SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB/A
(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, 1999 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 22, 1999 of voting stock held by
non-affiliates of the Registrant was $7,557,133 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 22, 1999, 10,226,631 shares of Registrant's Common Stock, no par
value, were issued and outstanding.
<PAGE>
PART I
THIS ANNUAL REPORT ON FORM 10-KSB CONTAINS FORWARD-LOOKING STATEMENTS (DENOTED
WITH AN ASTERISK (*) AT THE END OF EACH SUCH STATEMENT) THAT INVOLVE RISKS AND
UNCERTAINTIES. OUR 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
Our company, Bion Environmental Technologies, Inc. ("Bion") is a Colorado
corporation organized on December 31, 1987 and maintains principal executive
offices at Suite 3310, 555 Seventeenth Street, Denver, Colorado 80202.
Additional offices exist in California, Florida, Georgia, Oregon, New York, and
North Carolina.
Substantially all of our business and operations 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). Bion is also the parent of Bion Municipal, Inc. (a
Colorado corporation organized July 23, 1999); and Bion International, Inc. (a
Colorado corporation organized July 23, 1999), which are wholly owned, presently
inactive, subsidiaries.
This 10-KSB refers to the collective operations and financial statements
of Bion and its subsidiaries.
Business of the Company
Principal Products and Services
We currently conduct business in two complimentary areas:
First, we design, market, install, and manage waste, wastewater, and storm water
treatment systems, primarily in the agricultural and food processing area. Bion
systems rely on patented biological and engineering processes to treat waste and
wastewater to reduce or eliminate any harmful effects on the environment. Our
primary focus is in the livestock industry as confined animal rearing operations
are drawing more and more attention due to the increasing concentration of
animal waste and associated wastewater. Our systems provide proven solutions to
the nutrient and odor management problems associated with large dairy and hog
farms. The systems are designed to biologically treat all waste and wastewater
from hog and dairy farms to meet or exceed regulatory requirements. In almost
all livestock applications our systems bioconvert the waste into a nutrient-rich
organic material, BionSoil(R). We currently operate 16 animal waste systems in
six states and additional systems are in various stages of design, permitting,
and construction. Initial system sales of prototype systems were for both
BionSoil and non-BionSoil producing treatment applications. We originally
focused on research and technology development of "first-of-a-kind" wastewater
treatment systems for these applications. This focus existed from September 20,
1989 (when Bion Technologies, Inc. was incorporated) to June 30, 1993. In 1993,
we shifted this original emphasis to BionSoil producing systems (Bion NMS).
Second, we produce and market BionSoil products such as organic fertilizers,
potting soils, and soil amendments which are produced from the nutrient rich
BionSolids harvested from certain types of our agricultural systems installed on
large dairy and hog farms. BionSoil is a processed product created from the
BionSolids by one or more of drying, blending with various substrates such as
peat moss, pine bark and sand, and other processing. BionSoil contains a unique
matrix of organic nutrients, bacteria, and other microbes, which extensive
testing, by both us and outside agencies, shows provides superior plant growth
performance. We are placing an increasing amount of attention on BionSoil
development, production, and sales as the number of systems in operation
increases. BionSoil development efforts include testing, processing, blending,
packaging, marketing, distribution, and sales. In addition to this two-fold
focus, we anticipate emphasizing food processing, municipal, and industrial
wastewater treatment in the future.*
Marketing and Distribution
Our treatment system sales and marketing strategy involves 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. Second, as
the success of each particular application is demonstrated in an initial market,
marketing of that application commences in other geographic regions. Following
this basic approach, we are currently developing and/or marketing systems in
California, Florida, New York, Colorado, North Carolina, Illinois, Missouri,
Nebraska, Utah, Kansas, Iowa, Oklahoma, Vermont, Washington, and Oregon.
We market and sell our animal waste treatment systems primarily to large high
intensity hog raising facilities and dairy farms throughout the United States.
We continue to design, permit, build, and operate systems that meet the
objectives of our customers for waste and wastewater treatment, odor reduction,
and to satisfy environmental regulations while maximizing their BionSoil
production.
We are currently in the process of entering initial markets for our BionSoil
products. During the spring and summer of 1998 and 1999, we conducted limited
market tests of BionSoil products through retail and commercial outlets and
direct sales in western New York. The material for these tests was New York
produced dairy BionSoil processed and blended with sphagnum peat moss at our
Hermitage, New York facility. The blended product was sold in bulk quantities or
bagged and sold in both 20 and 40 pound bags. The results of our 1999 New York
BionSoil market test are very encouraging as the BionSoil sales for the Spring
and Summer of 1999 more than tripled from the prior year.
A significant portion of the material harvested from many systems in the
last year was devoted to both university and private research and studies
intended to determine physical characteristics, blends, and growth results
achievable by using BionSoil in many different applications. The results of
these studies consistently demonstrate that BionSoil products produce superior
plant growth performance compared to other commercially available products. We
have not, as of yet, commenced any commercial marketing programs and have not
established 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
There are a significant number of competitors in the wastewater treatment
industry who are working on animal related pollution issues. This competition is
increasing with the growing governmental and public concern focused on pollution
due to animal wastes. Anaerobic lagoons are the most common traditional
treatment process for animal waste on large farms within the hog and dairy
raising industries. These lagoons are coming under increasing regulatory
pressure due to associated odor, nutrient management, and water quality issues
and are facing possible phase out in some states such as North Carolina.
Although we believe that we have the most economical and technologically viable
solution for the current problems, other alternatives do exist including, for
example, synthetic lagoon covers, anaerobic digestors, methane digestors,
multistage anaerobic lagoons, and solids separators. Our ability to compete is
dependent upon our ability to obtain required approvals and licenses from
regulatory authorities and upon our ability to introduce and sell our systems in
the appropriate markets.
There is also extensive competition in the potting soil, organic soil
amendment, fertilizer and organic fertilizer markets. There are many companies
which are already selling products to satisfy demand in the sectors of these
markets we are trying to enter. Many of 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.
Dependence on One or a Few Major Customers
Our operating revenues from system sales are not dependent upon a limited
number of contracts. The nature of our business is such that significant system
sales are generally expected to be "one-time" contracts pursuant to which one or
more single systems are sold and designed, with significant income to be
received by us after the first year of system operation from the sale of
BionSoil and BionSoil products.
BionSoil sales, at present, have no dependence on one or a few major customers.
Patents
Bion Technologies, Inc. is the sole owner of six United States patents and one
Canadian patent:
1. U.S. Patent No. 5,078,882, Bioconversion Reactor and System.
2. U.S. Patent No. 5,472,472, Animal Waste Bioconversion System.
3. U.S. Patent No. 5,538,529, Bioconverted Nutrient Rich Humus.
4. U.S. Patent No. 5,755,852, Bioconverted Nutrient Rich Humus.
5. U.S. Patent No. 4,721,569, Phosphorus Treatment Process.
6. U.S. Patent No. 5,626,644 Storm Water Remediatory Bioconversion System.
7. Canadian Patent No. 1,336,623, Aqueous Stream Treatment Process.
Research and Development
We maintain an active research program to work on future generations of
potentially patentable and marketable waste and wastewater treatment application
of our technology. Current research and development efforts are focused on
enhancements of the Bion NMS and derivative technologies as utilized in our
existing systems in order to improve on competitiveness in existing markets and
to apply these technologies to opportunities that exist in additional geographic
areas and industry segments. We are also conducting an intense research effort
focused on further development of BionSoil and BionSoil products.
Environmental Protection/Regulation
We are a provider of systems and services which result in reduction of
pollution and, therefore, we are not under direct enforcement or regulatory
pressure. We are involved, however, in waste and wastewater treatment and,
therefore are impacted by environmental regulations in at least three different
ways:
(1) Our marketing and sales success depends, to a substantial degree on
pollution clean-up requirements of various governmental agencies from
the Environmental Protection Agency (EPA) at the federal level to
state and local agencies;
(2) Federal, state, and local environmental agencies' required final
effluent standards and other requirements for treatment systems
change frequently which introduces a degree of uncertainty in
system design and performance criteria; and
(3) Governmental permits or approval are required for system installation
and operation.
We are also a manufacturer and provider of BionSoil products, such as
potting soils, soil amendments and fertilizers. Some state and federal
regulatory agencies have standards which these products must meet for the sale
of soil and fertilizer products in various markets. The production and sales of
our BionSoil products currently meet relevant federal and state requirements.
These regulations, however, can experience change, which creates a level of
unpredictability in future outcomes. We are continually reviewing current
regulations and potential changes that may affect our business and are making
necessary compliance efforts in all jurisdictions in which we do business.
