<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
10-Q
For Quarter Ended: March 31, 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 (IRS Employer Identification Number)
incorporation of organization)
4 Manhattanville Road, Purchase, New York 10577
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(914) 701-4500
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO _______
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, Par Value $.005 29,560,494 shares as of May 12, 1999
- ----------------------------- ------------------------------------
<PAGE>
AMBI INC. & SUBSIDIARIES
INDEX
PART I FINANCIAL INFORMATION PAGE
- ------ --------------------- ----
Item 1 Financial Statements
Consolidated Balance Sheets
at March 31, 1999
and June 30, 1998 3
Consolidated Statements of Operations
for the three and nine month periods
ended March 31, 1999 and 1998 5
Consolidated Statement of Stockholders'
Equity for the nine month period
ended March 31, 1999 6
Consolidated Statements of Cash Flows
for the nine month periods ended
March 31, 1999 and 1998 7
Notes to Consolidated Financial
Statements 8
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of
Operations 14
PART II OTHER INFORMATION
- ------- -----------------
Item 2 Changes in Securities and Use of Proceeds 20
Item 6 Exhibits and Reports on Form 8-K 20
3
<PAGE>
AMBI INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
March 31, June 30,
1999 1998
---- ----
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 2,320 $ 2,109
Accounts receivable, net 4,633 3,408
Other receivables 325 71
Inventories, net 893 695
Prepaid and other current assets 485 342
--------- ---------
Total current assets 8,656 6,625
Property and equipment, net 1,135 914
Patent costs and licensed technology, net 19,032 11,715
Goodwill, net 2,571 950
Other assets 565 531
--------- ---------
TOTAL ASSETS $ 31,959 $ 20,735
========== ==========
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE>
AMBI INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
March 31, June 30,
1999 1998
---- ----
(unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short term debt, current portion of long-term debt and lease
obligations $ 1,596 $ 3,052
Accounts payable and accrued expenses 3,099 2,458
Contingent payments payable 2,165 2,747
Preferred dividends payable 44 637
-------- --------
Total current liabilities 6,904 8,894
Long term debt and lease obligation, less current portion 3,750 1,543
Other long term obligations 459 --
-------- --------
TOTAL LIABILITIES 11,113 10,437
Commitments and contingent liabilities
REDEEMABLE PREFERRED STOCK
Series E convertible preferred, 1,500 shares issued and
outstanding at March 31, 1999 (aggregate liquidation value
Series E $1,546,027). 1,226 --
Series F convertible preferred, 575 shares issued and 401
shares outstanding at March 31, l999 (aggregate liquidation
value Series F $408,031.) 345 --
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value, authorized 5,000,000 shares;
Series C convertible preferred, 895 shares issued; no
shares outstanding at March 31, l999 and 222 shares
outstanding at June 30, l998. -- --
Series D convertible preferred, 45,000 shares issued; no
shares outstanding at March 31, l999 and 22,500 shares
outstanding at June 30, 1998. -- --
Common stock, $0.005 par value, authorized 65,000,000 shares;
29,560,494 shares and 20,898,297 shares issued and outstanding
at March 31, 1999 and June 30, l998, respectively. 148 105
Additional paid-in capital 59,428 54,942
Accumulated deficit (40,301) (44,749)
-------- --------
TOTAL STOCKHOLDERS' EQUITY $ 19,275 $ 10,298
-------- --------
TOTAL LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY $ 31,959 $ 20,735
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE>
AMBI INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 7,146 $ 5,333 $ 18,925 $ 14,240
Other revenues 237 -- 1,237 --
-------- -------- ------- ------
REVENUES 7,383 5,333 20,162 14,240
COSTS AND EXPENSES:
Cost of sales 1,330 720 2,625 2,070
Selling, general & admin. expenses 3,627 3,051 9,101 8,657
Research and development expenses 355 475 1,220 2,037
Depreciation and amortization 734 450 1,863 1,075
-------- -------- -------- -------
OPERATING INCOME 1,337 637 5,353 401
Interest income 55 2 156 61
Interest expense 94 106 226 291
Other income, net -- -- 79 125
-------- -------- -------- -------
INCOME BEFORE INCOME TAXES 1,298 533 5,362 296
-------- -------- -------- -------
Income taxes 86 1 343 58
-------- -------- -------- -------
NET INCOME $ 1,212 $ 532 $ 5,019 $ 238
======== ======== ======== =======
Basic Earnings (Loss) per share $ 0.04 $ 0.00 $ 0.18 $ (0.06)
