<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported):
July 1, 1999 (June 23, 1998)
SYNAGRO TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation)
0-21054 76-0511324
(Commission File Number) (IRS Employer Identification Number)
1800 BERING DRIVE, SUITE 1000 HOUSTON, TEXAS 77057
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (713) 369-1700
5850 SAN FELIPE, SUITE 500 HOUSTON, TEXAS 77057
(Former name or former address, if changed since last report)
<PAGE> 2
Item 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a)(b) This form 8-K/A is being filed to include the financial statements and
pro forma financial information omitted from the current reports on Form 8-K
filed on June 30, 1998, August 3, 1998, and the Form 8-K/A filed on August 13,
1998.
(c) EXHIBITS.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Synagro Technologies, Inc. .....................................................
Introduction to Unaudited Pro Forma Financial Statements ................. F-2
Pro Forma Combined Statements of Operations for the nine months
ended September 30, 1998 (Unaudited) .................................. F-4
Pro Forma Combined Balance Sheet - March 31, 1998 (Unaudited) ............ F-5
Pro Forma Combined Statements of Operations for the year ended
December 31, 1997 (Unaudited) ......................................... F-6
Pro Forma Combined Statements of Operations for the three months
ended March 31, 1998 (Unaudited) ...................................... F-7
Notes to Unaudited Pro Forma Combined Financial Statements ............... F-8
A&J Cartage, Inc. and Related Companies
Report of Independent Public Accountants ................................. F-10
At and as of December 31, 1997
Combined Balance Sheets ............................................... F-11
Combined Statements of Operations ..................................... F-12
Combined Statements of Shareholders' Equity ........................... F-13
Combined Statements of Cash Flows ..................................... F-14
Notes to Combined Financial Statements ................................ F-15
At and as of March 31, 1998
Unaudited Combined Balance Sheet ...................................... F-22
Unaudited Combined Statements of Operations ........................... F-23
Unaudited Combined Statements of Cash Flows ........................... F-24
Notes to Unaudited Combined Financial Statements ...................... F-25
Biosolids Division of Recyc, Inc. ..............................................
Report of Independent Public Accountants ................................. F-28
At and as of December 31, 1997
Balance Sheets ........................................................ F-29
Statements of Income and Divisional Equity ............................ F-30
Statements of Cash Flows .............................................. F-31
Notes to Financial Statements ......................................... F-32
At and as of March 31, 1998
Unaudited Balance Sheet ............................................... F-40
Unaudited Statements of Income ........................................ F-41
Unaudited Statements of Cash Flows .................................... F-42
Notes to Unaudited Financial Statements ............................... F-43
At and as of June 30, 1998
Unaudited Balance Sheet ............................................... F-46
Unaudited Statements of Income ........................................ F-47
Unaudited Statements of Cash Flows .................................... F-48
Notes to Unaudited Financial Statements ............................... F-49
</TABLE>
<PAGE> 3
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.
By: /s/ THOMAS J. BINTZ
Thomas J. Bintz
Vice President, Corporate Controller
Date: July 1, 1999
<PAGE> 4
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Synagro Technologies, Inc. .....................................................
Introduction to Unaudited Pro Forma Financial Statements ................. F-2
Pro Forma Combined Statements of Operations for the nine months
ended September 30, 1998 (Unaudited) .................................. F-4
Pro Forma Combined Balance Sheet - March 31, 1998 (Unaudited) ............ F-5
Pro Forma Combined Statements of Operations for the year ended
December 31, 1997 (Unaudited) ......................................... F-6
Pro Forma Combined Statements of Operations for the three months
ended March 31, 1998 (Unaudited) ...................................... F-7
Notes to Unaudited Pro Forma Combined Financial Statements ............... F-8
A&J Cartage, Inc. and Related Companies
Report of Independent Public Accountants ................................. F-10
At and as of December 31, 1997
Combined Balance Sheets ............................................... F-11
Combined Statements of Operations ..................................... F-12
Combined Statements of Shareholders' Equity ........................... F-13
Combined Statements of Cash Flows ..................................... F-14
Notes to Combined Financial Statements ................................ F-15
At and as of March 31, 1998
Unaudited Combined Balance Sheet ...................................... F-22
Unaudited Combined Statements of Operations ........................... F-23
Unaudited Combined Statements of Cash Flows ........................... F-24
Notes to Unaudited Combined Financial Statements ...................... F-25
Biosolids Division of Recyc, Inc. ..............................................
Report of Independent Public Accountants ................................. F-28
At and as of December 31, 1997
Balance Sheets ........................................................ F-29
Statements of Income and Divisional Equity ............................ F-30
Statements of Cash Flows .............................................. F-31
Notes to Financial Statements ......................................... F-32
At and as of March 31, 1998
Unaudited Balance Sheet ............................................... F-40
Unaudited Statements of Income ........................................ F-41
Unaudited Statements of Cash Flows .................................... F-42
Notes to Unaudited Financial Statements ............................... F-43
At and as of June 30, 1998
Unaudited Balance Sheet ............................................... F-46
Unaudited Statements of Income ........................................ F-47
Unaudited Statements of Cash Flows .................................... F-48
Notes to Unaudited Financial Statements ............................... F-49
</TABLE>
<PAGE> 5
SYNAGRO TECHNOLOGIES, INC.
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
On June 23, 1998, Synagro Technologies, Inc. (Synagro or the Company), completed
the mergers of three of its wholly owned subsidiaries formed for the
acquisitions with and into A&J Cartage, Inc., a Wisconsin corporation (A&J),
Michigan Organic Resources, Inc., a Michigan corporation (MORI), and A&J
Cartage, Inc., Southeast, a Florida corporation (A&J Southeast, and collectively
with A&J and MORI, the A&J Companies), resulting in the A&J Companies becoming
wholly owned subsidiaries of the Company. The consideration paid in the mergers
was 1,812,533 shares of the Company's common stock, par value $.002 per share
(Common Stock) with a market trading value of approximately $12,400,000, and
approximately $6,000,000 in cash and notes, and acquisition costs subject to
certain adjustments based on the sellers' balance sheet as of the date of the
closing.
On July 24, 1998, the Company completed the acquisition from GroWest, Inc., a
California corporation (the Recyc Seller), of all of the outstanding shares of
capital stock of Recyc, Inc., a California corporation (Recyc). The
consideration paid in the transactions consisted of (i) a promissory note in the
amount of $2,304,750, (ii) 1,475,323 shares of the Company's Common Stock with a
market trading value of approximately $8,575,000, (iii)cash and acquisition
costs of approximately $1,349,000, and (iv) the assumption of approximately
$3,341,000 in other debts and obligations. The principal owed under the
promissory note may be offset, and up to 375,000 of the shares issued to the
Recyc Seller 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 two stockholders of Recyc,
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 Recyc Trucking, Inc., a California corporation
(RTI), which is a wholly owned subsidiary of the Recyc Seller, for the provision
by RTI of certain transportation services relating to Recyc's operations. The
acquisition of the A&J Companies and Recyc are collectively referred to herein
as the "Acquisitions".
The following unaudited pro forma financial statements present the balance sheet
and income statement data from the consolidated financial statements of the
Company, combined with the historical financial data of the Acquisitions, as
follows: (a) the unaudited pro forma balance sheet includes the historical
consolidated balance sheet data of Synagro at March 31, 1998, combined with the
Acquisitions, as if each had occurred on March 31, 1998, and (b) the unaudited
pro forma income statements for the year ended December 31, 1997, for the three
months ended March 31, 1998, and for the nine months ended September 30, 1998,
include the historical consolidated income statements of Synagro for the
respective periods combined with the Acquisitions as if each had occurred at the
beginning of each respective period, January 1, 1997 and January 1, 1998. The
pro forma financial statements include, among others, certain adjustments to the
historical financial statements of the Acquisitions, including the adjustment of
amortization expenses to reflect purchase price allocations, recording of
interest expense to reflect debt issued in connection with the Acquisitions, and
the elimination of certain net assets of operations of Recyc not retained by the
Company pursuant to the acquisition agreement.
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 revisions that would
F-2
<PAGE> 6
materially effect the accompanying proforma financial statements. 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 filing, as well as information included in this Form 8-K/A.
F-3
<PAGE> 7
SYNAGRO TECHNOLOGIES, INC.
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
A&J Pro Forma Pro Forma
Company Companies Recyc Adjustments Combined
----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
REVENUES $ 20,061,959 $ 4,243,191 $ 3,553,216 $ (195,535)(a) $ 27,662,831
COST OF SERVICES 17,487,823 2,886,486 3,302,443 (263,898)(a) 22,441,528
(170,100)(b)
(251,092)(c)
(550,134)(d)
------------ ----------- ----------- ----------- ------------
Gross profit 2,574,136 1,356,705 250,773 1,039,689 5,221,303
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 2,822,069 693,667 923,753 (807,087)(a) 4,088,536
(14,536)(e)
58,342 (f)
412,328 (g)
OTHER CHARGES (CREDITS):
Loss on assets held for sale and other special
charges (credits) 107,501 -- -- -- 107,501
------------ ----------- ----------- ----------- -------------
Income (loss) from operations (355,434) 663,038 (672,980) 1,390,642 1,025,266
------------ ----------- ----------- ----------- -------------
OTHER INCOME (EXPENSE):
Interest (941,830) (44,189) (124,454) (273,884)(h) (1,384,357)
Other income, net 334,794 9,244 0 0 344,038
------------ ----------- ----------- ------------ ------------
NET INCOME (LOSS) BEFORE BENEFIT OF INCOME TAX (962,470) 628,093 (797,434) 1,116,758 (15,053)
------------ ----------- ----------- ------------ ------------
PROVISION FOR INCOME TAXES -- -- -- -- 0
NET INCOME (LOSS) BEFORE REDEEMABLE PREFERRED (962,470) 628,093 (797,434) 1,116,758 (15,053)
REDEEMABLE PREFERRED STOCK DIVIDEND 3,934,588 -- -- -- 3,934,588
------------ ----------- ----------- ------------ ------------
NET INCOME (LOSS) $ (4,897,058) $ 628,093 $ (797,434) $ 1,116,758 $ (3,949,641)
============ =========== =========== ============ ============
INCOME (LOSS) PER COMMON AND COMMON SHARE EQUIVALENT:
Net income (loss), basic $ (.53) $ (.34)
============ ============
Net income (loss), diluted $ (.53) $ (.34)
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING, basic 9,295,890 11,541,526(i)
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING, diluted 9,295,890 11,541,526(j)
============ ============
</TABLE>
The accompanying notes are an integral part of these pro forma
combined financial statements.
