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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, 2000
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
COMMISSION FILE NUMBER: 0-21802
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N-VIRO INTERNATIONAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 34-1741211
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
3450 W. CENTRAL AVENUE, SUITE 328
TOLEDO, OHIO 43606
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (419) 535-6374
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock, par
value $.01 per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to the
filing requirements for at least the past 90 days. Yes X No ____
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the registrant, based upon the last sale price of registrant's Common Stock
in the National Association of Securities Dealers, Inc. Automated Quotation
System ("Nasdaq") as of March 23, 2001, was approximately $3,705,000.
The number of shares of Common Stock of the registrant outstanding as
of March 23, 2001, was 2,643,683.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive proxy statement for the annual
shareholders' meeting to be held May 10, 2001 are incorporated by reference into
Part III.
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INDEX
PAGE
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PART I
Item 1. Business 2
Item 2. Properties 10
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 13
PART II
Item 5. Market for Registrant's Common Equity and Related 14
Stockholder Matters
Item 6. Selected Financial Data 14
Item 7. Management's Discussion and Analysis of 15
Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures 20
About Market Risk
Item 8. Financial Statements and Supplementary Data 21
Item 9. Changes in and Disagreements with Accountants 22
on Accounting and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant 22
Item 11. Executive Compensation 22
Item 12. Security Ownership of Certain Beneficial Owners 22
and Management
Item 13. Certain Relationships and Related Transactions 22
PART IV
Item 14. Exhibits, Financial Statement Schedules, and 23
Reports on Form 8-K
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PART I
ITEM 1. BUSINESS
GENERAL
N-Viro International Corporation (the "Company" or "N-Viro"),
incorporated in April, 1993, owns and licenses the N-Viro Process, a patented
technology to treat and recycle wastewater sludges and other bio-organic wastes,
utilizing certain alkaline and mineral by-products produced by the cement, lime,
electric utilities and other industries. See "The N-Viro Process."
In 1979, Mr. J. Patrick Nicholson and several investors formed N-Viro
Energy Systems, Limited (the "Partnership"). The Partnership's initial strategy
was to license the N-Viro Process to third parties through independent agents.
Each independent agent acted in its respective territory as a marketing and
distribution agent of the Partnership, and the Partnership retained the
marketing and distribution rights to certain other territories. In early 1993,
as a result of the then pending implementation of the 40 CFR part 503 Sludge
Regulations (as defined below) and the market environment, the Partnership
concluded that a strategy that also included the development and operation, on a
contract management basis, of N-Viro facilities for third parties, and of
Company-owned and/or co-owned N-Viro facilities, would potentially expand the
opportunities to capitalize on the N-Viro Process.
In order to implement this strategy, the Partnership agreed to combine
with American N-Viro Resources, Inc., National N-Viro Tech, Inc., N-Viro
Midwest, Inc., N-Viro Soil South, Inc. and Tennessee-Carolina N-Viro
(collectively, the "Combined Agents") to form the Company. The Company was
incorporated in April 1993 primarily to expand the opportunities for
capitalizing on the N-Viro Process. The Company assumed the Partnership's
agreements with the remaining agents who were continuing to market the N-Viro
Process in their respective territories.
The Company became a public company on October 12, 1993 with an initial
public offering (the "IPO") of 2,000,000 shares of Common Stock at $9.50 per
share. On October 19, 1993, the Partnership contributed to the Company all of
its assets (except certain marketable securities and accounts receivable from
certain related parties), subject to all liabilities (except certain retained
liabilities), and the stockholders of the Combined Agents contributed to the
Company all of the outstanding capital stock of such entities in exchange for a
total of 6,000,000 shares of Common Stock of the Company and organization notes
totaling $5,221,709 (including notes of $276,909 which resulted from a partial
exercise of an over-allotment option). The organization notes were repaid out of
the proceeds from the IPO. On November 10, 1993, an additional 112,000 shares
were sold pursuant to the exercise by the Underwriters of their over-allotment
option.
On October 30, 1995, at a Special Meeting of the Shareholders, the
shareholders approved a one for four reverse stock split which reduced the
number of issued and outstanding shares of the Common Stock. This reverse split
did not affect the Company's retained deficit and the stockholders' equity
remained substantially unchanged. This action was deemed necessary by management
of the Company to remain in compliance with the minimum bid price requirement of
the National Association of Securities Dealers Automatic Quotation System
("Nasdaq") or the alternative net tangible assets requirement and for continued
listing of the Common Stock on Nasdaq. The reverse split reduced the number of
issued and outstanding shares of the Common Stock to approximately 2,037,000
(net of 57,250 treasury shares).
In late 1995, the Company's business strategy changed from being a low
cost provider of a process to marketing the N-Viro Process, which produces an
"exceptional quality" sludge product, as defined in the 40 CFR part 503 Sludge
Regulations under the Clean Water Act of 1987 (the "part 503 Regs"), with
multiple commercial uses. In this strategy, the primary focus is to identify
allies, public and private, who will build and operate the N-Viro facility. To
date, the Company's revenues primarily have been derived from the licensing of
the N-Viro Process to treat and recycle wastewater sludges generated by
municipal wastewater treatment plants and from the sale to licensees of the
alkaline admixture used in the N-Viro Process. The Company has also operated
N-Viro facilities for third parties on a start-up basis and currently operates
one N-Viro facility on a contract management basis. There are currently over 80
wastewater treatment facilities throughout the world treating sludge using the
N-Viro Process. The Company estimates that these facilities are treating and
recycling sludge at an annualized rate of over 140,000 dry tons per year.
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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 manufacturers representatives network was
started by the Company after acquiring eight of eleven domestic agents. These
representatives receive a commission on certain revenue.
The Toledo, Ohio facility is managed by the Company through a "Contract
Management Agreement" with the City of Toledo. Revenue from the Toledo operation
accounts for about 38% 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 with a renewable option for an additional five years through 2009.
Currently, the contract is in its thirteenth year of operation. The relationship
between the City of Toledo and the Company has been satisfactory.
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, 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.
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RESEARCH AND DEVELOPMENT
Research and development on the N-Viro Process is performed primarily
by BioCheck Laboratories, Inc. ("BioCheck"). In 2000 the Company spent
approximately $90,000 on continuous research on process improvements, and
considers its relationship with BioCheck to be satisfactory.
In 2000 the Company expended approximately $545,000 on research and
patent development. Research and development on N-Viro Soil has been, to date,
performed primarily by BioCheck and Dr. Terry J. Logan. Research was conducted
by Dr. Logan and his staff at The Ohio State University pursuant to a research
arrangement with the Company. Through June 30, 1999, Dr. Logan acted as an
independent consultant to the Company on a part-time basis and was, and
continues to be, a director of the Company. Since July 1, 1999, Dr. Logan has
been employed with the Company as President and Chief Operating Officer.
