UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[x] Annual report pursuant to Section 13 or 15 (d) of the Securities Exchange
Act of 1934 for the fiscal year ended June 30, 2003
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. 001-31437
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
(Registrant's telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of exchange on which registered
Common Stock, no par value Philadelphia Stock Exchange
Securities registered under Section 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 [ ] No [X]
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: $116,029
As of September 30, 2003 the issuer had outstanding 5,298,221 shares of common
stock. This includes 1,900,000 shares held by a majority-owned subsidiary.
The aggregate market value of the Common Stock held by nonaffiliates as of
September 30, 2003 was approximately $3,552,000 based on a closing price for
the Common Stock of $1.25 on the OTC Bulletin Board on such date.
BION ENVIRONMENTAL TECHNOLOGIES, INC.
ANNUAL REPORT ON FORM 10-KSB
THIS REPORT INCLUDES FINANCIAL STATEMENTS (AND NOTES ATTACHED THERETO) FOR THE
YEAR ENDED JUNE 30, 2003 WHICH HAVE BEEN INTERNALLY PREPARED AND WHICH HAVE
NOT BEEN REVIEWED OR AUDITED BY ANY INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS.
WHILE WE BELIEVE THAT THE FINANCIAL STATEMENTS ARE ACCURATE AND COMPLETE IN
ALL MATERIAL RESPECTS, IT IS POSSIBLE THAT AN AUDIT MAY RESULT IN ADJUSTMENTS,
SOME OF WHICH MAY BE MATERIAL.
TABLE OF CONTENTS
PART I 3
Item 1. Description of Business 3
Item 2. Description of Properties 17
Item 3. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of Security Holders 18
PART II 19
Item 5. Market for Bion Environmental Technologies, Inc.'s
Common Equity and Related Stockholder Matters 19
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations 20
Item 7. Unaudited Financial Statements 28
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 29
Item 8.A Controls and Procedures 29
PART III 30
Item 9. Directors and Executive Officers of Bion
Environmental Technologies, Inc 30
Item 10. Executive Compensation 33
Item 11. Security Ownership of Certain Beneficial Owners and
Management 38
Item 12. Certain Relationships and Related Transactions 40
PART IV 50
Item 13. Exhibits and Reports on Form 8-K 50
Item 14. Principal Accountant Fees and Services 54
Signatures
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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. ("BION," "WE," "US," OR "OUR") HAS
BEEN SUFFERING FROM SEVERE FINANCIAL DIFFICULTIES SINCE APPROXIMATELY LATE
JANUARY OF 2003, AS DISCLOSED IN OUR PERIODIC AND OTHER REPORTS FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION COMMENCING WITH OUR CURRENT REPORT ON FORM
8-K DATED FEBRUARY 7, 2003. THESE FINANCIAL DIFFICULTIES RESULTED IN THE
RESIGNATION OF NEARLY ALL OF OUR OFFICERS AND DIRECTORS DURING FEBRUARY AND
MARCH OF 2003, AND THE TERMINATION OF MOST OF OUR EMPLOYEES. WE HAVE RETAINED
A CORE TECHNICAL STAFF, BUT WE HAVE DRASTICALLY CURTAILED OUR BUSINESS
ACTIVITIES TO INCLUDE ONLY THOSE ACTIVITIES THAT ARE DIRECTLY NEEDED TO
COMPLETE DEVELOPMENT AND TESTING OF OUR SECOND GENERATION TECHNOLOGY.
OUR FINANCIAL DIFFICULTIES RESULTED PRIMARILY FROM OUR INABILITY TO
RAISE ADDITIONAL FUNDS DUE TO CONTRACTUAL ANTI-DILUTION PROVISIONS THAT WERE
CONTAINED IN THE AGREEMENTS RELATED TO THE FINANCING TRANSACTIONS THAT WERE
COMPLETED IN JANUARY OF 2002 (SEE OUR FORM 10-KSB FOR THE YEAR ENDED JUNE 30,
2002 AND OUR CURRENT REPORT ON FORM 8-K DATED DECEMBER 12, 2001 AND THE
EXHIBITS AND AMENDMENT THERETO) WHICH PREVENTED ANY REASONABLE FINANCING FROM
BEING COMPLETED. WHEN WE BECAME AWARE OF THE NEGATIVE IMPLICATIONS OF THESE
ANTI-DILUTION PROVISIONS WHILE ATTEMPTING TO STRUCTURE A PLANNED FINANCING
(WHICH FINANCING ATTEMPTS ULTIMATELY FAILED IN JANUARY OF 2003), WE ATTEMPTED
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TO EITHER FIND ALTERNATIVE FINANCING METHODS WHICH COULD BE REASONABLY
COMPLETED AND/OR NEGOTIATE AN AMENDMENT TO SUCH PROVISIONS. AFTER MONTHS OF
NEGOTIATIONS, AGREEMENTS RELATED TO AMENDING SUCH PROVISIONS WERE ENTERED INTO
DURING THE SPRING OF 2003 (SEE OUR CURRENT REPORT ON FORM 8-K DATED APRIL 12,
2003) AND THE PROVISIONS WERE FINALLY AMENDED EFFECTIVE AUGUST 27, 2003 (SEE
OUR CURRENT REPORT ON FORM 8-K DATED AUGUST 25, 2003 AND EXHIBITS THERETO).
ALTHOUGH WE WERE ABLE TO COMPLETE A SMALL FINANCING THROUGH ONE OF OUR
SUBSIDIARIES DURING AUGUST OF 2003 WHICH WILL ALLOW US TO CONTINUE LIMITED
WORK ON OUR SECOND GENERATION TECHNOLOGY (SEE OUR CURRENT REPORT ON FORM 8-K
DATED AUGUST 25, 2003), OUR OPERATIONS HAVE BEEN SEVERELY DAMAGED DURING THE
PAST YEAR. NOT ONLY DID WE HAVE TO TERMINATE MOST OF OUR ACTIVITIES AND
EMPLOYEES, BUT WE HAVE SUFFERED SUCH DIRE FINANCIAL CONSTRAINTS (AS WE WERE
FACED WITH THE LIKELY POSSIBILITY OF A BANKRUPTCY FILING) THAT WE HAVE LOST
CREDIBILITY WITH OUR VENDORS, CREDITORS, THE FINANCIAL COMMUNITY AND OUR
EXISTING SHAREHOLDERS AND INVESTORS. AS A RESULT, THE MARKET PRICE FOR OUR
STOCK FELL. IN ORDER TO CONTINUE WITH OUR BUSINESS ACTIVITIES AND SAVE THE
COMPANY WE HAVE HAD TO STRUCTURE INTERIM FINANCING ON EXTREMELY DILUTIVE TERMS
WHICH HAS NEGATIVELY AFFECTED OUR SHAREHOLDERS AND WILL PROBABLY CONTINUE TO
NEGATIVELY IMPACT OUR ABILITY TO OBTAIN FUTURE FINANCING ON REASONABLE TERMS.
WE STILL FACE A SEVERE WORKING CAPITAL SHORTAGE AND SINCE WE HAVE NO REVENUES
WE WILL NEED TO OBTAIN ADDITIONAL CAPITAL TO SATISFY OUR EXISTING CREDITORS
(SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS" AND "FINANCIAL STATEMENTS"),
THERE IS NO ASSURANCE WE WILL BE ABLE TO OBTAIN THE FUNDS THAT WE NEED TO STAY
IN BUSINESS OR TO SUCCESSFULLY DEVELOP OUR BUSINESS.
We are in the process of developing and testing a second generation of
our technology ("Bion NMS" or "NMS" or "System" or "Technology") to provide
waste management solutions to the agricultural industry, focusing on livestock
waste from confined animal feeding operations, such as large dairy and hog
farms. In the past we have engaged in two main areas of activity by utilizing
the first generation of our technology (which we discontinued marketing during
calendar year 2001) (which areas we intend to re-enter during the current
fiscal year pending results of field testing our second generation NMS
technology during fiscal year 2004):
1) WASTE STREAM REMEDIATION. The removal of pollutants (primarily
nitrogen and phosphorus) which pollute soil and water and reduction of
emissions of gases to the atmosphere which result in acid rain, smog,
ground-level ozone or produce "greenhouse warming" effects). We intend
to pursue this area of activity primarily through licensing our second
generation technology: a) to retrofit existing confined animal feeding
operations installations (with emphasis on large dairy farms utilizing
anaerobic lagoons for the next 12 months) and b) for use in newly
constructed dairy farms; and
2) BIONSOIL SALES. The production and sale of organic BionSoil
fertilizer products made from the waste solids produced by use of our
technology.
In addition, we intend to pursue what we call the "Dairy Park
Opportunity," which reflects what we believe is the potential for the Bion
technology to allow very large dairy farms to vertically integrate (with
pasteurization, cream separation, milk bottling, and/or cheese plants, etc.)
and pursue site integration (with ethanol plants, methane production, organic
farming, etc.) on relatively small plots of land.
All of these activities are completely dependent upon two factors,
neither of which can be assured at this date:
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1) successful completion of the field testing of our second generation
technology which is presently taking place in Texas for the purpose of
demonstrating its capacity for nutrient (primarily nitrogen and
phosphorus)removal from the dairy confined animal feeding operations
waste stream) (which will be followed, if successful, by a
demonstration/test(either at the Texas site or in California pursuant to
existing agreements) of our technology's capacity to reduce polluting
gaseous emissions from confined animal feeding operations operation);
and
2) our ability to raise sufficient funds to allow us to finance our
activities and pay our existing creditors.
We believe that our waste remediation technology will provide confined
animal feeding operations (primarily in the dairy and swine industries) with
treatment for their animal waste outputs. Our systems are designed to
microbiologically treat their entire waste stream while reducing air emissions
and nutrient discharges and creating solids which are in turn the basis for
the creation of organic soil and fertilizer products. We are attempting to
develop our soil and fertilizer products for use in a variety of applications.
Currently, the majority of confined animal feeding operations dispose of
their animal waste by spreading it on cropland (before or after placement in
anaerobic lagoons). In many parts of the United States, the operation and
expansion of confined animal feeding operations are severely restricted due to
a combination of the amount of land that is necessary to dispose of the animal
waste at an environmentally sustainable rate, and the pollution of existing
land and water due to prior disposal of excess nutrients and/or air pollution
emissions. Confined animal feeding operations are enormous polluters of our
air, water and land and are under significant 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 these feeding operations 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 increasingly being
evaluated for potential regulation under the Federal Clean Air Act and/or
similar state statutes (including without limitation a law recently passed in
California which explicitly makes large dairies subject to such regulation).
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. We have no additional offices at this time. 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
three wholly-owned subsidiaries, Bion Technologies, Inc. (a Colorado
corporation organized September 20, 1989), BionSoil, Inc. (a Colorado
corporation organized June 3, 1996) and Bion Dairy Corporation (formerly Bion
Municipal, Inc., a Colorado corporation organized July 23, 1999). Bion is also
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the parent of Bion International, Inc. (a Colorado corporation organized July
23, 1999), which is a wholly-owned, presently inactive subsidiary. 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").
Although we have been conducting business since 1989, we recently have,
effectively, re-entered the "development stage" pending completion of
testing/demonstration of our second generation technology during the current
fiscal year. 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 produced organic soil
products as a by-product of remediation of the waste stream when installed on
large dairy or swine farms. Through June 30, 2001, we sold and subsequently
installed, in the aggregate, 32 of these first generation systems in 7
states., of which 19 were still in operation through June 30, 2002. There are
presently approximately 12 first generation Bion NMS soil production system
installations operating in 3 states.
We discontinued marketing of our first generation NMS systems during
calendar 2001. We were unable to produce a business model based on the first
generation technology which would generate sufficient revenues to create a
profitable business. While continuing to market and operate the first
generation systems, during the second half of calendar year 2000 we began to
focus our activities on developing the next generation of the Bion NMS
technology. We no longer operate any of the first generation NMS systems.
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 have the potential to 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) products in a few weeks as
compared to six to twelve months with our first generation systems.
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 (which is now closed), 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 at the DreamMaker Dairy. We placed the NMS into a
configuration of enclosed tanks that fully contained the process. This
configuration allowed 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 sulfide 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 confined animal feeding
operations waste streams to a point-source equivalent for mass balance
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analysis. As we announced in September 2001, initial results of the mass
balance calculations demonstrated 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 Confined animal feeding operations
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 that initiative (which were successfully reached) were to:
* Increase the efficiencies of the first generation system;
* Convert the core Bion NMS technology into a platform-based system
that could be potentially integrated with complementary
technologies; and
* Develop a computerized monitoring and control system, capable of
precise measurements and adjustments and remote reporting.
We continued to undertake further NMS research and development through
the entire 2002 calendar year. This research included (without limitation)
work on:
* System acceleration in order to further increase capacity and
lower capital and operating 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
* Development of commercial designs for application in our second
generation NMS.
As a result of this entire research program, we have currently
installed, and are presently testing, a second generation Bion NMS as a
retrofit to an anaerobic lagoon system on a 1250 cow dairy farm in Texas.
Results are anticipated during the fall of 2003. The results of this
installation are crucial to the survival and progress of the Company. Success
in this demonstration will be the basis for marketing the second generation
NMS in areas with nutrient pollution problems.
Assuming that the Texas installation successfully demonstrates nutrient
removal of 80% or greater of nitrogen and phosphorus from the dairy waste
stream, we will proceed (assuming we have adequate funds, of which there is no
assurance) to install a tank-based NMS (either at the Texas location or in
California pursuant to an existing agreement) to demonstrate the efficacy of
the Bion NMS at mitigation/reduction of the production of polluting gases
which contribute to acid rain, smog, ground-level ozone and greenhouse gas.
Success of this demonstration (of which there is no assurance) regarding
atmospheric pollution will be the basis for marketing the second generation
NMS system in areas which face air pollution problems (alone or in addition
to problems with nutrient pollution of soil and/or water.
Management is cautiously optimistic that, if we have sufficient funds to
complete these two sets of demonstrations, the installations will more than
meet the expected criteria as we have previously carried out similar tests at
the DreamMaker facility described above.
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We also have had for many years an ongoing research program related to
our BionSoil(R) product lines. However, this research and development
program, which has included work related to harvesting and processing,
blending of specialty product mixes for specific market segments and tests of
the effectiveness of various blends in a number of plants in a variety of
growing environments, has been severely curtailed over the past year. This
program has a lower priority than the second generation NMS system development
and testing described above. However, if we obtain adequate funding, we will
continue to pursue this research.
Acquisition of Centerpoint/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 claims relating to Centerpoint's
transaction with Aprilia and other rights owned by Centerpoint for total
consideration of $14,250,000. On August 12, 2002, the Company filed a
registration statement to allow Centerpoint to distribute these shares of
common stock of Bion to the Centerpoint stockholders.
Immediately upon consummation of the transaction with Centerpoint, Bion
purchased a 57.7% majority interest in Centerpoint from Centerpoint's Italian
parent, OAM, S.p.A. ("OAM") by issuing 100,000 shares of our 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. Bion
intends to distribute the 57.7% majority interest in Centerpoint, totaling
3,459,997 shares, to Bion stockholders.
The above transactions were structured as a result of our negotiations
with OAM and its parent corporation as Centerpoint's controlling stockholders.
The net proceeds from the Centerpoint and OAM transactions were acquired to
fund continuing operations. The transactions were structured so that we
obtained the desired amount of capital, we acquired control of Centerpoint, we
obtained rights to certain claims that Centerpoint has, and, as a Centerpoint
stockholder, we will receive back approximately 57% of the 1.9 million shares
that we issued in connection with the transaction which will then be cancelled
if such shares are ever distributed to Centerpoint's shareholders.
Additional Bion shares were required to be issued to Centerpoint and OAM
if the Company raised 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 would have been 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.
