<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
10-Q
For Quarter Ended: December 31, 1997
Commission File Number 0-14983
AMBI INC.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 11-2653613
- -------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation of organization)
771 Old Saw Mill River Road, Tarrytown, New York 10591
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(914) 347-5767
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
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 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 90 days.
YES X NO
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, Par Value $.005 20,903,905 shares as of February 2, 1998
- ----------------------------- ----------------------------------------
1
<PAGE>
AMBI INC. & SUBSIDIARY
INDEX
PART I FINANCIAL INFORMATION PAGE
- ------ --------------------- ----
Item 1 Financial Statements
Condensed Consolidated Balance
Sheets at December 31, 1997 3
and June 30, 1997
Condensed Consolidated Statements of
Operations for the three months and
six months ended December 31, 1997 5
and December 31, 1996
Condensed Consolidated Statement of
Changes in Stockholders' Equity 6
for the six months ended
December 31, 1997
Condensed Consolidated Statements of
Cash Flows for the six months
ended December 31, 1997 and 7
December 31, 1996
Notes to Condensed Consolidated
Financial Statements 8
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of 15
Operations
PART II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 19
2
<PAGE>
AMBI INC. & SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31 June 30
1997 1997
(Unaudited) (Note)
$'000 $'000
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents 507 8,615
Trade accounts receivable less allowance for
doubtful accounts of $267,000 at December 31, 1997
and $104,000 at June 30, 1997 3,055 390
Inventories 1,588 606
Prepayments and other current assets 738 404
---------- ----------
Total current assets 5,888 10,015
Property, plant and equipment at cost less
accumulated depreciation of $513,000 at December
31, 1997 and $382,000 at June 30, 1997 1,024 1,082
Patent costs, licensed technology and other
intangible assets at cost less accumulated
amortization of $1,356,000 at December 31, 1997 9,422 1,584
and $862,000 at June 30, 1997
Goodwill at cost less accumulated amortization of
$43,000 at December 31, 1997 and $0 at June 30,
1997 2,108
Other assets 295 73
---------- ----------
TOTAL ASSETS 18,737 12,754
========== ==========
</TABLE>
Note: The Condensed Consolidated Balance Sheet as of June 30, 1997 has been
derived from the audited consolidated financial statements at that
date.
See notes to condensed consolidated financial statements
3
<PAGE>
AMBI INC. & SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(CONTINUED)
<TABLE>
<CAPTION>
December 31 June 30
1997 1997
(Unaudited) (Note)
$'000 $'000
------------ ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt and lease obligation 1,084 156
Accounts payable 734 1,283
Accrued expenses 1,570 1,181
Preferred dividends payable 480 340
Contingent payments payable - Nutrition 21 acquisition 575
------------ ------------
Total current liabilities 4,443 2,960
Long term debt and lease obligation, less current portion 3,949 2,184
Revolving line of credit facility 1,092
Accrued royalties 301
------------ ------------
TOTAL LIABILITIES 9,785 5,144
------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value, authorized 5,000,000:
Series C convertible preferred, 222 shares
outstanding at December 31 and June 30 respectively
(aggregate liquidation value Series C $2,610,355) * *
Series D convertible preferred, 45,000 shares issued and
22,600 shares outstanding at December 31 and 45,000
shares issued and outstanding at June 30
(aggregate liquidation value Series D $2,348,047) * *
Common stock, $0.005 par value, authorized
65,000,000 shares. Issued and outstanding 20,898,297
at December 31 and 18,783,342 at June 30 104 94
Additional paid-in capital 54,055 51,416
Accumulated deficit (45,207) (43,900)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 8,952 7,610
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 18,737 12,754
============ ============
</TABLE>
*Value less than $500
Note: The Condensed Consolidated Balance Sheet as of June 30, 1997 has been
derived from the audited consolidated financial statements at that
date.
