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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED):
JULY 7, 1999 (APRIL 23, 1999)
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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.)
1800 BERING, SUITE 1000 HOUSTON, TEXAS 77057
(Address of principal executive offices) (Zip Code)
REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 369-1700
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INTRODUCTION
Synagro Technologies, Inc., a Delaware corporation (the "Company"), is a
leading provider of biosolids management services. In the first quarter of
1999, the Company completed the acquisition of National Resource Recovery, Inc.
("NRR") a business combination accounted for as pooling of interests. Included
herein are the Selected Financial Data, Management's Discussion and Analysis of
Financial Condition and Results of Operations and Consolidated Financial
Statements as restated for the pooling transaction. Additionally, in order to
comply with the disclosure requirements of the Securities and Exchange
Commission regarding the financial statements of the businesses acquired and the
pro forma financial statements of businesses acquired, the Company is filing
this current report containing certain audited financial statements of the
businesses acquired and the pro forma financial statements of Synagro
Technologies, Inc.
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ITEM 5. OTHER ITEMS. Page
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Selected Financial Data 3
Management's Discussion and Analysis of Financial Condition and Results of Operations 3
Consolidated Financial Statements of Synagro Technologies, Inc. and Subsidiaries 16
Financial Statements of Businesses Acquired:
(a) Anti-Pollution Associates, Inc. and D&D Pumping, Inc.
Report of Independent Public Accountants 30
Combined Balance Sheets 31
Combined Statements of Operations 32
Combined Statements of Shareholder's Equity 33
Combined Statements of Cash Flows 34
Notes to Financial Statements 35
(b) Amsco, Inc.
Report of Independent Public Accountants 39
Balance Sheets 40
Statements of Income 42
Statements of Stockholders' Equity 43
Statements of Cash Flows 44
Notes to Financial Statements 46
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
Pro forma financial information
The following Unaudited Pro Forma Combined Financial Statements of Synagro
Technologies, Inc. are attached hereto and made a part hereof:
(a) Basis of Presentation 51
(b) Unaudited Pro Forma Combined Balance Sheet as of March 31, 1999 52
(c) Unaudited Pro Forma Combined Statements of Operations
for the three months ended March 31, 1999 53
(d) Unaudited Pro Forma Combined Statements of Operations
for the year ended December 31, 1998 54
(e) Notes to Unaudited Pro Forma Combined Financial Statements 55
Exhibits:
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Royster Smith Shelton & Company, PC.
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ITEM 5. OTHER ITEMS
SELECTED FINANCIAL DATA
The following table sets forth selected financial data with respect to the
Company which has been restated for the pooling transaction and should be read
in conjunction with the Consolidated Financial Statements:
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YEAR ENDED DECEMBER 31
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1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Net sales $33,565 $28,036 $24,175 $18,893 $13,947
Gross profit 5,449 4,797 3,868 3,011 2,536
Selling, general and administrative expenses 4,809 3,805 6,238 4,234 3,976
Other charges (credits), net (64) (721) 4,842 2,444 3,169
Interest expense, net 1,558 1,007 730 982 672
Net income (loss) before redeemable
preferred stock dividends (537) 1,116 (7,582) (4,507) (4,253)
Redeemable preferred stock dividends 3,935 -- -- -- --
Net income (loss) (4,472) 1,116 (7,582) (4,507) (4,253)
Net income (loss) per share (basic and diluted) (.40) .13 (1.04) (1.17)* (1.52)*
Working capital (deficit) 5,692 (805) (2,181) 1,763 (1,028)
Total assets 66,622 21,166 19,386 20,750 23,626
Total long-term debt, net 28,330 6,114 8,637 4,781 8,542
Stockholders' equity 34,249 7,727 3,864 10,893 10,086
</TABLE>
* As adjusted for the 1 for 15 reverse split consummated on July 3, 1995.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Except for the historical financial information contained herein, the matters
discussed in this report may be considered "forward-looking" statements within
the meaning of Section 27A of the Securities Act of 1933 and the Section 21E of
the Securities Exchange Act of 1934. Such statements include declarations
regarding our intent, belief or current expectations, statements regarding the
future results of acquired companies, our gross margins and our expectations
regarding year 2000 issues. Any such forward-looking statements are not
guarantees of future performance and involve a number of risks and
uncertainties. Actual results could differ materially from those indicated by
such forward-looking statements. Among the important factors that could cause
actual results to differ materially from those indicated by such forward-looking
statements are those discussed in the "Business of the Company," "Government
Regulation" and "Competition" sections of Form 10-K/A for the year ended
December 31, 1998.
RESULTS OF OPERATIONS
The following table sets forth certain items included in the Selected Financial
Data, as a percentage of net sales for the periods indicated:
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YEAR ENDED DECEMBER 31,
1998 1997 1996
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<S> <C> <C> <C>
Statement of Operations Data:
Net sales..................................................... 100% 100% 100%
Gross profit.................................................. 16.2 17.1 16.0
Selling, general and administrative expenses.................. 14.3 13.6 25.8
Other charges (credits), net.................................. (.2) (2.6) 20.0
Interest expense, net......................................... 4.6 3.6 3.0
Net income (loss) before redeemable preferred dividends....... (1.6) 4.0 (31.4)
</TABLE>
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RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 AND 1997
For the year ended December 31, 1998, net sales were approximately $33,565,000
compared to approximately $28,036,000 for the same period in 1997, an increase
of approximately $5,529,000 or 19.7%. The increase relates to the acquisitions
of A&J Cartage, Inc. and related companies ("A&J") (approximately $4,378,000),
Recyc, Inc., ("Recyc") (approximately $2,713,000), Environmental Waste
Recycling, Inc. ("EWR") (approximately $1,269,000), the purchase of certain
revenue contracts from Browning Ferris Industries, Inc ("BFI") organics division
(approximately $2,119,000), increased volume in Michigan (approximately
$856,000), partially offset by the divestiture of Organi-Gro, Inc. in 1997
("Organi-Gro") (approximately $1,608,000), reduced volume in Arkansas and Dallas
(approximately $3,021,000) due to non-renewal of certain low margin contracts,
and lower volumes related to operations in the Houston area (approximately
$837,000).
Cost of operations and gross profit for the year ended December 31, 1998 were
approximately $28,116,000 and $5,449,000 respectively, compared to approximately
$23,239,000 and $4,797,000 respectively for the year ended 1997, resulting in a
decrease in gross profit as a percentage of sales from 17.1% in 1997 to 16.2% in
1998. Gross profit increased by approximately $652,000 due primarily to the
increased net sales volume associated with businesses acquired. The decrease in
gross profit as a percentage of sales was primarily a result of unusual weather
conditions in the Mid-Atlantic Region, unseasonably heavy rainfall in
California, and a new biosolids land application restriction for certain months
of the year in one California county, which resulted in (a) additional expenses
incurred by the Company to transport material to land application sites
unaffected by the conditions and (b) land disposal costs which were incurred
when land application sites were not available. Specifically, landfill disposal
costs increased by approximately $1,180,000 compared to 1997 levels.
Additionally, costs associated with transporting material to alternate land
application sites increased by approximately $400,000 for the year ended 1998.
These costs were partially offset by higher margins of the biosolids composting
operation obtained in the Recyc acquisition.
Selling, general and administrative expenses were approximately $4,809,000 for
the year ended December 31, 1998 compared to approximately $3,805,000 for 1997,
an increase of approximately $1,004,000, or 26.4%. The increase relates
primarily to increased corporate staffing (approximately $466,000) to implement
the Company's acquisitions strategies, additional selling, general and
administrative costs associated with the businesses acquired (approximately
$938,000), partially offset by the divestiture of Organi-Gro (approximately
$164,000), staff reductions at the operational level implemented throughout 1997
(approximately $196,000), and a reduction of bonuses paid based upon operating
results (approximately $146,000).
Interest expense for the year ended December 31, 1998 was approximately
$1,558,000 compared to approximately $1,007,000 for the same period in 1997. The
increase in interest expense is related to the additional debt incurred to
finance acquisitions.
Other charges (credits) were ($63,799) for the year ended December 31, 1998,
compared to ($721,268) for the same period 1997. The decrease resulted from less
income being recognized in 1998 related to notes receivable previously reserved
of approximately ($280,000), partially offset by current year severance costs of
approximately $220,000. See note (11) to the Notes to Consolidated Financial
Statements.
Other income for the year ended December 31, 1998 was approximately $318,000
compared to approximately $409,000 for the same period in 1997. The decrease
relates primarily to a reduction in gains on sale of assets.
As a result of the foregoing, a net loss of approximately $537,000 before
redeemable preferred stock dividends, or $.05 per share, was reported at
December 31, 1998, compared to net income of approximately $1,116,000 before
redeemable preferred stock dividends, or $.13 per share, in 1997.
In the first quarter of 1998, the Company recognized a redeemable preferred
stock dividend of approximately $3,514,000, related to redeemable Preferred
Stock issued with a beneficial conversion feature. The value of this Preferred
Stock dividend had no impact on the Company's cash flows. See note (9) to the
Notes to Consolidated Financial Statements. During the second quarter of 1998,
the Company paid $420,000 in cash dividends to holders of Series B Preferred
Stock.
The Company has incurred substantial losses since inception and, therefore, has
not been subject to federal income taxes. As of December 31, 1998, the Company
had generated net operating loss carryforwards for financial reporting purposes
of approximately $11.7 million. These carryforwards will begin to expire in the
year 2004 through 2018. The Company's ability to utilize these carryforwards is
limited by a "change in ownership", as such term is defined by the federal
income tax laws and regulations. As the Company has incurred losses in recent
years and the utilization of these carryforwards may be limited as discussed
above, a valuation allowance has been established to fully offset the deferred
tax asset at December 31, 1998.
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RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
The Company's net sales increased by approximately $3,861,000, or 16.0%, in 1997
as compared to 1996. The increase in sales is attributable to certain BFI
contracts acquired in 1997 (approximately $3,068,000) and the impact of having a
full year of revenue for Pima Gro Systems, Inc. ("Pima Gro") which was acquired
in July 1996 (approximately $3,837,000), increased volume in Michigan
(approximately $1,535,000), partially offset by the divestiture of Organi-Gro
(approximately $4,595,000).
Gross profit increased to approximately $4,797,000, or 17.1% of sales, in 1997,
compared to approximately $3,868,000, or 16.0% of sales, in 1996. The gross
profit increase of approximately $929,000 was due primarily to a full year of
operations associated with PimaGro acquired in July 1996 which provided
incremental gross profit of approximately $750,000 during 1997. The gross profit
percentage increase from 16.0% to 17.1% related primarily to the acquisition of
PimaGro in 1996, which generated a gross profit margin of approximately 18.4%
during 1997, and the sale of Organi-Gro in 1997, which had a gross profit margin
of 10%. PimaGro in 1997 improved its gross margin percentage from 16.7% for the
half year of operations in 1996 to 18.4% in 1997 as a result of continued
reductions in operating costs through obtaining land applications sites closer
to waste generators.
Selling, general and administrative expenses decreased to approximately
$3,805,000, or 13.6% of sales, in 1997, compared to $6,238,000, or 25.8% of
sales, in 1996. The decrease of approximately $2,433,000 resulted from (i)
reduced expenses related to the sale of Organi-Gro which was sold in March 1997
($500,000), (ii) the integration of administrative functions of Pima Gro into
the corporate offices during 1997 which reduced selling, general and
administrative expenses by approximately $178,000 in 1997 from 1996, (iii)
reduced legal expenses of approximately $900,000 during 1997 compared to 1996
due to additional legal claims provisions in 1996, and (iv) expenses of
approximately $695,000 in 1996 related to the clean-up of its N-Viro processing
facilities, which were closed during 1996, that did not occur in 1997.
Other charges (credits) decreased to approximately $721,000 in 1997 from
approximately $4,842,000 in 1996. The decrease relates to charges related to the
sale of assets of Organi-Gro, the write-off of the Company's interests in the
N-Viro Technology recognized in 1996, and credits in 1997 for realization of
Organi-Gro notes which had been previously reserved. See notes 5 and 11 to the
Notes to Consolidated Financial Statements.
Other income and expense (net) was in line with 1996 expenses, but interest
expense increased in 1997 to approximately $1,007,000, compared to approximately
$730,000 in 1996. The increase in interest expense is a result of additional
debt incurred throughout the year due to acquisitions.
As a result of the foregoing, net income of approximately $1,116,000 was
reflected in 1997, as compared to a net loss of approximately $7,582,000 in
1996.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
The Company's net sales increased by approximately $5,282,000, or 28.0%, in 1996
as compared to 1995. This increase in sales was directly attributable to the
acquisition of Pima Gro in July 1996. No other significant changes occurred in
the sale of other services or products in relation to the respective periods.
During the year ended December 31, 1996, cost of goods sold and gross profit
increased to approximately $20,306,000 and $3,868,000, respectively, from
approximately $15,822,000 and $3,011,000, respectively, for the year ended
December 31, 1995. Gross profit as a percent of sales increased to 16.0% in 1996
from 15.9% in 1995 primarily due to the acquisition of PimaGro.
Selling, general and administrative expenses increased to approximately
$6,238,000, or 25.8% of sales, for 1996 as compared to $4,234,000, or 22.4% of
sales, in 1995. The increase in such expenses relates to the selling, general
and administrative expenses of PimaGro for the six months following its
acquisition on July 1, 1996 and additional provisions related to legal claims of
approximately $800,000. The additional legal provision relates to five claims,
including former employee agreement disputes, various contract disputes and
acquisition claims.
In the fourth quarter of 1996, management evaluated the future value of the
investments made in Organi-Gro and the N-Viro technologies. Organi-Gro, which
manufactures and sells poultry bedding, had generated losses in 1995 and 1996
and was inconsistent with the Company's future business strategies. As a result,
the Company decided to sell all of the assets of Organi-Gro (which was
accomplished in March 1997). It was also determined at that time, to discontinue
operations relating to the N-Viro process. The Company had certain agency rights
and had invested in property and equipment relating to the N-Viro process. By
December 1996, the Company had limited customers and the Company saw no
significant prospects for making the venture financially justifiable in the
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future. As a result, the property and equipment were written down to the
estimated fair value, and the carrying value of the agency rights was charged to
operations. These decisions resulted in a charge to operations for the year
ended December 31, 1996 of approximately $4,842,000. See notes 5 and 11 to Notes
to the Consolidated Financial Statements.
Interest expense for 1996 was approximately $730,000, as compared to
approximately $982,000 for 1995. This decrease of approximately $252,000 was
directly attributable to reduced average debt levels throughout the year prior
to assumption of debt related to the purchase of Pima Gro.
As a result of the foregoing, a net loss of approximately $7,582,000 was
reflected in 1996 as compared to a net loss of approximately $4,507,000 in 1995.
