AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 21, 1997
REGISTRATION NO. 333-17399
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 3
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
MERCURY WASTE SOLUTIONS, INC.
(Name of Small Business Issuer in its charter)
MINNESOTA 2819 41-1827776
(State or other jurisdiction (Primary standard industrial (I.R.S. Employer
of incorporation) classification code number) Identification Number)
302 NORTH RIVERFRONT DRIVE, SUITE 100A
MANKATO, MINNESOTA 56001
(507)345-0522
(612)635-0080
(Address and Telephone Number of Principal Executive Offices)
BRADLEY J. BUSCHER, CHAIRMAN AND CHIEF EXECUTIVE OFFICER
MERCURY WASTE SOLUTIONS, INC.
302 NORTH RIVERFRONT DRIVE, SUITE 100A
MANKATO, MINNESOTA 56001
(507) 345-0522
(Name, Address, and Telephone Number of Agent For Service)
COPIES TO:
RUSSELL F. LEDERMAN, ESQ. ROBERT K. RANUM, ESQ.
SHAWN R. MCINTEE, ESQ. FREDRIKSON & BYRON, P.A.
MASLON EDELMAN BORMAN & BRAND, 1100 INTERNATIONAL CENTRE
A PROFESSIONAL LIMITED LIABILITY PARTNERSHIP 900 SECOND AVENUE SOUTH
3300 NORWEST CENTER MINNEAPOLIS, MINNESOTA 55402-3397
MINNEAPOLIS, MINNESOTA 55402-4140 (612) 347-7000
(612) 672-8200 FAX (612) 347-7077
FAX (612) 672-8397
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after
the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REIGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED FEBRUARY 21, 1997
PROSPECTUS
1,000,000 SHARES
[LOGO]
MERCURY WASTE SOLUTIONS, INC.
COMMON STOCK
Mercury Waste Solutions, Inc. (the "Company") is offering (the "Offering")
1,000,000 shares (the "Shares") of Common Stock at an initial public offering
price of $5.00 per share. Prior to this Offering, there has been no market for
the shares, and no assurance can be given that any such market will exist or
develop upon completion of this Offering or, if developed, will be maintained.
See "Underwriting" for information relating to the factors considered in
determining the Price to Public. The Company's Common Stock has been approved
for listing on the Nasdaq SmallCap Market under the symbol MWSI.
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK AND SUBSTANTIAL DILUTION. SEE
"RISK FACTORS" COMMENCING ON PAGE 7 AND "DILUTION" ON PAGE 13. THESE ARE
SPECULATIVE SECURITIES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
Per Share $5.00 $0.45 $4.55
Total(3) $5,000,000 $450,000 $4,550,000
(1) The Company has agreed to pay to Equity Securities Trading Co. Inc. (the
"Underwriter"), a nonaccountable expense allowance equal to 2% of the gross
proceeds of the offering and has agreed to sell to the Underwriter five year
warrants to purchase up to 100,000 shares of Common Stock at 120% of the
Price to Public. The Company has also agreed to indemnify the Underwriter
against certain liabilities, including liabilities under the Securities Act
of 1933, as amended. See "Underwriting."
(2) Before deducting expenses of the offering estimated at $250,000, which does
not include the 2% nonaccountable expense allowance described in Note 1
above.
(3) The Company has granted the Underwriter a 45-day option to purchase up to
150,000 additional shares of Common Stock solely to cover
over-allotments, if any. If such option is exercised in full, the Total
Price to Public, Underwriting Discount and Proceeds to Company will be
$5,750,000, $517,500 and $5,232,500, respectively. See "Underwriting."
The Shares are being offered by the Underwriter when, as and if delivered to and
accepted by the Underwriter, and are subject to the right of the Underwriter to
withdraw, cancel or modify such offer and to its right to reject any order in
whole or in part. It is expected that delivery of the certificates representing
the Shares will be made on or about , 1997 in Minneapolis, Minnesota.
EQUITY SECURITIES TRADING CO., INC.
The date of this Prospectus , 1997
[PHOTO]
THE CONTINUOUS FLOW MERCURY DISTILLATION SYSTEM
[PHOTO]
MERCURY-CONTAINING PRODUCTS SUBJECT TO RETORTING AND RECYLYING INCLUDING
FLOURESCENT AND HID LAMPS, BATTERIES, SWITCHES AND CIRCUIT BOARDS
[PHOTO]
TECHNICIAN REMOVING SAMPLE OF RECOVERED MERCURY
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS (INCLUDING THE NOTES THERETO) APPEARING
ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, THE INFORMATION IN
THIS PROSPECTUS ASSUMES NO EXERCISE OF THE UNDERWRITER'S OVER-ALLOTMENT OPTION.
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE
RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE
SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED UNDER THE
HEADING "RISK FACTORS", WHICH INVESTORS SHOULD CAREFULLY CONSIDER.
THE COMPANY
Mercury Waste Solutions, Inc. (the "Company") provides services and products to
mercury waste generators to reduce the risk of liability associated with mercury
waste disposal. The Company currently operates a mercury waste retorting
facility in Union Grove, Wisconsin and a facility to recycle and store
fluorescent and other mercury-containing lamps in Roseville, Minnesota. In
addition, the Company markets and sells or leases lamp recycling equipment.
Retorting is a form of distillation pursuant to which mercury is removed from
contaminated products via vaporization and condensation.
In January, 1996, the Company acquired substantially all of the assets of U.S.
Environmental, Incorporated ("USE"), a Minnesota-based mercury recycling company
founded in 1993 by Mark G. Edlund, the Company's President and Chief Operating
Officer. USE co-developed the Model 2000 lamp recycler (the "Model 2000"),
opened a mercury lamp recycling facility in Roseville, Minnesota (the "Roseville
Recycling Facility") to showcase the Model 2000 and co-developed mercury
retorting equipment installed at a facility in Union Grove, Wisconsin (the
"Union Grove Retorting Facility"). Since the acquisition of USE, the Company
improved the Model 2000 (the "Model 2000B") and began development of equipment
that processes mercury-containing lamps for more efficient storage and
transportation (the "Lamp Processor"). The Company has also developed a new
continuous flow oven and a stationary oven utilized at the Union Grove Retorting
Facility. On September 12, 1996, the Company acquired the interests of the
co-developer of the equipment located at the Union Grove Retorting Facility.
The Company's mission is to provide mercury waste recycling solutions to mercury
waste generators of all sizes including, but not limited to, public utilities,
manufacturers that utilize mercury in their business (e.g., measurement, control
and electrical equipment industries), building managers and hazardous waste
managers. The Company has provided lamp recycling or retorting services to a
variety of customers including Sylvania Lighting Services, Norwest Bank, Kansas
City Power & Light, Laidlaw Environmental Services, Eaton Corporation and
Pennsylvania Power & Light, and has recently entered into contracts with the
United States Postal Service and PBM Construction (a general contractor to the
U.S. Navy). The Company believes that the mercury recycling industry has growth
potential because of: 1) stringent federal and state regulations governing
mercury-containing products; 2) acknowledgment from businesses of the potential
liability posed by mercury waste disposal; and 3) the growing recognition among
the public of the health risks of mercury. In a July 1994 article published by
the U.S. Environmental Protection Agency (the "EPA") titled GENERATION AND
TREATMENT OF MERCURY-BEARING WASTE, the EPA identified the total potential
demand for off-site retorting at 130,000 tons per year. Of this amount, the
Company believes that 30,000-40,000 tons are suitable for its proprietary
processing technology. In the same article, which was published prior to the
development of the Union Grove Retorting Facility, the EPA estimated the retort
industry capacity at 3,000 tons in 1994, the most recent year for which data is
available. The Company's current retorting capacity is approximately 2,500 tons
per year.
The Company presently offers the following services and products:
MERCURY WASTE RETORTING. The Company expects that a significant amount of its
revenue will consist of fees paid for retorting mercury waste to environmentally
acceptable levels. The Union Grove Retorting Facility utilizes a continuous flow
oven technology that processes more mercury waste in a shorter period of time
than other conventional methods presently utilized. The Company intends to apply
to the U.S. Patent and Trademark Office for protection of certain aspects of its
technology related to its retorting equipment. The processed waste from the
Union Grove Retorting Facility satisfies current federal and state environmental
standards for mercury waste and requires no further treatment as a hazardous
waste. The Company has also developed a high capacity stationary oven for
retorting larger, non-granular items such as thermostats and batteries. The
Company expects that the Union Grove Retorting Facility will derive its business
from: (1) large scale generators of mercury waste, particularly in the
measurement, control and electrical equipment industries; (2) lamp recycling
facilities, such as the Roseville Recycling Facility; (3) users of Lamp
Processors; and (4) other manufacturing facilities that utilize mercury in their
business. At the present time, the Company believes that the supply of
mercury-containing waste capable of being retorted exceeds the capacity of
mercury retorters. In order to more efficiently process mercury waste, the
Company intends to utilize a portion of the net proceeds of this Offering to
expand the Union Grove Retorting Facility to provide this capacity to store
mercury waste for a period of up to one year. For the year endedDecember 31,
1996, the Union Grove Retorting Facility generated approximately $638,000 in
revenues.
The Company's goal is to maximize the utilization of its Union Grove Retorting
Facility by acquiring and consolidating mercury waste generated throughout the
United States. The Company believes that mercury waste could be stored at
various locations across the country and transported to the Union Grove
Retorting Facility on a controlled basis. As part of such strategy, the Company
intends to utilize a portion of the proceeds of this Offering to acquire or
develop a consolidation and temporary hazardous waste storage facility (a "WSF")
in the Southwestern United States. Because governmental regulations limit the
amount of mercury waste that can be present at a retorting facility at any given
time, many generators of mercury waste are forced to store such waste in a
temporary hazardous waste storage facility prior to shipment to a retorting
facility or permanent hazardous waste disposal site. The Company believes that
the establishment of a WSF in the Southwestern United States would complement
the Company's business by consolidating the mercury waste located in the
Southwestern United States. This will allow the Company to control the shipments
of mercury waste to the Company's Union Grove Retorting Facility and achieve
maximum utilization of the facility's retorting capacity. The Company estimates
that the cost of acquiring or developing a 4,000 to 6,000 square foot WSF in the
Southwestern United States and establishing operations at such facility will be
approximately $300,000. After completion of the first WSF, the Company also
intends to develop a similar WSF in the Southeastern United States.
EQUIPMENT SALES AND LEASING. The Company intends to offer two proprietary types
of equipment for lease or sale: its Model 2000B lamp recycler and its Lamp
Processor. The Model 2000B can process approximately five million lamps annually
by separating the lamps into three principal components: glass, aluminum endcaps
and mercury-laced calcium phosphate powder. After separation, the powder's level
of mercury still exceeds federal and state guidelines for mercury and must
either be further retorted to remove the mercury or sent to a hazardous waste
landfill with potentially harmful environmental consequences. For the year ended
December 31, 1996, there were no sales of the Model 2000B lamp recycler because
the Company did not complete the purchase of the co-developer's rights to the
Model 2000 until September 12, 1996.
The Company is developing the Lamp Processor for marketing to businesses and
utilities that dispose of a large volume of fluorescent and other
mercury-containing lamps and desire to reduce lamp storage and transportation
costs. The Lamp Processor will reduce the lamps to a volume more convenient for
transporting and retorting. The Company anticipates that the Lamp Processor will
process lamps at a customer's business site and deposit the lamps into a sealed
holding container which will be periodically removed (and replaced with an empty
container) and transported to a mercury retorting facility such as the Union
Grove Retorting Facility. The Company intends to lease the Lamp Processor to its
customers. The Company believes that leasing, while requiring a greater initial
capital commitment by the Company, will better provide the Company with
recurring monthly revenue. A portion of the proceeds of this Offering will be
utilized to finance the final development and production of the Lamp Processor
for subsequent lease to customers.
LAMP RECYCLING. The Company operates the Roseville Recycling Facility in
Roseville, Minnesota, a suburb of St. Paul, which utilizes a Model 2000B to
recycle mercury-containing fluorescent lamps. The Roseville Recycling Facility
also collects other items including high intensity discharge ("HID") and neon
lamps, batteries, mercury-containing switches and thermostats for shipment to
and retorting by the Company's Union Grove Retorting Facility. The approximately
6,500 square foot Roseville Recycling Facility has processed approximately five
million lamps since it opened in April 1993. Fluorescent lamps are transported
to the Roseville Recycling Facility by Company-owned trucks that pick up
fluorescent lamps directly from customers or are delivered directly by the
customers. For the year ended December 31, 1996, the Roseville Recycling
Facility generated approximately $697,000 in revenues.
The Company was incorporated in January, 1996 as a Minnesota corporation. Its
principal executive offices are located at 302 North Riverfront Drive,
Mankato, Minnesota 56001 and the telephone number is (507) 345-0522.
THE OFFERING
COMMON STOCK OFFERED ............ 1,000,000 Shares
COMMON STOCK OUTSTANDING
AFTER THIS OFFERING ........... 3,369,097 Shares(1)(2)
PROPOSED NASDAQ SYMBOL .......... MWSI
USE OF PROCEEDS ................. A maximum of $1,660,000 to repay an
operating note to Norwest Bank
Minnesota, N.A.; $875,000 to expand
the Union Grove Retorting Facility,
develop an on-site hazardous waste
storage facility, and develop on-site
lamp processing capabilities;
$600,000 for the manufacture of the
Lamp Processor; $600,000 for the
lease or development of WSF temporary
hazardous waste storage facilities in
Southwestern and Southeastern parts
of the United States; and the balance
for working capital purposes.
(1) Includes 120,000 shares to be issued upon exercise of warrants
simultaneous with the effectiveness of this Offering.
(2) Does not include (a) 100,000 shares of Common Stock issuable upon exercise
of the Underwriter's Warrant at 120% of the Price to Public; (b) 185,500
shares of Common Stock reserved for issuance under the Company's 1996
Stock Option Plan of which 145,000 shares of Common Stock were subject to
options granted as of January 22, 1997; -- (consisting of (i) options
for 110,000 shares granted as of December 31, 1996 and (ii) options for
35,000 shares granted subsequent to December 31, 1996; see Note 8 to the
financial statements included elsewhere in the Prospectus) and (c) 200,771
shares of Common Stock issuable upon exercise of Warrants issued to
certain individuals prior to this Offering, including certain officers and
directors of the Company -- (consisting of (i) warrants for 169,492
shares granted in connection with the Company's initial capitalization,
(ii) warrants for 20,339 shares granted in connection with a September,
1996 private placement and (iii) warrants for 10,940 shares granted in
connection with a November, 1996 private placement; see Note 7 to the
financial statements included elsewhere in the Prospectus).
SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED YEAR
DECEMBER 31, ENDED
1995 DECEMBER 31,
(PREDECESSOR) 1996
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:(1)
Revenues $ 1,548,782 $ 1,334,709
Cost of revenues 783,355 552,681
Gross profit 765,427 782,028
Operating expenses 700,026 1,579,406
Interest expense 11,486 188,068
Net income (loss ) $ 53,915 $ (985,446)
PRO FORMA DATA(2)(3):
Net income (loss), as reported $ 53,915 $ (985,446)
Pro Forma provision for income taxes (Note 5) 13,500 --
Pro Forma net income (loss) $ 40,415 $ (985,446)
Net loss per share $ (0.40)
Weighted average number of common and common
equivalent shares outstanding 2,455,313
</TABLE>
DECEMBER 31, 1996
PRO PRO FORMA
ACTUAL FORMA(4) AS ADJUSTED(5)
BALANCE SHEET DATA:
Working capital $ 197,159 $ 197,159 $ 662,159
Total assets 2,566,585 2,566,585 5,106,585
Long-term
liabilities 2,064,867 1,929,867 269,867
Total liabilities 2,282,891 2,147,891 487,891
Shareholders' equity 283,694 418,694 4,618,694
(1) On January 4, 1996, the Company acquired substantially all the assets of
USE. The results of operations for the year ended December 31, 1995 are
those of USE. The results of USE from January 1, 1996 to January 3, 1996 are
included with the Company's 1996 results as they are not material.
(2) Since its incorporation on January 2, 1996, the Company has been an S
Corporation for federal and state income tax purposes and, accordingly, has
not been subject to federal or state income taxes. The pro forma statement
of operations data presented has been computed as if the Company were
subject to corporate federal and state income taxes. Net income (loss) does
not include a pro forma adjustment for income taxes due to the Company's net
loss. The Company's election to be taxed as an S Corporation will terminate
automatically upon the consummation of this offering. See Note 1 of Notes to
Financial Statements, "S Corporation Status" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
(3) On a supplemental basis, as adjusted to give effect to the number of shares
offered hereby necessary to retire as of the beginning of the period or at
the date of issuance of the Company's interest bearing debt, the Company's
net loss, loss per share, and weighted average number of common and common
equivalent shares outstanding would have been $(815,296), $(0.29) and
2,787,313, respectively.
(4) Adjusted for the effect of the exercise of a warrant for 120,000 shares of
Common Stock at $1.125 per share with exercise price paid by cancellation of
a related debt of $135,000 owed by the Company to the warrant holder.
(5) Adjusted for the effect of (i) the sale of 1,000,000 shares offered hereby
and the application of the net proceeds thereof and (ii) the
reclassification of accumulated deficit to additional paid-in capital as a
result of the automatic termination of the Company's S Corporation income
tax status upon consummation of the offering.
RISK FACTORS
AN INVESTMENT IN THE SHARES OFFERED HEREBY IS HIGHLY SPECULATIVE AND INVOLVES A
HIGH DEGREE OF RISK. INVESTORS COULD LOSE THEIR ENTIRE INVESTMENT. PROSPECTIVE
INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS, ALONG WITH THE OTHER
INFORMATION SET FORTH IN THIS PROSPECTUS, IN EVALUATING THE COMPANY, ITS
BUSINESS AND PROSPECTS BEFORE PURCHASING THE SHARES.
LACK OF PROFITABILITY; LACK OF OPERATING HISTORY The Company was organized in
January, 1996 to acquire substantially all of the assets of USE. USE earned a
substantial portion of its income from sales of the Model 2000, a source from
which the Company has earned no income or revenues in 1996. USE also profitably
operated the Roseville Recycling Facility from 1993-1995, but the Company has
substantially changed the management and operations at this facility. USE had no
operating history at the Union Grove Retorting Facility which is the major
source of projected revenue for the Company. During the period from January 2,
1996 (date of inception) through December 31, 1996, the Company had a net loss
of approximately $985,000. Accordingly, the Company's operations are subject to
all of the risks inherent in the establishment of a new business enterprise,
including the lack of profitability and the lack of operating history. The
likelihood of success of the Company must be considered in light of the
problems, expenses, difficulties, complications and delays frequently
encountered in connection with the establishment of any company. Future revenues
and profits, if any, will depend upon various factors, including the market
acceptance of the Company's services and products, environmental regulation and
enforcement and general economic conditions. There is no assurance that the
Company can operate profitably or that it will successfully implement its
expansion plans. Furthermore, to the extent that the Company's expansion
strategy is successful, the Company must manage the transition to multiple site
operations, higher volume operations, the control of overhead expenses and the
addition of necessary personnel.
NEW AND EVOLVING INDUSTRY; NEW PRODUCT The mercury waste treatment and mercury
lamp recycling industry in the United States is relatively new and evolving. The
demand for its services and products is highly dependent upon governmental
regulations, the federal and state enforcement of regulations and the perception
by mercury waste generators of the need for the Company's services and products.
The Company intends to market its mercury retorting services directly to waste
generators and to large hazardous waste brokers. Although the Company expects
that the customer base for its mercury retorting services will be broad and
diverse, in the past mercury waste has been collected by large hazardous waste
brokers who have arranged for its disposal or treatment. The Company may be
dependent on waste collected by a few large waste brokers with whom the Company
may indirectly compete for the collection and treatment of mercurial waste. In
addition, the Company's Lamp Processor is currently under development. There can
be no assurance that the Lamp Processor will be developed and if developed,
there can be no assurance that the market will accept the product on terms
acceptable to the Company.
LACK OF EQUIPMENT OPERATING HISTORY Nineteen Model 2000 Lamp Recyclers have been
sold since such product was developed in 1992 and no Model 2000Bs have been sold
in 1996. The Company did not actively market the Model 2000B until it acquired
all of the rights to the original Model 2000, the predecessor to the Model
2000B, in September, 1996. The Company is continuing to improve the Model 2000B
to provide more efficient and complete mercury removal. No assurance can be
given that such modified equipment can compete with equipment designed by
competitors. Additionally, the Company's retorting technology is new in design
and unproven in long-term processing. Furthermore, the Company's Lamp Processor
is in its final design and prototype stage and none have been sold or leased to
date.
LIMITED FINANCIAL RESOURCES; ADEQUACY OF PROCEEDS AND NEED FOR ADDITIONAL
FINANCING The Company's ability to execute its business strategy depends to a
significant degree on its ability to obtain substantial equity capital to
finance the development of WSF's and Lamp Processors. The proceeds of this
Offering will provide the Company with the financing required to develop and
open two WSFs, manufacture approximately 120 Lamp Processors, expand the Union
Grove Retorting Facility and supply working capital for at least 12 months.
There can be no assurance, however, that the costs of opening the WSFs and
manufacturing approximately 120 Lamp Processors will not exceed current
estimates. If the proceeds of this Offering are not sufficient to develop such
facilities or equipment, the Company may be required to seek additional
financing. If additional financing is required, there can be no assurance that
any additional financing will be available on terms acceptable to the Company or
its shareholders. New investors may seek and obtain substantially better terms
than were granted to the Company's present investors and the issuance of such
securities may result in dilution to the existing shareholders. Furthermore, as
the Company prepares to expand, it will expend a relatively higher amount on
administrative expenses than would a mature Company with such operations.
DEVELOPMENT OF FUTURE WSF FACILITIES; EXPANSION PLAN RISKS Part of the Company's
business strategy includes developing WSFs to consolidate and store hazardous
mercury waste and control the timing of shipments of mercury waste to the
Company's Union Grove Retorting Facility. The Company estimates an investment of
$300,000 to develop or acquire the proposed WSF in the Southwestern United
States. The Company presently intends to develop an additional WSF in the
Southeastern United States in late 1997 or early 1998 and estimates that such
WSF will also require a $300,000 investment. A portion of the Company's
projected revenue is based on successful development of WSFs to provide a source
of regular supply of mercury waste to the Union Grove Retorting Facility.
