-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FDaI8EH6MCj6YKykb0tz/B1whqCPDBxpOkR006Qbsq4MD/1ImERKsTYOOiQw6T6T Ka5s2xzpNu9Yp8DqnOID2A== 0001263279-03-000032.txt : 20031014 0001263279-03-000032.hdr.sgml : 20031013 20031014160852 ACCESSION NUMBER: 0001263279-03-000032 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20031014 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BION ENVIRONMENTAL TECHNOLOGIES INC CENTRAL INDEX KEY: 0000875729 STANDARD INDUSTRIAL CLASSIFICATION: AGRICULTURE CHEMICALS [2870] IRS NUMBER: 841176672 STATE OF INCORPORATION: CO FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 001-31437 FILM NUMBER: 03939789 BUSINESS ADDRESS: STREET 1: 18 EAST 50TH STREET STREET 2: 10TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10022 BUSINESS PHONE: 3032940750 MAIL ADDRESS: STREET 1: 18 EAST 50TH ST STREET 2: 10TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10022 FORMER COMPANY: FORMER CONFORMED NAME: RSTS CORP DATE OF NAME CHANGE: 19930328 10KSB 1 bion10k.txt BION ENVIRONMENTAL TECH 10-KSB (6-30-02 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 2 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 3 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: 4 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 5 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 6 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. 7 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 8 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. 9 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 EX-10 3 ex1047.txt BION ENVIRONMENTAL TECH 10-KSB (6-30-02) EX 10.47 EXHIBIT 10.47 THIS WARRANT HAS BEEN ISSUED IN RELIANCE UPON THE REPRESENTATION OF THE HOLDER THAT IT HAS BEEN ACQUIRED FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TOWARDS THE RESALE OR OTHER DISTRIBUTION THEREOF. NEITHER THIS WARRANT NOR THE SHARES ISSUABLE UPON THE EXERCISE OF THIS WARRANT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. BION ENVIRONMENTAL TECHNOLOGIES, INC. Class SV/DB-1 Warrant Warrant to Subscribe August 31, 2003 for 466,000 Shares Void After July 31, 2013 THIS CERTIFIES that, for value received, The Danielle Christine Bassani Trust or its registered assigns ("Holder"), is entitled to subscribe for and purchase from Bion Environmental Technologies, Inc., a Colorado corporation (hereinafter called the "Company"), at the price of $3.00 per share (such price as from time to time adjusted as hereinafter provided being hereinafter called the "Warrant Price"), from August 31, 2003 until July 31, 2008 (the "Warrant Expiration Date")(provided, however, that the exercise period shall immediately commence upon a Change of Control of the Company), up to 466,000 (subject to adjustment as hereinafter provided)fully paid and nonassessable shares of Common Stock, no par value per share, of the Company (hereinafter called the "Common Stock"), subject, however, to the provisions and upon the terms and conditions hereinafter set forth. This Warrant and any warrant or warrants subsequently issued upon exchange or transfer thereof are hereinafter collectively called the "Warrants". "Registered Holder" shall mean, as to any Warrant and as of any particular date the person in whose name the certificate representing the Warrant shall be registered on that date on the books maintained by the Company pursuant to Section 3(b). A "Change of Control" shall be deemed to occur upon any person or persons, not equity holders on the date hereof, acquiring the ability to elect a majority of the Board of Directors of the Company. Section 1. Exercise of Warrant. (a) Method of Exercise. (i) The rights represented by this Warrant may be exercised by the holder hereof, in whole at any time or from time to time in part, but not as to a fractional share of Common Stock, by the surrender of this Warrant (properly endorsed) at the office of the Company as it may designate by notice in writing to the holder thereof at the address of such holder appearing on the books of the Company, and as further provided below in this Section 1 by payment to the Company of the Warrant Price in cash or by certified or official bank check, for each share being purchased. (ii) In lieu of exercising this Warrant via cash payment, the holder may effect a cashless exercise and receive Common Stock equal to the value of this Warrant (or the portion thereof being cancelled by means of a net issuance exercise, in which event the Company shall issue to the Holder a number of shares of Common Stock computed using the following formula: X = Y (A - B) ------------- A Where X = the number of shares of Common Stock to be issued to the Holder. Y = the number of shares purchasable under this Warrant or, if only A portion of the Warrant is being exercised (at the date of such calculation). A = the current Market Price (as defined below) of one share of Common Stock (at the date of such calculation). B = the exercise price (as adjusted to the date of calculation). If the above calculation results in a negative number, then no Warrant shares of Common Stock shall be issued or issuable upon conversion of this Warrant pursuant to this Section 1 (b), and the Warrant shall not be deemed to have been exercised, notwithstanding the delivery of the notice of election. (b) Delivery of Certificates. Etc. In the event of any exercise of the rights represented by this Warrant, a certificate or certificates for the shares of Common Stock so purchased, registered in the name of the holder, shall be delivered to the holder hereof within a reasonable time, not exceeding ten days, after the rights represented by this Warrant shall have been so exercised; and, unless this Warrant has expired, a new Warrant representing the number of shares (except a remaining fractional share), if any, with respect to which this Warrant shall not then have been exercised shall also be issued to the holder hereof within such time. The person in whose name any certificate for shares of Common Stock is issued upon exercise of this Warrant shall for all purposes be deemed to have become the holder of record of such shares on the date on which the Warrant was surrendered and payment of the Warrant Price and any applicable taxes was made, except that, if the date of such surrender and payment is a date on which the stock transfer books of the Company are closed, such person shall be deemed to have become the holder of such shares at the close of business on the next succeeding date on which the stock transfer books are open. 2. Reservation of Shares; Listing; Payment of Taxes; etc. (a) The Company covenants that it will at all times reserve and keep available out of its authorized Common Stock, solely for the purpose of issue upon exercise of this Warrant, such number of shares of Common Stock as shall then be issuable upon the exercise of all outstanding Warrants. The Company covenants that all shares of Common Stock which shall be issuable upon exercise of this Warrant shall, at the time of delivery (assuming full payment of the purchase price thereof), be duly and validly issued, fully paid, nonassessable and free from all issuance taxes, liens and charges with respect to the issue thereof including, without limitation, adverse claims whatsoever (with the exception of claims arising through the acts of the Registered Holders themselves and except as arising from applicable Federal and state securities laws), that the Company shall have paid all taxes, if any, in respect of the original issuance thereof and that upon issuance such shares, to the extent applicable, shall be listed on, or included in, the Stock Market. As used herein, "Stock Market" shall mean the principal national securities exchange on which the Common Stock is listed or admitted to trading or, if the Common Stock is not listed or admitted to trading on any national securities exchange, shall mean NASDAQ or, if the Common Stock is not quoted on NASDAQ, shall mean the OTC Bulletin Board or, if the Common Stock is not quoted on the OTC Bulletin Board, shall mean the over-the-counter market as furnished by any NASD member firm selected from time to time by the Company for that purpose. (b) The Company covenants that if any securities to be reserved for the purpose of exercise of this Warrant hereunder require registration with, or the approval of, any governmental authority under any federal securities law before such securities may be validly issued or delivered upon such exercise, then the Company will in good faith and as expeditiously as reasonably possible, endeavor to secure such registration or approval. The Company will use reasonable efforts to obtain appropriate approvals or registrations under state "blue sky" securities laws; provided, that the Company shall not be required to qualify as a foreign corporation or file a general or limited consent to service of process in any such jurisdictions or make any changes in its capital structure or any other aspects of its business or enter into any agreements with blue sky commissions, including any agreement to escrow shares of its capital stock. With respect to any such securities, however, Warrants may not be exercised by, or shares of Common Stock issued to, any Registered Holder in any state in which such exercise would be unlawful. (c) The Company shall pay all documentary, stamp or similar taxes and other similar governmental charges that may be imposed with respect to the issuance of this Warrant, or the issuance or delivery of any shares upon exercise of this Warrant; provided, however, that if the shares of Common Stock are to be delivered in a name other than the name of the Registered Holder on any Warrant being exercised, then no such delivery shall be made unless the person requesting the same has paid to the Company the amount of transfer taxes or charges incident thereto, if any. 3. Exchange and Registration of Transfer. (a) This Warrant may be exchanged for another Warrant representing an equal aggregate number of Warrants of the same class or may be transferred in whole or in part, by surrendering it to the Company at its corporate office. Upon satisfaction of the terms and provisions hereof, the Company shall execute, and the Company shall sign, issue and deliver in exchange therefore, such new Warrant or Warrants that the Registered Holder making the exchange shall be entitled to receive. (b) The Company shall keep at its office books in which, subject to such reasonable regulations as it may prescribe, it shall register Warrants and any transfers thereof in accordance with its regular practice. Upon due presentment for registration of transfer of any Warrant at such office, the Company shall execute and the Company shall issue and deliver to the transferee or transferees a new Warrant or Warrants representing an equal aggregate number of Warrants. (c) With respect to all Warrants presented for registration or transfer, or for exchange or exercise, the subscription form attached hereto shall be duly endorsed, or be accompanied by a written instrument or instruments of transfer and subscription, in form satisfactory to the Company, duly executed by the Registered Holder or his attorney-in-fact duly authorized in writing. (d) Prior to due presentment for registration of transfer thereof, the Company may deem and treat the Registered Holder of any Warrant as the absolute owner thereof (notwithstanding any notations of ownership or writing thereon made by anyone other than a duly authorized officer of the Company) for all purposes and shall not be affected by any notice to the contrary. 4. Loss or Mutilation. Upon receipt by the Company of evidence satisfactory to it of the ownership of and loss, theft, destruction or mutilation of any Warrant and (in case of loss, theft or destruction) of indemnity satisfactory to it, and (in the case of mutilation) upon surrender and cancellation thereof, the Company shall execute, sign and deliver to the Registered Holder in lieu thereof a new Warrant of like tenor representing an equal aggregate number of Warrants. 5. Adjustment of Warrant Price and Number of Shares of Common Stock or Warrants. Upon each adjustment of the Warrant Price pursuant to this Section 5, the total number of shares of Common Stock purchasable upon the exercise of each Warrant shall (subject to the provisions contained in Subsection 5(c)) be such number of shares (calculated to the nearest tenth) purchasable at the Warrant Price in effect immediately prior to such adjustment multiplied by a fraction, the numerator of which shall be the Warrant Price in effect immediately prior to such adjustment and the denominator of which shall be the Warrant Price in effect immediately after such adjustment. (a) Except as otherwise provided herein, in the event the Company shall, at any time or from time to time after the date hereof, (i) sell or issue any shares of Common Stock for a consideration per share less than the Warrant Price in effect on the date of such sale or issuance, (ii) issue any shares of Common Stock as a stock dividend to the holders of Common Stock, or (iii) subdivide or combine the outstanding shares of Common Stock into a greater or fewer number of shares (any such sale, issuance, subdivision or combination being herein called a "Change of Shares"), then, and thereafter upon each further Change of Shares, the Warrant Price in effect immediately prior to such Change of Shares shall be changed to a price (rounded to the nearest cent) determined by multiplying the Warrant Price in effect immediately prior thereto by a fraction, the numerator of which shall be (x) the sum of (A) the number of shares of Common Stock outstanding immediately prior to the sale or issuance of such additional shares or such subdivision or combination plus (B) the number of shares of Common Stock that the aggregate consideration received (determined as provided in Paragraph 5(g)(v)) for the issuance of such additional shares would purchase at the Warrant Price in effect on the date of such issuance and the denominator of which shall be (y) the number of shares of Common Stock outstanding immediately after the sale or issuance of such additional shares or such subdivision or combination. Such adjustment shall be made successively whenever any such issuance is made. (b) In case of any reclassification, capital reorganization or other change of outstanding shares of Common Stock, or in case of any consolidation or merger of the Company with or into another entity (other than a consolidation or merger in which the Company is the continuing entity and which does not result in any reclassification, capital reorganization or other change of outstanding shares of Common Stock other than the number thereof), or in case of any sale or conveyance to another entity of the property of the Company as, or substantially as, an entirety (other than a sale/leaseback, mortgage or other financing transaction), the Company shall cause effective provision to be made so that each holder of a Warrant then outstanding shall have the right thereafter, by exercising such Warrant, upon the terms and conditions specified in the Warrant and in lieu of the shares of Common Stock immediately theretofore purchasable upon exercise of the Warrant, to purchase the kind and number of shares of stock or other securities or property (including cash) receivable upon such reclassification, capital reorganization or other change, consolidation, merger, sale or conveyance by a holder of the number of shares of Common Stock that might have been purchased upon exercise of such Warrant immediately prior to such reclassification, capital reorganization or other change, consolidation, merger, sale or conveyance. Any such provision shall include provision for adjustments that shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 5. The Company shall not effect any such consolidation, merger or sale unless prior to, or simultaneously with, the consummation thereof the successor (if other than the Company) resulting from such consolidation or merger or the entity purchasing assets or other appropriate entity shall assume, by written instrument executed and delivered to the Company, the obligation to deliver to the holder of each Warrant such shares of stock, securities or assets as, in accordance with the foregoing provisions, such holders may be entitled to purchase and the other obligations under this Warrant. The foregoing provisions shall similarly apply to successive reclassifications, capital reorganizations and other changes of outstanding shares of Common Stock and to successive consolidations, mergers, sales or conveyances. (c) If, at any time or from time to time, the Company shall issue or distribute to the holders of shares of Common Stock evidence of its indebtedness, any other securities of the Company or any cash, property or other assets (excluding an issuance or distribution governed by one of the preceding Subsections of this Section 5 and also excluding cash dividends or cash distributions paid out of net profits legally available therefore in the full amount thereof (any such non-excluded event being herein called a "Special Dividend")), then in each case the Registered Holders of the Warrants shall be entitled to a proportionate share of any such Special Dividend as though they were the holders of the number of shares of Common Stock of the Company for which their Warrants are exercisable as of the record date fixed for the determination of the holders of Common Stock of the Company entitled to receive such Special Dividend. (d) The Company may elect, upon any adjustment of the Warrant Price hereunder, to adjust the number of Warrants outstanding, in lieu of the adjustment in the number of shares of Common Stock purchasable upon the exercise of each Warrant as hereinabove provided, so that each Warrant outstanding after such adjustment shall represent the right to purchase one share of Common Stock. Each Warrant held of record prior to such adjustment of the number of Warrants shall become that number of Warrants (calculated to the nearest tenth) determined by multiplying the number one by a fraction, the numerator of which shall be the Warrant Price in effect immediately prior to such adjustment and the denominator of which shall be the Warrant Price in effect immediately after such adjustment. Upon each adjustment of the number of Warrants pursuant to this Section 5, the Company shall, as promptly as practicable, cause to be distributed to each Registered Holder of Warrants on the date of such adjustment Warrants evidencing, subject to Section 6, the number of additional Warrants to which such Holder shall be entitled as a result of such adjustment or, at the option of the Company, cause to be distributed to such Holder in substitution and replacement for the Warrants held by him prior to the date of adjustment (and upon surrender thereof, if required by the Company) new Warrants evidencing the number of Warrants to which such Holder shall be entitled after such adjustment. (e) Irrespective of any adjustments or changes in the Warrant Price or the number of shares of Common Stock purchasable upon exercise of this Warrant, the Warrants theretofore and thereafter issued shall, unless the Company shall exercise its option to issue new Warrants pursuant to Subsection 3(a), continue to express the same Warrant Price per share, number of shares purchasable thereunder and Redemption Price therefore as when the same were originally issued. (f) After each adjustment of the Warrant Price pursuant to this Section 5, the Company will promptly prepare a certificate signed by the Chairman or President, and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary, of the Company setting forth: (i) the Warrant Price as so adjusted, (ii) the number of shares of Common Stock purchasable upon exercise of each Warrant after such adjustment, and, if the Company shall have elected to adjust the number of Warrants pursuant to Subsection 5(d), the number of Warrants to which the registered holder of each Warrant shall then be entitled, and the adjustment in Redemption Price resulting there from, and (iii) a brief statement of the facts accounting for such adjustment. The Company will cause a brief summary thereof to be sent by ordinary first class mail to each Registered Holder of Warrants at his or her last address as it shall appear on the registry books. No failure to mail such notice or any defect therein or in the mailing thereof shall affect the validity of such adjustment. The affidavit the Secretary or an Assistant Secretary of the Company that such notice has been mailed shall, in the absence of fraud, be prima facie evidence of the facts stated therein. (g) For purposes of Subsections 5(a) and 5(d), the following provisions (i) to (v) shall also be applicable: (i) the number of shares of Common Stock deemed outstanding at any given time shall include all shares of capital stock convertible into, or exchangeable for, Common Stock (on an as converted basis) as well as all shares of Common Stock issuable upon the exercise of (x) any convertible debt, (y) warrants outstanding on the date hereof and (z) options outstanding on the date hereof. (ii) No adjustment of the Warrant Price shall be made unless such adjustment would require an increase or decrease of at least $.01 in such price; provided that any adjustments which by reason of this Paragraph (ii) are not required to be made shall be carried forward and shall be made at the time of and together with the next subsequent adjustment which, together with adjustments so carried forward, shall require an increase or decrease of at least $.01 in the Warrant Price then in effect hereunder. (iii) In case of (1) the sale by the Company (including as a component of a unit) of any rights or warrants to subscribe for or purchase, or any options for the purchase of, Common Stock or any securities convertible into or exchangeable for Common Stock (such securities convertible, exercisable or exchangeable into Common Stock being herein called "Convertible Securities"), or (2) the issuance by the Company, without the receipt by the Company of any consideration therefore, of any rights or warrants to subscribe for or purchase, or any options for the purchase of, Common Stock or Convertible Securities, whether or not such rights, warrants or options, or the right to convert or exchange such Convertible Securities, are immediately exercisable, and the consideration per share for which Common Stock is issuable upon the exercise of such rights, warrants or options or upon the conversion or exchange of such Convertible Securities (determined by dividing (x) the minimum aggregate consideration, as set forth in the instrument relating thereto without regard to any antidilution or similar provisions contained therein for a subsequent adjustment of such amount, payable to the Company upon the exercise of such rights, warrants or options, plus the consideration received by the Company for the issuance or sale of such rights, warrants or options, plus, in the case of such Convertible Securities, the minimum aggregate amount, as set forth in the instrument relating thereto without regard