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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
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
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N-VIRO INTERNATIONAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 34-1741211
(STATE OR OTHER JURISDICTION OF (I.R.S. 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
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $.01 per share
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
--- ---
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by
non-affiliates of the registrant, based upon the last sale price of registrant's
Common Stock in the National Association of Securities Dealers, Inc. Automated
Quotation System ("Nasdaq") as of March 22, 2002, was approximately $1,313,000.
The number of shares of Common Stock of the registrant
outstanding as of March 22, 2002, was 2,577,433.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive proxy statement for the
annual shareholders' meeting to be held May 9, 2002 are incorporated by
reference into Part III.
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INDEX
PAGE
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PART I
Item 1. Business 2
Item 2. Properties 11
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 13
PART II
Item 5. Market for Registrant's Common Equity and Related 14
Stockholder Matters
Item 6. Selected Financial Data 14
Item 7. Management's Discussion and Analysis of 15
Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures 23
About Market Risk
Item 8. Financial Statements and Supplementary Data 24
Item 9. Changes in and Disagreements with Accountants 25
on Accounting and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant 25
Item 11. Executive Compensation 25
Item 12. Security Ownership of Certain Beneficial Owners 25
and Management
Item 13. Certain Relationships and Related Transactions 25
PART IV
Item 14. Exhibits, Financial Statement Schedules, and 26
Reports on Form 8-K
1
PART I
ITEM 1. BUSINESS
GENERAL
N-Viro International Corporation (the "Company" or "N-Viro"),
incorporated in April, 1993, owns and licenses the N-Viro Process, a patented
technology to treat and recycle wastewater sludges and other bio-organic wastes,
utilizing certain alkaline and mineral by-products produced by the cement, lime,
electric utilities and other industries. See "The N-Viro Process."
In 1979, Mr. J. Patrick Nicholson and several investors formed N-Viro
Energy Systems, Limited (the "Partnership"). The Partnership's initial strategy
was to license the N-Viro Process to third parties through independent agents.
Each independent agent acted in its respective territory as a marketing and
distribution agent of the Partnership, and the Partnership retained the
marketing and distribution rights to certain other territories. In early 1993,
as a result of the then pending implementation of the 40 CFR part 503 Sludge
Regulations (as defined below) and the market environment, the Partnership
concluded that a strategy that also included the development and operation, on a
contract management basis, of N-Viro facilities for third parties, and of
Company-owned and/or co-owned N-Viro facilities, would potentially expand the
opportunities to capitalize on the N-Viro Process.
In order to implement this strategy, the Partnership agreed to combine
with American N-Viro Resources, Inc., National N-Viro Tech, Inc., N-Viro
Midwest, Inc., N-Viro Soil South, Inc. and Tennessee-Carolina N-Viro
(collectively, the "Combined Agents") to form the Company. The Company was
incorporated in April 1993 primarily to expand the opportunities for
capitalizing on the N-Viro Process. The Company assumed the Partnership's
agreements with the remaining agents who were continuing to market the N-Viro
Process in their respective territories.
The Company became a public company on October 12, 1993 with an initial
public offering (the "IPO") of 2,000,000 shares of Common Stock at $9.50 per
share. On October 19, 1993, the Partnership contributed to the Company all of
its assets (except certain marketable securities and accounts receivable from
certain related parties), subject to all liabilities (except certain retained
liabilities), and the stockholders of the Combined Agents contributed to the
Company all of the outstanding capital stock of such entities in exchange for a
total of 6,000,000 shares of Common Stock of the Company and organization notes
totaling $5,221,709 (including notes of $276,909 which resulted from a partial
exercise of an over-allotment option). The organization notes were repaid out of
the proceeds from the IPO. On November 10, 1993, an additional 112,000 shares
were sold pursuant to the exercise by the Underwriters of their over-allotment
option.
On October 30, 1995, at a Special Meeting of the Shareholders, the
shareholders approved a one for four reverse stock split which reduced the
number of issued and outstanding shares of the Common Stock. This reverse split
did not affect the Company's retained deficit and the stockholders' equity
remained substantially unchanged. This action was deemed necessary by management
of the Company to remain in compliance with the minimum bid price requirement of
the National Association of Securities Dealers Automatic Quotation System
("Nasdaq") or the alternative net tangible assets requirement and for continued
listing of the Common Stock on Nasdaq. The reverse split reduced the number of
issued and outstanding shares of the Common Stock to approximately 2,037,000
(net of 57,250 treasury shares).
In late 1995, the Company's business strategy changed from being a low
cost provider of a process to marketing the N-Viro Process, which produces an
"exceptional quality" sludge product, as defined in the 40 CFR part 503 Sludge
Regulations under the Clean Water Act of 1987 (the "part 503 Regs"), with
multiple commercial uses. In this strategy, the primary focus is to identify
allies, public and private, who will build and operate the N-Viro facility. To
date, the Company's revenues primarily have been derived from the licensing of
the N-Viro Process to treat and recycle wastewater sludges generated by
municipal wastewater treatment plants and from the sale to licensees of the
alkaline admixture used in the N-Viro Process. The Company has also operated
N-Viro facilities for third parties on a start-up basis and currently operates
one N-Viro facility on a contract management basis. There are currently over 80
wastewater treatment facilities throughout the world treating sludge using the
N-Viro Process. The Company estimates that these facilities are treating and
recycling sludge at an annualized rate of over 140,000 dry tons per year.
2
There are several licensees not currently operating, including both
international and domestic contractors or public generators, who are developing
or designing site-specific N-Viro facilities.
Since 1995, the Company has marketed licenses for the use of the N-Viro
Process through its own sales and marketing force in the United States in all 50
states and the District of Columbia and internationally throughout the world. In
certain other parts of the world, the Company licenses the N-Viro Process
through agents (the "Agents"). Typically, the agreements with the Agents provide
for the Company to receive a portion of the up-front license fees and ongoing
royalty fees paid by the licensees and a portion of the proceeds from the
distribution and resale of alkaline admixture and the sale of N-Viro SoilTM.
Agents have total responsibility and control over the marketing and contracts
for N-Viro technology subject only to license models or minimum agreements with
the Company. The sales representative network is the key component of the
Company's domestic sales strategy. The manufacturers representatives network was
started by the Company after acquiring eight of eleven domestic agents. These
representatives receive a commission on certain revenue.
The Toledo, Ohio facility is managed by the Company through a Contract
Management Agreement with the City of Toledo. Revenue generated from and related
to the Toledo operation accounts for about 39% of the Company's total revenue.
The Company processes a portion of Toledo's wastewater sludge and sells the
N-Viro Soil product. This contract with the City of Toledo was renewed in
October 1999, to extend through the year 2004; in 2001, the City exercised its
option to renew the contract for an additional five years through 2009.
Currently, the contract is in its fourteenth year of operation. The relationship
between the City of Toledo and the Company has been satisfactory.
On November 29, 2001, the Company received notification from Nasdaq that
as of September 30, 2001, the Company did not meet its minimum net tangible
assets and/or minimum stockholders' equity requirements (the "Requirements) for
continued listing on the Nasdaq SmallCap Market, as set forth in Marketplace
Rule 4310(c)(2)(B). Presently, the Company does not satisfy any of the
Requirements. The Company subsequently submitted a plan to Nasdaq for the
Company to meet the Requirements. Nasdaq rejected the Company's plan and ordered
that the Company's common stock be delisted from the Nasdaq SmallCap Market. The
Company has appealed this determination. Pending resolution of the Company's
appeal, the Company's common stock will remain listed on the Nasdaq SmallCap
Market. The Company has been notified that an oral hearing before a Nasdaq
Listing Qualifications Panel will be held on April 18, 2002. The Company is
hopeful that it will be able to demonstrate to Nasdaq that current developments
will enable the Company to meet one or more of the Requirements, however, there
can be no assurances that the Company will able to do this and that the
Company's shares won't be delisted from the Nasdaq SmallCap Market. If the
Company's common stock is delisted from Nasdaq, the Company's shares of common
stock will be traded on the Over-The-Counter Market and may not be subsequently
relisted on Nasdaq until the Company can meet the Requirements. The Company does
not anticipate that the delisting of its common stock on the Nasdaq SmallCap
Market will have a material adverse effect on the financial condition or results
of operations of the Company. The delisting of the Company's common stock from
Nasdaq, however, will have a material adverse effect on the marketability of the
Company's shares.
THE N-VIRO PROCESS
The N-Viro Process is a patented process for the treatment and recycling
of bio-organic wastes, utilizing certain alkaline by-products produced by the
cement, lime, electric utilities and other industries. To date, the N-Viro
Process has been commercially utilized for the recycling of wastewater sludges
from municipal wastewater treatment facilities. N-Viro Soil produced according
to N-Viro Process specifications is an "exceptional quality" sludge product
under the part 503 Regs.
The N-Viro Process involves mixing the wastewater sludge with an
alkaline admixture and then subjecting the mixture to a controlled period of
storage, mechanical turning and accelerated drying in which a blending of the
sludge and the alkaline admixture occurs. The N-Viro Process stabilizes and
pasteurizes the wastewater sludge, reduces odors to acceptable levels,
neutralizes or immobilizes various toxic components and generates N-Viro SoilTM,
a product which has a granular appearance similar to soil and has multiple
commercial uses. These uses include agricultural lime, soil enrichment, top soil
blend, landfill cover and filter, and land reclamation.
The alkaline admixture used in the N-Viro Process consists of by-product
dusts from cement or lime kilns, certain fly ashes and other products of coal,
coke or petroleum combustion and by-product dusts from sulfuric acid
3
"scrubbers" used in acid rain remediation systems and from fluidized bed
coal-fired systems used in electric power generation. The particular admixture
that is used usually depends upon cost and availability in local markets. In
certain cases, commercial lime may also be added to the admixture.
The Company is a distributor of alkaline admixture and is responsible
for quality control of the admixture. The Company also works with established
by-product marketers. The Company generally charges a mark-up over its cost for
alkaline admixture sold directly by the Company.
N-Viro Soil is sold for agricultural use as a bio-organic and mineral
fertilizer with agricultural liming and nutrient values, as landfill cover
material, as a topsoil blending ingredient and for land reclamation projects.
The Company estimates that approximately five percent of the N-Viro Soil
produced is sold to landfills for cover material, small amounts are sold for
land reclamation and similar projects, and a substantial portion of the
remainder is sold for agricultural use or as a topsoil blend. Although the use
of N-Viro Soil is not subject to any federal regulations or restrictions, each
N-Viro facility is typically required to obtain a state and/or local permit for
the sale of N-Viro Soil. In addition, many states and/or local governments
require site-specific permits for the use of sludge products in bulk amounts.
RESEARCH AND DEVELOPMENT
Research and development on the N-Viro Process is performed primarily by
BioCheck Laboratories, Inc. ("BioCheck"). In 2001, the Company expended
approximately $23,000 on continuous research on process improvements through
BioCheck, and considers its relationship with BioCheck to be satisfactory.
In 2001 the Company expended approximately $65,000 on research and
patent development, including the amount expended to BioCheck. Research and
development on N-Viro Soil has been, to date, performed primarily by BioCheck
and Dr. Terry J. Logan. Research was conducted by Dr. Logan and his staff at The
Ohio State University pursuant to a research arrangement with the Company.
Through June 30, 1999, Dr. Logan acted as an independent consultant to the
Company on a part-time basis and was, and continues to be, a director of the
Company. Since July 1, 1999, Dr. Logan has been employed with the Company as
President and Chief Operating Officer.
All participants on the Company's technology council, including Dr.
Logan and the officers of BioCheck, have contracts with the Company, protecting
the Company's rights.
In addition, grants totaling approximately $221,000 were secured from
several sources for process and product research. The United States Department
of Agriculture (USDA) funded research on the use of bio-mineral and compost
technology to disinfect and immobilize nutrients and metals in animal manure.
This research was conducted at USDA's Agricultural Research Service (ARS)
laboratory at Beltsville, MD and at BioCheck Labs. A field-scale test of the
Company's animal manure treatment technology was tested at a large poultry
operation in the State of Delaware in 2001 in collaboration with Environmental
Technologies of Delaware LLC ("ETD"). ETD holds an exclusive license for the
Company's animal manure treatment technology ("Nuresoil") for the States of
Delaware, Maryland and Virginia. The State of Maryland funded a study, conducted
with the University of Maryland, to utilize bio-mineral treated poultry manure
to reclaim acidic landfill cover. In 1999, two patents were submitted to the
U.S. Patent and Trademark Office and to the European Patent Office for
disinfection and for phosphorus and trace metal immobilization in animal manure.
In late 2000, the U.S. Patent and Trademark Office ("USPTO") declared the manure
disinfection technology to be patentable and this patent was issued in 2001. The
second manure patent, for phosphorus and trace metal immobilization, was
declared by the USPTO to be patentable in 2001 and that patent is expected to be
awarded in 2002. International patents have also been applied for. The Company
continues to investigate methods to shorten drying time, substitute various
other materials for use as alkaline admixture and improve the quality and
attractiveness of N-Viro Soil to a variety of end-users. Several new
developments are the subject of issued patents, including the use of carbon
dioxide in the N-Viro Process as a means to (i) reduce by-product carbon dioxide
emissions from industrial processes by immobilizing carbon dioxide in N-Viro
Soil and (ii) improve the quality and value of N-Viro Soil. In addition, the
Company has developed a dryer system which will reduce processing time while
continuing to permit the survival of beneficial microflora. Licensees of the
Company began operating dryer facilities in Phillipsburg, New Jersey and
Leamington, Ontario Canada in 1995. A new facility in Sarnia, Ontario, Canada
came on line in March, 2001. The Company's "BioBlend", which uses N-Viro Soil as
a reagent to accelerate and deodorize yard waste composting, is being utilized
to produce a topsoil at the new Englewood, Ohio N-Viro facility.
4
In 2000, the Department of Agri-Food Canada, filed Canadian and U.S.
patents on the use of N-Viro Soil to suppress soybean cyst nematode (SCN), a
soil pathogen which can severely reduce soybean yields and for which there is no
effective control. SCN damage is a widespread problem throughout soybean growing
areas. Research in Canada, and confirmed in Ohio, show that there is potential
for N-Viro Soil to increase soybean yields in areas with heavy infestations of
SCN. N-Viro is the exclusive licensee for the use patent in the U.S. and
internationally. In Canada, the license is held by N-Viro Systems Canada, Inc.
The USDA funded research in 2001-2002 on the effects of N-Viro Soil and Nuresoil
on the control of certain soil nematodes in soybeans and other crops.
In 2001, the Company filed two patents with the USPTO that deal with
controlled heating, drying and combustion of organic wastes, including sewage
sludges, animal manures, and pulp and paper wastes. One of the patents teaches
the ability of mineral by-products, such as coal combustion by-products, to
control the burning of organic wastes in a coal-fired power plant as a coal
substitute. The patent also teaches the generation of ammonia from the organic
waste for NOx control at the power plant, and the utilization of waste heat from
the power plant to dry the organic wastes. The original submission was declared
to be patentable by the USPTO in late 2001, and amended claims filed in 2001
were also declared to be patentable in early 2002. International patents have
also been applied for. The Company is currently in discussions with a major U.S.
utility to form a joint venture company to exploit the technology.
ORGANIZATION
Day-to-day operations, including management of the Toledo, Ohio
facility, and support functions, is directed by the Company's President and
Chief Operating Officer. Support functions include alkaline admixture
procurement and sales, product market development and sales, regulatory affairs,
and licensee support. Domestic sales and marketing and project development is
directed by the Company's Executive Vice-President who coordinates internal
staff, a network of manufacturers representatives, and consultants.
International sales and marketing, legal affairs and stockholder relations is
directed by the Company's Chief Executive Officer. The company's Chief Financial
Officer has responsibility for all finance and accounting functions and
reporting, filings with the Securities and Exchange Commission, and serves as
Secretary of the Board.
The following table sets forth the Agents of the Company and the
territorial rights of each Agent:
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The Agents
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Agent Territory
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Bio-Recycle Pty. Ltd.....................................Australia, New Zealand and Singapore
CRM Technologies.........................................Eastern Europe
EIEC.....................................................Spain
Esson Technology, Inc....................................China
Itico....................................................Egypt, North Africa, The Middle East
Nesher Israel Cement, Ltd................................Israel
N-Viro Filipino..........................................Phillipines
N-Viro Systems Canada, Inc...............................Canada
South Africa N-Viro .....................................All Africa except North Africa
In 1995, the Company sold the territorial rights of Europe, Africa and
the Middle East and granted an exclusive license for these territories to an
investor group headed by Mr. Robin Millard. This group acquired one of the
Company's wholly owned subsidiaries, N-Viro Worldwide Limited. In late 2000, an
agreement was reached for the Company to reacquire this territory and
corresponding Internet marketing capabilities from Mr. Millard in exchange with
the Company to dismiss its legal proceedings against Mr. Millard. This agreement
was completed in 2001. See Item 3, "Legal Proceedings" for further discussion.
In January, 2000, the Company acquired the territorial rights from ISG
Resources, Inc. for the states of Colorado, Iowa, Kansas, Minnesota, Montana,
Nebraska, North Dakota, South Dakota and Wyoming. This territory was acquired by
a termination of the existing agency agreement and concurrently executing a
Memorandum of Understanding to provide an exclusive supply of alkaline materials
to the Company, with a competitive market cap on the cost.
5
In 2001, the Company settled a dispute with Hydropress Environmental
Services ("Hydropress") that resulted in the reacquisition of Hydropress'
licensing and territory rights in New England and the Mid-Atlantic States.
Hydropress retained a non-exclusive license for the N-Viro technology for its
Phillipsburg, NJ merchant facility. See Item 3, "Legal Proceedings" for further
discussion.
