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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
COMMISSION FILE NUMBER: 0-21802
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N-VIRO INTERNATIONAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 34-1741211
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
3450 W. CENTRAL AVENUE, SUITE 328
TOLEDO, OHIO 43606
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (419) 535-6374
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock, par
value $.01 per share
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to the filing requirements for at least the past 90 days. Yes X No ____
The aggregate market value of the voting stock held by
non-affiliates of the registrant, based upon the last sale price of registrant's
Common Stock in the National Association of Securities Dealers, Inc. Automated
Quotation System ("Nasdaq") as of March 24, 2000, was approximately $8,755,000.
The number of shares of Common Stock of the registrant
outstanding as of March 24, 2000, was 2,632,483.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive proxy statement for
the annual shareholders' meeting to be held May 11, 2000 are incorporated by
reference into Part III.
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
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INDEX
PAGE
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PART I
Item 1. Business 2
Item 2. Properties 10
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security 11
Holders
PART II
Item 5. Market for Registrant's Common Equity and 12
Related Stockholder Matters
Item 6. Selected Financial Data 12
Item 7. Management's Discussion and Analysis of 13
Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures 19
About Market Risk
Item 8. Financial Statements and Supplementary Data 20
Item 9. Changes in and Disagreements with Accountants 21
on Accounting and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the 21
Registrant
Item 11. Executive Compensation 21
Item 12. Security Ownership of Certain Beneficial Owners 21
and Management
Item 13. Certain Relationships and Related Transactions 21
PART IV
Item 14. Exhibits, Financial Statement Schedules, and 22
Reports on Form 8-K
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PART I
ITEM 1. BUSINESS
GENERAL
N-Viro International Corporation (the "Company" or "N-Viro"),
incorporated in April, 1993, owns and licenses the N-Viro Process, a patented
technology to treat and recycle wastewater sludges and other bio-organic wastes,
utilizing certain alkaline and mineral by-products produced by the cement, lime,
electric utilities and other industries. See "The N-Viro Process."
In 1979, Mr. J. Patrick Nicholson and several investors formed N-Viro
Energy Systems, Limited (the "Partnership"). The Partnership's initial strategy
was to license the N-Viro Process to third parties through independent agents.
Each independent agent acted in its respective territory as a marketing and
distribution agent of the Partnership, and the Partnership retained the
marketing and distribution rights to certain other territories. In early 1993,
as a result of the then pending implementation of the Section 503 Sludge
Regulations (as defined below) and the market environment, the Partnership
concluded that a strategy that also included the development and operation, on a
contract management basis, of N-Viro facilities for third parties, and of
Company-owned and/or co-owned N-Viro facilities, would potentially expand the
opportunities to capitalize on the N-Viro Process.
In order to implement this strategy, the Partnership agreed to combine
with American N-Viro Resources, Inc., National N-Viro Tech, Inc., N-Viro
Midwest, Inc., N-Viro Soil South, Inc. and Tennessee-Carolina N-Viro
(collectively, the "Combined Agents") to form the Company. The Company was
incorporated in April 1993 primarily to expand the opportunities for
capitalizing on the N-Viro Process. The Company assumed the Partnership's
agreements with the remaining agents who were continuing to market the N-Viro
Process in their respective territories.
The Company became a public company on October 12, 1993 with an initial
public offering (the "IPO") of 2,000,000 shares of Common Stock at $9.50 per
share. On October 19, 1993, the Partnership contributed to the Company all of
its assets (except certain marketable securities and accounts receivable from
certain related parties), subject to all liabilities (except certain retained
liabilities), and the stockholders of the Combined Agents contributed to the
Company all of the outstanding capital stock of such entities in exchange for a
total of 6,000,000 shares of Common Stock of the Company and organization notes
totalling $5,221,709 (including notes of $276,909 which resulted from a partial
exercise of an over-allotment option). The organization notes were repaid out of
the proceeds from the IPO. On November 10, 1993, an additional 112,000 shares
were sold pursuant to the exercise by the Underwriters of their over-allotment
option.
On October 30, 1995, at a Special Meeting of the Shareholders, the
shareholders approved a one for four reverse stock split which reduced the
number of issued and outstanding shares of the Common Stock. This reverse split
did not affect the Company's retained deficit and the stockholders' equity
remained substantially unchanged. This action was deemed necessary by management
of the Company to remain in compliance with the minimum bid price requirement of
the National Association of Securities Dealers Automatic Quotation System
("Nasdaq") or the alternative net tangible assets requirement and for continued
listing of the Common Stock on Nasdaq. The reverse split reduced the number of
issued and outstanding shares of the Common Stock to approximately 2,037,000
(net of 57,250 treasury shares).
In late 1995, the Company's business strategy changed from being a low
cost provider of a process to marketing the N-Viro Process, which produces an
"exceptional quality" sludge product, as defined in the Section 503 Sludge
Regulations under the Clean Water Act of 1987 (the "Section 503 Sludge
Regulations"), with multiple commercial uses. In this strategy, the primary
focus is to identify allies, public and private, who will build and operate the
N-Viro facility. To date, the Company's revenues primarily have been derived
from the licensing of the N-Viro Process to treat and recycle wastewater sludges
generated by municipal wastewater treatment plants and from the sale to
licensees of the alkaline admixture used in the N-Viro Process. The Company has
also operated N-Viro facilities for third parties on a start-up basis and
currently operates one N-Viro facility on a contract management basis. There are
currently over 75 wastewater treatment facilities throughout the world treating
sludge using the N-Viro Process. The Company estimates that these facilities are
treating and recycling sludge at an annualized rate of
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over 140,000 dry tons per year. There are several licensees not currently
operating, including both international and domestic contractors or public
generators, who are developing or designing site specific N-Viro facilities.
Since 1995, the Company has marketed licenses for the use of the N-Viro
Process through its own sales and marketing force in the United States in all 50
states and the District of Columbia and internationally throughout the world. In
certain other parts of the world, the Company licenses the N-Viro Process
through agents (the "Agents"). Typically, the agreements with the Agents provide
for the Company to receive a portion of the up-front license fees and ongoing
royalty fees paid by the licensees and a portion of the proceeds from the
distribution and resale of alkaline admixture and the sale of N-Viro Soil(TM).
Agents have total responsibility and control over the marketing and contracts
for N-Viro technology subject only to license models or minimum agreements with
the Company. The sales representative network is the key component of the
Company's domestic sales strategy. The manufacturers representatives network was
started by the Company after acquiring eight of eleven domestic agents. These
representatives receive a commission on certain revenue.
The Toledo, Ohio facility is managed by the Company through a "Contract
Management Agreement" with the City of Toledo. Revenue from the Toledo operation
accounts for about 35% of the Company's total revenue. The Company processes
Toledo's bio-solids and sells the N-Viro Soil product. This contract with the
City of Toledo was renewed in October, 1999, to extend through the year 2004
with a renewable option for an additional five years through 2009. Currently,
the contract is in its twelfth year of operation. The relationship between the
City of Toledo and the Company has been satisfactory.
THE N-VIRO PROCESS
The N-Viro Process is a patented process for the treatment and
recycling of bio-organic wastes, utilizing certain alkaline by-products produced
by the cement, lime, electric utilities and other industries. To date, the
N-Viro Process has been commercially utilized for the recycling of wastewater
sludges from municipal wastewater treatment facilities. N-Viro Soil produced
according to N-Viro Process specifications is an "exceptional quality" sludge
product under the part 503 Sludge Regulations.
The N-Viro Process involves mixing the wastewater sludge with an
alkaline admixture and then subjecting the mixture to a controlled period of
storage, mechanical turning and accelerated drying in which a blending of the
sludge and the alkaline admixture occurs. The N-Viro Process stabilizes and
pasteurizes the wastewater sludge, reduces odors to acceptable levels,
neutralizes or immobilizes various toxic components and generates N-Viro Soil, a
product which has a granular appearance similar to soil and has multiple
commercial uses. These uses include agricultural lime, soil enrichment, top soil
blend, landfill cover and filter, and land reclamation.
The alkaline admixture used in the N-Viro Process consists of
by-product dusts from cement or lime kilns, certain fly ashes and other products
of coal, coke or petroleum combustion and by-product dusts from sulfuric acid
"scrubbers" used in acid rain remediation systems and from fluidized bed coal
fired systems used in electric power generation. The particular admixture that
is used usually depends upon cost and availability in local markets. In certain
cases, commercial lime may also be added to the admixture. Initially, the
Company required licensees to buy all alkaline admixtures from the Company. This
requirement has been eliminated by increasing the royalty or professional
services revenue to offset the lost revenue from alkaline sales.
The Company is a distributor of alkaline admixture and is responsible
for quality control of the admixture. The Company also works with established
by-product marketers. The Company generally charges a mark-up over its cost for
alkaline admixture sold directly by the Company.
N-Viro Soil is sold for agricultural use as a bio-organic and mineral
fertilizer with agricultural liming and nutrient values, as landfill cover
material, as a topsoil blending ingredient and for land reclamation projects.
The Company estimates that approximately five percent of the N-Viro Soil
produced is sold to landfills for cover material, small amounts are sold for
land reclamation and similar projects, and a substantial portion of the
remainder is sold for agricultural use or as a topsoil blend. Although the use
of N-Viro Soil is not subject to any federal regulations or restrictions, each
N-Viro facility is typically required to obtain a state and/or local permit for
the sale of N-Viro Soil. In addition, many states and/or local governments
require site-specific permits for the use of sludge products in bulk amounts.
