UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
AMENDMENT NO. 1
[x] Annual report pursuant to Section 13 or 15 (d) of the Securities Exchange
Act of 1934 for the fiscal year ended June 30, 2002
OR
[ ] Transition report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the transition period from ____ to ____
Commission File No. 000-19333
BION ENVIRONMENTAL TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Colorado 84-1176672
(State of incorporation ) (I.R.S. Employer Identification Number)
18 E. 50th Street, 10th Floor
New York, New York 10022
(Address of principal executive offices, including zip code)
(212) 758-6622
(Registrants telephone number, including area code)
Securities registered under Section 12(b) and or 12(g) of the Exchange Act:
Common Stock, no par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [x] No [ ]
Indicate by check mark if there is no disclosure of delinquent filers pursuant
to Item 405 of Regulation S-B contained herein, and will not be contained, to
the best of the issuer'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. [ ]
State issuer's revenues for its most recent fiscal year: $69,382
As of September 24, 2002 the issuer had outstanding 5,307,395 shares of common
stock. This includes 1,900,000 shares held by a majority-owned subsidiary of
the registrant.
The aggregate market value of the Common Stock held by nonaffiliates as of
September 24, 2002 was approximately $1,832,637 based on a closing price for
the Common Stock of $3.00 on the OTC Electronic Bulletin Board on such date.
BION ENVIRONMENTAL TECHNOLOGIES, INC.
ANNUAL REPORT ON FORM 10-KSB
TABLE OF CONTENTS
PART I 3
Item 1. Description of Business 3
Item 2. Description of Properties 16
Item 3. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of Security Holders 17
PART II 18
Item 5. Market for Bion Environmental Technologies, Inc.'s
Common Equity and Related Stockholder Matters 18
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations 20
Item 7. Financial Statements 27
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 27
PART III 27
Item 9. Directors and Executive Officers of Bion
Environmental Technologies, Inc 27
Item 10. Executive Compensation 31
Item 11. Security Ownership of Certain Beneficial Owners and
Management 34
Item 12. Certain Relationships and Related Transactions 36
PART IV 42
Item 13. Exhibits and Reports on Form 8-K 42
2
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, as amended (the "Securities Act") and section 21E
of the Securities Exchange Act of 1934, as amended. 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 some 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 o f 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
Overview
Bion Environmental Technologies, Inc. provides waste management solutions
to the agricultural industry, focusing on livestock waste from confined animal
feeding operations ("CAFOs"), such as large dairy and hog farms. We are
currently engaged in two main areas of activity:
* waste stream remediation and reduction of atmospheric emissions and
* organic soil and fertilizer production.
Our waste remediation and reduction of atmospheric emissions service
business provides CAFOs (primarily in the swine and dairy industries) with
treatment for the animal waste outputs. In this regard, we microbiologically
treat their entire waste stream reducing air emissions and nutrient
discharges, while creating value-added organic soil and fertilizer products.
Bion's soil and fertilizer products are being used for a variety of
topdressing applications including school athletic fields, golf courses and
home and garden applications.
Currently, the majority of CAFOs dispose of their animal waste by
spreading it on cropland. In some parts of the United States, such as east of
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the Mississippi River, CAFOs are severely restricted as to size due to the
amount of land that is required for CAFOs to dispose of the animal waste at an
environmentally sustainable rate. As a result, CAFOs are enormous polluters
of our air, water and land. CAFOs are under pressure from state and federal
regulatory agencies, the media, environmental groups and the public to reduce
their role as a major source of excess nutrient pollution and harmful air
emissions. Although nutrient pollution from CAFOs has gone largely
unregulated in the past, they are now subject to stringent regulation under
the Federal Clean Water Act and are required to become zero-discharge
facilities. Air emissions from these operations are being evaluated for
potential regulation under the Federal Clean Air Act. The livestock industry
and regulatory agencies are searching for affordable waste treatment solutions
to this widespread and immediate problem.
Corporate Background
The Company is a Colorado corporation organized on December 31, 1987. Our
principal executive offices are located at 18 East 50th Street, 10th Floor,
New York, New York 10022. Our telephone number at that address is (212)
758-6622. Additional offices exist in western New York and North Carolina.
References in this Form 10-KSB to the "Company", "Bion" , "we" or "us" mean
Bion Environmental Technologies, Inc., and its subsidiaries on a consolidated
basis, unless the context otherwise requires.
Development of our Business
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. Bion is also the parent of Dairy Parks, LLC
(a Delaware entity organized July 25, 2001). In January 2002, Bion entered
into a series of transactions, whereby the Company became a 57.7% owner of
Centerpoint Corporation (a Delaware corporation organized August 9, 1995)
("Centerpoint").
We have been conducting business since 1989. Our original systems were
wastewater treatment systems for dairy farms and food processing plants. The
basic design was modified in late 1994 to create Nutrient Management Systems
(NMS) that produce organic soil products as a by-product of remediation of the
waste stream when installed on large dairy or swine farms. Through June 2000,
we sold and subsequently installed, in the aggregate, 32 of these first
generation NMS systems in 7 states, of which 19 are still in operation through
June 30, 2002. Of these 19 systems, 12 are first generation Bion NMS soil
production system installations and 7 are waste only systems. Since June 30,
2000 we have not installed any new NMS systems since our concentration has
been on research and the development of our second generation system.
As a result of our research and development efforts during the last three
years, the second generation of our technology has been developed. We have
designed and tested NMS systems that use state-of-the-art, computerized,
real-time monitoring and system control that can be remotely accessed for both
reporting requirements and control functions. These systems are smaller,
faster and require less capital per animal than our first generation NMS
systems. The new generation of NMS system is designed to harvest solids used
to produce our BionSoil(R) and Bion Fertilizer products in a few weeks as
compared to six to twelve months with our first generation systems.
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The first phase of this research and development, which was conducted
during the summer and fall of 2000 at DreamMaker Dairy, our research facility
located outside Buffalo, New York, accelerated the speed of the Bion process
in a NMS which was substantially less than 20% of the size of a comparable
first generation system.
We began the second phase during the winter of 2000-2001, based on the
faster, smaller system, we placed the NMS into a configuration of enclosed
tanks that fully contained the process. This configuration allows control and
monitoring of the entire system from all inputs through all outputs. This
closed tank system gave us the ability to perform complete mass balance
calculations (measuring all inputs of the animal waste stream and all outputs
from the system, including nitrogen and phosphorus, which are the two elements
of most critical concern from a nutrient and water pollution control
standpoint, and hydrogen sulfiide and ammonia, which are two of the main
compounds of critical concern from an air pollution control standpoint) on the
system to produce the scientific/technical data necessary to demonstrate
definitively the performance of our NMS technology. Essentially, the tank
configuration enabled our technical staff to convert the outputs of CAFO waste
streams to a point-source equivalent for mass balance analysis. As we
announced in September 2001, initial results of the mass balance calculations
demonstrate that phosphorus and nitrogen removals from the total waste stream
approximated 80%. Additionally, measurements on the primary odor producing
compounds indicate levels low enough to essentially eliminate odor problems
associated with CAFO waste handling.
In January 2002, we announced that we completed development and testing
of the fully contained Bion NMS prototype at Dreammaker Dairy in upstate New
York. The goals of the initiative were to:
* Increase the efficiencies of the first generation system;
* Convert the core Bion NMS technology into a platform-based system
that is readily integrated with complementary technologies; and
* Develop a computerized monitoring and control system, capable of
precise measurements and adjustments and remote reporting.
We intend to continue to undertake further NMS research and development
that will be focused on:
* System acceleration in order to further increase capacity and
lower costs;
* Integration of the Bion NMS with complementary technologies such
as a methane digestion system and water cleaning technologies to
enhance the performance of the system (Phase Three development);
and
* Finalization of commercial designs for application in our second
generation NMS.
We also have an ongoing research program related to our BionSoil(R) and
Bion Fertilizer product lines. This research and development includes work
related to harvesting and processing, blending of specialty product mixes for
specific market segments and tests of the effectiveness of BionSoil(R) and
Bion Fertilizer blends in a number of plants in a variety of growing
environments.
5
Acquisition of Centerpoint
On January 15, 2002, we issued 1,900,000 shares of our restricted common
stock to Centerpoint in a transaction that to us was essentially structured as
a financing. At the time this transaction occurred, Centerpoint was not
current in its filings with the Securities and Exchange Commission and had not
been current since it had ceased business activities when it sold its Moto
Guzzi motorcycle business two years earlier, leaving Centerpoint with
approximately $8.5 million in cash. Since the sale of its motorcycle business
Centerpoint had been seeking an investment opportunity for the cash it had
received from the sale. The 1,900,000 shares acquired by Centerpoint in its
transaction with us represented approximately 36.2% of our issued and
outstanding shares. In exchange for our shares, we received approximately
$8.5 million in cash and were assigned certain claims and other rights that
were owned by Centerpoint.
The transaction was negotiated by us with Centerpoint's Italian parent,
OAM, S.p.A. ("OAM"). As a condition to our obtaining financing from
Centerpoint through the sale of our shares to Centerpoint, OAM required us to
purchase its 57.7% majority ownership interest in Centerpoint immediately upon
consummation of the transaction with Centerpoint by issuing 100,000 of our
shares to OAM together with a warrant to purchase an additional 100,000 shares
that was valued by us at $380,000 using the Black-Scholes pricing model,
paying OAM $3.7 million of the $8.5 million in cash that we received from
Centerpoint and reassigning to OAM all of the other assets that we obtained
from Centerpoint which consisted of a loan receivable valued at by us at
$3,263,000 and rights under Centerpoint's claims receivable that we acquired
from Centerpoint and were valued by us at $2,487,000. Through our transaction
with OAM, we acquired beneficial ownership of 3,459,997 Centerpoint shares and
a warrant to purchase an additional 1,000,000 shares.
As a net result of these two transactions, we obtained a net of $4.8
million in cash and ownership of a majority of Centerpoint's issued and
outstanding shares. The net proceeds from the Centerpoint and OAM
transactions are currently being used to fund our continuing operations.
Centerpoint is now current in its filings with the Securities and
Exchange Commission. On August 12, 2002, we filed a registration statement to
allow Centerpoint to distribute to its stockholders the 1,900,000 shares that
we issued to Centerpoint in connection with the financing. We expect the
distribution to occur during the second half of calendar 2002. When that
distribution occurs, approximately 1.1 million of our shares will be
distributed back to us and cancelled. After we cancel these shares, the two
transactions will have resulted in a net increase of approximately nine
hundred thousand of our issued and outstanding shares, which includes the one
hundred thousand shares issued by us to OAM as partial consideration for our
obtaining control of Centerpoint.
Other than seeking an investment opportunity, Centerpoint has been
inactive since August 2000. After giving effect to our January 15, 2002
transaction, Centerpoint's primary asset is 1,900,000 shares of our common
stock. Centerpoint currently has only minimal cash, no other significant
assets and no business operations. Centerpoint, however, continues to hold
35% of the rights to a litigation claim and an escrow account which are
carried on Centerpoint's books at no value.
After the distribution of the 1,900,000 Bion shares currently owned by
Centerpoint, Centerpoint will no longer be one of our shareholders. Subject
6
to the completion of an analysis of the income tax ramifications to our
shareholders and other corporate considerations, we currently intend to file a
registration statement that would allow us to distribute to our shareholders
all of the Centerpoint shares that are currently owned by us and we would then
also cease to be a stockholder of Centerpoint. If a distribution of the
Centerpoint stock occurs as anticipated, all of our current shareholders and
those of Centerpoint, including OAM, would then receive a pro rata
distribution of the Centerpoint shares that we currently own. Centerpoint
itself, however, would not receive any of these shares because it would no
longer be one of our shareholders when this distribution occurs. Another
option that is also currently under consideration by us , however, is to sell
our interest in Centerpoint either before or after the distribution of Bion
stock occurs since we do not currently have a business need to own a majority
interest in Centerpoint. In the event that some or all of our interest in
Centerpoint is sold before such a distribution occurs, then the number of Bion
shares that would be returned to us for cancellation would be reduced or
eliminated accordingly.
We may be required to issue additional shares to Centerpoint and OAM at
no cost if we raise equity at a price less than $7.50 per share before we
obtain at least $5 million in cumulative investment from unaffiliated third
parties. The number of additional shares to be issued would be determined by
calculating the additional number of shares that Centerpoint and OAM would
have received if the transactions with Centerpoint and OAM had been
consummated at the same price per share as the subsequent equity financing.
The Centerpoint transaction triggered the conversion of $14,256,779 of
notes payable, including interest, into 1,900,911 shares of our common stock.
In addition, warrants to purchase 213,263 shares of our common stock had their
exercise price decreased to $7.50 and $6.00. As described above, if we raise
equity at a price less than $7.50 per share, we may need to issue additional
shares to the note holders as if the notes had been converted into shares of
our common stock at the price per share of the subsequent equity financing.
In addition, the exercise prices for 17,596 warrants may be decreased to the
price per share of the subsequent equity financing and the exercise prices for
195,174 warrants may be decreased to 80% of the price per share of the
subsequent equity financing. Also, in the event of a subsequent equity
financing below $7.50, additional warrants would be required to be issued on
1,037,343 warrants currently outstanding to increase these warrants to reflect
20% of the fully diluted shares outstanding as of January 15, 2002, after
giving effect to the above adjustments. These warrants would also have their
exercise price lowered to the price per share of the subsequent equity
financing.
In March 2002, the Company and Centerpoint entered in an agreement
effective January 15, 2002 whereby Centerpoint agreed to pay the Company
$12,000 a month and issued a warrant to purchase 1,000,000 shares of
Centerpoint's common stock at $3.00 per share exercisable until March 14, 2007
for management services, support staff and office space. In addition, the
Company agreed to advance to Centerpoint funds needed to cure its
delinquencies with the SEC, distribute the Company's common shares to
Centerpoint shareholders, to locate and acquire new business opportunities and
for on-going expenses. The Company has no obligation to make any advances in
excess of $500,000. All funds due the Company are evidenced by a convertible
revolving promissory note, which bears interest at 1% per month, payable with
accrued interest on March 15, 2003. This date may be extended by agreement
between the Company and Centerpoint. The Company shall have the right to
convert, at any time, all or a portion of the amount due under the promissory
note in shares of Centerpoint's common stock at a conversion price of $3.00
per share. As of June 30, 2002 the Company had advanced Centerpoint $186,257.
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Centerpoint had owned the Moto Guzzi motorcycle business, which it sold
in August 2000. Since that time it had been seeking an investment opportunity
for the cash it received from the sale. Other than seeking an investment
opportunity, Centerpoint has been inactive since the time of the sale of Moto
Guzzi. Once all or a substantial portion of Bion's shares of common stock are
distributed to the Centerpoint stockholders, Centerpoint will have only
nominal assets and will effectively be a publicly-held shell corporation.
Centerpoint's Board of Directors will evaluate what, if any, business
opportunities are available to Centerpoint, following such distribution.
Reverse Stock Split
On July 8, 2002, the Company completed a 1 for 10 reverse stock split
(the "stock split"). The stock split has been retroactively reflected in the
Company's consolidated balance sheet and consolidated statement of operations,
consolidated statements of changes in stockholders equity, notes to
consolidated financial statements and to all references to share and per share
amounts, except as noted.
Recent Developments
In July 2002, we entered into a non-binding agreement to form a joint
venture with Dr. Michael J. McCloskey and Timothy C. den Dulk with our
subsidiary, Dairy Parks, LLC, to develop, own and operate a number of large
dairy facilities. We anticipate that two to four complexes, ranging in size
from 10,000 to 50,000 animals, will be developed by the joint venture over the
next three years. The complexes will be turnkey, state-of-the-art facilities
and will be made available to dairy producers under terms of a 10-year,
triple-net lease. We will provide the technology for waste management, secure
financing for the facilities, develop the financial lease terms and provide
independent management. The primary responsibilities of the McCloskey/den Dulk
partnership will be site selection and development, negotiation of lease
terms, recruitment of tenants, and management of the facilities.
This Form 10-KSB refers to the collective operations and consolidated
financial statements of Bion and its subsidiaries.
Principal Products and Services
Bion has been redesigning the Bion NMS over the past three fiscal years
resulting in the second generation NMS, As a result, the Company ceased
selling the first generation NMS systems. The Company's soil and fertilizer
products are derived from the NMS process and as a result of limited sales of
the systems developed limited soil for resale.
Revenues derived over the last three fiscal years by product were as
follows:
For the year ended June 30,
---------------------------------------------------------
2002 2001 2000
---------------------------------------------------------
Soil $69,382 100% $74,322 88% $135,945 86%
Systems - - 10,000 12% 22,500 14%
---------------------------------------------------------
$69,382 100% $84,322 100% $158,445 100%
=========================================================
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NMS
We believe our NMS solution addresses the needs of CAFOs by providing, in
one system:
* An economically viable,
* A regulatory compliant, and
* An environmentally sound solution.
The second generation NMS uses patented biological processes to achieve
substantial and certifiable reductions of nutrients and air emissions from
CAFOs. These second generation systems incorporate computerized monitoring
and control equipment that identifies air & nutrient emissions, documents the
emission reductions by maintaining set point process control parameters and
reports the results remotely. The NMS rebalances the nutrient levels at the
farm site by both reducing excess nutrient loading in the effluent stream and
by removing a significant amount (80% or more) of the nutrients from the farm
through sale as commercially-desirable, environmentally-friendly BionSoil(R)
and BionFertilizer organic products. In addition, the NMS reduces odors,
atmospheric emissions, greenhouse gas and precursors to greenhouse gas
emissions by 95% or better. The Bion second generation platform also enables
additional technologies, such as anaerobic digestion to produce energy, to be
effectively implemented and the resulting products can be sold back to the
CAFO.
The Bion NMS offers a comprehensive solution that allows Bion to serve as
a utility for CAFO facilities by incorporating solids removal, waste and water
treatment, and energy production into a single integrated system. The various
benefits provided by the systems afford Bion the opportunity for multiple
revenue streams, which include waste management fees per animal, sales from
BionSoil(R) and Fertilizer products, energy and water production, as well as
environmental credits.
BionSoil(R) and Bion Fertilizer Products
Bion's NMS produces two commercial products: BionSoil(R) and Bion
Fertilizer. Both are performance-proven fertility products. They supply
slow-release nutrients and high-quality organic matter in a consistent, stable
form, free from offensive odors, toxic substances and pathogens. Both
products enhance the physical, biological and chemical properties of the soil,
which results in improved plant growth and health, compared to conventional
fertility practices. This has been demonstrated in numerous applications in
university and commercial trials. The two products address specific but
different plant health needs, thereby providing Bion the opportunity to garner
a large market share of the high value turf and garden sector. We believe
that both products can be economically transported and will be produced in
quantities sufficient for national distribution.
BionSoil(R), a dark, peat-like material, with its high organic matter
content, is specifically applicable to the rebuilding of soil texture and
reestablishment or enhancement of beneficial soil microbial populations while
providing plants with nutrients in a non-leachable form. These properties,
crucial to sustainable plant growth, are typically destroyed by the
dehydrative effects of a synthetic fertilizer diet or through common
construction practices. While many agriculture and turf sectors are plagued by
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this problem, athletic fields, in particular, present a tremendous opportunity
because BionSoil(R) product's topdress blend meets the exacting specifications
written by turf experts to remedy this problem.
Marketing and Distribution
NMS
Our NMS marketing plan for the next year involves marketing our services
and technology to the swine and dairy industries based on the benefits which
the second generation NMS can provide to those industries. Our program will
emphasize, in addition to environmental compliance, the potential improvement
of the economics of their operations attainable through the installation of a
Bion NMS, including larger herd size, less land area devoted to waste
disposal, reduction of the risks of environmental problems, and the positive
perception of regulatory agencies and the public of their involvement in
environmental protection. Bion's primary marketing will be directed to
potential users who are either seeking to expand their existing operations or
build new installations.
Bion has begun marketing various upgrade capabilities from its second
generation system to its existing base of installations. The nutrient
management capabilities of this new generation of systems will help break one
of the major barriers facing those portions of the dairy and protein growing
businesses in the U.S. which desire to expand. Our second generation system
will allow them to meet ever stricter environmental standards for larger farms
and raise more animals on less land while meeting or exceeding all
requirements to protect the environment.