In their respective territories, the Agents market licenses for the
N-Viro Process, serve as distributors of alkaline admixture, oversee quality
control of the N-Viro Process and N-Viro Soil, enforce the terms of the license
agreements with licensees and market N-Viro Soil (or assist licensees in
marketing N-Viro Soil). In general, the Agents have paid one-time, up-front fees
to the Company for the rights to market or use the N-Viro Process in their
respective territories. Typically, the agreements with the Agents provide for
the Company to receive a portion of the up-front license fees and ongoing
royalty fees paid by the licensees and a portion of the proceeds from the
distribution and resale of alkaline admixture and the sale of N-Viro Soil.
INDUSTRY OVERVIEW
Sludge Management Practices and the 40 CFR part 503 Sludge Regulations.
Historically, sludge management has involved either disposal, principally by
landfilling, incineration, ocean dumping and surface disposal, or land
application for beneficial use. On February 19, 1993, the EPA published the 40
CFR part 503 Sludge Regulations ("part 503 Regs") under the Clean Water Act of
1987 implementing the EPA's "exceptional quality" sludge program. The part 503
Regs establish sludge use and disposal standards applicable to approximately
35,000 publicly and privately-owned wastewater treatment plants in the United
States, including primary publicly-owned treatment works ("POTWs"), secondary
and advanced treatment POTWs, privately-owned treatment works, federally-owned
treatment works and domestic septage haulers. The EPA currently estimates that
the 13,000 to 15,000 POTWs generate 110 to 150 million wet metric tons of sewage
sludge per year. Under the part 503 Regs, sludge may be disposed of in municipal
solid waste landfills approved under Subtitle D of the Resource Conservation and
Recovery Act ("RCRA"), or may be surface disposed, incinerated or land applied
for beneficial use in accordance with the requirements established by the part
503 Regs.
Disposal. Landfilling, incineration and ocean dumping have traditionally
provided inexpensive, reliable methods of sludge disposal. Ocean dumping was
banned in the United States in December 1992. Under the part 503 Regs,
landfilling and incineration remain permissible sludge management alternatives
but have become subject to more stringent regulatory standards. The vast
majority of states have some site restrictions or other management practices
governing the disposal of sludge in landfills. Amendments to the Clean Air Act
governing incineration and disposal of residual ash also impose stricter air
emission standards for incineration in general, and the part 503 Regs impose
additional specific pollutant limits for sludges to be incinerated and for the
resulting air emissions.
Surface disposal of sludge involves the placement of sludge on the land
at a dedicated site for disposal purposes. The part 503 Regs subject surface
disposal to increased regulation by requiring, among other things, run-off and
leachate collection systems, methane monitoring systems and monitoring of, and
limits on, pollutant levels. In addition, sludge placed in a surface disposal
site is required to meet certain standards with respect to pathogen levels
relating to coliform or salmonella bacteria counts ("Class B" pathogen levels),
levels of various pollutants, including metals, and elimination of
attractiveness to pests, such as insects and rodents.
Land Application for Beneficial Use. Land application for beneficial use
involves the application of sludge or sludge-based products, for non-disposal
purposes, including agricultural, silvicultural and horticultural uses and for
land reclamation. Under the part 503 Regs, sludge products that meet certain
stringent standards with respect to pathogen levels relating to coliform,
salmonella, enteric viruses and viable helminth ova counts ("Class A" pathogen
levels), levels of various pollutants, including metals, and elimination of
attractiveness to pests, such as insects and rodents, are considered by the EPA
to be "exceptional quality" sludge products. The Class A pathogen levels are
significantly more stringent than the Class B pathogen levels; for example,
permitted Class B fecal coliform levels are 2,000 times higher than their Class
A counterparts.
"Exceptional quality" sludge products are treated by the EPA as
fertilizer material, thereby exempting these products from federal restrictions
on their agricultural use or land application. N-Viro Soil that is produced
according to N-Viro Process specifications meets the pollutant concentration
limits and other standards set forth in the part 503 Regs and, therefore, is an
"exceptional quality" sludge product that exceeds the EPA's standards for
unrestricted agricultural use and land application. Lower quality sludges,
including sludge-based products that meet Class B
6
pathogen levels and certain pollutant control and pest attraction requirements,
may also be applied to the land for beneficial use but are subject to greater
record keeping and reporting requirements and restrictions governing, among
other items, the type and location of application, the volume of application and
limits on cumulative levels of metals. Sludges applied to the land for
agricultural use must meet Class B pathogen levels and, if applied in bulk,
require an EPA permit.
COMPETITION
The Company is in direct and indirect competition with other businesses,
including disposal and other wastewater sludge treatment businesses, some of
which are larger and more firmly established and may have greater marketing and
development budgets and capital resources than the Company. There can be no
assurance that the Company will be able to maintain a competitive position in
the sludge treatment industry.
A 1988 EPA survey estimated that sludge generators in the United States
utilized landfilling, incineration, surface disposal and ocean dumping as sludge
management alternatives for approximately two-thirds of wastewater sludges
generated. Although ocean dumping was banned in December 1992, other methods of
sludge disposal remain permissible sludge management alternatives under the part
503 Regs, and in many instances will be less expensive than treatment methods,
including the N-Viro Process.
Sludge treatment alternatives other than disposal include processes,
such as aerobic and anaerobic digestion and lime stabilization, that typically
produce lower quality sludge products, and other processes, such as
pelletization, composting, high heat lime sterilization and high heat en-vessel
lime pasteurization, that produce "exceptional quality" sludge products. Some of
these processes have established a significant market presence, and the Company
cannot predict whether any of such competing treatment processes will be more or
less successful than the N-Viro Process. In 2000 the primary competition to
N-Viro technology was the dumping of raw sewage sludge in landfills. While such
practices are prohibited in some states (e.g., North Carolina and New Jersey),
the practice is accepted by the USEPA.
ENVIRONMENTAL REGULATION
Various environmental protection laws have been enacted and amended
during recent decades in response to public concern over the environment. The
Company's operations and those of its licensees are subject to these evolving
laws and the implementing regulations. The United States environmental laws
which the Company believes are, or may be, applicable to the N-Viro Process and
the land application of N-Viro Soil include Resource Conservation and Recovery
Act ("RCRA"), as amended by the Hazardous and Solid Waste Amendments of 1984
("HSWA"), the Federal Water Pollution Control Act of 1972 (the "Clean Water
Act"), the Clean Air Act of 1970, as amended (the "Clean Air Act"), the
Comprehensive Environmental Response, Compensation, and Liability Act
("CERCLA"), the Pollution Prevention Act of 1990 and the Federal Insecticide,
Fungicide and Rodenticide Act ("FIFRA"). These laws regulate the management and
disposal of wastes, control the discharge of pollutants into the air and water,
provide for the investigation and remediation of contaminated land and
groundwater resources and establish a pollution prevention program. Many of
these laws have international counterparts, particularly in Europe and elsewhere
in North America. In addition, various states have implemented environmental
protection laws that are similar to the applicable federal laws and, in
addition, states may require, among other things, permits to construct N-Viro
facilities and to sell and/or use N-Viro Soil. There can be no assurance that
any such permits will be issued.
The part 503 Regulations. Sewage sludge and the use and disposal thereof
is regulated under the Clean Water Act. On February 19, 1993, the EPA published
the part 503 Regs under the Clean Water Act implementing the EPA's "exceptional
quality" sludge program. These regulations establish sludge use and disposal
standards applicable to approximately 35,000 wastewater treatment plants in the
United States, including approximately 12,750 publicly owned treatment works
("POTWs"). Under the part 503 Regs, sludge products that meet certain stringent
standards are considered to be "exceptional quality" sludge products and are not
subject to any federal restrictions on agricultural use or land application.
N-Viro Soil produced according to N-Viro Process specifications is an
"exceptional quality" sludge product. Lower quality sludges and sludge products
are subject to federal restrictions governing, among other items, the type and
location of application, the volume of application and the cumulative
application levels for certain pollutants. Agricultural application of these
lower quality sludges in bulk amounts also requires an EPA permit. Agricultural
and land applications of all sludges and sludge products, including N-Viro Soil
7
and other "exceptional quality" sludge products, are typically subject to state
and local regulation and, in most cases, require a permit.
In order to ensure compliance with the part 503 Regs, the Company
reviews the results of regular testing of sludges required by the EPA to be
conducted by wastewater treatment plants, and itself tests N-Viro Soil produced
at N-Viro facilities on a regular basis. In general, the Company does not
license or permit the ongoing use of the N-Viro Process to treat any sludge that
may not be processed into an "exceptional quality" sludge product. In one N-Viro
facility, however, the Company has permitted the use of the N-Viro Process to
produce a product that is not an "exceptional quality" sludge product due to the
high pollutant levels of the resulting product. This product is not considered
to be N-Viro Soil and is used solely for landfill cover at an adjacent landfill.
In addition, the Company has previously licensed for use at five treatment
facilities an earlier sludge treatment process that is designed to produce a
sludge product that meets only Class B pathogen levels, and therefore does not
produce an "exceptional quality" sludge product.
Although N-Viro Soil exceeds the current federal standards imposed by
the EPA for unrestricted agricultural use and land application, state and local
authorities are authorized under the Clean Water Act to impose more stringent
requirements than those promulgated by the EPA. Most states require permits for
land application of sludge and sludge based products and several states, such as
Rhode Island, Massachusetts and New Jersey, currently have regulations that
impose more stringent numerical concentration limits for certain pollutants than
the federal rules.
The Resource Conservation and Recovery Act. RCRA regulates all phases of
hazardous waste generation, management and disposal. A waste is subject to
regulation as a hazardous waste under RCRA if it is a solid waste specifically
listed as a hazardous waste by the EPA or exhibits a defined hazardous
characteristic. Although domestic sewage and mixtures of domestic sewage and
other wastes that pass through a sewer system to a POTW are specifically
exempted from the definition of solid waste, once treated by the POTW, the
sewage sludge is considered a solid waste. However, such sewage sludge is not
considered a hazardous waste unless it exhibits a hazardous characteristic.
While it is possible that sewage sludge could exhibit the toxicity
characteristic, the Company believes that regular tests for hazardous
constituent levels provide assurance that the sewage sludge used in the N-Viro
Process does not exhibit the toxicity characteristic. The alkaline admixtures
used in the N-Viro Process are specifically exempted from RCRA regulation by the
so-called Bevill Amendments to RCRA. Although the benefit of the exemption
provided by the "Bevill Amendments" can be lost if the alkaline admixture is
derived from or mixed with a hazardous waste, the Company has adopted and
implemented policies and operational controls, including review of operating
permits held by alkaline admixture suppliers and periodic testing of such
admixtures, to ensure that the alkaline admixtures used in the N-Viro Process by
itself and its licensees are not derived from or mixed with hazardous wastes.
Although neither the alkaline admixture nor wastewater sludges used in
the N-Viro Process are regulated as hazardous waste under RCRA, states may
impose restrictions that are more stringent than federal regulations.
Accordingly, the raw materials used in the N-Viro Process may be regulated under
some state hazardous waste laws as "special wastes," in which case specific
storage and record keeping requirements may apply.
The Clean Air Act. The Clean Air Act empowers the EPA to establish and
enforce ambient air quality standards and limits of emissions of pollutants from
specific facilities. The Clean Air Act Amendments of 1990 (the "Clean Air Act
Amendments") impose stringent requirements upon owners and operators of
facilities that discharge emissions into the air.
Existing N-Viro facilities generally have installed "baghouse"
technology for alkaline admixture storage and handling operations in order to
collect airborne dust. At present, the Company does not believe that any N-Viro
facilities will be required to undertake any further measures in order to comply
with the Clean Air Act or the existing Clean Air Act Amendments. Ammonia odors
of varying strength typically result from sludge treatment processes, including
the N-Viro Process. A number of N-Viro facilities have installed ammonia
"scrubbers" to reduce ammonia odors produced to varying degrees by the N-Viro
Process. The installation of ammonia "scrubbers" is not required by the Clean
Air Act or the existing Clean Air Amendments. However, the Company or its
licensees may be required under the Occupational Safety and Health Act and state
laws regulating nuisances, odors and air toxic emissions to install odor control
technology to limit ammonia emissions and odors produced during the N-Viro
Process, particularly at N-Viro facilities located near populated residential
areas. The amount of ammonia gas produced is dependent upon the type of sludge
being treated and the amount and type of alkaline admixture being used.
8
The Comprehensive Environmental Response, Compensation and Liability Act
of 1980. CERCLA imposes strict, joint and several liability upon owners and
operators of facilities where a release of hazardous substances has occurred,
upon parties who generated hazardous substances into the environment that were
released at such facilities and upon parties who arranged for the transportation
of hazardous substances to such facilities.
The Company believes that the N-Viro Process poses little risk of
releasing hazardous substances into the environment that presently could result
in liability under CERCLA. Although the sewage sludge and alkaline waste
products could contain hazardous substances (as defined under CERCLA), the
Company has developed plans to manage the risk of CERCLA liability, including
training of operators, regular testing of the sludge and the alkaline admixture
to be used in the N-Viro Process and reviewing incineration and other permits
held by the entities from whom alkaline admixtures are obtained.
Other Environmental Laws. The Pollution Prevention Act of 1990
establishes pollution prevention as a national objective, naming it a primary
goal wherever feasible. The act states that where pollution cannot be prevented,
materials should be recycled in an environmentally safe manner. The Company
believes that the N-Viro Process contributes to pollution prevention by
providing an alternative to disposal.
The alkaline admixtures used in the N-Viro Process may be required to be
registered as pesticides under FIFRA because of their effect on pathogens in
sludge. The EPA does not currently regulate commercial lime or any alkaline
by-products under FIFRA and has not attempted to assert such jurisdiction to
date. In the event the alkaline by-products are required to be registered under
FIFRA, the Company would likely be required to submit certain data as part of
the registration process and might be subject to further federal regulation.
State Regulations. State regulations typically require an N-Viro
facility to obtain a permit for the sale of N-Viro Soil for agricultural use,
and may require a site-specific permit by the user of N-Viro Soil. In addition,
in some jurisdictions, state and/or local authorities have imposed permit
requirements for, or have prohibited, the land application or agricultural use
of sludge products, including "exceptional quality" sludge products. There can
be no assurance that any such permits will be issued or that any further
attempts to require permits for, or to prohibit, the land application or
agricultural use of sludge products will not be successful.
In addition, many states enforce landfilling restrictions for
non-hazardous sludge. These regulations typically require a permit to sell or
use sludge products as landfill cover material. There can be no assurance that
N-Viro facilities or landfill operators will be able to obtain required permits.
Environmental impact studies may be required in connection with the
development of future N-Viro facilities. Such studies are generally time
consuming and may create delays in the construction process. In addition,
unfavorable conclusions reached in connection with such a study could result in
termination of, or expensive alterations to, the N-Viro facility being
developed.
EMPLOYEES
As of December 31, 2001, the Company had 20 employees in the following
capacities: 8 engaged in sales and marketing; 5 in finance and administration;
and 7 in operations. The Company considers its relationships with its employees
to be satisfactory.
The Company is a party to a collective bargaining agreement (the "Labor
Agreement") covering certain employees of National N-Viro Tech, Inc., a
wholly-owned subsidiary of the Company. The employees that are covered by the
Labor Agreement work at the Toledo, Ohio N-Viro facility which is operated by
the Company on a contract management basis for the City of Toledo. These
employees are members of the International Brotherhood of Teamsters, Chauffeurs,
Warehouseman and Helpers Local Union No. 20, and the Company considers its
relationships with the organization to be satisfactory. At present, the Labor
Agreement expires October 31, 2004.
9
N-VIRO FACILITIES
To date, the Company principally has licensed the N-Viro Process to
municipalities for use in municipally-owned wastewater treatment plants. The
Company has also operated, generally on a start-up basis, N-Viro facilities for
municipalities and currently operates one municipally-owned N-Viro facility on a
contract management basis. In most cases, however, municipal licensees have
elected to design, construct and operate N-Viro facilities independently.
As of December 31, 2001, there were more than 40 N-Viro facilities
operating throughout the world. The sludge processing capacity of these
facilities ranges from one to 160 dry tons per day. Based upon reports received
from N-Viro facilities, the Company estimates they are processing wastewater
sludge at an annualized rate of over 140,000 dry tons per year. The chart below
summarizes the current annualized sludge processing volume for each of the five
largest N-Viro facilities through December 31, 2001.
------------------------------------------------------------------------------------
Facility Location Approximate Sludge Processing Volume
(dry tons/year)
------------------------------------------------------------------------------------
Middlesex County, New Jersey 57,300
------------------------------------------------------------------------------------
Wilmington, Delaware 12,000
------------------------------------------------------------------------------------
Syracuse, New York 10,700
------------------------------------------------------------------------------------
Toledo, Ohio 8,100
------------------------------------------------------------------------------------
Phillipsburg, New Jersey 7,100
------------------------------------------------------------------------------------
All of the existing N-Viro facilities are owned and operated by third
parties, with the exception of the Toledo, Ohio facility which has been operated
by the Company on a contract management basis since January 1990.
Design and construction of a facility using the N-Viro Process is
typically undertaken by local independent engineering and construction firms.
Such a facility can be completed in approximately six months, but could take
substantially longer, depending on the size and complexity of the facility. The
N-Viro Process produces ammonia in various concentrations, depending on the
characteristics of the sludge. A number of N-Viro facilities, typically those
located near residential areas, have installed odor control systems in order to
minimize the release of ammonia odors resulting from the N-Viro Process. An odor
control system can significantly increase construction time and cost.
Construction of N-Viro facilities generally requires state and local permits and
approvals and, in certain instances, may require an environmental impact study.
