UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(MARK ONE)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004
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 NUMBER: 0-21802
N-VIRO INTERNATIONAL CORPORATION
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
DELAWARE 34-1741211
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
3450 W. CENTRAL AVENUE, SUITE 328
TOLEDO, OHIO 43606
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (419) 535-6374
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 the
filing requirements for at least the past 90 days. Yes X No.
---
As of August 1, 2004, 3,199,639 shares of N-Viro International
Corporation $ .01 par value common stock were outstanding.
Transitional Small Business Disclosure Format (check one): Yes No X
---
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
N-VIRO INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended June 30 Six Months Ended June 30
2004 2003 2004 2003
----------- ----------- ----------- -----------
Revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,589,539 $1,408,122 $3,047,908 $2,653,391
Cost of revenues. . . . . . . . . . . . . . . . . . . . . . . . 1,118,024 1,061,963 2,158,237 1,975,360
----------- ----------- ----------- -----------
Gross Profit. . . . . . . . . . . . . . . . . . . . . . . . . . 471,515 346,159 889,671 678,031
Operating expenses:
Selling, general and administrative . . . . . . . . . . . . . . 497,113 643,799 1,006,564 1,095,067
----------- ----------- ----------- -----------
497,113 643,799 1,006,564 1,095,067
----------- ----------- ----------- -----------
Operating loss. . . . . . . . . . . . . . . . . . . . . . . . . (25,598) (297,640) (116,893) (417,036)
Nonoperating income (expense):
Interest and dividend income. . . . . . . . . . . . . . . . . . 10,807 - 15,558 2,396
Interest expense. . . . . . . . . . . . . . . . . . . . . . . . (23,273) (72,293) (49,420) (94,623)
Gain on legal debt forgiven . . . . . . . . . . . . . . . . . . 157,174 - 157,174 -
Income (loss) from equity investment in joint venture . . . . . (61,161) (14,627) (104,984) (12,824)
----------- ----------- ----------- -----------
83,547 (86,920) 18,328 (105,051)
----------- ----------- ----------- -----------
Income (loss) before income taxes . . . . . . . . . . . . . . . 57,949 (384,560) (98,565) (522,087)
Federal and state income taxes. . . . . . . . . . . . . . . . . - - - -
----------- ----------- ----------- -----------
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . $ 57,949 $ (384,560) $ (98,565) $ (522,087)
=========== =========== =========== ===========
Basic and diluted income (loss) per share . . . . . . . . . . . $ 0.02 $ (0.15) $ (0.03) $ (0.20)
=========== =========== =========== ===========
Weighted average common shares outstanding - basic and diluted. 3,040,006 2,577,433 2,918,085 2,577,433
=========== =========== =========== ===========
See Notes to Consolidated Financial Statements
N-VIRO INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
June 30, 2004 (Unaudited) December 31, 2003
-------------------------- -------------------
ASSETS
- -----------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents:
Unrestricted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 70,946 $ 123,547
Restricted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75,112 -
Receivables:
Trade, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,029,948 842,583
Notes receivable - current. . . . . . . . . . . . . . . . . . . . . . . . . . 83,440 59,017
Related parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 17,000
Prepaid expenses and other assets . . . . . . . . . . . . . . . . . . . . . . 115,227 49,540
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53,345 80,932
-------------------------- -------------------
Total current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,428,018 1,172,619
Property and Equipment, Net . . . . . . . . . . . . . . . . . . . . . . . . . 422,379 468,497
Investment in Florida N-Viro, L.P.. . . . . . . . . . . . . . . . . . . . . . - -
Notes Receivable, net of current portion. . . . . . . . . . . . . . . . . . . 225,992 346,248
Intangible and Other Assets, Net. . . . . . . . . . . . . . . . . . . . . . . 1,158,645 1,209,825
-------------------------- -------------------
$ 3,235,034 $ 3,197,189
========================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
- -----------------------------------------------------------------------------
CURRENT LIABILITIES
Current maturities of long-term debt. . . . . . . . . . . . . . . . . . . . . $ 304,884 $ 259,782
Line-of-credit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000 398,223
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,547,390 1,737,019
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 457,489 419,377
-------------------------- -------------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 2,409,763 2,814,401
Long-term debt, less current maturities . . . . . . . . . . . . . . . . . . . 160,270 394,722
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $.01 par value; authorized 7,000,000 shares; issued
3,323,139 in 2004 and 2,713,833 in 2003 . . . . . . . . . . . . . . . . . . . 33,231 27,138
Preferred stock, $.01 par value; authorized 2,000,000 shares; issued 1 share. - -
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . . . 14,356,891 13,587,484
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (13,040,231) (12,941,666)
-------------------------- -------------------
1,349,891 672,956
Less treasury stock, at cost, 123,500 shares. . . . . . . . . . . . . . . . . 684,890 684,890
-------------------------- -------------------
Total stockholders' equity (deficit). . . . . . . . . . . . . . . . . . . . . 665,001 (11,934)
-------------------------- -------------------
$ 3,235,034 $ 3,197,189
========================== ===================
See Notes to Consolidated Financial Statements
N-VIRO INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30
2004 2003
---------- ----------
NET CASH USED BY OPERATING ACTIVITIES. . . . . . . . . . . . . . . . . . . . . . . . . . . $(164,835) $ (81,092)
CASH FLOWS FROM INVESTING ACTIVITIES
Increases (reductions) to restricted cash and cash equivalents . . . . . . . . . . . . . . (75,112) 400,000
Collections on notes receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,000 12,000
Purchases of property and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,004) (12,976)
Sales of property and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 750 -
Expenditures for intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . (26,257) (29,855)
---------- ----------
Net cash provided (used) in investing activities . . . . . . . . . . . . . . . . . . . . . (88,623) 369,169
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of stock - options, warrants and private placement. . . . . . . . . . . . . . . . 543,180 -
Borrowings under long-term obligations . . . . . . . . . . . . . . . . . . . . . . . . . . 74,386 336,003
Private placement expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (10,751) -
Principal payments on long-term obligations. . . . . . . . . . . . . . . . . . . . . . . . (107,735) (376,203)
Net payments on line-of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (298,223) (219,915)
---------- ----------
Net cash provided (used) by financing activities . . . . . . . . . . . . . . . . . . . . . 200,857 (260,115)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . . . . . . (52,601) 27,962
CASH AND CASH EQUIVALENTS - BEGINNING. . . . . . . . . . . . . . . . . . . . . . . . . . . 123,547 4,935
---------- ----------
CASH AND CASH EQUIVALENTS - ENDING . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 70,946 $ 32,897
========== ==========
Supplemental disclosure of cash flows information:
Cash paid during the six months ended for interest . . . . . . . . . . . . . . . . . . . . $ 28,085 $ 56,400
========== ==========
During the six months ended June 30, 2004, the Company issued unregistered
common stock with a fair market value of $162,533 for payment of trade debts
During the six months ended June 30, 2004, the Company issued unregistered
common stock with a fair market value of $91,710 to current and former directors
During the six months ended June 30, 2004, the Company issued unregistered
common stock with a fair market value of $88,000 to Ophir Holdings for consulting services
See Notes to Consolidated Financial Statements
N-VIRO INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION
The accompanying consolidated financial statements of N-Viro International
Corporation (the "Company") are unaudited but, in management's opinion, reflect
all adjustments (including normal recurring accruals) necessary to present
fairly such information for the period and at the dates indicated. The results
of operations for the six months ended June 30, 2004 may not be indicative of
the results of operations for the year ended December 31, 2004. Since the
accompanying consolidated financial statements have been prepared in accordance
with Item 310 of Regulation S-B, they do not contain all information and
footnotes normally contained in annual consolidated financial statements;
accordingly, they should be read in conjunction with the consolidated financial
statements and notes thereto appearing in the Company's Form 10-K for the period
ending December 31, 2003.
The financial statements are consolidated as of June 30, 2004 and December
31, 2003 for the Company. There were no intercompany transactions.
In preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, management makes estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The
following are certain significant estimates and assumptions made in preparation
of the financial statements:
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has in the past sustained
operating and net losses. In addition, the Company has used substantial amounts
of working capital in its operations which has reduced the Company's liquidity
to a low level. At June 30, 2004, current liabilities exceed current assets by
$981,745. These matters raise substantial doubt about the Company's ability to
continue as a going concern. The financial statements do not include any
adjustments relating to the recoverability and classification of recorded assets
or the amounts and classification of liabilities that may result from the
outcome of these uncertainties.
Non-domestic license and territory fees - The Company does not recognize
revenue on any non-domestic license or territory fee contracts until the cash is
received, assuming all other tests of revenue recognition are met. Canada is
excluded from this definition of non-domestic.
Allowance for Doubtful Accounts - The Company estimates losses for
uncollectible accounts based on the aging of the accounts receivable and the
evaluation of the likelihood of success in collecting the receivable.
Inventory - Inventory is recorded at lower of cost or market and consists
of N-Viro soil, manufactured by the Company, which is available for sale and
used in commercial, agricultural and horticultural applications. The
weighted-average method is used to value the inventory.
Property and Equipment/Long-Lived Assets - Property and equipment is
reviewed for impairment pursuant to the provisions of SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets." The carrying amount of an
asset (group) is considered impaired if it exceeds the sum of the Company's
estimate of the undiscounted future cash flows expected to result from the use
and eventual disposition of the asset (group), excluding interest charges.
Property, machinery and equipment are stated at cost less accumulated
depreciation. Management believes the carrying amount is not impaired based
upon estimated future cash flows.
Equity Method Investment - The Company accounts for its investments in
joint ventures under the equity method. The Company periodically evaluates the
recoverability of its equity investments in accordance with APB No. 18, "The
Equity Method of Accounting for Investments in Common Stock." If circumstances
were to arise where a loss would be considered other than temporary, the Company
would record a write-down of excess investment cost. Management has determined
that no write-down was required at June 30, 2004.
Intangible Assets - Intangible assets deemed to have indefinite lives are
tested for impairment by comparing the fair value with its carrying value.
Significant estimates used in the determination of fair value include estimates
of future cash flows. As required under current accounting standards, the
Company tests for impairment when events and circumstances indicate that the
assets might be impaired and the carrying value of those assets may not be
recoverable. The Company is also amortizing the capitalized cost of obtaining
its credit facility, for the additional collateral required and evidenced by a
warrant to purchase 50,000 shares of the Company's common stock. The Company
estimated this cost at February 26, 2003 to be $30,000, and is amortizing this
over 4 years by the straight-line method.
Fair Value of Financial Instruments - The fair values of cash, accounts
receivable, accounts payable and other short-term obligations approximate their
carrying values because of the short maturity of these financial instruments.
The carrying values of the Company's long-term obligations approximate their
fair value. In accordance with Statement of Financial Accounting Standards
("SFAS") No. 107, "Disclosure About Fair Value of Financial Instruments," rates
available at balance sheet dates to the Company are used to estimate the fair
value of existing debt.
Income Taxes - The Company assumes the deductibility of certain costs in
income tax filings and estimates the recovery of deferred income tax assets.
Preferred Stock - The Company has authorized, issued and outstanding one
share of Series A Redeemable Preferred Stock (the "Preferred Stock"), is
non-transferable, has a term equal to ten years and is subject to re-purchase by
the Company for a nominal sum. The Preferred Stock has no voting rights, but
has the special right, voting separately as a single class, to nominate and
elect one member of the Board of Directors of the Corporation at the annual
meeting of the shareholders of the Corporation at which such member is to be
elected. The Preferred Stock is not convertible or exchangeable for any other
securities or property of the Company and has no liquidation preference.
Stock Options - The Company accounts for stock-based compensation issued to
its employees and directors in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly, no
compensation cost has been recognized for the stock option plans, as all options
granted under the plans have an exercise price equal to the market value of the
underlying common stock on the date of the grant, except for the options granted
in May, 2004 to Michael Nicholson, which is explained further in "Related Party
Transactions". The fair value of options granted was determined using the
Black-Scholes option pricing model.
