<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, 1998
Commission File Number 0-14983
AMBI INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 11-2653613
- --------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation of organization)
4 Manhattanville Road, Purchase, New York 10577
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(914) 701-4500
- --------------------------------------------------------------------------------
(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 28,780,006 shares as of February 10, 1999
- ----------------------------- -----------------------------------------
<PAGE>
AMBI INC. & SUBSIDIARY
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE
- ------ --------------------- ----
<S> <C> <C>
Item 1 Financial Statements
Consolidated Balance Sheets
at December 31, 1998
and June 30, 1998 3
Consolidated Statements of Operations
for the three and six month periods
ended December 31, 1998 and 1997 5
Consolidated Statement of Changes
in Stockholders' Equity for
the six month period ended
December 31, 1998 6
Consolidated Statements of Cash Flows
for the six month periods ended
December 31, 1998 and 1997 7
Notes to Consolidated Financial
Statements 8
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of
Operations 14
PART II OTHER INFORMATION
- ------- -----------------
Item 1 Legal Proceedings 20
Item 2 Changes in Securities and Use of Proceeds 20
Item 4 Submission of Matters to a Vote of Security Holders 20
Item 6 Exhibits and Reports on Form 8-K 21
</TABLE>
2
<PAGE>
AMBI INC. & SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
December 31, June 30,
1998 1998
---- ----
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,610 $ 2,109
Accounts receivable, net 3,778 3,408
Inventories, net 565 695
Prepaid and other current assets 555 413
--------- ---------
Total current assets 10,508 6,625
Property and equipment, net 993 914
Patent costs and licensed technology, net 12,571 11,715
Goodwill, net 1,058 950
Other assets 601 531
--------- ---------
TOTAL ASSETS $ 25,731 $ 20,735
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
AMBI INC. & SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
December 31, June 30,
1998 1998
---- ----
(unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short term debt, current portion of long-term debt and lease
obligations $ 3,059 $ 3,052
Accounts payable and accrued expenses 2,554 2,458
Nutrition 21 acquisition payable 1,142 2,747
Preferred dividends payable 85 637
-------- --------
Total current liabilities 6,840 8,894
Long term debt and lease obligation, less current portion 1,012 1,543
Other long term obligations 470 --
-------- --------
TOTAL LIABILITIES 8,322 10,437
-------- --------
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value, authorized 5,000,000 shares;
Series C convertible preferred, 895 shares issued; no
shares outstanding at December 31, l998 and 222 shares
outstanding at June 30, l998. -- --
Series D convertible preferred, 45,000 shares issued; 5,750
shares outstanding at December 31, l998 and 22,500 shares
outstanding at June 30, 1998 (aggregate liquidation value
Series D $631,901). -- --
Series E convertible preferred, 1,500 shares issued and
outstanding at December 31, 1998 (aggregate liquidation
value Series E $1,509,041). -- --
Common stock, $0.005 par value, authorized 65,000,000 shares;
27,397,493 shares and 20,898,297 shares issued and outstanding
at December 31, and June 30, l998,
respectively. 137 105
-------- --------
Additional paid-in capital 58,590 54,942
Accumulated deficit (41,318) (44,749)
-------- --------
TOTAL STOCKHOLDERS' EQUITY $ 17,409 $ 10,298
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 25,731 $ 20,735
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
AMBI INC. & SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 5,964 $ 5,789 $ 11,779 $ 9,032
License revenues 1,000 -- 1,000 --
-------- -------- -------- --------
REVENUES 6,964 5,789 12,779 9,032
COSTS AND EXPENSES:
Cost of sales 617 695 1,295 1,350
Selling, general & admin. expenses 2,861 2,916 5,474 5,606
Research and development expenses 378 1,067 865 1,562
Depreciation and amortization 570 485 1,129 625
-------- -------- -------- --------
OPERATING INCOME/(LOSS) 2,538 626 4,016 (111)
Interest income 66 15 101 59
Interest expense 43 161 132 185
Other income, net -- -- 79 --
-------- -------- -------- --------
INCOME/(LOSS) BEFORE INCOME TAXES 2,561 480 4,064 (237)
-------- -------- -------- --------
Income taxes 166 50 257 57
-------- -------- -------- --------
NET INCOME/(LOSS) $ 2,395 $ 430 $ 3,807 $ (294)
======== ======== ======== ========
Basic Earnings (Loss) per share $ 0.08 $ 0.00 $ 0.14 $ (0.07)
======== ======== ======== ========
Weighted average number of common shares 26,475 19,821 23,843 19,464
======== ======== ======== ========
