<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
of the
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 1996 Commission File Number 0-21054
SYNAGRO TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its Charter)
Delaware 76-0511324
------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
16000 Stuebner Airline Rd., Suite 420 Spring, Texas 77379
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (281) 370-6700
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 Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant is required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes /X/ No / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the latest practicable date.
Class Outstanding at November 13, 1996
- ----------------------------------- -----------------------------------
Common stock, par value $.002 6,352,102
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SYNAGRO TECHNOLOGIES, INC.
INDEX
PART I - FINANCIAL INFORMATION
PAGE
----
Condensed Consolidated Balance Sheets as of
September 30, 1996 (Unaudited) and December 31, 1995 3
Condensed Consolidated Statements of Income
for the Three Months and Year To Date Ended September 30, 1996
and 1995 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 1996 and 1995
(Unaudited) 5
Notes to Condensed Consolidated Financial Statements 7
Management's Discussion and Analysis of Results
of Operations and Financial Condition 8
PART II - OTHER INFORMATION 10
2
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SYNAGRO TECHNOLOGIES, INC.
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
ASSETS (Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents (including certificates of deposit $623,730 $ 3,703,367
of $500,000 and $1,015,743, respectively)
Restricted cash, current portion 80,000 80,000
Accounts receivable, net 3,614,113 1,723,937
Note Receivable 683,930 -
Inventory 408,248 448,977
Prepaid expenses and other assets 513,794 725,849
------------- ------------
Total current assets 5,923,816 6,682,130
Property, Machinery & Equipment, net 11,108,770 7,953,081
Agency rights, net 1,150,357 1,178,325
Cost in excess of fair value of net assets acquired, net 5,262,852 4,059,599
Restricted cash, long-term portion 340,083 260,257
Other assets 440,508 78,994
------------- ------------
$24,226,386 $20,212,386
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $2,048,929 $2,058,263
Notes payable 803,724 220,069
Current portion of notes payable related parties 125,000 489,952
Current portion of long-term debt 3,798,244 2,024,408
------------- ------------
Total current liabilities 6,775,897 4,792,692
Long term debt 4,408,047 4,448,041
Deferred Income Taxes 969,000 -
Stockholders' Equity
Preferred stock, $.002 par value 10,000,000 shares
authorized, no shares issued or outstanding - -
Common Stock, $.002 par value, shares
authorized 100,000,000 6,352,102 and 6,052,757 issued
and outstanding 12,704 12,106
Additional paid-in capital 22,572,715 22,160,585
Accumulated deficit (10,511,978) (11,201,038)
------------- ------------
Total stockholders' equity 12,073,442 10,971,653
------------- ------------
$24,226,386 $20,212,386
============= ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
3
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SYNAGRO TECHNOLOGIES, INC.
Condensed Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- -----------------------------
1996 1995 1996 1995
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Net Sales $7,290,157 $4,870,767 $15,781,570 $13,860,391
Cost of goods sold 5,580,061 3,788,781 12,381,980 10,971,556
---------- ---------- ----------- -----------
Gross Profit 1,710,096 1,081,986 3,399,590 2,888,835
Selling, general and administrative expenses 1,225,603 1,099,084 2,645,604 2,875,534
---------- ---------- ----------- -----------
Income (loss) from operations 484,493 (17,098) 753,986 13,301
Other income (expenses)
Other Income 102,387 (50,012) 446,544 45,572
Interest Expense (224,016) (250,024) (511,471) (727,179)
---------- ---------- ----------- -----------
Net Income (Loss) $362,864 $(317,134) $ 689,059 $(668,306)
========== ========== =========== ===========
Net Income (Loss) per share $ 0.06 $ (0.15) $ 0.11 $ (0.33)
========== ========== =========== ===========
Weighted average shares outstanding 6,352,102 2,063,951 6,247,222 2,013,227
========== ========== =========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
4
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SYNAGRO TECHNOLOGIES, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
--------------------------------
1996 1995
----------- -----------
<S> <C> <C>
Cash Flows from operating activities:
Net Income (Loss) $689,059 $(668,306)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities
Depreciation and amortization 1,567,017 1,568,129
Gain on sale of equipment (292,300) (10,839)
Equity loss in Pan-American N-Viro, Inc. - 89,486
Stock issued for payment of interest & services - 50,435
Payment of notes receivable by services provided 87,270 33,533