On March 1, 2002, we announced we signed a Letter of Intent with Fair
Oaks Dairy, located in Fair Oaks, Indiana. The Letter of Intent calls for
Bion to install, own and operate our second generation Bion NMS for a term of
twenty years. The Letter of Intent calls for the system to be built and
operated to provide waste treatment for a 3,500-head dairy facility. The
Letter of Intent calls for an annual fee to be paid to Bion for the technology
license and operating and materials. The Letter of Intent is subject to a
number of terms and conditions including final documentation. The Fair Oaks
installation will incorporate methane digestion to produce energy to be used
in our NMS technology platform. This energy is produced in the form of methane
gas, which can either be combusted, to produce heat energy, or converted into
electricity, or both. We are currently working towards a final agreement with
Fair Oaks Dairy that should be executed in the second quarter of the 2003
fiscal year.
In fiscal year 2003, we plan on building three or four regional testing
facilities partially funded through cost-sharing. The purpose of these
facilities is to document and publish by independent investigators such as
state land grant universities air and nutrient emission data related to the
Bion NMS versus existing industry baseline standards.
BionSoil(R) and Bion Fertilizer Products
BionSoil(R) and Bion Fertilizers are 100% natural, odorless products that
have a history of excellent growing results. Our patented technology allows
us to manufacture a soil and fertilizer product line which acts as a natural
time-released growth agent (with low leaching, bound nitrogen and phosphorus
which potentially maintain a 95% WIN (water insoluble nitrogen)) ratio. Our
marketing efforts will be based primarily on these product attributes.
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In the past year, our primary marketing activities have been in the turf
grass industry in the Northeastern United States. We have marketed primarily
to schools and municipalities where a chemical free turf grass environment has
increased importance. Our marketing plan for the next year involves further
development of the turf grass market combined with landscaping, organic farms
and golf courses.
Bion is actively seeking strategic alliances with partners already in the
soil, soil amendment, fertilizer and related industries in order to establish
entry into existing business and consumer distribution channels.
Dairy Parks, LLC
We have entered into a non-binding agreement to form a joint venture with
Dr. Michael J. McCloskey and Timothy C. den Dulk with our subsidiary, Dairy
Parks, LLC. We intend that the joint venture will design and build
large-scale, turnkey dairy facilities that would be leased to the dairy
producers of CAFOs. These facilities would range from 10,000-50,000 cows,
with integrated facilities having a larger minimum threshold. The facilities
would include all required physical structures (barns, milking parlors, feed
bins, etc), as well as a Bion NMS, that would be responsible for waste
remediation and disposal. The dairy operator would provide the animals and
working capital. A significant hurdle to completing the arrangement is
securing the necessary financing for the construction of these facilities.
Both parties to the joint venture are presently making presentations to
possible financing sources. However, there is no assurance that the parties
will be able to secure the necessary financing or that the joint venture will
be formed or will be able to accomplish its goals.
We believe that leasing compared to owning a dairy becomes an attractive
alternative to dairy producers of CAFOs since an initial investment in land is
not needed and the dairy is equipped with an environmental solution for animal
waste.
Management believes that because of the size of such dairy facilities,
the ability to create vertically integrated operations that can be
independent, yet economically interdependent, may become very attractive
business opportunities. We may be able to develop potential partnership
agreements with:
* utilities to provide the utility with standby peak period power;
* ethanol processing facilities that may locate within the site
footprint that would utilize specific air credits to offset its
emissions and utilize excess methane produced by the NMS for its
energy needs, while providing feedstock as a byproduct of the
ethanol production;
* cooperative milk bottling/processing and cheese facilities
locating within the site footprint to reduce transportation costs
as well as potentially reduce waste remediation costs.
These large-scale dairy facilities would need inputs that could be
provided by the local farming base and could provide long-term stabilization
to that farm community.
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In addition, management believes that a potential source of future
revenues will be generated from the sale of Environmental Reduction Credits
(ERCs) related to the ability of the Bion NMS to significantly reduce the air
emissions as well as the nutrient discharges in the effluent stream associated
with CAFOs. Bion's NMS trials at Dreamaker Dairy demonstrated a reduction of
air emissions in excess of 95% and of nutrients in excess of 80%.
A pollution credit trading system allows pollution sources that have the
ability to reduce their pollution beyond regulatory requirements, to sell the
excess reduction to another source within the same geographic area (as
designated by EPA and/or state regulatory authority). The purchaser of the
ERCs can in turn use the credit to comply with its own particular emissions or
discharge standard. Thus, an emission source with high control costs can
purchase an ERC from a source with a lower cost, providing economic benefits
to both while achieving the desired overall air or water quality standards.
ERCs can be generated by either a voluntary reduction of emissions or early
compliance with future emission reduction requirements.
The NMS quantifies the reductions in real time with its control and
monitoring system. The quantification of pollution reductions is a critical
component for obtaining credits. With the ability to provide substantial,
quantifiable and verifiable reductions in these emissions, we believe we have
the unique potential to provide substantial environmental benefits while
reaping the economic benefit from being a significant source of credits.
The Bion NMS System does not currently qualify for ERCs. We have taken
the first step to become eligible for ERCs by entering into an agreement with
the Agricultural Foundation of California State University, Fresno ("Fresno").
Under this agreement, we will install a NMS system. Fresno will perform
research and issue a report at the end of the research period in 2003. This
report will be used to establish that the emission reductions are real and
quantifiable. Other criteria that need to be met are that air emission
reductions are permanent (by entering into a long-term contract with a
regulatory authority), surplus (emission reductions are in excess of those
required by laws), enforceable (open to inspection by an air district or other
regulatory authority), not used as offsets for the approval of any other
project, based on a timely submittal of application, and included in emissions
inventory (identified in a state implementation plan).
The unresolved major hurdles to enable credits from a Bion NMS to be
traded deal with the issues of a quantifiable baseline and the designation of
a responsible party since CAFOs are presently a non-point source. These as
well as other major agricultural policy issues are presently under discussion
by the Air Quality Task Force (AQTF), which is a joint EPA/USDA committee that
deals with agricultural air emissions issues. The AQTF has adopted a policy,
which endorses the trading of ERCs from agricultural sources, but to date no
specific regulations enabling trading have been adopted, and there is no
assurance that any regulations will ever be adopted.
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 CAFO 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
12
quality issues and are facing possible phase-out in some states such as North
Carolina. 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, methane digesters,
multistage anaerobic lagoons and solids separators. Additionally, many
efforts are underway to develop and test new technologies, including the
program under the supervision of North Carolina State University in which Bion
is a participant.
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.
We believe that our competitive advantage is that we offer a superior
service and technology with our NMS solution and that we offer a superior line
of products with our BionSoil(R) and Bion Fertilizer products.
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 Bion
Fertilizer products. Note, however, that the CAFO industries have been
undergoing substantial concentration in recent years. While the dairy
industry is not very consolidated, a relatively small number of companies
dominate the swine, poultry and feedlot CAFO industries. At some future point
we could become dependent on one or a few major customers in one or more CAFO
segments.
Commercial BionSoil(R) and Bion Fertilizer sales have only recently begun
and, at present, we have no dependence on one or a few major customers.
Patents
We are the sole owner of six United States patents and one Canadian
patent:
* U.S. Patent No. 5,078,882, Bioconversion Reactor and System,
expires January 2009.
* U.S. Patent No. 5,472,472, Animal Waste Bioconversion System,
expires December 2012.
* U.S. Patent No. 5,538,529, Bioconverted Nutrient Rich Humus,
expires July 2013.
* U.S. Patent No. 5,755,852, Bioconverted Nutrient Rich Humus,
expires May 2015.
* U.S. Patent No. 4,721,569, Phosphorus Treatment Process, expires
January 2005.
13
* U.S. Patent No. 5,626,644, Storm Water Remediatory Bioconversion
System, expires May 2014.
* Canadian Patent No. 1,336,623, Aqueous Stream Treatment Process,
expires August 2012.
We are also the exclusive U.S. licensee of the following patent from
BioBalance A/S of Denmark for the life of the patent for use in the field of
agricultural applications for treating/converting animal waste into soil-like
products with a content of nutrients and organic matter:
* U.S. Patent No. 5,906,746, Method for the Control of
Biodegradation.
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. In November 2000, we filed a patent application which is directed
to new features of the Bion process and extends the range of Bion's
intellectual property position. It is likely that we will file applications
for additional patents in the future. There is, however, no assurance that any
such patents will be granted.
It may become necessary or desirable in the future for us to obtain
additional patent and technology licenses from other companies relating to
technologies 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.
Research and Development
We incurred research and development expenses of $735,622 and $1,262,010
for the years ended June 30, 2002 and 2001, respectively. As a result of
limited sales of our soil and systems, the cost of our research and
development activities has been borne by us using funds raised from external
sources for operations.
NMS
During the year ended June 30, 2002, we spent approximately $487,000 on
undertaking further NMS research and development which was focused on: 1)
system acceleration in order to further increase capacity and lower costs; 2)
integration of the Bion NMS with a methane digestion system in order to create
additional revenue streams from the sale of electricity and natural gas and to
take advantage of energy generated for heat utilization; and 3) finalization
of commercial designs for application in our second generation NMS.
Additional research is being focused on water cleaning technologies as an
integrated enhancement to the Bion NMS in order to make available clean
process water as an additional product from the system.
During the year ended June 30, 2001, we spent approximately $947,000 on
research and development activities including, without limitation, system
design, testing, consulting fees and installation expenses related to reducing
the physical size of the system by implementing a higher rate biological
14
process. These second generation closed tank systems are utilizing
state-of-the-art, computerized, real-time monitoring and system control that
can be remotely accessed for both reporting requirements and control
functions.
NMS development is expected to run through fiscal year 2003 with research
and development costs currently estimated at $1,000,000, which budget could be
expanded substantially. In fiscal year 2003, we plan on building three to
four regional testing facilities partially funded through cost-sharing with
universities or other entities that desire to participate in such research.
The purpose of these facilities would be to document and publish by
independent investigators such as state land grant universities air and
nutrient emission data related to the Bion NMS versus existing industry
baseline standards.
These published reports would document not only the emission results of
the Bion NMS but would also correlate those results to a set of interrelated
specific operating parameters so that large scale field installations can then
demonstrate regulatory compliance by reporting operating parameters rather
than having to constantly test emissions using independent laboratories. This
process control model will also be used to qualify for the ongoing compliance
requirements of any ERC sales.
These published results by land grant universities and other independent
certified investigators could then be adopted by various state and federal
agencies to create new emission standards for air and nutrients. The adoption
of these standards could occur in numerous ways such as by local communities
in their permitting process for either new installations or renewals or by a
federal funding agency in grant qualification such as the USDA (United States
Department of Agricutlture) EQIP (Environmental Quality Incentive Program).
BionSoil(R) and Bion Fertilizer Products
During the year ended June 30, 2002, we expended approximately $249,000
in research and development for trials and tests of our BionSoil(R) and Bion
Fertilizer products with the focus shifting from testing pure BionSoil(R) and
Bion Fertilizer to evaluation of blends incorporating the Bion products. The
Bion products are being tested on a blended basis in the turf grass market,
high value fruit crops (such as wine grapes), potting mix market for both
consumers and the container nursery market and the greenhouse vegetable
market. These blended Bion products are being tested primarily for their
growth capabilities and disease suppression capabilities.
Bion conducted over twenty clinical trials during fiscal 2001, in-house
and by various academic, industry and professional organizations at a direct
cost to us of approximately $315,000 in the year ended June 30, 2001. We have
been testing the BionSoil(R) and Bion Fertilizer products in order to analyze
the effectiveness of the product on a number of crops in a variety of
different growing environments, and to measure the success of nutrient release
and limited leaching qualities.
These activities will continue in fiscal 2003, and future years, provided
funds are available, and our preliminary estimated budget amount is $300,000,
which budget could be expanded substantially.
On December 12, 2001, we entered into an agreement with The Scotts
Company ("Scotts") under which we agreed to give Scotts an exclusive right to
evaluate our technologies in the worldwide consumer lawns and gardens markets
for a period of twelve months. During this period, Scotts will conduct
15
efficacy testing; research and development and/or consumer research on our
technologies, and if the testing and research are satisfactory to Scotts, will
work with Bion to develop a business plan for selling products using our
technologies in the referenced markets.
Environmental Protection/Regulation
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 treatment and are impacted by
environmental regulations in at least three different ways:
* 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;
* 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
* Our system installations and operations require governmental
permit 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 sale
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.
Employees
As of September 24, 2002, we had 21 employees, all 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 Properties
Our executive offices are located at 18 E. 50th Street, 10th Floor, New
York, New York 10022 under a lease that expires on August 28, 2011 and
provides for annual base rents of approximately $265,000. The lease covers
approximately 5,700 square feet. The Company sublets part of the leased
premises under a sublease that expires on August 27, 2005 and provides for
annual base rents of approximately $50,000.
We have additional offices at 8899 Main Street, Williamsville, New York
14221 under a lease that expires on November 30, 2004 and provides for annual
base rents of approximately $18,600 and covers approximately 1,800 square
16
feet; and 138 Uzzle Industrial Drive, Clayton, North Carolina 27520 under a
lease that expires June 30, 2003 and provides for annual base rents of
approximately $15,000 and covers approximately 4 acres and an office building
of approximately 2,350 square feet. We also rent a BionSoil(R) processing
site located at 90 Washington Boulevard, Perry, New York 14530. 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. We believe that, under our current operations,
the facilities are adequate.
Item 3. Legal Proceedings
On July 22, 2002, Thomas Keith Barefoot ("Barefoot"), doing business as
Quin Deca Farm ("Quin Deca"), an unaffiliated party, filed a complaint against
the Company in the Superior Court of the County of Harnett in the State of
North Carolina regarding the Company's first generation Bion NMS on Quin Deca
Farm and the harvesting of BionSoil(R). The complaint includes breach of
contract claims asserting that the Company abandoned the NMS on Quin Deca Farm
and the failure of the Company to harvest BionSoil(R). The second claim is
for fraud regarding misrepresentation of the state of the technology of the
first generation NMS. The third claim is for unfair and deceptive trade
practices for misrepresentation of the state of the technology of the NMS.
The fourth claim is for negligent misrepresentation made by Bion in connection
with the work it performed and its suitability for the intended purpose. The
fifth claim is for equity/specific performance in that Bion left Quin Deca
with an economically and technically deficient waste management system that
cannot continue to be used without adequate and alternative methods of waste
removal. Quin Deca is seeking $30,000 in damages, $10,000 in punitive
damages, to have its damages trebled, reasonable attorney fees and principles
of equity
requiring Bion to install its second generation Bion NMS. Bion has not yet
filed an answer to the complaint. The Company believes it has adequate
defenses to defend this litigation and does not believe that the ultimate
resolution of this litigation will have a material adverse effect on the
Company, its operations or its financial condition.
On May 6, 2002, Arab Commerce Bank Ltd. ("ACB"), an unaffiliated party,
filed a complaint against the Company in the Supreme Court of the State of New
York regarding the $100,000 of the Company's convertible bridge notes
("Notes") that were issued to ACB in March of 2000. The complaint includes
breach of contract claims asserting that the Company owes ACB $265,400 plus
interest or $121,028 including interest based on its interpretation of the
terms of the Notes and subsequent amendments. Effective June 30, 2001, the
Company issued ACB 5,034 shares of common stock on conversion in full payment
of the Notes based on the Company's interpretation of the Notes, as amended.
The Company has filed an answer to the complaint denying liability and does
not believe that this litigation will have a material adverse effect on the
Company, its operations or its financial condition.
Item 4. Submission of Matters to a Vote of Security Holders
The 2002 Annual Meeting of the Stockholders of the Company was held on
April 4, 2002. For more information on the following proposals, reference is
made to the Company's proxy statement dated March 5, 2002. The following
items were voted upon and passed.
The stockholders elected the following directors to serve until the next
annual meeting, or until their successors have been elected:
17
Name Votes For Withheld
---- --------- --------
David Mitchell 1,940,345 2,969
Jere Northrop 1,940,345 2,969
Salvatore Zizza 1,940,345 2,969
Andrew J. Gould 1,940,345 2,969
Howard E. Chase 1,940,345 2,969
In addition the following items were voted on and passed:
The appointment of BDO Seidman LLC as the Company's independent public
accountants was ratified.
Votes For Votes Against Abstentions
--------- ------------- -----------
1,945,255 1,022 1,280
Approval of the Company's 2002 Incentive Plan was ratified.
Votes For Votes Against Abstentions Broker Non-Votes
--------- ------------- ----------- ----------------
1,575,339 20,570 1,661 420,243
Approval of the proposed 1 for 3.5 reverse split of the Company's common
stock was ratified.
Votes For Votes Against Abstentions
--------- ------------- -----------
1,905,092 41,626 839
A Special Meeting of Shareholders was held July 1, 2002. For more
information on the following proposal, reference is made to the Company's
proxy statement dated May 31, 2002. The following items were voted upon and
passed.
Abandonment of a previous approved 1 for 3.5 reverse split and the
approval of the proposed 1 for 10 reverse split of the Company's common stock
was ratified.
Votes For Votes Against Abstentions
--------- ------------- -----------
3,217,973 29,112 11,853
PART II
Item 5. Market for Bion Environmental Technologies, Inc. Common Equity and
Related Stockholder Matters
(a) 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.
18
Our common stock is quoted on the OTC Bulletin Board under the symbol
"BNET". The following quotations reflect inter-dealer prices, without retail
mark-up, markdown or commission and may not represent actual transactions.
Fiscal Year Ending June 30, 2002 2001
---- ----
High Low High Low
---- --- ---- ---
First Fiscal Quarter $ 20.10 $ 8.80 $ 26.90 $ 19.70
Second Fiscal Quarter $ 9.90 $ 7.00 $ 20.00 $ 8.50
Third Fiscal Quarter $ 17.00 $ 7.20 $ 14.40 $ 7.50
Fourth Fiscal Quarter $ 10.20 $ 5.00 $ 30.00 $ 8.80
On August 21, 2002 our common stock became listed on the Philadelphia
Stock Exchange under the ticker symbol "BNO."
(b) Holders
The number of holders of record of our common stock at September 24, 2002
was approximately 1,500. Many of our shares of common stock are held by
brokers and other institutions on behalf of stockholders, so we are unable to
estimate the number of stockholders represented by these record holders.
The transfer agent for our common stock is Corporate Stock Transfer,
Inc., 3200 Cherry Creek Drive South, Suite 430, Denver, Colorado 80209.
(c) Dividends
We have never paid any cash dividends on our common stock. Our board of
directors does not intend to declare any cash dividends in the foreseeable
future, but instead intends to retain earnings, if any, for use in our
business operations. 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 sales of unregistered securities
There were no sales of securities in the three-month period ended June
30, 2002 without registration under the Securities Act of 1933, as amended,
except as follows:
We issued 22,874 shares of restricted common stock to the Trust Under
Deferred Compensation Plan for D2CO, LLC for management fees for the quarter
ending June 30, 2002.
We issued 900 shares of restricted common stock to Hollandbrook Group LLC
for consulting services fees for the quarter ending June 30, 2002.
In connection with these issuances we relied on the exemption from
registration provided by Section 4(2) of the Securities Act of 1933, as
amended. The purchasers are sophisticated investors associated with Directors
of the Company and had access to complete information concerning the Company.
The certificates representing the Common Stock issued bear restrictive legends
concerning the transfer of the shares, and stop transfer orders have been
provided to our transfer agent.
19
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations
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, as amended (the "Securities Act") and section 21E
of the Securities Exchange Act of 1934, as amended. 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. 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.
The following discussion should be read in conjunction with our
consolidated financial statements and accompanying notes.
Overview
Bion Environmental Technologies, Inc. provides waste management solutions
to the agricultural industry, focusing on livestock waste from confined animal
feeding operations ("CAFOs"), such as large dairy and hog farms. We are
currently engaged in two main areas of activity:
* waste stream remediation and reduction of atmospheric emissions
and
* organic soil and fertilizer production.
Our waste remediation and reduction of atmospheric emissions service
business provides CAFOs (primarily in the swine and dairy industries) with
treatment for the animal waste outputs. In this regard, we microbiologically
treat their entire waste stream, reducing air emissions and nutrient
discharges, while creating value-added organic soil and fertilizer products.
Bion's soil and fertilizer products are being used for a variety of
topdressing applications including school athletic fields, golf courses and
home and garden applications.
20
Our Nutrient Management System (NMS) is a patented biological and
engineering process that treats water, nutrient and air pollution associated
with animal waste. The system also provides a use for the waste materials and
solids by biologically converting them into environmentally friendly,
time-release organic-based solids that are the basis of our organic soil and
fertilizer business segment. Our BionSoil(R) and Bion Fertilizer product
lines contain a unique mix of organic nutrients, bacteria and other microbes
that extensive testing has shown produces superior plant growth with reduced
leaching of nutrients when compared to traditional chemical fertilizers.