Successful expansion of the Company's operations will be largely dependent upon
a variety of factors, some of which are currently unknown or beyond the
Company's control, including the ability of the Company's management to identify
suitable WSF sites and to negotiate purchases and financing of such WSF sites;
timely regulatory approval of the sites; the hiring of skilled management and
other critical, experienced personnel; the ability of the Company's management
to apply its policies and procedures to geographically dispersed facilities; the
general ability to successfully manage growth; and the general state of the
economy. Although the Company is in the process of exploring the opening of new
WSF facilities, the Company has entered into no agreements. There can be no
assurance that the Company will be able to open WSF facilities.
TECHNOLOGICAL CHANGE The Company could be adversely affected by the development
of new technologies for processing mercury waste. The Company has a significant
investment in its existing mercury waste processing technologies. Changes could
result in reconfiguring or replacing existing equipment and redesign of
equipment the Company is selling/leasing. Research and development costs and
replacement costs could be substantial. Patents obtained by competitors
developing new technologies could hamper the Company's ability to adjust to
technological changes.
LACK OF INTELLECTUAL PROPERTY PROTECTION The Company has no patents on its Model
2000B lamp recycler, the Lamp Processor or on its retorting technology. There is
significant risk that third parties will independently develop similar
technology. Although the Company intends to apply to the United States Patent
and Trademark Office for protection of certain aspects of its technology
relating to the Model 2000B, the Lamp Processor and its retorting equipment, no
assurance can be given that patent protection will be obtained. There is also no
assurance that any of the Company's intellectual property rights will be
enforceable, even if patented or registered, against any prior users of similar
intellectual property or that the Company will be successful in defending itself
against a third party claiming that the Company's technologies violate an
existing patent. Any such claim, with or without merit, could also be time
consuming and costly to defend.
GOVERNMENT REGULATION The Company is subject to extensive and evolving
environmental laws and regulations which have become increasingly stringent in
recent years as a result of greater public interest in protecting the
environment. These laws and regulations affect the Company's business in many
ways and will continue to impose substantial costs on the Company.
The Company believes that the Environmental Protection Agency ("EPA") has
received requests from trade organizations to change its rules to allow
mercury-containing lamps (determined hazardous by existing federal regulations)
to be disposed of in municipal solid waste landfills and incinerators. This
action would effectively eliminate lamps from the federal hazardous waste
regulations. If these rules are changed, the lamp processing and mercury
recycling industries which have been specifically developed to mitigate mercury
problems would suffer a severe setback. The Company, its employees and vendors
would be adversely affected by such a change in EPA rules.
In order to develop and operate WSF facilities, it is necessary for the Company
to obtain and maintain in effect one or more licenses or permits as well as
zoning, environmental and/or other land use approvals. These licenses or permits
and approvals are often difficult and time consuming to obtain and are
frequently subject to opposition by various elected officials, environmental
advocates and citizen groups. Facility operating permits may be subject to
modification or revocation. Permits must be renewed periodically. There can be
no assurance that the Company will be successful in obtaining and maintaining
the permits and approvals required for the successful operation and growth of
its business. The failure by the Company to obtain or maintain in effect a
permit or approval significant to its business would have a material adverse
effect on the Company's operations and financial condition. Due to the
complexity of regulation of the industry and to public pressure, implementation
of existing laws, regulations or initiatives by different levels of government
may be inconsistent and difficult to foresee. The Company makes a continuing
effort to anticipate regulatory, political and legal developments that might
affect its operations, but it is not always able to do so.
POTENTIAL ENVIRONMENTAL LIABILITY The Company, as a transporter, recycler and
potential operator of temporary storage facilities of hazardous waste is subject
to liability for any contamination for which it is deemed responsible pursuant
to the Comprehensive Environmental Response, Compensation, and Liability Act of
1980, as amended ("Superfund" or "CERCLA"). The statute provides for the
remediation of contaminated facilities and imposes costs on the responsible
parties. The expense of conducting a cleanup and the damages can be very
significant. If the Company were to be found to be a responsible party for a
CERCLA cleanup, the enforcing authority could hold the Company completely
responsible for all investigative and remedial costs even if others may also be
liable. Any substantial liability for environmental damage incurred by the
Company could have a material adverse effect on the Company's financial
condition and results of operations.
LIMITED MANAGEMENT EXPERIENCE/NEED FOR ADDITIONAL MANAGEMENT The success of the
Company will depend upon the Company's ability to attract and retain a highly
qualified management and sales team. Mark G. Edlund, the Company's President and
Chief Operating Officer, Donald J. Wodek, the Company's Executive Vice
President-Operations, Legal and Regulatory Affairs, James Cornwell, General
Manager of the Union Grove Retorting Facility, Steven A. Rush, Facility Manager
at the Union Grove Retorting Facility, and Thomas Kimmel, General Manager of the
Roseville Recycling Facility, have an aggregate of 46 years of experience in the
recycling and/or hazardous waste business. However, these individuals have
limited prior experience in operating a mercury recycling facility with the
capacity of the Union Grove Retorting Facility. The Company will need to hire
other corporate level, management and sales employees to help implement and
operate its expansion plans. The failure to obtain, or delays in obtaining, key
employees could have a material adverse effect on the Company.
DEPENDENCE ON THIRD PARTY MANUFACTURER The Company co-owns the design rights to
its Model 2000 lamp recycler with Resource Technology, Inc., an Iowa-based
manufacturing company ("RTI"). RTI currently has the exclusive rights to
manufacture the Model 2000 and the Company is accordingly dependent upon RTI to
produce the Model 2000. The Company plans to purchase and modify the Model 2000
to produce the Model 2000B. No assurance can be given that if RTI were unable to
manufacture the Model 2000, another manufacturer could be located to perform the
manufacturing function or, if located, that such firm could successfully
manufacture the Model 2000 in a timely, cost-effective manner.
COMPETITION The mercury recycling industry is extremely competitive with respect
to price, service, and location. New or existing competitors that add capacity
can affect the price charged for remediation services and the volume of services
performed. Mercury retort competitors have been in the market for many years and
some have established excellent reputations. The Company may not be able to
establish relationships with customers of these competitors. Over the past five
years there has been considerable consolidation in the waste management
industry. However, the mercury recycling industry still consists mostly of
small, independent companies. A large, well-financed or capitalized company
might be able to quickly build a significant market share by buying existing
companies or processes, by reducing prices or by utilizing other marketing
methods.
CONTROL OF THE COMPANY; DEPENDENCE ON KEY PERSONNEL Bradley J. Buscher, the
Company's Chairman, Chief Executive Officer and Chief Financial Officer, will
control approximately 36% of the Company's Common Stock following this
Offering. Therefore, Mr. Buscher will have the ability to direct the
Company's operations and financial affairs and to substantially influence the
election of members of the Board of Directors of the Company. The Company is
also presently highly dependent upon the personal efforts and abilities of
Mr. Buscher and Mark G. Edlund, the Company's President and Chief Operating
Officer. The loss of the services of either Mr. Buscher or Mr. Edlund could
have a substantial adverse effect on the Company's ability to achieve its
objectives. The Company currently has no key man insurance on Mr. Buscher and
a $2 million key man insurance policy on Mr. Edlund.
RELATED PARTY TRANSACTIONS The Company and Messrs. Buscher and Edlund are
subject to certain transactions that may present a conflict of interest. See
"Certain Transactions."
DILUTION TO NEW INVESTORS - 79 PERCENT Purchasers of the securities offered
hereby will experience immediate substantial dilution of $3.97 per share in the
net tangible book value per share of Common Stock.
ABSENCE OF DIVIDENDS At the present time, the Company intends to use any
earnings which may be generated to finance further growth of the Company's
business. Accordingly, investors should not purchase the Shares with a view
towards receipt of cash dividends from any Shares.
LACK OF PUBLIC MARKET; DETERMINATION OF OFFERING PRICE Prior to this Offering,
there has been no public market for the Company's securities. Although the
Company has applied for listing of the Common Stock on the Nasdaq SmallCap
Market, there can be no assurance that an active public market will develop or
be sustained. The offering price of the Shares has been arbitrarily determined
by negotiation between the Company and the Underwriter and bears no relationship
to the Company's current operating results, book value, net worth or financial
statement criteria of value. The factors considered in determining the offering
price included an evaluation by management of the history of and prospects for
the industry in which the Company competes and the prospects for earnings of the
Company. Such factors are largely subjective, and the Company makes no
representation as to any objectively determinable value of the securities
offered hereby.
In addition, if the Company fails to maintain its qualification for its Common
Stock to trade on the Nasdaq SmallCap Market, the Shares will be subject to
certain rules of the Securities and Exchange Commission relating to "penny
stocks." Such rules require broker-dealers to make a suitability determination
for purchasers and to receive the purchaser's prior written consent for a
purchase transaction, thus restricting the ability of purchasers and
broker-dealers to sell the stock in the open market.
UNDESIGNATED STOCK; POSSIBLE ANTI-TAKEOVER EFFECT The Company's authorized
capital consists of 50,000,000 shares of capital stock. The Board of Directors,
without any action by the Company's stockholders, is authorized to designate and
issue shares in such classes or series (including classes or series of preferred
stock) as it deems appropriate and to establish the rights, preferences and
privileges of such shares, including dividends, liquidation and voting rights.
The Company currently has 2,369,097 shares of Common Stock outstanding (includes
120,000 shares to be issued upon exercise of warrants simultaneous with the
effectiveness of this Offering), has reserved 185,500 shares of Common Stock for
issuance under its 1996 Stock Option Plan, has issued warrants to purchase
200,771 shares of Common Stock and has authorized the issuance of an additional
1,150,000 shares of Common Stock in contemplation of this Offering. The rights
of holders of preferred stock and other classes of common stock that may be
issued may be superior to the rights granted to the holders of the Shares. The
ability of the Board of Directors to designate and issue such undesignated
shares could impede or deter an unsolicited tender offer or takeover proposal
regarding the Company. Further, the issuance of additional shares having
preferential rights could adversely affect the voting power and other rights of
holders of Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE The sale, or availability for sale, of
substantial amounts of Common Stock in the public market subsequent to this
offering may adversely affect the prevailing market price of Common Stock and
may impair the Company's ability to raise additional capital by the sale of its
equity securities. The Company and its directors, executive officers and 5%
shareholders have agreed that they will not sell nor grant any option for the
sale of, or otherwise dispose of any shares of Common Stock for 365 days after
the Effective Date without the prior written consent of the Underwriter. Subject
to certain limitations and customary cutbacks as reasonably determined by any
underwriter, if at any one time prior to the end of the two-year period
following complete exercise of any warrant or September 2001, whichever occurs
earlier, the Company proposes to register any of its Common Stock under the
Securities Act, the Company will provide each of the holders of warrants to
purchase an aggregate of 320,771 shares of Common Stock with the opportunity,
pursuant to piggyback registration rights, to participate in such public
offering. In connection with this Offering, certain officers and directors of
the Company have agreed to escrow a portion of their shares for three years or
until (i) the Company meets certain earnings requirements established by the
State of Minnesota, or (ii) the State of Minnesota determines that the escrow
agreement is no longer necessary. A total of 2,246,402 shares of Common Stock
will be subject to escrow.
DISCRETIONARY USE OF PROCEEDS A portion of the net proceeds to be received by
the Company in the offering have not been designated for any specific use. The
proceeds may be utilized for one or more alternative purposes in the discretion
of the Company.
MINNESOTA ANTI-TAKEOVER LAW The Company is subject to Minnesota statutes
regulating business combinations and restricting voting rights of certain
persons acquiring shares of the Company, which may hinder or delay a change in
control of the Company. See "Description of Securities--Minnesota Anti-Takeover
Law."
USE OF PROCEEDS
The net proceeds to be received by the Company from this Offering, after
deducting estimated costs and expenses of the Offering, are estimated to be
approximately $4,200,000 ($4,882,500 if the Underwriter's over-allotment option
is exercised in full). The Company intends to utilize the net proceeds as
follows:
Repayment of Norwest Bank Minnesota, N.A.
Operating Note $1,660,000
Expansion of Union Grove Retorting Facility $ 875,000
Manufacturing of Lamp Processors $ 600,000
Development of two WSF Storage Facilities $ 600,000
Working Capital $ 465,000
REPAYMENT OF NOTES. The Company intends to utilize a maximum of $1.66 million of
the net proceeds of the Offering to repay a secured revolving promissory note
issued to Norwest Bank Minnesota, N.A. The note is due January, 1998 and bears
interest at a rate of 2% over prime. As of January 23, 1997, $1,660,000
of such note remained outstanding. See "Certain Transactions"
EXPANSION OF UNION GROVE RETORTING FACILITY. The Company intends to utilize
approximately $575,000 to expand the Union Grove Retorting Facility to include a
hazardous waste storage facility and a lamp processing facility. The Company may
accomplish this by either purchasing and expanding its current facility at Union
Grove or leasing adjacent land and buildings and retrofitting the buildings to
the Company's specifications. The finalization of the Company's expansion plans
will depend upon a number of factors including regulatory approval of its plans.
The Company will also utilize approximately $300,000 for a closure fund for such
facility. A closure fund is required by certain states in connection with the
handling of hazardous waste to pay for the costs of closing down an operation in
the event that the operating company is not financially solvent at such time of
closure.
MANUFACTURING OF LAMP PROCESSORS. The Company intends to utilize
approximately $600,000 to manufacture Lamp Processors for leasing.
DEVELOPMENT OF WSF STORAGE FACILITIES. The Company intends to utilize $300,000
of the net proceeds to lease or develop a consolidation and temporary hazardous
waste storage facility in the Southwestern United States. Subsequently, the
Company intends to utilize an additional $300,000 of the net proceeds to lease
or develop a similar WSF in the Southeastern United States.
WORKING CAPITAL. The remaining net proceeds will be used for general working
capital purposes.
As of February 11, 1997, the Company owed $262,000 to Bradley J. Buscher, its
majority shareholder, pursuant to a $600,000 revolving credit promissory note,
payable on demand. Although the Company and Mr. Buscher have agreed that the
debt to Mr. Buscher will not be repaid from the proceeds of the Offering, the
Company may repay this amount from cash generated from operations or from other
financing sources, including refinancing such debt with an unrelated third
party, provided the Company's Board of Directors, excluding Mr. Buscher,
determines that such repayment will not adversely affect the Company's financial
condition.
The foregoing represents the Company's best estimate of its allocation of the
net proceeds of this Offering, based upon the current state of its business
operations, its current plans and current economic and industry conditions.
These estimates are subject to change based on unanticipated levels and types of
competition, adverse market trends and new business opportunities. Any material
revisions in the allocation of proceeds will be made at the discretion of the
Board of Directors. The Company believes the net proceeds from this Offering,
together with cash generated from operations, will be sufficient to meet the
Company's capital needs for at least 12 months. Pending the use of the proceeds
of this Offering, the Company intends to invest the proceeds in short-term, high
quality, interest-bearing instruments. If the Underwriter exercises the
over-allotment option in full, the Company will realize additional net proceeds
of $682,500. Such additional net proceeds will be added to the Company's working
capital.
DILUTION
Purchasers of the Shares offered hereby will experience an immediate substantial
dilution in net tangible book value of the Shares. As of December 31, 1996, the
Company's net tangible book value (deficit) was ($867,618) or ($.39) per share
of Common Stock. "Net tangible book value" (deficit) per share of Common Stock
represents the amount of total tangible assets of the Company less the amount of
all liabilities (excluding contingent liabilities), divided by the number of
shares of Common Stock outstanding. After giving effect to the issuance of
120,000 shares upon exercise of a warrant which exercise will take place upon
the effectiveness of this Offering (the "Pro Forma Adjustments"), the pro forma
net tangible book value (deficit) was ($732,618) or ($.31) per share. Without
giving effect to any other changes in net tangible book value after December 31,
1996 and assuming the sale of 1,000,000 shares of Common Stock offered hereby
and the receipt of the net proceeds of this Offering, the net tangible book
value as of December 31, 1996 would have been $3,467,382 or approximately $1.03
per share. This represents an immediate increase to existing shareholders in net
tangible book value of approximately $1.34 per share and an immediate dilution
to new shareholders of $3.97 per share. "Dilution" represents the difference
between the amount per share paid by purchasers in this Offering and pro forma
net tangible book value per share of the Common Stock after this Offering.
The following table illustrates the per share dilution:
<TABLE>
<CAPTION>
<S> <C> <C>
Assumed initial public offering price per Share $5.00
Net tangible book value (deficit) at December 31, 1996 $(.39)
Increase in net tangible book value attributable to pro forma
adjustments .08
Pro forma net tangible book value (deficit) at December 31, 1996 (.31)
Increase in net tangible book value attributable to new
investors 1.34
Pro forma net tangible book value after offering 1.03
Dilution in net tangible book value to new investors $3.97
</TABLE>
The following tables summarize the differences between the Company's officers,
directors and affiliated parties, existing shareholders and the new investors
with respect to the number of shares of Common Stock purchased from the Company,
the total cash consideration paid by each group, and the average cash
consideration per share of Common Stock paid by each group.
<TABLE>
<CAPTION>
AVERAGE
PRICE
SHARES PURCHASED TOTAL CONSIDERATION PER SHARE
NUMBER PERCENT AMOUNT PERCENT
<S> <C> <C> <C> <C> <C>
Officers, directors and affiliated
parties 2,298,178 68.2% $1,211,255 18.9% $0.53
Other existing shareholders 70,919 2.1% 195,012 3.0% 2.75
New Investors 1,000,000 29.7% 5,000,000 78.1% 5.00
Total 3,369,097 100.0% $6,406,267 100%
</TABLE>
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its Common Stock,
and the Board of Directors presently intends to retain all earnings, if any, for
use in the Company's business for the foreseeable future. Any future
determination as to declaration and payment of dividends will be made at the
discretion of the Board of Directors.
S CORPORATION STATUS
Since inception, the Company has elected to be treated for federal income tax
purposes as an S corporation under Subchapter S of the Internal Revenue Code of
1986, as amended, and has been treated as an S corporation for state income tax
purposes under comparable tax laws. As a result, the Company's losses through
the date of termination of the Company's S corporation status (the "Termination
Date") and the effective date of the offering of Common Stock hereby will for
federal and state income tax purposes be included in the personal tax returns of
the Company's shareholders. On the Termination Date, the Company will become
responsible for payment of state and federal income tax on earnings, if any,
subsequent to the Termination Date. On such date, the Company's cumulative
losses will be reclassified from accumulated deficit to additional paid-in
capital.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of December
31, 1996, as further adjusted to give effect to the sale of the Shares offered
hereby and the anticipated application by the Company of the proceeds therefrom.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
PRO
ACTUAL FORMA(1) AS ADJUSTED(2)
<S> <C> <C> <C>
Long-term debt:
Long-term debt $1,919,567 $1,919,567 $ 259,567
Subordinated debt 135,000 -- --
Total long-term debt 2,054,567 1,919,567 259,567
Shareholder's equity:
Capital stock, $0.01 par value; 50,000,000 shares
authorized; 2,249,097 shares of common stock
issued and outstanding actual; 2,369,097 shares of common stock
issued and outstanding proforma; 3,369,097 shares of common stock
issued and outstanding as adjusted 22,491 23,691 33,691
Additional paid-in capital 1,246,649 1,380,449 4,585,003
Accumulated deficit (985,446) (985,446) --
Total shareholders' equity 283,694 418,694 4,618,694
Total capitalization $2,338,261 $2,338,261 $4,878,261
</TABLE>
(1) Adjusted for the effect of the exercise of a warrant for 120,000 shares of
common stock at $1.125 per share with exercise price paid by cancellation of
a related debt of $135,000 owed by the Company to the warrant holder.
(2) Adjusted for the effect of (i) the sale of 1,000,000 shares offered hereby
and the application of the net proceeds thereof and (ii) the
reclassification of the accumulated deficit to additional paid-in capital as
a result of the automatic termination of the Company's S Corporation income
tax status upon consummation of the offering.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONNECTION WITH THE COMPANY'S
FINANCIAL STATEMENTS AND RELATED NOTES THERETO INCLUDED ELSEWHERE IN THIS
PROSPECTUS.
OVERVIEW
The Company provides mercury waste recycling solutions to mercury waste
generators of all sizes. The Company operates a mercury waste retorting facility
in Union Grove, Wisconsin (the "Union Grove Retorting Facility") and a facility
to recycle fluorescent and other mercury-containing lamps in Roseville,
Minnesota (the "Roseville Recycling Facility"). In addition, the Company markets
and sells lamp recycling equipment.
On January 4, 1996, the Company acquired substantially all of the assets and
assumed certain liabilities of U.S. Environmental, Incorporated ("USE"). The USE
assets acquired consisted primarily of (i) the operations of the Roseville
Recycling Facility, and (ii) rights in certain equipment including the Model
2000 and the retorting equipment used at the Union Grove Retorting Facility,
both of which USE co-developed with Resource Technology, Inc. ("RTI"), an
unrelated party. USE and RTI equally owned the design rights of the Model 2000.
RTI owns the exclusive manufacturing rights and USE owned (and sold to the
Company) the exclusive sales and distribution rights of the Model 2000. In
addition, USE and RTI equally owned the rights in the retorting equipment used
in the Union Grove Retorting Facility. In September, 1996, the Company acquired
RTI's rights in such retorting equipment used at the Union Grove Retorting
Facility and affirmed the respective parties' rights in the Model 2000.
In 1995, USE's activities consisted primarily of the continued co-development
with RTI of the Model 2000 and the Union Grove Retorting Facility, the full year
operation of the Roseville Recycling Facility and marketing and sale of the
Model 2000. In 1995, USE's revenues consisted primarily of recycling revenue
from the Roseville Recycling Facility and revenue from Model 2000 sales.
