SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [Fee Required] FOR THE FISCAL YEAR ENDED JUNE 30, 1998 OR [ ] TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
[No Fee Required] OR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER 0-19333
BION ENVIRONMENTAL TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
COLORADO 84-1176672
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
555 17th St., Suite 3310
DENVER, COLORADO 80202
(ADDRESS OF PRINCIPAL (ZIP CODE)
EXECUTIVE OFFICES)
(303) 294-0750
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Securities registered under Section 12(b) and/or 12(g) of the Exchange Act:
COMMON STOCK, NO PAR VALUE
(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 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___
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-K contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this form 10-KSB. [ X ]
The aggregate market value as of September 21, 1998 of voting stock held by
non-affiliates of the Registrant was $14,672,176 based upon the average of the
closing bid and asked prices on the Over the Counter Electronic Bulletin Board
exchange as of that date.
As of September 21, 1998, 8,866,769 shares of Registrant's Common Stock, no par
value, were issued and outstanding.
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PART I
THIS ANNUAL REPORT ON FORM 10-KSB CONTAINS FORWARD-LOOKING STATEMENTS
(IDENTIFIED WITH AN ASTERISK "*" AT THE END OF EACH SUCH STATEMENT) THAT INVOLVE
RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY
FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF
CERTAIN FACTORS, INCLUDING THOSE SET FORTH IN THIS BUSINESS SECTION AND UNDER
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" BELOW.
ITEM 1. DESCRIPTION OF BUSINESS
BUSINESS DEVELOPMENT
Bion Environmental Technologies, Inc. (the "Registrant") is a Colorado
corporation organized on December 31, 1987. The Registrant maintains its
principal executive offices at Suite 3310, 555 Seventeenth Street, Denver,
Colorado 80202 and its phone number is (303) 294-0750.
Substantially all of the business and operations of the Registrant are
conducted through two wholly owned subsidiaries, Bion Technologies, Inc. (a
Colorado corporation organized September 20, 1989) and BionSoil, Inc. (a
Colorado corporation organized June 3, 1996). The Registrant and its
subsidiaries are hereafter referred to as the "Company".
The Company has offices located in Colorado, Florida, New York, and North
Carolina.
BUSINESS OF THE COMPANY
GENERAL DESCRIPTION
The Company currently conducts its business in two complimentary areas:
first, the Company designs, markets and installs waste, wastewater, and storm
water treatment systems, primarily in the agricultural and food processing area;
and second, markets BionSoil(TM) products such as organic fertilizers, potting
soil, and soil amendments which are produced from the nutrient rich BionSolids
harvested from certain types of the Company's agricultural systems installed on
large dairy and hog farms.
PRINCIPAL PRODUCTS AND SERVICES
In the waste, wastewater, and stormwater treatment system area, the
Company designs, markets, monitors the construction and installation of, and
assists its customers in the operation of systems for the biological treatment
of organic waste, wastewater, and stormwater. The Company's systems reduce
pollutant levels in waters discharged from agricultural and food processing
operations in order to enable customers to satisfy environmental regulatory
requirements and to avoid fines, penalties, or citizen lawsuits. Currently the
Company has systems designed for and operating in the dairy and hog farming and
fruit processing industries. The Company is designing systems to treat
agricultural waste streams (feedlots, beef, poultry, fruit and vegetable farms),
food processing plants, and high-intensity and non-point source waste and
wastewater discharges. The Company's animal waste treatment systems convert
animal waste into nutrient rich organic BionSolids which the Company processes
and intends to sell as BionSoil and BionSoil products either in bulk or bagged
form when a distribution system and a sufficient amount of product are in place.
The Company holds patents that generally cover the systems' processes and the
soil products produced by those processes.
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The Company's systems solve or mitigate a broad range of environmental
problems by combining advanced technology with biological and chemical
processing, engineering, and management principles. The Company studies each
proposed site of application carefully to determine the best system design to
solve the client's existing problems, oversees system construction and start-up,
and then works to promote the conditions under which system performance can be
optimized. The result is an enhanced natural system generally consisting of
bioreactors (with aerobic, facultative, and anaerobic bacterial populations for
initial waste breakdown) and ecoreactors (a managed high intensity wetland-like
area). Such a system removes odors, nutrients such as nitrogen and phosphorus,
and other materials from wastes and wastewaters. The materials are then
bioconverted into some or all (depending on the specific application) of the
following end products: BionSolids used to produce BionSoil and BionSoil
products, clean water, and wetlands habitats.
MARKETING AND DISTRIBUTION
SYSTEMS
The Company's marketing efforts for system sales and installations
generally have been directed at solving environmental problems (ground and
surface water contamination, and odor) faced by the agricultural and food
processing industries. While system sales have continued to result from
enforcement actions and pressures from environmental regulatory agencies at the
federal, state, and local levels, satisfied customers and positive media
coverage have also resulted in system sales and the generation of more leads.
The Company's marketing strategy has generally involved a two stage
process. First, a particular technology application is developed and initial
sales are made in the selected market segment within a single geographic area.
Based on performance of the initial systems, the specific market segment is
developed in the geographic area through the sales of additional systems.
Simultaneously, other potential customers with similar problems in the area are
identified, and new applications of the technology are developed and marketed to
them based on the Company's demonstrated track record in solving similar
problems in the initial market segment. Second, as the success of each
particular application is demonstrated in an initial market, marketing commences
in other geographic regions. Following this basic approach, the Company is
currently developing and/or marketing systems in Florida, New York, Colorado,
North Carolina, Illinois, Missouri, Nebraska, Utah, Kansas, Iowa and Oklahoma.
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The Company has marketed and sold its animal waste treatment systems
primarily to large high intensity hog raising facilities and dairy farms. The
Company continues to design, permit, build, and operate systems that meet the
objectives of its customers for waste and wastewater treatment, reduce odor, and
satisfy environmental regulators. The Company also plans over the coming year to
increase its marketing efforts in the areas of industrial wastewater treatment
*.
BIONSOIL
The Company's Bion NMS(TM) system converts animal waste into nutrient rich
BionSolids which can be processed and sold in bulk and in bags as BionSoil and
BionSoil products. The BionSolids are blended to produce organic potting soil,
fertilizer, and soil amendments. The Company has not yet established sales
distribution systems for BionSoil products and sales to date have been only
sporadic. During the period from March 1, 1998 up to and continuing through June
30, 1998, the Company began structuring and executing an initial BionSoil test
market program. This test market has included both bagged and bulk sales. The
Company has not, as of yet, commenced any commercial marketing programs and has
no agreements with any large retail outlets. All test marketing has been through
various nurseries and lawn and garden care outlets in western New York.
COMPETITION
The Company believes that its systems offer technical and environmental
advantages, are frequently more affordable than competitive technologies, and
produce superior treatment results in appropriate situations. However,
competition in the biological wastewater treatment industry is intense. The
Company faces significant competition from many firms involved in the design,
construction, and operation of conventional wastewater treatment systems, as
well as developers of constructed wetlands which are similar but not identical
to the Company's technology. Additionally, there are companies that are capable
of developing systems similar to those being developed by the Company and that
have developed and are capable of developing systems based on other technologies
that are or may be competitive with the Company's systems. Many of these
companies are well-established, have substantially greater financial and other
resources than the Company and have established success in the development, sale
and service of their systems. These companies may succeed in developing
competing systems that are more effective than those developed by the Company.
The Company's ability to compete will be dependent upon its ability to obtain
required approvals and licenses from regulatory authorities and upon the
Company's ability to introduce its systems in the appropriate markets. The
Company believes, however, that in the market segments on which it has focused
to date, its systems offer a less expensive and more flexible process with
better economic and remedial performance than conventional systems offered by
competitors.
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There is also extensive competition in the potting soil, organic soil
amendment, and organic fertilizer markets. There are many companies which are
already selling similar type products. These companies have established
marketing and sales organizations and retail customer commitments, are
supporting their products with advertising, sometimes on a national basis, and
have developed brand name recognition and customer loyalty in many cases.
Gaining a share of this market may take time and could require substantial
resource allocation for advertising, packaging, and product introductions.
Further competition will come from a variety of composting operations being run
by municipal and other governmental agencies, and by private industry, to
dispose of various waste products including industrial and municipal wastewater
sludges, yard and landscaping wastes, and other industrial or commercial organic
wastes. These composted materials may be sold by the various organizations at
low cost just to reduce or defray disposal expense, thereby creating downward
pressure on the price the Company may be able to charge for its products. Many
of the competing organizations and companies are well established, have
substantially greater financial and other resources than the Company and have
already established success in the development and sale of their products. The
Company believes it can compete successfully with these organizations in its
market niche because BionSoil is generally a higher quality product which
qualifies as an all-organic material*. In addition, initial university growth
studies indicate that BionSoil has the potential of replacing all of the
amendments used in standard growers' mixes. It will, however, take further
product development and marketing to realize the market potential that BionSoil
currently appears to offer *.
DEPENDENCE ON ONE OR A FEW MAJOR CUSTOMERS
The Company's operating results are currently dependent upon a limited
number of large contracts. The Company has a contract with Crystal Springs Farms
LLC (formerly Bowman Family Farms), which accounts for more than 10 percent of
the Company's revenues during the past fiscal year. The nature of the Company's
business is such that significant sales are generally expected to be "one-time"
contracts pursuant to which single systems are sold and designed, with
significant income to be received by the Company after the first year of system
operation from the sale of BionSoil and BionSoil products and from maintenance
contracts.
PATENTS
The Company is the sole owner of five United States patents and one
Canadian patent:
U.S. Patent No. 5,078,882, Bioconversion Reactor and System. The patent
describes the Meta System Reactor (MSR) which is the underlying technology for
the Company's current wastewater treatment and Bion NMS systems. This patent
describes in detail the MSR containing three primary treatment zones,
bioreactor, ecoreactor and georeactor, which are cyclically connected by a
series of recycle flows and organism movements to bioconvert the contained
materials. The MSR, with modification, is the basis of the Company's NMS and
Bion NMS systems which have been developed for managing nutrient rich waste
streams from dairies, farms and food processing facilities.
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U.S. Patent No. 5,472,472, Animal Waste Bioconversion System. The patent
describes a process for the bioconversion of animal wastes produced at a
Confined Animal Feeding Operation into economically desirable or ecologically
neutral materials. There are two essential aspects of the process. One involves
treatment of the solids fraction of the waste stream, resulting in a variety of
soil-like materials ranging from a high nutrient, organic soil to a peat-like
substance. The other aspect of the process entails treatment of the waste stream
liquids by means of a microbial activation zone and a constructed wetland zone.
The end-products are clean, virtually nutrient-free water, a high humus soil,
and an attractive wetland environment. This patent covers the technology for the
Bion NMS.
U.S. Patent No. 5,538,529, Bioconverted Nutrient Rich Humus. The
patent describes the process which is an improved process to create nutrient
rich humus through the biological transformation of animal wastes into
ecologically desirable materials. This patent describes the process of
creating BionSoil and its characteristics. Prior to the issuance of this
patent a continuation-in-part was filed describing additional attributes of
BionSoil and how it can be mixed with other substances to create additional
useful products.
U. S. Patent No. 4,721,569, Phosphorus Treatment Process. The patent
describes a process developed to substantially reduce the phosphorus content of
an aqueous influent stream containing biodegradable substrates. This process, in
essence, reduces the capital expenditures required to reduce phosphorus levels
in either air or oxygen-based wastewater treatment plants, as compared to more
conventional biological phosphorus removal or chemical precipitation systems.
The process also allows further savings to be realized in operations due to the
elimination or significant reduction of the chemical loading required by
conventional systems to accomplish the same removal rate.
U.S. Patent No. 5,626,644 Storm Water Remediatory Bioconversion
System. The patent describes a process for the treatment of agricultural,
municipal, or residential stormwater runoff or the like through the capture
and bioconversion of nutrients and contaminants in a constructed wetland
treatment zone entailing the addition of non-toxic chemical additives and the
establishment of chemical-microbial-vegetative complexes.
Canadian Patent No. 1,336,623, Aqueous Stream Treatment Process. This
patent extends Canadian patent protection to a combination of the features
included in U.S. Patents No. 4,721,569 and 5,078,882.
Management intends to file such additional patent applications in the
future as it may deem necessary or appropriate to protect any future development
of the Company's existing technology.
However, there can be no assurances: that any additional patents will be
granted to the Company, that the patents will be defendable against competitors'
potential infringement actions, if any, and/or that the patents will provide any
substantial protection of the Company's technology.
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RESEARCH AND DEVELOPMENT
The Company maintains an active research program and continues working on
the generation of potentially marketable and patentable applications of the
Company's waste and wastewater treatment technology. Current research and
development efforts are focused on enhancements of the Bion NMS and derivative
technologies as utilized in the Company's existing systems in order to apply
these technologies to opportunities that exist in additional geographic areas
and industry segments. As each new geographic market and industry application
area is entered, there will be a need for additional research efforts to adapt
the Company's systems.
Further, the Company is developing a research effort focused on BionSoil
and BionSoil products. During the past two years the Company, in conjunction
with North Carolina State University has studied the benefits of using BionSoil
in a variety of applications. The Company has also hired a horticulturist in
order to conduct formal and informal plant growth studies as well as conduct
research into harvesting and blending techniques for BionSoil and BionSoil
products.
ENVIRONMENTAL PROTECTION/REGULATION
The Company is a provider of systems and services which result in
reduction of pollution and as such is not itself under direct enforcement or
regulatory pressure. However, because the Company is involved in wastewater
treatment, it is subject to environmental regulations with at least three
different focuses. Specifically:
(1) The marketing and sales success of the Company depends, to a
substantial degree, on the pollution clean-up requirements of various
governmental agencies from the Environmental Protection Agency (EPA) at the
federal level to various state departments of environmental affairs to local
governmental agencies at the county and city levels. As guidelines or directives
are established at the highest of these levels, lower jurisdictions generally
are required to at least meet or, in many instances, exceed the standards
established. Without these governmentally-induced pressures to solve pollution
problems, many municipalities, industries and individuals will not expend the
capital necessary to purchase systems to treat their wastewater streams. While
the current administration in Washington, D.C. has verbally placed emphasis on
pollution clean-up targets, there can be no assurance that these statements will
lead to actions which will result in regulations and/or enforcement activity
that will increase demand for the Company's systems.
(2) Federal, state and local environmental agencies frequently change
required final effluent standards and other requirements for treatment systems
which introduces a degree of uncertainty in system design and performance
criteria. As these requirements change, the marketability of the Company's
systems may be impacted both negatively and/or positively.
(3) Most of the Company's systems require governmental permits or approval
prior to installation as they are treating situations for customers where
government regulations specify permit requirements for operation.
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EMPLOYEES
The Company employed twenty-five persons with twenty-three persons
full-time as of June 30, 1998. Four of these full-time persons are engaged in
management; fifteen in operations, sales and marketing; and four in clerical and
administration.
ITEM 2. DESCRIPTION OF PROPERTY
OFFICE AND PROCESSING FACILITIES
The Company's executive offices are located at 555 17th Street, Suite
3310, Denver, Colorado. The Company subleases four offices (plus use of common
facilities, office equipment and certain services) from Delta Petroleum
Corporation (which owns approximately 1.7% of the Company's currently issued and
outstanding common stock) on a month-to-month basis pursuant to an oral
arrangement between the parties. The Company has additional offices at 606 N.
French Road, Suite 6, W. Amherst, New York; 206 North Parrott Avenue,
Okeechobee, Florida; and 138 Uzzle Industrial Drive, Clayton, North Carolina.
The Company also rents BionSoil processing sites located at State Road 710 and
SE 74th Trail, Okeechobee, Florida; 5116 Hermitage Road, Gainesville, New York;
5905 Curriers Road, Arcade, New York; Upper Reservation Road, Castile, New York;
and 542 Garrett Road, Four Oaks, North Carolina. All leases and rental
agreements are with non-affiliated parties.
ITEM 3. LEGAL PROCEEDINGS
The Company knows of no material pending legal proceedings to which the
Company (or its Subsidiaries) is a party or of which any of its systems is the
subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There has been no submission of matters to a vote of security holders
during the fourth quarter of the fiscal year ended June 30, 1998.
PART II
ITEM 5. MARKET FOR BION ENVIRONMENTAL TECHNOLOGIES, INC. COMMON STOCK AND
RELATED STOCKHOLDER MATTERS
(a) MARKET INFORMATION
The Company has had during the past two years only sporadic trading in its
common stock in the over-the-counter market, and there is no assurance that such
trading will expand or even continue. The Company's stock may not be traded in
certain states unless the Company is able to qualify its stock in such states.
During the past year there have been quotations for various transactions in the
Company's shares which are not necessarily representative of an established
public trading market.
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At present, the Company's Common Stock trades under the symbol "BION"
(changed from "BIET" effective September 15, 1997) on the OTC Bulletin Board.
The following quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions.
QUARTER ENDED HIGH BID LOW BID
September 30, 1996 $ 3.25 $ 2.50
December 31, 1996 $ 5.50 $ 4.00
March 31, 1997 $ 6.38 $ 5.44
June 30, 1997 $ 5.50 $ 3.00
September 30, 1997 $ 4.50 $ 2.00
December 31, 1997 $ 7.31 $ 4.13
March 31, 1998 $ 8.50 $ 6.00
June 30, 1998 $ 9.19 $ 5.75
On September 21, 1998 the bid and asked prices of the Common Stock were
$3.88 and $4.13, respectively.
(b) HOLDERS
The number of holders of record of the Company's Common Stock at September
21, 1998 was approximately 687.
(c) DIVIDENDS
The Company has never paid any cash dividends on its Common Stock. The
payment of dividends, if any, in the future is within the discretion of the
Board of Directors and will depend on the Company's earnings, if any, its
capital requirements and financial condition, and other relevant factors. The
Board of Directors does not intend to declare any cash or other dividends in the
foreseeable future, but instead intends to retain earnings, if any, for use in
the Company's business operations.
Class B Preferred stockholders were entitled to receive, upon conversion,
redemption or liquidation, cumulative dividends at the per annum rate of $.54
per share on the issued and outstanding Class B Preferred Stock. Effective
December 15, 1997, all Class B Preferred Stock was converted to Common Stock.
The cumulative dividends totalling $30,961.11 were paid in Common Stock (10,324
shares).
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
THE DISCUSSION IN ITEM 6(A) BELOW CONTAINS FORWARD-LOOKING STATEMENTS
(IDENTIFIED WITH AN ASTERISK "*" AT THE END OF EACH SUCH STATEMENT) MADE IN
RELIANCE UPON THE PROVISIONS OF RULE 175 PROMULGATED UNDER THE SECURITIES ACT OF
1933 AND SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S CONSOLIDATED FINANCIAL
STATEMENTS AND THE NOTES THERETO. THE FOOTNOTES SET FORTH BELOW (AT PAGES 23 TO
27) ARE AN INTEGRAL PART OF THIS DISCUSSION AND SHOULD BE CAREFULLY REVIEWED TO
PROPERLY UNDERSTAND THIS SECTION. THIS DISCUSSION IS QUALIFIED IN ITS ENTIRETY
BY THE RISK FACTORS DISCUSSED HEREIN.
