SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31,1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO _________.
COMMISSION FILE NO. 0-22533
MERCURY WASTE SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1827776
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
302 NORTH RIVERFRONT DRIVE, SUITE 100A, MANKATO, MN 56001
(Address and zip code of principal executive offices)
(507) 345-0522
(Issuer's telephone number)
Securities registered pursuant to Section 12 (b) of the Act: NONE
Securities registered pursuant to Section 12 (g) of the Act:
COMMON STOCK, $.01 PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange of Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best to the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB [X]
State issuer's revenues for its most recent fiscal year: $2,862,208
The aggregate market value of voting stock held by nonaffiliates of the
registrant's common stock, as of March 2, 1998 was approximately $4,500,000.
(based on the last sale price of such stock as reported by NASDAQ Stock Market).
The number of shares outstanding of the registrants common stock as of March 2,
1998 was 3,480,097.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 1998 Annual Meeting of
Shareholders are incorporated by reference into Part III as set forth therein.
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Mercury Waste Solutions, Inc. ("the Company") provides services 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, a facility for recycling and storing
fluorescent and other mercury-containing lamps in Roseville, Minnesota and
mercury waste storage and collection facilities in Indianapolis, Indiana and
Atlanta, Georgia.
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"), developed a new continuous flow oven and a stationary oven utilized at
the Union Grove Retorting Facility and in September, 1996 acquired the interests
of the co-developer of the equipment located at the Union Grove Retorting
Facility.
In September, 1997, the Company acquired certain assets and
liabilities of Ballast & Lamp Recycling, Inc. ("BLR"). The primary business of
BLR is the collection and storage of mercury-containing lamps and lamp ballasts
for recycling. BLR has collection facilities in Indianapolis, Indiana and
Atlanta, Georgia. The acquisition of BLR increased the Company's customer base,
placed the Company in what the Company believes are two additional strategic and
growing markets and leveraged the Company's processing capacity.
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. 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. The Company believes that 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 serves a broad scope of the
mercury waste disposal market.
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.
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There are approximately 600 million mercury-containing lamps sold
annually in the United States. 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 nonhazardous 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.
On July 27, 1994, the EPA published a proposed rule addressing the
management of spent mercury-containing lamps. In the proposal, the EPA presented
two options for changing the regulations governing spent mercury-containing
lamps: (1) Add mercury-containing lamps to the universal waste regulations; or
(2) conditionally exempt mercury-containing lamps from regulation as hazardous
waste. The universal waste regulations allow a few high volume post consumer
hazardous wastes, such as batteries, to be managed under streamlined collection
and handling rules. According to a recent article in the February 6, 1998 volume
of Inside E.P.A. Weekly Report, the EPA plans to add spent lamps to the list of
universal wastes, thereby reducing the handling requirements for the lamps but
not exempting them from the hazardous waste provisions of the Resource
Conservation and Recovery Act of 1976, as amended.
A final decision by the EPA regarding the management of spent
fluorescent lamps is expected by mid-1998. If the EPA decides to place
fluorescent lamps under the universal waste regulations, generators will
continue to be required to handle lamps as a hazardous waste. Generators will be
required to either send lamps to a hazardous waste landfill for disposal or send
them for recycling. They will not be able to send lamps to municipal landfills
for disposal under the universal waste regulations. However, if the EPA excludes
lamps from hazardous waste regulations, generators will not have to handle lamps
as a hazardous waste and will be able to
<PAGE>
send lamps to municipal landfills for disposal or send them for recycling.
Excluding spent fluorescent lamps from hazardous waste regulations would have
the effect of decreasing the number of lamps sent by generators for recycling,
which in turn would negatively impact the Company's lamp recycling operations.
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. 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 then RCRA.
The EPA's Office of Air Quality Planning and Standards and the
Office of Research and Development released Congressionally mandated study on
mercury on December 19, 1997. The report provides an assessment of the magnitude
of U.S. mercury emissions by source, the health and environmental implications
of those emissions, and the availability and cost of control technologies. While
it is unclear what impact this study will have on future governmental
legislation and regulation, the content of the report reaffirms the Company's
belief that mercury is a danger to the environment if not recycled properly.
SERVICES AND PRODUCTS
The Company is in the business of providing mercury waste recycling
solutions to mercury waste generators of all sizes. The Company's recycling
service operations consist of the following:
MERCURY RETORTING. In 1997, approximately 50% of the Company's
business consisted 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
proprietary processes which recover approximately 99.99% 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'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.
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 generated from
fluorescent lamps, 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 stationary 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.
<PAGE>
In addition to its new continuous flow retorting technology, the
Company utilizes a high capacity electrically powered stationary oven that can
retort up to 30 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, and filters.
The Company is in the process of adding two more stationary ovens to this
facility which will increase retorting capacity to approximately 15,000 tons
annually.
WASTE STORAGE FACILITIES. 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.
In 1997, the Company was unable to store mercury-containing waste at
the Union Grove Retorting Facility for more than a 24 hour period due to
governmental regulations which caused logistical problems for the Company
regarding the scheduling and delivery of mercury waste. To address this
limitation, the Company expanded the Union Grove Retorting Facility which
includes an area to store approximately 181 drums of hazardous mercury waste. In
May, 1997, the Company applied for a hazardous waste storage permit from the
Wisconsin Department of Natural Resources (DNR). Currently the application is
being reviewed by the DNR. In March, 1998, the DNR granted the Company a
variance which will allow the Company to store up to 181 drums of hazardous
waste. The variance will remain in effect until the DNR issues the final
hazardous waste storage permit.
In October, 1997 the Company also established a 10 day mercury waste
transfer and storage facility in Kenosha, Wisconsin (approximately 15 miles from
the Union Grove Retorting Facility) that has a storage capacity for
approximately 250 drums of universal and hazardous waste. The acquisition of BLR
also provided 10 day mercury waste transfer and universal waste collection
facilities in Indianapolis, Indiana and Atlanta, Georgia.
LAMP RECYCLING. 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. 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. With the BLR acquisition, lamps are transported weekly from the
Indianapolis and Atlanta collection and storage facilities to the Roseville
Recycling Facility.
Fluorescent lamps are then processed by the Model 2000B. Fluorescent
lamps are manually placed onto a conveyor 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. 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 Company sends the mercury-laced calcium phosphate powder to the Union Grove
Retorting Facility for retorting. Any mercury that evaporates 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.
In addition to the collection and recycling of fluorescent lamps,
the Company handles related types of waste, consisting primarily of PCB and
non-PCB ballasts. Ballasts are an integral component of the fluorescent light
fixture. Ballasts manufactured before 1979 contain PCB's. The Company does not
recycle ballasts, but brokers them to approved ballast recyclers.
In conjunction with the Union Grove Retorting Facility expansion,
the Company developed and installed a prototype Model 3000 lamp recycling
machine, which is a second generation model of the 2000B. The machine was
installed to increase lamp processing capacity due to growth in local markets
and to minimize the transportation cost of transporting lamps from its
Indianapolis and Atlanta facilities.
<PAGE>
EQUIPMENT SALES AND LEASING. The Company is currently not actively
marketing the sale or lease of its lamp processing equipment. Development and
sales activity in this area will depend on future market demand and
opportunities which are largely driven by pending environmental regulation.
COMPETITION AND MARKET
The mercury recycling industry is relatively new and evolving. The
demand for mercury recycling services 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.
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. Other established retorting competitors include
Mercury Refining Company, Inc., a New York-based company that also has been
operating since 1955, Advanced Environmental Recycling Corporation, located in
Pennsylvania and Recyclights, a Minneapolis-based firm with retorting operations
in Minnesota.
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 15,000 tons per year.
Because the amount of mercury waste shipped each year has
historically exceeded the retorting capacity, retorting prices were high
relative to landfill and incineration alternatives. However, now with its
increased retorting capacity, the Company believes it can offer mercury waste
generators a competitive pricing alternative when compared to landfilling or
incineration and a reduction in potential environmental liability.
LAMP RECYCLING. Approximately 600 million mercury-containing lamps
are sold annually in the United States. Industry experts estimate that
approximately 12% of these lamps are recycled. There are 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, with operations in Minnesota, Florida and Ohio.
MARKETING AND SALES
MARKETING. Retort customers 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. Potential lamp recycling customers include those listed
above and any entity that has a high quantity of fluorescent lamps, such as
property management companies, large distributors, hotel chains, hospitals etc.
The Company informs potential customers that the Company's mercury recycling
services are designed to significantly eliminate potential environmental
financial liability associated with disposal of mercury-bearing materials. The
Company competes in each of its markets with respect to price, service, product
quality and the timeliness of its mercury retorting and lamp recycling
capabilities.
The Company also initiates mercury waste collection programs with
hospitals, electrical contractors and dentists, in which the Company provides
self-contained disposal mailers for on-site collection and shipping to the
Company's mercury recycling facilities.
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SALES STRATEGIES. The Company promotes its services and products
through a national direct sales force. The sales force consists of separate
specialized technical sales managers in the areas of mercury retorting services
and lamp recycling services. A customer who recycles lamps may become a customer
for mercury retorting of other wastes. Due to the ongoing generation of waste
material by Company customers, the sales and marketing efforts benefit
substantially from the ability to utilize a building block approach
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.
RESEARCH AND DEVELOPMENT
Research and development expense was $137,137 and $359,915 for the
years ended December 31, 1997 and 1996, respectively. The 1996 expense included
$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 has continued the development of leading edge mercury
processing technology which includes 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.
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 nationwide transporter
of hazardous waste, is subject to strict hazardous waste transportation
guidelines under federal and state Department of Transportation (DOT)
regulations. 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 could severely limit the
Company's ability to transport hazardous waste.
