<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 June 30, 1997 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 July 24, 1997
- ------------------------------- -------------------------------
Common stock, par value $.002 7,679,678
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SYNAGRO TECHNOLOGIES, INC.
INDEX
PART I - FINANCIAL INFORMATION
PAGE
----
Condensed Consolidated Balance Sheets as of
June 30, 1997 (Unaudited) and December 31, 1996 3
Condensed Consolidated Statements of Operations
for the Three and Six Months Ended June 30, 1997
and 1996 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 1997 and 1996
(Unaudited) 5
Notes to Condensed Consolidated Financial Statements 6-7
Management's Discussion and Analysis of Results
of Operations and Financial Condition 8-9
PART II - OTHER INFORMATION 10
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SYNAGRO TECHNOLOGIES, INC.
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
---------------- ------------------
<S> <C> <C>
ASSETS (Unaudited)
Current Assets:
Cash and cash equivalents $ 609,024 $ 643,109
Short-term investments 56,000 560,000
Restricted cash, current portion 345,362 159,285
Accounts receivable, net 2,981,635 2,910,781
Assets held for resale 397,000 -
Prepaid expenses and other current assets 858,027 218,224
---------------- ------------------
Total current assets 5,247,048 4,491,399
Property, machinery & equipment, net 8,020,964 8,146,354
Other Assets:
Goodwill, net 4,496,224 4,562,172
Restricted cash, long-term portion - 186,077
Assets held for sale, net - 1,138,754
Other assets 56,778 106,531
---------------- ------------------
Total assets $17,821,014 $18,631,287
================ ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 2,735,638 $ 4,132,212
Current portion of long-term debt 1,906,064 2,434,057
---------------- ------------------
Total current liabilities 4,641,702 6,566,269
Long term debt 6,334,016 8,262,894
Stockholders' Equity
Preferred stock, $.002 par value 10,000,000 shares authorized, - -
no shares issued or outstanding
Common Stock, $.002 par value, 100,000,000 shares authorized,
7,679,678, and 6,355,434 issued and outstanding 15,359 12,712
Additional paid in capital 25,428,424 22,579,380
Accumulated deficit (18,598,487) (18,789,968)
---------------- ------------------
Total stockholders' equity 6,845,296 3,802,124
---------------- ------------------
Total liabilities and stockholders' equity $17,821,014 $18,631,287
================ ==================
</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 Operations
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended June 30, Six Months Ended June 30,
--------------------------------- ---------------------------------
1997 1996 1997 1996
--------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Net Sales $5,362,224 $4,379,988 $12,099,530 $8,491,413
Cost of Operations 4,472,232 3,368,215 9,985,559 6,801,919
-------------- --------------- -------------- ---------------
Gross Profit 889,992 1,011,773 2,113,971 1,689,494
Selling, general and administrative expenses 801,658 737,609 1,728,865 1,420,001
-------------- --------------- -------------- ---------------
Income from operations 88,334 274,164 385,106 269,493
Other income (expense)
Other Income 274,501 154,732 356,732 344,157
Interest Expense (295,107) (166,008) (550,359) (287,455)
--------------- -------------- -------------- ---------------
Income before taxes $ 67,728 $ 262,888 $ 191,479 $ 326,195
Income tax - - - -
--------------- -------------- -------------- ---------------
Net Income $ 67,728 $ 262,888 $ 191,479 $ 326,195
=============== ============== ============== ===============
Earnings per share $ 0.01 $ 0.04 $ 0.03 $ 0.05
=============== ============== ============== ===============
Weighted average common shares outstanding
7,679,678 6,197,102 7,422,544 6,193,912
=============== ============== ============== ===============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
4
<PAGE> 5
SYNAGRO TECHNOLOGIES, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------------------
1997 1996
----------------- ------------------
<S> <C> <C>
Cash Flows from operating activities:
Net Income $ 191,479 $ 326,195
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Depreciation and amortization 829,450 933,734
Gain on sale of equipment (57,030) (248,454)
(Increase) decrease in the following:
Accounts receivable (70,854) (324,261)
Inventory - (1,752)
Prepaid expenses and other (590,050) 248,659
Assets held for resale 40,000 -
Decrease in accounts payable and accrued expenses (1,729,563) (972,136)
----------------- ------------------
Net cash used in operating activities (1,386,568) (38,015)
Cash flows from investing activities:
Additions to property, machinery & equipment (808,700) (577,686)
Proceeds from sale of equipment 227,619 532,291
Sale of short-term investments 504,000 -
Deposits and deferred acquisition costs - (14,768)
----------------- ------------------
Net cash used in investing activities (77,081) (60,163)
Cash flows from financing activities:
Proceeds from debt 1,511,514 1,480,007
Payments on debt (2,933,642) (2,782,520)
Decrease (Increase) in restricted cash - (36,757)
Sale of common stock, net of offering costs 2,851,692 (6)
----------------- ------------------
Net cash provided by (used in) financing activities 1,429,564 (1,339,276)
----------------- ------------------
Net decrease in cash (34,085) (1,437,454)
Cash, beginning of period 643,109 3,703,367
----------------- ------------------
Cash, end of period $ 609,024 $2,265,913
================= ==================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
5
<PAGE> 6
SYNAGRO TECHNOLOGIES, INC.
