-----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, GBJD4GJynAWcnKEeTZHTN03Va33BbLqCizvkOyXom1j3eWsLc2onEPkS3x5q/4tM RUMHVenRhnmp1XViuOqQbQ== 0000889812-98-002432.txt : 19981012 0000889812-98-002432.hdr.sgml : 19981012 ACCESSION NUMBER: 0000889812-98-002432 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19981009 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: 98723175 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, 1998 Commission File Number 0-14983 AMBI INC. (Exact Name of Registrant as Specified in its Charter) New York 11-2653613 (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) 4 Manhattanville Road Purchase, New York 10577-2197 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including Area Code: (914) 701-4500 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 $9,821,611 as of October 6, 1998. The number of shares outstanding of Registrant's Common Stock as of October 6, 1998: 25,468,145. FORM 10-K REPORT INDEX
10-K Part and Item No. Page No. PART I Item 1 Business 3 Item 2 Properties 11 Item 3 Legal Proceedings 12 Item 4 Submission of Matters to a Vote of Security Holders 13 PART II Item 5 Market Price of Registrant's Common Equity and Related Stockholder Matters 14 Item 6 Selected Financial Data 15 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 16 Item 8 Financial Statements and Supplementary Data 24 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 24 PART III Item 10 Directors and Executive Officers of the Registrant 25 Item 11 Executive Compensation 30 Item 12 Security Ownership of Certain Beneficial Owners and Management 37 Item 13 Certain Relationships and Related Transactions 38 PART IV Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K 40
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: Nutrition Products and Pharmaceutical 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. 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 four years following acquisition. 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 ("SSBT") and the remainder came from internal working capital. The loans bear interest at SSBT's prime rate plus one percent and are due June 30, 2000. The products acquired from Nutrition 21 constituted a large majority of the Company's revenues during the fiscal year ended June 30, 1998. On September 17, 1998, the Company entered into a strategic alliance with American Home Products Corporation ("AHP") for retail distribution of the Company's proprietary nutrition products. As part of the alliance, Whitehall-Robins Healthcare Division was granted an exclusive license to sell the Company's Cardia(R) Salt Alternative under the "Cardia" trademark in retail markets in the United States and received a first negotiation option for exclusive rights and licenses for additional nutrition products for retail distribution in the United States. In addition, AHP agreed to make equity investments in newly issued shares of the Company's common stock. On October 8, 1998, AHP paid $1.15 per share, or a total of $4 million, for 3,478,261 shares of newly issued common stock. Also on October 8, 1998, the Company 3 received an upfront payment of $1 million from AHP for the rights and options granted under the agreement. The Company retained the exclusive rights to market its products in both direct response and ingredient channels. 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, and 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. 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 conducts clinical studies to further strengthen the medical and scientific rationale for these products. Ingredient Products The Company develops, manufactures, and markets essential trace elements used primarily as ingredients in nutritional supplements. Currently, the Company's primary product is chromium picolinate, which is protected by six patents which cover its composition and 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. The Company 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 expire in 2009. Chromium picolinate is marketed by the Company under its registered trademark Chromax. In addition, the Company also markets zinc picolinate and selenium formulations. The Company 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. The Company has its products manufactured and formulated to its specifications by contract manufacturers as bulk raw materials. The Company 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 Company's 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. The Company has approximately 50 customers. During the year ended June 30, 1998, Leiner Health Products accounted for 10% of revenues. In 1996, chromium picolinate was approved by the U.S. Food and Drug Administration 4 ("FDA") for use as a supplement in animal feed for swine. In addition to sales for human consumption, the Company sells chromium picolinate for use in certain animal feed applications. The Company is developing new micro-nutrients such as arginine silicate and magnesium taurate for which the Company has patent protection, and may commercialize these or other products. Retail Products 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 United States. The Company began selling the salt alternative in April 1996 under the trademark Cardia(R) Salt Alternative initially 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. For example, two separate studies released in April and May 1997, respectively, compared the use of Cardia Salt Alternative and regular salt in hypertensive patients and found reduced blood pressure in the patients who used Cardia Salt Alternative. On September 17, 1998, the Company licensed Cardia(R) Salt Alternative to AHP for sale in U.S. retail markets. See "The Company." The Company is evaluating other proprietary Nutrition Products in the areas of cardiovascular disease, diabetes, infectious disease, and gastrointestinal disorders, which will be sold under the Company's CaridaNutrition(TM) umbrella brand, subject to AHP obtaining licenses for the use of the CardiaNutrition(TM) brand for retail sales. Pharmaceutical Products 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 Company has determined that it does not have the resources necessary to take nisin and lysostaphin from the development stage through regulatory filings and ultimately to the marketplace, should a product be proven to be safe and efficacious. Therefore, the Company is 5 continuing to seek corporate partners to develop and commercialize nisin and lysostaphin as treatments for serious infections. The Company has identified the programs for nisin to treat colon infections and lysostaphin to treat endocarditis as the ones with the shortest development timetables and has concentrated the majority of its pharmaceutical resources on these drug candidates. Two other programs, an oral form of nisin for the eradication of the bacteria that cause peptic ulcer disease, and an injectable form of nisin for the treatment of systemic, hospital-acquired infections, have been given lower development priorities. See "Pharmaceutical Partners." 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. Currently, the Company's nisin formulations for treatment of ulcers have been successfully tested for safety in human studies outside the United States. Human studies have also been successful in confirming that the Company's nisin formulations can be delivered orally to the colon for treatment of infections of the colon. None of the human clinical studies have tested for efficacy. The use of nisin and lysostaphin to treat hospital-acquired infections is still being investigated in animal studies. After the effectiveness of a treatment has been successfully demonstrated in human clinical studies, an application for final approval is submitted for review by the FDA. Such review can take one or more years and can result in the requirement that further studies be undertaken. The Company does not anticipate that any of its pharmaceutical products will be available for marketing before late 1999. See also "Governmental Regulation." Infections of the colon - The Company 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, the Company announced results of a human study demonstrating that nisin was successfully delivered orally, in the form of a tablet, to the colon. In November 1997, the Company received clearance from the U.S. FDA to begin human clinical testing of a novel nisin tablet for infections of 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. Ulcer - The Company 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. 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. 6 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. In September 1998, the Company announced results of a study demonstrating that lysostaphin successfully treated endocarditis caused by MRSA-VISA bacteria in rabbits. Mastitis infections -- The Company developed a moistened towel using a nisin-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 in April 1996. 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 Pharmaceuticals, LP) to develop and market in the U.S. drug products based on nisin for the treatment of gastrointestinal disorders, including ulcers. In view of the lower priority now assigned by the Company to treatment of such gastrointestinal disorders, the Company is evaluating whether to continue the development effort. In March 1996, the Company entered into an exclusive Agreement with Nippon Shoji Kaisha, Ltd. ("NSK") 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. The agreement provides for the Company to perform certain research and development activities and to provide semi-annual reports thereon to NSK. NSK provides the Company with research funds for a period of three years, milestone payments and royalties, and agrees to make certain purchases of raw materials from the Company. In connection with the agreement, NSK invested $2 million in the Company's Common Stock and loaned the Company another $2 million which can be repaid, at the Company's option, with the Company's Common Stock upon meeting certain milestones. The Company has advised NSK that one milestone, FDA acceptance of its Investigational New Drug application for diseases of the colon, has been met and as a result, the Company intends to repay $1 million of the loan with its Common Stock and $1 million with funds generated from operations. Governmental Regulation Healthcare 7 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'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. The Company does not have any pharmaceutical products which have completed this process. All of these products are in various stages of preclinical or clinical development. There can be no assurance that the Company's proposed drug products will prove to be safe and effective under these regulatory procedures. See also "Pharmaceuticals." Depending upon the ingredients of a specific product, some nutrition products can be marketed in the U.S. under DSHEA or the Orphan Drug Act. The Company's nutrition products fall in regulatory categories that do not require FDA approval for marketing, but are subject to monitoring by the FDA. In addition to FDA regulations, the Federal Trade Commission ("FTC") regulates product advertising claims. Prior to the Company's acquisition of Nutrition 21, Nutrition 21 and the FTC entered into a consent agreement, which culminated in an FTC order that, among other things, requires that claims for dietary supplements be supported by competent and reliable scientific evidence. The order requires that Nutrition 21 advise its customers who resell chromium picolinate to the public not to make claims which are not supported by competent and reliable scientific evidence. Research and Development 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. In addition, the Company conducts research and development to develop and expand uses of its Pharmaceutical Product candidates, to identify new antibacterial products, and to improve the production processes for the Company's antibacterial products. During the fiscal year ended June 30, 1998, 1997 and 1996, approximately $2.7 million, $4.8 million and $2.3 million were spent on research and development by the Company. Proprietary Rights Cardia is a registered trademark used by the Company in the U.S., Wipe Out is a trademark of the Company with applications for registration filed in the U.S. and other countries, and Ambicin (which is the brand name for a nisin formulation used in a mastitis preventative) is 8 a registered trademark of the Company 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 is developing other nutrition products to be sold under its CardiaNutrition trademark. 9 Nutrition Patents 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. The USDA license grants Nutrition 21 the exclusive right to manufacture, use, and sell chromium picolinate in the United States. The Company also owns U. S. patents expiring in 2009 relating to the use of chromium picolinate for reducing hyperglycemia and stabilizing the level of serum glucose, for undesirable levels of blood serum lipids, and increasing lean body mass and reducing body fat. The Company owns other patents relating to, among other things, chromium/biotin treatments for reducing hyperglycemia and stabilizing the level of serum glucose, magnesium taurate treatments of cardiac conditions, and arginine-silicate-inositol complexes for preventing or inhibiting atherosclerosis. The Company also has pending patent applications on other nutrition 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. Pharmaceutical Patents The Company also owns more than 170 patents relating to, among other things, the expression and production of proteins by recombinant Bacillus strains; plasmid vectors and methods of construction; 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. 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. The licenses include exclusive rights under a basic patent, which expires in 2010, for making recombinant lanthocins. 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, and 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. 10 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. Manufacturing The Company's products are manufactured for the Company by subcontractors who manufacture to the Company's specifications and use the Company's manufacturing technology. The Company subcontracted manufacture of nisin to 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. The Company believes that these manufacturers can be readily replaced, except that there may be a delay in commencing nisin production at another facility. However, the Company believes that it has adequate inventory of product, including nisin, to accommodate a suspension in the manufacture of any of its products. There are numerous sources of supply for all of the raw materials used in the manufacture of the Company's products. Marketing and Sales Selling Products in Retail Channels In September 1998, the Company announced that it had entered into a strategic alliance with the Whitehall-Robins Healthcare Division of American Home Products ("AHP") under which AHP is licensed to sell the Company's Cardia(R) Salt Alternative under the "Cardia" trademark in retail markets in the United States. AHP also received options to obtain exclusive rights and licenses for additional Company nutrition products for retail distribution in the U.S. and Canada. Selling Products Through Direct Response Channels The Company is building CardiaNutrition(TM) brand awareness principally through direct response marketing and selling systems. Currently, the Company is testing a variety of direct response distribution systems including direct mail, the Internet, and television shopping channels. Direct response systems are highly targeted to individual consumers and do not require the establishment of large selling and support organizations. In addition, these distribution systems facilitate collection of data on customer demographics and purchasing characteristics which assist the Company in its plans to develop new products and refine marketing programs. AMBI is test-marketing Heart's Content, a magazine-format guide designed to assist and inform consumers on issues involving cardio-fitness. The first issue contains in-depth information, services, and products for maintaining good cardiovascular health. Each issue of 11 Heart's Content will also contain advertisements for nutritional products that can be purchased by phone, fax, mail, or at the Company's forthcoming Internet site www.Cardiautrition.com. Selling Products as Ingredients Currently, the Company's revenues are primarily generated from the sale of ingredients products including Chromax(R) chromium picolinate, Selenomax(R) selenium, and Zinmax(R) zinc picolinate. This business is growing and new products are being evaluated. The Company sells the ingredients to many customers throughout the U.S. for incorporation into their product lines. Customers include Leiner Health Products, Twin Labs, Weider, Rexall Sundown, General Nutrition Centers, and other large food and dietary supplement marketers. Chromium is an essential trace mineral needed for carbohydrate, protein and fat metabolism and for the normal function of insulin. According to the USDA, it is more likely to be in short supply in the average American diet than any other vitamin or mineral. The Company is the only licensed supplier of chromium picolinate (a patented composition) in the United States; at the retail level, sales of chromium picolinate are estimated to be more than $125 million. Employees As of June 30, 1998, the Company had 40 full-time employees, of whom six were executive employees, 18 were administrative, nine were engaged in marketing and sales, and seven were involved in research, process and product development, and manufacturing. The Company does not have a collective bargaining agreement with any of its personnel and considers its relationship with its employees to be satisfactory. Item 2. PROPERTIES In September 1998, the Company moved its headquarters to 4 Manhattanville Road, Purchase, New York 10577-2197 (Tel: 914-701-4500, Fax: 914-696-0860). Pursuant to a seven and one-half year sublease entered into September 1998, the Company is paying an annual rent for its headquarters location in the amount of $589,420, which sum is due in monthly installments. The rent is subject to annual increases over the term of the lease based on increases in certain building operating expenses. The Company is also relocating its laboratories to a nearby facility. The Company maintains a sales office at 1010 Turquoise Street, San Diego, California 92109 (Tel: 619-488-1021, Fax: 619-488-7316). Pursuant to a lease which expires in April 2002, the annual rent on this office is $35,203. 12 13 Item 3. LEGAL PROCEEDINGS The Company is a defendant in a lawsuit brought in 1997 in the United States District Court for the Southern District of New York (Civil Action No. 97 Civ.5802 (BDP)) by RCN Products, Inc. ("RCN"). RCN sells a product called "NoSalt - The NO Sodium Salt Alternative." RCN is suing under the Lanham Act and New York General Business Law, alleging that the term "Salt Alternative" used by AMBI to describe its Cardia(R) product, amounts to unfair competition by leading consumers to believe that the Cardia product is salt free. RCN is seeking to enjoin the Company from using the term "Salt Alternative" and unspecified damages. The Company believes that the Cardia label clear states that the product is not salt free. The label states, among other things, that the product contains 54% less sodium than table salt, and lists sodium chloride as an ingredient. The Company is contesting RCN's claim, and in the opinion of management, the RCN claim is without merit. The cost of defending this lawsuit, except for a $100,000 deductible which has been expensed by the Company, is being reimbursed by the Company's insurers. 14 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the annual meeting of shareholders of the Company held on March 31, 1998, the following actions were taken: Holders of 19,269,306 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 99,329 shares of common stock, and 36,738 abstained. The following persons were elected as directors by the votes indicated: Name For Against - -------------------------------------------------------------------------------- Audrey T. Cross 19,129,986 257,387 Robert Flynn 19,134,386 270,987 Sheldon G. Gilgore 19,134,386 270,987 Marvin Moser 19,134,386 270,987 Robert E. Pollack 19,134,386 270,987 Fredric D. Price 19,134,386 270,987 15 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 were traded on Nasdaq Small Cap Market under the symbol "AMBIW", until they expired on November 30, 1997. The Company has outstanding warrants to purchase 1,298,225 shares of common stock at June 30, 1998. These warrants are not publicly traded. 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 the high and low sales prices as reported by the Nasdaq National Market for the Common Stock, and bid prices quoted for the Warrants. The 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 Ended High Low High Low - -------------------------------------------------------------------------------- September 30, 1996 $6.625 $3.250 $2.375 $1.125 December 31, 1996 $4.25 $2.188 $1.500 $0.50 March 31, 1997 $4.75 $2.688 $1.500 $0.50 June 30, 1997 $3.063 $1.750 $0.750 $0.125 September 30, 1997 $3.375 $1.938 $0.313 $0.188 December 31, 1997* $4.00 $1.750 $0.281 $0.016 March 31, 1998 $2.25 $1.25 June 30, 1998 $2.188 $1.188
* Warrants expired November 30, 1997 16 Item 6. SELECTED FINANCIAL DATA The following table summarizes selected consolidated financial data that are qualified by the more detailed financial statements included herein. Figures are stated in thousands of dollars, except per share amounts.
