute and a J.D. degree from American University. The directors serve for a term of one year and until their successors are duly elected and qualified. Officers serve at the pleasure of the Board of Directors. There are no family relationships among directors or executive officers. Arrangements Regarding the Election of Directors In connection with the sale on December 12, 1996 of A&B to BP, BP agreed that for a period of two years and so long as BP owns at least 10% of the Company's outstanding common stock, BP will vote its shares in favor of Fredric D. Price and one nominee of Fredric D. Price for election to the Company's Board. So long as BP owns at least 20% of the Company's outstanding common stock, BP is entitled to nominate one member for election to the Company's Board. See Item 13. Certain Relationships and Related Transactions. -21- Committees of the Board of Directors The Company has an audit committee consisting of Mr. Flynn and Mr. Kop. In addition, the Company has a compensation committee consisting of Dr. Cross, Mr. Flynn and Dr. Pollack. During the year ended June 30, 1997, the audit committee met one time, and the compensation committee met one time. Scientific Advisory Board The Company has certain scientific advisors with expertise in areas of benefit to the Company, who serve on its Scientific Advisory Board and consult with the Company concerning the Company's research and development programs. Following are members of the Scientific Advisory Board working with the Company: Robert E. Pollack, Ph.D. - Dr. Pollack has been a Professor of Biological Sciences at Columbia University since 1978. In addition, from 1982 to 1989 he was Dean of Columbia College. Prior thereto he was Professor of Microbiology at the State University of New York School of Medicine at Stony Brook, Senior Scientist at Cold Spring Harbor Laboratory, Special NIH fellow at the Weizmann Institute in Israel, and NIH Fellow in the Department of Pathology at New York University School of Medicine. He is the author of more than a hundred research papers on the molecular biology of viral oncogenesis, a dozen articles in the popular press, and three books. He received a B.A. in physics from Columbia University and a Ph.D. in biology from Brandeis University. Edward Goldberg, Ph.D. - Dr. Goldberg is professor of molecular biology and microbiology at the Tufts University School of Medicine, Dentistry and Veterinarian Medicine. He is an authority on the mechanism of recognition and infection of bacteria by viruses. He has also done extensive research on the genetics, structure and function of ion exchanges related to bacterial pH control and multi drug antiporters in bacteria . He holds a B.A. in Chemistry from Columbia University and a Ph.D. in Biology from Johns Hopkins University. Richard Novick, M.D. - Dr. Novick is professor of medicine and microbiology at New York University Medical School and an Investigator at the Skirball Institute for Biomolecular Medicine. During a postdoctoral fellowship at the National Institute for Medical Research in Mill Hill, England, he discovered the first plasmids in Staphylococci, those responsible for penicillin resistance. Dr. Novick holds a B.S. from Yale University and an M.D. with honors in Microbiology from New York University Medical School. Marvin Moser, M.D. - Dr. Moser is clinical professor of medicine at Yale and senior medical consultant at the National High Blood Pressure Education Program of the National Heart, Lung and Blood Institute. Dr. Moser's work has focused on non pharmacological approaches to the prevention and control of hypertension and he has published extensively on this subject with over 300 publications. He has contributed to over 30 books and numerous physician and patient education programs. Dr. Moser holds a B.A. from Cornell University and an M.D. from Downstate University College of Medicine. -22- Stephen R. Peikin, M.D. - Dr. Peikin is professor of medicine and head of the division of gastroenterology and liver diseases at Cooper Hospital Medical Center, the Robert Wood Johnson Medical School, Camden, New Jersey. He is an authority on the release of the hormone cholecystokinin and its effects on satiety. He is the holder of a US patent on a method of stimulating satiety through the administration of an oral trypsin inhibitor. He holds a B.A. from Temple University and an M.D. from the Thomas Jefferson University. Dr. Pollack is Chairman of the Scientific Advisory Board. Members of the Scientific Advisory Board receive a per diem fee of $1,000 for each meeting of the Board attended by them, plus reasonable expenses. In addition, the Company has issued to each member of the Scientific Advisory Board stock options to purchase 10,000 shares of the Company's Common Stock. The options so issued have exercise prices ranging from $1.875 to $3.00 per share and are vested. Such options expire five years from the date of grant. See Note 10 of the Notes to Consolidated Financial Statements. Item 11. EXECUTIVE COMPENSATION The following table sets forth the compensation paid or accrued by the Company during the three fiscal years ended June 30, 1997 (i) to its Chief Executive Officer and (ii) to the three highest paid employees of the Company whose cash compensation exceeded $100,000 per year in any such year (other than the individuals listed in the table, no employee of the Company or of its former A&B subsidiary received compensation in excess of $100,000): -23- SUMMARY COMPENSATION TABLE(1)(2) Annual Compensation (a) (b) (c) (d) (e) Name and Principal Period Salary ($) Bonus ($) All other Position Compensation - -------------------------------------------------------------------------------- Fredric Price, 9/12/94- President, Chief 6/30/95 210,000 15,000 Executive Officer and Director (3) 7/1/95- 6/30/96 260,000 21,121 7/1/96 6/30/97 275,000 90,000 Stephen Benoit, 7/1/94- Vice President- 6/30/95 57,692 Marketing and Sales (4) 7/1/95 6/30/96 135,000 5,000 Peter Herring, 1/2/96 Controller 6/30/96 64,500 7/1/96 6/30/97 135,500 Solomon Mowshowitz, 1/15/96 Vice President-Research 6/30/96 62,308 and Development 7/1/97 6/30/97 140,000 Benjamin T. Sporn, 7/1/94- Vice President- 6/30/95 129,000 Legal 7/1/95- 6/30/96 120,000 7/1/96 6/30/97 127,500 5,000 (1) The above compensation does not include the use of an automobile and other personal benefits, the total value of which do not exceed as to any named officer or director or group of executive officers, the lesser of $50,000 or 10% of such person's or persons' cash compensation -24- (2) Pursuant to the regulations promulgated by the Securities and Exchange Commission (the "Commission"), the table omits a number of columns reserved for types of compensation not applicable to the Company. (3) Mr. Price became the Company's Chief Executive Officer on September 12, 1994. (4) Mr. Benoit's employment with the Company terminated January 10, 1997. None of the individuals listed above received any long-term incentive plan awards during the fiscal year. Employment Agreements Effective September 1994, the Company entered into an employment agreement with Fredric Price. The agreement provides for an annual salary of $260,000 plus a performance related bonus. He was also granted options to purchase up to a total of 500,000 shares of Common Stock, vesting in equal installments over a five year period commencing at the conclusion of his first year of employment. In addition, he was granted 15,325 shares of Common Stock on the first anniversary of the agreement. A further 15,326 shares of Common Stock were granted on the second anniversary of the agreement. Although employment is at will, salary and certain benefits continue for twelve months after notice of termination. Stock Option Plans The Board of Directors has adopted and the shareholders have approved four Stock Option Plans (the "Plan(s)"): 1. The Incentive Stock Option Plan provides for the grant of qualified incentive stock options to officers and key employees. 2. The Non-qualified Stock Option Plan provides for the grant of options to various persons who render certain services to the Company. 3. The 1989 Stock Option Plan provides for the grant of options to either group which, in the case of employees, may be incentive stock options. 4. The 1991 Stock Option Plan provides for the grant of options to either group which, in the case of employees, may be incentive stock options. Each of the Incentive and Non-qualified Stock Option Plans permits the purchase of an aggregate of up to 250,000 shares of Common Stock. The 1989 Stock Option Plan permits the purchase of an aggregate of up to 500,000 shares of Common Stock. The 1991 Stock Option Plan permits the purchase of an aggregate of up to 3,000,000 shares of Common Stock. The purpose of the Plans is to attract and retain competent executive personnel and other key employees and consultants and to provide incentives to all such persons to use their effort and skill for the advancement and betterment of the Company by permitting them to participate in the ownership of the Company. -25- Options granted as qualified incentive stock options are intended to qualify as Incentive Stock Options within the meaning of Section 422A of the Internal Revenue Code of 1986, as amended. The exercise price of Incentive Stock Options granted under the Plans shall not be less than the fair market value (110% of the fair market value for 10% or greater shareholders) of the Common Stock on the date of grant. Incentive Stock Options may not be exercised later than ten years from the date of grant (five years for 10% or greater shareholders). Determinations as to recipients of stock options under the Plans and other terms of such grants are made by the Company's Board of Directors. The following tables set forth information as of June 30, 1997 with regard to options granted (i) to the Company's Chief Executive Officer, and (ii) to other officers of the Company named in the Summary Compensation Table.