Diluted Earnings (Loss) per share $ 0.08 $ 0.00 $ 0.14 $ (0.07)
======== ======== ======== ========
Weighted average number of common shares
and equivalents 31,981 19,821 27,643 19,464
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
AMBI INC. & SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
Additional
Preferred Stock Preferred Stock Preferred Stock Paid-In Accumulated
Series C Series D Series E Common Stock Capital Deficit Total
Shares $ Shares $ Shares $ Shares $ $ $ $
------ ----- ------ ----- ------ ----- ------- ----- ------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, l998 222 -- 22,500 -- -- 20,898,297 105 54,942 (44,749) 10,298
Conversion of Series D
preferred stock to
common stock, including
dividends issued as
common stock -- -- (16,750) -- -- -- 2,696,246 13 128 -- 141
Exchange and redemption of
Series C preferred stock,
including accrued dividends
for common stock and
Series E preferred stock (222) -- -- -- 1,500 -- 324,689 2 (503) (242) (743)
Preferred stock dividends -- -- -- -- -- -- -- -- -- (134) (134)
Issuance of common stock -- -- -- -- -- -- 3,478,261 17 3,983 -- 4,000
to American Home Products
Compensation related to
issuance of stock options -- -- -- -- -- -- -- -- 40 -- 40
Net income for the period -- -- -- -- -- -- -- -- -- 3,807 3,807
--- ---- ------ ---- ----- ------ ---------- ------ -------- --------- -------
Balance at December 31,
l998 -- $ -- 5,750 $ -- 1,500 $ -- 27,397,493 $ 137 $ 58,590 ($ 41,318) $17,409
=== ==== ====== ==== ===== ===== ========== ====== ======== ========= =======
See accompanying notes to consolidated financial statements.
</TABLE>
6
<PAGE>
AMBI INC. & SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income/(loss) $ 3,807 $ (294)
Adjustments to reconcile net income/(loss) to net cash
provided by/(used in) operating activities:
Depreciation and amortization 1,129 625
Loss on disposal of equipment 137 --
Nutrition 21 consulting expense 106 --
Other non-cash items 40 --
Changes in assets and liabilities:
(Increase) in accounts receivable (370) (58)
Decrease/(increase) in inventories 130 (526)
(Increase) in prepaid and other current assets (142) (257)
(Increase) in other assets (176) (201)
Increase in preferred stock dividends -- 301
Increase/(decrease) in accounts payable and accrued expenses
96 (617)
-------- --------
Net cash provided by/(used in) operating activities 4,757 (1,027)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment (212) (39)
Payments for patents and licensed technology (290) (328)
Proceeds from sale of equipment 75 --
Payment for Nutrition 21 and related acquisition costs -- (10,499)
--
Contingent payments for Nutrition 21 acquisition (3,269) --
-------- --------
Net cash used in investing activities (3,696) (10,866)
-------- --------
Cash flows from financing activities:
Term loan borrowings -- 3,300
Revolving line of credit borrowings -- 1,092
Issuance of common stock 4,000 --
Term loan repayments (467) (500)
Capital lease obligation repayments (57) (107)
Redemption of Series C Preferred Stock (1,027) --
Preferred dividends paid (9) --
-------- --------
Net cash provided by financing activities 2,440 3,785
-------- --------
Net increase/(decrease) in cash and cash equivalents 3,501 (8,108)
Cash and cash equivalents at beginning of period 2,109 8,615
-------- --------
Cash and cash equivalents at end of period $ 5,610 $ 507
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
AMBI INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
(unaudited)
Note 1 BASIS OF PRESENTATION
The accompanying unaudited interim 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, l998 are not necessarily indicative of the
results that may be expected for the fiscal year ending June 30,
l999. 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, l998.
Certain reclassifications have been made to the prior period's
financial statement amounts to conform to the current period
presentation.
Note 2 Acquisition of Nutrition 21
The purchase price paid on August 11, l997 for the acquisition of
Nutrition 21 was $10,000,000 in cash plus 500,000 restricted
shares of common stock of the Company. The Purchase Agreement also
provides for annual contingent payments for each of the next four
years of $2.5 million, but subject to adjustment for the
achievement of net sales levels of certain products (contingent
consideration clause), and royalties of 2.5% to 5.0% on net sales
of products recommended for certain patented uses. At December 31,
l998, the Company recorded on its balance sheet a current
liability of $1,142 in respect of the contingent payment due in
September 1999 to the former owners of Nutrition 21. On September
30, l998, the Company paid the former owners of Nutrition 21
approximately $3.3 million representing the full amount of the
contingent payment due for the 12 month period September 1997
through August 1998.