In 1996, the Company's revenues consisted of recycling revenues generated from
its Roseville and Union Grove facilities. The Company's activities also
included: (i) the continued improvement of the Model 2000, (ii) completion of
the development of the mercury retorting equipment at the Union Grove Retorting
Facility, (iii) development of new lamp processing equipment, (iv) commencement
of marketing strategies and (v) activities related to the organizational
development of the Company including various capital raising activities.
RESULTS OF OPERATIONS
This discussion compares the results of operations of the Company from January
2, 1996, date of inception, to December 31, 1996 with USE's operations for the
twelve months ended December 31, 1995. USE's operations from January 1, 1996 to
January 3, 1996 are included with the Company's 1996 operations as they are not
material.
Total revenues were $1,334,709 for the year ended December 31, 1996 compared to
$1,548,782 for the year ended December 31, 1995. Mercury retorting revenues were
$637,924 for the year ended December 31, 1996 compared to $40,177 for the year
ended December 31, 1995. This significant increase is primarily due to volume
increases as a result of the Union Grove Retorting Facility becoming fully
operational in September, 1996. Since that time, the Company has been actively
pursuing large potential customers, including national waste management
companies and Fortune 500 companies. Lamp Recycling revenues were $696,785 for
the year ended December 31, 1996 compared to $748,605 for the year ended
December 31, 1995. The 7% decrease is primarily due to diminished volume in the
first six months of 1996 as a result of the changes in utility programs to
encourage energy conservation by replacement of older fluorescent lamps in
Minnesota and changes in management following the Company's acquisition of USE.
The Roseville Recycling Facility's revenue has been generated largely from small
to mid-sized local customers. In 1996, the Company began the development of a
sales force on a national level. Although the Company anticipates increased
recycling revenues due to a fully operational Union Grove Retorting Facility,
expansion of marketing efforts and recently obtained recycling contracts, there
can be no assurance that these increased revenues will be realized.
The Company had no revenue from equipment sales for the year ended December 31,
1996 compared to $760,000 in 1995. USE sold five Model 2000s in 1995. The
Company had no sales of equipment in 1996 and did not market the equipment
because it was negotiating with RTI, the manufacturer of the Model 2000, to
resolve RTI's rights in the Model 2000 and the Union Grove Retorting equipment.
This process was completed in September, 1996. In 1997, the Company anticipates
equipment sales will resume, but believes it will not be a significant revenue
source in 1997. The Company is also developing a proprietary lamp processor that
it plans to lease to large users of fluorescent and other mercury-containing
lamps such as office towers and retail chain stores. This equipment marketing
activity is expected to begin generating revenues in the second half of 1997.
For the year ended December 31, 1996, the Company had one customer that
accounted for 11% of revenues. The Company believes it has not been and will not
be economically dependent on this customer.
Cost of recycling revenues consists primarily of direct labor costs to process
the waste and direct facility overhead costs. Cost of recycling revenue as a
percent of revenue was 41% of recycling revenue in 1996 compared to 47% in 1995.
The reduction in the percentage in 1996 is primarily due to increases in
capacity utilization at the Union Grove Retorting Facility, which spreads more
volume over the fixed costs at this facility. The Company anticipates that costs
of revenues as a percent of revenue will continue to decrease in the future as
anticipated increased revenues will utilize both facilities' additional
capacities. Cost of equipment sales as a percent of the related sales was 0% in
1996 (due to the lack of revenue in 1996) compared to 54% in 1995.
Research and Development expense was $359,915 for the year ended December 31,
1996 compared to $124,807 for the year ended December 31, 1995. USE's
development activities consisted of the development of the mercury retorting
equipment for the Union Grove Retorting Facility. The Company's development
activities consisted of completing the development of the continuous flow oven
at the Union Grove Retorting Facility and development of new lamp processing
equipment. Research and development expense for the year ended December 31, 1996
includes $200,000 allocated to purchased research and development relating to
the continuous flow oven that had no alternative future use for the Company. The
balance of research and development expense in 1996 consists primarily of
engineering cost incurred to complete the redesign and development of this oven,
which became fully operational in September, 1996. The Company expects to
continue to incur costs in the development of its lamp processing equipment.
Selling, general and administrative expense was $1,219,491 or 91% of revenues
for the year ended December 31, 1996 compared to $575,219 or 37% of revenues for
the year ended December 31, 1995. Salaries and wages increased $406,000 as a
result of the Company's development of a sales and marketing staff and the
hiring of other management to support its anticipated growth. Professional and
consulting fees increased $89,000 relating to the initial operating activities
of the new company and the USE and RTI transactions. Depreciation and
amortization expense increased $160,000 as a result of the increased basis in
the acquired assets and due to the purchase of property and equipment totaling
$552,000 during the year. The Company believes selling, general and
administrative expense will increase in 1997 due to the continued development of
a sales and marketing staff and the hiring of other management to support its
anticipated growth.
Interest expense was $188,068 for the year ended December 31, 1996 compared to
$11,486 for the year ended December 31, 1995. The significant increase is due to
the debt incurred to finance the acquisitions of certain assets of USE and RTI
and to fund Company operations.
The Company and USE elected S corporation status and, as a result, the Company's
losses were allocated at the shareholder level rather than the corporate level.
The pro forma provision for income taxes is calculated as if the Company and USE
had been subject to corporate income taxes. Pro forma provision for income taxes
was $0 for the year ended December 31, 1996 compared to $13,500 for the year
ended December 31, 1995. There was no pro forma income tax expense (benefit)
recorded in 1996 because, on a pro forma basis, the deferred tax assets
generated in 1996 were fully reserved by a valuation allowance due to their
uncertainty of realization.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has incurred losses and has been dependent on debt
and equity financing to fund operations and capital expenditures. The Company
had no cash balance and had working capital of $197,159 at December 31, 1996.
Net cash used in operating activities of $778,178 for the year ended December
31, 1996, primarily resulted from the net loss of $985,446 and an increase in
accounts receivable of $339,971 offset by depreciation, amortization and the
non-cash purchased research and development expenses totaling $430,956,
resulting primarily from the purchase accounting. The increase in sales in the
latter part of 1996 resulted in the increase in accounts receivable.
Cash flows used in investing activities were $2,052,074 for the year ended
December 31, 1996, consisting primarily of payments of $1,444,125 associated
with the transactions with USE and RTI and the purchase of furniture, fixtures
and equipment of $551,942. The furniture, fixture and equipment purchases
consisted primarily of recycling equipment and leaseholds for its recycling
facilities.
As part of the transaction with USE, the Company will make payments to USE for
each Model 2000 (or Model 2000B) sold by the Company (as defined in the
agreement), with total payments not to exceed $460,000. There were no payments
for 1996. Any contingent consideration paid under this agreement will be
capitalized to goodwill and amortized over its remaining useful life.
Cash provided by financing activities consisted of proceeds from common stock
issuances of approximately $769,000, issuance of $135,000 of subordinated debt,
and proceeds from related party debt issuances of $2,045,000.
The Company has a $300,000 revolving credit promissory note with Bradley J.
Buscher, its majority shareholder, of which $45,000 was outstanding at December
31, 1996 and $262,000 as of February 11, 1997. The note is secured by all assets
of the Company and bears interest at prime plus 2%. Subsequent to year end, the
availability under this facility was increased to $600,000. The Company had a
$1,660,000 revolving note payable to Mr. Buscher that was replaced in December
1996 with a $1,660,000 revolving line of credit ("Revolver") with Norwest Bank
Minnesota, N.A. The Revolver bears interest at 2% over prime, is secured by all
the assets of the Company, is due in January 1998 and is personally guaranteed
by Mr. Buscher. As of January 23, 1997, $1,660,000 of the Revolver remained
outstanding. The Revolver will be repaid out of the net proceeds of this
Offering and will then be terminated.
The Company has debt related to the acquisition of USE ("USE Note") of $259,567
at December 31, 1996. The USE Note bears interest at 10% and is payable in
monthly interest only installments with the principal due January 1, 2001. As
set forth in the note, the Company is obligated to prepay certain amounts of
principal under the note from the Company's "excess cash flow" (as defined in
the note).
As part of a private placement completed in September, 1996, the Company
received proceeds of $135,000 of subordinated debt that bears interest at 2%
over the prime rate. The Company expects that the holder of this debt will
cancel the indebtedness concurrently with the effectiveness of this Offering as
payment of the exercise price of a warrant to purchase 120,000 shares of Common
Stock.
The Company's capital requirements will be significant for 1997 to fund
operations and planned capital expenditures related to expansion of the Union
Grove Retorting Facility ($875,000), the manufacture of lamp processing
equipment for lease ($600,000) and to lease and develop consolidation and
temporary hazardous waste storage facilities ($600,000). The Company anticipates
that the net proceeds from the sale of shares offered hereby will be sufficient
to fund its operations and planned expansion for at least 12 months following
the Offering. If the Company's business grows more rapidly than anticipated or
if anticipated revenue increases do not materialize, the Company may require
additional capital more quickly. There can be no assurance that financing from
this offering or any additional financing will be available at all or that, if
available, such financing would be obtainable on terms favorable to the Company.
BUSINESS
GENERAL
The Company provides services and products to mercury waste generators to reduce
the risk of liability associated with mercury waste disposal. The Company
currently operates a mercury waste retorting facility in Union Grove, Wisconsin
and a facility for recycling and storing fluorescent and other
mercury-containing lamps in Roseville, Minnesota. In addition, the Company
markets and sells lamp recycling equipment. Retorting is a form of distillation
pursuant to which mercury is removed from contaminated products via vaporization
and condensation.
On January 4, 1996, the Company acquired substantially all of the assets of U.S.
Environmental, Incorporated, a Minnesota-based mercury recycling company ("USE")
founded in 1993 by Mark G. Edlund, the Company's President and Chief Operating
Officer. USE co-developed the Model 2000 lamp recycler (the "Model 2000"),
opened a mercury lamp recycling facility in Roseville, Minnesota (the "Roseville
Recycling Facility") to showcase the Model 2000 and co-developed the mercury
retorting equipment installed at a facility in Union Grove, Wisconsin, (the
"Union Grove Retorting Facility"). Since the acquisition of USE, the Company
improved the Model 2000 (hereinafter referred to as the "Model 2000B") and began
development of equipment that processes mercury-containing lamps for more
efficient storage and transportation that the Company intends to lease (the
"Lamp Processor"). The Company has also developed a new continuous flow oven and
a stationary oven utilized at the Union Grove Retorting Facility and on
September 12, 1996 acquired the interests of the co-developer of the equipment
located at the Union Grove Retorting Facility.
In addition to current federal and state regulations which provide strict
guidelines regarding the disposal of all mercury containing products, many
county and local governments have begun to strictly regulate mercury wastes due
to the growing recognition of the serious health risks of mercury. Most
businesses which generate mercury wastes have now recognized the large potential
legal liability from the improper handling and disposal of mercury-containing
wastes and are motivated to reduce potential hazardous waste liability. By
offering disposal solutions for all types of mercury containing products, from
mercury lamp recycling to mercury waste retorting, the Company intends to serve
the entire scope of the mercury waste disposal market.
The Company's mission is to provide mercury waste recycling solutions to mercury
waste generators of all sizes including, but not limited to, public utilities,
manufacturers that utilize mercury in their business (e.g., measurement, control
and electrical equipment industries), building managers and hazardous waste
managers. The Company has provided lamp recycling or retorting services to a
variety of customers including Sylvania Lighting Services, Norwest Bank, Kansas
City Power & Light, Laidlaw Environmental Services, Eaton Corporation and
Pennsylvania Power & Light, and has recently entered into contracts with the
United States Postal Service and PBM Construction (a general contractor to the
U.S. Navy). The Company believes that the mercury recycling industry has growth
potential because of 1) stringent federal and state regulations governing
mercury-containing products; 2) acknowledgment from businesses of the potential
liability posed by mercury waste disposal; and 3) the growing recognition among
the public of the health risks of mercury. In a July 1994 article published by
the U.S. Environmental Protection Agency (the "EPA") titled GENERATION AND
TREATMENT OF MERCURY-BEARING WASTE, the EPA identified the total potential
demand for off-site retorting at 130,000 tons per year. Of this amount, the
Company believes that 30,000-40,000 tons are suitable for its proprietary
processing technology. In the same article, which was published prior to the
development of the Union Grove Retorting Facility, the EPA estimated the retort
industry capacity at 3,000 tons in 1994, the most recent year for which data is
available. The Company's current retorting capacity is approximately 2,500 tons
per year.
INDUSTRY
MERCURY AND ITS HAZARDS. Mercury has long been recognized as a valuable metal
because of its ability to expand and contract evenly through various temperature
ranges and its ability to be combined with other metals. The Company believes
that mercury is presently utilized principally in three applications in the
United States:
* ELECTRICAL AND ELECTRONIC APPLICATIONS, such as mercury batteries and
fluorescent lamps, currently account for approximately 30% of the current
usage of mercury.
* MEASUREMENT AND CONTROL INSTRUMENTS, SUCH AS THERMOMETERS AND BAROMETERS
AND DENTAL APPLICATIONS, account for approximately 40% of the current
usage of mercury.
* The CHLORALKALI INDUSTRY utilizes mercury as the cathode in cells which
produce chlorine and caustic soda through the electrolysis of brine. This
industry accounts for approximately 30% of the current usage of mercury.
In 1994, there were approximately 600 million mercury-containing lamps sold in
the United States. Total mercury consumed in lamps in 1993 was approximately 42
tons. Today, approximately 12 percent of fluorescent lights being discarded each
year are recycled. The remaining mercury-containing lamps are being disposed of
in landfills with other non-hazardous waste or are incinerated. Once mercury is
in the environment, it cannot be removed by combustion or biological process.
Mercury may either seep into the soil and then possibly into the water supply or
vaporize into the atmosphere and fall back to earth in the form of rain. If
mercury enters a lake or river through rain or the water supply, a portion of
the mercury is converted into methyl mercury by bacteria and other chemical
processes. Methyl mercury then accumulates and concentrates as it moves up the
food chain. Once in older and larger fish, mercury measurements can be 200,000
times higher than measurements in the same body of water. When humans and
animals consume mercury contaminated fish, the methyl mercury is transferred to
their tissues.
In humans, mercury poisoning affects the brain, spinal cord, kidneys and liver.
Mercury affects the ability to see, taste and move and leaves a tingling
sensation in the fingers and toes. Long term exposure to mercury can result in
personality changes, stupor or a coma. Exposure of pregnant women to mercury can
affect development of the fetal brain and nervous system resulting in children
with lower intelligence, impaired hearing and poor coordination.
The United States government has taken steps to alleviate the risks from mercury
poisoning including:
* Prohibitions on the sale of fish with certain levels of mercury.
* Passage of the Clean Water Act requiring paper companies, smelters, sludge
incinerators and chloralkali plants to limit the release of mercury into the
water.
* Bans on uses of mercury connected with food production.
The EPA enacted hazardous waste disposal regulations that require businesses of
certain size to test fluorescent and HID lamps for mercury content prior to
disposal. The regulations require that if the mercury content of lamps exceeds a
certain level, then the lamps must be treated as hazardous waste. Some states,
such as Florida, California, Wisconsin and Minnesota have enacted regulations
more rigorous than the EPA's. Recent research by the federal and state
regulatory agencies have established that almost without exception, fluorescent
and HID lamps exceed the EPA toxicity threshold. Nevertheless, these regulations
have not been stringently enforced by some state and local agencies charged with
enforcement of such regulations.
The Company believes that federal and state governments have been slower to
react to the risks posed by fluorescent lamps and other mercury-containing lamps
because any individual lamp contains a relatively small amount of mercury
relative to other mercury wastes and governmental agencies have recognized the
difficulty of gathering widely dispersed fragile products such as fluorescent
lamps. Although most fluorescent lamps are currently designated as hazardous
waste by the EPA, according to an article in the October 18, 1996 volume of RCRA
REPORT, a waste industry newsletter, the EPA has been requested to designate
used fluorescent lamps as solid and not hazardous waste.
In addition to the disposal of fluorescent and HID lamps, the disposal of other
mercury-containing products/wastes is strictly regulated under the Resource
Conservation and Recovery Act of 1976, as amended ("RCRA"), which is discussed
in more detail in the "Regulation" section of this Prospectus. RCRA regulates
the generation, treatment, storage, handling, transportation and disposal of
hazardous wastes. Nearly all mercury-containing products/wastes are classified
as hazardous because they are specifically listed as a hazardous waste or
exhibit certain hazardous characteristics. State and local laws also regulate
mercury-containing products/wastes in a similar manner, with some state and
local laws being more strict than RCRA.
HISTORICAL BACKGROUND
In 1992, Mark G. Edlund, President and Chief Operating Officer of the Company,
recognized a business opportunity resulting from mercury waste management
legislation and regulations. Mr. Edlund initially focused on the recovery and
recycling of fluorescent lights and co-developed a concept for a machine that
would separate and remove mercury contaminated calcium phosphate powder from the
other components of a fluorescent lamp. Working with designers, engineers and
manufacturers, Mr. Edlund and RTI co-developed the Model 2000 mercury lamp
recycling machine and sold 19 Model 2000s from 1992 through 1995. While selling
the Model 2000 machines, Mr. Edlund realized that USE needed a showcase lamp
recycling facility to demonstrate the machine's capability. Accordingly, he
opened the USA Lights mercury recycling facility in Roseville, Minnesota in
April, 1993.
Mercury-laced calcium phosphate powder, a residual of the Model 2000 lamp
recycling process, requires retorting to reduce the level of mercury to EPA
acceptable levels. Mr. Edlund believed that existing mercury retorting
facilities were expensive and, because of their slow processing methods,
significantly backlogged. Utilizing the continuous flow method of retorting
mercury, USE co-developed mercury retorting technology that the Company believes
is significantly more efficient and faster than previously existing technology.
In January, 1996, the Company was formed by Bradley J. Buscher and Mark G.
Edlund to acquire substantially all of the assets of USE. The Company paid
USE $1.24 million comprised of $790,000 in cash and a $448,000 secured
promissory note, which note is due on January 1, 2001 and bears interest at
ten percent per year, as consideration for the purchase of USE's assets. USE
is wholly-owned by Mr. Edlund.
The Company acquired USE's assets in January, 1996 but did not complete its
agreement with RTI regarding RTI's rights in the Model 2000 and the equipment
located at the Union Grove Retorting Facility until September, 1996. The process
took longer than a usual acquisition due to co-ownership of two of USE's assets:
the Model 2000 and the original retorting equipment installed at the Union Grove
Retorting Facility.
The Model 2000 was co-developed with RTI beginning in 1992. Prior to the
Company's acquisition of certain rights in the Model 2000, USE and RTI equally
owned the design rights while RTI owned the exclusive manufacturing rights and
USE owned the exclusive sales and distribution rights. USE's rights in the Model
2000 were transferred to the Company pursuant to a Distribution Rights Bill of
Sale Agreement dated January 4, 1996 between the Company and USE which agreement
was amended and restated on November 30, 1996 (the "Distribution Rights
Agreement"). Under the Distribution Rights Agreement, the Company may become
obligated to reconvey to USE the distribution rights relating to the Model 2000
if: (i) the Company stops distributing the Model 2000 prior to the time that USE
has received total distribution payments of $460,000 due under the agreement
(the "Total Distribution Payment"); or (ii) during any one year period,
beginning with the year following September 12, 1996, before USE has earned the
entire Total Distribution Payment, the Company either fails to purchase at least
three Model 2000's for retail sale or the Company fails to issue distribution
notes to USE evidencing distribution payments in the aggregate of at least
$138,000. The Company acknowledged in the Distribution Rights Agreement that USE
has granted exclusive territory rights with respect to the Model 2000 and/or
rights of first refusal to purchase Model 2000s in a given area to certain
parties.
To further document the Company's ownership rights to the Model 2000, the
Company entered into an Amended and Restated Model 2000 Agreement dated
September 12, 1996 with RTI. This agreement amends the original Model 2000
Agreement between USE and RTI, dated June 27, 1994. The Agreement acknowledges
that all of USE's rights were assigned to the Company in the Distribution Rights
Agreement. The agreement contains a covenant not to compete which limits the
Company's ability to manufacture or distribute a fluorescent lamp recycling
machine anywhere in North America, other than the Model 2000 machine, for a
period of 36 months. This restriction does not apply to retort units, conveyors
and lamp and bulb crushers not designed to function with or be added to the
Model 2000. The Agreement does not prohibit the research and development of
fluorescent lamp recycling machines. The restrictive covenants set forth above
do not prohibit the Company or RTI from manufacturing, distributing and/or
selling fluorescent lamp recycling devices which: (i) employ processes and means
of operation which do not include any of the components of the Model 2000; or
(ii) employ processes and utilize any of the components of the Model 2000, that
(A) are less than 30 feet 6 inches or greater than 70 feet 6 inches of lineal
feet of floor space (whether in a straight line or other configuration), and (B)
the published/stated technical specifications for hourly processing capability
are less than 2,000 lamps or more than 3,000 lamps; provided, however, that any
such fluorescent lamp recycling machine (whether under (i) or (ii) above) must
be in a different color than the Model 2000. The agreement also contains
non-solicitation language which prohibits the parties from soliciting,
interfering with or endeavoring to entice away any prospective or existing
customer of the other party in connection with sales of any fluorescent lamp
recycling machines. The agreement expires on September 30, 1999, or sooner under
certain circumstances such as the bankruptcy of a party.
Since the acquisition of USE, the Company has refined and improved the Model
2000, creating a new model which is called the Model 2000B. The Company is the
exclusive owner of all improvements embodied in the Model 2000B. The Amended and
Restated Model 2000 Agreement will not prevent the Company from distributing the
Model 2000B so long as the Model 2000B is manufactured from the Model 2000.
USE and RTI also co-developed the original continuous-flow mercury retorting
equipment installed at the Union Grove Retorting Facility. In a Bill of Sale
Agreement, dated September 12, 1996, between RTI, the Company, Donald Seiler and
Michael Seiler, the Company purchased RTI's interest in the mercury distillation
system at Union Grove, Wisconsin and the Union Grove Retorting Facility.
