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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, 1996 Commission File Number 0-14983
APPLIED MICROBIOLOGY, 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)
771 Old Saw Mill River Road
Tarrytown, New York 10591
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number,
including Area Code: (914) 347-5767
Securities registered pursuant to Section 12(b) of the Act:
Common Stock (par value $.005 per share)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock (par value $.005 per share)
Title of Class
Redeemable Warrants
Title of Class
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve (12) months (or for such shorter period that
the registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past ninety (90) days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
registrant's best knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of voting stock held by non-affiliates of the
Registrant was approximately $45,330,337 as of September 19, 1996.
The number of shares outstanding of Registrant's Common Stock as of
September 19, 1996: 20,613,833.
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FORM 10-K REPORT INDEX
10-K Part
and Item No. Page No.
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PART I
Item 1 Business ......................................................... 3
Item 2 Properties ....................................................... 10
Item 3 Legal Proceedings ................................................ 10
Item 4 Submission of Matters to a Vote of Security Holders .............. 11
PART II
Item 5 Market Price of Registrant's Common Equity and Related
Stockholder Matters .............................................. 12
Item 6 Selected Financial Data .......................................... 13
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations ............................................ 14
Item 8 Financial Statements and Supplementary Data ...................... 18
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure ............................................. 18
PART III
Item 10 Directors and Executive Officers of the Registrant ............... 19
Item 11 Executive Compensation ........................................... 23
Item 12 Security Ownership of Certain Beneficial Owners and Management ... 29
Item 13 Certain Relationships and Related Transactions ................... 31
PART IV
Item 14 Exhibits, Financial Statement Schedules, and
Reports on Form 8-K .............................................. 36
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PART I
Item 1. BUSINESS
The Company
Applied Microbiology, Inc., (the "Company") is a New York corporation which
was incorporated on June 29, 1983. The Company currently concentrates its
business in three areas: Special Dietary Foods, Pharmaceuticals, and Food
Ingredients. The Company engages in the following activities for these areas:
research, development, manufacturing, and sales.
On September 24, 1996, the Company signed a non-binding Letter of Intent to
sell its nisin-based food preservative business to Burns Philp & Company Limited
("Burns Philp"), an affiliate of the Company. The Company retained exclusive
rights to its nisin-based pharmaceutical and animal healthcare business.
Special Dietary Foods
Special Dietary Foods are foods that supply particular dietary needs or
that may aid in the dietary management of disease and are sometimes known as
medical foods, functional foods, or nutraceuticals.
In October, 1995, the Company acquired an exclusive license from a division
of Orion Corporation ("Orion"), the largest pharmaceutical company in Finland,
to sell Orion's patented salt alternative in the United States. The Company
began selling the salt alternative in April 1996 under the trademark Cardia(TM)
Salt Alternative in Florida and Pennsylvania. This product has significantly
less sodium than regular salt and contains potassium and magnesium, essential
minerals that may help in the dietary management of blood pressure. High blood
pressure, or hypertension, affects approximately 50 million Americans.
On March 5, 1996, the Company acquired an exclusive license to an issued US
patent that covers a novel method of controlling food intake. Using this
patented method, the Company intends to develop a calorie control food product
for use by people who have been unable to comply with their physicians'
recommendations to lose weight by modifying their normal diets. The Company
licensed the patent from Steven R. Peikin, MD, Professor of Medicine and Head,
Division of Gastroenterology and Liver Diseases at the Robert Wood Johnson
Medical School, University of Medicine and Dentistry of New Jersey. Dr. Peikin
is also a member of the Company's Scientific Advisory Board.
The Company is evaluating other proprietary Special Dietary Food products
in the areas of cardiovascular disease, diabetes, infectious disease, and
gastrointestinal disorders.
The Company intends to market Special Dietary Foods that are regulated by
the 1994 Dietary Supplement Health and Education Act (DSHEA) and the Orphan Drug
Act to physicians and to support the use of these products with data from
clinical studies. In addition, the
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Company intends to conduct its own clinical studies to further strengthen the
clinical and scientific rationale for these products.
Pharmaceuticals
Nisin
The Company is developing the compound nisin, a member of the lanthocin
class of peptides, in different proprietary formulations as a potential
treatment for hospital-acquired infections, for infections of the colon, and for
ulcer disease.
During each phase of the drug development process, scientific and business
evaluations of the cost, risk, and potential return on investment are undertaken
on a product by product basis. There can be no assurance that the development
programs will continue should there be a negative evaluation of the cost and
risks of continuing to develop a particular product.
The development of nisin as a therapeutic agent for these and other
indications can be a long, difficult, and expensive process. Thus, there can be
no assurance that a nisin-based drug product will be approved by the U.S. Food
and Drug Administration ("FDA") or its regulatory equivalent in a foreign
country. See "Governmental Regulation."
Hospital-acquired infections
The Company believes that nisin and its recombinant structural analogues
may have potential for systemic use via intravenous administration for the
treatment of severe hospital-acquired infections. These infections are caused by
bacterial pathogens that resist treatment with all, or nearly all, currently
available antibiotics and they are responsible for many deaths annually. The
Company has established that nisin is highly active in laboratory studies
against bacterial isolates of staphylococci, enterococci and pneumococci,
including the multiple drug-resistant strains which are often the cause of such
infections in hospitalized patients, and for which current antibiotics are
increasingly becoming less effective.
Infections of the colon
Antibiotic-associated diarrhea and pseudomembranous colitis are infections
of the colon that are caused by Clostridium difficile (C. difficile). These
infections are often encountered by patients receiving antibiotic therapy and
result in diarrhea and inflammation of the colon. C. difficile is usually
treated with the drug vancomycin; however, this use of vancomycin correlates to
a significant degree with the rise in vancomycin-resistant enterococci. The
Company is investigating the feasibility of delivering nisin in an oral form
directly to the colon using a proprietary delivery system. Subject to completing
feasibility and safety studies, the Company expects to begin to clinical
evaluations in humans in 1997.
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Ulcer disease
Chronic gastritis and recurrent gastric and duodenal ulcer disease have
been found to be associated with colonization of the gastric and duodenal mucosa
by the gram negative bacterium Helicobacter pylori (H. pylori). The Company has
determined that nisin can be formulated so as to efficiently kill H. pylori.
Many of the characteristics of nisin are well-suited to this application,
namely: nisin is effective against H. pylori in the laboratory; nisin is stable
in the acid environment in the stomach; and nisin is not degraded by the
digestive enzymes in the stomach. It is, however, degraded by the pancreatic
enzymes found in the gastrointestinal tract beyond the stomach and, as a result,
should not have the side effects associated with antibiotics. The Company is
working on optimizing the delivery of nisin to the site of infection in the
gastric mucosa using an animal model. Human trials began in April, 1996.
Pharmaceutical Partners
In March 1994, the Company entered into an exclusive License and Supply
Agreement with the Astra/Merck Group of Merck & Co., Inc. (now Astra Merck) to
develop and market in the U.S. drug products based on nisin for the treatment of
gastrointestinal disorders, including ulcers.
In March 1996, the Company entered into an exclusive Agreement with Nippon
Shoji Kaisha, Ltd. of Osaka, Japan, to develop and market in Japan, certain
Asian countries, Australia and New Zealand drug products based on nisin for the
treatment of hospital acquired infections and infections of the colon.
Food Ingredients
Preservatives
The Company manufactures Nisaplin, a food grade preparation of nisin, at
its plant in Beaminster, Dorset, U.K., with processes it considers proprietary
trade secrets. Nisaplin has been used in foods as a natural antimicrobial
preservative for more than 20 years and is approved for use in over 40 countries
worldwide. Applications include the prevention of food-borne illness resulting
from spoilage of dairy and bakery products, dressings and sauces and canned
foods. On September 24, 1996, the Company signed a non-binding Letter of Intent
to sell its nisin-based food preservative business to Burns Philp. The Company
retained exclusive rights to its nisin-based pharmaceutical and animal
healthcare business.
Dairy starter cultures
The Company manufactures and markets bacterial starter cultures used by the
dairy industry in certain territories in Europe and in the United States. Most
of the dairy starter cultures sold by the Company are manufactured by Mauri
Laboratories, a Burns Philp company, and are sold as a distributor for Mauri
Laboratories, which also acts as a distributor for Nisaplin
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in Australia and other areas of the Pacific. In June 1996, Mauri Laboratories
was sold to Gist-brocades N.V. of the Netherlands ("Gist"). Gist terminated the
distributorship for dairy starter cultures, effective September 11, 1996. The
Company's remaining sales of dairy starter cultures are at a very low level; as
a result, the Company has decided to withdraw from the dairy starter culture
market during the current fiscal year. Aplin and Barrett Limited ("A&B"), will
continue to use Mauri Laboratories (Gist) as a distributor for Nisaplin in
Australia and other areas of the Pacific.
Dairy Hygiene Products
The Company manufactures and sells a preparation of nisin which the Company
markets under its trademark Ambicin(R) N, which is the active ingredient in an
animal hygiene product applied to the udders of lactating dairy cattle before
and after milking.
Udder washes
The Company has developed a germicidal solution based on Ambicin N that is
applied to the teats of cows as a dip or spray before and after milking in order
to prevent the spread of mastitis. This dermatological preparation is a potent
broad spectrum germicide that acts rapidly against the bacteria that cause
mastitis.
On December 15, 1988, the Company entered into a License and License Option
Agreement ("Agreement"), as amended November 25, 1991, July 1, 1993 and February
9, 1996, with Babson Brothers ("Babson") of Naperville, Illinois. Under the
Agreement, Babson is granted licenses for certain exclusive territories which
include North America and Puerto Rico to manufacture and market Ambicin N based
mastitis preventatives, other than udder wipes, which are exclusively reserved
for manufacture and marketing by the Company. The Company supplies Ambicin N to
Babson. In July 1991, Babson commenced manufacturing and marketing an Ambicin
N-based teat dip product in the U.S. under its trademark Consept.
Under a July 1991 agreement with CFPI, a French specialty chemical
manufacturer, the Company licensed CFPI to manufacture and market Ambicin
N-based formulations for use as topical germicides in the prevention of mastitis
in nine European countries. CFPI introduced its product in France in 1992.
Udder wipes
The Company developed a moistened towel using an Ambicin N-based
formulation that is for use in preparing dairy cows for milking. Trials in dairy
cows at Cornell Veterinary College showed the product to be effective. The
Company launched the product under its trademark Wipe Out(TM) Dairy Wipes on a
test basis in February, 1996, and nationally in April, 1996.
Governmental Regulation
Healthcare
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Products which are intended for use in the diagnosis, cure, mitigation,
treatment or prevention of disease in humans or animals are subject to extensive
governmental regulation. All such products must undergo extensive
characterization, and are subject to regulation for quality assurance,
toxicology and safety. Products containing such agents must undergo thorough
preclinical and clinical evaluations of performance as to safety and efficacy
under approved protocols.
The Company intends to pursue regulatory approval for the pharmaceutical
and related uses of its nisin-based products. The Company's proposed
pharmaceutical products will be subject to the regulatory approval processes for
new drugs. Depending upon the ingredients of a specific product, some special
dietary food products will be marketed in the U.S. under the Dietary Supplement
Health and Education Act or the Orphan Drug Act.
To take a pharmaceutical product from the discovery stage through research
and preclinical development to the point where the Company and/or its partners
can make the necessary filings (to the FDA and governmental agencies outside the
U.S.) to conduct human clinical trials may take several years. Regulatory
requirements for human clinical trials are substantial, depend upon a variety of
factors, vary by country, and will further add to the time necessary to
determine whether a product candidate can be approved for human use.
There can be no assurance that the Company's proposed products will prove
to be safe and effective under these regulatory procedures.
Foods and food processing
Ingredients added to or used in food which are considered "food additives"
require FDA approval in the U.S. unless, based on the submission of safety and
functionality data, such ingredients are considered generally recognized as safe
("GRAS"). Use of GRAS food ingredients does not require FDA approval, but
companies frequently submit petitions to the FDA which request that the FDA
affirm GRAS status. The Company submitted a request to the FDA for such
affirmation for the Company's nisin preparation. The FDA has affirmed that nisin
or a nisin preparation which meets certain specifications is GRAS for use in
pasteurized cheese spreads and pasteurized processed cheese spreads, plain or
with fruits, vegetables, or meats (GRAS Affirmed uses). A GRAS petition has been
accepted for filing for certain sauces, non-standardized dressings and liquid
egg products. The use of nisin in cheese products and foods, other than for GRAS
Affirmed uses, may occur based on the manufacturer or user determining that such
use is GRAS or may necessitate a submission to FDA and FDA concurrence in an
amendment of the current GRAS Affirmation regulation for nisin. Should such a
submission to the FDA become necessary, timely action by the FDA cannot be
assured.