The following table illustrates the effect on net income (loss) and net
income (loss) per share if the Company had applied the fair value recognition
provisions of FASB Statement No. 123, "Accounting for Stock-based Compensation"
to stock-based employee compensation:
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- -------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Net income (loss), as reported. . . . . . . $ 57,949 $(384,561) $ (98,565) $(522,087)
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects . . . . . . . (235,621) (20,294) (254,242) (38,915)
---------- ---------- ---------- ----------
Pro forma net income (loss) . . . . . . . . $(177,672) $(404,855) $(352,807) $(561,002)
========== ========== ========== ==========
Income (loss) per share:
Basic and diluted - as reported . . . . . . $ 0.02 $ (0.15) $ (0.03) $ (0.20)
========== ========== ========== ==========
Basic and diluted - pro-forma . . . . . . . $ (0.06) $ (0.16) $ (0.12) $ (0.22)
========== ========== ========== ==========
NOTE 2. RELATED PARTY TRANSACTIONS
The Company had an unsecured receivable from a related party, N-Viro Energy
Systems, Inc. estimated to be $17,000 at March 31, 2004. During the second
quarter of 2004, the Company learned the amount was negotiated as repaid by the
related party in December 2003, and therefore was not owed to the Company. The
amount was then recorded to expense as part of the additional settlement
expenses incurred by the Company during the second quarter 2004.
On May 12, 2004, the Company granted to Michael Nicholson, a member of the
Board and Chief Operating Officer, 50,000 options to purchase common stock of
the Company, pursuant to his employment agreement dated June 6, 2003 and filed
as an Exhibit to the Form 8-K filed with the Securities and Exchange Commission
on June 10, 2003. Because these options were not granted until May 2004 but
priced as of June 6, 2003 at $0.90 per option, the Company is required to take a
charge to earnings totaling approximately $90,000 ratably through June, 2007,
the ending date of his employment agreement.
During the second quarter of 2004, 50,000 shares of unregistered common
stock of the Company were issued to Ophir Holdings, Inc., pursuant to the terms
of a Financial Public Relations Agreement signed May 20, 2004. These shares
also bear an additional restriction limiting transfer to any other party. The
Company is recording an expense of $88,000 over the eight-month period through
December 31, 2004 the Agreement is in effect, for the estimated fair value of
the stock for services rendered, or $11,000 per month. This Financial Public
Relations Agreement is attached to this Form 10-QSB as Exhibit 99.1
NOTE 3. LONG-TERM DEBT
In February 2003 the Company closed on an $845,000 credit facility with
Monroe Bank + Trust (the "Bank"). This senior debt credit facility was
comprised of a $295,000 four year term note at 7.5% and a line of credit up to
$550,000 at Prime plus 1.5% and secured by a first lien on all assets of the
Company. The Company used the funds to refinance its prior debt and to provide
working capital. The Company was in violation of financial covenants governing
the credit facility at December 31, 2003, concerning the maintenance of both a
tangible net worth amount and positive debt service coverage ratio for the
period, both of which require positive earnings. The Bank waived this violation
in light of the Company's net loss for the year ended December 31, 2003, but
required additional consideration in exchange for this waiver. In January 2004,
the Company obtained a certificate of deposit in the amount of $75,000 with the
Bank, and transferred custodianship of its treasury stock to the Bank. In
February, 2004, the Company renewed its line of credit with the Bank through
April, 2004, and in April 2004 it was renewed again through October, 2004. As
part of this renewal, the Bank decreased the maximum amount available to borrow
on the line to $400,000. At June 30, 2004, the Company had $300,000 of
borrowing capacity under the Credit Facility.
NOTE 4. CONTINGENCIES
The Company leases its executive and administrative offices in Toledo,
Ohio, under a lease that was renewed in January 2003. The Company believes its
relationship with its lessor is satisfactory. The total minimum rental
commitment through 2006 is approximately $56,000 each year. The total rental
expense included in the statements of operations for each of the six months
ended June 30, 2004 and 2003 is approximately $28,000. The Company also leases
various equipment on a month-to-month basis.
During 1999, the Company entered into employment and consulting agreements
with an officer of the Company, Dr. Terry J. Logan. The employment agreement
expired in June 2004. The consulting agreement was modified in June 2004 and
began upon termination of the employment agreement and extends through July
2006. The agreement requires Dr. Logan to provide minimum future services to be
eligible for compensation. The agreement was disclosed in a filing on July 2,
2004 on Form 8-K.
In the second quarter of 2003, the Company entered into an employment with
another officer of the Company, Michael G. Nicholson. The employment agreement
will expire in June 2007. Future compensation amounts are to be determined
annually by the Board. The agreement was disclosed in a filing on June 10, 2003
on Form 8-K.
In August 2003, the Company entered into a Settlement Agreement with Mr. J.
Patrick Nicholson and negotiated a new consulting agreement. The new consulting
agreement will expire in August 2008, and Mr. Nicholson will be required to
provide future services to be eligible for compensation. Mr. Nicholson is also
entitled to payments of $48,000 per year for non-competition and $6,000 per year
for office space reimbursement, in addition to life and health insurance
coverage similar to the provision contained in his 1999 employment and
consulting agreements previously discussed. The details of this new agreement
were disclosed in a filing on August 29, 2003 on Form 8-K
NOTE 5. NEW ACCOUNTING STANDARDS
There were no new accounting pronouncements issued in the second quarter of
2004 that affect the Company.
NOTE 6. SEGMENT INFORMATION
EARNINGS VARIATION DUE TO BUSINESS CYCLES AND SEASONAL FACTORS. The
Company's operating results can experience quarterly or annual variations due to
business cycles, seasonality and other factors. The market price for its common
stock may decrease if its operating results do not meet the expectations of the
market.
For the second quarter of 2004, approximately 31% of the Company's revenue
is from management operations, 67% from other domestic operations, 1% from
research and development grants and the remaining 1% from foreign operations.
Sales of the N-Viro technology are affected by general fluctuations in the
business cycles in the United States and worldwide, instability of economic
conditions (such as the current conditions in the Asia Pacific region and Latin
America) and interest rates, as well as other factors. In addition, operating
results of some of the Company's business segments are influenced by particular
business cycles and seasonality, as well as other factors such as interest
rates.
COMPETITION. The Company does business in a highly competitive market and
has fewer resources than most of its competitors. Businesses in this market
compete within and outside the United States principally on the basis of price,
product quality, custom design, technical support, reputation, equipment
financing assistance and reliability. Competitive pressures and other factors
could cause the Company to lose market share or could result in decreases in
prices, either of which could have a material adverse effect on its financial
position and results of operations.
RISKS OF DOING BUSINESS IN OTHER COUNTRIES. The Company conducts business
in markets outside the United States, and expects to continue to do so. In
addition to the risk of currency fluctuations, the risks associated with
conducting business outside the United States include: social, political and
economic instability; slower payment of invoices; underdeveloped infrastructure;
underdeveloped legal systems; and nationalization. The Company has not entered
into any currency swap agreements which may reduce these risks. The Company may
enter into such agreements in the future if it is deemed necessary to do so.
Current economic and political conditions in the Asia Pacific and Middle East
regions have affected the Company outlook for potential revenue there. The
Company cannot predict the full impact of this economic instability, but it
could have a material adverse effect on revenues and profits.
The Company has determined that its reportable segments are those that are
based on the Company's method of internal reporting, which segregates its
business by product category and service lines. The Company's reportable
segments are as follows:
Management Operations - The Company provides employee and management
services to operate the Toledo Wastewater Treatment Facility.
Other Domestic Operations - Sales of territory or site licenses and
royalty fees to use N-Viro technology in the United States.
Foreign Operations - Sale of territory or site licenses and royalty
fees to use N-Viro technology in foreign operations.
Research and Development - The Company contracts with Federal and
State agencies to perform or assist in research and development on the Company's
technology.
The accounting policies of the segments are the same as the Company's
significant accounting policies. Fixed assets generating specific revenue are
identified with their respective segments and are accounted for as such in the
internal accounting records. All other assets, including cash and other current
assets and all long-term assets, other than fixed assets, are not identified
with any segments, but rather the Company's administrative functions. The
Company allocates a total of approximately 24% of its labor cost contained in
selling, general, and administrative expenses to the segments, to reflect the
indirect cost of maintaining these segments. All of the net nonoperating income
(expense) are non-apportionable and not allocated to a specific segment. The
Company accounts for and analyzes the operating data for its segments generally
by geographic location, with the exception of the Management Operations and
Research and Development segments. The Management Operations segment represents
both a significant amount of business generated as well as a specific location
and unique type of revenue.
The domestic and foreign operations segments differ in terms of
environmental and municipal legal issues, nature of the waste disposal
infrastructure, political climate and availability of funds for investing in the
Company's technology. These factors have not changed significantly over the
past several years and are not expected to change in the near term.
The Research and Development segment accounts for approximately 2% of the
total year-to-date revenue of the Company, and is unlike any other revenue in
that it is generated as a result of a specific project to conduct initial or
additional ongoing research into the Company's emerging technologies.
The table below presents information about the segment profits and segment
identifiable assets used by the chief operating decision makers of the Company
for the periods ended June 30, 2004 and 2003 (dollars in thousands):
Management Domestic Foreign Research &
Operations Operations Operations Development Total
---------------------------- ----------- ----------- ------------ ------
Quarter Ended June 30, 2004
----------------------------
Revenues . . . . . . . . . . . . $ 494 $ 1,060 $ 13 $ 23 $1,590
Cost of revenues . . . . . . . . 307 811 - - 1,118
Segment profits. . . . . . . . . 187 249 13 23 472
Identifiable assets. . . . . . . 322 76 - - 398
Depreciation . . . . . . . . . . 16 5 - - 21
Quarter Ended June 30, 2003
--------------------------------
Revenues . . . . . . . . . . . . $ 504 $ 868 $ 13 $ 23 $1,408
Cost of revenues . . . . . . . . 368 674 - 20 1,062
Segment profits. . . . . . . . . 136 194 13 3 346
Identifiable assets. . . . . . . 395 93 - - 488
Depreciation . . . . . . . . . . 17 10 - - 27
Six Months Ended June 30, 2004
--------------------------------
Revenues . . . . . . . . . . . . $ 994 $ 1,982 $ 26 $ 46 $3,048
Cost of revenues . . . . . . . . 663 1,476 - 19 2,158
Segment profits. . . . . . . . . 331 506 26 27 890
Identifiable assets. . . . . . . 322 76 - - 398
Depreciation . . . . . . . . . . 32 10 - - 42
Six Months Ended June 30, 2003
--------------------------------
Revenues . . . . . . . . . . . . $ 1,007 $ 1,575 $ 25 $ 46 $2,653
Cost of revenues . . . . . . . . 715 1,216 - 44 1,975
Segment profits. . . . . . . . . 292 359 25 2 678
Identifiable assets. . . . . . . 395 93 - - 488
Depreciation . . . . . . . . . . 31 21 - - 52
A reconciliation of total segment revenues, cost of revenues, and segment
profits to consolidated revenues, cost of revenues, and segment information to
the consolidated financial statements for the periods ended June 30, 2004 and
2003 is as follows (dollars in thousands):
Three Months Ended June 30 Six Months Ended June 30
--------------------------- -------------------------
2004 2003 2004 2003
------- ------- -------- --------
Segment profits:
Segment profits for reportable segments. . . . $ 472 $ 346 $ 890 $ 678
Corporate selling, general and administrative
expenses and research + development costs. . . (497) (644) (1,007) (1,095)
Other income (expense) . . . . . . . . . . . . 83 (87) 18 (105)
------- ------- -------- --------
Consolidated earnings before taxes . . . . . . $ 58 $ (385) $ (99) $ (522)
======= ======= ======== ========
Identifiable assets:
Identifiable assets for reportable segments. . $ 398 $ 488 $ 398 $ 488
Corporate property and equipment . . . . . . . 24 52 24 52
Current assets not allocated to segments . . . 1,428 1,449 1,428 1,449
Intangible and other assets not allocated to
segments . . . . . . . . . . . . . . . . . . . 1,385 2,314 1,385 2,314
Consolidated eliminations. . . . . . . . . . . - (234) - (234)
------- ------- -------- --------
Consolidated assets. . . . . . . . . . . . . . $3,235 $4,069 $ 3,235 $ 4,069
======= ======= ======== ========
Depreciation and amortization:
Depreciation for reportable segments . . . . . $ 21 $ 27 $ 42 $ 52
Corporate depreciation and amortization. . . . 39 42 78 84
------- ------- -------- --------
Consolidated depreciation and amortization . . $ 60 $ 69 $ 120 $ 136
======= ======= ======== ========
NOTE 7. INVESTMENT IN FLORIDA N-VIRO, L. P.
