-----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, Sfa2+WxLguqs9ttd/k3YohihlCryarmTu9pF0hB87Vtq5YqhIfKLGr9mz9Dc0Ijf zenzkMe4nZviJikxOW+Wkg== 0000950152-00-002746.txt : 20000410 0000950152-00-002746.hdr.sgml : 20000410 ACCESSION NUMBER: 0000950152-00-002746 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000407 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-K SEC ACT: SEC FILE NUMBER: 000-21802 FILM NUMBER: 595974 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-K 1 N-VIRO INTERNATIONAL CORPORATION 1 ================================================================================ 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, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ____________ COMMISSION FILE NUMBER: 0-21802 ---------------- N-VIRO INTERNATIONAL CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 34-1741211 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 3450 W. CENTRAL AVENUE, SUITE 328 TOLEDO, OHIO 43606 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (419) 535-6374 ---------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock, par value $.01 per share Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for at least the past 90 days. Yes X No ____ 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 24, 2000, was approximately $8,755,000. The number of shares of Common Stock of the registrant outstanding as of March 24, 2000, was 2,632,483. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's definitive proxy statement for the annual shareholders' meeting to be held May 11, 2000 are incorporated by reference into Part III. 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. [ ] ================================================================================ 2 INDEX
PAGE ---- 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 11 Holders PART II Item 5. Market for Registrant's Common Equity and 12 Related Stockholder Matters Item 6. Selected Financial Data 12 Item 7. Management's Discussion and Analysis of 13 Financial Condition and Results of Operations Item 7A. Quantitative and Qualitative Disclosures 19 About Market Risk Item 8. Financial Statements and Supplementary Data 20 Item 9. Changes in and Disagreements with Accountants 21 on Accounting and Financial Disclosure PART III Item 10. Directors and Executive Officers of the 21 Registrant Item 11. Executive Compensation 21 Item 12. Security Ownership of Certain Beneficial Owners 21 and Management Item 13. Certain Relationships and Related Transactions 21 PART IV Item 14. Exhibits, Financial Statement Schedules, and 22 Reports on Form 8-K
1 3 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 Section 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 totalling $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 Section 503 Sludge Regulations under the Clean Water Act of 1987 (the "Section 503 Sludge Regulations"), 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 75 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 2 4 over 140,000 dry tons per year. There are several licensees not currently operating, including both international and domestic contractors or public generators, who are developing or designing site specific N-Viro facilities. Since 1995, the Company has marketed licenses for the use of the N-Viro Process through its own sales and marketing force in the United States in all 50 states and the District of Columbia and internationally throughout the world. In certain other parts of the world, the Company licenses the N-Viro Process through agents (the "Agents"). Typically, the agreements with the Agents provide for the Company to receive a portion of the up-front license fees and ongoing royalty fees paid by the licensees and a portion of the proceeds from the distribution and resale of alkaline admixture and the sale of N-Viro Soil(TM). Agents have total responsibility and control over the marketing and contracts for N-Viro technology subject only to license models or minimum agreements with the Company. The sales representative network is the key component of the Company's domestic sales strategy. The 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 35% of the Company's total revenue. The Company processes Toledo's bio-solids 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 twelfth 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 Sludge Regulations. 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. Initially, the Company required licensees to buy all alkaline admixtures from the Company. This requirement has been eliminated by increasing the royalty or professional services revenue to offset the lost revenue from alkaline sales. 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. 3 5 RESEARCH AND DEVELOPMENT Research and development on the N-Viro Process is performed primarily by BioCheck Laboratories, Inc. ("BioCheck"), formerly a wholly-owned subsidiary of the Company. In 1999 the Company spent approximately $39,000 on testing of the process, and considers its relationship with BioCheck to be satisfactory. In 1999 the Company spent approximately $185,000 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 and his staff at The Ohio State University pursuant to a consulting arrangement with the Company. Through June 30, 1999, Dr. Logan acted as an independent consultant to the Company on a part-time basis and is a director of the Company. Effective July 1, 1999, Dr. Logan is 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 Laboratories, have contracts with the Company, protecting its rights. In addition, the United States Department of Agriculture (the "USDA") and the Ohio Coal Development Authority (the "OCDA") have provided substantial grants to N-Viro International, Rodale Institute, and Compost Council (USDA), and to BioCheck (OCDA), to demonstrate the effectiveness of compost and bio-mineral technology on manure (USDA) and ash utilization or bio-mineral processes (OCDA). These grants have funded approximately $323,000 in 1999 and $141,000 in 1998. The Company's initial pasteurization patents have over eight years of patent life remaining. Newer technologies for accelerated stabilization and use of carbon dioxide have a longer life cycle. Three patents, including patents regarding manure and pine technologies, were applied for in 1999 and are currently pending. 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. The Company's "BioBlend", which uses N-Viro Soil as a reagent to accelerate and deodorize yard waste composting, is expected to be fully integrated into Middlesex County operations in 2000. In late 1997, N-Viro was awarded a grant from USDA to build a pilot plant at Beltsville, Maryland, to demonstrate the ability of both old and new N-Viro technology to disinfect animal manure pathogens, fixate their metals, reduce their odors and most importantly, immobilize soluble nutrients to prevent water pollution. The facility was "on-line" in the summer of 1998. In August of 1999, this grant was extended through December, 2000 for a total commitment by the USDA of approximately $642,000. In early 1999, N-Viro was awarded a grant for approximately $73,000 from the State of Maryland Department of Business and Economic Development. The funds will be used to conduct research on the utilization and marketability of alkaline treated animal manure for reclamation of acid sulfate soils in the State of Maryland. ORGANIZATION Domestic Sales and Marketing and Management of the Toledo, Ohio facility is directed by the Company's Vice-President of Sales and Marketing and assisted by sales and marketing personnel who coordinate their actions within the network of manufacturers representatives. Staff personnel are responsible for the sales and promotions of the N-Viro Process in assigned states. International Sales and Marketing is directed by the Company's Chief Executive Officer. 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: 4 6 - -------------------------------------------------------------------------------- The Agents - -------------------------------------------------------------------------------- Agent Territory - -------------------------------------- ------------------------------------ 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 1998, the Company acquired the territorial rights from Synagro Technologies, Inc., for the states of Arizona, Arkansas, Louisiana, New Mexico, Oklahoma and Texas. This territory was acquired by a termination of the existing agency agreement and concurrently agreeing to a new license agreement. 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 an exclusive supply of alkaline materials with a competitive market cap. In their respective territories, the Agents market licenses for the N-Viro Process, serve as distributors of alkaline admixture, oversee quality control of the N-Viro Process and N-Viro Soil, enforce the terms of the license agreements with licensees and market N-Viro Soil (or assist licensees in marketing N-Viro Soil). In general, the Agents have paid one-time, up-front fees to the Company for the rights to market or use the N-Viro Process in their respective territories. Typically, the agreements with the Agents provide for the Company to receive a portion of the up-front license fees and ongoing royalty fees paid by the licensees and a portion of the proceeds from the distribution and resale of alkaline admixture and the sale of N-Viro Soil. INDUSTRY OVERVIEW Sludge Management Practices and the 40 CFR part 503 Sludge Regulations. Historically, sludge management has involved either disposal, principally by landfilling, incineration, ocean dumping and surface disposal, or land application for beneficial use. On February 19, 1993, the EPA published the 40 CFR part 503 Sludge Regulations ("part 503 Regs") under the Clean Water Act of 1987 implementing the EPA's "exceptional quality" sludge program. The part 503 Regs establish sludge use and disposal standards applicable to approximately 35,000 publicly and privately-owned wastewater treatment plants in the United States, including primary publicly-owned treatment works ("POTWs"), secondary and advanced treatment POTWs, privately-owned treatment works, federally-owned treatment works and domestic septage haulers. The EPA currently estimates that the 13,000 to 15,000 POTWs generate 110 to 150 million wet metric tons of sewage sludge per year. Under the part 503 Regs, sludge may be disposed of in municipal solid waste landfills approved under Subtitle D of the Resource Conservation and Recovery Act ("RCRA"), or may be surface disposed, incinerated or land applied for beneficial use in accordance with the requirements established by the part 503 Regs. Disposal. Landfilling, incineration and ocean dumping have traditionally provided inexpensive, reliable methods of sludge disposal. Ocean dumping was banned in the United States in December 1992. Under the part 503 Regs, landfilling and incineration remain permissible sludge management alternatives but have become subject to more stringent regulatory standards. The vast majority of states have some site restrictions or other management practices governing the disposal of sludge in landfills. Amendments to the Clean Air Act governing incineration and disposal of residual ash also impose stricter air emission standards for incineration in general, and the part 503 Regs impose additional specific pollutant limits for sludges to be incinerated and for the resulting air emissions. Surface disposal of sludge involves the placement of sludge on the land at a dedicated site for disposal purposes. The part 503 Regs subject surface disposal to increased regulation by requiring, among other things, run-off and leachate collection systems, methane monitoring systems and monitoring of, and limits on, pollutant levels. In addition, sludge placed in a surface disposal site is required to meet certain standards with respect to pathogen levels relating to coliform or salmonella bacteria counts ("Class B" pathogen levels), levels of various pollutants, including metals, and elimination of attractiveness to pests, such as insects and rodents. 5 7 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 levels; for example, permitted Class B fecal coliform levels are 2,000 times higher than Class A levels. "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 1999, 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 RCRA, as amended by the Hazardous and Solid Waste Amendments of 1984 ("HSWA"), the Federal Water Pollution Control Act of 1972 (the "Clean Water Act"), the Clean Air Act of 1970, as amended (the "Clean Air Act"), 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. 6 8 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 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. Although N-Viro Soil exceeds the current federal standards imposed by the EPA for unrestricted agricultural use and land application, state and local authorities are authorized under the Clean Water Act to impose more stringent requirements than those promulgated by the EPA. Most states require permits for land application of sludge and sludge based products and several states, such as Rhode Island, Massachusetts and New Jersey, currently have regulations that impose more stringent numerical concentration limits for certain pollutants than the federal rules. The Resource Conservation and Recovery Act. RCRA regulates all phases of hazardous waste generation, management and disposal. A waste is subject to regulation as a hazardous waste under RCRA if it is a solid waste specifically listed as a hazardous waste by the EPA or exhibits a defined hazardous characteristic. Although domestic sewage and mixtures of domestic sewage and other wastes that pass through a sewer system to a POTW are specifically exempted from the definition of solid waste, once treated by the POTW, the sewage sludge is considered a solid waste. However, such sewage sludge is not considered a hazardous waste unless it exhibits a hazardous characteristic. While it is possible that sewage sludge could exhibit the toxicity characteristic, the Company believes that regular tests for hazardous constituent levels provide assurance that the sewage sludge used in the N-Viro Process does not exhibit the toxicity characteristic. The alkaline admixtures used in the N-Viro Process are specifically exempted from RCRA regulation by the so-called "Bevill Amendments" to RCRA. Although the benefit of the exemption provided by the "Bevill Amendments" can be lost if the alkaline admixture is derived from or mixed with a hazardous waste, the Company has adopted and implemented policies and operational controls, including review of operating permits held by alkaline admixture suppliers and periodic testing of such admixtures, to ensure that the alkaline admixtures used in the N-Viro Process by itself and its licensees are not derived from or mixed with hazardous wastes. Although neither the alkaline admixture nor wastewater sludges used in the N-Viro Process are regulated as hazardous waste under RCRA, states may impose restrictions that are more stringent than federal regulations. Accordingly, the raw materials used in the N-Viro Process may be regulated under some state hazardous waste laws as "special wastes," in which case specific storage and record keeping requirements may apply. The Clean Air Act. The Clean Air Act empowers the EPA to establish and enforce ambient air quality standards and limits of emissions of pollutants from specific facilities. The Clean Air Act Amendments of 1990 (the "Clean Air Act Amendments") impose stringent requirements upon owners and operators of facilities that discharge emissions into the air. 7 9 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 N-Viro facilities will be required to undertake any further measures in order to comply with the Clean Air Act or the existing Clean Air Act Amendments. Ammonia odors of varying strength typically result from sludge treatment processes, including the N-Viro Process. A number of N-Viro facilities have installed ammonia "scrubbers" to reduce ammonia odors produced to varying degrees by the N-Viro Process. The installation of ammonia "scrubbers" is not required by the Clean Air Act or the existing Clean Air Amendments. However, the Company or its licensees may be required under the Occupational Safety and Health Act and state laws regulating nuisances, odors and air toxic emissions to install odor control technology to limit ammonia emissions and odors produced during the N-Viro Process, particularly at N-Viro facilities located near populated residential areas. The amount of ammonia gas produced is dependent upon the type of sludge being treated and the amount and type of alkaline admixture being used. The Comprehensive Environmental Response, Compensation and Liability Act of 1980. CERCLA imposes strict, joint and several liability upon owners and operators of facilities where a release of hazardous substances has occurred, upon parties who generated hazardous substances into the environment that were released at such facilities and upon parties who arranged for the transportation