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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, 2002
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
COMMISSION FILE NUMBER: 0-21802
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
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. [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12-2). Yes No X
-
The aggregate market value of the voting stock held by non-affiliates
of the registrant, computed by reference to the closing sales price of such
shares on the Over The Counter Bulletin Board as of the last business day of the
registrant's most recently completed second fiscal quarter was approximately
$1,059,000.
The number of shares of Common Stock of the registrant outstanding as
of March 25, 2003 was 2,577,433.
DOCUMENTS INCORPORATED BY REFERENCE
None.
INDEX
PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners
and Management
Item 13. Certain Relationships and Related Transactions
Item 14. Controls and Procedures
PART IV
Item 15. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K
PART I
ITEM 1. BUSINESS
GENERAL
N-Viro International Corporation (the "Company" or "N-Viro"), incorporated
in Delaware 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. N-Viro Energy Systems' 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 N-Viro Energy Systems, and 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, N-Viro Energy Systems 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, N-Viro Energy Systems 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 N-Viro Energy Systems'
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, N-Viro Energy Systems 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 40
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.
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
Soil(TM). 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 manufacturer's
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 45% 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 fifteenth year of operation. The
relationship between the City of Toledo and the Company has been 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. ("VFL") 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 promissory 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 investment of the
Company and VFL in Florida N-Viro 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 third note is unsecured,
due on demand and bears interest at prime (tied to a local Bank) plus 0.25%, 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 at the time, and were required after additional
monies were advanced by VFL during 2000. VFL has subsequently loaned additional
monies to Florida N-Viro to fund operations, totaling approximately $350,000
through December 31, 2002. The Company has made no additional loans since
January 2001, and is actively pursuing sale of its investment in Florida N-Viro.
Because Florida N-Viro has not remitted any interest to the Company to date, the
Company set up a reserve at December 31, 2002 of approximately $63,000 for the
full amount of the accrued interest on all notes.
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 Soil(TM), 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 "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 2002, the Company expended
approximately $9,300 on continuous research on process improvements through
BioCheck, and considers its relationship with BioCheck to be satisfactory.
In 2002 the Company expended approximately $71,000 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. 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. From July 1, 1999 through May 9, 2002, Dr. Logan was employed with the
Company as President and Chief Operating Officer, and after that time to the
present has been employed as President and Chief Executive 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, in 2002 alone, grants totaling approximately $179,000 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. 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 ("USPTO") and to the European
Patent Office for disinfection and for phosphorus and trace metal immobilization
in animal manure. In late 2000, the 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 was 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 reduces 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 topsoil at the
Englewood, Ohio N-Viro facility.
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. Those patents were awarded in 2002. 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 several
fuel users and marketers to develop this technology.
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 0.25% 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 expensed to MCO through December 31, 2002 is $56,556.
ORGANIZATION
Day-to-day operations, including management of the Toledo, Ohio processing
facility, and support functions, is directed by the Company's President and
Chief Executive 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 Chief Operating Officer and Executive Vice-President,
who coordinates internal staff, a network of manufacturers representatives, and
consultants. International sales and marketing, legal affairs and stockholder
relations are 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 Corporate Treasurer and Secretary of the Board.
The following table sets forth the Agents of the Company and the
territorial rights of each Agent:
_____________
The Agents
----------
Agent Territory
----- ---------
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 Philippines
N-Viro Systems Canada, Inc Canada
South Africa N-Viro All Africa except North Africa
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 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 13,000 to 15,000 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
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 five N-Viro
facilities, 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. 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.
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, 2002, the Company had 17 employees in the following
capacities: 7 engaged in sales and marketing; 3 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.
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, 2002, there were more than 40 N-Viro facilities
operating throughout the world. The sludge processing capacity of these
facilities ranges from one to 200 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, 2002.
Facility Location Approximate Sludge Processing
Volume (dry tons/year)
Middlesex County, New Jersey 56,600
Wilmington, Delaware 12,900
Syracuse, New York 11,900
Toledo, Ohio 9,300
Parker Ag Services - Colorado 8,900
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 45% of the Company's revenue is from management
operations, 51% from other domestic operations, 3% from research and development
grants and the remaining 1% from foreign operations. Sales of the N-Viro
technology are affected by general fluctuations in the business cycles in the
United States and worldwide, instability of economic conditions (such as the
current conditions in the Asia Pacific region and Latin America) and interest
rates, as well as other factors. In addition, operating results of some of the
Company's business segments are influenced, 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.
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 Other Domestic Foreign Research &
Operations Operations Operations Development
-------------- ---------------- ------------- ------------
COMPETITIVE
FACTORS Price Price Price Innovative
Technologies
Reliability Reputation Product quality and Technical support
Specifications
Product quality Product quality Custom design Reputation
and specifications and specifications
Responsiveness Technical support Equipment financing Product quality and
to customer assistance specifications
Technical support Custom design Technical support Custom design
Reputation Equipment financing Reputation Equipment financing
assistance 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 was renewed in January 2003. The Company believes its
relationship with its lessor is satisfactory. The total minimum rental
commitment for the years ending December 31, 2003 through 2006 is approximately
$56,000 each year. The total rental expense included in the statements of
operations for the years ended December 31, 2002 and 2001 is approximately
$64,600 and $63,300, respectively. The Company also leases various equipment on
a month-to-month basis.
ITEM 3. LEGAL PROCEEDINGS.
Prior to May 9, 2002, the Company's shares of voting, common stock were
traded on the SmallCap Market of the National Association of Securities Dealers
Automated Quotation System ("NASDAQ"). On May 9, 2002, the Company received
notice from the NASD that the Company's shares of voting, common stock would be
de-listed effective with the open of business on May 10, 2002. In July, 2002 the
Company decided not to pursue further appeal of the NASD's decision to de-list
its voting common stock. Currently, the Company's shares of common stock are
traded on the Over-The-Counter ("OTC") market. The Company does not believe that
the delisting of its common stock from the Nasdaq SmallCap Market has or 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, may have a material adverse effect on the marketability of the
Company's shares, as shares traded on the OTC market generally experience lower
trading value than those traded on the organized exchange.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's shares of Common Stock are traded on the Over The Counter
Bulletin Board under the symbol "NVIC.OB". The price range of the Common Stock
since January 1, 2001, was as follows:
Quarter High Low
---- ----
First 2001 2.75 1.75
Second 2001 2.18 1.54
Third 2001 1.80 1.04
Fourth 2001 1.15 0.80
First 2002 1.25 0.75
Second 2002 1.14 0.64
Third 2002 0.88 0.40
Fourth 2002 1.85 0.30
The Company's stock price closed at $0.80 per share on March 25, 2003.
HOLDERS
As of March 25, 2003, the number of holders of record of the Company's
Common Stock was approximately 1,250.
DIVIDENDS
The Company has never paid dividends with respect to its Common Stock.
UNREGISTERED SALES OF SECURITIES
None.
ANNUAL MEETING
On March 19, 2003, the Company filed a Form 8-K that announced the 2003
Annual Stockholders Meeting will be held on August 14, 2003, as approved by the
Board of Directors at a meeting on March 4, 2003. This date is approximately 95
days later than the 2003 meeting date referenced in the Company's 2002 Notice of
Annual Meeting and Proxy Statement dated April 5, 2002. The reasons cited by
the Board for delaying the annual meeting include the following: (1) the
Company is planning on amending its 1998 Stock Option Plan, which is scheduled
to expire in May 2003, and additional time is necessary to finalize the form of
the amendment prior to submitting it to stockholders for approval; (2) the
Company's directors have had preliminary discussions on a possible amendment to
the Company's Certificate of Incorporation and By-Laws to change the number of
directors on its Board, and a special committee has been established to review
this issue and issue a report to the Board in the next thirty (30) days, and,
any actions approved by the Board with respect to amending the Company's
Certificate of Incorporation would need to be approved by the stockholders at
the annual meeting in order to be effective; and (3) the Company believes that
by delaying the annual meeting it will realize cost savings through an enhanced
ability to rely upon internal resources to prepare and administer the proxy
documents and other public filings, as compared to solely relying on outside
legal counsel to prepare such items.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated statement of operations data for the
years ended December 31, 1998, 1999, 2000, 2001 and 2002; and the consolidated
balance sheet data set forth below as of December 31, 1998, 1999, 2000, 2001 and
2002 respectively, have been derived from the financial statements of the
Company which have been audited by McGladrey & Pullen, LLP, independent auditors
for the year ending December 31, 1998, and Hausser + Taylor, LLP, independent
auditors for the years ended December 31, 1999, 2000, 2001 and 2002. In the
opinion of management, the financial data presented below reflect all
adjustments (which are of a normal recurring nature) 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):
12/31/02 12/31/01 12/31/00 12/31/99 12/31/98
Revenues $ 5,238 $ 4,383 $ 4,166 $ 4,749 $ 3,929
Net income (loss) (96) (1,267) (845) 471 (373)
Net income (loss) per share $ (0.04) $ (0.48) $ (0.32) $ 0.18 $ (0.15)
BALANCE SHEET DATA (IN THOUSANDS):
12/31/02 12/31/01 12/31/00 12/31/99 12/31/98
--------- --------- --------- --------- ---------
Total assets $ 4,028 $ 4,133 $ 4,752 $ 4,772 $ 3,783
Notes and line of credit payable $ 1,475 $ 1,402 $ 649 $ 352 $ 161
Shareholder Advance $ 24 $ 24 $ 22 $ 49 $ 47
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,
2002 2001 2000
------ ------ ------
Technology fees 13.1% 19.4% 24.0%
Facility management 35.7% 37.3% 36.5%
Products and services 51.2% 43.3% 39.5%
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.
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;
service fee revenue for the management of alkaline admixture, which represent
fees charged by the Company to manage and sell the alkaline admixture on behalf
of a third party customer; 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
None.
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,
2002 Percentage 2001 Percentage 2000
Change Change
- ------------------------------------- -------------- ----------- -------------- ----------- --------------
COMBINED STATEMENT OF
OPERATIONS DATA:
Revenues $ 5,238 19.5% $ 4,383 5.2% $ 4,166
Cost of revenues 3,381 21.0% 2,795 14.7% 2,437
Gross profit 1,857 16.9% 1,588 (8.2%) 1,729
Operating expenses 1,878 (30.9%) 2,717 12.8% 2,408
Operating loss (21) * (1,129) * (679)
Non-operating income (expense) (75) * (138) * 146
Loss before income tax expense (96) * (1,267) * (533)
Federal and state income tax expense 0 * 0 * 312
Net loss $ (96) * $ (1,267) * $ (845)
* Period to period percentage change comparisons have only been calculated for positive numbers.
PERCENTAGE OF REVENUES:
Revenues 100.0% 100.0% 100.0%
Cost of revenues 64.6 63.8 58.5
Gross profit 35.4 36.2 41.5
Operating expenses 35.8 62.0 57.8
Operating loss (0.4) (25.8) (16.3)
Non-operating income (expense) (1.4) (3.1) 3.5
Income (loss) before income tax expense (1.8) (28.9) (12.8)
Federal and state income tax expense 0.0 0.0 7.5
Net loss (1.8%) (28.9%) (20.3%)
COMPARISON OF YEAR ENDED DECEMBER 31, 2002 WITH YEAR ENDED DECEMBER 31, 2001
Revenues increased $855,000, or 19.5%, to $5,238,000 for the year ended
December 31, 2002 from $4,383,000 for the year ended December 31, 2001. The
increase in revenue was due to the following: revenues from one-time domestic
license or international territory fees increased $59,000, to $92,000 for 2002
from $33,000 for 2001; revenues from existing on-line facilities increased
$942,000 to $5,146,000 from $4,204,000 for 2001. This increase in revenue from
existing on-line facilities was primarily from: the recognition of a new source
of revenue for 2002, fees derived from the management of alkaline admixture of
$520,000, an increase in facility management fee operations of $235,000, an
increase in alkaline admixture revenue of $373,000, an increase in commission,
product and consulting revenue totaling $46,000, offset by decreases in
royalties of $182,000, research and development project revenue of $42,000 and
leased equipment revenue of $10,000. An additional decrease in gross revenue
was the $144,000 in equipment sales in 2001 to an existing licensee who is not
yet on-line. There were no equipment sales in 2002. The mix of revenues for
2002 continued to change from previous years, in that the Company continues to
move towards a higher amount of revenues derived from ongoing licensees.
