-----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, JoyqCpLdIvhesVLbLP2xya+u6tsxSIzVuhxLdUjMnP8Br0Mtl6u8Lr24jTOcTasc iL6kfaArKTYEwBpsZ2NzVQ== 0001047469-99-015296.txt : 19990419 0001047469-99-015296.hdr.sgml : 19990419 ACCESSION NUMBER: 0001047469-99-015296 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990416 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-K405 SEC ACT: SEC FILE NUMBER: 000-21802 FILM NUMBER: 99596238 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-K405 1 10-K405 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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, 1998 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 incorporation or organization) No.) 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 April 2, 1999, was approximately $4,582,000. The number of shares of Common Stock of the registrant outstanding as of April 2, 1999, was 2,829,733. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's definitive proxy statement for the annual shareholders' meeting to be held May 13, 1999 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. /X/ - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- INDEX
PAGE ----- PART I Item 1. Business....................................................................................... 2 Item 2. Properties..................................................................................... 12 Item 3. Legal Proceedings.............................................................................. 12 Item 4. Submission of Matters to a Vote of Security Holders............................................ 13 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.......................... 13 Item 6. Selected Financial Data........................................................................ 13 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 15 Item 7A. Quantitative and Qualitative Disclosures About Market Risk..................................... 23 Item 8. Financial Statements and Supplementary Data.................................................... 24 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........... 25 PART III Item 10. Directors and Executive Officers of the Registrant............................................. 25 Item 11. Executive Compensation......................................................................... 25 Item 12. Security Ownership of Certain Beneficial Owners and Management................................. 25 Item 13. Certain Relationships and Related Transactions................................................. 25 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................... 26
1 PART I ITEM 1. BUSINESS GENERAL N-Viro International Corporation (the "Company" or "N-Viro"), incorporated in April, 1993, owns and licenses the N-Viro Process, a patented technology to treat and recycle wastewater sludges and other bio-organic wastes, utilizing certain alkaline and mineral by-products produced by the cement, lime, electric utilities and other industries. See "The N-Viro Process." In 1979, Mr. J. Patrick Nicholson and several investors formed N-Viro Energy Systems, Limited (the "Partnership"). The Partnership's initial strategy was to license the N-Viro Process to third parties through independent agents. Each independent agent acted in its respective territory as a marketing and distribution agent of the Partnership, and the Partnership retained the marketing and distribution rights to certain other territories. In early 1993, as a result of the then pending implementation of the 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 totaling $5,221,709 (including notes of $276,909 which resulted from a partial exercise of an over-allotment option). The organization notes were repaid out of the proceeds from the IPO. On November 10, 1993, an additional 112,000 shares were sold pursuant to the exercise by the Underwriters of their over-allotment option. On October 30, 1995, at a Special Meeting of the Shareholders, the shareholders approved a one for four reverse stock split which reduced the number of issued and outstanding shares of the Common Stock. This reverse split did not affect the Company's retained deficit and the stockholders' equity remained substantially unchanged. This action was deemed necessary by management of the Company to remain in compliance with the minimum bid price requirement of the National Association of Securities Dealers Automatic Quotation System ("Nasdaq") or the alternative net tangible assets requirement and for continued listing of the Common Stock on Nasdaq. The reverse split reduced the number of issued and outstanding shares of the Common Stock to approximately 2,037,000 (net of 57,250 treasury shares). In late 1995, the Company's business strategy changed from being a low cost provider of a process to marketing the N-Viro Process, which produces an "exceptional quality" sludge product, as defined in the 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 2 N-Viro Process. The Company has also operated N-Viro facilities for third parties on a start-up basis and currently operates one N-Viro facility on a contract management basis. There are currently over 40 locations throughout the world using the N-Viro Process and treat sludge from over 75 wastewater treatment facilities. The Company estimates that these locations are treating and recycling sludge at an annualized rate of over 150,000 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 41 states and the District of Columbia and internationally throughout the world. In the remaining states, and in these 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 36% 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 will expire in October of 1999. Currently, the contract is in its second five-year renewal period, and the Company it will be renewed for another term. 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 and the Agents act as distributors of alkaline admixture within their respective marketing and distribution territories and are responsible for quality control of the admixture. The 3 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, and receives a royalty fee from the Agents based on a percentage of the Agents' gross profits from alkaline admixture sales. N-Viro Soil is sold for agricultural use as a bio-organic and mineral fertilizer with agricultural liming and nutrient values, as landfill cover material, as a topsoil blending ingredient and for land reclamation projects. The Company estimates that approximately five percent of the N-Viro Soil produced is sold to landfills for cover material, small amounts are sold for land reclamation and similar projects, and a substantial portion of the remainder is sold for agricultural use or as a topsoil blend. Although the use of N-Viro Soil is not subject to any federal regulations or restrictions, each N-Viro facility is typically required to obtain a state and/or local permit for the sale of N-Viro Soil. In addition, many states and/or local governments require site-specific permits for the use of sludge products in bulk amounts. RESEARCH AND DEVELOPMENT Research and development on the N-Viro Process is performed primarily by BioCheck Laboratories, Inc. ("BioCheck"), formerly a wholly-owned subsidiary of the Company. In 1998 the Company spent approximately $27,000 on testing of the process, and considers its relationship with BioCheck to be satisfactory. In 1998 the Company spent approximately $59,000 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. To date, Dr. Logan has acted as an independent consultant to the Company on a part-time basis and is a director of the Company. 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 $141,000 in 1998 and $66,000 in 1997. The Company's net revenue after costs from these grants has been approximately $73,000 in 1998 and $5,000 in 1997, which have been used to reimburse the administrative costs of each program. The Company's initial pasteurization patents have over nine years of patent life remaining. Newer technologies for accelerated stabilization and use of carbon dioxide have a longer life cycle. Two patents, including dryer and "BioBlend" technology, were issued in 1998. 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 been working with Cemen Tech, an Iowa-based manufacturer of concrete and sludge processing equipment, to develop a dryer system which will reduce processing time while continuing to permit the survival of beneficial microflora. The Company's Phillipsburg, New Jersey and Leamington, Canada facilities began use of dryers in late 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 1999. In late 1997, N-Viro was awarded a $500,000 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 4 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 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: THE AGENTS
AGENT TERRITORY - ------------------------------------ ------------------------------------------------------- N-Viro Resources, Inc............... Colorado, Iowa, Kansas, Minnesota, Montana, Nebraska, North Dakota, South Dakota and Wyoming 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 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 5 EPA's "exceptional quality" sludge program. The part 503 Regs establish sludge use and disposal standards applicable to approximately 35,000 publicly and privately-owned wastewater treatment plants in the United States, including primary publicly-owned treatment works ("POTWs"), secondary and advanced treatment POTWs, privately-owned treatment works, federally-owned treatment works and domestic septage haulers. The EPA currently estimates that the 13,000 to 15,000 POTWs generate 110 to 150 million wet metric tons of sewage sludge per year. Under the part 503 Regs, sludge may be disposed of in municipal solid waste landfills approved under Subtitle D of the Resource Conservation and Recovery Act ("RCRA"), or may be surface disposed, incinerated or land applied for beneficial use in accordance with the requirements established by the part 503 Regs. DISPOSAL. Landfilling, incineration and ocean dumping have traditionally provided inexpensive, reliable methods of sludge disposal. Ocean dumping was banned in the United States in December 1992. Under the part 503 Regs, landfilling and incineration remain permissible sludge management alternatives but have become subject to more stringent regulatory standards. The vast majority of states have some site restrictions or other management practices governing the disposal of sludge in landfills. Amendments to the Clean Air Act governing incineration and disposal of residual ash also impose stricter air emission standards for incineration in general, and the part 503 Regs impose additional specific pollutant limits for sludges to be incinerated and for the resulting air emissions. Surface disposal of sludge involves the placement of sludge on the land at a dedicated site for disposal purposes. The part 503 Regs subject surface disposal to increased regulation by requiring, among other things, run-off and leachate collection systems, methane monitoring systems and monitoring of, and limits on, pollutant levels. In addition, sludge placed in a surface disposal site is required to meet certain standards with respect to pathogen levels relating to coliform or salmonella bacteria counts ("Class B" pathogen levels), levels of various pollutants, including metals, and elimination of attractiveness to pests, such as insects and rodents. LAND APPLICATION FOR BENEFICIAL USE. Land application for beneficial use involves the application of sludge or sludge-based products, for non-disposal purposes, including agricultural, silvicultural and horticultural uses and for land reclamation. Under the part 503 Regs, sludge products that meet certain stringent standards with respect to pathogen levels relating to coliform, salmonella, enteric viruses and viable helminth ova counts ("Class A" pathogen levels), levels of various pollutants, including metals, and elimination of attractiveness to pests, such as insects and rodents, are considered by the EPA to be "exceptional quality" sludge products. The Class A pathogen levels are significantly more stringent than the Class B 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 6 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 1998, 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, New Jersey and Ohio), 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. 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 7 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. 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 8 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, 1998, 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. 9 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, 1999. 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, 1998, 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 150,000 dry tons per year. The chart below summarizes the current annualized sludge processing volume for each of the ten largest N-Viro facilities.