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 raised equity at a price less than $7.50 per share, the Company might
have needed 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 the subsequent equity financing. In addition, the exercise prices
for 17,596 warrants might have been decreased to the price per share of the
subsequent equity financing and the exercise prices for 195,174 warrants might
have been decreased to 80% of the price per share of the subsequent equity
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financing. Also, in the event of a subsequent equity financing below $7.50,
additional warrants might have been 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 might also have had their
exercise price lowered to the price per share of the subsequent equity
financing.
The adjustment provisions in these agreements (as connected with the
conversions/adjustments for the converted notes/warrants described above) made
it impossible for Bion to raise additional needed funds from the middle of
2002 thru February 2003 (at which time Bion had run out of cash and liquid
resources). This resulted in the financial crisis (and subsequent management
turnover and curtailment of Bion's activities) described above. These
provisions were finally amended in August 2003 as described below. (See our
Current Reports on Form 8-K dated April 12, 2003 and August 25, 2003 and the
exhibits thereto.)
In March 2002, the Company and Centerpoint entered into 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 had no obligation to make any advances in
excess of $500,000. All funds due the Company were evidenced by a convertible
revolving promissory note, which bore interest at 1% per month, payable with
accrued interest on March 15, 2003. This date was extendable by agreement
between the Company and Centerpoint. The Company had 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.
During March 2003, the Company and Centerpoint entered into an agreement
(amended on April 23, 2003) which forgave sums due from Centerpoint to Bion
(approximately $450,000 at that time) and cancelled the warrants issued by
Centerpoint to Bion in consideration of amending the terms of the January 2002
agreement between Bion and Centerpoint to remove the adjustment provisions
(and other related provisions) described above. (See our Current Report on
Form 8-K dated April 12, 2003 and the exhibits thereto). This agreement was
ratified by the shareholders of Centerpoint (including an overwhelming
majority of the shares not owned by Bion) on August 25, 2003. Such
ratification enabled Bion to complete an agreement with OAM, S.p.A. on August
27, 2003 which removed the balance of the adjustment provisions (see our
current report on form 8-K dated August 25,2003 and exhibits thereto).
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 If and when all or a substantial portion of the shares of Bion common
stock owned by Centerpoint 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, if any.
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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
-------------------
Bion Dairy Corporation Financing
--------------------------------
On August 25, 2003, Bion Dairy Corporation (" Dairy"), of which we own
all 4,000,000 shares of its common stock outstanding, closed an initial stage
of financing totaling $1,117,500 (including $600,000 of prior advances from
Bright Capital, Ltd. ("Brightcap") and $65,000 of prior advances from
affiliates of David Mitchell, our former CEO) of secured convertible debt
("Notes"). Through September 30,2003 an additional $65,000 of the Notes were
sold to Mark A. Smith our president, for a total issuance of $1,182,500. Up
to a total of $2,065,00 of such Notes may be issued. The largest holder of
these Notes is Chris-Dan, LLC, which is owned by Dominic Bassani, General
Manager of Dairy and a consultant to Bion. The Notes are secured by: a) all
of the intellectual property of Bion (and its subsidiaries) (which previously
secured outstanding obligations to Bright Capital, Ltd. which is owned by Mr.
Bassani), b) all of the outstanding shares of Dairy, and c) all of the shares
of Centerpoint owned by Bion. The Notes are convertible into the common stock
of Dairy at a price of $1.00 (principal and accrued interest on the Notes)
under various conditions specified in the financing documentation, one or more
of which conditions precedent to conversion may never be met. Under
additional specified conditions (which also have no assurance of being met),
the Notes (or Dairy common stock received pursuant to the conversion thereof)
may in the future be exchanged for shares of the common stock of Bion. If
conversion of the Notes into the common stock of Dairy takes place, all of
Bion's business opportunity in the dairy industry world-wide will be conducted
through Dairy, and the board of directors of Dairy will consist of three
members, two of which will be designated by the majority of the shareholders
of Dairy and only one will be designated by Bion. The financing restricts the
use of its proceeds and, unless Dairy and/or Bion raise substantial additional
funds, there will be no substantial funds available for Bion to pay its
creditors and carry out its business. See Exhibit 10.1 to our Current Report
on Form 8-K dated August 25,2003 for further details.
Although Dairy, our subsidiary, recently received the financing described
above (which financing was not large enough to repay our creditors and is
subject to a limiting "Use of Proceeds" which does not permit significant
payment to our existing creditors) and we are currently seeking other outside
sources of capital, as of this date we have not been able to secure the level
of financing that is necessary for our current and future operations and/or to
repay our existing indebtedness and there can be no assurance that sufficient
funds will be available from external sources. 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
our existing shareholders. Since we do not yet have the ability to generate
cash flow from operations, we have substantially curtailed our current
business activities and we may need to cease operations if we are not able to
10
raise capital from outside sources. This would have a material adverse effect
on our business and our shareholders.
Centerpoint Shareholders Meeting/Removal of Contractual Problems
----------------------------------------------------------------
A meeting of the Centerpoint Corporation ("Centerpoint") stockholders
which commenced on July 31,2003 was concluded on August 25, 2003.
Centerpoint's stockholders approved the ratification of the Amended
Centerpoint Agreement, with 96% of the shares present at the meeting voted in
favor, including shares owned by Bion. Of the shares present at the meeting,
85% (1,179,405 shares) other than the shares owned by Bion voted in favor of
the ratification and only 1,490 shares voted against the ratification (with
the balance of such shares abstaining). See our Current Reports on Form 8-K
dated April 12, 2003 and August 25, 2003 and the exhibits thereto for further
details regarding the matters being ratified.
On August 27, 2003, Bion paid the sum of $90,000 to OAM, S.p.A. (and its
designees) to complete the transaction described in our Current Report on Form
8-K dated April 12, 2003 (set forth in Exhibit 99.2 thereto) as a result of
the favorable vote by Centerpoint's stockholders.
As a result, the contractual impediments to future financing described in
our Current Report on Form 8-K dated April 12, 2003(see Exhibits 99.2 and 99.3
thereto) have now been removed.
Principal Products and Services
-------------------------------
NMS
---
We believe our NMS solution, when testing is completed during the current
fiscal year, will address the needs of confined animal feeding operations 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
confined animal feeding operations. These second generation systems will
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
will allow rebalancing of 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) organic
products. In addition, the NMS will reduces odors, atmospheric emissions,
greenhouse gas and precursors to greenhouse gas emissions by 95% or better.
We believe that Bion second generation NMS platform will also enables
additional technologies, such as anaerobic digestion to produce energy.
11
The Bion NMS will offers a comprehensive solution that allows Bion to
serve as a "utility" for confined animal feeding operations 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 may include
without limitation, technology license fees, waste management fees on a per
animal basis, sales from BionSoil(R) products, sales revenue from energy
and/or clean water production, as well as environmental credits.
Additionally the second generation NMS may create the possibility for Bion to
participate in the "Dairy Park Opportunity" which we believe arises from the
potential for the Bion technology to allow very large dairy farms to
vertically integrate (with pasteurization, cream separation, milk bottling
and/or cheese plants, etc.) and pursue site integration (with ethanol plants,
methane digestion, hydroponic growing, and/or organic farming, etc.) on
relatively small plots of land.
BionSoil(R) Products
--------------------
Bion's NMS systems will potentially allow Bion to produce and market
BionSoil(R) products which will be sold as fertilizers and soil enhancements
which supply slow-release nutrients and high-quality organic matter in a
consistent, stable form, free from offensive odors, toxic substances and
pathogens. These products will enhance the physical, biological and chemical
properties of the soil, which results in improved plant growth and health,
compared to conventional fertility practices. We believe that these products
can be economically transported and will be produced in quantities sufficient
for national distribution if a large enough (as yet unknown) number of second
generation Bion NMS systems are sold and placed in operation in relatively
concentrated geographic areas, of which there is no assurance. The exact
properties and attributes of the products are not known at this time.
Marketing and Distribution
--------------------------
NMS
---
Until we complete the testing and demonstration of our second generation
NMS systems, it will not be possible to fully specify the manner in which such
systems will be marketed. We anticipate that such marketing plans will be
developed during the second half of fiscal year 2004 if the
testing/demonstrations described above are successful and will be largely
based on the NMS performance which will have been demonstrated.
However, we anticipate that our NMS marketing plan for the next 12-15
months will focus on marketing the NMS primarily to the dairy industries
based on the benefits which the second generation NMS can provide to those
industries, assuming that these benefits have been successfully documented in
the tests/demonstrations discussed above. 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
need to retrofit their existing installations to meet environmental standards
12
and/or are seeking to expand their existing operations or build new
installations.
Bion began preliminary pre-marketing of various capabilities from its
second generation system during 2002 based on the results at DreamMaker Dairy
described above. 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.
BionSoil(R) Products
--------------------
BionSoil(R) are intended to be 100% natural, odorless fertilizer and soil
enhancement products. We believe that our technology will 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.
However, no detailed marketing plan will be implemented until after second
generation NMS marketing is well under way.
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 confined animal feeding operations wastes. Anaerobic lagoons
are the most common traditional treatment process for animal waste on large
farms within the hog raising and dairy industries. These lagoons are coming
under increasing regulatory pressure due to associated odor, nutrient
management and water quality issues and are facing possible phase-out in some
states such as North Carolina. 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.
13
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 products.
Note, however, that the confined animal feeding operations 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 confined animal feeding operations
industries. At some future point we could become dependent on one or a few
major customers in one or more confined animal feeding operations segments.
Commercial BionSoil(R) products are not currently being marketed, and
therefore, 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.
* 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 related to
low oxygen organic waste bioconversion features of the Bion process and
extends the range of Bion's intellectual property position. We have received
a Notice of Allowance and have filed a Divisional Application associated with
it.
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.
14
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
------------------------
NMS
---
During the year ended June 30, 2003 we spent approximately $423,411 on
undertaking further NMS research and development including, among other
things, work related to design and installation of the second generation NMS
facility now being tested and demonstrated in Texas and design work related to
a subsequent NMS instation to be constructed (in Texas or California) to test
and demonstrate the capabilities of the second generation NMS in preventing
atmosheric discharge of polluting gases from animal raising facilities. Only
a small portion of the funds spent during the year related to BionSoil
research.
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) development of
pre-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
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 2004 with research
and development costs currently estimated to be not less than $500,000
(subject to availability of funds, which budget could be expanded
substantially. In fiscal year 2004, we plan to complete the
testing/demonstration related to nutrient removal at the Texas installation
and then install/test/demonstrate the capacities of the second generation NMS
related to atmospheric discharges of polluting gases. Assuming success in
such tests/demonstrations, additional funds would be expended on producing
commercial designs/engineering related to the second generation NMS for
various climates and applications. However, there is no assurance that such
tests will be successful or, if successful, that we will have sufficient funds
to carry out the needed work. The major purposes of this research would be to
15
allow documentation and publishing by independent investigators such as state
land grant universities of papers describing the air and nutrient emission
reduction data related to the Bion NMS versus existing industry baseline
standards and to further refine the second generation NMS while further
researching integration possibilities.
BionSoil(R) Products
--------------------
During the year ended June 30, 2003, due to financial constraints, we
substantially curtailed our BionSoil related research and spent approximately
$136,348.
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 may recommence during fiscal 2004, and future years,
provided funds are available. We have no preliminary estimated budget amount
for 2004 at present.
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 intend to be 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
16
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 30, 2003, we had five 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 which, as renegotiated during fiscal 2003,
expires on December 31, 2003. Bion currently pays no rent and occupies a
small portion of the leased space at no monthly cost pursuant to agreements
between and among the landlord (an unaffiliated party), Bion, and entities
connected with David Mitchell (our former C.E.O. and Director) and Salvatore
Zizza (our former Secretary and Director). We amended our New York City office
lease effective March 1, 2003. Under this amendment the expiration date was
changed to December 31, 2003, from the previous expiration date of December
31, 2010. The amendment calls for the drawdown of the letter of credit
provided to the landlord for the full amount of $120,561 to be used to pay
arrearages and future rent. In addition, two of our new subtenants, Mitchell &
Co. and Zizza & Co., which are controlled by David Mitchell and Salvatore
Zizza, respectively, are former officers and directors of Bion, and have
personally guaranteed the lease with the landlord. It is possible that we will
not incur additional cash outflows in connection with this lease as a result
of the drawdown of the letter of credit, the subrental income and the personal
guarantees. See our Current Report dated March 25, 2003 and the exhibits
thereto. However, Bion may have certain liabilities at the end of the lease
term which cannot be fully determined at this time but which we estimate will
be less than $20,000. The lease and sublease agreements cover approximately
5,700 square feet.
We have no additional offices at this time but may have liability in
connection with prior office leases related to space we have vacated including
without limitation: a) space 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
feet; and b) space at 138 Uzzle Industrial Drive, Clayton, North Carolina
27520 under a lease that expired 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. Except as described above, 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, but, if our second generation NMS testing is
17
successful and we obtain additional financing, we will need additional office
and other space.
Item 3. Legal Proceedings
On September 30, 2003, Morrison Cohen Singer & Weinstein, LLP ("MCSW")
filed a complaint in the Supreme Court of the State of New York, County of New
York, against us alleging that we owe MCSW approximately $114,000 for legal
services provided. We have not yet filed an answer in that proceeding.
Because we have already recorded a liability for these legal services, we do
not believe that this lawsuit will have a material adverse effect on our
financial condition.
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
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 $830,000 in damages plus
punitive damages and to have its damages trebled, reasonable attorney fees and
principles of equity requiring Bion to install its second generation Bion NMS
system. We have filed an answer and counterclaims. The action has been
removed to the U.S. District Court for the Eastern District of North Carolina
which court recently ruled that most of the substantive claims should be
arbitrated. The Company does not believe that the claims against it have
merit and, assuming that we have the funds to properly defend this action, we
that the ultimate resolution of this litigation will not 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. Assuming that we
have the funds to properly defend this action. 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.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of our stockholders during the
quarter ended June 30, 2003.
18
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. We are also listed on the
Philadelphia Stock Exchange, but no trading has occurred on that exchange.
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 2003
---- ----
High Low High Low
---- --- ---- ---
First Fiscal Quarter $ 20.10 $ 8.80 $ 5.20 $ 2.85
Second Fiscal Quarter $ 9.90 $ 7.00 $ 3.75 $ 1.60
Third Fiscal Quarter $ 17.00 $ 7.20 $ 3.50 $ 0.55
Fourth Fiscal Quarter $ 10.20 $ 5.00 $ 1.35 $ 0.30
(b) Holders
The number of holders of record of our common stock at September 30, 2003
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, 2003 without registration under the Securities Act of 1933, as amended.
19
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This Report includes financial statements (and notes attached thereto)
for the year ending June 30, 2003 which have not been reviewed or audited by
independent certified public accountants and other items derived therefrom
which may not fully conform the requirements/regulations governing the content
of Form 10-KSB.
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. ("BION," "WE," "US," OR "OUR") HAS
BEEN SUFFERING FROM SEVERE FINANCIAL DIFFICULTIES SINCE APPROXIMATELY LATE
JANUARY OF 2003, AS DISCLOSED IN OUR PERIODIC AND OTHER REPORTS FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION COMMENCING WITH OUR CURRENT REPORT ON FORM
8-K DATED FEBRUARY 7, 2003. THESE FINANCIAL DIFFICULTIES RESULTED IN THE
RESIGNATION OF NEARLY ALL OF OUR OFFICERS AND DIRECTORS DURING FEBRUARY AND
MARCH OF 2003, AND THE TERMINATION OF MOST OF OUR EMPLOYEES. WE HAVE RETAINED
A CORE TECHNICAL STAFF, BUT WE HAVE DRASTICALLY CURTAILED OUR BUSINESS
ACTIVITIES TO INCLUDE ONLY THOSE ACTIVITIES THAT ARE DIRECTLY NEEDED TO
COMPLETE DEVELOPMENT AND TESTING OF OUR SECOND GENERATION TECHNOLOGY.
