<PAGE> 1
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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 JUNE 30, 1998 COMMISSION FILE NUMBER 0-21054
SYNAGRO TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its Charter)
<TABLE>
<S> <C>
DELAWARE 76-0511324
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5850 SAN FELIPE, SUITE 500 HOUSTON, TEXAS 77057
(Address of principal executive offices) (Zip Code)
</TABLE>
(Registrant's telephone number, including area code) (713) 706-6180
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.
<TABLE>
<CAPTION>
CLASS OUTSTANDING AT AUGUST 14, 1998
----- ------------------------------
<S> <C>
Common stock, par value $.002 12,382,947
</TABLE>
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SYNAGRO TECHNOLOGIES, INC.
INDEX
PART I -- FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Condensed Consolidated Balance Sheets as of June 30, 1998
(Unaudited) and December 31, 1997......................... 3
Condensed Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 1998 and 1997
(Unaudited)............................................... 4
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 1998 and 1997 (Unaudited)........... 5
Notes to Condensed Consolidated Financial Statements........ 7-10
Management's Discussion and Analysis of Results of
Operations and Financial Condition........................ 11-12
PART II -- OTHER INFORMATION................................ 13
</TABLE>
2
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SYNAGRO TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
Current Assets:
Cash and cash equivalents................................. $ 1,910,213 $ 166,994
Short-term investments.................................... 64,504 64,504
Restricted cash, current portion.......................... 383,536 172,925
Accounts receivable, net.................................. 4,416,363 3,942,355
Note receivable........................................... 500,133 500,133
Prepaid expenses and other current assets................. 1,509,082 1,330,018
------------ ------------
Total current assets.............................. 8,783,831 6,176,929
Property, machinery & equipment, net........................ 10,063,466 8,914,588
Other Assets:
Non-compete............................................... 132,212 --
Goodwill, net............................................. 21,282,210 4,430,277
Restricted cash, long-term portion........................ 123,387 173,387
Other assets.............................................. 643,368 249,938
------------ ------------
Total assets...................................... $ 41,028,474 $ 19,945,119
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses..................... $ 3,984,267 $ 4,021,610
Current portion of long-term debt......................... 5,686,892 2,951,291
------------ ------------
Total current liabilities......................... 9,671,159 6,972,901
Long term debt.............................................. 8,718,946 5,494,549
Stockholders' Equity
Common Stock, $.002 par value, 100,000,000 shares
authorized, 7,610,305, 6,355,434 issued and
outstanding............................................ 21,817 15,221
Additional paid in capital................................ 44,766,222 25,323,915
Accumulated deficit....................................... (22,149,670) (17,861,467)
------------ ------------
Total stockholders' equity........................ 22,638,369 7,477,669
------------ ------------
Total liabilities and stockholders' equity........ $ 41,028,474 $ 19,945,119
============ ============
</TABLE>
The accompanying notes are an integral part of these Condensed Consolidated
Financial Statements.
3
<PAGE> 4
SYNAGRO TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------- -------------------------
1998 1997 1998 1997
---------- ---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net sales.................................. $5,888,537 $5,362,224 $11,510,171 $12,099,530
Cost of services........................... 5,437,875 4,472,232 10,383,795 9,985,559
---------- ---------- ----------- -----------
Gross profit............................... 450,662 889,992 1,126,376 2,113,971
Selling, general and administrative
expenses................................. 856,489 801,658 1,444,774 1,728,865
Special charges (credits).................. (70,436) -- (183,435) --
---------- ---------- ----------- -----------
Income from operations..................... (335,391) 88,334 (134,963) 385,106
Other income (expense)
Other income............................. 82,421 274,501 256,101 356,732
Interest expense......................... (232,228) (295,107) (474,753) (550,359)
---------- ---------- ----------- -----------
Income (loss) before provision for income
taxes.................................... (485,198) 67,728 (353,615) 191,479
---------- ---------- ----------- -----------
Provision for income taxes................. -- -- -- --
Net income (loss) before redeemable
preferred stock dividends................ (485,198) 67,728 (353,615) 191,479
Redeemable preferred stock dividends....... 420,001 -- 3,934,588 --
---------- ---------- ----------- -----------
Net earnings (loss) on common stock........ $ (905,199) $ 67,728 $(4,288,203) $ 191,479
========== ========== =========== ===========
Income (loss) per common share equivalent:
Net income (loss), basic................. (0.11) .01 $ (0.54) $ 0.03
Net income (loss), diluted............... (0.11) .01 $ (0.54) $ 0.03
Weighted average shares outstanding,
basic.................................... 8,198,419 7,679,678 7,905,987 7,422,544
Weighted average shares outstanding,
diluted.................................. 8,198,419 7,769,448 7,905,987 7,468,874
</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
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------
1998 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
Cash Flows from operating activities:
