<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 1999 Commission File Number 0-21054
SYNAGRO TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its Charter)
DELAWARE 76-0511324
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1800 BERING DRIVE, SUITE 1000 HOUSTON, TEXAS 77057
(Address of principal executive offices) (Zip Code)
(713) 369-1700
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant is required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the latest practicable date.
CLASS OUTSTANDING AT AUGUST 12, 1999
----------------------------- ------------------------------
Common stock, par value $.002 17,677,789
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SYNAGRO TECHNOLOGIES, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I - FINANCIAL INFORMATION
Condensed Consolidated Balance Sheets as of June 30, 1999
(Unaudited) and December 31, 1998..................................................... 3
Condensed Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 1999 and 1998 (Unaudited)......................... 4
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1999 and 1998 (Unaudited)................................... 5
Notes to Condensed Consolidated Financial Statements .................................... 7
Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................................... 12
PART II -- OTHER INFORMATION............................................................. 16
</TABLE>
2
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SYNAGRO TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
ASSETS 1999 1998
------------ ------------
(UNAUDITED)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 414,908 $ 414,712
Restricted cash, current portion 680,656 680,656
Accounts receivable, net 9,952,568 6,523,943
Note receivable 118,810 436,325
Prepaid expenses and other current assets 1,956,752 1,679,381
------------ ------------
Total current assets 13,123,694 9,735,017
Property, machinery & equipment, net 15,527,010 12,394,018
Other Assets:
Goodwill, net 61,464,501 43,130,904
Restricted cash, long-term portion 262,829 262,829
Other assets 1,096,170 1,099,714
------------ ------------
Total assets $ 91,474,204 $ 66,622,482
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 3,831,987 $ 4,043,512
Current portion of notes payable to prior owners 2,062,178 --
Current portion of long-term debt 844,107 --
------------ ------------
Total current liabilities 6,738,272 4,043,512
Long term liabilities:
Long term debt - net 39,964,377 21,651,197
Notes payable to prior owners 992,731 6,679,039
------------ ------------
Total long term liabilities 40,957,108 28,330,236
COMMITMENTS AND CONTINGENCIES
Stockholders' Equity
Preferred stock, $.002 par value, 10,000,000 shares
authorized, none issued and outstanding -- --
Common stock, $.002 par value, 100,000,000 shares authorized,
17,392,790, 14,251,706 issued and outstanding 34,786 28,503
Additional paid in capital 65,708,864 56,495,873
Accumulated deficit (21,964,864) (22,275,641)
------------ ------------
Total stockholders' equity 43,778,902 34,248,735
------------ ------------
Total liabilities and stockholders' equity $ 91,474,204 $ 66,622,482
============ ============
</TABLE>
The accompanying notes are an integral part of these Condensed
Consolidated Financial Statements.
3
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SYNAGRO TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------- -------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net sales ............................................ $ 14,917,754 $ 6,995,730 $ 23,978,231 $ 12,655,698
Cost of services ..................................... 10,765,419 6,107,329 18,514,021 11,415,320
------------ ------------ ------------ ------------
Gross profit ......................................... 4,152,335 888,401 5,464,210 1,240,378
Selling, general and administrative expenses ......... 1,566,210 865,403 3,220,452 1,454,239
Amortization of goodwill ............................. 345,377 57,222 668,028 114,444
Special charges (credits) ............................ -- (70,436) (--) (183,435)
------------ ------------ ------------ ------------
Income from operations ............................... 2,240,748 36,212 1,575,730 (144,870)
Other income (expense) ............................. (3,840) 89,321 51,032 263,001
Interest expense ................................... (768,679) (262,412) (1,315,985) (523,031)
------------ ------------ ------------ ------------
Income (loss) before provision for income taxes ...... 1,468,229 (136,879) 310,777 (404,900)
Provision for income taxes ........................... -- -- -- --
------------ ------------ ------------ ------------
Net income (loss) before redeemable
preferred stock dividends .......................... 1,468,229 (136,879) 310,777 (404,900)
Redeemable preferred stock dividends ................. -- 420,001 -- 3,934,588
------------ ------------ ------------ ------------
Net earnings (loss) on common stock .................. $ 1,468,229 $ (556,880) $ 310,777 $ (4,339,488)
============ ============ ============ ============
Income (loss) per common share equivalent:
Net income (loss), basic ........................... 0.09 (0.06) $ 0.02 $ (0.49)
Net income (loss), diluted ......................... 0.09 (0.06) $ 0.02 $ (0.49)
Weighted average shares outstanding, basic ........... 16,343,171 9,199,420 15,308,759 8,905,908
Weighted average shares outstanding, diluted ......... 17,142,759 9,199,420 16,086,432 8,905,908
</TABLE>
The accompanying notes are an integral part of these Condensed
Consolidated Financial Statements.