APPROXIMATE SLUDGE PROCESSING FACILITY LOCATION VOLUME (DRY TONS/YEAR) - ---------------------------------------------------------------- ----------------------------- Middlesex County, New Jersey.................................... 54,000 Phillipsburg, New Jersey........................................ 15,000 Wilmington, Delaware............................................ 12,500 Syracuse, New York.............................................. 10,500 Toledo, Ohio.................................................... 8,000 Ft. Meade, FL................................................... 6,000 Minneapolis/St. Paul, Minnesota................................. 5,000 Greenville, South Carolina...................................... 4,000 Asheville, North Carolina....................................... 2,200 Riverstone, Australia........................................... 2,000
All of the existing N-Viro facilities are owned and operated by third parties, with the exception of the Toledo, Ohio facility which has been operated by the Company on a contract management basis since January 1990 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 10 payments from sludge processed at the five facilities using such earlier technology currently account for less than two percent of total royalty payments to the Company and the Company does not actively market the use of this process. SEGMENT INFORMATION EARNINGS VARIATION DUE TO BUSINESS CYCLES AND SEASONAL FACTORS. 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 37% of the Company's revenue is from management fee operations, 58% from domestic licenses and agreements, and the remaining 5% 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 Note No. 12 to the Financial Statements on page F-16. 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:
- -------------------------------------------------------------------------------------------- NON-MGT. FEE NON-MGT. FEE SEGMENT MGT. FEE OPERATIONS OPERATIONS--U.S. OPERATIONS--INTERNATIONAL - -------------------------------------------------------------------------------------------- Price Price Price ---------------------------------------------------------------------- Reliability Reputation Product quality and specifications ---------------------------------------------------------------------- COMPETITIVE Product quality and Product quality and Custom design FACTORS 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. 11 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 and equipment to Florida N-Viro in return for approximately $1,000,000. Additionally, each partner would contribute $250,000 each 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 $38,300 for MCO's portion of royalties through the year ending December 31, 1998. 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. Simon Waste Solutions ("Simon Waste") had Agency rights for Mexico and Puerto Rico. Simon Waste has ceased operations, and in 1996 the Company terminated their license and called for arbitration as provided in their contract. Simon Waste has failed to respond and the Company is proceeding with arbitration to obtain a definitive ruling. 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 12 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION The Company's 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, 1997, was as follows:
QUARTER HIGH LOW - -------------------------------------------------------------------------------- ------ ------ First 1997...................................................................... 3 2 Second 1997..................................................................... 2 1/8 1 5/16 Third 1997...................................................................... 3 1/4 1 5/8 Fourth 1997..................................................................... 3 3/8 2 1/8 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
The Company's stock price closed at $2.50 per share on April 1, 1999. HOLDERS As of April 2, 1999, the number of holders of record of the Company's Common Stock was 953. DIVIDENDS The Company has never paid dividends with respect to its Common Stock. UNREGISTERED SALES OF SECURITIES Effective in 1998 the Company reached agreements with a 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, of 74,000 shares of Common Stock. See Item 7 under the heading "Comparison of Year Ended December 31, 1998 with Year Ended December 31, 1997". 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 13 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, 1994, 1995, 1996, 1997 and 1998; and the consolidated balance sheet data set forth below as of December 31, 1994, 1995, 1996, 1997 and 1998 respectively, have been derived from the financial statements of the Company which have been audited by Ernst & Young LLP, independent auditors for the year ending December 31, 1994, and McGladrey & Pullen, LLP for the years ending December 31, 1995, 1996, 1997 and 1998. 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):
12/31/98 12/31/97 12/31/96 12/31/95 12/31/94 ----------- ----------- ----------- ----------- ----------- Revenues.................................... $ 3,929 $ 4,053 $ 3,624 $ 5,214 $ 4,552 Net income (loss)........................... (373) 534 (193) (1,815) (7,342) Net income (loss) per share(1).............. $ (0.15) $ 0.23 $ (0.09) $ (0.89) $ (3.66)
BALANCE SHEET DATA (IN THOUSANDS):
12/31/98 12/31/97 12/31/96 12/31/95 12/31/94 ----------- ----------- ----------- ----------- ----------- Total assets................................ $ 3,783 $ 4,423 $ 4,167 $ 5,062 $ 6,560 Notes payable............................... $ 161 $ 278 $ 1,188 $ 1,540 $ 1,661 Shareholder Advance......................... $ 47 n/a $ 197 n/a n/a
- ------------------------ (1) Per share amounts have been restated for a one-for-four reverse stock split effective October 31, 1995. 14 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) agency, license and royalty, (ii) facility management and sludge processing, (iii) alkaline admixture, (iv) N-Viro Soil and (v) miscellaneous revenues:
FOR THE YEAR ENDED DECEMBER 31, ------------------------------- 1998 1997 1996 --------- --------- --------- Agency, license and royalty.................................... 27.4% 28.2% 23.1% Facility management and sludge processing...................... 36.0% 33.6% 34.9% Alkaline admixture............................................. 29.6% 33.1% 32.7% N-Viro Soil.................................................... 1.2% 1.1% 1.8% Laboratory..................................................... .6% 1.4% 3.9% Miscellaneous revenues......................................... 5.2% 2.6% 3.6% --------- --------- --------- Totals....................................................... 100.0% 100.0% 100.0% --------- --------- --------- --------- --------- ---------
Agency revenues represent non-recurring payments for the right to market the N-Viro Process in a specified territory. License revenues 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 Company has fulfilled substantially all of its obligations under the relevant contract. 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. 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. 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. N-Viro Soil sales represent revenues derived from the sale of N-Viro Soil, 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. Miscellaneous revenues represent: research and development revenue (net of cost of revenue), commissions earned on sales, rental of equipment to a licensee or agent, or testing income. 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. 15 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.