Net Income (loss) before redeemable preferred stock
dividends.............................................. $ (353,615) $ 191,479
Adjustments to reconcile net income to net cash provided
by (used in) operating activities
Depreciation and amortization.......................... 805,186 829,450
Gain on sale of equipment.............................. (128,457) (57,030)
Special charges (credits).............................. (183,435) --
(Increase) decrease in the following:
Accounts receivable.................................... 717,768 (433,940)
Prepaid expenses and other............................. (168,915) (590,050)
Other assets........................................... (319,082) (40,000)
Decrease in accounts payable and accrued expenses......... (280,222) (972,316)
------------ -----------
Net cash provided by (used in) operating activities......... 89,228 (730,586)
Cash flows from investing activities:
Additions to property, machinery & equipment.............. (318,652) (808,700)
Proceeds from sale of equipment........................... 319,355 227,619
Cash paid for acquired business, net of cash acquired..... (1,314,193) --
Sales (purchases) of short-term investments, net.......... (210,611) 504,000
------------ -----------
Net cash used in investing activities....................... (1,524,101) (77,081)
Cash flows from financing activities:
Proceeds from debt........................................ 851,855 1,511,514
Payments on debt.......................................... (840,352) (2,933,642)
Decrease (increase) in restricted cash.................... 50,000 -0-
Sale of redeemable preferred stock........................ 3,480,432 -0-
Distributions............................................. (420,001) --
Sale of common stock, net of offering costs............... 56,158 2,851,692
------------ -----------
Net cash provided by financing activities................... 3,178,092 1,429,564
------------ -----------
Net increase (decrease) in cash and cash equivalents........ 1,743,219 (34,085)
Cash and cash equivalents, beginning of period.............. 166,994 643,109
------------ -----------
Cash and cash equivalents, end of period.................... $ 1,910,213 $ 609,024
============ ===========
</TABLE>
The accompanying notes are an integral part of these Condensed Consolidated
Financial Statements.
5
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SYNAGRO TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS
JUNE 30,
--------------------
1998 1997
-------- --------
(UNAUDITED)
<S> <C> <C>
Supplemental Cash Flow Information
Interest paid during the period........................... $470,201 $440,071
Taxes paid during the period.............................. -- --
</TABLE>
NON-CASH INVESTING AND FINANCING ACTIVITIES
On March 31, 1998, the Company issued 1,458,335 shares of Series B
Preferred Stock "Preferred Stock" with a beneficial conversion feature. The
Company recognized the value of the beneficial conversion feature of $3,514,587
as a preferred dividend.
On June 10, 1998, the Preferred Stock was converted to 1,458,336 shares of
common stock.
The Company sold the operations of a wholly-owned subsidiary in 1997. The
Assets and liabilities sold were approximately $978,000 net of a loss allowance
of approximately $2.4 million and assumed debt by the purchaser was
approximately $978,000 in exchange for a note receivable of approximately $1.4
million which was reserved by the Company.
6
<PAGE> 7
SYNAGRO TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(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, 1998 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, 1997.
The accounting policies followed by the Company in preparing interim
consolidated financial statements are described in the "Notes to Consolidated
Financial Statements" in the Company's Form 10-K, as amended, for the year ended
December 31, 1997.
Synagro Technologies, Inc. (the Company), is engaged in the biosolids
management business. The Company does this through beneficial reuse of organic
materials, transportation and monitoring of biosolids, and the marketing of end
products from the treatment of such materials. The Company's primary
concentration of customers is in the states of Arkansas, Arizona, California,
Maryland, Ohio, Pennsylvania, Texas, Virginia and the District of Columbia.
Recently Issued Accounting Standard
In March 1998, the AICPA issued Statement of Position (SOP) 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use. The SOP provides guidance with respect to accounting for the
various types of costs incurred for computer software developed or obtained for
the Company's use. The Company is required and will adopt SOP 98-1 in the first
quarter of Fiscal 1999 and believes that adoption will not have a significant
effect on its consolidated financial statements.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-up Activities." At adoption, SOP 98-5 requires the Company to write off
any unamortized start up costs as a cumulative change in accounting principle
and, going forward, expense all start-up activity costs as they are incurred.
The Company is required and will adopt SOP 98-5 in the first quarter of Fiscal
1999 and believes that adoption will not have a significant effect on its
consolidated financial statements.
In June 1997, SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information," was issued. SFAS No. 131 requires that companies
report financial and descriptive information about their reportable operating
segments. Segment information to be reported is to be based upon the way
management organizes the segments for making operating decisions and assessing
performance. The Company believes the adoption of SFAS No. 131 will have no
significant effect on its financial reporting.
7
<PAGE> 8
SYNAGRO TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) ACQUISITIONS AND DISPOSITIONS
SALE OF ORGANI-GRO, INC.