The following represents the pro forma consolidated results of
operations as if the Company and Nutrition 21 had been combined
for the six months ended December 31, 1997. The pro forma results
of operations reflect amounts adjusted to their accounting basis
as if the acquisition had occurred at the beginning of the
respective periods. The pro forma information is not necessarily
indicative of the results of operations as they may be in the
future or as they would have been had the acquisition been
effected on the assumed dates. The pro forma information for the
six months ended December 31, 1997 is as follows:
Net sales $ 10,355
Net income 209
Basic and diluted loss per share $ (0.07)
8
<PAGE>
AMBI INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
(unaudited)
Note 3 INVENTORIES
The components of inventories at December 31, l998 and June 30, 1998
were:
December 31, June 30,
l998 1998
---- ----
Raw materials $289 $289
Work in process -- --
Finished goods 390 541
------ ------
679 830
less: inventory valuation reserve (114) (135)
------ ------
Inventories, net $ 565 $ 695
====== ======
Note 4 STOCKHOLDERS' EQUITY
Common Stock
On October 8, l998, the Company received $4.0 million from American
Home Products (AHP) in exchange for 3,478,261 newly issued shares of
common stock (par value $0.005) as described in a Stock Purchase
Agreement entered into between the Company and AHP on that date.
Convertible Preferred Stock
The Company is authorized to issue up to 5,000,000 shares of preferred
stock, with a $0.01 par value, in one or more series, and to fix the
powers, designations, preferences and rights of each series.
In May 1997, the Company issued 45,000 shares of non-voting, Series D
Preferred Stock (the "D Preferred"). Each share of D Preferred has a
face value of $100 per share, and accrues a premium at 6% per annum for
conversion purposes. The Company has registered Common Stock issuable
upon conversion. In connection with this private placement, the Company
also issued Warrants to purchase 528,937 shares of Common Stock at
$2.72 per share.
With respect to the D Preferred, on December 5, 1997 the holders of the
D Preferred (the "D Investors") converted fifty percent of their
holdings into common stock of the Company at a twenty-five percent
discount to the average closing bid prices for the Company's Common
Stock for the five (5) consecutive trading days immediately preceding
conversion. The Company reduced both the fixed conversion price of
$2.49557 and the warrant exercise price of $2.72 to $2.25. The maturity
date for mandatory conversion was extended to May 8, 2001. The D
Investors agreed not to convert any of their remaining holdings for a
9
<PAGE>
AMBI INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
(unaudited)
Note 4 STOCKHOLDERS' EQUITY, Continued
period of six months ending on June 5, 1998. The twenty-five percent
conversion discount described above has been recorded as additional
preferred dividends and reduced net income available to common
stockholders for the year ended June 30, 1998. At December 31, 1998,
there were 5,750 shares of D Preferred outstanding. The D Preferred was
exchanged for a Series F Preferred after December 31, l998.
See Note 9 - Subsequent Events.
In October 1995, the Company issued 895 shares of non-voting Series C
Preferred Stock ("C Preferred") for $10,000 per share. At June 30,
1998, 222 shares of C Preferred were outstanding. On December 10, l998,
the Company issued 1,500 shares of new Series E Preferred Stock ("E
Preferred") with a par value of $0.01 per share. On that date, the
Company's outstanding C Preferred and accrued dividends thereon of $542
were exchanged for $1,500 face amount of E Preferred, $1.0 million in
cash and the issuance of 324,689 shares of the Company's Common Stock.
The E Preferred has a conversion price of $1.25 per share. The fixed
conversion rate is subject to adjustments in certain circumstances. The
E Preferred bears dividends at a rate of 10% per annum payable in cash
or, at the option of the company, in shares of Common Stock and has a
provision for additional payments dependent upon increases in valuation
of the Company's equity securities, subject to a $250 minimum. As a
result of this exchange transaction, the Company recorded a one-time
incremental preferred dividend of $242, representing the excess of the
consideration exchanged over the carrying value of the then outstanding
C Preferred. The E Preferred is subject to conversion at any time, at
the option of the holder, and is subject to mandatory conversion after
three years.