OPTION/SAR GRANTS IN LAST FISCAL YEAR - ------------------------------------------------------------------------------------------------------------------------ Potential Realizable Value At Assumed Annual Rates Of Stock Individual Grants Price Appreciation For Option Term - ------------------------------------------------------------------------------------------------------------------------ Percent Of Number Of Total Securities Options Exercise Underlying Granted To Of Base Options Employees In Price Expiration Name Granted (#) Fiscal Year ($/Sh) Date 5% (S) 10% (S) (a) (b) (c) (d) (e) (f) (g) A. Stephen Benoit 10,000 4.24 $5.625 (1) N/A N/A 5,000 $5.625 B. Peter Herring 10,000 6.34 $ 2.50 (2) $25,551.79 $61,790.30 5,000 $5.625 C. Solomon Mowshowitz 10,000 6.34 $ 2.50 (2) $25,551.79 $61,790.30 D. Fredric D. Price 35,000 14.83 $5.1875 (2) $87,327.00 $211,177.42 7,500 $5.625 E. Benjamin T. Sporn 35,000 1 $ 2.50 (2) $62,376.43 $150,841.01 7.978.01
(1) Expired April 9, 1997 which is 89 days after termination of employment. (2) Vesting 20% per year; expiration the earlier of 5 years from vesting or 89 days after termination of employment. -26- AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
Individual Grants - ----------------------------------------------------------------------------------------------------------- (a) (b) (c) (d) (e) Name Shares Value Number of Unexercised Value of Unexercised In-the Acquired on realized ($) Options at FY-End (#) Money Options at FY-End Exercise (#) Exercisable Unexercisable Exercisable Unexercisable - ----------------------------------------------------------------------------------------------------------- Stephen Benoit 20,000 28,750 0 0 0 0 Peter Herring 0 0 8,000 47,000 0 0 Solomon Mowshowitz 0 0 9,200 51,800 0 0 Fredric Price 0 0 200,000 335,000 0 0 Benjamin T. Sporn 0 0 75,000 42,500 0 0
Pension Plans AMBI Inc. Eligible employees of the Company are entitled to participate in the Burns Philp Inc. Retirement Plan for Non-Bargaining Unit Employees, a non-contributory pension plan (the "Pension Plan") maintained by Burns Philp. Assuming retirement at age 65, the Pension Plan provides benefits equal to the greater of (a) 1.1% of the employee's final average earnings multiplied by the employee's final average earnings in excess of the average of the contribution and the benefit basis in effect under Section 230 of the Social Security Act for each year in the 35-year period ending with the year of Social Security retirement age, multiplied by the employee's years of credited service up to 35, minus any predecessor plan benefit in the case of an employee who participated in a predecessor plan or (b) $24 multiplied by the number of years of credited service up to 25 years plus $12 multiplied by the years of employment from 26-40 years, minus any predecessor plan benefit in the case of an employee who participated in a predecessor plan. The "final average earnings" are the average monthly earnings during the five highest-paid consecutive calendar years within the last ten calendar years of credited service with the Company. Earnings include the salary and bonus listed in the summary compensation table. Earnings which may be considered under the Pension Plan are limited to $160,000 per year subject to annual cost of living adjustments as determined by the IRS. -27- The following table sets forth estimated annual benefits payable upon retirement, assuming retirement at age 65 in 1997 and a single life annuity benefit, according to years of credited service and final average earnings. The benefits listed are not subject to any deduction for Social Security or other offset amounts. Years of Credited Service
final average earnings 15 20 25 30 35 - ---------------------------------------------------------------------------------------------------------- $25,000 $4,320 $5,760 $7,200 $8,250 $9,625 $50,000 $10,268 $13,691 $17,113 $20,536 $23,958 $75,000 $16,830 $22,440 $28,051 $33,661 $39,271 $100,000 $23,393 $31,190 $38,988 $46,786 $54,583 $150,000 $36,518 $48,690 $60,683 $73,036 $85,208 $160,000 $39,143 $52,190 $65,238 $78,286 $91,333 and up
Peter Herring, Solomon Mowshowitz, Benjamin Sporn and Fredric Price each have 1.5, 1.5, 5.0 and 2.75 years, respectively, of credited service under the Pension Plan as of June 30, 1997, and, at age 65, would have approximately 21, 12, 10, and 17 years of credited service, respectively. Compliance with Section 16(a) of the Securities Exchange Act of 1934 Section 16(a) of the Securities Exchange Act of 1934 requires the Company's officers and directors, and persons who own more than ten percent of a registered class of the Company's equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Officers, directors and greater than ten-percent shareholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file. Based solely on review of the copies of such forms furnished to the Company, or written representations that no Forms 5 were required, the Company believes that during the period from July 1, 1996 through June 30, 1997 all Section 16(a) filing requirements applicable to its officers, directors and greater than ten-percent beneficial owners were complied with. -28- Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, as of September 22, 1997, information regarding the beneficial ownership of the Company's Common Stock based upon the most recent information available to the Company for (i) each person known by the Company to own beneficially more than five (5%) percent of the Company's outstanding Common Stock, (ii) each of the Company's executive officers and directors and (iii) all officers and directors of the Company as a group. Unless otherwise indicated, each stockholder's address is c/o the Company, 771 Old Saw Mill River Road, Tarrytown, New York 10591. Shares Owned Beneficially and of Record (1) Name and Address No. of Shares % of Total ================================================================================ Fredric D. Price (2) 337,651 1.72 Sheldon G. Gilgore (3) 125,000 * Audrey T. Cross (4) 34,000 * 259 Sunset Avenue Englewood, NJ 07631 Robert Flynn (5) 20,000 * Peter E. Herring (5) 9,000 * Colin Kop 0 -- 7 Bridge Street Sydney, NSW 2000 Australia Solomon L. Mowshowitz (5) 10,200 * Robert E. Pollack (5) 40,000 * 813B Sherman Fairchild Columbia University New York, NY 10027 Benjamin Sporn (6) 105,625 * Burns Philp & Company 7,763,837 40.26 Limited(7) 7 Bridge Street Sydney, NSW 2000 Australia All Officers and Directors 681,476 3.43 as a Group (10 persons) (2)(3)(4)(5) and (6) - ---------- * Less than 1% -29- (1) Includes shares issuable within 60 days upon the exercise of all options and warrants. Shares issuable under options or warrants are owned beneficially but not of record. (2) Includes 307,000 shares issuable upon exercise of currently exercisable options under the Company's Stock Option Plans. (3) Includes 120,000 shares issuable upon exercise of currently exercisable options under the Company's Stock Option Plans. (4) Includes 30,000 shares issuable upon exercise of currently exercisable options under the Company's Stock Option Plans. (5) Consists of shares issuable upon exercise of currently exercisable options under the Company's Stock Option Plans. (6) Includes 76,500 shares issuable upon exercise of currently exercisable options under the Company's Stock Option Plans. (7) Consists of shares owned by subsidiaries. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Pursuant to an Agreement for the Purchase and Sale of Stock dated as of June 30, 1992 (the "Purchase Agreement"), in July 1993 the Company issued 935,000 shares of Common Stock to BP. During July 1996, BP sold 1,400,000 shares of Common Stock, and during December 1996 BP returned 2,420,000 shares of Common Stock to the Company in connection with the purchase of A&B. As a result of the July 1993 issuance, of prior acquisitions of shares of Common Stock, the July 1996 sale of Common Stock, and the December 1996 return of Common Stock, BP currently owns 7,763,837 shares of Common Stock. Under the Purchase Agreement, the Company and BP entered into certain arrangements and understandings which were effective until September 1, 1996 with respect to election of directors, the Chief Executive Officer, issuances of securities, borrowings, and other corporate matters. On December 12, 1996, the Company completed the sale of its UK-based subsidiary, A&B to BP in accordance with the terms of a Share Purchase Agreement for $13.5 million in cash and the return to the Company of 2.42 million shares of the Company's Common Stock held by BP. In addition, BP has provided the Company with a revolving line of credit of up to $2.5 million. Any borrowings under this line of credit can be forgiven under certain circumstances. As of the date of filing this Form 10-K, no amount has been drawn under this line of credit. In accordance with the Share Purchase Agreement, the purchase price was paid in two installments: an initial payment of $8 million to the Company was made on December 11, 1996; and a final payment of $5.5 million was made to the Company on June 12, 1997. -30- In connection with the transaction, the Company and A&B entered into two License Agreements. Pursuant to the first License Agreement, the Company is exclusively licensed by A&B for the use of nisin generally in pharmaceutical products and animal healthcare products. Pursuant to