In March 1997, the Company sold the operations of Organi-Gro, a wholly
owned subsidiary, to its former owners. Consideration included subordinated
notes of approximately $1.4 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. In addition, proceeds received
from the sale of products by the purchaser are to be remitted on a monthly basis
with a total amount of $603,930 due no later than September 16, 1998. The
balance of the notes are due in March 2002. The notes were reserved at the date
of sale due to considerable doubt relative to realization. During 1997,
approximately $300,000 was realized on the notes through cash collections or
other consideration. During the fourth quarter of 1997, management assessed
realization of the notes based on collection history to date and current
financial condition of the purchasers and recognized approximately $500,000 of
the notes. An additional $183,435 was recognized during the six month period
ended June 30, 1998 and is reflected in Special charges (credits). As a result
of the 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. These charges
(credits) are included in "losses on assets held for sale and other special
charges (credits)" in the consolidated statements of operations in the Company's
Form 10-K, as amended, for the year ended December 31, 1997
A & J CARTAGE AND RELATED COMPANIES
On June 23, 1998, the Company purchased the stock of A & J Cartage, Inc., a
Wisconsin company, Michigan Organic Resources, Inc., a Michigan company and A &
J Cartage Southeast, Inc., a Florida corporation (collectively "A & J") for
approximately $18,000,000. The acquisitions were financed through the issuance
of 1,812,533 in shares of Common Stock, $4,150,000 in notes and $1,581,400 in
cash. The transaction was recorded using the purchase method of accounting.
(3) PREFERRED STOCK
The Company is authorized to issue up to 10,000,000 shares of preferred
stock, par value of $.002 per share. 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.
REDEEMABLE PREFERRED STOCK
On March 31, 1998, the Company issued 1,458,335 shares of Series B
Preferred Stock ("Preferred Stock"), par value $.002 per share for total
consideration of $3,500,004. The Preferred Stock is convertible by the holders
to Common Stock at a rate of 1:1, with a beneficial conversion feature
permitting the shareholders to convert their holdings to common shares at $2.40.
The market price of the Company's common stock at date of issuance was $4.81.
The Company recognized the value of the beneficial conversion feature of
approximately $3.5 million as a preferred dividend. The value of such preferred
dividend has no impact on the Company's cash flows, but reduced basic and
diluted earnings available to common stockholders. The Company is required to
effect one registration statement to register such securities. If any holder
elects not to include its securities in such registration, they will have no
other rights to have such securities registered
8
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SYNAGRO TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
except as discussed below. At any time the Company proposes to register for sale
any of its equity securities (excluding registrations on Form S-8 or Form S-4,
or any comparable successor forms), the holders shall have the rights to be
included.
Each share of Preferred Stock is entitled to vote with the Common Stock
with one vote per share. The vote of a majority of the Preferred stock is
required to validate certain specified actions by the Company. Holders of the
Preferred Stock are entitled to a liquidation preference equal to the face value
and accrued and unpaid dividends, if any, plus a special redemption premium in
the event of a dissolution, liquidation or winding up of the affairs of the
Company or if a change of control occurs, as defined. The special redemption
premium begins at 112% of the liquidation preference in 1998 and increases to
172% in 2003 or thereafter.
Unless restricted from doing so by law or covenant of a loan or financing
agreement, as defined therein, the Preferred Stock is redeemable by the Company
on April 1, 2003, at the greater of the sum of $2.40 per share, and accrued but
unpaid dividends, if any, or fair market value, as defined. The Preferred Stock
will automatically convert to Common Stock in certain circumstances related to
an underwritten public offering generating proceeds in excess of a defined
amount or within four years if the Company achieves a certain level of trailing
twelve-month diluted earnings per share. The Preferred Stock contains certain
anti-dilution conversion features.
No dividends accrue on the Preferred Stock through its fifth anniversary
date. Thereafter, if not redeemed, dividends accrue at a quarterly rate of $.108
per share, decreasing at a rate of $.0048 per quarter thereafter. Dividends are
payable in additionally issued Preferred Stock.
On June 10, 1998, a dividend of approximately $420,000 was paid to the
holders of preferred stock as consideration for converting the shares of
preferred stock held by them into shares of Common Stock. The preferred shares
were immediately converted into 1,458,336 shares of Common Stock.
(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.
9
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SYNAGRO TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) EARNINGS (LOSS) PER COMMON SHARE
The FASB issued SFAS No. 128, "Earnings Per Share" in February 1997.
Implementation of SFAS No. 128 is required for periods ending after December 15,
1997. SFAS No. 128 required dual presentation of earnings per share (EPS); basic
EPS and diluted EPS. Basic EPS excludes dilution and is computed by dividing net
income by the weighted average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock. For purposes of the calculation, outstanding stock options,
warrants and redeemable preferred stock are considered common stock equivalents.