PERIOD TO PERIOD TO YEAR ENDED PERIOD YEAR ENDED PERIOD YEAR ENDED DECEMBER 31, PERCENTAGE DECEMBER 31, PERCENTAGE DECEMBER 31, 1998 CHANGE 1997 CHANGE 1996 ------------ ---------- ------------ ---------- ------------ (DOLLARS IN THOUSANDS) COMBINED STATEMENT OF OPERATIONS DATA: Revenues................................ $3,929 (3.0)% $4,052 (11.8)% $3,624 Cost of revenues........................ 1,883 3.0% 1,829 1.7% 1,798 ------ ------ ------ Gross profit............................ 2,046 (8.0)% 2,223 21.7% 1,826 Selling, general & administrative....... 2,386 24.1% 1,923 (10.6)% 2,151 ------ ------ ------ Operating income (loss)................. (340) * 300 * (325) Non-operating income (expense).......... (33) * (78) * 132 ------ ------ ------ Income (loss) before income tax (credits)............................. (373) * 222 * (193) Federal and state income tax (credits)............................. 0 * (312) * 0 ------ ------ ------ Net income (loss)....................... $ (373) * $ 534 * $ (193) ------ ------ ------ ------ ------ ------ PERCENTAGE OF REVENUES: Revenues................................ 100.0% 100.0% 100.0% Cost of revenues........................ 47.9 45.1 49.6 ------ ------ ------ Gross profit............................ 52.1 54.9 50.4 Selling, general & administrative....... 60.7 47.5 59.4 ------ ------ ------ Operating income (loss)................. (8.6) 7.4 (9.0) Non-operating income (expense).......... (0.9) (1.9) 3.6 ------ ------ ------ Income (loss) before income tax (credits)............................. (9.5) 5.5 (5.3) Federal and state income tax (credits)............................. 0.0 (7.7) 0.0 ------ ------ ------ Net income (loss)....................... (9.5)% 13.2% (5.3)% ------ ------ ------ ------ ------ ------
- ------------------------ * Period to period percentage change comparisons have only been calculated for positive numbers. 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 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 1999 will increase due to the successful completion of a sludge processing project for a sub-licensee in the United Kingdom. 16 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. Selling, General and Administrative expenses ("S,G+A 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 totaling $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. These S,G+A expenses were offset by an 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 S,G+A expense in 1998 will translate into increased sales of the N-Viro technology in the near future. Nonoperating expense decreased by $45,000 to a loss of $33,000 for the year ended December 31, 1998 from a loss of $78,000 for the year ended December 31, 1997. The decrease was primarily due to interest income (expense), net increased 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. Effective in 1998 the Company reached agreements with a 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, of 74,000 shares of Common Stock. Two trade creditors are current members of the Board of Directors of the Company, Bobby Carroll and Frederick Kurtz. The 17 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:
AMOUNT OF NO. OF SHARES DATE ISSUED CREDITOR CANCELED DEBT ISSUED IN 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 + Associates, 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 with the Securities and Exchange Commission, to register certain shares of Common Stock of the Company, presently held by Heartland Limited Partnership I ("Heartland"). The Company subsequently received a comment letter from the Commission in July of 1998 relating to the Registration Statement and the periodic reports of the Company incorporated therein by reference and subsequently responded to such comments of the Commission. As of the date hereof, the registration statement has not been declared effective by the Commission and no shares of the Company's Common Stock have been sold, pursuant to the terms thereof. Heartland has, however, recently sold a portion of its holdings of Company Common Stock pursuant to Rule 144 as promulgated under the Securities Act of 1933, as amended. COMPARISON OF YEAR ENDED DECEMBER 31, 1997 WITH YEAR ENDED DECEMBER 31, 1996 Revenues increased $428,000, or 12%, to $4,052,000 for the year ended December 31, 1997 from $3,624,000 for the year ended December 31, 1996. This increase was offset in part by the sale of one of its wholly-owned subsidiaries, BioCheck Laboratories, which contributed about $54,000 in revenue in 1996. The net increase in revenue of $482,000 was due to the following:revenues from one-time domestic license or international territory fees increased $328,000, to $428,000 for 1997 from $100,000 for 1996; revenues from existing on-line facilities, excluding BioCheck, increased $155,000 to $3,625,000 from $3,470,000 for 1996. In 1997 the Company received approximately $100,000 in gross royalty revenue from our European licensee, N-Viro Worldwide. Management is optimistic that activities in 1998 will increase due to the 1998 ban on ocean dumping of sewerage sludge by European Economic Community countries. Gross Profit increased $397,000, or 22% to $2,223,000 for the year ended December 31, 1997 from $1,826,000 for the year ended December 31, 1996. The gross profit margin increased to 55% from 50% for the year ended December 31, 1996. This increase in gross profit margin was primarily due to the increase in one-time license fee gross profit of $264,000. The gross profit margin from existing on-line facilities, excluding BioCheck, increased to 51% from 49% for 1996. Selling, General and Administrative expenses decreased 11% to $1,923,000 for the year ended December 31, 1997 from $2,151,000 for the year ended December 31, 1996. In 1997, the Company continued streamlining its operations, primarily through staff reduction. The Company reduced expenditures for salaries and employee benefits by $282,000, as well as reducing sales, promotion and outside consultants expense totaling $57,000. An additional $49,000 of S,G+A expense was reduced by the sale of BioCheck, for non-personnel costs. These S,G+A expenses were offset by an increase in bad debt expense of $148,000, most of which was a one-time charge that resulted from a testing contract negotiated by BioCheck and deemed uncollectible in 1997. The Company anticipates that its development of a network 18 of marketing representatives and regional partnerships will more than offset the Company's reduced staffing in generating new sales revenue. Nonoperating income (expense) decreased by $210,000 to a loss of $78,000 for the year ended December 31, 1997 from income of $132,000 for the year ended December 31, 1996. The decrease was primarily due to the Company recognizing legal and settlement income of approximately $250,000 in 1996 relating to the settlement of the patent infringement litigation with Frank Manchak, Jr. See "Liquidity and Capital Resources." Also, interest income (expense), net decreased by approximately $50,000 due to the incurrence of interest expense related to the establishment and usage of working capital line of credit. 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. The amount of the deferred tax asset considered realizable, however, 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 $534,000 for the year ended December 31, 1997 compared to a net loss of $193,000 for the year ended December 31, 1996. In early 1996 the Company completed the transfer of its interest in the Fort Meade, Florida facility. The Company incurred a loss of approximately $46,000 on its share of Florida N-Viro LLP in 1997, a decrease of $4,000 from 1996. The Company expects to record losses from this investment through at least 1998. The audited financial statements of Florida N-Viro are included in this document after the Company's financial statements as Item 14(d), Financial Statements of Subsidiaries not Consolidated. In June of 1997, the Company reached agreements with three trade creditors to eliminate, in the aggregate, $259,500 of the Company's short-term debt in exchange for the Company's issuance and delivery to such creditors, in the aggregate, 86,500 shares of Common Stock. All three trade creditors are current members of the Board of Directors of the Company, J. Patrick Nicholson, Bobby Carroll and Frederick Kurtz. Additionally, Mr. Nicholson is the Chairman of the Board, Chief Executive Officer and President of the Company. The number of shares of Common Stock issued to, and the corresponding amount of short-term debt forgiven by, Mr. Nicholson, Mr. Carroll and Mr. Kurtz is set forth in the table below:
AMOUNT OF NO. OF SHARES CREDITOR CANCELED DEBT ISSUED IN EXCHANGE - ----------------------------------------------------------- ------------- ------------------- J. Patrick Nicholson....................................... $ 48,000 16,000 Bobby Carroll.............................................. $ 150,000 50,000 Frederick Kurtz............................................ $ 61,500 20,500
All such shares of Common Stock were issued and delivered to the Company's creditors pursuant to appropriate exemptions from registration under federal and state securities laws. All of the exchanges were evidenced by written Share Exchange Agreements between the Company and each of the creditors. Copies of such Share Exchange Agreements were filed as Exhibits to the Company's Form 8-K filed on July 18, 1997 which has been incorporated herein by reference. In addition to the share exchanges described above, the Company, in June of 1997, also reached agreement with N-Viro Energy Systems, Ltd. an Ohio limited partnership ("NVESL") and the holder of 45% of the issued and outstanding share of the Common Stock to cancel $150,000 of the Company's short-term debt to NVESL in exchange for the Company's issuance and delivery to NVESL of 50,000 shares of Common Stock. At the time of this agreement, the Company's total indebtedness to NVESL was $176,500. Such indebtedness was evidenced by three promissory notes in the aggregate amount of 19 $191,500. In exchange for the cancellation of the three original promissory notes, the Company agreed to issue and deliver to NVESL (i) 50,000 shares of Common Stock and (ii) a promissory note in the amount of $26,500. The shares of Common Stock issued and delivered to NVESL were issued and delivered pursuant to applicable exemptions from registration under the Securities Act and state securities laws. Further, this exchange was evidenced by a written Share Exchange Agreement which was filed by the Company as an Exhibit to the Company's Form 8-K filed on July 18, 1997. In addition to the share exchanges described above, the Company, in January of 1998, also reached agreement with Morgan Lewis & Bockius, New York, New York ("ML&B"), to cancel $60,000 of the Company's trade debt to ML&B in exchange for the Company's issuance and delivery to ML&B of 20,000 shares of Common Stock. At the time of this agreement, the Company's total indebtedness to ML&B was $90,272. The shares of Common Stock issued and delivered to ML&B will be issued and delivered pursuant to applicable exemptions from registration under the federal and state securities laws. In 1996 the Company agreed to acquire the remaining 50% ownership in Pan-American N-Viro from Synagro, Inc., a public company headquartered in Houston, Texas. The Company acquired this interest in September of 1996 and agreed to issue to Synagro 75,000 unregistered shares of the Company's common stock for the interest. The share certificates were issued in September of 1997. Pan-American N-Viro has exclusive licensing rights for all N-Viro technology in Central and South America. The market value of the stock at the time of issuance was $2.375 per share. LIQUIDITY AND CAPITAL RESOURCES The Company had working capital of $404,000 at December 31, 1998 compared to $420,000 at December 31, 1997. Current assets at December 31, 1998 included cash and