<PAGE>
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 Company 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 non sudden
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 cleanup.
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
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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 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.
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. All of the Company's facilities
are 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. The Company's Indiana facility is
regulated by the Indiana Department of Environmental Management and the Georgia
facility is subject to regulations administered by the Georgian Department of
Natural Resources.
<PAGE>
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.
The primary cost of complying with the above laws and regulations is
the establishment of assurance funds which are available to cover processing and
closure costs related to the Company's facilities. At December 31, 1997, the
Company has approximately $130,000 deposited in closure trust funds. In
addition, the Company has ongoing regulatory permit related costs that totaled
approximately $5,000 in 1997.
INTELLECTUAL PROPERTY
The Company has no patents on its lamp recycling equipment 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 its lamp recycling and 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 March 2, 1998 the Company employed 36 persons, of which 34 are
full-time. No employee is covered by a collective bargaining agreement, and the
Company has never experienced an organized work stoppage, strike or labor
dispute.
ITEM 2. PROPERTIES
The Company's corporate headquarters are located in Mankato,
Minnesota. The Company leases approximately 1,600 square feet of office space
pursuant to a lease expiring in January, 2001. The Company leases its 6,500
square foot Roseville Recycling Facility pursuant to a lease expiring in March,
1999. The Company leases its 25,000 square foot Union Grove Retorting pursuant
to a lease expiring in May, 2007, with four renewal options for five years each.
The Company leases its 5,000 square foot Kenosha storage facility pursuant to a
lease expiring in January, 1999. The 3,000 square foot Indianapolis storage
facility is rented on a month to month basis. The Company leases its 4,300
square foot Atlanta storage facility pursuant to a lease expiring in October,
1998.
<PAGE>
ITEM 3. 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.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been traded on the NASDAQ Small Cap
Market since March 5, 1997, the closing date of its initial public offering. The
following table sets forth the range of high and low closing sales prices for
the Company's Common Stock by NASDAQ for the periods indicated below:
Fiscal 1997
-----------
High Low
---- ---
First Quarter (period from March
5, 1997 to March 31,1997) $5.125 $4.75
Second Quarter $5.25 $4.375
Third Quarter $5.125 $4.625
Fourth Quarter $5.125 $2.094
As of March 2, 1998, there were approximately 325 record holders of
the Company's Common Stock. The Company has not paid 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.
Changes in Securities :
Pursuant to Item 701 of Regulation S-B, the following is a report of
use of proceeds resulting from the Form SB-2 of Mercury Waste Solutions, Inc.,
effective date February 28, 1997, file no. 333-17399. Information is for the
period from October 1, 1997 through December 31, 1997.
Construction of plant, building and facilities
(primarily the Union Retorting Grove Facility) $ 70,634
Purchase and installation of machinery and equipment
(primarily the Union Grove Retorting Facility) 167,566
Development of Waste Storage Facilities 35,338
Working Capital 297,283
--------
Total use of proceeds for the period $570,821
========
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in connection with the
Company's consolidated financial statements and related notes thereto included
within this document.
OVERVIEW
The Company provides services 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,
<PAGE>
Wisconsin, a facility for recycling and storing fluorescent and other
mercury-containing lamps in Roseville, Minnesota and mercury waste storage and
collection facilities in Indianapolis, Indiana and Atlanta, Georgia.
In September, 1997, the Company acquired certain assets and
liabilities of Ballast & Lamp Recycling, Inc. ("BLR"). The primary business of
BLR is the collection and storage of mercury-containing lamps and lamp ballasts
for recycling. BLR has collection facilities in Indianapolis, Indiana and
Atlanta, Georgia. The Company believes that the acquisition of BLR increased the
Company's customer base, placed the Company in two additional strategic and
growing markets and leveraged the Company's processing capacity. Annual 1996
revenues for BLR were approximately $1 million.
In 1997, the Company's revenues consisted primarily of recycling
revenues generated from its Roseville and Union Grove facilities. The Company's
activities also included: (i) the raising of approximately $4,400,000 in capital
through an Initial Public Offering of the Company's common stock, (ii) research
and development of hazardous waste storage facility alternatives, (iii)
expansion of the Union Grove Retorting Facility (iv) pursuit of acquisition
opportunities and (v) continued activities related to the organizational
development of the Company.
In March, 1998 the Company signed a definitive purchase agreement to
acquire certain assets and liabilities of Mercury Refining Company, Inc.,
("MERECO") for approximately $1,250,000. The acquisition is subject to the
completion of due diligence, financing, regulatory approvals and other closing
considerations. The acquisition is expected to be completed in April of 1998.
The primary business of MERECO, located in Albany, New York, is the collection
and storage of hazardous mercury-containing waste for retorting, refining and
recycling.
RESULTS OF OPERATIONS
Total revenues were $2,862,208 for the year ended December 31, 1997
compared to $1,334,709 for the year ended December 31, 1996, an increase of
$1,527,499 or 114%
Mercury retorting revenues, which exclude any recovery for the
Company's 1997 business interruption insurance claim discussed below, were
$1,428,960 for the year ended December 31, 1997 compared to $637,924 for the
year ended December 31, 1996, an increase of $791,036 or 124% The 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 continued to add customers by targeting national waste management
companies and Fortune 500 companies. However, the increase in revenues was less
than management expected due to a number of factors including (i) longer than
anticipated lead time in obtaining permitted storage capacity, (ii) significant
impact of a business interruption and (iii) delays in the expansion of the Union
Grove Retorting Facility due to the first two factors.
The Company is dependent on storage to ensure uninterruptible
processing capability. In 1996 and 1997, the Company was unable to store
mercury-containing waste at the Union Grove Retorting Facility for more than a
24 hour period due to governmental regulations which caused logistical problems
for the Company regarding the scheduling and delivery of mercury waste. To
address this limitation, the Company raised the necessary capital through its
initial public offering in March, 1997 to expand the Union Grove Retorting
Facility and obtain permitted storage capacity. In May, 1997, the Company
applied for a hazardous waste storage permit from the Wisconsin Department of
Natural Resources (DNR). The Company anticipated that the permitting process
would be completed in 1997, however, currently, the application is still being
reviewed by the DNR. In March, 1998, the DNR granted the Company a variance
which will allow the Company to store up to 181 drums of hazardous waste. The
variance will remain in effect until the DNR issues the final hazardous waste
storage permit. This longer than anticipated permitting process as well as the
business interruption discussed below delayed the completion of the Union Grove
Retorting Facility expansion. These factors constrained the Company's potential
revenue growth in 1997. In October, 1997 the Company also established a 10 day
mercury waste transfer and storage facility in Kenosha, Wisconsin (approximately
15 miles from the Union Grove Retorting Facility) that has a storage capacity
for approximately 250 drums of hazardous and universal waste.
<PAGE>
In September, 1997 the Company had an electrical power problem that
caused a short and took both of its ovens out of production at its Union Grove
facility causing a seven week production interruption. The Company has property
and business interruption insurance and filed its claim in March, 1998. The
claim, which is in excess of $650,000, seeks recovery of expenses incurred to
repair the equipment damage as well as the lost revenue during the seven week
interruption period. While the Company believes it has a reasonable basis for
making its claim, the amount recovered on the claim will ultimately be
determined by settlement with the insurance company. The Company will record a
recovery on the claim upon reimbursement by the insurance company.
Lamp Recycling revenues were $1,433,248 for the year ended December
31, 1997 compared to $696,785 for the year ended December 31, 1996, an increase
of $736,463 or 106%. These increases are due primarily to the acquisition of BLR
in September, 1997, an overall increase in lamp recycling sales and the
continued growth of ballast collection as a service to lamp recycling customers.
Revenues generated from the BLR acquisition totaled approximately $400,000 in
1997.
For the year ended December 31, 1997, 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, transportation costs and direct facility overhead costs.
Gross profit as a percent of revenue was 45% and 59% for the years ended
December 31, 1997 and 1996, respectively. The decrease in gross profit
percentage in the 1997 is due to (i) the business interruption that occurred,
(ii) lower than anticipated volumes at the Union Grove Retorting Facility, (iii)
increases in costs incurred related to the expansion at the Union Grove
Retorting Facility, (iv) competitive pressures causing downward pricing, and (v)
the increase in ballast collection revenues which is a lower margin item.
Because the cost structure of the Union Grove Retorting Facility is primarily
fixed, the Company did not realize a significant decrease in costs during the
seven week interruption period when no revenue was generated.
Research and development expense was $137,137 for the year ended
December 31, 1997 compared to $359,915 for the year ended December 31, 1996, a
decrease of $222,778 or 62%. The Company's development activities in 1997
consisted of the development of new lamp processing equipment. Research and
development expense in 1996 included $200,000 allocated to purchased research
and development related to a continuous flow oven at the Union Grove Retorting
Facility that had no alternative use for the Company.
Sales and marketing expense was $940,300 for the year ended December
31, 1997 compared to $332,622 for the year ended December 31, 1996, an increase
of $607,678 or 183% . This increase in expense in 1997 was related to the
Company's continued development of its direct sales staff, the acquired sales
staff of BLR, costs of deploying its marketing plan, including increased travel
and telephone expense and a significant investment in marketing and promotional
materials.
General and administrative expense was $1,373,598 for the year ended
December 31, 1997 compared to $886,869 for the year ended December 31, 1996, an
increase of $486,729 or 55%. The increase in expense in 1997 was principally due
to personnel and related costs resulting from the Company's continued investment
in infrastructure to support the Company's growth and expenses related to the
business interruption.