Diluted per common share amounts are not applicable for loss periods. For the
six months ended June 30, 1997, the difference in weighted average numbers of
Common Shares between basic and diluted earnings per share of 95,549 represents
the impact of stock options. The following table summarizes the basic EPS and
diluted EPS computations for the quarter and six months ended June 30, 1998 and
1997:
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
------------------------ ------------------------
1998 1997 1998 1997
----------- ---------- ----------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net income before redeemable preferred stock
dividends................................. $ (485,198) $ 67,728 $ (353,615) $ 191,479
Redeemable preferred stock dividends........ 420,001 3,934,588 --
----------- ---------- ---------- ----------
Net earnings (loss) on common stock......... (905,999) 67,728 (4,288,203) 191,479
=========== ========== ========== ==========
Basic earnings (loss) per share:
Earnings per share prior to preferred
dividend............................... $ (.06) $ 0.01 $ (.04) $ 0.03
Preferred stock dividend.................. (.05) -- (.50) --
----------- ---------- ---------- ----------
Basic earnings (loss) per common share.... (0.11) 0.01 (.54) 0.03
Weighted average number of common
shares................................. 8,198,419 7,422,544 7,905,987 7,422,544
Diluted earnings (loss) per share:
Earnings per share prior to preferred
dividend............................... $ (.06) $ 0.01 $ (.04) $ 0.03
Preferred stock dividend.................. (.05) -- (.50) --
----------- ---------- ---------- ----------
Diluted earnings (loss) per common
share.................................. $ (0.11) $ 0.01 $ (.54) $ 0.03
Weighted average number of common shares.... 8,198,419 7,468,874 7,905,987 7,422,544
Weighted average shares outstanding,
diluted................................... 8,198,419 7,769,448 8,198,419 7,468,874
</TABLE>
10
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
INTRODUCTION
The following discussion should be read in conjunction with the
consolidated historical and pro forma combined financial statements of the
Company and related notes thereto included elsewhere in this Form 10-Q and the
Annual Report on Form 10-K/A for the year ended December 31, 1997 (the "Form
10-K/A"). This discussion contains forward-looking statements regarding the
business and industry of the Company within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements are based on the
current plans and expectations of the Company and involve risks and
uncertainties that could cause actual future activities and results of
operations to be materially different from those set forth in the
forward-looking statements.
The Company is a national provider of Biosolids management. The Company's
plans are to consolidate the fragmented biosolids markets, and currently
performs services for municipalities local agencies and private industry. The
timing and magnitude of acquisitions and assimilation costs may materially
affect future operating results. Accordingly, the operating results for any
period may not necessarily be indicative of the results that may be achieved for
any subsequent period.
On June 23, 1998, the Company acquired A&J which serves Florida, Illinois,
Wisconsin and Michigan. The transaction was recorded using the purchase method
of accounting. Additionally, on July 24, 1998, subsequent to the quarter ended
June 30, 1998 (see Item 5), the Company acquired Recyc Inc. ("Recyc") a
composting facility servicing the California market. This transaction will be
recorded using the purchase method of accounting.
The following unaudited pro forma information is presented supplementary to
reflect pro forma results of operations as if the acquisitions of A & J and
Recyc, occurred as of the beginning of the respective periods. Pro forma
combined and historical results are not necessarily indicative of future results
of the Company because, among other things, the acquired companies were not
under common control or management prior to their acquisition.
The pro forma results of operations include (i) the elimination of sales
and related costs and expenses of certain Recyc operations not retained by the
Company, (ii) an adjustment as a result of a renegotiated lease agreement
entered into in connection with the acquisition of Recyc, (iii) a depreciation
adjustment related to purchase price adjustments to property and equipment, (iv)
an adjustment to certain transportation costs based on the transportation
agreement entered into in connection with acquisition of Recyc, (v) an
adjustment to compensation expense to reflect additional salary costs related to
an employment agreement with a seller of A & J, net of certain salary costs
attributable to staff reductions, (vii) the amortization of goodwill to be
recorded in connection with the acquisitions, (viii) additional interest expense
on debt incurred in connection with the acquisitions, and (ix) the elimination
of certain non-recurring charges.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
QUARTER SIX MONTHS
ENDED ENDED
JUNE 30, 1998 JUNE 30, 1998
------------- -------------
<S> <C> <C>
Net sales................................................... $10,128,707 $18,611,899
Cost of services............................................ 8,012,829 15,221,151
----------- -----------
Gross profit................................................ 2,115,878 3,390,748
Selling, general and administrative expenses................ 1,370,882 2,421,548
Special charges (credits)................................... (70,436) (183,435)
----------- -----------
Income from operations...................................... 815,432 1,152,635
Other income (expense), net................................. (446,936) (722,248)
----------- -----------
Income before tax........................................... 368,496 430,387
</TABLE>
11
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HISTORICAL RESULTS OF OPERATIONS. For the quarter ended June 30, 1998, net
sales were $5,888,537 compared to $5,362,224 for the second quarter of 1997, an
increase of $526,313 or 9.8%. For the first half of 1998, net sales decreased
from $12,099,530 to $11,510,171 for the same period in 1997. The fluctuations
are primarily attributable to the divestiture of Organi-Gro in the first quarter
of 1997.
Cost of operations and gross profit for the second quarter of 1998 were
$5,437,875 and $450,662 respectively, compared with $450,662 and $889,992
respectively, for the second quarter of 1997, resulting in a decrease in gross
profit as a percentage of sales from 16.6% in 1997 to 7.6% in 1998. Cost of
operations and gross profit for the first half of 1998 changed to $10,383,795
and $1,126,376 respectively from $9,985,554 and $2,113,971 respectively for the
same period in 1997, resulting in a decrease in gross profit as a percentage of
sales from 17.5% in the first half of 1997 to 9.8% in 1998. The decrease in
gross profit as a percentage of sales is primarily a result of winter conditions
and unseasonably heavy rainfall in the Mid Atlantic Region and California which
caused additional expenses associated with transportation and landfill disposal
costs in lieu of the land application access which is less costly. Gross margins
are anticipated to improve for the remainder of the year as these landfill
disposal fees are expected to decline.