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RESEARCH AND DEVELOPMENT
Research and development on the N-Viro Process is performed primarily
by BioCheck Laboratories, Inc. ("BioCheck"), formerly a wholly-owned subsidiary
of the Company. In 1999 the Company spent approximately $39,000 on testing of
the process, and considers its relationship with BioCheck to be satisfactory.
In 1999 the Company spent approximately $185,000 on research and patent
development. Research and development on N-Viro Soil has been, to date,
performed primarily by BioCheck and Dr. Terry J. Logan and his staff at The Ohio
State University pursuant to a consulting arrangement with the Company. Through
June 30, 1999, Dr. Logan acted as an independent consultant to the Company on a
part-time basis and is a director of the Company. Effective July 1, 1999, Dr.
Logan is employed with the Company as President and Chief Operating Officer.
All participants on the Company's technology council, including Dr.
Logan and the officers of BioCheck Laboratories, have contracts with the
Company, protecting its rights.
In addition, the United States Department of Agriculture (the "USDA")
and the Ohio Coal Development Authority (the "OCDA") have provided substantial
grants to N-Viro International, Rodale Institute, and Compost Council (USDA),
and to BioCheck (OCDA), to demonstrate the effectiveness of compost and
bio-mineral technology on manure (USDA) and ash utilization or bio-mineral
processes (OCDA). These grants have funded approximately $323,000 in 1999 and
$141,000 in 1998.
The Company's initial pasteurization patents have over eight years of
patent life remaining. Newer technologies for accelerated stabilization and use
of carbon dioxide have a longer life cycle. Three patents, including patents
regarding manure and pine technologies, were applied for in 1999 and are
currently pending.
The Company continues to investigate methods to shorten drying time,
substitute various other materials for use as alkaline admixture and improve the
quality and attractiveness of N-Viro Soil to a variety of end-users. Several new
developments are the subject of issued patents, including the use of carbon
dioxide in the N-Viro Process as a means to (i) reduce by-product carbon dioxide
emissions from industrial processes by fixating carbon dioxide in the N-Viro
Soil and (ii) improve the quality and value of N-Viro Soil. In addition, the
Company has developed a dryer system which will reduce processing time while
continuing to permit the survival of beneficial microflora. Licensees of the
Company began operating dryer facilities in Phillipsburg, New Jersey and
Leamington, Ontario Canada in 1995. The Company's "BioBlend", which uses N-Viro
Soil as a reagent to accelerate and deodorize yard waste composting, is expected
to be fully integrated into Middlesex County operations in 2000.
In late 1997, N-Viro was awarded a grant from USDA to build a pilot
plant at Beltsville, Maryland, to demonstrate the ability of both old and new
N-Viro technology to disinfect animal manure pathogens, fixate their metals,
reduce their odors and most importantly, immobilize soluble nutrients to prevent
water pollution. The facility was "on-line" in the summer of 1998. In August of
1999, this grant was extended through December, 2000 for a total commitment by
the USDA of approximately $642,000.
In early 1999, N-Viro was awarded a grant for approximately $73,000
from the State of Maryland Department of Business and Economic Development. The
funds will be used to conduct research on the utilization and marketability of
alkaline treated animal manure for reclamation of acid sulfate soils in the
State of Maryland.
ORGANIZATION
Domestic Sales and Marketing and Management of the Toledo, Ohio
facility is directed by the Company's Vice-President of Sales and Marketing and
assisted by sales and marketing personnel who coordinate their actions within
the network of manufacturers representatives. Staff personnel are responsible
for the sales and promotions of the N-Viro Process in assigned states.
International Sales and Marketing is directed by the Company's Chief Executive
Officer.
Prior to late 1995, the marketing and distribution territories were
assigned specifically to divisions of the Company or to its Agents. The
following table sets forth the Agents of the Company and the territorial rights
of each Agent:
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The Agents
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Agent Territory
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N-Viro Systems Canada, Inc................Canada
Nesher Israel Cement, Ltd.................Israel
Bio-Recycle Pty. Ltd......................Australia, New Zealand and Singapore
In 1995, the Company sold the territorial rights of Europe, Africa and
the Middle East and granted an exclusive license for these territories to an
investor group headed by Mr. Robin Millard. This group acquired one of the
Company's wholly owned subsidiaries, N-Viro Worldwide Limited.
In 1998, the Company acquired the territorial rights from Synagro
Technologies, Inc., for the states of Arizona, Arkansas, Louisiana, New Mexico,
Oklahoma and Texas. This territory was acquired by a termination of the existing
agency agreement and concurrently agreeing to a new license agreement.
In January, 2000, the Company acquired the territorial rights from ISG
Resources, Inc. (parent company of N-Viro Resources, Inc.), for the states of
Colorado, Iowa, Kansas, Minnesota, Montana, Nebraska, North Dakota, South Dakota
and Wyoming. This territory was acquired by a termination of the existing agency
agreement and concurrently executing an exclusive supply of alkaline materials
with a competitive market cap.
In their respective territories, the Agents market licenses for the
N-Viro Process, serve as distributors of alkaline admixture, oversee quality
control of the N-Viro Process and N-Viro Soil, enforce the terms of the license
agreements with licensees and market N-Viro Soil (or assist licensees in
marketing N-Viro Soil). In general, the Agents have paid one-time, up-front fees
to the Company for the rights to market or use the N-Viro Process in their
respective territories. Typically, the agreements with the Agents provide for
the Company to receive a portion of the up-front license fees and ongoing
royalty fees paid by the licensees and a portion of the proceeds from the
distribution and resale of alkaline admixture and the sale of N-Viro Soil.
INDUSTRY OVERVIEW
Sludge Management Practices and the 40 CFR part 503 Sludge Regulations.
Historically, sludge management has involved either disposal, principally by
landfilling, incineration, ocean dumping and surface disposal, or land
application for beneficial use. On February 19, 1993, the EPA published the 40
CFR part 503 Sludge Regulations ("part 503 Regs") under the Clean Water Act of
1987 implementing the EPA's "exceptional quality" sludge program. The part 503
Regs establish sludge use and disposal standards applicable to approximately
35,000 publicly and privately-owned wastewater treatment plants in the United
States, including primary publicly-owned treatment works ("POTWs"), secondary
and advanced treatment POTWs, privately-owned treatment works, federally-owned
treatment works and domestic septage haulers. The EPA currently estimates that
the 13,000 to 15,000 POTWs generate 110 to 150 million wet metric tons of sewage
sludge per year. Under the part 503 Regs, sludge may be disposed of in municipal
solid waste landfills approved under Subtitle D of the Resource Conservation and
Recovery Act ("RCRA"), or may be surface disposed, incinerated or land applied
for beneficial use in accordance with the requirements established by the part
503 Regs.
Disposal. Landfilling, incineration and ocean dumping have
traditionally provided inexpensive, reliable methods of sludge disposal. Ocean
dumping was banned in the United States in December 1992. Under the part 503
Regs, landfilling and incineration remain permissible sludge management
alternatives but have become subject to more stringent regulatory standards. The
vast majority of states have some site restrictions or other management
practices governing the disposal of sludge in landfills. Amendments to the Clean
Air Act governing incineration and disposal of residual ash also impose stricter
air emission standards for incineration in general, and the part 503 Regs impose
additional specific pollutant limits for sludges to be incinerated and for the
resulting air emissions.
Surface disposal of sludge involves the placement of sludge on the land
at a dedicated site for disposal purposes. The part 503 Regs subject surface
disposal to increased regulation by requiring, among other things, run-off and
leachate collection systems, methane monitoring systems and monitoring of, and
limits on, pollutant levels. In addition, sludge placed in a surface disposal
site is required to meet certain standards with respect to pathogen levels
relating to coliform or salmonella bacteria counts ("Class B" pathogen levels),
levels of various pollutants, including metals, and elimination of
attractiveness to pests, such as insects and rodents.
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Land Application for Beneficial Use. Land application for beneficial
use involves the application of sludge or sludge-based products, for
non-disposal purposes, including agricultural, silvicultural and horticultural
uses and for land reclamation. Under the part 503 Regs, sludge products that
meet certain stringent standards with respect to pathogen levels relating to
coliform, salmonella, enteric viruses and viable helminth ova counts ("Class A"
pathogen levels), levels of various pollutants, including metals, and
elimination of attractiveness to pests, such as insects and rodents, are
considered by the EPA to be "exceptional quality" sludge products. The Class A
pathogen levels are significantly more stringent than the Class B levels; for
example, permitted Class B fecal coliform levels are 2,000 times higher than
Class A levels.
"Exceptional quality" sludge products are treated by the EPA as
fertilizer material, thereby exempting these products from federal restrictions
on their agricultural use or land application. N-Viro Soil that is produced
according to N-Viro Process specifications meets the pollutant concentration
limits and other standards set forth in the part 503 Regs and, therefore, is an
"exceptional quality" sludge product that exceeds the EPA's standards for
unrestricted agricultural use and land application. Lower quality sludges,
including sludge-based products that meet Class B pathogen levels and certain
pollutant control and pest attraction requirements, may also be applied to the
land for beneficial use but are subject to greater record keeping and reporting
requirements and restrictions governing, among other items, the type and
location of application, the volume of application and limits on cumulative
levels of metals. Sludges applied to the land for agricultural use must meet
Class B pathogen levels and, if applied in bulk, require an EPA permit.