See notes to condensed consolidated financial statements
4
<PAGE>
AMBI INC. & SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31 December 31
1997 1996 1997 1996
$'000 $'000 $'000 $'000
----- ----- ----- -----
<S> <C> <C> <C> <C>
Revenues 5,789 4,199 9,032 8,565
Cost of goods sold (695) (1,164) (1,350) (3,653)
------ ------ ------ ------
GROSS PROFIT 5,094 3,035 7,682 4,912
Marketing and sales expenses (1,600) (2,850) (3,047) (6,006)
Research and development expenses (1,067) (1,112) (1,562) (2,512)
General and administrative expenses (1,316) (1,552) (2,559) (3,001)
Depreciation and amortization (485) (241) (625) (483)
------ ------ ------ ------
OPERATING INCOME/(LOSS) 626 (2,720) (111) (7,090)
Interest income 15 42 59 109
Interest expense (161) (50) (185) (87)
Gain on sale of Aplin & Barrett 9,683 9,683
------ ------ ------ ------
INCOME/(LOSS) BEFORE TAX EXPENSE 480 6,955 (237) 2,615
Income tax expense (50) (96) (57) (141)
------ ------ ------ ------
NET INCOME/(LOSS) 430 6,859 (294) 2,474
====== ====== ====== ======
EARNINGS/(LOSS) PER SHARE
- -Basic $ 0.00 $ 0.33 $(0.04) $ 0.11
- -Diluted $ 0.00 $ 0.32 $(0.04) $ 0.11
</TABLE>
See notes to condensed consolidated financial statements
5
<PAGE>
AMBI INC. & SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Common Additional Accumulated
Stock Paid In Deficit
Capital
$000 $000 $000
------ ------ -------
<S> <C> <C> <C>
Balance at June 30, 1997 94 51,416 (43,900)
Common stock issued in connection with the
acquisition of Nutrition 21 3 1,772
Conversion of preferred stock 7 71
Conversion discount on convertible preferred stock 796 (796)
Preferred stock dividends (217)
Net loss for the period (294)
------ ------ -------
Balance at December 31, 1997 104 54,055 (45,207)
====== ====== =======
</TABLE>
See notes to condensed consolidated financial statements
6
<PAGE>
AMBI INC. & SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
December 31
1997 1996
$'000 $'000
----- -----
<S> <C> <C>
Cash flows from operating activities:
Net (loss)/income (294) 2,474
Adjustments to reconcile net (loss)/income
to net cash used in operating activities:
Depreciation and amortization 625 483
Gain on Sale of Aplin & Barrett (9,683)
Other non-cash items 65
Changes in assets and liabilities, net of effects
from the acquisition of Nutrition 21 and the sale
of Aplin & Barrett:
(Increase) in trade accounts receivable (58) (635)
(Increase)/decrease in inventories (526) 275
(Increase) in other current assets (257) (209)
(Decrease) in taxes payable (254)
(Decrease)/increase in accounts payable and accrued expenses (617) 1,147
Increase in accrued royalties 301
Increase in other liabilities 189
------- -------
Net cash (used in) operating activities (826) (6,148)
------- -------
Cash flows from investing activities:
Purchases of property, plant and equipment (39) (754)
Patent costs (328) (121)
Increase in other assets (201)
Payment for Nutrition 21 and related acquisition costs (10,499)
Proceeds from the sale of Aplin & Barrett 8,000
------- -------
Net cash (used in)/provided by investing activities (11,067) 7,125
------- -------
Cash flows from financing activities:
Term loan borrowings 3,300
Revolving line of credit borrowings 1,092
Term loan repayments (500)
Capital lease obligation repayments (107) (1,103)
Capital lease proceeds 328
Proceeds from issuance of common stock 294
------- -------
Net cash provided by/(used in) financing activities 3,785 (481)
------- -------
Effect of exchange rate movement (10)
Net (decrease)/ increase in cash and cash equivalents (8,108) 486
Cash and cash equivalents at beginning of period 8,615 8,431
------- -------
Cash and cash equivalents at end of period 507 8,917
======= =======
Supplementary disclosure of cash flow information:
Interest paid 83 62
Tax paid 7
</TABLE>
On August 11, 1997 the Company acquired the net assets of Nutrition 21 in
exchange for $10,000,000 in cash and 500,000 shares of the Company's common
stock. In connection with the acquisition; liabilities were assumed as
follows:
Fair value of assets acquired $11,644
Cash purchase price 10,000
Stock issued 1,187
-------
Liabilities assumed $457
=======
7
<PAGE>
AMBI INC. & SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 1997
Note A Basis of Presentation
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally
accepted accounting principles for interim financial
statement reporting and in accordance with the instructions
to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly,
they do not include all the information and footnotes
required by generally accepted accounting principles for
complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been
included. Operating results for the six month period ended
December 31, 1997 are not necessarily indicative of the
results that may be expected for the year ending June 30,
1998. For further information, refer to the consolidated
financial statements and notes thereto, included in the
Company's annual report on Form 10-K as amended for the year
ended June 30, 1997.
