U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________TO__________
Commission File Number 0-22533
MERCURY WASTE SOLUTIONS, INC.
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(Exact name of small business issuer as specified in its charter)
MINNESOTA 41-1827776
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
302 North Riverfront Drive, Suite 100A
MANKATO, MINNESOTA 56001
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(Address of principal executive offices)
(507) 345-0522
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(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 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 ___
The number of shares outstanding of each of the Issuer's Common Stock, $.01 Par
Value, as of March 31, 1999 was 3,480,097.
Transitional small business disclosure format:
Yes ___ No _X_
<PAGE>
MERCURY WASTE SOLUTIONS, INC.
FORM 10-QSB
INDEX
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of March 31, 1999 and December 31, 1998 3
Consolidated Statements of Operations for the three months ended March 31, 1999
and 1998 4
Consolidated Statements of Cash Flows for the three months ended March 31, 1999
and 1998 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 7
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 11
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MERCURY WASTE SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
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<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 113,489 $ 75,015
Accounts receivable, less allowance for doubtful accounts of $40,000
at March 31, 1999 and $55,000 at December 31, 1998 1,149,294 1,309,757
Insurance claim receivable 434,000 150,000
Other current assets 312,351 265,138
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TOTAL CURRENT ASSETS 2,009,134 1,799,910
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Property and Equipment, at cost
Leasehold improvements 434,949 420,160
Furniture, fixtures, and equipment 390,696 370,279
Plant equipment 1,951,029 1,915,910
Construction in progress 75,161 49,788
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TOTAL PROPERTY AND EQUIPMENT 2,851,835 2,756,137
Less accumulated depreciation 725,267 610,700
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NET PROPERTY AND EQUIPMENT 2,126,568 2,145,437
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Other Assets
Cash restricted for closure 93,402 91,278
Intangible assets, net 2,606,911 2,711,897
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TOTAL OTHER ASSETS 2,700,313 2,803,175
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TOTAL ASSETS $ 6,836,015 $ 6,748,522
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Line of credit $ 490,000 $ 220,000
Current portion of long-term debt 499,000 462,393
Accounts payable 428,791 395,714
Accrued expenses 344,487 337,342
Deferred revenue 112,977 107,037
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TOTAL CURRENT LIABILITIES 1,875,255 1,522,486
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Long-Term Liabilities
Long-term debt, net of current portion 958,801 1,072,571
Closure fund 30,300 30,300
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TOTAL LONG-TERM LIABILITIES 989,101 1,102,871
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Shareholders' Equity
Common stock, $0.01 par value; shares issued and outstanding of
3,480,097 at March 31, 1999 and December 31, 1998 34,801 34,801
Additional paid-in capital 4,794,144 4,792,394
Accumulated deficit (857,286) (704,030)
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TOTAL SHAREHOLDERS' EQUITY 3,971,659 4,123,165
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 6,836,015 $ 6,748,522
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
MERCURY WASTE SOLUTIONS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31, 1999 MARCH 31, 1998
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<S> <C> <C>
Revenues $ 1,280,536 $ 1,345,658
Cost of Revenues 934,708 669,895
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Gross Profit 345,828 675,763
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Operating Expenses
Sales & Marketing 302,911 225,343
General & Administrative 470,753 383,929
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773,664 609,272
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Operating Income (Loss) (427,836) 66,491
Business interruption claim recovery, net of direct expenses of $105,060 and $5,292
in 1999 and 1998, respectively (Note 2) 328,940 121,034
Interest Income 2,124 7,655
Interest Expense (56,484) (8,518)
----------- -----------
Net Income (Loss) before Income Taxes (153,256) 186,662
Income tax expense (benefit) 0 0
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Net Income (Loss) $ (153,256) $ 186,662
=========== ===========
Basic and diluted income (loss) per share $ (0.04) $ 0.05
Weighted average number of common and
common equivalent shares outstanding:
Basic 3,480,097 3,479,919
Diluted 3,480,097 3,627,028
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
MERCURY WASTE SOLUTIONS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31, 1999 MARCH 31, 1998
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<S> <C> <C>
Cash Flows From Operating Activities
Net Income(Loss) $(153,256) $ 186,662
Adjustments to reconcile net income (loss) to net cash used in (provided by) operating activities:
Depreciation 114,567 63,942
Amortization 114,978 53,568
Non cash compensation 1,750 1,753
Changes in assets and liabilities:
Receivables (123,537) (321,887)
Other current assets 4,672 (81,322)
Accounts payable 33,077 47,487
Accrued expenses 7,145 (82,103)
Deferred revenue 5,940 31,877
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NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 5,336 (100,023)
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Cash Flows from Investing Activities
Purchase of property and equipment and other assets (105,690) (363,793)
Increase in restricted cash (2,124) (28,620)
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NET CASH USED IN INVESTING ACTIVITIES (107,814) (392,413)
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Cash Flows From Financing Activities
Payments on long-term debt (129,048) (25,915)
Net borrowings on the line of credit 270,000 0
Net proceeds from exercise of stock options 0 8,000
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NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 140,952 (17,915)
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INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS 38,474 (510,351)
Cash and cash equivalents
Beginning 75,015 779,945
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Ending $ 113,489 $ 269,594
========= =========
Supplemental Disclosures of Cash Flow Information
Cash payments for interest $ 43,850 $ 8,518
========= =========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
MERCURY WASTE SOLUTIONS, INC.