Gain from legal settlement - (119,028)
Increase (decrease) in cash due to changes in
assets and liabilities:
Accounts receivable (853,841) (240,344)
Inventory 40,729 104,011
Prepaid expenses and other 537,485 (380,892)
Accounts payable/accrued liabilities (766,445) 203,763
----------- -----------
Total adjustments 319,915 1,298,254
----------- -----------
Net cash provided by (used in) operating activities 1,008,974 629,948
Cash flows from investing activities:
Purchase of businesses, net of cash acquired (3,233,120) -
Additions to property, machinery and equipment (1,343,775) (1,110,582)
Proceeds from sale of machinery and equipment 443,491 447,708
Deposits and deferred acquisition costs (119,557) 4,023
----------- -----------
Net cash used in investing activities (4,252,961) (658,851)
Cash flows from financing activities:
Decrease (Increase) in restricted cash (79,826) (59,878)
Payments on notes payable 1,856,618 (608,336)
Proceeds from notes payable (1,971,763) 602,000
Proceeds from long-term debt 2,645,561 2,786,284
Payments on long-term debt (2,698,968) (2,204,980)
Payments on deferred offering costs - (308,954)
Proceeds from issuance of common stock 412,728 72,272
----------- -----------
Net cash used in investing activities 164,350 278,408
----------- -----------
Net decrease in cash (3,079,637) 249,505
----------- -----------
Cash at beginning of period 3,703,367 322,062
----------- -----------
Cash at end of period $623,730 $571,567
=========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
5
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SYNAGRO TECHNOLOGIES, INC.
<TABLE>
<CAPTION>
Nine Months Ended Sept. 30,
-----------------------------
1996 1995
---- ----
<S> <C> <C>
Supplemental Cash Flow Information - (Unaudited)
Interest paid during the period $485,550 $599,126
Taxes paid during the period - -
</TABLE>
Non Cash Investing and Financing Activities
In January, 1996, $190,000 of debentures were converted to 144,344 shares of
common stock.
In the first half of 1995, 8% convertible debentures in the face amount of
$525,000, and accrued interest in the amount of $8,499, was converted into
67,287 shares of common stock.
In March, 1995, as a result of a settlement agreement, the company transferred
100% of the stock of Agkone, Inc. in exchange for 20,000 shares of the
company's common stock valued at $501,000.
6
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
General
The accompanying unaudited condensed consolidated financial statements have
been prepared by the Registrant ("Synagro Technologies, Inc." or the "Company")
pursuant to the rules and regulations of the Securities and Exchange
Commission. These condensed consolidated financial statements reflect all
normal recurring adjustments which are, in the opinion of management, necessary
for the fair presentation of such financial statements for the periods
indicated. Certain information relating to the Company's organization and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles has been condensed or
omitted in this Form 10-Q pursuant to Rule 10-01 of Regulation S-X for interim
financial statements required to be filed with the Securities and Exchange
Commission. However, the Company believes that the disclosures herein are
adequate to make the information presented not misleading. The results for the
nine months ended September 30, 1996 are not necessarily indicative of future
operating results. It is suggested that these financial statements be read in
conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1995.
The accounting policies followed by the Company in preparing interim
consolidated financial statements are similar to those described in the "Notes
to Consolidated Financial Statements" in the Company's Annual Report on Form
10-K for the year ended December 31, 1995.
Earnings per common share is based on the weighted average number of common
shares.
Organization
Synagro Technologies, Inc., engages in the business of management of
biosolids through beneficial reuse of organic materials. The Company offers a
variety of services with respect to this business, including the
transportation, processing, regulatory compliance and marketing of end products
from these materials.
Reclassifications
Certain reclassifications have been made to the 1995 financial statements
to conform with the September 30, 1996 presentation.
(2) INVENTORY
Inventory consists of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
---- ----
<S> <C> <C>
Wood Shavings $ 70,700 $ 49,775
Truck Parts 337,548 399,202
------- --------
$408,248 $448,977
======== ========
</TABLE>
(3) REORGANIZATION
On July 3, 1995 the Company effected a recapitalization that included
a 1-for-15 reverse stock split of common stock. The common stock outstanding
and weighted average shares outstanding for all periods
7
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presented have been adjusted for this stock split. The financial statements
give effect to these transactions for all periods presented.