Year ended June 30 1998(2) 1997(1) 1996 1995 1994 - ------------------------------------------------------------------------------------------------- Sales $20,758 $11,280 $16,022 $11,726 $10,156 Gross Profit 17,802 6,282 9,669 8,468 6,630 Operating Income/(Loss) 1,467 (16,635) (4,621) 440 1,815 Income/(Loss) before taxes(3) 1,168 (6,661) (4,434) 537 1,941 Tax Expense 116 152 285 254 185 Net Income/(Loss) 1,052 (6,813) (4,719) 283 1,756 Diluted Earnings /(Loss) per Share (0.04) (0.38) (0.27) 0.01 0.09 Selected Balance Sheet Data: 1998 1997(1) 1996 1995 1994 - ------------------------------------------------------------------------------------------------- Working Capital $(2,269) $7,055 $14,812 $7,333 $7,352 Total Assets 20,735 12,754 23,367 13,788 11,808 Total Liabilities 10,437 5,144 6,221 3,163 1,544 Long Term Obligations and Redeemable Preferred Stock 1,543 2,184 4,408 2,267 1,500 Stockholders' Equity $10,298 $7,610 $15,646 $9,125 $8,764
(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 only for the full year (see Item 13-Certain Relationships and Related Transactions). (2) Consolidated Statement of Operations includes the operations of Nutrition 21 from August 11, 1997, the date of acquisition. (3) Includes gain of $9.7 million on sale of Aplin & Barrett in fiscal 1997. The Company has not paid a cash dividend to its public shareholders on its Common 17 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 Historically, the Company's revenues have been attributable primarily to sales of its own products. The Company has acted in the past as selling agent for certain dairy starter culture products of affiliated and non-affiliated companies but discontinued such actions on September 11, 1996. Since the acquisition of Nutrition 21 on August 11, 1997, the Company's revenues have been primarily derived from the sale of nutrition products to manufacturers of vitamin and mineral supplements and to a lesser extent from the sale of Wipe Out Dairy Wipes and Cardia Salt Alternative. The Company has also received royalty income from users of its patented technology and milestone payments from research partners. Cost of goods sold 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 acquisition-related goodwill and intangible assets, and amortizes them over periods of one to twenty years. Acquisitions and Divestitures 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 in cash 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 four years following acquisition. The Company will also pay royalties to the sellers on sales of certain patented products. Of the $10 million cash paid at closing, $3.3 million was provided pursuant the Loan Agreement with SSBT and the remainder came from internal working capital. The loan bears interest at SSBT's prime rate plus one percent and is due June 30, 2000. The acquisition of Nutrition 21 was accounted for under the purchase method. Based 18 upon the allocation of purchase price, the transaction resulted in $10.7 million of identifiable intangible assets, primarily patents and trademarks, and $1.0 million of goodwill. These amounts include approximately $2.5 million of identifiable intangible assets and $.2 million of goodwill recorded in connection with amounts due under a contingency consideration clause in the Nutrition 21 purchase agreement. As additional contingency consideration is earned, the Company will allocate these amounts in accordance with the original purchase price allocation. The Company is amortizing the goodwill over 15 years and amortizing the identifiable intangible assets over their useful economic lives, which range from three to 15 years. The Company completed the sale of A&B to Burns Philp on December 12, 1996. As a result, the operations of A&B are included in the financial statements through that date. Key terms of the transaction included the payment to the Company of $13.5 million in cash and the return of 2.42 million shares of the Company's common stock held by Burns Philp. In addition, Burns Philp provided the Company 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. As of June 30, 1998, the Company has not utilized the revolving line of credit from Burns Philp. The Company recorded a gain of $9.7 million in fiscal 1997 related to the sale of A&B. At June 30, 1998, Burns Philip owns approximately 37% of the Company's Common Stock. See "Item 12 -Security Ownership of Certain Beneficial Owners and Management." Results of Operations The Company has an accumulated deficit due primarily due to historical operating losses, 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). Three years ended June 30, 1998 Revenues Revenues were $20.8, $11.3 and $16.0 million in the year ended June 30, 1998 ("fiscal 1998"), the year ended June 30, 1997 ("fiscal 1997"), and the year ended June 30, 1996 (fiscal 1996"), respectively, representing an increase of 84% in fiscal 1998 from fiscal 1997 and a decrease of 30% in fiscal 1997 from fiscal 1996. The increase in revenue of $9.5 million in fiscal 1998 from fiscal 1997 is primarily attributable to the acquisition of Nutrition 21 which generated $18.6 million in revenues in fiscal 1998 but was not included in the Company's financial statements for fiscal 1997, as it was acquired by the company on August 11, 1997. Fiscal 1997 results included $6.0 million of revenue from A&B but no revenue was recorded for A&B in 1998 as this business was sold on December 12, 1996. Sales of other products decreased in fiscal 1998 from fiscal 1997 by a net 19 amount of $3.5 million, primarily due to a change in marketing and distribution strategy for Cardia Salt Alternative. Revenues decreased to $11.3 million in fiscal 1997 from $16.0 million in fiscal 1996, a reduction of $4.7 million. Of the total decline, $7.4 million was attributable to reduced revenue from A&B due to the divestiture of the business on December 12, 1996. A further $0.9 million decline was due to lower receipts of milestone and research payments from third party research collaborators. These declines were partially offset by sales of new products launched in fiscal 1996 which increased $3.6 million during the year primarily attributable to increases in Cardia Salt Alternative ($2.9 million) and Wipe Out Dairy Wipes ($.7 million). Cost of Goods Sold Cost of goods sold were $3.0, $5.0 and $6.4 million in fiscal 1998, fiscal 1997, fiscal 1996, respectively, representing a decrease of 41% in fiscal 1998 from fiscal 1997 and a decrease of 21% in fiscal 1997 from fiscal 1996. Cost of goods sold as a percentage of revenue was 14%, 44% and 40% in fiscal 1998, fiscal 1997 and fiscal 1996, respectively. The reduction in cost of goods sold in fiscal 1998 in absolute amount and percentage of revenue is attributable primarily to a change in the sales mix from fiscal 1997. Nutrition 21 products, which comprised a large majority of fiscal 1998 revenue, have an average cost of goods of approximately 10%. In fiscal 1997, cost of goods sold on A&B products, which comprised 53% of total revenue, were approximately 40% of revenue. In both fiscal 1998 and fiscal 1997, the Company's other products had cost of goods ranging from 50% to 90% of revenue. Cost of goods sold declined 21% in fiscal 1997 from the fiscal 1996. As a percentage of revenues, it increased to 44% in fiscal 1997, compared to 40% in fiscal 1996, due principally to the higher costs associated with production of animal health products. Selling, General and Administrative Expenses Selling, general and administrative expenses ("SG&A") were $12.1, $17.3 million, and $11.2 million in fiscal 1998, fiscal 1997 and fiscal 1996, respectively, representing a decrease of 30% in fiscal 1998 from fiscal 1997 and an increase of 54% in fiscal 1997 from fiscal 1996. SG&A as a percentage of revenue was 58%,153%, and 70% in fiscal 1998, fiscal 1997, and fiscal 1996, respectively. The main component of the decrease in SG&A in fiscal 1998 was a decrease in marketing and sales expenditures of $6.3 million related to reductions and refocusing of marketing and promotional expenses in support of Cardia Salt Alternative and Wipe Out Dairy Wipes, offset somewhat by increased marketing and promotional expenses related to Nutrition 21. The main component of the increase in SG&A in fiscal 1997 was marketing and sales expenditures incurred in support of the launch of two new products: Cardia Salt Alternative and 20 Wipe Out Dairy Wipes. SG&A costs principally representing marketing and promotional expenditures attributable to Cardia Salt Alternative were $10.3 million and $3.1 million in fiscal 1997 and fiscal 1996, respectively. SG&A costs representing marketing and promotional expenditures attributable to Wipe Out Dairy Wipes were $1.3 million and $0.7 million in fiscal 1997 and fiscal 1996, respectively. Research Expenses Research and development expenses were $2.7, $4.8 million, and $2.3 million, in fiscal 1998, fiscal 1997, and fiscal 1996, respectively, representing a decrease of 44% in fiscal 1998 from fiscal 1997 and an increase of 111% in fiscal 1997 from fiscal 1996. Research and development expenses as a percentage of revenue were 13%, 43% and 14% in fiscal 1998, 1997, and 1996, respectively. The decrease in expenses in fiscal 1998 from fiscal 1997 is due to the Company's decision to reduce research activities related to the infectious disease drug business. The increases in expenses in fiscal 1997 and fiscal 1996 were related to added spending to support ongoing programs. Research spending in fiscal 1997 increased $1.7 million for pharmaceutical products and $0.8 million for Cardia Salt Alternative. Research spending in fiscal 1996 increased $0.5 million for pharmaceutical products. Operating Income/(Loss) The Company had operating income of $1.5 million in fiscal 1998 compared to operating losses of $16.6 million in fiscal 1997 and $4.6 million in fiscal 1996. The Company became profitable in fiscal 1998 due to revenues from Nutrition 21 and by reducing marketing and sales expenses as well as research and development costs. The $12.0 million increase in operating loss in fiscal 1997 over fiscal 1996 was a result of increased expenditures in the areas of SG&A and research referred to above, and reduced revenue due primarily to the sale of A&B. A&B contributed operating profits of $0.5 million and $3.4 million in fiscal 1997 and fiscal 1996, respectively. Income/(Loss) Before Income Taxes The Company had income before income taxes of $1.2 million in fiscal 1998, compared with a loss before income taxes of $6.7 million in fiscal 1997 (or a loss of $16.3 million from continuing operations excluding a gain of $9.7 million on the sale of A&B). The Company's income before income taxes is a result of revenues from Nutrition 21 and a reduction in expenses relating to marketing and sales as well as research and development. 21 The Company had a loss before tax expense of $6.7 million in fiscal 1997 (including the $9.7 million gain referred to above), 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 due to the sale of A&B. Tax Expense The Company had tax expense of $0.1 million in fiscal 1998 primarily due to state income taxes and federal alternative minimum taxes. The Company had a tax expense of $.2 million in fiscal 1997, despite having a loss before tax expense, because of profits generated from A&B, its UK subsidiary, prior to the sale on December 12, 1996. Refer to Note 15 of the Notes to the Consolidated Financial Statements for a further analysis of taxes. Basic and Diluted Loss Per Share In fiscal 1998, the Company reported a basic and diluted loss per share of $0.04 despite recording net income of $1.1 million. The calculation of basic and diluted loss per share includes deductions from net income for accrued preferred dividends ($.4 million) as well as a conversion discount on preferred stock previously issued by the Company ($1.5 million) which result in a loss per share. It is anticipated that the accrual of preferred stock dividends will continue to impact basic and diluted loss per share calculations. In addition, further conversion discount will be recorded if the Company's common stock price exceeds $3.00 per share. Fourth Quarter Results Revenues in the fourth quarter of fiscal 1998 were $6.4 million, an increase of $5.6 million from the corresponding quarter of fiscal 1997. This increase was primarily due to revenues from the sale of nutrition products from Nutrition 21. The Company's revenues from products other than Nutrition 21 were approximately $1.4 million, an increase of $0.6 million or 75% as compared to the corresponding quarter of fiscal 1997. 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 22 As of June 30, 1998, the Company had a working capital deficit of $2.3 million. Cash and cash equivalents were $2.1 million. The Company continues to take steps to improve its working capital position by increasing sales from existing businesses and reducing operating expenses. With the closing of the AHP transaction (discussed below), the Company has restored a working capital surplus. On June 30, 1997, working capital was $7.1 million, which included cash and cash equivalents of $8.6 million. The $7.1 million of working capital came primarily from the sale of A&B in December 1996. A substantial portion of the cash on hand was used in the acquisition of Nutrition 21 in August 1997. On September 17, 1998, the Company entered into a strategic alliance with American Home Products Corporation ("AHP") for retail distribution of the Company's proprietary nutrition products. As part of the alliance, Whitehall-Robins Healthcare Division was granted an exclusive license to sell the Company's Cardia(R) Salt Alternative under the "Cardia" trademark in retail markets in the United States and received a first negotiation option for exclusive rights and licenses for additional nutrition products for retail distribution in the United States. In addition, AHP agreed to make equity investments in newly issued shares of the Company's common stock. On October 8, 1998, AHP paid $1.15 per share, or a total of $4 million, for 3,478,261 shares of newly issued common stock. Also on October 8, 1998, the Company received an upfront payment of $1 million from AHP for the rights and options granted under the agreement.. The Company retained the exclusive rights to market its products in both direct response and ingredient channels. As of June 30, 1998, the Company had a term loan balance of $2.4 million with SSBT. The Company had originally borrowed $3.3 million from SSBT to fund the acquisition of Nutrition 21. At December 31, 1997, the Company refinanced the then existing $2.8 million balance of the loan. Under the revised terms, the Company received a $2.8 million term loan which is being amortized through monthly payments of principal and interest over a 30 month period at an interest rate equal to the prime rate plus one percent. SSBT also continues to provide a revolving credit line, based upon the level of inventory and receivables, of up to $4 million. All amounts owing under the term loan and the revolving credit line are due by June 30, 2000, the expiration date of the credit line. The Company had a zero balance under the revolving credit line both as of June 30, l998 and as of the date of filing of this Form 10K. The Company reinvested the proceeds from the sale of A&B into the acquisition of Nutrition 21, which has thus far generated revenues greater than those lost as a result of the sale of A&B. In connection with the sale of A&B, Burns Philp provided the Company with a revolving credit line 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, l999. Borrowings under this credit line will accrue interest at a rate equal to the prime rate set from time to time by Citibank. To date the Company has not borrowed any amounts under this credit line, nor is it determinable at this time whether the future performance of the food preservative business would result in the forgiveness of any debt. 23 With respect to the acquisition of Nutrition 21, at June 30, 1998 the Company recorded on its balance sheet a then current liability of $2.7 million in respect of a contingent payment due in September 1999 to the former owners of Nutrition 21 as provided for in the acquisition agreement. On September 30, l998 the Company paid the former owners of Nutrition 21 approximately $3.3 million representing the full amount of the contingent payment due for the 12 month period September 1997 through August 1998. The Company utilized cash generated from operations to satisfy the contingent payment obligation. In April 1998, the Company replaced royalty agreements with two individuals who assisted the prior owners of Nutrition 21 in the development of chromium picolinate, with consulting agreements of equal term. Each consulting agreement provides for the retention by each individual of 100,000 shares of common stock issued under the prior royalty agreements and for cash payments totaling $0.7 million (or $1.4 million for both individuals) to be paid quarterly through August 2000. Payments under the prior royalty agreements were to be made in additional common stock dependent upon future net revenues from chromium picolinate. (Under the consulting agreements, cash payments totaling $200,000 were made in fiscal 1998 and total future payments will be as follows: $450,000 in fiscal 1999, $650,000 in fiscal 2000, and $100,000 in fiscal 2001, for a total of $1.4 million as noted above). The cost of the common stock issued to the individuals is being amortized over the life of the agreements. In conjunction with the relocation of the Company's headquarters operations in September 1998 to Purchase, NY, the Company received $0.4 million when it vacated the prior premises. The Company is utilizing those funds to pay the costs associated with the relocation and does not expect to use funds from operations for this purpose. The Company is also relocating its laboratory facilities which were formerly in Tarrytown, NY. The total annual rent for the new facilities is less than that for the prior facilities. In March 1996, the Company entered into an agreement with NSK, under which NSK agreed to provide research funding and equity and debt financing in return for exclusive rights to certain nisin based drug products in Japan and certain other Asian countries. In conjunction with that agreement, NSK invested $2 million in the Company's Common Stock and loaned the Company another $2 million which can be repaid, at the Company's option, with the Company's Common Stock upon meeting certain milestones. The Company has advised NSK that one milestone, FDA acceptance of its Investigational New Drug application for diseases of the colon, has been met and as a result, the Company intends to repay $1 million of the loan with its Common Stock and $1 million in cash from operating activities. The loan is payable in full in March 1999. The Company's primary sources of financing are cash generated from continuing operations and the SSBT revolving line of credit. The availability under the SSBT revolving line of credit is based on the Company's accounts receivable and inventory. At June 30, l998, the Company had a zero balance under this line. The Company believes that cash generated from operations and under the line of credit will provide sufficient liquidity to fund operations. The 24 Company continues to eliminate expenditures that are not critical to the process of generating sales. However, future acquisition activities and any increases in research and development expenses over the present level may require additional funds. Also, the Company is obligated to repay the borrowings to SSBT in June 2000. The Company intends to seek any necessary additional funding through arrangements with corporate collaborators, through public or private sales of its securities, including equity securities, or through bank financing arrangements. The Company does not currently have any specific arrangements for additional financing and there can be no assurance that additional funding will be available at all or on reasonable terms. Year 2000 The Company is analyzing the nature and extent of work required to make its products, systems and infrastructure Year 2000 compliant. The Company uses a number of computer software programs and operating systems in its internal operations, including applications in financial business systems, product development, marketing and various other administrative functions. To the extent that these software applications contain source code that is unable to appropriately interpret the upcoming year "2000", some level of modification or possibly replacement of such applications may be necessary. The Company is also asking its suppliers to determine whether there are any Year 2000 problems which could affect the Company, and to provide assurances that they will not permit a Year 2000 problem to interfere with performance under agreements with the Company. To the extent that the Company is uncertain as to its suppliers compliance, it may choose to increase certain key product inventories during 1999 to assure continuity of operations. The Company continues to evaluate the estimated costs associated with its Year 2000 compliance efforts. While these efforts involve some additional costs, the Company believes, based on available information, that it will be able to manage it total Year 2000 transition without material adverse effect on its business, financial condition, or operating results. Recently issued accounting standards The Company adopted, effective January 1, 1998, SFAS No. 128 "Earnings Per Share." 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. 25 In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive Income" and SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 130 establishes standards of reporting and display of comprehensive income and its components in a full set of general purpose financial statements. SFAS No. 131 supersedes SFAS No. 14 "Financial Reporting for Segments of a Business Enterprise", but retains the requirement to report information about major customers. In February 1998, the FASB issued SFAS No. 132 "Employers Disclosures About Pensions and Other Post-Retirement Benefits." These three statements are effective for financial statements for annual periods beginning after December 15, l997. It is not expected that the adoption of these statements will have a material impact on the Company's financial position or operating results. In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities." These three statements are effective for all fiscal quarters in fiscal years beginning after June 15, 1999. It is not expected that adoption of this statement 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. 26 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 and Age Company Position - -------------------------------------------------------------------------------------- Fredric D. Price (52) 1994 President, Chief Executive Officer, and Director Robert E. Flynn (65) 1996 Chairman of the Board P. George Benson, PhD (52) 1998 Director Lawrence W. Chakrin, PhD (59) 1998 Vice President, Product Development Audrey T. Cross, PhD (53) 1995 Director Jonathan de la Harpe, PhD (53) 1997 Vice President, Technical Operations Alan V. Gallantar (40) 1998 Treasurer and Controller Victor Moreno, PhD (60) 1997 Vice President, and President, Nutrition 21 Steven Morvay (44) 1998 Vice President, Marketing and Sales Marvin Moser, MD (74) 1997 Director Robert E. Pollack, PhD (58) 1995 Director Gerald A. Shapiro (51) 1998 Vice President, Finance and Administration and Chief Financial Officer Benjamin T. Sporn (60) 1986 Senior Vice President, General Counsel and Secretary