of hazardous substances to such facilities. The Company believes that the N-Viro Process poses little risk of releasing hazardous substances into the environment that presently could result in liability under CERCLA. Although the sewage sludge and alkaline waste products could contain hazardous substances (as defined under CERCLA), the Company has developed plans to manage the risk of CERCLA liability, including training of operators, regular testing of the sludge and the alkaline admixture to be used in the N-Viro Process and reviewing incineration and other permits held by the entities from whom alkaline admixtures are obtained. Other Environmental Laws. The Pollution Prevention Act of 1990 establishes pollution prevention as a national objective, naming it a primary goal wherever feasible. The act states that where pollution cannot be prevented, materials should be recycled in an environmentally safe manner. The Company believes that the N-Viro Process contributes to pollution prevention by providing an alternative to disposal. The alkaline admixtures used in the N-Viro Process may be required to be registered as pesticides under FIFRA because of their effect on pathogens in sludge. The EPA does not currently regulate commercial lime or any alkaline by-products under FIFRA and has not attempted to assert such jurisdiction to date. In the event the alkaline by-products are required to be registered under FIFRA, the Company would likely be required to submit certain data as part of the registration process and might be subject to further federal regulation. State Regulations. State regulations typically require an N-Viro facility to obtain a permit for the sale of N-Viro Soil for agricultural use, and may require a site-specific permit by the user of N-Viro Soil. In addition, in some jurisdictions, state and/or local authorities have imposed permit requirements for, or have prohibited, the land application or agricultural use of sludge products, including "exceptional quality" sludge products. There can be no assurance that any such permits will be issued or that any further attempts to require permits for, or to prohibit, the land application or agricultural use of sludge products will not be successful. In addition, many states enforce landfilling restrictions for non-hazardous sludge. These regulations typically require a permit to sell or use sludge products as landfill cover material. There can be no assurance that N-Viro facilities or landfill operators will be able to obtain required permits. Environmental impact studies may be required in connection with the development of future N-Viro facilities. Such studies are generally time consuming and may create delays in the construction process. In addition, unfavorable conclusions reached in connection with such a study could result in termination of, or expensive alterations to, the N-Viro facility being developed. EMPLOYEES As of December 31, 1999, the Company had 17 employees in the following capacities: 7 engaged in sales and marketing; 5 in finance and administration; and 5 in operations. The Company considers its relationships with its employees to be satisfactory. 8 10 The Company is a party to a collective bargaining agreement covering certain employees of National N-Viro Tech, Inc., a wholly-owned subsidiary of the Company. The employees that are covered by the collective bargaining 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, Chauffers, Warehouseman and Helpers Local Union No. 20, and the Company considers its relationships with the organization to be satisfactory. At present, the 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, 1999, 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 ten largest N-Viro facilities through December 31, 1999. --------------------------------------------------------------------------- Facility Location proximate Sludge Processing Volume (dry tons/year) --------------------------------------------------------------------------- Middlesex County, New Jersey 56,600 --------------------------------------------------------------------------- Phillipsburg, New Jersey 25,000 --------------------------------------------------------------------------- Syracuse, New York 10,200 --------------------------------------------------------------------------- Wilmington, Delaware 9,200 --------------------------------------------------------------------------- Toledo, Ohio 8,500 --------------------------------------------------------------------------- Ft. Meade/Volusia Cty., Florida 6,100 --------------------------------------------------------------------------- Greenville, South Carolina 4,000 --------------------------------------------------------------------------- Anderson, Indiana 2,500 --------------------------------------------------------------------------- Minneapolis, Minnesota 2,000 --------------------------------------------------------------------------- Bossier City, Lousiana 1,900 --------------------------------------------------------------------------- All of the existing N-Viro facilities are owned and operated by third parties, with the exception of the Toledo, Ohio facility which has been operated by the Company on a contract management basis since January 1990 and the Fort Meade, Florida facility which has been owned jointly by the Company and VFL Technologies, Ltd. since January 1996, after start-up in February 1995. 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. Our operating results can experience quarterly or annual variations due to business cycles, seasonality and other factors. The market price for our common stock may decrease if our operating results do not meet the expectations of the market. Currently, approximately 35% of the Company's revenue is from management fee operations, 62% from domestic licenses and agreements, and the remaining 3% from international sources. 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 our 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. We compete against companies in a highly competitive market and we have fewer resources than most of those companies. Our business competes within and outside the United States principally on the basis of the following factors:
- ------------------------------------------------------------------------------------------------- SEGMENT Mgt. Fee Operations Non-Mgt. Fee Non-Mgt. Fee Operations- U.S. Operations- International - ------------------------------------------------------------------------------------------------- COMPETITIVE FACTORS Price Price Price - ------------------------------------------------------------------------------------------------- Reliability Reputation Product quality and specifications - ------------------------------------------------------------------------------------------------- Product quality and Product quality and Custom design specifications specifications - ------------------------------------------------------------------------------------------------- Responsiveness to Technical support Equipment financing customer assistance - ------------------------------------------------------------------------------------------------- Technical support Custom design Technical support - ------------------------------------------------------------------------------------------------- Reputation Equipment financing Reputation assistance - -------------------------------------------------------------------------------------------------
Competitive pressures, including those described above, and other factors could cause us to lose market share or could result in decreases in prices, either of which could have a material adverse effect on our financial position and results of operations. RISKS OF DOING BUSINESS IN OTHER COUNTRIES. We conduct business in markets outside the United States, and we expect 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 our outlook for potential revenue there. We 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 liability partnership named Florida N-Viro, LLP ("Florida N-Viro"), the Fort Meade, Florida facility, beginning January 1, 1996. Under this agreement, the Company would contribute the property, plant 10 12 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%. Also contained in the Agreement was the issuance of a $250,000 Promissory Note to the Company for an existing trade receivable due the Company from VFL Technologies ("VFL"), the other partner in Florida N-Viro Management, LLC. In October, 1998, the Promissory Note was cancelled, current debts and receivables between the Company, VFL and Florida N-Viro were offset and netted to a new Promissory Note for $100,000. 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 $46,500 for MCO's portion of royalties through the year ending December 31, 1999. 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., Plaintiff v. N-Viro International Corp., Defendant, bearing Case 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 which concerned issues that arose out of the subject license agreement. Though the Complaint was filed with the Court, there was a failure of 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 matter captioned Hydropress Environmental Services, Inc., Plaintiff v. N-Viro International Corp., Defendant, Case No. 984573 then pending in the United States District Court for the District of New Jersey; 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 Company stock that had been issued in connection with the 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 Settlement Agreement. On February 25, 2000, the Company filed with the United States District Court, Northern District of Ohio, Eastern Division, a Complaint for Patent Infringement and Jury Demand against the City of Warren, Ohio. The Company believes that the City of Warren has directly and willfully infringed on patents the Company owns, and is seeking judgements, an injunction and a recovery of damages asserted. To date the Company has not received a response from the City of Warren. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 11 13 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION The Company's Common Stock is listed in the Nasdaq Small Cap Market under the symbol "NVIC". The price range of the Common Stock in the Market since January 1, 1998, was as follows: - -------------------------------------------------------------------------------- Quarter High Low - -------------------------------------------------------------------------------- First 1998 2 & 1/2 1 7/8 - -------------------------------------------------------------------------------- Second 1998 3 & 1/16 2 - -------------------------------------------------------------------------------- Third 1998 3 & 1/2 1 & 7/8 - -------------------------------------------------------------------------------- Fourth 1998 2 & 3/8 1 & 7/32 - -------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------- The Company's stock price closed at $4.5625 per share on March 24, 2000. HOLDERS As of March 24, 2000, the number of holders of record of the Company's Common Stock was approximately 1,450. DIVIDENDS The Company has never paid dividends with respect to its Common Stock. UNREGISTERED SALES OF SECURITIES In March 1999 the Company reached an agreement with the Cooke Family Trust to issue 100,000 shares of Common Stock. See Notes to the Financial Statements contained in Item 8 hereof. 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, 1995, 1996, 1997, 1998 and 1999; and the consolidated balance sheet data set forth below as of December 31, 1995, 1996, 1997, 1998 and 1999 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, 1995, 1996, 1997 and 12 14 1998, and Hausser + Taylor, LLP, independent auditors for the year ended December 31, 1999. In the opinion of management, the financial data presented below reflect all adjustments (which are of a normal recurring nature) necessary to present fairly the Company's financial position and results of operations. The data presented below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Financial Statements and Supplementary Data appearing elsewhere in this Form 10-K. STATEMENT OF OPERATIONS DATA (IN THOUSANDS, EXCEPT PER SHARE DATA):
- ------------------------------------------------------------------------------------------------------- 12/31/99 12/31/98 12/31/97 12/31/96 12/31/95 - ------------------------------------------------------------------------------------------------------- Revenues $4,749 $3,929 $4,053 $3,624 $5,214 - ------------------------------------------------------------------------------------------------------- Net income (loss) 471 (373) 534 (193) (1,815) - ------------------------------------------------------------------------------------------------------- Net income (loss) per share (1) $0.18 $(0.15) $0.23 $(0.09) $(0.89) - -------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA (IN THOUSANDS):
- ------------------------------------------------------------------------------------------------------ 12/31/99 12/31/98 12/31/97 12/31/96 12/31/95 - ------------------------------------------------------------------------------------------------------ Total assets $4,772 $3,783 $4,423 $4,167 $5,062 - ------------------------------------------------------------------------------------------------------ Notes payable $352 $161 $278 $1,188 $1,540 - ------------------------------------------------------------------------------------------------------ Shareholder Advance $49 $47 n/a $197 n/a - ------------------------------------------------------------------------------------------------------
(1) Per share amounts have been restated for a one-for-four reverse stock split effective October 31, 1995. 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) license and territory, (ii) facility management and sludge processing, (iii) alkaline admixture, (iv) royalty and (v) other revenues:
FOR THE YEAR ENDED DECEMBER 31, - ------------------------------------------------------------------------------------------------------------- 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------- Facility management and sludge processing 33.8% 36.0% 33.6% - ------------------------------------------------------------------------------------------------------------- Royalty 13.9% 16.4% 17.5% - ------------------------------------------------------------------------------------------------------------- License and territory fees 16.0% 11.0% 10.6% - ------------------------------------------------------------------------------------------------------------- Alkaline admixture 26.2% 29.6% 34.3% - ------------------------------------------------------------------------------------------------------------- Other 10.1% 7.0% 4.0% - ------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------- Totals 100.0% 100.0% 100.0% - -------------------------------------------------------------------------------------------------------------
Facility management and sludge processing revenues are recognized under contracts where the Company itself utilizes the N-Viro Process to treat sludge, either pursuant to a fixed price contract or based on volumes of sludge processed. Royalty revenues 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 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. The Company's policy is to record fully revenues payable pursuant to agency and license agreements when the Company has fulfilled substantially all of 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 13 15 Company has fulfilled substantially all of its obligations under the relevant contract. Alkaline admixture revenues represent ongoing payments from licensees arising from the sale and distribution of alkaline admixture by the Company and the Agents to N-Viro facilities. Other revenues represent: N-Viro Soil sales, research and development revenue, commissions earned on sales, rental of equipment to a licensee or agent, or testing income. N-Viro Soil sales are either through royalties from sales of N-Viro Soil sold by N-Viro facilities, or through sales of N-Viro Soil sold directly by the Company. In 1996 the Company redrafted its standard technology license to include all royalty and alkaline commission income in its on-going professional services fee. This change allows licensees to directly acquire all alkaline admixtures, providing such materials meet N-Viro specifications. Moreover, in 1996 the Company offered new and old licensees the opportunity to pre-pay on-going professional services fees on a one-time up-front basis. A present-value concept is used to determine the revenue on an up-front basis. Cost of goods sold expenses principally reflect sludge processing costs (principally labor and equipment), costs of acquiring and transporting alkaline admixture, and storage of N-Viro Soil. 14 16 RESULTS OF OPERATIONS The following tables set forth, for the periods presented, (i) certain items in the Combined Statement of Operations, (ii) the percentage change of each such item from period to period and (iii) each such item as a percentage of total revenues in each period presented.