F-4
<PAGE> 8
SYNAGRO TECHNOLOGIES, INC.
PRO FORMA COMBINED BALANCE SHEETS--MARCH 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
A&J Pro Forma Pro Forma
Company Companies Recyc Adjustments(a) Combined
------------ ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,625,772 $ 260,573 $ 205,659 $ (2,240,177) $ 1,851,827
Short-term investments 64,504 -- -- -- 64,504
Restricted cash, current portion 170,926 -- -- -- 170,926
Accounts receivable, net 3,194,727 652,607 706,967 (706,967) 3,847,334
Notes receivable 467,139 -- -- -- 467,139
Prepaid expenses and other current assets 1,720,579 13,579 189,533 (189,533) 1,734,158
------------ ---------- ---------- ------------ ------------
Total current assets 9,243,647 926,759 1,102,159 (3,136,677) 8,135,888
PROPERTY, MACHINERY AND EQUIPMENT, net 8,558,674 1,660,974 1,647,398 (1,047,398) 10,819,648
OTHER ASSETS:
Goodwill, net 4,276,054 970,366 747,719 29,898,645 35,892,784
Restricted cash, long-term portion 173,387 -- -- -- 173,387
Assets held for sale, net -- -- -- -- --
Other 590,109 129,681 517,079 (997,671) 239,198
------------ ---------- ---------- ------------ ------------
Total assets $ 22,841,871 $3,687,780 $4,014,355 $ 24,716,899 $ 55,260,905
============ ========== ========== ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 3,642,327 $ 494,777 $1,018,419 $ (1,018,419) $ 4,137,104
Current portion of long-term debt 3,200,303 604,698 1,136,984 1,414,973 6,356,958
------------ ---------- ---------- ------------ ------------
Total current liabilities 6,842,630 1,099,475 2,155,403 396,554 10,494,062
LONG-TERM DEBT, net 5,011,235 125,514 766,322 6,902,725 12,805,796
DEFERRED TAXES -- -- 141,362 (141,362) --
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PREFERRED STOCK 3,500,004 -- -- -- 3,500,004
STOCKHOLDERS' EQUITY:
Preferred stock -- -- -- -- --
Common stock 15,221 4,200 1,000 1,376 21,797
Additional paid-in capital 28,838,502 1,084,587 340,775 19,541,103 49,804,967
Accumulated deficit (21,365,721) 1,374,004 609,493 (1,983,497) (21,365,721)
------------ ---------- ---------- ------------ ------------
Total stockholders' equity 7,488,002 2,462,791 951,268 17,558,982 28,461,043
------------ ---------- ---------- ------------ ------------
Total liabilities and stockholders' equity $ 22,841,871 $3,687,780 $4,014,355 $ 24,716,899 $ 55,260,905
============ ========== ========== ============ ============
</TABLE>
The accompanying notes are an integral part of these pro forma
combined financial statements.
F-5
<PAGE> 9
SYNAGRO TECHNOLOGIES, INC.
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
A&J Pro Forma Pro Forma
Company Companies Recyc Adjustments(a) Combined
------------ ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
REVENUES $ 25,303,069 $8,307,545 $6,239,460 $ (579,802)(a) $ 39,270,272
COST OF SERVICES 21,007,387 5,994,871 5,015,286 (666,151)(a) 30,388,562
(279,200)(b)
(382,099)(c)
(301,532)(d)
------------ ---------- ---------- ------------ ------------
Gross profit 4,295,682 2,312,674 1,224,174 1,049,180 8,881,710
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 3,668,765 1,051,458 728,828 (528,828)(a) 5,704,082
(63,624)(e)
100,017 (f)
747,466 (g)
OTHER CHARGES (CREDITS):
Loss on assets held for sale and other special
charges (credits) (721,286) -- -- -- (721,286)
------------ ---------- ---------- ------------ ------------
Income (loss) from operations 1,348,203 1,261,216 495,346 794,149 3,898,914
------------ ---------- ---------- ------------ ------------
OTHER INCOME (EXPENSE):
Other income, net 407,177 129,806 32,299 -- 569,282
Interest (923,879) (54,968) (119,769) (582,238)(h) (1,680,854)
------------ ---------- ---------- ------------ ------------
(516,702) 74,838 (87,470) (582,238) (1,111,572)
------------ ---------- ---------- ------------ ------------
NET INCOME (LOSS) BEFORE BENEFIT FOR INCOME TAXES 831,501 1,336,054 407,876 211,911 2,787,342
PROVISION FOR INCOME TAXES -- -- 4,948 -- 4,948
------------ ---------- ---------- ------------ ------------
NET INCOME (LOSS) $ 831,501 $1,336,054 $ 402,928 $ 211,911 $ 2,782,394
============ ========== ========== ============ ============
INCOME PER COMMON AND COMMON SHARE EQUIVALENT:
Net income (loss), basic $ .11 $ .26
============ ===========
Net income (loss), diluted $ .11 $ .25
============ ===========
WEIGHTED AVERAGE SHARES OUTSTANDING, basic 7,545,113 10,832,969(i)
============ ===========
WEIGHTED AVERAGE SHARES OUTSTANDING, diluted 7,740,344 11,028,196(j)
============ ===========
</TABLE>
The accompanying notes are an integral part of these pro forma
combined financial statements.
F-6
<PAGE> 10
SYNAGRO TECHNOLOGIES, INC.
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
A&J Pro Forma Pro Forma
Company Companies Recyc Adjustments Combined
----------- ------------ ----------- -------------- -----------
<S> <C> <C> <C> <C> <C>
REVENUES $ 5,621,635 $ 1,455,909 $ 1,546,160 $(140,511)(a) $ 8,483,193
COST OF SERVICES 4,945,920 1,409,601 1,447,656 (206,066)(a) 7,208,322
(80,300)(b)
(107,611)(c)
(200,878)(d)
----------- ------------ ----------- --------- -----------
Gross profit 675,715 46,308 98,504 454,344 1,274,871
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 612,534 227,893 381,339 (331,339)(a) 1,087,562
(14,536)(e)
25,004 (f)
186,867(g)
SPECIAL CHARGES (CREDITS), NET (112,999) -- -- -- (112,999)
----------- ------------ ----------- --------- -----------
Operating income 176,180 (181,585) (282,835) 588,348 300,108
OTHER INCOME (EXPENSE):
Interest income (expense) (242,529) (14,967) (49,879) (145,559)(h) (452,934)
Other 173,681 5,929 14 179,624
----------- ------------ ----------- --------- -----------
(68,848) (9,038) (49,865) (145,559) (273,310)
----------- ------------ ----------- --------- -----------
INCOME (LOSS) BEFORE BENEFIT OF INCOME TAXES 107,332 (190,623) (332,700) 442,789 26,798
PROVISION FOR INCOME TAXES -- -- -- -- --
----------- ------------ ----------- --------- -----------
NET INCOME (LOSS) BEFORE REDEEMABLE
PREFERRED STOCK DIVIDEND 107,332 (190,623) (332,700) 442,789 26,798
REDEEMABLE PREFERRED STOCK DIVIDEND 3,514,587 -- -- -- 3,514,587
----------- ------------ ----------- --------- -----------
NET INCOME (LOSS) $(3,407,255) $ (190,623) $ (332,700) $ 442,789 $(3,487,789)
=========== ============ =========== ========= ===========
NET INCOME (LOSS) PER SHARE:
Basic $ (.45) $ (.32)
=========== ===========
Diluted $ (.45) $ (.32)
=========== ===========
SHARES USED IN COMPUTING NET INCOME (LOSS) PER SHARE:
Basic 7,610,305 10,898,161(i)
=========== ===========
Diluted 7,610,305 10,898,161(j)
=========== ===========
</TABLE>
The accompanying notes are an integral part of these pro forma
combined financial statements.
F-7
<PAGE> 11
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 A & J Companies and Recyc, the purchase price and
goodwill recorded is presented as follows:
<TABLE>
<CAPTION>
A & J
Companies Recyc
----------- -----------
<S> <C> <C>
Purchase price:
Common stock issued $12,397,726 $ 8,575,314
Notes payable and assumed debt 4,986,584 5,851,633
Cash/Acquisition costs 1,581,400 1,139,369
----------- -----------
$18,965,710 $15,566,316
Less - historical net assets
acquired 3,080,003 1,553,378
----------- -----------
Goodwill $15,885,707 $14,012,938
----------- -----------
</TABLE>
The note payable in the principal amount of $4,150,000 to the former
owner of the A & J Companies is unsecured with principal and interest
payable quarterly in six equal installments with the first installment
due October 1, 1998. The note bears an annual interest rate of 7% and
has no financial covenants. The note payable in the principal amount of
$2,304,750 to the former owner of Recyc is unsecured with principal due
November 2000. The note bears annual interest of 7% payable quarterly
with the first interest payment due November 1998. The note has no
financial covenants. The Company also assumed debt of approximately
$836,000 and $3,547,000 for A & J and Recyc, respectively. The assumed
debt is with various financial institutions with rates varying from
8.5% to 10.0%, the majority of which rates are fixed and not subject to
interest rate fluctuations.
The common stock issued to the former owners of the A&J Companies and
Recyc 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 Recyc
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 the acquisition of Recyc. 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 year
anniversary thereafter, the per annum rate is increased by 75% of the
Consumer Price Index over the preceding five year period. The Company
has a five year purchase option for $2,250,000.
F-8
<PAGE> 12
(c) To adjust depreciation expense related to purchase price adjustments of
property and equipment not purchased at acquisition.
(d) To adjust certain transportation costs based on the transportation
agreement entered into in connection with the acquisition of Recyc. 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, including legal fees,
related to the acquisition and certain outside accounting costs.
