-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, INzJGV3WXBQAsWPM0qNteDVCMxq7x9ahg3GA6DpW7dCCNI+EMe18PBpEYMZK8D1P /3yuEXpBZOjbaNi+8nEfxw== 0000950152-01-505892.txt : 20020410 0000950152-01-505892.hdr.sgml : 20020410 ACCESSION NUMBER: 0000950152-01-505892 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: N-VIRO INTERNATIONAL CORP CENTRAL INDEX KEY: 0000904896 STANDARD INDUSTRIAL CLASSIFICATION: PATENT OWNERS & LESSORS [6794] IRS NUMBER: 341741211 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-21802 FILM NUMBER: 1790494 BUSINESS ADDRESS: STREET 1: 3450 W CENTRAL AVE STREET 2: STE 328 CITY: TOLEDO STATE: OH ZIP: 43606 BUSINESS PHONE: 4195356374 MAIL ADDRESS: STREET 1: 3450 WEST CENTRAL AVENUE SUITE 328 CITY: TOLEDO STATE: OH ZIP: 43606 10-Q 1 l90947ae10-q.txt N-VIRO INTERNATIONAL CORPORATION 10-Q/9-30-01 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (MARK ONE) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ____________ COMMISSION FILE NUMBER: 0-21802 ---------- N-VIRO INTERNATIONAL CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 34-1741211 (STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 3450 W. CENTRAL AVENUE, SUITE 328 TOLEDO, OHIO 43606 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (419) 535-6374 ---------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for at least the past 90 days. Yes X No . --- --- As of November 8, 2001, 2,643,683 shares of N-Viro International Corporation $ .01 par value common stock were outstanding. ================================================================================ -1- PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS N-VIRO INTERNATIONAL CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended Sept. 30 Nine Months Ended Sept. 30 -------------------------------------------------------------- 2001 2000 2001 2000 -------------------------------------------------------------- Revenues $ 1,175,057 $ 1,083,134 $ 3,453,299 $ 3,302,630 Cost of revenues 747,823 599,825 2,144,181 1,810,744 -------------------------------------------------------------- Gross profit 427,234 483,309 1,309,118 1,491,886 Operating expenses: Selling, general + administrative 517,400 511,117 1,517,388 1,499,948 Patent litigation expense 182,767 30,421 384,708 52,867 Research and development 8,000 30,186 54,449 65,410 -------------------------------------------------------------- 708,167 571,724 1,956,545 1,618,225 -------------------------------------------------------------- Operating loss (280,933) (88,415) (647,427) (126,339) Nonoperating income (expense): Interest income (expense), net (23,819) (4,820) (18,125) (3,487) Equity in losses of joint venture (51,171) (68,195) (113,266) (128,695) Loss on sale of assets (935) -- (935) -- Bad debts recovered -- -- -- 275,000 -------------------------------------------------------------- (75,925) (73,015) (132,326) 142,818 -------------------------------------------------------------- Income (loss) before income tax expense (356,858) (161,430) (779,753) 16,479 Federal and state income tax expense -- -- -- -- -------------------------------------------------------------- Net income (loss) $ (356,858) $ (161,430) $ (779,753) $ 16,479 ============================================================== Basic and diluted earnings (loss) per share $ (0.13) $ (0.06) $ (0.29) $ 0.01 ============================================================== Weighted average common shares outstanding 2,643,683 2,637,553 2,643,683 2,633,917 ==============================================================
See Notes to Consolidated Financial Statements -2- N-VIRO INTERNATIONAL CORPORATION CONSOLIDATED BALANCE SHEETS
September 30, December 31, 2001 2000 ASSETS (Unaudited) (Audited) ------------ ------------ Current Assets Cash and cash equivalents: Unrestricted $ 205,659 $ 128,485 Restricted 400,000 417,666 Securities available-for-sale 1,660 1,401 Receivables: Trade, net of allowance of $144,564 in 2001 and 2000 1,297,585 1,500,514 Notes and other, net of allowance of $-0- in 2001 and 2000 22,000 22,540 Related parties 27,906 21,912 Prepaid expenses and other assets 115,336 83,569 ------------------------------ Total current assets 2,070,146 2,176,087 Property and Equipment 511,838 581,196 Investment in Florida N-Viro, L.P. 548,700 661,966 Intangibles and Other Assets 1,481,398 1,332,728 ------------------------------ TOTAL ASSETS $ 4,612,082 $ 4,751,977 ============================== LIABILITIES & STOCKHOLDERS' EQUITY Current Liabilities Current maturities of long-term debt $ 141,744 $ 119,992 Line of credit 380,000 300,000 Accounts payable 1,657,890 1,085,872 Accrued expenses 396,454 359,672 ------------------------------ Total current liabilities 2,576,088 1,865,536 Long-Term Debt, less current maturities 161,044 228,738 Stockholders' Equity Common stock, $.01 par value; authorized 7,000,000 shares; issued 2,700,933 shares 27,010 27,010 Additional paid-in capital 13,495,602 13,498,602 Retained earnings (deficit) (11,029,685) (10,249,932) ------------------------------ 2,492,927 3,275,680 Less treasury stock, at cost, 57,250 shares 617,977 617,977 ------------------------------ 1,874,950 2,657,703 ------------------------------ TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 4,612,082 $ 4,751,977 ==============================