OUR FINANCIAL DIFFICULTIES RESULTED PRIMARILY FROM OUR INABILITY TO
RAISE ADDITIONAL FUNDS DUE TO CONTRACTUAL ANTI-DILUTION PROVISIONS THAT WERE
CONTAINED IN THE AGREEMENTS RELATED TO THE FINANCING TRANSACTIONS THAT WERE
COMPLETED IN JANUARY OF 2002 (SEE OUR FORM 10-KSB FOR THE YEAR ENDED JUNE 30,
20
2002 AND OUR CURRENT REPORT ON FORM 8-K DATED DECEMBER 12, 2001 AND THE
EXHIBITS AND AMENDMENT THERETO) WHICH PREVENTED ANY REASONABLE FINANCING FROM
BEING COMPLETED. WHEN WE BECAME AWARE OF THE NEGATIVE IMPLICATIONS OF THESE
ANTI-DILUTION PROVISIONS WHILE ATTEMPTING TO STRUCTURE A PLANNED FINANCING
(WHICH FINANCING ATTEMPTS ULTIMATELY FAILED IN JANUARY OF 2003), WE ATTEMPTED
TO EITHER FIND ALTERNATIVE FINANCING METHODS WHICH COULD BE REASONABLY
COMPLETED AND/OR NEGOTIATE AN AMENDMENT TO SUCH PROVISIONS. AFTER MONTHS OF
NEGOTIATIONS, AGREEMENTS RELATED TO AMENDING SUCH PROVISIONS WERE ENTERED INTO
DURING THE SPRING OF 2003(SEE OUR CURRENT REPORT ON FORM 8-K DATED April 12,
2003) AND THE PROVISIONS WERE FINALLY AMENDED EFFECTIVE AUGUST 27, 2003 (SEE
OUR CURRENT REPORT ON FORM 8-K DATED AUGUST 25, 2003 AND EXHIBITS THERETO).
ALTHOUGH WE WERE ABLE TO COMPLETE A SMALL FINANCING THROUGH ONE OF OUR
SUBSIDIARIES DURING AUGUST OF 2003 WHICH WILL ALLOW US TO CONTINUE LIMITED
WORK ON OUR SECOND GENERATION TECHNOLOGY (SEE OUR CURRENT REPORT ON FORM 8-K
DATED AUGUST 25, 2003), OUR OPERATIONS HAVE BEEN SEVERELY DAMAGED DURING THE
PAST YEAR. NOT ONLY DID WE HAVE TO TERMINATE MOST OF OUR ACTIVITIES AND
EMPLOYEES, BUT WE HAVE SUFFERED SUCH DIRE FINANCIAL CONSTRAINTS (AS WE WERE
FACED WITH THE LIKELY POSSIBILITY OF A BANKRUPTCY FILING) THAT WE HAVE LOST
CREDIBILITY WITH OUR VENDORS, CREDITORS, THE FINANCIAL COMMUNITY AND OUR
EXISTING SHAREHOLDERS AND INVESTORS. AS A RESULT, THE MARKET PRICE FOR OUR
STOCK FELL IN ORDER TO CONTINUE WITH OUR BUSINESS ACTIVITIES AND SAVE THE
COMPANY WE HAVE HAD TO STRUCTURE INTERIM FINANCING ON EXTREMELY DILUTIVE TERMS
WHICH HAS NEGATIVELY AFFECTED OUR SHAREHOLDERS AND WILL PROBABLY CONTINUE TO
NEGATIVELY IMPACT OUR ABILITY TO OBTAIN FUTURE FINANCING ON REASONABLE TERMS.
WE STILL FACE A SEVERE WORKING CAPITAL SHORTAGE AND SINCE WE HAVE NO REVENUES
WE WILL NEED TO OBTAIN ADDITIONAL CAPITAL TO SATISFY OUR EXISTING CREDITORS
(SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS" AND "FINANCIAL STATEMENTS").
THERE IS NO ASSURANCE WE WILL BE ABLE TO OBTAIN THE FUNDS THAT WE NEED TO STAY
IN BUSINESS OR TO SUCCESSFULLY DEVELOP OUR BUSINESS.
We are in the process of developing and testing a second generation of
our technology ("Bion NMS" or "NMS" or "System" or "Technology") to provide
waste management solutions to the agricultural industry, focusing on livestock
waste from confined animal feeding operations, such as large dairy and hog
farms. In the past we have engaged in two main areas of activity by utilizing
the first generation of our technology (which we discontinued marketing during
calendar year 2001) (which areas we intend to re-enter during the current
fiscal year pending results of field testing our second generation NMS
technology during fiscal year 2004):
1) WASTE STREAM REMEDIATION. The removal of pollutants (primarily
nitrogen and phosphorus) which pollute soil and water and reduction of
emissions of gases to the atmosphere which result in acid rain, smog,
ground-level ozone or produce "greenhouse warming" effects). We intend
to pursue this area of activity primarily through licensing our second
generation technology: a) to retrofit existing confined animal feeding
operations installations (with emphasis on large dairy farms utilizing
anaerobic lagoons for the next 12 months) and b) for use in newly
constructed dairy farms; and
2) BIONSOIL SALES. The production and sale of organic BionSoil
fertilizer products made from the waste solids produced by use of our
technology.
In addition, we intend to pursue what we call the "Dairy Park
Opportunity," which reflects what we believe is the potential for the Bion
technology to allow very large dairy farms to vertically integrate (with
pasteurization, cream separation, milk bottling, and/or cheese plants, etc.)
21
and pursue site integration (with ethanol plants, methane production, organic
farming, etc.) on relatively small plots of land.
Note that all of these activities completely are dependent upon two
things, neither of which can be assured at this date:
1) successful completion of the field testing of our second generation
technology which is presently taking place in Texas for the purpose of
demonstrating its capacity for nutrient ( primarily nitrogen and
phosphorus)removal from the dairy confined animal feeding operations
waste stream)(which will be followed, if successful, by a
demonstration/test( either at the Texas site or in California pursuant
to existing agreements) of our technology's capacity to reduce polluting
gaseous emissions from confined animal feeding operations operation);
and
2) our ability to raise sufficient funds to allow us to finance our
activities and pay our existing creditors.
We believe that our waste remediation technology will provide confined
animal feeding operations (primarily in the dairy and swine industries) with
treatment for their animal waste outputs. In this regard, our systems are
designed to microbiologically treat their entire waste stream while reducing
air emissions and nutrient discharges and creating solids which are in turn
the basis for the creation of organic soil and fertilizer products. We are
attempting to develop our soil and fertilizer products for use in a variety of
applications.
Currently, the majority of confined animal feeding operations dispose of
their animal waste by spreading it on cropland (before or after placement in
anaerobic lagoons). In many parts of the United States, the operation and/or
expansion of confined animal feeding operations are severely restricted due to
a combination of the amount of land that is necessary to dispose of the animal
waste at an environmentally sustainable rate, and the pollution of existing
land and water due to prior disposal of excess nutrients and/or air pollution
emissions. Confined animal feeding operations are enormous polluters of our
air, water and land and are under significant 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 these feeding operations 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 increasingly being
evaluated for potential regulation under the Federal Clean Air Act and/or
similar state statutes (including without limitation a law recently passed in
California which explicitly makes large dairies subject to such regulation).
The livestock industry and regulatory agencies are searching for affordable
waste treatment solutions to this widespread and immediate problem.
Although we have been conducting business since 1989, we recently have,
effectively, re-entered the "development stage" pending completion of
testing/demonstration of our second generation technology during the current
fiscal year. 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 produced organic soil
products as a by-product of remediation of the waste stream when installed on
large dairy or swine farms. Through June 30, 2001, we sold and subsequently
installed, in the aggregate, 32 of these first generation systems in 7
states., of which 19 were still in operation through June 30, 2002. There are
22
presently approximately 12 first generation Bion NMS soil production system
installations operating in 3 states.
We discontinued marketing of our first generation NMS systems during
calendar 2001. We were unable to produce a business model based on the first
generation technology which would generate sufficient revenues to create a
profitable business. While continuing to market and operate the first
generation systems, during the second half of calendar year 2000 we began to
focus our activities on developing the next generation of the Bion NMS
technology. We no longer operate any of the first generation NMS systems.
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 have the potential to 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) products in a few weeks as
compared to six to twelve months with our first generation systems.
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
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
23
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 when shipped, 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, 2003
with Fiscal Year Ended June 30, 2002
---------------------------------------------------------------------
We recorded $116,029 of BionSoil(R) sales during the fiscal year ended
June 30, 2003 ("2003"). This compares to total sales of $69,382 for the
fiscal year ended June 30, 2002 ("2002"), consisting of $116,029 of
BionSoil(R). In 2003 we began harvesting the solids from our first generation
nutrient management systems. We did not harvest any solids from these systems
in 2002 as we were focusing our efforts on the development of our second
generation system. The increase in solids allowed us to sell more soil during
2003 compared to 2002. Cost of soil was $692,138 for 2003 and $546,117 for
2002. The increase in cost of goods sold was principally due to an increase
in sales. The decrease in the gross loss as a percentage of sales is
principally due to economies of scale.
General and administrative expenses decreased to $2,373,800 for 2003 from
$2,498,400 for 2002. The decrease is primarily attributable to a decrease in
salaries and office expense offset by an increase in legal fees.
Research and development costs decreased by $175,863 during the year
ended June 30, 2003. This decrease is primarily the result of the
construction during 2002 of the second generation prototype system built at
Dreammaker Dairy. We did not incur construction costs on the prototype during
2003.
Non-cash expenses for services and compensation decreased to $30,000 for
2003 from $4,968,000 for 2002. During 2002, non-cash charges for services and
compensation included the issuance of warrants as inducement to convert debt
of $3,710,000, an increase of stock issued for services compensation and
24
interest of $307,000, and an increase in notes payable issued for management
fees of $180,000.
Interest expense decreased to $9,846 for 2003 from $8,612,000 for 2002.
Interest expense 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.
We did not record income tax expense during the years ended June 30, 2003
and 2002, as a result of our net losses. A valuation allowance of $15,394,000
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.
WE HAVE NOT YET HAD THE RESOURCES (FINANCIAL AND PERSONNEL) TO ADDRESS
OUR TAX ITEMS FOR THE YEAR ENDED JUNE 30, 2003. HOWEVER, AS SET FORTH IN THE
FINANCIAL STATEMENTS, IT IS CLEAR THAT WE HAD ADDITIONAL LOSSES DURING THE
YEAR.
At June 30, 2002, we had net operating loss carry-forwards of
approximately $32,582,000, with expirations through 2022. The utilization of
a portion of the loss carry-forwards may be limited under Section 382 of the
Internal Revenue Code.
DUE TO OUR INABILITY TO OBTAIN ACCOUNTING SERVICES, WE ARE UNABLE TO
DETERMINE THE AMOUNTS OF THE VALUATION ALLOWANCES OR CARRY-FORWARDS AT JUNE
30, 2003.
The net loss and comprehensive loss decreased $13,675,767 (80%) during
the year ended June 30, 2003. The decrease primarily related to a decrease of
non-cash interest expense that was offset by a decrease in general and
administrative expenses of $124,600, a decrease in non-cash expenses for
services and compensation, a decrease in research and development and a
decrease in cumulative change in accounting principle. 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 $6.36 from $7.18 to
$0.82. 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, and the decrease in non-cash charges.
25
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 $9,386 as of June 30, 2003. We believe we will not generate
sufficient operating cash flow to meet our needs without additional external
financing. THE LACK OF ADDITIONAL CAPITAL RESULTING FROM THE INABILITY TO
GENERATE CASH FLOW FROM OPERATIONS OR TO RAISE CAPITAL FROM EXTERNAL SOURCES
HAVE ALREADY FORCED THE COMPANY TO SUBSTANTIALLY CURTAIL OPERATIONS, CAUSED US
TO REDUCE STAFF, AND MAY CAUSE THE COMPANY TO CEASE OPERATIONS AND WOULD,
THEREFORE, HAVE A MATERIAL ADVERSE EFFECT ON ITS BUSINESS. 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.
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.
Effective February 12, 2003, in order to eliminate an impediment to a
possible future financing, we entered into an agreement with Centerpoint
Corporation, our majority-owned subsidiary, to immediately cancel Section 2.4
"Post-Closing Adjustment" and Section 1.2(b) "Failure to Register or Lapse of
Effectiveness" from the January 2002 Subscription Agreement between us and
Centerpoint. Our management believes that it is in the best interest of all
of the shareholders of both companies that these obstacles to a possible
future financing be removed. As majority stockholder, we have fiduciary
obligation to act in the best interests of the Centerpoint minority
stockholders.
As consideration to Centerpoint for canceling the sections noted above we
will forgive all amounts due from Centerpoint, totaling approximately $450,000
(this amount has been eliminated in consolidation). In addition, we will
return to Centerpoint, for cancellation, warrants to purchase one million
shares of Centerpoint's common stock.
During the period from January 2003 to June 30, 2003, Bright Capital LLC
("Brightcap"), an entity owned and controlled by Dominic Bassani, a consultant
whose services were provided to us as a part of our management agreement with
D2CO, LLC ("D2"), advanced us $593,800. These advances were made for the
purpose of providing funds to allow us to be able to pay operating expenses
that are critical to our operations primarily consisting of salaries paid to
retain critical personnel (which now consists of six employees), to take
actions to protect and expand our intellectual property and to commence work
on the system installation in Texas. On August 25, 2003, in connection with
26
the financing of Bion Dairy Corporation ("Dairy"), $600,000 of advances from
Brightcap were converted into secured convertible debt of Dairy. (See Item 1.
Description of Business - Recent Developments.)
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. SINCE THAT DATE, BION'S FINANCIAL SITUATION HAS GREATLY
WORSENED AND HAS EXPERIENCED SUBSTANTIAL FINANCIAL AND MANAGEMENT DISTRESS.
(SEE ITEM 1. DESCRIPTION OF BUSINESS, ABOVE).
At June 30, 2003, we had stockholders' deficit of $1,760,155, an
accumulated deficit of $60,107,394. We have no significant 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 is currently engaged in seeking additional capital or other
financing arrangements to fund operations until Bion system and BionSoil(R)
are sufficient to fund operations.
Consolidated Working Capital
----------------------------
Consolidated working capital decreased to a deficit of $2,217,185 at June
30, 2003 from $1,814,000 at June 30, 2002. This decrease is primarily due to
the loss incurred during the year and our inability to raise funds to replace
the funds expended.
Analysis of Cash Flows
----------------------
Cash used in operating activities decreased to $2,330,000 in 2003 from
$3,870,000 in 2002.
Cash used in investing activities increased to $75,000 in 2003 compared
to $4,818,000 cash provided by investing activities in 2002. The decrease is
primarily the result of minimal investing activities in 2003.
Cash provided by financing activities increased to $592,000 in 2003
compared to $435,000 cash used for financing activities in 2002. The increase
is primarily the result of new advances from affiliates in 2003 verses 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 except
as to ongoing work related to our Texas installation/demonstration which is
being funded through Dairy, our subsidiary. See Item 1. Description of
Business, above.
Recent Accounting Pronouncements
--------------------------------
The following information is as of June 30, 2002. Due to our inability
to obtain accounting services, we are unable to update this information.
27
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.