(f) To adjust compensation expense to reflect additional salary costs
related to an employment agreement with a seller of the A&J Companies,
net of certain salary costs attributable to staff reductions. Such
agreement is for a term of two years at a base salary of not less than
$100,000 per year.
(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) Includes 7,545,113, 7,610,305 and 9,295,890 shares outstanding for the
year ended December 31, 1997, for the three months ended March 31,
1998, and for the nine months ended September 30, 1998, respectively.
In addition, includes 3,287,856 shares for the year ended December 31,
1997, and the three months ended March 31, 1998, and 2,245,636 shares
for the nine months ended September 30, 1998, issued in connection with
the Acquisitions as if each occurred at the beginning of each
respective period.
(j) Includes the weighted average common shares outstanding of 195,227
shares, -0- shares and -0- shares for the year ended December 31, 1997,
for the three months ended March 31, 1998, and for the nine months
ended September 30, 1998, respectively, representing the effect of
outstanding warrants and options to purchase common stock, using the
treasury method.
F-9
<PAGE> 13
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To A & J Cartage, Inc.:
We have audited the accompanying combined balance sheets of A & J Cartage, Inc.
and related companies as of December 31, 1996 and 1997, and the related combined
statements of operations, cash flows and shareholders' equity for each of the
three years in the period ended December 31, 1997. 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 combined financial statements referred to above present
fairly, in all material respects, the financial position of A & J Cartage, Inc.
and related companies as of December 31, 1996 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
June 5, 1998
F-10
<PAGE> 14
A & J CARTAGE, INC. AND RELATED COMPANIES
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
-----------------------
1996 1997
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 147,089 $ 98,495
Accounts receivable, net of allowance of $20,000 1,218,507 1,167,199
Prepaid expenses and other current assets 45,867 10,231
---------- ----------
Total current assets 1,411,463 1,275,925
PROPERTY AND EQUIPMENT, net 1,761,361 1,814,991
GOODWILL, net 1,004,231 977,139
NONCOMPETE AGREEMENT, net 223,739 162,720
---------- ----------
Total assets $4,400,794 $4,230,775
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Lines of credit $ -- $ 255,100
Current maturities of long-term debt 76,000 334,516
Due to shareholder 132,558 --
Accounts payable and accrued expenses 298,316 396,164
---------- ----------
Total current liabilities 506,874 985,780
LONG-TERM DEBT, net of current maturities 160,605 103,585
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock 4,100 4,200
Additional paid-in capital 1,084,587 1,084,587
Retained earnings 2,644,628 2,052,623
---------- ----------
Total shareholders' equity 3,733,315 3,141,410
---------- ----------
Total liabilities and shareholders' equity $4,400,794 $4,230,775
========== ==========
</TABLE>
The accompanying notes are an integral part of these
combined financial statements.
F-11
<PAGE> 15
A & J CARTAGE, INC. AND RELATED COMPANIES
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES $ 5,183,497 $ 7,197,854 $ 8,307,545
COST OF REVENUES 3,504,931 5,116,446 5,994,871
----------- ----------- -----------
Gross profit 1,678,566 2,081,408 2,312,674
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 827,972 895,552 1,051,458
----------- ----------- -----------
Income from operations 850,594 1,185,856 1,261,216
----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest, net (17,349) (20,533) (54,968)
Other 33,395 355,656 129,806
----------- ----------- -----------
Other income (expense), net 16,046 335,123 74,838
----------- ----------- -----------
INCOME BEFORE PROVISION FOR INCOME TAXES 866,640 1,520,979 1,336,054
PROVISION (BENEFIT) FOR INCOME TAXES 36,567 (138,926) -
----------- ----------- -----------
NET INCOME $ 830,073 $ 1,659,905 $ 1,336,054
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these
combined financial statements.
F-12
<PAGE> 16
A & J CARTAGE, INC. AND RELATED COMPANIES
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional Total
--------------- Paid-In Retained Shareholders'
Shares Amount Capital Earnings Equity
------- ------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994 4,100 $4,100 $1,084,587 $ 2,151,873 $ 3,240,560
Distributions -- -- -- (1,250,075) (1,250,075)
Net income -- -- -- 830,073 830,073
----- ------ ---------- ----------- -----------
BALANCE, December 31, 1995 4,100 4,100 1,084,587 1,731,871 2,820,558
Distributions -- -- -- (747,148) (747,148)
Net income -- -- -- 1,659,905 1,659,905
----- ------ ---------- ----------- -----------
BALANCE, December 31, 1996 4,100 4,100 1,084,587 2,644,628 3,733,315
Founding of A & J Cartage Southeast, Inc. 100 100 -- --
100
Distributions -- -- -- (1,928,059) (1,928,059)
Net income -- -- -- 1,336,054 1,336,054
----- ------ ---------- ----------- -----------
BALANCE, December 31, 1997 4,200 $4,200 $1,084,587 $ 2,052,623 $ 3,141,410
===== ====== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these
combined financial statements.
F-13
<PAGE> 17
A & J CARTAGE, INC. AND RELATED COMPANIES
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 830,073 $ 1,659,905 $ 1,336,054
Adjustments to reconcile net income to net cash provided
by operating activities-
Depreciation and amortization 285,357 735,796 948,279
Loss (gain) on sale of property and equipment (15,994) (12,333) (137,049)
Deferred income taxes 36,567 (138,926) --
Changes in operating assets and liabilities-
(Increase) decrease in-
Accounts receivable 432,265 (526,908) 51,308
Prepaid expenses and other current assets 26,951 (12,285) 35,636
Increase (decrease) in-
Accounts payable and accrued expenses 236,150 (26,727) 97,848
Other, net (8,884) 66,350 --
----------- ----------- -----------
Net cash provided by operating activities 1,822,485 1,744,872 2,332,076
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net additions of property and equipment (169,664) (881,125) (776,748)
----------- ----------- -----------
Net cash used in investing activities (169,664) (881,125) (776,748)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on notes payable 100,000 -- 258,516
Payments on notes payable (166,363) (252,128) (57,021)
Borrowings on revolving credit facility 197,112 -- 255,100
Payments on revolving credit facility -- (197,112) --
Borrowings (payments) on notes payable from shareholders,
net (281,625) 132,588 (132,558)
Issuance of common stock -- -- 100
Distribution to shareholders (1,250,075) (747,148) (1,928,059)
----------- ----------- -----------
Net cash used in financing activities (1,400,951) (1,063,800) (1,603,922)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 251,870 (200,053) (48,594)
CASH AND CASH EQUIVALENTS, beginning of year 95,271 347,142 147,089
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 347,141 $ 147,089 $ 98,495
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for-
Interest $ 84,861 $ 6,478 $ 35,987
Income taxes 56,340 41,906 --
</TABLE>
The accompanying notes are an integral part of these
combined financial statements.
F-14
<PAGE> 18
A & J CARTAGE, INC. AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
A & J Cartage, Inc. (A & J), a Wisconsin corporation, is engaged in the
biosolids management business. A & J does this through reuse of organic
materials, transportation and monitoring of biosolids and the marketing of end
products from the treatment of such materials. A & J, which is headquartered in
Milwaukee, Wisconsin, serves customers in the states of Wisconsin, Illinois and
Oklahoma.
Michigan Organic Resources, Inc. (Michigan Organic), a Michigan corporation, is
also engaged in the biosolids management business. Michigan Organic is
headquartered in Grand Rapids, Michigan. Michigan Organic was acquired by the
Shareholder (see Note 2) in August 1995.
The following unaudited pro forma summary presents information as if the
purchase of Michigan Organic had occurred at January 1, 1995. The pro forma
information is provided for information purposes only. It is based on historical
information and does not necessarily reflect the actual results that would have
occurred nor is it necessarily indicative of future results of operations of the
consolidated enterprise:
<TABLE>
<CAPTION>
Year Ended
December 31,
1995
-------------
(Unaudited)
<S> <C>
Pro forma revenue $ 6,520,591
Pro forma net income 250,806
</TABLE>
A & J Cartage Southeast, Inc. (Southeast), a Florida corporation, was founded in
June 1997 by the Shareholder (see Note 2) and is engaged in the biosolids
management business. Southeast is headquartered and operates in Florida.
The Company (see Note 2) entered into an agreement effective May 1, 1998, to
sell substantially all the Company's net assets to Synagro Technologies, Inc.
(Synagro), a biosolids management company located in Houston, Texas.
Concurrently with the sale, the Company will enter into agreements with the
Shareholder to lease certain land and buildings used in the Company's operations
for negotiated amounts and terms.
2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES:
Basis of Presentation
The combined financial statements include the accounts and operations of A & J,
Michigan Organic (since date of acquisition) and Southeast (since date of
formation) (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.
Cash and Cash Equivalents
The Company considers all investments with an original maturity of three months
or less when purchased to be cash equivalents.
F-15
<PAGE> 19
Property and Equipment
Property and equipment are stated at cost. Depreciation is being provided using
straight-line methods over estimated useful lives of seven to 20 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.
Stockholders' Equity
The authorized, issued and outstanding shares of the Company were as follows at
December 31, 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
-------------------------------------- --------------------------------------
Issued and Issued and
Authorized Outstanding Par Authorized Outstanding Par
---------- ----------- --- ---------- ----------- ---
<S> <C> <C> <C> <C> <C> <C>
A & J 100 100 $1 100 100 $1
Michigan Organic 4,000 4,000 1 4,000 4,000 1
Southeast -- -- -- 100 100 1
</TABLE>
Revenue Recognition
The Company recognizes revenue when services are completed or provided.
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.
Intangible Assets and Amortization
The Company's intangible assets are comprised of goodwill and a noncompete
agreement. Goodwill is amortized on a straight-line basis over 40 years, while
the noncompete agreement is amortized on a straight-line basis over five years.
Amortization expense for these intangible assets was $32,704, $88,111 and
$88,111 for the years ended December 31, 1995, 1996 and 1997, respectively.
Income Taxes
Effective May 1, 1996, Michigan Organic elected S Corporation status 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.
Prior to May 1, 1996, Michigan Organic followed the liability method of
accounting for income taxes in accordance with Statement of Financial Accounting
Standards (SFAS) No. 109. Under this method, deferred income taxes were recorded
based upon differences between the financial reporting and tax bases of assets
when the underlying assets or liabilities were recovered or settled.