The Company believes that the Nutrition Labeling and Education Act of 1990
and the FDA's implementing regulations permit the use of nisin in low-fat
cheeses, low-fat salad dressings and additional foods.
In general, outside of the U.S. products such as nisin when used in food
must be included on the "Positive List" of food additives in the country where
the food product is to be sold. The
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regulations vary from country to country. To date, the Company has obtained
permission in over 40 countries for its nisin-preparation (sold under its
trademark Nisaplin(R)) to be used in a variety of foods, predominantly processed
cheese products, canned foods and fruit juices. The Company advises customers on
the legal status regarding use and labeling of the Company's products in their
own country.
Research and Development
The Company conducts research and development to expand uses of its current
antimicrobial products in food preservation and in human and veterinary
healthcare, to identify new antimicrobial products, and to improve the
production process for the Company's antimicrobial products. These efforts are
conducted with industrial and academic co-workers in various countries. During
the fiscal year ended June 30, 1996, approximately $2,294,000 was spent on
research and development by the Company.
Proprietary Rights
Nisaplin is a trademark which is registered and defended by the Company in
the EC countries, the U.S., Russia, and other countries. Ambicin is a registered
trademark of the Company in the U.S. and other countries. Cardia is a registered
trademark of the Company in the U.S. and Wipe Out is a trademark of the Company
with applications for registration filed in the U.S. and other countries.
The Company also owns 117 patents relating to, among other things, the
expression and production of proteins by recombinant Bacillus strains; plasmid
vectors and methods of construction in gram positive bacteria; expression and
production of recombinant lysostaphin; novel bacteriocin compositions and their
use as broad spectrum bactericides; the use of bacteriocin compositions to treat
bovine mastitis; the use of bacteriocin compositions in oral healthcare; the use
of bacteriocin compositions on skin for healthcare and hygiene; the use of
bacteriocin compositions in gastrointestinal healthcare; the use of nisin in
alcoholic beverages; and antibotulinal protection of foods. The Company has
exclusive licenses under certain patents and patent applications relating to the
use of nisin to prevent microbial spoilage in foods and alcoholic beverages.
In the event that the nisin-based food preservative is sold, it is
anticipated that the Company's patents for the use of nisin in alcoholic
beverages and antibotulinal protection of foods will be transferred as well.
Under an agreement with the University of Maryland, the Company has
obtained exclusive licenses under patents and applications relating to the
cloning, expression and alteration of genes encoding nisin, subtilin, and
related peptides, and their production and compositions..
Under an agreement with the Institute of Food Research, Norwich, U.K., the
Company owns certain strains of bacteria producing nisin and related patents,
and may obtain exclusive licenses to certain nisin-related mutants and related
patents.
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Under an agreement with the New York University Medical Center, the Company
owns patent rights to the parenteral treatment of drug-resistant bacterial
infections with lanthocins and other agents.
Under a Pre-Clinical Study Agreement for work being performed at the
McGuire Veterans Administration Hospital, the Company owns patent rights to the
parenteral treatment of drug-resistant bacterial infections with lanthocins and
other agents.
The Company maintains trade secret protection for bacterial strains,
technical know-how, and other information it considers proprietary and
beneficial for the manufacture, use, regulatory approval, and marketing of the
Company's products.
The Company maintains non-disclosure safeguards, including confidentiality
agreements, with employees, certain consultants and Scientific Advisory Board
members. There can be no assurance, however, that others may not independently
develop similar technology or that secrecy will not be breached despite any
agreements which exist.
Manufacturing
The Company's Nisaplin and Ambicin N products are manufactured by the
Company at its 30,000 square foot plant at Beaminster, Dorset, U.K. In addition,
at its Beaminster facility, the Company produces certain dairy starter cultures,
which production will be phased out during the current fiscal year. The
Beaminster plant and technical facilities are adequate for the Company's current
business.
On September 24, 1996, the Company signed a non-binding Letter of Intent to
sell the nisin-based food preservative business to Burns Philp. The consummation
of the sale would result in the transfer of the Beaminster plant to Burns Philp.
Thereafter, the Company plans to purchase nisin from Burns Philp for
pharmaceutical and animal healthcare uses for a period of up to one year.
Subsequently, nisin-based products for pharmaceutical and animal healthcare uses
will be manufactured by the Company at another site to be determined.
Marketing and Sales
The Company maintains sales offices in the U.S. and the U.K. for its
Nisaplin product and in the U.S. for its Cardia and Wipe Out product lines. In
addition, the Company markets Nisaplin through a combination of direct selling
efforts and an extensive network of distributors and agents throughout the
world. The Company maintains a scientific and technical sales group in the U.K.
to support existing Nisaplin customers and to develop new applications for
products marketed to the food and beverage industries.
Financial Information About Industry Segments
The Company's business historically was in a single industry segment, the
research, development, production and marketing of antimicrobial proteins for
various applications. In April 1996, the Company began selling a salt
alternative as a special dietary food that may help
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in the dietary managment of hypertension. For financial data pertaining to the
amount of revenue and operating profit and loss of the Company, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Financial Statements."
Employees
As of June 30, 1996, the Company had 107 full-time employees, of whom 5
were executive employees, 14 were administrative, 18 were engaged in marketing
and sales, and 70 were involved in research, process 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. On September 24, 1996, the Company signed a non-binding Letter of
Intent to sell the nisin-based food preservative business to Burns Philp. The
consummation of the sale would result in the transfer of approximately 70
employees to Burns Philp.
Item 2. PROPERTIES
Effective as of January 1, 1995, the Company's headquarters are located at
771 Old Saw Mill River Road, Tarrytown, New York 10591 (Tel: 914-347-5767, Fax:
914-347-6370). These facilities include office space as well as the Company's
U.S. laboratory where the Company conducts its pharmaceutical research and
development. Pursuant to a seven year lease, the Company is paying an annual
rent in the amount of $488,400, which sum is due in monthly installments. The
rent is subject to annual increases over the term of the lease. However, since
the premises were not ready to be occupied by the Company's research laboratory
until June 12, 1995, until that date the rent consisted of a nominal amount.
The Company's U.K. headquarters are located at Clarks Mill, Stallard
Street, Trowbridge, U.K., and comprise approximately 3,000 square feet which are
rented under a lease expiring in 2114 and providing for a current annual rent of
GBP 34,000 ($52,000). The Company's 30,000 square foot manufacturing and
research facility is located in Beaminster, U.K., and is owned by the Company.
On September 24, 1996, the Company signed a non-binding Letter of Intent to sell
the nisin-based food preservative business to Burns Philp. The consummation of
the sale will result in the transfer of the U.K. facilities to Burns Philp.
Item 3. LEGAL PROCEEDINGS
No material proceedings are pending to which the Company or any of its
property is subject.
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Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual meeting of shareholders of the Company held in March 1996,
the following actions were taken.
1. holders of 13,943,708 shares of common stock approved an increase in the
authorized common stock from 25,000,000 shares to 40,000,000 shares. The
increase was opposed by the holders of 445,846 shares of common stock, and
37,295 abstained;
2. holders of 12,820,348 shares of common stock approved an increase in the
common stock authorized for issuance under the Company's 1991 Stock Option Plan
from 1,500,000 shares to 3,000,000 shares. The increase was opposed by the
holders of 779,496 shares of common stock, and 65,345 abstained; and
3. holders of 14,384,772 shares of common stock ratified the appointment of KPMG
Peat Marwick LLP as the Company's independent auditors. The appointment was
opposed by the holders of 23,200 shares of common stock, and 27,977 abstained.
The following persons were elected as directors:
Name For Against
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Fredric D. Price 14,238,349 197,600
Sheldon G. Gilgore 14,238,349 197,600
Ian Clack 14,238,349 197,600
Douglas Cotter 14,237,849 198,100
Audrey T. Cross 14,237,799 198,200
John P. Friend 14,237,849 198,150
Robert E. Pollack 14,237,849 198,100
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PART II
Item 5. MARKET PRICE OF REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National Market System
under the symbol "AMBI" and the Company's warrants are traded on Nasdaq Small
Cap Market under the symbol "AMBIW". Trading of the Company's Common Stock on
the Pacific Stock Exchange was discontinued as of November 4, 1994.
The Company has not paid a cash dividend to its public shareholders on its
Common Stock, although A&B did pay dividends to its stockholders before A&B was
acquired by the Company. The Company intends to retain all earnings for the
foreseeable future for use in the operation and expansion of its business and,
accordingly, the Company does not contemplate paying any cash dividends on its
Common Stock in the near future.
The following table sets forth prices quoted for the Common Stock which
represent actual sale prices. The high and low bid quotations for the Company's
Warrants have been reported by the National Association of Securities Dealers,
Inc. and represent quotations by dealers without adjustments for retail
mark-ups, mark-downs or commissions and may not represent actual transactions.
Common Stock Warrants
Fiscal ---------------- ----------------
Quarter High Low High Low
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Ended
September 30, 1994 $4.00 $3.00 $1.375 $1.00
Ended
December 31, 1994 $4.625 $2.625 $2.00 $0.875
Ended
March 31, 1995 $3.25 $2.50 $0.875 $0.625
Ended
June 30, 1995 $2.875 $1.375 $0.625 $0.25
Ended
September 30, 1995 $4.50 $1.375 $1.125 $0.3125
Ended
December 31, 1995 $5.875 $3.3775 $1.9375 $0.6875
Ended
March 31, 1996 $5.5625 $3.185 $1.625 $0.6875
Ended
June 30, 1996 $8.1875 $4.87 $3.75 $1.125
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Item 6. SELECTED FINANCIAL DATA
The following tables summarize certain financial data that are qualified by
the more detailed financial statements included herein. Figures are stated in
thousands of United States Dollars, except per share amounts.
Year ended June 30 1996 1995 1994 1993(1) 1992(1)
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Sales 14,157 11,264 9,614 12,083 9,796
Write-off of Purchased
Research and Development -- -- -- 22,504 --
Other Costs and Expenses 20,776 11,337 8,374 8,891 6,653
Tax Expense 285 254 185 423 1,090
Net (Loss)/Income (4,719) 283 1,756 (19,423) 2,282
Net (Loss)/Earnings per
Share (0.27) 0.01 .09 (1.37) 2.41
Selected Balance Sheet Data: 1996 1995 1994 1993 1992(1)
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(As of June 30)
Working Capital 14,812 7,333 7,352 5,750 1,990
Total Assets 23,367 13,788 11,808 10,724 8,059
Total Liabilities 6,221 3,163 1,544 2,255 3,363
Long Term Obligations and
Redeemable Preferred Stock 4,408 2,267 1,500 1,500 --
Stockholders' Equity 15,646 9,125 8,764 6,969 3,196
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(1) In connection with the consummation of the BP Transactions (see Item 13),
which for financial accounting purposes were accounted for as a reverse
acquisition, and pursuant to which the Company acquired its A&B subsidiary, the
results for the year ended June 30, 1993, are those of A&B for the full year and
those of the Company other than A&B for the period from September 1, 1992
through June 30, 1993. The data as of and for the year ended June 30, 1992,
includes A&B only.
The Company has not paid a cash dividend to its public shareholders on its
Common Stock, although A&B did pay dividends to its stockholders before A&B was
acquired by the Company. 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.
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Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements and related notes thereto of the Company
included elsewhere herein.
General
The Company's historical revenues have been primarily attributable to sales
of its own products. The Company also acts as selling agent for certain products
of both affiliated as well as unaffiliated companies. Effective July 1, 1995,
the Company assumed responsibility for selling products in the US on behalf of
an affiliated company. The Company also receives royalty income from users of
its patented technology, milestone payments from research partners, and income
from toll manufacturing arrangements.
Cost of sales includes both direct and indirect manufacturing costs.
Research expenses include internal expenditures as well as expenses associated
with third party collaborators. Selling, general and administrative expenses
include salaries and overheads, third party fees and expenses, and costs
associated with the selling of the Company's products. The Company capitalizes
patent costs and amortizes them over periods of nine months to fifteen years.
Results of Operations
The Company has an accumulated deficit due primarily to the write-off of
purchased goodwill (amortized over five years from 1986 - 1990) and purchased
research and development costs (written-off in the year ended June 30, 1993) in
connection with the BP Transactions, and the current year loss.