Notes to Consolidated Financial Statements
March 31, 1999
Note 1. - Basis of Presentation
The accompanying unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and the instructions to Form 10-QSB. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three month period ended March 31, 1999 are not necessarily
indicative of the results that may be expected for the year ended December 31,
1999, or any other period. For further information, refer to the audited
financial statements and footnotes thereto for the year ended December 31, 1998
contained in the Company's Annual Report on Form 10-KSB.
Note 2. Insurance Recovery
The Company settled its 1998 business interruption insurance claim
related to an incident at its Union Grove Facility for approximately $684,000.
Of this amount, $250,000 was recorded in fiscal 1998. As a result, for the three
months ended March 31,1999, the Company recorded a net recovery on this claim of
$328,940, which consisted of gross proceeds received from the insurance company
of $434,000, net of direct expenses.
The net recovery of $121,034 recorded for the three months ended
March 31, 1998 represents net proceeds received from the insurance company
related to a 1997 business interruption insurance claim.
<PAGE>
ITEM 2. 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.
RESULTS OF OPERATIONS
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,
Wisconsin, a facility for recycling and storing fluorescent and other
mercury-containing lamps in Roseville, Minnesota and Union Grove, Wisconsin and
mercury waste storage and collection facilities in Kenosha, Wisconsin,
Indianapolis, Indiana, Atlanta, Georgia and Albany, New York.
REVENUES. Total revenues were $1,280,536 for the three months ended
March 31, 1999 compared to $1,345,658 for the three months ended March 31, 1998,
a decrease of $65,122 or 5%.
Mercury retorting revenues, which exclude any recovery from the
business interruption insurance claims discussed below, were $620,991 for the
three months ended March 31, 1999 compared to $684,907 for the three months
ended March 31, 1998, a decrease of $63,916 or 9%. The Company believes the
decrease in retort revenue is primarily due to the continuing impact caused by
the October 1998 processing incident at the Union Grove Facility (see discussion
below). The Company believes this incident has caused certain customers to delay
shipments pending the completion of customer re-audits of the Union Grove
Facility. The Company believes the re-audits are nearing completion. In
addition, retort revenues can vary significantly from period to period due to
the extent or lack of one-time large retort projects. For the three months ended
March 31, 1999, the Company had no large retort projects as compared to
approximately $100,000 for the three months ended March 31, 1998.
Lamp Recycling revenues were $659,545 for the three months ended
March 31, 1999 compared to $660,751 for the three months ended March 31, 1998.
Strong revenue growth in the Southeast markets has been offset by decreases in
the Midwest markets.
COST OF REVENUES. Cost of 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 27% and 50% for the
three months ended March 31, 1999 and 1998, respectively.
Mercury retorting gross profit percentages were 7% and 60% for the
three months ended March 31, 1999 and 1998, respectively. The decrease in
mercury retorting gross profit margin is due to the large fixed cost structure
of the Union Grove Facility, which significantly increased from 1998 to 1999. In
1998, the Company expanded the Union Grove Facility and added processing and
storage capability via the Mercury Refining Company, Inc. ("MERECO") acquisition
to support larger anticipated revenues than those realized in the 1999 period.
Lamp recycling gross profit percentages were 46% and 39% for the three months
ended March 31, 1999 and 1998, respectively. The improved lamp recycling gross
profit margin in 1999 is due primarily to a continued focus on higher margin
products and services.
SALES AND MARKETING. Sales and marketing expense was $302,911 for
the three months ended March 31, 1999 compared to $225,343 for the three months
ended March 31, 1998, an increase of $77,568 or 34%. As a percent of revenues,
sales and marketing expense was 24% and 17% for the three months ended March 31,
1999 and 1998, respectively. The increase in expense was due primarily to sales
staff acquired through business acquisitions and an increase in marketing and
advertising related to the Company's lamp recycling products and services.
