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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, 1999 Commission File Number 0-14983
AMBI INC.
(Exact Name of Registrant as Specified in its Charter)
New York 11-2653613
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4 Manhattanville Road
Purchase, New York 10577-2197
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including Area Code: (914) 701-4500
-------------------------
Securities registered pursuant to Section 12(b) of the Act:
Common Stock (par value $.005 per share)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock (par value $.005 per share)
Title of Class
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve (12) months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past ninety (90) days.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
registrant's best knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of voting stock held by non-affiliates of the
Registrant was approximately $53,301,379 as of September 22, 1999.
The number of shares outstanding of Registrant's Common Stock as of September
22, 1999: 30,494,215.
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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 11
Item 3 Legal Proceedings 11
Item 4 Submission of Matters to a Vote of Security Holders 12
PART II
Item 5 Market Price of Registrant's Common Equity and
Related Stockholder Matters 13
Item 6 Selected Financial Data 14
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 7a Quantitative and Qualitative Disclosures About Market Risk 22
Item 8 Financial Statements and Supplementary Data 22
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 22
PART III
Item 10 Directors and Executive Officers of the Registrant 23
Item 11 Executive Compensation 28
Item 12 Security Ownership of Certain Beneficial Owners
and Management 34
Item 13 Certain Relationships and Related Transactions 35
PART IV
Item 14 Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 37
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PART I
Item 1. BUSINESS
The Company
AMBI Inc. (the "Company") is a New York corporation that was
incorporated on June 29, 1983 and currently concentrates its business primarily
on research, development, manufacturing, and sales of Nutrition Products. The
Company supports the value of its Nutrition Products with "pharmaceutical-type"
clinical trials. The Company's Nutrition Products are developed for consumers
concerned primarily about cardiovascular health and diabetes.
On December 12, 1996, the Company completed the sale of its UK-based
food ingredients subsidiary, Aplin & Barrett Limited ("A&B") to Burns Philp &
Company Limited ("BP") for $13.5 million in cash and the return to the Company
of 2.42 million shares of the Company's Common Stock held by BP. The sale
included the Company's nisin-based food preservative business. The Company
retained exclusive rights to its nisin-based pharmaceutical and animal
healthcare business.
On August 11, 1997, the Company acquired the entire beneficial interest
in Nutrition 21, a limited partnership. Nutrition 21 is engaged in the business
of developing, producing, and marketing proprietary nutrition products and
dietary supplements. The purchase price for the acquisition was $10.0 million
(the "Cash Purchase Price"), plus 500,000 restricted shares of Common Stock of
the Company, and additional cash payments that are contingent upon the
achievement of certain sales levels in the four years following acquisition. The
Company will also pay royalties to the sellers on sales of certain patented
products. Part of the Cash Purchase Price was provided pursuant to a loan from
State Street Bank and Trust Company ("SSBT") and the remainder came from
internal working capital. All of the proceeds from the SSBT loan were repaid as
of January 21, 1999. The products acquired from Nutrition 21 constituted a large
majority of the Company's revenues during the fiscal year ended June 30, 1999.
On September 17, 1998, the Company entered into a strategic alliance
with American Home Products Corporation ("AHP") for the right to distribute
certain of the Company's proprietary nutrition products in certain retail
channels in the U.S. As part of the alliance, Whitehall-Robins Healthcare
Division was granted an exclusive license to sell the Company's
Cardia(Registered) Salt under the "Cardia" trademark in retail markets in the
United States and received a first negotiation option for exclusive rights and
licenses for additional nutrition products for retail distribution in the United
States. In addition, on October 8, 1998, AHP paid $1.15 per share, or a total of
$4.0 million, for 3,478,261 shares of newly-issued Common Stock from the
Company. Also on October 8, 1998, the Company received a non-refundable payment
of $1.0 million from AHP for the rights granted under the agreement. The Company
retained the exclusive rights to market its products in both direct response and
ingredient channels.
On January 21, l999, the Company acquired substantially all of the
assets and assumed certain of the liabilities of Optimum Lifestyle, Inc. ("OLI")
relating to the business of developing,
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producing, and marketing dietary supplements, primarily nutrition bars that are
marketed under the registered trademark "Lite Bites" through the QVC, Inc.
("QVC") television network (the "Lite Bites Business"). These products are
manufactured to proprietary specifications under agreements with third party
manufacturers. The purchase price paid by the Company was $6.0 million,
including related transaction costs (the "Cash Purchase Price"), and 1,304,347
restricted shares of Common Stock of the Company. Part of the Cash Purchase
Price was provided pursuant to a Revolving Credit and Term Loan Agreement (the
"Loan Agreement") with SSBT and the remainder came from internal working
capital. The Loan Agreement amended and restated the loan entered into in
connection with the acquisition of Nutrition 21, and bears interest at SSBT's
prime rate plus 1% and is due February 1, 2002. Additional contingent payments
will be made to the Seller depending primarily on sales levels of the Lite Bites
Business achieved during the five year period following closing and/or the
availability of Lite Bites products through certain distribution channels.
Nutrition Products
Nutrition Products may take the form of either foods or beverages and
can include vitamins, minerals, enteral and parenteral supplements, other
dietary supplements, healthy foods, functional foods, special dietary foods, and
medical foods, and are sometimes referred to colloquially as "nutraceuticals".
The Company develops Nutrition Products that are regulated by the 1994
Dietary Supplement Health and Education Act (DSHEA) and the Orphan Drug Act, and
markets its products to consumers, physicians, pharmacists, dietitians, other
health care professionals, and other companies, and supports the use of these
products with data from clinical studies. In addition, the Company conducts
clinical studies to further strengthen the medical and scientific rationale for
these products.
Ingredient Products
The Company develops, manufactures, and markets essential trace
elements used primarily as ingredients in nutritional supplements. Currently,
the Company's primary product is chromium picolinate. A composition of matter
patent for chromium picolinate and its uses is exclusively licensed for its
duration to Nutrition 21 by the United States Department of Agriculture
("USDA"), and expires August 8, 2000. In addition to the composition of matter
patent, the Company owns eight patents which cover certain chromium compositions
and their uses, including three patents that expire in 2009, for the use of
chromium picolinate in the management of cholesterol, glucose control, and
increasing lean body mass and reducing body fat. The Company also owns a patent
for a novel chromium picolinate complex, which the company calls
"Chromax(Registered) Plus", that also covers the use of the chromium picolinate
complex in the management of cholesterol, glucose control, and increasing lean
body mass and reducing body fat. This improved chromium picolinate complex
contains combinations of chromium, picolinic acid, and various nutrients for
enhancing the benefits of chromium picolinate alone. New Chromax Plus complexes
should provide added benefits to people concerned about these issues, and is
planned for development, in a different form,
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as a prescription drug for people with steroid-induced diabetes. Chromax Plus
complexes will have patent protection into the year 2018. See "Proprietary
Rights."
AMBI and Nutrition 21 have demonstrated the safety and efficacy of
Chromax chromium picolinate in more than 15 well-controlled clinical trials for
people concerned about maintaining healthy blood glucose levels, increasing lean
body mass and reducing body fat, and promoting healthy cholesterol levels. In
1999, scientists presented research at a symposium during the 59th annual
scientific sessions of the American Diabetes Association (ADA) that supports the
emerging role for the dietary supplement Chromax(Registered) chromium picolinate
in the management of diabetes.
Babak Bahadori, MD, of the University of Graz in Austria found that
chromium picolinate may enhance the effects of metformin and oral sulfonylureas,
the most commonly used drugs in the treatment of diabetes. Dr. Bahadori's data
suggest that in obese patients with Type 2 diabetes receiving a sulfonylurea and
metformin, supplementation with chromium picolinate significantly lowered
fasting insulin levels without a detrimental effect on glucose control.
The ability of chromium picolinate to lower fasting insulin levels in
patients already receiving diabetic medications is clinically important because
an elevated insulin level in the blood is an established risk factor for
cardiovascular disease. These findings provide justification for the use of
chromium picolinate as a nutritional adjunct in the dietary management of
diabetes.
Additional research conducted in 1999 by William T. Cefalu, MD,
Associate Professor of Medicine in the Endocrinology, Diabetes and Metabolism
Unit at the University of Vermont College of Medicine described an improvement
in insulin sensitivity in obese people with pre-diabetic symptoms who received
Chromax(Registered) chromium picolinate.
Furthermore, Alexander Ravina, MD, of the Diabetes Department at the
Linn Clinic in Haifa, Israel, published results of a clinical trial in Diabetic
Medicine that showed that chromium picolinate reduced or eliminated the symptoms
in 41 out of 44 patients with steroid-induced diabetes after standard drug
therapy failed. In Dr. Ravina's study, the 41 patients who had developed
diabetes as a result of undergoing steroid treatment and who benefited from
Chromax(Registered) chromium picolinate were able to reduce or eliminate their
diabetic medication, such as insulin. Patients were given Chromax(Registered)
supplements starting at daily doses of 600 micrograms of chromium and gradually
decreasing them to 200-400 micrograms daily within one week.
Chromium picolinate is marketed by the Company under its registered
trademark Chromax(Registered). In addition, the Company also markets zinc
picolinate and selenium formulations. The Company has funded and continues to
fund research studies investigating the uses of chromium picolinate and other
micro-nutrients or minerals as dietary supplements with preventative and
therapeutic benefits to humans. In 1996, chromium picolinate was approved by the
U.S. Food and Drug Administration ("FDA") for use as a supplement in animal feed
for swine. In addition to sales for human consumption, the Company sells
chromium picolinate for use in certain animal feed applications.
The Company has its products manufactured and formulated to its
specifications by
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contract manufacturers as bulk raw materials. The Company then sells the raw
materials to customers who incorporate them into over 900 finished products such
as vitamin/mineral formulas, dietary supplements, baked goods, beverages and
other products. These products are sold by the Company's customers under a
variety of brands throughout the world through natural/health food stores,
supermarkets, drug stores, and mass merchandisers, and also through direct sales
and catalogues sales. The Company has approximately 50 raw materials customers.
During the year ended June 30, 1999, Leiner Health Products accounted for
approximately 12% of revenues.
The Company is developing new micro-nutrients such as arginine silicate
and others for which the Company has patent protection, and may commercialize
these or other products.
Retail Products
In October 1995, the Company acquired an exclusive license from a
division of Orion Corporation ("Orion"), of Finland, to sell Orion's patented
salt in the United States. The Company began selling Cardia(Registered) Salt in
April 1996. This product has reduced sodium compared to regular salt and
contains potassium and magnesium, essential minerals that have been shown to
promote healthy blood pressure. High blood pressure, or hypertension, affects
approximately 50 million Americans. The Company has conducted and is continuing
to conduct clinical trials on Cardia Salt. For example, two separate studies
released in April and May 1997, respectively, compared the use of Cardia Salt
and regular salt in hypertensive patients and found reduced blood pressure in
the patients who used Cardia Salt. On September 17, 1998, the Company licensed
Cardia Salt to AHP for sale in U.S. retail markets. See "The Company."
In January 1999, the Company acquired the Lite Bites Business. Lite
Bites products are sold by the Company to QVC who offers them for sale to
consumers in the US primarily via QVC's direct response television programs. The
Lite Bites products constitute part of a fat fighting system and have
demonstrated weight loss when used as part of a program including diet
modification and exercise. In addition, the Company is working with QVC to
expand the Lite Bites product offerings and to broaden geographic penetration in
certain QVC international markets. In August 1999, the Company and QVC entered
into a strategic alliance that provides for the expansion of distribution of
Lite Bites nutrition products outside the U.S., introduction of a new line of
products called Sweet Support(Trademark) that addresses the special dietary
needs of people with diabetes, and test marketing of a new Company product line
composed of multiple nutrition products. In connection with the alliance, AMBI
issued to QVC 420,000 performance-based warrants to purchase the Company's
Common Stock. During the year ended June 30, 1999, QVC, Inc. accounted for
approximately 12% of revenues.
Other Products
The Company is evaluating other proprietary Nutrition Products in the
areas of cardiovascular disease, diabetes, infectious disease, and
gastrointestinal disorders. The Company is developing nisin, a member of the
lanthocin class of peptides, for use as a "probiotic" to promote a healthy
balance of intestinal flora.
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Pharmaceutical Products
The Company's infectious disease drug technology is centered around the
compound nisin, a member of the lanthocin class of peptides, as a potential
treatment for infections of the colon. All other infectious disease programs
have been curtailed.
In fiscal 1998, the Company determined that it did not have the
resources necessary to take pharmaceutical products for the treatment of
infectious diseases from the development stage through regulatory filings and
ultimately to the marketplace, should a product be proven to be safe and
efficacious. Therefore, the Company is seeking corporate partners to develop and
commercialize these products.
With respect to drugs requiring FDA review and approval, during each
phase of the development process, scientific and business evaluations of the
cost, risk, and potential return on investment are undertaken on a product by
product basis. There can be no assurance that a development program will
continue should there be a negative evaluation of the cost and risks of
continuing to develop a particular product. Drug product candidates undergo
extensive safety and efficacy testing and must have approval of a New Drug
Application ("NDA") from the FDA prior to commercialization in the U.S. See
"Governmental Regulation.
Infections of the colon: The Company has developed an oral delivery
form of nisin for the treatment of antibiotic-associated diarrhea caused by
Clostridium difficile (C. difficile) and for the eradication of Vancomycin
Resistant Enterococci (VRE) that inhabit the colon. These infections can be
especially severe for patients with cancer, AIDS, or those who are in intensive
care units. Nisin is able to kill C. difficile and VRE with relatively little
affect on the normal flora of the colon. In June 1997, the Company announced
results of a human study demonstrating that nisin was successfully delivered
orally, in the form of a tablet, to the colon. In November 1997, the Company
received clearance from the U.S. FDA to begin human clinical testing of a novel
nisin tablet for infections of the colon. The Company does not anticipate that a
product for treating infections of the colon will be available for marketing for
at least several years.
Mastitis infections: The Company developed a moistened towel using a
nisin-based formulation that is for use in preparing dairy cows for milking.
Trials in dairy cows at Cornell Veterinary College showed the product to be
effective. The Company launched the product under its trademark Wipe
Out(Trademark) Dairy Wipes in April 1996.
Pharmaceutical Partners
In March 1996, the Company entered into an exclusive Agreement with
AZWELL, Inc. (formerly Nippon Shoji Kaisha, Ltd. of Osaka, Japan), under which
AZWELL agreed to provide research funding, and equity and debt financing, in
return for exclusive rights to develop and market certain nisin-based drug
products in Japan, certain Asian countries, Australia and New Zealand. In
connection with the agreement, AZWELL invested $2.0 million in the Company's
Common Stock and loaned the Company another $2.0 million which could be repaid,
at the Company's option, with the Company's Common Stock upon meeting certain
milestones. The Company advised AZWELL
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that one milestone, FDA acceptance of its Investigational New Drug application
for diseases of the colon, was met. On March 18, 1999, the Company exercised its
right and repaid $1.0 million of the loan with its Common Stock and repaid the
other $1.0 million in cash.
The Development and License Agreement, and Supply Agreement with the
Astra/Merck Group of Merck & Co., Inc., related to developing and marketing
certain nisin-based drugs for treating ulcer disease, was mutually terminated
during the fiscal quarter ended June 30, 1999.
Governmental Regulation
Healthcare
Products that are intended for use in the diagnosis, cure, mitigation,
treatment or prevention of disease in humans or animals are subject to extensive
governmental regulation. All such products must undergo extensive
characterization, and are subject to regulation for quality assurance,
toxicology and safety. Products containing such agents must undergo thorough
preclinical and clinical evaluations of performance as to safety and efficacy
under approved protocols.
To take a pharmaceutical product from the discovery stage through
research and preclinical development to the point where the Company and/or its
partners can make the necessary filings (to the FDA and governmental agencies
outside the U.S.) to conduct human clinical trials may take several years.
Regulatory requirements for human clinical trials are substantial, depend upon a
variety of factors, vary by country, and will further add to the time necessary
to determine whether a product candidate can be approved for human use. The
Company does not have any pharmaceutical products that have completed this
process. There can be no assurance that the Company's proposed drug product will
prove to be safe and effective under these regulatory procedures. See also
"Pharmaceutical Products."
Depending upon the ingredients of a specific product, some nutrition
products can be marketed in the U.S. under the Dietary Supplement Health and
Education Act (DSHEA) or the Orphan Drug Act. The Company's nutrition products
fall in regulatory categories that do not require FDA approval for marketing,
but are subject to monitoring by the FDA. In addition to FDA regulations, the
Federal Trade Commission ("FTC") regulates product advertising claims. Prior to
the Company's acquisition of Nutrition 21, Nutrition 21 and the FTC entered into
a consent agreement, which culminated in an FTC order that, among other things,
requires that claims for dietary supplements be supported by competent and
reliable scientific evidence. The order requires that Nutrition 21 advise its
customers who resell chromium picolinate to the public not to make claims which
are not supported by competent and reliable scientific evidence.
Research and Development
The Company conducts preclinical, formulation, and clinical trials on
its products and product candidates. These efforts are conducted with industrial
and academic co-workers in various countries. During the fiscal years ended June
30, 1999, 1998 and 1997, approximately $1.8 million,
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$2.7 million, and $4.8 million were spent on research and development by the
Company.
Proprietary Rights
Cardia, CardiaNutrition, Lite Bites, and Lite Bites Fat-Fighting System
Chewies are registered trademarks used by the Company in the U.S. Wipe Out is a
trademark of the Company with applications for registration filed in the U.S.
and other countries. Chromax, Selenomax, Zinmax, and Magnemax are among the
registered trademarks owned by Nutrition 21: Chromax for chromium picolinate;
Selenomax for high selenium yeast and yeast-free selenium; Zinmax for zinc
picolinate; and Magnemax for manganese picolinate. The Company is developing
other nutrition products to be sold under its CardiaNutrition and other
trademarks.
Nutrition Patents
The Company owns 16 patents on Nutrition Products. Nutrition 21 has an
exclusive license from the USDA for the duration of a patent that covers the
composition of chromium picolinate and its uses, which patent expires August 8,
2000. The USDA license grants Nutrition 21 the exclusive right to manufacture,
use, and sell chromium picolinate in the United States. The Company owns three
U. S. patents expiring in 2009 relating to the use of chromium picolinate for
reducing hyperglycemia and stabilizing the level of serum glucose (glucose
control), for reducing undesirable levels of blood serum lipids (management of
high cholesterol), and increasing lean body mass and reducing body fat (body
composition). The Company also owns a U. S. patent expiring in 2018 for a novel
chromium picolinate complex, which the Company calls Chromax Plus, that contains
combinations of chromium, picolinic acid, and various nutrients for enhancing
the benefits of chromium picolinate alone, and its uses for glucose control,
management of high cholesterol, and for body mass composition. The Company owns
other patents relating to, among other things, chromium/biotin treatments for
reducing hyperglycemia and stabilizing levels of serum glucose, magnesium
taurate treatments of cardiac conditions, and arginine-silicate-inositol
complexes for preventing or inhibiting atherosclerosis which expire during the
period from 2015 through 2018. The Company also has other patent applications,
including patent applications on other enhanced chromium picolinate compositions
and their uses. The Company maintains non-disclosure safeguards, including
confidentiality agreements, with employees, certain consultants, and Science
Advisory Board members. There can be no assurance, however, that others may not
independently develop similar technology or that secrecy will not be breached
despite any agreements that exist.
Pharmaceutical Patents
The Company owns more than 160 patents relating to, among other things,
the expression and production of proteins by recombinant Bacillus strains;
plasmid vectors and methods of construction; expression and production of
recombinant lysostaphin; novel bacteriocin compositions and their use as broad
spectrum bactericides; the use of bacteriocin compositions to treat bovine
mastitis; the use of bacteriocin compositions in oral healthcare; the use of
bacteriocin compositions on skin for healthcare and hygiene; and the use of
bacteriocin compositions in gastrointestinal healthcare.
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The Company maintains trade secret protection for bacterial strains,
technical know-how, and other information it considers proprietary and
beneficial for the manufacture, use, regulatory approval, and marketing of the
Company's products.
Manufacturing
The Company's products are manufactured for the Company by
subcontractors who manufacture to the Company's specifications and use the
Company's manufacturing technology. The Company believes that these
manufacturers can be readily replaced, except that there may be a delay in
commencing nisin production at another facility. However, the Company believes
that it has adequate inventory of products to accommodate a suspension in the
manufacture of any of its products. There are numerous sources of supply for all
of the raw materials used in the manufacture of the Company's products.
Marketing and Sales
Selling Products in Retail Channels
In September 1998, the Company entered into a strategic alliance with
the Whitehall-Robins Healthcare Division of American Home Products ("AHP") under
which AHP is licensed to sell the Company's Cardia(Registered) Salt under the
"Cardia" trademark in retail markets in the United States. AHP also received
options to obtain exclusive rights and licenses for additional Company nutrition
products for retail distribution in the U.S. and Canada.
Selling Products Through Direct Response Channels
In January 1999, as a result of the Company's acquisition of the Lite
Bites Business, the Company began selling Lite Bites through QVC's direct
response television programs. In August 1999, the Company and QVC entered into a
strategic alliance which provides for the expansion of distribution of Lite
Bites nutrition products outside the U.S., introduction of a new line of
products called Sweet Support(Trademark) that addresses the special dietary
requirements of people with diabetes, and test marketing of a new Company
product line composed of multiple nutrition products.
The Company is testing a variety of direct response distribution
systems including direct mail, the Internet, and catalogs.
Selling Products as Ingredients
In fiscal 1999, the majority of the Company's revenues were generated
from the sale of ingredients products including Chromax(Registered) chromium
picolinate, Selenomax(Registered) selenium, and Zinmax(Registered) zinc
picolinate. The Company sells the ingredients to many customers throughout the
U.S. for incorporation into their product lines. Customers include Leiner Health
Products, Twin Laboratories, Weider, Rexall Sundown, General Nutrition Centers,
and other large food and dietary supplement marketers.