Pursuant to the agreement, the Company granted RTI and its subcontractors or
other agents, a non-exclusive paid-up worldwide, royalty-free license to use the
processes, inventions, trademarks, trade secrets and any other necessary or
desirable intellectual property with respect to the original mercury
distillation system at Union Grove, Wisconsin, sufficient to enable RTI to make
and sell mercury distillation equipment or systems. The license is not
assignable except to successors of RTI's business. Although the license is
perpetual, it does not apply to the new continuous flow technology or the
stationary oven developed by the Company.
SERVICES AND PRODUCTS
The Company presently offers the following services and products:
MERCURY RETORTING. The Company expects that a significant amount of its revenue
will consist of fees paid for retorting mercury waste to environmentally safe
levels. Retorting is the process by which mercury is separated from the
contaminated waste through the process of distilling. The Company has developed
a proprietary continuous flow process which, in conjunction with its stationary
retorting system, has the capability of processing over 10,000 drums of mercury
debris per year and recovering approximately 99.9995% of available mercury from
the processed waste. The processed waste contains less than one part per million
of mercury which satisfies current federal and state environmental standards for
mercury waste and requires no further treatment as hazardous waste. Mercury
recovered in the retorting process is sold for a nominal price to a distiller.
The Company currently ships the recovered mercury by common carrier
approximately once each quarter to a mercury distiller in Chicago.
The Company's mercury retorting facility in Union Grove, Wisconsin utilizes a
"continuous flow" concept developed by the Company which allows the facility to
process more mercury waste in a shorter period of time than other conventional
methods presently utilized. Other companies retort mercury primarily by placing
55 gallon drums filled with mercury-contaminated waste, each weighing up to 700
pounds, in a retorting oven for approximately 24 hours. Furthermore, typical
retorting ovens can only hold one or two drums and need increased capacity to
process more drums. The Company believes that this technology causes other
retorting companies to be relatively expensive and backlogged. With a relatively
heavy and dense powder such as calcium phosphate, the Company believes that
retorting is more effective if the mercury-laced powder is spread out evenly
during processing.
The Company's continuous flow concept automatically feeds the powder (or other
granular material such as soil and items such as batteries and switches up to 3
inches in diameter) through the oven. The electrically powered oven is heated to
a temperature sufficient to release the mercury from its device and vaporize it.
Negative air flow pulls the vapors through a series of condensers where mercury
is returned to liquid form. The air flow proceeds through two carbon filters and
a wet scrubber to remove any other potential impurities resulting from the
heating process. While the typical drum oven utilized by the Company's
competitors may require approximately 24 hours to process mercury-laced calcium
phosphate powder because of the significant amount of time required to
sufficiently heat and cool large, dense drums of mercury-laced waste, the
Company's continuous flow oven requires less than one hour to process the same
amount of mercury-laced waste.
In addition to its new continuous flow retorting technology, the Company has
developed a high capacity electrically powered stationary oven that can retort
more than 12 drums simultaneously. While the Company's continuous flow oven
works well with granular compounds such as powder and items less than 3 inches
in diameter, the stationary oven is able to process certain larger
mercury-containing items such as switches, batteries, thermostats, filters and
dental amalgam.
Prior to the development of the Union Grove Retorting Facility, the EPA
estimated in 1994 that the amount of mercury waste retorted annually was
approximately 3,000 tons. The Company expects that the Union Grove Retorting
Facility has the capacity to process over 2,500 tons of mercury waste annually.
The Company expects that the Union Grove Retorting Facility will derive its
business from: (1) large scale generators of mercury waste, particularly in the
measurement, control and electrical equipment industries; (2) lamp recycling
facilities, such as the Roseville Recycling Facility and other non-Company owned
facilities across the country; (3) users of Lamp Processors; and (4) other large
scale generators of mercury waste. For the year ended December 31, 1996, the
Union Grove Retorting Facility has generated approximately $638,000 in revenues.
The Union Grove Retorting Facility is unable to store mercury-containing waste
due to governmental regulations which cause logistical problems for the Company
regarding the scheduling and delivery of mercury waste to the Union Grove
Retorting Facility. Under governmental regulations, the Company currently cannot
store unprocessed mercury waste at its Union Grove Retorting Facility for more
than 24 hours. To address this limitation, the Company intends to utilize a
portion of the net proceeds of the Offering to expand the Union Grove Retorting
Facility, which expansion will include a "Part B" storage facility that has the
capacity to store up to approximately 180 drums of mercury waste up to 12
months. The Company will be required to obtain a license from the State of
Wisconsin to operate a Part B storage facility. No assurance can be given that
such license will be obtained, or that it will be obtained in a timely manner.
WASTE STORAGE FACILITIES. As part of the Company's strategy to maximize the
utilization of its Union Grove Retorting Facility by acquiring, consolidating
and storing mercury waste throughout the United States, the Company intends to
utilize a portion of the proceeds of the Offering to first acquire a
consolidation and temporary hazardous waste storage facility ("WSF") in the
Southwestern United States and later to acquire a similar WSF in the
Southeastern United States. Because governmental regulations limit the amount of
mercury waste that can be present at a retorting facility at any given time,
many generators of mercury waste are required to store such waste in a temporary
hazardous waste storage facility prior to shipment to a retorting facility or
permanent hazardous waste disposal site. The Company believes that the
acquisition or development of WSFs would complement the Company's business by
allowing the Company to consolidate the mercury waste and schedule shipments of
mercury waste to the Company's Union Grove Retorting Facility to maximize the
utilization of the facility. The Company estimates that the cost to acquire or
develop each 4,000 to 6,000 square foot WSF will be approximately $300,000.
MODEL 2000B. The Model 2000B retails for approximately $210,000, depending upon
the modifications required by a particular purchaser. The Model 2000B has the
capacity to recycle approximately 5 million fluorescent lamps annually.
Fluorescent lamps are manually placed onto a conveyer belt which feeds the lamps
into an enclosed machine. The Model 2000B operates under negative air flow to
limit the escape of mercury vapors. The Model 2000B breaks the lamps and
separates the debris into three principal components: the broken glass, the
aluminum endcaps and the mercury-laced calcium phosphate powder. The powder's
level of mercury exceeds federal and state guidelines for mercury and must
either be retorted to remove the mercury or sent to a hazardous waste landfill
with potentially harmful environmental consequences. Purchasers of the Model
2000B will be required to send the mercury-laced powder to the Union Grove
Retorting Facility for at least three years following the purchase. For an
additional fee, the Company also offers to purchasers of the Model 2000B the
right of first refusal on new sales of the Model 2000B into the purchaser's
market.
The Company and Resource Technology, Inc, an Iowa corporation ("RTI"), jointly
own the design rights to the Model 2000, the predecessor to the Model 2000B,
pursuant to a September 12, 1996 agreement. The Company has exclusive world-wide
distribution and sales rights to the Model 2000. RTI, which has exclusive
manufacturing rights to the Model 2000, manufactures the Model 2000. RTI's main
facility is located in Van Meter, Iowa. Nineteen Model 2000 machines have been
sold by USE, the Company's predecessor, since its development in 1992. In 1995,
Model 2000s accounted for approximately 49% of USE's revenues. For the year
ended December 31, 1996, the Company did not sell any Model 2000Bs because the
Company was in the process of finalizing its agreement with RTI over ownership
rights to the Model 2000. The Company has since increased its marketing efforts
of the Model 2000B.
LAMP PROCESSOR. The Company believes that with states enforcing federal
regulations or adopting even more stringent regulations, many major lamp waste
generators such as utilities and large retail and manufacturing companies will
be receptive to using in-house equipment to reduce handling, shipping and
processing costs and to better manage safety issues. The Company intends to
market its new equipment lines for recycling and processing such as the Lamp
Processor to such waste generators.
Many large generators of fluorescent lamps encounter problems storing and
handling fluorescent lamps given the volume of the used lamps, the risks of
breakage and the potential for release of toxic mercury vapors. These large
generators of fluorescent lamps may not have the volume of lamps to justify
owning a Model 2000B because of its expense and high recycling capacity. To
address the needs of these generators, the Company is developing the Lamp
Processor which will be marketed for lease to businesses and utilities that
dispose of a large volume of fluorescent lamps and desire to reduce storage and
transportation costs. The Lamp Processor will reduce fluorescent lamps to a
volume which is convenient for transportation and retorting. The processed
fluorescent lamps would be deposited by the Lamp Processor into a drum for
transporting to a mercury retorting facility such as the Union Grove Retorting
Facility. The Company will require users of the Lamp Processor to use the
Company's retorting services. The Company believes that leasing the Lamp
Processor to its customers will, while requiring a greater capital commitment by
the Company, better provide the Company with recurring monthly revenue. A
portion of the proceeds of this Offering will be utilized to finance the
production of the Lamp Processors.
RECYCLING FACILITIES. The Company owns and operates the Roseville Recycling
Facility located in Roseville, Minnesota, a St. Paul suburb, which utilizes a
Model 2000B to recycle fluorescent lamps. The approximately 6,500 square foot
Roseville Recycling Facility was developed in 1993 to serve as a showcase for
the Model 2000. Fluorescent lamps are primarily transported to the Roseville
Recycling Facility by Company-owned trucks that pick-up fluorescent lamps
directly from the Company's customers in Minnesota, western Wisconsin, northern
Iowa and the eastern sections of the Dakotas. Fluorescent lamps are then
processed by the Model 2000B and the mercury-laced powder is transported to the
Company's Union Grove Retorting Facility for retorting. Before the glass or
aluminum endcaps remaining after processing can leave the facility they must be
independently tested for mercury content and pass state regulatory standards.
The aluminum end caps are sent to a smelter for recycling. The glass is sent to
an aggregate company for use in asphalt. The Company sends the mercury-laced
calcium phosphate powder to the Union Grove Retorting Facility for retorting.
Any mercury that is vaporized during the Model 2000B's lamp processing is
captured in hepa and carbon filters. These filters are also sent to the Union
Grove Retorting Facility for retorting.
Since beginning operations in April, 1993 through December, 1996, the Roseville
Recycling Facility has recycled approximately 5.5 million lamps which is,
however, substantially less than capacity. The Roseville Recycling Facility has
the capacity to process approximately 7.5 million lamps annually. The Company
does not presently intend to open additional recycling facilities but will
continue to operate the Roseville Recycling Facility.
COMPETITION AND MARKET
The Company operates in three distinct market segments: retorting facilities,
recycling equipment and recycling facilities. The Company believes that within
these three markets the competition is highly fragmented with no competitor
having a national presence. Therefore, the Company believes that the mercury
recycling industry represents a potentially large source of revenues given
recent federal and state regulations governing mercury-containing products,
acknowledgment from businesses of the potential liability posed by mercury waste
disposal, and the growing recognition of the health risks of mercury. A
principal motivation for larger corporations to utilize the Company's services
and products is the reduction of potential future hazardous waste liability.
However, the mercury recycling industry is relatively new and evolving. The
demand for mercury recycling services and products is highly dependent upon
governmental regulations, the federal and state enforcement of regulations and
the perception by mercury waste generators of the need for the Company's
services and products. Currently, demand for mercury recycling products and
services is still being defined and is highly fragmented.
MERCURY RETORTING. The Union Grove Retorting Facility competes with several well
established mercury retorters. Currently, the nation's leading mercury retorter
is Bethlehem Apparatus, a Pennsylvania-based company that has been operating
since 1955. In a February 1994 article published in HAZMAT WORLD, it was
reported that Bethlehem Apparatus is in the process of developing a continuous
style retorting system. To the best of the Company's knowledge, Bethlehem
Apparatus is not currently operating a continuous style retorting system. Other
established retorting competitors include Mercury Refining Company, Inc., a New
York-based company that also has been operating since 1955 and Advanced
Environmental Recycling Corporation, located in Pennsylvania. In a July 1994
article published by the U.S. Environmental Protection Agency (the "EPA") titled
GENERATION AND TREATMENT OF MERCURY-BEARING WASTE, the EPA identified the total
potential demand for off-site retorting at 130,000 tons per year. Of this
amount, the Company believes that 30,000-40,000 tons are suitable for its
proprietary processing technology. In the same article, which was published
prior to the development of the Union Grove Retorting Facility, the EPA
estimated the retort industry capacity at 3,000 tons in 1994, the most recent
year for which data is available. The Company's current retorting capacity is
approximately 2,500 tons per year.
Because the amount of mercury waste shipped each year has exceeded the retorting
capacity, retorting prices are extremely high relative to landfill and
incineration alternatives. The Company believes that its competitors are
relatively expensive when compared to the Company and are significantly
back-logged. The Company believes there is a significant market for mercury
retorters and that it offers mercury waste generators a competitive alternative
to landfill or incineration and a reduction in potential environmental
liability.
LAMP RECYCLING EQUIPMENT. In 1994, approximately 600 million mercury-containing
lamps were sold in the United States. Industry experts estimate that
approximately 12% of these lamps are recycled. Total mercury consumed in lamps
in 1993 was approximately 42 tons. The Company believes that the Model 2000 is
the most prominent machine currently recycling lamps in the United States. The
Company's major mercury recycling equipment competitor, MRT, is based in Sweden
and sells mercury recycling equipment which is significantly more expensive than
the Company's equipment.
LAMP RECYCLING FACILITY. Mercury lamp recycling facilities themselves are very
fragmented with several mercury lamp recyclers across the country, none of which
has yet established a national presence. These include Advanced Environmental
Recycling Corporation/Mercury Technologies International which has facilities in
California, Pennsylvania, New Jersey and Florida; Lighting Resources, with
operations in Arizona, California and Indiana, and Recyclights, a
Minneapolis-based firm with operations in Minnesota and Florida. Accordingly,
the Company believes there is a significant market for the Lamp Processor and
lamp recycling facilities.
STRATEGY
The Company's strategy for growth includes the following key elements:
* Market retorting services to high volume customers by offering price
discounting. Because of the increased processing speed allowed by the
continuous flow method, the Company can charge $500 to $1,500 a drum,
depending upon the type of mercury waste and the complexity to retort it,
compared to up to $2,400 a drum frequently charged by retorters utilizing
single drum stationary ovens.
* WSF's -- acquire or develop waste storage facilities to aid in the logistics
of scheduling and transporting mercury waste to the Union Grove Retorting
Facility. The Company believes that these WSFs will help the Company to
maximize the utilization of the Union Grove Retorting Facility.
* Market retorting services by offering a means to reduce potential hazardous
waste liability. The Company can reduce the waste generator's storage costs
and potential liability associated with the storage and handling of mercury
waste.
* Continue research and development of mercury-processing technology for use
by the Company and for sale and lease.
Potential retorting customers to be solicited include public utilities,
electrical contractors, hazardous waste managers, mercury lamp recyclers similar
to the Roseville Recycling Facility, hazardous waste management facilities
(including both final disposal and transfer and storage facilities), electrical
manufacturers of lights, batteries and switches, amalgam manufacturers and
chemical manufacturers. The Company has not marketed, and does not intend to
market, its services to the chloralkali industry.
The Company will also attempt to initiate a mercury waste collection program
with hospitals, electrical contractors and dentists, in which the Company would
provide self-contained disposal mailers for on-site collection and shipping to
the Company's mercury recycling facilities.
MARKETING AND SALES
MARKETING. The Company must inform potential customers that the Company's
mercury recycling products and services are designed to significantly eliminate
potential financial liability associated with disposal of mercury-bearing
materials. The Company plans to compete in each of its three primary markets
with respect to price, service, product quality and the timeliness of its
mercury retorting capabilities.
ADVERTISING AND PROMOTION. The Company's direct sales activities are supported
by targeted direct mail activities to waste generators, waste brokers, waste
transporters, permitted waste storage facilities, lighting contractors, lamp
distribution organizations and various other related business entities. Due to
the identifiable nature of target customers, expensive mass media advertising is
not necessary. The Company also displays its products and services at various
regional and national trade shows on a regular basis. The Company believes that
trade shows are a very cost effective activity for the Company due to the fact
it is able to promote all three of its primary sales areas simultaneously.
SALES STRATEGIES. The Company promotes its services and products through a
direct sales force. The Company presently employs sales professionals from the
waste industry to sell its products and services. The Union Grove Retorting
Facility and the Roseville Recycling Facility each employ separate specialized
technical sales managers in the areas of mercury retorting services and lamp
recycling services. The Company has also established a sales office in Phoenix,
Arizona to market and sell the Company's products and services.
A Model 2000B purchaser potentially becomes a long-term mercury retort services
customer who will be sending the Company mercury-bearing lamp powder recovered
during lamp recycling. The Company realizes immediate revenue from the sale of
lamp recycling equipment and potential long term revenue from the on-going
retorting of that buyer's mercury waste from lamp recycling. The Company
anticipates that the long term revenue from retorting services for a successful
lamp recycler will exceed the immediate lamp equipment sale income.
In a similar manner, a customer who recycles lamps may become a customer for
mercury retorting of other wastes or a purchaser of lamp processing equipment.
Due to the on-going generation of waste material by Company customers, the sales
and marketing efforts benefit substantially from the ability to utilize a
building block approach.
RESEARCH AND DEVELOPMENT
Research and development expense was $359,915 for the year ended December 31,
1996 and $124,807 for the year ended December 31, 1995. The 1996 expense
includes $200,000 of purchased research and development expense related to the
acquisition of certain assets of USE. In order to stay technologically
competitive, the Company must continue development of leading edge mercury
processing technology which would include the development of the next generation
of lamp recycling equipment.
REGULATION
INTRODUCTION. The Company is currently subject to extensive and evolving
federal, state and local environmental laws and regulations that have been
enacted in response to technological advances and increased concern over
environmental issues. These regulations not only strictly regulate the conduct
of the Company's operations but are also related directly to the demand for many
of the services offered by the Company.
The regulations affecting the Company are administered by the EPA and various
other federal, state and local environmental, zoning, health and safety
agencies. The Company believes that its facilities are currently in compliance
with all applicable federal, state and local laws, permits, orders and
regulations. The Company believes there will continue to be increased
regulation, legislation and regulatory enforcement actions related to the
hazardous waste and recycling industry. As a result, the Company attempts to
anticipate future regulatory requirements and to plan accordingly to remain in
compliance with the regulatory framework.
In order to develop and operate a fluorescent lamp processing facility, a
mercury recycling facility or other hazardous waste related facilities, the
Company must typically go through several governmental review processes in order
to obtain one or more permits/licenses, zoning or other land use approvals.
Obtaining these permits/licenses and zoning or land use approvals is difficult,
time consuming and expensive and is often opposed by various local elected
officials and citizens' groups. Once obtained, operating permits generally must
be periodically renewed and are subject to fees, modification and revocation by
the issuing agency.
The Company's operating facilities are subject to a variety of operational,
monitoring, site maintenance, closure, and financial assurance obligations which
change from time to time and which could give rise to increased capital
expenditures and operating costs. In connection with the Company's expansion of
its existing facility or any future expansions, it is often necessary to expend
considerable time, effort and money in complying with the governmental review
and permitting process necessary to maintain or increase operational capacity.
Governmental authorities have broad power to enforce compliance with these laws
and regulations and to obtain injunctions or impose civil or criminal penalties
in the case of violations. In the ordinary course of operating its fluorescent
lamp processing and mercury recycling facility, the Company has from time to
time received notices from regulatory authorities that is operations may not be
in total compliance with certain applicable environmental laws and regulations.
Upon receipt of any notices, the Company has cooperated with the authorities in
an attempt to resolve the issues raised by such notices and has corrected the
problems to the satisfaction of the authorities. Failure to correct problems to
the satisfaction of the authorities could lead to curtailed operations, fines
and penalties or even closure of Company facilities.
In order to transport hazardous wastes, it is necessary for the Company to
possess one or more permits/licenses from state or local authorities. These
permits must be periodically renewed and are subject to fees, modification and
revocation by the issuing agency. The Company, as a transporter of hazardous
waste, is subject to strict hazardous waste transportation guidelines under
federal and state Department of Transportation (DOT) regulations. The Company
currently is licensed to transport hazardous wastes in the states of Minnesota,
Wisconsin and North Dakota. The Company is governed by both the Hazardous
Materials and Federal Motor Carrier Safety Regulations contained in Title 49 of
the Code of Federal Regulations. An accident during the transportation of
hazardous waste or the failure to comply with any DOT regulation could expose
the Company to liability. An unsatisfactory transportation rating from the DOT
would severely limit the Company's ability to transport hazardous waste.
The principal federal, state and local statutes and regulations applicable to
the Company's various operations are reviewed in part as follows:
THE RESOURCE CONSERVATION AND RECOVERY ACT (RCRA) OF 1976, AS AMENDED. RCRA
regulates the generation, treatment, storage, handling, transportation and
disposal of hazardous waste. All current facilities are governed by RCRA
regulations. RCRA divides solid waste into two groups, hazardous and
nonhazardous. Wastes are generally classified as hazardous if they (i) either
(a) are specifically included on a list of hazardous wastes or (b) exhibit
certain hazardous characteristics and (ii) are not specifically designated as
nonhazardous. Wastes classified as hazardous under RCRA are subject to much
stricter regulation than wastes classified as nonhazardous.
The EPA regulations issued under Subtitle C of RCRA impose a comprehensive
"cradle to grave" system for tracking the generation, transportation, treatment,
storage and disposal of hazardous wastes. The Subtitle C regulations provide
standards for generators, transporters and disposers of hazardous wastes, and
for the issuance of permits for sites where such material is treated, stored or
disposed. Subtitle C imposes detailed operating, inspection, training and
emergency preparedness and response standards, as well as requirements for
manifesting, record keeping and reporting, facility closure and financial
responsibilities. These regulations require the Company to demonstrate financial
assurance for sudden and nonsudden pollution occurrences and for future facility
closure costs. The Company believes that its hazardous waste transportation
activities and its facilities comply in all material respects with the
applicable requirements of Subtitle C of RCRA.