See Notes to Consolidated Financial Statements -3- N-VIRO INTERNATIONAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended September 30, ------------------------ 2001 2000 ------------------------ Net Cash Provided By Operating Activities $ 302,337 $ 165,141 Cash Flows From Investing Activities: Increase in notes receivable (204,296) -- Expenditures for intangibles and other assets (34,089) (275,858) Purchases of property and equipment (15,222) (43,645) ------------------------ Net Cash Used By Investing Activities (253,607) (319,503) Cash Flows From Financing Activities Net borrowings on line of credit 80,000 120,000 Borrowings under long-term obligations 63,519 96,870 Principal payments on long-term obligations (115,075) (115,512) ------------------------ Net Cash Provided By Financing Activities 28,444 101,358 ------------------------ Net Increase (Decrease) In Cash - Unrestricted 77,174 (53,004) Cash And Cash Equivalents - Unrestricted At Beginning Of Period 128,485 552,846 ------------------------ Cash And Cash Equivalents - Unrestricted At End Of Period $ 205,659 $ 499,842 ========================
See Notes to Consolidated Financial Statements -4- N-VIRO INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. ORGANIZATION AND BASIS OF PRESENTATION The accompanying consolidated financial statements of N-Viro International Corporation (the "Company") are unaudited but, in management's opinion, reflect all adjustments (including only normal recurring accruals) necessary to present fairly such information for the period and at the dates indicated. The results of operations for the nine months ended September 30, 2001 may not be indicative of the results of operations for the year ended December 31, 2001. Since the accompanying consolidated financial statements have been prepared in accordance with Article 10 of Regulation S-X, they do not contain all information and footnotes normally contained in annual consolidated financial statements; accordingly, they should be read in conjunction with the consolidated financial statements and notes thereto appearing in the Company's Form 10-K for the period ending December 31, 2000. The financial statements are consolidated as of September 30, 2001 and December 31, 2000 for the Company. Adjustments have been made to eliminate all intercompany transactions. 2. RELATED PARTY TRANSACTIONS The Company recognized an expense to Mr. Bobby B. Carroll, a Director of the Company and a former shareholder of Tennessee-Carolina N-Viro, Inc., of $45,000 for the nine months ended September 30, 2001 under an agreement for consulting services signed in 1993 and amended in 1998 (the "Consulting Agreement"). The Company granted Mr. Carroll a security interest in all present and future receivables and contract rights from licenses in the states of Tennessee, North Carolina and South Carolina pursuant to the Consulting Agreement. 3. CONTINGENCIES During 1994, the Company entered into an agreement to reacquire territory rights from a former agent, Hydropress Environmental Services, Inc. ("Hydropress"), in exchange for 66,250 (as adjusted) shares of unregistered common stock. This agreement stated that if Hydropress elected to sell these shares, the Company had guaranteed a value of $6 per common share. In October 1998, Hydropress filed suit against the Company seeking a declaratory judgment as to Hydropress' rights and duties related to certain obligations pursuant to a license agreement and a prior settlement agreement related to the license agreement. Hydropress filed the Complaint, but failed to obtain service of process upon the Company. During 1999, Hydropress and the Company entered into a Settlement Agreement that provided, among other things, for the dismissal of the suit, mutual limited releases, agreements as to past due amounts that Hydropress owed the Company, as well as a basis for determining future amounts, and an agreement that, for a period of eighteen (18) months from the date of the settlement agreement, Hydropress would not sell any of the 66,250 shares of Company stock that it had been issued in 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. -5- In February 2000, Hydropress and the Company modified the 1999 agreement by agreeing to allow Hydropress to sell shares of the Company's stock before the eighteen-month period, in addition to increasing the maximum amount of shares it could sell without approval from the Company in any one month to 15,000 shares. In exchange, Hydropress released the Company from its minimum price guarantee obligations under the 1999 Settlement Agreement. The Company understood the letter agreement to excuse it entirely from its obligation to guarantee Hydropress' receipt of proceeds of at least $6.00 per share from the sale of the Company stock. This was consistent with the position taken in the Company's public filings under and pursuant to the terms of the Securities Exchange Act of 1934 and the rules and regulations promulgated thereunder, as well as the Company's audited financial statements. In late September 2000, representatives of Hydropress informed the Company that Hydropress maintains that the letter suspended for a fixed period of time the $6.00 per share guarantee of proceeds, but that following that period of time, the guarantee remained in effect. In November 2000, the Company brought suit against Hydropress. The Complaint sought a declaratory judgment that the minimum price guarantee was no longer in effect. 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 $238,000 and $254,000. In December 2000, Hydropress filed a Complaint against the Company also seeking a declaratory judgment on the identical issue. The Company has filed a counterclaim seeking damages for royalties that Hydropress owes the Company. 