Florida N-Viro, L.P. was formed in January 1996 pursuant to a joint venture
agreement between the Company and VFL Technology Corporation (VFL). The Company
owns a 47.5% interest in the joint venture and accounts for its investment under
the equity method. The Company's limited partner interest in the joint venture
was reflected at a -0- value as of December 31, 2003. Any additional losses
passed through from the partnership were recorded as an increase to the
allowance against the Note Receivable due from the partnership.
Condensed financial information of the partnership for the quarters ended
June 30, 2004 and 2003 is as follows:
For the Quarter Ended June 30
-----------------------------
2004 2003
Net sales . . . . . . . . . . . . . . . . $ 478,237 $603,243
Gross profit (loss) . . . . . . . . . . . (33,864) 30,184
Income (loss) from continuing operations. (128,760) (30,794)
Net income (loss) . . . . . . . . . . . . (128,760) (30,794)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
OVERVIEW
We incorporated in April, 1993, and became a public company on October 12,
1993. Our business strategy is to market the N-Viro Process, which produces a
sludge product with multiple commercial uses having an "exceptional quality" as
defined in the Section 503 Sludge Regulations under the Clean Water Act of 1987.
To date, our revenues have been derived primarily from the licensing of the
N-Viro Process to treat and recycle wastewater sludge generated by municipal
wastewater treatment plants and from the sale to licensees of the alkaline
admixture used in the N-Viro Process. We also operate N-Viro facilities for
third parties on a start-up basis and currently operate one N-Viro facility on a
contract management basis.
COMPARISON OF THREE MONTHS ENDED JUNE 30, 2004 WITH THREE MONTHS ENDED JUNE 30,
2003
Our overall revenue increased $181,000, or 13%, to $1,590,000 for the
quarter ended June 30, 2004 from $1,408,000 for the quarter ended June 30, 2003.
The net increase in revenue was due primarily to the following:
a) Sales of alkaline admixture increased $139,000 from the same period
ended in 2003;
b) Revenue from the service fees for the management of alkaline admixture
increased $27,000 from the same period ended in 2003;
c) Our processing revenue, including facility management revenue, showed a
net decrease of $6,000 over the same period ended in 2003;
d) Licensing of the N-Viro Process showed no activity in the quarter, the
same as in 2003.
e) Miscellaneous revenues increased $21,000 from the same period ended in
2003;
f) Research and development revenue did not change from the same period
ended in 2003.
Our gross profit increased $125,000, or 36%, to $472,000 for the six months
ended June 30, 2004 from $346,000 for the six months ended June 30, 2003, and
the gross profit margin increased to 30% from 25% for the same periods. The
increase in gross profit margin is primarily due to the increase in the number
of ongoing processing facilities generating profit, and the increase in gross
profit margin is primarily due to the decrease in costs associated with the
facility management operation.
Our operating expenses decreased $147,000, or 23%, to $497,000 for the
three months ended June 30, 2004 from $644,000 for the three months ended June
30, 2003. The decrease was primarily due to a net decrease of approximately
$175,000 in attorney, auditing and consulting fees, partially offset by an
increase of approximately $37,000 in additional settlement fees and expenses
relating to the litigation with Strategic Asset Management, Inc. See a further
explanation in "Part II - Other Information, Item 1, Legal Proceedings".
As a result of the foregoing factors, we recorded an operating loss of
$26,000 for the three months ended June 30, 2004 compared to an operating loss
of $298,000 for the three months ended June 30, 2003, a decrease in the loss of
approximately $272,000.
Our net nonoperating income (expense) increased by $170,000 to net
nonoperating income of $83,000 for the three months ended June 30, 2004 from net
nonoperating expense of $87,000 for the three months ended June 30, 2003. The
increase in nonoperating income was primarily due to our recording a one-time
gain on the forgiveness of debt due our patent law firm of approximately
$157,000 (see further discussion under "Liquidity and Capital Resources"), a
decrease in interest expense of $49,000 from 2003 and an increase in interest
income of $11,000, which was paid to the Company by Florida N-Viro. The overall
increase was offset by an increase in the loss of approximately $46,000 in the
equity of a joint venture, from a loss of $15,000 in 2003 to a loss of $61,000
in 2004.
We recorded net income of $58,000 for the three months ended June 30, 2004
compared to a net loss of $385,000 for the same period ended in 2003, a decrease
in the loss of approximately $443,000.
For the three months ended June 30, 2004 and 2003, we have not fully
recognized the tax benefit of the losses incurred in prior periods.
Accordingly, our effective tax rate for each period was zero.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 2004 WITH SIX MONTHS ENDED JUNE 30, 2003
Our overall revenue increased $395,000, or 15%, to $3,048,000 for the six
months ended June 30, 2004 from $2,653,000 for the six months ended June 30,
2003. The net increase in revenue was due primarily to the following:
a) Sales of alkaline admixture increased $195,000 from the same period
ended in 2003;
b) Revenue from the service fees for the management of alkaline admixture
increased $81,000 from the same period ended in 2003;
c) Our processing revenue, including facility management revenue, showed a
net increase of $19,000 over the same period ended in 2003;
d) Licensing of the N-Viro Process showed a net increase of $72,000 from
the same period in 2003, which had $-0- license sales.
e) Miscellaneous revenues increased $28,000 from the same period ended in
2003;
f) Research and development revenue did not change from the same period
ended in 2003.
Our gross profit increased $212,000, or 31%, to $890,000 for the six months
ended June 30, 2004 from $678,000 for the six months ended June 30, 2003, and
the gross profit margin increased to 29% from 26% for the same periods. The
increase in gross profit is primarily due to the increase in revenue from
one-time license fees, and which are at a higher gross profit percentage than
other types of revenue, and the increase in the number of ongoing processing
facilities generating profit. One-time license fees are up-front fees paid by a
licensee for the right to use the patented process without incurring additional,
ongoing royalty payments. The increase in gross profit margin is also primarily
due to the increase in one-time license fees, and to a lesser extent a decrease
in costs associated with the facility management operation
Our operating expenses decreased $89,000, or 8%, to $1,006,000 for the six
months ended June 30, 2004 from $1,095,000 for the six months ended June 30,
2003. The decrease was primarily due to a net decrease of approximately
$221,000 in attorney, auditing and consulting fees, partially offset by an
increase of approximately $97,000 in director-related fees and expenses and
$37,000 in additional settlement fees and expenses relating to the litigation
with Strategic Asset Management, Inc. See a further explanation in "Part II -
Other Information, Item 1, Legal Proceedings". Included in the increase of
$97,000 for director-related costs was $74,000 for the value of unregistered
stock issued to current and former outside directors for board meeting
compensation.
As a result of the foregoing factors, we recorded an operating loss of
$117,000 for the six months ended June 30, 2004 compared to an operating loss of
$417,000 for the six months ended June 30, 2003, a decrease in the loss of
approximately $300,000.
Our net nonoperating income (expense) increased by $123,000 to net
nonoperating income of $18,000 for the six months ended June 30, 2004 from net
nonoperating expense of $105,000 for the six months ended June 30, 2003. The
increase in nonoperating income was primarily due to our recording a one-time
gain on the forgiveness of debt due our patent law firm of approximately
$157,000, a decrease in interest expense of $45,000 from 2003 and an increase in
interest income of $13,000, which was paid to us by Florida N-Viro. Offsetting
the overall increase in net nonoperating income was an increase in the loss of
approximately $92,000 in the equity of a joint venture, to a loss of $105,000 in
2004 from a loss of $13,000 in 2003.
We recorded a net loss of $99,000 for the six months ended June 30, 2004
compared to a net loss of $522,000 for the same period ended in 2003, a decrease
in the loss of approximately $423,000.
For the six months ended June 30, 2004 and 2003, we have not fully
recognized the tax benefit of the losses incurred in prior periods.
Accordingly, our effective tax rate for each period was zero.
LIQUIDITY AND CAPITAL RESOURCES
We had a working capital deficit of $982,000 at June 30, 2004, compared to
a working capital deficit of $1,642,000 at December 31, 2003, an increase in
working capital of $660,000. Current assets at June 30, 2004 included cash and
investments of $146,000 (including restricted cash of $75,000), which is an
increase of $22,000 from December 31, 2003. The increase in working capital was
principally due to the private placement of unregistered common stock with four
stockholders for $435,188, our issuing stock for payment of trade payables for
approximately $254,000 and the exercise of stock warrants and options totaling
approximately $111,000, offset by the operating loss for the six month period.
In the first six months of 2004 our cash flow used by operations was
approximately $165,000, a decrease of approximately $84,000 from the same period
in 2003. This decrease was principally due to a decrease in both the net loss
and the loss from Florida N-Viro totalling approximately $500,000 and cash
received from the issuance of stock of approximately $248,000, reduced by the
change in working capital of approximately $832,000.
In February 2003 we closed on an $845,000 credit facility with Monroe Bank
+ Trust (the "Bank"). This senior debt credit facility was comprised of a
$295,000 four year term note at 7.5% and a line of credit up to $550,000 at
Prime plus 1.5% and secured by a first lien on our all assets. We used the
funds to refinance our prior debt and to provide working capital. We were in
violation of financial covenants governing the credit facility at December 31,
2003, concerning the maintenance of both a tangible net worth amount and
positive debt service coverage ratio for the period, both of which require
positive earnings. The Bank waived this violation in light of our net loss for
the year ended December 31, 2003, but required additional consideration in
exchange for this waiver. In January 2004, we obtained a certificate of deposit
in the amount of $75,000 with the Bank, and transferred custodianship of its
treasury stock to the Bank. In February, 2004, we renewed our line of credit
with the Bank through April, 2004, and in April 2004 it was renewed again
through October, 2004. As part of this renewal, the Bank decreased the maximum
amount available to borrow on the line to $400,000. At June 30, 2004, we had
$300,000 of borrowing capacity under the Credit Facility.
The normal collection period for accounts receivable is approximately 30-60
days for the majority of customers. This is a result of the nature of the
license contracts, type of customer and the amount of time required to obtain
the information to prepare the billing. We did not change our reserve for bad
debts during the first six months of 2004.
During the first six months of 2004, our investment in a 47.5% owned
partnership, Florida N-Viro, L.P., recorded a net loss to us of approximately
$105,000. Cash flow from operations of Florida N-Viro, L.P. was negative,
partially due to the planned closing of one of its operating facilities, but we
believe Florida N-Viro, L.P. will provide adequate cash flow to fund its
operations for 2004.
We are currently active in pursuing a sale of our investment in Florida
N-Viro, L.P., which may provide, in our opinion, additional funds to finance our
cash requirements. There can be no assurance we will successfully complete
these negotiations.
During the first quarter of 2004, an additional 41,500 shares of common
stock were issued to our employees and former directors for stock options
exercised, realizing total proceeds to us of $66,117. Also during the first
quarter of 2004, 50,000 warrants were exercised jointly by J. Patrick Nicholson
and three of his sons, Michael, Robert and Timothy Nicholson, pursuant to the
terms of an Agreement signed in February, 2003 to pledge additional collateral
in securing additional financing to us. These warrants were exercised at $0.90
per share, and we issued unregistered common stock in exchange for the $45,000
in proceeds. The proceeds of the exercises of both the options and warrants
were used for working capital.