The Company had previously licensed for use at five treatment facilities
an earlier sludge treatment process that is designed to produce a sludge product
that meets only Class B pathogen levels, and therefore does not produce an
"exceptional quality" sludge product under the part 503 Regs. Royalty payments
from sludge processed at the five facilities using such earlier technology
currently account for less than two percent of total royalty payments to the
Company and the Company does not actively market the use of this process.
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.
Currently, approximately 37% of the Company's revenue is from management
operations, 53% from other domestic operations, 5% from research and development
grants and the remaining 5% 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, along with other factors such as
interest rates, by particular business cycles and seasonality. See Notes to the
Financial Statements contained in Item 8 hereof.
10
COMPETITION. The Company competes against companies in a highly
competitive market and has fewer resources than most of those companies. Its
business competes within and outside the United States principally on the basis
of the following factors:
-----------------------------------------------------------------------------------------------------------------
SEGMENT Management Operations Other Domestic Foreign Operations Research &
Operations Development
-----------------------------------------------------------------------------------------------------------------
Innovative
Price Price Price Technologies
-------------------------------------------------------------------------------------------
Product quality and
Reliability Reputation specifications Technical support
-------------------------------------------------------------------------------------------
COMPETITIVE Product quality and Product quality and
FACTORS specifications specifications Custom design Reputation
-------------------------------------------------------------------------------------------
Responsiveness to Equipment financing Product quality and
customer Technical support assistance specifications
-------------------------------------------------------------------------------------------
Technical support Custom design Technical support Custom design
-------------------------------------------------------------------------------------------
Equipment financing Equipment financing
Reputation assistance Reputation assistance
-------------------------------------------------------------------------------------------
Competitive pressures, including those described above, 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.
ITEM 2. PROPERTIES
The Company's executive and administrative offices are located in
Toledo, Ohio, under a lease that expires on December 31, 2002. The Company
believes its relationship with its lessor is satisfactory.
In early 1994 the Company purchased a site in Fort Meade, Florida to
develop a Company-owned N-Viro processing facility. Construction was started at
the site in late 1994 and the facility became operational in early 1995. In
December 1995, the Company entered into a Memorandum of Understanding with VFL
Technologies, Inc. to jointly own, through a limited partnership named Florida
N-Viro, LP ("Florida N-Viro"), the Fort Meade, Florida facility, beginning
January 1, 1996. On December 31, 1997, the members of Florida N-Viro Management,
LLC, the management company of the Florida entity, approved a Settlement
Agreement that amended certain provisions and increased the Company's ownership
percentage in Florida N-Viro to 50%.
In August 2000, a Memorandum of Understanding was entered into between
the Company and VFL, clarifying decisions, information and additional operating
requirements of Florida N-Viro. Later that month, the Company loaned Florida
N-Viro $120,000 cash to help meet operating expenses, and was issued a
Promissory Note. An additional $50,000 cash was loaned in November, 2000 under
similar circumstances, and a second Promissory Note was issued to the Company.
Both Notes are unsecured and are payable on demand, and both bear interest at
9.75%.
In January 2001, a Special Meeting of the Board of Directors of Florida
N-Viro Management LLC was held. Among the decisions made were amendments to both
the Partnership Agreement and the Memorandum of Understanding entered into in
August, 2000. The aggregate ownership percentages in the Florida investment of
the
11
Company and VFL were amended to 47.5% and 52.5%, respectively, effective January
1, 2001. Also, a decision was made to relieve the requirement of the Company
from funding any additional losses of Florida N-Viro, provided the Company loan
an additional total of $180,000 between January and February, 2001, to be
evidenced by a third Promissory Note. The Note is unsecured, due on demand and
bears interest at prime (tied to a local Bank) plus 1/4%, or the Applicable
Federal Rate, whichever is higher. All loans made by the Company to Florida
N-Viro in 2000 and 2001, were made to equalize each partner's advances to the
partnership, required after additional monies were advanced by VFL during 2000.
The Company is currently in negotiations to sell its investment in
Florida N-Viro to an unrelated third party purchaser.
Because of the joint development of early N-Viro patents with the
Medical College of Ohio ("MCO"), in 1995, the Company and MCO agreed that the
rights of MCO to any intellectual property of value to the Company in
development, patentable or patented would generate royalties to MCO. The Company
and MCO have also agreed that future claims to the N-Viro Soil process is 1/4%
of technical revenues. MCO rights to BioBlend and other N-Viro technologies
range from 2% to 4% of technical revenues derived from these newer technologies.
Cumulative royalties due to MCO through December 31, 2001 is $51,975.
ITEM 3. LEGAL PROCEEDINGS.
During 1994, the Company entered into an agreement to reacquire
territory rights from a former agent, Hydropress Environmental Services, Inc.
("Hydropress"), in exchange for 66,250 shares of unregistered common stock. This
agreement stated that if Hydropress elected to sell these shares, the Company
would guarantee a value of $6 per common share.
In October 1998, Hydropress filed suit against the Company seeking a
declaratory judgment as to Hydropress' rights and duties related to certain
obligations pursuant to a license agreement and a prior settlement agreement
related to the license agreement. Hydropress filed the Complaint, but failed to
obtain service of process upon the Company.
During 1999, Hydropress and the Company entered into a Settlement
Agreement that provided, among other things, for the dismissal of the suit,
mutual limited releases, agreements as to past due amounts that Hydropress owed
the Company, as well as a basis for determining future amounts, and an agreement
that, for a period of eighteen (18) months from the date of the settlement
agreement, Hydropress would not sell any of the 66,250 shares of Company stock
that it had been issued in 1994 and that Hydropress could thereafter sell no
more than 10,000 shares of the Company's stock per month.
In February 2000, Hydropress and the Company modified the 1999 agreement
by agreeing to allow Hydropress to sell shares of the Company's stock before the
eighteen-month period, in addition to increasing the maximum amount of shares it
could sell without approval from the Company in any one month to 15,000 shares.
In exchange, Hydropress released the Company from its minimum price guarantee
obligations under the 1999 Settlement Agreement. The Company understood the
letter agreement to excuse it entirely from its obligation to guarantee
Hydropress' receipt of proceeds of at least $6.00 per share from the sale of the
Company stock. This was consistent with the position taken in the Company's
public filings under and pursuant to the terms of the Securities Exchange Act of
1934 and the rules and regulations promulgated thereunder, as well as the
Company's audited financial statements. In late September 2000, representatives
of Hydropress informed the Company that Hydropress maintained that the letter
suspended for a fixed period of time the $6.00 per share guarantee of proceeds,
but that following that period of time, the guarantee remained in effect. In
November 2000, the Company brought suit against Hydropress. The Complaint sought
a declaratory judgment that the minimum price guarantee was no longer in effect.
In November, 2001, the Company and Hydropress signed a Settlement
Agreement, as filed under Form 8-K dated December 14, 2001. Each party dismissed
its claims against the other with prejudice and entered into general releases of
the other party. N-Viro purchased back the 66,250 N-Viro shares held by
Hydropress at the market price as of November 15, 2001, which was $1.01 per
share for a total of $66,913. The Company also purchased back three patent
license agreements (including territory rights) from Hydropress valued at
approximately $287,000. The first license concerned the exclusive right to sell
and use the N-Viro technology in Massachusetts, Vermont and New Hampshire. The
second concerned the non-exclusive right to sell and use the N-Viro technology
in New Jersey, Delaware, Maryland and Eastern Pennsylvania. The third concerned
amendments to the two prior-mentioned agreements and the exclusive right to use
the N-Viro technology at Hydropress' facility in Phillipsburg, New Jersey.
12
N-Viro and Hydropress entered into a new patent license agreement granting
Hydropress the non-exclusive right to use the N-Viro technology at its facility
in Phillipsburg, New Jersey. The Company is paying certain amounts due to
Hydropress under the Settlement Agreement pursuant to the terms of a promissory
note (the "Note"). The principal amount of the Note is $204,587, is non-interest
bearing and matures on October 15, 2002 with a balloon payment of $144,587. At
December 31, 2001 the outstanding principal balance on the Note was $198,587.
On February 25, 2000, the Company filed a Complaint for Patent
Infringement in the United States District Court for the Northern District of
Ohio against the City of Warren, Ohio. The Company believed that the City of
Warren had willfully and intentionally infringed patents the Company owns and
was seeking both equitable remedies in the form of an injunction and legal
remedies in the form of damages. On April 17, 2000, the City of Warren responded
by filing an Answer and Counterclaims against the Company. On September 14,
2000, the Company and the City of Warren settled the dispute, with the City of
Warren paying the Company the sum of $100,000. The successful conclusion of the
litigation with the City of Warren reinforces the Company's commitment to defend
its intellectual property.
In July 2000, the Company terminated the license of N-Viro Worldwide
Limited and filed suit against Robin Millard and R3 Management Limited ("R3M" in
the United States district Court for the Northern District of Ohio
(#3:00CV7443). The suit sought damages for breach of contract, breach of
fiduciary duty and related torts based on intellectual property developed by Mr.
Millard that the Company contends is owned by the Company.
N-Viro settled this lawsuit with Mr. Millard and R3M. The terms are as
follows: N-Viro dismissed its claims with prejudice and renounced any prior
interest in R3M's technology. R3M licensed its proprietary technology to N-Viro
on a worldwide non-exclusive basis subject to certain exceptions. N-Viro paid a
$5,000 fee for the license, which also provides for royalty payments if N-Viro
uses or licenses the technology. R3M assigned to N-Viro R3M's interest in
sublicense agreements with Yorkshire Water, Ltd. and Silt (now DEC), N.V. N-Viro
terminated its exclusive license with R3M related to N-Viro's proprietary
technology in specified countries in Europe, the Middle East and the former
Soviet Union. R3M and an affiliate, N-Viro Worldwide, Ltd. ("NVWL") agreed to
cease using the name "N-Viro" and to transfer to N-Viro the internet URL
"n-viro.com." NVWL agreed to pay N-Viro $195,532 for past fees owed and for
equipment. N-Viro agreed to pay NVWL $195,532 for ceasing to use the N-Viro name
and for transferring the internet URL "n-viro.com."
In 2001, officials of the North Carolina Department of Revenue (the
"Department") contacted the Company and indicated that the Company was under
investigation for failing to file sales tax returns in the state of North
Carolina during the period from December 1994 to June 2001. The Company
acknowledged to Department officials that during that period of time, it had
collected approximately $80,000 in sales taxes from certain customers but had
not collected sales tax from other customers in North Carolina. The Company
submitted a memorandum to the Department arguing that no sales tax was due by
the Company because the sales at issue were exempt from sales tax. The
Department disagreed with this memorandum and levied a fine and civil penalty
totaling approximately $70,000 plus interest due on the previous unremitted
taxes, which the Company agreed to in lieu of litigation. To date the Company
has remitted all sales tax due the State, as well as paid the fine and
approximately one-third of the civil penalty and interest due, and has arranged
a short-term payment schedule agreed to by the Department on the balance. The
Company has voluntarily approached state tax authorities in South Carolina and
acknowledged failing to file sales tax returns within that state. The Company
has collected and accrued approximately $167,000 in sales tax from customers in
South Carolina that has not been remitted to South Carolina tax authorities. The
Company believes that the sales at issue are exempt from sales tax. The Company
has retained counsel in South Carolina to assist it in negotiating a settlement
of this matter.
On October 30, 2001, the Company settled its lawsuit with RDP
Technologies, Inc. ("RDP"). RDP filed the lawsuit in Delaware federal court in
August 2000, asserting claims for tortious interference with prospective
business relations and unfair competition, and later adding a claim for a
declaratory judgment regarding infringement, validity and enforceability of two
of the Company's patents. The Company denied all of RDP's claims. As a result of
the settlement, RDP's claims were dismissed with prejudice, and each party
agreed to bear its own costs and attorneys fees.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's Common Stock is listed in the Nasdaq Small Cap Market
under the symbol "NVIC". The price range of the Common Stock in the Market since
January 1, 2000, was as follows:
- -------------------------------------------------------------------------------------------------------
QUARTER HIGH LOW
- -------------------------------------------------------------------------------------------------------
First 2000 5.75 1.66
- -------------------------------------------------------------------------------------------------------
Second 2000 5.25 2.94
- -------------------------------------------------------------------------------------------------------
Third 2000 3.94 2.56
- -------------------------------------------------------------------------------------------------------
Fourth 2000 3.00 1.38
- -------------------------------------------------------------------------------------------------------
First 2001 2.75 1.75
- -------------------------------------------------------------------------------------------------------
Second 2001 2.18 1.54
- -------------------------------------------------------------------------------------------------------
Third 2001 1.80 1.04
- -------------------------------------------------------------------------------------------------------
Fourth 2001 1.15 0.80
- -------------------------------------------------------------------------------------------------------
The Company's stock price closed at $0.87 per share on March 22, 2002.
HOLDERS
As of March 22, 2002, the number of holders of record of the Company's
Common Stock was approximately 1,285.
DIVIDENDS
The Company has never paid dividends with respect to its Common Stock.
UNREGISTERED SALES OF SECURITIES
None.
ITEM 6. SELECTED FINANCIAL DATA
The Company was incorporated in April 1993. In September 1993, an
agreement was entered into pursuant to which N-Viro Energy Systems, Ltd., an
Ohio limited partnership contributed to the Company all of its assets (except
certain marketable securities and accounts receivable from certain related
parties) subject to all liabilities (except certain retained liabilities), and
the stockholders of the Combined Agents contributed to the Company all of the
outstanding capital stock of each of such entities, in each case in exchange for
Common Stock and promissory notes (the "Organization"). The Organization was
accounted for as if the Partnership and the Combined Agents (collectively, the
"Company Entities") had always been members of the same operating group.
Accordingly, historical financial statements of each of such entities have been
combined throughout all relevant periods herein. Certain adjustments have been
made to eliminate intercompany transactions between the Company Entities.
The following selected consolidated statement of operations data for the
years ended December 31, 1997, 1998, 1999, 2000 and 2001; and the consolidated
balance sheet data set forth below as of December 31, 1997, 1998, 1999, 2000 and
2001 respectively, have been derived from the financial statements of the
Company which have been audited by McGladrey & Pullen, LLP, independent auditors
for the years ending December 31, 1997 and 1998, and Hausser + Taylor, LLP,
independent auditors for the years ended December 31, 1999, 2000 and 2001. In
the opinion of management, the financial data presented below reflect all
adjustments (which are of a normal recurring nature)
14
necessary to present fairly the Company's financial position and results of
operations. The data presented below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements and Supplementary Data appearing
elsewhere in this Form 10-K.
STATEMENT OF OPERATIONS DATA (IN THOUSANDS, EXCEPT PER SHARE DATA):
-------------------------------------------------------------------
12/31/01 12/31/00 12/31/99 12/31/98 12/31/97
- ---------------------------------------------------------------------------------------------------------
Revenues $4,383 $4,166 $4,749 $3,929 $4,053
- ---------------------------------------------------------------------------------------------------------
Net income (loss) (1,267) (845) 471 (373) 534
- ---------------------------------------------------------------------------------------------------------
Net income (loss) per share $(0.48) $(0.32) $0.18 $(0.15) $0.23
- ---------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA (IN THOUSANDS):
----------------------------------------------------------------
12/31/01 12/31/00 12/31/99 12/31/98 12/31/97
- ------------------------------------------------------------------------------------------------------
Total assets $4,133 $4,752 $4,772 $3,783 $4,423
- ------------------------------------------------------------------------------------------------------
Notes and line of credit payable $1,402 $ 649 $ 352 $ 161 $ 278
- ------------------------------------------------------------------------------------------------------
Shareholder Advance $ 24 $ 22 $ 49 $ 47 n/a
- ------------------------------------------------------------------------------------------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The following is a discussion of our results of operations and financial
position for the periods described below, and should be read in conjunction with
"Selected Financial Data" and the Financial Statements and Supplementary Data
appearing elsewhere in this Form 10-K. The discussion includes various
forward-looking statements about our markets, products, services and our
results. These statements are based on certain assumptions that we consider
reasonable. Our actual results may differ materially from these indicated
forward-looking statements.
The following table sets forth, as a percentage of total revenues for
the periods presented, revenues related to each of (i) technology fees, (ii)
facility management, (iii) products and services:
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------
2001 2000 1999
- --------------------------------------------------------------------------------------------------------
Technology fees 19.4% 24.0% 36.7%
- --------------------------------------------------------------------------------------------------------
Facility management 37.3% 36.5% 33.8%
- --------------------------------------------------------------------------------------------------------
Products and services 43.3% 39.5% 29.5%
- --------------------------------------------------------------------------------------------------------
Totals 100.0% 100.0% 100.0%
----------------------------------------------------
Technology fee revenues consist of: royalty revenue, which represent
ongoing amounts received from licensees for continued use of the N-Viro Process
and are typically based on volumes of sludge processed; license and territory
fees, which represent non-recurring payments for the right to use the N-Viro
Process in a specified geographic area or at a particular N-Viro facility;
research & development revenue, which represent payments from federal and state
agencies awarded to the Company to fund ongoing site-specific research utilizing
the N-Viro technology.
Facility management revenues are recognized under contracts where the
Company itself manages the N-Viro Process to treat sludge, pursuant to a fixed
price contract.
15
Product and service revenues consist of: alkaline admixture revenue,
which represent ongoing payments from licensees arising from the sale and
distribution of alkaline admixture by the Company and the Agents to N-Viro
facilities; N-Viro Soil sales, which represent either revenue received from
sales of N-Viro Soil sold by N-Viro facilities, or through sales of N-Viro Soil
sold directly by the Company; commissions earned on sales of equipment to an
N-Viro facility; rental of equipment to a licensee or agent; testing income,
which represent fees charged for the periodic quality control of the N-Viro Soil
produced; equipment sales, which represent the price charged for equipment held
for subsequent sale.
