<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [Fee Required] FOR THE FISCAL YEAR ENDED June 30, 2000 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.
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(Exact name of registrant as specified in its charter)
Colorado 84-1176672
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(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
18 E. 50th Street, 10th Floor
New York, NY 10022
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(Address of principal (Zip Code)
Executive offices)
(212) 758-6622
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(Registrant's telephone number, including area code)
7921 Southpark Plaza, Suite 200, Littleton, CO 80120
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(Former address if changed since last report)
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 18, 2000 of voting stock held by
non-affiliates of the Registrant was $15,729,454 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 18, 2000, 13,035,899 shares of Registrant's Common Stock, no
par value, were issued and outstanding.
1
PART I
STATEMENTS MADE IN THIS FORM 10-KSB THAT ARE NOT HISTORICAL OR CURRENT FACTS
ARE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE
SECURITIES ACT OF 1933 (THE "ACT") AND SECTION 21E OF THE SECURITIES EXCHANGE
ACT OF 1934. THESE STATEMENTS OFTEN CAN BE IDENTIFIED BY THE USE OF TERMS
SUCH AS "MAY," "WILL," "EXPECT," "BELIEVE," "ANTICIPATE," "ESTIMATE," OR
"CONTINUE" OR THE NEGATIVE THEREOF. BION INTENDS THAT SUCH FORWARD-LOOKING
STATEMENTS BE SUBJECT TO THE SAFE HARBORS FOR SUCH STATEMENTS. WE WISH TO
CAUTION READERS NOT TO PLACE UNDUE RELIANCE ON ANY SUCH FORWARD-LOOKING
STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE MADE. ANY FORWARD-LOOKING
STATEMENTS REPRESENT MANAGEMENT'S BEST JUDGMENT AS TO WHAT MAY OCCUR IN THE
FUTURE. HOWEVER, FORWARD-LOOKING STATEMENTS ARE SUBJECT TO RISKS,
UNCERTAINTIES AND IMPORTANT FACTORS BEYOND OUR CONTROL THAT COULD CAUSE ACTUAL
RESULTS AND EVENTS TO DIFFER MATERIALLY FROM HISTORICAL RESULTS OF OPERATIONS
AND EVENTS AND THOSE PRESENTLY ANTICIPATED OR PROJECTED. THESE FACTORS
INCLUDE ADVERSE ECONOMIC CONDITIONS, ENTRY OF NEW AND STRONGER COMPETITORS,
INADEQUATE CAPITAL, UNEXPECTED COSTS, FAILURE TO GAIN PRODUCT APPROVAL IN THE
UNITED STATES OR FOREIGN COUNTRIES AND FAILURE TO CAPITALIZE UPON ACCESS TO
NEW MARKETS. ADDITIONAL RISKS AND UNCERTAINTIES THAT MAY AFFECT FORWARD-
LOOKING STATEMENTS ABOUT BION'S BUSINESS AND PROSPECTS INCLUDE THE POSSIBILITY
THAT A COMPETITOR WILL DEVELOP A MORE COMPREHENSIVE OR LESS EXPENSIVE
ENVIRONMENTAL SOLUTION, DELAYS IN MARKET AWARENESS OF BION AND OUR SYSTEMS AND
SOIL, OR POSSIBLE DELAYS IN BION'S MARKETING STRATEGIES, EACH OF WHICH COULD
HAVE AN IMMEDIATE AND MATERIAL ADVERSE EFFECT BY PLACING US BEHIND OUR
COMPETITORS. FOR A FULLER DESCRIPTION OF CERTAIN OF THESE IMPORTANT FACTORS
THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE CURRENTLY
ANTICIPATED OR PROJECTED, PLEASE SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS." BION DISCLAIMS ANY OBLIGATION
SUBSEQUENTLY TO REVISE ANY FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR
CIRCUMSTANCES AFTER THE DATE OF SUCH STATEMENTS OR TO REFLECT THE OCCURRENCE
OF ANTICIPATED OR UNANTICIPATED EVENTS.
ITEM 1. DESCRIPTION OF BUSINESS
Business Development
--------------------
Our company, Bion Environmental Technologies, Inc. ("Bion") is a Colorado
corporation organized on December 31, 1987, that maintains principal executive
offices at 18 East 50th Street, 10th Floor, New York, New York 10022.
Additional offices exist in California, Colorado, Florida, western 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 Form 10-KSB refers to the collective operations and financial
statements of Bion and its subsidiaries.
2
Business of the Company
-----------------------
Principal Products and Services
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We are an environmental solutions company that operates in two distinct
business segments: systems and soils. See Footnote 10 to the June 30, 2000,
Financial Statements. Our systems business segment focuses on the treatment
and removal of animal waste associated with Concentrated Animal Feeding
Operations (CAFO). CAFOs are, by definition, large concentrations of animals.
These concentrations create environmental problems because of the production
of animal waste that creates odor and substantial volumes of high-nutrient
wastewater and noxious solids that require, under current practice, sizeable
crop fields on which they are disposed. This waste disposal technique, in
turn, exacerbates the odor problem and also frequently leaches nutrients into
adjacent surface and/or ground water. Increasing herd size increases the need
for additional acreage for waste disposal, thus compounding the environmental
and economic problems.
Our Nutrient Management System (NMS) solution is a patented biological
and engineering process that treats the water, nutrient and air pollution
associated with animal waste. The system also provides a use for the solids
by biologically converting them into an environmentally friendly, time-release
organic fertilizer product called BionSoil(R), which is the basis of our soil
business segment. BionSoil(R) contains a unique mix of organic nutrients,
bacteria, and other microbes that extensive testing has shown produces
superior plant growth and reduces the harmful leaching associated with
chemical fertilizers. In addition, the water produced in the process has a
substantially reduced nutrient content and may be discharged in a variety of
environmentally friendly manners, including into polishing ecoreactors and/or
constructed wetlands. Because we remove the BionSoil(R) from the site, the
systems also allow producers the possibility of growth in herd size without a
need for increased crop land for the disposal of waste in order to meet state
and federal environmental regulations.
We presently have thirteen animal waste, NMS system installations in six
states. The oldest installation dates back to 1992, and there are currently
three new dairy systems under construction in New York State. We also have a
second-generation system under development, which is presently being installed
at Dream Maker Dairy in west-central New York. This new system embodies all
of the performance benefits of our original system and is being designed to
utilize computerized, real-time monitoring and controls that can be remotely
accessed for both reporting requirements and control functions. These
monitoring and control functions will be utilized in both the original system
design and second generation system, when completed. The new system is also
designed to meet the objective of reducing system size by up to 80% while
maintaining the same processing capacity or, in the alternative, increasing
processing capacity by a factor of five without a corresponding increase in
size. The prototype of the new system was installed in late July 2000.
Additional hardware and communication links are being installed by mid-
October. By the end of the calendar year 2000, we anticipate results from the
monitoring and control initiative. It is anticipated that the new system,
when completed, will reduce the amount of waste water produced, allowing the
creation of a "clean water loop" from which water can be discharged into
wetlands, returned to the animal houses for use or discharged under permits.
3
Marketing and Distribution
--------------------------
Systems:
We currently market and sell our animal waste treatment systems primarily
to large, high intensity hog raising facilities and dairy farms throughout the
United States. We build and operate systems that meet the objectives of waste
and wastewater treatment, odor and pathogen reduction, and compliance with
environmental regulations, while maximizing BionSoil(R) production.
Soil:
A significant portion of the material harvested from our systems in the
last year was devoted to university and private research studies intended to
determine the physical characteristics, blends, and growth results achievable
by using BionSoil(R) in many different applications. The results of these
studies consistently demonstrate that BionSoil(R) products produce superior
plant growth performance compared to other commercially available products
while maintaining environmentally friendly qualities.
Our primary marketing initiative is in the turf grass industry.
BionSoil(R) from dairy farms located in the northeastern United States is
marketed primarily for turf grass applications in the same geographic region,
because it provides a chemical free turf grass environment which is
increasingly important to schools and municipalities. Other sales
opportunities also exist in the container plant, nursery, landscape and
agricultural markets.
Competition
-----------
There are a significant number of competitors in the waste 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
raising and dairy 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. Our systems are not anaerobic lagoons. Instead, they encompass a
variety of cells, which contain aerobic, facultative and anaerobic processing
zones as well as certain equipment and solids separation areas. Although we
believe that we have the most economically and technologically viable solution
for the current problems, other alternatives do exist including, for example,
synthetic lagoon covers, anaerobic digesters, methane digesters, 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 that 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.
4
We believe that our competitive advantage is that we offer a superior
technology in our systems and a superior soil product.
Dependence on One or a Few Major Customers
------------------------------------------
We are not dependent upon 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 income to be received by us
after the first year of system operation from the sale of BionSoil(R) and
BionSoil(R) products.
Commercial BionSoil(R) sales have only recently begun and, at present, we
have no dependence on one or a few major customers.
Patents
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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,
expires January 2009.
2. U.S. Patent No. 5,472,472, Animal Waste Bioconversion System,
expires December 2012.
3. U.S. Patent No. 5,538,529, Bioconverted Nutrient Rich Humus,
expires July 2013.
4. U.S. Patent No. 5,755,852, Bioconverted Nutrient Rich Humus,
expires May 2015.
5. U.S. Patent No. 4,721,569, Phosphorus Treatment Process,
expires January 2005.
6. U.S. Patent No. 5,626,644, Storm Water Remediatory Bioconversion,
System, expires May 2014.
7. Canadian Patent No. 1,336,623, Aqueous Stream Treatment Process,
expires August 2012.
In addition to such factors as innovation, technological expertise and
experienced personnel, we believe that a strong patent position is
increasingly important to compete effectively in the systems and soil
business. It may become necessary or desirable in the future for us to obtain
patent and technology licenses from other companies relating to certain
technology that may be employed in future products or processes. To date, we
have not received notices of claimed infringement of patents based on our
existing processes or products; but due to the nature of the industry, we may
receive such claims in the future.
We generally require all of our employees and consultants, including our
management, to sign a non-disclosure and invention assignment agreement upon
employment with us.
5
Research and Development
------------------------
Systems:
During the year ended June 30, 1999, we expended approximately $50,000 to
enhance the design and efficiency of our first generation system.
During the year ended June 30, 2000, we have invested substantially in
developing the "next generation" Bion system. In this just completed fiscal
year, approximately $150,000 was expended on system design, consulting and
installation. This upgraded system is designed to operate using significantly
lower water volume and less energy, therefore requiring smaller bioreactors.
The new system, when completed, will employ computerized, real-time monitoring
and controls that can be remotely accessed for both reporting requirements and
control functions. It is designed to meet the objective of reducing system
size by up to 80% while maintaining the same processing capacity or, in the
alternative, increasing processing capacity by a factor of five without a
corresponding increase in size. The prototype of the new system was installed
in late July, 2000; additional hardware and communication links are expected
to be installed by mid-October, and results of the monitoring and control
initiative are anticipated by the end of the calendar year. It is anticipated
that the new system, when completed, will allow creation of a "clean water
loop" from which water can be discharged into wetlands, returned to the animal
houses for use or discharged under permit. Product development is expected to
run through fiscal year 2001 and development costs are continuing in the 2001
fiscal year, with research and development costs estimated at $500,000.
Soil:
During the year ended June 30, 1999, we expended approximately $200,000
in research and development for trials and tests of our BionSoil(R) products.
We currently have over thirty clinical trials being conducted in-house
and by various academic, industry and professional organizations at a cost to
us of approximately $445,000 in our 2000 fiscal year. The testing being done
on the BionSoil(R) is to analyze the effectiveness of the product on a number
of crops as well as in a wide variety of different growing environments, and
to measure the success of nutrient release. Such activities and related costs
continue in fiscal year 2001 and are anticipated to continue in future years.
We estimate future soil research and development costs to be approximately
$250,000.
CAFO/Environmental Protection/Regulation
----------------------------------------
The federal government's regulations concerning Concentrated Animal
Feeding Operation (CAFO) require large animal farms to establish nutrient
management plans that must be implemented over the next three years. The
CAFO legislation also establishes a zero discharge baseline for nutrients, the
only zero discharge for any industry under the Clean Water Act. Many states
have already enacted legislation or regulatory schemes that create increased
demands on animal producers for effective waste management systems.
We are a provider of systems and services that result in the reduction of
pollution and, therefore, we are not under direct enforcement or regulatory
pressure. We are involved, however, in waste and wastewater treatment and are
impacted by environmental regulations in at least three different ways:
6
(1) Our marketing and sales success depends, to a substantial degree, on
the pollution clean-up requirements of various governmental
agencies, from the Environmental Protection Agency (EPA) at the
federal level to state and local agencies;
(2) Our system design and performance criteria must be responsive to the
changes in federal, state and local environmental agencies'
effluent standards and other requirements; and
(3) Our system installations and operations require governmental permits
or approvals in many jurisdictions.
We are also a manufacturer and provider of BionSoil(R) products such as
potting soils, soil amendments and fertilizers. Some state and federal
regulatory agencies have standards these products must meet to be sold as soil
amendment or fertilizer products in various markets. The production and sales
of our BionSoil(R) products currently meet relevant federal and state
requirements. These regulations can, however, 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.
As a result of the direct connection of our business operations to the
developments in federal and state legislative and regulatory arenas, we have
created the position of governmental affairs liaison, currently staffed by
Salvatore Zizza who is a member of our Board of Directors.