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(a) PLAN OF OPERATION
GENERAL DISCUSSION OF CURRENT AND PROPOSED OPERATIONS
The audited financial statements contained in this Form 10-KSB show that
over $10,884,000 of equity has been invested in the Company through the close of
the fiscal year ended June 30, 1998. These financial statements also show that,
as of that date, the Company had a negative net worth of $390,559, cumulative
losses of $11,275,528, limited current revenues and substantial current
operating losses. Continued losses without additional outside funding raise
doubt about the Company's ability to continue as a going concern. Management
plans to continue raising additional capital to fund operations until such time,
if ever, as Bion NMS sales along with the sales of BionSoil and BionSoil
products are sufficient to fund operations.
Management believes, however, that additional information is necessary to
evaluate the Company and its progress relative to the business it is pursuing,
its plans for the future, and the associated value the Company has developed
during the last several years. Therefore, the following section of this Form
10-KSB is presented by management to give the reader a better understanding of
the development of the business of the Company to date, and its goals for growth
in the future.
BUSINESS DEVELOPMENT
The Company's mission is to provide services, systems and products which
solve environmental problems with wastes and wastewater, and in appropriate
situations, recycle wastes into high value horticultural products which produce
superior plant growth performance. The Company currently conducts its business
in two complimentary areas: first, the Company designs, markets, and oversees
the installation and operation of waste, wastewater and storm water treatment
systems, primarily in the agricultural and food processing area; and second,
markets BionSoil products such as organic fertilizers, potting soils and soil
amendments which are produced from the nutrient rich solids harvested from
certain types of the Company's agricultural systems installed on large dairy and
swine farms. Eventually the Company anticipates emphasizing additional business
areas including without limitation municipal and industrial wastewater treatment
*.
The main emphasis of the Company's business during the past two years has
been on the application of the Bion NMS for large animal raising agricultural
facilities. As a result, the Company's focus has been more specifically on:
first, the design, sales, installation oversight, operations management, and
material harvesting of Bion NMS systems for large dairy and swine facilities;
and, second, BionSoil: the development efforts associated with testing,
processing, blending, packaging, marketing, distribution and sales of BionSoil
and BionSoil-based products which are produced from the solids harvested from
the Company's Bion NMS systems.
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As Bion NMS systems are brought on-line and BionSolids (see footnote 1,
below) are harvested, it is anticipated that BionSoil, Inc. will purchase the
harvested BionSolids from Bion Technologies, Inc. to process it into BionSoil
products for sale to customers *. Some farms may be paid fees as royalty for the
BionSolids harvested from their site *. These payments potentially represent an
important part of the strategy developed by the Company for the successful
marketing of Bion NMS systems *. Most large animal raising facilities have
substantial operating costs associated with the disposal of manure and waste
products, which are generated in large quantities at these facilities. With the
construction and operation of a Bion NMS on a farm site, many of these costs may
be substantially reduced or eliminated, and the farm may, in some cases, also
receive a revenue stream from the cash payments made by the Company to the
farm*.
During the past two years the Company has been working to emerge from the
research and development stage and transition into the sales and marketing of
the Bion NMS systems and the BionSoil products produced by those systems. The
Company has focused the majority of its efforts and expenditures in these two
areas and is beginning to see positive progress in both, as described below *.
The Company has defined a method for tracking both the sale and start-up of Bion
NMS systems and the production of BionSoil based on a Company defined standard
unit, the BionAnimal which relates BionSoil production to confined animal
weight. WHEN ALL THE MANURE AND URINE PRODUCED BY ONE BIONANIMAL IS COLLECTED AS
BIONSOLIDS AND SUBSEQUENTLY CONVERTED INTO BIONSOIL, THE COMPANY ESTIMATES THAT
EACH BIONANIMAL WILL YIELD APPROXIMATELY 1 CUBIC YARD OF PROCESSED BIONSOIL PER
YEAR *. [NOTE: PRIOR TO JANUARY 31, 1998, THE BIONANIMAL UNIT WAS DEFINED SUCH
THAT EACH BIONANIMAL PRODUCED APPROXIMATELY 10 CUBIC YARDS OF PROCESSED BIONSOIL
PER YEAR. THE ESTIMATED NUMBER OF CUBIC YARDS OF BIONSOIL PRODUCED BY EACH
ANIMAL (DAIRY COW, STEER, SOW, MARKET HOG, ETC.) HAS REMAINED THE SAME, HOWEVER,
BECAUSE READERS FOUND THE CALCULATION FROM BIONANIMALS TO CUBIC YARDS OF
BIONSOIL CONFUSING, THE COMPANY HAS CHANGED THE DEFINITION AS DESCRIBED.] THE
COMPANY CHANGED THE DEFINITION ON JANUARY 31, 1998 TO MAKE TRACKING OF THE
NUMBER OF BIONANIMALS UNDER CONTRACT AND THE ANNUAL PRODUCTION OF BIONSOIL (IF
ALL BIONANIMALS UNDER CONTRACT WERE IN PRODUCTION) ESSENTIALLY IDENTICAL.
Using this definition of BionAnimal the Company has developed the
following table relating the number of animals in full confinement
installations to the number of BionAnimal equivalents they represent. (See
footnote 2, below):
Table 1
ANIMAL APPROXIMATE EQUIVALENT BIONANIMALS
NEW DEFINITION OLD DEFINITION
One dairy cow 10.00 1.000
One steer 4.50 0.450 (2.2 = 1)
One sow 1.35 0.135 (7.4 = 1)
One market hog 0.90 (1.1 = 1) 0.090 (11 = 1)
One nursery pig 0.225 (4.4 = 1) 0.0225 (44 = 1)
One layer chicken 0.02 (50 = 1) 0.002 (500 = 1)
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Prior to September 20, 1989, (when Bion Technologies, Inc., was
incorporated) through at least June 30, 1997, the Company was in the technology
development mode with limited sales of primarily first-of-a-kind wastewater
and/or Bion NMS systems. Initial sales and installations were wastewater
treatment NMS (no BionSolids production) until 1993 when the emphasis shifted to
Bion NMS (BionSolids production) applications.
As of June 30, 1997 the Company had performed studies for, sold, had under
construction and/or in operation systems in four distinct regions: North
Carolina, New York, Florida, and the Pacific Northwest (see footnote 3, below).
As of June 30, 1998 the Company's business activities have expanded into
Colorado, Illinois, Missouri, Nebraska, and Utah. The Company also has contracts
for additional systems in Kansas, Iowa and Oklahoma (see footnote 4, below)*.
GEOGRAPHIC EXPANSION
The activities of the Company to design, permit, oversee the installation
of and operate these systems in these various geographic areas have established
credibility with federal, state, and local regulators and environmental and
agricultural professionals. With the establishment of this credibility and
recent contract signings, the Company is positioned to attempt to gain
significant market penetration into new geographic areas*. To date, the
Company's geographic expansion has been limited due to financial and personnel
constraints (which continue to exist). However, as a result of heightened
awareness about the major manure treatment and disposal problem facing the
animal raising industry (see footnote 5, below), and due to the current
proliferation of state and national legislation being considered management
believes that major geographic expansion is now possible and is essential to the
Company's ability to achieve successful operations in the future*.
The Company estimates that the cost associated with the required staffing,
servicing, and marketing for expansion into new geographic regions, including
initial sales calls, system design, regulatory approvals, system installation
and operation through the cash-flow break-even point (the Company has not yet
achieved cash-flow break-even in any of its regional operations), is not less
than $500,000 per region, and may exceed $1,500,000. Based on experience to date
in the regions where system sales and installation activity have been focused,
the Company believes that the money invested in these efforts has created what
might be called "good will," "marketing" and/or "regulatory" value *. Management
believes that achieving a greater rate of geographic expansion will require
expenditures greater than those expensed for previous expansion *. (An example
of the accumulation of these expenses can be understood by reference to the
development and installation of the Company's initial hog farm Bion NMS system
in North Carolina which is described in more detail in footnote 6, below).
As the Company continues its expansion into new areas in the future, and
this expansion requires similar or greater additional cash resources to be
spent, these cash amounts, when expended, will be expensed and not shown as
balance sheet assets *.
12
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TECHNOLOGY EXPANSION
The Company has six issued patents (see footnote 7, below) which provide
broad coverage of the fundamental technology that underlies the Company's
systems and processes. The Company is conducting a review of its existing patent
position and anticipates that additional patent filings may occur based on this
review or as further applications of the technology are developed *. The Company
currently anticipates the expansion of the technology into the cattle feedlot
and poultry raising businesses where the technology will need to be adapted to
treat waste with both different characteristics and different collection
technologies than for existing dairy or swine waste systems *.
Other factors that may motivate the expansion of technology include, but
are not limited to, current and/or new local, state, and federal regulations,
proximity of potential systems to current online systems or systems under
contract and the market size of poultry, cattle feedlot and other similar
operations.
Just as there are additional expenses associated with geographic
expansion, there also are additional expenses associated with the adaptation of
existing technology for use in regions where climate, soil, and regulatory
conditions are different from those experienced in other already established
installations. The majority of such expenses (which are investments in the
Company's future) will not show as balance sheet assets despite the fact that
long term technological value is being created.
The Company estimates that a large portion of the net loss through fiscal
year 1995 (then shown on the financial statements as approximately $4.0 million)
was actually expended on system development and the enhancement of the
technology and construction of prototype systems that are the basis of the
Company's planned future expansion. The Company has expensed all of these costs.
MARKET SIZE
Management has devoted significant effort to defining markets for both
Bion NMS systems and potential markets for BionSoil and BionSoil products. These
efforts have included formal and informal studies, creation of models as well as
analysis of available statistical data.
The Company has analyzed the 1992 U.S. Department of Agriculture Census
statistics (the most recent detailed information available from the U.S.
Department of Agriculture) as well as additional state by state information, in
some cases current as of December 1997, and developed the following size
estimates for the target market segments for system sales (see footnote 8,
below).
The total United States animal population, based on data contained in the
1992 U.S. Department of Agriculture Census statistics shows that there were over
96 million cattle and calves, 57 million hogs and in excess of 1.2 billion fowl
on farms in the United States. These numbers if converted based on the Company
defined BionAnimal unit yield approximately 455 million BionAnimals.
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However, not all of these BionAnimals are on farms that are potential
candidates for a Bion NMS installation. The Company has analyzed the economics
of system installation, minimum system size requirements and system operation
factors related to the size of farms. Based on this review and further analysis
of the census data, the Company estimates that the total number of BionAnimals
on larger farms which meet size criteria is approximately 140 million (see
footnote 9, below). Based on this review, these animals are believed by the
Company to be the potential candidates for system installation in the U.S.*
Further, the number of large animal farms is increasing as the move to
consolidate livestock operations into larger more efficient farm units is
accelerating (see footnote 10, below).
Management's review of the potential market for BionSoil and BionSoil
products has included research by the Battelle Institute in a study conducted
for the Solid Waste Composting Council (see footnote 11, below), as well as
initial market sector analysis *. Battelle calculated that the demand for
compost and compost-like products (including products ranging from manure to
composted organic wastes to manufactured potting soils and soil enhancers) in
selected areas of the U.S. alone is projected to be in excess of one billion
cubic yards per year *. This demand, categorized in nine application segments:
landscapers, delivered topsoil, bagged retail, nurseries, landfill final cover,
surface mine reclamation, sod production, silvaculture, and agriculture, far
exceeds projected supply *. Targeted markets for BionSoil include these segments
in addition to state and municipal park and transportation departments, golf
courses, athletic fields, home gardeners, reforestation projects for timber and
mining companies, the U.S. Park Service and others *. The Company is currently
analyzing specific market sectors that are initial target market areas within
this overall demand including container nursery products, golf course
construction, the turf industry and others (see footnote 12, below)*.
During the spring of 1998, the Company conducted a limited market test of
the BionSoil product through retail and commercial outlets in western New York
(see the Company's Form 8-K dated July 1, 1998). The material for this test was
New York dairy BionSoil processed and blended with Sphagnum peat moss at the
Company's Hermitage New York facility. Subsequently it was sold in bulk
quantities or bagged in both 20 pound and 40 pound bags and sold. The bagged
product was sold to a limited number of small retail garden shops and nurseries
at wholesale prices, to the Company, of $1.97 and $2.97 for 20 and 40 pounds
respectively (resulting in prices per cubic yard of $80.00 and $108.00
respectively). Bulk product was sold through similar distribution outlets for
prices from $15.00 to $27.95 per cubic yard. The test market program was
conducted with no advertising budget, only limited point-of-sales materials, and
with no participation of any large chain retail outlets. The average price per
cubic yard for all product sold in this limited test market program, bagged and
bulk combined, was $39.37 per cubic yard. Management believes that this test
market program provides the Company's first confirmation of the market viability
of BionSoil products. Management further believes that, when product sales
efforts are supported with a strong marketing/advertising program, average sales
prices will increase above $40.00 per cubic yard*.
Further, it should be noted that a significant portion of the material
harvested from many systems in the last year has been devoted to both university
and private studies intended to determine physical characteristics, blends, and
growth results achievable using BionSoil in many different applications (see
footnotes 13 and 14, below).
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BIONSOLIDS HARVESTING
BionSolid harvests to date have been from relatively new systems and the
Company has been devoting substantial effort to develop appropriate technology
and sites for processing the material for sale. As a result, only small
quantities of BionSoil have been available for sale during the last twelve
months. The results for a portion of these sales have been documented in the
above referenced test market.
The current methods for the harvest of BionSolids and processing it into
BionSoil are being continually refined and updated. Currently the BionSolids
harvested from a dairy Bion NMS are mechanically harvested and then left for
initial drying at the farm. Once dried to a sufficient level the BionSolids are
transported to a BionSoil processing site where additional drying takes place
before final processing or blending and then subsequently bagging or bulk
storage.
Harvesting of the hog Bion NMS is still in the experimental stage with
multiple methods being studied in an ongoing program. Currently, the most
efficient method of harvesting the BionSolids is to pump the BionSolids from the
system and then either blend them directly with an organic substrate (aged
shredded pine bark for example) or dry them before they are processed and
blended.
Although significant quantities of BionSoil have only recently become
available, BionSoil has been clearly shown to enhance plant growth performance
through both Company performed and independent university sponsored testing (see
footnote 14, below).
FINANCIAL DISCUSSION OF BION NMS AND BIONSOIL BUSINESS
The Company expects to receive two distinct revenue streams from Bion NMS
systems: 1) fees for system design, permitting, start-up and initial operation
(and, for certain systems, periodic management or technology fees); and, 2)
commencing approximately nine to fifteen months after the initial start-up of
BionSoil production systems installed on large dairy, swine, poultry farms or
feedlots, revenue from the sale of BionSoil and BionSoil-based products produced
from the systems [Note that initial system start-up typically occurs six to nine
months after a system contract is signed therefore BionSoil revenues will
typically commence between 15 and 24 months after a system contract is signed],
(see footnote 15, below) *. To date, revenues from the sale of BionSoil have
been minimal.
15
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BION NMS ECONOMICS
The Company may receive multiple design, permit and construction, and
operation oversight fees. These fees are paid to the Company by the clients in
return for services rendered and the licensing of a particular site to use the
Bion NMS technology. Fees may also be paid to the Company on a regular ongoing
basis for system oversight as well as regulatory and biological testing. These
fees are above and beyond any revenue the Company may receive from the sale of
BionSoil. In some cases one or more of these categories of fees may be waived or
excluded in formal negotiated contract terms for a variety of reasons, including
without limitation, signing the first system contract in a new geographic
region, signing the first system contract for a new application of the
technology, or offsetting some or all of the fees against reduced or eliminated
BionSolids royalties.
In the past the Company has lost money on system design, permitting
support, construction oversight and initial system operation. However, through
installing these systems at a loss the Company has been able to establish a
number of Bion NMS systems to use for test sites, demonstrations and to refine
the technology. Based on experience to date, the Company is working to establish
pricing for its contracts that the Company believes will, independent of
BionSoil revenues, be sufficient to cover direct expenses (such as system
design, permitting support, construction oversight and initial system operation)
related to these system installations*. However, there is no assurance that this
goal will be achieved or that the Company will be successful in selling its
systems at a price level sufficient for the Company to generate a profit.
While sales of Bion NMS systems have been sporadic over the last five
years, the Company believes it has clearly demonstrated the success of the
system technology with 11 agricultural Bion NMS soil production systems in
operation.
BIONSOIL ECONOMICS
Based on the Company's current market test, a review of prices for soils
and soil-enhancing products in various markets, and target market segment
strategies being developed, the Company believes that BionSoil will sell at no
less than an average of $20 per cubic yard when sold in bulk, and will sell for
higher prices when processed and bagged, which prices may rise to $100 per cubic
yard or higher *. [It should be noted that all prices quoted within this Form
10-KSB are wholesale only and may not be representative of actual retail
prices.] Additionally, based on actual costs experienced in BionSoil harvesting
and processing to date, anticipated improvements in processing technologies and
efficiencies, and lower per unit costs as volumes increase, the Company has
estimated costs for the various levels of processing required to sell BionSoil
products *. Given the contract terms and estimated costs of production and
sales, the potential gross margin (see footnote 16, below) returned to the
Company from BionSoil products sales alone has been calculated for a series of
potential price points (see footnote 17, below) (and the implied processing
levels required to achieve the products to be sold at these price points (see
footnote 18, below))*. Table 2 below presents this information for five selected
possible price points *. This table has been prepared reflecting estimates based
on the Company's limited experience to date with the harvesting and processing
of BionSoil and BionSoil products *. (See footnotes 17 and 18, below)*.
16
<PAGE>
Table 2 *
Potential BionSoil Estimated Related Calculated
Wholesale Price BionSoil Expenses Gross Margin
PER CUBIC YARD* PER CUBIC YARD * PER CUBIC YARD*
$ 20* 13* 7*
40* 22* 18*
60* 32* 28*
80* 41* 39*
100* 53* 47*
The calculated gross margin per cubic yard as presented in Table 2 above
is equivalent to the annual gross margin contribution of each BionAnimal in a
system that is fully on line producing BionSoil (see the definition of
BionAnimal above where one BionAnimal produces one cubic yard of BionSoil per
year).
If the Company were successful in bringing targeted systems on line
producing BionSoil within the 18 to 24 month start-up time frame (which cannot
be assured and is subject to numerous and substantial risks); and, if the
Company were successful in realizing the various potential price levels and
expense levels in columns 1 and 2 of Table 3 (which also cannot be assured and
is subject to numerous and substantial risks as explained below) then column
three, calculated gross margin per cubic yard is also the calculated annual
gross margin contribution of each BionAnimal producing BionSoil. Given that
revenue to the Company from BionSoil sales is anticipated to begin in an average
of one and a half to two years after the signing of an agreement for a Bion NMS
system, these calculated gross margins, which are equivalent to gross margins
per BionAnimal, would be anticipated to be repeated each year thereafter for as
long as the installations remain in operation (current system contracts are set
for 15 years with renewal option) *. If the net present value (discounted at 8%)
of these gross margins is calculated for the normal 15-year period of a
contract, the net present value of the gross margin from each BionAnimal under
contract would be as shown in Table 3 for each potential price point in Table
2*. (See Footenote 19 below)*.