The Company's policy is to record fully revenues payable pursuant to
agency and license agreements when the Company has fulfilled its obligations
under the relevant contract, except when the license agreement pertains to a
foreign contract. In this case revenue is recorded when cash is received and
when the Company has fulfilled its obligations under the relevant contract.
RECENT DEVELOPMENTS
The Company received notice on November 29, 2001 from Nasdaq regarding
the Company's continued listing on the Nasdaq SmallCap Market. The Nasdaq
maintains that the Company is in violation of a listing rule requiring all
listed companies to maintain either (1) a net tangible asset value of $2,000,000
or more, or (2) $2,500,000 or more in stockholders' equity, or (3) a market
capitalization of $35,000,000, or (4) net income of at least $500,000 for the
most recently completed fiscal year, or two of the three most recently completed
fiscal years (the "Requirements"). Presently, the Company does not satisfy any
of these Requirements. The Company subsequently provided Nasdaq with a plan to
achieve and sustain compliance with all of the Requirements. On February 28,
2002, the Company received a Nasdaq staff determination indicating that it had
rejected the Company's plan and the Company fails to comply with the minimum net
tangible assets or minimum stockholders' equity requirements for continued
listing on the Nasdaq SmallCap Market, as set forth in Nasdaq Marketplace Rule
4310(c)(2)(B). The Company filed an appeal to the staff's determination. Pending
resolution of the Company's appeal, the Company's common stock will remain
listed on the Nasdaq SmallCap Market. The Company's oral hearing before a Nasdaq
Listing Qualifications Panel will be held on April 18, 2002. While the Company
anticipates that it can bring itself into compliance with Nasdaq Requirements on
or before June 30, 2002, there can be no assurances that this will occur, or
even if it does occur, that the timing of compliance will be soon enough to
satisfy Nasdaq authorities and avoid the delisting of the Company's common
stock. If the Company's common stock is delisted from Nasdaq, the Company's
shares of common stock will be traded on the Over-The-Counter market and there
can be no assurance that such shares will be relisted on the Nasdaq. The Company
does not anticipate that the delisting of its common stock on the Nasdaq
SmallCap Market may have a material adverse effect on the financial condition or
results of operations of the Company. The delisting of the Company's common
stock from Nasdaq, however, may have a material adverse effect on the
marketability of the Company's shares, as shares traded on the Over-the-Counter
market generally experience lower trading value than those traded on the
organized exchanges.
16
RESULTS OF OPERATIONS
The following tables set forth, for the periods presented, (i) certain
items in the Combined Statement of Operations, (ii) the percentage change of
each such item from period to period and (iii) each such item as a percentage of
total revenues in each period presented.
---------------------------------------------------------------------------
(Dollars in thousands) Year Ended Period to Year Ended Period to Year Ended
---------------------- December 31, Period December 31, Period December 31,
2001 Percentage 2000 Percentage 1999
Change Change
---------------------------------------------------------------------------
COMBINED STATEMENT OF
OPERATIONS DATA:
Revenues $ 4,383 5.2% $ 4,166 (12.3%) $ 4,750
Cost of revenues 2,795 14.7% 2,437 8.6% 2,245
--------------- --------------- ---------------
Gross profit 1,588 (8.2%) 1,729 (31.0%) 2,505
Operating expenses 2,717 12.8% 2,408 21.8% 1,977
--------------- --------------- ---------------
Operating income (loss) (1,129) * (679) * 528
Non-operating income (expense) (138) * 146 * (57)
--------------- --------------- ---------------
Income (loss) before income tax
expense (1,267) * (533) * 471
Federal and state income tax expense 0 * 312 * 0
--------------- --------------- ---------------
Net income (loss) $ (1,267) * $ (845) * $ 471
=============== =============== ===============
PERCENTAGE OF REVENUES:
Revenues 100.0% 100.0% 100.0%
Cost of revenues 63.8 58.5 47.3
--------------- --------------- ---------------
Gross profit 36.2 41.5 52.7
Operating expenses 62.0 57.8 41.6
--------------- --------------- ---------------
Operating income (loss) (25.8) (16.3) 11.1
Non-operating income (expense) (3.1) 3.5 (1.2)
--------------- --------------- ---------------
Income (loss) before income tax
expense (28.9) (12.8) 9.9
Federal and state income tax expense 0.0 7.5 0.0
--------------- --------------- ---------------
Net income (loss) (28.9%) (20.3%) 9.9%
=============== =============== ===============
* Period to period percentage change comparisons have only been calculated for
positive numbers.
17
COMPARISON OF YEAR ENDED DECEMBER 31, 2001 WITH YEAR ENDED DECEMBER 31, 2000
Revenues increased $216,000, or 5%, to $4,383,000 for the year ended
December 31, 2001 from $4,166,000 for the year ended December 31, 2000. The
increase in revenue was due to the following: revenues from one-time domestic
license or international territory fees decreased $202,000, to $34,000 for 2001
from $236,000 for 2000; revenues from existing on-line facilities increased
$419,000 to $4,349,000 from $3,930,000 for 2000, primarily from an increase in
royalties of $81,000, an increase in management fee operations of $116,000, an
increase in alkaline admixture revenue of $86,000, an increase in product and
consulting revenue totaling $43,000, offset by decreases in research and
development project revenue of $28,000 and testing revenue (now billed directly
from an outside laboratory) of $25,000. In 2001 the Company realized a new type
of revenue when it recorded $144,000 in cash received from a foreign licensee
from the sale of equipment for the start-up of operations. Also, in 2001 the
Company recorded no gross royalty revenue from its former European licensee,
N-Viro Worldwide, Ltd., a decrease of $25,000 from 2000.
Gross Profit decreased $141,000, or 8%, to $1,588,000 for the year ended
December 31, 2001 from $1,729,000 for the year ended December 31, 2000. The
decrease in gross profit was primarily due to the increased revenue from sales
of equipment, facility management and alkaline admixture revenue which has a
higher associated cost of revenue than other types, and to the decreased revenue
from licensing which has a lower associated cost of revenue. The Company's
largest increase in revenue in 2001 was from the sale of equipment, which has a
lower gross profit margin than the Company's overall profit margin. The overall
gross profit margin decreased to 36% in 2001 from 42% for 2000. This decrease
in gross profit margin was primarily due to the decrease in one-time fee
revenue, and furthered by the increase in revenue from sales of equipment,
facility management operations and alkaline admixture revenue, which are at
higher and lower gross profit margins, respectively. One of the factors
contributing to the higher cost of revenue and lower margins was that
management operations saw increases in product distribution costs for the
N-Viro Soil(TM) product, which costs were primarily affected by the weather.
Another factor was the cost increase to the Company in 2001 for the alkaline
additive used in the process. This increase was primarily due to higher
transportation costs, which themselves were driven partially by increases in
fuel prices. However, in early 2002, the Company secured a major source of
lower cost alkaline additive in early 2002, which will generate revenue from the
management of the alkaline additive. This source should increase the gross
profit margin for these locations. The gross profit margin from existing on-line
facilities remained the same from the previous year at 39%.
Operating expenses increased $309,000, or 13% to $2,717,000 for the year
ended December 31, 2001 from $2,408,000 for the year ended December 31, 2000.
The main reason for this increase was that the Company incurred fees and
expenses of approximately $650,000 in 2001 for the defense of its patents and
licensing rights, which was approximately $520,000 more than in 2000. This
increase was partially offset by a total of approximately $210,000 primarily
for: a decrease of $200,000 in salaries and employee benefits, a decrease in
shareholder relations expense of $80,000, a $58,000 writedown of the Company's
allowance for bad debts, and an increase of $130,000 in legal fees, interest and
penalties in connection with the resolution of issues related to sales tax
audits in North Carolina and South Carolina. Because certain significant
litigation involving the Company was concluded in 2001, the Company anticipates
lower operating expenses for current ongoing operations for 2002.
Nonoperating income (expense) decreased by $284,000 to expense of
$138,000 for the year ended December 31, 2001 from income of $146,000 for the
year ended December 31, 2000. The increase was primarily due to the recovery in
2000 of $275,000 of a bad debt previously written off. The bad debt previously
written off was a note receivable from a Canadian licensee, which was fully
reserved for in allowance for bad debts.
In 1997, the Company recorded a deferred tax asset and a corresponding
income tax benefit of $312,000 to recognize the benefit of $800,000 in loss
carryforwards expected to be realized. The Company believed that sufficient
taxable income would be generated in the near term, as the Company had changed
its strategic focus to its profitable core business. Based on the results of the
Company's 2000 operating performance, the Company believed that the recording of
a deferred tax asset for the tax benefit of its net operating loss carryforward
was no longer appropriate. As a result, in 2000, the Company provided an
additional valuation allowance against the tax benefit associated with the net
operating loss and recognized expense of $312,000 to reduce the recorded tax
benefit of the net operating loss carryforwards to zero.
18
The Company recorded a net loss of $1,267,000 for the year ended
December 31, 2001 compared to a net loss of $845,000 for the year ended December
31, 2000.
The Company incurred a loss of approximately $137,000 on its share of
Florida N-Viro, LLP in 2001, an increased loss of $8,000 from 2000. The Company
anticipates this operation to continue to be unprofitable in 2002, and has taken
steps to minimize the impact of this investment on its net profit and cash flow.
The Company is currently in negotiations to sell its interest in this investment
to an unrelated third party purchaser. See the discussion in Liquidity and
Capital Resources section later in this Item 6. The audited financial statements
of Florida N-Viro are included in this document after the Company's financial
statements as Item 14(d), Financial Statements of Subsidiaries not Consolidated.
COMPARISON OF YEAR ENDED DECEMBER 31, 2000 WITH YEAR ENDED DECEMBER 31, 1999
Revenues decreased $583,000, or 12%, to $4,166,000 for the year ended
December 31, 2000 from $4,749,000 for the year ended December 31, 1999. The
decrease in revenue was due to the following: revenues from one-time domestic
license or international territory fees decreased $523,000, to $236,000 for 2000
from $759,000 for 1999; revenues from existing on-line facilities decreased
$60,000 to $3,930,000 from $3,990,000 for 1999, primarily from a decrease in
royalties of $149,000, a decrease in management fee operations of $85,000 and a
decrease in revenue from research and development projects of $75,000, offset by
an increase in alkaline admixture revenue of $299,000. In 2000 the Company
recorded approximately $25,000 in gross royalty revenue from its former European
licensee, N-Viro Worldwide, Ltd., a decrease of $75,000 from 1999.
Gross Profit decreased $776,000, or 31%, to $1,729,000 for the year
ended December 31, 2000 from $2,505,000 for the year ended December 31, 1999.
The decrease in gross profit was primarily due to the decrease in revenues from
one-time domestic license or international territory fees, and royalty fee
revenue. This revenue has a higher gross profit associated with them than other
types of revenue. The Company's largest percentage increase in revenue in 2000
was from the sale of alkaline admixture, which traditionally has a lower gross
profit margin than the Company's overall margin. The overall gross profit margin
decreased to 42% in 2000 from 53% for 1999. This decrease in gross profit margin
was primarily due to the decrease in one-time fees and royalty fee revenue, and
furthered by the increase in alkaline admixture revenue, which are at higher and
lower gross profit margins, respectively. The gross profit margin from existing
on-line facilities decreased to 39% from 46% for 1999, primarily from the
aforementioned increase in alkaline admixture revenue.
Operating expenses increased $432,000, or 22% to $2,408,000 for the year
ended December 31, 2000 from $1,976,000 for the year ended December 31, 1999.
The Company increased expenditures for salaries and employee benefits by
$141,000, the net cost (after a $100,000 settlement recovery) of patent
litigation initiated in 1999 by $123,000, legal and other professional fees by
approximately $120,000, research & development by approximately $41,000 and
sales, promotion, administrative overhead and outside consultants by a combined
total of $7,000. The Company anticipates its increase in operating expense in
2000 will translate into increased sales of the N-Viro technology in the near
future.
Nonoperating income (expense) increased by $215,000 to income of
$146,000 for the year ended December 31, 2000 from an expense of $69,000 for the
year ended December 31, 1999. The increase was primarily due to the recovery of
$275,000 of a bad debt previously written off, and an increase in the loss in
the equity of a joint venture from a loss of $69,000 in 1999 to a loss of
$129,000 in 2000. The bad debt previously written off was a note receivable from
a Canadian licensee, which was fully reserved for in allowance for bad debts.
See the discussion below of the investment in the Ft. Meade, Florida operation.
In 1997, the Company recorded a deferred tax asset and a corresponding
income tax benefit of $312,000 to recognize the benefit of $800,000 in loss
carryforwards expected to be realized. The Company believed that sufficient
taxable income would be generated in the near term, as the Company had changed
its strategic focus to its profitable core business. Based on the results of the
Company's 2000 operating performance, the Company believed that the recording of
a deferred tax asset for the tax benefit of its net operating loss carryforward
was no longer appropriate. As a result, in 2000, the Company has provided an
additional valuation allowance against the tax benefit associated with the net
operating loss and recognized expense of $312,000 to reduce the recorded tax
benefit of the net operating loss carryforwards to zero.
19
The Company recorded a net loss of $845,000 for the year ended December
31, 2000 compared to net income of $471,000 for the year ended December 31,
1999.
In early 1996 the Company completed the transfer of its interest in the
Fort Meade, Florida facility. The Company incurred a loss of approximately
$129,000 on its share of Florida N-Viro, LLP in 2000, an increased loss of
$60,000 from 1999. The Company anticipates this operation to continue to be
unprofitable in 2001, but has taken steps to minimize the impact of Florida
N-Viro on its net profit and cash flow. The audited financial statements of
Florida N-Viro are included in this document after the Company's financial
statements as Item 14(d), Financial Statements of Subsidiaries not Consolidated.
LIQUIDITY AND CAPITAL RESOURCES
The Company had a working capital deficit of approximately $955,000 at
December 31, 2001 compared to positive working capital of $311,000 at December
31, 2000, a decrease of approximately $1,266,000. Current assets at December 31,
2001 included cash and investments of $445,000 (including restricted cash of
$400,000), which is a decrease of about $101,000 from December 31, 2000. The
decrease in working capital was principally due to the operating loss for the
year.
In 2001 the Company's operating cash flow remained negative, and the
Company had difficulty paying its unsecured trade vendors. No unusual cash
transactions were recorded in 2001.
In 1997 the Company obtained a working capital line of credit of
$200,000 and in the third quarter of 1998 the line was increased to $500,000.
This debt was collateralized by a certificate of deposit with the lender,
accounts receivable, inventories and equipment, assignment of the Contract
between the City of Toledo and the Company, was due on demand, and, required the
Company to maintain certain financial covenants.
In April 2000, the Company renewed its agreement for a line of credit of
$1 million, and in May 2001 this renewal was agreed to for $750,000 that expires
April 30, 2002. This agreement is secured by a certificate of deposit with the
lender of $400,000, with all other terms similar as agreed to in 1998 except
there are no financial covenants. Borrowings up to $400,000 bear interest at
prime minus .5%, and borrowings above $400,000 bear interest at prime plus 1%.
The balance owed on the line at December 31, 2001 was approximately $504,000.
The normal collection terms for accounts receivable are approximately 60
days for a majority of the 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. The Company lowered its reserve for bad
debts during 2001 as a result of the collection of certain accounts that were
previously reserved for.
The Company is currently negotiating with several third parties in an
attempt to obtain additional sources of funds which, in management's opinion,
would provide adequate cash flows to finance the Company's cash requirements.
The satisfactory completion of these negotiations is essential as these avenues
are the Company's principal means of providing sufficient cash flows to meet
2002 requirements. Because these negotiations are still in progress, there can
be no assurance the Company will have sufficient funds to finance its
operations.
Current market trends and Company business development provide
significant basis for the Company's optimistic outlook for 2002 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.
The development and patenting of new technologies for animal manure treatment,
bio-fuel and nematode control have the potential to expand the Company's revenue
base over the next five years and beyond.
20
CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS
In preparing financial statements in conformity with accounting
principles generally accepted in the United States, 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 the significant estimates and assumptions made in preparation of
the financial statements:
Non-domestic license and territory fees - We do not recognize revenue on
any non-domestic license or territory fee contracts until the cash is received
by the Company, assuming all other tests of revenue recognition are met. Canada
is excluded from this definition of non-domestic.
Allowance for Doubtful Accounts - We estimate losses for uncollectible
accounts based on the aging of the accounts receivable and the evaluation and
the likelihood of success in collecting the receivable.
Income Taxes - We assume the deductibility of certain costs in our
income tax filings and estimate the recovery of deferred income tax assets.
New Accounting Standards - In June 1998, SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," was issued. SFAS No. 133
establishes accounting and reporting standards for derivative instruments and
hedging activities. SFAS No. 133, as amended by SFAS No. 137, is effective for
all fiscal quarters of all fiscal years beginning after June 15, 2000. In June
2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141,
"Business Combinations." SFAS No. 141 requires the purchase method of accounting
for business combinations initiated after June 30, 2001 and eliminates the
pooling-of-interest method and further clarifies the criteria to recognize
intangible assets separately from goodwill. The adoption of SFAS Nos. 133 and
141 had no material effect on the Company's financial statements.
In June 2001, FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." Under SFAS No. 142, goodwill and intangible assets deemed to have
indefinite lives will no longer be amortized but will be subject to periodic
impairment tests. Other intangible assets will continue to be amortized over
their useful lives. SFAS No. 142 is effective for fiscal years beginning after
December 15, 2001. In June 2001, FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," which is effective the first quarter of fiscal year
2003. SFAS 143 addresses financial accounting and reporting for obligations
associated with the retirement of long-lived assets and the associated asset
retirement cost. In August 2001, FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-lived Assets," which is effective the first
quarter of fiscal year 2002. SFAS No. 144 modifies and expands the financial
accounting and reporting for the impairment or disposal of long-lived assets
other than goodwill. The Company is still evaluating the impact of these new
standards, but at this time does not believe their adoption will have a
significant impact on its financial position and results of operations.