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Chromium is an essential trace mineral needed for carbohydrate, protein
and fat metabolism and for the normal function of insulin. According to the
USDA, it is likely to be in short supply in the average American diet. The
Company is the only licensed supplier of chromium picolinate (a patented
composition) in the United States and owns patents for essential uses of
chromium picolinate; at the retail level, sales of chromium picolinate are
estimated to be more than $125 million.
Employees
As of June 30, 1999, the Company had 41 full-time employees, of whom 4
were executive employees, 16 were administrative, 9 were engaged in marketing
and sales, and 12 were involved in research, process and product development,
and manufacturing. The Company does not have a collective bargaining agreement
with any of its personnel and considers its relationship with its employees to
be satisfactory.
Item 2. PROPERTIES
Since September 1998, the Company maintains its headquarters at 4
Manhattanville Road, Purchase, New York 10577-2197 (Tel: 914-701-4500). Pursuant
to a seven and one-half year sublease entered into September 1998, the Company
is paying an annual rent for its headquarters location in the amount of
$589,420, which sum is due in monthly installments. The rent is subject to
annual increases over the term of the lease based on increases in certain
building operating expenses. In November 1998, the Company relocated its
laboratories to 777 Old Saw Mill River Road, Tarrytown, New York 10591 (Tel:
914-347-7110). Pursuant to a lease that expires in November 2003, the annual
rent is $29,590.
The Company maintains a sales office in support of its ingredients
products business at 1010 Turquoise Street, San Diego, California 92109 (Tel:
619-488-1021). Pursuant to a lease that expires in April 2002, the annual rent
on this office is $38,034. The Company also maintains an office in support of
its Lite Bites business at 180 Harbor Drive, Sausalito, California 94965 (Tel:
415-289-0333). Pursuant to a lease that expires in January 2000, the annual rent
on this office is $18,540.
Item 3. LEGAL PROCEEDINGS
The Company was a defendant in a lawsuit brought in 1997 in the United
States District Court for the Southern District of New York (Civil Action No. 97
Civ.5802 (BDP)) by RCN Products, Inc. ("RCN"). RCN sued under the Lanham Act and
New York General Business Law, alleging that the term "Salt Alternative" used by
AMBI to describe its Cardia(Registered) product, amounts to unfair competition
by leading consumers to believe that the Cardia product is salt free. Effective
November 9, 1998, the Company and RCN settled the lawsuit.
The Company in the ordinary course of its business has brought several
patent infringement actions against companies that are selling chromium
picolinate in violation of the Company's patent rights. As of this date, these
actions are ongoing, and the Company intends to vigorously protect its
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proprietary rights.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the Company's shareholders during the
fiscal quarter ended June 30, 1999.
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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 were traded on Nasdaq
Small Cap Market under the symbol "AMBIW", until they expired on November 30,
1997.
The Company has not paid a cash dividend to its public shareholders on
its Common Stock. The Company intends to retain all earnings for the foreseeable
future for use in the operation and expansion of its business and, accordingly,
the Company does not contemplate paying any cash dividends on its Common Stock
in the near future.
The following table sets forth the high and low sales prices as
reported by the Nasdaq National Market for the Common Stock, and bid prices
quoted for the Warrants. The bid quotations for the Company's Warrants have been
reported by the National Association of Securities Dealers, Inc. and represent
quotations by dealers without adjustments for retail mark-ups, mark-downs or
commissions and may not represent actual transactions.
Common Stock Warrants
|
Fiscal Quarter Ended | High Low High Low
- ----------------------------|---------------------------------------------------
|
September 30, 1997 | $3.375 $1.938 $0.313 $0.188
|
December 31, 1997* | $4.00 $1.75 $0.281 $0.016
|
March 31, 1998 | $2.25 $1.25
|
June 30, 1998 | $2.188 $1.188
|
September 30, 1998 | $1.50 $0.625
|
December 31, 1998 | $2.00 $0.625
|
March 31, 1999 | $1.688 $1.063
|
June 30, 1999 | $2.969 $1.063
* Warrants expired November 30, 1997
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Item 6. SELECTED FINANCIAL DATA
The following tables summarize selected consolidated financial data
that are qualified by the more detailed financial statements included herein.
Figures are stated in thousands of dollars, except per share amounts.
<TABLE>
<CAPTION>
Selected Statement of Year Ended June 30,
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Operations Data: 1999(4) 1998(2) 1997(1) 1996 1995
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<S> <C> <C> <C> <C> <C>
Total Revenues $28,301 $20,758 $11,280 $16,022 $11,726
Gross Profit 23,519 17,802 6,282 9,669 8,468
Operating Income/(Loss) 6,469 1,467 (16,635) (4,621) 440
Income/(Loss) before taxes (3) 6,347 1,168 (6,661) (4,434) 537
Income Taxes 482 116 152 285 254
Net Income/(Loss) 5,865 1,052 (6,813) (4,719) 283
Diluted Earnings /(Loss) per Share 0.19 (0.04) (0.38) (0.34) 0.01
<CAPTION>
At June 30,
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Selected Balance Sheet Data: 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Working Capital $1,879 $ (2,269) $7,055 $14,812 $7,333
Total Assets 34,451 20,735 12,754 23,367 13,788
Total Liabilities 12,950 10,437 5,144 6,221 3,163
Long Term Obligations 3,807 1,543 2,184 4,408 2,267
Redeemable Preferred Stock 921 0 0 0 0
Stockholders' Equity 20,670 10,298 7,610 15,646 9,125
</TABLE>
- -----------------------------
(1) The results for the year ended June 30, 1997, are those of the Company
and Aplin & Barrett for the period July 1, 1996 through December 11,
1996 and those of the Company only for the remainder of the fiscal year
(see Item 13-Certain Relationships and Related Transactions).
(2) Consolidated Statements of Operations includes the operations of
Nutrition 21 from August 11, 1997, the date of acquisition.
(3) Includes gain of $9.7 million on sale of Aplin & Barrett in fiscal
1997.
(4) Consolidated Statements of Operations includes the operations of the
Lite Bites business from January 1, 1999, the effective date of
acquisition.
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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.
Overview
The following table sets forth items in the Consolidated Statements of
Operations as a percent of revenues:
Fiscal Year
Percent of Revenues
1999 1998 1997
---- ---- ----
Revenues 100.0% 100.0% 100.0%
Gross profit * 82.2 85.3 51.7
Research & development expense 6.3 12.8 42.8
Selling, general and administrative expense 44.0 58.3 153.5
Operating income (loss) 22.9 7.1 (147.5)
Net income (loss) 20.7 5.1 (60.4)
* Based upon percent of net sales
Results of Operations
1. Fiscal 1999 vs. Fiscal 1998
Revenues
Net sales for fiscal 1999 were $26.9 million, an increase of 34.0%
compared to $20.1 million in fiscal 1998. The increase in net sales is due
primarily to increased ingredient sales of $4.0 million from the August 1997
acquisition of Nutrition 21, and an increase of $3.1 million of product sales
from the January 1999 acquisition of the Lite Bites Business, partially offset
by a decline in sales from pharmaceutical products of $0.3 million.
Other revenues for fiscal 1999 were $1.4 million, an increase of 105.6%
compared to $0.7 million in fiscal 1998. The increase is comprised primarily of
a non-refundable payment for the rights granted to the Whitehall-Robbins
Healthcare division of American Home Products Corporation (AHP) in accordance
with the License, Option and Marketing Agreement entered into in September l998,
partially offset by a decrease of $0.6 million in revenue from pharmaceutical
partners.
15
<PAGE>
Gross Profit
Gross profit of $23.5 million increased $5.7 million or 32.1% in fiscal
1999 compared to $17.8 million in fiscal 1998 which includes $1.4 million of
revenue with no associated costs. Gross profit margins on net sales declined to
82.2% in fiscal 1999 compared to 85.3% in fiscal 1998, reflecting lower gross
margins on Lite Bites products, partially offset by higher gross margin
ingredient product sales.
Research and Development
Research and development expense declined $0.9 million, or 32.8% in
fiscal 1999 compared to fiscal 1998. The decrease is attributable to the
Company's decision to reduce research activities related to its infectious
disease drug business.
Selling, General and Administrative
Selling, general and administrative expense increased $0.4 million, an
increase of 2.9% in fiscal 1999 when compared to fiscal 1998. The increase is
due to greater spending for administrative expense and Lite Bites marketing
expense, partially offset by reduced promotional expenses for ingredient
products.
Operating Income
Operating income for fiscal 1999 was $6.5 million, an increase of 341%
compared to $1.5 million in fiscal 1998. The increase in operating income is
primarily due to the acquisition of the Lite Bites Business combined with
increases in sales of ingredients and a $0.7 million increase in other revenues.
Partially offsetting these increases were higher selling, general and
administrative expense as well as increased amortization costs resulting from
the acquisition of the Lite Bites Business.
Income Taxes
Income taxes for fiscal 1999 were $0.5 million, an increase of $0.4
million, compared to $0.1 million in fiscal 1998. The increase is primarily due
to estimated federal alternative minimum tax and state income taxes from the
Company's increased profitability.
2. Fiscal 1998 vs. Fiscal 1997
Revenues
Net sales for fiscal 1998 were $20.1 million, an increase of 93.9%
compared to $10.4 million in fiscal 1997. The increase in net sales was
primarily due to increased ingredient sales from the August 11, 1997 acquisition
of Nutrition 21. Fiscal 1997 results included revenues from
16
<PAGE>
Aplin & Barrett Limited (A&B) while no revenue was recorded for A&B in fiscal
1998 as the business was sold on December 12, l996. Sales of other products
decreased in fiscal 1998 from fiscal 1997 by a net amount of $3.5 million,
primarily due to a change in marketing and distribution strategy for Cardia
Salt.
Gross Profit
Gross profit increased $11.5 million or 183.4% in fiscal 1998 compared
to $6.3 million in fiscal 1997. Gross profit margins increased to 85.8% in
fiscal 1998 compared to 55.7% in fiscal 1997. The increase in both gross profit
dollars and gross profit margin was attributable primarily to a change in the
sales mix from fiscal 1997. Nutrition 21 product sales, which comprised 92% of
fiscal 1998 revenues, had an average gross profit of approximately 90%. In
fiscal 1997, cost of goods sold on A&B products, which comprised 53% of total
revenue, were approximately 40% of revenue. In both fiscal 1998 and fiscal 1997,
the Company's other products had cost of goods ranging from 50% to 90% of
revenue.
Research and Development
Research and development expense declined $2.2 million, or 45.0% in
fiscal 1998 when compared to fiscal 1997. The decrease in expense in fiscal 1998
was due to the Company's decision to reduce research activities related to the
infectious disease drug business.
Selling, General and Administrative
Selling general and administrative expense decreased $5.2 million, or
30.1% in fiscal 1998 when compared to fiscal 1997. The primary reason was a
decrease in marketing and sales expenditures of $6.3 million related to
reductions and refocusing of marketing and promotional expenses in support of
Cardia Salt and Wipe Out Dairy Wipes, offset somewhat by increased marketing and
promotional expenses related to Nutrition 21.
Operating Income
Operating income increased $18.1 million or 108.9% in fiscal 1998 over
fiscal 1997. The Company became profitable in fiscal 1998 due to revenues from
Nutrition 21 and by reducing non-ingredient marketing and sales expense as well
as research and development costs.
Business Segments
The Company operates in two business segments - Nutritional Products
and Pharmaceutical Products.
Nutritional Products
1. Fiscal 1999 vs. Fiscal 1998
Nutritional Products revenues were $27.4 million in fiscal 1999, an
increase of 44.4% compared to $19.0 million in fiscal 1998. The increase in
revenues is due to increased ingredient, sales of $4.0 million from the August
1997 acquisition of Nutrition 21, combined with product sales of $3.1 million
from the January 1999 acquisition of the Lite Bites Business, and other revenue
primarily attributable to fees and royalties from AHP.
17
<PAGE>
Nutritional Products operating income was $6.3 million in fiscal 1999,
an increase of 196.3% compared to $2.1 million in fiscal 1998. The increase is
primarily due to the acquisition of the Lite Bites Business, increased sales of
ingredients, and other revenue primarily attributable to fees and royalties from
AHP. Partially offsetting these increases were higher selling, general and
administrative expense as well as increased amortization costs resulting from
the acquisition of the Lite Bites Business.
2. Fiscal 1998 vs. Fiscal 1997
Nutritional Products revenues were $19.0 million in fiscal 1998. There
were no Nutritional Products sales in fiscal 1997. The increase is due to the
acquisition of Nutrition 21 in August 1997.
Nutritional Products operating income was $2.1 million in fiscal 1998.
There was no Nutritional Products operating income in fiscal 1997.
Pharmaceutical Products
1. Fiscal 1999 vs. Fiscal 1998
Pharmaceutical Products revenues were $0.9 million in fiscal 1999, an
decrease of 49.1% compared to $1.8 million in fiscal 1998. The decrease in
revenues is due to non-recurrence of $0.6 million of revenues from
pharmaceutical partners received during fiscal 1999 and from reduced sales of
$0.3 million nisin-based animal health products.
Pharmaceutical Products operating income was $0.1 million in fiscal
1999, an increase of $0.8 million compared to a loss of $0.7 million in fiscal
1998. The increase is primarily due a reduction in research and development
expenses associated with the Company's pharmaceutical products, partially offset
by the decrease in revenues.
2. Fiscal 1998 vs. Fiscal 1997
Pharmaceutical Products revenues were $1.8 million in fiscal 1998, a
decrease of 84.1% compared to $11.3 million in fiscal 1997. The decrease is
primarily due to sale of the A&B food preservatives business in December 1996.
Pharmaceutical Products operating loss was $0.7 million in fiscal 1998,
a reduction of 95.9% compared to an operating loss of $16.6 million in fiscal
1997. The reduction in operating loss is primarily due to elimination of
operating losses at A&B after the sale of the business and reductions in
research and development expenses associated with the Company's pharmaceutical
products.
18
<PAGE>
Liquidity and Capital Resources
Cash and cash equivalents at June 30, l999 were $4.5 million compared
to $2.1 million at June 30, l998. As of June 30, 1999, the Company had a working
capital surplus of $1.9 million compared to a working capital deficit of $2.3
million as of June 30, l998, due primarily to increases in cash and cash
equivalents combined with increases in inventory.
During fiscal year 1999, cash provided by operations was $8.8 million
compared to $1.9 million in fiscal 1998. This increase was due in large part to
higher net income and improved working capital management most notably
improvements in debt and receivable turnover management. Operational cash flows
in fiscal 1999 were reduced by an increase in inventories.
Cash used for investing activities during fiscal 1999 was $10.3 million
compared to $10.6 million in fiscal 1998. The primary uses of cash in fiscal
1999 were for the purchase of the Lite Bites Business on January 21, l999 of
$6.1 million, including related transaction costs, and for a contingent payment
of $2.8 million to the former owners of Nutrition 21.
Cash provided by financing activities for fiscal 1999 was $3.9 million
compared to $2.3 million in fiscal 1998.
On January 21, l999, the Company entered into an Amended and Restated
Revolving Credit and Term Loan Agreement (the "Loan Agreement") with State
Street Bank & Trust Company ("SSBT") which Loan Agreement amended and restated a
prior agreement with SSBT. The Loan Agreement is for a $5.5 million term loan
and a $4.0 million revolving credit facility for the purposes of acquiring the
Lite Bites Business and for general corporate purposes. Loans from SSBT bear
interest at the prime rate plus 1% and are due February 1, 2002. The Company is
making monthly payments of principal and interest on the loan. The Company had
no outstanding balance on the revolving credit facility as of June 30, l999. As
of June 30, 1999, the Company had an outstanding term loan balance of $4.9
million with SSBT.
On September 17, l998, the Company entered into a strategic alliance
with American Home Products Corporation ("AHP"). Under a License, Option and
Marketing agreement, AHP's Whitehall-Robins Healthcare Division was granted, for
$1.0 million, an exclusive license to sell the Company's Cardia(Registered) Salt
in retail markets in the United States. Under a separate Stock Purchase
Agreement, AHP, on October 8, l998, paid $1.15 per share, or a total of $4.0
million, for 3,478,261 shares of newly issued Common Stock. The Company retained
the exclusive rights to market its products in both direct response and
ingredient channels.
In accordance with the Purchase Agreement for the acquisition of
Nutrition 21, the Company recorded on its balance sheet at June 30, l999, a
current liability of $2.9 million for the contingent payment due in September
1999 to the former owners of Nutrition 21 as provided for in the acquisition
agreement. On September 30, l998, the Company paid the former owners of
Nutrition 21 approximately $3.3 million representing the full amount of the
contingent payment
19
<PAGE>
due for the 12 month period September 1997 through August 1998. The Company
utilized cash generated from operations to satisfy the contingent payment
obligation.
In March 1996, the Company entered into an agreement with AZWELL, Inc.
(formerly Nippon Shoji Kaisha), under which AZWELL agreed to provide research
funding and equity and debt financing in return for exclusive rights to certain
nisin based drug products in Japan and certain other Asian countries. In
conjunction with that Agreement, AZWELL invested $2.0 million in the Company's
Common Stock and loaned the Company another $2.0 million which could be repaid,
at the Company's option, with the Company's Common Stock upon meeting certain
milestones. The Company advised AZWELL that one milestone, FDA acceptance of its
Investigational New Drug application for diseases of the colon, was met. On
March 18, l999, the Company exercised its right and settled $1.0 million of the
loan with its Common Stock and repaid $1.0 million in cash.
On December 10, l998, the Company issued 1,500 shares of new Series E
Preferred Stock ("E Preferred") with a par value of $0.01 per share. The E
Preferred, which is convertible into common stock of the Company at a fixed
price of $1.25 per share, was exchanged for $1.5 million face amount of the
Company's outstanding Series C Preferred Stock ("C Preferred"), $1.0 million in
cash, and the issuance of 324,689 shares of the Company's Common Stock. As a
result of this exchange transaction, the Company recorded a one-time incremental
preferred dividend of $242 thousand, representing the excess of the
consideration exchanged over the carrying value of the then outstanding C
Preferred.
On January 27, l999, the Company issued 575 shares of new Series F
Preferred Stock ("F Preferred") with a par value of $0.01 per share. On that
date, the Company's then outstanding 5,750 shares of D Preferred Stock ("D
Preferred") and accrued dividends thereon of $59 thousand were exchanged for
$575 thousand face amount of F Preferred; 78,166 shares of the Company's common
stock and the resetting of the exercise price of the Warrants of the Company,
issued in connection with D Preferred, to $1.25. The F Preferred has a
conversion price of $1.25 per share. The fixed conversion rate is subject to
adjustments in certain circumstances. The F Preferred bears dividends at a rate
of 10% per annum payable in cash, or at the option of the Company, in shares of
Common Stock. As a result of this exchange transaction, the Company recorded a
one-time incremental preferred dividend of $81 thousand, representing the excess
of the consideration exchanged over the carrying value of the then outstanding D
Preferred. The F Preferred is subject to conversion at any time at the option of
the holders, and is subject to mandatory conversion after three years.
The Company's primary sources of financing are cash generated from
continuing operations and the SSBT revolving line of credit. The availability
under the SSBT revolving line of credit is based on the Company's accounts
receivable and inventory. At June 30, l999, the Company had no borrowings under
this line.
The Company believes that cash generated from operations and cash
available under the line of credit will provide sufficient liquidity to fund
operations for the next twelve months. The
20
<PAGE>
Company continues to eliminate expenditures that are not critical to the process
of generating sales.
Future acquisition activities and any increases in marketing and
research and development expenses over the present levels may require additional
funds. Also, the Company is obligated to repay the borrowings to SSBT in
February 2002. The Company intends to seek any necessary additional funding
through arrangements with corporate collaborators, through public or private
sales of its securities, including equity securities, or through bank financing
arrangements. The Company does not currently have any specific arrangements for
additional financing and there can be no assurance that additional funding will
be available at all or on reasonable terms.
Year 2000 Readiness Disclosure
Many computer systems and embedded technologies may experience problems
handling dates beyond the year 1999 and therefore may need to be modified prior
to the Year 2000 in order to remain functional. The company is taking steps to
ensure its readiness for handling dates beginning in the Year 2000.
The Company completed the implementation of Year 2000 readiness of its
critical operational and administrative software during the month of August
1999. The Company will continue to monitor its software vendors for additional
changes that may affect Year 2000 readiness, and will implement such changes, if
required.
The Company has formally communicated with all of its key suppliers to
determine their Year 2000 state of readiness and the extent to which the failure
of any of their systems may impact the Company's operations. The communication
and evaluation process is ongoing. Based upon current information, the Company
estimates that the costs of addressing the Year 2000 issue have not been
material and are expected to continue to be immaterial. To the extent the
Company is uncertain as to any of its key suppliers Year 2000 readiness, it may
choose to increase key product inventories during 1999 to assure continuity of
operations.
The Company currently believes that it is difficult to identify our
most reasonably likely worst case Year 2000 scenario. However, a reasonable
worst case scenario would be a failure by a significant third party in the
supply and distribution chain to remediate its Year 2000 deficiencies that would
continue for several days or more. Any such failure could impair the manufacture
and/or delivery of products.
The Company's Year 2000 efforts are ongoing and the overall plan, as well as the
Company's development of contingency plans, will continue to evolve as new
information becomes available.
Recently Issued Accounting Standards
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires companies to
recognize all derivatives as assets or
21
<PAGE>
liabilities measured at their fair value. Gains or losses resulting from changes
in the values of those derivatives would be accounted for depending on the use
of the derivative and whether it qualifies for hedge accounting.
In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133, an Amendment of FASB Statement No. 133". SFAS No. 137 defers
the effective date of SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" for one year. SFAS No. 133, as amended, is now effective for
all fiscal quarters of all fiscal years beginning after June 15, 2000. The
Company is currently evaluating the impact of SFAS No. 133 on the Company's
financial position and operating results.
Item 7a QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of changes in value of a financial
instrument, derivative or non-derivative, caused by fluctuations in interest
rates, foreign exchange rates and equity prices. The Company has no financial
instruments that give it exposure to foreign exchange rates or equity prices.