All participants on the Company's technology council, including Dr.
Logan and the officers of BioCheck have contracts with the Company, protecting
its rights.
In addition, grants totaling approximately $500,000 were secured from
several sources for process and product research. The United States Department
of Agriculture (USDA) funded research on the use of bio-mineral and compost
technology to disinfect and immobilize nutrients and metals in animal manure.
This research was conducted at USDA's Agricultural Research Service (ARS)
laboratory at Beltsville, MD and at BioCheck Labs. The State of Maryland funded
a study, conducted with the University of Maryland, to utilize bio-mineral
treated poultry manure to reclaim acidic landfill cover. In 1999, two patents
were submitted to the U.S. Patent and Trademark Office and to the European
Patent Office for disinfection and for phosphorus and trace metal immobilization
in animal manure. In late 2000, the U.S. Patent and Trademark Office and to the
European Patent Office declared the manure disinfection technology to be
patentable and these patents have been applied for. They are expected to be
issued in 2001.
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 fixating carbon dioxide in the N-Viro
Soil and (ii) improve the quality and value of N-Viro Soil. In addition, the
Company has developed a dryer system which will reduce processing time while
continuing to permit the survival of beneficial microflora. Licensees of the
Company began operating dryer facilities in Phillipsburg, New Jersey and
Leamington, Ontario Canada in 1995. A new facility in Sarnia, Ontario, Canada
came on line in March, 2001. The Company's "BioBlend", which uses N-Viro Soil as
a reagent to accelerate and deodorize yard waste composting, is being utilized
to produce a topsoil at the new Englewood, Ohio N-Viro facility.
In 2000, the Department of Agriculture and Food Canada, filed Canadian
and U.S. patents on the use of N-Viro Soil to suppress soybean cyst nematode
(SCN), a soil pathogen which can severely reduce soybean yields and for which
there is no effective control. SCN damage is a widespread problem throughout
soybean growing areas. Research in Canada, and confirmed in Ohio, show that
there is potential for N-Viro Soil to increase soybean yields in areas with
heavy infestations of SCN. N-Viro is the exclusive licensee for the use patent
in the U.S. and internationally. In Canada, the license is held by N-Viro
Systems Canada, Inc.
ORGANIZATION
Day-to-day operations, including management of the Toledo, Ohio
facility, and support functions, is directed by the Company's President and
Chief Operating Officer. Support functions include alkaline admixture
procurement and sales, product market development and sales, regulatory affairs,
and licensee support. Domestic sales and marketing and project development is
directed by the Company's Executive Vice-President who coordinates internal
staff, a network of manufacturers representatives, and consultants.
International sales and marketing, legal affairs and stockholder relations is
directed by the Company's Chief Executive Officer. The company's Chief Financial
Officer has responsibility for all finance and accounting functions and
reporting, filings with the Securities and Exchange Commission, and serves as
Secretary of the Board.
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Prior to late 1995, the marketing and distribution territories were
assigned specifically to divisions of the Company or to its Agents. The
following table sets forth the Agents of the Company and the territorial rights
of each Agent:
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The Agents
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Agent Territory
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N-Viro Systems Canada, Inc...............................Canada
Nesher Israel Cement, Ltd................................Israel
Bio-Recycle Pty. Ltd.....................................Australia, New Zealand and Singapore
In 1995, the Company sold the territorial rights of Europe, Africa and
the Middle East and granted an exclusive license for these territories to an
investor group headed by Mr. Robin Millard. This group acquired one of the
Company's wholly owned subsidiaries, N-Viro Worldwide Limited. In late 2000, an
agreement was reached for the Company to reacquire this territory and
corresponding Internet marketing capabilities from Mr. Millard in exchange with
the Company to dismiss its legal proceedings against Mr. Millard. See Item 3,
"Legal Proceedings" for further discussion.
In January, 2000, the Company acquired the territorial rights from ISG
Resources, Inc. (parent company of N-Viro Resources, Inc.) for the states of
Colorado, Iowa, Kansas, Minnesota, Montana, Nebraska, North Dakota, South Dakota
and Wyoming. This territory was acquired by a termination of the existing agency
agreement and concurrently executing a Memorandum of Understanding to provide an
exclusive supply of alkaline materials to the Company, with a competitive market
cap on the cost.
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.
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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
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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 Regulations under the Clean Water Act implementing the
EPA's "exceptional quality" sludge program. These regulations establish sludge
use and disposal standards applicable to approximately 35,000 wastewater
treatment plants in the United States, including approximately 12,750 publicly
owned treatment works ("POTWs"). Under the part 503 Regs, sludge products that
meet certain stringent standards are considered to be "exceptional quality"
sludge products and are not subject to any federal restrictions on agricultural
use or land application. N-Viro Soil produced according to N-Viro Process
specifications is an "exceptional quality" sludge product. Lower quality sludges
and sludge products are subject to federal restrictions governing, among other
items, the type and location of application, the volume of application and the
cumulative application levels for certain pollutants. Agricultural application
of these lower quality sludges in bulk amounts also requires an EPA permit.
Agricultural and land applications of all sludges and sludge products, including
N-Viro Soil and other "exceptional quality" sludge products, are typically
subject to state and local regulation and, in most cases, require a permit.
In order to ensure compliance with the part 503 Regs, the Company
reviews the results of regular testing of sludges required by the EPA to be
conducted by wastewater treatment plants, and itself tests N-Viro Soil produced
at N-Viro facilities on a regular basis. In general, the Company does not
license or permit the ongoing use of the N-Viro Process to treat any sludge that
may not be processed into an "exceptional quality" sludge product. In one N-Viro
facility, however, the Company has permitted the use of the N-Viro Process to
produce a product that is not an "exceptional quality" sludge product due to the
high pollutant levels of the resulting product. This product is not considered
to be N-Viro Soil and is used solely for landfill cover at an adjacent landfill.
In addition, the Company has previously licensed for use at five treatment
facilities an earlier sludge treatment process that is designed to produce a
sludge product that meets only Class B pathogen levels, and therefore does not
produce an "exceptional quality" sludge product.
Although N-Viro Soil exceeds the current federal standards imposed by
the EPA for unrestricted agricultural use and land application, state and local
authorities are authorized under the Clean Water Act to impose more stringent
requirements than those promulgated by the EPA. Most states require permits for
land application of sludge and sludge based products and several states, such as
Rhode Island, Massachusetts and New Jersey, currently have regulations that
impose more stringent numerical concentration limits for certain pollutants than
the federal rules.