-------- -------- -------- -------
Weighted average number of common shares 28,588 20,898 25,402 19,919
======== ======== ======== =======
Diluted Earnings (Loss) per share $ 0.04 $ 0.00 $ 0.17 $ (0.06)
======== ======== ======== =======
Weighted average number of common shares and
equivalents 30,054 20,912 26,654 19,919
-------- -------- -------- -------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
6
<PAGE>
AMBI INC. & SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
Additional
Preferred Stock Preferred Stock Paid-In Accumulated
Series C Series D Common Stock Capital Deficit Total
Shares $ Shares $ Shares $ $ $ $
------ ----- ------ ----- ------- ----- -------- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, l998 222 -- 22,500 -- 20,898,297 105 54,942 (44,749) 10,298
Conversion of Series D preferred
stock to common stock, include-
ing dividends issued as common
stock -- -- (16,750) -- 2,696,246 13 128 -- 141
Exchange and redemption of
Series C preferred stock, include-
ing accrued dividends for common
stock and Series E preferred stock (222) -- -- -- 324,689 2 (1,729) (242) (1,969)
Exchange and redemption of
Series D preferred stock, including
accrued dividends for common
stock and Series F preferred stock (5,750) -- 78,166 -- (379) (81) (460)
Premium on redemption of Series F
preferred stock (88) (88)
Shares issued in connection with
the settlement of AZWELL
obligation 780,488 4 996 1,000
Preferred stock dividends -- -- -- -- -- -- -- (160) (160)
Issuance of common stock in
connection with the acquisition
of the Lite Bites Business. 1,304,347 7 1,430 1,437
Issuance of common stock
to American Home Products stock -- -- -- -- 3,478,261 17 3,983 -- 4,000
Compensation related to issuance and/or
repricing of stock options and warrants -- -- -- -- -- 57 -- 57
Net income for the period -- -- -- -- -- -- -- 5,019 5,019
-- ------ -------- ------ ---------- ----- ----- ----- --------
Balance at March 31, 1999 -- $ -- -- $ -- 29,560,494 $ 148 $ 59,428 ($ 40,301) $ 19,275
== ====== ======== ======= ========== ====== ========== ========= ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
7
<PAGE>
AMBI INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 5,019 $ 238
Adjustments to reconcile net income to net cash provided
by/(used in) operating activities:
Depreciation and amortization 1,863 1,075
Loss on disposal of equipment 137 --
Nutrition 21 consulting expense 158 --
Changes in assets and liabilities:
(Increase) in accounts receivable (1,296) (356)
(Increase) in other receivables (237) --
(Increase) in inventories (198) (414)
(Increase) in prepaid and other current assets (72) (297)
(Increase) in other assets (144) (397)
(Decrease) in preferred stock dividends (41) --
Increase/(decrease) in accounts payable and accrued 641 (612)
expenses ------- --------
Net cash provided by/(used in) operating activities 5,830 (763)
------- --------
Cash flows from investing activities:
Purchases of property and equipment (430) (123)
Payments for patents and licensed technology (436) (477)
Proceeds from sale of equipment 75 --
Payment for Nutrition 21 and related acquisition costs -- (10,499)
Contingent payments for Nutrition 21 acquisition (3,269) --
Payment for Lite Bites Business (6,088) --
Net cash (used in) investing activities (10,148) (11,099)
Cash flows from financing activities:
Term loan borrowings 5,500 3,300
Term loan repayments (2,662) (656)
Revolving line of credit borrowings -- 1,608
Issuance of common stock 4,000 --
Capital lease obligation repayments (98) (141)
Redemption of Series C preferred stock (1,027) --
Preferred dividends paid (9) --
Redemption of Series F preferred stock (175) --
AZWELL, Inc. note repayment (1,000) --
Net cash provided by financing activities 4,529 4,111
Net increase/(decrease) in cash and cash equivalents 211 (7,751)
Cash and cash equivalents at beginning of period 2,109 8,615
------- -----
Cash and cash equivalents at end of period $ 2,320 $ 864
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
8
<PAGE>
AMBI INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
(unaudited)
Note 1 BASIS OF PRESENTATION
----------------------
The accompanying unaudited interim consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial statement reporting and in accordance
with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all the information and footnotes
required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the nine
month period ended March 31, l999 are not necessarily indicative of the
results that may be expected for the fiscal year ending June 30, l999.