--------------- ------------- --------------- ------------- --------------- (Dollars in thousands) Year Ended Period to Year Ended Period to Year Ended ---------------------- December 31, Period December 31, Period December 31, 1999 Percentage 1998 Percentage 1997 Change Change --------------- ------------- --------------- ------------- --------------- COMBINED STATEMENT OF OPERATIONS DATA: Revenues $ 4,750 20.9% $ 3,929 (3.0%) $ 4,052 Cost of revenues 2,245 19.2% 1,883 3.0% 1,829 --------------- --------------- --------------- Gross profit 2,505 22.4% 2,046 (8.0%) 2,223 Operating expenses 1,977 (17.2%) 2,386 24.1% 1,923 --------------- --------------- --------------- Operating income (loss) 528 * (340) * 300 Non-operating income (expense) (57) * (33) * (78) --------------- --------------- --------------- Income (loss) before income tax credits 471 * (373) * 222 Federal and state income tax credits 0 * 0 * (312) --------------- --------------- --------------- Net income (loss) $ 471 * $ (373) * $ 534 =============== =============== =============== PERCENTAGE OF REVENUES: Revenues 100.0% 100.0% 100.0% Cost of revenues 47.3 47.9 45.1 --------------- --------------- --------------- Gross profit 52.7 52.1 54.9 Operating expenses 41.6 60.7 47.5 --------------- --------------- --------------- Operating income (loss) 11.1 (8.6) 7.4 Non-operating income (expense) (1.2) (0.9) (1.9) --------------- --------------- --------------- Income (loss) before income tax credits 9.9 (9.5) 5.5 Federal and state income tax credits 0.0 0.0 (7.7) --------------- --------------- --------------- Net income (loss) 9.9% (9.5%) 13.2% =============== =============== ===============
* Period to period percentage change comparisons have only been calculated for positive numbers. 15 17 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 from $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 totalling $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 believes it is 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 Company, however, anticipates this operation to be profitable in 2000, as new contracts that were secured during 1999 and are generating net gross profit are recognized for a full year. In mid-1999, Florida N-Viro started up a new facility in Volusia County, Florida, and is currently planning on expanding the Ft. Meade, Florida operation to a new site. The audited financial statements of Florida N-Viro are included in this document after the Company's financial statements as Item 14(d), Financial Statements of Subsidiaries not Consolidated. COMPARISON OF YEAR ENDED DECEMBER 31, 1998 WITH YEAR ENDED DECEMBER 31, 1997 Revenues decreased $123,000, or 3%, to $3,929,000 for the year ended December 31, 1998 from $4,053,000 for the year ended December 31, 1997. The decrease in revenue was due to the following: revenues from one-time 16 18 domestic license or international territory fees increased $5,000, to $433,000 for 1998 from $428,000 for 1997; revenues from existing on-line facilities decreased $129,000 to $3,496,000 from $3,625,000 for 1997, as a result of a decrease in royalty revenue from an existing licensee which expired in March, 1998. In 1998 the Company received approximately $100,000 in gross royalty revenue from our European licensee, N-Viro Worldwide. Management is optimistic that revenue in late 1998 will increase due to the successful completion of a sludge processing project for a sub-licensee in the United Kingdom. Gross Profit decreased $178,000, or 8%, to $2,046,000 for the year ended December 31, 1998 from $2,223,000 for the year ended December 31, 1997. The decrease in gross profit was primarily due to a reduction of approximately $172,000 in ongoing royalty revenue from an existing licensee. This revenue had no associated cost of revenue, and the Company anticipates another $30,000 decrease from 1998 to 1999 as a sub-license expired on March 31, 1998. The overall gross profit margin decreased to 52% from 55% for the year ended December 31, 1997. This decrease in gross profit margin was primarily due to the decrease in royalty revenue from an existing licensee which expired in March, 1998, and an increase in storage and shipping costs for the Toledo, Ohio facility due to the unusually mild winter in early 1998. The gross profit margin from existing on-line facilities decreased to 47% from 51% for 1997. Operating expenses increased 24% to $2,386,000 for the year ended December 31, 1998 from $1,923,000 for the year ended December 31, 1997. In 1998, the Company increased its efforts to sell and promote the Company and its technology. The Company increased expenditures for salaries and employee benefits by $178,000, as well as increasing sales, promotion, administrative overhead and outside consultants expense totalling $176,000. Legal fees also increased by $60,000. Also in 1998, the Company increased its commitment to research and development efforts for $56,000, continuing its efforts to develop new and improve on existing technologies. Also contributing to the increase in 1998 was the Company recognizing an expense of approximately $73,000 relating to the 1994 acquisition of its Eastern U.S. agency held by Hydropress Environmental Services, Inc. See Notes to the Financial Statements contained in Item 8 hereof. These operating expenses were offset by a decrease in bad debt expense of $128,000, which was a receivable recorded by a subsidiary sold in 1996 and deemed uncollectible in 1997. The Company anticipates its increase in operating expense in 1998 will translate into increased sales of the N-Viro technology in the near future. Nonoperating income (expense) decreased by $45,000 to an expense of $33,000 for the year ended December 31, 1998 from an expense of $78,000 for the year ended December 31, 1997. The decrease was primarily interest income (expense), net increasing by approximately $65,000 due to the increase in interest income on an investment and a reduction in the level of outstanding draws on the working capital line of credit. The loss in the equity of joint venture increased by approximately $19,000 to a loss of $65,000 in 1998. 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 believes it is more likely than not that all of the recorded deferred tax asset will be realized. There was no additional income or expense recorded in 1998; 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 a net loss of $373,000 for the year ended December 31, 1998 compared to net income of $534,000 for the year ended December 31, 1997. In early 1996 the Company completed the transfer of its interest in the Fort Meade, Florida facility. The Company incurred a loss of approximately $65,000 on its share of Florida N-Viro LLP in 1998, an increased loss of $19,000 from 1997. The Company, however, anticipates this operation to be profitable in 1999, as new contracts have been secured during the last few months. 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 Effective in 1998 the Company reached agreements with trade creditors to eliminate, in the aggregate, $170,375 of the Company's short-term debt in exchange for the Company's issuance and delivery to such creditors, in the aggregate, 74,000 shares of Common Stock. One trade creditor is a current member of the Board of Directors of the Company, Bobby Carroll, and one was a member at the time of the agreement, Frederick Kurtz. The number of shares of Common Stock issued to, and the corresponding amount of short-term debt forgiven by each creditor is set forth in the table below:
==================================================================================================================== Date Creditor Amount of Canceled Debt No. of Shares Issued in Issued Exchange - -------------------------------------------------------------------------------------------------------------------- 5/12/98 Morgan, Lewis & Bockius $60,000 20,000 - -------------------------------------------------------------------------------------------------------------------- 9/23/98 Francis P. Bonner $ 6,750 3,000 - -------------------------------------------------------------------------------------------------------------------- 9/23/98 David Jenkins + Assoc., Inc. $ 2,375 1,000 - -------------------------------------------------------------------------------------------------------------------- 9/23/98 Cannon Consultants, Inc. $11,250 5,000 - -------------------------------------------------------------------------------------------------------------------- 1/13/99 Bobby B. Carroll $60,000 30,000 - -------------------------------------------------------------------------------------------------------------------- 1/13/99 Frederick H. Kurtz $30,000 15,000 ====================================================================================================================
All such shares of Common Stock were issued to the Company's creditors pursuant to appropriate exemptions from registration under federal and state securities laws. All exchanges were evidenced by a written Share Exchange Agreement between the Company and creditor. On June 1, 1998, the Company filed a registration statement on Form S-3 (the "Registration Statement") with the Securities and Exchange Commission for the registration of certain shares of Common Stock of the Company then held by Heartland Limited Partnership I ("Heartland"). These shares were subsequently assigned to an affiliate of Heartland. The Company's audited financial statements were not available as of the deadline for filing the Company's Form 10-K for the year ended December 31, 1998, and the Form 10-K was correspondingly not filed in a timely manner. As a result of such untimely filing, the Company may not currently use Form S-3 to register its shares of Common Stock, and the Company thus filed a request for withdrawal of the Registration Statement with the Securities and Exchange Commission on June 28, 1999, which request was subsequently granted. LIQUIDITY AND CAPITAL RESOURCES The Company had working capital of $1,090,000 at December 31, 1999 compared to $404,000 at December 31, 1998, an increase of $686,000. Current assets at December 31, 1999 included cash and investments of $554,000, which is an increase of about $230,000 from December 31, 1998. The increase in working capital was principally due to the operating income for the year. In 1999 the Company's operating cash flow continued to be positive, and the Company improved its payments to unsecured trade vendors. No unusual cash transactions were recorded in 1999. In 1997 the Company obtained a working capital line of credit of $200,000. In the third quarter of 1998 the line was increased to $500,000. Borrowings against the line bear interest at prime minus .50% for amounts borrowed up to $250,000, and prime plus 1% on the excess amount borrowed over $250,000. This debt is collateralized by a certificate of deposit with the lender of $250,000, accounts receivable, inventories and equipment, and is due on demand. Also, the Company must maintain certain financial covenants. In April, 1999, the bank waived a violation of a financial covenant in light of the Company's net loss for the year ended December 31, 1998. In exchange, the Company agreed to not borrow more than $350,000 outstanding at any one time, until further notice. In April 2000, the Company renewed this agreement for a line of credit of $1 million, secured by a certificate of deposit with the lender of $400,000, with all other terms similar as agreed to in 1998. The Company is not in violation of any financial convenants contained in the agreement. The balance owed on the line of credit at December 31, 1999 was $-0-, and the Company has not borrowed on the line of credit since April, 1999. 18 20 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 2000. 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 that 2000 and beyond 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. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As of December 31, 1999, the Company held $250,000 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. 19 21 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-24 REPORTS OF INDEPENDENT PUBLIC ACCOUNTANTS ON ACCOMPANYING INFORMATION F-25 - F-26 ACCOMPANYING INFORMATION Schedule II - valuation and qualifying accounts and reserves F-27
20 22 Report of Independent Public Accountants ---------------------------------------- To the Board of Directors N-Viro International Corporation Toledo, Ohio We have audited the accompanying consolidated balance sheet of N-Viro International Corporation and subsidiaries as of December 31, 1999, and the related consolidated statements of operations, stockholders' equity, and cash flows for the year 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 audit. We did not audit the 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 17% of total assets as of December 31, 1999 and the net loss of this partnership represents 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 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, based on our audit 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, 1999, and the consolidated results of their operations and their cash flows for the year then ended, in conformity with generally accepted accounting principles. /s/ HAUSSER + TAYLOR LLP Cleveland, Ohio March 3, 2000, except for Note 11 dated April 3, 2000 F-3 23 Report of Independent Public Accountants ---------------------------------------- To the Board of Directors N-Viro International Corporation Toledo, Ohio We have audited the accompanying consolidated balance sheet of N-Viro International Corporation as of December 31, 1998, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the two-year period 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 audits 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 audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of N-Viro International Corporation as of December 31, 1998, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ McGLADREY & PULLEN, LLP Elkhart, Indiana March 5, 1999 F-4 24 N-VIRO INTERNATIONAL CORPORATION CONSOLIDATED BALANCE SHEETS December 31, 1999 and 1998