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 allegedly negligently misrepresented the results to be expected from a dryer Hydropress purchased from a third party. Hydropress' third claim is that the Company breached the covenant of good faith and fair dealing by making the alleged misrepresentations. Hydropress' fourth 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 Court bifurcated discovery. It initially allowed discovery only on the issues raised in Hydropress' Complaint, which were the stock guarantee issues. That discovery has been completed. N-Viro has filed a motion to dismiss Hydropress' counterclaims based on numerous grounds. Following full briefing, the Court scheduled and heard oral argument on the motion to dismiss. Based on the arguments, the Court ordered that discovery be limited to two issues arising out of a prior settlement agreement: (1) whether Hydropress released all its claims in the prior settlement agreement, and (2) whether Hydropress has any legal basis for having withheld royalties from N-Viro. Once discovery on those two issues is finished, the parties shall be entitled to submit summary judgment motions on the two issues only. The parties are now in settlement discussions and are not actively litigating the case. The Company leases office space under an agreement which requires monthly payments of approximately $5,200. The lease expires in December 2002. The Company also leases various equipment on a month-to-month basis. The total minimum rental commitment at September 30, 2001 is $77,900. The total rental expense included in the statements of operations for the nine months ended September 30, 2001 and 2000 is approximately $47,800 and $43,200, respectively. -6- The Company's minimum commitment under an agreement with a consultant (see Note 2 above) is $90,000, payable in cash or stock of $15,000 in 2001 and $60,000 in 2002. During 1999, the Company entered into employment and consulting agreements with two officers of the Company. One of the employment agreements expires in July 2002 and called for payments totaling $144,000 annually through December 1999. The other agreement expires in June 2004 and calls for payments totaling $144,000 annually through December 31, 2000. Future compensation amounts are to be determined annually by the Board. In addition, one of the agreements provides for payment of life insurance premiums and the provision of health insurance coverage to the officer and his spouse for their lives. The present value of estimated costs related to the provisions of this agreement is expected to total $129,000 at July 2002. The estimated cost is being recognized over the term of the employment agreement. The consulting agreements begin upon termination of the respective employment agreements and extend through July 2015 and June 2014, respectively. The agreements require minimum future services to be provided to be eligible for compensation. The Company charged $36,300 to operations for the nine months ended September 30, 2001 in conjunction with these agreements. In July 2000, the Company terminated the license of N-Viro Worldwide Limited and filed suit against Robin Millard and R3 Management Limited ("R3M"). The suit sought damages for breach of contract, breach of fiduciary duty and related torts based on intellectual property developed by Mr. Millard that the Company contends is owned by the Company. The parties have resolved the suit pursuant to a settlement agreement, and the Company has dismissed the suit. 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. On October 30, 2001, the Company settled its lawsuit with RDP Technologies, Inc. ("RDP"). RDP filed the lawsuit in Delaware federal court in August 2000, asserting claims for tortious interference with prospective business relations and unfair competition, and later adding a claim for a declaratory judgment regarding infringement, validity and enforceability of two of the Company's patents. The Company denied all of RDP's claims. As a result of the settlement, RDP's claims were dismissed with prejudice, and each party agreed to bear its own costs and attorneys fees. The Consent Judgment is included in this filing as Exhibit 99. The Company is involved in legal proceedings and subject to claims which have arisen in the ordinary course of business. These actions, when concluded and determined, will not, in the opinion of management, have a material adverse effect upon the financial position, results of operations or cash flows of the Company. 4. NEW ACCOUNTING STANDARDS In June 2001, the Financial Accounting Standards Board ("FASB") issued Statements of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations". SFAS 141 requires the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the pooling-of-interest method and further clarifies the criteria to recognize intangible assets separately from goodwill. -7- In June 2001, FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets". Under SFAS No. 142, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to periodic impairment tests. Other intangible assets will continue to be amortized over their useful lives. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001. In June 2001, FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" which is effective the first quarter of fiscal year 2003. SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of long-lived assets and the associated asset retirement cost. In August 2001, FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets", which is effective the first quarter of fiscal year 2002. SFAS No. 144 modifies and expands the financial accounting and reporting for the impairment or disposal of long-lived assets other than goodwill. The Company is currently assessing but has not yet determined the impact of these pronouncements on its financial position and results of operations. 5. 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. 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 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. 