27 Fredric Price has been President, Chief Executive Officer and a Director of the Company since September 1994. 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. He has a BA from Dartmouth College and an MBA from the Wharton School of the University of Pennsylvania. Robert E. Flynn was elected a Director of the Company in October 1996 and Chairman of the Board of Directors in October 1997. 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. P. George Benson, PhD, was elected a Director of the Company in July 1998. Dr. Benson is Dean of the Terry College of Business and holds the Simon S. Selig, Jr. Chair for Economic Growth at the University of Georgia. Dr. Benson was previously the Dean of the Faculty of Management at Rutgers University and a professor of decision sciences at the Carlson School of Management of the University of Minnesota. In 1997, he was appointed by the U.S. Secretary of Commerce to a three year term as one of the nine judges for the Malcolm Baldrige National Quality Award. In 1996, Business News New Jersey named Dr. Benson one of New Jersey's "Top 100 Business People". He received a BS from Bucknell University and a PhD in decision sciences from the University of Florida. Lawrence W. Chakrin, PhD, was appointed Vice President, Product Development, in March 1998. From 1990 until 1998, he was head of LWC Consulting, a company which provided consulting services to the biotechnology and pharmaceutical industries. Previously, he served as President of The University City Science Center from 1988 to 1990, and was head of the Sterling Drug Company's Worldwide Research and Development Group from 1980 to 1988. Dr. Chakrin has more than 100 publications and several patented inventions. He received a BS in Pharmacy from Long Island University, Brooklyn College of Pharmacy and a PhD in Pharmacology from the University of Minnesota. Audrey T. Cross, PhD, was elected a Director of the Company in January 1995. Dr. 28 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 BS in dietetics, a Master of Public Health in nutrition and a PhD from the University of California at Berkeley, and a JD from the Hastings College of Law at the University of California at San Francisco. Jonathan de la Harpe, PhD, was appointed Vice President, Technical Operations, of the Company in February 1998. Dr. de la Harpe has been on the staff at AMBI since 1989, holding positions as Group Leader, Analytical and Biochemistry; Program Manager; Senior Manager, Product Development; and Director of Technical Operations, Pharmaceutical Products. In the years 1981 to 1988, Dr. de la Harpe held positions as Post-doctoral Fellow and later Research Associate at The Rockefeller University, and as Assistant Professor at Cornell University Medical College. During this period, Dr. de la Harpe also held positions as a Visiting Scientist at Genentech Inc., and Scientist at the Friedrich Miescher Institute in Basel, Switzerland. Dr. de la Harpe holds a BSc (Hons) and PhD from the University of Cape Town, South Africa. Alan Gallantar was appointed Treasurer and Controller of the Company in March 1998. For the five years prior to joining the Company, he was Chief Financial Officer of Bradley Pharmaceuticals, Inc. Previously, he held a series of increasingly important financial positions with PaineWebber, Inc. and the Chase Manhattan Bank, N.A. He holds a BA from Queens College and is a Certified Public Accountant. Victor Moreno, PhD, was appointed Vice President of the Company in February 1998. Dr. Moreno is currently and has been for the four years prior, President of Nutrition 21. From 1991 to 1993, he was Vice President responsible for worldwide research and development for Mead Johnson Nutritional Group, a division of Bristol Myers Squibb. From 1969 to 1991, he held senior management positions with Proctor & Gamble, Richardson Vicks, Nestle and General Foods. Dr. Moreno received a BS and a PhD in Food Science and Biochemistry from Cornell University. Steven Morvay was appointed Vice President, Marketing and Sales of the Company in July 1998. Prior to joining the Company, Mr. Morvay was President of Collier Newfield Publications and has spent more than 20 years in consumer marketing, including direct marketing as well as general marketing management. His experience encompasses senior positions at "brand name" companies such as Waldenbooks and Home Box Office as well as advertising agencies such as Saatchi & Saatchi Direct and Olgilvy & Mather Direct. He hold a BSc from the Newhouse School of Public Communication at Syracuse University. Marvin Moser, MD was elected to the Board of Directors in October 1997. He is clinical professor of medicine at Yale and senior medical consultant at the National High Blood Pressure 29 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 is also a member of the Board of The Third Avenue Value Funds. Dr. Moser holds a BA from Cornell University and an MD from Downstate University College of Medicine. Robert E. Pollack, PhD, 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 one hundred research papers on the molecular biology of viral oncogenesis, a dozen articles in the popular press, and three books. He received a BA in physics from Columbia University and a PhD in biology from Brandeis University. Gerald A. Shapiro was appointed Vice President, Finance and Administration & Chief Financial Officer of the Company in March 1998. From 1996 to 1998, Mr. Shapiro was Managing Director in the Corporate Finance practice at KPMG Peat Marwick, LLP, specializing in merger and acquisition activities. From 1995 to 1996, he was a Vice President in the Equity Capital Group of GE Capital Services and also served as Chief Operating Officer and Director of Shoe-Town, Inc., a GE Capital unit. From 1991 to 1995, Mr. Shapiro was a Managing Director in the healthcare investment banking group at Furman Selz LLC, concentrating on pharmaceutical and medical devices. Prior to that, he held senior executive positions at Equitable Capital Management Corporation and ITT Corporation with primary focus on mergers and acquisitions. Mr. Shapiro received a BSEE from City College of New York and an MBA from the Columbia University Graduate School of Business. Benjamin T. Sporn has been legal counsel to the Company since 1990 and has served as Secretary of the Company since 1986, and was appointed Senior Vice President and General Counsel in February 1998. 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 was a director of the Company from 1986 until 1994. He received a BSE degree from Rensselaer Polytechnic Institute and a JD 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 30 period of two years and so long as BP owns at least 10% of the Companyis 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. Committees of the Board of Directors The Company has an audit committee consisting of Mr. Flynn and Dr. Moser. In addition, the Company has a compensation committee consisting of Dr. Cross, Mr. Flynn and Dr. Pollack. During the year ended June 30, 1998, the audit committee met one time, and the compensation committee met two times. 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, PhD - 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 one hundred research papers on the molecular biology of viral oncogenesis, a dozen articles in the popular press, and three books. He received a BA in physics from Columbia University and a PhD in biology from Brandeis University. Gordon Archer, MD - Dr. Archer is Chairman, Division of Infectious Diseases, and Professor of Medicine and Microbiology/Immunology at Virginia Commonwealth University, Medical College of Virginia. He is an authority on resistance of staphylococci to antimicrobial agents and has focused his research on development of innovative chemotherapeutic approaches to treating infectious diseases. Dr. Archer is the author of more than 75 scientific papers and book chapters and the editor of a definitive text on staphylococcal diseases. He holds a BA from Washington and Lee University and an MD from the University of Virginia Medical School. Edward Goldberg, PhD - 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 BA in Chemistry from 31 Columbia University and a PhD in Biology from Johns Hopkins University. Richard Novick, MD - 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 BS from Yale University and an MD with honors in Microbiology from New York University Medical School. Marvin Moser, MD - 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 BA from Cornell University and an MD from Downstate University College of Medicine. Stephen R. Peikin, MD - 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 BA from Temple University and an MD 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, 1998 (i) to its Chief Executive Officer and (ii) to the four 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 $100,000): 32 SUMMARY COMPENSATION TABLE (1)(2)
Name and Principal Long-Term Position Annual Compensation Compensation (a) (b) (c) (d) (e) ----------------------------------------------------------------------------------- Period Salary ($) Bonus ($) Securities Underlying Options/SARs (#) - -------------------------------------------------------------------------------------------------------------------- Fredric Price, President, 7/1/95 - 6/30/96 260,000 21,000 Chief Executive Officer and Director 7/1/96 - 6/30/97 275,000 90,000 35,000 7/1/97 - 6/30/98 275,000 75,000 465,000 Jonathan de la Harpe, Vice 7/1/95 -6/30/96 85,000 President, Technical Operations 7/1/96 - 6/30/97 89,000 10,000 7/1/97 - 6/30/98 113,000 10,000 Victor Moreno, Vice President, 8/11/97 - 6/30/98 137,000 90,000 and President Nutrition 21 (3) Solomon Mowshowitz, Vice 1/15/96 - 6/30/96 62,000 46,000 President- Research and 7/1/96 - 6/30/97 140,000 15,000 Development (4) 7/1/97 - 6/30/98 106,000 10,000 Benjamin T. Sporn, Senior Vice 7/1/95 -6/30/96 120,000 President, General Counsel 7/1/96 - 6/30/97 127,500 5,000 42,500 and Secretary 7/1/97 - 6/30/98 147,000 15,000
33 (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 (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. Moreno joined the Company on August 11, 1997. (4) Mr. Mowshowitz's employment with the Company terminated June 28, 1998. None of the individuals listed above received any long-term incentive plan awards during the fiscal year. Employment Agreements The Company entered into an employment agreement, effective September 1994, with Fredric Price, which was amended and restated on April 1, 1998. The agreement has a three year term which ends on March 31, 2001, and provides for an annual salary of $275,000 and the forgiveness of one-third of a $59,500 loan on March 31 of each year of the term so long as Mr. Price is then employed by the Company. See table of Option/SAR Grants in Last Fiscal Year for information on certain stock options which have been granted to Mr. Price under the employment agreement. Although employment under the agreement is at will, if employment is terminated by the Company under certain circumstances, Mr. Price will receive one year's salary in a single payment, certain benefits will continue for twelve months after termination, and all of Mr. Price's stock options will vest. 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. 34 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. 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, 1998 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 Individual Grants Assumed Annual Rates Of Stock 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% ($) 10% ($) (a) (b) (c) (d) (e) (f) (g) - ----------------------------- --------------- ---------------- ----------- ------------ ---------------- --------------- A. Jonathan de la Harpe 10,000 0.69 $2.25 (1) $10,822 $26,170 B. Victor Moreno 90,000 6.27 $2.4375 (1) $105,514 $255,158
35 C. Solomon Mowshowitz 10,000 0.69 $2.25 (2) $1,708 $3,458 D. Fredric D. Price 465,000 32.42 $1.9375 (3) $367,778 $860,055 E. Benjamin T. Sporn 15,000 1.05 $2.25 (1) $16,233 $39,255
(1) Vesting 20% per year; expiration the earlier of 5 years from vesting or 89 days after termination of employment. (2) Vested and expire December 31, 1998. (3) Vesting 33.33% per year; expiration the earlier of 5 years from vesting or 89 days after termination of employment. AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
Individual Grants - -------------------------------------------------------------------------------------------------------------------- (a) (b) (c) (d) (e) Name Shares Acquired Value Number of Unexercised Options at Value of Unexercised In-the-Money in Exercise (#) realized ($) FY-End (#) Options at FY-End --------------------------------------------------------------------- Exercisable Unexercisable Exercisable Unexercisable - ------------ ----------------- --------------- ---------------- ------------------ ------------------ --------------- Jonathan de 0 0 25,000 18,000 0 0 la Harpe Victor 0 0 0 90,000 0 0 Moreno Solomon 0 0 71,000 0 0 0 Mowshowitz Fredric 0 0 307,000 693,000 0 0 Price Benjamin 0 0 83,500 49,000 0 0 T. Sporn
Pension Plans 36 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 as long as Burns Philp maintains the Pension Plan and owns at least 20% of the Company's outstanding Common Stock. Burns Philp currently holds approximately 31% of the Company's outstanding Common Stock. 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. The following table sets forth estimated annual benefits payable upon retirement, assuming retirement at age 65 in 1998 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 $8,160 $9,600 $50,000 $10,080 $13,440 $16,800 $20,160 $23,500 $75,000 $16,560 $22,000 $27,720 $33,240 $38,760 $100,000 $23,160 $30,840 $38,640 $46,320 $54,120 $150,000 $36,240 $48,360 $60,480 $72,600 $84,720 $160,000 $38,880 $51,840 $64,720 $77,880 $90,840 and up 37 Jonathan de la Harpe, Victor Moreno, Solomon Mowshowitz, Benjamin Sporn and Fredric Price each have 6.0, 0.875, 2.5, 6.0 and 3.75 years, respectively, of credited service under the Pension Plan as of June 30, 1998, and, at age 65, would have approximately 18, 5, 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, 1997 through June 30, 1998 all Section 16(a) filing requirements applicable to its officers, directors and greater than ten-percent beneficial owners were complied with. Compensation Committee Interlocks and Insider Participation The Board of Directors determines executive compensation taking into consideration recommendations of the Compensation Committee. No member of the Company's Board of directors is an executive officer of a company whose compensation committee or board of directors includes an executive officer of the Company. Director Compensation Non-management Directors each receive a quarterly director's fee of $1,800 and the Chairman of the Board receives a quarterly director's fee of $3,600. Each also receives $500 for each meeting of the Board attended in person, $250 for each meeting of the Board attended telephonically, and each receives annually options to acquire 10,000 shares of Common Stock. 38 Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, as of October 8, 1998, 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, 4 Manhattanville Road, Purchase, New York 10577-2197. Shares Owned Beneficially and of Record (1) Name and Address No. of Shares % of Total - ---------------- ------------- ---------- Fredric D. Price (2) 444,651 1.72 Robert E. Flynn (3) 82,000 * P. George Benson (4) 10,000 * Lawrence W. Chakrin 0 0 Audrey T. Cross (5) 44,000 * Jon de la Harpe (4) 27,000 * Alan Gallantar 0 0 Marvin Moser (4) 55,000 * Victor Moreno (4) 18,000 * Robert E. Pollack (4) 50,000 * Gerald A. Shapiro 0 0 Benjamin Sporn (6) 117,125 * American Home Products Corporation 3,478,261 13.66 5 Giralda Farms Madison, NJ 07940 Burns Philp & Company Limited (7) 7,763,837 30.48 7 Bridge Street Sydney, NSW 2000, Australia All Officers and Directors 847,776 3.23 as a Group (10 persons) (2)(3)(4)(5) and (6) - ----------------------- * Less than 1% 39 (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 414,000 shares issuable upon exercise of currently exercisable options under the Company's Stock Option Plans. (3) Includes 80,000 shares issuable upon exercise of currently exercisable options under the Company's Stock Option Plans. (4) Consists of shares issuable upon exercise of currently exercisable options under the Company's Stock Option Plans. (5) Includes 40,000 shares issuable upon exercise of currently exercisable options under the Company's Stock Option Plans. (6) Includes 88,000 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 As of June 30, 1998 BP owned 7,763,837 shares of Common Stock, and continues such Common Stock ownership as of the date hereof. 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. As part of the transaction, 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 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 Investorsi 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, 40 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 Companyis 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 Companyis 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 was reduced from two members to one member. Currently, BP has not nominated a member for election to the Company's Board. The amount of consideration for the sale was arrived at through arms-length negotiation and a fairness opinion was obtained. 41 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 a Report on Form 8-K relating to Series C and Series D Preferred Stock (filed on May 28, 1998). 42 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: October 8, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below as of October 8, 1998 by the following persons on behalf of Registrant and in the capacities indicated. /s/ Fredric D. Price -------------------- Fredric D. Price, President, CEO and Director /s/ Robert E. Flynn ------------------- Robert Flynn, Chairman of the Board /s/ P. George Benson -------------------- P. George Benson, Director /s/ Audrey T Cross ------------------ Audrey T. Cross, Director /s/ Marvin Moser ---------------- Marvin Moser, Director /s/ Robert E. Pollack --------------------- Robert E. Pollack, Director /s/ Gerald A. Shapiro --------------------- Gerald A. Shapiro, Chief Financial Officer 43 AMBI INC. AND SUBSIDIARY INDEX TO CONSOLIDATED FINANCIAL STATEMENTS FILED WITH THE ANNUAL REPORT OF THE COMPANY ON FORM 10-K JUNE 30, 1998 PAGE INDEPENDENT AUDITORS' REPORT F-2 CONSOLIDATED BALANCE SHEETS AT JUNE 30, 1998 AND 1997 F-3 CONSOLIDATED STATEMENTS OF OPERATIONS FOR EACH OF THE YEARS IN THE THREE YEAR PERIOD ENDED JUNE 30, 1998 F-5 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR EACH OF THE YEARS IN THE THREE YEAR PERIOD ENDED JUNE 30, 1998 F-6 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR EACH OF THE YEARS IN THE THREE YEAR PERIOD ENDED JUNE 30, 1998 F-7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-8 F-1 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, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 1998, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Stamford, CT September 28, 1998, except for Note 20 which is as of October 8, 1998 F-2 AMBI INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (in thousands)
JUNE 30 JUNE 30 1998 1997 ---- ---- ASSETS Current assets: Cash and cash equivalents $2,109 $8,615 Accounts receivable (less allowance for doubtful accounts of $377 in 1998 and $104 in 1997) 3,408 390 Inventories, net 695 606 Prepaid expenses and other current assets 413 404 ------- ------- Total current assets 6,625 10,015 Property and equipment, net 914 1,082 Patent costs and licensed technology (net of accumulated amortization of $2,138 in 1998 and $862 in 1997) 11,715 1,584 Goodwill (net of accumulated amortization of $48 in 1998) 950 -- Other assets 531 73 ------- --------- TOTAL ASSETS $20,735 $12,754 ======= =======
See accompanying notes to consolidated financial statements. F-3 AMBI INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
JUNE 30 JUNE 30 1998 1997 ---- ---- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term debt, current portion of long-term debt and lease obligations $3,052 $ 156 Accounts payable and accrued expenses 2,458 2,464 Nutrition 21 acquisition payable 2,747 -- Preferred dividends payable 637 340 ------- ------ Total current liabilities 8,894 2,960 Long-term debt and lease obligations, less current portion 1,543 2,184 TOTAL LIABILITIES $10,437 $5,144 ------- ------ STOCKHOLDERS' EQUITY: Preferred stock, $0.01 par value, authorized 5,000,000 shares; Series C convertible preferred, 222 shares issued and outstanding at June 30, 1998 and 1997, respectively (aggregate liquidation value Series C $2,698) -- -- Series D convertible preferred, 22,500 shares and 45,000 shares issued and outstanding at June 30, 1998 and 1997, respectively (aggregate liquidation value Series D $2,404) -- -- Common stock, $0.005 par value, authorized 40,000,000 shares; 20,898,297 shares and 18,783,342 shares issued and outstanding at June 30, 1998 and 1997, respectively 105 94 Additional paid-in capital 54,942 51,416 Accumulated deficit (44,749) (43,900) ------- ------- TOTAL STOCKHOLDERS' EQUITY $10,298 $7,610 ------- ------ COMMITMENTS AND CONTINGENT LIABILITIES TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $20,735 $12,754 ======= =======