Three years ended June 30, 1996, 1995 and 1994
Revenues
Revenues increased 37% to $16.0 million in the fiscal year ended June 30,
1996 ("fiscal 1996") from $11.7 million in the fiscal year ended June 30, 1995
("fiscal 1995"). $1.2 million of this increase was attributable to new products
launched during the year - Cardia ($0.7 million) and Wipe Out ($0.5 million). A
further $0.4 million in new business was recorded as a result of the Company
assuming responsibility for selling products in the US on behalf of an
affiliate. Sales of Nisaplin increased 6% in 1996; and accounted for 65% of the
total sales, compared with 77% in 1995. Other operating income increased by $1.4
million due to milestone and research payments received from third party
research collaborators.
Revenues increased 15% to $11.7 million in fiscal 1995 from $10.2 million
in the fiscal year ended June 30, 1994 ("fiscal 1994"). Sales of Nisaplin
increased by 15% and accounted for 77% of the total sales. Sales in the US and
UK declined, but were offset by increases principally
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in South America and Europe. Sales of Dairy Hygiene products declined by 21%,
due to reduced activity by users in the US and delays by users in launching
their products in Europe. Sales of Dairy Starter Cultures increased by 39%.
Cost of Sales
Cost of sales was $6.4 million in fiscal 1996, an increase of 95% from the
fiscal 1995 figure of $3.3 million. As a percentage of sales, it increased to
45%, compared to 29% in fiscal 1995. This was largely due to a change in the
sales mix, with a higher proportion of sales representing the lower margin
products (Dairy Starter Cultures) versus the prior year.
Cost of sales was $3.3 million in 1995, a decrease of 8% from the fiscal
1994 figures of $3.5 million. As a percentage of sales, it decreased to 29%
compared to 37% in fiscal 1994. The decrease was principally due to lower raw
material costs following a change in method of manufacture.
Selling, General and Administrative Expenses
Selling, general and administrative expenses ("SG&A") were $11.2 million,
$5.4 million, and $3.5 million in fiscal 1996, fiscal 1995 and fiscal 1994,
respectively, representing increases of 106% in fiscal 1996 from fiscal 1995,
and 55% in fiscal 1995 from fiscal 1994. SG&A as a percentage of revenue was
70%, 46%, and 34% in fiscal 1996, fiscal 1995, and fiscal 1994, respectively.
The main component of the increase in SG&A in fiscal 1996 was marketing and
sales expenditures incurred in the launch of two new products. The main
components of the increase in fiscal 1995 were attributable to increased sales
commissions paid to agents and distributors and increased costs of additional
personnel. In fiscal 1995, the Company incurred costs associated with the
relocation of the Company's corporate headquarters and research and development
facilities, in addition to losses on the sale of some equipment which was not
feasible to relocate.
Research Expenses
Research expenses were $2.3 million, $1.8 million, and $0.7 million in
fiscal 1996, fiscal 1995, and fiscal 1994, respectively, representing increases
of 25% in fiscal 1996 from fiscal 1995, and 150% in fiscal 1995 from fiscal
1994. Research expenses as a percentage of revenue were 14%, 16% and 7% in
fiscal 1996, 1995, and 1994, respectively. The increases in expenses in fiscal
1996 and fiscal 1995 were related to the addition of personnel required to
support ongoing programs.
Income Before Tax Expense
The Company had a loss before tax expense of $4.4 million in fiscal 1996,
compared with income of $0.5 million in fiscal 1995. This loss was a result of
increased expenditures in the area of SG&A referred to above.
- 15 -
<PAGE>
Income before tax expense was $0.5 million in 1995, compared with $1.9
million in fiscal 1994. The decrease was a result of the Company's increased
expenditures in the areas of SG&A and research, as described above.
Tax Expense
The Company had a tax expense in fiscal 1996, despite having a loss before
tax expense, because of profits generated from its UK subsidiary.
In fiscal 1995, the Company's effective tax rate was 47%. The effective tax
rate may be expected to vary in the future depending upon the respective levels
of income in the US and the UK. Refer to Note 13 of the Notes to the
Consolidated Financial Statements for a further analysis of the tax charge.
Fourth Quarter Results
Revenues in the fourth quarter of fiscal 1996 were $5.7 million, an
increase of 97% over the corresponding quarter for the previous year. Research
and milestone payments of $1.5 million combined with the introduction of new
products, Cardia and Wipe Out, with sales of $0.7 million and $0.5 million,
respectively, were the primary reasons for the increase. Nisaplin had sales of
$2.6 million, a 29% increase over last fiscal year.
Operating losses for the quarter were $2.3 million, compared to income of
$0.2 million the previous fiscal year.
Quarterly Variations
On a quarter-to-quarter basis, the Company's sales and income may vary
widely, as a result of various factors, including, for example, customers
placing orders in anticipation of a price increase and customers adjusting
finished goods inventory levels. As a result, the Company may report sales
increases or declines and/or income gains or losses for a particular quarter
that may not reflect end-customer usage of the Company's products.
Liquidity and Capital Resources
As of June 30, 1996, the Company had working capital of $14.8 million,
which included cash and cash equivalents of $8.4 million. On June 30, 1995,
working capital was $7.3 million, which included cash and cash equivalents of
$3.3 million.
The Company raised $13.7 million during fiscal 1996 from issuance of
preferred stock ($8.2 million), common stock ($3.5 million), and a long term
loan ($2.0 million). $6.6 million was used in operating activities, mainly to
fund the net loss and the increase in receivables resulting from higher sales
levels. $0.7 million was used for purchase of property and equipment, and $1
million was used on patent costs and licensing fees. The Company also used cash
for the payment of preferred stock dividends.
As of June 30, 1996, the Company has 1,500 shares of redeemable preferred stock
outstanding with an involuntary liquidation value of $1,500,000. For additional
details refer to Note 9 of the Notes to the Consolidated Financial Statements.
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<PAGE>
The Company anticipates growth in research and SG&A expenditures as it
expands its emphasis in drug development and continues to support recently
launched products. The Company does not expect to report Operating Income during
the fiscal year that ends June 30, 1997. In addition, the nature of research and
development is such that new discoveries and improvements may require additional
financing to take advantage of market opportunities afforded by such discoveries
and improvements. The Company is therefore considering, among other things,
raising capital through corporate partnerships, private placements, and public
offerings of securities.
On September 24, 1996, the Company signed a non-binding Letter of Intent to
sell its nisin-based food preservative business to BP. If the Company sells its
nisin-based food preservative business to BP, the Company's income stream from
the food business which accounts for approximately 75% of the Company's revenues
will be eliminated. However, the capital infusion from the sale of the food
business will permit the Company to concentrate on its human healthcare
business.
Inflation and Prevailing Economic Conditions
The Company does not believe inflation has had a significant impact on the
Company's operations.
The Company does not believe exchange rates have had a significant impact
on the Company's operations.
Seasonality
The Company does not believe there is any significant seasonal effect on
the Company's operations. There may be variations between quarters due to other
factors. See "Quarterly Variations."
Recently Issued Accounting Standards
In March, 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for the
Impairment of Long- Lived Assets and for Long-Lived Assets to be Disposed Of,
which becomes effective for the Company as of July 1, 1996. This statement
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles and goodwill related to those assets to be held
and used and for long-lived assets and certain identifiable intangibles to be
disposed. Adoption of SFAS No. 121 is not expected to have a material impact on
the Company's consolidated financial position and operating results, nor will it
affect the Company's cash flows.
In October, 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation. This statement establishes an alternative method of accounting for
stock-based compensation awarded to employees, such as stock options granted by
the Company to employees. SFAS No. 123 provides for the recognition of
compensation expense based on the fair value of the stock-based award, but
allows companies to continue to measure compensation
- 17 -
<PAGE>
cost in accordance with the Accounting Principles Board Opinion (APB) No. 25,
Accounting for Stock Issued to Employees. Companies electing to retain this
method must make pro forma disclosure of net income and earnings per share as if
the fair value based method had been applied. The Company plans to continue to
use APB No. 25, which does not require the Company to record compensation
expense for the stock options it awards to employees. In the Company's
consolidated financial statements for the year ending June 30, 1997, the Company
will disclose the pro forma effect of the fair value method on 1996 and 1997 net
income and earnings per share.
Item 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements are included herein commencing on page F-1.
Item 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
- 18 -
<PAGE>
PART III
Item 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Officers and Directors
The officers and directors of the Company are as follows:
Year Joined
Name Company Position
- --------------------------------------------------------------------------------
Fredric D. Price (50) 1994 President, Chief
Executive Officer,
Acting Chief Financial Officer
and Director
Sheldon G. Gilgore, M.D. (64) 1995 Chairman of the Board
Stephen C. Benoit (38) 1995 Vice President-Marketing and
Sales
Colin Kop (34) 1996 Director
Audrey T. Cross, Ph.D. (50) 1995 Director
John P. Friend, Ph.D. (52) 1989 Director
Peter E. Herring (45) 1996 Controller
Solomon L. Mowshowitz, Ph.D. (53) 1996 Vice President-Research and
Development
Robert E. Pollack, Ph.D. (55) 1995 Director
Benjamin Sporn (58) 1986 Vice President-Legal
and Secretary
Fredric Price has been President, Chief Executive Officer and a Director of
the Company since September 1994. In addition, he has been the Company's acting
Chief Financial Officer since January 1995. From July 1991 to September 1994, he
was Vice President, Finance and Administration and Chief Financial Officer of
Regeneron Pharmaceuticals, Inc. For more than
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<PAGE>
five years prior to joining Regeneron, he was head of RxFDP, a consulting firm
which provided strategic planning, market development, and new product
introduction services to pharmaceutical and other health care businesses. From
1973 to 1986 he was at Pfizer Pharmaceuticals, where he was a Vice President
with both line and staff responsibilities. Mr. Price is Secretary and on the
Executive Committee of the Board of Directors of the New York Biotechnology
Association. Mr. Price is also a director of Pharmos Corporation, a
biotechnology company engaged primarily in the development of pharmaceuticals
for ophthalmic and neurologic indications. He has a BA from Dartmouth College
and an MBA from the Wharton School of the University of Pennsylvania.
Sheldon G. Gilgore, MD was elected Chairman of the Board of Directors of
the Company in October 1995. Dr. Gilgore served as Chairman of the Board, Chief
Executive Officer, and President of G. D. Searle & Co. from 1986 to April 1995
when he retired. From 1971 to 1986, he was President of Pfizer Pharmaceuticals
and was a member of the Board of Directors of Pfizer, Inc. In addition, he
served as Chairman of the Pharmaceutical Research Manufacturers of America
(PhRMA). Dr. Gilgore received a BS in biology from Villanova University and an
MD from Jefferson Medical College.
Stephen C. Benoit was appointed Vice President-Marketing and Sales of the
Company in January 1995. Prior thereto he was with Calgene, Inc. where he served
as Vice President of Marketing from 1992 to 1994, as Vice President Strategic
Planning from 1990 to 1992, and as Director Financial Planning and Analysis from
1987 to 1990. He received a B.B.A. and M.B.A. in finance from Loyola Marymount
University, Los Angeles, California.
Audrey T. Cross, Ph.D., was elected a Director of the Company in January
1995. Dr. Cross has been Associate Clinical Professor at the Institute of Human
Nutrition at the School of Public Health of Columbia University since 1988. She
also works as a consultant in the areas of nutrition and health policy. She has
served as a special assistant to the United States Secretary of Agriculture as
Coordinator for Human Nutrition Policy and has worked with both the United
States Senate and the California State Senate on nutrition policy matters. Dr.
Cross received a B.S. in dietetics, a Master of Public Health in nutrition and a
Ph.D. from the University of California at Berkeley, and a J.D. from the
Hastings College of Law at the University of California at San Francisco.
John P. Friend, Ph.D. has been with Burns Philp & Company Limited (BPC)
since 1981 and is currently General Manager, Technology and Research. He was
elected a Director of the Company in July 1989. He received a B.Sc. and a Ph.D.
from the University of Sydney (Australia) in colloid chemistry and a M.Sc. in
biotechnology from the University of New South Wales.
Peter E. Herring was appointed Controller of the Company in January 1996.
Prior to joining the Company, he was with Pfizer Inc. from 1979 until January
1996. At Pfizer, he served as Director of Finance and Systems in a Corporate
Services Division from 1993 until he joined the Company. From 1979 until 1993 he
held increasingly responsible financial management
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<PAGE>
positions in both corporate and operating divisions of Pfizer. He received a BS
from the University of Tennessee and an MBA from Vanderbilt University.
Colin Kop was appointed General Manager Business Development of BPC in
September 1995. From 1994 to 1996, Mr. Kop served as General Manager Finance of
BPC and has served in various financial positions of increasing responsibility
with BPC since 1983. Mr. Kop was a Director of the Company from 1992 until 1994
and was reelected a Director in May 1996. Mr. Kop is a Certified Practicing
Accountant and he earned a Masters of Commerce Degree from the University of New
South Wales.
