-----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, NxCOL7vkXVkokC4v2hJZ2wKIMg1yWwdxcw4pEZ92Kit8JOXmq+ng0/47T4D8JFnK NBLW76UuLi2R1YCNTeAwBg== 0000889812-99-002803.txt : 19990928 0000889812-99-002803.hdr.sgml : 19990928 ACCESSION NUMBER: 0000889812-99-002803 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990927 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-K SEC ACT: SEC FILE NUMBER: 001-12106 FILM NUMBER: 99717568 BUSINESS ADDRESS: STREET 1: 4 MANHATTANVILLE ROAD CITY: PURCHASE STATE: NY ZIP: 10577-2197 BUSINESS PHONE: 9147014500 MAIL ADDRESS: STREET 1: 4 MANHATTANVILLE ROAD CITY: PURCHASE STATE: NY ZIP: 10577-2197 FORMER COMPANY: FORMER CONFORMED NAME: APPLIED MICROBIOLOGY INC DATE OF NAME CHANGE: 19920703 10-K 1 INITIAL FILING 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, 1999 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 incorporation or organization) Identification Number) 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 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 $53,301,379 as of September 22, 1999. The number of shares outstanding of Registrant's Common Stock as of September 22, 1999: 30,494,215. 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 11 Item 4 Submission of Matters to a Vote of Security Holders 12 PART II Item 5 Market Price of Registrant's Common Equity and Related Stockholder Matters 13 Item 6 Selected Financial Data 14 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 15 Item 7a Quantitative and Qualitative Disclosures About Market Risk 22 Item 8 Financial Statements and Supplementary Data 22 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 22 PART III Item 10 Directors and Executive Officers of the Registrant 23 Item 11 Executive Compensation 28 Item 12 Security Ownership of Certain Beneficial Owners and Management 34 Item 13 Certain Relationships and Related Transactions 35 PART IV Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K 37 2 PART I Item 1. BUSINESS The Company AMBI Inc. (the "Company") is a New York corporation that was incorporated on June 29, 1983 and currently concentrates its business primarily on research, development, manufacturing, and sales of Nutrition Products. The Company supports the value of its Nutrition Products with "pharmaceutical-type" clinical trials. The Company's Nutrition Products are developed for consumers concerned primarily about cardiovascular health and diabetes. 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. 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 $10.0 million (the "Cash Purchase Price"), plus 500,000 restricted shares of Common Stock of the Company, and additional cash payments that 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 loan from State Street Bank and Trust Company ("SSBT") and the remainder came from internal working capital. All of the proceeds from the SSBT loan were repaid as of January 21, 1999. The products acquired from Nutrition 21 constituted a large majority of the Company's revenues during the fiscal year ended June 30, 1999. On September 17, 1998, the Company entered into a strategic alliance with American Home Products Corporation ("AHP") for the right to distribute certain of the Company's proprietary nutrition products in certain retail channels in the U.S. As part of the alliance, Whitehall-Robins Healthcare Division was granted an exclusive license to sell the Company's Cardia(Registered) Salt 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, on October 8, 1998, AHP paid $1.15 per share, or a total of $4.0 million, for 3,478,261 shares of newly-issued Common Stock from the Company. Also on October 8, 1998, the Company received a non-refundable payment of $1.0 million from AHP for the rights granted under the agreement. The Company retained the exclusive rights to market its products in both direct response and ingredient channels. On January 21, l999, the Company acquired substantially all of the assets and assumed certain of the liabilities of Optimum Lifestyle, Inc. ("OLI") relating to the business of developing, 3 producing, and marketing dietary supplements, primarily nutrition bars that are marketed under the registered trademark "Lite Bites" through the QVC, Inc. ("QVC") television network (the "Lite Bites Business"). These products are manufactured to proprietary specifications under agreements with third party manufacturers. The purchase price paid by the Company was $6.0 million, including related transaction costs (the "Cash Purchase Price"), and 1,304,347 restricted shares of Common Stock of the Company. Part of the Cash Purchase Price was provided pursuant to a Revolving Credit and Term Loan Agreement (the "Loan Agreement") with SSBT and the remainder came from internal working capital. The Loan Agreement amended and restated the loan entered into in connection with the acquisition of Nutrition 21, and bears interest at SSBT's prime rate plus 1% and is due February 1, 2002. Additional contingent payments will be made to the Seller depending primarily on sales levels of the Lite Bites Business achieved during the five year period following closing and/or the availability of Lite Bites products through certain distribution 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". The Company develops Nutrition Products that are regulated by the 1994 Dietary Supplement Health and Education Act (DSHEA) and the Orphan Drug Act, and markets its products to consumers, physicians, pharmacists, dietitians, other health care professionals, and other companies, 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. A composition of matter patent for chromium picolinate and its uses is exclusively licensed for its duration to Nutrition 21 by the United States Department of Agriculture ("USDA"), and expires August 8, 2000. In addition to the composition of matter patent, the Company owns eight patents which cover certain chromium compositions and their uses, including three patents that expire in 2009, for the use of chromium picolinate in the management of cholesterol, glucose control, and increasing lean body mass and reducing body fat. The Company also owns a patent for a novel chromium picolinate complex, which the company calls "Chromax(Registered) Plus", that also covers the use of the chromium picolinate complex in the management of cholesterol, glucose control, and increasing lean body mass and reducing body fat. This improved chromium picolinate complex contains combinations of chromium, picolinic acid, and various nutrients for enhancing the benefits of chromium picolinate alone. New Chromax Plus complexes should provide added benefits to people concerned about these issues, and is planned for development, in a different form, 4 as a prescription drug for people with steroid-induced diabetes. Chromax Plus complexes will have patent protection into the year 2018. See "Proprietary Rights." AMBI and Nutrition 21 have demonstrated the safety and efficacy of Chromax chromium picolinate in more than 15 well-controlled clinical trials for people concerned about maintaining healthy blood glucose levels, increasing lean body mass and reducing body fat, and promoting healthy cholesterol levels. In 1999, scientists presented research at a symposium during the 59th annual scientific sessions of the American Diabetes Association (ADA) that supports the emerging role for the dietary supplement Chromax(Registered) chromium picolinate in the management of diabetes. Babak Bahadori, MD, of the University of Graz in Austria found that chromium picolinate may enhance the effects of metformin and oral sulfonylureas, the most commonly used drugs in the treatment of diabetes. Dr. Bahadori's data suggest that in obese patients with Type 2 diabetes receiving a sulfonylurea and metformin, supplementation with chromium picolinate significantly lowered fasting insulin levels without a detrimental effect on glucose control. The ability of chromium picolinate to lower fasting insulin levels in patients already receiving diabetic medications is clinically important because an elevated insulin level in the blood is an established risk factor for cardiovascular disease. These findings provide justification for the use of chromium picolinate as a nutritional adjunct in the dietary management of diabetes. Additional research conducted in 1999 by William T. Cefalu, MD, Associate Professor of Medicine in the Endocrinology, Diabetes and Metabolism Unit at the University of Vermont College of Medicine described an improvement in insulin sensitivity in obese people with pre-diabetic symptoms who received Chromax(Registered) chromium picolinate. Furthermore, Alexander Ravina, MD, of the Diabetes Department at the Linn Clinic in Haifa, Israel, published results of a clinical trial in Diabetic Medicine that showed that chromium picolinate reduced or eliminated the symptoms in 41 out of 44 patients with steroid-induced diabetes after standard drug therapy failed. In Dr. Ravina's study, the 41 patients who had developed diabetes as a result of undergoing steroid treatment and who benefited from Chromax(Registered) chromium picolinate were able to reduce or eliminate their diabetic medication, such as insulin. Patients were given Chromax(Registered) supplements starting at daily doses of 600 micrograms of chromium and gradually decreasing them to 200-400 micrograms daily within one week. Chromium picolinate is marketed by the Company under its registered trademark Chromax(Registered). 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. In 1996, chromium picolinate was approved by the U.S. Food and Drug Administration ("FDA") for use as a supplement in animal feed for swine. In addition to sales for human consumption, the Company sells chromium picolinate for use in certain animal feed applications. The Company has its products manufactured and formulated to its specifications by 5 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, drug stores, and mass merchandisers, and also through direct sales and catalogues sales. The Company has approximately 50 raw materials customers. During the year ended June 30, 1999, Leiner Health Products accounted for approximately 12% of revenues. The Company is developing new micro-nutrients such as arginine silicate and others 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"), of Finland, to sell Orion's patented salt in the United States. The Company began selling Cardia(Registered) Salt in April 1996. This product has reduced sodium compared to regular salt and contains potassium and magnesium, essential minerals that have been shown to promote healthy 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. For example, two separate studies released in April and May 1997, respectively, compared the use of Cardia Salt and regular salt in hypertensive patients and found reduced blood pressure in the patients who used Cardia Salt. On September 17, 1998, the Company licensed Cardia Salt to AHP for sale in U.S. retail markets. See "The Company." In January 1999, the Company acquired the Lite Bites Business. Lite Bites products are sold by the Company to QVC who offers them for sale to consumers in the US primarily via QVC's direct response television programs. The Lite Bites products constitute part of a fat fighting system and have demonstrated weight loss when used as part of a program including diet modification and exercise. In addition, the Company is working with QVC to expand the Lite Bites product offerings and to broaden geographic penetration in certain QVC international markets. In August 1999, the Company and QVC entered into a strategic alliance that provides for the expansion of distribution of Lite Bites nutrition products outside the U.S., introduction of a new line of products called Sweet Support(Trademark) that addresses the special dietary needs of people with diabetes, and test marketing of a new Company product line composed of multiple nutrition products. In connection with the alliance, AMBI issued to QVC 420,000 performance-based warrants to purchase the Company's Common Stock. During the year ended June 30, 1999, QVC, Inc. accounted for approximately 12% of revenues. Other Products The Company is evaluating other proprietary Nutrition Products in the areas of cardiovascular disease, diabetes, infectious disease, and gastrointestinal disorders. The Company is developing nisin, a member of the lanthocin class of peptides, for use as a "probiotic" to promote a healthy balance of intestinal flora. 6 Pharmaceutical Products The Company's infectious disease drug technology is centered around the compound nisin, a member of the lanthocin class of peptides, as a potential treatment for infections of the colon. All other infectious disease programs have been curtailed. In fiscal 1998, the Company determined that it did not have the resources necessary to take pharmaceutical products for the treatment of infectious diseases 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 seeking corporate partners to develop and commercialize these products. With respect to drugs requiring FDA review and approval, during each phase of the 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 a development program will continue should there be a negative evaluation of the cost and risks of continuing to develop a particular product. Drug product candidates undergo extensive safety and efficacy testing and must have approval of a New Drug Application ("NDA") from the FDA prior to commercialization in the U.S. See "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 with relatively little affect on 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. The Company does not anticipate that a product for treating infections of the colon will be available for marketing for at least several years. 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(Trademark) Dairy Wipes in April 1996. Pharmaceutical Partners In March 1996, the Company entered into an exclusive Agreement with AZWELL, Inc. (formerly Nippon Shoji Kaisha, Ltd. of Osaka, Japan), under which AZWELL agreed to provide research funding, and equity and debt financing, in return for exclusive rights to develop and market certain nisin-based drug products in Japan, certain Asian countries, Australia and New Zealand. In connection with the agreement, AZWELL invested $2.0 million in the Company's Common Stock and loaned the Company another $2.0 million which could be repaid, at the Company's option, with the Company's Common Stock upon meeting certain milestones. The Company advised AZWELL 7 that one milestone, FDA acceptance of its Investigational New Drug application for diseases of the colon, was met. On March 18, 1999, the Company exercised its right and repaid $1.0 million of the loan with its Common Stock and repaid the other $1.0 million in cash. The Development and License Agreement, and Supply Agreement with the Astra/Merck Group of Merck & Co., Inc., related to developing and marketing certain nisin-based drugs for treating ulcer disease, was mutually terminated during the fiscal quarter ended June 30, 1999. Governmental Regulation Healthcare Products that 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. 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 that have completed this process. There can be no assurance that the Company's proposed drug product will prove to be safe and effective under these regulatory procedures. See also "Pharmaceutical Products." Depending upon the ingredients of a specific product, some nutrition products can be marketed in the U.S. under the Dietary Supplement Health and Education Act (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 products and product candidates. These efforts are conducted with industrial and academic co-workers in various countries. During the fiscal years ended June 30, 1999, 1998 and 1997, approximately $1.8 million, 8 $2.7 million, and $4.8 million were spent on research and development by the Company. Proprietary Rights Cardia, CardiaNutrition, Lite Bites, and Lite Bites Fat-Fighting System Chewies are registered trademarks 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. 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 and other trademarks. Nutrition Patents The Company owns 16 patents on Nutrition Products. Nutrition 21 has an exclusive license from the USDA for the duration of a patent that 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 owns three U. S. patents expiring in 2009 relating to the use of chromium picolinate for reducing hyperglycemia and stabilizing the level of serum glucose (glucose control), for reducing undesirable levels of blood serum lipids (management of high cholesterol), and increasing lean body mass and reducing body fat (body composition). The Company also owns a U. S. patent expiring in 2018 for a novel chromium picolinate complex, which the Company calls Chromax Plus, that contains combinations of chromium, picolinic acid, and various nutrients for enhancing the benefits of chromium picolinate alone, and its uses for glucose control, management of high cholesterol, and for body mass composition. The Company owns other patents relating to, among other things, chromium/biotin treatments for reducing hyperglycemia and stabilizing levels of serum glucose, magnesium taurate treatments of cardiac conditions, and arginine-silicate-inositol complexes for preventing or inhibiting atherosclerosis which expire during the period from 2015 through 2018. The Company also has other patent applications, including patent applications on other enhanced chromium picolinate compositions and their uses. The Company maintains non-disclosure safeguards, including confidentiality agreements, with employees, certain consultants, and Science 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 that exist. Pharmaceutical Patents The Company owns more than 160 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. 9 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 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 products 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 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(Registered) Salt 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 In January 1999, as a result of the Company's acquisition of the Lite Bites Business, the Company began selling Lite Bites through QVC's direct response television programs. In August 1999, the Company and QVC entered into a strategic alliance which provides for the expansion of distribution of Lite Bites nutrition products outside the U.S., introduction of a new line of products called Sweet Support(Trademark) that addresses the special dietary requirements of people with diabetes, and test marketing of a new Company product line composed of multiple nutrition products. The Company is testing a variety of direct response distribution systems including direct mail, the Internet, and catalogs. Selling Products as Ingredients In fiscal 1999, the majority of the Company's revenues were generated from the sale of ingredients products including Chromax(Registered) chromium picolinate, Selenomax(Registered) selenium, and Zinmax(Registered) zinc picolinate. The Company sells the ingredients to many customers throughout the U.S. for incorporation into their product lines. Customers include Leiner Health Products, Twin Laboratories, Weider, Rexall Sundown, General Nutrition Centers, and other large food and dietary supplement marketers. 10 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 likely to be in short supply in the average American diet. The Company is the only licensed supplier of chromium picolinate (a patented composition) in the United States and owns patents for essential uses of chromium picolinate; at the retail level, sales of chromium picolinate are estimated to be more than $125 million. Employees As of June 30, 1999, the Company had 41 full-time employees, of whom 4 were executive employees, 16 were administrative, 9 were engaged in marketing and sales, and 12 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 Since September 1998, the Company maintains its headquarters at 4 Manhattanville Road, Purchase, New York 10577-2197 (Tel: 914-701-4500). 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. In November 1998, the Company relocated its laboratories to 777 Old Saw Mill River Road, Tarrytown, New York 10591 (Tel: 914-347-7110). Pursuant to a lease that expires in November 2003, the annual rent is $29,590. The Company maintains a sales office in support of its ingredients products business at 1010 Turquoise Street, San Diego, California 92109 (Tel: 619-488-1021). Pursuant to a lease that expires in April 2002, the annual rent on this office is $38,034. The Company also maintains an office in support of its Lite Bites business at 180 Harbor Drive, Sausalito, California 94965 (Tel: 415-289-0333). Pursuant to a lease that expires in January 2000, the annual rent on this office is $18,540. Item 3. LEGAL PROCEEDINGS The Company was 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 sued under the Lanham Act and New York General Business Law, alleging that the term "Salt Alternative" used by AMBI to describe its Cardia(Registered) product, amounts to unfair competition by leading consumers to believe that the Cardia product is salt free. Effective November 9, 1998, the Company and RCN settled the lawsuit. The Company in the ordinary course of its business has brought several patent infringement actions against companies that are selling chromium picolinate in violation of the Company's patent rights. As of this date, these actions are ongoing, and the Company intends to vigorously protect its 11 proprietary rights. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to the Company's shareholders during the fiscal quarter ended June 30, 1999. 12 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 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, 1997 | $3.375 $1.938 $0.313 $0.188 | December 31, 1997* | $4.00 $1.75 $0.281 $0.016 | March 31, 1998 | $2.25 $1.25 | June 30, 1998 | $2.188 $1.188 | September 30, 1998 | $1.50 $0.625 | December 31, 1998 | $2.00 $0.625 | March 31, 1999 | $1.688 $1.063 | June 30, 1999 | $2.969 $1.063 * Warrants expired November 30, 1997 13 Item 6. SELECTED FINANCIAL DATA The following tables summarize 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.