Gross Profit increased $269,000, or 16.9%, to $1,857,000 for the year ended
December 31, 2002 from $1,588,000 for the year ended December 31, 2001. The
increase in gross profit was primarily due to the increased revenue derived from
the management of alkaline admixture, facility management and sale of alkaline
admixture, and offset primarily by a decrease in royalty and equipment sales
revenue. The Company's largest increase in revenue in 2002 was from the fees
received on the management of alkaline admixture, which was a new source of
revenue for 2002. The Company is paid a fee by certain customers to manage the
mineral by-product used in the N-Viro process. The overall gross profit margin
decreased slightly to 35% in 2002 from 36% for 2001.
Operating expenses decreased $839,000, or 30.9% to $1,878,000 for the year
ended December 31, 2002 from $2,717,000 for the year ended December 31, 2001.
The primary reason for the decrease in operating expenses was the settlement in
late 2001 by the Company for the defense of its patents and licensing rights,
which was approximately $549,000 less in 2002 than 2001. Selling, general and
administrative expenses also decreased by $290,000, which was primarily due to:
a decrease of $141,000 in legal fees, a decrease of $93,000 in salaries,
employee benefits and consultants and a decrease in penalties of $68,000.
Nonoperating expense decreased by $63,000 to expense of $75,000 for the
year ended December 31, 2002 from expense of $138,000 for the year ended
December 31, 2001. The decrease was primarily due to the Company's share of
decrease in losses of Florida N-Viro, LP by $102,000 from 2001, partially offset
by decreases in interest income of $21,000 and the loss on the sale of assets of
$16,000.
The Company recorded a net loss of $96,000 for the year ended December 31,
2002 compared to a net loss of $1,267,000 for the year ended December 31, 2001.
The Company incurred a loss of approximately $35,000 on its share of
Florida N-Viro, LP in 2002, a decreased loss of $102,000 from 2001. The Company
anticipates this operation to continue to be marginally profitable in 2003. The
Company is actively pursuing sale of its interest in this investment. See the
discussion in Liquidity and Capital Resources section later in this Item 7. The
audited financial statements of Florida N-Viro, LP are included in this document
after the Company's financial statements as Item 15(d), Financial Statements of
Subsidiaries not Consolidated.
COMPARISON OF YEAR ENDED DECEMBER 31, 2001 WITH YEAR ENDED DECEMBER 31, 2000
Revenues increased $217,000, 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.
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, LP in 2001, an increased loss of $8,000 from 2000. The audited
financial statements of Florida N-Viro, LP are included in this document after
the Company's financial statements as Item 15(d), Financial Statements of
Subsidiaries not Consolidated.
LIQUIDITY AND CAPITAL RESOURCES
The Company had a working capital deficit of approximately $1,040,000 at
December 31, 2002 compared to a deficit of $955,000 at December 31, 2001, a
decrease of approximately $85,000. Current assets at December 31, 2002 included
cash of $405,000 (including restricted cash of $400,000), which is a decrease of
about $41,000 from December 31, 2001. The decrease in working capital was
principally due to the net loss for the year.
In 2002 the Company's cash flow generated from operations was approximately
$175,000, an improvement of approximately $541,000 from 2001. No unusual cash
transactions were recorded in 2002.
During the year, the Company had available a $750,000 line-of-credit with a
bank which was scheduled to expire January 31, 2003. Borrowings against the
line bore interest at prime plus 1% on borrowings up to $400,000 and prime plus
3% for borrowings above $400,000. Borrowings, which were collateralized by all
of the Company's assets including accounts receivable, inventories, equipment,
assignment of a $400,000 certificate of deposit and assignment of certain
contracts, were due on demand. At December 31, 2002, the Company had borrowed
$656,087 against the line. In February, 2003, this line of credit was paid off
with the redemption of the certificate of deposit and additional debt secured by
another local bank, discussed in the following section.
In February 2003 the Company closed on an $845,000 credit facility with a
local bank. This senior debt credit facility is comprised of a $295,000 four
year term note at 7.5% and a line of credit up to $550,000 at Prime plus 1.5%
and secured by a first lien on all assets of the Company. The Company will use
the funds to refinance existing debt and to provide working capital.
Previously, the Company had a $750,000 line of credit with another financial
institution, secured by a $400,000 restricted Certificate of Deposit, required
and held by this financial institution. Effectively, the former line of credit
provided only $350,000 of additional working capital. The effective increase in
the line will provide the Company with additional working capital, and the debt
refinance will provide lower cost and longer term debt, improving cash flow. To
secure the credit facility, the Company was required by the financial
institution to obtain Additional Collateral of $100,000 from a real estate
mortgage from a third party. Messrs. J. Patrick Nicholson, the Chairman of the
Board and Consultant to the Company; Michael G. Nicholson, the Company's Chief
Operating Officer and a Director; Robert F. Nicholson, a Company employee, and
Timothy J. Nicholson, a Company employee, ("the Nicholsons") collectively
provided the $100,000 Additional Collateral. In exchange for their commitment,
the Company has agreed to provide the Nicholsons the following: (1) an annual
fee in an amount equal to two percent (2%) of the aggregate value of the
Mortgage or Mortgages encumbering the Additional Collateral, which fee
originally shall be $2,000.00 per annum; (2) interest at an annual rate of 5%
of the aggregate value of the Mortgage or Mortgages encumbering the Additional
Collateral beginning on the first anniversary date of the closing of the Credit
Facility, and (3) grant, jointly, a warrant to acquire in the aggregate, 50,000
shares of the Company's voting common stock at a purchase price of $0.90 per
share, which was the closing market price of the Company's common stock on the
prior business day to the closing of the Credit Facility. In addition, the
Company granted to the Nicholsons a lien upon the Company's inventory and
accounts receivable. This lien is subordinated to both existing liens on the
Company's assets and all liens granted by the Company in favor of the financial
institution providing the Credit Facility.
The normal collection period for accounts receivable are approximately
45-60 days for the majority of customers. This is a result of the nature of the
license contracts, type of customer and the amount of time required to obtain
the information to prepare the billing. The Company lowered its reserve for bad
debts during 2002 by $47,500 as a result of both a decrease in the amount of
outstanding trade receivables and the collection on accounts previously reserved
for.
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. ("VFL") 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 promissory 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 investment of the
Company and VFL in Florida N-Viro 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 third note is unsecured,
due on demand and bears interest at prime (tied to a local Bank) plus 0.25%, 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 at the time, and were required after additional
monies were advanced by VFL during 2000. VFL has subsequently loaned additional
monies to Florida N-Viro to fund operations, totaling approximately $300,000
through December 31, 2002. The Company has made no additional loans since
January 2001. Because Florida N-Viro has not remitted any interest to the
Company to date, the Company set up a reserve at December 31, 2002 of
approximately $63,000 for the full amount of the accrued interest on all notes.
The Company is currently actively pursuing sale of its investment in
Florida N-Viro, LP, which may provide, in management's opinion, additional funds
to finance the Company's cash requirements. Because these efforts are still in
progress, there can be no assurance the Company will successfully complete these
negotiations.
The Company paid certain amounts due to Hydropress Environmental Services,
Inc. ("Hydropress") under a Settlement Agreement dated December 14, 2001 and
pursuant to the terms of a promissory note (the "Hydropress Note"). The
original principal amount of the Hydropress Note was $204,587, was non-interest
bearing and matured on October 15, 2002 with a balloon payment of $144,587. At
September 30, 2002, the outstanding principal balance on the Hydropress Note was
$144,587, which was paid in full to Hydropress in October 2002. In conjunction
with the final discharge of the Hydropress Note, the Company arranged an
unsecured loan from a third-party licensee for $144,587, with monthly payments
of $13,966 due for one year through October 15, 2003. At December 31, 2002, the
outstanding principal balance on the note was $123,196.
The Company is currently working with the investment banking firm of Laux &
Company of Medina, Ohio, with respect to a proposal to obtain up to $1.25
million in equity financing. The Company hopes to sell up to 500,000 shares of
preferred stock at a price per share of $2.50. The specific terms and
conditions applicable to the preferred shares will be determined once Laux &
Company has identified a potential purchaser. There can be no assurance that
the Company will be successful in finding a buyer for the preferred stock or in
selling these shares. If the shares are sold, the proceeds from the offering
will be used to supplement the Company's working capital.
Also, the Company has gone forward on contracts with two investment banking
firms with respect to a proposal to obtain up to $800,000 of mezzanine debt
financing. The specific terms and conditions applicable to the debt will be
determined once either firm has identified a potential debtor. There can be no
assurance that the Company will be successful in finding a lender for the
financing. If the financing is obtained, the proceeds from the offering will be
used to supplement the Company's working capital.
The Company is currently in discussions with several companies in the
cement and fuel industries for the development and commercialization of the
patented N-Viro fuel technology. Because these discussions are still in
progress, there can be no assurance they will be successful.
The Company continues to focus on the development of regional biosolids
processing facilities. Currently the Company is in negotiations with several
privatization firms to permit and develop independent, regional facilities.
The Company expects continued improvements in operating results for 2003 as
a result of maintaining lower administrative costs, along with realized and
expected new sources of revenue. Additionally, market developments and ongoing
discussions with companies in the cement, fuel and wastewater industries could
provide enhanced liquidity and positively impact 2003 operations.
Current market trends and Company business development provide significant
basis for the Company's optimistic outlook for 2003 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.
CRITICAL ACCOUNTING POLICIES, 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:
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has in the past sustained
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. These matters raise substantial doubt about
the Company's ability to continue as a going concern. The financial statements
do not include any adjustments relating to the recoverability and classification
of recorded assets or the amounts and classification of liabilities that may
result from the outcome of these uncertainties
Non-domestic license and territory fees - The Company does not recognize
revenue on any non-domestic license or territory fee contracts until the cash is
received, assuming all other tests of revenue recognition are met. Canada is
excluded from this definition of non-domestic.
Allowance for Doubtful Accounts - The Company estimates losses for
uncollectible accounts based on the aging of the accounts receivable and the
evaluation and the likelihood of success in collecting the receivable.
Property and Equipment/Long-Lived Assets - Property and equipment is
reviewed for impairment pursuant to the provisions of SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets." The carrying amount of an
asset (group) is considered impaired if it exceeds the sum of our estimate of
the undiscounted future cash flows expected to result from the use and eventual
disposition of the asset (group), excluding interest charges.
Equity Method Investment - The Company accounts for its investments in
joint ventures under the equity method. The Company periodically evaluates the
recoverability of its equity investments in accordance with APB No. 18, "The
Equity Method of Accounting for Investments in Common Stock." If circumstances
were to arise where a loss would be considered other than temporary, the Company
would record a write-down of excess investment cost. Management has determined
that no write-down was required at December 31, 2002.
Intangible Assets - Intangible assets deemed to have indefinite lives are
tested for impairment by comparing the fair value with its carrying value.
Significant estimates used in the determination of fair value include estimates
of future cash flows. As required under current accounting standards, the
Company tests for impairment when events and circumstances indicate that the
assets might be impaired and the carrying value of those assets may not be
recoverable.
Fair Value of Financial Instruments - The carrying amounts of cash and cash
equivalents, receivables, accounts payable and accrued liabilities approximate
their fair values because of the short-term nature of these instruments.
Management believes the carrying amounts of the current and long-term debt
approximate their fair value based on interest rates for the same or similar
debt offered to the Company having the same or similar terms and maturities.
Income Taxes - The Company assumes the deductibility of certain costs in
income tax filings and estimates the recovery of deferred income tax assets.
New Accounting Standards - In June 2001, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 142, "Goodwill and Other Intangible Assets."
Under SFAS No. 142, goodwill and intangible assets deemed to have indefinite
lives are no longer amortized but are subject to periodic impairment tests.
Other intangible assets continue to be amortized over their useful lives. SFAS
No. 142 was adopted by the Company in 2002.
In August 2001, the 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 tangible long-lived assets and the associated
asset retirement cost.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-lived Assets," which was adopted by the Company
in 2002. SFAS No. 144 supercedes SFAS No. 121 and modifies and expands the
financial accounting and reporting for the impairment or disposal of long-lived
assets other than goodwill.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." Provisions of SFAS No. 145 become effective in 2002 and 2003.