Table 3*
GROSS MARGIN NET PRESENT VALUE PER BIONANIMAL*
Calculated Annual 15 Year Net Present
Gross Margin Per Value Per BionAnimal
BIONANIMAL* ANNUAL GROSS MARGINS*
$ 7* $ 47*
18* 122*
28* 190*
39* 264*
47* 318*
Management believes that this NPV analysis is useful because it provides
an indication of the value to the Company, of the number of BionAnimals
contained in each contract for Bion NMS systems.
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<PAGE>
MANAGEMENT'S TARGETS/GOALS, BION NMS SYSTEM SALES AND BIONANIMALS UNDER
CONTRACT
Based on the results of the limited current BionSoil test market, analysis
of the Company's potential markets for both BionSoil products and Bion NMS
systems, the large number of proposals and preliminary agreements currently
being prepared at the specific request of potential clients, the recent signing
of additional major Bion NMS system installation contracts (see footnote 20,
below) and the steadily increasing interest in Bion NMS systems as a cost
effective and efficient solution to environmental issues related to waste and
wastewater handling in the large animal agriculture area, management has
reviewed the goals for system sales and installations that were previously
established by the Company.
The Company has set internal sales goals for each of the last two fiscal
years, 1997 and 1998. Note, however, that as of June 30, 1997, the Company HAD
NOT MET ITS INTERNAL SALES GOAL FOR SYSTEMS AND BIONANIMALS ESTABLISHED FOR THAT
FISCAL YEAR due to a number of factors, including but not limited to capital
availability, the decision to close the Company's Washington state operations,
uncertainty created in certain markets due to pending legislation which could
directly impact animal waste treatment and disposal practices, the decision to
cancel certain agreements and/or contracts for systems that were not profitable,
and the decision to re-negotiate certain of its existing agreements for systems
to establish more equitable terms (which systems have been removed from all
system and BionAnimal totals until such time, if ever, as the re-negotiations
result in new signed contracts), (see the Company's Form 10-KSB for the fiscal
year ended June 30, 1997).
As a result of its failure to attain the goals that had been established,
in June 1997 following careful review, Company management established the
primary long range goal to achieve a target level of 250 systems under contract
containing 2,000,000 BionAnimals by June 30, 2000, the end of the Company's
fiscal year 2000*. To support achievement of this long-range goal the Company
established the addition of 40 systems under contract containing 300,000
BionAnimals as the sales target through its fiscal year ending June 30, 1998
which would result in the Company having contracts for a total of 64 systems
containing approximately 390,000 BionAnimals by June 30, 1998. The Company's
goal for growth through fiscal 2000 was approximately 2,000,000 BionAnimals,
therefore approximately 2,000,000 cubic yards per year of BionSoil and BionSoil
products would be available for sale in fiscal years commencing after all of the
systems are on line, (approximately 15 to 24 months after contract signing) *.
(See the Company's Form 10-KSB for the fiscal year ended June 30, 1997 for a
discussion of these goals).
For fiscal year 1998 (which ended June 30, 1998), the Company
significantly exceeded these goals. During the year, the Company added systems
under contract containing approximately 650,000 BionAnimals as compared to its
goal of adding contracts for approximately 300,000 BionAnimals through the end
of the fiscal year. As a result the Company exceeded its target for the fiscal
year ended June 30, 1998 by over 100%. When all the systems under contract are
complete and in full operation (which is expected to take up to two years from
signing) they are anticipated to produce approximately 750,000 cubic yards of
BionSoil per year.
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<PAGE>
Based on these factors and the assumptions detailed below, management has
set the following performance goals for the number of BionAnimals under contract
in each of the next four fiscal years, and, following the 15 to 24 month lag for
system design, permitting, construction and start-up, for quantities of BionSoil
that are anticipated to be available to be sold*:
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<PAGE>
Table 4 (see footnote 21, below)
Management Targets/Goals
BIONANIMAL/CONTRACTS AND BIONSOIL (#'S IN THOUSANDS)*
FISCAL YEARS ENDED JUNE 30
1999 2000 2001 2002
Number of BionAnimals
added during fiscal
year (in thousands) * 800* 950* 1,200* 1,400*
Cumulative number of
BionAnimals under
contract (in
thousands) * 1,550* 2,500* 3,700*
5,100*
BionSoil available
for sale (in thousands
of cubic yards) * 30* 300* 1,600* 2,600*
The above goals will only be realized by the Company if many factors and
assumptions including but not limited to the following are met: a) that the
Company will be able to secure sufficient additional funding, most of which will
be raised through capital investments (of which there can be no guarantee); b)
that the Company will be able to hire sufficient management personnel i.e.
sales, engineering and operations, in order to promote the growth of the Company
and to properly manage that growth; c) that continuing regulatory pressures on
the agricultural industries will lead them to install the Bion NMS or similar
technology in order to solve the environmental problems; d) that legislative and
regulatory powers will not pass and enforce non-science based laws that would
render the Bion NMS obsolete or illegal; e) that the Company will be able to
expand the application of its technology and accomplish the geographic expansion
into new regions; f) that the pricing and features of the Bion NMS and the
services provided by the Company can be accomplished within the constraints of
the Company's economic model; g) that the trend towards market consolidation in
the agricultural community, whereby the total number of farms decreases,
however, the number of animals produced increases, continues; and, h) that the
Company is successful in developing, marketing and selling the BionSoil and
BionSoil products produced by the Bion NMS *. None of these factors and
assumptions can be guaranteed.
20
<PAGE>
These goals for system and BionSoil sales represent aggressive growth for
the Company *. The Company currently believes however, that its goals are
reasonable in light of recent developments. In fiscal year 1998 the Company
added contracts for Bion NMS systems containing 650,000 BionAnimals. Further, in
the first quarter of fiscal year 1999 the Company has added contracts for 18
additional Bion NMS systems containing approximately 315,000 BionAnimals. An
examination of the size of the target markets for system sales and installations
and BionSoil sales (as shown above) shows that the percent of total market
penetration, which these goals represent, are very modest *. On the basis of the
assumptions above and the analysis of market size (see page 13), the Company's
systems sales program has achieved (through June 30, 1998) approximately a 0.5%
market penetration, and the existing system sales goals for fiscal years 1999,
2000, 2001 and 2002 if achieved, would represent approximately a 1.1%, 1.8%,
2.6% and 3.6% market penetration respectively *. Management believes such market
penetrations represent realistic goals if the assumptions set forth above are
accurate.
MANAGEMENT FINANCIAL TARGETS/GOALS
Subject to the risks and uncertainties included in this General Discussion
of Current and Proposed Operations section of the Company's Form 10KSB and the
footnotes thereto, management has established the following financial
performance goals for the Company for fiscal years 1999 through 2002. PLEASE
CAREFULLY REVIEW THE RISKS AND UNCERTAINTIES PRESENTED ABOVE AND BELOW AND IN
THE FOOTNOTES IN CONJUNCTION WITH THE COMPANY GOALS SUMMARIZED IN THIS TABLE 5
(SEE ESPECIALLY FOOTNOTES 22, 23, 24 AND 25 BELOW).
Table 5*
PERFORMANCE GOALS*
Based on BionAnimals under
contract and BionSoil AVAILABLE FOR SALE AS DESCRIBED IN TABLE 4 ABOVE)
(dollars in thousands)
FISCAL YEARS
1999 2000 2001 2002
---- ---- ---- -----
Number of BionAnimals
added during fiscal
year (in thousands) * 800* 950* 1,200* 1,400*
Cumulative number of
BionAnimals under
contract (in
thousands) * 1,550* 2,500* 3,700* 5,100*
BionSoil available
for sale (in thousands
of cubic yards) * 30* 300* 1,600* 2,600*
Gross Revenue
(see Footnote 22)* $945* $10,476* $61,440* $109,070*
Gross Margin
(see Footnote 23)* $278* $3,700* $25,680* $50,600*
Pre-Tax Earnings
(see Footnote 24)* $(2,722)* $(300)* $17,680* $36,100*
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Note that the goals presented in Table 5, above, for fiscal year 2002 show
5,100,000 BionAnimals under contract but only 2,600,000 cubic yards of BionSoil
being sold during fiscal year 2002 due to the 15 to 24 month delay between
contract signing and BionSoil availability. The Company's goal, however, is that
the backlog of 2,500,000 additional cubic yards of BionSoil will be available in
subsequent years for sale and is anticipated to increase the goal for gross
revenue to approximately $220,000,000 and pre-tax earnings to approximately
$72,000,000 in those later years, even if there are no additional Bion NMS
system sales thereafter*.
While these goals are very aggressive, they are consistent with the
Company's progress in fiscal year 1998 (the addition of approximately 650,000
BionAnimals under contract) and progress in fiscal 1999 to date (contracts for
315,000 BionAnimals signed since July 1, 1998). The Company is currently
actively recruiting to fill key management, technical and sales positions to
support the attainment of these goals.
Even though the Company is extremely small at present, has not yet
developed substantial market penetration, needs to raise additional capital, and
has (and is continuing to accrue) losses to date, the potential return based on
the Company's growth goals is apparent if the Company is successful in achieving
its targets *.
# # # # # # # # # # # # # # #
As the discussion above includes forward looking statements made in
reliance upon the provisions of Rule 175 promulgated under the Securities Act of
1933, readers are cautioned that, although management believes it currently has
a reasonable good faith basis for disclosing the substance of some of its
internal projections to the public at this time, there can be no assurance given
that the Company will ever be successful in achieving any of its stated goals.
The Company intends to periodically report on its progress, or lack thereof, in
attaining the goals set forth above. The ultimate realization of most (if not
all) of the Company's goals will require significant expenditures of funds
which, as of this, date are not currently available to the Company.
It is currently anticipated that the selling and installation of
additional Bion NMS systems will require the Company to hire additional
personnel, make significant capital expenditures and generally increase its
overhead. Further, the marketing and sale of BionSoil products will require the
implementation of a distribution network of wholesalers and/or retailers and a
transportation system for delivery of the product to the intended recipients,
and may require permitting in some locations, none of which the Company may be
successful in achieving. Additional expenditures for personnel and equipment
will be necessary to harvest, process, package, sell and deliver the product.
The projections stated by management assume that the Company will be successful
in obtaining the requisite funds on commercially reasonable terms and that the
other stated obstacles will be successfully overcome in the process of making
sales of products in the future.
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<PAGE>
As the Company has never operated at a profit and has a negative net worth
at the present time, its ability to successfully confront even the currently
identified challenges which lie ahead in meeting its stated goals is far from
certain. It is likely that the Company will face additional challenges, which
have not as yet even been identified. In the event the Company is not able to
obtain sufficient outside funding to accomplish its goals within the time
periods indicated, the goals would not be met. In the event the Company is not
able to successfully overcome the other stated obstacles in the process of
making future sales within the time periods indicated, the goals would not be
met. As the Company's operations are not currently profitable, readers are
further cautioned that, if the Company is not successful in obtaining outside
funding in an amount sufficient for it to meet its operating expenses even at
its current level, the Company's continued existence is uncertain.
FOOTNOTES TO GENERAL DISCUSSION OF CURRENT AND PROPOSED OPERATIONS
1. BionSolids are the solid materials that are produced as a result of the
bio-conversion of manure and urine by the Bion Nutrient Management System (NMS).
BionSolids contain a high proportion of beneficial living organisms (in contrast
to traditional composted manure products), only trace amounts of heavy metals
and no human waste.
2. The quantities referred to in Table 2 represent the Company's estimate, based
on data from the American Society of Agricultural Engineers (ASAE D384.1 - 1989)
regarding animal waste production where all wastes are captured, of the quantity
of BionSoil that is produced per animal in one year. These estimates are
approximations based on the experience to date of the Company and are subject to
change. The ratio of animal species to BionAnimal is based on the amount of
BionSolids required (mixed and blended with other organic material) in order to
produce a growth medium with comparable characteristics that yields one cubic
yard of BionSoil.
3. The systems in these regions establish multiple applications for the
Company's technology including: (a) Dairy farm wastewater treatment and nutrient
reduction systems which treat wastewater from dairy farms to remove phosphorus,
nitrogen and other nutrients and create water suitable for discharge or reuse;
(b) Dairy farm Bion NMS systems which solve the environmental problems
associated with dairy farms and also create BionSoil; (c) Hog farm Bion NMS
systems, which solve odor, waste and wastewater problems, associated with hog
farms and also create BionSoil; (d) Combination food processing and manure waste
treatment systems which treat nutrients and solid wastes in waste streams from
combined food processing plants and animal confinement areas; (e) Fruit
processing wastewater treatment systems which treat wastewater from fruit
processing plants to remove solids, nutrients and other contaminants to create
water suitable for discharge or reuse; and, (f) Storm water and surface water
run-off treatment systems that treat storm water run-off from agricultural and
industrial installations to remove nutrients and other contaminants to create
water suitable for discharge or reuse.
4. The systems in these states are primarily additional hog farm Bion NMS
systems, which solve odor, waste and wastewater problems associated with hog
farms and also create BionSoil. Note that no design or other work has commenced
on the Kansas, Iowa or Oklahoma projects as of June 30, 1998.
5. For further discussion, see, for example, the December 1997 report compiled
by the U.S. Senate Committee on Agriculture, Nutrition, and Forestry for Sen.
Tom Harkin (D - IA) as well as "Lakes of animal waste pose environmental risk"
published by the USA TODAY, December 30, 1997.
23
<PAGE>
6. During February 1994 the Company opened its office in Smithfield, North
Carolina with one full time sales employee. Numerous contacts were made in both
the hog raising and dairy farming industries, and the first agreement (for a hog
system) was signed in December 1994. A second full time employee, required to
provide design, engineering, construction and system operation expertise, was
transferred to North Carolina in February 1995. Adverse weather conditions
during the construction period resulted in a longer construction time than
anticipated; however, system start-up was achieved in June of 1995, and the
system has been in continuous operation since. Based on this investment of time
and effort and the successful operation of the system, the Company has expanded
its efforts in North Carolina including hiring a horticulturist for BionSoil
product development and testing, an additional engineer, and a manager for the
region. Currently, the Company has submitted proposals to a number of potential
customers, is engaged in discussions with several of these, has signed
agreements for six additional system installations, and has two additional Bion
NMS that have come on line. Management estimates that, to date, in excess of
$1,100,000 has been devoted to the effort to build the Company's business in
North Carolina. Current projections are that it will require, at a minimum, an
additional nine to twelve months before sufficient cash flow will be generated
from system and BionSoil sales in North Carolina to offset ongoing expenses for
operations conducted in that state *.
7. Issued U.S. patents include the following titles: "Bioconversion Reactor and
System", "Animal Waste Bioconversion System", "Bioconverted Nutrient Rich
Humus", "Phosphorous Treatment Process", and "Storm Water Remediatory
Bioconversion System". In addition, the Canadian Patent Office
has issued "Aqueous Stream Treatment Process".
8. The 1992 U.S. Department of Agriculture Census numbers are somewhat out of
date. However, the 1997 U.S. Department of Agriculture Census national summary
statistics will not be available until the spring of 1999. Some more current
statistics used by management are available on a state-by-state basis.
9. All numbers of animals are taken from the 1992 Census of Agriculture
published by the United States Department of Agriculture. The numbers used are
for the animal populations of farms above a specific size as follows:
* Dairy cows: farms with 200 or more cows
* Beef cattle (steers): farms with 200 or more cattle
* Hogs and pigs: farms with 1,000 or more
* Poultry (chickens and turkeys) based on layers, broilers and
turkeys
10. According to a July 1996 report published by the U.S. Bureau of the Census
the number of large farms has increased from 51,995 in 1969 to 333,865 in 1992,
while at the same time the overall number of farms decreased from 2.7 million in
1969 to 1.9 million in 1992. Further evidence of consolidation in the hog
industry is found in the greater than 100% increase in the number of hogs in the
state of North Carolina from 1987 to 1992 while at the same time there was a 38%
decrease in the number of hog farms in the state. These numbers are calculated
from data in the 1992 U.S. Department of Agriculture Census.
11. Battelle estimated the total U.S. market for compost to be 1.04 billion
cubic yards per year. See "Compost: United States Supply and Demand Potential"
in BIOMASS AND BIOENERGY Vol.3, Nos 3-4, pp. 281-299, 1992.
12. As an example, study data provided by North Carolina State University for
the estimated volume of potting media used in container nurseries in the United
States shows current demand (1998) to be in excess of 100 million cubic yards
per year. Further, data on U.S. golf course construction and expansion show
that, as of May 1998, 13,954 holes (or the equivalent of 775 18-hole golf
courses) were under construction, and 11,677 (or the equivalent of 649 18-hole
courses) were in planning for construction.
24
<PAGE>
13. During fiscal year 1998, the Company initiated a BionSoil Giveaway Program
during which approximately 3,000 cubic yards were given away to private
gardeners, local garden centers and university research centers. This program
was formed in order to generate feedback regarding BionSoil and to raise public
awareness about the product. It is anticipated that additional (and larger)
quantities of BionSoil will be given away in each future year for these and
other purposes.
14. Representatives of North Carolina State University ("NCSU"), North Carolina
Department of Agriculture ("NCDA") and the North Carolina Cooperative Extension
Service conducted an independent on-farm research trial in 1996. The test
compared the plant growth of four woody ornamental species grown in three
BionSoil product mixes to that of the same species grown in a high-grade
commercial nursery potting soil with soluble fertilizer additives. The
performance of the plants in the BionSoil mixes exceeded that of the plants in
the commercial mix in all trials. Representatives of NCSU, NCDA, and Bion
Technologies, Inc conducted a further independent study in 1997. The experiment,
located at a research facility on NCSU's Raleigh, North Carolina campus,
compared the plant growth of four different species (a flowering shrub, an
annual, a woody ornamental and a perennial) grown in three mix rates of BionSoil
with pine bark to that of the same species grown in a standard mix fertilized
with a national brand of synthetic controlled release fertilizer plus other
additives. The evaluation also evaluated the performance of the plants in all
mixes under four irrigation regimes. BionSoil supplied a steady release of plant
nutrients over a three-month period and proved to be a more efficient source of
plant fertility under limited water availability than did the control
fertilizer. These study results support other studies performed by the Company
and anecdotal evidence gathered through plant trials from homeowners and others.
The Company has an extensive program of additional university and company tests
designed and being implemented for the 1998 summer growing season.
15. The time between contract signing and BionSoil revenues is between 15 and 24
months broken down as follows: a.) 3-6 months for the design and permitting of
the system; b.) 3-6 months for the construction of the system; c.) 1-2 months
for the system to come completely on-line, and, d.) 8-10 months for the
BionSolids to be produced and mature within the system. In some cases, including
the Company's contracts with Crystal Springs Farms, for example, there are
financing or other contingencies which may delay the beginning of these
activities.