Note B Acquisition of Nutrition 21
On August 11, 1997, the Company acquired the entire
beneficial interest in Nutrition 21 ("N21"), a limited
partnership, by way of the acquisition of Selene Systems,
Inc. ("Selene"), which was the general partner of N21, J.
Bie Enterprises, Inc. ("J. Bie"), which was a limited
partner of N21, and the limited partnership interests owned
by all other limited partners of N21, pursuant to a Purchase
Agreement. The Company retained the former chief executive
officer of N21 as a consultant.
N21 is engaged in the business of developing, producing and
marketing proprietary nutrition products and dietary
supplements. N21 has its products manufactured and
formulated to its specifications by contract manufacturers
as bulk raw materials. N21 then sells the raw materials to
customers who incorporate them into over nine hundred
finished products such as vitamin/mineral formulas, dietary
supplements, baked goods, beverages and other products.
These products are sold by customers under a variety of
brands throughout the world through natural/health food
stores, supermarkets, drug stores and direct mail catalogs.
Currently N21's primary product is chromium picolinate,
which is marketed under the registered trademark "Chromax."
N21 has an exclusive license from the United States
Department of Agriculture ("USDA") for the duration of a
patent which covers the composition of chromium picolinate
and its uses. This patent expires on August 8, 2000. The
USDA license grants N21 the exclusive right to manufacture,
use, and sell chromium picolinate in the United States. N21
also owns U.S. Patents expiring in 2009, relating to
chromium picolinate treatments for reducing hyperglycemia
and stabilizing the level of serum glucose, for preventing
undesirable high levels of blood serum lipids, and for
increasing lean body mass and reducing body fat, and other
patents relating to, among other things, magnesium taurate
treatments of cardiac conditions.
The purchase price for the acquisition was $10,000,000 in
cash plus 500,000 restricted shares of common stock of the
Company. The Purchase Agreement also provides for annual
contingent payments for each of the next four years of $2.5
million adjusted for the achievement of certain sales
levels, and royalties of 2.5% to 5.0% on net sales of
products recommended for certain patented uses. These
contingent payments, which will be made to former partners
of N21, will be recorded as an addition to the purchase
price as the amounts are earned and amortized over the
remaining life of the acquired assets. Based on sales
through December 31, 1997
8
<PAGE>
AMBI INC. & SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 1997
a contingent payment of $575,000 has been accrued. As of
December 31, 1997 no royalty payments were due. The
acquisition was accounted for under the purchase method. As
such, as of December 31, 1997 the Company has recorded
approximately $2,150,000 of goodwill and $7,963,000 of other
intangible assets, consisting primarily of patents and
trademarks, in connection with the acquisition. The Company
is amortizing the goodwill over fifteen years and amortizing
the other intangible assets over their useful economic
lives, which range from three to fifteen years. During the
six months ended December 31, 1997 the Company recorded
approximately $422,000 in amortization expense related to
the goodwill and other intangible assets described above.
Approximately $3,300,000 of the purchase price was provided
as a term loan pursuant to a Revolving Credit and Term Loan
Agreement ("Loan Agreement") with State Street Bank and
Trust Company ("State Street"). The loans earned interest at
the bank's prime rate plus one percent and were due February
1, 1998. However, on December 31, 1997 the Company
refinanced its loans with State Street (See Note F).
Approximately $6,700,000 of the purchase price was provided
from internal working capital.
To replace a prior royalty agreement with certain
individuals who assisted the prior owners of N21 in the
development of chromium picolinate, the Company in November
1997 issued 200,000 shares of its common stock
to these individuals, and agreed on August 8, 2000 to issue
to these individuals a number of additional shares of common
stock which then have a value equal to the amount (if any)
by which the then value of the 200,000 shares of stock is
less then 10% of chromium picolinate net sales (as defined)
during the period from August 11, 1997 through August 8,
2000. The Company has capitalized the cost of the stock at
its market value on the date of issuance and it is
amortizing the cost of the stock over the term of the
agreement. Based on sales of chromium picolinate from August
11, 1997 through December 31, 1997 and the Company's stock
price at December 31, 1997, the Company has accrued $301,000
in royalties to the individuals described above.