Under SFAS No. 145, gains and losses from the extinguishment of debt should be
classified as extraordinary items only if they meet the criteria of Accounting
Principles Board Opinion No. 30. SFAS No. 145 also addresses financial
accounting and reporting for capital leases that are modified in such a way as
to give rise to a new agreement classified as an operating lease.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which is effective for exit or
disposal activities initiated after December 31, 2002. SFAS No. 146 nullifies
Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)." Under SFAS No. 146, a liability is
required to be recognized for costs, including certain lease termination costs
and employee termination benefits, associated with an exit or disposal activity
when the liability is incurred. SFAS No. 146 applies to costs associated with
an exit activity that does not involve an entity newly acquired in a business
combination or with a retirement or disposal activity covered by SFAS Nos. 143
and 144.
In November 2002, the FASB issued FIN 45, which expands previously issued
accounting guidance and disclosure requirements for certain guarantees. FIN 45
requires the recognition of an initial liability for the fair value of an
obligation assumed by issuing a guarantee. The provision for initial
recognition and measurement of the liability will be applied on a prospective
basis to guarantees issued or modified after December 31, 2002.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based, Compensation - Transition and Disclosure," that amends SFAS No.
123, "Accounting for Stock-Based Compensation," to provide alternative methods
of transition to the fair value method of accounting for stock-based employee
compensation. SFAS No. 148 also amends the disclosure provisions of SFAS No.
123 and APB Opinion No. 28, "Interim Financial Reporting," to require disclosure
in the summary of significant accounting policies of the effects of an entity's
accounting policy with respect to stock-based employee compensation on reported
net income and earnings per share in annual and interim financial statements.
The Statement does not amend SFAS No. 123 to require companies to account for
employee stock options using the fair value method. The Statement is effective
for fiscal years beginning after December 15, 2002.
The adoption of the new standards did not, or is not expected to,
materially affect the Company's 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.
RISK FACTORS
THE COMPANY'S LICENSEES ARE SUBJECT TO EXTENSIVE AND INCREASINGLY STRICT
FEDERAL, STATE AND LOCAL ENVIRONMENTAL REGULATION AND PERMITTING
The Company's licensees and their operations are subject to increasingly
strict environmental laws and regulations, including laws and regulations
governing the emission, discharge, disposal and transportation of certain
substances and related odor. Wastewater treatment plants and other plants at
which our biosolids products or processes may be implemented are usually
required to have permits, registrations and/or approvals from state and/or local
governments for the operation of such facilities. Some of our licensee's
facilities require air, wastewater, storm water, biosolids processing, use or
siting permits, registrations or approvals. These licensees may not be able to
maintain or renew their current permits or registrations or to obtain new
permits or registrations. The process of obtaining a required permit or
registration can be lengthy and expensive. They may not be able to meet
applicable regulatory or permit requirements, and therefore may be subject to
related legal or judicial proceedings that could have a materially adverse
effect on our income derived from these licensees.
Any of the permits, registrations or approvals noted above, or related
applications may be subject to denial, revocation or modification, or challenge
by a third party, under various circumstances. In addition, if new environmental
legislation or regulations are enacted or existing legislation or regulations
are amended or are enforced differently, these licensees may be required to
obtain additional, or modify existing, operating permits, registrations or
approvals.
Maintaining, modifying or renewing current permits or registrations or
obtaining new permits or registrations after new environmental legislation or
regulations are enacted or existing legislation or regulations are amended or
enforced differently may be subject to public opposition or challenge. Much of
this public opposition and challenge, as well as related complaints, relates to
odor issues, even when our licensees are in compliance with odor requirements
and even though the licensee has worked hard to minimize odor from their
operations. Public misperceptions about the business and any related odor could
influence the governmental process for issuing such permits or registrations or
for responding to any such public opposition or challenge. Community groups
could pressure local municipalities or state governments to implement laws and
regulations which could increase our licensee's costs of its operations that in
turn could have a material and adverse effect on the Company's business and
financial condition.
THE ABILITY TO GROW MAY BE LIMITED BY COMPETITION
The Company provides a variety of technology and services relating to the
treatment of wastewater residuals. The Company is 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.
The Company derives a substantial portion of revenue from services provided
under municipal contracts, and many of these are subject to competitive bidding.
The Company also intends to bid on additional municipal contracts, however, and
may not be the successful bidder. In addition, some of its contracts will expire
in the future and those contracts may be renewed on less attractive terms. If
the Company is 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 its business, financial condition and results of
operation.
THE COMPANY'S CUSTOMER CONTRACTS MAY BE TERMINATED PRIOR TO THE EXPIRATION OF
THEIR TERM.
A substantial portion of the Company's revenue is derived from services
provided under contracts and agreements with existing licensees. Some of these
contracts, especially those contracts with large municipalities, provide for
termination of the contract by the customer after giving relatively short notice
(in some cases as little as ten days). In addition, some of these contracts
contain liquidated damages clauses, which may or may not be enforceable in the
event of early termination of the contracts. If one or more of these contracts
are terminated prior to the expiration of its term, and we are not able to
replace revenues from the terminated contract or receive liquidated damages
pursuant to the terms of the contract, the lost revenue could have a material
and adverse effect on our business and financial condition.
A SIGNIFICANT AMOUNT OF THE COMPANY'S BUSINESS COMES FROM A LIMITED NUMBER OF
CUSTOMERS AND OUR REVENUE AND PROFITS COULD DECREASE SIGNIFICANTLY IF WE LOST
ONE OR MORE OF THEM AS CUSTOMERS.
The Company's business depends on provision of services to a limited number
of customers. One or more of these customers may stop contracting for services
from us or may substantially reduce the amount of services we provide them. Any
cancellation, deferral or significant reduction in the services we provide these
principal customers or a significant number of smaller customers could seriously
harm our business and financial condition. For the year ended December 31,
2002, our single largest customer accounted for approximately 45 percent of our
revenues and our top two customers accounted for approximately 62 percent of our
revenues.
THE COMPANY IS AFFECTED BY UNUSUALLY ADVERSE WEATHER CONDITIONS
The Company's business is adversely affected by unusual weather conditions
and unseasonably heavy rainfall which can temporarily reduce the availability of
land application sites in close proximity to our operations. In addition,
revenues and operational results are adversely affected during months of
inclement weather which limits the level of land application that can be
performed. Long periods of adverse weather could have a material negative
effect on the Company's 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 operating expenses and have a negative impact on the results
of operations. The Company is 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.
THE COMPANY IS DEPENDENT ON THE MEMBERS OF ITS MANAGEMENT TEAM
The Company is highly dependent on the services of its management team, the
loss of any of whom may have a material adverse effect on its business and
financial condition.
The Company has entered into employment agreements with certain members of
its management team, which contain non-compete and other provisions. The laws of
each state differ concerning the enforceability of non-competition agreements.
The Company 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 its key executive officers were to leave and the courts
refused to enforce the non-compete covenant, the Company might be subject to
increased competition, which could have a material and adverse effect on its
business and financial condition.
THE COMPANY'S INTELLECTUAL PROPERTY MAY BE MISAPPROPRIATED OR SUBJECT TO CLAIMS
OF INFRINGEMENT
The Company attempts to protect our intellectual property rights through a
combination of patent, trademark, and trade secret laws, as well as licensing
agreements. The Company's 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.
The Company's 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 the Company's ability to
offer services. The Company has not conducted an independent review of patents
issued to third parties.
The Company also relies on unpatented proprietary technology. It is
possible that others will independently develop the same or similar technology
or otherwise obtain access to its unpatented technology. If the Company is
unable to maintain the proprietary nature of our technologies, it 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 2003, such
program may not begin until 2004 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, 2002, 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. On February 26, 2003, this certificate of deposit was liquidated
and the proceeds were used to pay down the Company's line of credit with its
bank.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
FINANCIAL STATEMENTS
Consolidated balance sheets
Consolidated statements of operations
Consolidated statements of stockholders' equity
Consolidated statements of cash flows
Notes to consolidated financial statements
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON
ACCOMPANYING INFORMATION
ACCOMPANYING INFORMATION
Schedule II - Valuation and qualifying accounts and reserves
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, 2002 and 2001, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 2002. 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 12% and 13% of total assets as of December 31, 2002
and 2001, respectively. The Company's share of the net loss of this partnership
represents 36%, 11% and 15% of the net loss of the Company for the three years
in the period ended December 31, 2002, respectively. 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, 2002 and 2001, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2002, in conformity with accounting principles generally
accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1D to the
financial statements, the Company has in the past and continues to sustain 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, 2002, current liabilities exceed current assets by
$1,040,210. 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 In May 2002, the Company was removed from listing its shares 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.
/s/ Hausser + Taylor LLP
----------------------------
HAUSSER + TAYLOR LLP
Cleveland, Ohio
March 19, 2003
N-VIRO INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 2002 and 2001
--------------------------
2002 2001
---------- ----------
ASSETS
- ------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents:
Unrestricted $ 4,935 $ 45,427
Restricted 400,000 400,000
Receivables:
Trade, net of allowance of $40,000 in 2002 and $87,501
in 2001 659,932 854,011
Notes and other 16,358 22,000
Related parties - 24,461
Prepaid expenses and other assets 137,257 51,158
Inventory, stated at lower of cost or market value 117,440 -
---------- ----------
Total current assets 1,335,922 1,397,057
PROPERTY AND EQUIPMENT 559,095 479,541
INVESTMENT IN FLORIDA N-VIRO, L.P. 490,583 525,086
INTANGIBLE AND OTHER ASSETS 1,641,990 1,731,647
---------- ----------
$4,027,590 $4,133,331
========== ==========
N-VIRO INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 2002 and 2001
--------------------------
2002 2001
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- --------------------------------------------------------------
CURRENT LIABILITIES
Current maturities of long-term debt $ 392,078 $ 438,534
Line-of-credit 656,087 503,613
Accounts payable 957,716 991,344
Accrued liabilities 370,251 418,926
------------- -------------
Total current liabilities 2,376,132 2,352,417
LONG-TERM DEBT, LESS CURRENT MATURITIES 426,738 460,342
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 13,495,602
Retained earnings (deficit) (11,613,002) (11,517,150)
------------- -------------
1,909,610 2,005,462
Less treasury stock, at cost 684,890 684,890
------------- -------------
Total stockholders' equity 1,224,720 1,320,572
------------- -------------
$ 4,027,590 $ 4,133,331
============= =============
N-VIRO INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2002, 2001 and 2000
--------------------------------------------
2002 2001 2000
----------- ------------ -----------
REVENUES $5,238,004 $ 4,382,664 $4,166,435
COST OF REVENUES 3,381,413 2,794,950 2,436,942
----------- ------------ -----------
GROSS PROFIT 1,856,591 1,587,714 1,729,493
OPERATING EXPENSES
Selling, general and administrative 1,876,601 2,167,308 2,272,978
Patent litigation expense 545 549,852 135,272
----------- ------------ -----------
1,877,146 2,717,160 2,408,250
----------- ------------ -----------
OPERATING LOSS (20,555) (1,129,446) (678,757)
NONOPERATING INCOME (EXPENSE)
Interest and dividend income 42,914 63,739 29,509
Interest expense (62,282) (59,626) (29,559)
Recovery of bad debt allowance - - 275,000
Loss on sale of assets (21,426) (5,005) -
Loss from equity investment in joint venture (34,503) (136,880) (128,701)
----------- ------------ -----------
(75,297) (137,772) 146,249
----------- ------------ -----------
LOSS BEFORE INCOME TAXES (95,852) (1,267,218) (532,508)
Federal and state income taxes - - 312,000
----------- ------------ -----------
NET LOSS $ (95,852) $(1,267,218) $ (844,508)
=========== ============ ===========
Basic and diluted loss per share $ (0.04) $ (0.48) $ (0.32)
=========== ============ ===========
Weighted average common shares outstanding 2,577,433 2,635,334 2,635,475
=========== ============ ===========
N-VIRO INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 2002, 2001 and 2000
--------------------------------------------
Additional Retained
Common Paid-in Earnings Treasury
Stock Capital (Deficit) Stock Total
----------- ------------ ------------- ---------- ------------
BALANCE JANUARY 1, 2000 $ 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
Net loss - - (95,852) - (95,852)
----------- ------------ ------------- ---------- ------------
BALANCE DECEMBER 31, 2002 $ 27,010 $13,495,602 $(11,613,002) $(684,890) $ 1,224,720
=========== ============ ============= ========== ============
N-VIRO INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2002, 2001 and 2000
--------------------------------------------
2002 2001 2000
---------- ------------ ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (95,852) $(1,267,218) $(844,508)
Adjustments to reconcile net loss to net
cash (used in) provided by operating activities:
Depreciation and amortization 253,373 263,861 188,398
Provision (credit) for bad debts 15,731 (57,063) (315,016)
Deferred income taxes - - 312,000
Loss on the sale of fixed assets 21,426 5,005 755
Issuance of common stock and options for fees and
services - - 112,887
Other 34,503 136,880 155,031
Decrease (increase) in trade receivables 241,580 554,153 (214,442)
Decrease (increase) in prepaid expenses (86,099) 33,812 (11,309)
Increase in inventory (117,440) - -
(Decrease) increase in accounts payable and accrued
liabilities (82,304) (35,274) 411,480
---------- ------------ ----------
Net cash (used in) provided by operating activities 184,918 (365,844) (204,724)
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 (25,969) (43,681) (49,147)
Proceeds from sale of equipment - - 6,000
Collections from (advances to) related parties (145) (2,549) 26,687
Increase in notes receivable (35,748) (212,873) (174,611)
Collections on notes receivable 22,288 20,777 371,415
Expenditures for intangible and other assets (79,408) (42,726) (233,585)
---------- ------------ ----------
Net cash used in investing activities (118,982) (263,386) (470,907)
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings on line-of-credit 152,474 203,613 300,000
Borrowings under long-term obligations 261,398 523,472 77,162
Principal payments on long-term obligations (520,300) (177,913) (129,642)
Other - (3,000) 3,750
---------- ------------ ----------
Net cash (used in) provided by financing activities (106,428) 546,172 251,270
---------- ------------ ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (40,492) (83,058) (424,361)
CASH AND CASH EQUIVALENTS BEGINNING 45,427 128,485 552,846
---------- ------------ ----------
CASH AND CASH EQUIVALENTS ENDING $ 4,935 $ 45,427 $ 128,485
========== ============ ==========
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. The Company periodically evaluates the recoverability of its equity
investments in accordance with APB No. 18, "The Equity Method of Accounting for
Investments in Common Stock." If circumstances were to arise where a loss would
be considered other than temporary, the Company would record a write-down of
excess investment cost. Management has determined that no write-down was
required at December 31, 2002.
