<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, 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 October 21, 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
September 30, 1997 (Unaudited) and December 31, 1996 3
Condensed Consolidated Statements of Operations
for the Three and Nine Months Ended September 30, 1997
and 1996 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended September 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
2
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SYNAGRO TECHNOLOGIES, INC.
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
---------------- -----------------
ASSETS (Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 335,443 $ 643,109
Short-term investments 64,504 560,000
Restricted cash, current portion 345,362 159,285
Accounts receivable, net 3,970,603 2,910,781
Assets held for resale 397,000 -
Prepaid expenses and other 645,451 218,224
---------------- -----------------
Total current assets 5,758,363 4,491,399
Property, machinery & equipment, net 8,568,193 8,146,354
Other Assets:
Goodwill, net 4,463,251 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 $18,846,585 $18,631,287
================ =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 3,167,250 $ 4,132,212
Current portion of long-term debt 2,240,927 2,434,057
---------------- -----------------
Total current liabilities 5,408,177 6,566,269
Long term debt 6,190,613 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 (18,195,988) (18,789,968)
---------------- -----------------
Total stockholders' equity 7,247,795 3,802,124
---------------- -----------------
Total liabilities and stockholders' equity $18,846,585 $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>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- ---------------------------------
1997 1996 1997 1996
-------------- --------------- ------------- ----------------
<S> <C> <C> <C> <C>
Net Sales $6,411,775 $7,290,157 $18,511,305 $15,781,570
Cost of Operations 5,285,075 5,580,061 15,270,634 12,381,980
-------------- --------------- ------------- ----------------
Gross Profit 1,126,700 1,710,096 3,240,671 3,399,590
Selling, general and administrative expenses 672,791 1,225,603 2,401,656 2,645,604
-------------- --------------- ------------- ----------------
Income from operations 453,909 484,493 839,015 753,986
Other income (expense)
Other Income 89,580 102,387 446,313 446,544
Interest Expense (140,990) (224,016) (691,350) (511,471)
-------------- --------------- ------------- ----------------
Income before taxes $ 402,499 $ 362,864 $ 593,978 $ 689,059
Income tax - - - -
-------------- --------------- ------------- ----------------
Net Income $ 402,499 $ 362,864 $ 593,978 $ 689,059
============== =============== ============= ================
Earnings per share $ 0.05 $ 0.06 $ 0.08 $ 0.11
============== =============== ============= ================
Weighted average common shares outstanding 7,679,678 6,352,102 7,577,955 6,247,222
============== =============== ============= ================
</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,
---------------------------------------
1997 1996
----------------- -----------------
<S> <C> <C>
Cash Flows from operating activities:
Net Income $ 593,978 $ 689,059
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Depreciation and amortization 1,217,070 1,567,017
Gain on sale of equipment (72,341) (292,300)
(Increase) decrease in the following:
Accounts receivable (1,059,822) (853,841)
Inventory - 40,729
Prepaid expenses and other (377,474) 537,485
Assets held for resale 40,000 -
Decrease in accounts payable and accrued expenses (1,297,365) (766,445)
----------------- -----------------
Net cash used in operating activities (955,954) 921,704
Cash flows from investing activities:
Purchase of businesses, net of cash acquired - (3,233,120)
Additions to property, machinery & equipment (762,997) (1,256,505)
Proceeds from sale of equipment 242,930 443,491
Sale of short-term investments 495,496 -
Other - (119,557)
----------------- -----------------
Net cash provided by (used in) investing activities (24,571) (4,165,691)
Cash flows from financing activities:
Proceeds from debt 977,506 673,798
Payments on debt (3,156,339) (842,350)
Decrease (Increase) in restricted cash - (79,826)
Sale of common stock, net of offering costs 2,851,692 412,728
----------------- -----------------
Net cash provided by (used in) financing activities 672,859 164,350
----------------- -----------------
Net decrease in cash (307,666) (3,079,637)
Cash, beginning of period 643,109 3,703,367
----------------- -----------------
Cash, end of period $ 335,443 $ 623,730
================= =================
</TABLE>
Nine Months Ended September 30,
Supplemental Cash Flow Information - (Unaudited) 1997 1996
---- ----
Interest paid during the period $690,764 $485,550
Taxes paid during the period - -
Non Cash Investing and Financing Activities
In August 1997, $946,000 of assets were purchased in accordance with a Purchase
and Sales Agreement. The purchase was financed through the Company's credit
facility. (See Footnote 2)
In January 1996, $190,000 of debentures were converted to 144,344 shares of
common stock.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
5
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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, 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.
