<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, 1998 Commission File Number 0-21054
SYNAGRO TECHNOLOGIES, INC.
- - -------------------------------------------------------------------------------
(Exact name of Registrant as specified in its Charter)
Delaware 76-0511324
- - -------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5850 San Felipe, Suite 500 Houston, Texas 77057
- - -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(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.
Class Outstanding at November 12, 1998
----------------------------- --------------------------------
Common stock, par value $.002 13,249,262
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SYNAGRO TECHNOLOGIES, INC.
INDEX
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
<S> <C>
Condensed Consolidated Balance Sheets as of
September 30, 1998 (Unaudited) and December 31, 1997 3
Condensed Consolidated Statements of Operations
for the Three and Nine Months Ended September 30, 1998
and 1997 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 1998 and 1997
(Unaudited) 5
Notes to Condensed Consolidated Financial Statements 7
Management's Discussion and Analysis of Results
of Operations and Financial Condition 11
PART II - OTHER INFORMATION 13
</TABLE>
2
<PAGE> 3
SYNAGRO TECHNOLOGIES, INC.
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
--------------- ---------------
ASSETS (Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 894,298 $ 166,994
Short-term investments 0 64,504
Restricted cash, current portion 45,158 172,925
Accounts receivable, net 5,202,086 3,942,355
Notes receivable 496,133 500,133
Prepaid expenses and other current assets 1,072,154 1,330,018
--------------- ---------------
Total current assets 7,709,829 6,176,929
Property, Machinery & Equipment, net 10,497,700 8,914,588
Other Assets:
Non-Compete 114,460 --
Goodwill, net 36,203,155 4,430,277
Restricted cash, long-term portion 123,387 173,387
Non-Compete other assets 132,276 249,938
--------------- ---------------
Total assets $ 54,780,807 $ 19,945,119
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses 5,837,864 $ 4,021,610
Current portion of long-term debt 0 2,951,291
--------------- ---------------
Total current liabilities 5,837,864 6,972,901
Long Term Debt
Short-term debt expected to be refinanced 9,578,458 --
Other Long-term debt 4,534,527 5,494,549
Debt to related party 4,150,000 --
--------------- ---------------
18,262,985 5,494,549
COMMITMENTS AND CONTINGENCIES
Stockholders' Equity
Preferred stock, $.002 par value, authorized 10,000,000 shares,
none issued and outstanding -- --
Common stock, $.002 par value, 100,000,000 shares authorized,
12,384,137 and 7,610,305 issued 24,768 15,221
Additional paid in capital 53,340,965 25,323,915
Accumulated deficit (22,685,775) (17,861,467)
--------------- ---------------
Total stockholders' equity 30,679,904 7,477,669
--------------- ---------------
Total liabilities and stockholders' equity $ 54,780,807 $ 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
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended September 30, Nine Months Ended September 30,
1998 1997 1998 1997
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net Sales $ 8,551,786 $ 6,411,775 $ 20,061,959 $ 18,511,305
Cost of Services 7,104,025 5,285,075 17,487,823 15,270,634
--------------- --------------- --------------- ---------------
Gross Profit 1,447,761 1,126,700 2,574,136 3,240,671
Selling, general and 1,338,977 672,791 2,749,319 2,401,656
administrative expenses
Special Charges 256,511 -0- 107,501 -0-
--------------- --------------- --------------- ---------------
Income (loss) from operations (147,727) 453,909 (282,684) 839,015
Other income (expense)
Other Income 78,694 89,580 334,794 446,313
Interest Expense (467,072) (140,990) (941,830) (691,350)
--------------- --------------- --------------- ---------------
Income (loss) before provision for
income taxes (536,105) 402,499 (889,720) 593,978
Provision for income taxes -0- -0- -0- -0-
--------------- --------------- --------------- ---------------
Net income (loss) (536,105) 402,499 (889,720) 593,978
Redeemable preferred stock -0- -0- 3,934,588 -0-
dividends
--------------- --------------- --------------- ---------------
Net earnings (loss) applicable to
common stock $ (536,105) $ 402,499 $ (4,824,308) $ 593,978
=============== =============== =============== ===============
Income (loss) per common
share equivalent:
Net Income (loss), basic $ (.04) $ 0.05 $ (.52) $ 0.08
Net income (loss), diluted $ (.04) $ 0.05 $ (.52) $ 0.08
Weighted average shares 12,030,372 7,679,678 9,295,890 7,577,955
outstanding, basic
Weighted average shares 12,030,372 8,177,810 9,295,890 7,811,294
outstanding, diluted
</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,
------------------------------------
1998 1997
--------------- ----------------
<S> <C> <C>
Cash Flows from operating activities:
Net Income (loss)before Redeemable Preferred Stock Dividends $ (889,720) $ 593,978
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities
Depreciation and amortization 1,429,390 1,217,070