Actual results could differ materially from the estimates and
assumptions that we use in the preparation of our financial statements.
OUR ABILITY TO GROW MAY BE LIMITED BY COMPETITION
We provide a variety of technology and services relating to the
transportation and 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.
Some of these competitors are larger and have greater capital resources than we
do.
We derive a substantial portion of our 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. In addition, some of our contracts will expire in the
future and those contracts 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 and financial condition.
21
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 business. In addition, our
revenues and operational results are adversely affected during the winter months
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 to run the trucks that purchase the processing materials and
supplies for our customers, price escalations or reductions in the supply of
fuel could increase our 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.
WE ARE DEPENDENT ON THE MEMBERS OF OUR MANAGEMENT TEAM
We are highly dependent on the services of our management team, the loss
of any of whom may have a material adverse effect on our 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 or not a court will enforce a
non-compete covenant in any given situation based on the facts and circumstances
at that time. If one of our key executive officers were to leave us and the
courts refused to enforce the non-compete covenant, we might be subject to
increased competition, which could have a material and adverse effect on our
business and financial condition.
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 our services. We
have not conducted an independent review of patents issued to third parties.
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 our unpatented technology. If we are unable to maintain the
proprietary nature of our technologies, we could be materially adversely
affected.
The Company cautions 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.
Some, but not all, of the factors that could cause actual results to be
different than those anticipated or predicted by the Company include: (i) a
deterioration in economic conditions in general; (ii) a decrease in demand for
the Company's products or services in particular; (iii) the Company's 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 the
Company's products or services; (v) increases in the Company's 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 customers of the Company.
For example, while the Company anticipates obtaining the permits and approvals
necessary for the Bio-Fuel pilot program to commence operations in
22
2002, such program may not begin until 2003 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.
INFLATION
The Company believes that inflation has not had a material impact to
date on the Company's operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
As of December 31, 2001, the Company held $400,000 in a certificate of
deposit with its bank. Market risk is considered to be low, with the potential
for loss of earnings, value or other changes in interest rates to be immaterial
to the Company.
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
- --------------------------------------------------------------------------------------------------
Page
----
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON THE
FINANCIAL STATEMENTS F-3 - F-4
FINANCIAL STATEMENTS
Consolidated balance sheets F-5 - F-6
Consolidated statements of operations F-7
Consolidated statements of stockholders' equity F-8
Consolidated statements of cash flows F-9
Notes to consolidated financial statements F-10 - F-26
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON
ACCOMPANYING INFORMATION F-27
ACCOMPANYING INFORMATION
Schedule II - Valuation and qualifying accounts and reserves F-28
24
Report of Independent Public Accountants
To the Board of Directors
N-Viro International Corporation
Toledo, Ohio
We have audited the accompanying consolidated balance sheets of N-Viro
International Corporation and subsidiaries as of December 31, 2001 and 2000, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We did not audit the financial statements of Florida N-Viro, L.P., a
limited partnership, the investment in which is reflected in the accompanying
financial statements using the equity method of accounting. The investment in
this partnership represents 13% and 14% of total assets as of December 31, 2001
and 2000. The Company's share of the net loss of this partnership represents 11%
and 15% of the net loss of the Company for the years ended December 31, 2001 and
2000, respectively, and a 13% reduction of the net income (before such net loss)
of the Company for the year ended December 31, 1999. The financial statements of
this partnership were audited by other auditors, whose report has been furnished
to us, and our opinion, insofar as it relates to amounts and information
relating to this partnership, is based solely on the reports of the other
auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors,
the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of N-Viro International
Corporation and subsidiaries as of December 31, 2001 and 2000, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States of America.
F-3
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 1D to the
financial statements, the Company has in the past and continues to sustain
substantial net and operating 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 December 31, 2001, current liabilities
exceed current assets by $955,360. Additionally, the Company has been notified
by the Nasdaq Stock Market that it is in violation of the Market's listing
standards for continued listing on the Nasdaq SmallCap Market, which might
further limit the Company's ability to raise equity capital. 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.
HAUSSER + TAYLOR LLP
Cleveland, Ohio
March 12, 2002
F-4
N-VIRO INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 2001 and 2000
- --------------------------------------------------------------------------------
2001 2000
---- ----
ASSETS
------
CURRENT ASSETS
Cash and cash equivalents:
Unrestricted $ 45,427 $ 128,485
Restricted 400,000 417,666
Securities available-for-sale 1,401 1,401
Receivables:
Trade, net of allowance of $87,501 in 2001 and $144,564
in 2000 854,011 1,500,514
Notes and other 22,000 22,540
Related parties 24,461 21,912
Prepaid expenses and other assets 49,757 83,569
---------- ----------
Total current assets 1,397,057 2,176,087
PROPERTY AND EQUIPMENT 479,541 581,196
INVESTMENT IN FLORIDA N-VIRO, L.P. 525,086 661,966
INTANGIBLE AND OTHER ASSETS 1,731,647 1,332,728
---------- ----------
$4,133,331 $4,751,977
========== ==========
The accompanying notes are an integral part of these financial statements.
F-5
N-VIRO INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 2001 and 2000
- --------------------------------------------------------------------------------
2001 2000
---- ----
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Current maturities of long-term debt $ 438,534 $ 119,992
Line-of-credit 503,613 300,000
Accounts payable 991,344 1,085,872
Accrued liabilities 418,926 359,672
------------ ------------
Total current liabilities 2,352,417 1,865,536
LONG-TERM DEBT, LESS CURRENT MATURITIES 460,342 228,738
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.01 par value
Authorized - 7,000,000 shares
Issued - 2,700,933 shares 27,010 27,010
Additional paid-in capital 13,495,602 13,498,602
Retained earnings (deficit) (11,517,150) (10,249,932)
------------ ------------
2,005,462 3,275,680
Less treasury stock, at cost, 123,500 shares in 2001
and 57,250 shares in 2000 684,890 617,977
------------ ------------
Total stockholders' equity 1,320,572 2,657,703
------------ ------------
$ 4,133,331 $ 4,751,977
============ ============
The accompanying notes are an integral part of these financial statements.
F-6
N-VIRO INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2001, 2000 and 1999
- --------------------------------------------------------------------------------
2001 2000 1999
---- ---- ----
REVENUES $ 4,382,664 $ 4,166,435 $ 4,749,427
COST OF REVENUES 2,794,950 2,436,942 2,244,540
----------- ----------- -----------
GROSS PROFIT 1,587,714 1,729,493 2,504,887
OPERATING EXPENSES
Selling, general and administrative 2,167,308 2,272,978 1,964,307
Patent litigation expense 549,852 135,272 12,145
----------- ----------- -----------
2,717,160 2,408,250 1,976,452
----------- ----------- -----------
OPERATING INCOME (LOSS) (1,129,446) (678,757) 528,435
NONOPERATING INCOME (EXPENSE)
Interest income (expense), net 4,113 (50) 12,283
Recovery of bad debt allowance - 275,000 -
Loss on sale of assets (5,005) - -
Loss from equity investment in joint venture (136,880) (128,701) (69,344)
----------- ----------- -----------
(137,772) 146,249 (57,061)
----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (1,267,218) (532,508) 471,374
Federal and state income taxes - 312,000 -
----------- ----------- -----------
NET INCOME (LOSS) $(1,267,218) $ (844,508) $ 471,374
=========== =========== ===========
Basic and diluted earnings (loss) per share $ (0.48) $ (0.32) $ 0.18
=========== =========== ===========
Weighted average common shares outstanding 2,635,334 2,635,475 2,563,121
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
F-7
N-VIRO INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 2001, 2000 and 1999
- --------------------------------------------------------------------------------
Additional Retained
Common Paid-in Earnings Treasury
Stock Capital (Deficit) Stock Total
------------ ------------ ------------ ------------ ------------
BALANCE - JANUARY 1, 1999 $ 28,298 $ 13,632,425 $ (9,876,798) $ (1,117,977) $ 2,665,948
Net income - - 471,374 - 471,374
Issuance of common stock for
fees and services 84 11,766 - - 11,850
Sale of common stock, net of
expenses of $1,288 1,000 197,712 - - 198,712
Retirement of treasury stock (2,500) (497,500) - 500,000 -
Other - 37,690 - - 37,690
------------ ------------ ------------ ------------ ------------
BALANCE - DECEMBER 31, 1999 26,882 13,382,093 (9,405,424) (617,977) 3,385,574
Net loss - - (844,508) - (844,508)
Exercise of qualified stock options 24 3,726 - - 3,750
Issuance of common stock for
fees and services 104 28,014 - - 28,118
Other - 84,769 - - 84,769
------------ ------------ ------------ ------------ ------------
BALANCE - DECEMBER 31, 2000 27,010 13,498,602 (10,249,932) (617,977) 2,657,703
Net loss - - (1,267,218) - (1,267,218)
Purchase of treasury stock - - - (66,913) (66,913)
Other - (3,000) - - (3,000)
------------ ------------ ------------ ------------ ------------
BALANCE - DECEMBER 31, 2001 $ 27,010 $ 13,495,602 $(11,517,150) $ (684,890) $ 1,320,572
============ ============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
F-8
N-VIRO INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2001, 2000 and 1999
- --------------------------------------------------------------------------------
2001 2000 1999
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $(1,267,218) $ (844,508) $ 471,374
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating activities:
Depreciation and amortization 263,861 188,398 175,574
Provision (credit) for bad debts (57,063) (315,016) -
Deferred income taxes - 312,000 -
Loss on the sale of fixed assets 5,005 755 -
Issuance of common stock and options for fees and
services - 112,887 49,540
Other 136,880 155,031 72,234
Decrease (increase) in trade receivables 554,153 (214,442) (616,721)
Decrease (increase) in prepaid expenses 33,812 (11,309) 9,384
(Decrease) increase in accounts payable and accrued
liabilities (35,274) 411,480 77,847
----------- ----------- -----------
Net cash (used in) provided by operating activities (365,844) (204,724) 239,232
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in restricted cash and cash equivalents - (417,666) -
Reductions to restricted cash and cash equivalents 17,666 - -
Purchases of property and equipment (43,681) (49,147) (130,638)
Proceeds from sale of equipment - 6,000 -
Collections from (advances to) related parties (2,549) 26,687 (1,809)
Increase in notes receivable (212,873) (174,611) (52,138)
Collections on notes receivable 20,777 371,415 141,387
Expenditures for intangible and other assets (42,726) (233,585) (63,275)
Additional investment in Florida N-Viro, L.P. - - (7,500)
----------- ----------- -----------
Net cash used in investing activities (263,386) (470,907) (113,973)
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings on line-of-credit 203,613 300,000 -
Borrowings under long-term obligations 523,472 77,162 161,127
Principal payments on long-term obligations (177,913) (129,642) (105,079)
Proceeds from sale of common stock - - 48,712
Other (3,000) 3,750 -
----------- ----------- -----------
Net cash provided by financing activities 546,172 251,270 104,760
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (83,058) (424,361) 230,019
CASH AND CASH EQUIVALENTS - BEGINNING 128,485 552,846 322,827
----------- ----------- -----------
CASH AND CASH EQUIVALENTS - ENDING $ 45,427 $ 128,485 $ 552,846
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
F-9
N-VIRO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Nature of Business - The Company owns and licenses the N-Viro
Process, a patented technology to treat and recycle wastewater
sludges and other bio-organic wastes, utilizing certain alkaline
by-products produced by the cement, lime, electric utilities and
other industries. Revenue and the related accounts receivable
are due from companies acting as independent agents or
licensees, principally municipalities. Credit is generally
granted on an unsecured basis. Periodic credit evaluations of
customers are conducted and appropriate allowances are
established.
B. Use of Estimates - The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
as of the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
C. Principles of Consolidation - The consolidated financial
statements include the accounts of the Company and its
wholly-owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation.
The Company accounts for its investments in joint ventures under
the equity method.
D. Going Concern - The accompanying financial statements have been
prepared assuming that the Company will continue as a going
concern. The Company has in the past and continues to sustain
substantial net and operating 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 December 31, 2001, current liabilities exceed current
assets by $955,360. Additionally, the Company has been notified
by the Nasdaq Stock Market that it is in violation of the
Market's listing standards for continued listing on the Nasdaq
SmallCap Market, which might further limit the Company's ability
to raise equity capital. 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.
Management of the Company is currently negotiating with several
third parties in an attempt to obtain additional sources of
funds which, in management's opinion, would provide adequate
cash flows to finance the Company's cash requirements. The
satisfactory completion of these negotiations is essential as
these avenues are the Company's principal means of providing
sufficient cash flows to meet 2002 requirements. Because these
negotiations are still in progress, there can be no assurance
that the Company will have sufficient funds to finance its
operations. However, management of the Company expects
significant improvements in operating results for 2002 and
believes that many of the costs (including significant
litigation costs associated with patent defense and license
recovery) incurred in 2001 are nonrecurring. Additionally,
market developments and opportunities with a major utilities
company and a large wastewater contractor, which are currently
in the negotiation phase, if finalized, should provide enhanced
liquidity and positively impact 2002 operations.
F-10
N-VIRO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
E. 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.
F. Cash and Cash Equivalents - The Company has cash on deposit in
one financial institution which, at times, may be in excess of
FDIC insurance limits.
For purposes of the statements of cash flows, the Company
considers all certificates of deposit with initial maturities of
90 days or less to be cash equivalents.
Restricted cash consists of a certificate of deposit which is
held as collateral against the Company's line-of-credit.
G. Property and Equipment - Depreciation has been computed
primarily by the straight-line method over the estimated useful
lives of the assets. Generally, useful lives are thirty-one
years for leasehold improvements and five to fifteen years for
equipment and furniture and fixtures. Depreciation expense
amounted to $140,331, $106,231 and $107,850 in 2001, 2000 and
1999, respectively. Management has reviewed property and
equipment for impairment when events and circumstances indicate
that the assets might be impaired and the carrying values of
those assets may not be recoverable. Management believes the
carrying amount is not impaired based upon estimated future cash
flows.
H. Intangible Assets - Patent costs and territory rights are
recorded at cost and then amortized by the straight-line method
over periods ranging from twelve to seventeen years.
Amortization expense amounted to $123,530, $82,167 and $67,724
in 2001, 2000 and 1999, respectively. Management has reviewed
intangible assets for impairment when events and circumstances
indicate that the assets might be impaired and the carrying
values of those assets may not be recoverable. Management
believes the carrying amount is not impaired based upon
estimated future cash flows.
I. Revenue Recognition - Facility management revenue, sludge
processing revenue and royalty fees are recognized under
contracts where the Company or licensees utilize the N-Viro
Process to treat sludge, either pursuant to a fixed-price
contract or based on volumes of sludge processed. Revenue is
recognized as services are performed.
Alkaline admixture sales, equipment sales and N-Viro Soil
revenue are recognized upon shipment.
License and territory fees are generated by selling the right to
market or use the N-Viro Process in a specified territory. The
Company's policy is to record revenue for the license agreements
when all material services relating to the revenue have been
substantially performed, conditions related to the contract have
been met and no material contingencies exist.
Research and development revenue is recognized as work is
performed and billed to the contracting entity.
F-11
N-VIRO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
I. Revenue Recognition (Continued)
Any type of revenue generated from international customers is
recognized when the cash is received.
J. Earnings (Loss) Per Common Share - Earnings (loss) per common
share has been computed on the basis of the weighted-average
number of common shares outstanding during each period
presented. For the years ended December 31, 2001 and 2000, the
effects of the stock options granted are excluded from the
diluted per share calculation because they would be
antidilutive. For the year ended December 31, 1999, the effect
of stock options increased the weighted average number of shares
by 9,804.
K. New Accounting Standards - In June 1998, SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities,"
was issued. SFAS No. 133 establishes accounting and reporting
standards for derivative instruments and hedging activities.
SFAS No. 133, as amended by SFAS No. 137, is effective for all
fiscal quarters of all fiscal years beginning after June 15,
2000. In June 2001, the Financial Accounting Standards Board
("FASB") issued SFAS No. 141, "Business Combinations." SFAS No.
141 requires the purchase method of accounting for business
combinations initiated after June 30, 2001 and eliminates the
pooling-of-interest method and further clarifies the criteria to
recognize intangible assets separately from goodwill. The
adoption of SFAS Nos. 133 and 141 had no material effect on the
Company's financial statements.
In June 2001, FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets." Under SFAS No. 142, goodwill and intangible
assets deemed to have indefinite lives will no longer be
amortized but will be subject to periodic impairment tests.
Other intangible assets will continue to be amortized over their
useful lives. SFAS No. 142 is effective for fiscal years
beginning after December 15, 2001. In June 2001, FASB issued
SFAS No. 143, "Accounting for Asset Retirement Obligations,"
which is effective the first quarter of fiscal year 2003. SFAS
143 addresses financial accounting and reporting for obligations
associated with the retirement of long-lived assets and the
associated asset retirement cost. In August 2001, FASB issued
SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-lived Assets," which is effective the first quarter of
fiscal year 2002. SFAS No. 144 modifies and expands the
financial accounting and reporting for the impairment or
disposal of long-lived assets other than goodwill. The Company
is still evaluating the impact of these new standards, but at
this time does not believe their adoption will have a
significant impact on its financial position and results of
operations.
L. Reclassifications - Certain amounts from the prior year
financial statements have been reclassified to conform with the
current year presentation.
F-12
N-VIRO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. BALANCE SHEET DATA
TRADE RECEIVABLES:
Trade receivables in the accompanying balance sheets at December
31, 2001 and 2000 are stated net of an allowance for doubtful
accounts of $87,501 and $144,564, respectively.
