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TERRACYCLE (A)
GETTING THE CYCLE GOING?
Original written by professors Hana Milanov and Cristina Cruz at IE Business School.
Original version, 18 February 2010. Last revised, 30 May de 2011.
Published by IE Business Publishing. María de Molina 13, 28006 – Madrid, Spain.
©2010 IE. Total or partial publication of this document without the express, written consent of IE is prohibited.

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“We made it to the last round!” thought Tom Szaky, founder of Terracycle, looking incredulous with
his entrée still sitting half eaten in front of him. Szaky and his partner Tom Beyer, were attending
the formal dinner for a business plan competition organized by the Carrot Capital venture capital
firm in New York City. Dressed in casual college clothes, while all the other business plan

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contestants wore ties and black suits, Szaky was already dreaming about the ways in which they
could spend half a million dollars… And then their name was called! Not half a million, they won the
whole thing. One million dollars! They could afford an office with windows! They could even have a
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real manufacturing plant!

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The timing of this event could not have been better. It was March 2003 and Terracycle, founded
two years ago with the motto ‘better, greener, cheaper’, had
only $500 in the bank, six unpaid employees, a few
prospective local customers, a trash-equipped office, and a
desperate need for cash. Fast. The entrepreneurs almost
gave up on their business a year ago, and the memories of
that decision still hurt. Now they had even more at stake.
Although the company’s business plan had won 7
competitions by then, the income was ‘peanuts’ if Terracycle
was serious about scaling up and becoming the kind
company that even their parents might take seriously. The
$20,000 from friends and (somewhat hesitantly) family served
as seed capital, and the extra $40,000 from the business plan
competitions had its purpose, of course, but Szaky felt that the
patience of the company’s volunteers was wearing thin. They
needed to start paying people for their work and get some real Szaky (left), David Geliebter (righ
Princeton President Shirley M. Tilghma
employees . They needed a factory. They needed scale. (middle).
photo: Evelyn Tu
With all these worries on his shoulders, Szaky was thrilled to
hear that Terracycle had beaten 750 other projects in the Carrot Capital Education Foundation
Business Plan Challenge. And he couldn’t wait to see the entire team on Monday when, as part of
their victory, Terracycle would be interviewed by CNBC and ring the NASDAQ opening bell!

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But then David Geliebter, Carrot Capital’s managing partner dampened his spirits. Taking Szaky
and Beyer aside, he first congratulated them then casually added: “We love your business
idea...We just need to tone down the
product´s environmental identity and of
course we’ll help you bring in “real
professionals” to make Terracycle a
great success. Let’s meet tomorrow to
discuss the best way to do it.

That revealed the true nature of their

“win”. In fact, they were far from having
a million in the bank. While the contest’s
judges were excited about the business
idea and Szaky and Beyer’s “sizzle”, the
Opening the NASDAQ, VCs wanted a closer inspection of the
company's plans before making any real
offers, let alone deals. Indeed, many questions about the company’s business model or use of

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proceeds still needed to be resolved.

Just 22 years old and with no real experience, Szaky couldn’t object to bringing some ‘grey hair’ on
board; but he could not hand over the company to outsiders. His team had made great efforts so

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far, and most of them were unpaid. He was really indebted to them. Moreover, they were proud of
being eco-preneurs. Toning down the “environmental awareness” of the product challenged the
company’s identity. How far could they go? With his adrenaline surging, Szaky left the party, eager
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for feedback from the rest of the team. Despite trying to focus on the positive events of the evening,
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Szaky couldn’t stop wondering: “Is money only one part of the equation? What if the VCs want to
change the core of who we are? With limited funding options and only $500 in the bank, can we
even consider leaving a million dollar offer on the table? What other funding options do we
have?What’s the best way to ensure Terracycle’s survival and growth? ”

BACKGROUND

ORIGINS OF THE IDEA:

A 2001 Thanksgiving trip to Montreal, Canada reintroduced Tom Szaky, then a Princeton
freshman, to his old “friend” Marley. Marley was the pet name Szaky had given to his marijuana
plant, which he had to leave behind three months before, when he started Princeton. At the time,
Marley had been in bad shape; a withering hulk that he left in his friend Pete’s care. While Szaky
was absorbing the knowledge at Princeton, Pete had learned the magical effects of adding ‘worm
poop’ to soil – a process known as vermicomposting (See Exhibit 1 for an explanation of the
process). That Thanksgiving Pete presented Szaky with a healthy, thriving marijuana plant and the
inspiration for a brilliant business idea that would come to be known as Terracycle.

During their first semester in college, Szaky and his classmate Jon Beyer had been searching
desperately for an idea to develop for Princeton’s business plan competition. Now Szaky had the
concept: "why not make a business out of…worm poop?!” By using worms to eat organic waste,
they would create a waste management company that earned money by collecting waste and then
processing it into fertilizer. The idea sounded great, and when Szaky returned to Princeton and
pitched it to Beyer and discovered that his classmate actually knew something about worms. It
turned out that his father was an eco-toxicologist who had studied worms. With all the pieces in
place, the two freshmen decided focus their business plan on worm castings (poop).