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 FINANCIAL STATEMENTS ATTACHED HERETO (TOGETHER WITH THE NOTES
THERETO AND THE NUMBERS DERIVED THEREFROM AND OTHER RELATED ITEMS) ON PAGES
F-1 THROUGH F-44 IN RESPONSE TO THIS ITEM HAVE NOT BEEN REVIEWED OR AUDITED BY
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS DUE TO THE FACT THAT WE LACK THE
28
FINANCIAL RESOURCES TO PAY OUTSTANDING BILLS FROM OUR AUDITORS, WE HAVE NOT
BEEN ABLE TO OBTAIN AN AUDIT OR REVIEW. HOWEVER, THE FINANCIAL STATEMENTS FOR
THE YEAR ENDED JUNE 30, 2002 ARE DERIVED FROM FINANCIAL STATEMENTS THAT WERE
PREVIOUSLY AUDITED.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
This Form 10-KSB (and our prior filing on Form 10-QSB for the quarters
ended December 21, 2002 and March 31, 2003) have not been reviewed by BDO
Seidman, LLP, our independent certified public accountants, as required by
Item 310(a)) of Regulation S-B. BDO Seidman, LLP has not performed the audit
(or prior reviews) initially because they had not reviewed the impact on the
Company's accounts and operations of the various items disclosed in our Form
8-K dated February 7,2003. No review or audit has been performed since that
date. We are not aware of any dispute with BDO Seidman, LLP as to any
accounting matters. We owe approximately $125,000 to BDO Seidman, LLP which
must be paid or otherwise resolved in order to eliminated independence issues
prior to any review or audit of our financial statements.
Item 8A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
------------------------------------------------
We maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed in our Exchange Act reports
is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms, and
that such information is accumulated and communicated to management, including
the chief executive officer and chief financial officer, as appropriate, to
allow timely decisions regarding required disclosure. Management necessarily
applied its judgment in assessing the costs and benefits of such controls and
procedures, which, by their nature, can provide only reasonable assurance
regarding management's control objectives.
With the participation of management, our chief executive officer and
interim chief financial officer evaluated the effectiveness of the design and
operation of our disclosure controls and procedures at the conclusion of the
period ended June 30, 2003. Based upon this evaluation, the chief executive
officer and chief financial officer concluded that our disclosure controls and
procedures were effective in ensuring that material information required to be
disclosed is included in the reports that it files with the Securities and
Exchange Commission.
Changes in Internal Controls
----------------------------
There were no significant changes in our internal controls or, to the
knowledge of our management, in other factors that could significantly affect
internal controls subsequent to the date of most recent evaluation of our
disclosure controls and procedures utilized to compile information included in
this filing.
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.
29
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act
Our directors, executive officers and significant employees, along with
their respective ages and positions are as follows:
Name Age Position
------------------------- --- ----------------------------------------------
Director and Officers
Mark A. Smith(1) 53 President, Interim Chief Financial Officer and
Director
Jere Northrop 61 Senior Technology Director and Director
Jon Northrop(2) 58 Secretary and Director
Significant Employees
George W. Bloom 48 Chief Operating Officer of Subsidiary
James W. Morris 52 Chief Technology Officer of Subsidiary
Dominic Bassani 56 General Manager of Subsidiary
(1) Mark A. Smith replaced David J. Mitchell as our President on March 25,
2003.
(2) Jon Northrop became Secretary and a Director on March 25, 2003.
Mark A. Smith has served as our President and a Director since March
2003. Since that time, he has also served as the sole director and President
of our wholly-owned subsidiaries, including Bion Dairy Corporation. Since
mid-February 2003 Mr. Smith has served as sole director and President of
Bion=s majority-owned subsidiary, Centerpoint Corporation. Previously, from
May 21, 1999 through January 31, 2002, Mr. Smith served as a director of Bion.
From July 23,1999 when he became President of Bion until mid-2001 when he
ceased to be Chairman, Mr. Smith served in senior positions with Bion on a
consulting basis. Additionally, Mr. Smith was the president of RSTS
Corporation prior to its acquisition of Bion Technologies, Inc. in 1992.
Mr. Smith received a Juris Doctor Degree from the University of Colorado
School of Law, Boulder, Colorado (1980) and a BS from Amherst College,
Amherst, Massachusetts (1971). Mr. Smith has engaged in the private practice
of law in Colorado since 1980. In addition, Mr. Smith has been active in
running private family companies, Stonehenge Capital Corporation (until
1994) and LoTayLingKyur, Inc. (1994-2002), and currently serves as the
president of LoTayLingKyur Foundation. Until returning to Bion during March
2003, Mr. Smith had been in retirement with focus on charitable work and
spiritual retreat.
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
30
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.
Jon Northrop has served as our Secretary and a Director since March of
2003. Since September 2001 he has been self employed as a consultant with a
practice focused on business buyer advocacy. Mr. Northrop is one of our
founders and served as our Chief Executive Officer and a Director from our
inception in September 1989 until August 2001. Before founding Bion
Technologies, Inc., he served in a wide variety of managerial and executive
positions. He was most recently the Executive Director of Davis, Graham &
Stubbs, one of Denver's largest law firms, from 1981 to 1989. Prior to his law
firm experience, Mr. Northrop worked at Samsonite Corporation's Luggage
Division in Denver, Colorado, for over 12 years. His experience was in all
aspects of manufacturing, systems design and implementation, and planning and
finance, ending with three years as the Division's Vice President, Finance.
Mr. Northrop has a bachelors degree in Physics from Amherst College, Amherst,
Massachusetts (1965), an MBA in Finance from the University of Chicago,
Chicago, Illinois (1969), and spent several years conducting post-graduate
research in low energy particle physics at Case Institute of Technology,
Cleveland, Ohio. Jon Northrop is the brother of Jere Northrop.
George W. Bloom has been with our Bion Technologies, Inc. subsidiary
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. He
has his BS in Environmental Science from Cornell University.
James W. Morris has served as Chief Technology Officer of our Bion
Technologies, Inc. subsidiary 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 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.
Dominic Bassani has been an investor in and consultant to Bion since
December 1999. He has served as General Manager of our subsidiary, Bion Dairy
Corporation since August 2003. He is an independent investor and since 1990
has owned and operated Bright Capital Ltd., a management consulting company
which provides management services to early stage technology companies. In
1998, he was retained to reorganize Internet Commerce Corp (ICCA) a leader in
business-to-business transactions using the internet. From January 2000 to the
31
present he has been an investor and consultant to Bion Environmental
Technologies, Inc. He is presently an investor in numerous private and public
companies primarily in technology related businesses. Prior to 1990, Mr.
Bassani was a consultant specializing in providing management reorganization
services to small operating companies since 1978.
During the year ended June 30, 2003, David J. Mitchell, Salvatorre
Zizza, Andy Gould, and Howard Chase all resigned as Directors. Directors are
elected to serve until the next annual meeting of shareholders at each 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 except that Jon Northrop and Jere Northrop are brothers.
Indemnification
---------------
The Articles of Incorporation and the Bylaws provide that we may
indemnify our officers and directors for costs and expenses incurred in
connection with the defense of actions, suits, or proceedings where the
officer or director acted in good faith and in a manner he reasonably believed
to be in our best interest and is a party to such actions by reason of his
status as an officer or director.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons pursuant to the foregoing provisions or otherwise, we have
been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
Compliance with Section 16(a) of the Exchange Act
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. 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, 2003, all executive officers, directors and such stockholders
complied with all applicable filing requirements on a timely basis, except
that Jon Northrop, an officer and a director, filed a Form 3 late, David J.
Mitchell, a former officer, director and 10% or greater shareholder, did not
file Form 4's or a Form 5 reporting at least two transactions, and Atlantic
Partners LLC, a former 10% or greater shareholder, did not file a Form 4
reporting one transaction.
32
Item 10. Executive Compensation
The following table sets forth the compensation paid to or accrued for
each of our current and former executive officers during each of our last
three fiscal years and the compensation paid to or accrued for each of our
significant employees and consultants for the same period.
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
Mark A. Smith 2003 $ 37,500 (2) - - -
President and Interim Chief 2002 0 - 2500
Financial Officer since
March 25, 2003 2001 $600,000 (3) - - -
Jere Northrop
Senior Technology Officer 2003 $ 56,000 (4) - - -
2002 $123,750 - 2500 -
2001 $150,000 - - -
Jon Northrop 2003 0 - - -
Secretary since March 25, 2003 2002 $ 0 - - -
(and Executive Vice President 2001 $150,000 - - -
from December 1999 to
August 2001)
Past Executive Officers
David Mitchell 2003 $546,935 (5) - - -
Chairman (A), Chief Executive 2002 $550,000 (6) - - $3,709,713 (8)
Officer and President until 2001 $370,000 (7) - - $2,230,000 (9)
March 25, 2003
David Fuller 2003 $ 88,121 - - -
Principal Accounting Officer
until February 7, 2003 2002 $125,000 - - -
2001 $ 8,333 - 4,254 -
Lawrence R. Danziger
Chief Financial Officer
until April 30, 2003 2003 $101,792 - 20,000 -
Significant Employees and Consultants
Dominic Bassani 2003 $75,000 (10) - - -
Consultant
George W. Bloom 2003 $150,000 - - -
Chief Operating Officer 2002 $150,000 - 12,000 -
of Subsidiary
James W. Morris 2003 $150,000 - - -
Chief Technology Officer 2002 $ 62,500 - 12,000 -
of Subsidiary
(A) David Mitchell initially replaced Mark Smith as Chairman of the Company
on September 6, 2001, but Mark Smith then replaced David Mitchell as
President and a Director on March 25, 2003 when Mr. Mitchell resigned.
(1) Includes compensation paid by Bion Technologies, Inc., our wholly owned
subsidiary.
33
(2) Mr. Smith has agreed to provide consulting services to us and Dairy
through March 31, 2004 in consideration of our accruing deferred consulting
fees of $150,000 per annum that will be payable to him in the future and the
granting of 50,000 options (effective August 31, 2003). Through June 30, 2003
$37,500 had been accrued. We have agreed that accrued deferred compensation
to Mr. Smith (see Exhibit 99.1 to our Current Report on Form 8-K dated June 9,
2003 for details) for his services commencing during March 2003 will be
converted into shares of our common stock at market price with a cap on the
conversion price of $3.00 per share; provided, however, that once, if ever, we
inform Mr. Smith of our intent to pay for such services in cash, the prior
outstanding balances will be immediately convertible into shares of our common
stock at the election of Mr. Smith.
(3) Includes consulting fees received according to agreements between
LoTayLingKyur, Inc., Mark A. Smith and Bion.
(4) Includes $15,000 of deferred, accrued compensation convertible into Bion
common stock on the same terms as the deferred compensation to Mark A. Smith
described above.
(5) Compensation of $546,935 issued as convertible notes to the Trust under
Deferred Compensation Plan for D2Co, LLC.
(6) 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.
(7) 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).
(8) Represents the value of 1,037,345 adjusted warrants issued to Atlantic
Partners LLC in January 2002.
(9) 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.
(10) Mr. Bassani and an entity owned by him have agreed to provide consulting
services to us and Dairy through March 31, 2005 in consideration of our
accruing deferred consulting fees of $300,000 per annum that will be payable
to him in the future and the granting of 200,000 options (effective August 31,
2003). We have agreed that accrued deferred compensation to Mr. Bassani (see
Exhibit 10.1 to our Current Report on Form 8-K dated June 9, 2003 and the
exhibits thereto for details) for his services commencing during March 2003
will be converted into shares of our common stock at market price with a cap
on the conversion price of $3.00 per share; provided, however, that once, if
ever, we inform Mr. Bassani of our intent to pay for such services in cash,
the prior outstanding balances will be immediately convertible into shares of
our common stock at the election of Mr. Bassani. In addition, certain
adjustments were made to outstanding warrants owned by family members (and
trusts for family members) of Mr. Bassani pursuant to prior existing
agreements and understandings. The agreements with Mr. Bassani are "interim"
34
agreements which were assembled under time and financial constraints. We are
presently in negotiations with Mr. Bassani regarding more formal and
comprehensive agreements (anticipated to be executed during the current fiscal
year) which will include extensions to the term of the agreement, specific
incentives to Mr. Bassani when and if we reach certain benchmarks/goals and
other matters.
Option Grants in Fiscal Year 2003
---------------------------------
The following table sets forth the options that were granted during the
fiscal year ended June 30, 2003 to Executive Officers and Significant
Employees and Consultants:
Number of Percent of
Securities Total Options
Underlying Granted to Exercise
Options Employees in Price Expiration
Name Granted Fiscal 2003 Per Share Date
-------------- ----------- ------------- --------- ----------
Mark A. Smith - - - -
David Mitchell - - - -
Jere Northrop - - - -
Jon Northrop - - - -
Larry Danziger 20,000 66.6% $7.50 7/29/07
David Fuller - - - -
Dominic Bassani - - - -
George W. Bloom - - - -
James W. Morris - - - -
Aggregated Option Exercises and Option Value Table as of June 30, 2003
The following table sets forth the options exercises during the fiscal
year ended June 30, 2003 and the value of exercisable and unexercisable
options outstanding as of June 30, 2003.
Number of Securities Underlying Value of Unexercised In-the
Unexercised Options at Money
Shares Acquired Value June 30, 2003 Options at FY-End
Name on Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable
-------------- --------------- -------- ------------------------------- ---------------------------
Mark A. Smith - - 2,500/0 $0/$0
David Mitchell - - 0/0 $0/$0
Jere Northrop - - 2,500/0 $0/$0
Jon Northrop - - 9,000/0 $0/$0
Larry Danziger - - 20,000/0 $0/$0
David Fuller - - 2,836/1,418 $0/$0
Dominic Bassani - - 0/0 $0/$0
George W. Bloom - - 0/0 $0/$0
James W. Morris - - 0/0 $0/$0
35
Employment Agreements
---------------------
As of February 15, 2003, due to a financial crisis, all of the
employment and consulting agreements between Bion and each of its
employees/consultants were terminated. Each employee consultant who
continued to work for Bion after that date is or has been working without a
contract except as set forth below. All agreements with David Mitchell and
D2CO, LLC were terminated upon his resignation on March 25, 2003.
Mark A. Smith , our President, has agreed to serve on a consulting basis
as President and as a director of the Company until March 31, 2004 for
deferred compensation of $150,000 which shall be deferred for three years from
the end of the calendar year in which earned and then paid out in equal annual
installments during the following three calendar years (unless each party
agrees otherwise) in common stock at the lesser of the market price or $3.00
per share. However, the Board of Directors has agreed to review or reopen
this provision upon the occurrence of certain events. Effective August 31,
2003 Mr. Smith also received an option grant (effective August 31, 2003) of
50,000 vested options to purchase our common stock at $3.00 per share until
August 31, 2008. See our Current Reports on Form 8-K dated June 9, 2003 and
August 25, 2003.
Jere Northrop, our Senior Technology Officer, agreed to defer $2,500 of
his salary effective January 1, 2003. The deferred portion of his salary will
be on the same terms as Mark Smith's compensation. Effective August 31, 2003
Mr. Northrop also received 40,000 options to purchase shares of our common
stock at $3.00 per share until July 31, 2008, of which 20,000 options were
immediately vested and the remainder vest in 2,500 option increments each
three months.
Dominic Bassani, General Manager of Dairy, has agreed to serve as a
consultant to Bion and Dairy until March 31,2005 for deferred compensation of
$300,000 per year which will have the same terms as the deferred compensation
of Mark Smith. Effective August 31, 2003, Mr. Bassani also received an option
to purchase 200,000 shares of our common stock at $3.00 per share until August
31, 2008. See Exhibit 10.1 to our Current Reports on Form 8-K dated June 9,
2003 and August 25, 2003. The agreements with Mr. Bassani are "interim"
agreements which were assembled under time and financial constraints. We are
presently in negotiations with Mr. Bassani regarding more formal and
comprehensive agreements (anticipated to be executed during the current fiscal
year) which will include extensions to the term of the agreement, specific
incentives to Mr. Bassani when and if we reach certain benchmarks/goals and
other matters.