See accompanying notes to consolidated financial statements. F-4 AMBI INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data)
YEAR ENDED JUNE 30, 1998 1997 1996 ---- ---- ---- Sales $20,082 $10,356 $14,157 Other revenues 676 924 1,865 ------- ------- ------- TOTAL REVENUE 20,758 11,280 16,022 Cost of goods sold 2,956 4,998 6,353 ------- ------- ------- GROSS PROFIT 17,802 6,282 9,669 Selling, general and administrative expense 12,100 17,312 11,177 Research and development expense 2,660 4,833 2,294 Depreciation and amortization 1,575 772 819 ------- ------- ------- OPERATING INCOME/(LOSS) 1,467 (16,635) (4,621) Foreign exchange gain -- -- 3 Interest income 71 433 317 Interest expense 370 142 133 Gain on sale of Aplin & Barrett Ltd. -- 9,683 -- ------- ------- ------- INCOME/(LOSS) BEFORE INCOME TAXES 1,168 (6,661) (4,434) Income taxes 116 152 285 ------- ------- ------- NET INCOME/(LOSS) $1,052 $(6,813) $(4,719) ======= ======= ======= BASIC AND DILUTED LOSS PER SHARE (Note 12) $(0.04) $(0.38) $(0.34) ======= ======= =======
See accompanying notes to consolidated financial statements. F-5 AMBI INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands, except share data)
Preferred Stock Preferred Stock Common Stock Series C Series D Shares $ Shares $ Shares $ ------ - ------ - ------ - 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 discount on preferred stock -- -- -- -- -- -- 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 -- -- -- Conversion discount on preferred stock -- -- -- -- -- -- 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 Conversion of preferred stock to common stock including dividends issued as common stock -- -- (22,500) -- 1,414,955 7 Conversion discount on preferred stock -- -- -- -- -- -- Common stock issued for Nutrition 21 acquisition -- -- -- -- 500,000 3 Common stock issued for Nutrition 21 consulting agreements -- -- -- -- 200,000 1 Preferred dividends paid and provided -- -- -- -- -- -- Financing cost of warrants issued to State Street Bank -- -- -- -- -- -- Compensation related to issuance of stock options -- -- -- -- -- -- Net income for the year -- -- -- -- -- -- ----- --- ------- --- ------- ---- Balance at June 30, 1998 222 $-- 22,500 $-- 20,898,297 $105 === === ====== === ========== ==== Additional Accumulated Currency Paid-In Deficit Translation Capital Adjustment TOTAL $ $ $ $ - - - - 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 discount on preferred stock 1,343 (1,343) -- -- 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 52,732 (36,522) (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 Conversion discount on preferred stock 173 (173) -- -- 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 51,416 (43,900) -- 7,610 Conversion of preferred stock to common stock including dividends issued as common stock 71 -- -- 78 Conversion discount on preferred stock 1,527 (1,527) -- -- Common stock issued for Nutrition 21 acquisition 1,185 -- -- 1,188 Common stock issued for Nutrition 21 consulting agreements 587 -- -- 588 Preferred dividends paid and provided -- (374) -- (374) Financing cost of warrants issued to State Street Bank 33 -- -- 33 Compensation related to issuance of stock options 123 -- -- 123 Net income for the year -- 1,052 -- 1,052 ------ ------- ----- ------ Balance at June 30, 1998 $54,942 $(44,749) $-- $10,298 ======= ========= === =======
See accompanying notes to consolidated financial statements. F-6 AMBI INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
YEAR ENDED JUNE 30 1998 1997 1996 ---- ---- ---- Cash flows from operating activities: Net income/(loss) $ 1,052 $ (6,813) $ (4,719) Adjustments to reconcile net income/(loss) to net cash provided by/(used in) operating activities: Depreciation and amortization 1,575 772 819 Write-off of patents and trademarks 179 -- -- Loss on disposal of equipment -- 275 14 Deferred income tax benefit -- -- (6) Gain on sale of Aplin & Barrett -- (9,683) -- Nutrition 21 consulting expense 168 -- -- Other non-cash items 124 65 -- Changes in assets and liabilities, which includes Nutrition 21 from the date of acquisition: Decrease/(increase) in accounts receivable (3,018) 1,320 (3,569) Decrease/(increase) in inventories (89) 646 (310) Increase in other assets (467) (191) (211) Decrease in amounts due from affiliated companies -- -- 606 (Decrease)/increase in accounts payable and accrued expenses (6) (778) 618 Increase in Nutrition 21 acquisition payable 2,747 -- -- Increase in preferred stock dividends (374) (153) (133) Decrease in amounts due to affiliated companies -- -- (126) Increase in other liabilities -- 189 282 ------- --------- --------- Net cash provided by/(used in) operating activities 1,891 (14,351) (6,735) ------- -------- ---------- Cash flows from investing activities: Nutrition 21 acquisition payments (10,000) -- -- Acquisitions of property and equipment (216) (866) (700) Proceeds on sale of equipment 73 -- -- Cash received upon sale of subsidiary -- 13,500 -- Patent costs and licensed technology (509) (437) (1,026) ------- --------- -------- Net cash provided by/(used in) investing activities (10,652) 12,197 (1,726) ------- --------- -------- Cash flows from financing activities: Proceeds from notes payable -- -- 2,023 Repayment of notes payable (29) (8) -- Capital lease repayments (126) (811) (186) Proceeds from term loan 3,300 -- -- Repayment of term loan (890) -- -- 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 ------- --------- -------- Net cash provided by financing activities 2,255 2,348 13,565 ------- --------- -------- Effect of exchange rate movement -- (10) (10) ------- --------- -------- Net (decrease)/increase in cash and cash equivalents (6,506) 184 5,094 Cash and cash equivalents at beginning of year 8,615 8,431 3,337 ------- --------- -------- Cash and cash equivalents at end of year $ 2,109 $ 8,615 $ 8,431 ======= ======== ==========
See accompanying notes to consolidated financial statements. F-7 AMBI INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data) 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. 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 United States ("US"). The Company began selling the salt alternative in April 1996 under the trademark Cardia(TM) Salt Alternative. See Note 20, Subsequent Event, for further developments regarding Cardia Salt Alternative The Company has developed a moistened towel using a proprietary antibacterial formulation for use in preparing dairy cows for milking. The Company launched the product under its trademark Wipe Out(TM) Dairy Wipes. 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 and Pacific 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. Also as part of this transaction, the Company issued to NSK warrants to purchase 315,408 shares of the Company's common stock. As of June 30, 1998, Burns Philp & Company Limited ("BP) owned 7,763,837 shares of the Company's common stock, which constitutes approximately 37% of the issued and outstanding shares of common stock. BP, based in Australia, is a leading global food manufacturer and marketer. 2. SALE OF APLIN & BARRETT LTD. The Company completed the sale of its United Kingdom based food preservative business, Aplin & Barrett, Ltd. ("A&B"), to Burns Philp & Company Ltd ("Burns Philp"). on December 12, 1996. As a result, the operations of A&B are included in the financial statements through that date. Key terms of the transaction included the payment to the Company of $13.5 million in cash, ($8.0 million paid on December 12, 1996 and $5.5 million paid on June 12, 1997), and the payment of 2.42 million shares of the Company's common stock held by Burns Philp. The Company reported a gain of $9.7 million in connection with this sale. In addition, Burns Philp has provided the Company 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. As of June 30, 1998, the Company has not borrowed any amounts under this revolving line of credit. 3. ACQUISITION OF NUTRITION 21 On August 11, 1997, the Company acquired the entire beneficial interest in Nutrition 21 ("N21"), a limited partnership, by way of the acquisition of Selene Systems, Inc., which was the general partner of N21, J. Bie Enterprises, Inc., which was a limited partner of N21, and the limited partnership interests owned by all other limited partners of N21, pursuant to a Purchase Agreement. The Company retained the former chief executive officer of N21 as a consultant. N21 is engaged in the business of developing, producing and marketing proprietary nutrition products and dietary supplements. N21 has its products manufactured and formulated to its specifications by contract manufacturers as bulk raw materials. N21 then sells the raw materials to customers who incorporate them into over nine hundred finished products such as vitamin/mineral formulas, dietary supplements, baked goods, F-8 AMBI INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data) 3. ACQUISITION OF NUTRITION 21, Continued beverages and other products. These products are sold by customers under a variety of brands throughout the world through natural/health food stores, supermarkets, drug stores and direct mail catalogs. Currently, N21's primary product is chromium picolinate, which is marketed under the registered trademark "Chromax." N21 has an exclusive license from the United States Department of Agriculture ("USDA") for the duration of a patent which covers the composition of chromium picolinate. This patent expires on August 8, 2000. The USDA license grants N21 the exclusive right to manufacture, use, and sell chromium picolinate in the United States. N21 also owns U.S. patents expiring in 2009 relating to chromium picolinate treatments for reducing hyperglycemia and stabilizing the level of serum glucose, for preventing undesirable high levels of blood serum lipids, and for increasing lean body mass and reducing body fat, and other patents with varying expiration dates through 2017 relating to, among other things, arginine silicate complexes for preventing or inhibiting atherosclerosis, and magnesium taurate treatments of cardiac conditions. The purchase price for the acquisition was $10,000,000 in cash plus 500,000 restricted shares of common stock of the Company. The Purchase Agreement also provides for annual contingent payments for each of the next four years of $2.5 million, but subject to adjustment for the achievement of net sales levels of certain products (contingent consideration clause), and royalties of 2.5% to 5.0% on net sales of products recommended for certain patented uses. These contingent payments, which are payable to former partners of N21, will be recorded as an addition to the purchase price as the amounts are earned, allocated to the acquired identifiable intangibles and goodwill in proportions consistent with the original purchase price allocation, and amortized over the remaining lives of these respective intangible assets. The contingent payment accrued for the period from September 1, 1997 through June 30, 1998 is $2.7 million. The first contingent payment is due in September 1998 for amounts earned in the twelve month period from September 1, 1997 through August 31, 1998 The transaction was financed from the Company's operating funds and a $3.3 million loan from State Street Bank and Trust Company ("SSBT") bearing an interest rate at the bank's prime rate plus one percent, with a stated maturity of February 1, 1998. Approximately $6.7 million of the purchase price was provided from internal working capital. At December 31, 1997, the Company refinanced the then existing $2.8 million balance of the loan. (See Note 8). Under the revised terms, the Company received a $2.8 million term loan which is being amortized through monthly payments of principal and interest over a 30 month period at an interest rate equal to the prime rate plus one percent. SSBT also continues to provide a revolving credit line, based upon the level of inventory and receivables, of up to $4 million. All amounts owing under the term loan and the revolving credit line are due by June 30, 2000, the expiration date of the credit line. As of June 30, 1998, the Company has not borrowed any amount under this revolving line of credit. The Company is current in all of its scheduled payments to SSBT. The acquisition was accounted for under the purchase method of accounting. Based upon the allocation of purchase price, the transaction resulted in $10.7 million of identifiable intangible assets, primarily patents and trademarks, and $998 of goodwill. These amounts include approximately $2,514 of identifiable intangible assets and $233 of goodwill recorded in connection with amounts due under the contingent consideration clause. As additional contingent consideration is earned, the Company will allocate these amounts in accordance with the original purchase price allocation. The Company is amortizing the goodwill over 15 years and amortizing the identifiable intangible assets over their useful economic lives, which range from three to 15 years. The operating results of Nutrition 21 are included in the consolidated statements of operations from the date of acquisition. The following represents the pro forma consolidated results of operations as if the Company and Nutrition 21 had been combined for the fiscal years ended June 30, 1998 and 1997, respectively. The pro forma results of operations reflect amounts adjusted to their accounting basis as if the acquisition had occurred at the beginning of the respective periods. The pro forma information is not necessarily indicative of the results of operations as they may be in the future or as they would have been had the acquisition been effected on the assumed dates. F-9 AMBI INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data) 3. ACQUISITION OF NUTRITION 21, Continued
Year Ended June 30, 1998 1997 ---- ---- (Pro forma amounts) Revenues $22,081 $30,102 Net income/(loss) 1,555 (1,074) Basic and diluted loss per share ($0.02) ($0.07)
The results for the year ended June 30, 1997 include a $9.7 million one time gain from the sale of Aplin & Barrett, a food preservative business. (See Note 2). 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a) Consolidation The consolidated financial statements for the year ended June 30, 1998 include the results of operations of the Company and its wholly-owned subsidiary, Nutrition 21, from August 11, 1997. There were no intercompany accounts or transactions between the Company and Nutrition 21. The consolidated financial statements for the year ended June 30, 1997 include the results of operations of the Company and its wholly-owned subsidiary, A&B (through December 1996), after elimination of material intercompany 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, bank overnight investments and commercial paper. c) Inventories Inventories are carried at the lower of cost (on a first-in, first-out basis) or estimated net realizable value. d) Property and Equipment Property and equipment are stated at cost less accumulated depreciation. Depreciation is provided using the straight-line method to depreciate assets over their estimated useful lives. The estimated useful lives are as follows: Leasehold improvements -- 5 to 7 years Furniture and fixtures -- 7 years Machinery and equipment -- 5 to 10 years Office equipment -- 3 to 6 years Leased assets -- 3 to 5 years
e) Patent Costs and Licensed Technology The Company capitalizes certain patent costs and licensed technology. Accumulated costs are amortized over the estimated economic lives of the assets on a straight-line basis. The remaining economic lives range from two to 20 years. F-10 AMBI INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data) 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued f) Goodwill Goodwill represents the excess of cost over the fair value of assets acquired and is amortized using the straight line method over 15 years. The recoverablity of the carrying value is evaluated on a periodic basis by assessing current and future levels of operating income and cash flows, as well as other factors. g) Research and Development Research and development costs are expensed as incurred. h) 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. i) Long-lived Assets In March 1995, Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed Of," was issued. SFAS No. 121 requires that long-lived assets and certain identifiable intangibles to be held and used or disposed of by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. j) Revenue Recognition Sales of product are recognized upon shipment to manufacturers and distributors of the Company's products. Other revenues include amounts received from patent licensees and other research collaborators. k) Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. l) Recently Adopted Accounting Standards The Company adopted, effective January 1, 1998, Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." 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. In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 130 "Reporting Comprehensive Income" and SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 130 establishes standards of reporting and display of comprehensive income and its components in a full set of general purpose financial F-11 AMBI INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data) 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued statements. SFAS No. 131 supercedes SFAS No. 14 "Financial Reporting for Segments of a Business Enterprise", but retains the requirement to report information about major customers. In February 1998, the FASB issued SFAS No. 132 "Employers Disclosures About Pensions and Other Post-Retirement Benefits." This statement revises employers disclosures about pension and other post-retirement benefit plans. These statements are effective for financial statements for annual periods beginning after December 15, 1997. It is not expected that the adoption of these statements will have a material impact on the Company's financial position or operating results. In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities." This statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. It is not expected that the adoption of this statement will have a material impact on the Company's financial position or operating results. m) Concentration of Credit Risk The Company sells its products to customers in the United States. Credit evaluations are done on all new customers and periodically evaluated for existing customers. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information. n) Reclassifications Certain reclassifications have been made to prior years' financial statement amounts to conform to the 1998 presentation. 5. INVENTORIES The components of inventories at June 30, 1998, 1997 and 1996 follow:
1998 1997 1996 ---- ---- ---- Raw materials $289 $ -- $240 Work in process -- -- 960 Finished goods 541 606 1,888 ----- ----- ------ 830 606 3,088 less: Inventory valuation reserve (135) -- -- ----- ----- ------ Inventories, net $695 $606 $3,088 ===== ===== ======
During the fiscal years ended June 30, 1998, 1997 and 1996, the Company did not deduct amounts from the inventory valuation reserve 6. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair values of the Company's financial instruments at June 30, 1998 and 1997 follow:
1998 1997 -------------------- ---------------------- Carrying Fair Carrying Fair Amount Value Amount Value --------- ------ --------- ------- Cash and cash equivalents $2,109 $2,109 $8,615 $8,615 Accounts receivable, net 3,408 3,408 390 390
The carrying amounts for cash and cash equivalents and accounts receivable, net, approximate fair value because of the short maturities of these instruments. Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. The Company places its cash primarily in market interest rate accounts, overnight investments and commercial paper. The Company did not have funds invested in commercial paper at June 30, 1998. F-12 AMBI INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data) 7. PROPERTY AND EQUIPMENT, NET
1998 1997 ---- ---- Laboratory and furniture and fixtures $1,235 $1,018 Leased machinery and equipment 371 371 Leasehold improvements -- 75 ------- ------- 1,606 1,464 Less: Accumulated depreciation (692) (382) ------- ------- Property and equipment, net $914 $1,082 ======= =======
8. LINES OF CREDIT AND LONG-TERM DEBT As a result of the sale of A&B in December 1996 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 interest at a rate equal to the Citibank prime rate. As of June 30, 1998, the Company has not borrowed any funds on this line of credit. Long-term debt consists of the following at June 30, 1998 and 1997:
1998 1997 ---- ---- A. NSK promissory note $2,000 $2,000 B. State Street term loan 2,410 -- C. Obligations under capital leases 185 311 D. Other note payable -- 29 ------- ------- 4,595 2,340 Less: Current portion (3,052) (156) ------- ------- $1,543 $ 2,184 ======= =======