Selected Statement of Year Ended June 30, - ---------------------------------------------------------------------------------------------------------------- Operations Data: 1999(4) 1998(2) 1997(1) 1996 1995 - ---------------------------------------------------------------------------------------------------------------- Total Revenues $28,301 $20,758 $11,280 $16,022 $11,726 Gross Profit 23,519 17,802 6,282 9,669 8,468 Operating Income/(Loss) 6,469 1,467 (16,635) (4,621) 440 Income/(Loss) before taxes (3) 6,347 1,168 (6,661) (4,434) 537 Income Taxes 482 116 152 285 254 Net Income/(Loss) 5,865 1,052 (6,813) (4,719) 283 Diluted Earnings /(Loss) per Share 0.19 (0.04) (0.38) (0.34) 0.01 At June 30, - ---------------------------------------------------------------------------------------------------------------- Selected Balance Sheet Data: 1999 1998 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------- Working Capital $1,879 $ (2,269) $7,055 $14,812 $7,333 Total Assets 34,451 20,735 12,754 23,367 13,788 Total Liabilities 12,950 10,437 5,144 6,221 3,163 Long Term Obligations 3,807 1,543 2,184 4,408 2,267 Redeemable Preferred Stock 921 0 0 0 0 Stockholders' Equity 20,670 10,298 7,610 15,646 9,125
- ----------------------------- (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 remainder of the fiscal year (see Item 13-Certain Relationships and Related Transactions). (2) Consolidated Statements 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. (4) Consolidated Statements of Operations includes the operations of the Lite Bites business from January 1, 1999, the effective date of acquisition. 14 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. Overview The following table sets forth items in the Consolidated Statements of Operations as a percent of revenues: Fiscal Year Percent of Revenues 1999 1998 1997 ---- ---- ---- Revenues 100.0% 100.0% 100.0% Gross profit * 82.2 85.3 51.7 Research & development expense 6.3 12.8 42.8 Selling, general and administrative expense 44.0 58.3 153.5 Operating income (loss) 22.9 7.1 (147.5) Net income (loss) 20.7 5.1 (60.4) * Based upon percent of net sales Results of Operations 1. Fiscal 1999 vs. Fiscal 1998 Revenues Net sales for fiscal 1999 were $26.9 million, an increase of 34.0% compared to $20.1 million in fiscal 1998. The increase in net sales is due primarily to increased ingredient sales of $4.0 million from the August 1997 acquisition of Nutrition 21, and an increase of $3.1 million of product sales from the January 1999 acquisition of the Lite Bites Business, partially offset by a decline in sales from pharmaceutical products of $0.3 million. Other revenues for fiscal 1999 were $1.4 million, an increase of 105.6% compared to $0.7 million in fiscal 1998. The increase is comprised primarily of a non-refundable payment for the rights granted to the Whitehall-Robbins Healthcare division of American Home Products Corporation (AHP) in accordance with the License, Option and Marketing Agreement entered into in September l998, partially offset by a decrease of $0.6 million in revenue from pharmaceutical partners. 15 Gross Profit Gross profit of $23.5 million increased $5.7 million or 32.1% in fiscal 1999 compared to $17.8 million in fiscal 1998 which includes $1.4 million of revenue with no associated costs. Gross profit margins on net sales declined to 82.2% in fiscal 1999 compared to 85.3% in fiscal 1998, reflecting lower gross margins on Lite Bites products, partially offset by higher gross margin ingredient product sales. Research and Development Research and development expense declined $0.9 million, or 32.8% in fiscal 1999 compared to fiscal 1998. The decrease is attributable to the Company's decision to reduce research activities related to its infectious disease drug business. Selling, General and Administrative Selling, general and administrative expense increased $0.4 million, an increase of 2.9% in fiscal 1999 when compared to fiscal 1998. The increase is due to greater spending for administrative expense and Lite Bites marketing expense, partially offset by reduced promotional expenses for ingredient products. Operating Income Operating income for fiscal 1999 was $6.5 million, an increase of 341% compared to $1.5 million in fiscal 1998. The increase in operating income is primarily due to the acquisition of the Lite Bites Business combined with increases in sales of ingredients and a $0.7 million increase in other revenues. Partially offsetting these increases were higher selling, general and administrative expense as well as increased amortization costs resulting from the acquisition of the Lite Bites Business. Income Taxes Income taxes for fiscal 1999 were $0.5 million, an increase of $0.4 million, compared to $0.1 million in fiscal 1998. The increase is primarily due to estimated federal alternative minimum tax and state income taxes from the Company's increased profitability. 2. Fiscal 1998 vs. Fiscal 1997 Revenues Net sales for fiscal 1998 were $20.1 million, an increase of 93.9% compared to $10.4 million in fiscal 1997. The increase in net sales was primarily due to increased ingredient sales from the August 11, 1997 acquisition of Nutrition 21. Fiscal 1997 results included revenues from 16 Aplin & Barrett Limited (A&B) while no revenue was recorded for A&B in fiscal 1998 as the business was sold on December 12, l996. Sales of other products decreased in fiscal 1998 from fiscal 1997 by a net amount of $3.5 million, primarily due to a change in marketing and distribution strategy for Cardia Salt. Gross Profit Gross profit increased $11.5 million or 183.4% in fiscal 1998 compared to $6.3 million in fiscal 1997. Gross profit margins increased to 85.8% in fiscal 1998 compared to 55.7% in fiscal 1997. The increase in both gross profit dollars and gross profit margin was attributable primarily to a change in the sales mix from fiscal 1997. Nutrition 21 product sales, which comprised 92% of fiscal 1998 revenues, had an average gross profit of approximately 90%. 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. Research and Development Research and development expense declined $2.2 million, or 45.0% in fiscal 1998 when compared to fiscal 1997. The decrease in expense in fiscal 1998 was due to the Company's decision to reduce research activities related to the infectious disease drug business. Selling, General and Administrative Selling general and administrative expense decreased $5.2 million, or 30.1% in fiscal 1998 when compared to fiscal 1997. The primary reason 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 and Wipe Out Dairy Wipes, offset somewhat by increased marketing and promotional expenses related to Nutrition 21. Operating Income Operating income increased $18.1 million or 108.9% in fiscal 1998 over fiscal 1997. The Company became profitable in fiscal 1998 due to revenues from Nutrition 21 and by reducing non-ingredient marketing and sales expense as well as research and development costs. Business Segments The Company operates in two business segments - Nutritional Products and Pharmaceutical Products. Nutritional Products 1. Fiscal 1999 vs. Fiscal 1998 Nutritional Products revenues were $27.4 million in fiscal 1999, an increase of 44.4% compared to $19.0 million in fiscal 1998. The increase in revenues is due to increased ingredient, sales of $4.0 million from the August 1997 acquisition of Nutrition 21, combined with product sales of $3.1 million from the January 1999 acquisition of the Lite Bites Business, and other revenue primarily attributable to fees and royalties from AHP. 17 Nutritional Products operating income was $6.3 million in fiscal 1999, an increase of 196.3% compared to $2.1 million in fiscal 1998. The increase is primarily due to the acquisition of the Lite Bites Business, increased sales of ingredients, and other revenue primarily attributable to fees and royalties from AHP. Partially offsetting these increases were higher selling, general and administrative expense as well as increased amortization costs resulting from the acquisition of the Lite Bites Business. 2. Fiscal 1998 vs. Fiscal 1997 Nutritional Products revenues were $19.0 million in fiscal 1998. There were no Nutritional Products sales in fiscal 1997. The increase is due to the acquisition of Nutrition 21 in August 1997. Nutritional Products operating income was $2.1 million in fiscal 1998. There was no Nutritional Products operating income in fiscal 1997. Pharmaceutical Products 1. Fiscal 1999 vs. Fiscal 1998 Pharmaceutical Products revenues were $0.9 million in fiscal 1999, an decrease of 49.1% compared to $1.8 million in fiscal 1998. The decrease in revenues is due to non-recurrence of $0.6 million of revenues from pharmaceutical partners received during fiscal 1999 and from reduced sales of $0.3 million nisin-based animal health products. Pharmaceutical Products operating income was $0.1 million in fiscal 1999, an increase of $0.8 million compared to a loss of $0.7 million in fiscal 1998. The increase is primarily due a reduction in research and development expenses associated with the Company's pharmaceutical products, partially offset by the decrease in revenues. 2. Fiscal 1998 vs. Fiscal 1997 Pharmaceutical Products revenues were $1.8 million in fiscal 1998, a decrease of 84.1% compared to $11.3 million in fiscal 1997. The decrease is primarily due to sale of the A&B food preservatives business in December 1996. Pharmaceutical Products operating loss was $0.7 million in fiscal 1998, a reduction of 95.9% compared to an operating loss of $16.6 million in fiscal 1997. The reduction in operating loss is primarily due to elimination of operating losses at A&B after the sale of the business and reductions in research and development expenses associated with the Company's pharmaceutical products. 18 Liquidity and Capital Resources Cash and cash equivalents at June 30, l999 were $4.5 million compared to $2.1 million at June 30, l998. As of June 30, 1999, the Company had a working capital surplus of $1.9 million compared to a working capital deficit of $2.3 million as of June 30, l998, due primarily to increases in cash and cash equivalents combined with increases in inventory. During fiscal year 1999, cash provided by operations was $8.8 million compared to $1.9 million in fiscal 1998. This increase was due in large part to higher net income and improved working capital management most notably improvements in debt and receivable turnover management. Operational cash flows in fiscal 1999 were reduced by an increase in inventories. Cash used for investing activities during fiscal 1999 was $10.3 million compared to $10.6 million in fiscal 1998. The primary uses of cash in fiscal 1999 were for the purchase of the Lite Bites Business on January 21, l999 of $6.1 million, including related transaction costs, and for a contingent payment of $2.8 million to the former owners of Nutrition 21. Cash provided by financing activities for fiscal 1999 was $3.9 million compared to $2.3 million in fiscal 1998. On January 21, l999, the Company entered into an Amended and Restated Revolving Credit and Term Loan Agreement (the "Loan Agreement") with State Street Bank & Trust Company ("SSBT") which Loan Agreement amended and restated a prior agreement with SSBT. The Loan Agreement is for a $5.5 million term loan and a $4.0 million revolving credit facility for the purposes of acquiring the Lite Bites Business and for general corporate purposes. Loans from SSBT bear interest at the prime rate plus 1% and are due February 1, 2002. The Company is making monthly payments of principal and interest on the loan. The Company had no outstanding balance on the revolving credit facility as of June 30, l999. As of June 30, 1999, the Company had an outstanding term loan balance of $4.9 million with SSBT. On September 17, l998, the Company entered into a strategic alliance with American Home Products Corporation ("AHP"). Under a License, Option and Marketing agreement, AHP's Whitehall-Robins Healthcare Division was granted, for $1.0 million, an exclusive license to sell the Company's Cardia(Registered) Salt in retail markets in the United States. Under a separate Stock Purchase Agreement, AHP, on October 8, l998, paid $1.15 per share, or a total of $4.0 million, for 3,478,261 shares of newly issued Common Stock. The Company retained the exclusive rights to market its products in both direct response and ingredient channels. In accordance with the Purchase Agreement for the acquisition of Nutrition 21, the Company recorded on its balance sheet at June 30, l999, a current liability of $2.9 million for the 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 19 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 March 1996, the Company entered into an agreement with AZWELL, Inc. (formerly Nippon Shoji Kaisha), under which AZWELL 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, AZWELL invested $2.0 million in the Company's Common Stock and loaned the Company another $2.0 million which could be repaid, at the Company's option, with the Company's Common Stock upon meeting certain milestones. The Company advised AZWELL that one milestone, FDA acceptance of its Investigational New Drug application for diseases of the colon, was met. On March 18, l999, the Company exercised its right and settled $1.0 million of the loan with its Common Stock and repaid $1.0 million in cash. On December 10, l998, the Company issued 1,500 shares of new Series E Preferred Stock ("E Preferred") with a par value of $0.01 per share. The E Preferred, which is convertible into common stock of the Company at a fixed price of $1.25 per share, was exchanged for $1.5 million face amount of the Company's outstanding Series C Preferred Stock ("C Preferred"), $1.0 million in cash, and the issuance of 324,689 shares of the Company's Common Stock. As a result of this exchange transaction, the Company recorded a one-time incremental preferred dividend of $242 thousand, representing the excess of the consideration exchanged over the carrying value of the then outstanding C Preferred. On January 27, l999, the Company issued 575 shares of new Series F Preferred Stock ("F Preferred") with a par value of $0.01 per share. On that date, the Company's then outstanding 5,750 shares of D Preferred Stock ("D Preferred") and accrued dividends thereon of $59 thousand were exchanged for $575 thousand face amount of F Preferred; 78,166 shares of the Company's common stock and the resetting of the exercise price of the Warrants of the Company, issued in connection with D Preferred, to $1.25. The F Preferred has a conversion price of $1.25 per share. The fixed conversion rate is subject to adjustments in certain circumstances. The F Preferred bears dividends at a rate of 10% per annum payable in cash, or at the option of the Company, in shares of Common Stock. As a result of this exchange transaction, the Company recorded a one-time incremental preferred dividend of $81 thousand, representing the excess of the consideration exchanged over the carrying value of the then outstanding D Preferred. The F Preferred is subject to conversion at any time at the option of the holders, and is subject to mandatory conversion after three years. 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, l999, the Company had no borrowings under this line. The Company believes that cash generated from operations and cash available under the line of credit will provide sufficient liquidity to fund operations for the next twelve months. The 20 Company continues to eliminate expenditures that are not critical to the process of generating sales. Future acquisition activities and any increases in marketing and research and development expenses over the present levels may require additional funds. Also, the Company is obligated to repay the borrowings to SSBT in February 2002. 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 Readiness Disclosure Many computer systems and embedded technologies may experience problems handling dates beyond the year 1999 and therefore may need to be modified prior to the Year 2000 in order to remain functional. The company is taking steps to ensure its readiness for handling dates beginning in the Year 2000. The Company completed the implementation of Year 2000 readiness of its critical operational and administrative software during the month of August 1999. The Company will continue to monitor its software vendors for additional changes that may affect Year 2000 readiness, and will implement such changes, if required. The Company has formally communicated with all of its key suppliers to determine their Year 2000 state of readiness and the extent to which the failure of any of their systems may impact the Company's operations. The communication and evaluation process is ongoing. Based upon current information, the Company estimates that the costs of addressing the Year 2000 issue have not been material and are expected to continue to be immaterial. To the extent the Company is uncertain as to any of its key suppliers Year 2000 readiness, it may choose to increase key product inventories during 1999 to assure continuity of operations. The Company currently believes that it is difficult to identify our most reasonably likely worst case Year 2000 scenario. However, a reasonable worst case scenario would be a failure by a significant third party in the supply and distribution chain to remediate its Year 2000 deficiencies that would continue for several days or more. Any such failure could impair the manufacture and/or delivery of products. The Company's Year 2000 efforts are ongoing and the overall plan, as well as the Company's development of contingency plans, will continue to evolve as new information becomes available. Recently Issued Accounting Standards In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 requires companies to recognize all derivatives as assets or 21 liabilities measured at their fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133, an Amendment of FASB Statement No. 133". SFAS No. 137 defers the effective date of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" for one year. SFAS No. 133, as amended, is now effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. The Company is currently evaluating the impact of SFAS No. 133 on the Company's financial position and operating results. Item 7a QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk represents the risk of changes in value of a financial instrument, derivative or non-derivative, caused by fluctuations in interest rates, foreign exchange rates and equity prices. The Company has no financial instruments that give it exposure to foreign exchange rates or equity prices. The Company's existing term loan with State Street Bank and trust Company bears interest at a rate equal to the prime lending rate plus one percent. As a result, the Company does have exposure to changes in interest rates. For example, if interest rates increase by one percentage point from current levels, the Company would incur incremental interest expense of $72 thousand through the scheduled maturity of the term loan on February 1, 2002. 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. 22 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 (53) 1994 President, Chief Executive Officer, and Director Robert E. Flynn (66) 1996 Chairman of the Board P. George Benson, PhD (53) 1998 Director Audrey T. Cross, PhD (54) 1995 Director Sander A. Flaum (62) 1999 Director Jonathan de la Harpe, PhD (54) 1989 Vice President, Technical Operations Marvin Moser, MD (75) 1997 Director Robert E. Pollack, PhD (59) 1995 Director Gerald A. Shapiro (52) 1998 Vice President, Finance and Administration and Chief Financial Officer Benjamin T. Sporn (61) 1986 Senior Vice President, General Counsel and Secretary 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 23 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. Audrey T. Cross, PhD, was elected a Director of the Company in January 1995. Dr. Cross has been Associate Clinical Professor at the Institute of Human Nutrition at the School of Public Health of Columbia University since 1988. She also works as a consultant in the areas of nutrition and health policy. She has served as a special assistant to the United States Secretary of Agriculture as Coordinator for Human Nutrition Policy and has worked with both the United States Senate and the California State Senate on nutrition policy matters. Dr. Cross received a 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. Sander A. Flaum was elected a Director of the Company in May 1999. Mr. Flaum has been CEO of Robert A. Becker, Inc. EURO SCG for 10 years, previously having served in increasingly responsible management positions at Lederle Laboratories. Mr. Flaum is Adjunct Associate Professor of Marketing at New York University's Stern School of Business. Mr. Flaum is also a member of the Boards of Directors of the Fischer College of Business at The Ohio State University, Hollins Communications Research Institute and Neopharm Corporation. Mr. Flaum received a BA from The Ohio State University and MBA from Fairleigh Dickinson University. 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, previously 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 24 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. 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 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 pharmaceuticals 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 BEE 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. 25 Arrangements Regarding the Election of Directors 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. Benson. In addition, the Company has a compensation committee consisting of Dr. Cross, Mr. Flynn and Dr. Pollack. During the year ended June 30, 1999, the audit committee met two times, and the compensation committee met two times. Science Advisory Board The Company has certain scientific advisors with expertise in areas of benefit to the Company, who serve on its Science Advisory Board and consult with the Company concerning the Company's research and development programs. Following are members of the Science 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 Columbia University and a PhD in Biology from Johns Hopkins University. 26 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 Science Advisory Board. Members of the Science 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 Science 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 11 of the Notes to Consolidated Financial Statements. 27 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, 1999 (i) to its Chief Executive Officer and (ii) to the four highest paid employees of the Company and a former officer whose cash compensation exceeded $100,000 in the fiscal year ended June 30, 1999. SUMMARY COMPENSATION TABLE (1)(2)(4)