the second License Agreement, A&B is exclusively licensed by the Company generally for the use of nisin as a food preservative and for food preservation. In addition, the Company entered into a Supply Agreement with A&B pursuant to which A&B was required to sell nisin to the Company while the Company was establishing its own source of supply. The Company established its own source of supply for nisin, and sent notice of termination of the Supply Agreement effective September 26, 1997. In connection with the transaction, the Company and BP entered into an Investors' Rights Agreement pursuant to which BP agreed until December 11, 1998, not to acquire, directly or indirectly, the Company's securities, and to refrain from selling the Company's Common Stock, except under certain circumstances through underwritten public offerings and private placement transactions. Until December 11, 1998 and so long as BP owns at least 10% of the Company's outstanding common stock, BP will vote its shares in favor of Fredric D. Price and one nominee of Fredric D. Price for election to the Company's Board. So long as BP owns at least 20% of the Company's outstanding common stock, BP is entitled to nominate one member for election to the Company's Board. As of the date of sale, two of the Company's Board members were representatives of BP. BP's Board representatives did not participate in the vote of the Company's Board which approved the sale of A&B to BP. As a result of the sale, BP's representation on Registrant's Board of Directors is reduced from two members to one member. Colin Kop is currently serving as the Director designated by BP. The amount of consideration for the sale was arrived at through arms-length negotiation and a fairness opinion was obtained. -31- PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. and 2. Financial Statements and Schedules The financial statements are listed in the Index to Financial Statements on page F-1 and are filed as part of this annual report. 3. Exhibits The Index to Exhibits following the Signature Page indicates the Exhibits which are being filed herewith and the Exhibits which are incorporated herein by reference. (b) Reports on Form 8-K The Company filed Reports on Form 8-K relating to the sale of Aplin & Barrett Limited (filed December 27, 1996), and relating to the acquisition of Nutrition 21 (filed on August 25, 1997). -32- AMBI INC. AND SUBSIDIARY INDEX TO CONSOLIDATED FINANCIAL STATEMENTS FILED WITH THE ANNUAL REPORT OF THE COMPANY ON FORM 10-K JUNE 30, 1997 PAGE INDEPENDENT AUDITORS' REPORT F-2 CONSOLIDATED BALANCE SHEETS AT JUNE 30, 1997 AND 1996 F-3 CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995 F-5 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995 F-6 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995 F-7 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS F-8 AMBI INC. AND SUBSIDIARY INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders AMBI Inc.: We have audited the consolidated financial statements of AMBI Inc. and subsidiary as listed in the accompanying index. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of AMBI Inc., and subsidiary as of June 30, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 1997, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP New York, New York July 25, 1997 F-2 AMBI INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS JUNE 30 JUNE 30 1997 1996 $000 $000 ---- ---- ASSETS Current assets: Cash and cash equivalents 8,615 8,431 Trade accounts receivable (less allowance for doubtful accounts of $104,000 in 1997 and $81,000 in 1996) 390 5,356 Inventories 606 3,088 Prepayments and other current assets 404 874 -------- -------- Total current assets 10,015 17,749 Property and equipment, net 1,082 3,881 Patent costs and licensed technology (net of amortization of $862,000 in 1997 and $717,000 in 1996) 1,584 1,624 Other assets 73 113 -------- -------- TOTAL ASSETS 12,754 23,367 See accompanying notes to consolidated financial statements. F-3 AMBI INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
JUNE 30 JUNE 30 1997 1996 $000 $000 ---- ---- LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of notes payable and lease obligation 156 195 Accounts payable and accrued expenses 2,464 1,889 Other liabilities - 368 Dividends payable 340 231 Taxes payable - 254 -------- -------- Total current liabilities 2,960 2,937 Notes payable and lease obligation 184 935 Long term loan 2,000 2,000 Deferred taxes payable - 349 -------- -------- TOTAL LIABILITIES 5,144 6,221 -------- -------- REDEEMABLE PREFERRED STOCK: $0.01 par value. Issued and outstanding - 0 - shares at June 30, 1997 and 1,500 shares at June 30, 1996 (aggregate involuntary liquidation value $1,500,000) - 1,500 -------- -------- STOCKHOLDERS' EQUITY: Preferred stock, $0.01 par value, authorized 5,000,000; Series C convertible preferred, 222 shares and 370 shares outstanding at June 30, 1997 and 1996 respectively (aggregate liquidation value Series C $2,521,190) - - Series D convertible preferred, 45,000 shares issued and outstanding at June 30, 1997 (aggregate liquidation value Series D $4,539,205) - - Common stock, $0.005 par value, authorized 40,000,000 shares. Issued and outstanding 18,783,342 shares at June 30, 1997 and 20,469,776 at June 30, 1996 94 102 Additional paid-in capital 49,900 51,389 Accumulated deficit (42,384) (35,179) Currency translation adjustment - (666) -------- -------- TOTAL STOCKHOLDERS' EQUITY 7,610 15,646 -------- -------- COMMITMENTS AND CONTINGENT LIABILITIES TOTAL LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY 12,754 23,367
See accompanying notes to consolidated financial statements. F-4 AMBI INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED JUNE 30 1997 1996 1995 $000 $000 $000 ---- ---- ---- Sales 10,356 14,157 11,264 Other operating income 924 1,865 462 -------- -------- -------- TOTAL REVENUE 11,280 16,022 11,726 Cost of sales (4,363) (6,353) (3,258) -------- -------- -------- GROSS PROFIT 6,917 9,669 8,468 Selling, general and administrative expenses (16,912) (11,177) (5,421) Research expenses (4,833) (2,294) (1,840) Depreciation and amortization (772) (819) (767) -------- -------- -------- OPERATING (LOSS)/INCOME (15,600) (4,621) 440 Foreign exchange gain/(loss) - 3 (49) Interest income 433 317 148 Interest expense (142) (133) (2) Gain on sale of Aplin & Barrett Ltd. 8,648 - - -------- -------- -------- (LOSS)/INCOME BEFORE TAX EXPENSE (6,661) (4,434) 537 Tax expense (152) (285) (254) -------- -------- -------- NET (LOSS)/INCOME (6,813) (4,719) 283 NET (LOSS)/EARNINGS PER SHARE ($0.37) ($0.27) $0.01 WEIGHTED AVERAGE SHARES 19,544,526 19,091,664 18,201,562
See accompanying notes to consolidated financial statements. F-5 AMBI INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Preferred Stock Preferred Stock Common Stock Series "C" Series "D" Shares $000 Shares $000 Shares $000 ------ ---- ------ ---- ------ ---- Balance at June 30, 1994 - - - - 18,155,858 91 Common stock issued for cash on exercise of options and warrants - - - - 21,000 - Net income for the year - - - - - - Preferred dividend paid and provided - - - - - - Arising on translation during the year - - - - - - ----- ---- ------- ---- ----------- ---- Balance at June 30, 1995 - - - - 18,176,858 91 Common stock granted to officers - - - - 15,326 - Common stock issued for cash on exercise of options and warrants - - - - 533,163 2 Common stock issued for cash under agreement with NSK - - - - 315,408 2 Preferred stock issued for cash 895 - - - - - Conversion of preferred stock to common stock including dividends issued as common stock (525) - - 1,429,021 7 Preferred dividend paid and provided - - - - - - Net loss for the year - - - - - - Arising on translation during the year - - - - - - ----- ---- ------- ---- ----------- ---- Balance at June 30, 1996 370 - - - 20,469,776 102 Common stock granted to officers - - - - 15,326 - Common stock issued for cash on exercise of options and warrants - - - - 172,300 1 Preferred stock issued for cash - - 45,000 - - - Common stock retired in connection with the sale of Aplin & Barrett Ltd. - - - - (2,420,000) (12) Conversion of preferred stock to common stock including dividends issued as common stock (148) - - - 545,940 3 Preferred dividend paid and provided - - - - - - Net loss for the year - - - - - - Arising on translation during the year - - - - - - ----- ---- ------- ---- ----------- ---- Balance at June 30, 1997 222 - 45,000 - 18,783,342 94 Additional Accumulated Currency Paid-In Deficit Translation Capital Adjustment TOTAL $000 $000 $000 $000 ---- ---- ---- ---- Balance at June 30, 1994 39,453 (30,113) (667) 8,764 Common stock issued for cash on exercise of options and warrants 47 - - 47 Net income for the year - 283 - 283 Preferred dividend paid and provided - (128) - (128) Arising on translation during the year - - 159 159 ------- -------- ----- ------ Balance at June 30, 1995 39,500 (29,958) (508) 9,125 Common stock granted to officers - - - - Common stock issued for cash on exercise of options and warrants 1,513 - - 1,515 Common stock issued for cash under agreement with NSK 1,998 - - 2,000 Preferred stock issued for cash 8,213 - - 8,213 Conversion of preferred stock to common stock including dividends issued as common stock 165 (172) - - Preferred dividend paid and provided - (330) - (330) Net loss for the year - (4,719) - (4,719) Arising on translation during the year - - (158) (158) ------- -------- ----- ------ Balance at June 30, 1996 51,389 (35,179) (666) 15,646 Common stock granted to officers 57 - - 57 Common stock issued for cash on exercise of options and warrants 436 - - 437 Preferred stock issued for cash 4,230 - - 4,230 Common stock retired in connection with the sale of Aplin & Barrett Ltd. (6,340) - - (6,352) Conversion of preferred stock to common stock including dividends issued as common stock 128 (131) - - Preferred dividend paid and provided - (261) - (261) Net loss for the year - (6,813) - (6,813) Arising on translation during the year - - 666 666 ------- -------- ----- ------ Balance at June 30, 1997 49,900 (42,384) - 7,610