Note C Inventory
All inventory consists of finished goods at December 31 and
June 30, respectively.
Note D Earnings/(loss) per share
The Company has adopted the provisions of the Financial
Accounting Standards Board ("FASB") Statement of Financial
Accounting Standards ("SFAS") No.128, "Earnings Per Share."
Accordingly, the earnings per share calculations for the
prior periods have been restated to conform with the
provisions of SFAS No. 128. This statement replaces the
presentation of primary earnings per share and fully diluted
earnings per share with basic and diluted earnings per share
respectively.
Basic earnings/(loss) per share for the three and six months
ended December 31, 1997 and 1996 are computed based on the
weighted average number of shares outstanding for the
respective periods as follows:
9
<PAGE>
AMBI INC. & SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
3 months ended 6 months ended
December 31 December 31
1997 1996 1997 1996
No. of Shares No. of Shares
------------- -------------
<S> <C> <C> <C> <C>
Weighted average shares 19,820,502 20,243,174 19,464,121 20,387,206
----------- ----------- ----------- -----------
$'000 $'000 $'000 $'000
----------- ----------- ----------- -----------
Net income/(loss) 430 6,859 (294) 2,474
Preferred stock dividend (103) (100) (217) (194)
Conversion discount on convertible
preferred stock (420) (796)
----------- ----------- ----------- -----------
Net income/(loss) attributable to
common stockholders (93) 6,759 (1,307) 2,280
=========== =========== =========== ===========
Basic earnings/(loss) per share of
common stock $0.00 $0.33 ($0.07) $0.11
</TABLE>
Diluted earnings per share for the three and six month
periods ended December 31, 1997 do not reflect the
incremental shares from the assumed conversion of stock
options or warrants or the conversion of the preferred stock
or convertible debt to common stock because the effect of
such inclusion would be to reduce the loss per share.
Diluted earnings per share for the three and six month
periods ended December 31, 1996 are computed based on the
weighted average number of shares outstanding plus the
shares that would be outstanding assuming the exercise of
certain stock options and warrants and the conversion of
preferred stock to common stock. 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. The computation of diluted
earnings per share is as follows:
10
<PAGE>
AMBI INC. & SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
3 months ended 6 months ended
December 31 December 31
1997 1996 1997 1996
No. of Shares No. of Shares
------------- -------------
<S> <C> <C> <C> <C>
Average shares outstanding 19,820,502 20,243,174 19,464,121 20,387,206
Stock options and warrants 192,323 448,302
Conversion of preferred stock 1,094,632 896,381
----------- ----------- ----------- -----------
Total average shares 19,820,502 21,530,129 19,464,121 21,731,889
----------- ----------- ----------- -----------
$'000 $'000 $'000 $'000
----------- ----------- ----------- -----------
Net income/(loss) 430 6,859 (294) 2,474
Preferred stock dividend (103) (217)
Conversion discount on convertible
preferred stock (420) (796)
----------- ----------- ----------- -----------
Net income/(loss) attributable to
common stockholders (93) 6,859 (1,307) 2,474
Diluted earnings/(loss) per share of
common stock $0.00 $0.32 ($0.07) $0.11
</TABLE>
At December 31, 1997 the Company had 5,202,000 stock options
and warrants outstanding to purchase common stock at
exercise prices ranging from $1.25 to $7.69 , but were not
included in the computation of diluted earnings per share
because such inclusion would be antidilutive.
The Company has a $2 million note at an interest rate of 5%,
payable to Nippon Shoji Kaisha (NSK) on March 18, 1999. The
note provides that (1) if an Investigational New Drug
application (IND) for the treatment of diseases of the colon
is filed and accepted by the United States Food and Drug
Administration (FDA) by March 18, 1998, the Company has the
right to repay $1 million of the note with its common stock,
and (2) if rat and dog toxicology programs related to
treatment of nosocomial antibiotic resistant infections are
completed by September 18, 1998, the Company has the right
to repay $1 million of the note with its common stock. The
common stock for repayment purposes is valued at the average
closing price during the ten (10) consecutive trading days
immediately prior to the Company notifying NSK of its
election to repay with common stock. The Company has been
advised that the FDA has accepted its IND for diseases of
the colon. The Company as a result, intends to repay $1
million of the note with its common stock.