Interest income was $69,899 for the year ended December 31, 1997
compared to no interest income for 1996. The increase was due to investment of
proceeds from the Company's Initial Public Offering. Interest expense was
$72,001 for the year ended December 31, 1997 compared to $188,068 for the year
ended December 31, 1996, a decrease of $116,067 or 62%. The decrease was due
primarily to the payoff and cancellation of the $1,660,000 revolving bank credit
line with proceeds from the Initial Public Offering.
There was no income tax benefit recorded in 1997 or in 1996. At
December 31, 1997, the Company has recorded a valuation allowance of
approximately $523,000 on its net deferred tax assets due to the uncertainty of
<PAGE>
their realization. The realization of these deferred tax assets is dependent
upon generating sufficient taxable income during the period that deductible
temporary differences are expected to be available to reduce taxable income. At
December 31, 1997, the Company had net operating loss carryforwards, generated
since the Company became a C Corporation, of approximately $1,050,000 that
expire in 2012.
Resulting from the factors discussed above, the Company's net loss
was $1,173,089 or $0.34 per share for the year ended December 31, 1997 and
$985,446 or $0.40 per share for the year ended December 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents of $779,945 and working
capital of $935,414 at December 31, 1997. Net cash used in operating activities
was $878,474 for the year ended December 31, 1997, primarily resulting from the
net loss of $1,173,089, an increase in other current assets of $147,242, and an
increase in accounts receivable of $363,536, offset by depreciation and
amortization of $371,251 and an increase in accounts payable of $243,644. The
increases in the Company's current assets and liabilities are due to the
continued sales growth which has and will require working capital to fund this
growth.
Cash flows used in investing activities were $1,088,796 for the year
ended December 31, 1997, consisting of payments for capital expenditures of
$688,463, an increase in cash reserved for closure related to the Union Grove
Retorting Facility and Atlanta facility of $56,856, $75,000 for a settlement of
a contingent liability related to the acquisition of USE, and $268,477 paid for
the acquisition of certain assets and liabilities of BLR. The capital
expenditures for the period relate primarily to the expansion of the Union Grove
Retorting Facility. The Company is in the process of expanding the Union Grove
Retorting Facility to increase the retorting capacity, to add lamp recycling
capability and to add hazardous waste storage capability. The expansion will be
substantially completed in the first quarter of 1998. Capital expenditures
related to this expansion in 1998 will total approximately $300,000. After the
expansion, the Company will continue to lease this facility under a long-term
lease.
Cash provided by financing activities consisted primarily of net
proceeds from the Initial Public Offering, offset by the payoff and termination
of the Company's revolving credit line with Norwest Bank, N.A. of $1,660,000.
As part of the transaction with USE, the Company agreed to make
payments to USE for each Model 2000 (or 2000B) sold by the Company, with total
payments not to exceed $460,000. There were no payments made in 1996. In March,
1997, the Company, to avoid reconveyance of certain distribution rights related
to the Model 2000, settled this obligation for $250,000 by paying $75,000 in
cash and the balance of $175,000 in a note. This amount, together with the
amounts already owing the related party are payable pursuant to notes bearing
interest at 10% and payable in installments totaling $11,550 a month through
December, 2000.
The Company has a $600,000 revolving credit promissory note with
Brad J. Buscher, its Chairman of the Board and Chief Executive Officer of which
$0 was outstanding on December 31, 1997. The note is secured by all assets of
the Company and bears interest at prime plus 2%.
The Company's capital requirements will be significant for 1998 to
fund operations, planned capital expenditures related to expansion of the Union
Grove Retorting Facility, to develop consolidation and temporary hazardous waste
storage facilities and to fund potential acquisitions, including the MERECO
acquisition. The Company anticipates that the net proceeds from the Initial
Public Offering and availability under its revolving promissory note will be
sufficient to fund its operations and planned expansion for at least 12 months,
excluding any business acquisitions. The Company anticipates it will fund the
MERECO acquisition, if completed, with related party debt financing. In addition
to capital needed for acquisitions, if the Company's business grows more rapidly
than anticipated or if anticipated revenue increases do not materialize, the
Company may require additional capital. There can be no assurance that
additional financing will be available at all or that, if available, such
financing would be obtainable on terms favorable to the Company.
<PAGE>
FORWARD LOOKING STATEMENTS
Statements contained in this report regarding the Company's future
operations, performance and results, and anticipated liquidity are
forward-looking and therefore are subject to certain risks and uncertainties,
including those discussed herein. In addition, any forward-looking information
regarding the operations of the Company will be affected by the actual amount of
the insurance claim settlement received by the Company and the ability of the
Company to implement its marketing strategies and secure new customers, secure
storage facilities at the Union Grove Retorting Facility and other parts of the
country, manage anticipated growth, successfully integrate business
acquisitions, complete the MERECO acquisition and other Risk Factors included in
the Registration Statement on Form SB-2, as amended, filed with the Securities
and Exchange Commission (File No. 333-17399.)
ITEM 7. FINANCIAL STATEMENTS
The consolidated financial statements of the Company are included in
a separate financial section at the end of this Annual Report on Form 10-KSB.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The information required by this item concerning the Company's
directors and executive officers is incorporated by reference from the Company's
Proxy Statement to be filed no later than 120 days following the close of the
fiscal year ended December 31, 1997.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this item is hereby incorporated by
reference from the Company's Proxy Statement.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is hereby incorporated by
reference from the Company's Proxy Statement.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is hereby incorporated by
reference from the Company's Proxy Statement.
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
(a) Financial Statements
The financial statements filed as part of this Annual Report on Form
10-KSB are described in the Index to Consolidated Financial
Statements on page F-1.
<PAGE>
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of the
period covered by this report.
(c) Exhibits
EXHIBIT NO. DESCRIPTION
----------- -----------
2 Asset Purchase Agreement by and between Mercury Waste
Solutions, Inc. and U.S. Environmental, Incorporated dated
January 4, 1996. (1)
3.1 Articles of Incorporation (1)
3.2 By-laws (1)
10.1 Commercial Lease dated February 25, 1993 for premises located
at 2007 West County Road C-2.
10.2 Security Agreement by and between the Company and Bradley J.
Buscher dated January 4, 1996. (1)
10.3 Employment Agreement by and between Mercury Waste Solutions,
Inc. and Mark Edlund dated as of January 4, 1996. (1)
10.4 Amended and Restated Distribution Rights Bill of Sale
Agreement by and between the Company and USE dated November
30, 1996. (1)
10.5 Management Consulting Agreement by and between Bankers
American Capital Corporation dated as of January 4, 1996. (1)
10.6 Bill of Sale Agreement dated September 12, 1996 between
Resource Technology, Inc. Mercury Waste Solutions, Inc. and
certain other parties. (1)
10.7 Amended and Restated Model 2000 Agreement dated September 12,
1996 between Resource Technology, Inc. and Mercury Waste
Solutions, Inc. (1)
10.8 Mercury Waste Solutions, Inc. Stock Option Plan dated
September 17, 1996. (1)
10.9 Employment Agreement by and between Mercury Waste Solutions,
Inc. and Bradley J. Buscher dated as of January 22, 1997. (1)
10.10 Employment Agreement by and between Mercury Waste Solutions,
Inc. and Donald J. Wodek dated as of January 22, 1997. (1)
10.11 Revolving Credit Promissory Note by and between Mercury Waste
Solutions, Inc. and Bradley J. Buscher dated as of January 22,
1997. (1)
10.12 Non Statutory Stock Option Agreement by and between Mercury
Waste Solutions, Inc. and Donald J. Wodek dated as of January
22, 1997. (1)
10.13 Subordination Agreement by and between Bradley J. Buscher and
Capital Partners, Ltd. dated January 22, 1997. (1)
10.14 Lease dated July 15, 1997 by and between Durand Properties and
Mercury Waste Solutions, Inc. for premises located at 21211
Durand Ave., Union Grove, Wisconsin 53182. (2)
10.15 Employment Agreement by and between Mercury Waste Solutions,
Inc. and Todd J. Anderson dated as of September 6, 1997.
10.16 Incentive Stock Option Agreement by and between Mercury Waste
Solutions, Inc. and Todd J. Anderson dated as of November 11,
1997.
11 Computation of Loss Per Common and Common Equivalent Share.
23.1 Consent of McGladrey & Pullen, LLP.
27 Financial Data Schedule.
- ----------------------
(1) Filed as an exhibit to Registration Statement on Form SB-2, as
amended (SEC file no. 333-17399) filed on February 25, 1997
and incorporated herein by reference.
(2) Filed as an exhibit to Form 10-QSB for the third quarter of
fiscal 1997, filed on November 14, 1997, and incorporated
herein by reference.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
MERCURY WASTE SOLUTIONS, INC.
by: /s/ BRAD J. BUSCHER
Brad J. Buscher
Chairman of the Board of Directors
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant in the capacities indicated on March 31, 1998.
NAME TITLE
- ---- -----
/s/ BRAD J. BUSCHER Chairman of the Board of Directors
Brad J. Buscher and Chief Executive Officer
/s/ TODD J. ANDERSON Chief Financial Officer
Todd J. Anderson
/s/ MARK G. EDLUND President, Secretary, Treasurer and Director
Mark G. Edlund
/s/ ALAN R. GEIWITZ Director
Alan R. Geiwitz
/s/ JOEL H. GOTTESMAN Director
Joel H. Gottesman
/s/ ROBERT L. ETTER Director
Robert L. Etter
/s/ FRANK L. FARRAR Director
Frank L. Farrar
<PAGE>
CONTENTS
- -------------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT F-2
- -------------------------------------------------------------------------------
FINANCIAL STATEMENTS
Consolidated balance sheets F-3 - F-4
Consolidated statements of operations F-5
Consolidated statements of shareholders' equity F-6
Consolidated statements of cash flows F-7 - F-8
Notes to consolidated financial statements F-9 - F-19
- -------------------------------------------------------------------------------
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Mercury Waste Solutions, Inc. and Subsidiary
Mankato, Minnesota
We have audited the accompanying consolidated balance sheets of Mercury Waste
Solutions, Inc. and Subsidiary as of December 31, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Mercury Waste
Solutions, Inc. and Subsidiary as of December 31, 1997 and 1996, and the results
of their operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles.