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 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, 2002,
current liabilities exceed current assets by $1,040,210. In May 2002, the
Company was removed from listing its shares 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.
As discussed in Note 3, in February 2003, management of the Company
obtained additional debt financing which, in management's opinion, will provide
additional cash flows required to assist the Company in meeting its 2003
operating and liquidity requirements. Management of the Company also expects
continued improvements in operating results for 2003 as a result of maintaining
lower administrative costs, along with realized and expected new sources of
revenue. Additionally, market developments and ongoing discussions with
companies in both the utility and wastewater industries could provide enhanced
liquidity and positively impact 2003 operations. There can be no assurance that
these developments will create sufficient funds to finance the Company's
operations.
The Company is currently working with the investment banking firm of Laux &
Company of Medina, Ohio, with respect to a proposal to obtain up to $1.25
million in equity financing. The Company hopes to sell up to 500,000 shares of
preferred stock at a price per share of $2.50. The specific terms and
conditions applicable to the preferred shares will be determined once Laux &
Company has identified a potential purchaser. There can be no assurance that
the Company will be successful in finding a buyer for the preferred stock or in
selling these shares. If the shares are sold, the proceeds from the offering
will be used to supplement the Company's working capital.
N-VIRO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Also, the Company has gone forward on contracts with two investment banking
firms with respect to a proposal to obtain up to $800,000 of mezzanine debt
financing. The specific terms and conditions applicable to the debt will be
determined once either firm has identified a potential debtor. There can be no
assurance that the Company will be successful in finding a lender for the
financing. If the financing is obtained, the proceeds from the offering will be
used to supplement the Company's working capital.
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 was held as
collateral against the Company's line-of-credit as of the balance sheet date.
This certificate of deposit was used to pay the Company's line-of-credit with
its former lending institution in February 2003.
G. Accounts Receivable - The Company extends unsecured credit to customers
under normal trade agreements, which require payment within 30 days. Accounts
greater than 90 days past due amounted to $93,064 and $259,556 of net
receivables for the years ended December 31, 2002 and 2001, respectively.
Management estimates an allowance for doubtful accounts, which was $40,000 and
$87,501 as of December 31, 2002 and 2001, respectively. The estimate is based
upon management's review of delinquent accounts and an assessment of the
Company's historical evidence of collections. Bad debt expense (recovery) of
$8,864 and $(41,824) was recognized for the years ended December 31, 2002 and
2001, respectively, as a result of this estimate. Specific accounts are charged
directly to the reserve when management obtains evidence of a customer's
insolvency or otherwise determines that the account is uncollectible.
Charge-offs of specific accounts for the years ended December 31, 2002 and 2001
totaled $56,251 and $-0-, respectively.
H. Prepaid Expenses and Other Assets - Included in prepaid expenses and
other assets are costs of $90,946 associated with a potential stock offering.
Should the preferred stock offering not go forward, these costs will be expensed
in 2003.
I. Inventory - Inventory at December 31, 2002 is recorded at lower of cost
or market and consists of N-Viro soil, manufactured by the Company, which is
available for sale and used in commercial, agricultural and horticultural
applications.
J. 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 five to fifteen years. Depreciation expense amounted to
$119,730, $140,331 and $106,231 in 2002, 2001 and 2000, 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.
N-VIRO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
K. Intangible Assets - Patent costs and territory rights are recorded at
cost and then amortized by the straight-line method over their estimated useful
lives (periods ranging from twelve to seventeen years; weighted-average
amortization periods for patents/related intangibles and territory rights were
15.2 and 13.2 years, respectively, at December 31, 2002.). Amortization expense
amounted to $133,643, $123,530 and $82,167 in 2002, 2001 and 2000, respectively;
estimated amortization expense, based on intangible assets at December 31, 2002,
for each of the ensuing five years is as follows: 2003-2005 - $138,000; 2006 -
$131,000; 2007 - $117,000. 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.
L. 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, alkaline admixture management service revenue,
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 in accordance with the contract.
Any type of revenue generated from international customers (excluding
Canada) is recognized when the cash is received.
M. Loss Per Common Share - 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, 2002, 2001 and 2000, the
effects of the stock options granted are excluded from the diluted per share
calculation because they would be antidilutive.
N. New Accounting Standards - In June 2001, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 142, "Goodwill and Other Intangible
Assets." Under SFAS No. 142, goodwill and intangible assets deemed to have
indefinite lives are no longer amortized but are subject to periodic impairment
tests. Other intangible assets continue to be amortized over their useful
lives. SFAS No. 142 was adopted by the Company in 2002.
In August 2001, the 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 tangible long-lived assets and the associated
asset retirement cost.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-lived Assets," which was adopted by the Company
in 2002. SFAS No. 144 supercedes SFAS No. 121 and modifies and expands the
financial accounting and reporting for the impairment or disposal of long-lived
assets other than goodwill.
N-VIRO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." Provisions of SFAS No. 145 become effective in 2002 and 2003.
Under SFAS No. 145, gains and losses from the extinguishment of debt should be
classified as extraordinary items only if they meet the criteria of Accounting
Principles Board Opinion No. 30. SFAS No. 145 also addresses financial
accounting and reporting for capital leases that are modified in such a way as
to give rise to a new agreement classified as an operating lease.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which is effective for exit or
disposal activities initiated after December 31, 2002. SFAS No. 146 nullifies
Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)." Under SFAS No. 146, a liability is
required to be recognized for costs, including certain lease termination costs
and employee termination benefits, associated with an exit or disposal activity
when the liability is incurred. SFAS No. 146 applies to costs associated with
an exit activity that does not involve an entity newly acquired in a business
combination or with a retirement or disposal activity covered by SFAS Nos. 143
and 144.
In November 2002, the FASB issued FIN 45, which expands previously issued
accounting guidance and disclosure requirements for certain guarantees. FIN 45
requires the recognition of an initial liability for the fair value of an
obligation assumed by issuing a guarantee. The provision for initial
recognition and measurement of the liability will be applied on a prospective
basis to guarantees issued or modified after December 31, 2002.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based, Compensation - Transition and Disclosure," that amends SFAS No.
123, "Accounting for Stock-Based Compensation," to provide alternative methods
of transition to the fair value method of accounting for stock-based employee
compensation. SFAS No. 148 also amends the disclosure provisions of SFAS No.
123 and APB Opinion No. 28, "Interim Financial Reporting," to require disclosure
in the summary of significant accounting policies of the effects of an entity's
accounting policy with respect to stock-based employee compensation on reported
net income and earnings per share in annual and interim financial statements.
The Statement does not amend SFAS No. 123 to require companies to account for
employee stock options using the fair value method. The Statement is effective
for fiscal years beginning after December 15, 2002.
The adoption of the new standards did not, or is not expected to,
materially affect the Company's financial position and results of operations.
O. Reclassifications - Certain amounts from the prior year financial
statements have been reclassified to conform with the current year presentation.
NOTE 2. BALANCE SHEET DATA
TRADE RECEIVABLES:
Trade receivables in the accompanying balance sheets at December 31, 2002 and
2001 are stated net of an allowance for doubtful accounts of $40,000 and
$87,501, respectively.
N-VIRO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BALANCE SHEET DATA (CONTINUED)
NOTES AND OTHER RECEIVABLES:
At December 31, 2002, unsecured, 9.75% demand notes receivable totaling $207,330
(including accrued interest of $37,330) and unsecured, prime (stated by a local
bank) plus % demand note receivable totaling $205,902 (including accrued
interest of $25,902) 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. The Company recorded interest
income of $25,748 in 2002. During 2002, the Company set up an allowance of
$63,232 for the interest portion of the note receivable.
The Company has an unsecured receivable from a related party totaling $24,606 in
2002 and $24,461 in 2001. During 2002, the amount due from the related party
has been deemed to be noncurrent by management in the accompanying balance
sheets.
PROPERTY AND EQUIPMENT (AT COST):
2002 2001
---------- ----------
Land and leasehold improvements $ 43,903 $ 44,911
Equipment 1,215,893 1,141,408
Furniture and fixtures 160,706 195,318
---------- ----------
1,420,502 1,381,637
Less accumulated depreciation and amortization 861,407 902,096
---------- ----------
$ 559,095 $ 479,541
========== ==========
INVESTMENT IN FLORIDA N-VIRO, L.P.:
Florida N-Viro, L.P. was formed in January 1996 pursuant to a joint venture
agreement between the Company and VFL Technology Corporation (VFL). The Company
owns a 47.5% interest in the joint venture and, as described in Note 1, accounts
for its investment under the equity method.
The Company is currently actively pursuing sale of its investment in Florida
N-Viro, LP, which may provide, in management's opinion, additional funds to
finance the Company's cash requirements. Because these efforts are still in
progress, there can be no assurance the Company will successfully complete these
negotiations.
N-VIRO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. BALANCE SHEET DATA (CONTINUED)
INVESTMENT IN FLORIDA N-VIRO, L.P. (CONTINUED):
Condensed financial information of the partnership as of December 31, 2002 and
2001 is as follows:
2002 2001
---------- ----------
Current assets $ 624,843 $ 633,019
Long-term assets 1,928,495 2,113,032
---------- ----------
$2,553,338 $2,746,051
========== ==========
Current liabilities $1,537,744 $1,610,090
Long-term liabilities 62,467 110,198
Partners' equity 953,127 1,025,763
---------- ----------
$2,553,338 $2,746,051
========== ==========
Year Ended December 31,
------------------------
2002 2001 2000
----------- ----------- -----------
Net sales $3,135,465 $2,930,294 $2,777,606
Net loss (72,636) (288,168) (257,402)
During 2002, 2001 and 2000, the Partnership's largest customer accounted for
29%, 19% and 17%, respectively, of its revenue. Additionally, during 2002, 2001
and 2000, the Partnership's largest customers accounted for 60% (three
customers), 59% (four customers) and 77% (four customers) of total revenue,
respectively.