NOTES AND OTHER RECEIVABLES:
The Company has notes receivable with customers and various
other parties, totaling $426,130 in 2001 and $234,034 in 2000.
At December 31, 2001, unsecured, 9.75% demand notes receivable
totaling $191,141 (including accrued interest of $21,141) and
unsecured, prime (stated by a local bank) plus 1/4% demand note
receivable totaling $196,343 (including accrued interest of
$16,343) are due from Florida N-Viro, the Company's joint
venture investee. The notes due from Florida N-Viro have been
deemed to be noncurrent by management in the accompanying
balance sheets. At December 31, 2001, a note receivable of
$38,646, $22,000 of which is current, is due from a non-related
licensee.
The Company has various unsecured notes receivable from related
parties totaling $24,461 in 2001 and $21,912 in 2000, which bear
interest at 6% and are due on demand.
PROPERTY AND EQUIPMENT (AT COST):
2001 2000
---- ----
Land and leasehold improvements $ 44,911 $ 44,911
Equipment 1,141,408 1,252,342
Furniture and fixtures 195,318 195,719
---------- ----------
1,381,637 1,492,972
Less accumulated depreciation and amortization 902,096 911,776
---------- ----------
$ 479,541 $ 581,196
========== ==========
F-13
N-VIRO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. BALANCE SHEET DATA (CONTINUED)
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.
Condensed financial information of the partnership as of
December 31, 2001 and 2000 is as follows:
2001 2000
---- ----
Current assets $ 633,019 $ 387,650
Long-term assets 2,113,032 2,270,824
---------- ----------
$2,746,051 $2,658,474
========== ==========
Current liabilities $1,610,090 $1,170,915
Long-term liabilities 110,198 173,629
Partners' equity 1,025,763 1,313,930
---------- ----------
$2,746,051 $2,658,474
========== ==========
Year Ended December 31,
---------------------------------------------
2001 2000 1999
---- ---- ----
Net sales $ 2,930,294 $ 2,777,606 $ 1,498,821
Net loss (288,168) (257,402) (138,686)
During 2001, 2000 and 1999, the Partnership's largest customer
accounted for 19%, 17% and 27%, respectively, of its revenue.
Additionally, during 2001, 2000 and 1999, the Partnership's
largest customers accounted for 59% (four customers), 77% (four
customers) and 78% (six customers) of total revenue,
respectively.
INTANGIBLE AND OTHER ASSETS:
2001 2000
---- ----
Patents and other intangibles, less accumulated
amortization
2001 - $325,000; 2000 - $266,000 $ 772,124 $ 815,587
Territory rights, less accumulated amortization
2001 - $145,000; 2000 - $108,000 555,393 305,647
Notes receivable - Florida N-Viro, L.P. 387,484 174,611
Other notes receivable 16,646 36,883
---------- ----------
$1,731,647 $1,332,728
========== ==========
F-14
N-VIRO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. BALANCE SHEET DATA (CONTINUED)
INTANGIBLE AND OTHER ASSETS (CONTINUED):
During the year ended December 31, 2001, the Company
repurchased, as part of the settlement of a lawsuit (see Note
6), the exclusive license and territory rights, valued at
approximately $287,000, for portions of the Northeast and
Mid-Atlantic United States from an unrelated party.
During the year ended December 31, 2000, the Company purchased
from the Canadian government the right to market and sell
licenses promoting a patent-pending technology that inhibits the
growth of soybean cyst nematodes, in exchange for the
forgiveness of a portion of a note receivable for $250,000 due
the Company from an unrelated licensee. This portion of the note
had previously been fully reserved for in the allowance for bad
debts and the Company recognized income in 2000 on the recovery
of this note. In 2000, the Company purchased a non-exclusive
license to use a patent-pending technology and Internet site
address from an unrelated party in exchange for a total of
approximately $205,500. Additionally, in 2000, the Company
repurchased the territory covering nine midwestern and western
states of the United States from an unrelated party in exchange
for $10,000 cash.
During the year ended December 31, 1999, the Company repurchased
portions of the Kentucky, Virginia and West Virginia territory
from an unrelated party in exchange for $15,000 cash and a
$135,000 note payable.
ACCRUED LIABILITIES:
2001 2000
---- ----
Employee benefits $ 56,116 $ 68,182
Sales tax payable 168,274 239,068
Other 194,536 52,422
-------- --------
$418,926 $359,672
======== ========
NOTE 3. PLEDGED ASSETS, LINE-OF-CREDIT AND LONG-TERM DEBT
The Company has available a $750,000 line-of-credit with a bank
which expires April 30, 2002. Borrowings against the
line-of-credit bear interest at prime minus .5% on borrowings up
to $400,000 and prime plus 1% for borrowings above $400,000.
Borrowings, which are collateralized by accounts receivable,
inventories, equipment, assignment of a $400,000 certificate of
deposit and assignment of certain contracts, are due on demand.
At December 31, 2001, the Company had borrowed $503,613 against
the line.
F-15
N-VIRO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. PLEDGED ASSETS, LINE-OF-CREDIT AND LONG-TERM DEBT (CONTINUED)
Long-term debt at December 31, 2001 and 2000 is as follows:
2001 2000
---- ----
Notes payable $898,876 $348,730
Less current maturities 438,534 119,992
-------- --------
$460,342 $228,738
======== ========
The notes payable are notes signed for amounts owed to vendors
and other parties. The notes bear interest ranging from 6% to
19% and are due at varying dates through March 2007. Aggregate
maturities of long-term debt for the years ending December 31
are as follows: 2002 - $438,534; 2003 - $133,173; 2004 -
$117,855; 2005- $99,782; 2006 - $85,603 and 2007 - $23,929.
Interest expensed and paid was approximately $58,000, $36,500
and $25,200 for the years ended December 31, 2001, 2000 and
1999, respectively.
NOTE 4. EQUITY TRANSACTIONS
The Company has authorized 2,000,000 shares of preferred stock,
par value of $.01 per share, of which no shares were outstanding
at December 31, 2001 and 2000.
The Company has a stock option plan for directors and key
officers under which 600,000 shares of common stock may be
issued. The options are 20% vested on the date of grant, with
the balance vesting 20% per year over the next four years except
for directors whose options vest immediately. Options have been
granted at the approximate market value of the stock at date of
grant.
The following summarizes the number of grants and their
respective exercise prices and grant date fair values per option
for the years ended December 31, 2001, 2000 and 1999 and the
number outstanding and exercisable at those dates:
2001 2000 1999
-------------------- -------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------- ---------- -------- ---------- -------- ---------
Outstanding, beginning of year 516,325 $2.69 454,325 $2.62 461,325 $2.65
Granted 93,200 1.50 95,500 3.37 7,000 2.16
Expired during the year (42,000) 2.72 (33,500) 3.72 (14,000) 3.43
-------- -------- --------
Outstanding, end of year 567,525 2.49 516,325 2.69 454,325 2.62
======= ======= =======
Eligible for exercise at end of year 403,425 316,125 261,725
======= ======= =======
Weighted average fair value per
option for options granted
during the year $1.50 $3.29 $2.16
===== ===== =====
F-16
N-VIRO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. EQUITY TRANSACTIONS (CONTINUED)
A further summary of stock options follows:
Options Outstanding Options Exercisable
------------------------------------------ ---------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Outstanding Life Price Exercisable Price
------------- ------------- ---------- ------------- ----------
2001
-------------------------------------------------------------------------------------------------------
Range of exercise prices:
$1.50 to $2.43 458,600 7.37 $2.01 324,100 $2.09
$4.00 to $5.00 108,925 4.77 4.52 79,325 4.35
2000
-------------------------------------------------------------------------------------------------------
Range of exercise prices:
$1.56 to $2.43 398,400 7.74 $2.14 240,700 $2.15
$4.00 to $5.00 117,925 5.94 4.55 75,425 4.30
1999
-------------------------------------------------------------------------------------------------------
Range of exercise prices:
$1.56 to $2.38 359,200 8.27 $2.21 171,200 $2.15
$4.00 to $4.75 95,125 4.14 4.17 90,525 4.14
As permitted under accounting principles generally accepted in
the United States of America, the Company's present accounting
with respect to the recognition and measurement of stock-based
employee compensation costs is in accordance with APB Opinion
No. 25, which generally requires that compensation costs be
recognized for the difference, if any, between the quoted market
price of the stock at grant date and the amount an employee must
pay to acquire the stock. The Company follows the disclosure
provisions of SFAS Statement No. 123 which prescribes a
fair-value based method of measurement that results in the
disclosure of computed compensation costs for essentially all
awards of stock-based compensation to employees.
Had compensation cost been determined based upon the fair value
method prescribed in SFAS Statement No. 123, reported net income
(loss) would have been $(1,513,440), ($1,064,278) and $313,173
and basic earnings (loss) per share would have been $(.57),
($.40) and $.12 for the years ended December 31, 2001, 2000 and
1999, respectively.
In determining the pro forma amounts above, the value of each
grant is estimated at the grant date using the fair value method
prescribed in Statement No. 123, with the following
weighted-average assumptions for grants in 2001, 2000 and 1999,
respectively: no assumed dividend rates for all years; risk-free
interest rates of 5.0%, 6.0% and 5.5% on expected lives of 10
years for all years; and expected price volatility of 113%, 135%
and 114%, respectively.
F-17
N-VIRO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. REVENUE AND MAJOR CUSTOMERS
Revenues for the years ended December 31, 2001, 2000 and 1999
consist of the following:
2001 2000 1999
---- ---- ----
Facility management $1,637,243 $1,520,830 $1,605,332
Technology fees 849,086 999,345 1,745,010
Products and services 1,896,335 1,646,260 1,399,085
--------- --------- ---------
$4,382,664 $4,166,435 $4,749,427
========== ========== ==========
Cost of revenues for the years ended December 31, 2001, 2000 and
1999 consist of the following:
2001 2000 1999
---- ---- ----
Facility management $1,272,566 $1,138,071 $1,083,902
Technology fees 183,294 219,852 269,322
Products and services 1,339,090 1,079,019 891,316
---------- ---------- ----------
$2,794,950 $2,436,942 $2,244,540
========== ========== ==========
Revenues for the years ended December 31, 2001, 2000 and 1999
include revenues from one major customer, the City of Toledo,
Ohio (included in the facility management and products and
services classifications), which represented approximately 39%,
38% and 35%, respectively, of total revenues. In addition, the
Company had another major customer, the City of Greenville,
South Carolina, totaling approximately 7%, 12% and 10% of total
revenues (which is included mainly in the products and services
classification) for the years ended December 31, 2001, 2000 and
1999, respectively. The accounts receivable balances due from
these customers at December 31, 2001 and 2000 were approximately
$118,000 and $217,000, respectively.
F-18
N-VIRO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6. COMMITMENTS AND CONTINGENCIES
In November 2001, the Company and Hydropress Environmental
Services, Inc. ("Hydropress") signed a Settlement Agreement, as
filed under Form 8-K dated December 14, 2001. Each party
dismissed its claims against each other with prejudice and
entered into general releases of the other party. N-Viro
purchased back the 66,250 N-Viro shares held by Hydropress at
the market price as of November 15, 2001, which was $1.01 per
share for a total of $66,913. This has been recorded as treasury
stock in the financial statements. N-Viro also purchased back
three patent license agreements (including territory rights)
from Hydropress valued at approximately $287,000. The first
license concerned the exclusive right to sell and use the N-Viro
technology in Massachusetts, Vermont and New Hampshire. The
second concerned the non-exclusive right to sell and use the
N-Viro technology in New Jersey, Delaware, Maryland and Eastern
Pennsylvania. The third concerned amendments to the two
prior-mentioned agreements and the exclusive right to use the
N-Viro technology at Hydropress' facility in Phillipsburg, New
Jersey. N-Viro and Hydropress entered into a new patent license
agreement granting Hydropress the non-exclusive right to use the
N-Viro technology at its facility in Phillipsburg, New Jersey.
As to payment, Hydropress credited N-Viro with $149,413 for past
royalties that Hydropress owed N-Viro. Thus, at settlement,
N-Viro owed Hydropress $204,587. N-Viro issued Hydropress a
Promissory Note providing for ten equal monthly installments of
$6,000 each to be paid by the 15 of each month beginning in
December 2001 and ending in September 2002. On or before October
15, 2002, N-Viro will pay Hydropress the balance of $144,587.
The 66,250 N-Viro shares purchased from Hydropress are being
held in escrow until the note payable is fully paid. All
scheduled payments to date have been made timely.
In July 2000, the Company terminated the license of N-Viro
Worldwide Limited and filed suit against Robin Millard and R3
Management Limited ("R3M"). The suit sought damages for breach
of contract, breach of fiduciary duty and related torts based on
intellectual property developed by Mr. Millard that the Company
contends is owned by the Company. N-Viro settled this lawsuit
with Mr. Millard and R3M in the United States district Court for
the Northern District of Ohio (#3:00CV7443). The terms are as
follows: N-Viro dismissed its claims with prejudice and
renounced any prior interest in R3M's technology. R3M licensed
its proprietary technology to N-Viro on a worldwide
non-exclusive basis subject to certain exceptions. N-Viro paid a
$5,000 fee for the license, which also provides for royalty
payments if N-Viro uses or licenses the technology. R3M assigned
to N-Viro R3M's interest in sublicense agreements with Yorkshire
Water, Ltd. and Silt (now DEC), N.V. N-Viro terminated its
exclusive license with R3M related to N-Viro's proprietary
technology in specified countries in Europe, the Middle East and
the former Soviet Union. R3M and an affiliate, N-Viro Worldwide,
Ltd. ("NVWL"), agreed to cease using the name "N-Viro" and to
transfer to N-Viro the Internet URL "n-viro.com." NVWL agreed to
pay N-Viro $195,532 for past fees owed and for equipment. N-Viro
agreed to pay NVWL $195,532 for ceasing to use the N-Viro name
and for transferring the Internet URL "n-viro.com."
On October 30, 2001, the Company settled its lawsuit with RDP
Technologies, Inc. ("RDP"). RDP filed the lawsuit in Delaware
federal court in August 2000, asserting claims for tortious
interference with prospective business relations and unfair
competition, and later adding a claim for a declaratory judgment
regarding infringement, validity and enforceability of two of
the Company's patents. The Company denied all of RDP's claims.
As a result of the settlement, RDP's claims were dismissed with
prejudice, and each party agreed to bear its own costs and
attorneys fees.
F-19
N-VIRO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
In 2001, officials of the North Carolina Department of Revenue
(the "Department") contacted the Company and indicated that the
Company was under investigation for failing to file sales tax
returns in the state of North Carolina during the period from
December 1994 to June 2001. The Company acknowledged to
Department officials that during that period of time, it had
collected approximately $80,000 in sales taxes from certain
customers but had not collected sales tax from other customers
in North Carolina. The Company submitted a memorandum to the
Department arguing that no sales tax was due by the Company
because the sales at issue were exempt from sales tax. The
Department disagreed with this memorandum and levied a fine and
civil penalty plus interest due on the previous unremitted
taxes, which the Company agreed to in lieu of litigation. To
date the Company has remitted all sales tax due the State, as
well as paid the fine and approximately one-third of the civil
penalty and interest due, and has arranged a short-term payment
schedule agreed to by the Department on the balance.
The Company has voluntarily approached state tax authorities in
South Carolina and acknowledged failing to file sales tax
returns within that state. The Company has collected and accrued
approximately $167,000 in sales tax from customers in South
Carolina that has not been remitted to South Carolina tax
authorities. The Company believes that the sales at issue are
exempt from sales tax. The Company has retained counsel in South
Carolina to assist it in negotiating a settlement of this
matter.
The Company leases office space under an agreement which
requires monthly payments of approximately $5,200. The lease
expires in December 2002. The Company also leases various
equipment on a month-to-month basis. The total rental expense
included in the statements of operations for the years ended
December 31, 2001, 2000 and 1999 is approximately $63,300,
$59,000 and $56,000, respectively.
The Company has a minimum commitment for 2002 under an agreement
with a consultant payable in cash or stock of $60,000.
During 1999, the Company entered into employment and consulting
agreements with two officers of the Company. The employment
agreements expire in July 2002 and June 2004. Future
compensation amounts are to be determined annually by the Board.
In addition, one of the agreements provides for payment of life
insurance premiums and the provision of health insurance
coverage to the officer and his spouse for their lives. The
present value of estimated costs related to the insurance
provisions of this agreement total $129,000 at July 2002. The
cost is being recognized over the term of the employment
agreement. The consulting agreements begin upon termination of
the respective employment agreements and extend through July
2015 and June 2014, respectively. The agreements require minimum
future services to be provided to be eligible for compensation.
F-20
N-VIRO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company operates in an environment with many financial
risks, including, but not limited to, major customer
concentrations, competing technologies, infringement and/or
misappropriation of intellectual property rights, and the highly
competitive and, at times, seasonal nature of the industry and
worldwide economic conditions. The Company's ability to expand
and diversify its operations is also dependent upon the
Company's ability to obtain the necessary capital through
operating cash flow, additional borrowings or additional equity
funds (also see Note 1.D. - Going Concern). Various federal,
state and governmental agencies are considering, and some have
adopted, laws and regulations regarding environmental protection
which could adversely affect the business activities of the
Company. The Company cannot predict what effect, if any, current
and future regulations may have on the operations of the
Company.
The Company is involved in legal proceedings and subject to
claims which have arisen in the ordinary course of business.
These actions, when concluded and determined, will not, in the
opinion of management, have a material adverse effect upon the
financial position, results of operations or cash flows of the
Company.