1999 1998 ----------------------------------------------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 552,846 $ 322,827 Securities available-for-sale 1,401 1,401 Receivables: Trade, net of allowance of $128,600 1,302,036 802,913 Notes and other, net of allowance of $330,980 258,590 197,839 Related parties 48,599 46,790 Prepaid expenses and other assets 72,260 81,644 ----------------------------------------------- Total current assets 2,235,732 1,453,414 PROPERTY AND EQUIPMENT 596,060 577,116 INVESTMENT IN FLORIDA N-VIRO, L.P. 790,667 852,510 DEFERRED TAX ASSETS 312,000 312,000 INTANGIBLE AND OTHER ASSETS 837,414 588,312 ----------------------------------------------- $ 4,771,873 $ 3,783,352 ===============================================
The accompanying notes are an integral part of these financial statements. F-5 25 N-VIRO INTERNATIONAL CORPORATION CONSOLIDATED BALANCE SHEETS December 31, 1999 and 1998
1999 1998 ----------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Current maturities of long-term debt $ 111,856 $ 93,640 Accounts payable 707,324 729,427 Accrued liabilities 326,740 226,790 ----------------------------------------------- Total current liabilities 1,145,920 1,049,857 LONG-TERM DEBT, LESS CURRENT MATURITIES 240,379 67,547 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Common stock, $.01 par value Authorized - 7,000,000 shares Issued - 1999 - 2,688,133 shares; 1998 - 2,829,733 shares 26,882 28,298 Additional paid-in capital 13,382,093 13,632,425 Retained earnings (deficit) (9,405,424) (9,876,798) ----------------------------------------------- 4,003,551 3,783,925 Less treasury stock, at cost, 57,250 shares in 1999 and 307,250 shares in 1998 617,977 1,117,977 ----------------------------------------------- Total stockholders' equity 3,385,574 2,665,948 ----------------------------------------------- $ 4,771,873 $ 3,783,352 ===============================================
The accompanying notes are an integral part of these financial statements. F-6 26 N-VIRO INTERNATIONAL CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997 ------------------------------------------------ REVENUES $ 4,749,427 $ 3,929,317 $ 4,052,648 COST OF REVENUES 2,244,540 1,883,529 1,829,309 ------------------------------------------------ GROSS PROFIT 2,504,887 2,045,788 2,223,339 OPERATING EXPENSES Selling, general and administrative 1,928,154 2,327,575 1,920,563 Research and development 48,298 58,478 2,714 ------------------------------------------------ 1,976,452 2,386,053 1,923,277 ------------------------------------------------ OPERATING INCOME (LOSS) 528,435 (340,265) 300,062 NONOPERATING INCOME (EXPENSE) Interest income (expense), net 12,283 32,372 (32,157) Equity in losses of joint venture (69,344) (65,110) (45,838) ------------------------------------------------ (57,061) (32,738) (77,995) ------------------------------------------------ INCOME (LOSS) BEFORE INCOME TAX (CREDITS) 471,374 (373,003) 222,067 Federal and state income tax (credits) - - (312,000) ------------------------------------------------ NET INCOME (LOSS) $ 471,374 $ (373,003) $ 534,067 ================================================ Basic and diluted earnings (loss) per share $ 0.18 $ (0.15) $ 0.23 ================================================ Weighted average common shares outstanding 2,563,121 2,463,667 2,274,134 ================================================
The accompanying notes are an integral part of these financial statements. F-7 27 N-VIRO INTERNATIONAL CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY Years Ended December 31, 1999, 1998 and 1997
Additional Retained Common Paid-in Earnings Treasury Stock Capital (Deficit) Stock Total -------------------------------------------------------------------------------------- BALANCE - DECEMBER 31, 1996 $ 20,943 $ 12,048,455 $(10,037,862) $ (617,977) $ 1,413,559 Net income - - 534,067 - 534,067 Issuance of common stock for relief of liabilities 3,865 805,635 - - 809,500 Proceeds from sale of common stock, net of expenses of $25,414 2,000 322,587 - - 324,587 Issuance of common stock for business combination 750 177,375 - - 178,125 Purchase of treasury stock - - - (500,000) (500,000) Other - 5,500 - - 5,500 -------------------------------------------------------------------------------------- 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 ======================================================================================
The accompanying notes are an integral part of these financial statements. F-8 28 N-VIRO INTERNATIONAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997 -------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 471,374 $(373,003) $ 534,067 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 175,574 169,807 170,588 Provision for bad debts - 40,000 123,490 Deferred income taxes - - (312,000) Issuance of common stock and options for fees and services 49,540 299,092 - Other 72,234 63,596 47,316 Increase in receivables (616,721) (21,007) (482,939) Decrease in prepaid expenses and other assets 9,384 10,416 133,537 Increase (decrease) in accounts payable and accrued liabilities 77,847 (329,891) 25,643 -------------------------------------------- Net cash provided by (used in) operating activities 239,232 (140,990) 239,702 CASH FLOWS FROM INVESTING ACTIVITIES Collection of contract receivable - 671,521 - Purchase of property and equipment (130,638) (67,041) (49,943) Advances to related parties (1,809) (46,790) - Increase in notes receivable (52,138) - - Collections on notes receivable 141,387 103,203 - Expenditures for intangible and other assets (63,275) (21,139) (53,294) Additional investment in Florida N-Viro, L.P. (7,500) - - -------------------------------------------- Net cash (used in) provided by investing activities (113,973) 639,754 (103,237) CASH FLOWS FROM FINANCING ACTIVITIES Net borrowings (payments) on line of credit - (120,000) 120,000 Borrowings under long-term obligations 161,127 67,000 102,296 Principal payments on long-term obligations (105,079) (129,135) (433,786) Proceeds from sale of common stock 48,712 - 324,587 Purchase of treasury stock - - (500,000) Other - (25,479) - -------------------------------------------- Net cash provided by (used in) financing activities 104,760 (207,614) (386,903) -------------------------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 230,019 291,150 (250,438) CASH AND CASH EQUIVALENTS - BEGINNING 322,827 31,677 282,115 -------------------------------------------- CASH AND CASH EQUIVALENTS - ENDING $ 552,846 $ 322,827 $ 31,677 ============================================
The accompanying notes are an integral part of these financial statements. F-9 29 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 generally accepted accounting principles 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 maturities of 90 days or less to be cash equivalents. 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 30 N-VIRO INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) H. Revenue Recognition - Facility management revenue, sludge processing revenue, and royalty fees are recognized under contracts where the Company or licensees utilize the N-Viro Process to treat sludge, either pursuant to a fixed-price contract or based on volumes of sludge processed. Revenue is recognized as services are performed. Alkaline admixture sales and N-Viro Soil revenue is recognized upon shipment. License and territory fees are generated by selling the right to market or use the N-Viro Process in a specified territory. The Company's policy is to record revenue for the license agreements when all material services relating to the revenue have been substantially performed, conditions related to the contract have been met, and no material contingencies exist. I. Earnings (Loss) Per Common Share - Earnings (loss) per common share has been computed on the basis of the weighted-average number of common shares outstanding during each period presented. The effects of the stock options were to increase the weighted average number of shares by 9,804 for the year ended December 31, 1999 and 6,346 for the year ended December 31, 1997. For the year ended December 31, 1998, the amounts are excluded from the dilutive per share calculation because they would be antidilutive. J. New Accounting Standards - In 1998, the Company adopted Statement of Financial Accounting Standards (SFAS) Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 supersedes SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise," replacing the "industry segment" approach with the "management" approach. The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the source of the Company's reportable segments. SFAS No. 131 also requires disclosures about products and services, geographic areas, and major customers. The adoption of SFAS No. 131 had no effect on the results of operations or financial position of the Company. In June 1998, SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," was issued. SFAS 133 establishes accounting and reporting standards for derivative instruments and hedging activities. SFAS 133, as amended by SFAS 137, is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. The effect of the anticipated adoption of this standard is expected to have no material effect on the Company's financial statements. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") 101, "Revenue Recognition in Financial Statements." SAB 101, which is effective in 2000, summarizes the staff's views in applying generally accepted accounting principles to revenue recognition. The Company has not determined the effects, if any, the SAB may have on its financial statements. F-11 31 N-VIRO INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2. BALANCE SHEET DATA TRADE RECEIVABLES: Trade receivables in the accompanying balance sheets at December 31, 1999 and 1998 are stated net of an allowance for doubtful accounts of $128,600. NOTES AND OTHER RECEIVABLES: The Company has notes receivable with customers and various other parties, totalling $439,570 in 1999 and $528,819 in 1998. The amounts in the accompanying balance sheets at December 31, 1999 and 1998 are stated net of an allowance for doubtful accounts of $330,980. In addition, at December 31, 1999, the Company had a $150,000 receivable in connection with the sale of stock. See Subsequent Events, Note 11. The Company has various unsecured notes receivable from related parties totalling $48,599 in 1999 and $46,790 in 1998 which bear interest at 6% and are due on demand. PROPERTY AND EQUIPMENT (AT COST):
1999 1998 --------------------- ------------------- Land and leasehold improvements $ 44,911 $ 44,911 Equipment 1,183,445 1,088,929 Furniture and fixtures 192,559 206,740 --------------------- ------------------- 1,420,915 1,340,580 Less accumulated depreciation and amortization 824,855 763,464 --------------------- ------------------- $ 596,060 $ 577,116 ===================== ===================
The Company rents certain equipment to customers under short-term arrangements. INVESTMENT IN FLORIDA N-VIRO, L.P.: Florida N-Viro, L.P. was formed in January 1996 pursuant to a joint venture agreement between the Company and VFL Technology Corporation (VFL). The Company owns a 50% interest in the joint venture. F-12 32 N-VIRO INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2. BALANCE SHEET DATA (CONTINUED) INVESTMENT IN FLORIDA N-VIRO, L.P. (CONTINUED): Condensed financial information of the partnership as of December 31, 1999 and 1998 is as follows:
1999 1998 --------------------- ---------------------- Current assets $ 393,137 $ 282,675 Long-term assets 2,005,429 1,794,171 --------------------- ---------------------- $ 2,398,566 $ 2,076,846 ===================== ====================== Current liabilities $ 747,735 $ 363,073 Long-term liabilities 79,498 18,754 Partners' equity 1,571,333 1,695,019 --------------------- ---------------------- $ 2,398,566 $ 2,076,846 ===================== ======================
Year Ended December 31, ----------------------------------------------------------- 1999 1998 1997 ----------------- -------------------- ------------------ Net sales $ 1,498,821 $ 906,130 $ 655,570 Net loss (138,686) (130,220) (91,675)
The Partnership had a major customer which represented approximately 60% and 58% of its revenue for the years ended December 31, 1998 and 1997, respectively. During 1999, the Partnership's largest customer accounted for 27% of its revenue, with its six largest customers accounting for 78% of total revenue.