See accompanying notes to consolidated financial statements. F-6 AMBI INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED JUNE 30 1997 1996 1995 $000 $000 $000 ---- ---- ---- Cash flows from operating activities: Net (loss)/income (6,813) (4,719) 283 Adjustments to reconcile net (loss)/income to net cash (used in)/provided by operating activities: Depreciation and amortization 772 819 767 Loss on disposal of equipment 275 14 129 Deferred income tax benefit (6) (81) Gain on sale of Aplin & Barrett (8,648) - - Other non-cash items 65 Changes in assets and liabilities: Decrease/(increase) in trade accounts receivable 1,320 (3,569) (468) Decrease/(increase) in inventories 646 (310) (1,345) Increase in other assets (191) (211) (124) Decrease/(increase) in amounts due from affiliated companies - 606 (614) (Decrease)/increase in taxes payable (254) 7 232 (Decrease)/increase in accounts payable and accrued expenses (1,559) 611 540 (Decrease)/increase in amounts due to affiliated companies - (126) (91) Increase in other liabilities 189 282 33 --------- -------- ------- Net cash used in operating activities (14,198) (6,602) 739) --------- -------- -------- Cash flows from investing activities: Acquisitions of property and equipment (866) (700) (1,269) Proceeds on sale of equipment - 19 Cash received upon sale of subsidiary 13,500 - - Patent costs and licensed technology (437) (1,026) (393) --------- ------- -------- Net cash provided by/(used in) investing activities 12,197 (1,726) 1,643) --------- -------- -------- Cash flows from financing activities: Dividends paid (153) (133) (120) Notes payable proceeds/(repayments) (8) 23 (6) Capital lease (repayments)/proceeds (811) (186) 721 Long term loan proceeds - 2,000 - Proceeds from issuance of preferred stock 4,230 8,213 - Redemption of redeemable preferred stock (1,500) - - Proceeds from issuance of common stock 437 3,515 47 --------- -------- ------- Net cash provided by financing activities 2,195 13,432 642 --------- -------- ------- Net increase/(decrease) in cash and cash equivalents 194 5,104 (1,740) Cash and cash equivalents at beginning of year 8,431 3,337 5,048 Effect of exchange rate movement (10) (10) 29 --------- -------- ------- Cash and cash equivalents at end of year 8,615 8,431 3,337 --------- -------- -------
See accompanying notes to consolidated financial statements. F-7 AMBI INC. AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF BUSINESS AMBI Inc. ('The Company') is a New York corporation which was incorporated on June 29, 1983. The Company develops and commercializes nutrition products for cardiovascular and other conditions and develops pharmaceuticals for serious infectious diseases. It markets the nutrition products through a network of distributors and should the pharmaceutical products be approved by a regulatory authority, it is anticipated that such products will be commercialized by joint venture partners. As of June 30, 1997, Burns Philp & Company Limited ("BP") owned 7,763,837 shares of the Company's common stock, which constitutes approximately 40% of the issued and outstanding shares of common stock. BP is a leading global food manufacturer and marketer. The Company sold its UK-based food preservative business, Aplin & Barrett Limited ("A&B"), a wholly-owned UK company, to BP on December 12, 1996. As a result, the operations of A&B are included in the financial statements through that date. A&B's principal activities are the manufacture and marketing of food preservatives, cheese starter cultures and other ingredients for the dairy industry. In October 1995, the Company acquired an exclusive license from a division of Orion Corporation ("Orion"), the largest pharmaceutical company in Finland, to sell Orion's patented salt alternative in the US. The Company began selling the salt alternative on a test basis in April 1996, and announced national availability in January 1997, under the trademark Cardia(TM) Salt Alternative. The Company has developed a moistened towel using a proprietary antibacterial formulation that is for use in preparing dairy cows for milking. The Company launched the product under its trademark Wipe Out(TM) Dairy Wipes on a test basis in February 1996, and nationally in April 1996. The Company signed an agreement with Nippon Shoji Kaisha, Ltd. (NSK) of Osaka, Japan in March 1996, in which NSK acquired the right to develop and market nisin, the Company's proprietary antibacterial peptide, in Japan and certain Asian countries for the treatment of hospital-acquired infections and infections of the colon. Under the agreement, NSK purchased $2 million of newly-issued common stock of the Company at $6.34 per share. In addition, NSK loaned $2 million to the Company that, under certain circumstances can be repaid in common stock valued at the market price at the time of repayment, and agreed to make research and milestone payments to the Company. Upon commercialization, NSK will pay royalties to the Company. The Company issued to NSK warrants to purchase 315,408 shares of the Company's common stock as part of this transaction. On August 12, 1997 the Company completed the acquisition of Nutrition 21, a privately-owned San Diego, California-based company engaged in the development and marketing of proprietary nutrition products and dietary supplements. During fiscal 1997, the Company incurred a $15.6 million loss from operations. As more fully discussed in note 18, the Company acquired Nutrition 21 for $10.0 million and other considerations. The transaction was financed from the Company's operating funds and a $3.3 million loan from State Street Bank and Trust company ("State Street Bank") that matures in February 1998. Management believes that the acquisition of Nutrition 21 and expense reductions will result in a significant reduction in the operating loss for fiscal 1998. Management also believes that it will be able to extend the loan from State Street Bank upon maturity or obtain other financing to satisfy this obligation. The achievement of a significant reduction in the operating loss and the refinancing the State Street Bank loan will be significant factors in the Company's ability to maintain adequate levels of cash flow. F-8 AMBI INC. AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 2. SIGNIFICANT ACCOUNTING POLICIES Significant accounting policies followed by the Company are in accordance with generally accepted accounting principles and are as follows: a) Consolidation The consolidated financial statements include the results of operations and financial position of the Company and its wholly owned subsidiary, A&B, after elimination of material inter-company accounts and transactions. b) Cash Equivalents The Company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents. Cash equivalents included in the accompanying financial statements include money market accounts. c) Inventories Inventories are valued at the lower of cost (first-in, first-out) or market value, and consist of: 1997 1996 $000 $000 ---- ---- Raw materials - 240 Work in process - 960 Finished products 606 1,888 ---- ----- 606 3,088 d) Property and Equipment Property and equipment are stated at cost. Depreciation is provided using the straight-line method to depreciate assets over their estimated useful lives. The estimated useful lives are as follows: Buildings and building improvements - 50 years Furniture and fixtures - 20 years Machinery and equipment - 5 or 10 years Office equipment - 3, 5 or 6 years Motor vehicles - 5 years Leased assets - 3 or 5 years e) Patent Costs and Licensed Technology Patent costs and licensed technology have been capitalized and are being amortized on a straight-line basis over periods ranging from one to fifteen years. f) Research and Development Research and development costs are expensed as incurred. F-9 AMBI INC. AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 2. SIGNIFICANT ACCOUNTING POLICIES (Continued) g) Net (Loss)/Earnings Per Share Earnings per share for the years ended June 30, 1995 are computed based on the weighted average number of shares actually outstanding plus the shares that would be outstanding assuming the exercise of dilutive stock options, all of which are considered to be common stock equivalents. The number of shares that would be issued from the exercise of stock options and warrants has been reduced by the number of shares that could have been purchased from the proceeds at the average market price of the Company's stock. Common stock equivalents are not included in the computation of average shares outstanding for the year ended June 30, 1997 and June 30, 1996, because the effect of such inclusion would be to decrease the loss per share.