Gain on sale of equipment (174,111) (72,341)
Non-cash portion of special charges (credits) 29,351 -0-
(Increase) decrease in the following:
Accounts receivable (419,101) (1,059,822)
Prepaid expenses and other 567,854 (377,474)
Other assets 117,644 40,000
Decrease (increase) in accounts payable and accrued expenses 1,357,544 (1,297,365)
--------------- ---------------
Net cash provided by (used in) operating activities 2,018,851 (955,954)
--------------- ---------------
Cash flows from investing activities:
Additions to property, machinery & equipment (1,147,,069) (762,997)
Proceeds from sale of equipment 953,456 242,930
Cash paid for acquired businesses, net of cash acquired (2,807,118)
Sales (purchases) of short-term investments, net 172,925 495,496
--------------- ---------------
Net cash provided by (used in) investing activities (2,827,806) (24,571)
--------------- ---------------
Cash flows from financing activities:
Proceeds from debt 1,321,937 977,506
Payments on debt (2,973,992) (3,156,339)
Decrease (Increase) in restricted cash 69,346 -0-
Sale of redeemable preferred stock 3,480,432 -0-
Preferred stock dividend (420,001) -0-
Sale of common stock, net of offering costs 58,537 2,851,692
--------------- ---------------
Net cash provided by (used in) financing activities 1,536,259 672,859
--------------- ---------------
Net increase (decrease) in cash and cash equivalents 727,304 (307,666)
Cash and cash equivalents, beginning of period 166,994 643,109
--------------- ---------------
Cash and cash equivalents, end of period $ 894,298 $ 335,443
=============== ===============
</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 September 30,
---------------------------
<S> <C> <C>
Supplemental Cash Flow Information - (Unaudited) 1998 1997
---- ----
Interest paid during the period $342,365 $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
NOTES TO UNAUDITED 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, 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 as amended for the year ended December 31, 1997.
The accounting policies followed by the Company in preparing interim
consolidated financial statements are consistent with those 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 in the states of Arkansas, Arizona, California, Florida, Georgia,
Maryland, Michigan, Ohio, Pennsylvania, Texas, Virginia, Wisconsin and the
District of Columbia.
Recent Accounting Pronouncements
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.
7
<PAGE> 8
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
beginning with its 1998 Annual Financial Statements. 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.
(2) ACQUISITIONS AND DISPOSITIONS
BFI Organics Division
In August 1, 1997, the Company purchased certain assets and revenue contracts of
the Organics Division of Browning Ferris Industries, Inc. in the District of
Columbia, Georgia, Maryland, Ohio, Pennsylvania and Virginia for approximately
$946,000. The acquisition was financed through the issuance of third party debt,
with all working capital requirements funded under the existing credit facility.
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.
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. 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. These monthly payments have been received on a timely basis
and are current. 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.
Through September 30, 1998, the Company has realized approximately $510,000 in
cash and other consideration consisting of stock of the Company held by former
owners value based upon market trading value. The Company recognized special
credits related to such notes of $500,000, in fiscal 1997, $113,000 in the three
months ended September 30, 1998 and $215,000 during the nine months ended
September 30, 1998 which are included in "Special Charges (credits) in the
Company's Statement of Operations for such periods. Of the $603,930 due no later
than September 16, 1998 approximately $160,000 had been realized. The former
owners were unable to pay the remainder of the amount due without liquidating
the assets securing the note. The Company is currently working with the former
owners to liquidate sufficient assets to meet the current obligations. Based on
collection history, the former owners' current financial position and the
expected liquidation value of assets securing the loan, the Company expects the
unreserved amount of approximately $496,000 at September 30, 1998 to be
realizable.
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. The
accompanying balance sheet as of September 30, 1998 includes a preliminary
allocation of the purchase price and is subject to final adjustments. The
preliminary allocation resulted in approximately $17,216,000 of goodwill that is
being amortized over 40 years. The unsecured note issued to the common owner is
to be paid quarterly in six equal installments with the first installment due
October 1, 1998. The note bears annual interest rate of 7%. The note has no
financial covenants. The stock issued was valued in accordance with the
provisions of ETIF 95-19.
Recyc, Inc.