GENERAL AND ADMINISTRATIVE. General and administrative expense was
$470,753 for the three months ended March 31, 1999 compared to $383,929 for the
three months ended March 31, 1998, an increase of $86,824 or 23%. As a percent
of revenues, general and administrative expense was 37% and
<PAGE>
29% for the three months ended March 31, 1999 and 1998, respectively. The
increase in administrative expense in 1999 was principally due to increased
amortization resulting from the MERECO acquisition.
BUSINESS INTERRUPTIONS. In October 1998, a processing incident at
the Union Grove Facility caused a business interruption for a significant part
of the 1998 fourth quarter. The Company experienced a loss of revenue due to
this incident and as a result, the Company filed a business interruption
insurance claim in February 1999. The claim, which was in excess of $750,000,
seeks recovery of expenses incurred to repair the equipment damage and clean up
the facility as well as for lost revenue during the interruption period. The
Company has settled this claim for approximately $684,000. Of this amount,
$250,000 was recorded in 1998. As a result, for the three months ended March
31,1999, the Company recorded a net recovery on this claim of $328,940, which
consisted of gross proceeds received from the insurance company of $434,000, net
of direct expenses. The net recovery of $121,034 recorded for the three months
ended March 31, 1998 represents net proceeds received from the insurance company
related to a 1997 business interruption insurance claim.
In January 1999, the U. S. Occupational Safety and Health
Administration ("OSHA") cited the Company for alleged violations of various OSHA
standards at its Union Grove Facility with proposed penalties that were not
material. The Company has contested these violations and is currently in
settlement negotiations with OSHA. In February 1999, the Company received a
Notice of Violation from the Wisconsin Department of Natural Resources ("WDNR")
alleging violation of certain state hazardous waste regulations relating to its
Union Grove Facility. The WDNR's letter identified several alleged violations
and informed the Company it has the authority to impose monetary penalties. The
Company has responded to these violations and is working with the WDNR towards
resolution. It is not known at this time if the Notice of Violation will result
in a legal complaint, monetary penalty, or any other future regulatory
ramification that would have a material adverse effect on the Company's
business. While the Company believes it has taken all necessary steps to address
these regulatory concerns, the October 1998 interruption and related regulatory
issues have and may continue to have a short-term negative impact on revenue
growth and profitability.
INTEREST INCOME AND EXPENSE. Interest income was $2,124 and $7,655
for the three months ended March 31, 1999 and 1998, respectively. The decrease
in 1999 was due to the decrease in cash and cash equivalents used to fund the
Company's expansion in 1998. Interest expense was $56,484 for the three months
ended March 31, 1999 compared to $8,518 for the three months ended March 31,
1998. The 1999 increase is due to the debt incurred in connection with the
MERECO acquisition and increased line of credit borrowings.
INCOME TAXES. There was no income tax expense (benefit) recorded in
1999 or in 1998. At March 31, 1999, the Company recorded a valuation allowance
of approximately $400,000 on its net deferred tax assets due to the uncertainty
of 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, 1998, the Company had net operating loss carryforwards of
approximately $610,000 that expire in 2012.
NET INCOME (LOSS). Resulting from the factors discussed above, the
Company recorded a net loss of $153,256 for the three months ended March 31,
1999 compared to net income of $186,662 for the three months ended March 31,
1998. Basic and diluted loss per share was $0.04 for the three months ended
March 31, 1999 compared to basic and diluted income per share of $0.05 for the
three months ended March 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash of $113,489 and working capital of $133,879 at
March 31, 1999. Net cash provided by operating activities was $5,336 for the
three months ended March 31, 1999, primarily resulting form depreciation and
amortization of $229,545, offset by the net loss of $153,256 and an increase in
receivables of $123,537 due to the insurance claim.
<PAGE>
Cash flows used in investing activities were $107,814 for the three
months ended March 31, 1999, consisting primarily of payments for capital
expenditures related to the Union Grove Facility.
Cash flows provided by financing activities were $140,952 for the
three months ended March 31, 1999, consisting of borrowings of $270,000 under
the Company's line of credit offset by payments on long-term debt of $129,048.
In conjunction with the acquisition of MERECO in May 1998, the
Company replaced its $600,000 revolving credit promissory note with Brad J.