COMPETITION
The Company is in direct and indirect competition with other
businesses, including disposal and other wastewater sludge treatment businesses,
some of which are larger and more firmly established and may have greater
marketing and development budgets and capital resources than the Company. There
can be no assurance that the Company will be able to maintain a competitive
position in the sludge treatment industry.
A 1988 EPA survey estimated that sludge generators in the United States
utilized landfilling, incineration, surface disposal and ocean dumping as sludge
management alternatives for approximately two-thirds of wastewater sludges
generated. Although ocean dumping was banned in December 1992, other methods of
sludge disposal remain permissible sludge management alternatives under the part
503 Regs, and in many instances will be less expensive than treatment methods,
including the N-Viro Process.
Sludge treatment alternatives other than disposal include processes,
such as aerobic and anaerobic digestion and lime stabilization, that typically
produce lower quality sludge products, and other processes, such as
pelletization, composting, high heat lime sterilization and high heat en-vessel
lime pasteurization, that produce "exceptional quality" sludge products. Some of
these processes have established a significant market presence, and the Company
cannot predict whether any of such competing treatment processes will be more or
less successful than the N-Viro Process. In 1999, the primary competition to
N-Viro technology was the dumping of raw sewage sludge in landfills. While such
practices are prohibited in some states (e.g., North Carolina and New Jersey),
the practice is accepted by the USEPA.
ENVIRONMENTAL REGULATION
Various environmental protection laws have been enacted and amended
during recent decades in response to public concern over the environment. The
Company's operations and those of its licensees are subject to these evolving
laws and the implementing regulations. The United States environmental laws
which the Company believes are, or may be, applicable to the N-Viro Process and
the land application of N-Viro Soil include RCRA, as amended by the Hazardous
and Solid Waste Amendments of 1984 ("HSWA"), the Federal Water Pollution Control
Act of 1972 (the "Clean Water Act"), the Clean Air Act of 1970, as amended (the
"Clean Air Act"), CERCLA, the Pollution Prevention Act of 1990 and the Federal
Insecticide, Fungicide and Rodenticide Act ("FIFRA"). These laws regulate the
management and disposal of wastes, control the discharge of pollutants into the
air and water, provide for the investigation and remediation of contaminated
land and groundwater resources and establish a pollution prevention program.
Many of these laws have international counterparts, particularly in Europe and
elsewhere in North America. In addition, various states have implemented
environmental protection laws that are similar to the applicable federal laws
and, in addition, states may require, among other things, permits to construct
N-Viro facilities and to sell and/or use N-Viro Soil. There can be no assurance
that any such permits will be issued.
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The part 503 Regulations. Sewage sludge and the use and disposal
thereof is regulated under the Clean Water Act. On February 19, 1993, the EPA
published the part 503 Regulations under the Clean Water Act implementing the
EPA's "exceptional quality" sludge program. These regulations establish sludge
use and disposal standards applicable to approximately 35,000 wastewater
treatment plants in the United States, including approximately 12,750 publicly
owned treatment works ("POTWs"). Under the part 503 Regs, sludge products that
meet certain stringent standards are considered to be "exceptional quality"
sludge products and are not subject to any federal restrictions on agricultural
use or land application. N-Viro Soil produced according to N-Viro Process
specifications is an "exceptional quality" sludge product. Lower quality sludges
and sludge products are subject to federal restrictions governing, among other
items, the type and location of application, the volume of application and the
cumulative application levels for certain pollutants. Agricultural application
of these lower quality sludges in bulk amounts also requires an EPA permit.
Agricultural and land applications of all sludges and sludge products, including
N-Viro Soil and other "exceptional quality" sludge products, are typically
subject to state and local regulation and, in most cases, require a permit.
In order to ensure compliance with the part 503 Regs, the Company
reviews the results of regular testing of sludges required by the EPA to be
conducted by wastewater treatment plants, and itself tests N-Viro Soil produced
at N-Viro facilities on a regular basis. In general, the Company does not
license or permit the ongoing use of the N-Viro Process to treat any sludge that
may not be processed into an "exceptional quality" sludge product. In one N-Viro
facility, however, the Company has permitted the use of the N-Viro Process to
produce a product that is not an "exceptional quality" sludge product due to the
high pollutant levels of the resulting product. This product is not considered
to be N-Viro Soil and is used solely for landfill cover at an adjacent landfill.
In addition, the Company had previously licensed for use at five treatment
facilities an earlier sludge treatment process that is designed to produce a
sludge product that meets only Class B pathogen levels, and therefore does not
produce an "exceptional quality" sludge product.
Although N-Viro Soil exceeds the current federal standards imposed by
the EPA for unrestricted agricultural use and land application, state and local
authorities are authorized under the Clean Water Act to impose more stringent
requirements than those promulgated by the EPA. Most states require permits for
land application of sludge and sludge based products and several states, such as
Rhode Island, Massachusetts and New Jersey, currently have regulations that
impose more stringent numerical concentration limits for certain pollutants than
the federal rules.
The Resource Conservation and Recovery Act. RCRA regulates all phases
of hazardous waste generation, management and disposal. A waste is subject to
regulation as a hazardous waste under RCRA if it is a solid waste specifically
listed as a hazardous waste by the EPA or exhibits a defined hazardous
characteristic. Although domestic sewage and mixtures of domestic sewage and
other wastes that pass through a sewer system to a POTW are specifically
exempted from the definition of solid waste, once treated by the POTW, the
sewage sludge is considered a solid waste. However, such sewage sludge is not
considered a hazardous waste unless it exhibits a hazardous characteristic.
While it is possible that sewage sludge could exhibit the toxicity
characteristic, the Company believes that regular tests for hazardous
constituent levels provide assurance that the sewage sludge used in the N-Viro
Process does not exhibit the toxicity characteristic. The alkaline admixtures
used in the N-Viro Process are specifically exempted from RCRA regulation by the
so-called "Bevill Amendments" to RCRA. Although the benefit of the exemption
provided by the "Bevill Amendments" can be lost if the alkaline admixture is
derived from or mixed with a hazardous waste, the Company has adopted and
implemented policies and operational controls, including review of operating
permits held by alkaline admixture suppliers and periodic testing of such
admixtures, to ensure that the alkaline admixtures used in the N-Viro Process by
itself and its licensees are not derived from or mixed with hazardous wastes.
Although neither the alkaline admixture nor wastewater sludges used in
the N-Viro Process are regulated as hazardous waste under RCRA, states may
impose restrictions that are more stringent than federal regulations.
Accordingly, the raw materials used in the N-Viro Process may be regulated under
some state hazardous waste laws as "special wastes," in which case specific
storage and record keeping requirements may apply.
The Clean Air Act. The Clean Air Act empowers the EPA to establish and
enforce ambient air quality standards and limits of emissions of pollutants from
specific facilities. The Clean Air Act Amendments of 1990 (the "Clean Air Act
Amendments") impose stringent requirements upon owners and operators of
facilities that discharge emissions into the air.
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Existing N-Viro facilities generally have installed "baghouse"
technology for alkaline admixture storage and handling operations in order to
collect airborne dust. At present, the Company does not believe that N-Viro
facilities will be required to undertake any further measures in order to comply
with the Clean Air Act or the existing Clean Air Act Amendments. Ammonia odors
of varying strength typically result from sludge treatment processes, including
the N-Viro Process. A number of N-Viro facilities have installed ammonia
"scrubbers" to reduce ammonia odors produced to varying degrees by the N-Viro
Process. The installation of ammonia "scrubbers" is not required by the Clean
Air Act or the existing Clean Air Amendments. However, the Company or its
licensees may be required under the Occupational Safety and Health Act and state
laws regulating nuisances, odors and air toxic emissions to install odor control
technology to limit ammonia emissions and odors produced during the N-Viro
Process, particularly at N-Viro facilities located near populated residential
areas. The amount of ammonia gas produced is dependent upon the type of sludge
being treated and the amount and type of alkaline admixture being used.
The Comprehensive Environmental Response, Compensation and Liability
Act of 1980. CERCLA imposes strict, joint and several liability upon owners and
operators of facilities where a release of hazardous substances has occurred,
upon parties who generated hazardous substances into the environment that were
released at such facilities and upon parties who arranged for the transportation
of hazardous substances to such facilities.
The Company believes that the N-Viro Process poses little risk of
releasing hazardous substances into the environment that presently could result
in liability under CERCLA. Although the sewage sludge and alkaline waste
products could contain hazardous substances (as defined under CERCLA), the
Company has developed plans to manage the risk of CERCLA liability, including
training of operators, regular testing of the sludge and the alkaline admixture
to be used in the N-Viro Process and reviewing incineration and other permits
held by the entities from whom alkaline admixtures are obtained.
Other Environmental Laws. The Pollution Prevention Act of 1990
establishes pollution prevention as a national objective, naming it a primary
goal wherever feasible. The act states that where pollution cannot be prevented,
materials should be recycled in an environmentally safe manner. The Company
believes that the N-Viro Process contributes to pollution prevention by
providing an alternative to disposal.
The alkaline admixtures used in the N-Viro Process may be required to
be registered as pesticides under FIFRA because of their effect on pathogens in
sludge. The EPA does not currently regulate commercial lime or any alkaline
by-products under FIFRA and has not attempted to assert such jurisdiction to
date. In the event the alkaline by-products are required to be registered under
FIFRA, the Company would likely be required to submit certain data as part of
the registration process and might be subject to further federal regulation.