investments of $324,000, which is an increase of about $291,000 from December 31, 1997. The decrease in working capital was principally due to restructuring of certain debt to equity which was offset by the operating loss for the year. In 1998 the Company's operating cash flow continued to be positive, and the Company improved its payments to unsecured trade vendors. Expenses relating to the Honolulu project were partially recovered in April, 1998, with the balance owed to the Company received by September, 1998. A portion of this money ($250,000) has been invested in a certificate of deposit with a bank and held as collateral on the Company's working capital line of credit. As previously discussed, effective in 1998 the Company reached agreements with a 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, of 74,000 shares of Common Stock. The Company incurred costs through 1997 for engineering work for a privately operated facility to have been constructed in Honolulu, Hawaii. In July, 1997, the Company signed Contract Change Order No. 1 with the City of Honolulu to reimburse the Company "non-transferable" costs of $200,000 by July 30, 1997 and $250,000 by July 15, 1998. An additional $299,651 in "transferable" costs were to have been included in a new operating contract fee structure with the City, but on December 30, 1997, the City canceled these negotiations, and the transferable costs were due the Company by November 30, 1998. This Contract Change Order No. 1 was reported in the Form 8-K filed by the Company on July 18, 1997. From July, 1997 through December, 1997, the Company incurred additional costs outside the Change Order, and these costs were billed to the City at December 31, 1997. The Company received $200,000 in July, 1997, $103,000 in April, 1998, $250,000 in July and the balance of $300,000 in August, 1998. 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 are due on demand. Also, the Company must maintain certain financial covenants. In 20 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 has agreed to not borrow more than $350,000 outstanding at any one time, until further notice. The Company expects this borrowing limitation to be lifted after the first quarter 1999 results are known. The balance owed on the line of credit at December 31, 1998 was $-0-. 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 1999. 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 (2.2 billion USA market vs. 40 million USA sewer sludge market), the Company is optimistic that 1999 and beyond will 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. EFFECT OF YEAR 2000 ISSUE ON THE COMPANY'S MANAGEMENT AND INFORMATION SYSTEMS The Company has prepared its systems and applications to operate properly after the year 2000 (Y2K). The issue is whether computer systems will properly recognize date-sensitive information when the year changes to 2000. Systems that do not properly recognize such information could generate erroneous data or cause a system to fail. The potential for failures and errors affects all aspects of our business, including computers and their backup systems, office equipment and building components. We are also addressing our interdependencies with our customers and suppliers, all of whom must address the same problem. N-Viro's Y2K Program is focused on four inter-related categories which are crucial to maintaining uninterrupted service to our customers: the Company local area network (LAN) and wide-area network (WAN), software applications, and the external hardware that supports the applications. Additionally, the Company will include an assessment of its non-computer based equipment and office infrastructure, which is less significant to serving the needs of the Company's customers. The milestones within each category 21 are:assessment, repair, testing and approval. The Company has a target of September 30, 1999 for the completion of all phases for all systems affecting the Company. CURRENT STATUS The Company has approximately 20 computers in use or available for use, all connected via a LAN. Of these, all but four are run under Macintosh operating systems, which do not have a Y2K problem. The other four are Windows 95 operating systems, and support the financial accounting and financial administration of the Company. All are important to the administration and maintenance related to our direct N-Viro product support activities, and support our sales and marketing department and other company services and internal administrative functions. As of December 31, 1998, the Company has completed 100% of the assessment, 100% of the repair and 100% of the application testing. All are Y2K compliant. The Company WAN helps provide quality service to the Company's customers. All of the boxes, switches, routers and network control points have been assessed: 100% are Y2K compliant. Additional Y2K testing will be conducted to independently verify supplier claims of compliance. At December 31, 1998, the assessment of the supplier applications was 10% complete. The Company expects to complete all phases of network certification by July 31, 1998. With respect to customer and supplier (third party) assessment, letters have been sent to about 400 companies to request information on their Y2K plans and targets for compliance. The Company has identified no existing types of third party interfaces. At December 31, 1998, the Company received approximately 11% of third party requests and approximately 100% of these indicated they were or expected to be Y2K compliant. The Company expects to complete Y2K certification for third parties by August 31, 1999, with 100% expected to be complete by Fall 1999. The non-information technology infrastructure focuses on the utilities-based systems (e.g., electric) that support the computer systems, as well as the need to continue security and operations. The effort to date for Y2K compliance within the non-IT infrastructure is in inventory and assessment. At December 31, 1998, approximately 25% of all sites completed inventory, 25% completed assessment and 25% are Y2K compliant. The Company expects to complete the remaining sites by mid-year 1999. COSTS The Company has expended approximately $7,000 since inception in late 1997 on the Y2K project. Total costs for the year ended December 31, 1998 were $5,000, all of which is classified as capital spending for upgrading and replacing non-compliant computer systems and applications. The Company anticipates the total cost of the project to be approximately $10,000 through December of 1999, which includes approximately $7,000 of capitalized fixed assets and $3,000 of additional assessment and compliance costs. CONTINGENCY PLANS The Company is in the process of establishing Y2K contingency plans, which include the following: - Data retention and recovery procedures to be in place for customer and business data to provide pre-millennium backups with on-site (primary backup) and off-site (2nd backup) data copies. - Alternative processes to be developed to support all customer functions in the event information systems or mechanical processes experience disruptions. - Alternative suppliers and plans to be in place for third-party products/services that do not meet Y2K compliance commitment schedules. 22 RISK ASSESSMENT The Company has assessed our business exposure that would result from a failure of our Y2K Program, as well as those of our suppliers and customers. Such failures would result in business consequences that could include failure to be able to serve customers, loss of network functionality, inability to render accurate bills, lost revenue, harm to the Company trademark, legal exposure and failure of management controls. Although the Company believes that internal Y2K compliance will be achieved by December 31, 1999, there can be no assurance that the Y2K problem will not have a material adverse affect on the Company's business, financial condition and results of operations. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As of December 31, 1998, 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. 23 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
PAGE ------------- REPORT OF INDEPENDENT AUDITOR ON THE FINANCIAL STATEMENTS.......................................... F-2 FINANCIAL STATEMENTS Consolidated Balance Sheets as of December 31, 1998 and 1997..................................... F-3 Consolidated Statements of Operations for the years ended December 31, 1998, 1997, and 1996...... F-4 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1998, 1997, and 1996........................................................................................... F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997, and 1996...... F-6 Notes to Financial Statements.................................................................... F-7 - F-18 REPORT OF INDEPENDENT AUDITOR ON THE SUPPLEMENTAL SCHEDULE......................................... F-19 SCHEDULE Schedule II, valuation and qualifying accounts and reserves...................................... F-20 All other schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the financial statements and notes thereto.
24 REPORT OF INDEPENDENT AUDITOR To the Board of Directors N-VIRO INTERNATIONAL CORPORATION Toledo, Ohio We have audited the accompanying consolidated balance sheets of N-VIRO INTERNATIONAL CORPORATION as of December 31, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-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 1997, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ MCGLADREY & PULLEN, LLP Elkhart, Indiana March 5, 1999 F-2 N-VIRO INTERNATIONAL CORPORATION CONSOLIDATED BALANCE SHEETS
DECEMBER 31, -------------------------- 1998 1997 ------------ ------------ ASSETS Current Assets Cash and cash equivalents........................................................... $ 322,827 $ 31,677 Securities available-for-sale....................................................... 1,401 1,401 Receivables: Trade............................................................................. 802,913 821,906 Contract.......................................................................... -- 671,521 Notes............................................................................. 197,839 394,718 Related parties................................................................... 46,790 -- Prepaid expenses.................................................................... 81,644 92,060 ------------ ------------ TOTAL CURRENT ASSETS.......................................................... 1,453,414 2,013,283 Property and Equipment................................................................ 577,116 561,229 Investment in Florida N-Viro, L.P..................................................... 852,510 912,620 Deferred Tax Assets................................................................... 312,000 312,000 Intangible and Other Assets........................................................... 588,312 624,237 ------------ ------------ $ 3,783,352 $ 4,423,369 ------------ ------------ ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Note payable, bank.................................................................. $ -- $ 120,000 Current maturities of long-term debt................................................ 93,640 93,545 Accounts payable.................................................................... 729,427 1,196,713 Accrued expenses.................................................................... 226,790 183,071 ------------ ------------ TOTAL CURRENT LIABILITIES..................................................... 1,049,857 1,593,329 ------------ ------------ Long-Term Debt, less current maturities............................................... 67,547 64,702 ------------ ------------ Commitments and Contingencies Stockholders' Equity Common stock, $.01 par value; authorized 1998 7,000,000 shares; 1997 45,000,000 shares; issued 1998 2,829,733 shares; 1997 2,755,733 shares....................... 28,298 27,558 Additional paid-in capital.......................................................... 13,632,425 13,359,552 Retained earnings (deficit)......................................................... (9,876,798) (9,503,795) ------------ ------------ 3,783,925 3,883,315 Less cost of 307,250 shares of treasury stock, at cost.............................. 1,117,977 1,117,977 ------------ ------------ 2,665,948 2,765,338 ------------ ------------ $ 3,783,352 $ 4,423,369 ------------ ------------ ------------ ------------