16. The Company's gross margin (prior to deduction of G&A expenses, interest,
depreciation, taxes, etc.) per cubic yard of BionSoil is calculated from the
projected price per cubic yard obtained from sales of bulk or bagged product
after deducting the amount paid to the producer, if appropriate, and the
projected costs which the Company expects to incur for harvesting, processing,
bagging, and marketing.
17. The potential BionSoil prices reflect assumptions about the mix between bulk
and bagged product sold. For example, at a wholesale price of $20 per cubic yard
the mix would be 100% bulk product with no bagged product sold, while at a
wholesale price of $100 or higher per cubic yard, the mix would consist almost
entirely of bagged product.
18. Due to the Company's lack of experience and start-up nature in the soil
processing area, BionSoil expenses are based on management's estimate and
therefore are subject to significant variation. Actual production costs to date
are higher than those shown in Table 3 due to significant start-up
inefficiencies. Current expenses include but are not limited to harvesting,
transportation, processing, blending and bagging of the BionSolids into
BionSoil. Management believes, however, that as greater quantities of BionSoil
are harvested and the processing techniques become more efficient, the margins
may equal or exceed the projected Gross Margins shown in Table 3*.
19. Management has changed the Net Present Value calculation from that presented
in its Form 10-KSB dated June 30, 1997 by lowering the discount rate from 10% to
8% to more accurately reflect current conditions, and by increasing from 1.5
year to 2.0 years the time before BionSoil revenues commence after contract
signing.
20. As reported in the Company's February 23, 1998, Form 8-K, the Company
entered into an agreement with Murphy Family Farms, Inc. of Rose Hill, North
Carolina, to design, install and operate multiple Bion NMS swine waste treatment
systems in six additional states. Also, as reported in the Company's July 1,
1998, Form 8-K, the Company entered into an agreement with Crystal Springs
Farms, LLC. of Wray, Colorado, to design, install and operate approximately 18
Bion NMS swine waste treatment systems Yuma County, Colorado.
25
<PAGE>
21. Although the Company's goals project for the Company to have 1.5 million
BionAnimals under contract in the fiscal year 1999, only the BionAnimals that
are currently in operating systems that have been harvested along with a limited
number of the new BionAnimals will produce BionSoil that will be available for
sale in fiscal year 1999.
22. The following risk factors should be considered when reviewing the
projections in these tables: the Company has not made significant sales or
operated at a profit, and the projections herein represent very large advances
which management believes are attainable since the Company is now emerging from
the development stage; there are many difficulties that may be encountered by
the Company (as it is a start-up), especially in view of the intense competition
from existing and more established companies in the wastewater, waste
management, the environmental control and organic soils and products businesses;
the Bion NMS system has had limited development and market acceptance is
uncertain; the Company is in direct competition with consulting and engineering
firms (which may be better capitalized than the Company) that may be capable of
developing competitive technologies and products; the business is susceptible to
changing technology and the Company may not have adequate patent and proprietary
information protection; the Company may become subject to unfavorable
governmental regulations, and may have, in the future, liability (with no
insurance coverage) for damage to the environment; and, the costs and expenses
used for all calculations are estimates made on the basis of limited information
available.
23. The following assumptions (none of which are guaranteed to occur) have been
made for the gross revenue calculations:
a.) that the BionSoil available for sale is sold in the fiscal year that it
is available *;
b.) that the percentage of BionSoil sold in each year in bagged form for
retail sales (which the Company does not engage in) will be as follows*:
Fiscal year ending June 30
1999 2000 2001 2002
Percent bagged
BionSoil sold 10%* 11%* 12%* 14%*
(Management has established this mix although it is probable that the mix will
vary considerably over time)*.
c.) that the average selling price per cubic yard realized by the Company
for each fiscal year is as indicated in the following table *:
<TABLE>
<CAPTION>
Fiscal year ending June 30
(dollars per cubic yard)
1999 2000 2001 2002
---- ---- ---- ----
<S> <C> <C> <C> <C>
SELLING PRICE
Bagged $ 90.00* $ 95.00* $ 100.00* $ 100.00*
Bulk 25.00* 27.50* 30.00* 32.50*
Weighted Average 31.50* 34.92* 38.40* 41.95*
</TABLE>
(The selling price increases shown above are not related to inflation
adjustments, rather they reflect the Company establishing product credibility in
its respective markets as well as further product refinements *.)
d.) that the average selling price include freight to the customer of $7.00
per cubic yard for bagged product and $4.50 per cubic yard for bulk
product *.
24. The following assumptions (none of which are guaranteed to occur) have been
made for the product costs for gross margin calculations:
a.) that the average product direct cost for each fiscal year is as
follows:*
<TABLE>
<CAPTION>
Fiscal year ending June 30
1999 2000 2001 2002
---- ---- ---- ----
<S> <C> <C> <C> <C>
DIRECT COST
Bagged Product $ 58.00* $ 57.00* $ 55.00* $ 53.00*
Bulk Product 13.00* 13.00* 12.50* 12.00*
Weighted Average 17.50* 17.84* 17.60* 17.74*
</TABLE>
26
<PAGE>
(The reduction in direct product costs over time reflects increased efficiencies
of operation that have been included based on anticipated product handling
efficiencies and economics of scale as the volume of product processed increases
*.)
b.) that freight charges for shipments to customers will be $7.00 per cubic
yard for bagged product (sold and shipped on pallets with approximately
two cubic yards per pallet) and $4.50 per cubic yard for bulk product
shipped via common carrier truck *.
c.) based on the assumptions above and in footnote 23, the target gross
margin per cubic yard of BionSoil (which is the same as gross margin
per BionAnimal) is*:
Fiscal year ending June 30
1999 2000 2001 2002
Gross margin
per cubic yard $9.25* $12.33* $16.05* $19.46*
25. The Company has developed projections for selling, general and
administrative expenses based on increased staffing levels and facilities
required for attainment of the target sales and processing levels as follows:*
Fiscal year ending June 30
(dollars in thousands)
1999 2000 2001 2002
---- ---- ---- ----
Selling,
General and
Administrative
Expenses $3,000* $4,000* $8,000* $14,500*
(B) MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The Company has incurred losses since inception totaling $11,275,528 and is
currently experiencing liquidity problems. The Company's cash requirements are
currently not being met by revenue, and are not expected to be met by revenue in
the coming fiscal year. Continued losses without additional outside funding
raise doubt about the Company's ability to continue as a going concern.
Management plans to continue raising additional capital to fund operations until
such time as systems sales along with the sales of BionSoil and BionSoil
products are sufficient to fund operations. The Company is currently negotiating
with independent third parties to obtain the necessary additional funding for
the Company. Although management believes that there is a reasonable basis to
remain optimistic, no assumption can be made that the Company will be able to
successfully attain profitable operations and/or raise sufficient capital to
sustain operations.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998 the Company's total assets were $780,202 compared to
$1,222,706 as of June 30, 1997. The change is primarily attributable to a
decrease in accounts and contract receivables of $36,075 and Assets held for
resale of $600,000, partially offset by an increase in work-in-progress and cash
of $231,584 during the period.
The Company's current ratio as of June 30, 1998 was 0.61 : 1 as compared to
0.79 : 1 as of June 30, 1997. Cash for the period ended June 30, 1998
increased $9,872 as compared to a decrease of $109,380 for the period ended
June 30, 1997.
27
<PAGE>
The Company's total liabilities decreased $238,549 for the year ended June 30,
1998. Accounts payable, notes payable, and capital lease obligations decreased
$70,538, $318,000, and $61,770, respectively, accrued payroll increased $148,750
and the note payable to a stockholder increased $105,000.
Effective January 1, 1998 holders of 84% of the Company's common stock (post
transaction) transferred property to the Company pursuant to Section 351 of the
Internal Revenue Code of 1986, as amended. The transaction resulted in the
transfer of 7,463,012 warrants of various classes for 4,351,348 shares of
restricted stock and 2,832,909 Class Z Warrants at $15.00 per share for a 24
month period commencing on January 1, 2000. (See Form 8-K/A dated December 1,
1997.)
For the year ended June 30, 1998 the Company issued 272,068 shares of common
stock for cash ($915,650), 36,258 shares of common stock for services
($134,228), 138,900 shares of stock for the exercise of options ($795,875), and
50,113 shares of common stock to a shareholder as payment of a note payable and
interest ($300,677). The Company also converted all of its Series "B" preferred
stock (18,834 shares) and the accumulated dividends into 29,158 shares of common
stock ($126,443) and converted 190,166 shares of subscribed stock to 190,166
shares of common stock valued at $607,322. The Company issued a total of
4,929,111 shares of legended and restricted common stock and 138,900 shares of
unrestricted stock during the year ended June 30, 1998 for a total of 5,068,011
shares of common stock issued.
RESULTS OF OPERATIONS
COMPARISON OF FISCAL YEAR ENDED JUNE 30, 1998 WITH FISCAL YEAR ENDED JUNE
30, 1997
During the twelve months ended June 30, 1998 the Company provided design,
engineering, construction oversight, and/or operations on 44 new or existing
systems. Contract revenue increased $413,326 due to increased activity on
several large projects and the increased sales from BionSoil. Contract costs
increased by $109,881 due to the additional work associated with system design
and engineering.
The Company's contract receivables and work in progress reserves for bad debt
were $60,000 as of June 30, 1998.
General and administrative expenses decreased due to lower consulting fees
which was partially offset by increased investor relations expense.
The Company incurred $88,649 of interest expense on notes payable to an outside
lender and to shareholders of the Company (see "Notes 4 and 6 to Consolidated
Financial Statements" and research and development expenses of $267,733. The
$94,917 increase in R & D expenses is due to a focused effort to increase the
application of the technology.
28
<PAGE>
The Company had 62 systems and 750,000 BionAnimals under contract on June 30,
1998 compared to a plan of 64 systems and 389,000 BionAnimals. The increase of
361,000 BionAnimals is due to the signing of a large hog contract in western
Nebraska.
COMPARISON OF FISCAL YEAR ENDED JUNE 30, 1997 WITH FISCAL YEAR ENDED JUNE
30, 1996
During the twelve months ended June 30, 1997 the Company performed work on 30
new or existing projects as compared to 23 projects in the corresponding period
that ended on June 30, 1996. Contract revenue was slightly higher due to the
increased amount of project activity and the initial sales efforts on BionSoil
and BionSoil products. Contract costs were higher due to the start up expenses
associated with the New York and Florida processing sites. Included in these
expenses are facilities (rent, utilities, maintenance, etc.), equipment and
additional personnel.
The Company increased its contract receivables and work in progress reserves
for bad debt by $30,000 during the year. The Company's reserves total $60,000 as
of June 30, 1997.
General and administrative expenses increased due to employee compensation,
consulting, legal and accounting costs.
The Company recorded $105,000 in interest income from the sale of Delta stock
associated with the Settlement Agreement and General Release on the UFG note.
This is the final amount to be collected on the UFG note. The total amount
collected is $296,581 in excess of the original principal of the note.
The Company incurred $286,387 of interest expense on notes payable to an
outside lender and shareholders of the Company (see "Notes 4 and 6 to
Consolidated Financial Statements" in the Company's Form 10-KSB dated June 30,
1997) and research and development expenses of $172,816. The $98,228 increase in
R&D expenses is due to the increased research activity in the soils area.
YEAR 2000 ISSUE
The Company is aware of the issues associated with the programming code in
existing computer systems as the millennium (year 2000) approaches. The "year
2000" problem is pervasive and complex as virtually every computer operation
will be affected in some way by the rollover of the two-digit year value to 00.
The issue is whether computer systems will properly recognize date-sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail. After a review of the Company's computer systems and associated software,
management does not believe year 2000 will have a material effect on the
operations or financial condition of the Company. The Company can not predict
the impact that "Year 2000" will have on its customers and vendors.
29
<PAGE>
SEASONALITY
The Company's system sales and installation business is not seasonal in nature,
except to the extent that weather conditions at certain times of the year in
certain geographic areas may temporarily affect construction and installation of
its systems. However, the Company's projects and markets are geographically
spread so that when weather conditions limit construction activity in southern
market areas, projects in northern markets can proceed, and when northern area
weather is inappropriate, southern projects can proceed. BionSoil and BionSoil
product sales are expected to exhibit a somewhat seasonal sales pattern with
emphasis on spring, summer, and fall sales.
INFLATION AND CHANGES IN PRICES
The Company is unable to predict the impact of inflation on the Company's
activities, however, at this time it is minimal.
ITEM 7. FINANCIAL STATEMENTS
Financial Statements are included on Pages F-1 through F-21.
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Independent Auditors' Report..................................................F - 1
Financial Statements
Consolidated Balance Sheet..............................................F - 2
Consolidated Statements of Operations...................................F - 3
Consolidated Statement of Changes in Stockholders' Deficit..............F - 4
Consolidated Statements of Cash Flows...................................F - 5
Notes to Consolidated Financial Statements....................................F - 7
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
To The Board of Directors and Stockholders
Bion Environmental Technologies, Inc.
Denver, CO
We have audited the accompanying consolidated balance sheet of Bion
Environmental Technologies, Inc. and Subsidiaries as of June 30, 1998 and the
related consolidated statement of operations, changes in stockholders' deficit,
and cash flows for the years ended June 30, 1998 and 1997. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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 Bion Environmental
Technologies, Inc. and Subsidiaries as of June 30, 1998, and the results of
their operations and their cash flows for the year ended June 30, 1998 and 1997,
in conformity with generally accepted accounting principles.
The consolidated financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the then consolidated
financial statements, the Company as of June 30, 1998 had a working capital
deficiency of approximately $280,000 and a stockholders' deficit of
approximately $391,000. As discussed in Note 2, the Company has incurred losses
since inception approximately $11,300,000. Continued losses without raising
additional capital raise substantial doubt about its ability to continue as a
going concern. Management's plans in regard to these matters are discussed in
Note 2. The consolidated financial statements do not include any adjustments
that might result from the outcome this uncertainty.
/s/Ehrhardt Keefe Steiner & HOttman PC
Ehrhardt Keefe Steiner & Hottman PC
August 12, 1998
Denver, Colorado
F-1
<PAGE>
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 1998
ASSETS
Current assets
Cash and cash equivalents ................................... $ 19,104
Accounts receivable ......................................... 13,986
Contract receivables (net of allowance of $30,000) .......... 22,902
Work in progress (Note 3) ................................... 389,712
------------
Total current assets ............................... 445,704
Property and equipment
Computers and equipment ..................................... 298,782
Accumulated depreciation .................................... (91,727)
207,055
Other assets
Deferred long-term contact costs (Note 3) ................... 71,333
Patents, net ................................................ 43,066
Deposits and other .......................................... 13,044
------------
Total other assets ................................. 127,443
Total assets ................................................... $ 780,202
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable ............................................ $ 241,384
Accounts payable - related party ............................ 20,324
Notes payable-stockholders (Note 4) ......................... 89,171
Capital lease obligations (Note 4) .......................... 67,137
Accrued expenses ............................................ 24,368
Accrued payroll (Notes 6 and 8) ............................. 284,250
------------
Total current liabilities .......................... 726,634
Long-term liabilities
Note payable - stockholder (Note 4) ......................... 210,000
Capital lease obligations (Note 4) .......................... 83,127
Deferred contract revenue (Note 3) .......................... 151,000
------------
Total liabilities .................................. 1,170,761
Commitments and contingencies (Notes 2, 8 and 10)
Stockholders' deficit (Note 5)
Common stock, no par value, 100,000,000 shares
authorized, 8,764,827 shares issued and ..................... 10,863,469
outstanding
Common stock subscribed ..................................... 21,500
Accumulated deficit ......................................... (11,275,528)
Total stockholders' deficit ........................ (390,559)
Total liabilities and stockholders' deficit .................... $ 780,202
============
F-2
<PAGE>
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended
JUNE 30,
1998 1997
Contract revenues ............................ $ 547,251 $ 133,925
Contract costs ............................... 549,343 439,462
----------- -----------
Gross (loss) ................................. (2,092) (305,537)
General and administrative expenses .......... 2,001,831 2,326,389
Research and development ..................... 267,733 172,816
----------- -----------
Loss from operations ......................... (2,271,656) (2,804,742)
Other income (expense)
Interest income ........................... -- 111,964
Interest expense .......................... (88,649) (286,387)
Other expense, net ........................ (17,388) --
----------- -----------
Net loss ..................................... $(2,377,693) $(2,979,165)
=========== ===========
Basic loss per common share .................. $ (.38) $ (1.38)
=========== ===========
Weighted common shares outstanding ........... 6,265,128 2,161,347
=========== ===========
F-3
<PAGE>
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
PREFERRED STOCK SERIES B COMMON STOCK
----------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Balance at June 30, 1996 ............ 18,834 $ 95,482 1,683,777 $3,485,270
Conversion of common stock
subscriptions to common stock ...... -- -- 2,075 9,000
Common stock subscriptionsf
for services ....................... -- -- -- --
Issuance of common stock for cash ... -- -- 247,777 904,488
Issuance of common stock for property -- -- 336,905 600,000
Conversion of notes payable to
common stock ....................... -- -- 1,268,508 2,361,905
Issuance of common stock for ........ -- -- 157,774 469,361
services and interest
Issuance of warrants for services ... -- -- -- 122,000
Issuance of warrants for cash ....... -- -- -- 31,250
Dividends declared, preferred
stock Series B ..................... -- -- -- --
Net loss ............................ -- -- -- --
-------- -------- --------- ----------
Balance at June 30, 1997 ............ 18,834 95,482 3,696,816 7,983,274
Conversion of common stock .......... -- -- 190,166 607,322
subscriptions to common stock
Common stock subscriptions
for services ....................... -- -- -- --
Cancellation of common stock
subscriptions ...................... -- -- -- --
Issuance of common stock for cash ... -- -- 272,068 915,650
Issuance of common stock in ......... -- -- 4,351,348 --
warrant exchange (Note 5)
Exercise of stock options (Note 5) .. -- -- 138,900 795,875
Conversion of notes payable to
common stock ....................... -- -- 50,113 300,677
Issuance of common stock for services -- -- 36,258 134,228
Dividends declared, preferred stock
Series B ........................... -- -- -- --
Conversion of Series B preferred .... (18,834) (95,482) 29,158 126,443
common stock and accrued dividends
Net loss ............................ -- -- -- --
------- -------- ---------- -----------
Balance at June 30, 1998 ............ -- $ -- 8,764,827 $10,863,469
======= ======== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
COMMON
STOCK ACCUMULATED
SUBSCRIBED DEFICIT TOTAL
------------ ------------ -----------
<S> <C> <C> <C>
Balance at June 30, 1996 ............ $ 49,538 $ (5,903,824) $ (2,273,534)
Conversion of common stock
subscriptions to common stock ...... (9,000) -- --
Common stock subscriptionsf
for services ....................... 587,284 -- 587,284
Issuance of common stock for cash ... -- -- 904,488
Issuance of common stock for property -- -- 600,000
Conversion of notes payable to
common stock ....................... -- -- 2,361,905
Issuance of common stock for ........ -- -- 469,361
services and interest
Issuance of warrants for services ... -- -- 122,000
Issuance of warrants for cash ....... -- -- 31,250
Dividends declared, preferred
stock Series B ..................... -- (10,193) (10,193)
Net loss ............................ -- (2,979,165) (2,979,165)
------------ ------------ ------------ ------------
Balance at June 30, 1997 ............ 627,822 (8,893,182) (186,604)
Conversion of common stock .......... (607,322) -- --
subscriptions to common stock
Common stock subscriptions
for services ....................... 232,000 -- 232,000
Cancellation of common stock
subscriptions ...................... (231,000) -- (231,000)
Issuance of common stock for cash ... -- -- 915,650
Issuance of common stock in ......... -- -- --
warrant exchange (Note 5)
Exercise of stock options (Note 5) .. -- -- 795,875
Conversion of notes payable to
common stock ....................... -- -- 300,677
Issuance of common stock for services -- -- 134,228
Dividends declared, preferred stock
Series B ........................... -- (4,653) (4,653)
Conversion of Series B preferred .... -- -- 30,961
common stock and accrued dividends
Net loss ............................ -- (2,377,693) (2,377,693)
------------ ------------ ------------ ------------
(2,377,693)
Balance at June 30, 1998 ............ $ 21,500 $(11,275,528) $ (390,559) $ (390,559)
============ ============ ============ ============
</TABLE>
F-4
<PAGE>
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended
JUNE 30,
1998 1997
----------- ----------
Cash flows from operating activities
Net loss ........................................ $(2,377,693) $(2,979,165)
----------- -----------
Adjustments to reconcile net loss to net cash
used in operating activities -
Depreciation and amortization ................. 55,629 35,617
Accounts receivable and work-in progress ...... -- 30,000
allowance
Issuance of stock for services, compensation .. 134,228 469,360
and interest
Issuance of note payable for services and ..... -- 6,015
interest
Issuance of warrants for services ............. -- 122,000
Loss on sale of assets held for resale ........ 20,598 --
Issuance of subscribed stock for services ..... 1,000 347,284
Changes in assets and liabilities -
Receivables ................................. 36,075 (70,893)
Costs and estimated excess of billings on ... (221,712) 16,186
contracts
Prepaid expenses and other .................. (1,350) (5,179)
Accounts payable ............................ (70,538) 65,409
Accrued liabilities ......................... 163,067 209,773
Deferred contact revenue .................... (30,000) --
Deferred long-term contract costs ........... 6,000 5,100
----------- -----------
92,997 1,108,672
Net cash used in operating activities ..... (2,284,696) (1,748,493)
----------- -----------
Cash flows from investing activities
Purchases of equipment .......................... (14,560) (19,661)
Proceeds on sale of assets ...................... 579,402 --
Investment in patents ........................... (7,706) (645)
----------- -----------
Net cash (used in) provided by investing .. 557,136 (20,306)
----------- -----------
activities
Cash flows from financing activities
Payments on notes payable ....................... (325,000) --
Proceeds from notes payable ..................... 412,677 764,976
Proceeds from stock and warrant issuances ....... 915,650 935,739
Proceeds from exercise of options ............... 795,875 --
Payments on capital lease obligations ........... (61,770) (41,296)
----------- -----------
Net cash provided by financing activities . 1,737,432 1,659,419
----------- -----------
Net increase (decrease) in cash and cash equivalents 9,872 (109,380)
Cash and cash equivalents at beginning of period ... 9,232 118,612
----------- -----------
Cash and cash equivalents at end of period ......... $ 19,104 $ 9,232
=========== ===========
Continued on following page.