SEASONALITY
The Company's business historically has not been seasonal, but has been subject
to certain unusual weather conditions and unseasonably heavy rainfall which can
temporarily reduce the availability of land application sites in close proximity
to the Company's business.
During 1998 and 1999, the Company acquired companies, whose operations are
subject to significant seasonal variations. During the winter months, the ground
is frozen and land application cannot be performed. Generally, the product is
stored by the customer during the winter months with transportation and land
application services performed as the ground thaws. The Company now expects its
revenues and operational results to be generally lower in the first calendar
quarter.
BONDING
The amount of bonding capacity offered by sureties is a function of financial
health of the Company requesting the bonding. As of December 31, 1998, the
Company had a bonding capacity of approximately $20,000,000 with approximately
$7,878,000 utilized as of that date. Management believes the existing capacity
is sufficient to meet bonding needs for the foreseeable future, but is also
currently negotiating to expand that availability as new contract opportunities
arise. To date, no payments have been made by any bonding company for bonds
issued for the Company.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations principally through the
sale of equity and debt securities, a credit facility and through funds provided
by operating activities.
On March 31, 1998, the Company issued Series B Preferred Stock for total cash
consideration of $3,500,004. This Series B Preferred Stock was convertible into
common stock on a 1:1 ratio at a conversion price of $2.40 per share. On
June 10, 1998, a cash dividend of $420,000 was paid to the holders of Series B
Preferred Stock; concurrently, the holders converted the Preferred Shares into
1,458,335 shares of Common Stock.
During 1998, the Company acquired A&J, EWR and Recyc for aggregate consideration
of approximately $45,517,000 including approximately $9,410,000 in cash
including acquisition costs. The preliminary allocations of the purchase prices
resulted in goodwill of approximately $39,426,000, that is being amortized over
40 years.
The Company purchased additional capital assets during 1998 in the amount of
approximately $2,558,000 and sold capital assets with proceeds totaling
approximately $2,081,000.
As of December 31, 1998, the Company had current maturities on long-term debt of
approximately $4,130,000, as compared to approximately $3,177,000 in 1997. The
Company currently has the intent and ability to refinance the current maturities
with its credit facility and has classified the 1998 portion of this debt as
long-term indebtedness in the consolidated balance sheet as of December 31,
1998. The Company's long-term portion of debt was approximately $24,200,000 in
1998, reflecting an increase of approximately $18,086,000 over 1997. This
increase is due primarily to the funding of the acquisitions of A&J, Recyc and
EWR, and the assumption of debt pursuant to such acquisitions.
In October 1998, the Company obtained a new $40 million bank credit facility
with Bank of America National Trust and Savings Association ("Bank of America"),
which has the right to add participants to the credit facility. In November
1998, the credit facility was amended and in
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December 1998, Bank of America assigned a portion of the credit facility to
Union Bank of California. The credit facility was used to retire certain debt
payable to various individuals and financial institutions and fund the
acquisition of EWR. The credit facility bears interest at the bank eurodollar
rate plus a margin based upon a pricing schedule in the credit facility. The
weighted average interest rate in 1998 was 7.51%. The credit facility is secured
by substantially all of the Company's assets. At December 31, 1998, the Company
had borrowings from this credit facility of approximately $18,200,000 and
amounts available under the credit facility of approximately $2,579,000. Amounts
under the credit facility are subject to a borrowing base equal to 4.25 times
earnings before interest, taxes, depreciation and amortization ("EBITDA") based
on a trailing twelve months calculation, as defined in the credit facility less
funded debt as defined, (which includes notes payable to former owners, which
can be refinanced through the credit facility) until June 30, 1999, 4.00 until
September 30,1999, and 3.75 times thereafter. The credit facility requires the
Company to meet certain loan covenants, and the Company was in compliance with
those covenants as of December 31, 1998. The credit facility expires in October
2001 and management anticipates that it will renegotiate and/or refinance this
credit facility prior to that time. As of July 2, 1999, approximately $972,000
was available to the Company for additional borrowing under the facility. The
decrease from December 31, 1998, primarily relates to the funding of
acquisitions during fiscal 1999. The Company is currently renegotiating an
increase to the facility with the banks.
At December 31, 1998, the Company had working capital of approximately
$5,692,000. Accounts receivable and prepaid expenses and other currents assets
increased by approximately $2,418,539 and $328,000, respectively, primarily due
to the acquisitions of A&J, Recyc, and EWR. The Company evaluates the
collectibility of its receivables based on a specific account-by-account review.
The Company had allowances of approximately $197,000 and $190,000 at December
31, 1998 and 1997, respectively, and writeoffs of approximately $13,000 and
$98,000 in 1998 and 1997, respectively. Accounts payable and accrued expenses
decreased by approximately $104,000 as a result of (a) the reduction of legal
accruals by approximately $650,000 (the Company had 5 significant legal matters
open at the close of 1997 and only 2 significant legal matters pending at
December 31, 1998), (b) increased trade payables and other accruals of
approximately $325,000, of which $655,000 relates to additional trade payables
relating to acquisitions, offset by $330,000 relating to reduced check
processing time, and (c) an increase in accrued interest of approximately
$218,000 related to additional debt incurred for the above acquisitions. The
Company believes its cash requirements for 1999 can be met with existing cash,
cash flows from operations and its borrowing availability under its credit
facility.
The increase in other assets as of December 31, 1998 related primarily to an
increase in deferred bank costs of approximately $360,000 associated with the
credit facility, and non-compete agreements of approximately $307,000 with
former owners of acquired companies.
The Company has undergone significant restructuring throughout the last two
years, including changes in senior management and refinancing of its
indebtedness. As a result of these changes, management believes the Company is
better positioned to respond to opportunities in the biosolids market and
aggressively pursue its goal of acquiring additional biosolids management
companies.
Subsequent to December 31, 1998, the Company acquired all of the outstanding
stock of National Resource Recovery, Inc. ("NRR") in exchange for 1,000,001
shares of the Company's Common Stock in a business transaction accounted for as
a "pooling-of-interests" transaction. NRR is a biosolids company with operations
in Michigan. The Company's historical financial statements and management
discussion and analysis have been restated herein to reflect the transaction.
Additionally, during 1999, the Company acquired three other biosolids management
companies. The total purchase price was approximately $22,451,000. These
acquisitions were funded through the issuance of approximately 3,045,000 shares
of common stock and $13,827,000 in cash. The cash was funded through the
Company's credit facility. The transactions were recorded using the purchase
method of accounting.
YEAR 2000
IMPACT OF YEAR 2000
The Year 2000 issue exists because many computer systems and applications
currently use two-digit fields to designate the year. As the century change
occurs, computer programs, computers, and embedded microprocessors controlling
equipment with date-sensitive systems may recognize the Year 2000 as 1900, or
not at all. This inability to recognize or properly handle the Year 2000 date
may result in computer system failures or miscalculations of financial and
operational information as well as failures of equipment controlling
date-sensitive microprocessors. Most of our major customers are municipalities
with wastewater treatment plants. It is likely that most of these plants have
computer-controlled processes, some of which may slow down or even halt delivery
of biosolids. We will address all of these potential problem areas in the
sections below.
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State of Readiness: We began formulating a plan to address the Year 2000
("Y2K") issue during 1997. The plan consists of three phases: awareness,
assessment, and renovation. In the Awareness Phase, we established a Year 2000
committee with membership from the executive, operations, legal, financial, and
information technology departments. This committee provides the leadership for
developing the plan, assessing the impact of Year 2000 issues, and giving
directives to each of the functional areas for implementation of the plan.
To date our primary focus has been on the assessment of our own internal
systems. We have inventoried all of the Company's computer hardware. Most of
this hardware was purchased after August of 1998 from a national manufacturer,
was NTSL tested prior to shipment, and is in full compliance. The remaining
hardware will either be replaced or tested and have BIOS upgrades if needed by
the end of the third quarter 1999.
The Company is using Microsoft Office for our desktop suite so no significant
Year 2000 impact is expected. All of the accounting and financial reporting
functions are performed at the corporate office using third party software from
a national vendor that is Year 2000 compliant. Our remote locations are
currently running proprietary software that has been written to collect data
pertaining to the pickup, hauling, land application and composting of biosolids.
Most of these systems are written in current versions Microsoft Access and Excel
and are Year 2000 compliant. There are potential issues concerning Year 2000
that could arise if any of the other systems are not Year 2000 compliant. We are
currently implementing a new Manifest and Compliance System that is Year 2000
compliant. The implementation of this new system at all of our locations will be
completed by the fall of 1999. We use specialized spreading equipment in many
(but not all) of our land application operations. We have on file a statement
from the vendor that these vehicles are Year 2000 compliant. This information is
also available on the vendors Internet site.
We have recently begun to assess the potential for Year 2000 problems with the
information systems of our customers, vendors, sub-contractors and other third
parties. We have received some preliminary information concerning Year 2000
readiness from some of our customers, vendors, sub-contractors, and other third
parties. Additionally, we are preparing questionnaires, which we expect to mail
in summer of 1999. We expect to engage in discussions with those parties who
have failed to show proof of compliance prior to the fall of 1999 in an attempt
to determine the extent to which we are vulnerable to those parties'
non-compliance. We are currently unable to estimate the costs that we may incur
to remedy the Year 2000 issues relating to these parties.
Costs to Address the Year 2000 Issue: The cost to date for our Year 2000 program
is $50,000. Most of this cost was for workstation computers and servers that
were replaced for reasons not involving Y2K. Although we have not completed our
assessment, we do not currently believe that the future costs associated with
our Year 2000 program will be more than $25,000.
Risks to the Company: The risks to the Company involve our customers', vendors',
and sub-contractors' failure to reach compliance. Most of our customers are
large municipalities that are engaged in or have completed Y2K testing. It is
possible that those customers whose waste water treatment plants are not Y2K
compliant may suffer failures that cause those customers to delay placing orders
for biosolids removal from their wastewater treatment plants. Date functionality
is typically not used in process control application software. More common is
the use of relative time. We are still, however, dependent on our customers
having an effective Year 2000 compliance program in place. We have prepared a
questionnaire that will be mailed to our major customers in July. If we have not
had a response from them by September, we will open a dialog with them to ensure
their state of readiness. In the case of our vendors and sub-contractors, we
will take special care in reviewing the compliance of all of the equipment and
services needed to perform day to day operational functions. Most of our
subcontractors are trucking companies. The information that we receive from them
is typically in the form of a manually prepared invoice. This process should not
be affected by the year change. The three vendors for other services critical to
our operation (spreading equipment, telecommunications, and financial services)
are all national suppliers of these services and have stated that they are Year
2000 compliant in our discussions and on their Internet sites.
Furthermore, as a result of the Company's ongoing acquisition program, our
assessment of Year 2000 issues may change. As we acquire companies, we attempt
to assess Year 2000 issues relating to their computer systems and operating
processes. Our current integration plan also attempts to have them integrated
into our business systems within a short period of time. We feel that this
minimizes our exposure to their failure to meet Y2K compliance.
If any of the above uncertainties were to occur, our business, financial
conditions, and results of operations would be adversely affected. As such,
there can be no assurance that the systems of customers, vendors, newly acquired
companies, sub-contractors, and other third party relationships on which we may
rely will be made Year 2000 compliant in a timely manner or that any such
failure to be Year 2000 compliant by another company would not have an adverse
effect on our business or consolidated results of operations, financial position
or liquidity. We are unable to assess the likelihood of such events occurring or
the extent of the effect on the Company.
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Contingency Plan: We are in the process of developing a comprehensive
contingency plan to address avoidable or unavoidable Year 2000 risks with
internal information technology systems and with customers, vendors, newly
acquired companies, sub-contractors, and other third parties. We expect to have
this plan completed by the summer of 1999.
GOODWILL
The consolidated balance sheet at December 31, 1998, includes goodwill
representing approximately 64.7% of assets and 125.9% of stockholders' equity.
An intangible asset, goodwill arises when a buyer accounts for a business
acquisition under the purchase method of accounting and the purchase price
exceeds the fair value of the tangible and separately measurable intangible net
assets of that business. Generally accepted accounting principles require that
the buyer amortize this and all other intangible assets over the period
benefited. This amortization represents a noncash deduction in the determination
of current operating net income which does not affect cash flows, but does
reduce reported earnings.
The Company has determined the estimated benefits period for goodwill to be 20
to 40 years with a substantial majority of such goodwill with a life of 40
years. If the Company has understated or overlooked a material intangible asset
having a benefit period less than the amortization period being used, or has
overlooked factors indicating that a shorter benefit period for goodwill is
appropriate, (1) earnings reported in periods immediately following the
acquisition will be overstated and (2) earnings subsequently would be burdened
by a continuing charge without the associated benefit to income that is expected
in arriving at the consideration paid for acquisitions. Earnings in later years
also could be significantly affected if management then determines that the
remaining balance of goodwill has become impaired. The Company has reviewed all
the factors and related future cash flows considered in arriving at the amount
paid for acquisitions. The Company has concluded that (1) the anticipated future
cash flows associated with the intangible assets recognized in the acquisitions
will continue throughout the period of amortization selected and (2) no
persuasive evidence exists that any material portion will dissipate over a
shorter period. The Company's conclusion may prove to be incorrect. During May
1999, the Financial Accounting Standards Board ("FASB") tentatively decided to
reduce the current maximum write-off period for goodwill from 40 years to 20
years for most companies. The 20 year write-off period may apply only to
acquisitions occurring after a future effective date that the FASB will set. The
FASB will issue a formal proposal on this subject for public comment later in
the year. Should the FASB's final pronouncement apply only to business
combinations consummated after a future date, there should be no impact on the
amortization expense for our previously consummated acquisitions that use a 40
year goodwill life. However, if the FASB effects a change that requires us to
apply a reduced amortization period on our previous acquisitions, our future
operating results would be negatively impacted.
9
<PAGE> 10
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Synagro Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of Synagro
Technologies, Inc. (a Delaware corporation), and subsidiaries as of December 31,
1998 and 1997, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Synagro
Technologies, Inc., and subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period then ended in conformity with generally accepted accounting
principles.
As discussed in Note 1, the accompanying consolidated financial statements
reflect the Company on a historical basis as restated for the effect of a
pooling-of-interests transaction completed in the first quarter of 1999.