Also during the first quarter of 2004, we issued 72,237 shares of
unregistered common stock to two trade creditors, eliminating $162,533 worth of
debt owed by us to such creditors. In addition, 7,329 shares of unregistered
common stock were issued to Phillip Levin and Daniel Haslinger, respectively,
both members of the Board of Directors, in exchange for services rendered to
management incurred from April through December, 2003, for $9,000 each, or a
total of $18,000. An additional 32,760 shares of unregistered common stock were
issued to current and former members of the Board of Directors, to replace stock
options earned as a board member from August 2002 to May 2003 but not granted,
at a total estimated cost of $73,710.
On March 24, 2004, we announced in a Form 8-K that the Board of Directors
had approved a Rights Offering for the beneficial owners of its common stock.
We plan to issue one right to purchase one share of common stock, for each ten
shares of stock beneficially owned. The Rights, which are being issued without
registration, will be non-transferable and exercisable only by the beneficial
owners in whose names they are issued. On April 8, 2004, we announced that the
record date for the Rights Offering was April 16, 2004. If the Rights are
exercised, the proceeds from the offering will be used to supplement our working
capital. To date, no Rights have been issued.
On May 28, 2004, we announced in a Form 8-K that we were renegotiating an
operating contract with our largest customer, the City of Toledo (the "City").
On August 11, 2004, we announced in a press release that the City approved a
resolution on August 10, 2004 to modify and extend our contract for advanced
sewage sludge stabilization treatment with them for an additional five years
through December 31, 2009. Modifications to the contract are that the price per
ton is reduced from $39.60 to $32.00 per ton for the first 35,000 wet tons of
sludge processed, but provides an additional 3,000 wet tons at $25.00 per ton.
The addendum also permits either party to re-open negotiations on pricing due to
increased fuel costs. We expect to reduce our cost of operating this contract
to offset the reduction of revenue.
We reached settlement on trade debt and a note owed to our patent law firm,
which totalled $470,442 through June 30, 2004. The law firm agreed, in exchange
for cash payments totaling $183,268 and registered common stock of the Company
worth $130,000 at the time of delivery, to forgive the balance of $157,174 in
previously billed services and accrued interest. The cash payments were due
from July 14 through July 31, 2004, and all payments were made timely. The
stock is required to be delivered on September 1 and November 1, 2004 in equal
installments. Our total cash saved as a result of this settlement was $287,174.
We are currently completing a private placement of up to $835,188 in
unregistered shares of our common stock. We hope to sell up to 668,151 shares
of common stock at a price per share of $1.25. As announced in a Form 8-K on
June 18, 2004, this price was lowered from the initial offering price of $2.25
per share, and the total amount of the private placement was increased from
$750,000 to $835,188. The price of the associated warrants decreased from $2.85
to $1.85. As of the date of this filing, we have issued 348,150 shares for
total proceeds of $435,188. There can be no assurance that we will be
successful in finding a buyer for the balance of the private offering. The
proceeds of all shares sold from the offering will be used to supplement our
working capital.
We are currently in discussions with several companies in the cement and
fuel industries for the development and commercialization of the patented N-Viro
fuel technology. There can be no assurance that these discussions will be
successful.
We continue to focus on the development of regional biosolids processing
facilities. Currently we are in negotiations with several privatization firms
to permit and develop independent, regional facilities.
We expect continued improvements in operating results for 2004 primarily
due to a lowering of our administrative costs, along with realized and expected
new sources of revenue. Additionally, market developments and ongoing
discussions with companies in the fuel and wastewater industries could provide
enhanced liquidity and positively impact 2004 operations.
We believe that current market trends and increased and more focused
emphasis on our business development efforts provide basis for an optimistic
outlook for 2005 and beyond. The national public attack on Class B levels of
sludge treatment is rapidly moving the market to Class A technologies, of which
the Company's patented N-Viro processes are very cost competitive, and well
established in the market place. There are currently over 40 facilities
worldwide using the N-Viro Process, with most of these for over 10 years, and
five new facilities are expected to come on-line in the next twelve to eighteen
months. The development and patenting of new technologies for animal manure
treatment, bio-fuel and nematode control have the potential to expand our
revenue base over the next five years and beyond. We believe we have sufficient
liquidity to continue operations over the next twelve months.
OFF-BALANCE SHEET ARRANGEMENTS AND OTHER
At June 30, 2004, we did not have any material commercial commitments,
including guarantees or standby repurchase obligations, or any relationships
with unconsolidated entities or financial partnerships, including entities often
referred to as structured finance or special purpose entities or variable
interest entities, which would have been established for the purpose of
facilitating off-balance sheet arrangements or other contractually narrow or
limited purposes.
From time to time, during the normal course of business, we may make
certain indemnities, commitments and guarantees under which we may be required
to make payments in relation to certain transactions. These include: (i)
indemnities to vendors and service providers pertaining to claims based on our
negligence or willful misconduct and (ii) indemnities involving the accuracy of
representations and warranties in certain contracts. Pursuant to Delaware law,
we may indemnify certain officers and directors for certain events or
occurrences while the officer or director is, or was, serving at our request in
such capacity. We also have director and officer insurance coverage that limits
our exposure and enables us to recover a portion of any future amounts that we
may pay for indemnification purposes. We believe the applicable insurance
coverage is generally adequate to cover any estimated potential liability for
which we may provide indemnification. The majority of these indemnities,
commitments and guarantees do not provide for any limitation of the maximum
potential for future payments we could be obligated to make. We have not
recorded any liability for these indemnities, commitments and other guarantees
in the accompanying Consolidated Balance Sheets.
CONTRACTUAL OBLIGATIONS
The following table summarizes our contractual cash obligations at June 30,
2004, and the effect these obligations are expected to have on liquidity and
cash flow in future periods:
Payments Due By Period
footnote Total Less than 1 year 1 - 3 years 4 - 5 years after 5 years
----------- ------------ ------------ ------------ ----------
Purchase obligations . . . . . . . (1) $ 818,100 $ 150,800 $ 306,800 $ 156,000 $ 204,500
Long-term debt obligations . . . . (2) 465,598 304,883 160,715 - -
Operating leases . . . . . . . . . (3) 169,165 61,127 108,038 - -
Capital lease obligations. . . . . - - - - -
Other long-term debt obligations . - - - - -
----------- ------------ ------------ ------------ --------------
Total contractual cash obligations $1,452,863 $ 516,810 $ 575,553 $ 156,000 $ 204,500
=========== ========== =========== =========== ===========
(1) Purchase obligations include agreements to purchase services that are
enforceable and legally binding on the Company and that specify all significant terms and the
approximate timing of the transaction. Purchase obligations exclude agreements that are cancelable
without penalty.
(2) Amounts represent the expected cash payments of our long-term obligations.
(3) Amounts represent the expected cash payments of our operating lease
obligations.
RISK FACTORS
OUR LICENSEES ARE SUBJECT TO EXTENSIVE AND INCREASINGLY STRICT FEDERAL, STATE
AND LOCAL ENVIRONMENTAL REGULATION AND PERMITTING.
Our licensees and their operations are subject to increasingly strict
environmental laws and regulations, including laws and regulations governing the
emission, discharge, disposal and transportation of certain substances and
related odor. Wastewater treatment plants and other plants at which our
biosolids products or processes may be implemented are usually required to have
permits, registrations and/or approvals from state and/or local governments for
the operation of such facilities. Some of our licensee's facilities require
air, wastewater, storm water, biosolids processing, use or siting permits,
registrations or approvals. These licensees may not be able to maintain or
renew their current permits or registrations or to obtain new permits or
registrations. The process of obtaining a required permit or registration can
be lengthy and expensive. They may not be able to meet applicable regulatory or
permit requirements, and therefore may be subject to related legal or judicial
proceedings that could have a materially adverse effect on our income derived
from these licensees.
Any of the permits, registrations or approvals noted above, or related
applications may be subject to denial, revocation or modification, or challenge
by a third party, under various circumstances. In addition, if new
environmental legislation or regulations are enacted or existing legislation or
regulations are amended or are enforced differently, these licensees may be
required to obtain additional, or modify existing, operating permits,
registrations or approvals. For example, while we anticipate obtaining the
permits and approvals necessary for the Bio-Fuel pilot program to commence
operations within the next twelve months, such program may not begin until after
that period or ever. Delay or cancellation with respect to this project could
result from (1) a failure to achieve acceptable air quality levels in
preliminary testing, (2) costs associated with the use of Bio-Fuel
significantly exceeding current estimates, or (3) competing technologies
rendering the Bio-Fuel process less attractive.
Maintaining, modifying or renewing current permits or registrations or
obtaining new permits or registrations after new environmental legislation or
regulations are enacted or existing legislation or regulations are amended or
enforced differently may be subject to public opposition or challenge. Much of
this public opposition and challenge, as well as related complaints, relates to
odor issues, even when our licensees are in compliance with odor requirements
and even though the licensees have worked hard to minimize odor from their
operations. Public misperceptions about the business and any related odor could
influence the governmental process for issuing such permits or registrations or
for responding to any such public opposition or challenge. Community groups
could pressure local municipalities or state governments to implement laws and
regulations which could increase our licensees' costs of their operations that
in turn could have a material and adverse effect on our business and financial
condition.
THE ABILITY TO GROW MAY BE LIMITED BY COMPETITION.
We provide a variety of technology and services relating to the treatment
of wastewater residuals. We are in direct and indirect competition with other
businesses that provide some or all of the same services including regional
residuals management companies and national and international water and
wastewater operations/privatization companies, technology suppliers, municipal
solid waste companies and farming operations. Many of these competitors are
larger, have significantly greater capital resources and would include
contractors who provide wastewater treatment and construction or alternative
waste disposal technologies.
We derive a substantial portion of its revenue from services provided under
municipal contracts, and many of these are subject to competitive bidding. We
also intend to bid on additional municipal contracts, however, we may not be the
successful bidder. Typically, 2-5 groups might bid on a project that meets our
target specifications. In addition, some of its contracts will expire in the
future and those contracts may not be renewed or may be renewed on less
attractive terms. If we are not able to replace revenues from contracts lost
through competitive bidding or from the renegotiation of existing contracts with
other revenues within a reasonable time period, the lost revenue could have a
material and adverse effect on our business, financial condition and results of
operation.
OUR CUSTOMER CONTRACTS MAY BE TERMINATED PRIOR TO THE EXPIRATION OF THEIR TERM.
A substantial portion of our revenue is derived from services provided
under contracts and agreements with existing licensees. Some of these
contracts, especially those contracts with large municipalities, provide for
termination of the contract by the customer after giving relative short notice
(in some cases as little as ten days). In addition, some of these contracts
contain liquidated damages clauses, which may or may not be enforceable in the
event of early termination of the contracts. If one or more of these contracts
are terminated prior to the expiration of its term, and we are not able to
replace revenues from the terminated contract or receive liquidated damages
pursuant to the terms of the contract, the lost revenue could have a material
and adverse effect on our business, financial condition and results of
operations.
A SIGNIFICANT AMOUNT OF OUR BUSINESS COMES FROM A LIMITED NUMBER OF CUSTOMERS
AND OUR REVENUE AND PROFITS COULD DECREASE SIGNIFICANTLY IF WE LOST ONE OR MORE
OF THEM AS CUSTOMERS.
Our business depends on provision of services to a limited number of
customers. One or more of these customers may stop contracting for services
from us or may substantially reduce the amount of services we provide them. Any
cancellation, deferral or significant reduction in the services we provide these
principal customers or a significant number of smaller customers could seriously
harm our business and financial condition. For the quarter ended June 30, 2004,
our single largest customer accounted for approximately 34 percent of gross
revenue and the top three customers accounted for approximately 67 percent of
gross revenue.
WE ARE AFFECTED BY UNUSUALLY ADVERSE WEATHER CONDITIONS.
Our business is adversely affected by unusual weather conditions and
unseasonably heavy rainfall which can temporarily reduce the availability of
land application sites in close proximity to our operations. In addition,
revenues and operational results are adversely affected during months of
inclement weather which limits the level of land application that can be
performed. Long periods of adverse weather could have a material negative
effect on our business and financial condition.