Employees
We employed 26 persons with 22 persons full-time as of June 30, 1999.
ITEM 2. DESCRIPTION OF PROPERTY
Principle Plants and other Property
Our executive offices are located at 555 17th Street, Suite 3310, Denver,
Colorado 80202. We sublease five offices (plus use of common facilities, office
equipment and certain services) from Delta Petroleum Corporation (which owns
approximately 1.3% of our currently issued and outstanding common stock) on a
month-to-month basis pursuant to an arrangement between the parties. We have
additional offices at 8899 Main Street, Williamsville, New York 14221; 7798 NW
82nd Court, Okeechobee, Florida 34972; 138 Uzzle Industrial Drive, Clayton,
North Carolina 27520; 28420 Yosemite Springs Parkway, Suite H, Coarsegold, CA
93614; 5570 Arundel Drive, Atlanta, GA 30327 and 6107 SW Murry Blvd. #105,
Beaverton, OR 97008. We also rent BionSoil processing sites located at State
Road 710 and SE 74th Trail, Okeechobee, Florida 34972; 5116 Hermitage Road,
Gainesville, New York 14066; 5190 Sheppard Road, Bliss, NY 14204; and 542
Garrett Road, Four Oaks, North Carolina 27524. All leases and rental agreements
are with non-affiliated parties.
ITEM 3. LEGAL PROCEEDINGS
Management knows of no material pending legal proceedings to which we are
a party or of which any of our systems or products are 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, 1999.
PART II
ITEM 5. MARKET FOR BION ENVIRONMENTAL TECHNOLOGIES, INC. COMMON
STOCK AND RELATED STOCKHOLDER MATTERS
Market Information
During the past two years, we have had only limited volumes of trading in
our common stock in the over-the-counter market, and there is no assurance that
such trading will expand or even continue.
At present, our 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, 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
September 30, 1998 $4.25 $3.13
December 31, 1998 $4.38 $2.63
March 31, 1999 $3.63 $1.25
June 30, 1999 $2.31 $1.75
On September 22, 1999 the bid and asked prices of the Common Stock were
$1.75 and $1.81, respectively.
Holders
The number of holders of record of our Common Stock at September 22, 1999
was approximately 900.
Dividends
We have never paid any cash dividends on our common stock. 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
our business operations. We declared a stock/warrant dividend on May 21, 1999
for record holders on May 30, 1999. (See our 8-K dated May 21, 1999 for details
on this dividend.) The payment of dividends, if any, in the future is within the
discretion of the Board of Directors and will depend on our earnings, if any,
our capital requirements and financial condition, and other relevant factors.
Recent Sale of Unregistered Securities
The following shares of common stock were sold within the past three month
period ended June 30, 1999 without registering the securities under the
Securities Act:
|X| 1,250 shares of restricted and legended common stock to three
employees in lieu of cash for services rendered. The shares had
an aggregate value of $3,000 when issued.
|X| 4,354 shares of restricted and legended common stock to a shareholder
for rent and services valued in aggregate at $10,725.
The following warrants were issued without registration under the
Securities Act of 1933, as amended:
Class# of Shares Price/Sh Exercise Period
---------------- -------- ---------------
H16 356,000 $2.25 01/01/00 - 12/31/01
X 1,256,747 $8.00 01/01/00 - 12/31/01
H15.1 28,751 $3.60 04/30/00 - 12/31/02
H15.2 28,751 $3.60 04/30/01 - 12/31/02
H15.3 28,751 $3.60 04/30/02 - 12/31/02
H15.4 20,881 $7.20 04/30/00 - 12/31/02
H15.5 20,881 $7.20 04/30/01 - 12/31/02
H15.6 20,881 $7.20 04/30/02 - 12/31/02
H15.7 33,898 $13.50 04/30/00 - 12/31/02
H15.8 33,898 $13.50 04/30/01 - 12/31/02
H15.9 33,898 $13.50 04/30/02 - 12/31/02
All warrants reported in Note 4 of Notes to Consolidated Financial
Statements in our Form 10-QSB dated March 30, 1999 and those in all prior 10-QSB
forms were not registered under the Securities Act.
We issued four convertible promissory notes without registration under the
Securities Act of 1933, as amended, which are listed in Note 4 of Notes to
Consolidated Financial Statements in this 10-KSB.
The securities which were issued pursuant to the transactions set forth
above were issued in reliance upon the exemptions from registration afforded by
Sections 3(b), 4(2), or other provisions of the Securities Act of 1933, as
amended. Each of the persons to whom such securities were issued made an
informed investment decision based upon negotiation with us and was provided
with appropriate offering documents and access to material information. We
believe that such person had knowledge and experience in financial and business
matters such that they were capable of evaluating the merits and risks of the
acquisition of our Common Stock in connection with these transactions. All
certificates representing such common shares bear an appropriate legend
restricting the transfer of such securities, except in accordance with the
Securities Act of 1933, as amended, and stop transfer instructions have been
provided to our transfer agent in accordance therewith.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
Management's Discussion of Financial Condition and Results of Operations
Financial Condition and Results of Operations
The audited financial statements contained in this 10-KSB show more than
$12,120,000 being invested in Bion as of June 30, 1999. We have a negative net
worth of $2,808,788, cumulative deficit of $14,929,493, limited current
revenues, and substantial current operating losses. (Note that the negative net
worth is approximately equal to the outstanding long-term debt to management and
major shareholders, the largest part of which is convertible into Bion's
restricted and legended common stock.) Our operations are not currently
profitable; therefore, readers are further cautioned that our continued
existence is uncertain if we are not successful in obtaining outside funding in
an amount sufficient for us to meet our operating expenses at our current level.
Management plans to continue raising additional capital to fund operations until
Bion system and BionSoil sales are sufficient to fund operations.
Bion NMS system and BionSoil sales require additional expenditures. Our
system sales require additional personnel and significant capital expenditures,
which will generally increase our overhead. BionSoil product sales and marketing
requires wholesaler and retailer distribution networks (which may require
permitting in some locations) and additional expenditures for personnel and
equipment to harvest, process, package, sell, and deliver our products. We are
continually negotiating with independent third parties and related parties to
obtain the necessary additional funding for us. Although management believes
that there is a reasonable basis to remain optimistic, no assumption can be made
that we will be able to successfully attain profitable operations and/or raise
sufficient capital to sustain operations.
Liquidity and Capital Resources
Our Consolidated Balance Sheet shows Current assets of $649,345 and Total
assets of $1,317,231. Our Current and total liabilities as of June 30, 1999 are
$975,604 and $4,126,019, respectively. Total assets decreased by $537,029 from
our previous 1998 year end. This change is primarily attributable to a decrease
in work in progress partially offset by an increase in mortgage receivables held
for sale (see "Note 11 to Consolidated Financial Statements") and the prepaid
consulting services (see "Note 3 to Consolidated Financial Statements"). We have
reduced our contract receivables and our work in progress reserves for bad debt
from $60,000 to $10,000. The increase in accounts receivable is due to the
increase in BionSoil sales. Cash and cash equivalents increased $36,479 from the
previous year, compared to an increase of $9,872 for the period ended June 30,
1998. Our current ratio (current assets / current liabilities) is .67 as of June
30, 1999 as compared to .61 as of June 30, 1998.
Total liabilities increased $2,955,258 in the past year. Accounts payable,
notes payable, and accrued payroll also increased by $96,418, $3,024,637, and
$35,211, respectively. All but $96,418 of the notes payable increase were to
related parties or employees. As a result of our work in progress write off, we
have also written off the $151,000 of previously deferred contract revenue.
Our Stockholders' Equity reflects a total of 1,327,968 shares of common
stock issued over the past year. We issued 310,304 shares of common stock for
cash ($809,125), 67,827 shares of common stock for services ($200,629), 17,500
shares of stock for the exercise of options ($102,812), and 12,862 shares of
common stock to a shareholder as payment of a note payable and interest
($77,170). We also converted 2,550 shares of subscribed stock to 2,550 shares of
common stock valued at $7,500. Our May 21, 1999 stock/warrant dividend resulted
in an issuance of 916,925 shares of stock (see Form 8-K dated May 21, 1999). Of
these shares, we issued a total of 1,310,468 shares of legended and restricted
common stock and 17,500 shares of unrestricted stock.