A & J and Southeast are S Corporations, as defined by the Internal Revenue Code,
during all years presented.
F-16
<PAGE> 20
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 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 December 31
Useful Lives -------------------------
in Years 1996 1997
------------- ----------- -----------
<S> <C> <C> <C>
Transportation equipment 7-10 $ 2,765,942 $ 3,302,176
Machinery and equipment 7-10 3,176,263 3,628,815
Building and leasehold improvements 20 495,284 120,512
Furniture and fixtures 10 25,937 31,877
----------- -----------
6,463,426 7,083,380
Less- Accumulated depreciation and amortization 4,702,065 5,268,389
----------- -----------
Property and equipment, net $ 1,761,361 $ 1,814,991
=========== ===========
</TABLE>
4. DETAIL OF CERTAIN
BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts receivable consists of
the following:
<TABLE>
<CAPTION>
December 31
----------------------
1996 1997
--------- --------
<S> <C> <C>
Balance at beginning of period $ 20,000 $20,000
Additions to costs and expenses 28,598 --
Deductions for uncollectible receivables written off and
recoveries (28,598) --
-------- -------
Balance at end of period $ 20,000 $20,000
======== =======
</TABLE>
F-17
<PAGE> 21
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
December 31
---------------------
1996 1997
-------- --------
<S> <C> <C>
Accounts payable, trade $240,900 $284,997
Accrued compensation and benefits 34,596 66,831
Other accrued expenses 22,820 44,336
-------- --------
$298,316 $396,164
======== ========
</TABLE>
5. LINES OF CREDIT:
The Company has two open line-of-credit agreements with maximum credit limits of
$250,000 and $500,000, due on July 1, 1998, and April 1, 1998, respectively. The
two line-of-credit agreements bear interest based upon the bank's variable prime
lending rate plus 1 percent and less 0.5 percent, respectively. Borrowings of $-
and $255,100 were outstanding under these line-of-credit agreements at December
31, 1996 and 1997, respectively.
These agreements contain certain covenants which include, among other things,
maintenance of certain financial ratios and minimum equity balances and are
personally guaranteed by the Shareholder.
6. LONG-TERM DEBT:
The following is a summary of the Company's long-term debt instruments:
<TABLE>
<CAPTION>
December 31
---------------------
1996 1997
-------- --------
<S> <C> <C>
Note payable to a financial institution, secured by equipment, matures June
1998, payable in monthly principal and interest installments of $9,941,
bearing interest of 9% until maturity and 11% after maturity $ -- $258,516
Notes payable to former owner of Michigan Organic, secured by an irrevocable letter of
credit maturing in August 2000, payable in fixed monthly installments of $6,333,
imputed interest of 9% 236,605 179,585
-------- --------
236,605 438,101
Less- Current maturities 76,000 334,516
-------- --------
$160,605 $103,585
======== ========
</TABLE>
7. LEASES:
The Company leases storage facilities from a company owned by the Shareholder.
The lease is currently on a month-to-month basis. Rent expense under this
related-party lease was $60,000, $60,000 and $60,000 for the years ended
December 31, 1995, 1996 and 1997, respectively.
F-18
<PAGE> 22
8. INCOME TAXES:
Federal and state income taxes for the years ended December 31, 1995 and 1996,
are as follows:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Federal-
Current $ -- $ --
Deferred 34,496 (131,168)
State-
Current -- --
Deferred 2,071 (7,758)
--------- ---------
$ 36,567 $(138,926)
========= =========
</TABLE>
Actual income tax expense differs from income tax expense computed by applying
the U.S. federal statutory corporate rate of 35 percent to income (loss) before
provision for income taxes for the years ended December 31, 1995 and 1996, as
follows:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Provision at the statutory rate $ 32,415 $ --
Increase (decrease) resulting from-
Nondeductible expenses 2,786 --
State income tax, net of benefit for federal deduction 1,366 --
Effect of electing S Corporation status -- (138,926)
--------- ---------
$ 36,567 $(138,926)
========= =========
</TABLE>
9. RELATED-PARTY TRANSACTIONS:
The Company recognized revenue from a Canadian company majority-owned by the
Shareholder of the Company. During years ended December 31, 1995, 1996 and 1997,
the Company recognized revenue from the related company of $40,000, $36,000 and
$48,000, respectively. Additionally, the Company purchased $110,000 of machinery
and equipment from the related company during the year ended December 31, 1996.
10. EMPLOYEE BENEFIT PLAN:
A & J has a defined contribution profit-sharing plan. The plan allows all
employees who have completed 12 months of service to contribute up to 15 percent
of income. The plan does not provide for matching contributions from A & J,
though A & J may make discretionary contributions. For the three years ended
December 31, 1997, no discretionary contributions were made and the only
participant was the Shareholder. A & J's profit-sharing plan and trust was
terminated in April 1998.
Michigan Organic has a defined contribution 401(k) profit-sharing plan. The plan
allows all employees who have completed 12 months of service to contribute up to
16 percent of income. The plan provides for Michigan Organic to match 50 percent
of the first 4 percent contributed by each employee. The contributions by
Michigan Organic under the plan were approximately $-, $- and $6,466 for the
years ended December 31, 1995, 1996 and 1997, respectively. Michigan Organic
made no discretionary contributions for the three years ended December 31, 1997.
F-19
<PAGE> 23
11. FINANCIAL INSTRUMENTS:
The Company's financial instruments consist of cash and cash equivalents, a line
of credit, notes payable and debt. The Company believes that the carrying value
of these instruments on the accompanying balance sheets approximates their fair
value.
12. 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.
Insurance
The Company carries a broad range of insurance coverage, including business auto
liability, general liability and an umbrella policy.
Other Matters
During 1996, the Company collected $350,000 on a legal claim against a customer
for services provided by the Company prior to 1995. The amount has been
recognized as other income in the accompanying financial statements for the year
ended December 31, 1996.
13. MAJOR CUSTOMERS AND RISK CONCENTRATION:
Significant Customers
Significant customers are those that account for greater than 10 percent of the
Company's revenues. One customer accounted for 53%, 34% and 19% of the Company's
revenues for the three years ended December 31, 1997. During the fourth quarter
of 1997, the Company discontinued its service with this customer. Another
customer accounted for 12% and 10% of the Company's revenues for the years ended
December 31, 1995 and 1997, respectively.
In addition, the Company grants credit, generally without collateral, to its
customers, which are municipalities located primarily in Milwaukee, Chicago,
Tulsa, Grand Rapids and South Florida. Consequently, the Company is subject to
potential credit risk related to changes in business and economic factors within
these markets. However, management believes that its contract acceptance,
billing and collection policies are adequate to minimize the potential credit
risk.
14. SUBSEQUENT EVENTS:
On April 30, 1998, Michigan Organic purchased 2,401 shares from the Shareholder.
In consideration, Michigan Organic assumed a note payable by the Shareholder to
a third party in the amount of $1,054,263. The note is payable in monthly
principal and interest installments of approximately $37,000, bears interest at
an annual rate of 8.75% and matures on December 1, 2000. The note is secured by
certain assets of the Company.
15. RECENTLY ISSUED
ACCOUNTING PRONOUNCEMENT:
In June 1997, SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information," was issued. SFAS No. 131 requires that companies report
financial and descriptive information about their reportable operating segments.
Segment information to be reported is to be based upon the way
F-20
<PAGE> 24
management organizes the segments for making operating decisions and assessing
performance. The Company believes the adoption of SFAS No. 131 will have no
significant effect on its financial reporting.
F-21
<PAGE> 25
A & J CARTAGE, INC. AND RELATED COMPANIES
UNAUDITED COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
March 31
1998
----------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 260,573
Accounts receivable, net of allowance of $20,000 652,607
Prepaid expenses and other current assets 13,579
----------
Total current assets 926,759
PROPERTY AND EQUIPMENT, net 1,660,974
GOODWILL, net 970,366
NONCOMPETE AGREEMENT, net 129,681
----------
Total assets $3,687,780
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Lines of credit $ 356,100
Current maturities of long-term debt 228,598
Due to shareholder 20,000
Accounts payable and accrued expenses 494,777
----------
Total current liabilities 1,099,475
LONG-TERM DEBT, net of current maturities 125,514
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock 4,200
Additional paid-in capital 1,084,587
Retained earnings 1,374,004
----------
Total shareholders' equity 2,462,791
----------
Total liabilities and shareholders' equity $3,687,780
==========
</TABLE>
The accompanying notes are an integral part of these
combined financial statements.
F-22
<PAGE> 26
A & J CARTAGE, INC. AND RELATED COMPANIES
UNAUDITED COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months
Ended March 31
--------------------------
1997 1998
----------- -----------
<S> <C> <C>
REVENUES $ 1,724,100 $ 1,455,909
COST OF REVENUES 1,081,588 1,409,601
----------- -----------
Gross profit 642,512 46,308
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 288,341 227,893
----------- -----------
Income (loss) from operations 354,171 (181,585)
----------- -----------
OTHER INCOME (EXPENSE):
Interest, net (6,731) (14,967)
Other 154 5,929
----------- -----------
Other income (expense), net (6,577) (9,038)
----------- -----------
NET INCOME (LOSS) $ 347,594 $ (190,623)
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
combined financial statements.
F-23
<PAGE> 27
A & J CARTAGE, INC. AND RELATED COMPANIES
UNAUDITED COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months
Ended March 31
---------------------------
1997 1998
----------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 347,594 $ (190,623)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities-
Depreciation and amortization 188,137 205,129
Loss (gain) on sale of property and equipment (30,000) (30,000)
Changes in operating assets and liabilities-
(Increase) decrease in-
Accounts receivable 26,669 514,592
Prepaid expenses and other current assets 12,350 (3,348)
Increase (decrease) in-
Accounts payable and accrued expenses 32,380 100,434
----------- ------------
Net cash provided by operating activities 577,130 596,184
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale (purchase) of property and equipment, net (343,833) 16,870
----------- ------------
Net cash provided by (used in)
investing activities (343,833) 16,870
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (payments) on notes payable, net (15,091) 270,527
Borrowings (payments) on revolving credit facility 309,312 (233,516)
Distribution to shareholder (167,530) (487,987)
----------- ------------
Net cash provided by (used in)
financing activities 126,691 (450,976)
----------- ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 359,988 162,078
CASH AND CASH EQUIVALENTS, beginning of year 147,089 98,495
----------- ------------
CASH AND CASH EQUIVALENTS, end of year $ 507,077 $ 260,573
=========== ============
</TABLE>
The accompanying notes are an integral part of these
combined financial statements.