F-5
<PAGE>
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Continued from previous page.
Supplemental disclosure of cash flow information
Cash paid during the year for interest was $88,583 (1998) and $160,643
(1997).
Supplemental disclosures of non-cash financing activities For the year ended
June 30, 1998 -
Declared and accrued dividends of $4,653 for preferred stock Series B
Converted $607,322 of common stock subscribed into 190,166 shares of common
stock Converted $95,482 of Series B preferred stock plus cumulative accrued
dividends of $30,961 into 29,158 shares of common stock. Converted
7,463,012 warrants outstanding into 4,351,648 shares of common stock and
2,832,909 newly issued warrants in a tax free B reorganization (Note 5).
Converted $300,677 of notes payable and accrued interest into 50,113 shares
of common stock.
For the year ended June 30, 1997 -
Purchase of equipment under capital leases for $191,801
Conversion of debt, interest and services totaling $2,361,905 into
1,268,508 shares commons stock Declared and accrued dividends of $10,193
for preferred stock Series B Issued 336,905 shares common stock for
property valued at $600,000 Converted $240,000 of accrued wages to
officers into 80,000 shares subscribed stock Converted $9,000 of common
stock subscribed into 2,075 shares of common stock
F-6
<PAGE>
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
The accompanying consolidated financial statements include the accounts of Bion
Environmental Technologies, Inc. ("Biet"), and its wholly owned subsidiaries,
Bion Technologies, Inc. ("Bion") and BionSoil, Inc. ("BionSoil"), (collectively
the Company). The Company is engaged in the designing, marketing and overseeing
the installation and operation of environmentally effective and economically
efficient treatment systems (based on proprietary and/or patented processes) for
the bio-conversion of wastewater, with customers in New York, Washington, North
Carolina, Illinois, Missouri, Nebraska, Kansas, Utah, Iowa, Oklahoma, Colorado
and Florida. Additionally, the Company has entered the market with an animal
waste management system, BionSoil NMS, which converts flushed or scraped animal
wastes into an economically valuable product, BionSoil, which the Company
intends to market and sell.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Biet, Bion and
BionSoil. All significant intercompany transactions and balances have been
eliminated in consolidation.
CONTRACT RECEIVABLES
The Company grants credit in the normal course of business to customers who are
located primarily in the New York, Florida, North Carolina, Illinois, Missouri,
Nebraska, Kansas, Utah, Iowa, Oklahoma, Colorado and Washington state areas. To
reduce credit risk, the Company monitors the financial condition and performs
credit analysis prior to entering into contracts.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, equipment under capital lease is
stated at the lower of fair market value or the net present value of the minimum
lease payments at the inception of the lease. Depreciation is provided using the
straight-line method over the estimated useful lives of the related assets
ranging from three to seven years. For the periods ended June 30, 1998 and 1997,
depreciation was recorded in the amounts of $52,329 and $32,854, respectively.
REVENUE AND COST RECOGNITION
TREATMENT SYSTEM CONTRACTS
Revenues from fixed-price system development and construction type contracts are
recognized on the percentage-of-completion method, measured by the percentage of
costs incurred to date to total estimated contract costs for each contract. This
method is used because the Company considers cost to date to be the best
available measure of progress on these contracts.
F-7
<PAGE>
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE AND COST RECOGNITION (CONTINUED)
Contract costs include all direct material and labor costs and those indirect
costs related to contract performance. General and administrative costs are
charged to expense as incurred. Provisions for estimated losses on uncompleted
contracts are made in the period in which such losses are determined. Changes in
job performance, job conditions and estimated profitability, including those
arising from contract penalty provisions, and final contract settlements may
result in revisions to costs and income and are recognized in the period in
which the revisions are determined.
BIONSOIL CONTRACTS
Beginning in fiscal year 1994, the Company entered into contracts for producing
BionSoil with fees to be paid through a defined portion of the net profit from
the sale of the product. The contractual fees as of June 30, 1998 are $152,500
for these systems.
Since the Company is paid from the sales proceeds of BionSoil, all costs and
revenue earned with the construction of the systems are deferred until the sale
of BionSoil commences.
All capitalized BionSoil system costs for each contract are amortized on the
unit-of-production method once sale of BionSoil commences using estimates of
sales. If the results of an assessment indicate that the contract is impaired,
the amount of the impairment is expensed. As of June 30, 1998, no material sales
of the product have been consummated and accordingly, no revenue has been
recognized in the financial statements on these contracts. At June 30, 1998, no
contracts are deemed to be impaired.
INCOME TAXES
Deferred tax liabilities and assets are determined based on the difference
between the financial statement and tax basis of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse. The measurement of deferred tax assets is reduced, if necessary, by
the amount of any tax benefits that, based on available evidence, which are not
expected to be realized.
PATENTS
Patent applications are recorded at cost and are amortized when the patent is
issued over a period of the lesser of the patent's estimated economic or legal
life. For the periods ended June 30, 1998 and 1997, amortization was recorded in
the amount of $3,300 and $2,763, respectively.
F-8
<PAGE>
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses are expensed as incurred and include both
expenses for new technology development and expenses for ongoing efforts to
improve existing technologies.
ADVERTISING COSTS
The Company expenses advertising and promotional costs as incurred.
BASIC LOSS PER COMMON SHARE
The Company computes earnings per share in accordance with Statement of
Financial Accounting Standard No. 128. The Company has presented only basic loss
per share as all dilutive potential common shares have an antidilutive effect on
loss per share. Basic loss per share has been computed based on the weighted
average number of shares outstanding.
USE OF ESTIMATES
The preparation of 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 and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. As described in Note 3,
contract cost estimates could be revised in the near term, and such revisions
could be material.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" (SFAS 130), which establishes standards
for reporting and display of comprehensive income, its components and
accumulated balances. Comprehensive income is defined to include all changes in
equity except those resulting from investments by owners and distributions to
owners. Among other disclosures, SFAS 130 requires that all items that are
required to be recognized under current accounting standards as components of
comprehensive income, be reported in a financial statement that is displayed
with the same prominence as other financial statements. Currently the Company's
only component, which would comprise comprehensive income, is its results of
operations.
F-9
<PAGE>
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED)
Also, in June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
(SFAS 131), which supersedes Statement of Financial Accounting Standards No. 14,
"Financial Reporting for Segments of a Business Enterprise." SFAS 131
establishes standards for the way that public companies report information about
operating segments in interim financial statements issued to the public. It also
establishes standards for disclosures regarding products and services,
geographic areas and major customers. SFAS 131 defines operating segments as
components of a company about which separate financial information is available
that is evaluated regularly by the chief operating decision maker in deciding
how to allocate resources and in assessing performance. SFAS 131 will require
the Company to disclose such segment data in its audited financial statements in
the future.
SFAS 130 and 131 are effective for financial statements for periods beginning
after December 15, 1997, and requires comparative information for earlier
periods to be restated.
NOTE 2 - CONTINUED OPERATIONS/GOING CONCERN
The accompanying financial statements have been prepared on a going concern
basis which contemplates the realization of assets and liquidation of
liabilities in the ordinary course of business. In prior years, the Company had
been in the development stage and its principal activities had consisted of
raising capital, performing research and development activities and the
development of their products. Consequently, as of June 30, 1998, the Company
has incurred accumulated losses totaling approximately $11,300,000, resulting in
an accumulated stockholders deficit of approximately $391,000. Cash flows from
current operations are not sufficient to meet the obligations of the Company.
Management plans include continuing efforts to obtain additional capital to fund
operations until contract sales along with sales of BionSoil are sufficient to
fund operations. There can be no assurance that the Company will be able to
successfully attain profitable operations or raise sufficient capital.
F-10
<PAGE>
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 3 - COST AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
The Company's costs and estimated earnings on uncompleted treatment system
contracts consist of the following:
June 30,
1998
---------
Costs incurred on contracts $1,927,813
Estimated (losses) 548,450
1,379,363
---------
Less billings to date (1,069,318)
$ 310,045
==========
Included in the accompanying balance sheet
under the following captions
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 389,712
Deferred long-term contract costs 71,333
Less deferred revenue (151,000)
---------
Total costs and estimated earnings in excess
of billings on contracts $ 310,045
=========
Due to uncertainties in the estimation process, it is at least reasonably
possible that completion costs could be further revised in the near term, and
that the change may be material.
NOTE 4 - NOTES PAYABLE - STOCKHOLDERS AND CAPITAL LEASES
On May 12, 1995, Bion entered into an agreement with a shareholder whereby the
Company received 28,572 shares of common stock of Cyclopss Medical Systems,
Inc., valued at $125,000 and a convertible promissory note of Delta Petroleum
Corporation with a face value of $660,000, valued at $1,220,000 all in exchange
for a note payable to the shareholder in the amount of $1,345,000. All of the of
Delta Petroleum Corporation promissory note was converted at a rate of $3.30 per
share for a total of 200,000 shares. In addition, the Company received 8,042
shares for accrued interest through November 20, 1995. Effective May 6, 1997,
the Company converted the entire note balance of $2,146,045 including accrued
interest of $80,280 into common stock.
F-11
<PAGE>
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 4 - NOTES PAYABLE - STOCKHOLDERS AND CAPITAL LEASES (CONTINUED)
June 30,
1998
Notes payable to stockholders, due on
demand, interest ranging from
11% to 12%, payable monthly $ 89,171
=========
Capital leases - finance companies;
with monthly installments ranging from
$362 to $2,287, including interest from
6.5% to 23.8%, maturing from May 1999
through June 2002; collateralized by
equipment with a net book value of
approximately $225,000 $ 150,264
Less current portion (67,137)
$ 83,127
Future maturities of notes payable and capital leases.
Year Ending Capital Notes
JUNE 30, LEASE PAYABLE TOTAL
1999 $ 84,085 $ 89,171 $ 173,256
2000 54,581 - 54,581
2001 26,193 - 26,193
2002 11,893 - 11,893
--------- -------- ---------
176,752 $ 89,171 $ 265,923
======== =========
Less amount
representing
interest (26,488)
$ 150,264
=========
NOTES PAYABLE - STOCKHOLDERS
Effective October 26, 1996, the Company entered into an agreement with a
stockholder whereby the stockholder would provide a $500,000 credit facility to
the Company. Interest is at 12% per annum and is due monthly. Principal and
interest is due in full on December 31, 1999.
The entire outstanding balance may be converted into units, each consisting of
one share of common stock and one and one half warrants to purchase common stock
at a price of $6 per share for a period commencing at the time of conversion and
expiring December 31, 2001.
F-12
<PAGE>
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 4 - NOTES PAYABLE - STOCKHOLDERS AND CAPITAL LEASES (CONTINUED)
NOTE PAYABLE - STOCKHOLDER (CONTINUED)
In addition, for each $5 loaned to the Company, the Company will issue one and
one half warrants to purchase common stock at a price of $6.00 per share. If the
Company pays the entire balance due on or before December 31, 1998, the quantity
of warrants issued will be reduced by 50%.
As of June 30, 1998, $210,000 was outstanding on the credit facility.
NOTE 5 - STOCKHOLDERS' DEFICIT
WARRANT EXCHANGE
Effective January 1, 1998, holders of 84% of the Company's common stock (post
transaction) participated in an exchange transaction (the "Exchange") conducted
pursuant to Section 351 of the Internal Revenue Code of 1986 as amended that
resulted in the exchange of 7,463,012 warrants of various classes for 4,351,348
shares of restricted stock and 2,832,909 Class Z Warrants to purchase shares of
the Registrant's common stock at $15.00 per share for a 24 month period
commencing January 1, 2000. The Exchange was the result of negotiations that
were initiated in response to a proposal made by certain warrant holders on
November 23, 1997, and finalized on December 24, 1997. (See Form 8-K/A dated
December 1, 1997).
The Exchange transaction was designed to reduce future potential dilution of the
Company in an effort to increase value to the current group of shareholders and
to improve the ability of the Company to raise future equity capital on more
favorable terms. The exchange was based on the fair market values of the
existing warrants to be exchanged, the newly issued warrants and the common
stock issued. Fair market values of the warrants were determined using the Black
Scholes option pricing model. The fair market values of the securities exchanged
were equal to the fair market values of the securities issued. The transaction
was treated as a recapitalization for accounting purposes, which resulted in no
net change to stockholders' equity.
F-13
<PAGE>
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 5 - STOCKHOLDERS' DEFICIT (CONTINUED)
PREFERRED STOCK SERIES B
Class B Preferred Stock entitles the holder to convert the Preferred stock at
the rate of one Class B Preferred Share for one share of Common Stock of the
Company, subject to adjustment from time to time. The holders of the Class B
Preferred Stock have the option to convert all the outstanding shares of the
stock at any time after December 31, 1994. Class B Preferred Stock holders are
entitled to receive, upon conversion, redemption or liquidation, cumulative
dividends at the per annum rate of $.54 per share on the issued and outstanding
Class B Preferred Stock. The holders of the Series B Convertible Preferred Stock
may require the Company to redeem all of the outstanding shares of Series B
Preferred Stock at any time on or after December 31, 1996. Series B Preferred
Stock holders have liquidation preference to the extent of their par value over
holders of common stock and other series of preferred stock. During the year
ended June 30, 1998, the remaining issued and outstanding shares of 18,834 with
a carrying value of $95,482 plus $30,961 of cumulative accrued dividends were
converted into 29,158 shares of common stock.
WARRANTS
As of June 30, 1998, the Company has outstanding the following warrants:
EXPIRATION EXERCISE
WARRANT SHARES DATE PRICE
Class G 25,000 (1) 5.00
Class G-5.1 1,003 (2) 3.00
Class G-5.2 827 (3) 3.00
Class G-6 4,172 (4) 6.00
Class G-7 35,000 (5) 4.00
Class G-8 100,000 (6) 6.00
Class H-1 10,000 (7) 5.00
Class H-2 14,500 (8) 3.00
Class H-9 10,000 (9) 10.00
Class H-9.1 10,000 (10) 12.50
Class H-9.2 10,000 (11) 8.00
Class H-9.3 10,000 (12) 15.00
Class H-9.4 10,000 (13) 6.00
Class I-1 3,750 (14) 6.00
Class K-1 50,000 (15) 6.00
Class L 150,000 (16) 7.50
Z 2,832,909 (17) 15.00
------------- --------------
3,277,161 $ 3.00-15.00
============= ==============
F-14
<PAGE>
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 5 - STOCKHOLDERS' DEFICIT (CONTINUED)
WARRANTS (CONTINUED)
(1) Class G warrants may be exercised to purchase 25,000 shares of common stock
for a 36 month period beginning June 20, 1996 and ending June 20, 1999.
(2) Class G-5.1 warrants may be exercised to purchase 1,003 shares of common
stock for a 60 month period beginning January 22, 1996 and ending January 21,
2001.
(3) Class G-5.2 warrants may be exercised to purchase 827 shares of common
stock for a 60 month period beginning September 13, 1996 and ending September
12, 2001.
(4) Class G-6 warrants may be exercised to purchase 4,172 shares of common
stock for a 60 month period beginning April 21, 1997 and ending April 20,
2002.
(5) Class G-7 warrants may be exercised to purchase 35,000 shares of common
stock for a 25 month period beginning June 5, 1997 and ending June 30, 1999.