Solomon L. Mowshowitz, Ph.D., was appointed Vice President-Research and
Development of the Company in January 1996. For the five prior years, Dr.
Mowshowitz was President of Diligen, a company that provides scientific and
commercial consulting services to biotechnology companies as well as to the
venture capital community. From 1983 to 1990, Dr. Mowshowitz held senior
research management positions at three biotechnology companies. From 1970 to
1983, he was Assistant Professor in the Department of Microbiology at the Mt.
Sinai School of Medicine in New York. Dr. Mowshowitz holds a BA from the
University of Pennsylvania and a PhD in biochemistry from the Albert Einstein
College of Medicine in New York.
Robert E. Pollack, Ph.D., was elected a Director of the Company in January
1995. Dr. Pollack has been a Professor of Biological Sciences at Columbia
University since 1978. In addition, from 1982 to 1989 he was Dean of Columbia
College. Prior thereto he was Professor of Microbiology at the State University
of New York School of Medicine at Stony Brook, Senior Scientist at Cold Spring
Harbor Laboratory, Special NIH fellow at the Weizmann Institute in Israel, and
NIH Fellow in the Department of Pathology at New York University School of
Medicine. He is the author of more than a hundred research papers on the
molecular biology of viral oncogenesis, a dozen articles in the popular press,
and three books. He received a B.A. in physics from Columbia University and a
Ph.D. in biology from Brandeis University.
Benjamin Sporn has been legal counsel to the Company since 1990 and has
served as Secretary of the Company since 1986. He was an attorney with AT&T from
1964 until December 1989 when he retired from AT&T as a General Attorney for
Intellectual Property Matters. Mr. Sporn is also Chairman of the Board of
Directors of Creative Technologies Corp. and of Micel Corp. Mr. Sporn was a
director of the Company from 1986 until 1994. He received a BSE degree from
Rensselaer Polytechnic Institute and a J.D. degree from American University.
The directors serve for a term of one year and until their successors are
duly elected and qualified. Officers serve at the pleasure of the Board of
Directors. There are no family relationships among directors or executive
officers.
Arrangements Regarding the Election of Directors
The by-laws of the Company provide that until September 1, 1996 the Board
of Directors is to consist of seven directors, and that designated actions by
the Board require the affirmative
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<PAGE>
vote of not less than six directors. The by-laws further include certain
provisions regulating the election of directors. See Item 13. Certain
Relationships and Related Transactions.
Committees of the Board of Directors
The Company has an audit committee consisting of Dr. Gilgore and Mr. Kop.
In addition, the Company has a compensation committee consisting of Drs. Cross
and Pollack.
Scientific Advisory Board
The Company has certain scientific advisors with expertise in areas of
benefit to the Company, who serve on its Scientific Advisory Board and consult
with the Company concerning the Company's research and development programs.
Following are members of the Scientific Advisory Board working with the
Company:
Robert E. Pollack, Ph.D. - Dr. Pollack has been a Professor of Biological
Sciences at Columbia University since 1978. In addition, from 1982 to 1989 he
was Dean of Columbia College. Prior thereto he was Professor of Microbiology at
the State University of New York School of Medicine at Stony Brook, Senior
Scientist at Cold Spring Harbor Laboratory, Special NIH fellow at the Weizmann
Institute in Israel, and NIH Fellow in the Department of Pathology at New York
University School of Medicine. He is the author of more than a hundred research
papers on the molecular biology of viral oncogenesis, a dozen articles in the
popular press, and three books. He received a B.A. in physics from Columbia
University and a Ph.D. in biology from Brandeis University.
Edward Goldberg, Ph.D. - Dr. Goldberg is professor of molecular biology and
microbiology at the Tufts University School of Medicine, Dentistry and
Veterinarian Medicine. He is an authority on the mechanism of recognition and
infection of bacteria by viruses. He has also done extensive research on the
genetics, structure and function of ion exchanges related to bacterial pH
control and multi drug antiporters in bacteria . He holds a B.A. in Chemistry
from Columbia University and a Ph.D. in Biology from Johns Hopkins University.
Richard Novick, M.D. - Dr. Novick is professor of medicine and microbiology
at New York University Medical School and an Investigator at the Skirball
Institute for Biomolecular Medicine. During a postdoctoral fellowship at the
National Institute for Medical Research in Mill Hill, England, he discovered the
first plasmids in Staphylococci, those responsible for penicillin resistance.
Dr. Novick holds a B.S. from Yale University and an M.D. with honors in
Microbiology from New York University Medical School.
Marvin Moser, M.D. - Dr. Moser is clinical professor of medicine at Yale
and senior medical consultant at the National High Blood Pressure Education
Program of the National Heart, Lung and Blood Institute. Dr. Moser's work has
focused on non pharmacological approaches to the prevention and control of
hypertension and he has published extensively on this subject with over 300
publications. He has contributed to over 30 books and numerous
- 22 -
<PAGE>
physician and patient education programs. Dr. Moser holds a B.A. from Cornell
University and an M.D. from Downstate University College of Medicine.
Stephen R. Peikin, M.D. - Dr. Peikin is professor of medicine and head of
the division of gastroenterology and liver diseases at Cooper Hospital Medical
Center, the Robert Wood Johnson Medical School, Camden, New Jersey. He is an
authority on the release of the hormone cholecystokinin and its effects on
satiety. He is the holder of a US patent on a method of stimulating satiety
through the administration of an oral trypsin inhibitor. He holds a B.A. from
Temple University and an M.D. from the Thomas Jefferson University.
Dr. Pollack is Chairman of the Scientific Advisory Board. Members of the
Scientific Advisory Board receive a per diem fee of $1,000 for each meeting of
the Board attended by them, plus reasonable expenses. In addition, the Company
has issued to each member of the Scientific Advisory Board stock options to
purchase 10,000 shares of the Company's Common Stock. The options so issued have
exercise prices ranging from $1.875 to $3.00 per share and are vested. Such
options expire five years from the date of grant. See Note 10 of the Notes to
Consolidated Financial Statements.
Item 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid or accrued by the
Company during the three fiscal years ended June 30, 1996 (i) to its Chief
Executive Officer and (ii) to the three highest paid employees of the Company
whose cash compensation exceeded $100,000 per year in any such year (other than
the individuals listed in the table, no employee of the Company or of its A&B
subsidiary received compensation in excess of $100,000):
- 23 -
<PAGE>
SUMMARY COMPENSATION TABLE(1)(2)
Annual Compensation
(a) (b) (c) (d) (e)
Name and Period Salary ($) Bonus ($)
Principal All other
Position Compensation
- ----------------------------------------------------------------------
Fredric Price, 9/12/94-
President, Chief 6/30/95 210,000 15,000
Executive Officer
and Director (3) 7/1/95-
6/30/96 260,000 21,121
Stephen Benoit, 7/1/94-
Vice President- 6/30/95 57,692
Marketing and Sales
7/1/95
6/30/96 135,000 5,000
Peter Blackburn, 7/1/93-
Executive Vice 6/30/94 119,713 5,700
President
7/1/94-
6/30/95 150,000 23,153
7/1/95-
5/25/96 150,000 150,000 (4)
Benjamin T. Sporn, 7/1/93-
Vice President- 6/30/94 117,400
Legal
7/1/94-
6/30/95 129,000
7/1/95-
6/30/96 120,000
(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.
- 24 -
<PAGE>
(3) Mr. Price became the Company's Chief Executive Officer on September 12,
1994.
(4) Consists of a severance payment made to Dr. Blackburn in May 1996.
None of the individuals listed above received any long-term incentive plan
awards during the fiscal year.
Employment Agreements
Effective September 1994, the Company entered into an employment agreement
with Fredric Price. The agreement provides for an annual salary of $260,000 plus
a performance related bonus. He was also granted options to purchase up to a
total of 500,000 shares of Common Stock, vesting in equal installments over a
five year period commencing at the conclusion of his first year of employment.
In addition, he was granted 15,325 shares of Common Stock on the first
anniversary of the agreement. A further 15,326 shares of Common Stock are to be
granted on the second anniversary of the agreement. Although employment is at
will, salary and certain benefits continue for twelve months after notice of
termination.
Stock Option Plans
The Board of Directors has adopted and the shareholders have approved four
Stock Option Plans (the "Plan(s)"):
1. The Incentive Stock Option Plan provides for the grant of qualified
incentive stock options to officers and key employees.
2. The Non-qualified Stock Option Plan provides for the grant of options to
various persons who render certain services to the Company.
3. The 1989 Stock Option Plan provides for the grant of options to either
group which, in the case of employees, may be incentive stock options.
4. The 1991 Stock Option Plan provides for the grant of options to either
group which, in the case of employees, may be incentive stock options.
Each of the Incentive and Non-qualified Stock Option Plans permits the
purchase of an aggregate of up to 250,000 shares of Common Stock. The 1989 Stock
Option Plan permits the purchase of an aggregate of up to 500,000 shares of
Common Stock. The 1991 Stock Option Plan permits the purchase of an aggregate of
up to 3,000,000 shares of Common Stock. The purpose of the Plans is to attract
and retain competent executive personnel and other key employees and consultants
and to provide incentives to all such persons to use their effort and skill for
the advancement and betterment of the Company by permitting them to participate
in the ownership of the Company.
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
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<PAGE>
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 table sets forth information with regard to aggregated option
values at June 30, 1996 of options granted (i) to the Company's Chief Executive
Officer, and (ii) to the highest paid employees of the Company whose cash
compensation exceeded $100,000 per year in such year. On September 12, 1994, Mr.
Price was granted 500,000 options to purchase shares at $3.2625 per share. On
January 9, 1995, Mr. Benoit was granted 50,000 options to purchase shares at
$3.00 per share.
AGGREGATED OPTION/ SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
Individual Grants
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
Name Shares Value Number of Unexercised Value of Unexercised In-the
Acquired on realized ($) Options at FY-End (#) Money Options at FY-End
Exercise (#)
Exercisable Unexercisable Exercisable Unexercisable
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Stephen
Benoit 0 0 10,000 50,000 $22,500 $107,500
Peter
Blackburn 75,000 $398,438 95,000 0 $310,000 0
Benjamin
T. Sporn 0 0 75,000 0 $150,000 0
Fredric
Price 0 0 100,000 400,000 $198,750 $795,000
</TABLE>
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<PAGE>
Pension Plans
Applied Microbiology, Inc.
Eligible employees of the Company are entitled to participate in the Burns
Philp Inc. Retirement Plan for Non-Bargaining Unit Employees, a non-contributory
pension plan (the "Pension Plan") maintained by Burns Philp. Assuming retirement
at age 65, the Pension Plan provides benefits equal to the greater of (a) 1.1%
of the employee's final average earnings multiplied by the employee's final
average earnings in excess of the average of the contribution and the benefit
basis in effect under Section 230 of the Social Security Act for each year in
the 35-year period ending with the year of Social Security retirement age,
multiplied by the employee's years of credited service up to 35, minus any
predecessor plan benefit in the case of an employee who participated in a
predecessor plan or (b) $24 multiplied by the number of years of credited
service up to 25 years plus $12 multiplied by the years of employment from 26-40
years, minus any predecessor plan benefit in the case of an employee who
participated in a predecessor plan. The "final average earnings" are the average
monthly earnings during the five highest-paid consecutive calendar years within
the last ten calendar years of credited service with the Company. Earnings
include the salary and bonus listed in the summary compensation table. Earnings
which may be considered under the Pension Plan are limited to $150,000 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 1996 and a single life annuity
benefit, according to years of credited service and final average earnings. The
benefits listed are not subject to any deduction for Social Security or other
offset amounts.
Years of Credited Service
final average
earnings 15 20 25 30 35
- ----------------------------------------------------------------------
$25,000 $4,320 $5,760 $7,200 $8,250 $9,625
$50,000 $10,436 $13,915 $17,394 $20,873 $24,351
$75,000 $16,987 $22,665 $28,331 $33,998 $39,664
$100,000 $23,561 $31,415 $39,269 $47,123 $54,976
$150,000 and up $36,686 $48,915 $61,144 $73,373 $85,602
- 27 -
<PAGE>
Stephen Benoit, Peter Herring, Solomon Mowshowitz, Benjamin Sporn and
Fredric Price each have 1.6, 0.6, 0.6, 3.5 and 1.75 years, respectively, of
credited service under the Pension Plan as of June 30, 1996, and, at age 65,
would have approximately 28, 21, 12, 10, and 17 years of credited service,
respectively.
A&B Pension Plan
Eligible A&B employees are entitled to participate in the Burns Philp
(U.K.) plc Pension Plan, a defined benefit plan providing a pension of one
sixtieth of final pensionable earnings for each year of service at a normal
retirement age of 65. Pensionable earnings are basic salary less the basic U.K.
state pension.