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 price, product quality, custom design, technical support, reputation, equipment financing assistance and reliability. Competitive pressures and other factors could cause the Company to lose market share or could result in decreases in prices, either of which could have a material adverse effect on its financial position and results of operations. RISKS OF DOING BUSINESS IN OTHER COUNTRIES. The Company conducts business in markets outside the United States, and expects to continue to do so. In addition to the risk of currency fluctuations, the risks associated with conducting business outside the United States include: social, political and economic instability; slower payment of invoices; underdeveloped infrastructure; underdeveloped legal systems; and nationalization. The Company has not entered into any currency swap agreements which may reduce these risks. The Company may enter into such agreements in the future if it is deemed beneficial to do so. The Company has determined that its reportable segments are those that are based on the Company's method of internal reporting, which segregates its business by product category and service lines. The Company's reportable segments are as follows: -8- Management Operations - The Company provides employee and management services to operate the Toledo Wastewater Treatment Facility. Other Domestic Operations - Sales of territory or site licenses and royalty fees to use N-Viro technology in the United States. Foreign Operations - Sale of territory or site licenses and royalty fees to use N-Viro technology in foreign operations. Research and Development - The Company contracts with Federal and State agencies to perform or assist in research and development on the Company's technology. The accounting policies of the segments are the same as the Company's significant accounting policies. Fixed assets generating specific revenue are identified with their respective segments as they are accounted for as such in the internal accounting records. All other assets, including cash and other current assets and all long-term assets, other than fixed assets, are identified with the Corporate segment. The Company does not allocate any selling, general, and administrative expenses to any specific segments. All of the other income (expense) costs or income are non-apportionable and not allocated to a specific segment. The Company accounts for and analyzes the operating data for its segments generally by geographic location, with the exception of the Management Operations and Research and Development segments, as this revenue accounts for over 45% of the total revenue of the Company. These segments represent both a significant amount of business generated as well as a specific location and unique type of revenue. The next two segments are divided between domestic and foreign sources, as these segments differ in terms of environment and municipal legal issues, nature of the waste disposal infrastructure, political climate, and availability of funds for investing in the Company's technology. These factors have not changed significantly over the past three years and are not expected to change in the near term. A new segment first presented at December 31, 2000 is the Research and Development segment. Prior year amounts have been reclassified to conform with the current year presentation. This segment accounts for approximately 6% of the total revenue of the Company, and is unlike any other revenue, in that it is generated as a result of a specific project to conduct initial or additional ongoing research into the Company's emerging technologies. -9- The tables below present information about the segment profits, segment identifiable assets and other information used by the chief operating decision makers of the Company for the quarters ended September 30, 2001 and 2000 (dollars in thousands).
Other Management Domestic Foreign Research & Operations Operations Operations Development Total ---------- ---------- ---------- ----------- ----- 2001 ---------------------------------------------------------------------------------- Revenues $ 474 $ 448 $ 185 $ 68 $ 1,175 Cost of revenues 329 231 132 56 748 Segment profits 145 217 53 12 427 Identifiable assets 189 65 - 52 306 Depreciation 8 10 - 2 20 2000 ---------------------------------------------------------------------------------- Revenues $ 424 $ 578 $ 11 $ 70 $ 1,083 Cost of revenues 342 236 - 22 600 Segment profits 82 342 11 48 483 Identifiable assets 192 78 - 59 329 Depreciation 6 11 - 1 18
2001 2000 ------- ------- Segment profits: Segment profits for reportable segments $ 427 $ 483 Corporate selling, general and administrative expenses and research and development costs (708) (571) Other income (expense) (76) (73) ------- ------- Consolidated earnings (loss) before interest and taxes $ (357) $ (161) ======= ======= Identifiable assets: Identifiable assets for reportable segments $ 306 $ 329 Corporate property and equipment 206 229 Current assets not allocated to segments 2,070 2,383 Intangible and other assets not allocated to segments 2,264 2,248 Consolidated eliminations (234) (234) ------- ------- Consolidated assets $ 4,612 $ 4,955 ======= ======= Depreciation and amortization: Depreciation for reportable segments $ 20 $ 18 Corporate depreciation and amortization 32 29 ------- ------- Consolidated depreciation and amortization $ 52 $ 47 ======= =======