We have been conducting business since 1989. Our original systems were
wastewater treatment systems for dairy farms and food processing plants. The
basic design was modified in late 1994 to create an NMS that produces organic
soil products as a by-product of remediation of the waste stream when
installed on large dairies or swine farms. Through June 2000, we sold and
subsequently installed, in the aggregate, 32 of these first generation systems
in 7 states, of which 19 are still in operation through June 2002. Of these
19 systems, 12 are first generation Bion NMS soil production system
installations and 7 are waste only systems. Since June 30, 2000 we have not
installed any new NMS systems since our concentration has been on research and
the development of our second generation system.
We also have an ongoing research program related to our BionSoil(R) and
Bion Fertilizer product lines. This research and development includes work
related to harvest and processing, blending of specialty product mixes for
specific market segments and tests of the effectiveness of BionSoil(R) and
Bion Fertilizer blends in a number of plants in a variety of growing
environments.
The past two years have been transitional years as to Bion's sales and
marketing efforts. As the development program described above moved forward
during the 2001 and 2002 fiscal years, our focus shifted from sales of first
generation systems to pre-marketing the system capabilities and the economics
of our second generation NMS. We have recently initiated marketing Bion's
second generation system and anticipate our first sales during the first half
of calendar 2002. In addition, Bion has begun marketing various upgrade
capabilities from its second generation system to its existing base of first
generation installations. The nutrient management capabilities of this new
generation of systems will help break one of the major barriers facing those
portions of the dairy and protein growing businesses in the U.S. which desire
to expand. Our second generation system will allow businesses in these
markets to meet ever stricter environmental standards for larger farms and
raise more animals on less land while meeting or exceeding all CAFO emission
standards and subjective odor control standards to protect the environment.
Critical Accounting Policies and Significant Use of Estimates in Financial
Statements
The Securities and Exchange Commission ("SEC") recently issued disclosure
guidance for "critical accounting policies." The SEC defines "critical
accounting policies" as those that require application of management's most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain and
may change in subsequent periods.
The following list of critical accounting policies is not intended to be
a comprehensive list of all of our accounting policies. Our significant
accounting policies are more fully described in Note 2 to the consolidated
21
financial statements included in this Annual Report on Form 10-KSB. In many
cases, the accounting treatment of a particular transaction is specifically
dictated by generally accepted accounting principles with no need for
management's judgment in their application. There are also areas in which
management's judgment in selecting any available alternative would not produce
a materially different result. We have identified the following to be critical
accounting policies of the Company:
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 costs expended to date bear to the anticipated final total cost based
upon current estimates of the cost to complete the contract. Contract costs
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(R) products and associated fees are
recognized upon delivery to customer, as the Company has no continuing
obligations.
Stock-based compensation: The Company accounts for its stock-based
compensation arrangements with its employees in accordance with the provisions
of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and complies with the disclosure provisions of SFAS 123,
"Accounting for Stock-Based Compensation." SFAS 123 established a
fair-value-based method of accounting for stock-based compensation plans.
Stock-based awards to nonemployees are accounted for at fair value in
accordance with the provisions of SFAS 123.
Income taxes: Deferred income taxes are determined by applying enacted
statutory rates in effect at the balance sheet date to the differences between
the tax bases of assets and liabilities and their reported amounts in the
consolidated financial statements. A valuation allowance is provided based on
the weight of available evidence, if it is considered more likely than not
that some portion, or all, of the deferred tax assets will not be realized.
Use of estimates: The preparation of financial statements in conformity
with generally accepted accounting principles in the United States 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.
Results of Operations - Comparison of Fiscal Year Ended June 30, 2002
with Fiscal Year Ended June 30, 2001
22
We recorded $69,000 of BionSoil(R) sales during the fiscal year ended
June 30, 2002 ("2002"). This compares to total sales of $84,000 for the
fiscal year ended June 30, 2001 ("2001"), consisting of $74,000 of BionSoil(R)
sales and $10,000 of system sales. BionSoil(R) sales decreased by $5,000
during the year ended June 30, 2002, due to our continued efforts to
concentrate on research and development on our second generation system for
most of the fiscal year and further BionSoil(R) testing and analysis. Cost of
soil was $546,000 for 2002 and $440,000 for 2001. The increase in cost of
goods sold was proportionately higher than the increase in sales due to the
fact that more soil was produced and sold at prices below cost to help gain
market acceptance. We believe that this trend will reverse as we enter the
commercial phase of system sales and revenues will increase at a higher rate.
General and administrative expenses, excluding non-cash charges,
decreased to $2,498,000 for 2002 from $2,779,000 for 2001. The decrease is
primarily attributable to a decrease in salaries and office expense offset by
an increase in legal fees.
Non-cash expenses for services and compensation decreased to $4,666,000
for 2002 from $7,646,000 for 2001. The decrease is due to the following
charges taken in 2001: the cancellation of warrants previously issued of
$2,361,000, consulting services of $2,003,000, beneficial value of warrants
exchanged for common stock of $2,179,000 amortization of deferred consulting
expense of $321,000 and compensation for variable options $3,470. A credit
taken in 2002 for a reduction in the value of the Company's common stock held
by the Trust Under Deferred Compensation Plan for D2CO, LLC for $302,000 also
added to the decrease in non-cash expenses for services and compensation.
These amounts were offset by an increase in charges taken in 2002 for the
issuance of warrants as inducement to convert debt of $3,710,000, an increase
of stock issued for services compensation and interest of $307,000, and an
increase in notes payable issued for management fees of $180,000.
Interest expense increased to $8,612,000 for 2002 from $3,016,000 for
2001. Increases for 2002 included non-cash interest expense of $131,000, a
charge for the beneficial conversion feature of debt converted to common stock
of $5,547,000 and a charge for the change in the terms of warrants issued in
conjunction with convertible bridge notes of $297,000. These increases were
offset by a decrease in amortization on debt discount of $381,000.
Research and development costs decreased by $526,000 during the year
ended June 30, 2002. This decrease is due to the increased costs in 2001 from
the construction of the second generation prototype system built at
Dreammaker Dairy. No such prototype was built in 2002.
We did not record income tax expense during the years ended June 30, 2002
and 2001, as a result of our net losses. A valuation allowance of $15,814,000
at June 30, 2002, 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, 2002, we had net operating loss carryforwards of
approximately $32,582,000, with expirations through 2022. The utilization of
a portion of the loss carryforwards may be limited under Section 382 of the
Internal Revenue Code.
The net loss and comprehensive loss increased $1,239,000 (8%) during the
year ended June 30, 2002. The increase primarily related to an increase of
$5,593,000 of non-cash interest expense that was offset by a decrease in
general and administrative expenses of $280,000, a decrease in non-cash
expenses for services and compensation of $2,980,000, a decrease in research
and development of $526,000 and a decrease in cumulative change in accounting
23
principle of $481,000. During the year ended June 30, 2001, the Company
applied Emerging Issues Task Force Issue No. 00-27 ("EITF 00-27"),
"Application of EITF Issue No. 98.5, Accounting for Convertible Securities
with Beneficial Conversion Features of Contingently Adjustable Conversion
Ratios, to Certain Convertible Instruments", which is effective for all such
instruments. This issue clarifies the accounting for instruments with
beneficial conversion features or contingently adjustable conversion ratios.
As a result of this adoption, the Company modified the previous calculation of
the beneficial conversion features associated with previously issued
convertible bridge notes and recorded an additional warrant discount on the
convertible bridge notes issued during the year ended June 30, 2000 of
$1,050,000 due to the beneficial conversion feature calculated on the
intrinsic value of the allocated proceeds received in the financing. Since
the notes were automatically convertible into common stock one year from the
date of issuance, the Company recorded $481,250 as a cumulative effect of
change in accounting principle for the year ended June 30, 2001. The Company
also recorded a discount on convertible bridge notes issued during the year
ended June 30, 2001 of $701,000.
Basic and diluted loss per common share decreased by $4.88, from $12.02
to $7.14. The decrease in the loss per share is attributable to the increase
in the amount of shares outstanding due to the conversion of all our debt,
other than trade payables, to common stock.
Seasonality
Bion's installation capability is restricted in cold weather climates to
approximately eight months per year. However, 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) harvests on the existing installed base is
semi-annual and is timed for spring and fall, with harvested soils being
available for sale during the next spring or fall. BionSoil(R) and Bion
Fertilizer product sales are expected to exhibit a somewhat seasonal sales
pattern with emphasis on spring, summer and fall sales.
Liquidity and Capital Resources
Our principal sources of liquidity, which consist of cash and cash
equivalents, are $1,814,000 as of June 30, 2002. We believe we will not
generate sufficient operating cash flow to meet our needs without additional
external financing during fiscal 2003. There can be no assurances that any
financing will be available or that the terms will be acceptable to us, or
that any financing will be consummated. Any failure on our part to do so will
have a material adverse impact on us and may cause us to cease operations.
We have been successful during the year ended June 30, 2001 in raising
working capital through the sale of warrants and convertible debt. During the
year ended June 30, 2001 we raised $2,527,000 in a private placement in the
form of convertible bridge notes. In addition, Southview, Inc., a related
party, had advanced the Company funds totaling $518,000 as of June 30, 2001.
During the year ended June 30, 2002 we raised approximately $8,500,000 of
working capital as partial consideration for the issuance of the Company's
common stock to Centerpoint (less cash of $3,700,000 used as partial
consideration to purchase 57.7% of the outstanding shares of Centerpoint)
through our transactions with Centerpoint.
24
On January 15, 2002 due to the Centerpoint transaction and the terms of
our outstanding Convertible Bridge Notes ("Notes"), all of the Notes were
converted to shares of our common stock. The terms of the Notes stated that
in the event we issued any capital stock (or instrument convertible into our
capital stock) for an aggregate price of at least $5,000,000 pursuant to a
public or private offering then, at our option, either we would repay the
Notes or the Notes would be converted into a number of shares equal to the
principal value of the Notes plus accrued interest divided by the price paid
for one share of stock issued in the offering. The conversion of the Notes
also caused the conversion of all other promissory notes held by our
shareholders, officers and former employees. These notes were converted under
the same terms as the Notes. The total outstanding debt of the Notes and
other promissory notes of $14,256,779 was converted at $7.50 per share, which
was the same price per share of the shares purchased by Centerpoint. The
total shares issued for the conversion of the Notes and other promissory notes
was 1,900,911.
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 is unknown. Currently, we estimate that no less than approximately
$5,000,000 will be required during the year ending June 30, 2003. We
anticipate spending $1,300,000 on research and development efforts and the
balance on compensation and general business overhead.
Going Concern
In connection with their report on our Consolidated Financial Statements
as of and for the year ended June 30, 2002, 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.
We have stockholders' equity of $2,410,746, a cumulative deficit of
$56,172,245, limited current revenues and substantial current operating
losses. Our operations are not currently profitable; therefore, readers are
further cautioned that our continued existence is uncertain if we are not
successful in obtaining outside funding in an amount sufficient for us to meet
our operating expenses at our current level. Management plans to continue
raising additional capital to fund operations until Bion system and BionSoil
sales are sufficient to fund operations.
Consolidated Working Capital
Consolidated working capital increased to $1,665,000 at June 30, 2002
from a negative $7,028,000 at June 30, 2001. This increase is primarily due
to the issuance of common stock to Centerpoint for partial consideration of
$8,500,000, reduction our current debt of $8,100,000 as a result of the
conversion of this amount of debt into 1,312,094 shares of the Company's
common stock. These increases were offset by cash of $3,700,000 paid for the
purchase of 57.7% of the outstanding shares of Centerpoint and continued
losses of $3,519,000 not including non cash charges for services and
compensation and non cash interest expenses.
25
Analysis of Cash Flows
Cash used in operating activities decreased to $3,870,000 in 2002 from
$4,288,000 in 2001. The decrease is primarily the result of a decrease in
cash operating expenses of $807,000, which excludes non-cash charges for
equity instruments issued for compensation and services and non-cash charges
included in interest expense. This decrease in cash operating expenses is
offset primarily from an increase in a note receivable, an increase in
inventory and decrease in accounts payable totaling $274,000.
Cash provided by investing activities increased to $4,818,000 in 2002
compared to $59,000 cash used in investing activities in 2001. The increase is
primarily the result of net proceeds of $8,500,000 from the issuance of common
stock to Centerpoint partially offset by the cash paid for the purchase of
Centerpoint, net of cash received in the amount of $3,700,000.
Cash used in financing activities increased to $435,444 in 2002 compared
to $3,042,000 cash provided by financing activities in 2001. The increase in
cash used in financing activities is primarily the result of payment of loans
in the amount of $898,000 in 2002. This is in contrast to $2,527,000 received
for the issuance of notes in a private placement in 2001.
We currently have no commitments for material capital expenditures.
Recent Accounting Pronouncements
In July 2001, the FASB issued Financial Accounting Standards No. 141,
"Business Combinations" ("SFAS 141"), which supersedes APB Opinion No. 16.
SFAS 141 eliminates the pooling-of-interests method of accounting for
business combinations and modifies the application of the purchase accounting
method. The elimination of the pooling-of-interests method is effective for
transactions initiated after June 30, 2001. The remaining provisions of SFAS
141 will be effective for transactions accounted for using the purchase method
that are completed after June 30, 2001. The adoption of SFAS No. 141 did not
have an effect on our financial condition or the results of operations.
In July 2001, the FASB also issued Statement of Financial Accounting
Standards No. 142, "Goodwill and Intangible Assets," ("SFAS 142"), which
supersedes APB Opinion No. 17. SFAS 142 eliminates the current requirement to
amortize goodwill and indefinite-lived intangible assets, addresses the
amortization of intangible assets with a defined life and addresses the
impairment testing and recognition for goodwill and intangible assets. SFAS
142 will apply to goodwill and intangible assets arising from transactions
completed before and after the statement's effective date. SFAS 142 is
effective for fiscal 2002. The adoption of SFAS No. 142 will not have an
effect on our financial condition or the results of operations.
In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment of Disposal of Long-Lived Assets. SFAS No. 144 requires that those
long-lived assets be measured at the lower of carrying amount of fair value
less cost to sell, whether reported in continuing operations or in
discontinued operations. Therefore, discontinued operations will no longer be
measured at net realizable value or include amounts for operating losses that
have not occurred. SFAS No. 144 is effective for financial statements issued
for fiscal years beginning after December 15, 2001 and, generally, is to be
applied prospectively. The Company is currently evaluating the potential
impact of SFAS No. 144 on its results of operations and financial position.
26
In July 2002, the FASB issued SFAS No. 146, Accounting for Restructuring
Costs. SFAS No. 146 applies to costs associated with an exit activity
(including restructuring) or with a disposal of long-lived assets. Those
activities can include eliminating or reducing product lines, terminating
employees and contracts, and relocating plant facilities or personnel. Under
SFAS No. 146, a company will record a liability for a cost associated with an
exit or disposal activity when that liability is incurred and can be measured
at fair value. SFAS No. 146 will require a company to disclose information
about its exit and disposal activities, the related costs, and changes in
those costs in the notes to the interim and annual financial statements that
include the period in which an exit activity is initiated and in any
subsequent period until the activity is completed. SFAS No. 146 is effective
prospectively for exit or disposal activities initiated after December 31,
2002 with earlier adoption encouraged. Under SFAS No. 146, a company may not
restate its previously issued financial statements and the new Statement
grandfathers the accounting for liabilities that a company had previously
recorded under Emerging Issues task Force Issue 94-3. The Company is
currently evaluating the potential impact of SFAS No. 144 on its results of
operations and financial position.
Item 7. Financial Statements
The response to this item is submitted in a separate section of this
annual report.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Within the twenty-four (24) months prior to the date of our most recent
Financial Statements and through the date of this report, we have had no
disagreements with our accountants on accounting or financial disclosure.
PART III
Item 9. Directors and Executive Officers of Bion Environmental
Technologies, Inc.
The directors and executive officers and significant employees of Bion,
along with their respective ages and positions with Bion as of June 30, 2002,
are as follows:
Name Age Position
------------------------- --- ----------------------------------------
Director and Officers
David J. Mitchell 41 Chairman(1), Chief Executive Officer,
President and Director
Lawrence R. Danziger 31 Chief Financial Officer
David Fuller 46 Principal Accounting Officer
Jere Northrop 60 Senior Technology Director and Director
Salvatore J. Zizza 56 Director
Andrew G. Gould 48 Director
Howard Chase 66 Director
27
Significant Employees
George Bloom 48 Chief Operating Officer of Subsidiary
James Morris 52 Chief Technology Officer of Subsidiary
(1) David J. Mitchell replaced Mark A. Smith as Chairman of the Company on
September 6, 2001.
David J. Mitchell has been our Chairman since September 6, 2001, 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.
Mr. Mitchell is the immediate past president of AmeriCash, a national network
of ATM machines. Mr. Mitchell has held various executive positions primarily
in investment banking and brokerage firms. Mr. Mitchell is also the Chairman
and Chief Executive Officer of Centerpoint Corporation. He also serves as a
director of several private companies and not-for-profit universities and
foundations. Prior to May 2001, Mr. Mitchell served as a director and
executive officer of Direct Furniture, Inc. which had a bankruptcy petition
filed against it in February 2002.
Lawrence R. Danziger serves as our Chief Financial Officer since July
2002. From April 1999 to July 2002, Mr. Danziger served as Corporate
Controller of Internet Commerce Corporation. Prior to joining Internet
Commerce Corporation, Mr. Danziger was Supervisor at the accounting firm of
Eisner LLP. Mr. Danziger is a Certified Public Accountant and is a member of
the American Institute of Certified Public Accountants and the New York State
Society of Certified Public Accountants. Mr. Danziger received a Bachelor of
Science degree in Accounting from the University at Albany, State University
of New York.
David Fuller has served as our Principal Accounting Officer since April
2001. From January 2001 to April 2001, Mr. Fuller was a consultant to several
companies, including Bion. From March 1994 to December 2000, he was the Chief
Financial Officer of Hyman Beck & Company, Inc., an international money
management firm. Mr. Fuller is a member of the American Institute of
Certified Public Accountants and the New York Society of Certified Public
Accountants. Mr. Fuller is also the Principal Accounting Officer of
Centerpoint Corporation. Mr. Fuller graduated from Lehigh University in May
1978 with a Bachelor of Science degree in Accounting.
Jere Northrop currently serves as our Senior Technology Officer and has
been 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 has twenty-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.
28
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. Mr.
Gould co-founded in late 2000, and is presently a member of the Board of
Directors and Chief Financial Officer of Chromaplex, Inc., a photonics company
developing telecom and laser applications of proprietary periodic structures
built in silicon, glass and other materials. 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. Until
2001, Mr. Gould was 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 investment partnership trading financial futures and equities
using proprietary, systems-based trading methods. 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).
Howard Chase is currently the principal of the Hollandbrook Group, LLC, a
consulting firm organized to provide M&A services to the asset management
business. Mr. Chase served as President and Chief Executive Officer of Carret
Holdings, Inc. from mid-1999 to December 2001. He served as Chairman of the
Board of Trident Rowan Group, Inc. from March 1998 until December 1999, having
served continuously as a director of that company since 1971. Mr. Chase also
served as Secretary and as outside counsel of Trident Rowan from 1971 until
September 1995 and as its President and Chief Executive Officer from October
1995 to March 1998. He also served as Vice-President of Trident Rowan from
1986 until October 1995. Mr. Chase has served as a director of Thoratec
Corporation since 1987 and as a director of Centerpoint Corporation since
1998. He is a graduate of Harvard College and Harvard Law School.
George Bloom has been with Bion Technologies, Inc. since December 2000
and has served as Chief Operating Officer since January 15, 2002. From 1986
through December 2000, Mr. Bloom was employed by Woodard & Curran, Inc., an
environmental consulting firm, where he held the position of Chief Engineer of
the Municipal Business Center upon his departure. Mr. Bloom is a registered
professional engineer with over twenty years environmental engineering and
consulting experience specializing in the planning, design, construction and
operation of waste treatment facilities. Mr. Bloom is responsible at Bion for
oversight of the planning, design and construction of waste treatment systems
and solids processing facilities.
James Morris has served as Chief Technology Officer of Bion Technologies,
Inc. since February 2002. Prior to joining Bion, Dr. Morris provided the
Company with technical assistance and technical advise for over two years as a
consultant. Other consulting work included eight years acting as the senior
29
technical consultant for a large environmental consulting firm and the
formation of James W. Morris & Associates, Inc. that allowed him to serve
clients ranging from small commercial establishments, to municipalities and
corporations, as well as a sub consultant to several larger engineering firms.