The Resource Conservation and Recovery Act. RCRA regulates all phases
of hazardous waste generation, management and disposal. A waste is subject to
regulation as a hazardous waste under RCRA if it is a solid waste specifically
listed as a hazardous waste by the EPA or exhibits a defined hazardous
characteristic. Although domestic sewage and mixtures of domestic sewage and
other wastes that pass through a sewer system to a POTW are specifically
exempted from the definition of solid waste, once treated by the POTW, the
sewage sludge is considered a solid waste. However, such sewage sludge is not
considered a hazardous waste unless it exhibits a hazardous characteristic.
While it is possible that sewage sludge could exhibit the toxicity
characteristic, the Company believes that regular tests for hazardous
constituent levels provide assurance that the sewage sludge used in the N-Viro
Process does not exhibit the toxicity characteristic. The alkaline admixtures
used in the N-Viro Process are specifically exempted from RCRA regulation by the
so-called "Bevill Amendments" to RCRA. Although the benefit of the exemption
provided by the "Bevill Amendments" can be lost if the alkaline admixture is
derived from or mixed with a hazardous waste, the Company has adopted and
implemented policies and operational controls, including review of operating
permits held by alkaline admixture suppliers and periodic testing of such
admixtures, to ensure that the alkaline admixtures used in the N-Viro Process by
itself and its licensees are not derived from or mixed with hazardous wastes.
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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.
8
10
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, 2000, the Company had 20 employees in the following
capacities: 9 engaged in sales and marketing; 5 in finance and administration;
and 6 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, 2000, there were more than 40 N-Viro facilities
operating throughout the world. The sludge processing capacity of these
facilities ranges from one to 160 dry tons per day. Based upon reports received
from N-Viro facilities, the Company estimates they are processing wastewater
sludge at an annualized rate of over 140,000 dry tons per year. The chart below
summarizes the current annualized sludge processing volume for each of the five
largest N-Viro facilities through December 31, 2000.
------------------------------------------------------------------------------------
Facility Location Approximate Sludge Processing Volume
(dry tons/year)
------------------------------------------------------------------------------------
Middlesex County, New Jersey 53,400
....................................................................................
Syracuse, New York 10,900
....................................................................................
Phillipsburg, New Jersey 10,000
....................................................................................
Wilmington, Delaware 9,100
....................................................................................
Toledo, Ohio 8,000
------------------------------------------------------------------------------------
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.
9
11
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 38% of the Company's revenue is from
management operations, 54% from other domestic operations, 6% from research and
development grants and the remaining 2% 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 Operations Other Domestic Foreign Operations Research &
Operations Development
-----------------------------------------------------------------------------------------------------------------
Innovative
Price Price Price Technologies
...........................................................................................
Product quality and
Reliability Reputation specifications Technical support
...........................................................................................
COMPETITIVE Product quality and Product quality and
FACTORS specifications specifications Custom design Reputation
...........................................................................................
Responsiveness to Equipment financing Product quality and
customer Technical support assistance specifications
...........................................................................................
Technical support Custom design Technical support Custom design
...........................................................................................
Equipment financing Equipment financing
Reputation assistance Reputation assistance
-----------------------------------------------------------------------------------------------------------------
Competitive pressures, including those described above, and other
factors could cause the Company to lose market share or could result in
decreases in prices, either of which could have a material adverse effect on its
financial position and results of operations.
RISKS OF DOING BUSINESS IN OTHER COUNTRIES. The Company conducts
business in markets outside the United States, and expects to continue to do so.
In addition to the risk of currency fluctuations, the risks associated with
conducting business outside the United States include: social, political and
economic instability; slower payment of invoices; underdeveloped infrastructure;
underdeveloped legal systems; and nationalization. The Company has not entered
into any currency swap agreements which may reduce these risks. The Company may
enter into such agreements in the future if it is deemed necessary to do so.
Current economic conditions in the Asia Pacific region and Latin
America 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 our revenues and profits.
ITEM 2. PROPERTIES
The Company's executive and administrative offices are located in
Toledo, Ohio, under a lease that expires on December 31, 2002. The Company
believes its relationship with its lessor is satisfactory.
In early 1994 the Company purchased a site in Fort Meade, Florida to
develop a Company-owned N-Viro processing facility. Construction was started at
the site in late 1994 and the facility became operational in early 1995. In
December 1995, the Company entered into a Memorandum of Understanding with VFL
Technologies, Inc. to jointly own, through a limited partnership named Florida
N-Viro, LP ("Florida N-Viro"), the Fort Meade, Florida facility, beginning
January 1, 1996. Under this agreement, the Company would contribute the
property, plant
10
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and equipment to Florida N-Viro in return for approximately $1,000,000.
Additionally, each partner would contribute $250,000 to Florida N-Viro for
working capital and property improvements. The employees of Fort Meade would
become employees of the new company, however, the purpose of this facility would
remain essentially unchanged.
The agreement was amended in 1996 to provide that the Company would
receive $881,000 for the contribution of property, each partner would contribute
$250,000 for working capital, and the Company would receive a 47% interest (as
opposed to a 49% interest under the original agreement) in Florida N-Viro.
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 of existing documents involving the Company.
Among those approved was an increase in the Company's ownership percentage in
Florida N-Viro to 50%.
In August 2000, a Memorandum of Understanding was entered into between
the Company and VFL, clarifying decisions, information and additional operating
requirements of Florida N-Viro. Later that month, the Company loaned Florida
N-Viro $120,000 cash to help meet operating expenses, and was issued a
Promissory Note. An additional $50,000 cash was loaned in November, 2000 under
similar circumstances, and a second Promissory Note was issued to the Company.
Both Notes are unsecured and are payable on demand, and both bear interest at
9.75%.
In January 2001, a Special Meeting of the Board of Directors of Florida
N-Viro LLC was held. Among the decisions made were amendments to both the
Partnership Agreement and the Memorandum of Understanding entered into in
August, 2000. The aggregate ownership percentages in the Florida investment of
the Company and VFL were amended to 47.5% and 52.5%, respectively, effective
January 1, 2001. Also, a decision was made to relieve the requirement of the
Company from funding any additional losses of Florida N-Viro, provided the
Company loan an additional total of $180,000 between January and February, 2001,
to be evidenced by a third Promissory Note. The Note is unsecured, due on demand
and bears interest at a rate tied to a local Bank or the Applicable Federal
Rate, whichever is higher. All loans made by the Company to Florida N-Viro in
2000 and 2001, were made to equalize each partner's advances to the partnership,
required after additional monies were advanced by VFL during 2000.