1997 1996 1995 (No. of shares) (No. of shares) (No. of shares) Average shares outstanding 19,544,526 19,091,664 18,168,187 Net effect of dilutive stock options - - 33,375 ------------- ------------- ------------ Total average shares 19,544,526 19,091,664 18,201,562 $000 $000 $000 ---- ---- ---- Net (loss)/income (6,813) (4,719) 283 Preferred stock dividend (392) (502) (128) ------------- ------------- ------------ Net (loss)/income attributable to common stockholders (7,205) (5,221) 155 Net (loss)/earnings per share of common stock ($0.37) ($0.27) $0.01
h) Foreign Currencies Transactions in currencies other than the local currency are recorded at the rate at the date of the transaction. Balances denominated in currencies other than the local currency are translated at the exchange rate at the balance sheet date. Assets and liabilities of the Company's foreign subsidiary are generally translated at current rates, and related translation adjustments are reported as a component of stockholders' equity. Statement of operations accounts are translated at the average rates of exchange reported during the year. Stockholders' equity amounts are translated at historical rates, and variances from the balance sheet rate are recorded as currency translation adjustment. i) Taxation The Company accounts for deferred taxes using the liability method. j) Use of Estimates The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. F-10 AMBI INC. AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 3. PROPERTY AND EQUIPMENT 1997 1996 $000 $000 ---- ---- Cost: Land - 110 Buildings and building improvements 75 1,083 Plant and other assets 1,018 5,898 Leased assets: Furniture and fixtures - 195 Office equipment - 171 Machinery and equipment 371 917 ------ ------- 1,464 8,374 Accumulated depreciation and amortization (382) (4,493) ------- ------- Net book value 1,082 3,881 4. CAPITAL LEASES On December 11, 1996, concurrent with the sale of A&B to BP, the Company bought out the leases for certain lab and office equipment that were entered into in 1995. Subsequently, on December 30, 1996, the Company entered into an agreement to lease certain lab equipment. The terms of the lease met the criteria for capitalization under the Financial Accounting Standards (FAS) No. 13, "Accounting for Leases." Accordingly, the lease has been classified as a capital lease in the accompanying financial statements. The following is a schedule by years of future minimum lease payments under the capital lease together with the present value of the net minimum lease payments. Year ending June 30: $ 000 ----- 1998 152 1999 133 2000 66 ---- Total minimum lease payments 351 Less amounts representing interest (40) ----- Present value of net minimum lease payments 311 This obligation is reflected in the balance sheet at June 30, 1997, as current and non-current obligations of $127,000 and $184,000, respectively. 5. NOTES PAYABLE In connection with the purchase of a telephone system, the Company borrowed approximately $35,000 in November 1995. This loan bears interest at a rate of 6% and matures in November 1999. The payments on the loan approximate $800 per month. As a result of the sale of A&B to BP the Company has access to a revolving line of credit of up to $2.5 million that could be forgiven under certain circumstances related to the performance of the food preservative business through June 30, 1999. The loan bears an interest rate equal to the Citibank prime rate. As of July 25, 1997, the Company has not borrowed any funds on this line of credit. 6. LONG TERM DEBT In March 1996, as part of a research collaboration with Nippon Shoji Kaisha of Japan, the Company has secured a loan of $2 million. This loan bears interest at a rate of 5%, and matures in March 1999. Interest is payable quarterly and principal payment is due in full upon maturity. F-11 AMBI INC. AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES The following items are included in accounts payable and accrued expenses: 1997 1996 $000 $000 ---- ---- Accounts payable 1,283 814 Accrued expenses 1,181 1,075 ----- ----- 2,464 1,889 8. PREFERRED STOCK The Company is authorized to issue up to 5,000,000 shares of preferred stock, with a $0.01 par value, in one or more series and to fix the powers, designations, preferences and rights of each series. In May 1997, the Company issued 45,000 shares of non-voting, Series D preferred stock. Each share of D Preferred has a face value of $100 per share, and accrues a premium at 6% per annum for conversion purposes. The D Preferred is not convertible during the 90-day period from May 8, 1997 until August 5, 1997. For the next 90 days until November 4, 1997, the D Preferred is convertible by the holder into Common Stock at $2.49557 per share, which is 110% of the average closing bid price for the 10 trading days prior to May 8, 1997. After November 4, 1997 the conversion price per share is the lesser of (i) $2.49557 or (ii) the average closing bid price of the Common Stock for the ten trading days prior to conversion less a discount which increases in stages from 13% on November 4, 1997 to 25% by August 1, 1998. The Company has registered the Common Stock issuable upon conversion. In connection with this private placement, the Company also issued Warrants to purchase 528,937 shares of Common Stock at $2.72 per share. In October 1995, the Company issued 895 shares of non-voting, Series C preferred stock for $10,000 per share. These shares are convertible into common stock of the Company at the lower of $3.25 per share or 85% of the average closing bid price for the common stock of the Company for the five trading days immediately preceding the date of conversion, and bear an 8% dividend payable in common stock of the Company on the same basis as the preferred stock at the time of conversion. The Company has the right to redeem the preferred stock for cash upon receipt of a notice of conversion. All preferred stock outstanding on October 13, 1999 will automatically convert into common stock of the Company. As of June 30, 1997, there were 222 shares of the preferred stock outstanding. Dividends payable at June 30, 1997 were approximately $340,000. All of the outstanding issue of 1,500 shares of redeemable preferred stock at June 30, 1996 was redeemed on June 12, 1997 and all cumulative annual dividends were paid at that time. F-12 AMBI, INC. AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 9. CAPITAL STOCK The Company had outstanding warrants for the purchase of its common stock as follows: Number of Exercise price warrants per share --------------------------------- Balance at June 30, 1994 1,378,368 $1.25-$6.00 Exercised (3,000) $1.25 ---------- Balance at June 30, 1995 1,375,368 $1.25-$6.00 Issued 591,789 $3.125-$6.75 Expired (52,000) $1.25-$2.00 Exercised (236,663) $1.25-$4.375 --------- Balance at June 30, 1996 1,678,494 $1.25-$6.75 Issued 528,937 $2.722 Expired (167,027) $1.25-$6.00 Exercised (16,000) $1.25-$5.00 ---------- Balance at June 30, 1997 2,024,404 $1.25-$6.75 At June 30, 1997, 2,170,401 shares were issuable upon exercise of the above warrants. All such warrants were available to be exercised immediately. The warrants expire between 1997 and 2004. Certain of the warrants include anti-dilution clauses. On April 10, 1986, the Company adopted a Nonqualified Stock Option Plan whereby options to purchase 250,000 shares of the Company's common stock may be granted to consultants and Business Advisory Board and Scientific Advisory Board members. The Company adopted three Incentive Stock Option Plans ('Incentive Plans') whereby options to purchase an aggregate of 3,750,000 shares of the Company's common stock may be granted to officers, directors, employees, consultants and others who render services to the Company. The exercise price per share for the options granted under the Incentive Plans may not be less than the fair value of the Company's common stock on the date of grant. The options expire between 1997 and 2007. F-13 AMBI, INC. AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 9. CAPITAL STOCK (Continued) A summary of stock option activity related to the Company's stock option plans is as follows: Number of Exercise price options per share -------------------------------- Balance at June 30, 1994 979,750 $1.25-$6.00 Issued 560,000 $3.00-$3.625 Exercised (18,000) $1.25-$2.56 ---------- ---------- Balance at June 30, 1995 1,521,750 $1.25-$6.00 Issued 577,370 $1.50-$7.688 Expired (19,750) $1.25-$2.56 Exercised (296,500) $1.25-$5.063 Canceled (49,960) $1.50-$2.875 ---------- ---------- Balance at June 30, 1996 1,732,910 $1.25-$7.688 Issued 352,900 $2.375-$5.625 Expired (282,246) $1.50-$6.00 Exercised (154,980) $1.50-$4.375 ---------- ---------- Balance at July 1, 1997 1,648,584 $1.25-$7.688 Each of these options are entitled to one share of common stock, and 908,796 of these options are exercisable at June 30, 1997. 