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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 March 31, 1997 Commission File Number 0-21054
SYNAGRO TECHNOLOGIES, INC.
- -------------------------------------------------------------------------------
(Exact name of Registrant as specified in its Charter)
Delaware 76-0511324
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
16000 Stuebner Airline Rd., Suite 420 Spring, Texas 77379
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(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 May 8, 1997
- ------------------------------- -------------------------------
Common stock, par value $.002 7,679,638
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SYNAGRO TECHNOLOGIES, INC.
INDEX
PART I - FINANCIAL INFORMATION
PAGE
Condensed Consolidated Balance Sheets as of
March 31, 1997 (Unaudited) and December 31, 1996 3
Condensed Consolidated Statements of Operations
for the Three Months Ended March 31, 1997 and 1996
(Unaudited) 4
Condensed Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 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
PART II - OTHER INFORMATION 9
2
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SYNAGRO TECHNOLOGIES, INC.
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 889,773 $ 643,109
Short-term investments 60,000 560,000
Restricted cash, current portion 345,362 159,285
Accounts receivable, net 3,344,720 2,910,781
Prepaid expenses and other current assets 812,326 218,224
------------ ------------
Total current assets 5,452,181 4,491,399
Property, machinery & equipment, net 7,876,032 8,146,354
Other Assets:
Goodwill, net 4,535,645 4,562,172
Restricted cash, long-term portion -- 186,077
Assets held for sale, net 104,011 1,138,754
Other assets 72,051 106,531
------------ ------------
Total assets $ 18,039,920 $ 18,631,287
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 3,724,685 $ 4,132,212
Current portion of long-term debt 1,994,340 2,434,057
------------ ------------
Total current liabilities 5,719,025 6,566,269
Long term debt 5,543,329 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, 15,359 12,712
7,679,638, 6,355,434 issued and outstanding
Additional paid in capital 25,428,424 22,579,380
Accumulated deficit (18,666,217) (18,789,968)
------------ ------------
Total stockholders' equity 6,777,566 3,802,124
------------ ------------
Total liabilities and stockholders' equity $ 18,039,920 $ 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 March 31,
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Net Sales $ 6,737,306 $ 4,111,425
Cost of Operations 5,513,327 3,433,703
------------ ------------
Gross Profit 1,223,979 677,722
Selling, general and administrative expenses 927,207 682,392
------------ ------------
Income (loss) from operations 296,772 (4,670)
Other income (expense)
Other Income 82,231 189,423
Interest Expense (255,252) (121,446)
------------ ------------
Net Income $ 123,751 $ 63,307
============ ============
Earnings per share $ 0.02 $ 0.01
============ ============
Weighted average common shares outstanding 7,111,306 6,190,757
============ ============
</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>
Three Months Ended March 31,
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Cash Flows from operating activities:
Net Income $ 123,751 $ 63,307
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Depreciation and amortization 553,843 482,535
Gain on sale of equipment (7,091) (177,341)
(Increase) decrease in the following:
Accounts receivable (433,940) (256,667)
Inventory -- 46,390
Prepaid expenses and other (559,622) 150,076
Decrease in accounts payable and accrued expenses (407,527) (493,574)
------------ ------------
Net cash provided by (used in) operating activities (730,586) (185,274)
Cash flows from investing activities:
Additions to property, machinery & equipment (337,480) (173,748)
Proceeds from sale of equipment 87,575 230,019
Sales (purchases) of short-term investments, net 500,000 (511,447)
Other -- 3,436
------------ ------------
Net cash provided by (used in) investing activities 250,095 (451,740)
Cash flows from financing activities:
Proceeds from debt 1,682,134 1,280,007
Payments on debt (3,806,673) (1,781,080)
Decrease (Increase) in restricted cash -- 7,113
Sale of common stock, net of offering costs 2,851,694 --
------------ ------------
Net cash provided by (used in) financing activities 727,155 (493,960)
------------ ------------
Net increase (decrease) in cash 246,664 (1,130,974)
Cash, beginning of period 643,109 2,687,624
------------ ------------
Cash, end of period $ 889,773 $ 1,556,650
============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
5
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SYNAGRO TECHNOLOGIES, INC.
<TABLE>
<CAPTION>
Quarter Ended March 31,
---------------------------
Supplemental Cash Flow Information - (Unaudited) 1997 1996
------------ ------------
<S> <C> <C>
Interest paid during the period $ 188,933 $ 204,225
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.
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
three months ended March 31, 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.
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.
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
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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
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.
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.