to any antidilution or similar provisions contained therein for a subsequent adjustment of such amount, of additional consideration, if any, other than such Convertible Securities, payable upon the conversion or exchange thereof, by (y) the total maximum number, as set forth in the instrument relating thereto without regard to any antidilution or similar provisions contained therein for a subsequent adjustment of such amount, of shares of Common Stock issuable upon the exercise of such rights, warrants or options or upon the conversion or exchange of such Convertible Securities issuable upon the exercise of such rights, warrants or options) is less than the Warrant Price of the Common Stock as of the date of the issuance or sale of such rights, warrants or options, then such total maximum number of shares of Common Stock issuable upon the exercise of such rights, warrants or options or upon the conversion or exchange of such Convertible Securities (as of the date of the issuance or sale of such rights, warrants or options) shall be deemed to be "Common Stock" for purposes of Subsections 5(a) and 5(d) and shall be deemed to have been sold for an amount equal to such consideration per share and shall cause an adjustment to be made in accordance with Subsections 5(a) and 5(d). (iv) In case of the sale or other issuance by the Company of any Convertible Securities, whether or not the right of conversion or exchange thereunder is immediately exercisable, and the price per share for which Common Stock is issuable upon the conversion or exchange of such Convertible Securities (determined by dividing (x) the total amount of consideration received by the Company for the sale of such Convertible Securities, plus the minimum aggregate amount, as set forth in the instrument relating thereto without regard to any antidilution or similar provisions contained therein for a subsequent adjustment of such amount, of additional consideration, if any, other than such Convertible Securities, payable upon the conversion or exchange thereof, by (y) the total maximum number, as set forth in the instrument relating thereto without regard to any antidilution or similar provisions contained therein for a subsequent adjustment of such amount, of shares of Common Stock issuable upon the conversion or exchange of such Convertible Securities) is less than the Warrant Price of the Common Stock as of the date of the sale of such Convertible Securities, then such total maximum number of shares of Common Stock issuable upon the conversion or exchange of such Convertible Securities (as of the date of the sale of such Convertible Securities) shall be deemed to be "Common Stock" for purposes of Subsections 5(a) and 5(d) and shall be deemed to have been sold for an amount equal to such consideration per share and shall cause an adjustment to be made in accordance with Subsections 5(a) and 5(d). (v) In case the Company shall modify the rights of conversion, exchange or exercise of any of the securities referred to in Paragraphs (iii) or (iv) of this Subsection 5(g) or any other securities of the Company convertible, exchangeable or exercisable for shares of Common Stock, for any reason other than an event that would require adjustment to prevent dilution, so that the consideration per share received by the Company after such modification is less than the Warrant Price as of the date prior to such modification, then such securities, to the extent not theretofore exercised, converted or exchanged, shall be deemed to have expired or terminated immediately prior to the date of such modification and the Company shall be deemed, for purposes of calculating any adjustments pursuant to this Section 5, to have issued such new securities upon such new terms on the date of modification. Such adjustment shall become effective as of the date upon which such modification shall take effect. On the expiration or cancellation of any such right, warrant or option or the termination or cancellation of any such right to convert or exchange any such Convertible Securities, the Warrant Price then in effect hereunder shall forthwith be readjusted to such Warrant Price as would have obtained (a) had the adjustments made upon the issuance or sale of such rights, warrants, options or Convertible Securities been made upon the basis of the issuance of only the number of shares of Common Stock theretofore actually delivered (and the total consideration received therefore) upon the exercise of such rights, warrants or options or upon the conversion or exchange of such Convertible Securities and (b) had adjustments been made on the basis of the Warrant Price as adjusted under clause (a) of this sentence for all transactions (which would have affected such adjusted Warrant Price) made after the issuance or sale of such rights, warrants, options or Convertible Securities. (vi) In case of the sale of any shares of Common Stock, any Convertible Securities, any rights or warrants to subscribe for or purchase, or any options for the purchase of, Common Stock or Convertible Securities, the consideration received by the Company therefore shall be deemed to be the gross sales price therefore without deducting there from any expense paid or incurred by the Company or any underwriting discounts or commissions or concessions paid or allowed by the Company in connection therewith. In the event that any securities shall be issued in connection with any other securities of the Company, together comprising one integral transaction in which no specific consideration is allocated among the securities, then each of such securities shall be deemed to have been issued for such consideration as the Board of Directors of the Company determines in good faith; provided, however that if holders of more than of 10% of the then outstanding Warrants disagree with such determination, the Company shall retain an independent investment banking firm for the purpose of obtaining an appraisal. (h) Notwithstanding any other provision hereof, no adjustment to the Warrant Price of the Warrants or to the number of shares of Common Stock purchasable upon the exercise of each Warrant will be made: (i) upon the exercise of any of the options outstanding on the date hereof under the Company's existing stock option plans; or (ii) upon the issuance or exercise of options which may hereafter be granted with the approval of the Board of Directors, or exercised, under any employee benefit plan of the Company to officers, directors, consultants or employees, but only with respect to such options as are exercisable at prices no lower than the Closing Bid Price (or, if the price referenced in the definition of Closing Bid Price cannot be determined, the Fair Market Value (as defined below)) of the Common Stock as of the date of grant thereof; or (iii) upon the issuance or exercise of any options or warrants that are granted to or held by the "Holder" or any of its successors, assigns, affiliates and or agents; or (iv) upon the issuance or sale of Common Stock or convertible securities for a consideration to the Company that is not less than the bid price of the Company's Common Stock on the date of issuance (as determined by quotations on the Stock Market); or (v) upon the issuance or sale of Common Stock or Convertible Securities pursuant to the exercise of any rights, options or warrants to receive, subscribe for or purchase, or any options for the purchase of, Common Stock or Convertible Securities, whether or not such rights, warrants or options were outstanding on the date of the original sale of the Warrants or were thereafter issued or sold, provided that an adjustment was either made or not required to be made in accordance with Subsections 5(a) and 5(d) in connection with the issuance or sale of such securities or any modification of the terms thereof; or (vi) upon the issuance or sale of Common Stock upon conversion or exchange of any Convertible Securities, provided that any adjustments required to be made upon the issuance or sale of such Convertible Securities or any modification of the terms thereof were so made, and whether or not such Convertible Securities were outstanding on the date of the original sale of the Warrants or were thereafter issued or sold. Paragraph 5(g)(v) shall nevertheless apply to any modification of the rights of conversion, exchange or exercise of any of the securities referred to in Paragraphs (i), (ii) and (iii) of this Subsection 5(h). For purposes hereof, "Fair Market Value" shall mean the average Closing Bid Price for twenty (20) consecutive trading days, ending with the trading day prior to the date as of which the Fair Market Value is being determined, (with appropriate adjustments for subdivisions or combinations of shares effected during such period) provided that if the prices referred to in the definition of Closing Bid Price cannot be determined for such period, "Fair Market Value" shall be the fair market value as determined by the Board of Directors in good faith. (i) As used in this Section 5, the term "Common Stock" shall mean and include the Company's Common Stock authorized on the date of the original issue of the Warrants and shall also include any capital stock of any class of the Company thereafter authorized which shall not be limited to a fixed sum or percentage in respect of the rights of the holders thereof to participate in dividends and in the distribution of assets upon the voluntary liquidation, dissolution or winding up of the Company; provided, however, that the shares issuable upon exercise of the Warrants shall include only shares of such class designated in the Company's Certificate of Incorporation, as amended, as Common Stock on the date of the original issue of the Warrants or (i), in the case of any reclassification, change, consolidation, merger, sale or conveyance of the character referred to in Subsection 5(c), the stock, securities or property provided for in such section or (ii), in the case of any reclassification or change in the outstanding shares of Common Stock issuable upon exercise of the Warrants as a result of a subdivision or combination or consisting of a change in par value, or from par value to no par value, or from no par value to par value, such shares of Common Stock as so reclassified or changed. (j) Any determination as to whether an adjustment in the Warrant Price in effect hereunder is required pursuant to Section 5, or as to the amount of any such adjustment, if required, shall be binding upon the holders of the Warrants and the Company if made in good faith by the Board of Directors of the Company. (k) If and whenever the Company shall grant to the holders of Common Stock, as such, rights or warrants to subscribe for or to purchase, or any options for the purchase of, Common Stock or securities convertible into or exchangeable for or carrying a right, warrant or option to purchase Common Stock, the Company may at its option elect concurrently therewith to grant to each Registered Holder as of the record date for such transaction of the Warrants then outstanding, the rights, warrants or options to which each Registered Holder would have been entitled if, on the record date used to determine the shareholders entitled to the rights, warrants or options being granted by the Company, the Registered Holder were the holder of record of the number of whole shares of Common Stock then issuable upon exercise of his or her Warrant. If the Company shall so elect under this Subsection 5(k), then such grant by the Company to the holders of the Warrants shall be in lieu of any adjustment which otherwise might be called for pursuant to this Section 5. 6. Fractional Warrants and Fractional Shares. If the number of shares of Common Stock purchasable upon the exercise of each Warrant is adjusted pursuant to Section 5, the Company nevertheless shall not be required to issue fractions of shares, upon exercise of the Warrant or otherwise, nor to distribute certificates that evidence fractional shares. With respect to any fraction of a share called for upon any exercise hereof, the Company shall pay to the Registered Holder an amount in cash equal to such fraction multiplied by the Fair Market Value of one share of Common Stock as of the date of exercise. 7. Warrant Holders Not Deemed Shareholders. No holder of Warrants shall, as such, be entitled to vote or to receive dividends or be deemed the holder of Common Stock that may at any time be issuable upon exercise of such Warrants for any purpose whatsoever, nor shall anything contained herein be construed to confer upon the holder of Warrants, as such, any of the rights of a shareholder of the Company or any right to vote for the election of directors or upon any matter submitted to shareholders at any meeting thereof, or to give or withhold consent to any corporate action (whether upon any recapitalization, issue or reclassification of stock, change of par value or change of stock to no par value, consolidation, merger or conveyance or otherwise), or to receive notice of meetings, or to receive dividends or subscription rights, until such Holder shall have exercised such Warrants and been issued shares of Common Stock in accordance with the provisions hereof. 8. Rights of Action. All rights of action with respect to this Agreement are vested in the respective Registered Holders of the Warrants, and any Registered Holder of a Warrant, without consent of the holder of any other Warrant, may, in his own behalf and for his own benefit, enforce against the Company his right to exercise his Warrant for the purchase of shares of Common Stock in the manner provided herein. 9. Agreement of Warrant Holders. Every holder of any Warrant, by his acceptance thereof, consents and agrees with the Company and every other holder of any Warrant that: (i) The Warrants are transferable only on the registry books of the Company by the Registered Holder thereof in person or by his or her attorney duly authorized in writing and only if such Warrants are surrendered at the office of the Company, duly endorsed or accompanied by a proper instrument of transfer satisfactory to the Company, in its sole discretion, together with payment of any applicable transfer taxes; and (ii) The Company may deem and treat the person in whose name the Warrant is registered as the holder and as the absolute, true and lawful owner thereof for all purposes, and the Company shall not be affected by any notice or knowledge to the contrary, except as otherwise expressly provided in Section 3. 10. Investment Representation and Legend. The holder, by acceptance of the Warrants, represents and warrants to the Company that it is acquiring the Warrants and the shares of Common Stock (or other securities) issuable upon the exercise hereof for investment purposes only and not with a view towards the resale or other distribution thereof and agrees that the Company may affix upon this Warrant the following legend: "This Warrant has been issued in reliance upon the representation of the holder that it has been acquired for investment purposes and not with a view towards the resale or other distribution thereof. Neither this Warrant nor the shares issuable upon the exercise of this Warrant have been registered under the Securities Act of 1933, as amended." The holder, by acceptance of this Warrant, further agrees that the Company may affix the following legend to certificates for shares of Common Stock issued upon exercise of this Warrant: "The securities represented by this certificate have been issued in reliance upon the representation of the holder that they have been acquired for investment and not with a view toward the resale or other distribution thereof, and have not been registered under the Securities Act of 1933, as amended. Neither the securities evidenced hereby, nor any interest therein, may be offered, sold, transferred, encumbered or otherwise disposed of unless either (i) there is an effective registration statement under said Act relating thereto or (ii) the Company has received an opinion of counsel, reasonably satisfactory in form and substance to the Company, stating that such registration is not required." 11. Cancellation of Warrants. If the Company shall purchase or acquire any Warrant or Warrants, by redemption or otherwise, each such Warrant shall thereupon be and canceled by it and retired. The Company shall also cancel the Warrant or Warrants following exercise of any or all thereof or delivered to it for transfer, split up, combination or exchange. 12. Modification of Warrant. The terms of the Warrants shall not be modified, supplemented or altered in any respect except with the consent in writing of the Registered Holders representing at least a majority of the Warrants then outstanding; provided, that, no change in the number or nature of the securities purchasable upon the exercise of any Warrant, or the Warrant Price therefore, or the acceleration of the Warrant Expiration Date, shall be made without the consent in writing of the Registered Holder of the Warrant, and in compliance with applicable law. 13. Notices. All notices, requests, consents and other communications hereunder shall be in writing and shall be deemed to have been made when delivered or mailed by means of first class registered or certified mail, postage prepaid as follows: if to the Registered Holder of a Warrant, at the address of such holder as shown on the registry books maintained by the Company; if to the Company, at 18 East 50th Street, New York, New York 10022, or at such other address as may have been furnished to the Registered Holder in writing by the Company. 14. Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York, without reference to principles of conflict of laws. 15. Binding Effect. This Agreement shall be binding upon and inure to the benefit of the Company, the Registered Holder and their respective successors and assigns, and the holders from time to time of the Warrants. Nothing in this Warrant is intended nor shall be construed to confer upon any other person any right, remedy or claim, in equity or at law, or to impose upon any other person any duty, liability or obligation. 16. Registration Rights. Registration of Common Stock. 16.1. Registration. (a) In the event that the Company files any registration statement for its Common Stock hereafter, the Registrable Securities (defined as the Common Stock Underlying the exercise of the Warrants ) shall have "piggy-back" registration rights in such Registration Statement (one time only), subject to underwriter approval, with registration expenses allocated as set forth below. (b) If the Registrable Securities have not been registered pursuant to 16.1 (a) above on or before August 31, 2005, the Company will, thereafter, upon the written request of a majority of the Holders of its outstanding Class SV warrants (aggregating all SV warrants) file a registration statement (the "Registration Statement") with respect to the resale of the Registrable Securities with the Securities and Exchange Commission. The Company will use commercially reasonable efforts to effect the registrations, qualifications or compliances (including, without limitation, the execution of any required undertaking to file post-effective amendments, appropriate qualifications under applicable blue sky or other state securities laws and appropriate compliance with applicable securities laws, requirements or regulations) as may be reasonably requested and as would permit or facilitate that sale and distribution of all Registrable Securities until the distribution thereof is complete. 16.2 Registration Procedures. In connection with the registration of any Registrable Securities under the Securities Act as provided in this Section 16, the Company will use its best efforts, as expeditiously as possible to: (a) Prepare and file with the Securities and Exchange Commission the Registration Statement with respect to such Registrable Securities and use its best efforts to cause such Registration Statement to become effective; (b) Prepare and file with the Securities and Exchange Commission such amendments and supplements to such Registration Statement and the prospectus used in connection therewith as may be necessary to keep such Registration Statement effective for a period of 12 months, unless agreed otherwise, and to comply with the provisions of the Securities Act (to the extent applicable to the Company)with respect thereto; (c) Furnish to each seller of such Registrable Securities such number of copies of such Registration Statement and of each such amendment and supplement thereto (in each case including all exhibits), such number of copies of the prospectus included in such Registration Statement (including each preliminary prospectus), in conformity with the requirements of the Securities Act, and such other documents, as such seller may reasonably request, in order to facilitate the disposition of the Registrable Securities owned by such seller; (d) Use its best efforts to register or qualify such Registrable Securities covered by such Registration Statement under such other securities or blue sky laws of such jurisdictions as any seller reasonably requests, and do any and all other acts and things which may be reasonably necessary or advisable to enable such seller to consummate the disposition in such jurisdictions of the Registrable Securities owned by such seller, except that the Company will not for any such purpose be required to qualify generally to do business as a foreign corporation in any jurisdiction wherein it would not, but for the requirements of this Section 16.2(d) be obligated to be qualified, to subject itself to taxation in any such jurisdiction, or to consent to general service of process in any such jurisdiction; (e) Provide a transfer agent and registrar for all such Registrable Securities covered by such Registration Statement not later than the effective date of such Registration Statement; (f) Notify each seller of such Registrable Securities at any time when a prospectus relating thereto is required to be delivered under the Securities Act, of the happening of any event as a result of which the prospectus included in such Registration Statement contains an untrue statement of a material fact or omits any fact necessary to make the statements therein not misleading, and, at the request of any such seller, the Company will prepare a supplement or amendment to such prospectus so that, as thereafter delivered to the purchasers of such Registrable Securities, such prospectus will not contain an untrue statement of a material fact or omit to state any fact necessary to make the statements therein not misleading; (g) Cause all such Registrable Securities to be listed on each securities exchange or automated over-the-counter trading system on which similar securities issued by the Company are then listed; (h) Enter into such customary agreements and take all such other actions as reasonably required in order to expedite or facilitate the disposition of such Registrable Securities; and (i) Make available for inspection by any seller of Registrable Securities, all financial and other records, pertinent corporation documents and properties of the Company, and cause the Company's officers, directors and employees to supply all information reasonably requested by any such seller in connection with the Registration Statement pursuant to Section 16.1. 