Employees
---------
As of June 30, 2000 we had 26 employees, 24 of whom were full time. Our
future success depends in significant part on the continued service of our key
technical and senior management personnel. The competition for highly
qualified personnel is intense, and there can be no assurance that we will be
able to retain our key managerial and technical employees or that we will be
able to attract and retain additional highly qualified technical and
managerial personnel in the future. None of our employees is represented by a
labor union, and we consider our relations with our employees to be good.
None of our employees is covered by "key person" life insurance.
ITEM 2. DESCRIPTION OF PROPERTY
Principal Plants and Other Property
-----------------------------------
Our executive offices are located at 18 E. 50th Street, 10th Floor, New
York, New York 10022. We have additional offices at 7921 Southpark Plaza,
Suite 200, Littleton, Colorado 80120; 8899 Main Street, Williamsville, New
York 14221; 7798 NW 82nd Court, Okeechobee, Florida 34972; 138 Uzzle
Industrial Drive, Clayton, North Carolina 27520; and 31131 Wild Berry Court,
Coarsegold, California 93614. We also rent BionSoil(R) processing sites
located at State Road 710 and SE 74th Trail, Okeechobee, Florida 34972; 5116
Hermitage Road, Gainesville, New York 14066; and 1305 S. Brightleaf Blvd,
Suite 102, Smithfield, North Carolina 27577. All leases and rental agreements
are with non-affiliated parties.
We do not own any of these facilities, nor are we obligated under any
mortgages for the properties. The lease terms extend from thirty days to
7
eleven years. We believe that, under our current operations, the facilities
are adequate.
ITEM 3. LEGAL PROCEEDINGS
We know of no material pending legal proceeding to which we or any of our
subsidiaries is a party or in which any of our systems is the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There has been no submission of matters to a vote of security holders
during the fourth quarter of the fiscal year ended June 30, 2000.
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" on the OTC
Bulletin Board. The following quotations reflect inter-dealer prices, without
retail mark-up, markdown or commission and may not represent actual
transactions.
Quarter Ended High Bid Low Bid
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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
September 30, 1999 $1.81 $1.44
December 31, 1999 $3.44 $1.81
March 31, 2000 $4.09 $2.31
June 30, 2000 $2.75 $1.81
On September 18, 2000, the closing bid and asked prices of the Common
Stock were $2.125 and $2.187, respectively.
Holders
-------
The number of holders of record of our Common Stock at September 18, 2000
was approximately 1,500.
The transfer agent for our Common Stock is Corporate Stock Transfer,
Inc., 3200 Cherry Creek Drive South, Suite 430, Denver, Colorado 80209.
8
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 Footnote 7 to the June 30, 2000,
Financial Statements. The payment of dividends, if any, in the future is
within the discretion of the Board of Directors and will depend on our future
earnings, if any, our capital requirements and financial condition, and other
relevant factors.
Recent Sale of Unregistered Securities
--------------------------------------
The following securities were sold in the three-month period ended June
30, 2000 without registration under the Securities Act of 1933, as amended:
Warrants
--------
We sold 290,650 J-1 Warrants at $.05 per warrant to purchase restricted
and legended Common Stock at $2.375 per share in our private placement of
convertible bridge notes to accredited investors. The warrants are
exercisable from March 31, 2000, to December 31, 2004. We received $14,532 in
cash for use in operations for these warrants. See Exhibits 10.1 and 10.3 to
our Form 8-K dated April 13, 2000.
We issued 65,000 J-2 Warrants to purchase restricted and legended Common
Stock at $2.375 per share to two parties for consulting and management
services. The warrants are exercisable from March 31, 2000, to December 31,
2004. The value attributed to the warrants represents the fair market value
of the services provided.
Common Stock
------------
We issued 52,251 shares of restricted and legended Common Stock to two
shareholders for consulting and legal services valued at $116,235. The value
attributed to the Common Stock represented the fair market value of the
service provided.
Convertible Notes
-----------------
We added $425,848 of long-term convertible bridge debt and interest
during the three-month period of April 1, 2000, to June 30, 2000. See our
Form 8-K dated April 13, 2000.
We added $105,608 of interest to the convertible notes listed in Note 4
of Notes to Consolidated Financial Statements in our 10-KSB/A dated June 30,
1999.
The securities that were issued pursuant to the transactions set forth
above were issued in reliance upon the exemptions from registration afforded
by sections 3(a)(9), 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 and was provided with appropriate
9
offering documents and access to material information. We believe that such
persons 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 shares. Transfer instructions have been provided to our
transfer agent in accordance therewith.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our
Consolidated Financial Statements and accompanying notes.
Going Concern
-------------
The audited financial statements contained in this Form 10-KSB show
$22,748,871 being invested in or contributed to Bion as of June 30, 2000. We
have a shareholder deficit of $3,590,246, cumulative deficit of $23,826,878,
which includes non-cash charges of $5,834,219 during the year ended June 30,
2000, limited current revenues and substantial current operating losses.
(Note that the related parties notes payable of $2,846,471 are approximately
80% of the negative net worth, all of which is convertible into our restricted
and legend 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(R) sales are sufficient to fund operations.
Bion NMS system and BionSoil(R) sales require additional expenditures.
Our system sales require additional personnel and significant capital
expenditures, which will generally increase our overhead. BionSoil(R) product
sales and marketing require 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. Although
management believes that there is a reasonable basis to remain optimistic, no
assumption can be made that we will be able to attain profitable operations
and/or raise sufficient capital to sustain operations.
The level of funding required to accomplish our objectives is ultimately
dependent on the success of our research and development efforts which, at
this time, are unknown. Currently, we estimate that approximately $3,000,000
will be required during the year ended June 30, 2001. We anticipate spending
$750,000 on research and development efforts and the balance on compensation
and general business overhead.
In connection with their report on our Consolidated Financial Statements
as of and for the year ended June 30, 2000, BDO Seidman, LLP, our independent
certified public accountants, expressed substantial doubt about our ability to
continue as a going concern because of recurring net losses and negative cash
flow from operations.
10
Financial Condition and Results of Operations
---------------------------------------------
Liquidity and Capital Resources
-------------------------------
We have been successful on several occasions during the past two years in
raising additional working capital through the sale of warrants and
convertible debt. We raised $6,241,564 during the year ended June 30, 2000,
of which $4,095,000 was secured in a private placement in the form of
convertible bridge notes payable. We raised an additional $1,031,074 from
proceeds in connection with notes payable to related parties, $561,425 from
proceeds in connection with the issuance of warrants, $426,460 from proceeds
in connection with the sale of Common Stock and the collection of
subscriptions receivable, and $127,605 from the sale of stock to officers.
During the year ended June 30, 1999, we raised $1,018,111 and $809,125 in
proceeds from notes payable to related parties and proceeds from the sale of
Common Stock and the collection of subscriptions receivable.
We believe that beyond June 30, 2000, we will not generate sufficient
operating cash flow to meet our needs without additional external financing.
There is no assurance that our efforts to obtain such financing will be
successful. Any failure on our part to do so will have a material adverse
impact on us and may cause us to cease operations.
Our working capital as of June 30, 2000, was $2,501,118, of which
$2,604,933 represents cash and cash equivalents generated from our private
placement of convertible bridge notes payable.
Our operating activities required $3,498,506 and $1,818,111 for the years
ended June 30, 2000 and 1999, respectively. The major factor contributing to
the higher figure for the year 2000 is our net loss of $8,897,385 in year
2000 compared to the net loss of $3,653,965 in 1999. The loss of $8,897,385
included non-cash general and administrative expenses of $3,590,191 and non-
cash interest expense of $2,244,028. Non-cash general and administrative
expense and non-cash interest expense of $339,189 and $37,132 were included in
the 1999 loss of $3,653,965. During the year ended June 30, 2000, our
accounts payable and accrued expenses were reduced by $581,696 as accounts
were paid using the proceeds from the private placement of our convertible
bridge notes payable.
Our investing activities provided cash of $107,371 during the year ended
June 30, 2000, compared with a use of cash totaling $6,979 during the year
ended June 30, 1999. During the year ended June 30, 2000, we sold mortgage
assets generating $202,750.
We purchased $95,379 of equipment during the year ended June 30, 2000,
compared with $6,979 during the year ended June 30, 1999.
Financing activities provided cash of $5,940,485 during the year ended
June 30, 2000, compared with $1,861,569 during the year ended June 30, 1999.
As previously noted, we raised $6,241,564 during the year ended June 30, 2000,
compared to $1,930,048 during the year ended June 30, 1999. During the year
ended June 30, 2000, we repaid $241,559 of notes payable and $49,520 of
capital lease obligations, compared to $68,479 of capital lease obligations
during the year ended June 30, 1999.
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Results of Operations - Comparison of Fiscal Year Ended June 30, 2000
with Fiscal Year Ended June 30, 1999
---------------------------------------------------------------------
We recorded $135,945 of BionSoil(R) sales and $22,500 of system sales
during the fiscal year ended June 30, 2000. This compares to total sales of
$220,119 for our prior year, $140,423 BionSoil(R) sales and $79,696 system
sales. The decrease of $61,974 is attributable to lower system sales. The
company has been in the design and testing of the second-generation system
that will include computerized real-time monitoring and controls and will also
reduce the size of the system. The focus on the new system design has had a
short-term negative effect on system sales. Cost of goods sold increased
$111,534 (47%) for the soil sales and decreased $107,725 (72%) for system
sales. The increase in the soil area is due to the increased harvesting
costs. The revenue did not increase since most of the material was used for
testing. The decrease in the systems' costs of goods is a result of lower
sales as discussed above.
We incurred gross losses of $231,857 and $166,374 during the years ended
June 30, 2000 and 1999, respectively. The gross losses result from
inefficiencies associated with the disproportionate relationship between
compensation/overhead and revenues associated with a technologically growth-
oriented company. We believe that this trend will reverse as revenues
increase.
General and administrative expenses increased $2,848,258 (97%). The
increase is primarily ($2,982,118) attributable to non-cash expenses as part
of the issuance of stock and warrants associated with the various transactions
discussed above. (See "Notes 2, 3, 4 and 12 to the June 30, 2000 financial
statements and Item 12 herein).
The impaired contract costs for the prior year were a one-time clean up
of old contracts and therefore nothing was recorded for the year ended June
30, 2000.
Research and development costs increased $349,097 during the year ended
June 30, 2000. This increase is due to the design and testing of the second-
generation system and increased BionSoil(R) research and testing expenses.
Interest expenses increased $2,134,046, of which $2,244,020 was for non-
cash expenses associated with certain warrants and promissory notes. Non-cash
interest expense for the year ended June 30, 1999, was $37,132. (See "Notes
2, 3, 4 and 12 to the June 30, 2000 financial statements").
We had an increase in interest income due to higher cash balances
associated with cash flow generated from financing activities.
We sold the two mortgages we received from the LTLK Defined Benefit Plan
during the year. We incurred a loss of $57,250 on the sale of the two
mortgages.
We did not record income tax expense during the year ended June 30, 2000
and 1999, as a result of our net losses. The valuation allowance of
$9,094,000 at June 30, 2000, was established because we have not been able to
determine that it is more likely than not that the deferred tax asset will be
realized.
At June 30, 2000, we had net operating loss carryforwards of
approximately $20,572,000, with expirations through 2020. The utilization of
12
certain of the loss carryforwards may be limited under Section 382 of the
Internal Revenue Code.
The net loss and comprehensive loss increased $5,261,421 (144%) during
the year ended June 30, 2000. The increase primarily related to $2,982,118 of
non-cash general and administrative expenses and $2,244,028 of non-cash
interest expense incurred during the year ended June 30, 2000.
Basic and diluted loss per common share is increased by $.39, from $.40
to $.79. The increase in the loss per share is attributable to the
aforementioned increase in the net loss and the increase in the weighted-
average number of basic and diluted common shares outstanding from 9,101,783
to 11,196,912.
Overview
--------
The following accounts in our Consolidated Statements of Operations were
increased by non-cash transactions:
Interest expense $ 2,244,028
Warrant expense (beneficial value) 1,477,370
Consulting expense 1,159,748
Other general administrative expense 953,073
TOTAL $ 5,834,219
We incurred a net loss of $8,897,385 for the year ended June 30, 2000, of
which $5,834,219 is attributable to the above interest and general and
administrative non-cash charges. Excluding these non-cash charges, general
and administrative expense and interest expense for the year ended June 30,
2000, would have been $2,188,890 and $15,108. The net loss for the year ended
June 30, 2000, would have been $3,063,166 excluding these non-cash charges.
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(R) and
BionSoil(R) product sales are expected to exhibit a somewhat seasonal sales
pattern with emphasis on spring, summer and fall sales.
Impact of Recently Issued Accounting Pronouncements
---------------------------------------------------
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," required companies to record derivatives on the balance sheet as
assets or liabilities, measured at fair market value. Gains or losses
resulting from changes in the values of those derivatives are accounted for
depending on the use of the derivative and whether it qualifies for hedge
accounting. The key criterion for hedge accounting is that the hedging
relationship must be highly effective in achieving offsetting changes in fair
value or cash flows. SFAS No. 133 is effective for fiscal years beginning
after June 15, 2000. Management believes that the adoption of SFAS No. 133
will have no material effect on our financial statements.
13
In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting
for Certain Transactions Involving Stock Compensation" ("FIN 44"), which was
effective July 1, 2000, except that certain conclusions in this Interpretation
which cover specific events that occur after either December 15, 1998, or
January 12, 2000, are recognized on a prospective basis from July 1, 2000.
This Interpretation clarifies the application of APB Opinion 25 for certain
issues related to stock issued to employees. We believe our existing stock-
based compensation policies and procedures are in compliance with FIN 44 and,
therefore, the adoption of FIN 44 had no material impact on our financial
condition, results of operation or cash flows.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") 101 (effective for the last fiscal quarter
of 2001), which provides guidance on applying generally accepted accounting
principles to selected revenue recognition issues. Management believes that
our revenue recognition policies are in accordance with SAB 101.