For further information, refer to the consolidated financial statements
and notes thereto, included in the Company's annual report on Form 10-K
as amended for the year ended June 30, l998.
Certain reclassifications have been made to the prior period's financial
statements to conform to the current period 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.
("Seller") 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:
Fair value of assets acquired $ 7,616
Cash paid, including transaction costs (6,088)
Restricted common stock issued (1,436)
Liabilities assumed $ 92
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 in the future as follows:
a maximum of $3.0 million in cash and/or AMBI common stock, at the
option of the previous 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.
9
<PAGE>
AMBI INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
(unaudited)
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 three to fifteen years. During the three months ended March
31, l999, the Company recorded approximately $94 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 restricted shares of common stock of the Company.
In connection with the acquisition, liabilities assumed were as follows:
Fair value of assets acquired $ 11,645
Cash purchase price (10,000)
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 March 31, l999, the Company
recorded on its balance sheet a current liability of $2.0 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 nine months ended March 31, 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 nine months ended March 31,
1999 and 1998 is as follows:
1999 1998
---- ----
Net sales $ 22,069 20,970
Net income 4,469 2,152
Basic earnings per share $ 0.15 $ 0.04
Diluted earnings per share $ 0.14 $ 0.04
10
<PAGE>
AMBI INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
(unaudited)
Note 3 INVENTORIES
-----------
The components of inventories at March 31, l999 and June 30, 1998 were:
March 31, June 30,
l999 1998
---- ----
Raw materials $369 $289
Finished goods 638 541
------- ------
1,007 830
less: inventory valuation reserve (114) (135)
------- -------
Inventories, net $ 893 $ 695
======= ======
Note 4 LICENSE, OPTION AND MARKETING AGREEMENT
---------------------------------------
On October 8, 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 an upfront payment of $1.0 million from AHP for the rights and
options. 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 5 PREFERRED STOCK
---------------
Redeemable Preferred 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 D Preferred
and accrued dividends thereon of $59 were exchanged for $575 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, 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.
11
<PAGE>
AMBI INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
(unaudited)
Note 5 PREFERRED STOCK, Continued
--------------------------
The holders of F Preferred have the right to require the Company to
redeem all or a portion of such holder's F Preferred at a price equal to
125% of the Conversion Amount if (i) the Company receives a purchase,
tender or exchange offer made to and accepted by holders of more than
30% of the outstanding shares of Common Stock; (ii) there is a sale or
transfer of all or substantially all of the Company's assets; (iii)
there is a consolidation, merger or other business combination of the
Company with another; (iv) there is a suspension from trading or failure
of the Common Stock to be listed on the Nasdaq National Market, The New
York Stock Exchange, Inc. or the American Stock exchange, Inc. for a
period of five consecutive trading days, or for more than an aggregate
of 10 trading days in any 365 day period; or (v) the Company breaches
any representation, warranty, covenant or other term or condition of the
Exchange Agreement. Further, the holders have the right to require the
Company to redeem up to 10% of the face amount (together with accrued
dividends thereon) of the F Preferred at a price equal to 150% of the
Conversion Amount if, in any calendar month, the average of the closing
bid price of the Common Stock for all trading days during such calendar
month is less than $1.875. As of March 31, l999, 174 shares of F
Preferred were redeemed, for $264, which included a premium of $88. As
of March 31, l999, 401 shares of F Preferred were outstanding.
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 then outstanding C Preferred and accrued dividends thereon of
$542 were exchanged for $1,500 face amount of E Preferred, $1.0 million
in cash and the issuance of 324,689 shares of the Company's common
stock. The E Preferred has a conversion price of $1.25 per share. The
fixed conversion rate is subject to adjustments in certain
circumstances. The E Preferred bears dividends at a rate of 10% per
annum payable in cash or, at the option of the company, in shares of
Common Stock and has a provision for additional payments dependent upon
increases in valuation of the Company's equity securities, subject to a
$250 minimum. As a result of this exchange transaction, the Company
recorded a one-time incremental preferred dividend of $242, representing
the excess of the consideration exchanged over the carrying value of the
then outstanding C Preferred. The E Preferred is subject to conversion
at any time, at the option of the holder, and is subject to mandatory
conversion after three years.