Other Agreements
----------------
In December 1999, the Company entered into a three year agreement for
management and consulting services with D2CO., LLC ("D2") (pursuant to which
D2 provided the services of Mr. Dominic Bassani to the Company). 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 -
36
$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.
All agreements with D2 and/or David Mitchell terminated March 25, 2003 upon
Mr. Mitchell's resignation. 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. For the
2003 calendar year, we are also accruing the sum of $2500 per month of
deferred compensation to Jere Northrop.
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 and
resigned in February 2003. In addition to his duties as a director, Mr.
Chase, through Hollandbrook Group LLC (Hollandbrook), Inc. provided us
consulting services. Bion paid Hollandbrook $1,000 per month and issue to
Hollandbrook $9,000 in Bion common stock at a price per share of $15.00. 900
shares were issued to Hollandbrook during 2002, all of which were returned
during March 2003.
Stock Option Plans
------------------
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, 2003, options to purchase
18,500 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, 2003, options to
purchase 18,500 shares of the Company's common stock are outstanding under the
Director Plan.
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
37
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, 2003, options to purchase 3,891 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, 2003, options to purchase 10,612 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, 2003, there were no options outstanding under the
2002 Plan. However, as of the date of this report, 110,000 options are
outstanding under the 2002 Plan.
The 2003 Incentive Plan (the "2003 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
750,000 shares of the Company's common stock may be granted under the 2003
Plan. Terms of exercise and expiration of options granted under the 2003 Plan
may be established at the discretion of an administrative committee appointed
to administer the 2003 Plan, but no option may be exercisable for more than
ten years. As of June 30, 2003, there were no options outstanding under the
2002 Plan. However, as of September 30, 2003, 431,333 options were
outstanding under the 2003 Plan.
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 30, 2003 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 in Item 10 above; 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 30, 2003. 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 5,298,221 shares outstanding as of September 30, 2003. The address for
those individuals for which an address is not otherwise provided is c/o Bion
38
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 35.7% -
18 East 50th Street
New York, NY 10022
Dominic Bassani 306,086 (2) 5.8% 8.2%
18 East 50th Street
New York, NY 10022
The Danielle Christine Bassani Trust 466,000 (3) 8.1% 12.1%
Anthony Orphonos and
Donald Codignatto, Trustees
4 Keenan Drive
Garden City, NY 11530
The Mitchell Children's Trust 387,343 (4) 6.8% 10.2%
Richard Kirshenbaum and
Seymour Zises, trustees
c/o Seymour Zises Family
Management Corporation
477 Madison Avenue
New York, NY 10022
Executive Officers and Directors:
Mark A. Smith 371,194 (5) 6.9% 10.8%
P.O. Box 566
Crestone, Colorado 81131
Jere Northrop 152,820 (6) 2.9% 4.4%
1961 Tonawanda Creek Road
Amherst, NY 14228
Jon Northrop 149,162 (7) 2.8% 4.4%
1922 W. Sanibel Court
Littleton, Colorado 80120
All executive officers and directors 673,176 12.7% 19.2%
as group (3 persons)
----------------------
* 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 may be distributed to the
39
shareholders of Centerpoint Corporation at a future date. The shares, if
distributed, distributed to Bion will be cancelled immediately following
distribution.
(2) Includes 45,719 shares held directly by Dominic Bassani; 4,500 shares
held by his wife; 3,000 shares held by his adult stepson who lives with him
(of which he disclaims beneficial ownership); 26,367 shares which represents
50% of the shares held by D2CO, of which he is 50% owner; 1,500 bridge
warrants which represents 50% of the bridge warrants held by D2CO; 25,000 SV-
DB warrants held by his wife; and 200,000 options.
(3) Represents SV-DB warrants held by the trust.
(4) Represents SV-DM warrants held by the trust.
(5) Includes 52,500 options held directly by Mark Smith, 3,416 shares held
directly by Mark Smith, 42,518 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 Roth IRA 50,905 shares of common stock held by
Kelly Smith Roth IRA and 156,931 shares of common stock held by LoTayLingKyur
Foundation which is controlled by Mark Smith. Does not include any shares
which Mr. Smith may receive pursuant to deferred compensation arrangements.
Does not include convertible debt issued by Bion Dairy Corporation that under
certain circumstances may become convertible into Bion's common stock. Mr.
Smith disclaims beneficial ownership on 80,588 shares of common stock held by
Dublin Holding, Ltd. for which Mr. Smith is the authorized agent.
(6) Includes 67,401 shares held by Jere Northrop's wife; 20,121 shares held
by a family trust; and options to purchase 42,500 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.
(7) Includes 109,698 shares held directly; 20,464 shares owned by Jon
Northrop's wife and options to purchase 19,000 shares held by Mr. Northrop.
Does not include shares owned by the adult children of Jon Northrop for each
of which he disclaims beneficial ownership.
Item 12. Certain Relationships and Related Transactions
TRANSACTIONS SINCE THE FILING OF OUR ANNUAL REPORT ON FORM 10-KSB FOR
THE YEAR ENDED JUNE 30, 2003:
During February 2003 Bion entered into an agreement with Centerpont
(which agreement was amended April 23, 2003) which agreement was ratified by
the shareholders of Centerpoint on August 25,2003. This agreement, upon
ratification by Centerpoint's shareholders and completion of a related
agreement (executed May 29,2003) with OAM, S.p.A., the former parent of
Centerpoint, on August 27, 2003, amended certain contractual provisions which
had prevented the raising of funds by Bion thereby creating the
financial/management crisis which has afflicted Bion over the past year. For
details, see "Item 1. Description of Business - Acquisition of
Centerpoint/Transactions with Centerpoint and Recent Developments -
Centerpoint Shareholders' Meeting/Removal of Contractual Problems" above and
our Current Reports on Form 8-K dated August 25, 2003, June 9, 2003 and April
12, 2003 and the exhibits thereto.
40
During August 2003 Bion Dairy Corporation ("Dairy"), our wholly-owned
subsidiary, completed the initial closing of secured convertible notes. As of
September 30, 2003, the largest purchaser ($600,000 in exchange for $600,000
of advances (see below) made to Bion during 2003) was an entity owned by
Dominic Bassani, General Manager of Dairy and a consultant to Bion and Dairy.
In addition, Mark A. Smith, our President and a director, purchased $65,000 of
such notes and an entity affiliated with David Mitchell, our former C.E.O.,
Chairman and a director, purchased (in exchange for $65,000 of prior advances
(see below) to Bion during 2003) $65,000 of such notes. For details see "Item
1, Description of Business - Recent Developments, Bion Dairy Corporation
Financing" above and our Current Report on Form 8-K dated August 25,2003 and
the exhibits thereto.
From January 2003 through August 2003, Dominic Bassani made advances to
Bion (primarily through Bright Capital, Ltd. and D2, LLC) which totaled in
excess of $600,000. From late March 2003 (when most management personnel
resigned and the contract with D2, LLC under which he had been providing
consulting services to Bion terminated)) through present, Mr Bassani has
provided ongoing consulting services to Bion. Mr. Bassani will provide
services to Bion and Dairy through March 31,2005 for the sum of $300,000 per
year in deferred compensation (to be converted into Bion common stock at a
price no greater than $3.00 per share and the grant of 200,000 options to
purchase Bion common stock at a price of $3.00 per share until Asugust
31,2008. Additionally, pursuant to prior existing arrangements, adjustments
were made to outstanding Class SV (650,000 were increased to 800,000 ;
exercise price reduced to $3.00; term extended to July 31, 2013 now owned by
family members of Mr. Bassani (and/or trust for such family members). Various
agreements related to such advances, services and adjustments have been
executed by Bion. See our Current Reports on Form 8-K dated March 25, 2003,
April 12, 2003, June 9, 2003 and August 25, 2003 and the exhibits thereto for
further details. The agreements with Mr. Bassani are "interim" agreements
which were assembled under time and financial constraints. We are presently
in negotiations with Mr. Bassani regarding more formal and comprehensive
agreements (anticipated to be executed during the current fiscal year) which
will include extensions to the term of the agreement, specific incentives to
Mr. Bassani when and if we reach certain benchmarks/goals and other matters.
Mark A. Smith, our President and a director, has agreed to serve in such
positions on a consulting basis through March 31,2003 in consideration of
$150,000 in deferred compensation (to be converted into Bion common stock at a
price no greater than $3.00 per share) and the grant (effective August 31,
2003) of 50,000 options to purchase Bion common stock at $3.00 per share until
August 31, 2003. See our Current Report on Form 8-K dated June 9, 2003 and
the exhibits thereto for further details.
The management agreement between us and D2, LLC/David Mitchell was
terminated effective as of March 25, 2003. The voting and shareholder
agreements to which D2 was a party were also terminated as of that same date.
The Trust Under Deferred Compensation Plan for D2CO, LLC (the "Trust") will
remain in existence until mutually agreed otherwise and, unless otherwise
agreed in writing, the "payable" balance of $487,500 principal (plus accrued
interest) owed by us to the Trust will be converted into shares of our Common
Stock upon the earlier to occur of (a) a $5 million or greater equity
financing(s) by us, in which case the amount payable will be converted into
shares of our Common Stock at the equity price of the financing (or, in the
event that the $5 million in equity financing is obtained in a series of more
than one financing, the price of the equity financing which pushed the
aggregate total of the financings above $5 million), or (b)March 31, 2005, at
the then current market price of our Common Stock.
41
Until late March 2003 consulting fees accrued for the services of D2,
LLC (which provided the services of David Mitchell, our former Chairman, and
Mr. Bassani). For details, see our Current Report on Form 8-K dated March 25,
2003 and the exhibits thereto. All 91,439 shares of Bion common stock held in
the Trust were distributed pursuant to the instructions of D2, LLC (45,720 to
David Mitchell and 45,719 to Dominic Bassani) effective May 8, 2003.
Effective August 31, 2003, pursuant to prior agreements and in consideration
of services provided by David Mitchell to Bion, 387,543 outstanding Class SV
warrants (now owned by family members of Mr. Mitchell or trusts for such
persons) were adjusted to lower the exercise price to $5.00 per share and
extend the term until August 31, 2008. Below, find some details concerning
compensation paid to the Trust (in shares and/or notes. The shares have been
distributed as described above. The notes will be converted as described
above.
As to other transactions related to David Mitchell/D2, LLC during the
period leading up to the agreements in the above paragragh:
(a) The Company issued to D2: 15,322 and 23,421 shares of common stock
for management fees during the three and six months ended December
31, 2001, respectively. The management fees were valued at
$125,000 and $250,000 during the three and six months ended
December 31, 2001, respectively. These shares are among the shares
distributed from the Trust as described above.
(b) The Company and D2 orally agreed during January 2002, that in the
event the average price per common share is below $7.50 for any
quarter in which consulting fees are to be paid to the Trust, Bion
will issue a convertible note in lieu of the stock payment. The
agreement was to remain in place during the "Adjustment Period"
noted in the Centerpoint and OAM Agreements which has been
eliminated recently (see our Current Report on Form 8-K dated
August 25,2003). The convertible note is recorded as deferred
compensation upon consolidation of the Trust.
(c) On July 1, 2002, D2 returned to the Company 2,874 shares of the
Company's common stock that were issued as part of the consulting
fee to D2 paid to the Trust. The shares were subsequently
cancelled.
(d) On September 30, 2002, the Company issued a convertible note for
the D2 management fee to be paid to the Trust for the three months
ended September 30, 2002. The convertible note was issued for the
amount of the management fee of $150,000 and pays interest at 6%
per annum, payable in cash or in shares of the Company's common
stock. The convertible note is convertible into shares of common
stock in whole or in part at the time of the Company's next equity
financing, at the price of the next equity financing. The
convertible note is recorded as deferred compensation upon
consolidation of the Trust.
(e) On December 31, 2002, the Company issued a convertible note for
the D2 management fee to be paid to the Trust for the three months
ended December 31, 2002. The convertible note was issued for the
amount of the management fee of $150,000 and pays interest at 6%
per annum, payable in cash or in shares of the Company's common
stock. The convertible note is convertible into shares of common
stock in whole or in part at the time of the Company's next equity
financing, at the price of the next equity financing. The
42
convertible note is recorded as deferred compensation upon
consolidation of the Trust.
On June 30, 2001, Bion and D2CO, LLC ("D2") agreed that the payments
owed to D2 under an existing management agreement be paid to the Trust. On
July 31, 2001, Bion and Sam Spitz (the "Trustee") entered into the Trust.
Under the Trust agreement, the Company contributed assets to the Trust at such
times as specified in the management agreement with D2. Such assets are
subject to claims of the Company's creditors in the event of the Company's
insolvency, have no preferred claim on, or any beneficial ownership interest
in, any assets of the Trust unless and until such assets are distributed. 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, unless agreed otherwise.
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. As of June 30, 2003, $487,500 is owed to the
Trust(not including accrued interest of $9,550. At March 31, 2003 the Trust
held 91,439 shares of common stock of the Company (distributed effective May
8, 2003, net of return and cancellation of 2,874 shares as described above)
having a fair value of $59,435, for a total of $549,185 in deferred
compensation (including $2250 of accrued interest). At June 30, 2003, the
Trust is owed $497,050 (including interest), all of which will convert into
Bion common stock as set forth above.
Jon Northrop, a director of Bion, has been granted (effective August
31,2003) an option to purchase 10,000 shares of Bion's common stock at a price
of $3.00 until August 31, 2008.
Jere Northrop, director and Technology Director of Bion, has been
granted (effective August 31,2003) an option to purchase 40,000 shares of
Bion's common stock at a price of $3.00 per share until August 31, 2008. In
addition, Jere Northrop is receiving $2500 per month of deferred compensation
(to be converted into Bion common stock at a price no greater than $3.00 per
share ) to compensate for additional duties he has taken on due to Bion's
reduced technical personnel resulting from our ongoing financial crisis.
Our executive offices are located at 18 E. 50th Street, 10th Floor, New
York, New York 10022 under a lease which, as renegotiated during fiscal 2003,
expires on December 31, 2003. Bion currently pays no rent and occupies a
small portion of the leased space at no monthly cost pursuant to agreements
between and among the landlord (an unaffiliated party), Bion, and entities
connected with David Mitchell (our former C.E.O. and Director) and Salvatore
Zizza (our former Secretary and Director). We amended our New York City office
lease effective March 1, 2003. Under this amendment the expiration date was
changed to December 31, 2003, from the previous expiration date of December
31, 2010. The amendment calls for the drawdown of the letter of credit
provided to the landlord for the full amount of $120,561 to be used to pay
arrearages and future rent. In addition, two of our new subtenants, Mitchell &
43
Co. and Zizza & Co., which are controlled by David Mitchell and Salvatore
Zizza, respectively, are former officers and directors of Bion, and have
personally guaranteed the lease with the landlord. It is possible that we will
not incur additional cash outflows in connection with this lease as a result
of the drawdown of the letter of credit, the subrental income and the personal
guarantees. See our Current Report dated March 25, 2003 and the exhibits
thereto. However, Bion may have certain liabilities at the end of the lease
term which cannot be fully determined at this time but which we estimate will
be less than $20,000. The lease/sublease agreements cover approximately 5,700
square feet.
We have no additional offices at this time but may have liability in
connection with prior office leases related to space we have vacated including
without limitation: a) space 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
feet; and b) space at 138 Uzzle Industrial Drive, Clayton, North Carolina
27520 under a lease that expired 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. Except as described above, 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, but, if our second generation NMS testing is
successful and we obtain additional financing, we will need additional office
and other space.