Dr. Morris is a licensed professional engineer in Maine and Vermont. He
earned his BSCE and MSCE at Tennessee Technological University and a Ph.D.
from Cornell University. He is a member of the American Society of Civil
Engineers, Water Environment Federation, Institute of Food Technologists,
American Society of Agricultural Engineers, Agricultural Engineering Society,
Aquacultural Engineering Society and American Water Works Association.
During the year ended June 2002, Mark Smith, James Wright, and Jon
Northrop resigned as Directors. At each annual meeting of shareholders,
Directors are elected to serve until the next annual meeting of shareholders.
Officers serve at the discretion of the Board of Directors, subject to rights,
if any, under contracts of employment.
Family Relationships
There are currently no family relationships among our Directors and
Executive Officers.
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
Section 16(a) of the Exchange Act requires our officers and directors,
and stockholders owning more than ten percent of a registered class of our
equity securities, to file reports of ownership and changes in ownership with
the Securities and Exchange Commission and the National Association of
Securities Dealers, Inc. Executive officers, directors and such stockholders
are required by SEC regulations to furnish us with copies of all forms they
file pursuant to these requirements. Based solely on our review of the copies
of such forms that we have received, or written representations from reporting
persons, we believe that during the fiscal year ending June 30, 2002, all
executive officers, directors and such stockholders complied with all
applicable filing requirements on a timely basis, except that Atlantic
Partners LLC filed a Form 3 late.
Advisory Board
On June 6, 2001, our Board of Directors authorized the formation of an
Advisory Board to consist of up to 15 members and determined that up to
300,000 options, in aggregate, be made available as compensation for Advisory
Board members over the next two years, subject to Board of Directors'
ratification on a case-by-case basis. Members of the Advisory Board provide
us advice in their specific areas of expertise as requested.
30
We currently have seven persons on our Advisory Board. They are:
Dan Glickman is currently director of the Institute of Politics at the
John F. Kennedy School of Government at Harvard Universty. Mr. Glickman is
also a consultant and advisor to the public law and policy practice group at
Akin Gump Strauss Hauer and Feld. Mr. Glickman is a former U.S. Agriculture
Secretary, who served as a member of President Clinton's Cabinet for six years
and whose service prior to that position included 18 years as a member of the
U.S. House of Representatives.
Jon D. Howard is a Managing Director at Bear Stearns & Co. Inc. and head
of Bear Stearns Merchant Banking Group whose prior experience includes
executive positions with Vestar Capital Partners, Inc. and Wesray Capital
Corporation. Mr. Howard is a director of Acropostal, Inc., Dyersberg
Corporation, Integrated Circuit System, Inc., and Nice-Pac Holdings, Inc.
Victor L. Lechtenberg, Ph.D. is Dean of Agriculture at Purdue University
- a premier land grant college of agriculture. Dr. Lechtenberg is chairman of
the National Agricultural Research, Extension, Education and Economics
Advisory Board.
William Spier, serves as Chairman of the Board of Empire Resources, Inc.,
a distributor of a range of semi-finished aluminum products, which is traded
on the American Stock Exchange. He was Chairman of DeSoto, Inc., a
manufacturer and distributor of cleaning products, from May 1991 through
September 1996. Mr. Spier is a member of the Executive Committee and Board of
Directors of Keystone Consolidated Industries, Inc., a New York Stock Exchange
company which manufactures carbon steel wire and rod products. Mr. Spier was
also a Vice Chairman of Phibro-Salomon Inc an international commodity trading
and investment banking firm.
Dennis C. Tristao currently serves as Environmental Affairs Officer at
J.G. Boswell Company. Mr. Tristao has worked within the agricultural air
quality issue for over 12 years. His past commitments to the Agricultural Air
Quality Task Force resulted in the Memorandum Of Understanding between the
USDA and the EPA on agricultural air quality research, the establishment of a
research priority and funding recommendation and a recommendation for national
policy on implementing a voluntary compliance strategy for agricultural
producers.
Jarold A. Glick is president of G&R Foods, Inc. and vice president of G&R
Foods subsidiary, Dairy Ingredient Technology. Mr Glick has thirty-nine years
of both corporate and entrepreneurial experience in the start-up, acquisition
and management of dairy brokerage, bottled milk, yogurt and cheese
manufacturing operations.
Dr. McCloskey is actively involved in the ownership and management of
dairies in New Mexico, Michigan, and Indiana. Dr. McCloskey was instrumental
in the formation of the Texas-New Mexico Milk Marketing Agency, an agency that
controls the marketing and transportation of virtually all milk marketed in
Texas and New Mexico. Additionally, he serves on the board of the National
Milk Producers Federation, participates in the Federal Order Policy and Dairy
Export Policy committees.
Item 10. Executive Compensation
The following table sets forth the compensation paid or earned for
services rendered during the three fiscal years ended June 30, 2002 to our
former chief executive officer, our current chief executive officer and the
most highly compensated other executive officers whose compensation in the
year ended June 30, 2002 was more than $100,000.
31
Summary Compensation Table
Long Term
Compensation Awards
Annual Compensation ---------------------
Fiscal ------------------- Securities Underlying All other
Name and Principal Position Year Salary (1) Bonus Options (#) Compensation
--------------------------- ------ ---------- ----- --------------------- ---------------
Current Executive Officers
David Mitchell 2002 $550,000 (2) - - $3,709,713 (5)
Chairman (A), Chief Executive 2001 370,000 (3) - - 2,230,000 (6)
Officer and President 2000 120,000 (4) - - -
Jere Northrop 2002 $123,750 - 2,500 -
Senior Technology Officer 2001 150,000 - - -
2000 150,000 - - -
David Fuller 2002 $125,000 - 4,000 (7) -
Principal Accounting Officer 2001 8,333 - 4,254 -
2000 - - - -
A) David Mitchell replaced Mark A. Smith as Chairman of the Company on
September 6, 2001.
(1) Includes compensation paid by Bion Technologies, Inc. our wholly owned
subsidiary.
(2) Compensation of $550,000 issued as 58,247 shares of common stock of the
Company to the Trust Under Deferred Compensation Plan for D2CO, LLC.
valued at $320,358 at June 30, 2002. The Company recorded $301,755 as
a reduction in compensation expense at June 30, 2002 due to the decrease
in value of the total shares of the Company's stock held by the Trust.
(3) Includes compensation of $120,000 that was added to the balance of the
2000 D2 Convertible Bridge Note (this balance plus accrued interest was
converted into 18,200 shares of common stock); compensation of $125,000
was added to the balance of the 2000 Convertible Bridge Note for the
Trust Under Deferred Compensation Plan for D2CO, LLC (this balance plus
accrued interest was converted into 18,241 shares of common stock); and
compensation of $125,000 was added to the balance of the 2001 Convertible
Bridge Note for the Trust Under Deferred Compensation Plan for D2CO, LLC
(this balance plus accrued interest was converted into 17,824 shares of
common stock).
(4) Compensation for the period January 1, 2000 (inception of agreement),
through June 30, 2000, which was added to the balance of the D2 2000
Convertible Bridge Note (this balance plus accrued interest was converted
into 18,822 shares of common stock).
(5) Represents the value of 387,343 warrants issued to Atlantic Partners LLC
in January 2002.
(6) Represents the difference between the value of warrants to purchase
650,000 shares of common stock purchased by Southview, Inc. (later
assigned to Atlantic Partners LLC), a company owned by David J. Mitchell,
and the amount paid.
(7) Represents options granted during the year ended June 30, 2001 that were
repriced in January 2002.
32
Option Grants in Fiscal Year 2002
The following table sets forth the options that were granted during the
fiscal year ended June 30, 2002.
Number of Percent of
Securities Total Options
Underlying Granted to Exercise
Options Employees in Price Expiration
Name Granted Fiscal 2001 Per Share Date
-------------- ----------- ------------- --------- -----------------
David Mitchell - - - -
Jere Northrop 2,500 2.62% $11.00 December 31, 2004
David Fuller 4,000* 4.19% $11.00 December 31, 2003
----------------------
* Represents 4,000 options granted during the year ended June 30, 2001 that were
repriced in January 2002.
Aggregated Option Exercises and Option Value Table as of June 30, 2002
The following table sets forth the options exercises during the fiscal
year ended June 30, 2002 and the value of exercisable and unexercisable
options outstanding as of June 30, 2002.
Number of Securities Underlying Value of Unexercised In-the
Unexercised Options at Money
Shares Acquired Value June 30, 2002 Options at FY-End
Name on Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable
-------------- --------------- -------- ------------------------------- ---------------------------
David Mitchell - - 0/0 $0/$0
Jere Northrop - - 2,500/0 $0/$0
David Fuller - - 2,836/1,418 $0/$0
Employment Agreements
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. On August 10, 2000 we amended the
D2 Management Agreement by extending the term of the agreement by one year.
On December 1, 2000, the Company made further amendments to the D2 Management
Agreement by extending the term of the agreement by 18 months, increasing the
annual base consideration from $240,000 as follows: calendar year 2001 -
$500,000; calendar year 2002 - $600,000; and calendar year 2003 - $750,000.
Effective January 1, 2001, the Company agreed to make the payments due under
the consulting agreement under a deferred compensation plan to the Trust Under
Deferred Compensation Plan for D2CO, LLC for the benefit of D2. See Item 12 -
Certain Relationships and Related Transactions.
On December 1, 1997, we entered into an employment agreement with Jere
Northrop. During the year ending June 30, 2002, this agreement was amended
from an end date of December 31, 2002 and an annual base salary of $150,000 to
an end date of December 31, 2003 and an annual base salary of $60,000.
33
Director Compensation
Members of the Board of Directors do not currently receive any cash
compensation for their services as Directors, but are entitled to be
reimbursed for their reasonable expenses in attending meetings of the Board.
Howard Chase joined our Board of Directors on January 21, 2002. In
addition to his duties as a director, Mr. Chase, through Hollandbrook Group
LLC (Hollandbrook), Inc. will provide us consulting services. Bion will pay
Hollandbrook $1,000 per month and issue to Hollandbrook $9,000 in Bion common
stock at a price per share of $15.00.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding the
beneficial ownership of our common stock as of September 24, 2002 by:
* each person that is known by us to beneficially own more than 5% of our
common stock;
* each of our directors;
* each of our executive officers named in the summary compensation table
on page 25; and
* all our directors and executive officers as a group.
Under the rules of the Securities and Exchange Commission, beneficial
ownership includes voting or investment power with respect to securities and
includes the shares issuable under stock options that are exercisable within
sixty (60) days of September 24, 2002. Those shares issuable under stock
options are deemed outstanding for computing the percentage of each person
holding options but are not deemed outstanding for computing the percentage of
any other person. The percentage of beneficial ownership schedule is based
upon 5,307,395 shares outstanding as of September 24, 2002. The address for
those individuals for which an address is not otherwise provided is c/o Bion
Environmental Technologies, 18 East 50th Street, 10th Floor, New York, NY
10022. To our knowledge, except as indicated in the footnotes to this table
and pursuant to applicable community property laws, the persons named in the
table have sole voting power and investment power with respect to all shares
of common stock listed as owned by them.
Shares of Common Stock
Beneficially Owned
-------------------------------------------------------
Percent of Class
--------------------------------------
Name and Address Number Outstanding Entitled to Vote (1)
------------------------------- ---------- ----------- --------------------
Principal Stockholders
Centerpoint Corporation (1) 1,900,000 35.8% -
Atlantic Partners LLC (2) 1,037,343 16.3% 23.3%
Mark A. Smith (3) 436,699 8.2% 12.8%
409 Spruce Street
Boulder, CO 8030
LoTayLingKyur Foundation (4) 274,931 5.2% 8.1%
409 Spruce Street
Boulder, CO 80302
Dublin Holding, Ltd. (5) 285,388 5.4% 8.4%
C/O Amerilawyer, Ltd.
Attn: Lloyd Rodney, Esq.
Harbor House
P.O. Box 120, Grand Turk
Turks & Caicos Isl., B.W.I.
34
Executive Officers and Directors
David J. Mitchell (6) 1,911,477 30.1% 43.0%
Jere Northrop (7) 152,820 2.9% 4.5%
Salvatore J. Zizza (8) 43,801 * 1.3%
Andrew G. Gould (9) 8,851 * *
Howard Chase 900 * *
Lawrence R. Danziger (10) 6,666 * *
David Fuller (11) 3,420 * *
All executive officers and directors 2,127,935 33.3% 47.4%
as group (7 persons) (12)
----------------------
* Less than 1%
(1) Centerpoint Corporation is currently majority-owned by the Company.
Under Colorado law, the common shares held by Centerpoint Corporation are
not entitled to vote. These shares of common stock are to be distributed
to the shareholders of Centerpoint Corporation upon the effectiveness of
a registration statement. The shares to be distributed to Bion will be
cancelled immediately following distribution.
(2) Atlantic Partners LLC, which is wholly owned by David Mitchell, owns
warrants to purchase 1,037,343 shares of common stock at $7.50 per share
through February 16, 2006.
(3) Includes 2,500 options held directly by Mark Smith, 39,418 shares of
common stock held jointly with his wife, 5,240 shares of common stock
held by his wife, 59,684 shares of common stock held by Mark A. Smith IRA
Rollover, 50,905 shares of common stock held by Kelly Smith IRA Rollover,
274,931 shares of common stock held by LoTayLingKyur Foundation which is
controlled by Mark Smith, 605 shares of common stock held by
LoTayLingKyur, Inc. which is owned by Mark A. Smith and his wife. Mr.
Smith disclaims beneficial ownership on 285,388 shares of common stock
held by DHL for which Mr. Smith is the authorized agent. In accordance
with a voting agreement with D2 all shares beneficially owned by Mark
Smith, DHL and LoTayLingKyur Foundation are to be voted by David Mitchell
as to most matters except for a sale of substantially all the Company's
assets or a merger.
(4) In accordance with a voting agreement with D2 all LoTayLingKyur
Foundation shares are to be voted by David Mitchell as to most matters
except for a sale of substantially all the Company's assets or a merger.
(5) Mark Smith, the authorized agent for DHL disclaims beneficial ownership
of these shares. In accordance with a voting agreement with D2 all DHL
shares are to be voted by David Mitchell as to most matters except for a
sale of substantially all the Company's assets or a merger.
(6) Includes 52,734 shares of common stock held by D2 and 94,313 shares of
common stock held by a trust for D2's benefit. Also includes warrants to
purchase 1,037,343 shares of common stock exercisable until February 16,
2006, owned by Atlantic Partners LLC, a corporation wholly owned by David
Mitchell, and 3,000 bridge warrants held by D2. Also includes 2,000
shares of common stock held by a minor child of David Mitchell. Also
includes 436,699 shares of common stock beneficially owned by Mark A.
Smith (Note 3), the LoTayLingKyur Foundation (operated by Mr. Smith) and
285,388 shares of common stock beneficially owned by Dublin Holdings Ltd.
("DHL") over which David Mitchell holds voting control for all of the
shares through a voting agreement as to most matters except for a sale of
substantially all the Company's assets or a merger.
35
(7) Includes 67,401 shares held by Jere Northrop's wife; 20,121 shares held
by a family trust; and options to purchase 2,500 shares held by Mr.
Northrop. Does not include shares owned by an adult child of Jere
Northrop, 12,608 shares owned by the Jere and Lynn Northrop Family
Foundation, and 7,906 shares owned by the Jere Northrop Family trust, for
each of which Mr. Northrop disclaims beneficial ownership.
(8) Includes options held by Mr. Zizza to purchase 17,500 shares of common
stock; J-1A bridge warrants to purchase 1,500 shares of common stock; and
J-1C bridge warrant to purchase 2,955 shares of common stock.
(9) Includes options held by Mr. Gould to purchase 7,500 shares of common
stock and a J-1C bridge warrant to purchase 237 shares of common stock.
(10) Includes options to purchase 6,666 shares of common stock.
(11) Includes options to purchase 2920 shares of common stock.
(12) See footnotes (6) through (11).
Item 12. Certain Relationships and Related Transactions
Transactions with David Mitchell and Related Entities
Management Agreement with D2
In December 1999, we entered into a three year Management Agreement with
D2 Co., LLC ("D2") of which David Mitchell, Chairman, CEO and President of the
Company, is sole member, pursuant to which D2 agreed to provide us specific
management and consulting services. The agreement called for compensation to
D2 for such services in the amounts of:
* $240,000 per year payable in our common stock or cash; and
* 250,000 warrants exercisable at $25.00 expiring on December 31,
2004.
On August 10, 2000, we amended the Management Agreement with D2 under
which we:
* extended the agreement for D2's services for an additional year;
and
* issued 150,000 additional warrants (100,000 exercisable at $35.00
per share and 50,000 exercisable at $60.00 per share, both
exercisable from January 1, 2002 until August 10, 2005).
In December 2000, the Company made additional amendments to the D2
Management Agreement by:
* extending the term of the agreement by 18 months;
* canceling all of the warrants issued under the Management
Agreement as amended; and
* increasing the annual base consideration to $500,000 in calendar
year 2001, to $600,000 in calendar year 2002 and $750,000; and
calendar year 2003.
Effective January 1, 2001, the Company orally agreed to the following:
* to make the payments due under the Management Agreement to the
Trust Under Deferred Compensation Plan for D2CO, LLC (the "Trust")
for the benefit of D2.
36
The payments to the Trust for the six months ended June 30, 2001 totaling
$250,000 were made in the form of 2000 and 2001 convertible bridge notes (the
"CV Notes").
Effective July 1, 2001, compensation to D2 is paid to the Trust in the
form of common stock on a quarterly basis.
We receive consulting services from Bright Capital, which provides the
services of consultant Dominic Bassani. Bright Capital is compensated
directly by D2 from the fees paid by Bion to D2.
On January 15, 2002, as a result of the transaction with Centerpoint:
* all the D2 and the Trust CV Notes were converted into 37,022
shares and 36,064 shares of the Company's common stock,
respectively.
In the event of a subsequent equity financing below $7.50, the Company
may need to issue additional shares to D2 and to the Trust for the CV Notes
converted as if the notes were converted into shares of the Company's common
stock at the price per share of the subsequent equity financing. See Item 1.
Warrant Purchase Agreement
In December 1999, we entered into a Warrant Purchase Agreement pursuant
to which:
* D2 purchased 250,000 warrants, exercisable at $17.50 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 was secured by the
subject warrants).
In December 2000, we entered into an agreement with D2 pursuant to which:
* We canceled the warrants issued under the Warrant Purchase
Agreement; and
* We agreed to repay the purchase price of the warrants issued under
the Warrant Purchase Agreement with $500,000 cash and cancellation
of the existing $500,000 non-recourse promissory note receivable
and accrued interest
Southview
During the period January 8 through March 31, 2001, Southview, Inc.
("Southview"), a corporation wholly owned by Mr. Mitchell:
* loaned the Company $871,000 earning 8% interest per annum of which
$371,000 was repaid in April 2001.
On February 16, 2001, under an agreement effective January 8, 2001,
Southview purchased:
* warrants to purchase 650,000 shares of the Company's common stock
for the sum of $500,000, exercisable until February 16, 2006.
Half of these warrants were exercisable at $10.00 and half of these
warrants were exercisable at varying prices between $10.00 and $20.00 per
share, depending on the market price of the Company's common stock. The
warrants were subsequently assigned to Atlantic Partners, LLC ("Atlantic"), an
affiliate of David Mitchell.
37
On September 6, 2001, the Board of Directors affirmed an agreement dated
August 1, 2001 entered into between the Company, D2, Southview and Atlantic in
which, among other things, the Company agreed to amend the Southview warrants
so that:
* upon the conversion of the Company's outstanding CV Notes into the
Company's common stock, the outstanding Southview warrants will be
adjusted ("Adjusted Warrants") so that the Adjusted Warrants
equal 20% of the "fully-diluted" outstanding shares; and
As partial consideration for Bion agreeing to the adjustment to the
Southview warrants, Southview agreed to:
* extend the term of the outstanding promissory note due July 31,
2001, with a balance of $521,040 including accrued interest, so
that such promissory note could be repaid from the proceeds of a
new financing.
On January 15, 2002, as a result of the transaction with Centerpoint:
* the Southview warrants were adjusted to equal 20% or, 1,037,343
shares of the "fully-diluted" outstanding shares of the Company
and the exercise was adjusted to $7.50; and
* In addition, the Company repaid the Southview promissory note,
which had a value of $718,485 including interest and additional
advances.