Buscher, its Chairman of the Board and Chief Executive Officer, with a
$2,000,000 loan borrowed from Bankers American Capital Corporation ("BACC"), a
corporation wholly owned by Brad J. Buscher. The $2,000,000 loan consists of a
$1,200,000 term loan used to fund the MERECO acquisition and an $800,000
revolving credit loan to be used for working capital purposes. The term loan has
a two-year term requiring quarterly payments, commencing on September 1, 1998,
of $60,000 plus interest with the balance due in May 2000 and the revolving
credit loan has a one-year term. Borrowings under the loans bear interest at 6%
over the prime rate and are secured by all Company assets. The Company is in the
process of negotiating a renewal with BACC on the revolving line of credit. At
March 31,1999, line of credit borrowings totaled $490,000.
The Company's capital requirements will be significant for 1999 to
fund operations, planned capital expenditures and potential acquisitions. The
Company anticipates that its availability under its revolving credit loan, the
proceeds from settlement of its outstanding insurance claim and cash generated
by its operations will be sufficient to fund its working capital needs and
capital expenditures for at least 12 months, excluding any additional business
acquisitions. In addition to capital needed for any potential 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. In addition, if anticipated revenue increases do not
materialize in the short-term, the Company plans to take steps to reduce its
overhead to be in line with its actual revenues realized.
YEAR 2000 COMPLIANCE
The Company has completed several tasks related to year 2000
compliance and is on schedule to complete the remaining tasks in the next six
months. In June 1998, the Company purchased, from a worldwide supplier and
developer of information systems, an enterprise-wide information system with
written assurance from the developer that the system will correctly function
across the year 2000. The Company is also in the process of upgrading its plant
production software to become year 2000 compliant. With respect to non-IT
applications, the Company is investigating issues related to the operation of
each of its facilities, such as utilities and security systems. Each facility is
being evaluated individually and upgrades to hardware and software are being
addressed as they are encountered. The Company considers risks in this area to
be minimal. Through March 31, 1999, the Company has spent approximately $70,000
in upgrading its hardware and software systems and plans to spend another
$30,000 in the next six months.
The Company is in the process of evaluating the extent to which the
Company is vulnerable to the failure of third parties to solve their own year
2000 compliance issues. Because of the diversity of sources available for the
supplies and services the Company needs to conduct its operations, the Company
believes that the year 2000 issue will not have a material adverse effect on the
Company's ability to provide its recycling services. Although the Company is not
economically dependent on any one customer, failure of a number of larger
customers to become year 2000 compliant could have an adverse effect on the
Company's financial position.
To supplement the above initiatives, the Company intends to prepare
a contingency plan so that the Company's critical business processes can be
expected to continue to function on January 1, 2000 and
<PAGE>
beyond. The Company's contingency plan will be structured to address the
continuity of its internal recycling processes and information systems as well
as overall business operating risks, including potential external risks with
vendors or customers. The Company anticipates the contingency plan to be
substantially completed by September 1999.
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 ability of the
Company to implement its marketing strategies and secure new customers,
successfully operate its Union Grove Facility without interruption, receive
favorable resolutions in the Company's present regulatory matters with OSHA and
the WDNR, secure storage facilities at the Union Grove Facility and other parts
of the country, manage anticipated growth, complete its year 2000 compliance
initiatives 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.)
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits
27 -- Financial Data Schedule
(B) Reports on Form 8-K - no reports of Form 8-K were filed during
the quarter ended March 31,1999.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Mercury Waste Solutions, Inc.
-----------------------------------------
(registrant)
Dated: May 17, 1999 /s/ BRAD J. BUSCHER
-----------------------------------------
Brad J. Buscher
Chairman of the Board and Chief Executive
Officer
Dated: May 17, 1999 /s/ TODD J. ANDERSON
-----------------------------------------
Todd J. Anderson
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 113,489
<SECURITIES> 0
<RECEIVABLES> 1,189,294
<ALLOWANCES> 40,000
<INVENTORY> 0
<CURRENT-ASSETS> 2,009,134
<PP&E> 2,851,835
<DEPRECIATION> 725,267
<TOTAL-ASSETS> 6,836,015
<CURRENT-LIABILITIES> 1,875,255
<BONDS> 0
0
0
<COMMON> 34,801
<OTHER-SE> 3,936,858
<TOTAL-LIABILITY-AND-EQUITY> 6,836,015
<SALES> 1,280,536
<TOTAL-REVENUES> 1,280,536
<CGS> 0
<TOTAL-COSTS> 934,708
<OTHER-EXPENSES> 773,664
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 56,484
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (153,256)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (153,256)
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> (0.04)
</TABLE>