16.3. Registration and Selling Expenses. (a) All expenses incurred by the Company in connection with the Company's performance of or compliance with this Section 16, including, without limitation (i) all registration and filing fees (including all expenses incident to filing with the National Association of Securities Dealers, Inc.), (ii) blue sky fees and expenses, (iii) all necessary printing and duplicating expenses and (iv) all fees and disbursements of counsel and accountants for the Company (including the expenses of any audit of financial statements), retained by the Company (all such expenses being herein called "Registration Expenses"), will be paid by the Company except as otherwise expressly provided in this Section 16.3. The term "Registration Expenses" shall not include any underwriting discounts or commissions incurred by the Purchaser, which shall be the responsibility of the Purchaser. (b) The Company will, in any event, in connection with any registration statement, pay its internal expenses (including, without limitation, all salaries and expenses of its officers and employees performing legal, accounting or other duties in connection therewith and expenses of audits of year-end financial statements), the expense of liability insurance and the expenses and fees for listing the securities to be registered on one or more securities exchanges or automated over-the-counter trading systems on which similar securities issued by the Company are then listed. (c) Nothing herein shall be construed to prevent any holder or holders of Registrable Securities from retaining such counsel as they shall choose, the expenses of one of which, as determined by the holder or holders, shall be borne by the holders. 16.4. [Intentionally Omitted] 16.5. Indemnification. (a) The Company hereby agrees to indemnify, to the extent permitted by law, each holder of Registrable Securities, its officers and directors, if any, and each person, if any, who controls such holder within the meaning of the Securities Act, against all losses, claims, damages, liabilities and expenses (under the Securities Act or common law or otherwise) caused by any untrue statement or alleged untrue statement of a material fact contained in any registration statement or prospectus (and as amended or supplemented if the Company has furnished any amendments or supplements thereto) or any preliminary prospectus, which registration statement, prospectus or preliminary prospectus shall be prepared in connection with the registration contemplated by this Section 16, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages, liabilities or expenses are caused by any untrue statement or alleged untrue statement contained in or by any omission or alleged omission from information furnished in writing by such holder to the Company in connection with the registration contemplated by this Section 16, provided the Company will not be liable pursuant to this Section 16.5 if such losses, claims, damages, liabilities or expenses have been caused by any selling security holder's failure to deliver a copy of the registration statement or prospectus, or any amendments or supplements thereto, after the Company has furnished such holder with the number of copies required by Section 16.2(c). (b) In connection with any registration statement in which a holder of Registrable Securities is participating, each such holder shall furnish to the Company in writing such information as is reasonably requested by the Company for use in any such registration statement or prospectus and shall severally, but not jointly, indemnify, to the extent permitted by law, the Company, its directors and officers and each person, if any, who controls the Company within the meaning of the Securities Act, against any losses, claims, damages, liabilities and expenses resulting from any untrue statement or alleged untrue statement of a material fact or any omission or alleged omission of a material fact required to be stated in the registration statement or prospectus or any amendment thereof or supplement thereto or necessary to make the statements therein not misleading, but only to the extent such losses, claims, damages, liabilities or expenses are caused by an untrue statement or alleged untrue statement contained in or by an omission or alleged omission from information so furnished in writing by such holder in connection with the registration contemplated by this Section 16. If the offering pursuant to any such registration is made through underwriters, each such holder agrees to enter into an underwriting agreement in customary form with such underwriters and to indemnify such underwriters, their officers and directors, if any, and each person who controls such underwriters within the meaning of the Securities Act to the same extent as hereinabove provided with respect to indemnification by such holder of the Company. Notwithstanding the foregoing or any other provision of this Agreement, in no event shall a holder of Registrable Securities be liable for any such losses, claims, damages, liabilities or expenses in excess of the net proceeds received by such holder in the offering. (c) Promptly after receipt by an indemnified party under Section 16.5 (a) or (b) of notice of the commencement of any action or proceeding, such indemnified party will, if a claim in respect thereof is made against the indemnifying party under such Section, notify the indemnifying party in writing of the commencement thereof; but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party otherwise than under such Section. In case any such action or proceeding is brought against any indemnified party, and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein, and, to the extent that it wishes, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel approved by such indemnified party, and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party under such Section for any legal or any other expenses subsequently incurred by such indemnified party in connection with the defense thereof (other than reasonable costs of investigation) unless incurred at the written request of the indemnifying party. Notwithstanding the above, the indemnified party will have the right to employ counsel of its own choice in any such action or proceeding if the indemnified party has reasonably concluded that there may be defenses available to it which are different from or additional to those of the indemnifying party, or counsel to the indemnified party is of the opinion that it would not be desirable for the same counsel to represent both the indemnifying party and the indemnified party because such representation might result in a conflict of interest (in either of which cases the indemnifying party will not have the right to assume the defense of any such action or proceeding on behalf of the indemnified party or parties and such legal and other expenses will be borne by the indemnifying party). An indemnifying party will not be liable to any indemnified party for any settlement of any such action or proceeding effected without the consent of such indemnifying party. (d) If the indemnification provided for in Section 16.5(a) or (b) is unavailable under applicable law to an indemnified party in respect of any losses, claims, damages or liabilities referred to therein, then each applicable indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities in such proportion as is appropriate to reflect the relative fault of the Company on the one hand and of the holders of Registrable Securities on the other in connection with the statements or omissions which resulted in such losses, claims, damages, or liabilities, as well as any other relevant equitable considerations. The relative fault of the Company on the one hand and of the holders of Registrable Securities on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the Company or by the holders of Registrable Securities and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The amount paid or payable by a party as a result of the losses, claims, damages and liabilities referred to above shall be deemed to include, subject to the limitations set forth in Section 16.5(c), any legal or other fees or expenses reasonably incurred by such party in connection with investigating or defending any action or claim. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) will be entitled to contribution from any person who is not guilty of such fraudulent misrepresentation. (e) Promptly after receipt by the Company or any holder of Securities of notice of the commencement of any action or proceeding, such party will, if a claim for contribution in respect thereof is to be made against another party (the "contributing party"), notify the contributing party of the commencement thereof; but the omission so to notify the contributing party will not relieve it from any liability which it may have to any other party other than for contribution hereunder. In case any such action, suit, or proceeding is brought against any party, and such party notifies a contributing party of the commencement thereof, the contributing party will be entitled to participate therein with the notifying party and any other contributing party similarly notified. IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed as of the date first above written. BION ENVIRONMENTAL TECHNOLOGIES, INC. By: _________________________________ Authorized Officer SUBSCRIPTION FORM To Be Executed by the Registered Holder in Order to Exercise Warrant The undersigned Registered Holder hereby irrevocably elects to exercise ___________ Warrants represented by this certificate, and to purchase the securities issuable upon the exercise of such Warrants, and requests that certificates for such securities shall be issued in the name of PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ [please print or type name and address] and be delivered to ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ [please print or type name and address] and if such number of Warrants shall not be all the Warrants evidenced by this Warrant Certificate, that a new Warrant for the balance of such Warrants be registered in the name of, and delivered to, the Registered Holder at the address stated below. The undersigned represents that the exercise of the within Warrant was solicited by a member of the National Association of Securities Dealers, Inc. If not solicited by an NASD member, please write "unsolicited" in the space below. _________________________________________ (Name of NASD Member) Dated: X ___________________________________ ___________________________________ ___________________________________ Address ___________________________________ Taxpayer Identification Number ___________________________________ Signature Guaranteed ASSIGNMENT To Be Executed by the Registered Holder In Order to Assign Warrant FOR VALUE RECEIVED, ____________________________________ hereby sells, assigns and transfers unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ [please print or type name and address] ___________________________ of the Warrants represented hereby, and hereby irrevocably constitutes and appoints __________________________________________________________________________ Attorney to transfer this Warrant on the books of the Company, with full power of substitution in the premises. Dated: _____________________________ X ___________________________________ Signature Guaranteed ___________________________________ THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO THE NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER, AND MUST BE GUARANTEED BY A MEMBER OF THE MEDALLION STAND PROGRAM. EX-10 4 ex1048.txt BION ENVIRONMENTAL TECH 10-KSB (6-30-02) EX 10.48 EXHIBIT 10.48 THIS WARRANT HAS BEEN ISSUED IN RELIANCE UPON THE REPRESENTATION OF THE HOLDER THAT IT HAS BEEN ACQUIRED FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TOWARDS THE RESALE OR OTHER DISTRIBUTION THEREOF. NEITHER THIS WARRANT NOR THE SHARES ISSUABLE UPON THE EXERCISE OF THIS WARRANT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. BION ENVIRONMENTAL TECHNOLOGIES, INC. Class SV-DM Warrant Warrant to Subscribe August 31, 2003 for 387,343 shares Void After July 31, 2008 THIS CERTIFIES that, for value received, Mitchell Children's Trust dated September 6, 2002 or its registered assigns ("Holder"), is entitled to subscribe for and purchase from Bion Environmental Technologies, Inc., a Colorado corporation (hereinafter called the "Company"), at the price of $5.00 per share (such price as from time to time adjusted as hereinafter provided being hereinafter called the "Warrant Price"), from August 31, 2003 until July 31, 2008 (the "Warrant Expiration Date")(provided, however, that the exercise period shall immediately commence upon a Change of Control of the Company), up to 387,343(subject to adjustment as hereinafter provided)fully paid and nonassessable shares of Common Stock, no par value per share, of the Company (hereinafter called the "Common Stock"), subject, however, to the provisions and upon the terms and conditions hereinafter set forth. This Warrant and any warrant or warrants subsequently issued upon exchange or transfer thereof are hereinafter collectively called the "Warrants". "Registered Holder" shall mean, as to any Warrant and as of any particular date the person in whose name the certificate representing the Warrant shall be registered on that date on the books maintained by the Company pursuant to Section 3(b). A "Change of Control" shall be deemed to occur upon any person or persons, not equity holders on the date hereof, acquiring the ability to elect a majority of the Board of Directors of the Company. Section 1. Exercise of Warrant. (a) Method of Exercise. (i) The rights represented by this Warrant may be exercised by the holder hereof, in whole at any time or from time to time in part, but not as to a fractional share of Common Stock, by the surrender of this Warrant (properly endorsed) at the office of the Company as it may designate by notice in writing to the holder thereof at the address of such holder appearing on the books of the Company, and as further provided below in this Section 1 by payment to the Company of the Warrant Price in cash or by certified or official bank check, for each share being purchased. (ii) In lieu of exercising this Warrant via cash payment, the holder may effect a cashless exercise and receive Common Stock equal to the value of this Warrant (or the portion thereof being cancelled by means of a net issuance exercise, in which event the Company shall issue to the Holder a number of shares of Common Stock computed using the following formula: X = Y (A B) ------------- A Where X = the number of shares of Common Stock to be issued to the Holder. Y = the number of shares purchasable under this Warrant or, if only a portion of the Warrant is being exercised (at the date of such calculation). A = the current Market Price (as defined below) of one share of Common Stock (at the date of such calculation). B = the exercise price (as adjusted to the date of calculation. If the above calculation results in a negative number, then no Warrant shares of Common Stock shall be issued or issuable upon conversion of this Warrant pursuant to this Section 1 (b), and the Warrant shall not be deemed to have been exercised, notwithstanding the delivery of the notice of election. (b) Delivery of Certificates. Etc. In the event of any exercise of the rights represented by this Warrant, a certificate or certificates for the shares of Common Stock so purchased, registered in the name of the holder, shall be delivered to the holder hereof within a reasonable time, not exceeding ten days, after the rights represented by this Warrant shall have been so exercised; and, unless this Warrant has expired, a new Warrant representing the number of shares (except a remaining fractional share), if any, with respect to which this Warrant shall not then have been exercised shall also be issued to the holder hereof within such time. The person in whose name any certificate for shares of Common Stock is issued upon exercise of this Warrant shall for all purposes be deemed to have become the holder of record of such shares on the date on which the Warrant was surrendered and payment of the Warrant Price and any applicable taxes was made, except that, if the date of such surrender and payment is a date on which the stock transfer books of the Company are closed, such person shall be deemed to have become the holder of such shares at the close of business on the next succeeding date on which the stock transfer books are open. 2. Reservation of Shares; Listing; Payment of Taxes; etc. (a) The Company covenants that it will at all times reserve and keep available out of its authorized Common Stock, solely for the purpose of issue upon exercise of this Warrant, such number of shares of Common Stock as shall then be issuable upon the exercise of all outstanding Warrants. The Company covenants that all shares of Common Stock which shall be issuable upon exercise of this Warrant shall, at the time of delivery (assuming full payment of the purchase price thereof), be duly and validly issued, fully paid, nonassessable and free from all issuance taxes, liens and charges with respect to the issue thereof including, without limitation, adverse claims whatsoever (with the exception of claims arising through the acts of the Registered Holders themselves and except as arising from applicable Federal and state securities laws), that the Company shall have paid all taxes, if any, in respect of the original issuance thereof and that upon issuance such shares, to the extent applicable, shall be listed on, or included in, the Stock Market. As used herein, "Stock Market" shall mean the principal national securities exchange on which the Common Stock is listed or admitted to trading or, if the Common Stock is not listed or admitted to trading on any national securities exchange, shall mean NASDAQ or, if the Common Stock is not quoted on NASDAQ, shall mean the OTC Bulletin Board or, if the Common Stock is not quoted on the OTC Bulletin Board, shall mean the over-the-counter market as furnished by any NASD member firm selected from time to time by the Company for that purpose. (b) The Company covenants that if any securities to be reserved for the purpose of exercise of this Warrant hereunder require registration with, or the approval of, any governmental authority under any federal securities law before such securities may be validly issued or delivered upon such exercise, then the Company will in good faith and as expeditiously as reasonably possible, endeavor to secure such registration or approval. The Company will use reasonable efforts to obtain appropriate approvals or registrations under state "blue sky" securities laws; provided, that the Company shall not be required to qualify as a foreign corporation or file a general or limited consent to service of process in any such jurisdictions or make any changes in its capital structure or any other aspects of its business or enter into any agreements with blue sky commissions, including any agreement to escrow shares of its capital stock. With respect to any such securities, however, Warrants may not be exercised by, or shares of Common Stock issued to, any Registered Holder in any state in which such exercise would be unlawful. (c) The Company shall pay all documentary, stamp or similar taxes and other similar governmental charges that may be imposed with respect to the issuance of this Warrant, or the issuance or delivery of any shares upon exercise of this Warrant; provided, however, that if the shares of Common Stock are to be delivered in a name other than the name of the Registered Holder on any Warrant being exercised, then no such delivery shall be made unless the person requesting the same has paid to the Company the amount of transfer taxes or charges incident thereto, if any. 3. Exchange and Registration of Transfer. (a) This Warrant may be exchanged for another Warrant representing an equal aggregate number of Warrants of the same class or may be transferred in whole or in part, by surrendering it to the Company at its corporate office. Upon satisfaction of the terms and provisions hereof, the Company shall execute, and the Company shall sign, issue and deliver in exchange therefore, such new Warrant or Warrants that the Registered Holder making the exchange shall be entitled to receive. (b) The Company shall keep at its office books in which, subject to such reasonable regulations as it may prescribe, it shall register Warrants and any transfers thereof in accordance with its regular practice. Upon due presentment for registration of transfer of any Warrant at such office, the Company shall execute and the Company shall issue and deliver to the transferee or transferees a new Warrant or Warrants representing an equal aggregate number of Warrants. (c) With respect to all Warrants presented for registration or transfer, or for exchange or exercise, the subscription form attached hereto shall be duly endorsed, or be accompanied by a written instrument or instruments of transfer and subscription, in form satisfactory to the Company, duly executed by the Registered Holder or his attorney-in-fact duly authorized in writing. (d) Prior to due presentment for registration of transfer thereof, the Company may deem and treat the Registered Holder of any Warrant as the absolute owner thereof (notwithstanding any notations of ownership or writing thereon made by anyone other than a duly authorized officer of the Company) for all purposes and shall not be affected by any notice to the contrary. 4. Loss or Mutilation. Upon receipt by the Company of evidence satisfactory to it of the ownership of and loss, theft, destruction or mutilation of any Warrant and (in case of loss, theft or destruction) of indemnity satisfactory to it, and (in the case of mutilation) upon surrender and cancellation thereof, the Company shall execute, sign and deliver to the Registered Holder in lieu thereof a new Warrant of like tenor representing an equal aggregate number of Warrants. 