F-24
<PAGE> 28
A & J CARTAGE, INC. AND RELATED COMPANIES
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
A & J Cartage, Inc. (A & J), a Wisconsin corporation, is engaged in the
biosolids management business. A & J does this through reuse of organic
materials, transportation and monitoring of biosolids and the marketing of end
products from the treatment of such materials. A & J, which is headquartered in
Milwaukee, Wisconsin, serves customers in the states of Wisconsin, Illinois and
Oklahoma.
Michigan Organic Resources, Inc. (Michigan Organic), a Michigan corporation, is
also engaged in the biosolids management business. Michigan Organic is
headquartered in Grand Rapids, Michigan. Michigan Organic was acquired by the
Shareholder (see Note 2) in August 1995.
A & J Cartage Southeast, Inc. (Southeast), a Florida corporation, was founded in
November 1997 by the Shareholder (see Note 2) and is engaged in the biosolids
management business. Southeast is headquartered and operates in Florida.
2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES:
Basis of Presentation
The combined financial statements include the accounts and operations of A & J,
Michigan Organic (since date of acquisition) and Southeast (since date of
formation) (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 Financial Information
The interim financial statements for the three months ended March 31, 1997, and
1998, are unaudited, and certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been omitted. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments, necessary to
fairly present the results of operations with respect to the interim financial
statements have been included. The results of operations for the interim period
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.
Property and Equipment
Property and equipment are stated at cost. Depreciation is being provided using
straight-line methods over estimated useful lives of seven to 20 years.
F-25
<PAGE> 29
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.
Stockholders' Equity
The authorized, issued and outstanding shares of the Company were as follows at
March 31, 1997 and 1998:
<TABLE>
<CAPTION>
Issued and
Authorized Outstanding Par
---------- ----------- ---
<S> <C> <C> <C>
A & J 100 100 $1
Michigan Organic 4,000 4,000 1
Southeast 100 100 1
</TABLE>
Revenue Recognition
The Company recognizes revenue when services are completed or provided.
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.
Intangible Assets and Amortization
The Company's intangible assets are comprised of goodwill and a noncompete
agreement. Goodwill is amortized on a straight-line basis over 40 years, while
the noncompete agreement is amortized on a straight-line basis over five years.
Income Taxes
Effective May 1, 1996, Michigan Organic elected S Corporation status 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.
Prior to May 1, 1996, Michigan Organic followed the liability method of
accounting for income taxes in accordance with Statement of Financial Accounting
Standards (SFAS) No. 109. Under this method, deferred income taxes were recorded
based upon differences between the financial reporting and tax bases of assets
when the underlying assets or liabilities were recovered or settled. A & J and
Southeast are S Corporations, as defined by the Internal Revenue Code, during
all years presented.
F-26
<PAGE> 30
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 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.
F-27
<PAGE> 31
Report of Independent Auditors
Board of Directors
Recyc, Inc.
We have audited the accompanying balance sheets of the Biosolids Division of
Recyc, Inc. as of December 31, 1997 and 1996, and the related statements of
income and divisional equity, and cash flows for each of the three years in the
period ended December 31, 1997. 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 the Biosolids Division of
Recyc, Inc. at December 31, 1997 and 1996 and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Riverside, California
April 3, 1998
F-28
<PAGE> 32
Biosolids Division of Recyc, Inc.
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Accounts receivable, less allowances for doubtful
accounts of approximately $40,800 in 1997
and $28,800 in 1996 $ 833,435 $ 537,479
Intercompany receivables 2,965,192 2,308,844
Prepaid expenses and other 152,479 135,780
------------ ------------
Total current assets 3,951,106 2,982,103
Property, plant and equipment:
Machinery and equipment 1,834,142 1,512,210
Transportation equipment 1,818,296 1,587,168
Office furniture and equipment 201,342 140,101
Buildings and improvements 378,506 354,704
Land 132,500 132,500
------------ ------------
4,364,786 3,726,683
Less accumulated depreciation and amortization 2,602,861 2,138,061
------------ ------------
1,761,925 1,588,622
Long-term accounts receivable 331,939 322,300
Note receivable from shareholder 183,557 182,365
Intangible assets, net of accumulated amortization of
approximately $54,300 in 1997 and $15,900 in 1996 655,426 264,600
------------ ------------
Total assets $ 6,883,953 $ 5,339,990
============ ============
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
------------ ------------
<S> <C> <C>
LIABILITIES AND DIVISIONAL EQUITY
Current liabilities:
Cash overdraft $ 376,210 $ 128,478
Accounts payable 386,554 266,869
Accrued expenses 307,566 436,169
Current portion of notes payable 1,136,984 700,916
------------ ------------
Total current liabilities 2,207,314 1,532,432
Notes payable, less current portion 684,419 222,414
Deferred income taxes 10,658 6,510
------------ ------------
Total liabilities 2,902,391 1,761,356
Commitments and contingencies (Notes 5 and 8)
Divisional equity 3,981,562 3,578,634
------------ ------------
Total liabilities and divisional equity $ 6,883,953 $ 5,339,990
============ ============
</TABLE>
See accompanying notes.
F-29
<PAGE> 33
Biosolids Division of Recyc, Inc.
Statements of Income and Divisional Equity
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Net sales $ 6,239,460 $ 6,050,966 $ 6,588,021
Cost of sales 4,466,519 4,451,594 4,853,758
------------ ------------ ------------
Gross profit 1,772,941 1,599,372 1,734,263
Operating expenses:
Selling, general and administrative expenses 728,829 987,438 881,380
Depreciation and amortization 548,767 449,125 490,912
------------ ------------ ------------
Operating income 495,345 162,809 361,971
Other (income) expense:
Interest expense, net 119,769 64,334 99,632
Other, net (32,300) (87,033) (34,945)
------------ ------------ ------------
Income before income taxes 407,876 185,508 297,284
Income tax expense (benefit) 4,948 4,150 (82,024)
------------ ------------ ------------
Net income 402,928 181,358 379,308
Capital contributions -- 340,775 --
Divisional equity at beginning of year 3,578,634 3,056,501 2,677,193
------------ ------------ ------------
Divisional equity at end of year $ 3,981,562 $ 3,578,634 $ 3,056,501
============ ============ ============
</TABLE>
See accompanying notes.
F-30
<PAGE> 34
Biosolids Division of Recyc, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 402,928 $ 181,358 $ 379,308
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 548,767 449,125 490,912
Deferred income taxes 4,148 3,350 (82,824)
Gain on sale of assets (37,000) (96,538) (45,992)
Provision for losses on accounts receivable 12,000 12,000 12,000
Changes in operating assets and liabilities:
Accounts receivable (307,956) 216,721 (540,907)
Intercompany receivables (656,348) 105,939 (237,361)
Prepaid expenses and other (16,699) 60,172 (4,339)
Long-term accounts receivable (9,639) 24,837 (8,637)
Intangible assets (429,297) (157,209) (123,268)
Accounts payable 119,685 (451,642) 548,767
Accrued expenses and other liabilities (128,603) (34,070) (23,354)
------------ ------------ ------------
Net cash provided by (used in) operating activities (498,014) 314,043 364,305
INVESTING ACTIVITIES
Purchases of equipment and improvements -- (441,978) (346,852)
Proceeds from sale of assets 54,721 139,325 159,560
------------ ------------ ------------
Net cash provided by (used in) investing activities 54,721 (302,653) (187,292)
FINANCING ACTIVITIES
Decrease (increase) in note receivable from shareholder (1,192) 24,120 42,950
(Principal payments on) proceeds from notes payable 196,753 113,920 (41,331)
------------ ------------ ------------
Net cash provided by financing activities 195,561 138,040 1,619
------------ ------------ ------------
Decrease (increase) in cash overdraft (247,732) 149,430 178,632
Cash overdraft at beginning of year (128,478) (277,908) (456,540)
------------ ------------ ------------
Cash overdraft at end of year $ (376,210) $ (128,478) $ (277,908)
============ ============ ============
</TABLE>
See accompanying notes.
F-31
<PAGE> 35
Biosolids Division of Recyc, Inc.
Notes to Financial Statements
December 31, 1997
1. ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
Recyc, Inc. (the "Company") is a closely held corporation established on May 13,
1987. Through its biosolids division (the "Biosolids Division"), the Company is
in the business of contracting with municipalities located in Southern
California for the management of biosolids (sludge) from sewage treatment
plants. The Company's facility, having a California integrated waste facilities
permit, allows the municipalities to gain AB 939 waste diversion credit. The
Company transports the biosolids to its facility, composts them, and sells the
compost to nurseries, landscapers and farmers under the name Bremer Landscape
Supply. Company operations outside of the Biosolids Division consist of tree
nurseries that wholesale specimen trees in California, Nevada and Arizona under
the name Bergen Nurseries.
The accompanying financial statements have been prepared in consideration of the
possible sale of the Company's Biosolids Division operations and include only
the accounts of the Biosolids Division of Recyc, Inc. Such financial statements
do not purport to represent the financial position or operations of Recyc, Inc.
as a whole, or necessarily reflect the results of operations of the Biosolids
Division that may have been achieved had the Biosolids Division been a separate,
stand-alone entity during the periods presented, or the results of operations
which may be achieved in the future. Such financial statements include costs
incurred by the Company that are directly attributable to the Biosolids
Division's operations as well as the Biosolids Division's allocable share of
other corporate costs.
ALLOCATION OF COSTS AND EXPENSES
The accompanying statements of income include revenues directly attributable to
the operations of the Biosolids Division and costs and expenses both directly
attributable to the Biosolids Division as well as certain costs of the Company
that have been allocated to the Biosolids Division as further discussed below.