The holders of E Preferred have the right to require the Company to
redeem all or a portion of such holder's E Preferred at a price equal to
125% of the Conversion Amount if (i) the Company receives a purchase,
tender or exchange offer made to and accepted by holders of more than
30% of the outstanding shares of Common Stock; (ii) there is a sale or
transfer of all or substantially all of the Company's assets; (iii)
there is a consolidation, merger or other business combination of the
Company with another; (iv) there is a suspension from trading or failure
of the Common Stock to be listed on the Nasdaq National Market, The New
York Stock Exchange, Inc. or the American Stock exchange, Inc. for a
period of five consecutive trading days, or for more than an aggregate
of 10 trading days in any 365 day period; or (v) the Company breaches
any representation, warranty, covenant or other term or condition of the
Exchange Agreement.
12
<PAGE>
AMBI INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
(unaudited)
Note 5 PREFERRED STOCK, Continued
--------------------------
Dividends payable at March 31, l999 on the E Preferred and F Preferred
were approximately $37 and $7, respectively.
13
<PAGE>
AMBI INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
(unaudited)
Note 6 EARNINGS/(LOSS) PER SHARE
-------------------------
Basic and diluted earnings (loss) per share for the three and nine month
periods ended March 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
March 31, March 31,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 1,212 $ 532 $ 5,019 $ 238
Preferred stock dividends (198) (78) (571) (295)
Conversion discount on convertible
preferred stock (427) (1,222)
Net income/(loss) available --------- --------- --------- ---------
to common stockholders $ 1,014 $ 27 $ 4,448 $ (1,279)
========= ========= ========= =========
Basic earnings/(loss) per share $ 0.04 $ 0.00 $ 0.18 $ (0.06)
========= ========= ========= =========
Weighted average number of common shares 28,588,111 20,898,297 25,401,575 19,919,345
========== ========== ========== ==========
Net income/(loss) available to
common stockholders $ 1,014 $ 27 $ 4,448 $ (1,279)
Interest on AZWELL, Inc. loan, net -- 33
Preferred stock dividends 44 53
Net income/(loss) available to common --------- --------- --------- ---------
stockholders after giving effect to dilution $ 1,058 $ 27 $ 4,534 $ (1,279)
========= ========= ========= =========
Diluted earnings/(loss) per share $ 0.04 $ 0.00 $ 0.17 ($0.06)
========= ========= ========= =========
Weighted average number of common
shares and equivalents 30,054,866 26,654,458
========== ==========
</TABLE>
Diluted earnings/(loss) per share for the three and nine month periods
ended March 31, 1999 and March 31, l998 do not reflect the incremental
shares from the assumed conversion of stock options or warrants or the
conversion of the preferred stock or convertible debt to common stock if
the effect of such inclusion would be to reduce the loss per share.
14
<PAGE>
AMBI INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
(unaudited)
<TABLE>
<CAPTION>
Note 7 SUPPLEMENTAL CASH FLOW INFORMATION Nine months ended
---------------------------------- March 31,
1999 1998
---- ----
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid for interest $ 247 $ 191
Cash paid for income taxes 50 8
Supplemental schedule of non-cash financing activities:
Obligation for purchase of property & equipment $ 220 --
Obligation for N21 contingent payment $ 1,998 $ 1,515
Obligation for Lite Bites contingent payment $ 167 --
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
</TABLE>
Note 8 DEBT FINANCING
--------------
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 $5.5M term loan and a $4.0M revolver 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
March 31, 1999.
15
<PAGE>
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the
consolidated financial statements and related notes thereto of the
Company included elsewhere herein.
General
The Company's revenues have been primarily derived from the sale of
nutrition products to manufacturers of vitamin and mineral supplements
and, since the acquisition on January 21, l999 of all the assets and
certain liabilities of Optimum Lifestyle, Inc. (the "Lite Bites
Business"), from the sale of nutrition bars and other related dietary
supplement products marketed under the trademark "Lite Bites". The
Company has, in addition, received royalty income from users of its
patented technology and milestone payments from its research partners.
Cost of goods sold includes both direct and indirect manufacturing
costs. Research expenses include internal expenditures as well as
expenses associated with third party collaborators. Selling, general
and administrative expenses include salaries and overheads, third party
fees and expenses, royalty expenses for licenses and trademarks, and
costs associated with the selling of the Company's products. The
Company capitalizes patent costs and acquisition-related goodwill and
intangible assets, and amortizes them over periods of one to twenty
years.