INTANGIBLE AND OTHER ASSETS:
2002 2001
- ------------------------------------------------- -------- --------
Patents and related intangibles, less accumulated
amortization
2002 - $399,300; 2001 - $325,000 $ 774,324 $772,124
Territory rights, less accumulated amortization
2002 - $202,800; 2001 - $145,000 483,060 555,393
Notes receivable - Florida N-Viro, L.P. net
of allowance of $63,232 in 2002 350,000 387,484
Notes receivable - Related party 24,606 -
Other 10,000 16,646
---------- --------
$1,641,990 $1,731,647
========== ==========
N-VIRO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
ACCRUED LIABILITIES:
2002 2001
-------- --------
Employee benefits $137,313 $ 56,116
Sales tax payable 175,661 168,274
Other payable 57,277 194,536
-------- --------
$370,251 $418,926
======== ========
NOTE 3. PLEDGED ASSETS, LINE-OF-CREDIT AND LONG-TERM DEBT
During the year, the Company had available a $750,000 line-of-credit with a bank
which was scheduled to expire on January 31, 2003. Borrowings against the
line-of-credit bore interest at prime plus 1% on borrowings up to $400,000 and
prime plus 3% for borrowings above $400,000. Borrowings, which were
collateralized by all of the Company's assets including accounts receivable,
inventories, equipment, assignment of a $400,000 certificate of deposit and
assignment of certain contracts, were due on demand. At December 31, 2002, the
Company had borrowed $656,087 against the line.
N-VIRO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. PLEDGED ASSETS, LINE-OF-CREDIT AND LONG-TERM DEBT (CONTINUED)
In February 2003, the Company closed on an $845,000 credit facility ("Credit
Facility") with a local bank. This senior debt Credit Facility is comprised of
a $295,000 four year term note at 7.5% and a line-of-credit up to $550,000 at
prime plus 1 1/2% and secured by a first lien on all assets of the Company. The
Company will use the funds to refinance existing debt and to provide working
capital. To secure the Credit Facility, the Company was required by the
financial institution to obtain additional collateral of $100,000 from a real
estate mortgage from a third party. Messrs. J. Patrick Nicholson, the Chairman
of the Board and Consultant to the Company, Michael G. Nicholson, the Company's
Chief Operating Officer and a Director, Robert F. Nicholson, a Company employee,
and Timothy J. Nicholson, a Company employee (the "Nicholsons"), collectively
provided the $100,000 additional collateral. In exchange for their commitment,
the Company has agreed to provide the Nicholsons the following: (1) an annual
fee in an amount equal to two percent (2%) of the aggregate value of the
mortgage or mortgages encumbering the additional collateral, which fee
originally shall be $2,000 per annum; (2) interest at an annual rate of 5% of
the aggregate value of the mortgage or mortgages encumbering the additional
collateral beginning on the first anniversary date of the closing of the Credit
Facility and (3) grant, jointly, a warrant to acquire, in the aggregate, 50,000
shares of the Company's voting common stock at a purchase price of $0.90 per
share, which was the closing market price of the Company's common stock on the
prior business day to the closing of the Credit Facility. In addition, the
Company granted to the Nicholsons a lien upon the Company's inventory and
accounts receivable. This lien is subordinated to existing liens on the
Company's assets and all liens granted by the Company in favor of the financial
institution providing the Credit Facility.
Long-term debt at December 31, 2002 and 2001 is as follows:
2002 2001
-------- --------
Notes payable $818,816 $898,876
Less current maturities 392,078 438,534
-------- --------
$426,738 $460,342
======== ========
The notes payable are notes signed for amounts owed to vendors and other
parties. The notes bear interest ranging from 5.99% to 28.17% (with a weighted
average interest rate of 10.3% as of December 31, 2002) and are due at varying
dates through March 2007. Included in notes payable is $219,003 in installment
notes secured by equipment and $489,509 secured by the general assets of the
Company. The remainder of the notes are unsecured. Aggregate maturities of
long-term debt for the years ending December 31 are as follows: 2003 - $392,078;
2004 - $154,433; 2005 - $146,377; 2006 - $103,605 and 2007 - $22,323. Interest
paid was approximately $54,000, $55,300 and $31,000 for the years ended December
31, 2002, 2001 and 2000, 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, 2002 and
2001.
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.
N-VIRO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. EQUITY TRANSACTIONS (CONTINUED)
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,
2002, 2001 and 2000 and the number outstanding and exercisable at those dates:
2002 2001 2000
-------------------- ---------------- --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- ---------- --------- --------- ------- ------
Outstanding, beginning of year 567,525 $ 2.49 516,325 $ 2.69 454,325 $ 2.62
Granted 6,300 0.91 93,200 1.50 95,500 3.37
Expired during the year - (42,000) 2.72 (33,500) 3.72
--------- - --------- ---------
Outstanding, end of year 573,825 2.47 567,525 2.49 516,325 2.69
========= ========= =======
Eligible for exercise at end of year 495,025 403,425 316,125
========= ========== =========
Weighted average fair value per
option for options granted
during the year $ 1.07 $ 1.50 $ 3.29
========= ========== =========
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
----------- ----------- --------- ----------- ---------
2002
- ----------------------------------------------------------------------------------------
Range of exercise prices:
$0.91 to $2.43 464,900 6.41 $ 1.99 408,000 $ 2.06
$4.00 to $5.00 108,925 3.77 4.52 87,025 4.40
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
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. No
compensation cost was recognized under APB No. 25 for the years ended December
31, 2002, 2001 and 2000. 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 loss would have been
$(312,001), $(1,513,440) and $(1,064,278) and basic loss per share would have
been $(.12), $(.57) and $(.40) for the years ended December 31, 2002, 2001 and
2000, 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 2002, 2001 and
2000, respectively: no assumed dividend rates for all years; risk-free interest
rates of 4.5%, 5.0% and 6.0%, respectively, on expected lives of 10 years for
all years; and expected price volatility of 109%, 113% and 135%, respectively.
NOTE 5. REVENUE AND MAJOR CUSTOMERS
Revenues for the years ended December 31, 2002, 2001 and 2000 consist of the
following:
2002 2001 2000
---------- ---------- ----------
Facility Management $1,872,722 $1,637,243 $1,520,830
- ----------------------- ---------- ---------- ----------
Technology Fees 685,757 849,086 999,345
- ----------------------- ---------- ---------- ----------
Products and Services 2,679,525 1,896,335 1,646,260
- ----------------------- ---------- ---------- ----------
$5,238,004 $4,382,664 $4,166,435
---------- ---------- ----------
N-VIRO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. REVENUE AND MAJOR CUSTOMERS (CONTINUED)
Cost of revenues for the years ended December 31, 2002, 2001 and 2000 consist of
the following:
2002 2001 2000
---------- ---------- ----------
Facility Management $1,527,754 $1,272,566 $1,138,071
- ----------------------- ---------- ---------- ----------
Technology Fees 143,628 183,294 219,852
- ----------------------- ---------- ---------- ----------
Products and Services 1,710,031 1,339,090 1,079,019
- ----------------------- ---------- ---------- ----------
$3,381,413 $2,794,950 $2,436,942
---------- ---------- ----------
Revenues for the years ended December 31, 2002, 2001 and 2000 include revenues
from one major customer, the City of Toledo, Ohio (included in the facility
management and products and services classifications), which represented
approximately 45%, 39% and 38%, respectively, of total revenues. In addition,
the Company had another major customer, WeCare Environmental Services, totaling
approximately 17%, 12% and 5% of total revenues (which is included mainly in the
products and services classification) for the years ended December 31, 2002,
2001 and 2000, respectively. The accounts receivable balances due (all of which
are unsecured) from these customers at December 31, 2002 and 2001 were
approximately $281,000 and $252,000, respectively.
A substantial portion of the Company's revenue is derived from services provided
under contracts and agreements with existing licensees. Some of these
contracts, especially those contracts with large municipalities, provide for
termination of the contract by the customer after giving relatively short notice
(in some cases as little as ten days). In addition, some of these contracts
contain liquidated damages clauses, which may or may not be enforceable in the
event of early termination of the contracts. If one or more of these contracts
are terminated prior to the expiration of its term, and the Company is not able
to replace revenues from the terminated contract or receive liquidated damages
pursuant to the terms of the contract, the lost revenue could have a material
and adverse effect on its business and financial condition.
N-VIRO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. COMMITMENTS AND CONTINGENCIES
In November 2001, and as filed under Form 8-K dated December 14, 2001, the
Company and Hydropress Environmental Services, Inc. ("Hydropress") signed a
settlement agreement (the "Settlement Agreement") of a lawsuit between the
parties related to alleged price guarantees on shares of the Company's common
stock and to alleged breaches of a license agreement between the parties. Each
party dismissed its claims against the other with prejudice and entered into
general releases in favor of the other party. Pursuant to the terms of the
Settlement Agreement, among other things, N-Viro purchased back 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. Also pursuant to the Settlement
Agreement, the Company 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 license concerned the
non-exclusive right to sell and use the N-Viro technology in New Jersey,
Delaware, Maryland and Eastern Pennsylvania. The third license 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. The Company paid certain amounts due to Hydropress
under the Settlement Agreement pursuant to the terms of a promissory note (the
"Note"). The original principal amount of the Note was $204,587, was
non-interest bearing and matured on October 15, 2002 with a balloon payment of
$144,587. In conjunction with the final discharge of the Hydropress Note, the
Company arranged an unsecured loan from WeCare Environmental Services, Inc., a
third-party licensee, for $144,587, with monthly payments of $13,966 including
interest at 28.17% through October 15, 2003. At December 31, 2002, the
outstanding principal balance on the Note was $123,196. This obligation is
included in long-term debt disclosed in Note 3.
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 $173,000 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 is currently in
negotiations and believes it will arrange for a long-term installment payment of
all tax due.
Prior to May 9, 2002, the Company's shares of voting, common stock were traded
on the SmallCap Market of the National Association of Securities Dealers
Automated Quotation System ("NASDAQ"). On May 9, 2002, the Company received
notice from the NASD that the Company's shares of voting, common stock would be
de-listed effective with the open of business on May 10, 2002. In July 2002,
the Company decided not to pursue further appeal of the NASD's decision to
de-list its voting common stock. Currently, the Company's shares of common
stock are traded on the Over-The-Counter ("OTC") market. The Company does not
believe that the de-listing of its common stock from the NASDAQ SmallCap Market
has or will have a material adverse effect on the financial condition or results
of operations of the Company. The de-listing 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 OTC market generally experience lower
trading value than those traded on the organized exchanges.
N-VIRO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company leases its executive and administrative offices in Toledo, Ohio.
The total minimum rental commitment for the years ending December 31, 2003
through 2006 is approximately $56,000 each year. The total rental expense
included in the statements of operations for the years ended December 31, 2002,
2001 and 2000 is approximately $64,600, $63,300 and $59,000, respectively. The
Company also leases various equipment on a month-to-month basis.
During 1999, the Company entered into employment and consulting agreements with
two officers of the Company. One employment agreement expired in July 2002 and
the other will expire in 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 provisions of this agreement totalled
approximately $137,300 at December 31, 2002. The cost was recognized over the
term of the employment agreement. The Company charged $40,644 to operations in
2002 related to this agreement. Future payments will be offset against this
liability. The consulting agreements begin upon termination of the respective
employment agreements and extend through July 2015 and June 2014, respectively.
The agreements require the officers to provide minimum future services to be
eligible for compensation.
The Company operates in an environment with many financial risks, including, but
not limited to, major customer concentrations, customer contract termination
provisions, competing technologies, infringement and/or misappropriation of
intellectual property rights, 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.