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THE “WORM PROJECT”

You could recycle all the organic waste.You could solve the problem of dwindling landfill space!
You could replace chemical fertilizers with organic fertilizers! And you could make a fortune!1

Since neither Szaky nor Beyer knew a thing about writing a business plan, they enlisted eight of
their best friends to help them through the process of seizing this, apparently tremendous,
opportunity. The equation was simple: worms + garbage = green success2: “We could take
people’s garbage (a service for which we could get paid), feed it to tons of worms (which is an
environmentally chill process), get beautiful worm poop (which Pete had already proven was a
fantastic fertilizer) and then sell it to the masses.”3

The team’s research revealed that on a national basis, Americans produced an estimated 483
million tons of solid waste in 2002 (See Exhibit 2, The State Of Garbage in the US, 2002). Most of
this waste ended up in landfills, while only 30 percent was composted or recycled and the
remaining 16% was incinerated. They also found that typical trash collection and disposal

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programs in the US cost anywhere from $50 to more than $150 per ton of waste.4 As Szaky saw it,
this meant that Americans paid more than $35 billion every year to dispose of potentially harmful
waste that might otherwise be fed to worms. Moreover, this material, when compressed in landfills,
produced vast amounts of methane gas, which contributed both to ozone depletion and global

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warming. 5

They had also realized that both home users and organic farmers had known of the miracle of
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vermicomposting for years (see Exhibit 3, Vermicomposting Home Usage), and discovered a
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whole world of worm-aficionados with their blogs and home-made vermicomposting mechanisms.
Critically, no one had tried to make it commercially available - or at least no one had succeeded.
While most home users kept their worms in repurposed trays, the only attempt to commercialize
worms was a disastrous worm farming economy based on a pyramid scheme led by Greg
Bradley of B&B Worm Farms. The idea behind B&B was to sell contracts to farmers in amounts
ranging from a few thousand dollars to as much as $60,000 to grow worms. B&B’s role was to
supply worms to farmers, and then collect the worm offspring for $7 to $9 a pound — guaranteed.
B&B would then sell the worms to a new group of large-scale farmers. However, two years after
founding the company, rumor had it that Bradley had either died or fled to an island somewhere in
the Caribbean! More than twenty nine hundred farmers who had grown worms according to the
B&B model were left high and dry.

The team’s research revealed that no one had even tried to use worms for large-scale production
of organic fertilizer. Their biggest challenge was to find a way to make and harvest worm poop on a
huge scale both quickly and efficiently. The solution to this problem came to Szaky after an intense
brainstorming session in the most appropriate place – the toilet. As he was sitting there, Szaky
recalled, “I could not think of a single animal that likes hanging out near its own poop”. Following
that ‘a-ha!’ moment, Szaky told Beyer: “Let’s put the worms on a conveyor belt, place the organic
waste on one end, and the worms will slowly move through it; we simply run the belt in the opposite
direction as the worms and their poop will just drop off the other end. It would be like a poop-
producing treadmill!”

Although he was excited to have found a good way to scale production, Szaky understood that this
did not guarantee them a market. Moreover, landfills represented an important source of
competition. But he reasoned that landfills had such bad press for damaging the environment, that
an alternative that could also generate profits would be welcomed. Moreover, since they planned to

1
Burlington, B. “The coolest little startup in America”. Inc Magazine, July 1, 2006
2
www.cnn.com/2007/US/02/01/organic.fertilizer/indrx.html
3
Szaky, 2009, p. 15
4
http://www.inc.com/magazine/20021101/24819.html
5
Szaky, 2009, p. 16

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significantly undercut the price of landfill services, they could not only count on an eco-advantage,
but price leadership as well!

From the team’s research, it seemed that industrial composting sites were their only serious
competitors. There were 3,227 composting sites in the US in 2002. (See Exhibit 2) Composting
sites turned waste into an eco-friendly finished product (compost) to be sold to farmers and
landscapers. Having read all the reports about worm behavior and the process of vermicomposting
that Byer’s dad had given them, they itemized the many advantages of using worms over traditional
composting. First,unlike composting,the vermicomposting process is odorless. Second, composting
without worms takes between six and ten months while worms can do the same in two months and
in a much smaller space. Third, worm poop has twice the calcium, three times the magnesium, five
times the nitrogen and eleven times the potassium of the surrounding soil. Finally, worm poop adds
busy microbes and bacteria to the dirt, which can be enormously important to the health of the soil.
For these reasons, the team calculated that solid worm poop could fetch a market price much
higher than that of compost.

In addition to this, they estimated that Terracycle could charge on average a price 25% lower than

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traditional waste-disposal services. And the business model could be even more profitable by
selling the soil product -- branded under a different name -- at a premium price at supermarkets,
garden centers and nurseries. Fertilizers formed a multibillion-dollar industry and its organic
segment had been growing at double-digit rates for the past four years (see Exhibit 4, Fertilizer

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6
Industry and the Fertilizer Market) . It appeared that they had discovered two untapped, potentially
lucrative revenue streams – waste management and a great fertilizer -- while at the same time
addressing a major environmental issue!
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The team completed its extensive research in late January 2002, and packed it into a 100 page
business plan for the Princeton Business Plan competition. The plan carefully laid out how the
Worm Project would solve the world’s landfill problems by converting millions of tons of organic
waste per year into worm poop fertilizer, all while making money on both ends.

BUILDING A COMPANY FROM WORM-POOP

That March (2002), the Terracycle business plan placed fourth in the Princeton competition and
collected no funding7. They were a bit disappointed and surprised by the loss. What had gone
wrong? They had focused on the business plan, the research and the details; the Worm project
was good. Szaky went over it and suddenly realized the problem -- he identified why they lost.
“Our plan was all steak and they wanted sizzle” The judges couldn’t bother to read the plan
because we did a crappy job explaining it to them. What’s the use of a revolutionary idea like the
Worm project if we can’t convince people to buy it?”8.