Inflation and Changes in Prices
-------------------------------
We are unable to predict the impact of inflation on our activities;
however, at this time we believe it is minimal.
ITEM 7. FINANCIAL STATEMENTS
Financial Statements are included on Pages F-1 through F-35.
The Table of Contents to the Financial Statements is as follows:
Report of Independent Certified Public Accountants-
BDO Seidman, LLP F-2
Independent Auditors' Report
Ehrhardt Keefe Steiner & Hottman P.C. F-3
Consolidated Balance Sheet as of June 30, 2000 F-4 to F-5
Consolidated Statements of Operations for the Years Ended
June 20, 2000 and 1999 F-6
Consolidated Statements of Changes in Stockholders' Deficit
for the Years Ended June 30, 1999, and 2000 F-7
Consolidated Statements of Cash Flows for the Years Ended
June 30, 2000 and 1999 F-8 to F-9
Summary of Accounting Policies F-10 to F-16
Notes to Consolidated Financial Statements F-17 to F-35
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.
14
On August 9, 2000, we terminated our relationship with Ehrhardt Keefe
Steiner & Hottman, P.C. as our principal accountant. See our Form 8-K dated
August 9, 2000. The decision to change accountants was approved by our Board
of Directors.
Neither of the reports of Ehrhardt Keefe Steiner & Hottman, P.C. on our
financial statements for each of the past two fiscal years ended June 30, 1998
and 1999, contained an adverse opinion or disclaimer of opinion. Their
reports were modified for going concern uncertainty. There were no
modifications to these reports as a result of audit scope or accounting
principles. There were no disagreements with Ehrhardt Keefe Steiner &
Hottman, P.C. on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, during the subsequent
interim period through August 9, 2000, which, if not resolved to Ehrhardt
Keefe Steiner & Hottman, P.C.'s satisfaction, would have caused Ehrhardt Keefe
Steiner & Hottman, P.C. to make reference to the subject matter of the
disagreement(s) in connection with its reports.
We have engaged BDO Seidman, LLP as our new independent accountants as of
August 9, 2000. During the two most recent fiscal years and through August 9,
2000, we have not consulted with BDO Seidman, LLP regarding either (i) the
application of accounting principles to a specific transaction, either
completed or proposed; or consulted with BDO Seidman, LLP regarding the type
of audit opinion that might be rendered on our financial statements (BDO
Seidman, LLP has not provided us with any reports or advice, either written or
oral, that would be an important factor in reaching a decision as to an
accounting, auditing or financial reporting issue); or (ii) any matter that
was the subject of a disagreement or event identified in response to Item
304(a)(1)(iv) of Regulation SB.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE
EXCHANGE ACT
Executive Officers and Directors
--------------------------------
Our Directors and Executive Officers are listed below. Executive
Officers are elected by the Board of Directors and hold office until their
successors are elected and qualified.
Period of Service
Name Age Position(s) as Director
---- --- ----------- -----------------
Mark A. Smith 50 Chairman and May 21, 1999 to
Secretary Present
David J. Mitchell 39 Chief Executive Officer, December 23, 1999 to
President(1) Present
and Director
Jon Northrop 57 Executive Vice President(2), April 9, 1992 to
Chief Financial Officer, Present
Treasurer, Assistant
Secretary and Director
15
Jere Northrop 58 Chief Technology Officer April 9, 1992 to
and Director Present
Ronald G. Cullis 64 Director November 1, 1994 to
Present
Salvatore J. Zizza 54 Director December 23, 1999 to
Present
Andrew G. Gould 46 Director August 10, 2000 to
Present
(1) Mr. Mitchell became President on August 10, 2000. Prior to that time,
Jon Northrop served as our President.
(2) Mr. Northrop became Executive Vice President on August 10, 2000.
Mark A. Smith has been our Chairman since May 21, 1999. He was the
president of RSTS Corporation (now Bion Environmental Technologies, Inc.)
prior to its acquisition of 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).
David J. Mitchell has been our Chief Executive Officer and a Director
since December 23, 1999, and our President since August 10, 2000. Since
January 1991, Mr. Mitchell has been the President of Mitchell & Co., Ltd., a
merchant banking company he founded. Since March 1998, Mr. Mitchell has been
the Chairman of Direct Furniture, Inc. (d/b/a Empire Direct). Mr. Mitchell is
the immediate past president of AmeriCash, a national network of ATM machines.
Over the last 10 years Mr. Mitchell has held various executive positions
primarily in investment banking and brokerage firms. He currently serves as a
director of Kellstrom Industries, Inc., a NASDAQ listed company in the
business of selling jet engine parts, and is also director of Bogen
Communications International, a NASDAQ listed company involved in digital
voice processing peripheral products. Mr. Mitchell is also a director of Moto
Guzzi Corp., a publicly traded Italian motorcycle manufacturer. Mr. Mitchell
previously served as a director of Holmes Protection Group, a public company
that was sold in February of 1998. Mr. Mitchell also serves as a director of
several private companies and not-for-profit universities and foundations.
Jon Northrop has been our Executive Vice President since August 10, 2000,
and was our Chief Executive Officer from April 9, 1992 until December 23,
1999. Mr. Northrop has been our Chief Financial Officer since July 23, 1999,
our Treasurer since July 23, 1999, our Assistant Secretary since May 21, 1999
and a Director 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 twelve 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.
16
Northrop has a bachelor's degree in physics from Amherst College, Amherst,
Massachusetts (1965) and an MBA in Finance from the University of Chicago,
Chicago, Illinois (1969), and spent several years conducting post-graduate
research in low-energy particle physics at Case Institute of Technology,
Cleveland, Ohio. Jon Northrop is the brother of Jere Northrop.
Jere Northrop has been our Chief Technology Officer since May 21, 1999
and a Director since April 9, 1992. 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 at a large municipal advanced wastewater
treatment plant in Amherst, New York (1979-1989). He also hastwenty-five
years of experimental research on both individual and complex systems of
microorganisms. Dr. Northrop has a bachelor's 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 is the brother of Jon Northrop.
Ronald G. Cullis has been a Director of Bion since November 1, 1994. He
has spent the last eleven years with PENSA, a national consulting firm
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 he was Vice President Finance for
Oceaneering International, Inc.; Senior Vice President Finance, Treasurer and
Director for Vetco, Inc.; Vice President and Chief Acounting Officer for Fluor
Corporation; and in various planning and analysis capacities with a number of
other corporations. Mr. Cullis received a B.A. in Economics from Williams
College in Williamstown, Massachusetts in 1960.
Salvatore J. Zizza has been a Director of Bion since December 23, 1999.
He has served as Chairman of the Board, President, Treasurer and a Director of
Hollis Eden Pharmaceuticals (f/k/a IAC), a NASDAQ listed company, since its
inception in November 1992. Mr. Zizza was also Chairman of the Board of
Directors of The Lehigh Group, Inc. (f/k/a The LVI Group Inc.) beginning in
1991, and was President and Chief Financial Officer of The Lehigh Group, Inc.
from 1985 to 1991. The Lehigh Group Inc., a New York Stock Exchange listed
company, was engaged, through its subsidiary, in the distribution of
electrical products, and from 1985 until 1991 was one of the largest interior
construction and asbestos abatement firms in the United States. Mr. Zizza was
Chief Operating and Chief Financial Officer of NICO, Inc. from 1978 until its
acquisition in 1985 by Lehigh Valley Industries, Inc. (currently The Lehigh
Group, Inc.) NICO, Inc. was an interior construction firm. Mr. Zizza is a
director of The Gabelli Equity Trust, The Gabelli Asset Fund, The Gabelli
Growth Fund and The Gabelli Convertible Securities Fund.
Andrew G. Gould has been a Director of Bion since August 10, 2000. From
May 1998 to June 2000 Mr. Gould was Special Principal and New Business
Development Manager of DZ Israel Associates, Tel Aviv, Israel, a venture
banking and investment company. Since 1981, Mr. Gould has been a Managing
Director of Arthur P. Gould & Co., a merchant bank. Mr. Gould has a
bachelor's degree in philosophy from Yale University (1976), and an MBA in
finance and economics from New York University (1983). Mr. Gould is a
director of Storlogic Ltd., a privately-held Israeli/U.S. developer and
manufacturer of network-attached storage and other server hardware and
software, and Regency Stocks & Commodities Fund LP, a privately-held
17
investment partnership trading financial futures and equities using
proprietary, systems-based trading methods.
We have an Executive Committee consisting of Mark A. Smith, David J.
Mitchell and Jon Northrop, which was established on December 23, 1999. See
our Form 8-K dated December 11, 1999. On August 10, 2000, we reestablished
the Audit and Compensation Committees composed of Ronald Cullis and Salvatore
Zizza. (Prior to our December 23, 1999 changes, we had an Executive Committee
consisting of Messrs. Jon Northrop, Jere Northrop and M. Duane Stutzman. The
former Audit and Compensation Committees consisting of Messrs. John
Schwanekamp and Ronald Cullis had been eliminated on July 1, 1999. See our
Form 8-K, dated August 20, 1999.)
Family Relationships
--------------------
Jon Northrop and Jere Northrop are brothers.
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.
Compliance with Section 16(a) of the Exchange Act of 1934
---------------------------------------------------------
Based solely on a review of Forms 3, 4 and 5 and amendments thereto
furnished to us during the fiscal year ended June 30, 2000, and certain
investment representations, no one who was a director, officer or beneficial
owner of more than ten percent (10%) of our Common Stock failed to file, on a
timely basis, reports required by Section 16(a) of the Exchange Act during the
fiscal year.
ITEM 10. EXECUTIVE COMPENSATION
Summary Compensation
--------------------
The following table shows the aggregate direct remuneration for the
fiscal years ended June 30, 2000, 1999, and 1998 to each executive officer and
two additional individuals:
18
<TABLE>
<CAPTION>
Summary Compensation Table(8)
-----------------------------
Long Term Compensation
----------------------
Annual Compensation Awards Payouts
---------------------------------- ------------------- -------
Securities All
Other Underlying Other
Annual Restricted Options/ LTIP Compen-
Name and Principal Salary(1) Compen- Stock SARs Payouts sation
Position Year ($) Bonus($) sation Award(s) (#) ($) ($)
------------------ ---- --------- -------- ------ --------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mark A. Smith 2000 600,000(2)
Chairman and 1999 26,667(3) 626,667
Secretary
David J. Mitchell 2000 120,000(4) 2,500,000
Chief Executive
Officer and
President
Jon Northrop(3) 2000 150,000
Executive Vice 1999 150,000(5)
President, Chief 1998 150,000(5)
Financial Officer,
Treasurer and
Assistant
Secretary
Jere Northrop(3) 2000 150,000
Chief Technology 1999 150,000(5)
Officer 1998 150,000(5)
Craig Scott 2000 132,000 150,000
1999 132,000 10,000
1998 121,000(6) 10,000
M. Duane Stutzman 2000 120,000 75,000
1999 120,000(7) 227,452
1998 120,000(7) 30,000 20,000
</TABLE>
(1) Includes compensation paid by Bion Technologies, Inc., our wholly owned
subsidiary.
(2) Consulting fees earned according to the agreements between LoTayLingKyur,
Inc., Mark A. Smith, and Bion as reported in our Forms 8-K dated December
11, 1999, (Item 10.4) and May 21, 1999, (Item 5.1).
(3) Compensation for the period May 21, 1999 (inception of agreement),
through June 30, 1999.
(4) Compensation for the period January 1, 2000 (inception of agreement),
through June 30, 2000, which has been added to the balance of the D2
Convertible Bridge Note.
(5) Management deferred and accrued $50,000 of fiscal year 1998 and
1999 salary as a liability to conserve cash.
(6) Compensation for the period August 1, 1997 (inception of agreement),
through June 30, 1998.
(7) Management deferred and accrued $30,000 of fiscal year 1998 and 1999
salary as a liability to conserve cash.
19
(8) Does not include any options or warrants received in financing
transactions or otherwise purchased.
During the fiscal year ended June 30, 2000, we granted the following
stock options or warrants to the named officers:
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Individual Grants
-------------------------------------
Number of % of Total
Securities Options/SARs
Underlying Granted to Exercise or
Name and Options/SARs Employees in Base Price Expiration
Principal Position Granted Fiscal Year ($/SH) Date
------------------ ------------ ------------ ----------- ----------
Mark A. Smith
Chairman of the
Board and
Secretary
David J. Mitchell 2,500,000(1) - $2.50 6/30/04
Chief Executive
Officer and
President
Jon Northrop
Executive Vice
President, Chief
Financial Officer,
Treasurer and
Assistant Secretary
Jere Northrop
Chief Technology
Officer
Craig Scott 150,000 10.3% $2.50 12/31/01
M. Duane Stutzman 75,000 5.2% $2.50 06/30/03
(1) Warrants granted to D2 in connection with the consulting agreement
whereby David J. Mitchell is acting as our CEO and President.