Minneapolis, Minnesota
February 13, 1998, except for Note 9,
as to which the date is March 12, 1998
<PAGE>
MERCURY WASTE SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
ASSETS (NOTES 2 AND 3) 1997 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 779,945 $ --
Accounts receivable, less allowance for doubtful accounts of
$40,000 in 1997 and $10,000 in 1996 (Note 8) 867,936 381,064
Other current assets 195,749 34,119
--------------------------
TOTAL CURRENT ASSETS 1,843,630 415,183
--------------------------
Property and Equipment, at cost
Leasehold improvements 198,462 95,860
Furniture, fixtures, and equipment 279,039 150,430
Plant equipment 958,683 663,792
Construction in progress 182,623 --
--------------------------
1,618,807 910,082
Less accumulated depreciation 303,625 103,032
--------------------------
1,315,182 807,050
--------------------------
Other Assets
Deferred offering costs -- 118,908
Cash restricted for closure (Note 5) 130,988 74,132
Acquired equipment and facility rights, net of accumulated
amortization of $98,749 in 1997 and $40,000 in 1996 551,251 360,000
Goodwill, net of accumulated amortization of $175,848 in 1997
and $87,924 in 1996 703,388 791,312
Other intangibles, primarily acquired customer lists, net of
accumulated amortization of $20,410 in 1997 285,743 --
--------------------------
1,671,370 1,344,352
--------------------------
TOTAL ASSETS $4,830,182 $2,566,585
==========================
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Liabilities
Related-party demand note (Note 3) $ -- $ 45,000
Current portion of long-term debt 107,646 --
Accounts payable 470,543 113,922
Accrued expenses 269,718 59,102
Deferred revenue 60,309 --
-----------------------------
TOTAL CURRENT LIABILITIES 908,216 218,024
-----------------------------
Long-Term Liabilities
Long-term debt, less current portion (Note 3) 250,290 1,919,567
Closure fund (Note 5) 10,300 10,300
Subordinated debt (Note 6) -- 135,000
-----------------------------
260,590 2,064,867
-----------------------------
Commitments and Contingencies (Note 5)
Shareholders' Equity (Notes 6 and 7)
Common stock, $0.01 par value; 10,000,000 shares authorized; 3,464,079 and
2,249,097 shares issued and outstanding in
1997 and 1996, respectively 34,641 22,491
Additional paid-in capital 4,722,304 1,246,649
Accumulated deficit (1,095,569) (985,446)
-----------------------------
3,661,376 283,694
-----------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 4,830,182 $ 2,566,585
=============================
</TABLE>
<PAGE>
MERCURY WASTE SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues (Note 8) $ 2,862,208 $ 1,334,709
Cost of revenues 1,582,160 552,681
-----------------------------
GROSS PROFIT 1,280,048 782,028
-----------------------------
Operating expenses:
Research and development (Note 2) 137,137 359,915
Sales and marketing 940,300 332,622
General and administrative, including business
interruption expenses (Note 5) 1,373,598 886,869
-----------------------------
2,451,035 1,579,406
-----------------------------
OPERATING LOSS (1,170,987) (797,378)
Interest income 69,899 --
Interest expense (72,001) (188,068)
-----------------------------
NET LOSS $(1,173,089) $ (985,446)
=============================
Basic and diluted loss per share $ (0.34) $ (0.40)
Weighted-average number of common and common equivalent
shares outstanding 3,498,512 2,455,313
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
MERCURY WASTE SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
PERIOD FROM JANUARY 2, 1996 (DATE OF INCEPTION) TO DECEMBER 31, 1996 AND YEAR
ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Common Stock Additional Total
----------------------- 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 6) 1,000,000 10,000 271,250 -- 281,250
Conversion of debt to equity (Note 6) 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 6) 120,000 1,200 131,673 -- 132,873
Issuance of common stock in November 1996
(Note 6) 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
Initial public offering of common stock, net of
commissions and offering costs of $1,065,062
(Note 6) 1,095,000 10,950 4,398,988 -- 4,409,938
Reclassification of S Corporation accumulated
deficit to additional paid-in capital pursuant
to termination of S Corporation status (Note 6) -- -- (1,062,966) 1,062,966 --
Compensation expense on stock option grants
(Note 7) -- -- 5,833 -- 5,833
Exercise of warrants (Note 6) 120,000 1,200 133,800 -- 135,000
Net loss -- -- -- (1,173,089) (1,173,089)
--------- ----------- ----------- ----------- -----------
Balance, December 31, 1997 3,464,097 $ 34,641 $ 4,722,304 $(1,095,569) $ 3,661,376
========= =========== =========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
MERCURY WASTE SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows From Operating Activities
Net loss $(1,173,089) $ (985,446)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 204,168 103,032
Amortization 167,083 127,924
Purchased research and development -- 200,000
Noncash compensation 5,833 --
Provision for doubtful accounts 30,000 33,400
Changes in assets and liabilities, net of effects of business acquisitions:
Accounts receivable (363,536) (339,971)
Other current assets (147,242) (34,119)
Accounts payable 243,644 57,920
Accrued expenses 94,356 59,102
Deferred revenue 60,309 --
----------------------------
NET CASH USED IN OPERATING ACTIVITIES (878,474) (778,158)
----------------------------
Cash Flows From Investing Activities
Purchase of furniture, fixtures, and equipment (688,463) (551,942)
Acquisition of businesses (Note 3) (268,477) (1,444,125)
Increase in restricted cash (56,856) (56,007)
Settlement of contingent consideration (75,000) --
----------------------------
NET CASH USED IN INVESTING ACTIVITIES (1,088,796) (2,052,074)
----------------------------
Cash Flows From Financing Activities
Net proceeds from issuance of common stock 4,528,846 769,140
Proceeds from related-party, long-term debt -- 2,000,000
Proceeds from long-term debt -- 1,660,000
Payments on long-term debt (1,736,631) (1,660,000)
Net proceeds on related-party demand note (45,000) 45,000
Proceeds from issuance of subordinated debt -- 135,000
Deferred offering costs -- (118,908)
----------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,747,215 2,830,232
----------------------------
INCREASE IN CASH AND CASH EQUIVALENTS 779,945 --
Cash and Cash Equivalents
Beginning -- --
----------------------------
Ending $ 779,945 $ --
============================
</TABLE>
(Continued)
<PAGE>
MERCURY WASTE SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Supplemental Disclosures of Cash Flow Information
Cash payments for interest $ 86,025 $168,078
=====================
Supplemental Schedules of Noncash Investing and Financial Activities
Issuance of common stock upon conversion of long-term debt $ -- $500,000
Closure fund liability capitalized in property and equipment -- 10,300
Subordinated debt satisfied by exercise of warrant 135,000 --
Settlement of contingent consideration by issuance of long-term debt 175,000 --
=====================
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
MERCURY WASTE SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS AND BASIS OF PRESENTATION: Mercury Waste Solutions,
Inc. and Subsidiary (the Company) is in the business of providing mercury waste
recycling solutions to mercury waste generators of all sizes. As discussed in
Note 2, the Company was incorporated on January 2, 1996, for the purposes of
acquiring substantially all of the assets of U.S. Environmental, Inc. (USE) on
January 4, 1996. The accompanying financial statements reflect the Company's
operations since inception. 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:
* 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 fluorescent lamps.
* 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 collection and storage: In addition to the above recycling
facilities, the Company has mercury waste collection facilities in
Indianapolis, Indiana, and Atlanta, Georgia.
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 and
disclosure of contingent assets and liabilities at 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: The Company recognizes revenue upon receipt and acceptance
of the waste materials at its facilities. Estimated recycling and disposal costs
for the waste materials are accrued. Amounts billed prior to services being
performed are recorded as deferred revenue.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiary. All intercompany
transactions are eliminated from the consolidated financial statements.
CASH AND CASH EQUIVALENTS: For purposes of reporting cash flows, the Company
considers all cash and treasury bills, commercial paper, and money market funds
with an initial maturity of three months or less to be cash equivalents. The
Company maintains its cash in bank deposits and money market accounts which, at
times, exceed federally insured limits. The Company has not experienced any
losses in such accounts. As of December 31, 1997, the Company had cash
equivalents of approximately $682,000 in a money market account.
<PAGE>
MERCURY WASTE SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
Acquired equipment and facility rights 10
Goodwill 10
Other intangibles 5
In accordance with Statement of Financial 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 the 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 would continue to be evaluated to
determine whether events or circumstances warrant revised estimates of useful
lives pursuant to APB Opinion No. 17. To date, management has determined that no
impairment of long-lived assets and goodwill exists.
LOSS PER SHARE: The Company adopted Statement of Financial Accounting Standards
No. 128 (SFAS No. 128), EARNINGS PER SHARE, which supersedes APB Opinion No. 15.
SFAS No. 128 requires the presentation of earnings per share by all entities
that have common stock or potential common stock, such as options, warrants, and
convertible securities, outstanding that trade in a public market. Those
entities that have only common stock outstanding are required to present basic
earnings per share amounts. Basic per share amounts are computed, generally, by
dividing net income or loss by the weighted-average number of common shares
outstanding. All other entities are required to present basic and diluted per
share amounts. Diluted per share amounts assume the conversion, exercise, or
issuance of all potential common stock instruments unless the effect is
antidilutive, thereby reducing the loss or increasing the income per common
share.