Results of Operations
Comparison of Fiscal Year Ended June 30, 1999 with Fiscal Year Ended
June 30, 1998
Our Consolidated Statement of Operations identifies 1999 BionSoil sales of
$140,423 and system contract revenues of $79,696, giving us total revenues of
$220,119. Total expenses for the year were $3,874,084, resulting in a net loss
of $3,653,965. Soil sales increased by $93,576 from our previous 1998 fiscal
year. This is a result of additional product availability in New York. Soil
sales increased more than threefold (additionally, our total Florida inventory
was sold in August). System contract revenues decreased from the previous year
by $420,708. We attribute this decrease to the continuing slump in hog prices
and the uncertainty in the animal raising industry regulatory environment (See
Trends, Events and Uncertainties below). Our contract costs decreased by
$162,850 due to the decrease in system sales.
The Consolidated Statement of Operations also shows increases in general
and administrative expenses and interest expenses. General and administrative
expenses increased due to higher compensation, consulting fees, investor
relations, and travel expenses. The compensation increase was a result of full
year compensation for an employee hired in May 1998 and two executives hired by
Bion Technologies, Inc. and BionSoil, Inc. in November and December,
respectively. We incurred $125,090 of interest expense on notes payable to an
outside lender and to our shareholders (see "Note 4 to Consolidated Financial
Statements") and research and development expenses of $249,207.
Comparison of Fiscal Year Ended June 30, 1998 with Fiscal Year Ended
June 30, 1997
We provided design, engineering, construction oversight, and/or operations
on 44 new or existing systems during our 1998 fiscal year (most of which are
currently on hold, see Hog Market Impact below). 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.
Our 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.
We incurred $88,649 of interest expense on notes payable to an outside
lender and to our shareholders (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.
Trends, Events and Uncertainties
Liquidity
We continue to have difficulty raising finances for operations. Funding
for operations occurs primarily through equity financing. The following
identifies cash sources over the past two fiscal years.
Convertible
Debt/Notes Stock Revenue (cash) Options Total
--------------- ---------- -------------- ------------ ----------
LTLK $1,111,000 $282,750 $1,393,750
Other $300,000 $1,280,546 $499,906 $889,938 $2,970,390
Total $1,411,000 $1,563,296 $499,906 $889,938 $4,364,140
LoTayLingKyur, Inc. ("LTLK") has been the primary funding agent for Bion
over the past year. LTLK is a major shareholder that continues to finance our
operations. Without this funding the company would not be able to continue as a
going concern.
The Hog Market Impact
Our system sales growth was negatively impacted as a result of the recent
extended deep depression in hog prices, which started in 1998. Prices reached a
low of $9.00 per hundred weight in December 1998, down from $43.00 per hundred
weight in December 1997. While these prices have trended up from the December
1998 low point, they still remain well below historic levels for the industry.
These depressed prices are below the break-even point for many hog growers. The
price drop and resulting hog industry losses have caused hog producers to reduce
general and capital expenditures and curtail their expansion plans. This
industry change has had a significant negative impact on our plans to sign
additional contracts within the hog industry and has caused some growers to put
systems covered by existing contracts on temporary hold.
Management believes that over the next several quarters, if the
strengthening in hog prices continues, it will result in more contracts being
signed and work resuming (or commencing) on some existing contracts that have
been slowed or put on hold.*
As a result of the problems facing the hog industry, we have increased our
focus on expanding Bion's presence in the dairy farm system markets to offset
the reduction in hog system sales. To support this shift, as well as to gain
access to the large western United States market, we have recently added sales
personnel in California and the Pacific Northwest. This recent expansion in
conjunction with increasing hog prices should assist us in accelerating our
system sales pace.*
Regulatory Environment
We have experienced an adverse impact in selected regions due to changes
and uncertainties in regulatory positions. For example, Colorado voters passed
an amendment in November 1998 (Amendment 14) that places significant constraints
on large hog farms in the state. The extended election campaign and subsequent
rule making process (which is the subject of litigation by some hog growers)
completely stopped our progress on system contracts for 350,000 hogs on farms in
Eastern Colorado. It is not likely that work will resume on this contract, nor
for us to acquire significant additional contracts in Colorado, until this
situation is completely resolved and a consistent regulatory practice is
established.* We face a similar slow down of new contract activity in North
Carolina as the result of a state wide moratorium on construction of new or
expanded hog farms (retrofits of waste handling systems on existing farms are
proceeding) which may be extended. Numerous other states, including without
limitation, Georgia, Minnesota, Florida, California, and New York have adopted
or are considering new regulations on large animal raising facilities.
Additionally, litigation is in process in a number of states. The short term
impact on our business has been negative but management believes the trend to
stricter regulations will help our business in the long run.*
There is growing activity at the state and federal levels to protect the
environment from pollution caused by animal raising facilities. Although future
regulations will probably assist us in obtaining system contracts, the current
ambiguity in the regulatory environment is causing farmers to delay
implementation of waste treatment technologies.* For example, on March 9, 1999,
Vice President Gore announced a federal strategy to decrease non-point source
pollution of lakes, rivers, and streams caused by large livestock facilities. A
joint effort by the Environmental Protection Agency and the Department of
Agriculture developed the UNSAFO (Unified National Strategy for Animal Feeding
Operations). UNSAFO will require large animal facilities to obtain Clean Water
Act discharge permits and to develop nutrient management plans for animal
feeding operations. UNSAFO will also require integrators, large livestock
companies that contract with smaller operators to raise their animals, to share
responsibility for meeting regulatory requirements. This strategy is not a new
regulation nor is it a substitute for existing Federal regulations; however, it
does give an indication of the potential regulatory environment. In addition,
President Clinton and the EPA have indicated that they are planning on enforcing
a provision of the Clean Water Act that requires states to assess the health of
every body of water within their borders, determine the maximum allowable levels
of pollutants for each one and then parcel out the responsibility for meeting
these goals to individual polluters. This includes point and non-point source
polluters.
This increasing federal environmental activity along with similar changes
at the state and local levels create an unpredictable regulatory environment.
How these changes affect our business can not be identified with any precision
at this time; however, we believe that more stringent requirements on the animal
raising industry will improve our sales outlook.*
Year 2000 Issue
We are 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 our computer systems and associated software, management
does not believe year 2000 will have a material effect on our operations or
financial condition. We can not predict the impact that year 2000 will have on
our customers and vendors.
Seasonality
Our 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
our systems. However, our 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
We are unable to predict the impact of inflation on our activities,
however, at this time it is minimal.
ITEM 7. FINANCIAL STATEMENTS
Financial Statements are included on Pages F-1 through F-21.
<PAGE>
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
Table of Contents
Page
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
<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, 1999 and the
related consolidated statements of operations, changes in stockholders' deficit,
and cash flows for the years ended June 30, 1999 and 1998. 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, 1999, and the results of
their operations and their cash flows for the years ended June 30, 1999 and
1998, 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 had a working capital deficiency of
approximately $327,000 as of June 30, 1999 and a stockholders' deficit of
approximately $2,800,000. As discussed in Note 2, the Company has incurred
losses since inception approximately $14,900,000. 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 20, 1999
Denver, Colorado
<PAGE>
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
Consolidated Balance Sheet
June 30, 1999
Assets
Current assets
Cash and cash equivalents $ 55,583
Accounts receivable (Net of allowance of $2,000) 60,452
Contract receivables (net of allowance of ($10,000) 33,310
Mortgage Receivables held for sale (Notes 6 and 11) 260,000
Prepaid consulting service, current portion 240,000 (Note 3) 240,000
----------
Total current assets 649,345
Property and equipment
Computers and equipment 316,967
Accumulated depreciation (146,207)
170,760
Other assets
Prepaid consulting service, long-term 360,000 portion (Note 3)
Other prepaid assets 86,735
Patents, net 39,834
Deposits and other 10,557
----------
Total other assets 497,126
----------
Total assets $1,317,231
==========
Liabilities and Stockholders' Deficit
Current liabilities
Accounts payable $ 340,202
Accounts payable - related party 17,924
Related party notes payable and accrued interest (Note 4) 210,589
Capital lease obligations (Note 4) 55,688
Accrued expenses 31,740
Accrued payroll 319,461
----------
Total current liabilities 975,604
Long-term liabilities
Related party notes payable and accrued 2,478,264 interest
(Note 4)
Related party note payable and accrued 210,589
interest for consulting services (Note 3) 634,955
Capital lease obligations (Note 4) 37,196
----------
Total liabilities 4,126,019
Commitments and contingencies (Notes 2, 8 and 10)
Stockholders' deficit (Note 5)
Common stock, no par value, 100,000,000
shares authorized, 10,092,795 shares issued
and outstanding 12,060,705
Common stock subscribed 60,000
Accumulated deficit (14,929,493)
-----------
Total stockholders' deficit (2,808,788)
Total liabilities and stockholders' deficit $ 1,317,231
===========
See notes to consolidated financial statements.