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SYNAGRO TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------------
1999 1998
------------ ------------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) before redeemable preferred stock
dividends ................................................. $ 310,777 $ (404,900)
Adjustments to reconcile net income (loss)
used in operating activities
Depreciation and amortization ........................... 1,984,618 896,164
Loss (gain) on sale of equipment ........................ 25,841 (128,457)
Special charges (credits) ............................... -- (183,435)
Change in operating assets and liabilities, net of effects of
acquired businesses:
Accounts receivable ..................................... (1,835,659) 534,129
Prepaid expenses and other .............................. (111,008) (189,512)
Other assets ............................................ -- (326,588)
Accounts payable and accrued expenses ................... (833,276) (270,396)
------------ ------------
Net cash used in operating activities .......................... (458,707) (72,995)
Cash flows from investing activities:
Additions to property, machinery & equipment ................. (2,016,869) (811,668)
Proceeds from sale of equipment .............................. 224,918 319,355
Cash paid for acquired business, net of cash acquired ........ (13,606,292) (1,314,193)
Proceeds from notes receivable ............................... 317,515 --
Sales (purchases) of short-term investments, net ............. -- (210,611)
------------ ------------
Net cash used in investing activities .......................... (15,080,728) (2,017,117)
Cash flows from financing activities:
Proceeds from debt ........................................... 20,136,580 1,547,413
Payments on debt ............................................. (4,792,048) (840,352)
Decrease (increase) in restricted cash ....................... -- 50,000
Sale of redeemable preferred stock ........................... -- 3,480,432
Preferred stock dividends .................................... -- (420,001)
Exercise of options and warrants ............................. 195,099 56,158
------------ ------------
Net cash provided by financing activities ...................... 15,539,631 3,873,650
------------ ------------
Net increase in cash and cash equivalents ...................... 196 1,783,538
Cash and cash equivalents, beginning of period ................. 414,712 281,043
------------ ------------
Cash and cash equivalents, end of period ....................... $ 414,908 $ 2,064,581
============ ============
</TABLE>
The accompanying notes are an integral part of these Condensed
Consolidated Financial Statements.
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SYNAGRO TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS
JUNE 30,
----------------------------
1999 1998
---------- ----------
(UNAUDITED)
<S> <C> <C>
Supplemental Cash Flow Information
Interest paid during the period ...... $1,197,751 $ 518,479
Taxes paid during the period ......... -- --
</TABLE>
NON-CASH INVESTING AND FINANCING ACTIVITIES
On March 31, 1998, the Company issued 1,458,335 shares of Series B Preferred
Stock ("Preferred Stock") with a beneficial conversion feature. The Company
recognized the value of the beneficial conversion feature of $3,514,587 as a
preferred dividend. On June 10, 1998, the Preferred Stock was converted to
1,458,336 shares of common stock.
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SYNAGRO TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
GENERAL
The accompanying unaudited condensed consolidated financial statements have been
prepared by the Registrant ("Synagro Technologies, Inc." or the "Company")
pursuant to the rules and regulations of the Securities and Exchange Commission.
These condensed consolidated financial statements reflect all normal recurring
adjustments which are, in the opinion of management, necessary for the fair
presentation of such financial statements for the periods indicated. Certain
information relating to the Company's organization and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles has been condensed or omitted in this Form 10-Q
pursuant to Rule 10-01 of Regulation S-X for interim financial statements
required to be filed with the Securities and Exchange Commission. However, the
Company believes that the disclosures herein are adequate to make the
information presented not misleading. The results for the three and six months
ended June 30, 1999, are not necessarily indicative of future operating results.
It is suggested that these financial statements be read in conjunction with the
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K, as amended, for the year ended December 31, 1998, and the
Company's current report on form 8-K filed on July 7, 1999.
The accounting policies followed by the Company in preparing interim
consolidated financial statements are consistent with those described in the
"Notes to Consolidated Financial Statements" in the Company's Form 10-K, as
amended, for the year ended December 31, 1998, and the Company's current report
on form 8-K filed on July 7, 1999.
The Company is engaged in the biosolids management business throughout the
United States. The Company does this through beneficial reuse of organic
materials, transportation and monitoring of biosolids, and the marketing of end
products from the treatment of such materials.
ACCOUNTING PRONOUNCEMENTS
Effective December 31, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 131, "Disclosures about segments of an
enterprise and related information." SFAS No. 131 establishes new standards for
segment reporting which are based on the way management organizes segments
within a Company for making operating decisions and assessing performance.
Through June 30, 1999, the Company operated in one segment, namely, the
biosolids management business segment.
In March 1998, the AICPA issued Statement of Position (SOP) 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use." The
SOP provides guidance with respect to accounting for the various types of costs
incurred for computer software developed or obtained for the Company's use. The
Company adopted SOP 98-1 in the first quarter of fiscal 1999 and it had no
effect on the Company's consolidated financial statements.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities." At adoption, SOP 98-5 requires the Company to write-off any
unamortized start-up costs as a cumulative change in accounting principle and,
going forward, expense all start-up activity costs as they are incurred. The
Company adopted SOP 98-5 in the first quarter of fiscal 1999 and it had no
effect on the Company's consolidated financial statements.
In June 1998, the FASB issued No. 133, "Accounting for Derivative Instruments
and Hedging Activities", which becomes effective for financial statements
beginning January 1, 2000. SAFS No. 133 requires a company to recognize all
derivative instruments (including certain derivative instruments embedded in
other contracts) as assets or liabilities in its balance sheet and measure them
at fair value. The statement requires that changes in the derivatives fair
value be recognized currently in earnings unless specific hedge accounting
criteria are met. The Company is evaluating SASF No. 133 and the impact on
existing accounting policies and financial disclosures. However, the Company
has not to date engaged in activities or entered into arrangements normally
associated with derivative instruments. In June 1999, the FASB issued SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities - - Deferral
of the effective date of FASB statement No. 133 - - An amendment of FASB
statement No. 133". SFAS No. 137 delayed the effective date of the requirements
of SFAS No. 133 to all fiscal quarters of fiscal years beginning after June 15,
2000.
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(2) ACQUISITIONS AND DISPOSITIONS
1999 ACQUISITIONS
AMSCO, INC.