(4) SIGNIFICANT ACQUISITIONS
As of July 1, 1996, the Company purchased all of the common stock of
Pima Gro Systems, Inc. and Pima Gro Systems 2, Inc. (collectively referred to
hereafter as "Pima Gro"), which provides biosolids management services to
customers in California, Arizona and Washington D.C. The purchase price was
$3,095,561 (subject to certain adjustments) which was paid for $1,277,265 cash,
$1,595,561 in a promissory note, and 155,000 shares of the Company's common
stock valued at $1.437 per share. The acquisition was accounted for as a
purchase.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with the
attached condensed consolidated financial statement and notes thereto, and with
the Company's audited financial statements and notes thereto for the fiscal
year ended December 31, 1995.
RESULTS OF OPERATIONS. Net sales in the third quarter of 1996
increased approximately 50% to $7,290,157 from $4,870,767 in the third quarter
of 1995. For the first nine months of 1996, net sales increased approximately
14% to $15,781,570 from $13,860,391 for the same period in 1995. This increase
was primarily due to the acquisition of Pima Gro Systems, Inc., effective July
1, 1996.
Cost of goods sold and gross profit in the third quarter of 1996 were
$5,580,061 and $1,710,096, respectively, compared with $3,788,781 and
$1,081,986, respectively, in the third quarter of 1995. Gross margin increased
to 23% from 22% in the third quarter of 1995. Cost of goods sold and gross
profit in the first nine months of 1996 increased to $12,381,980 and
$3,399,590, respectively, from $10,971,556 and $2,888,835, respectively, for
the same period in 1995. The increase in cost of goods sold and gross profit
was attributable to the acquisition of Pima Gro Systems, Inc., effective July
1, 1996.
Selling, general and administrative expenses increased $126,519 for
the quarter and decreased $229,930 year to date. The increase for the quarter
was attributable to the acquisition of Pima Gro Systems, Inc. effective July 1,
1996. The decrease during the nine (9) month period was directly the result of
management's cost reduction efforts throughout fiscal 1996.
Third quarter interest expense decreased to $224,016 from $250,024 in
the third quarter of 1995. Interest expense for the first nine months of 1996
was $511,471, or a decrease of $215,708 from the same period in 1995. This
decrease was attributable to the retirement of certain debt obligations.
As a result of the foregoing, the third quarter 1996 reflects net
income of $362,864, as compared to a net loss of $(317,134) in the third
quarter of 1995. Year to date net income of $689,059 compares favorably to a
net loss of $(668,306) in 1995.
8
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As a result of the Company's cumulative operating losses from prior
years, no provision for income taxes has been made. As of December 31, 1995,
the Company had net operating loss carryforwards totaling approximately
$5,500,000. Utilization of the Company's net operating loss may be subject to
limitation under certain circumstances.
LIQUIDITY AND CAPITAL RESOURCES. The Company has Revolving Credit
Facilities in the aggregate amount of $2,700,000. Outstanding balances and
letters of credit against these Facilities totaled $1,133,600 as of September
30, 1996 reducing the balance available to $1,566,400. The Company has
historically financed its operations principally through the sale of equity and
debt securities and through funds provided by operating activities. Cash and
cash equivalents decreased by $3,079,637 as of September 30, 1996. The primary
utilization of cash was for the acquisition of Pima Gro Systems, Inc. and for
equipment purchases and significant reductions in accounts payable and long
term debt.
During the period ended September 30, 1996, the Company expended
approximately $1,343,775 for capital equipment purchases. Additionally, the
Company completed sales of certain assets for gross proceeds of $1,134,691.
These assets had an aggregate net book value of $842,391, resulting in a
recognized gain of approximately $292,300.
As of September 30, 1996, the Company had long-term borrowings in the
aggregate amount of $8,331,291, the current portion of which was $3,923,244.
The Company increased its long-term borrowings by approximately $1,368,346
during the first nine months of 1996. This increase in debt was primarily
attributable to Notes issued and Notes assumed in the acquisition of Pima Gro
Systems, Inc., effective July 1, 1996.