Dividends payable on the D Preferred were approximately $13 and $155 at
December 31, 1998 and June 30, l998, respectively. Series E Preferred
dividends of $9 were paid in cash at December 31, l998
Note 5 EARNINGS/(LOSS) PER SHARE
Basic and diluted earnings (loss) per share for the three months and
six months ended December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
December 31, December 31,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income/(loss) $ 2,395 $ 430 $ 3,807 $ (294)
Preferred stock dividends (298) (103) (376) (217)
Conversion discount on convertible
preferred stock (420) (796)
========== ========== ========== ==========
Net income/(loss) attributable
to common stockholders $ 2,097 $ (93) $ 3,431 $ (1,307)
========== ========== ========== ==========
Basic earnings/(loss) per share $ 0.08 $ 0.00 $ 0.14 $ (0.07)
========== ========== ========== ==========
Weighted average number of common shares 26,474,738 19,820,502 23,842,943 19,464,121
========== ========== ========== ==========
</TABLE>
10
<PAGE>
AMBI INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
(unaudited)
Note 5 EARNINGS/(LOSS) PER SHARE, Continued
<TABLE>
<CAPTION>
Three months ended Six months ended
December 31, December 31,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income attributable to
common shareholders $ 2,097 (93) $ 3,431 (1,307)
Interest on AZWELL loan, net 8 16
Preferred dividends, net 298 376
---------- ------- ---------- -------
Net income available to common
shareholders after giving effect to dilution $ 2,403 (93) $ 3,823 (1,307)
========== ======= ========= =======
Diluted earnings/(loss) per share $ 0.08 $ 0.00 $ 0.14 ($0.07)
========== ======= ========= =======
Weighted average number of common
shares and equivalents 31,980,985 27,642,848
========== ==========
</TABLE>
Diluted earnings per share for the three and six month periods ended
December 31, l997 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.
Note 6 COMMITMENTS AND CONTINGENT LIABILITIES
In September 1998, the Company entered into an operating lease for
office space in the US for its corporate offices for a term of 90
months expiring in March, 2006. Under the terms of the lease, the
Company is obligated to make rental payments of $321 during fiscal
1999, $589 during fiscal 2000 through fiscal 2005, and $418 during
fiscal 2006.
Note 7 COMPREHENSIVE INCOME
Effective July 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 "Reporting Comprehensive Income." This
Statement requires that companies disclose comprehensive income, which
includes net income, foreign currency translation, minimum pension
liability adjustments and unrealized gains and losses on marketable
securities classified as available for sale. For the Company,
comprehensive income is the same as net income/(loss).
11
<PAGE>
AMBI INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
(unaudited)
Note 8 SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Six Months Ended
December 31,
1998 1997
---- ----
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid for interest $ 168 $83
Cash paid for income taxes 50 7
Supplemental schedule of non-cash financing activities:
Obligation for purchase of property & equipment $ 220 --
Obligation for N21 contingent payment $ 1,142 --
Obligation related to Series C redemption $ 250 --
</TABLE>
On August 11, 1997, the Company acquired the net assets of Nutrition 21
in exchange for $10 million in cash and 500,000 shares of the Company's
common stock. In connection with the acquisition, liabilities were
assumed as follows:
Fair value of assets acquired $11,645
Cash purchase price (10,000)
Stock issued (1,188)
--------
Liabilities assumed $ 457
========
Note 9 SUBSEQUENT EVENTS
On January 21, 1999, the Company acquired substantially all of the
assets and assumed certain of the liabilities of Optimum Lifestyle,
Inc. ("Seller") relating to the business (the "Business") of
developing, producing, and marketing dietary supplements, primarily
nutrition bars which are marketed under the trademark "Lite-Bites"
through the QVC Inc. television network. These products are
manufactured to proprietary specifications under agreements with third
party manufacturers. The purchase price paid by the Company at the
closing was $6,000,000 in cash (the "Cash Purchase Price") and
1,304,347 shares of common stock of the Company. Additional contingent
payments will be made to the Seller depending primarily on sales levels
of the Business achieved during the five year period following the
closing, payable in preferred stock of the Company and up to $5,500,000
in cash. A portion of the Cash Purchase Price was provided pursuant to
an Amended and Restated Revolving Credit and Term Loan Agreement (the
"Loan Agreement") with State Street Bank and Trust Company (the
"Bank"), dated January 21, 1999, which Loan Agreement amended and
restated a prior agreement with the Bank, and the balance was funded
from internal working capital. Loans from the Bank bear interest at the
prime rate plus 1% and are due February 1, 2002. The owners of the
shares of capital stock of Seller have entered into consulting and
non-competition agreements with the Company.