See Notes to Financial Statements. F-3 N-VIRO INTERNATIONAL CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, ---------------------------------------- 1998 1997 1996 ------------ ------------ ------------ Revenues................................................................ $ 3,929,317 $ 4,052,648 $ 3,623,873 Cost of revenues........................................................ 1,883,529 1,829,309 1,797,796 ------------ ------------ ------------ GROSS PROFIT...................................................... 2,045,788 2,223,339 1,826,077 ------------ ------------ ------------ Operating expenses: Selling, general, and administrative.................................. 2,327,575 1,920,563 2,108,866 Research and development.............................................. 58,478 2,714 41,784 ------------ ------------ ------------ 2,386,053 1,923,277 2,150,650 ------------ ------------ ------------ OPERATING INCOME (LOSS)........................................... (340,265) 300,062 (324,573) ------------ ------------ ------------ Nonoperating income (expense): Miscellaneous income.................................................. -- -- 154,941 Interest income (expense), net........................................ 32,372 (32,157) 18,215 Equity in losses of joint venture..................................... (65,110) (45,838) (41,544) ------------ ------------ ------------ (32,738) (77,995) 131,612 ------------ ------------ ------------ INCOME (LOSS) BEFORE INCOME TAX (CREDITS)......................... (373,003) 222,067 (192,961) Federal and state income tax (credits).................................. -- (312,000) -- ------------ ------------ ------------ NET INCOME (LOSS)................................................. $ (373,003) $ 534,067 $ (192,961) ------------ ------------ ------------ ------------ ------------ ------------ Basic and diluted earnings (loss) per share............................. $ (0.15) $ 0.23 $ (0.09) ------------ ------------ ------------ ------------ ------------ ------------ Weighted average common shares outstanding.............................. 2,463,667 2,274,134 2,037,000 ------------ ------------ ------------ ------------ ------------ ------------
See Notes to Financial Statements. F-4 N-VIRO INTERNATIONAL CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ADDITIONAL RETAINED COMMON PAID-IN EARNINGS TREASURY STOCK CAPITAL (DEFICIT) STOCK TOTAL --------- ------------- ------------- ------------- ------------ Balance, December 31, 1995................. $ 20,943 $ 12,024,060 $ (9,844,901) $ (617,977) $ 1,582,125 Net (loss)............................... -- -- (192,961) -- (192,961) Other.................................... -- 24,395 -- -- 24,395 --------- ------------- ------------- ------------- ------------ 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 --------- ------------- ------------- ------------- ------------ --------- ------------- ------------- ------------- ------------
See Notes to Financial Statements. F-5 N-VIRO INTERNATIONAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ------------------------------------ 1998 1997 1996 ----------- ---------- ----------- Cash Flows From Operating Activities Net income (loss)........................................................ $ (373,003) $ 534,067 $ (192,961) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization.......................................... 169,807 170,588 164,353 Provision for bad debts................................................ 40,000 123,490 656,000 Deferred income taxes.................................................. -- (312,000) -- Issuance of common stock and options for fees and services............. 299,092 -- -- Other.................................................................. 63,596 47,316 (360,985) Change in assets and liabilities: Decrease (increase) in: Receivables........................................................ (21,007) (482,939) (341,773) Prepaid expenses and other......................................... 10,416 133,537 (35,928) Increase (decrease) in accounts payable and accrued liabilities...... (329,891) 25,643 5,901 ----------- ---------- ----------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES............ (140,990) 239,702 (105,393) ----------- ---------- ----------- Cash Flows From Investing Activities Collection of contract receivable........................................ 671,521 -- -- Proceeds from sale of property and equipment............................. -- -- 945,147 Purchase of property and equipment....................................... (67,041) (49,943) (122,434) Advances to related parties.............................................. (46,790) -- -- Payments on notes receivable............................................. 103,203 -- -- Expenditures for intangible and other assets............................. (21,139) (53,294) (203,833) ----------- ---------- ----------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES............ 639,754 (103,237) 618,880 ----------- ---------- ----------- Cash Flows From Financing Activities Net borrowings (payments) on note payable, bank.......................... (120,000) 120,000 -- Borrowings under long-term obligations................................... 67,000 102,296 375,683 Principal payments on long-term obligations.............................. (129,135) (433,786) (855,392) Proceeds from sale of common stock....................................... -- 324,587 -- Purchase of treasury stock............................................... -- (500,000) -- Other.................................................................... (25,479) -- 24,395 ----------- ---------- ----------- NET CASH (USED IN) FINANCING ACTIVITIES........................ (207,614) (386,903) (455,314) ----------- ---------- ----------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............... 291,150 (250,438) 58,173 Cash and cash equivalents, beginning....................................... 31,677 282,115 223,942 ----------- ---------- ----------- Cash and cash equivalents, ending.......................................... $ 322,827 $ 31,677 $ 282,115 ----------- ---------- ----------- ----------- ---------- -----------
See Notes to Financial Statements. F-6 N-VIRO INTERNATIONAL CORPORATION NOTES TO FINANCIAL STATEMENTS NOTE 1. NATURE OF BUSINESS, USE OF ESTIMATES, BASIS OF PRESENTATION, AND SIGNIFICANT ACCOUNTING POLICIES 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. 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. SIGNIFICANT ACCOUNTING POLICIES: 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. 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. 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. INTANGIBLE ASSETS: Patent costs and territory rights are being 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-7 N-VIRO INTERNATIONAL CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 1. NATURE OF BUSINESS, USE OF ESTIMATES, BASIS OF PRESENTATION, AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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. 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 was to increase the weighted average number of shares by 6,346 for the year ended December 31, 1997. For the years ended December 31, 1998 and 1996, the amounts are excluded from the dilutive per share calculation because they would be antidilutive. SEGMENT INFORMATION: 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. NOTE 2. BALANCE SHEET DATA TRADE RECEIVABLES: Trade receivables in the accompanying balance sheets at December 31, 1998 and 1997 are stated net of an allowance for doubtful accounts of approximately $128,600 and $89,000 respectively. CONTRACT RECEIVABLES: Contract receivables represent amounts for reimbursement of direct costs incurred for a processing facility in Hawaii. NOTES RECEIVABLE: The Company has notes receivable with customers. The amounts in the accompanying balance sheets at December 31, 1998 and 1997 are stated net of an allowance for doubtful accounts of $330,980. F-8 N-VIRO INTERNATIONAL CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 2. BALANCE SHEET DATA (CONTINUED) The Company has various unsecured notes receivable from related parties which bear interest at 6% and are due on demand. PROPERTY AND EQUIPMENT:
1998 1997 ------------ ------------ Land and leasehold improvements................................... $ 44,911 $ 41,618 Equipment......................................................... 1,088,929 1,033,906 Furniture and fixtures............................................ 206,740 212,464 ------------ ------------ 1,340,580 1,287,988 Less accumulated depreciation and amortization.................... 763,464 726,759 ------------ ------------ $ 577,116 $ 561,229 ------------ ------------ ------------ ------------
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 contributed its Florida operating facility with a carrying value of $1,934,334. In exchange, the Company received $880,700 in cash and retains a 47% interest in the facility. During the year ended December 31, 1997, the Company acquired an additional 3% interest in the subsidiary. Condensed financial information of the partnership is as follows:
DECEMBER 31, -------------------------- 1998 1997 ------------ ------------ Current assets.................................................... $ 282,674 $ 221,511 Long-term assets.................................................. 1,794,171 1,853,455 ------------ ------------ $ 2,076,845 $ 2,074,966 ------------ ------------ ------------ ------------ Current liabilities............................................... $ 363,071 $ 249,726 Long-term liabilities............................................. 18,754 -- Partners' equity.................................................. 1,695,020 1,825,240 ------------ ------------ $ 2,076,845 $ 2,074,966 ------------ ------------ ------------ ------------
YEAR ENDED DECEMBER 31, ----------------------------------- 1998 1997 1996 ----------- ---------- ---------- Net sales............................................... $ 975,130 $ 655,570 $ 761,630 Net (loss).............................................. (130,220) (91,675) (83,085)
The partnership has a major customer which represented approximately 60%, 58%, and 45% of its revenue for the years ended December 31, 1998, 1997, and 1996 respectively. F-9 N-VIRO INTERNATIONAL CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 2. BALANCE SHEET DATA (CONTINUED) INTANGIBLE AND OTHER ASSETS:
1998 1997 ---------- ---------- Patents and other intangibles, less accumulated amortization 1998 $180,000; 1997 $181,000; 1996 $151,000.............................. $ 387,258 $ 400,876 Territory rights, less accumulated amortization 1998 $45,000; 1997 $22,600; 1996 none.................................................. 201,054 223,361 ---------- ---------- $ 588,312 $ 624,237 ---------- ---------- ---------- ----------
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. Pro forma and condensed financial information has not been presented as the investment is not significant to the Company's financial position or results of operations. ACCRUED LIABILITIES:
1998 1997 ---------- ---------- Employee benefits..................................................... $ 39,846 $ 37,656 Sales tax payable..................................................... 178,799 145,415 Other................................................................. 8,145 -- ---------- ---------- $ 226,790 $ 183,071 ---------- ---------- ---------- ----------