20
Shown below is information on exercises of stock options and fiscal year-
ended values pursuant to our stock option plan to the named officers:
<TABLE>
<CAPTION>
Aggregated option/SAR Exercises and FY-End Option/SAR Values
------------------------------------------------------------
Number of Securities
Shares Underlying Unexercised Value of Unexercised In-
Name and Acquired Value Options/SARs at the-Money Options/SARs
Principal on Realized FY-End(#) at FY-End(#)
Position Exercise ($) Exercisable/Unexercisable Exercisable/Unexercisable
--------- -------- -------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Mark A. Smith 626,667
Chairman of
the Board and
Secretary
David J. Mitchell 2,500,000
Chief Executive
Officer and
President
Jon Northrop
Executive Vice
President, Chief
Financial Officer,
Treasurer and
Assistant Secretary
Jere Northrop
Chief Technology
Officer
Craig Scott 169,445
M. Duane Stutzman 107,818/77,261
</TABLE>
Compensation of Directors
-------------------------
Effective September 1, 1993, until December 31, 1999, outside directors
were 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. On August 5, 1999, we granted, pursuant to our 1996 Nonemployee
Director Stock Plan, the following options to each of the two outside
directors, Mr. Cullis and Mr. Schwanekamp:
Grant Date Number of Shares Exercise Price
---------- ---------------- --------------
08/05/99 5,000 $1.61
21
Employment Contracts and Termination 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 pursuant to which Jon
Northrop and Jere Northrop are each entitled to receive an annual salary of
$150,000 and M. Duane Stutzman is entitled to receive an annual salary of
$120,000. All of the employment agreements are for the period beginning on
December 1, 1997, and ending on December 31, 2002.
On May 21, 1999, we also entered into a consulting agreement with Mark A.
Smith and LTLK to perform consulting services for us during the period
beginning on May 21, 1999, and ending on December 31, 2001. In accordance
with the consulting agreement, LTLK received compensation in the form of a
convertible promissory note in the amount of $626,667 and warrants to purchase
626,667 shares of our Common Stock (the terms of the promissory note and
warrants were later modified when the transaction with D2 was consummated (see
"Certain Relationships and Related Transactions").
All of the employment agreements and the consulting agreement provide
that the named individual's compensation will be reviewed no less than once
per year with a view to making such increases in the individual's salary or
declaring such bonuses or other benefits as may be merited and warranted in
light of factors considered pertinent by our Board of Directors. Each named
individual is entitled to receive free of cost parking for his automobile,
health, hospitalization and life insurance with coverage exceeding or equal to
that which was then in force through us, as well as such other benefits as our
Board may deem appropriate from time to time. All of the subject agreements
provide that in the event the individual is terminated by us for any reason
other than "for cause," he will continue to be compensated by us for the
duration of the term of the agreement. All of the agreements also provide
that in the event that we have a change in control at any time during their
respective terms, as a result of which the Board of Directors appoints any
person other than the named individual to serve in the capacity for which he
is entitled to receive compensation under his agreement, the individual will
nevertheless be entitled to receive all of his compensation and benefits under
his agreement regardless of whether he continues to perform any services for
us. In addition, all of the subject agreements provide that in the event that
the named individual is terminated upon death or disability, terminated
without cause, or terminated upon change in management, all warrants, options
or shares issued but unvested at the date of termination will become fully
vested as of the date of termination.
On December 23, 1999, we entered into a three year management agreement
with D2 pursuant to which D2 provides us with specific management and
consulting services and David J. Mitchell has been appointed to serve as our
Chief Executive Officer, Chairman of our Executive Committee and as one of our
Directors. In accordance with this agreement, D2 received warrants to
purchase 2,500,000 shares of our Common Stock at an exercise price of $2.50
per share until December 31, 2004, and receives ongoing compensation of
$240,000 per year payable in shares of our Common Stock or cash. Also in
accordance with this agreement, we added three members to our Board of
Directors (David J. Mitchell and Salvatore J. Zizza added December 23, 1999,
and Andrew G. Gould added August 10, 2000), and receive consulting services
from Summerwind Restructuring, Inc., which provides the services of consultant
Dominic Bassani, who is acting as Vice President of Operations of Bion
Technologies, Inc. and BionSoil, Inc. at present. We amended this agreement
on August 10, 2000, including (but not limited to) extending the term for one
22
additional year, issuing additional warrants to D2, and amending certain
provisions of the Shareholders Agreement. See our Form 8-K dated August 3,
2000. The original agreement may be referenced in our Form 8-K dated December
11, 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 that 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 of this Plan.
On June 14, 1996, the Board of Directors adopted the 1996 Nonemployee
Director Stock Plan ("Director Plan"). The maximum number of shares of Common
Stock that 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 of this
Director Plan.
On May 16, 2000, the Board of Directors adopted the 2000 Incentive Plan
("2000 Plan"), which will be submitted for ratification by our shareholders at
the next meeting of the shareholders. The maximum number of shares of Common
Stock, that may be issued under the 2000 Plan is 1,000,000 shares. See
Exhibit 99.5 of our Form 8-K dated August 10, 2000, for specific details of
this 2000 Plan.
Report on Repricing of Options/SARs
-----------------------------------
During the fiscal year ended June 30, 2000, we repriced the following
options (warrants) awarded to named executive officers and directors:
Craig Scott had 19,445 options repriced from $3.60/share to $2.50/share
and extended from 08/01/00 to 11/01/00.
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 18, 2000,
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:
23
Name and Address of Amount and Nature of
Beneficial Owner Beneficial Owner Percent of Class
------------------- -------------------- ----------------
Mark A. Smith 7,285,613(1) 47.0%
409 Spruce Street
Boulder, CO 80302
D2 Company, LLC 5,030,000(2) 27.8%
18 E. 50th Street
10th Floor
New York, NY 10022
Jon Northrop 885,567(3) 6.7%
1922 W. Sanibel Court
Littleton, CO 80102
Jere Northrop 922,719(4) 7.0%
1961 Tonawanda Creek Rd.
Amherst, NY 14228
LoTayLingKyur Foundation 1,716,186 13.2%
409 Spruce Street
Boulder, CO 80302
LoTayLingKyur, Inc. 1,091,621(5) 8.1%
1475 Terminal Way, #3
Reno, NV 89502
Dublin Holding, Ltd. 3,865,889(6) 25.6%
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 56,089(7) 0.4%
76 Northview Lane
Chesapeake City, MD 21915
Salvatore J. Zizza 197,500(8) 1.5%
810 Seventh Ave., 27th Floor
New York, NY 10019
Andrew G. Gould 75,000(9) 0.6%
c/o Bion Environmental
Technologies
18 E. 50th Street, 10th Floor
New York, NY 10022
Management as a Group 14,397,148(10) 68.2%
(7 persons)
(1) Includes 611,950 shares owned by Mark A. Smith and his wife plus all
shares beneficially owned by LoTayLingKyur, Inc. ("LTLK") (owned by Mr.
Smith and his wife), the LoTayLingKyur Foundation (operated by Mr. Smith)
and Dublin Holding, Ltd. ("DHL") (voted by Mr. Smith). See Notes 6 and 7
to our Notes to Consolidated Financial Statements. This figure does not
include securities owned by their adult children.
24
(2) Owned by David J. Mitchell, our President and CEO. Includes a D2P
warrant to purchase 2,500,000 shares of Common Stock at $1.75 per share,
exercisable until December 31, 2004, and a D2C warrant to purchase
2,500,000 shares of Common Stock at $2.50 per share until June 30, 2004,
and 30,000 shares underlying bridge warrants held by D2. Does not
include shares to be issued upon conversion of the Convertible
Bridge Note held by D2 ($100,000 principal), and does not include a D2D
warrant to purchase 1,000,000 shares of Common Stock at $3.50 per share
from January 1, 2002, until August 10, 2005, and a D2E warrant to
purchase 500,000 shares at $6.00 per share from January 1, 2002, until
August 10, 2005. See our Forms 8-K dated December 11, 1999, April 13,
1999 and August 10, 2000, and Item 12 herein.
(3) Jon Northrop owns 491,554 shares of record and has investment rights for
491,554 shares. This total includes 204,640 shares owned by his wife
and 17,373 shares plus 38,000 warrants owned by the Family Trust U/A 3rd
U/W Catherine Northrop, and 134,000 options exercisable at $2.25 per
share commencing January 1, 2000, and ending December 31, 2001. Does not
include 151,452 shares owned by adult children of Jon Northrop, for each
of which Mr. Northrop disclaims beneficial ownership. See Item 12
herein.
(4) Jere Northrop owns 411,706 shares of record and has investment rights for
411,706 shares. The total includes 352,640 shares owned by his wife,
17,373 shares plus 38,000 warrants owned by the Family Trust U/A 3rd U/W
Catherine Northrop, and 103,000 options exercisable at $2.25 per share
commencing January 1, 2000, and ending December 31, 2001. Does not
include 85,572 shares owned by an adult child of Jere Northrop, 15,080
shares owned by the Jere and Lynn Northrop Family Foundation, and 79,052
shares owned by the Jere Northrop Family trust, for each of which Mr.
Northrop disclaims beneficial ownership. See Item 12 herein.
(5) The figure includes 553,458 shares owned by LoTayLingKyur, Inc. ("LTLK")
plus 130,703 shares owned by its pension plan. Includes the shares that
would be issued if our convertible promissory notes were converted at a
price of $1.80 per share upon maturity (407,460 shares, in aggregate, as
of the maturity date). LTLK is in the process of terminating its pension
plan and it is anticipated that the shares and convertible notes held by
the pension plan will be rolled into IRA accounts for the benefit of Mark
A. Smith and his wife during the next thirty days. See Item 12 herein.
(6) Mark A. Smith has the right to vote all shares pursuant to a voting
agreement. Includes the shares that would be issued if our convertible
promissory notes were converted at a price of $1.80 per share upon
maturity (2,046,080 shares, in aggregate, as of the maturity date).
See Item 12 herein.
(7) Includes options to purchase 31,668 shares of Common Stock.
(8) Includes options to purchase 75,000 shares of Common Stock at $2.25 per
share until December 31, 2003, a J1 warrant to purchase 15,000 shares of
Common Stock at $2.00 per share until December 31, 2004, and a J2 warrant
to purchase 100,000 shares of Common Stock at $2.375 per share until
December 31, 2004. Also includes 15,000 shares underlying bridge
warrants held by Mr. Zizza. Does not include shares to be issued upon
conversion of the convertible bridge notes held by Mr. Zizza ($50,000
principal). See our Form 8-K dated April 13, 2000.
25
(9) Includes options to purchase 75,000 shares of Common Stock at $2.25 per
share until December 31, 2003.
(10) Includes 9,882,517 options and convertible debt exercisable within sixty
days.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following is a list of certain relationships and related party
transactions in the previous two years:
During the period beginning July 1, 1998, we entered into numerous
transactions with Mark A. Smith (our Chairman) and/or related entities
LoTayLingKyur, Inc. ("LTLK"), LTLK Defined Benefit Plan, LoTayLingKyur
Foundation, and Dublin Holding Ltd. (collectively "First Parties") including
but not limited to:
i) on November 5, 1998, we converted the balance of a note payable to
LTLK ($77,170) into 12,862 shares of restricted and legended Common Stock and
37,500 warrants exercisable at $7.50 per share, which warrants were
subsequently converted into Class X Warrants (exercisable at $8.00 per share
until December 31, 2001). See our Form 10-QSB dated December 31, 1998;
ii) between November 6, 1998, and February 28, 1999, LTLK purchased
127,002 shares of restricted and legended Common Stock and 282,230 Class Z
Warrants (exercisable at $13.50 per share until December 31, 2001) in private
placement investments totaling $412,750;
iii) on May 22, 1999, we issued a note to the LTLK Defined Benefit Plan
for $260,000 in principal for two mortgages assigned to us plus 260,000 Class
X Warrants plus interest (see our Form 8-K dated May 22, 1999), and on
September 14, 1999, we sold the two mortgages for $202,750 plus $6,717 in
interest for a total of $209,467. See our Form 10-QSB dated September 30,
1999;
iv) on May 21, 1999, we entered into a consulting agreement with LTLK for
the services of Mr. Smith as Chairman for which LTLK received a convertible
promissory note with principal of $626,667, which principal was convertible
into shares of Common Stock at $1.80 per share plus a Class X Warrant for
626,667 shares of Common Stock. See our Form 8-K dated May 21, 1999;
v) also on May 21, 1999, as additional incentive for LTLK to make the
services of Mr. Smith available to us, we converted warrants held by LTLK to
purchase, in aggregate, 897,990 shares at various prices from $4.00 to $15.00
per share into one Class X Warrant to purchase 897,990 shares of Common Stock
at $8.00 per share. See our Form 8-K dated May 21, 1999;
vi) from July 1, 1999, to December 21, 1999, we received advances from
LTLK, aggregating $1,035,681, for which LTLK received convertible notes (plus
one Class X Warrant for each $1.00 advanced);
vii) effective December 20, 1999, pursuant to an agreement between First
Parties and us, (see our Form 8-K dated December 11, 1999):
26
(a) First Parties exchanged all the convertible promissory notes
for new convertible promissory notes with aggregate principal
of $3,075,797.85 (which amount equaled the principal plus
accrued interest of the prior promissory notes) due at
December 31, 2002;
(b) we received the right to convert such new notes to Common Stock
under specific conditions;
(c) First Parties' Class X Warrants were exchanged for 0.3
restricted shares of Common Stock plus 0.7 Class Z Warrants for
each Class X (in aggregate, 1,172,426 restricted shares of
Common Stock and 2,735,660 Class Z Warrants were issued and
exchanged for 3,908,084 Class X Warrants); and
(d) First Parties agreed to participate in and support a future
registered warrant exchange on specified terms and conditions;
and
viii) commencing August 3, 2000, and at various other effective dates
through the month of August 2000, the First Parties (and certain related
holders of our Class X Warrants and Class Z Warrants) exchanged, in aggregate,
165,198 Class X Warrants and 5,425,440 Class Z Warrants for 863,399 restricted
shares of our Common Stock. This exchange occurred pursuant to an agreement
we had with the warrant holders dated December 20, 1999. See our Form 8-K
dated December 11, 1999, Exhibits 10.4, 10.9, and 10.13. Mark A. Smith,
Chairman, (and affiliates and extended family members of Mr. Smith)
participated in this warrant exchange agreement. For further details see our
Form 8-K dated August 3, 2000, and Exhibit 99.4 thereto.