The Company's existing term loan with State Street Bank and trust Company bears
interest at a rate equal to the prime lending rate plus one percent. As a
result, the Company does have exposure to changes in interest rates. For
example, if interest rates increase by one percentage point from current levels,
the Company would incur incremental interest expense of $72 thousand through the
scheduled maturity of the term loan on February 1, 2002.
Item 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements are included herein commencing on page F-1.
Item 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
22
<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 and Age Company Position
- --------------------------------------------------------------------------------
Fredric D. Price (53) 1994 President, Chief
Executive Officer,
and Director
Robert E. Flynn (66) 1996 Chairman of the Board
P. George Benson, PhD (53) 1998 Director
Audrey T. Cross, PhD (54) 1995 Director
Sander A. Flaum (62) 1999 Director
Jonathan de la Harpe, PhD (54) 1989 Vice President, Technical
Operations
Marvin Moser, MD (75) 1997 Director
Robert E. Pollack, PhD (59) 1995 Director
Gerald A. Shapiro (52) 1998 Vice President, Finance and
Administration and Chief Financial Officer
Benjamin T. Sporn (61) 1986 Senior Vice President,
General Counsel and
Secretary
Fredric Price has been President, Chief Executive Officer and a
Director of the Company since September 1994. From July 1991 to September 1994,
he was Vice President, Finance and Administration and Chief Financial Officer of
Regeneron Pharmaceuticals, Inc. For more than five years prior to joining
Regeneron, he was head of RxFDP, a consulting firm which provided strategic
planning, market development, and new product introduction services to
pharmaceutical and other health care businesses. From 1973 to 1986 he was at
Pfizer Pharmaceuticals, where he was a Vice President with both line and staff
responsibilities. He has a BA from Dartmouth College and an MBA from the Wharton
School of the University of Pennsylvania.
Robert E. Flynn was elected a Director of the Company in October 1996
and Chairman of
23
<PAGE>
the Board of Directors in October 1997. Mr. Flynn is a Senior Advisor to CSC
Index, management consultants. He served as Chairman of the NutraSweet Company
from June 1990 until he retired in December 1995. Mr. Flynn also served as Chief
Executive Officer of the NutraSweet Company from June 1990 until March 1995.
From 1981 to 1990, he served in various executive capacities with Fisher
Controls International Inc., including Chairman and Chief Executive Officer.
Prior thereto from 1957 to 1981, Mr. Flynn held positions of increasing
importance with The Carborundum Co. Mr. Flynn is also a member of the Board of
Stanley Technology Group. He received a BSc from Loyola College, a BEE from
McGill University and an MBA from Rutgers University.
P. George Benson, PhD, was elected a Director of the Company in July
1998. Dr. Benson is Dean of the Terry College of Business and holds the Simon S.
Selig, Jr. Chair for Economic Growth at the University of Georgia. Dr. Benson
was previously the Dean of the Faculty of Management at Rutgers University and a
professor of decision sciences at the Carlson School of Management of the
University of Minnesota. In 1997, he was appointed by the U.S. Secretary of
Commerce to a three-year term as one of the nine judges for the Malcolm Baldrige
National Quality Award. In 1996, Business News New Jersey named Dr. Benson one
of New Jersey's "Top 100 Business People". He received a BS from Bucknell
University and a PhD in decision sciences from the University of Florida.
Audrey T. Cross, PhD, was elected a Director of the Company in January
1995. Dr. Cross has been Associate Clinical Professor at the Institute of Human
Nutrition at the School of Public Health of Columbia University since 1988. She
also works as a consultant in the areas of nutrition and health policy. She has
served as a special assistant to the United States Secretary of Agriculture as
Coordinator for Human Nutrition Policy and has worked with both the United
States Senate and the California State Senate on nutrition policy matters. Dr.
Cross received a BS in dietetics, a Master of Public Health in nutrition and a
PhD from the University of California at Berkeley, and a JD from the Hastings
College of Law at the University of California at San Francisco.
Sander A. Flaum was elected a Director of the Company in May 1999. Mr.
Flaum has been CEO of Robert A. Becker, Inc. EURO SCG for 10 years, previously
having served in increasingly responsible management positions at Lederle
Laboratories. Mr. Flaum is Adjunct Associate Professor of Marketing at New York
University's Stern School of Business. Mr. Flaum is also a member of the Boards
of Directors of the Fischer College of Business at The Ohio State University,
Hollins Communications Research Institute and Neopharm Corporation. Mr. Flaum
received a BA from The Ohio State University and MBA from Fairleigh Dickinson
University.
Jonathan de la Harpe, PhD, was appointed Vice President, Technical
Operations, of the Company in February 1998. Dr. de la Harpe has been on the
staff at AMBI since 1989, previously holding positions as Group Leader,
Analytical and Biochemistry; Program Manager; Senior Manager, Product
Development; and Director of Technical Operations, Pharmaceutical Products. In
the years 1981 to 1988, Dr. de la Harpe held positions as Post-doctoral Fellow
and later Research Associate at The Rockefeller University, and as Assistant
Professor at Cornell University
24
<PAGE>
Medical College. During this period, Dr. de la Harpe also held positions as a
Visiting Scientist at Genentech Inc., and Scientist at the Friedrich Miescher
Institute in Basel, Switzerland. Dr. de la Harpe holds a BSc (Hons) and PhD from
the University of Cape Town, South Africa.
Marvin Moser, MD was elected to the Board of Directors in October 1997.
He is clinical professor of medicine at Yale and senior medical consultant at
the National High Blood Pressure Education Program of the National Heart, Lung
and Blood Institute. Dr. Moser's work has focused on non-pharmacological
approaches to the prevention and control of hypertension and he has published
extensively on this subject with over 300 publications. He has contributed to
over 30 books and numerous physician and patient education programs. Dr. Moser
is also a member of the Board of The Third Avenue Value Funds. Dr. Moser holds a
BA from Cornell University and an MD from Downstate University College of
Medicine.
Robert E. Pollack, PhD, was elected a Director of the Company in
January 1995. Dr. Pollack has been a Professor of Biological Sciences at
Columbia University since 1978. In addition, from 1982 to 1989 he was Dean of
Columbia College. Prior thereto he was Professor of Microbiology at the State
University of New York School of Medicine at Stony Brook, Senior Scientist at
Cold Spring Harbor Laboratory, Special NIH fellow at the Weizmann Institute in
Israel, and NIH Fellow in the Department of Pathology at New York University
School of Medicine. He is the author of more than one hundred research papers on
the molecular biology of viral oncogenesis, a dozen articles in the popular
press, and three books. He received a BA in physics from Columbia University and
a PhD in biology from Brandeis University.
Gerald A. Shapiro was appointed Vice President, Finance and
Administration & Chief Financial Officer of the Company in March 1998. From 1996
to 1998, Mr. Shapiro was Managing Director in the Corporate Finance practice at
KPMG Peat Marwick, LLP, specializing in merger and acquisition activities. From
1995 to 1996, he was a Vice President in the Equity Capital Group of GE Capital
Services and also served as Chief Operating Officer and Director of Shoe-Town,
Inc., a GE Capital unit. From 1991 to 1995, Mr. Shapiro was a Managing Director
in the healthcare investment banking group at Furman Selz LLC, concentrating on
pharmaceuticals and medical devices. Prior to that, he held senior executive
positions at Equitable Capital Management Corporation and ITT Corporation with
primary focus on mergers and acquisitions. Mr. Shapiro received a BEE from City
College of New York and an MBA from the Columbia University Graduate School of
Business.
Benjamin T. Sporn has been legal counsel to the Company since 1990 and
has served as Secretary of the Company since 1986, and was appointed Senior Vice
President and General Counsel in February 1998. He was an attorney with AT&T
from 1964 until December 1989 when he retired from AT&T as a General Attorney
for Intellectual Property Matters. Mr. Sporn was a director of the Company from
1986 until 1994. He received a BSE degree from Rensselaer Polytechnic Institute
and a JD degree from American University.
The directors serve for a term of one year and until their successors
are duly elected and qualified. Officers serve at the pleasure of the Board of
Directors. There are no family relationships among directors or executive
officers.
25
<PAGE>
Arrangements Regarding the Election of Directors
So long as BP owns at least 20% of the Company's outstanding common
stock, BP is entitled to nominate one member for election to the Company's
Board. See Item 13. Certain Relationships and Related Transactions.
Committees of the Board of Directors
The Company has an audit committee consisting of Mr. Flynn and Dr.
Benson. In addition, the Company has a compensation committee consisting of Dr.
Cross, Mr. Flynn and Dr. Pollack. During the year ended June 30, 1999, the audit
committee met two times, and the compensation committee met two times.
Science Advisory Board
The Company has certain scientific advisors with expertise in areas of
benefit to the Company, who serve on its Science Advisory Board and consult with
the Company concerning the Company's research and development programs.
Following are members of the Science Advisory Board working with the
Company:
Robert E. Pollack, PhD - Dr. Pollack has been a Professor of Biological
Sciences at Columbia University since 1978. In addition, from 1982 to 1989 he
was Dean of Columbia College. Prior thereto he was Professor of Microbiology at
the State University of New York School of Medicine at Stony Brook, Senior
Scientist at Cold Spring Harbor Laboratory, Special NIH fellow at the Weizmann
Institute in Israel, and NIH Fellow in the Department of Pathology at New York
University School of Medicine. He is the author of more than one hundred
research papers on the molecular biology of viral oncogenesis, a dozen articles
in the popular press, and three books. He received a BA in physics from Columbia
University and a PhD in biology from Brandeis University.
Gordon Archer, MD - Dr. Archer is Chairman, Division of Infectious
Diseases, and Professor of Medicine and Microbiology/Immunology at Virginia
Commonwealth University, Medical College of Virginia. He is an authority on
resistance of staphylococci to antimicrobial agents and has focused his research
on development of innovative chemotherapeutic approaches to treating infectious
diseases. Dr. Archer is the author of more than 75 scientific papers and book
chapters and the editor of a definitive text on staphylococcal diseases. He
holds a BA from Washington and Lee University and an MD from the University of
Virginia Medical School.
Edward Goldberg, PhD - Dr. Goldberg is professor of molecular biology
and microbiology at the Tufts University School of Medicine, Dentistry and
Veterinarian Medicine. He is an authority on the mechanism of recognition and
infection of bacteria by viruses. He has also done extensive research on the
genetics, structure and function of ion exchanges related to bacterial pH
control and multi drug antiporters in bacteria. He holds a BA in Chemistry from
Columbia University and a PhD in Biology from Johns Hopkins University.
26
<PAGE>
Richard Novick, MD - Dr. Novick is professor of medicine and
microbiology at New York University Medical School and an Investigator at the
Skirball Institute for Biomolecular Medicine. During a postdoctoral fellowship
at the National Institute for Medical Research in Mill Hill, England, he
discovered the first plasmids in Staphylococci, those responsible for penicillin
resistance. Dr. Novick holds a BS from Yale University and an MD with honors in
Microbiology from New York University Medical School.
Marvin Moser, MD - Dr. Moser is clinical professor of medicine at Yale
and senior medical consultant at the National High Blood Pressure Education
Program of the National Heart, Lung and Blood Institute. Dr. Moser's work has
focused on non pharmacological approaches to the prevention and control of
hypertension and he has published extensively on this subject with over 300
publications. He has contributed to over 30 books and numerous physician and
patient education programs. Dr. Moser holds a BA from Cornell University and an
MD from Downstate University College of Medicine.
Stephen R. Peikin, MD - Dr. Peikin is professor of medicine and head of
the division of gastroenterology and liver diseases at Cooper Hospital Medical
Center, the Robert Wood Johnson Medical School, Camden, New Jersey. He is an
authority on the release of the hormone cholecystokinin and its effects on
satiety. He is the holder of a US patent on a method of stimulating satiety
through the administration of an oral trypsin inhibitor. He holds a BA from
Temple University and an MD from the Thomas Jefferson University.
Dr. Pollack is Chairman of the Science Advisory Board. Members of the
Science Advisory Board receive a per diem fee of $1,000 for each meeting of the
Board attended by them, plus reasonable expenses. In addition, the Company has
issued to each member of the Science Advisory Board stock options to purchase
10,000 shares of the Company's Common Stock. The options so issued have exercise
prices ranging from $1.875 to $3.00 per share and are vested. Such options
expire five years from the date of grant. See Note 11 of the Notes to
Consolidated Financial Statements.
27
<PAGE>
Item 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid or accrued by the
Company during the three fiscal years ended June 30, 1999 (i) to its Chief
Executive Officer and (ii) to the four highest paid employees of the Company and
a former officer whose cash compensation exceeded $100,000 in the fiscal year
ended June 30, 1999.
SUMMARY COMPENSATION TABLE (1)(2)(4)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Name and Principal Long-Term All Other
(a) Annual Compensation Compensation Compensation
(a) (c) (d) (e) (i)
-----------------------------------------------------------------------------------
Period Salary($) Bonus($) Securities ($)
Underlying
Options/SARs
(#)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Fredric D. Price, President Chief 7/1/96 - 6/30/97 275,000 90,000 35,000
Executive Officer and Director
7/1/97 - 6/30/98 275,000 75,000 465,000
7/1/98 - 6/30/99 275,000 200,000 21,154
- -------------------------------------------------------------------------------------------------------------------------
Jonathan de la Harpe, Vice 7/1/96 - 6/30/97 89,000 10,000
President, Technical Operations
7/1/97 - 6/30/98 113,000 10,000
7/1/98 - 6/30/99 129,923 15,000
- -------------------------------------------------------------------------------------------------------------------------
Alan Gallantar, Treasurer and 3/23/98 - 6/30/98 33,654 90,000
Controller
7/1/98 - 6/30/99 146,212 5,333
- -------------------------------------------------------------------------------------------------------------------------
Steven Morvay, Vice President - 7/13/98 - 6/28/99 153,846 52,885
Marketing and Sales (3)
- -------------------------------------------------------------------------------------------------------------------------
Gerald A. Shapiro, Vice 3/9/98 - 6/30/98 49,231 75,000
President - Finance &
Administration & 7/1/98 - 6/30/99 160,000 25,000 10,666
CFO
- -------------------------------------------------------------------------------------------------------------------------
Benjamin T. Sporn, Senior Vice 7/1/96 - 6/30/97 127,500 5,000 42,500
President, General Counsel and
Secretary 7/1/97 - 6/30/98 147,000 15,000
7/1/98 - 6/30/99 160,000 30,000 15,000
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The above compensation does not include the use of an automobile and
other personal benefits, the total value of which do not exceed as to
any named officer or director or group of executive officers, the
lesser of $50,000 or 10% of such person's or persons' cash
compensation.
(2) Pursuant to the regulations promulgated by the Securities and Exchange
Commission (the "Commission"), the table omits a number of columns
reserved for types of compensation not applicable to the Company.
28
<PAGE>
(3) Mr. Morvay's employment with the Company terminated June 28, 1999.
(4) All Other Compensation represents loans and interest forgiven.
None of the individuals listed above received any long-term incentive
plan awards during the fiscal year.
Employment Agreements
The Company entered into an employment agreement, effective September
1994, with Fredric Price, which was amended and restated on April 1, 1998. The
agreement has a three-year term that ends on March 31, 2001, and provides for an
annual salary of $275,000 and the forgiveness of one-third of a $59,500 loan on
March 31 of each year of the term so long as Mr. Price is then employed by the
Company. See table of Option/SAR Grants in Last Fiscal Year for information on
certain stock options that have been granted to Mr. Price under the employment
agreement. Although employment under the agreement is at will, if employment is
terminated by the Company under certain circumstances, Mr. Price will receive
one year's salary in a single payment, certain benefits will continue for twelve
months after termination, and all of Mr. Price's stock options will vest.
Stock Option Plans
The Board of Directors has adopted and the shareholders have approved
five Stock Option Plans (the "Plan(s)"):
1. The Incentive Stock Option Plan provides for the grant of qualified
incentive stock options to officers and key employees.
2. The Non-qualified Stock Option Plan provides for the grant of
options to various persons who render certain services to the Company.
3. The 1989 Stock Option Plan provides for the grant of options to
either group that, in the case of employees, may be incentive stock options.
4. The 1991 Stock Option Plan provides for the grant of options to
either group that, in the case of employees, may be incentive stock options.
5. The 1998 Stock Option Plan provides for the grant of options to
either group that, in the case of employees, may be incentive stock options.
Each of the Incentive and Non-qualified Stock Option Plans permits the
purchase of an aggregate of up to 250,000 shares of Common Stock. The 1989 Stock
Option Plan permits the purchase of an aggregate of up to 500,000 shares of
Common Stock. The 1991 Stock Option Plan permits the purchase of an aggregate of
up to 3,000,000 shares of Common Stock. The 1998 Stock Option Plan permits the
purchase of an aggregate of up to 2,500,000 shares of Common Stock. The purpose
of the Plans is to attract and retain competent executive personnel and other
key employees and consultants and to provide incentives to all such persons to
use their effort and skill for the advancement and betterment of the Company by
permitting them to participate in the ownership of the Company.
29
<PAGE>
Options granted as qualified incentive stock options are intended to
qualify as Incentive Stock Options within the meaning of Section 422A of the
Internal Revenue Code of 1986, as amended. The exercise price of Incentive Stock
Options granted under the Plans shall not be less than the fair market value
(110% of the fair market value for 10% or greater shareholders) of the Common
Stock on the date of grant. Incentive Stock Options may not be exercised later
than ten years from the date of grant (five years for 10% or greater
shareholders). Determinations as to recipients of stock options under the Plans
and other terms of such grants are made by the Company's Board of Directors.
The following tables set forth information as of June 30, 1999 with
regard to options granted (i) to the Company's Chief Executive Officer, and (ii)
to other officers of the Company named in the Summary Compensation Table.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Potential Realizable Value
Individual Grants At Assumed Annual Rates
Of Stock Price Appreciation
For Option Term
- ------------------------------------------------------------------------------------------------------------------------------------
Percent Of
Number Of Total
Securities Options Exercise
Underlying Granted To Of Base
Options Employees In Price Expiration
Name Granted (#) Fiscal Year ($/Sh) Date 5% ($) 10% ($)
(a) (b) (c) (d) (e) (f) (g)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
A. Jonathan de la Harpe 15,000 2.46 $1.4375 (1) $13,561 $34,365
B. Alan Gallantar 10,000 1.64 $1.4375 (1) $ 9,040 $22,910
C. Steven Morvay (2) 100,000 16.38 $1.40625 $ 4,289 $ 8,719
D. Fredric D. Price 0 0 - - - -
E. Gerald A. Shapiro 25,000 4.10 $1.4375 (1) $22,601 $57,275
F. Benjamin T. Sporn 25,000 4.10 $1.4375 (1) $22,601 $57,275
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Vesting 20% per year; expiration the earlier of 5 years from vesting or
89 days after termination of employment.
(2) Mr. Morvay's employment with the Company terminated June 28, 1999,
40,000 options vested upon termination and expire December 28, 1999,
and 60,000 options expired upon termination.
30
<PAGE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Individual Grants
- -----------------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
Name Shares Value Number of Unexercised Options Value of Unexercised In-the-
Acquired realized ($) at FY-End (#) Money Options at FY-End
In
Exercise
(#)
--------------------------------------------------------------
Exercisable Unexercisable Exercisable Unexercisable
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Jonathan de la Harpe 0 0 34,000 56,000 $376 $16,511
Alan Gallantar 0 0 10,000 40,000 $3,075 $25,019
Steven Morvay (2) 0 0 40,000 0 $103,200 $0
Fredric D. Price 0 0 669,000 331,000 $77,577 $155,155
Gerald A. Shapiro 0 0 20,000 80,000 $10,788 $68,164
Benjamin T. Sporn 0 0 104,500 53,000 $564 $27,268
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Pension Plans
AMBI Inc.
Eligible employees of the Company are entitled to participate in the
Burns Philp Inc. Retirement Plan for Non-Bargaining Unit Employees, a
non-contributory pension plan (the "Pension Plan") maintained by Burns Philp as
long as Burns Philp maintains the Pension Plan and owns at least 20% of the
Company's outstanding Common Stock. Burns Philp currently holds approximately
25% of the Company's outstanding Common Stock. Assuming retirement at age 65,
the Pension Plan provides benefits equal to the greater of (a) 1.1% of the
employee's final average earnings multiplied by the number of years of credited
service plus 0.65% of the employee's final average earnings in excess of the
average of the contribution and the benefit basis in effect under Section 230 of
the Social Security Act for each year in the 35-year period ending with the year
of Social Security retirement age, multiplied by the employee's years of
credited service up to 35, minus any predecessor plan benefit in the case of an
employee who participated in a
31
<PAGE>
predecessor plan or (b) $24 multiplied by the number of years of credited
service up to 25 years plus $12 multiplied by the years of employment from
26-40 years, minus any predecessor plan benefit in the case of an employee who
participated in a predecessor plan. The "final average earnings" are the
average monthly earnings during the five highest-paid consecutive calendar
years within the last ten calendar years of credited service with the Company.
Earnings include the salary and bonus listed in the summary compensation
table. Earnings which may be considered under the Pension Plan are limited to
$160,000 per year subject to annual cost of living adjustments as determined
by the IRS.
The following table sets forth estimated annual benefits payable upon
retirement, assuming retirement at age 65 in 1999 and a single life annuity
benefit, according to years of credited service and final average earnings. The
benefits listed are not subject to any deduction for Social Security or other
offset amounts.
Years of Credited Service
<TABLE>
<CAPTION>
Final average
earnings 15 20 25 30 35
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$25,000 $4,320 $5,760 $7,200 $8,160 $9,600
$50,000 $9,840 $13,200 $16,440 $19,800 $23,040
$75,000 $16,440 $21,840 $27,360 $32,880 $38,400
$100,000 $22,920 $30,600 $38,280 $45,960 $53,640
$150,000 $36,120 $48,120 $60,240 $72,240 $84,240
$160,000 $38,760 $51,600 $64,560 $77,520 $90,360
and up
</TABLE>
Jonathan de la Harpe, Gerald A. Shapiro, Benjamin T. Sporn and Fredric
D. Price each have 7.0, 1.5, 7.0 and 4.75 years, respectively, of credited
service under the Pension Plan as of June 30, 1999, and, at age 65, would have
approximately 18, 15, 10, and 17 years of credited service, respectively.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission.