THE COMPREHENSIVE ENVIRONMENTAL RESPONSE, COMPENSATION AND LIABILITY ACT
(CERCLA) OF 1980, AS AMENDED. CERCLA established a regulatory and remedial
program intended to provide for the investigation and cleanup of facilities from
which there has been, or is threatened, a release of any hazardous substance
into the environment. CERCLA's primary mechanism for remedying such problems is
to impose strict joint and several liability for cleanup of facilities on
current owners and operators of the site, former owners and operators of the
site at the time of the disposal of the hazardous substances, as well as the
generators of the hazardous substances and the transporters who arranged for
disposal or transportation of the hazardous substances. The costs of a CERCLA
investigation and cleanup can be very substantial. Liability under CERCLA does
not depend upon the existence or disposal of "hazardous waste" as defined by
RCRA, but can also be founded upon the existence of even very small amounts of
the more than 700 "hazardous substances" listed by the EPA, many of which can be
found in household waste. If the Company were to be found to be a responsible
party for a CERCLA cleanup, the enforcing authority could hold the Company, or
any other generator, transporter or owner or operator of the facility,
completely responsible for all investigative and remedial costs even if others
may also be liable. CERCLA also authorizes the imposition of a lien in favor of
the United States upon the real property subject to, or affected by, a remedial
action for all costs for which a party is liable. CERCLA provides a responsible
party with the right to bring legal action against other responsible parties for
their allocable share of investigative and remedial costs. The Company's ability
to get others to reimburse it for their allocable share of such costs would be
limited by the Company's ability to find other responsible parties and prove the
extent of their responsibility and by the financial resources of such other
parties. CERCLA requires the EPA to establish a national priorities list of
sites at which hazardous substances have been or are threatened to be released
into the environment. Because the Company participates in the hazardous waste
industry, it bears an enhanced risk of being deemed a responsible party for
hazardous waste clean-up.
THE CLEAN AIR ACT OF 1976, AS AMENDED. The Clean Air Act provides for
regulation, through state implementation of federal requirements, of the
emission of air pollutants from any operating facility. The Clean Air Act
Amendments of 1990 broadened the scope of the law to control air pollution from
additional and often smaller industries. Federal and state air quality
regulations may apply to any facility emitting something into the air. The
amount of air pollution released generally determines whether compliance is
necessary with air quality regulations. Any of the Company's facilities that
have air emissions are in some way governed by federal and state air emission
regulations, compliance agreements or permits and licenses. Some of the
Company's facilities have air emissions that are governed by federal and state
air emission regulations, compliance agreements or permits and licenses. Failure
to comply with air emission standards at any of the Company's facilities could
have a severe impact on the Company ability to operate that facility. Failure to
correct the air emission problems could lead to curtailed operations, fines and
penalties or even closure of the Company facility. The inability to operate a
facility could have a material adverse effect on the Company's financial
condition and results of operation.
THE OCCUPATIONAL SAFETY AND HEALTH ACT OF 1970. The Occupational Safety and
Health Act of 1970, as amended, authorizes the Occupational Safety and Health
Administration (OSHA) to promulgate occupational safety and health standards.
Several of these standards apply to many of the operations at all Company
facility locations. OSHA regulations set standards for employee protection,
including medical surveillance, the use of respirators, protective clothing,
hearing protection and personal protective equipment. OSHA specifies a maximum
permissible exposure level for hazardous materials, including mercury. Company
employees are required to receive hazardous waste training which includes
training to respond to an accidental spill or release of a hazardous material
during processing, recycling or transportation activities. Failure to comply
with OSHA standards could lead to fines or penalties. The inability to
immediately correct a serious problem could lead to curtailed operations or even
closure until the problem is corrected.
EMERGENCY PLANNING AND COMMUNITY RIGHT-TO-KNOW ACT OF 1986 (SARA TITLE III).
This free-standing law is designed to address concerns about the effect of
chemical releases on communities. Section 312 contains community right-to-know
provisions that grant local emergency response personnel and the general public
access to information on chemicals present in local facilities. Local
participation varies, however, any of the Company's facilities may be subject to
this law and may also be subject to penalties for noncompliance. Company
facilities may be subject to this law and may also be subject to penalties for
noncompliance.
TOXIC SUBSTANCES CONTROL ACT (TSCA) OF 1976. The act established a system for
identifying and evaluating environmental and health effects of existing
chemicals and any new substances entering the U.S. market. TSCA provides for
regulation of chemical substances and mixtures which present an unreasonable
risk of injury or health to the environment. As part of its business, the
Company may handle and/or transport substances (Polychlorinated Biphenyls --
PCBs) subject to TSCA regulations. The Company's Roseville Lamp Recycling
facility is currently subject to these regulations since it transports,
consolidates, stores and ships PCBs for recycling. Failure to comply with any of
the handling, storage, record keeping or transportation requirements could lead
to fines or penalties for the Company.
STATE AND LOCAL REGULATIONS. Each state in which the Company currently operates,
or may operate within in the future, has laws and regulations governing the
generation, storage, treatment, recycling, handling, transportation and disposal
of solid and hazardous waste. States also regulate water and air pollution and,
in most cases, the siting, design, operation, maintenance and closure of
hazardous waste management facilities for any of the activities previously
stated. These regulations are in addition to the federal regulations and state
regulations may be even more restrictive than the federal regulations. Failure
to comply with any of the regulations could subject the Company to curtailed
operations, fines and penalties or even closure of Company facilities.
Within Minnesota, the primary responsibility for environmental programs is
shared by the Minnesota Pollution Control Agency (MPCA) and the Minnesota
Attorney General's Office. The MPCA is responsible for developing environmental
regulations, issuing permits, investigating violations of environmental
requirements and initiating administrative enforcement actions. The Company's
Roseville Lamp Recycling Facility is subject to all of Minnesota's hazardous
waste regulations and rules. The Company has entered into a Facility Compliance
Agreement with the MPCA because there is currently no legislation which grants
the MPCA the authority to license/permit this type of facility. The Facility
Compliance Agreement sets standards under which the facility must operate. The
Attorney General is responsible for investigating criminal violations of
environmental laws, representing the MPCA in administrative hearings and
initiating civil judicial enforcement actions.
In Wisconsin, the primary responsibility for environmental programs rests with
the Wisconsin Department of Natural Resources ("DNR"). The DNR is responsible
for developing environmental regulations, issuing permits, investigating
violations of environmental requirements and initiating administrative actions.
DNR environmental regulations are contained within the Wisconsin Administrative
Code. The Union Grove Retorting Facility is subject to all of the DNR's
environmental regulations.
In addition to state regulations, counties and municipalities may issue
operating licenses or permits to operate Company facilities. Failure to comply
with these requirements may also result in curtailed Company operations, fines
and penalties or even closure of Company facilities. The Company's Roseville
Lamp Recycling Facility is located in Ramsey County and some programs at the
facility are regulated by the county. The Special Hazardous Waste Program is
licensed and regulated by Ramsey County which has been granted authority by the
MPCA to regulate such program.
Many counties and municipalities also have ordinances, local laws and
environmental regulations affecting the Company's operations. These include
zoning and health measures that limit any type of hazardous waste management
facility to specified sites or activities. There has been an increasing trend at
the state and local level to mandate and encourage waste reduction at the source
and to provide waste recycling and limit or prohibit the disposal of certain
types of solid wastes in landfills.
Many states including Wisconsin and Minnesota, have programs that require
investigation and cleanup of sites containing hazardous materials in a manner
comparable to CERCLA. These statutes impose requirements for investigation and
cleanup of contaminated sites and liability for costs and damages associated
with such sites and some provide for the imposition of liens on property owned
by responsible parties.
INTELLECTUAL PROPERTY
The Company has no patents on its Model 2000B lamp recycler, the Lamp Processor
or on its retorting technology. There is significant risk that third parties
will independently develop similar technology. Although the Company has applied
to the United States Patent and Trademark Office for protection of certain
aspects of its technology relating to the Model 2000B, the Lamp Processor and
its retorting equipment, no assurance can be given that patent protection will
be obtained. There is also no assurance that any of the Company's intellectual
property rights will be enforceable, even if patented or registered, against any
prior users of similar intellectual property or that the Company will be
successful in defending itself against a third party claiming that the Company's
technologies violates an existing patent. Any such claim, with or without merit,
could also be time consuming and costly to defend.
EMPLOYEES
As of January 24, 1997 the Company employed 18 persons, 6 of whom served in
executive and administrative capacities, 6 served in facilities sales and
operations management, and 6 in hourly positions. No employee is covered by a
collective bargaining agreement, and the Company has never experienced an
organized work stoppage, strike or labor dispute. The Company considers
relations with its employees to be satisfactory.
FACILITIES AND EQUIPMENT
Effective January, 1997 the Company's corporate headquarters are located in
Mankato, Minnesota. The Company leases approximately 1,600 square feet of office
space at a rent of $1,250 per month, which rent is subject to increase in year
three of the lease, pursuant to a lease expiring in January, 2001. The Company
also leases approximately 2,000 square feet of office space in St. Paul,
Minnesota at a rent of $2,338 per month pursuant to a lease expiring in March,
1998. The 6,500 square foot Roseville Recycling Facility, is leased at a current
rent of $2,028 per month pursuant to a lease expiring in March, 1998. The
Roseville Recycling Facility has a recycling capacity of 7.5 million lamps and
operated at approximately 25 percent of capacity in 1996. The 8,000 square foot
Union Grove Retorting Facility is leased at a current rent of $2,800 per month
pursuant to a lease expiring in February, 2000. The Union Grove Retorting
Facility has a retorting capacity of 2,500 tons and operated at approximately
eight percent of capacity in 1996. Substantially all of the Company's assets
secure indebtedness owed to Norwest Bank Minnesota, N.A., Capital Partners, Ltd
and Bradley J. Buscher. See "Certain Transactions."
The Company is considering consolidating its St. Paul office facility and its
Roseville Recycling Facility in a single facility in the Minneapolis/St. Paul
area. The potential consolidation is in the investigative stage and there are
no definite plans for such consolidation.
LEGAL PROCEEDINGS
The Company is not a party to any material litigation and is not aware of any
threatened litigation that would have a material adverse effect on its business.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to each of the
directors and executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION(S) HELD
<S> <C> <C>
Bradley J. Buscher 41 Chairman of the Board, Chief Executive Officer, Chief
Financial Officer and Director
Mark G. Edlund 43 President, Chief Operating Officer, Secretary,
Treasurer and Director
Donald J. Wodek 46 Executive Vice President-Operations, Legal and
Regulatory Affairs
Alan R. Geiwitz 45 Director
Joel H. Gottesman 48 Director
Robert L. Etter 51 Director
Frank L. Farrar 67 Director
</TABLE>
BRADLEY J. BUSCHER has been Chairman of the Board and Chief Executive Officer
of the Company since its inception. Mr. Buscher has also been the Chairman
and Chief Executive Officer of Bankers American Capital Corp., a privately
held merchant banking company, since 1993. From 1981 to 1994, Mr. Buscher was
President and Chief Executive Officer of American Bancshares, a multi-bank
holding company, and from 1976 to 1981 he served as Vice President of
American Bancshares. From 1986 to 1994, Mr. Buscher was also Chief Executive
Officer of American Banks, a subsidiary of American Bancshares. Mr. Buscher
also served as Chief Executive Officer of Eagle Insurance Agencies, Inc., a
full line property, casualty, life, health and crop insurance agency, from
1987 to 1994. In February, 1994, American Bancshares, its subsidiary American
Banks, and Eagle Insurance Agencies, Inc. were purchased by First Bank
Systems. From 1993 to the present, Mr. Buscher has served as the managing
general partner of BRB Development, LLC, a commercial and retail land
development company. Mr. Buscher also holds various other managing positions
in private investment partnerships. Mr. Buscher is a director, Vice President
and Treasurer of the Mankato State University Foundation, is chairman of the
Investment Committee of the Foundation, and is a member of the Foundation's
Executive Committee. He has served as a director of the Foundation since
1990. Mr. Buscher is the immediate past chairman of the Mankato State
University College of Business Board of Advisors.
MARK G. EDLUND has been President and Chief Operating Officer and a Director of
the Company since its inception. From 1993 to January, 1996, Mr. Edlund served
as President of U.S. Environmental, Incorporated, which sold substantially all
of its assets to the Company. From 1987 to 1992, Mr. Edlund was President of
Professional Resources International, Inc., a manufacturer and retailer of
ophthalmic products. Prior to forming Professional Resources International,
Inc., Mr. Edlund was Chief Operating Officer for Midwest Vision Center, a
Minnesota based retailer of ophthalmic products and services.
DONALD J. WODEK has been Executive Vice President-Operations, Legal and
Regulatory Affairs since January, 1997. From June, 1994 to March, 1997, Mr.
Wodek has and will serve as District Manager of the Hennepin Conservation
District, a local unit of government which manages environmental programs in
Hennepin County, Minnesota. From May, 1992 to June, 1994, he served as General
Counsel and Environmental Manager for Dynex Industries, Inc., a corporation
which manages, transports and recycles hazardous wastes. From September, 1991 to
May, 1992, Mr. Wodek was in the private practice of law handling environmental
and employment matters. From May, 1990 to September, 1991, he served as
Assistant General Counsel for the Space Center Company, a real estate management
corporation. From September, 1985 to April, 1990, he served as Director of
Health and Safety of the Metropolitan Waste Control Commission, the agency which
manages all of the sewers and related facilities for the Minneapolis/St. Paul
metropolitan area. From January, 1980 to August, 1985 he served as Director of
Western Operations of Cleveland-Cliffs, a world-wide mining corporation. From
January, 1979 to January, 1980, he served as Administrator of Health and Safety
of Cleveland-Cliffs Western Division. From March, 1977 to January, 1979, Mr.
Wodek served as Quality Control Chemist of Cleveland-Cliffs.
ALAN R. GEIWITZ has been a Director of the Company since September, 1996. Mr.
Geiwitz has been President and Director of Orion Financial Corp. since 1982.
Orion Financial Corp. provides middle market corporate financial assistance
including merger and acquisition, debt and equity placements and direct
investments to a variety of public and private companies. Prior to forming
Orion Financial Corp., Mr. Geiwitz was Vice President and Manager of a
commercial lending division of Norwest Bank Minnesota, N.A. which handled
manufacturing, wholesale and leasing companies. Mr. Geiwitz is also a member
of the Board of Directors of Midwest Financial Services, Inc., a commercial
finance company, BMD Company, Inc., a re-manufacturer and distributor of
parts for agricultural equipment, and Southwest Capital Corporation, a
publicly traded corporation with no current operations.
JOEL H. GOTTESMAN, has been a Director of the Company since January, 1996.
Mr. Gottesman has been Senior Vice President, General Counsel and Secretary
of Green Tree Financial Corporation, a diversified financial services
company, since September, 1995. Prior thereto, from 1983 through September,
1995, Mr. Gottesman was a shareholder of Briggs & Morgan, P.A., and served as
the firm's Treasurer and on its Board of Directors. Mr. Gottesman practiced
law in the areas of corporate finance, securities and mergers and
acquisitions. Mr. Gottesman also served as an early-round investor for and
served on the Board of Directors of Information Advantage, Inc., a software
development company operating in the data warehousing market.
ROBERT L. ETTER, a certified public accountant, has been a Director of the
Company since May, 1996. Mr. Etter has been a shareholder and Executive Board
Member of Wolf, Etter and Co., Certified Public Accountants since 1973. Mr.
Etter heads the firm's financial institutions department for tax, auditing
and consulting. Prior to 1973, Mr. Etter was with the Internal Revenue
Service.
FRANK L. FARRAR has been a Director of the Company since January 1997. Mr.
Farrar has been Chairman of the following companies since 1983: (i) Beresford
Bancorporation, Inc., a South Dakota thrift holding company, (ii) Capital
Bancorporation, Inc., a South Dakota bank holding company, and (iii) Uptown
Bancorporation, Inc., an Illinois bank holding company. Mr. Farrar has also been
Chairman of Fulda Bancorporation, a Minnesota bank holding company since 1986.
From 1970 to 1983, Mr. Farrar owned and operated several banks. From 1969 to
1970, Mr. Farrar was the Governor and from 1962 to 1968, he was the Attorney
General of South Dakota. From 1962 to 1968, he was the State Attorney for
Marshall County, South Dakota and during 1967, he served as a Marshall County
judge.
KEY EMPLOYEES
James Cornwell, the General Manager of the Union Grove Retorting Facility,
has been with the Company since January, 1996. Mr. Cornwell has over 7 years
of experience in all areas associated with hazardous materials including
experience in regulatory management, project management, and waste recycling
and disposal. From September, 1994 to January, 1996, Mr. Cornwell served as
General Manager of the Union Grove Retorting Facility for U.S. Environmental,
Incorporated. From July 1993 to August 1994, Mr. Cornwell served as the
General Manager of Superior Lamp Recycling, a flourescent lamp recycling
division of Superior Services. From November 1991 to July 1993, Mr. Cornwell
served as the Regional Sales Manager for Superior Services, a full service
environmental firm managing hazardous and solid waste through recycling,
disposal, remediation and reuse.
Steven A. Rush, the Facility Manager at the Union Grove Retorting Facility,
has been with the Company since January, 1996. From November, 1995 to
January, 1996, Mr. Rush was Facility Manager of the Union Grove Retorting
Facility for U.S. Environmental, Incorporated. From March, 1995, to November,
1995, Mr. Rush was an Environmental Consultant for Braun Intertec, an
environmental engineering and consulting firm. From November, 1991 to March,
1995, Mr. Rush served as Project Manager and Emergency Response Manager for
Superior Services.
Thomas Kimmel, the General Manager of the Roseville Recycling Facility, has been
with the Company since July, 1996. Mr. Kimmel has worked in the hazardous waste
recycling industry for the past 7 years. From November, 1995 to July, 1996, Mr.
Kimmel was Sales Manager for ABB Service, Inc., one of the world's largest
electrical engineering firms. From September, 1990 to November, 1995, Mr. Kimmel
was employed by Dynex Industries, Inc., an electrical service and hazardous
waste recycling company, in several capacities including Marketing Development
Manager responsible for setting up lamp and PCB recycling facilities for the
company.
EXECUTIVE COMPENSATION
The following table sets forth all cash compensation paid by the Company for the
period from January 2, 1996 (inception) through December 31, 1996 to the
Company's Chairman and Chief Executive Officer:
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION
NAME OF INDIVIDUAL POSITION SALARY
<S> <C> <C>
Bradley J. Buscher Chairman of the Board, Chief Executive Officer and $ 0(1)
Chief Financial Officer
</TABLE>
(1) Pursuant to a Management Consulting Agreement with Bankers American
Capital Corporation ("BACC"), a Minnesota corporation wholly-owned by
Bradley J. Buscher, the Company pays $10,000 to Bankers Capital on a
monthly basis for certain consulting and administrative services provided
to the Company. See "Certain Transactions."
EMPLOYMENT AGREEMENTS
In January of 1997, the Company entered into an employment agreement with
Bradley J. Buscher pursuant to which Mr. Buscher serves the Company as Chief
Executive Officer. The Company or Mr. Buscher may each terminate the Agreement
upon 90 days written notice following the first year term of the agreement. Mr.
Buscher will receive an annual salary of $60,000 and a cash performance bonus
for the Company's 1997 fiscal year in an amount equal to four percent (4%) of
the Company's pre-tax income for the 1997 fiscal year in excess of Five Hundred
Thousand Dollars ($500,000) up to a maximum bonus of One Hundred Seventy-Five
Thousand Dollars ($175,000). Pursuant to the agreement, Mr. Buscher may not
disclose confidential information about the Company and has agreed not to
compete with the Company for a one year period after any termination of
employment.
In January of 1996, the Company entered into an employment agreement with Mark
Edlund pursuant to which Mr. Edlund serves the Company as President and Chief
Operating Officer. The Company or Mr. Edlund may each terminate the agreement
upon ninety days notice. Mr. Edlund currently receives an annual base salary of
$90,000. Pursuant to the agreement, Mr. Edlund may not disclose confidential
information about the Company and has agreed not to compete with the Company for
a five-year period after any termination of employment.
In January of 1997, the Company entered into an employment agreement with Donald
J. Wodek pursuant to which Mr. Wodek serves the Company as Executive Vice
President-Operations, Legal and Regulatory Affairs. Mr. Wodek will perform
services on a part time basis until March 1, 1997. The Company or Mr. Wodek may
each terminate the agreement upon ninety days written notice following the first
year term of the agreement. As of March 1, 1997, Mr. Wodek will receive an
annual salary of $80,000 with an additional compensation of $20,000 if he is
employed with the Company at the end of 1997. Mr. Wodek will also receive a
$7,000 bonus on March 1, 1997, and will receive a $400 a month car allowance.
Pursuant to the agreement, Mr. Wodek may not disclose confidential information
about the Company and may not compete with the Company for a one-year period
after any termination of employment. Contingent upon the effectiveness of this
offering, the Company has also granted to Mr. Wodek an option to purchase 35,000
shares of the Company's Common Stock at $2.75 per share which shares vest over a
five year period which option was approved by a majority of the shareholders
excluding officers, directors, employees and their spouses. The exercise price
was negotiated on an arm's length basis.
STOCK OPTION AND COMPENSATION PLAN
In September 1996, the Company adopted a Stock Option Plan (the "Plan"),
pursuant to which options and other awards to acquire an aggregate of 185,500
shares of the Company's Common Stock may be granted. Stock options, stock
appreciation rights, restricted stock, other stock and cash awards may be
granted under the Plan.
The Plan is administered by a stock option committee (the "Stock Option
Committee") consisting of Alan R. Geiwitz, Joel H. Gottesman and Robert L.
Etter, which has the discretion to determine the number and purchase price of
shares subject to stock options, which may not be below 85% of the fair market
value of the Common Stock on the date granted, the term of each option, and the
time or times during its term when the option becomes exercisable. As of the
date of this Prospectus, options aggregating 145,000 shares of Common Stock have
been granted to certain employees of the Company.
BOARD OF DIRECTORS
Each of the Company's directors has been elected to serve until the next annual
meeting of shareholders. The Company's executive officers are appointed annually
by the Company's directors. Each of the Company's directors continues to serve
until his or her successor has been designated and qualified. Non-employee
Directors currently receive $250 for each meeting attended.