State Regulations. State regulations typically require an N-Viro
facility to obtain a permit for the sale of N-Viro Soil for agricultural use,
and may require a site-specific permit by the user of N-Viro Soil. In addition,
in some jurisdictions, state and/or local authorities have imposed permit
requirements for, or have prohibited, the land application or agricultural use
of sludge products, including "exceptional quality" sludge products. There can
be no assurance that any such permits will be issued or that any further
attempts to require permits for, or to prohibit, the land application or
agricultural use of sludge products will not be successful.
In addition, many states enforce landfilling restrictions for
non-hazardous sludge. These regulations typically require a permit to sell or
use sludge products as landfill cover material. There can be no assurance that
N-Viro facilities or landfill operators will be able to obtain required permits.
Environmental impact studies may be required in connection with the
development of future N-Viro facilities. Such studies are generally time
consuming and may create delays in the construction process. In addition,
unfavorable conclusions reached in connection with such a study could result in
termination of, or expensive alterations to, the N-Viro facility being
developed.
EMPLOYEES
As of December 31, 1999, the Company had 17 employees in the following
capacities: 7 engaged in sales and marketing; 5 in finance and administration;
and 5 in operations. The Company considers its relationships with its employees
to be satisfactory.
8
10
The Company is a party to a collective bargaining agreement covering
certain employees of National N-Viro Tech, Inc., a wholly-owned subsidiary of
the Company. The employees that are covered by the collective bargaining
agreement work at the Toledo, Ohio N-Viro facility which is operated by the
Company on a contract management basis for the City of Toledo. These employees
are members of the International Brotherhood of Teamsters, Chauffers,
Warehouseman and Helpers Local Union No. 20, and the Company considers its
relationships with the organization to be satisfactory. At present, the
agreement expires October 31, 2004.
N-VIRO FACILITIES
To date, the Company principally has licensed the N-Viro Process to
municipalities for use in municipally-owned wastewater treatment plants. The
Company has also operated, generally on a start-up basis, N-Viro facilities for
municipalities and currently operates one municipally-owned N-Viro facility on a
contract management basis. In most cases, however, municipal licensees have
elected to design, construct and operate N-Viro facilities independently.
As of December 31, 1999, there were more than 40 N-Viro facilities
operating throughout the world. The sludge processing capacity of these
facilities ranges from one to 160 dry tons per day. Based upon reports received
from N-Viro facilities, the Company estimates they are processing wastewater
sludge at an annualized rate of over 140,000 dry tons per year. The chart below
summarizes the current annualized sludge processing volume for each of the ten
largest N-Viro facilities through December 31, 1999.
---------------------------------------------------------------------------
Facility Location proximate Sludge Processing Volume
(dry tons/year)
---------------------------------------------------------------------------
Middlesex County, New Jersey 56,600
---------------------------------------------------------------------------
Phillipsburg, New Jersey 25,000
---------------------------------------------------------------------------
Syracuse, New York 10,200
---------------------------------------------------------------------------
Wilmington, Delaware 9,200
---------------------------------------------------------------------------
Toledo, Ohio 8,500
---------------------------------------------------------------------------
Ft. Meade/Volusia Cty., Florida 6,100
---------------------------------------------------------------------------
Greenville, South Carolina 4,000
---------------------------------------------------------------------------
Anderson, Indiana 2,500
---------------------------------------------------------------------------
Minneapolis, Minnesota 2,000
---------------------------------------------------------------------------
Bossier City, Lousiana 1,900
---------------------------------------------------------------------------
All of the existing N-Viro facilities are owned and operated by third
parties, with the exception of the Toledo, Ohio facility which has been operated
by the Company on a contract management basis since January 1990 and the Fort
Meade, Florida facility which has been owned jointly by the Company and VFL
Technologies, Ltd. since January 1996, after start-up in February 1995.
Design and construction of a facility using the N-Viro Process is
typically undertaken by local independent engineering and construction firms.
Such a facility can be completed in approximately six months, but could take
substantially longer, depending on the size and complexity of the facility. The
N-Viro Process produces ammonia in various concentrations, depending on the
characteristics of the sludge. A number of N-Viro facilities, typically those
located near residential areas, have installed odor control systems in order to
minimize the release of ammonia odors resulting from the N-Viro Process. An odor
control system can significantly increase construction time and cost.
Construction of N-Viro facilities generally requires state and local permits and
approvals and, in certain instances, may require an environmental impact study.
The Company had previously licensed for use at five treatment
facilities an earlier sludge treatment process that is designed to produce a
sludge product that meets only Class B pathogen levels, and therefore does not
produce an "exceptional quality" sludge product under the part 503 Regs. Royalty
payments from sludge processed at the five facilities using such earlier
technology currently account for less than two percent of total royalty payments
to the Company and the Company does not actively market the use of this process.
9
11
SEGMENT INFORMATION
EARNINGS VARIATION DUE TO BUSINESS CYCLES AND SEASONAL FACTORS. Our
operating results can experience quarterly or annual variations due to business
cycles, seasonality and other factors. The market price for our common stock may
decrease if our operating results do not meet the expectations of the market.
Currently, approximately 35% of the Company's revenue is from
management fee operations, 62% from domestic licenses and agreements, and the
remaining 3% from international sources. Sales of the N-Viro technology are
affected by general fluctuations in the business cycles in the United States and
worldwide, instability of economic conditions (such as the current conditions in
the Asia Pacific region and Latin America) and interest rates, as well as other
factors. In addition, operating results of some of our business segments are
influenced, along with other factors such as interest rates, by particular
business cycles and seasonality. See Notes to the Financial Statements contained
in Item 8 hereof.
COMPETITION. We compete against companies in a highly competitive
market and we have fewer resources than most of those companies. Our business
competes within and outside the United States principally on the basis of the
following factors:
- -------------------------------------------------------------------------------------------------
SEGMENT Mgt. Fee Operations Non-Mgt. Fee Non-Mgt. Fee
Operations- U.S. Operations-
International
- -------------------------------------------------------------------------------------------------
COMPETITIVE FACTORS Price Price Price
- -------------------------------------------------------------------------------------------------
Reliability Reputation Product quality and
specifications
- -------------------------------------------------------------------------------------------------
Product quality and Product quality and Custom design
specifications specifications
- -------------------------------------------------------------------------------------------------
Responsiveness to Technical support Equipment financing
customer assistance
- -------------------------------------------------------------------------------------------------
Technical support Custom design Technical support
- -------------------------------------------------------------------------------------------------
Reputation Equipment financing Reputation
assistance
- -------------------------------------------------------------------------------------------------
Competitive pressures, including those described above, and other
factors could cause us to lose market share or could result in decreases in
prices, either of which could have a material adverse effect on our financial
position and results of operations.
RISKS OF DOING BUSINESS IN OTHER COUNTRIES. We conduct business in
markets outside the United States, and we expect to continue to do so. In
addition to the risk of currency fluctuations, the risks associated with
conducting business outside the United States include: social, political and
economic instability; slower payment of invoices; underdeveloped infrastructure;
underdeveloped legal systems; and nationalization. The Company has not entered
into any currency swap agreements which may reduce these risks. The Company may
enter into such agreements in the future if it is deemed necessary to do so.
Current economic conditions in the Asia Pacific region and Latin
America have affected our outlook for potential revenue there. We cannot predict
the full impact of this economic instability, but it could have a material
adverse effect on our revenues and profits.
ITEM 2. PROPERTIES
The Company's executive and administrative offices are located in
Toledo, Ohio, under a lease that expires on December 31, 2002. The Company
believes its relationship with its lessor is satisfactory.
In early 1994 the Company purchased a site in Fort Meade, Florida to
develop a Company-owned N-Viro processing facility. Construction was started at
the site in late 1994 and the facility became operational in early 1995. In
December 1995, the Company entered into a Memorandum of Understanding with VFL
Technologies, Inc. to jointly own, through a limited liability partnership named
Florida N-Viro, LLP ("Florida N-Viro"), the Fort Meade, Florida facility,
beginning January 1, 1996. Under this agreement, the Company would contribute
the property, plant
10
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and equipment to Florida N-Viro in return for approximately $1,000,000.
Additionally, each partner would contribute $250,000 to Florida N-Viro for
working capital and property improvements. The employees of Fort Meade would
become employees of the new company, however, the purpose of this facility would
remain essentially unchanged.
The agreement was amended in 1996 to provide that the Company would
receive $881,000 for the contribution of property, each partner would contribute
$250,000 for working capital, and the Company would receive a 47% interest (as
opposed to a 49% interest under the original agreement) in Florida N-Viro.
On December 31, 1997, the members of Florida N-Viro Management, LLC,
the management company of the Florida entity, approved a Settlement Agreement
that amended certain provisions of existing documents involving the Company.
Among those approved was an increase in the Company's ownership percentage in
Florida N-Viro to 50%. Also contained in the Agreement was the issuance of a
$250,000 Promissory Note to the Company for an existing trade receivable due the
Company from VFL Technologies ("VFL"), the other partner in Florida N-Viro
Management, LLC. In October, 1998, the Promissory Note was cancelled, current
debts and receivables between the Company, VFL and Florida N-Viro were offset
and netted to a new Promissory Note for $100,000.