Undiscouraged, and convinced of their idea’s brilliance, Szaky and Beyer dedicated every spare
moment during the weeks before the summer of 2002, to developing Terracyle and starting a pilot
project. They persisted through 15 rounds of meetings with Princeton’s Dining Service, Buildings
Management and Grounds Management departments and ultimately negotiated a test with the
university. Princeton agreed to let them take ownership of the dining hall organic waste over the
summer and even provided the young entrepreneurs with a location to process the garbage.

In the meantime, while surfing the Internet, Beyer discovered a recent patent (from May 1, 2001)
for an industrial scale machine for collecting worm poop compost: Harry Windle’s worm gin (See
Exhibit 5, The Worm gin and its patent). Harry was an inventor located in Florida whose hobby was
inventing industrial worm machines and compost screeners. Harry’s system resembled the
conveyor belt principle, but he took it to another level: by boasting conveyors stacked on multiple

6
Inc, com November , 2002
7
Burlington, B. “The coolest little startup in America”. Inc Magazine, July 1, 2006
8
Szaky, 2009 (p.21)

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levels, the machine could accomplish what Szaky and Beyer had imagined, but in a tenth of the
space! The device basically consisted of 2 main components: a “hopper” that holds the “worm food”
or garbage, connected to conveyer belts that roll away from the central hopper. The worms are
placed on the belt and crawl up toward the food as their feces move in the other direction and are
collected as they fall off the belt.

Harry agreed to build a system that could handle Princeton’s waste and test their concept and sell
it to the team for a mere $20,000. Beyer and Szaky combined their savings (amounting to $5,000)
and sent it to Harry as goodwill on payment. An old buddy from high school, Anthony Green gave
9
them another $5,000 from his bar mitzvah money . They collected the rest by maxing out Tom’s
parents’ credit card, which they agreed to reluctantly. With $20,000 to pay for the worm gin,
Terracycle was off to a good start.

Beyer had a summer internship in Maryland but Szaky would stay in Princeton ready to officially
begin working on the new business. Since Beyer would be away, Szaky convinced another friend,
Princeton senior Noemi Millman, to help him with the business during the summer. After two days
of setting-up, the worm gin was ready to go. The “worm food” from Princeton’s cafeteria, which had

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been sitting in 55 gallon barrels in the hot sun for days was ripe, to say the least, and was waiting
to be transported and loaded into the gin. Szaky had rented an old truck, which could transport
about 2 barrels at a time. Pushing heavy barrels loaded with smelly garbage up a makeshift ramp
onto the old pickup was far from glamorous work. While constantly surrounded by smell, Szaky and

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Millman had to unload the barrels and shovel the waste into the gin. Millman had been a good
sport but as the hot, steamy summer day turned to night and they continued loading the “worm
food,” it began to rain. Szaky recalls: “It was after 2:30 in the morning…the last barrel fell over,
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spilling the putrid, maggot-infested swill all over her legs and feet. Noemi staggered a few steps,
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puked and quit. ”

Hearing of Millman’s quick exit, Beyer immediately left his summer internship and returned to
Princeton to help. The partners spent the remaining summer months shoveling garbage and
sending business plans. With their initial investment completely tied up in the worm gin and
worms, they needed money to support the business and to live. According to Szaky, “We sent our
business plan to every Venture Capital firm we could find, in the hopes of securing some funding,
and received nothing back but a steady stream of rejections.”11

As Szaky recalls, “By the end of July, all we had really accomplished was proving the worm gin
actually worked (phew!) and that we could indeed produce ample amounts of worm excrement.
The rest of the plan had been a total failure. We weren’t paid to take anyone’s garbage away and
we hadn’t sold a single pound of poop. The Worm Project just wasn’t working”12. Out of money, the
guys decided this would be the end to their adventure. They would sell the worm gin on e-bay and
use the money to pay back at least some of their debts.

By that time, though, they have already agreed to follow through with an interview requested by a
local radio station. With the heavy decision to close down operations on their shoulders, they still
thought that the interview would be a nice commemorative tribute and represent some kind of
closure to their experience with Terracycle. However, fate stepped in, and following the 30-minute
interview, they arrived home to find an email waiting with the simple message “I want to invest, call
me”. Suman Sinha, a local entrepreneur who had heard the interview, invited them that night for
dinner. Szaky and Beyer told him about the worm gin and told him how they hoped to expand the
operation. Over dinner, he asked them how much money they needed. “How much can you give
13
us?” Szaky desperately responded. “Two thousand dollars” Sinha said. Following dinner they

9
In Judaism, a Bar Mitzvah is the coming of age ceremony that takes place when a boy turns 13. It is common that on
Bar Mitzvah celebrations the celebrant receives a gift. Depending on the guests’ closeness to the family and the region,
gifts can include anything from symbolic pens to gift certificates to savings bonds or money.
10
Szaky, 2009, p. 22
11
Szaky, 2009, p. 24
12
Szaky, 2009, p 25
13
Inc. Com July 2006

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took a short drive to see the worm gin and he wrote them a check for $2,000 in exchange for 1% of
the company. They were back in business. As Szaky remembered:“He was attracted to the
environmental advantages of the worm project and also thought he could make a little profit.”14

BUILDING THE TEAM

With Suman’s investment, Szaky and Beyer were able to rent a small office space near campus,
which they literally furnished with trash, picking up items being thrown out by Princeton University
and resident students. Having spent all of their money on the worm gin, this space doubled as their
residence, becoming both a home and an office until they could move back into the dorms when
the fall term began.