Direct expenses, such as components of cost of sales and certain salaries, are
recorded to the appropriate division of the Company as incurred. Certain
indirect expenses for which there is a measurable basis for allocation, such as
interest expense, trucking and related costs, salaries and general insurance are
allocated between the divisions of the Company using various measurable bases.
For example, interest expense related to Company debt which has been utilized to
acquire assets for a specific division's use is allocated to that division,
while trucking related costs are allocated based upon trucking miles utilized by
each division. In addition, income taxes were recalculated for the Biosolids
Division on a stand-alone basis.
F-32
<PAGE> 36
Biosolids Division of Recyc, Inc.
Notes to Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
In situations where specific identification of expenses to a division is not
practicable and there is no easily measurable basis for allocation, costs are
either allocated equally between the divisions or based upon a relative
percentage of total sales revenue depending upon the nature of the cost or
expense. Examples of such expenses include accounting and legal services, and
corporate overhead costs.
Management considers its methodologies for specifically identifying or
allocating costs and expenses to the Biosolids Division to be reasonable and to
present fairly the costs and expenses of the Biosolids Division.
REVENUE RECOGNITION
Revenues and costs of goods sold are recognized when services are performed or
goods are shipped to the customer.
USE OF 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.
CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
The Company performs periodic credit evaluations of its customers' financial
condition and generally does not require collateral. Credit losses have been
within management's expectations and amounts provided for doubtful accounts. For
the years ended December 31, 1997, 1996 and 1995, the Biosolids Division had
three customers which cash accounted for at least 10% of total sales. The
following table summarizes total sales and accounts receivable for the years
ended December 31 for these three customers:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------------------------------------------------------------------------------
SALES ACCOUNTS SALES ACCOUNTS SALES ACCOUNTS
PERCENTAGE RECEIVABLE PERCENTAGE RECEIVABLE PERCENTAGE RECEIVABLE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Customer 1 16.2% $ 70,213 20.8% $ 146,008 17.5% $ 144,785
Customer 2 11.8% 60,640 13.0% 65,860 13.0% 100,101
Customer 3 30.4% 374,891 30.4% 147,805 15.7% 141,391
</TABLE>
F-33
<PAGE> 37
Biosolids Division of Recyc, Inc.
Notes to Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost and includes those assets owned
by the Company that are utilized in the operations of the Biosolids Division.
Depreciation and amortization is calculated using the straight-line method over
the following estimated useful lives:
<TABLE>
<S> <C>
Machinery and equipment 7 years
Transportation equipment 5 years
Office furniture and equipment 7 years
Buildings 30 years
Leasehold improvements Life of Lease
</TABLE>
In March 1995, the Financial Accounting Standards Board issued statement of
Financial Accounting Standard No. 121 (FAS 121), "Accounting for the Impairment
of Long-Lived Assets." The Standard requires the Company to review the carrying
amount of long-lived assets, identifiable intangibles and related goodwill to
determine whether any indicators of impairment are present. At December 31,
1997, 1996 and 1995, the Company's review of its long-lived assets utilized in
the operations of the Biosolids Division showed no indications of loss or
impairment, therefore, there has been no impact of the implementation of FAS 121
on the Biosolids Division's financial position or results of operations.
INTANGIBLE ASSETS
Intangible assets relate to costs incurred to acquire licenses and permits
related to the composting facility of the Biosolids Division (Note 6).
Intangible assets are stated at cost and are amortized over the life of the
license or the permit using the straight-line method.
INCOME TAXES
The Company has elected S Corporation status for federal and state income tax
reporting purposes. Due to this election, all income or loss for federal tax
reporting purposes is passed through to the Company's stockholder. The Company's
liability for income tax is limited to the state franchise tax rate of 1.5% in
1997, 1996 and 1995 and has been allocated among the divisions of the Company
based upon the taxable income of each division.
F-34
<PAGE> 38
Biosolids Division of Recyc, Inc.
Notes to Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
NONCASH FINANCING ACTIVITIES
Equipment additions of the Biosolids Division of approximately $666,100 and
$105,600 were financed with long-term debt during the years ended December 31,
1997 and 1996, respectively. No equipment additions were financed with long-term
debt during the year ended December 31, 1995.
During 1996, the Company's sole shareholder contributed land and buildings to
the Company to be utilized by the Biosolids Division. This contribution was
recorded as contributed capital by the Company at the shareholder's basis of
approximately $341,000 and is reflected as part of divisional equity in the
accompanying financial statements of the Biosolids Division.
2. INTERCOMPANY RECEIVABLES
Intercompany receivables consist of cash advances, including allocations for
corporate overhead costs paid for by the Biosolids Division, made to Rentrac,
Inc., an affiliate of the Company, and to Bergen Nurseries, a division of the
Company. The Biosolids Division has also made cash advances to the Company's
shareholder that are included in notes receivable. The Company has agreed not to
demand payment of the notes receivable due from the Company's shareholder prior
to January 1, 1999.
3. LONG-TERM ACCOUNTS RECEIVABLE
The Company has made certain arrangements for collections of compost receivables
with two customers of the Biosolids Division that specify payment terms over
several years; therefore, the receivables are classified as noncurrent in the
accompanying balance sheet.
4. NOTES PAYABLE
The Company's debt includes certain lines of credit and equipment loans that are
directly attributable to the operations of the Biosolids Division. Therefore,
such amounts are included in the accompanying financial statements. Certain
other notes payable to related parties have also been included as the borrowed
funds were determined to have been utilized by the Biosolids Division.
F-35
<PAGE> 39
Biosolids Division of Recyc, Inc.
Notes to Financial Statements (continued)
4. NOTES PAYABLE (CONTINUED)
Long-term debt of the Biosolids Division consists of the following at December
31:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Revolving line of credit, interest payable monthly at prime plus 5% (9.0%
at December 31, 1997), principal due June 1, 1998,
collateralized by substantially all assets of the Company $ 998,000 --
Equipment loans payable, interest and payable monthly (10% at
December 31, 1997), with maturity dates no later than March 2002,
collateralized by substantially all assets of the Company
391,855 $ 426,434
Equipment loans payable, interest ranging from 2.9% to 9.26%, interest
and principal payable monthly with maturity dates no later than June
2000, collateralized by certain Biosolids Division equipment
151,647 208,495
Related parties:
Unsecured, subordinated note payable to shareholder,
interest at 7%, principal and accrued interest payable
December 31, 2001 115,401 120,401
Operating loan payable with related party, interest at
7.625% payable monthly, outstanding principal payable on
June 1, 2002 139,500 143,000
Operating loan payable with related party, interest at 8%
payable monthly, outstanding principal payable on demand
25,000 25,000
------------ ------------
1,821,403 923,330
Less current portion 1,136,984 700,916
============ ============
$ 684,419 $ 222,414
============ ============
</TABLE>
Based on the Company's bank agreement, assets of the Biosolids Division are
used as collateral in loans for the Bergen Nurseries division. The Company's
shareholder has provided a guaranty to the bank for the Company's term loan,
and the Company has provided a guaranty to the bank for a seven-year term loan
to the shareholder in the amount of approximately $1,389,000. Included in the
current portion of the Biosolids Division's long-term debt at December 31, 1997
is the $998,000 balance outstanding under the Company's line of credit, which
is renewable annually on June 1.
F-36
<PAGE> 40
4. NOTES PAYABLE (CONTINUED)
Principal maturities of the long-term debt of the Biosolids Division for the
fiscal years subsequent to December 31, 1997 are approximately:
<TABLE>
<S> <C>
1998 $ 1,136,984
1999 178,158
2000 118,129
2001 220,622
2002 167,510
-------------
$ 1,821,403
=============
</TABLE>
Interest paid by the Biosolids Division for the years ended December 31, 1997,
1996 and 1995 was approximately $96,300, $77,400 and $100,100, respectively.
Included in these amounts are interest expense and interest paid to related
parties by the Biosolids Division for the years ended December 31, 1997, 1996
and 1995 of approximately $22,700, $29,100 and $20,700, respectively.
5. OPERATING LEASES
The Company leases certain facilities and equipment used in the operations of
the Biosolids Division under noncancelable operating leases that have initial
or remaining lease terms in excess of one year. Certain equipment leases
include the option to purchase the equipment for its fair market value at the
end of the lease term. Future minimum payments by year and in the aggregate
under these leases at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
RELATED
Year ending December 31, PARTY OTHER TOTAL
------------- ----------- -------------
<S> <C> <C> <C>
1998 $ 540,000 $ 327,259 $ 867,259
1999 277,500 250,194 527,694
2000 90,000 15,489 105,489
2001 90,000 - 90,000
2002 90,000 - 90,000
Thereafter 481,500 - 481,500
------------- ----------- -------------
$ 1,569,000 $ 592,942 $ 2,161,942
============= =========== =============
</TABLE>
Included above are several related-party leases between the Company and its
sole shareholder whereby the Company leases its corporate office, composting
site, equipment and other land used by the Biosolids Division at a combined
monthly cost of $45,000 at December 31, 1997. These leases expire at various
dates through May 2007. Rent expense paid by the Biosolids Division to the sole
shareholder was $495,000, $455,000 and $420,000 for the years ended December
31, 1997, 1996 and 1995, respectively.
F-37
<PAGE> 41
5. OPERATING LEASES (CONTINUED)
Rent expense directly attributable or allocated to the Biosolids Division
relating to all operating leases (inclusive of related-party leases) was
approximately $817,300, $888,000 and $876,000 for the years ended December 31,
1997, 1996 and 1995, respectively.
6. INCOME TAXES
The components of state income tax expense for the years ended December 31 are
as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current $ 800 $ 800 $ 800
Deferred 4,148 3,350 (82,824)
========= ========= ===========
$ 4,948 $ 4,150 $ (82,024)
========= ========= ===========
</TABLE>
As of December 31, 1997 and 1996, the Biosolids Division had deferred income tax
liabilities of approximately $11,000 and $7,000, respectively. This is primarily
comprised of depreciation and basis of accounting differences for tax purposes.
The Company paid income taxes of approximately $1,000 and $21,000 during the
years ended December 31, 1997 and 1996, respectively, and none in 1995 that were
attributable to the operations of the Biosolids Division. The $21,000 payment in
1996 included approximately $20,000 related to a previously provided for tax
liability related to the 1993 and 1994 tax years.