ARTHUR ANDERSEN LLP
Houston, Texas
June 30, 1999
10
<PAGE> 11
SYNAGRO TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 414,712 $ 281,043
Short-term investments -- 64,504
Restricted cash, current portion 680,656 172,925
Accounts receivable, net 6,523,944 4,105,405
Note receivable, current portion 436,325 543,706
Prepaid expenses and other current assets 1,679,381 1,351,212
------------ ------------
Total current assets 9,735,018 6,518,795
Property, machinery & equipment, net 12,394,018 9,888,583
Other Assets:
Goodwill, net of accumulated amortization of $15,594,918 and $996,079 43,130,904 4,333,277
Restricted cash, long-term portion -- 173,387
Notes receivable, long-term portion 262,829 --
Other 1,099,714 251,594
------------ ------------
Total assets $ 66,622,483 $ 21,165,636
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ -- $ 2,777,871
Notes payable to prior owners, current portion -- 398,890
Accounts payable and accrued expenses 4,043,512 4,147,377
------------ ------------
Total current liabilities 4,043,512 7,324,138
Long term liabilities:
Long-term debt 21,651,197 6,114,000
Notes payable to prior owners 6,679,039 --
------------ ------------
Total long term liabilities 28,330,236 6,114,000
COMMITMENTS AND CONTINGENCIES
Stockholders' Equity:
Preferred stock, $.002 par value, 10,000,000 shares authorized,
none issued and outstanding -- --
Common Stock, $.002 par value, 100,000,000 shares authorized,
14,251,706, shares and 8,610,306 issued and outstanding 28,503 17,221
Additional paid in capital 56,495,873 25,513,915
Accumulated deficit (22,275,641) (17,803,638)
------------ ------------
Total stockholders' equity 34,248,735 7,727,498
------------ ------------
Total liabilities and stockholders' equity $ 66,622,483 $ 21,165,636
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
11
<PAGE> 12
SYNAGRO TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net sales $ 33,564,831 $ 28,036,056 $ 24,174,505
Cost of service 28,116,069 23,239,213 20,306,298
------------ ------------ ------------
Gross profit 5,448,762 4,796,843 3,868,207
Selling, general and administrative expenses 4,809,474 3,804,901 6,237,816
Other charges (credits):
Loss on assets held for sale and other special charges/(credits) (63,799) (721,286) 4,841,807
------------ ------------ ------------
Income (loss) from operations 703,087 1,713,228 (7,211,416)
------------ ------------ ------------
Other income (expense):
Other income, net 317,714 409,283 359,685
Interest (1,558,219) (1,006,790) (730,406)
------------ ------------ ------------
Total (1,240,505) (597,507) (370,721)
------------ ------------ ------------
Net income (loss) before redeemable preferred dividends and income taxes (537,418) 1,115,721 (7,582,137)
Provision for income taxes -- -- --
------------ ------------ ------------
Net income (loss) before redeemable preferred dividends (537,418) 1,115,721 (7,582,137)
Redeemable preferred stock dividends 3,934,585 -- --
------------ ------------ ------------
Net income (loss) applicable to common stock $ (4,472,003) $ 1,115,721 $(7,582,137)
============ ============ ============
Income per common and common share equivalent:
Net income (loss), basic $ (.40) $ .13 $ (1.04)
Net income (loss), diluted $ (.40) $ .13 $ (1.04)
Weighed average shares outstanding, basic 11,207,249 8,545,114 7,266,760
Weighed average shares outstanding, diluted 11,207,249 8,740,345 7,266,760
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
12
<PAGE> 13
SYNAGRO TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------------- ------------
PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
---------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1995.................. 6,952,758 $ 13,906 $ 22,215,785 $(11,337,222) $ 10,892,469
Additional shares issued ................ 100,000 $ 200 $ 134,800 -- $ 135,000
Shares issued in acquisition............. 155,000 310 222,425 -- 222,735
Conversion of long-term debt............. 144,344 289 189,711 -- 190,000
Exercise of options...................... 3,333 7 6,659 -- 6,666
Net loss................................. -- -- -- (7,582,137) (7,582,137)
---------- -------- ------------ ------------ ------------
BALANCE, December 31, 1996.................. 7,355,435 14,712 22,769,380 (18,919,359) 3,864,733
Redemption of warrants, net.............. 1,324,243 2,648 2,947,412 -- 2,950,060
Shares exchanged in repayment of
notes receivable........................ (74,372) (149) (212,867) -- (213,016)
Exercise of options...................... 5,000 10 9,990 -- 10,000
Net income............................... -- -- -- 1,115,721 1,115,721
---------- -------- ------------ ------------ ------------
BALANCE, December 31, 1997.................. 8,610,306 17,221 25,513,915 (17,803,638) 7,727,498
Shares issued in acquisitions............ 4,152,981 8,306 23,773,983 -- 23,782,289
Conversion of preferred stock............ 1,458,335 2,916 3,429,968 -- 3,432,884
Issuance of warrants..................... -- -- 200,000 -- 200,000
Exercise of options and warrants......... 30,084 60 63,422 -- 63,482
Preferred stock dividends................ -- -- 3,514,585 (3,934,585) (420,000)
Net loss................................. -- -- -- (537,418) (537,418)
---------- -------- ------------ ------------ ------------
BALANCE, DECEMBER 31, 1998.................. 14,251,706 $ 28,503 $ 56,495,873 $(22,275,641) $ 34,248,735
========== ======== ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
13
<PAGE> 14
SYNAGRO TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) before preferred stock dividends .......... $ (537,418) $ 1,115,721 $ (7,582,137)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities-
Depreciation ........................................... 1,856,866 1,610,268 2,022,203
Amortization ........................................... 667,845 228,895 255,690
Loss on assets held for sale and other special
charges (credits) ...................................... (251,476) (721,286) 4,841,807
Gain on sale of property, machinery and equipment ...... (145,333) (251,470) (261,319)
Other .................................................. -- (113,133) --
(Increase) decrease in the following, excluding
the effects of acquisitions-
Accounts receivable ............................... (596,818) (1,466,866) (669,516)
Inventory ......................................... -- -- 111,429
Prepaid expenses and other current assets ......... (161,355) (1,124,110) 757,382
Other assets ...................................... (338,832) (118,950) (21,952)
Increase (decrease) in the following, excluding
the effects of acquisitions-
Accounts payable and accrued expenses ............. (787,629) (9,482) 1,515,557
------------ ------------ ------------
Net cash provided by (used in) operating
activities ............................................. (294,150) (850,413) 969,144
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of businesses, net of cash acquired ................ (9,411,182) -- (1,277,265)
Purchase of property, machinery and equipment ............... (2,557,826) (1,634,722) (1,643,928)
Proceeds from sale of property, machinery and equipment ..... 2,081,026 456,564 640,404
Sales of short-term investments, net ........................ 64,504 495,496 455,743
Proceeds from notes receivable .............................. 138,999 121,286 --
------------ ------------ ------------
Net cash used in investing activities .................. (9,684,479) (561,376) (1,825,046)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt .......................................... 8,419,768 1,360,945 5,829,103
Payments on debt ............................................ (1,049,492) (3,301,330) (7,135,023)
Increase in restricted cash ................................. (334,344) (950) (5,105)
Preferred stock dividend .................................... (420,000) -- --
Redemption of warrants, net ................................. -- 2,950,060 --
Issuance of preferred stock, net of offering costs .......... 3,432,884 -- --
Issuance of stock ........................................... -- -- 135,000
Exercise of options and warrants ............................ 63,482 10,000 6,666
------------ ------------ ------------
Net cash provided by (used in) financing
activities ............................................. 10,112,298 1,018,725 (1,169,359)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ............ 133,669 (393,064) (2,025,261)
CASH AND CASH EQUIVALENTS, beginning of year .................... 281,043 674,107 2,699,368
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of year .......................... $ 414,712 $ 281,043 $ 674,107
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
14
<PAGE> 15
SYNAGRO TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(Continued)
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid................................................ $ 1,008,430 $ 1,025,788 $ 818,039
Taxes paid................................................... -- -- --
</TABLE>
NONCASH INVESTING AND FINANCING ACTIVITIES
On March 31, 1998, the Company issued 1,458,335 shares of Series B Preferred
Stock, $.002 par value per share (the "Preferred Stock"), with a beneficial
conversion feature. The Company recognized the value of the beneficial
conversion feature of $3,514,585 as a preferred dividend.
On June 10, 1998, the Preferred Stock was converted into 1,458,335 shares of the
Company's Common Stock.
The Company sold the operations of a wholly-owned subsidiary in 1997. The net
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 initially reserved at the date of sale. (NOTE 11)
In 1997, $946,000 of assets were purchased in accordance with a purchase and
sale agreement. The purchase was financed through debt.
In 1997, approximately $213,000 of notes receivable was repaid with 74,372
shares of Common Stock.
In 1996, $190,000 of debentures were converted into 144,344 shares of Common
Stock.
In 1996, $1,325,150 of machinery and equipment was acquired with debt.
The accompanying notes are an integral part of these consolidated
financial statements.
15
<PAGE> 16
SYNAGRO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES --
BUSINESS AND ORGANIZATION
Synagro Technologies, Inc., a Delaware corporation ("Synagro"), and collectively
with its subsidiaries (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 is headquartered in Houston,
Texas and operates throughout the United States.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Synagro and its
wholly owned subsidiaries. All intercompany accounts and transactions have been
eliminated. As discussed further in Note 2, the Company acquired National
Resource Recovery, Inc., on March 1, 1999, in a transaction accounted for as a
pooling-of-interests. The historical consolidated financial statements of the
Company have been restated for all periods presented for the effect of the
pooling-of-interests transaction.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all investments with an original maturity of three months
or less when purchased to be cash equivalents. Short-term investments have
maturities greater than three months at the date of purchase. At December 31,
1997, short-term investments consisted of certificates of deposit. All
short-term investments have been classified as held-to-maturity at December 31,
1997. These investments have various maturity dates which do not exceed one
year. These securities are carried at cost, which approximates fair value.
PROPERTY, MACHINERY AND EQUIPMENT
Property, machinery and equipment is stated at cost. Depreciation is being
provided using straight-line and accelerated methods over estimated useful lives
of three to twenty years. Leasehold improvements are capitalized and amortized
over the lesser of the life of the lease or the estimated useful life of the
asset.
Expenditures for repairs and maintenance are charged to expense when incurred.
Expenditures for major renewals and betterments, which extend the useful lives
of existing equipment, are capitalized and depreciated. Upon retirement or
disposition of property, machinery and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of operations.
In the second quarter of 1997, the Company changed the estimated useful lives of
certain fixed assets. The change which had an impact of less than one-half of
$0.01 on net income per share did not materially effect the Company's results of
operations.
GOODWILL
Goodwill represents the aggregate purchase price paid by the Company in
acquisitions accounted for as a purchase over the fair value of the net tangible
assets acquired. Goodwill is amortized on a straight-line basis over the
estimated period of benefit ranging from 20 to 40 years.
In the event that facts and circumstances indicate that goodwill may be
impaired, an evaluation of recoverability would be performed. If an evaluation
were required, the estimated future undiscounted cash flows associated with the
asset would be compared to the asset's carrying amount to determine if a
write-down to market value or discounted cash flow value was necessary. The
Company believes the goodwill remaining as of December 31, 1998, is fully
realizable.
At December 31, 1998, goodwill of approximately $3,879,000 is being amortized
over a 20 year life. The Company's remaining goodwill is being amortized over a
40 year life. Goodwill amortization expense was $255,690, $228,895 and $628,839
for 1996, 1997 and 1998, respectively.
16
<PAGE> 17
OTHER ASSETS
Included in other assets are non-compete agreements. These agreements are valued
at cost and amortized on a straight-line basis over the term of the agreement,
which is generally for two to five years. Amortization expense was approximately
$40,000 in 1998 and -0- in 1997 and 1996, respectively. Additionally, the
Company had deferred financing costs in connection with the credit facility
disclosed in Note 6, the costs are being expensed over the term of the
agreement.
REVENUE RECOGNITION
Revenues are recognized as services are completed and provided.
USE OF ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
LONG-LIVED ASSETS
Effective January 1, 1996, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of." SFAS No. 121 requires that
long-lived assets and certain identifiable intangibles held and used by an
entity be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The
Company's adoption of SFAS No. 121 did not have a material effect on the
Company's financial position or results of its operations.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior years' financial
statements to conform with the 1998 presentation.
CONCENTRATION OF CREDIT RISK
The Company provides services to a broad range of geographical regions. The
Company's credit risk primarily consists of receivables from a variety of
customers including, state and local agencies, municipalities and private
industries. The Company reviews its accounts receivable and provides allowances
as deemed necessary.
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". This standard provides the method for determining
the appropriate asset and liability for deferred taxes which are computed by
applying applicable tax rates to temporary (timing) differences. Therefore,
expenses recorded for financial statement purposes before they are deducted for
tax purposes create temporary differences which give rise to deferred tax
assets. Expenses deductible for tax purposes before they are recognized in the
financial statements create temporary differences which give rise to deferred
tax liabilities.
NEW ACCOUNTING PRONOUNCEMENTS
In the first quarter of 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income," which requires the display of comprehensive income and
its components in the financial statements. Comprehensive income represents all
non-stockholder related changes in equity of an entity during the reporting
period, including net income and charges directly to equity, which are excluded
from net income. For the three years ended December 31, 1998, there are no
material differences between the Company's "traditional" and "comprehensive"
net income.
Effective December 31, 1998, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." SFAS No. 131
establishes new standards for segment reporting which are based on the way
management organizes segments within a company for making operating decisions
and assessing performance. Through December 31, 1998, the Company operated in
one segment namely, the biosolids management business segment.
In February 1998, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 132, "Employers Disclosures about Pensions and Other Postretirement
Benefits," which becomes effective for financial statements for the year ended
December 31, 1998. SFAS No. 132 requires revised disclosures about pensions and
other postretirement benefit plans. The Company has adopted the
17
<PAGE> 18
provisions of SFAS No. 132, and it does not have a material effect on the
Company's consolidated financial position or result of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which becomes effective for financial
statements beginning after June 15, 1999. SFAS No. 133 requires a company to
recognize all derivative instruments (including certain derivative instruments
embedded in other contracts) as assets or liabilities in its balance sheet and
measure them at fair value. The statement requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. In June 1999, the FASB amended SFAS No. 133
to defer its effective date to all fiscal quarters and all fiscal years
beginning after June 15, 2000. The Company is evaluating SFAS No.133 and the
impact on existing accounting policies and financial reporting disclosures.
However, the Company has not historically engaged in activities or entered into
arrangements normally associated with derivative instruments.
In March 1998, the American Institute of Certified Public Accountants ("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 adopted SOP
98-1 in the first quarter of fiscal 1999 which did not have a material effect on
its consolidated financial position or result of operations.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities," which requires costs of start-up activities to be expensed as
incurred, and upon adoption, previously deferred costs should be charged as a
cumulative effect of a change in accounting principle. The statement is
effective for financial statements beginning after December 15, 1998. The
adoption of this standard is not expected to have a material effect on the
Company's consolidated financial position or result of operations.
(2) ACQUISITIONS -
ENVIRONMENTAL WASTE RECYCLING, INC.
On November 5, 1998, the Company acquired Environmental Waste Recycling Inc.