TRANSACTIONS DISCLOSED IN OUR FORM 10-KSB FOR THE YEAR ENDED
JUNE 30, 2002:
------------------------------------------------------------
Transactions with David Mitchell and Related Entities
-----------------------------------------------------
Management Agreement with D2
----------------------------
In December 1999, we entered into a three year Management Agreement with
D2CO., LLC ("D2") of which David Mitchell, the former Chairman, CEO and
President of the Company, is sole member, pursuant to which D2 agreed to
provide us specific management and consulting services (including the services
of Dominic Bassani). 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).
44
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.
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.
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:
45
* 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, 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.
46
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.
On August 1, 2001, the Company, D2 and Dublin Holdings, Ltd.,
LoTayLingKyur, Inc., Mark Smith, Kelly Smith, LoTayLingKyur 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:
47
* 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.
Transactions with Salvatore J. Zizza
------------------------------------
Beginning August 10, 2000, Salvatore J. Zizza, who served as a Director
from December 1999 to February 2003, agreed to serve as our governmental
affairs liaison and provide additional consulting services through September
1, 2002 for which he received 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.
Transactions with Andrew G. Gould
---------------------------------
Andrew G. Gould served on our Board of Directors from August 10, 2000 to
February 14, 2003. 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
48
consulting services through August 31, 2002, at no cost to us. We 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.
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.
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.
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.
49
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 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 previously filed and incorporated
herein by reference.
3.2 Bylaws previously filed and incorporated by reference.
10.1 Management Agreement and Management Compensation Warrant
dated December 23, 1999, between Bion Environmental
Technologies, Inc. and D2CO, 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 D2CO, LLC.;
Promissory Note dated December 23, 1999; Warrant between
Bion Environmental Technologies, Inc. and D2CO, LLC.; and
Pledge Agreement dated December 23, 1999, between Bion
Environmental Technologies, Inc. and D2CO, 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 D2CO,
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.
50
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.
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.
51
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.
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.
52
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.
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. Incorporated by
reference to Exhibit 10.36 to our Form 10-KSB for the
year ended June 30, 2002.
10.37 Non-Binding Agreement re Dairy Parks LLC. Incorporated by
reference to Exhibit 10.37 to our Form 10-KSB for the
year ended June 30, 2002.
10.38 Agreement between Bion Environmental Technologies, Inc. and
Centerpoint Corporation canceling provisions of the
Subscription Agreement by and between Bion Environmental
Technologies, Inc. and Centerpoint Corporation.
Incorporated by reference to Exhibit 10.1 to our Form 8-K
dated February 7, 2003.
10.39 Promissory Note and Security Agreement between Bion
Environmental Technologies, Inc. and Bright Capital, LLC.
Incorporated by reference to Exhibit 10.1 to our Form
8-K dated March 25, 2003.
10.40 First Amendment to Lease between Bion Environmental
Technologies, Inc. and Pan Am Equities Corp.
Incorporated by reference to Exhibit 10.2 to our Form
8-K dated March 25, 2003.
10.41 Agreement between Bion Environmental Technologies, Inc.
and Bergen Cove. Incorporated by reference to Exhibit
10.3 to our Form 8-K dated March 25, 2003.
10.42 Agreement between Bion Environmental Technologies, Inc.
and David Mitchell dated April 7, 2003. Incorporated
by reference to Exhibit 10.4 to our Form 8-K dated
March 25, 2003.
10.43 Letter Agreement with Bright Capital, Ltd. Incorporated by
reference to Exhibit 99.1 to our Form 8-K dated April 12,
2003.
10.44 Agreement with OAM, S.p.A. Incorporated by reference to
Exhibit 99.2 to our Form 8-K dated April 12, 2003.
10.45 Amended Agreement with Centerpoint Corporation.
Incorporated by reference to Exhibit 99.3 to our Form 8-K
dated April 12, 2003.
53
10.46 Financing Documents for Bion Dairy Corporation.
Incorporated by reference to Exhibit 10.1 to our Form 8-K
dated August 25, 2003.
10.47 Form of Class SV/DB Warrant. Filed herewith electronically.
10.48 Form of Class SV/DM Warrant. Filed herewith electronically.
10.49 2003 Incentive Plan. Filed herewith electronically.
21 Subsidiaries of the Registrant. Filed herewith
electronically.
31.1 Certification of Chief Executive Officer and Interim Chief
Financial Officer Pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002. Filed herewith electronically.
32.1 Certification of Chief Executive Officer Pursuant to 18
U.S.C. Section 1350. Filed herewith electronically.
Reports on Form 8-K
The following Report on Form 8-K was filed during the quarter ended June 30,
2003:
We filed a Form 8-K dated April 12, 2003 reporting information under
items 5 and 7 of that form.
Item 14. Principal Accountant Fees and Services
As result of our inability to pay our auditors, BDO Seidman LLP, for their
audit of our financial statements for the year ended June 30, 2002, we have
not yet engaged them to audit our financial statements for the year ended June
30, 2003. For the fiscal year ended June 30, 2003, we were billed $10,000 by
BDO Seidman LLP in connection with their review of our Form 10-QSB for the
quarter ended September 30, 2003 and $15,290 for their review of a
registration statement and amendments to prior Forms 10-KSB and 10-QSB.
54
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements and Schedule
THIS REPORT INCLUDES FINANCIAL STATEMENTS AND THE NOTES THERETO WHICH HAVE NOT
BEEN REVIEWED OR AUDITED BY INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS. AS A
RESULT, THE FINANCIAL STATEMENTS DO NOT MEET THE REQUIREMENTS OF FORM 10-KSB.
Page
Consolidated balance sheet as of June 30, 2003 (Unaudited) F-2
Consolidated statements of operations for the years
ended June 30, 2003 (Unaudited) and 2002 F-3
Consolidated statements of changes in stockholders'
equity for the years ended June 30, 2003 (Unaudited) and 2002 F-4
Consolidated statements of cash flows for the years
ended June 30, 2003 (Unaudited) and 2002 F-5
Notes to consolidated financial statements (Unaudited) F-6
F-1
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
As of June 30, 2003 (Unaudited)
June 30, 2003
-------------
ASSETS
Current assets:
Cash and cash equivalents $ 9,386
Accounts receivable, net of allowance
for doubtful accounts of $5,935 7,945
Inventory
Prepaid expenses and other current assets 42,988
------------
Total current assets 60,319
Property and equipment, net 215,683
Claims receivable 600,000
Other assets 31,873
------------
Total assets $ 907,875
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 854,957
Accrued expenses 330,676
Capital lease obligation 1,021
Deferred compensation / due to trust 497,050
Advances from affiliates 593,800
------------
Total current liabilities 2,277,504
Capital lease obligation - less current portion -
------------
Total liabilities 2,277,504
Minority interest 390,526
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, 4,202,491 shares issued
and outstanding (does not include 1,095,730 shares held
by Centerpoint which when distributed will be cancelled)
Additional paid in capital 58,347,239
Accumulated deficit (60,107,394)
------------
Total stockholders' equity (1,760,155)
============
Total liabilities and stockholders' equity $ 907,875
============
See notes to consolidated financial statements
F-2
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years Ended June 30,
----------------------------
2003 2002
----------- ------------
(Unaudited)
Revenue:
Soil $ 116,029 $ 69,382
----------- ------------
116,029 69,382
Cost of soil 762,681 546,117
----------- ------------
Gross loss (646,652) (476,735)
Expenses:
General and administrative (excluding non cash
charges for services and compensation) 2,343,385 2,498,400
Research and development 559,759 735,622
Non cash charges for compensation - 4,967,562
----------- ------------
2,903,144 8,201,584
----------- ------------
Operating loss (3,549,796) (8,678,319)
Other income and expenses:
Interest expense (including non-cash
interest charges) (9,846) (8,611,903)
Interest income 13,940 36,011
Other expenses, net 36,875 74,855
----------- ------------
40,969 (8,501,037)
Net loss before minority interest (3,508,827) (17,179,356)
Minority interest 50,567 85,457
----------- ------------
Net loss $(3,458,260) $(17,093,899)
=========== ============
Basic and diluted loss per common share:
Net loss $ (0.82) $ (7.18)
=========== ============
Weighted-average number of common shares outstanding,
basic and diluted loss per share 4,205,993 2,380,651
=========== ============
See notes to consolidated financial statements
F-3
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Additional Total
Common Stock Paid-In Accumulated Stockholders'
Shares Capital Deficit 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 297,000 297,000
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
Net loss (17,093,899) (17,093,899)
----------------------------------------------------------
Balance - June 30, 2002 4,211,665 $59,403,468 $(56,474,000) $ 2,929,468
Unaudited:
Non-cash variable options
adjusted (30,993) (30,993)
Adjustment to value of
claim receivable (739,154)
Elimination of shares
due to trust (94,313) (142,108) (397,004) (539,112)
Distribution of shares
to trust 94,439 58,973 58,973
Return of shares (6,300) (143,974) 162,897 18,923
Net Loss (3,458,260) (3,458,260)
----------------------------------------------------------
Balance - June 30, 2003 4,202,491 58,347,239 (60,107,394) (1,760,155)
F-4
BION ENVIRONMENTAL TECHNOLOGIES, INC AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended June 30,
-------------------------------
2003 2002
------------- -------------
(Unaudited)
Cash flows from operating activities:
Net loss $ (3,458,260) $ (17,093,899)
Adjustments to reconcile net loss to net cash
used in operating activities:
Minority interest in net loss of subsidiary (50,567) (85,457)
Depreciation and amortization 137,001 72,199
Amortization of debt discount 1,554,425
Accretion of notes payable for interest expense 1,208,598
Beneficial conversion feature amortized to interest expense 5,844,000
Compensation charge from variable options (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 1,193,670
Loss on disposal of assets 109,278
Amounts owed to trust (including interest of $9,550) 497,050
Reduction of note receivable for consulting services 67,646
Changes in:
Accounts receivable (9,350) 4,443
Note receivable (55,969) (123,615)
Inventory (67,640) (67,640)
Prepaid expenses and other current assets (105,011) (96,782)
Claims receivable
Deposits and other (124,973) 9,150
Accounts payable 531,020 (82,702)
Accrued liabilities 275,524 19,880
------------- -------------
Net cash used in operating activities (2,321,897) (3,869,840)
------------- -------------
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)
Proceeds from sale of assets 44,554
Purchase of property and equipment (119,060) (40,540)
------------- -------------
Net cash provided by (used in) investing activities (74,506) 4,818,457
------------- -------------
Cash flows from financing activities:
Proceeds from advances from affiliates 593,800 355,000
Proceeds from exercise of options and warrants 120,000
Payment of loan (897,552)
Payments of capital lease obligations (1,582) (12,892)
------------- -------------
Net cash (used in) provided by financing activities 592,218 (435,444)
------------- -------------
Net increase (decrease) in cash and cash equivalents (1,804,185) 513,173
Cash and cash equivalents, beginning of period 1,813,571 1,300,398
------------- -------------
Cash and cash equivalents, end of period $ 9,386 $ 1,813,571
============= =============
See notes to consolidated financial statements
F-5
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
PRELIMINARY NOTE:
THE FINANCIAL STATEMENTS AS OF JUNE 30, 2003 AND FOR THE YEAR THEN ENDED HAVE
NOT BEEN AUDITED. THE FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2002
ARE FROM FINANCIAL STATEMENTS PREVIOUSLY AUDITED BY BDO SEIDMAN LLP. BDO
SEIDMAN LLP HAS NOT REISSUED THEIR REPORT AS TO SUCH FINANCIAL STATEMENTS AND
HAVE NOT OTHERWISE BEEN INVOLVED IN THE PREPARATION OF THESE 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.
The Company is in the process of developing and testing a second generation of
its technology to provide waste management solutions to the agricultural
industry, focusing on livestock waste from confined animal feeding operations,
such as large dairy and hog farms. In the past the Company has engaged in two
main areas of activity by utilizing the first generation of its technology
(which the Company discontinued marketing during calendar year 2001) (which
areas the Company intends to re-enter during the current fiscal year pending
results of field testing its second generation NMS technology during fiscal
year 2004):
1) WASTE STREAM REMEDIATION. The removal of pollutants (primarily
nitrogen and phosphorus) which pollute soil and water and reduction of
emissions of gases to the atmosphere which result in acid rain, smog,
ground-level ozone or produce "greenhouse warming" effects). We intend
to pursue this area of activity primarily through licensing our second
generation technology: a) to retrofit existing confined animal feeding
operations installations (with emphasis on large dairy farms utilizing
anaerobic lagoons for the next 12 months) and b) for use in newly
constructed dairy farms; and
2) BIONSOIL SALES. The production and sale of organic BionSoil
fertilizer products made from the waste solids produced by use of our
technology.
In addition, the Company intends to pursue the "Dairy Park Opportunity," which
reflects what the Company believes is the potential for the Bion technology to
allow very large dairy farms to vertically integrate (with pasteurization,
cream separation, milk bottling, and/or cheese plants, etc.) and pursue site
integration (with ethanol plants, methane production, organic farming, etc.)
on relatively small plots of land. The consolidated financial statements have
been prepared assuming the Company will continue as a going concern. The
Company incurred losses totaling $17,093,899 during the year ended June 30,
2002 (including non-cash interest expense and other non-cash expenses of
$8,607,023 and $4,971,610, respectively) and has a history of losses which has
resulted in an accumulated deficit of $56,474,000 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.
F-6
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
1. ORGANIZATION AND NATURE OF BUSINESS (Continued)
The consolidated financial statements have been prepared assuming the Company
will continue as a going concern. The Company incurred losses totaling
$3,458,200 during the year ended June 30, 2003 and has a history of losses
which has resulted in an accumulated deficit of $60,107,394 at June 30, 2003.
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.
The Company has been suffering from severe financial difficulties since
approximately late January of 2003. These financial difficulties resulted in
the resignation of nearly all of the Company's officers and directors during
February and March of 2003, and the termination of most of our employees. The
Company has retained a core technical staff, but has drastically curtailed its
business activities to include only those activities that are directly needed
to complete development and testing of the Company's second generation
technology.
The Company's financial difficulties resulted primarily from its inability to
raise additional funds due to contractual anti-dilution provisions that were
contained in the agreements related to the financing transactions that were
completed in January of 2002 which prevented any reasonable financing from
being completed. When the Company became aware of the negative implications
of these anti-dilution provisions while attempting to structure a planned
financing (which financing attempts ultimately failed in January of 2003), the
Company attempted to either find alternative financing methods which could be
reasonably completed and/or negotiate an amendment to such provisions. After
months of negotiations, agreements related to amending such provisions were
entered into during the spring of 2003 and the provisions were finally amended
effective August 27, 2003.
Although the Company was able to complete a small financing through one of its
subsidiaries during August of 2003 which will allow it to continue limited
work on its second generation technology, the Company's operations have been
severely damaged during the past year. In order to continue with business
activities, the Company has had to structure interim financing on extremely
dilutive terms. The Company still faces a severe working capital shortage and
since it has no revenues will need to obtain additional capital to satisfy its
existing creditors. There is no assurance that the Company will be able to
obtain the funds that it needs to stay in business or to successfully develop
its business.
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.
The Company has a stockholders' deficit of $1,760,155 accumulated deficit of
$60,107,394 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.
F-7
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
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
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.
F-8
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
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-9
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
For the years ended June 30, 2003 and 2002, stock options exercisable into
51,503 and 214,523 shares of common stock, respectively, and stock warrants
exercisable into 1,393,393 and 1,393,393 shares of common stock, respectively,
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, 2003 and 2002 was $3,232 each year.
Reclassifications:
Certain prior-year amounts have been reclassified to conform to their 2002
presentation.
F-10
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
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-11
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
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/SUBSEQUENT TRANSACTIONS WITH
CENTERPOINT
ACQUISTION:
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-12
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
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-13
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
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
was initially reflected on the balance sheet at $1,339,154 and the escrow
account was not valued.