NOTE 3. PLEDGED ASSETS, LINE OF CREDIT, AND LONG-TERM DEBT The Company has a $500,000 line of credit with a bank, none of which was outstanding at December 31, 1998. Borrowings against the line of credit are limited to a borrowing base based on eligible accounts receivable, bear interest at prime (7.75% at December 31, 1998) minus .5% on borrowings up to $250,000 and prime plus 1% for borrowings above $250,000, are collateralized by accounts receivable, inventories, equipment, assignment of a $250,000 certificate of deposit, and assignment of certain contracts, and are due on demand. This agreement expires July 31, 1999. This agreement is subject to certain covenants which have been complied with or waived. In connection with the waiver, the Company has agreed not to borrow more than $350,000 until further notice. Long-term debt at December 31, 1998 and 1997 is as follows:
1998 1997 ---------- ---------- Notes payable......................................................... $ 161,187 $ 158,247 Less current maturities............................................... 93,640 93,545 ---------- ---------- $ 67,547 $ 64,702 ---------- ---------- ---------- ----------
The notes payable are notes signed for amounts owed to vendors. The notes bear interest ranging from 8.5% to 10.5% and are due at varying dates through June 2004. Aggregate maturities of long-term F-10 N-VIRO INTERNATIONAL CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 3. PLEDGED ASSETS, LINE OF CREDIT, AND LONG-TERM DEBT (CONTINUED) debt for the years ending December 31 are as follows: 2000 $25,573; 2001 $20,926; 2002 $13,898; 2003 $5,057; and thereafter $2,093. Interest expensed and paid was approximately $16,000, $38,000, and $20,000 for the years ended December 31, 1998, 1997, and 1996 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 to 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, notes payable to a 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, none of which were issued and outstanding at December 31, 1998 and 1997. 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. 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, 1998 and 1997, and the number outstanding and exercisable at those dates:
1998 1997 ---------------------- ----------------------- WEIGHTED WEIGHTED AVERAGE AVERAGE EXERCISE EXERCISE SHARES PRICE SHARES PRICE --------- ----------- ---------- ----------- Outstanding, beginning of year....................................... 163,825 $ 3.54 151,525 $ 26.45 Granted............................................................ 323,375 2.38 124,850 3.13 Expired during the year............................................ (25,875) 4.86 (112,550) 33.92 --------- ---------- Outstanding, end of year............................................. 461,325 2.65 163,825 3.54 --------- ---------- --------- ---------- Eligible for exercise at end of year................................. 193,135 90,850 --------- ---------- --------- ---------- Weighted average fair value per option for options granted during the year............................................................... $ 1.86 $ 1.83 ----------- ----------- ----------- -----------
F-11 N-VIRO INTERNATIONAL CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 4. EQUITY TRANSACTIONS (CONTINUED) 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 ----------- --------------- ----------- ----------- ----------- 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 1997 ------------------------------------------------------------------- Range of exercise prices: $1.56 to $2.38 53,200 9.3 $ 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, primarily related to the Company's stock option plan, 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 and the amount an employee must pay to acquire the stock. The Company has adopted the 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. This requirement is to be applied prospectively to any options granted. Had compensation cost been determined based upon the fair value method prescribed in SFAS Statement No. 123, reported net income (loss) would have been $(460,168), $386,564, and $(263,833), and basic earnings (loss) per share would have been $(.23), $.18, and $(.13) for the years ended December 31, 1998, 1997, and 1996 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 1996, 1997, and 1998 respectively: no assumed dividend rates for all years; risk-free interest rates of 5.5%, 5.25%, and 5.25%, on expected lives of 10 years for all years; and expected price volatility of 118%, 99%, and 99% respectively. Subsequent to December 31, 1998, the Company issued options for 3,500 shares to its Board of Directors. These options vest immediately upon issuance. F-12 N-VIRO INTERNATIONAL CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 5. REVENUE AND MAJOR CUSTOMERS Revenues for the years ended December 31, 1998, 1997, and 1996 consist of the following:
1998 1997 1996 ------------ ------------ ------------ Facility management and sludge processing........... $ 1,415,418 $ 1,360,572 $ 1,267,161 Royalty fees........................................ 644,069 707,694 696,117 License and territory fees.......................... 432,867 428,050 100,000 Alkaline admixture sales............................ 1,163,286 1,393,526 1,186,908 Other............................................... 273,677 162,806 373,687 ------------ ------------ ------------ $ 3,929,317 $ 4,052,648 $ 3,623,873 ------------ ------------ ------------ ------------ ------------ ------------
Revenues for the years ended December 31, 1998, 1997, and 1996 include revenues from one major customer (included in the management operations segment) which represented approximately 36%, 35%, and 30% respectively of total revenues. In addition, the Company had another major customer of approximately 11% of total revenues (which is included in the other domestic operations segment) for each of the years ended December 31, 1998 and 1997. The accounts receivable balances due from these customers at December 31, 1998 and 1997 were approximately $211,000 and $189,000 respectively. NOTE 6. RELATED PARTY TRANSACTIONS The Company paid consulting fees to the former stockholder of one of the Company's agents of $120,000, $120,000, and $150,000 for the years ended December 31, 1998, 1997, and 1996 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 $107,000 and $100,000 at December 31, 1998 and 1997 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. Subsequent to year end, 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. 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, 1998 is $119,000. The total rental expense included in the statements of operations for the years ended December 31, 1998, 1997, and 1996 is approximately $69,000, $78,000, and $110,000 respectively. F-13 N-VIRO INTERNATIONAL CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 7. COMMITMENTS AND CONTINGENCIES (CONTINUED) The Company's minimum commitment under an agreement with a consultant (see Note 6) is $240,000, payable in cash or stock of $60,000 per year for each year ending December 31, 1999 through 2002. 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, and cash flows of the Company. 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. The composition of the deferred tax assets and liabilities at December 31, 1998 and 1997 is as follows:
1998 1997 ------------- ------------- Gross deferred tax liability, accelerated depreciation.......... $ (17,000) $ (12,000) ------------- ------------- Gross deferred tax assets: Loss carryforwards............................................ 3,634,000 3,490,000 Patent costs.................................................. 590,000 666,000 Allowance for doubtful accounts............................... 184,000 156,000 Property and equipment basis difference....................... 18,000 21,000 Other......................................................... 15,000 15,000 ------------- ------------- 4,441,000 4,348,000 ------------- ------------- Less valuation allowance........................................ (4,112,000) (4,024,000) ------------- ------------- $ 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, 1998, 1997, and 1996 as follows:
1998 1997 1996 ---------- ----------- ---------- Computed "expected" tax (credits)........................ $ (99,000) $ 76,000 $ (66,000) State taxes, net of federal tax benefit.................. (10,000) 8,000 (7,000) Increase in income taxes resulting from: Change in valuation allowance.......................... 88,000 (355,000) 103,000 Other.................................................. 21,000 (41,000) (30,000) ---------- ----------- ---------- $ -- $ (312,000) $ -- ---------- ----------- ---------- ---------- ----------- ----------
F-14 N-VIRO INTERNATIONAL CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 8. INCOME TAX MATTERS (CONTINUED) The net operating loss carryforwards available at December 31, 1998 to offset future taxable income total approximately $9,035,000 and expire as follows: 2008 $311,000; 2009 $6,255,000; 2010 $1,530,000; 2012 $685,000; and 2013 $254,000. In 1997, the Company has 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 during the next three years, as the Company has changed its strategic focus to its profitable core business and realization of the loss carryforwards beyond that period are uncertain. Realization of that asset 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 all of the recorded 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. NOTE 9. DISCONTINUED AND TRANSFERRED DIVISIONS At the beginning of the year ended December 31, 1996, the Company transferred its Florida operating facility to a joint venture which is being accounted for under the equity method, and sold its wholly-owned subsidiary, Biocheck Laboratories. NOTE 10. RESTATEMENT The 1996 income statement has been restated to reflect an adjustment for a contract which did not meet the Company's policy on revenue recognition. The Company incorrectly recorded a bad debt expense rather than a reduction of revenue, accordingly, the year ended December 31, 1996 revenue and selling, general, and administrative expenses have been reduced by $600,000, resulting in no change in operating or net income. NOTE 11. CASH FLOWS INFORMATION Supplemental information relative to the statements of cash flows for the years ended December 31, 1998, 1997, and 1996 is as follows:
1998 1997 1996 ---------- ---------- --------- Supplemental schedule of noncash investing and financial activities: Common stock issued for relief of liabilities............... $ 170,375 $ 809,500 $ -- ---------- ---------- --------- ---------- ---------- --------- Common stock issued in exchange for 50% interest of Pan-Am.................................................... $ -- $ 178,125 $ -- ---------- ---------- --------- ---------- ---------- --------- Price guarantee of common stock in connection with settlement agreement (see Note 7)......................... $ 72,875 $ -- $ -- ---------- ---------- --------- ---------- ---------- ---------
F-15 N-VIRO INTERNATIONAL CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 12. 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--Sale 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 countries. The accounting policies of the segments are the same as those described in "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 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 do so 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, 1998, F-16 N-VIRO INTERNATIONAL CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 12. SEGMENT INFORMATION (CONTINUED) 1997, and 1996. Segment information for 1997 and 1996 has been presented to conform with the require-ments of SFAS No. 131 (dollars in thousands).