Selling, general and administrative expenses increased by $54,831 for the
quarter and decreased $284,091 for the six months ended June 30, 1998. Selling,
general and administrative expenses increased as a result of increased corporate
staffing in the second quarter of 1998. Year to date is still below 1997 levels
due to cost reductions implemented throughout 1997.
Interest expense for the quarter ended June 30, 1998 was $232,228 or a
decrease of $62,879 from the quarter ended June 30, 1997. Interest expense for
the first half of 1998 decreased to $474,758 from $550,359 in 1997. The
decreases relate to lower levels of indebtedness.
Other income for the second quarter of 1998 of $82,421 compares with
$274,501 for the same period in 1997. Other income for the first half of 1998
was $256,101 compared to $356,732 for 1997. The differences relate to legal
settlements in 1997 partially offset by higher gains on sales of assets in 1998.
As a result of the foregoing, the second quarter of 1998 reflects a net
loss, before preferred dividends, of $485,198 or $.06 per share compared to net
income of $67,728 or $.01 per share in the second quarter of 1997. The
year-to-date net loss before preferred dividends was $353,615 or $.04 per share
in 1998 compared to net income of $191,479 or $.03 per share in 1997.
During the second quarter of 1998, the Company paid approximately $420,000
in dividends to preferred stockholders. In the first quarter the Company
recognized a Preferred Stock dividend of $3,514,587, relating to redeemable
Preferred Stock issued with a beneficial conversion feature. The value of the
first quarter preferred dividend had no impact on the Company's cash flows. See
Note (3) to the Notes to Condensed Consolidated Financials for further
discussion.
As a result of the Company's cumulative operating losses, the Company has
not paid income tax since inception. As of December 31, 1997, 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.
YEAR 2000
The Company is currently implementing a Year 2000 program to ensure that
the Company's computer systems and applications will function properly beyond
1999. The Company does not expect to incur significant expenditures to address
this issue. The ability of third parties with whom the Company transacts
business to address adequately their Year 2000 issues is outside of the
Company's control. There can be no assurance that the failure of the Company or
such third parties to address adequately their respective Year 2000 issues will
not have a material adverse effect on the Company's financial condition or
results of operations.
LIQUIDITY AND CAPITAL RESOURCES. The Company has historically financed its
operations principally through the sale of equity and debt securities and
through funds provided by operating activities.
12
<PAGE> 13
On March 31, 1998, the Company issued a Series B Preferred Stock, with
shares outstanding of 1,458,335, for total cash consideration of $3,500,004.
This Series B Preferred Stock is convertible into common stock on a 1:1 ratio at
a conversion price of $2.40. See Note (3) to the Notes to Condensed
Consolidation Financial Statements for further discussion. On June 6, 1998 the
preferred stock was converted to 1,458,335 shares of Common Stock.
During the period ending June 30, 1998, the Company purchased additional
capital assets in the amount of $140,803.
The Company has a credit facility with LaSalle National Bank ("LaSalle") in
the amount of $10,000,000 ($5 million term and $5 million line of credit). At
June 30, 1998, the Company had borrowings under the term loan in the amount of
$3,500,000 and $1,634,321 under the line of credit. Amounts under the line of
credit are subject to a borrowing base consisting of 85% of accounts receivable,
as defined in the credit facility. The LaSalle credit facility requires the
Company to meet certain loan covenants, and the Company was in compliance with
those covenants as of June 30, 1998. This credit facility expires in September
1999 and management anticipates that it will re-negotiate and/or refinance this
credit facility prior to that time.
As of June 30, 1998, the Company had long-term borrowings in the aggregate
amount of $8,718,946, the current portion of which was $5,686,892. The Company's
revolving line of credit has a lock box requirement and subjective acceleration
clause. As a result, in order to comply with Emerging Issues Task Force
pronouncement 95-22, the Company has classified the revolving line as a current
liability. However, management believes the bank will continue to provide credit
to the Company through the expiration date of September 30, 1999. The Company
believes that its cash requirements for the remainder of 1998 can be met with
its existing cash and short-term investments at June 30, 1998, cash flow from
operations and its borrowing availability under its credit facility.
At June 30, 1998, the Company had a working capital deficit of $887,328.
The Company's revolving line of credit has a lock box requirement and subjective
acceleration clause. As a result, in order to comply with Emerging Issues Task
Force pronouncement 95-22, the Company has classified the revolving line as a
current liability. However, management believes the bank will continue to
provide credit to the Company through the expiration date of September 30, 1999.
The Company believes that its cash requirements for 1998 can be met with its
existing cash and short-term investments at June 30, 1998, cash flows from
operations and its borrowing availability under its credit facility. Beyond
1998, there can be no assurances that additional financing requirements will not
be required to maintain liquidity as the LaSalle credit facility will expire in
September 1999 and will need to be renegotiated and/or refinanced prior to that
time.
13
<PAGE> 14
PART II -- OTHER INFORMATION
ITEM 1. LITIGATION
The Company is involved in litigation and claims arising in the ordinary
course of its business. Management believes, based on consultation with legal
counsel and accruals provided, that the ultimate outcome of these matters will
not have a material adverse impact on the Company's operations or financial
position.