("EWR"), a biosolids management company for approximately $9,487,000. The
acquisition was financed through the issuance of 865,125 shares of Common Stock
with a market value of approximately $2,812,000, $200,000 in debt and
approximately $6,475,000 in cash and acquisition costs. The Common Stock was
valued in accordance with the provisions of Emerging Issues Task Force ("EITF")
95-19. The transaction was recorded using the purchase method of accounting. The
accompanying balance sheet as of December 31, 1998, includes a preliminary
allocation of the purchase price and is subject to final adjustments which
management believes will not be material. The preliminary allocation resulted in
approximately $7,091,000 of goodwill, that is being amortized over 40 years. The
purchase agreement provides for the payment of additional cash and stock
consideration in an aggregate amount not to exceed $2,956,216 in the event
certain financial targets are realized during the twelve-month period after
closing. The Company financed the cash portion of the merger consideration with
borrowings under its credit facility with Bank of America.
RECYC, INC.
On July 24, 1998, the Company acquired Recyc, Inc. ("Recyc"), a biosolids
composting company, for approximately $15,573,000. The acquisition was financed
through the issuance of 1,475,323 shares of Common Stock with a market trading
value of approximately $8,573,000, $5,646,000 in debt, and $1,354,000 in cash
and acquisition costs. The Common Stock issued was valued in accordance with the
provisions of EITF 95-19. The transaction was recorded using the purchase method
of accounting. The accompanying balance sheet as of December 31, 1998, includes
a preliminary allocation of the purchase price and is subject to final
adjustments which management believes will not be material. The accompanying
balance sheet as of December 31, 1998 includes a preliminary allocation
resulting in approximately $14,964,000 of goodwill that is being amortized over
40 years. An unsecured note in the approximate amount of $2,305,000 was issued
to the prior owner with principal due November 2000. The note bears annual
interest of 7% and is payable quarterly with the first payment made in November
1998. The note has no financial covenants. The principal owed under the
promissory note may be offset, and up to 375,000 of the shares issued to the
prior owners may be returned to the Company if certain postclosing conditions
are not met. In connection with the acquisition, the Company entered into a
lease agreement with an option to purchase with the prior owners, as trustees of
a family trust of said stockholders, providing for the lease by Recyc of a
composting facility. In addition, the Company entered into a transportation
agreement with an initial term of two years with Recyc Trucking, Inc., ("RTI"),
a company owned by the prior owners, for the provision by RTI of certain
transportation services relating to Recyc's operations.
18
<PAGE> 19
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 company (collectively "A&J") all of which
provide biosolids management services, for approximately $19,802,000. The
acquisitions were financed through the issuance of 1,812,533 shares of Common
Stock with a market trading value of approximately $12,398,000, approximately
$5,823,000 in debt and $1,581,000 in cash and acquisition costs. The Common
Stock issued was valued in accordance with the provisions of EITF 95-19. The
transactions were recorded using the purchase method of accounting. The
accompanying balance sheet as of December 31, 1998, includes a preliminary
allocation of the purchase price and is subject to final adjustments which
management believes will not be material. The preliminary allocation resulted in
approximately $17,372,000 of goodwill that is being amortized over 40 years. The
unsecured notes issued to the prior owner are payable in quarterly installments
with the first installment due January 1, 1999. The notes bear annual interest
rate of 7%. The notes have no financial covenants.
The Company purchased all of the common stock of A&J, Recyc and EWR during 1998.
The assets acquired and liabilities assumed were as follows for the year ended
December 31, 1998.
<TABLE>
<S> <C>
Net cash paid including acquisition costs $ 9,410,000
Fair value of tangible assets acquired (6,091,000)
Liabilities assumed 655,000
Notes payable - Issued and Assumed 11,669,000
Common Stock issued 23,783,000
------------
Goodwill $ 39,426,000
============
</TABLE>
BFI ORGANICS DIVISION
Effective 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. The debt bears an interest rate equal to 30 day commercial
paper plus 2.77%.
PIMA GRO SYSTEMS, INC.
Effective July 1, 1996, the Company acquired all the issued and outstanding
stock of Pima Gro Systems, Inc., and Pima Gro Systems 2, Inc. (collectively,
PimaGro), a company engaged in the business of recycling and transportation of
biosolids. The aggregate purchase price was approximately $3,096,000, consisting
of approximately $1,277,000 in cash, $1,595,000 in notes payable and 155,000
shares of the Company's Common Stock valued at approximately $223,000, subject
to an additional contingent sum on the purchase price of $5.20 for each dollar
by which the pretax earnings of PimaGro, for each of the fiscal years during
1996 through 1998, exceed the base amount of $380,000 in 1996 and, subject to
certain adjustments to the base amount, during the two following fiscal years.
The additional contingent sum may be payable by the Company, if at all, in cash,
Common Stock or promissory notes, or any combination thereof. Such amounts which
may be payable as contingent sum payments will be held in escrow until March 31,
1999, and subject to reduction based on amounts expended by the Company for
certain capital expenditures and costs reserved for the development of certain
business sites. As of December 31, 1998, there were no additional contingent
amounts payable by the Company. The acquisition has been accounted for under the
purchase method and, accordingly, the operating results of PimaGro have been
included in the operating results of the Company since the date of acquisition.
The excess of the total acquisition cost over the fair value of the net assets
acquired (goodwill) in the amount of $1,419,000 is being amortized on a
straight-line basis over 40 years.
The Company purchased all of the common stock of PimaGro during 1996. The assets
acquired and liabilities assumed were as follows for the year ended December 31,
1996:
<TABLE>
<S> <C>
Net cash paid $ 1,277,000
Fair value of tangible assets acquired (4,792,000)
Liabilities assumed 3,116,000
Notes payable - issued 1,595,000
Common Stock issued 223,000
------------
Goodwill $ 1,419,000
============
</TABLE>
The following unaudited pro forma information for the periods set forth below
gives effect to the acquisitions of A&J, Recyc and
19
<PAGE> 20
EWR as if they had occurred at the beginning of 1997. The unaudited pro forma
information is presented for information purposes only and is not necessarily
indicative of actual results which might have occurred if the acquisitions had
been made at the beginning of the periods presented.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31 (UNAUDITED)
-------------------------
1998 1997
------------ ------------
<S> <C> <C>
Net sales $ 48,272,298 50,133,695
Net income (loss) before Preferred Stock Dividends 1,255,573 2,993,880
Net earnings (loss) applicable to Common Stock (2,679,012) 2,993,880
Net earnings (loss) per share
Basic (.20) .24
Diluted (.20) .23
</TABLE>
ACQUISITION OF NATIONAL RESOURCE RECYCLING, INC.
During March 1999, Synagro Technologies completed the acquisition of all the
common stock of National Resource Recycling, Inc. ("NRR"), in a business
combination accounted for as a "pooling-of-interests" transaction. NRR,
headquartered in Michigan, provides biosolids management services. Synagro
issued 1,000,001 shares of common stock in exchange for all of the common stock
of NRR. There were no transactions between Synagro and NRR during the periods
prior to the business combination.
The following table summarizes the restated revenues, net income and
per share data of Synagro after giving effect to the pooling transaction (in
thousands, except per share data).
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1996 1997 1998
---- ---- ----
NET NET NET
REVENUES INCOME REVENUES INCOME REVENUES INCOME
-------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Revenues and net income-
As previously reported in 1998 Form 10-K/A $22,977 $(7,589) $25,303 $ 832 $29,967 $(4,672)
NRR ........................................... 1,198 5 2,733 284 3,598 200
------- ------- ------- ------- ------- -------
As restated ............................... $24,175 $(7,582) $28,036 $ 1,116 $33,565 $(4,472)
======= ======= ======= ======= ======= =======
Basic earnings per share-
As previously reported in 1998 Form 10-K/A $ (1.21) $ 0.11 $ (0.46)
NRR............................................ .17 0.02 0.06
------- ------- -------
As restated................................ $ (1.04) $ 0.13 $ (0.40)
======= ======= =======
Diluted earnings per share-
As previously reported in 1998 Form 10-K/A $ (1.21) $ 0.11 $ (0.46)
NRR............................................ .17 0.02 0.06
------- ------- -------
As restated................................ $ (1.04) $ 0.13 $ (0.40)
======= ======= =======
</TABLE>
(3) PROPERTY, MACHINERY AND EQUIPMENT --
Property, machinery and equipment consists of the following:
20
<PAGE> 21
<TABLE>
<CAPTION>
DECEMBER 31,
ESTIMATED USEFUL --------------------------
LIVE-IN YEARS 1998 1997
------------- ----------- -----------
<S> <C> <C> <C>
Land N/A $ 444,958 $ 576,884
Buildings 20 -- 252,093
Machinery and equipment 3-10 17,116,636 13,949,911
Office furniture and equipment 3-10 552,264 380,800
Leasehold improvements 7-20 197,265 106,100
Construction in process -- 225,644 116,725
----------- -----------
18,536,767 15,382,513
Less- Accumulated depreciation and amortization 6,142,749 5,493,930
----------- -----------
$12,394,018 $ 9,888,583
=========== ===========
</TABLE>
(4) DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS --
Activity of the Company's allowance for doubtful accounts consists of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1997
--------- ---------
<S> <C> <C>
Balance at beginning of year $ 189,862 $ 287,514
Deductions for recoveries and for uncollectible
receivables written off (13,092) (97,652)
Allowance for doubtful accounts of purchased companies
at acquisition date 20,000 --
--------- ---------
Balance at end of year $ 196,770 $ 189,862
========= =========
</TABLE>
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1998 1997
---------- ----------
<S> <C> <C>
Accounts payable $2,790,668 $2,580,887
Accrued legal and other claims costs 287,378 937,065
Accrued salaries and benefits 102,808 84,495
Accrued interest 294,723 77,025
Other accrued expenses 567,935 467,905
---------- ----------
Total $4,043,512 $4,147,377
========== ==========
</TABLE>
(5) AGENCY RIGHTS --
The Company had the exclusive agency rights to market the "N-Viro Process" in
the southwestern United States. The "N-Viro Process" is a process to convert
biological organic waste into marketable products. The Company acted as the
agent to collect all of the fees from any licensees and to pay to N-Viro
International any amounts not payable to the Company as compensation pursuant
to the agency and license agreements.
In December 1996, the Company decided to wind down and discontinue its
operations relating to the N-Viro Process and accordingly determined that a
permanent impairment had occurred in the value of the agency rights. The
carrying value of the agency rights of approximately $1,178,000 was charged to
operations. In addition, the Company sold certain assets related to these
operations and recorded a charge to operations in the fourth quarter of 1996
amounting to approximately $1,200,000 to adjust the carrying values of these
assets to their estimated fair market values. These charges are included in
"loss on assets held for sale and other special charges (credits)" in the
accompanying consolidated statements of operations. The remaining assets in the
amount of approximately $397,000 in 1998 and 1997, respectively, have been
classified as property, machinery and equipment in the accompanying
consolidated balance sheet at December 31, 1998 and 1997.
21
<PAGE> 22
(6) LONG-TERM DEBT OBLIGATIONS --
Long-term debt obligations consist of the following:
<TABLE>
<CAPTION>
December 31
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
Term loan with a bank, repaid with credit facility $ -- $ 4,000,000
Revolving credit facility with a bank 18,200,000 1,037,270
Economic development revenue bonds 630,000 945,000
Note payable to a financial institution, maturing in varying
Installments through the year 2002, secured by certain assets of the
Company, with an interest rate of 4% 245,757 300,000
Capital lease obligations 233,557 297,177
Notes payable to financial institution and individuals, maturing in varying
Installments through the year 2001, secured by equipment with
interest rates ranging from 8% to 11% 2,341,883 2,312,424
----------- -----------
Total debt 21,651,197 8,891,871
Less:
Current maturities -- 2,777,871
----------- -----------
Long-term debt, net of current maturities $21,651,197 $ 6,114,000
=========== ===========
</TABLE>
CREDIT FACILITY
On October 7, 1998, the Company obtained a $40 million bank credit facility
(the "Facility"). The Facility was used to retire certain debt payable to
various individuals and financial institutions. The Facility is secured by
substantially all of the Company's assets.
The Facility expires October 5, 2001, and bears interest at the bank eurodollar
rate plus a margin based upon a pricing schedule per the Facility agreement
(7.4% at December 31, 1998). The weighted average interest rate in 1998 was
7.51%. The Facility is subject to a borrowing base equal to 4.25 times earnings
before interest, taxes, depreciation and amortization ("EBITDA") based on a
trailing twelve months calculation, as defined in the Facility, less funded
debt as defined, (which includes notes payable to prior owners, which can be
refinanced through the Facility), until June 30, 1999, 4.00 until September 30,
1999, and 3.75 times EBITDA thereafter. Amounts available for additional
borrowing under the Facility at December 31, 1998 totaled approximately
$2,579,000.
The Facility requires the consent of the lenders for acquisitions exceeding a
certain level of cash consideration, prohibits the payments of cash dividends,
limits the issuance of indebtedness and requires the Company to comply with
certain financial covenants, including a minimum net worth requirement, maximum
senior and total debt to pro forma EBITDA and interest coverage ratio. The
Company was in compliance with all covenants as of December 31, 1998.
The Facility was used to payoff the Company's previous facility with LaSalle
National Bank ("LaSalle") which had been obtained through two of the Company's
subsidiaries. The previous facility consisted of a $5 million revolving line of
credit and a $5 million term loan. The amount under the line of credit was
subject to a borrowing base of 85% of eligible accounts receivable, as defined
in the agreement. The term loan required principal payments of $1 million a
year. The revolving line of credit required the Company to direct all its
account debtors to make all payments on the accounts to a lockbox designated
by, and under the control of, LaSalle. Additionally, the bank had the right to
accelerate borrowings outstanding in the event the bank reasonably felt
insecure for any material reason. As a result, in order to comply with EITF
Pronouncement 95-22, the Company classified the revolving line of credit
portion of the Facility as a current liability in the accompanying balance
sheet as of December 31, 1997. This previous facility was to expire in
September 1999.
REVENUE BONDS
The economic development revenue bonds are expected to be paid in September
1999. Interest was payable at 6.7 and 6.9 percent per annum in 1998 and 1997,
respectively. Included in the accompanying consolidated balance sheets as of
December 31, 1998 and 1997, is restricted cash of $680,656 and $346,312,
respectively, for future payment of principal and interest on the bonds.
NOTES PAYABLE TO PRIOR OWNERS
The Company issued notes in the amount of $8,050,311 to prior owners of certain
purchased companies as partial consideration of the acquisition price. These
notes had a balance of $6,361,822 and $398,890 at December 31, 1998 and 1997
respectively. The terms of
22
<PAGE> 23
the outstanding notes include varying principal installments starting August
1998 and continuing through November 2000 and annual interest rates of 7% to be
paid quarterly. The notes have no financial covenants. The note related to the
Recyc acquisition with a balance of approximately $2,212,000 at December 31,
1998 may be offset if certain postclosing conditions are not met. No adjustments
have been made as of December 31, 1998. Additionally, the Company has notes to
prior owners relating to non-compete agreements; these notes have a balance of
$317,217 at December 31, 1998. The notes are paid in varying installments
starting July 1998, and have an annual imputed interest rate of 9%. These notes
have no financial covenants.