In the event of a subsequent equity financing below $7.50, additional
warrants would be issued on the Southview warrants currently outstanding to
increase these warrants to reflect 20% of the fully diluted shares outstanding
as of January 15, 2002, after giving effect to all subsequent financing
adjustments. These warrants would also have their exercise price lowered to
the price per share of the subsequent equity financing. See Item 1.
Private Placement
On April 13, 2000, we completed a private placement offering in which D2
participated under the same terms as unaffiliated third parties. D2 purchased
four units evidencing $100,000 convertible notes and 3,000 warrants to
purchase common stock exercisable at $23.75 per share until December 31, 2004.
On January 15, 2002, as a result of the transaction with Centerpoint,
D2's convertible note was converted into 15,712 shares of the Company's common
stock under the amended terms of the notes.
In the event of a subsequent equity financing below $7.50, the Company
may need to issue additional shares to for the D2 notes conversion as if the
note was converted into shares of the Company's common stock at the price per
share of the subsequent equity financing. See Item 1.
Shareholder Agreement/Stock Voting Agreement
On December 23, 1999, D2, Mark A. Smith, Jere Northrop, LoTayLingKyur,
Inc., and Dublin Holding, Ltd. entered into a Shareholders' Agreement, as
amended, which, among other things, restricts the transfer, sale, conveyance,
exchange, pledge, or otherwise disposition of any shares of the Company except
in connection with a sale of all or substantially all of the outstanding stock
of the Company or a merger of the Company. Under the agreement, certain
transfers are permitted under certain conditions.
38
On August 1, 2001, the Company, D2 and Dublin Holdings, Ltd., LoTayLing,
Inc., Mark Smith, Kelly Smith, LoTayLing Foundation, Kelly Smith Rollover IRA,
and Mark Smith Rollover IRA (collectively "the Smith shares"), entered into a
voting agreement where among other things, the Smith shares shall not be
transferred in a private non-market transfer which reduces the number of
shares for which D2 is Proxy to less than 2/3 of the initial shares for which
D2 is Proxy unless the transferee is willing to appoint D2 as Proxy for the
transferred portion of the shares .
Transactions with Mark A. Smith and Related Entities
During the period beginning July 1, 2000, we entered into the following
transactions with Mark A. Smith (our former Chairman and a former Director)
and/or entities affiliated with him: LoTayLingKyur, Inc. ("LTLK"), LTLK
Defined Benefit Plan, LoTayLingKyur Foundation, and Dublin Holding Ltd.
(collectively "First Parties"), including the following:
Commencing August 3, 2000, and at various other effective dates through
the month of August 2000, the First Parties (and related holders of our Class
X Warrants and Class Z Warrants):
* exchanged, in aggregate, 16,520 Class X Warrants and 542,544 Class
Z Warrants for 86,340 restricted shares of our common stock. This
exchange occurred pursuant to an agreement we had with the warrant
holders dated December 20, 1999. Mr. Smith, (and affiliates and
extended family members of Mr. Smith) participated in this warrant
exchange agreement.
On August 1, 2001 Mark Smith, Dublin Holding, Ltd., LoTayLingKyur, Inc.,
LoTayLingKyur Foundation, Mark Smith Rollover IRA, Kelly Smith and Kelly Smith
Rollover IRS which all owned shares of the Company's common stock (the "Smith
Shares"), entered into a voting agreement that gives D2:
* the power to vote all of the Smith Shares as to most matters. Mr.
Smith will still have the right to vote the Smith Shares with
respect to a sale of substantially all of our assets or a merger.
The voting agreement is purely contractual and is not a formal
voting trust.
In addition, Mark Smith, Dublin Holding, Ltd., LoTayLingKyur, Inc.,
LoTayLingKyur Foundation, Mark Smith Rollover IRA, Kelly Smith and Kelly Smith
Rollover IRS entered into a separate agreement with the Company which imposed
certain restrictions on the sale and transfer of the Smith Shares and amended
the respective terms of convertible promissory notes payable to Dublin
Holding, Ltd, the Mark A. Smith Rollover IRA and the Kelly Smith Rollover IRA
to provide that these notes:
* would be automatically and fully converted (with all principal and
accrued interest calculated as if they had been held to maturity)
into shares of the Company's common stock upon the conversion of
the CV Notes at a conversion rate equal to the lesser of (i)
$18.00 per share or (ii) the conversion price of the CV Notes.
On January 15, 2002, as a result of the transaction with Centerpoint,
these notes were converted into 588,852 shares of the Company's stock at $7.50
per share.
In the event of a subsequent equity financing below $7.50, the Company
may need to issue additional shares to for the CV Notes conversion as if the
notes were converted into shares of the Company's common stock at the price
per share of the subsequent equity financing. See Item 1.
39
Transactions with Salvatore J. Zizza
Beginning August 10, 2000, Salvatore J. Zizza, one of our directors,
agreed to serve as our governmental affairs liaison and provide additional
consulting services through September 1, 2002 for which he receives no
additional compensation. We granted Mr. Zizza options to purchase 7,500
shares of our common stock at a price of $22.50 per share, exercisable until
December 31, 2003, and issued him 10,000 Class J-2 warrants to purchase common
stock at a price of $23.75 per share. In addition, we agreed to provide Mr.
Zizza with office space in our New York City office at no cost to him.
On January 15, 2002, we adjusted the price of the options to $11.00 and
cancelled the 10,000 Class J-2 warrants and issued Mr. Zizza options to
purchase 10,000 shares of our common stock at a price of $11.00 per share
exercisable until December 31, 2004.
On June 25, 2002, Mr Zizza agreed to devote more time as our governmental
affairs liaison. On July 1, 2002 we issued Mr. Zizza additional options to
purchase 10,000 shares of our common stock at a price of $7.50 per share
vesting on July 1, 2003, exercisable until July 1, 2005.
Private Placements
On April 13, 2000, we completed a private placement offering in which Mr.
Zizza participated under the same terms as unaffiliated third parties. Mr.
Zizza purchased two units evidencing $50,000 convertible debt and 1,500
warrants to purchase common stock exercisable at $23.75 per share until
December 31, 2004.
On June 8, 2001, we completed private placement offering in which Mr.
Zizza participated under the same terms as unaffiliated third parties. Mr.
Zizza purchased a $98,552 convertible note and 2,955 warrants to purchase
common stock exercisable at $15.00 per share until December 31, 2005.
On January 15, 2002, as a result of the transaction with Centerpoint, Mr.
Zizza's convertible notes, including accrued interest, were converted to
21,846 shares of the Company's common stock under the amended terms of the
notes.
In the event of a subsequent equity financing below $7.50, the Company
may need to issue additional shares to for Mr. Zizza's notes conversion as if
the notes were converted into shares of the Company's common stock at the
price per share of the subsequent equity financing. See Item 1.
Transactions with Andrew G. Gould
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, contracted to provide us with an average of
approximately ten hours per month of technology consulting services through
August 31, 2002, at no cost to us. We have granted Mr. Gould options to
purchase 7,500 shares of our common stock at a price of $22.50 per share,
exercisable until December 31, 2003. The exercise price of these options was
adjusted on January 15, 2002 to $11.00 per share.
On June 8, 2001, we completed private placement offering in which Mr.
Gould participated under the same terms as unaffiliated third parties. Mr.
Gould purchased a $7,882 convertible note and 237 warrants to purchase common
stock exercisable at $15.00 per share until December 31, 2005.
40
On January 15, 2002, as a result of the transaction with Centerpoint, Mr.
Gould's convertible note was converted to 1,114 shares of the Company's common
stock under the amended terms of the note.
In the event of a subsequent equity financing below $7.50, the Company
may need to issue additional shares to for Mr. Gould's note conversion as if
the note was converted into shares of the Company's common stock at the price
per share of the subsequent equity financing. See Item 1.
Other Transactions with Related Parties
Effective August 23, 2000, Jon Northrop, who was then a Director and
President, and Jere Northrop, Director and Senior Technology Officer and their
extended families, agreed to exchange, in aggregate:
* 47,155 Class X Warrants and 85,570 Class Z Warrants for 26,984
restricted shares of our common stock. This exchange occurred
pursuant to the terms of agreements dated December 20, 1999.
Effective August 29, 2001, we amended 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:
* extend the maturity date to April 30, 2002;
* cancel some of the outstanding options owned by the note holder;
and
* change the terms of the note so that outstanding principal and
interest shall be completely converted to shares of the Company's
common stock upon the earlier of April 29, 2002 or the conversion
of the Company's outstanding CV Notes which conversion shall take
place at the lower of $22.50 per share, or the conversion price of
the CV Notes.
On January 15, 2002, as a result of the transaction with Centerpoint, all
of these promissory notes were automatically converted to 249,056 shares of
the Company's common stock, respectively.
In the event of a subsequent equity financing below $7.50, the Company
may need to issue additional shares to for the promissory notes conversion as
if the notes were converted into shares of the Company's common stock at the
price per share of the subsequent equity financing. See Item 1.
Effective on September 6, 2001 we entered into a severance agreement with
Jon Northrop and as a result, we no longer have any employees in Denver and
substantially all of our business operations are conducted out of our office
in New York City. Mr. Northrop received monthly payments of $10,000 in cash
or common stock through August 2002.
Howard Chase joined our Board of Directors on January 21, 2002. In
addition to his duties as a director, Mr. Chase, through Hollandbrook Group
LLC (Hollandbrook), Inc. will provide us consulting services. Bion will pay
Hollandbrook $1,000 per month and issued to Hollandbrook $9,000 in Bion common
stock at a price per share of $15.00.
Transactions with Centerpoint
On January 15, 2002, Bion issued 1,900,000 shares of its restricted
common stock, valued at $7.50 per share, to Centerpoint, in exchange for
41
$8,500,000 in cash and the assignment of certain claims and other rights owned
by Centerpoint for total consideration of $14,250,000. Additional shares may
be issued to Centerpoint if the Company raises equity at a price less than
$7.50 per share until the cumulative investment in the Company, from
unaffiliated third parties, from the date of this transaction, equals $5
million. The number of additional shares to be issued is determined by
calculating the additional number of shares Centerpoint and OAM would have
received if the transactions were consummated at the price per share of the
subsequent equity financing. David Mitchell was a director of Centerpoint
prior to the transaction with Bion and currently serves as Chairman and Chief
Executive Officer of Centerpoint.
Option and Warrant Issuance
Directors and officers were issued options and warrants as disclosed in
Item 10 Executive Compensation in this Form 10-KSB, above.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
The following documents are filed as exhibits to this Form 10-KSB,
including those exhibits incorporated in this Form 10-KSB by reference to a
prior filing of Bion under the Securities Act or the Exchange Act as indicated
in parenthesis:
Exhibit No. Description
3.1 Articles of Incorporation, as amended. Filed herewith
electronically.
3.2 First Amended and Restated Bylaws. Filed herewith
electronically.
10.1 Management Agreement and Management Compensation Warrant
dated December 23, 1999, between Bion Environmental
Technologies, Inc. and D2 Co., LLC. Incorporated by
reference to 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 to 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 to 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 to Exhibit 10.4 to our Form 8-K
dated December 11, 1999.
42
10.5 Agreement dated December 11, 1999, between Bion
Environmental Technologies, Inc. and Jon Northrop.
Incorporated by reference to Exhibit 10.5 to our Form 8-K
dated December 11, 1999.
10.6 Agreement dated December 14, 1999, between Bion
Environmental Technologies, Inc. and Jere Northrop.
Incorporated by reference to 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 to 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 to 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 to 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 to 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 to 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 to Exhibit 10.12 to our Form 8-K
dated December 11, 1999.
10.13 Agreement dated August 10, 2000 between Bion Environmental
Technologies, Inc. and D2CO, LLC. Incorporated by reference
to Exhibit 99.2 to our Form 8-K dated August 3, 2000.
10.14 Agreement dated August 16, 2000 between Bion Environmental
Technologies, Inc. and Salvatore Zizza. Incorporated by
reference to Exhibit 99.3 to our Form 8-K dated August 3,
2000.
10.15 Agreement dated August 17, 2000 between Bion Environmental
Technologies, Inc. and James W. Morris & Associates,
Inc. Incorporated by reference to Exhibit 99.4 to our Form
8-K dated August 3, 2000.
10.16 Agreement dated August 6, 2000 among Bion Environmental
Technologies, Inc., Dream Maker Dairy and Chris Northrop.
Incorporated by reference to Exhibit 99.7 to our Form 8-K
dated August 3, 2000.
43
10.17 2000 Incentive Plan. Incorporated by reference to Exhibit
99.5 to our Form 8-K dated August 10, 2000.
10.18 Amendment to Management Agreement with D2CO, LLC.
Incorporated by reference to Exhibit 99.1 to our Form 8-K
dated December 1, 2000.
10.19 Agreement dated February 7, 2001 between Bion Technologies,
Inc. and Southview, Inc. Incorporated by reference to
Exhibit 99.2 to our Form 8-K dated December 1, 2000.
10.20 Agreement dated October 31, 2000 between Bion Environmental
Technologies, Inc. and George Bloom. Incorporated by
reference to Exhibit 99.3 to our Form 8-K dated December 1,
2000.
10.21 Note and Warrant Purchase Agreement. Incorporated by
reference to Exhibit 10.1 to our Form 8-K dated April 26,
2001.
10.22 Convertible Bridge Note. Incorporated by reference to
Exhibit 10.2 to our Form 8-K dated April 26, 2001.
10.23 Bridge Warrant. Incorporated by reference to Exhibit 10.3
to our Form 8-K dated April 26, 2001.
10.24 Severance Agreement of Jon Northrop. Incorporated by
reference to Exhibit 10.1 to our Form 8-K dated September 6,
2001.
10.25 Severance Agreement of Edward Hennig. Incorporated by
reference to Exhibit 10.2 to our Form 8-K dated September 6,
2001.
10.26 Agreement of Harley E. Northrop. Incorporated by reference
to Exhibit 10.3 to our Form 8-K dated September 6, 2001.
10.27 Agreement of Jere Northrop. Incorporated by reference to
Exhibit 10.4 to our Form 8-K dated September 6, 2001.
10.28 Agreement of William J. Crossetta, Jr. Incorporated by
reference to Exhibit 10.5 to our Form 8-K dated September 6,
2001.
10.29 Agreement of S. Craig Scott. Incorporated by reference to
Exhibit 10.6 to our Form 8-K dated September 6, 2001.
10.30 Agreement of Northrop Family Trust. Incorporated by
reference to Exhibit 10.7 to our Form 8-K dated September 6,
2001.
10.31 Agreement of M. Duane Stutzman. Incorporated by reference
to Exhibit 10.8 to our Form 8-K dated September 6, 2001.
10.32 Stock Voting Agreement dated August 1, 2001. Incorporated
by reference to Exhibit 10.9 to our Form 8-K dated September
6, 2001.
44
10.33 Mark Smith and Related Entities Agreement dated August 1,
2001. Incorporated by reference to Exhibit 10.10 to our
Form 8-K dated September 6, 2001.
10.34 D2 Agreement dated August 1, 2001. Incorporated by
reference to Exhibit 10.11 to our Form 8-K dated September
6, 2001.
10.35 2001 Incentive Plan. Incorporated by reference to Exhibit
10.12 to our Form 8-K dated September 6, 2001.
10.36 Letter Agreement with Howard Chase. Filed with initial
filing of this report.
10.37 Non-Binding Agreement re Dairy Parks LLC. Filed with
initial filing of this report.
21 Subsidiaries of the Registrant. Filed with initial filing
of this report.
23.1 Consent of BDO Seidman, LLP. Filed herewith
electronically.
99.1 Bion Environmental Technologies, Inc.'s Capital Structure.
Incorporated by reference to 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 to Exhibit 10.1 to our Form 8-K dated April 13,
2000.
99.3 Form of Convertible Bridge Note. Incorporated by reference
to Exhibit 10.2 to our Form 8-K dated April 13, 2000.
99.4 Form of Bridge Warrant. Incorporated by reference to
Exhibit 10.3 to our Form 8-K dated April 13, 2000.
Reports on Form 8-K
The following Report on Form 8-K was filed during the quarter ended June
30, 2002:
Form 8-K/A dated December 12, 2001 reporting information under
Item 7.
45
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements and Schedule
Page
Independent auditors' report F-2
Consolidated balance sheet as of June 30, 2002 F-3
Consolidated statements of operations for the years
ended June 30, 2002 and 2001 F-4
Consolidated statements of changes in stockholders'
equity for the years ended June 30, 2002 and 2001 F-5
Consolidated statements of cash flows for the years
ended June 30, 2002 and 2001 F-7
Notes to consolidated financial statements F-8
F-1
Report of Independent Certified Public Accountants
To the Board of Directors and Stockholders
Bion Environmental Technologies, Inc.
New York, New York
We have audited the accompanying consolidated balance sheet of Bion
Environmental Technologies, Inc. and Subsidiaries as of June 30, 2002 and the
related consolidated statements of operations, stockholders' deficit, and cash
flows for the years June 30, 2002 and 2001. 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 audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Bion
Environmental Technologies, Inc. and Subsidiaries as of June 30, 2002, and the
results of its operations and its cash flows for the years ended June 30, 2002
and 2001 in conformity with accounting principles generally accepted in the
United States of America.