FUEL COST VARIATION COULD AFFECT OPERATING RESULTS AND EXPENSES.
The price and supply of fuel is unpredictable and fluctuates based on
events outside our control, including demand for oil and gas, actions by OPEC
and other oil and gas producers, and war in oil producing countries. Because
fuel is needed for the trucks that transport the processing materials and
supplies for our customers, price escalations or reductions in the supply of
fuel could increase operating expenses and have a negative impact on the results
of operations. We are not always able to pass through all or part of the
increased fuel costs due to the terms of certain customers' contracts and the
inability to negotiate such pass through costs in a timely manner. Recent
increases in fuel costs have approximated 3-5% of our costs, reducing our gross
profit margin from these operations 1-2%.
WE ARE DEPENDENT ON THE MEMBERS OF ITS MANAGEMENT TEAM.
We are highly dependent on the services of its management team, the loss of
any of whom may have a material adverse effect on its business and financial
condition.
We have entered into employment agreements with certain members of our
management team, which contain non-compete and other provisions. The laws of
each state differ concerning the enforceability of non-competition agreements.
We cannot predict with certainty whether a court will enforce a non-compete
covenant in any given situation based on the facts and circumstances at that
time.
OUR INTELLECTUAL PROPERTY MAY BE MISAPPROPRIATED OR SUBJECT TO CLAIMS OF
INFRINGEMENT.
We attempt to protect our intellectual property rights through a
combination of patent, trademark, and trade secret laws, as well as licensing
agreements. Our failure to obtain or maintain adequate protection of our
intellectual property rights for any reason could have a material adverse effect
on our business and financial condition.
Our competitors, many of whom have substantially greater resources and have
made substantial investments in competing technologies, may have applied for or
obtained, or may in the future apply for and obtain, patents that will prevent,
limit or otherwise interfere with our ability to offer services. We have not
conducted an independent review of patents issued to third parties. Moreover,
our financial resources provide limitations on our ability to enforce our
intellectual property rights through litigation.
We also rely on unpatented proprietary technology. It is possible that
others will independently develop the same or similar technology or otherwise
obtain access to its unpatented technology. If we areunable to maintain the
proprietary nature of our technologies, we could be materially adversely
affected.
FORWARD-LOOKING STATEMENTS
This 10-QSB contains statements that are forward-looking. We caution that
words used in this document such as "expects," "anticipates," "believes," "may,"
and "optimistic," as well as similar words and expressions used herein, identify
and refer to statements describing events that may or may not occur in the
future. These forward-looking statements and the matters to which they refer
are subject to considerable uncertainty that may cause actual results to be
materially different from those described herein. There are numerous factors
that could cause actual results to be different than those anticipated or
predicted by us, including: (i) a deterioration in economic conditions in
general; (ii) a decrease in demand for our products or services in particular;
(iii) our loss of a key employee or employees; (iv) regulatory changes,
including changes in environmental regulations, that may have an adverse affect
on the demand for our products or services; (v) increases in our operating
expenses resulting from increased costs of labor and/or consulting services; and
(vi) a failure to collect upon or otherwise secure the benefits of existing
contractual commitments with third parties, including our customers. This list
provides examples of factors that could affect the results described by
forward-looking statements contained in this Form 10-QSB; however, this list is
not exhaustive and many other factors could impact the Company's business and it
is impossible to predict with any accuracy which factors could result in
negative impacts. Although we believe that the forward-looking statements
contained in this Form 10-QSB are reasonable, we cannot provide you with any
guarantee that the anticipated results willnotbe adverse andthat the anticipated
results will be achieved. All forward-looking statements in this Form 10-QSB
are expressly qualified in their entirety by the cautionary statements contained
in this section and you are cautioned not to place undue reliance on the
forward-looking statements contained in this Form 10-QSB. In addition to the
risks listed above, other risks may arise in the future, and we disclaim any
obligation to update information contained in any forward-looking statement.
ITEM 3. CONTROLS AND PROCEDURES
As of June 30, 2004, under the direction of our Chief Executive Officer and
Chief Financial Officer, we evaluated the effectiveness of the design and
operation of our disclosure controls and procedures, as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended.
We concluded that our disclosure controls and procedures were effective as of
June 30, 2004, such that the information required to be disclosed in our SEC
reports is recorded, processed, summarized and reported within the time periods
specified by the SEC's rules and forms, and is accumulated and communicated to
management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate to allow timely decisions regarding required disclosure.
There were no changes in our internal controls over financial reporting
during the quarter ended June 30, 2004 that have materially affected, or are
reasonably likely to materially affect, our internal controls over financial
reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In May, 2004, the Court of Chancery of the State of Delaware for New Castle
County (the "Court") issued a response to the proposed settlement in
negotiations between us, certain directors and Strategic Asset Management, Inc.
("SAMI"), as a result of the hearing with the Court on December 15, 2003. This
response is attached to this Form 10-QSB as Exhibit 99.2. The details of this
settlement were disclosed in a Form 8-K filed on August 29, 2003. As a result
of this memo, we negotiatied a new Settlement Agreement and Release (the
"Agreement") between us, SAMI and certain directors that was signed by all
parties by June 29, 2004. This Agreement is attached to this Form 10-QSB as
Exhibit 99.3. Principal monetary changes to the 2003 agreement are the removal
of stock warrants due SAMI, but additional cash due of $64,000 for estimated
costs and expenses of SAMI. The Agreement will not become effective until
approved by the Court, which has not happened as of the date of this filing.
From time to time we are involved in legal actions arising in the ordinary
course of business. With respect to these matters, we believe we have adequate
legal defenses and/or provided adequate accruals for related costs such that the
ultimate outcome will not have a material adverse effect on our future financial
position or results of operations.
ITEM 2. CHANGES IN SECURITIES AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY
SECURITIES
From January 12, 2004 through February 17, 2004, an additional 41,500
shares of unregistered common stock were issued to employees and former
directors of the Company for stock options exercised, realizing total proceeds
to us of $66,117. On January 29, 2004, 50,000 warrants were exercised jointly
by J. Patrick Nicholson and three of his sons, Michael, Robert and Timothy
Nicholson, pursuant to the terms of an Agreement signed in February, 2003 to
pledge additional collateral in securing additional financing to us. These
warrants were exercised at $0.90 per share, and we issued 50,000 unregistered
shares of common stock in exchange for the $45,000 in proceeds.
On or before February 13, 2004, we issued 72,237 shares of unregistered
common stock to two trade creditors, eliminating $162,533 worth of debt owed by
us to such creditors. On January 9, 2004, 7,329 shares of unregistered common
stock were issued to Phillip Levin and Daniel Haslinger, respectively, both
members of the Board of Directors, in exchange for services rendered to
management incurred from April through December, 2003, in the amount of $9,000
each, or a total of $18,000. On March 17, 2004, an additional 32,760 shares of
unregistered common stock were issued to current and former members of the Board
of Directors, to replace the automatic awards of stock options which were not
granted to the non-employee directors after May 10, 2003 as a result of the
termination of our 1998 Amended and Restated Stock Option Plan and the failure
of the stockholders to approve the proposed 2003 Stock Option Plan at the 2003
annual meeting, at a total estimated cost of $73,710.
On May 20, 2004, we contracted with Ophir Holdings, Inc. ("Ophir") to
provide consulting services for non-exclusive financial public relations through
December 31, 2004. In exchange, we issued a total of 50,000 shares of
unregistered common stock. Ophir was listed in our 2004 Definitive Proxy
statement filed in April 2004 as a beneficial owner of 230,472 shares or 7.42%
of the common stock of the Company as of March 24, 2004. On May 17, 2004, Ophir
filed a Form 13D stating that it was the beneficial owner of -0- shares of our
common stock.
We are currently completing a private placement of up to $835,188 in
unregistered shares of its common stock. We hope to sell up to 668,151 shares
of common stock at a price per share of $1.25. As announced in a Form 8-K on
June 18, 2004, this price was lowered from $2.25 per share, the total amount of
the private placement increased from $750,000 and the price of the associated
warrants decreased to $1.85 from $2.85. During February and early March, 2004,
we issued 193,417 shares for total proceeds of $435,188. To reflect the
re-pricing, in June, 2004 we issued an additional 154,734 shares for no
additional proceeds.
All of the foregoing issuances were exempt from registration pursuant to
Section 4(2) of the Securities and Exchange Act of 1933, and no underwriters or
placement agents were involved.
Item 3. Defaults Upon Senior Securities
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
The Company issued a press release dated August 11, 2004, announcing
approval of an extension to a contract with the City of Toledo, which is
attached as Exhibit 99.4. Once the City of Toledo has issued an executed
addendum that extends the contract, we will disclose the addendum in a report on
either a Form 8-K or other periodic filing as required.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
See Exhibit Index below.
(b) Reports on Form 8-K:
We filed a report on Form 8-K on April 8, 2004, to announce that we
had set the record date for the Rights Offering as April 16, 2004.
We filed a report on Form 8-K on May 28, 2004, dated May 28, 2004, to
announce we were renegotiating our contract with the City of Toledo.
We filed a report on Form 8-K on June 18, 2004, dated June 18, 2004,
to announce the approval by the Board of Directors of a change in the unit price
of an equity investment agreement.
N-VIRO INTERNATIONAL CORPORATION
Pursuant to the requirements 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.
N-VIRO INTERNATIONAL CORPORATION
Date: August 16, 2004 /s/ Phillip I. Levin
----------------- -----------------------
Phillip I. Levin
Chief Executive Officer and President
(Principal Executive Officer)
Date: August 16, 2004 /s/ James K. McHugh
----------------- ----------------------
James K. McHugh
Chief Financial Officer, Secretary and Treasurer
(Principal Financial & Accounting Officer)
EXHIBIT INDEX
=============
EXHIBIT NO. DOCUMENT
============ ========
31.1 Certification of CEO Pursuant to Section 302 of the Sarbanes
- Oxley Act of 2002.
31.2 Certification of CFO Pursuant to Section 302 of the Sarbanes
- Oxley Act of 2002.
32.1 Certification of CEO Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of CFO Pursuant to Section 906 of the Sarbanes
- Oxley Act of 2002.
99.1 Financial Public Relations Agreement with Ophir Holdings,
Inc.
99.2 Court of Chancery of the State of Delaware memo dated May 20,
2004.
99.3 Settlement Agreement and Release between Strategic Asset Management,
Inc., N-Viro International Corporation and certain directors.
99.4 Press Release dated August 11, 2004,announcing approval of an extension
to a contract with the City of Toledo.
Exhibit 31.1
------------
N-Viro International Corporation
Certifications
I, Phillip I. Levin, President and Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of N-Viro
International Corporation;
2. Based on my knowledge, this quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in the Report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant 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 registrant, 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 registrant'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 registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant'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 registrant'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 registrant's internal control over
financial reporting.
Date: August 16, 2004 /s/ Phillip I. Levin
-----------------------
President and Chief Executive Officer
Exhibit 31.2
------------
N-Viro International Corporation
Certifications
I, James K. McHugh, Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of N-Viro
International Corporation;
2. Based on my knowledge, this quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in the Report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant 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 registrant, 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 registrant'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 registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant'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 registrant'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 registrant's internal control over
financial reporting.
Date: August 16, 2004 /s/ James K. McHugh
----------------------
Chief Financial Officer
Exhibit32.1
-----------
CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Phillip I. Levin, the Chief Executive Officer of N-Viro International
Corporation, certify that (i) the Form 10-QSB fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934
and (ii) the information contained in the Form 10-QSB fairly presents, in all
material respects, the financial condition and results of operations of N-Viro
International Corporation.
/s/ Phillip I. Levin
- -----------------------
Phillip I. Levin, Chief Executive Officer
August 16, 2004
Exhibit 32.2
------------
CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, James K. McHugh, the Chief Financial Officer of N-Viro International
Corporation, certify that (i) the Form 10-QSB fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934
and (ii) the information contained in the Form 10-QSB fairly presents, in all
material respects, the financial condition and results of operations of N-Viro
International Corporation.