CERTAIN TRANSACTIONS
In January 1996, the Company issued to Bradley J. Buscher, Chief Executive
Officer and Chairman of the Company, a secured revolving credit note authorizing
the Company to borrow up to $2,000,000 from Mr. Buscher for working capital
purposes. The largest aggregate amount of such indebtedness outstanding under
such note since January 2, 1996 was $1,885,000. A portion of this revolving
credit note was assigned to various parties and exchanged for stock and was
accordingly replaced with a similar revolving credit note in the amount of
$1,660,000, dated September 16, 1996. Such debt accrued interest at a adjustable
rate of 2% above the prime rate. Interest was payable each quarter with the
principal being due on January 1, 2001. The note was secured by all of the
Company's tangible and intangible assets. On December 4, 1996 the $1,660,000
revolving credit note held by Mr. Buscher was paid in full with proceeds from a
$1,660,000 revolving line of credit ("Revolver") with Norwest Bank Minnesota,
N.A. The Revolver bears interest at 2% over prime, is secured by all the assets
of the Company, is due in January, 1998 and is personally guaranteed by Bradley
J. Buscher, the Company's majority shareholder. The Revolver will be repaid out
of the net proceeds of this Offering and will be terminated. As of January 23,
1997, $1,660,000 of the Revolver remained outstanding.
In September, 1996, Mr. Buscher assigned a total of $114,600 of the original
amount of the revolving credit note to the 1996 Irrevocable Trust of Bradley J.
Buscher ($50,000), Joel Gottesman ($51,000), Robert L. Etter ($6,800) and to an
employee of the Company ($6,800). Mr. Gottesman and Mr. Etter are directors of
the Company. All of these amounts were then exchanged for the Company's Common
Stock based upon a Common Stock price of $.50 per share. Mr. Buscher converted
$225,400 of the revolving credit note into 450,800 shares of the Company's
Common Stock. The Board of Directors established the conversion price at the
fair value of the Company's Common Stock.
Mr. Buscher agreed to loan the Company $300,000 pursuant to a demand note
facility (the "Buscher Note"). The largest aggregate amount of indebtedness
outstanding under the Buscher Note since January 2, 1996 was $300,000. As of
February 11, 1997, $262,000 was outstanding under such note. The loan was
originally used to purchase RTI's interest in the Union Grove Retorting Facility
and is now used for working capital purposes . The Buscher Note accrues at a
adjustable rate of 2% above the prime rate. Interest is payable monthly and the
principal amount of the note is payable on demand by Mr. Buscher. The note is
secured by all of the Company's tangible and intangible assets. Subsequent to
year end, the borrowing availability under this facility was increased to
$600,000.
The Company owed USE approximately $448,257 pursuant to a secured note made in
connection with the Company's purchase of substantially all of USE's assets.
This amount was reduced by $28,690 in September, 1996 due in part to
uncollectible accounts receivable purchased by the Company from USE. The note
was subsequently assigned to Capital Partners, Ltd, a Florida corporation wholly
owned by Mark Edlund, which then assigned an interest equal to $160,000 in the
note to Mark Edlund. Mr. Edlund subsequently converted his $160,000 note into
320,000 shares of the Company's Common Stock. The Board of Directors established
the conversion price at the fair value of the Company's Common Stock. As of
December 31, 1996, $259,567 is still owed to Capital Partners, Ltd. The debt on
the note accrues interest at the rate of 10% per annum and interest is payable
monthly. The principal amount of such note is due on January 1, 2001. As set
forth in the note, the Company is obligated to prepay certain amounts of
principal under the note from the Company's "excess cash flow" (as defined in
the note). All amounts owed under the note may become immediately due at Capital
Partner, Ltd.'s discretion: 1) if the Company suspends business or becomes
insolvent or bankrupt, 2) if the Company terminates Mr. Edlund's employment with
the Company, 3) if Mr. Edlund becomes disabled or incompetent or 4) upon the
death of Mr. Edlund. The note is secured by all of the Company's tangible and
intangible assets. Capital Partners, Ltd. has entered into a Subordination
Agreement with Bradley J. Buscher whereby the debt owed by the company to
Capital Partners, Ltd. is subordinate to the debt owed by the company to Mr.
Buscher.
The Company may also become indebted to USE pursuant to an Amended and Restated
Distribution Rights Bill of Sale Agreement ("Distribution Rights Agreement") for
certain amounts in connection with the on-going sale of the Model 2000B and
other mercury recycling equipment. The maximum indebtedness due USE under the
agreement is $460,000 (the "Total Distribution Payment"). The exact amount
depends upon the number of Model 2000B units and other mercury recycling
equipment sold by the Company. Such amount due will be evidenced by a note(s)
between the Company and USE which note(s) will bear interest at 10% with
interest due monthly and the principal due January 4, 2001. As set forth in the
note, the Company is obligated to prepay certain amounts of principal under the
note from the Company's "excess cash flow" (as defined in the note). The note is
secured by all of the Company's tangible and intangible assets.
The Company and Bankers American Capital Corporation, a corporation wholly-owned
by Bradley J. Buscher ("BACC"), entered into a management consulting agreement
on January 4, 1996 (the "Management Consulting Agreement"), pursuant to which
BACC provides certain management, accounting and other administrative services
to the Company for $10,000 per month. The Management Consulting Agreement
terminates in January, 1999. In January of 1996, the Company reimbursed BACC
$53,000 for out-of-pocket costs incurred by BACC in connection with the
acquisition of USE.
The Company is a party to a Shareholder Agreement with Mark G. Edlund, the
President and Chief Operating Officer of the Company and a director of the
Company, and Mr. Buscher. Pursuant to the agreement, the Company and/or Mr.
Buscher have the following rights and obligations: (i) the right of first
refusal on all common stock transfers by Mr. Edlund; (ii) the right but not the
obligation, to call any or all shares of common stock of Mr. Edlund after
January 4, 2001; and (iii) the right but not the obligation, to call any or all
shares of common stock of Mr. Edlund on the occurrence of certain other events.
The purchase price pursuant to the agreement is the fair value of the
common stock at the date of the transaction. The Company currently has no key
man insurance on Mr. Buscher and a $2 million key man insurance policy on Mr.
Edlund. This Agreement will terminate upon the effectiveness of this offering.
In September, 1996, the Company borrowed $135,000 of subordinated debt from
Orion Financial Corp. Money Purchase Plan which entity is for the sole benefit
of and controlled by Alan R. Geiwitz. The loan bears interest at 2% over the
prime rate and matures on September 25, 1998. In connection with such loan,
Orion Financial Corp. Money Purchase Plan received warrants to purchase 120,000
shares of the Company's Common Stock at $1.125 per share. The Company expects
that the loan will be canceled concurrently with the effectiveness of this
Offering as payment of the exercise price of the warrant for the purchase of
120,000 shares of Common Stock. The terms of this transaction were negotiated
on an arm's length basis.
After the Offering, Bradley J. Buscher, Mark G. Edlund, Alan R. Geiwitz, Joel
H. Gottesman and Frank L. Farrar, as holders of warrants to purchase 116,180,
54,237, 140,339, 925 and 1,541 shares of Common Stock, respectively, will be
entitled to certain rights to cause the Company to register the sale of the
shares issuable upon exercise of such warrants under the Act. See
"Description of Securities -- Sales Eligible for Future Sale."
Effective January, 1997, the Company leases its corporate office space pursuant
to a lease between the Company and American Building Properties Inc., a company
owned substantially by Bradley J. Buscher, Chairman of the Board, Chief
Executive Officer, Chief Financial Officer and a shareholder of the Company. The
lease is for 1,600 square feet at $1,250 per month, which rent is subject to
increase in year three of the lease and expires in January, 2001. The lease rate
approximates the fair market value of the property.
The Company believes that all prior transactions between the Company and its
officers, directors or other affiliates of the Company were on terms no less
favorable than could have been obtained from unaffiliated third parties on an
arm's length basis. All future transactions and loans, and any forgiveness of
loans, with officers, directors or shareholders holding more than 5% of the
company's outstanding Common Stock, or affiliates of any such persons, will be
made for bona fide business purposes, will be on terms no less favorable than
could be obtained from an unaffiliated third party, and will be approved by a
majority of the independent outside directors who do not have an interest in the
transactions.
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of the date of this Prospectus, as
adjusted to give effect to the issuance of the securities offered hereby, by (i)
each person known by the Company to be the beneficial owner of more than 5% of
the outstanding Common Stock, (ii) each director of the Company, (iii) each
executive officer of the Company, and (iv) all executive officers and directors
of the Company as a group. Unless otherwise indicated, each of the following
persons has sole voting and investment power with respect to the shares of
Common Stock set forth opposite their respective names. The address of directors
and executive officers is 302 North Riverfront Drive, Mankato, Minnesota 56001.
<TABLE>
<CAPTION>
PERCENT
SHARES OF PRIOR TO AFTER
NAME COMMON STOCK OFFERING OFFERING
<S> <C> <C> <C>
Bradley J. Buscher 1,257,890(1) 50.6% 36.1%
Mark G. Edlund 674,237(2) 27.8 19.7
Alan R. Geiwitz 260,339(3) 10.9 7.7
Joel H. Gottesman 213,835(4)(5) 9.0 6.3
Robert L. Etter 113,600(5) 4.8 3.4
Frank L. Farrar 19,723(6) * *
All executive officers and directors as a group (7
persons) 2,439,624(7) 95.2 68.5
</TABLE>
*Less than one percent.
(1) Includes 116,180 shares issuable upon exercise of warrants.
(2) Includes 54,237 shares issuable upon exercise of warrants.
(3) Includes 20,339 shares issuable upon exercise of warrants.
(4) Includes 925 shares issuable upon exercise of warrants.
(5) Includes 100,000 shares held as co-trustee of an irrevocable trust for
the benefit of Bradley J. Buscher's children.
(6) Includes 1,541 shares issuable upon exercise of warrants.
(7) Includes 193,222 shares issuable upon exercise of warrants.
DESCRIPTION OF SECURITIES
The Company's authorized capital stock consists of 50,000,000 undesignated
shares, $.01 par value per share. After the closing of this Offering, there will
be issued and outstanding 3,369,097 shares of Common Stock (if the Underwriter's
over-allotment option is not exercised).
COMMON STOCK
There are no preemptive, subscription, conversion or redemption rights
pertaining to the Common Stock. The absence of preemptive rights could result in
a dilution of the interest of existing shareholders should additional shares of
Common Stock be issued. Holders of the Common Stock are entitled to receive such
dividends as may be declared by the Board of Directors out of assets legally
available therefor, and to share ratably in the assets of the Company available
upon liquidation. The Company's Board of Directors does not intend to declare
dividends and presently intends to return all earnings, if any, for use in the
Company's business for the foreseeable future.
Each share of Common Stock is entitled to one vote for all purposes and
cumulative voting is not permitted in the election of directors. Accordingly,
the holders of more than 50% of all of the outstanding shares of Common Stock
can elect all of the directors. Significant corporate transactions such as
amendments to the articles of incorporation, mergers, sales of assets and
dissolution or liquidation require approval by the affirmative vote of the
majority of the outstanding shares of Common Stock. Other matters to be voted
upon by the holders of Common Stock normally require the affirmative vote of a
majority of the shares present at the particular shareholders' meeting. The
Company's directors and officers as a group beneficially own approximately 95%
of the outstanding Common Stock of the Company. Upon completion of this
Offering, such persons will beneficially own approximately 69% of the
outstanding shares (approximately 66% if the Underwriter's over-allotment option
is exercised in full). See "Principal Shareholders." Accordingly, such persons
will continue to be able to substantially control the Company's affairs,
including, without limitation, the sale of equity or debt securities of the
Company, the appointment of officers, the determination of officers'
compensation and the determination whether to cause a registration statement to
be filed. There are 18 holders of record of the Company's Common Stock as of the
date of this Prospectus.
The rights of holders of the shares of Common Stock may become subject in the
future to prior and superior rights and preferences in the event the Board of
Directors establishes one or more additional classes of Common Stock, or one or
more additional series of Preferred Stock. The Board of Directors has no present
plan to establish any such additional class or series.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, there will be 3,369,097 shares of Common Stock
issued and outstanding (3,519,097 if the Underwriter's over-allotment option is
exercised in full). The shares purchased in this Offering will be freely
tradeable without registration or other restriction under the Securities Act of
1933, as amended (the "Act"), except for any shares purchased by an "affiliate"
of the Company (as defined in the Act).
All the currently outstanding shares were issued in reliance upon the "private
placement" exemptions provided by the Act and are deemed restricted securities
within the meaning of Rule 144 ("Restricted Shares"). Restricted Shares may not
be sold unless they are registered under the Act or are sold pursuant to an
applicable exemption from registration, including an exemption under Rule 144.
2,369,097 Restricted Shares will become eligible for sale on various dates in
1998 assuming all of the other requirements of Rule 144 have been satisfied.
In general, under Rule 144 as currently in effect, any person (or persons whose
shares are aggregated) including persons deemed to be affiliates, whose
restricted securities have been fully paid for and held for at least two years
from the later of the date of issuance by the Company or acquisition from an
affiliate, may sell such securities in broker's transactions or directly to
market makers, provided that the number of shares sold in any three month period
may not exceed the greater of 1% of the then-outstanding shares of Common Stock
or the average weekly trading volume of the shares of Common Stock in the
over-the-counter market during the four calendar weeks preceding the sale. Sales
under Rule 144 are also subject to certain notice requirements and the
availability of current public information about the Company. After three years
have elapsed from the later of the issuance of restricted securities by the
Company or their acquisition from an affiliate, such securities may be sold
without limitation by persons who are not affiliates under the rule. The
Securities and Exchange Commission is currently reviewing a proposal to amend
Rule 144 to reduce the period of time restricted securities must be held.
In connection with this Offering, certain officers and directors of
the Company have agreed to escrow a portion of their shares for three years or
until (i) the Company meets certain earnings requirements established by the
State of Minnesota, or (ii) the State of Minnesota determines that the escrow
agreement is no longer necessary. A total of 2,246,402 shares of Common Stock
will be subject to escrow.
In general, under Rule 701 of Regulation F as currently in effect, any employee,
consultant or advisor of the Company who purchases shares from the Company by
exercising a stock option outstanding on the date of the Offering is eligible to
resell such shares 90 days after the date of the Prospectus in reliance on Rule
144, but need not comply with certain restrictions contained in Rule 144,
including the holding period requirement. As soon as practicable after the
Offering, the Company intends to register 185,500 shares of Common Stock that
are reserved for issuance under the Stock Option Plan. See "Management." After
the effective date of such registration statement, shares issued upon exercise
of outstanding options would generally be eligible for immediate resale in the
public market, subject to vesting under the applicable option agreements.
Following this Offering, the Company cannot predict the effect, if any, that
sales of the Common Stock or the availability of such Common Stock for sale will
have on the market price prevailing from time to time. Nevertheless, sales by
existing shareholders of substantial amounts of Common Stock could adversely
affect prevailing market prices for the Common Stock if and when a public market
exists. The Company and its directors, executive officers and 5% shareholders
have agreed that they will not sell, grant any option for the sale of, or
otherwise dispose of any shares of Common Stock for 365 days after the Effective
Date without the prior written consent of the Underwriter.
Subject to certain limitations and customary cutbacks as reasonably determined
by any underwriter, if at any one time prior to the end of the two-year period
following complete exercise of any warrant or September 2001, whichever occurs
earlier, the Company proposes to register any of its Common Stock under the
Securities Act, the Company will provide each of the holders of warrants to
purchase an aggregate of 320,771 shares of Common Stock with the opportunity,
pursuant to piggyback registration rights, to participate in such public
offering.
MINNESOTA ANTI-TAKEOVER LAW
The Company is governed by the provisions of Sections 302A.671 and 302A.673 of
the Minnesota Business Corporation Act. In general, Section 302A.671 provides
that the shares of a corporation acquired in a "control share acquisition" have
no voting rights unless voting rights are approved in a prescribed manner. A
"control share acquisition" is an acquisition, directly or indirectly, of
beneficial ownership of shares that would, when added to all other shares
beneficially owned by the acquiring person, entitle the acquiring person to have
voting power of 20% or more in the election of directors. In general, Section
302A.673 prohibits a publicly-held Minnesota corporation from engaging in a
"business combination" with an "interested shareholder" for a period of four
years after the date of the transaction in which the person became an interested
shareholder, unless the business combination is approved in a prescribed manner.
"Business combination" includes mergers, asset sales and other transactions
resulting in a financial benefit to the interested shareholder. An "interested
shareholder" is a person who is the beneficial owner, directly or indirectly, of
10% or more of the corporation's voting stock or who is an affiliate or
associate of the corporation and at any time within four years prior to the date
in question was the beneficial owner, directly or indirectly, of 10% or more of
the corporation's voting stock.
INDEMNIFICATION AND WAIVER OF DIRECTOR LIABILITY
The Minnesota Statutes provide that officers and directors of the Company have
the right to indemnification from the Company for liability arising out of
certain actions. Such indemnification may be available for liabilities arising
in connection with this offering. Insofar as indemnification for liabilities
arising under the Act may be permitted to directors, officers or persons
controlling the Company pursuant to such indemnification provisions, the Company
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is
therefore unenforceable.
The Company has adopted in its Articles of Incorporation a provision which
limits personal liability for breach of the fiduciary duty of its director to
the extent provided by Chapter 302A of the Minnesota Statutes. Such provision
eliminates the personal liability of directors for damages occasioned by breach
of fiduciary duty, except for liability based on the director's duty of loyalty
to the Company, liability for acts or omissions not made in good faith,
liability for acts or omissions involving intentional misconduct, liability
based on payments of improper dividends, liability based on violations of state
securities laws, and liability for acts occurring prior to the date such
provision was added.
TRANSFER AGENT AND REGISTRAR
Norwest Bank Minnesota, N.A. is the transfer agent and registrar for the
Common Stock.
UNDERWRITING
Under the terms and subject to the conditions contained in the Underwriting
Agreement, dated the effective date of this offering, Equity Securities Trading
Co., Inc. (the "Underwriter") has agreed to purchase from the Company and the
Company has agreed to sell to the Underwriter an aggregate of 1,000,000 shares
of Common Stock.
The Underwriting Agreement provides that the Underwriter will be obligated to
purchase, subject to the terms and conditions set forth therein, all of the
shares of Common Stock being sold pursuant to the Underwriting Agreement (other
than the shares covered by the over-allotment option) if any of the shares being
sold pursuant to the Underwriting Agreement are purchased.
The Company has been advised by the Underwriter that the Underwriter proposes to
offer the 1,000,000 Shares at a Price to Public of $5.00 per share and to
certain selected dealers at such price less usual and customary commissions.
After the initial public offering, the Price to Public and commissions to
dealers may be changed by the Underwriter. The Underwriter does not intend to
confirm sales to any account over which it has discretionary authority.
In the Underwriting Agreement, the Company and the Underwriter have agreed to
indemnify each other against certain liabilities under the Securities Act of
1933, as amended (the "Act"), or to contribute to payments which the Underwriter
may be required to make in respect thereof.
The Company has granted to the Underwriter an option, exercisable by the
Underwriter within 45 days after the date of this Prospectus, to purchase up to
an additional 150,000 Shares at the Price to Public, less the Underwriting
Discount shown on the cover page of this Prospectus. This option may only be
exercised in whole or in part, but only for the purpose of covering any
over-allotments in the sale of the 1,000,000 Shares offered hereby.
The Company has agreed to pay the Underwriter a nonaccountable expense allowance
of 2% of the aggregate Total Price to Public of the Shares offered hereby,
including any Shares purchased pursuant to the over-allotment option, if
exercised.
The Company has agreed to sell to the Underwriter, for nominal consideration, a
warrant to purchase 100,000 shares of Common Stock of the Company at a price per
share equal to 120% of the per Share Price to Public (the Underwriter's
Warrant"). The Underwriter's Warrant is exercisable commencing one year from the
date of this Prospectus and for a period of four years thereafter. The
Underwriter's Warrant contains anti-dilution provisions providing for
appropriate adjustments on the occurrence of certain events. The Underwriter's
Warrant also provides certain demand and participatory rights to the require
registration of the shares underlying the Underwriter's Warrant under the Act.
The Underwriter's Warrant will be restricted from sale, transfer, assignment or
hypothecation except to persons who are both officers and shareholders of the
Underwriter. Any profits realized by the Underwriter upon the sale of the
Underwriter's Warrant or the securities issuable upon exercise thereof may be
deemed to constitute additional underwriting compensation.
The Company's directors, executive officers and 5% shareholders have agreed not
to sell or otherwise dispose of any shares of Common Stock for a period of one
year from the date of this Prospectus without the prior written consent of the
Underwriter.
The Company has granted the Underwriter a right of first refusal to act as
underwriter or finder in connection with all future equity or long-term debt
financing of the Company for a period of three (3) years from the effective date
of this Offering; provided that such right of first refusal shall not apply to
long term debt financing obtained from any bank or insurance company.
At the request of the Company, up to five percent of the Shares offered hereby
(the "Designated Shares") may be reserved for sale to persons designated by the
Company. The price of the Designated Shares will be the Price to Public set
forth on the cover of this Prospectus.
Prior to this Offering, there has been no public market for the shares.
Consequently, the Price to the Public was determined through negotiation between
the Company and the Underwriter and bears no relation to the Company's current
earnings, book value, net worth or financial statement criteria of value. The
factors considered in determining the Price to the Public, in addition to
prevailing market and general economic conditions, included the history of, and
prospects for, the industry in which the Company principally competes, the
historical results of operations of the Company, the experience of the Company's
management, the Company's earnings prospects and other related factors. There
can be no assurance that the price at which the shares will sell in the public
market after this Offering will not be lower than the initial Price to Public.
The foregoing is a summary of the material provisions of the Underwriting
Agreement and the Underwriter's Warrant. Copies of such documents have been
filed as exhibits to the Registration Statement of which this Prospectus is a
part.
LEGAL MATTERS
The validity of the shares offered hereby will be passed upon for the Company by
Maslon Edelman Borman & Brand, a Professional Limited Liability Partnership,
Minneapolis, Minnesota ("Maslon"). Partners in Maslon benefically own 9,862
shares of Common Stock. Certain legal matters relating to the sale of the shares
of Common Stock will be passed upon for the Underwriter by Fredrikson & Byron,
P.A., Minneapolis, Minnesota.