On December 23, 1999, we entered into the following transactions with D2,
which was formerly unaffiliated with us (see our Form 8-K dated December 11,
1999):
i) we entered into a three year Management Agreement with D2, pursuant to
which D2 will provide us specific management and consulting services;
compensation to D2 for such services consists of: $240,000 per year payable
in our Common Stock or cash; and 2,500,000 warrants exercisable at $2.50
expiring on December 31, 2004;
ii) we entered into a Warrant Purchase Agreement and other agreements
with D2, pursuant to which D2 purchased 2,500,000 warrants, exercisable at
$1.75 expiring on December 31, 2004, for $1,000,000 ($500,000 in cash and
%500,000 in a non-recourse promissory note to us that is secured by the
subject warrants);
iii) on December 23, 1999, D2, Mark A. Smith, Jere Northrop, Jon
Northrop, LoTayLingKyur, Inc., and Dublin Holding, Ltd. entered into a
Shareholders' Agreement which, among other things, provides that D2 will
receive warrants to purchase additional shares of Common Stock, allows D2 to
receive additional shares of Common Stock in lieu of cash payments for its
fee, and grants D2 2,500,000 warrants to purchase additional shares of Common
Stock for an aggregate purchase price of $1,000,000;
iv) on August 10, 2000, we amended the Management Agreement with D2 that
we entered into on December 23, 1999, which amendment (1) extended the
agreement for D2's services for an additional year; and (2) issued D2
1,500,000 additional warrants (1,000,000 exercisable at $3.50 per share and
500,000 exercisable at $6.00 per share, both exercisable from January 1, 2002,
until August 10, 2005). See our Form 8-K dated August 3, 2000.
27
On May 21, 1999, 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 we issued long-
term promissory notes to each party in exchange for payables aggregating
$793,500 owed to such parties. See our Form 8-K dated May 21, 1999.
Effective December 15, 1999, we entered into agreements with eight
holders of outstanding promissory notes (Jon Northrop, Jere Northrop, Northrop
Family Trust, M. Duane Stutzman, Harley Northrop, Edward Hennig, William
Crossetta and Craig Scott), pursuant to which each note holder agreed to
exercise either outstanding options or warrants owned by the note holder by
cancellation of the promissory note owned by the holder under certain
specified conditions. Additionally, each note holder agreed to participate in
and support a future registered warrant exchange under specified terms and
conditions. See our Form 8-K dated December 11, 1999.
Effective August 23, 2000, certain holders of our Class X Warrants and
Class Z Warrants, including without limitation, Jon Northrop, Director and
President, and Jere Northrop, Director and Chief Technology Officer (and their
extended families), agreed to exchange, in aggregate, 471,545 Class X Warrants
and 855,696 Class Z Warrants for 269,831 restricted shares of our Common
Stock. This exchange occurred pursuant to the terms of agreements dated
December 20, 1999. See our Forms 8-K dated December 11, 1999, and August 10,
2000.
Andrew G. Gould joined our Board of Directors on August 10, 2000. In
addition to his duties as a director, Mr. Gould, through Arthur P. Gould &
Co., Inc., a company that he owns, will provide us with an average of
approximately ten (10) hours per month of technology consulting services
through August 31, 2002. We have granted Mr. Gould options to purchase 75,000
shares of our Common Stock at a price of $2.25 per share, exercisable until
December 31, 2003. See our Form 8-K dated August 3, 2000.
Beginning August 10, 2000, Salvatore J. Zizza, one of our directors, will
also serve as our governmental affairs liaison and provide additional
consulting services through September 1, 2002. We granted Mr. Zizza options
to purchase 75,000 shares of our Common Stock at a price of $2.25 per share,
exercisable until December 31, 2003, and issued him 100,000 Class J-2 warrants
purchasing Common Stock at a price of $2.375 per share. We will provide Mr.
Zizza with office space in our New York City office. See our Form 8-K dated
August 3, 2000.
On April 13, 2000, we completed a private placement offering of
$4,156,425 consisting of $4,095,000 in long term convertible bridge debt and
$61,425 in equity for the purchase of 1,213,500 warrants exercisable at $2.375
per share until December 31, 2004. See our Form 8-K dated April 13, 2000.
D2 and Salvatore Zizza participated in this offering on the same terms as
unaffiliated third parties. D2 purchased four units ($100,00 convertible debt
and 30,000 warrants) and Mr. Zizza purchased two units ($50,000 convertible
debt and 15,000 warrants). Effective September 15, 2000, we amended certain
terms of the convertible bridge notes upon approval of the holders of a
majority of the notes concerning changes to the conversion procedure and
amended exercise prices on the Bridge Warrants. See our Form 8-K dated August
10, 2000.
Effective May 21, 1999, Jon Northrop, our CEO, relinquished his voting
rights on securities owned by LTLK and Dublin Holding Ltd. ("DHL"), two of our
major shareholders. Following this relinquishment, and also effective May 21,
1999, Mark A. Smith, our Chairman, was granted the power to vote the
28
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 E. Northrop, father of 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 our Common Stock at $1.80 per
share. See Item 12 in our Form 10-KSB dated June 30, 1998.
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 our
affiliates, officials and shareholders will be approved by the majority vote
of disinterested directors.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
--------
3.1 Articles of Incorporation previously filed and incorporated
herein by reference.
3.2 Bylaws previously filed and incorporated by reference.
10.1 Management Agreement and Management Compensation Warrant dated
December 23, 1999, between Bion Environmental Technologies, Inc.
and D2 Co., LLC. Incorporated by reference from Exhibit 10.1
to our Form 8-K dated December 11, 1999.
10.2 Warrant Purchase Agreement dated December, 1999, between Bion
Environmental Technologies, Inc. and D2 Co., LLC.; Promissory
Note dated December 23, 1999; Warrant between Bion Environmental
Technologies, Inc. and D2 Co., LLC.; and Pledge Agreement dated
December 23, 1999, between Bion Environmental Technologies, Inc.
and D2 Co., LLC. Incorporated by reference from Exhibit 10.2 to
our Form 8-K dated December 11, 1999.
10.3 Shareholders' Agreement dated December 23, 1999, among D2 Co.,
LLC, Mark A. Smith, Jere Northrop, Jon Northrop, LoTayLingKyur,
Inc., LTLK Defined Benefit Plan, and Dublin Holding, Ltd.
Incorporated by reference from Exhibit 10.3 to our Form 8-K
dated December 11, 1999.
10.4 Agreement dated December 15, 1999, between Bion Environmental
Technologies, Inc. and First Parties. Incorporated by reference
from Exhibit 10.4 to our Form 8-K dated December 11, 1999.
10.5 Agreement dated December 11, 1999, between Bion Environmental
Technologies, Inc. and Jon Northrop. Incorporated by reference
from Exhibit 10.5 to our Form 8-K dated December 11, 1999.
29
10.6 Agreement dated December 14, 1999, between Bion Environmental
Technologies, Inc. and Jere Northrop. Incorporated by reference
from Exhibit 10.6 to our Form 8-K dated December 11,
1999.
10.7 Agreement dated December 13, 1999, between Bion Environmental
Technologies, Inc. and Northrop Family Trust. Incorporated by
reference from Exhibit 10.7 to our Form 8-K dated December 11,
1999.
10.8 Agreement dated December 11, 1999, between Bion Environmental
Technologies, Inc. and M. Duane Stutzman. Incorporated by
reference from Exhibit 10.8 to our Form 8-K dated December 11,
1999.
10.9 Agreement dated December 14, 1999, between Bion Environmental
Technologies, Inc. and Harley E. Northrop. Incorporated by
reference from Exhibit 10.9 to our Form 8-K dated December 11,
1999.
10.10 Agreement dated December 11, 1999, between Bion Environmental
Technologies, Inc. and Edward A. Hennig. Incorporated by
reference from Exhibit 10.10 to our Form 8-K dated December 11,
1999.
10.11 Agreement dated December 14, 1999, between Bion Environmental
Technologies, Inc. and William J. Crossetta, Jr. Incorporated
by reference from Exhibit 10.11 to our Form 8-K dated December
11, 1999.
10.12 Agreement dated December 11, 1999, between Bion Environmental
Technologies, Inc. and S. Craig Scott. Incorporated by
reference from Exhibit 10.12 to our Form 8-K dated December 11,
1999.
21 Subsidiaries of the Registrant. Filed herewith electronically.
23.1 Consent of Ehrhardt Keefe Steiner & Hottman. Filed herewith
electronically.
23.2 Consent of BDO Seidman, LLP. Filed herewith electronically.
27 Financial Data Schedule. Filed herewith electronically.
99.1 Bion Environmental Technologies, Inc.'s Capital Structure.
Incorporated by reference from Exhibit 10.13 to our Form 8-K/A
dated December 28, 1999.
99.2 Form of Note and Warrant Purchase Agreement. Incorporated by
reference from Exhibit 10.1 to our Form 8-K dated April 13,
2000.
99.3 Form of Convertible Bridge Note. Incorporated by reference from
Exhibit 10.2 to our Form 8-K dated April 13, 2000.
99.4 Form of Bridge Warrant. Incorporated by reference from Exhibit
10.3 to our Form 8-K dated April 13, 2000.
30
Reports on Form 8-K
-------------------
Form 8-K; August 1, 1999; Items 5 and 7
Form 8-K; December 11, 1999; Items 1,5 and 7
Form 8-K/A; December 11, 1999; Items 5 and
Form 8-K; April 13, 2000; Items 5 and 7
Form 8-K; August 3, 2000; Items 5 and 7
Form 8-K; August 9, 2000; Items 4 and 7
Form 8-K; August 10, 2000; Items 5 and 7
31
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Financial Statements:
Report of Independent Certified Public Accountants
BDO Seidman, LLP F-2
Independent Auditors' Report
Ehrhardt Keefe Steiner & Hottman P.C. F-3
Consolidated Balance Sheet as of June 30, 2000 F-4 - F-5
Consolidated Statements of Operations for the Years Ended
June 30, 2000 and 1999 F-6
Consolidated Statements of Changes in Stockholders' Deficit
for the Years Ended June 30, 1999 and 2000 F-7
Consolidated Statements of Cash Flows for the Years Ended
June 30, 2000 and 1999 F-8 - F-9
Summary of Accounting Policies F-10 - F-16
Notes to Consolidated Financial Statements F-17 - F-35
F-1
Report of Independent Certified Public Accountants
To the Board of Directors and Stockholders
Bion Environmental Technologies, Inc.
Littleton, Colorado
We have audited the accompanying consolidated balance sheet of Bion
Environmental Technologies, Inc. and Subsidiaries as of June 30, 2000, and the
related consolidated statements of operations, stockholders' deficit and cash
flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit 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 audit provides 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, 2000 and the
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 1 to the consolidated
financial statements, the Company's significant operating losses and
stockholders' deficit raise substantial doubt about its ability to continue as
a going concern. Management's plans regarding those matters are also described
in Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ BDO Seidman, LLP
Denver, Colorado
August 25, 2000
F-2
Independent Auditors' Report
To The Board of Directors and Stockholders
Bion Environmental Technologies, Inc.
Denver, CO
We have audited the accompanying consolidated statements of operations,
stockholders' deficit, and cash flows for the year ended June 30, 1999 of Bion
Environmental Technologies, Inc. and Subsidiaries. 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 audit.
We conducted our audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of Bion Environmental Technologies, Inc. and Subsidiaries for the year
ended June 30, 1999, 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, as filed on Form 10-KSB for the year ended June 30,
1999, 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 1 of those statements, the Company had incurred losses
since inception of 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 1. The consolidated financial statements do not include any adjustments
that might result from the outcome this uncertainty.
/s/ Ehrhardt Keefe Steiner & Hottman P.C.
August 20, 1999
Denver, Colorado
F-3
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
June 30, 2000
-------- ------------
ASSETS
Current:
Cash and cash equivalents $ 2,604,933
Accounts receivable, less allowance of $12,000
for possible losses 26,695
Prepaid expenses, note receivable and accrued interest 46,702
------------
Total current assets 2,678,330
------------
Property and equipment (Note 6):
Furniture and equipment 319,499
Computer equipment 92,828
------------
412,327
Less accumulated depreciation 203,894
------------
Net property and equipment 208,433
------------
Other assets:
Patents, net of accumulated amortization of $18,344 36,602
Deposits and other 11,884
------------
Total other assets 48,486
------------
$ 2,935,249
============
See report of independent certified public accountants, accompanying summary
of accounting policies and notes to consolidated financial statements.
F-4
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONNSOLIDATED BALANCE SHEET
June 30, 2000
-------- ------------
Liabilities and Stockholders' Deficit
Current:
Accounts payable $ 101,166
Current portion of capital lease obligations (Note 6) 26,627
Accrued expenses and note payable 49,419
------------
Total current liabilities 177,212
------------
Long-term liabilities:
Convertible bridge notes payable (Note 2) 3,362,242
Notes payable, related parties (Note 3) 2,846,471
Accrued consulting fees (Note 4) 122,833
Long-term portion of capital lease obligations (Note 6) 16,737
------------
Total long-term liabilities 6,348,283
------------
Total liabilities 6,525,495
------------
Commitments and contingencies (Note 6)
Stockholders' deficit:
Common stock, no par value, 100,000,000 shares
authorized, 11,902,669 shares issued and
outstanding 22,748,871
Non-recourse promissory note (Note 4) (500,000)
Deferred consulting expense (Note 4) (1,944,739)
Unearned compensation (Note 7) (67,500)
Accumulated deficit (23,826,878)
------------
Total stockholders' deficit (3,590,246)
------------
$ 2,935,249
============
See report of independent certified public accountants, accompanying summary
of accounting policies and notes to consolidated financial statements.