As more fully discussed in Note E the Company has
convertible preferred stock outstanding that can be
converted into common stock. At December 31, 1997, these
amounts have not been included in the computation of diluted
earnings per share because such inclusion would be
antidilutive.
11
<PAGE>
AMBI INC. & SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 1997
Note E Convertible preferred stock
With respect to the Company's Series C Preferred Stock (the
"C Preferred"), on December 5, 1997 the Company reduced the
fixed conversion price to form $3.25 to $2.75. The maturity
date for mandatory conversion was extended to October 13,
1999. The holders of the C Preferred agreed not to convert
any of their remaining holdings for a period of six months
ending on June 5, 1998.
With respect to the Company's Series D Preferred Stock (the
"D Preferred"), on December 5, 1997 the holders of the D
Preferred (the " D Investors") converted fifty percent of
their holdings into common stock of the Company at a
twenty-five percent discount. The Company reduced the fixed
conversion price and the warrant exercise price from $2.50
to $2.25. The maturity date for mandatory conversion was
extended to May 8, 2001. The D Investors agreed not to
convert any of their remaining holdings for a period of six
months ending on June 5, 1998. The twenty-five percent
conversion discount described above has been recorded as
additional preferred dividends and it had the effect of
reducing net income available to common stockholders for the
three and six months ended December 31, 1997 (See Note D).
The Company expects to amortize an additional $730,000 in
additional preferred dividends relating to the conversion
discount on the series D preferred stock for the six months
ended June 30, 1998.
The reduction in the fixed conversion price described above
for the Series C and Series D Preferred Stock has not been
recorded as additional preferred dividends for the six
months ended December 31, 1997 because the Company's stock
price is not high enough for the fixed conversion price to
be beneficial to the Series C and Series D investors. As of
December 31, 1997 the original discounts of fifteen and
twenty-five percent granted to the Series C and Series D
investors are more beneficial for conversion purposes. As
such, these conversion discounts have been recorded as
additional preferred dividends (See Note D). At such a time
when the fixed conversion price becomes more beneficial to
the Series C investors (when the Company's stock price
exceeds $3.23) or the Series D Investors (when the Company's
stock price exceeds $3.00) the Company will record
additional preferred dividends based on the Company's stock
price at that time.
Note F Debt refinancing
On December 31, 1997 the Company entered into a new
Revolving Credit and Term Loan Agreement with State Street
to refinance its loans. The refinanced loans consist of a
term loan of $2.8 million ("Term Loan") and a revolving
credit line of up to $4.0 million ("Revolving Loan"), both
bearing interest at the prime rate plus one percent and are
due June 30, 2000. The Company is making monthly payments of
principal and interest on the Term Loan. The Revolving Loan
is an asset based loan, with any amounts borrowed due June
30, 2000.
12
<PAGE>
AMBI INC. & SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 1997
Note G Pro forma financial information
The following represents the pro forma consolidated results
of operations as if the Company and Nutrition 21 had been
combined for the entire six months ended December 31, 1997
and 1996 respectively. The pro forma results of operations
reflect amounts adjusted to their accounting basis as if the
acquisition had occurred at the beginning of the respective
periods. The pro forma information is not necessarily
indicative of the results of operations as they may be in
the future or as they would have been had the acquisition
been effected on the assumed dates.
<TABLE>
<CAPTION>
Six Months Ended
December 31
1997 1996
$000 $000
---- ----
<S> <C> <C>
Revenues 10,355 16,649
Net income 209 4,614
Basic (loss)/earnings per share ($0.04) $0.22
Diluted (loss)/earnings per share ($0.04) $0.21
</TABLE>
The results for the six months ended December 31, 1996,
include a $9.7 million one time gain from the sale of Aplin
& Barrett, a food preservative business (See Note H).