Because of the joint development of early N-Viro patents with the
Medical College of Ohio ("MCO"), in 1995 the Company and MCO agreed that the
rights of MCO to any intellectual property of value to the Company which
currently may be in development or patentable is equivalent to $46,500 for MCO's
portion of royalties through the year ending December 31, 1999. The Company and
MCO have also agreed that future claims to the N-Viro Soil process is only 1/4
of 1% of technical revenues. MCO rights to BioBlend and other new N-Viro
technologies range from 2% to 4% of technical revenues derived from these newer
technologies.
ITEM 3. LEGAL PROCEEDINGS.
On October 1, 1998, Hydropress Environmental Services, Inc.
("Hydropress") filed suit against the Company in the United States District
Court for the District of New Jersey captioned Hydropress Environmental
Services, Inc., Plaintiff v. N-Viro International Corp., Defendant, bearing Case
No. 98-4573. The suit sought a declaratory judgment as to Hydropress' rights and
duties related to certain obligations pursuant to a license agreement and a
prior settlement agreement which concerned issues that arose out of the subject
license agreement. Though the Complaint was filed with the Court, there was a
failure of service of process upon the Company.
As of March 22, 1999, Hydropress and the Company entered into a
Settlement Agreement that provided, among other things, for the dismissal of the
matter captioned Hydropress Environmental Services, Inc., Plaintiff v. N-Viro
International Corp., Defendant, Case No. 984573 then pending in the United
States District Court for the District of New Jersey; mutual limited releases;
agreements as to past due amounts that Hydropress owed the Company, as well as a
basis for determining future amounts; and an agreement that, for a period of
eighteen (18) months from the date of the settlement agreement, Hydropress would
not sell any of the Company stock that had been issued in connection with the
prior settlement agreement, and that Hydropress could thereafter sell no more
than 10,000 shares of the Company's stock per month.
On February 15, 2000, Hydropress and the Company modified the March,
1999 agreement by agreeing to allow Hydropress to sell shares of the Company's
stock before the eighteen-month period, in addition to increasing the maximum
amount of shares it could sell without approval from the Company in any one
month to 15,000 shares. In exchange, Hydropress released the Company from its
minimum price guarantee obligations under the Settlement Agreement.
On February 25, 2000, the Company filed with the United States District
Court, Northern District of Ohio, Eastern Division, a Complaint for Patent
Infringement and Jury Demand against the City of Warren, Ohio. The Company
believes that the City of Warren has directly and willfully infringed on patents
the Company owns, and is seeking judgements, an injunction and a recovery of
damages asserted. To date the Company has not received a response from the City
of Warren.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
11
13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's Common Stock is listed in the Nasdaq Small Cap Market
under the symbol "NVIC". The price range of the Common Stock in the Market since
January 1, 1998, was as follows:
- --------------------------------------------------------------------------------
Quarter High Low
- --------------------------------------------------------------------------------
First 1998 2 & 1/2 1 7/8
- --------------------------------------------------------------------------------
Second 1998 3 & 1/16 2
- --------------------------------------------------------------------------------
Third 1998 3 & 1/2 1 & 7/8
- --------------------------------------------------------------------------------
Fourth 1998 2 & 3/8 1 & 7/32
- --------------------------------------------------------------------------------
First 1999 2 & 11/16 1 & 3/16
- --------------------------------------------------------------------------------
Second 1999 2 & 3/4 2
- --------------------------------------------------------------------------------
Third 1999 2 & 9/16 1 & 3/4
- --------------------------------------------------------------------------------
Fourth 1999 2 1 & 1/4
- --------------------------------------------------------------------------------
The Company's stock price closed at $4.5625 per share on March 24, 2000.
HOLDERS
As of March 24, 2000, the number of holders of record of the Company's
Common Stock was approximately 1,450.
DIVIDENDS
The Company has never paid dividends with respect to its Common Stock.
UNREGISTERED SALES OF SECURITIES
In March 1999 the Company reached an agreement with the Cooke Family
Trust to issue 100,000 shares of Common Stock. See Notes to the Financial
Statements contained in Item 8 hereof.
ITEM 6. SELECTED FINANCIAL DATA
The Company was incorporated in April 1993. In September 1993, an
agreement was entered into pursuant to which N-Viro Energy Systems, Ltd., an
Ohio limited partnership contributed to the Company all of its assets (except
certain marketable securities and accounts receivable from certain related
parties) subject to all liabilities (except certain retained liabilities), and
the stockholders of the Combined Agents contributed to the Company all of the
outstanding capital stock of each of such entities, in each case in exchange for
Common Stock and promissory notes (the "Organization"). The Organization was
accounted for as if the Partnership and the Combined Agents (collectively, the
"Company Entities") had always been members of the same operating group.
Accordingly, historical financial statements of each of such entities have been
combined throughout all relevant periods herein. Certain adjustments have been
made to eliminate intercompany transactions between the Company Entities.
The following selected consolidated statement of operations data for
the years ended December 31, 1995, 1996, 1997, 1998 and 1999; and the
consolidated balance sheet data set forth below as of December 31, 1995, 1996,
1997, 1998 and 1999 respectively, have been derived from the financial
statements of the Company which have been audited by McGladrey & Pullen, LLP,
independent auditors for the years ending December 31, 1995, 1996, 1997 and
12
14
1998, and Hausser + Taylor, LLP, independent auditors for the year ended
December 31, 1999. In the opinion of management, the financial data presented
below reflect all adjustments (which are of a normal recurring nature) necessary
to present fairly the Company's financial position and results of operations.
The data presented below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Financial Statements and Supplementary Data appearing elsewhere in this Form
10-K.
STATEMENT OF OPERATIONS DATA (IN THOUSANDS, EXCEPT PER SHARE DATA):
- -------------------------------------------------------------------------------------------------------
12/31/99 12/31/98 12/31/97 12/31/96 12/31/95
- -------------------------------------------------------------------------------------------------------
Revenues $4,749 $3,929 $4,053 $3,624 $5,214
- -------------------------------------------------------------------------------------------------------
Net income (loss) 471 (373) 534 (193) (1,815)
- -------------------------------------------------------------------------------------------------------
Net income (loss) per share (1) $0.18 $(0.15) $0.23 $(0.09) $(0.89)
- -------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA (IN THOUSANDS):
- ------------------------------------------------------------------------------------------------------
12/31/99 12/31/98 12/31/97 12/31/96 12/31/95
- ------------------------------------------------------------------------------------------------------
Total assets $4,772 $3,783 $4,423 $4,167 $5,062
- ------------------------------------------------------------------------------------------------------
Notes payable $352 $161 $278 $1,188 $1,540
- ------------------------------------------------------------------------------------------------------
Shareholder Advance $49 $47 n/a $197 n/a
- ------------------------------------------------------------------------------------------------------
(1) Per share amounts have been restated for a one-for-four reverse stock split
effective October 31, 1995.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following discussion should be read in conjunction with "Selected
Financial Data" and the Financial Statements and Supplementary Data appearing
elsewhere in this Form 10-K.
The following table sets forth, as a percentage of total revenues for
the periods presented, revenues related to each of (i) license and territory,
(ii) facility management and sludge processing, (iii) alkaline admixture, (iv)
royalty and (v) other revenues:
FOR THE YEAR ENDED DECEMBER 31,
- -------------------------------------------------------------------------------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------
Facility management and sludge processing 33.8% 36.0% 33.6%
- -------------------------------------------------------------------------------------------------------------
Royalty 13.9% 16.4% 17.5%
- -------------------------------------------------------------------------------------------------------------
License and territory fees 16.0% 11.0% 10.6%
- -------------------------------------------------------------------------------------------------------------
Alkaline admixture 26.2% 29.6% 34.3%
- -------------------------------------------------------------------------------------------------------------
Other 10.1% 7.0% 4.0%
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
Totals 100.0% 100.0% 100.0%
- -------------------------------------------------------------------------------------------------------------
Facility management and sludge processing revenues are recognized under
contracts where the Company itself utilizes the N-Viro Process to treat sludge,
either pursuant to a fixed price contract or based on volumes of sludge
processed. Royalty revenues represent ongoing amounts received from licensees
for continued use of the N-Viro Process and are typically based on volumes of
sludge processed. License and territory fees represent non-recurring payments
for the right to use the N-Viro Process in a specified geographic area or at a
particular N-Viro facility. The Company's policy is to record fully revenues
payable pursuant to agency and license agreements when the Company has fulfilled
substantially all of its obligations under the relevant contract, except when
the license agreement pertains to a foreign contract. In this case revenue is
recorded when cash is received and when the
13
15
Company has fulfilled substantially all of its obligations under the relevant
contract. Alkaline admixture revenues represent ongoing payments from licensees
arising from the sale and distribution of alkaline admixture by the Company and
the Agents to N-Viro facilities. Other revenues represent: N-Viro Soil sales,
research and development revenue, commissions earned on sales, rental of
equipment to a licensee or agent, or testing income. N-Viro Soil sales are
either through royalties from sales of N-Viro Soil sold by N-Viro facilities, or
through sales of N-Viro Soil sold directly by the Company.
In 1996 the Company redrafted its standard technology license to
include all royalty and alkaline commission income in its on-going professional
services fee. This change allows licensees to directly acquire all alkaline
admixtures, providing such materials meet N-Viro specifications. Moreover, in
1996 the Company offered new and old licensees the opportunity to pre-pay
on-going professional services fees on a one-time up-front basis. A
present-value concept is used to determine the revenue on an up-front basis.
Cost of goods sold expenses principally reflect sludge processing costs
(principally labor and equipment), costs of acquiring and transporting alkaline
admixture, and storage of N-Viro Soil.