The following table sets forth estimated annual benefits payable upon
retirement, assuming retirement at age 65 in 1995 and a straight annuity
benefit, according to years of credited service and final pensionable earnings.
Estimated benefits are shown in US dollars based on an average exchange rate of
$1.5423 per GBP. The benefits listed are not subject to any deductions.
Years of Credited Service
final average
earnings 15 20 25 30 35
- --------------------------------------------------------------------
$25,000 $5,024 $6,699 $8,373 $10,048 $11,722
$50,000 $11,274 $15,032 $18,790 $22,548 $26,306
$75,000 $17,524 $23,365 $29,206 $35,048 $40,889
$100,000 $23,774 $31,699 $39,623 $47,548 $55,472
$150,000 $36,274 $48,365 $60,456 $72,548 $84,639
$200,000 $48,774 $65,032 $81,290 $97,548 $113,806
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.
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<PAGE>
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, 1995 through June 30, 1996 all
Section 16(a) filing requirements applicable to its officers, directors and
greater than ten-percent beneficial owners were complied with.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of September 19, 1996, 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 officers and directors and
(iii) all officers and directors of the Company as a group. Unless otherwise
indicated, each stockholder's address is c/o the Company, 771 Old Saw Mill River
Road, Tarrytown, New York 10591.
- 29 -
<PAGE>
Shares Owned Beneficially
and of Record (1)
Name and Address No. of Shares % of Total
============================================================================
Fredric D. Price (2) 230,651 1.11
Sheldon G. Gilgore (3) 115,000 *
Stephen C. Benoit (4) 12,000 *
Audrey T. Cross (5) 24,000 *
259 Sunset Avenue
Englewood, NJ 07631
John P. Friend 0 --
7 Bridge Street
Sydney, NSW 2000
Australia
Peter E. Herring 0 *
Colin Kop 0 --
7 Bridge Street
Sydney, NSW 2000
Australia
Solomon L. Mowshowitz 0 *
Robert E. Pollack (4) 30,000 *
813B Sherman Fairchild
Columbia University
New York, NY 10027
Benjamin Sporn (6) 104,125 *
Burns Philp & Company Limited (7) 10,183,837 49.40
7 Bridge Street
Sydney, NSW 2000
Australia
All Officers and Directors 515,776 2.45
as a Group (10 persons)
(2)(3)(4)(5) and (6)
- ---------------
* Less than 1%
(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
- 30 -
<PAGE>
not of record.
(2) Includes 200,000 shares issuable upon exercise of currently exercisable
options under the Company's Stock Option Plans.
(3) Includes 110,000 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 75,000 shares issuable upon exercise of currently exercisable
options under the Company's Stock Option Plans.
(7) Consists of shares owned by subsidiaries.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the fiscal year ended June 30, 1996, the Company's A&B subsidiary
made sales of approximately $1,939,000 to Mauri Laboratories Pty Limited
("Mauri"). In addition, it purchased approximately $1,430,000 of goods from
Mauri. Mauri was, until June 14, 1996, a wholly-owned subsidiary of BPC which
currently holds approximately a 49% interest in the Company (as described
below). On June 14, 1996, Mauri was sold to Gist-brocades N.V. of the
Netherlands and ceased to be an affiliate.
Certain of A&B's U.K. based staff provide accounting and administrative
services for other U.K. based subsidiaries of BPC. During the fiscal year ended
June 30, 1996, A&B, as a result of these activities, received income from Burns
Philp (U.K.) plc. of approximately $74,000.
A&B manufactures certain products on a contract basis for Imperial
Biotechnology Limited ("IBT") at its U.K. production site. IBT was, until
December 12, 1995, a 50% owned affiliate of BPC. On December 12, 1995, IBT was
sold to Protein Technologies International of the USA and ceased to be an
affiliate. During the fiscal year ended June 30, 1996, A&B received no income as
a result of sales to IBT prior to IBT ceasing to be an affiliate.
From time to time, the Company advances funds to Burns Philp Inc., a wholly
owned subsidiary of BPC. During the fiscal year ended June 30, 1996, the Company
received interest income of approximately $79,000 in respect of such advances.
Pursuant to an Agreement for the Purchase and Sale of Stock dated as of
June 30, 1992 (the "Purchase Agreement"), in July 1993 the Company issued
935,000 shares of Common Stock to BPC. During July 1996, BPC sold 1,400,000
shares of Common Stock. As a result of the July
- 31 -
<PAGE>
1993 issuance, of prior acquisitions of shares of Common Stock, and the July
1996 sale of Common Stock, BPC currently owns 10,183,837 shares of Common Stock.
Under the Purchase Agreement, the Company and BPC entered into the
following arrangements and understandings with respect to election of directors
and related matters:
The by-laws of the Company were amended to provide, among other things,
that until September 1, 1996 the Board of Directors shall consist of seven
directors. The by-laws further provided that David Guttmann, Peter Blackburn and
Benjamin Sporn were designated "Prior Directors," and that the Board of
Directors was to nominate three persons designated by the Prior Directors as the
Board's nominees for election as directors at meetings of shareholders. In
September 1994, the Company hired Fredric D. Price as President and Chief
Executive Officer. In connection with this hiring, four directors: Peter
Blackburn, Alan English, Colin Kop and Benjamin Sporn resigned from the Board.
Mr. Price was elected to the Board and designated a Prior Director by the
remaining Prior Director, Mr. Guttmann. The Board then authorized Mr. Price to
propose three new directors to fill the remaining vacancies. In January 1995,
Drs. Audrey T. Cross, Douglas A. Cotter and Robert E. Pollack were proposed by
Mr. Price and elected to the Board. In October 1995, David Guttmann resigned
from the Board and Dr. Sheldon G. Gilgore was elected to the Board. In May 1996,
Ian Clack resigned from the Board and Colin Kop was elected to the Board. In
July 1996, Dr. Cotter resigned from the board. See "Directors and Executive
Officers of the Registrant--Arrangements Regarding the Election of Directors."
The amended by-laws also provide that the following actions by the Company
shall require
- 32 -
<PAGE>
the prior favorable vote of not less than six directors: termination of the
Company's chief executive officer, or a change in his or her responsibilities or
compensation, or the retention of any chief
- 33 -
<PAGE>
executive officer; removal of the Company's chairman or the election of any
person as chairman other than the person last elected to such position; the
issuance of any shares of capital stock or of securities convertible or
exercisable into shares of capital stock except as to outstanding warrants,
options and other convertible securities; the grant of options to any officer or
director; any merger, or any acquisition or disposition of assets in excess of
$250,000; the incurrence of a commitment or obligation in excess of $650,000;
any change in the Company's charter or by-laws; any transaction with any
affiliate of BPC, including any overhead charge or any other intercompany charge
or allocation, but excluding the continuation of certain current agency
agreements; any dividend or other distribution except on the 1992 Redeemable
Preferred; any purchase by BPC (whether in the public market or in private
transactions, or otherwise) of any shares of the Company's Common Stock which
would increase BPC's percentage ownership of the outstanding Common Stock beyond
the percentage ownership of such stock owned by BPC on August 31, 1992 subject
to certain increases provided for in the Agreement.
BPC also agreed that:
BPC and its affiliates will for a four-year period vote all shares of the
Company stock from time to time owned by them in favor of election as
directors of the Prior Directors and their nominees.
BPC and its affiliates will for a four-year period be entitled to purchase
shares of Common Stock (in the public market or in private transactions, or
otherwise) only as permitted in the Company's by-laws.
So long as BPC and its affiliates shall have control of the Company, BPC
will not sell, in a single transaction or in a series of transactions
occurring within a period of up to 18 months, to any single purchaser or to
any "group," a block of the Company shares owned by BPC or its affiliates
which shall be sufficient in itself both to (i) divest BPC and its
affiliates of control of the Company and (ii) vest control of the Company
in the purchaser or purchasers, unless BPC shall cause the purchaser to
tender for the purchase of all shares of the Company which are owned by all
shareholders of the Company on the same terms and conditions as those which
apply to the sale by BPC. The term "control" has the meaning assigned to it
in Rule 405 of Regulation C under the Securities Act, and "group" has the
meaning assigned to in Rule 13D of the Securities Exchange Act. However,
BPC is permitted to sell, without compliance with this provision, a block
of shares to an underwriter for the purposes of a broad distribution of the
shares.
An affiliate of BPC will, if required by the Company, for a four-year
period maintain its bank comfort letter in respect of not more than GBP
300,000 of bank borrowings by the Company.
So long as BPC or its affiliates owns at least 50% of the Company's total
voting power and for five years after BPC and its affiliates ceases to own
at least 50% of the Company's total voting power, neither BPC nor any of
its affiliates will manufacture, sell
- 34 -
<PAGE>
or otherwise deal in or with nisin or Nisaplin (or any derivative products)
except under distribution agreements with the Company on terms equivalent
to those in effect on June 30, 1992. At such time after the five-year
period aforesaid that BPC shall be permitted to engage in the businesses
aforesaid, BPC will nevertheless continue to refrain from using trade
secrets and other confidential information which are the property of the
Company.
BPC has certain demand and "piggyback" registration rights for its
shareholdings.
On September 24, 1996, the Company signed a non-binding Letter of Intent to sell
its nisin-based food preservative business to BPC, an affiliate of the Company.
The Company retained exclusive rights to its nisin-based pharmaceutical and
animal healthcare business.
- 35 -
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. and 2. Financial Statements and Schedules
The financial statements are listed in the Index to Financial Statements on
page F-1 and are filed as part of this annual report.
3. Exhibits
The Index to Exhibits following the Signature Page indicates the exhibits
which are being filed herewith and the exhibits which are incorporated herein by
reference.
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the last quarter of the fiscal
year ended June 30, 1996.
- 36 -
<PAGE>
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.
APPLIED MICROBIOLOGY, INC.
By: /s/ Fredric D. Price
Fredric D. Price, President,
CEO and Director
Dated: September 26, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below as of September 26, 1996 by the following persons
on behalf of Registrant and in the capacities indicated.
/s/ Fredric D. Price
Fredric D. Price, President,
CEO and Director
(Principal Financial Officer)
/s/ Audrey T Cross
Audrey T. Cross, Director
/s/ John P. Friend
John P. Friend, Director
/s/ Sheldon G. Gilgore
Sheldon G. Gilgore,
Chairman of the Board
/s/ Colin Kop
Colin Kop, Director
/s/ Robert Pollack
Robert E. Pollack, Director
/s/ Peter E. Herring
Peter E. Herring, Controller
(Principal Accounting Officer)
- 37 -
<PAGE>
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)
3.02 Amended and Restated By-laws(2)
4.01 Form of Warrant Agreement and Form of Warrant Certificate for Warrants
included in Units
10.01 Form of Incentive Stock Option Plan
10.02 Form of Non-qualified Stock Option Plan
10.02a Form of 1989 Stock Option Plan(1)
10.02b Form of 1991 Stock Option Plan(1)
10.24 Exclusive Option and Collaborative Research Agreement dated July 1,
1988 between the Company and the University of Maryland(4)
10.25 License and License Option Agreement dated December 15, 1988 between
the Company and Babson Brothers Company(4)
10.27 Option Agreement dated April 1, 1989 between the Company and Calgon
Corporation(4)
10.28 Agreement between the Company and BPC(5)
10.32 Development and Supply Agreement dated as of March 19, 1991 by and
between the Company and Ciba- Geigy AG(1)
10.32a Termination Agreement dated August 31, 1993 by and between the Company
and Ciba-Geigy AG(6)
10.34 Consulting Agreement dated June 29, 1992 between the Company and Donald
A.M. McKay(7)
- 38 -
<PAGE>
10.36 Agreement, dated October 6, 1992 between the Company and PHRI(7)
10.37 Agreement for the Purchase and Sale of Stock dated as of June 30, 1993
by and among the Company and BP(8)
10.38 Technology and License Agreement dated as of June 29, 1992 by and among
the Company and Fermtec Prochim SpA.(8)
10.39 Investment Banking Agreement dated May 19, 1992 between the Company and
Wertheim Schroder & Company ("WSC")(2)
10.40 Letter dated June 29, 1992 from WSC to the Company regarding the
fairness of the BP Transactions(2)
10.41 Agreement dated May 3, 1993 between the Company and SmithKline Beecham
p.l.c. (Schedules omitted)(6)
10.41a Amendment dated August 16, 1994 to Development and Supply Agreement
dated as of May 3, 1993 between the Company and SmithKline Beecham
p.l.c.(9)*
10.43 Supply Agreement dated as of January 1, 1994 by and between the
Astra/Merck Group of Merck & Co., Inc. (9)*
10.44 Development and License Agreement dated as of January 1, 1994 by and
between the Astra/Merck Group of Merck & Co., Inc. (9)*
10.45 Supply Agreement dated as of June 30, 1994 by and between the Company
and Calgon Vestal Laboratories, Inc. (9)*
10.46 License Agreement dated as of June 30, 1994 by and between the Company
and Calgon Vestal Laboratories, Inc. (9)*
10.47 Employment Agreement dated August 30, 1994 between the Company and
Fredric D. Price (9)
10.48 Lease dated as of February 7, 1995, between the Company and Keren
Limited Partnership (10)
10.49 Master Lease Agreement dated as of June 28, 1995, between the Company
and General Electric Capital Corporation (10)
23.01 Consent of KPMG Peat Marwick LLP (11)
27 Financial Data Schedule(11)
- 39 -
<PAGE>
- ---------------
(1) Incorporated by reference to the Company's Report on Form 10-K for 1991.