A. The Company issued a $2 million note at an interest rate of 5%, payable to Nippon Shoji Kaisha (NSK) on March 18, 1999. The note provides that (1) if an Investigational New Drug application (IND) for the treatment of diseases of the colon is filed and accepted by the United States Food and Drug Administration (FDA) by March 18, 1998, the Company has the right to repay $1 million of the note with its common stock, and (2) if rat and dog toxicology programs related to treatment of nosocomial antibiotic resistant infections are completed by September 18, 1998, the Company has the right to repay $1 million of the note with its common stock. The common stock for repayment purposes is valued at the average closing price during the ten (10) consecutive trading days immediately prior to the Company notifying NSK of its election to repay with common stock. The Company has been advised that the FDA has accepted its IND for diseases of the colon as of November 10, 1997. The Company, as a result, intends to repay $1 million of the note with its common stock prior to maturity and $1 million in cash from operating activities. B. On December 31, 1997 the Company entered into a new Revolving Credit and Term Loan Agreement with State Street to refinance its prior loans from State Street. The refinanced loans consist of a term loan of $2.8 million ("Term Loan") and a revolving credit line of up to $4.0 million ("Revolving Loan"), both bearing interest at the prime rate plus one percent and are due June 30, 2000. The Company is making monthly payments of principal and interest on the Term Loan. The Revolving Loan is an asset based loan, with any amounts borrowed due by the expiration date of the revolving loan (June 30, 2000). On June 30, 1998, the outstanding balance on the term loan was $2.4 million. The Company has a zero balance on its revolving loan at June 30, 1998. C. 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. F-13 AMBI INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data) 8. LINES OF CREDIT AND LONG-TERM DEBT, Continued 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: 1999 $133 2000 66 ---- Total minimum lease payments 199 Less: Amounts representing interest (14) ---- Present value of net minimum lease payments $185 ====
This obligation is reflected in the balance sheet at June 30, 1998 as current and non-current obligations of $120 and $65, respectively. D. During fiscal 1998, the Company repaid a note related to the purchase of a telephone system. 9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES The following items are included in accounts payable and accrued expenses at June 30, 1998 and 1997:
1998 1997 ---- ---- Accounts payable $407 $1,283 Consulting and professional fees payable 569 267 Accrued compensation and benefits 480 -- Taxes payable 97 -- Other accrued expenses 905 914 ------ ------ $2,458 $2,464 ====== ======
10. ACCOUNTS RECEIVABLE The components of accounts receivable at June 30, 1998, 1997 and 1996 follow:
1998 1997 1996 ---- ---- ---- Accounts receivable $3,785 $494 $5,437 less: allowance for doubtful accounts (377) (104) (81) ------ ------- ------- Accounts receivable, net $3,408 $390 $5,356 ====== ===== ======
The Company made net increases to its allowance for doubtful accounts of $273, $23 and $49 in 1998, 1997 and 1996, respectively. 11. STOCKHOLDERS' EQUITY a) Convertible 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 (the "D Preferred"). 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 Company has registered 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. At June 30, 1998, there were 22,500 shares of D Preferred outstanding. F-14 AMBI INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data) 11. STOCKHOLDERS' EQUITY, Continued With respect to the D Preferred, on December 5, 1997 the holders of the D Preferred (the "D Investors") converted fifty percent of their holdings into common stock of the Company at a twenty-five percent discount to the average closing bid prices for the Company's Common Stock for the five (5) consecutive trading days immediately preceding conversion. The Company reduced both the fixed conversion price of $2.49557 and the warrant exercise price of $2.72 to $2.25. The maturity date for mandatory conversion was extended to May 8, 2001. The D Investors agreed not to convert any of their remaining holdings for a period of six months ending on June 5, 1998. The twenty-five percent conversion discount described above has been recorded as additional preferred dividends and reduced net income available to common stockholders for the year ended June 30, 1998. In October 1995, the Company issued 895 shares of non-voting, Series C Preferred Stock (the "C Preferred") 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 C Preferred outstanding on October 13, 1999 will automatically convert into common stock of the Company. As of June 30, 1998, there were 222 shares of C Preferred outstanding. With respect to the C Preferred, on December 5, 1997, the Company reduced the fixed conversion price from $3.25 to $2.75. The maturity date for mandatory conversion was extended to October 13, 1999. The holders of the C Preferred agreed not to convert any of their remaining holdings for a period of six months ending on June 5, 1998. Dividends payable on the C Preferred and the D Preferred were approximately $637 and $340 at June 30, 1998 and 1997, respectively. The reduction in the fixed conversion price described above for the Series C and Series D Preferred Stock has not been recorded as additional preferred dividends for the year ended June 30, 1998 because the Company's stock price is not high enough for the fixed conversion price to be beneficial to the Series C and Series D investors. As of June 30, 1998, the original discounts of fifteen and twenty-five percent granted to the Series C and Series D investors, respectively, are more beneficial for conversion purposes. As such, these conversion discounts have been recorded as additional preferred dividends. Should the fixed conversion price become more beneficial to the Series C investors (when the Company's stock price exceeds $3.23) or the D Investors (when the Company's stock price exceeds $3.00), the Company will record additional preferred dividends based on the Company's stock price at that time. F-15 AMBI INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data) 11. STOCKHOLDERS' EQUITY, Continued b) Warrants The Company had outstanding warrants for the purchase of its common stock as follows:
Number of Exercise price warrants per share ----------- -------------- Outstanding 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 ---------- Outstanding 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 ---------- Outstanding at June 30, 1997 2,024,404 $1.25-$6.75 Issued 100,000 $2.79 Expired (826,179) $3.00-$4.91 ---------- Outstanding at June 30, 1998 1,298,225 $1.25-$6.75 ============
At June 30, 1998, 1,298,225 shares were issuable upon exercise of the above warrants. All such warrants were available to be exercised immediately. The warrants expire between 1998 and 2004. Certain of the warrants include anti-dilution clauses. Warrants outstanding and exercisable at June 30, 1998 are as follows:
Warrants Outstanding Warrants Exercisable ------------------------------------- --------------------------- Weighted Average Weighted Weighted Remaining Average Average Range of Number Contractual Exercise Number Exercise Exercise Prices Outstanding Life Price Exercisable Price --------------- ----------- ----------- -------- ----------- -------- $1.25 10,000 2.5 $1.25 10,000 $1.25 $2.00 - $2.79 669,937 3.7 $2.74 669,937 $2.69 $3.00 104,999 2.9 $3.00 104,999 $3.00 $4.00 - $4.84 360,408 1.6 $4.75 360,408 $4.75 $6.00 - $6.75 152,881 2.2 $6.33 152,881 $6.33 --------- --------- 1,298,225 1,298,225 ========= =========
c) Stock Based Compensation 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 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 1998 and 2007. Approximately 273,000 options remain available for grant under the Incentive Plans. F-16 AMBI INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data) 11. STOCKHOLDERS' EQUITY, 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 --------- -------------- Outstanding 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 -------- Outstanding 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 --------- Outstanding at June 30, 1997 1,648,584 $1.25-$7.688 Issued 1,454,385 $1.62-$3.25 Expired (215,016) $1.62-7.68 Exercised (608) $1.62 ----------- Outstanding at June 30, 1998 2,887,345 $1.25-$6.00 =========
Each of these options are entitled to one share of common stock. Stock options generally vest ratably over five years from the date of grant and expire within five years from the date of vesting. Options outstanding and exercisable at June 30, 1998 are as follows:
Options Outstanding Options Exercisable -------------------------------------- ----------------------------- Weighted Average Weighted Weighted Remaining Average Average Range of Number Contractual Exercise Number Exercise Exercise Prices Outstanding Life Price Exercisable Price --------------- ----------- ----------- -------- ----------- -------- $1.63 - $1.97 701,060 4.2 $1.91 113,042 $1.76 $2.00 - $2.94 1,018,385 3.8 2.44 655,185 2.45 $3.00 - $3.94 902,900 3.8 3.30 383,900 3.29 $4.00 - $4.38 230,500 3.0 4.02 210,200 4.02 $5.63 13,000 3.9 5.63 6,900 5.63 $6.00 - $6.75 21,500 4.4 6.26 18,700 6.30 --------- --------- 2,887,345 1,387,927 ========= =========
The per share weighted-average fair value of stock options granted during fiscal 1998, 1997 and 1996 was $0.68, $2.43 and $ 2.22, respectively, on the date of grant using the Black Scholes option-pricing model with the following weighted-average assumptions:
1998 1997 1996 ---- ---- ---- Risk-free interest rate 5.7% 6% 6% Expected life-years 2.5 5 5 Expected volatility 46.1% 81% 81% Expected dividend yield -- -- --
F-17 AMBI INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data) 11. STOCKHOLDERS' EQUITY, Continued 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 employee 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:
1998 1997 1996 ---- ---- ---- Net income/(loss) As reported $1,052 $(6,813) $(4,719) Pro forma 176 (7,391) (5,592) Basic and diluted loss per share As reported $(0.04) $(0.38) $(0.34) Pro forma (0.09) (0.41) (0.39)
The effects of applying SFAS No. 123 in this pro forma disclosure are not necessarily indicative of future amounts because it does not take into consideration pro forma compensation expense related to grants made prior to 1995. 12. EARNINGS/(LOSS) PER SHARE The Company has adopted the provisions of the Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 128. "Earnings Per Share." Accordingly, the earnings per share calculations for the prior periods have been restated to conform with the provisions of SFAS No. 128. This statement replaces the presentation of primary earnings per share and fully diluted earnings per share with basic and diluted earnings per share, respectively. Basic and diluted loss per share for the years ended June 30, 1998, 1997 and 1996 are computed based on the weighted average number of shares outstanding for the respective periods as follows:
1998 1997 1996 ---- ---- ---- Weighted average shares 20,163,412 19,544,526 19,091,664 Net income/(loss) $1,052 $(6,813) $(4,719) Preferred stock dividend (374) (392) (502) Conversion discount on convertible preferred stock (1,527) (173) (1,343) ----------- ---------- ---------- Net loss attributable to common stockholders $(849) $(7,378) $(6,564) =========== ========== ========== Basic and diluted loss per share ($0.04) ($0.38) ($0.34) ======= ======= =======
The weighted-average shares of dilutive securities that would have been used to calculate diluted EPS had their effect not been anti-dilutive are as follows:
1998 1997 1996 ---- ---- ---- Convertible Preferred Stock 4,222,906 1,223,137 454,556
In accordance with the March 1997 SEC Staff announcement, the conversion discount on the Company's preferred stock has been recognized as additional preferred dividends. The conversion discount on preferred stock in the table above represents the amortized discount of $173 and $1,527 on the Series D preferred stock in fiscal 1997 and in fiscal 1998, respectively, and the conversion discount of $1,343 on the Series C preferred stock in fiscal 1996. F-18 AMBI INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data) 13. SEGMENT REPORTING a) Industry The Company currently concentrates its business in two business segments: nutritional products and pharmaceutical products. As a result of the acquisition of Nutrition 21, the Company's operations during fiscal year 1998 were predominantly in the nutrition product segment. Historically, the Company's business and that of A&B had been in a single segment - the research, development, production and marketing of antimicrobial drugs and dairy ingredients for various applications As of June 30, 1998, the Company's pharmaceutical products business related primarily to research and development efforts on antimicrobial drugs and sales of Wipe Out Dairy Wipes. In 1998, pharmaceutical product line revenues (licensing fees, fees from research and development contracts, and revenue from Wipe Out Dairy Wipes) were $1,795, and the operating loss was approximately $674, which primarily reflects research and development costs, some of which are shared among the Company's lines of business. The identifiable assets, net of depreciation and amortization, of this segment were $2,299 at June 30, 1998 and were comprised mainly of inventory, laboratory equipment and capitalized patent costs. b) Significant customers There was one significant unaffiliated customer representing 10% of sales for the year ended June 30, 1998. There were no significant unaffiliated customers comprising over 10% of sales during fiscal 1997 and 1996, respectively. Sales to affiliated companies represented 0%,0%, and 12% of consolidated sales in 1998, 1997, and 1996, respectively. c) Information about the Company's Operations in Different Geographic Areas During fiscal 1998, the Company did not distribute its products outside the United States.
YEAR ENDED JUNE 30, 1997: United United Adjustments Consolidated States Kingdom & Eliminations 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 (17,026) 391 -- (16,635) Identifiable assets $12,754 $ -- $ -- $12,754 YEAR ENDED JUNE 30, 1996: United United Adjustments Consolidated States Kingdom & Eliminations 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
F-19 AMBI INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data) 13. SEGMENT REPORTING, Continued 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:
1998 1997 1996 ---- ---- ---- North America $ -- $ 88 $ 1,164 Europe -- 2,041 5,128 South America -- 808 2,423 Other -- 2,157 1,956 -------- ------- ------- $ -- $ 5,094 $10,671 ======== ======= =======
14. RELATED PARTY TRANSACTIONS Transactions with affiliated companies were as follows:
1998 1997 1996 ---- ---- ---- Sales to subsidiaries of common parent: Mauri Laboratories Pty. Ltd. (1) $ -- $ -- $1,939 Purchases from subsidiary of common parent: Mauri Laboratories Pty. Ltd. (1) -- -- 1,430 Management fees received from subsidiaries of common parent: Burns Philp (UK) Plc -- 37 74 Loan interest received from subsidiaries of common parent: Burns Philp Inc. $ -- $ -- $ 79
(1) Mauri Laboratories Pty. Ltd. ceased to be an affiliate on June 14, 1996. 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. During fiscal 1998, the Company did not have transactions with affiliated companies except for a contribution to the Burns Philp Inc. Retirement Plan of $94. F-20 AMBI INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data) 15. INCOME TAXES Income/(loss) before income taxes for the three years ended June 30, 1998 consists of the following:
1998 1997 1996 ---- ---- ---- Domestic income/(loss) $1,168 $(7,052) $(5,161) Foreign income -- 391 727 ------ -------- -------- Income/(loss) before income taxes $1,168 $(6,661) $(4,434) ====== ======== ========
Provisions for income taxes for the three years ended June 30, 1998 consist of the following:
1998 1997 1996 ---- ---- ---- Current $116 $501 $291 Deferred -- (349) (6) ---- ----- ---- $116 $152 $285 ==== ===== ====
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:
1998 1997 1996 ---- ---- ---- Computed "expected" tax expense $397 $(2,265) $(1,508) Increase/(reduction) in Income taxes resulting from: Tax losses carried forward/(utilized) (351) 2,398 1,755 Federal Alternative Minimum Tax 38 -- -- Lower tax rate on foreign earnings -- (4) (8) State taxes, net of federal benefit 32 11 18 Other items -- 12 28 ----- -------- -------- $116 $152 $285 ===== ======== ========
The tax effect of temporary differences that give rise to deferred tax assets and deferred tax liabilities at June 30, 1998 and 1997 are presented below:
1998 1997 ---- ---- Deferred tax assets: Net operating loss carryforwards $5,713 $5,494 AMT tax credit 38 -- R&D credit 818 -- Accrued expenses 209 251 Allowance for doubtful accounts 151 -- Partnership basis 1,318 -- ------- -------- Total gross deferred tax assets 8,247 5,745 Less valuation allowance (5,159) (5,745) ------- -------- Net deferred tax assets 3,088 -- ------- -------- Deferred tax liabilities: Property and equipment 163 -- Intangible assets, principally due to amounts capitalized for financial reporting purposes 2,925 -- ------- -------- Net deferred tax liabilities 3,088 -- ------- -------- Total deferred taxes, net of valuation allowance $ -- $ -- ======== ========
F-21 AMBI INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data) 15. INCOME TAXES, Continued At June 30, 1998, the Company had available, for federal income tax purposes, net operating loss carryforwards of approximately $14.3 million expiring in varying amounts through 2013. Ultimate utilization/availability of such net operating losses may be significantly curtailed if a significant change in ownership were to occur. 16. 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 through 2007. In connection with this agreement, the Company recorded royalty expense of $366, $246, and $56 for the fiscal years ended June 30, 1998, 1997 and 1996, respectively. 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. These leases expire in the years 1998 to 2002. Payments under these leases were approximately $728 in 1998, $491 in 1997, and $540 in 1996. Future noncancellable minimum payments under these leases are as follows: Year Amount ---- ------ 1999 $451 2000 449 2001 449 2002 449 ------ Total $1,798 17. NUTRITION 21 CONSULTING AGREEMENTS In August 1997, the Company entered into royalty agreements with two individuals who assisted the prior owners of N21 in the development of chromium picolinate. In April 1998, the Company replaced these royalty agreements with consulting agreements of equal term. The term of these consulting contracts is from August 11, 1997 through August 11, 2000. In connection with the revised agreements: (a) 100,000 shares of the Company's common stock were issued to each of the two individuals. The Company capitalized the 200,000 shares of common stock at its market value on the date of issuance ($588) and it is amortizing the cost of the stock over the term of the agreement; (b) In addition, the Company agreed to pay a total of $1.4 million in cash over the contract periods. Cash payments totaling $200 were made in fiscal 1998. Future payments will be as follows: $450 in fiscal 1999, $650 in fiscal 2000, and $100 in fiscal 2001, for a total of $1.4 million, as noted above. F-22 AMBI INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data) 17. NUTRITION 21 CONSULTING AGREEMENTS, Continued In addition, at the closing of the Nutrition 21 acquisition, the Company entered into a consulting agreement with the former Chief Executive Officer ("CEO") of Nutrition 21 to secure his services from time to time, as required, to assist in business matters going forward. The former CEO was issued 100,000 stock options to purchase the Company's common stock at fair market value on the date of closing to purchase AMBI common stock. These options vest over a two year period. 18. SUPPLEMENTAL CASH FLOW INFORMATION
1998 1997 1996 ---- ---- ---- Supplemental disclosure of cash flow information: Cash paid for interest $320 $137 $104 Cash paid for income taxes 19 196 266 Supplemental schedule of non-cash investing and financing activities: Nutrition 21 acquisition payable $2,747 -- -- Common stock issued for Nutrition 21 acquisition $1,188 -- --