On May 3, 1999, the Company acquired AMSCO, Inc., a provider of residuals
management, recycling, and land application services in the southeastern United
States for approximately $19,519,000. The acquisition was financed through the
issuance of 2,851,946 shares of common stock with a market trading value of
approximately $8,419,000 and approximately $11,100,000 in cash and acquisition
costs. The common stock was valued in accordance with the provisions of
Emerging Issues Task Force, 95-19. The cash portion was funded through the
Company's credit facility. The transaction was recorded using the purchase
method of accounting. The accompanying balance sheet as of June 30, 1999,
includes a preliminary allocation of the purchase price and is subject to final
adjustments which management believes will not be material. The preliminary
allocation resulted in approximately $16,564,000 of goodwill that is being
amortized over 40 years.
ANTI POLLUTION ASSOCIATES, INC. AND D&D PUMPING, INC.
On April 23, 1999, the Company acquired two companies located in the Florida
Keys, Anti-Pollution Associates, Inc. and D&D Pumping, Inc. (collectively,
"Anti-Pollution") for approximately $1,313,000. Anti-Pollution Associates,
Inc.'s core business is the operation and maintenance of small wastewater
treatment plants and lift stations. D&D Pumping, Inc. haul the residuals
produced at these plants to transfer stations. The acquisition was financed
through the issuance of 193,000 shares of common stock with a market trading
value of approximately $605,000 and approximately $708,000 in cash and
acquisition costs. The common stock was valued in accordance with the
provisions of Emerging Issues Task Force, 95-19. The cash portion was funded
through the Company's credit facility. The transaction was recorded using the
purchase method of accounting. The accompanying balance sheet as of June 30,
1999, includes a preliminary allocation of the purchase price and is subject to
final adjustments which management believes will not be material. The
preliminary allocation resulted in approximately $1,119,000 of goodwill that is
being amortized over 40 years.
VITAL CYCLE, INC.
On April 8, 1999, the Company acquired Vital-Cycle, Inc. ("Vital-Cycle"), a
national marketer of heat dried biosolids to the fertilizer industry, for
approximately $1,799,000 in cash and acquisition costs. The cash was funded
through the Company's credit facility. The transaction will be recorded using
the purchase method of accounting. The accompanying balance sheet as of June
30, 1999, includes a preliminary allocation of the purchase price and is
subject to final adjustments which management believes will not be material.
The preliminary allocation resulted in approximately $1,026,000 of goodwill
that is being amortized over 40 years.
The following unaudited pro forma information for the periods set forth below
gives effect to the acquisitions of A&J, Recyc, EWR, Amsco, Anti Pollution and
Vital Cycle as if they had occurred at the beginning of 1998. The unaudited
pro forma information is presented for information purposes only and is not
necessarily indicative of actual results which might have occurred if the
acquisitions had been made at the beginning of the periods presented.
<TABLE>
<CAPTION>
SIX MONTH PERIOD ENDED
JUNE 30 (UNAUDITED)
-------------------------
1998 1997
----------- ----------
<S> <C> <C>
Net sales ......................................... $28,189,574 29,664,428
Net income (loss) before Preferred Stock Dividends. 790,679 239,868
Net earnings (loss) applicable to Common Stock..... 790,679 (3,694,720)
Net earnings (loss) per share
Basic ......................................... 0.05 (0.23)
Diluted ....................................... 0.04 (0.23)
</TABLE>
NATIONAL RESOURCE RECYCLING, INC.
During March 1999, the Company completed the acquisition of all the common
stock of National Resource Recycling, Inc. ("NRR"), in a business transaction
accounted for as a "pooling-of-interests" transaction. NRR, headquartered in
Michigan, provides biosolids management services. The Company issued 1,000,001
shares of common stock in exchange for all the common stock of NRR. There were
no transactions between the Company and NRR during the periods prior to the
business combination.
The Company's historical financial statements have been restated to reflect the
NRR pooling transaction.
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The following table summarizes the unaudited restated revenues, net income and
per share data of Synagro after giving effect to the NRR pooling transaction
(in thousands except per share data)
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1998
-------------------------------- --------------------------------
<S> <C> <C> <C> <C>
Revenues and net income (loss)- Revenues Net income (loss) Revenues Net income (loss)
As reported $ 5,899 $ (929) $ 11,510 $ (4,337)
NRR 1,107 372 1,146 (2)
---------- ---------- ---------- ----------
As restated $ 6,996 $ (557) $ 12,656 $ (4,339)
========== ========== ========== ==========
Basic earnings (loss) per share-
As reported $ (0.11) $ (0.55)
NRR 0.05 0.06
---------- ----------
As restated $ (0.06) $ (0.49)
========== ==========
Diluted earnings (loss) per share-
As reported $ (0.11) $ (0.55)
NRR 0.05 0.06
---------- ----------
As restated $ (0.06) $ (0.49)
========== ==========
</TABLE>
1998 ACQUISITIONS
During 1998, the Company purchased all the stock of A&J Cartage and related
companies ("A&J"), Recyc, Inc. ("Recyc") and Environmental Waste Recycling,
Inc. ("EWR"). The assets acquired and liabilities assumed were as follows:
<TABLE>
<S> <C>
Common stock issues $ 23,783,000
Notes payable 11,669,000
Cash 9,410,000
Less: Historical net assets acquired 5,156,000
------------
Goodwill $ 39,706,000
============
</TABLE>
The transactions were recorded using the purchase method of accounting. The
allocation of the purchase prices resulted in approximately $37,328,000 of
goodwill that is being amortized over 40 years. The common stock issued to
former owners was valued in accordance with the provisions of EITF 95-19.