Sam Ault, a recent Princeton graduate from Canada, joined the team shortly thereafter. He had
learned about Terracycle earlier in the year when they were in the Princeton business plan
competition, and had expressed interest in working with them following his studies. Ault was now
back in Toronto but when Szaky contacted him, he agreed to come on board and work on the

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business plan. “Now we really were international with offices in Toronto and Princeton” said Szaky
15
with a smile after hiring him.

Since the business plan competition in March, Szaky had also been speaking with an entrepreneur

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and an old friend, Robin Tator, who was also up in Canada. After more than 10 years working as
Operations Manager for New World Marketing, he had founded StreetCarts, Inc., the world's first
portable self-serve ice cream dispenser company. Although really busy with his new company,
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Tator loved the Terracycle idea and was happy to offer his advice.
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In early 2003, Szaky received a call from Tom Pyle, a 1976 Princeton graduate who had 20 years
of corporate finance experience under his belt, working in senior positions with the likes of
Deutsche Bank and Chase Manhattan. Pyle saw Terracycle’s ad in the careers section of TigerNet
(the online community for Princeton alumni), saying that Terracycle was seeking a CEO. Despite
an awkward start of an interview with his potential employer unshaved and dressed in a T-shirt,
Pyle was excited about the company’s vision. Having a soft spot in his heart for idealistic
Princetonians, Pyle soon became Terracycle’s CEO. Coming from a corporate background, Pyle
insisted on introducing some processes to the hectic little company. His first objective, as he told
Szaky, was to “get you stabilized. You need a board of directors. You need to get a few tribal
16
elders around here to give you some ballast." Pyle described this as “the laborious process of
taking an amusing, energetic, youthful garage shop and trying to put some corporate process
around it”. He immediately began recruiting board members with relevant experience including (1)
a former Princeton athletic director, (2) an emeritus professor of engineering, and (3) an engineer
and environmental consultant. It was the latter, Bill Gillum, who filled an important gap in Terracycle
when he came to work full time on Terracycle’s product development. Gillum had a PhD in
inorganic chemistry and 23 years of experience at Western Electric, Bell Labs, and Lucent.

CHANGING THE BUSINESS MODEL: TURNING WORM-POOP INTO LIQUID

GOLD

August 2002 meant returning to school. Beyer, a dedicated student, made classes his first priority.
For Szaky however, the possibility of creating a huge business that would substantially reduce the
amount of waste that was going into the landfills was too powerful a motivator to think about class-
work.

14
Szaky, 2009, p. 26
15
Szaky, 2009, p. 30.
16
Burlingham, B., “The coolest little start-up in America”, Inc Magazine, July 1 2006

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As convinced as he was about Terracycle’s potential, Szaky’s couldn’t escape the reality: by the fall
of 2002, Terracycle still had no sales. Pressed by problems, Szaky sent his business plan to
Inc.com to be evaluated by experts from various backgrounds. Inc.com proved interested, and on
November 1st, 2002 the first article on Terracycle appeared in Inc. Magazine, including large photos
and reviews on the business by VCs and industry experts. Two VCs, an editor of “Worm Digest”
and a president of a firm specializing in developing clean-tech, each commented on their business
model, with an average score of Terracycle’s idea reaching 5 out of 10. The judges commented on
Terracycle’s long term goal of “becoming the dominant alternative waste management company
with 30 to 100 worm gins functioning world wide by 2010” and their projected $2.5 million in
revenues in 2003 from different angles. But one comment stuck with him:

Terracycle has multiple markets that must be developed simultaneously for it to be

financially viable. The first niche market that the company must locate is 'early
adopter' facility managers and innovative institutions such as universities, prisons, and
so forth. Unfortunately, when it comes to waste, facility managers pretty much just
want to pay someone to haul it away as quickly and painlessly as possible. Selling
higher-margin bags of worm castings is the right idea, but that will not come quickly. In

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its current configuration, the company is likely to run out of cash long before it creates
a financially viable business.

This comment paired up with the fact that they hadn’t found anybody outside the university that

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would pay them to haul away their organic waste, made it pretty clear that they needed to rethink
their business model and its reliance on the waste management part of the business. It appeared
that their only remaining source of revenue was packaged in bags and bags of the best fertilizer on
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earth. Szaky recalled those days: “We took to heart one of the crucial lessons of entrepreneurship
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(not to mention life): when something isn’t working, do something different”. Looking at the market
and its growth (See Exhibit 4) they decided that there was a good opportunity in the organic
fertilizer market. The new market study showed them that although the size of the organic fertilizer
market was still small compared to the overall market size for all fertilizers and chemicals (see
Exhibit 4 for market size estimates), its growth was appealing: not only was the organic segment of
fertilizers growing at 16%, but the sales of organic products in certain applications such as lawns
and consumables was growing at well over 400% between 1997 and 2002. Although the
agricultural and commercial markets offered higher margins, Szaky advocated a home consumer
focus. His reasoning was that agricultural users, whose business depended on the product's
efficacy, would take longer to try and consider adopting the product. On the other hand, home
users would more readily try out the Terracycle product, as there were no such high stakes
involved.

Thinking further about the business model, the team thought that with the progress they made, they
could sell the worm poop for a profit below the price of the organic competition. They had a unique,
green product that would not only feed plants but also the soil. They had inventory that could be
produced quickly at low cost; their overhead consisted primarily of worms and the waste they fed
on. Now, they had all the reason to ditch the waste management focus of the business and instead
focus on selling worm poop. And with this decision made, Terracycle refocused its energy from a
service orientation to a pure consumer product company.