- ------------------------------------------------------------------------------------------------------------------------- Name and Principal Long-Term All Other (a) Annual Compensation Compensation Compensation (a) (c) (d) (e) (i) ----------------------------------------------------------------------------------- Period Salary($) Bonus($) Securities ($) Underlying Options/SARs (#) - ------------------------------------------------------------------------------------------------------------------------- Fredric D. Price, President Chief 7/1/96 - 6/30/97 275,000 90,000 35,000 Executive Officer and Director 7/1/97 - 6/30/98 275,000 75,000 465,000 7/1/98 - 6/30/99 275,000 200,000 21,154 - ------------------------------------------------------------------------------------------------------------------------- Jonathan de la Harpe, Vice 7/1/96 - 6/30/97 89,000 10,000 President, Technical Operations 7/1/97 - 6/30/98 113,000 10,000 7/1/98 - 6/30/99 129,923 15,000 - ------------------------------------------------------------------------------------------------------------------------- Alan Gallantar, Treasurer and 3/23/98 - 6/30/98 33,654 90,000 Controller 7/1/98 - 6/30/99 146,212 5,333 - ------------------------------------------------------------------------------------------------------------------------- Steven Morvay, Vice President - 7/13/98 - 6/28/99 153,846 52,885 Marketing and Sales (3) - ------------------------------------------------------------------------------------------------------------------------- Gerald A. Shapiro, Vice 3/9/98 - 6/30/98 49,231 75,000 President - Finance & Administration & 7/1/98 - 6/30/99 160,000 25,000 10,666 CFO - ------------------------------------------------------------------------------------------------------------------------- Benjamin T. Sporn, Senior Vice 7/1/96 - 6/30/97 127,500 5,000 42,500 President, General Counsel and Secretary 7/1/97 - 6/30/98 147,000 15,000 7/1/98 - 6/30/99 160,000 30,000 15,000 - -------------------------------------------------------------------------------------------------------------------------
(1) The above compensation does not include the use of an automobile and other personal benefits, the total value of which do not exceed as to any named officer or director or group of executive officers, the lesser of $50,000 or 10% of such person's or persons' cash compensation. (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. 28 (3) Mr. Morvay's employment with the Company terminated June 28, 1999. (4) All Other Compensation represents loans and interest forgiven. 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 that 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 that 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 five 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 that, in the case of employees, may be incentive stock options. 4. The 1991 Stock Option Plan provides for the grant of options to either group that, in the case of employees, may be incentive stock options. 5. The 1998 Stock Option Plan provides for the grant of options to either group that, 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 1998 Stock Option Plan permits the purchase of an aggregate of up to 2,500,000 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. 29 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, 1999 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 Individual Grants At 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 15,000 2.46 $1.4375 (1) $13,561 $34,365 B. Alan Gallantar 10,000 1.64 $1.4375 (1) $ 9,040 $22,910 C. Steven Morvay (2) 100,000 16.38 $1.40625 $ 4,289 $ 8,719 D. Fredric D. Price 0 0 - - - - E. Gerald A. Shapiro 25,000 4.10 $1.4375 (1) $22,601 $57,275 F. Benjamin T. Sporn 25,000 4.10 $1.4375 (1) $22,601 $57,275 - ------------------------------------------------------------------------------------------------------------------------------------
(1) Vesting 20% per year; expiration the earlier of 5 years from vesting or 89 days after termination of employment. (2) Mr. Morvay's employment with the Company terminated June 28, 1999, 40,000 options vested upon termination and expire December 28, 1999, and 60,000 options expired upon termination. 30 AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
- ----------------------------------------------------------------------------------------------------------------------------------- Individual Grants - ----------------------------------------------------------------------------------------------------------------------------------- (a) (b) (c) (d) (e) Name Shares Value Number of Unexercised Options Value of Unexercised In-the- Acquired realized ($) at FY-End (#) Money Options at FY-End In Exercise (#) -------------------------------------------------------------- Exercisable Unexercisable Exercisable Unexercisable - ----------------------------------------------------------------------------------------------------------------------------------- Jonathan de la Harpe 0 0 34,000 56,000 $376 $16,511 Alan Gallantar 0 0 10,000 40,000 $3,075 $25,019 Steven Morvay (2) 0 0 40,000 0 $103,200 $0 Fredric D. Price 0 0 669,000 331,000 $77,577 $155,155 Gerald A. Shapiro 0 0 20,000 80,000 $10,788 $68,164 Benjamin T. Sporn 0 0 104,500 53,000 $564 $27,268 - -----------------------------------------------------------------------------------------------------------------------------------
Pension Plans AMBI Inc. Eligible employees of the Company are entitled to participate in the Burns Philp Inc. Retirement Plan for Non-Bargaining Unit Employees, a non-contributory pension plan (the "Pension Plan") maintained by Burns Philp 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 25% 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 number of years of credited service plus 0.65% of 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 31 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 1999 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 $9,840 $13,200 $16,440 $19,800 $23,040 $75,000 $16,440 $21,840 $27,360 $32,880 $38,400 $100,000 $22,920 $30,600 $38,280 $45,960 $53,640 $150,000 $36,120 $48,120 $60,240 $72,240 $84,240 $160,000 $38,760 $51,600 $64,560 $77,520 $90,360 and up
Jonathan de la Harpe, Gerald A. Shapiro, Benjamin T. Sporn and Fredric D. Price each have 7.0, 1.5, 7.0 and 4.75 years, respectively, of credited service under the Pension Plan as of June 30, 1999, and, at age 65, would have approximately 18, 15, 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, 1998 through June 30, 1999, except as noted below, all Section 16(a) filing requirements 32 applicable to its officers, directors and greater than ten-percent beneficial owners were complied with. The Company has information that Steven Morvay, a former employee, failed to file one or more Forms 4 reporting purchases and sales of the Company's Common Stock during the fiscal year ended June 30, 1999. 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. 33 Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, as of September 22, 1999, 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) 699,651 2.25 Robert E. Flynn (3) 102,000 * P. George Benson (4) 20,000 * Audrey T. Cross (6) 54,000 * Jon de la Harpe (4) 34,000 * Sander A. Flaum (4) 10,000 * Alan Gallantar (4) 10,000 * Marvin Moser (4) 65,000 * Robert E. Pollack (4) 60,000 * Gerald A. Shapiro (5) 31,300 * Benjamin T. Sporn (7) 133,625 * American Home Products Corporation 3,478,261 11.41 5 Giralda Farms Madison, NJ 07940 Burns Philp & Company Limited (8) 7,763,837 25.46 7 Bridge Street Sydney, NSW 2000, Australia All Officers and Directors 1,219,576 3.86 as a Group (11 persons) (2)(3)(4)(5)(6) and (7) - ------------------------------ * Less than 1% 34 (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 669,000 shares issuable upon exercise of currently exercisable options under the Company's Stock Option Plans. (3) Includes 90,000 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 20,000 shares issuable upon exercise of currently exercisable options under the Company's Stock Option Plans. (6) Includes 50,000 shares issuable upon exercise of currently exercisable options under the Company's Stock Option Plans. (7) Includes 104,500 shares issuable upon exercise of currently exercisable options under the Company's Stock Option Plans. (8) Consists of shares owned by subsidiaries. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS As of June 30, 1999, 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 connection with the transaction, the Company and BP entered into an Investors' Rights Agreement pursuant to which BP agreed until December 11, 1998, not to acquire, directly or indirectly, the Company's securities, and to refrain from selling the Company's Common Stock, except under certain circumstances through underwritten public offerings and private placement transactions. Until December 11, 1998 and so long as BP owns at least 10% of the Company's outstanding common stock, BP will vote its shares in favor of Fredric D. Price and one nominee of Fredric D. Price for election to the Company's Board. So long as BP owns at least 20% of the Company's outstanding common stock, BP is entitled to nominate one member for election to the Company's Board. Currently, BP has not nominated a member for election to the Company's 35 Board. The amount of consideration for the sale was arrived at through arms- length negotiation and a fairness opinion was obtained. In October 1998, the Company issued 3,478,261 shares of Common Stock to AHP for $4.0 million. AHP currently holds approximately 11.4% of the Company's outstanding Common Stock. Under a separate agreement in October 1998, AHP paid the Company $1.0 million for exclusive rights to sell the Company's Cardia Salt in retail markets in the United States. See "Business - The Company" 36 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. Financial Statements The financial statements are listed in the Index to Consolidated Financial Statements on page F-1 and are filed as part of this annual report. 2. Financial Statement Schedules The following financial statement schedule is included herein: Schedule II - Valuation and Qualifying Accounts All other schedules are not submitted because they are not applicable, not required, or because the information is included in the Consolidated Financial Statements. 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 did not file any Reports on Form 8-K during the fiscal quarter ended June 30, 1999. 37 AMBI INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS FILED WITH THE ANNUAL REPORT OF THE COMPANY ON FORM 10-K JUNE 30, 1999 PAGE ---- INDEPENDENT AUDITORS' REPORT F-2 CONSOLIDATED BALANCE SHEETS AT JUNE 30, 1999 AND 1998 F-3 CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997 F-5 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997 F-6 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR YEARS ENDED JUNE 30, 1999, 1998 AND 1997 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 subsidiaries 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 subsidiaries as of June 30, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 1999, in conformity with generally accepted accounting principles. KPMG LLP Stamford, CT September 2, 1999 F-2 AMBI INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands)
JUNE 30, JUNE 30, 1999 1998 -------- --------- ASSETS Current assets: Cash and cash equivalents $4,458 $2,109 Accounts receivable (less allowance for doubtful accounts of $242 in 1999 and $377 in 1998.) 3,980 3,312 Other receivables 473 96 Inventories 1,426 695 Prepaid expenses and other current assets 685 413 ------- ------- Total current assets 11,022 6,625 Property and equipment, net 1,066 914 Patents and trademarks (net of accumulated amortization of $4,362 in 1999 and $2,138 in 1998.) 19,473 11,715 Goodwill (net of accumulated amortization of $178 in 1999 and $48 in 1998) 2,583 950 Other assets 397 531 ------- ------- TOTAL ASSETS $34,541 $20,735 ======= =======
See accompanying notes to consolidated financial statements. F-3 AMBI INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
JUNE 30, JUNE 30, 1999 1998 -------- -------- LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt and lease obligations $ 1,563 $ 3,052 Accounts payable and accrued expenses 4,262 2,458 Contingent payments payable 3,293 2,747 Preferred dividends payable 25 637 ------- ------- Total current liabilities 9,143 8,894 Long-term debt and lease obligations 3,375 1,543 Other long-term obligations 432 - ------- ------- TOTAL LIABILITIES 12,950 10,437 ------- ------- Commitments and contingent liabilities REDEEMABLE PREFERRED STOCK Series E convertible preferred, 1,500 shares issued and 773 shares outstanding at June 30, 1999 (aggregate liquidation value Series E $816). 634 - Series F convertible preferred, 575 shares issued and 343 shares outstanding at June 30, 1999 (aggregate liquidation value Series F $358). 287 - STOCKHOLDERS' EQUITY Preferred stock, $0.01 par value, authorized 5,000,000 shares; Series C convertible preferred, no shares issued and outstanding at June 30, 1999 and 222 shares issued and outstanding at June 30, 1998 - - Series D convertible preferred, no shares issued and outstanding at June 30, 1999 and 22,500 shares issued and outstanding at June 30, 1998 - - Common stock, $0.005 par value, authorized 65,000,000 shares; 30,152,306 shares and 20,898,297 shares issued and outstanding at June 30, 1999 and June 30, 1998, respectively. 150 105 Additional paid-in capital 60,045 54,942 Accumulated deficit (39,525) (44,749) ------- ------- TOTAL STOCKHOLDERS' EQUITY $20,670 $10,298 ------- ------- TOTAL LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY $34,541 $20,735 ======= =======
See accompanying notes to consolidated financial statements. F-4 AMBI INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share and per share data)
YEAR ENDED JUNE 30, ------------------- 1999 1998 1997 ---- ---- ---- Net sales $26,911 $20,082 $10,356 Other revenues 1,390 676 924 ------- ------- ------- REVENUES 28,301 20,758 11,280 Cost of goods sold 4,782 2,956 4,998 ------- ------- ------- GROSS PROFIT 23,519 17,802 6,282 Selling, general & administrative expense 12,456 12,100 17,312 Research and development expense 1,787 2,660 4,833 Depreciation and amortization 2,807 1,575 772 ------- ------- ------- OPERATING INCOME/(LOSS) 6,469 1,467 (16,635) Interest income 189 71 433 Interest expense 397 370 142 Other income, net 86 -- 9,683 ------- ------- ------- INCOME/(LOSS) BEFORE INCOME TAXES 6,347 1,168 (6,661) Income taxes 482 116 152 ------- ------- ------- NET INCOME/(LOSS) $ 5,865 $ 1,052 $(6,813) ======= ======= ======= Basic earnings (loss) per share (note 12) $ 0.20 ($ 0.04) ($ 0.38) ======= ======= ======= Weighted average number of common shares - basic 26,481,880 20,163,412 19,544,526 ========== ========== ========== Diluted earnings (loss) per share (note 12) $ 0.19 ($ 0.04) ($ 0.38) ======= ======= ======= Weighted average number of common shares and equivalents - diluted 27,754,827 20,163,412 19,544,526 ========== ========== ==========
See accompanying notes to consolidated financial statements. F-5 AMBI INC. & SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (in thousands, except share data)
Preferred Stock Preferred Stock Series C Series D Common Stock Shares $ Shares $ Shares $ ------ ---- ------ ---- ------ ---- 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 & 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 Alpin & Barrett Ltd. -- -- -- -- (2,420,000 (12) Conversion of preferred stock to common stock including dividends issued as common stock (148) -- -- -- 545,940 3 Preferred stock dividends -- -- -- -- -- -- 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 stock dividends -- -- -- -- -- -- Financing cost of warrants issued to State Street Bank -- -- -- -- -- -- Compensation related to issuance of stock options to non-employees -- -- -- -- -- -- Net income for the year -- -- -- -- -- -- -- -- ------ -- ---------- ---- Balance at June 30, l998 222 -- 22,500 -- 20,898,297 105 Conversion of Series D preferred stock to common stock, including dividends issued as common stock -- -- (16,750) -- 2,696,246 12 Exchange and redemption of Series C preferred stock, including accrued dividends for common stock and Series E preferred stock (222) -- -- -- 324,689 2 Exchange and redemption of Series D preferred stock, including accrued dividends for common stock and Series F preferred stock -- -- (5,750) -- 78,166 Premium on redemption of Series F preferred stock Shares issued in connection with the settlement of AZWELL obligation 780,488 4 Preferred stock dividends -- -- -- -- -- -- Conversion of Series E preferred stock to common stock, including dividends issued as common stock -- -- -- -- 591,812 3 Issuance of common stock in connection with the acquisition of-- the Lite Bites Business. -- -- -- -- 1,304,347 7 Issuance of common stock to American Home Products -- -- -- -- 3,478,261 17 Compensation related to issuance and repricing of stock options and warrants to non-employees -- -- -- -- -- Net income for the year -- -- -- -- -- -- ---- ---- ------ ---- ---------- ---- Balance at June 30, 1999 -- $ -- -- $ -- 30,152,306 $150 ==== ==== ====== ==== ========== ==== Additional Paid-In Accumulated Capital Deficit Total $ $ $ ---------- ----------- -------- Balance at June 30, 1996 52,732 (36,522) 15,646 Common stock granted to officers 57 -- 57 Common stock issued for cash on exercise of options & 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 Alpin & Barrett Ltd. (6,340) -- (6,352) Conversion of preferred stock to common stock including dividends issued as common stock 128 (131) -- Preferred stock dividends -- (261) (261) Net Loss for the year -- (6,813) (6,813) Arising on translation during the year -- -- 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 stock dividends -- (374) (374) Financing cost of warrants issued to State Street Bank 33 -- 33 Compensation related to issuance of stock options to non-employees 123 -- 123 Net income for the year -- 1,052 1,052 ------- ------ ------ Balance at June 30, l998 54,942 (44,749) 10,298 Conversion of Series D preferred stock to common stock, including dividends issued as common stock 128 -- 140 Exchange and redemption of Series C preferred stock, including accrued dividends for common stock and Series E preferred stock (1,729) (242) (1,969) Exchange and redemption of Series D preferred stock, including accrued dividends for common stock and Series F preferred stock (379) (81) (460) Premium on redemption of Series F preferred stock (117) (117) Shares issued in connection with the settlement of AZWELL obligation 996 1,000 Preferred stock dividends -- (201) (201) Conversion of Series E preferred stock to common stock, including dividends issued as common stock 604 -- 607 Issuance of common stock in connection with the acquisition of-- the Lite Bites Business. 1,430 -- 1,437 Issuance of common stock to American Home Products 3,983 -- 4,000 Compensation related to issuance and repricing of stock options and warrants to non-employees 70 -- 70 Net income for the year -- 5,865 5,865 ------- ------- ------ Balance at June 30, 1999 $60,045 ($39,525) $20,670 ======= ======= =======