Unsecured notes were issued to prior owners totaling approximately $8,128,000
with principal due in varying installments with final payment due November
2000. The notes bear interest of 7% and have no financial covenants. The cash
portions of the purchases were financed through the Company's credit facility.
The payment agreement with EWR provided for additional cash and stock
consideration in an aggregate amount not to exceed $ 2,956,216 in the event
certain financial targets are realized during the twelve-month period after
closing. In connection with the acquisition of Recyc, the Company entered into
a lease agreement with an option to purchase with the prior owners, as trustees
of a family trust of said stockholders, providing for a lease by Recyc of a
composting facility. In addition, the Company entered into a transportation
agreement with an initial term of two years with Recyc Trucking, Inc. ("RTI"),
a company owned by the prior owners, for the provision by RTI of certain
transportation services relating to Recyc's operations.
(3) PREFERRED STOCK
The Company is authorized to issue up to 10,000,000 shares of preferred stock.
The stock may be issued in one or more series or classes by the Board of
Directors of the Company. Each such series or class shall have such powers,
preferences, rights and restrictions as determined by resolution by the Board of
Directors. Series A Junior Participating Preferred Stock will be issued upon
exercise of the Stockholder Rights described below.
SERIES B REDEEMABLE PREFERRED STOCK
On March 31, 1998, the Company issued 1,458,335 shares of Series B Preferred
Stock for $3,500,004. The Series B Preferred Stock was convertible by the
holders to Common Stock at a conversion rate of 1:1, with a beneficial
conversion feature permitting the shareholders to convert their holdings to
Common Stock at $2.40. The market price of the Common Stock at date of issuance
was $4.81. The Company recognized the value of the beneficial conversion
feature of approximately $3.5 million as a preferred stock dividend. The value
of such preferred stock dividend had no impact on the Company's cash flows, but
reduced basic and diluted earnings available to holders of Common Stock.
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On June 10, 1998, a cash dividend of $420,000 was paid to the holders of the
Series B Preferred Stock in connection with their conversion of the shares of
Series B Preferred Stock into 1,458,335 shares of Common Stock. All of the
shares of Series B Preferred Stock were converted to Common Stock at that time.
(4) STOCKHOLDERS' RIGHTS PLAN
In December 1996, the Company adopted a stockholders' rights plan (the "Rights
Plan"). The Rights Plan provides for a dividend distribution of one preferred
stock purchase right ("Right") for each outstanding share of the Company's
common stock, to stockholders of record at the close of business on January 10,
1997. The Rights Plan is designed to deter coercive takeover tactics and to
prevent an acquirer from gaining control of the Company without offering a fair
price to all of the Company's stockholders. The Rights will expire on December
31, 2006.
Each Right entitles stockholders to buy one one-thousandth of a newly issued
share of Series A Junior Participating Preferred Stock of the Company at an
exercise price of $10. The Rights are exercisable only if a person or group
acquires beneficial ownership of 15 percent or more of the Company's common
stock or commences a tender or exchange offer which, if consummated, would
result in that person or group owning 15 percent or more of the common stock of
the Company. However, the Rights will not become exercisable if common stock is
acquired pursuant to an offer for all shares which a majority of the board of
directors determines to be fair to and otherwise in the best interests of the
Company and its stockholders. If, following an acquisition of 15 percent or
more of the Company's common stock, the Company is acquired by that person or
group in a merger or other business combination transaction, each Right would
then entitle its holder to purchase common stock of the acquiring company
having a value of twice the exercise price. The effect will be to entitle the
Company stockholder to buy stock in the acquiring company at 50 percent of its
market price.
The Company may redeem the Rights at $.001 per Right at any time on or prior to
the tenth business day following the acquisition of 15 percent or more of its
common stock by a person or group or commencement of a tender offer for such 15
percent ownership.
(5) CREDIT FACILITY
As of June 30, 1999, the Company had current maturities of long-term debt of
approximately $2,906,000. The Company's total debt was approximately
$43,863,000 at June 30, 1999.
The Company has a $40 million bank credit facility with Bank of America National
Trust and Savings Association, which has the right to add participants to the
credit facility. The credit facility bears interest (which was approximately
7.93% at June 30, 1999) at the bank Eurodollar rate plus a margin based upon a
pricing schedule in the credit facility. The credit facility is secured by
substantially all of the Company's assets. At June 30, 1999, the Company had
borrowings under this credit facility of approximately $38,500,000 and amounts
available under the credit facility of approximately $872,000. Amounts under the
credit facility are subject to a borrowing base equal to 4.25 times earnings
before interest, taxes, depreciation and amortization ("EBITDA") based on a
trailing twelve months calculation, as defined in the credit facility less
funded debt as defined, (which includes notes payable to former owners, which
can be refinanced through the credit facility) until June 30, 1999, 4.00 until
September 30,1999, and 3.75 times thereafter. The credit facility requires the
Company to meet certain loan covenants, and the Company was in compliance with
those covenants as of June 30, 1999. The credit facility expires in October
2001.
(6) COMMITMENTS / CONTINGENCIES
The Company currently and from time to time is subject to claims and lawsuits
arising in the ordinary course of business. In the opinion of management, the
outcome of such proceedings will not have a material adverse effect or the
Company's consolidated financial position or results of operations.
(7) SPECIAL CHARGES - (CREDITS)
Special charges (credits), net were ($70,436) for the quarter
ended June 30, 1998 and ($183,435) for the six month period ended June 30, 1998
which were related to notes receivable previously reserved. There were no such
credits during the six months ended June 30, 1999.