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 which
currently may be in development or patentable is equivalent to $51,900 for MCO's
portion of royalties through the year ending December 31, 2000. The Company and
MCO have also agreed that future claims to the N-Viro Soil process is only 1/4
of 1% of technical revenues. MCO rights to BioBlend and other new N-Viro
technologies range from 2% to 4% of technical revenues derived from these newer
technologies.
ITEM 3. LEGAL PROCEEDINGS.
On October 1, 1998, Hydropress Environmental Services, Inc.
("Hydropress") filed suit against the Company in the United States District
Court for the District of New Jersey captioned Hydropress Environmental
Services, Inc., v. N-Viro International Corp. (No. 98-4573). The suit sought a
declaratory judgment as to Hydropress' rights and duties related to certain
obligations pursuant to a license agreement and a prior settlement agreement
related to the license agreement. Hydropress filed the Complaint, but failed to
obtain service of process upon the Company.
As of March 22, 1999, Hydropress and the Company entered into a
Settlement Agreement that provided, among other things, for the dismissal of the
suit; mutual limited releases; agreements as to past due amounts that Hydropress
owed the Company, as well as a basis for determining future amounts; and an
agreement that, for a period of eighteen (18) months from the date of the
settlement agreement, Hydropress would not sell any of the 66,250 shares of
Company stock, as adjusted, that it had been issued in connection with a prior
settlement agreement, and that Hydropress could thereafter sell no more than
10,000 shares of the Company's stock per month.
On February 15, 2000, Hydropress and the Company modified the March,
1999 agreement by agreeing to allow Hydropress to sell shares of the Company's
stock before the eighteen-month period, in addition to increasing the maximum
amount of shares it could sell without approval from the Company in any one
month to 15,000 shares. In exchange, Hydropress released the Company from its
minimum price guarantee obligations under the March 22, 1999 Settlement
Agreement. The Company understands the letter agreement dated February 15, 2000
to excuse it entirely
11
13
from its obligation to guarantee Hydropress' receipt of proceeds of at least
$6.00 per share from the sale of the Company stock. This is consistent with the
position taken in the Company's public filings under and pursuant to the terms
of the Securities Exchange Act of 1934 and the rules and regulations promulgated
thereunder, as well as the Company's audited financial statements.
In late September of 2000, representatives of Hydropress informed the
Company that Hydropress maintains that the $6.00 per share guarantee of proceeds
in favor of Hydropress is still in effect. On November 28, 2000, the Company
brought suit in the United States District Court for the Northern District of
Ohio, Western Division (case number 3:00CV7733) (the "Ohio Action") against
Hydropress. The Complaint sought a declaratory judgment that the minimum price
guarantee was no longer in effect. At the time of filing the Complaint, the
value of the Company's guarantee, if it were still in effect at the time of the
Complaint, would have ranged between $238-$254,000.
On December 1, 2000, Hydropress filed a Complaint against the Company
in the United States District Court for the District of New Jersey, Western
Division (case number 00-CV-5908) (the "New Jersey Action") also seeking a
declaratory judgment on the identical issue. Hydropress also filed a motion in
the Ohio Action asking the judge to dismiss the Ohio Action or transfer it to
New Jersey based on a forum selection clause in one of the contracts at issue.
The judge's ruling on the motion was that the company should file a similar
motion in New Jersey and allow the New Jersey judge to decide.
The Company subsequently dismissed the Ohio Action without prejudice.
Thus, it will be litigating the case in New Jersey. The Company has filed a
counterclaim in the New Jersey Action seeking damages for royalties that
Hydropress owes the Company. There is some uncertainty in the amount of damages
owed because of the legal theories involved. The likely range is between
$120-$180,000.
Hydropress, in turn, filed counterclaims in response to the Company's
counterclaims. Hydropress' first claim seeks damages based on an alleged
indemnification that the Company allegedly breached by not indemnifying
Hydropress for costs incurred in connection with Hydropress' releasing emissions
of volatile organic compounds in excess of permitted levels. Hydropress' second
claim is that the Company has wrongfully terminated Hydropress' February 28,
1994 Patent License Agreement. Hydropress alleges that it has incurred costs in
excess of two million dollars as a result of its emission problem but seeks
damages in an unspecified amount and a declaration that the Company is obligated
to continue indemnifying Hydropress in the matter. The Company intends to
vigorously contest Hydropress' claims.
On February 25, 2000, the Company filed a Complaint for Patent
Infringement in the United States District Court for the Northern District of
Ohio against the City of Warren, Ohio. The Company believed that the City of
Warren had willfully and intentionally infringed patents the Company owns and
was seeking both equitable remedies in the form of an injunction and legal
remedies in the form of damages. On April 17, 2000, the City of Warren responded
by filing an Answer and Counterclaims against the Company. On September 14,
2000, the Company and the City of Warren settled the dispute, with the City of
Warren paying the Company the sum of $100,000. The successful conclusion of the
litigation with the City of Warren reinforces the Company's commitment to defend
its intellectual property.
In July, 2000 the Company terminated the license of N-Viro Worldwide
Limited. On July 25, 2000, the Company filed suit against Robin Millard and R3
Management Limited ("R3M") in the United States District Court for the Northern
District of Ohio, Western Division. The suit sought damages for breach of
contract, breach of fiduciary duty and related torts based on intellectual
property developed by Mr. Millard that the company contends is owned by the
Company. The parties have subsequently resolved the suit, and are in the process
of drafting the final settlement agreements. The Company will become the direct
licensor on three licenses on which R3M's subsidiary, N-Viro Worldwide, is
currently the licensor. R3M will license the disputed technology to the Company.
The parties will reconcile amounts owed to each other and offset the debts owed
to each without any funds changing hands, other than a $5,000 lump-sum royalty
payment from the Company to R3M.
In August, 2000, RDP Technologies, Inc. ("RDP") filed a Complaint
against the Company in the United States District Court for the District of
Delaware, alleging intentional interference with prospective business
relationships and common law unfair competition. In September, 2000, RDP filed
an Amended Complaint, adding a claim for a declaratory judgment of patent
noninfringement, invalidity and unenforceability with respect to two of the
Company's patents. The Company filed an Answer to Amended Complaint on January
5, 2001, and subsequently
12
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filed a motion for summary judgment on each of RDP's claims. The Company is
currently awaiting the Delaware court's decision on that motion. The Company
believes that the claims made by RDP in its Amended Complaint are without merit
and the Company is and will continue to vigorously defend itself in this matter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
13
15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's Common Stock is listed in the Nasdaq Small Cap Market
under the symbol "NVIC". The price range of the Common Stock in the Market since
January 1, 1999, was as follows:
- -------------------------------------------------------------------------------------------------------
Quarter High Low
- -------------------------------------------------------------------------------------------------------
First 1999 2 & 11/16 1 & 3/16
.......................................................................................................