N-VIRO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2002
and 2001 is as follows:
2002 2001
------------ ------------
Gross deferred tax liability, accelerated
depreciation $ (700) $ (25,000)
Gross deferred tax assets:
Loss carryforwards 4,492,700 4,481,000
Patent costs 284,100 361,000
Allowance for doubtful accounts 16,000 35,000
Allowance for notes receivable 25,300 -
Property and equipment basis difference 7,000 9,000
Other 16,700 9,000
------------ ------------
4,841,800 4,895,000
Less valuation allowance (4,841,100) (4,870,000)
------------ ------------
$ - $ -
============ ============
N-VIRO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2002, 2001 and 2000 and are as
follows:
2002 2001 2000
--------- ---------- ----------
Computed "expected" tax (credits) $(32,600) $(431,000) $(181,000)
State taxes, net of federal tax benefit (2,900) (38,000) (16,000)
(Decrease) increase in income taxes resulting
from:
Change in valuation allowance (28,900) 455,000 480,000
Other 64,400 14,000 29,000
--------- ---------- ----------
$ - $ - $ 312,000
========= ========== ==========
The net operating losses available at December 31, 2002 to offset future taxable
income total approximately $11,200,000 and expire principally in years 2009 -
2022.
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 Company's
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, 2002 follows:
Supplemental schedule of noncash investing and
financing activities:
Equipment purchases financed with notes payable $ 178,842
=======
N-VIRO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
The last segment is the Research and Development segment. 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.
N-VIRO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2002, 2001 and 2000 (dollars in
thousands).
Other
Management Domestic Foreign Research &
Operations Operations Operations Development Total
----------- ----------- ----------- ------------ ------
2002
- --------------------------------------------------------------------------------
Revenues $ 2,340 $ 2,669 $ 50 $ 179 $5,238
Cost of revenues 1,528 1,732 2 119 3,381
Segment profits 812 937 48 60 1,857
Identifiable assets 340 108 - 44 492
Depreciation 41 44 - 6 91
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
N-VIRO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2002, 2001 and 2000 follows (dollars in thousands):
2002 2001 2000
-------- -------- --------
Segment profits:
Segment profits for reportable segments $ 1,857 $ 1,588 $ 1,729
Corporate selling, general and administrative
expenses and research and development costs (1,877) (2,717) (2,408)
Other income (expense) (75) (138) 146
-------- -------- --------
Consolidated earnings before taxes $ (95) $(1,267) $ (533)
======== ======== ========
Identifiable assets:
Identifiable assets for reportable segments $ 492 $ 322 $ 337
Corporate property and equipment 67 158 244
Current assets not allocated to segments 1,336 1,397 2,176
Intangible and other assets not allocated to
segments 2,357 2,491 2,229
Consolidated eliminations (234) (234) (234)
-------- -------- --------
Consolidated assets $ 4,028 $ 4,134 $ 4,752
======== ======== ========
Depreciation and amortization:
Depreciation for reportable segments $ 91 $ 109 $ 73
Corporate depreciation and amortization 162 155 115
-------- -------- --------
Consolidated depreciation and amortization $ 253 $ 264 $ 188
======== ======== ========
NOTE 10. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of selected quarterly financial data for the years
ended December 31, 2002 and 2001:
Quarters Ended
-----------------------------------------------------
March 31 June 30 September 30 December 31
----------- ----------- ------------- -------------
2002
- ----
Revenues $1,417,779 $1,240,414 $ 1,485,610 $ 1,094,201
Operating income (loss) (382) (149,892) 133,971 ( 4,253)
Net income (loss) 24,054 (126,373) 106,120 (99,653)
Basic and diluted income
(loss) per share $ 0.01 $ (0.05) $ 0.04 $ (0.04)
N-VIRO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
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)
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, 2002. 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 19, 2003
N-VIRO INTERNATIONAL CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
December 31, 2002, 2001 and 2000
--------------------------------
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:
2002 $ 87,501 $ 15,700 $ - $ 103,200 (3)
=========== =========== =========== =========
2001 $ 144,564 $ - $ 57,500 (2) $ 87,500
=========== =========== =========== ========
2000 $ 460,000 $ 16,000 $ 331,000 (1) $145,000
=========== =========== =========== ========
(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.
(3) This includes $40,000 related to trade receivables and $63,200 related to
accrued interest on notes receivable.
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
DIRECTORS OF THE COMPANY
DANIEL J. HASLINGER, AGE 47. Mr. Haslinger is presently Chief Executive Officer
and Owner of Micro Macro Integrated Technologies, a Nevada company specializing
in industrial automation integration. Mr. Haslinger is also Chairman and Chief
Executive Officer of WJZE 97.3FM RASP Broadcast Enterprises, Inc., a local
broadcast company. Mr. Haslinger is a member of N-Viro Filipino, LLC, a
licensee of the Company, and is also a member of DJH Holdings, LLC. Mr.
Haslinger has served as a Director of the Company since May 1999 and is a member
of the Board's Audit and Compensation Committees.
R. FRANCIS DIPRETE, AGE 48. Mr. DiPrete is a lawyer and is presently President
and Board Chairman of Worldtech Waste Management, Inc., a Virginia thermal soil
remediation facility, specialty waste handler and a licensee of the Company.
Mr. DiPrete is also an officer, consultant to, and Chairman of the Board of
Symbiat, Inc. (formerly Computone), which is a provider of computer technology
support and service. Mr. DiPrete has served as a Director of the Company since
May 2000.
BOBBY B. CARROLL, AGE 69. Mr. Carroll was formerly the President, Chief
Executive Officer and owner of Pozzolanic Contracting & Supply Co., a supplier
of roadway construction materials in the Southeast U.S. Mr. Carroll also acted
as a consultant and sales representative to the Company with respect to various
matters until the end of 2002. Mr. Carroll has served as a Director of the
Company since May 1997 and is a member of the Board's Compensation, Nominating
and Finance Committees.
J. PATRICK NICHOLSON, AGE 66. Mr. Nicholson became Chairman and Chief Executive
Officer of the Company in May 1993 until his retirement as an officer in May
2002. Mr. Nicholson presently serves as a consultant to the Company. In 1979,
he founded N-Viro Energy Systems, Limited, a limited partnership and one of the
predecessor entities that combined to form the Company in October 1993, and is
the controlling stockholder of N-Viro Energy Systems, Inc. Mr. Nicholson has
served as a Chairman of the Board of the Company since May 1993, and is a member
of the Finance Committee.
B.K. WESLEY COPELAND, AGE 69. Mr. Copeland, a physical chemist, was the Founder
of the International Science and Technology Institute, Inc., as well as Founder
and Chief Executive Officer of the Foundation for Economic Development. Mr.
Copeland is associated with N-Viro Africa, which holds rights to the N-Viro
technology in all of Africa except North Africa. Mr. Copeland has served as a
Director of the Company since May 1997, is a member of the Board's Compensation,
Audit and Nominating Committees.
TERRY J. LOGAN, PH.D., AGE 60. Dr. Logan served as Chief Operating Officer and
President of the Company since joining the Company in July 1999, and was
appointed Chief Executive Officer in May 2002. From 1971 until July 1999, Dr.
Logan was a professor of Agronomy at The Ohio State University. Dr. Logan
served as President of Pan-American N-Viro Inc. (subsidiary of the Company) from
1994 through 1995 and is the President of Logan Environmental, Inc.
(environmental consulting firm). Dr. Logan has served as a Director of the
Company since May 1993.
MICHAEL G. NICHOLSON, AGE 36. Mr. Nicholson was appointed Chief Operating
Officer in May 2002, and has served as the Vice-President of Sales and Marketing
of the Company since December 1996 and Senior Vice-President after May 2000.
Prior to December 1996, Mr. Nicholson served the Company and N-Viro Energy
Systems Ltd. in various management positions in sales since his hiring in 1990.
Mr. Nicholson is the son of J. Patrick Nicholson, and has served as a Director
of the Company since February 1998.
PHILLIP LEVIN, AGE 63. Mr. Levin is the President of both Levin Development
Company and MGM Consulting Services, a real estate development and financial
consulting company, respectively, located in Troy, Michigan. Mr. Levin holds an
MBA in both Accounting and Finance, and was a partner-in-charge of
PriceWaterhouseCoopers' consulting division in Michigan for 16 years. Mr. Levin
has served as a Director of the Company since November 2002 and is a member of
the Audit, Nominating and Finance Committees.
EXECUTIVE OFFICERS OF THE COMPANY
TERRY J. LOGAN, PH.D., AGE 60. Dr. Logan served as Chief Operating Officer and
President of the Company since joining the Company in July 1999, and was
appointed Chief Executive Officer in May 2002. From 1971 until July 1999, Dr.
Logan was a professor of Agronomy at The Ohio State University. Dr. Logan
served as President of Pan-American N-Viro Inc. (subsidiary of the Company) from
1994 through 1995 and is the President of Logan Environmental, Inc.
(environmental consulting firm). Dr. Logan has served as a Director of the
Company since May 1993.
MICHAEL G. NICHOLSON, AGE 36. Mr. Nicholson was appointed Chief Operating
Officer in May 2002, and has served as the Vice-President of Sales and Marketing
of the Company since December 1996 and Senior Vice-President after May 2000.
Prior to December 1996, Mr. Nicholson served the Company and N-Viro Energy
Systems Ltd. in various management positions in sales since his hiring in 1990.
Mr. Nicholson is the son of J. Patrick Nicholson, and has served as a Director
of the Company since February 1998.
JAMES K. MCHUGH, AGE 44. Mr. McHugh has served as Chief Financial Officer,
Secretary and Treasurer of the Company since January 1997. Prior to that date,
Mr. McHugh served the Company and N-Viro Energy Systems Ltd. in various
financial positions since his hiring in April 1992.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF EXECUTIVE OFFICERS
The following table presents the total compensation awarded to, earned by,
or paid to, the Chief Executive Officer during 2000, 2001 and 2002. There were
no other Executive Officers of the Company who were serving at the end of 2002
and whose total annual salary and bonus, if any, exceeded $100,000.
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
Annual Compensation Securities All Other
------------------------ Underlying Compensation
Name and Principal Position Year Salary ($) Bonus ($) Options(#)(1) ($)
- ------------------------------------- ------ ----------- --------- -------------- --------------
CURRENT MANAGEMENT
Terry J. Logan 2002 $120,000 $ 250 -0- $ 1,488 (2)
President and Chief Executive Officer 2001 $120,000 $ 300 20,000 $ 1,782
2000 $120,000 $7,125 12,500 $ -0-
FORMER MANAGEMENT
J. Patrick Nicholson 2002 $76,563 $ 250 -0- $72,289 (4)
Chief Executive Officer (3) 2001 $131,250 $14,300 -0- $27,146
2000 $131,250 $ 7,125 12,500 $27,146
(1) The numbers shown represent the number of shares of common stock for which
options were granted to the Named Executive Officers in 2000, 2001 and
2002.
(2) Dr. Logan received term life insurance premium payment benefits for a
$250,000 term policy with his spouse named as beneficiary.
(3) Mr. Nicholson retired as Chief Executive Officer effective May 2002, and
received salary through July 2002, per his employment agreement.
(4) In 2002, Mr. Nicholson received fees beginning in August 2002 of $54,000
for consulting services, the benefit of premium payments of $17,303 for
both a $100,000 and $612,000 whole-life insurance policy and the benefit of
term life insurance premium payments of $986 for a $250,000 term policy,
pursuant to the terms of his Employment and Consulting Agreements dated
December 2, 1999. Mr. Nicholson receives full rights of cash surrender
value and death benefits on the whole-life policies, and his spouse is the
named beneficiary on all life insurance policies noted.
EMPLOYMENT AGREEMENTS
On June 14, 1999, Dr. Logan entered into a five-year employment agreement
with the Company at a minimum annual salary of $144,000, reviewable annually at
January 1 during the employment term. Such agreement also provides that Dr.
Logan shall be entitled to (i) bonuses to be payable at the discretion of the
Board of Directors, (ii) other benefits, including insurance and pension plan,
as are provided to other Executive Officers of the Company, and (iii) stock
options to purchase 50,000 shares of the Company's common stock. Effective July
1, 1999, Dr. Logan voluntarily agreed to reduce his minimum annual salary to
$120,000 for the years ended December 31, 2000, 2001 and 2002.
On December 2, 1999, Mr. J. Patrick Nicholson entered into a two and
one-half-year employment agreement with the Company at a minimum annual salary
of $144,000, reviewable annually at January 1 during the employment term. Such
agreement also provides that Mr. Nicholson shall be entitled to (i) bonuses to
be payable at the discretion of the Board of Directors, (ii) such medical and
other benefits, including insurance and pension plan, as are provided to other
Executive Officers of the Company, and (iii) stock options to purchase 50,000
shares of the Company's common stock. Effective December 2, 1999, Mr. Nicholson
voluntarily agreed to reduce his minimum annual salary to $131,250 for the years
ended December 31, 1999, 2000 and 2001.