7. COMPOSTING FACILITY PERMIT
In October 1996, the County of Riverside approved a revised conditional use
permit for the expansion of the Company's composting facility used by the
Biosolids Division. The permit is valid through December 31, 2009. Under the
terms of the permit, the Company will be allowed to increase the intake of
material from 500 tons per day to 1,232 tons per day, over a three-year period
commencing January 1, 1998. This increase is dependent upon the Company's
continual compliance with various regulatory terms and conditions. Among the
conditions is the posting of a $100,000 letter of credit and a $400,000
performance bond to ensure site clean-up upon cessation of operations. In
January 1997, the Company obtained a $100,000 letter of credit and a $400,000
performance bond in accordance with the terms of the permit. The permit
conditions allow for a reduction in material intake and the permit life in the
event of the Company's noncompliance with permit terms and conditions.
F-38
<PAGE> 42
8. CONTINGENCIES
The Company is involved with pending litigation which has arisen in the ordinary
course of business. Although the outcome of these matters is not presently
determinable, management does not expect the resolution of these matters will
have a material adverse impact on the financial condition of the Biosolids
Division.
At December 31, 1997, the Company has outstanding a $100,000 letter of credit
and a $400,000 performance bond which are related to the expansion of the
Company's composting facility used by the Biosolids Division as discussed above.
The Company also has outstanding a $200,000 irrevocable letter of credit which
was issued as collateral for the performance bond. The letters of credit and
performance bond are for one-year terms with annual renewal provisions.
At December 31, 1997, the Company also has outstanding three mine reclamation
bonds totaling $178,909 relating to surface mining operations on real property
leased by the Company on behalf of the Biosolids division. These bonds will
remain outstanding until closure and reclamation of the associated mines.
9. SUBSEQUENT EVENT
At the close of business on December 31, 1997, the Company implemented a
reorganization plan to restructure its lines of business. The reorganization is
tax free under Internal Revenue Code Sections 351 and 1361. Under the plan of
reorganization, the Company's shareholder contributed his stock in the Company
to a parent company, Professional Growers Inc. (PGI), in exchange for stock of
PGI. The Company subsequently distributed substantially all of its non-Biosolids
Division assets and liabilities to PGI, some of which were then contributed by
PGI into other subsidiary companies. As a result of this reorganization, the
assets and liabilities of the former Biosolids Division, as of December 31, 1997
included in the accompanying financial statements, are held in a corporation,
Recyc Inc., which is a wholly owned subsidiary of PGI. This reorganization does
not result in a change in the carrying values of the Company's assets and
liabilities.
F-39
<PAGE> 43
BIOSOLIDS DIVISION OF RECYC, INC.
BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
March 31
1998
-----------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 205,659
Accounts receivable, net 706,967
Intercompany receivables -
Prepaid expenses and other 189,533
-----------
Total current assets 1,102,159
PROPERTY PLANT, AND EQUIPMENT, net 1,647,398
LONG-TERM ACCOUNTS RECEIVABLE 333,522
NOTE RECEIVABLE FROM SHAREHOLDER 183,557
INTANGIBLE ASSETS, net 747,719
-----------
Total assets $ 4,014,355
===========
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Accounts payable $ 629,730
Accrued expenses 388,689
Current portion of notes payable 1,136,984
-----------
Total current liabilities 2,155,403
NOTES PAYABLE, less current portion 766,322
DEFERRED INCOME TAXES 141,362
-----------
Total liabilities 3,063,087
COMMITMENTS AND CONTINGENCIES
EQUITY 951,268
-----------
Total liabilities and equity $ 4,014,355
===========
</TABLE>
See accompanying notes.
F-40
<PAGE> 44
BIOSOLIDS DIVISION OF RECYC, INC.
STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended March 31
----------------------------------
1997 1998
------------ ------------
<S> <C> <C>
NET SALES $ 1,394,513 $ 1,546,160
COST OF SALES 1,349,195 1,447,656
------------ ------------
Gross profit 45,318 98,504
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 403,828 381,339
------------ ------------
Operating income (loss) (358,510) (282,835)
OTHER INCOME (EXPENSE):
Interest expense, net (18,033) (49,879)
Other, net (5,016) --
------------ ------------
Income (loss) before income taxes (381,559) (332,714)
INCOME TAX EXPENSE (BENEFIT) -- --
------------ ------------
NET LOSS $ (381,559) $ (332,714)
============ ============
</TABLE>
See accompanying notes.
F-41
<PAGE> 45
BIOSOLIDS DIVISION OF RECYC, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended March 31
--------------------------------
1997 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (381,559) $ (332,714)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities-
Depreciation and amortization 121,382 149,325
Deferred income taxes 134,055 106,685
Changes in operating assets and liabilities-
Accounts receivable (98,347) 126,468
Intercompany receivables (29,825) 268,410
Prepaid expenses and other (4,540) (37,054)
Long-term accounts receivable (5,606) (1,583)
Intangible assets (153,400) (104,765)
Accounts payable 278,199 (133,033)
Accrued expenses and other liabilities (189,260) 81,123
Other, net 2,746 894
------------ ------------
Net cash provided by (used in) operating activities (326,155) 123,756
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and improvements (113,229) --
------------ ------------
Net cash provided by (used in) investing activities (113,229) --
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Principal payments on) proceeds from notes payable 439,384 81,903
------------ ------------
Net cash provided by financing activities 439,384 81,903
------------ ------------
DECREASE (INCREASE) IN CASH AND CASH EQUIVALENTS -- 205,659
CASH AND CASH EQUIVALENTS, beginning of year -- --
------------ ------------
CASH AND CASH EQUIVALENTS, end of year $ -- $ 205,659
============ ============
</TABLE>
See accompanying notes.
F-42
<PAGE> 46
BIOSOLIDS DIVISION OF RECYC, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES:
Organization and Basis of Presentation
Recyc, Inc. (the Company), is a closely held corporation established on May 13,
1987. Through its biosolids division (the Biosolids Division), the Company is
in the business of contracting with municipalities located in Southern
California for the management of biosolids (sludge) from sewage treatment
plants. The Company's facility, having a California integrated waste facilities
permit, allows the municipalities to gain AB 939 waste diversion credit. The
Company transports the biosolids to its facility, composts them and, under the
name Bremer Landscape Supply, sells the compost to nurseries, landscapers and
farmers. Company operations outside of the Biosolids Division consist of tree
nurseries that wholesale specimen trees in California, Nevada and Arizona under
the name Bergen Nurseries.
The accompanying financial statements have been prepared in consideration of
the possible sale of the Company's Biosolids Division operations and include
only the accounts of the Biosolids Division of Recyc, Inc. Such financial
statements do not purport to represent the financial position or operations of
Recyc, Inc., as a whole or necessarily reflect the results of operations of the
Biosolids Division that may have been achieved had the Biosolids Division been
a separate, stand-alone entity during the periods presented or the results of
operations which may be achieved in the future. Such financial statements
include costs incurred by the Company that are directly attributable to the
Biosolids Division's operations as well as the Biosolids Division's allocable
share of other corporate costs.
Interim Financial Information
The interim financial statements for the three months ended March 31, 1997, and
1998, are unaudited, and certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been omitted. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments, necessary to
fairly present the results of operations with respect to the interim financial
statements have been included. The results of operations for the interim period
are not necessarily indicative of the results for the entire fiscal year.
Allocation of Costs and Expenses
The accompanying statements of income include revenues directly attributable to
the operations of the Biosolids Division and costs and expenses both directly
attributable to the Biosolids Division as well as certain costs of the Company
that have been allocated to the Biosolids Division as further discussed below.
Direct expenses, such as components of cost of sales and certain salaries, are
recorded to the appropriate division of the Company as incurred. Certain
indirect expenses for which there is a measurable basis for allocation, such as
interest expense, trucking and related costs, salaries and general insurance,
are allocated between the divisions of the Company using various measurable
bases. For example, interest expense related to Company debt which has been
utilized to acquire assets for a specific division's use is allocated to that
division, while trucking-related costs are allocated based upon trucking miles
utilized by each division. In addition, income taxes were recalculated for the
Biosolids Division on a stand-alone basis.
F-43
<PAGE> 47
In situations where specific identification of expenses to a division is not
practicable and there is no easily measurable basis for allocation, costs are
either allocated equally between the divisions or based upon a relative
percentage of total sales revenue, depending upon the nature of the cost or
expense. Examples of such expenses include accounting and legal services and
corporate overhead costs.
Management considers its methodologies for specifically identifying or
allocating costs and expenses to the Biosolids Division to be reasonable and to
present fairly the costs and expenses of the Biosolids Division. Revenue
Recognition
Revenues and costs of goods sold are recognized when services are performed or
goods are shipped to the customer.
Use of 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.
Property, Plant and Equipment
Property, plant and equipment is stated at cost and includes those assets owned
by the Company that are utilized in the operations of the Biosolids Division.
Depreciation and amortization is calculated using the straight-line method over
the following estimated useful lives:
<TABLE>
<S> <C>
Machinery and equipment 7 years
Transportation equipment 5 years
Office furniture and equipment 7 years
Buildings 30 years
Leasehold improvements Life of lease
</TABLE>
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment
of Long-Lived Assets." This standard requires the Company to review the
carrying amount of long-lived assets, identifiable intangibles and related
goodwill to determine whether any indicators of impairment are present. At
March 31, 1997 and 1998, the Company's review of its long-lived assets utilized
in the operations of the Biosolids Division showed no indications of loss or
impairment; therefore, there has been no impact of the implementation of SFAS
No. 121 on the Biosolids Division's financial position or results of
operations. Intangible Assets
Intangible assets relate to costs incurred to acquire licenses and permits
related to the composting facility of the Biosolids Division. Intangible assets
are stated at cost and are amortized over the life of the license or permit
using the straight-line method.
Income Taxes
The Company has elected S Corporation status for federal and state income tax
reporting purposes. Due to this election, all income or loss for federal tax
reporting purposes is passed through to the Company's shareholder. The Company's
liability for income tax is limited to the state franchise tax rate of 1.5
percent in 1997 and 1998 and has been allocated among the divisions of the
Company based upon the taxable income of each division.