F - 2
<PAGE>
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
Year Ended
June 30,
-------------------------------
1999 1998
----------- ------------
Soil sales ........................ $ 140,423 $ 46,847
System contract revenues .......... 79,696 500,404
----------- -----------
Total revenues .................... 220,119 547,251
Contract costs .................... 386,493 549,343
----------- -----------
Gross (loss) ...................... (166,374) (2,092)
General and administrative expenses 2,930,823 2,001,831
Impaired Contract Costs (Note 10) . 184,133 --
Research and development .......... 249,207 267,733
----------- -----------
Loss from operations .............. (3,530,537)
Other income (expense)
Interest income ................ 1,847 --
Interest expense ............... (125,090) (88,649)
Other expense, net ............. (185) (17,388)
----------- -----------
Net loss and comprehensive loss ... ($3,653,965) $(2,377,693)
=========== ===========
Basic loss per common share ....... $ (.40) $ (.38)
=========== ===========
Weighted common shares outstanding 9,101,783 6,265,128
=========== ===========
See notes to consolidated financial statements.
F - 3
<PAGE>
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
Consolidated Statement of Changes in Stockholders' Deficit
<TABLE>
<CAPTION>
Preferred Common
Stock Series B Common Stock Stock Accumulated
Shares Amount Shares Amount Subscribed Deficit Total
-------- --------- -------- ---------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1997 18,834 $ 95,482 3,696,816 $7,983,274 $627,822 $(8,893,182) $(186,604)
Conversion of common stock
subscriptions to common
stock - - 190,166 607,322 (607,322) - -
Common stock subscriptions
for services - - - - 232,000 - 232,000
Cancellation of common stock
subscriptions - - - - (231,000) - (231,000)
Issuance of common stock for
cash - - 272,068 915,650 - - 915,650
Issuance of common stock in
warrant exchange (Note 5) - - 4,351,348 - - - -
Exercise of stock options
(Note 5) - - 138,900 795,875 - - 795,875
Conversion of notes payable
to common stock - - 50,113 300,677 - - 300,677
Issuance of common stock for
services - - 36,258 134,228 - - 134,228
Dividends declared,
preferred stock Series B - - - - - (4,653) (4,653)
Conversion of Series B
preferred stock and accrued
dividends (18,834) (95,482) 29,158 126,443 - - 30,961
Net loss - - - - - (2,377,693) (2,377,693)
-------- --------- -------- ---------- ---------- ------------ ----------
Balance at June 30, 1998 - - 8,764,827 10,863,469 21,500 (11,275,528) (390,559)
Common stock subscription
for services - - - - 46,000 - 46,000
Conversion of stock
subscriptions to common
stock - - 2,550 7,500 (7,500) - -
Exercise of stock options - - 17,500 102,812 - - 102,812
Issuance of common stock for
services - - 67,827 200,629 - - 200,629
Issuance of common stock for
cash - - 310,304 809,125 - - 809,125
Conversion of note payable
to common stock - - 12,862 77,170 - - 77,170
Stock dividend declared - - 916,925 - - - -
Net loss - - - - - (3,653,965) (3,653,965)
-------- --------- ----------- ---------- ---------- ------------ ----------
Balance at June 30, 1999 - $ - 10,092,795 $12,060,705 $ 60,000 $(14,929,493) $(2,808,788)
======== ========= =========== =========== ========== ============ ===========
</TABLE>
See notes to consolidated financial statements
F - 4
<PAGE>
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended
June 30,
----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities
Net loss ..................................... $(3,653,965) $(2,377,693)
----------- -----------
Adjustments to reconcile net loss to net cash
used in operating activities -
Depreciation and amortization .............. 54,373 55,629
Accounts receivable and work-in progress
allowance ................................. (20,000) --
Issuance of stock for services,
compensation and interest ................. 246,629 134,228
Issuance of subscribed stock for services .. -- 1,000
Issuance of note payable for consulting
services .................................. 34,955 --
Loss on sale of assets held for resale ..... -- 20,598
Changes in assets and liabilities -
Receivables .............................. (36,874) 36,075
Costs and estimated earnings in excess of
billings on contracts ................... 389,712 (221,712)
Prepaid expenses and other ............... (84,248) (1,350)
Accounts payable ......................... 859,894 (70,538)
Accrued liabilities ...................... 467,848 163,067
Deferred contact revenue ................. 71,333 (30,000)
Deferred long-term contract costs ........ (151,000) 6,000
----------- -----------
1,832,622 92,997
----------- -----------
Net cash used in operating activities .. (1,821,343) (2,284,696)
----------- -----------
Cash flows from investing activities
Purchases of equipment ....................... (6,979) (14,560)
Proceeds on sale of assets ................... -- 579,402
Investment in patents ........................ 3,232 (7,706)
----------- -----------
Net cash (used in) provided by
investing activities .................. (3,747) 557,136
----------- -----------
Cash flows from financing activities
Payments on notes payable .................... -- (325,000)
Proceeds from notes payable .................. 1,018,111 412,677
Proceeds from stock and stock subscription
issuances ................................... 809,124 915,650
Proceeds from exercise of options and warrants 102,813 795,875
Payments on capital lease obligations ........ (68,479) (61,770)
----------- -----------
Net cash provided by financing
activities ............................ 1,861,569 1,737,432
----------- -----------
Net increase in cash and cash equivalents ...... 36,479 9,872
Cash and cash equivalents at beginning of period 19,104 9,232
----------- -----------
Cash and cash equivalents at end of period ..... $ 55,583 $ 19,104
=========== ===========
</TABLE>
Continued on following page.
See notes to consolidated financial statements.
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 $15,318 (1999) and $88,583 (1998).
Supplemental disclosures of non-cash financing activities for the year ended
June 30, 1999 -
These non-cash disclosures occurred prior to the stock/warrant dividend
declared by the Company in May 1999 Converted $94,183 of accounts payable to
a note payable Acquired $11,099 of fixed assets under capital leases
Converted $75,000 note payable with $2,170 of accrued interest to 12,862
shares of common stock acquired mortgage receivables of $260,000 in exchange
for note payable
Financed services under a consulting agreement with a related party of
$626,667 by issuing a note payable including accrued interest of $8,288.
Converted $165,707 in accrued expenses into a note payable Converted $77,337
in accrued interest in notes payable Converted $424,079 in accounts payable
into a note payable Converted $7,500 of common stock subscribed into 2,550
shares of common stock
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.
See notes to consolidated financial statements.
F - 6
<PAGE>
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies
Nature of Business and Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Bion
Environmental Technologies, Inc. ("Bion"), and its wholly owned subsidiaries,
Bion Technologies, Inc. and BionSoil, Inc. The Company has entered the market
with an animal waste management system, Bion NMS, which converts flushed or
scraped animal wastes into an economically valuable product, BionSoil, which the
Company currently markets. Additionally, 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, Utah, and
Florida.
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, Utah, 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, 1999 and 1998,
depreciation was recorded in the amounts of $51,173 and $52,329, 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.
<PAGE>
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. Fees and/or royalties to be paid are negotiated on an individual
contract basis, generally as a fixed amount per cubic yard of BionSoil produced.
Revenues from BionSoil sales and the related associated fees to be paid are
recognized as sales are made as the Company has no continuing obligations.
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, 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, 1999 and 1998, amortization was recorded in
the amount of $3,232 and $3,300, respectively.
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.
<PAGE>
Note 1 - Summary of Significant Accounting Policies (continued)
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.
Employee Compensatory Stock and Stock Options
The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board No. 25, Accounting
for Stock Issued to Employees; and complies with the disclosure requirements of
SFAS No. 123, Accounting for Stock-Based Compensation. Under APB No. 25,
compensation cost, if any, is recognized over the respective vesting period
based on the difference, on the date of grant, between the fair value of the
Company's common stock and the grant price.
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.
Reclassifications
Certain amounts in the June 30, 1998 financial statements have been reclassified
to conform with the June 30, 1999 presentation.
<PAGE>
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. As of June 30, 1999, the Company
has incurred accumulated losses totaling approximately $14,900,000, resulting in
an accumulated stockholders deficit of approximately $2,800,000. 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.
Note 3 - Consulting Services Agreement with Related Party
During the year ended June 30, 1999, the Company entered into a consulting
service agreement with a shareholder. The entire $626,667 consulting service
agreement was prepaid and a related note payable was issued. If the consulting
agreement is terminated, the unearned compensation balance will be fully
recognized. The prepaid asset balance at June 30, 1999 was $600,000. The related
note payable has an interest rate of 12% with principal and interest due in
December 2001. The balance due at June 30, 1999 was $634,955.