(2) Incorporated by reference to the Company's Report on Form 8-K dated
September 4, 1992.
(3) Incorporated by reference to the Company's Registration Statement on Form
S-8 dated August 8, 1996, file No. 333-09801.
(4) Incorporated by reference to the Company's Report on Form 10-K for 1988.
(5) Incorporated by reference to the Company's Report on Form 10-Q for the
quarter ended June 10, 1989.
(6) Incorporated by reference to the Company's Report on Form 10-K for 1993.
(7) Incorporated by reference to the Company's Report on Form 10-K for the
fiscal period January 31, 1992 through August 31, 1992.
(8) Incorporated by reference to the Company's Report on Form 10-Q for the
quarter ended June 30, 1992.
(9) Incorporated by reference to the Company's Report on Form 10-K for 1994.
(10) Incorporated by reference to the Company's Report on Form 10-K for 1995.
(11) 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.
- 40 -
<PAGE>
APPLIED MICROBIOLOGY, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FILED WITH THE ANNUAL REPORT OF THE
COMPANY ON FORM 10-K
JUNE 30, 1996
PAGE
----
INDEPENDENT AUDITORS' REPORT F-2
CONSOLIDATED BALANCE SHEETS AT JUNE 30, 1996 AND 1995 F-3
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE
YEARS ENDED JUNE 30, 1996, 1995 AND 1994 F-5
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1996, 1995 AND 1994 F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE
YEARS ENDED JUNE 30, 1996, 1995 AND 1994 F-7
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS F-8
<PAGE>
APPLIED MICROBIOLOGY, INC. AND SUBSIDIARY
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Applied Microbiology, Inc.:
We have audited the consolidated financial statements of Applied Microbiology,
Inc. and subsidiary as listed in the accompanying index. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Applied
Microbiology, Inc., and subsidiary as of June 30, 1996 and 1995, and the results
of their operations and their cash flows for each of the years in the three-year
period ended June 30, 1996, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
New York, New York
July 22, 1996
F-2
<PAGE>
APPLIED MICROBIOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JUNE 30 JUNE 30
1996 1995
$000 $000
---- ----
ASSETS
Current assets:
Cash and cash equivalents 8,431 3,337
Trade accounts receivable (less
allowance for doubtful accounts
of $81,000 in 1996 and $14,000 in 1995) 5,356 1,836
Inventories 3,088 2,865
Prepayments and other current assets 874 694
Due from affiliated companies -- 627
------ ------
Total current assets 17,749 9,359
Property and equipment, net 3,881 3,446
Patent costs and licensed technology
(net of amortization of $717,000
in 1996 and $691,000 in 1995) 1,624 881
Other assets 113 102
------ ------
TOTAL ASSETS 23,367 13,788
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
APPLIED MICROBIOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30 JUNE 30
1996 1995
$000 $000
---- ----
<S> <C> <C>
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of notes payable and lease obligation 195 149
Accounts payable and accrued expenses 1,889 1,306
Due to affiliated companies -- 191
Other liabilities 368 89
Dividends payable 231 34
Taxes payable 254 257
------- -------
Total current liabilities 2,937 2,026
Notes payable and lease obligation 935 770
Long term loan 2,000 --
Deferred taxes payable 349 367
------- -------
TOTAL LIABILITIES 6,221 3,163
------- -------
REDEEMABLE PREFERRED STOCK:
$0.01 par value. Issued and outstanding 1,500 shares at
June 30, 1996 and June 30, 1995
(aggregate involuntary liquidation value $1,500,000) 1,500 1,500
------- -------
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value. Issued and outstanding
370 shares at June 30, 1996 and 0 at June 30, 1995 -- --
(aggregate liquidation value $3,906,000)
Common stock, $0.005 par value, authorized 40,000,000
shares. Issued and outstanding 20,469,776 shares
at June 30, 1996 and 18,176,858 at June 30, 1995 102 91
Additional paid-in capital 51,389 39,500
Accumulated deficit (35,179) (29,958)
Currency translation adjustment (666) (508)
------- -------
TOTAL STOCKHOLDERS' EQUITY 15,646 9,125
------- -------
COMMITMENTS AND CONTINGENT LIABILITIES
TOTAL LIABILITIES, REDEEMABLE PREFERRED
STOCK AND STOCKHOLDERS' EQUITY 23,367 13,788
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
APPLIED MICROBIOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED JUNE 30
1996 1995 1994
$000 $000 $000
---- ---- ----
Sales 14,157 11,264 9,614
Other operating income 1,865 462 542
----------- ----------- -----------
TOTAL REVENUE 16,022 11,726 10,156
Cost of sales (6,353) (3,258) (3,526)
----------- ----------- -----------
GROSS PROFIT 9,669 8,468 6,630
Selling, general and
administrative expenses (11,177) (5,421) (3,496)
Research expenses (2,294) (1,840) (737)
Depreciation and amortization (819) (767) (582)
----------- ----------- -----------
OPERATING (LOSS)/INCOME (4,621) 440 1,815
Foreign exchange gain/(loss) 3 (49) (30)
Interest income 317 148 159
Interest expense (133) (2) (3)
----------- ----------- -----------
(LOSS)/INCOME BEFORE
TAX EXPENSE (4,434) 537 1,941
Tax expense (285) (254) (185)
----------- ----------- -----------
NET (LOSS)/INCOME (4,719) 283 1,756
NET (LOSS)/EARNINGS
PER SHARE ($0.27) $0.01 $0.09
WEIGHTED AVERAGE SHARES 19,091,664 18,201,562 18,787,320
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
APPLIED MICROBIOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Preferred Common Additional Accumulated Currency
Stock Stock Paid-In Deficit Translation
Capital Adjustment TOTAL
Shares $000 Shares $000 $000 $000 $000 $000
------ ---- ------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at July 1, 1993 1,145 -- 16,838,727 84 39,391 (31,742) (764) 6,969
Issue of common stock provided
for in 1993 -- -- 935,000 5 (5) -- -- --
Conversion of preferred stock
to common stock (1,145) -- 327,131 2 (2) -- -- --
Common stock issued for cash on
exercise of options and warrants -- -- 55,000 -- 69 -- -- 69
Net income for the year -- -- -- -- -- 1,756 -- 1,756
Preferred dividend paid and provided -- -- -- -- -- (127) -- (127)
Arising on translation during the year -- -- -- -- -- -- 97 97
------ ---- ---------- ---- ------ ------- ---- ------
Balance at June 30, 1994 -- -- 18,155,858 91 39,453 (30,113) (667) 8,764
Common stock issued for cash on
exercise of options and warrants -- -- 21,000 -- 47 -- -- 47
Net income for the year -- -- -- -- -- 283 -- 283
Preferred dividend paid and provided -- -- -- -- -- (128) -- (128)
Arising on translation during the year -- -- -- -- -- -- 159 159
------ ---- ---------- ---- ------ ------- ---- ------
Balance at June 30, 1995 -- -- 18,176,858 91 39,500 (29,958) (508) 9,125
Common stock granted to officers -- -- 15,326 -- -- -- -- --
Common stock issued for cash on
exercise of options and warrants -- -- 533,163 2 1,513 -- -- 1,515
Common stock issued for cash
under agreement with NSK -- -- 315,408 2 1,998 -- -- 2,000
Preferred stock issued for cash 895 -- -- -- 8,213 -- -- 8,213
Conversion of preferred stock to
common stock including dividends
issued as common stock (525) -- 1,429,021 7 165 (172) -- --
Preferred dividend paid and provided -- -- -- -- -- (330) -- (330)
Net loss for the year -- -- -- -- -- (4,719) -- (4,719)
Arising on translation during the year -- -- -- -- -- -- (158) (158)
------ ---- ---------- ---- ------ ------- ---- ------
Balance at June 30, 1996 370 -- 20,469,776 102 51,389 (35,179) (666) 15,646
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
APPLIED MICROBIOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
1996 1995 1994
$000 $000 $000
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss)/income (4,719) 283 1,756
Adjustments to reconcile net (loss)/income to net cash
(used in)/provided by operating activities:
Depreciation and amortization 819 767 582
Loss on sale of equipment 14 129 --
Deferred income tax benefit (6) (81) (16)
Changes in assets and liabilities:
(Increase)/decrease in trade accounts receivable (3,569) (468) 472
(Increase)/decrease in inventories (310) (1,345) 32
Increase in other assets (211) (124) (169)
Decrease/(increase) in amounts due from affiliated companies 606 (614) 256
Increase/(decrease) in taxes payable 7 232 (208)
Increase/(decrease) in accounts payable and accrued expenses 611 540 (239)
(Decrease)/increase in amounts due to affiliated companies (126) (91) 150
Increase/(decrease) in other liabilities 282 33 (77)
------- ------- -------
Net cash (used in)/provided by operating activities (6,602) (739) 2,539
------- ------- -------
Cash flows from investing activities:
Acquisitions of property and equipment (700) (1,269) (337)
Proceeds on sale of equipment -- 19 --
Patent costs and licensed technology (1,026) (393) (323)
------- ------- -------
Net cash used in investing activities (1,726) (1,643) (660)
------- ------- -------
Cash flows from financing activities:
Dividends paid (133) (120) (192)
Decrease in bank overdraft -- -- (289)
Notes payable proceeds/(repayments) 23 (6) (13)
Capital lease (repayments)/proceeds (186) 721 --
Long term loan proceeds 2,000 -- --
Proceeds from issuance of preferred stock 8,213 -- --
Proceeds from issuance of common stock 3,515 47 69
------- ------- -------
Net cash provided by/(used in) financing activities 13,432 642 (425)
------- ------- -------
Net increase/(decrease) in cash and cash equivalents 5,104 (1,740) 1,454
Cash and cash equivalents at beginning of year 3,337 5,048 3,571
Effect of exchange rate movement (10) 29 23
------- ------- -------
Cash and cash equivalents at end of year 8,431 3,337 5,048
------- ------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
APPLIED MICROBIOLOGY, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
Applied Microbiology, Inc. ('The Company') is a New York corporation
which was incorporated on June 29, 1983. The Company has developed
non-toxic proteins which destroy bacteria. It markets its products by
direct sale and through licenses or joint ventures with companies that
have established positions in target markets.
As of June 30, 1996, Burns Philp & Company Limited ("BP") owned
11,583,837 shares of the Company's common stock, which constitutes
approximately 57% of the issued and outstanding shares of common stock.
BP is a leading global food manufacturer and marketer.
The financial results for Aplin and Barrett Limited ("A&B"), a
wholly-owned UK company, are included in the accompanying financial
statements. A&B's principal activities are the manufacture and marketing
of food preservatives, cheese starter cultures and other ingredients for
the dairy industry. Most of the dairy starter cultures sold by the
Company are manufactured by Mauri Laboratories, a BP company, and A&B
acts as a distributor for Mauri. Mauri also acts as a distributor for A&B
in Australia. In June 1996, Mauri Laboratories was sold to Gist-brocades
NV ("Gist") of the Netherlands. Gist has notified the Company that the
distributorship for dairy starter cultures will be terminated, effective
September 11, 1996.
In October 1995, the Company acquired an exclusive license from a
division of Orion Corporation ("Orion"), the largest pharmaceutical
company in Finland, to sell Orion's patented salt alternative in the US.
The Company began selling the salt alternative in April 1996, under the
trademark Cardia(TM) Salt Alternative.
The Company has developed a moistened towel using an Ambicin N
(nisin)-based formulation that is for use in preparing dairy cows for
milking. The Company launched the product under its trademark Wipe
Out(TM) Dairy Wipes on a test basis in February 1996, and nationally in
April 1996.