Note H Sale of Aplin & Barrett
The Company completed the sale of its United Kingdom based
food preservative business, Aplin & Barrett, Ltd., to Burns
Philp & Company Ltd. on December 12, 1996. As a result, the
operations of Aplin & Barrett are included in the financial
statements through that date. Key terms of the transaction
included the payment to the Company of $13.5 million in
cash, ($8.0 million paid on December 12, 1996 and $5.5
million paid on June 12, 1997), and the payment of 2.42
million shares of the Company's common stock held by Burns
Philp. In addition, Burns Philp has provided the Company
with a revolving line of credit of up to $2.5 million that
could be forgiven under certain circumstances related to the
performance of the food preservative business through June
30, 1999. As of December 31, 1997 the Company has not
borrowed any amounts under this revolving line of credit.
Note I Recently issued accounting standards
In April 1997, the FASB issued SFAS number 130 "Reporting
Comprehensive Income" and SFAS number 131 "Disclosures about
Segments of an Enterprise and Related Information." SFAS No.
130 establishes standards of reporting and display of
comprehensive income and its components in a full set of
general purpose financial statements. SFAS No. 131
supersedes
13
<PAGE>
AMBI INC. & SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 1997
SFAS No. 14 "Financial Reporting for Segments of a Business
Enterprise", but retains the requirement to report
information about major customers. These statements are
effective for financial statements for both interim and
annual periods ending after December 31, 1997. It is not
expected that the adoption of these statements will have a
material impact on the Company's financial position or
operating results.
14
<PAGE>
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read in conjunction with the Consolidated
Financial Statements and related notes thereto of the Company included
elsewhere herein.
General
The Company's historical revenues have been primarily attributable to sales of
its own products. The Company has acted in the past as selling agent for
certain products of both affiliated as well as unaffiliated companies.
Effective July 1, 1995, the Company assumed responsibility for selling
products in the US on behalf of an affiliated company, Burns Philp & Company
Ltd. ("Burns Philp"). This relationship was discontinued effective September
11, 1996. The Company also receives royalty income from users of its patented
technology and milestone payments from research partners.
The Company completed the sale of its UK-based food preservative business,
Aplin & Barrett Ltd. ("A&B"), to Burns Philp on December 12, 1996. As a
result, the operations of A&B are included in the financial statements through
that date. The decision to sell A&B to Burns Philip was made by the Company's
Board of Directors in 1996. At that time directors unaffiliated with Burns
Philp constituted a majority of the Board of Directors. The Board's decision
was based upon its view that the Company's resources would be more profitably
employed in pursuing the development and/or acquisition of other
products or businesses and that such development and acquisitions would be
facilitated by the cash proceeds of the sale of A&B. After the sale, Burns
Philip owned approximately 40% of the Company's Common Stock.
On August 11, 1997, the Company acquired the entire beneficial interest in
Nutrition 21 ("N21"), a limited partnership. Nutrition 21 is engaged in the
business of developing, producing, and marketing proprietary nutrition
products and dietary supplements. Currently N21's primary product is chromium
picolinate, which is marketed under the registered trademark "Chromax." N21
has an exclusive license from the United States Department of Agriculture
("USDA") for the duration of a patent which covers the composition of chromium
picolinate and its uses. This patent expires on August 8, 2000. The USDA
license grants N21 the exclusive right to manufacture use, and sell chromium
picolinate in the United States. N21 also owns U.S. Patents expiring in 2009,
relating to chromium picolinate treatments for reducing hyperglycemia and
stabilizing the level of serum glucose, for preventing undesirable high levels
of blood serum lipids, and for increasing lean body mass and reducing body
fat, and other patents relating to, among other things, magnesium taurate
treatments of cardiac conditions.
Cost of sales includes both direct and indirect manufacturing costs. Marketing
and sales expenses include salaries, third party fees, royalties and all other
costs associated with selling the Company's products. Research and development
expenses include internal expenditures as well as expenses associated with
third party collaborators. General and administrative expenses include
salaries, overheads, third party fees and expenses, and costs that are not
associated with selling the Company's products or research and development.
Depreciation and amortization include the depreciation of the companies
property, plant and equipment and the amortization of goodwill, patent costs
and other intangible assets. The Company amortizes goodwill over fifteen years
and it amortizes all other intangible assets over their useful economic lives,
which range from three to fifteen years.