<PAGE>
MERCURY WASTE SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company initially applied SFAS No. 128 for the year ended December 31, 1997,
and as required by the statement, has retroactively applied it to all periods
presented. As described in Notes 6 and 7, at December 31, 1997 and 1996, the
Company had stock options and warrants outstanding to purchase common stock.
However, because the Company has incurred a loss in all periods presented, the
inclusion of potential common shares in the calculation of diluted loss per
share would have an antidilutive effect. Therefore, basic and diluted loss per
share amounts are the same in each period presented.
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 (IPO) price during the 12-month period
preceding the date of the initial filing of the registration statement have been
included in the calculation of loss per share as if they were outstanding for
all periods through the effective date of the IPO. Stock options and warrants
outstanding subsequent to the effective date of the IPO have not been included
in the calculation as such items have a dilutive effect.
INCOME TAXES: From inception through the date of the initial public offering,
the net loss of the Company was reported in the individual income tax returns of
the shareholders under provisions of Subchapter S of the Internal Revenue Code.
As described in Note 6, the Company completed an initial public offering of its
common stock. Upon completion of this sale, the Company's income tax status
changed, and the Company is required to pay income taxes on its earnings
subsequent to the date it became publicly owned, including deferred taxes
existing at the time that the S Corporation status terminated. At that time, the
Company adopted Statement of Financial Accounting Standards No. 109, ACCOUNTING
FOR INCOME TAXES. Under SFAS No. 109, deferred taxes are provided for on a
liability method whereby deferred tax assets are recognized for deductible
temporary differences and operating loss and tax credit carryforwards and
deferred tax liabilities are recognized for taxable temporary differences.
Temporary differences are the differences between the reported amounts of assets
and liabilities and their tax bases. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely than
not that some portion or all of the deferred tax assets will not be realized.
Deferred tax assets and liabilities are adjusted for the effects of changes in
tax laws and rates on the date of enactment.
From the date of the change to C Corporation status, the Company recorded no
income tax expense. On a pro forma basis, the Company would have had no income
tax expense for the periods it was a S Corporation due to its net losses.
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: Due to the short-term nature of the restricted cash, the
carrying amount approximates fair value.
<PAGE>
MERCURY WASTE SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LONG-TERM DEBT: The fair value of the 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 long-term debt approximates fair value.
NOTE 2. ACQUISITIONS
USE: 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 codeveloped 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
codevelopment 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. 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 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
==========
<PAGE>
MERCURY WASTE SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. ACQUISITIONS (CONTINUED)
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
Acquired 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 percent on the fair value of the acquired assets and 32 percent based on the
historical cost basis of the seller, since such person is a shareholder in the
new company (see Note 6), 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 agreed to 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. In March 1997, the Company settled this obligation for $250,000 by
paying $75,000 in cash and the balance of $175,000 in a note. This amount,
together with the amounts already owing the related party ($259,567 at that
time), is payable pursuant to notes bearing interest at 10 percent and payable
in installments totaling $11,550 a month through December 2000. This settlement
was an adjustment of the original purchase price of USE and has been allocated
to equipment and facility rights.
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 percent 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.
BLR: In September 1997, the Company acquired certain assets and liabilities of
Ballast & Lamp Recycling, Inc. (BLR) for cash of $268,477. The primary business
of BLR is the collection and storage of hazardous mercury-containing lighting
debris and ballasts for recycling. BLR has collection facilities in
Indianapolis, Indiana, and Atlanta, Georgia.
<PAGE>
MERCURY WASTE SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. ACQUISITIONS (CONTINUED)
The acquisition was accounted for as a purchase, and accordingly, the results of
operations of BLR are included with the Company's since the date of acquisition.
The purchase price was allocated as follows:
Current assets $ 163,708
Equipment 27,854
Intangibles, primarily customer list 306,153
Liabilities assumed (229,238)
-------------
$ 268,477
=============
Unaudited pro forma results of operations for the years ended December 31, 1997
and 1996, as though the Company acquired BLR as of January 1, 1996, are as
follows:
1997 1996
---- ----
Revenues $3,589,104 $2,445,678
Net loss (1,188,905) (1,013,444)
Basic and diluted loss per share (0.34) (0.41)
NOTE 3. DEBT ARRANGEMENTS
DEMAND NOTE: The Company has a $600,000 demand note facility with its major
shareholder and CEO, of which there was no balance outstanding at December 31,
1997. The note is secured by all assets of the Company and bears interest at the
prime rate plus 2 percent (10.50 percent at December 31, 1997).
LONG-TERM DEBT:
December 31
-------------------------
1997 1996
- --------------------------------------------------------------------------------
$1,660,000 revolving line of credit to bank,
paid with proceeds of the initial public offering $ - $ 1,660,000
10% notes payable to related party (formerly USE),
due in monthly installments of $11,550 to
December 1, 2000, secured by all assets of the
Company 357,936 259,567
-------------------------
357,936 1,919,567
Less current maturities 107,646 -
-------------------------
$ 250,290 $ 1,919,567
=========================
<PAGE>
MERCURY WASTE SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. DEBT ARRANGEMENTS (CONTINUED)
Annual maturities of long-term debt as of December 31, 1997, were as follows:
Years ending December 31:
1998 $ 108,000
1999 119,000
2000 131,000
Interest expense to related parties totaled $56,525 and $174,834 for the years
ended December 31, 1997 and 1996, respectively.
NOTE 4. INCOME TAXES
The components of deferred tax assets at December 31, 1997, are as follows:
Depreciation and amortization $ 60,000
Deferred revenue 24,000
Accrued expenses and other 16,000
Net operating loss 423,000
Less valuation allowance (523,000)
---------------
$ -
===============
The deferred tax assets include a valuation allowance of $523,000 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. At December 31, 1997, the
Company has net operating losses of approximately $1,050,000 available to offset
future taxable income through 2012.
NOTE 5. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES: The Company leases its office, warehouse, and certain
equipment under noncancelable operating leases with unrelated third parties,
expiring at various times through May 2007. In addition, the Company leases
office space with a related party substantially owned by the Company's major
shareholder and CEO. 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. Certain facility
leases require that the Company pay a portion of the real estate taxes,
maintenance, utilities, and insurance.
<PAGE>
MERCURY WASTE SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Approximate future minimum rental commitments, excluding common area costs,
under these noncancelable operating leases are:
Years ending December 31:
1998 $ 246,000
1999 165,000
2000 139,000
2001 126,000
2002 113,000
Rental expense, including common area costs and short-term equipment rentals,
was approximately $283,000 and $144,000 for the years ending December 31, 1997
and 1996, respectively.
CONSULTING AGREEMENT: The Company has a consulting agreement effective through
January 1999 with a related party 100 percent owned by the Company's major
shareholder and CEO. The consulting fees are $10,000 per month. Consulting
expense for the years ended December 31, 1997 and 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, 1997, the Company had
deposited $130,988 in restricted cash accounts. 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.
BUSINESS INTERRUPTION CLAIM: In September 1997, the Company had an electrical
power malfunction that took certain of its recycling equipment out of operation,
causing a business interruption for approximately seven weeks. The Company has
property and business interruption insurance and filed its claim in March, 1998.
The claim, which is in excess of $650,000, seeks recovery of expenses incurred
to repair the equipment damage as well as for lost revenue during the
interruption period. As of December 31, 1997, no recovery amounts have been
recorded. The Company will record a recovery on the claim upon reimbursement by
the insurance company.
NOTE 6. 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 percent of this stock and the minority shareholder, who
was the 100 percent owner of USE, purchased the remaining 32 percent. 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.
<PAGE>
MERCURY WASTE SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. SHAREHOLDERS' EQUITY (CONTINUED)
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 PLACEMENTS: 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. 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.
Simultaneously with the completion of the initial public offering, the warrant
was exercised, with the exercise price paid by the cancellation of the related
subordinated debt. 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.
In November 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: In March 1997, the Company sold 1,000,000 shares of
common stock at $5.00 per share in an initial public offering, realizing net
proceeds of $4,012,017. In April 1997, the Company closed on the over-allotment
for the offering by selling an additional 95,000 shares at $5.00, realizing net
proceeds of $397,921. In conjunction with the offering, the underwriter was
issued a warrant to purchase 100,000 shares of common stock at $6.00 per share.
Upon the closing of the initial public offering, the Company's S Corporation
election was terminated. At that time, the accumulated deficit balance of
$1,062,966, representing losses on which income tax deductions have been taken,
was reclassified to paid-in capital.
WARRANT COMPENSATION: For the above disclosed warrant issuances at $4.50, $4.75,
$5.00, and $6.00 per share, there was no compensation expense recorded using the
Black-Scholes option pricing model pursuant to FASB Statement No. 123.