/s/ James K. McHugh
- ----------------------
James K. McHugh, Chief Financial Officer
August 16, 2004
Exhibit 99.1
------------
FINANCIAL PUBLIC RELATIONS AGREEMENT
THIS FINANCIAL PUBLIC RELATIONS AGREEMENT, made as of this 18th day of May,
2004, by and between:
N-VIRO INTERNATIONAL CORPORATION, a Delaware corporation having its principal
place of business located at 3450 W. Central Avenue, Suite 328, Toledo, Ohio
43606
(hereinafter referred to as "COMPANY")
AND
OPHIR HOLDINGS, INC. a Nevada corporation having its principal office located at
600 Boston Neck Road, North Kingstown, Rhode Island 02852(hereinafter referred
to as the "CONSULTANT"),
WITNESSETH THAT, WHEREAS, the COMPANY, a public corporation, requires financial
public relations services and desires to employ CONSULTANT, as an independent
contractor consultant, to provide such services, and CONSULTANT is agreeable to
such employment, and the parties desire a written document formalizing their
relationship and evidencing the terms of their agreement;
NOW, THEREFORE, intending to be legally bound and in consideration of the
mutual promises and covenants, the parties have agreed as follows:
1. APPOINTMENT. The COMPANY hereby appoints CONSULTANT as its
non-exclusive financial public relations counsel and hereby retains and employs
CONSULTANT, on the terms and conditions of this Agreement. CONSULTANT accepts
such appointment and agrees to perform the services upon the terms and
conditions of this Agreement.
2. TERM. (a) The term of this Agreement shall begin on the date
executed by the COMPANY and shall terminate on December 31, 2004.
(b) Prior to the execution of this Financial Consulting Agreement, CONSULTANT
has provided services to the COMPANY in anticipation of the execution of this
Agreement. The compensation provided herein is intended to cover such services
and CONSULTANT waives any claim to separate compensation for such previously
rendered services.
(c) Services of the CONSULTANT commenced during the term of this agreement may
continue beyond the term hereof, and the compensation provided herein is
intended to cover any such continuation.
3. SERVICES. (a) CONSULTANT shall act, generally, as a non-exclusive
financial consultant, advising the COMPANY about strategic options to obtain
financing, either debt or equity, and the obtaining of and utilization of
financial public relations counsel. If COMPANY shall so request, from time to
time, CONSULTANT shall introduce COMPANY to potential lenders and investors,
whether insurance companies, commercial banks, merchant banks, venture capital
funds, REIT's, mortgage companies, or other institutional lenders or private
individuals. CONSULTANT shall have no authority to commit the COMPANY in any way
or on any basis to any financing. (b) CONSULTANT shall assist COMPANY in the
initial preparation of a registration statement, to be reviewed, corrected and
fifed by the COMPANY's securities counsel with the SEC for registration of the:
(i) common stock to be issued pursuant to the previously authorized and
announced stockholders' rights offering upon exercise of those rights;
(ii) common stock to be issued upon the exercise of the warrants issued in
the recently conducted private placement (as an inducement to the holders
thereof to exercise such warrants currently); and
(iii) common stock issued in the recently conducted private placement for
those investors who elect to utilize their piggy-back registration rights.
(c) As the COMPANY shall request or direct, CONSULTANT shall assist in
establishing, and advise the COMPANY with respect to: shareholder meetings;
interviews of COMPANY officers by the financial media; and interviews of COMPANY
officers by analysts, market makers, broker-dealers, and other members of the
financial community.
(d) CONSULTANT shall seek to make the COMPANY, its management, its products, and
its financial situation and prospects, known to the financial press and
publications, broker-dealers, mutual funds, institutional investors, market
makers, broker-dealers, and other members of the financial community.
(e) As the COMPANY shall request or direct, CONSULTANT shall act, generally, as
a financial public relations counselor to the COMPANY, including: (1)
introducing the COMPANY to broker-dealers, market makers, banks, financial
advisors, financial institutions and potential investors; (2) introducing the
COMPANY to potential business partners and customers; and (3) arranging
interviews and analyst meetings, and securing invitation of the COMPANY to
appropriate conferences and business events, and similar financial public
relations events.
4. LIMITATIONS ON SERVICES. The parties recognize that certain
responsibilities and obligations are imposed by U. S. federal and state
securities laws and by various
foreign securities laws as well as by the applicable rules and regulations of U.
S. and foreign stock exchanges, the National Association of Securities Dealers,
in-house "due diligence" or "compliance" departments of brokerage houses, etc.
Accordingly, CONSULTANT agrees:
(a) CONSULTANT shall NOT release any financial or other information or
data about the COMPANY without the consent and approval of the COMPANY.
(b) CONSULTANT shall NOT conduct any meetings with financial analysts
without informing the COMPANY in advance of the proposed meeting and the format
or agenda of such meeting and the COMPANY may elect to have a representative of
the COMPANY attend at such meeting.
(c) CONSULTANT shall NOT release any information or data about the COMPANY
to any selected or limited person(s), entity, or group if CONSULTANT is aware
that such information or data has not been generally released or promulgated.
(d) After notice by the COMPANY of filing for a proposed public
offering of securities of the COMPANY, and during any period of restriction on
publicity, CONSULTANT shall not engage in any public relations efforts not in
the normal course without approval of counsel for the COMPANY and of counsel for
the underwriter(s), if any.
(e) CONSULTANT shall NOT take any action or advise or knowingly permit
the COMPANY to take any action, which would violate any foreign securities laws
or rules and regulations issued thereunder.
(f) After notice by the COMPANY of any placement of its securities pursuant
to the provisions of Regulation S and during any period of restriction on
publicity, CONSULTANT shall NOT violate the publicity provisions of Regulation
S.
5. DUTIES OF COMPANY. (a) COMPANY shall supply CONSULTANT, on a regular
and timely basis, with all approved data and information about the COMPANY, its
management, its products, and its operations and COMPANY shall be responsible
for advising CONSULTANT of any facts which would affect the accuracy of any
prior data and information previously supplied to CONSULTANT so that CONSULTANT
may take corrective action.
(b) COMPANY shall promptly supply CONSULTANT: with full and complete
copies of all filings with all federal and state securities agencies; with full
and complete copies of all filings with all U. S., Canadian and European stock
exchanges; with full and complete copies of all shareholder reports and
communications whether or not prepared with CONSULTANT's assistance; with all
data and information supplied to any analyst, broker-dealer, market maker, or
other member of the financial community; and with all product/services
brochures, sales materials, etc.
(c) COMPANY shall promptly notify CONSULTANT of the filing of any
registration statement for the sale of securities, the making of any placement
pursuant to Regulation 5, and of any other event which triggers any restrictions
on publicity, together with a statement as to the countries included within the
publicity restriction requirements.
(d) COMPANY shall contemporaneously notify CONSULTANT if any
information or data being supplied to CONSULTANT has not been generally released
or promulgated.
6. REPRESENTATION AND INDEMNIFICATION. (a) The COMPANY shall be deemed
to make a continuing representation of the accuracy of any and all material
facts, material information, and material data which it supplies to CONSULTANT
and the COMPANY acknowledges its awareness that CONSULTANT will rely on such
continuing representation in disseminating such information and otherwise
performing their public relations functions.
(b) CONSULTANT, in the absence of notice in writing from COMPANY, will
rely on the continuing accuracy of material, information, and data supplied by
the COMPANY.
(c) COMPANY hereby agrees to indemnify CONSULTANT against, and to hold
CONSULTANT harmless from, any claims, demands, suits, loss, damages, and etc.
arising out of CONSULTANT's reliance upon the accuracy and continuing accuracy
of such material facts, material information, and material data, unless
CONSULTANT has been negligent in fulfilling its duties and obligations
hereunder.
(d) COMPANY hereby agrees to indemnify CONSULTANT against, and to hold
CONSULTANT harmless from, any claims, demands, suits, losses, damages, etc.
arising out of CONSULTANT's reliance on the general availability of information
supplied to CONSULTANT and CONSULTANT's ability to promulgate such information,
unless CONSULTANT has been negligent in fulfilling their duties and obligations
hereunder.
(e) COMPANY hereby authorizes CONSULTANT to issue, in CONSULTANT's sole
discretion, such corrective, amendatory, supplemental, or explanatory press
releases, shareholder communications and reports, or data supplied to analysts,
broker-dealers, market makers, or other members of the financial community.
7. COMPENSATION. (a) For its services hereunder COMPANY shall issue to
CONSULTANT Fifty Thousand (50,000) shares of its common stock. The shares to be
issued to CONSULTANT for its services are being issued in a private transaction
and shall be restricted as to further sale or transfer. Certificates issued for
the shares shall bear the usual restrictive legends and the COMPANY shall issue
"Stop Transfer" instructions to its Transfer Agent with respect to such shares.
However, such shares shall have piggy-back registration rights and shall be
includable in the registration
statement referred to above. 25,000 of such shares shall be issued upon the
execution hereof and the other 25,000 shares shall be issued within three (3)
business days after June 30, 2004.
(b) COMPANY shall reimburse CONSULTANT for all reasonable costs
incurred by CONSULTANT in providing the foregoing services, including but not
limited to wire service distribution costs, out-of-pocket expenses for travel,
entertainment, telephone/facsimile charges, and postage and delivery service
charges (e.g., Federal Express) as well as compensation to third party vendors,
copywriters, staff writers, art and graphic personnel, printing, etc. CONSULTANT
shall obtain COMPANY's prior written consent to all costs in excess of $1,000
and shall provide adequate documentation of all costs for which reimbursement is
sought.
(c) For all special services, not within the scope of this Agreement,
COMPANY shall pay CONSULTANT such fees, costs, and expenses as, and when, the
parties shall determine in advance of performance of the special services
provided that COMPANY has agreed in advance in writing to the performance of the
special services on behalf of the COMPANY.
8. CONFIDENTIAL INFORMATION. (a) The relationship between COMPANY and
CONSULTANT will be one of trust and confidence and there may have been and/or
may be financial information, related trade secrets and proprietary business
information of COMPANY disclosed or made accessible to CONSULTANT which may
include, but not be limited to, the records of COMPANY dealing with sales,
income, clients, services, products, prices, and other items relative thereto
(collectively and individually referred to as the "Confidential Information").
COMPANY may, in its discretion, provide CONSULTANT with such promotional
materials, samples of its merchandise and goods, demonstration products,
catalogues, and other sales materials relative thereto (collectively and
individually referred to as the "Sales Materials").
(b) CONSULTANT acknowledges that the Confidential Information and Sales
Materials are extremely valuable and important assets of COMPANY and that the
unauthorized use of the Confidential Information and/or Sales Materials would
cause irreparable economic and business injury to COMPANY.
(c) CONSULTANT shall hold the Confidential Information and Sales Materials in
strict confidence and in trust for COMPANY and shall not disclose or otherwise
communicate, provide or reveal in any manner whatsoever any of the Confidential
Information and Sales Materials to any person or entity without the prior
written consent of COMPANY.
(d) The Confidential Information and Sales Materials shall be used solely for
the benefit of COMPANY and no other purposes without the express written consent
of
COMPANY.
(e) Upon termination of this Agreement, CONSULTANT shall return to COMPANY,
without demand from COMPANY, and CONSULTANT shall not retain, any Confidential
Information and Sales Materials disclosed or provided to CONSULTANT, including,
but not limited to, all originals, copies, reproductions, notes, facsimiles,
samples and products thereof.
(f) CONSULTANT acknowledges that the Confidential Information and Sales
Materials, regardless of form, are, and shall always remain, the sole and
exclusive property of
COMPANY.
(g) CONSULTANT shall indemnify, defend and hold COMPANY harmless against the
loss, damage or destruction of the Confidential Information and Sales Materials,
including the reimbursement of COMPANY for any costs or fees (including
attorneys' fees) incurred by COMPANY in reacquiring, protecting and/or defending
the Confidential Information and Sales Materials."