Six Months Ended June 30,
-------------------------
Supplemental Cash Flow Information - (Unaudited) 1997 1996
---- ----
Interest paid during the period $440,071 $304,819
Taxes paid during the period - -
Non Cash Investing and Financing Activities
In January 1996, $190,000 of debentures were converted to 144,344
shares of common stock.
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 six months ended
June 30, 1997 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, 1996.
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, 1996.
In the second quarter of 1997, the Company re-evaluated the useful
lives of certain of it's fixed assets. The effect of this evaluation resulted in
the extension of the useful lives of certain assets and reduced the depreciation
expense accordingly.
Recently Issued Accounting Standard
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
per share," was issued in February 1997. The Company will adopt SFAS No. 128 for
the year ended December 31, 1997. Had the Company adopted it in the current
quarter, there would not have been an effect on the Company's basic and diluted
earnings per share.
6
<PAGE> 7
Organization
The Company engages in the business of the management of biosolids
through beneficial reuse of organic materials. The Company provides
transportation, treatment, site monitoring, land application and environmental
regulatory compliance services with respect to biosolids and wastewater products
to local and state agencies, municipalities and private industries. The
Company's vehicles pick up and transport biosolids and other organic waste
materials to sites operated by the Company. The Company's services also include
the dredging of sludge ponds and cleaning out municipal and industrial lagoons.
(2) SIGNIFICANT ACQUISITIONS AND DISPOSITIONS
On June 26, 1997, the Company announced that it had signed a Purchase and Sale
Agreement with Browning-Ferris, Inc. to acquire the assets and certain revenue
contracts of BFI's Organics Division in Pennsylvania, Ohio, Georgia, Virginia,
Maryland and the District of Columbia. The agreement is anticipated to close by
July 31, 1997.
In December 1996, the Company decided to sell all of the net assets of its
wholly owned subsidiary, Organi-Gro. In April 1997, the Company reached a
definitive agreement to sell Organi-Gro to its former owners. As a pre-condition
to the definitive agreement, the purchaser has been successful in obtaining
refinancing of the assumed debt. Consideration included subordinated notes with
a face value of approximately $1.5 million and the assumption of certain debt
and liabilities. The notes are payable in equal monthly installments of
approximately $15,000 for 48 months following the first anniversary date of the
note and bears interest at a rate of 6 percent. The balance of the notes are due
in March 2002. Proceeds from the notes will be recognized as income in the
period collected as collection of such proceeds is considered doubtful. As a
result of the proposed sale, the Company recorded a charge to operations in the
fourth quarter of 1996 amounting to approximately $2.5 million to adjust the
carrying value of Organi-Gro's net assets to its estimated fair market value.
This charge is included in "losses on assets held for sale and other special
charges" in the consolidated statements of operations in the Company's annual
report on Form 10-K for the year ended December 31, 1996.
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 with $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 effective July 1, 1996.
(3) PREFERRED STOCK
The Company is authorized to issue up to 10,000,000 shares of preferred stock,
par value of $.002 per share. At June 30, 1997, no preferred shares were issued
or outstanding. Shares of preferred stock may be issued in one or more series of
classes, each of which series or class shall have such distinctive designation
or title as shall be fixed by the Board of Directors of the Company prior to
issuance of any shares. Each such series or class shall have such voting powers,
full or limited, or no voting powers, and such preferences and relative,
participating, optional or other special rights and such qualifications,
limitations or restrictions thereof, as shall be stated in such resolution or
resolutions providing for the issuance of such series or class of preferred
stock as may be adopted by the Board of Directors prior to the issuance of any
shares thereof. Series A Junior Participating Preferred Stock will be issued
upon exercise of the Stockholder Rights described below.