OPTION GRANTS IN LAST FISCAL YEAR
No option grants were made by the Company in fiscal year 2002 to named
executive officers of the Company.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
Shares Value of Unexercised In-The-
Acquired Value Number of Unexercised Money Options at Fiscal Year
Name On Exercise Realized ($) Options at Fiscal Year End (1) End ($) (2)
- -------------------- ----------- ------------ ------------------------------ -----------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ----------- ----------- ------------- ----------- -------------
CURRENT MANAGEMENT
Terry J. Logan -0- $-0- 89,650 17,000 $17,050 $21,700
President and Chief
Executive Officer
FORMER MANAGEMENT
J. Patrick Nicholson -0- $-0- 87,500 5,000 $ 4,650 $ 3,100
Chief Executive Officer
(1) All options granted prior to November 1995 have been adjusted to reflect a
one-for-four reverse stock split effective October 31, 1995.
(2) Options are "in-the-money" only if the closing market price of the common
stock on December 31, 2002 exceeded the exercise price of the options.
There were 14,000 options "in-the-money" that were held by Named Executive
Officers of the Company on December 31, 2002 at $1.55 per share closing
price.
COMPENSATION OF DIRECTORS
Directors who are employees of the Company do not receive additional
compensation for serving as Directors. Effective December 15, 2000, non-employee
directors receive, as of the date of the Annual Stockholders Meeting, a stock
option grant of 700 shares of Common Stock of the Company per meeting attended
for the previous year, as approved by the Compensation Committee on December 14,
2000. The Directors of the Company are reimbursed for out-of-pocket expenses
incurred in attending meetings of the Board of Directors or any committees
thereof.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the 2002 fiscal year, the members of the Compensation Committee
consisted of Mr. Carroll, Mr. Haslinger and Mr. Wallace G. (Jack) Irmscher, who
retired from the Board in February 2003 and was replaced by Mr. Copeland on the
Committee, each of whom is a non-employee Director of the Company. Mr.
Haslinger is a member of N-Viro Filipino, a licensee of the Company for the
territory of the Philippine Islands, but has not received any fees or revenue
from the Company other than the reimbursement of travel expenses for costs
directly related to this territory. Mr. Copeland is an Agent of the Company for
the territory of all of Africa except North Africa, but has not received any
fees or revenue from the Company other than the reimbursement of travel expenses
for costs directly related to this territory. Mr. Carroll, a consultant and
sales representative to the Company, received fees of $60,000 in 2002 for
consulting and sales assistance with the operations of the Company facilities
located in Tennessee, North Carolina and South Carolina. Mr. Carroll was under
contract with the Company, which ended December 31, 2002.
SECTION 16(A) COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's Directors and Executive Officers, and persons who own beneficially
more than ten percent (10%) of the shares of common stock of the Company, to
file reports of ownership and changes of ownership with the Securities and
Exchange Commission. Copies of all filed reports are required to be furnished
to the Company pursuant to Section 16(a). Based solely on the reports received
by the Company and on written representations from reporting persons, the
Company believes that the Directors and Executive Officers complied with all
applicable filing requirements during the fiscal year ended December 31, 2002.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company had outstanding 2,577,433 shares of common stock, $.01 par
value per share (the "shares of common stock"), on March 25, 2003. These shares
of common stock constitute the only class of outstanding voting securities of
the Company.
At March 25, 2003, the following were the only persons known to the Company
to own beneficially more than 5% of the outstanding shares of common stock:
Shares of Common Stock Percentage of Outstanding
Name and Address of Beneficial Owner Beneficially Owned Shares of Common Stock
- ------------------------------------ ---------------------- -------------------------
J. Patrick Nicholson (1)
2025 Richmond Rd.
Toledo, Ohio 43607 558,538 21.67%
N-Viro Energy Systems, Inc. (2)
3450 West Central Avenue, Suite 328
Toledo, Ohio 43606 336,769 13.07%
R. Francis DiPrete (3)
255 Ide Road
Scituate, RI 02857 464,372 18.02%
Worldtech Waste Management, Inc. (4)
272 Allison Gap Rd.
Saltville, VA 24370 454,472 17.63%
(1) The shares attributed to Mr. Nicholson include the 336,769 shares owned
beneficially by N-Viro Energy Systems, Inc., of which Mr. Nicholson is the
majority owner of the voting shares.
(2) N-Viro Energy Systems, Inc. was formerly the corporate general partner of
N-Viro Energy Systems, Limited, a limited partnership that was terminated
as of December 31, 2001 and was one of the predecessor entities that
combined to form the Company in October 1993. The general partners of
N-Viro Energy Systems, Limited were J. Patrick Nicholson, N-Viro Energy
Systems, Inc., a corporation of which Mr. Nicholson is the controlling
stockholder, and four trusts established for the benefit of Mr. Nicholson's
children.
(3) Mr. DiPrete's shares include: 5,000 shares owned directly and 454,472
shares owned by Worldtech Waste Management, Inc., which may be deemed to be
beneficially owned by Mr. DiPrete as a result of the positions he holds
with Worldtech. Mr. DiPrete disclaims beneficial ownership of the 454,472
Company shares held by Worldtech because he is paid a salary by Worldtech
for his services as an employee and otherwise has no economic interest in
Worldtech except to the extent of his personal ownership of Worldtech
shares.
(4) R. Francis DiPrete, a Director of the Company, is President and a Director
of Worldtech.
The following table sets forth, as of March 25, 2003, unless otherwise
specified, certain information with respect to the beneficial ownership of the
Company's shares of common stock by each person who is a Director of the
Company, a nominee for the Board, each of the Named Executive Officers, and by
the Directors and Executive Officers of the Company as a group. Unless
otherwise noted, each person has voting and investment power, with respect to
all such shares, based on 2,577,433 shares of Common Stock outstanding.
Pursuant to the rules of the Securities and Exchange Commission, certain shares
of Common Stock which a person has the right to acquire within 60 days of the
date hereof pursuant to the exercise of stock options are deemed to be
outstanding for the purpose of computing the percentage ownership of such person
but are not deemed outstanding for the purpose of computing the percentage
ownership of any other person.
Beneficial Ownership of
Name of Beneficial Owner Common Stock Percent of Class
- ------------------------------------------ ----------------------- ----------------
Bobby B. Carroll 88,200 (1) 3.42%
B.K. Wesley Copeland 13,600 (2) .53%
R. Francis DiPrete 464,372 (3) 18.02%
Daniel Haslinger 17,900 (4) .69%
Phillip Levin -0- (5) -0-
Terry J. Logan 90,462 (6) 3.51%
James K. McHugh 45,521 (7) 1.77%
J. Patrick Nicholson 558,538 (8) 21.67%
Michael G. Nicholson 72,734 (9) 2.82%
---------- ------
All Directors and Executive Officers as a
group (9 persons) 1,351,327 52.43%
(1) Represents 81,600 shares of Common Stock owned by Mr. Carroll, and a total
of 6,600 shares issuable upon exercise of options which are currently
exercisable at prices ranging from $0.91 to $5.19 per share.
(2) Represents 6,100 shares of Common Stock owned by Mr. Copeland, and a total
of 7,500 shares issuable upon exercise of options which are currently
exercisable at prices ranging from $0.91 to $2.50 per share.
(3) Represents 5,000 shares of Common Stock owned by Mr. DiPrete, 454,472
shares owned by Worldtech Waste Management, Inc., a privately-held company
of which may be deemed to be beneficially owned by Mr. DiPrete as a result
of the positions he holds with Worldtech. Mr. DiPrete disclaims beneficial
ownership of the 454,472 Company shares held by Worldtech because he is
paid a salary by Worldtech for his services as an employee and otherwise
has no economic interest in Worldtech except to the extent of his personal
ownership of Worldtech shares. Also included is a total of 4,900 shares
issuable upon exercise of options which are currently exercisable at prices
ranging from $0.91 to $1.50 per share.
(4) Represents 11,500 shares of Common Stock owned by Mr. Haslinger, and a
total of 6,400 shares issuable upon exercise of options which are currently
exercisable at prices ranging from $0.91 to $5.19 per share.
(5) Represents 812 shares of Common Stock owned by Dr. Logan, and a total of
89,650 shares issuable upon exercise of options which are currently
exercisable at prices ranging from $1.50 to $5.00 per share.
(6) Represents 796 shares of Common Stock owned by Mr. McHugh, and a total of
44,725 shares issuable upon exercise of options which are currently
exercisable at prices ranging from $1.50 to $5.00 per share.
(7) Represents 133,554 shares of Common Stock owned by Mr. Nicholson, 715
shares owned by his spouse, 336,769 shares owned by N-Viro Energy Systems,
Inc., a corporation of which Mr. Nicholson is the controlling shareholder,
and a total of 87,500 shares issuable upon exercise of options which are
currently exercisable at prices ranging from $1.50 to $5.00 per share.
(8) Represents 12,884 shares of Common Stock owned by Mr. Nicholson, and a
total of 59,850 shares issuable upon exercise of options which are
currently exercisable at prices ranging from $1.50 to $5.00 per share.
(9) Represents 252,246 shares of Common Stock owned by the Directors and
Officers, 791,956 shares owned indirectly and a total of 307,125 shares
issuable upon exercise of options which are currently exercisable at prices
ranging from $0.91 to $5.19 per share.
EQUITY COMPENSATION PLAN INFORMATION
Number of securities Number of securities remaining
to be issued upon Weighted-average available for future issuance under
exercise of exercise price of equity compensation plans
outstanding options, outstanding options, (excluding securities reflected in
Plan category warrants and rights warrants and rights column (a))
- ----------------------------------- -------------------- -------------------- ----------------------------------
Equity compensation plans approved
by security holders 573,825 $2.47 26,175
Equity compensation plans not
approved by security holders -0- -0- -0-
------- -----
Total 573,825 $ $2.47 26,175
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
J. Patrick Nicholson, a consultant and Director of the Company, received
fees of $54,000 in 2002 for consulting services pursuant to the terms of his
Consulting Agreement dated December 2, 1999. Mr. Nicholson also received
benefits of approximately $23,000 in 2002, including life insurance and medical
benefit payments, pursuant to the terms of his Employment and Consulting
Agreements dated December 2, 1999. In addition, loans totaling $1,700 were
advanced to N-Viro Energy Systems, Inc., a corporation of which Mr. Nicholson is
the controlling stockholder, increasing the balance owed the Company to $24,606,
as disclosed in Note 2 in Notes to Consolidated Financial Statements.
Bobby B. Carroll, a consultant and sales representative to and Director of
the Company, received fees of $60,000 in 2002 for consulting and sales
assistance with the operations of the Company facilities located in Tennessee,
North Carolina and South Carolina. Mr. Carroll was under contract with the
Company, which ended December 31, 2002.
Michael Nicholson, the Chief Operating Officer and Director of the Company,
was paid $90,430 and $90,480 in salary and bonuses, for 2002 and 2001,
respectively. Mr. Nicholson is the son of J. Patrick Nicholson, Chairman and
former Chief Executive Officer of the Company.
In February 2003 the Company closed on an $845,000 credit facility with a
local bank. This senior debt credit facility is comprised of a $295,000 four
year term note at 7.5% and a line of credit up to $550,000 at Prime plus 1.5%
and secured by a first lien on all assets of the Company. The Company will use
the funds to refinance existing debt and to provide working capital.