9. RELATIONSHIP OF PARTIES. CONSULTANT is an independent contractor,
responsible for compensation of its own agents, employees and representatives,
as well as all applicable withholding therefrom and taxes thereon (including
unemployment compensation) and all workmen's compensation insurance. This
Agreement does not establish any partnership, joint venture, or other business
entity or association between the parties and no party is intended to have any
interest in the business or property of the other by reason of this Agreement.
10. TERMINATION. This Agreement may be terminated by either the Company
or the CONSULTANT prior to the expiration of the term provided in Paragraph 2
above as follows:
(a) Upon failure of the other party to cure a default under, or a breach of,
this agreement within thirty (30) days after written notice is given as to such
default or breach by the terminating party;
(b) Upon the bankruptcy or liquidation of the other party; whether
voluntary or involuntary;
(c) Upon the other party taking the benefit of any insolvency law; and/or
(d) Upon the other party having or applying for a receiver appointed
for all or a substantial part of such party's assets or business.
11. ATTORNEY FEES. Should a party default in the terms or conditions of
this Agreement and suit be filed as a result of such default, the prevailing
party shall be entitled to recover all costs incurred as a result of such
default including all costs and reasonable attorney fees, expenses and court
costs through trial and appeal.
12. WAIVER OF BREACH. The waiver by a party of a breach of any
provision of this Agreement by another party shall not operate or be construed
as a waiver of any subsequent breach by the breaching party.
13. ASSIGNMENT. The rights and obligations of the parties under this
Agreement shall inure to the benefit of, and shall be binding upon, the
successors and assigns of the parties.
14. NOTICES. Any notice required or permitted to be given under this
Agreement shall be sufficient if in writing, and if sent by certified mail,
return receipt requested, to the principal office of the party being notified.
15. ENTIRE AGREEMENT. This instrument contains the entire agreement of
the parties and may be modified only be agreement in writing, signed by the
party against whom enforcement of any waiver, change, modification, extension or
discharge is sought. If any provision of this Agreement is declared void, such
provision shall be deemed severed from this Agreement, which shall otherwise
remain in full force and effect.
11. GOVERNING LAW. This Agreement shall be a contract made in the State
of Delaware and shall be interpreted and governed by, and construed in
accordance with, the laws of the State of Delaware.
12. TAXES. Any and all taxes, excises, assessments, levies, interest
and penalties, which may be assessed, levied, demanded, or imposed by any
governmental agency in connection with this Agreement, shall be paid by the
party upon which they are imposed and shall be the sole obligation of such
party.
13. ARBITRATION. Any controversy or claim arising out of or relating to
this Agreement shall be settled by arbitration. The parties shall arbitrate any
and all disputes or claims arising out of or relating to the construction or
enforcement of this Agreement, or the Parties' relationships in connection
herewith, through the procedures and policies of the American Arbitration
Association before a panel of three (3) arbitrators in Toledo, Ohio, unless
other procedures are agreed upon in writing between the Parties. The
determination of the arbitrators shall be binding and final upon all Parties.
The award of the arbitrators may be filed with a court of jurisdiction over the
matter and judgment may be entered by the court upon the arbitration award and
execution may be issued upon the judgment. The cost for the arbitration shall be
split equally between the Parties.
14. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto, intending to be legally bound, have
executed this Agreement.
N-VIRO INTERNATIONAL CORPORATION
By: /s/ James K. McHugh
----------------------
James K. McHugh, CFO
OPHIR HOLDINGS, INC.
By: /s/ Roby K. Mattiace
-----------------------
Roby K. Mattiace, President
Exhibit 99.2
------------
COURT OF CHANCERY
OF THE
STATE OF DELAWARE
JOHN W. NOBLE 417 S. STATE STREET
VICE CHANCELLOR DOVER, DELAWARE 19901
TELEPHONE: (302) 739-4397
FACSIMILE: (302) 739-6179
May 20, 2004
Bayard J. Snyder, Esquire Michael F. Bonkowski, Esquire
Snyder & Associates, P.A. Saul Ewing LLP
300 Delaware Avenue, #1014 222 Delaware Avenue, #1200
P.O. Box 90 P.O. Box 1266
Wilmington, DE 19899-0090 Wilmington, DE 19899-1266
Re: Strategic Asset Management, Inc. v. Nicholson, et al. C.A. No. 20360-NC
Date Submitted: December 22, 2003
Dear Counsel:
Pending is a motion to approve a proposed settlement of this derivative
action. For the reasons set forth below, the motion is denied.
Plaintiff Strategic Asset Management, Inc. ("SAMI"), a shareholder of
Nominal Defendant N-Viro International Corporation ("N-Viro"), brought this
action to challenge the conduct of N-Viro's Board which allegedly was dominated
by N-Viro's founder and chairman, Defendant J. Patrick Nicholson ("Nicholson").
SAMI's complaint focused on the efforts of N-Viro's directors, other than R.
Francis DiPrete ("DiPrete"), SAMI's president, to entrench themselves and to
award unreasonable compensation to Nicholson.
Strategic Asset Management, Inc. v. Nicholson, et al.
C.A. No. 20360-NC
May 20, 2004
Page 2
All defendants, except for Nicholson,1 have entered into the Settlement
Agreement and Release (the "Settlement Agreement") which the Court is now being
asked to approve. 2
SAMI asserts that its efforts have conferred numerous benefits upon N-Viro.
Most of these benefits relate to securing the departure of Nicholson as N-Viro'
s chief executive officer and adjusting compensation obligations of N-Viro to
Nicholson. The Settlement Agreement, however, pays scant express attention to
Nicholson. It provides that N-Viro will vigorously contest any litigation or
arbitration proceedings with Nicholson and that, under certain circumstances,
Nicholson may continue to provide consulting services for N-Viro.
1 Thus, all members of the Board, except for Nicholson and DiPrete, (the
"Settling Defendants") are participating in the proposed settlement.
2 The scope of the Court's role in evaluating proposed settlements of
derivative actions and class actions is bounded by two sometimes competing
policy considerations. First, there is a policy in favor of voluntary resolution
of contested matters. Second, because of the fiduciary obligations borne by
representative plaintiffs in derivative actions and class actions, the Court
must satisfy\y itself of the "intrinsic fairness" of the proposed settlement.
This task requires the Court to consider the claims and defenses, to evaluate
the particular legal and factual circumstances of the case at hand, and "then to
apply its own business judgment in determining whether the settlement is
reasonable in light of these factors." Nottingham Partners v. Dana, 564 A.2d
1089, 1102 (Del. 1989) (quoting Polk v. Good, 507 A.2d 531, 535 (Del. 1986)).
The burden of persuasion rests upon the proponent of the settlement. See In re
MAXXAM, Inc./Federated Dev. S 'holders Litig., 659 A.2d 760, 768 (Del. Ch.
1995).
Strategic Asset Management, Inc. v. Nicholson, et al.
C.A. No. 20360-NC
May 20, 2004
Page 3
Otherwise, the Settlement Agreement addresses releases, including releases
for the Settling Defendants, and fees and expenses to be paid to both SAMI's
attorneys and to SAMI. The Settlement Agreement provides that "in full
satisfaction of all claims by SAMI for its time and energy expended in this
matter, N-Viro shall issue SAMI 75,000 warrants." These warrants have an
exercise price of $0.72 per share. At the time of settlement, the underlying
shares of N-Viro were worth slightly more than $1.00. By the time of the
settlement hearing, N-Viro's stock had appreciated to $3.60 per share.
Interestingly, the Settlement Agreement, although providing releases for the
benefit of the Settling Defendants, imposes no obligations on them and does not
recite that they have otherwise contributed to resolution of this matter except
for agreeing with the terms of the Settlement Agreement. I also note that under
the Settlement Agreement: N-Viro would release SAMI, SAMI would release the
Settling Defendants, but N-Viro would not release the Settling Defendants.
Certain objectors oppose the settlement because of the issuance of warrants
and contest the authority of the Board to approve a grant of warrants under the
current circumstances. My reluctance to approve the settlement is more
fundamental.
While N-Viro's stock was trading for a little more than $1.00 per share at
the time the parties negotiated the Settlement Agreement, the Court cannot
ignore the significant
Strategic Asset Management, Inc. v. Nicholson, et al.
C.A. No. 20360-NC
May 20, 2004
Page 4
increase in price that had occurred by the time of the settlement hearing. SAMI
points out that, after exercise of the warrants, transfer of the securities it
receives will be restricted and, therefore, a marketability discount should be
applied to assess the potential value of the warrants to SAMI. SAMI takes the
position that a 35% discount would be appropriate. Accepting SAMI's proposed
discount would leave an effective share price upon exercise, assuming that
occurred on the date of the settlement hearing, of $2.34. Thus, at a reasonable
minimum, the warrants to be conferred upon SAMI would then have had an
approximate value of $120,000: ($2.34 share price minus $0.72 exercise price)
(75,000 warrants). I acknowledge that any award tied to stock price will likely
fluctuate in value between the time of the settlement and the time of the
settlement hearing; nevertheless, the economic reality, as of the date of the
settlement hearing, is a significant factor of the Court's analysis.
SAMI seeks an award by the Court to compensate it for its time and effort
in pursuing this matter. Its efforts were undertaken by DiPrete, an officer of
SAMI and a director of N-Viro. Thus, DiPrete is indirectly seeking compensation
from N-Viro for his efforts, pursued apparently on behalf of SAMI, to prosecute
this litigation. I note, however, that it is difficult to perform any rational
allocation between his efforts
Strategic Asset Management, Inc. v. Nicholson, et al.
C.A. No. 20360-NC
May 20, 2004
Page 5
undertaken on behalf of SAMI and those undertaken in his capacity as an N-Viro
director and fiduciary.
SAMI has sought to justify the amount of the benefits that would accrue to
it, (i.e., the 75,000 warrants with an exercise price of $0.72), with a
submittal evidencing that SAMI incurred overhead costs of $12,000 (i.e., $1,000
per month for a year) in its efforts and human resources costs (i.e., DiPrete's
time) in the amount of $84,800: (seven hours per week) ($200 per hour) (52
weeks). Even with SAMI's projected marketability discount, the net value of the
stock after exercise of the warrants (i.e., assuming a conversion value of $2.34
per share instead of the market value at settlement of $3.60 per share) would
provide a bonus to SAMI in an approximate amount of $35,000 over costs
identified.3
I now turn to my nonmonetary concerns about the Settlement Agreement.
First, although in unique circumstances an award to the representative plaintiff
might be appropriate for its efforts, the record before the Court does not
suggest that any such
3 SAMI's methodology for determining its "costs" does not inspire confidence,
and the Court expresses no view as to its ultimate reliability. The Court also
notes that the Settlement Agreement allows N-Viro, under certain circumstances,
to repurchase any unexercised warrants for $1.78 per warrant or to purchase any
shares that SAMI obtained from the exercise of the warrants for $2.50 per share.
The implicit value of repurchasing the warrants or purchasing the stock obtained
through the warrants (assuming repurchase of all shares or warrants) would be
approximately $134,000.
Strategic Asset Management, Inc. v. Nicholson, et al.
C.A. No. 20360-NC
May 20, 2004
Page 6
award would be proper here. Awards to representative plaintiffs carry the risk
that these plaintiffs have used their status to obtain additional personal
benefits at the expense of the other shareholders - additional benefits made
possible with the leverage acquired as the representative plaintiffs.4 Second,
the award, when given any reasonable valuation as of the settlement date, would
exceed substantially what SAMI has attempted - albeit not very convincingly - to
justify. Finally, this is an action brought on behalf of N-Viro for the benefit
of N-Viro.5 SAMI has not offered any reason as to why the cost of settlement of
a derivative action should be borne directly by N-Viro, and not by the parties
alleged to have been the wrongdoers.6 In short, the Settling Defendants are
charged in SAMI's derivative complaint with having breached their fiduciary
duties, but they apparently are not contributing to the settlement (not even to
the payment of attorneys' fees).