NOTE 7. INCOME TAX MATTERS
Deferred income tax assets and liabilities are computed annually
for differences between the financial statement and tax bases of
assets and liabilities that will result in taxable or deductible
amounts in the future based on enacted tax laws and rates
applicable to the periods in which the differences are expected
to affect taxable income. Valuation allowances are established
when necessary to reduce deferred tax assets to the amount
expected to be realized. Income tax expense is the tax payable
or refundable for the current period plus or minus the change
during the period in deferred tax assets and liabilities.
The composition of the deferred tax assets and liabilities at
December 31, 2001 and 2000 is as follows:
2001 2000
---- ----
Gross deferred tax liability, accelerated
depreciation $ (25,000) $ (29,000)
Gross deferred tax assets:
Loss carryforwards 4,481,000 3,925,000
Patent costs 361,000 437,000
Allowance for doubtful accounts 35,000 58,000
Property and equipment basis difference 9,000 12,000
Other 9,000 12,000
------------ ------------
4,895,000 4,444,000
Less valuation allowance (4,870,000) (4,415,000)
------------ ------------
$ - $ -
============ ============
F-21
N-VIRO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. INCOME TAX MATTERS (CONTINUED)
The income tax provisions differ from the amount of income tax
determined by applying the U.S. Federal income tax rate to
pre-tax income from continuing operations for the years ended
December 31, 2001, 2000 and 1999 and are as follows:
2001 2000 1999
---- ---- ----
Computed "expected" tax (credits) $(431,000) $(181,000) $ 160,000
State taxes, net of federal tax benefit (38,000) (16,000) 14,000
(Decrease) increase in income taxes resulting
from:
Change in valuation allowance 455,000 480,000 (148,000)
Other 14,000 29,000 (26,000)
--------- --------- ---------
$ - $ 312,000 $ -
========= ========= =========
The net operating losses available at December 31, 2001 to
offset future taxable income total approximately $11,000,000 and
expire principally in years 2009 - 2021. The tax effect of net
operating loss carryforwards reduced the 1999 current provision
for income taxes by $115,000.
In 1997, the Company recorded a deferred tax asset and a
corresponding income tax benefit of $312,000 to recognize the
benefit of $800,000 in loss carryforwards expected to be
realized. The Company believed that sufficient taxable income
would be generated in the near term, as the Company had changed
its strategic focus to its profitable core business. Based on
the results of the Company's 2000 operating performance, the
Company believes that the recording of a deferred tax asset for
the tax benefit of its net operating loss carryforward is no
longer appropriate. As a result, in 2000, the Company has
provided an additional valuation allowance against the tax
benefit associated with the net operating loss and recognized
expense of $312,000 to reduce the recorded tax benefit of the
net operating loss carryforwards to $-0-.
NOTE 8. CASH FLOWS INFORMATION
Information relative to the statements of cash flows not
disclosed elsewhere for the year ended December 31, 1999
follows:
Supplemental schedule of noncash investing and financing
activities:
Common stock subscribed $150,000
========
Retirement of treasury stock $500,000
========
F-22
N-VIRO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. SEGMENT INFORMATION
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 those
described in Note 1 which contains the Company's significant
accounting policies. Fixed assets generating specific revenue
are identified with their respective segments as they 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 identified with
the Corporate segment. The Company does not allocate any
selling, general and administrative expenses to any specific
segments. All of the other income (expense) costs or income 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.
These segments represent both a significant amount of business
generated as well as a specific location and unique type of
revenue.
The next two segments are divided between domestic and foreign
sources, as these 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 three years and are not
expected to change in the near term.
A new segment first presented at December 31, 2000 is the
Research and Development segment. Prior year amounts have been
reclassified to conform with the current year presentation. This
segment is unlike any other segment in that revenue is generated
as a result of a specific project to conduct initial or
additional ongoing research into the Company's emerging
technologies.
F-23
N-VIRO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. SEGMENT INFORMATION (CONTINUED)
The table below presents information about the segment profits
and segment identifiable assets used by the chief operating
decision makers of the Company as of and for the years ended
December 31, 2001, 2000 and 1999 (dollars in thousands).
Other
Management Domestic Foreign Research &
Operations Operations Operations Development Total
---------- ---------- ---------- ----------- -----
2001
Revenues $1,727 $2,213 $ 222 $ 221 $4,383
Cost of revenues 1,273 1,206 132 184 2,795
Segment profits 454 1,007 90 37 1,588
Identifiable assets 184 87 - 51 322
Depreciation 31 71 - 7 109
2000
Revenues $1,582 $2,265 $ 70 $ 249 $4,166
Cost of revenues 1,138 1,115 - 184 2,437
Segment profits 444 1,150 70 65 1,729
Identifiable assets 205 74 - 58 337
Depreciation 25 45 - 3 73
1999
Revenues $1,677 $2,640 $ 163 $ 270 $4,750
Cost of revenues 1,084 985 - 176 2,245
Segment profits 593 1,655 163 94 2,505
Identifiable assets 189 82 - 61 332
Depreciation 15 43 - 6 64
F-24
N-VIRO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. SEGMENT INFORMATION (CONTINUED)
A reconciliation of total segment profits, identifiable assets
and depreciation and amortization to the consolidated financial
statements as of and for the years ended December 31, 2001, 2000
and 1999 follows (dollars in thousands):
2001 2000 1999
---- ---- ----
Segment profits:
Segment profits for reportable segments $ 1,588 $ 1,729 $ 2,505
Corporate selling, general and administrative
expenses and research and development costs (2,717) (2,408) (1,977)
Other income (expense) (138) 146 (57)
------- ------ -------
Consolidated earnings before taxes $(1,267) $ (533) $ 471
======= ====== =======
Identifiable assets:
Identifiable assets for reportable segments $ 322 $ 337 $ 332
Corporate property and equipment 158 244 264
Current assets not allocated to segments 1,397 2,176 2,236
Intangible and other assets not allocated to
segments 2,491 2,229 2,174
Consolidated eliminations (234) (234) (234)
------- ------ -------
Consolidated assets $ 4,134 $ 4,752 $ 4,772
======= ====== =======
Depreciation and amortization:
Depreciation for reportable segments $ 109 $ 73 $ 64
Corporate depreciation and amortization 155 115 112
------- ------ -------
Consolidated depreciation and amortization $ 264 $ 188 $ 176
======= ====== =======
NOTE 10. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of selected quarterly financial data
for the years ended December 31, 2001 and 2000:
Quarters Ended
----------------------------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
2001
----
Revenues $1,162,764 $1,115,478 $1,175,057 $ 929,365
Operating loss (208,626) (157,866) (280,933) (482,021)
Net loss (219,735) (203,158) (356,858) (487,467)
Basic and diluted loss
per share $ (0.08) $ (0.08) $ (0.13) $ (0.19)
F-25
N-VIRO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
Quarters Ended
----------------------------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
2000
Revenues $1,107,033 $1,112,463 $1,083,134 $ 863,805
Operating income (loss) (58,505) 43,027 (82,793) (580,486)
Net income (loss) 163,034 14,875 (161,430) (860,987)
Basic and diluted income
(loss) per share $ 0.06 $ 0.01 $ (0.06) $ (0.33)
F-26
Report of Independent Public Accountants
To the Board of Directors
N-Viro International Corporation
Toledo, Ohio
Our audits of the consolidated financial statements of N-Viro
International Corporation and subsidiaries included Schedule II, contained
herein, for each of the three years in the period ended December 31, 2001. Such
schedule is presented for purposes of complying with the Securities and Exchange
Commission's rule and is not a required part of the basic consolidated financial
statements. In our opinion, such schedule presents fairly the information set
forth therein, in conformity with accounting principles generally accepted in
the United States of America.
HAUSSER + TAYLOR LLP
Cleveland, Ohio
March 12, 2002
F-27
N-VIRO INTERNATIONAL CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
December 31, 2001, 2000 and 1999
- --------------------------------------------------------------------------------
Balance at Deductions Balance at
Beginning Charged to From Close
of Period Operations Reserves of Period
------------- ------------ ------------ ------------
Allowance for doubtful accounts - deducted
from trade receivables and notes receivable
in the balance sheets:
2001 $145,000 $ - $ 57,500 (2) $ 87,500
======== ======= ======== ========
2000 $460,000 $16,000 $331,000 (1) $145,000
======== ======= ======== ========
1999 $460,000 $ - $ - $460,000
======== ======= ======== ========
(1) The 2000 deduction from reserves was the result of a transaction which
included the Company acquiring technology from the Canadian government
in exchange for the forgiveness of a portion of a note receivable (see
Note 2).
(2) The 2001 deduction from reserves was the result of the Company
collecting amounts due from certain customers that were previously
reserved for.
F-28
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference to
the information under the heading "Election of Directors" and "Executive
Officers of the Company" in the definitive proxy statement of the Company filed
with the Commission on April 12, 2002.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to
the information under the heading "Renumeration" in the definitive proxy
statement of the Company filed with the Commission on April 12, 2002.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to
the information under the heading "Security Ownership of Directors and
Management" in the definitive proxy statement of the Company filed with the
Commission on April 12, 2002.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to
the information under the heading "Certain Relationship and Related
Transactions" in the definitive proxy statement of the Company filed with the
Commission on April 12, 2002.
25
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)1. AND (a)2. FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
See "Index to Financial Statements and Schedule" set
forth in Item 8 at page 20 of this Form 10-K.
(a)3. EXHIBITS
Exhibit
Number Description
3.1 Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 to the
Registration Statement of the Registrant on Form S-1
(Reg. No. 33-62766) (the "Registration Statement").)
3.2 By-Laws of the Company (incorporated by reference to
Exhibit 3.2 to the Registration Statement).
10.1 The Amended and Restated N-Viro International
Corporation Stock Option Plan (incorporated by
reference to Form S-8 filed May 9, 2000).
10.2 Employment Agreement, dated December 2, 1999, between
N-Viro International Corporation and J. Patrick
Nicholson (incorporated by reference to Exhibit 1 to
the Form 8-K dated December 2, 1999).
10.3 Transitional Consulting and Sales Representative
Agreement, dated September 2, 1993, and amended
January 1, 1994, between N-Viro International
Corporation and Bobby B. Carroll (incorporated by
reference to Exhibit 10.102 to Amendment No. 1 to the
Registration Statement).
10.4 Employment Agreement, dated June 14, 1999, between
N-Viro International Corporation and Terry J. Logan
(incorporated by reference to Exhibit 1 to the Form
8-K dated June 30, 1999)
13 2001 Executive Review (as exhibit in Form 10-K filed
electronically)
21.1 List of subsidiaries of the Company.#
24.1 Powers of Attorney.#
#Only included in Form 10-K filed electronically with
the Securities and Exchange Commission
(b) REPORTS ON FORM 8-K
The Company filed a report on Form 8-K dated November
29, 2001, to disclose both the receipt of a letter from Nasdaq
regarding the Company's continued listing on the Nasdaq SmallCap
Market, and the settlement of a criminal matter in the State of
North Carolina.
The Company filed a report on Form 8-K dated December
14, 2001, to disclose its settlement of lawsuits with Hydropress
Environmental Services, Inc. and Robin Millard and R3M
Management Limited.
The Company filed a report on Form 8-K dated March 6,
2002, to disclose the receipt of a Nasdaq Staff determination
letter indicating the Company fails to comply with the continued
listing requirements of the Market.
26
The Company filed a report on Form 8-K dated March 18,
2002, to disclose both the receipt of a notice that the
Company's oral hearing before a Nasdaq Listing Qualifications
Panel will be held, and the announcement of the retirement of
Mr. James O'Neil from the Board of Directors.
(c) The exhibits listed in Item 14(a)(3) are filed with this Form
10-K.
27
(d) FINANCIAL STATEMENTS OF SUBSIDIARIES NOT CONSOLIDATED
FLORIDA N-VIRO, L.P.
Table of Contents
Page
----
Independent Auditor's Report E-1
Balance Sheets E-2-3
Statement of Income (Loss) and Partners' Capital E-4
Statement of Cash Flows E-5
Notes to Financial Statements E-6-9
28
[letterhead - "Joseph M. Cahill, Ltd. - Certified Public Accountant"]
February 6, 2002
INDEPENDENT AUDITOR'S REPORT
To the Partners
Florida N-Viro, L.P.
West Chester, Pennsylvania
I have audited the accompanying balance sheets of Florida N-Viro, L.P., (a
Limited Partnership), as of December 31, 2001 and 2000, and the related
statements of income (loss) and partners' capital, and cash flows for the years
then ended. These financial statements are the responsibility of the
Partnership's management. My responsibility is to express an opinion on these
financial statements based on my audit.
I conducted my audit in accordance with generally accepted auditing standards.
Those standards require that I plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
I believe that my audit provides a reasonable basis for my opinion.
In my opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Florida N-Viro, L.P. as of December
31, 2001 and 2000, and the results of operations and cash flows for the years
then ended in conformity with generally accepted accounting principles.
JMC/rb
/s/ Joseph M. Cahill, Ltd.
[letterhead - "189 W. Lancaster Avenue Paoli, Pennsylvania 19301
610 889 3300 Fax 610 889 3303"]
E-1
FLORIDA N-VIRO, L.P.
Balance Sheets
December 31, 2001 and 2000
ASSETS
2001 2000
-------------------- --------------------
Current Assets:
Cash $ 5,056 $ 6,769
Accounts Receivable 468,058 355,095
Prepaid Expenses 159,905 25,787
-------------------- --------------------
Total Current Assets 633,019 387,651
Property and Equipment
Land 147,163 147,163
Site improvements 312,517 285,519
Building 1,183,169 1,183,169
Operating equipment 1,242,795 1,262,387
Furniture and fixtures 13,215 13,215
-------------------- --------------------
2,898,859 2,891,453
Less Accumulated Depreciation 785,827 620,629
-------------------- --------------------
Total Property and Equipment 2,113,032 2,270,824
-------------------- --------------------
Total Assets $ 2,746,051 $ 2,658,475
==================== ====================
The accompanying notes are an integral part of these financial statements.
E-2
FLORIDA N-VIRO, L.P.
Balance Sheets
December 31, 2001 and 2000
LIABILITIES AND PARTNERS' CAPITAL
2001 2000
------------------------
Current Liabilities:
Payables:
Trade $ 337,800 $ 354,655
Related party 308,672 200,073
Notes payable -- current 64,199 111,942
Notes payable -- related party 700,000 340,000
Accrued expenses 199,419 164,245
------------------------
Total Current Liabilities 1,610,090 1,170,915
Long-term Liabilities:
Notes Payable 110,198 173,629
------------------------
Total Liabilities 1,720,288 1,344,544
Partners' Capital 1,025,763 1,313,931
------------------------
Total Liabilities and Partners' Capital $2,746,051 $2,658,475
========================
The accompanying notes are an integral part of these financial statements.
E-3
FLORIDA N-VIRO, L.P.
Statements of Income(Loss) and Partners' Capital
For the years ended December 31, 2001 and 2000
2001 2000
-----------------------------------
Revenues $ 2,930,294 $ 2,777,606
Cost of sales 2,839,116 2,802,843
-----------------------------------
Gross profit (loss) 91,178 (25,237)
Selling, general and administrative 300,118 200,750
-----------------------------------
Income (loss) from operations (208,940) (225,987)
Other income (expense):
Interest income 5 428
Gain (loss) on sale of assets (2,860)
Interest expense (76,343) (31,843)
-----------------------------------
Total other income (expense) (79,228) (31,415)
-----------------------------------
Net Income (loss) (288,168) (257,402)
Beginning partners' capital 1,313,931 1,571,333
-----------------------------------
Ending partners' capital $ 1,025,763 $ 1,313,931
===================================
The accompanying notes are an integral part of these financial statements.
E-4
FLORIDA N-VIRO, L.P.
Statements of Cash Flows
For the years ended December 31, 2001 and 2000
2001 2000
----------------------------------
Cash flows from operating activities
Net income (loss) $ (288,168) $ (257,402)
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation 183,891 201,971
(Gain) loss on sale of assets 2,890
(Increase) decrease in:
Accounts receivable-trade (112,963) (128,193)
Accounts receivable-related party - 14,387
Prepaid expenses (134,118) 4,524
Increase (decrease) in:
Accounts payable-trade (16,855) (150,947)
Accounts payable-related party 108,599 195,073
Accrued expenses 35,174 (16,443)
----------------------------------
Net cash provided (used) by
operating activities (221,550) (137,030)
Cash flows from investing activities:
Proceeds from the sale of assets 8,367 -
Acquisition of property and equipment (37,356) (467,365)
----------------------------------
Net cash provided (used) by
investing activities (28,989) (467,365)
Cash flows from financing activities:
Proceeds from new borrowings 360,000 571,260
Proceeds from contributed capital - -
Payments on long-term debt (111,174) (81,634)
----------------------------------
Net cash provided (used) by
financing activities 248,826 489,626
----------------------------------
Net increase (decrease) in cash and cash equivalents (1,713) (114,769)
Cash and cash equivalents at beginning of year 6,769 121,538
----------------------------------
Cash and cash equivalents at end of year $ 5,056 $ 6,769
==================================
Supplemental disclosure for cash flows
Interest Paid $ 20,220 $ 31,843
==================================
The accompanying notes are an integral part of these financial statements.
E-5
FLORIDA N-VIRO, L.P.
Notes to Financial Statements
December 31, 2001 and 2000
Note A - Background
Business Activities - Florida N-Viro, L.P. was formed January 1, 1996 as
a Delaware Limited Partnership under the Delaware Revised Limited
Partnership Act. The Partnership has entered into a patent and
technology agreement with N-Viro International Corporation for the
exclusive, royalty free, use in Florida of certain systems/processes for
the treatment and remediation of wastewater sludge. The Partnership
operates from its Ft. Meade and Volusia, Florida facilities.