F-44
<PAGE> 48
Noncash Financing Activities
Equipment additions of the Biosolids Division of approximately $105,600 and
$666,100 were financed with long-term debt during the years ended December 31,
1996 and 1997, respectively. No equipment additions were financed with
long-term debt during the year ended December 31, 1995.
During 1996, the Company's sole shareholder contributed land and buildings to
the Company to be utilized by the Biosolids Division. This contribution was
recorded as contributed capital by the Company at the shareholder's basis of
approximately $341,000 and is reflected as part of divisional equity in the
accompanying financial statements of the Biosolids Division.
2. INTERCOMPANY RECEIVABLES:
Intercompany receivables consist of cash advances, including allocations for
corporate overhead costs paid for by the Biosolids Division, made to Rentrac,
Inc., an affiliate of the Company, and to Bergen Nurseries, a division of the
Company. The Biosolids Division has also made cash advances to the Company's
shareholder that are included in notes receivable. The Company has agreed not to
demand payment of the notes receivable due from the Company's shareholder prior
to January 1, 1999.
3. LONG-TERM ACCOUNTS RECEIVABLE:
The Company has made certain arrangements that specify payment terms over
several years for collections of compost receivables with two customers of the
Biosolids Division; therefore, the receivables are classified as noncurrent in
the accompanying balance sheets.
4. NOTES PAYABLE:
The Company's debt includes certain lines of credit and equipment loans that are
directly attributable to the operations of the Biosolids Division. Therefore,
such amounts are included in the accompanying financial statements. Certain
other notes payable to related parties have also been included as the borrowed
funds were determined to have been utilized by the Biosolids Division.
F-45
<PAGE> 49
BIOSOLIDS DIVISION OF RECYC, INC.
BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
June 30
1998
------------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ --
Accounts receivable, net 918,928
Intercompany receivables --
Prepaid expenses and other 205,814
------------
Total current assets 1,124,742
PROPERTY PLANT, AND EQUIPMENT, net 1,601,446
LONG-TERM ACCOUNTS RECEIVABLE 333,522
NOTE RECEIVABLE FROM SHAREHOLDER 183,837
INTANGIBLE ASSETS, net 728,349
------------
Total assets $ 3,971,896
============
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Accounts payable $ 810,418
Accrued expenses 259,265
Intercompany payable 18,523
Current portion of notes payable 1,136,984
------------
Total current liabilities 2,225,190
NOTES PAYABLE, less current portion 1,399,849
------------
Total liabilities 3,625,039
COMMITMENTS AND CONTINGENCIES
EQUITY 346,857
------------
Total liabilities and equity $ 3,971,896
============
</TABLE>
See accompanying notes.
F-46
<PAGE> 50
BIOSOLIDS DIVISION OF RECYC, INC.
STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended June 30
----------------------------------
1997 1998
------------ ------------
<S> <C> <C>
NET SALES $ 3,080,053 $ 3,120,699
COST OF SALES 2,578,982 2,862,385
------------ ------------
Gross profit 501,071 258,314
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 824,251 821,166
------------ ------------
Operating income (loss) (323,180) (562,852)
OTHER INCOME (EXPENSE):
Interest expense, net (60,157) (106,661)
Other, net 8,066 --
------------ ------------
Income (loss) before income taxes (375,271) (669,513)
INCOME TAX EXPENSE (BENEFIT) -- --
------------ ------------
NET LOSS $ (375,271) $ (669,513)
============ ============
</TABLE>
See accompanying notes.
F-47
<PAGE> 51
BIOSOLIDS DIVISION OF RECYC, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended June 30
--------------------------------
1997 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (375,271) $ (669,513)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities-
Depreciation and amortization 227,067 298,556
Changes in operating assets and liabilities-
Accounts receivable (274,493) (85,493)
Intercompany receivables 57,430 18,523
Prepaid expenses and other (45,005) (53,335)
Long-term accounts receivable (11,222) (1,583)
Intangible assets (268,481) (97,771)
Accounts payable 324,675 57,260
Accrued expenses and other liabilities (69,497) (68,565)
Other, net (280) (280)
------------ ------------
Net cash provided by (used in) operating activities (435,077) (602,201)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and improvements (392,989) (113,229)
------------ ------------
Net cash provided by (used in) investing activities (392,989) (113,229)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Principal payments on) proceeds from notes payable - Net 828,066 715,430
------------ ------------
Net cash provided by financing activities 828,066 715,430
------------ ------------
DECREASE (INCREASE) IN CASH AND CASH EQUIVALENTS -- --
CASH AND CASH EQUIVALENTS, beginning of year -- --
------------ ------------
CASH AND CASH EQUIVALENTS, end of year $ -- $ --
============ ============
</TABLE>
See accompanying notes.
F-48
<PAGE> 52
BIOSOLIDS DIVISION OF RECYC, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES:
Organization and Basis of Presentation
Recyc, Inc. (the Company), is a closely held corporation established on May 13,
1987. Through its biosolids division (the Biosolids Division), the Company is in
the business of contracting with municipalities located in Southern California
for the management of biosolids (sludge) from sewage treatment plants. The
Company's facility, having a California integrated waste facilities permit,
allows the municipalities to gain AB 939 waste diversion credit. The Company
transports the biosolids to its facility, composts them and, under the name
Bremer Landscape Supply, sells the compost to nurseries, landscapers and
farmers. Company operations outside of the Biosolids Division consist of tree
nurseries that wholesale specimen trees in California, Nevada and Arizona under
the name Bergen Nurseries.
The accompanying financial statements have been prepared in consideration of the
possible sale of the Company's Biosolids Division operations and include only
the accounts of the Biosolids Division of Recyc, Inc. Such financial statements
do not purport to represent the financial position or operations of Recyc, Inc.,
as a whole or necessarily reflect the results of operations of the Biosolids
Division that may have been achieved had the Biosolids Division been a separate,
stand-alone entity during the periods presented or the results of operations
which may be achieved in the future. Such financial statements include costs
incurred by the Company that are directly attributable to the Biosolids
Division's operations as well as the Biosolids Division's allocable share of
other corporate costs.
Interim Financial Information
The interim financial statements for the six months ended June 30, 1997, and
1998, are unaudited, and certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been omitted. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments, necessary to
fairly present the results of operations with respect to the interim financial
statements have been included. The results of operations for the interim period
are not necessarily indicative of the results for the entire fiscal year.
Allocation of Costs and Expenses
The accompanying statements of income include revenues directly attributable to
the operations of the Biosolids Division and costs and expenses both directly
attributable to the Biosolids Division as well as certain costs of the Company
that have been allocated to the Biosolids Division as further discussed below.
Direct expenses, such as components of cost of sales and certain salaries, are
recorded to the appropriate division of the Company as incurred. Certain
indirect expenses for which there is a measurable basis for allocation, such as
interest expense, trucking and related costs, salaries and general insurance,
are allocated between the divisions of the Company using various measurable
bases. For example, interest expense related to Company debt which has been
utilized to acquire assets for a specific division's use is allocated to that
division, while trucking-related costs are allocated based upon trucking miles
utilized by each division. In addition, income taxes were recalculated for the
Biosolids Division on a stand-alone basis.
F-49
<PAGE> 53
In situations where specific identification of expenses to a division is not
practicable and there is no easily measurable basis for allocation, costs are
either allocated equally between the divisions or based upon a relative
percentage of total sales revenue, depending upon the nature of the cost or
expense. Examples of such expenses include accounting and legal services and
corporate overhead costs.
Management considers its methodologies for specifically identifying or
allocating costs and expenses to the Biosolids Division to be reasonable and to
present fairly the costs and expenses of the Biosolids Division.
Revenue Recognition
Revenues and costs of goods sold are recognized when services are performed or
goods are shipped to the customer.
Use of 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.
Property, Plant and Equipment
Property, plant and equipment is stated at cost and includes those assets owned
by the Company that are utilized in the operations of the Biosolids Division.
Depreciation and amortization is calculated using the straight-line method over
the following estimated useful lives:
<TABLE>
<S> <C>
Machinery and equipment 7 years
Transportation equipment 5 years
Office furniture and equipment 7 years
Buildings 30 years
Leasehold improvements Life of lease
</TABLE>
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets." This standard requires the Company to review the carrying
amount of long-lived assets, identifiable intangibles and related goodwill to
determine whether any indicators of impairment are present. At June 30, 1997 and
1998, the Company's review of its long-lived assets utilized in the operations
of the Biosolids Division showed no indications of loss or impairment;
therefore, there has been no impact of the implementation of SFAS No. 121 on the
Biosolids Division's financial position or results of operations.
Intangible Assets
Intangible assets relate to costs incurred to acquire licenses and permits
related to the composting facility of the Biosolids Division. Intangible assets
are stated at cost and are amortized over the life of the license or permit
using the straight-line method.
Income Taxes
The Company has elected S Corporation status for federal and state income tax
reporting purposes. Due to this election, all income or loss for federal tax
reporting purposes is passed through to the Company's shareholder. The Company's
liability for income tax is limited to the state franchise tax rate
F-50
<PAGE> 54
of 1.5 percent in 1997 and 1998 and has been allocated among the divisions of
the Company based upon the taxable income of each division.
2. INTERCOMPANY RECEIVABLES/PAYABLES:
Intercompany accounts consist of net cash advances and payments including
allocations for corporate overhead costs paid for by the Biosolids Division,
made to Rentrac, Inc., an affiliate of the Company, and to Bergen Nurseries, a
division of the Company. The Biosolids Division has also made cash advances to
the Company's shareholder that are included in notes receivable.
3. LONG-TERM ACCOUNTS RECEIVABLE:
The Company has made certain arrangements that specify payment terms over
several years for collections of compost receivables with two customers of the
Biosolids Division; therefore, the receivables are classified as noncurrent in
the accompanying balance sheets.
4. NOTES PAYABLE:
The Company's debt includes certain lines of credit and equipment loans that are
directly attributable to the operations of the Biosolids Division. Therefore,
such amounts are included in the accompanying financial statements. Certain
other notes payable to related parties have also been included as the borrowed
funds were determined to have been utilized by the Biosolids Division.
F-51