The Company signed an agreement with Nippon Shoji Kaisha, Ltd. (NSK) of
Osaka, Japan in March 1996, in which NSK acquired the right to develop
and market nisin in Japan and certain Asian countries for the treatment
of hospital-acquired infections and infections of the colon. Under the
agreement, NSK purchased $2 million of newly-issued common stock of the
Company at $6.34 per share, a 31% premium to the then existing price of
the stock. In addition, NSK loaned $2 million to the Company that, under
certain circumstances can be repaid in common stock valued at the market
price at the time of repayment, and agreed to make research and milestone
payments to the Company. Upon commercialization, NSK will pay royalties
to the Company. The Company issued to NSK warrants to purchase 315
thousand shares of the Company's common stock as part of this
transaction.
F-8
<PAGE>
APPLIED MICROBIOLOGY, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2. SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies followed by the Company are in accordance
with generally accepted accounting principles and are as follows:
a) Consolidation
The consolidated financial statements include the results of
operations and financial position of the Company and its wholly
owned subsidiary, A&B, after elimination of material inter-company
accounts and transactions.
b) Cash Equivalents
The Company considers all highly liquid debt instruments with
original maturities of three months or less to be cash equivalents.
Cash equivalents included in the accompanying financial statements
include money market accounts.
c) Inventories
Inventories are valued at the lower of cost (first-in, first-out,
including attributable overhead expenditure) or market value, and
consist of:
1996 1995
$000 $000
---- ----
Raw materials 240 144
Work in process 960 1,262
Finished products 1,888 1,459
----- -----
3,088 2,865
d) Property and Equipment
Property and equipment are stated at cost. Depreciation is provided
using the straight-line method to depreciate assets over their
estimated useful lives. The estimated useful lives are as follows:
Buildings and building
improvements - 50 years
Furniture and fixtures - 20 years
Machinery and equipment - 5 or 10 years
Office equipment - 3, 5 or 6 years
Motor vehicles - 5 years
Leased assets - 3 or 5 years
F-9
<PAGE>
APPLIED MICROBIOLOGY, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
e) Patent Costs and Licensed Technology
Patent costs and licensed technology have been capitalized and are
being amortized on a straight-line basis over periods ranging from
nine months to fifteen years.
f) Research and Development
Research and development costs are expensed as incurred.
g) Net (Loss)/Earnings Per Share
Earnings per share for the years ended June 30, 1995 and June 30,
1994 are computed based on the weighted average number of shares
actually outstanding plus the shares that would be outstanding
assuming the exercise of dilutive stock options, all of which are
considered to be common stock equivalents. The number of shares
that would be issued from the exercise of stock options and
warrants has been reduced by the number of shares that could have
been purchased from the proceeds at the average market price of the
Company's stock.
Common stock equivalents are not included in the computation of
average shares outstanding for the year ended June 30, 1996 because
the effect of such inclusion would be to decrease the loss per
share.
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(No. of shares) (No. of shares) (No. of shares)
<S> <C> <C> <C>
Average shares outstanding 19,091,664 18,168,187 18,032,102
Net effect of dilutive stock options - 33,375 755,218
---------- ---------- ----------
Total average shares 19,091,664 18,201,562 18,787,320
$000 $000 $000
---- ---- ----
Net (loss)/income (4,719) 283 1,756
Preferred stock dividend (502) (128) (127)
---------- ---------- ----------
Net (loss)/income attributable
to common stockholders (5,221) 155 1,629
Net (loss)/earnings per share
of common stock ($0.27) $0.01 $0.09
</TABLE>
h) Foreign Currencies
Transactons in currencies other than the local currency are
recorded at the rate at the date of the transaction. Balances
denominated in currencies other than the local currency are
translated at the exchange rate at the balance sheet date.
Assets and liabilities of the Company's foreign subsidiary are
generally translated at current rates, and related translation
adjustments are reported as a component of stockholders' equity.
Statement of operations accounts are translated at the average
rates of exchange reported during the year. Stockholders' equity
amounts are translated at historical rates, and variances from the
balance sheet rate are recorded as currency translation adjustment.
F-10
<PAGE>
APPLIED MICROBIOLOGY, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
i) Taxation
The Company accounts for deferred taxes using the liability method.
j) Use of Estimates
The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements. Estimates also affect the reported amounts of revenues
and expenses during the reporting period. Actual results could
differ from those estimates.
k) Reclassifications
Certain reclassifications have been made to the prior year's
financial statements to conform with the current year's
presentation.
3. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
1996 1995
$000 $000
---- ----
<S> <C> <C>
Cost: Land 110 113
Buildings and building improvements 1,083 1,198
Plant and other assets 5,898 5,321
Leased assets:
Furniture and fixtures 195 179
Office equipment 171 84
Machinery and equipment 917 647
------ ------
8,374 7,542
Accumulated depreciation and amortization (4,493) (4,096)
------ ------
Net book value 3,881 3,446
</TABLE>
4. CAPITAL LEASES
On June 30, 1995 and December 31, 1995, the Company entered into
agreements to lease certain lab and office equipment. The terms of the
leases met the criteria for capitalization under the Financial Accounting
Standards Board Statement of Financial Accounting Standards No. 13,
"Accounting for Leases." Accordingly, the leases have been classified as
capital leases in the accompanying financial statements. The lease
agreements contain a purchase option whereby at the expiration of the
lease the Company may purchase the leased assets at the estimated fair
market value. The following is a schedule by years of future minimum
lease payments under capital leases together with the present value of
the net minimum lease payments.
Year ending June 30: $ 000
-----
1997 348
1998 348
1999 301
2000 286
2001 38
-----
Total minimum lease payments 1,321
Less amounts representing interest (221)
-----
Present value of net minimum lease payments 1,100
F-11
<PAGE>
APPLIED MICROBIOLOGY, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
4. CAPITAL LEASES (continued)
The obligation is secured by the leased assets and is guaranteed by BP to
the extent of BP's ownership in the company.
This obligation is reflected in the balance sheet at June 30, 1996, as
current and non-current obligations of $192,000 and $908,000,
respectively.
5. NOTES PAYABLE
In connection with the purchase of an automobile, the Company borrowed
approximately $25,000 in December 1992. This loan was repaid on disposal
of the automobile in May 1996.
In connection with the purchase of a telephone system, the Company
borrowed approximately $35,000 in November 1995. This loan bears interest
at a rate of 6% and matures in November 1999. The payments on the loan
approximate $800 per month.
6. LONG TERM DEBT
In March 1996, as part of a research collaboration with Nippon Shoji
Kaisha of Japan, the Company has secured a loan of $2 million. This loan
bears interest at a rate of 5%, and matures in March 1999. Interest is
payable quarterly and principal payment is due in full upon maturity.
7. BANK LINE OF CREDIT
The Company maintains a line of credit for working capital purposes in
the UK of GBP 300,000 (at June 30, 1996 rate = $462,000) and pays
interest on outstanding balances at the rate of 1% over Barclays Bank plc
base rate. The arrangement expires in October 1996 and is reviewed for
renewal on an annual basis. The facility was not being used at June 30,
1996. This line of credit includes an annual fee of approximately $1,000.
8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The following items are included in accounts payable and accrued
expenses:
1996 1995
$000 $000
---- ----
Accounts payable 814 837
Accrued expenses 1,075 469
----- ------
1,889 1,306
F-12
<PAGE>
APPLIED MICROBIOLOGY, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
9. PREFERRED STOCK
The Company is authorized to issue up to 5,000,000 shares of preferred
stock, with a $0.01 par value, in one or more series and to fix the
powers, designations, preferences and rights of each series. In October
1995, the Company issued 895 shares of non-voting, Series C preferred
stock for $10,000 per share. These shares are convertible into common
stock of the Company at the lower of $5.25 per share or 85% of the
average closing bid price for the common stock of the Company for the
five trading days immediately preceding the date of conversion, and bear
an 8% dividend payable in common stock of the Company on the same basis
as the preferred stock at the time of conversion. The Company has the
right to redeem the preferred stock for cash upon receipt of a notice of
conversion. All preferred stock outstanding on October 13, 1998 will
automatically convert into common stock of the Company. As of June 30,
1996, there were 370 shares of the preferred stock outstanding. Dividends
payable at June 30, 1996 were approximately $197,000.
The outstanding issue of 1,500 shares of non-voting, non-convertible
preferred stock at June 30, 1996, 1995 and 1994 is entitled to cumulative
annual dividends at the prime rate of Citibank NA in effect from time to
time payable in quarterly installments commencing January 1, 1993. These
shares are mandatorily redeemable at $1,000 per share plus accrued
dividends on consummation by the Company of a public offering of its
securities for cash on Form S-1 or an equivalent form. Dividends payable
on this stock at June 30, 1996 were approximately $34,000, which were
paid in July.
The Company's previous issue of 1,145 shares of non-voting preferred
stock which was outstanding at June 30, 1993 was converted into common
stock in September 1993. Each share of preferred stock which had a value
of $1,000 was converted in accordance with the terms of the preferred
stock offering at a conversion price of $3.50 per share of common stock
into 285.7 shares of common stock.
10. CAPITAL STOCK
The Company had outstanding warrants for the purchase of its common stock
as follows:
Number of Exercise price
warrants per share
--------- --------------
Balance at July 1, 1993 1,373,368 $1.25-$6.00
Issued 50,000 $4.625
Expired (20,000) $1.25
Exercised (25,000) $1.25
----------
Balance at June 30, 1994 1,378,368 $1.25-$6.00
Exercised (3,000) $1.25
----------
Balance at June 30, 1995 1,375,368 $1.25-$6.00
Issued 591,789 $3.125-$6.75
Expired (52,000) $1.25-$2.00
Exercised (236,663) $1.25-$4.375
----------
Balance at June 30, 1996 1,678,494 $1.25-$6.75
F-13
<PAGE>
APPLIED MICROBIOLOGY, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
10. CAPITAL STOCK (continued)
At June 30, 1996, 1,881,567 shares were issuable upon exercise of the
above warrants. All such warrants were available to be exercised
immediately. The warrants expire between 1996 and 2003. Certain of the
warrants include anti-dilution clauses.
On April 10, 1986, the Company adopted a Nonqualified Stock Option Plan
whereby options to purchase 250,000 shares of the Company's common stock
may be granted to consultants and Business Advisory Board and Scientific
Advisory Board members.
The Company adopted three Incentive Stock Option Plans ('Incentive
Plans') whereby options to purchase an aggregate of 3,750,000 shares of
the Company's common stock may be granted to officers, directors,
employees, consultants and others who render services to the Company. The
exercise price per share for the options granted under the Incentive
Plans may not be less than the fair value of the Company's common stock
on the date of grant. The options expire between 1996 and 2004.
A summary of stock option activity related to the Company's stock option
plans is as follows:
Number of Exercise price
options per share
--------- --------------
Balance at July 1, 1993 1,163,250 $1.25-$4.875
Issued 64,000 $4-$6
Expired (217,500) $1.25-$4.875
Exercised (30,000) $1.25
----------
Balance at June 30, 1994 979,750 $1.25-$6.00
Issued 560,000 $3.00-$3.625
Exercised (18,000) $1.25-$2.56
----------
Balance at June 30, 1995 1,521,750 $1.25-$6.00
Issued 577,370 $1.50-$7.688
Expired (19,750) $1.25-$2.56
Exercised (296,500) $1.25-$5.063
Cancelled (49,960) $1.50-$2.875
----------
Balance at June 30, 1996 1,732,910 $1.25-$7.688
Each of these options are entitled to one share of common stock, and
1,031,100 of these options are exercisable at June 30, 1996.