Officers, directors and greater than ten-percent shareholders are required by
SEC regulation to furnish the Company with copies of all Section 16(a) forms
they file.
Based solely on review of the copies of such forms furnished to the
Company, or written representations that no Forms 5 were required, the Company
believes that during the period from July 1, 1998 through June 30, 1999, except
as noted below, all Section 16(a) filing requirements
32
<PAGE>
applicable to its officers, directors and greater than ten-percent beneficial
owners were complied with. The Company has information that Steven Morvay, a
former employee, failed to file one or more Forms 4 reporting purchases and
sales of the Company's Common Stock during the fiscal year ended June 30, 1999.
Compensation Committee Interlocks and Insider Participation
The Board of Directors determines executive compensation taking into
consideration recommendations of the Compensation Committee. No member of the
Company's Board of directors is an executive officer of a company whose
compensation committee or board of directors includes an executive officer of
the Company.
Director Compensation
Non-management Directors each receive a quarterly director's fee of
$1,800 and the Chairman of the Board receives a quarterly director's fee of
$3,600. Each also receives $500 for each meeting of the Board attended in
person, $250 for each meeting of the Board attended telephonically, and each
receives annually options to acquire 10,000 shares of Common Stock.
33
<PAGE>
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of September 22, 1999, information
regarding the beneficial ownership of the Company's Common Stock based upon the
most recent information available to the Company for (i) each person known by
the Company to own beneficially more than five (5%) percent of the Company's
outstanding Common Stock, (ii) each of the Company's executive officers and
directors and (iii) all officers and directors of the Company as a group. Unless
otherwise indicated, each stockholder's address is c/o the Company, 4
Manhattanville Road, Purchase, New York 10577-2197.
Shares Owned Beneficially and of Record (1)
Name and Address No. of Shares % of Total
Fredric D. Price (2) 699,651 2.25
Robert E. Flynn (3) 102,000 *
P. George Benson (4) 20,000 *
Audrey T. Cross (6) 54,000 *
Jon de la Harpe (4) 34,000 *
Sander A. Flaum (4) 10,000 *
Alan Gallantar (4) 10,000 *
Marvin Moser (4) 65,000 *
Robert E. Pollack (4) 60,000 *
Gerald A. Shapiro (5) 31,300 *
Benjamin T. Sporn (7) 133,625 *
American Home Products Corporation 3,478,261 11.41
5 Giralda Farms
Madison, NJ 07940
Burns Philp & Company Limited (8) 7,763,837 25.46
7 Bridge Street
Sydney, NSW 2000, Australia
All Officers and Directors 1,219,576 3.86
as a Group (11 persons)
(2)(3)(4)(5)(6) and (7)
- ------------------------------
* Less than 1%
34
<PAGE>
(1) Includes shares issuable within 60 days upon the exercise of all
options and warrants. Shares issuable under options or warrants
are owned beneficially but not of record.
(2) Includes 669,000 shares issuable upon exercise of currently
exercisable options under the Company's Stock Option Plans.
(3) Includes 90,000 shares issuable upon exercise of currently
exercisable options under the Company's Stock Option Plans.
(4) Consists of shares issuable upon exercise of currently
exercisable options under the Company's Stock Option Plans.
(5) Includes 20,000 shares issuable upon exercise of currently
exercisable options under the Company's Stock Option Plans.
(6) Includes 50,000 shares issuable upon exercise of currently
exercisable options under the Company's Stock Option Plans.
(7) Includes 104,500 shares issuable upon exercise of currently
exercisable options under the Company's Stock Option Plans.
(8) Consists of shares owned by subsidiaries.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As of June 30, 1999, BP owned 7,763,837 shares of Common Stock, and
continues such Common Stock ownership as of the date hereof.
On December 12, 1996, the Company completed the sale of its UK-based
subsidiary, A&B to BP in accordance with the terms of a Share Purchase
Agreement. As part of the transaction, BP has provided the Company with a
revolving line of credit of up to $2.5 million. Any borrowings under this line
of credit can be forgiven under certain circumstances. As of the date of filing
this Form 10-K, no amount has been drawn under this line of credit.
In connection with the transaction, the Company and A&B entered into two
License Agreements. Pursuant to the first License Agreement, the Company is
exclusively licensed by A&B for the use of nisin generally in pharmaceutical
products and animal healthcare products. Pursuant to the second License
Agreement, A&B is exclusively licensed by the Company generally for the use of
nisin as a food preservative and for food preservation.
In connection with the transaction, the Company and BP entered into an
Investors' Rights Agreement pursuant to which BP agreed until December 11, 1998,
not to acquire, directly or indirectly, the Company's securities, and to refrain
from selling the Company's Common Stock, except under certain circumstances
through underwritten public offerings and private placement transactions. Until
December 11, 1998 and so long as BP owns at least 10% of the Company's
outstanding common stock, BP will vote its shares in favor of Fredric D. Price
and one nominee of Fredric D. Price for election to the Company's Board. So long
as BP owns at least 20% of the Company's outstanding common stock, BP is
entitled to nominate one member for election to the Company's Board. Currently,
BP has not nominated a member for election to the Company's
35
<PAGE>
Board. The amount of consideration for the sale was arrived at through arms-
length negotiation and a fairness opinion was obtained.
In October 1998, the Company issued 3,478,261 shares of Common Stock to
AHP for $4.0 million. AHP currently holds approximately 11.4% of the Company's
outstanding Common Stock. Under a separate agreement in October 1998, AHP paid
the Company $1.0 million for exclusive rights to sell the Company's Cardia Salt
in retail markets in the United States. See "Business - The Company"
36
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
(a) 1. Financial Statements
The financial statements are listed in the Index to Consolidated
Financial Statements on page F-1 and are filed as part of this
annual report.
2. Financial Statement Schedules
The following financial statement schedule is included herein:
Schedule II - Valuation and Qualifying Accounts
All other schedules are not submitted because they are not
applicable, not required, or because the information is included
in the Consolidated Financial Statements.
3. Exhibits
The Index to Exhibits following the Signature Page indicates the
Exhibits which are being filed herewith and the Exhibits which
are incorporated herein by reference.
(b) Reports on Form 8-K
The Company did not file any Reports on Form 8-K during the
fiscal quarter ended June 30, 1999.
37
<PAGE>
AMBI INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FILED WITH THE ANNUAL REPORT OF THE
COMPANY ON FORM 10-K
JUNE 30, 1999
PAGE
----
INDEPENDENT AUDITORS' REPORT F-2
CONSOLIDATED BALANCE SHEETS AT JUNE 30, 1999 AND 1998 F-3
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE
YEARS ENDED JUNE 30, 1999, 1998 AND 1997 F-5
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997 F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR
YEARS ENDED JUNE 30, 1999, 1998 AND 1997 F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-8
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
AMBI Inc.:
We have audited the consolidated financial statements of AMBI Inc. and
subsidiaries as listed in the accompanying index. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of AMBI Inc. and
subsidiaries as of June 30, 1999 and 1998, and the results of their operations
and their cash flows for each of the years in the three-year period ended June
30, 1999, in conformity with generally accepted accounting principles.
KPMG LLP
Stamford, CT
September 2, 1999
F-2
<PAGE>
AMBI INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1999 1998
-------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $4,458 $2,109
Accounts receivable (less allowance for
doubtful accounts of $242 in 1999 and
$377 in 1998.) 3,980 3,312
Other receivables 473 96
Inventories 1,426 695
Prepaid expenses and other current assets 685 413
------- -------
Total current assets 11,022 6,625
Property and equipment, net 1,066 914
Patents and trademarks (net of accumulated amortization
of $4,362 in 1999 and $2,138 in 1998.) 19,473 11,715
Goodwill (net of accumulated amortization of
$178 in 1999 and $48 in 1998) 2,583 950
Other assets 397 531
------- -------
TOTAL ASSETS $34,541 $20,735
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
AMBI INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1999 1998
-------- --------
<S> <C> <C>
LIABILITIES, REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt and lease obligations $ 1,563 $ 3,052
Accounts payable and accrued expenses 4,262 2,458
Contingent payments payable 3,293 2,747
Preferred dividends payable 25 637
------- -------
Total current liabilities 9,143 8,894
Long-term debt and lease obligations 3,375 1,543
Other long-term obligations 432 -
------- -------
TOTAL LIABILITIES 12,950 10,437
------- -------
Commitments and contingent liabilities
REDEEMABLE PREFERRED STOCK
Series E convertible preferred, 1,500 shares issued and 773
shares outstanding at June 30, 1999 (aggregate liquidation
value Series E $816). 634 -
Series F convertible preferred, 575 shares issued and 343
shares outstanding at June 30, 1999 (aggregate liquidation
value Series F $358). 287 -
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value, authorized 5,000,000 shares;
Series C convertible preferred, no shares issued and
outstanding at June 30, 1999 and 222 shares issued and
outstanding at June 30, 1998 - -
Series D convertible preferred, no shares issued and
outstanding at June 30, 1999 and 22,500 shares issued and
outstanding at June 30, 1998 - -
Common stock, $0.005 par value, authorized 65,000,000 shares;
30,152,306 shares and 20,898,297 shares issued and outstanding
at June 30, 1999 and June 30, 1998, respectively. 150 105
Additional paid-in capital 60,045 54,942
Accumulated deficit (39,525) (44,749)
------- -------
TOTAL STOCKHOLDERS' EQUITY $20,670 $10,298
------- -------
TOTAL LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY $34,541 $20,735
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
AMBI INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net sales $26,911 $20,082 $10,356
Other revenues 1,390 676 924
------- ------- -------
REVENUES 28,301 20,758 11,280
Cost of goods sold 4,782 2,956 4,998
------- ------- -------
GROSS PROFIT 23,519 17,802 6,282
Selling, general & administrative expense 12,456 12,100 17,312
Research and development expense 1,787 2,660 4,833
Depreciation and amortization 2,807 1,575 772
------- ------- -------
OPERATING INCOME/(LOSS) 6,469 1,467 (16,635)
Interest income 189 71 433
Interest expense 397 370 142
Other income, net 86 -- 9,683
------- ------- -------
INCOME/(LOSS) BEFORE
INCOME TAXES 6,347 1,168 (6,661)
Income taxes 482 116 152
------- ------- -------
NET INCOME/(LOSS) $ 5,865 $ 1,052 $(6,813)
======= ======= =======
Basic earnings (loss) per share (note 12) $ 0.20 ($ 0.04) ($ 0.38)
======= ======= =======
Weighted average number of common
shares - basic 26,481,880 20,163,412 19,544,526
========== ========== ==========
Diluted earnings (loss) per share (note 12) $ 0.19 ($ 0.04) ($ 0.38)
======= ======= =======
Weighted average number of common
shares and equivalents - diluted 27,754,827 20,163,412 19,544,526
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
AMBI INC. & SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
<TABLE>
<CAPTION>
Preferred Stock Preferred Stock
Series C Series D Common Stock
Shares $ Shares $ Shares $
------ ---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1996 370 -- -- -- 20,469,776 102
Common stock granted to officers -- -- -- -- 15,326 --
Common stock issued for cash on exercise of options & warrants -- -- -- -- 172,300 1
Preferred stock issued for cash -- -- 45,000 -- -- --
Conversion discount on preferred stock -- -- -- -- -- --
Common stock retired in connection with the sale of Alpin & Barrett
Ltd. -- -- -- -- (2,420,000 (12)
Conversion of preferred stock to common stock including dividends
issued as common stock (148) -- -- -- 545,940 3
Preferred stock dividends -- -- -- -- -- --
Net Loss for the year -- -- -- -- -- --
Arising on translation during the year -- -- -- -- -- --
---- ---- ------ ---- ---------- ----
Balance at June 30, 1997 222 -- 45,000 -- 18,783,342 94
Conversion of Preferred stock to common stock including dividends
issued as common stock -- -- (22,500) -- 1,414,955 7
Conversion discount on preferred stock -- -- -- -- -- --
Common stock issued for Nutrition 21 acquisition -- -- -- -- 500,000 3
Common stock issued for Nutrition 21 consulting agreements -- -- -- -- 200,000 1
Preferred stock dividends -- -- -- -- -- --
Financing cost of warrants issued to State Street Bank -- -- -- -- -- --
Compensation related to issuance of stock options to non-employees -- -- -- -- -- --
Net income for the year -- -- -- -- -- --
-- -- ------ -- ---------- ----
Balance at June 30, l998 222 -- 22,500 -- 20,898,297 105
Conversion of Series D preferred stock to common stock,
including dividends issued as common stock -- -- (16,750) -- 2,696,246 12
Exchange and redemption of Series C preferred stock, including
accrued dividends for common stock and Series E preferred stock (222) -- -- -- 324,689 2
Exchange and redemption of Series D preferred stock, including
accrued dividends for common stock and Series F preferred stock -- -- (5,750) -- 78,166
Premium on redemption of Series F preferred stock
Shares issued in connection with the settlement of AZWELL obligation 780,488 4
Preferred stock dividends -- -- -- -- -- --
Conversion of Series E preferred stock to common stock, including
dividends issued as common stock -- -- -- -- 591,812 3
Issuance of common stock in connection with the acquisition of--
the Lite Bites Business. -- -- -- -- 1,304,347 7
Issuance of common stock to American Home Products -- -- -- -- 3,478,261 17
Compensation related to issuance and repricing of stock options
and warrants to non-employees -- -- -- -- --
Net income for the year -- -- -- -- -- --
---- ---- ------ ---- ---------- ----
Balance at June 30, 1999 -- $ -- -- $ -- 30,152,306 $150
==== ==== ====== ==== ========== ====
<CAPTION>
Additional
Paid-In Accumulated
Capital Deficit Total
$ $ $
---------- ----------- --------
<S> <C> <C> <C>
Balance at June 30, 1996 52,732 (36,522) 15,646
Common stock granted to officers 57 -- 57
Common stock issued for cash on exercise of options & warrants 436 -- 437
Preferred stock issued for cash 4,230 -- 4,230
Conversion discount on preferred stock 173 (173) --
Common stock retired in connection with the sale of Alpin & Barrett
Ltd. (6,340) -- (6,352)
Conversion of preferred stock to common stock including dividends
issued as common stock 128 (131) --
Preferred stock dividends -- (261) (261)
Net Loss for the year -- (6,813) (6,813)
Arising on translation during the year -- -- 666
-------- ------ ------
Balance at June 30, 1997 51,416 (43,900) 7,610
Conversion of Preferred stock to common stock including dividends
issued as common stock 71 -- 78
Conversion discount on preferred stock 1,527 (1,527) --
Common stock issued for Nutrition 21 acquisition 1,185 -- 1,188
Common stock issued for Nutrition 21 consulting agreements 587 -- 588
Preferred stock dividends -- (374) (374)
Financing cost of warrants issued to State Street Bank 33 -- 33
Compensation related to issuance of stock options to non-employees 123 -- 123
Net income for the year -- 1,052 1,052
------- ------ ------
Balance at June 30, l998 54,942 (44,749) 10,298
Conversion of Series D preferred stock to common stock,
including dividends issued as common stock 128 -- 140
Exchange and redemption of Series C preferred stock, including
accrued dividends for common stock and Series E preferred stock (1,729) (242) (1,969)
Exchange and redemption of Series D preferred stock, including
accrued dividends for common stock and Series F preferred stock (379) (81) (460)
Premium on redemption of Series F preferred stock (117) (117)
Shares issued in connection with the settlement of AZWELL obligation 996 1,000
Preferred stock dividends -- (201) (201)
Conversion of Series E preferred stock to common stock, including
dividends issued as common stock 604 -- 607
Issuance of common stock in connection with the acquisition of--
the Lite Bites Business. 1,430 -- 1,437
Issuance of common stock to American Home Products 3,983 -- 4,000
Compensation related to issuance and repricing of stock options
and warrants to non-employees 70 -- 70
Net income for the year -- 5,865 5,865
------- ------- ------
Balance at June 30, 1999 $60,045 ($39,525) $20,670
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements
F-6
<PAGE>
AMBI INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income/(loss) $ 5,865 $ 1,052 $ (6,813)
Adjustments to reconcile net income/(loss) to net cash
provided by/(used in) operating activities:
Depreciation and amortization 2,807 1,575 772
Write-off of patents and trademarks -- 179 --
Provision for doubtful accounts -- 273 37
Loss on disposal of equipment 138 -- 275
Gain on sale of Alpin & Barrett -- -- (9,683)
Nutrition 21 consulting expense 214 168 --
Other, net 62 124 65
Changes in assets and liabilities, net of effect of
acquisition:
(Increase)/decrease in accounts receivable (668) (3,291) 1,283
(Increase) in other receivables (377) -- --
(Increase)/decrease in inventories (610) (89) 646
(Increase) in prepaid and other current assets (272) -- --
(Increase)/decrease in other assets (80) (467) (191)
Increase/(decrease) in accounts payable and accrued
expenses 1,707 (6) (778)
Increase in contingent payments payable -- 2,747 --
Increase/(decrease) in preferred dividends payable -- (374) (153)
Increase in other liabilities -- -- 189
-------- -------- --------
Net cash provided by/(used for) operating activities 8,786 1,891 (14,351)
-------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment (443) (216) (866)
Payments for patents and licensed technology (1,145) (509) (437)
Proceeds from sale of equipment 76 73 --
Payments for acquisitions (6,088) (10,000) --
Cash received upon sale of subsidiary -- -- 13,500
Contingent payment for Nutrition 21 acquisition (2,747) -- --
-------- -------- --------
Net cash (used for)/provided by investing activities (10,347) (10,652) 12,197
-------- -------- --------
Cash flows from financing activities:
Proceeds from term loan borrowings 5,500 3,300 --
Debt repayments (4,036) (919) (8)
Proceeds from issuance of common stock 4,000 -- 437
Capital lease obligation repayments (122) (126) (811)
Redemption of redeemable preferred stock (1,388) -- (1,500)
Proceeds from issuance of preferred stock -- -- 4,230
Preferred dividends paid (44) -- --
-------- -------- --------
Net cash provided by financing activities 3,910 2,255 2,348
-------- -------- --------
Net increase/(decrease) in cash and cash equivalents 2,349 (6,506) 184
Cash and cash equivalents at beginning of period 2,109 8,615 8,431
-------- -------- --------
Cash and cash equivalents at end of period $ 4,458 $ 2,109 $ 8,615
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
AMBI INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Consolidation
The consolidated financial statements for the year ended June
30, 1999 include the results of operations of the Company and
the Lite Bites Business from January 21, 1999. The consolidated
financial statements for the year ended June 30, 1998 include
the results of operations of the Company and its wholly-owned
subsidiary, Nutrition 21, from August 11, 1997. All
intercompany balances and transactions have been eliminated in
consolidation.
b) Use of Estimates
The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements. Estimates also affect the reported
amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
c) Cash Equivalents
The Company considers all highly liquid debt instruments with
original maturities of three months or less to be cash
equivalents. Cash equivalents included in the accompanying
financial statements include money market accounts, bank
overnight investments and commercial paper.
d) Inventories
Inventories are carried at the lower of cost (on a first-in,
first-out basis) or estimated net realizable value.
e) Property and Equipment
Property and equipment are stated at cost less accumulated
depreciation. Depreciation is provided using the straight-line
method over the estimated useful lives. The estimated useful
lives are as follows:
Leasehold improvements -- Term of lease
Furniture and fixtures -- 7 years
Machinery and equipment -- 5 to 10 years
Office equipment -- 3 to 6 years
f) Patents and Trademarks
The Company capitalizes certain patents and trademarks. Patents
and trademarks are amortized over the estimated economic lives
of the assets, ranging from 2 to 15 years.
g) Goodwill
Goodwill represents the excess of cost over the fair value of
net assets acquired and is amortized using the straight line
method over 15 years. The recoverablity of the carrying value
is evaluated on a periodic basis by assessing current and
future levels of operating income and cash flows, as well as
other factors.
h) Revenue Recognition
Sales of product are recognized upon shipment to customers.
Other revenues include amounts received from licensees and
research collaborators.
F-8
<PAGE>
AMBI INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
i) Research and Development
Research and development costs are expensed as incurred.
j) Income taxes
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss
and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the
enactment date. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely
than not that some portion or all of the deferred tax assets
will not be realized.
k) Stock-based Compensation
The Company continues to account for stock-based compensation
using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees". Compensation cost for stock options, if any, is
measured as the excess of the quoted market price of the
Company's stock at the date of grant over the amount an
employee must pay to acquire the stock.
Statement of Financial Accounting Standards ("SFAS") No. 123.
"Accounting for Stock-Based Compensation," established
accounting and disclosure requirements using a fair-value
method of accounting for stock-based employee compensation
plans. The Company has elected to remain on its current method
of accounting as described above, and has adopted the
disclosure requirements of SFAS No. 123.
l) Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed
The Company reviews long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and
used is measured by a comparison of the carrying amount of an
asset to future net cash flows expected to be generated by the
asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceed the fair value. Assets
to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
m) Recently Issued Accounting Standards
In June 1998, the FASB issued SFAS No. 133 "Accounting for
Derivative Instruments and Hedging Activities," SFAS No. 133
requires companies to recognize all derivatives as assets or
liabilities measured at their fair value. Gains or losses
resulting from changes in the values of those derivatives would
be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting.
In June 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133, an Amendment of FASB
Statement No. 133". SFAS No. 137 defers the effective date of
STAS No. 133, "Accounting for Derivative Instruments and
Hedging activities" for one year. SFAS No. 133, as amended, is
now effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000.