On August 11, 1997, the Company acquired the net assets of Nutrition 21 in exchange for $10 million in cash and 500,000 shares of the Company's common stock. In connection with the acquisition, liabilities were assumed as follows: Fair value of assets acquired $11,645 Cash purchase price 10,000 Stock issued 1,188 ------- Liabilities assumed $ 457 ======= 19. 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. 20. SUBSEQUENT EVENT On September 17, 1998, the Company entered into a strategic alliance with AHP for retail distribution of the Company's proprietary nutrition products. As part of the alliance, AHP's Whitehall-Robins Healthcare Division was granted an exclusive license to sell the Company's Cardia(R) Salt Alternative under the "Cardia" trademark in retail markets in the United States and received a first negotiation option for exclusive rights and licenses for additional nutrition products for retail distribution in the United States. In addition, AHP agreed to make equity investments in newly issued shares of the Company's common stock. On October 8, 1998, AHP paid $1.15 per share or a total of $4 million for 3,478,261 shares of newly issued Company common stock. Also on October 8, 1998, the Company received an upfront payment of $1 million from AHP for the rights and options granted under the agreement. The Company retained the exclusive rights to market its products in both direct response and ingredient channels. F-23 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 (11) 3.01d Certificate of Amendment to the Certificate of Incorporation (11) 3.01e Certificate of Amendment to the Certificate of Incorporation (12) 3.02 Amended and Restated By-laws (2) 10.01 Form of Incentive Stock Option Plan (8) 10.02 Form of Non-qualified Stock Option Plan (8) 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) 10.36 Agreement, dated October 6, 1992 between the Company and PHRI (5) 10.43 Supply Agreement dated as of January 1, 1994 by and between the Astra/Merck Group of Merck & Co., Inc. (6)* 10.44 Development and License Agreement dated as of January 1, 1994 by and between the Astra/Merck Group of Merck & Co., Inc. (6)* 10.47 Employment Agreement dated August 30, 1994 between the Company and Fredric D. Price, as amended and restated (6) 10.48 Lease dated as of February 7, 1995, between the Company and Keren Limited Partnership (7) 44 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. (9) 10.50 License Agreement dated as of December 12, 1996 between Licensee Applied Microbiology, Inc. and Licensor Aplin & Barrett Limited. (9) 10.51 License Agreement dated as of December 12, 1996 between Licensee Aplin & Barrett Limited and Licensor Applied Microbiology, Inc. (9) 10.52 Supply Agreement dated as of December 12, 1996 between Aplin & Barrett Limited and Applied Microbiology, Inc. (9) 10.53 Investors' Rights Agreement dated as of December 12, 1996 between Applied Microbiology, Inc. and Burns Philp Microbiology. Pty Limited. (9) 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. (9) 10.55 Stock and Partnership Interest Purchase Agreement dated as of August 11, 1997, for the purchase of Nutrition 21. (10) 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. (10) 10.57 Sublease dated as of September 18, 1998, between the Company and Abitibi Consolidated Sales Corporation (12) 23.1 Consent of KPMG Peat Marwick LLP (12) 27 Financial Data Schedule (12) - ------------------------------------------- (1) Incorporated by reference to the Company's Report on Form 10-K for 1991. (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-K for the fiscal 45 period January 31, 1992 through August 31, 1992. (6) Incorporated by reference to the Company's Report on Form 10-K for 1994. (7) Incorporated by reference to the Company's Report on Form 10-K for 1995. (8) Incorporated by reference to the Company's Registration Statement on Form S-1 originally filed April 15, 1986, file No. 33-4822. (9) Incorporated by reference to the Company's Report on Form 8-K dated December 27, 1996. (10) Incorporated by reference to the Company's Report on Form 8-K dated August 25, 1997. (11) Incorporated by reference to the Company's Report on Form 10-K/A2 for 1997. (12) 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. 46 EX-3.01E 2 CERTIFICATE OF AMENDMENT OF THE INCORPORATION Exhibit 3.01e 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-10.47 3 LETTER OF EMPLOYMENT Exhibit 10.47 April 28, 1998, effective as of April 1, 1998 Mr. Fredric D. Price 64 Quarry Lane Bedford, NY 10506 Dear Fred: This letter amends and restates the letter agreement dated August 30, 1994 between you and AMBI Inc. ("AMBI") regarding your position as President & Chief Executive Officer of AMBI, reporting to the Board of Directors, and is for the period commencing April 1, 1998 through March 31, 2001 (the "Contract Period"). You will also be required to serve as a Director on the AMBI Board. This offer is contingent upon the following terms and conditions: GENERAL You agree that your employment by AMBI shall be full time and that you shall engage in no other business or employment, other than supervising your passive investments. You represent that you are under no restrictions or obligations which would prevent you from serving as President and Chief Executive Officer. You may serve as a non-executive director on Boards of other companies only with the permission of the AMBI Board. COMPENSATION Your direct annualized base compensation will be $275,000 paid bi-weekly, as a non-union, full-time employee, and is fixed during the Contract Period. ANNUAL PERFORMANCE INCENTIVE You will be eligible to receive up to $275,000 annually as a performance incentive (cash award). The Board of Directors will decide on the amount of the incentive based upon AMBI's and your performance against goals established by the Board of Directors. OTHER BENEFITS Coverage for group insurance, i.e. medical, dental, life insurance, AD&D, Short and Long Term Disability, Business Travel Insurance, etc. as well as the AMBI sponsored pension plan and savings plan will be provided in accordance with the terms and conditions of each plan. STOCK OPTIONS You are granted 465,000 additional Stock Options @ $1.9375 under the AMBI 1991 Stock Option Plan, which Options will vest in equal amounts at the conclusion of each year of employment over the next three (3) years. Vested options will expire five years from the date of vesting. The Options are all subject to the terms of a Stock Option Award Agreement to be signed by AMBI and you. VACATION Annual paid vacation and holidays will accrue in accordance AMBI's vacation policy. PERIOD OF EMPLOYMENT Employment the AMBI remains on an "at will" basis. This means that both AMBI as well as you can terminate your employment at any time. AMBI makes no implied or expressed contract concerning termination of your employment, except as stated in this letter, and no such additional contract may be implied or construed unless provided in writing and signed on behalf of AMBI by an Officer of AMBI and countersigned by the Chairman of the Board of Directors. TERMINATION You hereby resign your Board membership upon termination of employment. In the event the AMBI Board of Directors relieves you of your CEO responsibilities due to performance related issues (and not due to either a change in ownership/control or for cause), you will receive one year of salary (lump sum payment) and all of your Stock Options will vest, and the period during which all vested options can be exercised will be one year from the date of termination. Your health benefits will also continue for one year from the date of termination or until you secure health benefits through another corporate position, whichever is earlier. LOAN You have an outstanding loan from AMBI of $59,500 with interest payable at 6%, with both principal and interest payments deferred. You have secured the loan with your AMBI Stock and your rights to receive AMBI stock. The loan will continue to be secured with your AMBI Stock and your rights to receive AMBI Stock, principal and interest will continue to be deferred, and the loan will be due March 31, 2001. However, one third of the principal and accrued interest shall be forgiven on each of the following dates: March 31, 1999; March 31, 2000; and March 31, 2001, provided that you are an employee of AMBI on each of these dates. OTHER MATTERS You agree that during and after termination of your employment and for a two (2) year period following termination, you will not, directly compete with AMBI or engage in or participate in any business which is in direct substantial competition with the business of AMBI. You certify that you have not been debarred by the U.S. Food and Drug Administration under 21 U.S.C. 335a (Federal Food, Drug and Cosmetic Act 306). This employment agreement is the only employment agreement in effect between AMBI and you, and supersedes the employment agreement dated August 30, 1994. If you accept this offer of continued employment and the conditions outlined above, would you please sign the original of this letter and initial each page. Please retain the duplicate for your records. Yours sincerely, /s/ Robert E. Flynn Robert E. Flynn Chairman of the Board I accept this offer of continued employment and the conditions outlined above. Signed: /s/ Fredric D. Price Date: April 1, 1998 EX-10.57 4 SUBLEASE Exhibit 10.57 SUBLEASE Between ABITIBI CONSOLIDATED SALES CORPORATION as Sublessor and AMBI INC. as Sublessee Premises: A Portion of the 2nd Floor 4 Manhattanville Road Purchase, New York TABLE OF CONTENTS Article PAGE 1. Demised Premises 1 2. Term 1 3. Rent 3 4. Use 5 5. Master Lease 5 6. Services 6 7. Electricity 7 8. Alterations and Repairs 7 9. Insurance 8 10. Assignment, Subletting and Encumbrances 9 11. Indemnification 11 12. Time Limits 11 13. Remedies Cumulative 12 14. Quiet Enjoyment 12 15. Release of Sublessor 12 16. Surrender of Premises 13 17. Estoppel Certificates 17 18. Security 13 19. Notices 15 20. Landlord's Consent Required 16 21. Broker 16 22. Waiver of Rights to Jury and Counterclaim 16 23. Miscellaneous 16 EXHIBIT A - Sublease Commencement Agreement EXHIBIT B - Form of Surety Bond SUBLEASE SUBLEASE, dated as of August ____, 1998, between ABITIBI CONSOLIDATED SALES CORPORATION (formerly known as, Abitibi-Price Sales Corp.), a Delaware corporation ("Sublessor"), having an office at 4 Manhattanville Road, Purchase, NY 10577 and AMBI INC., a New York corporation ("Sublessee"), having an office at 771 Old Saw Mill River Road, Tarrytown, NY 10591. W I T N E S S E T H: WHEREAS, by Agreement of Lease ("Original Lease"), dated as of May 15, 1995, as amended by Amendment to Agreement of Lease dated as of February 16, 1996 (the "Amendment"); the Original Lease, as amended by the Amendment, being collectively referred to herein as the "Master Lease") between Purchase Corporate Park Associates ("Landlord"), as landlord, and Sublessor, as tenant, Landlord leased to Sublessor a portion of the second (2nd) floor (the "Master Premises") in accordance with the terms of the Master Lease, in the building designated as Building D (the "Building") on land (the "Land") located in the Town of Harrison, County of Westchester, State of New York, and also commonly known as "The Centre at Purchase," a true and complete copy of which Master Lease (with certain financial terms omitted) has been delivered to Sublessee; and WHEREAS, Sublessor desires to sublet to Sublessee, and Sublessee desires to hire from Sublessor, all of the premises demised under the Master Lease upon the terms and conditions hereinafter set forth; NOW, THEREFORE, in consideration of the mutual covenants hereinafter provided, Sublessor and Sublessee hereby agree as follows: . Demised Premises. . Sublessor hereby sublets to Sublessee, and Sublessee hereby sublets and hires from Sublessor, the premises ("Premises") comprising a portion of the second (2nd) floor of the Building as leased to Sublessor under the Master Lease (being all of the Master Premises), for the sublease term hereinafter stated and for the Fixed Rent and Additional Rent (both as hereinafter defined) hereinafter reserved, subject to all of the terms and provisions hereinafter provided or incorporated in this Sublease by reference. . Sublessee agrees to accept the Premises broom clean and vacant on the Commencement Date (as hereinafter defined) in its "as-is" condition on the date hereof, subject to reasonable wear and tear. Sublessor has not made and does not make any representations or warranties as to the physical condition of the Premises, or any other matter affecting or relating to the Premises, but Sublessor shall make any necessary repairs so as to deliver the Premises to Sublessee in the condition required under the first sentence of this Section. . Any and all alterations to, work to be performed in or materials to be supplied for the Premises shall be made, performed and supplied at the sole cost and expense of Sublessee -3- and in conformance with all of the terms and provisions of this Sublease and the Master Lease. . Term. . The term ("Term") of this Sublease shall commence on the date which is the later of (i) the date Sublessor shall have obtained Landlord's written consent to this Sublease in accordance with the provisions of Article 20, and (ii) September 14, 1998 or such earlier date as Sublessee or anyone claiming through or under Sublessee first occupies the Premises for the conduct of business (the "Commencement Date"), and unless earlier terminated as herein provided, shall expire on March 14, 2006 (the "Expiration Date"). When the Commencement Date has been determined, at Sublessor's request, Sublessee shall within ten (10) days after such request, execute a written agreement, substantially in the form annexed hereto as Exhibit A. Any failure of Sublessor to send, or Sublessee to execute such written agreement shall not affect the validity of the Commencement Date. . If the term of the Master Lease is terminated for any reason prior to the Expiration Date, this Sublease shall thereupon be terminated ipso facto without any liability of Sublessor to Sublessee by reason of such early termination (the parties acknowledge that this provision is not intended to relieve Sublessor of any liability which Sublessor may have to Sublessee for voluntarily terminating the Master Lease or this Sublease in violation of Section 5.3 below or for Sublessor failing to pay all amounts due to the Landlord under the Master Lease. Except as otherwise expressly provided in this Sublease with respect to those obligations of Sublessee and Sublessor which by their nature or under the circumstances can only be, or under the provisions of this Sublease may be, performed after the termination of this Sublease, the Term and estate granted hereby shall end at noon on the date of termination of this Sublease as if such date were the Expiration Date, and neither party shall have any further obligation or liability to the other after such termination. Notwithstanding the foregoing, any liability of Sublessee to make any payment under this Sublease, whether of Fixed Rent, Additional Rent (both as hereinafter defined) or otherwise, which shall have accrued prior to the expiration or sooner termination of this Sublease, shall survive the expiration or sooner termination of this Sublease. . Except as otherwise specifically provided in this Sublease, Sublessee waives the right to recover any damages which may result from Sublessor's failure to deliver possession of the Premises on the Commencement Date. If Sublessor shall be unable to deliver possession of the Premises on such scheduled date, and provided Sublessee is not responsible for such inability to give possession, the Rent reserved and guaranteed to be paid herein shall not commence until Sublessor shall be able to so deliver possession of the Premises to Sublessee, and no such failure to deliver possession on such scheduled date shall in any way affect the validity of this Sublease or the obligations of Sublessee hereunder or give rise to any claim for damages by Sublessee or claim for rescission of this Sublease, nor shall the same in any way be construed to extend the Term. -4- . Notwithstanding anything above to the contrary, in the event that Sublessor is unable to deliver possession of the entire Premises to Sublessee by September 25, 1998, Sublessee shall be granted a license to occupy sufficient space within the Premises to accommodate thirty workstations in reasonable proximity to each other (the "Temporary Space"), it being in the sole and absolute discretion of the Sublessor to select which portion of the Premises shall serve as such Temporary Space. The Temporary Space shall include two (2) individual offices. Sublessee shall not be obligated to pay Sublessor any rent for the Temporary Space prior to the Commencement Date. Sublessee shall be responsible for the installation of telephones used in the Temporary Space and shall promptly pay to the provider of such telephones and telephone service any and all charges associated therewith. Prior to occupying the Temporary Space, Sublessee shall obtain and maintain such insurance policies as are required under the provisions of below Article 9 and any required consent of Landlord. . Sublessor agrees to deliver possession of the entire Premises to Sublessee on or prior to September 30, 1998 (subject to obtaining Landlord's consent and to force majeure conditions delaying the completion of Sublessor's premises at 4 Gannett Drive, White Plains, New York). If Sublessor has not delivered the entire Premises to Sublessee by September 30, 1998, then, except to the extent that such delay in delivery of possession is due to the failure to obtain Landlord's consent or any force majeure event, Sublessor shall pay Sublessee an amount equal to (i) $2,000.00 per day for each day from and including October 1 through October 31, 1998 and (ii) $3,000.00 per day for each day from and including November 1 through December 31, 1998 that Sublessor has not delivered possession to Sublessee of the entire Premises. . In addition to the foregoing, Sublessor agrees to deliver possession of the entire Premises to Sublessee (subject to obtaining Landlord's consent or any force majeure event) no later than December 31, 1998. . Sublessor agrees that, so long as the Sublessee is not in default under the Sublease, it shall not exercise its termination option under Article 43 of the Master Lease or otherwise voluntarily terminate the Master Lease, prior to the Expiration Date of this Sublease. . All capitalized terms not defined in this Sublease shall have the meanings ascribed to such terms in the Master Lease. . The parties agree that this Article 2 constitutes an express provision as to the time at which Sublessor shall deliver possession of the Premises to Sublessee, and, except as provided in Section 2.6 above, Sublessee hereby waives any rights to rescind this Sublease which Sublessee might otherwise have pursuant to Section 223-a of the Real Property Law of the State of New York or any other law of like import now or hereafter in force. . Rent. -5- . The rent ("Rent") reserved for the Term shall consist of the following: () annual fixed rent ("Fixed Rent") at the rate of $589,420.00 per annum for the period commencing on the Commencement Date and ending on the Expiration Date, payable in equal monthly installments of $49,118.33 each. The installment of Fixed Rent for the calendar month in which the Commencement Date occurs shall be payable on the execution hereof. Subsequent installments of Fixed Rent shall be payable on the first day of each subsequent month of the Term except that, provided that Sublessee shall not then be in default hereunder, the Fixed Rent in an amount equal to $49,118.33 per month shall be abated for a period of three (3) months beginning on the Commencement Date (if, however, this Sublease shall terminate due to a default at any time by Sublessee hereunder or if this Sublease shall be rejected in the case of a bankruptcy, the Fixed Rent otherwise abated pursuant to this section shall be immediately due and payable). If the Commencement Date shall be other than the first day of the month, it shall be prorated and the second installment of Fixed Rent shall be appropriately adjusted; and () additional rent ("Additional Rent") in an amount equal to any and all sums of money other than fixed annual rent which is or may become payable by Sublessor to Landlord under the Master Lease including, without limiting the generality of the foregoing, the "Tax Escalation Payment", as defined in Section 3.3 of the Master Lease, and the "Expense Payment", as defined in Section 4.4(a) of the Master Lease. The payment of the Tax Payment and the Operating Payment shall be made in accordance with the terms of Articles 3 and 4 of the Master Lease except that the term "Comparative Year" as defined in Section 3.1(d) shall mean the period commencing on September 1, 1998 and ending on August 31, 1999 and each subsequent one-year period; the term "Building Expense Base Factor", as defined in Section 4.2(a) of the Master Lease, shall mean the amount of Building Expenses for the period commencing on September 1, 1998 and ending on August 31, 1999; the term "Non-Building Expense Base Factor" as defined in Section 4.2(b) of the Master Lease shall mean the amount of Non-Building Expenses incurred for the period commencing on September 1, 1998 and ending on August 31, 1999; the term "Land Tax Base Factor", as defined in Section 3.2(g) of the Master Lease, shall mean the amount of taxes attributable to the Land for the period commencing on September 1, 1998 and ending on August 31, 1999; the term "Building Tax Base Factor", as defined in Section 3.2(h) of the Master Lease, shall mean the Building Taxes payable for the period commencing on September 1, 1998 and ending on August 31, 1999; and the term "Tax Year", as defined in Section 3.2(a) of the Master Lease, shall mean calendar year 1998 and each subsequent calendar year, any portion of which occurs during the Term. Additional Rent under this subsection shall be payable by -6- Sublessee to Sublessor on the date five (5) days before the date on which such amounts are payable by Sublessor to Landlord under the Master Lease. Sublessor shall have the same remedies with respect to any default by Sublessee in the payment of Additional Rent as are provided in this Sublease, the Master Lease or applicable law with respect to any nonpayment of rent. . Sublessor agrees to provide to Sublessee copies of any Tax Escalation Statements and Expense Escalation Statements promptly following their receipt by Sublessor from Landlord. . The Fixed Rent and, except as otherwise specifically provided in this Sublease, the Additional Rent, shall be paid by Sublessee to Sublessor at the office of Sublessor set forth above or such other place as Sublessor may designate in writing, without prior notice or demand therefor without any abatement, deduction or setoff. . Sublessee shall pay all Rent when due, in lawful money of the United States which shall be legal tender for the payment of all debts, public and private, at the time of payment. All sums due and payable as Rent shall from and after the date which is ten (10) days after the due date bear interest at the lesser of (i) two (2%) percent above the base rate or the equivalent thereof charged by Citibank, N.A. (or any successor thereto) or (ii) the maximum legal rate of interest permitted from time to time under law to be charged, provided, however, that no further interest shall be payable upon such interest. All interest accrued under this subsection as hereinabove provided shall be deemed to be Additional Rent payable hereunder and due at such time or times as the Rent with respect to which such interest shall have accrued shall be payable under this Sublease. . Use. . Sublessee may occupy and use the Premises only for general and executive offices and uses incidental thereto, and for no other purpose, provided that any use of the Premises shall in all respects be only as permitted under the terms and provisions of this Sublease and the Master Lease, including the rules and regulations under the Master Lease, and any and all laws, statutes, ordinances, orders, regulations and requirements of all federal, state and local governmental, public or quasi-public authorities, whether now or hereafter in effect, which may be applicable to or in any way affect the Building or the Premises or any part thereof (collectively, "Legal Requirements"). . Sublessee shall not, without the prior consent of Sublessor and Landlord, knowingly do or permit anything to be done which may result in a violation of the terms of this Sublease or the Master Lease or which may make Sublessor liable for any damages, claims, fines, penalties, costs or expenses thereunder. . Master Lease. -7- . This Sublease and all of Sublessee's rights hereunder are and shall remain in all respects subject and subordinate to (i) all of the terms and provisions