F-14
<PAGE>
APPLIED MICROBIOLOGY, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
11. SEGMENT REPORTING
a) Significant customers
There were no significant unaffiliated customers comprising
over 10% of sales during the years 1996, 1995 and 1994. Sales
to affiliated companies represented 12%, 19%, and 26% of
consolidated sales in 1996, 1995, and 1994.
b) Information about the Company's Operations in Different
Geographic Areas
Year ended June 30, 1996
<TABLE>
<CAPTION>
United United Adjustments
States Kingdom & Eliminations Consolidated
$000 $000 $000 $000
-------- -------- -------------- ------------
<S> <C> <C> <C> <C>
Sales to unaffiliated customers 1,543 10,671 - 12,214
Transfer between geographic areas 2,824 318 (3,142) -
Sales to affiliated customers - 1,943 - 1,943
Other income 1,788 77 - 1,865
------- ------- ------- -------
Total Revenue 6,155 13,009 (3,142) 16,022
------- ------- ------- -------
Operating (loss)/profit (5,384) 786 (23) (4,621)
------- ------- ------- -------
Identifiable assets 16,005 11,443 (4,081) 23,367
------- ------- ------- -------
Year ended June 30, 1995
Sales to unaffiliated customers 6 9,141 - 9,147
Transfer between geographic areas 3,635 - (3,635) -
Sales to affiliated customers - 2,117 - 2,117
Other income 296 166 - 462
------- ------- ------- -------
Total revenue 3,937 11,424 (3,635) 11,726
------- ------- ------- -------
Operating (loss)/profit (88) 528 - 440
------- ------- ------- -------
Identifiable assets 6,673 9,207 (2,092) 13,788
Year ended June 30, 1994
Sales to unaffiliated customers 52 7,080 - 7,132
Transfer between geographic areas 4,022 (42) (3,980) -
Sales to affiliated customers - 2,482 - 2,482
Other income 301 241 - 542
------- ------- ------- -------
Total revenue 4,375 9,761 (3,980) 10,156
------- ------- ------- -------
Operating profit 1,779 19 17 1,815
------- ------- ------- -------
Identifiable assets 6,147 6,627 (966) 11,808
</TABLE>
F-15
<PAGE>
APPLIED MICROBIOLOGY, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
11. SEGMENT REPORTING (continued)
b) Information about the Company's Operations in Different
Geographic Areas continued
Transfers between geographic areas are accounted for as
arms-length transactions. Operating profit is total revenue less
operating expenses. Identifiable assets are those assets which are
identifiable with the operations in each geographic area.
Of the US sales to unaffiliated customers there were no export
sales.
Sales of the UK operation to unaffiliated customers by
geographical area were as follows:
1996 1995 1994
$000 $000 $000
---- ---- ----
North America 1,164 585 685
Europe 5,128 4,816 3,531
South America 2,423 1,983 1,497
Other 1,956 1,757 1,367
------ ----- -----
10,671 9,141 7,080
c) Industry
The Company's business and that of A&B have been in a single
industry segment - the research, development, production and
marketing of antimicrobial proteins and dairy ingredients for
various applications. In April 1996, the Company began selling
a salt alternative as a Special Dietary Food that may help in
the dietary management of blood pressure.
12. RELATED PARTY TRANSACTIONS
a) Transactions with affiliated companies were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
$000 $000 $000
---- ---- ----
<S> <C> <C> <C>
Sales to subsidiaries of common parent:
Mauri Laboratories Pty. Ltd (1) 1,939 2,117 2,107
Burns Philp Food Inc. - - 375
Purchases from subsidiary of common parent:
Mauri Laboratories Pty. Ltd (1) 1,430 832 528
Income from manufacturing on behalf of associate
of parent:
Imperial Biotechnology Ltd (2) - 77 36
Management fees received from subsidiaries of
common parent:
Burns Philp (UK) Plc 74 75 67
Burns Philp R&D Ltd - - 28
Loan interest received from subsidiaries of
common parent:
Burns Philp Inc. 79 63 48
Burns Philp (UK) Plc - - 16
</TABLE>
F-16
<PAGE>
APPLIED MICROBIOLOGY, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
12. RELATED PARTY TRANSACTIONS (continued)
(1) Mauri Laboratories Pty. Ltd ceased to be an affiliate on June
14, 1996.
(2) Imperial Biotechnology Ltd., ceased to be an affiliate on
December 12, 1995.
From time to time the Company advances money to affiliated
companies. Interest received on these advances is as shown above.
In addition, the Company periodically incurs expenditures on
behalf of affiliated companies for which it is reimbursed and
reimburses affiliates for expenditures incurred on its behalf.
The Company paid an affiliate $20,000 during fiscal year
1995 for rent of office space and facilities (1994 $38,000).
b) Amounts due from/(to) affiliated companies were as follows:
<TABLE>
<CAPTION>
1996 1995
$000 $000
---- ----
<S> <C> <C>
Subsidiaries of common parent:
Burns Philp (UK) Plc - (10)
Mauri Laboratories Pty. Ltd - 446
--------- ------
- 436
Disclosed as:
Due from affiliated companies - 627
Due to affiliated companies - (191)
---------- ------
436
</TABLE>
13. INCOME TAXES
The income tax expense consists of:
<TABLE>
<CAPTION>
1996 1995 1994
$000 $000 $000
---- ---- ----
<S> <C> <C> <C>
Current 291 335 201
Deferred (6) (81) (16)
---- ---- ----
285 254 185
</TABLE>
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:
<TABLE>
<CAPTION>
1996 1995 1994
$000 $000 $000
---- ---- ----
<S> <C> <C> <C>
Computed 'expected' tax expense (1,508) 188 679
Increase/(reduction) in income taxes resulting from:
Tax losses carried forward/(utilized) 1,755 86 (652)
Lower tax rate on foreign earnings (8) (16) (1)
State and local taxes 18 - 140
Other items 28 (4) 19
------ ----- -----
285 254 185
</TABLE>
F-17
<PAGE>
APPLIED MICROBIOLOGY, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
13. INCOME TAXES (continued)
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
1996 1995
$000 $000
---- ----
<S> <C> <C>
Deferred tax asset:
Net operating loss carryforwards 3,807 2,118
Less valuation allowance (3,807) (2,118)
------ -------
0 0
Deferred tax liability:
Plant and equipment differences between
depreciation and capital allowances (192) (230)
Pension costs deductible as paid (153) (136)
Other (4) (1)
------ -------
(349) (367)
Net deferred tax liability (349) (367)
</TABLE>
At June 30, 1996, the Company has net operating loss carryforwards for
United States federal income tax purposes of approximately $11,200,000
which are available to offset future United States federal taxable
income, if any, through 2011. Ultimate utilization/availability of such
net operating losses may be significantly curtailed if a significant
change in ownership occurs.
In fiscal year ended June 30, 1996, the UK taxing authorities accepted
certain income tax deductions taken by A&B for the fiscal years ended
June 30, 1995, June 30, 1994, and June 30, 1993 relative to payments
made by A&B to the Company, which they had previously questioned. No tax
effect of any potential disallowance had been reflected in the
consolidated financial statements.
Pretax income of the Company and its source for the years ended June
30, 1996, 1995 and 1994 is as follows:
Year Total Foreign Domestic
---- ----- ------- --------
1994 1,941 61 1,880
1995 537 783 (246)
1996 (4,434) 727 (5,161)
F-18
<PAGE>
APPLIED MICROBIOLOGY, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
14. COMMITMENTS AND CONTINGENT LIABILITIES
In July 1991, the Company entered into an exclusive license agreement
whereby the Company received a license, with the right to sublicense,
the use of a deodorant formulation. In exchange, the Company has agreed
to pay royalties. Through June 30, 1996, the Company has not earned any
revenue from these licenses.
In October 1995, the Company entered into an exclusive license agreement
whereby the Company received a license to sell a patented salt
alternative in the United States. As a result, the Company is required
to make royalty payments quarterly. Accrued royalty payments due as of
June 30, 1996 amounted to $35,000.
The Company has entered into various research and license agreements
with certain universities to supplement the Company's research
activities and to obtain for the Company rights to certain technology.
The agreements generally require the Company to fund the research and to
pay royalties based upon a percentage of product sales.
The Company has consulting agreements with several of its Scientific
Advisory Board members and other consultants. These agreements generally
are for a term of one year and are terminable at the Company's option.
Under operating leases, the Company and A&B lease certain office and
laboratory space in the US and the UK. These leases expire in the years
2002 and 2013. Payments under these leases were approximately $540,000
in 1996, $54,000 in 1995, and $49,000 in 1994. Future noncancellable
minimum payments under these leases are as follows:
Year $000
---- ----
1997 540
1998 467
1999 453
2000 453
2001 453
Thereafter 839
------
Total 3,205
15. SUPPLEMENTAL CASH FLOW INFORMATION
1996 1995 1994
$000 $000 $000
---- ---- ----
Interest paid 104 2 3
Taxes paid 266 103 373
16. PENSION BENEFITS
i) The Company participates in a defined benefit pension plan of
Burns Philp Inc., an affiliated company, and the plan is
called the 'Burns Philp Inc. Retirement Plan for
Non-Bargaining Unit Employees'. This plan provides retirement
benefits based upon years of service, or a combination of
employee compensation and years of service. Contributions
payable to the plan were approximately $42,000 in 1996,
$28,000 in 1995 and $11,000 in 1994.
ii) A&B participates in a defined benefit pension plan of
Burns Philp (UK) plc, an affiliated company called 'The Burns
Philp (UK) plc Pension Plan'. The plan provides a pension of
one sixtieth of final pensionable earnings for each year of
service at a normal retirement age of 65. Pensionable
earnings is basic salary less the basic UK state pension.
On death in service, a lump sum benefit of three times basic
salary is paid. In addition, on death at any time, a
spouse's pension of one-half of the pension (or prospective
pension) becomes payable. There is a special category of
membership, which is closed to new entrants, which provides
a cash sum based on final salary and length of service at
retirement.
F-19
<PAGE>
APPLIED MICROBIOLOGY, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
16. PENSION BENEFITS (continued)
Employee Groups covered
Permanent UK employees who have completed six months service.
Funding policy
That the assets should be at least equal to the present value
of obligations in respect of service to the valuation date
taking account of the projected final earnings of active
members.
Types of assets held
The investments comprise Managed Fund Units, and since October
1, 1991 have been managed by Pensions Management (SWF)
Limited.
The funding status of the Burns Philp (UK) plc Pension Plan
as of June 30, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1996 1995
$000 $000
---- ----
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation (3,932) (3,200)
Accumulated benefit obligation (4,289) (3,490)
Projected benefit obligation for service
rendered to date (5,101) (4,152)
Plan assets at fair value 4,856 4,285
Plan assets (less than)/in excess of
projected benefit obligation (245) 133
Unrecognized net loss 961 616
Unrecognized net transition asset (304) (338)
Prepaid cost 412 411
</TABLE>
Of the above prepaid costs of $412,000 at June 30, 1996,
$383,000 relates to A&B as determined by actuarial valuation,
and is therefore included in the accounts of the Company. As
of June 30, 1995, $395,000 of the prepaid costs related to
A&B.
On termination of the plan these monies would be returned to
the contributing companies.
F-20
<PAGE>
APPLIED MICROBIOLOGY, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
16. PENSION BENEFITS (continued)
Net pension cost of the Burns Philp (UK) plc Pension Plan for
1996, 1995, and 1994 included the following components:
1996 1995 1994
$000 $000 $000
---- ---- ----
Service costs - benefits
earned during the period 326 183 118
Interest cost on projected
benefit obligation 361 262 192
Actual return on plan assets (416) (292) (222)
Net amortization and deferral 9 39 15
Net pension cost 280 192 103
Of the above net pension costs of $280,000 at June 30, 1996,
$181,000 relates to A&B as determined by actuarial valuation,
and is therefore included in the accounts of the Company. For
the years ended 1995 and 1994, all of the net pension costs
relate to A&B.
Assumptions used in accounting for the pension plan as at
June 30 1996, 1995 and 1994 were:
1996 1995 1994
% % %
--- --- ---
Discount rate 8 9 8
Rates of increase in
compensation levels 7 7 7
Expected return on assets 10 10 10
17. RISKS AND UNCERTAINTIES
The Company buys certain of its inventories from single
suppliers. Management believes that other suppliers could
provide similar products at comparable terms. As a result,
management believes a change in suppliers would not disrupt
on-going operations and would not effect operating results
adversely.
18. SUBSEQUENT EVENTS
In July 1996, B.P., the parent company with a 57% controlling ownership
interest, sold off 1.4 million shares of the Company reducing its
ownership to below 50%.
On September 24, 1996 the Company signed a non-binding letter of intent
to sell its nisin-based food preservative business to B.P. The
transaction is expected to be completed in fiscal 1997. In fiscal 1996,
the food preservative business accounted for approximately 49% of total
assets and 75% of total sales of the Company. The Company retained
exclusive rights to its nisin-based pharmaceutical and animal
healthcare business.
F-21
<PAGE>
Independent Auditors' Consent
The Board of Directors
Applied Microbiology, Inc.
We consent to incorporation by reference in the Registrtion Statement No.
33-73332 on Form S-8, Registration Statement No. 333-9801 on Form S-8,
Registration Statement No. 33-4822 on Form S-3, and Registration Statement No.
333-2507 on Form S-3 of Applied Microbiology, Inc. of our report dated July 22,
1996, relating to the consolidated balance sheets of Applied Microbiology, Inc.
and subsidiary as of June 30, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
years in the three-year period ended June 30, 1996, which report appears in the
June 30, 1996 annual report on Form 10-K of Applied Microbiology, Inc.
New York, New York KPMG Peat Marwick LLP
September 26, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
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1500
0
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