Previously, the Company had a $750,000 line of credit with another financial
institution, secured by a $400,000 restricted Certificate of Deposit, required
and held by this financial institution. Effectively, the former line of credit
provided only $350,000 of additional working capital. The effective increase in
the line will provide the Company with additional working capital, and the debt
refinance will provide lower cost and longer term debt, improving cash flow. To
secure the credit facility, the Company was required by the financial
institution to obtain Additional Collateral of $100,000 from a real estate
mortgage from a third party. Messrs. J. Patrick Nicholson, the Chairman of the
Board and Consultant to the Company; Michael G. Nicholson, the Company's Chief
Operating Officer and a Director; Robert F. Nicholson, a Company employee, and
Timothy J. Nicholson, a Company employee, ("the Nicholsons") collectively
provided the $100,000 Additional Collateral. In exchange for their commitment,
the Company has agreed to provide the Nicholsons the following: (1) an annual
fee in an amount equal to two percent (2%) of the aggregate value of the
Mortgage or Mortgages encumbering the Additional Collateral, which fee
originally shall be $2,000.00 per annum; (2) interest at an annual rate of 5%
of the aggregate value of the Mortgage or Mortgages encumbering the Additional
Collateral beginning on the first anniversary date of the closing of the Credit
Facility, and (3) grant, jointly, a warrant to acquire in the aggregate, 50,000
shares of the Company's voting common stock at a purchase price of $0.90 per
share, which was the closing market price of the Company's common stock on the
prior business day to the closing of the Credit Facility. In addition, the
Company granted to the Nicholsons a lien upon the Company's inventory and
accounts receivable. This lien is subordinated to both existing liens on the
Company's assets and all liens granted by the Company in favor of the financial
institution providing the Credit Facility.
ITEM 14. CONTROLS AND PROCEDURES
Within 90 days prior to the date of filing this Annual Report on Form 10-K,
an evaluation was performed under the supervision and with the participation of
our management, including the chief executive officer and chief financial
officer, of the effectiveness of the design and operation of our disclosure
controls and procedures. Based on that evaluation, our chief executive officer
and chief financial officer concluded that our disclosure controls and
procedures were effective as of December 31, 2002, and the evaluation date.
There have been no significant changes in our internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of our evaluation.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A)1. THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS ARE INCLUDED IN PART II,
ITEM 8:
Report of Independent Auditors
Consolidated balance sheets
Consolidated statements of operations
Consolidated statements of stockholders' equity
Consolidated statements of cash flows
Notes to consolidated financial statements
(A)2. THE FOLLOWING FINANCIAL STATEMENTS ARE INCLUDED IN ITEM 15 (D):
Financial Statements of Subsidiaries not Consolidated.
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable and
therefore have been omitted.
(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)
Certifications
21.1 List of subsidiaries of the Company.#
24.1 Powers of Attorney.#
99.1 Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
#Only included in Form 10-K filed electronically with the
Securities and Exchange Commission
(B) REPORTS ON FORM 8-K
None.
(C) The exhibits listed in Item 15(a)(3) are either filed with this Form 10-K
or incorporated by reference in accordance with Rule 12b-32 of the Exchange
Act.
(D) FINANCIAL STATEMENTS OF SUBSIDIARIES NOT CONSOLIDATED
FLORIDA N-VIRO, L.P.
----------------------
Table of Contents
-------------------
- ------------------------------------------------
Independent Auditor's Report
Balance Sheets
Statement of Income (Loss) and Partners' Capital
Statement of Cash Flows
Notes to Financial Statements
Joseph M. Cahill, Ltd. - Certified Public Accountant
February 18, 2003
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, 2002 and 2001, 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 auditing standards generally accepted in
the United States of America. 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, 2002 and 2001, and the results of operations and cash flows for the years
then ended in conformity with accounting principles generally accepted in the
United States of America.
JMC/rb
/s/ Joseph M. Cahill, Ltd.
189 W. Lancaster Avenue Paoli, Pennsylvania 19301 610 889 3300
Fax 610 889 3303
FLORIDA N-VIRO, L.P.
--------------------
Balance Sheets
--------------
December 31, 2002 and 2001
--------------------------
ASSETS
------
2002 2001
---------- ----------
Current Assets:
Cash $ 149,155 $ 5,056
Accounts Receivable (less reserve for
doubtful accounts of $7,500 in 2002) 433,744 468,058
Prepaid Expenses 41,944 159,905
---------- ----------
Total Current Assets 624,843 633,019
Property and Equipment
Land 147,163 147,163
Site improvements 282,007 312,517
Building 1,189,682 1,183,169
Operating equipment 1,244,595 1,242,795
Furniture and fixtures 12,565 13,215
---------- ----------
2,876,012 2,898,859
Less Accumulated Depreciation 947,517 785,827
---------- ----------
Total Property and Equipment 1,928,495 2,113,032
---------- ----------
Total Assets $2,553,338 $2,746,051
========== ==========
The accompanying notes are an integral part of these financial statements.
FLORIDA N-VIRO, L.P.
--------------------
Balance Sheets
--------------
December 31, 2002 and 2001
--------------------------
LIABILITIES AND PARTNERS' CAPITAL
---------------------------------
2002 2001
---------- ----------
Current Liabilities:
Payables:
Trade $ 93,472 $ 337,800
Notes payable - current 47,731 64,199
Notes payable - related party 1,182,539 1,008,672
Accrued expenses 214,002 199,419
---------- ----------
Total Current Liabilities 1,537,744 1,610,090
Long-term Liabilities:
Notes Payable 62,467 110,198
---------- ----------
Total Liabilities 1,600,211 1,720,288
Partners' Capital 953,127 1,025,763
---------- ----------
Total Liabilities and Partners' Capital $2,553,338 $2,746,051
========== ==========
The accompanying notes are an integral part of these financial statements.
FLORIDA N-VIRO, L.P.
--------------------
Statements of Income(Loss) and Partners' Capital
------------------------------------------------
For the years ended December 31, 2002 and 2001
----------------------------------------------
2002 2001
----------- -----------
Revenues $3,135,465 $2,930,294
Cost of sales 2,774,725 2,839,116
----------- -----------
Gross profit (loss) 360,740 91,178
Selling, general and administrative 335,363 300,118
----------- -----------
Income (loss) from operations 25,377 (208,940)
Other income (expense):
Interest income 122 5
Gain (loss) on sale of assets (8,335) (2,860)
Interest expense (89,800) (76,343)
----------- -----------
Total other income (expense) (98,013) (79,228)
----------- -----------
Net Income (loss) (72,636) (288,168)
Beginning partners' capital 1,025,763 1,313,931
Ending partners' capital $ 953,127 $1,025,763
========== ==========
The accompanying notes are an integral part of these financial statements.
FLORIDA N-VIRO, L.P.
--------------------
Statements of Cash Flows
------------------------
For the years ended December 31, 2002 and 2001
----------------------------------------------
2002 2001
---------- ----------
Cash flows from operating activities
Net income (loss) $ (72,636) $(288,168)
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation 175,192 183,891
(Gain) loss on sale of assets 8,335 2,890
(Increase) decrease in:
Accounts receivable-trade 34,314 (112,963)
Prepaid expenses 117,961 (134,118)
Increase (decrease) in:
Accounts payable-trade (244,328) (16,855)
Accounts payable-related party - 108,599
Accrued expenses 14,584 35,174
--------- ---------
Net cash provided (used) by
operating activities 33,422 (221,550)
Cash flows from investing activities:
Proceeds from the sale of assets 9,322 8,367
Purchase of property and equipment (8,313) (37,356)
--------- ---------
Net cash provided (used) by
investing activities 1,009 (28,989)
Cash flows from financing activities:
Proceeds from new borrowings 173,867 360,000
Payments on long-term debt (64,199) (111,174)
--------- ---------
Net cash provided (used) by
financing activities 109,668 248,826
--------- ---------
Net increase (decrease) in cash and cash equivalents 144,099 (1,713)
Cash and cash equivalents at beginning of year 5,056 6,769
--------- ---------
Cash and cash equivalents at end of year $ 149,155 $ 5,056
========= =========
Supplemental disclosure for cash flows
Interest Paid $ 14,146 $ 20,220
========= =========
The accompanying notes are an integral part of these financial statements.
FLORIDA N-VIRO, L.P.
--------------------
Notes to Financial Statements
-----------------------------
December 31, 2002 and 2001
--------------------------
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 defer 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:
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 $175,192 and $183,891 for 2002 and 2001,
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 $6,076 and $9,837 for 2002 and 2001, respectively.
Note C - Related Parties
- ----------------------------
The Partnership had sales to a partner of $483,837 and $36,879 in 2002 and
2001, respectively.
The Partnership has a revolving credit loan agreement with a partner and
the note balances were $482,539 and $308,672 as of December 31, 2002 and
2001. The interest rate charged on the outstanding balance is prime plus
0.25%. The Partnership also has on demand notes payable to partners of
$240,000 at an interest rate of 9.75% and $460,000 of notes payable at an
interest rate of prime plus 0.25%.
FLORIDA N-VIRO, L.P.
--------------------
Notes to Financial Statements (continued)
-----------------------------------------
The Partnership rents equipment and personnel from a partner in the normal
course of business. In 2002 and 2001, the equipment and personnel expenses
were $204,462 and $162,055.
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 has an
allowance for doubtful accounts of $7,500 for the year 2002.
The Partnership conducts a major portion of its business with several
customers. For the year ended December 31, 2002, three customers accounted
for 60% of total revenue. For 2001, four customers accounted for 59% 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:
2002 2001
-------- --------
9.25% Note payable to bank, monthly payments
of $2,245, including interest, secured by
equipment, due August 2002 - 17,355
10.007% Note payable to bank, monthly
payments of $2,445, including interest,
secured by equipment, due June 2005 64,661 88,341
10.257% Note payable to bank, monthly payments
of $2,279, including interest, secured by
equipment, due October 2004 45,537 68,701
------- -------
Total Long Term Debt $110,198 $174,397
Less current maturities 47,731 64,199
------- -------
$ 62,467 $110,198
======== ========
Maturities of Long Term Debt are as follows:
2003 47,731
2004 48,216
2005 14,251
----------
$ 110,198
==========
FLORIDA N-VIRO, L.P.
--------------------
Notes to Financial Statements (continued)
-----------------------------------------
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
-------------------------
2003 32,214
2004 23,198
2005 19,680
2006 3,280
----------
$ 78,372
==========
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 years and has working capital deficiencies as
of December 31, 2002 and 2001.
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.
Note H - Reclassifications
- -----------------------------
Reclassifications occurred to certain prior year amounts in order to conform
with the current year classifications. The reclassifications have no effect on
reported net income.
FLORIDA N-VIRO, L.P.
----------------------
Table of Contents
-------------------
- ------------------------------------------------
Independent Auditor's Report
Balance Sheets
Statement of Income (Loss) and Partners' Capital
Statement of Cash Flows
Notes to Financial Statements
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.
189 W. Lancaster Avenue Paoli, Pennsylvania 19301 610 889 3300
Fax 610 889 3303
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.
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.
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.
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.
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:
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.
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
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
======== ========
FLORIDA N-VIRO, L.P.
--------------------
Notes to Financial Statements (continued)
-----------------------------------------
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.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
N-VIRO INTERNATIONAL CORPORATION
Dated: May 12, 2003
By: /s/ Terry J. Logan*
- ------------------------
Terry J. Logan, Chief Executive Officer and President
(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: May 12, 2003
/s/ Terry J. Logan, Ph.D.* /s/ J. Patrick Nicholson*
- ------------------------------ ----------------------------
Terry J. Logan, Ph.D., J. Patrick Nicholson
Chief Executive Officer, , Chairman of the Board
President and Director
(Principal Executive Officer)
/s/ Michael G. Nicholson* /s/ James K. McHugh
- ---------------------------- ----------------------
Michael G. Nicholson, , Chief Financial Officer,
Chief Operating Officer Secretary and Treasurer
Senior Vice-President and Director (Principal Financial and Accounting
Officer)
/s/ Phillip Levin* /s/ R. Francis DiPrete*
- -------------------- --------------------------
Phillip Levin, 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*
- ---------------------------
Daniel J. Haslinger, Director
*By: /s/ James K. McHugh
- ----------------------------
James K. McHugh, Attorney-in-Fact
N-Viro International Corporation
Certifications
I, Terry J. Logan, President and Chief Executive Officer, certify that:
1. I have reviewed this annual report on Form 10-K of N-Viro International
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in the Report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within the 90 days prior to the filing date of this
annual report (the "Evaluation Date");
c. presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function);
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 12, 2003 /s/ Terry J. Logan
------------------------------------
President and Chief Executive Officer
N-Viro International Corporation
Certifications
I, James K. McHugh, Chief Financial Officer, certify that:
1. I have reviewed this annual report on Form 10-K of N-Viro International
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in the Report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within the 90 days prior to the filing date of this
annual report (the "Evaluation Date");
c. presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function);
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 12, 2003 /s/ James K. McHugh
----------------------
Chief Financial Officer