As brilliant as it seemed, the packaging and the pitch did not win too many sales. The faces of
hardware stores’ and plant shops’ owners, upon seeing Szaky, were distorted with laughter. Who
could blame them, Szaky would pop into the store wearing jeans, carrying plastic bags labeled
simply “pure worm poop”. Not quite what one would call a great sales pitch! The feedback from
sales attempts was unanimous: their packaging needed to look more professional.

The Terracycle team also realized that while it was in no way harmful, consumers may not want to
have direct contact with this type of product. Robin Tator then came up with the idea of making it
into a liquid spray. With a little Internet research they learned that liquefying worm poop was well

17
Szaky, 2009, p 32

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known among organic gardeners – they referred to it as the “worm poop tea” (See Exhibit 6,
Terracycle Production Process). Moreover, there were a variety of ways to produce it -- at least as
individual users had done on a small scale. There was just one slight problem; it only had a 24-
hour shelf life. It took Gillum another month of intensive work to find a solution to stabilize the tea
and extend its shelf life. Almost two years had gone by since that Thanksgiving Day when Szaky
had met Marley. Finally, they had a product to sell: a sprayable, all-purpose indoor plant food
aimed at the consumer market.

FINANCING

Since its inception Terracycle was very good at bootstrapping and raising money with some out-of-
the-box ideas to keep the business going. One of these ideas was inspired by Szaky’s friend
Grant, on a visit from LA. Grant was a hairdresser working in LA and Szaky saw an opportunity.
The guys posted fliers advertising “Celebrity hairstylist from LA, in for only one exclusive weekend.”
It worked like a charm with hundreds of girls responding. Grant was booked every 30 minutes all
weekend and Terracycle was able to raise enough to pay the month’s rent.

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Despite bootstrapping efforts, at the end of April 2002, apart from the initial $20,000 collected
through friends and family to get the worm gin, the $2,000 investment from Suman, and some
additional funds that came from another friend and Princeton student, Hilary Burt, who convinced

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her father to invest $6,000, nobody that did not already belong to the close circle of the founders
had shown any real interest in Terracycle.
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But August 2002 brought another interesting development when Szaky received a letter from John
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Litman, Daniel Pope and their company, Tropika, a Toronto based brokerage. They were interested
in helping Terracycle find funding, so Szaky flew up to Canada to discuss the terms. Following the
meeting Szaky opened a bank account including John Litman’s name and Tropika lent Terracycle
office space in Toronto for Sam Ault’s and Robin Tator’s use. Around this time Szaky approached
Tator and asked him to come on board more full-time in exchange for a share of the business. He
agreed and said he “would come down every other week, sleep in the office and help put the
18
business on its feet”.

Soon after, they received a call from Tropika with what appeared to be more great news. They
found an investor ready to put in $40,000. The guys were thrilled but a little later Szaky received a
call from Tator suggesting that he immediately take Litman’s name off of the bank account. Szaky
flew up to Canada to find out what was happening, to discuss the offer and to learn what Litman
meant when he said they needed to discuss “how to structure the business”. It turned out that
Tropika suddenly wanted to change things, restructure their agreement and the company, and
bring in their own CEO. Ultimately, it looked like they were trying to take over the company.
Terracycle tried to come to terms with them but since Tropika was not interested in negotiating
Terracycle ended the relationship and called the investor directly to find out how to proceed with
the money already in their account. As it turned, out the Canadian investor had no strong ties to
Tropika and was happy to keep working with them, he liked the Terracycle concept. So they were
able to keep his money and stay in business for a little longer.

From March to May 2003, Terracycle was able to raise more funds by winning business plan
competitions. Szaky and Beyer re-entered the Princeton business plan competition and this time
walked away with a $5,000 prize. They went on to enter every competition they could find.
Ultimately these competitions netted them 5 additional victories ranging from $2,000 to $10,000
and kept the company alive. However, despite their progress, by May 2003, the company was
down to a mere $500 in the bank. They had not yet made any sales, they were out of business plan
competitions to enter and almost out of money.

18
Szaky, 2009, p 32

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CURRENT SITUATION

With all the commotion and uncertainty regarding the final product, the “tea”, or liquefied worm
poop, had been stabilized and was ready to sell. The product could be either packaged directly as
a solid, or brewed and then packaged as a liquefied plant food. This innovative separation and
brewing process allowed the fertilizer to retain its nutrients on the shelf for years -- a considerable
improvement over the kitchen-cupboard system, whose output would lose its nutrients after only
weeks19.

They just needed to find appropriate packaging. Bottle manufacturers required a large minimum
order that they could not afford, so Szaky called a meeting and they began brainstorming. Then
another ‘a-ha!’ moment occurred. They were processing organic garbage into a useful product --
why not also package it in garbage? Terracycle’s idea for “upcycling” (as opposed to recycling) was
born.20 They would collect used plastic bottles; wash them, label them and, in addition to saving
money, they would further the eco-friendly mission of the company. They left the office the same
night to collect bottles (and that very evening had an incident with the local police, who explained to
them that picking others’ trash without permission was illegal). The next day they began pitching to

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local stores. The idea worked. The product began to sell (10 cases on day one). The company
found their packaging solution and had the first product in the world that was made entirely from
and packaged in waste. At that moment, Terracycle food for plants was born.21