Results of Operations
Revenues
Revenues for the quarter increased from the corresponding period in 1996 by
38% to $5.8 million, and for the six month period by 5% to $9.0 million. These
increases in revenues are a result primarily of the acquisition of N21. The
increase in revenue from the acquisition of N21 is partially offset by the
decline in revenues from other products. Revenues also reflect the absence of
the Company's food preservative business which was discontinued during the
quarter ended December 31, 1996 (See Note H).
15
<PAGE>
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Cost of goods sold
Gross profit for the Company as a percentage of net revenues was 88% for the
quarter and 85% for the six months ended December 31, 1997, compared to 72%
for the quarter and 57% for the six months ended December 31, 1996. This
increase in gross profits reflects a sales mix which includes the higher
margin N21 products for the
A&B products for the quarter and the six months ended December 31, 1996. N21
products had a gross profit percentage of net revenues of approximately 91%
for the quarter and six months ended December 31, 1997, while A&B had a gross
profit as a percentage of net revenues of approximately 61% for the quarter
and 52% for the six months ended December 31, 1996.
Marketing and sales expenses
Marketing and sales expenses decreased $1.3 million or 45% for the quarter and
$3.0 million or 50% for the six months ended December 31, 1997, compared to
the quarter and six months ended December 31, 1996. The decrease is primarily
due to lower spending on Cardia Salt Alternative and Wipe Out Dairy Wipes.
Combined spending on these products declined for the quarter and six months
ended December 31, 1997 by $1.9 million and $3.7 million respectively.
Research and development costs
Research costs decreased $25 thousand (2%) in the quarter and $930 thousand
(37%) in the six month period compared to the same periods last year. This
decrease is due to the Company's decision to only fund research activities
that are focused on achieving drug development milestones.
General and administrative expenses ("G&A")
G&A expenses decreased $0.2 million or 15% for the quarter and $0.4 million or
15% for the six months ended December 31, 1997, compared to the quarter and
six months ended December 31, 1996. These decreases are largely due to due to
the absence of A&B for the quarter (a decrease of $0.4 million) and six months
(a decrease of $0.6 million).
Depreciation and amortization
The increase in depreciation and amortization for the three and six month
period ended December 31, 1997 was caused by the amortization of the goodwill
and other intangible assets associated with the acquisition of N21.
Operating income (loss)
The Company recorded operating income of $0.6 million in the quarter ended
December 31, 1997, compared with a loss of $2.7 million in the quarter ended
December 31, 1996. In the six months ended December 31, 1997, the Company
recorded an operating loss of $0.1 million, compared with a loss of $7.1
million in the six months ended December 31, 1996. The decline in the
operating loss is mainly due to the decrease in spending and the increase in
gross profits attributable to the acquisition of N21.
Income/(loss) before tax expense
The Company recorded income before tax expenses of $0.5 million in the quarter
ended December 31, 1997, compared with income of $7.0 million in the quarter
ended December 31, 1996. In the six months ended December 31, 1997, the
Company recorded a loss before tax expense of $0.2 million, compared with
income of $2.6 million in the six months ended December 31, 1996. The income
in 1996 was due to the gain on the sale of A&B which occurred on December 12,
1996 (See Note H).
16
<PAGE>
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Tax expense
The Company's tax expense for the quarter and in the six months is a result of
taxes on the profits of N21 in the state of California.
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 December 31, 1997, the Company had working capital of $1.1 million,
which included cash and cash equivalents of $0.5 million. On June 30, 1997,
working capital was $7.1 million, which included cash and cash equivalents of
$8.6 million.
As of December 31, 1997 the Company had a loan balance of $3.9 million with
State Street Bank. The Company had originally borrowed $3.3 million from State
Street to fund the acquisition of N21. At December 31, 1997 , the Company
refinanced the loan with State Street. Under the revised terms the Company now
has a $2.8 million term loan which is amortized over a 30 month period, at an
interest rate at the bank's prime rate plus one percent. The bank also
continues to provide a revolving credit line of up to $4 million, and any
amount borrowed under this facility is not due until June 30, 2000. The
Company has borrowed approximately $1.1 million under this line of credit as
of December 31, 1997.