(8) EARNINGS (LOSS) PER COMMON SHARE
The FASB issued SFAS No. 128, "Earnings Per Share" in February 1997.
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SFAS No. 128 required dual presentation of earnings per share (EPS); basic EPS
and diluted EPS. Basic EPS excludes dilution and is computed by dividing net
income by the weighted average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock. For purposes of the calculation, outstanding stock options,
warrants and redeemable preferred stock are considered common stock equivalents.
Diluted per common share amounts are not applicable for loss periods. For the
six months ended June 30, 1999, and the quarter ended June 30, 1999 the
difference in weighted average numbers of Common Shares between basic and
diluted earnings per share of 777,673 and 799,588 respectively, represents the
impact of stock options. The adjusted number of shares for the six months ended
June 30, 1998 and the quarter ended June 30, 1998, that would be increased
related to stock options were approximately 1,060,903 and 1,516,918
respectively; however, diluted per share amounts are not applicable for loss
periods. The following table summarizes the basic EPS and diluted EPS
computations for the quarter and six months ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------ ------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C>
Net income before redeemable preferred stock
dividends ...................................... $ 1,468,229 $ (136,879) $ 310,777 $ (404,900)
Redeemable preferred stock dividends ............. -- 420,001 -- 3,934,588
------------ ------------ ------------ ------------
Net earnings (loss) on common stock .............. 1,468,229 (556,880) 310,777 (4,339,488)
============ ============ ============ ============
Basic earnings (loss) per share:
Earnings per share prior to preferred
dividend .................................... $ .09 $ (0.02) $ 0.02 $ (0.05)
Preferred stock dividend ....................... -- (0.04) -- (0.44)
------------ ------------ ------------ ------------
Basic earnings (loss) per common share ......... .09 (0.06) 0.02 (0.49)
Diluted earnings (loss) per share:
Earnings per share prior to preferred
dividend .................................... $ .09 $ (0.02) $ 0.02 $ (0.05)
Preferred stock dividend ....................... -- (0.04) -- (0.44)
------------ ------------ ------------ ------------
Diluted earnings (loss) per common share ....... $ .09 $ (0.06) $ 0.02 $ (0.49)
Weighted average shares outstanding basic ........ 16,343,171 9,199,420 15,308,759 8,905,908
Weighted average shares outstanding, diluted ..... 17,142,759 9,199,420 16,086,432 8,905,908
</TABLE>
(9) PENDING ACQUISITIONS
On June 4, 1999, The Company entered into a non-binding letter of intent to
acquire 100% ownership of Residual Technologies LP and its affiliate companies
(collectively referred to as "RESTEC"). RESTEC engages in the contract
management of municipal residuals in New England, handling an average of 165
dry tons per day of residuals from more than 75 customers. RESTEC owns and
operates three residuals incineration facilities located in Woonsocket, RI, New
Haven and Waterbury, Conn. RESTEC has annual revenues of approximately $22
million, a substantial portion of which are generated from multi-year
contracts. The closing of this transaction is subject to negotiating and
entering into a definitive purchase and sale agreement, the completion of
Synagro's business, environmental, legal, and accounting due diligence review,
financing and other customary closing conditions.
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The following discussion should be read in conjunction with the consolidated
historical and pro forma combined financial statements of the Company and
related notes thereto included elsewhere in this Form 10-Q and the Annual
Report on Form 10-K, as amended for the year ended December 31, 1998 and the
Company's current report on Form 8-K filed on June 7, 1999. This discussion
contains forward-looking statements regarding the business and industry of the
Company within the meaning of the Private Securities Litigation Reform Act of
1995. These statements are based on the current plans and expectations of the
Company and involve risks and uncertainties that could cause actual future
activities and results of operations to be materially different from those set
forth in the forward-looking statements.
The Company is a national provider of biosolids management. The Company's plans
are to consolidate the fragmented biosolids markets, and the Company currently
performs services for municipalities, local agencies and private industry. The
timing and magnitude of acquisitions and assimilation costs may materially
affect future operating results. Accordingly, the operating results for any
period may not necessarily be indicative of the results that may be achieved
for any subsequent period.
HISTORICAL RESULTS AND OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------- -------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net sales .......................................... $ 14,917,754 $ 6,995,730 $ 23,978,231 $ 12,655,698
Cost of services ................................... 10,765,419 6,107,329 18,514,021 11,415,320
------------ ------------ ------------ ------------
Gross profit ....................................... 4,152,335 888,401 5,464,210 1,240,378
Selling, general and administrative expenses ....... 1,566,210 865,403 3,220,452 1,454,239
Amortization of goodwill ........................... 345,377 57,222 668,028 114,444
Special charges (credits) .......................... -- (70,436) -- (183,435)
------------ ------------ ------------ ------------
Income (loss) from operations ...................... 2,240,748 36,212 1,575,730 (144,870)
Other income (expense)
Other income (expense) ........................... (3,840) 89,321 51,032 263,001
Interest expense ................................. (768,679) (262,412) (1,315,985) (523,031)
------------ ------------ ------------ ------------
Income (loss) before provision for income taxes .... 1,468,229 (136,879) 310,777 (404,900)
Provision for income taxes ......................... -- -- -- --
------------ ------------ ------------ ------------
Net income (loss) before redeemable
preferred stock dividends ........................ 1,468,229 (136,879) 310,777 (404,900)
Redeemable preferred stock dividends ............... -- 420,001 -- 3,934,588
------------ ------------ ------------ ------------
Net earnings (loss) on common stock ................ $ 1,468,229 $ (556,880) $ 310,777 $ (4,339,488)
============ ============ ============ ============
</TABLE>
For the quarter ended June 30, 1999, net sales were approximately $14,918,000
compared to approximately $6,996,000 for the second quarter 1998, an increase of
approximately $7,922,000 or 113%. For the first half of 1999, net sales
increased from approximately $12,656,000 to approximately $23,978,000 for the
same period in 1998. The increase for the quarter relates to sales from
acquisitions made in 1998 and 1999 (approximately $8,376,000), an increase in
volume relating to new contracts and event work (approximately $627,000),
partially offset by reduced volume relating to non-renewal of certain low margin
contracts (approximately $868,000). The increase in sales year-to-date relates
to sales from acquisitions made in 1998 and 1999 (approximately $12,360,000), an
increase in volume relating to new contracts and event work (approximately
$627,000), partially offset by reduced volume relating to non-renewal of certain
low margin contracts (approximately $1,516,000).