ITEM 5. SUBSEQUENT EVENTS
On July 23, 1998, the Company acquired Recyc, Inc., a biosolids composting
company for approximately $14,000,000. The acquisition was financed through the
issuance of 1,475,323 shares of common stock, $4 million in debt and $658,000 in
cash. The transaction will be recorded using the purchase method of accounting.
ITEM 6. FINANCIAL STATEMENTS, EXHIBITS AND REPORTS ON FORM 8-K.
a. Exhibit Index
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
3.1 -- Restated Certificate of Incorporation of Synagro
Technologies, Inc. (the "Company") dated August 16, 1996
(Exhibit 3.1 to the Company's Post-Effective Amendment
No. 1 to Registration Statement No. 33-95028, dated
October 25, 1996, is incorporated herein by reference).
3.2 -- Bylaws of the company dated August 5, 1996. (Exhibit 3.2
to the Company's Post-Effective Amendment No. 1 to
Registration Statement No. 33-95028, dated October 25,
1996, is incorporated herein by reference).
4.1 -- Specimen Common Stock Certificate of the Company (Exhibit
4.1 to the Company's Post-Effective Amendment No. 1 to
Registration Statement on Form 10, dated December 29,
1992, is incorporated herein by reference).
4.2 -- Specimen Warrant Certificate of the Company. (Exhibit 4.2
to the Company's Registration Statement on Form S-1 (No.
33-95028, dated July 27, 1995, and as amended, is
incorporated herein by reference).
4.3 -- Rights Agreement, dated as of December 20, 1996, between
the Company and Intercontinental Registrar & Transfer
Agency, Inc., as Rights Agent, which includes as Exhibit
A thereto the Synagro Technologies, Inc. Statement of
Designations, Preferences, Limitations and Relative
Rights of its Series A Junior Participating Preferred
Stock, and as Exhibit C thereto the Form of Rights
Certificate. (Incorporated by reference to Exhibit No.
4.1 to Registrants Registration Statement on Form 8-A
dated December 27, 1996).
4.4 -- Certificate of Designation, Preferences, Rights and
Limitations of Series B Preferred Stock of Synagro
Technologies, Inc. (Exhibit 4.4 to the Company's Amended
and Restated Annual Report on Form 10-K, as amended, for
the year ended December 31, 1997, is incorporated herein
by reference).
4.5 -- Registration Rights Agreement, dated as of March 31,
1998, among the Company, Environmental Opportunities
Fund, L.P., Environmental Fund (Cayman), L.P. and other
purchasers of the Company's Series B Preferred Stock as
listed on Exhibit A thereto. (Exhibit 4.5 to the
Company's Amended and Restated Annual Report on Form
10-K, as amended, for the year ended December 31, 1997,
is incorporated herein by reference).
</TABLE>
14
<PAGE> 15
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
4.6 -- Specimen Series B Preferred Stock Certificate. (Exhibit
4.6 to the Company's Amended and Restated Annual Report
on Form 10-K, as amended, for the year ended December 31,
1997, is incorporated herein by reference).
10.1 -- Synagro Technologies, Inc. Subscription Agreement, dated
as of March 31, 1998 among the Company, Environmental
Opportunities Fund, L.P., Environment Opportunities Fund
(Cayman), L.P. and other purchasers of the Company's
Series B Preferred Stock as listed on Exhibit A thereto.
(Exhibit 10.1 to the Company's Amended and Restated
Annual Report on Form 10-K, as amended, for the year
ended December 31, 1997, is incorporated herein by
reference).
10.2 -- Form of Indemnification Agreement. (Appendix F to the
Company's Proxy Statement on Schedule 14A for Annual
Meeting of Stockholders, dated May 9, 1996, is
incorporated herein by reference).
10.3 -- Amended and Restated 1993 Stock Option Plan dated August
5, 1996. (Exhibit 4.1 to the Company's Registration
Statement on Form S-8 (No. 333-18029), dated December 17,
1996, is incorporated herein by reference).
10.4 -- Lease Agreement between the Company and Green Coast
Enterprises, Inc. dated February 1, 1996. (Exhibit 10.2
to the Company's Annual Report on Form 10K for the year
ended December 31, 1995, is incorporated herein by
reference).
10.5 -- Employment Agreement between Pima Gro Systems, Inc. and
Wilson Nolan, dated July 18, 1996. (Exhibit 10.1 to the
Company's current Report on Form 8-K, dated July 31,
1996, is incorporated herein by reference).
10.6 -- Agreement for the Purchase of Stock by and among Synagro
Technologies, Inc. CDR Environmental, Inc. Pima Gro, Pima
Gro Systems 2, Inc., Wilson Nolan, Herbert Kai and John
Kai, Jr., dated July 18, 1996. (Exhibit 2.1 to the
Company's current Report on Form 8-K, dated July 31,
1996, is incorporated herein by reference).
10.7 -- 6% Promissory Note made by Custom Poultry to Organi-Gro
and the Company in the principal amount of $1,152,381,
dated April 1, 1997 (Exhibit 10.8 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996,
is incorporated herein by reference).