At December 31, 1998, future principal payments of total long-term debt are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING LONG-TERM PAYABLE TO
DECEMBER 31, DEBT AFFILIATE/STOCKHOLDER
----------- ----------- ---------------------
<S> <C> <C>
1999 $ 1,978,145 $ 2,151,768
2000 538,425 4,343,938
2001 18,662,199 100,000
2002 354,048 83,333
2003 and thereafter 118,380 --
----------- -----------
Total $21,651,197 $ 6,679,039
=========== ===========
</TABLE>
The Company had current maturities on total long-term debt of $4,129,913 at
December 31, 1998. The Company has the ability and intent to refinance such
maturities related to long term debt with the Facility and has therefore
classified such indebtedness as long-term in the consolidated balance sheet as
of December 31, 1998. The Company estimates the fair value of long-term debt as
of December 31, 1998 and 1997, to be approximately the same as the recorded
value.
CAPITAL LEASES
The Company operates under lease agreements which are accounted for as capital
leases. The capitalized costs and accumulated depreciation of equipment under
capital leases were as follows:
<TABLE>
<CAPTION>
ASSET BALANCES AT
DECEMBER 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Equipment $391,370 $391,370
Less: Accumulated depreciation 61,844 22,707
-------- --------
$329,526 $368,663
======== ========
</TABLE>
The following is a schedule by years of future minimum lease payments under
capital leases together with the present value of present net minimum lease
payments as of December 31, 1998:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
<S> <C>
1999 $ 93,122
2000 93,122
2001 93,122
--------
Total minimum lease payments 279,366
Less: Amount representing interest 45,809
--------
Present value of minimum lease payments $233,557
========
</TABLE>
23
<PAGE> 24
(7) INCOME TAXES --
Significant components of the Company's deferred tax liabilities and assets for
federal income taxes consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------
1998 1997
----------- -----------
<S> <C> <C>
Deferred tax assets-
Net operating loss carryforwards $ 3,992,000 $ 3,785,000
Accrual not currently deductible for tax purposes 157,000 240,000
Allowance for bad debts 200,000 65,000
Write-off of assets not currently deductible for tax purposes 520,000 505,000
Other 1,000 1,000
----------- -----------
Total deferred tax assets 4,870,000 4,596,000
Valuation allowance for deferred tax assets (4,025,000) (4,079,000)
Deferred tax liability-
Differences between book and tax bases of fixed assets (845,000) (517,000)
----------- -----------
Net deferred tax liability $ -- $ --
=========== ===========
</TABLE>
As of December 31, 1998, the Company has generated net operating loss ("NOL")
carryforwards of approximately $11,730,000 available to reduce future income
taxes. These carryforwards begin to expire in 2004 through 2018. A change in
ownership, as defined by federal income tax regulations, could significantly
limit the Company's ability to utilize its carryforwards. Accordingly, the
Company's ability to utilize its NOLs to reduce future taxable income and tax
liabilities may be limited. Additionally, because federal tax laws limit the
time during which these carryforwards may be applied against future taxes, the
Company may not be able to take full advantage of these attributes for federal
income tax purposes. As the Company has incurred losses in recent years and the
utilization of these carryforwards could be limited as discussed above, a
valuation allowance has been established to fully offset the net deferred tax
asset at December 31, 1998 and 1997. The valuation allowance decreased $54,000
and increased $253,000 for the year ended December 31, 1998 and 1997,
respectively, due to the Company's tax losses and changes in fixed asset basis
differences.
(8) COMMITMENTS AND CONTINGENCIES --
LEASES
The Company leases certain facilities for its corporate and operations offices
under non-cancelable long-term lease agreements. Minimum annual rental
commitments under these leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1999 $ 1,065,650
2000 733,206
2001 469,590
2002 415,137
2003 and thereafter 6,656,999
-----------
$ 9,340,582
===========
</TABLE>
Rental expense was $1,060,703, $530,685 and $633,751 for 1998, 1997 and 1996,
respectively.
Concurrent with certain acquisitions, the Company entered into various
agreements with prior owners to lease land and buildings used in the Company's
operations. The terms of these leases range from three years to thirty years
and provide for certain escalations in rental expense. One such lease which
expires in 2028 has an option to terminate upon 30 days notice in the event a
conditional use permit (as defined in the agreement) relating to the leased
land expires. Additionally the Company has a 5 year option to purchase such
leased property for $2,250,000 which expires in July 2003. Currently, the
Company pays rent in the amount of $36,000 per annum for the first three years
and $192,000 per annum thereafter on the lease. The charge for the lease costs
are being expensed on a straight-line basis. Included in 1998 rent expense
above is approximately $210,500 of rent paid to related parties.
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
24
<PAGE> 25
impact on the Company's operations or financial position.
(9) STOCKHOLDERS' EQUITY --
COMMON STOCK AND WARRANTS
In October 1995, the Company completed a secondary public offering of its
Common Stock. The offering consisted of 500,000 units at $12.00 per unit, each
unit consisting of six shares of Common Stock and six redeemable Common Stock
purchase warrants. The 3,000,000 warrants have an exercise price of $2.40 per
share and expire in October 2000. These warrants are redeemable by the Company
at $0.10 per warrant, subject to certain events occurring. The underwriters
were issued a warrant which expires in October 2000 to purchase 50,000 units
(includes 300,000 warrants) at $16.20 per unit. During 1998 approximately 4,646
warrants were converted to Common Stock.
On December 23, 1996, the Company called the 3,000,000 warrants for redemption
on February 22, 1997. Prior to redemption, 1,324,243 warrants were converted
into Common Stock providing net proceeds to the Company of $3,117,636 in 1997.
In February 1997, the remaining 1,675,757 warrants were redeemed by the Company
for $167,576.
The Company had issued warrants to purchase 16,667 shares of Common Stock, which
were exercisable at $90.00 per share that expired December 1998.
On October 7, 1998 the Company issued warrants to purchase 170,000 shares of
Common Stock, in connection with the new Facility (Note 6). The warrants are
exercisable at $6.00 and expire October 2002. The Company estimated the fair
market value of the warrants to be approximately $200,000, which was recorded
as deferred loan costs and additional paid in capital. These deferred loan
costs are being amortized over the term of the credit facility.
PREFERRED STOCK -
The Company is authorized to issue up to 10,000,000 shares of Preferred Stock.
The Preferred Stock may be issued in one or more series or classes by the Board
of Directors of the Company prior to issuance of the shares. Each such series
or class shall have such powers, preferences, rights and restrictions as
determined by resolution of the Board of Directors. Series A Junior
Participating Preferred Stock will be issued upon exercise of the Stockholder
Rights described below.
SERIES B REDEEMABLE PREFERRED STOCK
On March 31, 1998, the Company issued 1,458,335 shares of Series B Preferred
Stock for $3,500,004. The Series B 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 Stock at $2.40.
The market price of the 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 Stock dividend. The value of such Preferred Stock
dividend had no impact on the Company's cash flows, but reduced basic and
diluted earnings available to holders of Common Stock.
On June 10, 1998, a cash dividend of $420,000 was paid to the holders of Series
B Preferred Stock as consideration for converting the shares of Series B
Preferred Stock held by them into 1,458,335 shares of Common Stock. All of the
shares of Series B Preferred Stock were converted to Common Stock at that time.
EARNINGS PER 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 requires 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 year ended December 31, 1997, the
difference in weighted average numbers of Common Stock between basic and
diluted earnings per share represents the impact of stock options. The adjusted
number of shares for the years ended December 31, 1998 and December 31, 1996
that would be increased related to stock options were approximately 990,772 and
- -0-, respectively; however, diluted per share amounts are not applicable for
loss periods. The following
25
<PAGE> 26
table summarizes the basic EPS and diluted EPS computations for the fiscal years
1998, 1997 and 1996.
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------- ------------
<S> <C> <C> <C>
Net income (loss) before redeemable preferred stock dividends $ (537,418) $ 1,115,721 $ (7,582,137)
Redeemable preferred stock dividends (3,934,585) -- --
------------ ------------- ------------
Net earnings (loss) on common stock $ (4,472,003) $ 1,115,721 $ (7,582,137)
============ ============= ============
Basic earnings (loss) per share:
Earning per share prior to preferred dividends $ (.05) .13 $ (1.04)
Preferred stock dividends (.35) -- --
------------ ------------- ------------
Basic earnings (loss) per common share (.40) .13 $ (1.04)
Diluted earnings (loss) per share:
Earnings per share prior to preferred dividends (.05) .13 (1.04)
Preferred Stock Dividends (.35) -- --
------------ ------------- ------------
Diluted earning (loss) per common share (.40) .13 $ (1.04)
Weighted average number of common shares, basic $ 11,207,249 $ 8,545,114 $ 7,266,760
Weighted average shares outstanding, diluted 11,207,249 8,740,345 7,266,760
</TABLE>
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% 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% 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% 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
stockholders to buy stock in the acquiring company at 50% 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% or more of its Common
Stock by a person or group or commencement of a tender offer for such 15%
ownership.
(10) STOCK OPTION PLANS
At December 31, 1998, the Company had outstanding stock options granted under
the Amended and Restated 1993 Stock Option Plan ("the Plan") for officers,
directors and key employees of the Company.
Under the Plan, the Company has reserved 1,325,171 shares of Common Stock for
issuance. The exercise price of options granted shall be at least 100 percent
(110 percent for 10 percent or greater stockholders) of the fair value of
Common Stock on the date of grant. Options must be granted within 10 years from
the date of the Plan and become exercisable at such times as determined by the
Plan committee. Options are exercisable for no longer than five years for
certain 10 percent or greater stockholders and for no longer than 10 years for
others.
26
<PAGE> 27
A summary of the Company's stock option plans as of December 31, 1998, 1997 and
1996, and changes during those years is presented below:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARES UNDER EXERCISE EXERCISE
OPTION PRICE RANGE PRICE
------------ --------------- --------
<S> <C> <C> <C>
Options outstanding at December 31, 1995 91,928 $ 2.00 to 10.80 9.24
Granted 174,667 2.00 2.00
Canceled/expired (162,662) 2.00 to 10.80 5.12
Exercised (3,333) 2.00 2.00
---------
Options outstanding at December 31, 1996 100,600 2.00 to 10.80 3.57
Granted 206,000 2.00 to 3.50 2.13
Canceled/expired (29,000) 2.00 to 10.80 2.91
Exercised (5,000) 2.00 2.00
---------
Options outstanding at December 31, 1997 272,600 2.00 to 8.25 2.58
Granted 772,000 2.75 to 5.75 2.91
Canceled/expired (11,556) 2.00 2.00
Exercised (25,438) 2.00 2.00
---------
Options outstanding at December 31, 1998 1,007,606 2.00 - 8.25 2.85
=========
Exercisable at December 31, 1998 430,106 2.00 - 8.25 3.20
=========
</TABLE>
At December 31, 1998, there were 267,794 options for shares of Common Stock
reserved under the Plan for the future grants.
OTHER OPTIONS
In addition to options issuable under the Plan, the Company has other options
outstanding to employees and directors of the Company. The options were issued
at exercise prices equal to the fair market value at the grant date of the
options.
The following summarizes the stock option transactions of the "other" options:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARES UNDER EXERCISE EXERCISE
OPTION PRICE RANGE PRICE
------------ --------------- --------
<S> <C> <C> <C>
Options outstanding at December 31, 1995 400,000 $ 2.00 $ 2.00
Granted 221,296 2.00 2.00
---------
Options outstanding at December 31, 1996 621,296 2.00 2.00
Granted 806,800 2.00 to 3.38 3.03
---------
Options outstanding at December 31, 1997 1,428,096 2.00 to 3.38 2.58
Granted 1,400,000 2.75 to 6.94 4.29
Canceled (162,163) 3.38 3.38
---------
Options outstanding at December 31, 1998 2,665,933 2.00 to 6.94 4.09
---------
Exercisable at December 31, 1998 1,662,602 $ 2.00 to 6.94 $ 4.06
=========
</TABLE>
During 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123, which is effective for fiscal years beginning
after December 15, 1995, establishes financial accounting and reporting
standards for stock-based employee compensation plans and for transactions in
which an entity issues its equity instruments to acquire goods and services
from non-employees. SFAS No. 123 requires, among other things, that
compensation cost be calculated for fixed stock options at the grant date by
determining fair value using an option-pricing model. The Company has the
option of recognizing the compensation cost over the vesting period as an
expense in the income statement or making pro forma disclosures in the notes to
the financial statements for employee stock-based compensation.
The Company continues to apply APB Opinion 25 and related interpretations in
accounting for its plans. Accordingly, no compensation cost has been recognized
in the accompanying consolidated financial statements for its stock option
plans. Had the
27
<PAGE> 28
Company elected to apply SFAS No. 123, the Company's net loss and loss per share
would have approximated the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net income (loss)
As reported....................... $(4,472,003) $ 1,115,721 $(7,582,137)
Pro forma for FAS No. 123......... $(5,743,474) (1,025,384) (7,774,558)
Diluted earnings (loss) per share-
As reported....................... $ (.40) $ .13 $ (1.04)
Pro forma for FAS No. 123......... (.51) (.12) (1.07)
</TABLE>
The following ranges of options were outstanding as of December 31, 1998:
<TABLE>
<CAPTION>
OUTSTANDING
SHARES UNDER EXERCISE PRICE WEIGHTED AVERAGE WEIGHTED AVERAGE
OPTION RANGE EXERCISE PRICE CONTRACTUAL LIFE EXERCISABLE
------------ -------------- -------------- ---------------- ----------------
<S> <C> <C> <C> <C>
2,225,969 $2.00 - 3.00 $2.48 8.7 years 1,299,138
927,637 3.01 - 4.50 3.31 8.4 601,637
106,333 4.51 - 6.75 4.98 8.0 45,000
413,600 6.76 - 8.25 6.98 9.4 146,933
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model resulting in a weighted average fair value
of $3.59, $2.79, and $.78 per share for grants made during the years ended
December 31, 1998, 1997, and 1996, respectively. The following assumptions were
used for option grants in 1998, 1997, and 1996, respectively: expected
volatility of 92 percent, 70 percent, and 87 percent; risk-free interest rates
of 5.66 percent, 6.45 percent, and 6.47 percent; expected lives of up to 6.3
years and no expected dividends to be paid. The compensation expense included
in the above pro forma net income data, may not be indicative of amounts to be
included in future periods as the fair value of options granted prior to 1995
was not determined.