10. STOCK-BASED COMPENSATION The per share weighted-average fair value of stock options granted during fiscal 1997 and 1996 was $2.43 and $2.22, respectively on the date of grant using the Black Scholes option-pricing model with the following weighted-average assumptions: expected dividend yield of 0%, risk free interest rate of 6%, expected stock volatility of 81%, and an expected option life of 5 years. The Company applies APB Opinion No. 25 in accounting for its Plan and, accordingly, no compensation cost has been recognized in the financial statements for its stock options which have an exercise price equal to the fair value of the stock on the date of the grant. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net income would have been reduced to the pro forma amounts indicated below: 1997 1996 $000 $000 ---- ---- Net loss As reported (6,813) (4,719) Pro forma (7,391) (5,592) Net loss per share As reported ($0.37) ($0.27) Pro forma ($0.40) ($0.32) F-14 AMBI, INC. AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 10. STOCK-BASED COMPENSATION (Continued) Pro forma net income reflects only options granted in fiscal 1997 and 1996. Therefore, the full impact of calculating compensation cost for the stock options under SFAS No. 123 is not reflected in the pro forma net income amounts presented above because compensation cost is reflected over the option's vesting period of 5 years and compensation cost for options granted prior to July 1, 1995. 11. SEGMENT REPORTING a) Significant customers There were no significant unaffiliated customers comprising over 10% of sales during the years 1997, 1996 and 1995. Sales to affiliated companies represented 0%,12%, and 19% of consolidated sales in 1997, 1996, and 1995. b) Information about the Company's Operations in Different Geographic Areas Year ended June 30, 1997
United United Adjustments Consolidated States Kingdom & Eliminations $000 $000 $000 $000 -------- -------- ------------ ---------- Sales to unaffiliated customers 5,262 5,094 - 10,356 Transfer between geographic areas 810 (810) - Sales to affiliated customers - - - - Other income 887 37 - 924 -------- -------- -------- -------- Total revenue 6,149 5,941 (810) 11,280 -------- -------- -------- -------- Operating (loss)/profit (15,991) 391 - (15,600) --------- -------- -------- -------- Identifiable assets 12,754 - - 12,754
F-15 AMBI, INC. AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 11. SEGMENT REPORTING (Continued) b) Information about the Company's Operations in Different Geographic Areas continued
Year ended June 30, 1996 United United Adjustments Consolidated States Kingdom & Eliminations $000 $000 $000 $000 -------- -------- ------------ ---------- Sales to unaffiliated customers 1,543 10,671 - 12,214 Transfer between geographic areas 2,824 318 (3,142) - Sales to affiliated customers - 1,943 - 1,943 Other income 1,788 77 - 1,865 ------- ------- ------- ------- Total Revenue 6,155 13,009 (3,142) 16,022 ------- ------- ------- ------- Operating (loss)/profit (5,384) 786 (23) (4,621) ------- ------- ------- ------- Identifiable assets 16,005 11,443 (4,081) 23,367 ------- ------- ------- ------- Year ended June 30, 1995 Sales to unaffiliated customers 6 9,141 - 9,147 Transfer between geographic areas 3,635 - (3,635) - Sales to affiliated customers - 2,117 - 2,117 Other income 296 166 - 462 -------- -------- -------- -------- Total revenue 3,937 11,424 (3,635) 11,726 -------- -------- -------- -------- Operating (loss)/profit (88) 528 - 440 -------- -------- -------- -------- Identifiable assets 6,673 9,207 (2,092) 13,788
Transfers between geographic areas are accounted for as arms-length transactions. Operating profit is total revenue less operating expenses. Identifiable assets are those assets which are identifiable with the operations in each geographic area. Of the US sales to unaffiliated customers there were no export sales. Sales of the UK operation to unaffiliated customers by geographical area were as follows: 1997 1996 1995 $000 $000 $000 ---- ---- ---- North America 88 1,164 585 Europe 2,041 5,128 4,816 South America 808 2,423 1,983 Other 2,157 1,956 1,757 ----- ------ ------ 5,094 10,671 9,141 c) Industry The Company's business and that of A&B have been in a single industry segment - the research, development, production and marketing of antimicrobial proteins and dairy ingredients for various applications. In April 1996, the Company began selling a salt alternative as a special dietary food that may help in the dietary management of blood pressure. F-16 AMBI, INC. AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 12. RELATED PARTY TRANSACTIONS Transactions with affiliated companies were as follows:
1997 1996 1995 $000 $000 $000 ---- ---- ---- Sales to subsidiaries of common parent: Mauri Laboratories Pty. Ltd. (1) - 1,939 2,117 Purchases from subsidiary of common parent: Mauri Laboratories Pty. Ltd. (1) - 1,430 832 Income from manufacturing on behalf of associate of parent: Imperial Biotechnology Ltd. (2) - - 77 Management fees received from subsidiaries of common parent: Burns Philp (UK) Plc 37 74 75 Loan interest received from subsidiaries of common parent: Burns Philp Inc. - 79 63
(1) Mauri Laboratories Pty. Ltd. ceased to be an affiliate on June 14, 1996. (2) Imperial Biotechnology Ltd., ceased to be an affiliate on December 12, 1995. From time to time the Company advances money to affiliated companies. Interest received on these advances is as shown above. In addition, the Company periodically incurs expenditures on behalf of affiliated companies for which it is reimbursed and reimburses affiliates for expenditures incurred on its behalf. The Company paid an affiliate $20,000 during fiscal year 1995 for rent of office space and facilities. F-17 AMBI, INC. AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 13. INCOME TAXES The income tax expense consists of: 1997 1996 1995 $000 $000 $000 ---- ---- ---- Current 501 291 335 Deferred (309) (6) (81) ---- ---- ---- 152 285 254 Income tax expense attributed to pre-tax income differed from the amounts computed by applying the US federal statutory tax rate to pre-tax income as a result of the following:
1997 1996 1995 $000 $000 $000 ---- ---- ---- Computed 'expected' tax expense (2,265) (1,508) 188 Increase/(reduction) in income taxes resulting from: Tax losses carried forward/(utilized) 2,398 1,755 86 Lower tax rate on foreign earnings (4) (8) (16) State and local taxes 11 18 - Other items 12 28 (4) ----- -- ----- 152 285 254
The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities are as follows:
1997 1996 $000 $000 ---- ---- Deferred tax asset: Net operating loss carryforwards 5494 3,807 Accrued Expenses 251 0 Less valuation allowance (5,745) (3,807)) ------- ----- 0 0 Deferred tax liability: Plant and equipment differences between depreciation and capital allowances - (192) Pension costs deductible as paid - (153) Other - (4) ------- ----- (349) Net deferred tax liability - (349)