5. Adjustment of Warrant Price and Number of Shares of Common Stock or Warrants. Upon each adjustment of the Warrant Price pursuant to this Section 5, the total number of shares of Common Stock purchasable upon the exercise of each Warrant shall (subject to the provisions contained in Subsection 5(c)) be such number of shares (calculated to the nearest tenth) purchasable at the Warrant Price in effect immediately prior to such adjustment multiplied by a fraction, the numerator of which shall be the Warrant Price in effect immediately prior to such adjustment and the denominator of which shall be the Warrant Price in effect immediately after such adjustment. (a) Except as otherwise provided herein, in the event the Company shall, at any time or from time to time after the date hereof, (i) sell or issue any shares of Common Stock for a consideration per share less than the Warrant Price in effect on the date of such sale or issuance, (ii) issue any shares of Common Stock as a stock dividend to the holders of Common Stock, or (iii) subdivide or combine the outstanding shares of Common Stock into a greater or fewer number of shares (any such sale, issuance, subdivision or combination being herein called a "Change of Shares"), then, and thereafter upon each further Change of Shares, the Warrant Price in effect immediately prior to such Change of Shares shall be changed to a price (rounded to the nearest cent) determined by multiplying the Warrant Price in effect immediately prior thereto by a fraction, the numerator of which shall be (x) the sum of (A) the number of shares of Common Stock outstanding immediately prior to the sale or issuance of such additional shares or such subdivision or combination plus (B) the number of shares of Common Stock that the aggregate consideration received (determined as provided in Paragraph 5(g)(v)) for the issuance of such additional shares would purchase at the Warrant Price in effect on the date of such issuance and the denominator of which shall be (y) the number of shares of Common Stock outstanding immediately after the sale or issuance of such additional shares or such subdivision or combination. Such adjustment shall be made successively whenever any such issuance is made. (b) In case of any reclassification, capital reorganization or other change of outstanding shares of Common Stock, or in case of any consolidation or merger of the Company with or into another entity (other than a consolidation or merger in which the Company is the continuing entity and which does not result in any reclassification, capital reorganization or other change of outstanding shares of Common Stock other than the number thereof), or in case of any sale or conveyance to another entity of the property of the Company as, or substantially as, an entirety (other than a sale/leaseback, mortgage or other financing transaction), the Company shall cause effective provision to be made so that each holder of a Warrant then outstanding shall have the right thereafter, by exercising such Warrant, upon the terms and conditions specified in the Warrant and in lieu of the shares of Common Stock immediately theretofore purchasable upon exercise of the Warrant, to purchase the kind and number of shares of stock or other securities or property (including cash) receivable upon such reclassification, capital reorganization or other change, consolidation, merger, sale or conveyance by a holder of the number of shares of Common Stock that might have been purchased upon exercise of such Warrant immediately prior to such reclassification, capital reorganization or other change, consolidation, merger, sale or conveyance. Any such provision shall include provision for adjustments that shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 5. The Company shall not effect any such consolidation, merger or sale unless prior to, or simultaneously with, the consummation thereof the successor (if other than the Company) resulting from such consolidation or merger or the entity purchasing assets or other appropriate entity shall assume, by written instrument executed and delivered to the Company, the obligation to deliver to the holder of each Warrant such shares of stock, securities or assets as, in accordance with the foregoing provisions, such holders may be entitled to purchase and the other obligations under this Warrant. The foregoing provisions shall similarly apply to successive reclassifications, capital reorganizations and other changes of outstanding shares of Common Stock and to successive consolidations, mergers, sales or conveyances. (c) If, at any time or from time to time, the Company shall issue or distribute to the holders of shares of Common Stock evidence of its indebtedness, any other securities of the Company or any cash, property or other assets (excluding an issuance or distribution governed by one of the preceding Subsections of this Section 5 and also excluding cash dividends or cash distributions paid out of net profits legally available therefore in the full amount thereof (any such non-excluded event being herein called a "Special Dividend")), then in each case the Registered Holders of the Warrants shall be entitled to a proportionate share of any such Special Dividend as though they were the holders of the number of shares of Common Stock of the Company for which their Warrants are exercisable as of the record date fixed for the determination of the holders of Common Stock of the Company entitled to receive such Special Dividend. (d) The Company may elect, upon any adjustment of the Warrant Price hereunder, to adjust the number of Warrants outstanding, in lieu of the adjustment in the number of shares of Common Stock purchasable upon the exercise of each Warrant as hereinabove provided, so that each Warrant outstanding after such adjustment shall represent the right to purchase one share of Common Stock. Each Warrant held of record prior to such adjustment of the number of Warrants shall become that number of Warrants (calculated to the nearest tenth) determined by multiplying the number one by a fraction, the numerator of which shall be the Warrant Price in effect immediately prior to such adjustment and the denominator of which shall be the Warrant Price in effect immediately after such adjustment. Upon each adjustment of the number of Warrants pursuant to this Section 5, the Company shall, as promptly as practicable, cause to be distributed to each Registered Holder of Warrants on the date of such adjustment Warrants evidencing, subject to Section 6, the number of additional Warrants to which such Holder shall be entitled as a result of such adjustment or, at the option of the Company, cause to be distributed to such Holder in substitution and replacement for the Warrants held by him prior to the date of adjustment (and upon surrender thereof, if required by the Company) new Warrants evidencing the number of Warrants to which such Holder shall be entitled after such adjustment. (e) Irrespective of any adjustments or changes in the Warrant Price or the number of shares of Common Stock purchasable upon exercise of this Warrant, the Warrants theretofore and thereafter issued shall, unless the Company shall exercise its option to issue new Warrants pursuant to Subsection 3(a), continue to express the same Warrant Price per share, number of shares purchasable thereunder and Redemption Price therefore as when the same were originally issued. (f) After each adjustment of the Warrant Price pursuant to this Section 5, the Company will promptly prepare a certificate signed by the Chairman or President, and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary, of the Company setting forth: (i) the Warrant Price as so adjusted, (ii) the number of shares of Common Stock purchasable upon exercise of each Warrant after such adjustment, and, if the Company shall have elected to adjust the number of Warrants pursuant to Subsection 5(d), the number of Warrants to which the registered holder of each Warrant shall then be entitled, and the adjustment in Redemption Price resulting there from, and (iii) a brief statement of the facts accounting for such adjustment. The Company will cause a brief summary thereof to be sent by ordinary first class mail to each Registered Holder of Warrants at his or her last address as it shall appear on the registry books. No failure to mail such notice or any defect therein or in the mailing thereof shall affect the validity of such adjustment. The affidavit the Secretary or an Assistant Secretary of the Company that such notice has been mailed shall, in the absence of fraud, be prima facie evidence of the facts stated therein. (g) For purposes of Subsections 5(a) and 5(d), the following provisions (i) to (v) shall also be applicable: (i) the number of shares of Common Stock deemed outstanding at any given time shall include all shares of capital stock convertible into, or exchangeable for, Common Stock (on an as converted basis) as well as all shares of Common Stock issuable upon the exercise of (x) any convertible debt, (y) warrants outstanding on the date hereof and (z) options outstanding on the date hereof. (ii) No adjustment of the Warrant Price shall be made unless such adjustment would require an increase or decrease of at least $.01 in such price; provided that any adjustments which by reason of this Paragraph (ii) are not required to be made shall be carried forward and shall be made at the time of and together with the next subsequent adjustment which, together with adjustments so carried forward, shall require an increase or decrease of at least $.01 in the Warrant Price then in effect hereunder. (iii) In case of (1) the sale by the Company (including as a component of a unit) of any rights or warrants to subscribe for or purchase, or any options for the purchase of, Common Stock or any securities convertible into or exchangeable for Common Stock (such securities convertible, exercisable or exchangeable into Common Stock being herein called "Convertible Securities"), or (2) the issuance by the Company, without the receipt by the Company of any consideration therefore, of any rights or warrants to subscribe for or purchase, or any options for the purchase of, Common Stock or Convertible Securities, whether or not such rights, warrants or options, or the right to convert or exchange such Convertible Securities, are immediately exercisable, and the consideration per share for which Common Stock is issuable upon the exercise of such rights, warrants or options or upon the conversion or exchange of such Convertible Securities (determined by dividing (x) the minimum aggregate consideration, as set forth in the instrument relating thereto without regard to any antidilution or similar provisions contained therein for a subsequent adjustment of such amount, payable to the Company upon the exercise of such rights, warrants or options, plus the consideration received by the Company for the issuance or sale of such rights, warrants or options, plus, in the case of such Convertible Securities, the minimum aggregate amount, as set forth in the instrument relating thereto without regard to any antidilution or similar provisions contained therein for a subsequent adjustment of such amount, of additional consideration, if any, other than such Convertible Securities, payable upon the conversion or exchange thereof, by (y) the total maximum number, as set forth in the instrument relating thereto without regard to any antidilution or similar provisions contained therein for a subsequent adjustment of such amount, of shares of Common Stock issuable upon the exercise of such rights, warrants or options or upon the conversion or exchange of such Convertible Securities issuable upon the exercise of such rights, warrants or options) is less than the Warrant Price of the Common Stock as of the date of the issuance or sale of such rights, warrants or options, then such total maximum number of shares of Common Stock issuable upon the exercise of such rights, warrants or options or upon the conversion or exchange of such Convertible Securities (as of the date of the issuance or sale of such rights, warrants or options) shall be deemed to be "Common Stock" for purposes of Subsections 5(a) and 5(d) and shall be deemed to have been sold for an amount equal to such consideration per share and shall cause an adjustment to be made in accordance with Subsections 5(a) and 5(d). (iv) In case of the sale or other issuance by the Company of any Convertible Securities, whether or not the right of conversion or exchange thereunder is immediately exercisable, and the price per share for which Common Stock is issuable upon the conversion or exchange of such Convertible Securities (determined by dividing (x) the total amount of consideration received by the Company for the sale of such Convertible Securities, plus the minimum aggregate amount, as set forth in the instrument relating thereto without regard to any antidilution or similar provisions contained therein for a subsequent adjustment of such amount, of additional consideration, if any, other than such Convertible Securities, payable upon the conversion or exchange thereof, by (y) the total maximum number, as set forth in the instrument relating thereto without regard to any antidilution or similar provisions contained therein for a subsequent adjustment of such amount, of shares of Common Stock issuable upon the conversion or exchange of such Convertible Securities) is less than the Warrant Price of the Common Stock as of the date of the sale of such Convertible Securities, then such total maximum number of shares of Common Stock issuable upon the conversion or exchange of such Convertible Securities (as of the date of the sale of such Convertible Securities) shall be deemed to be "Common Stock" for purposes of Subsections 5(a) and 5(d) and shall be deemed to have been sold for an amount equal to such consideration per share and shall cause an adjustment to be made in accordance with Subsections 5(a) and 5(d). (v) In case the Company shall modify the rights of conversion, exchange or exercise of any of the securities referred to in Paragraphs (iii) or (iv) of this Subsection 5(g) or any other securities of the Company convertible, exchangeable or exercisable for shares of Common Stock, for any reason other than an event that would require adjustment to prevent dilution, so that the consideration per share received by the Company after such modification is less than the Warrant Price as of the date prior to such modification, then such securities, to the extent not theretofore exercised, converted or exchanged, shall be deemed to have expired or terminated immediately prior to the date of such modification and the Company shall be deemed, for purposes of calculating any adjustments pursuant to this Section 5, to have issued such new securities upon such new terms on the date of modification. Such adjustment shall become effective as of the date upon which such modification shall take effect. On the expiration or cancellation of any such right, warrant or option or the termination or cancellation of any such right to convert or exchange any such Convertible Securities, the Warrant Price then in effect hereunder shall forthwith be readjusted to such Warrant Price as would have obtained (a) had the adjustments made upon the issuance or sale of such rights, warrants, options or Convertible Securities been made upon the basis of the issuance of only the number of shares of Common Stock theretofore actually delivered (and the total consideration received therefore) upon the exercise of such rights, warrants or options or upon the conversion or exchange of such Convertible Securities and (b) had adjustments been made on the basis of the Warrant Price as adjusted under clause (a) of this sentence for all transactions (which would have affected such adjusted Warrant Price) made after the issuance or sale of such rights, warrants, options or Convertible Securities. (vi) In case of the sale of any shares of Common Stock, any Convertible Securities, any rights or warrants to subscribe for or purchase, or any options for the purchase of, Common Stock or Convertible Securities, the consideration received by the Company therefore shall be deemed to be the gross sales price therefore without deducting there from any expense paid or incurred by the Company or any underwriting discounts or commissions or concessions paid or allowed by the Company in connection therewith. In the event that any securities shall be issued in connection with any other securities of the Company, together comprising one integral transaction in which no specific consideration is allocated among the securities, then each of such securities shall be deemed to have been issued for such consideration as the Board of Directors of the Company determines in good faith; provided, however that if holders of more than of 10% of the then outstanding Warrants disagree with such determination, the Company shall retain an independent investment banking firm for the purpose of obtaining an appraisal. (h) Notwithstanding any other provision hereof, no adjustment to the Warrant Price of the Warrants or to the number of shares of Common Stock purchasable upon the exercise of each Warrant will be made: (i) upon the exercise of any of the options outstanding on the date hereof under the Company's existing stock option plans; or (ii) upon the issuance or exercise of options which may hereafter be granted with the approval of the Board of Directors, or exercised, under any employee benefit plan of the Company to officers, directors, consultants or employees, but only with respect to such options as are exercisable at prices no lower than the Closing Bid Price (or, if the price referenced in the definition of Closing Bid Price cannot be determined, the Fair Market Value (as defined below)) of the Common Stock as of the date of grant thereof; or (iii) upon the issuance or exercise of any options or warrants that are granted to or held by the "Holder" or any of its successors, assigns, affiliates and or agents; or (iv) upon the issuance or sale of Common Stock or convertible securities for a consideration to the Company that is not less than the bid price of the Company's Common Stock on the date of issuance (as determined by quotations on the Stock Market); or (v) upon the issuance or sale of Common Stock or Convertible Securities pursuant to the exercise of any rights, options or warrants to receive, subscribe for or purchase, or any options for the purchase of, Common Stock or Convertible Securities, whether or not such rights, warrants or options were outstanding on the date of the original sale of the Warrants or were thereafter issued or sold, provided that an adjustment was either made or not required to be made in accordance with Subsections 5(a) and 5(d) in connection with the issuance or sale of such securities or any modification of the terms thereof; or (vi) upon the issuance or sale of Common Stock upon conversion or exchange of any Convertible Securities, provided that any adjustments required to be made upon the issuance or sale of such Convertible Securities or any modification of the terms thereof were so made, and whether or not such Convertible Securities were outstanding on the date of the original sale of the Warrants or were thereafter issued or sold. Paragraph 5(g)(v) shall nevertheless apply to any modification of the rights of conversion, exchange or exercise of any of the securities referred to in Paragraphs (i), (ii) and (iii) of this Subsection 5(h). For purposes hereof, "Fair Market Value" shall mean the average Closing Bid Price for twenty (20) consecutive trading days, ending with the trading day prior to the date as of which the Fair Market Value is being determined, (with appropriate adjustments for subdivisions or combinations of shares effected during such period) provided that if the prices referred to in the definition of Closing Bid Price cannot be determined for such period, "Fair Market Value" shall be the fair market value as determined by the Board of Directors in good faith. (i) As used in this Section 5, the term "Common Stock" shall mean and include the Company's Common Stock authorized on the date of the original issue of the Warrants and shall also include any capital stock of any class of the Company thereafter authorized which shall not be limited to a fixed sum or percentage in respect of the rights of the holders thereof to participate in dividends and in the distribution of assets upon the voluntary liquidation, dissolution or winding up of the Company; provided, however, that the shares issuable upon exercise of the Warrants shall include only shares of such class designated in the Company's Certificate of Incorporation, as amended, as Common Stock on the date of the original issue of the Warrants or (i), in the case of any reclassification, change, consolidation, merger, sale or conveyance of the character referred to in Subsection 5(c), the stock, securities or property provided for in such section or (ii), in the case of any reclassification or change in the outstanding shares of Common Stock issuable upon exercise of the Warrants as a result of a subdivision or combination or consisting of a change in par value, or from par value to no par value, or from no par value to par value, such shares of Common Stock as so reclassified or changed. (j) Any determination as to whether an adjustment in the Warrant Price in effect hereunder is required pursuant to Section 5, or as to the amount of any such adjustment, if required, shall be binding upon the holders of the Warrants and the Company if made in good faith by the Board of Directors of the Company. (k) If and whenever the Company shall grant to the holders of Common Stock, as such, rights or warrants to subscribe for or to purchase, or any options for the purchase of, Common Stock or securities convertible into or exchangeable for or carrying a right, warrant or option to purchase Common Stock, the Company may at its option elect concurrently therewith to grant to each Registered Holder as of the record date for such transaction of the Warrants then outstanding, the rights, warrants or options to which each Registered Holder would have been entitled if, on the record date used to determine the shareholders entitled to the rights, warrants or options being granted by the Company, the Registered Holder were the holder of record of the number of whole shares of Common Stock then issuable upon exercise of his or her Warrant. If the Company shall so elect under this Subsection 5(k), then such grant by the Company to the holders of the Warrants shall be in lieu of any adjustment which otherwise might be called for pursuant to this Section 5. 6. Fractional Warrants and Fractional Shares. If the number of shares of Common Stock purchasable upon the exercise of each Warrant is adjusted pursuant to Section 5, the Company nevertheless shall not be required to issue fractions of shares, upon exercise of the Warrant or otherwise, nor to distribute certificates that evidence fractional shares. With respect to any fraction of a share called for upon any exercise hereof, the Company shall pay to the Registered Holder an amount in cash equal to such fraction multiplied by the Fair Market Value of one share of Common Stock as of the date of exercise. 7. Warrant Holders Not Deemed Shareholders. No holder of Warrants shall, as such, be entitled to vote or to receive dividends or be deemed the holder of Common Stock that may at any time be issuable upon exercise of such Warrants for any purpose whatsoever, nor shall anything contained herein be construed to confer upon the holder of Warrants, as such, any of the rights of a shareholder of the Company or any right to vote for the election of directors or upon any matter submitted to shareholders at any meeting thereof, or to give or withhold consent to any corporate action (whether upon any recapitalization, issue or reclassification of stock, change of par value or change of stock to no par value, consolidation, merger or conveyance or otherwise), or to receive notice of meetings, or to receive dividends or subscription rights, until such Holder shall have exercised such Warrants and been issued shares of Common Stock in accordance with the provisions hereof. 