-10- 6. INVESTMENT IN FLORIDA N-VIRO, L. P. Florida N-Viro, L.P. was formed in January 1996 pursuant to a joint venture agreement between the Company and VFL Technology Corporation. Effective January 1, 2001 the Company owns a 47.5% interest in the joint venture. Prior to January 1, 2001 the Company owned 50% of the joint venture. Condensed financial information of the partnership for the quarters ended September 30, 2001 and 2000 is as follows:
Quarter Ended September 30, ----------------------------------- 2001 2000 -------- -------- Net sales $ 607,310 $ 605,948 Gross profit (loss) (45,948) (50,599) Loss from continuing operations (107,728) (136,390) Net loss (107,728) (136,390)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company was incorporated in April, 1993, and became a public company on October 12, 1993. The Company's business strategy is to market the N-Viro Process, which produces an "exceptional quality" sludge product as defined in the Section 503 Sludge Regulations under the Clean Water Act of 1987, with multiple commercial uses. To date, the Company's revenues primarily have been derived from the licensing of the N-Viro Process to treat and recycle wastewater sludge generated by municipal wastewater treatment plants and from the sale to licensees of the alkaline admixture used in the N-Viro Process. 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. Total revenues were $1,175,000 for the quarter ended September 30, 2001 compared to $1,083,000 for the same period of 2000. The net increase in revenue is due primarily to an increase in revenue from the sale of equipment. The Company's cost of revenues increased to $748,000 in the quarter ended September 30, 2001 from $600,000 for the same period in 2000. The gross profit percentage decreased to 36% from 45% for the quarters ended September 30, 2001 and 2000. This decrease in gross profit percentage is primarily due to the increased share in sales of equipment and, equally, to the decreased share in site license fees. These revenues have a lower and higher, respectively, gross profit margin associated with them than other types of revenue. Operating expenses, primarily patent litigation costs, significantly increased for the comparative period, while nonoperating expenses increased slightly. These changes collectively resulted in a net loss of approximately $357,000 for the quarter ended September 30, 2001 compared to a net loss of $161,000 for the quarter ended September 30, 2000. COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2001 WITH THREE MONTHS ENDED SEPTEMBER 30, 2000 Overall revenue increased $92,000, or 8%, to $1,175,000 for the quarter ended September 30, 2001 from $1,083,000 for the quarter ended September 30, 2000. The net increase in revenue was due primarily to the following: -11- a) Alkaline admixture revenue decreased $16,000 from the same period ended in 2000; b) The Company's processing revenue, including facility management revenue, showed a net increase of $40,000 over the same period ended in 2000; c) Revenue from the sale of equipment is a new source of revenue for the Company in 2001 and earned the Company $144,000 in the quarter ended September 30, 2001; d) Testing and miscellaneous revenues increased $14,000 from the same period ended in 2000; e) Licensing of the N-Viro Process, including territory fees, earned the Company $28,000 for the period, a decrease of $124,000 from the same period in 2000; and, f) Research and development revenue increased $34,000 from the same period ended in 2000. Gross profit decreased $56,000, or 12%, to $427,000 for the three months ended September 30, 2001 from $483,000 for the three months ended September 30, 2000. This decrease in gross profit was primarily due to the increased revenue from sales of equipment which has a higher associated cost of revenue than other types of revenue and, equally, to the decreased revenue from licensing which has a lower associated cost of revenue. The gross profit margin decreased to 36% from 45% for the same period ended in 2000 for the reasons stated in the previous sentence. Operating expenses increased $136,000, or 24%, to $708,000 for the three months ended September 30, 2001 from $572,000 for the three months ended September 30, 2000. The increase was primarily due to an increase in patent litigation costs of $152,000. As a result of the foregoing factors, the Company recorded an operating loss of $281,000 for the three months ended September 30, 2001 compared to an operating loss of $88,000 for the three months ended September 30, 2000. Nonoperating expense increased by $3,000 to a net expense of $76,000 for the three months ended September 30, 2001 from a net expense of $73,000 for the three months ended September 30, 2000. The increase was primarily due to an increase in net interest expense of $19,000, offset by a decrease in the loss of $17,000 in the equity of a joint venture, from a loss of $68,000 in 2000 to a loss of $51,000 in 2001. The net interest expense increase of $19,000 is comprised of an increase in interest income from $1,000 for the three months ended September 30, 2000 to $16,000 in the three months ended September 30, 2001, and an increase in interest expense from $6,000 for the three months ended September 30, 2000 to $40,000 for the three months ended September 30, 2001. For the three months ended September 30, 2001 and 2000, the Company has not fully recognized the tax benefit of the losses incurred in prior periods. Accordingly, the effective tax rate for each period was zero. COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2001 WITH NINE MONTHS ENDED SEPTEMBER 30, 2000 Overall revenue increased $151,000, or 5%, to $3,453,000 for the nine months ended September 30, 2001 from $3,303,000 for the nine months ended September 30, 2000. The net increase in revenue was due primarily to the following: -12- a) Alkaline admixture revenue increased $142,000 from the same period ended in 2000; b) The Company's processing revenue, including facility management revenue, showed a net increase of $186,000 over the same period ended in 2000; c) Revenue from the sale of equipment is a new source of revenue for the Company in 2001 and earned the Company $144,000 in the nine month period ended September 30, 2001; d) Testing and miscellaneous revenues decreased $1,000 from the same period ended in 2000; e) Licensing of the N-Viro Process, including territory fees, earned the Company $28,000 for the period, a decrease of $277,000 from the same period in 2000; and, f) Research and development revenue decreased $43,000 from the same period ended in 2000. Gross profit decreased $183,000, or 12%, to $1,309,000 for the nine months ended September 30, 2001 from $1,492,000 for the nine months ended September 30, 2000. This decrease in gross profit was primarily due to the increased revenue from facility management, alkaline admixture and equipment sale revenues, all of which have a higher associated cost of revenue than other types of revenue and, to the decreased revenue from licensing, which has a lower associated cost of revenue. The gross profit margin decreased to 38% from 45% for the same period ended in 2000 for the reasons stated in the previous sentence. Operating expenses increased $339,000, or 21%, to $1,957,000 for the nine months ended September 30, 2001 from $1,618,000 for the nine months ended September 30, 2000. The increase was primarily due to an increase in patent litigation costs of $332,000. As a result of the foregoing factors, the Company recorded an operating loss of $647,000 for the nine months ended September 30, 2001 compared to an operating loss of $126,000 for the nine months ended September 30, 2000. Nonoperating income (expense) decreased by $275,000 to a net expense of $132,000 for the nine months ended September 30, 2001 from income of $142,000 for the nine months ended September 30, 2000. The decrease was primarily due to the recognition in the first nine months of 2000 for the recovery of $275,000 of a bad debt previously written off. The bad debt previously written off was a note receivable from a Canadian licensee, which was fully reserved for in the allowance for bad debts. An increase in net interest expense of $15,000 is comprised of an increase in interest income from $13,000 for the nine months ended September 30, 2000 to $48,000 in the nine months ended September 30, 2001, and an increase in interest expense from $16,000 for the nine months ended September 30, 2000 to $66,000 for the nine months ended September 30, 2001. For the nine months ended September 30, 2001 and 2000, the Company has not fully recognized the tax benefit of the losses incurred in prior periods. Accordingly, the effective tax rate for each period was zero. -13- LIQUIDITY AND CAPITAL RESOURCES The Company had a working capital deficit of $506,000 at September 30, 2001, compared to a working capital surplus of $311,000 at December 31, 2000, a decrease of $817,000. Current assets at September 30, 2001 included cash and investments of $607,000 (including restricted cash of $400,000), which is an increase of $60,000 from December 31, 2000. The decrease in working capital was principally due to the operating loss for the nine months ended September 30, 2001. The Company maintains a $400,000 certificate of deposit with a bank and held as collateral on the Company's working capital line of credit. In 1997 the Company obtained a working capital line of credit of $200,000 and in the third quarter of 1998 the line was increased to $500,000. This debt was collateralized by a certificate of deposit with the lender, accounts receivable, inventories and equipment, assignment of the Contract between the City of Toledo and the Company, was due on demand, and, required the Company to maintain certain financial covenants. In April 2000, the Company renewed its agreement for a line of credit of $1 million, and in May 2001 this renewal was agreed to at $750,000. This agreement is secured by a certificate of deposit with the lender of $400,000, with all other terms similar as agreed to in 1998. Borrowings up to $400,000 bear interest at prime minus .5%, and borrowings above $400,000 bear interest at prime plus 1%. The Company was in violation of a financial covenant contained in the agreement, concerning the maintenance of positive net income for the fiscal year ended December 31, 2000. The Company's bank waived this violation in light of the Company's net loss for the year ended December 31, 2000. The balance owed on the line-of-credit at September 30, 2001 was $380,000. The Company is negotiating with the states of North and South Carolina resolution of certain contingent liabilities related to sales tax issues. (See discussion under the heading "Recent Developments" in Item 5 of this Form 10Q.) The Company expects to satisfy these contingent liabilities through securing extended payment terms, obtaining indemnity from insurance or third parties or extending its line of credit. 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. 