<PAGE>
MERCURY WASTE SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. STOCK OPTION PLAN
In September 1996, the Company adopted the Mercury Waste Solutions, Inc. Stock
Option Plan (the 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 nonqualified 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 $5,883 and $-0- compensation cost charged to
income for the stock option grants for the years ended December 31, 1997 and
1996, respectively. 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 loss and basic
and diluted loss per common share on a pro forma basis would have been as shown
below:
1997 1996
- --------------------------------------------------------------------------------
Net loss:
As reported $ (1,173,089) $ (985,446)
Pro forma (1,186,559) (988,656)
Basic and diluted loss per share:
As reported (0.34) (0.40)
Pro forma (0.34) (0.40)
The fair value of each option grant is estimated on the date of the grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions:
1997 1996
- --------------------------------------------------------------------------------
Expected dividend yield -- --
Expected stock price volatility 53.00% 38.00%
Risk-free interest rate 6.01% 6.28%
Expected life of options (years) 3 3
A summary of the status of the plan at December 31, 1997 and 1996, and changes
during the years then ended is as follows:
<TABLE>
<CAPTION>
1997 1996
-------------------------------------- --------------------------
Weighted- Weighted-
Average Average
Shares Exercise Price Shares Exercise Price
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of period 110,000 $ 0.67 -- $ --
Granted 80,000 3.66 110,000 0.67
Exercised -- -- -- --
Forfeited (15,000) 1.13 -- --
-------------------------------------------------------------------
Outstanding at end of period 175,000 $ 2.00 110,000 $ 0.67
===================================================================
Weighted-average fair value of
options granted during the year $ 1.91 $ 0.23
</TABLE>
<PAGE>
MERCURY WASTE SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. STOCK OPTION PLAN (CONTINUED)
The following table summarizes information about stock options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------------------- -----------------------------------
Number Number
Outstanding at Weighted-Average Weighted- Exercisable at Weighted-
Range of December 31, Remaining Average December 31, Average
Exercise Prices 1997 Contractual Life (Yrs.) Exercise Price 1997 Exercise Price
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.50 80,000 8.00 $ 0.50 16,000 $ 0.50
$1.125 - $2.75 50,000 8.93 2.26 3,000 1.13
$4.00 - $5.00 45,000 9.77 4.36 - -
--------------------------------------------------------------------------------------------------
175,000 8.72 $ 2.00 19,000 $ 0.60
=================================================================================================
</TABLE>
NOTE 8. MAJOR CUSTOMERS
The Company had one customer in 1997 that accounted for 11 percent of revenues.
The Company had a different customer in 1996 that accounted for 11 percent of
revenues. At December 31, 1997, the receivable balance from the 1997 major
customer was approximately $88,000.
NOTE 9. SUBSEQUENT EVENT
In March 1998 the Company signed a purchase agreement to acquire certain assets
and liabilities of Mercury Refining Company, Inc. (MERECO), for approximately
$1,250,000. The acquisition is subject to the completion of due diligence,
financing, regulatory approvals, and other closing considerations. The
acquisition is expected to be completed in April 1998. The primary business of
MERECO, located in Albany, New York, is the collection and storage of hazardous
mercury-containing waste for retorting, refining, and recycling.
EXHIBIT 10.15
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made and entered into as of September 6, 1997, by and
between MERCURY WASTE SOLUTIONS, INC., a corporation duly organized and existing
under the laws of the State of Minnesota, with a place of business at 302 North
Riverfront Drive, Mankato, Minnesota 56001, hereinafter referred to as "MWS,"
and TODD J. ANDERSON, with an address at 8501 - 32nd Place North, Crystal,
Minnesota, 55427, hereinafter referred to as "EXECUTIVE".
RECITALS
A. The following recitals shall be considered a part of this Agreement,
and explain the general nature and purposes of MWS's business and Executive's
rights and obligations under this Agreement. Any interpretation or construction
of this Agreement shall be considered in light of these recitals.
B. MWS is a Minnesota corporation engaged in the business of (i)
recycling high intensity lamps and other materials which is conducted at various
facilities throughout the United States, (ii) recycling high intensity lamps and
distilling/retorting mercury at a facility in Union Grove, Wisconsin, and (iii)
the sale and distribution of lamp processing equipment (collectively, the
"Business").
C. MWS desires to employ Executive and Executive desires to be employed
by MWS, on the terms, covenants, and conditions set forth in this Agreement.
D. In connection with the foregoing aspects of the Business, MWS
anticipates developing, from time to time, confidential business data and trade
secrets which it desires to protect from disclosure to competitors. "Trade
secret" means any information, formulae, patterns, computations, programs,
devices, methods, techniques, or processes relating to MWS' products and/or
services or its research, development, manufacture, design, marketing,
merchandising, selling and servicing.
E. The parties acknowledge that MWS' trade secrets and confidential
business data, have value to MWS only to the extent that they are not disclosed
to MWS' competitors.
F. For the purposes of this Agreement, a "competitor" shall mean any
firm, person, partnership, corporation, or any other entity, whether legal or
natural, engaged in the same or similar business as MWS as defined above or
expanded in the future, whether that particular business comprises a part of or
all of the competitor's business.
E. This Agreement supersedes and replaces any other agreement and
understanding, oral or written, between Executive and MWS with respect to
employment of Executive with MWS.
NOW, THEREFORE, for the reasons set forth above, and in consideration
of the mutual promises and agreements set forth in this Agreement, MWS and
Executive agree as follows:
<PAGE>
ARTICLE 1
EMPLOYMENT
1.1 MWS hereby employs, engages, and hires Executive as Chief Financial
Officer and Executive hereby accepts and agrees to such hiring, engagement, and
employment, subject to the general supervision and pursuant to the advice of the
Chief Executive Officer and MWS's Board of Directors.
1.2 Executive shall perform such duties as may be assigned to him from
time to time by MWS's Chief Executive Officer and Board of Directors.
ARTICLE 2
EFFORTS OF EMPLOYEE
2.1 Executive agrees to devote his full time and skills beginning the
Effective Date to the conduct of MWS's business operations, performing the
duties of Executive's position with MWS, and such other duties as may be
requested by the Board of Directors of MWS. Executive will not, without the
express written permission of MWS, engage in any substantial private business
activities outside or separate from Executive's employment with MWS in any field
which would prevent or interfere with the performance of his services for MWS as
contemplated herein. Executive will comply with MWS's policies and personnel
regulations as the same may be adopted by MWS from time to time. Executive shall
perform his duties and at all times in strict accordance with all applicable
federal and state laws and regulations, local ordinances, and any compliance
agreement or other agreement/authorization between MWS and the Minnesota
Pollution Control Agency ("MPCA"), the Wisconsin Department of Natural Resources
("WDNR"), or any other applicable state agency for the conduct of the Business.
ARTICLE 3
TERM OF EMPLOYMENT AND AGREEMENT
3.1 Subject to the provisions for termination hereinafter set forth,
the term of this Agreement and the performance of Executive's services shall
commence on a full time basis as of OCTOBER 20, 1997 (the "Effective Date") and
shall continue thereafter for a period of one year unless earlier terminated as
provided in Article 5 hereof. The Agreement shall automatically renew for
consecutive one (1) year terms unless otherwise terminated as provided herein.
3.2 This Agreement shall be binding upon Executive and MWS as of the
Effective Date.
ARTICLE 4
COMPENSATION AND BENEFITS
4.1 Executive will be paid a base salary of Eighty Thousand and no/100
Dollars ($80,000.00) per year for each year of the term of this contract.
Executive's compensation shall be payable in equal biweekly installments. MWS's
Board of Directors shall review Executive's base salary compensation annually,
and may, within its sole discretion, adjust Executive's base salary based upon
Executive's performance, MWS's performance or any other criteria it determines
is appropriate.
<PAGE>
4.2 Executive and MWS shall mutually agree on a bonus plan which shall
be attached as Exhibit A hereto.
4.3 Executive shall receive an automobile allowance of Three Hundred
Fifty and no/100 Dollars ($350.00) per month throughout the term of this
Agreement and will also be reimbursed for gas and oil used in fulfilling
Executive's duties set forth in this Agreement pursuant to the reimbursement
guidelines set forth in Section 4.6.
4.4 Executive shall be granted options to purchase 25,000 shares of
Common Stock of MWS pursuant to the terms of a certain Incentive Stock Option
Agreement.
4.5 MWS shall, to the extent permitted by law and the terms of the
applicable plans, provide Executive with full participation in MWS's employee
benefit plans under the same terms as provided to other similarly positioned
employees of MWS from time to time in the exclusive discretion of MWS's Board of
Directors. Such benefits may include, but are not limited to, a medical and
dental plan, disability plan, life insurance plan, 401(k) plan and a profit
sharing plan. MWS is not obligated to provide or continue any of these benefits
and may, without any prior notice, discontinue any benefit already provided or
as may be provided in the future, within the exclusive discretion of MWS's Board
of Directors.
4.6 Executive shall be reimbursed for authorized traveling and other
out-of-pocket business expenses, provided they have been reasonably incurred in
the performance of Executive's duties for MWS, and do not exceed a gross amount
as preapproved by MWS's Board of Directors. Executive shall submit to MWS an
itemized account detailing the expenses on a form provided to Executive by MWS,
accompanied by receipts. MWS reserves the right to reject reimbursement of
expense submissions not in compliance with the terms set forth in this Section
or which are not in compliance with Internal Revenue Service statutes, rules,
regulations or other controlling or interpretive authority.
4.7 Executive is entitled to four (4) weeks of vacation per year upon
the same terms and conditions as provided to the other employees of MWS.
Vacation time will be scheduled taking into account the Executive's duties and
obligations at MWS. Sick leave, holiday pay and all other leaves of absence also
will be in accordance with MWS's stated personnel policies.
ARTICLE 5
TERMINATION
5.1 Executive's employment with MWS shall terminate in accordance with
the following provisions:
5.1 (a) MWS may terminate Executive's employment as follows:
(i) Upon at least thirty (30) days' written notice to
Executive, with or without cause, after the end of
the first year term of this Agreement.
(ii) Upon the disability of Executive for a period of at
least ninety (90) business
<PAGE>
days, whether or not consecutive, during any twelve
(12) month period. For the purposes of this
Agreement, the term "disability" means any physical
or mental impairment of Executive, whether total or
partial, which prevents Executive, in the reasonable
judgment of MWS's Board of Directors, from carrying
out or performing the major duties of his employment.