Effective June 30, 2003 Bion management based on its own evaluation of the
relevant facts and circumstances (collectibility, cost of litigation,
timelines for receipt, currency fluctuation, etc.) reduced the value of the
35% of the Claims owned by Centerpoint to $600,000 ( a reduction of $739,154).
TRANSACTIONS (POST-ACQUISITION):
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
had 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.
F-14
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
3. ACQUISITION OF CENTERPOINT CORPORATION (Continued)
During March 2003, the Company and Centerpoint entered into an agreement
(amended on April 23, 2003) which forgave sums due from Centerpoint to Bion
(approximately $450,000 at that time) and cancelled the warrants issued by
Centerpoint to Bion in consideration of amending the terms of the January 2002
agreement between Bion and Centerpoint to remove the adjustment provisions(and
other related) described above. This agreement was ratified by the
shareholders of Centerpoint on August 25, 2003. Such ratification enabled Bion
to complete an agreement with OAM, S.p.A. on August 27,2003 which removed the
balance of the adjustment provisions.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of June 30, 2003:
Estimated
Useful Lives (Years)
--------------------
Furniture and equipment 5-7 $ 331,647
Computer equipment 3-5 60,032
Leasehold improvements 11 30,174
----------
421,854
Less accumulated depreciation and amortization 206,171
----------
$ 215,683
==========
Depreciation and amortization expense related to property and equipment was
$72,199 and 137,001 for the years ended June 30, 2002 and 2003, respectively.
At June 30, 2003, property and equipment acquired under capital leases had all
been fully depreciated.
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$4,658,000). In
July 2001, Centerpoint's Italian counsel sent a letter to Aprilia's counsel
contesting all of the alleged claims.
F-15
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
5. CLAIMS RECEIVABLE (Continued)
On July 13, 2001, Aprilia requested that IMI, the escrow agent, pay them Lit.
7,611 million, (approximately US$ 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.
Effective June 30, 2003 Bion management, based on its own evaluation of the
relevant facts and circumstances (including without limitation,
collectibility, cost of litigation, timelines for receipt, currency
fluctuation, etc.) reduced the value of the 35% of the claims owned by
Centerpoint to $600,000 (a reduction of $739,154).
6. 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.
F-16
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
6. STOCKHOLDERS' EQUITY (Continued)
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, 2003, the Company issued a net of 87,539 shares
of its common stock, including 91,349 shares which the Trust distributed on
May 8, 2003, and returns of 3,900 shares including 3,000 shares from Stanley
F. Freedman, legal counsel to the Company, and 900 shares from Holllandbrook.
During the year ended June 30, 2003, 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.
Warrants:
As of September 30, 2003, the Company had the following common stock warrants
(1,543,353 in aggregate) outstanding:
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) $ 6.00 December 31, 2004
Class J-1AA 17,596 (b) $ 7.50 December 31, 2004
Class J-1B 30,047 (a) $ 6.00 December 31, 2005
Class J-1C 45,770 (a) $ 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/DM 387,343 $ 5.00 July 31, 2008
Class O 100,000 $ 9.00 January 15, 2006
Class SV/DB 800,000 $ 3.00 July 31, 2013
(a) Redeemable by the Company at $0.05 per warrant if the bid price for our
common stock is above $14.00.
F-17
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
6. STOCKHOLDERS' EQUITY (Continued)
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 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.
(e) In the event of (d) 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, 2003, options to purchase 18,500 shares
of the Company's common stock are outstanding under the 1994 Plan.
F-18
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
6. STOCKHOLDERS' EQUITY (Continued)
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, 2003, options to
purchase 18,500 shares of the Company's common stock are outstanding under the
Director Plan.
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, 2003, options to purchase 3,891 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, 2003, options to purchase 10,612 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, 2003, there were no options outstanding under the 2002
Plan. However, as of the date of this report, 110,000 options are outstanding
under the 2002 Plan.
F-19
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
6. STOCKHOLDERS' EQUITY (Continued)
The 2003 Incentive Plan (the "2003 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 750,000 shares
of the Company's common stock may be granted under the 2003 Plan. Terms of
exercise and expiration of options granted under the 2003 Plan may be
established at the discretion of an administrative committee appointed to
administer the 2003 Plan, but no option may be exercisable for more than ten
years. As of June 30, 2003, there were no options outstanding under the 2002
Plan. However, as of September 30, 2003, 431,333 options were outstanding
under the 2003 Plan.
During the year ended June 30, 2003, the Company granted options to purchase
30,000 shares of common stock, of which options to purchase 10,000 shares
expired during the year.
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.
During the year ended June 30, 2001, the Company granted options to purchase
24,000 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
during the year ended June 30, 2002.
F-20
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
6. STOCKHOLDERS' EQUITY (Continued)
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 year ended June 30, 2002:
For the Year ended June 30,
--------------------------
2002
-------------
Pro forma net loss:
As reported $ (17,093,899)
Pro forma effect of SFAS No. 123 (541,995)
-------------
Pro forma after giving effect to SFAS No. 123 $ (17,635,894)
=============
Basic and diluted loss per common share:
As reported $ (7.18)
Pro forma effect of SFAS No. 123 (0.23)
-------------
Pro forma after giving effect to SFAS No. 123 $ ( 7.41)
=============
THE ABOVE TABLE HAS NOT BEEN UPDATED FOR THE YEAR ENDED JUNE 30, 2003 AS ONLY
30,000 OPTIONS WERE GRANTED DURING THE YEAR AND 10,000 OF THEM EXPIRED.
MANAGEMENT HAS CONCLUDED THAT THE AGGREGATE AFFECT ON OUR FINANCIAL STATEMENTS
IS RELATIVELY SMALL AND DOES NOT MATERIALLY AFFECT THE ABILITY OF INVESTORS TO
EVALUATE THE COMPANY.
The weighted-average fair value at date of grant for options granted during
the years ended June 30, 2002 was $4.20 per share. 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
-----
Risk-free interest rate 3.24%
Expected lives in years 2.7
Expected volatility 60%
Expected dividend yield 0%
Because of its financial difficulties, the Company has been unable to prepare
the information required by SFAS 123 for the year ended June 30, 2003.
F-21
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
6. STOCKHOLDERS' EQUITY (Continued)
The following table summarizes the Company's stock options at June 30, 2003
and 2002, as well as changes during the years then ended:
Years ended June 30,
---------------------------------------------------
2003 2002
----------------------- -----------------------
Weighted- Weighted-
Average Average
Shares Exercise Price Shares Exercise Price
------- -------------- ------- --------------
Options outstanding at beginning
of year 214,523 $ 14.17 190,541 $ 18.39
Granted 30,000 $ 7.50 95,419 $ 4.62
Forfeited 193,020 $ 16.44 (62,319) $ 26.79
Exercised 0 $ 0 (9,118) $ 2.08
------- -------
Options outstanding at end of year 51,503 $ 12.81 214,523 $ 14.17
======= =======
Options exercisable at end of year 51,503 $ 12.81 159,069 $ 15.10
======= =======
The following table presents information relating to stock options outstanding
as of June 30, 2003:
Options Outstanding Options Exercisable
-------------------------------- --------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Contractual Exercise Exercise
Range of Exercise Prices Shares Life Price Shares Price
------------------------------------------------------------ --------------------
$ 0 - $ 7.50 20,000 4.1 $ 7.50 20,000 $ 7.50
$ 9.50 - $ 11.00 9,000 1.1 $ 10.83 9,000 $ 10.83
$ 12.20 - $ 15.00 4,891 1.3 $ 15.00 4,891 $ 15.00
$ 15.40 - $ 17.00 6,500 1.5 $ 16.02 6,500 $ 16.02
$ 20.00 - $ 29.10 11,112 1.0 $ 21.14 11,112 $ 21.14
------------------------------------------------------------ --------------------
51,503 2.29 $ 12.81 51,503 $ 12.81
======= =======
The Company had 746,552 options reserved for future issuance under all of the
incentive plans as of June 30, 2003.
F-22
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
7. INCOME TAXES
DUE TO OUR CURRENT FINANCIAL PROBLEMS, WE HAVE NOT PREPARED INCOME TAX
INFORMATION FOR THE YEAR ENDED JUNE 30, 2003. WE ARE PROVIDING INFORMATION
FOR THE YEAR ENDED JUNE 30, 2002 BELOW.
The provision for income taxes consisted of the following:
For the year ended June 30,
2002
------------
Deferred benefit:
Federal $ 1,185,000
State 209,000
------------
1,394,000
Increase in valuation allowance (1,394,000)
------------
$ -
============
A reconciliation of the effective tax and the statutory U.S. federal income
tax is as follows:
For the year ended June 30,
2002
------------
Expected tax (benefit) $ (4,139,000)
Increase (decrease) in taxes resulting from:
Permanent differences 3,475,000
State and local income tax (benefit),
net of federal effect (730,000)
Increase in valuation allowance 1,394,000
------------
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 are as follows:
F-23
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
7. INCOME TAXES (Continued)
June 30,
2002
------------
Deferred tax assets:
Accounts receivable allowance $ 1,000
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 1,961,000
1,954,000
Federal, state and local net operating loss carryforwards 13,961,000
------------
Net deferred tax asset before valuation allowance 15,934,000
Valuation allowance (15,934,000)
------------
Net deferred tax asset $ -
============
The Company 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.
8. COMMITMENTS AND CONTINGENCIES
Employment and director agreements:
At June 30, 2003 the Company was not a party to any employment/consultant
agreements (as all employees had been terminated effective February 15, 2003.
Those employees/consultants who continued working for the Company subsequent
thereto have done so without agreements.
For termination of agreements with D2, LLC/David Mitchell, see Note 9 below.
F-24
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
8. COMMITMENTS AND CONTINGENCIES (Continued)
Subsequent to June 30, 2003 certain agreements have been executed. See Note 9
below.
Obligations under operating leases:
Our executive offices are located at 18 E. 50th Street, 10th Floor, New York,
New York 10022 under a lease which, as renegotiated during fiscal 2003,
expires on December 31, 2003. Bion currently pays no rent and occupies a
small portion of the leased space at no monthly cost pursuant to agreements
between and among the landlord (an unaffiliated party), Bion, and entities
connected with David Mitchell (our former C.E.O. and Director) and Salvatore
Zizza (our former Secretary and Director). We amended our New York City office
lease effective March 1, 2003. Under this amendment the expiration date was
changed to December 31, 2003, from the previous expiration date of December
31, 2010. The amendment calls for the drawdown of the letter of credit
provided to the landlord for the full amount of $120,561 to be used to pay
arrearages and future rent. In addition, two of our new subtenants, Mitchell &
Co. and Zizza & Co., which are controlled by David Mitchell and Salvatore
Zizza, respectively, are former officers and directors of Bion, and have
personally guaranteed the lease with the landlord. It is possible that we will
not incur additional cash outflows in connection with this lease as a result
of the drawdown of the letter of credit, the subrental income and the personal
guarantees. See our Current Report dated March 25, 2003 and the exhibits
thereto. However, Bion may have certain liabilities at the end of the lease
term which cannot be fully determined at this time but which we estimate will
be less than $20,000. The lease and sublease agreements cover approximately
5,700 square feet.
We have no additional offices at this time but may have liability in
connection with prior office leases related to space we have vacated including
without limitation: a) space 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
feet; and b) space at 138 Uzzle Industrial Drive, Clayton, North Carolina
27520 under a lease that expired 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. Except as described above, all
leases and rental agreements are with non-affiliated parties.
F-25
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
8. COMMITMENTS AND CONTINGENCIES (Continued)
Obligations under capital leases:
The Company has various non-cancelable capital leases for computers and
equipment. At June 30, 2003, minimum future lease payments under
non-cancelable capital leases were as follows:
2003 $ 1,021
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, 20023 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
-----------
$ 1,875,000
===========
Claims Contingency:
On September 30, 2003, Morrison Cohen Singer & Weinstein, LLP ("MCSW") filed a
complaint in the Supreme Court of the State of New York, County of New York,
against us alleging that we owe MCSW approximately $114,000 for legal services
provided. We have not yet filed an answer in that proceeding. Because we
have already recorded a liability for these legal services, we do not believe
that this lawsuit will have a material adverse effect on our financial
condition.
F-26
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
8. COMMITMENTS AND CONTINGENCIES (Continued)
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
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 $830,000 in damages plus
punitive damages and to have its damages trebled, reasonable attorney fees and
principles of equity requiring Bion to install its second generation Bion NMS
system. We have filed an answer and counterclaims. The action has been
removed to the U.S. District Court for the Eastern District of North Carolina
which court recently ruled that most of the substantive claims should be
arbitrated. The Company does not believe that the claims against it have
merit and, assuming that we have the funds to properly defend this action, we
that the ultimate resolution of this litigation will not 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.
F-27
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
9. RELATED PARTY TRANSACTIONS AND SUBSEQUENT EVENTS
(A) Since filing of Annual Report on Form 10-KSB for the year ended June 30,
2002:
During February 2003 Bion entered into an agreement with Centerpont (which
agreement was amended April 23, 2003) which agreement was ratified by the
shareholders of Centerpoint on August 25,2003. This agreement, upon
ratification by Centerpoint's shareholders and completion of a related
agreement (executed May 29,2003) with OAM, S.p.A., the former parent of
Centerpoint, on August 27, 2003, amended certain contractual provisions which
had prevented the raising of funds by Bion thereby creating the
financial/management crisis which has afflicted Bion over the past year. For
details, see "Item 1. Description of Business---Acquisition of
Centerpoint/Transactions with Centerpoint and Recent Developments -
Centerpoint Shareholders' Meeting/Removal of Contractual Problems" above and
our Current Reports on Form 8-K dated August 25, 2003, June 9, 2003 and April
12, 2003 and the exhibits thereto.
During August 2003 Bion Dairy Corporation ('Dairy'), our wholly-owned
subsidiary, completed the initial closing of secured convertible notes. As of
September 30, 2003, the largest purchaser ($600,000 in exchange for $600,000
of advances (see below) made to Bion during 2003) was an entity owned by
Dominic Bassani, General Manager of Dairy and a consultant to Bion and Dairy.
In addition, Mark A. Smith, our President and a director, purchased $65,000 of
such notes and an entity affiliated with David Mitchell, our former C.E.O.,
Chairman and a director, purchased (in exchange for $65,000 of prior advances
(see below) to Bion during 2003) $65,000 of such notes. For details see "Item
1. Description of Business -Recent Developments, Bion Dairy Corporation
Financing" above and our Current Report on Form 8-K dated August 25,2003 and
the exhibits thereto.
F-28
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
9. RELATED PARTY TRANSACTIONS AND SUBSEQUENT EVENTS (Continued)
From January 2003 through August 2003, Dominic Bassani made advances to Bion
(primarily through Bright Capital, Ltd. and D2, LLC) which totaled in excess
of $600,000. From late March 2003 (when most management personnel resigned
and the contract with D2, LLC under which he had been providing consulting
services to Bion terminated)) through present, Mr Bassani has provided ongoing
consulting services to Bion. Mr. Bassani will provide services to Bion and
Dairy through March 31,2005 for the sum of $300,000 per year in deferred
compensation (to be converted into Bion common stock at a price no greater
than $3.00 per share and the grant of 200,000 options to purchase Bion common
stock at a price of $3.00 per share until Asugust 31,2008. Additionally,
pursuant to prior existing arrangements, adjustments were made to Class SV
(650,000 increased to 800,000 ; exercise price reduced to $3.00; term extended
to August 31,2008) now owned by family members of Mr. Bassani (and/or trust
for such family members). Various agreements related to such advances,
services and adjustments have been executed by Bion. See our Current Reports
on Form 8-K dated March 25, 2003, April 12, 2003, June 9, 2003 and August 25,
2003 and the exhibits thereto for further details.