In connection with the Consulting Service Agreement, the Company also issued one
warrant to purchase one share of common stock at a price of $8.00 per share for
a 24 month period commencing January 1, 2000, for each $1.00 of principal amount
of the note which was $626,667 at date of issuance.
The principal and interest of the note is also convertible in whole or part, at
the option of the note holder, into shares of common stock at a price of $2.00
per share at any time prior to the payment of the outstanding principal and
interest. The price per share has been adjusted to $1.80, as a result of the May
21, 1999 stock/warrant dividend (See Form 8-K/A dated May 21, 1999).
<PAGE>
Note 4 -Related Party Notes Payable, Notes Payable and Capital Leases
June 30,
1999
---------
Note payable to stockholder, due on demand, interest rate of
12%, payable monthly. This note is unsecured. $ 20,524
Notes payable to stockholders, interest rate of 12%. Principle
and interest due in December 2001. These notes are unsecured. 2,384,081
Note payable to a Company and shareholder interest at 12%,
due on December 31, 2001. 94,183
Note payable to a company, at an interest rate of prime plus
2% (9.75% at June 30, 1999), principle and interest due on
January 12, 2000. Guaranteed by a shareholder and officer. 190,065
Capital leases - finance companies; with monthly installments
ranging from $120 to $2,287, including interest from 6.5%
to 23.8%, maturing from January 2000 through August 2003;
collateralized by equipment with a net book value of
approximately $133,000. 92,884
----------
2,781,737
Less current portion (266,277)
----------
$2,515,460
==========
Future maturities of notes payable and capital leases are as follows:
Note Payable
Year Ending Capital Notes For Consulting
June 30, Lease Payable Services (Note 3) Total
- ------------------- ------------- ---------- ----------------- -----------
2000 $ 58,201 $ 210,589 $ - $ 268,790
2001 29,314 - - 29,314
2002 15,014 2,478,264 634,955 3,128,233
2003 3,122 - - 3,122
2004 520 - - 520
Thereafter - - - -
--------- --------- -------------- ----------
106,171 $2,688,853 $ 634,955 $3,429,979
========== ============== ==========
Less amount representing
interest (13,287)
---------
$ 92,884
=========
<PAGE>
Note 4 - Notes Payable - Capital Leases (continued)
Note Payable - Stockholder
The Company holds four notes payable to related parties which may be converted
as of June 30, 1999, into the Company's common stock as follows:
Convertible at
$1.80 Per
Principal Interest Total Share for
------------ -------- ----------- ---------------
993,623 11,122 1,004,745 558,192 shares
626,667 8,288 634,955 352,753 shares
260,000 3,439 263,439 146,355 shares
308,114 3,479 311,593 173,108 shares
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 4,351,348 shares of restricted common stock and 2,832,909
Class Z warrants at $15.00 per share were adjusted to 4,786,483 shares of
restricted common stock and 3,147,677 Class Z warrants at $13.50 per share due
to the May 21, 1999 stock/warrant dividend for record holders on May 30, 1999
(See 8-K dated May 21, 1999).
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.
<PAGE>
Note 5 - Stockholders' Deficit (continued)
Preferred Stock Series B
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. Class B Preferred
Stock entitled 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. Series B Preferred Stock holders had liquidation
preference to the extent of their par value over holders of common stock and
other series of preferred stock.
Warrants
As of June 30, 1999, the Company has outstanding the following warrants:
Warrant Expiration Exercise
Shares Date Price
---------- ----------- -----------
Class G-5.1 1,115 (1) 2.70
Class G-5.2 919 (2) 2.70
Class G-6 3,148 (3) 5.40
Class G-8 27,779 (4) 5.40
Class H-1 11,112 (5) 4.50
Class H-2 16,112 (6) 2.70
Class H-9 11,112 (7) 9.00
Class H-9.1 11,112 (8) 11.25
Class H-9.2 11,112 (9) 7.20
Class H-9.3 11,112 (10) 13.50
Class H-9.4 11,112 (11) 5.40
Class H-10 18,519 (12) 3.60
Class H-11 18,519 (13) 3.60
Class H-12 27,778 (14) 2.70
Class H-14 18,519 (15) 3.60
Class H-15.1 26,251 (16) 3.60
Class H-15.2 26,251 (17) 3.60
Class H-15.3 26,251 (18) 3.60
Class H-15.4 18,381 (19) 7.20
Class H-15.5 18,381 (20) 7.20
Class H-15.6 18,381 (21) 7.20
Class H-15.7 28,898 (22) 13.50
Class H-15.8 28,898 (23) 13.50
Class H-15.9 28,898 (24) 13.50
Class H-16 356,000 (25) 2.25
Class H-17 18,519 (26) 7.20
Class I-1 4,167 (27) 5.40
Class K-1 55,556 (28) 5.40
Class X 3,988,513 (29) 8.00
Class Z 3,588,224 (30) 13.50
----------- ------------
8,430,649 $ 2.25-13.50
=========== ============
<PAGE>
Note 5 - Stockholders' Deficit (continued)
Warrants (continued)
(1) Class G-5.1 warrants may be exercised to purchase 1,115 shares of common
stock for a 60 month period beginning January 22, 1996 and ending January
21, 2001.
(2) Class G-5.2 warrants may be exercised to purchase 919 shares of common
stock for a 60 month period beginning September 13, 1996 and ending
September 12, 2001.
(3) Class G-6 warrants may be exercised to purchase 3,148 shares of common
stock for a 60 month period beginning April 21, 1997 and ending April 20,
2002.
(4) Class G-8 warrants may be exercised to purchase 27,779 shares of common
stock for a 37 month period beginning June 5, 1997 and ending June 30,
2000.
(5) Class H-1 warrants may be exercised to purchase 11,112 shares of common
stock for a 60 month period beginning August 21, 1996 and ending August
20, 2001.
(6) Class H-2 warrants may be exercised to purchase 16,112 shares of common
stock for a 60 month period beginning August 21, 1996 and ending August
20, 2001.
(7) Class H-9 Warrants may be exercised to purchase 11,112 shares of common
stock for a 47 month period beginning February 1, 1997 and ending December
31, 2001.
(8) Class H-9.1 Warrants may be exercised to purchase 11,112 shares of common
stock for a 47 month period beginning February 1, 1997 and ending December
31, 2001.
(9) Class H-9.2 Warrants may be exercised to purchase 11,112 shares of common
stock for a 47 month period beginning February 1, 1997 and ending December
31, 2001.
(10) Class H-9.3 Warrants may be exercised to purchase 11,112 shares of common
stock for a 47 month period beginning February 1, 1997 and ending December
31, 2001.
(11) Class H-9.4 Warrants may be exercised to purchase 11,112 shares of common
stock for a 47 month period beginning February 1, 1997 and ending December
31, 2001.
<PAGE>
Note 5 - Stockholders' Deficit (continued)
Warrants (continued)
(12) Class H-10 may be exercised to purchase 18,519 shares of common stock for
a 50 month period beginning November 2, 1998 and ending December 31, 2002.
(13) Class H-11 may be exercised to purchase 18,519 shares of common stock for
a 49 month period beginning December 1, 1998 and ending December 31, 2002.
(14) Class H-12 may be exercised to purchase 27,778 shares of common stock for
34 month period beginning March 1, 1999 and ending December 31, 2002.
(15) Class H-14 may be exercised to purchase 18,519 shares of common stock for
a 25 month period beginning December 1, 1999 and ending December 31, 2002.
(16) Class H-15.1 may be exercised to purchase 26,251 shares of common stock
for a 32 month period beginning April 30, 2000 and ending December 31,
2002.
(17) Class H-15.2 may be exercised to purchase 26,251 shares of common stock
for a 20 month period beginning April 30, 2001 and ending December 31,
2002.
(18) Class H-15.3 may be exercised to purchase 26,251 shares of common stock
for a 8 month period beginning April 30, 2002 and ending December 31,
2002.
(19) Class H-15.4 may be exercised to purchase 18,381 shares of common stock
for a 32 month period beginning April 30, 2000 and ending December 31,
2002.
(20) Class H-15.5 may be exercised to purchase 18,381 shares of common stock
for a 20 month period beginning April 30, 2001 and ending December 31,
2002.
(21) Class H-15.6 may be exercised to purchase 18,381 shares of common stock
for a 8 month period beginning April 30, 2002 and ending December 31,
2002.
(22) Class H-15.7 may be exercised to purchase 28,898 shares of common stock
for a 32 month period beginning April 30, 2000 and ending December 31,
2002.
(23) Class H-15.8 may be exercised to purchase 28,898 shares of common stock
for a 26 month period beginning April 30, 2001 and ending December 31,
2002.