The accompanying financial statements have been prepared assuming that 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 in regard to these matters are
also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
As discussed in Note 6 to the consolidated financial statements, the Company
has restated its June 30, 2002 financial statements to reflect the
consolidation of its Rabbi Trust.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
August 23, 2002, except with respect to
Note 6 which is as of January 16, 2003
F-2
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
As of June 30, 2002
ASSETS
Current assets:
Cash and cash equivalents $ 1,813,571
Accounts receivable, net of allowance for doubtful accounts of $2,000 17,295
Inventory 67,640
Prepaid expenses and other current assets 147,999
------------
Total current assets 2,046,505
Property and equipment, net 154,425
Claims receivable 1,339,154
Other assets 212,815
------------
Total assets $ 3,752,899
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 323,937
Accrued expenses 55,152
Capital lease obligation 2,603
------------
Total current liabilities 381,692
Capital lease obligation - less current portion 646
Deferred compensation 518,722
------------
Total liabilities 901,060
Minority interest 441,093
Commitments and contingencies
Stockholders' Equity:
Preferred Stock, $.01 par value, 10,000 shares authorized,
-0- shares issued and outstanding -
Common stock, no par value, 100,000,000 shares authorized,
4,211,665 shares issued and 4,117,352 shares outstanding
(this does not include 1,095,730 shares held by Centerpoint
which will be distributed to Bion and subsequently cancelled) -
Additional paid in capital 59,403,468
Accumulated deficit (56,172,245)
Treasury stock at cost, 94,313 shares of common stock (820,477)
------------
Total stockholders' equity 2,410,746
------------
Total liabilities and stockholders' equity $ 3,752,899
============
See notes to consolidated financial statements
F-3
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years Ended June 30,
-------------------------------
2002 2001
------------ ------------
Revenue:
Soil $ 69,382 $ 74,322
System sales - 10,000
------------ ------------
69,382 84,322
Cost of soil 546,117 439,817
------------ ------------
546,117 439,817
Gross loss (476,735) (355,495)
------------ ------------
Expenses:
General and administrative (excluding $4,665,807 and $7,645,570
of non-cash charges for services and compensation, respectively) 2,498,400 2,778,881
Research and development 735,622 1,262,010
Non-cash charges for services and compensation 4,665,807 7,645,570
------------ ------------
7,899,829 11,686,461
------------ ------------
Operating loss (8,376,564) (12,041,956)
------------ ------------
Other income and expense:
Interest expense (including $8,607,023 and $3,013,644 of non-cash
interest charges, respectively) (8,611,903) (3,016,149)
Interest income 36,011 36,598
Other expense, net 74,855 (50,466)
------------ ------------
(8,501,037) (3,030,017)
------------ ------------
Net loss before minority interest and cumulative effect of a change
in accounting principle (16,877,601) (15,071,973)
Minority interest 85,457 -
------------ ------------
Net loss before cumulative effect of change in accounting principle (16,792,144) (15,071,973)
Cumulative effect of change in accounting principle - (481,250)
------------ ------------
Net loss and comprehensive loss $(16,792,144) $(15,553,223)
============ ============
Basic and diluted loss per common share:
Net loss before cumulative effect of change in accounting principle $ (7.14) $ (11.65)
Cumulative effect of change in accounting principle - (0.37)
------------ ------------
Net loss per common share $ (7.14) $ (12.02)
============ ============
Weighted-average number of common shares
outstanding, basic and diluted loss per share 2,352,190 1,293,719
============ ============
See notes to consolidated financial statements
F-4
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Additional Non-Recourse Deferred Total
Common Stock Paid-In Promissory Consulting Unearned Accumulated Stockholders'
Shares Capital Note Expense Compensation Deficit Deficit
---------------------------------------------------------------------------------------------------
Balance, June 30, 2000 1,190,364 $22,748,871 $(500,000) $(1,944,739) $(67,500) $(23,826,878) $ (3,590,246)
---------------------------------------------------------------------------------------------------
Compensation associated
with warrants exchanged
for common stock 114,531 2,179,182 2,179,182
Issuance of stock options
and warrants for
consulting services 2,834,702 2,834,702
Modification of terms of
convertible bridge notes 213,172 213,172
Warrants issued for
consulting services 737,005 (737,005) -
Deferred consulting expense 320,591 320,591
Issuance of common stock for
consulting services 25,000 42,175 42,175
Deferred salaries expense 27,000 27,000
Beneficial conversion feature
on convertible bridge
notes 1,751,000 1,751,000
Beneficial value of warrants
issued 699,902 699,902
Deferred compensation charged
to operations in connection
with renegotiation of
management agreement 2,361,153 2,361,153
Repurchase of warrants
previously issued for cash
and non-recourse
promissory note (1,000,000) 500,000 (500,000)
Cancellation of shares
previously issued for
services (16,200) (40,500) 40,500
Issuance of warrants for
cash as additional
consideration to
convertible note holders 37,907 37,907
Issuance of shares on
exercise of options in
exchange for legal
services 5,000 10,000 10,000
Exercise of stock options 73 1,454 1,454
Adjustment for variable options 3,469 3,469
Net loss (15,553,223) (15,553,223)
---------------------------------------------------------------------------------------------------
Balance, June 30, 2001 1,306,348 $30,218,339 $ - $ - $ - $(39,380,101) $ (9,161,762)
---------------------------------------------------------------------------------------------------
F-5
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Additional Non-Recourse Deferred Unearned Total
Common Stock Paid-In Promissory Consulting Compen- Accumulated Treasury Stockholders'
Shares Capital Note Expense sation Deficit Stock Deficit
------------------------------------------------------------------------------------------------------
Balance, June 30, 2001 1,306,348 $30,218,339 $ - $ - $ - $(39,380,101) $(9,161,762)
-------------------------------------------------------------------------------------------------------
Issuance of stock options 9,118 120,000 120,000
Issuance of stock for
notes conversion 1,905,979 14,369,520 14,369,520
Issuance of stock for
services 85,950 864,934 864,934
Issuance of options and
warrants for consulting
services 329,283 329,283
Non-cash variable options
adjusted (3,469) (3,469)
Modification of terms of
bridge warrants 197,000 297,000
Issuance of warrants as an
inducement to convert debt 3,709,713 3,709,713
Beneficial conversion feature
on change of terms of debt 5,547,000 5,547,000
Write-off of debt discount
on conversion of debt (1,566,511) (1,566,511)
Acquisition of Centerpoint 904,270 5,517,659 5,517,659
Issuance of common stock
to trust (94,313) (820,477) (820,477)
Net loss (16,792,144) (16,792,144)
----------------------------------------------------------------------------------------------------------------------------------
Balance -June 30, 2001 4,117,352 $59,403,468 $ - $ - $ - $(56,172,245) (820,477) $ 2,410,796
----------------------------------------------------------------------------------------------------------------------------------
F-6
BION ENVIRONMENTAL TECHNOLOGIES, INC AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended June 30,
-------------------------------
2002 2001
------------- -------------
Cash flows from operating activities:
Net loss $ (16,792,144) $ (15,553,223)
Adjustments to reconcile net loss to net cash
used in operating activities:
Minority interest in net loss of subsidiary (85,457) -
Depreciation and amortization 72,199 76,954
Amortization of debt discount 1,554,425 1,673,178
Accretion of notes payable for interest expense 1,208,598 1,077,966
Beneficial conversion feature amortized to interest expense 5,844,000 262,500
Accretion of note payable for management fee - 370,000
Compensation charge from variable options (3,469) 3,469
Issuance of warrants as an inducement to convert debt 3,709,713 -
Non-cash charges for equity instruments issued for compensation
and services 891,915 6,951,510
Loss on disposal of property and equipment - 10,691
Reduction of note receivable for consulting services 67,646 -
Beneficial conversion feature recorded as a cumulative effect of a
change in accounting principle - 481,250
Amortization of deferred consulting expense - 320,591
Changes in:
Accounts receivable 4,443 4,957
Note receivable (123,615) -
Inventory (67,640) -
Prepaid expenses and other current assets (96,782) (85,719)
Deposits and other 9,150 -
Accounts payable (82,702) 109,307
Accrued liabilities 19,880 8,807
------------- -------------
Net cash used in operating activities (3,869,840) (4,287,762)
------------- -------------
Cash flows from investing activities:
Proceeds from issuance of common stock for acquisition 8,500,545 -
Payment for purchase of acquisition, net of cash acquired (3,641,548) -
Purchases of property and equipment (40,540) (59,354)
Proceeds from sale of computer equipment - 525
------------- -------------
Net cash provided by (used in) investing activities 4,818,457 (58,829)
------------- -------------
Cash flows from financing activities:
Proceeds from notes payable from related parties 355,000 500,000
Proceeds from issuance of notes payable in private placement - 2,527,218
Proceeds from issuance of warrants - 540,607
Proceeds from exercise of options and warrants 120,000 1,454
Payments for cancellation of warrants - (500,000)
Payment of loan (897,552) -
Payments of capital lease obligations (12,892) (27,223)
------------- -------------
Net cash (used in) provided by financing activities (435,444) 3,042,056
------------- -------------
Net increase (decrease) in cash and cash equivalents 513,173 (1,304,535)
Cash and cash equivalents, beginning of period 1,300,398 2,604,933
------------- -------------
Cash and cash equivalents, end of period $ 1,813,571 $ 1,300,398
============= =============
Supplemental disclosure of cash flow information:
Cash paid for interest during the period $ 4,880 $ 2,505
See notes to consolidated financial statements
F-7
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
1. ORGANIZATION AND NATURE OF BUSINESS
Bion Environmental Technologies, Inc. ("Bion" or the "Company") was
incorporated in 1987 in the State of Colorado.
Bion Environmental Technologies, Inc. ("Bion" or the "Company") is an
environmental service company focused on the needs of confined animal feeding
operations (CAFOs). Bion is engaged in two main areas of activity: waste
stream remediation and organic soil and fertilizer production. Bion's waste
remediation service business provides CAFOs (primarily in the swine and dairy
industries) with treatment for the animal waste outputs. In this regard, Bion
treats their entire waste stream in a manner which cleans and reduces the
waste stream thereby mitigating pollution of the air, water (both ground and
surface) and soil, while creating value-added organic soil and fertilizer
products. Bion's soil and fertilizer products are being used for a variety of
applications including school athletic fields, golf courses and home and
garden applications.
The Company's Nutrient Management System (NMS) solution is a patented
biological and engineering process that treats water, nutrient and air
pollution associated with animal waste. The system also provides a use for
the waste materials and solids by biologically converting them into
environmentally friendly, time-release organic-based solids that are the basis
of Bion's organic soil and fertilizer business segment. Bion's BionSoil and
Bion Fertilizer product lines contain a unique mix of organic nutrients,
bacteria and other microbes that extensive testing has shown produces superior
plant growth with reduced leaching of nutrients when compared to traditional
chemical fertilizers.
The consolidated financial statements have been prepared assuming the Company
will continue as a going concern. The Company incurred losses totaling
$16,792,144 during the year ended June 30, 2002 (including non-cash interest
expense and other non-cash expenses of $8,607,023 and $4,665,807,
respectively) and has a history of losses which has resulted in an accumulated
deficit of $56,172,245 at June 30, 2002.
Effective July 8, 2002, the Company completed a 1 for 10 reverse stock split
(the "stock split"). The stock split has been retroactively reflected in the
Company's consolidated balance sheet and consolidated statement of operations,
adjusted in the consolidated statements of changes in stockholders equity and
notes to consolidated financial statements.
During the year ended June 30, 2002, through the Company's transactions with
Centerpoint Corporation and OAM S.p.A. the Company obtained $4,800,000 in cash
(See Note 3). The Company continues to explore sources of additional
financing to satisfy its current operating requirements.
F-8
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
1. ORGANIZATION AND NATURE OF BUSINESS (Continued)
There can be no assurance that sufficient funds required during the next
twelve months or thereafter will be generated from operations or 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.
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.
We have a stockholders' equity of $2,910,746, cumulative deficit of
$56,172,245, limited current revenues and substantial current operating
losses. Our operations are not currently profitable; therefore, readers are
further cautioned that our continued existence is uncertain if we are not
successful in obtaining outside funding in an amount sufficient for us to meet
our operating expenses at our current level. Management plans to continue
raising additional capital to fund operations until Bion system and BionSoil
sales are sufficient to fund operations.
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation:
The consolidated financial statements include the accounts of the Company and
its wholly- and majority-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Revenue recognition:
Revenue from the sale of BionSoil products and associated fees are recognized
when shipped, as the Company has no continuing obligations.
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
F-9
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
Depreciation and amortization:
Property and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives of the related assets,
generally three to seven years. Leasehold improvements are amortized using the
straight-line method over the shorter of the term of the lease or the
estimated useful life of the asset.
Income taxes:
Deferred income taxes are determined by applying enacted statutory rates in
effect at the balance sheet date to the differences between the tax bases of
assets and liabilities and their reported amounts in the consolidated
financial statements. A valuation allowance is provided based on the weight
of available evidence, if it is considered more likely than not that some
portion, or all, of the deferred tax assets will not be realized.
Cash and 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.
Impairment of long-lived assets:
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.
Inventory:
Inventories are stated at the lower of cost or market, principally determined
by the FIFO method. Inventories include the cost of raw materials, supplies,
labor and overhead.
Loss per share of common stock:
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.
F-10
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
For the years ended June 30, 2002 and 2001, stock options exercisable into
214,523 and 190,497 shares of common stock and stock warrants exercisable into
1,393,393 and 93 9,761 shares of common stock were not included in the
computation of diluted earnings per share because their effect was
anti-dilutive.
Use of estimates:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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.
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.
Stock-based compensation:
The Company accounts for its stock-based compensation arrangements with its
employees in accordance with the provisions of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" and complies with
the disclosure provisions of SFAS 123, "Accounting for Stock-Based
Compensation." SFAS 123 established a fair-value-based method of accounting
for stock-based compensation plans. Stock-based awards to nonemployees are
accounted for at fair value in accordance with the provisions of SFAS 123.
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, 2002 and 2001 was $3,232 each year.
Reclassifications:
Certain prior-year amounts have been reclassified to conform to their 2002
presentation.
F-11
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Cumulative effects of accounting changes:
During the year ended June 30, 2001, the Company applied Emerging Issues Task
Force Issue No. 00-27 ("EITF 00-27"), "Application of EITF Issue No. 98-5,
Accounting for Convertible Securities with Beneficial Conversion Features of
Contingently Adjustable Conversion Ratios, to Certain Convertible
Instruments", which is effective for all such instruments. This issue
clarifies the accounting for instruments with beneficial conversion features
or contingently adjustable conversion ratios. The Company modified the
previous calculation of the beneficial conversion features associated with
previously issued convertible bridge notes. Based on further clarification,
the beneficial conversion feature should be calculated by allocating the
proceeds received in the financing to the convertible instruments and to any
detachable warrants issued in the transactions, and measuring the intrinsic
value based on the effective conversion price based on the allocated proceeds.
The previous calculation was based on a comparison of the stated conversion
price in the terms of the instrument to the fair value of the issuer's stock
at the commitment date.
As a result of the issuance of EITF 00-27, effective October 1, 2000, the
Company recorded an additional warrant discount on the 2000 convertible bridge
notes of $1,050,000 due to the beneficial conversion feature calculated on the
intrinsic value of the allocated proceeds received in the financing. Since
the notes automatically convert into common stock one year from the date of
issuance, the Company has recorded $481,250 as a cumulative effect of change
in accounting principle. The remaining discount of $568,750 has been
amortized to interest expense over the remaining conversion period.
Recent accounting pronouncements:
In July 2002, the FASB issued SFAS No. 146, Accounting for Restructuring
Costs. SFAS No. 146 applies to costs associated with an exit activity
(including restructuring) or with a disposal of long-lived assets. Those
activities can include eliminating or reducing product lines, terminating
employees and contracts, and relocating plant facilities or personnel. Under
SFAS No. 146, a company will record a liability for a cost associated with an
exit or disposal activity when that liability is incurred and can be measured
at fair value. SFAS No. 146 will require a company to disclose information
about its exit and disposal activities, the related costs, and changes in
those costs in the notes to the interim and annual financial statements that
include the period in which an exit activity is initiated and in any
subsequent period until the activity is completed. SFAS No. 146 is effective
prospectively for exit or disposal activities initiated after December 31,
2002 with earlier adoption encouraged. Under SFAS No. 146, a company may not
restate its previously issued financial statements and the new Statement
grandfathers the accounting for liabilities that a company had previously
recorded under Emerging Issues task Force Issue 94-3. The adoption of SFAS
No. 146 will not have an effect on our financial condition or the results of
operations.
F-12
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of." SFAS No. 144 addresses financial accounting and reporting
for the impairment or disposal of long-lived assets. The provisions of SFAS
No. 144 are effective for fiscal years beginning after December 15, 2001. The
Company is required to adopt SFAS No. 144 by the first quarter of fiscal 2003.
The Company is currently evaluating the potential impact of SFAS No. 144 on
its results of operations and financial position.
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS
No. 141 requires the use of the purchase method of accounting and prohibits
the use of pooling-of-interests method of accounting for business combinations
initiated after June 30, 2001. SFAS No. 141 also requires that we recognize
acquired intangible assets apart from goodwill if the acquired intangible
assets meet certain criteria. SFAS No. 141 applies to all business
combinations initiated after June 30, 2001 and for purchase business
combinations completed on or after July 1, 2001. It also requires, upon
adoption of SFAS No. 142, that we reclassify the carrying amounts of
intangible assets and goodwill based on the criteria in SFAS No. 141. The
adoption of SFAS No. 141 did not have an effect on our financial condition or
the results of operations.
SFAS No. 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS No. 142 requires that we identify reporting units for the
purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An
intangible asset with an indefinite useful life should be tested for
impairment in accordance with the guidance in SFAS No. 142. SFAS No. 142 is
required to be applied in fiscal years beginning after December 15, 2001 to
all goodwill and other intangibles assets recognized at that date, regardless
of when those assets were initially recognized. The adoption of SFAS No. 141
and 142 did not have an effect on our financial condition or results of
operations. The adoption of SFAS No. 142 will not have an effect on our
financial condition or the results of operations
3. ACQUISITION OF CENTERPOINT CORPORATION
On January 15, 2002, Bion issued 1,900,000 shares of its restricted common
stock, valued at $7.50 per share, to Centerpoint Corporation, a publicly held
Delaware corporation ("Centerpoint"), in exchange for $8,500,000 in cash and
the assignment of claims related to Centerpoint's transaction with Aprilia and
other rights owned by Centerpoint for total consideration of $14,250,000.
F-13
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
3. ACQUISITION OF CENTERPOINT CORPORATION (Continued)
Immediately upon consummation of the transaction with Centerpoint, Bion
purchased a 57.7% majority interest in Centerpoint from its Italian parent,
OAM, S.p.A. ("OAM") by issuing 100,000 shares of its common stock to OAM, a
warrant to purchase an additional 100,000 shares of common stock valued at
$380,000 using the Black-Scholes pricing model, $3,700,000 of cash, assignment
of a loan receivable valued at $3,263,000 and its rights acquired under claims
receivable acquired from Centerpoint valued at $2,487,000. The combination
has been accounted for using the purchase method of accounting.
Additional shares may be issued to Centerpoint and OAM if the Company issues,
sells or transfers any of its equity securities or securities convertible into
or exchangeable for equity securities at a price less than $7.50 per share
until the cumulative investment in the Company, from unaffiliated third
parties, from the date of this transaction, equals $5 million. The number of
additional shares to be issued would be determined by calculating the
additional number of shares Centerpoint and OAM would have received if the
transactions were consummated at the price per share of the subsequent equity
financing.
On January 15, 2002, the Company recorded a minority interest of $526,550,
which represents 42.3% of the net assets of Centerpoint at that time. The
Company has included the results of Centerpoint's operations in its financial
statements for the period commencing January 15, 2002, the date of the
combination, through June 30, 2002. The Company recorded a minority interest
of $85,457 representing the minority shareholders interest in the net loss of
Centerpoint for the period ended June 30, 2002.
As a result of these two transactions, the Company obtained $4,800,000 in cash
and ownership of a majority of issued and outstanding shares of Centerpoint.
On August 12, 2002, the Company filed a registration statement to allow
Centerpoint to distribute to its stockholders the 1.9 million shares of Common
Stock of Bion that the Company issued to Centerpoint in connection with the
transaction. The Company expects the distribution to occur during the second
half of calendar 2002. When that distribution occurs, approximately 1.1
million shares of common stock of Bion will be distributed back to the Company
and cancelled. After the Company cancels these shares of common stock, the two
transactions will have resulted in a net increase of approximately 900,000 of
issued and outstanding shares of common stock of Bion, which includes 100,000
shares issued by the Company directly to OAM as partial consideration for the
Company obtaining control of Centerpoint.
The Centerpoint transaction triggered the conversion of $14,256,779 of notes
payable including interest into 1,900,911 shares of our common stock. In
addition, warrants to purchase 213,263 shares of our common stock had their
exercise price decreased to $7.50 and $6.00. As described above, if the
Company raises equity at a price less than $7.50 per share, the Company may
need to issue additional shares to the note holders as if the notes were
converted into shares of the Company's common stock at the price per share of
F-14
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
3. ACQUISITION OF CENTERPOINT CORPORATION (Continued)
the subsequent equity financing. In addition, the exercise prices for 17,596
warrants may be decreased to the price per share of the subsequent equity
financing and the exercise prices for 195,174 warrants may be decreased to 80%
of the price per share of the subsequent equity financing. Also, in the event
of a subsequent equity financing below $7.50, additional warrants will be
issued on 1,037,343 warrants currently outstanding to increase these warrants
to reflect 20% of the fully diluted shares outstanding as of January 15, 2002,
after giving effect to the above adjustments. These warrants will also have
their exercise price lowered to the price per share of the subsequent equity
financing.
Centerpoint had owned the Moto Guzzi motorcycle business, which it sold in
August 2000. Since that time it had been seeking an investment opportunity
for the cash it received from the sale. Other than seeking an investment
opportunity, Centerpoint has been inactive since the time of the sale of Moto
Guzzi. After giving effect to the January 15, 2002 transactions,
Centerpoint's primary asset is 1,900,000 shares of Bion's common stock.
Centerpoint currently has only minimal cash, no other significant assets other
than the Bion shares and no business operations. Centerpoint does continue to
hold 35% of the rights to a litigation claim and an escrow account. The claim
is reflected on the balance sheet at $1,339,154 and the escrow account was not
valued.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of June 30, 2002:
Estimated
Useful Lives (Years)
--------------------
Furniture and equipment 5-7 $ 379,954
Computer equipment 3-5 75,845
Leasehold improvements 11 30,174
----------
485,973
Less accumulated depreciation and amortization 331,548
----------
$ 154,425
==========
Depreciation and amortization expense related to property and equipment was
$68,967 and $73,722 for the years ended June 30, 2002 and 2001, respectively.
At June 30, 2002, property and equipment acquired under capital leases had a
cost basis of $102,599 and accumulated depreciation of $92,924.
F-15
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
5. CLAIMS RECEIVABLE
Aprilia claim:
In June 2001, Aprilia's legal counsel sent a letter to Centerpoint which
alleged that it had various claims under the Share Purchase Agreement
aggregating approximately Lit. 9,600 million (approximately US$4,658,000). In
July 2001, Centerpoint's Italian counsel sent a letter to Aprilia's counsel
contesting all of the alleged claims.
On July 13, 2001, Aprilia requested that IMI, the escrow agent, pay them Lit.
7,611 million, (approximately US$ 3,693,000) in respect of the alleged claims.
On July 26, 2001, in spite of being aware of Centerpoint contesting of the
alleged claims and its intention to seek arbitration, IMI advised Centerpoint
that it had paid the requested funds from the escrow account to Aprilia.