MANAGEMENT DOMESTIC FOREIGN OPERATIONS OPERATIONS OPERATIONS TOTAL ------------- ----------- ------------- --------- 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 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 1996 ---------------------------------------------------- Revenues......................................................... $ 1,373 $ 1,903 $ 348 $ 3,624 Cost of revenues................................................. 824 974 -- 1,798 Segment profits.................................................. 549 929 348 1,826 Identifiable assets.............................................. 91 351 -- 442 Depreciation..................................................... 13 67 -- 80
F-17 N-VIRO INTERNATIONAL CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 12. SEGMENT INFORMATION (CONTINUED) A reconciliation of total segment revenues, cost of revenues, and segment profits sales to consolidated revenues, cost of revenues, and segment information to the consolidated financial statements as of and for the years ended December 31, 1998, 1997, and 1996 is as follows (dollars in thousands):
1998 1997 1996 --------- --------- --------- Revenues Total revenues for reportable segments............................................. $ 3,929 $ 4,053 $ 3,624 --------- --------- --------- --------- --------- --------- Cost of revenues: Total cost of revenues for reportable segments..................................... $ 1,886 $ 1,830 $ 1,798 Other.............................................................................. (3) (1) -- --------- --------- --------- Consolidated cost of revenues.................................................. $ 1,883 $ 1,829 $ 1,798 --------- --------- --------- --------- --------- --------- Segment profits: Segment profits for reportable segments............................................ $ 2,043 $ 2,223 $ 1,826 Corporate selling, general, and administrative expenses............................ (2,313) (1,923) (2,151) Other income (expense)............................................................. (135) (46) 114 --------- --------- --------- Consolidated EBIT.............................................................. $ (405) $ 254 $ (211) --------- --------- --------- --------- --------- --------- Consolidated assets: Identifiable assets for reportable segments........................................ $ 336 $ 303 $ 442 Corporate property and equipment................................................... 241 258 180 Current assets not allocated to segments........................................... 1,453 2,013 2,191 Intangible and other assets not allocated to segments.............................. 1,987 2,083 1,903 Consolidation eliminations......................................................... (234) (234) (549) --------- --------- --------- Consolidated assets............................................................ $ 3,783 $ 4,423 $ 4,167 --------- --------- --------- --------- --------- --------- Depreciation and amortization: Depreciation for reportable segments............................................... $ 54 $ 66 $ 80 Corporate depreciation and amortization............................................ 116 105 84 --------- --------- --------- Consolidated depreciation...................................................... $ 170 $ 171 $ 164 --------- --------- --------- --------- --------- ---------
NOTE 13. SUBSEQUENT EVENTS On March 3, 1999, the Company repurchased the Kentucky, Virginia, and West Virginia territory from an unrelated party for a cash payment $150,000. F-18 INDEPENDENT AUDITOR'S REPORT ON THE SUPPLEMENTAL SCHEDULE To the Board of Directors N-VIRO INTERNATIONAL CORPORATION Toledo, Ohio Our audits of the consolidated financial statements of N-VIRO INTERNATIONAL CORPORATION included Schedule II, contained herein, for the years ended December 31, 1996, 1997, and 1998. 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-19 N-VIRO INTERNATIONAL SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES DECEMBER 31, 1996, 1997, AND 1998
BALANCE AT DEDUCTIONS BALANCE AT BEGINNING CHARGED TO FROM CLOSE OF PERIOD OPERATIONS RESERVES OF PERIOD ----------- ----------- ----------- ----------- Allowance for doubtful accounts--deducted from trade receivables and notes receivable, in the balance sheets: 1996.......................................................... $ 270,000 $ 56,000 $ -- $ 326,000 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- 1997.......................................................... $ 326,000 $ 204,000 $ 110,000 $ 420,000 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- 1998.......................................................... $ 420,000 $ 76,000 $ 36,000 $ 460,000 ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
F-20 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item is incorporated by reference to the information under the heading "Election of Four Directors" and "Executive Officers of the Company" in the definitive proxy statement of the Company filed with the Commission on April 14, 1999. 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 14, 1999. 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 14, 1999. 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 14, 1999. 25 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. AND (a) 2. FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE See "Index to Financial Statements and Schedule" set forth in Item 8 at page 20 of this Form 10-K. (a) 3. EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ----------- -------------------------------------------------------------------------------------------------------- 3.1 Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Registration Statement of the Registrant on Form S-1 (Reg. No. 33-62766) (the "Registration Statement").) 3.2 By-Laws of the Company (incorporated by reference to Exhibit 3.2 to the Registration Statement). 10.1 The Amended and Restated N-Viro International Corporation Stock Option Plan (incorporated by reference to 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). 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 None (c) The exhibits listed in Item 14(a)(3) are filed with this Form 10-K. 26 (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 Statement of Income (Loss) and Partners' Capital.......................................................... E-3 Statement of Cash Flows................................................................................... E-4 Notes to Financial Statements............................................................................. E-5-7
27 [letterhead -- "joseph m cahill, ltd. -- certified public accountant"] February 15, 1999 INDEPENDENT AUDITOR'S REPORT To the Partners of Florida N-VIRO, L.P. West Chester, Pennsylvania 19382 I have audited the accompanying balance sheets of Florida N-VIRO, L.P., (a Limited Partnership), as of December 31, 1998 and 1997, 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, 1998 and 1997, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. JMC/rb /s/ joseph m cahill, ltd. [letterhead--"189 w. lancaster avenue paoli, pennsylvania 19301 610 889 3300 fax 610 889 3303"] E-1 FLORIDA N-VIRO, L.P. BALANCE SHEETS DECEMBER 31, 1998 AND 1997
1998 1997 ------------ ------------ ASSETS Current Assets Cash.............................................................................. $ 39,888 $ 26,820 Receivables: Trade........................................................................... 129,497 60,616 Partners........................................................................ 107,416 124,696 Prepaid Expenses.................................................................. 5,873 9,379 ------------ ------------ Total Current Assets.............................................................. 282,674 221,511 Property and Equipment Land.............................................................................. 147,163 147,163 Site improvements................................................................. 45,965 45,965 Building.......................................................................... 1,383,169 1,383,169 Operating equipment............................................................... 497,695 459,345 Office furniture and equipment.................................................... 6,072 3,199 ------------ ------------ 2,080,064 2,038,841 Less Accumulated Depreciation..................................................... 285,893 185,386 ------------ ------------ Total Property and Equipment...................................................... 1,794,171 1,853,455 ------------ ------------ Total Assets.......................................................................... $ 2,076,845 $ 2,074,966 ------------ ------------ ------------ ------------ LIABILITIES AND PARTNERS' CAPITAL Current Liabilities Payables: Trade........................................................................... $ 234,831 $ 128,684 Partners........................................................................ -- 21,523 Current portion note payable.................................................... 6,917 -- Accrued expenses................................................................ 99,519 99,519 ------------ ------------ Total Current Liabilities........................................................... 363,071 249,726 Note Payable, Less Current Portion.................................................. 18,754 -- Partners' Capital................................................................... 1,695,020 1,825,240 ------------ ------------ Total Liabilities and Partners' Capital............................................... $ 2,076,845 $ 2,074,966 ------------ ------------ ------------ ------------
The accompanying notes are an integral part of these financial statements. E-2 FLORIDA N-VIRO, L.P. STATEMENTS OF INCOME (LOSS) AND PARTNERS' CAPITAL FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
1998 1997 ------------ ---------- Revenues................................................................................ $ 906,130 $ 655,570 Costs and Expenses Costs of Operations................................................................... 975,600 691,781 Selling General and Administrative.................................................... 60,264 51,062 Interest.............................................................................. 1,680 5,197 ------------ ---------- Total Costs and Expenses................................................................ 1,037,544 748,040 Interest Income....................................................................... 1,194 795 ------------ ---------- Net Income (Loss)....................................................................... $ (130,220) $ (91,675) ------------ ---------- ------------ ----------
STATEMENT OF PARTNERS' CAPITAL