8. Rights of Action. All rights of action with respect to this Agreement are vested in the respective Registered Holders of the Warrants, and any Registered Holder of a Warrant, without consent of the holder of any other Warrant, may, in his own behalf and for his own benefit, enforce against the Company his right to exercise his Warrant for the purchase of shares of Common Stock in the manner provided herein. 9. Agreement of Warrant Holders. Every holder of any Warrant, by his acceptance thereof, consents and agrees with the Company and every other holder of any Warrant that: (i) The Warrants are transferable only on the registry books of the Company by the Registered Holder thereof in person or by his or her attorney duly authorized in writing and only if such Warrants are surrendered at the office of the Company, duly endorsed or accompanied by a proper instrument of transfer satisfactory to the Company, in its sole discretion, together with payment of any applicable transfer taxes; and (ii) The Company may deem and treat the person in whose name the Warrant is registered as the holder and as the absolute, true and lawful owner thereof for all purposes, and the Company shall not be affected by any notice or knowledge to the contrary, except as otherwise expressly provided in Section 3. 10. Investment Representation and Legend. The holder, by acceptance of the Warrants, represents and warrants to the Company that it is acquiring the Warrants and the shares of Common Stock (or other securities) issuable upon the exercise hereof for investment purposes only and not with a view towards the resale or other distribution thereof and agrees that the Company may affix upon this Warrant the following legend: "This Warrant has been issued in reliance upon the representation of the holder that it has been acquired for investment purposes and not with a view towards the resale or other distribution thereof. Neither this Warrant nor the shares issuable upon the exercise of this Warrant have been registered under the Securities Act of 1933, as amended." The holder, by acceptance of this Warrant, further agrees that the Company may affix the following legend to certificates for shares of Common Stock issued upon exercise of this Warrant: "The securities represented by this certificate have been issued in reliance upon the representation of the holder that they have been acquired for investment and not with a view toward the resale or other distribution thereof, and have not been registered under the Securities Act of 1933, as amended. Neither the securities evidenced hereby, nor any interest therein, may be offered, sold, transferred, encumbered or otherwise disposed of unless either (i) there is an effective registration statement under said Act relating thereto or (ii) the Company has received an opinion of counsel, reasonably satisfactory in form and substance to the Company, stating that such registration is not required." 11. Cancellation of Warrants. If the Company shall purchase or acquire any Warrant or Warrants, by redemption or otherwise, each such Warrant shall thereupon be and canceled by it and retired. The Company shall also cancel the Warrant or Warrants following exercise of any or all thereof or delivered to it for transfer, split up, combination or exchange. 12. Modification of Warrant. The terms of the Warrants shall not be modified, supplemented or altered in any respect except with the consent in writing of the Registered Holders representing at least a majority of the Warrants then outstanding; provided, that, no change in the number or nature of the securities purchasable upon the exercise of any Warrant, or the Warrant Price therefore, or the acceleration of the Warrant Expiration Date, shall be made without the consent in writing of the Registered Holder of the Warrant, and in compliance with applicable law. 13. Notices. All notices, requests, consents and other communications hereunder shall be in writing and shall be deemed to have been made when delivered or mailed by means of first class registered or certified mail, postage prepaid as follows: if to the Registered Holder of a Warrant, at the address of such holder as shown on the registry books maintained by the Company; if to the Company, at 18 East 50th Street, New York, New York 10022, or at such other address as may have been furnished to the Registered Holder in writing by the Company. 14. Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York, without reference to principles of conflict of laws. 15. Binding Effect. This Agreement shall be binding upon and inure to the benefit of the Company, the Registered Holder and their respective successors and assigns, and the holders from time to time of the Warrants. Nothing in this Warrant is intended nor shall be construed to confer upon any other person any right, remedy or claim, in equity or at law, or to impose upon any other person any duty, liability or obligation. 16. Registration Rights. Registration of Common Stock. 16.1. Registration. (a) In the event that the Company files any registration statement for its Common Stock hereafter, the Registrable Securities (defined as the Common Stock Underlying the exercise of the Warrants ) shall have "piggy-back" registration rights in such Registration Statement (one time only), subject to underwriter approval, with registration expenses allocated as set forth below. (b) If the Registrable Securities have not been registered pursuant to 16.1 (a) above on or before August 31, 2005, the Company will, thereafter, upon the written request of a majority of the Holders of its outstanding Class SV warrants (aggregating all SV warrants) file a registration statement(the "Registration Statement") with respect to the resale of the Registrable Securities with the Securities and Exchange Commission. The Company will use commercially reasonable efforts to effect the registrations, qualifications or compliances (including, without limitation, the execution of any required undertaking to file post-effective amendments, appropriate qualifications under applicable blue sky or other state securities laws and appropriate compliance with applicable securities laws, requirements or regulations) as may be reasonably requested and as would permit or facilitate that sale and distribution of all Registrable Securities until the distribution thereof is complete. 16.2 Registration Procedures. In connection with the registration of any Registrable Securities under the Securities Act as provided in this Section 16, the Company will use its best efforts, as expeditiously as possible to: (a) Prepare and file with the Securities and Exchange Commission the Registration Statement with respect to such Registrable Securities and use its best efforts to cause such Registration Statement to become effective; (b) Prepare and file with the Securities and Exchange Commission such amendments and supplements to such Registration Statement and the prospectus used in connection therewith as may be necessary to keep such Registration Statement effective for a period of 12 months, unless agreed otherwise, and to comply with the provisions of the Securities Act (to the extent applicable to the Company)with respect thereto; (c) Furnish to each seller of such Registrable Securities such number of copies of such Registration Statement and of each such amendment and supplement thereto (in each case including all exhibits), such number of copies of the prospectus included in such Registration Statement (including each preliminary prospectus), in conformity with the requirements of the Securities Act, and such other documents, as such seller may reasonably request, in order to facilitate the disposition of the Registrable Securities owned by such seller; (d) Use its best efforts to register or qualify such Registrable Securities covered by such Registration Statement under such other securities or blue sky laws of such jurisdictions as any seller reasonably requests, and do any and all other acts and things which may be reasonably necessary or advisable to enable such seller to consummate the disposition in such jurisdictions of the Registrable Securities owned by such seller, except that the Company will not for any such purpose be required to qualify generally to do business as a foreign corporation in any jurisdiction wherein it would not, but for the requirements of this Section 16.2(d) be obligated to be qualified, to subject itself to taxation in any such jurisdiction, or to consent to general service of process in any such jurisdiction; (e) Provide a transfer agent and registrar for all such Registrable Securities covered by such Registration Statement not later than the effective date of such Registration Statement; (f) Notify each seller of such Registrable Securities at any time when a prospectus relating thereto is required to be delivered under the Securities Act, of the happening of any event as a result of which the prospectus included in such Registration Statement contains an untrue statement of a material fact or omits any fact necessary to make the statements therein not misleading, and, at the request of any such seller, the Company will prepare a supplement or amendment to such prospectus so that, as thereafter delivered to the purchasers of such Registrable Securities, such prospectus will not contain an untrue statement of a material fact or omit to state any fact necessary to make the statements therein not misleading; (g) Cause all such Registrable Securities to be listed on each securities exchange or automated over-the-counter trading system on which similar securities issued by the Company are then listed; (h) Enter into such customary agreements and take all such other actions as reasonably required in order to expedite or facilitate the disposition of such Registrable Securities; and (i) Make available for inspection by any seller of Registrable Securities, all financial and other records, pertinent corporation documents and properties of the Company, and cause the Company's officers, directors and employees to supply all information reasonably requested by any such seller in connection with the Registration Statement pursuant to Section 16.1. 16.3. Registration and Selling Expenses. (a) All expenses incurred by the Company in connection with the Company's performance of or compliance with this Section 16, including, without limitation (i) all registration and filing fees (including all expenses incident to filing with the National Association of Securities Dealers, Inc.), (ii) blue sky fees and expenses, (iii) all necessary printing and duplicating expenses and (iv) all fees and disbursements of counsel and accountants for the Company (including the expenses of any audit of financial statements), retained by the Company (all such expenses being herein called "Registration Expenses"), will be paid by the Company except as otherwise expressly provided in this Section 16.3. The term "Registration Expenses" shall not include any underwriting discounts or commissions incurred by the Purchaser, which shall be the responsibility of the Purchaser. (b) The Company will, in any event, in connection with any registration statement, pay its internal expenses (including, without limitation, all salaries and expenses of its officers and employees performing legal, accounting or other duties in connection therewith and expenses of audits of year-end financial statements), the expense of liability insurance and the expenses and fees for listing the securities to be registered on one or more securities exchanges or automated over-the-counter trading systems on which similar securities issued by the Company are then listed. (c) Nothing herein shall be construed to prevent any holder or holders of Registrable Securities from retaining such counsel as they shall choose, the expenses of one of which, as determined by the holder or holders, shall be borne by the holders. 16.4. [Intentionally Omitted] 16.5. Indemnification. (a) The Company hereby agrees to indemnify, to the extent permitted by law, each holder of Registrable Securities, its officers and directors, if any, and each person, if any, who controls such holder within the meaning of the Securities Act, against all losses, claims, damages, liabilities and expenses (under the Securities Act or common law or otherwise) caused by any untrue statement or alleged untrue statement of a material fact contained in any registration statement or prospectus (and as amended or supplemented if the Company has furnished any amendments or supplements thereto) or any preliminary prospectus, which registration statement, prospectus or preliminary prospectus shall be prepared in connection with the registration contemplated by this Section 16, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages, liabilities or expenses are caused by any untrue statement or alleged untrue statement contained in or by any omission or alleged omission from information furnished in writing by such holder to the Company in connection with the registration contemplated by this Section 16, provided the Company will not be liable pursuant to this Section 16.5 if such losses, claims, damages, liabilities or expenses have been caused by any selling security holder's failure to deliver a copy of the registration statement or prospectus, or any amendments or supplements thereto, after the Company has furnished such holder with the number of copies required by Section 16.2(c). (b) In connection with any registration statement in which a holder of Registrable Securities is participating, each such holder shall furnish to the Company in writing such information as is reasonably requested by the Company for use in any such registration statement or prospectus and shall severally, but not jointly, indemnify, to the extent permitted by law, the Company, its directors and officers and each person, if any, who controls the Company within the meaning of the Securities Act, against any losses, claims, damages, liabilities and expenses resulting from any untrue statement or alleged untrue statement of a material fact or any omission or alleged omission of a material fact required to be stated in the registration statement or prospectus or any amendment thereof or supplement thereto or necessary to make the statements therein not misleading, but only to the extent such losses, claims, damages, liabilities or expenses are caused by an untrue statement or alleged untrue statement contained in or by an omission or alleged omission from information so furnished in writing by such holder in connection with the registration contemplated by this Section 16. If the offering pursuant to any such registration is made through underwriters, each such holder agrees to enter into an underwriting agreement in customary form with such underwriters and to indemnify such underwriters, their officers and directors, if any, and each person who controls such underwriters within the meaning of the Securities Act to the same extent as hereinabove provided with respect to indemnification by such holder of the Company. Notwithstanding the foregoing or any other provision of this Agreement, in no event shall a holder of Registrable Securities be liable for any such losses, claims, damages, liabilities or expenses in excess of the net proceeds received by such holder in the offering. (c) Promptly after receipt by an indemnified party under Section 16.5 (a) or (b) of notice of the commencement of any action or proceeding, such indemnified party will, if a claim in respect thereof is made against the indemnifying party under such Section, notify the indemnifying party in writing of the commencement thereof; but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party otherwise than under such Section. In case any such action or proceeding is brought against any indemnified party, and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein, and, to the extent that it wishes, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel approved by such indemnified party, and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party under such Section for any legal or any other expenses subsequently incurred by such indemnified party in connection with the defense thereof (other than reasonable costs of investigation) unless incurred at the written request of the indemnifying party. Notwithstanding the above, the indemnified party will have the right to employ counsel of its own choice in any such action or proceeding if the indemnified party has reasonably concluded that there may be defenses available to it which are different from or additional to those of the indemnifying party, or counsel to the indemnified party is of the opinion that it would not be desirable for the same counsel to represent both the indemnifying party and the indemnified party because such representation might result in a conflict of interest (in either of which cases the indemnifying party will not have the right to assume the defense of any such action or proceeding on behalf of the indemnified party or parties and such legal and other expenses will be borne by the indemnifying party). An indemnifying party will not be liable to any indemnified party for any settlement of any such action or proceeding effected without the consent of such indemnifying party. (d) If the indemnification provided for in Section 16.5(a) or (b) is unavailable under applicable law to an indemnified party in respect of any losses, claims, damages or liabilities referred to therein, then each applicable indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities in such proportion as is appropriate to reflect the relative fault of the Company on the one hand and of the holders of Registrable Securities on the other in connection with the statements or omissions which resulted in such losses, claims, damages, or liabilities, as well as any other relevant equitable considerations. The relative fault of the Company on the one hand and of the holders of Registrable Securities on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the Company or by the holders of Registrable Securities and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The amount paid or payable by a party as a result of the losses, claims, damages and liabilities referred to above shall be deemed to include, subject to the limitations set forth in Section 16.5(c), any legal or other fees or expenses reasonably incurred by such party in connection with investigating or defending any action or claim. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) will be entitled to contribution from any person who is not guilty of such fraudulent misrepresentation. (e) Promptly after receipt by the Company or any holder of Securities of notice of the commencement of any action or proceeding, such party will, if a claim for contribution in respect thereof is to be made against another party (the "contributing party"), notify the contributing party of the commencement thereof; but the omission so to notify the contributing party will not relieve it from any liability which it may have to any other party other than for contribution hereunder. In case any such action, suit, or proceeding is brought against any party, and such party notifies a contributing party of the commencement thereof, the contributing party will be entitled to participate therein with the notifying party and any other contributing party similarly notified. IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed as of the date first above written. BION ENVIRONMENTAL TECHNOLOGIES, INC. By: _________________________________ Authorized Officer SUBSCRIPTION FORM To Be Executed by the Registered Holder in Order to Exercise Warrant The undersigned Registered Holder hereby irrevocably elects to exercise ___________ Warrants represented by this certificate, and to purchase the securities issuable upon the exercise of such Warrants, and requests that certificates for such securities shall be issued in the name of PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ [please print or type name and address] and be delivered to ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ [please print or type name and address] and if such number of Warrants shall not be all the Warrants evidenced by this Warrant Certificate, that a new Warrant for the balance of such Warrants be registered in the name of, and delivered to, the Registered Holder at the address stated below. The undersigned represents that the exercise of the within Warrant was solicited by a member of the National Association of Securities Dealers, Inc. If not solicited by an NASD member, please write "unsolicited" in the space below. _________________________________________ (Name of NASD Member) Dated: X ___________________________________ ___________________________________ ___________________________________ Address ___________________________________ Taxpayer Identification Number ___________________________________ Signature Guaranteed ASSIGNMENT To Be Executed by the Registered Holder In Order to Assign Warrant FOR VALUE RECEIVED, ___________________________________ hereby sells, assigns and transfers unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ [please print or type name and address] ___________________________ of the Warrants represented hereby, and hereby irrevocably constitutes and appoints __________________________________________________________________________ Attorney to transfer this Warrant on the books of the Company, with full power of substitution in the premises. Dated: _____________________________ X ___________________________________ Signature Guaranteed ___________________________________ THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO THE NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER, AND MUST BE GUARANTEED BY A MEMBER OF THE MEDALLION STAND PROGRAM. EX-10 5 ex1049.txt BION ENVIRONMENTAL TECH 10-KSB (6-30-02) EX 10.49 EXHIBIT 10.49 BION ENVIRONMENTAL TECHNOLOGIES, INC. ------------------------------------- 2003 INCENTIVE PLAN ------------------- 1. Purpose of the Plan The purpose of this Bion Environmental Technologies, Inc. 2003 Incentive Plan ("Plan") is to create shareholder value. To do so, the Plan provides incentives to selected employees and directors of the Company and its Subsidiaries, and selected non-employee consultants and advisors to the Company and its Subsidiaries, who contribute, and are expected to contribute, materially to its success. The Plan also provides a means of rewarding outstanding performance and enhances the interest of such persons in the Company's success and development by providing them a proprietary interest in the Company. Further, the Plan is designed to enhance the Company's ability to maintain a competitive position in attracting and retaining qualified personnel necessary for the success and development of the Company. 