IMI claim:
At the September 7, 2000 closing of the sale of the subsidiaries, in
accordance with an invoice previously submitted to them by IMI, but without
the prior approval, knowledge or consent of the Company, IMI was paid
Lit.11,401 million (approximately US$5,532,000), in respect of fees and
expenses claimed by IMI to be due it under its engagement letter with TRG and
OAM.
On February 11, 2002, Centerpoint brought a suit against IMI seeking
reimbursement of Lit. 8,766 million (approximately US$4,253,000) of the amount
paid to IMI at the closing.
The above claims were valued at $3,826,154 arrived through an internal
allocation made by Bion management based on its own evaluation of the relevant
facts and circumstances and its review of a fairness opinion that was
provided by an investment banking firm with regard to the transaction as a
whole. The rights to 65% of these claims were ultimately assigned to OAM.
The rights to 35% of the claims remained with Centerpoint and are included in
the consolidated financial statements of the Company. See Note 3 -
Acquisition of Centerpoint.
6. DEFERRED COMPENSATION
On June 30, 2001, Bion and D2 agreed that the payments owed to D2 under an
existing management agreement be paid to a Rabbi Trust for the benefit of D2.
On July 31, 2001, Bion and Sam Spitz (the "Trustee") entered into the Trust
Under Deferred Compensation Plan for D2Co, LLC (the "Trust").
Under the Trust agreement, the Company shall contribute assets to the Trust,
such assets are subject to claims of the Company's creditors in the event of
the Company's insolvency, at such times as specified in the management
agreement with D2. D2 shall have no preferred claim on, or any beneficial
ownership interest in, any assets of the trust. Any rights created under the
management agreement with D2 and the Trust shall be unsecured contractual
rights of D2 against the Company. Payments of all amounts in the Trust are
to be made to D2 on January 2, 2011, as stated in the Trust agreement.
F-16
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
6. DEFERRED COMPENSATION (Continued)
The Company accounts for the Trust under the provisions of Emerging Issues
Task Force ("EITF") 97-14 "Accounting for Deferred Compensation Arrangement
Where Amounts are Earned and Held in a Rabbi Trust and Invested" which
requires the Company to consolidate into its financial statements the net
assets of the Trust. The value of the Company's common stock held by the
Trust is classified in shareholders' equity and is accounted for in a manner
similar to treasury stock. The deferred compensation obligation has been
classified as a liability and is adjusted, with the corresponding charge or
credit to compensation expense, to reflect changes in fair value of the common
stock held by the Trust. The Company has restated its June 30, 2002
consolidated financial statements to reflect the consolidation of the Trust.
The more significant effects of the restatement were to reduce consolidated
net loss, loss per common share, and consolidated stockholders equity at June
30, 2002 by $301,755, $.04 and $518,722, respectively.
7. STOCKHOLDERS' EQUITY
Reverse stock split:
Effective July 8, 2002, the Company completed a one-for-ten reverse stock
split of its outstanding shares of common stock. The accompanying
consolidated financial statements have been retroactively adjusted to reflect
the reverse stock split.
Common stock:
Holders of common stock are entitled to one vote per share on all matters to
be voted on by common stockholders. In the event of liquidation, dissolution
or winding up of the Company, the holders of common stock are entitled to
share in all assets remaining after liabilities have been paid in full or set
aside. Common stock has no preemptive, redemption or conversion rights. The
rights of holders of common stock are subject to, and may be adversely
affected by, the rights of the holders of any other series of preferred stock
the Company may designate in the future.
During the year ended June 30, 2002, the Company issued 14,690 shares of its
common stock, valued at $136,906, for services and 6,250 shares of
Centerpoint's common stock valued at $9,377. The Company also issued 13,012
shares of its common stock, valued at $168,650, to employees as compensation.
During the year ended June 30, 2001, the Company issued 3,000 shares of its
common stock, valued at $52,175, for services. Also, during the year ended
June 30, 2001, the Company cancelled 1,620 shares of common stock issued as
compensation in accordance with termination agreements with these employees.
Warrants:
As of June 30, 2002, the Company had the following common stock warrants
outstanding:
F-17
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
7. STOCKHOLDERS' EQUITY (Continued)
Number of Exercise
Shares Price Expiration Date
--------- -------- ---------------
Class D2C-W 2,455 $ 25.00 June 30, 2004
Class J-1 3,000 $ 20.00 December 31, 2004
Class J-1A 119,850 (a)(d) $ 6.00 December 31, 2004
Class J-1AA 17,596 (b)(e) $ 7.50 December 31, 2004
Class J-1B 30,047 (a)(d) $ 6.00 December 31, 2005
Class J-1C 45,770 (a)(d) $ 6.00 December 31, 2005
Class J-1D 30,832 (c) $ 15.00 December 31, 2004
Class J-2 6,500 $ 15.00 December 31, 2004
Class SV 1,037,343 (e)(f) $ 7.50 February 16, 2006
Class O 100,000 $ 9.00 January 15, 2006
(a) Redeemable by the Company at $0.05 per warrant if the bid price for our
common stock is above $14.00.
(b) Redeemable by the Company at $0.05 per warrant if the bid price for our
common stock is above $15.00.
(c) Issued for services valued at $109,543. Redeemable by the Company at
$0.05 per warrant if the bid price for our common stock is above $35.00.
(d) The exercise price is deemed to be 80% of the conversion price of the
2000 and 2001 convertible bridge notes (the "CV Notes"). The exercise
price may be lowered if the Company issues shares of its common stock
for consideration that is below $7.50 up until the time the Company
raises $5,000,000 in proceeds. See Note 3.
F-18
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
7. STOCKHOLDERS' EQUITY (Continued)
(e) The exercise price is deemed to be the conversion price of the CV Notes.
The exercise price may be lowered if the Company issues shares of its
common stock for consideration that is below $7.50 up until the time the
Company raises $5,000,000 in proceeds. See Note 3.
(f) In the event of (e) above, additional warrants will be issued to reflect
20% of "fully diluted" outstanding shares of the Company. See Note 9.
During the year ended June 30, 2001, in connection with the Company's private
placement of its convertible notes payable, the Company issued 75,817 warrants
with a value of $737,809. This value was obtained using the Black Scholes
model of pricing, and has been charged to stockholders' deficit, and is
reflected as a discount on the convertible notes. Increases in value totaling
$297,000 and $213,172 have been made to the warrants issued during the years
ended June 30, 2002 and June 30, 2001, respectively, due to various changes in
terms of these warrants.
During the year ended June 30, 2001, holders of 63,466 Class X warrants and
632,389 Class Z warrants exchanged their warrants for 114,531 shares of
restricted common stock. For the year ended June 30, 2001, the Company
recorded $2,179,182 as additional expense related to the beneficial value of
the consideration received over the value of warrants surrendered.
Stock options:
The 1994 Incentive Plan (the "1994 Plan") provides for incentive stock options
to be granted to employees. Options to purchase up to 238,055 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 1994 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, 2002, options to purchase 112,244 shares
of the Company's common stock are outstanding under the 1994 Plan.
The 1996 Non-employee Director Stock Plan ("the Director Plan") provides for
each non-employee director to receive annually, an option to purchase 500
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 10,000 shares of the Company's common
stock may be granted under the Director Plan. As of June 30, 2002, options to
purchase 4,336 shares of the Company's common stock are outstanding under the
Director Plan.
F-19
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
7. STOCKHOLDERS' EQUITY (Continued)
The 2000 Incentive Plan (the "2000 Plan") 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 100,000 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, 2002, options to purchase 90,609 shares of the Company's
common stock are outstanding under the 2000 Plan.
The 2001 Incentive Plan (the "2001 Plan") 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 150,000 shares
of the Company's common stock may be granted under the 2001 Plan. Terms of
exercise and expiration of options granted under the 2001 Plan may be
established at the discretion of an administrative committee appointed to
administer the 2001 Plan, but no option may be exercisable for more than ten
years. As of June 30, 2002, options to purchase 7,334 shares of the Company's
common stock are outstanding under the 2001 Plan.
The 2002 Incentive Plan (the "2002 Plan") 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 300,000 shares
of the Company's common stock may be granted under the 2002 Plan. Terms of
exercise and expiration of options granted under the 2002 Plan may be
established at the discretion of an administrative committee appointed to
administer the 2002 Plan, but no option may be exercisable for more than ten
years. As of June 30, 2002, there were no options outstanding under the 2002
Plan.
During the year ended June 30, 2002, the Company granted options to purchase
18,500 shares of common stock to members of the advisory board. The fair
value of the options, in the amount of $78,000, is being amortized as non-cash
compensation expense through July 2003. Non-cash charges for these options
amounted to $47,921 during the year ended June 30, 2002. The Company also
issued options to consultants to purchase 21,618 shares of common stock. The
fair value of the options, in the amount of $98,000, is being amortized as
non-cash compensation expense through July 2004. Non-cash charges for these
options amounted to $68,741 during the year ended June 30, 2002.
In January 2002, the Company reduced the exercise price to $11.00 for 63,693
outstanding options. These options will be accounted for as variable from the
date of the modification to the date the options are exercised, forfeited or
expires unexercised. Variable accounting requires the Company to take a
non-cash charge to earnings for the difference between the exercise price and
the fair market value of the stock multiplied by the number of vested options
on the date each price requirement is met. As of June 30, 2002, the fair
market value of the Company's common stock was lower than the reduced exercise
price of these options, thus no charges against operations were incurred.
F-20
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
7. STOCKHOLDERS' EQUITY (Continued)
During the year ended June 30, 2001, the Company granted options to purchase
524,000 shares of common stock to consultants. The fair value of the options,
in the amount of $162,000, was amortized as non-cash compensation expense
through June 2002. Non-cash charges for these options amounted to $66,209 and
$76,501 during the years ended June 30, 2002 and 2001, respectively.
The Company applies APB Opinion 25 and related interpretations in accounting
for equity instruments issued to employees. Accordingly, no compensation cost
has been recognized for its employee stock option grants other than non-cash
charges for the vesting of price-vested options. Had the compensation cost for
the Company's stock options grants been determined based on the fair value at
the grant dates for awards consistent with the method of SFAS 123, the
Company's net loss attributable to common stockholders and basic and diluted
loss per common share would have changed to the pro forma amounts indicated
below:
For the Years ended June 30,
-------------------------------
2002 2001
------------- -------------
Pro forma net loss:
As reported $ (16,792,144) $ (15,553,223)
Pro forma effect of SFAS No. 123 (541,995) (542,684)
------------- -------------
Pro forma after giving effect to SFAS No. 123 $ (17,334,139) $ (16,095,907)
============= =============
Basic and diluted loss per common share:
As reported $ (7.14) $ (12.02)
Pro forma effect of SFAS No. 123 (0.23) (0.04)
------------- -------------
Pro forma after giving effect to SFAS No. 123 $ ( 7.37) $ (12.44)
============= =============
The weighted-average fair value at date of grant for options granted during
the years ended June 30, 2002 and 2001 was $4.20 and $8.20 per share,
respectively. The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model using the following
weighted-average assumptions:
Year ended June 30,
-------------------
2002 2001
----- -----
Risk-free interest rate 3.24% 5.12%
Expected lives in years 2.7 2.5
Expected volatility 60% 60%
Expected dividend yield 0% 0%
Treasury Stock:
Treasury stock consists of 94,313 shares of the Company's common stock issued
to the Trust Under Deferred Compensation Plan for D2CO, LLC.
F-21
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
7. STOCKHOLDERS' EQUITY (Continued)
The following table summarizes the Company's stock options at June 30, 2002
and 2001, as well as changes during the years then ended:
Years ended June 30,
---------------------------------------------------
2002 2001
----------------------- -----------------------
Weighted- Weighted-
Average Average
Shares Exercise Price Shares Exercise Price
------- -------------- ------- --------------
Options outstanding at beginning
of year 190,541 $ 18.39 178,689 $ 42.80
Granted 95,419 $ 4.62 97,936 $ 19.50
Forfeited (62,319) $ 26.79 (85,511) $ 20.00
Exercised (9,118) $ 2.08 (573) $ 63.90
------- -------
Options outstanding at end of year 214,523 $ 14.17 190,541 $ 18.39
======= =======
Options exercisable at end of year 159,069 $ 15.10 117,634 $ 11.16
======= =======
The following table presents information relating to stock options outstanding
as of June 30, 2002:
Options Outstanding Options Exercisable
-------------------------------- --------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Contractual Exercise Exercise
Range of Exercise Prices Shares Life Price Shares Price
------------------------------------------------------------ --------------------
$ 9.50 - $ 11.00 121,961 1.7 $ 10.90 74,576 $ 10.97
$ 12.20 - $ 15.00 34,311 1.5 $ 13.64 31,742 $ 13.58
$ 15.40 - $ 17.00 7,612 2.1 $ 15.93 2,112 $ 15.76
$ 20.00 - $ 29.10 50,639 1.0 $ 22.11 50,639 $ 22.11
------------------------------------------------------------ --------------------
214,523 1.5 $ 14.17 159,069 $ 15.10
======= =======
The Company had 505,748 options reserved for future issuance under all of the
incentive plans as of June 30, 2002.
F-22
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
8. INCOME TAXES
The provision for income taxes consisted of the following:
For the year ended June 30,
2002 2001
------------ -------------
Deferred benefit:
Federal $ 1,083,000 $ 1,535,000
State 191,000 271,000
------------ ------------
1,274,000 1,806,000
Increase in valuation allowance (1,274,000) (1,806,000)
------------ ------------
$ - $ -
============ ============
A reconciliation of the effective tax and the statutory U.S. federal income tax is as follows:
For the year ended June 30,
2002 2001
------------ -------------
Expected tax (benefit) $ (4,019,000) $ (2,351,000)
Increase (decrease) in taxes resulting from:
Permanent differences 3,475,000 960,000
State and local income tax (benefit), net of federal effect (730,000) (415,000)
Increase in valuation allowance 1,274,000 1,806,000
------------ ------------
Taxes on income $ - $ -
============ ============
Deferred income taxes reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the amounts used for income
tax purposes. Significant components of the Company's deferred tax assets, liabilities and the
valuation allowance at June 30, 2002 and 2001 are as follows:
June 30,
----------------------------
2002 2001
------------ ------------
Deferred tax assets:
Accounts receivable allowance $ 1,000 $ 5,000
Accrued expenses 4,000 14,000
Depreciation and amortization 7,000 -
Compensation expense for common stock options and
warrants not allowed for income tax purposes 1,841,000 1,954,000
Federal, state and local net operating loss carryforwards 13,961,000 9,309,000
------------ ------------
Net deferred tax asset before valuation allowance 15,814,000 11,282,000
Valuation allowance (15,814,000) (11,282,000)
------------ ------------
Net deferred tax asset $ - $ -
============ ============
F-23
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
8. INCOME TAXES (Continued)
The Company has provided a valuation allowance of 100% of its net deferred tax
asset due to the uncertainty of generating future profits that would allow for
the realization of such deferred tax asset.
The Company has a net operating loss carryforward for tax purposes of
approximately $32,580,000 as of June 30, 2002. This carryforward expires from
2004 to 2022.
The utilization of the loss carryforwards may be limited under Section 382 of
the Internal Revenue Code.
The net operating loss carryfoward includes net operating losses from
Centerpoint of approximately $3,258,000 which expire between 2019 and 2021.
In addition to these operating losses, Centerpoint has a capital loss
carry-forward of $14,370,000 which can be carried forward to 2005. The
utilization of the loss carryfowards should be limited under Section 382 of
the Internal Revenue Code. The above loss carryfowards are carried at no
value on Centerpoint's books as management believes that it more likely than
not that these carryfowards will not be utilized.
9. COMMITMENTS AND CONTINGENCIES
Employment and director agreements:
The Company has employment agreements with two of its key employees which
expire on various dates from December 2003 through July 2005. The agreements
require aggregate annual payments of $210,000 for the year ending June 30,
2003, 180,000 for the year ending June 30, 2004, and 87,500 for the year
ending June 30, 2005. The Company also has an agreement with a director to
pay him $1,000 monthly through March 31, 2003.
Obligations under operating leases:
The Company has non-cancelable operating lease commitments for office space
expiring on various dates through August 31, 2011. Rent expense was $325,917
and $247,059 for the years ended June 30, 2002 and 2001, respectively. Some
of the leases contain escalation clauses for operating expenses.
At June 30, 2002, minimum future rental payments due under non-cancelable
operating leases are as follows:
Lease Obligation Sub Lease Income
2003 $ 286,956 $ 49,644
2004 280,065 49,644
2005 271,836 49,644
2006 264,086 8,274
2007 264,086 -
Thereafter 962,574 -
---------------------------------------
$2,321,163 $ 157,206
=======================================
F-24
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
9. COMMITMENTS AND CONTINGENCIES (Continued)
Obligations under capital leases:
The Company has various non-cancelable capital leases for computers and
equipment. At June 30, 2002, minimum future lease payments under
non-cancelable capital leases were as follows:
2003 $ 2,882
2004 660
-------
3,542
Amount representing imputed interest 293
-------
Present value of future minimum lease payments 3,249
Less current portion (2,603)
-------
Capital lease obligation - less current portion $ 646
=======
Licensing agreement:
On January 31, 2002, the Company entered into a licensing agreement with
BioBalance A/S. This agreement allows the Company to license the BioBlance
technology for use in the field of agricultural applications for
treating/converting animal waste into soil-like products with a content of
nutrients and organic matter. The agreement exclusively covers the United
States and its territories. This licensing agreement is for ten years and can
be cancelled by the Company with 120 days notice. At June 30, 2002 future
minimum licensing commitments are as follows:
2003 $ 20,833
2004 60,417
2005 85,417
2006 100,000
2007 100,000
Thereafter 1,508,333
-----------
$ 1,466,666
===========
Claims Contingency:
On July 22, 2002, Thomas Keith Barefoot ("Barefoot"), doing business as Quin
Deca Farm ("Quin Deca"), an unaffiliated party, filed a complaint against the
Company in the Superior Court of the County of Harnett in the State of North
Carolina regarding the Company's first generation Bion NMS System on Quin Deca
Farm and the harvesting of BionSoil. The complaint includes breach of
contract claims asserting that the Company abandoned the NMS system on Quin
Deca Farm and the failure of the Company to harvest BionSoil. The second
F-25
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
9. COMMITMENTS AND CONTINGENCIES (Continued)
claim is for fraud regarding misrepresentation of the state of the technology
of the first generation NMS. The third claim is for unfair and deceptive trade
practices for misrepresentation of the state of the technology of the NMS
System. The fourth claim is for negligent misrepresentation made by Bion in
connection with the work it performed and its suitability for the intended
purpose. The fifth claim is for equity/specific performance in that Bion left
Quin Deca with an economically and technically deficient waste management
system that cannot continue to be used without adequate and alternative
methods of waste removal. Quin Deca is seeking $30,000 in damages, $10,000 in
punitive damages, to have its damages trebled, reasonable attorney fees and
principles of equity requiring Bion to install its second generation Bion NMS
system. The Company does not believe that the ultimate resolution of this
litigation will have a material adverse effect on the Company, its operations
or its financial condition.
On May 6, 2002, Arab Commerce Bank Ltd. ("ACB"), an unaffiliated party, filed
a complaint against the Company in the Supreme Court of the State of New York
regarding $100,000 of the Company's convertible bridge notes ("Notes") that
were issued to ACB in March of 2000. The complaint includes breach of
contract claim asserting that the Company owes ACB $265,400 plus interest or
$121,028 including interest based on ACB's interpretation of the terms of the
Notes and subsequent amendments. Effective June 30, 2001, the Company issued
ACB 5,034 shares of common stock on conversion in full payment of the Notes
based on the Company's interpretation of the Notes, as amended. The Company
has filed an answer to the complaint denying the allegations. The Company
does not believe that the ultimate resolution of this litigation will have a
material adverse effect on the Company, its operations or its financial
condition.
Letter of Credit:
The Company has provided a letter of credit for $120,561, which serves as a
security deposit on a lease agreement. The amount has been recorded as
restricted cash and is included in other assets on the Company's consolidated
balance sheet.
10 RELATED PARTY TRANSACTIONS
Transactions with David Mitchell and Related Entities
Management Agreement with D2
In December 1999, the Company entered into a three year Management Agreement
with D2 Co., LLC ("D2") of which David Mitchell, Chairman, CEO and President
of the Company, is sole member, pursuant to which D2 agreed to provide the
Company specific management and consulting services. The agreement called for
compensation to D2 for such services in the amounts of:
* $240,000 per year payable in common stock or cash; and
* 250,000 warrants exercisable at $25.00 expiring on December 31,
2004.