On August 11, l997, the Company acquired the entire beneficial interest
in Nutrition 21, a limited partnership. Nutrition 21 is engaged in the
business of developing, producing, and marketing proprietary nutrition
products and dietary supplements. The purchase price for the
acquisition was $10.0 million in cash plus 500,000 restricted shares of
Common Stock of the Company, and additional cash payments which are
contingent upon the achievement of certain sales level in the four
years following acquisition. The Company will also pay royalties to the
sellers on sales of certain patented products. Of the $10.0 million
cash paid at closing, $3.3 million was provided pursuant to a Loan
Agreement with State Street Bank and Trust Company ("SSBT") and the
remainder came from internal working capital. The loan which bears
interest at SSBT's prime rate plus one percent was repaid in January
1999.
The acquisition of Nutrition 21 was accounted for under the purchase
method. Based upon the allocation of purchase price, the transaction
resulted in $10.7 million of identifiable intangible assets, primarily
patents and trademarks, and $1.0 million of goodwill. These amounts
include approximately $2.5 million of identifiable intangible assets
and $0.2 million of goodwill recorded in connection with amounts due
under a contingent consideration clause in the Nutrition 21 purchase
agreement. As additional contingent consideration is earned, the
Company will allocate these amounts in accordance with the original
purchase price allocation. The Company is amortizing the goodwill over
15 years and amortizing the identifiable intangible assets over their
useful economic lives, which range from three to 15 years.
On January 21, l999, the company acquired substantially all of the
assets and assumed certain of the liabilities of Optimum Lifestyle,
Inc. ("Seller") relating to the business ("Lite Bites Business") of
developing, producing, and marketing dietary supplements, primarily
nutrition bars which are marketed under the trademark "Lite-Bites"
through the QVC Inc. television network. These products are
manufactured to proprietary specifications under agreements with third
party manufacturers. The purchase price paid by the Company 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.
16
<PAGE>
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations, Continued
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 in the future, as
follows: a maximum of $3.0 million in cash and/or AMBI common stock, at
the option of the previous 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.
Results of Operations
Revenues
--------
For the three and nine month periods ended March 31, l999, the Company
reported net sales of $7.1 million and $18.9 million respectively, as
compared to $5.3 million and $14.2 million respectively for the same
periods a year earlier. The increase in net sales of $1.8 million and
$4.7 million for the three and nine month periods of fiscal 1999 when
compared to the same fiscal periods a year ago, is primarily due to
increased ingredient sales from the August 11, l997 acquisition of
Nutrition 21, combined with product sales from the January 21, l999
acquisition of the Lite Bites Business.
Other revenues of $0.2 million and $1.2 million for the three and nine
month periods ended March 31, l999, respectively, are comprised of
license and royalty revenues earned from the Whitehall-Robbins
Healthcare division of American Home Products Corporation in accordance
with the License, Option and Marketing Agreement entered into on
October 8, l998.
Cost of sales
-------------
Cost of sales of $1.3 million and $2.6 million for the three and nine
month periods ended March 31, l999, respectively, was $0.6 million
greater than the three and nine month periods a year earlier. The
increase in cost of sales for the three and nine month periods is
directly attributable to increased sales levels and a lower proportion
of high margin ingredient revenues.
Gross margin of 81.3% for the three months ended March 31, l999 was
5.2% less than the comparable period a year ago. The sale of higher
margin ingredient products was partially offset by the sale of
Lite-Bites products which have a lower gross profit as a percentage of
sales.
Selling, general and administrative expenses (SG&A)
---------------------------------------------------
SG&A expense for the three and nine month periods ended March 31, l999,
was $3.6 million and $9.1 million, respectively, as compared to $3.1
million and $8.7 million, respectively, for the same periods a year
earlier. The increase in both periods is due to increased general and
administrative expenses and marketing expenses partially offset by
reduced promotional expenses for ingredient products.
17
<PAGE>
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations, Continued
Research and development expenses
---------------------------------
Research costs decreased $0.1 million and $0.8 million for the three
and nine month periods ended March 31, l999, respectively, compared to
$0.5 million and $2.0 million of research costs for the same periods a
year earlier. The decrease for the three and nine month periods is
attributable to the Company's decision to reduce research activities
related to its infectious disease drug business.