On July 24, 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 was recorded using the purchase method of accounting. The
accompanying balance sheet as of 9/30/98 includes a preliminary allocation of
the purchase price and is subject to final adjustments. The preliminary
allocation resulted in approximately 14,666,000 of goodwill that is being
amortized over 40 years. A unsecured note in the approximate amount of
$2,305,000 was issued to the former owner with principle due November, 2000. The
note bears annual interest rate of 7% which is to be paid quarterly with the
first payment due November 1998. The note has no financial covenants The stock
issued was valued in accordance with the provisions of ETIF 95-19.
Environmental Waste Recycling, Inc.
On November 6, 1998, the Company purchased the stock of Environmental Waste
Recycling, Inc., (EWR) for approximately $9,374,000. The acquisition was
financed through the issuance of 865,125 shares of Common Stock and 6,560,535 in
cash. The transaction will be recorded using the purchase method of accounting.
8
<PAGE> 9
(3) SPECIAL CHARGES (CREDITS)
Special charges (credits) for the nine months ended September 30, 1998 consist
primarily of a charge of $320,000 associated with severance related to two
former officers of the Company offset partially by a special credit of
approximately $210,000 related to income recognized on certain notes receivable
related to the sale of Organi-Gro in 1997. See Note 2 for further discussion.
(4) NEW CREDIT FACILITY
At September 30, 1998, the Company had 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 September 30, 1998, the Company had borrowings under
the term loan in the amount of $2,966,234 and $1,674,582 under the line of
credit. Amounts under the line of credit were subject to a borrowing base
consisting of 85% of accounts receivable, as defined in the credit facility. The
Revolving Line of Credit required the Company to direct all its Account Debtors
to make all payments on the accounts directly to a lockbox designated by, and
under the control of the Bank. The Revolving Line of credit also has a
subjective acceleration clause. The LaSalle credit facility requires the Company
to meet certain loan covenants, and the Company was in compliance with those
covenants as of September 30, 1998. This credit facility was to expire in
September, 1999.
During November 1998, the Company entered into a new $40 million credit
facility ("Facility") with Bank of America National Trust and Savings
Association (B of A). Amounts under the facility are subject to a borrowing base
equal to 4 times earnings before interest, taxes, depreciation and amortization
(EBITDA), as defined in the Facility, until March, 1999 and 3.5 times EBITDA
thereafter. The Facility requires the consent of the lenders for acquisitions
exceeding a certain level of cash considerations, prohibits the payment of cash
dividends, limits the incurrence of indebtedness, requires the Company to
comply with certain financial covenants, including a minimum net worth
requirement, maximum senior and total debt to pro forma EBITDA limit and
interest coverage ratio. The Company was in compliance with those covenants as
of September 30, 1998. The Facility expires in October 2001.
(5) LITIGATION
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.
(6) 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 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.
9
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(7) 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.
(8) 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.
For the nine months ended September 30, 1997, the difference in weighted average
numbers of Common Shares between basic and diluted earnings per share represents
the impact of stock options. The adjusted number of shares for the quarter and
year to date 1998 was approximately 1,753,000 and 1,219,000 respectively,
however diluted per share amounts are not applicable for loss periods. The
following table summarizes the basic EPS and diluted EPS computations for the
quarter and nine months ended September 30, 1997 and 1998.
<TABLE>
<CAPTION>
Quarter Ended September 30, Nine Months Ended September 30,
1998 1997 1998 1997
------------- ------------- ------------- -------------
(Unaudited)
<S> <C> <C> <C> <C>
Net income (loss) before redeemable
preferred stock dividends $ (536,105) $ 402,499 $ (889,720) $ 593,978
Redeemable preferred stock dividends -- -- 3,934,588 --
------------- ------------- ------------- -------------
Net earnings (loss) on common stock $ (536,105) $ 402,499 $ (4,824,308) $ 593,978
============= ============= ============= =============
Basic earnings (loss) per share:
Earning per share prior to
Preferred dividends $ (.04) $ .05 $ (.10) $ .08
Preferred stock dividends -- -- (.42) --
------------- ------------- ------------- -------------
Basic earnings (loss) per Common share $ (.04) $ .05 $ (.52) $ .08
Diluted earnings (loss) per share:
Earnings per share prior to Preferred
dividends $ (.04) $ .05 $ (.10) $ .08
Preferred stock dividends -- -- (.42) --
------------- ------------- ------------- -------------
Diluted earnings (loss) per Common share $ (.04) $ .05 $ (.52) $ .08
============= ============= ============= =============
Weighted average number of Common shares, basic 12,030,372 7,769,678 9,295,890 7,577,955
Weighted average shares Outstanding, diluted 12,030,372 8,177,810 9,295,890 7,811,294
</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. On July 24, 1998, the Company acquired Recyc Inc. ("Recyc") a
composting facility servicing the California market. This transaction was also
recorded using the purchase method of accounting. Additionally, on November 5,
1998 subsequent to the quarter ended September 30, 1998 (see Item 5), the
Company acquired EWR. This transaction will be recorded using the purchase
method of accounting.