12
<PAGE>
AMBI INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
(unaudited)
Note 9 SUBSEQUENT EVENTS, Continued
On January 27, 1999, the Company issued 575 shares of the Company's new
Series F Preferred Stock with a face value of $575,000 in exchange for
all of the Series D Preferred Stock, which currently has a face value
of $575,000. The Series F Preferred Stock has a fixed conversion price
of $1.25 per share in contrast to the variable conversion rate of the
Series D Preferred Stock. The fixed conversion rate is subject to
adjustment in certain circumstances. The Series F Preferred Stock bears
dividends at a rate of 10% per annum payable in cash or, at the option
of the Company, in shares of Common Stock, is subject to conversion at
any time at the option of the holder, and is subject to mandatory
conversion after three years.
13
<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
Historically, the Company's revenues have been attributable primarily
to sales of its own products. Since the acquisition of Nutrition 21
on August 11, l997, the Company's revenues have been primarily
derived from the sale of nutrition products to manufacturers of
vitamin and mineral supplements and to a lesser extent from the sale
of Wipe Out(TM) Dairy Wipes and Cardia(R) Salt. The Company has also
received royalty income from users of its patented technology and
milestone payments from research partners.
Cost of goods sold includes both direct and indirect manufacturing
costs. Research expenses include internal expenditures as well as
expenses associated with third party collaborators. Selling, general
and administrative expenses include salaries and overheads, third
party fees and expenses, royalty expenses for licenses and
trademarks, and costs associated with the selling of the Company's
products. The Company capitalizes patent costs and
acquisition-related goodwill and intangible assets, and amortizes
them over periods of one to twenty years.
On August 11, l997, the Company acquired the entire beneficial
interest in Nutrition 21, a limited partnership. Nutrition 21 is
engaged in the business of developing, producing, and marketing
proprietary nutrition products and dietary supplements. The purchase
price for the acquisition was $10,000,000 in cash plus 500,000
restricted shares of Common Stock of the Company, and additional cash
payments which are contingent upon the achievement of certain sales
level in the four years following acquisition. The Company will also
pay royalties to the sellers on sales of certain patented products.
Of the $10 million cash paid at closing, $3.3 million was provided
pursuant to a Loan Agreement with State Street Bank and Trust Company
("SSBT") and the remainder came from internal working capital. The
loan which bears interest at SSBT's prime rate plus one percent was
repaid in January 1999 in conjunction with the acquisition of the
business and assets of Optimum Lifestyle, Inc. in January 1999.
The acquisition of Nutrition 21 was accounted for under the purchase
method. Based upon the allocation of purchase price, the transaction
resulted in $10.7 million of identifiable intangible assets,
primarily patents and trademarks, and $1.0 million of goodwill. These
amounts include approximately $2.5 million of identifiable intangible
assets and $0.2 million of goodwill recorded in connection with
amounts due under a contingent consideration clause in the Nutrition
21 purchase agreement. As additional contingent consideration is
earned, the Company will allocate these amounts in accordance with
the original purchase price allocation. The Company is amortizing the
goodwill over 15 years and amortizing the identifiable intangible
assets over their useful economic lives, which range from three to 15
years.
Results of Operations
The Company has an accumulated deficit due primarily to historical
operating losses, the write-off of purchased goodwill (amortized over
five years from 1986 - 1990) and purchased research and development
costs (written-off in the year ended June 30, l993).
14
<PAGE>
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations, Continued
Total Revenues
Net sales increased 3.0% to $5,964 for the three months ended
December 31, l998 from $5,789 for the three months ended December 31,
l997. The increase of $175 is due to increased Nutrition 21 ("N21")
sales when compared to the comparable quarter a year earlier. Net
sales for the six months ended December 31, 1998 increased 30.4% to
$11,779 as compared to $9,032 for the six months ended December 31,
l997. The increase in net sales is primarily due to the inclusion of
N21 sales for the entire six month period ended December 31, l998, as
well as continued growth in N21 revenues.
License revenues of $1.0 million for the three and six month periods
ended December 31, l998, is comprised entirely of license fees
received from the Whitehall-Robins Healthcare division of American
Home Products Corporation in accordance with the License, Option and
Marketing Agreement entered into on October 8, l998.
Cost of sales
Cost of sales was $617 and $1,295 for the three and six month periods
ended December 31, l998, as compared to $695 and $1,350 for the three
and six month periods ended December 31, l997. The decrease in cost
of sales is primarily due to increased proportion of higher margin
ingredient revenues.