Operating Income
----------------
The Company's reported operating income of $1.3 million and $5.4
million for the three and nine month periods ended March 31, l999
respectively, were $0.7 million and $5.0 million greater than the
operating income of $0.6 million and $0.4 million for the same periods
a year earlier. The increase in net sales from the acquisition of the
Lite Bites Business and, the increase in net sales of the ingredient
products, combined with licensing and royalty revenues of $0.2 million
and $1.2 million for the three and nine months periods, respectively,
were contributing factors; partially offsetting these improvements were
increased selling, general and administrative expenses.
Interest expense, net
---------------------
Interest expense, net of interest income of $39 and $70 for the three
and nine month periods ended March 31, l999 respectively were $65 and
$160 less than the comparable periods a year earlier. The improvement
is due primarily to reduction in debt levels and from interest earned
from funds received.
Other income, net
-----------------
During the nine months ended March 31, l999, and in conjunction with
the relocation of the Company's headquarters operations in September
1998 to Purchase, NY, the Company received $404 when it vacated its
prior premises. Also included in other income, net is $361 of costs
associated with the relocation. The decrease in other income, net,
arises primarily from a reduction in sponsored pharmaceutical-related
research.
Income taxes
------------
Income taxes for the three and nine month periods ended March 31, l999
of $86 and $343, respectively, increased $85 and $285, respectively,
when compared to comparable periods a year earlier. The increase is
primarily due to estimated federal alternative minimum tax and state
income taxes from the Company's increased profitability.
Quarterly Variations
--------------------
On a quarter-to-quarter basis, the Company's sales and income may vary
widely as a result of various factors. Such factors may include
customers placing orders in anticipation of a price increase, customers
adjusting finished goods inventory and planned variations in marketing,
promotion and product development expenses. As a result, the Company
may report sales increases or declines and/or income gains or losses
for a particular quarter that may not reflect end-customer usage of the
Company's products.
18
<PAGE>
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations, Continued
Liquidity and Capital Resources
As of March 31, l999, the Company had a working capital surplus of $1.8
million including cash and cash equivalents of $2.3 million. The
Company continues to improve its working capital position by increasing
profits and reducing research and development expenses, notably,
related to infectious diseases. At June 30, l998, the Company had a
working capital deficit of $2.3 million, including cash and cash
equivalents of $2.1 million.
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
$5.5M term loan and a $4.0M revolver 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 loan as
of March 31, l999. As of March 31, l999, the Company has an outstanding
term loan balance of $5.2 million with SSBT.
On October 8, l998, the Company entered into agreements to form a
strategic alliance with American Home Products Corporation ("AHP").
Under a License, Option and Marketing agreement, AHP's Whitehall-Robins
Healthcare Division was granted, for $1.0 million, an exclusive license
to sell the Company's Cardia(R) Salt in retail markets in the United
States. Under a separate Stock Purchase Agreement, AHP, on October 8,
l998, paid $1.15 per share, or a total of $4.0 million, for 3,478,261
shares of newly issued common stock. The Company retained the exclusive
rights to market its products in both direct response and ingredient
channels.
In accordance with the Purchase Agreement for the acquisition of
Nutrition 21, the Company recorded on its balance sheet at March 31,
l999, a current liability of $2.0 million for the contingent payment
due in September 1999 to the former owners of Nutrition 21 as provided
for in the acquisition agreement. On September 30, l998, the Company
paid the former owners of Nutrition 21 approximately $3.3 million
representing the full amount of the contingent payment due for the 12
month period September 1997 through August 1998. The Company utilized
cash generated from operations to satisfy the contingent payment
obligation.
In March 1996, the Company entered into an agreement with AZWELL, Inc.
(formerly Nippon Shoji Kaisha), under which AZWELL agreed to provide
research funding and equity and debt financing in return for exclusive
rights to certain nisin based drug products in Japan and certain other
Asian countries. In conjunction with that Agreement, AZWELL invested
$2.0 million in the Company's Common Stock and loaned the Company
another $2.0 million which 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"). All remaining shares of C Preferred not so exchanged, were
redeemed for $1.0 million in cash and the issuance of 324,689 shares
19
<PAGE>
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations, Continued
of the Company's Common Stock. The C Preferred was convertible into
common stock of the Company at a discount to the average closing price
in the five days preceding conversion.