2. Definitions As used in the Plan, the following definitions apply to the terms indicated below: (a) "Board of Directors" shall mean the Board of Directors of Bion Environmental Technologies, Inc. (b) "Cause," when used in connection with the termination of a Participant's employment with the Company, for purposes of the Plan, shall mean the termination of the Participant's employment by the Company on account of (i) the willful and continued failure by the Participant substantially to perform his duties and obligations (other than any such failure resulting from his incapacity due to physical or mental illness) or (ii) the willful engaging by the Participant in an act or acts which could reasonably be expected to cause injury to the Company or are contrary to the best interests of the Company. For purposes of this Section 2(b), no act, or failure to act, on a Participant's part shall be considered "willful" unless done, or omitted to be done, by the Participant in bad faith and without reasonable belief that his action or omission was in the best interests of the Company. (c) "Cash Bonus" shall mean an award of a bonus payable in cash pursuant to Section 13 hereof. (d) "Change in Control" shall mean: (i) the acquisition at any time by a "person" or "group" (as that term is used in Sections 13(d)and 14(d)(2) of the Exchange Act) (excluding, for this purpose, the Company or any Subsidiary or any employee benefit plan of the Company or any Subsidiary) of beneficial ownership (as defined in Rule 13d-3 under the Exchange Act) directly or indirectly, of securities representing 60% or more of the combined voting power in the election of directors of the then-outstanding securities of the Company or any successor of the Company; (ii) the termination of service as directors, for any reason other than death, disability or retirement from the Board of Directors, during any period of two consecutive years or less, of individuals who at the beginning of such period constituted a majority of the Board of Directors, unless the election of or nomination for election of each new director during such period was approved by a vote of at least two-thirds of the directors still in office who were directors at the beginning of the period; (iii) approval by the shareholders of the Company of any merger or consolidation or statutory share exchange as a result of which the Common Shares shall be changed, converted or exchanged (other than a merger or share exchange with a wholly-owned Subsidiary of the Company), or liquidation of the Company, or any sale or disposition of 50% or more of the assets or earning power of the Company; or (iv) approval by the shareholders of the Company of any merger, consolidation or statutory share exchange to which the Company is a party as a result of which the persons who were shareholders of the Company immediately prior to the effective date of the merger, consolidation or statutory share exchange shall have beneficial ownership of less than 50% of the combined voting power in the election of directors of the surviving corporation following the effective date of such merger, consolidation or statutory share exchange; provided, however, that no change in control shall be deemed to have occurred if, prior to such time as a change in control would otherwise be deemed to have occurred, the Company's Board of Directors deems otherwise. (e) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. (f) "Common Shares" shall mean Bion Environmental Technologies, Inc. common shares, no par value per share. (g) "Company" shall mean Bion Environmental Technologies, Inc., a Colorado corporation, and each of its Subsidiaries. (h) "Disability" shall mean a Participant's inability to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than twelve (12) months. (i) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. (j) The "Fair Market Value" of Common Shares with respect to any day shall be (i) the closing sales price on the immediately preceding business day of Common Shares as reported on the principal securities exchange on which Common Shares are then listed or admitted to trading, or (ii) if not so reported, the average of the closing bid and ask prices on the immediately preceding business day as reported on the National Association of Securities Dealers Automated Quotation System, or (iii) if not so reported, as furnished by any member of the National Association of Securities Dealers, Inc. selected by the Board of Directors. In the event that the price of Common Shares shall not be so reported, the Fair Market Value of Common Shares shall be determined by the Board of Directors in its absolute discretion. (k) "Incentive Award" shall mean an Option, LSAR, Tandem SAR, Stand-Alone SAR, share of Phantom Stock, Stock Bonus or Cash Bonus granted pursuant to the terms of the Plan. (l) "Incentive Stock Option" shall mean an Option which is an "incentive stock option" within the meaning of Section 422 of the Code and which is identified as an Incentive Stock Option in the agreement by which it is evidenced. (m) "Issue Date" shall mean the date established by the Board of Directors on which certificates representing shares of Restricted Stock shall be issued by Bion Environmental Technologies, Inc. pursuant to the terms of Section 10(d) hereof. (n) "LSAR" shall mean a limited stock appreciation right which is granted pursuant to the provisions of Section 7 hereof and which relates to an Option. Each LSAR shall be exercisable only upon the occurrence of a Change in Control and only in the alternative to the exercise of its related Option. (o) "Non-Employee Participant" shall mean a Participant who is not an employee of the Company. (p) "Non-Qualified Stock Option" shall mean an Option which is not an Incentive Stock Option and which is identified as a Non-Qualified Stock Option in the agreement by which it is evidenced. (q) "Option" shall mean an option to purchase Common Shares of Bion Environmental Technologies, Inc. granted pursuant to Section 6 hereof. Each Option shall be identified as either an Incentive Stock Option or a Non-Qualified Stock Option in the agreement by which it is evidenced. (r) "Participant" shall mean a person who is eligible to participate in the Plan and to whom an Incentive Award is granted pursuant to the Plan, and, upon his death, his successors, heirs, executors and administrators, as the case may be. (s) "Person" shall mean a "person," as such term is used in Sections 13(d) and 14(d) of the Exchange Act. (t) "Phantom Stock" shall mean the right to receive in cash the Fair Market Value of Common Shares of Bion Environmental Technologies, Inc., which right is granted pursuant to Section 11 hereof and subject to the terms and conditions contained therein. (u) "Plan" shall mean the Bion Environmental Technologies, Inc. 2003 Incentive Plan, as it may be amended from time to time. (v) "Restricted Stock" shall mean a Common Share which is granted pursuant to the terms of Section 10 hereof and which is subject to the restrictions set forth in Section 10(c) hereof for so long as such restrictions continue to apply to such share. (w) "Securities Act" shall mean the Securities Act of 1933, as amended. (x) "Stand-Alone SAR" shall mean a stock appreciation right granted pursuant to Section 9 hereof which is not related to any Option. (y) "Stock Bonus" shall mean a grant of a bonus payable in Common Shares pursuant to Section 12 hereof. (z) "Subsidiary" shall mean any corporation in which at the time of reference Bion Environmental Technologies, Inc. owns, directly or indirectly, stock comprising more than fifty percent of the total combined voting power of all classes of stock of such corporation. (aa) "Tandem SAR" shall mean a stock appreciation right granted pursuant to Section 8 hereof which is related to an Option. Each Tandem SAR shall be exercisable only to the extent its related Option is exercisable and only in the alternative to the exercise of its related Option. (bb) "Vesting Date" shall mean the date established by the Board of Directors on which a share of Restricted Stock or Phantom Stock may vest. (cc) "Bion Environmental Technologies, Inc." shall mean Bion Environmental Technologies, Inc., a Colorado corporation, and its successors. 3. Stock Subject to the Plan Under the Plan, the Board of Directors may grant to Participants (i) Options, (ii) LSARs, (iii) Tandem SARs, (iv) Stand-Alone SARs, (v) shares of Restricted Stock, (vi) shares of Phantom Stock, (vii) Stock Bonuses and (viii) Cash Bonuses; provided, however, that grants under the Plan to non-employee directors of the Company shall be made by the Board of Directors. When referring to grants under the Plan to non-employee directors of the Company, any reference in this Plan to the Board of Directors shall be deemed to refer to the Board of Directors. Subject to adjustment as provided in Section 14 hereof, the Board of Directors may grant Options, Stand-Alone SARs, shares of Restricted Stock, shares of Phantom Stock and Stock Bonuses under the Plan with respect to a number of Common Shares that in the aggregate does not exceed 750,000 shares. The maximum number of Common Shares for which Incentive Awards, including Incentive Stock Options, may be granted to any one Participant shall not exceed 200,000 shares in any one calendar year; and the total of all cash payments to any one Participant pursuant to the Plan in any calendar year shall not exceed $500,000. The grant of an LSAR, Tandem SAR or Cash Bonus shall not reduce the number of Common Shares with respect to which Options, Stand-Alone SARs, shares of Restricted Stock, shares of Phantom Stock or Stock Bonuses may be granted pursuant to the Plan. In the event that any outstanding Option or Stand-Alone SAR expires, terminates or is canceled for any reason (other than pursuant to Paragraphs 7(b)(2) or 8(b)(3) hereof), the Common Shares subject to the unexercised portion of such Option or Stand-Alone SAR shall again be available for grants under the Plan. In the event that an outstanding Option is canceled pursuant to Paragraphs 7(b)(2) or 8(b)(3) hereof by reason of the exercise of an LSAR or a Tandem SAR, the Common Shares subject to the canceled portion of such Option shall not again be available for grants under the Plan. In the event that any shares of Restricted Stock or Phantom Stock, or any Common Shares granted in a Stock Bonus are forfeited or canceled for any reason, such shares shall again be available for grants under the Plan. Common Shares issued under the Plan may be either newly issued shares or treasury shares, at the discretion of the Board of Directors, and Bion Environmental Technologies, Inc. hereby reserves 750,000 Common Shares for issuance pursuant to the Plan. 4. Administration of the Plan The Plan shall be administered by the Board of Directors. The Board of Directors shall from time to time designate the persons who shall be granted Incentive Awards and the amount and type of such Incentive Awards. The Board of Directors shall have full authority to administer the Plan, including authority to interpret and construe any provision of the Plan and the terms of any Incentive Award issued under it and to adopt such rules and regulations for administering the Plan as it may deem necessary. Decisions of the Board of Directors shall be final and binding on all parties. The Board of Directors may, in its absolute discretion (i) accelerate the date on which any Option or Stand-Alone SAR granted under the Plan becomes exercisable, (ii) accelerate the Vesting Date or Issue Date, or waive any condition imposed pursuant to Section 10(b) hereof, with respect to any share of Restricted Stock granted under the Plan and (iii) accelerate the Vesting Date or waive any condition imposed pursuant to Section 11 hereof, with respect to any share of Phantom Stock granted under the Plan. In addition, the Board of Directors may, in its absolute discretion, grant Incentive Awards to Participants on the condition that such Participants surrender to the Board of Directors for cancellation such other Incentive Awards (including, without limitation, Incentive Awards with higher exercise prices) as the Board of Directors specifies. Notwithstanding Section 3 herein, prior to the surrender of such other Incentive Awards, Incentive Awards granted pursuant to the preceding sentence of this Section 4 shall not count against the limits set forth in such Section 3. Whether an authorized leave of absence, or absence in military or government service, shall constitute termination of employment shall be determined by the Board of Directors. No member of the Board of Directors shall be liable for any action, omission, or determination relating to the Plan, and Bion Environmental Technologies, Inc. shall indemnify and hold harmless each member of the Board of Directors and each other director or employee of the Company to whom any duty or power relating to the administration or interpretation of the Plan has been delegated against any cost or expense (including counsel fees) or liability (including any sum paid in settlement of a claim with the approval of the Board of Directors) arising out of any action, omission or determination relating to the Plan, unless, in either case, such action, omission or determination was taken or made by such member, director or employee in bad faith and without reasonable belief that it was in the best interests of the Company. 5. Eligibility The persons who shall be eligible to receive Incentive Awards pursuant to the Plan shall be such persons, including employees, officers, and directors of the Company and non-employee consultants and advisors to the Company, as the Board of Directors shall select from time to time. 6. Options Subject to the provisions of the Plan, the Board of Directors may grant Options, which Options shall be evidenced by agreements in such form as the Board of Directors shall from time to time approve. Options shall comply with and be subject to the following terms and conditions: (a) Identification of Options All Options granted under the Plan shall be clearly identified in the agreement evidencing such Options as either Incentive Stock Options or as Non-Qualified Stock Options. (b) Exercise Price The exercise price of any Non-Qualified Stock Option granted under the Plan shall be such price as the Board of Directors shall determine on the date on which such Non-Qualified Stock Option is granted; provided, that such price may not be less than the minimum price required by applicable law. The exercise price of any Incentive Stock Option granted under the Plan shall be not less than 100% of the Fair Market Value of Common Shares on the date on which such Incentive Stock Option is granted. (c) Term and Exercise of Option (1) Each Option shall be exercisable on such date or dates, during such period and for such number of Common Shares as shall be determined by the Board of Directors on the day on which such Option is granted and set forth in the Option agreement with respect to such Option; provided, however, that no Option shall be exercisable after the expiration of ten years from the date such Option was granted; and, provided, further, that each Option shall be subject to earlier termination, expiration or cancellation as provided in the Plan. (2) Each Option shall be exercisable in whole or in part; provided, that no partial exercise of an Option shall be for an aggregate exercise price of less than $1,000, unless such partial exercise is for the last remaining unexercised portion of such Option. The partial exercise of an Option shall not cause the expiration, termination or cancellation of the remaining portion thereof. Upon the partial exercise of an Option, the agreements evidencing such Option and any related LSARs and Tandem SARs shall be returned to the Participant exercising such Option together with the delivery of the certificates described in Section 6(c)(5) hereof. (3) An Option shall be exercised by delivering notice to Bion Environmental Technologies, Inc.'s principal office, to the attention of its Secretary, no less than one business day in advance of the effective date of the proposed exercise. Such notice shall be accompanied by the agreements evidencing the Option and any related LSARs and Tandem SARs, shall specify the number of Common Shares with respect to which the Option is being exercised and the effective date of the proposed exercise and shall be signed by the Participant. The Participant may withdraw such notice at any time prior to the close of business on the business day immediately preceding the effective date of the proposed exercise, in which case such agreements shall be returned to him. Payment for Common Shares purchased upon the exercise of an Option shall be made on the effective date of such exercise either (i) in cash, by certified check, bank cashier's check or wire transfer or (ii) subject to the approval of the Board of Directors, in Common Shares owned by the Participant and valued at their Fair Market Value on the effective date of such exercise, or partly in Common Shares with the balance in cash, by certified check, bank cashier's check or wire transfer. Any payment in Common Shares shall be effected by the delivery of such shares to the Secretary of Bion Environmental Technologies, Inc., duly endorsed in blank or accompanied by stock powers duly executed in blank, together with any other documents and evidences as the Secretary of Bion Environmental Technologies, Inc. shall require from time to time. (4) Any Option granted under the Plan may be exercised by a broker-dealer acting on behalf of a Participant if (i) the broker-dealer has received from the Participant or the Company a fully-and-duly-endorsed agreement evidencing such Option and instructions signed by the Participant requesting Bion Environmental Technologies, Inc. to deliver the Common Shares subject to such Option to the broker-dealer on behalf of the Participant and specifying the account into which such shares should be deposited, (ii) adequate provision has been made with respect to the payment of any withholding taxes due upon such exercise and (iii) the broker-dealer and the Participant have otherwise complied with Section 220.3(e)(4) of Regulation T, 12 CFR Part 220. (5) Certificates for Common Shares purchased upon the exercise of an Option shall be issued in the name of the Participant and delivered to the Participant as soon as practicable following the effective date on which the Option is exercised. (d) Limitations on Grant of Incentive Stock Options (1) The aggregate Fair Market Value of Common Shares with respect to which "incentive stock options" (within the meaning of Section 422 of the Code) are exercisable for the first time by a Participant during any calendar year under the Plan and any other stock option plan of the Company (or any "subsidiary" of Bion Environmental Technologies, Inc. as such term is defined in Section 425 of the Code) shall not exceed $100,000. Such Fair Market Value shall be determined as of the date on which each such incentive stock option is granted. In the event that the aggregate Fair Market Value of Common Shares with respect to such incentive stock options exceeds $100,000, then Incentive Stock Options granted hereunder to such Participant shall, to the extent and in the order required by Regulations promulgated under the Code (or any other authority having the force of Regulations), automatically be deemed to be Non-Qualified Stock Options, but all other terms and provisions of such Incentive Stock Options shall remain unchanged. In the absence of such Regulations (and authority), or in the event such Regulations (or authority) require or permit a designation of the options which shall cease to constitute incentive stock options, Incentive Stock Options shall, to the extent of such excess and in the order in which they were granted, automatically be deemed to be Non-Qualified Stock Options, but all other terms and provisions of such Incentive Stock Options shall remain unchanged. (2) No Incentive Stock Option may be granted to an individual if, at the time of the proposed grant, such individual owns stock possessing more than ten percent of the total combined voting power of all classes of stock of Bion Environmental Technologies, Inc. or any of its "subsidiaries" (within the meaning of Section 425 of the Code), unless (i) the exercise price of such Incentive Stock Option is at least one hundred and ten percent of the Fair Market Value of a Common Share at the time such Incentive Stock Option is granted and (ii) such Incentive Stock Option is not exercisable after the expiration of five years from the date such Incentive Stock Option is granted. (e) Effect of Termination of Employment (1) In the event that the employment of a Participant with the Company shall terminate for any reason other than retirement at age 60 or later, Cause, Disability or death (i) Options granted to such Participant, to the extent that they were exercisable at the time of such termination, shall remain exercisable until the expiration of one month after such termination, on which date they shall expire, and (ii) Options granted to such Participant, to the extent that they were not exercisable at the time of such termination, shall expire at the close of business on the date of such termination; provided, however, that no Option shall be exercisable after the expiration of its term, and further expressly provided that this provision may be varied/amended by specific provisions in any given agreement evidencing an option. (2) In the event that the employment of a Participant with the Company shall terminate on account of the retirement at age 60 or later, Disability or death of the Participant (i) Options granted to such Participant, to the extent that they were exercisable at the time of such termination, shall remain exercisable until the expiration of one year after such termination, on which date they shall expire, and (ii) Options granted to such Participant, to the extent that they were not exercisable at the time of such termination, shall expire at the close of business on the date of such termination; provided, however, that no Option shall be exercisable after the expiration of its term. (3) In the event of the termination of a Participant's employment for Cause, all outstanding Options granted to such Participant shall expire at the commencement of business on the date of such termination. (4) In the event that a Non-Employee Participant ceases to provide services to the Company, all Options granted to such Non-Employee Participant shall remain exercisable in accordance with their terms. (f) Acceleration of Exercise Date Upon Change in Control Upon the occurrence of a Change in Control, each Option granted under the Plan and outstanding at such time shall become fully and immediately exercisable and shall remain exercisable until its expiration, termination or cancellation pursuant to the terms of the Plan. 7. Limited Stock Appreciation Rights The Board of Directors may