F-5
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended June 30, 2000 1999
----------- ------------
Revenues:
Soil sales $ 135,945 $ 140,423
System contract revenues 22,500 79,696
------------ ------------
Total revenues 158,445 220,119
------------ ------------
Cost of goods sold:
Soil sales 348,305 236,771
System contract revenues 41,997 149,722
------------ ------------
Total cost of goods sold 390,302 386,493
------------ ------------
Gross loss (231,857) (166,374)
------------ ------------
Expenses:
General and administrative (including
$3,590,191 and $339,189, non-cash,
respectively) 5,779,081 2,930,823
Impaired contract costs - 184,133
Research and development 598,304 249,207
------------ ------------
Total expenses 6,377,385 3,364,163
============ ============
Loss from operations (6,609,242) (3,530,537)
------------ ------------
Other income (expense):
Interest expense (including $2,244,028 and
$37,132, non-cash, respectively) (2,259,136) (125,090)
Interest income 79,411 1,847
Loss on sale of mortgage receivable (57,250) -
Other expense, net (51,168) (185)
------------ ------------
Total other expense (2,288,143) (123,428)
Net loss and comprehensive loss $(8,897,385) $ (3,653,965)
=========== ------------
Basic and diluted loss per common share $ (.79) $ (.40)
=========== ============
Weighted-average number of common
shares outstanding, basic and diluted 11,196,912 9,101,783
See report of independent certified public accountants, accompanying summary
of accounting policies and notes to consolidated financial statements.
F-6
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDLERS' DEFICIT
<TABLE>
<CAPTION>
Common Stock Recourse Common Deferred Total
Years Ended June 30, 1999 Promissory Stock Consulting Accumulated Stockholders'
and 2000 Shares Amount Note Subscribed Expense Compensation Deficit Deficit
---------------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, July 1, 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 (Note 7) 67,827 200,629 - - - - - 200,629
Issuance of common stock
for cash (Note 7) 310,304 809,125 - - - - - 809,125
Conversion of note payable
to common stock (Note 7) 12,862 77,170 - - - - - 77,170
Stock distribution
declared (Note 7) 916,925 - - - - - - -
Net loss for the year
ended June 30, 1999 - - - - - - (3,653,965) (3,653,965)
---------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1999 10,092,795 12,060,705 - 60,000 - - (14,929,493) $(2,808,788)
Conversion of common
stock subscriptions to
note payable - - - (60,000) - - - (60,000)
Issuance of common stock
for cash (Note 7) 282,686 426,460 - - - - - 426,460
Issuance of common stock
for services and note
payable (Note 7) 294,762 643,503 - - - (90,000) - 553,503
Issuance of warrants for
cash and non- recourse
promissory note (Note 4) - 2,477,370 (500,000) - - - - 1,977,370
Issuance of stock to
employees for cash (Note 7) 60,000 127,605 - - - - - 127,605
Issuance of stock and
warrants in related party
note payable and warrant
exchange (Note 3) 1,172,426 2,419,771 - - - - - 2,419,771
Beneficial conversion
feature on convertible
note payable (Note 3) - 656,027 - - - - - 656,027
Issuance of warrants as
additional consideration
to note holders (Note 3) - 349,492 - - - - - 349,492
Warrants issued for
consulting services
(Note 4) - 2,477,820 - - (2,333,687) - - 144,133
Issuance of warrants in
connection with
convertible bridge
notes (Note 2) - 1,110,118 - - - - - 1,110,118
Deferred consulting and
compensation expense
(Notes 4 and 7) - - - - 388,948 22,500 - 411,448
Net loss for the year
ended June 30, 2000 - - - - - - (8,897,385) (8,897,385)
---------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2000 11,902,669 $22,748,871 $(500,000) $ - $(1,944,739) $(67,500) $(23,826,878) $(3,590,246)
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See report of independent certified public accountants, accompanying summary
of accounting policies and notes to consolidated financial statements.
F-7
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Concluded)
<TABLE>
<CAPTION>
Increase (Decrease) in Cash and Cash Equivalents
Years Ended June 30, 2000 1999
-------------------- ----------- -----------
<C> <C> <C>
Operating activities:
Net loss $(8,897,385) $(3,653,965)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 60,919 57,605
Accounts receivable and work-in progress allowance - (20,000)
Issuance of stock for services, compensation and interest 459,321 246,629
Amortization of prepaid consulting expenses 770,800 34,955
Issuance of note payable for management fee 120,000 -
Issuance of note payable for legal services rendered 225,000 -
Issuance of note payable for officer compensation 65,333 -
Beneficial value of warrants issued 1,477,370 -
Amortization of debt discounts 944,187 -
Amortization of deferred consulting expense 388,948 -
Beneficial conversion feature amortized to interest expense 656,027 -
Issuance of note payable for interest expense 643,814 37,132
Amortization of unearned compensation 22,500 -
Loss on sale of mortgage assets 57,250 -
Impaired contract costs - 184,133
Changes in operating assets and liabilities:
Accounts receivable 67,067 (36,874)
Costs and estimated earnings in excess of billings on
contracts - 205,579
Prepaid expenses and other 42,039 (84,248)
Accrued interest receivable (20,000) -
Accounts payable (256,960) 859,894
Accrued liabilities (324,736) 430,716
Deferred contract revenue - 71,333
Deferred long-term contract costs - (151,000)
----------- -----------
Net cash used in operating activities (3,498,506) (1,818,111)
----------- -----------
</TABLE>
F-8
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Concluded)
<TABLE>
Years Ended June 30, 2000 1999
-------------------- ----------- -----------
<C> <C> <C>
Investing activities:
Purchases of equipment (95,379) (6,979)
Proceeds on sale of mortgage assets 202,750 -
----------- -----------
Net cash provided by (used in) investing activities 107,371 (6,979)
----------- -----------
Financing activities:
Proceeds from notes payable, related parties 1,031,074 1,018,111
Proceeds from issuance of notes payable in private placement 4,095,000 -
Proceeds from issuance of warrants 561,425 -
Proceeds from stock issuances and subscriptions 426,460 809,125
Proceeds from sale of stock to officers 127,605
Proceeds from exercise of options and warrants - 102,812
Payments in exchange for note receivable (10,000) -
Payments on notes payable (241,559) -
Payments on capital lease obligations (49,520) (68,479)
Net cash provided by financing activities 5,940,485 1,861,569
----------- -----------
Net increase in cash and cash equivalents 2,549,350 36,479
Cash and cash equivalents, beginning of year 55,583 19,104
----------- -----------
Cash and cash equivalents, end of year $ 2,604,933 $ 55,583
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 9,323 $ 15,318
Supplemental disclosure of non-cash financing activities:
Warrants issued in private placement 1,110,118 -
Warrants issued for deferred consulting services 2,333,687 -
Warrants and stock issued in exchange for warrants 2,419,771 -
Conversion of accrued interest to note payable - 77,337
Conversion of accounts payable to note payable - 94,182
Conversion of note payable to common stock for legal services 94,182 77,170
Acquisition of fixed assets under capital leases - 11,099
Issuance of stock for unearned compensation 90,000 -
Issuance of note receivable for sale of warrants 500,000 -
Acquisition of mortgage receivable for note payable - 260,000
Issuance of note payable for consulting services, including
accrued interest - 634,955
Conversion of accrued expenses to note payable - 165,707
Conversion of accounts payable to note payable - 424,079
Conversion of common stock subscribed 60,000 7,500
</TABLE>
See report of independent certified public accountants, accompanying summary
of accounting policies and notes to consolidated financial statements.
F-9
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
Basis of Presentation
Bion Environmental Technologies, Inc. ("Bion" or the "Company") designs,
markets, installs, and manages waste, wastewater, and storm water treatment
systems, primarily in the agricultural and food processing industries. The
Company produces and markets BionSoil products such as organic fertilizers,
potting soils, and soil amendments which are produced from the nutrient rich
BionSolids harvested from certain types of agricultural systems installed on
large dairy and hog farms. Bion is 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, distributing, and sales. The Company markets
and sells animal waste treatment systems primarily to large high intensity hog
raising facilities and dairy farms throughout the United States. The Company's
BionSoil products are primarily sold through retail and commercial outlets and
direct sales in western New York.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries, BionTechnologies, Inc. and BionSoil, Inc. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Cash Equivalents
The Company considers cash and all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
F-10
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are
computed using the straight-line method over the estimated useful lives
(ranging from three to seven years) of the assets. Maintenance and repairs
are expensed as incurred. Major renewals and improvements are capitalized.
When property and equipment is retired or otherwise disposed of, the asset and
accumulated depreciation or amortization are removed from the accounts and the
resulting profit or loss is reflected in operations.
Depreciation expense for the years ended June 30, 2000 and 1999, was $57,687
and $51,141.
Property and equipment at June 30, 2000 and 1999 included equipment under
capital lease obligations with an original cost of $171,151 and accumulated
depreciation of $101,157 and $72,273.
Long-Lived Assets
The Company applies Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for the Impairment of Long-Lived Assets. Under SFAS No. 121,
long-lived assets and certain intangibles are evaluated for impairment when
events or changes in circumstances indicate that the carrying value of the
assets may not be recoverable through the estimated undiscounted future cash
flows resulting from the use of these assets. When any such impairment exists,
the related assets will be written down to fair value.
F-11
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
Revenue Recognition
Revenues from fixed-price system development and construction projects are
recognized on the percentage-of-completion method. For contracts accounted
for under the percentage-of-completion method, the amount of revenue
recognized is the percentage of the total contract price that the cost
expended to date bears to the anticipated final total cost based upon current
estimates of the cost to complete the contract. Contract cost includes all
labor and benefits, materials unique to or installed in the project,
subcontract costs and allocations of indirect costs. General and
administrative costs are charged to expense. Provisions for estimated losses
on uncompleted contracts are provided when determined, regardless of the
completion percentage. As contracts can extend over one or more accounting
periods, revisions in costs and earnings estimated during the course of the
work are reflected during the accounting period in which the facts that
require such revisions become known. Project managers make assumptions
concerning cost estimates for labor hours, consultant hours and other project
costs. Due to uncertainties inherent in the estimation process and potential
changes in customer needs as projects progress, it is at least reasonably
possible that completion costs for some uncompleted projects may be further
revised in the near term, and that such revisions may be material.
Revenue from the sale of BionSoil products and associated fees are recognized
when shipped, as the Company has no continuing obligations. Fees and royalties
paid on BionSoil production are negotiated as a fixed price per cubic yard of
product produced and are included in the cost of the BionSoil.
Advertising
The Company expenses advertising and promotional costs as incurred. For the
years ended June 30, 2000 and 1999, the Company recorded $2,402 and $18,825 in
advertising expense.
F-12
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
Income Taxes
The Company accounts for income taxes under the liability method, which
requires an entity to recognize deferred tax assets and liabilities. Temporary
differences are differences between the tax basis of assets and liabilities
and their reported amounts in the financial statements that will result in
taxable or deductible amounts in future years.
Net Loss Per Share
The Company follows the provisions of SFAS No. 128, "Earnings Per Share."
SFAS No. 128 provides for the calculation of "Basic" and "Diluted" earnings
per share. Basic earnings per share includes no dilution and is computed by
dividing income or loss available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted earnings
per share reflect the potential dilution of securities that could share in the
earnings of an entity, similar to fully diluted earnings per share. In loss
periods, dilutive common equivalent shares are excluded, as the effect would
be anti-dilutive. Therefore, basic and diluted earnings per share are the
same for all periods presented.
For the years ended June 30, 2000 and 1999, stock options exercisable into
1,786,445 and 504,850 shares of common stock and stock warrants exercisable
into 14,069,173 and 8,430,649 shares of common stock and debt convertible into
3,910,334 and 1,094,202 shares of common stock were not included in the
computation of diluted earnings per share because their effect was
antidilutive.
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, disclosures of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual results could differ
from those estimates and assumptions.
F-13
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
Concentrations of Credit Risk
The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of cash and accounts receivable.
The Company's cash is in demand deposit accounts placed with federally insured
financial institutions. Such deposit accounts at times may exceed federally
insured limits. The Company has not experienced any losses on such accounts.
Concentrations of credit risk with respect to trade accounts receivable are
generally limited since customers are dispersed across geographic areas. The
Company reviews a customer's credit history before extending credit and
establishes an allowance for doubtful accounts based upon the credit risk of
specific customers, historical trends and other information. Generally, the
Company does not require collateral from its customers.
Fair Value of Financial Instruments
The estimated fair value of financial instruments has been determined using
available market information or other appropriate valuation methodologies,
including the Black Scholes model. However, considerable judgment is required
in interpreting market data to develop estimates of fair value. Consequently,
the estimates are not necessarily indicative of the amounts that could be
realized or would be paid in a current market exchange. The carrying amounts
reported on the consolidated balance sheets approximate their respective fair
values.
Segment Information
The Company follows the provisions of SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." This statement establishes
standards for the reporting of information about operating segments in annual
and interim financial statements. Operating segments are defined as components
of an enterprise for which separate financial information is available that is
evaluated regularly by the chief operating decision maker(s) in deciding how
to allocate resources and in assessing performance. See Note 10 for
disclosure.