4 There is some suggestion that SAMI is taking warrants in an effort to avoid
imposing a greater cash burden on N-Viro. Whether the compensation is by
warrants or by cash, it must still be reasonable. Although not entirely clear,
SAMI may be seeking the warrants to avoid a greater cost obligation for payment
of attorneys' fees. If the Court is to award attorneys' fees, they should be
awarded as such.
5 See Ct. Ch. R. 23.1. ("In a derivative action brought by 1 or more
shareholders to enforce a right of the corporation")
6 Whether a corporation may ultimately end up absorbing the costs of settlement
indirectly, through indemnification obligations or otherwise, is a distinct
question.
Strategic Asset Management, Inc. v. Nicholson, et al.
C.A. No. 20360-NC
May 20, 2004
Page 7
This is not a large case in terms of the actual compensation which SAMI
seeks. However, the settlement, as proposed, suffers from several shortfalls,
and the Court may not ignore the various problems merely because it is a small
settlement.7
Accordingly, for the foregoing reasons, the motion to approve the
Settlement Agreement is denied.
IT IS SO ORDERED.
Very truly yours,
/s/ JOHN W. NOBLE
JWN/cap
cc: Mr. J. Patrick Nicholson
Register in Chancery-NC
7 The Court's principal concerns are with the benefits accruing to SAMI. The
Court's impression is that the award to SAMI is integral to the settlement and
that all parties would not seek approval of the settlement without that
component.
Exhibit 99.3
------------
SETTLEMENT AGREEMENT AND RELEASE
--------------------------------
This Settlement Agreement and Release (the "Agreement") is among Strategic
Asset Management, Inc. ("SAMI"), N-Viro International Corporation ("N-Viro"),
Michael Nicholson, Terry J. Logan, Bobby B. Carroll ("Carroll"), Phillip Levin,
Daniel J. Haslinger and B.K. Wesley Copeland ("Copeland") (jointly referred to
as the "Non-JPN Defendant Directors"). This Agreement shall be effective as of
the date (the "Effective Date") it is approved by the Court of Chancery of the
State of Delaware for New Castle County (the "Chancery Court").
BACKGROUND
----------
1. SAMI, derivatively and on behalf of N-Viro, brought suit against J.
Patrick Nicholson ("JPN"), the Non-JPN Defendant Directors and N-Viro as a
nominal defendant in the Chancery Court (Case No. 20360) (the "Lawsuit").
2. SAMI, formerly known as Worldtech Waste Management, Inc., was a
shareholder of N-Viro at all times relative to the matters related in the
Lawsuit.
3. The Non-JPN Defendant Directors were all Directors of N-Viro's Board
of Directors (the "Board") at the time SAMI filed the Lawsuit. Carroll and
Copeland have since resigned from the Board.
4. The Lawsuit alleged, among other things, that the Board of
Directors, other than R. Francis DiPrete, were seeking to entrench themselves
and were breaching their fiduciary duties with regard to compensation for
N-Viro's former Chief Executive Officer, JPN, including but not limited to JPN's
current consulting agreement (the "Consulting Agreement") with N-Viro, a copy of
which is attached as Exhibit 1, and alternatives to the Consulting Agreement
being considered by N-Viro.
5. On July 18, 2003, this Court entered a Temporary Restraining Order
(the "Order") that, among other things, prevented N-Viro from entering into any
new agreements with JPN.
6. The Non-JPN Defendant Directors denied the accusations in the
Lawsuit, and believed they had fully complied with their fiduciary duties by,
among other things, having set up an independent special committee with its own
independent counsel to review issues related to JPN's compensation and to make
recommendations, which the Board was prepared to follow.
7. During the period between the filing of the Lawsuit and July 28,
2003 the parties discussed the issues raised by the Lawsuit, including the JPN
Consulting Agreement, JPN's compensation and fringe benefits, the repayment of
funds by JPN, the repayment of the loan, JPN's claims for deferred compensation
and a retirement plan of $150,000 per year, as well as a restructuring of the
Board of Directors. SAMI, N-Viro and the Non-JPN Defendant Directors arrived at
various agreements relating to those issues.
8. With respect to the corporate governance issue, N-Viro agreed to
propose an amendment of the Certificate of Incorporation to the Shareholders at
the up-coming Annual Meeting which would restructure the Board of Directors, to
a Board of not fewer than 7 directors, nor more than 9 directors, who would be
elected to two year terms. This proposed amendment was submitted to the
shareholders at the Annual Meeting and was passed and implemented.
9. During the same period, N-Viro, through its Special Committee and
counsel, discussed the above-referenced issues raised by the Lawsuit with JPN
and his counsel.
10. On July 28, 2003, the N-Viro Board of Directors adopted various
resolutions intended to force a decision by JPN between (A) arbitration with
SAMI of the issues raised by the Lawsuit or (B) arbitration with N-Viro with
respect to the issues under the Arbitration Clause in the Consulting Agreement.
11. In lieu of either arbitration, JPN agreed to settle the matters. The
settlement resulted in:
(A) JPN released all his claims to additional or deferred
compensation under any prior employment or consulting agreement and all such
contracts were canceled and of no further effect;
(B) JPN released his claim for a $150,000 per year retirement
pension;
(C) JPN's then-current consulting agreement, which was for a term
of 13 years, was canceled and a new Consulting Agreement, calling for a minimum
of two days service per month for a term of 5 years, was substituted;
(D) JPN resigned from the N-Viro Board of Directors and received a
series of Preferred Stock permitting him to name a director, provided that such
director was neither JPN himself or a member of his family, such Preferred Stock
to have a term ending upon the earlier to occur of (i) ten years or (ii) JPN's
percentage of ownership in N-Viro falling below 17.5%;
(E) JPN moved out of the N-Viro offices;
(F) JPN repaid funds improperly disbursed to him.
11. With no party admitting any liability, all the parties to this
Agreement seek to advance N-Viro's best interest. Accordingly, they have agreed
to the following Settlement Agreement.
AGREEMENT
---------
1. Chancery Court Approval. This Agreement is subject to Chancery
Court approval. It shall become effective only when and if the Chancery Court
approves it.
2. SAMI has calculated that its costs and expenses incurred in this
lawsuit, covering legal services by Attorneys Fox, Kerger and Snyder, expert
witness fees (William Hanlin, the forensic examiner), and incidental costs and
expenses including document retrieval costs, travel and miscellaneous
out-of-pocket costs are $164,000. N-Viro shall reimburse SAMI $164,000 within
three (3) business days after approval of this Settlement Agreement by the
Chancery Court.
3. JPN Litigation. N-Viro shall vigorously prosecute or defend any
litigation or arbitration with JPN.
4. Release of Indemnified non-JPN Directors. Because N-Viro has
indemnification provisions in place that would require that N-Viro reimburse the
non-JPN Directors if any liability were imposed on them, N-Viro has specifically
bargained with SAMI for the release of the non-JPN Directors so as to limit
N-Viro's liability.
5. Releases and Covenants Not to Sue. The following releases shall
become effective upon the approval of this Settlement Agreement. by the Chancery
Court:
5.1. SAMI to N-Viro. SAMI, on behalf of itself, its predecessors,
successors, officers, directors, employees, affiliates, subsidiaries and parents
(the "SAMI Group"), release N-Viro, its predecessors, successors, officers, the
non-JPN Directors, employees, affiliates, subsidiaries and parents (the "N-Viro
Group") and the N-Viro Group's attorneys and accountants (including, without
limitation, Shumaker, Loop & Kendrick, LLP, Eastman & Smith and Hausser +
Taylor), for any matter raised or that could have been raised in the Lawsuit.
5.2 N-Viro to SAMI. The N-Viro Group releases and covenants not
to sue the SAMI Group and its attorneys (including, without limitation, Fox Law
Offices, P.A. and Kerger & Kerger, as well as R. Frances DiPrete) for any matter
raised or that could have been raised in the Lawsuit.
6. Lawsuit Dismissal. On satisfaction of the conditions in paragraph
7, SAMI shall dismiss the Lawsuit with prejudice, with each party to pay his or
her own costs and expenses, except as provided in this Agreement.
7. Non-Assistance. The SAMI Group, DiPrete, Robert Cooke and Richard
Fox shall not aid, abet, foment or cause a filing by another stockholder of a
stockholder suit, whether derivative or direct, against N-Viro or the Non-JPN
Defendants related in any way to the matters raised or that could have been
raised in the Lawsuit.
8. Submission of Agreement to Chancery Court. After the parties to
this Agreement have executed this Agreement, N-Viro and SAMI shall present this
Agreement to the Chancery Court and request its approval of the Agreement.
9. Agreement Arbitration. Any controversy or claim arising out of or
relating to this Agreement, or the breach of this Agreement, shall be settled by
arbitration administered by the American Arbitration Association under its
Commercial Arbitration Rules, and judgment on the award rendered by the
arbitrator may be entered in any court having jurisdiction of the matter;
provided that this paragraph is not intended to compel arbitration of any matter
raised in the Lawsuit.
10. Counterparts. This Agreement may be signed in counterparts and
shall be as effective as if all the signatories signed the same copy of the
Agreement.
Witnesses: STRATEGIC ASSETMANAGEMENT,
INC.
By: /s/ Robert Allen Cooke
----------------------------
Its: /s/ President
-----------------
Dated: June 25, 2004
--------------------
Witnesses: N-VIRO INTERNATIONAL
CORPORATION
/s/ Louis St.Amadio By: /s/ Phillip Levin
- ---------------------- ----------------------
Its: /s/ Chairman of the Board
--------------------------------
Dated: June 23, 2004
Witnesses:
/s/ Tricia L. Bacon /s/ Michael G. Nicholson
- ------------------------- ------------------------------
Michael Nicholson
Dated: June 28, 2004
Witnesses:
/s/ Billie Lindsay /s/ Terry J. Logan
- ----------------------- ------------------------
Terry J. Logan
Dated: June 24, 2004
Witnesses:
/s/ Elizabeth Kemp /s/ Bobby B. Carroll
- ----------------------- --------------------------
Bobby B. Carroll
Dated: June 29, 2004
Witnesses:
/s/ Louis St.Amadio By: /s/ Phillip Levin
- --------------------- ----------------------
Phillip Levin
Dated: June 23, 2004
Witnesses:
/s/ Gregory Theokas By: /s/ Daniel J. Haslinger
- --------------------- -----------------------------
Daniel J. Haslinger
Dated: June 29, 2004
Witnesses:
/s/ Jacqueline D. Kerns By: /s/ B.K. Wesley Copeland
- ------------------------- ----------------------------
B.K. Wesley Copeland
Dated: June 29, 2004
Exhibit 99.4
------------
NEWS RELEASE FOR IMMEDIATE RELEASE
For More Information Contact:
Phil Levin., Chairman & CEO
(419) 535-6374
N-VIRO'S TOLEDO CONTRACT EXTENDED
Toledo, Ohio, August 11, 2004 - N-Viro International Corp. (OTC Bulletin Board:
NVIC:OB) announced today that the Toledo City Council passed a resolution to
extend N-Viro International Corp.'s sludge stabilization contract for five (5)
years beginning January 1, 2005. Acting CEO Phil Levin indicated that N-Viro
has taken steps to reduce transportation, distribution and other costs, which we
expect to offset the reduction in revenue. "We are pleased to continue our
relationship with the City of Toledo to provide the support and service to the
City."
N-Viro International Corporation develops and licenses its technology to
municipalities and private companies. N-Viro's patented processes use lime
and/or mineral-rich, combustion byproducts to treat, pasteurize, immobilize and
convert wastewater sludge and other bio-organic wastes into biomineral
agricultural and soil-enrichment products with real market value. More
information about N-Viro International can be obtained by contacting the office
or on the Internet at www.nviro.com or by e-mail inquiry to info@nviro.com.
The Company cautions that words used in this document such as "expects,"
"anticipates," "believes" and "may," as well as similar words and expressions
used herein, identify and refer to statements describing events that may or may
not occur in the future. These forward-looking statements and the matters to
which they refer are subject to considerable uncertainty that may cause actual
results to be materially different from those described herein.
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