Second 1999 2 & 3/4 2
.......................................................................................................
Third 1999 2 & 9/16 1 & 3/4
.......................................................................................................
Fourth 1999 2 1 & 1/4
.......................................................................................................
First 2000 5 & 3/4 1 & 21/32
.......................................................................................................
Second 2000 5 & 1/4 2 & 15/16
.......................................................................................................
Third 2000 3 & 15/16 2 & 9/16
.......................................................................................................
Fourth 2000 3 1 & 3/8
- -------------------------------------------------------------------------------------------------------
The Company's stock price closed at $2.375 per share on March 23, 2001.
HOLDERS
As of March 23, 2001, the number of holders of record of the Company's
Common Stock was approximately 1,420.
DIVIDENDS
The Company has never paid dividends with respect to its Common Stock.
UNREGISTERED SALES OF SECURITIES
None.
ITEM 6. SELECTED FINANCIAL DATA
The Company was incorporated in April 1993. In September 1993, an
agreement was entered into pursuant to which N-Viro Energy Systems, Ltd., an
Ohio limited partnership contributed to the Company all of its assets (except
certain marketable securities and accounts receivable from certain related
parties) subject to all liabilities (except certain retained liabilities), and
the stockholders of the Combined Agents contributed to the Company all of the
outstanding capital stock of each of such entities, in each case in exchange for
Common Stock and promissory notes (the "Organization"). The Organization was
accounted for as if the Partnership and the Combined Agents (collectively, the
"Company Entities") had always been members of the same operating group.
Accordingly, historical financial statements of each of such entities have been
combined throughout all relevant periods herein. Certain adjustments have been
made to eliminate intercompany transactions between the Company Entities.
The following selected consolidated statement of operations data for
the years ended December 31, 1996, 1997, 1998, 1999 and 2000; and the
consolidated balance sheet data set forth below as of December 31, 1996, 1997,
1998, 1999 and 2000 respectively, have been derived from the financial
statements of the Company which have been audited by McGladrey & Pullen, LLP,
independent auditors for the years ending December 31, 1996, 1997 and 1998, and
Hausser + Taylor, LLP, independent auditors for the year ended December 31, 1999
and 2000. In the opinion of management, the financial data presented below
reflect all adjustments (which are of a normal recurring nature)
14
16
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):
------------ ------------ ------------ ------------ -------------
12/31/00 12/31/99 12/31/98 12/31/97 12/31/96
------------ ------------ ------------ ------------ -------------
Revenues $4,166 $4,749 $3,929 $4,053 $3,624
.......................................................................................................
Net income (loss) (845) 471 (373) 534 (193)
.......................................................................................................
Net income (loss) per share $(0.32) $ 0.18 $(0.15) $ 0.23 $(0.09)
.......................................................................................................
BALANCE SHEET DATA (IN THOUSANDS):
------------ ------------ ------------- ------------ ------------
12/31/00 12/31/99 12/31/98 12/31/97 12/31/96
------------ ------------ ------------- ------------ ------------
Total assets $4,752 $4,772 $3,783 $4,423 $4,167
.......................................................................................................
Notes payable $ 649 $ 352 $ 161 $ 278 $1,188
.......................................................................................................
Shareholder Advance $ 22 $ 49 $ 47 $ n/a $ 197
.......................................................................................................
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The following discussion should be read in conjunction with "Selected
Financial Data" and the Financial Statements and Supplementary Data appearing
elsewhere in this Form 10-K.
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,
------------------ ------------------ -------------------
2000 1999 1998
....................................................------------------ ------------------ -------------------
Technology fees 24.0% 36.7% 29.3%
...................................................................... .................. ...................
Facility management 36.5% 33.8% 36.0%
...................................................................... .................. ...................
Products and services 39.5% 29.5% 34.7%
....................................................------------------ ------------------ -------------------
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 utilizes 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; 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.
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.
15
17
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,
2000 Percentage 1999 Percentage 1998
Change Change
--------------- ------------- --------------- ------------- ---------------
COMBINED STATEMENT OF
OPERATIONS DATA:
Revenues $ 4,166 (12.3%) $ 4,750 20.9% $ 3,929
Cost of revenues 2,437 8.6% 2,245 19.2% 1,883
--------------- --------------- ---------------
Gross profit 1,729 (31.0%) 2,505 22.4% 2,046
Operating expenses 2,408 21.8% 1,977 (17.7%) 2,386
--------------- --------------- ---------------
Operating income (loss) (679) * 528 * (340)
Non-operating income (expense) 146 * (57) * (33)
--------------- --------------- ---------------
Income (loss) before income tax
expense (533) * 471 * (373)
Federal and state income tax expense 312 * 0 * 0
--------------- --------------- ---------------
Net income (loss) $ (845) * $ 471 * $ (373)
=============== =============== ===============
PERCENTAGE OF REVENUES:
Revenues 100.0% 100.0% 100.0%
Cost of revenues 58.5 47.3 47.9
--------------- --------------- ---------------
Gross profit 41.5 52.7 52.1
Operating expenses 57.8 41.6 60.7
--------------- --------------- ---------------
Operating income (loss) (16.3) 11.1 (8.6)
Non-operating income (expense) 3.5 (1.2) (0.9)
--------------- --------------- ---------------
Income (loss) before income tax
expense (12.8) 9.9 (9.5)
Federal and state income tax expense 7.5 0.0 0.0
--------------- --------------- ---------------
Net income (loss) (20.3%) 9.9% (9.5%)
=============== =============== ===============
* Period to period percentage change comparisons have only been calculated for
positive numbers.
16
18
COMPARISON OF YEAR ENDED DECEMBER 31, 2000 WITH YEAR ENDED DECEMBER 31, 1999
Revenues decreased $583,000, or 12%, to $4,166,000 for the year ended
December 31, 2000 from $4,749,000 for the year ended December 31, 1999. The
decrease in revenue was due to the following: revenues from one-time domestic
license or international territory fees decreased $523,000, to $236,000 for 2000
from $759,000 for 1999; revenues from existing on-line facilities decreased
$60,000 to $3,930,000 from $3,990,000 for 1999, primarily from a decrease in
royalties of $149,000, a decrease in management fee operations of $85,000 and a
decrease in revenue from research + development projects of $75,000, offset by
an increase in alkaline admixture revenue of $299,000. In 2000 the Company
recorded approximately $25,000 in gross royalty revenue from its former European
licensee, N-Viro Worldwide, Ltd., a decrease of $75,000 from 1999.