The Partnership consists of one general partner, Florida N-Viro Limited
Liability Corporation, a Delaware limited liability corporation, and two
limited partners: VFL Technology Corporation and N-Viro International
Corporation. The general partner is a limited liability corporation that
has limited resources and is responsible for the liabilities of the
partnership beyond the capital contributed by the limited partners.
The Partnership agreement terminates on December 31, 2026.
Note B - Summary of Accounting Principles
1. Method of Accounting and Use of Estimates - The financial statements are
prepared using the accrual basis of accounting. Generally accepted
accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from the estimates.
2. Cash and Cash Equivalents - The Partnership considers all short-term
investments with an original maturity of three months or less to be cash
equivalents.
3. Property and Equipment - Property and equipment, carried at cost, are
depreciated over the estimated useful life of the related assets.
Depreciation is computed principally by the straight-line method. The
estimated useful lives used in computing depreciation are summarized as
follows:
E-6
FLORIDA N-VIRO, L.P.
Notes to Financial Statements (continued)
Years of Useful Life
Operating equipment 5-10
Furniture and fixtures 5-7
Site improvements 15
Buildings 39
Depreciation amounted to $183,891 and $201,971 for 2001 and 2000,
respectively.
Maintenance, repairs and expenditures for renewals and betterments not
determined to extend the useful life or to increase materially the
productivity of the properties to which they are applied are charged to
income as incurred. Other renewals and betterments are capitalized.
It is the policy of the Partnership generally to eliminate from the
accounts the cost and related allowances for depreciation applicable to
assets retired or otherwise disposed of, charging or crediting to income
the differences between depreciation cost and the proceeds of sale or
salvage.
4. Income Taxes - No provision for income taxes is required since the
partners report their proportionate share of partnership taxable income
or loss on their respective income tax returns. Such income or losses
are proportionately allocated to the partners based upon their ownership
interests.
5. Advertising - The Partnership follows the policy of charging the
costs of advertising to expense as incurred.
Advertising expense is $9,837 and $6,359 for 2001 and 2000,
respectively.
6. Reclassifications - Certain reclassifications were made to the 1999
financial statements presentation in order to conform to the 2000
financial statements presentation.
Note C - Related Parties
VFL Technology Corporation charged the Partnership $40,570 in 2001 and
$23,556 in 2000 for certain operating and engineering services.
The Partnership has a fee sharing arrangement with N-Viro International
Corporation for services provided to certain customers. The agreement
terminated during 2000. The Partnership's share of these fees was
approximately $34,269 for 2000.
E-7
FLORIDA N-VIRO, L.P.
Notes to Financial Statements (continued)
The Partnership had payable balances due the general partner and limited
partners as of December 31, 2001 and 2000 of $308,672 and $200,073
respectively.
As of December 31, 2001 and 2000, the Partnership had notes due to the
limited partners, payable on demand and bearing interest of 9.75%
accrued monthly.
Note D - Concentration of Credit Risk
In the normal course of business, the Partnership extends credit to
customers principally in the State of Florida. The Partnership does not
provide an allowance for doubtful accounts since it expects to collect
all of its accounts receivable.
The Partnership conducts a major portion of its business with several
customers. For the year ended December 31, 2001, four customers
accounted for 59% of total revenue. For 2000, six customers accounted
for 77% of revenue.
The Partnership maintains its operating checking account at a bank
located in Southeastern Pennsylvania. The balance in this account may at
times exceed the federally insured limit of $100,000.
NOTE E - LONG-TERM NOTES PAYABLE
Long-term notes payable consist of the following:
2001 2000
--------------- ------------------
9.25% Note payable to bank, monthly
payments of $2,245, including interest,
secured by equipment, due August 2002 17,355 41,468
10.007% Note payable to bank, monthly
payments of $2,445, including interest,
secured by equipment, due June 2005 88,341 105,965
8.97% Note payable to bank, monthly
payments of $745, including interest,
secured by automobile, due May 2002 - 11,193
10.037% Note payable to bank, monthly
payments of $2,353, including interest,
secured by equipment, due July 2001 - 13,711
9.54% Note payable to bank, monthly
payments of $2,550, including interest,
secured by equipment, due October 2001 - 26,837
E-8
FLORIDA N-VIRO, L.P.
Notes to Financial Statements (continued)
2001 2000
----------------------------------
10.257% Note payable to bank, monthly
payments of $2,279, including interest,
secured by equipment, due October 2004 68,701 86,397
----------------------------------
Total Long Term Debt $174,397 $285,571
Less current maturities 64,199 111,942
----------------------------------
$110,198 $173,629
==================================
Maturities of Long Term Debt are as follows:
2002 $ 64,199
2003 47,731
2004 48,216
2005 14,251
-----------
$174,397
===========
Note F - Lease Commitments
The Partnership leases various equipment under operating leases that expire at
various times through the year 2006.
The following is a schedule detailing future minimum lease payments:
Year Ended December 31
----------------------
2002 $ 25,295
2003 21,663
2004 19,847
2005 19,847
2006 3,308
-----------
$ 89,960
===========
Note G - Working Capital Deficiency
The Partnership's financial statements have been presented on the basis that it
is a going concern, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Partnership
has incurred losses over the past several years and has working capital
deficiencies as of December 31, 2001 and 2000.
Management believes that actions presently being taken to expand the customer
base and revenues and for the partners to provide additional working capital
when needed, will provide the opportunity for the Partnership to continue as a
going concern.
E-9
FLORIDA N-VIRO, L.P.
Table of Contents
Page
----
Independent Auditor's Report E-10
Balance Sheets E-11-12
Statement of Income (Loss) and Partners' Capital E-13
Statement of Cash Flows E-14
Notes to Financial Statements E-15-18
29
[letterhead - "Joseph M. Cahill, Ltd. - Certified Public Accountant"]
February 14, 2001
INDEPENDENT AUDITOR'S REPORT
To the Partners
Florida N-Viro, L.P.
West Chester, Pennsylvania
I have audited the accompanying balance sheets of Florida N-Viro, L.P., (a
Limited Partnership), as of December 31, 2000 and 1999, and the related
statements of income (loss) and partners' capital, and cash flows for the years
then ended. These financial statements are the responsibility of the
Partnership's management. My responsibility is to express an opinion on these
financial statements based on my audit.
I conducted my audit in accordance with generally accepted auditing standards.
Those standards require that I plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
I believe that my audit provides a reasonable basis for my opinion.
In my opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Florida N-Viro, L.P. as of December
31, 2000 and 1999, and the results of operations and cash flows for the years
then ended in conformity with generally accepted accounting principles.
JMC/rb
/s/ Joseph M. Cahill, Ltd.
[letterhead - "189 W. Lancaster Avenue Paoli, Pennsylvania 19301 610 889 3300
Fax 610 889 3303"]
E-10
FLORIDA N-VIRO, L.P.
Balance Sheets
December 31, 2000 and 1999
ASSETS
2000 1999
---------------------------------
Current Assets:
Cash $ 6,769 $ 121,538
Receivables:
Trade 355,095 226,902
Related party - 14,387
Prepaid Expenses 25,786 30,310
---------------------------------
Total Current Assets 387,650 393,137
Property and Equipment
Land 147,163 147,163
Site improvements 285,519 123,159
Building 1,183,169 1,183,169
Operating equipment 1,262,387 960,878
Furniture and fixtures 13,215 9,718
---------------------------------
2,891,453 2,424,087
Less Accumulated Depreciation 620,629 418,658
---------------------------------
Total Property and Equipment 2,270,824 2,005,429
---------------------------------
Total Assets $ 2,658,474 $ 2,398,566
=================================
The accompanying notes are an integral part of these financial statements.
E-11
FLORIDA N-VIRO, L.P.
Balance Sheets
December 31, 2000 and 1999
LIABILITIES AND PARTNERS' CAPITAL
2000 1999
------------------------
Current Liabilities:
Payables:
Trade $ 354,655 $ 505,602
Related party 200,073 5,000
Notes payable - current 111,942 56,445
Notes payable - related
party 340,000 -
Accrued expenses 164,245 180,688
------------------------
Total Current Liabilities 1,170,915 747,735
Long-term Liabilities:
Notes Payable 173,629 79,498
------------------------
Total Liabilities 1,344,544 827,233
Partners' Capital 1,313,930 1,571,333
------------------------
Total Liabilities and Partners' Capital $2,658,474 $2,398,566
========================
The accompanying notes are an integral part of these financial statements.
E-12
FLORIDA N-VIRO, L.P.
Statements of Income(Loss) and Partners' Capital
For the years ended December 31, 2000 and 1999
2000 1999
-----------------------------------
Revenues $ 2,777,606 $ 1,498,821
Cost of sales 2,802,843 1,498,425
-----------------------------------
Gross profit (loss) (25,237) 396
Selling General and Administrative 200,750 139,264
-----------------------------------
Income (loss) from operations (225,987) (138,868)
Other income (expense)
Interest income 428 2,204
Interest expense (31,843) (2,022)
-----------------------------------
Total other income (expense) (31,415) 182
-----------------------------------
Net Income (loss) (257,402) (138,686)
Beginning partners' capital 1,571,333 1,695,019
Capital contribution - 15,000
-----------------------------------
Ending partners' capital $ 1,313,931 $ 1,571,333
===================================
The accompanying notes are an integral part of these financial statements.
E-13
FLORIDA N-VIRO, L.P.
Statements of Cash Flows
For the years ended December 31, 2000 and 1999
2000 1999
----------------------------------
Cash flows from operating activities
Net income (loss) $ (257,402) $ (138,686)
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation 201,971 132,765
(Increase) decrease in:
Accounts receivable-trade (128,193) (97,405)
Accounts receivable-related party 14,387 93,029
Prepaid expenses 4,524 (24,436)
Increase (decrease) in:
Accounts payable-trade (150,947) 221,310
Accounts payable-related party 195,073 5,000
Accrued expenses (16,443) 59,363
----------------------------------
Net cash provided (used) by
operating activities (137,030) 250,940
Cash flows from investing activities
Acquisition of property and equipment (467,365) (344,023)
----------------------------------
Net cash provided (used) by
investing activities (467,365) (344,023)
Cash flows from financing activities
Proceeds from new borrowings 571,260 198,452
Proceeds from contributed capital - 15,000
Payments on long-term debt (81,634) (38,719)
----------------------------------
Net cash provided (used) by
financing activities 489,626 174,733
----------------------------------
Net increase (decrease) in cash and cash equivalents (114,769) 81,650
Cash and cash equivalents at beginning of year 121,538 39,888
----------------------------------
Cash and cash equivalents at end of year $ 6,769 $ 121,538
==================================
Supplemental disclosure for cash flows
Interest paid $ 31,843 $ 2,022
==================================
The accompanying notes are an integral part of these financial statements.
E-14
FLORIDA N-VIRO, L.P.
Notes to Financial Statements
December 31, 2000 and 1999
Note A - Background
Business Activities - Florida N-Viro, L.P. was formed January 1, 1996 as
a Delaware Limited Partnership under the Delaware Revised Limited
Partnership Act. The Partnership has entered into a patent and
technology agreement with N-Viro International Corporation for the
exclusive, royalty free, use in Florida of certain systems/processes for
the treatment and remediation of wastewater sludge. The Partnership
operates from its Ft. Meade and Volusia, Florida facilities.
The Partnership consists of one general partner, Florida N-Viro Limited
Liability Corporation, a Delaware limited liability corporation, and two
limited partners: VFL Technology Corporation and N-Viro International
Corporation. The general partner is a limited liability corporation that
has limited resources and is responsible for the liabilities of the
partnership beyond the capital contributed by the limited partners.
The Partnership agreement terminates on December 31, 2026.
Note B - Summary of Accounting Principles
1. Method of Accounting and Use of Estimates - The financial statements are
prepared using the accrual basis of accounting. Generally accepted
accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from the estimates.
2. Cash and Cash Equivalents - The Partnership considers all short-term
investments with an original maturity of three months or less to be cash
equivalents.
4. Property and Equipment - Property and equipment, carried at cost, are
depreciated over the estimated useful life of the related assets.
Depreciation is computed principally by the straight-line method. The
estimated useful lives used in computing depreciation are summarized as
follows:
Years of Useful Life
-----------------------
Operating equipment 5-10
Furniture and fixtures 5-7
E-15
FLORIDA N-VIRO, L.P.
Notes to Financial Statements (continued)
Site improvements 15
Buildings 39
Depreciation amounted to $201,973 and $132,765 for 2000 and 1999,
respectively.
Maintenance, repairs and expenditures for renewals and betterments not
determined to extend the useful life or to increase materially the
productivity of the properties to which they are applied are charged to
income as incurred. Other renewals and betterments are capitalized.
It is the policy of the Partnership generally to eliminate from the
accounts the cost and related allowances for depreciation applicable to
assets retired or otherwise disposed of, charging or crediting to income
the differences between depreciation cost and the proceeds of sale or
salvage.
4. Income Taxes - No provision for income taxes is required since the
partners report their proportionate share of partnership taxable income
or loss on their respective income tax returns. Such income or losses
are proportionately allocated to the partners based upon their ownership
interests.
5. Advertising - The Partnership follows the policy of charging the costs
of advertising to expense as incurred.
Advertising expense for 2000 is $6,359. There was no advertising expense
for 1999.
6. Reclassifications - Certain reclassifications were made to the 1999
financial statements presentation in order to conform to the 2000
financial statements presentation.
Note C - Related Parties
VFL Technology Corporation charged the Partnership $23,556 in 2000 for
certain operating and engineering services.
The Partnership has a fee sharing arrangement with N-Viro International
Corporation for services provided to certain customers. The
Partnership's share of these fees was approximately $34,269 for 2000 and
$37,800 for 1999.
E-16
FLORIDA N-VIRO, L.P.
Notes to Financial Statements (continued)
The Partnership had the following receivable balances due as of December
31, from its partners:
2000 1999
---------------------------------
General Partner $ - $ -
Limited Partners - 14,387
---------------------------------
$ - $ 14,387
=================================
The Partnership had payable balances due the general partner and limited
partners as of December 31, 2000 and 1999 of $200,073 and $5,000,
respectively.
As of December 31, 2000, the Partnership had notes due to the limited
partners, payable on demand and bearing interest of 9.75% accrued
monthly.
Note D - Concentration of Credit Risk
In the normal course of business, the Partnership extends credit to
customers principally in the State of Florida. The Partnership does not
provide an allowance for doubtful accounts since it expects to collect
all of its accounts receivable.
The Partnership conducts a major portion of its business with several
customers. For the year ended December 31, 2000, six customers accounted
for 77% of total revenue. For 1999, four customers accounted for 78% of
revenue.
The Partnership maintains its operating checking account at a bank
located in Southeastern Pennsylvania. The balance in this account may at
times exceed the federally insured limit of $100,000.
NOTE E - LONG-TERM NOTES PAYABLE
Long-term notes payable consist of the following:
2000 1999
----------------------------------
8.97% Note payable to bank, monthly
payments of $745, including interest,
secured by automobile, due May 2002 $ 11,193 $ 18,755
E-17
FLORIDA N-VIRO, L.P.
Notes to Financial Statements (continued)
2000 1999
----------------------------------
9.54% Note payable to bank, monthly
payments of $2,550, including interest,
secured by equipment, due October 2001 26,837 53,729
9.25% Note payable to bank, monthly
payments of $2,245, including interest,
secured by equipment, due August 2003 41,468 63,459
10.037% Note payable to bank, monthly
payments of $2,353, including interest,
secured by equipment, due July 2001 13,711 -
10.007% Note payable to bank, monthly
payments of $2,445, including interest,
secured by equipment, due June 2005 105,965 -
10.257% Note payable to bank, monthly
payments of $2,279, including interest,
secured by equipment, due October 2004 86,397 -
----------------------------------
Total Long Term Debt $285,571 $135,943
Less current maturities 111,942 56,445
----------------------------------
$173,629 $ 79,498
==================================
Maturities of Long Term Debt are as follows:
2001 $111,942
2002 63,431
2003 47,731
2004 48,216
2005 14,251
-----------
$285,571
===========
E-18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Amendment No. 2 to be
signed on its behalf by the undersigned, thereunto duly authorized.
N-VIRO INTERNATIONAL CORPORATION
Dated: April 15, 2002
By: /s/ J. Patrick Nicholson*
---------------------------------------------------
J. Patrick Nicholson, Chairman of the Board of Directors
and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
Dated: April 15, 2002
/s/ J. Patrick Nicholson* /s/ Terry J. Logan, Ph.D.*
- ------------------------------------------------ --------------------------------------
J. Patrick Nicholson, Chairman of the Board and Terry J. Logan, Ph.D., Chief Operating Officer,
Chief Executive Officer President and Director
(Principal Executive Officer)
/s/ James K. McHugh /s/ Michael G. Nicholson*
- ------------------------------------------------ -----------------------------------------------
Chief Financial Officer, Secretary and Treasurer Michael G. Nicholson, Senior Vice-President
(Principal Financial and Accounting Officer) and Director
/s/ Wallace G. Irmscher* /s/ R. Francis DiPrete*
- ------------------------------------------------ -----------------------------------------------
Wallace G. Irmscher, Director R. Francis DiPrete, Director
/s/ B.K. Wesley Copeland* /s/ Bobby B. Carroll*
- ------------------------------------------------ -----------------------------------------------
B.K. Wesley Copeland, Director Bobby B. Carroll, Director
/s/ Daniel J. Haslinger* /s/ Charles B. Kaiser, Jr.*
- ------------------------------------------------ -----------------------------------------------
Daniel J. Haslinger, Director Charles B. Kaiser, Jr., Director
*By: /s/ James K. McHugh
- ------------------------------------------------
James K. McHugh, Attorney-in-Fact
30