(24) Class H-15.9 may be exercised to purchase 28,898 shares of common stock
for a 8 month period beginning April 30, 2002 and ending December 31,
2002.
<PAGE>
Note 5 - Stockholders' Deficit (continued)
Warrants (continued)
(25) Class H-16 may be exercised to purchase 356,000 shares of common stock for
a 24 month period beginning January 1, 2000 and ending December 31, 2001.
(26) Class H-17 may be exercised to purchase 18,519 shares of common stock for
a 25 month period beginning December 1, 2000 and ending December 31, 2002.
(27) Class I-1 warrants may be exercised to purchase 4,167 shares of common
stock for approximately a 42 month period beginning June 9, 1998 and
ending December 31, 2001.
(28) Class K-1 warrants may be exercised to purchase 55,556 shares of common
stock for a 19 month period beginning March 1, 1998 and ending October 1,
1999.
(29) Class X may be exercised to purchase 3,988,513 shares of common stock for
a 24 month period beginning January 1, 2000 and ending December 31, 2001.
(30) Class Z warrants may be exercised to purchase 3,588,224 shares of common
stock for a 24 month period beginning January 1, 2000 and ending December
31, 2001.
At June 30, 1999, there were warrants exercisable to purchase 258,803 shares of
common stock. The weighted average exercise price per share for shares
exercisable at June 30, 1999 was $5.33, and the weighted average remaining
contractual maturities are 3.63 years.
Exercise Price
Number of Per
Shares Share
------------ ---------------
Balance at June 30, 1998 3,277,161 3.00-15.00
Expired (1,102,288) 3.00-13.50
Issued 6,255,776 2.25-13.50
--------- -----------
Balance at June 30, 1999 8,430,649 2.25-15.00
========= ===========
<PAGE>
Note 5 - Stockholders' Deficit (continued)
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.
The following table sets forth information regarding incentive stock options
granted under the 1994 and 1996 Plans:
Exercise
Price
Number of Per
Shares Share
------------- ------------
Balance, June 30, 1998 227,672 1.72-15.00
Granted 484,957 1.25-15.00
Exercised (17,500) 4.00-5.38
Expired (190,279) 1.13-13.50
-------- ------------
Balance, June 30, 1999 504,850 1.55-15.00
======== ===========
At June 30, 1999, there were options exercisable to purchase 174,167 shares of
common stock. The weighted average exercise price per share for shares
exercisable at June 30, 1999 was $3.75 and the weighted average contractual
maturities are 3.52 years.
The Company follows 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.
<PAGE>
Note 5 - Stockholders' Deficit (continued)
Pro Forma Disclosures
Had compensation cost for options and warrants issued by the Company 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,
---------------------------
1999 1998
----------- ------------
Net loss - as reported $(3,653,965) $(2,377,693)
Net loss - pro forma (5,822,685) (2,938,606)
Basic loss per common share - as reported (.40) (.38)
Basic loss per common share - pro forma (.64) (.47)
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 90%
(1999) and 88% (1998); discount rate of 5.5%; and expected lives of five months
to five years.
Note 6 - Related Party Transactions
During the year ended June 30, 1999, the Company entered into an agreement with
a shareholder to provide the Company $626,667 of consulting services over a 31
and 1/3 month period ending December 31, 2001. The agreement states that all
warrants held by the related party, other than Z warrants, will convert to X
warrants and all Z warrants issued between April 1, 1999 and May 21, 1999 will
convert to X warrants. The Company also issued a note payable to the related
party which had an outstanding balance of $626,667 at June 30, 1999. The Company
incurred consulting expenses of $26,667 during the year ended June 30, 1999
relating to this agreement.
The Company also received $993,623 in advances from a related party which were
converted into a note payable as part of a credit facility made available to the
Company under various notes payable.
The Company also issued a note payable to a related party for $260,000 in
exchange for two mortgage loans receivable which have been valued at a
predecessor cost (Note 11).
<PAGE>
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 $4,988,000 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 $14,672,000 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 13,598,000
-----------
$14,672,000
===========
<PAGE>
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).
The Company has entered into an employment agreement with a non-related party
for a period commencing December 1, 1998 and ending November 30, 2003. The
Agreement provides for a base salary of $132,000 per year and various benefits,
with annual review for increases, bonuses and benefits.
For the periods ended June 30, 1999 and 1998, a shareholder of the Company
provided office space to the Company. Rent expense for 1999 and 1998 was
$42,900.
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.
<PAGE>
Note 10 - Impaired Contract Costs
During the year ended June 30, 1999, the Company experienced changes in
regulations over environmental standards relating to their industry along with
significant price changes in the industry. As a result, management recorded a
$339,000 write-off to reduce work in progress, $151,000 of deferred revenue and
$65,633 of capitalized deferred charges were also written off at June 30, 1999.
Note 11 - Subsequent Events (Unaudited)
For the period July 1, 1999 through September 22, 1999, the Company received
$437,741 of adding money from a shareholder. The shareholder received 437,741
"X" warrants and the total principal and interest can be converted into
restricted common stock at $1.80 per share.
On September 14, 1999, the Company sold the two mortgages it received on May 22,
1999 from the LTLK Defined Benefit Plan for $202,750. The Company has also
received $6,717 in interest from the two mortgages for a total of $209,467.
<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 our most recent
Financial Statements and through the date of this report, we have had no
disagreements with our 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 since July 23, 1999. See our Form
8-K dated July 23, 1999 for the announcement of board and officer changes
reflected in this table.
Name Age Position(s) Period of Service
Mark A. Smith 49 Chairman and President May 21, 1999 to Present
Jon Northrop 56 Chief Executive Officer, April 9, 1992 to Present
Chief Financial Officer,
Secretary, Treasurer and
Director
Jere Northrop 57 Director April 9, 1992 to Present
Ronald G. Cullis 63 Director November 1, 1994 to Present
The following table sets forth the names, ages, and positions held with
respect to each Director and Executive Officer as of June 30, 1999 and prior to
the July 23, 1999 changes.
Name Age Position(s) Period of Service
Mark A. Smith 49 Chairman May 21, 1999 to Present
Jon Northrop 56 Chief Executive Officer, April 9, 1992 to Present
Secretary, and Director
Jere Northrop 57 Chief Operating Officer, April 9, 1992 to Present
President, and Director
M. Duane Stutzman 60 Chief Financial Officer, August 31, 1993 to Present
Treasurer, and Director
Ronald G. Cullis 63 Director November 1, 1994 to Present
John Schwanekamp 51 Director August 31, 1993 to Present
M. Duane Stutzman and Edward Lamb are the only other executive employees who are
expected to make a significant contribution to the company. Mr. Stutzman is the
President of Bion Technologies, Inc. and Vice President of BionSoil, Inc. Mr.
Lamb is the President of BionSoil, Inc. and Vice President of Bion Technologies,
Inc. Mr. Stutzman and Mr. Lamb are not Directors or Executive Officers of Bion
and as such not involved in policy making decisions of Bion.
Mark A. Smith has been our Chairman since May 21, 1999 and President since July
23, 1999. He was the president of RSTS Corporation prior to its merger with Bion
Technologies in 1992. Mr. Smith received a Juris Doctor Degree from the
University of Colorado School of Law, Boulder, Colorado (1980) and a Bachelor of
Science degree from Amherst College, Amherst, Massachusetts (1971). Mr. Smith
has engaged in the private practice of law in Colorado since 1980. In addition,
Mr. Smith has been active in running private family companies, Stonehenge
Corporation (until 1994) and LoTayLingKyur, Inc. (1994-present).
Jon Northrop has been our Chief Executive Officer, and Secretary 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 was our Chief Operating Officer from April, 1992 until July
23, 1999 and is currently our Chief Technology Officer. Dr. Northrop is a
founder of Bion Technologies, Inc. and was its President from October 1989 to
July 23, 1999. 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.
Ronald G. Cullis has been a director of Bion 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.
We have an Executive Committee consisting of Mark A. Smith and Jon
Northrop and an Operating Committee consisting of Mark A. Smith, M. Duane
Stutzman and Edward Lamb, which were established on July 1, 1999. See our Form
8-K dated August 20, 1999. Prior to our July 1, 1999 changes, we had an
Executive Committee consisting of Messrs. Jon Northrop, Jere Northrop and Duane
Stutzman and Audit and Compensation Committees consisting of Messrs. John
Schwanekamp and Ronald Cullis. The Audit and Compensation committees were
eliminated on July 1, 1999.
Family Relationships
Jon Northrop and Jere Northrop are brothers.