F-9
<PAGE>
AMBI INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
m) Recently Issued Accounting Standards, Continued
The Company has not yet made an evaluation of the impact of
adopting these statements on the Company's financial position
or operating results.
n) Reclassifications
Certain reclassifications have been made to prior years'
financial statement amounts to conform to the 1999
presentation.
Note 2: ACQUISITIONS
Lite Bites Business
On January 21, l999, the Company acquired substantially all of the
assets and assumed certain of the liabilities of Optimum Lifestyle,
Inc. ("OLI") relating to the business of developing, producing, and
marketing dietary supplements, primarily nutrition bars which are
marketed under the trademark "Lite-Bites" through the QVC Inc.
television network (the "Lite Bites Business"). These products are
manufactured to proprietary specifications under agreements with
third party manufacturers. The purchase price paid by the Company was
$6.1 million in cash, including related transaction costs, and
1,304,347 shares of restricted Common Stock of the Company, valued at
$1.4 million. In connection with the acquisition, liabilities assumed
were as follows (in thousands):
Fair value of assets acquired $ 7,617
Cash paid, including transaction costs (6,088)
Restricted common stock issued (1,437)
-------
Liabilities assumed $ 92
=======
Additional contingent payments will be made to the former owners of
OLI depending primarily on sales levels of the Lite Bites Business
achieved during the five year period following closing and/or the
availability of Lite Bites products through certain distribution
channels in the future as follows: a maximum of $3.0 million in cash
and/or AMBI common stock, at the option of the former owners of OLI,
payable $1.0 million on each of the first three anniversaries of the
acquisition; $3.0 million in newly issued AMBI preferred stock,
payable $1.5 million on the first and second anniversaries of the
acquisition; and a single payment of $1.0 million in cash, payable
prior to the fifth anniversary of the acquisition. At June 30, 1999
the Company recorded on its balance sheet a current liability of $0.5
million in respect of the contingent payments.
F-10
<PAGE>
AMBI INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2: ACQUISITIONS, Continued
The acquisition was accounted for under the purchase method. Based
upon the allocation of purchase price, the transaction resulted in
$6.1 million in identifiable intangible assets, primarily trademarks
and non-compete agreements, and $1.5 million of goodwill. The Company
is amortizing the goodwill over fifteen years and amortizing the
identifiable intangible assets over their useful economic lives,
which range from 3 to 15 years. During the year ended June 30, l999,
the Company recorded approximately $249 thousand in amortization
expense related to the goodwill and other intangible assets described
above.
Nutrition 21
On August 11, l997, the Company purchased Nutrition 21 for $10.0
million in cash plus 500,000 shares of restricted Common Stock of the
Company.
In connection with the acquisition, liabilities assumed were as
follows (in thousands):
Fair value of assets acquired $ 11,645
Cash purchase price (10,000)
Common stock issued (1,188)
--------
Liabilities assumed $ 457
========
The Purchase Agreement also provides for annual contingent payments
to the former owners of Nutrition 21 for each of the four years after
the closing of $2.5 million, but subject to adjustment for the
achievement of net sales levels of certain products (contingent
consideration clause), and royalties of 2.5% to 5.0% on net sales of
products recommended for certain patented uses. At June 30, l999, the
Company recorded on its balance sheet a current liability of $2.8
million in respect of the contingent payment due in September 1999.
On September 30, l998, the Company paid the former owners of
Nutrition 21 approximately $3.3 million representing the full amount
of the contingent payment due for the 12 month period September 1997
through August 1998.
The following represents the pro forma consolidated results of
operations as if the Company, the Lite Bites Business and Nutrition
21 had been combined for the years ended June 30, 1999 and 1998. The
pro forma results of operations reflect amounts adjusted to their
accounting basis as if the acquisition had occurred at the beginning
of the respective periods. The pro forma information is not
necessarily indicative of the results of operations as they may be in
the future or as they would have been had the acquisition been
effected on the assumed dates. The pro forma information for the
years ended June 30, 1999 and 1998 is as follows (in thousands,
except for per share amounts):
1999 1998
---- ----
Revenues $ 30,208 $28,862
Net income 5,116 3,173
Basic earnings per share 0.19 0.06
Diluted earnings per share 0.18 0.06
Note 3: SALE OF APLIN & BARRETT LTD.
The Company completed the sale of its United Kingdom based food
preservative business, Aplin & Barrett, Ltd. ("A&B"), to Burns Philp
& Company Ltd. ("Burns Philp") on December 12, 1996. As a result, the
operations of A&B are included in the financial statements through
that date. Key terms of the transaction included the payment to the
Company of $13.5 million in cash, ($8.0 million paid on December 12,
1996 and $5.5 million paid on June 12, 1997), and the payment of 2.42
million shares of the Company's common stock held by Burns Philp. The
Company reported a gain of $9.7 million in connection with this sale.
In addition, Burns Philp has provided the Company with a revolving
line of credit of up to $2.5 million that could be forgiven under
certain circumstances related to the performance of the food
preservative business through June 30, 1999. The agreement expired as
of June 30, 1999. The Company borrowed no amounts under the agreement
prior to expiration.
F-11
<PAGE>
AMBI INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4: INVENTORIES
The components of inventories at June 30, l999 and 1998 are as
follows (in thousands):
l999 1998
---- ----
Raw materials $ 373 $ 289
Finished goods 1,053 406
------ ------
Total inventories $1,426 $ 695
====== ======
Note 5: FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value amounts for cash and cash equivalents and accounts
receivable approximate carrying amounts due to the short maturities of
these instruments.
The fair value of long-term debt approximates its carrying value, as
there is no difference between the stated interest rate on the debt and
the current market rate of interest available to the Company for debt
with the same maturities.
Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist principally of cash
and cash equivalents and accounts receivable. The Company places its
cash primarily in market interest rate accounts, overnight investments
and commercial paper. The Company had $3.0 million funds invested in
commercial paper at June 30, 1999.
Note 6: LICENSE, OPTION AND MARKETING AGREEMENT
On September 17, l998, the Company commenced a strategic alliance with
American Home Products Corporation ("AHP") for retail distribution of
the Company's proprietary nutrition products. As part of the alliance,
AHP's Whitehall-Robins Healthcare Division was granted an exclusive
license to sell the Company's Cardia(R) Salt in retail markets in the
United States and received a first negotiation option for exclusive
rights and licenses for additional nutrition products for retail
distribution in the United States. On October 8, l998, the Company
received a non-refundable payment of $1.0 million for the rights
granted to AHP. Also on October 8, l998, AHP paid $1.15 per share or a
total of $4.0 million for 3,478,261 shares of newly issued Company
Common Stock. The Company retained the exclusive rights to market its
products in both direct response and ingredient channels.
Note 7: PROPERTY AND EQUIPMENT, NET
The components of property and equipment, net, at June 30, 1999 and
1998 are as follows (in thousands):
1999 1998
---- ----
Furniture and fixtures $ 421 $ 163
Machinery and equipment 562 538
Office equipment 192 507
Computer equipment 660 398
------ ------
1,835 1,606
Less: Accumulated depreciation (769) (692)
------ ------
Property and equipment, net $1,066 $ 914
====== ======
F-12
<PAGE>
AMBI INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8: LINES OF CREDIT AND LONG-TERM DEBT
Long-term debt consists of the following at June 30, 1999 and 1998 (in
thousands):
1999 1998
---- ----
NSK promissory note $ -- $2,000
State Street term loan 4,875 2,410
Obligations under capital leases 63 185
------ ------
4,938 4,595
Less: Current portion (1,563) (3,052)
------ ------
$3,375 $1,543
====== ======
In March, 1996, the Company issued a $2.0 million note at an interest
rate of 5%, to AZWELL, Inc. (formerly Nippon Shoji Kaisha). In fiscal
1999, the Company, in accordance with the terms of the agreement,
repaid $1.0 million of the note by issuing 780,488 shares of its Common
Stock, and $1.0 million in cash from operating activities.
On January 21, l999, the Company entered into an Amended and Restated
Revolving Credit and Term Loan Agreement (the "Loan Agreement") with
State Street Bank and Trust Company ("SSBT"), which Loan Agreement
amended and restated a prior agreement with SSBT. The Loan Agreement is
for a $5.5 million term loan and a $4.0 million revolving credit
facility for the purposes of acquiring the Lite Bites Business and for
general corporate purposes. Loans from SSBT bear interest at the prime
rate plus 1% and are due February 1, 2002. The Company is making
monthly payments of principal and interest on the loan. There was no
outstanding balance on the revolving loan at June 30, 1999. Payments
due on long-term debt are as follows: fiscal 2000 $1.5 million, fiscal
2001 $1.5 million, fiscal 2002 $1.9 million.
Note 9: ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The following items are included in accounts payable and accrued
expenses at June 30, 1999 and 1998 (in thousands):
1999 1998
---- ----
Accounts payable $1,280 $ 407
Consulting and professional fees payable 989 569
Royalty fees 442 413
Accrued compensation and benefits 700 480
Taxes payable 309 97
Other accrued expenses 542 492
------ ------
$4,262 $2,458
====== ======
F-13
<PAGE>
AMBI INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10: REDEEMABLE PREFERRED STOCK
In October 1995, the Company issued 895 shares of non-voting Series C
Preferred Stock ("C Preferred") for $10,000 per share. At June 30,
1998, 222 shares of C Preferred were outstanding. On December 10,
l998, the Company issued 1,500 shares of new Series E Preferred Stock
("E Preferred") with a par value of $0.01 per share. On that date, the
Company's outstanding C Preferred and accrued dividends thereon of
$542 thousand were exchanged for $1,500 face amount of E Preferred,
$1.0 million in cash and the issuance of 324,689 shares of the
Company's common stock. In addition, the agreement provides for a
payment of at least $250 thousand on the second anniversary of the
agreement. The total amount of the payment is subject to increases
based on increases in the Company's equity securities. The E Preferred
has a conversion price of $1.25 per share. The fixed conversion rate
is subject to adjustments in certain circumstances. The E Preferred
bears dividends at a rate of 10% per annum payable in cash or, at the
option of the company, in shares of Common Stock. As a result of this
exchange transaction, the Company recorded a one-time incremental
preferred dividend of $242 thousand, representing the excess of the
consideration exchanged over the carrying value of the then
outstanding C Preferred. The E Preferred is subject to conversion at
any time, at the option of the holder, and is subject to mandatory
conversion after three years. During fiscal 1999, 727 shares of the
Company's E Preferred plus accrued dividends on these shares, were
converted into 591,812 shares of common stock.
On January 27, l999, the Company issued 575 shares of new Series F
Preferred Stock ("F Preferred") with a par value of $0.01 per share.
On that date, the Company's then outstanding 5,750 shares of Series D
Preferred Stock ("D Preferred") and accrued dividends thereon of $59
thousand were exchanged for $575 thousand face amount of F Preferred,
78,166 shares of the Company's common stock and the resetting of the
exercise price of the Warrants of the Company, issued in connection
with D Preferred, to $1.25. The F Preferred has a conversion price of
$1.25 per share. The fixed conversion rate is subject to adjustments
in certain circumstances. The F Preferred bears dividends at a rate of
10% per annum payable in cash, or at the option of the Company, in
shares of Common Stock. As a result of this exchange transaction, the
Company recorded a one-time incremental preferred dividend of $81
thousand, representing the excess of the consideration exchanged over
the carrying value of the then outstanding D Preferred. The F
Preferred is subject to conversion at any time at the option of the
holders, and is subject to mandatory conversion after three years.
During fiscal 1999, 232 shares of the Company's F Preferred plus
accrued dividends on these shares were redeemed for $0.4 million.
Note 11: STOCKHOLDERS' EQUITY
a. Warrants
The Company had outstanding warrants for the purchase of its
common stock as follows:
<TABLE>
<CAPTION>
Number of Exercise price
warrants per share
--------- --------------
<S> <C> <C>
Outstanding at June 30, 1996 1,786,314 $1.25-$6.75
Issued 569,937 $2.00-$2.72
Expired (153,027) $4.00-$6.00
Exercised (17,331) $1.25-$4.91
----------
Outstanding at June 30, 1997 2,185,893 $1.25-$6.75
Issued 217,460 $1.18-$2.44
Expired (1,022,668) $3.00-$4.91
---------
Outstanding at June 30, 1998 1,380,685 $1.18-$6.75
Issued 100,000 $1.38
---------
Outstanding at June 30, 1999 1,480,685 $1.18-$6.75
=========
</TABLE>
F-14
<PAGE>
AMBI INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11: STOCKHOLDERS' EQUITY, Continued
At June 30, 1999, 1,480,685 shares were issuable upon exercise
of the above warrants. The warrants expire between 2000 and
2006. Certain of the warrants include anti-dilution clauses.
Warrants outstanding and exercisable at June 30, 1999, are as
follows:
<TABLE>
<CAPTION>
Warrants Outstanding Warrants Exercisable
---------------------------------------- -----------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
--------------- ------------ ----------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C>
$1.18 - $1.38 227,460 7.46 $1.27 33,492 $1.20
$1.50 - $2.00 125,499 1.44 $1.72 125,499 $1.72
$2.25 - $2.44 628,937 3.37 $2.28 562,271 $2.26
$4.00 - $4.84 355,408 1.55 $4.76 355,408 $4.76
$6.00 - $6.75 143,381 1.35 $6.31 143,381 $6.31
--------- ---------
1,480,685 1,220,051
========= =========
</TABLE>
b) Stock Based Compensation
On April 10, 1986, the Company adopted a Nonqualified Stock
Option Plan whereby options to purchase 250,000 shares of the
Company's common stock may be granted to consultants and
Scientific Advisory Board members.
The Company adopted four Stock Option Plans ("Plans") whereby
options to purchase an aggregate of 6,250,000 shares of the
Company's common stock may be granted to officers, directors,
employees, consultants and others who render services to the
Company. The exercise price per share for the options granted
under the Plans may not be less than the fair value of the
Company's common stock on the date of grant. The options
issuable pursuant to the Plans expire between 1999 and 2009.
Approximately 2,800,000 options remain available for grant
under the Plans.
A summary of stock option activity related to the Company's
stock option plans is as follows:
<TABLE>
<CAPTION>
Number of Exercise price
options per share
--------- --------------
<S> <C> <C>
Outstanding at June 30, 1996 1,951,380 $1.50 - $7.688
Issued 381,900 $2.00 - $5.625
Expired (282,246) $1.50 - $6.00
Exercised (154,980) $1.50 - $4.375
---------
Outstanding at June 30, 1997 1,896,054 $1.50 - $7.688
Issued 1,371,885 $1.56 - $3.25
Expired (592,486) $1.62 - $7.68
Exercised (608) $1.62
-----------
Outstanding at June 30, 1998 2,674,845 $1.50 - $6.00
Issued 610,470 $0.75 - $2.31
Cancelled (454,030) $0.75 - $5.63
--------
Outstanding at June 30, 1999 2,831,285 $0.75 - $6.75
=========
</TABLE>
Each of these options are entitled to one share of common
stock. Stock options generally vest ratably over five years
from the date of grant and expire within five years from the
date of vesting.
F-15
<PAGE>
AMBI INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11: STOCKHOLDERS' EQUITY, Continued
Options outstanding and exercisable at June 30, 1999 are as follows:
<TABLE>
<CAPTION>
Options Exercisable Options Outstanding
---------------------------------------- -----------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
--------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.75 - $1.25 228,970 3.65 $1.11 50,000 $1.09
$1.38 - $1.97 909,530 3.17 $1.76 255,268 $1.85
$2.00 - $2.94 805,885 3.7 $2.40 583,385 $2.39
$3.00 - $4.84 830,400 3.0 $3.40 693,900 $3.40
$5.19 - $6.75 56,500 4.0 $5.45 31,000 $5.60
--------- ---------
2,831,285 1,613,553
========= =========
</TABLE>
The per share weighted-average fair value of stock options granted
during fiscal 1999, 1998 and 1997 was $1.33, $0.68 and $ 2.43,
respectively, on the date of grant using the Black Scholes
option-pricing model with the following weighted-average assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Risk-free interest rate 5.0% 5.7% 6%
Expected life-years 2.5 2.5 5
Expected volatility 46.1% 46.1% 81%
Expected dividend yield -- -- --
</TABLE>
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized in the financial
statements for its employee stock options which have an exercise price
equal to the fair value of the stock on the date of the grant. Had the
Company determined compensation cost based on the fair value at the
grant date for its stock options under SFAS No. 123, the Company's net
income would have been reduced to the pro forma amounts indicated
below (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net income/(loss)
As reported $5,865 $1,052 ($6,813)
Pro forma 4,963 176 (7,391)
Basic earnings (loss) per share
As reported $ 0.20 ($0.04) ($0.38)
Pro forma 0.16 (0.09) (0.41)
Diluted earnings (loss) per share
As reported $ 0.19 ($0.04) ($0.38)
Pro forma 0.16 (0.09) (0.41)
</TABLE>
The effects of applying SFAS No. 123 in this pro forma disclosure are
not necessarily indicative of future amounts because the calculation
does not take into consideration pro forma compensation expense
related to grants made prior to 1995.
F-16
<PAGE>
AMBI INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12: EARNINGS/(LOSS) PER SHARE
Basic and diluted earnings (loss) per share for the years ended June
30, 1999, 1998 and 1997 are as follows (in thousands, except share and
per share amounts):
<TABLE>
<CAPTION>
Year ended June 30,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net income (loss) $ 5,865 $ 1,052 $ (6,813)
Preferred stock dividends (641) (374) (392)
Conversion discount on convertible
preferred stock -- (1,527) (173)
Net income/(loss) available
-------- ------- --------
to common stockholders $ 5,224 $ (849) $ (7,378)
======== ======= ========
Basic earnings/(loss) per share $ 0.20 $ (0.04) $ (0.38)
======== ======= ========
Weighted average number of common shares 26,481,880 20,163,412 19,544,526
========== ========== ==========
<CAPTION>
Year ended June 30,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net income/(loss) available to
common stockholders $ 5,224 $ (849) $ (7,378)
Interest on AZWELL, Inc. note, net 33 -- --
Preferred stock dividends 94 -- --
Net income/(loss) available to common
-------- ------- --------
stockholders after giving effect to dilution $ 5,351 $ (849) $ (7,378)
========= ======= ========
Diluted earnings/(loss) per share $ 0.19 ($0.04) $ (0.38)
========= ======= ========
Weighted average number of common
shares and equivalents 27,754,827 -- --
==========
</TABLE>
Diluted earnings/(loss) per share for the years ended June 30, 1998
and 1997, do not reflect the incremental shares from the assumed
conversion of stock options or warrants or the conversion of the
preferred stock to common stock as the effect of such inclusion would
be to reduce the loss per share. The weighted average shares of
dilutive securities that would have been used to calculate diluted EPS
had their effect not been anti-dilutive are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Convertible preferred stock -- 4,222,906 1,223,137
</TABLE>
Note 13: SEGMENT REPORTING
Effective in fiscal 1999, the Company adopted FASB Statement No. 131
"Disclosures about Segments of an Enterprise and Related Information"
which established revised standards for reporting information about
operating segments. Pursuant to Statement No. 131, the Company's
reporting segments are nutritional products and pharmaceutical
products.
The accounting policies of the operating segments are the same as
those described in the summary of accounting policies. The Company
evaluates the performance of its operating segments based on the
operating income of the respective business units.
F-17
<PAGE>
AMBI INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13: SEGMENT REPORTING, Continued
A summary of business data for the Company's reportable segments for
the fiscal years 1999, 1998, 1997 follows:
Information by business segment (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Revenues
Nutritional Products $ 27,387 $ 18,963 $ --
Pharmaceutical Products 914 1,795 11,280
-------- -------- --------
$ 28,301 $ 20,758 $ 11,280
======== ======== ========
Operating Income (Loss)
Nutritional Products $ 6,343 $ 2,141 $ --
Pharmaceutical Products 126 (674) (16,635)
-------- -------- --------
$ 6,469 $ 1,467 $(16,635)
======== ======== ========
Depreciation and Amortization
Nutritional Products $ 2,681 $ 1,447 $ --
Pharmaceutical Products 226 228 772
-------- -------- --------
$ 2,807 $ 1,575 $ 772
======== ======== ========
Segment Assets
Nutritional Products $ 32,427 $ 18,436 $ --
Pharmaceutical Products 2,114 2,299 12,754
-------- -------- -------
$ 34,541 $ 20,735 $ 12,754
======== ======== ========
Capital Expenditures
Nutritional Products $ 443 $ 216 $ --
Pharmaceutical Products -- -- 866
-------- -------- --------
$ 443 $ 216 $ 866
======== ======== ========
Information by geographic segment (in thousands):
Revenues
United States $ 28,301 $ 20,758 $ 6,149
United Kingdom -- -- 5,131
-------- -------- --------
$ 28,301 $ 20,758 $ 11,280
======== ======== ========
Property and Equipment, net
United States $ 1,066 $ 914 $ 1,082
United Kingdom -- -- --
-------- -------- --------
$ 1,066 $ 914 $ 1,082
======== ========= =========
</TABLE>
Note 14: RELATED PARTY TRANSACTIONS
During fiscal 1999, the Company did not have transactions with
affiliated companies except for a contribution to the Burns Philp &
Company Inc. Retirement Plan of $96 thousand.