EXPERTS
The financial statements for the year ended December 31, 1995 of USE and of the
Company for the year ending December 31, 1996 included herein have been audited
by McGladrey & Pullen, LLP, independent auditors, as stated in their report with
respect thereto, and is included herein in reliance upon the authority of said
firm as experts in giving said report.
ADDITIONAL INFORMATION
The Company is not a reporting company under the Securities Exchange Act of
1934, as amended. The Company has filed with the Washington, D.C. Office of the
Securities and Exchange Commission (the "Commission") a Registration Statement
on Form SB-2 under the Act with respect to the Common Stock offered hereby. This
Prospectus filed as a part of the Registration Statement does not contain all of
the information contained in the Registration Statement and the exhibits
thereto, certain portions of which have been omitted in accordance with the
rules and regulations of the Commission. For further information with respect to
the Company and the securities offered hereby, reference is made to such
Registration Statement including the exhibits and schedules thereto. Statements
contained in this Prospectus as to the contents of any contract, agreement or
other documents are not necessarily complete, and in each instance, reference is
made to such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. The Registration Statement and exhibits may be inspected without
charge and copied at the Washington office of the Commission, 450 Fifth Street,
N.W., Washington, DC 20549, and copies of such material may be obtained at
prescribed rates from the Commission's Public Reference Section at the same
address. In addition, the Commission maintains a Web site that contains reports,
proxy and information regarding registrants, such as the Company, that file
electronically with the Commission. The address of this Web site is:
http://www.sec.gov.
The Company intends to furnish to its shareholders annual reports containing
audited financial statements.
MERCURY WASTE SOLUTIONS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Independent Auditor's Report F-2
Balance Sheet as of December 31, 1996 F-3
Statements of Operations for the Years Ended December 31, 1995 and 1996 F-4
Statement of Shareholders' Equity for the Year Ended December 31, 1996 F-5
Statements of Cash Flows for the Years Ended December 31, 1995 and 1996 F-6
Notes to Financial Statements F-7
</TABLE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Mercury Waste Solutions, Inc.
Mankato, Minnesota
We have audited the accompanying balance sheet of Mercury Waste Solutions, Inc.
as of December 31, 1996, and the related statements of operations, shareholders'
equity, and cash flows for the year then ended, and the statements of operations
and cash flows of the Company's predecessor, U.S. Environmental, Inc. (USE), for
the year ended December 31, 1995. 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 financial statements referred to above present fairly, in
all material respects, the financial position of Mercury Waste Solutions, Inc.
as of December 31, 1996, and the results of its operations and its cash flows
for the year then ended, and USE's results of operations and cash flows for the
year ended December 31, 1995, in conformity with generally accepted accounting
principles.
McGLADREY & PULLEN, LLP
Minneapolis, Minnesota
January 22, 1997
MERCURY WASTE SOLUTIONS, INC.
BALANCE SHEET
DECEMBER 31, 1996
ASSETS (NOTES 3 AND 4)
<TABLE>
<CAPTION>
<S> <C>
Current Assets
Accounts receivable, less allowance for doubtful accounts of $10,000 (Note 9) $ 381,064
Prepaid expenses 34,119
TOTAL CURRENT ASSETS 415,183
Property and Equipment, at cost
Leasehold improvements 95,860
Furniture, fixtures and equipment 150,430
Plant equipment 663,792
910,082
Less accumulated depreciation 103,032
807,050
Other Assets
Deferred offering costs 118,908
Cash restricted for closure (Note 6) 74,132
Acquired equipment and facility rights, net of accumulated
amortization of $40,000 360,000
Goodwill, net of accumulated amortization of $87,924 791,312
1,344,352
TOTAL ASSETS $2,566,585
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Related party demand note (Note 4) $ 45,000
Accounts payable 113,922
Accrued expenses 59,102
TOTAL CURRENT LIABILITIES 218,024
Long-Term Liabilities
Long-term debt (Note 4) 1,919,567
Closure fund (Note 6) 10,300
Subordinated debt (Note 7) 135,000
2,064,867
Commitments and Contingencies (Notes 6 and 7)
Shareholders' Equity (Notes 7 and 8)
Common stock, $0.01 par value; 2,249,097 shares issued and outstanding 22,491
Additional paid-in capital 1,246,649
Accumulated deficit (985,446)
283,694
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,566,585
</TABLE>
See Notes to Financial Statements.
MERCURY WASTE SOLUTIONS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, YEAR ENDED
1995 DECEMBER 31,
(PREDECESSOR) 1996
<S> <C> <C>
Revenues (Note 9):
Recycling revenue $ 788,782 $ 1,334,709
Recycling equipment sales 760,000 --
TOTAL REVENUES 1,548,782 1,334,709
Cost of revenues:
Recycling 371,849 552,681
Equipment 411,506 --
TOTAL COST OF REVENUES 783,355 552,681
GROSS PROFIT 765,427 782,028
Operating expenses:
Research and development (Note 3) 124,807 359,915
Selling, general and administrative 575,219 1,219,491
700,026 1,579,406
OPERATING INCOME (LOSS) 65,401 (797,378)
Interest expense 11,486 188,068
NET INCOME (LOSS) $ 53,915 $ (985,446)
Pro Forma Data (Note 5):
Net income (loss), as reported $ 53,915 $ (985,446)
Pro forma provision for income taxes (Note 5) 13,500 --
PRO FORMA NET INCOME (LOSS) $ 40,415 $ (985,446)
Loss per share $ (0.40)
Weighted average number of common and common
equivalent shares outstanding -- 2,455,313
</TABLE>
See Notes to Financial Statements.
MERCURY WASTE SOLUTIONS, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
PERIOD FROM JANUARY 2, 1996 (DATE OF INCEPTION) TO DECEMBER 31, 1996
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON STOCK PAID-IN ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
<S> <C> <C> <C> <C> <C>
Balance, January 2, 1996 (Date of Inception) -- $ -- $ -- $ -- $ --
Initial capitalization (Note 7) 1,000,000 10,000 271,250 -- 281,250
Conversion of debt to equity (Note 7) 1,000,000 10,000 490,000 -- 500,000
Issuance of common stock in September,
1996, net of stock issuance costs of
$2,127 (Note 7) 120,000 1,200 131,673 -- 132,873
Issuance of common stock in November, 1996
(Note 7) 129,097 1,291 353,726 -- 355,017
Net loss -- -- -- (985,446) (985,446)
Balance, December 31, 1996 2,249,097 $22,491 $1,246,649 $(985,446) $ 283,694
</TABLE>
See Notes to Financial Statements.
MERCURY WASTE SOLUTIONS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, YEAR ENDED
1995 DECEMBER 31,
(PREDECESSOR) 1996
<S> <C> <C>
Cash Flows From Operating Activities
Net income (loss) $ 40,415 $ (985,446)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation 65,814 103,032
Amortization -- 127,924
Purchased research and development -- 200,000
Provision for doubtful accounts 29,000 33,400
Changes in assets and liabilities, net of
effects of business acquisition:
Accounts receivable (11,562) (339,971)
Prepaid expenses (7,276) (34,119)
Accounts payable (6,190) 57,920
Accrued expenses 85,950 59,102
Customer deposits 40,000 --
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES 236,151 (778,158)
Cash Flows From Investing Activities
Purchase of furniture, fixtures, and equipment (244,350) (551,942)
Acquisition of business (Note 3) -- (1,444,125)
Increase in restricted cash (1,698) (56,007)
NET CASH USED IN INVESTING ACTIVITIES (246,048) (2,052,074)
Cash Flows From Financing Activities
Net proceeds from issuance of common stock -- 769,140
Proceeds from related party long-term debt -- 2,000,000
Proceeds from long-term debt 7,022 1,660,000
Payments on related party long-term debt -- (1,660,000)
Net proceeds on related party demand note -- 45,000
Proceeds from issuance of subordinated debt -- 135,000
Increase in excess of outstanding checks over
bank balance 104,125 --
Distribution to shareholder (158,640) --
Deferred offering costs -- (118,908)
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES (47,493) 2,830,232
DECREASE IN CASH AND CASH EQUIVALENTS (57,390) --
Cash and cash equivalents:
Beginning 57,390 --
Ending $ -- $ --
Supplemental Disclosures of Cash Flow
Information
Cash payments for interest $ 11,486 $ 168,078
Supplemental Schedule of Noncash Investing and
Financial Activities
Issuance of common stock upon conversion of
long-term debt
(Note 7) $ -- $ 500,000
Closure fund liability capitalized in property
and equipment -- 10,300
</TABLE>
See Notes to Financial Statements.
MERCURY WASTE SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS AND BASIS OF PRESENTATION: Mercury Waste Solutions, Inc.
(the Company) is in the business of providing mercury waste recycling
solutions to mercury waste generators of all sizes. As discussed in Note 3,
the Company was incorporated on January 2, 1996 for the purposes of acquiring
substantially all of the assets of U.S. Environmental, Inc. (USE or
Predecessor) on January 4, 1996. The accompanying financial statements
reflect the Company's operations since inception and USE's operations for
1995. In addition, USE's operations from January 1, 1996 to January 3, 1996
are included with the Company's 1996 operations as they are not material.
The Company offers the following services and products:
* LAMP RECYCLING: The Company owns and operates a recycling facility in
Roseville, Minnesota (Roseville Facility) that utilizes proprietary
equipment to recycle mercury-containing fluorescent lamps.
* MERCURY WASTE RETORTING: The Company operates a mercury waste retorting
facility in Union Grove, Wisconsin (Union Grove Facility) that utilizes
proprietary equipment (continuous flow and stationary ovens) to process
mercury containing waste and the residual powder from the fluorescent lamps.
* EQUIPMENT SALES AND LEASING: The Company intends to offer certain of its
recycling equipment for sale or lease. There were no equipment sales or
leasing activity in 1996. In 1995, USE generated revenues from sales of
equipment of $760,000.
A summary of the Company's significant accounting policies follows:
ACCOUNTING ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of 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 may differ from those
estimates.
REVENUE RECOGNITION: Recycling revenue is recognized in the period when the
waste is collected and processed. Processing is complete when the mercury
waste is recycled to the point where it is no longer hazardous waste. The
Company has no significant obligations relating to the disposal of the waste
after it has been processed. Revenue from equipment sales is recognized upon
shipment to the customer.
WARRANTY: The Company intends to provide a warranty on recycling equipment
sales. The Company provides for estimated normal costs at the time of sale and
for costs associated with unusual problems at the time of their existence and
such amounts are determinable.
LOSS CONTINGENCIES: From time to time, the Company may be subject to
contingent liabilities in the ordinary course of business. The Company
records a liability related to a loss contingency at the time the loss is
probable and can be reasonably estimated.
RESEARCH AND DEVELOPMENT COSTS: Expenditures for research and development are
charged to operations as incurred.
DEPRECIATION AND AMORTIZATION: Depreciation and amortization are provided
using the straight-line method based on the estimated useful lives of
individual assets over the following periods:
YEARS
Furniture, fixtures, and equipment 3 - 7
Leasehold improvements Life of lease
Aquired equipment and facility rights 10
Goodwill 10
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In accordance with Statement of Financing Accounting Standards No. 121,
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO
BE DISPOSED OF, the Company reviews its long-lived assets and goodwill related
to those assets periodically to determine potential impairment by comparing the
carrying value of the long-lived assets and identified goodwill with the
estimated future net undiscounted cash flows expected to result from the use of
the assets, including cash flows from disposition. Should the sum of the
expected future net cash flows be less than the carrying value, the Company
would recognize an impairment loss at that date. An impairment loss would be
measured by comparing the amount by which the carrying value exceeds the fair
value (estimated discounted future cash flows) of the long-lived assets and
identified goodwill.
Goodwill not identified with impaired assets will continue to be evaluated to
determine whether events or circumstances warrant a write-down or revised
estimates of useful lives. The Company will determine a potential impairment by
comparing the carrying value of goodwill with the estimated future net
undiscounted cash flows expected to result from the use of the assets, including
cash flows from disposition. Should the sum of the expected future net cash
flows be less than the carrying value, the Company would recognize an impairment
loss at that date. An impairment loss would be measured by comparing the amount
by which the carrying value exceeds the fair value (estimated discounted future
cash flows) of the goodwill.
To date, management has determined that no impairment of long-lived assets and
goodwill exists.
PRO FORMA LOSS PER COMMON AND COMMON EQUIVALENT SHARE: The pro forma net loss
per common and common equivalent share is based upon the weighted average number
of common and common equivalent shares outstanding during each period. Pursuant
to Securities and Exchange Commission Staff Accounting Bulletin No. 83, common
stock issued and stock options and warrants granted with exercise prices below
the assumed initial public offering price during the 12-month period preceding
the date of the initial filing of the registration statement have been included
in the calculation as if they were outstanding for all periods presented. Pro
forma loss per share information has only been provided for the Company.
INCOME TAXES: Net income (loss) of the Company and USE are reported in the
individual income tax returns of the shareholders under provisions of Subchapter
S of the Internal Revenue Code. As described in Note 7, the Company is filing a
registration statement for the sale of 1,000,000 shares of its common stock to
the public. Upon completion of this sale, the Company's income tax status will
change and the Company will be required to pay income taxes on its earnings
subsequent to the date it becomes publicly owned, including deferred taxes
existing at the time that the S corporation status terminates. At that time, the
Company will adopt Statement of Financial Accounting Standards No. 109,
"ACCOUNTING FOR INCOME TAXES". Deferred income taxes resulting from temporary
differences arising prior to termination will be recorded as a component of
current income tax expense in the period of adoption. Although this amount is
not currently known, if the Company's S Corporation status were terminated
effective December 31, 1996, the net deferred tax assets would be approximately
$94,000, subject to the need to record a valuation allowance.
The pro forma adjustment to reflect income taxes in the accompanying statement
of income is for information purposes only and has been calculated based on the
estimated effective tax rate in each year, assuming the Company had been subject
to corporate income taxes.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The following methods and assumptions were
used to estimate the fair value of each class of financial instruments:
RESTRICTED CASH: The carrying amount approximates fair value.
SHORT AND LONG-TERM DEBT: The fair value of the short and long-term debt is
estimated based on interest rates for the same or similar debt offered to the
Company having the same or similar remaining maturities and collateral
requirements. The carrying value of the short and long-term debt approximates
fair value.
NOTE 2. CORPORATE LIQUIDITY
Management believes that the Company's liquidity is dependent upon raising
adequate capital to fund anticipated capital expenditures and operations until
profitability is achieved. Subsequent to year end, the Company increased the
availability under its demand note facility with its majority shareholder (See
Note 4) from $300,000 to $600,000 and plans to raise additional capital from an
initial public offering of its common stock (see Note 7). The Company believes
that the borrowing availability under the demand note facility and the capital
anticipated to be received from the initial public offering, along with
anticipated revenue increases, will provide adequate liquidity to fund
operations for at least twelve months after the offering. If the public offering
is unsuccessful, the Company plans to adjust its capital expenditure and
operational plans accordingly and believes the availability under the demand
note facility will provide adequate capital for 1997. In addition, if the
offering is unsuccessful, the Company believes it will be able to renew its
revolving bank line of credit (See Note 4) that is due on January 1, 1998.
NOTE 3. ACQUISITION
On January 4, 1996, the Company acquired substantially all of the assets of USE,
consisting primarily of (i) the operations at the Roseville Facility, and (ii)
rights in certain lamp recycling equipment (the Model 2000) and the mercury
retorting equipment at the Union Grove Facility (continuous flow oven), both of
which it had co-developed with Resource Technology, Inc. (RTI), an unrelated
party. USE and RTI equally owned the design rights of the Model 2000. RTI owned
the exclusive manufacturing rights and USE owned the exclusive sales and
distribution rights of the Model 2000. In addition, USE and RTI equally owned
the rights in the mercury retorting equipment at the Union Grove Facility. In
September, 1996, the Company acquired RTI's rights in the mercury retorting
equipment at the Union Grove facility and affirmed the respective parties'
rights in the Model 2000 for $400,000.
Prior to the settlement with RTI, there were no formal agreements governing the
co-development activities between USE and RTI or the respective parties rights
in the equipment at the Union Grove Facility. However, there was an oral
agreement between USE and RTI regarding the rights at the Union Grove Retorting
Facility, but this agreement was never legally formalized and RTI did not
significantly participate in the financing development and operation of the
related business activities. As a result, USE had complete operating control of
the facility and had all of the related risks of ownership. Due to the nature of
this relationship, RTI was treated as a vendor as opposed to an ownership
partner for accounting purposes. Payments to RTI for the purchase of certain
equipment totaled approximately $132,000 in 1995. The Company assumed the
complete operating control of the facility upon the acquisition of USE and,
other than the settlement, had no transactions with RTI in 1996. As a result,
the financial statements of USE and the Company reflect all revenues and
expenses of the Union Grove Facility.
The above acquisition was accounted for as a purchase. The purchase price is
summarized as follows:
Cash paid to USE $ 790,000
Note payable to USE 419,567
Cash paid to RTI 400,000
Direct acquisition costs, consisting of
legal, environmental audit and consulting fees 254,125
TOTAL $1,863,692
The purchase price was allocated as follows:
Current assets and restricted cash $ 92,618
Property and equipment 335,652
Purchased research and development 200,000
Aquired equipment and facility rights 400,000
Goodwill 879,236
Less liabilities assumed (43,814)
TOTAL $1,863,692
The purchase price allocation includes all equipment at the Roseville and Union
Grove Facilities. The amounts allocated to (i) property and equipment were based
68% on the fair value of the acquired assets and 32% based on the historical
cost basis of the seller, since such person is a shareholder in the new company
(see Note 7), and (ii) purchased research and development were based on the
Company's estimated replacement cost of certain recycling equipment development
activities acquired that had no alternative future use to the Company.
As part of the transaction with USE, the Company will make payments to USE for
each Model 2000 (or 2000B) sold by the Company (as defined in the agreement),
with total payments not to exceed $460,000. There were no payments for 1996. Any
contingent consideration paid under this agreement will be capitalized to
goodwill and amortized over its remaining useful life. There will be no
carryover basis accounting with respect to any payments made under this
agreement.
As a part of the transaction with RTI, the Company entered into an agreement
that affirmed the respective parties rights in the Model 2000 equipment. The
term of the agreement is for three years and provides for fixed pricing for the
purchase of the equipment by the Company from RTI. RTI is also granted the right
to receive 30% of all royalties, if any, received by the Company from the sale
of the equipment to its customers. The Company currently has no outstanding
royalty arrangements.
Unaudited pro forma revenues and pro forma net loss for USE for the year ended
December 31, 1995, as though the acquisition had occurred as of January 1, 1995
were approximately $1,549,000 and $486,000, respectively.
NOTE 4. SHORT AND LONG-TERM DEBT
The Company has a $300,000 demand note facility with its majority shareholder,
of which $45,000 is outstanding at December 31, 1996. The note is secured by all
assets of the Company and bears interest at the prime rate plus 2% (10.25% at
December 31, 1996). Subsequent to year end this facility was increased to
$600,000 with similar terms.
Long-term debt consisted of the following:
<TABLE>
<S> <C>
$1,660,000 revolving line of credit to bank, interest payable at prime plus 2%
(10.25% at December 31, 1996), due in monthly installments of interest only
with the outstanding principal due January 1, 1998, or upon completion of an
initial public offering, secured by all assets of the Company and guaranteed by
the Company's majority shareholder. (1) $1,660,000
10% note payable to related party (formerly USE), due in
monthly installments of interest only with the principal due
January 1, 2001, secured by all assets of the Company(2) 259,567
$1,919,567
</TABLE>
(1) On December 4, 1996, the Company replaced its $1,660,000 revolving line of
credit with its majority shareholder with this revolving line of credit.
(2) Principal payments may be made on this note before maturity to the extent
that excess cash flow, as defined in the agreement, is achieved by the
Company. The note may also become due under certain events as defined in the
agreement including termination of employment in certain circumstances,
death, or disability of the related shareholder. The Company does not
anticipate any principal payments on this note within the next year, unless
there is a successful initial public offering of the Company's common stock.
Accordingly, this obligation has been recorded as a long-term liability (See
Note 7).
Interest expense to related parties totalled $174,834 for the year ended
December 31, 1996.
NOTE 5. PRO FORMA INCOME TAXES
The components of pro forma deferred tax assets at December 31, 1996 are as
follows:
1996
Intangible amortization $ 92,000
Accrued expenses 2,000
Less valuation allowance (94,000)
$ --
The pro forma deferred tax assets include a valuation allowance of $94,000 to
reduce the total to an amount that management believes will ultimately be
realized. Realization of deferred tax assets is dependent upon sufficient future
taxable income during the period that deductible temporary differences and
carryforwards are expected to be available to reduce taxable income. There are
no deferred tax assets related to net operating losses as these losses accrue to
the individual shareholders due to the Company's S Corporation tax status.
The pro forma income tax benefit (expense) differed from the statutory federal
rate as follows:
1995 1996
Statutory rate applied to income (loss) before tax $18,100 $(345,000)
Income taxes at lower rates (4,600) --
Net operating losses not utilized -- 345,000
$13,500 $ --
NOTE 6. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES: The Company leases its office, warehouse and certain equipment
under non-cancellable operating leases with unrelated third parties. Certain
facility leases require that the Company pay a portion of the real estate taxes,
maintenance, utilities, and insurance.
Approximate future minimum rental commitments, excluding common area costs,
under these non-cancelable operating leases are:
YEARS ENDING DECEMBER 31,
1997 $131,000
1998 89,000
1999 55,000
2000 21,000
Rental expense, including common areas costs, was approximately $99,000 and
$144,000 for the year ending December 31, 1995 and 1996, respectively.
Subsequent to year end, the Company entered into a lease for office space with a
related party substantially owned by the Company's majority shareholder. The
lease calls for monthly rent of $1,250, subject to an increase in year three of
the lease, and expires in January, 2001. Management believes rental payments
under this lease approximate amounts that would be payable to unrelated third
parties for similar facilities.