of the Master Lease, a copy of which (except for the rent and certain other financial provisions) has been delivered to Sublessee, (ii) any and all amendments of the Master Lease or supplemental agreements relating thereto hereafter made between Landlord and Sublessor (copies of which Sublessor agrees to deliver to Sublessee except for the rent and certain other financial provisions which may be contained therein), provided, however, that Sublessor shall not enter into any such amendments or supplemental agreements that shall (1) adversely affect Sublessee's rights hereunder, (2) increase Sublessee's obligations hereunder other than in an immaterial way, (3) decrease the size of the Premises, or (4) shorten the term hereof and (iii) any and all matters to which the tenancy of Sublessor, as tenant under the Master Lease, is or may be subordinate. Sublessee shall in no case have any rights under this Sublease greater than Sublessor's rights as tenant under the Master Lease. The foregoing provisions shall be self-operative and no further instrument of subordination shall be necessary to effectuate such provisions unless required by Landlord or Sublessor, in which event Sublessee shall, within ten (10) business days of any demand by Landlord or Sublessor, at any time and from time to time, execute, acknowledge and deliver to Sublessor and Landlord any and all instruments that Sublessor or Landlord may deem reasonably necessary or proper to confirm such subordination of this Sublease, and the rights of Sublessee hereunder. Sublessee hereby appoints Sublessor its attorney in fact, coupled with an interest, for the purpose of executing any such instrument of subordination if Sublessee shall fail to execute, acknowledge and/or deliver any such instrument of subordination within ten (10) business days after Landlord's or Sublessor's demand therefor. . Sublessee acknowledges that in the event of a (i) termination of the Master Lease for any reason other than a voluntary agreement between Sublessor and Landlord terminating the Master Lease, or (ii) re-entry or dispossess by Landlord under the Master Lease, Landlord may, at its option, take over all of the right, title and interest of Sublessor hereunder and Sublessee agrees that it shall, at Landlord's option, attorn to Landlord pursuant to the then executory provisions of this Sublease, except that Landlord shall not (i) be liable for any previous act or omission of Sublessor under this Sublease, (ii) be subject to any offset not expressly provided in this Sublease, which theretofore accrued to the Sublessee against Sublessor, or (iii) be bound by any previous modification of this Sublease (which is made without Landlord's consent) or by any previous prepayment of more than one month's rent. . Sublessor agrees not to voluntarily terminate the Master Lease, as long as Sublessee is not in default hereunder. Sublessee shall observe and perform for the benefit of Landlord and Sublessor, each and every term, covenant, condition and agreement of the Master Lease which Sublessor is required to observe or perform with respect to the Premises as tenant under the Master Lease, except for (i) those covenants, if any, of the tenant under the Master Lease which are not incorporated by reference in this Sublease and (ii) the covenants of Sublessor to pay Landlord the "fixed annual rent" and "additional rent" (as such terms are defined in the Master Lease) and to perform its -8- obligations as tenant under the Master Lease (to the extent such obligations affect Sublessee's use and occupancy of the Premises), which covenants Sublessor shall observe and perform as long as Sublessee is not in default hereunder. Except as otherwise specifically provided in this Sublease, all of the terms, covenants, conditions and agreements which Landlord or Sublessor are required to observe or perform with respect to the Premises as parties to the Master Lease are hereby incorporated herein by reference and deemed to constitute terms, covenants, conditions and agreements which Sublessor and Sublessee are required to observe or perform under this Sublease as if set forth herein at length, mutatis mutandis, with the exception of the following articles and provisions of the Master Lease: Articles 2, 11, 24, 41, 42, 43, and 44, Sections 1.2 (i) - (iv), and 25.4 and Exhibit D of the Original Lease; Paragraphs 4, 5, 8, and Paragraph 2, second sentence, of the Amendment. Sublessor may exercise all of the rights, powers, privileges and remedies reserved to Landlord under the Master Lease to the same extent as if fully set forth herein at length, including, without limitation, all releases from liability to Landlord thereunder except as may be provided otherwise herein, and all rights and remedies arising out of or with respect to any default by Sublessee in the payment of Rent hereunder or the observance or performance of the terms, covenants, conditions and agreements of this Sublease (including those portions of the Master Lease that are incorporated herein). In the event of any inconsistency between the terms of this Sublease and the Master Lease, the terms of this Sublease shall govern. . The consent of Landlord shall be required in connection with any act which requires the consent of Landlord pursuant to the terms of the Master Lease, notwithstanding that a particular provision herein may not require Sublessor's consent or states that only Sublessor's consent is required. . Services. . Except as otherwise specifically provided in this Sublease, Sublessee shall be entitled during the Term to receive all services, utilities, repairs and facilities which Landlord is required to provide insofar as such services, utilities, repairs and facilities pertain to the Premises. Notwithstanding anything to the contrary in this Sublease, Sublessor shall have no liability of any nature whatsoever to Sublessee as a consequence of the failure or delay on the part of Landlord in performing any or all of its obligations under the Master Lease, unless such failure or delay is caused by Sublessor, and under no circumstances shall Sublessee have any right to require or obtain the performance by Sublessor of any obligations of Landlord under the Master Lease or otherwise. Sublessee's obligations under this Sublease shall not be impaired, nor shall the performance thereof be excused, because of any failure or delay on the part of Landlord in performing its obligations under the Master Lease. 6.2 If at any time during the Term Landlord shall default in any of its obligations to furnish facilities, services or utilities or to make repairs to the Premises, then, upon Sublessor's receipt of a written notice from Sublessee specifying such default, Sublessor shall, at Sublessee's sole cost and -9- expense, use its reasonable efforts to cause Landlord to cure such default. Any action or proceeding instituted by Sublessor against Landlord to enforce such rights shall be conducted at the expense of Sublessee, using attorneys which have been selected by Sublessee (such selections being subject to the prior approval of Sublessor which shall not be unreasonably withheld or delayed). 7. Electricity. 7.1 Sublessee shall comply with all of the obligations of Sublessor under the Master Lease with respect to electricity. Bills therefor shall be rendered by Sublessor to Sublessee at such times as Landlord submits bills to Sublessor therefor pursuant to the Master Lease. The amounts thereon shall be Additional Rent and shall be due and payable to Sublessor, without set-off or deduction, within ten (10) days of the rendition of such bills. 7.2 Sublessee acknowledges that (i) Sublessor is not responsible for providing or installing any equipment necessary for Sublessee's electrical requirements, and (ii) Sublessor and Landlord shall have no liability to Sublessee for any loss, damage or expense which Sublessee may sustain or incur by reason of any change, failure, inadequacy or defect in the supply or character of the electrical energy furnished to the Premises or if the quantity or character of the electrical energy is no longer available or suitable for Sublessee's requirements. 8. Alterations and Repairs. 8.1 Sublessee shall make no alterations, installations, additions or i mprovements, including Sublessee's initial leasehold improvements (collectively, "Alterations") in or about the Premises without the prior written consent of Sublessor and Landlord in each instance, which consent shall not be unreasonably withheld by Sublessor as to nonstructural Alterations which do not affect building systems provided any required consent of Landlord shall have first been obtained. Any Alterations consented to by Sublessor shall be performed by Sublessee, at its sole cost and expense, and in compliance with the following requirements: (a) Sublessee, at its sole expense, shall comply with all of the provisions of this Sublease and the Master Lease pertaining to the making of Alterations, including, without limiting the generality of the foregoing, the provisions requiring the prior written consent of Landlord before any Alterations may be made in or about the Premises; (b) Sublessee shall submit to Sublessor for its and Landlord's prior written approval all plans and specifications for such proposed Alterations, together with the name of the proposed contractor and all proposed subcontractors, and all other documentation required to be submitted by Sublessor to Landlord under the Master Lease in respect of such Alterations; (c) Sublessee shall furnish Sublessor with certificates of insurance as shall be reasonably satisfactory to Sublessor as to coverage and insurer (who shall be licensed to do business in the State of New York), including, but not limited to, liability, property damage, and worker's compensation insurance to protect -10- Sublessor, Landlord, their agents, employees, successors and assigns and Sublessee during the period of the performance of such Alteration; (d) All such Alterations shall be performed in a good and workmanlike manner and in compliance with all Legal Requirements and with all requirements of any insurance policies affecting the Premises or the Building and so as to cause as little interference as is reasonably possible with Sublessor's or its sublessees' use, occupancy and enjoyment of the premises of which the Premises are a part; and (e) Sublessee, at its sole expense, shall obtain all municipal and other governmental licenses, permits, authorizations, approvals and certificates required in connection with such Alteration. 8.2 Sublessor shall have no obligations whatsoever to make any repairs or Alterations in the Premises to any systems serving the Premises or to any equipment, fixtures or furnishing in the Premises, or to restore the Premises in the event of a fire or other casualty therein or to perform any other duty with respect to the Premises which Landlord is required to perform pursuant to certain obligations which Landlord has to Sublessor under the Master Lease. Subject to the provisions of Section 6.2 above, Sublessee shall look solely to Landlord for the making of any and all repairs in the Premises and the performance of all such other work and responsibilities and only to the extent required by the terms of the Master Lease. 9. Insurance. 9.1 Sublessee, at Sublessee's sole expense, shall maintain for the benefit of Sublessee, Sublessor and Landlord such policies of insurance required by the Master Lease or reasonably satisfactory to Sublessor as to coverage and insurer (who shall be licensed to do business in the State of New York), provided that such insurance shall at a minimum include comprehensive general liability insurance protecting and indemnifying Sublessor, Landlord and Sublessee against any and all claims and liabilities for injury or damage to persons or property or for the loss of time or of property occurring upon, in or about the Premises, and the public portions of the Building, caused by or resulting from or in connection with any act or omission of Sublessee, Sublessee's employees, agents or invitees. Sublessee shall furnish to Sublessor certificates of insurance evidencing such coverage prior to the Commencement Date. 9.2 Nothing contained in this Sublease shall relieve Sublessee or Sublessor from any liability as a result of damage from fire or other casualty, but each party shall look first to any property insurance in its favor before making any claim against the other party for recovery for loss or damage resulting from fire or other casualty. To the extent that such insurance is in force and collectible and to the extent permitted by law, Sublessor and Sublessee each hereby releases and waives all right to recovery against the other or anyone claiming through or under the other by way of subrogation or otherwise. The foregoing release and waiver shall be in force only if the insurance policies of Sublessor and Sublessee provide that such release or waiver does not invalidate the insurance; each party agrees to use its best efforts to include such a provision in its applicable insurance -11- policies. If the inclusion of said provision would involve an additional expense, either party, at its sole expense, may require such provision to be inserted in the other's policy. 10. Assignment, Subletting and Encumbrances. 10.1 Except as otherwise provided herein, Sublessee, shall not sublease, mortgage, pledge or otherwise encumber all or any part of the Premises, assign this Sublease (by operation of law or otherwise) or permit the Premises to be used or occupied by anyone other than Sublessee, without the prior written approval of Sublessor and Landlord in each instance, which approval from Landlord, as to a request for an assignment of this Sublease or a subletting by Sublessee of the Premises, shall be granted or withheld in accordance with the applicable requirements under the Master Lease, and from Sublessor shall not be unreasonably withheld or delayed. If Sublessor consents to an assignment of this Sublease or a subletting of the Premises, no such assignment or subletting shall be or be deemed to be effective until the following conditions have been met: (i) Landlord shall have consented in writing to such assignment or subletting; (ii) in the case of an assignment, the assignee shall have assumed in writing, directly for the benefit of Sublessor, all of the obligations of Sublessee hereunder and Sublessor shall have been furnished with a duplicate original of the agreement of assignment and assumption, in form and substance reasonably satisfactory to Sublessor; and (iii) in the case of a subletting, Sublessor shall have been furnished with a duplicate original of the sublease prior to the commencement of the term of such sublease, which sublease shall be in form and substance reasonably satisfactory to Sublessor, and shall be subject and subordinate to all of the terms, covenants and conditions of this Sublease and the Master Lease and shall restrict the right of the subtenant thereunder to assign such sublease or further sublet its subleased premises. Notwithstanding Sublessor's consent to any such assignment or subletting, the provisions of this subsection shall be applicable to each and every subsequent assignment or subletting, and Sublessee shall not be released from any of its obligations or liabilities hereunder. 10.2 Subject to the provisions of Section 10.3 hereof, the transfer of a majority of the issued and outstanding capital stock of any corporate Sublessee or permitted assignee of this Sublease, or the transfer of a majority of the interest in any partnership Sublessee or permitted assignee, however accomplished, and whether in a single transaction or in a series of related or unrelated transactions, shall be deemed an assignment of this Sublease. -12- 10.3 Sublessee may, without obtaining Sublessor's consent but subject to Sublessor obtaining any required consent from Landlord, (a) assign or transfer this Sublease to a corporation or other entity into which Sublessee shall be merged or consolidated or an entity which acquires all or substantially all of the assets, stock, or other equity interest of Sublessee (each, a "successor entity"), or an entity which controls, is controlled by, or is under common control with Sublessee (a "related entity"), or (b) sublet the Premises to a related entity; provided that in all such cases: (i) Sublessee shall not be in default hereunder at the time of such sublet or assignment; (ii) the principal purpose of such transfer or acquisition is not the acquisition of Sublessee's interest in this Sublease and is not made to circumvent the provisions of this Section 10.3; (iii) in the case of an assignment to a successor entity such successor entity has a net worth immediately following such merger or acquisition computed in accordance with generally accepted accounting principles at least equal to the greater of (1) the net worth of Sublessee immediately prior to such merger, consolidation or acquisition, or (2) the net worth of Sublessee herein named on the date of this Sublease; (iv) in the case of an assignment or subletting to a related entity, the rights granted to Sublessee pursuant to this Section 10.3 shall be for only so long as such assignee or sublessee shall remain a related entity and at such time as such assignee or sublessee shall no longer be a related entity the rights accorded to Sublessee by this Section 10.3 shall not apply and Sublessee shall promptly comply with all of the terms and conditions of this Section 10 with respect to such assignment or subletting; (v) Sublessor shall have been delivered, at least ten (10) days prior to the effective date of such assignment or subletting: (1) in the case of an assignment to a successor entity, proof reasonably satisfactory to Sublessor of the net worth of such assignee or sublessee, (2) in the case of an assignment or subletting to a related entity, proof reasonably satisfactory to Sublessor that such assignee or sublessee is a related entity; (3) in all cases, a duplicate original of the assignment or sublease instrument; (4) in the case of an assignment, an instrument in form and substance reasonably satisfactory to Sublessor, duly executed by the assignee, in which such assignee assumes (as of the date of such assignment) observance of and performance of, and agrees to be personally bound by, all of the terms, covenants and conditions of this Sublease on Sublessee's part to be performed; (5) in the event of a subletting, an instrument in form and substance reasonably satisfactory to Sublessor, duly executed by the sublessee, in which such sublessee agrees that in the event of a termination of this Sublease, such sublessee shall, at Sublessor's election, attorn to Sublessor upon all of the terms and conditions of this Sublease or, at Sublessor's election, enter into a new sublease with Sublessor upon all of the then executory terms and conditions of this Sublease with respect to the premises so subleased; and (6) an instrument in form and substance reasonably acceptable to Sublessor duly executed by such assignee or sublessee, in which such assignee or sublessee consents to the exclusive jurisdiction of the courts of New York State and the Federal courts located in the County of New York, State of New York. If Sublessor fails to object to any documentation provided to Sublessor pursuant to subsection -13- 10.3(b)(v) as soon as practicable but in no event later than ten (10) business days following receipt thereof by Sublessor, then such documentation shall be deemed to be reasonably satisfactory to Sublessor. 10.4 If this Sublease be assigned or if the Premises or any part thereof be further sublet or occupied by anybody other than Sublessee, Sublessor may, after default by Sublessee, collect rent from the assignee, subtenant or occupant, and, if Sublessor does so, it shall apply the net amount collected to the Fixed Rent, Additional Rent and other charges herein reserved, but no such assignment, subletting, occupancy or collection shall be deemed a waiver of Sublessee's covenants under this Article 10, or the acceptance by Sublessor of the assignee, subtenant or occupant as tenant hereunder or a release of Sublessee from the further performance by Sublessee of any of the terms, covenants and conditions of this Sublease on the part of Sublessee to be performed hereunder. 10.5 Sublessee shall pay on demand the actual costs and expenses reasonably incurred by Sublessor and Landlord, including, without limitation, reasonable architect, engineer and attorneys' fees and disbursements in connection with any proposed or actual assignment of this Sublease or subletting of the Premises or any part thereof and the review and/or preparation of documents in connection therewith. 11. Indemnification 11.1 Sublessor, Landlord, their respective employees, agents, contractors, licensees and invitees, shall not be liable to Sublessee, its employees, agents, contractors, licensees or invitees, and Sublessee shall indemnify and hold harmless Sublessor and Landlord and their respective employees, contractors, licensees or invitees for any and all loss, cost, liability, claim, damage and expense, including, without limiting the generality of the foregoing, attorneys' fees and expenses and court costs, penalties and fines incurred in connection with or arising from any injury to Sublessee or any other person or for any damage to, or loss (by theft or otherwise) of, any of the property of Sublessee and/or any other person, (i) irrespective of the cause of such injury, damage or loss if occurring in or about the Premises, and (ii) to the extent caused by the acts, omissions or negligence of Sublessee, its employees, agents, contractors, licensees, or invitees, if occurring in or about the Building. 