Upon the request of MWS's Board of Directors,
Executive shall submit to examinations by a physician
or physicians, to assist MWS's Board of Directors in
determining whether Executive has been disabled for
purposes of this Agreement. The decision as to
Executive's disability, if made in good faith by
MWS's Board of Directors, shall be conclusive and
binding upon Executive.
5.1 (b) Executive may terminate employment with MWS upon at least
ninety (90) days' prior written notice to MWS after the end of
the first year term of this Agreement.
5.1 (c) Any other provision of this Agreement notwithstanding, MWS may
terminate Executive's employment without notice if the
termination is based on a violation of this Agreement, or on
fraud, embezzlement, securities law violation, material
violation or willful criminal violation of environmental laws
and regulations or an applicable agreement with a federal or
state environmental agency (including without limitation any
Compliance Agreement or other agreement/authorization with the
MPCA or WDNR), sexual harassment of fellow employees, or if
Executive takes employment in addition to that of MWS, in
competition with MWS, or if Executive is guilty of an act or
acts of insubordination, misconduct, dishonesty, or disloyalty
against MWS, or gross misconduct involving moral turpitude as
determined in the sole discretion of MWS.
5.2 Employment will be deemed terminated upon the death of the
Executive.
ARTICLE 6
PROTECTION OF TRADE SECRETS AND
CONFIDENTIAL BUSINESS DATA
6.1 In the performance of his duties, Executive may become aware of,
either directly or indirectly, information of the following types regarding or
belonging to MWS which constitutes trade secrets or confidential business data:
(a) Patterns, programs, devices, methods, techniques or
processes.
(b) Products or components.
(c) Merchandising aids, marketing or strategic planning
information.
(d) Pricing or price structure, customers, potential
customers.
(e) Research and development.
6.2 The foregoing list of trade secrets and confidential business data
is not intended to be
<PAGE>
exclusive. From time to time during the term of his employment, Executive may
gain and has gained access to other information concerning MWS's business of
commercial value to MWS, which information shall be included in the definitions
under Section 6.1, above, even though not specifically listed. MWS believes that
such information constitutes trade secret information because MWS derives
economic value from the fact that such information is not generally known or
readily ascertainable by proper means by MWS's competitors or potential
competitors who may obtain economic value by its disclosure or use. The
provisions of this Article 6 apply to any form in which the subject information,
secrets or data may appear, whether written, oral or any other form of recording
or storage.
6.3 Executive covenants and agrees that both during and after his
employment with MWS, the foregoing confidential business data and information
and trade secrets will not be communicated or disclosed by him (directly or
indirectly) to any person or entity, including but not limited to, the press,
other professionals, corporations, partnerships or the public. Executive further
agrees to never use such information for Executive's benefit or the benefit of
any other person, firm, corporation or entity, directly or indirectly. Executive
agrees to take reasonable security measures to prevent accidental disclosure and
industrial espionage. Executive further covenants and agrees that he will
faithfully abide by all rules and regulations established by MWS for insuring
the confidentiality of the foregoing information and data, including, but not
limited to, rules and regulations:
(a) Limiting access to authorized personnel;
(b) Limiting copying of any writing or recording;
(c) Requiring storage of documents in secure facilities
provided by MWS and limiting safe or vault lock
combinations or keys to authorized personnel; and
(d) Checkout and return or other procedures or
regulations promulgated by MWS from time to time.
The obligations of this Section 6.3 shall survive Executive's employment with
MWS and continue until the information at issue is no longer confidential and
becomes generally publicly known, other than as a direct or indirect result of
the breach of this Agreement by Executive or a breach of a confidentiality
obligation owed to MWS by any other person or entity.
6.4 Upon termination of his employment with MWS, whether voluntary or
involuntary, Executive will return to MWS any and all written or other recorded
form of the foregoing information and data, and will take with him, upon leaving
MWS' place of business, no documents, writings, recordings or reproduction in
any form which may have been entrusted to him during the course of his
employment or to which he had access or possession.
ARTICLE 7
INVENTIONS OR DISCOVERIES
7.1 Executive acknowledges that inventions or other discoveries may be
developed, conceived or otherwise made by Executive during employment with MWS.
Executive agrees that all such inventions or other discoveries shall be the
exclusive property of MWS. With respect to all such
<PAGE>
inventions or other discoveries, Executive agrees to:
(a) Keep accurate, complete and timely records, which
shall be MWS's property and be retained on MWS's
premises; and
(b) Promptly and fully disclose and describe all such
inventions or other discoveries to MWS; and
(c) Assign (and Executive does hereby assign) to MWS all
of Executive's rights to these inventions or other
discoveries, and to application for letters patent or
copyrights in all countries and to letters patent or
copyrights granted upon these inventions or other
discoveries in all countries; and
(d) To do such other acts as may be necessary in the
opinion of MWS to preserve property rights to these
inventions or other discoveries against forfeiture,
abandonment or loss and to obtain and maintain
letters patent or copyrights and to vest the entire
right and title thereto exclusively in MWS.
7.2 The obligations of this Article 7 shall continue beyond the
termination of Executive's employment with MWS with respect to inventions or
other discoveries conceived or otherwise developed during Executive's employment
and shall be binding upon assigns, executors, administrators and other legal
representatives.
7.3 MWS hereby notifies Executive, and Executive understands and
agrees, that the foregoing terms of this Article 7 do not apply to any invention
or other discovery for which no equipment, supplies, facility, or trade secret
information of MWS was used and that were developed entirely on Executive's own
time, and (a) that does not relate (1) directly to MWS's business or (2) to
MWS's actual or demonstrably anticipated business research or development, or
(b) that does not result from any work performed by Executive for MWS.
ARTICLE 8
COVENANT NOT TO COMPETE
8.1 In view of the compensation and benefits set forth herein, as well
as Executive's equity participation in MWS, Executive agrees that at no time
during the term of this Agreement and Executive's employment with MWS and for a
period of one (1) year following the termination of Executive's employment
(whether voluntary or involuntary) (the "Noncompete Period"), will Executive,
directly or indirectly, without the prior written consent of the MWS Board of
Directors, (a) solicit or do competitive business with any person or entity that
is or was a customer or vendor of MWS within the twelve (12) months prior to the
date of termination, or (b) engage within the United States or Canada in any
similar or related business in competition with MWS or have any direct or
indirect interest, whether as a proprietor, partner, employee, shareholder,
principal, agent, consultant, director, officer or in any other capacity or
manner whatsoever, in any enterprise that shall so engage. Executive recognizes
and agrees that the geographic scope of this restriction is reasonable because
MWS's business will be
<PAGE>
conducted on a national and international scale and is not limited to a
particular geographic area within the United States or Canada.
8.2 Executive shall not, during the Noncompete Period, directly or
indirectly, hire for employment or solicit, induce or otherwise attempt to cause
any individual who is an employee of MWS during the term of his or her
employment to leave the employ of MWS for any reason whatsoever; provided,
however, that this provision shall not apply to any such employee whose
employment or relationship with MWS has been terminated for at least six (6)
months prior to such hiring or other restricted activity. The term "employment"
for purposes of this paragraph means an arrangement for services as a full-time
or part-time employee, independent contractor, agent or otherwise.
ARTICLE 9
INJUNCTIVE RELIEF
9.1 The parties acknowledge that MWS will suffer irreparable harm if
Executive breaches this Agreement, either during or after its term. Accordingly,
MWS shall be entitled, in addition to any other rights and remedy it may have,
at law or equity, to any injunction, without the posting of a bond or other
security, enjoining or restraining Executive from any violation of this
Agreement, and Executive hereby consents to MWS's right to the issuance of such
injunction. In any proceeding by MWS to enforce any provision of this Agreement,
MWS shall, in addition to any injunctive relief to which it may be entitled, be
awarded damages to be determined by a court of competent jurisdiction as well as
all court costs, disbursements, expenses and attorneys' fees incurred by MWS.
9.2 In the event Executive violates the terms of Article 8, the
Noncompete Period shall be extended for one (1) year from and after the later
of:
(a) The date which Executive ceases any violation; or
(b) The date on which a court issues an order or judgment
enforcing the terms of the covenant.
9.3 In the event a court of competent jurisdiction determines that a
provision of Article 8 above is unreasonable, it may limit such provision to the
extent it deems reasonable, without declaring the provision invalid in its
entirety. This provision shall not be construed as an admission by MWS, but is
only included to provide MWS with the maximum possible protection consistent
with the right of Executive to earn a livelihood subsequent to the termination
of his employment.
ARTICLE 10
MISCELLANEOUS
10.1 Governing Law. This Agreement shall be governed according to the
laws of the State of Minnesota.
10.2 Successors. This Agreement is personal to Executive and Executive
may not assign or transfer any part of his rights or duties hereunder, or any
compensation due to him hereunder, to any other person or entity. This Agreement
may be assigned by MWS.
<PAGE>
10.3 Waiver. The waiver by MWS of the breach or nonperformance of any
provision of this Agreement by Executive will not operate or be construed as a
waiver of any future breach or nonperformance under any such provision of this
Agreement or any similar agreement with any other employee.
10.4 Modification. This Agreement supersedes and replaces any and all
prior and written understandings, if any, between the parties relating to the
subject matter of this Agreement, including any previous employment contract
which is hereby revoked. The parties agree that this Agreement is the entire
understanding and agreement between the parties.
IN WITNESS WHEREOF the following parties have executed the above
Employment Agreement as of the day and year first above written.
MERCURY WASTE SOLUTIONS, INC.
By /s/ Brad J. Buscher
--------------------------------------
Its Chairman
----------------------------------
/s/ Todd J. Anderson
------------------------------------------
Todd J. Anderson
EXHIBIT 10.16
MERCURY WASTE SOLUTIONS INC.