See accompanying notes to consolidated financial statements F-6 AMBI INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
YEAR ENDED JUNE 30, ------------------- 1999 1998 1997 ---- ---- ---- Cash flows from operating activities: Net income/(loss) $ 5,865 $ 1,052 $ (6,813) Adjustments to reconcile net income/(loss) to net cash provided by/(used in) operating activities: Depreciation and amortization 2,807 1,575 772 Write-off of patents and trademarks -- 179 -- Provision for doubtful accounts -- 273 37 Loss on disposal of equipment 138 -- 275 Gain on sale of Alpin & Barrett -- -- (9,683) Nutrition 21 consulting expense 214 168 -- Other, net 62 124 65 Changes in assets and liabilities, net of effect of acquisition: (Increase)/decrease in accounts receivable (668) (3,291) 1,283 (Increase) in other receivables (377) -- -- (Increase)/decrease in inventories (610) (89) 646 (Increase) in prepaid and other current assets (272) -- -- (Increase)/decrease in other assets (80) (467) (191) Increase/(decrease) in accounts payable and accrued expenses 1,707 (6) (778) Increase in contingent payments payable -- 2,747 -- Increase/(decrease) in preferred dividends payable -- (374) (153) Increase in other liabilities -- -- 189 -------- -------- -------- Net cash provided by/(used for) operating activities 8,786 1,891 (14,351) -------- -------- -------- Cash flows from investing activities: Purchases of property and equipment (443) (216) (866) Payments for patents and licensed technology (1,145) (509) (437) Proceeds from sale of equipment 76 73 -- Payments for acquisitions (6,088) (10,000) -- Cash received upon sale of subsidiary -- -- 13,500 Contingent payment for Nutrition 21 acquisition (2,747) -- -- -------- -------- -------- Net cash (used for)/provided by investing activities (10,347) (10,652) 12,197 -------- -------- -------- Cash flows from financing activities: Proceeds from term loan borrowings 5,500 3,300 -- Debt repayments (4,036) (919) (8) Proceeds from issuance of common stock 4,000 -- 437 Capital lease obligation repayments (122) (126) (811) Redemption of redeemable preferred stock (1,388) -- (1,500) Proceeds from issuance of preferred stock -- -- 4,230 Preferred dividends paid (44) -- -- -------- -------- -------- Net cash provided by financing activities 3,910 2,255 2,348 -------- -------- -------- Net increase/(decrease) in cash and cash equivalents 2,349 (6,506) 184 Cash and cash equivalents at beginning of period 2,109 8,615 8,431 -------- -------- -------- Cash and cash equivalents at end of period $ 4,458 $ 2,109 $ 8,615 ======== ======== ========
See accompanying notes to consolidated financial statements. F-7 AMBI INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a) Consolidation The consolidated financial statements for the year ended June 30, 1999 include the results of operations of the Company and the Lite Bites Business from January 21, 1999. 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. All intercompany balances and transactions have been eliminated in consolidation. b) 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. c) 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. d) Inventories Inventories are carried at the lower of cost (on a first-in, first-out basis) or estimated net realizable value. e) Property and Equipment Property and equipment are stated at cost less accumulated depreciation. Depreciation is provided using the straight-line method over the estimated useful lives. The estimated useful lives are as follows: Leasehold improvements -- Term of lease Furniture and fixtures -- 7 years Machinery and equipment -- 5 to 10 years Office equipment -- 3 to 6 years f) Patents and Trademarks The Company capitalizes certain patents and trademarks. Patents and trademarks are amortized over the estimated economic lives of the assets, ranging from 2 to 15 years. g) Goodwill Goodwill represents the excess of cost over the fair value of net 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. h) Revenue Recognition Sales of product are recognized upon shipment to customers. Other revenues include amounts received from licensees and research collaborators. F-8 AMBI INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued i) Research and Development Research and development costs are expensed as incurred. j) 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. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. k) Stock-based Compensation The Company continues to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". Compensation cost for stock options, if any, is measured as the excess of the quoted market price of the Company's stock at the date of grant over the amount an employee must pay to acquire the stock. Statement of Financial Accounting Standards ("SFAS") No. 123. "Accounting for Stock-Based Compensation," established accounting and disclosure requirements using a fair-value method of accounting for stock-based employee compensation plans. The Company has elected to remain on its current method of accounting as described above, and has adopted the disclosure requirements of SFAS No. 123. l) Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed The Company reviews long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. m) Recently Issued Accounting Standards In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities," SFAS No. 133 requires companies to recognize all derivatives as assets or liabilities measured at their fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133, an Amendment of FASB Statement No. 133". SFAS No. 137 defers the effective date of STAS No. 133, "Accounting for Derivative Instruments and Hedging activities" for one year. SFAS No. 133, as amended, is now effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. F-9 AMBI INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued m) Recently Issued Accounting Standards, Continued The Company has not yet made an evaluation of the impact of adopting these statements on the Company's financial position or operating results. n) Reclassifications Certain reclassifications have been made to prior years' financial statement amounts to conform to the 1999 presentation. Note 2: ACQUISITIONS Lite Bites Business On January 21, l999, the Company acquired substantially all of the assets and assumed certain of the liabilities of Optimum Lifestyle, Inc. ("OLI") relating to the business of developing, producing, and marketing dietary supplements, primarily nutrition bars which are marketed under the trademark "Lite-Bites" through the QVC Inc. television network (the "Lite Bites Business"). These products are manufactured to proprietary specifications under agreements with third party manufacturers. The purchase price paid by the Company was $6.1 million in cash, including related transaction costs, and 1,304,347 shares of restricted Common Stock of the Company, valued at $1.4 million. In connection with the acquisition, liabilities assumed were as follows (in thousands): Fair value of assets acquired $ 7,617 Cash paid, including transaction costs (6,088) Restricted common stock issued (1,437) ------- Liabilities assumed $ 92 ======= Additional contingent payments will be made to the former owners of OLI depending primarily on sales levels of the Lite Bites Business achieved during the five year period following closing and/or the availability of Lite Bites products through certain distribution channels in the future as follows: a maximum of $3.0 million in cash and/or AMBI common stock, at the option of the former owners of OLI, payable $1.0 million on each of the first three anniversaries of the acquisition; $3.0 million in newly issued AMBI preferred stock, payable $1.5 million on the first and second anniversaries of the acquisition; and a single payment of $1.0 million in cash, payable prior to the fifth anniversary of the acquisition. At June 30, 1999 the Company recorded on its balance sheet a current liability of $0.5 million in respect of the contingent payments. F-10 AMBI INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 2: ACQUISITIONS, Continued The acquisition was accounted for under the purchase method. Based upon the allocation of purchase price, the transaction resulted in $6.1 million in identifiable intangible assets, primarily trademarks and non-compete agreements, and $1.5 million of goodwill. The Company is amortizing the goodwill over fifteen years and amortizing the identifiable intangible assets over their useful economic lives, which range from 3 to 15 years. During the year ended June 30, l999, the Company recorded approximately $249 thousand in amortization expense related to the goodwill and other intangible assets described above. Nutrition 21 On August 11, l997, the Company purchased Nutrition 21 for $10.0 million in cash plus 500,000 shares of restricted Common Stock of the Company. In connection with the acquisition, liabilities assumed were as follows (in thousands): Fair value of assets acquired $ 11,645 Cash purchase price (10,000) Common stock issued (1,188) -------- Liabilities assumed $ 457 ======== The Purchase Agreement also provides for annual contingent payments to the former owners of Nutrition 21 for each of the four years after the closing 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. At June 30, l999, the Company recorded on its balance sheet a current liability of $2.8 million in respect of the contingent payment due in September 1999. 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 following represents the pro forma consolidated results of operations as if the Company, the Lite Bites Business and Nutrition 21 had been combined for the years ended June 30, 1999 and 1998. 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. The pro forma information for the years ended June 30, 1999 and 1998 is as follows (in thousands, except for per share amounts): 1999 1998 ---- ---- Revenues $ 30,208 $28,862 Net income 5,116 3,173 Basic earnings per share 0.19 0.06 Diluted earnings per share 0.18 0.06 Note 3: 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. The agreement expired as of June 30, 1999. The Company borrowed no amounts under the agreement prior to expiration. F-11 AMBI INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 4: INVENTORIES The components of inventories at June 30, l999 and 1998 are as follows (in thousands): l999 1998 ---- ---- Raw materials $ 373 $ 289 Finished goods 1,053 406 ------ ------ Total inventories $1,426 $ 695 ====== ====== Note 5: FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value amounts for cash and cash equivalents and accounts receivable approximate carrying amounts due to the short maturities of these instruments. The fair value of long-term debt approximates its carrying value, as there is no difference between the stated interest rate on the debt and the current market rate of interest available to the Company for debt with the same maturities. 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 had $3.0 million funds invested in commercial paper at June 30, 1999. Note 6: LICENSE, OPTION AND MARKETING AGREEMENT On September 17, l998, the Company commenced a strategic alliance with American Home Products Corporation ("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 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. On October 8, l998, the Company received a non-refundable payment of $1.0 million for the rights granted to AHP. Also on October 8, l998, AHP paid $1.15 per share or a total of $4.0 million for 3,478,261 shares of newly issued Company Common Stock. The Company retained the exclusive rights to market its products in both direct response and ingredient channels. Note 7: PROPERTY AND EQUIPMENT, NET The components of property and equipment, net, at June 30, 1999 and 1998 are as follows (in thousands): 1999 1998 ---- ---- Furniture and fixtures $ 421 $ 163 Machinery and equipment 562 538 Office equipment 192 507 Computer equipment 660 398 ------ ------ 1,835 1,606 Less: Accumulated depreciation (769) (692) ------ ------ Property and equipment, net $1,066 $ 914 ====== ====== F-12 AMBI INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 8: LINES OF CREDIT AND LONG-TERM DEBT Long-term debt consists of the following at June 30, 1999 and 1998 (in thousands): 1999 1998 ---- ---- NSK promissory note $ -- $2,000 State Street term loan 4,875 2,410 Obligations under capital leases 63 185 ------ ------ 4,938 4,595 Less: Current portion (1,563) (3,052) ------ ------ $3,375 $1,543 ====== ====== In March, 1996, the Company issued a $2.0 million note at an interest rate of 5%, to AZWELL, Inc. (formerly Nippon Shoji Kaisha). In fiscal 1999, the Company, in accordance with the terms of the agreement, repaid $1.0 million of the note by issuing 780,488 shares of its Common Stock, and $1.0 million in cash from operating activities. On January 21, l999, the Company entered into an Amended and Restated Revolving Credit and Term Loan Agreement (the "Loan Agreement") with State Street Bank and Trust Company ("SSBT"), which Loan Agreement amended and restated a prior agreement with SSBT. The Loan Agreement is for a $5.5 million term loan and a $4.0 million revolving credit facility for the purposes of acquiring the Lite Bites Business and for general corporate purposes. Loans from SSBT bear interest at the prime rate plus 1% and are due February 1, 2002. The Company is making monthly payments of principal and interest on the loan. There was no outstanding balance on the revolving loan at June 30, 1999. Payments due on long-term debt are as follows: fiscal 2000 $1.5 million, fiscal 2001 $1.5 million, fiscal 2002 $1.9 million. Note 9: ACCOUNTS PAYABLE AND ACCRUED EXPENSES The following items are included in accounts payable and accrued expenses at June 30, 1999 and 1998 (in thousands): 1999 1998 ---- ---- Accounts payable $1,280 $ 407 Consulting and professional fees payable 989 569 Royalty fees 442 413 Accrued compensation and benefits 700 480 Taxes payable 309 97 Other accrued expenses 542 492 ------ ------ $4,262 $2,458 ====== ====== F-13 AMBI INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 10: REDEEMABLE PREFERRED STOCK In October 1995, the Company issued 895 shares of non-voting Series C Preferred Stock ("C Preferred") for $10,000 per share. At June 30, 1998, 222 shares of C Preferred were outstanding. On December 10, l998, the Company issued 1,500 shares of new Series E Preferred Stock ("E Preferred") with a par value of $0.01 per share. On that date, the Company's outstanding C Preferred and accrued dividends thereon of $542 thousand were exchanged for $1,500 face amount of E Preferred, $1.0 million in cash and the issuance of 324,689 shares of the Company's common stock. In addition, the agreement provides for a payment of at least $250 thousand on the second anniversary of the agreement. The total amount of the payment is subject to increases based on increases in the Company's equity securities. The E Preferred has a conversion price of $1.25 per share. The fixed conversion rate is subject to adjustments in certain circumstances. The E Preferred bears dividends at a rate of 10% per annum payable in cash or, at the option of the company, in shares of Common Stock. As a result of this exchange transaction, the Company recorded a one-time incremental preferred dividend of $242 thousand, representing the excess of the consideration exchanged over the carrying value of the then outstanding C Preferred. The E Preferred is subject to conversion at any time, at the option of the holder, and is subject to mandatory conversion after three years. During fiscal 1999, 727 shares of the Company's E Preferred plus accrued dividends on these shares, were converted into 591,812 shares of common stock. On January 27, l999, the Company issued 575 shares of new Series F Preferred Stock ("F Preferred") with a par value of $0.01 per share. On that date, the Company's then outstanding 5,750 shares of Series D Preferred Stock ("D Preferred") and accrued dividends thereon of $59 thousand were exchanged for $575 thousand face amount of F Preferred, 78,166 shares of the Company's common stock and the resetting of the exercise price of the Warrants of the Company, issued in connection with D Preferred, to $1.25. The F Preferred has a conversion price of $1.25 per share. The fixed conversion rate is subject to adjustments in certain circumstances. The F Preferred bears dividends at a rate of 10% per annum payable in cash, or at the option of the Company, in shares of Common Stock. As a result of this exchange transaction, the Company recorded a one-time incremental preferred dividend of $81 thousand, representing the excess of the consideration exchanged over the carrying value of the then outstanding D Preferred. The F Preferred is subject to conversion at any time at the option of the holders, and is subject to mandatory conversion after three years. During fiscal 1999, 232 shares of the Company's F Preferred plus accrued dividends on these shares were redeemed for $0.4 million. Note 11: STOCKHOLDERS' EQUITY a. 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, 1996 1,786,314 $1.25-$6.75 Issued 569,937 $2.00-$2.72 Expired (153,027) $4.00-$6.00 Exercised (17,331) $1.25-$4.91 ---------- Outstanding at June 30, 1997 2,185,893 $1.25-$6.75 Issued 217,460 $1.18-$2.44 Expired (1,022,668) $3.00-$4.91 --------- Outstanding at June 30, 1998 1,380,685 $1.18-$6.75 Issued 100,000 $1.38 --------- Outstanding at June 30, 1999 1,480,685 $1.18-$6.75 =========
F-14 AMBI INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 11: STOCKHOLDERS' EQUITY, Continued At June 30, 1999, 1,480,685 shares were issuable upon exercise of the above warrants. The warrants expire between 2000 and 2006. Certain of the warrants include anti-dilution clauses. Warrants outstanding and exercisable at June 30, 1999, 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 --------------- ------------ ----------- ---------- ------------ --------- $1.18 - $1.38 227,460 7.46 $1.27 33,492 $1.20 $1.50 - $2.00 125,499 1.44 $1.72 125,499 $1.72 $2.25 - $2.44 628,937 3.37 $2.28 562,271 $2.26 $4.00 - $4.84 355,408 1.55 $4.76 355,408 $4.76 $6.00 - $6.75 143,381 1.35 $6.31 143,381 $6.31 --------- --------- 1,480,685 1,220,051 ========= =========