14
16
RESULTS OF OPERATIONS
The following tables set forth, for the periods presented, (i) certain
items in the Combined Statement of Operations, (ii) the percentage change of
each such item from period to period and (iii) each such item as a percentage of
total revenues in each period presented.
--------------- ------------- --------------- ------------- ---------------
(Dollars in thousands) Year Ended Period to Year Ended Period to Year Ended
----------------------
December 31, Period December 31, Period December 31,
1999 Percentage 1998 Percentage 1997
Change Change
--------------- ------------- --------------- ------------- ---------------
COMBINED STATEMENT OF
OPERATIONS DATA:
Revenues $ 4,750 20.9% $ 3,929 (3.0%) $ 4,052
Cost of revenues 2,245 19.2% 1,883 3.0% 1,829
--------------- --------------- ---------------
Gross profit 2,505 22.4% 2,046 (8.0%) 2,223
Operating expenses 1,977 (17.2%) 2,386 24.1% 1,923
--------------- --------------- ---------------
Operating income (loss) 528 * (340) * 300
Non-operating income (expense) (57) * (33) * (78)
--------------- --------------- ---------------
Income (loss) before income tax
credits 471 * (373) * 222
Federal and state income tax credits
0 * 0 * (312)
--------------- --------------- ---------------
Net income (loss) $ 471 * $ (373) * $ 534
=============== =============== ===============
PERCENTAGE OF REVENUES:
Revenues 100.0% 100.0% 100.0%
Cost of revenues 47.3 47.9 45.1
--------------- --------------- ---------------
Gross profit 52.7 52.1 54.9
Operating expenses 41.6 60.7 47.5
--------------- --------------- ---------------
Operating income (loss) 11.1 (8.6) 7.4
Non-operating income (expense) (1.2) (0.9) (1.9)
--------------- --------------- ---------------
Income (loss) before income tax
credits 9.9 (9.5) 5.5
Federal and state income tax credits 0.0 0.0 (7.7)
--------------- --------------- ---------------
Net income (loss) 9.9% (9.5%) 13.2%
=============== =============== ===============
* Period to period percentage change comparisons have only been calculated for
positive numbers.
15
17
COMPARISON OF YEAR ENDED DECEMBER 31, 1999 WITH YEAR ENDED DECEMBER 31, 1998
Revenues increased $820,000, or 21%, to $4,749,000 for the year ended
December 31, 1999 from $3,929,000 for the year ended December 31, 1998. The
increase in revenue was due to the following: revenues from one-time domestic
license or international territory fees increased $326,000, to $759,000 for 1999
from $433,000 for 1998; revenues from existing on-line facilities increased
$494,000 to $3,990,000 from $3,496,000 for 1998, primarily from an increase in
management fee operations of $190,000 and an increase in revenue from research +
development projects of $250,000. In 1999 the Company recorded approximately
$100,000 in gross royalty revenue from our European licensee, N-Viro Worldwide.
Gross Profit increased $459,000, or 22%, to $2,505,000 for the year
ended December 31, 1999 from $2,046,000 for the year ended December 31, 1998.
The increase in gross profit was primarily due to the increase in revenues from
one-time domestic license or international territory fees. This revenue has a
higher gross profit associated with them than other types of revenue. The
overall gross profit margin increased slightly to 53% in 1999 from 52% for 1998.
This increase in gross profit margin was primarily due to the increase in
one-time fees, offset by the increase in management fee revenue which are at a
lower gross profit margin. The gross profit margin from existing on-line
facilities decreased slightly to 46% from 47% for 1998.
Operating expenses decreased $410,000, or 17% to $1,976,000 for the
year ended December 31, 1999 from $2,386,000 for the year ended December 31,
1998. The Company increased expenditures for salaries and employee benefits by
$71,000, but decreased outlays for sales, promotion, administrative overhead and
outside consultants expense totalling $235,000. Legal and other professional
fees also decreased by approximately $100,000. Operating expenses were further
reduced by a decrease in bad debt write-offs of $76,000. Finally, the Company
had recognized a non-recurring expense of $73,000 in 1998 for the prior-year
acquisition of its Eastern U.S. agency. The Company does not believe its
decrease in operating expenses in 1999 will impede future sales of the N-Viro
technology.
Nonoperating income (expense) increased by $24,000 to an expense of
$57,000 for the year ended December 31, 1999 from an expense of $33,000 for the
year ended December 31, 1998. The increase was primarily due to interest income
(expense), net decreasing by approximately $20,000 due to the increase in the
level of outstanding draws on the working capital line of credit and a decrease
in interest income on an investment. The loss in the equity of joint venture
increased by approximately $4,000 to a loss of $69,000 in 1999. See the
discussion below of the investment in the Ft. Meade, Florida operation.
The Company recorded a deferred tax asset (credit) of $312,000 in 1997,
to recognize the future tax benefit of a federal net operating loss carryforward
to offset anticipated net income for years starting in 1998. The effective tax
rate used was 39%. Realization of the asset is dependent on generating
sufficient taxable income prior to expiration of the loss carryforward. Although
realization is not assured, management believes it is more likely than not that
all of the recorded deferred tax asset will be realized. There was no additional
income or expense recorded in 1999; however, the amount of the deferred tax
asset considered realizable could be reduced in the near term if estimates of
future taxable income during the carryforward period are reduced.
The Company recorded net income of $471,000 for the year ended December
31, 1999 compared to a net loss of $373,000 for the year ended December 31,
1998.
In early 1996 the Company completed the transfer of its interest in the
Fort Meade, Florida facility. The Company incurred a loss of approximately
$69,000 on its share of Florida N-Viro LLP in 1999, an increased loss of $4,000
from 1998. The Company, however, anticipates this operation to be profitable in
2000, as new contracts that were secured during 1999 and are generating net
gross profit are recognized for a full year. In mid-1999, Florida N-Viro started
up a new facility in Volusia County, Florida, and is currently planning on
expanding the Ft. Meade, Florida operation to a new site. The audited financial
statements of Florida N-Viro are included in this document after the Company's
financial statements as Item 14(d), Financial Statements of Subsidiaries not
Consolidated.
COMPARISON OF YEAR ENDED DECEMBER 31, 1998 WITH YEAR ENDED DECEMBER 31, 1997
Revenues decreased $123,000, or 3%, to $3,929,000 for the year ended
December 31, 1998 from $4,053,000 for the year ended December 31, 1997. The
decrease in revenue was due to the following: revenues from one-time
16
18
domestic license or international territory fees increased $5,000, to $433,000
for 1998 from $428,000 for 1997; revenues from existing on-line facilities
decreased $129,000 to $3,496,000 from $3,625,000 for 1997, as a result of a
decrease in royalty revenue from an existing licensee which expired in March,
1998. In 1998 the Company received approximately $100,000 in gross royalty
revenue from our European licensee, N-Viro Worldwide. Management is optimistic
that revenue in late 1998 will increase due to the successful completion of a
sludge processing project for a sub-licensee in the United Kingdom.
Gross Profit decreased $178,000, or 8%, to $2,046,000 for the year
ended December 31, 1998 from $2,223,000 for the year ended December 31, 1997.
The decrease in gross profit was primarily due to a reduction of approximately
$172,000 in ongoing royalty revenue from an existing licensee. This revenue had
no associated cost of revenue, and the Company anticipates another $30,000
decrease from 1998 to 1999 as a sub-license expired on March 31, 1998. The
overall gross profit margin decreased to 52% from 55% for the year ended
December 31, 1997. This decrease in gross profit margin was primarily due to the
decrease in royalty revenue from an existing licensee which expired in March,
1998, and an increase in storage and shipping costs for the Toledo, Ohio
facility due to the unusually mild winter in early 1998. The gross profit margin
from existing on-line facilities decreased to 47% from 51% for 1997.
Operating expenses increased 24% to $2,386,000 for the year ended
December 31, 1998 from $1,923,000 for the year ended December 31, 1997. In 1998,
the Company increased its efforts to sell and promote the Company and its
technology. The Company increased expenditures for salaries and employee
benefits by $178,000, as well as increasing sales, promotion, administrative
overhead and outside consultants expense totalling $176,000. Legal fees also
increased by $60,000. Also in 1998, the Company increased its commitment to
research and development efforts for $56,000, continuing its efforts to develop
new and improve on existing technologies. Also contributing to the increase in
1998 was the Company recognizing an expense of approximately $73,000 relating to
the 1994 acquisition of its Eastern U.S. agency held by Hydropress Environmental
Services, Inc. See Notes to the Financial Statements contained in Item 8 hereof.
These operating expenses were offset by a decrease in bad debt expense of
$128,000, which was a receivable recorded by a subsidiary sold in 1996 and
deemed uncollectible in 1997. The Company anticipates its increase in operating
expense in 1998 will translate into increased sales of the N-Viro technology in
the near future.
Nonoperating income (expense) decreased by $45,000 to an expense of
$33,000 for the year ended December 31, 1998 from an expense of $78,000 for the
year ended December 31, 1997. The decrease was primarily interest income
(expense), net increasing by approximately $65,000 due to the increase in
interest income on an investment and a reduction in the level of outstanding
draws on the working capital line of credit. The loss in the equity of joint
venture increased by approximately $19,000 to a loss of $65,000 in 1998. See the
discussion below of the investment in the Ft. Meade, Florida operation.