For financial reporting purposes, the assets and liabilities (excluding assumed
debt) attributable to Organi-Gro have been classified in the consolidated
balance sheet as assets held for sale as of December 31, 1996. Following are
the assets and liabilities of Organi-Gro as of December 31, 1996:
<TABLE>
<S> <C>
Current assets $1,448,320
Property, plant and equipment, net 1,448,219
Other assets 661,715
----------
3,558,254
Current liabilities 392,952
Reserve for loss on sale 2,463,056
----------
Net assets held for sale $ 702,246
----------
Long-term debt $1,034,743
----------
</TABLE>
(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 March 31, 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
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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.
(4) STOCKHOLDERS' RIGHTS PLAN
In December 1996, the Company adopted a stockholders' rights plan (the Rights
Plan). The Rights Plan provides for a dividend 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 following discussion should be read in conjunction with the
attached condensed consolidated financial statements and notes thereto, and
with the Company's audited financial statements and notes thereto for the
fiscal year ended December 31, 1996.
RESULTS OF OPERATIONS. For the quarter ended March 31, 1997, net sales
were $6,737,306 compared to $4,111,425 for the first quarter of 1996, or an
increase of $2,625,881. 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 first quarter of 1997 were
$5,513,327 and $1,223,979 respectively, compared with $3,433,703 and $677,722,
respectively for the first quarter of 1996, resulting in gross profit as a
percentage of sales of 18.2% in 1997 and 16.5% in 1996. The increase in gross
profit is primarily a result of higher sales volume from the Company's
operations and the acquisition of Pima Gro.
Selling, general and administrative expenses increased to $927,207
from $682,392 in 1996. This increase in selling, general and administrative
expense is primarily the result of the acquisition of Pima Gro in July 1996.
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Interest expense for the quarter ended March 31, 1997 was $255,252 or
an increase of $133,806 from the quarter ended March 31, 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 of $82,231 compares with $189,423 for the period
ending March 31, 1996. Other income in 1996 was predominantly the result of a
gain on the sale of the sawmill assets.
As a result of the foregoing, the first quarter of 1997 reflects
net income of $123,751 or $0.02 per share compared to net income of $63,307 or
$.01 per share in the first quarter of 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 quarter ended March 31, 1997, the Company reduced total
debt by approximately $2.1 million, primarily from the net proceeds of the
warrant conversion.
In December 1996, the Company was successful in obtaining a credit
facility with LaSalle National Bank ("LaSalle") in the amount of $10,000,000
($5 million term loan and $5 million line of credit). At March 31, 1997, the
Company had borrowings under the term loan in the amount of approximately $3.4
million. No borrowings are outstanding under the line of credit at March 31,
1997. The Company was in compliance with all financial covenants as of March
31, 1997.
During the period ended March 31, 1997, the Company expended
approximately $406,000 for capital equipment purchases. The majority of the
purchases were financed by the use of proceeds from internally generated funds.
As of March 31, 1997, the Company had long-term borrowings in the
aggregate amount of $7,537,669, the current portion of which was $1,994,340.
At March 31, 1997, the Company had negative working capital of
($266,844). Management believes that the Company will be able to return to
positive working capital as it pursues its goal of profitability for the
remainder of 1997.
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.
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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
March 31, 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: May 8, 1997 By: /s/ Donald L. Thone
--------------------------------
Chief Executive Officer
Date: May 8, 1997 By: /s/ Daniel L. Shook
--------------------------------
Chief Financial Officer
11
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 1,235,135
<SECURITIES> 60,000
<RECEIVABLES> 3,632,234
<ALLOWANCES> 287,514
<INVENTORY> 0
<CURRENT-ASSETS> 5,452,181
<PP&E> 12,581,038
<DEPRECIATION> 4,705,006
<TOTAL-ASSETS> 18,039,920
<CURRENT-LIABILITIES> 5,719,025
<BONDS> 5,543,329
<COMMON> 15,359
0
0
<OTHER-SE> 6,762,207
<TOTAL-LIABILITY-AND-EQUITY> 18,039,920
<SALES> 6,737,306
<TOTAL-REVENUES> 6,737,306
<CGS> 5,513,327
<TOTAL-COSTS> 5,513,327
<OTHER-EXPENSES> (82,231)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 255,252
<INCOME-PRETAX> 123,751
<INCOME-TAX> 0
<INCOME-CONTINUING> 123,751
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 123,751
<EPS-PRIMARY> 0.02
<EPS-DILUTED> 0
</TABLE>