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
Summary Compensation
The following table shows the aggregate direct remuneration for the
fiscal years ended June 30, 1999, 1998, and 1997 to each executive officer.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION AWARDS PAYOUTS
----------------------------- ------------------------------ ---------------------
RESTRICTED SECURITIES
STOCK UNDERLYING LTIP
SALARY 1 BONUS OTHER AWARDS OPTIONS/ PAYOUTS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) $ SARs(#) ($) ($)
- --------------------------- ---------- ---------- -------- -------- -------------- -------------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mark A. Smith 1999 26,667 2 -- -- -- -- -- --
Chairman and
President
Jon Northrop 3 1999 150,000 -- -- -- 153,000 -- --
Chief Execu- 1998 150,000 -- -- -- 225,000 5 -- --
Officer and 1997 150,000 -- -- -- -- -- --
Secretary
Jere Northrop 3 1999 150,000 -- -- -- 122,000 -- --
Chief Operat- 1998 150,000 -- -- -- 225,000 5 -- --
Officer 1997 150,000 -- -- -- -- -- --
Duane Stutzman 4 1999 120,000 -- -- 30,000 227,452 -- --
Chief Finan- 1998 120,000 -- -- -- 190,000 6 -- --
cial Officer 1997 120,000 -- -- -- 20,000 -- --
and Treasurer
1. Includes Compensation paid by Bion Technologies, Inc., our wholly-owned
subsidiary.
2. Compensation for the period May 21, 1999 through June 30, 1999.
3. Management deferred and accrued $50,000 of each year's salary as a liability
to conserve cash.
4. Management deferred and accrued $30,000 of each year's salary as a liability
to conserve cash.
5. These warrants were part of the January 1, 1998 warrant exchange (See 8-K/A
dated December 1, 1997).
6. 170,000 of these warrants were part of the January 1, 1998 warrant exchange
(See 8-K/A dated December 1, 1997).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Option/SAR Grants Table
Number of % of Total
Securities Options/SARs
Name and Underlying Granted to Exercise
Principal Options/SARs Employees or Base
Position Granted(#) in Fiscal Year Price($/Sh) Expiration Date
- ---------------- ------------ ---------------- ------------- -----------------
<S> <C> <C> <C> <C>
Mark A. Smith
Chairman of the
Board and President
Jon Northrop 153,000 8.6% $2.25 12/31/01
Chief Executive Officer
and Secretary
Jere Northrop 122,000 6.9% $2.25 12/31/01
Chief Operating Officer
Duane Stutzman 63,000 3.5% $2.25 12/31/02
Chief Financial 55,556 3.1% $2.70 12/31/02
Officer and 44,448 2.5% $3.60 12/31/02
Treasurer 22,224 1.2% $7.20 12/31/02
22,224 1.2% $13.50 12/31/01
20,000 1.1% $7.25 12/31/98
</TABLE>
<TABLE>
Aggregated Option/SAR Exercises and FY-End Option/SAR Values
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
at FY-end(#) at FY-end(#)
Name and Principal Shares Acquired Exercisable/ Exercisable/
Position on Exercise Value Realized($) Unexercisable Unexercisable
- --------------------- ------------- ------------------- --------------- ---------------
<S> <C> <C> <C> <C>
Mark A. Smith (un) 6,312,1641
Chairman of the
Board and President
Jon Northrop (un) 667,581
Chief Executive Officer
and Secretary
Jere Northrop (un) 578,882
Chief Operating Officer
Duane Stutzman 55,556
Chief Financial Officer (un) 251,170
and Treasurer
</TABLE>
1. This number includes the total options and warrants held by Mark A. Smith
and his wife (169,905), LTLK (2,556,523), and Dublin Holding Ltd.
(3,585,736). LTLK and DHL holdings are included as Mr. Smith has voting
power over securities owned by both of these shareholders. See also Item 11
in this 10-KSB.
Compensation of Directors
Effective September 1, 1993, outside Directors are compensated at a rate
of $75 per month for their contributions. On June 14, 1996 the Board of
Directors adopted the 1996 Nonemployee Director Stock Plan. There were no awards
made during the fiscal year ended June 30, 1997. On August 20, 1997, November
18, 1998, and August 5, 1999 we granted, pursuant to our 1996 Nonemployee
Director Stock Option Plan, the following options to the two outside directors
Mr. Cullis and Mr.
Schwanekamp:
Grant date Number of shares Exercise Price
08/20/97 11,1121 $1.551
08/20/97 11,1121 $2.041
11/18/98 11,1121 $2.911
08/05/99 10,000 $1.61
1. Adjusted subsequent to the May 1999 dividend.
Employment Contracts and Terms of Employment and Change in Control Arrangements
On December 1, 1997, we entered into separate employment agreements with
Jon Northrop, Jere Northrop, and M. Duane Stutzman, which agreements may be
referenced in our Form 8-K/A dated December 1, 1997.
On May 21, 1999, we entered into a consulting agreement with LoTayLingKyur, Inc.
for the services of Mark A. Smith as Chairman. This consulting agreement may be
referenced in our Form 8-K dated May 21, 1999.
Incentive Compensation Plans
On July 9, 1993, the Board of Directors adopted the Fiscal Year 1994
Incentive Plan ("Plan"), which was ratified by our 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 our outstanding Common Stock.
See Item 10 of our Form 10-KSB dated June 30, 1998 for specific details on this
Plan.
The following shares were issued during fiscal year 1999 to Directors and
Executive Officers under the Plan:
We granted 27,778 options to M. Duane Stutzman our Chief Financial Officer
to purchase shares of common stock at $2.70 per share commencing on March 1,
1999 and expiring of December 31, 2002. We also granted Mr. Stutzman: 22,224
options with an exercise price of $3.60 per share, 11,112 options with an
exercise price of $7.20 per share, and 11,112 options with an exercise of price
$13.50 per share under the fiscal year 1994 Incentive Plan. The options will
vest one-third (April 20, 2000), one-third (April 30, 2001), and one-third
(April 30, 2002) and will expire on December 31, 2002. (The number of shares and
pricing of the above options reflect post May 1999 dividend adjustments.)
On June 14, 1996, the Board of Directors adopted the 1996 Nonemployee
Director Stock Plan ("Director Plan"), which plan will be submitted for
ratification by our 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. See Item 10 of our Form 10-KSB dated June 30, 1998 for
specific details on this Director Plan.
See Table in Compensation of Directors section above for shares issued to
non-employee directors under the Director Plan.
Indemnification
The Articles of Incorporation and the Bylaws provide that we may indemnify
our 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 our best
interest and is a party to such actions 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 pursuant to the foregoing provisions or otherwise, we have 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.
Report on Repricing of Options/SARs
We have not during the fiscal year ending June 30, 1999 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 22, 1999 based
on information obtained from the persons named below, with respect to the
beneficial ownership of Common Stock by (i) each person known by management 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
of Beneficial Owner
Percent of Class Amount and Nature of Beneficial Owner
- ----------------------- -------------------- -----------------
Mark A. Smith 4,162,117 1 40.7
409 Spruce Street
Boulder, CO 80302
Jon Northrop 693,483 2 6.8
1922 W. Sanibel Court
Littleton, CO 80120
Jere Northrop 349,941 3 3.4
1961 Tonawanda Creek Road
Amherst, NY 14228
LoTayLingKyur, Inc. 729,138 4 7.1
Terminal Way, #3
Reno, NV 89502
Dublin Holding, Ltd. 2,498,504 5 24.4
c/o AmeriLawyer, Ltd.
Attn: Lloyd Rodney, Esq.
Harbor House
P.O. Box 120, Grand Turk
Turks & Caicos Isl., B.W.I.
Ronald G. Cullis 27,289 6 .3
76 Northview Lane
Chesapeake City, MD 21915
Management as a Group 5,216,951 50.9
(4 persons)
1. Includes 934,475 shares owned by Mark A. Smith and his wife plus all shares
owned by LTLK and Dublin Holding, Ltd. ("DHL"), which are voted by Mr. Smith.
See Notes 3 and 4 to our Notes to Consolidated Financial Statements. This
figure does not include securities owned by their adult children or the
169,905 Class X warrants exerciseable at $8.00 per share commencing January
1, 2000 and ending December 31, 2001, which are owned by Mr. Smith and his
wife.
2. Jon Northrop owns of record 693,483 shares and has investment rights for
693,483 shares. This total includes 15,879 shares owned by the Family Trust
U/A 3rd U/W Catherine Northrop. Does not include 4,400 shares owned by his
wife and 118,814 shares owned by adult children of Jon Northrop each of which
Mr. Northrop disclaims beneficial ownership. Does not include 125,074 Class X
warrants exerciseable at $8.00 per share commencing January 1, 2000 and
ending December 31, 2001; 389,507 Class Z warrants exerciseable at $13,50 per
share commencing January 1, 2000 and ending December 31, 2001; or 153,000
Class H-16 warrants exerciseable at $2.25 per share commencing on January 1,
2000 and ending December 31, 2001.