CONSULTING AGREEMENT: The Company has a consulting agreement effective through
January 1999 with a related party 100% owned by the Company's majority
shareholder. The consulting fees are $10,000 per month. Consulting expense for
the year ended December 31, 1996 totaled $120,000. In addition, the Company
reimbursed the related party $53,000 related to the acquisition of USE, which
was expensed in 1996. The Company believes these fees materially approximate the
amounts which would have been paid to unrelated parties for these services.
CLOSURE FUND: State environmental laws require that the Company provide
assurance funds that would be available to cover processing and closure costs
related to its recycling facilities. As of December 31, 1996, the Company had
deposited $74,132 in a restricted cash account. The Company also has capitalized
in property and equipment and recorded a related liability of $10,300
representing an estimate to close its current facilities, should closure ever be
required.
USE CONTINGENCY: A customer has threatened to bring an action against USE for
breach of contract related to a 1995 equipment sale. The total amount of the
claim is approximately $113,000. To date, the customer has taken no action. If
such action is taken, USE intends to vigorously defend such action, including
filing a third party claim against the manufacturer (RTI). USE management
believes there will not be a material adverse outcome as a result of this claim.
As a result, USE has accrued no liability relating to this claim.
The Company is not a party to this claim. If the Company is sued in connection
with this claim, USE is required, pursuant to the asset purchase agreement
between USE and the Company, to indemnify the Company for any damages up to
$400,000.
NOTE 7. SHAREHOLDERS' EQUITY
INITIAL CAPITALIZATION: The Company was initially capitalized by issuing
1,000,000 shares of common stock for $281,250, to two shareholders. The majority
shareholder purchased 68% of this stock and the minority shareholder, who was
the 100% owner of USE, purchased the remaining 32%. In connection with this
investment, the shareholders were issued five-year warrants to purchase 169,492
shares of common stock at $4.50 per share.
SHAREHOLDER AGREEMENTS: The Company's minority shareholders are a party to an
agreement with the Company and/or the majority shareholder whereby the
Company and/or the majority shareholder have the following rights:
* The right of first refusal on all common stock transfers by minority
shareholders.
* The right but not the obligation, to call any or all shares of common stock
held by the minority shareholders after January 4, 2001.
* The right but not the obligation, to call any or all shares of common stock
held by the minority shareholders on the occurrence of certain other events.
The purchase price pursuant to the agreement is the fair value of the common
stock at the date of the transaction. These agreements are canceled upon the
successful completion of an initial public offering by the Company.
CONVERSION OF DEBT FOR COMMON STOCK: In September 1996, the majority shareholder
and certain other shareholders exchanged $340,000 of debt for 680,000 shares of
common stock. In September 1996, $160,000 of the note payable to USE incurred in
the acquisition was exchanged for 320,000 shares of the Company's common stock.
PRIVATE PLACEMENT: In September 1996, the Company completed a $270,000 private
placement with an investor that consisted of 120,000 shares of common stock at
$1.125 per share and $135,000 of subordinated debt with a warrant to purchase
120,000 shares of common stock at $1.125 per share. The warrant expires in
January 1998 and is automatically exercised upon a public offering of common
stock. Pursuant to FASB Statement No. 123, the fair value of the warrant was
measured based on the terms of the related debt. This measurement resulted in no
value assigned to this warrant due to the stated interest rate and expected
short duration of the related debt. The debt bears interest at 2% over prime and
is due September 1998. In connection with this offering, the investor was issued
five-year warrants to purchase 20,339 shares of common stock at $4.75 per share.
PRIVATE PLACEMENT: On November 22, 1996, the Company completed a private
placement of common stock by selling 129,097 shares of common stock at $2.75 per
share, for total proceeds of $355,017. In connection with this private
placement, the investors were granted five-year warrants to purchase 10,940
shares of common stock at $5.00 per share.
INITIAL PUBLIC OFFERING: On December 5, 1996, the Company signed a letter of
intent with an investment banker to undertake a public offering of 1,000,000
shares of common stock at a price based on market conditions at the time of
effectiveness. The letter of intent includes an over-allotment option to sell an
additional 150,000 shares and provides that the Company will issue the
investment banker a warrant for the purchase of 100,000 shares at 120% of the
offering price.
Upon the closing of the initial public offering, the Company's S corporation
election will terminate. At that time, the accumulated deficit balance ($985,446
at December 31, 1996) representing losses on which income tax deductions have
been taken, will be reclassified to paid-in-capital.
AUTHORIZED SHARES: On December 5, 1996, the Company increased its authorized
shares of capital stock from 10,000,000 to 50,000,000. The Board of Directors is
authorized to designate and issue shares in such classes or series as it deems
appropriate and to establish the rights, preferences, and privileges of such
shares, including dividends, liquidation and voting rights.
WARRANT COMPENSATION: For the above disclosed warrant issuances at $4.50,
$4.75 and $5.00 per share, there was no compensation expense recorded using
the Black-Scholes option pricing model pursuant to FASB Statement No. 123.
NOTE 8. STOCK OPTION PLAN
In September 1996, the Company adopted the Mercury Waste Solutions, Inc. Stock
Option Plan ("Plan"). The Plan permits the granting of "incentive stock options"
meeting the requirements of Section 422 of the Internal Revenue Code of 1986 as
amended, and non-qualified options which do not meet the requirements of Section
422. A total of 185,500 shares of the Company's common stock have been reserved
for issuance pursuant to options granted or shares awarded under the Plan.
Grants under that plan are accounted for following APB Opinion No. 25 and
related Interpretations. There was no compensation cost charged to income for
the stock option grants for the year ended December 31, 1996. Had compensation
cost for all of the stock-based compensation plans been determined based on the
grant date fair value of awards (the method described in FASB Statement No.
123), reported net income and earnings per common share would have been reduced
to the pro forma amounts shown below:
1996
Net loss:
As reported $(985,446)
Pro forma (988,656)
Loss per share:
As reported $ (0.40)
Pro forma (0.40)
The fair value of each grant is estimated at the grant date using the
Black-Scholes option-pricing model with the following weighted-average
assumptions for grants in 1996: dividend rate of 0%, price volatility of 38%,
risk-free interest rate of 6.28%, and expected lives of 3 years.
A summary of the status of the plan at December 31, 1996 and changes during
the year then ended is as follows:
<TABLE>
<CAPTION>
1996
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
<S> <C> <C>
Outstanding at beginning of period -- $ --
Granted 110,000(1) 0.67
Exercised -- --
Forfeited -- --
Outstanding at end of period 110,000 $0.67
Exercisable at end of year None
Weighted average fair value per option of options
granted during the year $0.23
Weighted average remaining contractual life 9 years
</TABLE>
(1) Consists of an option for 80,000 shares at $0.50 per share granted by the
Board of Directors in January, 1996 and formalized under the plan in
September, 1996 and options for 30,000 shares at $1.125 per share granted in
October, 1996.
Subsequent to year end, options for the purchase of 35,000 shares of common
stock at $2.75 were granted to an employee. Compensation cost of $35,000 will be
recorded related to this grant and will be amortized over the five year vesting
period.
NOTE 9. MAJOR CUSTOMERS
Equipment sales to three customers accounted for approximately 21%, 10%, and 10%
of 1995 revenues, respectively. The Company had one customer in 1996 that
accounted for 11% of revenues. At December 31, 1996, the receivable balance from
this customer was approximately $106,000.
[PHOTO]
THE MODEL 2000B FLOURESCENT LAMP RECYCLER
[PHOTO]
THE STATIONARY MERCURY DISTILLATION SYSTEM
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITER. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY
ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED
OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO
SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
TABLE OF CONTENTS
PAGE
Prospectus Summary 3
Risk Factors 7
Use of Proceeds 12
Dilution 13
Dividend Policy 13
S Corporation Status 14
Capitalization 14
Management's Discussion and Analysis
of Financial Condition and Results
of Operations 15
Business 18
Management 31
Certain Transactions 35
Principal Shareholders 37
Description of Securities 38
Underwriting 41
Legal Matters 42
Experts 42
Additional Information 42
Index To Consolidated Financial Statements F-1
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THE PROSPECTUS), ALL DEALERS EFFECTING
TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
1,000,000 SHARES
[LOGO]
MERCURY WASTE
SOLUTIONS, INC.
COMMON STOCK
PROSPECTUS
EQUITY SECURITIES
TRADING CO., INC.
______________, 1997
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company is governed by Minnesota Statutes Chapter 302A. Minnesota Statutes
Section 302A.521 provides that a corporation shall indemnify any person made or
threatened to be made a party to any proceeding by reason of the former or
present official capacity of such person against judgments, penalties, fines,
including, without limitation, excise taxes assessed against such person with
respect to an employee benefit plan, settlements, and reasonable expenses,
including attorney's fees and disbursements, incurred by such person in
connection with the proceeding, if, with respect to the acts or omissions of
such person complained of in the proceeding, such person has not been
indemnified by another organization or employee benefit plan for the same
expenses with respect to the same acts or omissions; acted in good faith;
received no improper personal benefit and Section 302A.255 (relating to director
conflicts of interest), if applicable, has been satisfied; in the case of a
criminal proceeding, had no reasonable cause to believe the conduct was
unlawful; and in the case of acts or omissions by persons in their official
capacity for the corporation, reasonably believed that the conduct was in the
best interests of the corporation, or in the case of acts or omissions by
persons in their capacity for other organizations, reasonably believed that the
conduct was not opposed to the best interests of the corporation.
As permitted by Section 302A.251 of the Minnesota Statutes, the Articles of
Incorporation of the Company provide that a director shall have no personal
liability to the Company and its shareholders for breach of his fiduciary duty
as a director, to the fullest extent permitted by law.
The Underwriting Agreement contains provisions under which the small business
issuer on the one hand, and the Underwriter, on the other hand, have agreed to
indemnify each other (including officers and directors of the small business
issuer and the Underwriter and any person who may be deemed to control the small
business issuer or the Underwriter) against certain liabilities, including
liabilities under the Securities Act of 1933, as amended.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses in connection with the issuance and distribution of the
securities registered hereby, other than underwriting discounts and fees, are
set forth in the following table:
SEC registration fee $1,924.27
NASD filing fee 1,075.00
Nasdaq listing fee 10,000
Legal fees and expenses 120,000
Accounting fees and expenses 70,000
Blue Sky fees and expenses. 10,000
Transfer agent fees and expenses 5,000
Printing and engraving expenses. 30,000
Miscellaneous 2,000.73
Total $ 250,000
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
In connection with the initial capitalization of the Company in January, 1996,
the Company sold an aggregate of 1,000,000 shares of Common Stock to two
"Accredited Investors" as defined in Regulation D of the Securities Act of 1933,
as amended (the "Securities Act") for a total aggregate consideration of
$281,250. In connection therewith, such Accredited Investors also received
warrants to purchase an aggregate 169,492 shares of the Company's Common Stock
for $4.50 per share. No underwriter was involved in such offering. The Company
believes that each and every such sale of such securities was exempt from
registration pursuant to Section 4 (2) of the Securities Act and Rules 505
and/or 506 under Regulation D of the Securities Act.
On September 16, 1996, the Company issued an aggregate of 1,000,000 shares of
Common Stock to six Accredited Investors for an aggregate principle amount of
$500,000 in relief of indebtedness. The Company believes that each and every
such sale of such securities was exempt from registration pursuant to Section 4
(2) of the Securities Act and Rules 505 and/or 506 under Regulation D of the
Securities Act.
On September 25, 1996, the Company issued 120,000 shares of Common Stock to one
Accredited Investor for a total consideration of $135,000. In connection
therewith, such Accredited Investor also received warrants to purchase 10,170
shares of the Company's Common Stock for $4.75 per share. The Company believes
that such sale of such securities was exempt from registration pursuant to
Section 4 (2) of the Securities Act and Rules 505 and/or 506 under Regulation D
of the Securities Act.
On September 25, 1996, the Company issued 120,000 warrants to one Accredited
Investor to purchase shares of the Company's Common Stock for $1.125 per share
in connection with a promissory note in the amount of $135,000 payable to such
Accredited Investor. In connection therewith, such Accredited Investor received
warrants to purchase 10,169 shares of the Company's Common Stock for $4.75 per
share.
In November, 1996, the Company sold and aggregate of 129,097 shares of Common
Stock to twelve Accredited Investors for a total aggregate consideration of
$355,016.75. In connection therewith, such Accredited Investors also received
warrants to purchase an aggregate of 10,940 shares of the Company's Common Stock
for $5.00 per share. The Company believes that each and every such sale of such
securities was exempt from registration pursuant to Section 4(2) of the
Securities Act and Rules 505 and/or 506 under Regulation D of the Securities
Act.
ITEM 27. EXHIBITS.
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
<S> <C>
1.1 Form of Underwriting Agreement +
1.2 Form of Underwriter's Warrant +
2 Asset Purchase Agreement by and between Mercury Waste Solutions, Inc. and U.S. Environmental,
Incorporated dated January 4, 1996. +
Exhibits:
A-1 List of Accounts Receivables/List of Certain Assets
A-2 List of Contracts/Leases Assumed
A-3 Union Grove Costs/Estimates
B Promissory Note
C Allocation of Purchase Price
D-1 Bill of Sale
D-2 Distribution Rights Bill of Sale
Agreement Schedules:
4.9 Litigation
4.10 Contracts
4.15 Environmental Compliance/Violations
4.17 Employees
4.21 Environmental Data and Test Results
10.1(k) Creditors
3.1 Articles of Incorporation +
3.2 By-laws +
5 Opinion of Maslon Edelman Borman & Brand, a Professional Limited Liability Partnership +
10.1 Commercial Lease dated February 25, 1993 for premises located at 2007 West County Road
C-2, Roseville, Minnesota +
10.2 Lease dated January 25, 1995 by and between Durand Properties and U.S. Environmental,
Incorporated for Premises located at 21209 Building No. 6, Durand Avenue, Union Grove,
Wisconsin 53182 +
10.3 Revolving Credit Promissory Note made by the Company in favor of Bradley J. Buscher dated
October 24, 1996 +
10.4 Revolving Credit Promissory Note in the amount of $1,660,000
dated December 4, 1996 with the Company as Borrower in favor of
Norwest Bank Minnesota, N.A.+
10.5 Security Agreement by and between the Company and Bradley J. Buscher dated January 4,
1996 +
10.6 Shareholder Agreement by and among Bradley J. Buscher, Mark Edlund and the Company effective
January 4, 1996 +
10.7 Employment Agreement by and between Mercury Waste Solutions, Inc. and Mark Edlund dated
as of January 4, 1996 +
10.8 Amended and Restated Distribution Rights Bill of Sale Agreement by and between the Company
and USE dated November 30, 1996 +
10.9 Management Consulting Agreement by and between Bankers American Capital Corporation dated
as of January 4, 1996 +
10.10 Bill of Sale Agreement dated September 12, 1996 between Resource Technology, Inc. Mercury
Waste Solutions, Inc. and certain other parties. +
10.11 Amended and Restated Model 2000 Agreement dated September 12, 1996 between Resource Technology,
Inc. and Mercury Waste Solutions, Inc. +
10.12 Mercury Waste Solutions, Inc. Stock Option Plan dated September 17, 1996. +
10.13 Employment Agreement by and between Mercury Waste Solutions, Inc. and Bradley J. Buscher
dated as of January 22, 1997 +
10.14 Employment Agreement by and between Mercury Waste Solutions, Inc. and Donald J. Wodek
dated as of January 22, 1997 +
10.15 Revolving Credit Promissory Note by and between Mercury Waste Solutions, Inc. and Bradley
J. Buscher dated as of January 22, 1997 +
10.16 Non Statutory Stock Option Agreement by and between Mercury Waste Solutions, Inc. and
Donald J. Wodek dated as of January 22, 1997 +
10.17 Subordination Agreement by and between Bradley J. Buscher and Capital Partners, Ltd. dated January 22, 1997. +
11 Computation of Loss Per Common and Common Equivalent Share +
23.1 Consent of Maslon Edelman Borman & Brand, a Professional Limited Liability Partnership
(included in Exhibit 5) +
23.2 Consent of McGladrey & Pullen, LLP
24.1 Powers of Attorney (included on Page II-5) +
24.2 Power of Attorney for Frank L. Farrar +
27 Restated Financial Data Schedule. +
</TABLE>
+ Previously filed.
ITEM 28. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the small business
issuer pursuant to the foregoing provisions or otherwise, the small business
issuer has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the small business issuer of
expenses incurred or paid by a director, officer or controlling person of the
small business issuer in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the small business issuer will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
The undersigned small business issuer hereby undertakes that it will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to (i) include any
prospectus required by Section 10(a)(3) of the Securities Act; (ii) reflect
in the prospectus any facts or events which, individually or together,
represent a fundamental change in the information in the registration
statement; and (iii) include any additional or changed material information
on the plan of distribution.
(2) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the small business issuer under Rule 424(b)(1) or (4) or
Rule 497(h) under the Securities Act as part of this registration statement
as of the time the Commission declared it effective.
(3) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration
statement, and that offering of the securities at that time as the initial
bona fide offering of those securities.
The small business issuer hereby undertakes to provide to the Underwriter
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriter to
permit prompt delivery to each purchaser.
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and has authorized this Amendment
No. 3 to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Minneapolis, State of
Minnesota, on February 21, 1997.
MERCURY WASTE SOLUTIONS, INC.
By /s/ BRADLEY J. BUSCHER
Bradley J. Buscher
CHAIRMAN OF THE BOARD, CHIEF EXECUTIVE
OFFICER AND CHIEF FINANCIAL OFFICER
In accordance with the requirements of the Securities Act of 1933, this
Amendment No. 3 to the Registration Statement has been signed by the following
persons in the capacities and on the dates stated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/S/ BRADLEY J. BUSCHER Chairman of the Board, Chief Executive February 21, 1997
Bradley J. Buscher Officer and Chief Financial Officer
* President, Secretary, Treasurer February 21, 1997
Mark G. Edlund and Director
* Director February 21, 1997
Alan R. Geiwitz
* Director February 21, 1997
Joel H. Gottesman
* Director February 21, 1997
Robert L. Etter
* Director February 21, 1997
Frank L. Farrar
* By: /s/ Bradley J. Buscher February 21, 1997
Bradley J. Buscher
Attorney-in-Fact
</TABLE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
<S> <C>
1.1 Form of Underwriting Agreement +
1.2 Form of Underwriter's Warrant +
2 Asset Purchase Agreement by and between Mercury Waste Solutions, Inc. and U.S. Environmental,
Incorporated dated January 4, 1996. +
Exhibits:
A-1 List of Accounts Receivables/List of Certain Assets
A-2 List of Contracts/Leases Assumed
A-3 Union Grove Costs/Estimates
B Promissory Note
C Allocation of Purchase Price
D-1 Bill of Sale
D-2 Distribution Rights Bill of Sale
Agreement Schedules:
4.9 Litigation
4.10 Contracts
4.15 Environmental Compliance/Violations
4.17 Employees
4.21 Environmental Data and Test Results
10.1(k) Creditors
3.1 Articles of Incorporation +
3.2 By-laws +
5 Opinion of Maslon Edelman Borman & Brand, a Professional Limited Liability Partnership +
10.1 Commercial Lease dated February 25, 1993 for premises located at 2007 West County Road
C-2, Roseville, Minnesota +
10.2 Lease dated January 25, 1995 by and between Durand Properties and U.S. Environmental,
Incorporated for Premises located at 21209 Building No. 6, Durand Avenue, Union Grove,
Wisconsin 53182 +
10.3 Revolving Credit Promissory Note made by the Company in favor of Bradley J. Buscher dated
October 24, 1996 +
10.4 Revolving Credit Promissory Note in the amount of $1,660,000
dated December 4, 1996 with the Company as Borrower in favor of
Norwest Bank Minnesota, N.A. +
10.5 Security Agreement by and between the Company and Bradley J. Buscher dated January 4,
1996 +
10.6 Shareholder Agreement by and among Bradley J. Buscher, Mark Edlund and the Company effective
January 4, 1996 +
10.7 Employment Agreement by and between Mercury Waste Solutions, Inc. and Mark Edlund dated
as of January 4, 1996 +
10.8 Amended and Restated Distribution Rights Bill of Sale Agreement by and between the Company
and USE dated November 30, 1996 +
10.9 Management Consulting Agreement by and between Bankers American Capital Corporation dated
as of January 4, 1996 +
10.10 Bill of Sale Agreement dated September 12, 1996 between Resource Technology, Inc. Mercury
Waste Solutions, Inc. and certain other parties. +
10.11 Amended and Restated Model 2000 Agreement dated September 12, 1996 between Resource Technology,
Inc. and Mercury Waste Solutions, Inc. +
10.12 Mercury Waste Solutions, Inc. Stock Option Plan dated September 17, 1996. +
10.13 Employment Agreement by and between Mercury Waste Solutions, Inc. and Bradley J. Buscher
dated as of January 22, 1997 +
10.14 Employment Agreement by and between Mercury Waste Solutions, Inc. and Donald J. Wodek
dated as of January 22, 1997 +
10.15 Revolving Credit Promissory Note by and between Mercury Waste Solutions, Inc. and Bradley
J. Buscher dated as of January 22, 1997 +
10.16 Non Statutory Stock Option Agreement by and between Mercury Waste Solutions, Inc. and
Donald J. Wodek dated as of January 22, 1997 +
10.17 Subordination Agreement by and between Bradley J.Buscher and Capital Partners, Ltd. dated January 22, 1997. +
11 Computation of Loss Per Common and Common Equivalent Share +
23.1 Consent of Maslon Edelman Borman & Brand, a Professional Limited Liability Partnership
(included in Exhibit 5) +
23.2 Consent of McGladrey & Pullen, LLP
24.1 Powers of Attorney (included on Page II-5) +
24.2 Power of Attorney for Frank L. Farrar +
27 Restated Financial Data Schedule. +
</TABLE>
+ Previously filed.
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Mercury Waste Solutions, Inc.
Mankato, MN
We hereby consent to the use in this Registration Statement on Form
SB-2 of our report, dated January 22, 1997, relating to the financial statements
of Mercury Waste Solutions, Inc. and its predecessor, U.S. Environmental, Inc.,
and to the reference to our Firm under the caption "Experts" in the Prospectus.
McGladrey & Pullen, LLP
Minneapolis, MN
February 21, 1997