Gross Profit decreased $776,000, or 31%, to $1,729,000 for the year
ended December 31, 2000 from $2,505,000 for the year ended December 31, 1999.
The decrease in gross profit was primarily due to the decrease in revenues from
one-time domestic license or international territory fees, and royalty fee
revenue. This revenue has a higher gross profit associated with them than other
types of revenue. The Company's largest percentage increase in revenue in 2000
was from the sale of alkaline admixture, which traditionally has a lower gross
profit margin than the Company's overall margin. The overall gross profit margin
decreased to 42% in 2000 from 53% for 1999. This decrease in gross profit margin
was primarily due to the decrease in one-time fees and royalty fee revenue, and
furthered by the increase in alkaline admixture revenue, which are at higher and
lower gross profit margins, respectively. The gross profit margin from existing
on-line facilities decreased to 39% from 46% for 1999, primarily from the
aforementioned increase in alkaline admixture revenue.
Operating expenses increased $432,000, or 22% to $2,408,000 for the
year ended December 31, 2000 from $1,976,000 for the year ended December 31,
1999. The Company increased expenditures for salaries and employee benefits by
$141,000, the net cost (after a $100,000 settlement recovery) of patent
litigation initiated in 1999 by $123,000, legal and other professional fees by
approximately $120,000, research & development by approximately $41,000 and
sales, promotion, administrative overhead and outside consultants by a combined
total of $7,000. The Company anticipates its increase in operating expense in
2000 will translate into increased sales of the N-Viro technology in the near
future.
Nonoperating income (expense) increased by $215,000 to income of
$146,000 for the year ended December 31, 2000 from an expense of $69,000 for the
year ended December 31, 1999. The increase was primarily due to the recovery of
$275,000 of a bad debt previously written off, and an increase in the loss in
the equity of a joint venture from a loss of $69,000 in 1999 to a loss of
$129,000 in 2000. The bad debt previously written off was a note receivable from
a Canadian licensee, which was fully reserved for in allowance for bad debts.
See the discussion below of the investment in the Ft. Meade, Florida operation.
In 1997, the Company recorded a deferred tax asset and a corresponding
income tax benefit of $312,000 to recognize the benefit of $800,000 in loss
carryforwards expected to be realized. The Company believed that sufficient
taxable income would be generated in the near term, as the Company had changed
its strategic focus to its profitable core business. Based on the results of the
Company's 2000 operating performance, the Company 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-.
The Company recorded a net loss of $845,000 for the year ended December
31, 2000 compared to net income of $471,000 for the year ended December 31,
1999.
In early 1996 the Company completed the transfer of its interest in the
Fort Meade, Florida facility. The Company incurred a loss of approximately
$129,000 on its share of Florida N-Viro, LLP in 2000, an increased loss of
$60,000 from 1999. The Company anticipates this operation to continue to be
unprofitable in 2001, but has taken steps to minimize the impact of Florida
N-Viro on its net profit and cash flow. The audited financial statements of
Florida N-Viro are included in this document after the Company's financial
statements as Item 14(d), Financial Statements of Subsidiaries not Consolidated.
17
19
COMPARISON OF YEAR ENDED DECEMBER 31, 1999 WITH YEAR ENDED DECEMBER 31, 1998
Revenues increased $820,000, or 21%, to $4,749,000 for the year ended
December 31, 1999 and $3,929,000 for the year ended December 31, 1998. The
increase in revenue was due to the following: revenues from one-time domestic
license or international territory fees increased $326,000, to $759,000 for 1999
from $433,000 for 1998; revenues from existing on-line facilities increased
$494,000 to $3,990,000 from $3,496,000 for 1998, primarily from an increase in
management fee operations of $190,000 and an increase in revenue from research +
development projects of $250,000. In 1999 the Company recorded approximately
$100,000 in gross royalty revenue from our European licensee, N-Viro Worldwide.
Gross Profit increased $459,000, or 22%, to $2,505,000 for the year
ended December 31, 1999 from $2,046,000 for the year ended December 31, 1998.
The increase in gross profit was primarily due to the increase in revenues from
one-time domestic license or international territory fees. This revenue has a
higher gross profit associated with them than other types of revenue. The
overall gross profit margin increased slightly to 53% in 1999 from 52% for 1998.
This increase in gross profit margin was primarily due to the increase in
one-time fees, offset by the increase in management fee revenue which are at a
lower gross profit margin. The gross profit margin from existing on-line
facilities decreased slightly to 46% from 47% for 1998.
Operating expenses decreased $410,000, or 17% to $1,976,000 for the
year ended December 31, 1999 from $2,386,000 for the year ended December 31,
1998. The Company increased expenditures for salaries and employee benefits by
$71,000, but decreased outlays for sales, promotion, administrative overhead and
outside consultants expense totaling $235,000. Legal and other professional fees
also decreased by approximately $100,000. Operating expenses were further
reduced by a decrease in bad debt write-offs of $76,000. Finally, the Company
had recognized a non-recurring expense of $73,000 in 1998 for the prior-year
acquisition of its Eastern U.S. agency. The Company does not believe its
decrease in operating expenses in 1999 will impede future sales of the N-Viro
technology.
Nonoperating income (expense) increased by $24,000 to an expense of
$57,000 for the year ended December 31, 1999 from an expense of $33,000 for the
year ended December 31, 1998. The increase was primarily due to interest income
(expense), net decreasing by approximately $20,000 due to the increase in the
level of outstanding draws on the working capital line of credit and a decrease
in interest income on an investment. The loss in the equity of joint venture
increased by approximately $4,000 to a loss of $69,000 in 1999. See the
discussion below of the investment in the Ft. Meade, Florida operation.
The Company recorded a deferred tax asset (credit) of $312,000 in 1997,
to recognize the future tax benefit of a federal net operating loss carryforward
to offset anticipated net income for years starting in 1998. The effective tax
rate used was 39%. Realization of the asset is dependent on generating
sufficient taxable income prior to expiration of the loss carryforward. Although
realization is not assured, management believed it was more likely than not that
all of the recorded deferred tax asset will be realized. There was no additional
income or expense recorded in 1999; however, the amount of the deferred tax
asset considered realizable could be reduced in the near term if estimates of
future taxable income during the carryforward period are reduced.
The Company recorded net income of $471,000 for the year ended December
31, 1999 compared to a net loss of $373,000 for the year ended December 31,
1998.
In early 1996 the Company completed the transfer of its interest in the
Fort Meade, Florida facility. The Company incurred a loss of approximately
$69,000 on its share of Florida N-Viro LLP in 1999, an increased loss of $4,000
from 1998. The audited financial statements of Florida N-Viro are included in
this document after the Company's financial statements as Item 14(d), Financial
Statements of Subsidiaries not Consolidated.