7
<PAGE> 8
(4) STOCKHOLDERS' RIGHTS PLAN
In December 1996, the Company adopted a stockholders' rights plan (the Rights
Plan). The Rights Plan provided for a distribution of one preferred stock
purchase right (Right) for each outstanding share of the Company's common stock,
to stockholders of record at the close of business on January 10, 1997. The
Rights Plan is designed to deter coercive takeover tactics and to prevent an
acquirer from gaining control of the Company without offering a fair price to
all of the Company's stockholders. The Rights will expire on December 31, 2006.
Each Right entitles stockholders to buy one one-thousandth of a newly issued
share of Series A Junior Participating Preferred Stock of the Company at an
exercise price of $10. The Rights are exercisable only if a person or group
acquires beneficial ownership of 15 percent or more of the Company's common
stock or commences a tender or exchange offer which, if consummated, would
result in that person or group owning 15 percent or more of the common stock of
the Company. However, the Rights will not become exercisable if common stock is
acquired pursuant to an offer for all shares which a majority of the board of
directors determines to be fair to and otherwise in the best interests of the
Company and its stockholders. If, following an acquisition of 15 percent or more
of the Company's common stock, the Company is acquired by that person or group
in a merger or other business combination transaction, each Right would then
entitle its holder to purchase common stock of the acquiring company having a
value of twice the exercise price. The effect will be to entitle the Company
stockholder to buy stock in the acquiring company at 50 percent of its market
price.
The Company may redeem the Rights at $.001 per Right at any time on or prior to
the tenth business day following the acquisition of 15 percent or more of its
common stock by a person or group or commencement of a tender offer for such 15
percent ownership.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. Actual results could differ materially
from those projected in the forward-looking statements as a result of a number
of important factors. For a discussion of important factors that could affect
the Company's results, please refer to the financial statement line item
discussions below. Readers are also encouraged to refer to the Company's 1996
Annual Report on Form 10-K for further discussion of the Company's business and
the risks and opportunities attendant thereto.
RESULTS OF OPERATIONS. For the quarter ended June 30, 1997, net sales
were $5,362,224 compared to $4,379,988 for the second quarter of 1996, an
increase of $982,236 or 22.4%. For the first half of 1997, net sales increased
to $12,099,530 from $8,491,413 for the same period in 1996. This increase in net
sales is primarily attributable to the acquisition of Pima Gro in July 1996.
Cost of operations and gross profit for the second quarter of 1997 were
$4,472,232 and $889,992 respectively, compared with $3,368,215 and $1,011,733,
respectively for the second quarter of 1996, resulting in a decrease in gross
profit as a percentage of sales from 23.1% in 1996 to 16.6% in 1997. Cost of
operations and gross profit for the first half of 1997 increased to $9,985,559
and $2,113,971 respectively from $6,801,919 and $1,689,494 respectively for the
same period in 1996, however gross profit as a percentage of sales decreased
from 19.9% in the first half of 1996 to 17.5% in 1997. The decrease in gross
profit as a percentage of sales is primarily a result of fees paid for the
disposal of biosolids in landfills of $450,000 in the second quarter of 1997.
Gross margins should improve as these landfill disposal fees will be minimal for
the remainder of the year.
In the second quarter of 1997, management initiated a cost reduction
program across the Company aimed at improving gross profit margins and the
reduction of selling general and administrative expenses. The impact of these
cost reductions should be realized beginning in the third quarter of 1997.
8
<PAGE> 9
Selling, general and administrative expenses increased $64,049 for
the quarter and $308,864 year-to-date. This increase in selling, general and
administrative expense is primarily the result of the acquisition of Pima Gro in
July 1996.
Interest expense for the quarter ended June 30, 1997 was $295,107 or an
increase of $129,099 from the quarter ended June 30, 1996. Interest expense for
the first half of 1997 increased to $550,359 from $287,455 in 1996. This
increase in interest cost is directly attributable to increased borrowings
associated with the acquisition of Pima Gro and the finance cost of new assets
acquired.