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. -14- PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS During 1994, the Company entered into an agreement to reacquire territory rights from a former agent, Hydropress Environmental Services, Inc. ("Hydropress"), in exchange for 66,250 (as adjusted) shares of unregistered common stock. This agreement stated that if Hydropress elected to sell these shares, the Company had guaranteed a value of $6 per common share. On October 1, 1998, 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 from its obligation to guarantee Hydropress' receipt of proceeds of at least $6.00 per share from the sale of the Company stock. This was consistent with the position taken in the Company's public filings under and pursuant to the terms of the Securities Exchange Act of 1934 and the rules and regulations promulgated thereunder, as well as the Company's audited financial statements. In late September of 2000, representatives of Hydropress informed the Company that Hydropress maintains that the letter suspended for a fixed period of time the $6.00 per share guarantee of proceeds, but that following that period of time, the guarantee remained in effect. 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 $238,000 and $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. -15- 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 allegedly negligently misrepresented the results to be expected from a dryer Hydropress purchased from a third party. Hydropress' third claim is that the Company breached the covenant of good faith and fair dealing by making the alleged misrepresentations. Hydropress' fourth 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 Court bifurcated discovery. It initially allowed discovery only on the issues raised in Hydropress' Complaint, which were the stock guarantee issues. That discovery has been completed. N-Viro has filed a motion to dismiss Hydropress' counterclaims based on numerous grounds. Following full briefing, the Court scheduled and heard oral argument on the motion to dismiss. Based on the arguments, the Court ordered that discovery be limited to two issues arising out of a prior settlement agreement: (1) whether Hydropress released all its claims in the prior settlement agreement, and (2) whether Hydropress has any legal basis for having withheld royalties from N-Viro. Once discovery on those two issues is finished, the parties shall be entitled to submit summary judgment motions on the two issues only. The parties are now in settlement discussions and are not actively litigating the case. On October 30, 2001, the Company settled its lawsuit with RDP Technologies, Inc. ("RDP"). RDP filed the lawsuit in Delaware federal court in August 2000, asserting claims for tortious interference with prospective business relations and unfair competition, and later adding a claim for a declaratory judgment regarding infringement, validity and enforceability of two of the Company's patents. The Company denied all of RDP's claims. As a result of the settlement, RDP's claims were dismissed with prejudice, and each party agreed to bear its own costs and attorneys fees. The Consent Judgment is included in this filing as Exhibit 99. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None -16- ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. RECENT DEVELOPMENTS In August of 2001, officials of the North Carolina Department of Revenue (the "Department") contacted the Company and indicated that the Company was under investigation for failing to file sales tax returns in the state of North Carolina during the period from December, 1994, to the present. James McHugh, the Company's chief financial officer, acknowledged to Department officials that during that period of time, the Company had collected approximately $80,000 in sales taxes from certain customers but had not collected sales tax from other customers in North Carolina. Mr. McHugh also informed Department officials that he had responsibility for filing the returns, had failed to do so and had never called the matter to management's attention, although he believed the sales on which the tax was collected were exempt from sales tax. Shortly after interviewing Mr. McHugh, the Department contacted the Company and informed it that Mr. McHugh was also under investigation on an individual basis because of his status as officer of the Company during the period in which the Company had failed to file sales tax returns. Mr. McHugh requested and the Company, with reservation of rights to seek reimbursement from Mr. McHugh, has advanced fees for his legal expenses in defending against the claims made by the Department. These payments were made by the Company in conformity with the indemnification requirements under the Company's Bylaws and applicable provisions of Delaware law. After consulting with legal counsel, the Company, on its own and Mr. McHugh's behalf, submitted a memorandum to the Department arguing that no sales tax was due by the Company because the sales at issue were exempt from sales tax. The Department disagreed and informed the Company and Mr. McHugh that they planned on pursuing both civil and criminal cases against both the Company and Mr. McHugh. The Company is currently seeking to negotiate resolution of the matter with North Carolina. The Company has voluntarily approached state tax authorities in South Carolina and acknowledged failing to file sales tax returns within that state. The Company estimates that it has collected approximately $160,000 in sales tax from customers in South Carolina that has not been remitted to South Carolina tax authorities, but again the Company believes that the sales at issue are exempt from sales tax. The Company has retained counsel in South Carolina to assist it in negotiating a settlement of this matter. Throughout the periods from 1994 to the present, the Company's financial statements have included a current liability equal to the amount of sales tax collected by the Company from customers in North Carolina and South Carolina but not remitted to taxing authorities in each of those states, and the amount has been separately disclosed on an annual basis in the Notes