b) 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 four Stock Option Plans ("Plans") whereby options to purchase an aggregate of 6,250,000 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 Plans may not be less than the fair value of the Company's common stock on the date of grant. The options issuable pursuant to the Plans expire between 1999 and 2009. Approximately 2,800,000 options remain available for grant under the Plans. 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, 1996 1,951,380 $1.50 - $7.688 Issued 381,900 $2.00 - $5.625 Expired (282,246) $1.50 - $6.00 Exercised (154,980) $1.50 - $4.375 --------- Outstanding at June 30, 1997 1,896,054 $1.50 - $7.688 Issued 1,371,885 $1.56 - $3.25 Expired (592,486) $1.62 - $7.68 Exercised (608) $1.62 ----------- Outstanding at June 30, 1998 2,674,845 $1.50 - $6.00 Issued 610,470 $0.75 - $2.31 Cancelled (454,030) $0.75 - $5.63 -------- Outstanding at June 30, 1999 2,831,285 $0.75 - $6.75 =========
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. F-15 AMBI INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 11: STOCKHOLDERS' EQUITY, Continued Options outstanding and exercisable at June 30, 1999 are as follows:
Options Exercisable Options Outstanding ---------------------------------------- ----------------------------- Weighted Average Weighted Weighted Remaining Average Average Range of Number Contractual Exercise Number Exercise Exercise Prices Outstanding Life Price Exercisable Price --------------- ----------- ----------- -------- ----------- -------- $0.75 - $1.25 228,970 3.65 $1.11 50,000 $1.09 $1.38 - $1.97 909,530 3.17 $1.76 255,268 $1.85 $2.00 - $2.94 805,885 3.7 $2.40 583,385 $2.39 $3.00 - $4.84 830,400 3.0 $3.40 693,900 $3.40 $5.19 - $6.75 56,500 4.0 $5.45 31,000 $5.60 --------- --------- 2,831,285 1,613,553 ========= =========
The per share weighted-average fair value of stock options granted during fiscal 1999, 1998 and 1997 was $1.33, $0.68 and $ 2.43, respectively, on the date of grant using the Black Scholes option-pricing model with the following weighted-average assumptions:
1999 1998 1997 ---- ---- ---- Risk-free interest rate 5.0% 5.7% 6% Expected life-years 2.5 2.5 5 Expected volatility 46.1% 46.1% 81% Expected dividend yield -- -- --
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 (in thousands):
1999 1998 1997 ---- ---- ---- Net income/(loss) As reported $5,865 $1,052 ($6,813) Pro forma 4,963 176 (7,391) Basic earnings (loss) per share As reported $ 0.20 ($0.04) ($0.38) Pro forma 0.16 (0.09) (0.41) Diluted earnings (loss) per share As reported $ 0.19 ($0.04) ($0.38) Pro forma 0.16 (0.09) (0.41)
The effects of applying SFAS No. 123 in this pro forma disclosure are not necessarily indicative of future amounts because the calculation does not take into consideration pro forma compensation expense related to grants made prior to 1995. F-16 AMBI INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 12: EARNINGS/(LOSS) PER SHARE Basic and diluted earnings (loss) per share for the years ended June 30, 1999, 1998 and 1997 are as follows (in thousands, except share and per share amounts):
Year ended June 30, 1999 1998 1997 ---- ---- ---- Net income (loss) $ 5,865 $ 1,052 $ (6,813) Preferred stock dividends (641) (374) (392) Conversion discount on convertible preferred stock -- (1,527) (173) Net income/(loss) available -------- ------- -------- to common stockholders $ 5,224 $ (849) $ (7,378) ======== ======= ======== Basic earnings/(loss) per share $ 0.20 $ (0.04) $ (0.38) ======== ======= ======== Weighted average number of common shares 26,481,880 20,163,412 19,544,526 ========== ========== ========== Year ended June 30, 1999 1998 1997 ---- ---- ---- Net income/(loss) available to common stockholders $ 5,224 $ (849) $ (7,378) Interest on AZWELL, Inc. note, net 33 -- -- Preferred stock dividends 94 -- -- Net income/(loss) available to common -------- ------- -------- stockholders after giving effect to dilution $ 5,351 $ (849) $ (7,378) ========= ======= ======== Diluted earnings/(loss) per share $ 0.19 ($0.04) $ (0.38) ========= ======= ======== Weighted average number of common shares and equivalents 27,754,827 -- -- ==========
Diluted earnings/(loss) per share for the years ended June 30, 1998 and 1997, do not reflect the incremental shares from the assumed conversion of stock options or warrants or the conversion of the preferred stock to common stock as the effect of such inclusion would be to reduce the loss per share. 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:
1999 1998 1997 ---- ---- ---- Convertible preferred stock -- 4,222,906 1,223,137
Note 13: SEGMENT REPORTING Effective in fiscal 1999, the Company adopted FASB Statement No. 131 "Disclosures about Segments of an Enterprise and Related Information" which established revised standards for reporting information about operating segments. Pursuant to Statement No. 131, the Company's reporting segments are nutritional products and pharmaceutical products. The accounting policies of the operating segments are the same as those described in the summary of accounting policies. The Company evaluates the performance of its operating segments based on the operating income of the respective business units. F-17 AMBI INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 13: SEGMENT REPORTING, Continued A summary of business data for the Company's reportable segments for the fiscal years 1999, 1998, 1997 follows: Information by business segment (in thousands):
1999 1998 1997 ---- ---- ---- Revenues Nutritional Products $ 27,387 $ 18,963 $ -- Pharmaceutical Products 914 1,795 11,280 -------- -------- -------- $ 28,301 $ 20,758 $ 11,280 ======== ======== ======== Operating Income (Loss) Nutritional Products $ 6,343 $ 2,141 $ -- Pharmaceutical Products 126 (674) (16,635) -------- -------- -------- $ 6,469 $ 1,467 $(16,635) ======== ======== ======== Depreciation and Amortization Nutritional Products $ 2,681 $ 1,447 $ -- Pharmaceutical Products 226 228 772 -------- -------- -------- $ 2,807 $ 1,575 $ 772 ======== ======== ======== Segment Assets Nutritional Products $ 32,427 $ 18,436 $ -- Pharmaceutical Products 2,114 2,299 12,754 -------- -------- ------- $ 34,541 $ 20,735 $ 12,754 ======== ======== ======== Capital Expenditures Nutritional Products $ 443 $ 216 $ -- Pharmaceutical Products -- -- 866 -------- -------- -------- $ 443 $ 216 $ 866 ======== ======== ======== Information by geographic segment (in thousands): Revenues United States $ 28,301 $ 20,758 $ 6,149 United Kingdom -- -- 5,131 -------- -------- -------- $ 28,301 $ 20,758 $ 11,280 ======== ======== ======== Property and Equipment, net United States $ 1,066 $ 914 $ 1,082 United Kingdom -- -- -- -------- -------- -------- $ 1,066 $ 914 $ 1,082 ======== ========= =========
Note 14: RELATED PARTY TRANSACTIONS During fiscal 1999, the Company did not have transactions with affiliated companies except for a contribution to the Burns Philp & Company Inc. Retirement Plan of $96 thousand. Note 15: INCOME TAXES Income/(loss) before income taxes for the years ended June 30, 1999, 1998 and 1997 are as follows (in thousands):
1999 1998 1997 ---- ---- ---- Domestic income/(loss) $ 6,347 $ 1,168 $(7,052) Foreign income -- -- 391 ------- ------- ------- Income/(loss) before income taxes $ 6,347 $ 1,168 $(6,661) ======= ======= =======
F-18 AMBI INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 15: INCOME TAXES, Continued Provisions for income taxes for the years ended June 30, 1999, 1998 and 1997 consist of the following (in thousands):
1999 1998 1997 ---- ---- ---- Current $ 482 $ 116 $ 501 Deferred -- -- (349) ----- ----- ----- $ 482 $ 116 $ 152 ===== ===== =====
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 (in thousands):
1999 1998 1997 ---- ---- ---- Computed "expected" tax expense $2,171 $ 397 $(2,265) Increase/(reduction) in Income taxes resulting from: Tax losses carried forward/(utilized) (2,070) (351) 2,398 Federal Alternative Minimum Tax 148 38 -- Lower tax rate on foreign earnings -- -- (4) State taxes, net of federal benefit 233 32 11 Other items -- 12 ------ ------ $ 482 $ 116 $ 152 ====== ====== ======
The tax effect of temporary differences that give rise to deferred tax assets and deferred tax liabilities at June 30, 1999 and 1998 are presented below (in thousands):
Deferred tax assets: 1999 1998 ---- ---- Net operating loss carryforwards $4,475 $5,713 AMT tax credit 176 38 R&D credit 720 818 Accrued expenses 50 209 Allowance for doubtful accounts 97 151 Partnership basis 1,054 1,318 Inventory reserve 54 -- Property and equipment 4 -- ------ ------ Total gross deferred tax assets 6,630 8,247 Less valuation allowance (4,638) (5,159) ------ ------- Net deferred tax assets 1,992 3,088 ------ ------ Deferred tax liabilities: Property and equipment -- 163 Intangible assets, principally due to amounts capitalized for financial reporting purposes 1,992 2,925 ------ ----- Net deferred tax liabilities 1,992 3,088 ------ ------ Total deferred taxes, net of valuation allowance $ -- $ -- ======== ======
At June 30, 1999, the Company had available, for federal income tax purposes, net operating loss carryforwards of approximately $7.7 million expiring in varying amounts through 2019. Ultimate utilization/availability of such net operating losses may be significantly curtailed if a significant change in ownership of the Company were to occur. A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company has provided a valuation allowance of $4.6 million which reduced the deferred tax asset to zero. F-19 AMBI INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 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 $450 thousand, $366 thousand, and $246 thousand for the fiscal years ended June 30, 1999, 1998 and 1997, respectively. In addition, the Company has an exclusive license from the USDA for the duration of a patent which covers chromium picolinate and its uses. In connection with this agreement, the Company recorded royalty expense of $646 thousand, $301 thousand and $0 thousand for the fiscal years ended June 30, 1999, 1998 and 1997 respectively. These royalty amounts are included in selling, general and administrative expenses in the statement of operations. 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 Science 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 2000 to 2006. Payments under these leases were approximately $384 thousand in fiscal 1999, $728 thousand in fiscal 1998 and $491 thousand in fiscal 1997. Future non-cancellable minimum payments under these leases are as follows (in thousands): Year Amount ---- ------ 2000 $673 2001 650 2002 619 2003 619 2004 and Thereafter 1,461 ------ Total $4,022 ====== Note 17: SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosure of cash flow information (in 1999 1998 1997 thousands): ---- ---- ---- Cash paid for interest $ 337 $ 320 $ 137 Cash paid for income taxes 217 19 196 Supplemental schedule of non-cash financing activities: Common stock issued for Nutrition 21 acquisition -- $ 1,188 -- Obligation for purchase of property & equipment $ 208 -- -- Obligation for N21 contingent payment $ 2,855 $ 2,747 -- Obligation for Lite Bites contingent payment $ 438 -- -- Obligation related to Series C redemption $ 250 -- -- Conversion of long-term debt to common stock $ 1,000 -- -- Issuance of common stock for Series C redemption $ 345 -- -- Issuance of common stock for Series D redemption $ 105 -- -- Issuance of common stock for Series E conversion $ 592 -- --
Note 18: 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. F-20 Schedule II AMBI INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS
Additions --------------------------------- Balance Charged to Balance Beginning Charged to Other End of Accounts of Period Cost and Expense Accounts Deductions Period - -------- --------- ---------------- ---------- ---------- ------ ($ in thousands) Year ended June 30, 1999 Allowance for Doubtful Accounts $ 377 -- -- $(135) $ 242 Deferred Tax Valuation Allowance $5,159 -- -- $(521) $4,638 Year ended June 30, 1998 Allowance for Doubtful Accounts $ 104 $ 273 -- $ 377 Deferred Tax Valuation Allowance $5,745 -- -- $(586) $5,159 Year ended June 30, 1997 Allowance for Doubtful Accounts $ 67 $ 37 -- -- $ 104 Deferred Tax Valuation Allowance $3,807 $1,938 -- -- $5,745
Independent Auditor's Report The Board of Directions AMBI Inc.: Under date of September 2, l999, we reported on the consolidated balance sheet of AMBI Inc. and subsidiaries as of June 30, 1999 and 1998, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the years in the three-year period ended June 30, 1999, which are included in the annual report on Form 10-K. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedule included in the annual report on Form 10-K. The financial statements schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statement schedule based on our audits. In our opinion, the financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. KPMG LLP Stamford, Connecticut September 2, l999 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AMBI INC. By: /s/ Fredric D. Price Fredric D. Price, President, CEO and Director Dated: September 27, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below as of September 27, 1999 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/ Sander Flaum Sander Flaum, 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 38 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) 10.02c Form of 1998 Stock Option Plan (15) 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) 10.47 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) 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 39 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) 10.57 Sublease dated as of September 18, 1998, between the Company and Abitibi Consolidated Sales Corporation (12) 10.58 Stock Purchase Agreement dated as of September 17, 1998 between American Home Products Corporation and AMBI Inc. (13)* 10.59 License, Option and Marketing Agreement dated as of September 17, 1998 between American Home Products, acting through its Whitehall-Robins Healthcare division, and AMBI Inc. (13)* 10.60 Amended and Restated Revolving Credit and Term Loan Agreement dated as of January 21, 1999 between State Street Bank & Trust Company as Lender and the Company and Nutrition 21 as Borrower. (14) 10.61 Agreement of Purchase and Sale of Assets made as of January 19, 1999 by and among Dean Radetsky and Cheryl Radetsky, Optimum Lifestyle, Inc. and AMBI Inc. (14) 10.62 Strategic Alliance Agreement dated as of August 13, 1999 between AMBI Inc. and QVC, Inc. (15)** 23.1 Consent of KPMG LLP (15) 27 Financial Data Schedule (15) - ------------------------------------------- (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. 40 (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 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) Incorporated by reference to the Company's Report on Form 10-K/A for 1998. (13) Incorporated by reference to the Company's Report on Form 10-Q for the quarter ended September 30. 1998. (14) Incorporated by reference to the Company's Report on Form 8-K dated February 3, 1999. (15) 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. ** Subject to a request for confidential treatment currently pending with the Securities and Exchange Commission. 41 EX-10.02C 2 1998 STOCK OPTION PLAN AMBI INC. 1998 STOCK OPTION PLAN There is hereby established a 1998 Stock Option Plan (the "Plan"). The Plan provides for the grant to directors, officers, and employees of AMBI Inc. (the "Company") or its subsidiaries and consultants and others who perform services for the Company or its subsidiaries of options ("Options") to purchase shares of common stock of the Company ("Common Stock"). 1. Purpose. The purpose of the Plan is to provide additional incentive to the directors, officers, employees, consultants and others who render services to the Company, who are responsible for the management and growth of the Company, or otherwise contribute to the conduct and direction of its business, operations and affairs. It is intended that Options granted under the Plan strengthen the desire of such persons to join and remain in the employ of (or in the rendering of services to) the Company and stimulate their efforts on behalf of the Company. 2. The Stock. The aggregate number of shares of Common Stock which may be subject to Options shall not exceed 2,500,000. Such shares may be either authorized and unissued shares, or treasury shares. If any Option granted under the Plan shall expire, terminate or be canceled for any reason without having been exercised in full, the corresponding number of unpurchased shares shall again be available for the purposes of the Plan. The preceding sentence shall apply only for purposes of determining the aggregate number of shares of Common Stock subject to options, but shall not apply for purposes of determining the maximum number of shares of Common Stock with respect to which Options that may be granted to any person participating in the Plan. 3. Administration of the Plan. (a) The Plan shall be administered by a committee or committees (the "Committee") which shall be appointed by the Board of Directors of the Company (the "Board") from among its members. With regard to options to be granted to directors and officers, the Committee shall be comprised solely of not less than two members, the majority of whom shall be (i) "Non-Employee Directors" within the meaning of Rule 16b-3(b)(3) (or any successor rule) promulgated under the Securities Exchange Act of 1934, as amended, and (ii) unless otherwise determined by the Board, "outside directors" within the meaning of Treasury Regulation Section 1.162-27(e)(3) under Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"). Subject to the express provisions of the Plan, the Committee shall have authority, in its discretion, to determine the individuals to receive Options, the times when they shall receive them and the number of shares of Common Stock to be subject to each Option, and other terms relating to the grant of Options. (b) Subject to the express provisions of the Plan, the Committee shall have authority to construe the respective option agreements and the Plan, to prescribe, amend and rescind rules and regulations relating to the Plan, to determine the terms and provisions of the respective 1 option agreements (which need not be identical) and, as specified in this Plan, the fair market value of the Common Stock, and to make all other determinations necessary or advisable for administering the Plan. The Committee may correct any defect or supply any omission or reconcile any inconsistency in the Plan or in any option agreement in the manner and to the extent it shall deem expedient to carry it into effect, and it shall be the sole and final judge of such expediency. The determinations of the Committee on the matters referred to in this Section 3 shall be conclusive. (c) The Committee may, in its sole discretion, and subject to such terms and conditions as it may adopt, accelerate the date or dates on which some or all outstanding Options may be exercised. (d) The Committee may require that any Option Shares issued be legended as necessary to comply with applicable federal and state securities laws. 4. Types of Options. Options granted under the Plan shall be in the form of (i) incentive stock options ("ISOs"), as defined in Section 422 of the Code, or (ii) non-statutory options which do not qualify under such Section ("NSOs"), or both, in the discretion of the Committee. The status of each Option shall be identified in the option agreement, or if not identified, the status of each Option shall be an ISO to the extent permitted by law. 5. Eligibility. (a) ISOs may be granted to employees of the Company, and such directors and officers who are employees of the Company, as the Committee shall select from time to time. (b) NSOs may be granted to directors, officers, employees, consultants and others who render services to the Company as the Committee shall select from time to time. (c) In no event shall the number of shares which are subject to Options awarded under the Plan to any one person (including any Options which have been exercised, expired, terminated or canceled for any reason without having been exercised in full) exceed 1,500,000. 