The Company recorded a deferred tax asset (credit) of $312,000 in 1997,
to recognize the future tax benefit of a federal net operating loss carryforward
to offset anticipated net income for years starting in 1998. The effective tax
rate used was 39%. Realization of the asset is dependent on generating
sufficient taxable income prior to expiration of the loss carryforward. Although
realization is not assured, management believes it is more likely than not that
all of the recorded deferred tax asset will be realized. There was no additional
income or expense recorded in 1998; however, the amount of the deferred tax
asset considered realizable could be reduced in the near term if estimates of
future taxable income during the carryforward period are reduced.
The Company recorded a net loss of $373,000 for the year ended December
31, 1998 compared to net income of $534,000 for the year ended December 31,
1997.
In early 1996 the Company completed the transfer of its interest in the
Fort Meade, Florida facility. The Company incurred a loss of approximately
$65,000 on its share of Florida N-Viro LLP in 1998, an increased loss of $19,000
from 1997. The Company, however, anticipates this operation to be profitable in
1999, as new contracts have been secured during the last few months. The audited
financial statements of Florida N-Viro are included in this document after the
Company's financial statements as Item 14(d), Financial Statements of
Subsidiaries not Consolidated.
17
19
Effective in 1998 the Company reached agreements with trade creditors
to eliminate, in the aggregate, $170,375 of the Company's short-term debt in
exchange for the Company's issuance and delivery to such creditors, in the
aggregate, 74,000 shares of Common Stock. One trade creditor is a current member
of the Board of Directors of the Company, Bobby Carroll, and one was a member at
the time of the agreement, Frederick Kurtz. The number of shares of Common Stock
issued to, and the corresponding amount of short-term debt forgiven by each
creditor is set forth in the table below:
====================================================================================================================
Date Creditor Amount of Canceled Debt No. of Shares Issued in
Issued Exchange
- --------------------------------------------------------------------------------------------------------------------
5/12/98 Morgan, Lewis & Bockius $60,000 20,000
- --------------------------------------------------------------------------------------------------------------------
9/23/98 Francis P. Bonner $ 6,750 3,000
- --------------------------------------------------------------------------------------------------------------------
9/23/98 David Jenkins + Assoc., Inc. $ 2,375 1,000
- --------------------------------------------------------------------------------------------------------------------
9/23/98 Cannon Consultants, Inc. $11,250 5,000
- --------------------------------------------------------------------------------------------------------------------
1/13/99 Bobby B. Carroll $60,000 30,000
- --------------------------------------------------------------------------------------------------------------------
1/13/99 Frederick H. Kurtz $30,000 15,000
====================================================================================================================
All such shares of Common Stock were issued to the Company's creditors pursuant
to appropriate exemptions from registration under federal and state securities
laws. All exchanges were evidenced by a written Share Exchange Agreement between
the Company and creditor.
On June 1, 1998, the Company filed a registration statement on Form S-3
(the "Registration Statement") with the Securities and Exchange Commission for
the registration of certain shares of Common Stock of the Company then held by
Heartland Limited Partnership I ("Heartland"). These shares were subsequently
assigned to an affiliate of Heartland. The Company's audited financial
statements were not available as of the deadline for filing the Company's Form
10-K for the year ended December 31, 1998, and the Form 10-K was correspondingly
not filed in a timely manner. As a result of such untimely filing, the Company
may not currently use Form S-3 to register its shares of Common Stock, and the
Company thus filed a request for withdrawal of the Registration Statement with
the Securities and Exchange Commission on June 28, 1999, which request was
subsequently granted.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $1,090,000 at December 31, 1999
compared to $404,000 at December 31, 1998, an increase of $686,000. Current
assets at December 31, 1999 included cash and investments of $554,000, which is
an increase of about $230,000 from December 31, 1998. The increase in working
capital was principally due to the operating income for the year.
In 1999 the Company's operating cash flow continued to be positive, and
the Company improved its payments to unsecured trade vendors. No unusual cash
transactions were recorded in 1999.
In 1997 the Company obtained a working capital line of credit of
$200,000. In the third quarter of 1998 the line was increased to $500,000.
Borrowings against the line bear interest at prime minus .50% for amounts
borrowed up to $250,000, and prime plus 1% on the excess amount borrowed over
$250,000. This debt is collateralized by a certificate of deposit with the
lender of $250,000, accounts receivable, inventories and equipment, and is due
on demand. Also, the Company must maintain certain financial covenants. In
April, 1999, the bank waived a violation of a financial covenant in light of the
Company's net loss for the year ended December 31, 1998. In exchange, the
Company agreed to not borrow more than $350,000 outstanding at any one time,
until further notice.
In April 2000, the Company renewed this agreement for a line of credit
of $1 million, secured by a certificate of deposit with the lender of $400,000,
with all other terms similar as agreed to in 1998. The Company is not in
violation of any financial convenants contained in the agreement. The balance
owed on the line of credit at December 31, 1999 was $-0-, and the Company has
not borrowed on the line of credit since April, 1999.
18
20
The normal collection terms for accounts receivable are approximately 60
days for a majority of the customers. This is a result of the nature of the
license contracts, type of customer and the amount of time required to obtain
the information to prepare the billing.
The Company believes that its working capital, together with the line of
credit, will provide sufficient cash to meet the Company's cash requirements
through 2000.
As a result of the current market development and also due to a
significant increase in public and private interest in the safe and responsible
management of animal manure, a 1.5 billion ton market vs. a 40 million ton
sewage sludge market in the USA, the Company is optimistic that 2000 and beyond
will continue to see an increase in the sale and use of N-Viro technology.
Moreover, public recognition (e.g., President's Commission on Food Safety) of
the dangers of farm-derived pathogens in our food and water supply, and
awareness of the highly negative impact of currently acceptable organic disposal
practices on the ozone and global warming crisis, is creating renewed awareness
of the long term ecological sustainability of N-Viro type concepts.
The Company cautions that words used in this document such as
"expects," "anticipates," "believes," "may," and "optimistic," as well as
similar words and expressions used herein, identify and refer to statements
describing events that may or may not occur in the future. These forward-looking
statements and the matters to which they refer are subject to considerable
uncertainty that may cause actual results to be materially different from those
described herein. Some, but not all, of the factors that could cause actual
results to be different than those anticipated or predicted by the Company
include: (i) a deterioration in economic conditions in general; (ii) a decrease
in demand for the Company's products or services in particular; (iii) the
Company's loss of a key employee or employees; (iv) regulatory changes,
including changes in environmental regulations, that may have an adverse affect
on the demand for the Company's products or services; (v) increases in the
Company's operating expenses resulting from increased costs of labor and/or
consulting services; and (vi) a failure to collect upon or otherwise secure the
benefits of existing contractual commitments with third parties, including
customers of the Company.
INFLATION
The Company believes that inflation has not had a material impact to
date on the Company's operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
As of December 31, 1999, the Company held $250,000 in a certificate of
deposit with its bank. Market risk is considered to be low, with the potential
for loss of earnings, value or other changes in interest rates to be immaterial
to the Company.
19
21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
Page
----
REPORTS OF INDEPENDENT PUBLIC ACCOUNTANTS ON THE
FINANCIAL STATEMENTS F-3 - F-4
FINANCIAL STATEMENTS
Consolidated balance sheets F-5 - F-6
Consolidated statements of operations F-7
Consolidated statements of stockholders' equity F-8
Consolidated statements of cash flows F-9
Notes to consolidated financial statements F-10 - F-24
REPORTS OF INDEPENDENT PUBLIC ACCOUNTANTS ON
ACCOMPANYING INFORMATION F-25 - F-26
ACCOMPANYING INFORMATION
Schedule II - valuation and qualifying accounts and reserves F-27
20
22
Report of Independent Public Accountants
----------------------------------------
To the Board of Directors
N-Viro International Corporation
Toledo, Ohio
We have audited the accompanying consolidated balance sheet of N-Viro
International Corporation and subsidiaries as of December 31, 1999, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We did not audit the 1999 financial statements of Florida N-Viro, L.P.,
a limited partnership, the investment in which is reflected in the accompanying
financial statements using the equity method of accounting. The investment in
this partnership represents 17% of total assets as of December 31, 1999 and the
net loss of this partnership represents a 13% reduction of the net income
(before such net loss) of the Company for the year ended December 31, 1999. The
financial statements of this partnership were audited by other auditors, whose
report has been furnished to us, and our opinion, insofar as it relates to
amounts and information relating to this partnership, is based solely on the
reports of the other auditors.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, based on our audit and the reports of other auditors,
the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of N-Viro International
Corporation and subsidiaries as of December 31, 1999, and the consolidated
results of their operations and their cash flows for the year then ended, in
conformity with generally accepted accounting principles.
/s/ HAUSSER + TAYLOR LLP
Cleveland, Ohio
March 3, 2000, except for Note 11
dated April 3, 2000
F-3
23
Report of Independent Public Accountants
----------------------------------------
To the Board of Directors
N-Viro International Corporation
Toledo, Ohio
We have audited the accompanying consolidated balance sheet of N-Viro
International Corporation as of December 31, 1998, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
years in the two-year period ended December 31, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of N-Viro
International Corporation as of December 31, 1998, and the results of its
operations and its cash flows for each of the years in the two-year period ended
December 31, 1998, in conformity with generally accepted accounting principles.
/s/ McGLADREY & PULLEN, LLP
Elkhart, Indiana
March 5, 1999
F-4
24
N-VIRO INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
1999 1998
-----------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 552,846 $ 322,827
Securities available-for-sale 1,401 1,401
Receivables:
Trade, net of allowance of $128,600 1,302,036 802,913
Notes and other, net of allowance of $330,980 258,590 197,839
Related parties 48,599 46,790
Prepaid expenses and other assets 72,260 81,644
-----------------------------------------------
Total current assets 2,235,732 1,453,414
PROPERTY AND EQUIPMENT 596,060 577,116
INVESTMENT IN FLORIDA N-VIRO, L.P. 790,667 852,510
DEFERRED TAX ASSETS 312,000 312,000
INTANGIBLE AND OTHER ASSETS 837,414 588,312
-----------------------------------------------
$ 4,771,873 $ 3,783,352
===============================================
The accompanying notes are an integral part of these financial statements.
F-5
25
N-VIRO INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
1999 1998
-----------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 111,856 $ 93,640
Accounts payable 707,324 729,427
Accrued liabilities 326,740 226,790
-----------------------------------------------
Total current liabilities 1,145,920 1,049,857
LONG-TERM DEBT, LESS CURRENT MATURITIES 240,379 67,547
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.01 par value
Authorized - 7,000,000 shares
Issued - 1999 - 2,688,133 shares; 1998 - 2,829,733
shares 26,882 28,298
Additional paid-in capital 13,382,093 13,632,425
Retained earnings (deficit) (9,405,424) (9,876,798)
-----------------------------------------------
4,003,551 3,783,925
Less treasury stock, at cost, 57,250 shares in 1999
and 307,250 shares in 1998 617,977 1,117,977
-----------------------------------------------
Total stockholders' equity 3,385,574 2,665,948
-----------------------------------------------
$ 4,771,873 $ 3,783,352
===============================================
The accompanying notes are an integral part of these financial statements.
F-6
26
N-VIRO INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997
------------------------------------------------
REVENUES $ 4,749,427 $ 3,929,317 $ 4,052,648
COST OF REVENUES 2,244,540 1,883,529 1,829,309
------------------------------------------------
GROSS PROFIT 2,504,887 2,045,788 2,223,339
OPERATING EXPENSES
Selling, general and administrative 1,928,154 2,327,575 1,920,563
Research and development 48,298 58,478 2,714
------------------------------------------------
1,976,452 2,386,053 1,923,277
------------------------------------------------
OPERATING INCOME (LOSS) 528,435 (340,265) 300,062
NONOPERATING INCOME (EXPENSE)
Interest income (expense), net 12,283 32,372 (32,157)
Equity in losses of joint venture (69,344) (65,110) (45,838)
------------------------------------------------
(57,061) (32,738) (77,995)
------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAX (CREDITS) 471,374 (373,003) 222,067
Federal and state income tax (credits) - - (312,000)
------------------------------------------------
NET INCOME (LOSS) $ 471,374 $ (373,003) $ 534,067
================================================
Basic and diluted earnings (loss) per share $ 0.18 $ (0.15) $ 0.23
================================================
Weighted average common shares outstanding 2,563,121 2,463,667 2,274,134
================================================
The accompanying notes are an integral part of these financial statements.
F-7
27
N-VIRO INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
Years Ended December 31, 1999, 1998 and 1997
Additional Retained
Common Paid-in Earnings Treasury
Stock Capital (Deficit) Stock Total
--------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 1996 $ 20,943 $ 12,048,455 $(10,037,862) $ (617,977) $ 1,413,559
Net income - - 534,067 - 534,067
Issuance of common stock for
relief of liabilities 3,865 805,635 - - 809,500
Proceeds from sale of common
stock, net of expenses of $25,414 2,000 322,587 - - 324,587
Issuance of common stock for
business combination 750 177,375 - - 178,125
Purchase of treasury stock - - - (500,000) (500,000)
Other - 5,500 - - 5,500
--------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 1997 27,558 13,359,552 (9,503,795) (1,117,977) 2,765,338
Net loss - - (373,003) - (373,003)
Issuance of common stock for
fees and services 740 217,031 - - 217,771
Other - 55,842 - - 55,842
--------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 1998 28,298 13,632,425 (9,876,798) (1,117,977) 2,665,948
Net income - - 471,374 - 471,374
Issuance of common stock for
fees and services 84 11,766 - - 11,850
Sale of common stock, net of
expenses of $1,288 1,000 197,712 - - 198,712
Retirement of treasury stock (2,500) (497,500) - 500,000 -
Other - 37,690 - - 37,690
--------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 1999 $ 26,882 $ 13,382,093 $ (9,405,424) $ (617,977) $ 3,385,574
======================================================================================
The accompanying notes are an integral part of these financial statements.
F-8
28
N-VIRO INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997
--------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 471,374 $(373,003) $ 534,067
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 175,574 169,807 170,588
Provision for bad debts - 40,000 123,490
Deferred income taxes - - (312,000)
Issuance of common stock and options for fees and
services 49,540 299,092 -
Other 72,234 63,596 47,316
Increase in receivables (616,721) (21,007) (482,939)
Decrease in prepaid expenses and other assets 9,384 10,416 133,537
Increase (decrease) in accounts payable and accrued
liabilities 77,847 (329,891) 25,643
--------------------------------------------
Net cash provided by (used in) operating activities 239,232 (140,990) 239,702
CASH FLOWS FROM INVESTING ACTIVITIES
Collection of contract receivable - 671,521 -
Purchase of property and equipment (130,638) (67,041) (49,943)
Advances to related parties (1,809) (46,790) -
Increase in notes receivable (52,138) - -
Collections on notes receivable 141,387 103,203 -
Expenditures for intangible and other assets (63,275) (21,139) (53,294)
Additional investment in Florida N-Viro, L.P. (7,500) - -
--------------------------------------------
Net cash (used in) provided by investing activities (113,973) 639,754 (103,237)
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (payments) on line of credit - (120,000) 120,000
Borrowings under long-term obligations 161,127 67,000 102,296
Principal payments on long-term obligations (105,079) (129,135) (433,786)
Proceeds from sale of common stock 48,712 - 324,587
Purchase of treasury stock - - (500,000)
Other - (25,479) -
--------------------------------------------
Net cash provided by (used in) financing activities 104,760 (207,614) (386,903)
--------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 230,019 291,150 (250,438)
CASH AND CASH EQUIVALENTS - BEGINNING 322,827 31,677 282,115
--------------------------------------------
CASH AND CASH EQUIVALENTS - ENDING $ 552,846 $ 322,827 $ 31,677
============================================
The accompanying notes are an integral part of these financial statements.
F-9
29
N-VIRO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Nature of Business - The Company owns and licenses the N-Viro
Process, a patented technology to treat and recycle wastewater
sludges and other bio-organic wastes, utilizing certain alkaline
by-products. Revenue and the related accounts receivable are due
from companies acting as independent agents or licensees,
principally municipalities. Credit is generally granted on an
unsecured basis. Periodic credit evaluations of customers are
conducted and appropriate allowances are established.
B. Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.
C. Principles of Consolidation - The consolidated financial
statements include the accounts of the Company and its
wholly-owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation.
The Company accounts for its investments in joint ventures under
the equity method.
D. Fair Value of Financial Instruments - The fair values of cash,
accounts receivable, accounts payable and other short-term
obligations approximate their carrying values because of the
short maturity of these financial instruments. The carrying
values of the Company's long-term obligations approximate their
fair value. In accordance with Statement of Financial Accounting
Standards ("SFAS") No. 107, "Disclosure About Fair Value of
Financial Instruments," rates available at balance sheet dates to
the Company are used to estimate the fair value of existing debt.
E. Cash and Cash Equivalents - The Company has cash on deposit in
one financial institution which, at times, may be in excess of
FDIC insurance limits.
For purposes of the statements of cash flows, the Company
considers all certificates of deposit with maturities of 90 days
or less to be cash equivalents.
F. Property and Equipment - Depreciation has been computed primarily
by the straight-line method over the estimated useful lives of
the assets. Generally, useful lives are thirty-one years for
leasehold improvements and five to fifteen years for equipment
and furniture and fixtures. Management has reviewed property and
equipment for impairment when events and circumstances indicate
that the assets might be impaired and the carrying values of
those assets may not be recoverable. Management believes the
carrying amount is not impaired based upon estimated future cash
flows.
G. Intangible Assets - Patent costs and territory rights are
recorded at cost and then amortized by the straight-line method
over 17 and 11 year periods, respectively. Management has
reviewed intangible assets for impairment when events and
circumstances indicate that the assets might be impaired and the
carrying values of those assets may not be recoverable.
Management believes the carrying amount is not impaired based
upon estimated future cash flows.
F-10
30
N-VIRO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
H. Revenue Recognition - Facility management revenue, sludge
processing revenue, and royalty fees are recognized under
contracts where the Company or licensees utilize the N-Viro
Process to treat sludge, either pursuant to a fixed-price
contract or based on volumes of sludge processed. Revenue is
recognized as services are performed.
Alkaline admixture sales and N-Viro Soil revenue is recognized
upon shipment.
License and territory fees are generated by selling the right to
market or use the N-Viro Process in a specified territory. The
Company's policy is to record revenue for the license agreements
when all material services relating to the revenue have been
substantially performed, conditions related to the contract have
been met, and no material contingencies exist.
I. Earnings (Loss) Per Common Share - Earnings (loss) per common
share has been computed on the basis of the weighted-average
number of common shares outstanding during each period presented.
The effects of the stock options were to increase the weighted
average number of shares by 9,804 for the year ended December 31,
1999 and 6,346 for the year ended December 31,