F-14
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
Stock Option Plan
The Company applies Accounting Principles Board Opinion 25, "Accounting for
Stock Issued to Employees" ("APB Opinion 25") and related Interpretations in
accounting for all stock option plans. Under APB Opinion 25, compensation cost
is recognized for stock options issued to employees when the exercise price of
the Company's stock options granted is less than the market price of the
underlying common stock on the date of grant. SFAS No. 123, "Accounting for
Stock-Based Compensation" requires the Company to provide pro forma
information regarding net income (loss) as if compensation cost for the
Company's stock option plans had been determined in accordance with the fair
value based method prescribed in SFAS No. 123. To provide the required pro
forma information, the Company estimates the fair value of each stock option
at the date of grant by using the Black-Scholes option pricing model (Note 8).
Patents
Patents are recorded at cost less accumulated amortization, which is
calculated on a straight-line basis over a period of the estimated economic
life or legal life of 17 years. Amortization expense for the years ended June
30, 2000 and 1999 was $3,232 each year.
Comprehensive Loss
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income".
Comprehensive loss is comprised of net loss and all changes to the
consolidated statement of stockholders' deficit, except those changes made due
to investment by stockholders, changes in paid in capital and distributions to
stockholders. The Company had no components of comprehensive loss except for
net losses for the years ended June 30, 2000 and 1999.
F-15
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
Impact of Recently Issued
Accounting Pronouncements
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
requires companies to record derivatives on the balance sheet as assets or
liabilities, measured at fair market value. Gains or losses resulting from
changes in the values of those derivatives are accounted for depending on the
use of the derivative and whether it qualifies for hedge accounting. The key
criterion for hedge accounting is that the hedging relationship must be highly
effective in achieving offsetting changes in fair value or cash flows. SFAS
No. 133 is effective for fiscal years beginning after June 15, 2000.
Management believes that the adoption of SFAS No. 133 will have no material
effect on its financial statements.
In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation" ("FIN 44"), which was
effective July 1, 2000, except that certain conclusions in this Interpretation
which cover specific events that occur after either December 15, 1998 or
January 12, 2000 are recognized on a prospective basis from July 1, 2000. This
Interpretation clarifies the application of APB Opinion 25 for certain issues
related to stock issued to employees. The Company believes its existing stock
based compensation policies and procedures are in compliance with FIN 44 and
therefore, the adoption of FIN 44 had no material impact on the Company's
financial condition, results of operations or cash flows.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB") 101 which provides guidance on applying generally
accepted accounting principles to selected revenue recognition issues.
Management believes that the Company's revenue recognition policies are in
accordance with SAB 101.
Reclassifications
Certain consolidated financial amounts have been reclassified for consistent
presentation.
F-16
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Going Concern
The consolidated financial statements have been prepared assuming the Company
will continue as a going concern. The Company incurred losses totaling
$8,897,385 during the year ended June 30, 2000 (including non-cash interest
expense and other non-cash expenses of $2,244,028 and $3,590,191,
respectively) and a history of losses has resulted in an accumulated deficit
of $23,826,878 at June 30, 2000.
During the year ended June 30, 2000, the Company has successfully obtained
external financing through private placements of debt and equity and the sale
of its warrants. The Company continues to explore sources of additional
financing to satisfy its current operational requirements, and is currently
contemplating additional private placements of debt and equity, under the most
favorable terms available.
There can be no assurance that any funds required during the next twelve
months or thereafter can be generated from operations or that if such required
funds are not internally generated that funds will be available from external
sources such as debt or equity financings or other potential sources. The lack
of additional capital resulting from the inability to generate cash flow from
operations or to raise capital from external sources, would force the Company
to substantially curtail or cease operations and would, therefore, have a
material adverse effect on its business. Further, there can be no assurance
that any such required funds, if available, will be available on attractive
terms or that they will not have a significantly dilutive effect on the
Company's existing shareholders.
F-17
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
To enhance the Company's longer term prospects, since January 2000, management
has committed significant resources to develop the next generation Bion system
design, which will include system monitoring and controls and a clean water
recycling loop; an expanded research program for BionSoil; and retained
consultants to support these efforts. The expenditures related to these
efforts are anticipated to continue until the next generation design is
completed. Management's decision to pursue these efforts is the result of
positive results of limited market tests of BionSoil products. There can be no
assurance that the next generation Bion system design or the BionSoil program
will be successful or that sufficient capital will be available to fund
operations.
There is substantial doubt about the Company's ability to continue as a going
concern. The accompanying consolidated financial statements do not include any
adjustments relating to the recoverability or classification of asset carrying
amounts or the amounts and classification of liabilities that may result
should the Company be unable to continue as a going concern.
2. Convertible Bridge Notes Payable
On April 13, 2000, the Company completed a private offering of unsecured
convertible bridge notes payable (the "Notes") in the principal amount of
$4,095,000. Principal and accrued interest ($124,000 at June 30, 2000 is
included in convertible bridge notes) on the Notes at 10% per annum are due on
July 1, 2001. In connection with the sale of the Notes, the Company issued
stock purchase warrants convertible into 1,213,500 shares of the Company's
common stock at $2.375 per share through December 31, 2004. The warrants were
originally valued at $1,110,118 using the Black Scholes option-pricing model
and are being amortized as additional interest expense over the term of the
Notes. The unamortized warrant discount at June 30, 2000 was approximately
$857,000.
F-18
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Upon issuance of its capital stock in a public or private offering, with gross
proceeds greater than $5,000,000, the Company, at its option, must either
prepay the notes without penalty or convert the notes into shares of common
stock, at a conversion rate equal to the price of the common stock
attributable to the shares issued in the future public or private offering.
Of the convertible bridge notes payable issued, $50,000 was issued to a
director and $100,000 was issued to D2 Co., LLC (Note 4).
3. Notes Payable, Related Parties
Notes payable, related parties, consisted of the following:
June 30, 2000
-------- ----
Unsecured notes payable to LoTayLingKyur, Inc.,
LTLK Defined Benefit Plan and Dublin Holding
LTD., entities controlled by a stockholder/
director, principal amount of $3,075,798 plus
accrued interest of $200,810, net of unamortized
warrant discount of $2,016,476. All outstanding
principal and interest, computed at 1% per month,
is due and payable on or before December 31,
2002. (1) $ 1,260,132
Unsecured notes payable to a stockholder,
principal amount of $308,114 plus accrued
interest of $40,453. All outstanding principal
and interest, computed at 1% per month, is
due and payable on or before December 31,
2001. The outstanding principal and accrued
interest due, is convertible into shares of the
Company's common stock at a price of $1.80
per share, under certain agreed upon conditions. 348,567
F-19
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unsecured notes payable to various
stockholders, principal amount of $1,150,833
plus accrued interest of $86,939. All
outstanding principal and accrued interest at
1% per month is due and payable on or before
December 31, 2001. Under the terms of the
agreement, options or warrants held by these
stockholders may be exercised, as repayment
for the existing notes. 1,237,772
----------
$2,846,471
==========
(1) The outstanding principal and accrued interest due, is immediately
convertible into shares of the Company's common stock at a price of $1.80 per
share. In December 1999, the Company exchanged its previous note obligation
including related accrued interest for a total of $3,075,798, and extended the
terms of the notes. In connection with the note exchange, the Company issued
1,172,426 shares of common stock valued at $3,089,343 and 2,735,660 Class Z
warrants, exercisable into common stock at $13.50 per share through December
31, 2001, valued at $218,853, in exchange for 3,908,084 Class X warrants
previously issued to the entities in connection with various events, including
the original note issuances. The total value of the 3,908,084 warrants using
the Black Scholes option-pricing model was $888,425, of which $349,492 related
to the warrants issued with the original notes payable. On the date of the
exchange, the Company expensed the remaining balance of the unamortized
discount, and recorded a new discount of $2,419,771, representing the excess
of the value of the stock and warrants issued over the value of the warrants
surrendered.
The Company amortized $403,295 of the new discount through June 30, 2000,
resulting in a $2,016,476 discount balance at that time. Additionally, a
beneficial conversion feature of $656,027 was recorded and charged to interest
expense as the Company's common stock price exceeded the $1.80 conversion
price on the date the notes were exchanged.
F-20
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Related Party Transactions
The Company's notes payable and equity transactions with stockholders and
other related parties are included in Notes 3 and 7, respectively.
In December 1999 the Company entered into a three year agreement for
management and consulting services with D2 Co., LLC ("D2"). The agreement
requires total annual consideration of $240,000 payable in common stock of
Bion or cash, at the option of the Company. In January 2000, D2 agreed to add
monthly fees aggregating to $122,833 at June 30, 2000, to the balance of their
convertible bridge notes payable (Note 2). In connection with the agreement
the Company granted warrants exercisable into 2,500,000 shares of the
Company's common stock at $2.50 per share through June 30, 2004. The warrants
were valued at $2,333,687 using the Black Scholes option-pricing model and
have been reflected as deferred consulting expense in the accompanying
Consolidated Statement of Stockholders' Deficit and are being amortized to
consulting expense over the three year term of the agreement. In a separate
transaction with D2, the Company issued warrants exercisable into 2,500,000
shares of the Company's common stock at $1.75 per share through December 31,
2004 for $500,000 in cash and a $500,000 non-recourse note receivable which
bears interest at 8% per annum and is due December 31, 2004. The warrants were
valued at $2,477,370 using the Black Scholes option-pricing model. The
$1,477,370 value of the options in excess of the consideration received has
been expensed in the accompanying Consolidated Statement of Operations
(included in general and administrative expenses).
F-21
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the year ended June 30, 1999, the Company entered into an agreement
with a stockholder for $626,667 in consulting services, to be provided over
approximately a 31-month period. As additional consideration, the Company also
issued warrants to the stockholder to purchase 626,667 shares of common stock
at $8.00 per share through December 31, 2001, valued at $144,133 using the
Black Scholes option-pricing model. The Company recorded deferred consulting
fees of $770,800 and a note payable of $626,667 in connection with the
agreement. The fees were earned during the year ended June 30, 2000, and the
balance of the unamortized prepaid consulting fees was charged to expense. The
balance of the note payable is included in the note payable to entities
controlled by a stockholder (Note 3).
Of the convertible bridge notes payable issued, $50,000 was issued to a
director and $100,000 was issued to D2 Co., LLC (Note 4).
F-22
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Income Taxes
The provision for income taxes consisted of the following:
Years Ended June 30, 2000 1999
-------------------- ----------- ----------
Deferred benefit:
Federal $ 2,751,000 $ 1,189,000
State 562,000 244,000
----------- -----------
3,313,000 1,433,000
Increase in valuation
allowance (3,313,000) (1,433,000)
----------- -----------
$ - $ -
=========== ===========
A reconciliation of the effective tax rate and the statutory U.S. federal
income tax rate is as follows:
Years Ended June 30, 2000 1999
-------------------- ----------- ----------
Benefit computed at the federal
statutory rate
$(3,025,000) $(1,242,000)
Change in valuation allowance 3,313,000 1,433,000
State income tax benefit,
net of federal tax amount (618,000) (254,000)
Permanent differences 275,000 9,000
Other 55,000 54,000
----------- -----------
Taxes on income $ - $ -
=========== ===========
F-23
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Temporary differences that give rise to a significant portion of the deferred
tax assets and liabilities are as follows:
Years Ended June 30, 2000 1999
-------------------- ----------- ----------
Deferred tax asset:
Net operating loss
carryforwards $ 8,285,000 $ 5,704,000
Accounts receivable
allowance 5,000 5,000
Accrued liabilities 9,000 72,000
Compensation expense for
common stock options and
warrants not allowed for
income tax purposes 795,000 -
----------- -----------
Deferred tax asset 9,094,000 5,781,000
Valuation allowance (9,094,000) (5,781,000)
----------- -----------
Net deferred tax asset
(liability) $ - $ -
=========== ===========
The valuation allowance of $9,094,000 at June 30, 2000 was established because
the Company has not been able to determine that it is more likely than not
that the deferred tax asset will be realized.
At June 30, 2000, the Company had net operating loss carryforwards of
approximately $20,572,000 with expirations through 2020. The utilization of
certain of the loss carryforwards may be limited under Section 382 of the
Internal Revenue Code.
F-24
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Commitments and Contingencies
Leases
Rent expense for the years ended June 30, 2000 and 1999 was $95,519 and
$122,384, respectively. The Company leases certain equipment, office space and
operating facilities under noncancellable operating and capital leases. At
June 30, 2000 future minimum rental commitments under operating and capital
leases are as follows:
Years Ending June 30, Operating Leases Capital Leases
--------------------- ---------------- --------------
2001 $ 101,322 $ 29,527
2002 83,938 14,855
2003 71,431 400
--------- ---------
Total minimum lease payments $ 256,691 $ 44,782
=========
Less amounts representing interest 1,418
----------
Present value of minimum lease
payments 43,364
Less current maturities 26,627
----------
Long-term obligation, net $ 16,737
==========
Litigation
The Company is a party to legal actions and claims in the ordinary course of
business. Management of the Company believes that the disposition of such
matters will not have a material effect on the financial position, operating
results or cash flows of the Company.
F-25
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 may be accrued annually
and paid when the Company has sufficient cash flow from future operations.
Salaries were accrued through June 30, 1999, and paid in full since July 1,
1999.
The Company entered into an employment agreement with a non-related party for
a period commencing December 1, 1998 and ending November 30, 2003. The
Agreement provided for a base salary of $132,000 per year; in addition,
various benefits and its terms were subject to adjustment annually. The
agreement was terminated during the year ended June 30, 2000.