Note 15: INCOME TAXES
Income/(loss) before income taxes for the years ended June 30, 1999,
1998 and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Domestic income/(loss) $ 6,347 $ 1,168 $(7,052)
Foreign income -- -- 391
------- ------- -------
Income/(loss) before income taxes $ 6,347 $ 1,168 $(6,661)
======= ======= =======
</TABLE>
F-18
<PAGE>
AMBI INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15: INCOME TAXES, Continued
Provisions for income taxes for the years ended June 30, 1999, 1998
and 1997 consist of the following (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Current $ 482 $ 116 $ 501
Deferred -- -- (349)
----- ----- -----
$ 482 $ 116 $ 152
===== ===== =====
</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 (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Computed "expected" tax expense $2,171 $ 397 $(2,265)
Increase/(reduction) in
Income taxes resulting from:
Tax losses carried forward/(utilized) (2,070) (351) 2,398
Federal Alternative Minimum Tax 148 38 --
Lower tax rate on foreign earnings -- -- (4)
State taxes, net of federal benefit 233 32 11
Other items -- 12
------ ------
$ 482 $ 116 $ 152
====== ====== ======
</TABLE>
The tax effect of temporary differences that give rise to deferred tax
assets and deferred tax liabilities at June 30, 1999 and 1998 are
presented below (in thousands):
<TABLE>
<CAPTION>
Deferred tax assets: 1999 1998
---- ----
<S> <C> <C>
Net operating loss carryforwards $4,475 $5,713
AMT tax credit 176 38
R&D credit 720 818
Accrued expenses 50 209
Allowance for doubtful accounts 97 151
Partnership basis 1,054 1,318
Inventory reserve 54 --
Property and equipment 4 --
------ ------
Total gross deferred tax assets 6,630 8,247
Less valuation allowance (4,638) (5,159)
------ -------
Net deferred tax assets 1,992 3,088
------ ------
Deferred tax liabilities:
Property and equipment -- 163
Intangible assets, principally
due to amounts capitalized for
financial reporting purposes 1,992 2,925
------ -----
Net deferred tax liabilities 1,992 3,088
------ ------
Total deferred taxes, net of valuation allowance $ -- $ --
======== ======
</TABLE>
At June 30, 1999, the Company had available, for federal income tax
purposes, net operating loss carryforwards of approximately $7.7
million expiring in varying amounts through 2019. Ultimate
utilization/availability of such net operating losses may be
significantly curtailed if a significant change in ownership of the
Company were to occur. A valuation allowance is provided when it is
more likely than not that some portion or all of the deferred tax
assets will not be realized. The Company has provided a valuation
allowance of $4.6 million which reduced the deferred tax asset to
zero.
F-19
<PAGE>
AMBI INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16: COMMITMENTS AND CONTINGENT LIABILITIES
In October 1995, the Company entered into an exclusive license
agreement whereby the Company received a license to sell a patented
salt alternative in the United States. As a result, the Company is
required to make royalty payments quarterly through 2007. In connection
with this agreement, the Company recorded royalty expense of $450
thousand, $366 thousand, and $246 thousand for the fiscal years ended
June 30, 1999, 1998 and 1997, respectively. In addition, the Company
has an exclusive license from the USDA for the duration of a patent
which covers chromium picolinate and its uses. In connection with this
agreement, the Company recorded royalty expense of $646 thousand, $301
thousand and $0 thousand for the fiscal years ended June 30, 1999, 1998
and 1997 respectively. These royalty amounts are included in selling,
general and administrative expenses in the statement of operations.
The Company has entered into various research and license agreements
with certain universities to supplement the Company's research
activities and to obtain for the Company rights to certain technology.
The agreements generally require the Company to fund the research and
to pay royalties based upon a percentage of product sales.
The Company has consulting agreements with several of its Science
Advisory Board members and other consultants. These agreements
generally are for a term of one year and are terminable at the
Company's option.
Under operating leases, the Company leases certain office and
laboratory space in the US. These leases expire in the years 2000 to
2006. Payments under these leases were approximately $384 thousand in
fiscal 1999, $728 thousand in fiscal 1998 and $491 thousand in fiscal
1997. Future non-cancellable minimum payments under these leases are as
follows (in thousands):
Year Amount
---- ------
2000 $673
2001 650
2002 619
2003 619
2004 and Thereafter 1,461
------
Total $4,022
======
Note 17: SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Supplemental disclosure of cash flow information (in 1999 1998 1997
thousands): ---- ---- ----
<S> <C> <C> <C>
Cash paid for interest $ 337 $ 320 $ 137
Cash paid for income taxes 217 19 196
Supplemental schedule of non-cash financing activities:
Common stock issued for Nutrition 21 acquisition -- $ 1,188 --
Obligation for purchase of property & equipment $ 208 -- --
Obligation for N21 contingent payment $ 2,855 $ 2,747 --
Obligation for Lite Bites contingent payment $ 438 -- --
Obligation related to Series C redemption $ 250 -- --
Conversion of long-term debt to common stock $ 1,000 -- --
Issuance of common stock for Series C redemption $ 345 -- --
Issuance of common stock for Series D redemption $ 105 -- --
Issuance of common stock for Series E conversion $ 592 -- --
</TABLE>
Note 18: RISKS AND UNCERTAINTIES
The Company buys certain of its inventories from single suppliers.
Management believes that other suppliers could provide similar products
at comparable terms. As a result, management believes a change in
suppliers would not disrupt on-going operations and would not effect
operating results adversely.
F-20
<PAGE>
Schedule II
AMBI INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions
---------------------------------
Balance Charged to Balance
Beginning Charged to Other End of
Accounts of Period Cost and Expense Accounts Deductions Period
- -------- --------- ---------------- ---------- ---------- ------
<S> <C> <C> <C>
($ in thousands)
Year ended June 30, 1999
Allowance for Doubtful Accounts $ 377 -- -- $(135) $ 242
Deferred Tax Valuation Allowance $5,159 -- -- $(521) $4,638
Year ended June 30, 1998
Allowance for Doubtful Accounts $ 104 $ 273 -- $ 377
Deferred Tax Valuation Allowance $5,745 -- -- $(586) $5,159
Year ended June 30, 1997
Allowance for Doubtful Accounts $ 67 $ 37 -- -- $ 104
Deferred Tax Valuation Allowance $3,807 $1,938 -- -- $5,745
</TABLE>
<PAGE>
Independent Auditor's Report
The Board of Directions
AMBI Inc.:
Under date of September 2, l999, we reported on the consolidated
balance sheet of AMBI Inc. and subsidiaries as of June 30, 1999 and 1998, and
the related consolidated statements of operations, shareholders' equity and cash
flows for each of the years in the three-year period ended June 30, 1999, which
are included in the annual report on Form 10-K. In connection with our audits of
the aforementioned consolidated financial statements, we also audited the
related consolidated financial statement schedule included in the annual report
on Form 10-K. The financial statements schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statement schedule based on our audits.
In our opinion, the financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
KPMG LLP
Stamford, Connecticut
September 2, l999
<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.
AMBI INC.
By: /s/ Fredric D. Price
Fredric D. Price, President,
CEO and Director
Dated: September 27, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below as of September 27, 1999 by the following
persons on behalf of Registrant and in the capacities indicated.
/s/ Fredric D. Price
Fredric D. Price, President,
CEO and Director
/s/ Robert E. Flynn
Robert Flynn,
Chairman of the Board
/s/ P. George Benson
P. George Benson, Director
/s/ Audrey T Cross
Audrey T. Cross, Director
/s/ Sander Flaum
Sander Flaum, Director
/s/ Marvin Moser
Marvin Moser, Director
/s/ Robert E. Pollack
Robert E. Pollack, Director
/s/ Gerald A. Shapiro
Gerald A. Shapiro, Chief
Financial Officer
38
<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)
3.01c Certificate of Amendment to the Certificate of Incorporation (11)
3.01d Certificate of Amendment to the Certificate of Incorporation (11)
3.01e Certificate of Amendment to the Certificate of Incorporation (12)
3.02 Amended and Restated By-laws (2)
10.01 Form of Incentive Stock Option Plan (8)
10.02 Form of Non-qualified Stock Option Plan (8)
10.02a Form of 1989 Stock Option Plan (1)
10.02b Form of 1991 Stock Option Plan (1)
10.02c Form of 1998 Stock Option Plan (15)
10.24 Exclusive Option and Collaborative Research Agreement dated July
1, 1988 between the Company and the University of Maryland (4)
10.25 License and License Option Agreement dated December 15, 1988
between the Company and Babson Brothers Company (4)
10.36 Agreement, dated October 6, 1992 between the Company and PHRI (5)
10.47 Employment Agreement dated August 30, 1994 between the Company and
Fredric D. Price, as amended and restated (6)
10.48 Lease dated as of February 7, 1995, between the Company and Keren
Limited Partnership (7)
10.49 Share Purchase Agreement dated as of December 12, 1996, by and
among Applied Microbiology, Inc., Aplin & Barrett Limited and
Burns Philp (UK) plc. (9)
10.50 License Agreement dated as of December 12, 1996 between Licensee
Applied
39
<PAGE>
Microbiology, Inc. and Licensor Aplin & Barrett Limited. (9)
10.51 License Agreement dated as of December 12, 1996 between Licensee
Aplin & Barrett Limited and Licensor Applied Microbiology, Inc.
(9)
10.52 Supply Agreement dated as of December 12, 1996 between Aplin &
Barrett Limited and Applied Microbiology, Inc. (9)
10.53 Investors' Rights Agreement dated as of December 12, 1996 between
Applied Microbiology, Inc. and Burns Philp Microbiology. Pty
Limited. (9)
10.54 Revolving Loan and Security Agreement dated as of December 12,
1996 between Burns Philp Inc. as Lender and Applied Microbiology,
Inc. as Borrower. (9)
10.55 Stock and Partnership Interest Purchase Agreement dated as of
August 11, 1997, for the purchase of Nutrition 21. (10)
10.57 Sublease dated as of September 18, 1998, between the Company and
Abitibi Consolidated Sales Corporation (12)
10.58 Stock Purchase Agreement dated as of September 17, 1998 between
American Home Products Corporation and AMBI Inc. (13)*
10.59 License, Option and Marketing Agreement dated as of September 17,
1998 between American Home Products, acting through its
Whitehall-Robins Healthcare division, and AMBI Inc. (13)*
10.60 Amended and Restated Revolving Credit and Term Loan Agreement
dated as of January 21, 1999 between State Street Bank & Trust
Company as Lender and the Company and Nutrition 21 as Borrower.
(14)
10.61 Agreement of Purchase and Sale of Assets made as of January 19,
1999 by and among Dean Radetsky and Cheryl Radetsky, Optimum
Lifestyle, Inc. and AMBI Inc. (14)
10.62 Strategic Alliance Agreement dated as of August 13, 1999 between
AMBI Inc. and QVC, Inc. (15)**
23.1 Consent of KPMG LLP (15)
27 Financial Data Schedule (15)
- -------------------------------------------
(1) Incorporated by reference to the Company's Report on Form 10-K for
1991.
(2) Incorporated by reference to the Company's Report on Form 8-K
dated September 4, 1992.
40
<PAGE>
(3) Incorporated by reference to the Company's Registration Statement
on Form S-8 dated August 8, 1996, file No. 333-09801.
(4) Incorporated by reference to the Company's Report on Form 10-K for
1988.
(5) Incorporated by reference to the Company's Report on Form 10-K for
the fiscal period January 31, 1992 through August 31, 1992.
(6) Incorporated by reference to the Company's Report on Form 10-K for
1994.
(7) Incorporated by reference to the Company's Report on Form 10-K for
1995.
(8) Incorporated by reference to the Company's Registration Statement
on Form S-1 originally filed April 15, 1986, file No. 33-4822.
(9) Incorporated by reference to the Company's Report on Form 8-K
dated December 27, 1996.
(10) Incorporated by reference to the Company's Report on Form 8-K
dated August 25, 1997.
(11) Incorporated by reference to the Company's Report on Form 10-K/A2
for 1997.
(12) Incorporated by reference to the Company's Report on Form 10-K/A
for 1998.
(13) Incorporated by reference to the Company's Report on Form 10-Q for
the quarter ended September 30. 1998.
(14) Incorporated by reference to the Company's Report on Form 8-K
dated February 3, 1999.
(15) Filed herewith.
- --------------------------------
* Subject to an order by the Securities and Exchange Commission granting
confidential treatment. Specific portions of the document for which
confidential treatment has been granted have been blacked out. Such portions
have been filed separately with the Commission pursuant to the application
for confidential treatment.
** Subject to a request for confidential treatment currently pending with the
Securities and Exchange Commission.
41
<PAGE>
AMBI INC.
1998 STOCK OPTION PLAN
There is hereby established a 1998 Stock Option Plan (the "Plan"). The
Plan provides for the grant to directors, officers, and employees of AMBI Inc.
(the "Company") or its subsidiaries and consultants and others who perform
services for the Company or its subsidiaries of options ("Options") to purchase
shares of common stock of the Company ("Common Stock").
1. Purpose. The purpose of the Plan is to provide additional incentive to
the directors, officers, employees, consultants and others who render services
to the Company, who are responsible for the management and growth of the
Company, or otherwise contribute to the conduct and direction of its business,
operations and affairs. It is intended that Options granted under the Plan
strengthen the desire of such persons to join and remain in the employ of (or in
the rendering of services to) the Company and stimulate their efforts on behalf
of the Company.
2. The Stock. The aggregate number of shares of Common Stock which may be
subject to Options shall not exceed 2,500,000. Such shares may be either
authorized and unissued shares, or treasury shares. If any Option granted under
the Plan shall expire, terminate or be canceled for any reason without having
been exercised in full, the corresponding number of unpurchased shares shall
again be available for the purposes of the Plan. The preceding sentence shall
apply only for purposes of determining the aggregate number of shares of Common
Stock subject to options, but shall not apply for purposes of determining the
maximum number of shares of Common Stock with respect to which Options that may
be granted to any person participating in the Plan.
3. Administration of the Plan.
(a) The Plan shall be administered by a committee or committees (the
"Committee") which shall be appointed by the Board of Directors of the Company
(the "Board") from among its members. With regard to options to be granted to
directors and officers, the Committee shall be comprised solely of not less than
two members, the majority of whom shall be (i) "Non-Employee Directors" within
the meaning of Rule 16b-3(b)(3) (or any successor rule) promulgated under the
Securities Exchange Act of 1934, as amended, and (ii) unless otherwise
determined by the Board, "outside directors" within the meaning of Treasury
Regulation Section 1.162-27(e)(3) under Section 162(m) of the Internal Revenue
Code of 1986, as amended (the "Code"). Subject to the express provisions of the
Plan, the Committee shall have authority, in its discretion, to determine the
individuals to receive Options, the times when they shall receive them and the
number of shares of Common Stock to be subject to each Option, and other terms
relating to the grant of Options.
(b) Subject to the express provisions of the Plan, the Committee shall
have authority to construe the respective option agreements and the Plan, to
prescribe, amend and rescind rules and regulations relating to the Plan, to
determine the terms and provisions of the respective
1
<PAGE>
option agreements (which need not be identical) and, as specified in this Plan,
the fair market value of the Common Stock, and to make all other determinations
necessary or advisable for administering the Plan. The Committee may correct any
defect or supply any omission or reconcile any inconsistency in the Plan or in
any option agreement in the manner and to the extent it shall deem expedient to
carry it into effect, and it shall be the sole and final judge of such
expediency. The determinations of the Committee on the matters referred to in
this Section 3 shall be conclusive.
(c) The Committee may, in its sole discretion, and subject to such
terms and conditions as it may adopt, accelerate the date or dates on which some
or all outstanding Options may be exercised.
(d) The Committee may require that any Option Shares issued be legended
as necessary to comply with applicable federal and state securities laws.
4. Types of Options. Options granted under the Plan shall be in the form
of (i) incentive stock options ("ISOs"), as defined in Section 422 of the Code,
or (ii) non-statutory options which do not qualify under such Section ("NSOs"),
or both, in the discretion of the Committee. The status of each Option shall be
identified in the option agreement, or if not identified, the status of each
Option shall be an ISO to the extent permitted by law.
5. Eligibility.
(a) ISOs may be granted to employees of the Company, and such directors
and officers who are employees of the Company, as the Committee shall select
from time to time.
(b) NSOs may be granted to directors, officers, employees, consultants
and others who render services to the Company as the Committee shall select from
time to time.
(c) In no event shall the number of shares which are subject to Options
awarded under the Plan to any one person (including any Options which have been
exercised, expired, terminated or canceled for any reason without having been
exercised in full) exceed 1,500,000.
6. Option Price.
(a) The price or prices per share of Common Stock to be sold pursuant
to an Option (the "Exercise Price") shall be such as shall be fixed by the
Committee but shall in any case not be less than:
(i) the fair market value per share for such Common
Stock on the date of grant in the case of ISOs other
than to a 10% Shareholder, and
(ii) 110% of the fair market value per share for such
Common Stock on the date of grant in the case of ISOs
to a 10% Shareholder.
2
<PAGE>
(b) A "10% Shareholder" means an individual who within the meaning of
Section 422(b)(6) of the Code owns stock possessing more than 10 percent of the
total combined voting power to all classes of stock of the Company or of its
parent or any subsidiary corporation.
7. Period of Option Vesting.
(a) The Committee shall determine for each Option the period during
which such Option shall be exercisable in whole or in part, provided, however,
that an ISO shall not be exercisable after the expiration of ten years from the
date of grant of such ISO and provided further that an ISO granted to a 10%
Shareholder shall not be exercisable after the expiration of five years from the
date of grant of such ISO.
(b) Special Rule for ISOs. The aggregate fair market value (determined
at the time the ISO is granted and ISOs will be taken into account in the order
in which they were granted) of the stock with respect to which ISOs are
exercisable for the first time by an Optionee (as defined below) during any
calendar year (under all such plans of the Company, its parent or subsidiaries)
shall not exceed $100,000, and any excess shall be considered an NSO.
3
<PAGE>
8. Effect of Termination of Employment.
(a) The Committee shall determine for each Option the extent, if any,
to which such Option shall be exercisable in the event of the termination of the
person to whom such Option was granted ("Optionee") from employment with or
rendering of other services to the Company.
(b) However, any such Option which is an ISO shall in all events lapse
unless exercised by the Optionee:
(i) prior to the 89th day after the date on which
employment terminated, if termination was other than
by reason of death; and
(ii) within the twelve-month period next succeeding
the death of the Optionee, if termination is by
reason of death.
(c) The Committee shall have the right, at any time, and from time to
time, with the consent of the Optionee, to modify the lapse date of an Option
and to convert an ISO into an NSO to the extent that such modification in lapse
date increases the life of the ISO beyond the dates set forth above or beyond
dates otherwise permissible for an ISO.
9. Payment for Shares of Common Stock. Upon exercise of an Option, the
Optionee shall make full payment of the Option Price in cash, or, with the
consent of the Committee and to the extent permitted by it:
(a) with Common Stock of the Company valued at fair market value on
date of exercise, but only if held by the Optionee for a period of time
sufficient to prevent a pyramid exercise that would create a charge to the
Company's earnings;
(b) with a full recourse interest bearing promissory note of the
Optionee, secured by a pledge of the shares of Common Stock received upon
exercise of such Option, and having such other terms and conditions as
determined by the Committee;
(c) by delivering a properly executed exercise notice together with
irrevocable instructions to a broker to sell shares acquired upon exercise of
the Option and promptly to deliver to the Company a portion of the proceeds
thereof equal to the exercise price; or
(d) any combination of any of the foregoing.
10. Option Exercises. Options shall be exercised by submitting to the
Company a signed copy of notice of exercise in a form to be supplied by the
Company. The exercise of an Option shall be effective on the date on which the
Company receives such notice at its principal corporate offices. The Company may
cancel such exercise in the event that payment is not effected in full, subject
to the other terms of this Plan.
11. Limited Transferability of Option. No Option shall be assignable or
transferable by the Optionee to whom it is granted, other than by will or laws
of descent and distribution, except
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that, upon approval by the Committee, the Optionee may transfer an Option that
is not intended to constitute an ISO (a) pursuant to a qualified domestic
relations order as defined for purposes of the Employee Retirement Income
Security Act of 1974, as amended, or (b) by gift: to a member of the "Family"
(as defined below) of the Optionee, to or for the benefit of one or more
organizations qualifying under Code Sec. 501(c)(3) and 170(c)(2) (a "Charitable
Organization") or to a trust for the exclusive benefit of the Optionee, one or
more members of the Optionee's Family, one or more Charitable Organizations, or
any combination of the foregoing, provided that any such transferee shall enter
into a written agreement to be bound by the terms of this Plan and the option
agreement. For this purpose, "Family" shall mean the ancestors, spouse,
siblings, spouses of siblings, lineal descendants and spouses of lineal
descendants of the Optionee. During the lifetime of an Optionee to whom an ISO
is granted, only such Optionee (or, in the event of legal incapacity or
incompetence, the Optionee's guardian or legal representative) may exercise the
ISO.
12. Other Plan Terms.
(a) The Committee may grant more than one Option to an individual, and,
subject to the requirements of Section 422 of the Code with respect to ISOs,
such Option may be in addition to, in tandem with, or in substitution for,
Options previously granted under the Plan or of another corporation and assumed
by the Company.
(b) The Committee may permit the voluntary surrender of all or a
portion of any Option granted under the Plan or otherwise to be conditioned upon
the granting to the employee of a new Option for the same or a different number
of shares of Common Stock as the Option surrendered, or may require such
voluntary surrender as a condition precedent to a grant of a new Option to such
employee. Such new Option shall be exercisable at the price, during the period,
and in accordance with any other terms or conditions specified by the Committee
at the time the new Option is granted, all determined in accordance with the
provisions of the Plan without regard to the price, period of exercise, or any
other terms or conditions of the Option surrendered.
(c) Options under the Plan may be granted at any time after the Plan
has been approved by the shareholders of the Company. However, no Option shall
be granted under the Plan after November 30, 2008.
(d) In the event of a reorganization, recapitalization, liquidation,
stock split, stock dividend, combination of shares, merger or consolidation, or
the sale, conveyance, lease or other transfer by the Company of all or
substantially all of its property, or any change in the corporate structure or
shares of common stock of the Company, pursuant to any of which events the then
outstanding shares of the common stock are split up or combined or changed into,
become exchangeable at the holder's election for, or entitle the holder thereof
to other shares of common stock, or in the case of any other transaction
described in Section 424(a) of the Code, the Committee may change the number and
kind of shares of Common Stock available under the Plan and any outstanding
Option (including substitution of shares of common stock of another corporation)
and the price of any Option and the fair market value determined under this Plan
in such manner as it shall deem equitable in its sole discretion.