Gross profit as a percentage of net sales was 89.7% and 89.0% for the
three and six month periods ended December 31, l998 as compared to
88.0% and 85.0 % for the three and six month periods ended December
31, l997. The increase in gross profit percentage reflects a sales
mix which included higher margin ingredient products of Nutrition 21
in the three and six month periods ended December 31, l998 as
compared to the same period a year earlier. Nutrition 21 products had
a gross profit percentage of approximately 92% for the three and six
months ended December 31, l998 as compared to approximately 91% for
the quarter and six months ended December 31, l997. Other products
had an average gross profit percentage of approximately 73% for the
three months and 65% for the six months ended December 31, l998 as
compared to 61% and 52% for the comparable periods a year earlier.
Selling, general and administrative expenses (SG&A)
SG&A expense for the three and six month period ended December 31,
l998 of $2,861 and $5,474, respectively, decreased $55 and $132,
respectively, as compared to the three and six month periods ended
December 31, l997. The decrease is primarily due to reduced
promotional expenses for ingredient products partially offset by
increases in general and administrative expenses.
Research and development expenses
Research costs decreased $689 and $697 for the three month and six
month periods ended December 31, l998 when compared to the three and
six month periods ended December 31, l997. The decrease is
attributable to the Company's decision to reduce research activities
related to its infectious disease drug business.
15
<PAGE>
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations, Continued
Operating Income/(Loss)
The Company's reported operating income of $2,538 and $4,016 for the
three and six month periods ended December 31, l998 increased $1,912
and $4,127 when compared to the three and six month periods ended
December 31, l997. The increase in gross profit on the Company's
sales, the $1.0 million in licensing revenue and cost containment
programs in the three and six month periods ended December 31, l998,
were the primary reasons for the improvement.
Interest income, net
Interest income, net of interest expense, was $23 for the three
months ended December 31, l998 as compared to interest expense, net
of interest income of $146 for the three months ended December 31,
l997. The improvement is due primarily to a reduction in debt levels
and from interest earned from funds received from American Home
Products (see footnote 4).
Income taxes
Income taxes for the three and six month period ended December 31,
l998 of $166 and $257, respectively, increased $116 and $200,
respectively, when compared to the comparable periods last year. The
increase is primarily due to estimated federal and state income taxes
from the Company's increased profitability and to estimated federal
alternative minimum tax.
Other income, net
During the six months ended December 31, l998, and in conjunction
with the relocation of the Company's headquarters operations in
September 1998 to Purchase, NY, the Company received $404 when it
vacated the prior premises. Also included in other income, net is
$361 of costs associated with the relocation. The decrease in Other
income, net arises primarily from a reduction in sponsored
pharmaceutical-related research.
Net Income/(Loss) and Earnings Per Share
Net income for the three and six month periods ended December 31,
l998 of $2,395 and $3,807 increased $1,965 and $4,101 as compared to
net income/(loss) of $430 and $(294) for the three and six month
periods ended December 31, l997. Basic and diluted earnings per share
for the three months ended December 31, l998 were $0.08 as compared
to $0.00 basic and diluted earnings per share for three months ended
December 31, l997. Basic and diluted earnings per share for the six
month period ended December 31, l998 were $0.14 as compared to basic
and diluted loss per share for the six months ended December 31, l997
of $(0.07).
Quarterly Variations
On a quarter-to-quarter basis, the Company's sales and income may
vary widely, as a result of various factors. Such factors may include
customers placing orders in anticipation of a price increase,
customers adjusting finished goods inventory and planned variations
in marketing, promotion and product development expenses. 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.
16
<PAGE>
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations, Continued
Liquidity and Capital Resources
As of December 31, l998, the Company had a working capital surplus of
$3.7 million. Cash and cash equivalents were $5.6 million. The
Company has taken steps to improve its working capital position by
increasing revenues and reducing operating expenses. With the closing
of the AHP transactions (discussed below), the Company has restored a
working capital surplus. On June 30, l998, the Company had a working
capital deficit of $2.3 million and cash equivalents of $2.1 million.