UNAUDITED PRO FORMA RESULTS OF OPERATIONS
The following unaudited pro forma information is presented supplementary to
reflect pro forma results of operations as if the acquisitions of A & J, Recyc
and EWR 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 NINE MONTHS
ENDED ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1998
------------------ ------------------
<S> <C> <C>
Net sales................................................... $10,651,000 $33,304,000
Cost of services............................................ 8,690,000 26,808,000
----------- -----------
Gross profit................................................ 1,961,000 6,496,000
Selling, general and administrative expenses................ 1,603,000 5,418,000
Special charges (credits)................................... 256,000 73,000
----------- -----------
Income from operations...................................... 102,000 1,005,000
Other income (expense), net................................. (507,000) (872,000)
----------- -----------
Income before tax........................................... (405,000) 133,000
</TABLE>
HISTORICAL RESULTS AND OPERATIONS.
For the quarter ended September 30,1998, net sales were $8,551,786
compared to $6,411,775 for the third quarter of 1997, an increase of 2,140,011
or 33.4%. For the first nine months of 1998, net sales increased to $20,061,958
from 18,511,305 for the same period in 1997. This increase in net sales year to
date and the quarter ended September 30, 1999 are primarily attributable to
acquisitions in 1997 and 1998 partially offset by a divestiture of
Organigro in 1997.
Cost of operations and gross profit for the third quarter of 1997 were
$5,285,075 and $1,126,700 respectively, compared with $7,104,025 and $1,447,761
respectively, for the third quarter of 1998, resulting in a decrease in gross
profit as a percentage of sales from 17.6% in 1997 to 16.9% in 1998. Cost of
operations and gross profit for the first nine months of 1998 changed to
$17,487,823 and $2,574,136 respectively from $15,270,634 and $3,240,671
respectively for the same period in 1997, however, gross profit as a percentage
of sales decreased from 17.5% in the first nine months of 1997 to 12.8% 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 land application which is less costly.
Landfill disposal costs increased approximately $1,102,000 and $389,000 year to
date and for the quarter ended September 30, 1998 respectively compared 1997
levels. Additionally, costs associated with transporting material to alternative
land application sites totaled approximately $400,000. The Company has
implemented a wet weather mitigation plan during the third quarter.
Selling, general and administrative expenses increased $631,757 for the
quarter and $347,663 year-to-date. The quarterly increase relates to an
increase in corporate staffing to implement the Company's acquisition
strategies, and the additional cost associated with the acquisitions. The year
to date increase related to the above mentioned acquisition related expenses
partially offset by staff reduction at the operational level implemented
throughout 1997.
11
<PAGE> 12
Interest expense for the quarter ended September 30, 1998 was $467,072
or a increase of $326,082 from the quarter ended September 30, 1997. Interest
expense for the first nine months of 1998 increased to $941,830 from $691,350 in
1997. The difference relates to interest charges relating to debt issued to
finance acquisitions.
Other income for the third quarter of 1998 of $78,694 compares with
$89,580 for the same period in 1997. Other income for the first nine months of
1998 was $334,794 compared to $446,313 for 1997.
Special charges (credits) were $256,511 for the quarter ended September
30, 1998 and $107,501 year-to-date. The cost consist of severance costs
partially offset by income recognized on notes receivable previously reserved.
See note (2) and note (3) to the Notes to Condensed Consolidated Financials for
further discussion.
As a result of the foregoing, the third quarter of 1998 reflects a net
loss before dividends, of $536,105 or .04 net loss per share compared to net
income of $402,499 or $.05 net income per share in the third quarter of 1997.
Year-to-date net loss was $889,720 or $.10 net loss per share in 1998 compared
to net income of $593,978 or $.08 net income per share in 1997.
During the second quarter of 1998, the Company paid approximately
$420,000 in dividends to Preferred Stock holders. 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 this Preferred dividend had no impact on the Company's cash flows. See
Note (6) 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
Computers, software, and other equipment utilizing microprocessors
that use only two digits to identify a year in a date field may be unable to
process accurately certain date-based information at or after the year 2000.
This is commonly referred to as the "Year 2000 issue." The Company has
implemented a Year 2000 program and is using both internal and external
resources to assess and replace or reprogram computers, software and other
equipment as needed. Key areas of the Company's operations that are being
addressed include external customers, external suppliers and internal computers
and software.