18
20
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $311,000 at December 31, 2000
compared to $1,090,000 at December 31, 1999, a decrease of $779,000. Current
assets at December 31, 2000 included cash and investments of $548,000 (including
restricted cash of $417,666), which is a decrease of about $7,000 from December
31, 1999. The decrease in working capital was principally due to the operating
loss for the year.
In 2000 the Company's operating cash flow reverted to negative towards
the end of the fiscal year, and the Company was not as timely as it had been
previously in its payments to unsecured trade vendors. No unusual cash
transactions were recorded in 2000.
In 1997 the Company obtained a working capital line of credit of
$200,000 and in the third quarter of 1998 the line was increased to $500,000.
This debt was collateralized by a certificate of deposit with the lender,
accounts receivable, inventories and equipment, assignment of the Contract
between the City of Toledo and the Company, is due on demand, and, the Company
must maintain certain financial covenants. In April 2000, the Company renewed
its agreement for a line of credit of $1 million (an increase of $500,000 from
$500,000 as of December 31, 1999), secured by a certificate of deposit with the
lender of $400,000, with all other terms similar as agreed to in 1998.
Borrowings up to $400,000 (up from $250,000 as of December 31, 1999) bear
interest at prime minus .5%, and borrowings above $400,000 (up from $250,000 as
of December 31, 1999) bear interest at prime plus 1%. The Company is in
violation of financial convenants contained in the agreement, concerning the
maintenance of positive net income for the fiscal year and minimum tangible net
worth. The Company's bank waived these violations in light of the Company's net
loss for the year ended December 31, 2000. The balance owed on the
line-of-credit at December 31, 2000 was $300,000.
The normal collection terms for accounts receivable are approximately
60 days for a majority of the customers. This is a result of the nature of the
license contracts, type of customer and the amount of time required to obtain
the information to prepare the billing.
The Company believes that its working capital, together with the line
of credit, will provide sufficient cash to meet the Company's cash requirements
through 2001.
As a result of the current market development and also due to a
significant increase in public and private interest in the safe and responsible
management of animal manure, a 1.5 billion ton market vs. a 40 million ton
sewage sludge market in the USA, the Company is optimistic for 2001 and beyond,
and anticipates that it will continue to see an increase in the sale and use of
N-Viro technology. Moreover, public recognition (e.g., President's Commission on
Food Safety) of the dangers of farm-derived pathogens in our food and water
supply, and awareness of the highly negative impact of currently acceptable
organic disposal practices on the ozone and global warming crisis, is creating
renewed awareness of the long term ecological sustainability of N-Viro type
concepts.
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.
INFLATION
The Company believes that inflation has not had a material impact to
date on the Company's operations.
19
21
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
As of December 31, 2000, 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.
20
22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
Page
----
REPORTS OF INDEPENDENT PUBLIC ACCOUNTANTS ON THE
FINANCIAL STATEMENTS F-3 - F-4
FINANCIAL STATEMENTS
Consolidated balance sheets F-5 - F-6
Consolidated statements of operations F-7
Consolidated statements of stockholders' equity F-8
Consolidated statements of cash flows F-9
Notes to consolidated financial statements F-10 - F-25
REPORTS OF INDEPENDENT PUBLIC ACCOUNTANTS ON
ACCOMPANYING INFORMATION F-26 - F-27
ACCOMPANYING INFORMATION
Schedule II - valuation and qualifying accounts and reserves F-28
21
23
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, 2000 and 1999, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for the years then ended. 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 2000 or 1999 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 14% and 17% of total assets as of
December 31, 2000 and 1999 and the net loss of this partnership represents an
18% increase in the net loss of the Company for the year ended December 31,
2000, and a 13% reduction of the net income (before such net loss) of the
Company for the year ended December 31, 1999. The financial statements of this
partnership were audited by other auditors, whose report has been furnished to
us, and our opinion, insofar as it relates to amounts and information relating
to this partnership, is based solely on the reports of the other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audits 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, 2000 and 1999, and the
consolidated results of their operations and their cash flows for the years then
ended, in conformity with accounting principles generally accepted in the United
States.
/s/ HAUSSER + TAYLOR LLP
Cleveland, Ohio
March 16, 2001
F-3
24
Report of Independent Public Accountants
----------------------------------------
To the Board of Directors
N-Viro International Corporation
Toledo, Ohio
We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of N-Viro International Corporation for the
year ended December 31, 1998. 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 conducted our audit in accordance with generally accepted auditing
standards. 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects the results of operations and cash
flows of N-Viro International Corporation for the year ended December 31, 1998,
in conformity with generally accepted accounting principles.
/s/ McGladrey & Pullen, LLP
Elkhart, Indiana
March 5, 1999
F-4
25
N-VIRO INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 2000 and 1999
2000 1999
-----------------------------------------------
ASSETS
CURRENT ASSETS Cash and cash equivalents:
Unrestricted $ 128,485 $ 552,846
Restricted 417,666 -
Securities available-for-sale 1,401 1,401
Receivables:
Trade, net of allowance of $144,564 in 2000 and
$128,600 in 1999 1,500,514 1,302,036
Notes and other, net of allowance of $-0- in 2000
and $330,980 in 1999 22,540 258,590
Related parties 21,912 48,599
Prepaid expenses and other assets 83,569 72,260
-----------------------------------------------
Total current assets 2,176,087 2,235,732
PROPERTY AND EQUIPMENT 581,196 596,060
INVESTMENT IN FLORIDA N-VIRO, L.P. 661,966 790,667
DEFERRED TAX ASSETS - 312,000
INTANGIBLE AND OTHER ASSETS 1,332,728 837,414
-----------------------------------------------
$ 4,751,977 $ 4,771,873
===============================================
The accompanying notes are an integral part of these financial statements.
F-5
26
N-VIRO INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 2000 and 1999
2000 1999
-----------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES
Current maturities of long-term debt $ 119,992 $ 111,856
Line-of-credit 300,000 -
Accounts payable 1,085,872 707,324
Accrued liabilities 359,672 326,740
-----------------------------------------------
Total current liabilities 1,865,536 1,145,920
LONG-TERM DEBT, LESS CURRENT MATURITIES 228,738 240,379
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.01 par value
Authorized - 7,000,000 shares
Issued - 2000 - 2,700,933 shares; 1999 - 2,688,133
shares 27,010 26,882
Additional paid-in capital 13,498,602 13,382,093
Retained earnings (deficit) (10,249,932) (9,405,424)
-----------------------------------------------
3,275,680 4,003,551
Less treasury stock, at cost, 57,250 shares in
2000 and 1999 617,977 617,977
-----------------------------------------------
Total stockholders' equity 2,657,703 3,385,574
-----------------------------------------------
$ 4,751,977 $ 4,771,873
===============================================
The accompanying notes are an integral part of these financial statements.