grant in connection with any Option granted hereunder one or more LSARs relating to a number of Common Shares equal to or less than the number of Common Shares subject to the related Option. An LSAR may be granted at the same time as, or subsequent to the time that, its related Option is granted. Each LSAR shall be evidenced by an agreement in such form as the Board of Directors shall from time to time approve. Each LSAR granted hereunder shall be subject to the following terms and conditions: (a) Benefit Upon Exercise (1) The exercise of an LSAR relating to a Non-Qualified Stock Option with respect to any number of Common Shares shall entitle the Participant to a cash payment, for each such share, equal to the excess of (i) the greater of (A) the highest price per Common Share paid in the Change in Control in connection with which such LSAR became exercisable and (B) the Fair Market Value of a Common Share on the date of such Change in Control over (ii) the exercise price of the related Option. Such payment shall be paid as soon as practical, but in no event later than the expiration of five business days, after the effective date of such exercise. (2) The exercise of an LSAR relating to an Incentive Stock Option with respect to any number of Common Shares shall entitle the Participant to a cash payment, for each such share, equal to the excess of (i) the Fair Market Value of a Common Share on the effective date of such exercise over (ii) the exercise price of the related Option. Such payment shall be paid as soon as practical, but in no event later than the expiration of five business days, after the effective date of such exercise. (b) Term and Exercise of LSARs (1) An LSAR shall be exercisable only during the period commencing on the first day following the occurrence of a Change in Control and terminating on the expiration of sixty days after such date. Notwithstanding the preceding sentence of this Section 7(b), in the event that an LSAR held by any Participant who is or may be subject to the provisions of Section 16(b) of the Exchange Act becomes exercisable prior to the expiration of six months following the date on which it is granted, then the LSAR shall also be exercisable during the period commencing on the first day immediately following the expiration of such six month period and terminating on the expiration of sixty days following such date. Notwithstanding anything else herein, an LSAR relating to an Incentive Stock Option may be exercised with respect to a Common Share only if the Fair Market Value of such share on the effective date of such exercise exceeds the exercise price relating to such share. Notwithstanding anything else herein, an LSAR may be exercised only if and to the extent that the Option to which it relates is exercisable. (2) The exercise of an LSAR with respect to a number of Common Shares shall cause the immediate and automatic cancellation of the Option to which it relates with respect to an equal number of shares. The exercise of an Option, or the cancellation, termination or expiration of an Option (other than pursuant to this Paragraph (2)), with respect to a number of Common Shares, shall cause the cancellation of the LSAR related to it with respect to an equal number of shares. (3) Each LSAR shall be exercisable in whole or in part; provided, that no partial exercise of an LSAR shall be for an aggregate exercise price of less than $1,000, unless such partial exercise is for the last remaining unexercised portion of such LSAR. The partial exercise of an LSAR shall not cause the expiration, termination or cancellation of the remaining portion thereof. Upon the partial exercise of an LSAR, the agreements evidencing the LSAR, the related Option and any Tandem SARs related to such Option shall be returned to the Participant exercising such LSAR together with the payment described in Paragraph 7(a)(1) or (2) hereof, as applicable. (4) An LSAR shall be exercised by delivering notice to Bion Environmental Technologies, Inc.'s principal office, to the attention of its Secretary, no less than one business day in advance of the effective date of the proposed exercise. Such notice shall be accompanied by the applicable agreements evidencing the LSAR, the related Option and any Tandem SARs relating to such Option, shall specify the number of Common Shares with respect to which the LSAR is being exercised and the effective date of the proposed exercise and shall be signed by the Participant. The Participant may withdraw such notice at any time prior to the close of business on the business day immediately preceding the effective date of the proposed exercise, in which case such agreements shall be returned to him. 8. Tandem Stock Appreciation Rights The Board of Directors may grant in connection with any Option granted hereunder one or more Tandem SARs relating to a number of Common Shares equal to or less than the number of Common Shares subject to the related Option. A Tandem SAR may be granted at the same time as, or subsequent to the time that, its related Option is granted. Each Tandem SAR shall be evidenced by an agreement in such form as the Board of Directors shall from time to time approve. Tandem SARs shall comply with and be subject to the following terms and conditions: (a) Benefit Upon Exercise The exercise of a Tandem SAR with respect to any number of Common Shares shall entitle a Participant to a cash payment, for each such share, equal to the excess of (i) the Fair Market Value of a Common Share on the effective date of such exercise over (ii) the exercise price of the related Option. Such payment shall be paid as soon as practical, but in no event later than the expiration of five business days, after the effective date of such exercise. (b) Term and Exercise of Tandem SAR (1) A Tandem SAR shall be exercisable at the same time and to the same extent (on a proportional basis, with any fractional amount being rounded down to the immediately preceding whole number) as its related Option. Notwithstanding the first sentence of this Paragraph 8(b)(1), (i) a Tandem SAR shall not be exercisable at any time that an LSAR related to the Option to which the Tandem SAR is related is exercisable and (ii) a Tandem SAR relating to an Incentive Stock Option may be exercised with respect to a Common Share only if the Fair Market Value of such share on the effective date of such exercise exceeds the exercise price relating to such share. (2) Notwithstanding the first sentence of Paragraph 8(b)(1) hereof, the Board of Directors may, in its absolute discretion, grant one or more Tandem SARs which shall not become exercisable unless and until the Participant to whom such Tandem SAR is granted is, in the determination of the Board of Directors, subject to Section 16(b) of the Exchange Act and which shall cease to be exercisable if and at the time that the Participant ceases, in the determination of the Board of Directors, to be subject to such Section 16(b). (3) The exercise of a Tandem SAR with respect to a number of Common Shares shall cause the immediate and automatic cancellation of its related Option with respect to an equal number of shares. The exercise of an Option, or the cancellation, termination or expiration of an Option (other than pursuant to this Paragraph (3)), with respect to a number of Common Shares shall cause the automatic and immediate cancellation of its related Tandem SARs to the extent that the number of Common Shares subject to such Option after such exercise, cancellation, termination or expiration is less than the number of shares subject to such Tandem SARs. Such Tandem SARs shall be canceled in the order in which they became exercisable. (4) Each Tandem SAR shall be exercisable in whole or in part; provided, that no partial exercise of a Tandem SAR shall be for an aggregate exercise price of less than $1,000, unless such partial exercise is for the last remaining unexercised portion of such Tandem SAR. The partial exercise of a Tandem SAR shall not cause the expiration, termination or cancellation of the remaining portion thereof. Upon the partial exercise of a Tandem SAR, the agreements evidencing such Tandem SAR, its related Option and LSARs relating to such Option shall be returned to the Participant exercising such Tandem SAR together with the payment described in Section 8(a) hereof. (5) A Tandem SAR shall be exercised by delivering notice to Bion Environmental Technologies, Inc.'s principal office, to the attention of its Secretary, no less than one business day in advance of the effective date of the proposed exercise. Such notice shall be accompanied by the applicable agreements evidencing the Tandem SAR, its related Option and any LSARs related to such Option, shall specify the number of Common Shares with respect to which the Tandem SAR is being exercised and the effective date of the proposed exercise and shall be signed by the Participant. The Participant may withdraw such notice at any time prior to the close of business on the business day immediately preceding the effective date of the proposed exercise, in which case such agreements shall be returned to him. 9. Stand-Alone Stock Appreciation Rights Subject to the provisions of the Plan, the Board of Directors may grant Stand-Alone SARs, which Stand-Alone SARs shall be evidenced by agreements in such form as the Board of Directors shall from time to time approve. Stand-Alone SARs shall comply with and be subject to the following terms and conditions: (a) Exercise Price The exercise price of any Stand-Alone SAR granted under the Plan shall be determined by the Board of Directors at the time of the grant of such Stand-Alone SAR. (b) Benefit Upon Exercise The exercise of a Stand-Alone SAR with respect to any number of Common Shares prior to the occurrence of a Change in Control shall entitle a Participant to a cash payment, for each such share, equal to the excess of (i) the Fair Market Value of a Common Share on the exercise date over (ii) the exercise price of the Stand-Alone SAR. The exercise of a Stand-Alone SAR with respect to any number of Common Shares upon or after the occurrence of a Change in Control shall entitle a Participant to a cash payment, for each such share, equal to the excess of (i) the greater of (A) the highest price per Common Share paid in connection with such Change in Control and (B) the Fair Market Value of a Common Share on the date of such Change in Control over (ii) the exercise price of the Stand-Alone SAR. Such payments shall be paid as soon as practical, but in no event later than five business days, after the effective date of the exercise. (c) Term and Exercise of Stand-Alone SARs (1) Each Stand-Alone SAR shall be exercisable on such date or dates, during such period and for such number of Common Shares as shall be determined by the Board of Directors and set forth in the Stand-Alone SAR agreement with respect to such Stand-Alone SAR; provided, however, that no Stand-Alone SAR shall be exercisable after the expiration of ten years from the date such Stand-Alone SAR was granted; and, provided, further, that each Stand-Alone SAR shall be subject to earlier termination, expiration or cancellation as provided in the Plan. (2) Each Stand-Alone SAR may be exercised in whole or in part; provided, that no partial exercise of a Stand-Alone SAR shall be for an aggregate exercise price of less than $1,000, unless such partial exercise is for the last remaining unexercised portion of such Stand-Alone SAR. The partial exercise of a Stand-Alone SAR shall not cause the expiration, termination or cancellation of the remaining portion thereof. Upon the partial exercise of a Stand-Alone SAR, the agreement evidencing such Stand-Alone SAR shall be returned to the Participant exercising such Stand-Alone SAR together with the payment described in Section 9(b) hereof. (3) A Stand-Alone SAR shall be exercised by delivering notice to Bion Environmental Technologies, Inc.'s principal office, to the attention of its Secretary, no less than one business day in advance of the effective date of the proposed exercise. Such notice shall be accompanied by the applicable agreement evidencing the Stand-Alone SAR, shall specify the number of Common Shares with respect to which the Stand-Alone SAR is being exercised and the effective date of the proposed exercise and shall be signed by the Participant. The Participant may withdraw such notice at any time prior to the close of business on the business day immediately preceding the effective date of the proposed exercise, in which case the agreement evidencing the Stand-Alone SAR shall be returned to him. (d) Effect of Termination of Employment (1) In the event that the employment of a Participant with the Company shall terminate for any reason other than retirement at age 60 or later, Cause, Disability or death, (i) Stand-Alone SARs granted to such Participant, to the extent that they were exercisable at the time of such termination, shall remain exercisable until the expiration of one month after such termination, on which date they shall expire, and (ii) Stand-Alone SARs granted to such Participant, to the extent that they were not exercisable at the time of such termination, shall expire at the close of business on the date of such termination; provided, however, that no Stand-Alone SAR shall be exercisable after the expiration of its term. (2) In the event that the employment of a Participant with the Company shall terminate on account of the retirement at age 60 or later, Disability or death of the Participant, (i) Stand-Alone SARs granted to such Participant, to the extent that they were exercisable at the time of such termination, shall remain exercisable until the expiration of one year after such termination, on which date they shall expire, and (ii) Stand-Alone SARs granted to such Participant, to the extent that they were not exercisable at the time of such termination, shall expire at the close of business on the date of such termination; provided, however, that no Stand-Alone SAR shall be exercisable after the expiration of its term. (3) In the event of the termination of a Participant's employment for Cause, all outstanding Stand-Alone SARs granted to such Participant shall expire at the commencement of business on the date of such termination. (4) In the event that a Non-Employee Participant ceases to provide services to the Company, all Stand-Alone SARs granted to such Non-Employee Participant shall remain exercisable in accordance with their terms. (e) Acceleration of Exercise Date Upon Change in Control Upon the occurrence of a Change in Control, each Stand-Alone SAR granted under the Plan and outstanding at such time shall become fully and immediately exercisable and shall remain exercisable until its expiration, termination or cancellation pursuant to the terms of the Plan. 10. Restricted Stock Subject to the provisions of the Plan, the Board of Directors may grant shares of Restricted Stock. Each grant of shares of Restricted Stock shall be evidenced by an agreement in such form as the Board of Directors shall from time to time approve. Each grant of shares of Restricted Stock shall comply with and be subject to the following terms and conditions: (a) Issue Date and Vesting Date At the time of the grant of shares of Restricted Stock, the Board of Directors shall establish an Issue Date or Issue Dates and a Vesting Date or Vesting Dates with respect to such shares. The Board of Directors may divide such shares into classes and assign a different Issue Date and/or Vesting Date for each class. Except as provided in Sections 10(c) and 10(f) hereof, upon the occurrence of the Issue Date with respect to a share of Restricted Stock, a share of Restricted Stock shall be issued in accordance with the provisions of Section 10(d) hereof. Provided that all conditions to the vesting of a share of Restricted Stock imposed pursuant to Section 10(b) hereof are satisfied, and except as provided in Sections 10(c) and 10(f) hereof, upon the occurrence of the Vesting Date with respect to a share of Restricted Stock, such share shall vest and the restrictions of Section 10(c) hereof shall cease to apply to such share. (b) Conditions to Vesting At the time of the grant of shares of Restricted Stock, the Board of Directors may impose such restrictions or conditions, not inconsistent with the provisions hereof, to the vesting of such shares as it, in its absolute discretion, deems appropriate. By way of example and not by way of limitation, the Board of Directors may require, as a condition to the vesting of any class or classes of shares of Restricted Stock, that the Participant or the Company achieve certain performance criteria, such criteria to be specified by the Board of Directors at the time of the grant of such shares. (c) Restrictions on Transfer Prior to Vesting Prior to the vesting of a share of Restricted Stock, no transfer of a Participant's rights with respect to such shares, whether voluntary or involuntary, by operation of law or otherwise, shall vest the transferee with any interest or right in or with respect to such share, but immediately upon any attempt to transfer such rights, such share, and all of the rights related thereto, shall be forfeited by the Participant and the transfer shall be of no force or effect. (d) Issuance of Certificates (1) Except as provided in Sections 10(c) or 10(f) hereof, reasonably promptly after the Issue Date with respect to shares of Restricted Stock, Bion Environmental Technologies, Inc. shall cause to be issued a stock certificate, registered in the name of the Participant to whom such shares were granted, evidencing such shares; provided, that Bion Environmental Technologies, Inc. shall not cause to be issued such a stock certificate unless it has received a stock power duly endorsed in blank with respect to such shares. Each such stock certificate shall bear the following legend: "The transferability of this certificate and the shares of stock represented hereby is subject to the restrictions, terms and conditions (including forfeiture and restrictions against transfer) contained in the Bion Environmental Technologies, Inc. 2003 Incentive Plan and an Agreement entered into between the registered owner of such shares and Bion Environmental Technologies, Inc. A copy of the Plan and Agreement is on file in the office of the Secretary of Bion Environmental Technologies, Inc. Such legend shall not be removed from the certificate evidencing such shares until such shares vest pursuant to the terms hereof." (2) Each certificate issued pursuant to Paragraph 10(d)(1) hereof, together with the stock powers relating to the shares of Restricted Stock evidenced by such certificate, shall be deposited by the Company with a custodian designated by the Company. The Company shall cause such custodian to issue to the Participant a receipt evidencing the certificates held by it which are registered in the name of the Participant. (e) Consequences Upon Vesting Upon the vesting of a share of Restricted Stock pursuant to the terms hereof, the restrictions of Section 10(c) hereof shall cease to apply to such share. Reasonably promptly after a share of Restricted Stock vests pursuant to the terms hereof, Bion Environmental Technologies, Inc. shall cause to be issued and delivered to the Participant to whom such shares were granted, a certificate evidencing such share, free of the legend set forth in Paragraph 10(d)(1) hereof, together with any other property of the Participant held by the custodian pursuant to Section 14(b) hereof. (f) Effect of Termination of Employment (1) In the event that the employment of a Participant with the Company shall terminate for any reason other than Cause prior to the vesting of shares of Restricted Stock granted to such Participant, a proportion of such shares, to the extent not forfeited or canceled on or prior to such termination pursuant to any provision hereof, shall vest on the date of such termination. The proportion referred to in the preceding sentence shall be determined by the Board of Directors at the time of the grant of such shares of Restricted Stock and may be based on the achievement of any conditions imposed by the Board of Directors with respect to such shares pursuant to Section 10(b). Such proportion may be equal to zero. (2) In the event of the termination of a Participant's employment for Cause, all shares of Restricted Stock granted to such Participant which have not vested as of the date of such termination shall immediately be forfeited. (3) In the event that a Non-Employee Participant ceases to provide services to the Company, all shares of Restricted Stock granted to such Non-Employee Participant shall vest in accordance with the terms of the grant. (g) Effect of Change in Control Upon the occurrence of a Change in Control, all shares of Restricted Stock which have not theretofore vested (including those with respect to which the Issue Date has not yet occurred), or been canceled or forfeited pursuant to any provision hereof, shall immediately vest. 11. Phantom Stock Subject to the provisions of the Plan, the Board of Directors may grant shares of Phantom Stock. Each grant of shares of Phantom Stock shall be evidenced by an agreement in such form as the Board of Directors shall from time to time approve. Each grant of shares of Phantom Stock shall comply with and be subject to the following terms and conditions: (a) Vesting Date At the time of the grant of shares of Phantom Stock, the Board of Directors shall establish a Vesting Date or Vesting Dates with respect to such shares. The Board of Directors may divide such shares into classes and assign a different Vesting Date for each class. Provided that all conditions to the vesting of a share of Phantom Stock imposed pursuant to Section 11(c) hereof are satisfied, and except as provided in Section 11(d) hereof, upon the occurrence of the Vesting Date with respect to a share of Phantom Stock, such share shall vest. (b) Benefit Upon Vesting Upon the vesting of a share of Phantom Stock, a Participant shall be entitled to receive in cash, within 30 days of the date on which such share vests, an amount in cash in a lump sum equal to the sum of (i) the Fair Market Value of a Common Share of the Company on the date on which such share of Phantom Stock vests and (ii) the aggregate amount of cash dividends paid with respect to a Common Share of the Company during the period commencing on the date on which the share of Phantom Stock was granted and terminating on the date on which such share vests. (c) Conditions to Vesting At the time of the grant of shares of Phantom Stock, the Board of Directors may impose such restrictions or conditions, not inconsistent with the provisions hereof, to the vesting of such shares as it, in its absolute discretion, deems appropriate. By way of example and not by way of limitation, the Board of Directors may require, as a condition to the vesting of any class or classes of shares of Phantom Stock, that the Participant or the Company achieve certain performance criteria, such criteria to be specified by the Board of Directors at the time of the grant of such shares. (d) Effect of Termination of Employment (1) In the event that the employment of a Participant with the Company shall terminate for any reason other than Cause prior to the vesting of shares of Phantom Stock granted to such Participant, a proportion of such shares, to the extent not forfeited or canceled on or prior to such termination pursuant to any provision hereof, shall vest on the date of such termination. The proportion referred to in the preceding sentence shall be determined by the Board of Directors at the time of the grant of such shares of Phantom Stock and may be based on the achievement of any conditions imposed by the Board of Directors with respect to such shares pursuant to Section 11(c). Such proportion may be equal to zero. (2) In the event of the termination of a Participant's employment for Cause, all shares of Phantom Stock granted to such Participant which have not vested as of the date of such termination shall immediately be forfeited. (3) In the event that a Non-Employee Participant ceases to provide services to the Company, all shares of Phantom Stock granted to such Non-Employee Participant shall vest in accordance with the terms of the grant. (e) Effect of Change in Control Upon the occurrence of a Change in Control, all shares of Phantom Stock which have not theretofore vested, or been canceled or forfeited pursuant to any provision hereof, shall immediately vest. 12. Stock Bonuses Subject to the provisions of the Plan, the Board of Directors may grant Stock Bonuses in such amounts as it shall determine from time to time. A Stock Bonus shall be paid at such time and subject to such conditions as the Board of Directors shall determine at the time of the grant of such Stock Bonus. Certificates for Common Shares granted as a Stock Bonus shall be issued in the name of the Participant to whom such grant was made and delivered to such Participant as soon as practicable after the date on which such Stock Bonus is required to be paid. 13. Cash Bonuses Subject to the provisions of the Plan, the Board of Directors may grant, in connection with any grant of Restricted Stock or Stock Bonus or at any time thereafter, a cash bonus, payable promptly after the date on which the Participant is required to recognize income for federal income tax purposes in connection with such Restricted Stock or Stock Bonus, in such amounts as the Board of Directors shall determine from time to time; provided however, that in no event shall the amount of a Cash Bonus exceed 50% of the Fair Market Value of the related shares of Restricted Stock or Stock Bonus on such date. A Cash Bonus shall be subject to such conditions as the Board of Directors shall determine at the time of the grant of such Cash Bonus. 