(11) OTHER CHARGES (CREDITS) TO OPERATIONS --
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 two subordinated notes
of approximately $1.4 million, the assumption of approximately $978,000 in debt
and approximately $392,000 in trade payables for which the Company is not
contingently liable. 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)" for the year ended
December 31, 1996. The first note of approximately $1.152 million ("Note 1") is
to be repaid from the proceeds received from the sale of products by the
purchaser which is to be remitted on a monthly basis with a total amount of
approximately $604,000 due no later than September 16, 1998. The remaining
balance of approximately $548,000 is payable in equal monthly installments of
approximately $11,000 including interest for 59 months. Note 1 bears interest
at an annual rate of 6%. The second note of approximately $308,000 ("Note 2")
is payable in equal monthly installments of $3,700 including interest for 48
months following the first anniversary date of Note 2 with the unpaid balance
due March 31, 2002 and bears interest at an annual rate of 6%. The notes were
reserved at the date of sale due to considerable doubt relative to realization.
In December 1997, Note 2 was substantially paid off. The Company received
Common Stock held by former owners with a market trading value of approximately
$213,000, and charged against the reserve approximately $45,000. The remaining
balance of $50,000 is to be paid off by providing repair services on equipment
in the amount of $1,000 per month with $41,000 remaining outstanding as of
December 31, 1998. Additionally, the Company has received approximately
$332,000 in cash since inception on Note 1. The monthly installments of $11,000
relating to Note 1 have been received on a timely basis and are current,
resulting in a $375,000 balance outstanding as of December 31, 1998. The
portion of Note 1 which had a remaining balance of approximately $445,000,
which was due no later than September 16, 1998, was not paid when due. The
former owners were unable to pay the remainder without liquidating some of the
assets securing the note. The Company agreed to accept $265,000 in cash in full
payment of the installment due, which was received in January 1999. The
remaining balance of the installment due was charged against the allowance.
28
<PAGE> 29
The Company has recognized special credits related to such notes of
approximately $721,000 in 1997 and $380,000 in 1998. Based upon historical
collections, the financial condition of the obligor to meet future debt
installments and the underlying value of the assets securing the loan, the
Company expects the unreserved amount of approximately $641,000 at December 31,
1998 to be realizable. Subsequent to year-end through February 26, 1999, the
Company has collected approximately $287,000 on the notes.
SEVERANCE CHARGES
During 1998, the Company recorded a charge of approximately $320,000 related to
severance costs of two former officers. The charge is included in "Other
Charges (credits)" for the year ended December 31, 1998.
(12) EMPLOYEE BENEFIT PLANS --
Certain of the Company's subsidiaries sponsor various defined contribution
retirement plans for full time and some part-time employees. The plans cover
employees at all of the Company's operating locations. The defined contribution
plans provide for contributions ranging from 1% to 15% of covered employees'
salaries or wages. The Company may make a matching contribution as a percentage
set at the end of each plan year. The matching contributions totaled
approximately $46,000 for 1998, approximately $28,000 for 1997 and
approximately $22,000 for 1996.
(13) SUBSEQUENT EVENTS
Subsequent to December 31, 1998 and through June 30, 1999, the Company acquired
three biosolids management companies for a total purchase price of
approximately $22,451,000. These acquisitions were funded through the issuance
of approximately 3,045,000 shares of Common Stock and $13,427,000 in cash. The
cash was funded through the Company's credit facility. The transactions were
accounted for using the purchase method of accounting.
29
<PAGE> 30
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Anti-Pollution Associates, Inc., and D&D Pumping, Inc.:
We have audited the accompanying combined balance sheets of Anti-Pollution
Associates, Inc. and D&D Pumping, Inc. ("the Company") as of December 31, 1998
and the related combined statements of operations, shareholder's equity and
cash flows for the year then ended. These combined financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Anti-Pollution
Associates, Inc. and D&D Pumping, Inc. as of December 31, 1998 and the results
of their operations and their cash flows for the year then ended, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
June 30, 1999
30
<PAGE> 31
ANTI-POLLUTION ASSOCIATES, INC. AND D&D PUMPING, INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------ ---------
1998 1999
-------- --------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $224,078 $300,110
Accounts receivable, net of allowance of $9,043 60,843 64,837
Prepaid expenses and other current assets 1,169 1,076
-------- --------
Total current assets 286,090 366,023
Property and equipment, net 69,283 61,177
Securities Available for Sale 56,625 53,201
Goodwill, net 184,301 182,469
Other Assets
42,353 40,307
-------- --------
Total assets $638,652 $703,177
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses 11,978 17,509
-------- --------
Total current liabilities 11,978 17,509
COMMITMENTS AND CONTINGENCIES
Shareholder's equity:
Common stock 2,500 2,500
Additional paid-in capital 7,333 7,333
Retained earnings 611,225 673,643
Unrealized gain on investments 5,616 2,192
-------- --------
Total shareholder's equity 626,674 685,668
-------- --------
Total liabilities and shareholder's equity $638,652 $703,177
======== ========
</TABLE>
The accompanying notes are an integral part of these
combined financial statements.
31
<PAGE> 32
ANTI-POLLUTION ASSOCIATES, INC. AND D&D PUMPING, INC.
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTH PERIOD ENDED
DECEMBER 31, MARCH 31,
------------ --------------------------
1998 1998 1999
----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Revenues $ 1,136,584 $ 317,342 $ 305,648
Cost of revenues 762,549 240,417 163,046
----------- ----------- -----------
Gross profit 374,035 76,925 142,602
Selling, general and administrative expenses 99,489 37,450 29,212
----------- ----------- -----------
Income from operations 274,546 39,475 113,390
----------- ----------- -----------
Other expense (6,800) -- --
----------- ----------- -----------
Net income $ 267,746 $ 39,475 $ 113,390
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these
combined financial statements.
32
<PAGE> 33
ANTI-POLLUTION ASSOCIATES, INC. AND D&D PUMPING, INC.
COMBINED STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL UNREALIZED TOTAL
---------------------- PAID-IN GAIN/LOSS RETAINED SHAREHOLDER'S
SHARES AMOUNT CAPITAL ON INVESTMENTS EARNINGS EQUITY
--------- --------- --------- -------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1997 2,500 $ 2,500 $ 7,333 $ (3,489) $ 487,423 493,767
--------- --------- --------- --------- --------- ---------
Distributions -- -- -- -- (143,944) (143,944)
Net income 267,746 267,746
Unrealized gain on investments -- -- -- 9,105 -- 9,105
--------- --------- --------- --------- --------- ---------
BALANCE, December 31, 1998 2,500 2,500 7,333 5,616 611,225 626,674
Distributions (unaudited) -- -- -- -- (50,972) (50,972)
Net income (unaudited) 113,390 113,390
Unrealized loss on investments (unaudited) -- -- -- (3,424) -- (3,424)
--------- --------- --------- --------- --------- ---------
BALANCE, March 31, 1999 (unaudited) 2,500 $ 2,500 $ 7,333 $ 2,192 $ 673,643 $ 685,668
========= ========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these
combined financial statements.
33
<PAGE> 34
ANTI-POLLUTION ASSOCIATES, INC. AND D&D PUMPING, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTH PERIOD ENDED
DECEMBER 31, MARCH 31,
------------- ------------------------
1998 1998 1999
--------- --------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 267,746 $ 39,475 $ 113,390
Adjustments to reconcile net income to net cash provided
by operating activities-
Depreciation and amortization 22,468 9,317 9,938
Loss (gain) on sale of property and equipment 6,800 -- --
Changes in operating assets and liabilities-
(Increase) decrease in-
Accounts receivable (19,938) (1,795) (3,994)
Prepaid expenses 5,417 1,465 2,139
Increase (decrease) in-
Accounts payable and accrued expenses (10,427) 22,178 5,531
--------- --------- ---------
Net cash provided by operating activities 272,066 70,640 127,004
--------- --------- ---------
Cash flows from investing activities:
Proceeds from sale of property and equipment 200 -- --
Purchases of property and equipment (20,001) -- --
Purchases of available for sale securities (30,847) -- --
--------- --------- ---------
Net cash used in investing activities (50,648) -- --
--------- --------- ---------
Cash flows from financing activities:
Distribution to shareholders (143,944) (13,400) (50,972)
--------- --------- ---------
Net cash used in financing activities (143,944) (13,400) (50,972)
--------- --------- ---------
Net increase in cash and cash equivalents 77,474 57,240 76,032
Cash and cash equivalents, beginning of year 146,604 146,604 224,078
--------- --------- ---------
Cash and cash equivalents, end of year $ 224,078 $ 203,844 $ 300,110
========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid for-
Interest $ 0 $ 0 $ 0
Income taxes 0 0 0
</TABLE>
The accompanying notes are an integral part of these
combined financial statements.
34
<PAGE> 35
ANTI-POLLUTION ASSOCIATES, INC. AND D&D PUMPING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Anti-Pollution Associates, Inc. (Anti-Pollution), a Florida corporation, is
engaged in the biosolids management business. Anti-Pollution operates and
provides maintenance for sanitary sewage disposal systems and waste water
treatment plants.
D & D Pumping, Inc.,(D&D) a Florida corporation, is also engaged in the
biosolids management business. D&D hauls residuals from small water treatment
plants and lift stations to transfer stations. Anti-Pollution and D&D serve
customers in the Florida Keys.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The combined financial statements include the accounts and operations of
Anti-Pollution and D&D (collectively, the Company), and each is controlled by
one individual shareholder (the Shareholder). All significant intercompany
balances and transactions between the related companies have been eliminated in
combination.
INTERIM CONSOLIDATED FINANCIAL INFORMATION
The unaudited interim consolidated financial statements have been prepared
pursuant to the rules of the Securities and Exchange Commission ("SEC").
Certain information and footnote disclosures, normally included in annual
financial statements prepared in accordance with generally accepted accounting
principles, have been condensed or omitted pursuant to those rules and
regulations, although the Company believes that the disclosures made are
adequate to make the information presented not misleading. In the opinion of
management, all adjustments, consisting of normal recurring adjustments,
necessary to fairly present the financial position, results of operations and
cash flows with respect to interim consolidated financial statements, have been
included. The results of operations for the interim periods are not necessarily
indicative of the results for the entire fiscal year.
CASH AND CASH EQUIVALENTS
The Company considers all investments with an original maturity of three months
or less when purchased to be cash equivalents.
ACCOUNTS RECEIVABLE AND PROVISION FOR DOUBTFUL ACCOUNTS
The Company provides an allowance for doubtful accounts based upon the specific
identification of accounts receivable where collection is no longer probable.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is being provided using
the straight-line method over estimated useful lives of three to 10 years.
Expenditures for repairs and maintenance are charged to expense as incurred.
Expenditures for major renewals and betterments, which extend useful lives of
existing equipment, are capitalized and depreciated. Upon retirement or
disposition of property and equipment, the cost and related accumulated
depreciation are removed from the accounts and any resulting gain or loss is
recognized in the combined statements of operations.
SECURITIES AVAILABLE FOR SALE
The Company accounts for its investments using Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS No. 115"). This standard requires that certain debt
and equity securities be adjusted to market value at the end of each accounting
period. Unrealized market value gains and losses are charged to earnings if the
35
<PAGE> 36
securities are traded for short-term profit. Otherwise, such unrealized gains
and losses are charged or credited to a separate component of shareholders'
equity.
Management determines the proper classifications of investments in obligations
with fixed maturities and marketable equity securities at the time of purchase
and reevaluates such designations as of each balance sheet date. At December
31, 1998, all securities covered by SFAS No. 115 were designated as available
for sale. Accordingly, these securities are stated at fair value, with
unrealized gains and losses reported in a separate component of shareholder's
equity.
OTHER ASSETS
Other assets consist of loans due from employees of $30,380 and long term
deposits of $11,973 as of December 31, 1998.
INTANGIBLE ASSETS AND AMORTIZATION
The Company's intangible assets are comprised of goodwill. Goodwill is
amortized on a straight-line basis over 40 years. Amortization expense for
these intangible assets was $4,850 for the year ended December 31, 1998.
STOCKHOLDERS' EQUITY
The authorized, issued and outstanding shares of the Company were as follows at
December 31, 1998:
<TABLE>
<CAPTION>
1998
----------------------------------
ISSUED AND
AUTHORIZED OUTSTANDING PAR
---------- ----------- ------
<S> <C> <C> <C>
Anti-Pollution 500 500 $ 1
D&D 2,000 2,000 1
</TABLE>
REVENUE RECOGNITION AND CONCENTRATION OF CREDIT RISK
The Company recognizes revenue when services are completed or provided. During
1998, one customer accounted for approximately 10 percent of the company's
revenues. Another customer accounted for approximately 15 percent of the
Company's accounts receivable as of December 31, 1998. Any significant change
in the Company's relationship with these customers could have a material
adverse effect on the Company's financial position and results of operations.
INCOME TAXES
Anti-Pollution and D&D are S Corporations, as defined by the Internal Revenue
Code whereby the Company is not subject to taxation for federal purposes. Under
S Corporation status, each shareholder reports his share of the Company's
taxable earnings or losses in his personal federal and state tax returns.
FAIR VALUES
The carrying amounts of cash, accounts receivable, accounts payable and accrued
liabilities are reasonable estimates of their fair values due to the short
maturities of these instruments.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
REALIZATION OF LONG-LIVED ASSETS
The Company follows the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived
36
<PAGE> 37
Assets and for Long-Lived Assets to Be Disposed Of." Accordingly, in the event
that facts and circumstances indicate that property and equipment or other
assets may be impaired, an evaluation of recoverability would be performed. If
an evaluation is required, the estimated future undiscounted cash flows
associated with the asset are compared to the asset's carrying amount to
determine if an impairment of such property is necessary.
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES DECEMBER 31,
IN YEARS 1998
------------ ------------
<S> <C> <C>
Machinery and equipment 5-10 $281,343
Leasehold improvements 3-10 2,916
Furniture and fixtures 3 2,857
--------
287,116
Less- Accumulated depreciation 217,833
--------
Property and equipment, net $ 69,283
========
</TABLE>
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1998
-----------
<S> <C>
Accounts payable, trade $ 2,902
Accrued compensation and benefits 4,098
Other accrued expenses 4,978
---------
$ 11,978
=========
</TABLE>
5. INSURANCE:
The Company carries a broad range of insurance coverage, including business
auto liability, general liability and an umbrella policy. The company has not
incurred significant claims or losses on any of its insurance policies.
6. RELATED PARTY TRANSACTIONS:
The Company leases office spaces from the Shareholder. The lease is currently
on a month-to-month basis. Rent paid to the shareholder under this
related-party lease was $26,900 for the year ended December 31, 1998.