11.2 Sublessee shall indemnify and hold harmless Sublessor and Landlord, and their respective employees, agents, contractors, licensees and invitees, from and against any and all loss, cost, liability, claims, damage and expenses, including, without limiting the generality of the foregoing, attorneys' fees and expenses and court costs, penalties and fines, incurred in connection with or arising from (i) any default by Sublessee in the observance or performance of, or compliance with, any of the terms, covenants or conditions of this Sublease or the Master Lease on Sublessee's part to be observed, performed or complied with, (ii) the use or occupancy or manner of use or occupancy of the Premises by Sublessee or any person claiming -14- through or under Sublessee or the exercise by Sublessee or any person claiming through or under Sublessee of any rights granted to Sublessee hereunder, including, without limiting the generality of the foregoing, those rights provided under Article 6 above, (iii) any acts, omissions or negligence of Sublessee or any person claiming through or under Sublessee, or the employees, agents, contractors, licensees or invitees of Sublessee or any such person, in or about the Premises or the Building either prior to, during, or after the termination of this Sublease or (iv) the condition of the Premises for which Sublessee is liable. If any action or proceeding shall be brought against Sublessor or Landlord by reason of any such claim, Sublessee, upon notice from Sublessor or Landlord, shall resist and defend such action or proceeding and employ counsel therefor reasonably satisfactory to Sublessor and Landlord. Sublessee shall pay to Sublessor on demand all sums which may be owing to Sublessor and Landlord by reason of the provisions of this subsection. Sublessee's obligations under this subsection shall survive the Expiration Date or other termination of this Sublease. 12. Time Limits. 12.1 Except with respect to actions to be taken by Sublessee for which shorter time limits are specifically set forth in this Sublease, which time limits shall control for the purposes of this Sublease, the time limits provided in those portions of the Master Lease that are incorporated herein for the giving or making of any Notice (as hereinafter defined) by the tenant thereunder to Landlord, the holder of any leasehold mortgage or any other party, or for the performance of any act, condition or covenant by the tenant thereunder, or for the exercise of any right, remedy or option by the tenant thereunder, are changed for the purpose of incorporation into this Sublease, by shortening the same in each instance by (i) fifteen (15) days with respect to all such periods of sixty (60) or more days, (ii) seven (7) days with respect to all such periods of thirty (30) or more days but less than sixty (60) days, (iii) five (5) days with respect to all such periods of twenty (20) or more but less than thirty (30) days and (iv) three (3) days with respect to all such periods of less than twenty (20) days, provided, however, that in no event shall any such period be shortened to less than five (5) days, so that any Notice may be given or made, or any act, condition or covenant performed, or option hereunder exercised, by Sublessor within the time limit relating thereto contained in the Master Lease. 12.2 Except with respect to actions to be taken by Sublessor for which longer time limits are specifically set forth in this Sublease, which time limits shall control for the purposes of this Sublease, the time limits provided in the Master Lease for the giving or making of any Notice by Landlord or the performance of any act, covenant or condition by Landlord for the exercise of any right, remedy or option by Landlord thereunder are changed for the purposes of this Sublease, by lengthening the same in each instance by (i) ten (10) days with respect to all such periods of sixty (60) or more days (ii) seven (7) days with respect to all such periods of thirty (30) or more but less than sixty (60) days, (iii) five (5) days with respect to all such periods of twenty (20) or more but less than thirty (30) days and (iv) three (3) days with respect to all such periods of less than -15- twenty (20) days so that any Notice may be given or made, or any act, condition or covenant performed or option hereunder exercised by Landlord within the number of days respectively set forth above, after the time limits relating thereto contained in the Master Lease. 13. Remedies Cumulative. 13.1 Each right and remedy of Sublessor under this Sublease shall be cumulative and be in addition to every other right and remedy of Sublessor under this Sublease and now or hereafter existing at law or in equity, by statute or otherwise. 14. Quiet Enjoyment. 14.1 Sublessor covenants that, as long as Sublessee shall pay the Fixed Rent and Additional Rent and all other amounts due hereunder and shall duly observe, perform, and comply with all of the terms, covenants and conditions of this Sublease on its part to be observed, performed or complied with, Sublessee shall, subject to all of the terms of the Master Lease and this Sublease, peaceably have, hold and enjoy the Premises during the Term without molestation or hindrance by Sublessor, except as otherwise provided in Section 5.2 hereof. 15. Release of Sublessor. 15.1 The term "Sublessor", as used in this Sublease shall be limited to mean and include only the owner or owners at the time in question of the tenant's interest under the Master Lease, and in the event of any transfer or transfers of the tenant's interest in the Master Lease, and provided that in each such document of transfer the assignee expressly assumes all of the assignor's obligations and duties thereafter arising under this Sublease, Sublessor herein named (and in case of any subsequent transfer or conveyance, the then transferor of the tenant's interest in the Master Lease) shall be automatically freed and relieved from and after the date of such transfer of all liability with respect to the performance of any covenants or obligations on the part of Sublessor contained in this Sublease thereafter to be performed. 16. Surrender of Premises. 16.1 Sublessee shall, no later than the termination of this Sublease and in accordance with all of the terms of this Sublease and the Master Lease, vacate and surrender to Sublessor the Premises, together with all Alterations, in good order, condition and repair, reasonable wear and tear excepted and loss by fire or other casualty excepted. Sublessee acknowledges that Sublessee shall be solely responsible for any and all restoration obligations imposed upon the tenant under the Master Lease. Sublessee's obligation to observe or perform this covenant shall survive the termination of this Sublease. 16.2 Sublessee expressly waives, for itself and for any person claiming through or under Sublessee, any rights which Sublessee or any such person may have under the provisions of Section 2201 of the New York Civil Practice Law and Rules and any successor law of like import then in force in connection with any -16- holdover summary proceedings which Sublessor may institute to enforce the foregoing provisions of this Article 16. 17. Estoppel Certificates. 17.1 At any time and from time to time within ten (10) days after a written request from either party to this Sublease, the other party shall execute, acknowledge and deliver to the requesting party a written statement certifying (i) that this Sublease has not been modified and is in full force and effect or, if there has been a modification of this Sublease, that this Sublease is in full force and effect as modified, and stating such modifications, (ii) the dates to which the Fixed Rent, Additional Rent and other charges hereunder have been paid, (iii) that to the best of such party's knowledge, no defaults exist under this Sublease or, if any defaults do exist, specifying the nature of each such default and (iv) as to such other matters pertaining to the terms of this Sublease as the requesting party may reasonably request. 18. Security. 18.1 (a) Simultaneously with the execution of this Sublease, Sublessee shall deposit with Sublessor the sum of Five Hundred Eighty-Nine Thousand, Four Hundred Twenty Dollars ($589,420.00) ("Security Deposit") as security for the faithful performance and observance by Sublessee of all of the terms, covenants and conditions of this Sublease on Sublessee's part to be performed and observed. Sublessor may use, apply or retain the whole or any part of the Security Deposit to the extent required for the payment of any Rent and any other sums as to which Sublessee may be in default hereunder beyond the expiration of applicable grace and notice periods and for any sum which Sublessor may expend or may be required to expend by reason of Sublessee's default beyond the expiration of applicable grace and notice periods in respect of any of the terms, covenants and conditions of this Sublease, including, without limiting the generality of the foregoing, any and all damages and deficiencies in the reletting of the Premises, whether such damages or deficiencies shall accrue before or after summary proceedings or other re-entry by Sublessor. In the event that Sublessee shall fully and faithfully comply with all of the terms, provisions, covenants and conditions of this Sublease, the Security Deposit, or so much thereof as shall not have been applied by Sublessor as aforesaid, together with accrued interest thereof, shall be returned to Sublessee promptly following the Expiration Date or date of earlier termination and delivery of the entire possession of the Premises to Sublessor. In the event of an assignment by Sublessor of its interest under the Master Lease, Sublessor shall transfer the Security Deposit to the assignee and Sublessor shall thereupon be released by Sublessee from all liability for the return of such Security Deposit. In such event, Sublessee shall look solely to its new landlord for the return of said Security Deposit. The foregoing provisions shall apply to every transfer or assignment made of the Security Deposit to a new landlord. Sublessee further covenants that it will not assign or encumber or attempt to assign or encumber the Security Deposit and that -17- neither Sublessor nor its successors and assigns shall be bound by any such assignment, encumbrance, attempted assignment or attempted encumbrance. (b) The Security Deposit shall be placed by Sublessor in an interest be aring account. Interest that accrues thereon shall belong to Sublessee. Provided Sublessee is not in default hereunder and Sublessee supplies Sublessor with its Tax I.D. Number, interest shall be paid to Sublessee once annually. The obligation to pay any taxes, whether income or otherwise, related to or affecting any interest earned on the Security Deposit shall be the sole responsibility of Sublessee and Sublessee hereby agrees to pay same. Sublessee represents that its Tax I.D. Number is 11-2653613. (c) Sublessee shall have the right, either (i) in lieu of certain funds required to be deposited with Sublessor pursuant to this Article 18 of this Sublease or (ii) at any time thereafter in substitution for such funds, to deposit and maintain with Sublessor as a portion of the security deposit referred to in Section 18.1(a) of this Sublease, a surety bond not to exceed the aggregate amount of $294,710.00, in the form attached hereto as Exhibit B (the "Surety Bond"). (d) Sublessee shall, not less than sixty (60) days prior to the expiration of the term of the Surety Bond, time being of the essence of this provision of the Sublease, deliver to Sublessor one of the following: (i) an extension of the Surety Bond for a term equal to the term of the expiring Surety Bond; (ii) a new surety bond substantially in the form attached hereto as Exhibit B; (iii) cash in the sum of $294,710.00; or (iv) an irrevocable commercial letter of credit, in accordance with the terms of Section 18.1(e) below. If Sublessee shall fail to deliver one of above items (i) through (iv) in accordance with the provisions of this Section, such failure shall be an event of default under this Sublease. (e) Sublessee shall have the right, either (i) in lieu of providing the Sublessor with a Surety Bond pursuant to Section 18.1(c) of this Sublease or (ii) at any time thereafter in substitution for such Surety Bond, to deposit and maintain with Sublessor as a portion of the security deposit referred to in Section 18.1(a) of this Sublease, an irrevocable commercial letter of credit in the aggregate amount of $294,710.00, in form and substance reasonably satisfactory to Sublessor, and issued by a member bank of the New York Clearing House Association, acceptable to Sublessor, payable upon the presentation by Sublessor to such bank in New York City of a sight draft, without presentation of any other documents, statements or authorizations, other than a written statement by an officer or authorized representative of the beneficiary of the Letter of Credit stating that Sublessee is in default under this Sublease, beyond any applicable grace period (a "Letter of Credit"), which Letter of Credit shall provide (a) for the continuance of such credit for the period of at least one (1) year from the date hereof, (b) for the automatic extension of such Letter of Credit for additional periods of one (1) year from the initial and each future expiration date thereof (the last such extension to provide for the continuance of such Letter of Credit for at least three (3) months beyond the Expiration Date) unless such bank gives Sublessor notice of its intention not to renew such Letter -18- of Credit, not less than sixty (60) days prior to the initial or any future expiration date of such Letter of Credit and (c) that in the event such notice is given by such bank, Sublessor shall have the right to draw on such bank at sight for the balance remaining in such Letter of Credit and hold and apply the proceeds thereof in accordance with the provisions of this Article 18. Each Letter of Credit to be deposited and maintained with Sublessor (or the proceeds thereof) shall be held by Sublessor as security for the faithful performance and observance by Sublessee of the terms, provisions and conditions of this Sublease, and in the event that (x) any default occurs under this Sublease, or (y) Sublessor transfers its right, title and interest under this Sublease to a third party and the bank issuing such Letter of Credit does not consent to the transfer of such Letter of Credit to such third party, or (z) notice is given by the bank issuing such Letter of Credit that it does not intend to renew the same, as above provided, then, in any such event, Sublessor may draw on such Letter of Credit, and the proceeds of such Letter of Credit shall then be held and applied as security (and be replenished, if necessary) as provided in Article 18 and herein. (f) In the event Sublessor shall use, apply or retain the whole or any part of the security deposited under this Article 18, Sublessee shall immediately deliver to Sublessor an amount equal to the sum used, applied or retained by Sublessor in accordance therewith so that at all times during the term hereof, Sublessor shall have as security hereunder an amount equal to $589,420.00. Sublessee shall pay as Additional Rent Sublessor's reasonable attorneys' fees in connection with the replacement, substitution or amendment of any Letter of Credit or Surety Bond described herein. 19. Notices. 19.1 All notices, consents, approvals or other communications (collectively, a "Notice") required to be given under this Sublease or pursuant to law shall be in writing and, unless otherwise required by law, shall be given by registered or certified mail, return receipt requested, postage prepaid, addressed: (a) if to Sublessor, at Sublessor's address set forth in this Sublease or at such other address as Sublessor may designate by Notice to Sublessee, and with a copy to Richards & O'Neil, LLP 885 Third Avenue, New York, New York 10022, Attn.: Mark A. Mauriello, Esq. (b) if to Sublessee, from and after the Commencement Date, at the Premises, Attention: General Counsel and Chief Financial Officer, and, in the event of any default notice, with a copy to Morton Ruden, Esq., 3 Sylvan Road, Westport, CT 06860. Either party may designate a new address to which Notices may be sent by Notice to the other party. Any Notice given pursuant hereto shall be deemed to have been received on the third day after the mailing thereof if mailed in accordance with the terms hereof. -19- 20. Landlord's Consent Required. 20.1 This Sublease shall be of no force or effect unless and until Sublessor shall have obtained Landlord's consent to this Sublease. 21. Broker. 21.1 Sublessee and Sublessor represent and warrant to each other that they have not dealt with any broker in connection with this Sublease other than Cushman & Wakefield, Inc., Williamson, Pickett, Gross, Inc. and Capital Real Estate Development (collectively, the "Broker") and that, to its knowledge, no broker or person other than the Broker had any part or was instrumental in any way in bringing about this transaction. Sublessee and Sublessor shall indemnify and hold each other harmless from and against any and all loss, claims, liabilities, damages and expenses, including, without limitation, attorneys' fees and expenses and court costs, arising out of or in connection with any breach or alleged breach of the above representations or any claim by any person or entity other than Broker for brokerage commissions or other compensation in connection with the consummation of this Sublease. The provisions of this Article shall survive the expiration or sooner termination of this Sublease. Sublessor shall pay the Broker any brokerage commission due the Broker pursuant to a separate agreement in connection with this Sublease, if any. 22. Waiver of Rights to Jury and Counterclaim. 22.1 Sublessor and Sublessee each hereby waive trial by jury in any action, proceeding or counterclaim brought by either of the parties against the other on any matters whatsoever arising out of or in any way connected with this Sublease, the relationship of Sublessor and Sublessee, Sublessee's use or occupancy of the Premises, and/or any claim of injury or damage, or for the enforcement of any remedy under any statute, emergency or otherwise. Sublessor and Sublessee further agree that in the event Sublessor commences any summary proceeding for non-payment of Rent, Sublessee will not interpose any counterclaim, other than compulsory counterclaims, of whatever nature or description in any such proceeding. 23. Miscellaneous. 23.1 This Sublease shall be governed by and construed in accordance with the laws of the State of New York. 23.2 The section headings in this Sublease and the table of contents are inserted only as a matter of convenience for reference and are not to be given any effect in construing this Sublease. 23.3 If any of the provisions of this Sublease or the application thereof to any person or circumstance shall, to any extent, be invalid or unenforceable, the remainder of this Sublease, or the application of such provision or provisions to persons or circumstances other than those as to whom or which it is held invalid or unenforceable, shall not be affected thereby, and every provision of this Sublease shall be valid and enforceable to the fullest extent permitted by law. -20- 23.4 All of the terms and provisions of this Sublease shall be binding upon and inure to the benefit of the parties hereto and, subject to the provisions of Article 10 hereof, their respective successors and assigns. 23.5 Sublessor has made no representations, warranties or covenants to or with Sublessee with respect to the subject matter of this Sublease except as expressly provided herein and all prior negotiations and agreements relating thereto are merged into this Sublease. This Sublease may not be amended or terminated, in whole or in part, nor may any of the provisions be waived, except by a written instrument executed by the party against whom enforcement of such amendment, termination or waiver is sought and unless the same is permitted under the terms and provisions of the Master Lease. 23.6 Unless specifically provided herein, all capitalized terms used in this Sublease which are defined in the Master Lease shall be deemed to have the respective meanings set forth therein. 23.7 The submission by Sublessor to Sublessee of this Sublease in draft form shall be deemed submitted solely for Sublessee's consideration and not for acceptance and execution. Such submission shall have no binding force and effect, shall not constitute an option for the leasing of the Premises, and shall not confer any rights or impose any obligation upon either party. The submission by Sublessor of this Sublease for execution by Sublessee and the actual execution and delivery by Sublessee to Sublessor shall similarly have no binding force and effect unless and until Sublessor and Sublessee shall have executed this Sublease and a counterpart thereof shall have been delivered to Sublessee. In consideration of Sublessor's administrative expense in considering this Sublease and the terms of Sublessee's proposed tenancy hereunder and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Sublessee's submission to Sublessor of this Sublease, duly executed by Sublessee, shall constitute an irrevocable offer for the leasing of the Premises, to continue for ten (10) business days from and after receipt by Sublessor of this Sublease duly executed by Sublessee. IN WITNESS WHEREOF, Sublessor and Sublessee have executed this Sublease as of the day and year first above written. ABITIBI CONSOLIDATED AMBI INC., SALES CORPORATION, as Sublessee as Sublessor By: /s/ D. A. Schirmer By: /s/ Gerald Shapiro Name: D. A. Schirmer Name: Gerald Shapiro Title: President Title: Vice President -21- EX-23.1 5 CONSENT OF KPMG PEAT MARWICK LLP Exhibit 23.1 Consent of KPMG Peat Marwick LLP The Board of Directors AMBI Inc. We consent to the 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. 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 September 28, 1998, except for footnote 20 which is as of October 8, 1998, relating to the consolidated balance sheets of AMBI Inc. and subsidiary as of June 30, 1998 and 1997, and the related consolidated statements operations, stockholders' equity, and cash flows for each of the years in the three-year period ended June 30, 1998, which report appears in the June 30, 1998 annual report on Form 10-K of AMBI Inc. Stamford, CT KPMG Peat Marwick LLP October 9, 1998 EX-27 6 FINANCIAL DATA SCHEDULE
5 YEAR JUN-30-1998 JUL-01-1997 JUN-30-1998 2109 0 3785 377 695 6625 1606 692 20735 8894 1543 0 0 105 10193 20735 20082 20758 2956 16264 0 0 370 1168 116 1052 0 0 0 1052 (.04) (.04)
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