Year 2000 considerations may have an effect on some of the Company's
customers and suppliers, and thus indirectly on the Company. The Company is
assessing the potential effect on the Company with respect to customers and
suppliers with Year 2000 issues and does not expect a material affect on the
Company's financial condition or results of operations at this time. The
existing financial and operating systems of the Company are Year 2000 compliant
and no related software or hardware costs are expected. A contingency plan is
being formulated to address unavoided or unavoidable Year 2000 risks with
internal information technology systems and with customers, vendors, and other
third parties.
However, the ability of third parties with which the Company transacts
business to adequately address 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 adequately address their respective Year 2000 issues will not
have a material adverse effect on the Company's financial condition or results
of operations. At this time, the Company does not expect such an adverse impact.
Liquidity and Capital Resources
At September 30, 1998, the Company had 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 September 30, 1998, the Company had borrowings under
the term loan in the amount of $2,966,234 and $1,674,582 under the line of
credit. Amounts under the line of credit were subject to a borrowing base
consisting of 85% of accounts receivable, as defined in the credit facility. The
Revolving Line of Credit required the Company to direct all its Account Debtors
to make all payments on the accounts directly to a lockbox designated by, and
under the control of the Bank. The Revolving Line of credit also has a
subjective acceleration clause. The LaSalle credit facility requires the Company
to meet certain loan covenants, and the Company was in compliance with those
covenants as of September 30, 1998. This credit facility was to expire in
September, 1999.
During November 1998, the Company entered into a new $40 million credit
facility ("Facility") with Bank of America National Trust and Savings
Association (B of A). Amounts under the facility are subject to a borrowing base
equal to 4 times earnings before interest, taxes, depreciation and amortization
(EBITDA), as defined in the Facility, until March, 1999 and 3.5 times EBITDA
thereafter. The Facility requires the consent of the lenders for acquisitions
exceeding a certain level of cash considerations, prohibits the payment of cash
dividends, limits the incurrence of indebtedness, requires the Company to
comply with certain financial covenants, including a minimum net worth
requirement, maximum senior and total debt to pro forma EBITDA limit and
interest coverage ratio. The Company was in compliance with those covenants as
of September 30, 1998. The Facility expires in October 2001.
12
<PAGE> 13
As of September 30, 1998, the Company had borrowings in the amount of
$18,262,985, management has the intent and the availability under its current B
of A facility to finance the current portion of long term debt, and has
classified such debt as short term debt expected to be refinanced.
At September 30, 1998, the Company had working capital of $1,964,971.
The Company believes that its cash requirements of current operations for the
foreseeable future can be met with it's existing cash at September 30, 1998,
cash flows from operations and its borrowing availability under the B of A
Facility. During the nine months ended September 30, 1998, accounts receivable
increased by $419,101 and accounts payable and accrued expenses increased by
$1,357,544 as a result of primarily the acquisition of A&J Cartage and Recyc.
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 5. OTHER INFORMATION
ITEM 6. FINANCIAL STATEMENTS, EXHIBITS AND REPORTS ON FORM 8-K.
a. Exhibit Index
EXHIBIT DESCRIPTION OF EXHIBIT
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).
13
<PAGE> 14
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).
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 $3308,203, 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).
14
<PAGE> 15
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.
--------------------
*Filed herewith
b. Form 8-K
No reports on Form 8-K were filed during the quarter ended
March 31, 1998.
15
<PAGE> 16
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: _____________ By: /s/ Ross M. Patten
-----------------------------
Chief Executive Officer
Date: _____________ By: /s/ Randy L. Jennings
-----------------------------
Chief Financial Officer
16
<PAGE> 17
EXHIBIT INDEX
<TABLE>
<S> <C>
*27.1 Financial Data Schedule.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 894,298
<SECURITIES> 0
<RECEIVABLES> 5,389,073
<ALLOWANCES> 186,987
<INVENTORY> 0
<CURRENT-ASSETS> 7,709,829
<PP&E> 16,254,948
<DEPRECIATION> 5,757,248
<TOTAL-ASSETS> 54,780,807
<CURRENT-LIABILITIES> 5,837,864
<BONDS> 18,262,985
0
0
<COMMON> 24,768
<OTHER-SE> 53,340,965
<TOTAL-LIABILITY-AND-EQUITY> 54,780,807
<SALES> 20,061,959
<TOTAL-REVENUES> 20,061,959
<CGS> 17,487,823
<TOTAL-COSTS> 17,487,823
<OTHER-EXPENSES> 107,501
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (889,720)
<INCOME-PRETAX> (889,720)
<INCOME-TAX> 0
<INCOME-CONTINUING> (889,720)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (889,720)
<EPS-PRIMARY> (.52)
<EPS-DILUTED> (.52)
</TABLE>