At September 30, 1996, the Company had negative working capital of
approximately $(852,000). This is directly attributable to the acquisition of
Pima Gro Systems, Inc. The Company plans to restructure certain notes payable
and short term debt in the fourth quarter of 1996, which will significantly
reduce the current portion of notes payable and long term debt and thereby
increase working capital. Additionally, the Company plans to continue to meet
its current obligations with cash provided from operations. Management
believes that the Company will be able to return to positive working capital in
the fourth quarter of 1996.
9
<PAGE> 10
PART II -- OTHER INFORMATION
ITEM 5. OTHER INFORMATION.
Employment Agreements
As of May 26, 1995, and as amended as of June 10, 1996, the Company
entered into a five (5) year employment agreement with Don L. Thone, pursuant
to which the Company has agreed to pay Mr. Thone an annual base salary of
$150,000, plus other benefits. The Company also granted options to Mr. Thone
to purchase up to 246,296 shares of Common Stock in connection with his
employment agreement, 179,629 of which are currently vested. As of January 29,
1996, the Company entered into a five (5) year employment agreement with Daniel
L. Shook, pursuant to which the Company has agreed to pay Mr. Shook an annual
base salary of $125,000, plus other benefits. The Company also granted options
to Mr. Shook to purchase up to 125,000 shares of Common Stock in connection
with his employment agreement, 41,666 of which are currently vested.
ITEM 6. FINANCIAL STATEMENTS, EXHIBITS AND REPORTS ON FORM 8-K.
a. Exhibits
2.1 Agreement for the Purchase of Stock by and among Synagro
Technologies, Inc., CDR Environmental, Inc., Pima Gro Systems,
Inc., Pima Gro Systems 2, Inc., Wilson Nolan, Herbert Kai and
John Kai, Jr., dated July 18, 1996.(1)
10.1 Amendment No. 1 to Employment Agreement between the Company
and Don Thone dated June 10, 1996.(2)
10.2 Employment Agreement between the Company and Daniel Shook
dated January 29, 1996.(2)
27. Financial Data Schedule
b. Form 8-K
The Company has filed Form 8-K on July 18, 1996 relating to the
acquisition of Pima Gro Systems, Inc.
- -------------------------------------------------------------------------------
(1) Filed as part of the Company's current Report on Form 8-K, dated
July 31, 1996.
(2) Filed as part of the Company's Registration Statement on Form S-1, dated
July 27, 1995, and as amended (No. 33-95028).
10
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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.
SYNAGRO TECHNOLOGIES, INC.
Date: November 8, 1996 By: Donald L. Thone /S/
----------------------------
Chief Executive Officer
Date: November 8, 1996 By: Daniel L. Shook /S/
----------------------------
Chief Financial Officer
11
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INDEX TO EXHIBITS
Exhibit
No. Description
------- -----------
2.1 Agreement for the Purchase of Stock by and among Synagro
Technologies, Inc., CDR Environmental, Inc., Pima Gro Systems,
Inc., Pima Gro Systems 2, Inc., Wilson Nolan, Herbert Kai and
John Kai, Jr., dated July 18, 1996.(1)
10.1 Amendment No. 1 to Employment Agreement between the Company
and Don Thone dated June 10, 1996.(2)
10.2 Employment Agreement between the Company and Daniel Shook
dated January 29, 1996.(2)
27. Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FORM SEPTEMBER
30, 1996 CONDENDSED CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF INCOME AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 623,730
<SECURITIES> 0
<RECEIVABLES> 4,298,043
<ALLOWANCES> 0
<INVENTORY> 408,248
<CURRENT-ASSETS> 5,923,816
<PP&E> 17,900,104
<DEPRECIATION> 6,791,334
<TOTAL-ASSETS> 24,226,386
<CURRENT-LIABILITIES> 6,775,897
<BONDS> 0
0
0
<COMMON> 12,704
<OTHER-SE> 12,060,737
<TOTAL-LIABILITY-AND-EQUITY> 24,226,386
<SALES> 0
<TOTAL-REVENUES> 7,290,157
<CGS> 5,580,061
<TOTAL-COSTS> 6,805,664
<OTHER-EXPENSES> (102,387)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 224,016
<INCOME-PRETAX> 362,864
<INCOME-TAX> 0
<INCOME-CONTINUING> 362,864
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 362,864
<EPS-PRIMARY> 0.06
<EPS-DILUTED> 0
</TABLE>