1997 ---------------------------------------------- LIMITED GENERAL PARTNER PARTNERS TOTAL --------------- --------------- ------------ Beginning Balance................................................ $ 8,339 $ 1,908,576 $ 1,916,915 Net Loss....................................................... (1,833) (89,842) (91,675) ------- --------------- ------------ Ending Balance, December 31, 1997................................ $ 6,506 $ 1,818,734 $ 1,825,240 ------- --------------- ------------ ------- --------------- ------------ 1998 ---------------------------------------------- Beginning Balance................................................ $ 6,506 $ 1,818,734 $ 1,825,240 Net Loss....................................................... (2,604) (127,616) (130,220) ------- --------------- ------------ Ending Balance, December 31, 1998................................ $ 3,902 $ 1,691,118 $ 1,695,020 ------- --------------- ------------ ------- --------------- ------------
The accompanying notes are an integral part of these financial statements. E-3 FLORIDA N-VIRO, L.P. STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
1998 1997 ----------- ---------- Cash Flow from Operating Activities Net Income (Loss)...................................................................... $ (130,220) $ (91,675) Adjustment to Reconcile Net Earnings (loss) to Cash Provided (used) by Operating Activities Depreciation........................................................................... 100,507 92,691 (Increase) Decrease in Accts Receivable................................................ (51,601) 10,569 (Decrease) in Prepaid Expenses......................................................... 3,506 2,165 Decrease in Costs in Excess of Billings................................................ -- 976 Increase (Decrease) in Accts Payable................................................... 84,624 (40,290) Increase (Decrease) in Accrued Expenses................................................ 21,804 58,580 ----------- ---------- Net Cash Provided (Used) by Operating Activities....................................... 28,620 33,016 Cash Flows from Investing Activities Acquisition of Property and Equipment.................................................. (41,223) -- ----------- ---------- Net Cash Provided (Used) by Investing Activities....................................... (41,223) -- Cash Flows from Financing Activities New Borrowings: Long-term Debt......................................................... 29,950 -- Repayments: Long-term Debt............................................................. (4,279) -- Principal Payments on Capital Lease.................................................... -- (10,013) ----------- ---------- Net Cash Provided (Used) by Financing Activities......................................... 25,671 (10,013) ----------- ---------- Net Increase in Cash..................................................................... 13,068 23,003 Cash, Beginning of Year.................................................................. 26,820 3,817 ----------- ---------- Cash, End of Year........................................................................ $ 39,888 $ 26,820 ----------- ---------- ----------- ----------
The accompanying notes are an integral part of these financial statements. E-4 FLORIDA N-VIRO, L.P. NOTES TO FINANCIAL STATEMENTS NOTE A--BACKGROUND BUSINESS ACTIVITIES--Florida N-Viro, L.P., was formed January 1, 1996 as a Delaware Limited Partnership under the Delaware Revised Limited Partnership Act. The Partnership has entered into a patent and technology agreement with N-Viro International Corporation for the exclusive, royalty free, use in Florida of certain systems/processes for the treatment and remediation of waste water sludge. The Partnership operates from its Ft. Meade, Florida facility. 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, which is a limited liability corporation having limited resources, 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 or 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, is 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 Office equipment................................................ 5-7 Land improvements............................................... 15 Buildings....................................................... 39
Depreciation amounted to $100,507 and $92,691 for 1998 and 1997, 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 E-5 FLORIDA N-VIRO, L.P. NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE B--SUMMARY OF ACCOUNTING PRINCIPLES (CONTINUED) 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 1998 or 1997. NOTE C--SUPPLEMENTAL DISCLOSURES FOR STATEMENT OF CASH FLOWS
1998 1997 --------- --------- Cash paid for: Interest................................................................. $ 1,680 $ 5,197 --------- --------- --------- ---------
NOTE D--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 $32,500 for 1998 and $25,500 for 1997. The Partnership had the following receivable balances due at December 31, from its partners:
1998 1997 ---------- ---------- General Partner....................................................... $ -- $ 10,000 Limited Partner....................................................... 107,416 114,696 ---------- ---------- $ 107,416 $ 124,696 ---------- ---------- ---------- ----------
The Partnership had payable balances due the other limited partner at December 31, 1997 of $21,523. There was no payable balance due at December 31, 1998. NOTE E--CAPITAL LEASE The Partnership assumed responsibility for the balance of a capital lease on equipment that was part of the initial capital contribution of one of the partners. Accordingly, the asset was capitalized and has the following book value at December 31, 1997:
1997 ---------- Capitalized Cost........................................................ $ 120,000 Accumulated Depreciation................................................ 34,286 ---------- Net Book Value.......................................................... $ 85,714 ---------- ----------
The capital lease was satisfied in 1997. E-6 FLORIDA N-VIRO, L.P. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 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 expects to collect all of its accounts receivable and, accordingly, no allowance for doubtful accounts is provided. The Partnership conducts a major portion of its business with several customers. For the year ended December 31, 1998, four customers accounted for 87% of total revenue. For 1997, two customers accounted for 73% 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 leases a piece of heavy equipment that is accounted for as an operating lease. The future lease minimum payments are: 1999....................................................... 28,788 2000....................................................... 11,995 --------- $ 40,783 --------- ---------
NOTE H--YEAR 2000 COMPUTER ISSUE The dating features of some computer software programs are not designed to properly accommodate the change of century. This dating problem may also be embedded in the microchips in various equipment and machinery. Management is in the process of assessing the extent of the Company's Year 2000 problem and formulating a corrective action plan. To date, management has determined that the accounting software package being used is not Year 2000 compliant. The Company has purchased the latest version of the accounting package which is Year 2000 compliant and will install it early in 1999. E-7 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 14, 1999 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 14, 1999 /s/ J. PATRICK NICHOLSON* /s/ JAMES D. O'NEIL* ---------------------------------------- ---------------------------------------- J. Patrick Nicholson, President, James D. O'Neil, Director Chairman, Chief Executive Officer and Director (Principal Executive Officer) /s/ FREDERICK H. KURTZ* /s/ CHARLES B. KAISER, JR.* ---------------------------------------- ---------------------------------------- Frederick H. Kurtz, Vice-Chairman and Charles B. Kaiser, Jr., Director Director /s/ JAMES K. MCHUGH /s/ TERRY J. LOGAN, PH.D.* ---------------------------------------- ---------------------------------------- James K. McHugh Terry J. Logan, Ph.D., Director 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
28 EX-21.1 2 EX-21.1 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. 29 EX-24.1 3 EX-24.1 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, 1998 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 8th day of April, 1999. /s/ J. Patrick Nicholson ------------------------- J. Patrick Nicholson 30 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, 1998 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 26th day of March, 1999. /s/ Frederick H. Kurtz ----------------------- Frederick H. Kurtz 31 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, 1998 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 29th day of March, 1999. /s/ Wallace G. Imrscher ------------------------ Wallace G. Imrscher 32 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, 1998 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 1st day of April, 1999. /s/ B.K. Wesley Copeland ------------------------- B.K. Wesley Copeland 33 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, 1998 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 13th day of April, 1999. /s/ James D. O'Neil -------------------- James D. O'Neil 34 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, 1998 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 3rd day of April, 1999. /s/ Charles B. Kaiser, Jr. --------------------------- Charles B. Kaiser, Jr. 35 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, 1998 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 26th day of March, 1999. /s/ Terry J. Logan, Ph.D. -------------------------- Terry J. Logan, Ph.D. 36 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, 1998 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 12th day of April, 1999. /s/ Michael G. Nicholson ------------------------- Michael G. Nicholson 37 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, 1998 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 29th day of March, 1999. /s/ Bobby B. Carroll --------------------- Bobby B. Carroll 38 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, 1998 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 5th day of April, 1999. /s/ Daniel J. Haslinger ------------------------ Daniel J. Haslinger 39 EX-27.1 4 EX-27.1
5 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 322,827 1,401 802,913 0 0 1,453,414 0 0 3,783,352 1,049,857 0 0 0 28,298 0 3,783,352 0 3,929,317 1,883,529 0 0 0 0 (373,003) 0 0 0 0 0 (373,003) 0 (0.15)
-----END PRIVACY-ENHANCED MESSAGE-----