INTANGIBLE AND OTHER ASSETS: 1999 1998 ------------------- ----------------- Patents and other intangibles, less accumulated amortization 1999 - $217,000; 1998 - $180,000; 1997 - $181,000 $ 394,494 $ 387,258 Territory rights, less accumulated amortization 1999 - $75,000; 1998 - $45,000; 1997 - $22,600 325,322 201,054 Accounts receivable due in more than one year 117,598 - ------------------- ----------------- $ 837,414 $ 588,312 =================== =================
During the year ended December 31, 1999, the Company repurchased portions of the Kentucky, Virginia and West Virginia territory from an unrelated party in exchange for $15,000 cash and a $135,000 note payable. F-13 33 N-VIRO INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2. BALANCE SHEET DATA (CONTINUED) INTANGIBLE AND OTHER ASSETS (CONTINUED): During the year ended December 31, 1997, the Company purchased the remaining 50% interest of Pan-American N-Viro, Inc. (Pan-Am) and, at that time, consolidated the entity. The transaction was accounted for as a purchase and the purchase price was allocated primarily to territory rights. The purpose of Pan-Am is to promote the N-Viro Process in Central and South America and the Caribbean. ACCRUED LIABILITIES:
1999 1998 -------------------- -------------------- Employee benefits $ 86,325 $ 39,846 Sales tax payable 207,960 178,799 Other 32,455 8,145 -------------------- -------------------- $ 326,740 $ 226,790 ==================== ====================
NOTE 3. PLEDGED ASSETS, LINE-OF-CREDIT AND LONG-TERM DEBT The Company had a $500,000 line-of-credit with a bank which expired on July 31, 1999. Borrowings against the line-of-credit were limited to a borrowing base based on eligible accounts receivable and would bear interest at prime minus .5% on borrowings up to $250,000 and prime plus 1% for borrowings above $250,000. Borrowings, which were collateralized by accounts receivable, inventories, equipment, assignment of a $250,000 certificate of deposit and assignment of certain contracts, were due on demand and the facility was subject to certain covenants. See Subsequent Events, Note 11. Long-term debt at December 31, 1999 and 1998 is as follows:
1999 1998 -------------------- -------------------- Notes payable $ 352,235 $ 161,187 Less current maturities 111,856 93,640 -------------------- -------------------- $ 240,379 $ 67,547 ==================== ====================
F-14 34 N-VIRO INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 3. PLEDGED ASSETS, LINE-OF-CREDIT AND LONG-TERM DEBT (CONTINUED) The notes payable are notes signed for amounts owed to vendors and other parties. The notes bear interest ranging from 8% to 15% and are due at varying dates through June 2004. Aggregate maturities of long-term debt for the years ending December 31 are as follows: 2000 - $111,856; 2001 - $93,573; 2002 - $75,819; 2003 - $62,075; and 2004 - $8,912. Interest expensed and paid was approximately $25,200; $16,000 and $38,000, for the years ended December 31, 1999, 1998 and 1997 respectively. During 1998, the Company reached agreements with six trade creditors and directors to eliminate $170,375 of the Company's accounts payable by issuance of 74,000 shares of common stock. During the year ended December 31, 1997, the Company entered into an agreement to settle a contractual obligation with a cash payment of $200,000 and the issuance of 250,000 shares of common stock with a fair value of $500,000. In addition, the agreement required that certain shares remain in escrow and the Company agreed that if the party elected to sell the shares, a price per share would be guaranteed to satisfy the liability. Subsequent to that original agreement, the Company reached an agreement to repurchase the shares for cash. In addition, during 1997, the Company reached agreements with three trade creditors and directors to eliminate $211,500 of the Company's accounts payable by issuance of 70,500 shares of common stock. The net gain on extinguishment of these liabilities was immaterial. In 1997, the notes payable - related partnership were extinguished by their conversion into 66,000 shares of common stock. No gain or loss was recognized on the transaction as the Partnership was controlled by the majority stockholder. NOTE 4. EQUITY TRANSACTIONS The Company has authorized 2,000,000 shares of preferred stock, par value of $.01 per share, of which no shares were outstanding at December 31, 1999 and 1998. The Company has adopted a stock option plan for directors and key officers under which 600,000 shares of common stock may be issued. The options are 20% vested on the date of grant, with the balance vesting 20% per year over the next four years except for directors whose options vest immediately. Options are granted at fair market value. F-15 35 N-VIRO INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 4. EQUITY TRANSACTIONS (CONTINUED) The following summarizes the number of grants and their respective exercise prices and grant date fair values per option for the years ended December 31, 1999, 1998 and 1997 and the number outstanding and exercisable at those dates:
1999 1998 1997 ----------------------- ------------------------ ---------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Price Price Price Shares Shares Shares ----------------------- ------------------------ ---------------------- Outstanding, beginning of year 461,325 $ 2.65 163,825 $ 3.54 151,525 $ 26.45 Granted 7,000 2.16 323,375 2.38 124,850 3.13 Expired during the year (14,000) 3.43 (25,875) 4.86 (112,550) 33.92 ----------- ----------- ------------ Outstanding, end of year 454,325 2.62 461,325 2.65 163,825 3.54 =========== =========== ============ Eligible for exercise at end of year 261,725 193,135 90,850 =========== =========== ============ Weighted average fair value per option for options granted during the year $ 2.16 $ 1.86 $ 1.83 =========== ========== ===========
During 1998, the Company repriced 14,375 shares from $6.00 per option to $4.00 per option. During 1997, the Company repriced 71,250 shares from $38.00 per option to $4.00 per option. The above schedule reflects the granted and expired shares and includes the shares that have been repriced. A further summary of stock options is as follows:
Options Outstanding Options Exercisable --------------------------------------------------- -------------------------- Weighted Average Weighted Weighted Remaining Average Average Number Contractual Exercise Number Exercise Outstanding Life Price Exercisable Price -------------------------------------------------------------------------------- 1999 -------------------------------------------------------------------------------- Range of exercise prices: $1.56 to $2.38 359,200 8.27 $ 2.21 171,200 $2.15 $4.00 to $4.75 95,125 4.14 4.17 90,525 4.14 1998 -------------------------------------------------------------------------------- Range of exercise prices: $1.56 to $2.38 358,200 9.43 $ 2.22 92,200 $2.17 $4.00 to $4.75 103,125 5.21 4.18 100,935 4.18
F-16 36 N-VIRO INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 4. EQUITY TRANSACTIONS (CONTINUED)
Options Outstanding Options Exercisable -------------------------------------------- ------------------------------ Weighted Average Weighted Weighted Remaining Average Average Number Contractual Exercise Number Exercise Outstanding Life Price Exercisable Price ----------------------------------------------------------------------------- 1997 ----------------------------------------------------------------------------- Range of exercise prices: $1.56 to $2.38 53,200 9.30 $ 1.69 17,200 $ 1.62 $4.00 to $6.00 110,625 6.29 4.43 73,650 4.29
As permitted under generally accepted accounting principles, the Company's present accounting with respect to the recognition and measurement of stock-based employee compensation costs is in accordance with APB Opinion No. 25, which generally requires that compensation costs be recognized for the difference, if any, between the quoted market price of the stock at grant date and the amount an employee must pay to acquire the stock. The Company follows the disclosure provisions of SFAS Statement No. 123 which prescribes a fair-value based method of measurement that results in the disclosure of computed compensation costs for essentially all awards of stock-based compensation to employees. Had compensation cost been determined based upon the fair value method prescribed in SFAS Statement No. 123, reported net income (loss) would have been $313,173, $(460,168) and $386,564 and basic earnings (loss) per share would have been $.12, $(.23) and $.18 for the years ended December 31, 1999, 1998 and 1997, respectively. In determining the pro forma amounts above, the value of each grant is estimated at the grant date using the fair value method prescribed in Statement No. 123, with the following weighted-average assumptions for grants in 1999, 1998 and 1997, respectively: no assumed dividend rates for all years; risk-free interest rates of 5.5%, 5.5% and 5.25%; on expected lives of 10 years for all years; and expected price volatility of 114%, 118% and 99%, respectively. F-17 37 N-VIRO INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 5. REVENUE AND MAJOR CUSTOMERS Revenues for the years ended December 31, 1999, 1998 and 1997 consist of the following:
1999 1998 1997 --------------- ---------------- ----------------- Facility management and sludge processing $ 1,605,332 $ 1,415,418 $ 1,360,572 Royalty fees 659,513 644,069 707,694 License and territory fees 759,328 432,867 428,050 Alkaline admixture sales 1,247,188 1,163,286 1,393,526 Other 478,066 273,677 162,806 --------------- ---------------- ----------------- $ 4,749,427 $ 3,929,317 $ 4,052,648 =============== ================ =================
Revenues for the years ended December 31, 1999, 1998 and 1997 include revenues from one major customer, the City of Toledo, Ohio, (included in the management operations segment) which represented approximately 35%, 36% and 35%, respectively, of total revenues. In addition, the Company had another major customer, the City of Greenville, South Carolina, of approximately 10%, 11% and 11% of total revenues (which is included in the other domestic operations segment) for the years ended December 31, 1999, 1998 and 1997, respectively. The accounts receivable balances due from these customers at December 31, 1999 and 1998 were approximately $188,000 and $211,000, respectively. NOTE 6. RELATED PARTY TRANSACTIONS The Company paid a consulting fee to the former stockholder of one of the Company agents of $60,000, $120,000 and $120,000 for the years ended December 31, 1999, 1998 and 1997, respectively. On January 1, 1994, the Company granted this individual a security interest in all present and future receivables and contract rights from licenses in the states of Tennessee, North Carolina, and South Carolina. The secured receivables amounted to approximately $118,000 and $107,000 at December 31, 1999 and 1998, respectively. NOTE 7. COMMITMENTS AND CONTINGENCIES During 1994, the Company reacquired territory rights from a former agent and issued 66,250 shares of unregistered common stock. The former agreement stated that if the former agent elected to sell these shares, the Company has guaranteed the former agent $6 per common share. During 1999, the Company reached a settlement agreement to modify its royalty agreement with the former agent and the stock price guarantee agreement. As part of this agreement, the former agent is required to pay royalties owed and shall not sell any common stock issued in connection with the original agreement until September 2000 at which time the former agent may sell up to 10,000 shares per month. The former agent has the right to offset future royalties owing against the difference between the $6 per share guarantee and the fair market value of the stock at the time the shares are sold. Subsequent to year-end, this agreement was modified to remove the Company's $6 per share guarantee, to permit sales of up to 15,000 shares per month (with the Company's approval), and to waive the waiting period for sales of stock related to this agreement. F-18 38 N-VIRO INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 7. COMMITMENTS AND CONTINGENCIES (CONTINUED) The Company leases office space under an agreement which requires monthly payments of approximately $4,800. The lease expires in December 2002. The Company also leases various equipment on a month-to-month basis. The total minimum rental commitment at December 31, 1999 is $172,800. The total rental expense included in the statements of operations for the years ended December 31, 1999, 1998 and 1997 is approximately $56,000, $69,000 and $78,000, respectively. The Company's minimum commitment under an agreement with a consultant (see Note 6) is $180,000, payable in cash or stock of $60,000 per year for each year ending December 31, 2000 through 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 totalling $144,000 annually, through December 1999. The other agreement expires in June 2004 and calls for payments totalling $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 are expected to total $129,000, which will be recognized over the remaining terms of the applicable 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 effect of these agreements had an immaterial impact on the Company's 1999 operations. 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. Subsequent to year-end, the Company has filed a lawsuit against the City of Warren, Ohio, claiming infringement of certain Company patents. There has been no progress on the suit to date. NOTE 8. INCOME TAX MATTERS Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the current period plus or minus the change during the period in deferred tax assets and liabilities. F-19 39 N-VIRO INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 8. INCOME TAX MATTERS (CONTINUED) The composition of the deferred tax assets and liabilities at December 31, 1999 and 1998 is as follows:
1999 1998 ------------------- ------------------ Gross deferred tax liability, accelerated depreciation $ (21,000) $ (17,000) ------------------- ------------------ Gross deferred tax assets: Loss carryforwards 3,571,000 3,634,000 Patent costs 514,000 590,000 Allowance for doubtful accounts 184,000 184,000 Property and equipment basis difference 15,000 18,000 Other 13,000 15,000 ------------------- ------------------ 4,297,000 4,441,000 Less valuation allowance (3,964,000) (4,112,000) ------------------- ------------------ $ 312,000 $ 312,000 =================== ==================
The income tax provisions differ from the amount of income tax determined by applying the U.S. Federal income tax rate to pre-tax income from continuing operations for the years ended December 31, 1999, 1998 and 1997 are as follows:
1999 1998 1997 ---------------- ----------------- ----------------- Computed "expected" tax (credits) $ 160,000 $ (99,000) $ 76,000 State taxes, net of federal tax benefit 14,000 (10,000) 8,000 (Decrease) increase in income taxes resulting from: Change in valuation allowance (148,000) 88,000 (355,000) Other (26,000) 21,000 (41,000) ---------------- ----------------- ----------------- $ - $ - $(312,000) ================ ================= =================
The net operating losses available at December 31, 1999 to offset future taxable income total approximately $8,879,000 and expire principally in years 2009 - 2013. The tax effect of net operating loss carryforwards reduced the 1999 current provision for income taxes by $115,000. In 1997, the Company recorded a deferred tax asset and a corresponding income tax benefit of $312,000 to recognize the benefit of $800,000 in loss carryforwards expected to be realized. The Company believes that taxable income will be generated in the next few years, as the Company has changed its strategic focus to its profitable core business. Realization of the loss carryforwards and related deferred tax asset beyond that period is uncertain and is dependent on generating sufficient taxable income prior to expiration of the loss carryforwards. Although realization is not assured, management believes it is more likely than not that the $312,000 recorded net deferred tax asset will be realized. 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. F-20 40 N-VIRO INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 9. CASH FLOWS INFORMATION Supplemental information relative to the statements of cash flows for the years ended December 31, 1999, 1998 and 1997 is as follows:
1999 1998 1997 ------------------ -------------- ---------------- Supplemental schedule of noncash investing and financing activities: Common stock subscribed $ 150,000 $ - $ - ================== ============== ================ Repurchase territory rights in exchange for note payable $ 135,000 $ - $ - ================== ============== ================ Retirement of treasury stock $ 500,000 $ - $ - ================== ============== ================ Price guarantee of common stock in connection with settlement agreement (see Note 7) $ - $ 72,875 $ - ================== ============== ================ Common stock issued for relief of liabilities $ - $170,375 $809,500 ================== ============== ================ Common stock issued in exchange for 50% interest of Pan-Am $ - $ - $178,125 ================== ============== ================
NOTE 10. SEGMENT INFORMATION The Company has determined that its reportable segments are those that are based on the Company's method of internal reporting, which segregates its business by product category and service lines. The Company's reportable segments are as follows: Management Operations - The Company provides employee and management services to operate the Toledo Wastewater Treatment Facility. Other Domestic Operations - Sales of territory or site licenses and royalty fees to use N-Viro technology in the United States. Foreign Operations - Sale of territory or site licenses and royalty fees to use N-Viro technology in foreign operations. F-21 41 N-VIRO INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 10. SEGMENT INFORMATION (CONTINUED) The accounting policies of the segments are the same as those described in Note 1 which contains the Company's significant accounting policies. Fixed assets generating specific revenue are identified with their respective segments as they are accounted for as such in the internal accounting records. All other assets, including cash and other current assets and all long-term assets, other than fixed assets, are identified with the Corporate segment. The Company does not allocate any selling, general, and administrative expenses to any specific segments. All of the other income (expense) costs or income are non-apportionable and not allocated to a specific segment. The Company accounts and analyzes the operating data for its segments generally by geographic location, with the exception of the Management Operations segment, as this revenue accounts for over 10% of the total revenue of the Company. This segment represents both a significant amount of business generated as well as a specific location and unique type of revenue. The other 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. The table below presents information about the segment profits and segment identifiable assets used by the chief operating decision makers of the Company as of and for the years ended December 31, 1999, 1998, and 1997 (dollars in thousands).
Other Management Domestic Foreign Operations Operations Operations Total ----------------- ----------------- ----------------- ------------------ 1999 ------------------------------------------------------------------------------ Revenues $ 1,677 $ 2,910 $ 163 $ 4,750 Cost of revenues 1,084 1,161 - 2,245 Segment profits 593 1,749 163 2,505 Identifiable assets 189 143 - 332 Depreciation 15 49 - 64 1998 ------------------------------------------------------------------------------ Revenues $ 1,463 $ 2,267 $ 199 $ 3,929 Cost of revenues 998 888 - 1,886 Segment profits 465 1,379 199 2,043 Identifiable assets 75 261 - 336 Depreciation 11 43 - 54
F-22 42 N-VIRO INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 10. SEGMENT INFORMATION (CONTINUED)
Other Management Domestic Foreign Operations Operations Operations Total ----------------- ----------------- ----------------- ------------------ 1997 ------------------------------------------------------------------------------ Revenues $ 1,409 $ 2,487 $ 157 $ 4,053 Cost of revenues 847 980 3 1,830 Segment profits 562 1,507 154 2,223 Identifiable assets 83 220 - 303 Depreciation 12 54 - 66
A reconciliation of total segment profits, identifiable assets and depreciation and amortization to the consolidated financial statements as of and for the years ended December 31, 1999, 1998 and 1997 follows (dollars in thousands):
1999 1998 1997 ----------------- --------------- ------------------ Segment profits: Segment profits for reportable segments $ 2,505 $ 2,043 $ 2,223 Corporate selling, general and administrative expenses and research and development costs (1,977) (2,386) (1,923) Other income (expense) (69) (62) (46) ----------------- --------------- ------------------ Consolidated EBIT $ 459 $ (405) $ $ 254 ================= =============== ================== Identifiable assets: Identifiable assets for reportable segments $ 332 $ 336 $ 303 Corporate property and equipment 264 241 258 Current assets not allocated to segments 2,236 1,453 2,013 Intangible and other assets not allocated to segments 2,174 1,987 2,083 Consolidated eliminations (234) (234) (234) ----------------- --------------- ------------------ Consolidated assets $ 4,772 $ 3,783 $ 4,423 ================= =============== ================== Depreciation and amortization: Depreciation for reportable segments $ 64 $ 54 $ 66 Corporate depreciation and amortization 112 116 105 ----------------- --------------- ------------------ Consolidated depreciation $ 176 $ 170 $ 171 ================= =============== ==================
F-23 43 NOTE 11. SUBSEQUENT EVENTS Subsequent to year-end, the Company signed an agreement with its bank to provide a $1,000,000 line-of-credit. This facility is similar in terms to the facility described in Note 3, except that it requires the assignment of a $400,000 certificate of deposit (increased from $250,000) and that borrowings up to $400,000 (up from $250,000) would bear interest at prime minus .5% and borrowings above $400,000 (up from $250,000) would bear interest at prime plus 1%. Subsequent to year-end, the Company collected the $150,000 note receivable in connection with the sale of stock described in Note 2. F-24 44 Report of Independent Public Accountants To the Board of Directors N-Viro International Corporation Toledo, Ohio Our audit of the consolidated financial statements of N-Viro International Corporation and subsidiaries included Schedule II, contained herein, for the year ended December 31, 1999. Such schedule is presented for purposes of complying with the Securities and Exchange Commission's rule and is not a required part of the basic consolidated financial statements. In our opinion, such schedule presents fairly the information set forth therein, in conformity with generally accepted accounting principles. /s/ HAUSSER + TAYLOR LLP Cleveland, Ohio March 3, 2000 F-25 45 Report of Independent Public Accountants To the Board of Directors N-Viro International Corporation Toledo, Ohio Our audit of the consolidated financial statements of N-Viro International Corporation included Schedule II, contained herein, for the years ended December 31, 1998 and 1997. Such schedule is presented for purposes of complying with the Securities and Exchange Commission's rule and is not a required part of the basic consolidated financial statements. In our opinion, such schedule presents fairly the information set forth therein, in conformity with generally accepted accounting principles. /s/ McGLADREY & PULLEN, LLP Elkhart, Indiana March 5, 1999 F-26 46 N-VIRO INTERNATIONAL SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES DECEMBER 31, 1999, 1998 AND 1997
Balance At Beginning Of Charged To Deductions Balance At Period Operations From Reserves Close Of Period ---------------- ----------------- --------------- ---------------- Allowance for doubtful accounts - deducted from trade receiv- ables and notes receivable, in the balance sheets: 1999 $ 460,000 $ - $ - $ 460,000 =================== ================= =============== ================ 1998 $ 420,000 $ 76,000 $ 36,000 $ 460,000 =================== ================= =============== ================ 1997 $ 326,000 $ 204,000 $ 110,000 $ 420,000 =================== ================= =============== ================
F-27 47 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES On September 21, 1999, McGladrey & Pullen, LLP, the Registrant's certifying accountant, resigned as the certifying accountant for the Registrant by so notifying the Registrant in writing. A copy of the letter of resignation is attached hereto as Exhibit 16.1. McGladrey & Pullen, LLP served as the Company's independent auditors of the Company since January 10, 1996. McGladrey & Pullen, LLP issued, for the periods ended December 31, 1997 and 1998, an unqualified opinion, without qualification, disclaimer, adverse opinion or any uncertainties. McGladrey & Pullen, LLP voluntarily resigned as the certifying accountant for the Registrant. Neither the Registrant, nor its Board of Directors or any committee thereof made a decision to change accountants. There were no disagreements with McGladrey & Pullen, LLP during the Registrant's two most recent fiscal years and subsequent interim periods on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure which, if not resolved to the satisfaction of McGladrey & Pullen, LLP, would have caused it to make a reference to the subject matter of the disagreement in connection with its report. There have been no reportable events within the Registrant's two most recent fiscal years and subsequent interim periods. On November 9, 1999, at a meeting of the Board of Directors, Hausser + Taylor, LLP, was approved as the Registrant's newly engaged certifying independent accountant for the fiscal year ending December 31, 1999. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item is incorporated by reference to the information under the heading "Election of Three Directors" and "Executive Officers of the Company" in the definitive proxy statement of the Company filed with the Commission on April 4, 2000. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated by reference to the information under the heading "Renumeration" in the definitive proxy statement of the Company filed with the Commission on April 4, 2000. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated by reference to the information under the heading "Security Ownership of Directors and Management" in the definitive proxy statement of the Company filed with the Commission on April 4, 2000. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated by reference to the information under the heading "Certain Relationship and Related Transactions" in the definitive proxy statement of the Company filed with the Commission on April 4, 2000. 21 48 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (A) 1. AND (A) 2. FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE See "Index to Financial Statements and Schedule" set forth in Item 8 at page 20 of this Form 10-K. (A) 3. EXHIBITS Exhibit Number Description 3.1 Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Registration Statement of the Registrant on Form S-1 (Reg. No. 33-62766) (the "Registration Statement").) 3.2 By-Laws of the Company (incorporated by reference to Exhibit 3.2 to the Registration Statement). 10.1 The Amended and Restated N-Viro International Corporation Stock Option Plan (incorporated by reference to Exhibit 10.1 to the 1993 Form 10-K). 10.2 Employment Agreement, dated May 10, 1993, between N-Viro International Corporation and J. Patrick Nicholson (incorporated by reference to Exhibit 10.2 to the Registration Statement). 10.3 Transitional Consulting and Sales Representative Agreement, dated September 2, 1993, and amended January 1, 1994, between N-Viro International Corporation and Bobby B. Carroll (incorporated by reference to Exhibit 10.102 to Amendment No. 1 to the Registration Statement). 10.4 Employment Agreement, dated June 14, 1999, between N-Viro International Corporation and Terry J. Logan (incorporated by reference to Exhibit 1 to the Form 8-K dated June 30, 1999) 13 1999 Executive Review 16.1 Correspondence from McGladrey + Pullen, LLP, resigning as auditors of the Company.# 16.2 Correspondence from McGladrey + Pullen, LLP, after review of the Company's Form 8-K which reported their resignation as auditors of the Company.# 21.1 List of subsidiaries of the Company.# 24.1 Powers of Attorney.# 27.1 Financial Data Schedule.# #Only included in Form 10-K filed electronically with the Securities and Exchange Commission (b) REPORTS ON FORM 8-K The Company filed a report on Form 8-K dated November 22, 1999, to disclose the resignation of a member of the Board of Directors. (c) The exhibits listed in Item 14(a)(3) are filed with this Form 10-K. 22 49 (D) FINANCIAL STATEMENTS OF SUBSIDIARIES NOT CONSOLIDATED FLORIDA N-VIRO, L.P. Table of Contents Page ---- Independent Auditor's Report E-1 Balance Sheets E-2-3 Statement of Income (Loss) and Partners' Capital E-4 Statement of Cash Flows E-5 Notes to Financial Statements E-6-8 23 50 [letterhead - "joseph m cahill, ltd. - certified public accountant"] February 21, 2000 INDEPENDENT AUDITOR'S REPORT To the Partners Florida N-VIRO, L.P. West Chester, Pennsylvania I have audited the accompanying balance sheets of Florida N-VIRO, L.P., (a Limited Partnership), as of December 31, 1999 and 1998, and the related statements of income (loss) and partners' capital, and cash flows for the years then ended. These financial statements are the responsibility of the Partnership's management. My responsibility is to express an opinion on these financial statements based on my audit. I conducted my audit in accordance with generally accepted auditing standards. Those standards require that I plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. I believe that my audit provides a reasonable basis for my opinion. In my opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Florida N-VIRO, L.P. as of December 31, 1999 and 1998, and the results of operations and cash flows for the years then ended in conformity with generally accepted accounting principles. JMC/rb /s/ Joseph M. Cahill, Ltd. [letterhead - "189 w. lancaster avenue paoli, pennsylvania 19301 610 889 3300 fax 610 889 3303"] E-1 51 FLORIDA N-VIRO, L.P. Balance Sheets December 31, 1999 and 1998 ASSETS
1999 1998 -------------------- -------------------- Current Assets Cash $ 121,538 $ 39,888 Receivables: Trade 226,902 129,497 Related party 14,387 107,416 Prepaid Expenses 30,310 5,874 -------------------- -------------------- Total Current Assets 393,137 282,675 Property and Equipment Land 147,163 147,163 Site improvements 123,159 45,965 Building 1,383,169 1,383,169 Operating equipment 760,878 497,695 Furniture and fixtures 9,718 6,072 -------------------- -------------------- 2,424,087 2,080,064 Less Accumulated Depreciation 418,658 285,893 -------------------- -------------------- Total Property and Equipment 2,005,429 1,794,171 -------------------- -------------------- Total Assets $ 2,398,566 $ 2,076,846 ==================== ====================
The accompanying notes are an integral part of these financial statements. E-2 52 FLORIDA N-VIRO, L.P. -------------------- Balance Sheets -------------- December 31, 1999 and 1998 -------------------------- Liabilities and Partners' Capital ---------------------------------
1999 1998 -------------- ------------- Current Liabilities Payables: Trade $ 456,141 $ 234,831 Related party 5,000 - Current portion note payable 105,906 6,917 Accrued expenses 180,688 121,325 -------------- ------------- Total Current Liabilities 747,735 363,073 Note Payable, Less Current Portion 79,498 18,754 Partners' Capital 1,571,333 1,695,019 -------------- ------------- Total Liabilities and Partners' Capital $2,398,566 $2,076,846 ============== =============
The accompanying notes are an integral part of these financial statements. E-3 53 FLORIDA N-VIRO, L.P. -------------------- Statements of Income(Loss) and Partners' Capital ------------------------------------------------ For the years ended December 31, 1999 and 1998 ----------------------------------------------
1999 1998 --------------------- --------------------- Revenues $ 1,498,821 $ 906,130 Cost of sales 1,498,425 975,600 --------------------- --------------------- Gross profit (loss) 396 (69,470) Selling General and Administrative 139,264 60,266 --------------------- --------------------- Income (loss) from operations (138,868) (129,736) Other income (expense) Interest income 2,204 1,194 Interest expense (2,022) (1,679) --------------------- --------------------- Total other income (expense) 182 (485) --------------------- --------------------- Net Income (loss) (138,686) (130,221) Beginning partners' capital 1,695,019 1,825,240 Capital contribution 15,000 - --------------------- --------------------- Ending partners' capital $ 1,571,333 $ 1,695,019 ===================== =====================
The accompanying notes are an integral part of these financial statements. E-4 54 FLORIDA N-VIRO, L.P. -------------------- Statements of Cash Flows ------------------------ For the years ended December 31, 1999 and 1998 ----------------------------------------------