F-6
27
N-VIRO INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2000, 1999, and 1998
2000 1999 1998
------------------------------------------------
REVENUES $ 4,166,435 $ 4,749,427 $ 3,929,317
COST OF REVENUES 2,436,942 2,244,540 1,883,529
------------------------------------------------
GROSS PROFIT 1,729,493 2,504,887 2,045,788
OPERATING EXPENSES
Selling, general and administrative 2,183,896 1,916,009 2,327,575
Patent litigation expense 135,272 12,145 -
Research and development 89,082 48,298 58,478
------------------------------------------------
2,408,250 1,976,452 2,386,053
------------------------------------------------
OPERATING INCOME (LOSS) (678,757) 528,435 (340,265)
NONOPERATING INCOME (EXPENSE)
Interest income (expense), net (50) 12,283 32,372
Recovery of bad debt allowance 275,000 - -
Equity in losses of joint venture (128,701) (69,344) (65,110)
------------------------------------------------
146,249 (57,061) (32,738)
------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES (532,508) 471,374 (373,003)
Federal and state income tax expense 312,000 - -
------------------------------------------------
NET INCOME (LOSS) $ (844,508) $ 471,374 $ (373,003)
================================================
Basic and diluted earnings (loss) per share $ (0.32) $ 0.18 $ (0.15)
================================================
Weighted average common shares outstanding 2,635,475 2,563,121 2,463,667
================================================
The accompanying notes are an integral part of these financial statements.
F-7
28
N-VIRO INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
Years Ended December 31, 2000, 1999 and 1998
Additional Retained
Common Paid-in Earnings Treasury
Stock Capital (Deficit) Stock Total
-------------------------------------------------------------------------
BALANCE - DECEMBER 31, 1997 27,558 13,359,552 (9,503,795) (1,117,977) 2,765,338
Net loss - - (373,003) - (373,003)
Issuance of common stock for
fees and services 740 217,031 - - 217,771
Other - 55,842 - - 55,842
--------------------------------------------------------------------------
BALANCE - DECEMBER 31, 1998 28,298 13,632,425 (9,876,798) (1,117,977) 2,665,948
Net income - - 471,374 - 471,374
Issuance of common stock for
fees and services 84 11,766 - - 11,850
Sale of common stock, net of
expenses of $1,288 1,000 197,712 - - 198,712
Retirement of treasury stock (2,500) (497,500) - 500,000 -
Other - 37,690 - - 37,690
--------------------------------------------------------------------------
BALANCE - DECEMBER 31, 1999 26,882 13,382,093 (9,405,424) (617,977) 3,385,574
Net loss - - (844,508) - (844,508)
Exercise of qualified stock options 24 3,726 - - 3,750
Issuance of common stock for
fees and services 104 28,014 - - 28,118
Other - 84,769 - - 84,769
--------------------------------------------------------------------------
BALANCE - DECEMBER 31, 2000 $ 27,010 $ 13,498,602 $ (10,249,932) $ (617,977) $2,657,703
=========================================================================
The accompanying notes are an integral part of these financial statements.
F-8
29
N-VIRO INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998
---------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (844,508) $ 471,374 $(373,003)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Deferred income taxes 312,000 - -
Loss on the sale of fixed assets 755 - -
Depreciation and amortization 188,398 175,574 169,807
Provision for bad debts (315,016) - 40,000
Issuance of common stock and options for fees and services 112,887 49,540 299,092
Other 155,031 72,234 63,596
Increase in receivables (214,442) (616,721) (21,007)
(Increase) decrease in prepaid expenses (11,309) 9,384 10,416
Increase (decrease) in accounts payable and accrued
liabilities 411,480 77,84 7 (329,891)
---------------------------------------
Net cash provided by (used in) operating activities (204,724) 239,232 (140,990)
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in restricted cash and cash equivalents (417,666) - -
Collection of contract receivable - - 671,521
Purchases of property and equipment (49,147) (130,638) (67,041)
Proceeds from sale of equipment 6,000 - -
Collections from (advances to) related parties 26,687 (1,809) (46,790)
Increase in notes receivable (174,611) (52,138) -
Collections on notes receivable 371,415 141,387 103,203
Expenditures for intangible and other assets (233,585) (63,275) (21,139)
Additional investment in Florida N-Viro, L.P. - (7,500) -
---------------------------------------
Net cash provided by (used in) investing activities (470,907) (113,973) 639,754
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (payments) on line of credit 300,000 - (120,000)
Borrowings under long-term obligations 77,162 161,127 67,000
Principal payments on long-term obligations (129,642) (105,079) (129,135)
Proceeds from sale of common stock - 48,712 -
Other 3,750 - (25,479)
---------------------------------------
Net cash provided by (used in) financing activities 251,270 104,760 (207,614)
---------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (424,361) 230,019 291,150
CASH AND CASH EQUIVALENTS - BEGINNING 552,846 322,827 31,677
---------------------------------------
CASH AND CASH EQUIVALENTS - ENDING $ 128,485 $ 552,846 $ 322,827
=======================================
The accompanying notes are an integral part of these financial statements.
F-9
30
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. 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 requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
as of the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
C. Principles of Consolidation - The consolidated financial
statements include the accounts of the Company and its
wholly-owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation.
The Company accounts for its investments in joint ventures under
the equity method.
D. 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.
E. Cash and Cash Equivalents - The Company has cash on deposit in
one financial institution which, at times, may be in excess of
FDIC insurance limits.
For purposes of the statements of cash flows, the Company
considers all certificates of deposit with initial maturities of
90 days or less to be cash equivalents.
Restricted cash consists of a certificate of deposit which is
held as collateral against the Company's line-of-credit.
F. Property and Equipment - Depreciation has been computed primarily
by the straight-line method over the estimated useful lives of
the assets. Generally, useful lives are thirty-one years for
leasehold improvements and five to fifteen years for equipment
and furniture and fixtures. 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.
G. Intangible Assets - Patent costs and territory rights are
recorded at cost and then amortized by the straight-line method
over 17 and 11 year periods, respectively. Management has
reviewed intangible assets for impairment when events and
circumstances indicate that the assets might be impaired and the
carrying values of those assets may not be recoverable.
Management believes the carrying amount is not impaired based
upon estimated future cash flows.
F-10
31
N-VIRO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATE