<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): APRIL 13, 1997
N-VIRO INTERNATIONAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
DELAWARE 0-21802 34-1741211
(STATE OR OTHER JURISDICTION (COMMISSION (IRS EMPLOYER
OF INCORPORATION) FILE NUMBER) IDENTIFICATION NO.)
3450 W. CENTRAL AVENUE, SUITE 328
TOLEDO, OHIO 43606
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (419) 535-6374
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ITEM 5. OTHER ITEMS
On April 13, 1997, the TOLEDO BLADE published an article on N-Viro
International Corporation, incorporated by reference herein as Exhibit 1. On
April 23, 1997, J. Patrick Nicholson, N-Viro International Corporation's
Chairman of the Board and Chief Executive Officer, personally delivered a
response to the writer of the TOLEDO BLADE article, Mr. Gary Pakulski,
incorporated by reference herein as Exhibit 2.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
N-VIRO INTERNATIONAL CORPORATION
Dated: April 24, 1997 By: /s/ James K. McHugh
--------------------- -------------------
James K. McHugh
Chief Financial Officer
<PAGE> 1
Exhibit 1
N-VIRO FACING KEY CHALLENGES TO PROFITABILITY
BY GARY T. PAKULSKI
BLADE BUSINESS WRITER
WHEN J. PATRICK Nicholson extols his magic soil, he sounds not like the
financially struggling entrepreneur that he is, but like Mr. Infomercial, Ron
Popeil, enthusiastically selling the latest household kitchen aid.
"We've just got a major contract in Alaska," beams Mr. Nicholson, the
60-year-old chairman and chief executive of Toledo-based N-Viro International
Corp. "We've gone from losses of $7 million to $2 million to $193,000. We're
expecting a profit next year. We're turning the corner."
But Mr. Nicholson, whose publicly traded company markets a process for
converting sewage plant sludge into an enriched substance called N-Viro Soil,
has made that promise before.
N-Viro has struggled mightily since going public nearly four years ago.
Ernst & Young accountants suggested, after a 1995 audit, there was
"substantial doubt about its ability to continue as a going concern."
The next year, a new accounting firm, McGladrey & Pullen, of Elkhart,
Ind., raised nearly identical concerns: "The company has suffered recurring
losses from operations. This raises substantial doubt about the company's
ability to continue as a going concern."
In 1995, the company's badly performing stock, which today trades at about $2
a share, barely survived permanent banishment from Nasdaq national stock
market to penny stock status.
Despite Mr. Nicholson's rosy assessment, the company remains in the
red. Staff at Toledo headquarters has been trimmed in half to barely more than
a dozen.
In the seven years since the N-Viro process won a prestigious award
from the U.S. Environmental Protection Agency, the company has had minimal
success selling it to municipal sewage treatment plants. Today, the process is
in use at 37 U.S. cities --just seven more than in 1990.
While the company once eyed construction of recycling plants across the
country, today it makes money through licensing fees paid by treatment plants
that use the process and the sale of certain additives used to make N-Viro
soil.
The company has implemented a number of key management changes,
including the resignation of chief operating officer Christopher Mahoney last
December. In other changes, the chairman's son, Michael, moved from national
sales manager to vice president for sales and marketing, and controller James
McHugh is now chief financial officer.
It is unclear how these changes will affect performance.
While the company's 1996 loss of $193,000, or 9 cents a share, is a
fraction of losses in previous years, the picture isn't rosy. Sales declined
19 per cent to $4.2 million. The reduction in red ink last year resulted from
work force downsizing and the sale of two unprofitable subsidiaries, the
company concedes.
There is little disagreement that N-Viro, working with researchers at
Ohio State University and the Medical College of Ohio, put forth an effective
method for disposing of two potential pollutants: the dust left over from the
production of cement and the solids remaining after the treatment of human
waste. When mixed together with additives, N-Viro Soil can be used as a
fertilizer or soil conditioner or additive.
The key question is why what looked like an ideal marriage between
capitalism and responsible environmentalism has been so rocky.
Mr. Nicholson blames what he sees as the government's failure to
enforce regulations on sewage sludge disposal. "The feds have no budget for
enforcement. It's like, if you set up stop signs, no one paid attention to
them."
Other evidence, however, suggests that a growing number of communities
are switching to environmentally responsible methods of sewage sludge
disposal-- methods common in the past included ocean-dumping and landfill
disposal--but that they aren't choosing N-Viro.
Over the past seven years, a growing number of large cities have begun
sending their sewage sludge to rural areas for use as fertilizer on farm
fields, according to a survey by the nonprofit Water Environment Federation.
The figure stands at 54 per cent today, compared to 36 per cent in 1988, the
survey shows. Incineration and land-fill disposal have become less common.
And seventy per cent of respondents said sludge disposal rules were
being enforced. Cost is a key factor in the failure of N-Viro Soil to
catch on,
See N-VIRO, Page 2
[Photos]
LOAD OF N-VIRO SOIL, PASTEURIZED FROM TOLEDO'S SLUDGE, IS READIED
FOR SHIPMENT TO FARM FIELDS.
BLADE PHOTO BY CAITLIN CLEARY
<PAGE> 2
N-VIRO
Continued from Page 1
-------------------
company officials acknowledge. The company likes to describe itself as the
"low cost" recycler of sludge.
That is true when compared to systems like one in Milwaukee where
sewage sludge is converted to fertilizer pellets at a cost of more than $77
per ton of sludge, according to Mike Link, operations manager for the
Milwaukee Sewerage District.
In contrast, the city of Toledo pays N-Viro, which operates a plant
next to the municipal sewage treatment plant, $36.81 a ton-- $1.2 million in
1995--to recycle sludge, said Robert Stevenson, Toledo's acting commissioner
of treatment services.
However, another company with an alternate disposal method charges
Toledo less. S & L Fertilizer, of Whitehouse, which turns the sludge into a
product it calls NuSoil, charges $36.06 a ton. As a result, the company's
share of Toledo business grew in 1996 to 46 per cent of the 34,823. tons of
sludge produced here from 36 per cent in 1995.
N-Viro spends about $30 a ton to convert sludge, but can sell the
product for just $5 a ton.
Other methods, such as application of untreated sludge to farm fields,
can be even cheaper, according to industry experts. But the N-Viro chairman
points out that municipal sewage systems pay a high price in bad public
relations because of the odors that result from land application.
N-Viro has experienced other major changes. Cement kiln dust, which was
once the major ingredient combined with sludge, has been largely replaced with
fly ash, a by-product of coal burning at electrical power plants. The fly ash
costs less, but requires additional testing to guard against excessive levels
of arsenic. Mr. Nicholson is hopeful one of four sludge recycling contracts
being awarded by the metropolitan New York sewage treatment system will go to
a nearby N-Viro site.
"We're going to be at least as comfortable as in 1996," he said. We
expect to make at least $1 million or more... "
But in the view of accountants and others, time is running out.
<PAGE> 1
Exhibit 2
[N-Viro International Letterhead]
April 23, 1997
Mr. Gary Pakulski
c/o The Blade
541 N. Superior St.
Toledo, OH 43660
Dear Gary:
While we appreciate your efforts to do a story on N-Viro International
Corporation, I am sure that it will come as no surprise to you that we were
extremely disappointed in your story on N-Viro published in the Toledo Blade on
Sunday, April 13th.
As you are aware, N-Viro International Corporation (NVIC) is a public company
whose shares of common stock are traded over the counter and quoted on the
National Association of Securities Dealers Automated Quotation System (NASDAQ).
Public companies are subject to the disclosure and reporting requirements set
forth in the Securities Act of 1933 and the Securities Exchange Act of 1934 and
the rules and regulations promulgated thereunder. These laws, rules and
regulations require the Company to, among other things, refrain from making any
public statements about the company or its shares of common stock that are false
or misleading. Any false or misleading statements made by the company or made by
another party acting on behalf of or in concert with the Company, can create
significant liability. The Company believes that portions of your article were
both false and misleading. In order to provide investors and potential investors
in the Company with accurate information, the Company, on advice of legal
counsel, has elected to file your article, together with this letter, as part of
a Form 8-K filing.
On Friday, April 11th, the last day PRIOR to your article, over 124,000 shares
traded, the 2nd largest day in N-Viro history. While the stock ended even for
the day, the trend was up as the value increased almost 50% during the day. On
Monday, April 14th, the first day AFTER your article, the stock value dropped
over 20%. Since Monday the stock has dropped even further. With Toledo as a
primary base of our financial support, your article did severe damage to
N-Viro's perceived value. I realized how seriously the article impacted us when
4 old friends at Msgr. Schmidt's funeral last Tuesday told me they were praying
for us.
<PAGE> 2
If your article was accurate, we would be disappointed, but not upset.
Tragically, that is not the case. Your article was both inaccurate and
misleading and highly opinionated on issues in which you are not well educated.
Let's examine the facts!
1. After disparaging my integrity by comparing me to a kitchen aid salesman
you state N-Viro "barely survived permanent banishment from NASDAQ national
stock market." Simply the fact that we have never met makes the character
criticism highly questionable. There are no grounds for the NASDAQ
statement. The issue was never in doubt. We simply had to achieve a 1-4
revenue stock split to meet NASDAQ's requirements. The words "barely
survived" are totally inappropriate and false.
2. You state: "Today, the process is in use at 37 U.S. cities - just seven
more than in 1990." Your statement reflects an increase of just .038% per
year.
In fact in 1990 we only had FOUR plants operational, including our pilot
plant in Toledo. In 1993 when we went public (October 17, 1993) we had 27
plants. Since then we have increased by 10, which represents an annual
increase of 12.3% (over 3 times the figure reported by you). Moreover, two
of the current plants are regional facilities, which together now process
bio-solids from over 20 cities. When YOU TALK about U.S. cities using
N-Viro technologies, do these two regional facilities count as 2 or as 20?
We are not proud of a 12% per year increase rate, but considering the
indecision factor in the market and THE LACK OF NEW SLUDGE TREATMENT
FACILITIES BUILT FROM 1994-1996, we are not discouraged.
3. You state: "1996 sales declined 19%." This is true! You failed to state
that 1996 operating profit increased 18.5%. You failed to state that
operating profit on revenue increased 46.28%. As our strategy switched from
that of an operating company with higher revenues and higher cost of goods
sold to a technical sales company, the key issue is operating profit, not
revenue. This you ignored!
While you make much of our staff downsizing, you failed to mention our 1995
and 1996 development of a National Representative Network. This was doable
because of the credibility of N-Viro's technology. Today, the N-Viro sales
force, with Representatives, is 250% larger than ever before - AT HALF THE
COST!
4. You state: "A growing number of communities are switching to
ENVIRONMENTALLY RESPONSIBLE methods of sewage sludge disposal - but that
they are not choosing N-Viro ... large cities have begun sending their
sewage sludge to rural areas for use as fertilizer on farm fields." How
many new facilities have been built in the last 3 years - very few!
How "environmentally responsible" are such Class B land application
practices? In 1986 and 1987 eighteen (18) Toledo area subdivisions passed
resolutions prohibiting the land application of treated (Class B) Toledo
sludge in their areas. Recently, Ohio EPA withdrew a permit allowing
Wheelabrator to land-apply New Jersey sludge in eastern Ohio due to strong
<PAGE> 3
public opposition. Enclosure #1 contains information on the risks of
land-applying marginally disinfected sludges and other information. The
enclosed Public Broadcasting Video presentation is equally informative (see
Enclosure #2).
Enclosure #2A contains information on the vast difference between Class B
land-applied sludges and Class A "Exceptional Quality Sludge" Products such
as N-Viro Soil(TM). Class A disinfection standards are 2,000 times more
stringent than Class B.
5. You state: "And seventy percent of respondents said sludge disposal rules
are being enforced." How many regulated bodies will ever admit that their
regulations are not being enforced? Let's examine the facts.
Enclosure #3 is an article from the Journal of the same Water Environment
Federation which you quoted. You will note that the EPA is publicly
admitting in this national article that they do not have the resources to
even issue permits, much less enforce permits. EPA publicly states they are
relying on "self-implementation". That obviously is NOT ENFORCEMENT.
Enclosure #4 is a memo to the White House from the EPA on the issue of
animal manures. I call your attention to the last line of paragraph one.
"Therefore an EPA REGULATORY MECHANISM to control human health and
environmental impacts from improper application or burial of manures to
both farm lands and other lands DOES NOT EXIST AT THIS TIME." Enclosure #5
is a report from the Inspector General's office of USEPA to both the Water
and Enforcement offices of USEPA. I call your attention to the Executive
Summary on page i. "NORTH CAROLINA HAS NOT ISSUED ANY NATIONAL POLLUTANT
DISCHARGE ELIMINATION SYSTEM (NPDES) PERMITS TO LIVESTOCK OR POULTRY
FACILITIES." Do you still want to argue about enforcement? The federal
regulations for POTW biosolids management were published on February 19,
1993. The concept was for STATE ENFORCEMENT of the FEDERAL REGULATIONS. As
of today, it is a matter of record that only two states have accepted
delegation of responsibility. The critical sticking point is 40CFR501, not
40CFR503. As you appear to be getting information from another source, see
if they even know the difference between 40CFR501 and 40CFR503.
The Office of Enforcement at USEPA advised the Office of Water at USEPA, in
my presence, that they had no one assigned to bio-solids enforcement.
Some states, including Ohio, have implemented and are enforcing STATE laws
and STATE regulations pertaining to sewer sludge. Today, there are few, if
any, state laws or regulations pertaining to the safe management of animal
manures.
N-Viro has taken a leadership role in organizing a Vision 2000 Roundtable.
Enclosure #6 is a list of those involved and the communications involved.
Enclosure #7 is a letter to Vice President Gore discussing both the
challenge and the opportunity. We are meeting with the Administration in
early May.
5. You contend that regulations are being enforced and you also state: "Other
methods, such as APPLICATION OF UNTREATED SLUDGE to farm fields can be even
cheaper, according to industry experts."
<PAGE> 4
Federal law (CWA405e) and federal regulations (40CFR503) PROHIBIT the land
application of "untreated sludge". To my knowledge no state allows such a
practice. If they did, the state regulation would not be applicable as
federal law (CWA405e) requires state regulations to be at least as
stringent as federal regulations. "Industry experts" who tell you that
"untreated sludge" can be applied to "farm fields" are no experts. They are
wrong! The Chairman of the Ohio Sludge Use Task Force is Dr. Terry Logan,
of Ohio State University. He can be reached at (614) 292-9043. The Sludge
Coordinator of the State of Ohio is Rico Kmetz-Gonzalez, Ph.D. He can be
reached at (614) 644-2021.
6. You state: "In Milwaukee, where sewage sludge is converted to fertilizer
pellets at a cost of more than $77 per ton of sludge according to Mike
Link, Operations Manager for the Milwaukee Sewerage District."
First of all, comparing Milorganite, an excellent organic fertilizer and
N-Viro Soil(TM) an aglime and topsoil, with land-applied Class B sludge,
treated or "untreated", is comparing apples and oranges. Milorganite,
N-Viro Soil, and sludge compost such as produced by Columbus and Akron, are
Class A EQS products. Their disinfection standard is 2,000 times more
stringent than TREATED sludge. Moreover, municipalities using such high
performance practices (i.e. EQS) are relieved of tremendous liability risks
(Enclosure #8).