As of December 31, l998, the Company had a term loan balance of $1.9
million with State Street Bank & Trust Company ("SSBT"). The Company
had originally borrowed $3.3 million in August 1997 from SSBT to fund
the acquisition of Nutrition 21. At December 31, 1997, the Company
refinanced the then existing $2.8 million balance of the loan. Under
the revised terms, the term loan was to be amortized through monthly
payments of principal and interest over a 30 month period at an
interest rate equal to the prime rate plus one percent. SSBT also
continued to provide a revolving credit line, based upon the Company
meeting certain levels of inventory and receivables, of up to $4.0
million. All amounts owing under the term loan and the revolving
credit line are due by the expiration date of the credit line. As of
December 31, 1998 the Company had no borrowings under the revolving
credit line. In January 1999, in conjunction with the acquisition of
the business and substantially all of the assets of Optimum
Lifestyle, Inc., the then outstanding balance of the term loan was
repaid and a new loan was entered into for a portion of the purchase
price.
On October 8, l998, the Company entered into agreements to form a
strategic alliance with American Home Products Corporation ("AHP").
Under a License, Option and Market agreement, AHP's Whitehall-Robins
Healthcare Division ("W-R") was granted, for $1.0 million, an
exclusive license to sell the Company's Cardia(R) Salt in retail
markets in the United States. Under a separate Stock Purchase
Agreement, AHP, on October 8, l998, paid $1.15 per share, or a total
of $4.0 million, for 3,478,261 shares of newly issued common stock.
The Company retained the exclusive rights to market its products in
both direct response and ingredient channels.
In accordance with the Purchase Agreement for the acquisition of
Nutrition 21, the Company recorded on its balance sheet at December
31, l998, a current liability of $1.1 million for the contingent
payment due in September 1999 to the former owners of Nutrition 21 as
provided for in the acquisition agreement. On September 30, l998, the
Company paid the former owners of Nutrition 21 approximately $3.3
million representing the full amount of the contingent payment due
for the 12 month period September 1997 through August 1998. The
Company utilized cash generated from operations to satisfy the
contingent payment obligation.
In March 1996, the Company entered into an agreement with AZWELL,
Inc. (formerly Nippon Shoji Kaisha), under which AZWELL agreed to
provide research funding and equity and debt financing in return for
exclusive rights to certain nisin based drug products in Japan and
certain other Asian countries. In conjunction with that Agreement,
AZWELL invested $2.0 million in the Company's Common Stock and loaned
the Company another $2.0 million which can be repaid, at the
Company's option, with the Company's Common Stock upon meeting
certain milestones. The Company has advised AZWELL that one
milestone, FDA acceptance of its Investigational New Drug application
for diseases of the colon, has been met and as a result the Company
intends to repay $1.0 million of the loan with its Common Stock and
$1.0 million in cash from operations. The loan is payable in full in
March 1999.
17
<PAGE>
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations, Continued
On December 10, l998, the Company issued 1,500 shares of new Series E
Preferred Stock ("Series E") with a par value of $0.01 per share. The
Series E was exchanged for $1,500,000 face amount of the Company's
outstanding Series C Preferred Stock. All remaining shares of Series
C Preferred Stock were redeemed for $1.0 million in cash and the
issuance of 324,689 shares of the Company's Common Stock.
The Company's primary sources of financing are cash generated from
continuing operations and the SSBT revolving line of credit. The
availability under the SSBT revolving line of credit is based on the
Company's accounts receivable and inventory. At December 31, l998,
the Company had no borrowings under this line.
The Company believes that cash generated from operations and cash
available under the line of credit will provide sufficient liquidity
to fund operations for the next twelve months. The Company continues
to eliminate expenditures that are not critical to the process of
generating sales.
Future acquisition activities and any increases in research and
development expenses over the present level may require additional
funds. Also, the Company is obligated to repay the borrowings to SSBT
in February 2002. The Company intends to seek any necessary
additional funding through arrangements with corporate collaborators,
through public or private sales of its securities, including equity
securities, or through bank financing arrangements. The Company does
not currently have any specific arrangements for additional financing
and there can be no assurance that additional funding will be
available at all or on reasonable terms.
Year 2000
The Company is analyzing the nature and extent of work required to
make its products, systems and infrastructure Year 2000 compliant.
The Company uses a number of computer software programs and operating
systems in its internal operations, including applications in
financial business systems, product development, marketing and
various other administrative functions. To the extent that these
software applications contain source code that is unable to
appropriately interpret the upcoming year "2000", some level of
modification or possibly replacement of such applications may be
necessary. The Company is in the process of inventorying all software
and hardware components and has begun to upgrade software on its
systems which are Year 2000 compliant. The Company has asked its
suppliers to determine whether there are any Year 2000 problems which
could affect the Company, and to provide assurances that they will
not permit a Year 2000 problem to interfere with performance under
agreements with the Company. The Company has received responses from
its suppliers and customers and the Company is currently evaluating
these responses. To the extent that the Company is uncertain as to
its key suppliers compliance, it may choose to increase certain key
product inventories during 1999 to assure continuity of operations.