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Now the company really needed to find funding. They were making first sales to some local stores
and needed to step up production but they were collecting, filling and labeling bottles by hand and
this was not scalable. The EcoComplex facilities, an incubator to develop “innovative environmental
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technologies”22 at Rutgers University, where they had moved their worm gin six months ago, were
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not large enough for mass production. They had proven they could create a viable product, had at
least some customers in hand and a market that was growing. They knew they could find money,
but what was the best source? A meeting with Carrot Capital approaching but, burned by their
experience with Tropika, Szaky wondered whether another VC firm would have the same
demands? Should they look for Angel investors? Martin Stein, a business angel Szaky met by
accident in a shareholders meeting of another company, seemed eager to talk. Should they try
going back to friends and family? They could try to get some extra money from Anthony since he
seemed to be really enthusiastic about the project. This enthusiasm was probably not equally
shared by mom and dad. Would they be willing to give Tom more money once he had explained
that he did not plan to return to Princeton? Trying to find a partnership with the competition was
another possibility. Szaky met managers from Scott Miracle Grow at a recent trade fair, and they
invited him to contact them with more details. With such a wide range of possibilities, Szaky was
thinking about how to tailor the pitch to each group, and whether any funding would result from all
the time and effort?

19
Financial Post Business, December 3 2005.
20
Upcycling is a term coined by Michael Braungart and William McDonough in their 2002 book entitled Cradle to Cradle:
Remaking the Way We Make Things. Upcycling is the reuse of a product for an alternate purpose; finding value in its
original form. In contrast, recycling requires that a product be destroyed to make use of its raw material.
21
Szaky, p 47.
22
Szaky, p 40

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TERRACYCLE (A) GE1-117-A-I

EXHIBIT 1

VERMICOMPOSTING23

Vermicomposting is a process in which red worms and other decomposer organisms process
organic waste and turn it into a natural fertilizer (called vermicompost)24.

WORMS:
The most common types of earthworms used for vermicomposting are brandling worms (Eisenia
foetida) and redworms or red wigglers (Lumbricus rubellus). They are not to be confused with the
common garden or field earthworm. Earthworms are hermaphrodites, meaning that they have both
male and female sex organs, but they require another earthworm to mate. As they copulate while
they eat -- their number doubles every three months, so that one pound of worms (1,000 worms)
can reproduce to reach 16 pounds in a year, although some reports suggest that in working
conditions, this number can be 35 pounds.

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The worms eat their bodyweight every day. It takes approximately 2 pounds of earthworms
(approximately 2,000 breeders) to recycle a pound of food waste in 24 hours.

Redworms can survive a wide range of temperatures (40-80°F), but they reproduce and process

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food waste at an optimum bedding temperature range of 55-77°F. The worms should never be
allowed to freeze. Bins kept outside may have to be insulated with straw in the winter to keep the
worms from freezing. Redworms eat all kinds of food and yard wastes, including coffee grounds,
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tea bags, vegetable and fruit waste, pulverized egg shells, grass clippings, manure and sewage
Copyright encoded A76HM-JUJ9K-PJMN9I

sludge. The worms eat this waste and recycled organic waste is excreted as castings or “worm
poop”. Avoid bones, dairy products, and meats that may attract pests, and garlic, onions, and spicy
foods. Limited amounts of citrus can be added, but too much can make the compost too acidic. The
compost should be kept at a pH of 6.5 if possible, with upper and lower limits at 7.0 and 6.0,
respectively. Overly acidic compost can be corrected by adding crushed eggshells. Avoid adding
chemicals (including insecticides), metals, plastics, glass, soaps, pet manures, and oleanders or
other poisonous plants, or plants sprayed with insecticides to the worm bin.

GETTING THE OUTPUT:

There are three basic ways to separate the worms from the finished compost.

1. By moving the finished compost and worms over to one side of the bin and adding new
bedding material and food waste to the other side. Worms in the finished compost should move
over to the new bedding with the fresh food waste. The finished compost can then be removed.
2. By building a small harvester frame with a 3/16-inch mesh bottom, placing the worm compost
on the frame and sifting the worms out.
3. By placing the compost in small piles on a tarp in the sun (or under bright lights inside).
Because worms don’t like light, they will wiggle to the bottoms of the piles. After waiting 10
minutes, remove the upper inch or more of finished compost from each pile until you run into
the worms. Allow the worms to again wiggle to the bottom of the pile and repeat the process.

Completed vermicompost, when appropriately processed by worms, should have a rich, earthly
smell. This organic material is rich in nutrients often containing 5 to 11 times more nitrogen,
phosphorous, and potassium than soil. Vermicompost can be used in potting soil mixes for
houseplants and as a top dressing for lawns. Vermicompost also makes an excellent mulch and
soil conditioner for the home garden.

23
This Exhibit is composed of excerpts from the article by Dickerson, G. “Vermicomposting”, published by College of
Agriculture and Home Economics, New Mexico State University, Guide H-164. June, 2001.
24
Definition sourced from http://www.allthingsorganic.com/How_To/01.asp

10
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TERRACYCLE (A) GE1-117-A-I

EXHIBIT 2

STATE OF GARBAGE IN THE USA, 2002

In 2002, 483 millions tons of solid waste was generated in the US compared to 409 million in 2001.
On a per capita basis, this translates to an increase from 1.46 tons in 2000 to 1.68 tons in 2002.
Municipal solid waste (MSW) -- more commonly known as trash or garbage -- which includes
residential and commercial/institutional streams, represents the most important component of solid
waste (others types of solids waste include construction and demolition debris, industrial waste and
biosolids). In 2002 it was estimated that 369 millions tons of the total solid were MSW25.