Cost of services and gross profit for the second quarter of 1999 were
approximately $10,765,000 and approximately $4,152,000 respectively, compared
with approximately $6,107,000 and approximately $888,000 respectively, for the
second quarter of 1998, resulting in gross profit as a percentage of sales
increasing to 27.8% in 1999 from 12.7% in 1998. For the first half of 1999,
cost of services and gross profit were approximately $18,514,000 and $5,464,000
respectively, compared with approximately $11,415,000 and $1,240,000
respectively, for the first half of 1998, resulting in gross profit as a
percentage of sales increasing to 22.8% in 1999 from 9.8% in 1998. The increase
in gross profit as a percentage of sales relates to unusual weather conditions
in the Mid-Atlantic Region and unseasonably heavy rainfall in California in
1998, which caused (a) additional expenses associated with transportation to
land application sites unaffected by the conditions and (b) increased land
disposal costs which were incurred when land application sites were not
available. Landfill disposal costs and transportation costs associated with
these conditions totaled $749,000 for the six month period ended June 30, 1998
and $489,000 for the quarter ended June 30, 1998. Additionally, the Company did
not renew certain low margin contracts during 1998. The remainder of the
increase is attributed to higher margin sales associated with certain
acquisitions completed during 1998 and 1999.
Selling general and administrative expenses were approximately $1,566,000 for
the quarter ended June 30, 1999 compared to approximately $865,000 for the
quarter ended June 30, 1998, an increase of approximately $701,000. Selling
general and administrative expenses were approximately $3,220,000 for the six
months ended June 30, 1999 compared to approximately $1,454,000 for the six
months ended June 30, 1998, an increase of approximately $1,766,000. The
increase relates primarily to additional staffing at the corporate level
(approximately $182,000 for the three months ended June 30, 1999 and
approximately $699,000 for the six month period ended June 30, 1999) to
implement the Company's growth strategies. The remaining difference relates
primarily to selling general and administrative expenses associated with 1998
and 1999 acquisitions (approximately $498,000 for the three months ended June
30, 1999 and approximately $977,000 for the six months ended June 30, 1999).
12
<PAGE> 13
Amortization of goodwill was approximately $345,000 for the quarter ended June
30, 1999 compared to approximately $57,000 for the second quarter of 1998, an
increase of approximately $288,000. For the first half of 1999, amortization of
goodwill increased from approximately $114,000 for the same period in 1998 to
approximately $668,000. The increases relate to acquisitions made in 1998 and
1999.
Special charges (credits), net were approximately ($70,000) for the quarter
ended June 30, 1998 and ($183,000) for the six month period ended June 30,
1998. These amounts relate to notes receivable previously reserved. There were
no such credits in 1999.
Other income (expense) was approximately ($4,000) for the quarter ended June
30, 1999 compared to approximately $89,000 for the quarter ended June 30, 1998,
a decrease of approximately $93,000. Other income (expense) was approximately
$51,000 for the six month period ended June 30, 1999 compared to approximately
$263,000 for the six month period ended June 30, 1998, a decrease of
approximately $212,000. The decreases relate to lower gains or losses on the
sale of assets.
As a result of the foregoing, net income of approximately $1,468,000 before
preferred stock dividends or $0.09 per share was reported for the quarter ended
June 30, 1999 compared to a net loss of approximately $137,000 before preferred
stock dividends or $0.01 loss per share for the quarter ended June 30, 1998.
Net income of approximately $311,000 before preferred stock dividends or $0.02
per share was reported for the six month period ended June 30, 1999 compared to
a net loss of approximately $405,000 before preferred stock dividends or $0.05
loss per share for the six month period ended June 30, 1998.
During the second quarter of 1998, the Company paid approximately $420,000 in
dividends to preferred stock holders. In the first quarter of 1998 the Company
recognized a preferred stock dividend of approximately $3,515,000 related to
redeemable preferred stock with a beneficial conversion feature. See Note (3) to
the notes to the financial statements included herein for further discussion.
There were no such dividends during 1999.
As a result of the Company's cumulative operating losses, the Company has not
paid federal income tax since inception. As of December 31, 1998, the Company
had net operating loss carry forwards totaling approximately $11,690,000.
Utilization of the Company's net operating losses may be subject to limitation
under certain circumstances.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations principally through the
sale of equity, bank credit facility arrangements or through funds provided by
operating activities.