10.8 -- Guaranty of Tony D. Childers ("Childers") for 6%
Promissory Note made by Custom Poultry to Organi-Gro,
dated April 1, 1997 (Exhibit 10.9 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996,
is incorporated herein by reference).
10.8.1 -- 6% Promissory Note made by Hodges to Organi-Gro and the
Company in the principal amount of $3,308,203, dated
April 1, 1997. (Exhibit 10.10 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996,
is incorporated herein by reference).
10.10 -- Guaranty of Childers and Jack Hodges for 6% Promissory
Note made by Hodges to Organi-Gro, dated April 1, 1997
(Exhibit 10.11 to the Company's Annual Report on Form
10-K for the year ended December 31, 1996, is
incorporated herein by reference).
10.11 -- Employment Agreement between the Company and Donald L.
Thone, dated April 16, 1998. (Exhibit 10.11 to the
Company's Amended and Restated Annual Report on Form
10-K, as amended, for the year ended December 31, 1997,
is incorporated herein by reference).
</TABLE>
15
<PAGE> 16
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
10.12 -- Employment Agreement between the Company and Daniel L
Shook, dated April 16, 1998. (Exhibit 10.12 to the
Company's Amended and Restated Annual Report on Form
10-K, as amended, for the year ended December 31, 1997,
is incorporated herein by reference).
10.13 -- Employment Agreement between the Company and Ross M.
Patten, dated April 16, 1998. (Exhibit 10.12 to the
Company's Amended and Restated Annual Report on Form
10-K, as amended, for the year ended December 31, 1997,
is incorporated herein by reference).
21.1 -- Subsidiaries of Synagro Technologies, Inc. (Exhibit 21.1
to the Company's Amended and Restated Annual Report on
Form 10-K, as amended, for the year ended December 31,
1997, is incorporated herein by reference).
*27.1 -- Financial Data Schedule.
</TABLE>
- ---------------
* Filed herewith
b. Form 8-K
On June 30, 1998, the Company filed a Current Report on Form 8-K, reporting
the Company's acquisition of A&J Cartage, Inc., a Wisconsin corporation,
Michigan Organic Resources, Inc., a Michigan corporation and A&J Cartage, Inc.,
Southeast, a Florida corporation. The financial statements of the businesses
acquired as well as pro forma financial information was filed was filed Form
8-K/A on August 13, 1998.
16
<PAGE> 17
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.
<TABLE>
<S> <C>
SYNAGRO TECHNOLOGIES, INC.
Date: By: /s/ ROSS M. PATTEN
---------------------------------- -------------------------------------------------
Chief Executive Officer
Date: By: /s/ THOMAS J. BINTZ
---------------------------------- -------------------------------------------------
Vice President and
Corporate Controller
</TABLE>
17
<PAGE> 18
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
3.1 -- Restated Certificate of Incorporation of Synagro
Technologies, Inc. (the "Company") dated August 16, 1996
(Exhibit 3.1 to the Company's Post-Effective Amendment
No. 1 to Registration Statement No. 33-95028, dated
October 25, 1996, is incorporated herein by reference).
3.2 -- Bylaws of the company dated August 5, 1996. (Exhibit 3.2
to the Company's Post-Effective Amendment No. 1 to
Registration Statement No. 33-95028, dated October 25,
1996, is incorporated herein by reference).
4.1 -- Specimen Common Stock Certificate of the Company (Exhibit
4.1 to the Company's Post-Effective Amendment No. 1 to
Registration Statement on Form 10, dated December 29,
1992, is incorporated herein by reference).
4.2 -- Specimen Warrant Certificate of the Company. (Exhibit 4.2
to the Company's Registration Statement on Form S-1 (No.
33-95028, dated July 27, 1995, and as amended, is
incorporated herein by reference).
4.3 -- Rights Agreement, dated as of December 20, 1996, between
the Company and Intercontinental Registrar & Transfer
Agency, Inc., as Rights Agent, which includes as Exhibit
A thereto the Synagro Technologies, Inc. Statement of
Designations, Preferences, Limitations and Relative
Rights of its Series A Junior Participating Preferred
Stock, and as Exhibit C thereto the Form of Rights
Certificate. (Incorporated by reference to Exhibit No.
4.1 to Registrants Registration Statement on Form 8-A
dated December 27, 1996).
4.4 -- Certificate of Designation, Preferences, Rights and
Limitations of Series B Preferred Stock of Synagro
Technologies, Inc. (Exhibit 4.4 to the Company's Amended
and Restated Annual Report on Form 10-K, as amended, for
the year ended December 31, 1997, is incorporated herein
by reference).
4.5 -- Registration Rights Agreement, dated as of March 31,
1998, among the Company, Environmental Opportunities
Fund, L.P., Environmental Fund (Cayman), L.P. and other
purchasers of the Company's Series B Preferred Stock as
listed on Exhibit A thereto. (Exhibit 4.5 to the
Company's Amended and Restated Annual Report on Form
10-K, as amended, for the year ended December 31, 1997,
is incorporated herein by reference).