FIGURE 4.
STATE OF GARBAGE IN AMERICA

US Solid Waste Generated

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5.00

4.50

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4.00

3.50
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3.00

2.50

2.00

1.50

1.00
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Year

U.S. Population (in hundred millions)

Solid Waste Generated (in hundred milliones of tones)
Solid Waste Generated (Per capita)

Source : Biocycle, 2002.

MSW can be recycled, composted, combusted or deposited in landfills. Although at a decreasing

rate, in 2002 landfills still received most of the MSW, while 30% was recycled or composted and
remaining 16% was incinerated (see Figure 5).

25
The State of Garbage in America, Biocycle, 2004.

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FIGURE 5
TRENDS IN WASTE MANAGEMENT PRACTICES FROM 1960-2002

100%
90%
80%
70%
60% Landfilled
50% Incinerated
40% Recycled/Composted
30%
20%
10%
0%
1960 1970 1980 1990 1995 2002*

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Source: Characterization of MSW in the U.S.: 1998 Update, U.S. EPA, Washington, DC

In 1978, there were approximately 20,000 landfills in the USA. By 1988, that number had dropped

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to 5,499. In 2002 the figure stood at 1,767. Landfill capacity varies greatly from 200 millions tons to
970 millions tons. Average landfill fees vary from $13.60 per ton in California to $72 tons in
Massachusetts. The Worldwatch Institute reports that landfills are overflowing and the costs of
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disposing of sewage and garbage are rising. City leaders can relieve over-extended municipal
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budgets, prevent the contamination of drinking water, and help farmers build healthier soils by
recycling garbage and human waste back to farms. According to one study in 1997, at least 13
26
U.S. states have 6 years or less before all of their landfills are completely full . Municipalities are
already seeking alternative means of disposal because disposal prices are expected to skyrocket
as landfill space dramatically decreases. In contrast, the number of yard trimming composting sites
experienced a steady growth in the US since 1990, with the 3,227 composting sites existing in
2002, which is more than three times the number compared to 12 years before.

FIGURE 6
YARD TRIMMING FACILITIES AND LANDFILLS FROM 1988-2002

9000
8000
1,767
7000 3,227
6000
5000
4000
3000
2000
1000
0
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2002

Landfills Yard Trimmings Facilities

Source: WTE:Waste to Energy, 2002.

26
Paper 135: Recycling Organic Waste: From Urban Pollutant to Farm Resource.

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According to Cornell University27, composting is experiencing a resurgence of activity, which is

driven by increased understanding of the agronomic benefits of compost utilization, and rising
disposal costs for municipal wastes. Also, consumption of compost in the commercial market is
growing due to people looking for a more organic or natural substitute for traditional chemical
fertilizers. Composting market segments include:

 Agriculture, for food and non food crops and sod farms
 Landscapers (for industrial and commercial properties; golf courses, cemeteries, and athletic
fields; landfill covers; and damaged soils).
 Nurseries (for plant and forest seedling crops and reforestation projects).
 Public agencies (for highway median strips, parks, recreational areas, and other public
property)

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27
www.cals.cornell.edu/dept/compost.feas.study.html

13
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EXHIBIT 3

VERMICOMPOSTING HOME USAGE

They laughed when I said worms eat my garbage,

but I showed them how, and now thousands say the same thing …
Mary Appelhof

Vermicomposting usage in private homes traces its roots to the 1970s, when upon returning from
an International Environmental Conference in Stockholm, Mrs. Appelhof realized the potential
benefits of using worms for processing organic waste28. After seeing the spectacular results of her
first batch of tomatoes from a plant fertilized using worm castings, she decided to become a
vermicomposting evangelist, or as she would later become known, “the worm woman” (see Figure
1 for Mrs. Appelhof’s website). Mrs. Appelhof wrote and published a book in 1982, which has sold
150,000 copies. In 2000, she even organized a very large vermicomposting seminar in Comstock
called “Vermillenium” that drew people from as far as Australia, Japan and Italy. Her consistent
emails to subscribers were signed with “Changing the way the world thinks about garbage one

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worm-bin at a time”. The amazing success of the book and such seminars, together with Dr. Scott
Subler’s (former Ohio State University entomologist) marketing efforts, helped inspire a following of
people using earthworms for composting garbage in the US.

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As a result of this following, a wealth of vermicomposting articles, blogs, user communities, and
related (more or less amateur) products started appearing on the market. A plethora of “Do-It-
Yourself” articles appeared online and offline, with detailed information on worm habits, likes and
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dislikes, as well as how to provide the worms with an ideal home, from plastic bins, to car tires, to
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containers requiring far more elaborate carpentry. The resulting worm bins can vary depending on
the desired size of the system (see Figures 2 and 3), but most of them share the layering of
different process components across trays.

On a somewhat less amateur end, Mrs. Appelhof herself manufactured and sold smaller household
worm bins through the local Goodwill Industries ($76 or $89 depending on size), claiming that with
only a two-person household, one can harvest six five-gallon buckets of vermicompost twice a
29
year . In general, the prices of vermicomposting systems varied according to type. One needs
approximately 1,000 worms (1 lb) to start a worm box. One pound runs approximately $20-$30.
The smaller systems typically run anywhere from $70-$90. Worm bins were also available from
other sources such as the Gardener's Supply catalog.