(6) Class G-8 warrants may be exercised to purchase 100,000 shares of common
stock for a 37 month period beginning June 5, 1997 and ending June 30, 2000.
(7) Class H-1 warrants may be exercised to purchase 10,000 shares of common
stock for a 60 month period beginning August 21, 1996 and ending August 20,
2001.
(8) Class H-2 warrants may be exercised to purchase 14,500 shares of common
stock for a 60 month period beginning August 21, 1996 and ending August 20,
2001.
(9) Class H-9 Warrants may be exercised to purchase 10,000 shares of common
stock for a 47 month period beginning February 1, 1997 and ending December 31,
2001.
(10) Class H-9.1 Warrants may be exercised to purchase 10,000 shares of common
stock for a 47 month period beginning February 1, 1997 and ending December 31,
2001.
(11) Class H-9.2 Warrants may be exercised to purchase 10,000 shares of common
stock for a 47 month period beginning February 1, 1997 and ending December 31,
2001.
(12) Class H-9.3 Warrants may be exercised to purchase 10,000 shares of common
stock for a 47 month period beginning
February 1, 1997 and ending December 31, 2001.
(13) Class H-9.4 Warrants may be exercised to purchase 10,000 shares of common
stock for a 47 month period beginning February 1, 1997 and ending December 31,
2001.
F-15
<PAGE>
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 5 - STOCKHOLDERS' DEFICIT (CONTINUED)
WARRANTS (CONTINUED)
(14) Class I-1 warrants may be exercised to purchase 3,750 shares of common
stock for approximately a 42 month period beginning June 9, 1998 and ending
December 31, 2001.
(15) Class K-1 warrants may be exercised to purchase 50,000 shares of common
stock for a 19 month period beginning
March 1, 1998 and ending October 1, 1999.
(16) Class L warrants may be exercised to purchase 150,000 shares of common
stock for a 29 month period beginning July 1, 1998 and ending December 31,
2000.
(17) Class Z warrants may be exercised to purchase 2,832,909 shares of common
stock for a 24 month period beginning January 1, 2000 and ending December 31,
2001.
At June 30, 1998, there were warrants exercisable to purchase 444,252 shares of
common stock. The weighted average exercise price per share for shares
exercisable at June 30, 1998 was $6.65.
OPTIONS
The Company established the Fiscal Year 1994 Incentive Plan (the Plan) in July
1993. Under the Plan, incentive stock options can be granted at prices not less
than 100% of the Fair Market Value of a share of Common Stock on the date on
which the Incentive Stock Option is granted. Options are exercisable within ten
years from the date of grant, subject to early termination as provided in the
Plan.
In 1996, the Company established the 1996 Non-employee Director Stock Plan. The
Plan is available to all non-employee directors and provides that each
non-employee director will receive annually, an option to purchase 5,000 shares
of the Company's common stock at an exercise price of 50% of the average market
price of the Company's common stock for the preceding twelve months. Options
issued under this Plan are exercisable for five years from the date granted.
It is the Company's policy to recognize compensation expense to the extent the
fair market value of the stock exceeds the option exercise price on the date of
grant. To date, the Company has not recognized any compensation expense as all
options have been granted at a price equal to or greater than the fair market
value of the stock on the date of grant.
F-16
<PAGE>
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 5 - STOCKHOLDERS' DEFICIT (CONTINUED)
OPTIONS (CONTINUED)
The following table sets forth information regarding incentive stock options
granted under the 1994 and 1996 Plans:
Exercise
Number of Price
SHARES PER SHARE
Balance, June 30, 1996 10,000 1.72
Granted 270,000 2.27-6.00
Exercised (89,100) 3.75-5.00
Expired (90,000) 5.25-6.00
------------------- ------------
Balance, June 30, 1997 100,900 1.72-6.00
Granted 325,672 4.00-15.00
Exercised (138,900) 4.00-7.50
Expired (60,000) 5.00-6.00
------------------- ------------
Balance, June 30, 1998 227,672 $1.72-15.00
=================== ===========
At June 30, 1998, there were options exercisable to purchase 153,494 shares of
common stock. The weighted average exercise price per share for shares
exercisable at June 30, 1998 was $5.90.
The Corporation has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." Accordingly, no compensation cost has been recognized for the
stock option plans.
Had compensation cost for the Company's stock option plan been determined based
on the fair value at the grant date for awards consistent with the provisions of
SFAS No. 123, the Company's net earnings and earnings per share would have been
reduced to the pro forma amounts indicated below.
JUNE 30,
1998 1997
Net loss - as reported $ (2,377,693) $ (2,979,165)
Net loss - pro forma (2,938,606) (3,172,756)
Basic loss per common share - as reported (.38) (1.38)
Basic loss per common share - pro forma (.47) (1.48)
F-17
<PAGE>
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 5 - STOCKHOLDERS' DEFICIT (CONTINUED)
OPTIONS (CONTINUED)
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants; dividend yield of 0%; expected volatility of 86%
(1998) and 64% (1997); discount rate of 5.5%; and expected lives of five months
to five years.
NOTE 6 - RELATED PARTY TRANSACTIONS
As of June 30, 1998, there were $274,583 of accrued salaries due to officers
included in accrued payroll.
For the periods ended June 30, 1998 and 1997, a shareholder of the Company
provided office space to the Company. Rent expense for the years totaled $42,900
(1998) and $58,710 (1997), respectively.
During the year ended June 30, 1997, the Company converted $240,000 of accrued
salaries to officers into stock subscriptions for 80,000 units, each consisting
of one share of subscribed common stock with one and one half warrants to
purchase common stock for $6.00 per share beginning January 1, 2001 and ending
December 31, 2001.
During the year ended June 30, 1997, a shareholder of the Company provided
consulting services to the Company in the amount of $28,000.
During the year ended June 30, 1997, the Company converted four notes payable
totaling $2,361,905 plus accrued interest and services totaling $174,207 to four
shareholders of the Company into common stock. In conjunction with these
transactions, the Company also issued stock for three properties contributed by
a shareholder totaling $600,000. In addition, the shareholders received warrants
to purchase 937,154 shares of common stock at a price of $6.00 per share
beginning January 1, 2001 and ending December 31, 2001, and warrants to purchase
1,087,154 shares of common stock for $10.00 per share beginning January 1, 2003
and ending December 31, 2003.
During the year ending June 30, 1997, the Company entered into an agreement with
a shareholder to provide a $500,000 revolving line-of-credit to the Company
(Note 4).
F-18
<PAGE>
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 7 - INCOME TAXES
The Company recognizes deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred tax liabilities and
assets are determined based on the difference between the financial statements
and tax basis of assets and liabilities using the enacted tax rates in effect
for the year in which the differences are expected to reverse. The measurement
of deferred tax assets is reduced, if necessary, by the amount of any tax
benefits that, based on available evidence, are more likely than not to be
realized.
The principal temporary differences that result in a deferred tax asset are due
to the losses generated since inception. The Company has generated a long-term
deferred tax asset of approximately $4,215,000 that is fully impaired because of
a lack of profitable operating history. Accordingly, there is no net deferred
tax asset reflected in the accompanying financial statements.
The Company is a taxable corporation and has carry-forward operating losses of
approximately $11,018,000 which expire in the following years. Furthermore,
utilization may be further limited due to change in ownership.
2004 $ 12,000
2005 242,000
2006 239,000
2007 19,000
2008 338,000
2009 224,000
Thereafter 9,944,000
----------
$11,018,000
===========
NOTE 8 - COMMITMENTS
EMPLOYMENT AGREEMENTS
The Company has entered into three employment agreements with officers for a
period commencing December 1, 1997 and ending December 31, 2002. The agreements
each provide for base salaries ranging from $120,000 to $150,000 per year and
various benefits, with annual reviews for increases, bonuses and benefits. Of
the base salaries, $30,000 to $50,000 is accrued annually and payable when the
Company has sufficient cash flow from future operations. (See Form 8-K/A dated
December 1, 1997).
F-19
<PAGE>
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 9 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value. Fair value estimates are made at a specific point in time for the
Company's financial instruments; they are subjective in nature and involve
uncertainties, matters of significant judgment and, therefore, cannot be
determined with precision. Fair value estimates do not reflect the total value
of the Company as a going concern.
CASH AND CASH EQUIVALENTS, ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The carrying value approximates fair value due to their liquid or short-term
nature.
NOTES PAYABLE - STOCKHOLDERS AND CAPITAL LEASE OBLIGATION
Rates currently available to the Company for debt and capital lease obligations
with similar terms and remaining maturities are used to estimate the fair value
of existing debt. Carrying values approximate fair value as the stated or
implicit rates of these instruments approximate rates available to the Company
for instruments with similar terms.
NOTE 10 - SUBSEQUENT EVENTS
On July 1, 1998, the Company signed an agreement (hereby referred to as the
("Agreement")) with Crystal Springs Farms, LLC. (hereby referred to as ("CSF")),
of Wray Colorado, to design, install and operate 18 Bion NMS(TM) swine waste
treatment systems. The Agreement anticipates that the systems will be installed
at CSF sites located in Yuma County, Colorado over a period of 18 months
commencing on the date that CSF receives financing for the project. Although
preliminary financing approval has been obtained, it is currently unknown when,
if ever that funding will be made available. The total capacity of all 18 units
will be approximately 351,000 hogs. The Agreement calls for the Company to
receive various project related fees from CSF totaling $1,755,000. The Company
and CSF have also agreed upon an operation and maintenance fee that will be in
excess of $200,000 per year once all systems are in operation. Bion will be
required to pay royalties to CSF under the terms of the Agreement which are
anticipated to be paid from revenues generated by sales of BionSoil(TM) (see
Form 8-K dated July 1, 1998).
F-20
<PAGE>
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 10 - SUBSEQUENT EVENTS (CONTINUED)
On July 1, 1998, the Company entered into an agreement with John Finamore,
nominee for a business entity to be formed by individuals who are currently
principals of CSF (hereinafter called ("X"), of Wray Colorado, (the Company and
X are collectively the ("Parties")). The Agreement calls for the Company to
issue to X a warrant to purchase up to one million (1,000,000) shares of common
stock of the Company for $7.00 per share for the period ending June 30, 1999.
Under terms of the Agreement should the Company negotiate any private placement
sale of stock at any price, X shall have the opportunity to purchase a number of
shares under the warant up to equal to the number of shares in the private
placement at $7.00 per share. Should X elect not to purchase any of the shares
under this section, the warrant shall be reduced by the number of private
placement shares. The Agreement also provides: the Company and X have set forth
a sales representation agreement; and an agreement that X (or any affiliates
thereto) agrees to use the Bion NMS waste treatment technology for any animal
raising facility or other similar projects where the technology is an
appropriate solution to waste and wastewater handling issues (see Form 8-K dated
July 1, 1998).
From July through September 21, 1998, the Company sold 101,942 shares of common
stock for $226,175.
F-21
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Within the twenty-four (24) months prior to the date of its most recent
Financial Statements, the Company has had no disagreements with its accountants
on accounting or financial disclosure.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth the names, ages and positions held with respect
to each Director and Executive Officer of the Company along with the period
served as a Director.
NAME AGE POSITION(S) PERIOD OF SERVICE
Jon Northrop 55 Chairman of the Board, April 9, 1992 to
Chief Executive Officer, Present
Secretary, and Director
Jere Northrop 56 Chief Operating Officer, April 9, 1992 to
President, and Director Present
M. Duane Stutzman 59 Chief Financial Officer, August 31, 1993 to
Treasurer, and Director Present
Ronald G. Cullis 62 Director November 1, 1994 to
Present
John Schwanekamp 50 Director August 31, 1993 to
Present
30
<PAGE>
All officers and directors will hold office until the next annual meeting
of shareholders. There is no person who is not a designated officer or director
who is expected to make any significant contribution to the business of the
Company.
The following sets forth biographical information as to the business
experience of each current Director and Executive Officer of the Company.
JON NORTHROP has been Chairman of the Board, Chief Executive Officer, and
Secretary of the Company since April 9, 1992. Mr. Northrop is a founder of Bion
Technologies, Inc. and has been its Chief Executive Officer since its inception
in September 1989. Before founding Bion Technologies, Inc., he served in a wide
variety of managerial and executive positions. He was most recently the
Executive Director of Davis, Graham & Stubbs, one of Denver's largest law firms,
from 1981 to 1989. Prior to his law firm experience, Mr. Northrop worked at
Samsonite Corporation's Luggage Division in Denver, Colorado, for over 12 years.
His experience was in all aspects of manufacturing, systems design and
implementation, and planning and finance, ending with three years as the
Division's Vice President, Finance. Mr. Northrop has a bachelors degree in
Physics from Amherst College, Amherst, Massachusetts (1965), an MBA in Finance
from the University of Chicago, Chicago, Illinois (1969), and spent several
years conducting post-graduate research in low energy particle physics at Case
Institute of Technology, Cleveland, Ohio. Jon Northrop is the brother of Jere
Northrop.
JERE NORTHROP has been President, Chief Operating Officer, and a Director
of the Company since April 9, 1992. Dr. Northrop is a founder of Bion
Technologies, Inc. and has been its President since October 1989. Prior to
founding Bion he had ten years experience in the management of operations and
process control of a large municipal advanced wastewater treatment plant at
Amherst, New York (1979-1989). He also has 25 years of experimental research on
both individual and complex systems of microorganisms. Dr. Northrop has a
bachelors degree in Biology from Amherst College, Amherst, Massachusetts (1964),
a doctorate degree in Biophysics from Syracuse University, Syracuse, New York,
(1969), and has done post doctoral work at both the University of California at
Davis, Davis, California and The Center for Theoretical Biology, State
University of New York at Buffalo, Buffalo, New York. Jere Northrop also is an
Officer and Director of AutoGnomics Corporation (without compensation) and is
the brother of Jon Northrop.
31
<PAGE>
M. DUANE STUTZMAN has been a Director of the Company since August 31,
1993. Immediately prior to joining the Company as a full time employee on May 1,
1994, he spent 11 years with Davis, Graham & Stubbs, a large Denver law firm,
ending as its Chief Financial Officer for the last four years. Prior to his
employment at Davis, Graham & Stubbs, Mr. Stutzman worked for 18 years in
various accounting and financial positions at Samsonite Corporation's Luggage
Division in Denver and the Bendix Corporation's Aerospace Division in Denver and
Teterboro, New Jersey. Mr. Stutzman received a Bachelor of Science degree in
Accounting from Florida Southern College, Lakeland, Florida in 1964. Mr.
Stutzman became Chief Financial Officer on May 1, 1994 and Treasurer on June 30,
1995.
RONALD G. CULLIS has been a director of the Company since November 1,
1994. He has spent the last ten years with PENSA and Altman Weill Pensa,
national consulting firms oriented towards law firms, in-house legal departments
and other service enterprises as a consultant, manager, and partner. From 1980
to 1985, Mr. Cullis served as the Executive Director of Milbank, Tweed, Hadley &
McCloy, a New York City law firm. Prior to that time he worked for 20 years in
various positions including Vice President-Finance, and Treasurer for
Oceaneering International, Inc., Senior Vice President Finance, Treasurer and
Director for Vetco, Inc., Vice President and Controller for Fluor Corporation,
and in various planning and analysis capacities with a number of other
corporations. Mr. Cullis received a B.A. degree in economics from Williams
College in Williamstown, Massachusetts in 1960.
JOHN SCHWANEKAMP has been a Director of the Company since August 31, 1993.
He has over 20 years of experience in public administration. From 1971 to 1973
he served as a lieutenant at the U.S. Army Medical/Bioengineering Research and
Development Laboratory in New York and Maryland. The laboratory designed,
fabricated and tested prototype devices and equipment for field medical needs
and prostheses. Since 1973 he has worked at the Chautauqua County Department of
Personnel in Mayville, New York, and currently serves there as deputy director.
That work includes a broad range of general management duties in public
personnel administration and labor relations. Mr. Schwanekamp received a B.S.
degree in Business Administration from Canisius College in Buffalo, New York in
1970.
The Company has an Executive Committee consisting of Messrs. Jon
Northrop, Jere Northrop, and Duane Stutzman. The Company has Audit and
Compensation Committees which consist of Messrs. Schwanekamp and Cullis.
These committees were formed on August 31, 1993.
FAMILY RELATIONSHIPS
Jon Northrop and Jere Northrop are brothers.
ITEM 10.EXECUTIVE COMPENSATION
SUMMARY COMPENSATION
The following table shows the aggregate direct remuneration paid by
the Company for the fiscal years ended June 30, 1998, 1997, and 1996 to each
executive officer.
32
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------- ----------------------- ---------------
SECURITIES
UNDERLYING LTIP
SALARY SALARY SALARY OPTIONS/ PAYOUTS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) SARs(#) ($) ($)
<S> <C> <C> <C> <C> <C> <C> <C>
Jon Northrop 1998 150,000 2 -- -- 225,000 6 -- --
Chairman of 1997 150,000 2 -- -- -- -- --
the Board, 1996 133,333 3 -- -- -- -- --
Chief Execu-
tive Officer
and Secretary
Jere Northrop 1998 150,000 2 -- -- -- 225,0006 --
President and 1997 150,000 2 -- -- -- -- --
Chief Operat- 1996 133,333 3 -- -- -- -- --
ing Officer
Duane Stutzman 1998 120,000 4 -- -- 30,000 190,000 7 --
Chief Finan- 1997 120,000 4 -- -- -- 20,000 --
cial Officer 1996 110,000 5 -- -- 45,777 -- --
and Treasurer
</TABLE>
1 Includes compensation paid by Bion Technologies, Inc., the Company's
wholly-owned subsidiary.
2 Includes $50,000 of salary that was deferred by management and accrued as a
liability to conserve cash for operations.
3 Includes $33,333 of salary that was deferred by management and accrued as a
liability to conserve cash for operations.
4 Includes $30,000 of salary that was deferred by management and accrued as a
liability to conserve cash for operations.
5 Includes $20,000 of salary that was deferred by management and accrued as a
liability to conserve cash for operations.
6 All of these warrants were part of the January 1, 1998 warrant exchange (see
Note 5 and
8-K/A dated December 1, 1997).
7 170,000 of these warrants were part of the January 1, 1998 warrant exchange
(see Note 5 and 8-K/A dated December 1, 1997).