3. Jere Northrop owns of record 349,941 shares and has investment rights for
349,941 shares. The total includes 15,879 shares owned by the Family Trust
U/A 3rd U/W Catherine Northrop. Does not include 334,400 shares owned by his
wife, 79,572 shares owned by an adult child of Jere Northrop and 14,300
shares owned by the Jere and Lynn Northrop Family Foundation, each of which
Mr. Northrop disclaims beneficial ownership. Does not include 60,739 Class X
warrants exerciseable at $8.00 per share commencing January 1, 2000 and
ending December 31, 2001; 396,143 Class Z warrants exerciseable at $13.50 per
share commencing January 1, 2000 and ending December 31, 2001; or 122,000
Class H-16 warrants exerciseable at $2.25 per share commencing on January 1,
2000 and ending December 31, 2001.
4. The figure indicated includes 708,458 shares owned by LoTayLingKyur, Inc.
("LTLK") and 20,680 shares in its pension plan. Does not include warrants to
purchase restricted stock owned by LTLK as follows: Class X Warrants to
purchase 2,556,523 shares of common stock at $8.00 per share until December
31, 2001 (of which 263,760 are owned by its pension plan) and Class Z
Warrants to purchase 1,029,213 shares of common stock at $13.50 per share
until December 31, 1999. In addition, LTLK owns convertible promissory notes
with an outstanding balance of $2,328,271 as of August 31, 1999 (of which
$268,639 is owned by its pension plan), which are convertible at $1.80 per
share (1,293,484 shares, in aggregate as of that date).
5. Dublin Holding, Ltd. - Mark A. Smith has the right to vote all shares
pursuant to a voting agreement. Does not include Class Z Warrants to purchase
1,255,104 shares of common stock at $13.50 per share commencing January 1,
2000 and ending December 31, 2001 and Class X Warrants to purchase 528,038
shares of common stock at $8.00 per share until December 31, 2001.
6. Includes options to purchase 21,168 shares of common stock. This does not
include 1,022 Class X warrants exerciseable at $8.00 per share commencing
January 1, 2000 and ending December 31, 2001.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following is a list of certain relationships and related party
transactions in the previous two years.
We entered into the following transactions with LoTayLingKyur, Inc.
("LTLK"), a major shareholder of Bion, of which Mark A. Smith, Chairman, has
voting power over its shares.
|X| During the period of March 15, 1999 to June 30, 1999, LTLK has made
consistent advances to Bion to cover operating expenses. LTLK holds a
convertible promissory note with outstanding principal on these advances of
$993,623 with a total interest accrued of $11,122 as of June 30, 1999. The
outstanding principal and balance is convertible into Bion's common stock
at $1.80 per share. LTLK also received Class X warrants to purchase one
share of Bion common stock for every dollar of principal advanced. See
promissory note in our Form 8-K dated May 21, 1999.
|X| During the period between November 6, 1998 to February 28, 1999, LTLK
purchased 127,002 shares of restricted and legended Bion common stock and
282,230 Class Z warrants in private placement investments totaling
$412,750.
|X| The LTLK Defined Benefit Plan holds a note for $260,000 in principal
received for two mortgages assigned to Bion plus 260,000 Class X warrants
and accrued interest of $3,439 as of June 30, 1999. See our Form 8-K dated
May 22, 1999.
|X| On May 21, 1998 we entered into a credit facility with LTLK for a maximum
amount not to exceed $1,500,000. On June 30, 1998 the Company converted all
of the then outstanding debt ($300,000 of principal and $677 of interest)
into 50,113 shares of common stock at $6.00 per share and 150,000 warrants
at $7.50 per share exercisable for the period commencing July 1, 1998 and
expiring December 31, 2000. (See 8-K dated May 21, 1998.) As of November 5,
1998 the Company had converted the balance of the note payable ($75,000)
and interest ($2,170) into 12,862 shares of restricted and legended common
stock and 37,500 warrants exercisable at $7.50 per share commencing on
November 5, 1998 and expiring on December 31, 1999. (These later warrants
were subsequently converted into Class X warrants, see below, and therefore
do not reflect post dividend adjustments.)
|X| On May 21, 1999, we entered into a consulting agreement with LTLK for the
services of Mr. Smith as Chairman. See our Form 8-K dated May 21, 1999 for
the terms of this agreement. LTLK received a convertible promissory note
with principal of $626,667 on which $8,288 of interest has accrued as of
June 30, 1999. The outstanding principal is convertible into shares of
common stock at $1.80 per share. LTLK also received a Class X warrant to
purchase 626,667 shares of common stock. In addition to the above note, and
as additional consideration to LTLK for Mr. Smith's services, we converted
the following warrants held by LTLK into one Class X warrant to purchase
897,990 shares of common stock at $8.00:
Class # of Shares Exercise Price
----- ----------- --------------
L 150,000 $7.50
L5 37,500 $7.50
G6 1340 $6.00
G7 24,750 $4.00
G8 75,000 $6.00
Z 609,400 $15.00
-------
897,990
Effective May 21, 1999, Jon Northrop, our CEO, relinquished his voting
rights on securities owned by LTLK and Dublin Holding Ltd. ("DHL"), two major
shareholders of Bion. Following this relinquishment, and also effective May 21,
1999, Mark A. Smith, our Chairman, was granted the power to vote the securities
as proxy of LTLK and DHL. See prior voting agreements in our Form 10-KSB dated
June 30, 1998.
Effective May 28, 1999, Harley Northrop, father to Jon and Jere Northrop,
agreed to exchange one short-term convertible promissory note for one long-term
convertible promissory note. The initial principal of the new note was
$308,114.23 with a due date of December 31, 2001. The outstanding principal and
interest is convertible into Bion's common stock at $1.80 per share. See Item 12
in our Form 10-KSB dated June 30, 1998.
We entered into two short term promissory notes with the Family Trust U/A
3rd U/W Catherine Northrop on two separate occasions: (1) effective July 15,
1997 in the amount of $7,000 and (2) effective June 15, 1998 in the amount of
$20,000.
We made agreements with five parties, including Jon Northrop, CEO, Jere
Northrop, CTO, M. Duane Stutzman, CFO, the Family Trust U/A 3rd U/W Catherine
Northrop and one other employee; whereby, the Company issued long-term
promissory notes to each party for payables aggregating $793,500. See exhibit
10.5 in our Form 8-K dated May 21, 1999.
Effective January 1, 1998, holders of 84% of our 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
our common stock at $15.00 per share for a 24 month period commencing January 1,
2000. See analysis of our capital structure following this exchange in Item 12
of our Form 10-KSB dated June 30, 1998. See Note 5 in Notes to Consolidated
Financial Statements for adjustments subsequent to our May, 1999 stock/warrant
dividend.
Directors and officers were issued options and warrants as disclosed in
Item 10 Executive Compensation in this Form 10-KSB, above.
All past and future and ongoing transactions with affiliates are
and will be on terms, which our management believes are no less favorable than
could be obtained from non-affiliated parties. All future and ongoing loans to
affiliates, officials and Bion shareholders 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 23 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
1999 and the first quarter of fiscal year 2000:
Form 8-K dated:
July 1, 1998: items 5 & 7
March 15, 1999: items 5 & 7
May 21, 1999: items 5 & 7
May 22, 1999: items 5 & 7
June 22, 1999: items 5 & 7
July 23, 1999: items 5 & 7
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, we have caused this Report to be signed on its behalf by the undersigned
thereunto duly authorized.
BION ENVIRONMENTAL TECHNOLOGIES,
INC.
Date: September 28, 1999 By:/s/ 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/Mark A. Smith, Chairman, President September 28, 1999
and Director
September 28, 1999
/s/Jon Northrop, Chief Executive
Officer, Chief Financial Officer,
Treasurer, Secretary and Director
September 28, 1999
/s/Jere Northrop, Director
September 28, 1999
/s/Ronald G. Cullis, Director
<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 as Exhibit 21.1and 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.
(28) Information from Reports Furnished to State Insurance Regulatory
Authorities. None.
(29) Additional Exhibits. None.
EXHIBIT 21.1
BION ENVIRONMENTAL TECHNOLOGIES, INC.
Subsidiary List
Bion Environmental Technologies, Inc. is the parent company
to four wholly owned subsidiaries, each incorporated under the
laws of the State of Colorado.
1. Bion Technologies, Inc.
2. BionSoil, Inc.
3. Bion International, Inc.
4. Bion Municipal, Inc.
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