28
, Originally published in Lynden Tribune, Washington, October 23, 2002
29
http://wormwoman.com/acatalog/home_garden_sp2002a.html, originally published in Home & Garden, Spring 2002

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15
FIGURE 2
FIGURE 1

MRS. APPELHOF'S WORM-BIN FOR HOME USAGE

MARY APPELHOF’S WEBSITE FOR WORM COMPOSTING RESOURCES
812-018-1

GE1-117-A-I

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FIGURE 3
DIY WORM-BINS, MANUALS,WIKI-POSTS
812-018-1

GE1-117-A-I

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EXHIBIT 4
FERTILIZER MARKET AND FERTILIZER INDUSTRY

FERTILIZER MARKET

Standard & Poor’s Industry Report on basic chemicals (of which fertilizers are a special industry
sub-group) defines fertilizers as “substances or mixtures that contain one or more of the primary
plant nutrients and sometimes secondary and/or trace nutrients. Fertilizers are added to soil to
replace essential nutrients that are depleted by crops.”30 The majority (81%) of the industry’s
products is used in the cultivation of various crops, including: corn (43% of total U.S. fertilizer
consumption), hay/pasture crops (15%), wheat (13%), soybeans (6%), and cotton (4%); the other
segment of industry’s products (19%) is sold for all other crops and uses, which include home-
users as end customers.

Although the U.S. farm economy and the domestic fertilizer market are considered mature, there
have been interesting dynamics in the market in the last few years. In 2002 the global fertilizer and
31
agricultural chemicals market was valued at about $106.4B. There were two main groups in the

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fertilizer manufacturing industry: organic and chemical fertilizer producers. The organic fertilizer
market segment was valued at about $400M.32 Although representing a minor fraction of the overall
market, it is interesting that the organic segment was growing at a rate of about 16% per year,
which is three times faster than the growth of the chemical segment. More interestingly, when

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fertilizer growth is observed in certain usage segments, such as the lawn and consumables
segment, sales of organic fertilizers grew 400% in the 1997-2002 period.
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In 2002, the US Department of Agriculture released its organic certification standards and labeling
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program for organic food, which triggered greater demand for such products. However, in the same
33
year, there was still no such Federal classification or any standard for organic fertilizers. By the
end of 2002, the organic food market exceeded $10B, which shows the potential for organic
fertilizers. One could expect this to be boosted by the introduction of a formal Federal standard,
requiring all organic food products to buy only certified organic fertilizers. Still, the significant growth
of all types of organic products in the market, and growing concern among fertilizer users (farmers,
gardeners and landscapers) regarding soil degradation and the long term effects of chemical
fertilizers, resulted in increased greater demand for organic fertilizers. The National Gardening
Association estimated that by 2003, 11.7 Million US households would be buying organic fertilizer,
reflecting a tripling of the market in just 4 years.

FERTILIZER INDUSTRY

Companies serving the market need to keep an eye on government farm programs, and the
quantity and combination of the planted crops. In addition, demand for their products is affected by
weather patterns and the value of the U.S. dollar. Population growth and dietary trends play an
indirect role34, though they influence markets that are known to be highly seasonal and volatile.

In the basic chemicals industry, there are three main barriers to entry: (1) heavy capital and
technology requirements, (2) large safety and environmental liabilities, and (3) the costs and time
involved in testing and approving new products. As the industry often generates toxic and
dangerous waste products, federal and state bodies, including the Environmental Protection
Agency and the Food and Drug Administration, regulate it heavily and with increasing intensity.
Consequently, fertilizer manufacturers need to account (and make reserves against earnings) for
35
the future costs of environmental remediation of existing plants or hazardous waste sites.

30
O’Reilly, R. “Chemicals: Basic” Standard & Poors Industry Surveys, July 11 2002
31
Gale Cengage Learning., 2003.
32
Business, Financial Post, 2005.
33
Sustainable Marketing, 2005
4
ibid.
5
ibid.

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Despite the presence of many small players, the industry is dominated by large multinational
companies that operate under multiple brand names, some of which compete against each other.
The home user segment of the market in which Terracycle wanted to compete, is no different. Two
big players dominate the segment, with Scotts' Miracle-Gro Scotts enjoying a de facto monopoly on
lawn care and garden products in the US. Founded in 1951, it is the world's largest marketer of
branded consumer lawn and garden products, with a full range of products for professional
horticulture as well. The company is publicly traded and operates globally. In 2002, the company
reported sales of $1,941 Million and a net income of $82.5 Million. In the year ending September
2002, the company controlled 62% of the consumer market for lawn fertilizers, 35% of the all-
purpose fertilizer segment, 43% of the market for grass seed and 41% of the market for control
products (i.e. herbicides and pesticides). One of its products, Miracle-Gro (a chemical concentrate
to feed plants), enjoys tremendous brand name recognition and customer loyalty.

The other big competitor, IMC Global Inc. is a leading fertilizer company, which reported net
income of $5 million in the first quarter of 2002, versus $11 million in the quarter year-earlier, as
sales were off modestly to $498 million.

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Operating Revenues: Scotts Co. and IMC Global Inc.

3,500.00

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Millions

3,000.00
2,500.00
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2,000.00
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1,500.00
1,000.00
500.00
0.00
1991 1996 1997 1998 1999 2000 2001
Year

SCOTTS CO IMC GLOBAL INC

Some of the prices for existing products on the market in 2001 are the following:
Packaging
Producer Product (oz.) Price
Scotts Co. Miracle Grow All Purpose 48 $5.93
Schultz Starter Plus 40 $6.64
Plantation Products Potting Mix 40 $7.97
Organica Plant Growth Activator 16 $18.43

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19
EXHIBIT 5

THE WORM GIN PATENT AND THE RESULTING MACHINE BY HARRY WINDLE
812-018-1

GE1-117-A-I

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812-018-1

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21
■■■
EXHIBIT 6

TERRACYCLE PRODUCTION PROCESS:

812-018-1

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