to the Consolidated Financial Statements. The statements do not reflect contingent liability for fines or penalties. The Company plans to pay its obligations through earnings or by borrowing funds under its revolving credit facility from Fifth Third Bank. For a more detailed discussion of this issue, see the discussion under the heading "Liquidity and Capital Resources" on page 14 of this Form 10-Q. The Company has a directors and officers liability and company indemnification insurance policy through Gulf Insurance Group. The Company, with the assistance of legal counsel, has submitted -17- a request to Gulf Insurance Group for indemnification in connection with this matter in an attempt to recover amounts expended by the Company for legal fees, fines, penalties and interest. While the Company has made this claim, there can be no assurances that the Company will be successful in recovering some or all of its expenditures from Gulf Insurance Group. The Company has not collected sales tax in states other than North Carolina and South Carolina. Further, the Company believes it has no sales tax obligations with respect to the Company's sales in other states. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 99 Consent Judgment with RDP Technologies, Inc. (b) Reports on Form 8-K: None. -18- N-VIRO INTERNATIONAL CORPORATION Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. N-VIRO INTERNATIONAL CORPORATION Date: November 14, 2001 /s/ J. Patrick Nicholson -------------------- ------------------------------------------------ J. Patrick Nicholson Chairman and Chief Executive Officer (Principal Executive Officer) Date: November 14, 2001 /s/ James K. McHugh -------------------- ------------------------------------------------ James K. McHugh Chief Financial Officer, Secretary and Treasurer (Principal Financial & Accounting Officer) -19- EX-99 3 l90947aex99.txt EXHIBIT 99 Exhibit 99 IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF DELAWARE RDP TECHNOLOGIES, INC., ) ) Plaintiff, ) Civil Action No. 00-697-RRM ) v. ) ) N-VIRO INTERNATIONAL CORP., ) ) Defendant. ) ) - ----------------------------------- CONSENT JUDGMENT Upon motion of the parties in settlement of this action, and with their consent through counsel as indicated by the signatures attached hereto, and good reason being shown, IT IS HEREBY ORDERED, ADJUDGED, AND DECREED, as follows: 1. N-Viro International Corp. ("N-Viro") is hereby permanently enjoined from filing or pursing an action for infringement of U.S. Patent No. 4,781,842 ("the `842 patent") and/or U.S. Patent No. 4,902,431 ("the `431 patent") against either RDP Technologies, Inc. ("RDP") or any other person as a result of their involvement with the design, construction, ownership or operation of the planned wastewater treatment facilities that have been the subject of this action for Kalamazoo, Michigan, Lowell, Massachusetts, and Providence, Rhode Island. 2. N-Viro and its respective officers, agents, servants, employees, attorneys, and persons in active concert or participation with N-Viro are hereby restrained and permanently enjoined from -20- communicating in any manner to any prospective RDP customer, or any person providing services in connection with such prospective customer's use of RDP equipment, that using the equipment to practice the RDP EnVessel Pasteurization Process, with or without any drying of the sludge or any mixing of the sludge with a bulking agent, does or would infringe the `842 and/or `431 patents. a. The foregoing shall not inhibit in any way N-Viro's right or ability to bring an action for infringement of the `842 and/or `431 patents against any such prospective customer or person providing services. b. In the event that N-Viro wants to respond to any inquiry made by a third party as to N-Viro's position regarding infringement of the '842 and/or '431 patents, N-Viro's response shall be limited to the following: "Enclosed are copies of N-Viro Patents Nos. 4,781,842 and/or 4,902,431. N-Viro does not offer opinions on infringement by competitive processes and you should seek the advice of a patent lawyer." No other statements as to infringement shall be made by N-Viro in response to such an inquiry. 3. The Court will retain jurisdiction over the parties with respect to enforcement of, or resolution of any dispute arising from, this Consent Judgment. 4. All obligations and rights hereunder shall inure to the benefit of, and be binding upon, RDP and N-Viro, and their respective successors and assigns. 5. It being represented to the Court that the parties have settled all claims and demands made in this action, the Amended Complaint and Answer thereto are hereby dismissed with prejudice, no award of attorney fees is made herein, and each party shall pay its own costs. 6. All pending and unresolved motions are hereby denied without prejudice. Date: __________________ ____________________________ United States District Judge -21- AGREED and CONSENTED TO: ASHBY & GEDDES YOUNG CONAWAY STARGATT & TAYLOR, LLP - --------------------------------- ------------------------------- Steven J. Balick (I.D. #2114) Josy W. Ingersoll (I.D. #1088) Steven T. Margolin (I.D. #3110) Christian D. Wright (I.D. #3554) 222 Delaware Avenue - 17th Floor The Brandywine Building Wilmington, DE 19899 1000 West Street - 17th Floor (302) 654-1888 Wilmington, DE 19899 Attorneys for Plaintiff (302) 571-6672 Attorneys for Defendant Of Counsel: CALFEE, HALTER & GRISWOLD LLP KENYON & KENYON John T. Wiedemann (OH #0065844) Edward T. Colbert 1400 McDonald Investment Center Mark M. Supko 800 Superior Avenue 1500 K Street, N.W. Cleveland, OH 44114 Washington, D.C. 20005 -22- -----END PRIVACY-ENHANCED MESSAGE-----