7. EMPLOYEE BENEFIT PLAN:
The Company maintains a simplified employee pension (SEP) plan. A SEP plan is a
pension plan that meets certain minimum qualifications regarding eligibility
and employer contributions. The plan allows all employees who have completed 5
years of service to contribute up to $2,000 of income on an annual basis. The
Company contributes 10% of wages each year. The contributions made by the
Company were $14,480 for the year ended December 31, 1998.
8. COMMITMENTS AND CONTINGENCIES:
Litigation
The Company is involved in disputes or legal actions arising in the ordinary
course of business. Management does not believe the outcome of such legal
actions will have a material adverse effect on the Company's financial position
or results of operations.
37
<PAGE> 38
9. SUBSEQUENT EVENT:
The Company entered into an agreement effective April 23, 1999, to sell the
Company's common stock to Synagro Technologies, Inc. (Synagro), a biosolids
management Company located in Houston, Texas.
38
<PAGE> 39
To The Board of Directors
AMSCO, INC.
Clemmons, North Carolina
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying balance sheets of AMSCO, INC. as of December
31, 1998 and 1997, and the related statements of income, changes in
stockholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of AMSCO, INC. as of December 31,
1998 and 1997, and the results of its operations and cash flows for the years
then ended in conformity with generally accepted accounting principles.
Royster Smith Shelton & Company, P.C.
Winston-Salem, NC
June 30, 1999
39
<PAGE> 40
AMSCO, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1997 1999
----------- ----------- -----------
(UNAUDITED)
ASSETS
<S> <C> <C> <C>
Current assets
Cash $ 1,448,651 $ 948,112 $ 1,173,247
Trade accounts receivable 2,344,703 1,731,313 2,074,842
Employee advances--Note C 65,158 45,778 65,158
Account receivable - officer--Note C 5,710 -- 5,710
Account receivable - affiliate--Note C 11,339 -- 11,339
Note receivable -- 5,000 --
----------- ----------- -----------
Total Current Assets 3,875,561 2,730,203 3,330,296
----------- ----------- -----------
Property and equipment--notes D, E, and F
Land 19,655 19,655 19,655
Building 79,701 79,701 79,701
Equipment 5,623,411 5,034,559 5,608,562
----------- ----------- -----------
5,722,767 5,133,915 5,707,918
Less accumulated depreciation 3,315,530 2,887,143 3,420,836
----------- ----------- -----------
2,407,237 2,246,772 2,287,082
$ 6,282,798 $ 4,976,975 $ 5,617,378
=========== =========== ===========
</TABLE>
See notes to financial statements
40
<PAGE> 41
AMSCO, INC.
BALANCE SHEETS - CONTINUED
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1997 1999
----------- ----------- -----------
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C> <C>
CURRENT LIABILITIES
Current portion of long-term debt--Notes E and F $ -- $ 380,604 $ --
Capital lease obligations--Note D -- 10,623 --
Accounts payable 141,024 45,594 81,955
Accrued payroll 120,711 110,170 78,098
Accrued payroll taxes 9,252 10,207 9,252
----------- ----------- -----------
Total Current Liabilities 270,987 557,198 169,305
----------- ----------- -----------
LONG-TERM DEBT -
less current portion--Notes E and F 332,390 540,319 11,165
----------- ----------- -----------
STOCKHOLDERS' EQUITY
Common stock, $1.00 par;
authorized 100,000 shares, issued and
outstanding 5,000 shares 5,000 5,000 5,000
Additional paid-in capital 262,000 262,000 262,000
Retained earnings 5,412,421 3,612,458 5,169,908
----------- ----------- -----------
5,679,421 3,879,458 5,436,908
----------- ----------- -----------
$ 6,282,798 $ 4,976,975 $ 5,617,378
=========== =========== ===========
</TABLE>
See notes to financial statements
41
<PAGE> 42
AMSCO, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE THREE
FOR THE YEARS ENDED MONTH PERIOD ENDED
------------------------------- -------------------------------
DECEMBER 31, MARCH 31,
1998 1997 1999 1998
------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUE $ 11,751,238 $ 9,594,627 $ 2,161,268 $ 1,761,639
COST OF REVENUE 7,418,536 6,248,234 1,688,533 1,279,453
------------- ------------- ------------- -------------
GROSS PROFIT 4,332,702 3,346,393 472,735 482,186
GENERAL AND ADMINISTRATIVE EXPENSES 1,571,721 1,279,210 380,188 372,308
------------- ------------- ------------- -------------
OPERATING INCOME 2,760,981 2,067,183 92,547 109,878
OTHER INCOME (EXPENSES):
Interest expense (79,478) (62,972) (3,979) (23,411)
Interest income 48,755 30,592 15,773 12,446
Gain (loss) on sale of equipment (9,391) 6,200 -- --
Other income (expense) (15,020) 5,819 (25,834) (13,197)
------------- ------------- ------------- -------------
(55,134) (20,361) (14,040) (24,162)
------------- ------------- ------------- -------------
NET INCOME $ 2,705,847 $ 2,046,822 $ 78,507 $ 85,716
============= ============= ============= =============
</TABLE>
See notes to financial statements
42
<PAGE> 43
AMSCO, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
-------------------------- ADDITIONAL RETAINED
SHARES AMOUNT PAID-IN-CAPITAL EARNINGS
------------ ------------ --------------- ------------
<S> <C> <C> <C> <C>
Balance, January 1, 1997, 5,000 $ 5,000 $ 262,000 $ 2,253,182
Prior period adjustments--Note H -- -- -- 623,834
Net income -- -- -- 2,046,822
Dividends -- -- -- (1,311,380)
------------ ------------ ------------ ------------
Restated balance, December 31, 1997 5,000 5,000 262,000 3,612,458
Net income -- -- -- 2,705,847
Dividends -- -- -- (905,884)
------------ ------------ ------------ ------------
Balance, December 31, 1998 5,000 5,000 262,000 5,412,421
------------ ------------ ------------ ------------
Net income -- -- -- 78,507
Dividends (321,020)
------------ ------------ ------------ ------------
Balance, March 31, 1999 (unaudited) $ 5,000 $ 5,000 $ 262,000 $ 5,490,928
============ ============ ============ ============
</TABLE>
See notes to financial statements
43
<PAGE> 44
AMSCO, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE THREE
FOR THE YEARS ENDED MONTH PERIOD ENDED
------------------------------- -------------------------------
DECEMBER 31, MARCH 31,
1998 1997 1999 1998
------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,705,847 $ 2,046,822 $ 78,507 $ 85,716
Adjustments to reconcile net income
to net cash provided (used) by
operating activities:
Depreciation 456,733 364,756 105,306 98,189
(Gain) loss on asset disposal 9,391 (6,200)
(Increase) decrease in:
Trade accounts receivable (613,390) (393,330) 269,861 (255,304)
Employee advances (19,380) -- -- --
Account receivable - officer (5,710) -- -- --
Account receivable - affiliate (11,339) -- -- --
Note receivable 5,000 (5,000) -- --
Increase (decrease) in:
Accounts payable 95,430 (35,977) (59,069) --
Accrued payroll and payroll taxes 9,586 31,811 (42,613) --
------------ ------------ ------------ ------------
CASH PROVIDED (USED)
BY OPERATING ACTIVITIES 2,632,168 2,002,882 351,992 (71,399)
------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (178,170) (85,078) -- --
Proceeds from equipment sold 28,498 6,200 14,849 --
------------ ------------ ------------ ------------
CASH PROVIDED (USED)
BY INVESTING ACTIVITIES (149,672) (78,878) 14,849 --
------------ ------------ ------------ ------------
</TABLE>
See notes to financial statements
44
<PAGE> 45
AMSCO, INC.
STATEMENTS OF CASH FLOWS - CONTINUED
<TABLE>
<CAPTION>
FOR THE THREE
FOR THE YEARS ENDED MONTH PERIOD ENDED
----------------------------- -----------------------------
DECEMBER 31, MARCH 31,
1998 1997 1999 1998
------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on debt and capital lease obligations (1,076,073) (360,068) (321,225) (87,532)
Dividends paid (905,884) (1,311,380) (321,020) (148,100)
------------ ------------ ------------ ------------
CASH USED BY FINANCING ACTIVITIES (1,981,957) (1,671,448) (642,245) (235,632)
------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH 500,539 252,556 (275,404) (307,031)
------------ ------------ ------------ ------------
CASH AT BEGINNING OF YEAR 948,112 695,556 1,448,651 948,112
------------ ------------ ------------ ------------
CASH AT END OF YEAR $ 1,448,651 $ 948,112 $ 1,173,247 $ 641,081
============ ============ ============ ============
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest $ 79,478 $ 62,972 $ 3,980 $ 23,412
============ ============ ============ ============
Acquisition of assets in exchange for debt $ 476,917 $ 999,746 $ 197,262
============ ============ ============
Refinancing of notes payable $ 1,152,022
============
Accounts payable reduction for machinery and
equipment return $ 6,500
============
</TABLE>
See notes to financial statements
45
<PAGE> 46
NOTES TO FINANCIAL STATEMENTS
AMSCO, INC.
NOTE A--NATURE OF BUSINESS
AMSCO, INC. (the "Company") was incorporated in 1981. The Company manages and
recycles municipal and industrial water and wastewater residuals, primarily in
the southeastern United States.
NOTE B--SUMMARY OF ACCOUNTING POLICIES
INCOME TAXES:
No provision for income taxes has been made by the Company since it has elected
to be taxed as an S corporation, whereby federal and state income taxes are the
responsibility of the individual stockholders.
PROPERTY AND EQUIPMENT:
Property and equipment are carried at cost. Depreciation is computed using
accelerated and straight-line methods over the estimated useful lives of the
respective assets.
CAPITAL LEASES:
Leases that transfer substantially all of the benefits and risks of ownership
to the Company have been accounted for as capital leases. The aggregate lease
payments, discounted at appropriate rates, are recorded as current and
long-term debt; the related assets are capitalized and amortization is included
in depreciation expense (Note D).
CASH ACCOUNTS:
During 1998 and 1997, the Company's cash account balances held at a commercial
bank exceeded the $100,000 federally insured limit.
CASH EQUIVALENTS:
Cash equivalents include investments in highly liquid instruments with a
maturity of three months or less.
MANAGEMENT'S ESTIMATES:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
ADVERTISING:
The Company follows the policy of charging the costs of advertising to expense
as incurred.
46
<PAGE> 47
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE C--RECEIVABLES
The Company periodically advances funds to its employees for use at job sites
as needed. When expenditures are made, the Company recognizes these project
expenses as a component of cost of goods sold and replenishes the employee
advance accounts. Any amounts expended by an employee for personal use are
reimbursed to the Company by the employee through payroll withholdings. Upon
termination of employment, any amounts not expended by an employee are returned
to the Company and the advance can be transferred to another employee.
During 1998, the Company paid certain expenses on behalf of an officer.
Additionally, the Company also paid certain expenses on behalf of an entity
affiliated through common ownership. There are no specific repayment terms for
either of these non-interest bearing receivables but the Company expects
collection in 1999.
NOTE D--LEASES
The Company leased certain equipment under lease agreements which were
accounted for as capital leases. Total monthly minimum lease payments for
existing leases in 1997 were $2,899. All capital leases were repaid during
1998. The capitalized cost and accumulated depreciation of equipment under
capital leases as of December 31, 1997 were $155,125 and $72,392, respectively.
The Company leases its office space from a stockholder for $1,600 a month under
a month-to-month operating lease agreement. In addition, the Company leases
equipment and vehicles on a month-to-month basis depending on its project
needs.
The Company also leases certain equipment under lease obligations which are
accounted for as operating leases. Future minimum lease payments due under all
noncancelable operating lease obligations are as follows:
<TABLE>
<S> <C>
1999 $ 220,896
2000 218,803
2001 48,333
----------
$ 488,032
==========
</TABLE>
Rental expense under all operating leases was $399,590 and $198,817 for 1998
and 1997, respectively.
47
<PAGE> 48
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE E--CREDIT FACILITIES
The Company had a $400,000 line-of-credit agreement with a bank for the purpose
of financing acquisitions of new equipment. This credit agreement provided for
interest at the bank's prime rate plus 1/4% per annum and was payable monthly.
All amounts outstanding under this agreement were repaid during 1997. The
credit agreement was guaranteed by the stockholders of the Company.
During 1998 and 1997, the Company had a $100,000 stand-by letter-of-credit
agreement with a bank for use as a substitute for a performance bond required
by a customer. Amounts advanced under this agreement are at the bank's prime
interest rate plus 3/4% per annum. No advances were made under this agreement
during 1998 or 1997. Subsequent to December 31, 1998, the customer reduced the
amount of the performance bond required and the stand-by letter-of-credit
agreement was reduced to $15,000.
During 1997, the Company entered into a $250,000 line-of-credit agreement with
a bank bearing interest at the bank's prime rate plus 3/4%. This line-of-credit
agreement was renewed in 1998 at the bank's 30 day LIBOR rate plus 2% and will
be secured by purchased equipment. The agreement contains several restrictive
covenants including targeted levels of debt to equity and current ratios. No
amounts were outstanding under this agreement as of December 31, 1998 or 1997.
During 1998, the Company entered into several new debt agreements with a bank.
The first was a master equipment note with an original principal balance of
$1,152,022 which was primarily used to refinance a number of outstanding
equipment notes. This note is secured by all equipment and bears interest at 7
1/2% per annum (Note F). The Company also entered into a $1,500,000
line-of-credit agreement which is secured by all assets of the Company.
Borrowings under this agreement bear interest at LIBOR plus 1.8% per annum. The
Company also entered into a line-of-credit agreement for $1,000,000 for the
construction of a new building, to be collateralized by a deed of trust on the
building, which bears interest at LIBOR plus 1.6% per annum. No advances were
made under either line-of-credit agreement during 1998. Both credit agreements
contain restrictive covenants including targeted levels of debt service
coverage and net working capital. The bank providing these credit facilities
agreed to subordinate its security interest in equipment or vehicles that may
be acquired and financed by another bank.
48
<PAGE> 49
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE F--LONG-TERM DEBT
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Notes payable to a bank in aggregate monthly installments of $36,905,
including interest ranging from 8% to 8 3/4% per annum, secured
by vehicles and equipment $ -- $ 920,923
Note payable to a bank in monthly
installments of $42,250, including
interest of 7 1/2% per annum, secured
by equipment (repaid in 1999) 332,390 --
---------- ----------
332,390 920,923
Less current maturities -- 380,604
---------- ----------
$ 332,390 $ 540,319
========== ==========
</TABLE>
NOTE G--PENSION PLAN
The Company sponsors a qualified pension plan pursuant to Section 401(k) of the
Internal Revenue Code which covers all employees who have at least one year of
service. Eligible employees may contribute a percentage of their salary subject
to Internal Revenue Code limitations. The Company matches 25% of employee
contributions up to a maximum employee contribution of 15% of annual
compensation. Company contributions of $24,948 and $24,134 were paid to the
plan during 1998 and 1997, respectively.