7. Stockholders' Deficit
Stock/Warrant Dividend
On May 21, 1999, the Company declared a stock and warrant dividend. All
stockholders of record as of May 20, 1999 received one share of common stock
for every 10 shares held and one Class X warrant for every five shares held.
The dividend was issued on June 14, 1999 and resulted in the issuance of
916,925 shares of common stock. The stock dividend has been termed a
distribution, as dividend treatment is only afforded to stock dividends to the
extent that retained earnings exist. Warrants to purchase 1,833,776 restricted
shares of common stock beginning January 1, 2000 at $8.00 per share until
December 31, 2001 were also issued.
F-26
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Conversion of Notes Payable to Common Stock
During November 1998, the Company converted $77,170 of notes payable and
accrued interest due to an existing stockholder, into 12,862 shares of common
stock.
During October 1999, the Company issued 60,000 shares of common stock to two
employees and received short-term notes receivable for the value of the stock
($127,605). The employees repaid the notes during the year ended June 30,
2000.
Private Placements - Common Stock and Warrants
During the years ended June 30, 2000 and 1999, the Company issued, for cash
consideration, 282,686 and 310,304 shares of restricted common stock for
$426,460 and $809,125, respectively.
In connection with the Company's private placement of its convertible bridge
notes payable (Note 2), the Company issued 1,213,500 warrants. The value of
these warrants computed using the Black Scholes model of $1,110,118 has been
charged to stockholders' deficit, and is reflected as a discount on the
convertible bridge notes.
Common Stock Issued for Services
During the years ended June 30, 2000 and 1999, the Company issued 294,762 and
67,827 shares of its common stock in return for services totaling $643,503 and
$200,629, respectively. Of the shares issued in fiscal 2000, 36,000 shares of
common stock valued at $90,000 were issued as compensation to certain
employees and have been reflected as unearned compensation at June 30, 2000 to
be amortized through stockholders' deficit to expense over the one year
contract terms.
F-27
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Stock Option Plan and Warrants
The 1994 Incentive Plan (the "Plan") provides for incentive stock options to
be granted to employees. Options to purchase up to 2,380,553 shares of the
Company's common stock (or 20% of the Company's outstanding stock which ever
is greater) may be granted under the Plan. Terms of exercise and expiration of
options granted under the Plan may be established at the discretion of an
administrative committee appointed to administer the Plan, or by the Board of
Directors if no committee is appointed, but no option may be exercisable for
more than ten years. As of June 30, 2000, options to purchase 1,599,109 shares
of the Company's common stock are outstanding under the Plan.
The 1996 Non-employee Director Stock Plan ("the Director Plan") provides for
each non-employee director to 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. The options were ultimately issued with an exercise price equal to the
market value of the Company's common stock at its issuance date, and therefore
no compensation had been recorded. No option may be exercisable for more than
five years. Options to purchase up to 100,000 shares of the Company's common
stock may be granted under the Director Plan. As of June 30, 2000, options to
purchase 43,336 shares of the Company's common stock are outstanding under the
Director Plan.
In April 2000, the Company established the 2000 Incentive Plan (the "2000
Plan"), which provides for incentive stock options to be granted to selected
employees and directors of the Company, and selected non-employee advisors to
the Company. Options to purchase up to 1,000,000 shares of the Company's
common stock may be granted under the 2000 Plan. Terms of exercise and
expiration of options granted under the 2000 Plan may be established at the
discretion of an administrative committee appointed to administer the 2000
Plan, but no option may be exercisable for more than five years. As of June
30, 2000, options to purchase 144,000 shares of the Company's common stock are
outstanding under the 2000 Plan.
F-28
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company applies APB Opinion 25 in accounting for stock options and stock
purchase warrants granted to employees. Had compensation expense been
determined based upon the fair value of the awards at the grant date and
consistent with the method under SFAS 123, the Company's net loss and basic
and diluted loss per share would have been increased to the pro forma amounts
indicated in the following table.
The following table provides detail as to Pro forma amounts:
Years Ended June 30, 2000 1999
-------------------- ----------- -----------
Net loss as reported $(8,897,385) $(3,653,965)
Net loss pro forma (9,597,939) (5,822,685)
Loss per share basic and diluted,
as reported (.79) (.40)
Loss per share basic and diluted,
pro forma (.86) (.64)
Years Ended June 30, 2000 1999
-------------------- ----------- -----------
Dividend yield 0% 0%
Expected volatility 74% 90%
Risk free interest rates 5.55 to 6.66% 5.5%
Expected lives in years .50 to 5 years .42 to 5 years
F-29
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the status of the Company's stock option plan and warrants issued
as of June 30, 2000 and 1999 are presented below:
<TABLE>
<CAPTION>
Options Warrants
----------------------------- -----------------------------
Weighted Weighted
Average Average
Shares Exercise Price Shares Exercise Price
--------- -------------- ---------- --------------
<S> <C> <C> <C> <C>
Outstanding,
July 1, 1998 227,672 $8.36 3,277,161 $9.00
Granted 484,957 6.19 6,255,776 8.11
Canceled (190,279) 6.80 (1,102,288) 6.89
Exercised (17,500) 4.84 - -
--------- ----- ---------- -----
Outstanding
July 1, 1999 504,850 5.87 8,430,649 10.14
Granted 1,453,094 3.94 10,407,868 5.74
Exercised - - - -
Canceled (171,499) 6.03 (4,769,344) 7.33
--------- ----- ---------- -----
Outstanding
June 30, 2000 1,786,445 $4.28 14,069,173 $7.77
========= ===== ========== =====
Exercisable
June 30, 1999 174,167 $3.75 8,430,649 $5.33
========= ===== ========== =====
Exercisable
June 30, 2000 1,176,338 $3.48 14,069,173 $7.77
========= ===== ========== =====
Options Warrants
------- --------
Weighted average fair value of options and
warrants granted during 1999 $1.48 $0.67
Weighted average fair value of options and
warrants granted during 2000 $0.55 $0.67
</TABLE>
F-30
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about exercisable stock options and
warrants at June 30, 2000:
<TABLE>
<CAPTION>
Outstanding Exercisable
-------------------------------------- -----------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercisable Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
----------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Options $1.55-2.25 506,224 3.47 $ 2.22 506,224 $ 2.22
2.50-3.04 502,225 2.13 2.53 362,225 2.54
3.60-4.05 308,915 2.45 3.60 124,755 3.61
5.40-5.63 43,805 2.15 5.40 30,156 5.40
7.20-9.00 293,654 2.43 7.27 102,874 7.39
13.50 131,622 2.48 13.50 50,104 13.50
----------- ----------- ----------- -------- ----------- --------
$1.55-13.50 1,786,445 2.11 $ 4.28 1,176,338 $ 3.48
=========== =========== =========== ======== =========== ========
Warrants 1.75 - 2.50 6,503,625 4.89 $ 2.18 6,503,625 $ 2.18
2.70 - 3.60 29,258 1.26 3.04 29,258 3.04
4.50 - 5.40 44,539 1.43 5.18 44,539 5.18
7.20 -11.25 1,149,348 0.04 8.03 1,149,348 8.03
13.50 6,342,403 1.51 13.50 6,342,403 13.50
----------- ----------- ----------- -------- ----------- --------
1.75-13.50 14,069,173 1.70 $7.77 14,069,173 $ 7.77
=========== =========== =========== ======== =========== ========
</TABLE>
The weighted average grant date fair value of stock options granted is
summarized as follows:
Year Ended June 30, 2000 1999
------------ -----------
Market value equal to
exercise price
$ 2.16 $ .15
Market value greater
than exercise price $ 1.39 $ .83
Market value less
than exercise price $ .82 $ .51
F-31
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Subsequent Events
During August 2000, the Company amended the management agreement (Note 4) with
D2 Co., LLC, which provides the services of David J. Mitchell, President and
CEO, of the Company. The Company extended the consulting services for an
additional year and issued 1,500,000 additional warrants (1,000,000 warrants
exercisable at $3.50 per share and 500,000 exercisable at $6.00 share, both
from January 1, 2002 until August 10, 2005). The Company will value the
warrants issued and add their value to the deferred consulting expense. The
period over which the remaining deferred consulting expense is amortized will
be adjusted relative to the new term of the agreement.
Effective August 3, 2000, certain holders of Class X warrants and Class Z
warrants exchanged 165,198 Class X warrants and 5,425,440 Class Z warrants for
863,399 shares of restricted common stock. In connection with the exchange,
the Company will value the warrants and common stock, and will record an
expense for the excess of the value of consideration received over the value
of warrants surrendered.
Effective August 23, 2000, certain holders of the Class X warrants and Class Z
warrants, including certain officers, employees and stockholders exchanged, in
aggregate, 471,545 Class X warrants and 855,696 Class Z warrants for 269,831
shares of restricted common stock. Upon the effective date, the Company will
value the warrants, and record an expense for the excess of the value of
consideration received over the value of warrants surrendered.
On September 15, 2000, the Company amended the convertible bridge notes
payable and associated warrants, which were accepted by the note-warrant
holders on August 24, 2000:
* limited the conversion rate on the notes to $5.00 per share
* adjusted the exercise price of the warrants from $2.375 to $2.00
* automatic conversion one year from date of note
F-32
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In connection with the reduction in exercise price, the Company will value the
benefit of the reduction, and add the value to the discount of notes, which
will continue to be amortized over the term of the note.
On August 10, 2000, the Company initiated an exchange offer with holders
(current and former employees and consultants) of certain classes of options
issued under the Company's existing option plans, which was completed on
August 31, 2000. In aggregate, the Company exchanged up to 404,107 new
options, exercisable at $2.00 per share until December 31, 2002 and canceled
775,772 existing options with various exercise prices between $3.60 to $13.50
and expiration dates from October 31, 2000 to June 30, 2003.
On August 28, 2000, the Company entered into a lease agreement for office
facilities in New York City. The term of the lease is eleven years and the
aggregate cost is approximately $2.8 million. The Company also entered into a
sublease for a potion of the facilities with an unrelated party for an
aggregate rent of approximately $576,000 over the eleven-month term.
10. Segment Information
The Company operates in two business segments as follows:
Systems: The Company designs, markets, installs and manages waste, wastewater
and storm water systems, primarily in the agricultural and food processing
industries.
Soil: The Company produces and markets BionSoil products such as organic
fertilizers, potting soils and soil amendments which are produced from the
nutrient rich Bion Solids harvested from certain types of agricultural systems
installed on large dairy and hog farms.
F-33
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's reportable operating segments have been determined in accordance
with the Company's internal management structure, which is organized based on
operating activities. The accounting policies of the operating segments are
the same as those described in the summary of accounting policies. The Company
evaluates performance based upon several factors, of which the primary
financial measure is segment operating income.
Year Ended June 30, 2000 1999
------------ -----------
Revenues:
Soil $ 135,945 $ 140,423
Systems 22,500 79,696
------------ -----------
$ 158,445 $ 220,119
============ ===========
Operating Income (Loss):
Soil $ (3,017,623) $ (900,580)
Systems (3,591,619) (2,629,957)
------------ -----------
$ (6,609,242) $(3,530,537)
============ ===========
Depreciation and amortization:
Soil $ 49,024 $ 49,815
Systems 11,895 7,790
------------ -----------
$ 60,919 $ 57,605
============ ===========
Expenditures for additions and
long-lived assets:
Soil $ 95,379 $ 6,979
Systems - -
------------ -----------
$ 95,379 $ 6,979
============ ===========
F-34
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Fourth Quarter Adjustments
The Company recorded in the fourth quarter certain adjustments relative to
non-cash interest expense related to the valuations of detachable warrants
issued with certain promissory notes payable and the beneficial conversion
feature of certain related party notes payable amounting to $1.6 million,
non-cash miscellaneous expense related to the excess of the valuation of
warrants purchased over the purchase consideration received by the Company
amounting to $1.5 million and non-cash consulting expense related to the
valuation of warrants issued for consulting services amounting to $533,000.
Of the aggregate amount, approximately $180,000, $2.4 million and $396,000
relate to the first, second and third quarters, respectively. The Company will
file an amended Form 10-QSB for the quarters ended September 30, 1999,
December 31, 1999 and March 31, 2000.
The following summarizes the effect of the changes on earnings (loss) per
share as previously reported:
Previously Reported Restated
------------------- --------
Three months ended
September 30, 1999 $(.12) $(.13)
Three months ended
December 31, 1999 (.09) (.32)
Six months ended
December 31, 1999 (.12) (.46)
Three months ended
March 31, 2000 (.11) (.14)
Nine months ended
March 31, 2000 (.32) (.60)
F-35
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 27, 2000 By: /s/ Jon Northrop
---------------------------------
Jon Northrop
Executive Vice President
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 September 27, 2000
------------------------------
Mark A. Smith, Chairman,
Secretary & Director
/s/ David J. Mitchell September 27, 2000
------------------------------
David J. Mitchell,
Chief Executive Officer
President & Director
/s/ Jon Northrop September 27, 2000
------------------------------
Jon Northrop, Executive
Vice President, Chief
Financial Officer,
Treasurer, & Director
/s/ Jere Northrop September 27, 2000
------------------------------
Jere Northrop, Director
/s/ Ronald G. Cullis September 27, 2000
------------------------------
Ronald G. Cullis, Director
/s/ Salvatore J. Zizza September 27, 2000
------------------------------
Salvatore J. Zizza, Director
/s/ Andrew G. Gould September 27, 2000
------------------------------
Andrew G. Gould, Director