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(e) An Optionee or a legal representative thereof shall have none of
the rights of a stockholder with respect to shares of Common Stock subject to
Options until such shares shall be issued or transferred upon exercise of the
Option.
(f) The Company shall effect the grant of Options under the Plan, in
accordance with determinations made by the Committee, by execution of
instruments in writing in a form approved by the Committee. Each Option shall
contain such terms and conditions (which need not be the same for all Options,
whether granted at the time or at different times) as the Committee shall deem
to be appropriate and not inconsistent with the provisions of the Plan, and such
terms and conditions shall be agreed to in writing by the Optionee.
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13. Certain Definitions.
(a) Fair Market Value. As used in the Plan, the term "fair market
value" shall mean as of any date:
(i) if the Common Stock is not traded on any
over-the-counter market or on a national securities
exchange, the value determined by the Committee using
the best available facts and circumstances;
(ii) if the Common Stock is traded in the over-the-
counter market, based on most recent closing prices
for the Common Stock on the date the calculation
thereof shall be made; or
(iii) if the Common Stock is listed on a national
securities exchange, based on the most recent closing
prices for the Common Stock of the Company on such
exchange.
(b) Subsidiary and Parent. The terms "subsidiary" and "parent" as used
in the Plan shall have the respective meanings set forth in Sections 424(f) and
(e) of the Code.
14. Not an Employment Contract. Nothing in the Plan or in any Option or
stock option agreement shall confer on any Optionee any right to continue in the
service of the Company or any parent or subsidiary of the Company or interfere
with the right of the Company to terminate such Optionee's employment or other
services at any time.
15. Withholding Taxes.
(a) Whenever the Company proposes or is required to issue or transfer
shares of Common Stock under the Plan, the Company shall have the right to
require the Optionee to remit to the Company an amount sufficient to satisfy any
federal, state and/or local withholding tax requirements prior to the delivery
of any certificate or certificates for such shares. Alternatively, the Company
may, in its sole discretion from time to time, issue or transfer such shares of
Common Stock net of the number of shares sufficient to satisfy the withholding
tax requirements. For withholding tax purposes, the shares of Common Stock shall
be valued on the date the withholding obligation is incurred.
(b) In the case of shares of Common Stock that an Optionee receives
pursuant to his exercise of an Option which is an ISO, if such Optionee disposes
of such shares of Common Stock within two years from the date of the granting of
the ISO or within one year after the transfer of such shares of Common Stock to
him, the Company shall have the right to withhold from any salary, wages, or
other compensation for services payable by the Company to such Optionee, amounts
sufficient to satisfy any withholding tax obligation attributable to such
disposition.
(c) In the case of a disposition described in paragraph (b), the
Optionee shall give written notice to the Company of such disposition within 30
days following the disposition,
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which notice shall include such information as the Company may reasonably
request to effectuate the provisions hereof.
16. Agreements and Representations of Optionees. As a condition to the
exercise of an Option, unless counsel to the Company opines that it is not
necessary under the Securities Act of 1933, as amended (the "Securities Act"),
and the pertinent rules thereunder, as the same are then in effect, the Optionee
shall represent in writing that the shares of Common Stock being purchased are
being purchased only for investment and without any present intent at the time
of the acquisition of such shares of Common Stock to sell or otherwise dispose
of the same.
17. Amendment and Discontinuance of the Plan. The Board may at any time
alter, suspend or terminate the Plan, but no change shall be made which will
have a materially adverse effect upon any Option previously granted, unless the
consent of the Optionee is obtained; provided, however, that the Board may not
without further approval of the shareholders, (i) increase the maximum number of
shares of Common Stock for which Options may be granted under the Plan or which
may be purchased by an individual Optionee, (ii) decrease the minimum option
price provided in the Plan, or (iii) change the class of persons eligible to
receive Options.
18. Other Conditions.
(a) If at any time counsel to the Company shall be of the opinion that
any sale or delivery of shares of Common Stock pursuant to an Option granted
under the Plan is or may in the circumstances be unlawful under the statutes,
rules or regulations of any applicable jurisdiction, the Company shall have no
obligation to make such sale or delivery, and the Company shall not be required
to make any application or to effect or to maintain any qualification or
registration under the Securities Act or otherwise with respect to shares of
Common Stock or Options under the Plan, and the right to exercise any such
Option may be suspended until, in the opinion of said counsel, such sale or
delivery shall be lawful.
(b) At the time of any grant or exercise of any Option, the Company
may, if it shall deem it necessary or desirable for any reason connected with
any law or regulation of any governmental authority relative to the regulation
of securities, condition the grant and/or exercise of such Option upon the
Optionee making certain representations to the Company and the satisfaction of
the Company with the correctness of such representations.
19. Approval; Effective Date; Governing Law. This Plan shall become
effective upon the approval by the stockholders of the Company at an annual
meeting or any special meeting of the stockholders of the Company. This Plan
shall be interpreted in accordance with the internal laws of the State of New
York.
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STRATEGIC ALLIANCE AGREEMENT
THIS AGREEMENT ("Agreement") is dated as of the 13th day of August,
1999, by and between QVC, Inc. ("QVC"), a Delaware corporation with its
principal place of business at Studio Park, 1200 Wilson Drive, West Chester, PA
19380, and AMBI Inc. ("Company"), a New York corporation, with its principal
place of business at 4 Manhattanville Road, Purchase, New York 10577-2197 and
shall be effective as set forth in paragraph 4 herein.
BACKGROUND
A. QVC and its affiliates promote, market, sell and distribute
(collectively, "Promote") products through various means and media, including
without limitation, their televised shopping programs (the "Programs").
B. Company manufactures and/or sells various items of health care and
dietary supplement products under the Lite Bites brand ("Lite Bites Branded
Products") and manufactures and/or sells various items of health care and
dietary supplement products under other brands ("Other Branded Products") (all
such Lite Bites Branded Products sold by Company to QVC, whether now in
existence or developed hereafter, and all such Other Branded Products sold by
Company to QVC are collectively called the "Products").
C. Company and QVC desire that QVC Promote the Lite Bites Branded
Products through certain means and media, and that (i) Marvin Segel, a
representative of Company (or any other mutually agreed upon spokesperson,
hereinafter referred to as the "Lite Bites Spokesperson"), appear on certain of
the Programs to assist QVC in promoting the Lite Bites Branded Products, and
that (ii) another mutually agreed upon Spokesperson (hereinafter referred to as
the "Other Products Spokesperson") appear on certain of the Programs to assist
QVC in promoting the Other Branded Products (collectively referred to as the
"Spokespersons") .
D. Company and QVC desire to develop a Heart Healthy Show related to
heart healthy products featuring Company's Products.
NOW, THEREFORE, incorporating the foregoing background, and for good
and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, and intending to be legally bound hereby, the parties hereto agree
as follows:
<PAGE>
1. Grant of License and Other Rights.
LITE BITES GRANT
(a) Company grants to QVC and its affiliates throughout the Term (as
defined in paragraph 3(a) below) of this Agreement: (i) the exclusive worldwide
right to Promote the Lite Bites Branded Products through all means and media
including, without limitation, Direct Response Television Programs (as defined
below); and (ii) the right to use, publish, reproduce and transmit the Lite
Bites trademarks, trade names and/or logos used by Company in connection with
the promotion of Lite Bites Branded Products, including without limitation the
words "Lite Bites" (whether now in existence or created hereafter in connection
with the promotion of the Lite Bites Branded Products, collectively, the "Lite
Bites Trademarks") to Promote the Products in accordance with the terms and
conditions of this Agreement. In addition, Company grants to QVC and its
affiliates the non-exclusive right to use the rights granted above during the
Sell-Off Period (as defined in paragraph 3(c) below). For purposes of this
Agreement, "Direct Response Television Programs" shall mean any televised
program which requests a consumer to respond to any promotion of any product or
service by mail, telephone or other electronic means, which program: (A) is
live; (B) contains an intermittent or continuous call to action; (C) devotes at
least twenty percent (20%) of its programming time to the promotion of products
or services; or (D) is otherwise in the style of a televised retailing program.
(b) Lite Bites Branded Products may, upon agreement of the Company and
QVC, be branded by the Company with other brand names dedicated to QVC for sales
on Direct Response Television Programs, e.g. Lite Bites will be branded "Brite
Bites" for Direct Response Television Programs in the UK. The licenses and
rights granted to QVC for the Lite Bites Branded Products, shall extend to such
other dedicated brands agreed to by the Company for sales by QVC on Direct
Response Television Programs.
HEART HEALTHY SHOW GRANT
(c) Heart Healthy Show. Within six months of the date of this
Agreement, QVC agrees to develop, produce and on-air test at such time and on
such date as QVC shall determine, a one hour format program tentatively
identified as the Heart Healthy Show (such name or any other name to be
acceptable to QVC at such time), subject to the availability of mutually
agreeable Products and prices therefor. Both parties agree to negotiate in good
faith to arrive at mutually agreeable Products and prices for inclusion in the
Heart Healthy Show. This show will offer for sale primarily products derived
from the Company's CardiaNutrition(TradeMark) line of products (although Other
Branded Products
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sold to QVC will not be branded "CardiaNutrition") and may include Lite Bites
Branded Products. Products sold in the Heart Healthy Show will be exclusively
sourced from AMBI, unless otherwise agreed. If the parties agree to proceed with
a Heart Healthy show, then the Company grants to QVC the licenses and rights set
forth below.
(d) Company grants to QVC and its affiliates throughout the Term (as
defined in paragraph 3 below) of this Agreement: (i) the exclusive worldwide
right to Promote the Products through Direct Response Television Programs called
the Heart Healthy Show or another title agreed to by the Company, any such name
to be acceptable to QVC, and the rights in 1(f) below, and (ii) the right to
use, publish, reproduce and transmit for the Products offered on the Heart
Healthy show, the trademarks, trade names and/or logos used by Company in
connection with the Lite Bites Branded Products and Other Branded Products,
including without limitation the words "Lite Bites" (whether now in existence or
created hereafter and used in connection with the promotion of the Products,
collectively, the "Heart Healthy Show Trademarks") to Promote the Products in
accordance with the terms and conditions of this Agreement. In addition, Company
grants to QVC and its affiliates the non-exclusive right to use the rights
granted above during the Sell-Off Period (as defined in paragraph 3(c) below).
(e) So long as this Agreement remains in effect, QVC shall have a right
of first refusal to match any marketing proposals for the Products offered for
sale on the Heart Healthy show, to be offered via infomercial, radio or similar,
over-the air, interactive medium, excluding internet. Under no circumstances
shall Company offer any third party the right to Promote the Product via
infomercial, radio or interactive medium on terms more favorable than those
offered to QVC.
(f) QVC may list Products on its iQVC Internet site incidental to its
Promotion of these Products through Direct Response Television Programs.
ALL PRODUCTS
(g) The Spokesperson, as the case may be, grants to QVC and its
affiliates (i) throughout the Term of this Agreement, the exclusive worldwide
right to use his name, likeness, image, voice and performance (the
"Endorsement") to Promote the Lite Bites Branded Products and Other Branded
Products for which the Spokesperson appears on Programs to assist QVC in
promoting the Products through Direct Response Television Programs, in
accordance with the terms and conditions of this Agreement, and (ii) throughout
the Term of this Agreement and the Sell-Off Period, the non-exclusive worldwide
right to use the Endorsement to Promote the Products for which Spokesperson
appeared, through any means or media. Hereinafter, the rights granted to
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QVC pursuant to subparagraphs (a), (b), (c), (d), and (e) of this paragraph 1
and this subparagraph (f) are collectively referred to as the "License".
2. Products.
(a) From time to time, QVC may issue to Company a purchase order (any
such purchase order, as may be issued from time to time, is hereinafter referred
to as a "Purchase Order"). Hereafter, any purchases of Products by QVC shall be
made according to the terms set forth in this Agreement and on any such Purchase
Order(s). This paragraph 2, together with all other terms of each Purchase
Order, shall survive the expiration or termination of this Agreement.
Notwithstanding anything to the contrary contained in this Agreement or
otherwise, QVC makes no representations or warranties with respect to (i) the
amount of Products that may be sold through the Programs, if any, (ii) the
number of times, if any, the Products may be offered for sale on the Programs or
(iii) the amount of revenue, if any, that may be generated through any sales of
Products on the Programs. Although this Agreement does not obligate QVC to
purchase any Products from Company or to Promote or sell any Products, during
the Term of this Agreement, QVC shall treat Company as a Core Vendor, including
payment of 100% of Company's invoices, net thirty (30) days from receipt of
goods, less returns and performance-related chargebacks, if any.
(b) During the Term of this Agreement, Company and/or the
Spokespersons, at their sole expense, shall provide to QVC or its designee, upon
the reasonable request of QVC, (i) all then-existing relevant research and
development information for the Products, and subject the Products to all
necessary or appropriate quality control procedures, and other testing to ensure
that the Products fully comply with all claims made or to be made about the
Products and any applicable state and federal laws, rules and regulations, (ii)
reasonable advisory services with respect to QVC's efforts to Promote the
Products, and (iii) such other creative input as QVC may reasonably deem
appropriate from time to time.
3. Term.
(a) Generally. The initial term of this Agreement (the "Initial Term")
shall be retroactive to January 1, 1999 and shall expire on December 31, 1999.
Upon the expiration of the Initial Term, this Agreement shall automatically and
continually renew for additional one-year terms (each, a "Renewal Term," and the
Initial Term and all Renewal Terms being collectively referred to herein as the
"Term") in perpetuity, unless (i) either party notifies the other party in
writing, at least sixty (60) days prior to the end of the Initial Term or any
Renewal Term, as the case may be, of its intent to terminate the
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Agreement, and (ii) Net Purchases of Products during the Initial Term or such
Renewal Term are less than the Minimum Amount (as such terms are defined in
paragraphs 3(d) and (e) hereof).
(b) Right to Cure. Notwithstanding anything to the contrary contained
in paragraph 3(a) hereof, if Company gives QVC timely notice of its intent to
terminate the Agreement due to insufficient Net Purchases for the Initial Term
or then-current Renewal Term, as the case may be, then QVC may cure such
shortfall by issuing purchase order(s) for Products in quantities which, if
added to existing Net Purchases for such period, would yield Net Purchases
equaling or exceeding the Minimum Amount for such period. In such case, such
notice of termination shall be deemed rescinded, and the Agreement shall renew
for another Renewal Term. Net Purchases derived from Products ordered pursuant
to such right to cure shall be counted toward the Minimum Amount applicable to
the term being cured so long as payment is made by QVC to Company prior to
expiration of the Term being cured. Purchase Orders issued pursuant to a right
to cure shall be on a 0% Sale or Return basis, i.e. Product being purchase is
non-returnable and non-refundable, except for defective and non-conforming
goods.
(c) Failure to Achieve Minimum Amount. If Company gives QVC timely
notice of its intent to terminate the Agreement due to insufficient Net
Purchases for the Initial Term or then-current Renewal Term, as the case may be,
and QVC fails to exercise its right to cure under paragraph 3(b) hereof, then
the Agreement shall terminate at the conclusion of such Term, whereupon QVC may
continue to exercise the License rights, including the Endorsement, on a
nonexclusive basis (i) for a period of up to three months after termination on
Direct Response Television Programs and iQVC, (ii) for a period of up to six
months after termination through all other means and media for which rights are
granted hereunder, and (iii) as long as is necessary with respect to continuity
sales, so long as during the initial three month period from termination QVC
Promotes the Lite Bites Branded Products on air for at least 50% of the average
number of minutes per month that QVC Promoted such Products in the previous year
("Previous Year's Time); provided however, if QVC does not meet the Previous
Year's Time, then such rights with respect to continuity sales will be limited
to a total of six months from termination (the "Sell-Off Period"). During the
Sell-Off Period, QVC may (i) sell off any of its remaining inventory of
Products, (ii) place additional orders for Products to fulfill any remaining
unfilled customer orders for Products, and (iii) have such additional orders
fulfilled by Company. Failure of QVC to achieve the Minimum Amount in the
Initial Term or any Renewal Term shall not constitute a breach of this
Agreement.
(d) Minimum Amount. For purposes of this Agreement, "Minimum Amount"
for Lite Bites Branded Products shall mean (***) for the Initial Term. The
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Minimum Amount for each Renewal Term shall be (***)% greater than the preceding
Term. Minimum Amounts for sales on the Heart Healthy show shall be as agreed
upon by the parties prior to launching the show.
(e) Net Purchases. For purposes of this Agreement, "Net Purchases"
shall mean the aggregate amount of all Purchase Orders for Products issued by
QVC to Company during the applicable term excluding freight, shipping and
handling charges, sales, use and other taxes.
(f) Exclusivity. Should Net Purchases of Lite Bites Branded Products
during any Term be less than (***), (i) QVC's rights to Promote the Lite Bites
Branded Products through all means and media other than Direct Response
Television Programs shall become nonexclusive and (ii) QVC's right to Promote
the Lite Bites Branded Products through Direct Response Television Programs
shall remain exclusive. Notwithstanding the foregoing, QVC shall use
commercially reasonably efforts to promote Products, provided that
notwithstanding QVC's failure to achieve Net Purchases of (***), Company's sole
remedy shall be as set forth in the preceding sentence.
4. Appearances.
(a) Lite Bites - If requested by QVC, the Lite Bites Spokesperson shall
make at least six (6) Appearances on the Lite Bites Programs during each year
during the Term of this Agreement. For purposes of this Agreement, an
"Appearance" shall mean a one (1) to three (3) day period during which the
Products may be offered for sale on certain of the Programs.
(b) Other Branded Products - The parties will agree on the number of
appearances and the definition of an appearance with respect to Other Branded
Products Spokesperson.
(c) The Spokespersons agree to appear in promotional announcements
featuring the Programs, at dates and times determined by QVC, subject to their
reasonable availability. Unless otherwise determined by QVC, all Appearances and
promotional announcements shall take place at QVC's studios in West Chester,
Pennsylvania. Any costs and expenses of the Spokespersons that may arise in
connection with all Appearances and promotional announcements, including without
limitation, travel, lodging and food, shall be borne by Company. QVC makes no
representations or warranties with respect to the number of Appearances, if any,
that it may request the Spokespersons to make. Company and QVC may mutually
agree to replace any
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Spokesperson at any time during the Term of this Agreement. In the event of the
death or disability of a Spokesperson, or the failure of a Spokesperson to make
an Appearance required pursuant to this Agreement for any other reason, Company
shall use commercially reasonably efforts to provide an alternative Spokesperson
satisfactory to QVC. Appearances on other Programs shall be agreed upon by the
parties.
(d) Company agrees to protect, defend, hold harmless and indemnify QVC
and its affiliates, employees, agents, officers and directors, from and against
any and all claims, actions, suits, costs, liabilities, damages and expenses
(including, without limitation, all attorney's fees and court costs) arising out
of or related to any acts or omissions of Company or Spokespersons in connection
with the Appearances, which obligation shall survive the expiration or
termination of this Agreement.
(e) QVC agrees to protect, defend, hold harmless and indemnify Company
and its affiliates, employees, agents, officers and directors, and Spokespersons
from and against any and all claims, actions, suits, costs, liabilities, damages
and expenses (including, without limitation, all attorneys' fees and court
costs) arising out of or related to any acts or omissions of QVC in connection
with its Promotion of the Products, which obligation shall survive the
expiration or termination of this Agreement.
5. Warrant. A Warrant shall be issued to QVC upon execution of this
Agreement. The Warrant is set forth on Exhibit A and grants to QVC or an
affiliate the right to purchase up to four hundred twenty thousand (420,000)
common shares of Company. QVC agrees to pay to AMBI $63,000 for the Warrant.
6. Non-Compete. Except as contemplated hereunder and without the prior
written consent of QVC, neither Company nor Spokespersons shall, during the Term
of this Agreement, and, if this Agreement is terminated by Company, during the
three (3) month period following the expiration or termination of this
Agreement, promote, advertise, endorse or sell (a) any goods, services, or
products, including without limitation the Products, anywhere in the world by
means of Direct Response Television Programs other than QVC's Programs, and (b)
the Lite Bites Branded Products anywhere in the world by any means or media
(subject to paragraph 3(f) herein). Notwithstanding the foregoing, in the event
that during the Term of this Agreement, a Spokesperson's association with
Company is terminated for any reason and, in connection with such termination, a
Spokesperson's role as the Spokesperson under this Agreement is terminated, then
such Spokesperson's obligations pursuant to this Paragraph 6, except the
obligations with respect to the Products, shall terminate upon the later of the
date which is (a) one (1) year after the date of the last Appearance, and (b)
one (1) year after the effective date of the termination of Spokesperson's
association with Company. In
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the event that during the Term of this Agreement, a Spokesperson's role as the
Spokesperson under this Agreement is terminated for any reason other than in
connection with the termination of such Spokesperson's association with Company,
then such Spokesperson's obligations pursuant to this Paragraph 6, except the
obligations with respect to the Products, shall terminate upon the date which is
one (1) year after the date of the last Appearance. A Spokesperson's obligations
with respect to the Products shall in all cases terminate upon the date which is
one (1) year after the expiration or termination of this Agreement, as set forth
in the first sentence of this Paragraph 6. This provision shall survive the
expiration or termination of this Agreement.
7. Representations, Warranties and Covenants.
(a) Company represents, warrants and covenants, which representations,
warranties and covenants shall continue during the Term of this Agreement and
shall survive the expiration or termination of this Agreement, that: (i) it
possesses the full power and exclusive right to grant the License to QVC; (ii)
the execution, delivery and performance of this Agreement, including the
Warrant, by Company does not violate any agreement, instrument, judgment, order
or award of any court or arbitrator or any law, rule or regulation; (iii) each
Product shall comply with all foreign, federal, state, county, municipal or
other statutes, laws, orders and regulations of any governmental or
quasi-governmental entity; (iv) QVC's use of the License, and QVC's Promotion of
the Products as permitted hereunder, will not infringe or otherwise violate the
copyrights, trademarks, or other proprietary rights of third parties or
constitute unfair competition; (v) all claims concerning the Products made by
Company are, and will be, true and correct at the time such claims are made, and
supported by data which complies with applicable law; and (vi) except as
contemplated hereunder, there exist no agreements, or other arrangements, for
Company to endorse, promote, advertise, or sell any Products through Direct
Response Television Programs. Company shall provide QVC with any and all
documents reasonably required or requested by QVC at any time and from time to
time to support the representations and warranties herein contained. Company
shall cause any Spokesperson to agree to the provisions set forth in paragraphs
1(f), 2(b), 3(c), 4, 6, 7(c), 8(a), 10 and 11 of this Agreement.