INCENTIVE STOCK OPTION AGREEMENT
This AGREEMENT is dated as of November 3, 1997, by and between MERCURY
WASTE SOLUTIONS, INC., a Minnesota corporation (the "Company") and TODD J.
ANDERSON ("Optionee").
WHEREAS, pursuant to the Stock Option Plan of the Company (the "Plan"),
the Board of Directors of the Company has authorized granting to Optionee an
Incentive Stock Option to purchase certain shares of common stock of the Company
reserved for issuance pursuant to the Plan, such option to be for the term and
upon the terms and conditions hereinafter stated.
NOW, THEREFORE , it is hereby agreed:
1. GRANT OF OPTION. Pursuant to said action of the Board of Directors,
the Company hereby grants to Optionee the option to purchase, upon and subject
to the terms and conditions of the Plan, the terms and conditions of which are
incorporated in full herein by reference, twenty-five thousand (25,000) shares
of common stock (the "Option Stock") of the Company at the option price of $4
1/4 per share (the "Option"). The Company intends that the Option shall be an
Incentive Stock OptiON governed by the provisions of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"). The Optionee (or any other person
claiming under the Optionee) shall not have any of the rights of a shareholder
with respect to the Option Stock until the due exercise of the Option and
payment of the option price in accordance with this Agreement.
2. TERMS AND CONDITIONS.
a. Term of Option; Exercise of Option. The Option shall
terminate ten (10) years after the date hereof, subject to the
provisions contained herein. The Optionee may exercise the Option for
up to twenty percent (20%) of the Option Stock each year commencing one
year from the date hereof, with additional installments of twenty
percent (20%) exercisable on each of the second, third, fourth and
fifth year anniversary dates, in accordance with the Incentive Stock
Option Vesting Schedule attached hereto as Exhibit A. Such installments
shall be cumulative and, if in any year the total number of shares of
Option Stock which may be purchased in such year is not purchased, the
shares not purchased may be purchased in any subsequent year during the
term of the Option.
b. Procedure for Exercise. Subject to the foregoing, the
Option may be exercised in whole or in part from time to time by
serving written notice of exercise on the Company at its principal
office, accompanied by the payment of the option price in cash or check
payable to the Company. As soon as is practicable after such notice is
received, Optionee shall be recorded on the books of the Company as the
owner of the Option Stock purchased and the Company shall deliver to
Optionee a stock certificate evidencing such ownership.
c. Death or Disability of Optionee. If the Optionee dies or
becomes Disabled (as hereinafter defined) and the Optionee has been at
the time of his death or Disability in continuous employment by the
Company or a parent or subsidiary corporation, the Option shall be
exercisable in full on the date of Optionee's death or Disability
without regard to the
<PAGE>
installment percentages provided in Section 2(a) above. The term
"Disability" shall mean any physical or mental impairment of Optionee,
whether total or partial, which prevents Optionee, in the reasonable
judgment of the Company, from carrying out or performing the major
duties of his employment with the Company. The determination of whether
an Optionee has a Disability within the meaning of this Section 2(c)
shall be made in writing by the Board of Directors in its sole
discretion.
d. Termination of Employment for Cause. If Optionee's
employment by the Company or a parent or subsidiary corporation is
terminated for cause, as is hereafter defined ("Cause"), the Option,
regardless of the extent vested, shall be canceled immediately.
Termination for Cause shall include termination for violation of any
employment agreement, or on fraud, embezzlement, securities law
violation, material violation or willful criminal violation of
environmental laws and regulations or an applicable agreement with a
federal or state environmental agency, sexual harassment of fellow
employees, or if Optionee is guilty of an act or acts of
insubordination, misconduct, dishonesty, or disloyalty against the
Company, or gross misconduct involving moral turpitude. The
determination of the Board of Directors with respect thereto shall be
final and conclusive.
e. Termination of Employment other than for Cause. If
Optionee's employment shall terminate for any reason, voluntary or
involuntary, other than for Cause, the Optionee may at any time within
three months after such termination exercise the Option to the extent
the Option was exercisable by the Optionee on the date of the
termination of his employment.
f. No Right to Continued Status as an Employee. This Option
shall not confer upon Optionee any right with respect to continued
status as en employee of the Company, nor shall it interfere in any way
with the right of the Company to terminate his status as an employee at
any time.
3. MODIFICATION AND TERMINATION BY BOARD OF DIRECTORS. The rights of
Optionee are subject to modification and termination in certain events as
provided in the Plan.
4. WITHHOLDING. Company shall be entitled to withhold from amounts due
to Optionee amounts required to be withheld for income taxes, FICA (social
security) taxes or other purposes as required under any federal, state or local
law. If Company fails to withhold in the full amount or at the time required by
law, Company may make up the deficiency by withholding from later amounts due.
If such amounts withheld are at any time for any reason insufficient to meet
Company's withholding obligations, Company may (i) withhold and deduct the
deficiency from any amounts due to Optionee for any reason, and (ii) require
that Optionee pay the amount of such withholding deficiency to Company (and
Optionee shall make such payment immediately upon demand).
5. OPTIONEE BOUND BY PLAN. The Optionee hereby acknowledges receipt of
a copy of the Plan and agrees to be bound by all the terms and provisions
thereof.
6. NOTICES. Any notice hereunder to the Company shall be addressed to
it at its principal office; and any notice hereunder to the Optionee shall be
addressed to him at the address set forth below; subject to the right of either
party to designate at any time hereunder in writing some other address.
7. ENTIRE AGREEMENT. This Agreement, together with the provisions of
the Plan, sets forth
<PAGE>
the entire agreement between the parties with respect to the subject matter
hereof, and supersedes and revokes all prior negotiations, discussions,
representations, understandings and agreements between the parties with respect
to such subject matter.
8. AMENDMENT; WAIVER. This Agreement may be amended only in a written
instrument signed by all parties hereto and setting forth the nature of such
amendment and the specific intent to so amend. Rights under this Agreement may
be waived only in a written instrument signed by the waiving party and setting
forth the specific right being waived and the specific intent to so waive. A
waiver of any particular right in any particular instance shall not be deemed a
waiver of any other right or a waiver of such right in any other instance.
9. BINDING NATURE. This Agreement shall be binding upon and shall inure
to the benefit of the parties hereto, and their respective legal
representatives, heirs, successors and permitted assigns.
10. HEADINGS. Headings in this Agreement are for convenience of
reference only, and shall not alter the interpretation, meaning or effect of any
provision of this Agreement.
11. GOVERNING LAW. The validity, enforceability, interpretation and
effect of this Agreement shall be governed in all respects by the laws of the
State of Minnesota.
12. COUNTERPARTS. This Agreement may be executed in two counterparts,
each of which shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
MERCURY WASTE SOLUTIONS, INC
By: /s/ Brad J. Buscher
--------------------------------------
Its: Chairman
----------------------------------
OPTIONEE:
/s/ Todd J. Anderson
-----------------------------------------
Todd J. Anderson
Address and Telephone Number of Optionee:
8501 - 32nd Place North
Crystal, Minnesota 55427
Phone: (612) 512-0221
<PAGE>
EXHIBIT A
INCENTIVE STOCK OPTION VESTING SCHEDULE
Name of Employee: Todd J. Anderson
Social Security Number ###-##-####
Date of Commencement of Employment: November 3, 1997
Number of Shares Subject to Option: 25,000
Date of Grant: November 3, 1997
OPTION VESTING SCHEDULE
NO. OF SHARES
DATE EXERCISABLE
---- -----------
November 3, 1998 5,000
November 3, 1999 5,000
November 3, 2000 5,000
November 3, 2001 5,000
November 3, 2002 5,000
The above vesting schedule assumes continuous employment. Reference is
made to the Plan and the Agreement for your rights to exercise your Option in
the event of termination of employment during lifetime or upon death or
disability. The above vesting schedule is in all respects subject to the terms
of the Plan.
EXHIBIT 11
MERCURY WASTE SOLUTIONS, INC.
COMPUTATION OF LOSS PER COMMON
AND COMMON EQUIVALENT SHARE
Twelve Twelve
Months Months
Ended Ended
December 31, December 31,
1997 1996
------------- -------------
Computation of weighted average number of common
shares outstanding and common stock equivalent
shares:
Common shares outstanding at the beginning of
the period 2,249,097 1,000,000
Weighted average number of shares issued during
the period 978,233 333,027
Common equivalent shares attributed to stock
options and warrant granted (A) 34,415 206,216
Common stock issued (B) 236,767 916,070
---------- ----------
Weighted average number of common and common
equivalent shares 3,498,512 2,455,313
========== ==========
Net Income (loss) $(1,173,089) $ (985,446)
=========== ==========
Income (loss) per common and equivalent shares $ (.34) $ (0.40)
=========== ==========
(A) All stock options and warrants are anti-dilutive, however, pursuant to
the Securities and Exchange Commission Staff Accounting Bulletin No. 83
(SAB 83), stock options and warrants granted with the exercise price
below the assumed initial offering price during the twelve-month
period preceding the date of the initial filing of the Registration
Statement have been included in the calculation of common stock
equivalent shares as if they were outstanding for all periods
presented, using the treasury stock method.
(B) Pursuant to the Securities and Exchange Commission SAB 83, all stock
issued at a price below the assumed initial offering price issued
during the twelve-month period preceding the date of the initial filing
of the Registration Statement has been included in the calculation of
common stock as if it was outstanding for all periods presented.
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (Commission file No. 333-27199) of our report dated
February 13, 1998, with respect to the consolidated financial statements of
Mercury Waste Solutions, Inc. and Subsidiary, appearing in the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1997.
McGLADREY & PULLEN, LLP
Minneapolis, Minnesota
March 31, 1998
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