14. Adjustment Upon Changes in Common Shares (a) Shares Available for Grants In the event of any change in the number of Common Shares outstanding by reason of any stock dividend or split, recapitalization, merger, consolidation, combination or exchange of shares or similar corporate change, the maximum aggregate number of Common Shares with respect to which the Board of Directors may grant Options, Stand-Alone SARs, shares of Restricted Stock, shares of Phantom Stock and Stock Bonuses shall be appropriately adjusted by the Board of Directors. In the event of any change in the number of Common Shares outstanding by reason of any other event or transaction, the Board of Directors may, but need not, make such adjustments in the number and class of Common Shares with respect to which Options, Stand-Alone SARs, shares of Restricted Stock, shares of Phantom Stock and Stock Bonuses may be granted as the Board of Directors may deem appropriate. (b) Outstanding Restricted Stock and Phantom Stock Unless the Board of Directors in its absolute discretion otherwise determines, any securities or other property (including dividends paid in cash) received by a Participant with respect to a share of Restricted Stock, the Issue Date with respect to which occurs prior to such event, but which has not vested as of the date of such event, as the result of any dividend, stock split, recapitalization, merger, consolidation, combination, exchange of shares or otherwise, will not vest until such share of Restricted Stock vests, and shall be promptly deposited with the custodian designated pursuant to Paragraph 10(d)(2) hereof. The Board of Directors may, in its absolute discretion, adjust any grant of shares of Restricted Stock, the Issue Date with respect to which has not occurred as of the date of the occurrence of any of the following events, or any grant of shares of Phantom Stock, to reflect any dividend, stock split, recapitalization, merger, consolidation, combination, exchange of shares or similar corporate change as the Board of Directors may deem appropriate to prevent the enlargement or dilution of rights of Participants under the grant. (c) Outstanding Options, LSARs, Tandem SARs and Stand-Alone SARs--Certain Increases or Decreases in Issued Shares Without Consideration Subject to any required action by the shareholders of Bion Environmental Technologies, Inc., in the event of any increase or decrease in the number of issued Common Shares resulting from a subdivision or consolidation of Common Shares or the payment of a stock dividend (but only on the Common Shares), the Board of Directors shall proportionally adjust the number of Common Shares subject to each outstanding Option, LSAR, Tandem SAR and Stand-Alone SAR, and the exercise price per Common Share of each such Option, LSAR, Tandem SAR and Stand-Alone SAR. (d) Outstanding Options, LSARs, Tandem SARs and Stand-Alone SARs--Certain Mergers Subject to any required action by the shareholders of Bion Environmental Technologies, Inc., in the event that Bion Environmental Technologies, Inc. shall be the surviving corporation in any merger or consolidation (except a merger or consolidation as a result of which the holders of Common Shares receive securities of another corporation), each Option, LSAR, Tandem SAR and Stand-Alone SAR outstanding on the date of such merger or consolidation shall pertain to and apply to the securities which a holder of the number of Common Shares subject to such Option, LSAR, Tandem SAR or Stand-Alone SAR would have received in such merger or consolidation. (e) Outstanding Options, LSARs, Tandem SARs and Stand-Alone SARs--Certain Other Transactions In the event of (i) a dissolution or liquidation of Bion Environmental Technologies, Inc., (ii) a sale of all or substantially all of Bion Environmental Technologies, Inc.'s assets, (iii) a merger or consolidation involving Bion Environmental Technologies, Inc. in which Bion Environmental Technologies, Inc. is not the surviving corporation or (iv) a merger or consolidation involving Bion Environmental Technologies, Inc. in which Bion Environmental Technologies, Inc. is the surviving corporation but the holders of Common Shares receive securities of another corporation and/or other property, including cash, the Board of Directors shall, in its absolute discretion, have the power to: (i) cancel, effective immediately prior to the occurrence of such event, each Option (including each LSAR and Tandem SAR related thereto) and Stand-Alone SAR outstanding immediately prior to such event (whether or not then exercisable), and, in full consideration of such cancellation, pay to the Participant to whom such Option or Stand-Alone SAR was granted an amount in cash, for each Common Share subject to such Option or Stand-Alone SAR, respectively, equal to the excess of (A) the value, as determined by the Board of Directors in its absolute discretion, of the property (including cash) received by the holder of a Common Share as a result of such event over (B) the exercise price of such Option or Stand-Alone SAR; or (ii) provide for the exchange of each Option (including any related LSAR or Tandem SAR) and Stand-Alone SAR outstanding immediately prior to such event (whether or not then exercisable) for an option on or stock appreciation right with respect to, as appropriate, some or all of the property for which such Option or Stand-Alone SAR is exchanged and, incident thereto, make an equitable adjustment as determined by the Board of Directors in its absolute discretion in the exercise price of the option or stock appreciation right, or the number of shares or amount of property subject to the option or stock appreciation right or, if appropriate, provide for a cash payment to the Participant to whom such Option or Stand-Alone SAR was granted in partial consideration for the exchange of the Option or Stand-Alone SAR. (f) Outstanding Options, LSARs, Tandem SARs and Stand-Alone SARs--Other Changes In the event of any change in the capitalization of Bion Environmental Technologies, Inc. or corporate change other than those specifically referred to in Section 14(c), (d) or (e) hereof, the Board of Directors may, in its absolute discretion, make such adjustments in the number and class of shares subject to Options, LSARs, Tandem SARs or Stand-Alone SARs outstanding on the date on which such change occurs and in the per share exercise price of each such Option, LSAR, Tandem SAR and Stand-Alone SAR as the Board of Directors may consider appropriate to prevent dilution or enlargement of rights. (g) No Other Rights Except as expressly provided in the Plan, no Participant shall have any rights by reason of any subdivision or consolidation of shares of stock of any class, the payment of any dividend, any increase or decrease in the number of shares of stock of any class or any dissolution, liquidation, merger or consolidation of Bion Environmental Technologies, Inc. or any other corporation. Except as expressly provided in the Plan, no issuance by Bion Environmental Technologies, Inc. of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to the number of Common Shares subject to an Incentive Award or the exercise price of any Option, LSAR, Tandem SAR or Stand-Alone SAR. 15. Rights as a Shareholder No person shall have any rights as a shareholder with respect to any Common Shares covered by or relating to any Incentive Award granted pursuant to this Plan until the date of the issuance of a stock certificate with respect to such shares. Except as otherwise expressly provided in Section 14 hereof, no adjustment to any Incentive Award shall be made for dividends or other rights for which the record date occurs prior to the date such stock certificate is issued. 16. No Special Employment Rights; No Right to Incentive Award Nothing contained in the Plan or any Incentive Award shall confer upon any Participant any right with respect to the continuation of his employment by the Company or interfere in any way with the right of the Company, subject to the terms of any separate employment agreement to the contrary, at any time to terminate such employment or to increase or decrease the compensation of the Participant from the rate in existence at the time of the grant of an Incentive Award. No person shall have any claim or right to receive an Incentive Award hereunder. The Board of Directors' granting of an Incentive Award to a Participant at any time shall neither require the Board of Directors to grant an Incentive Award to such Participant or any other Participant or other person at any time nor preclude the Board of Directors from making subsequent grants to such Participant or any other Participant or other person. 17. Securities Matters (a) The Company shall be under no obligation to effect the registration pursuant to the Securities Act of any Common Shares to be issued hereunder or to effect similar compliance under any state laws. Notwithstanding anything herein to the contrary, the Company shall not be obligated to cause to be issued or delivered any certificates evidencing Common Shares pursuant to the Plan unless and until the Company is advised by its counsel that the issuance and delivery of such certificates is in compliance with all applicable laws, regulations of governmental authority and the requirements of any securities exchange on which Common Shares are traded. The Board of Directors may require, as a condition of the issuance and delivery of certificates evidencing Common Shares pursuant to the terms hereof, that the recipient of such shares make such covenants, agreements and representations, and that such certificates bear such legends, as the Board of Directors, in its sole discretion, deems necessary or desirable. (b) The exercise of any Option granted hereunder shall only be effective at such time as counsel to the Company shall have determined that the issuance and delivery of Common Shares pursuant to such exercise is in compliance with all applicable laws, regulations of governmental authority and the requirements of any securities exchange on which Common Shares are traded. The Company may, in its sole discretion, defer the effectiveness of any exercise of an Option granted hereunder in order to allow the issuance of shares of Common Stock pursuant thereto to be made pursuant to registration or an exemption from the registration or other methods for compliance available under federal or state securities laws. The Company shall inform the Participant in writing of its decision to defer the effectiveness of the exercise of an Option granted hereunder. During the period that the effectiveness of the exercise of an Option has been deferred, the Participant may, by written notice, withdraw such exercise and obtain the refund of any amount paid with respect thereto. (c) With respect to persons subject to Section 16 of the Securities Exchange Act of 1934, transactions under this Plan are intended to comply with all applicable conditions of Rule 16b-3 or its successors under the Exchange Act. To the extent any provision of the Plan, the grant of an Incentive Award, or action by the Board of Directors fails to so comply, it shall be deemed null and void, to the extent permitted by law and deemed advisable by the Board of Directors. 18. Withholding Taxes (a) Cash Remittance Whenever Common Shares are to be issued upon the exercise of an Option, the occurrence of the Issue Date or Vesting Date with respect to a share of Restricted Stock or the payment of a Stock Bonus, the Company shall have the right to require the Participant to remit to the Company in cash an amount sufficient to satisfy federal, state and local withholding tax requirements, if any, attributable to such exercise, occurrence or payment prior to the delivery of any certificate or certificates for such shares. In addition, upon the exercise of an LSAR, Tandem SAR or Stand-Alone SAR, the grant of a Cash Bonus or the making of a payment with respect to a share of Phantom Stock, the Company shall have the right to withhold from any cash payment required to be made pursuant thereto an amount sufficient to satisfy the federal, state and local withholding tax requirements. (b) Stock Remittance At the election of the Participant, subject to the approval of the Board of Directors, when Common Shares are to be issued upon the exercise of an Option, the occurrence of the Issue Date or the Vesting Date with respect to a share of Restricted Stock or the grant of a Stock Bonus, in lieu of the remittance required by Section 18(a) hereof, the Participant may tender to the Company a number of Common Shares determined by such Participant, the Fair Market Value of which at the tender date the Board of Directors determines to be sufficient to satisfy the federal, state and local withholding tax requirements, if any, attributable to such exercise, occurrence or grant and not greater than the Participant's estimated total federal, state and local tax obligations associated with such exercise, occurrence or grant. (c) Stock Withholding At the election of the Participant, subject to the approval of the Board of Directors, when Common Shares are to be issued upon the exercise of an Option, the occurrence of the Issue Date or the Vesting Date with respect to a share of Restricted Stock or the grant of a Stock Bonus, in lieu of the remittance required by Section 18(a) hereof, the Company shall withhold a number of such shares determined by such Participant, the Fair Market Value of which at the exercise date the Board of Directors determines to be sufficient to satisfy the federal, state and local withholding tax requirements, if any, attributable to such exercise, occurrence or grant and is not greater than the Participant's estimated total federal, state and local tax obligations associated with such exercise, occurrence or grant. 19. Amendment of the Plan The Plan will have no fixed termination date, but may be terminated at any time by the Board of Directors. Incentive Awards outstanding as of the date of any such termination will not be affected or impaired by the termination of the Plan. The Board of Directors may amend, alter, or discontinue the Plan, but no amendment, alteration or discontinuation shall be made which would (i) impair the rights of a Participant without the Participant's consent, except such an amendment which is necessary to cause any Incentive Award or transaction under the Plan to qualify, or to continue to qualify, for the exemption provided by Rule 16b-3, or (ii) disqualify any Incentive Award or transaction under the Plan from the exemption provided by Rule 16b-3. In addition, no such amendment may be made without the approval of the Company's shareholders to the extent such approval is required by law or agreement. 20. No Obligation to Exercise The grant to a Participant of an Option, LSAR, Tandem SAR or Stand-Alone SAR shall impose no obligation upon such Participant to exercise such Option, LSAR, Tandem SAR or Stand-Alone SAR. 21. Nontransferability Unless the Board of Directors provides otherwise, (i) no right or interest of a Participant in any Incentive Award may be pledged, encumbered, or hypothecated to or in favor of any party other than the Company or a Subsidiary, or shall be subject to any lien, obligation, or liability of such Participant to any other party other than the Company or a Subsidiary, and (ii) no Incentive Award shall be assignable or transferable by a Participant other than by will or the laws of descent and distribution. 22. Expenses and Receipts The expenses of the Plan shall be paid by the Company. Any proceeds received by the Company in connection with any Incentive Award will be used for general corporate purposes. 23. Suspension or Termination of Incentive Award In addition to the remedies of the Company elsewhere provided for herein, if the Board of Directors reasonably believes that a Participant has committed an act of misconduct as described in this Section, the Board of Directors may suspend the Participant's rights to exercise any Incentive Award pending a determination by the Board of Directors. If the Board of Directors determines a Participant has committed an act of misconduct, including, but not limited to, embezzlement, fraud, dishonesty, nonpayment of any obligation owed to the Company, breach of fiduciary duty or deliberate disregard of the Company's rules resulting in loss, damage or injury to the Company, or a Participant makes an unauthorized disclosure of any Company trade secret or confidential information, engages in any conduct constituting unfair competition, induces any Company customer to breach a contract with the Company, induces any principal for whom the Company acts as agent to terminate such agency relationship, or has failed to comply with the terms and conditions of the Plan or any agreement executed by such Participant evidencing an Incentive Award, unless such failure has been remedied by such Participant within 10 days after having been notified of such failure by the Board of Directors, neither the Participant nor his or her estate, executors, administrators, or heirs, shall be entitled to exercise any Incentive Award whatsoever. In making such determination, the Board of Directors shall act fairly and shall give the Participant an opportunity to appear and present evidence on his or her behalf at a hearing before the Board of Directors. 24. Code Section 162(m). The Board of Directors, in its sole discretion, may require that one or more Incentive Awards contain provisions which provide that, in the event Section 162(m) of the Code, or any successor provision relating to excessive employee remuneration, would operate to disallow a deduction by the Company for all or part of any Incentive Award under the Plan, a Participant's receipt of the portion of such Incentive Award that would not be deductible by the Company shall be deferred until the next succeeding year or years in which the Participant's remuneration does not exceed the limit set forth in such provision of the Code. 25. Effective Date of Plan The Plan shall be effective as of August 31, 2003. EX-21 6 ex21.txt BION ENVIRONMENTAL TECH 10-KSB (6-30-02) EX 21 EXHIBIT 21 BION ENVIRONMENTAL TECHNOLOGIES, INC. Subsidiaries of the Registrant Bion Environmental Technologies, Inc. is the parent company of six subsidiaries as follows: State of Incorporation Subsidiary or Organization ---------- ---------------------- 1. Bion Technologies, Inc. Colorado 2. BionSoil, Inc. Colorado 3. Bion International, Inc. Colorado 4. Bion Dairy Corporation Colorado 5. Centerpoint Corporation Delaware 6. Dairy Parks, LLC. Delaware EX-31 7 ex311.txt BION ENVIRONMENTAL TECH 10-KSB (6-30-02) EX 31.1 EXHIBIT 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND INTERIM CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Mark A. Smith certify that: 1. I have reviewed this annual report of Bion Environmental Technologies, Inc. 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors (none exist at this date as described in the Annual Report) and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Date: October 13, 2003 /s/ Mark A. Smith [Signature] Chief Executive Officer and Interim Chief Financial Officer EX-32 8 ex321.txt BION ENVIRONMENTAL TECH 10-KSB (6-30-02) EX 31.2 EXHIBIT 32.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND INTERIM CHIEF FINANCIAL OFFICER OF BION ENVIRONMENTAL TECHNOLOGIES, INC. PURSUANT TO 18 U.S.C. SECTION 1350 I hereby certify that, to the best of my knowledge, the Annual Report on Form 10-KSB of Bion Environmental Technologies, Inc. for the period ending June 30, 2003: (1) complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, EXCEPT THAT THE FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2003 HAVE NOT BEEN AUDITED OR REVIEWED BY INDEPENDENT AUDITORS AND THE NOTES THERETO AND THE DISCUSSIONS WITHIN THE ANNUAL REPORT OF SUCH NUMBERS HAVE HOT BEEN AUDITED OR REVIEWED BY OUR INDEPENDENT AUDITORS; and (2) the information contained in the Report fairly presents, in all material aspects, the financial condition and results of operations of Bion Environmental Technologies, Inc. /s/ Mark A. Smith Mark A. Smith Chief Executive Officer and Interim Chief Financial Officer October 13, 2003 A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to Bion Environmental Technologies, Inc. and will be retained by Bion Environmental Technologies, Inc. and furnished to the Securities and Exchange Commission upon request. -----END PRIVACY-ENHANCED MESSAGE-----