The Company purchased additional capital assets during the six months ended
June 30, 1999, in the amount of approximately $2,017,000 and sold capital
assets with proceeds totaling approximately $225,000.
As of June 30, 1999, the Company had current maturities of long-term debt of
approximately $2,906,000. The Company's total debt was approximately
$43,863,000 at June 30, 1999.
The Company has a $40 million bank credit facility with Bank of America
National Trust and Savings Association, which has the right to add participants
to the credit facility. The credit facility bears interest at the bank
Eurodollar rate plus a margin based upon a pricing schedule in the credit
facility. The credit facility is secured by substantially all of the Company's
assets. At June 30, 1999, the Company had borrowings under this credit facility
of approximately $38,500,000 and amounts available under the credit facility of
approximately $872,000. Amounts under the credit facility are subject to a
borrowing base equal to 4.25 times earnings before interest, taxes,
depreciation and amortization ("EBITDA") based on a trailing twelve months
calculation, as defined in the credit facility less funded debt as defined,
(which includes notes payable to former owners, which can be refinanced through
the credit facility) until June 30, 1999, 4.00 until September 30,1999, and
3.75 times thereafter. The credit facility requires the Company to meet certain
loan covenants, and the Company was in compliance with those covenants as of
June 30, 1999. The credit facility expires in October 2001 and management
anticipates that it will renegotiate and/or refinance this credit facility
prior to that time.
At June 30, 1999, the Company had working capital of approximately $6,385,000.
The Company evaluates the collectibility of its receivables based on a specific
account-by-account review. The Company has an allowance of approximately
$197,000 at June 30, 1999. Accounts receivable increased by approximately
$3,429,000 from December 31, 1998, due primarily to 1999 acquisitions. Accounts
payable and accruals decreased by approximately $212,000 due to improved check
processing partially offset by payables and accruals relating to 1999
acquisitions. The Company believes its cash requirements for the next twelve
months can be met with existing cash, cash flows from operations and its
borrowing availability under its credit facility.
13
<PAGE> 14
Should the Company accelerate or revise its acquisition program, the Company
may need to seek additional financing through the public or private sale of
equity or debt securities or increase its credit facility. There can be no
assurances that the Company will secure such financing if and when it's needed,
or that such financing will be available on terms that the company deems
acceptable.
YEAR 2000
IMPACT OF YEAR 2000
The Year 2000 issue exists because many computer systems and applications
currently use two-digit fields to designate the year. As the century change
occurs, computer programs, computers, and embedded microprocessors controlling
equipment with date-sensitive systems may recognize the Year 2000 as 1900, or
not at all. This inability to recognize or properly handle the Year 2000 date
may result in computer system failures or miscalculations of financial and
operational information as well as failures of equipment controlling
date-sensitive microprocessors. Most of our major customers are municipalities
with wastewater treatment plants. It is likely that most of these plants have
computer-controlled processes, some of which may slow down or even halt
delivery of biosolids. We will address these potential problem areas in the
sections below.
STATE OF READINESS
We began formulating a plan to address the Year 2000 ("Y2K") issue during 1997.
The plan consists of three phases: awareness, assessment, and renovation. In the
Awareness Phase, we established a Year 2000 committee with membership from the
executive, operations, legal, financial, and information technology departments.
This committee provides the leadership for developing the plan, assessing the
impact of Year 2000 issues, and giving directives to each of the functional
areas for implementation of the plan.
To date our primary focus has been on the assessment of our own internal
systems. We have inventoried all of the Company's computer hardware. Most of
this hardware was purchased after August 1998 from a national manufacturer, was
NTSL tested prior to shipment, and is in full compliance. The remaining
hardware will either be replaced or tested and have BIOS upgrades if needed by
the end of the third quarter 1999.
The Company is using Microsoft Office for our desktop suite so no significant
Year 2000 impact is expected. All of the accounting and financial reporting
functions are performed at the corporate office using third party software from
a national vendor that is Year 2000 compliant. Our remote locations are
currently running proprietary software that has been written to collect data
pertaining to the pickup, hauling, land application and composting of
biosolids. Most of these systems are written in current versions Microsoft
Access and Excel and are Year 2000 compliant. There are potential issues
concerning Year 2000 that could arise if any of the other systems are not Year
2000 compliant. We are currently implementing a new Manifest and Compliance
System that is Year 2000 compliant. The implementation of this new system at
all of our locations will be completed by the fall of 1999. We use specialized
spreading equipment in many (but not all) of our land application operations.
We have on file a statement from the vendor that these vehicles are Year 2000
compliant. This information is also available on the vendors Internet site.
We are assessing the potential for Year 2000 problems with the information
systems of our customers, vendors and sub-contractors. We have received some
preliminary information concerning Year 2000 readiness from some of our
customers, vendors, sub-contractors, and other third parties. Additionally, we
prepared questionnaires, which we mailed in July 1999. We expect to engage in
discussions with those parties who have failed to show proof of compliance
prior to the fall of 1999 in an attempt to determine the extent to which we are
vulnerable to those parties' non-compliance. We are currently unable to
estimate the costs that we may incur to remedy the Year 2000 issues relating to
these parties.
COSTS TO ADDRESS THE YEAR 2000 ISSUE
The cost to date for our Year 2000 program is $50,000. Most of this cost was
for workstation computers and servers that were replaced for reasons not
involving Y2K. Although we have not completed our assessment, we do not
currently believe that the future costs associated with our Year 2000 program
will be more than $25,000.