6. Option Price. (a) The price or prices per share of Common Stock to be sold pursuant to an Option (the "Exercise Price") shall be such as shall be fixed by the Committee but shall in any case not be less than: (i) the fair market value per share for such Common Stock on the date of grant in the case of ISOs other than to a 10% Shareholder, and (ii) 110% of the fair market value per share for such Common Stock on the date of grant in the case of ISOs to a 10% Shareholder. 2 (b) A "10% Shareholder" means an individual who within the meaning of Section 422(b)(6) of the Code owns stock possessing more than 10 percent of the total combined voting power to all classes of stock of the Company or of its parent or any subsidiary corporation. 7. Period of Option Vesting. (a) The Committee shall determine for each Option the period during which such Option shall be exercisable in whole or in part, provided, however, that an ISO shall not be exercisable after the expiration of ten years from the date of grant of such ISO and provided further that an ISO granted to a 10% Shareholder shall not be exercisable after the expiration of five years from the date of grant of such ISO. (b) Special Rule for ISOs. The aggregate fair market value (determined at the time the ISO is granted and ISOs will be taken into account in the order in which they were granted) of the stock with respect to which ISOs are exercisable for the first time by an Optionee (as defined below) during any calendar year (under all such plans of the Company, its parent or subsidiaries) shall not exceed $100,000, and any excess shall be considered an NSO. 3 8. Effect of Termination of Employment. (a) The Committee shall determine for each Option the extent, if any, to which such Option shall be exercisable in the event of the termination of the person to whom such Option was granted ("Optionee") from employment with or rendering of other services to the Company. (b) However, any such Option which is an ISO shall in all events lapse unless exercised by the Optionee: (i) prior to the 89th day after the date on which employment terminated, if termination was other than by reason of death; and (ii) within the twelve-month period next succeeding the death of the Optionee, if termination is by reason of death. (c) The Committee shall have the right, at any time, and from time to time, with the consent of the Optionee, to modify the lapse date of an Option and to convert an ISO into an NSO to the extent that such modification in lapse date increases the life of the ISO beyond the dates set forth above or beyond dates otherwise permissible for an ISO. 9. Payment for Shares of Common Stock. Upon exercise of an Option, the Optionee shall make full payment of the Option Price in cash, or, with the consent of the Committee and to the extent permitted by it: (a) with Common Stock of the Company valued at fair market value on date of exercise, but only if held by the Optionee for a period of time sufficient to prevent a pyramid exercise that would create a charge to the Company's earnings; (b) with a full recourse interest bearing promissory note of the Optionee, secured by a pledge of the shares of Common Stock received upon exercise of such Option, and having such other terms and conditions as determined by the Committee; (c) by delivering a properly executed exercise notice together with irrevocable instructions to a broker to sell shares acquired upon exercise of the Option and promptly to deliver to the Company a portion of the proceeds thereof equal to the exercise price; or (d) any combination of any of the foregoing. 10. Option Exercises. Options shall be exercised by submitting to the Company a signed copy of notice of exercise in a form to be supplied by the Company. The exercise of an Option shall be effective on the date on which the Company receives such notice at its principal corporate offices. The Company may cancel such exercise in the event that payment is not effected in full, subject to the other terms of this Plan. 11. Limited Transferability of Option. No Option shall be assignable or transferable by the Optionee to whom it is granted, other than by will or laws of descent and distribution, except 4 that, upon approval by the Committee, the Optionee may transfer an Option that is not intended to constitute an ISO (a) pursuant to a qualified domestic relations order as defined for purposes of the Employee Retirement Income Security Act of 1974, as amended, or (b) by gift: to a member of the "Family" (as defined below) of the Optionee, to or for the benefit of one or more organizations qualifying under Code Sec. 501(c)(3) and 170(c)(2) (a "Charitable Organization") or to a trust for the exclusive benefit of the Optionee, one or more members of the Optionee's Family, one or more Charitable Organizations, or any combination of the foregoing, provided that any such transferee shall enter into a written agreement to be bound by the terms of this Plan and the option agreement. For this purpose, "Family" shall mean the ancestors, spouse, siblings, spouses of siblings, lineal descendants and spouses of lineal descendants of the Optionee. During the lifetime of an Optionee to whom an ISO is granted, only such Optionee (or, in the event of legal incapacity or incompetence, the Optionee's guardian or legal representative) may exercise the ISO. 12. Other Plan Terms. (a) The Committee may grant more than one Option to an individual, and, subject to the requirements of Section 422 of the Code with respect to ISOs, such Option may be in addition to, in tandem with, or in substitution for, Options previously granted under the Plan or of another corporation and assumed by the Company. (b) The Committee may permit the voluntary surrender of all or a portion of any Option granted under the Plan or otherwise to be conditioned upon the granting to the employee of a new Option for the same or a different number of shares of Common Stock as the Option surrendered, or may require such voluntary surrender as a condition precedent to a grant of a new Option to such employee. Such new Option shall be exercisable at the price, during the period, and in accordance with any other terms or conditions specified by the Committee at the time the new Option is granted, all determined in accordance with the provisions of the Plan without regard to the price, period of exercise, or any other terms or conditions of the Option surrendered. (c) Options under the Plan may be granted at any time after the Plan has been approved by the shareholders of the Company. However, no Option shall be granted under the Plan after November 30, 2008. (d) In the event of a reorganization, recapitalization, liquidation, stock split, stock dividend, combination of shares, merger or consolidation, or the sale, conveyance, lease or other transfer by the Company of all or substantially all of its property, or any change in the corporate structure or shares of common stock of the Company, pursuant to any of which events the then outstanding shares of the common stock are split up or combined or changed into, become exchangeable at the holder's election for, or entitle the holder thereof to other shares of common stock, or in the case of any other transaction described in Section 424(a) of the Code, the Committee may change the number and kind of shares of Common Stock available under the Plan and any outstanding Option (including substitution of shares of common stock of another corporation) and the price of any Option and the fair market value determined under this Plan in such manner as it shall deem equitable in its sole discretion. 5 (e) An Optionee or a legal representative thereof shall have none of the rights of a stockholder with respect to shares of Common Stock subject to Options until such shares shall be issued or transferred upon exercise of the Option. (f) The Company shall effect the grant of Options under the Plan, in accordance with determinations made by the Committee, by execution of instruments in writing in a form approved by the Committee. Each Option shall contain such terms and conditions (which need not be the same for all Options, whether granted at the time or at different times) as the Committee shall deem to be appropriate and not inconsistent with the provisions of the Plan, and such terms and conditions shall be agreed to in writing by the Optionee. 6 13. Certain Definitions. (a) Fair Market Value. As used in the Plan, the term "fair market value" shall mean as of any date: (i) if the Common Stock is not traded on any over-the-counter market or on a national securities exchange, the value determined by the Committee using the best available facts and circumstances; (ii) if the Common Stock is traded in the over-the- counter market, based on most recent closing prices for the Common Stock on the date the calculation thereof shall be made; or (iii) if the Common Stock is listed on a national securities exchange, based on the most recent closing prices for the Common Stock of the Company on such exchange. (b) Subsidiary and Parent. The terms "subsidiary" and "parent" as used in the Plan shall have the respective meanings set forth in Sections 424(f) and (e) of the Code. 14. Not an Employment Contract. Nothing in the Plan or in any Option or stock option agreement shall confer on any Optionee any right to continue in the service of the Company or any parent or subsidiary of the Company or interfere with the right of the Company to terminate such Optionee's employment or other services at any time. 15. Withholding Taxes. (a) Whenever the Company proposes or is required to issue or transfer shares of Common Stock under the Plan, the Company shall have the right to require the Optionee to remit to the Company an amount sufficient to satisfy any federal, state and/or local withholding tax requirements prior to the delivery of any certificate or certificates for such shares. Alternatively, the Company may, in its sole discretion from time to time, issue or transfer such shares of Common Stock net of the number of shares sufficient to satisfy the withholding tax requirements. For withholding tax purposes, the shares of Common Stock shall be valued on the date the withholding obligation is incurred. (b) In the case of shares of Common Stock that an Optionee receives pursuant to his exercise of an Option which is an ISO, if such Optionee disposes of such shares of Common Stock within two years from the date of the granting of the ISO or within one year after the transfer of such shares of Common Stock to him, the Company shall have the right to withhold from any salary, wages, or other compensation for services payable by the Company to such Optionee, amounts sufficient to satisfy any withholding tax obligation attributable to such disposition. (c) In the case of a disposition described in paragraph (b), the Optionee shall give written notice to the Company of such disposition within 30 days following the disposition, 7 which notice shall include such information as the Company may reasonably request to effectuate the provisions hereof. 16. Agreements and Representations of Optionees. As a condition to the exercise of an Option, unless counsel to the Company opines that it is not necessary under the Securities Act of 1933, as amended (the "Securities Act"), and the pertinent rules thereunder, as the same are then in effect, the Optionee shall represent in writing that the shares of Common Stock being purchased are being purchased only for investment and without any present intent at the time of the acquisition of such shares of Common Stock to sell or otherwise dispose of the same. 17. Amendment and Discontinuance of the Plan. The Board may at any time alter, suspend or terminate the Plan, but no change shall be made which will have a materially adverse effect upon any Option previously granted, unless the consent of the Optionee is obtained; provided, however, that the Board may not without further approval of the shareholders, (i) increase the maximum number of shares of Common Stock for which Options may be granted under the Plan or which may be purchased by an individual Optionee, (ii) decrease the minimum option price provided in the Plan, or (iii) change the class of persons eligible to receive Options. 18. Other Conditions. (a) If at any time counsel to the Company shall be of the opinion that any sale or delivery of shares of Common Stock pursuant to an Option granted under the Plan is or may in the circumstances be unlawful under the statutes, rules or regulations of any applicable jurisdiction, the Company shall have no obligation to make such sale or delivery, and the Company shall not be required to make any application or to effect or to maintain any qualification or registration under the Securities Act or otherwise with respect to shares of Common Stock or Options under the Plan, and the right to exercise any such Option may be suspended until, in the opinion of said counsel, such sale or delivery shall be lawful. (b) At the time of any grant or exercise of any Option, the Company may, if it shall deem it necessary or desirable for any reason connected with any law or regulation of any governmental authority relative to the regulation of securities, condition the grant and/or exercise of such Option upon the Optionee making certain representations to the Company and the satisfaction of the Company with the correctness of such representations. 19. Approval; Effective Date; Governing Law. This Plan shall become effective upon the approval by the stockholders of the Company at an annual meeting or any special meeting of the stockholders of the Company. This Plan shall be interpreted in accordance with the internal laws of the State of New York. 8 EX-10.62 3 STRATEGIC ALLILANCE AGREEMENT STRATEGIC ALLIANCE AGREEMENT THIS AGREEMENT ("Agreement") is dated as of the 13th day of August, 1999, by and between QVC, Inc. ("QVC"), a Delaware corporation with its principal place of business at Studio Park, 1200 Wilson Drive, West Chester, PA 19380, and AMBI Inc. ("Company"), a New York corporation, with its principal place of business at 4 Manhattanville Road, Purchase, New York 10577-2197 and shall be effective as set forth in paragraph 4 herein. BACKGROUND A. QVC and its affiliates promote, market, sell and distribute (collectively, "Promote") products through various means and media, including without limitation, their televised shopping programs (the "Programs"). B. Company manufactures and/or sells various items of health care and dietary supplement products under the Lite Bites brand ("Lite Bites Branded Products") and manufactures and/or sells various items of health care and dietary supplement products under other brands ("Other Branded Products") (all such Lite Bites Branded Products sold by Company to QVC, whether now in existence or developed hereafter, and all such Other Branded Products sold by Company to QVC are collectively called the "Products"). C. Company and QVC desire that QVC Promote the Lite Bites Branded Products through certain means and media, and that (i) Marvin Segel, a representative of Company (or any other mutually agreed upon spokesperson, hereinafter referred to as the "Lite Bites Spokesperson"), appear on certain of the Programs to assist QVC in promoting the Lite Bites Branded Products, and that (ii) another mutually agreed upon Spokesperson (hereinafter referred to as the "Other Products Spokesperson") appear on certain of the Programs to assist QVC in promoting the Other Branded Products (collectively referred to as the "Spokespersons") . D. Company and QVC desire to develop a Heart Healthy Show related to heart healthy products featuring Company's Products. NOW, THEREFORE, incorporating the foregoing background, and for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, and intending to be legally bound hereby, the parties hereto agree as follows: 1. Grant of License and Other Rights. LITE BITES GRANT (a) Company grants to QVC and its affiliates throughout the Term (as defined in paragraph 3(a) below) of this Agreement: (i) the exclusive worldwide right to Promote the Lite Bites Branded Products through all means and media including, without limitation, Direct Response Television Programs (as defined below); and (ii) the right to use, publish, reproduce and transmit the Lite Bites trademarks, trade names and/or logos used by Company in connection with the promotion of Lite Bites Branded Products, including without limitation the words "Lite Bites" (whether now in existence or created hereafter in connection with the promotion of the Lite Bites Branded Products, collectively, the "Lite Bites Trademarks") to Promote the Products in accordance with the terms and conditions of this Agreement. In addition, Company grants to QVC and its affiliates the non-exclusive right to use the rights granted above during the Sell-Off Period (as defined in paragraph 3(c) below). For purposes of this Agreement, "Direct Response Television Programs" shall mean any televised program which requests a consumer to respond to any promotion of any product or service by mail, telephone or other electronic means, which program: (A) is live; (B) contains an intermittent or continuous call to action; (C) devotes at least twenty percent (20%) of its programming time to the promotion of products or services; or (D) is otherwise in the style of a televised retailing program. (b) Lite Bites Branded Products may, upon agreement of the Company and QVC, be branded by the Company with other brand names dedicated to QVC for sales on Direct Response Television Programs, e.g. Lite Bites will be branded "Brite Bites" for Direct Response Television Programs in the UK. The licenses and rights granted to QVC for the Lite Bites Branded Products, shall extend to such other dedicated brands agreed to by the Company for sales by QVC on Direct Response Television Programs. HEART HEALTHY SHOW GRANT (c) Heart Healthy Show. Within six months of the date of this Agreement, QVC agrees to develop, produce and on-air test at such time and on such date as QVC shall determine, a one hour format program tentatively identified as the Heart Healthy Show (such name or any other name to be acceptable to QVC at such time), subject to the availability of mutually agreeable Products and prices therefor. Both parties agree to negotiate in good faith to arrive at mutually agreeable Products and prices for inclusion in the Heart Healthy Show. This show will offer for sale primarily products derived from the Company's CardiaNutrition(TradeMark) line of products (although Other Branded Products 2 sold to QVC will not be branded "CardiaNutrition") and may include Lite Bites Branded Products. Products sold in the Heart Healthy Show will be exclusively sourced from AMBI, unless otherwise agreed. If the parties agree to proceed with a Heart Healthy show, then the Company grants to QVC the licenses and rights set forth below. (d) Company grants to QVC and its affiliates throughout the Term (as defined in paragraph 3 below) of this Agreement: (i) the exclusive worldwide right to Promote the Products through Direct Response Television Programs called the Heart Healthy Show or another title agreed to by the Company, any such name to be acceptable to QVC, and the rights in 1(f) below, and (ii) the right to use, publish, reproduce and transmit for the Products offered on the Heart Healthy show, the trademarks, trade names and/or logos used by Company in connection with the Lite Bites Branded Products and Other Branded Products, including without limitation the words "Lite Bites" (whether now in existence or created hereafter and used in connection with the promotion of the Products, collectively, the "Heart Healthy Show Trademarks") to Promote the Products in accordance with the terms and conditions of this Agreement. In addition, Company grants to QVC and its affiliates the non-exclusive right to use the rights granted above during the Sell-Off Period (as defined in paragraph 3(c) below). (e) So long as this Agreement remains in effect, QVC shall have a right of first refusal to match any marketing proposals for the Products offered for sale on the Heart Healthy show, to be offered via infomercial, radio or similar, over-the air, interactive medium, excluding internet. Under no circumstances shall Company offer any third party the right to Promote the Product via infomercial, radio or interactive medium on terms more favorable than those offered to QVC. (f) QVC may list Products on its iQVC Internet site incidental to its Promotion of these Products through Direct Response Television Programs. ALL PRODUCTS (g) The Spokesperson, as the case may be, grants to QVC and its affiliates (i) throughout the Term of this Agreement, the exclusive worldwide right to use his name, likeness, image, voice and performance (the "Endorsement") to Promote the Lite Bites Branded Products and Other Branded Products for which the Spokesperson appears on Programs to assist QVC in promoting the Products through Direct Response Television Programs, in accordance with the terms and conditions of this Agreement, and (ii) throughout the Term of this Agreement and the Sell-Off Period, the non-exclusive worldwide right to use the Endorsement to Promote the Products for which Spokesperson appeared, through any means or media. Hereinafter, the rights granted to 3 QVC pursuant to subparagraphs (a), (b), (c), (d), and (e) of this paragraph 1 and this subparagraph (f) are collectively referred to as the "License". 