Secondly, the true costs of Milorganite are more than double the figures
provided by Mike Link. His figures do not include the more than $200
million dollar grant from USEPA to build the Milorganite facility. If you
divide $200,000,000.00 of annual amortization by 50,000 tons of annual
Milorganite product, the cost might blow your mind. Toledo did not use a
federal grant to build the N-Viro facility.
7. You stated that "S & L Fertilizer's share of Toledo business grew in 1996
to 46 percent of the 34,823 tons of sludge produced `here'," implying that
N-Viro was losing its Toledo customer.
In that N-Viro processed over 34,000 tons of Toledo sludge in 1996, ITS
LARGEST YEAR EVER, something appears dramatically wrong with your
information. I suggest you contact the City of Toledo to seek the truth.
It should be noted that the NUSOIL process is simply a Class B process. The
generator (e.g. City of Toledo) retains all liability for its use. When
municipal sludge is used as a "feedstock" to a Class A EQS PRODUCT (e.g.
N-Viro) generator liability is greatly reduced. (See Enclosure #8).
8. You state that I said: "We are going to be at least as COMFORTABLE as in
1996." I never said that we were comfortable in 1996. I am never
comfortable with red ink. I said that I was comfortable with our
projections for 1997. There is one hell of a difference! While we made
progress in 1996 we are not at all happy with our results. If our
improvement in 1997 is at least comparable to our improvement in 1996 we
will still not be happy, but at least we will be on the right road.
<PAGE> 5
9. Finally, perhaps worst of all, you state: "But in the view of accountants
and others, time is running out."
At our last Board Meeting, OUR accountants advised the Board Audit
Committee that N-Viro had made "significant progress in 1996." In fact, had
N-Viro been able to resolve its differences with Honolulu, the "going
concern" comment would NOT have been issued. (Enclosure #9 is our 10-K
report which discusses Honolulu.)
In spite of impressions to the contrary, we do not believe that you ever
talked to our accountants. To give the impression that you did, is terribly
wrong!
In closing, you should note, and I wish you would have noted in your article,
that whenever the Company uses words such as "expects", "anticipates",
"believes", "may" and "hopes", and similar words and phrases, such words and
expressions identify forward-looking statements and the matters to which they
relate are subject to considerable uncertainty that may cause actual results to
be materially different from those described herein. For example, while I have
indicated that I am comfortable with projections for 1997, such projections may
prove to be overly optimistic and earnings below projection may have a material
adverse effect on the Company.
Gary, the purpose of this long and time-consuming letter is NOT to seek a
retraction or redress of a very harmful article. The Blade has always been more
than fair to N-Viro International and to the Nicholson family. The purpose is to
educate you on the issues we are trying to solve and the TRUTH about N-Viro's
IMPROVING status. N-Viro was created to provide technology to solve a serious
problem. Today, that problem is being ignored because of the political power of
special interests. I call your attention to Enclosure #1 and Enclosure #5
(included in full) of my letter to Vice President Gore (Enclosure #7). The
opening page of Enclosure #5 is particularly relevant to the issues we are
attempting to raise on a national scale.
As I attempted to tell you earlier, we are convinced that local peer pressure,
such as existed in Toledo 10 years ago, is now driving POTW decisions toward
Class A EQS alternatives like compost and N-Viro. National awareness and
acceptance of the organic waste disposal challenge and opportunity would be a
big help to N-Viro and more importantly, to mankind. The issues are critically
important and I am grateful for the opportunity to be involved. One person can
make a difference! We intend to make that difference!
Best wishes.
Sincerely yours,
/s/ J. Patrick Nicholson
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J. Patrick Nicholson
Chief Executive
JPN/erv
Enclosures (10)
cc: T. Walton, Editor, The Blade