(b) QVC represents, warrants and covenants, which representations,
warranties and covenants shall continue during the Term of this Agreement and
shall survive the expiration or termination of this Agreement, that: (i) it
possesses the full power and exclusive right to entire into this Agreement; and
(ii) the execution, delivery and performance of this Agreement by QVC does not
violate any agreement, instrument, judgment, order or award of any court or
arbitrator or any law, rule or regulation. QVC shall provide Company with any
and all documents reasonably required or requested by
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QVC at any time and from time to time to support the representations and
warranties herein contained.
(c) Each Spokesperson represents, warrants and covenants, which
representations, warranties and covenants shall continue during the term of this
Agreement and shall survive the expiration or termination of this Agreement,
that: (i) he possesses the full power and exclusive right to grant the
Endorsement to QVC; (ii) the execution, delivery and performance of this
Agreement does not violate any agreement, instrument, judgment, order or award
of any court or arbitrator or any law, rule or regulation; (iii) all claims
concerning the Products made by Spokesperson are, and will be, true and correct
at the time such claims are made, and supported by data which complies with
applicable law; and (iv) except as contemplated hereunder, there exist no
agreements, or other arrangements, for the Spokesperson to endorse, promote,
advertise, or sell any Products through Direct Response Television Programs. The
Spokesperson shall provide QVC with any and all documents reasonably required or
requested by QVC at any time and from time to time to support the
representations and warranties herein contained.
8. Confidentiality.
(a) Company and each Spokesperson each acknowledge and agree that any
and all information regarding QVC or its operations disclosed to them in
conjunction with this Agreement, and any information regarding the sale and
promotion of Products and/or products by QVC, will be treated as confidential
information and will not be disclosed to any third party at any time during the
term of this Agreement, including any Renewal Term(s), and thereafter. Company
and the Spokesperson further agree that any such information will not be used
for any purposes by Company or any Spokesperson other than for purposes
contemplated by this Agreement. Confidential information shall not be deemed to
include information which (a) is public knowledge or becomes generally available
to the public other than as a result of disclosure by Company or the
Spokesperson; (b) becomes available to Company or the Spokesperson, on a
non-confidential basis, from a source (other than QVC or its agents) who is not
bound by a confidentiality agreement with QVC; or (c) is in the possession of
Company or the Spokesperson prior to disclosure by QVC, provided that the source
was not bound by a confidentiality agreement with QVC. Company and the
Spokesperson each agree that in the event of a breach or threatened breach of
the terms of this paragraph 8 and/or the provisions of paragraph 6, QVC shall be
entitled to seek from any court of competent jurisdiction, preliminary and
permanent injunctive relief which remedy shall be cumulative and in addition to
any other rights and remedies to which QVC may be entitled. Company and the
Spokesperson each acknowledge and agree that the confidential information and
other information referred to in this paragraph 8 and the prohibitions
9
<PAGE>
provided in paragraph 6 above, are valuable and unique and that such breach of
such provisions will result in immediate irreparable injury to QVC. The rights
and obligations of the parties set forth in this paragraph 8 shall survive and
continue after the termination or expiration of this Agreement.
(b) QVC acknowledges and agrees that any and all information regarding
Company or its operations disclosed to it in conjunction with this Agreement,
will be treated as confidential information and will not be disclosed to any
third party at any time during the term of this Agreement, including any Renewal
Term(s), and thereafter. Confidential information shall not be deemed to include
information which (a) is public knowledge or becomes generally available to the
public other than as a result of disclosure by QVC; (b) becomes available to
QVC, on a non-confidential basis, from a source (other than Company or its
agents) who is not bound by a confidentiality agreement with Company; or (c) is
in the possession of QVC prior to disclosure by Company, provided that the
source was not bound by a confidentiality agreement with Company. QVC agrees
that in the event of a breach or threatened breach of the terms of this
paragraph 8, Company shall be entitled to seek from any court of competent
jurisdiction, preliminary and permanent injunctive relief which remedy shall be
cumulative and in addition to any other rights and remedies to which Company may
be entitled. QVC acknowledges and agrees that the confidential information and
other information referred to in this paragraph 8 are valuable and unique and
that such breach of such provisions will result in immediate irreparable injury
to Company. The rights and obligations of the parties set forth in this
paragraph 8 shall survive and continue after the termination or expiration of
this Agreement.
9. Committee. The parties shall create and structure a committee (the
"Committee") which will have equal membership of up to three (3) members from
each party, and that will have the responsibility to coordinate activities
between the Company and QVC. The Committee shall meet at least quarterly unless
otherwise mutually agreed. The plans include, but are not limited to allocating
responsibilities and establishing timeframes and implementation schedules. The
areas to be decided by the Committee shall include, but are not limited to:
(a) Introduction of Company's Products into non-US Direct Response
Television Programs;
(b) Operations, such as inventory planning and rotation;
(c) Programming, such as the new Heart Healthy Show or new Lite Bites
products shows;
(d) Other distribution channels, such as infomercials for Lite Bites
Branded Products, catalog programs, such as Heart's Content, and
retail initiatives.
10
<PAGE>
10. Publicity. Except for incidental non-derogatory remarks
necessitated by the services provided hereunder or as required by law or
regulation, neither Company nor any Spokesperson shall issue any publicity or
press release regarding their contractual relations with QVC or otherwise make
any oral or written reference to QVC regarding their activities hereunder,
without obtaining QVC's prior written consent, and approval of the contents
thereof. Neither Company nor any Spokesperson shall utilize any trade name,
service mark, trademark, or copyright belonging to QVC without the prior written
consent of QVC.
11. Miscellaneous.
(a) Amendment. This Agreement may not be varied, amended, or modified
unless in writing signed by the parties hereto.
(b) No Assignment. This Agreement and the rights and obligations
hereunder are not assignable and any such assignment shall be null and void.
(c) Governing Law. This Agreement shall be construed according to the
internal laws of the Commonwealth of Pennsylvania, without regard to conflict of
laws principles. Each of QVC, Company and each Spokesperson hereby consents to
the exclusive jurisdiction of the state courts of the Commonwealth of
Pennsylvania, Chester County, and the United States District Court for the
Eastern District of Pennsylvania, in all matters arising out of this Agreement.
Company and each Spokesperson each consent to service of process by certified
mail, return receipt requested, at the address indicated in the opening
paragraph hereof.
(d) Notices. All notices provided for hereunder shall be sent via
certified mail, return receipt requested, or by reputable overnight carrier, to
the addresses indicated in the opening paragraph hereof. All notices sent to QVC
shall be sent to the attention of Executive Vice President, Merchandising, and
Senior Vice President, General Counsel. All notices sent to the Company shall be
sent to the attention of Senior Vice President and General Counsel.
(e) Entire Agreement. This Agreement supersedes all prior
communications between the parties regarding the subject matter hereof, whether
oral or written, and constitutes the entire understanding of the parties.
(f) Remedies and Waiver. No delay or failure on the part of any party
hereto in exercising any right or remedy under this Agreement, and no partial or
single exercise
11
<PAGE>
thereof, shall constitute a waiver of such right or remedy or of any other right
or remedy. The rights and remedies provided in this Agreement shall be in
addition to, and not in lieu of, any rights and remedies provided in any
Purchase Order(s) or under applicable law. The rights and remedies provided in
this Agreement and the Purchase Order are intended to be consistent and
cumulative. However, to the extent needed to resolve any conflict between this
Agreement and the terms and conditions of any Purchase Order, the terms and
conditions of this Agreement shall govern.
(g) Severability. If any term or condition of this Agreement or the
application thereof shall be illegal, invalid or unenforceable, all other
provisions hereof shall continue in full force and effect as if the illegal,
invalid or unenforceable provision were not a part hereof. The headings used in
this Agreement are for the convenience of the parties only and shall not be
construed in the interpretation of any provisions of this Agreement.
(h) No Joint Venture. Nothing herein contained shall be construed to
place the parties in the relationship of partners or joint venturers, and none
of the parties hereto shall have the power to obligate or bind the others in any
manner whatsoever. Each of the parties hereto agree that in performing their
duties under this Agreement they shall be in the position of independent
contractors.
IN WITNESS WHEREOF, and intending to be legally bound hereby, the
parties hereto have executed this Agreement as of the date first above written.
AMBI, INC. QVC, INC.
By: /s/ Fredric D. Price By: /s/ Daniel J. Schutzman
------------------------- ---------------------------
Fredric D. Price Daniel J. Schutzman
President and CEO Vice President
I, Marvin Segel, hereby acknowledge the terms and conditions set forth in the
above Agreement, and, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, and intending to be legally bound
hereby, agree to be personally bound by the provisions set forth in paragraphs
1(f), 2(b), 3(c), 4, 6, 7(c), 8(a), 10 and 11 of the above Agreement.
/s/ Marvin Segel
- ------------------------
Marvin Segel
Date: August 13, 1999
----------------------
12
<PAGE>
Exhibit A
AMBI INC.
WARRANT
Dated: as of August 13, 1999
Number of Shares: 420,000
Exercise Price: As defined below in Section 3
Holder: QVC, Inc
Address: Studio Park, 1200 Wilson Drive, West Chester, PA 19830
- -------------------------------------
The Holder is entitled to exercise this Warrant to purchase from AMBI Inc., a
New York corporation (hereinafter called the "Company" or "Holder"), at the
Exercise Price(s), the number of shares of the Company's common stock, $.005 par
value, set forth above ("Common Stock").
1. The right to exercise this Warrant shall apply as to the tranches thereof set
forth below only from and after the date set forth with respect to such tranche
(the "Vesting Date"), and only if the Strategic Alliance Agreement dated of even
date herewith (the "Agreement") was in effect on the Vesting Date:
- --------------------------------------------------------------------------------
Tranche Number Number of Shares Vesting Date
- --------------------------------------------------------------------------------
1 150,000 December 31, 1999
2 60,000 October 1, 2000
3 105,000 December 31, 2000
4 105,000 December 31, 2000
- --------------------------------------------------------------------------------
2. The right to exercise this Warrant shall expire four years from the date of
issuance, and no shares of Common Stock may be acquired under this Warrant
from and after such date.
3. The Initial Warrant Exercise Price is 120% of the Initial Stock Price. The
Initial Stock Price is the average NASDAQ closing price of AMBI common
stock on the five trading days immediately preceding the execution of this
Agreement between AMBI and QVC.
(a) The Initial Warrant Exercise Price will be adjusted under the following
conditions:
13
<PAGE>
(i) If Product Purchases (each as defined in the Agreement) by
QVC from AMBI for the period January 1, 1999 through
December 31, 1999 are less than $(***), then the exercise
price of the warrants which are scheduled to vest on
December 31, 1999 will be the greater of the Warrant
Exercise Price or the sum of (1) 120% of the average NASDAQ
closing price of AMBI common stock on the five trading days
immediately preceding January 1, 2000 (the First Revised
Stock Price) plus (2) the difference between the First
Revised Stock Price and the Initial Stock Price.
(ii) If by September 30, 2000, QVC has not aired a total of (***)
full hours of "Heart Healthy" programming (as defined in the
Agreement) featuring AMBI products, then the exercise price
of the warrants which are scheduled to vest on July 1, 2000
will be the greater of the Warrant Exercise Price or the sum
of (1) 120% of the average NASDAQ closing price of AMBI
common stock on the five trading days immediately preceding
January 1, 2000 (the Second Revised Stock Price) plus (2)
the difference between the Second Revised Stock Price and
the Initial Stock Price.
(iii) If Product Purchases by QVC from AMBI for the period January
1, 2000 through December 31, 2000 are less than $(***), then
the exercise price of the warrants which are scheduled to
vest on December 31, 2000 will be the greater of the Warrant
Exercise Price or the sum of (1) 120% of the average NASDAQ
closing price of AMBI common stock on the five trading days
immediately preceding January 1, 2000 (the Third Revised
Stock Price) plus (2) the difference between the Third
Revised Stock Price and the Initial Stock Price.
(iv) If Product Purchases by QVC from AMBI for the period January
1, 2001 through December 31, 2001 are less than $(***), then
the exercise price of the warrants which are scheduled to
vest on December 31, 2001 will be the greater of the Warrant
Exercise Price or the sum of (1) 120% of the average NASDAQ
closing price of AMBI common stock on the five trading days
immediately preceding January 1, 2000 (the Fourth Revised
Stock Price) plus (2) the difference between the Fourth
Revised Stock Price and the Initial Stock Price.
4. The rights represented by this Warrant may be exercised at any time within
the period above specified, in whole or in part, by
(a) giving to the Company notice of exercise at the principal
executive office of the Company (or such other office or
agency of the Company as it may designate by notice in
writing to the Holder at the address of the Holder appearing
on the books of the Company);
(b) paying to the Company the exercise price for the number of
shares specified in the above-mentioned notice of exercise
together with applicable stock transfer taxes, if any; and
14
<PAGE>
(c) unless in connection with an effective registration
statement which covers the sale of the shares underlying the
Warrant, the delivery to the Company of a statement by the
Holder (in a form acceptable to the Company and its counsel)
that such shares are being acquired by the Holder for
investment and not with a view to their distribution or
resale.
5. This Warrant and the Common Stock issuable on exercise of this Warrant (the
"Underlying Shares") may be transferred, sold, assigned or hypothecated,
only if registered by the Company under the Securities Act of 1933, as
amended (the "Act"), or if the Company has received from counsel to the
Company a written opinion to the effect that registration of the Warrant or
the Underlying Shares is not necessary in connection with such transfer,
sale, assignment or hypothecation. The Underlying Shares shall be
appropriately legended to reflect this restriction and stop transfer
instructions shall apply.
6. The Company covenants and agrees that all shares of Common Stock which may
be issued upon exercise hereof will, upon issuance, be duly and validly
issued, fully paid and non-assessable and no personal liability will attach
to the holder thereof. The Company further covenants and agrees that,
during the periods within which this Warrant may be exercised, the Company
will at all times have authorized and reserved a sufficient number of
shares of Common Stock for issuance upon exercise of this Warrant and all
other Options.
7. This Warrant shall not entitle the Holder to any voting rights or other
rights as a stockholder of the Company.
8. Certain Adjustments.
(a) In case the Company shall at any time subdivide or combine the
outstanding shares of Common Stock, the exercise price of this Warrant
shall forthwith be proportionately decreased in the case of subdivision
or increased in the case of combination. Upon each such adjustment of
the exercise price, the number of shares of Common Stock usable upon
the exercise of this Warrant shall be adjusted to the nearest full
share by multiplying the exercise price in effect immediately prior to
such adjustment by the number of shares of Common Stock issuable upon
exercise of this Warrant immediately prior to such adjustment and
dividing the product so obtained by the adjusted exercise price.
(b) Major Transactions, etc.
(i) In case of any Major Transaction (as hereinafter defined) the
Holder shall thereafter have the right (during the balance of the
term of this Warrant) to purchase the kind and number of shares of
stock and other securities and property (including cash) such
holder would have received in such Major Transaction had he
exercised this Warrant and had this Warrant theretofore become
exercisable as to all tranches thereof as if each Vesting Date
hereunder had occurred. The purchase price shall be equal to the
product of (x) the number of shares issuable upon exercise of this
Warrant and (y) the Initial Warrant Exercise Price (or the Initial
Warrant Exercise Price, as adjusted, with respect to any tranche
of this Warrant for
15
<PAGE>
which any such adjustment pursuant to Section 3 shall have
occurred prior to the Major Transaction).
(ii) A "Major Transaction" means a reclassification or change of the
outstanding shares of Common Stock (other than a change in par
value to no par value, or from no par value to par value, or as a
result of a subdivision or combination), or any consolidation of
the Company with, or merger of the company into, or acquisitions
by, another corporation (other than a consolidation or merger in
which the Company is the surviving corporation and which does not
result in any reclassification or change of the outstanding shares
of Common Stock, except a change as a result of a subdivision or
combination of such shares or a change in par value, as
aforesaid), or a sale or conveyance to another corporation of all
or substantially all of its assets or outstanding equity
securities.
(c) There are no other anti-dilution provisions. Without limiting the
generality of the foregoing, no adjustment shall be required in respect
of the issuance of additional shares, whether for cash, on conversion
of preferred or other securities, or otherwise.
9. Registrations.
(a) Within 45 days after a request therefor which is given by QVC not
earlier than 18 months after the date of issuance of this Warrant, the
Company shall file a registration statement under the Act which covers
all shares underlying this Warrant, whether or not vested, or for which
this Warrant shall theretofore have been exercised. The Company shall
use its best efforts to cause such registration statement to become
effective and to remain effective until 90 days after the expiration of
this Warrant .
(b) If prior to the period when the Underlying Shares may be publicly sold
pursuant to Rule 144 under the Act or pursuant to the registration
statement referred to in Section (a), the Company shall file a
registration statement under the Act to cover the public sale of Common
Stock by any shareholder of the Company (other than a registration
statement on Form S-8), the Company shall at QVC's request include in
such registration statement which is filed by the Company all shares
underlying this Warrant, whether or not vested, or for which this
Warrant shall theretofore have been exercised. The Company shall give
to Holder notice of such registration as soon as practicable (but not
less than 30 days) prior to the filing of the registration statement.
The Company need not include any shares in any registration statement
under this Section (b) if the underwriters of any offering covered
thereby provides the Company and QVC an opinion in writing that states
that the inclusion of the requested shares in the offering will have a
material adverse effect on the offering price or the Company's ability
to complete the offering; provided that this sentence shall not apply
unless the Company grants to Holder the right to demand an additional
registration statement commencing 90 days after the consummation of the
offering as to which such underwriters shall have made such objection.
Holder's request as aforesaid may be given only during the 30-day
period after the Company shall have given the notice aforesaid to
Holder.
16
<PAGE>
(c) The expenses of each registration hereunder (other than underwriting
discounts and commissions) shall be borne by the Company.
(d) As a condition to the inclusion of any shares in any registration
statement hereunder, the Company may require that Holder execute in
favor of the Company indemnity and similar agreements (other than
lock-up agreements) which are conventional in transactions of this
type.
10. Commencing 90 days after the Vesting Date for each tranche, if the
Company's Common Stock trades at more than $4.00 above the Warrant Exercise
Price (or Adjusted Warrant Exercise Price, if applicable) for such tranche
for a period of ten consecutive trading days, then AMBI will have the
right, at its sole discretion, to repurchase any or all of this Warrant as
to such tranche (the "Called Portion") at a price of $0.05 per share;
provided, however, that this section 10 shall be effective and Repurchase
Notices (as defined hereinafter) shall be valid, if and only if, there is
an effective registration statement under the Act (or an exemption
therefrom available to QVC in the opinion of its counsel, the reasonable
expense of which shall be borne by the Company) that would cover the
Acquired Shares (as hereinafter defined) for at least 90 days following the
date of the Repurchase Notice if QVC were to exercise its rights with
respect to the Called Portion. Upon notice by AMBI of its intention to
repurchase (the "Repurchase Notice"), QVC will be have thirty (30) days
from the date of the Repurchase Notice to exercise its rights hereunder to
exercise this Warrant to purchase the shares covered by the Called Portion
(the "Acquired Shares").
11. This Warrant shall be governed by and construed in accordance with the
internal laws of the State of New York.
12. The Company represents and warrants that the issuance of this Warrant and
the execution and delivery of the Agreement do not violate any agreement or
organizational document of the Company, and that this Warrant has been
issued, and the shares issuable on exercise of this Warrant when so issued
will be issued, in compliance with all securities laws, including the Act.
IN WITNESS WHEREOF, AMBI INC. has caused this Warrant to be signed by its duly
authorized officers under its corporate seal, and to be dated as of August 13,
1999.
AMBI INC.
By: Fredric D. Price
- -----------------------------------
Fredric D. Price, President and CEO
Attest:
/s/ Benjamin T. Sporn
- -----------------------------------
Benjamin T. Sporn, Secretary
17
<PAGE>
Consent of Independent Auditors
The Board of Directors
AMBI Inc.
We consent to incorporation by reference in the Registration Statements (Nos.
333-73397, 333-69969, 33-73312, 333-9801, 333-2507, 333-29829, and 333-35897) on
Form S-3 of AMBI Inc. of our reports dated September 2, 1999, relating to the
consolidated balance sheets of AMBI Inc. and subsidiaries as of June 30, 1999
and 1998, and the related consolidated statements of operations, stockholders'
equity, and cash flows and related schedule for each of the years in the
three-year period ended June 30, 1999, which reports appears in the June 30,
1999 annual report on Form 10-K of AMBI Inc.
KPMG LLP
Stamford, CT
September 27, 1999
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<ARTICLE> 5
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<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-1-1998
<PERIOD-END> JUN-30-1999
<CASH> 4,458
<SECURITIES> 0
<RECEIVABLES> 4,222
<ALLOWANCES> 242
<INVENTORY> 1,426
<CURRENT-ASSETS> 11,022
<PP&E> 1,066
<DEPRECIATION> 292
<TOTAL-ASSETS> 34,541
<CURRENT-LIABILITIES> 9,143
<BONDS> 0
0
921
<COMMON> 150
<OTHER-SE> 20,670
<TOTAL-LIABILITY-AND-EQUITY> 34,541
<SALES> 26,911
<TOTAL-REVENUES> 28,301
<CGS> 4,782
<TOTAL-COSTS> 17,050
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 397
<INCOME-PRETAX> 6,347
<INCOME-TAX> 482
<INCOME-CONTINUING> 5,865
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<NET-INCOME> 5,865
<EPS-BASIC> 0.20
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