The Company continues to evaluate the estimated costs associated with
its Year 2000 compliance efforts. While these efforts involve some
additional costs, the Company believes, based on available
information, that it will be able to manage its total Year 2000
transition without material adverse effect on its business, financial
condition, or operating results.
Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 131
"Disclosures about Segments of an Enterprise and Related
Information." 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. This
statement is effective for financial statements for annual periods
beginning after December 15, l997.
18
<PAGE>
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations, Continued
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities," SFAS No. 133 requires companies
to recognize all derivatives as assets or liabilities measured at
their fair value. Gains or losses resulting from changes in the
values of those derivatives would be accounted for depending on the
use of the derivative and whether it qualifies for hedge accounting.
It is not expected that adoption of these statements will have a
material impact on the Company's financial position or operating
results.
19
<PAGE>
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
The Company was a defendant in a lawsuit brought in 1997 in the United States
District Court for the Southern District of New York (Civil Action No. 97
Civ.5802 (BDP)) by RCN Products, Inc. ("RCN"). RCN sued under the Lanham Act and
New York General Business Law, alleging that the term "Salt Alternative" used by
AMBI to describe its Cardia(R) product, amounts to unfair competition by leading
consumers to believe that the Cardia product is salt free. Effective November 9,
1998, the Company and RCN settled the lawsuit.
Item 2 - Changes in Securities and Use of Proceeds
(a) On December 10, 1998, AMBI Inc. (the "Company") issued 1,500 shares of new
Series E Preferred Stock in exchange for $1,500,000 face amount of the Company's
outstanding Series C Preferred Stock. All remaining shares of Series C Preferred
Stock were redeemed for cash and Common Stock. The Company also entered into an
agreement with the holders of its Series D Preferred Stock to exchange all of
the Series D Preferred Stock, which currently has a face value of $575,000, for
575 shares of the Company's new Series F Preferred Stock also with a face value
of $575,000. This exchange was consummated on January 27, l999 following
effectiveness of a registration statement for the underlying Common Stock (see
Note 9 Subsequent Events). Both the Series E and Series F Preferred Stock have a
fixed conversion price of $1.25 per share in contrast to the variable conversion
rates of the Series C and Series D Preferred Stock. The fixed conversion rate is
subject to adjustment in certain circumstances. The Series E and Series F
Preferred Stock bear dividends at a rate of 10% per annum payable in cash or, at
the option of the Company, in shares of Common Stock. Both new series of
Preferred Stock are subject to conversion at any time at the option of the
holder and are subject to mandatory conversion after three years.
(b) On October 8, l998, the Company issued 3,478,261 shares of newly issued
Company common stock to American Home Products Corporation for $1.15 per share
or a total of $4.0 million.
Item 4 - Submission of Matters to a Vote of Security Holders
The Company's annual meeting of stockholders was held on December 17, 1998. The
following actions were taken at the meeting:
Election of Directors Votes For Votes Against
P. George Benson, PhD 23,915,397 432,780
Audrey T. Cross, PhD 23,835,397 512,780
Robert E. Flynn 23,918,347 432,830
Marvin Moser, MD 23,835,347 512,830
Fredric D. Price 23,915,297 432,880
Robert E. Pollack, PhD 23,835,397 512,780
Creation of a new 1998 Stock Option Plan authorizing the Company to issue up to
2,500,000 shares of Common Stock to directors, officers, employees, and others
who render services to the Company
Votes For 15,118,539; Votes Against 1,178,814; Abstentions 135,562, and
7,915,262 Unvoted.
Appointment of KPMG Peat Marwick LLP as auditors for the fiscal year ending June
30, 1999;
Vote For 24,138,635; Votes Against 114,604; and Abstentions 94,438
20
<PAGE>
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) The Company filed a report on Form 8-K relating to the exchange of its
Series C and D Preferred Stock for Series E and F Preferred Stock,
respectively (filed on December 11, 1998) consisting of Item 5 (Other
Information) and Item 7 (Exhibits).
21
<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 11, 1999 By: /S/ Fredric D. Price
--------------------
Fredric D. Price
President and Chief Executive Officer
(Principal Executive Officer)
/S/ Gerald A. Shapiro
---------------------
Gerald A. Shapiro
Vice President and Chief Financial Officer
(Principal Financial Officer)
22
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<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
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0
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