Mark A. Smith, our President and a director, has agreed to serve in such
positions on a consulting basis through March 31,2003 in consideration of
$150,000 in deferred compensation (to be converted into Bion common stock at a
price no greater than $3.00 per share) and the grant (effective August 31,
2003) of 50,000 options to purchase Bion common stock at $3.00 per share until
August 31, 2003. See our Current Report on Form 8-K dated June 9, 2003 and
the exhibits thereto for further details.
The management agreement between us and D2, LLC/David Mitchell was terminated
effective as of March 25, 2003. The voting and shareholder agreements to which
D2 was a party were also terminated as of that same date. The Trust Under
Deferred Compensation Plan for D2CO, LLC (the "Trust") will remain in
existence until mutually agreed otherwise and, unless otherwise agreed in
writing, the "payable" balance of $487,500 principal (plus accrued interest)
owed by us to the Trust will be converted into shares of our Common Stock upon
the earlier to occur of (a) a $5 million or greater equity financing(s) by us,
in which case the amount payable will be converted into shares of our Common
Stock at the equity price of the financing (or, in the event that the $5
million in equity financing is obtained in a series of more than one
financing, the price of the equity financing which pushed the aggregate total
of the financings above $5 million), or (b) March 31, 2005, at the then
current market price of our Common Stock.
F-29
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
9. RELATED PARTY TRANSACTIONS AND SUBSEQUENT EVENTS (Continued)
Until late March 2003 consulting fees accrued for the services of D2, LLC
(which provided the services of David Mitchell, our former Chairman, and,
indirectly, Mr. Bassani). For details, see our Current Report on Form 8-K
dated March 25, 2003 and the exhibits thereto. All 94,439 shares of Bion
common stock held in the Trust were distributed pursuant to the instructions
of D2, LLC (to David Mitchell and Dominic Bassani). Effective August 31,
2003, pursuant to prior agreements and in consideration of services provided
by David Mitchell to Bion, 387,343 outstanding Class SV warrants (now owned by
a trust for his children) were adjusted to lower the exercise price to $5.00
per share and extend the term until August 31, 2008. Below are some details
concerning compensation paid to the Trust in shares and/or notes. The shares
have been distributed as described above. The notes will be converted as
described above.
As to other transactions related to David Mitchell/D2, LLC during the period
leading up to the agreements in the above paragragh:
(1) The Company issued to D2: 15,322 and 23,421 shares of common stock for
management fees during the three and six months ended December 31, 2001,
respectively. The management fees were valued at $125,000 and $250,000 during
the three and six months ended December 31, 2001, respectively. These shares
are among the shares distributed from the Trust (as defined below) as
described above.
(2) The Company and D2 orally agreed during January 2002, that in the event
the average price per common share is below $7.50 for any quarter in which
consulting fees are to be paid to the Trust, Bion will issue a convertible
note in lieu of the stock payment. The agreement is to remain in place during
the "Adjustment Period" noted in the Centerpoint and OAM Agreements. The
convertible note is recorded as deferred compensation upon consolidation of
the Trust.
(3) On July 1, 2002, D2 returned to the Company 2,874 shares of the Company's
common stock that were issued as part of the consulting fee to D2 paid to the
Trust Under Deferred Compensation Plan for D2Co, LLC (the "Trust") for the
Benefit of D2. The shares were subsequently cancelled.
(4) On September 30, 2002, the Company issued a convertible note for the D2
management fee to be paid to the Trust for the three months ended September
30, 2002. The convertible note was issued for the amount of the management fee
of $150,000 and pays interest at 6% per annum, payable in cash or in shares of
the Company's common stock. The convertible note is convertible into shares of
common stock in whole or in part at the time of the Company's next equity
financing, at the price of the next equity financing. The convertible note is
recorded as deferred compensation upon consolidation of the Trust.
F-30
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
9. RELATED PARTY TRANSACTIONS AND SUBSEQUENT EVENTS (Continued)
(5) On December 31, 2002, the Company issued a convertible note for the D2
management fee to be paid to the Trust for the three months ended December 31,
2002. The convertible note was issued for the amount of the management fee of
$150,000 and pays interest at 6% per annum, payable in cash or in shares of
the Company's common stock. The convertible note is convertible into shares of
common stock in whole or in part at the time of the Company's next equity
financing, at the price of the next equity financing. The convertible note is
recorded as deferred compensation upon consolidation of the Trust.
On June 30, 2001, Bion and D2CO, LLC ("D2") agreed that the payments owed to
D2 under an existing management agreement be paid to the Trust. On July 31,
2001, Bion and Sam Spitz (the "Trustee") entered into the Trust. Under the
Trust agreement, the Company contributed assets to the Trust at such times as
specified in the management agreement with D2. Such assets are subject to
claims of the Company's creditors in the event of the Company's insolvency,
have no preferred claim on, or any beneficial ownership interest in, any
assets of the Trust unless and until such assets are distributed. 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, unless agreed otherwise.
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. As of June 30, 2003, $487,500 is owed to the Trust(not
including accrued interest of $9,550).At March 31, 2003 the Trust held 91,439
shares of common stock of the Company (now distributed after return and
cancellation of 2874 shares as described above) having a fair value of
$59,435, for a total of $549,185 in deferred compensation (including $2250 of
accrued interest). At June 30, 2003, the Trust is owed $497,050 (including
interest), all of which will convert into Bion common stock as set forth
above.
Jon Northrop, a director of Bion, has been granted (effective August 31, 2003)
an option to purchase 10,000 shares of Bion's common stock at a price of $3.00
until August 31, 2008.
F-31
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
9. RELATED PARTY TRANSACTIONS AND SUBSEQUENT EVENTS (Continued)
Jere Northrop, director and Technology Director of Bion, has been granted
(effective August 31,2003) an option to purchase 40,000 shares of Bion's
common stock at a price of $3.00 per share until August 31, 2008. In
addition, Jere Northrop is receiving $2,500 per month of deferred compensation
(to be converted into Bion common stock at $3.00 per share) to compensate for
additional duties he has taken on due to Bion's reduced technical personnel
resulting from our ongoing financial crisis.
Our executive offices are located at 18 E. 50th Street, 10th Floor, New
York, New York 10022 under a lease which, as renegotiated during fiscal 2003,
expires on December 31, 2003. Bion currently pays no rent and occupies a
small portion of the leased space at no monthly cost pursuant to agreements
between and among the landlord (an unaffiliated party), Bion, and entities
connected with David Mitchell (our former C.E.O. and Director) and Salvatore
Zizza (our former Secretary and Director). We amended our New York City office
lease effective March 1, 2003. Under this amendment the expiration date was
changed to December 31, 2003, from the previous expiration date of December
31, 2010. The amendment calls for the drawdown of the letter of credit
provided to the landlord for the full amount of $120,561 to be used to pay
arrearages and future rent. In addition, two of our new subtenants, Mitchell &
Co. and Zizza & Co., which are controlled by David Mitchell and Salvatore
Zizza, respectively, are former officers and directors of Bion, and have
personally guaranteed the lease with the landlord. It is possible that we will
not incur additional cash outflows in connection with this lease as a result
of the drawdown of the letter of credit, the subrental income and the personal
guarantees. See our Current Report dated March 25, 2003 and the exhibits
thereto. However, Bion may have certain liabilities at the end of the lease
term which cannot be fully determined at this time but which we estimate will
be less than $20,000. The lease/sublease agreements cover approximately 5,700
square feet.
We have no additional offices at this time but may have liability in
connection with prior office leases related to space we have vacated including
without limitation: a) space 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
feet; and b) space at 138 Uzzle Industrial Drive, Clayton, North Carolina
27520 under a lease that expired 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. Except as described above, 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, but, if our second generation NMS testing is
successful and we obtain additional financing, we will need additional office
and other space.
F-32
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
9. RELATED PARTY TRANSACTIONS (Continued)
(B) Transactions disclosed in our Annual Report on Form 10-KSB for the year
ended June 30, 2002:
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:
* 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.
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").
F-33
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
9. RELATED PARTY TRANSACTIONS (Continued)
Effective July 1, 2001 through June 30, 2002, compensation to D2 was paid to
the Trust in the form of common stock on a quarterly basis. Thereafter, notes
were issued to the Trust. As of March 27, 2003, the date on which the
agreements with D2 terminated (upon the resignation of David J. Mitchell), the
sum of $487,500 was owed to by Bion to the Trust. The Trust and D2 have
agreed, unless otherwise agreed in writing, that the "payable" balance of
$475,000 owed by us to the Trust will be converted into shares of our common
stock upon the earlier to occur of (a) a $5 million or greater equity
financing(s) by us, in which case the amount payable will be converted into
shares of our common stock at the equity price of the financing (or, in the
event that the $5 million in equity financing is obtained in a series of more
than one financing, the price of the equity financing which pushed the
aggregate total of the financings above $5 million), or (b) March 31, 2005, at
the then current market price of our common stock. See our Current Report on
Form 8K dated March 25, 2003 and the exhibits thereto.
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.
See Note 3.
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).
F-34
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
9. RELATED PARTY TRANSACTIONS (Continued)
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-35
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
9. 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.
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.
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.
On August 1, 2001, the Company, D2 and Dublin Holdings, Ltd., LoTayLingKyur,
Inc., Mark Smith, Kelly Smith, LoTayLingKyur 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 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-36
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
9. 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 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, 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.
See Note 3.
Transactions with Salvatore J. Zizza
Beginning August 10, 2000, Salvatore J. Zizza, who served as a Director from
December 1999 to February 2003, agreed to serve as our governmental affairs
liaison and provide additional consulting services through September 1, 2002
for which he received 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.
F-37
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
9. RELATED PARTY TRANSACTIONS (Continued)
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.
Transactions with Andrew G. Gould
Andrew G. Gould served on our Board of Directors from August 10, 2000 to
February 14, 2003. 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 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-38
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
9. 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. See Note 3.
Other Transactions with Northrops and Other 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.
See Note 3.
F-39
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
9. 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. provided us consulting services. Bion paid Hollandbrook
$1,000 per month and issued to Hollandbrook $9,000 in Bion common stock at a
price per share of $15.00. On February 14, 2003, Mr. Chase resigned from our
Board of Directors and, subsequent thereto, Hollandbrook returned the 900
shares of Bion common stock that had been issued to it.
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.
David Mitchell was a director of Centerpoint prior to the transaction with
Bion and remained a director of Centerpoint until mid 2002.
The Company's equity and notes payable transactions with stockholders and
other related parties are included in Note 10.
10. 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, former 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.
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-40
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
10. CONVERSION OF NOTES PAYABLE (Continued)
a conversion price of $7.50 per share, of the Company's common stock. The
conversion included common shares issued to Jere Northrop, our Chief Technical
Officer and a director of the Company, and Mark Smith and affiliates of Mark
A. Smith, President and Jon Northrop, 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. 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.
11. BUSINESS SEGMENT INFORMATION
The Company has in the past operated in three business segments. The Company
has effectively re-entered the "development stage" over the past 18 months as
it has ceased sales and operation of its first generation NMS systems and
BionSoil derived from them as it completes development and testing of its
second generation NMS systems. The business segments it operated in are as
follows:
Systems: The Company designed, marketed, installed and managed waste,
wastewater and storm water systems, primarily in the livestock agricultural
and food processing industries.
Soil: The Company produced and marketed BionSoil products such as organic
fertilizers, potting soils and soil amendments which were 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 in the past has been
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, 2003 and 2002:
F-41
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
11. BUSINESS SEGMENT INFORMATION (Continued
Systems Soil Other Total
------- ---- ----- -----
Year Ended - June 30, 2003
Revenues $ - $ 116,029 $ - $ 116,029
=========== =========== ========= ============
Operating loss $(2,989,540) $ (900,224) $ 339,968 $ (3,549,796)
Other income/(expense), net $ 244,298 3,820 $(207,149) $ 40,969
Minority interest $ - $ - $ 50,567 $ 50,567
----------- ----------- --------- ------------
Net Loss $(2,745,242) $ (896,404) $ 183,386 $ (3,458,260)
=========== =========== ========= ============
Supplemental segment information:
Amortization and depreciation $ 37,883 $ 99,118 $ - $ 137,001
As of June 30, 2003
Property and Equipment, net $ 165,803 $ 49,880 $ - $ 215,683
Total Assets $ 203,580 $ 58,183 $ 646,113 $ 907,875
Year Ended - June 30, 2002
Revenues $ - $ 69,382 $ - $ 69,382
=========== =========== ========= ============
Operating loss $(4,672,777) $(3,903,022) $(102,520) $ (8,678,319)
Other income/(expense), net $(4,193,612) (4,208,301) $ (99,124) $ (8,501,037)
Minority interest $ - $ - $ 85,457 $ 85,457
----------- ----------- --------- ------------
Net Loss $(8,866,389) $(8,111,323) $(116,187) $(17,093,899)
=========== =========== ========= ============
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
12. 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-42
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
12. 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.
13. SUPPLEMENTAL NON-CASH DISCLOSURES TO STATEMENT OF CASH FLOWS
The Company had the following non-cash financing activities during 2002 (no
such activities took place during 2003):
Year ended
June 30, 2002
-------------
Warrants issued in private placement $ -
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 -
Beneficial conversion feature on convertible bridge notes -
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
13. SUBSEQUENT EVENT
Bion Dairy Corporation Financing
On August 25, 2003 Bion Dairy Corporation ("Dairy"), of which we own all
4,000,000 shares of its common stock outstanding, closed an initial stage of
financing totaling $1,117,500 (including $600,000 of prior advances from
Bright Capital, Ltd. ("Brightcap") and $65,000 of prior advances from
affiliates of David Mitchell, our former CEO) of secured convertible debt
("Notes"). Through September 30,2003 an additional $65,000 of the Notes were
sold to Mark A. Smith our president, for a total issuance of $1,182,500. Up
to a total of $2,065,00 of such Notes may be issued. The largest holder of
these Notes is Chris-Dan, LLC, which is owned by Dominic Bassani, General
Manager of Dairy and a consultant to Bion. The Notes are secured by: a) all
of the intellectual property of Bion (and its subsidiaries) (which previously
secured outstanding obligations to Bright Capital, Ltd. which is owned by Mr.
Bassani), b) all of the outstanding shares of Dairy, and c) all of the shares
of Centerpoint owned by Bion. The Notes are convertible into the common stock
of Dairy at a price of $1.00 (principal and accrued interest on the Notes)
F-43
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to consolidated financial statements (Unaudited)
13. SUBSEQUENT EVENT (Continued)
under various conditions specified in the financing documentation, one or more
of which conditions precedent to conversion may never be met. Under
additional specified conditions (which also have no assurance of being met),
the Notes (or Dairy common stock received pursuant to the conversion thereof)
may in the future be exchanged for shares of the common stock of Bion. If
conversion of the Notes into the common stock of Dairy takes place, all of
Bion's business opportunity in the dairy industry world-wide will be conducted
through Dairy, and the board of directors of Dairy will consist ot three
members, two of which will be designated by the majority of the shareholders
of Dairy and only one will be designated by Bion. The financing restricts the
use of its proceeds and, unless Dairy and/or Bion raise substantial additional
funds, there will be no substantial funds available for Bion to pay its
creditors and carry out its business. See Exhibit 10.1 to our Current Report
on Form 8-K dated August 25,2003 for further details.
F-44
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: October 13, 2003
BION ENVIRONMENTAL TECHNOLOGIES, INC.
By: /s/ Mark A. Smith
-------------------------------------
Mark A. Smith
President and Interim Chief
Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Mark A. Smith Director October 13, 2003
--------------------------- President, Interim
Mark A. Smith Chief Financial
Officer and Director
/s/ Jon Northrop Director October 13, 2003
---------------------------
Jon Northrop
Director October _, 2003
---------------------------
Jere Northrop