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 August 1, 1997, the Company 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 acquisition was financed under the existing credit
facility.
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
6
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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 September 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.
(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.
7
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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 September 30, 1997, net
sales were $6,411,775 compared to $7,290,157 for the third quarter of 1996, a
decrease of $878,382 or 12%. This decrease in sales is directly attributable to
the divestiture of Organi-Gro, positively offset by the increased sales due to
the CDR Mid Atlantic purchase. For the first nine months of 1997, net sales
increased to $18,511,305 from $15,781,570 for the same period in 1996. This
increase in net sales of $2,729,735 is primarily attributable to the
acquisitions of Pima Gro and CDR Mid Atlantic offset by the sale of Organi-Gro.
Gross profit for the third quarter was $1,126,700 or 17.6% of sales,
compared with $1,710,096 or 23.4% of sales for the same period in 1996. This
decrease in gross margin is due to lower volumes associated with project clean
outs. Year to date, the gross margins were $3,240,671 or 17.5% in 1997, and
$3,399,590 and 21.5% respectively in 1996. This year to date reduction in gross
margins pertains to lower volumes in project clean outs, and due to disposal
fees paid, for the disposal of biosolids in landfills in lieu of land
application, due to weather issues.
Selling, general and administrative expenses decreased to $672,791 for
the quarter and $2,401,656 year-to-date. This decrease in selling, general and
administrative expenses is the result of cost reduction efforts begun in the
second quarter.
Interest expense for the quarter ended September 30, 1997 was $140,990.
Interest expense for the first nine months of 1997 increased to $691,350 from
$511,470 in 1996. This increase in interest cost is directly attributable to
increased borrowings associated with the acquisitions of Pima Gro and the
finance cost of new assets acquired.
Other income for the nine months ending September 30, 1997 is the
result of a legal settlement in favor of the Company, and collections on the
notes receivable pertaining to the Organi-Gro asset sale.
As a result of the foregoing, the third quarter of 1997 reflects net
income of $402,499 or $.05 per share compared to net income of $362,864 or $.06
per share in the third quarter of 1996. Year-to-date net income was $593,978 or
$.08 per share in 1997 compared to $689,059 or $.11 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.
During the nine months ended September 30, 1997, the Company reduced
total debt by approximately $2.3 million, leaving borrowings in the aggregate
amount of $8,431,540, the current portion of which was $2,240,927. 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.
During the nine months ended September 30, 1997, the Company expended
$762,997 for capital equipment purchases. The majority of the purchases were
financed through borrowings, net of the proceeds received from the sale of idle
assets.
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At September 30, 1997, the Company had positive working capital of
$350,186. Management believes that the Company will be able to maintain positive
working capital throughout 1997.
On August 1, 1997, the Company bought all of the assets and assumed
certain revenue contracts for the Organics Division of Browning Ferris
Industries Inc.. The purchase of these assets were financed under the LaSalle
Bank credit facility. This new region, "CDR Mid Atlantic", should generate
annual revenue in excess of $6.0 million.
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.
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 September 30, 1997, the Company had
borrowings under the facility in the amount of approximately $4.9 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.
9
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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
September 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: October 21, 1997 By: Daniel L. Shook /S/
-------------------
Vice President and Chief Financial Officer
Date: October 21, 1997 By: Thomas J. Bintz /S/
-------------------
Corporate Controller
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EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 680,805
<SECURITIES> 64,504
<RECEIVABLES> 4,190,350
<ALLOWANCES> 219,747
<INVENTORY> 0
<CURRENT-ASSETS> 5,758,363
<PP&E> 13,384,252
<DEPRECIATION> 4,816,059
<TOTAL-ASSETS> 18,846,585
<CURRENT-LIABILITIES> 5,408,177
<BONDS> 6,190,613
0
0
<COMMON> 15,359
<OTHER-SE> 7,232,436
<TOTAL-LIABILITY-AND-EQUITY> 18,846,585
<SALES> 18,511,305
<TOTAL-REVENUES> 18,511,305
<CGS> 15,270,634
<TOTAL-COSTS> 15,270,634
<OTHER-EXPENSES> (446,313)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 691,350
<INCOME-PRETAX> 593,978
<INCOME-TAX> 0
<INCOME-CONTINUING> 593,978
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 593,978
<EPS-PRIMARY> 0.08
<EPS-DILUTED> 0.08
</TABLE>