RISKS TO THE COMPANY
The risks to the Company involve our customers', vendors' and sub-contractors'
failure to reach compliance. Most of our customers are large municipalities
that are engaged in or have completed Y2K testing. It is possible that those
customers whose waste water treatment plants are not Y2K compliant may suffer
failures that cause those customers to delay placing orders for biosolids
removal
14
<PAGE> 15
from their wastewater treatment plants. Date functionality is typically not
used in process control application software. More common is the use of
relative time. We are still, however, dependent on our customers having an
effective Year 2000 compliance program in place. We have prepared a
questionnaire that was mailed to our major customers in July. If we have not
had a response from them by September, we will open a dialog with them to
ensure their state of readiness. In the case of our vendors and
sub-contractors, we will take special care in reviewing the compliance of all
of the equipment and services needed to perform day to day operational
functions. Most of our subcontractors are trucking companies. The information
that we receive from them is typically in the form of a manually prepared
invoice. This process should not be affected by the year change. The three
vendors for other services critical to our operation (spreading equipment,
telecommunications, and financial services) are all national suppliers of these
services and have stated that they are Year 2000 compliant in our discussions
and on their Internet sites.
Furthermore, as a result of the Company's ongoing acquisition program, our
assessment of Year 2000 issues may change. As we acquire companies, we attempt
to assess Year 2000 issues relating to their computer systems and operating
processes. Our current integration plan also attempts to have them integrated
into our business systems within a short period of time. We feel that this
minimizes our exposure to their failure to meet Y2K compliance.
If any of the above uncertainties were to occur, our business, financial
conditions, and results of operations would be adversely affected. As such,
there can be no assurance that the systems of customers, vendors, newly
acquired companies, sub-contractors, and other third party relationships on
which we may rely will be made Year 2000 compliant in a timely manner or that
any such failure to be Year 2000 compliant by another company would not have an
adverse effect on our business or consolidated results of operations, financial
position or liquidity. We are unable to assess the likelihood of such events
occurring or the extent of the effect on the Company.
CONTINGENCY PLAN
We are in the process of developing a comprehensive contingency plan to address
avoidable or unavoidable Year 2000 risks with internal information technology
systems and with customers, vendors, newly acquired companies, sub-contractors,
and other third parties. We expect to have this plan completed by September of
1999.
SEASONALITY
The Company's business historically has not been seasonal, but has been subject
to certain unusual weather conditions and unseasonably heavy rainfall which can
temporarily reduce the availability of land application sites in close
proximity to the Company's business.
During 1998 and 1999, the Company acquired certain companies, whose operations
are subject to significant seasonal variations. During the winter months the
ground is frozen and land application cannot be performed. Generally, the
product is stored by the customer during the winter months with transportation
and land application services performed as the ground thaws. The Company now
expects its revenues and operational results to be generally lower in the first
calendar quarter.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company utilizes financial instruments, which inherently have some degree
of market risk due to interest rate fluctuations. Management is actively
involved in monitoring exposure to market risk and continues to develop and
utilize appropriate risk management techniques. The Company is not exposed to
any other significant market risks, including commodity price risks, foreign
currency exchange risk or interest rate risks from the use of derivative
financial instruments for trading or to speculate in changes in interest rates
or on commodity prices.
INTEREST RISK RATE
Total debt at June 30, 1999, included approximately $38,500,000 in floating rate
debt attributed to the bank credit facility borrowings and a note to another
financial institution at an average interest rate of 7.93%. As a result the
Company's annual interest rate cost in 1999 will fluctuate based on short-term
interest rates. The impact on annual cash flow of a ten-percent change in the
floating rate (approximately 50 basis points) would be approximately $192,500.
At June 30, 1999, the Company's fixed rate debt had a book value of $5,363,393
which approximates its fair value. The floating rate debt will mature in October
2001.
15
<PAGE> 16
PART II - OTHER INFORMATION
ITEM 1.
The Company is currently involved in certain routine litigation. Management
believes that all such litigation arose in the ordinary course of business and
that costs of settlements or judgments arising from such suits will not have a
material adverse effect on the Company's consolidated financial position or
results of operations.
ITEM 6. FINANCIAL STATEMENTS, EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibit Index
27.1 Financial Data Schedule
(B) Reports on Form 8-K
Form 8-K filed on May 10, 1999
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SYNAGRO TECHNOLOGIES, INC.
<TABLE>
<S> <C>
Date: August 17, 1999 By: Ross M. Patten /S/ Chief Executive Officer
-----------------------
Date: August 17, 1999 By: Paul Withrow /S/ Chief Financial Officer
-----------------------
</TABLE>
17
<PAGE> 18
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<PERIOD-START> MAR-31-1999
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 414,908
<SECURITIES> 0
<RECEIVABLES> 10,149,338
<ALLOWANCES> 196,770
<INVENTORY> 0
<CURRENT-ASSETS> 13,123,694
<PP&E> 22,761,341
<DEPRECIATION> 7,234,331
<TOTAL-ASSETS> 84,839,620
<CURRENT-LIABILITIES> 6,738,272
<BONDS> 0
0
0
<COMMON> 34,786
<OTHER-SE> 63,330,434
<TOTAL-LIABILITY-AND-EQUITY> 84,839,620
<SALES> 14,917,754
<TOTAL-REVENUES> 14,917,754
<CGS> 10,765,419
<TOTAL-COSTS> 10,765,419
<OTHER-EXPENSES> 3,840
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 768,679
<INCOME-PRETAX> 1,468,229
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,468,229
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,468,229
<EPS-BASIC> 0.09
<EPS-DILUTED> 0.09
</TABLE>