2. Products. (a) From time to time, QVC may issue to Company a purchase order (any such purchase order, as may be issued from time to time, is hereinafter referred to as a "Purchase Order"). Hereafter, any purchases of Products by QVC shall be made according to the terms set forth in this Agreement and on any such Purchase Order(s). This paragraph 2, together with all other terms of each Purchase Order, shall survive the expiration or termination of this Agreement. Notwithstanding anything to the contrary contained in this Agreement or otherwise, QVC makes no representations or warranties with respect to (i) the amount of Products that may be sold through the Programs, if any, (ii) the number of times, if any, the Products may be offered for sale on the Programs or (iii) the amount of revenue, if any, that may be generated through any sales of Products on the Programs. Although this Agreement does not obligate QVC to purchase any Products from Company or to Promote or sell any Products, during the Term of this Agreement, QVC shall treat Company as a Core Vendor, including payment of 100% of Company's invoices, net thirty (30) days from receipt of goods, less returns and performance-related chargebacks, if any. (b) During the Term of this Agreement, Company and/or the Spokespersons, at their sole expense, shall provide to QVC or its designee, upon the reasonable request of QVC, (i) all then-existing relevant research and development information for the Products, and subject the Products to all necessary or appropriate quality control procedures, and other testing to ensure that the Products fully comply with all claims made or to be made about the Products and any applicable state and federal laws, rules and regulations, (ii) reasonable advisory services with respect to QVC's efforts to Promote the Products, and (iii) such other creative input as QVC may reasonably deem appropriate from time to time. 3. Term. (a) Generally. The initial term of this Agreement (the "Initial Term") shall be retroactive to January 1, 1999 and shall expire on December 31, 1999. Upon the expiration of the Initial Term, this Agreement shall automatically and continually renew for additional one-year terms (each, a "Renewal Term," and the Initial Term and all Renewal Terms being collectively referred to herein as the "Term") in perpetuity, unless (i) either party notifies the other party in writing, at least sixty (60) days prior to the end of the Initial Term or any Renewal Term, as the case may be, of its intent to terminate the 4 Agreement, and (ii) Net Purchases of Products during the Initial Term or such Renewal Term are less than the Minimum Amount (as such terms are defined in paragraphs 3(d) and (e) hereof). (b) Right to Cure. Notwithstanding anything to the contrary contained in paragraph 3(a) hereof, if Company gives QVC timely notice of its intent to terminate the Agreement due to insufficient Net Purchases for the Initial Term or then-current Renewal Term, as the case may be, then QVC may cure such shortfall by issuing purchase order(s) for Products in quantities which, if added to existing Net Purchases for such period, would yield Net Purchases equaling or exceeding the Minimum Amount for such period. In such case, such notice of termination shall be deemed rescinded, and the Agreement shall renew for another Renewal Term. Net Purchases derived from Products ordered pursuant to such right to cure shall be counted toward the Minimum Amount applicable to the term being cured so long as payment is made by QVC to Company prior to expiration of the Term being cured. Purchase Orders issued pursuant to a right to cure shall be on a 0% Sale or Return basis, i.e. Product being purchase is non-returnable and non-refundable, except for defective and non-conforming goods. (c) Failure to Achieve Minimum Amount. If Company gives QVC timely notice of its intent to terminate the Agreement due to insufficient Net Purchases for the Initial Term or then-current Renewal Term, as the case may be, and QVC fails to exercise its right to cure under paragraph 3(b) hereof, then the Agreement shall terminate at the conclusion of such Term, whereupon QVC may continue to exercise the License rights, including the Endorsement, on a nonexclusive basis (i) for a period of up to three months after termination on Direct Response Television Programs and iQVC, (ii) for a period of up to six months after termination through all other means and media for which rights are granted hereunder, and (iii) as long as is necessary with respect to continuity sales, so long as during the initial three month period from termination QVC Promotes the Lite Bites Branded Products on air for at least 50% of the average number of minutes per month that QVC Promoted such Products in the previous year ("Previous Year's Time); provided however, if QVC does not meet the Previous Year's Time, then such rights with respect to continuity sales will be limited to a total of six months from termination (the "Sell-Off Period"). During the Sell-Off Period, QVC may (i) sell off any of its remaining inventory of Products, (ii) place additional orders for Products to fulfill any remaining unfilled customer orders for Products, and (iii) have such additional orders fulfilled by Company. Failure of QVC to achieve the Minimum Amount in the Initial Term or any Renewal Term shall not constitute a breach of this Agreement. (d) Minimum Amount. For purposes of this Agreement, "Minimum Amount" for Lite Bites Branded Products shall mean (***) for the Initial Term. The 5 Minimum Amount for each Renewal Term shall be (***)% greater than the preceding Term. Minimum Amounts for sales on the Heart Healthy show shall be as agreed upon by the parties prior to launching the show. (e) Net Purchases. For purposes of this Agreement, "Net Purchases" shall mean the aggregate amount of all Purchase Orders for Products issued by QVC to Company during the applicable term excluding freight, shipping and handling charges, sales, use and other taxes. (f) Exclusivity. Should Net Purchases of Lite Bites Branded Products during any Term be less than (***), (i) QVC's rights to Promote the Lite Bites Branded Products through all means and media other than Direct Response Television Programs shall become nonexclusive and (ii) QVC's right to Promote the Lite Bites Branded Products through Direct Response Television Programs shall remain exclusive. Notwithstanding the foregoing, QVC shall use commercially reasonably efforts to promote Products, provided that notwithstanding QVC's failure to achieve Net Purchases of (***), Company's sole remedy shall be as set forth in the preceding sentence. 4. Appearances. (a) Lite Bites - If requested by QVC, the Lite Bites Spokesperson shall make at least six (6) Appearances on the Lite Bites Programs during each year during the Term of this Agreement. For purposes of this Agreement, an "Appearance" shall mean a one (1) to three (3) day period during which the Products may be offered for sale on certain of the Programs. (b) Other Branded Products - The parties will agree on the number of appearances and the definition of an appearance with respect to Other Branded Products Spokesperson. (c) The Spokespersons agree to appear in promotional announcements featuring the Programs, at dates and times determined by QVC, subject to their reasonable availability. Unless otherwise determined by QVC, all Appearances and promotional announcements shall take place at QVC's studios in West Chester, Pennsylvania. Any costs and expenses of the Spokespersons that may arise in connection with all Appearances and promotional announcements, including without limitation, travel, lodging and food, shall be borne by Company. QVC makes no representations or warranties with respect to the number of Appearances, if any, that it may request the Spokespersons to make. Company and QVC may mutually agree to replace any 6 Spokesperson at any time during the Term of this Agreement. In the event of the death or disability of a Spokesperson, or the failure of a Spokesperson to make an Appearance required pursuant to this Agreement for any other reason, Company shall use commercially reasonably efforts to provide an alternative Spokesperson satisfactory to QVC. Appearances on other Programs shall be agreed upon by the parties. (d) Company agrees to protect, defend, hold harmless and indemnify QVC and its affiliates, employees, agents, officers and directors, from and against any and all claims, actions, suits, costs, liabilities, damages and expenses (including, without limitation, all attorney's fees and court costs) arising out of or related to any acts or omissions of Company or Spokespersons in connection with the Appearances, which obligation shall survive the expiration or termination of this Agreement. (e) QVC agrees to protect, defend, hold harmless and indemnify Company and its affiliates, employees, agents, officers and directors, and Spokespersons from and against any and all claims, actions, suits, costs, liabilities, damages and expenses (including, without limitation, all attorneys' fees and court costs) arising out of or related to any acts or omissions of QVC in connection with its Promotion of the Products, which obligation shall survive the expiration or termination of this Agreement. 5. Warrant. A Warrant shall be issued to QVC upon execution of this Agreement. The Warrant is set forth on Exhibit A and grants to QVC or an affiliate the right to purchase up to four hundred twenty thousand (420,000) common shares of Company. QVC agrees to pay to AMBI $63,000 for the Warrant. 6. Non-Compete. Except as contemplated hereunder and without the prior written consent of QVC, neither Company nor Spokespersons shall, during the Term of this Agreement, and, if this Agreement is terminated by Company, during the three (3) month period following the expiration or termination of this Agreement, promote, advertise, endorse or sell (a) any goods, services, or products, including without limitation the Products, anywhere in the world by means of Direct Response Television Programs other than QVC's Programs, and (b) the Lite Bites Branded Products anywhere in the world by any means or media (subject to paragraph 3(f) herein). Notwithstanding the foregoing, in the event that during the Term of this Agreement, a Spokesperson's association with Company is terminated for any reason and, in connection with such termination, a Spokesperson's role as the Spokesperson under this Agreement is terminated, then such Spokesperson's obligations pursuant to this Paragraph 6, except the obligations with respect to the Products, shall terminate upon the later of the date which is (a) one (1) year after the date of the last Appearance, and (b) one (1) year after the effective date of the termination of Spokesperson's association with Company. In 7 the event that during the Term of this Agreement, a Spokesperson's role as the Spokesperson under this Agreement is terminated for any reason other than in connection with the termination of such Spokesperson's association with Company, then such Spokesperson's obligations pursuant to this Paragraph 6, except the obligations with respect to the Products, shall terminate upon the date which is one (1) year after the date of the last Appearance. A Spokesperson's obligations with respect to the Products shall in all cases terminate upon the date which is one (1) year after the expiration or termination of this Agreement, as set forth in the first sentence of this Paragraph 6. This provision shall survive the expiration or termination of this Agreement. 7. Representations, Warranties and Covenants. (a) Company represents, warrants and covenants, which representations, warranties and covenants shall continue during the Term of this Agreement and shall survive the expiration or termination of this Agreement, that: (i) it possesses the full power and exclusive right to grant the License to QVC; (ii) the execution, delivery and performance of this Agreement, including the Warrant, by Company does not violate any agreement, instrument, judgment, order or award of any court or arbitrator or any law, rule or regulation; (iii) each Product shall comply with all foreign, federal, state, county, municipal or other statutes, laws, orders and regulations of any governmental or quasi-governmental entity; (iv) QVC's use of the License, and QVC's Promotion of the Products as permitted hereunder, will not infringe or otherwise violate the copyrights, trademarks, or other proprietary rights of third parties or constitute unfair competition; (v) all claims concerning the Products made by Company are, and will be, true and correct at the time such claims are made, and supported by data which complies with applicable law; and (vi) except as contemplated hereunder, there exist no agreements, or other arrangements, for Company to endorse, promote, advertise, or sell any Products through Direct Response Television Programs. Company shall provide QVC with any and all documents reasonably required or requested by QVC at any time and from time to time to support the representations and warranties herein contained. Company shall cause any Spokesperson to agree to the provisions set forth in paragraphs 1(f), 2(b), 3(c), 4, 6, 7(c), 8(a), 10 and 11 of this Agreement. (b) QVC represents, warrants and covenants, which representations, warranties and covenants shall continue during the Term of this Agreement and shall survive the expiration or termination of this Agreement, that: (i) it possesses the full power and exclusive right to entire into this Agreement; and (ii) the execution, delivery and performance of this Agreement by QVC does not violate any agreement, instrument, judgment, order or award of any court or arbitrator or any law, rule or regulation. QVC shall provide Company with any and all documents reasonably required or requested by 8 QVC at any time and from time to time to support the representations and warranties herein contained. (c) Each Spokesperson represents, warrants and covenants, which representations, warranties and covenants shall continue during the term of this Agreement and shall survive the expiration or termination of this Agreement, that: (i) he possesses the full power and exclusive right to grant the Endorsement to QVC; (ii) the execution, delivery and performance of this Agreement does not violate any agreement, instrument, judgment, order or award of any court or arbitrator or any law, rule or regulation; (iii) all claims concerning the Products made by Spokesperson are, and will be, true and correct at the time such claims are made, and supported by data which complies with applicable law; and (iv) except as contemplated hereunder, there exist no agreements, or other arrangements, for the Spokesperson to endorse, promote, advertise, or sell any Products through Direct Response Television Programs. The Spokesperson shall provide QVC with any and all documents reasonably required or requested by QVC at any time and from time to time to support the representations and warranties herein contained. 8. Confidentiality. (a) Company and each Spokesperson each acknowledge and agree that any and all information regarding QVC or its operations disclosed to them in conjunction with this Agreement, and any information regarding the sale and promotion of Products and/or products by QVC, will be treated as confidential information and will not be disclosed to any third party at any time during the term of this Agreement, including any Renewal Term(s), and thereafter. Company and the Spokesperson further agree that any such information will not be used for any purposes by Company or any Spokesperson other than for purposes contemplated by this Agreement. Confidential information shall not be deemed to include information which (a) is public knowledge or becomes generally available to the public other than as a result of disclosure by Company or the Spokesperson; (b) becomes available to Company or the Spokesperson, on a non-confidential basis, from a source (other than QVC or its agents) who is not bound by a confidentiality agreement with QVC; or (c) is in the possession of Company or the Spokesperson prior to disclosure by QVC, provided that the source was not bound by a confidentiality agreement with QVC. Company and the Spokesperson each agree that in the event of a breach or threatened breach of the terms of this paragraph 8 and/or the provisions of paragraph 6, QVC shall be entitled to seek from any court of competent jurisdiction, preliminary and permanent injunctive relief which remedy shall be cumulative and in addition to any other rights and remedies to which QVC may be entitled. Company and the Spokesperson each acknowledge and agree that the confidential information and other information referred to in this paragraph 8 and the prohibitions 9 provided in paragraph 6 above, are valuable and unique and that such breach of such provisions will result in immediate irreparable injury to QVC. The rights and obligations of the parties set forth in this paragraph 8 shall survive and continue after the termination or expiration of this Agreement. (b) QVC acknowledges and agrees that any and all information regarding Company or its operations disclosed to it in conjunction with this Agreement, will be treated as confidential information and will not be disclosed to any third party at any time during the term of this Agreement, including any Renewal Term(s), and thereafter. Confidential information shall not be deemed to include information which (a) is public knowledge or becomes generally available to the public other than as a result of disclosure by QVC; (b) becomes available to QVC, on a non-confidential basis, from a source (other than Company or its agents) who is not bound by a confidentiality agreement with Company; or (c) is in the possession of QVC prior to disclosure by Company, provided that the source was not bound by a confidentiality agreement with Company. QVC agrees that in the event of a breach or threatened breach of the terms of this paragraph 8, Company shall be entitled to seek from any court of competent jurisdiction, preliminary and permanent injunctive relief which remedy shall be cumulative and in addition to any other rights and remedies to which Company may be entitled. QVC acknowledges and agrees that the confidential information and other information referred to in this paragraph 8 are valuable and unique and that such breach of such provisions will result in immediate irreparable injury to Company. The rights and obligations of the parties set forth in this paragraph 8 shall survive and continue after the termination or expiration of this Agreement. 