As a result of the sale of A&B, the Company experienced a significant decline
in revenues during the latter part of fiscal 1997. This loss of revenues also
contributed to the increase in the operating loss to $16.6 million in fiscal
1997, compared with an operating loss of $4.6 million in fiscal 1996. A&B
generated cash flows of $0.5 million and $3.1 million in fiscal 1997 and
fiscal 1996, respectively. The sale of A&B did generate cash proceeds of $13.5
million which provided adequately for the Company's short-term capital
requirements. The Company has only recently reinvested the proceeds from this
sale into the acquisition of N21, which has thus far generated revenues
greater than those lost as a result of the sale of A&B.
In connection with the sale of A&B, Burns Philp provided the Company with a
revolving credit line of up to $2.5 million that could be forgiven under
certain circumstances related to the performance of the Nisaplin food
preservative business through June 30, 1999. Borrowings under this credit line
will accrue interest at a rate equal to the prime rate set from time to time
by Citibank. To date the Company has not borrowed any amounts under this
credit line, nor is it determinable at this time whether the future
performance of the food preservative business would result in the forgiveness
of any debt.
With respect to the acquisition of N21, the Company expects that as of fiscal
year-end June 30, 1998, the Company will owe the former partners of Nutrition
21 a contingent payment of $2.5 million (see Note B). As of December 31, 1997
the Company has accrued $575 thousand towards that expected contingent
payment. The Company believes that it will be able to use cash generated from
operations or its short term revolving line of credit to satisfy the
contingent payment obligation. The ability to satisfy the contingent payment
obligation will be a significant factor in the Company's ability to maintain
an adequate level of cash flow.
The Company anticipates a continued decline in spending as it seeks to find
pharmaceutical partners to fund research and development and it has eliminated
expenditures that are not critical to the process of generating sales. The
Company may report operating income during the fiscal year ending June 30,
1998 as a result of the aforementioned expense reduction combined with
operating income provided from the recent acquisition of N21 in August 1997.
17
<PAGE>
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
After the acquisition of N21, the Company's two primary sources of financing
are cash generated from continuing operations and the State Street revolving
line of credit. The revolving line of credit was originally obtained as part
of the financing for the N21 acquisition. The availability under this
revolving line of credit is based on the Company's accounts receivable and
inventory. At December 31, 1997 approximately $1.1 million had been drawn down
on this line. The Company believes that cash generated from operations or the
amounts available under the line of credit will provide sufficient liquidity
to fund operations.
Year 2000 compliance
The Company is currently analyzing the potential impact of the Year 2000 on
the processing of date sensitive information by the Company's computerized
information systems. The Year 2000 problem is the result of computer programs
being written using two digits (rather then four) to define an applicable
year. The Company's general ledger system, Great Plains Dynamics, is currently
Year 2000 compliant. The Company is studying the impact of the Year 2000
problem on other aspects of its business and as of December 31, 1997 this
impact on the future financial position, operating results, and cash flows of
the Company is not determinable.
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 April 1997, the FASB issued SFAS number 130 "Reporting Comprehensive
Income" and SFAS number 131 "Disclosures about Segments of an Enterprise and
Related Information." SFAS No. 130 establishes standards of reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. SFAS No. 131 supersedes SFAS No. 14 "Financial
Reporting for Segments of a Business Enterprise", but retains the requirement
to report information about major customers.
These statements are effective for financial statements for both interim and
annual periods ending after December 31, 1997. It is not expected that the
adoption of these statements will have a material impact on the Company's
financial position or operating results.
18
<PAGE>
PART II - OTHER INFORMATION
Item 6 - Exhibits and Report on Form 8-K
Exhibit 27 - Financial Data Schedule
The Company filed reports on Form 8-K/A and Form 8-K/A2 relating to the
purchase of Nutrition 21 on October 22 and December 19, 1997, respectively.
The Company filed reports on Form 8-K/A and Form 8-K/A2 relating to the sale
of its Aplin and Barrett subsidiary on November 6 and December 19, 1997,
respectively.
19
<PAGE>
AMBI INC.& SUBSIDIARY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMBI INC.
Registrant
Date: February 17, 1998 By: /s/ Fredric D. Price
-------------------------------------
Fredric D. Price
President and Chief Executive Officer
20
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<PERIOD-END> DEC-31-1997
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