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
and accrued dividends thereon of $59 were exchanged for $575 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, 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 March 31, 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 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
---------
The Company is analyzing the nature and extent of work required to make
its systems and infrastructure Year 2000 compliant. The Company uses a
number of computer software programs and operating systems in its
internal operations, including applications in financial business
systems, product development, marketing and various other
administrative functions. To the extent that these software
applications contain source code that is unable to appropriately
interpret the upcoming year "2000", some level of modification or
possibly replacement of such applications may be necessary. The Company
is in the process of inventorying all software and hardware components
and has begun to upgrade software on its systems which are Year 2000
compliant. The Company has asked its suppliers to determine whether
there are any Year 2000 problems which could affect the Company, and to
provide assurances that they will not permit a Year 2000 problem to
interfere with performance under agreements with the Company. The
Company has received responses from its suppliers and customers and the
Company is currently evaluating these responses. To the extent that the
Company is uncertain as to its key suppliers compliance, it may choose
to increase certain key product inventories during 1999 to assure
continuity of operations. The Company continues to evaluate the
estimated costs associated with
20
<PAGE>
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations, Continued
its Year 2000 compliance efforts. At the present time, the Company
believes that any additional costs to be incurred will be immaterial.
While these efforts may involve some additional costs, the Company
believes, based on available information, that it will be able to
manage its total Year 2000 transition without material adverse effect
on its business, financial condition, or operating results.
Recently Issued Accounting Standards
------------------------------------
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 131 "Disclosures
about Segments of an Enterprise and Related Information." SFAS No. 131
supersedes SFAS No. 14 "Financial Reporting for Segments of a Business
Enterprise", but retains the requirement to report information about
major customers. This statement is effective for financial statements
for annual periods beginning after December 15, l997.
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.
The Company continues to evaluate the impact these statements may have
on the Company's financial position or operating results.
21
<PAGE>
PART II - OTHER INFORMATION
Item 2 - Changes in Securities and Use of Proceeds
On December 10, 1998, AMBI Inc. (the "Company") issued 1,500 shares of new
Series E Preferred Stock in exchange for $1,500,000 face amount of the
Company's outstanding Series C Preferred Stock. All remaining shares of
Series C Preferred Stock were redeemed for cash and Common Stock. The
Company also entered into an agreement with the holders of its Series D
Preferred Stock to exchange all of the Series D Preferred Stock, which had
a face amount of $575,000, for 575 shares of the Company's new Series F
Preferred Stock also with a face amount of $575,000. This exchange was
consummated on January 27, l999 following effectiveness of a registration
statement for the underlying Common Stock. Both the Series E and Series F
Preferred Stock have a fixed conversion price of $1.25 per share in
contrast to the variable conversion rates of the Series C and Series D
Preferred Stock. The fixed conversion rate is subject to adjustment in
certain circumstances. The Series E and Series F Preferred Stock bear
dividends at a rate of 10% per annum payable in cash or, at the option of
the Company, in shares of Common Stock. Both new series of Preferred Stock
are subject to conversion at any time at the option of the holder and are
subject to mandatory conversion after three years.
On March 4, l999, the Company issued a warrant to The Research Works, Inc.
to purchase up to 100,000 shares of the Company's common stock at a price
of $1.375 per share prior to March 4, 2004, in exchange for research
reporting services. The above issuances were made pursuant to Section 4(2)
of the Securities Act of 1933.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) The Company filed a report on Form 8-K on February 3, l999 relating to its
acquisition of substantially all of the assets of Optimum Lifestyle, Inc.,
consisting of Item 2 (Acquisition of Assets) and Item 7 (Exhibits).
The Company filed a report on Form 8-K/A on March 15, l999, amending its
Form 8-K relating to its acquisition of substantially all of the Assets of
Optimum Lifestyle, Inc., consisting of Item 7(a) (Financial Statements of
Optimum Lifestyle, Inc); Item 7(b) (Unaudited pro forma financial
information) and Item 7(c) (Exhibits).
22
<PAGE>
AMBI INC. & SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMBI INC.
---------
Registrant
Date: May 14, 1999 By: /S/ Fredric D. Price
--------------------
Fredric D. Price
President and Chief Executive Officer
(Principal Executive Officer)
/S/ Gerald A. Shapiro
---------------------
Gerald A. Shapiro
Vice President and Chief Financial Officer
(Principal Financial Officer)
23
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<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 2,320
<SECURITIES> 0
<RECEIVABLES> 4,875
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<CURRENT-ASSETS> 8,656
<PP&E> 1,135
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0
1,571
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