49
<PAGE> 50
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE H--PRIOR PERIOD ADJUSTMENTS
Certain accounting errors relating to years prior to 1997 were corrected and
are reported as prior period adjustments in the accompanying financial
statements. The change in the Company's 1997 retained earnings resulting from
these errors is summarized below:
<TABLE>
<CAPTION>
RETAINED
EARNINGS
------------
<S> <C>
December 31, 1997, retained earnings as previously stated $ 2,988,624
Misstatement of:
Certificate of deposit 37,068
Accounts receivable 484,118
Employee advances 45,776
Equipment book value 56,872
------------
December 31, 1997, retained earnings as restated $ 3,612,458
============
</TABLE>
NOTE I--SUBSEQUENT EVENT - CHANGE OF OWNERSHIP
Effective April 30, 1999, Synagro Technologies, Inc., a publicly-held company,
("Synagro") acquired all of the outstanding common stock of the Company in
exchange for $8,954,000 cash and newly issued shares of Synagro common stock.
This acquisition was effected by merger of the Company into AMS Acquisition
Corporation, ("AMS"), a wholly owned subsidiary of Synagro, with AMS as the
surviving company. Upon completion of this merger, AMS's name was changed to
Synagro of North Carolina - AMSCO, Inc.
NOTE J--INTERIM FINANCIAL INFORMATION
The unaudited interim financial statements have been included with the
accompanying audited financial statements pursuant to the rules of the
Securities and Exchange Commission. Management believes these unaudited interim
financial statements are prepared in accordance with generally accepted
accounting principles and all adjustments necessary to fairly present the
financial position, results of operations and cash flows have been included.
The results of operations for the interim periods are not necessarily
indicative of the results for the entire year.
50
<PAGE> 51
SYNAGRO TECHNOLOGIES, INC.
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
During 1998 the Company purchased all the stock of A&J Cartage and related
companies, Recyc, Inc. and Environmental Waste Recycling, Inc. ("1998
Acquisitions"). The assets acquired and liabilities assumed were as follows:
<TABLE>
<S> <C>
Common stock shares 4,152,981
Common stock issues $ 23,783,000
Notes payable 11,669,000
Cash 9,410,000
Less: Historical net assets
Acquired 5,436,000
------------
Goodwill $ 39,426,000
------------
</TABLE>
During 1999 the Company purchased Anti-Pollution Associates, Inc. and D&D
Pumping, Inc., Vital Cycle, Inc. and Amsco, Inc. ("1999 Acquisitions") recorded
using the purchase method of accounting and completed a business combination
with National Resource Recovery, Inc. accounted for as a pooling-of-interests.
The assets acquired and liabilities assumed relating to the 1999 acquisitions
were as follows:
<TABLE>
<S> <C>
Common stock shares 3,044,784
Common stock issues $ 9,024,000
Cash 13,427,000
Less: Historical net assets
Acquired 4,092,000
------------
Goodwill $ 18,359,000
------------
</TABLE>
The following unaudited pro forma combined financial statements include the
consolidated financial statements as of March 31, 1999 (unaudited) of the
Company and for the year ended December 31, 1998 included herein, combined with
the historical financial data of the 1998 acquisitions and the 1999
acquisitions as follows: (i) the unaudited pro forma combined balance sheet at
March 31, 1999 includes the historical combined balance sheet of Synagro at
March 31, 1999, combined with the 1999 acquisitions as if they had occurred on
March 31, 1999. (ii) the unaudited pro forma combined income statement for the
three month period ended March 31, 1999 includes the historical combined income
statement of Synagro combined with the 1999 acquisitions as if they had
occurred on the at January 1, 1999. (ii) the unaudited pro forma combined
income statement for the year ended December 31, 1998 includes the combined
income statement of Synagro included herein, combined with the 1998
acquisitions and 1999 acquisitions as if they had occurred on the at January 1,
1998.
The pro forma adjustments are based on preliminary estimates, available
information and certain assumptions and may be revised as additional
information becomes available. Management does not expect any material changes.
The pro forma financial statements do not purport to represent what the
Company's financial position or results of operations would actually have been
if such transactions in fact had occurred on those dates or project the
Company's financial position or results of operations for any future period.
Since the Company and the Acquisitions were not under common control or
management for all periods, historical combined results may not be comparable
to, or indicative of, future performance. The unaudited pro forma financial
statements should be read in conjunction with the other financial statements
and notes thereto included elsewhere in this Form 8-K/A.
51
<PAGE> 52
SYNAGRO TECHNOLOGIES, INC.
PRO FORMA COMBINED BALANCE SHEETS--MARCH 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
1999 PRO FORMA PRO FORMA
COMPANY ACQUISITIONS ADJUSTMENTS(A) COMBINED
-------------- -------------- -------------- --------------
ASSETS
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 354,104 $ 1,502,974 $ (1,502,974) $ 354,104
Restricted cash, current portion 680,656 -- -- 680,656
Accounts receivable, net 5,728,770 2,389,430 (1,069,160) 7,049,040
Notes receivable 146,690 82,207 228,897
Prepaid expenses and other current assets 1,693,299 48,818 -- 1,742,117
-------------- -------------- -------------- --------------
Total current assets 8,603,519 4,023,429 (2,572,134) 10,054,814
Property, machinery and equipment, net 12,457,637 2,886,483 -- 15,344,120
Other assets:
Goodwill, net 42,873,144 182,469 18,358,786 61,414,399
Note receivable long-term portion 262,829 -- -- 262,829
Other 1,016,271 253,508 (216,625) 1,053,154
-------------- -------------- -------------- --------------
Total assets $ 65,213,400 $ 7,345,889 $ 15,570,027 $ 88,129,316
============== ============== ============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 3,533,582 $ 530,858 $ (165,000) $ 3,899,440
Current portion of long-term debt -- 101,683 (101,683) --
-------------- -------------- -------------- --------------
Total current liabilities 3,533,582 632,541 (266,683) 3,899,440
Long-term debt:
Long-term debt, net 28,292,881 593,422 12,932,423 41,818,726
Note payable prior owners 295,154 -- -- 295,154
Total long-term debt $ 28,588,035 $ 593,422 $ 12,932,423 $ 42,113,880
COMMITMENTS AND CONTINGENCIES
Stockholders' equity:
Preferred stock -- -- -- --
Common stock 28,553 7,638 (1,548) 34,643
Additional paid-in capital 56,548,323 270,577 8,747,546 65,566,446
Accumulated income (deficit) (23,485,093) 5,841,711 (5,841,711) (23,485,093)
-------------- -------------- -------------- --------------
Total stockholders' equity 33,091,783 6,119,926 2,904,287 42,115,996
-------------- -------------- -------------- --------------
Total liabilities and stockholders'
equity $ 65,213,400 $ 7,345,889 $ 15,570,027 $ 88,129,316
============== ============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these
pro forma combined financial statements.
52
<PAGE> 53
SYNAGRO TECHNOLOGIES, INC.
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
1999 PRO FORMA PRO FORMA
COMPANY ACQUISITIONS ADJUSTMENTS COMBINED
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 9,060,478 $ 3,048,630 $ -- $ 12,109,108
Cost of services 7,748,604 2,341,022 -- 10,089,626
------------ ------------ ------------ ------------
Gross profit 1,311,874 707,608 2,019,482
Selling, general and administrative expenses 1,654,271 409,400 (37,500)(f) 2,026,171
Amortization of goodwill 322,651 -- 115,884 (g) 438,535
-- -- -- --
------------ ------------ ------------ ------------
Income (loss) from operations (665,048) 298,208 (78,384) (445,224)
------------ ------------ ------------ ------------
Other income (expense):
Other income, net 54,902 -- -- 54,902
Interest (547,306) (32,233) (237,971)(h) (817,510)
------------ ------------ ------------ ------------
Net income (loss) before benefit for income taxes (1,157,452) 265,975 (316,355) (1,207,832)
Provision for income taxes -- 10,749 (10,749)(i) --
------------ ------------ ------------ ------------
Net income (loss) $ (1,157,452) $ 255,226 $ (305,606) $ (1,207,832)
============ ============ ============ ============
Income per common and common share equivalent:
Net income (loss), basic $ (.08) $ (.07)
============ ============
Net income (loss), diluted $ (.08) $ (.07)
============ ============
Weighted average shares outstanding, basic 14,262,854 17,307,638 (j)
============ ============
Weighted average shares outstanding, diluted 14,262,854 17,307,638 (j)
============ ============
</TABLE>
The accompanying notes are an integral part of these
pro forma combined financial statements.
53
<PAGE> 54
SYNAGRO TECHNOLOGIES, INC.
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
1998 1999 PRO FORMA PRO FORMA
COMPANY ACQUISITIONS ACQUISITIONS ADJUSTMENTS COMBINED
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues $ 33,564,831 $ 14,813,826 $ 14,549,234 $ (195,535)(a) $ 62,732,356
Cost of services 28,116,069 11,994,218 9,629,439 (263,898)(a) 48,504,502
(170,100)(b)
(251,092)(c)
(550,134)(d)
------------ ------------ ------------ ------------ ------------
Gross profit 5,448,762 2,819,608 4,919,795 1,039,689 14,227,854
Selling, general and administrative expenses 4,180,635 2,179,233 1,671,210 (807,087)(a) 6,668,747
(14,536)(e)
(540,708)(f)
Amortization of goodwill 628,839 -- -- 1,023,137 (g) 1,651,976
Special charges (credits) (63,799) -- -- -- (63,799)
------------ ------------ ------------ ------------ ------------
Operating income 703,087 640,375 3,248,585 1,378,883 5,970,930
Other income (expense):
Interest income (expense) (1,558,219) (227,979) (156,123) (1,522,680)(h) (3,465,001)
Other 317,714 (69,923) 17,544 -- 265,335
------------ ------------ ------------ ------------ ------------
Income before income taxes (537,418) 342,473 3,110,006 (143,797) 2,771,264
Provision for income taxes -- -- 19,650 (19,650)(i) --
------------ ------------ ------------ ------------ ------------
Net income before redeemable preferred
stock dividend (537,418) 342,473 3,090,356 (124,147) 2,771,264
Redeemable preferred stock dividend (3,934,585) -- -- -- (3,934,585)
------------ ------------ ------------ ------------ ------------
Net income (loss) $ (4,472,003) $ 342,473 $ 3,090,356 $ (124,147) $ (1,163,321)
============ ============ ============ ============ ============
Net income (loss) per share:
Basic $ (.40) $ (.07)
============ ============
Diluted $ (.40) $ (.07)
============ ============
Shares used in computing net income
(loss) per share:
Basic 11,207,249 17,296,490 (j)
============ ============
Diluted 11,207,249 17,296,490 (j)
============ ============
</TABLE>
The accompanying notes are an integral part of these
pro forma combined financial statements.
54
<PAGE> 55
SYNAGRO TECHNOLOGIES, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
1. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS:
The unaudited pro forma combined balance sheet adjustments consist of the
following:
(a) To record the purchase of Anti-Pollution and Associates, Inc. and D&D
Pumping, Inc., Vital Cycle, Inc. and Amsco, Inc., the purchase price and
goodwill recorded is presented as follows:
<TABLE>
<S> <C>
Purchase Price
Common stock issued $ 9,024,000
Cash 13,427,000
Less: Historical net assets
Acquired 4,092,000
----------
Goodwill $18,359,000
</TABLE>
The cash was financed through the Company's credit facility. The common stock
issued to the former owners was valued in accordance with the provisions of
EITF 95 - 19.
2. UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS ADJUSTMENTS:
The unaudited pro forma combined statement of operations adjustments consist of
the following:
(a) To eliminate sales and related costs and expenses of certain operations
not retained by the Company.
(b) To adjust rental charge of a composting site as a result of a lease
agreement entered into in connection with a 1998 acquisition. The new
lease is for 30 years commencing July 1998. Rent is $36,000 per annum for
the first three years increasing to $192,000 per annum thereafter.
Commencing on the fifth anniversary and every five years anniversary
thereafter, the per annum rate is increased by 75% of the Consumer Price
Index over the preceeding five year period. The Company has a five year
purchase option for $2,250,000.
(c) To adjust depreciation expense related to purchase price adjustments of
property and equipment.
(d) To adjust certain transportation costs based on the transportation
agreement entered into in connection with a 1998 acquisition. The
transportation agreement is for two years commencing July 1998. The
agreement is for a fixed rate per mile for hauling up to 525,000 cubic
yards of materials.
(e) To eliminate certain nonrecurring expenses related to the acquisition
including legal fees, and certain accounting costs.
(f) To adjust expenses related to prior owners based on employment agreements
entered into in connection with acquisitions and salary costs attributable
to staff reductions.
(g) To reflect the amortization of goodwill to be recorded in connection with
the acquisitions over a 40-year estimated life.
(h) To record additional interest expense on the debt incurred in connection
with the acquisitions.
(i) To eliminate taxes as the Company has a net operating loss carryforward,
which can be utilized.
(j) Includes 11,207,249 and 14,262,854 outstanding shares for the year ended
December 31, 1998 and for the three months ended March 31, 1999,
respectively; and an additional 6,089,241 shares and 3,044,784 shares for
the year ended December 31, 1997 and the three months ended March 31,
1999, respectively issued in connection with acquisitions as if each
occurred at the beginning of each respective period.
55
<PAGE> 56
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 hereunto duly authorized.
SYNAGRO TECHNOLOGIES, INC.
Date: July 7, 1999
By: /s/ THOMAS BINTZ
-----------------------------------
Thomas Bintz
Vice President and Controller
56
<PAGE> 57
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Royster Smith Shelton & Company, PC.
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
on the financial statements of the following businesses included in or made a
part of this current report on Form 8-K/A: our report dated June 30, 1999 on the
consolidated financial statements of Synagro Technologies, Inc.; our report
dated June 30, 1999 on the combined financial statements of Anti-Pollution
Associates, Inc. and D&D Pumping, Inc. and to the incorporation by reference of
said reports into Synagro Technologies, Inc.'s previously filed Registration
Statement File No. 333-18029 on Form S-8 and Registration File No. 333-20825
on Form S-3.
Arthur Andersen LLP
Houston, Texas
_____________, 1999
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
on the financial statements of Amsco, Inc. included in or made a part of this
current report on Form 8-K/A; our report dated June 30, 1999 on the financial
statements of Amsco, Inc. to the incorporation by reference of said reports
into Synagro Technologies, Inc.'s previously filed Registration Statement File
No. 333-18029 on Form S-8 and Registration File No. 333-20825 on Form S-3.
Royster Smith Shelton & Company, P.C.
Winston-Salem, NC
June 30, 1999