9. Committee. The parties shall create and structure a committee (the "Committee") which will have equal membership of up to three (3) members from each party, and that will have the responsibility to coordinate activities between the Company and QVC. The Committee shall meet at least quarterly unless otherwise mutually agreed. The plans include, but are not limited to allocating responsibilities and establishing timeframes and implementation schedules. The areas to be decided by the Committee shall include, but are not limited to: (a) Introduction of Company's Products into non-US Direct Response Television Programs; (b) Operations, such as inventory planning and rotation; (c) Programming, such as the new Heart Healthy Show or new Lite Bites products shows; (d) Other distribution channels, such as infomercials for Lite Bites Branded Products, catalog programs, such as Heart's Content, and retail initiatives. 10 10. Publicity. Except for incidental non-derogatory remarks necessitated by the services provided hereunder or as required by law or regulation, neither Company nor any Spokesperson shall issue any publicity or press release regarding their contractual relations with QVC or otherwise make any oral or written reference to QVC regarding their activities hereunder, without obtaining QVC's prior written consent, and approval of the contents thereof. Neither Company nor any Spokesperson shall utilize any trade name, service mark, trademark, or copyright belonging to QVC without the prior written consent of QVC. 11. Miscellaneous. (a) Amendment. This Agreement may not be varied, amended, or modified unless in writing signed by the parties hereto. (b) No Assignment. This Agreement and the rights and obligations hereunder are not assignable and any such assignment shall be null and void. (c) Governing Law. This Agreement shall be construed according to the internal laws of the Commonwealth of Pennsylvania, without regard to conflict of laws principles. Each of QVC, Company and each Spokesperson hereby consents to the exclusive jurisdiction of the state courts of the Commonwealth of Pennsylvania, Chester County, and the United States District Court for the Eastern District of Pennsylvania, in all matters arising out of this Agreement. Company and each Spokesperson each consent to service of process by certified mail, return receipt requested, at the address indicated in the opening paragraph hereof. (d) Notices. All notices provided for hereunder shall be sent via certified mail, return receipt requested, or by reputable overnight carrier, to the addresses indicated in the opening paragraph hereof. All notices sent to QVC shall be sent to the attention of Executive Vice President, Merchandising, and Senior Vice President, General Counsel. All notices sent to the Company shall be sent to the attention of Senior Vice President and General Counsel. (e) Entire Agreement. This Agreement supersedes all prior communications between the parties regarding the subject matter hereof, whether oral or written, and constitutes the entire understanding of the parties. (f) Remedies and Waiver. No delay or failure on the part of any party hereto in exercising any right or remedy under this Agreement, and no partial or single exercise 11 thereof, shall constitute a waiver of such right or remedy or of any other right or remedy. The rights and remedies provided in this Agreement shall be in addition to, and not in lieu of, any rights and remedies provided in any Purchase Order(s) or under applicable law. The rights and remedies provided in this Agreement and the Purchase Order are intended to be consistent and cumulative. However, to the extent needed to resolve any conflict between this Agreement and the terms and conditions of any Purchase Order, the terms and conditions of this Agreement shall govern. (g) Severability. If any term or condition of this Agreement or the application thereof shall be illegal, invalid or unenforceable, all other provisions hereof shall continue in full force and effect as if the illegal, invalid or unenforceable provision were not a part hereof. The headings used in this Agreement are for the convenience of the parties only and shall not be construed in the interpretation of any provisions of this Agreement. (h) No Joint Venture. Nothing herein contained shall be construed to place the parties in the relationship of partners or joint venturers, and none of the parties hereto shall have the power to obligate or bind the others in any manner whatsoever. Each of the parties hereto agree that in performing their duties under this Agreement they shall be in the position of independent contractors. IN WITNESS WHEREOF, and intending to be legally bound hereby, the parties hereto have executed this Agreement as of the date first above written. AMBI, INC. QVC, INC. By: /s/ Fredric D. Price By: /s/ Daniel J. Schutzman ------------------------- --------------------------- Fredric D. Price Daniel J. Schutzman President and CEO Vice President I, Marvin Segel, hereby acknowledge the terms and conditions set forth in the above Agreement, and, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, and intending to be legally bound hereby, agree to be personally bound by the provisions set forth in paragraphs 1(f), 2(b), 3(c), 4, 6, 7(c), 8(a), 10 and 11 of the above Agreement. /s/ Marvin Segel - ------------------------ Marvin Segel Date: August 13, 1999 ---------------------- 12 Exhibit A AMBI INC. WARRANT Dated: as of August 13, 1999 Number of Shares: 420,000 Exercise Price: As defined below in Section 3 Holder: QVC, Inc Address: Studio Park, 1200 Wilson Drive, West Chester, PA 19830 - ------------------------------------- The Holder is entitled to exercise this Warrant to purchase from AMBI Inc., a New York corporation (hereinafter called the "Company" or "Holder"), at the Exercise Price(s), the number of shares of the Company's common stock, $.005 par value, set forth above ("Common Stock"). 1. The right to exercise this Warrant shall apply as to the tranches thereof set forth below only from and after the date set forth with respect to such tranche (the "Vesting Date"), and only if the Strategic Alliance Agreement dated of even date herewith (the "Agreement") was in effect on the Vesting Date: - -------------------------------------------------------------------------------- Tranche Number Number of Shares Vesting Date - -------------------------------------------------------------------------------- 1 150,000 December 31, 1999 2 60,000 October 1, 2000 3 105,000 December 31, 2000 4 105,000 December 31, 2000 - -------------------------------------------------------------------------------- 2. The right to exercise this Warrant shall expire four years from the date of issuance, and no shares of Common Stock may be acquired under this Warrant from and after such date. 3. The Initial Warrant Exercise Price is 120% of the Initial Stock Price. The Initial Stock Price is the average NASDAQ closing price of AMBI common stock on the five trading days immediately preceding the execution of this Agreement between AMBI and QVC. (a) The Initial Warrant Exercise Price will be adjusted under the following conditions: 13 (i) If Product Purchases (each as defined in the Agreement) by QVC from AMBI for the period January 1, 1999 through December 31, 1999 are less than $(***), then the exercise price of the warrants which are scheduled to vest on December 31, 1999 will be the greater of the Warrant Exercise Price or the sum of (1) 120% of the average NASDAQ closing price of AMBI common stock on the five trading days immediately preceding January 1, 2000 (the First Revised Stock Price) plus (2) the difference between the First Revised Stock Price and the Initial Stock Price. (ii) If by September 30, 2000, QVC has not aired a total of (***) full hours of "Heart Healthy" programming (as defined in the Agreement) featuring AMBI products, then the exercise price of the warrants which are scheduled to vest on July 1, 2000 will be the greater of the Warrant Exercise Price or the sum of (1) 120% of the average NASDAQ closing price of AMBI common stock on the five trading days immediately preceding January 1, 2000 (the Second Revised Stock Price) plus (2) the difference between the Second Revised Stock Price and the Initial Stock Price. (iii) If Product Purchases by QVC from AMBI for the period January 1, 2000 through December 31, 2000 are less than $(***), then the exercise price of the warrants which are scheduled to vest on December 31, 2000 will be the greater of the Warrant Exercise Price or the sum of (1) 120% of the average NASDAQ closing price of AMBI common stock on the five trading days immediately preceding January 1, 2000 (the Third Revised Stock Price) plus (2) the difference between the Third Revised Stock Price and the Initial Stock Price. (iv) If Product Purchases by QVC from AMBI for the period January 1, 2001 through December 31, 2001 are less than $(***), then the exercise price of the warrants which are scheduled to vest on December 31, 2001 will be the greater of the Warrant Exercise Price or the sum of (1) 120% of the average NASDAQ closing price of AMBI common stock on the five trading days immediately preceding January 1, 2000 (the Fourth Revised Stock Price) plus (2) the difference between the Fourth Revised Stock Price and the Initial Stock Price. 4. The rights represented by this Warrant may be exercised at any time within the period above specified, in whole or in part, by (a) giving to the Company notice of exercise at the principal executive office of the Company (or such other office or agency of the Company as it may designate by notice in writing to the Holder at the address of the Holder appearing on the books of the Company); (b) paying to the Company the exercise price for the number of shares specified in the above-mentioned notice of exercise together with applicable stock transfer taxes, if any; and 14 (c) unless in connection with an effective registration statement which covers the sale of the shares underlying the Warrant, the delivery to the Company of a statement by the Holder (in a form acceptable to the Company and its counsel) that such shares are being acquired by the Holder for investment and not with a view to their distribution or resale. 5. This Warrant and the Common Stock issuable on exercise of this Warrant (the "Underlying Shares") may be transferred, sold, assigned or hypothecated, only if registered by the Company under the Securities Act of 1933, as amended (the "Act"), or if the Company has received from counsel to the Company a written opinion to the effect that registration of the Warrant or the Underlying Shares is not necessary in connection with such transfer, sale, assignment or hypothecation. The Underlying Shares shall be appropriately legended to reflect this restriction and stop transfer instructions shall apply. 6. The Company covenants and agrees that all shares of Common Stock which may be issued upon exercise hereof will, upon issuance, be duly and validly issued, fully paid and non-assessable and no personal liability will attach to the holder thereof. The Company further covenants and agrees that, during the periods within which this Warrant may be exercised, the Company will at all times have authorized and reserved a sufficient number of shares of Common Stock for issuance upon exercise of this Warrant and all other Options. 7. This Warrant shall not entitle the Holder to any voting rights or other rights as a stockholder of the Company. 8. Certain Adjustments. (a) In case the Company shall at any time subdivide or combine the outstanding shares of Common Stock, the exercise price of this Warrant shall forthwith be proportionately decreased in the case of subdivision or increased in the case of combination. Upon each such adjustment of the exercise price, the number of shares of Common Stock usable upon the exercise of this Warrant shall be adjusted to the nearest full share by multiplying the exercise price in effect immediately prior to such adjustment by the number of shares of Common Stock issuable upon exercise of this Warrant immediately prior to such adjustment and dividing the product so obtained by the adjusted exercise price. (b) Major Transactions, etc. (i) In case of any Major Transaction (as hereinafter defined) the Holder shall thereafter have the right (during the balance of the term of this Warrant) to purchase the kind and number of shares of stock and other securities and property (including cash) such holder would have received in such Major Transaction had he exercised this Warrant and had this Warrant theretofore become exercisable as to all tranches thereof as if each Vesting Date hereunder had occurred. The purchase price shall be equal to the product of (x) the number of shares issuable upon exercise of this Warrant and (y) the Initial Warrant Exercise Price (or the Initial Warrant Exercise Price, as adjusted, with respect to any tranche of this Warrant for 15 which any such adjustment pursuant to Section 3 shall have occurred prior to the Major Transaction). (ii) A "Major Transaction" means a reclassification or change of the outstanding shares of Common Stock (other than a change in par value to no par value, or from no par value to par value, or as a result of a subdivision or combination), or any consolidation of the Company with, or merger of the company into, or acquisitions by, another corporation (other than a consolidation or merger in which the Company is the surviving corporation and which does not result in any reclassification or change of the outstanding shares of Common Stock, except a change as a result of a subdivision or combination of such shares or a change in par value, as aforesaid), or a sale or conveyance to another corporation of all or substantially all of its assets or outstanding equity securities. (c) There are no other anti-dilution provisions. Without limiting the generality of the foregoing, no adjustment shall be required in respect of the issuance of additional shares, whether for cash, on conversion of preferred or other securities, or otherwise. 9. Registrations. (a) Within 45 days after a request therefor which is given by QVC not earlier than 18 months after the date of issuance of this Warrant, the Company shall file a registration statement under the Act which covers all shares underlying this Warrant, whether or not vested, or for which this Warrant shall theretofore have been exercised. The Company shall use its best efforts to cause such registration statement to become effective and to remain effective until 90 days after the expiration of this Warrant . (b) If prior to the period when the Underlying Shares may be publicly sold pursuant to Rule 144 under the Act or pursuant to the registration statement referred to in Section (a), the Company shall file a registration statement under the Act to cover the public sale of Common Stock by any shareholder of the Company (other than a registration statement on Form S-8), the Company shall at QVC's request include in such registration statement which is filed by the Company all shares underlying this Warrant, whether or not vested, or for which this Warrant shall theretofore have been exercised. The Company shall give to Holder notice of such registration as soon as practicable (but not less than 30 days) prior to the filing of the registration statement. The Company need not include any shares in any registration statement under this Section (b) if the underwriters of any offering covered thereby provides the Company and QVC an opinion in writing that states that the inclusion of the requested shares in the offering will have a material adverse effect on the offering price or the Company's ability to complete the offering; provided that this sentence shall not apply unless the Company grants to Holder the right to demand an additional registration statement commencing 90 days after the consummation of the offering as to which such underwriters shall have made such objection. Holder's request as aforesaid may be given only during the 30-day period after the Company shall have given the notice aforesaid to Holder. 16 (c) The expenses of each registration hereunder (other than underwriting discounts and commissions) shall be borne by the Company. (d) As a condition to the inclusion of any shares in any registration statement hereunder, the Company may require that Holder execute in favor of the Company indemnity and similar agreements (other than lock-up agreements) which are conventional in transactions of this type. 10. Commencing 90 days after the Vesting Date for each tranche, if the Company's Common Stock trades at more than $4.00 above the Warrant Exercise Price (or Adjusted Warrant Exercise Price, if applicable) for such tranche for a period of ten consecutive trading days, then AMBI will have the right, at its sole discretion, to repurchase any or all of this Warrant as to such tranche (the "Called Portion") at a price of $0.05 per share; provided, however, that this section 10 shall be effective and Repurchase Notices (as defined hereinafter) shall be valid, if and only if, there is an effective registration statement under the Act (or an exemption therefrom available to QVC in the opinion of its counsel, the reasonable expense of which shall be borne by the Company) that would cover the Acquired Shares (as hereinafter defined) for at least 90 days following the date of the Repurchase Notice if QVC were to exercise its rights with respect to the Called Portion. Upon notice by AMBI of its intention to repurchase (the "Repurchase Notice"), QVC will be have thirty (30) days from the date of the Repurchase Notice to exercise its rights hereunder to exercise this Warrant to purchase the shares covered by the Called Portion (the "Acquired Shares"). 11. This Warrant shall be governed by and construed in accordance with the internal laws of the State of New York. 12. The Company represents and warrants that the issuance of this Warrant and the execution and delivery of the Agreement do not violate any agreement or organizational document of the Company, and that this Warrant has been issued, and the shares issuable on exercise of this Warrant when so issued will be issued, in compliance with all securities laws, including the Act. IN WITNESS WHEREOF, AMBI INC. has caused this Warrant to be signed by its duly authorized officers under its corporate seal, and to be dated as of August 13, 1999. AMBI INC. By: Fredric D. Price - ----------------------------------- Fredric D. Price, President and CEO Attest: /s/ Benjamin T. Sporn - ----------------------------------- Benjamin T. Sporn, Secretary 17 EX-23.1 4 CONSENT OF INDEPENDENT AUDITORS Consent of Independent Auditors The Board of Directors AMBI Inc. We consent to incorporation by reference in the Registration Statements (Nos. 333-73397, 333-69969, 33-73312, 333-9801, 333-2507, 333-29829, and 333-35897) on Form S-3 of AMBI Inc. of our reports dated September 2, 1999, relating to the consolidated balance sheets of AMBI Inc. and subsidiaries as of June 30, 1999 and 1998, and the related consolidated statements of operations, stockholders' equity, and cash flows and related schedule for each of the years in the three-year period ended June 30, 1999, which reports appears in the June 30, 1999 annual report on Form 10-K of AMBI Inc. KPMG LLP Stamford, CT September 27, 1999 EX-27 5 FINANCIAL DATA SCHEDULE
5 12-MOS JUN-30-1999 JUL-1-1998 JUN-30-1999 4,458 0 4,222 242 1,426 11,022 1,066 292 34,541 9,143 0 0 921 150 20,670 34,541 26,911 28,301 4,782 17,050 0 0 397 6,347 482 5,865 0 0 0 5,865 0.20 0.19
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