1999 1998 -------------------- -------------------- Cash flows from operating activities Net income (loss) $ (138,686) $ (130,221) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 132,765 100,507 (Increase) decrease in: Accounts receivable-trade (97,405) (68,881) Accounts receivable-related party 93,029 17,281 Prepaid expenses (24,436) 3,506 Increase (decrease) in: Accounts payable-trade 221,310 106,147 Accounts payable-related party 5,000 (21,523) Accrued expenses 59,363 21,804 -------------------- -------------------- Net cash provided (used) by operating activities 250,940 28,620 Cash flows from investing activities Acquisition of property and equipment (344,023) (41,223) -------------------- -------------------- Net cash provided (used) by investing activities (344,023) (41,223) Cash flows from financing activities Proceeds from new borrowings 198,452 29,950 Proceeds from contributed capital 15,000 - Payments on long-term debt (38,719) (4,279) -------------------- -------------------- Net cash provided (used) by financing activities 174,733 25,671 -------------------- -------------------- Net increase (decrease) in cash and cash equivalents 81,650 13,068 Cash and cash equivalents at beginning of year 39,888 26,820 -------------------- -------------------- Cash and cash equivalents at end of year $ 121,538 $ 39,888 ==================== ==================== Supplemental disclosure for cash flows Interest paid $ 2,022 $ 1,680 ==================== ====================
The accompanying notes are an integral part of these financial statements. E-5 55 FLORIDA N-VIRO, L.P. -------------------- Notes to Financial Statements ----------------------------- December 31, 1999 and 1998 -------------------------- Note A - Background - ------------------- BUSINESS ACTIVITIES - Florida N-Viro, L.P. formed January 1, 1996 as a Delaware Limited Partnership under the Delaware Revised Limited Partnership Act. The Partnership has entered into a patent and technology agreement with N-Viro International Corporation for the exclusive, royalty free, use in Florida of certain systems/processes for the treatment and remediation of wastewater sludge. The Partnership operates from its Ft. Meade and Volusia, Florida facilities. The Partnership consists of one general partner, Florida N-Viro Limited Liability Corporation, a Delaware limited liability corporation, and two limited partners: VFL Technology Corporation and N-Viro International Corporation. The general partner is a limited liability corporation that has limited resources and is responsible for the liabilities of the partnership beyond the capital contributed by the limited partners. The Partnership agreement terminates on December 31, 2026. Note B - Summary of Accounting Principles - ----------------------------------------- 1. METHOD OF ACCOUNTING AND USE OF ESTIMATES - The financial statements are prepared using the accrual basis of accounting. Generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could defer from the estimates. 2. CASH AND CASH EQUIVALENTS - The Partnership considers all short-term investments with an original maturity of three months or less to be cash equivalents. 3. PROPERTY AND EQUIPMENT - Property and equipment, carried at cost, are depreciated over the estimated useful life of the related assets. Depreciation is computed principally by the straight-line method. The estimated useful lives used in computing depreciation are summarized as follows: Years of Useful Life ---------------------------------- Operating equipment 7-10 Furniture and fixtures 5-7 E-6 56 FLORIDA N-VIRO, L.P. -------------------- Notes to Financial Statements (continued) ----------------------------------------- Site improvements 15 Buildings 39 Depreciation amounted to $132,765 and $100,507 for 1999 and 1998, respectively. Maintenance, repairs and expenditures for renewals and betterments not determined to extend the useful life or to increase materially the productivity of the properties to which they are applied are charged to income as incurred. Other renewals and betterments are capitalized. It is the policy of the Partnership generally to eliminate from the accounts the cost and related allowances for depreciation applicable to assets retired or otherwise disposed of, charging or crediting to income the differences between depreciation cost and the proceeds of sale or salvage. 4. INCOME TAXES - No provision for income taxes is required since the partners report their proportionate share of partnership taxable income or loss on their respective income tax returns. Such income or losses are proportionately allocated to the partners based upon their ownership interests. 5. ADVERTISING - The Partnership follows the policy of charging the costs of advertising to expense as incurred. There was no advertising expense for 1999 or 1998. Note C - Related Parties - ------------------------ VFL Technology Corporation provides the Partnership with certain management, accounting, and engineering services without charge. The Partnership has a fee sharing arrangement with N-Viro International Corporation for services provided to several customers. The Partnership's share of these fees was approximately $37,800 for 1999 and $32,500 for 1998. The Partnership had the following receivable balances due as of December 31, from its partners: 1999 1998 ------------------------------- General Partner $ ------ $ ----- Limited Partners 14,387 107,416 ------------------------------- $ 14,387 $ 107,416 =============================== E-7 57 FLORIDA N-VIRO, L.P. -------------------- Notes to Financial Statements (continued) ----------------------------------------- The Partnership had payable balances due the general partner as of December 31, 1999 of $5,000. There was no payable balance due as of December 31, 1998. Note F - Concentration of Credit Risk - ------------------------------------- In the normal course of business, the Partnership extends credit to customers principally in the State of Florida. The Partnership does not provide an allowance for doubtful accounts since it expects to collect all of its accounts receivable. The Partnership conducts a major portion of its business with several customers. For the year ended December 31, 1999, six customers accounted for 78% of total revenue. For 1998, four customers accounted for 87% of revenue. The Partnership maintains its operating checking account at a bank located in Southeastern Pennsylvania. The balance in this account may at times exceed the federally insured limit of $100,000. NOTE G - OPERATING LEASES - ------------------------- The Partnership holds an operating lease for heavy equipment. The future minimum lease payments are: 2000 $ 11,995 ======== NOTE H - LONG-TERM NOTES PAYABLE - -------------------------------- 9.54% Note payable to bank, monthly payments of $2,550, including interest, secured by equipment, due October 2001 $26,837 9.25% Note payable to bank, monthly payments of $2,245, including interest, secured by equipment, due August 2003 $41,468 8.97% Note payable to bank, monthly payments of $745, including interest, secured by automobile, due May 2002 $11,193 ------- $79,498 ======= E-8 58 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Amendment No. 2 to be signed on its behalf by the undersigned, thereunto duly authorized. N-VIRO INTERNATIONAL CORPORATION Dated: April 5, 2000 By: /s/ J. Patrick Nicholson* ------------------------------------- J. Patrick Nicholson, President, Chairman and Chief Executive Officer (Principal Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
Dated: April 5, 2000 /s/ J. Patrick Nicholson* /s/ James D. O'Neil* - ------------------------------------------------ --------------------------- J. Patrick Nicholson, President, Chairman, James D. O'Neil, Director Chief Executive Officer and Director (Principal Executive Officer) /s/ Terry J. Logan, Ph.D.* /s/ Charles B. Kaiser, Jr.* - ------------------------------------------------ --------------------------------- Terry J. Logan, Ph.D., Chief Operating Officer Charles B. Kaiser, Jr., Director and Director /s/ James K. McHugh - ------------------------------------------------ James K. McHugh Chief Financial Officer, Secretary and Treasurer (Principal Financial and Accounting Officer) /s/ Wallace G. Irmscher* /s/ Michael G. Nicholson* - ------------------------------------------------ --------------------------------- Wallace G. Irmscher, Director Michael G. Nicholson, Director /s/ B.K. Wesley Copeland* /s/ Bobby B. Carroll* - ------------------------------------------------ --------------------------------- B.K. Wesley Copeland, Director Bobby B. Carroll, Director /s/ Daniel J. Haslinger* *By: /s/ James K. McHugh - ------------------------------------------------ --------------------------------- Daniel J. Haslinger, Director James K. McHugh, Attorney-in-Fact
24 EX-13 2 EXHIBIT 13 1 Exhibit 13 1999 EXECUTIVE REVIEW 1999 and early 2000 have resulted in major opportunities for N-Viro International Corp. In 1999, we increased our revenue over 20% and gross profit over 22%, while reducing our selling, general and administrative expenses over 17%. This resulted in the Company having its best operational year since going public, an increase in net profit of over $840,000 from 1998's net loss. We expect our Florida joint venture to show a net profit and to continue growing its revenue base and market share in 2000. N-Viro is the recognized U.S. pioneer and leader in organic and mineral by-product utilization technologies. Several critical factors, which previously have limited our growth, are now turning in a more positive direction. The wastewater industry is increasingly turning to advanced treatment technologies to treat their sewage sludge so as to produce a Class A Exceptional Quality Biosolids product. This is being driven by public concerns for the safety of less treated materials and a lack of regulatory enforcement. The N-Viro process in one of only a handful of such technologies, and we have shown in the marketplace that we can be very competitive. Similar concerns in the international market, particularly in England and other European countries are driving sludge treatment to higher levels. This has resulted in increased interest in our technology overseas. Improper and inadequate management of untreated animal manures are highlighted daily in the press. The U.S. EPA and several states are moving towards manure management regulations that will require the use of technology in many cases. N-Viro is strategically placed to enter this large market as a result of its RD&D efforts. Certain competitors with alternative alkaline treatment technologies have attempted to bypass N-Viro patents. On March 3, 2000 N-Viro filed litigation against the City of Warren, Ohio for patent infringement and patent infringement inducement. We will spare no effort to defend our intellectual property. In July 1999 Dr. Terry Logan became President and Chief Operating Officer of N-Viro. His reputation and his disciplines have been invaluable. Under his leadership N-Viro's RD&D program has, once again, become an industry model. Our research at USDA Beltsville, Maryland has demonstrated patentable processes to disinfect animal manures, stabilize odors and vectors, immobilize nutrients and provide carbon sequestration -- at a reasonable and recoverable cost. Working with the Department of Agriculture of Canada, N-Viro now has exclusive non-Canadian worldwide rights to technology that demonstrates the ability of N-Viro Soil(TM) to suppress nematodes in soybeans and similar crops. The value-added benefit of these characteristics will increase the value of alkaline pasteurized products and reduce total management costs. We are proud of the year we have had, and we believe there are a number of market and regulatory factors that should be beneficial to the financial and market growth that N-Viro has been working so hard to achieve since the Company went public in 1993. First, the industry has experienced a long delay in the delegation of the federal biosolids regulatory program to the state level. During the past seven years, only a few states have adopted the new regulations. Today, the industry is moving as the majority of states are currently within reach of delegation. With delegation in sight, we believe municipal managers are now more comfortable with a long-term, decision-making process. The long delay has, however, hurt the credibility of the regulations and has drawn unwanted attention to the practice of traditional Class B land application. In many areas of the country, conventional Class B land application practices are under attack and are being converted either to landfill disposal or upgraded to Class A (Exceptional Quality). Obviously, this changing market condition should help N-Viro. Second, the solid waste industry has seen a tremendous amount of consolidation and restructuring. Who would have thought three years ago that Waste Management would have been sold? Over the past year, landfill prices have significantly increased, as the solid waste industry has chosen to focus on its key, core business and get landfill prices back to the levels of the late 80s and early 90s. Consolidation in the water and wastewater industry also may result in increases in the cost of traditional land-application programs. This changing situation should also help N-Viro. 2 Third, in a recent consent decree with the National Resource Defense Council, the USEPA agreed to prepare effluent guidelines for poultry, swine, beef and dairy operations by December 15, 2000. Public health issues, together with air and water pollution, are now critically impacted by inadequate manure management. Biosolids constitute an annual land-application volume of about 20-to-25 million wet tons. In contrast, animal manure contributes about 1.5 billion wet tons annually, which is either disposed in lagoons or land applied. N-Viro, working with USDA, has developed what it believes is cutting-edge technology in the treatment and economic utilization of animal manure. Finally, a major deterrent to N-Viro's development has been the lowering of landfill prices in the last decade and subsequent movement of raw sewage sludge (no treatment is now required by EPA regulations, i.e. 40 CFR 258) into co-disposal landfills. These landfills, containing unstabilized, raw sewage sludge, are a huge unregulated, unmanaged cause of global warming and ozone depleting gases such as methane, nitrous oxides, ammonia and carbon dioxide. N-Viro believes that nationally more than 5 billion wet tons of degradable organics are disposed annually in landfills, generating the CO(2) equivalency of 2 billion tons annually. This is one-third of the total U.S. greenhouse gas inventory presented by U.S. officials in Kyoto. USEPA now appears determined to reduce greenhouse gases, including the huge greenhouse emissions emanating from landfills, lagoons and surface impoundments caused by degradation of organic waste. Beneficial utilization, such as the N-Viro process, provides soil fertility and carbon sequestration in lieu of greenhouse gas emissions, caused by organic disposal. There is a difference - a huge difference. We appreciate the patience, support and encouragement of our many shareholders. We pledge our dedication to doing this job and doing it right. Best wishes. Terry J. Logan, Ph.D. President, Chief Operating Officer J. Patrick Nicholson Chairman, Board of Directors, Chief Executive Officer 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. EX-16.1 3 EXHIBIT 16.1 1 EXHIBIT 16.1 ------------ [McGladrey & Pullen, LLP letterhead] September 21, 1999 Mr. James K. McHugh Chief Financial Officer N-Viro International Corporation 3450 West Central Avenue, Suite 328 Toledo, OH 43606 Dear Mr. McHugh: This is to confirm that the client-auditor relationship between N-Viro International Corporation (Commission File Number 0-21802), and McGladrey & Pullen, LLP has ceased. Sincerely, /s/ McGladrey & Pullen, LLP --------------------------- McGLADREY & PULLEN, LLP cc: Office of the Chief Accountant SECPS Letter File Securities and Exchange Commission Mail Stop 11-3 450 Fifth Street, N.W. Washington, DC 20549 EX-16.2 4 EXHIBIT 16.2 1 EXHIBIT 16.2 [McGladrey & Pullen, LLP letterhead] September 24, 1999 Securities and Exchange Commission Washington, DC 20549 We were previously the independent accountants for N-Viro International Corporation, and on March 5, 1999 we reported on the consolidated financial statements of N-Viro International Corporation and subsidiaries as of and for the two years ended December 31, 1998. On September 21, 1999, we resigned as independent accountants of N-Viro International Corporation. We have read N-Viro International Corporation's statements included under Item 4 of its Form 8-K, dated September 23, 1999, and we agree with such statements. /s/ McGladrey & Pullen, LLP --------------------------- McGLADREY & PULLEN, LLP 26 EX-21.1 5 EXHIBIT 21.1 1 EXHIBIT 21.1 ------------ LIST OF SUBSIDIARIES OF THE COMPANY - ----------------------------------- National N-Viro Tech., Inc. (Ohio) Midwest N-Viro, Inc. (Illinois) Tennessee-Carolina N-Viro, Inc. (Tennessee) N-Viro Soil South, Inc. (Florida) N-Viro Honolulu, Inc. (Hawaii) Pan-American N-Viro, Inc. (Delaware) BioCheck Laboratories, Inc.* (Ohio) American N-Viro Resources, Inc. (Ohio) *Assets were sold April 1, 1996 but the entity was never dissolved. 27 EX-24.1 6 EXHIBIT 24.1 1 EXHIBIT 24.1 ------------ POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS that the undersigned, a Director of N-Viro International Corporation (the "Company"), a Delaware corporation that is filing an Annual Report on Form 10-K ("Form 10-K") for the year ended December 31, 1999 with the Securities and Exchange Commission under the provisions of the Securities and Exchange Act of 1934, as amended, hereby constitutes and appoints James K. McHugh his true and lawful attorney-in-fact and agent, for him and in his name, place and stead, in the capacity as Chairman of the Board, Chief Executive Officer and President of the Company, to sign such Form 10-K and any and all amendments thereto, and to file such Form 10-K and each such amendment so signed, with all exhibits thereto, and any and all other documents in connection therewith, hereby granting unto said attorney-in-fact and agent full power and authority to do and perform any and all acts and things requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might do in person, hereby ratifying and confirming all that said attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned hereunto sets his hand this 22nd day of March, 2000. /s/ J. Patrick Nicholson ------------------------------- J. Patrick Nicholson 28 2 EXHIBIT 24.1 ------------ POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS that the undersigned, a Director of N-Viro International Corporation (the "Company"), a Delaware corporation that is filing an Annual Report on Form 10-K ("Form 10-K") for the year ended December 31, 1999 with the Securities and Exchange Commission under the provisions of the Securities and Exchange Act of 1934, as amended, hereby constitutes and appoints James K. McHugh his true and lawful attorney-in-fact and agent, for him and in his name, place and stead, in the capacity as Director, to sign such Form 10-K and any and all amendments thereto, and to file such Form 10-K and each such amendment so signed, with all exhibits thereto, and any and all other documents in connection therewith, hereby granting unto said attorney-in-fact and agent full power and authority to do and perform any and all acts and things requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might do in person, hereby ratifying and confirming all that said attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned hereunto sets his hand this 22nd day of March, 2000. /s/ Wallace G. Imrscher --------------------------- Wallace G. Imrscher 29 3 EXHIBIT 24.1 ------------ POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS that the undersigned, a Director of N-Viro International Corporation (the "Company"), a Delaware corporation that is filing an Annual Report on Form 10-K ("Form 10-K") for the year ended December 31, 1999 with the Securities and Exchange Commission under the provisions of the Securities and Exchange Act of 1934, as amended, hereby constitutes and appoints James K. McHugh his true and lawful attorney-in-fact and agent, for him and in his name, place and stead, in the capacity as Director, to sign such Form 10-K and any and all amendments thereto, and to file such Form 10-K and each such amendment so signed, with all exhibits thereto, and any and all other documents in connection therewith, hereby granting unto said attorney-in-fact and agent full power and authority to do and perform any and all acts and things requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might do in person, hereby ratifying and confirming all that said attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned hereunto sets his hand this 22nd day of March, 2000. /s/ B.K. Wesley Copeland -------------------------------- B.K. Wesley Copeland 30 4 EXHIBIT 24.1 ------------ POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS that the undersigned, a Director of N-Viro International Corporation (the "Company"), a Delaware corporation that is filing an Annual Report on Form 10-K ("Form 10-K") for the year ended December 31, 1999 with the Securities and Exchange Commission under the provisions of the Securities and Exchange Act of 1934, as amended, hereby constitutes and appoints James K. McHugh his true and lawful attorney-in-fact and agent, for him and in his name, place and stead, in the capacity as Director, to sign such Form 10-K and any and all amendments thereto, and to file such Form 10-K and each such amendment so signed, with all exhibits thereto, and any and all other documents in connection therewith, hereby granting unto said attorney-in-fact and agent full power and authority to do and perform any and all acts and things requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might do in person, hereby ratifying and confirming all that said attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned hereunto sets his hand this 22nd day of March, 2000. /s/ James D. O'Neil ---------------------------------- James D. O'Neil 31 5 EXHIBIT 24.1 ------------ POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS that the undersigned, a Director of N-Viro International Corporation (the "Company"), a Delaware corporation that is filing an Annual Report on Form 10-K ("Form 10-K") for the year ended December 31, 1999 with the Securities and Exchange Commission under the provisions of the Securities and Exchange Act of 1934, as amended, hereby constitutes and appoints James K. McHugh his true and lawful attorney-in-fact and agent, for him and in his name, place and stead, in the capacity as Director, to sign such Form 10-K and any and all amendments thereto, and to file such Form 10-K and each such amendment so signed, with all exhibits thereto, and any and all other documents in connection therewith, hereby granting unto said attorney-in-fact and agent full power and authority to do and perform any and all acts and things requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might do in person, hereby ratifying and confirming all that said attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned hereunto sets his hand this 22nd day of March, 2000. /s/ Charles B. Kaiser, Jr. -------------------------------- Charles B. Kaiser, Jr. 32 6 EXHIBIT 24.1 ------------ POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS that the undersigned, a Director of N-Viro International Corporation (the "Company"), a Delaware corporation that is filing an Annual Report on Form 10-K ("Form 10-K") for the year ended December 31, 1999 with the Securities and Exchange Commission under the provisions of the Securities and Exchange Act of 1934, as amended, hereby constitutes and appoints James K. McHugh his true and lawful attorney-in-fact and agent, for him and in his name, place and stead, in the capacity as Director, to sign such Form 10-K and any and all amendments thereto, and to file such Form 10-K and each such amendment so signed, with all exhibits thereto, and any and all other documents in connection therewith, hereby granting unto said attorney-in-fact and agent full power and authority to do and perform any and all acts and things requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might do in person, hereby ratifying and confirming all that said attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned hereunto sets his hand this 22nd day of March, 2000. /s/ Terry J. Logan, Ph.D. ------------------------------ Terry J. Logan, Ph.D. 33 7 EXHIBIT 24.1 ------------ POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS that the undersigned, a Director of N-Viro International Corporation (the "Company"), a Delaware corporation that is filing an Annual Report on Form 10-K ("Form 10-K") for the year ended December 31, 1999 with the Securities and Exchange Commission under the provisions of the Securities and Exchange Act of 1934, as amended, hereby constitutes and appoints James K. McHugh his true and lawful attorney-in-fact and agent, for him and in his name, place and stead, in the capacity as Director, to sign such Form 10-K and any and all amendments thereto, and to file such Form 10-K and each such amendment so signed, with all exhibits thereto, and any and all other documents in connection therewith, hereby granting unto said attorney-in-fact and agent full power and authority to do and perform any and all acts and things requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might do in person, hereby ratifying and confirming all that said attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned hereunto sets his hand this 22nd day of March, 2000. /s/ Michael G. Nicholson ---------------------------------- Michael G. Nicholson 34 8 EXHIBIT 24.1 ------------ POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS that the undersigned, a Director of N-Viro International Corporation (the "Company"), a Delaware corporation that is filing an Annual Report on Form 10-K ("Form 10-K") for the year ended December 31, 1999 with the Securities and Exchange Commission under the provisions of the Securities and Exchange Act of 1934, as amended, hereby constitutes and appoints James K. McHugh his true and lawful attorney-in-fact and agent, for him and in his name, place and stead, in the capacity as Director, to sign such Form 10-K and any and all amendments thereto, and to file such Form 10-K and each such amendment so signed, with all exhibits thereto, and any and all other documents in connection therewith, hereby granting unto said attorney-in-fact and agent full power and authority to do and perform any and all acts and things requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might do in person, hereby ratifying and confirming all that said attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned hereunto sets his hand this 22nd day of March, 2000. /s/ Bobby B. Carroll --------------------------------- Bobby B. Carroll 35 9 EXHIBIT 24.1 ------------ POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS that the undersigned, a Director of N-Viro International Corporation (the "Company"), a Delaware corporation that is filing an Annual Report on Form 10-K ("Form 10-K") for the year ended December 31, 1999 with the Securities and Exchange Commission under the provisions of the Securities and Exchange Act of 1934, as amended, hereby constitutes and appoints James K. McHugh his true and lawful attorney-in-fact and agent, for him and in his name, place and stead, in the capacity as Director, to sign such Form 10-K and any and all amendments thereto, and to file such Form 10-K and each such amendment so signed, with all exhibits thereto, and any and all other documents in connection therewith, hereby granting unto said attorney-in-fact and agent full power and authority to do and perform any and all acts and things requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might do in person, hereby ratifying and confirming all that said attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned hereunto sets his hand this 22nd day of March, 2000. /s/ Daniel J. Haslinger ------------------------------------- Daniel J. Haslinger 36 EX-27.1 7 EXHIBIT 27.1
5 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 552,846 1,401 1,302,036 0 0 2,235,732 0 0 4,771,873 1,145,920 0 0 0 26,882 0 4,771,873 0 4,749,427 0 2,244,540 0 0 0 471,374 0 0 0 0 0 471,374 0 0.18
-----END PRIVACY-ENHANCED MESSAGE-----