At June 30, 1997, the Company has net operating loss carryforwards for United States federal income tax purposes of approximately $17,000,000 which are available to offset future United States federal taxable income, if any, through 2012. Ultimate utilization/availability of such net operating losses may be significantly curtailed if a significant change in ownership occurs. F-18 AMBI, INC. AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 13. INCOME TAXES Pretax income of the Company and its source for the years ended June 30, 1996, 1995 and 1994 is as follows: Year Total Foreign Domestic ---- ----- ------- -------- 1995 537 783 (246) 1996 (4,434) 727 (5,161) 1997 (6,661) 391 (7,052) 14. COMMITMENTS AND CONTINGENT LIABILITIES In October 1995, the Company entered into an exclusive license agreement whereby the Company received a license to sell a patented salt alternative in the United States. As a result, the Company is required to make royalty payments quarterly. Accrued royalty payments due as of June 30, 1997 amounted to $56,000. The Company has entered into various research and license agreements with certain universities to supplement the Company's research activities and to obtain for the Company rights to certain technology. The agreements generally require the Company to fund the research and to pay royalties based upon a percentage of product sales. The Company has consulting agreements with several of its Scientific Advisory Board members and other consultants. These agreements generally are for a term of one year and are terminable at the Company's option. Under operating leases, the Company leases certain office and laboratory space in the US. This lease expires in the year 2002. Payments under this lease was approximately $491,000 in 1997, $540,000 in 1996, and $54,000 in 1995. Future noncancellable minimum payments under this lease is as follows: Year $000 ---- ---- 1998 437 1999 449 2000 449 2001 449 2002 449 ------ Total 2,233 15. SUPPLEMENTAL CASH FLOW INFORMATION 1997 1996 1995 $000 $000 $000 ---- ---- ---- Interest paid 137 104 2 Taxes paid 196 266 103 F-19 AMBI INC. AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 16. PENSION BENEFITS The Company participates in a defined benefit pension plan of Burns Philp Inc., an affiliated company, and the plan is called the 'Burns Philp Inc. Retirement Plan for Non-Bargaining Unit Employees'. This plan provides retirement benefits based upon years of service, or a combination of employee compensation and years of service. Contributions payable to the plan were approximately $67,000 in 1997, $42,000 in 1996 and $28,000 in 1995. A&B participated in a defined benefit pension plan of Burns Philp (UK) plc, an affiliated company called "The Burns Philp (K) plc Pension Plan'. The funding status of the Burns Philp (UK) Plc Pension Plan for the A&B employees as of June 30, 1996 is shown below. Since the sale of A&B was completed December 12, 1996, figures as of June 30, 1997 are not relevant. 1996 $000 ---- Actuarial present value of benefit obligations: Vested benefit obligation (3,932) Accumulated benefit obligation (4,289) Projected benefit obligation for service (5,101) rendered to date Plan assets at fair value 4,856 Plan assets (less than)/in excess of projected benefit obligation (245) Unrecognized net loss 961 Unrecognized net transition asset (304) Prepaid cost 412 Of the above prepaid costs of $412,000 at June 30, 1996, $383,000 relates to A&B as determined by actuarial valuation, and is therefore included in the accounts of the Company. F-20 AMBI INC. AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 16. PENSION BENEFITS (continued) Net pension cost of the Burns Philp (UK) plc Pension Plan for 1996 and 1995 included the folowing components: 1996 1995 ($000) ($000) ------ ------ Service costs - benefits earned during the period 326 183 Interest cost on projected benefit obligation 361 262 Actual return on plan assets (416) (292) Net amortization and deferral 9 39 Net pension cost 280 192 Of the above net pension costs of $280,000 at June 30, 1996, $181,000 relates to A&B as determined by actuarial valuation, and is therefore included in the accounts of the Company. For fiscal 1995 all of the pension cost relate to A&B. The pension cost for the period July 1, 1996 through December 12, 1996 (date of sale of A&B) was approximately $88,000. The components of this pension cost is not available. Assumptions used in accounting for the pension plan as at June 30, 1996 and 1995 were:
1996 1995 % % ---- ---- Discount rate 8 9 Rates of increase in compensation levels 7 7 Expected return on assets 10 10
17. RISKS AND UNCERTAINTIES The Company buys certain of its inventories from single suppliers. Management believes that other suppliers could provide similar products at comparable terms. As a result, management believes a change in suppliers would not disrupt on-going operations and would not effect operating results adversely. 18. SUBSEQUENT EVENTS On August 12, 1997, the Company completed the acquisition of Nutrition 21, a privately-owned San Diego, California-based company engaged in the development and marketing of proprietary nutrition products and dietary supplements. Terms of the transaction included the payment by the Company of $10 million is cash and 500,000 shares of the Company's common stock. The Company has agreed to make contingent payments, based upon the achievement of certain sales levels in the next four years, and to pay royalties in the future on sales of certain patented products. The acquisition was financed in part by a six month loan of $3.3 million from State Street Bank bearing an interest rate of prime plus 1%. As part of the same financing from State Street Bank and Trust, the Company secured a revolving credit facility of $4.0 million which matures February 1, 1998 and is renewable for up to 18 months, at the lender's option. The facility bears an interest rate of prime plus 1%. F-21 AMBI INC. AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 19. RECENTLY ISSUED ACCOUNTING STANDARDS In February 1997, FASB issued SFAS No. 128, "Earnings Per Share" and SFAS No. 129, "Disclosure of Information about Capital Structure". SFAS No. 128 specifies the computation, presentation, and disclosure requirements for earnings per share (EPS) for entities with publicly held common stock or potential common stock. SFAS No. 128 replaces the presentation of primary EPS and fully diluted EPS with basic EPS and diluted EPS. It also requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. SFAS No. 129 was issued in connection with SFAS No. 128 and specifies the required disclosures about capital structure. Both SFAS No. 128 and No. 129 are effective for financial statements for both interim and annual periods ending after December 31, 1997. It is not expected that the adoption of either of these statements will have a material impact on the Company's financial position or operating results. F-22 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AMBI INC. By: /s/ Fredric D. Price ------------------------------ Fredric D. Price, President, CEO and Director Dated: September 26, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below as of September 26, 1997 by the following persons on behalf of Registrant and in the capacities indicated. /s/ Fredric D. Price ------------------------------ Fredric D. Price, President, CEO and Director (Principal Financial Officer) /s/ Audrey T Cross ------------------------------ Audrey T. Cross, Director /s/ Robert Flynn ------------------------------ Robert Flynn, Director /s/ Sheldon G. Gilgore ------------------------------ Sheldon G. Gilgore, Chairman of the Board /s/ Colin Kop ------------------------------ Colin Kop, Director /s/ Robert Pollack ------------------------------ Robert E. Pollack, Director /s/ Peter E. Herring ------------------------------ Peter E. Herring, Controller (Principal Accounting Officer) -33- EXHIBITS Except where otherwise indicated, the following exhibits are incorporated by reference to the correspondingly numbered exhibit in the Company's Registration Statement on Form S-1 (No. 33-4822): 3.01 Certificate of Incorporation (1) 3.01a Certificate of Amendment to the Certificate of Incorporation (2) 3.01b Certificate of Amendment to the Certificate of Incorporation (3) 3.01c Certificate of Amendment to the Certificate of Incorporation (14) 3.01d Certificate of Amendment to the Certificate of Incorporation (14) 3.02 Amended and Restated By-laws (2) 4.01 Form of Warrant Agreement and Form of Warrant Certificate for Warrants included in Units (11) 10.01 Form of Incentive Stock Option Plan (11) 10.02 Form of Non-qualified Stock Option Plan (11) 10.02a Form of 1989 Stock Option Plan (1) 10.02b Form of 1991 Stock Option Plan (1) 10.24 Exclusive Option and Collaborative Research Agreement dated July 1, 1988 between the Company and the University of Maryland (4) 10.25 License and License Option Agreement dated December 15, 1988 between the Company and Babson Brothers Company (4) 10.28 Agreement between the Company and BP (5) 10.34 Consulting Agreement dated June 29, 1992 between the Company and Donald A.M. McKay (7) 10.36 Agreement, dated October 6, 1992 between the Company and PHRI (7) 10.37 Agreement for the Purchase and Sale of Stock dated as of June 30, 1993 by and among the Company and BP (8) -34- 10.38 Technology and License Agreement dated as of June 29, 1992 by and among the Company and Fermtec Prochim SpA. (8) 10.43 Supply Agreement dated as of January 1, 1994 by and between the Astra/Merck Group of Merck & Co., Inc. (9)* 10.44 Development and License Agreement dated as of January 1, 1994 by and between the Astra/Merck Group of Merck & Co., Inc. (9)* 10.47 Employment Agreement dated August 30, 1994 between the Company and Fredric D. Price (9) 10.48 Lease dated as of February 7, 1995, between the Company and Keren Limited Partnership (10) 10.49 Share Purchase Agreement dated as of December 12, 1996, by and among Applied Microbiology, Inc., Aplin & Barrett Limited and Burns Philp (UK) plc. (12) 10.50 License Agreement dated as of December 12, 1996 between Licensee Applied Microbiology, Inc. and Licensor Aplin & Barrett Limited. (12) 10.51 License Agreement dated as of December 12, 1996 between Licensee Aplin & Barrett Limited and Licensor Applied Microbiology, Inc. (12) 10.52 Supply Agreement dated as of December 12, 1996 between Aplin & Barrett Limited and Applied Microbiology, Inc. (12) 10.53 Investors' Rights Agreement dated as of December 12, 1996 between Applied Microbiology, Inc. and Burns Philp Microbiology. Pty Limited. (12) 10.54 Revolving Loan and Security Agreement dated as of December 12, 1996 between Burns Philp Inc. as Lender and Applied Microbiology, Inc. as Borrower. (12) 10.55 Stock and Partnership Interest Purchase Agreement dated as of August 11, 1997, for the purchase of Nutrition 21. (13) 10.56 Revolving Loan and Term Loan Agreement dated as of August 11, 1997 between State Street Bank & Trust Company as Lender and the Company and Nutrition 21 as Borrowers. (13) 23.01 Consent of KPMG Peat Marwick LLP (14) 27 Financial Data Schedule (14) - ---------- (1) Incorporated by reference to the Company's Report on Form 10-K for 1991. -35- (2) Incorporated by reference to the Company's Report on Form 8-K dated September 4, 1992. (3) Incorporated by reference to the Company's Registration Statement on Form S-8 dated August 8, 1996, file No. 333-09801. (4) Incorporated by reference to the Company's Report on Form 10-K for 1988. (5) Incorporated by reference to the Company's Report on Form 10-Q for the quarter ended June 10, 1989. (6) Incorporated by reference to the Company's Report on Form 10-K for 1993. (7) Incorporated by reference to the Company's Report on Form 10-K for the fiscal period January 31, 1992 through August 31, 1992. (8) Incorporated by reference to the Company's Report on Form 10-Q for the quarter ended June 30, 1992. (9) Incorporated by reference to the Company's Report on Form 10-K for 1994. (10) Incorporated by reference to the Company's Report on Form 10-K for 1995. (11) Incorporated by reference to the Company's Registration Statement on Form S-1 originally filed April 15, 1986, file No. 33-4822. (12) Incorporated by reference to the Company's Report on Form 8-K dated December 27, 1996. (13) Incorporated by reference to the Company's Report on Form 8-K dated August 25, 1997. (14) Filed herewith. * Subject to an order by the Securities and Exchange Commission granting confidential treatment. Specific portions of the document for which confidential treatment has been granted have been blacked out. Such portions have been filed separately with the Commission pursuant to the application for confidential treatment. -36- EX-3.01(C) 2 CERTIFICATE OF AMENDMENT OF THE CERTIFICATE OF INCORPORATION Exhibit 3.01c Certificate of Amendment of the Certificate of Incorporation CERTIFICATE OF AMENDMENT OF THE CERTIFICATE OF INCORPORATION OF APPLIED MICROBIOLOGY, INC. Under Section 805 of the Business Corporation Law * * * * * WE, THE UNDERSIGNED, Fredric D. Price and Benjamin Sporn, being respectively the President and Chief Executive Officer and the Secretary of Applied Microbiology, Inc. hereby certify: 1. The name of the corporation is APPLIED MICROBIOLOGY, INC. 2. The certificate of incorporation of said corporation was filed with the Department of State on June 29, 1983. The name under which the corporation was formed was APPLIED MICRO BIOLOGY, INC. 3. (a) The certificate of incorporation is amended to change the name of the corporation from Applied Microbiology, Inc. to AMBI Inc. (b) To effect the foregoing, Article FIRST is amended to read as follows: "The name of the corporation is AMBI Inc." 4. The amendment to the Certificate of Incorporation was authorized by vote of the holders of a majority of all outstanding shares entitled to vote at a meeting held on the 17th day of December, 1996, subsequent to the affirmative vote of the Board of Directors. IN WITNESS WHEREOF, we have signed this certificate this 18th day of December, 1996 and we affirm the statements contained therein as true under penalties of perjury. /s/ Fredric D. Price ----------------------------------- Fredric D. Price President and Chief Executive Officer /s/ Benjamin Sporn ----------------------------------- Benjamin Sporn, Secretary EX-3.01(D) 3 CERTIFICATE OF AMENDMENT OF THE CERTIFICATE OF INCORPORATION Exhibit 3.01d Certificate of Amendment of the Certificate of Incorporation CERTIFICATE OF AMENDMENT OF THE CERTIFICATE OF INCORPORATION OF AMBI INC. Under Section 805 of the Business Corporation Law * * * * * WE, THE UNDERSIGNED, Fredric D. Price and Benjamin Sporn, being respectively the President and Chief Executive Officer and the Secretary of AMBI Inc. hereby certify: 1. The name of the corporation is AMBI Inc. 2. The certificate of incorporation of said corporation was filed with the Department of State on June 29, 1983. The name under which the corporation was formed was APPLIED MICRO BIOLOGY, INC. 3. (a) The certificate of incorporation is amended to increase the aggregate number of shares of Common Stock, which the corporation shall have the authority to issue from 40,000,000 to 65,000,000. (b) To effect the foregoing, paragraph (a) of Article FOURTH, relating to the number of shares the corporation shall have the authority to issue shall be amended to read in its entirety as follows: "(a) The aggregate number of shares which the Corporation shall have the authority to issue is 70,000,000 which are divided into 65,000,000 shares of Common Stock of a par value of $.005 per share and 5,000,000 shares of Preferred Stock of a par value of $.01 per share." 4. The amendment to the Certificate of Incorporation was authorized by vote of the holders of a majority of all outstanding shares entitled to vote at a meeting held on the 15th day of July, 1997, and by the affirmative vote of the Board of Directors. IN WITNESS WHEREOF, we have signed this certificate this 23rd day of July, 1997 and we affirm the statements contained therein as true under penalties of perjury. /s/ Fredric D. Price ----------------------------------- Fredric D. Price President and Chief Executive Officer /s/ Benjamin Sporn ----------------------------------- Benjamin Sporn, Secretary EX-23.01 4 CONSENT OF KPMG PEAT MARWICK LLP Exhibit 23.01 Consent of KPMG Peat Marwick LLP The Board of Directors AMBI Inc. We consent to incorporation by reference in the Registration Statement No. 33-73312 on Form S-3, Registration Statement No. 333-9801 on Form S-3, Registration Statement No. 33-4822 on Form S-3, Registration Statement No. 333-2507 on Form S-3, Registration Statement No. 333-29829 on Form S-3, and Registration Statement No 333-35897 on Form S-3 of AMBI Inc. of our report dated July 25, 1997, relating to the consolidated balance sheets of AMBI Inc. and subsidiary as of June 30, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended June 30, 1997, which report appears in the June 30, 1997 annual report on Form 10-K of AMBI Inc. New York, New York KPMG Peat Marwick LLP September 26, 1997 EX-27 5 FINANCIAL DATA SCHEDULE
5 YEAR JUN-30-1997 JUL-01-1996 JUN-30-1997 8615 0 494 104 606 10015 1464 382 12754 2960 2184 0 0 94 7516 12754 10356 11280 4363 26880 0 0 142 (6661) 152 (6813) 0 0 0 (6813) (.37) (.37)
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