33
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARs
UNDERLYING GRANTED TO EXERCISE
NAME AND PRINCIPAL OPTIONS/SARs EMPLOYEES IN OR BASE EXPIRATION
POSITION GRANTED (#) FISCAL YEAR PRICE($/SH) DATE
<S> <C> <C> <C> <C>
Jon Northrop ........................................... 75,000 7.9% $ 6.00 12/31/01
Chairman of the ...................................... 150,000 15.8% 10.00 12/31/03
Board, Chief
Executive Officer
and Secretary
Jere Northrop .......................................... 75,000 7.9% $ 6.00 12/31/01
President and Chief150,000 ........................... 15.8% 10.00 12/31/03
Operating Officer
Duane Stutzman ......................................... 20,000 2.1% $ 7.25 12/31/98
Chief Financial ...................................... 25,000 2.6 4.00 12/31/01
Officer and .......................................... 25,000 2.6 6.00 12/31/01
Treasurer ............................................ 20,000 2.1 8.00 12/31/01
40,000 4.2 10.00 12/31/01
30,000 3.2 12.50 12/31/01
30,000 3.2 15.00 12/31/01
</TABLE>
AGGREGATED OPTION/SAR EXERCISES AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES
UNDERLYING VALUE OF
UNEXERCISED UNEXERCISED
OPTIONS/SARs IN-THE-MONEY
AT FY-END (#) OPTIONS/SARs
NAME AND PRINCIPAL SHARES ACQUIRED VALUE EXERCISABLE/ AT FY-END (#)
POSITION ON EXERCISE REALIZED ($) UNEXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C>
Jon Northrop .................................... -- -- (un) 350,556 --
Chairman of the
Board, Chief
Executive Officer
and Secretary
Jere Northrop ................................... -- -- (un) 356,528 --
President and Chief
Operating Officer
Duane Stutzman .................................. -- -- 20,000 --
Chief Financial ............................... -- -- (un) 65,259 --
Officer and Treasurer
</TABLE>
34
<PAGE>
COMPENSATION OF DIRECTORS
Effective September 1, 1993, outside Directors are compensated at a rate
of $75 per month for their contributions to the Company. No additional
compensation is paid for their involvement in the Audit and Compensation
Committees. On June 14, 1996 the Board of Directors of the Company adopted the
1996 Nonemployee Director Stock Plan. There were no awards made during the
fiscal year ended June 30, 1997. On August 20, 1997 the Company granted,
pursuant to its 1996 Nonemployee Director Stock Option Plan, options to the two
outside directors Mr. Cullis and Mr. Schwanekamp (see below).
EMPLOYMENT CONTRACTS AND TERMS OF EMPLOYMENT AND CHANGE IN CONTROL ARRANGEMENTS
On December 1, 1997, the Company entered into separate employment
agreements (both of which are substantially identical) with each of Jon Northrop
(the Company's Chief Executive Officer) and his brother, Jere Northrop (the
Company's President) for the period commencing on December 1, 1997 and ending on
December 31, 2002 (unless earlier terminated as discussed below). Among other
things, each of the subject employment agreements provides that the affected
employee is to be paid a salary of $150,000 per year of which $50,000 per year
will be accrued until such time as cash flow permits payment of the accrued
amounts, receive reimbursement for certain business expenses (including but not
limited to expenses for travel, entertainment and similar items) and receive
payment of certain benefits including parking, health, hospitalization and life
insurance, four weeks of paid vacation each year and such other benefits as the
Company's Board of Directors may deem appropriate from time to time. (See Form
8-K/A dated December 1, 1997.)
The Company's Board of Directors is required to review Messrs. Northrop's
salaries no less often than once annually with a view to making such increases
in each employee's salary or declaring such bonuses or other benefits as may be
merited and warranted in light of factors considered pertinent by the Board of
Directors at that time.
In the event of disability (as defined in the employment agreements) prior
to the end of the employment period in each case, the affected employee is
entitled to receive his full compensation under his employment agreement during
the full term of the disability. The Company may require such evidence of
disability as it deems appropriate. Also, in the event the employee dies during
the term of the agreement, the Company will be required to pay to the employee's
legal representative all of the compensation due to the employee under the
agreement for a period of one year or the end of the employment period,
whichever occurs earlier.
In the event the employee is terminated for cause (which is defined
generally as conduct including, among other things, criminal activity, willful
misconduct, gross neglect of duties, or breach of the employment agreement by
the employee), the Company is entitled to terminate the affected employment
agreement without any further liability to the employee. In the event the
employee is terminated for any reason other than "for cause," the employee is
entitled to receive his full compensation under the agreement for the entire
duration of the employment period.
35
<PAGE>
In the event the Employee is terminated upon death or disability,
terminated without cause, or terminated upon change in management, all warrants,
options, or shares issued but not vested at the date of termination shall become
fully vested as of the date of termination.
In the event that a change in control of the Company occurs at any time
during the term of either of the affected employment agreements (as a result of
which the Board of Directors appoints a person other than the employee to serve
in the capacity for which the employee is employed under the affected employment
agreement or as a result of which the employee elects to resign his executive
position with the Company), each affected employee is nevertheless entitled to
all of the benefits and compensation under his employment agreement for the
entire term thereof, regardless of whether the employee continues to perform any
services for the Company. Each of the employment agreements is binding upon the
Company and its successors and assigns and any person acquiring, whether by
merger, consolidation, liquidation, purchase of assets or otherwise all or
substantially all of the Company's equity or business.
The employment agreements allow each of the respective employees to
terminate employment without liability upon 90 days written notice to the
Company, and to directly and indirectly engage in other business activities that
are not directly competitive with the business of the Company. Neither of the
subject agreements contains any non-competition or similar provisions.
On December 1, 1997, the Company entered into an employment agreement with
Mr. M. Duane Stutzman (the Company's Chief Financial Officer and Treasurer) for
the period commencing on December 1, 1997 and ending on December 31, 2002
(unless earlier terminated as discussed below). Among other things, the
employment agreement provides that the affected employee is to be paid a salary
of $120,000 per year of which $30,000 per year will be accrued until such time
as cash flow permits payment of the accrued amounts, receive reimbursement for
certain business expenses (including but not limited to expenses for travel,
entertainment and similar items) and receive payment of certain benefits
including parking, health, hospitalization and life insurance, four weeks of
paid vacation each year and such other benefits as the Company's Board of
Directors may deem appropriate from time to time. (See Form 8-K/A dated December
1, 1997.)
The Company's Board of Directors is required to review Mr. Stutzman's
salary no less often than once annually with a view to making such increases in
employee salary or declaring such bonuses or other benefits as may be merited
and warranted in light of factors considered pertinent by the Board of Directors
at that time.
In the event of disability (as defined in the employment agreement) prior
to the end of the employment period, Mr. Stutzman is entitled to receive his
full compensation under his employment agreement for a period of twelve months
from the date of his disability. The Company may require such evidence of
disability as it deems appropriate. Also, in the event the employee dies during
the term of the agreement, the Company will be required to pay to the employee's
legal representative all of the compensation due to the employee under the
agreement for a period of six months or the end of the employment period,
whichever occurs earlier.
36
<PAGE>
In the event the employee is terminated for cause (which is defined
generally as conduct including, among other things, criminal activity, willful
misconduct, gross neglect of duties, or breach of the employment agreement by
the employee), the Company is entitled to terminate the affected employment
agreement without any further liability to the employee. In the event the
employee is terminated for any reason other than "for cause," the employee is
entitled to receive his full compensation under the agreement for a period of
twelve months or until the end of the employment period, whichever comes first.
In the event that the Employee is terminated upon death or disability,
terminated without cause, or terminated upon change in management, all warrants,
options, or shares issued but not vested at the date of termination shall become
fully vested as of the date of termination.
In the event that a change in control of the Company occurs at any time
during the term of the employment agreement (as a result of which the Board of
Directors appoints a person other than the employee to serve in the capacity for
which the employee is employed under the affected employment agreement or as a
result of which the employee elects to resign his executive position with the
Company), the employee is nonetheless entitled to all of the benefits and
compensation under his employment agreement for the entire term thereof,
regardless of whether the employee continues to perform any services for the
Company. The employment agreement is binding upon the Company and its successors
and assigns and any person acquiring, whether by merger, consolidation,
liquidation, purchase of assets or otherwise all of substantially all of the
Company's equity or business.
The employment agreement allows the employee to terminate employment
without liability upon 90 days written notice to the Company and to directly and
indirectly engage in other business activities that are not directly competitive
with the business of the Company. The subject agreement does not contain any
non-competition or similar provisions.
INCENTIVE COMPENSATION PLANS
On July 9, 1993, the Board of Directors of the Company adopted the Fiscal
Year 1994 Incentive Plan ("Plan"), which Plan was ratified by the Company's
shareholders on August 30, 1993. The maximum number of shares of Common Stock
which may be issued under the Plan is the greater of 250,000 shares or 20% of
the Company's outstanding Common Stock.
Shares issued under the Plan may be authorized but unissued shares of
common stock or treasury shares, at the discretion of a committee (the
"Committee") of not fewer than two directors appointed under the Plan to
administer the Plan. The Company's Compensation Committee, which presently
consists of John Schwanekamp and Ronald G.
Cullis, administers the Plan.
37
<PAGE>
The Plan provides for the grant of (i) non-qualified stock options, (ii)
incentive stock options, (iii) limited stock appreciation rights, (iv) tandem
stock appreciation rights, (v) stand-alone stock appreciation rights, (vi)
shares of restricted stock, (vii) shares of phantom stock, and (viii) stock
bonuses (collectively, "Incentive Grants"). In addition, the Plan provides for
the grant of cash bonuses payable when a participant is required to recognize
income for federal income tax purposes in connection with the vesting of shares
of restricted stock or the grant of a stock bonus. Employees, officers (whether
or not they are directors), and advisors of the Company and its subsidiaries
will be eligible to participate in the Plan.
The Committee will determine which persons receive Incentive Grants, the
type of Incentive Grants granted and the number of shares subject to each
Incentive Grant. No Incentive Grant may be granted under the Plan after April 1,
2002. Subject to the terms of the Incentive Plan, the Committee will also
determine the prices, expiration dates and other material features of the
Incentive Grants granted under the Plan. The Committee may, in its absolute
discretion, (i) accelerate the date on which an option or stock appreciation
right granted under the Incentive Plan becomes exercisable, (ii) accelerate the
date on which a share of restricted stock or phantom stock vests and waive any
conditions imposed by the Committee on the vesting of a share of restricted
stock, and (iii) grant Incentive Grants to a participant on the condition that
the participant surrender to the Company for cancellation such other Incentive
Grants (including, without limitation, Incentive Grants with higher exercise
prices) as the Committee specifies.
The Committee will have the authority to interpret and construe any
provision of the Plan and to adopt such rules and regulations for administering
the Plan as it deems necessary. All decisions and determinations of the
Committee are final and binding on all parties. The Company will indemnify each
member of the Committee against any cost, expense or liability arising out of
any action, omission or determination relating to the Plan, unless such action,
omission or determination was taken or made in bad faith and without reasonable
belief that it was in the best interests of the Company.
The Board of Directors may at any time amend the Plan in any respect,
provided, that no amendment may (i) increase the number of shares of Common
Stock that may be issued under the Plan, (ii) materially increase the benefits
accruing to individuals holding Incentive Grants, or (iii) materially modify the
requirements as to eligibility for participation in the Plan.
38
<PAGE>
During the year ended June 30, 1998 the Company awarded certain employees
(excluding the Company's officers and directors) the following options to
purchase the Company's common stock pursuant to the Fiscal Year 1994 Incentive
Plan in lieu of salaries: 17,500 options at a price of $4.00 per share
commencing on August 1, 1997 and expiring on August 1, 2000; 20,000 options at a
price of $6.25 per share commencing on October 3, 1997 and expiring on December
31, 1997; 10,000 options at a price of $5.40 per share commencing on October 3,
1997 and expiring on December 31, 1997; 10,000 options at a price of $6.25 per
share, commencing on October 6, 1997 and expiring on September 30, 1998; 5,000
options at a price of $6.25 per share commencing on October 6, 1997 and expiring
on December 31, 1998; 5,000 options at a price of $6.75 per share commencing on
October 6, 1997 and expiring on December 31, 1999; 10,000 options at a price of
$7.25 per share commencing on October 6, 1997 and expiring on December 31, 1999;
25,000 options at a price of $6.75 per share commencing on October 7, 1997 and
expiring on March 31, 1998; 25,000 options at a price of $7.25 per share
commencing on January 26, 1998 and expiring on December 31, 1998; 25,000 options
at a price of $7.50 per share commencing on February 23, 1998 and expiring on
December 31, 1998; 1,000 options at a price of $4.00 per share commencing March
31, 1998 and expiring on March 31, 1999; 1,000 options at a price of $6.00 per
share commencing on March 31, 1998 and expiring on March 31, 1999; 25,000
options at a price of $7.75 per share commencing on April 17, 1998 and expiring
on December 31, 1998; and 15,000 options at a price of $5.375 per share
commencing on June 16, 1998 and expiring on December 31, 1998.
The Company granted to M. Duane Stutzman, the Company's C.F.O., 20,000
options to purchase shares of the Company's common stock at a price of $7.25 per
share commencing on January 26, 1998 and expiring on December 31, 1998.
Effective September 15, 1997, the Company issued awards to all current
employees (excluding the Company's officers and directors) under the Company's
Fiscal Year 1994 Incentive Plan totaling 27,762 options with an exercise price
of $4.00 per share, 27,756 options with an exercise price of $6.00 per share,
27,754 options with an exercise price of $8.00 per share, 10,000 options with an
exercise price of $10.00 per share, 10,000 options with an exercise price of
$12.50 per share, and 10,000 options with an exercise price of $15.00 per share;
all of the above options expire on December 31, 2001. The options will vest as
follows: for employees with less than one year of service, the first third shall
vest on their one year employment anniversary date, the second third shall vest
on their second anniversary date, and the last third on their third anniversary.
For employees with more than one year of service, the first third shall vest on
the above effective date, and the second and last third shall vest twelve and
twenty-four months thereafter respectively.
On June 14, 1996, the Board of Directors of the Company adopted the 1996
Nonemployee Director Stock Plan ("Director Plan"), which plan will be submitted
for ratification by the Company's shareholders at the next meeting of the
shareholders. The maximum number of shares of Common Stock which may be issued
under the Director Plan is 100,000 shares.
Shares issued under the Director Plan may be authorized but unissued
shares of Common Stock or treasury shares, at the discretion of a committee (the
"Director Plan Committee") of not fewer than two directors appointed under the
Director Plan to administer the Director Plan who are not eligible to
participate in the Director Plan.
The Director Plan provides for the grant of stock options to participants.
All nonemployee directors shall participate in the Director Plan so long as they
remain eligible. No stock option may be granted under the Director Plan after
June 13, 2001. Each participant shall be granted an option for 5,000 shares of
Common Stock for each 12 months they serve as a director, or if a director for
less than the prior 12 months, a pro rata portion of 5,000 shares of Common
Stock based on the number of months such participant was a nonemployee director
of the Company. The exercise price of the stock option to be granted under the
Director Plan shall be 50% of the average market price for the prior twelve
months. The stock options granted under the Director Plan shall be exercisable
as set forth in the option agreement commencing on the date such option is
granted, provided that each option shall expire five years after the date such
option was granted.
39
<PAGE>
The Director Plan Committee will have the authority to interpret and
construe any provision of the Director Plan and to adopt such rules and
regulations for administering the Director Plan as it deems necessary. All
decisions and determinations of the Director Plan Committee are final and
binding on all parties. Neither the Company nor any member of the Board or the
Director Plan Committee or designee thereof will be liable for any damages
resulting from any action or determination made by the Board or the Director
Plan Committee with respect to the Director Plan or any transaction arising
under the Director Plan or any omission in connection with the Director Plan in
the absence of willful misconduct or gross negligence.
The Board of Directors may at any time amend the Director Plan in any
respect, provided, that no amendment may (i) change the class of persons
eligible to receive stock options under the Director Plan or otherwise modify
the requirements as to eligibility for participation in the Director Plan, (ii)
materially increase the benefits accruing to participants under the Director
Plan, or (iii) increase the number of shares of Common Stock which may be issued
under the Director Plan without the approval of the shareholders of the Company.
On June 6, 1996 a Form S-8 Registration Statement under the Securities Act
of 1933 was filed registering 330,928 shares under the Fiscal Year 1994
Incentive Plan and 100,000 shares under the 1996 Nonemployee Director Plan. On
June 30, 1998 a Form S-8 Registration Statement was Filed registering an
additional 534,104 shares under the Fiscal Year 1994 Incentive Plan.
On August 20, 1997 the Company granted, pursuant to the Company's 1996
Nonemployee Stock Option Plan, options to the two outside directors Mr. Cullis
and Mr. Schwanekamp for 10,000 shares each (5,000 shares for the year ended June
30, 1997 and 5,000 for the year ended June 30, 1996).
INDEMNIFICATION
The Articles of Incorporation and the Bylaws of the Company provide that
the Company may indemnify its officers and directors for costs and expenses
incurred in connection with the defense of actions, suits or proceedings where
the officer or director acted in good faith and in a manner he reasonably
believed to be in the Company's best interest and is a party by reason of his
status as an officer or director.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Company pursuant to the foregoing provisions or otherwise, the
Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable.
40
<PAGE>
REPORT ON REPRICING OF OPTIONS/SARS
The Company has not during the fiscal year ending June 30, 1998 repriced
any stock options or SARs previously awarded to any of the named executive
officers.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND SECURITY OWNERSHIP OF
MANAGEMENT
The following table sets forth information as of September 21, 1998 based
on information obtained from the persons named below, with respect to the
beneficial ownership of Common Stock by (i) each person known by the Company to
be the owner of more than 5% of the outstanding Common Stock, (ii) each officer
and director, and (iii) all officers and directors as a group:
Name and Address Shares of Common Percentage of Common
OF BENEFICIAL OWNER STOCK OWNED STOCK OUTSTANDING
Jon Northrop ................... 5,043,210 Shares1,3,4,5 55.6%
1922 W. Sanibel Court
Littleton, CO 80120.............
Jere Northrop .................. 555,654 Shares2,3 6.3%
1961 Tonawanda Creek Road
Amherst, NY 14228...............
LoTayLingKyur, Inc. ............ 2,286,651 Shares4 25.2%
1280 Terminal Way, #3
Reno, NV 89502..................
Dublin Holding, Ltd. ........... 2,442,190 Shares5 27.5%
c/o AmeriLawyer, Ltd. ..........
Attn: Lloyd Rodney, Esq ........
Harbor House
P.O. Box 120
Grand Turk
Turks & Caicos Isl., B.W.I .....
John Schwanekamp ............... 10,125 Shares6 0.1%
Sherman Road
Westfield, NY 14787.............
M. Duane Stutzman .............. 153,820 Shares7 1.7%
7483 West Laurel Avenue
Littleton, CO 80123.............
Ronald G. Cullis ............... 15,110 Shares 0.2%
76 Northview Lane
Chesapeake City, MD 21915
Crystal Springs Farms, LLC...... 1,000,000 Shares 8 10.1%
P.O. Box 126
Wray, Colorado 80758
Management as a Group .......... 5,613,106 Shares 61.6%
(5 Persons)
- ---------------
41
<PAGE>
1 Jon Northrop owns of record 665,367 shares and has investment rights for
665,367 shares. Because of voting rights and agreements Mr. Northrop holds
voting rights for a total of 5,043,210 shares. This total includes 14,435 shares
owned by the Family Trust U/A 3rd U/W Catherine Northrop. Additionally, includes
4,213,029 shares which Jon Northrop has the right to vote through June 30, 1999,
all of which shares are owned by LoTayLingKyur, Inc. ("LTLK") and Dublin
Holding, Ltd. (see footnotes 4 and 5). Does not include 4,000 shares owned by
his wife and 88,012 shares owned by adult children of Jon Northrop each of which
Mr. Northrop disclaims beneficial ownership. Does not include 350,566 Class Z
Warrants exercisable at $15.00 per share commencing January 1, 2000 and ending
December 31, 2001.