4.6 -- Specimen Series B Preferred Stock Certificate. (Exhibit
4.6 to the Company's Amended and Restated Annual Report
on Form 10-K, as amended, for the year ended December 31,
1997, is incorporated herein by reference).
10.1 -- Synagro Technologies, Inc. Subscription Agreement, dated
as of March 31, 1998 among the Company, Environmental
Opportunities Fund, L.P., Environment Opportunities Fund
(Cayman), L.P. and other purchasers of the Company's
Series B Preferred Stock as listed on Exhibit A thereto.
(Exhibit 10.1 to the Company's Amended and Restated
Annual Report on Form 10-K, as amended, for the year
ended December 31, 1997, is incorporated herein by
reference).
10.2 -- Form of Indemnification Agreement. (Appendix F to the
Company's Proxy Statement on Schedule 14A for Annual
Meeting of Stockholders, dated May 9, 1996, is
incorporated herein by reference).
10.3 -- Amended and Restated 1993 Stock Option Plan dated August
5, 1996. (Exhibit 4.1 to the Company's Registration
Statement on Form S-8 (No. 333-18029), dated December 17,
1996, is incorporated herein by reference).
10.4 -- Lease Agreement between the Company and Green Coast
Enterprises, Inc. dated February 1, 1996. (Exhibit 10.2
to the Company's Annual Report on Form 10K for the year
ended December 31, 1995, is incorporated herein by
reference).
</TABLE>
<PAGE> 19
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
10.5 -- Employment Agreement between Pima Gro Systems, Inc. and
Wilson Nolan, dated July 18, 1996. (Exhibit 10.1 to the
Company's current Report on Form 8-K, dated July 31,
1996, is incorporated herein by reference).
10.6 -- Agreement for the Purchase of Stock by and among Synagro
Technologies, Inc. CDR Environmental, Inc. Pima Gro, Pima
Gro Systems 2, Inc., Wilson Nolan, Herbert Kai and John
Kai, Jr., dated July 18, 1996. (Exhibit 2.1 to the
Company's current Report on Form 8-K, dated July 31,
1996, is incorporated herein by reference).
10.7 -- 6% Promissory Note made by Custom Poultry to Organi-Gro
and the Company in the principal amount of $1,152,381,
dated April 1, 1997 (Exhibit 10.8 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996,
is incorporated herein by reference).
10.8 -- Guaranty of Tony D. Childers ("Childers") for 6%
Promissory Note made by Custom Poultry to Organi-Gro,
dated April 1, 1997 (Exhibit 10.9 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996,
is incorporated herein by reference).
10.8.1 -- 6% Promissory Note made by Hodges to Organi-Gro and the
Company in the principal amount of $3,308,203, dated
April 1, 1997. (Exhibit 10.10 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996,
is incorporated herein by reference).
10.10 -- Guaranty of Childers and Jack Hodges for 6% Promissory
Note made by Hodges to Organi-Gro, dated April 1, 1997
(Exhibit 10.11 to the Company's Annual Report on Form
10-K for the year ended December 31, 1996, is
incorporated herein by reference).
10.11 -- Employment Agreement between the Company and Donald L.
Thone, dated April 16, 1998. (Exhibit 10.11 to the
Company's Amended and Restated Annual Report on Form
10-K, as amended, for the year ended December 31, 1997,
is incorporated herein by reference).
10.12 -- Employment Agreement between the Company and Daniel L
Shook, dated April 16, 1998. (Exhibit 10.12 to the
Company's Amended and Restated Annual Report on Form
10-K, as amended, for the year ended December 31, 1997,
is incorporated herein by reference).
10.13 -- Employment Agreement between the Company and Ross M.
Patten, dated April 16, 1998. (Exhibit 10.12 to the
Company's Amended and Restated Annual Report on Form
10-K, as amended, for the year ended December 31, 1997,
is incorporated herein by reference).
21.1 -- Subsidiaries of Synagro Technologies, Inc. (Exhibit 21.1
to the Company's Amended and Restated Annual Report on
Form 10-K, as amended, for the year ended December 31,
1997, is incorporated herein by reference).
*27.1 -- Financial Data Schedule.
</TABLE>
- ---------------
* Filed herewith
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,910,213
<SECURITIES> 64,504
<RECEIVABLES> 4,416,363
<ALLOWANCES> 185,575
<INVENTORY> 0
<CURRENT-ASSETS> 8,783,831
<PP&E> 15,513,150
<DEPRECIATION> 5,449,684
<TOTAL-ASSETS> 41,028,474
<CURRENT-LIABILITIES> 9,671,159
<BONDS> 8,718,946
0
0
<COMMON> 21,817
<OTHER-SE> 22,616,552
<TOTAL-LIABILITY-AND-EQUITY> 41,028,474
<SALES> 11,510,171
<TOTAL-REVENUES> 11,510,171
<CGS> 10,383,795
<TOTAL-COSTS> 10,383,795
<OTHER-EXPENSES> (183,455)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 474,758
<INCOME-PRETAX> (353,620)
<INCOME-TAX> 0
<INCOME-CONTINUING> (353,620)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (353,620)
<EPS-PRIMARY> (.54)
<EPS-DILUTED> (.54)
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