On August 10, 2000, the Company amended the Management Agreement with D2 under
which the Company:
F-26
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
10 RELATED PARTY TRANSACTIONS (Continued)
* extended the agreement for D2's services for an additional year;
and
* issued 150,000 additional warrants (100,000 exercisable at $35.00
per share and 50,000 exercisable at $60.00 per share, both
exercisable from January 1, 2002 until August 10, 2005).
In December 2000, the Company made additional amendments to the D2 Management
Agreement by:
* extending the term of the agreement by 18 months;
* canceling all of the warrants issued under the Management
Agreement as amended; and
* increasing the annual base consideration to $500,000 in calendar
year 2001, to $600,000 in calendar year 2002 and $750,000; and
calendar year 2003.
Effective January 1, 2001, the Company orally agreed to the following:
* to make the payments due under the Management Agreement to the
Trust.
The payments to the Trust for the six months ended June 30, 2001 totaling
$250,000 were made in the form of 2000 and 2001 convertible bridge notes (the
"CV Notes").
Effective July 1, 2001, compensation to D2 is paid to the Trust in the form of
common stock on a quarterly basis.
On January 15, 2002, as a result of the transaction with Centerpoint:
* all the D2 and the Trust CV Notes were converted into 37,022
shares and 36,064 shares of the Company's common stock,
respectively.
In the event of a subsequent equity financing below $7.50, the Company may
need to issue additional shares to D2 and to the Trust for the CV Notes
converted as if the notes were converted into shares of the Company's common
stock at the price per share of the subsequent equity financing. See Note 3.
During the year ended June 30, 2002, we issued 582,456 shares of common stock
to the Trust, valued at $550,000, for the management fee owed to D2.
Warrant Purchase Agreement
In December 1999, we entered into a Warrant Purchase Agreement pursuant to
which:
F-27
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
10 RELATED PARTY TRANSACTIONS (Continued)
* D2 purchased 250,000 warrants, exercisable at $17.50 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 was secured by the
subject warrants).
In December 2000, we entered into an agreement with D2 pursuant to which:
* We canceled the warrants issued under the Warrant Purchase
Agreement; and
* We agreed to repay the purchase price of the warrants issued under
the Warrant Purchase Agreement with $500,000 cash and cancellation
of the existing $500,000 non-recourse promissory note receivable
and accrued interest
Southview
During the period January 8 through March 31, 2001, Southview, Inc.
("Southview"), a corporation wholly owned by Mr. Mitchell:
* loaned the Company $871,000 earning 8% interest per annum of which
$371,000 was repaid in April 2001.
On February 16, 2001, under an agreement effective January 8, 2001, Southview
purchased:
* warrants to purchase 650,000 shares of the Company's common stock
for the sum of $500,000, exercisable until February 16, 2006.
Half of these warrants were exercisable at $10.00 and half of these warrants
were exercisable at varying prices between $10.00 and $20.00 per share,
depending on the market price of the Company's common stock. The warrants
were subsequently assigned to Atlantic Partners, LLC ("Atlantic"), an
affiliate of David Mitchell.
On September 6, 2001, the Board of Directors affirmed an agreement dated
August 1, 2001 entered into between the Company, D2, Southview and Atlantic in
which the Company agreed to amend the Southview warrants so that:
* upon the conversion of the Company's outstanding CV Notes into the
Company's common stock, the outstanding Southview warrants will be
adjusted ("Adjusted Warrants") so that the Adjusted Warrants
equal 20% of the "fully-diluted" outstanding shares; and
As partial consideration for Bion agreeing to the adjustment to the Southview
warrants, Southview agreed:
* to extend the term of the outstanding promissory note due July 31,
2001, with a balance of $521,040 including accrued interest, so
that such promissory note could be repaid from the proceeds of a
new financing.
F-28
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
10. RELATED PARTY TRANSACTIONS (Continued)
On January 15, 2002, as a result of the transaction with Centerpoint:
* the Southview warrants were adjusted to equal 20% or, 1,037,343
shares of the "fully-diluted" outstanding shares of the Company
and the exercise was adjusted to $7.50 resulting in a benefit of
$3,709,713 calculated using the Black-Scholes pricing model; and
* In addition, the Company repaid the Southview promissory note,
which had a value of $718,485 including interest and additional
advances.
In the event of a subsequent equity financing below $7.50, additional warrants
would be issued on the Southview warrants currently outstanding to increase
these warrants to reflect 20% of the fully diluted shares outstanding as of
January 15, 2002, after giving effect to all subsequent financing adjustments.
These warrants would also have their exercise price lowered to the price per
share of the subsequent equity financing. See Note 3.
Private Placement
On April 13, 2000, we completed a private placement offering in which D2
participated under the same terms as unaffiliated third parties. D2 purchased
four units evidencing $100,000 convertible notes and 3,000 warrants to
purchase common stock exercisable at $23.75 per share until December 31, 2004.
On January 15, 2002, as a result of the transaction with Centerpoint, D2's
convertible note was converted into 15,712 shares of the Company's common
stock under the amended terms of the notes.
In the event of a subsequent equity financing below $7.50, the Company may
need to issue additional shares to for the D2 notes conversion as if the note
was converted into shares of the Company's common stock at the price per share
of the subsequent equity financing. See Note 3.
Shareholder Agreement/Stock Voting Agreement
On December 23, 1999, D2, Mark A. Smith, Jere Northrop, LoTayLingKyur, Inc.,
and Dublin Holding, Ltd. entered into a Shareholders' Agreement, as amended,
which, among other things, restricts the transfer, sale, conveyance, exchange,
pledge, or otherwise disposition of any shares of the Company except in
connection with a sale of all or substantially all of the outstanding stock of
the Company or a merger of the Company. Under the agreement, certain
transfers are permitted under certain conditions.
Transactions with Mark A. Smith and Related Entities
During the period beginning July 1, 2000, we entered into the following
transactions with Mark A. Smith (our former Chairman and a former Director)
and/or entities affiliated with him: LoTayLingKyur, Inc. ("LTLK"), LTLK
Defined Benefit Plan, LoTayLingKyur Foundation, and Dublin Holding Ltd.
(collectively "First Parties"), including the following:
F-29
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
10. RELATED PARTY TRANSACTIONS (Continued)
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, 16,520 Class X Warrants and 542,544 Class
Z Warrants for 86,340 restricted shares of our common stock. This
exchange occurred pursuant to an agreement we had with the warrant
holders dated December 20, 1999. Mr. Smith, (and affiliates and
extended family members of Mr. Smith) participated in this warrant
exchange agreement.
On August 1, 2001 Mr. Smith, and certain entities related to him which owned
shares of the Company's common stock (the "Smith Shares"), entered into a
voting agreement that gives D2:
* the power to vote all of the Smith Shares as to most matters. Mr.
Smith will still have the right to vote the Smith Shares with
respect to a sale of substantially all of our assets or a merger.
The voting agreement is purely contractual and is not a formal
voting trust.
In addition, Mr. Smith and certain related entities entered into a separate
agreement with the Company which imposed certain restrictions on the sale and
transfer of the Smith Shares and amended the respective terms of convertible
promissory notes payable to Dublin Holding, Ltd, the Mark A. Smith Rollover
IRA and the Kelly Smith Rollover IRA to provide that these notes:
* would be automatically and fully converted (with all principal and
accrued interest calculated as if they had been held to maturity)
into shares of the Company's common stock upon the conversion of
the CV Notes at a conversion rate equal to the lesser of (i)
$18.00 per share or (ii) the conversion price of the CV Notes.
On January 15, 2002, as a result of the transaction with Centerpoint, these
notes were converted into 588,852 shares of the Company's stock at $7.50 per
share.
In the event of a subsequent equity financing below $7.50, the Company may
need to issue additional shares to for the CV Notes conversion as if the notes
were converted into shares of the Company's common stock at the price per
share of the subsequent equity financing. See Note 3.
Transactions with Salvatore J. Zizza
Beginning August 10, 2000, Salvatore J. Zizza, one of our directors, agreed to
serve as our governmental affairs liaison and provide additional consulting
services through September 1, 2002 for which he receives no additional
compensation. We granted Mr. Zizza options to purchase 7,500 shares of our
common stock at a price of $22.50 per share, exercisable until December 31,
F-30
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
10. RELATED PARTY TRANSACTIONS (Continued)
2003, and issued him 10,000 Class J-2 warrants to purchase common stock at a
price of $23.75 per share. In addition, we agreed to provide Mr. Zizza with
office space in our New York City office at no cost to him.
On January 15, 2002, we adjusted the price of the options to $11.00 and
cancelled the 10,000 Class J-2 warrants and issued Mr. Zizza options to
purchase 10,000 shares of our common stock at a price of $11.00 per share
exercisable until December 31, 2004.
On June 25, 2002, Mr Zizza agreed to devote more time as our governmental
affairs liaison. On July 1, 2002 we issued Mr. Zizza additional options to
purchase 10,000 shares of our common stock at a price of $7.50 per share
vesting on July 1, 2003, exercisable until July 1, 2005.
Private Placements
On April 13, 2000, we completed a private placement offering in which Mr.
Zizza participated under the same terms as unaffiliated third parties. Mr.
Zizza purchased two units evidencing $50,000 convertible debt and 1,500
warrants to purchase common stock exercisable at $23.75 per share until
December 31, 2004.
On June 8, 2001, we completed private placement offering in which Mr. Zizza
participated under the same terms as unaffiliated third parties. Mr. Zizza
purchased a $98,552 convertible note and 2,955 warrants to purchase common
stock exercisable at $15.00 per share until December 31, 2005.
On January 15, 2002, as a result of the transaction with Centerpoint, Mr.
Zizza's convertible notes, including accrued interest, were converted to
21,846 shares of the Company's common stock under the amended terms of the
notes.
In the event of a subsequent equity financing below $7.50, the Company may
need to issue additional shares to for Mr. Zizza's notes conversion as if the
notes were converted into shares of the Company's common stock at the price
per share of the subsequent equity financing. See Note 3.
Transactions with Andrew G. Gould
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, contracted to provide us with an average of
approximately ten hours per month of technology consulting services through
August 31, 2002, at no cost to us. We have granted Mr. Gould options to
purchase 7,500 shares of our common stock at a price of $22.50 per share,
exercisable until December 31, 2003. The exercise price of these options was
adjusted on January 15, 2002 to $11.00 per share.
F-31
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
10. RELATED PARTY TRANSACTIONS (Continued)
On June 8, 2001, we completed private placement offering in which Mr. Gould
participated under the same terms as unaffiliated third parties. Mr. Gould
purchased a $7,882 convertible note and 237 warrants to purchase common stock
exercisable at $15.00 per share until December 31, 2005.
On January 15, 2002, as a result of the transaction with Centerpoint, Mr.
Gould's convertible note was converted to 1,114 shares of the Company's common
stock under the amended terms of the note.
In the event of a subsequent equity financing below $7.50, the Company may
need to issue additional shares to for Mr. Gould's note conversion as if the
note was converted into shares of the Company's common stock at the price per
share of the subsequent equity financing. See Note 3.
Other Transactions with Related Parties
Effective August 23, 2000, certain holders of our Class X Warrants and Class Z
Warrants, including without limitation, Jon Northrop, who was then a Director
and President, and Jere Northrop, Director and Senior Technology Officer (and
their extended families), agreed to exchange, in aggregate:
* 47,155 Class X Warrants and 85,570 Class Z Warrants for 26,984
restricted shares of our common stock. This exchange occurred
pursuant to the terms of agreements dated December 20, 1999.
Effective August 29, 2001, we amended 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:
* extend the maturity date to April 30, 2002;
* cancel certain outstanding options owned by the note holder; and
* change the terms of the note so that outstanding principal and
interest shall be completely converted to shares of the Company's
common stock upon the earlier of April 29, 2002 or the conversion
of the Company's outstanding CV Notes which conversion shall take
place at the lower of$22.50 per share, or the conversion price of
the CV Notes.
On January 15, 2002, as a result of the transaction with Centerpoint, all of
these promissory notes were automatically converted to 249,056 shares of the
Company's common stock, respectively.
In the event of a subsequent equity financing below $7.50, the Company may
need to issue additional shares to for the promissory notes conversion as if
the notes were converted into shares of the Company's common stock at the
price per share of the subsequent equity financing. See Note 3.
F-32
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
10. RELATED PARTY TRANSACTIONS (Continued)
Effective on September 6, 2001 we entered into a severance agreement with Jon
Northrop and as a result, we no longer have any employees in Denver and
substantially all of our business operations are conducted out of our office
in New York City. Mr. Northrop received monthly payments of $10,000 in cash
or common stock through August 2002.
Howard Chase joined our Board of Directors on January 21, 2002. In addition
to his duties as a director, Mr. Chase, through Hollandbrook Group LLC
(Hollandbrook), Inc. will provide us consulting services. Bion will pay
Hollandbrook $1,000 per month and issued to Hollandbrook $9,000 in Bion common
stock at a price per share of $15.00.
Transactions with Centerpoint
On January 15, 2002, Bion issued 1,900,000 shares of its restricted common
stock, valued at $7.50 per share, to Centerpoint, in exchange for $8,500,000
in cash and the assignment of certain claims and other rights owned by
Centerpoint for total consideration of $14,250,000. Additional shares may be
issued to Centerpoint if the Company raises equity at a price less than $7.50
per share until the cumulative investment in the Company, from unaffiliated
third parties, from the date of this transaction, equals $5 million. The
number of additional shares to be issued is determined by calculating the
additional number of shares Centerpoint and OAM would have received if the
transactions were consummated at the price per share of the subsequent equity
financing. David Mitchell was a director of Centerpoint prior to the
transaction with Bion and currently remains a director of Centerpoint.
The Company's equity and notes payable transactions with stockholders and
other related parties are included in Note 10.
11. CONVERSION OF NOTES PAYABLE
In September 2001, a CV Note in the amount of $112,740 was converted into
5,033 shares of the Company's common stock.
On January 15, 2002, the transactions involving Centerpoint caused the
automatic conversion of our CV Notes in accordance with their terms. The CV
Notes, in the aggregate amount of $7,972,536, were converted into 1,063,038
common shares, at a conversion price of $7.50 per share, of the Company's
common stock. The conversion included 111,758 common shares issued to D2, the
Trust, and Salvatore Zizza and Andrew Gould, directors of the Company. The
conversion price was contractually set to be equal to the value per share used
to issue shares to Centerpoint in the Centerpoint transaction. Additional
shares may be issued to the former holders of the CV Notes if the Company
issues shares of it common stock for consideration that is below $7.50 up
until the time the Company raises $5,000,000 in proceeds. See Note 3.
The transactions involving Centerpoint also caused the automatic conversion of
promissory notes in accordance with their terms. The promissory notes, in the
aggregate amount of $6,284,244, were converted into 837,908 common shares, at
F-33
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
11. CONVERSION OF NOTES PAYABLE (Continued)
a conversion price of $7.50 per share, of the Company's common stock. The
conversion included 656,115 common shares issued to Jere Northrop, our Chief
Technical Officer and a director of the Company, and Mark Smith and affiliates
of Mark Smith, a former director of the Company. The conversion price was
contractually set to be equal to the value per share used to issue shares to
Centerpoint in the Centerpoint transaction. Additional shares may be issued
to the former holders of the CV Notes if the Company issues shares of it
common stock for consideration that is below $7.50 up until the time the
Company raises $5,000,000 in proceeds. See Note 3.
The Company incurred interest expense in the amount of $1,208,598 and
amortized debt discount in the amount of $1,554,425 on the CV Notes and
promissory notes during the year ended June 30, 2002.
In January 2002, the Company incurred interest expense in the amount of
$5,547,000 for the beneficial conversion of the CV Notes and promissory notes.
12. BUSINESS SEGMENT INFORMATION
The Company operates in three 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 agricultural systems installed on
large dairy and hog farms.
Other: Contains the operating results of Centerpoint in which the Company's
owns 57.2%. Centerpoint currently does not have any business operations other
than general and administrative.
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.
The following table summarizes information about operations and long-lived
assets as of and for the years ended June 30, 2002 and 2001:
F-34
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
12. BUSINESS SEGMENT INFORMATION (Continued)
Systems Soil Other Total
------- ---- ----- -----
Year Ended - June 30, 2002
Revenues $ - $ 69,382 $ - $ 69,382
=========== =========== ========= ============
Operating loss $(4,521,899) $(3,752,145) $(102,520) $ (8,376,564)
Other income/(expense), net $(4,193,612) (4,208,301) $ (99,124) $ (8,501,037)
Minority interest $ - $ - $ 85,457 $ 85,457
----------- ----------- --------- ------------
Net Loss $(8,715,511) $(7,960,446) $(116,187) $(16,792,144)
=========== =========== ========= ============
Supplemental segment information:
Amortization and depreciation $ 32,860 $ 23,877 $ - $ 72,199
As of June 30, 2002
Property and Equipment, net $ 68,070 $ 86,355 $ - $ 154,425
Total Assets $ 1,837,339 $ 1,858,162 $ 57,398 $ 3,752,899
Year Ended - June 30, 2001
Revenues $ 10,000 $ 74,322 $ - $ 84,322
=========== =========== ========= ============
Operating loss $(6,721,219) $(5,320,737) $ - $(12,041,956)
Other income/(expense), net $(1,800,627) $(1,710,640) $ - $ (3,511,267)
Minority interest - - - -
----------- ----------- --------- ------------
Net Loss $(8,521,846) $(7,031,377) $ - $(15,553,223)
=========== =========== ========= ============
Supplemental segment information:
Amortization and depreciation $ 28,729 $ 48,225 $ - $ 76,954
As of June 30, 2001
Property and Equipment, net $ 85,410 $ 97,441 $ - $ 182,851
Total Assets $ 840,516 $ 842,146 $ - $ 1,682,662
13. CONCENTRATIONS OF CREDIT RISK
The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of cash and cash equivalents and accounts
receivable.
The Company's cash and cash equivalents are in demand deposit accounts placed
with federally insured financial institutions and selected brokerage accounts.
Such deposit accounts at times may exceed federally insured limits. The
Company has not experienced any losses on such accounts.
F-35
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
13. CONCENTRATIONS OF CREDIT RISK (Continued)
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.
14. SUPPLEMENTAL NON-CASH DISCLOSURES TO STATEMENT OF CASH FLOWS
The Company had the following non-cash financing activities:
Year ended June 30,
2002 2001
---------- ----------
Warrants issued in private placement $ - $ 699,902
Convertible bridge notes payable converted to common stock 7,325,354 -
Note payable, related parties-current converted to common stock 1,867,872 -
Note payable, related parties-long-term converted to common stock 3,609,783 -
Cancellation of note receivable for sale of warrants - 500,000
Beneficial conversion feature on convertible bridge notes - 1,751,000
Note receivable received for sale of common stock, and reassigned
for purchase of Centerpoint stock 3,263,000 -
Claims receivable received for sale of common stock, then
reassigned for purchase of Centerpoint stock 2,487,000 -
Common stock issued to the Trust 820,477 -
F-36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Date: January 17, 2003 BION ENVIRONMENTAL TECHNOLOGIES, INC.
By: /s/ David J. Mitchell
-------------------------------------
David J. Mitchell
Chief Executive Officer
CERTIFICATIONS
I, David J. Mitchell, certify that:
1. I have reviewed this annual report on Form 10-KSB of Bion
Environmental Technologies, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report; and
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this annual
report.
Dated: January 17, 2002 /s/ David J. Mitchell
------------------------------------
David J. Mitchell
Chief Executive Officer
(Principal Executive Officer)
I, Lawrence R. Danziger, certify that:
1. I have reviewed this annual report on Form 10-KSB of Bion
Environmental Technologies, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report; and
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this annual
report.
Dated: January 17, 2003 /s/ Lawrence R. Danziger
------------------------------------
Lawrence R. Danziger
Chief Financial Officer
(Principal Financial Officer)
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
AND CHIEF FINANCIAL OFFICER OF
BION ENVIRONMENTAL TECHNOLOGIES, INC.
PURSUANT TO 18 U.S.C. SECTION 1350
We certify that, to the best of our knowledge, the Annual Report on Form
10-KSB of Bion Environmental Technologies, Inc. for the period ending June 30,
2002:
(1) complies with the requirements of Section 13(a) or 15(d) of the
Securities and Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of Bion
Environmental Technologies, Inc.
/s/ David J. Mitchell /s/ Lawrence R. Danziger
-------------------------------- ----------------------------------
David J. Mitchell Lawrence R. Danziger
Chief Executive Officer Chief Financial Officer
January 17, 2003 January 17, 2003