2 Jere Northrop owns of record 390,840 shares and has investment rights for
390,840 shares. Because of voting rights and agreements Mr. Northrop holds
voting rights for a total of 555,654 shares. The total includes 14,435 shares
owned by the Family Trust U/A 3rd U/W Catherine Northrop. Does not includes
304,000 shares owned by his wife and 72,338 shares owned by an adult child of
Jere Northrop, each of which Mr. Northrop disclaims beneficial ownership. Does
not include 356,528 Class Z Warrants exercisable at $15.00 per share commencing
January 1, 2000 and ending December 31, 2001.
3 Includes 150,379 shares owned by Delta Petroleum Corporation which Jon
Northrop and Jere Northrop jointly have the right to vote until December 31,
1999. Does not include 18,648 Class Z Warrants exercisable at $15.00 per share
commencing January 1, 2000 and ending December 31, 2001.
4 LoTayLingKyur, Inc. ("LTLK") is the assignee of shares previously owned
by Stonehenge Capital Corporation. The figure indicated includes 1,561,273
shares owned by LTLK and 505,822 shares owned by Mark Smith and his wife
(directors, officers, and controlling shareholders in LTLK) and 1,000 shares in
a pension plan. Jon Northrop has the right to vote all of the LTLK 1,561,273
shares and all 209,556 warrants pursuant to a voting agreement that expires on
June 30, 1999. LTLK has investment rights and no voting power to all 1,561,273
shares. LTLK has acquired warrants to purchase restricted stock as follows:
1,340 shares at $6.00 per share until April 20, 2002, 24,750 shares at $6.00 per
share until June 30, 2000, 150,000 shares at $7.50 per share until December 31,
2000, 8,466 shares at $6.00 per share until December 31, 1999, and 25,000 shares
at $7.50 per share until December 31, 1999. Does not include 484,075 Class Z
Warrants exercisable at $15.00 per share commencing January 1, 2000 and ending
December 31, 2001.
42
<PAGE>
5 Dublin Holding, Ltd. ("DHL") - Jon Northrop has the right to vote all
2,442,190 shares pursuant to a voting agreement that expires on June 30, 1999.
Does not include 1,141,003 Class Z Warrants exercisable at $15.00 per share
commencing January 1, 2000 and ending December 31, 2001.
6 Does not include 125 shares owned by Mr. Schwanekamp's wife of which he
disclaims beneficial ownership. Mr. Schwanekamp has full voting power and
investment rights on his stock.
7 Does not include 65,259 Class Z Warrants exercisable at $15.00 per share
commencing January 1, 2000 and ending December 31, 2001.
8 1,000,000 B-7 warrants exercisable at $7.00 per share commencing on July
1, 1998 and ending June 30, 1999. Warrants issued to John Finamore, nominee for
a business entity (as yet unnamed) to be formed by individuals who are currently
principals of Crystal Springs Farms, LLC (See Form8-K dated July 1, 1998).
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Effective May 6, 1997, the Company replaced an existing May 16, 1995
agreement among the Company, Jon Northrop (the Company's Chief Executive
Officer), Jere Northrop (the Company's President) and LoTayLingKyur, Inc.
("LTLK"), and an existing January 8, 1997 agreement among the Company, BionSoil,
Inc. and LTLK with a new agreement among the Company, BionSoil, Inc., LTLK,
Dublin Holding, Ltd. ("DHL"), Kelly Moone ("KM") and Mark A. Smith ("MAS").
LTLK, DHL, KM, and MAS are hereinafter collectively referred to as the
"Investors," and the May 6, 1997 agreement is hereinafter referred to as the
"Replacement Agreement."
Among other things, the Replacement Agreement provides that the Company is
released from any and all obligations to each of the Investors pursuant to: (a)
a May 16, 1995 convertible promissory note of the Company owned jointly by LTLK
and DHL (see Form 10-KSB/A for the fiscal year ended June 30, 1996); (b) a
promissory note and other rights related to a loan to the Company dating from
January 8, 1997 (see 8-K dated January 2, 1997); and (c) amounts owed by the
Company to LTLK in connection with an April 1997 loan arrangement and certain
other unpaid amounts. As of the date of the Replacement Agreement, the subject
obligations that were released aggregated an agreed upon $2,146,045.
43
<PAGE>
In accordance with the terms of the Replacement Agreement, the Investors
also assigned to the Company various real property interests owned by LTLK and
KM by quit claim deeds for an aggregate value of $710,000. In exchange, the
Company issued to the Investors 1,574,308 shares of the Company's Common Stock,
a Class E1 Warrant to purchase an additional 937,154 shares of the Company's
Common Stock at a price of $6.00 per share during the period from January 1,
2001 through December 31, 2001 and a Class X Warrant to purchase an additional
1,087,154 shares of the Company's Common Stock at a price of $10.00 per share
during the period from January 1, 2003 through December 31, 2003.
In accordance with the terms of the Replacement Agreement, the provisions
of the various debt instruments among the parties were terminated in their
entirety. In addition, the Replacement Agreement provides that in the event of
an underwritten offering by the Company, the Investors will not be subject to
any lock-up agreement which does not allow the Investors to sell at least 7,500
shares of the Company's Common Stock per month (on a cumulative basis), and that
any such lock-up agreement must terminate in its entirety no more than one year
after the completion of any such offering.
The Replacement Agreement further provides that the Investors do not now
and will not attempt to exercise any control over the management or business of
the Company and, further, that the Investors will not have any direct or
indirect power to control the Company (despite the size of their stockholdings
in the Company) due to an existing Voting Agreement, provided, however, that if
the Company is not profitable by June 30, 1999, the Voting Agreement will
terminate on January 1, 2000, unless otherwise agreed in writing by the Company
and the Investors.
Pursuant to the Replacement Agreement, the Company is required to
indemnify and hold the Investors harmless from any liability to the Company (or
others) pursuant to ss.16(b) of the Securities Exchange Act of 1934 for "short
swing profits" which may arise from matching the transactions which are the
subject of the Replacement Agreement (including transactions between and among
LTLK, DHL, KM, and/or MAS in connection with such agreement) with any other
transaction.
The Replacement Agreement also provides that LTLK will provide consulting
services to the Company commencing July 1, 1997 with base monthly fees of $2,500
until November 1997, at which time such base monthly fee will increase by $500
per month on November 1 of each year thereafter through November 1, 2001. The
consulting services are to be provided for a term of 64 months with the base
monthly consulting fees to be paid to LTLK on the 15th of each month commencing
July 1997.
On June 30, 1996 the Company converted the outstanding principal and
interest balance of $57,920 on a note held by Harley E. Northrop into 28,960
shares of restricted and legended common stock of the Company in full
satisfaction of the debt obligation.
44
<PAGE>
On October 26, 1996, the Company and Harley E. Northrop ("Lender") entered
into an agreement whereby Lender made a $500,000 credit facility available to
Company under the following terms and conditions. The Company may request that
funds be advanced on either the first or the fifteenth of any month, and Lender
will make such funds available within fifteen working days; interest will be
paid monthly in cash by the Company to Lender at the rate of 1% per month on the
drawn down balance, and if by mutual agreement not paid in cash, will be added
to the unpaid balance; the entire drawn down balance will be due and payable on
December 31, 1999; there will be no prepayment penalties should the Company pay
off the drawn down amount prior to December 31, 1999; advances from Lender to
the Company shall be evidenced by a promissory note; the entire outstanding
balance may be converted into units (the "Units") at a conversion price of $4.50
per Unit by mutual agreement between the Company and Lender at any time after
January 1, 1998; each Unit shall consist of one share of the restricted and
legended common stock of the Company plus one warrant authorizing the holder to
purchase one share of the restricted and legended common stock of the Company
for a price of $4.50 per share for a period commencing at the time of conversion
and expiring December 31, 2001; as additional consideration for establishing
this credit facility, for each $5.00 loaned to the Company, the Company shall
issue to Lender one warrant ("Warrant") to purchase one share of the Company's
stock between November 15, 1998 and November 15, 2001 at a price of $4.50 per
share; as incentive for the Company to pay the balance due at an earlier date
than December 31, 1999, the Company agreed that if it pays the entire balance
due on or before December 31, 1998, the quantity of Warrants issued will be
reduced by 50%. As of June 30, 1998 the Company had drawn $210,000 against the
note payable to a shareholder.
On December 1, 1996 Jon Northrop, the Company's C.E.O., Jere Northrop, the
Company's President and C.O.O., and M. Duane Stutzman, the Company's Treasurer
and C.F.O. signed Investor Representation and Subscription Agreements
("Agreements") to purchase 33,334, 33,334, and 13,334 shares of the restricted
and legended common stock of the Company plus 50,000, 50,000, and 20,000 E-1
Warrants to purchase additional shares of the Company's common stock at a per
share price of $6.00, for a price of $100,000, $100,000 and $40,000
respectively. Further, each of the officers has notified the Company that
payment for the subscribed stock would be made by cancellation of salary amounts
owed to the officers by the Company in the amounts of $100,000, $100,000, and
$40,000 respectively, such cancellation and payment to occur upon issuance of
the restricted and legended common stock.
During the year ended June 30, 1998, the Company authorized the issuance
of restricted stock and warrants to purchase stock to the following officer: M.
Duane Stutzman, the Company's Chief Financial Officer, will receive the
following: (a) 10,000 shares of the Company's restricted and legended common
stock, (b) 25,000 warrants with an exercise price of $4.00 per share, 25,000
warrants with an exercise price of $6.00 per share, and 20,000 warrants with an
exercise price of $8.00 per share, all three classes of warrants shall vest and
be exercisable commencing September 15, 1997; (c) 40,000 warrants with an
exercise price of $10.00 per share shall vest and be exercisable on September,
15, 1998, 30,000 warrants with an exercise price of $12.50 per share and 30,000
warrants with an exercise price of $15.00 per share shall vest and be
exercisable on September 15, 1999. All classes of warrants discussed in this
paragraph are to purchase restricted and legended shares of common stock of the
Company and shall expire on December 31, 2001. The Company also issued to Mr.
Stutzman 20,000 options to purchase shares of the Company's common stock at a
price of $7.25 per share commencing on January 26, 1998 and expiring on December
31, 1998 under the Fiscal Year 1994 Incentive Plan.
45
<PAGE>
Effective July 15, 1997 the Company entered into a short term promissory
note with the Family Trust U/A 3rd U/W Catherine Northrop in the amount of
$7,000. The note accrues interest monthly at a rate of twelve percent per year.
46
<PAGE>
Effective September 15, 1997, the Company issued the following: to Jon
Northrop, the Company's Chief Executive Officer, and to Jere Northrop, the
Company's President, 75,000 Class E-1 warrants to purchase the Company's
restricted and legended common stock at $6.00 per share with the exercise period
commencing on January 1, 2001 and expiring on December 31, 2001, and 150,000
Class X warrants to purchase restricted and legended common stock of the Company
at a price of $10.00 per share with the exercise period commencing January 1,
2003 and expiring on December 31, 2003.
Effective January 1, 1998, holders of 84% of the Company's common stock
(post transaction) participated in an exchange transaction (the "Exchange")
conducted pursuant to Section 351 of the Internal Revenue Code of 1986 as
amended that resulted in the exchange of 7,463,012 warrants of various classes
for 4,351,348 shares of restricted stock and 2,832,909 Class Z Warrants to
purchase shares of the Company's common stock at $15.00 per share for a 24 month
period commencing January 1, 2000. The Exchange was the result of negotiations
that were initiated in response to a proposal made by certain warrant holders on
November 23, 1997, and finalized on December 24, 1997. The Company has prepared
the following analysis of its capital structure on January 2, 1998 following the
Exchange:
Common Stock:
Issued and outstanding 8,559,455 1,2
Options
Vested 144,460
Not Vested 79,212
Warrants
Vested 3,129,836
Not Vested 11,250
1 This is an increase from December 31, 1997 of 4,539,586 shares,
4,351,348 of which are as a result of the Exchange, and 188,238 of which
result from the issuance of shares previously subscribed.
2 The Company currently is obligated to pay $130,000 under the terms of a
convertible credit facility with a shareholder which, if converted, would
result in the issuance of 28,889 shares of restricted Common Stock as
payment in full of the obligation. (See 8-K dated December 1, 1996). If
the note is converted into stock, it would result in the Company having
8,588,344 shares of Common Stock outstanding.
47
<PAGE>
Following completion of the Exchange the ownership positions of all officers
and/or owners of 5% or more of the common stock of the Company are as follows:
NAME OF HOLDER SHARES OWNED Z WARRANTS OWNED
Dublin Holding, Ltd. 2,489,090 1,141,003
LoTayLingKyur, Inc. 1,393,808 279,330
Jere Northrop 663,707 356,528
Jon Northrop 642,034 350,556
Mark Smith and Kelly Moone 521,822 216,486
Duane Stutzman 100,237 65,259
(See Form 8-K/A dated December 1, 1997.)
Effective June 15, 1998 the Company entered into a short term promissory
note with the Family Trust U/A 3rd U/W Catherine Northrop in the amount of
$20,000. The note accrues interest monthly at a rate of twelve percent per year.
On June 30, 1998 the note and interest was paid in full.
On July 1, 1998, the Company entered into an agreement with John Finamore,
nominee for a business entity to be formed by individuals who are currently
principals of CSF (hereinafter called ("X"), of Wray Colorado, (the Company and
X are collectively the ("Parties")). The Agreement calls for the Company to
issue to X a warrant to purchase up to one million (1,000,000) shares of common
stock of the Company for $7.00 per share for the period ending June 30, 1999.
Under terms of the Agreement should the Company negotiate any private placement
sale of stock at any price, X shall have the opportunity to purchase a number of
shares under the warant up to equal to the number of shares in the private
placement at $7.00 per share. Should X elect not to purchase any of the shares
under this section, the warrant shall be reduced by the number of private
placement shares. The Agreement also provides: the Company and X have set forth
a sales representation agreement; and an agreement that X (or any affiliates
thereto) agrees to use the Bion NMS waste treatment technology for any animal
raising facility or other similar projects where the technology is an
appropriate solution to waste and wastewater handling issues (see Form 8-K dated
July 1, 1998).
All future and ongoing transactions with affiliates will be on terms which
the Company's management believes are no less favorable than could be obtained
from non-affiliated parties. All future and ongoing loans to affiliates,
officials and shareholders of the Company will be approved by a majority vote of
the disinterested directors.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
The Exhibits listed in the Index to Exhibits appearing at page 33
are filed as part of this report.
REPORTS ON FORM 8-K
The following current reports on Form 8-K were filed during fiscal
year 1998 and the first quarter of fiscal year 1999:
Form 8-K dated:
September 1, 1997 reporting on item 5 September 30, 1997
reporting on items 5 & 7 December 1, 1997 reporting on items 5
& 7 February 23, 1998 reporting on items 5 & 7 May 21, 1998
reporting on items 5 & 7 June 11, 1998 reporting on items 5 &
7 July 1, 1998 reporting on items 5 & 7
48
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Company has caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
BION ENVIRONMENTAL TECHNOLOGIES, INC.
Date: September 28, 1998 By: /S/ JON NORTHROP
--------------------
Jon Northrop
Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, this Report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
NAME AND CAPACITY DATE
/S/ JON NORTHROP September 28, 1998
Jon Northrop, Chief Executive
Officer, Director
/S/ JERE NORTHROP September 28, 1998
Jere Northrop, President, Director
/S/ M. DUANE STUTZMAN September 28, 1998
- -------------------------------------
M. Duane Stutzman, Chief Financial
Officer, Treasurer, Director
/S/ JOHN SCHWANEKAMP September 28, 1998
John Schwanekamp, Director
/S/ RONALD G. CULLIS September 28, 1998
- -------------------------------------
Ronald G. Cullis, Director
49
<PAGE>
INDEX TO EXHIBITS
(2) PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, ETC. None.
2.1 Exchange offer memorandum previously filed and incorporated herein
by reference to Form 8-K/A dated December 1, 1997.
(3) ARTICLES OF INCORPORATION AND BYLAWS
3.1 Articles of Incorporation previously filed and incorporated herein by
reference.
3.2 Bylaws previously filed and incorporated herein by reference.
(4) INSTRUMENTS DEFINING THE RIGHTS OF HOLDERS, INC. INDENTURES
Statement of Designation and Determination of Preferences of Series A
Convertible Preferred Stock and Series B Convertible Preferred Stock previously
filed and incorporated by reference.
(9) VOTING TRUST AGREEMENT. None.
(10) MATERIAL CONTRACTS. None.
(11) STATEMENT RE COMPUTATION OF PER SHARE EARNINGS. None.
(13) ANNUAL OR QUARTERLY REPORTS, FORM 10-Q. Previously filed and
incorporated herein by reference.
(16) LETTER ON CHANGES IN CERTIFYING ACCOUNTANT. None.
(18) LETTER ON CHANGES IN ACCOUNTING PRINCIPLES. None.
(21) LIST OF SUBSIDIARIES. Attached and incorporated herein by reference.
(22) PUBLISHED REPORT REGARDING MATTERS SUBMITTED TO VOTE. None.
(23) CONSENTS OF EXPERTS. Attached to financial statements and incorporated
herein by reference.
(24) POWER OF ATTORNEY. None.
(27) FINANCIAL DATA SCHEDULE. Attached.
50
<PAGE>
(28) INFORMATION FROM REPORTS FURNISHED TO STATE INSURANCE REGULATORY
AUTHORITIES. None.
(29) ADDITIONAL EXHIBITS. None.
51
<PAGE>
EXHIBIT 21
BION ENVIRONMENTAL TECHNOLOGIES, INC.
Subsidiary List
Bion Technologies, Inc., incorporated under the laws of the State of Colorado.
BionSoil, Inc., incorporated under the laws of the State of Colorado.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 19,104
<SECURITIES> 0
<RECEIVABLES> 22,902
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 445,704
<PP&E> 298,782
<DEPRECIATION> (91,727)
<TOTAL-ASSETS> 780,202
<CURRENT-LIABILITIES> 726,634
<BONDS> 0
0
0
<COMMON> 10,863,469
<OTHER-SE> (11,254,028)
<TOTAL-LIABILITY-AND-EQUITY> 780,202
<SALES> 0
<TOTAL-REVENUES> 547,251
<CGS> 0
<TOTAL-COSTS> 549,343
<OTHER-EXPENSES> 2,269,564
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 88,649
<INCOME-PRETAX> (2,377,693)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,377,693)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,377,693)
<EPS-PRIMARY> (.38)
<EPS-DILUTED> (.38)
</TABLE>