Other income for the second quarter of 1997 of $274,501 compares
favorably with $154,732 for the same period in 1996. Other income for the second
quarter was predominantly the result of a legal settlement in 1997 and a gain on
the sale of the sawmill assets in 1996. Other income for the first half of 1997
remained even with that of 1996.
As a result of the foregoing, the second quarter of 1997 reflects net
income of $67,728 or $0.01 per share compared to net income of $262,888 or $.04
per share in the second quarter of 1996. Year-to-date net income was $191,479 or
$.03 per share in 1997 compared to $326,195 or $.05 per share in 1996.
As a result of the Company's cumulative operating losses, the Company
has not paid income tax since inception. As of December 31, 1996, the Company
had net operating loss carry forwards totaling approximately $7,700,000.
Utilization of the Company's net operating losses may be subject to limitation
under certain circumstances.
LIQUIDITY AND CAPITAL RESOURCES. The Company has historically financed
its operations principally through the sale of equity and debt securities and
through funds provided from operations.
On February 22, 1997, the Company completed its call of 3,000,000
warrants to purchase Common Stock. Warrants for 1,324,243 shares of Common Stock
were converted providing gross proceeds to the Company in the amount of
$3,178,183. The remaining 1,675,757 outstanding warrants were redeemed by the
Company for $167,576.
During the six months ended June 30, 1997, the Company reduced total
debt by approximately $2.5 million, leaving borrowings in the aggregate amount
of $8,240,080, the current portion of which was $1,906,064. The funds used in
the reduction of debt were generated primarily from the net proceeds of the
warrant conversion and the disposition of Organi-Gro, Inc.
In December 1996, the Company obtained a credit facility with LaSalle
National Bank ("LaSalle") in an amount of up to $10,000,000 ($5 million term
loan and $5 million line of credit). At June 30, 1997, the Company had
borrowings under the facility in the amount of approximately $4.6 million.
Amounts available under the line of credit are subject to a borrowing base
consisting of 85 percent of accounts receivable, as defined. This credit
facility expires in December 1998, and will need to be re-negotiated and/or
refinanced prior to that time.
During the six months ended June 30, 1997, the Company expended
approximately $759,700 for capital equipment purchases. The majority of the
purchases were financed through borrowings, net of the proceeds received from
the sale of idle assets.
At June 30, 1997, the Company had positive working capital of $605,346.
Management believes that the Company will be able to maintain positive working
capital throughout 1997.
9
<PAGE> 10
PART II - OTHER INFORMATION
ITEM 1.
The Company is currently involved in certain routine litigation.
Management believes that all such litigation arose in the ordinary course of
business and that costs of settlements or judgments arising from such suits will
not have a material adverse effect on the Company's consolidated financial
position or results of operations.
ITEM 6. FINANCIAL STATEMENTS, EXHIBITS AND REPORTS ON FORM 8-K.
a. Exhibits
(27) Financial Data Schedule
b. Form 8-K
No reports on Form 8-K were filed during the quarter ended
June 30, 1997.
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: July 24, 1997 By: /s/ Daniel L. Shook
--------------------------------
Vice President and
Chief Financial Officer
Date: July 24, 1997 By: /s/ William B. Cleveland
--------------------------------
Controller
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EXHIBIT INDEX
(27) Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 954,386
<SECURITIES> 56,000
<RECEIVABLES> 3,269,149
<ALLOWANCES> 287,514
<INVENTORY> 0
<CURRENT-ASSETS> 5,247,048
<PP&E> 12,950,560
<DEPRECIATION> 4,929,596
<TOTAL-ASSETS> 17,821,014
<CURRENT-LIABILITIES> 4,641,702
<BONDS> 6,334,016
0
0
<COMMON> 15,359
<OTHER-SE> 6,829,937
<TOTAL-LIABILITY-AND-EQUITY> 17,821,014
<SALES> 12,099,530
<TOTAL-REVENUES> 12,099,530
<CGS> 9,985,559
<TOTAL-COSTS> 9,985,559
<OTHER-EXPENSES> (356,732)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 550,359
<INCOME-PRETAX> 191,479
<INCOME-TAX> 0
<INCOME-CONTINUING> 191,479
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 191,479
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0
</TABLE>
